-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, KSrxW3v3HIqLSqpl0MUOls5k/zehDFpALUkaeVTZpT1qCjFofzmfkrT7oNLQhfIv 5uYqxtY+haC4zOxQjWgXIQ== 0000950130-94-000069.txt : 19940121 0000950130-94-000069.hdr.sgml : 19940121 ACCESSION NUMBER: 0000950130-94-000069 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19940120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOST MARRIOTT CORP CENTRAL INDEX KEY: 0000314733 STANDARD INDUSTRIAL CLASSIFICATION: 5812 IRS NUMBER: 530085950 STATE OF INCORPORATION: DE FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 33 SEC FILE NUMBER: 033-51707 FILM NUMBER: 94501980 BUSINESS ADDRESS: STREET 1: 10400 FERNWOOD RD CITY: BETHESDA STATE: MD ZIP: 20817 BUSINESS PHONE: 3013809000 FORMER COMPANY: FORMER CONFORMED NAME: MARRIOTT CORP DATE OF NAME CHANGE: 19920703 S-1/A 1 AMENDMENT TO S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 19, 1994 REGISTRATION NO. 33-51707 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- HOST MARRIOTT CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7011 53-0085950 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION ORGANIZATION) NUMBER) 10400 FERNWOOD ROAD BETHESDA, MARYLAND 20817 (301) 380-9000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) STEPHEN J. MCKENNA, ESQ. 10400 FERNWOOD ROAD BETHESDA, MARYLAND 20817 (301) 380-9000 (NAME, ADDRESS, INCLUDING ZIP CODE, TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) PLEASE SEND COPIES OF COMMUNICATIONS TO: BRUCE E. ROSENBLUM, ESQ. LATHAM & NICK P. SAGGESE, ESQ. GREGG A. NOEL, WATKINS 1001 PENNSYLVANIA AVENUE, N.W. ESQ. SKADDEN, ARPS, SLATE, MEAGHER & SUITE 1300 WASHINGTON, D.C. 20004-2505 FLOM 300 S. GRAND AVENUE, SUITE 3400 LOS ANGELES, CA 90071 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As promptly as practicable after the effective date of this Registration Statement. If the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- HOST MARRIOTT CORPORATION CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
LOCATION OR HEADING IN THE PROSPECTUS FORM S-1 ITEM NUMBER AND CAPTION OR REGISTRATION STATEMENT -------------------------------- ------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus.... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover of Prospectus............................. Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges.............. Prospectus Summary; Risk Factors; Ratio of Earnings to Fixed Charges (Inapplicable) 4. Use of Proceeds............................ Use of Proceeds 5. Determination of Offering Price............ * 6. Dilution................................... * 7. Selling Security Holders................... * 8. Plan of Distribution....................... Underwriting 9. Description of Securities to be Registered. Description of Capital Stock 10. Interests of Named Experts and Counsel..... Legal Matters; Experts 11. Information With Respect to the Registrant. Business and Properties; Legal Proceedings; Price Range of Common Stock and Dividends; Selected Historical Financial Data; Management's Discussion and Analysis of Results of Operations and Financial Condition; Pro Forma Financial Data; Management's Discussion and Analysis of Pro Forma Financial Data; Index to Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities............................... *
- -------- * Inapplicable ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + + +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JANUARY 19, 1994 PROSPECTUS JANUARY , 1994 17,500,000 SHARES (LOGO TO COME) COMMON STOCK Of the 17,500,000 shares of Common Stock offered by the Company, 14,000,000 shares are being offered for sale in the United States and Canada by the U.S. Underwriters (the "U.S. Offering") and 3,500,000 shares are being offered for sale outside the United States and Canada in a concurrent offering by the International Managers (the "International Offering" and, together with the U.S. Offering, the "Offerings"), subject to transfers between the U.S. Underwriters and the International Managers. The Common Stock of the Company is traded on the New York Stock Exchange and on the Chicago Stock Exchange, the Pacific Stock Exchange and the Philadelphia Stock Exchange under the symbol "HMT". On January 18, 1994, the last reported sale price of the Common Stock, as reported on the New York Stock Exchange Composite Tape, was $11.25 per share. See "Price Range of the Common Stock and Dividends." SEE "RISK FACTORS" FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. - -------------------------------------------------------------------------------- - -
PRICE UNDERWRITING PROCEEDS TO THE DISCOUNTS AND TO THE PUBLIC COMMISSIONS(1) COMPANY(2) - -------------------------------------------------------------------------------- - - Per Share...................................... $ $ $ Total (3)...................................... $ $ $ - -------------------------------------------------------------------------------- - -
(1) See "Underwriting" for indemnification arrangements with the Underwriters. (2) Before deducting expenses payable by the Company estimated at $ . (3) The Company has granted to the Underwriters an option to purchase up to 2,625,000 additional shares of Common Stock, on the same terms and conditions as set forth above, at the Price to the Public, less the Underwriting Discounts and Commissions, solely to cover over-allotments, if any. If the Underwriters exercise such option in full, the total Price to the Public, Underwriting Discounts and Commissions, and Proceeds to the Company will be $ , $ and $ , respectively. See "Underwriting." The shares are offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters and subject to various prior conditions, including the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares will be made in New York, New York on or about January , 1994. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MONTGOMERY SECURITIES SMITH BARNEY SHEARSON INC. BT SECURITIES CORPORATION Residence Inns have approximately 120 suites and resemble garden apartments. They are designed for the extended stay market. Courtyard by Marriott hotels are moderately priced for the business transient market. Each Courtyard has approximately 150 guestrooms. The Fort Lauderdale Marina Marriott has 580 guestrooms. The Company recently acquired this property. The New York Marriott Marquis has 1,871 guestrooms and over 80,000 square feet of meeting space. The San Francisco Marriott has 1,500 guestrooms and is directly adjacent to the Moscone Convention Center. Fairfield Inns are designed for the economy minded traveler and have approximately 120 guestrooms. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, THE PACIFIC STOCK EXCHANGE, THE CHICAGO STOCK EXCHANGE, THE PHILADELPHIA STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. ---------------- AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its regional offices located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may be obtained by mail from the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Reports, proxy statements and other information regarding the Company may also be inspected at the offices of the New York Stock Exchange (the "NYSE"), 20 Broad Street, New York, New York 10005, the Pacific Stock Exchange, 301 Pine Street, San Francisco, California 94104, the Chicago Stock Exchange, 440 South LaSalle Street, Chicago, Illinois 60605 or the Philadelphia Stock Exchange 1900 Market Street, Philadelphia, Pennsylvania 19103. The Company has filed with the Commission a Registration Statement on Form S- 1 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits thereto. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement and exhibits thereto. The Registration Statement, together with the exhibits thereto, may be inspected at the Commission's public reference facilities in Washington, D.C. and copies of all or any part thereof may be obtained from the Commission upon payment of the prescribed fees. ---------------- 3 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Unless the context otherwise requires, the term "Company" refers to Host Marriott Corporation and its subsidiaries and their respective operations. Unless otherwise indicated, the information in this Prospectus does not give effect to the exercise of the over-allotment option described in "Underwriting." THE COMPANY The Company is one of the largest owners of lodging properties in the world. The Company's 130 owned lodging properties are operated under Marriott brand names and managed by Marriott International, Inc. ("Marriott International"), formerly a wholly-owned subsidiary of the Company. The Company is the largest owner of hotels operated under Marriott brands and owns approximately 23% of the lodging properties operated by Marriott International. The Company also holds minority interests in various partnerships that own an additional 272 properties operated by Marriott International. The Company's properties span several market segments, including full service (Marriott Hotels, Resorts and Suites), moderately-priced (Courtyard by Marriott), extended-stay (Residence Inn by Marriott) and economy (Fairfield Inn by Marriott). These Marriott brands are among the most respected and widely recognized in the lodging industry. In 1992, each brand was ranked either first or second overall in its segment by Business Travel News. The Company's hotels consistently outperform the industry's average occupancy rate by a significant margin, and averaged approximately 78.9% for the first eight months of 1993 compared to 65.3% for the lodging industry. The Company seeks to grow through opportunistic acquisitions of full service hotels in the U.S. and abroad. The Company believes that the full service segment of the market offers numerous opportunities to acquire assets at attractive multiples of cash flow and at discounts to replacement value, including under-performing hotels which can be improved under new management. The Company believes that the full service segment, in particular, has potential for improved performance as the economy continues to improve and as business travel continues to increase. The Company has recently acquired the 580-room Ft. Lauderdale Marina Marriott and is pursuing discussions with respect to other acquisition opportunities. The Company believes it is well qualified to pursue its acquisition strategy. Management has extensive experience in acquiring and financing lodging properties and believes its industry knowledge, relationships and access to information provide a competitive advantage with respect to evaluating and acquiring hotel assets. In addition, the Company is well positioned to convert acquired properties to high quality lodging brand names due to its strategic alliance with Marriott International. The Company is also the leading operator of airport and tollroad food and merchandise concessions, with facilities in virtually every major commercial airport in the U.S. The Company operates restaurants, gift shops and related facilities at 73 airports, on 14 tollroads (including 93 travel plazas) and at 42 tourist attractions, stadiums and arenas. Many of the Company's concessions operate under branded names, including Pizza Hut, Burger King, Taco Bell, Sbarro's, Dunkin' Donuts, TCBY yogurt, Mrs. Fields cookies, Nathan's Famous hot dogs and Cheers. In addition, the Company owns 14 senior living facilities which are leased to Marriott International under long-term leases. 4 THE DISTRIBUTION AND RELATED TRANSACTIONS Prior to October 8, 1993, the Company was named "Marriott Corporation." In addition to conducting the Company's existing businesses of owning lodging properties and senior living facilities (the "Ownership Business") and operating restaurants, cafeterias, gift shops and related facilities at airports, stadiums, arenas and tourist attractions and on highway systems (the "Host/Travel Plazas Business"), Marriott Corporation engaged in lodging and senior living services management, timeshare resort development and operation, food service and facilities management and other contract services businesses (the "Management Business"). On October 8, 1993, Marriott Corporation made a special dividend consisting of the distribution (the "Distribution") to holders of outstanding shares of Common Stock, on a share-for-share basis, of all outstanding shares of its wholly-owned subsidiary, Marriott International, which at the time of the Distribution held all of the assets relating to the Management Business. Marriott International now conducts the Management Business as a separate publicly-traded company. The Distribution was designed to separate two types of businesses with distinct financial, investment and operating characteristics so that each could adopt strategies and pursue objectives appropriate to its specific needs. See "The Distribution." As a result of the Distribution, the Company believes it is better able to concentrate its attention and financial resources on its core businesses and to manage its real estate holdings and Host/Travel Plazas Business for cash flow. The Company and Marriott International are parties to several important ongoing arrangements, including (i) agreements pursuant to which Marriott International manages or leases the Company's lodging properties and senior living facilities and (ii) a $630 million line of credit (the "Credit Agreement") provided by Marriott International to the Company's wholly-owned subsidiary, HMH Holdings, Inc. ("Holdings"). See "Financing--Credit Agreement." In connection with the Distribution, the Company consummated an exchange offer (the "Exchange Offer") pursuant to which holders of approximately $1.2 billion of its senior notes ("Old Notes") exchanged Old Notes for a combination of (i) cash, (ii) Common Stock and (iii) new notes ("New Notes") issued by Host Marriott Hospitality, Inc. ("Hospitality"), an indirect wholly-owned subsidiary of the Company. See "The Exchange Offer and Restructuring." References herein to "the Distribution and related transactions" include the Exchange Offer. THE OFFERINGS Common Stock Offered U.S. Offering................................... 14.0 million shares International Offering.......................... 3.5 million shares ---- Total......................................... 17.5 million shares Common Stock to be Outstanding after the Offer- ings............................................. 137.1 million shares(1) Use of Proceeds................................... For the funding of future acquisitions and for general corporate purposes NYSE Trading Symbol............................... HMT
- -------- (1) Based on the shares outstanding on December 10, 1993. Does not include (i) up to 13.7 million shares of Common Stock subject to options granted to executive officers and certain employees of the Company, with a weighted average exercise price of $3.97 per share (certain of which options are subject to vesting requirements), (ii) up to 5.9 million shares of Common Stock issued to executive officers and certain employees under deferred stock incentive plans and restricted stock plans (certain of which shares are subject to vesting requirements), (iii) 7.1 million shares of Common Stock issuable upon the exercise of conversion rights by holders of the Company's Liquid Yield Option Notes due June 12, 2006 (the "LYONs"), (iv) up to 7.7 million shares of Common Stock issuable upon exercise of warrants to be issued by the Company to certain plaintiffs as part of a class action settlement, with a current exercise price of $8 per share, and (v) 5.6 million shares of Common Stock issuable upon exercise of conversion rights by holders of the Company's Series A Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock"). See "Recent Developments--LYONs Redemption," "Description of Capital Stock--Convertible Preferred Stock;-- Warrants," "Management--Executive Officer Compensation," and "Financing." 5 SUMMARY PRO FORMA FINANCIAL INFORMATION The following table presents summary unaudited pro forma financial information of the Company for the thirty-six weeks ended September 10, 1993 and September 11, 1992 and for the fiscal year ended January 1, 1993. This information is derived from the unaudited pro forma financial statements included in this Prospectus under "Pro Forma Financial Data" and reflects consummation of the Distribution and related transactions. During the fourth quarter of 1993, the Company effected the Distribution, which caused a substantial change in the composition of the Company's assets, liabilities and operations. Accordingly, the Company's historical financial data (see "Selected Historical Financial Data") does not reflect the financial condition and results of operations of the Company as it exists subsequent to the Distribution. The pro forma financial information set forth below is not necessarily indicative of the results that would have been achieved had such transactions been consummated as of the dates indicated, or that may be achieved in the future. The information presented below should be read in conjunction with the Host Marriott Corporation Pro Forma Consolidated Statements of Income for the thirty-six weeks ended September 10, 1993 and September 11, 1992 and the year ended January 1, 1993 ("fiscal year 1992"), the Host Marriott Corporation Pro Forma Consolidated Balance Sheet at September 10, 1993, the Host Marriott Corporation Consolidated and Condensed Consolidated Financial Statements and Notes thereto, Management's Discussion and Analysis of Results of Operations and Financial Condition and Management's Discussion and Analysis of Pro Forma Financial Data included in this Prospectus.
THIRTY-SIX WEEKS ENDED --------------------------- FISCAL SEPTEMBER 10, SEPTEMBER 11, YEAR 1993 1992 1992 ------------- ------------- ----------- (UNAUDITED, IN MILLIONS) INCOME STATEMENT DATA: Sales.................................. $ 963 $832 $1,209 Operating profit before corporate ex- penses and interest................... 133 126 160 Interest expense....................... 131 135 198 Loss before cumulative effect of changes in accounting principles(1)... (25) (20) (37) BALANCE SHEET DATA: Total assets........................... $3,742 Long-term debt......................... 2,156 Convertible subordinated debt ("LYONs")(2).......................... 241 OTHER DATA: EBITDA(3).............................. $ 251 $235 $ 329
- -------- (1) Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," was adopted in the first fiscal quarter of 1993. In the second fiscal quarter of 1993, the Company changed its accounting method for assets held for sale. See "Notes to Condensed Consolidated Financial Statements." (2) Pursuant to the LYONs Allocation Agreement (as defined), Marriott International has assumed responsibility for 90% of the LYONs obligation or $217 million of the outstanding balance of $241 million of the LYONs as of September 10, 1993. In December 1993, the Company gave notice of redemption of the LYONs and set a redemption date of January 25, 1994. Based on the aggregate principal amount of LYONs outstanding on December 13, 1993, the aggregate redemption price will be $197 million, of which $177 million is payable by Marriott International. However, the Company believes that most of the LYONs will be converted into Common Stock and Marriott International common stock, given the current market prices of such stocks relative to the redemption price. If all of the LYONs are converted, the Company will issue an additional 7,108,000 shares of its Common Stock. See "Recent Developments--LYONs Redemption." (3) EBITDA consists of the sum of consolidated net income (loss), interest expense, income taxes, depreciation and amortization and certain other non- cash charges, subject to certain other adjustments. EBITDA is not intended to represent cash flow from operations as defined by generally accepted accounting principles, and such information should not be considered as an alternative to net income, cash flow from operations or any other performance measures prescribed by generally accepted accounting principles. The Company's pro forma EBITDA in fiscal 1992 includes $12 million from the operation of certain hotels and other operations which were sold during the year. 6 RECENT DEVELOPMENTS ACQUISITIONS The Company recently acquired the 580-room Ft. Lauderdale Marina Marriott for a purchase price of approximately $40 million. The Company has participated in discussions with respect to a potential acquisition of the CIGA hotel chain. The CIGA hotel acquisition, if consummated, would consist of up to 35 full service lodging properties located throughout Western Europe. Other competitive bidders are also pursuing a potential acquisition of CIGA. The Company has not yet determined to what extent it will continue to pursue the CIGA acquisition, which decision will depend in part on the activities of competing bidders. If the Company elects to pursue such acquisition, there can be no assurance that the Company would be able to reach an agreement to acquire these hotels. DISPOSITIONS The Company has executed a letter of intent to sell 26 of its Fairfield Inn by Marriott hotels. The net proceeds from the sale of such hotels is expected to be approximately $115 million, of which approximately $27 million will be payable in the form of a note from the purchaser. The letter of intent is non- binding, and consummation of the transaction is subject to certain conditions, including the completion of due diligence review by the purchaser and the execution of a definitive agreement with respect to the sale. While these hotels were previously considered as long-term investments, the attractiveness of the proposed transaction caused the Company to reconsider its position relating to the sale of these hotels and to execute the letter of intent with respect to the sale of these hotels. Therefore, because of the proposed transaction, the Company is now considering these hotels as available for sale and is evaluating the carrying value of such hotels based on the current net realizable value (on the basis of expected sales price less the estimated costs of disposal) of individual hotels. While the transaction referred to above would result in an aggregate sales price in excess of the aggregate carrying value of the hotels, certain individual hotels have an indicated net realizable value below their carrying value. Therefore, the Company will record a charge to earnings in the fourth quarter of fiscal 1993 of approximately $11 million to write down 15 such properties to their individual estimated net realizable value. In December 1993, the Company sold its 15% interest in the partnership owning the Boston Copley Marriott hotel for $10.4 million (which exceeds the carrying value of the interest). During the fourth quarter of fiscal 1993, the Company realized $30 million on the disposition of its preferred stock investment in the American Restaurant Group and realized $11.7 million on the disposition of its preferred stock investment in the Restaurant Enterprises Group. RESIDENCE INNS In the fourth quarter of fiscal 1993, the Company sold certain of its equity interests in a partnership owning eleven Residence Inn by Marriott hotels for approximately $15 million. These sales reduced the Company's ownership to 16.6% and allowed the Company to be released from certain debt guarantee obligations. Accordingly, the Company will no longer be consolidating the partnership and will remove the $64 million of debt and $96 million of property, plant and equipment from its balance sheet. A gain will be recorded in installments as certain guarantee obligations expire. NEW YORK MARRIOTT MARQUIS The Company owns a 50% interest in Times Square Hotel Company ("TSHCO"), the owner of the New York Marriott Marquis, and also holds security interests in an additional 39% of the partnership interests as collateral for loans made to certain partners. The partners are in default on the loans and the Company has, for accounting purposes, realized an in-substance foreclosure of their partnership interests. The Company is in the process of legal foreclosure on these interests, which should be completed in early 1994. Effective in the fourth quarter of fiscal 1993, the Company consolidated TSHCO. The Company's balance sheet will be impacted by an increase in debt and other liabilities of approximately $445 million, and 7 a corresponding increase in assets (principally, property and equipment). Since the Company began reporting substantially all of the losses of TSHCO in 1993, the consolidation will have no material impact on consolidated net income or earnings per share. Of the $445 million of liabilities of TSHCO, $375 million represents a non- recourse first mortgage loan which matured December 7, 1993. A preliminary agreement has been reached for the extension of the loan for a term of five years, which is subject to final approval by the lenders and completion of definitive documentation. The preliminary agreement calls for a paydown of the loan by $37 million at, or before, closing. However, there can be no assurance that a final agreement will be reached. See "Certain Transactions." HOST/TRAVEL PLAZAS RESTRUCTURING In November 1993, the Company's Host/Travel Plazas business announced a plan to redesign its operations structure to improve the effectiveness and competitiveness of the business. Implementation of the new structure is currently underway and is expected to be completed in the first quarter of fiscal 1994. The Company will incur costs of approximately $7 million, principally for severance, relocation, and the closing of certain offices. The Company will take a restructuring charge in the fourth quarter of fiscal 1993 to reflect these costs. LYONS REDEMPTION In December 1993, the Company gave notice of redemption of the LYONs. The LYONs will be redeemed on January 25, 1994, unless prior to such time holders exercise their conversion rights. To the extent LYONs are redeemed for cash, Marriott International will fund 90% of the redemption price pursuant to the terms of the LYONs Allocation Agreement. Based on the aggregate principal amount of LYONs outstanding on December 13, 1993, the aggregate redemption price will be approximately $197 million, of which approximately $177 million is payable by Marriott International. The LYONs are redeemable at $367.60 per $1,000 principal amount and are convertible into 13.277 shares of Common Stock and 13.277 shares of Marriott International common stock per $1,000 principal amount. Based on the current market prices of the Common Stock and the Marriott International common stock, the Company expects that most holders will elect to convert LYONs into Common Stock and Marriott International common stock prior to redemption. If all of the LYONs holders elected to convert prior to redemption, LYONs holders would receive approximately 7.1 million shares of Common Stock upon conversion. See "Relationships Between the Company and Marriott International--LYONs Allocation Agreement." 8 RISK FACTORS In addition to the other information contained in this Prospectus, prospective investors should consider carefully the following factors before purchasing the shares of Common Stock offered hereby. SUBSTANTIAL LEVERAGE; RESTRICTIVE COVENANTS The Company has substantial indebtedness. After giving effect to the Distribution and related transactions, on a pro forma basis, the Company had consolidated long-term debt of $2.2 billion and total shareholders' equity of $439 million as of September 10, 1993. The Ownership Business and the Host/Travel Plazas Business are capital intensive, and the Company will have significant capital requirements in the future. The Company's leverage could affect its ability to obtain financing in the future or to undertake refinancings on terms and subject to conditions deemed acceptable by the Company. However, of the Company's pro forma long term debt of $2.2 billion as of September 10, 1993, debt maturities prior to the year 2000 aggregate $305 million. Most of the Ownership Business and the Host/Travel Plazas Business is conducted by subsidiaries of Hospitality (a second-tier subsidiary of the Company). Hospitality has issued $1.2 billion in aggregate principal amount of New Notes, which are secured by a pledge of the stock of, and guaranteed by, Hospitality and certain of its subsidiaries. The indenture governing these notes contains covenants that, among other things, (i) limit the ability of Hospitality to pay dividends and make other distributions and restricted payments, (ii) limit the ability of Hospitality and its subsidiaries to incur additional debt, (iii) limit the ability of Hospitality and its subsidiaries to create additional liens on their respective assets, (iv) limit the ability of the subsidiaries of Hospitality to incur debt and issue preferred stock, (v) limit the ability of Hospitality and its subsidiaries to engage in certain transactions with related parties, (vi) limit the ability of each subsidiary of Hospitality to enter into agreements which restrict such subsidiary in paying dividends or making certain other payments and (vii) limit the activities and businesses of Holdings. See "Financing--New Notes" and "The Exchange Offer and Restructuring." In addition, the Credit Agreement with Marriott International imposes certain restrictions on the ability of the Company and certain other subsidiaries to incur additional debt, impose liens or mortgages on their properties (other than various types of liens arising in the ordinary course of business), extend new guarantees (other than replacement guarantees), pay dividends, repurchase their common stock, make investments and incur capital expenditures. The above restrictions may limit the Company's ability to secure additional financing, and may prevent the Company from engaging in transactions that might otherwise be beneficial to the Company. See "Financing--Credit Agreement." PENDING LITIGATION Between October 9, 1992 and December 29, 1992, following the announcement of the Distribution, ten plaintiffs (United Apple Sales Incorporated Profit Sharing Trust U/A DTD 8/1/71; Bernard Fintz, Administrator of the Fintz Pension Plan; John D. Halford, Trustee of the John D. Halford Trust; Harvey Levy, as Trustee for the National Rubber Footwear, Inc. Profit Sharing Plan; Moges Gebremariam, as Trustee for the Moges Gebremariam Profit Sharing Plan; Howard W. Bleiman; Edmond Tomlinson; Robert Seigle; Matthew Harlib; and Paul L. Stone, collectively the "Class Action Plaintiffs") filed lawsuits against the Company purportedly brought on behalf of classes of holders and purchasers of Old Notes and other senior notes and debentures of the Company (the "Class Action Lawsuits"). The Class Action Plaintiffs were all holders, or former holders, of Old Notes. The foregoing Class Action Lawsuits were consolidated under the caption United Apple Sales Incorporated Profit Sharing Trust U/A DTD 8/l/71, et al. v. Marriott Corp., et al. in the United States District Court for the District of Maryland. A similar lawsuit filed by one of the Class Action Plaintiffs in Maryland state court was stayed pending resolution of the cases in the United States District Court for the District of Maryland (the "District Court"). On October 29, 1992, a second group of plaintiffs (the "PPM Group") purporting to hold approximately $120 million of principal amount of Old Notes filed lawsuits against the Company (the "PPM Lawsuit"). The PPM Group consists of PPM America, Inc.; London Pacific Life & Annuity Company; Transamerica 9 Life Insurance & Annuity Company, Transamerica Income Shares. Inc.; National Home Life Assurance Company; Commonwealth Life Insurance Company; Provident Mutual Life Insurance Company of Philadelphia; Vanguard Fixed Income Securities Fund. Inc.; Wellington Fund, Inc.; Anchor Series Trust; High Yield Plus Fund, Inc.; New America High Income Fund, Inc.; Security Mutual Life Insurance Company of New York, Security Equity Life Insurance Company; and Utica National Life Insurance Company. People's Security Life Insurance Company, which purportedly purchased approximately $16 million in Old Notes, was later added as an additional plaintiff in the PPM Lawsuit. On March 25, 1993, the State Board of Administration of Florida (the "Florida Plaintiff"), purporting to hold approximately $7.5 million principal amount of Old Notes, filed an additional class action lawsuit purportedly brought on behalf of certain classes of holders of Old Notes and other senior notes and debentures of the Company (the "Florida Lawsuit"). The Florida Lawsuit has been consolidated with the PPM Lawsuit. The Class Action Lawsuits and the Florida Lawsuit alleged, among other things, that (i) the Distribution, if effected, would violate the terms of the Old Notes, (ii) federal securities laws (and similar state laws) had been violated in connection with the sale by the Company of certain series of its Old Notes (the "Disclosure Claims"), (iii) the Distribution, if effected, would be a fraudulent conveyance as to creditors of the Company and (iv) the Distribution, if effected, would constitute a breach of fiduciary duty and a breach of implied covenants of good faith and fair dealing allegedly owed by the Company to holders of Old Notes. The PPM Lawsuit is limited to the Disclosure Claims. The Company has counterclaimed against certain members of the PPM Group, asserting tortious interference with business relationships. The Company reached an agreement to settle the Class Action Lawsuits (the "Class Action Settlement"), which settlement was approved by the District Court on August 30, 1993. The Class Action Settlement disposes of all legal claims challenging the Distribution, other than Disclosure Claims by certain holders and former holders of Old Notes (principally members of the PPM Group and the Florida Plaintiff) who have "opted out" of the Class Action Settlement with respect to the Disclosure Claims. On October 18, 1993, the District Court also dismissed all claims in the Florida Lawsuit other than those relating to the Disclosure Claims. The Florida Plaintiff has filed an appeal with the United States Court of Appeals for the Fourth Circuit, challenging the District Court's approval of the Class Action Settlement. As part of the Class Action Settlement, the Company effected the Exchange Offer, paid certain legal fees and expenses of the Class Action Plaintiffs and agreed to issue warrants to purchase up to 7.7 million shares of Common Stock, exercisable for five years after the Distribution, at $8.00 per share during the first three years and $10.00 per share during the last two years. The warrants are not expected to be issued until the appeal of the Class Action Settlement is resolved. See "Description of Capital Stock." The PPM Group and the Florida Plaintiff continue to litigate their Disclosure Claims. On December 17, 1993, the Company filed a motion for summary judgment asking the District Court to enter judgment in favor of the Company and other individual defendants on all the claims. The PPM Group also filed a motion for summary judgment with respect to the Company's counterclaim. The Company believes the Disclosure Claims are without merit and that the litigation pursued by those who have opted out of the Class Action Settlement will not have a material effect on the financial condition of the Company. Nevertheless, there can be no certainty as to the ultimate outcome of such litigation. POTENTIAL CONFLICTS WITH MARRIOTT INTERNATIONAL The interests of the Company and Marriott International may potentially conflict due to the ongoing relationships between the companies. In addition, the Company and Marriott International share two common directors--J.W. Marriott, Jr. serves as Chairman of the Board of Directors and President of Marriott International and also serves as a director of the Company, and Richard E. Marriott serves as Chairman of the Board of Directors of the Company and also serves as a director of Marriott International. Messrs. J.W. Marriott, Jr. and Richard E. Marriott, as well as certain other officers and directors of Marriott 10 International and the Company, also own shares (and/or options or other rights to acquire shares) in both companies. With respect to the various contractual arrangements between the two companies, the potential exists for disagreement as to the quality of services provided by Marriott International and as to contract compliance. Additionally, the possible desire of the Company, from time-to-time, to finance, refinance or effect a sale of any of the properties managed by Marriott International may, depending upon the structure of such transactions, result in a need to modify the management agreement with Marriott International with respect to such property. Any such modification proposed by the Company may not be acceptable to Marriott International, and the lack of consent from Marriott International could adversely affect the Company's ability to consummate such financing or sale. In addition, certain situations could arise where actions taken by Marriott International in its capacity as manager of competing lodging properties would not necessarily be in the best interests of the Company. The Company and Marriott International are also parties to a noncompetition agreement that imposes certain limitations on the companies' ability to compete with each other in certain businesses. Nevertheless, the Company believes that there is sufficient mutuality of interest between the Company and Marriott International to result in a mutually productive relationship. Moreover, appropriate policies and procedures are followed by the Board of Directors of each of the companies to limit the involvement of Messrs. J.W. Marriott, Jr. and Richard E. Marriott (and, if appropriate, other officers and directors of such companies) in conflict situations, including requiring them to abstain from voting as directors of either the Company or Marriott International (or as directors of any of their subsidiaries) on certain matters which present a conflict between the companies. See "Relationship Between the Company and Marriott International." DIVIDEND POLICY The Company intends to retain future earnings for use in its business and does not currently anticipate paying dividends on the Common Stock. In addition, the Credit Agreement contains restrictions on the payment of dividends on the Common Stock. See "Dividend Policy" and "Financing." The Company has also stated its intention to pay dividends on its outstanding Convertible Preferred Stock only to the extent of earnings, and the Company did not declare a dividend on the Convertible Preferred Stock for the last quarterly dividend period. If six quarterly dividend payments are in arrears, the holders of the Convertible Preferred Stock will become entitled to elect two directors of the Company. There are approximately 292,000 depositary shares, each representing 1/1000th of a share of Convertible Preferred Stock, that remain outstanding as of December 23, 1993, and the stated quarterly dividend on these shares is approximately $300,000. The Company could recommence payment of quarterly dividends in order to avoid the election of additional directors. In addition, commencing January 15, 1996, the outstanding Convertible Preferred Stock may be redeemed at an aggregate redemption price of approximately $15 million plus accrued and unpaid dividends. EFFECTS OF ECONOMIC CONDITIONS AND CYCLICALITY The Company's ownership of real property, including hotels, senior living facilities and undeveloped land parcels, is substantial. Real estate values are sensitive to changes in local market and economic conditions and to fluctuations in the economy as a whole. There can be no assurance that downturns or prolonged adverse conditions in real estate or capital markets or the economy as a whole will not have a material adverse impact on the Company. ANTITAKEOVER PROVISIONS The Company's Restated Certificate of Incorporation and Bylaws each contain provisions that will make difficult an acquisition of control of the Company by means of a tender offer, open market purchases, proxy fight, or otherwise, that is not approved by the Board of Directors. Provisions that may have an antitakeover effect include (i) a staggered board of directors with three separate classes, (ii) a super-majority vote requirement for removal or filling of vacancies on the Board of Directors and for amendment to the Restated Certificate of Incorporation and Bylaws, (iii) limitations on shareholder action by written consent and 11 (iv) super-majority voting requirements for approval of mergers and other business combinations involving the Company and interested shareholders. In addition, the Company is subject to Section 203 of the Delaware General Corporation Law requiring super-majority approval for certain business combinations. The Company has also adopted a shareholder rights plan which may discourage or delay a change in control of the Company. Finally, the Company has granted Marriott International, for a period of ten years following the Distribution, the right to purchase up to 20% of each class of the then outstanding voting stock of the Company at the fair market value thereof upon the occurrence of certain specified events, generally involving changes in control of the Company (the "Marriott International Purchase Right"). The Marriott International Purchase Right may have certain antitakeover effects with respect to the Company. See "Purposes and Antitakeover Effects of Certain Provisions of the Company Certificate and Bylaws and the Marriott International Purchase Right" and "Description of Capital Stock--Rights and Junior Preferred Stock." THE COMPANY The Company is one of the largest owners of lodging properties in the world. The Company's 130 owned lodging properties are operated under Marriott brand names and managed by Marriott International, formerly a wholly-owned subsidiary of the Company. The Company is the largest owner of hotels operated under Marriott brands and owns approximately 23% of the lodging properties operated by Marriott International. The Company also holds minority interests in various partnerships that own an additional 272 properties operated by Marriott International. The Company's properties span several market segments, including full service (Marriott Hotels, Resorts and Suites), moderately-priced (Courtyard by Marriott), extended-stay (Residence Inn by Marriott) and economy (Fairfield Inn by Marriott). These Marriott brands are among the most respected and widely recognized in the lodging industry. In 1992, each brand was ranked either first or second overall in its segment by Business Travel News. The Company's hotels consistently outperform the industry's average occupancy rate by a significant margin, and averaged approximately 78.9% for the first eight months of 1993 compared to 65.3% for the lodging industry. The Company seeks to grow through opportunistic acquisitions of full service hotels in the U.S. and abroad. The Company believes that the full service segment of the market offers numerous opportunities to acquire assets at attractive multiples of cash flow and at discounts to replacement value, including under-performing hotels which can be improved under new management. The Company believes that the full service segment, in particular, has potential for improved performance as the economy continues to improve and as business travel continues to increase. The Company has recently acquired the 580-room Ft. Lauderdale Marina Marriott and is pursuing discussions with respect to other acquisition opportunities. The Company believes it is well qualified to pursue its acquisition strategy. Management has extensive experience in acquiring and financing lodging properties and believes its industry knowledge, relationships and access to information provide a competitive advantage with respect to evaluating and acquiring hotel assets. In addition, the Company is well positioned to convert acquired properties to high quality lodging brand names due to its strategic alliance with Marriott International. The Company is also the leading operator of airport and tollroad food and merchandise concessions, with facilities in virtually every major commercial airport in the U.S. The Company operates restaurants, gift shops and related facilities at 73 airports, on 14 tollroads (including 93 travel plazas) and at 42 tourist attractions, stadiums and arenas. Many of the Company's concessions operate under branded names, including Pizza Hut, Burger King, Taco Bell, Sbarro's, Dunkin' Donuts, TCBY yogurt, Mrs. Fields cookies, Nathan's Famous hot dogs and Cheers. In addition, the Company owns 14 senior living facilities which are leased to Marriott International under long-term leases. The principal executive offices of the Company are located at 10400 Fernwood Road, Bethesda, Maryland, 20817, and its telephone number is (301) 380-9000. The Company was incorporated under the laws of the State of Delaware in 1929. 12 USE OF PROCEEDS The net proceeds to the Company from the sale of the Common Stock offered hereby, after deducting estimated underwriting discounts and commissions and expenses of the Offerings, are estimated to be approximately $187 million (approximately $215 million if the Underwriters' over-allotment option is exercised in full), based on the last reported sale price per share of the Common Stock on the NYSE Composite Tape on January 18, 1994. The Company expects to use the net proceeds from the Offerings for future acquisitions of lodging properties or related assets. To the extent not so expended, the net proceeds will be used for general corporate purposes. DIVIDEND POLICY The Company intends to retain future earnings for use in its business and does not currently anticipate paying any dividends on the Common Stock. In addition, the Credit Agreement contains restrictions on the payment of dividends on the Common Stock and the Company's subsidiaries are subject to certain agreements that limit their ability to pay dividends to the Company. See "Financing." The Company has also stated its intention to pay dividends on its outstanding Convertible Preferred Stock only to the extent of earnings, and the Company did not declare a dividend on the Convertible Preferred Stock for the last quarterly dividend period. If six quarterly dividend payments are in arrears, the holders of the Convertible Preferred Stock will become entitled to elect two directors of the Company. There are approximately 292,000 depositary shares, each representing 1/1000th of a share of Convertible Preferred Stock, that remain outstanding as of December 23, 1993, and the stated quarterly dividend on these shares is approximately $300,000. The Company could recommence payment of quarterly dividends in order to avoid the election of additional directors. In addition, commencing January 15, 1996, the outstanding Convertible Preferred Stock may be redeemed at an aggregate redemption price of approximately $15 million plus accrued and unpaid dividends. 13 PRO FORMA CAPITALIZATION The following table sets forth, as of September 10, 1993, the pro forma capitalization of the Company after giving effect to the Distribution and related transactions and as adjusted to give effect to the sale of the shares of Common Stock offered hereby (assuming an offering price of $11.25 per share, the last reported sale price on the New York Stock Exchange on January 18, 1994) as if the Offerings had occurred on September 10, 1993. The Pro Forma Capitalization of the Company should be read in conjunction with Host Marriott Corporation's Consolidated and Condensed Consolidated Financial Statements and Notes thereto contained elsewhere in this Prospectus.
AT SEPTEMBER 10, 1993 (UNAUDITED, IN MILLIONS) ------------------------ PRO FORMA PRO FORMA AS ADJUSTED(1) --------- -------------- Cash and equivalents................................... $ 27 $ 214 ====== ====== Long-term debt, including current portion.............. $2,164 $2,164 Convertible subordinated debt (LYONs)(2)............... 241 241 Shareholders' equity................................... 439 626 ------ ------ Total Capitalization................................... $2,844 $3,031 ====== ======
- -------- (1) Reflects receipt of proceeds of the Offerings after deducting estimated underwriting discounts and commissions and expenses of the Offerings. See "Use of Proceeds." (2) Pursuant to the LYONs Allocation Agreement, Marriott International assumed responsibility for 90% of the LYONs obligation or $217 million of the outstanding balance of $241 million of the LYONs as of September 10, 1993. The LYONs have been called for redemption on January 25, 1994. Based on the current market prices of the Common Stock and the Marriott International common stock, the Company expects that most holders will elect to convert LYONs into Common Stock and Marriott International common stock prior to redemption. See "Prospectus Summary--Recent Developments--LYONs Redemption." 14 PRO FORMA FINANCIAL DATA The unaudited Pro Forma Consolidated Balance Sheet of the Company as of September 10, 1993 presents, in the "Host Marriott Corporation Pro Forma" column, the financial position of the Company as if the Distribution and related transactions had been completed as of such date. The unaudited Pro Forma Consolidated Statement of Income of the Company for the thirty-six weeks ended September 10, 1993 and September 11, 1992 and for the fiscal year ended January 1, 1993 present, in the "Host Marriott Corporation Pro Forma" column, the results of operations of the Company as if the Distribution and related transactions had been completed at the beginning of the applicable period. The adjustments required to reflect the Distribution and related transactions are set forth in the "Distribution Pro Forma Adjustments" column and discussed in the accompanying notes. The unaudited Pro Forma Financial Data of the Company are presented for informational purposes only and may not reflect the Company's future results of operations and financial position or what the results of operations and financial position of the Company would have been had such transactions occurred as of the dates indicated. The unaudited Pro Forma Financial Data and Notes thereto of the Company should be read in conjunction with the Host Marriott Corporation Consolidated and Condensed Consolidated Financial Statements and Notes thereto contained elsewhere in this Prospectus. 15 HOST MARRIOTT CORPORATION PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
AT SEPTEMBER 10, 1993 (IN MILLIONS) -------------------------------------------------------------------- ADJUSTMENT TO REFLECT MARRIOTT HOST MARRIOTT INTERNATIONAL, ADJUSTED DISTRIBUTION MARRIOTT CORPORATION INC. ON THE MARRIOTT PRO FORMA CORPORATION HISTORICAL(1) EQUITY METHOD CORPORATION ADJUSTMENTS PRO FORMA ------------- ---------------- ----------- ------------ ----------- ASSETS Current Assets Cash and equivalents... $ 322 $ (141) $ 181 $ (25)(A) $ 27 (172)(N) 43 (O) Accounts receivable, net................... 612 (524) 88 (9)(A) 79 Inventories............ 298 (223) 75 (14)(A) 61 Other current assets... 201 (151) 50 (10)(A) 40 ------ ------- ------ ----- ------ 1,433 (1,039) 394 (187) 207 ------ ------- ------ ----- ------ Property and equipment, net.................... 3,399 (743) 2,656 (42)(J) 2,614 Investments in affili- ates................... 451 (93) 358 358 Investment and advances to Marriott International, Inc..... -- 718 718 (718)(B) -- Intangibles............. 442 (415) 27 27 Notes receivable and other.................. 629 (310) 319 217 (C) 536 ------ ------- ------ ----- ------ $6,354 $(1,882) $4,472 $(730) $3,742 ====== ======= ====== ===== ====== LIABILITIES AND EQUITY Current Liabilities Accounts payable....... $ 754 $ (541) $ 213 $ (99)(N) $ 77 (37)(A) Other current liabili- ties.................. 759 (565) 194 (46)(A) 148 ------ ------- ------ ----- ------ 1,513 (1,106) 407 (182) 225 ------ ------- ------ ----- ------ Long-term debt.......... 2,623 (382) 2,241 (8)(A) 2,156 43 (O) (42)(J) (44)(L) 200 (K) (60)(M) (200)(K) 26 (N) Other long-term liabili- ties................... 467 (333) 134 (2)(A) 132 Deferred income......... 161 (78) 83 83 Deferred income taxes... 473 17 490 (14)(J) 466 (10)(N) Convertible subordinated debt................... 241 241 241 Shareholders' Equity Convertible preferred stock................. 200 200 (184)(P) 16 Common stock........... 105 105 11 (P) 118 2 (M) Additional paid-in cap- ital.................. 41 41 173 (P) 272 58 (M) Retained earnings...... 581 581 (718)(B) 84 217 (C) 35 (A) (89)(N) 14 (J) 44 (L) Treasury stock, at cost.................. (51) (51) (51) ------ ------- ------ ----- ------ 876 876 (437) 439 ------ ------- ------ ----- ------ $6,354 $(1,882) $4,472 $(730) $3,742 ====== ======= ====== ===== ======
- -------- (1) Certain amounts have been reclassified to facilitate separate company presentation. 16 HOST MARRIOTT CORPORATION PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THIRTY-SIX WEEKS ENDED SEPTEMBER 10, 1993 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) --------------------------------------------------------------------- ADJUSTMENT TO REFLECT MARRIOTT HOST MARRIOTT INTERNATIONAL, ADJUSTED DISTRIBUTION MARRIOTT CORPORATION INC. ON THE MARRIOTT PRO FORMA CORPORATION HISTORICAL(1) EQUITY METHOD CORPORATION ADJUSTMENTS PRO FORMA ------------- ---------------- ----------- ------------ ----------- Sales Lodging Rooms.................. $2,037 $(1,671) $ 366 $(366)(E) $ -- Food and beverage...... 802 (694) 108 (108)(E) -- Other.................. 413 (385) 28 140 (E) 168 ------ ------- ------ ----- ------- 3,252 (2,750) 502 (334) 168 Contract services...... 3,011 (2,176) 835 (40)(D) 795 ------ ------- ------ ----- ------- 6,263 (4,926) 1,337 (374) 963 ------ ------- ------ ----- ------- Operating costs and ex- penses Lodging Departmental direct costs Rooms................. 492 (403) 89 (89)(E) -- Food and beverage..... 625 (539) 86 (86)(E) -- Other operating ex- penses, including pay- ments to hotel owners. 1,872 (1,633) 239 (147)(E) 93 1 (J) ------ ------- ------ ----- ------- 2,989 (2,575) 414 (321) 93 Contract services...... 2,901 (2,121) 780 (43)(D) 737 ------ ------- ------ ----- ------- 5,890 (4,696) 1,194 (364) 830 ------ ------- ------ ----- ------- Operating profit Lodging................ 263 (175) 88 (12)(E) 75 (1)(J) Contract services...... 110 (55) 55 3 (D) 58 ------ ------- ------ ----- ------- Operating profit before corporate expenses and interest............... 373 (230) 143 (10) 133 Corporate expenses...... (80) 39 (41) (41) Interest expense........ (156) 16 (140) 12 (C) (131) (4)(G) 2 (K) 2 (J) 4 (M) (1)(N) (1)(O) (5)(L) Interest income......... 21 (2) 19 19 ------ ------- ------ ----- ------- Income (loss) before in- come taxes, equity earnings of subsidiary and cumulative effect of changes in account- ing principles(2)...... 158 (177) (19) (1) (20) Provision (benefit) for income taxes........... 76 (74) 2 3 (H) 5 ------ ------- ------ ----- ------- Income (loss) before eq- uity in earnings of subsidiary and cumula- tive effect of changes in accounting princi- ples(2)................ 82 (103) (21) (4) (25) Equity in earnings of subsidiary, net of tax. 103 103 (103)(B) -- ------ ------- ------ ----- ------- Income (loss) before a cumulative effect of changes in accounting principles(2).......... 82 -- 82 (107) (25) Dividends on preferred stock.................. 12 -- 12 (11)(P) 1 ------ ------- ------ ----- ------- Income (loss) available for common stock before cumulative effect of changes in accounting principles(2).......... $ 70 $ -- $ 70 $ (96) $ (26) ====== ======= ====== ===== ======= Fully diluted earnings (loss) per share before cumulative effect of changes in accounting principle(2)........... $ 0.64 $ 0.64 $ (0.23) ====== ====== ======= (7.6) (I) 10.6 (P) Fully diluted common shares................. 109.8 109.8 1.8 (M) 114.6 ====== ====== ===== =======
- ------- (1) Certain costs have been reclassified to facilitate separate Company presentation. (2) Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," was adopted in the first fiscal quarter of 1993. In the second fiscal quarter of 1993, the Company changed its accounting method for assets held for sale. See "Notes to Condensed Consolidated Financial Statements." 17 HOST MARRIOTT CORPORATION PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THIRTY-SIX WEEKS ENDED SEPTEMBER 11, 1992 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) ---------------------------------------------------------------------- ADJUSTMENT TO REFLECT MARRIOTT MARRIOTT INTERNATIONAL, ADJUSTED DISTRIBUTION HOST MARRIOTT CORPORATION INC. ON THE MARRIOTT PRO FORMA CORPORATION HISTORICAL(1) EQUITY METHOD CORPORATION ADJUSTMENTS PRO FORMA ------------- ---------------- ----------- ------------ ------------- Sales Lodging Rooms.................. $2,004 $(1,618) $ 386 $(386)(E) $ -- Food and beverage...... 809 (688) 121 (121)(E) -- Other.................. 353 (325) 28 146 (E) 174 ------ ------- ----- ----- ------- 3,166 (2,631) 535 (361) 174 Contract services...... 2,771 (2,088) 683 (25)(D) 658 ------ ------- ----- ----- ------- 5,937 (4,719) 1,218 (386) 832 ------ ------- ----- ----- ------- Operating costs and ex- penses Lodging Departmental direct costs Rooms................. 474 (386) 88 (88)(E) -- Food and beverage..... 629 (531) 98 (98)(E) -- Other operating expenses, including payments to hotel owners................ 1,824 (1,556) 268 (162)(E) 107 1 (J) ------ ------- ----- ----- ------- 2,927 (2,473) 454 (347) 107 Contract services...... 2,676 (2,043) 633 (34)(D) 599 ------ ------- ----- ----- ------- 5,603 (4,516) 1,087 (381) 706 ------ ------- ----- ----- ------- Operating profit Lodging................ 239 (158) 81 (13)(E) 67 (1)(J) Contract services...... 95 (45) 50 9 (D) 59 ------ ------- ----- ----- ------- Operating profit before corporate expenses and interest............... 334 (203) 131 (5) 126 Corporate expenses...... (74) 40 (34) (34) Interest expense........ (161) 17 (144) 11 (C) (135) (4)(G) 1 (K) 2 (J) 4 (M) (5)(L) Interest income......... 20 (2) 18 -- 18 ------ ------- ----- ----- ------- Income (loss) before income taxes and equity earnings of subsidiary. 119 (148) (29) 4 (25) Provision (benefit) for income taxes........... 53 (64) (11) 6 (H) (5) ------ ------- ----- ----- ------- Income (loss) before eq- uity in earnings of subsidiary............. 66 (84) (18) (2) (20) Equity in earnings of subsidiary, net of tax. -- 84 84 (84)(B) -- ------ ------- ----- ----- ------- Income (loss)........... 66 -- 66 (86) (20) Dividends on preferred stock.................. 12 -- 12 (11)(P) 1 ------ ------- ----- ----- ------- Income (loss) available for common stock....... $ 54 $ -- $ 54 $ (75) $ (21) ====== ======= ===== ===== ======= Fully diluted earnings (loss) per share....... $ 0.51 $0.51 $ (0.19) ====== ===== ======= (5.8)(I) 10.6 (P) Fully diluted common shares................. 105.3 105.3 1.8 (M) 111.9 ====== ===== ===== =======
- -------- (1) Certain costs have been reclassified to facilitate separate Company presentation. 18 HOST MARRIOTT CORPORATION PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
FISCAL YEAR ENDED JANUARY 1, 1993 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) ---------------------------------------------------------------------- ADJUSTMENT TO REFLECT MARRIOTT MARRIOTT INTERNATIONAL, ADJUSTED DISTRIBUTION HOST MARRIOTT CORPORATION INC. ON THE MARRIOTT PRO FORMA CORPORATION HISTORICAL(1) EQUITY METHOD CORPORATION ADJUSTMENTS PRO FORMA ------------- ---------------- ----------- ------------ ------------- Sales Lodging Rooms.................. $2,843 $(2,315) $ 528 $ (528)(E) $ -- Food and beverage...... 1,190 (1,023) 167 (167)(E) -- Other.................. 518 (479) 39 194 (E) 233 ------ ------- ------ ------ ------- 4,551 (3,817) 734 (501) 233 Contract services...... 4,171 (3,154) 1,017 (41)(D) 976 ------ ------- ------ ------ ------- 8,722 (6,971) 1,751 (542) 1,209 ------ ------- ------ ------ ------- Operating costs and ex- penses Lodging Departmental direct costs Rooms................. 676 (546) 130 (130)(E) -- Food and beverage..... 917 (782) 135 (135)(E) Other operating expenses, including payments to hotel owners................ 2,625 (2,253) 372 (228)(E) 145 1 (J) ------ ------- ------ ------ ------- 4,218 (3,581) 637 (492) 145 Contract services...... 4,021 (3,064) 957 (53)(D) 904 ------ ------- ------ ------ ------- 8,239 (6,645) 1,594 (545) 1,049 ------ ------- ------ ------ ------- Operating profit Lodging................ 333 (236) 97 (8)(E) 88 (1)(J) Contract services...... 150 (90) 60 12 (D) 72 ------ ------- ------ ------ ------- Operating profit before corporate expenses and interest............... 483 (326) 157 3 160 Corporate expenses...... (129) 67 (62) 16 (F) (46) Interest expense........ (235) 25 (210) 16 (C) (198) (6)(G) (8)(L) 6 (M) 2 (K) 2 (J) Interest income......... 31 (3) 28 -- 28 ------ ------- ------ ------ ------- Income (loss) before income taxes and equity in earnings of Subsidiary............. 150 (237) (87) 31 (56) Provision (benefit) for income taxes........... 65 (103) (38) 19 (H) (19) ------ ------- ------ ------ ------- Income (loss) before eq- uity in earnings of subsidiary............. 85 (134) (49) 12 (37) Equity in earnings of subsidiary, net of tax. -- 134 134 (134)(B) -- ------ ------- ------ ------ ------- Net Income (loss)....... 85 -- 85 (122) (37) Dividends on preferred stock.................. 17 -- 17 (16)(P) 1 ------ ------- ------ ------ ------- Net Income (loss) avail- able for common stock.. $ 68 $ -- $ 68 $ (106) $ (38) ====== ======= ====== ====== ======= Earnings (loss) per share.................. $ 0.64 $ 0.64 $ (0.34) ====== ====== ======= 10.6 (P) (6.7)(I) Fully diluted common shares................. 106.5 106.5 1.8 (M) 112.2 ====== ====== ====== =======
- -------- (1) Certain costs have been reclassified to facilitate separate Company presentation. 19 NOTES TO PRO FORMA FINANCIAL STATEMENTS A. Represents the elimination of working capital for lodging properties and working capital and certain noncurrent liabilities for retirement communities owned by the Company and operated by Marriott International. B. Represents distribution of 100% of Marriott International common stock to the Company's common shareholders. C. Represents assumption by Marriott International of 90% of the LYONs. (See "Relationship Between the Company and Marriott International--LYONs Allocation Agreement.") D. Represents sales and operating expenses, other than depreciation, offset by rental income, for retirement communities owned by the Company and leased to Marriott International. E. Represents adjustment to reduce lodging sales of properties owned by the Company and operated by Marriott International to amounts to be remitted by Marriott International to the Company. F. Represents the elimination of nonrecurring costs directly related to the Distribution. G. Represents 1% commitment fee to Marriott International on the unborrowed portion of the revolving line of credit. H. Represents income tax impact of pro forma adjustments, at statutory rates, adjusted to reflect the loss of certain state income tax benefits. I. Represents elimination of shares that are antidilutive on a pro forma basis. J. Represents the transfer of land owned by the Company and leased to a partnership owning a Marriott hotel, along with related deferred taxes, and assumption of debt by Marriott International equal to the book value of the land and related impact on interest expense. K. Represents initial draw by the Company under the Marriott International line of credit (and corresponding paydown of other Company debt), the related impact on interest expense, and the reduction in commitment fee to Marriott International. L. Represents the impact of additional debt assumed by Marriott International, and the 100 basis point increase in interest rate applicable to the New Notes. M. Represents the Common Stock issued concurrently with the Distribution as part of the Exchange Offer, and the corresponding impact on interest expense. N. Represents adjustment to allocate outstanding drafts, cash and certain other assets and liabilities between the Company and Marriott International in accordance with the Distribution Agreement (as defined). O. Represents adjustment to reflect draws and related interest expense under a mortgage with Marriott International related to the funding of capital expenditures for the Philadelphia Convention Center Hotel. P. Represents adjustment to reflect conversion of Convertible Preferred Stock prior to the Distribution. Q. Excludes adjustment to reflect the loss on extinguishment of the Old Notes of approximately $9 million and transaction costs with respect to the Distribution and related transactions of approximately $13 million, because the amounts are non-recurring. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA FINANCIAL DATA The Company's Management's Discussion and Analysis of Pro Forma Financial Data should be read in conjunction with the Management's Discussion and Analysis of Results of Operations and Financial Condition for the thirty-six week periods ended September 10, 1993 and September 11, 1992 and the three fiscal years in the period ended January 1, 1993, which is attached as Annex A hereto. On October 8, 1993, the Company completed the Distribution and the Exchange Offer. As a result, the assets, liabilities, and businesses of the Company have changed substantially. Accordingly, the following pro forma analysis of financial position and results of operations is considered by management of the Company to be more reflective of the financial resources and operations of the Company as they now exist than Management's Discussion and Analysis of Results of Operations and Financial Condition which is included as part of this Prospectus. The following analysis should be read in conjunction with the Company's Consolidated and Condensed Consolidated financial statements and notes thereto, as well as the Pro Forma Financial Data, all of which are included as part of this Prospectus. PRO FORMA RESULTS OF OPERATIONS Thirty-six weeks ended September 10, 1993 compared to thirty-six weeks ended September 11, 1992. Pro forma sales increased approximately 16% to $963 million for the thirty-six weeks ended September 10, 1993 over the comparable 1992 amount. Total pro forma lodging sales declined by approximately 3% in the thirty-six weeks ended September 10, 1993 from the thirty-six weeks ended September 11, 1992 due primarily to the sale of seven full service hotels in 1992. However, on a comparable basis, excluding results for the seven full service hotels sold, pro forma lodging sales increased 8% in 1993, primarily due to a 7.7% increase in revenue per available room (weighted average room rate multiplied by the weighted average occupancy rate) for the Company's combined lodging operations. This increase represents a contribution from each of the Company's four lodging products with particularly strong improvement by the Residence Inn and Courtyard products. The Company's hotels consistently outperform the industry's average occupancy rate by a significant margin, and averaged approximately 78.9% for the first eight months of 1993 compared to 65.3% for the lodging industry. Pro forma lodging operating profit increased 12% in the 1993 thirty-six week period compared with the comparable period in 1992, principally due to the increase in revenues. Because the lodging property operations have a relatively fixed cost structure, increases in room rate generally yield greater percentage increases in operating profit. The Host/Travel Plazas Business experienced a sales increase in the 1993 period of 20% which is primarily attributable to the Company's acquisition of the Dobb's Houses, Inc. concessions in late 1992. See "Business and Properties--Host/Travel Plazas Business." Pro forma operating profit for the Host/Travel Plazas Business was relatively unchanged due principally to a general decline in U.S. enplanements, reduced traffic on several major tollroad systems, higher rent at one airport and unit remodeling on one tollroad system. The Host/Travel Plazas Business has led the industry in introducing branded products at its locations, including brands such as Pizza Hut, Burger King, Taco Bell, Sbarro's, Dunkin' Donuts, TCBY yogurt, Mrs. Fields cookies, Nathan's Famous hot dogs and Cheers. This strategy has resulted in enhanced customer capture rate but has caused a narrowing of profit margins. Management of the Company believes that the restructuring of the Host/Travel Plazas Business currently being implemented will better position it to increase operating efficiency and build synergies between its product offerings. See "Summary-- Recent Developments--Host/Travel Plazas Restructuring." Pro forma corporate expenses increased 20% in 1993 due to an increase in losses on the Company's equity investments, primarily due to the Company reporting substantially all of the losses of TSHCO beginning in fiscal 1993. Pro forma interest expense decreased slightly in the thirty-six weeks ended September 11, 1993 due to lower interest rates. Pro forma income tax expense increased $10 million principally as a result of the impact of a Federal tax rate increase enacted during the year. SOURCES AND USES OF CAPITAL Operating cash flow is generated principally by the Company's Ownership Business (approximately two-thirds of 1992 pro forma operating cash flow) and by the Host/Travel Plazas Business. As a result of the 21 Distribution, the Company is substantially more leveraged than it was prior to the Distribution. However, the Company believes that financial resources from ongoing operations as well as funds available under its $630 million line of credit will be sufficient to enable it to meet its debt service needs and finance its capital expenditures for the forseeable future. Financing Activities. On a pro forma basis, the Company had consolidated long-term debt of $2.2 billion at September 10, 1993. Substantially all of this debt carries fixed interest rates and the weighted average rate approximates 9.5%. The Company is also party to $527 million aggregate notional amount of interest exchange agreements. The principal agreement (covering $500 million) requires payment by the Company of interest based on specified floating rates (average rate 3.4% at September 10, 1993) and collects interest at fixed rates (average rate of 7.6% at September 10, 1993) through 1997. The Company owns a portfolio of real estate which can be sold or used to secure new financings. Pro forma net property and equipment, including property and equipment of the Host/Travel Plazas Business, totaled $2.6 billion at September 10, 1993, including approximately $1.8 billion which had not been pledged or mortgaged. The Company has initiated discussions with several financial institutions and investment banks which have expressed an interest in assisting it in obtaining long-term financing and (subject, among other things, to compliance with its existing debt agreements, including requirements to use the proceeds of certain refinancings to repay indebtedness) may use unencumbered assets as security for future financings, if such financings are determined to be advantageous. Such financings could take the form of traditional secured real estate financings or could be effected through vehicles such as formation of a real estate investment trust (REIT), assignment of senior living services lease payments or collateralized mortgage financings. In addition, the Company may, from time to time, consider opportunities to sell certain of its real estate properties if price targets can be achieved. Management does not believe that sales of property will be required for the Company to meet its debt service and capital expenditure requirements. In cases where there is an intent to sell particular properties, the Company assesses net realizable value of each individual property to be sold, on the basis of expected sales price less estimated costs of disposal. Otherwise, the Company assesses impairment of its real estate properties based on whether it is probable that undiscounted future cash flows from such properties will be less than their net book value. Capital expenditure program. Management estimates that capital spending for renovation and refurbishment of the Company's existing real estate properties will approximate $45 million annually. The majority of this amount is expected to be reserved in accordance with the terms of the management agreements for the lodging properties. Additionally management anticipates that an additional $50 million will be spent annually to maintain and expand the Host/Travel Plazas Business. In addition, the Company is committed to completing construction of two hotel properties and one retirement community. Capital expenditures for these projects are estimated to be $100 million in 1993 (including amounts incurred before the Distribution), $125 million in 1994 and $50 million in 1995. The Company has obtained a $40 million industrial development bond to finance a portion of the construction costs for the Philadelphia Airport Hotel and will also receive mortgage financing from Marriott International of up to $125 million to finance a portion of the construction costs for the Philadelphia Convention Center Hotel, of which approximately $43 million was borrowed as of December 31, 1993. The remaining portion of capital expenditures will be funded from cash from operations or borrowings under the Credit Agreement. Acquisitions. The Company expects to use the net proceeds of the Offering for acquisitions of lodging properties or related assets, to the extent that attractive acquisition opportunities become available. The Company may seek additional debt or equity financing in connection with such acquisitions, including debt secured by properties acquired. The Company believes it will have adequate sources of funding to permit it to pursue its acquisition strategy. Debt service guarantees. In addition to servicing its own debt, the Company will continue to be contingently liable under various guarantees of obligations of certain affiliates. Such commitments are limited, in the aggregate, to $296 million at October 8, 1993. Management believes fundings under these guarantees in 1993 will be approximately $22 million and will decline significantly in 1994 as the Company's obligations expire or maturities of partnership debt are extended. Credit Facility from Marriott International. An additional source of liquidity for the Company is the $630 million revolving credit facility from Marriott International available through 2007. See "Financing--Credit Agreement." The Company estimates that, as of December 31, 1993, approximately $175 million (net of cash on hand) was outstanding under the credit facility. 22 SELECTED HISTORICAL FINANCIAL DATA The following table presents certain selected historical financial data of the Company which has been derived from the Host Marriott Corporation Consolidated Financial Statements as of and for the thirty-six weeks ended September 10, 1993 and September 11, 1992 and the five most recent fiscal years ended January 1, 1993. The information in the table does not reflect the Distribution and related transactions and, accordingly, the table presents data for the Company that include amounts attributable to Marriott International. As a result of the Distribution and related transactions, the assets, liabilities and businesses of the Company have changed substantially. Accordingly, the financial disclosures set forth in the table below do not reflect the financial condition and results of operations of the Company as it now exists. See "Pro Forma Financial Data" included elsewhere in this Prospectus. The information set forth below should be read in conjunction with the Host Marriott Corporation Consolidated and Condensed Consolidated Financial Statements and Notes thereto and the Management's Discussion and Analysis of Results of Operations and Financial Condition attached hereto as Annex A.
THIRTY-SIX WEEKS ENDED --------------------------- SEPTEMBER 10, SEPTEMBER 11, ------------------------------------- 1993 1992 1992(1) 1991 1990(2) 1989(3) 1988 ------------- ------------- ------- ------ ------- ------- ------ (IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED) (53 WEEKS) INCOME STATEMENT DATA: Sales................... $6,263 $5,937 $8,722 $8,331 $7,646 $7,536 $6,624 Operating profit before corporate expenses and interest............... 383 344 496 478 353 535 501 Interest expense........ 166 171 248 265 183 185 136 Income from continuing operations before cumulative effect of a change in accounting principle (4)(5)....... 82 66 85 82 47 181 189 Net income.............. 80 66 85 82 47 177 232 Per share:(6) Income from continuing operations before cumulative effect of a change in accounting principle............. $0.65 $0.51 $0.64 $0.80 $0.46 $1.62 $1.59 Net income............. 0.63 0.51 0.64 0.80 0.46 1.58 1.95 Cash dividends declared per share.............. 0.14 0.21 0.28 0.28 0.28 0.25 0.21 BALANCE SHEET DATA: Total assets............ $6,341 $6,425 $6,410 $6,509 $7,034 $6,600 $6,079 Long-term debt.......... 2,614 2,848 2,732 2,979 3,598 3,050 2,857 Convertible subordinated debt ("LYONs")(7)...... 241 222 228 210 -- -- --
- -------- (1) Operating results in 1992 included pretax costs of $21 million related to the Distribution. (2) Operating results in 1990 reflect pretax restructuring charges and writeoffs, net of certain nonrecurring gains, of $153 million related to continuing operations. (3) Operating profit in 1989 reflects pretax restructuring charges and writeoffs of $256 million related to continuing operations and a $231 million pretax gain on the transfer of the airline catering division. Net income also reflects a $39 million after-tax charge recorded in conjunction with the planned disposal of restaurant operations. (4) Restaurant operations were discontinued in 1989. (5) Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," was adopted in the first fiscal quarter of 1993. In the second fiscal quarter of 1993, the Company changed its accounting method for assets held for sale. See "Notes to Condensed Consolidated Financial Statements." (6) Earnings per share is computed on a fully diluted basis using weighted average number of outstanding common and common equivalent shares, plus other potentially dilutive securities. (7) Pursuant to the LYONs Allocation Agreement, Marriott International assumed responsibility for 90% of the LYONs obligation or $217 million of the outstanding balance of $241 million of the LYONs as of September 11, 1993. The LYONs have been called for redemption on January 25, 1994. Based on the current market prices of the Common Stock and the Marriott International common stock, the Company expects that most holders will elect to convert LYONs into Common Stock and Marriott International common stock prior to redemption. See "Prospectus Summary--Recent Developments--LYONs Redemption." 23 BUSINESS AND PROPERTIES OWNERSHIP BUSINESS The Company is one of the largest owners of lodging properties in the world. The Company's lodging properties are operated under Marriott brand names and managed by Marriott International. The Company is the largest owner of hotels operated under Marriott brand names and owns approximately 23% of the lodging properties operated by Marriott International. The following table sets forth information regarding the lodging properties and senior living facilities that comprise the Company's Ownership Business. Each of these properties are operated by Marriott International pursuant to Lodging Management Agreements, in the case of lodging properties, or a Senior Living Services Lease Agreement, in the case of senior living facilities.
NUMBER NUMBER OF PROPERTIES OF ROOMS ------------- -------- Marriott Hotels, Resorts and Suites.................... 28(1) 14,774 Courtyard Hotels....................................... 54 7,940 Residence Inns......................................... 18(2) 2,178 Fairfield Inns......................................... 30(3) 3,632 Senior Living Communities.............................. 14(4) 3,942(5) --- ------ Total.............................................. 144 32,466 === ======
- -------- (1) Includes (i) two hotels currently under development, with one scheduled for completion in the first quarter of 1995 and one scheduled for completion in the first quarter of 1996, (ii) the New York Marriott Marquis, which was recently consolidated on the Company's balance sheet and (iii) the Ft. Lauderdale Marina Marriott hotel which was recently acquired by the Company. (2) Excludes 11 Residence Inns included in a partnership no longer consolidated with the Company. (3) The Company has executed a non-binding letter of intent to sell 26 of these Fairfield Inns. See "Prospectus Summary--Recent Developments-- Dispositions." (4) Includes a senior living facility currently under development and scheduled for completion in January 1994. (5) Represents total number of beds. Management believes that the lodging industry as a whole is benefitting from an improved supply/demand dynamic. Based on industry data, demand for hotel rooms increased 4.0% in 1992 and 3.9% in the first eight months of 1993. Management believes that recent demand increases have occurred due to an improved economic environment and a corresponding increase in business travel. In recent years, room supply growth in the lodging industry overall has slowed dramatically. From 1987 to 1990, room supply increased an average of approximately 4% annually and resulted in an oversupply of rooms. This growth slowed to 2.3% in 1991 and 1.3% in 1992. Management believes the decrease in growth is attributable to many factors, including the limited availability of financing for new hotel construction, availability of existing properties for sale at attractive prices and the recent recession in the U.S. While the lodging industry in general has recently improved, the full service hotel segment has lagged this recovery. Management believes that significant opportunities exist within the full service segment to acquire hotels at attractive multiples of cash flow or at significant discounts to replacement value. In addition, the Company believes that this segment offers many opportunities to acquire underperforming hotels, which can be improved under new management. The Company believes that the full service segment, in particular, has significant potential for improved occupancy and average room rates as the economy continues to improve and as business travel continues to increase. The Company's lodging properties consistently outperform the industry's average occupancy rate by a significant margin, and averaged approximately 78.9% for the first eight months of 1993 compared to 65.3% for the lodging industry. Management anticipates that, due to these superior occupancy rates, the limited supply of new rooms and the recent increase in business travel, there may be an opportunity to increase room rates at the Company's properties. Because the lodging property operations have a relatively fixed cost structure, increases in room rate generally yield greater percentage increases in operating cash flow. 24 Marriott Hotels, Resorts and Suites. The full service Marriott hotels owned by the Company are part of the full service Marriott hotel system, which was ranked first overall for 1992 in the full service hotel segment by Business Travel News in its February 8, 1993 issue. These hotels achieved an occupancy rate of 72.2 percent for 1992, compared to the 62 percent average occupancy rate for the entire hotel industry. The chart below sets forth performance information for such hotels for the first three fiscal quarters of 1992 and 1993 and for fiscal years 1990 through 1992.
3Q 3Q 1990 1991 1992 1992 1993 ------ ------ ------ ------ ------ Number of Properties...................... 23 23 23 23 24 Number of Rooms........................... 9,741 10,276 10,276 10,276 10,560 Average Daily Rate........................ $88.77 $85.35 $89.27 $87.28 $89.24 Occupancy Percentage...................... 68.2% 69.4% 72.2% 73.1% 75.6%
In addition to the properties set forth above, the Company is developing two other full service Marriott Hotels, the Philadelphia Convention Center Hotel (1,200 rooms, completion scheduled for first quarter, 1995) and the Philadelphia Airport Hotel (419 rooms, completion scheduled for first quarter, 1996), that, when completed, will be operated by Marriott International under Lodging Management Agreements. The Philadelphia Airport Hotel has been largely pre-financed through the issuance of $40 million of industrial revenue bonds. The Philadelphia Convention Center Hotel will be financed, in part, by the Philadelphia Mortgage (as defined). See "Relationship Between the Company and Marriott International--Philadelphia Mortgage." In addition, the Company recently acquired the 580-room Ft. Lauderdale Marina Marriott and the Company owns a 50% interest in TSHCO, the owner of the New York Marriott Marquis. Effective in the fourth fiscal quarter of 1993, the Company consolidated TSHCO. See "Prospectus Summary--Recent Developments--Acquisitions;--New York Marriott Marquis." Courtyard Hotels. The 54 Courtyard hotels owned by the Company are among the newest in the Courtyard hotel system, which was ranked first in price value, and second overall, for 1992 in the mid-priced hotel segment by Business Travel News in its February 8, 1993 issue. These hotels achieved an occupancy rate of 76.3 percent for 1992 compared to the 62 percent average occupancy rate for the entire hotel industry. The chart below sets forth performance information for such hotels for the first three fiscal quarters of 1992 and 1993 and for fiscal years 1990 through 1992.
3Q 3Q 1990 1991 1992 1992 1993 ------ ------ ------ ------ ------ Number of Properties...................... 37 52 54 55 54 Number of Rooms........................... 5,283 7,395 7,896 8,045 7,940 Average Daily Rate........................ $63.57 $61.12 $61.54 $60.98 $64.64 Occupancy Percentage...................... 57.6% 63.7% 76.3% 77.8% 80.5%
Residence Inns. The 18 Residence Inns owned by the Company are among the newest in the Residence Inn system, which was ranked first overall for 1992 among extended stay operators in the all suites segment by Business Travel News in its February 8, 1993 issue. These Residence Inns achieved an occupancy rate of 77.4 percent for 1992, compared to the 62 percent average occupancy rate for the hotel industry. The chart below sets forth performance information for such Inns for the first three fiscal quarters of 1992 and 1993 and for fiscal years 1990 through 1992. In the fourth fiscal quarter of 1993, the Company sold certain of its equity interests in a partnership owning eleven Residence Inn by Marriott hotels. The following table excludes information with respect to these eleven Residence Inns. See "Prospectus Summary--Recent Developments--Residence Inns."
3Q 3Q 1990 1991 1992 1992 1993 ------ ------ ------ ------ ------ Number of Properties...................... 6 17 18 18 18 Number of Rooms........................... 637 2,072 2,178 2,178 2,178 Average Daily Rate........................ $72.32 $73.69 $73.38 $73.59 $74.39 Occupancy Percentage...................... 67.2% 68.7% 77.4% 77.3% 85.4%
25 Fairfield Inns. The 30 Fairfield Inns owned by the Company are among the newest in the Fairfield Inn system, which was ranked first overall for 1992 in the economy hotel segment by Business Travel News in its February 8, 1993 issue. These Fairfield Inns achieved an occupancy rate of 77.2 percent for 1992, compared to the 62 percent average occupancy rate for the entire hotel industry. The chart below sets forth performance information for such Inns for the first three fiscal quarters of 1992 and 1993 and for fiscal years 1990 through 1992. The Company has executed a non-binding letter of intent to sell 26 of these Fairfield Inn by Marriott hotels. See "Prospectus Summary--Recent Developments--Dispositions."
3Q 3Q 1990 1991 1992 1992 1993 ------ ------ ------ ------ ------ Number of Properties...................... 23 30 30 30 30 Number of Rooms........................... 2,841 3,633 3,632 3,632 3,632 Average Daily Rate........................ $37.94 $36.46 $38.07 $38.38 $40.05 Occupancy Percentage...................... 50.9% 71.2% 77.2% 79.5% 81.0%
Senior Living Facilities. The Company also owns 13 operating senior living facilities, located in seven states, which offer independent living apartments, assisted living services and skilled nursing care. Certain of these senior living facilities are operated under the trade names Brighton Gardens and Stratford Court. The chart below sets forth performance information for such senior living facilities for the first three fiscal quarters of 1992 and 1993 and for fiscal years 1990 through 1992. Units open more than one year at the beginning of 1992 achieved an average occupancy rate in excess of 90 percent as of the end of 1992.
3Q 3Q 1990 1991 1992 1992 1993 ----- ----- ----- ----- ----- Number of Units................................ 7 9 12 12 13 Number of Beds................................. 1,881 2,359 3,437 3,345 3,589 Occupancy Percentage........................... 74.5% 72.2% 72.1% 69.7% 81.4%
In addition, the Company is scheduled to complete a Stratford Court Facility in Boca Raton (Boca Point), Florida (353 beds) in January 1994. The Company's, Jefferson Senior Living facility in Arlington, Virginia (included in the above chart) is being sold as condominium units. Approximately 118 of these units remain unsold as of December 20, 1993. The average price per unit sold in 1993 through December 20 was approximately $212,000. HOST/TRAVEL PLAZAS BUSINESS The Company is the leading operator of airport concessions in the United States with restaurants, gift shops and related facilities at 70 domestic airports and three foreign airports. The Company's foreign airport operations include concessions at two airports in New Zealand and one airport in Australia. The Company's airport concessions operate primarily under the trade name "Host" and include restaurants, cafeterias, snack bars and gift shops. Payments by the Company under operating contracts with airport authorities are typically based on percentages of sales subject to an annual minimum. The terms of such agreements vary but many have initial terms of ten or more years for food and beverage concessions, and five or more years for merchandise facilities. Additionally, the Company operates restaurants, gift shops and related facilities at 42 major tourist attractions, stadiums and arenas. During the fourth quarter of 1992, the Company acquired the 19 airport concessions of Dobbs Houses, Inc. for approximately $47 million. The Company is also the leading operator of travel plazas in the United States, with 93 travel plazas on 14 tollroads. The Company currently operates such facilities under contracts with the highway authorities which typically extend 15 years. The highway systems are located primarily in the Mid-Atlantic, Midwest and New England states as well as in Florida. Travel plazas typically include restaurants, snack bars, vending areas and merchandise facilities. 26 The Host/Travel Plazas Business includes branded food, beverage and merchandise concepts at many of its airports and tollroads, including Pizza Hut, Burger King, Taco Bell, Sbarro's, Dunkin' Donuts, TCBY yogurt, Mrs. Fields cookies, Nathan's Famous hot dogs, and Cheers. As a licensee of these brands, the Company typically pays royalties based on a percentage of sales. Three major Host airport contracts will expire in 1994. These contracts represent approximately 18% of total airport concessions business annual revenue. The Company has detailed development strategies in place with respect to each of these airports in order to maintain significant presence on a profitable basis. Based on the Company's successful track record in achieving lease extensions of existing contracts and gaining new contracts, management expects that these strategies will be successful. In November 1993, the Company's Host/Travel Plazas Division announced a plan to redesign its operations structure to improve the effectiveness and competitiveness of the business. Implementation of the new structure is currently underway and is expected to be completed in the first quarter of 1994. The Company will incur costs of approximately $7 million, principally for severance, relocation, and the closing of certain offices. The Company will take a restructuring charge in the fourth quarter of fiscal 1993 to reflect these costs. See "Prospectus Summary--Recent Developments--Host/Travel Plazas Restructuring." PARTNERSHIP INVESTMENTS The Company and certain of its subsidiaries also conduct the Company's partnership investments and partnership services business. The Company and/or its subsidiaries own an equity investment in, and serve as the managing general partner for, various partnerships which collectively own 52 Marriott full service hotels, 120 Courtyard hotels, 50 Residence Inns and 50 Fairfield Inns. Of these, 117 lodging properties are located on land leased from Marriott International or one of its subsidiaries. In addition, the Company holds notes receivable from partnerships in the aggregate amount of approximately $265 million. As a managing general partner, the Company or its subsidiary is responsible for the day-to-day management of partnership operations, which includes payment of partnership obligations from partnership funds, preparation of financial reports and tax returns and communications with lenders, limited partners and regulatory bodies. As managing general partner, the Company or its subsidiary is usually reimbursed for the cost of providing these services. Hotel properties owned by the partnerships generally were acquired from the Company in connection with limited partnership offerings. These hotel properties are currently operated under agreements with Marriott International. As the general partner of such partnerships, the Company and its subsidiaries oversee and monitor Marriott International's performance pursuant to these agreements. The Company's interests in these partnerships range from 1% to 50%. Cash distributions provided from these partnerships are tied to the overall performance of the underlying properties and the overall level of debt owed by the partnership. Partnership distributions to the Company approximated $6 million in 1993. All partnership debt is non-recourse to the Company except to the extent of limited debt service guarantees discussed below. In most circumstances, the Company has the ability to sell all or a portion of its investments in each partnership to other partners or outside third parties. The Company is contingently liable under various guarantees of obligations of certain of these partnerships. Such commitments are limited in the aggregate to $296 million at October 8, 1993. Management believes fundings under these guarantees in 1993 will be approximately $22 million and will decline significantly in 1994 as the Company's obligations expire or maturities of partnership debts are extended. In all cases, fundings of such guarantees represent loans to the respective partnerships. OTHER ASSETS AND OPERATIONS In connection with the aforementioned businesses, the Company conducts certain property and lease management activities including (i) real estate sales, (ii) office leasing and (iii) facilities and property management. 27 The Company owns approximately 65 undeveloped parcels of vacant land totalling approximately 315 acres originally purchased for the development of hotels or senior living facilities. In addition, the Company owns a 210-acre parcel of undeveloped land in Germantown, Maryland, suitable for commercial use. The Company may sell these properties from time to time when market conditions are favorable. The Company has disposed of most of its restaurant business, but continues to own certain free-standing restaurants. The Company also holds notes receivable arising from disposition of properties and businesses, including its airline catering business and restaurant business. COMPETITION Competition in the U.S. lodging industry is strong and is generally based on quality of service, attractiveness of facilities and locations, consistency of product offerings, price and other factors. Room revenues, which are determined by occupancy levels and room rates, have continued to be constrained in 1993 as a result of a slow growth economy, overbuilt markets, price sensitive customers and the effect of corporate restructurings. However, the Company has experienced increases in occupancy and room rates in each of its lodging product lines through the third quarter of 1993 over a comparable period for 1992. Room supply growth is expected to be minimal over the next few years due principally to a scarcity of financing for new construction. The cyclical nature of the U.S. lodging industry has been demonstrated over the past two decades--low hotel profitability during the 1974-75 recession led to a prolonged slump in new construction and, over time, high occupancy rates and real price increases in the late 1970s and early 1980s. Changes in tax and banking laws during the early 1980s precipitated a construction boom that peaked in 1986 but created an oversupply of hotel rooms that has not yet been absorbed by increased demand. The Company expects the U.S. hotel supply/demand imbalance to continue to improve. The Company believes that its lodging properties enjoy competitive advantages arising from their participation in the Marriott hotel systems. Repeat guest business is enhanced by the Marriott Honored Guest Awards program, which awards frequent travelers with free stays of varying lengths at Marriott Hotels, Resorts and Suites, and by frequent stay programs established by Courtyard by Marriott (Courtyard Club) and Fairfield Inn by Marriott (INNsiders Club). Marriott International's nationwide marketing programs and reservation systems as well as the advantage of increasing customer preference for Marriott brands should also help these properties to maintain or increase their premium over competitors in both occupancy and room rates. In connection with the Host/Travel Plazas Business, the Company competes with several national and regional companies to obtain the rights from airport and highway authorities to operate food, beverage and merchandise concessions. To compete effectively, the Company regularly updates and refines its product offerings (including the addition of branded products) and facilities to generate higher sales and thereby increase returns both to the airport and highway authorities and the Company. EMPLOYEES The Company and its subsidiaries collectively have approximately 23,000 employees. Approximately 5,900 of such employees are covered by collective bargaining agreements. LEGAL PROCEEDINGS A number of holders of the Company's Old Notes instituted legal proceedings against the Company. For a discussion of the allegations raised and agreements to settle certain of such claims, see "Risk Factors--Pending Litigation." 28 THE DISTRIBUTION Prior to October 8, 1993, the Company was named "Marriott Corporation." In addition to conducting its existing Ownership Business and the Host/Travel Plazas Business, Marriott Corporation engaged in lodging and senior living services management, timeshare resort development and operation, food service and facilities management and other contract services businesses (the "Management Business"). On October 8, 1993, Marriott Corporation made a special dividend consisting of the distribution (the "Distribution") to holders of outstanding shares of Common Stock, on a share-for-share basis, of all outstanding shares of its wholly-owned subsidiary, Marriott International, which at the time of the Distribution held all of the assets relating to the Management Business. Marriott International now conducts the Management Business as a separate publicly-traded company. The Distribution was designed to separate two types of businesses with distinct financial, investment and operating characteristics so that each could adopt strategies and pursue objectives appropriate to its specific needs. As a result of the Distribution, the Company believes it is better able to concentrate its attention and financial resources on its core businesses and to manage its real estate and Host/Travel Plazas Business for cash flow. The Company and Marriott International are parties to several important ongoing arrangements, including (i) agreements pursuant to which Marriott International manages or leases the Company's portfolio of lodging properties and senior living facilities and (ii) the Credit Agreement pursuant to which Marriott International provides a $630 million line of credit to Holdings. See "Relationship Between the Company and Marriott International" and "Financing--Credit Agreement." THE EXCHANGE OFFER AND RESTRUCTURING THE EXCHANGE OFFER In connection with the Distribution, the Company also completed the Exchange Offer pursuant to which holders of Old Notes in aggregate principal amount of approximately $1.2 billion exchanged such Old Notes for a combination of (i) cash, (ii) Common Stock and (iii) New Notes issued by Hospitality. The coupon and maturity date for each series of New Notes was 100 basis points higher and four years later, respectively, than the series of Old Notes for which it was exchanged (except that the maturity of the New Notes issued in exchange for the Series L Senior Notes due 2012 was shortened by five years). The Company also conducted a consent solicitation pursuant to which, as a condition to participation in the Exchange Offer, holders of Old Notes were required to deliver (i) a consent to the Distribution and a waiver of any defaults, claims or rights under the Old Note Indenture relating thereto, (ii) a release and discharge of legal or equitable claims relating to the Distribution and (iii) a consent to the deletion of a negative pledge covenant in the Old Note Indenture to permit the Restructuring and grant of a stock pledge under the New Note Indenture (collectively, the "Consents and Releases"). The Company received tenders of approximately $1.2 billion of Old Notes. Excluding the Series F Notes due 1995 (the "Old Series F Notes") and the Series I Senior Notes due 1995 (the "Old Series I Notes"), the Company received tenders for 82% of the aggregate amount of Old Notes subject to the Exchange Offer. The Company has redeemed all of the Old Series F Notes that did not tender in the Exchange Offer, and has secured the Old Series I Notes equally and ratably with the New Notes issued in the Exchange Offer. The Company expects to recognize an extraordinary pre-tax loss of approximately $9 million in the fourth quarter of fiscal 1993 in connection with extinguishment of debt in the Exchange Offer. THE RESTRUCTURING In connection with the Exchange Offer, the Company effected the restructuring of its assets (the "Restructuring"). As a result of the Restructuring, the Company's primary asset is the capital stock of Holdings, although the Company conducts certain operations directly and holds interests in various other subsidiaries. Holdings is a holding company, the primary asset of which is the capital stock of Hospitality, and is the borrower under the Credit Agreement. Hospitality is also a holding company which owns the capital stock of HMH Properties, Inc. ("HMH Properties") and Host Marriott Travel Plazas, Inc. ("HMTP"). In the Restructuring, most of the assets relating to the Ownership Business were transferred to HMH Properties and its subsidiaries, and most of the assets relating to the Host/Travel Plazas Business were transferred to HMTP and its subsidiaries. Certain assets relating to such businesses (the "Retained Business") were retained directly by the Company and certain of its other subsidiaries (the "Retained Business Subsidiaries"). 29 The Company also has two subsidiaries used to fund new acquisitions. HMC Ventures, Inc. ("HMC Ventures") is an unrestricted subsidiary under the Credit Agreement that will be capitalized with approximately $50 million from recent asset sales. HMC Acquisitions, Inc. ("HMC Acquisitions") is a newly-formed subsidiary that, pursuant to pending amendments to the Credit Agreement, will be permitted to use the net proceeds of the Offering to fund acquisitions. HMC Acquisitions will be a guarantor under the Credit Agreement. See "Financing-- Credit Agreement." The following chart shows the structure of the Company and its subsidiaries. The businesses that are owned by the Company through HMH Properties and HMTP are described below next to the boxes designated "HMH Properties, Inc. and Subsidiaries" and "Host Marriott Travel Plazas, Inc. and Subsidiaries." The "Retained Business," which is owned by the Company either directly or through one or more of the Retained Business Subsidiaries and HMC Ventures, Inc., is described next to the box designated "Host Marriott Corporation." The following chart should be read in conjunction with the narrative description set forth in "Business and Properties." References to airports, tollroads, stadiums, arenas and tourist attractions indicate Host/Travel Plazas concessions at such facilities. All unit counts listed below are as of January 19, 1994. See "Prospectus Summary--Recent Developments--Acquisitions." The Retained Business (a) 14 Full Service Hotels (b)(c) 9 Airports Host Marriott Corporation 6 Tollroads (Old Notes Issuer) 3 Stadiums and arenas 30 Restaurants 33 Partnership Investments 1 Undeveloped Land Parcel HMC HMC HMH Holdings, Inc. Acquisitions, Ventures, (New Notes Guarantor) Retained Business Inc. Inc. (Credit Agreement Borrower) Subsidiaries Host Marriott Hospitality, Inc. (New Notes Issuer) (d) HMH Properties, Inc. Host Marriott Travel Plazas, Inc. and Subsidiaries (g) and Subsidiaries (h) (New Notes Guarantors) (New Notes Guarantors) 11 Full Service Hotels 64 Airports 54 Courtyard Hotels 8 Tollroads 18 Residence Inns 39 Major tourist attractions, 30 Fairfield Inns (a) stadiums and arenas 14 Senior Living Facilities (f) 3 Full Service Hotels 65 Undeveloped Land Parcels 24 Restaurants - -------- (a) The Retained Business is owned by either the Company or one of the Retained Business Subsidiaries, and excludes 11 Residence Inns that were deconsolidated from the Company's balance sheet in the fourth quarter. (b) Includes (i) two hotels under development with one scheduled for completion in the first quarter of 1995 and one scheduled for completion in the first quarter 1996 and (ii) the New York Marriott Marquis which was consolidated by the Company in the fourth quarter of fiscal 1993. (c) Includes the Ft. Lauderdale Marina Marriott hotel which was recently acquired by HMC Ventures, Inc. (d) The New Notes are guaranteed by Holdings and all material subsidiaries of Hospitality, and are secured by a pledge of the stock of Hospitality and its material subsidiaries other than Marriott Financial Services, Inc. (e) The Company has executed a letter of intent to sell 26 of these Fairfield Inns. See "Prospectus Summary--Recent Developments--Dispositions." (f) Includes a senior living facility under development and scheduled for completion in January 1994. (g) Includes HMH Courtyard Properties, Inc., Marriott Financial Services, Inc. and HMC Retirement Properties, Inc. (h) Includes Host International, Inc., Gladieux Corporation and Marriott Family Restaurants, Inc. 30 FINANCING The following is a summary of important terms of certain indebtedness and financing arrangements of the Company and its subsidiaries. For more complete information regarding such documents, reference is made to the definitive agreements and instruments governing such indebtedness and financing arrangements, copies of which have been filed as exhibits to, or incorporated by reference in, the Registration Statement of which this Prospectus is a part, and which are incorporated by reference herein. NEW NOTES Hospitality issued $1.2 billion in aggregate principal amount of New Notes in the Exchange Offer. Each series of New Notes is secured by a pledge of all of the capital stock of Hospitality, HMH Properties, HMTP and certain of their subsidiaries, and is guaranteed (the "Guarantees") by Holdings, HMH Properties, HMTP and their material subsidiaries (the "Guarantors"). The New Notes were issued in series with an average maturity of 11.3 years. The weighted average interest rate on the New Notes is 10.5%. The New Notes are senior obligations of Hospitality and the Guarantees are senior obligations of the Guarantors. The New Note Indenture contains covenants that, among other things, (i) limit the ability of Hospitality to pay dividends and make other distributions and restricted payments, (ii) limit the ability of Hospitality and its subsidiaries to incur additional debt, (iii) limit the ability of Hospitality and its subsidiaries to create additional liens on their respective assets, (iv) limit the ability of the subsidiaries of Hospitality to incur debt and issue preferred stock, (v) limit the ability of Hospitality and its subsidiaries to engage in certain transactions with related parties, (vi) limit the ability of each subsidiary of Hospitality to enter into agreements restricting such subsidiary in paying dividends or making certain other payments and (vii) limit the activities and businesses of Holdings. Under certain circumstances, Hospitality is required to redeem all or a portion of the New Notes with the proceeds of Refinancing Indebtedness (as defined in the New Note Indenture) incurred by Hospitality or its subsidiaries, and with certain proceeds of the sale of equity interests of HMTP and/or its subsidiaries, at a redemption price of (i) 100% of the aggregate principal amount of such notes plus accrued and unpaid interest thereon, if the Comparable Interest Rate (as defined in the New Note Indenture) of this Refinancing Indebtedness (or, in the case of the sale of equity interests, certain Refinancing Indebtedness incurred substantially contemporaneously therewith) is not less than the interest rate of the notes redeemed or if the notes redeemed mature within 18 months, or (ii) otherwise, 103% of the aggregate principal amount of such notes plus accrued and unpaid interest thereon. Hospitality is also required, under certain circumstances, to redeem and offer to repurchase New Notes upon the sale of certain assets of Hospitality or its subsidiaries, with up to 75% of the net proceeds of such asset sales, at a redemption/repurchase price of 100% of the aggregate principal amount of such notes plus accrued and unpaid interest thereon. In addition, each holder of the New Notes has the right to require Hospitality to repurchase the New Notes of such holder, at 101% of their aggregate principal amount plus accrued and unpaid interest thereon, upon the occurrence of certain events constituting a Change of Control as defined under the New Note Indenture. OLD NOTES The Company has $231 million in aggregate principal amount outstanding of Old Notes. The Old Notes are senior obligations of the Company. The Old Notes were issued in series and have an average maturity of 4.2 years. The weighted average interest rate on the Old Notes is 9.0%, exclusive of the impact of interest rate swaps. The Old Note Indenture contains certain covenants that, among other things, limit the ability of the Company to (i) create liens on its assets and (ii) enter into certain sale and leaseback transactions. CREDIT AGREEMENT Marriott International and Holdings have entered into a Credit Agreement pursuant to which Holdings has the right to borrow from Marriott International up to $630 million to fund (i) obligations under certain 31 guarantees made by the Company, (ii) specified recourse debt of the Company and its subsidiaries (including the New Notes at maturity), (iii) repayment of interest on amounts borrowed under the Credit Agreement and on specified recourse debt of the Company and its subsidiaries (including the New Notes), (iv) the Company's allocable portion (maximum of approximately $20 million as of the date of the notice of redemption) of the amounts payable on the LYONs due to a Marriott International initiated call of LYONs (see "Relationship Between the Company and Marriott International--LYONs Allocation Agreement"), (v) certain capital expenditures under commitments to construct the Philadelphia Airport hotel (to the extent not funded by an existing $40 million credit facility) and Philadelphia Marriott hotel (the "Philadelphia Convention Center hotel") (to the extent not funded under the Philadelphia Mortgage (defined below)) and Port St. Lucie and Boca Point, Florida senior living service facilities, and (vi) other Marriott International approved capital expenditures or guarantees of the Company. The line of credit established by the Credit Agreement will be available through August 2007 (or, if earlier, the date when no New Notes are outstanding), with final maturity one year thereafter. Holdings will pay Marriott International a commitment fee equal to one percent per year on any unborrowed amounts. Additionally, any such borrowings are guaranteed by, or secured by the pledge of the stock of, certain subsidiaries of the Company, other than Hospitality or any of Hospitality's subsidiaries. Borrowings under the Credit Agreement bear interest at a floating rate equal to the London Interbank Borrowing Rate ("LIBOR") (as defined in the Credit Agreement) plus 400 basis points (provided that any interest in excess of 10.5 percent per annum will be deferred until maturity and will not reduce availability under the Credit Agreement). Outstanding borrowings must be reduced or repaid out of Net Cash Flow (as defined in the Credit Agreement), on an annual basis, with respect to fiscal year 1994, and on a quarterly basis thereafter. Amounts repaid may be reborrowed for the purposes specified in the Credit Agreement during the commitment term, subject to availability under the commitment (which is $630 million, subject to reduction to the extent that the sum of outstanding borrowings plus the principal amount of New Notes outstanding is less than $630 million). The Credit Agreement imposes certain restrictions on the ability of the Company and the Retained Business Subsidiaries to incur additional debt, impose liens or mortgages on their properties (other than various types of liens arising in the ordinary course of business), extend new guarantees (other than replacement guarantees), pay dividends, repurchase their common stock, make investments and incur capital expenditures. New debt is generally restricted to refinancing debt, non-recourse secured debt with a loan to value ratio of not less than 50% and certain types of subordinated debt. Liens and mortgages securing debt, other than existing liens and replacements of existing liens in connection with a debt refinancing, are generally limited to liens securing the new non-recourse secured debt described above. New guarantees of the Company's and its subsidiaries' debt, with an aggregate guarantee liability of not more than $150 million, are permitted, to the extent that each such guarantee supports no more than 20% of the principal amount of new non-recourse secured debt to which it relates and the principal amount of such debt is not greater than 70% of the value of the property which secures it. Dividends and distributions on stock (other than dividends on the Company's existing preferred stock, which are permitted), repurchases of stock, capital expenditures (other than expenditures to maintain existing assets and business operations), investments in persons other than subsidiaries and certain other restricted payments by the Company and the Retained Business Subsidiaries are generally prohibited (subject to specified exceptions), so long as there are any outstanding advances under the Credit Agreement. When no advances are outstanding under the Credit Agreement and the Company and the Retained Business Subsidiaries have adequately reserved for debt maturities over a 6- month term, (i) capital expenditures and additional investments to acquire entities engaged in the Ownership Business and the Host/Travel Plazas Business are generally permitted and (ii) such restricted payments as would otherwise be prohibited are permitted in the amount by which aggregate EBITDA of the Company and the Retained Business Subsidiaries (unconsolidated with Hospitality) and the proceeds of specified stock issuances exceed 170% of the aggregate of certain specified charges. Other covenants under the Credit Agreement restrict the ability of the Company and the Retained Business Subsidiaries to enter into new leases (other than in the ordinary course of business), sell assets (except for fair market value and, subject to certain 32 exceptions, for at least 75% cash consideration), issue new preferred stock, prepay indebtedness (other than in connection with refinancings, prepayments of LYONs and other specified exceptions), merge or consolidate with other entities or change the nature of their business. If an event of default (as defined in the Credit Agreement) occurs and is continuing, Marriott International is entitled to certain specified remedies, including the right to foreclose on its security interest in the stock of certain of the Retained Business Subsidiaries and the right to require Net Cash Flow (which includes proceeds of stock issuances) of the Company and the Retained Business Subsidiaries to be turned over on a quarterly basis to Marriott International, to be used to repay all advances under the Credit Agreement with the remainder to be held by Marriott International in trust as security for future such advances until all events of default cease to exist. However, prior to August 2007 (or such earlier date as no New Notes are outstanding) Marriott International will not be entitled to (i) accelerate the maturity of amounts due under the Credit Agreement (other than upon the occurrence of certain bankruptcy events, or the acceleration of the maturity of the New Notes as a result of an event of default under the New Note Indenture) or (ii) foreclose on its security interest in the stock of Holdings. In connection with the Offering, Marriott International and the Company are entering into an amendment to the Credit Agreement, that will (i) permit the Company to use the proceeds of the Offering to capitalize HMC Acquisitions, Inc. ("HMC Acquisitions"), a new subsidiary formed to make acquisitions, and (ii) exempt such proceeds from the mandatory repayment provisions of the Credit Agreement. HMC Acquisitions will be permitted to incur indebtedness and to reinvest its Net Cash Flow (including proceeds from asset sales) in its ongoing businesses and/or new acquisitions, except that, when the outstanding balance under the Credit Agreement exceeds $450 million, then HMC Acquisitions will be required to use Net Cash Flow to repay balances under the Credit Agreement and will be restricted in developing or acquiring new assets. RELATIONSHIP BETWEEN THE COMPANY AND MARRIOTT INTERNATIONAL For the purpose of governing certain of the ongoing relationships between the Company and Marriott International after the Distribution and to provide mechanisms for an orderly transition, the Company and Marriott International have entered into various agreements and have adopted policies, as described in this section. The Company believes that the agreements are fair to both parties and contain terms which generally are comparable to those which would have been reached in arms-length negotiations with unaffiliated parties (although comparisons are difficult with respect to certain agreements, such as the LYONs Allocation Agreement, which relate to the specific circumstances of the Distribution). In many cases (such as with the Lodging Management Agreements, the Senior Living Services Lease Agreements and the Transitional Services Agreements), the agreements were based on agreements that the Company has in fact negotiated with third parties. In other cases (such as the Distribution Agreement and the Tax Sharing Agreement), the agreements are comparable to those used by others in similar situations. In each case the terms of these agreements were reviewed by individuals who are at a senior management level in the Company and by individuals who are at a senior management level in Marriott International. The following are summaries of the principal terms of most such agreements and do not purport to be complete. The following summaries are qualified in their entirety by reference to the actual agreements which have been previously filed by the Company with the Securities and Exchange Commission. DISTRIBUTION AGREEMENT Prior to the Distribution, the Company and Marriott International entered into the Distribution Agreement, which provided for, among other things, (i) certain asset transfers to occur prior to the 33 Distribution (the "Assets Transfers"), (ii) the Distribution, (iii) the division between the Company and Marriott International of certain liabilities and (iv) certain other agreements governing the relationship between the Company and Marriott International following the Distribution. Subject to certain exceptions, the Distribution Agreement provides for, among other things, assumptions of liabilities and cross-indemnities designed to allocate, effective as of the Distribution, financial responsibility for the liabilities arising out of or in connection with the Management Business to Marriott International and its subsidiaries, and financial responsibility for the liabilities arising out of or in connection with the Ownership Business and Host/Travel Plazas Business, along with the Company's liabilities under a substantial portion of its pre-existing financing and long-term debt obligations, to the Company and its retained subsidiaries. The agreements executed in connection with the Distribution Agreement also set forth certain specific allocations of liabilities between the Company and Marriott International. To avoid adversely affecting the intended tax consequences of the Distribution and related transactions, the Distribution Agreement provides that, until the second anniversary of the Distribution, Marriott International must obtain an opinion of counsel reasonably satisfactory to the Company or a supplemental tax ruling before Marriott International may make certain material dispositions of its assets, engage in certain repurchases of Marriott International capital stock or cease the active conduct of its business independently, with its own employees and without material changes. The Company must also obtain an opinion of counsel reasonably satisfactory to Marriott International or a supplemental tax ruling before the Company may engage in similar transactions during such period. The Company does not expect these limitations to inhibit significantly its operations, growth opportunities or its ability to respond to unanticipated developments. Under the Distribution Agreement, Marriott International has a right (the "Marriott International Purchase Right") to purchase up to 20% of each class of the Company's voting stock (determined after assuming full exercise of the right) at its then fair market value (based on an average of trading prices during a specified period), upon the occurrence of certain specified events generally involving a change in control of the Company. The Marriott International Purchase Right terminates on the tenth anniversary of the Distribution. The Marriott International Purchase Right may have certain antitakeover effects as described in "Antitakeover Effects of Certain Provisions of the Company's Certificate and Bylaws and the Marriott International Purchase Right." In addition, under the Distribution Agreement, Marriott International has a right of first offer if the Company decides to sell all or any substantial portion of the Host/Travel Plazas Business. Pursuant to such right, prior to selling all or a substantial portion of the Host/Travel Plazas Business to any third-party, the Company must first offer to sell the Host/Travel Plazas Business (or applicable portion thereof) to Marriott International. If Marriott International declines to purchase the Host/Travel Plazas Business at a price established by the Company, the Company will be free to sell such business for a specified period of time to an unrelated third-party at a price at least equal to 95% of the price offered to Marriott International and on terms and conditions substantially consistent with those offered to Marriott International. The right of first offer with respect to the Host/Travel Plazas Business will terminate on the tenth anniversary of the Distribution. Notwithstanding the foregoing, the Company has no plan or intention to sell or dispose of all or any significant portion of the Host/Travel Plazas Business. LODGING MANAGEMENT AGREEMENTS Marriott International and certain of its subsidiaries entered into management agreements with the Company and certain of its subsidiaries (the "Lodging Management Agreements") to manage the Marriott Hotels, Resorts and Suites, Courtyard hotels, Residence Inns and Fairfield Inns owned by the Company and its subsidiaries. There are four types of Lodging Management Agreements corresponding to each line of Marriott lodging facilities. The terms of each type of Lodging Management Agreement reflect market terms and conditions and are substantially similar to the terms of recently negotiated management agreements with 34 third-party owners regarding lodging facilities of the same type. A separate agreement was entered into with respect to each individual lodging facility, or in certain cases a group of lodging facilities, based on the appropriate form of Lodging Management Agreement for lodging facilities of such type, with appropriate adjustments made for properties subject to ground leases, existing mortgages or covenants, conditions and other special factors relating to a particular lodging facility. Each Lodging Management Agreement has an initial term of 20 years and, at the option of Marriott International, may be renewed for up to three additional terms of ten years each, aggregating 30 years, for a total term of up to 50 years. Each Lodging Management Agreement for the Courtyard hotels, Fairfield Inns and Residence Inns (but not full service hotels) is also subject to the terms of a Consolidation Agreement (the "Consolidation Agreement") entered into between Marriott International and the Company, pursuant to which (i) certain fees payable under the Lodging Management Agreement with respect to a particular lodging facility will be determined on a consolidated basis with certain fees payable under the Lodging Management Agreements for all lodging facilities of the same type, and (ii) certain base fees payable under Lodging Management Agreements with respect to a particular lodging facility will be waived in return for payment of an incentive fee upon the sale of such facility. In general, properties remain subject to the Lodging Management Agreement upon the sale of such property to third parties. The principal terms of the four types of Lodging Management Agreements, along with the Consolidation Agreement, are summarized below. Marriott Hotels, Resorts and Suites. The form of Lodging Management Agreement for full service hotels in the Marriott Hotels, Resorts and Suites line provides for a base management fee equal to three percent of annual gross revenues plus an incentive management fee equal to 50 percent of "Available Cash Flow" for each fiscal year (provided that the cumulative incentive management fee may not on any date exceed 20 percent of the cumulative operating profit of the hotel from the Distribution through such date). "Available Cash Flow" is defined to be the excess of "Operating Profit" over the "Owner's Priority." "Operating Profit" is defined generally in all forms of Lodging Management Agreements as gross revenues, less all ordinary and necessary operating expenses, including all base and system fees and reimbursement for certain system-wide operating costs ("Chain Services"), as well as a deduction to fund a required reserve for furniture, fixtures and equipment, before any depreciation or amortization or similar fixed charges. "Owner's Priority" in all forms of Lodging Management Agreements is derived from an agreed upon base amount assigned to each lodging facility. Marriott International is also entitled to reimbursement for certain costs attributable to Chain Services of Marriott International. The Company has the option to terminate the agreement if specified performance thresholds regarding Operating Profit are not satisfied and if specified revenue market share tests are not met (provided that Marriott International can elect to avoid such termination by making cure payments to the extent necessary to allow the specified Operating Profit thresholds to be satisfied). Limited Service Hotels. The forms of Lodging Management Agreements for Courtyard hotels, Residence Inns and Fairfield Inns provide for a system fee equal to three percent (in the case of Courtyard hotels and Fairfield Inns) or four percent (in the case of Residence Inns) of annual gross revenue, and a base fee equal to two percent of annual gross revenues. The base fee is deferred in favor of the Owner's Priority, and in any fiscal year in which the base fee is greater than Operating Profit (prior to deduction of the base fee) less Owner's Priority, the excess base fee is deferred, to be paid in a subsequent fiscal year out of excess Operating Profit. Owner's Priority and Operating Profit are determined in substantially the same manner as described above for Marriott Hotels, Resorts and Suites. In addition, the agreements provide for an incentive management fee equal to 50 percent of "Available Cash Flow" for each fiscal year (provided that the cumulative incentive management fee may not on any date exceed 20 percent of the cumulative Operating Profit of the hotel through such date). "Available Cash Flow" is defined to be the excess of Operating Profit (after deduction of the base fee, including any portion of the base fee that is deferred or waived) over the Owner's Priority. Under such forms of agreement, Marriott International is also entitled to reimbursement for certain costs attributable to Chain Services of Marriott International. The Company or its subsidiaries have the option to terminate the agreement if specified performance thresholds regarding Operating Profit are not satisfied and if specified revenue market share tests are not met (provided that Marriott International 35 can elect to avoid such termination by making cure payments to the extent necessary to allow the specified Operating Profit thresholds to be satisfied). Consolidation Agreement. Each Lodging Management Agreement for the Courtyard hotels, Fairfield Inns and Residence Inns (but not full service hotels) is subject to the terms of the Consolidation Agreement. Pursuant to the Consolidation Agreement, certain revenues, expenses and fees payable under the Lodging Management Agreements for Courtyard hotels, Residence Inns and Fairfield Inns are consolidated by product line as set forth below. With respect to any Courtyard hotels, Residence Inns or Fairfield Inns managed by Marriott International under a Lodging Management Agreement, for so long as the Company has not sold or financed any such lodging facility, then the calculations, distributions and dispositions of gross revenues, reserves, base fees, Owner's Priority, incentive management fees and system fees under the Lodging Management Agreement with respect to such lodging facility will be determined and reported on an aggregate basis, together with all such facilities governed by a Lodging Management Agreement in the same product line. After any such lodging facility is sold or financed, the Consolidation Agreement will no longer be applicable to such facility, and the gross revenues, reserves, base fee, Owner's Priority, incentive management fee and system fee for such facility will be determined solely in accordance with the Lodging Management Agreement applicable to such facility. In addition, pursuant to the terms of the Consolidation Agreement, the base fee payable under the Lodging Management Agreements (other than Lodging Management Agreements for full service hotels) is modified as set forth below. Until December 31, 2000, in lieu of the base fees payable to Marriott International with respect to the Courtyard hotels, Residence Inns and Fairfield Inns managed by Marriott International under a Lodging Management Agreement, Marriott International will receive a "Bonus Incentive Fee" upon the sale of any of such facilities by the Company. The "Bonus Incentive Fee" is defined to be 50 percent of the "Net Excess Sale Proceeds" resulting from the sale of such facility (provided that the Bonus Incentive Fee shall not exceed two percent of the cumulative gross revenues of such facility, from the date of inception of the Lodging Management Agreement for such facility through the earlier of December 31, 2000 or the date of sale). "Net Excess Sale Proceeds" is defined to be the gross property sales price for the facility less (i) the reasonable costs incurred by the Company in connection with the sale and (ii) a base amount assigned to each lodging facility. Any future owners of such facility, and the Company to the extent that it retains ownership of such facility after December 31, 2000, will not be subject to the foregoing terms and will be required to pay to Marriott International the base fee as set forth in the Lodging Management Agreement applicable to such facility. SENIOR LIVING SERVICES LEASE AGREEMENTS Marriott International has entered into lease agreements with the Company (the "Senior Living Services Lease Agreements") to operate the 14 senior living facilities (including one under development) owned by the Company and its subsidiaries. Under the terms of the Senior Living Services Lease Agreements, Marriott International will pay or reimburse the Company for all costs and expenses (including property taxes) associated with the facilities, and in addition will pay the Company (i) fixed rentals, aggregating $28 million a year for all 14 facilities and (ii) additional rentals equal to 4.5 percent of annual revenues from operation of the facilities in excess of $72 million per annum beginning in 1994. The Senior Living Services Lease Agreements have initial terms of 20 years with renewal options aggregating 20 years and contain other terms and conditions customary for "triple net" leases. CREDIT AGREEMENT Marriott International and Holdings have entered into a Credit Agreement pursuant to which Holdings has the right to borrow from Marriott International up to $630 million. For a description of the Credit Agreement, see "Financing-- Credit Agreement." PHILADELPHIA MORTGAGE Marriott International is providing first mortgage financing for the Philadelphia Marriott hotel (the "Philadelphia Convention Center Hotel") to be constructed by the Company pursuant to a mortgage 36 financing agreement (the "Philadelphia Mortgage") entered into between the Company and Marriott International. The Philadelphia Mortgage will provide for the funding of a portion (approximately 60 percent) of the construction and development costs of such hotel, as and when such costs are incurred, up to a maximum of $125 million of fundings. The Philadelphia Mortgage (i) is a two- year construction loan, convertible into a two-year "mini-perm" facility upon completion of construction, carrying a floating interest rate of LIBOR plus 300 basis points, and (ii) will, upon maturity of the two-year mini-perm, fund into a ten-year term loan, bearing cash-pay interest at the rate of ten percent per annum, plus deferred interest of two percent per annum. The Philadelphia Mortgage is due on sale of the property (or any majority interest therein) and is subject to other terms and conditions customary for mortgage financings. LYONS ALLOCATION AGREEMENT Marriott Corporation issued $675,000,000 principal amount of LYONs, with an accreted value as of September 10, 1993 of approximately $241,000,000. Pursuant to the LYONs Allocation Agreement, Marriott International assumed 90 percent of the debt obligations evidenced by the LYONs ("Marriott International's Allocable Portion"). The Company retained responsibility for the remainder of the debt obligations evidenced by the LYONs ("Host Marriott's Allocable Portion"). LYONs holders exercising their conversion rights are entitled to receive 13.277 shares of Common Stock plus 13.277 shares of Marriott International common stock in exchange for each $1,000 principal amount of LYONs. Accordingly, Marriott International and the Company share, in accordance with the foregoing percentages, responsibility for all increases in the accreted value of the LYONs and all payment obligations at maturity or pursuant to an exercise of issuer call rights or holder put rights, and each of the Company and Marriott International will issue shares of its own stock in satisfaction of any exercise by the LYONs holders of their conversion rights. Notwithstanding Marriott International's assumption of such obligations, however, all payments made by Marriott International on the LYONs will be deemed to have been made on account of the Company's obligations to the holders of the LYONs and will be subject to the subordination provisions of the LYONs Indenture with respect to the relative rights of the holders of the LYONs and the holders of the Company's Senior Indebtedness (as defined in the LYONs Indenture). The LYONs Allocation Agreement further provides that (i) the Company will not initiate a call of LYONs for redemption without the prior approval of Marriott International and (ii) the Company will call the LYONs for redemption at the request of Marriott International provided that, at the Company's request, Marriott International will supply the funds required to satisfy the Company's Allocable Portion of the amounts payable on the LYONs called for redemption, in the form of an advance under the Credit Agreement. In December 1993, Marriott International exercised its rights under the LYONs Allocation Agreement to require the Company to call the LYONs for redemption. The Company has initiated a call of the LYONs and the LYONs will be redeemed on January 25, 1994, unless prior to such time holders exercise their conversion rights. The aggregate redemption price for all LYONs as of the redemption date will be approximately $197 million of which approximately $177 million is payable by Marriott International. The LYONs are redeemable at $367.60 per $1,000 principal amount and are convertible into 13.277 shares of Common Stock and 13.277 shares of Marriott International common stock per $1,000 principal amount. Based on current market prices of the Common Stock and the Marriott International common stock, the Company expects that most holders will elect to convert LYONs into Common Stock and Marriott International common stock prior to redemption. If all of the LYONs holders elected to convert prior to redemption, LYONs holders would receive approximately 7.1 million shares of Common Stock upon conversion. To the extent LYONs are redeemed for cash, Marriott International will fund 90% of the redemption price pursuant to the terms of the LYONs Allocation Agreement. TAX SHARING AGREEMENT The Company and Marriott International have entered into a tax sharing agreement (the "Tax Sharing Agreement") that defines the parties' rights and obligations with respect to deficiencies and refunds of federal, 37 state and other income or franchise taxes relating to the Company's businesses for tax years prior to the Distribution and with respect to certain tax attributes of the Company after the Distribution. In general, with respect to periods ending on or before the last day of 1993, the Company is responsible for (i) filing both consolidated federal tax returns for the Company affiliated group and combined or consolidated state tax returns for any group that includes a member of the Company affiliated group, including in each case Marriott International and its subsidiaries for the relevant periods of time that such companies were members of the applicable group, and (ii) paying the taxes relating to such returns (including any subsequent adjustments resulting from the redetermination of such tax liabilities by the applicable taxing authorities). Marriott International will reimburse the Company for the portion of such taxes relating to the Management Business. Marriott International is responsible for filing returns and paying taxes related to the Management Business for subsequent periods. The Company and Marriott International have agreed to cooperate with each other and to share information in preparing such tax returns and in dealing with other tax matters. HOST CONSULTING AGREEMENT Pursuant to the Host Consulting Agreement, Marriott International has agreed to provide certain consulting and advisory services to the Company and its subsidiaries with respect to certain operational matters involving the Host/Travel Plazas Business. The Host Consulting Agreement has an annual base fee of $500,000 and runs for an initial three-year term and thereafter will automatically renew for additional one-year terms unless cancelled by either party. If services under the Host Consulting Agreement require more than 500 employee-hours, Marriott International will be paid an additional amount equal to 200 percent of the hourly compensation payable to the employee providing such consulting services. The Host Consulting Agreement reflects the fact that the Host/Travel Plazas Business has in the past been included within the Company's contract services segment, most of which was transferred to Marriott International. Accordingly, certain of the key executive employees of the contract services group who were transferred to Marriott International will continue to provide certain advisory services to the management of the Company with respect to operating and personnel matters. ASSIGNMENT AND LICENSE AGREEMENT Pursuant to the terms of an Assignment and License Agreement, all of the Company's right, title and interest in certain trademarks, including the trademarks "Marriott," "Courtyard," "Residence Inns by Marriott" and "Fairfield Inns by Marriott," were conveyed to Marriott International. The Company and its subsidiaries have been granted a license to use such trademarks in their corporate names and in connection with the Host/Travel Plazas Business, subject to specified terms and conditions. NONCOMPETITION AGREEMENT The Company and Marriott International entered into a noncompetition agreement (the "Noncompetition Agreement") that defines the parties' rights and obligations with respect to certain businesses operated by Marriott International and the Company. Under the Noncompetition Agreement, the Company and its subsidiaries are prohibited from entering into, or acquiring an ownership interest in any entity that operates, any business that (i) competes with the food and facilities management business as conducted by a former subsidiary of the Company, Marriott Management Services, Inc. ("MMS," with such business being referred to as the "MMS Business"), provided that such restrictions do not apply to businesses that constitute part of the Host/Travel Plazas Business as of the Distribution or (ii) competes with the hotel management business as conducted by Marriott International with, however, certain exceptions as to acquired hotel properties or systems having existing management. Marriott International is prohibited from entering into, or acquiring an ownership interest in any entity that operates any business that competes with the Host/Travel Plazas Business, provided that such restrictions do not apply to businesses that constitute part of the MMS Business as of the Distribution. The Noncompetition Agreement has a seven-year term that commenced on the Distribution. 38 TRANSITIONAL SERVICES AGREEMENTS Marriott International and the Company entered into a number of agreements pursuant to which Marriott International has agreed to provide certain continuing services to the Company and its subsidiaries for a transitional period. Such services are to be provided on market terms and conditions. Subject to the termination provisions of the specific agreements, the Company and its subsidiaries are free to procure such services from outside vendors or may develop an in-house capability in order to provide such services internally. The Company believes that these agreements are based on commercially reasonable terms including pricing and payment terms. In general, the transitional services agreements can be kept in place at least through 1997. The Company has the right to terminate such agreements upon giving 180 day (or less) notice. POLICIES AND PROCEDURES FOR ADDRESSING CONFLICTS The on-going relationships between Marriott International and the Company may present certain conflict situations for Messrs. J.W. Marriott, Jr. and Richard E. Marriott, as J.W. Marriott, Jr. serves as Chairman of the Board of Directors and President of Marriott International and also serves as a director of the Company and Richard E. Marriott serves as Chairman of the Board of Directors of the Company and also serves as a director of Marriott International. Messrs. J.W. Marriott, Jr. and Richard E. Marriott, as well as other executive officers and directors of the Company and Marriott International, also own (or have options or other rights to acquire) a significant number of shares of common stock in both the Company and Marriott International. The Company and Marriott International have adopted appropriate policies and procedures to be followed by the Board of Directors of each company to limit the involvement of Messrs. J.W. Marriott, Jr. and Richard E. Marriott (or such other executive officers and directors having a significant ownership interest in both companies) in conflict situations, including matters relating to contractual relationships or litigation between the companies. Such procedures include requiring Messrs. J.W. Marriott, Jr. and Richard E. Marriott (or such other executive officers or directors having a significant ownership interest in both companies) to abstain from making management decisions in their capacities as officers of Marriott International and the Company, respectively, and to abstain from voting as directors of either company, with respect to matters that present a significant conflict of interest between the companies. Whether or not a significant conflict of interest situation exists is determined on a case-by-case basis depending on such factors as the dollar value of the matter, the degree of personal interest of Messrs. J.W. Marriott, Jr. or Richard E. Marriott (or such other executive officers and directors having a significant ownership interest in both companies) in the matter, the interests of the shareholders of the Company and the likelihood that resolution of the matter has significant strategic, operational or financial implications for the business of the Company. It is a principal responsibility of the general counsel of the Company to monitor this issue in consultation with the Audit Committee of the Board of Directors. See "Risk Factors--Potential Conflicts with Marriott International." 39 MANAGEMENT BOARD OF DIRECTORS Current Board of Directors. The Company's Board of Directors consists of seven directors divided into three classes, one class consisting of three directors and two classes consisting of two directors. Each director serves for a three-year term. Set forth below is information with respect to those individuals serving as directors of the Company. Recent Changes in the Board of Directors. The Company's Board of Directors formerly consisted of nine members: J. W. Marriott, Jr. (Chairman), Richard E. Marriott, Alice S. Marriott, Harry L. Vincent, Jr., Sterling D. Colton, Gilbert M. Grosvenor, Floretta Dukes McKenzie, R. Theodore Ammon and W. Mitt Romney. In connection with the consummation of the Distribution, Mr. J. W. Marriott, Jr. resigned as Chairman of the Board of Directors (although he remains a director) and was replaced as Chairman by Mr. R. E. Marriott. Additionally, in connection with the consummation of the Distribution, Mr. Colton, Mr. Grosvenor, Mrs. Marriott, Ms. McKenzie and Mr. Romney each resigned as a director. Mrs. Marriott, co-founder of the Company, was appointed Director Emeritus by the Board of Directors. On October 15, 1993 the Board of Directors, acting on the recommendation of its Nominating and Corporate Governance Committee, appointed the Honorable Andrew J. Young as a director of the Company. On December 2, 1993 the Board of Directors, acting on the recommendation of its Nominating and Corporate Governance Committee, appointed each of Anne Dore McLaughlin and Stephen F. Bollenbach as a director of the Company. Messrs. Young and Bollenbach and Ms. McLaughlin will each serve an initial term as director expiring at the 1994 Annual Meeting of Shareholders.
TERM DIRECTOR EXPIRES OTHER POSITIONS - -------- ------- --------------- Richard E. Marriott* 1995 Mr. Marriott is a director of Host Marriott Chairman of the Board Hospitality, Inc. and certain other subsidiaries Director since 1979 of the Company. He also serves as a director of Age: 54 Marriott International, Inc. and of Potomac Electric Power Company. He also is President of the National Restaurant Association. For additional information on Mr. Marriott, see "Executive Officers" below. R. Theodore Ammon 1995 Mr. Ammon is a director of Host Marriott Hospital- Director since 1992 ity, Inc. Mr. Ammon was formerly a general partner Age: 44 of Kohlberg Kravis Roberts & Co. (a New York and San Francisco-based investment firm). He also serves on the boards of Astrum International, Big Flower Press, Inc., Doskocil Incorporated, the New York YMCA, the Coro Foundation and Bucknell Uni- versity. Stephen F. Bollenbach 1994 Mr. Bollenbach is President and Chief Executive President and Chief Officer of the Company. He serves as a director of Executive Officer certain subsidiaries of the Company, Carr Realty Director since 1993 Corporation and Mid-America Apartment Communities, Age: 51 Inc. He also serves on the CEO Magazine Advisory Board. On December 2, 1993, Mr. Bollenbach was ap- pointed by the Board of Directors to fill a va- cancy on the Board. For additional information on Mr. Bollenbach, see "Executive Officers" below.
40
TERM DIRECTOR EXPIRES OTHER POSITIONS - -------- ------- --------------- J.W. Marriott, Jr.* 1996 Mr. Marriott is a director of Host Marriott Hospi- Director since 1964 tality, Inc. He is also Chairman of the Board and Age: 61 President of Marriott International, Inc. and di- rector of General Motors Corporation and Outboard Marine Corporation. He is a member of the Confer- ence Board, the Business Council and the Business Roundtable and serves on the boards of trustees of The Mayo Foundation, the National Geographic Soci- ety and the Executive Council on Foreign Diplomats. Ann Dore McLaughlin 1994 Ms. McLaughlin is President of the Federal City Director since 1993 Council and Vice Chairman of the Aspen Institute. Age: 52 She was formerly President and Chief Executive Of- ficer of New American Schools Development Corpora- tion. Ms. McLaughlin has served with distinction in several U.S. Administrations in such positions as Secretary of Labor and Under Secretary of the Department of the Interior. Ms. McLaughlin also serves as a director of AMR Corporation, General Motors Corporation, Kellogg Company, Nordstrom, Potomac Electric Power Company, The Traveler Cor- poration, Union Camp Corporation and Vulcan Mate- rials Company. Additionally, Ms. McLaughlin serves as a member of the governing boards of a number of civic, non-profit organizations, including The Public Agenda Foundation and the Conservation Fund. Ms. McLaughlin is on the Board of Overseers for the Wharton School of the University of Penn- sylvania and is a Trustee of the Center for Stra- tegic and International Studies. On December 2, 1993 Ms. McLaughlin was appointed by the Board of Directors to fill a vacancy on the Board. Harry L. Vincent, Jr. 1996 Mr. Vincent is a director of Host Marriott Hospi- Director since 1969 tality, Inc. Mr. Vincent is a retired Vice Chair- Age: 74 man of Booz-Allen & Hamilton, Inc. Andrew J. Young 1994 Mr. Young is Vice Chairman of the Law Companies Director since 1993 Group, Inc., an engineering and environmental con- Age: 61 sulting group, and Co-Chairman of the Atlanta Com- mittee for the Olympic Games. Mr. Young has spent more than 35 years in public service. He was elected to three terms in the U.S. Congress, rep- resenting the Fifth Congressional District of Georgia. In 1977 he was appointed U.S. Ambassador to the United Nations. He was elected mayor of At- lanta, Georgia in 1981, and reelected in 1985. Mr. Young is a member of several additional boards in- cluding those of Howard University, The Martin Lu- ther King, Jr. Center, the Global Infrastructure Fund and the Center for Global Partnership. He is also a member of the Georgia Institute of Technol- ogy advisory board. On October 15, 1993, Mr. Young was appointed by the Board of Directors to fill a vacancy on the Board.
- -------- * J.W. Marriott, Jr. and Richard E. Marriott are brothers. 41 COMPENSATION POLICY COMMITTEE The Compensation Policy Committee comprises two directors who are not employees of the Company or any of its subsidiaries. Prior to the Distribution, the members of the Compensation Policy Committee were former director Floretta Dukes McKenzie (Chairperson), Harry L. Vincent, Jr. and former director W. Mitt Romney. As a result of the resignation of Ms. McKenzie and Mr. Romney in connection with the Distribution, the current members of the Compensation Policy Committee are Mr. Vincent (Chairperson) and R. Theodore Ammon. The committee's functions include recommendations on policies and procedures relating to senior officers' compensation and various employee stock plans and approvals of individual salary adjustments and stock awards in those areas. COMPENSATION OF DIRECTORS Company directors who are also officers of the Company receive no additional compensation for their services as directors. Directors who are not officers of the Company receive an annual retainer fee of $25,000 as well as an attendance fee of $1,000 for each shareholders meeting, meeting of the Board of Directors and meeting of a committee thereof, regardless of the number of meetings held on a given day. The chairperson of each committee of the board of directors receives an additional annual retainer fee of $1,000. Directors are also reimbursed for travel expenses and other out-of-pocket costs incurred in attending meetings. EXECUTIVE OFFICERS Set forth below is certain information with respect to the persons who are executive officers of the Company.
BUSINESS EXPERIENCE PRIOR TO BECOMING NAME AND TITLE AGE AN EXECUTIVE OFFICER OF THE COMPANY - -------------- --- ------------------------------------- Richard E. Marriott 54 Richard E. Marriott joined the Company in 1965 and Chairman of the Board has served in various executive capacities. In 1979, Mr. Marriott was elected to the Board of Di- rectors. In 1984, he was elected Executive Vice President and in 1986 he was elected Vice Chairman of the Board of Directors. In 1993, Mr. Marriott was elected Chairman of the Board. Mr. Marriott also has been responsible for management of the Company's government affairs functions. Stephen F. Bollenbach 51 Stephen F. Bollenbach rejoined the Company in 1992 Chief Executive Officer as Executive Vice President and Chief Financial and President Officer. He was named President and Chief Execu- tive Officer of the Company in 1993. During the period from 1982 to 1986, Mr. Bollenbach was Se- nior Vice President--Finance and Treasurer of the Company. He subsequently served as Chief Financial Officer of Promus Companies from 1986 to 1990 and served as Chief Financial Officer with the Trump Organization from 1990 until he rejoined the Com- pany. William W. McCarten 45 William W. McCarten joined the Company in 1979 as Executive Vice President Vice President and Controller--Corporate Account- and President-- ing. He was promoted to Vice President and Con- Host/Travel Plazas troller of the Roy Rogers Division in 1982 and be- came Vice President--Group Finance in 1984. He was named Vice President and Corporate Controller in 1985. Mr. McCarten was elected Senior Vice Presi- dent--Finance and Corporate Controller in 1986. In 1991, he was elected Executive Vice President and in 1992 was elected President--Host/Travel Plazas.
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BUSINESS EXPERIENCE PRIOR TO BECOMING NAME AND TITLE AGE AN EXECUTIVE OFFICER OF THE COMPANY - -------------- --- ------------------------------------- Matthew J. Hart 41 Matthew J. Hart joined the Company in 1981 as Man- Executive Vice President ager of Project Finance and was named Vice Presi- and Chief Financial dent of Project Finance in 1984. He was appointed Officer Assistant Treasurer in 1987 and was appointed Se- nior Vice President--Finance and Treasurer in 1991. Mr. Hart was named Executive Vice President and Chief Financial Officer in 1993. Prior to joining the Company, Mr. Hart spent five years with Bankers Trust Company in the corporate lend- ing division. Stephen J. McKenna 53 Stephen J. McKenna joined the Company in 1973 as Senior Vice President an attorney. He was appointed Assistant General and General Counsel Counsel in 1976, and was promoted to Vice Presi- dent and Assistant General Counsel in 1986. He be- came Vice President and Associate General Counsel in 1990 and became Senior Vice President and Gen- eral Counsel in 1993. Prior to joining the Compa- ny, Mr. McKenna was employed as an attorney in the airline and aircraft manufacturing industries. Jeffrey P. Mayer 37 Jeffrey P. Mayer joined the Company in 1986 as Di- Senior Vice President-- rector--Corporate Accounting. He was promoted to Finance and Corporate Assistant Controller--Corporate Accounting in 1987 Controller and Vice President--Corporate Accounting in 1989. He was appointed Vice President--Project Finance in the Company's Treasury Department in 1991 and Senior Vice President--Finance and Corporate Con- troller in 1993. Prior to joining the Company, Mr. Mayer spent eight years with Arthur Andersen & Co.
EXECUTIVE OFFICER COMPENSATION Summary of Compensation. Table I below sets forth a summary of the compensation paid by the Company for the last three fiscal years to its Chief Executive Officer and four additional most highly compensated executive officers. With the exception of Mr. McCarten, all such executive officers assumed their current position effective October 8, 1993. Such information is also provided for three additional persons for whom disclosure would have been provided but for the fact that such persons were not serving as executive officers of the Company at the end of the last fiscal year. 43 TABLE I SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ------------------------------------ ANNUAL COMPENSATION AWARDS PAYOUTS ----------------------------- ---------------------------- ------- OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER COMPEN- STOCK UNDERLYING LTIP COMPEN- NAME AND PRINCIPAL FISCAL SALARY(2)(3) BONUS(4) SATION AWARDS(5)(6) OPTIONS PAYOUTS SATION(7) POSITION YEAR ($) ($) ($) ($) (#) ($) ($) - ------------------ ------ ------------ -------- ------- ------------ ---------- ------- --------- Richard E. Marriott 1993 227,942 125,369 -- 1,150,080(8) 0 0 8,408 Chairman of the Board 1992 210,000 100,800 -- 21,915 14,500 0 10,078 1991 214,039 101,026 -- 0 16,200 0 7,196 Stephen F. Bollenbach(1) 1993 468,750 328,125 -- 6,469,200(8)(9) 0 0 8,888 Chief Executive Offi- 1992 380,769 255,115 -- 253,200 193,000 0 150,000(10) cer and President William W. McCarten 1993 277,348 180,276 -- 1,088,640(8) 0 14,031 10,569 Executive Vice 1992 245,024 115,896 -- 0 23,000 12,102 13,073 President 1991 249,736 157,334 -- 0 25,000 5,544 12,081 Matthew J. Hart 1993 218,977 142,335 -- 1,088,640(8) 0 7,433 9,077 Executive Vice 1992 189,921 123,448 -- 0 16,500 3,996 9,083 President 1991 165,273 63,835 -- 0 13,200 1,344 7,421 Stephen J. McKenna 1993 195,178 126,866 -- 544,500(8) 0 0 6,272 Senior Vice President 1992 178,792 98,336 -- 0 10,000 0 8,829 and General Counsel 1991 171,916 93,694 -- 0 10,800 0 8,034 J.W. Marriott, Jr.(11) 1993 554,904 499,914 -- 0 0 13,697 38,069 Former Chairman of 1992 725,000 617,288 -- 75,799 114,000 0 40,967 the Board and Presi- 1991 738,942 539,428 -- 0 125,000 0 21,151 dent William J. Shaw(12) 1993 363,558 254,490 -- 0 0 27,958 14,971 Former Executive Vice 1992 471,154 304,837 -- 47,009 68,000 17,174 4,943 President 1991 458,654 309,591 -- 300,000 85,000 7,046 4,800 William R. Tiefel(13) 1993 346,154 242,308 -- 0 0 5,178 10,571 Former Executive Vice 1992 444,231 288,750 -- 44,431 68,000 4,061 21,262 President 1991 331,250 212,000 -- 300,000 60,000 0 14,155
- -------- (1) Mr. Bollenbach joined the Company as Executive Vice President and Chief Financial Officer on March 2, 1992. (2) Fiscal year 1991 base salary earnings were for 53 weeks. (3) Salary amounts include base salary earned and paid in cash during the fiscal year and the amount of base salary deferred at the election of the executive officer under the Company's Employees' Profit Sharing, Retirement and Savings Plan and Trust (the "Profit Sharing Plan") and the Company's Executive Deferred Compensation Plan (the "Deferred Compensation Plan'). (4) Bonus includes the amount of cash bonus earned and accrued during the fiscal year and paid subsequent to the end of each fiscal year. The bonus awards for fiscal year 1993 are reflected at the maximum possible bonus award; actual bonus determinations for fiscal year 1993 have not yet been made and may be in an amount lower than reflected herein. (5) As part of its long-term compensation program for executive officers, the Company awards shares of restricted stock pursuant to the Company's 1993 Comprehensive Stock Incentive Plan (the "Comprehensive Stock Plan") and previously awarded such shares under the Company's Restricted Stock Plan for Key Employees (the "Company Restricted Stock Plan"), a predecessor plan to the Comprehensive Stock Plan. On March 10, 1992, eight executive officers received, in lieu of a salary increase, awards of restricted common stock totalling 17,000 shares. These shares, including 1,275 44 shares held by Mr. R.E. Marriott, 4,410 shares held by Mr. J.W. Marriott, Jr., 2,735 shares held by Mr. Shaw, and 2,585 shares held by Mr. Tiefel, were distributable at the earlier of the attainment of certain company financial performance objectives or January 3, 1994. In connection with the consummation of the Distribution, these awards were distributed on October 8, 1993 without regard for whether the financial performance objectives were attained. (6) The aggregate number and value of shares of restricted stock, including such shares of restricted stock designated as long term incentive awards as indicated in footnote 8 below, held by each identified executive officer as of December 31, 1993, were as follows: Mr. R.E. Marriott, 400,000 shares valued at $3,675,200; Mr. Bollenbach, 1,512,000 shares valued at $13,892,256; Mr. McCarten, 360,000 shares valued at $3,307,680; Mr. Hart, 360,000 shares valued at $3,307,680; Mr. McKenna, 180,000 shares valued at $1,653,840; Mr. Shaw, 37,000 shares valued at $333,296 and Mr. Tiefel, 20,000 shares valued at $180,160. Mr. J.W. Marriott, Jr. does not hold shares of restricted stock. Of the above noted shares, 37,000 shares vest pro rata over a 10 year period, 952,000 vest pro rata over a five year period, 500,000 shares vest at the end of a five year period and 1,380,000 shares vest pursuant to certain performance objectives established by the Compensation Policy Committee. During the period in which any restrictions apply, holders of restricted stock are entitled to receive all dividends or other distributions paid with respect to such stock. (7) With the exception of Mr. Bollenbach's amount for 1992, amounts included as "All Other Compensation" represent matching Company contribution amounts received under one or both of the Profit Sharing Plan and the Deferred Compensation Plan. The amounts of matching Company contributions for fiscal year 1993 reflect such amounts contributed by the Company in respect of employee contributions made through October 8, 1993, the date of the Distribution. Contributions by the Company in respect of employee contributions for the remainder of fiscal year 1993 have not yet been made. (8) On October 17, 1993, the Compensation Policy Committee (the "Committee") of the Board of Directors approved awards of restricted stock to 18 key employees of the Company, including Mr. McCarten, Mr. Hart and Mr. McKenna. On October 29, 1993, the Board of Directors approved an award of restricted stock to Mr. Bollenbach, and on December 2, 1993, the Board of Directors approved an award of restricted stock to Mr. R.E. Marriott. Each such grant made in 1993 to the above named officers consists of two portions: shares subject to restrictions relating primarily to continued employment ("General Restrictions") which vest ratably over a five year period or at the end of a five-year period and awards subject to additional performance objectives such as financial performance of the Company ("Performance Restrictions"). Performance objectives are established by the Committee and are subject to periodic review and revision. All restricted stock awards subject only to General Restrictions are presented on Table I as "Restricted Stock Awards." Restricted stock awards subject to additional Performance Restrictions are presented as long term incentive ("LTIP") awards on Table III. (9) Includes 900,000 shares of restricted common stock awarded to Mr. Bollenbach by the Board of Directors on October 29, 1993. See footnote 8 above. Pursuant to this award, 400,000 shares are subject to General Restrictions and vest ratably over a five year period and 500,000 shares are subject to General Restrictions and vest on the fifth anniversary of the date of award. (10) Mr. Bollenbach received a one-time payment of $150,000 pursuant to the Company's relocation program. (11) In connection with the Distribution, Mr. J.W. Marriott, Jr. resigned his positions as Chairman of the Board and President of the Company effective October 8, 1993. Mr. Marriott remains a director of the Company. (12) In connection with the Distribution, Mr. Shaw resigned his position as Executive Vice President and President of the Company's Contract Services Group effective October 8, 1993. Mr. Shaw had assumed these duties on February 10, 1992. Prior to such date, Mr. Shaw served as Executive Vice President and Chief Financial Officer. (13) In connection with the Distribution, Mr. Tiefel resigned his position as Executive Vice President effective October 8, 1993. Aggregated Stock Option Exercises and Year-End Value. Table II below sets forth, on an aggregated basis, information regarding the exercise during the 1993 fiscal year of options to purchase Common Stock by each of the applicable persons listed on Table I above and the value on December 31, 1993 of all unexercised options held by such individuals. The Company did not grant any stock options to the persons listed on Table I during fiscal year 1993. 45 TABLE II AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT FISCAL YEAR-END IN-THE-MONEY OPTIONS AT (#)(1) FISCAL YEAR-END ($)(2) -------------------------- ------------------------- SHARES ACQUIRED ON VALUE REALIZED NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ------------ -------------- ------------ ------------- ----------- ------------- Richard E. Marriott..... 0 0 60,475 30,225 301,521 174,720 Stephen F. Bollenbach... 0 0 48,250 144,750 284,142 852,426 William W. McCarten..... 8,000 103,920 127,657 46,250 698,973 254,357 Matthew J. Hart......... 0 0 36,763 22,100 194,741 133,614 Stephen J. McKenna...... 14,000 172,180 83,432 17,525 474,173 110,404 J.W. Marriott, Jr....... 0 0 487,250 236,750 2,389,744 1,365,619 William J. Shaw......... 19,125 231,846 351,125 139,750 1,834,321 834,474 William R. Tiefel....... 6,000 78,600 176,200 105,750 984,222 632,299
- -------- (1) In connection with the Distribution, and pursuant to the Company's 1976 Employee Stock Option Plan, all Company stock options were adjusted to reflect the effects of the Distribution. Each non-qualified stock option held by a Company employee (or retiree) prior to the Distribution was effectively converted into two separate options: a Company option and a Marriott International Option, in both cases for a number of shares equal to the underlying Company option. The exercise price of the underlying Company option was allocated to the two options pursuant to a formula designed to preserve the economic value of the underlying Company option prior to the Distribution. Each incentive stock option held by an employee remaining a Company employee after the Distribution was adjusted in number and as to the exercise price in order to preserve the economic value of each such incentive stock option immediately prior to the Distribution. (2) Based on a per share price for Common Stock of $9.188. This price represents the average of the high and low trading prices for a share on December 31, 1993. Long-Term Incentive Plan ("LTIP") Awards. Table III below sets forth information regarding Deferred Stock Bonus Awards, Deferred Stock Agreements and restricted stock awards subject to certain performance criteria granted by the Company under the Comprehensive Stock Plan and previously awarded by the Company under its Deferred Stock Incentive Plan or Restricted Stock Plan for Key Employees, predecessor plans to the Comprehensive Stock Plan, to the person listed on Table I above in respect of the 1993 fiscal year. The number of shares underlying each Deferred Stock Bonus Award is derived by dividing twenty percent of each individual's cash bonus award by the average of the high and low trading prices for a share of Common Stock on the last trading day of the fiscal year. No voting rights or cash dividends are attributed to award shares until such award shares are distributed. Recipients of Deferred Stock Bonus Awards listed on Table I may elect to denominate such awards as a current award ("Current Award") or a deferred award ("Deferred Award"). A Current Award is distributed in ten annual installments commencing one year after the award is granted. If an employee dies before distribution of all shares to which the employee is entitled, the remaining shares are distributed in one distribution to the employee's designated beneficiaries or, in the absence of such beneficiaries, to the employee's estate. Any undistributed shares subject to a Current Award will be forfeited and the Deferred Stock Bonus Award terminated if the employee's employment with the Company is terminated for any reason other than termination of employment at or beyond age 55 with ten years of service, termination after 20 years of service with retirement approval from the Compensation Policy Committee of the Company's board of directors or its designee, permanent disability or death. Any undistributed shares not subject to forfeiture shall continue to be paid to the employee under the distribution schedule which would have applied to those shares if the employee had not terminated employment, or over such shorter period as the Chief Executive Officer of the Company may direct. 46 A Deferred Award is distributed to the recipient, as elected, in a lump sum or in up to ten installments following termination of employment. Deferred Award shares contingently vest pro rata in annual installments commencing one year after the Deferred Stock Bonus Award is granted to the employee, and continuing on each January 2 thereafter until the expiration of a ten year period from the commencement date. All shares subject to the Deferred Award vest upon termination of employment after reaching age 55 with ten years of service with the Company, termination of employment after 20 years of company service with retirement approval from the Compensation Policy Committee of the Company board of directors or its designee, permanent disability or death. Vesting stops when employment terminates for any other reason. On occasion, the Board of Directors, upon the recommendation of its Compensation Policy Committee, awards to certain key employees shares of restricted stock which vest upon satisfaction of specified performance objectives. The award of such performance-restricted stock is maintained in the name of the recipient in an account at the transfer agent and is restricted from further transfer, sale, alienation or hypothecation, until such time as the conditions restricting transfer have been satisfied. Such conditions include continued employment, non-competition, proper conduct, and attainment of specified Company business objectives. While such restricted shares are maintained on account, the award recipient is entitled to vote such shares, and receive any dividends if dividends on common shares are declared. Upon satisfaction of the business objectives and all other conditions, the shares are released from restrictions and may be sold or transferred by the employee. 47 TABLE III LONG-TERM INCENTIVE PLANS AWARDS IN LAST FISCAL YEAR
NUMBER OF PERFORMANCE OR OTHER PERIOD UNTIL NAME SHARES MATURATION OR PAYOUT(1) - ---- --------- --------------------------------- Richard E. Marriott............... 2,800(2) 10 Years(3) 240,000 5 Years(4) Stephen F. Bollenbach............. 7,500(2) 10 Years 600,000 5 Years(4) William W. McCarten............... 4,120(2) 10 Years 216,000 5 Years(4) Matthew J. Hart................... 3,253(2) 10 Years 216,000 5 Years(4) Stephen J. McKenna................ 2,900(2) 10 Years(3) 108,000 5 Years(4) J.W. Marriott, Jr................. 0 -- William J. Shaw................... 0 -- William R. Tiefel................. 0 --
- -------- (1) The vesting procedures and rules governing forfeitability of these awards are discussed in this section "Long-Term Incentive ("LTIP") Awards." (2) Represents estimated Deferred Stock Bonus Awards or Deferred Stock Agreements calculated based upon maximum bonus amounts presented in Table I and an estimated trading price for Common Stock. Actual Deferred Stock Bonus Awards and Deferred Stock Agreements have not yet been determined. These awards are currently subject to forfeiture pursuant to the terms of the Comprehensive Stock Plan, a successor plan to the Company's Deferred Stock Incentive Plan. See footnote 1 above. (3) Pursuant to the terms of the Company's Deferred Stock Incentive Plan, a predecessor to the Comprehensive Stock Plan, Mr. Marriott's and Mr. McKenna's awards are not subject to forfeiture as they each have over 20 years of service with the Company. (4) Represents awards of shares of restricted stock that vest on a pro-rata basis over a five year period subject to the satisfaction of certain Performance Restrictions to be established by the Compensation Policy Committee of the Board of Directors. See footnote 8 to Table I. The vesting provisions governing these awards are subject to review and revision by the Compensation Policy Committee. CERTAIN TRANSACTIONS In 1985, the Company sold for $10.03 million a 10.32 percent equity interest in the Times Square Hotel Company partnership ("TSHCO"), owner of the New York Marriott Marquis Hotel, to MM Times Square Hotel Investors ("MM Times Square"), a limited partnership which includes J.W. Marriott, Jr. and Richard E. Marriott as partners. The Company received cash at closing of $3.15 million and a $6.88 million nonrecourse promissory note due September 1, 2015 with interest at 12 percent per annum, collateralized by the ownership interest sold. At the same time, the Company sold a 28.68 percent interest in TSHCO to an unrelated third- party for approximately $26.3 million on essentially the same terms. Preliminary agreements were reached in 1991 with the purchaser of the 28.68 percent interest, and in 1992 with MM Times Square, to restructure the respective promissory notes payable to the Company. During the fourth quarter of 1992, the purchaser of the 28.68 percent interest informed the Company that he would not be making further payments on his promissory note. In view of this action, the restructurings of the promissory notes with both TSHCO and MM Times Square have been discontinued and the Company is seeking to foreclose on its security interests. The Company expects to complete both foreclosures in early 1994. See "Prospectus Summary--Recent Developments--New York Marriott Marquis." 48 The Company and its subsidiaries and Marriott International and its subsidiaries have entered into certain relationships following the Distribution. For a description of certain agreements entered into between the Company and its subsidiaries and Marriott International and its subsidiaries, see "Relationship Between the Company and Marriott International." OWNERSHIP OF COMPANY SECURITIES The Company has three outstanding classes of equity or equity-linked securities: Common Stock, Convertible Preferred Stock and LYONs. None of the directors, nominees or executive officers owns shares of Convertible Preferred Stock or LYONs. Set forth below is the ownership as of October 31, 1993 of Common Stock by directors, nominees, the chief executive officer and the four additional most highly compensated executive officers and certain former executive officers of the Company, as well as by all directors and executive officers (including such former executive officers) of the Company as a group, and to the best of the Company's knowledge, beneficial holders of 5% or more of Common Stock. The Company has no knowledge that any person is the beneficial holder of 5% or more of the LYONs. Based upon a Schedule 13D filed with the Securities and Exchange Commission on September 27, 1993, the Company believes that a group including Gotham Capital III, L.P., Alfred Partners, L.P., Joel M. Greenblatt and Daniel L. Nir each with an address of 100 Jericho Quadrangle, Jericho, New York, 11753, beneficially own 220,200 depositary shares representing 220.2 shares of the Convertible Preferred Stock. As of December 21, 1993, such holdings represent 75.54% of the approximately 292,000 then outstanding depositary shares of Convertible Preferred Stock.
% OF SHARES SHARES OF OUTSTANDING (NET COMMON STOCK OF TREASURY BENEFICIALLY OWNED SHARES) AS OF NAME ON OCTOBER 31, 1993 OCTOBER 31, 1993 - ---- ------------------- ---------------- Directors R. Theodore Ammon................... 0 0.00 Stephen F. Bollenbach............... 3,000(1) 0.00(2) J.W. Marriott, Jr................... 4,913,174(1)(3)(4) 4.14 Richard E. Marriott................. 6,129,154(1)(3)(4) 5.16 Ann Dore McLaughlin................. 0 0.00 Harry L. Vincent, Jr................ 11,100 0.01 Andrew J. Young..................... 0 0.00 Non-Director Executive Officers Matthew J. Hart..................... 1,628(1) 0.00(2) William W. McCarten................. 13,152(1) 0.01 Stephen J. McKenna.................. 14,104(1) 0.01 Certain Former Executive Officers William J. Shaw..................... 30,548 0.03 William R. Tiefel................... 54,323 0.05 All directors and executive officers as a group........................... 11,171,261(5) 9.41(5) Sanford C. Bernstein & Co., Inc....... 8,680,909(6) 7.31(6) 767 Fifth Avenue New York, New York 10153
- -------- (1) Does not include shares reserved, contingently vested or awarded under the Company's 1993 Comprehensive Stock Incentive Plan or 1993 Employee Stock Purchase Plan. For additional information, see Tables I through III above. (2) Ownership of less than 1/100th of 1% is reflected as 0.00 in the table above. 49 (3) Does not include: (i) 1,612,915 shares held in trust for the children and grandchildren of J.W. Marriott, Jr. or 1,089,949 shares held by his wife and children; (ii) 1,783,042 shares held in trust for the children and grandchildren of Richard E. Marriott or 447,562 shares held by his wife and children; (iii) 2,280,287 shares held by The J. Willard Marriott Foundation; (iv) 1,923,885 shares held by a charitable annuity trust, created by the will of J. Willard Marriott, to which his descendants have a remainder interest; (v) 2,707,590 shares held by J. Willard Family Enterprises, L.P., (vi) 2,302,729 shares held by First Media, L.P., or (vii) 1,126,441 shares owned directly or beneficially by certain other members of the Marriott family. The shares referred to in this note aggregated 12.86% of the common shares outstanding (net of treasury shares) as of October 31, 1993. (4) By virtue of their ownership of shares of common stock and their positions as directors and officers of the Company, J.W. Marriott, Jr. and Richard E. Marriott would be deemed in control of the Company within the meaning of the federal securities laws. Other members of the Marriott family might also be deemed control persons by reason of their ownership of shares and/or their relationship to other family members. J.W. Marriott, Jr., Richard E. Marriott, their mother Alice S. Marriott and other members of the Marriott family and various trusts established by members of the Marriott family owned beneficially an aggregate of 26,364,799 shares or 22.21% of the total common shares outstanding (net of treasury shares) of the Company as of October 31, 1993. All directors, nominees and current executive officers as a group (other than members of the Marriott family) owned beneficially an aggregate of 44,062 shares or .04% of the total common shares outstanding (net of treasury shares) as of October 31, 1993. In addition, the Company's Employees' Profit Sharing, Retirement and Savings Plan and Trust owned 605,855 shares or .51% of the total common shares outstanding (net of treasury shares) as of October 31, 1993. (5) Includes shares of Common Stock beneficially owned by the former executive officers listed on the table. (6) Source of information: Schedule 13G as filed with the Securities and Exchange Commission by Sanford C. Bernstein & Co., Inc. reporting ownership as of December 31, 1992. DESCRIPTION OF CAPITAL STOCK The following description of the Company's Capital Stock is only a summary, and is qualified in its entirety by reference to the Company's Restated Certificate of Incorporation and shareholder rights plan as previously filed by the Company with the Securities and Exchange Commission. GENERAL The Company's Restated Certificate of Incorporation (the "Company Certificate") authorizes the issuance of a total of 301,000,000 shares of all classes of stock, of which 1,000,000 may be shares of preferred stock, without par value, and 300,000,000 may be shares of Common Stock. At December 10, 1993, approximately 119,600,000 shares of Common Stock were outstanding. The Company Certificate provides that the Board is authorized to provide for the issuance of shares of preferred stock, from time to time, in one or more series, and to fix any voting powers, full or limited or none, and the designations, preferences and relative, participating, optional or other special rights, applicable to the shares to be included in any such series and any qualifications, limitations or restrictions thereon. COMMON STOCK Voting Rights. Each holder of Common Stock is entitled to one vote for each share registered in his name on the books of the Company on all matters submitted to a vote of shareholders. Except as otherwise provided by law, the holders of Common Stock vote as one class. The shares of Common Stock do not have cumulative voting rights. As a result, subject to the voting rights, if any, of the holders of any shares of the Company's preferred stock which may at the time be outstanding, the holders of Common Stock entitled to exercise more than 50% of the voting rights in an election of directors will be able to elect 100% of the directors to be elected if they choose to do so. In such event, the holders of the remaining Common Stock voting for the election of directors will not be able to elect any persons to the Board of Directors. The Company Certificate provides that the Board of Directors is classified into three classes, each serving a three year term, with one class to be elected in each of three consecutive years. 50 Dividend Rights. Subject to the rights of the holders of any shares of the Company's preferred stock which may at the time be outstanding, holders of Common Stock are entitled to such dividends as the Board of Directors may declare out of funds legally available therefor. The Company intends to retain future earnings for use in its business and does not currently intend to pay dividends. In addition, the Credit Agreement contains restrictions on the payment of dividends on the Common Stock. See "Dividend Policies." Liquidation Rights and Other Provisions. Subject to the prior rights of creditors and the holders of any of the Company's preferred stock which may be outstanding from time to time, the holders of Common Stock are entitled in the event of liquidation, dissolution or winding up to share pro rata in the distribution of all remaining assets. The Common Stock is not liable for any calls or assessments and is not convertible into any other securities. The Company Certificate provides that the private property of the shareholders shall not be subject to the payment of corporate debts. There are no redemption or sinking fund provisions applicable to the Common Stock, and the Company Certificate provides that there shall be no preemptive rights. The transfer agent and registrar for the Common Stock is The First National Bank of Boston. RIGHTS AND JUNIOR PREFERRED STOCK The Company has adopted a shareholder rights plan as set forth in that certain Rights Agreement dated February 3, 1989, as amended, between the Company and the Bank of New York, as rights agent (the "Rights Agreement"). The following is a summary of the terms of the Rights Agreement. Rights. Following the occurrence of certain events (the "Occurrence Date") and except as described below, each right (a "Right," and, collectively, the "Rights") will entitle the registered holder thereof to purchase from the Company one one-thousandth of a share (a "Unit") of the Company's Series A Junior Participating Preferred Stock ("Junior Preferred Stock") at a price (the "Purchase Price") of $150 per Unit, subject to adjustment. The Rights are not exercisable until the Occurrence Date. The Rights expire on the tenth anniversary of the adoption of the Rights Agreement, unless exercised in connection with a transaction of the type described below or unless earlier redeemed by the Company. Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. Initially, ownership of the Rights will be attached to all Common Stock certificates representing shares then outstanding, and no separate certificates representing the Rights (the "Rights Certificates") will be distributed. Until the Occurrence Date (or earlier redemption or expiration of the Rights), the Rights will be transferable only with the Common Stock, and the surrender or transfer of any certificate of Common Stock will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. The Rights will separate from the Common Stock and an Occurrence Date will occur upon the earlier of (i) 10 days following the date (a "Stock Acquisition Date") of a public announcement that a person or group of affiliates or associated persons (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding Common Stock or (ii) 10 business days following the commencement of or announcement of an intention to make a tender offer or exchange offer, the consummation of which would result in the Acquiring Person becoming the beneficial owner of 30% or more of such outstanding Common Stock (such date being called the Occurrence Date). For purposes of the Rights Agreement, a person shall not be deemed to beneficially own "Exempt Shares" which include (i) shares of Common Stock acquired by such person by gift, bequest and certain other transfers, which shares were Exempt Shares immediately prior to such transfer and were held by such person continuously thereafter and (ii) shares acquired by such person in connection with certain distributions of Common Stock with respect to Exempt Shares which were held by such person continuously thereafter. In connection with the Distribution, the Board amended the Rights Agreement to provide that the shares of 51 Common Stock acquired by Marriott International upon exercise of the Marriott International Purchase Right will be deemed "Exempt Shares" under the Rights Agreement, such that the exercise of such right by Marriott International will not cause Marriott International to be deemed an "Acquiring Person" under the Rights Agreement and thus trigger a distribution of the Rights. See "Relationship Between the Company and Marriott International--Marriott International Purchase Right." As soon as practicable following an Occurrence Date, Rights Certificates will be mailed to holders of record of Common Stock as of the close of business on the Occurrence Date. After such time, such separate Rights Certificates alone will evidence the Rights and could trade independently from the Common Stock. In the event (i) the Company is the surviving corporation in a merger with an Acquiring Person and the Common Stock is not changed or exchanged, or (ii) an Acquiring Person becomes the beneficial owner of 30% or more of the then outstanding shares of Common Stock (except pursuant to an offer for all outstanding shares of Common Stock which the Board determines to be fair to and otherwise in the best interests of the Company and its shareholders), each holder of a Right will, in lieu of the right to receive one one-thousandth of a share of Junior Preferred Stock, thereafter have the right to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the exercise price of the Right. Notwithstanding any of the foregoing, following the occurrence of any of the events set forth in this paragraph, all Rights that are (or, under certain circumstances specified in the Rights Agreement, were) beneficially owned by any Acquiring Person will be null and void. However, the Rights are not exercisable following the occurrence of either of the events set forth above until such time as the Rights are no longer redeemable by the Company as set forth below. For example, at an exercise price of $150 per Right, each Right not owned by an Acquiring Person (or by certain related parties) following an event set forth in the preceding paragraph would entitle its holder to purchase $300 worth of Common Stock (or other consideration, as noted above) for $150. Assuming that the Common Stock had a per share value of $30 at such time, the holder of each valid Right would be entitled to purchase 10 shares of Common Stock for $150. In the event that, at any time following the Stock Acquisition Date, (i) the Company is acquired in a merger or other business combination transaction in which the Company is not the surviving corporation (other than a merger described in the second preceding paragraph or a merger which follows an offer described in the second preceding paragraph), or (ii) 50% or more of the Company's assets or earning power is sold or transferred, each holder of a Right (except Rights which previously have been voided as set forth above) shall thereafter have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the Right. In general, the Board may redeem the Rights in whole, but not in part, at any time until 10 days following the Stock Acquisition Date, at a price of $.01 per Right. After the redemption period has expired, the Company's right of redemption may be reinstated if an Acquiring Person reduces its beneficial ownership to 10% or less of the outstanding shares of Common Stock in a transaction or series of transactions not involving the Company. Immediately upon the action of the Board ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the $.01 per Right redemption price. The purchase price payable, and the number of shares of Junior Preferred Stock or other securities or property issuable upon exercise of the Rights are subject to adjustment upon the occurrence of certain events with respect to the Company, including stock dividends, sub-divisions, combinations, reclassifications, rights or warrants offerings of Junior Preferred Stock at less than the then current market price and certain distributions of property or evidences of indebtedness of the Company to holders of Junior Preferred Stock, all as set forth in the Rights Agreement. 52 The Rights have certain anti-takeover effects. The Rights may cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Board of Directors, except pursuant to an offer conditioned on a substantial number of Rights being acquired. The Rights should not interfere with any merger or other business combination approved by the Board of Directors since the Rights may be redeemed by the Company as set forth above. See "Purposes and Antitakeover Effects of Certain Provisions of the Company Certificate and Bylaws and the Marriott International Purchase Right." JUNIOR PREFERRED STOCK In connection with the Rights Agreement, 300,000 shares of Junior Preferred Stock are authorized and reserved for issuance by the Board. No shares of Junior Preferred Stock are currently outstanding. The following statements with respect to the Junior Preferred Stock are subject to the detailed provisions of the Company Certificate and the certificate of designation relating to the Junior Preferred Stock (the "Junior Preferred Stock Certificate of Designation"). These statements do not purport to be complete and are subject to, and are qualified in their entirety by reference to, the terms of the Company Certificate and the Junior Preferred Stock Certificate of Designation. Subject to the prior payment of cumulative dividends on any class of preferred stock ranking senior to the Junior Preferred Stock, a holder of Junior Preferred Stock will be entitled to cumulative dividends out of funds legally available therefor, when, as and if declared by the Board, at a quarterly rate per share of Junior Preferred Stock equal to the greater of (a) $10.00 or (b) 1000 times (subject to adjustment upon certain dilutive events) the aggregate per share amount of all cash dividends and 1000 times (subject to adjustment upon certain dilutive events) the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions (other than dividends payable in Common Stock or a sub-division of the outstanding shares of Common Stock) declared on Common Stock, since the immediately preceding quarterly dividend payment date for the Junior Preferred Stock (or since the date of issuance of the Junior Preferred Stock if no such dividend payment date has occurred). A holder of Junior Preferred Stock will be entitled to 1000 votes (subject to adjustment upon certain dilutive events) per share of Junior Preferred Stock on all matters submitted to a vote of shareholders of the Company. Such holders will vote together with the holders of the Common Stock as a single class on all matters submitted to a vote of shareholders of the Company. In the event of a merger or consolidation of the Company which results in Common Stock being exchanged or changed for other stock, securities, cash and/or other property, the shares of Junior Preferred Stock shall similarly be exchanged or changed in an amount per share equal to 1000 times (subject to adjustment upon certain dilutive events) the aggregate amount of stock, securities, cash and/or other property, as the case may be, into which each share of Common Stock has been exchanged or changed. In the event of liquidation, dissolution or winding up of the Company, a holder of Junior Preferred Stock will be entitled to receive $1000 per share, plus accrued and unpaid dividends and distributions thereon, before any distribution may be made to holders of shares of stock of the Company ranking junior to the Junior Preferred Stock, and the holders of Junior Preferred Stock are entitled to receive an aggregate amount per share equal to 1000 times (subject to adjustment upon certain dilutive events) the aggregate amount to be distributed per share to holders of Common Stock. The Junior Preferred Stock is not subject to redemption. The terms of the Junior Preferred Stock provide that the Company is subject to certain restrictions with respect to dividends and distributions on and redemptions and purchases of shares of stock of the Company ranking junior to or on a parity with the Junior Preferred Stock in the event that payments of dividends or other distributions payable on the Junior Preferred Stock are in arrears. 53 CONVERTIBLE PREFERRED STOCK The Company has outstanding 292,000 depositary shares of Convertible Preferred Stock, each having a liquidation preference of $50 per depositary share plus an amount equal to any accrued and unpaid dividends thereon. The Distribution did not affect the terms of the Convertible Preferred Stock, which are set forth in the Company's Certificate of Designation with respect to the Convertible Preferred Stock (the "Convertible Preferred Stock Certificate of Designation"). However, pursuant to Section 5(e)(iv) of the Convertible Preferred Stock Certificate of Designation, the conversion price at which the Convertible Preferred Stock is convertible into Common Stock after the Distribution was adjusted from $17.40 per share to $2.61 per share. At the current conversion price of $2.61 per share, the 292,000 outstanding depositary shares of the Convertible Preferred Stock are convertible into approximately 5.6 million shares of Common Stock. Pursuant to Section 6(c) of the Convertible Preferred Stock Certificate of Designation, if the equivalent of six quarterly dividends payable on the Convertible Preferred Stock are in arrears, the number of directors of the Company will be increased by two and the holders of Convertible Preferred Stock voting separately as a class with the holders of shares of any one or more other series of preferred stock ranking on a parity with the Convertible Preferred Stock whether as to payment of dividends or the distribution of assets and upon which like voting rights have been conferred and are exercisable, will be entitled to elect two directors for one year terms to fill such vacancies at the Company's next annual meeting of shareholders. Such right to elect two additional directors shall continue at each subsequent annual meeting until all dividends in arrears have been paid or declared and set apart for payment. Upon payment or declaration and reservation of funds for payment of all such dividends in arrearage, the term of office of each director elected shall immediately terminate and the number of directors constituting the entire Board of Directors of the Company shall be reduced by the number of directors elected by the holders of the Convertible Preferred Stock and any other series of preferred stock ranking on a parity with the Convertible Preferred Stock as discussed above. The Company has failed to pay dividends for one quarterly period and presently intends to pay preferred stock dividends only to the extent earnings equal or exceed the amount of such dividends. This policy may result in an indefinite suspension of dividends on the Convertible Preferred Stock. See "Dividend Policy." In such case, the holders of the Convertible Preferred Stock may become entitled to elect two members of the Board of Directors. The stated quarterly dividend on the outstanding shares of Convertible Preferred Stock is approximately $300,000, and the Company could recommence payment of quarterly dividends in order to avoid the election of additional directors. In addition, commencing January 15, 1996, the outstanding Convertible Preferred Stock may be redeemed at an aggregate redemption price of $15 million plus accrued and unpaid dividends. WARRANTS As part of the Class Action Settlement, the Company agreed to issue warrants to purchase up to 7.7 million shares of Common Stock, such warrants to be exercisable for a period of five years after the Distribution, at $8.00 per share during the first three years and $10.00 per share during the last two years. The number of shares issuable under the warrants will be reduced to the extent that the verified losses of eligible claimants (certain sellers of Old Notes) are less than $8.7 million (such reduction to be one share for each dollar by which $8.7 million exceeds the amount of such losses). As of the date hereof, no such warrants have been issued, and no warrants are expected to be issued until the appeal of the approval of the Class Action Settlement is resolved. See "Risk Factors--Pending Litigation." It is anticipated that the warrants will be evidenced by warrant agreements that will provide for such matters as (i) the issuance, execution and delivery of the warrant certificates, (ii) the warrant exercise price, duration and exercise of warrant certificates, (iii) treatment of fractional shares, (iv) the transfer and exchange of warrant certificates and (v) other provisions relating to the rights of the registered holders of the warrants. The holders of the warrants shall not be entitled to any of the rights of the holders of Common Stock including, without limitation, the right to vote, receive dividends and other distributions, to exercise any preemptive right or to receive any notice of or to attend meetings of shareholders or any other proceedings. 54 PRICE RANGE OF THE COMMON STOCK AND DIVIDENDS The Common Stock is listed on the New York Stock Exchange and on several regional exchanges, and since consummation of the Distribution is traded under the symbol "HMT." The following table sets forth, for the fiscal periods indicated, the high and low sales prices per share of the Common Stock as reported on the New York Stock Exchange Composite Tape and traded during such periods under the symbol "MHS," and the cash dividends paid per share of Common Stock. Except for the fourth quarter of fiscal 1993, all periods presented in the table below were prior to the Distribution. Therefore the stock prices and dividends paid are not indicative of the Company's current stock price or dividend policies. See "Dividend Policy." As of October 31, 1993, there were approximately 66,561 holders of record of Common Stock.
CASH DIVIDENDS HIGH LOW PAID ---- ---- --------- 1992 1st Quarter......................................... $19 5/8 $15 3/4 $.07 2nd Quarter......................................... 18 13 3/8 .07 3rd Quarter......................................... 17 1/2 15 1/8 .07 4th Quarter......................................... 21 7/8 16 7/8 .07 1993 1st Quarter......................................... $27 3/8 $20 3/4 $.07 2nd Quarter......................................... 26 5/8 24 .07 3rd Quarter......................................... 29 24 3/8 .07 4th Quarter(1)...................................... 33 3/8 6 1/8 -- 1994 1st Quarter (through January 18, 1994).............. 11 3/8 8 3/4 --
- -------- (1) The high sales price per share of the Common Stock for the fourth quarter of fiscal 1993 occurred on October 8, 1993, the date of the Distribution. The low sales price per share of the Common Stock during such period occurred on October 11, 1993, after the occurrence of the Distribution. PURPOSES AND ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY CERTIFICATE AND BYLAWS AND THE MARRIOTT INTERNATIONAL PURCHASE RIGHT COMPANY CERTIFICATE AND BYLAWS The Company Certificate contains several provisions that will make difficult an acquisition of control of the Company, by means of a tender offer, open market purchases, a proxy fight or otherwise, that is not approved by the Board. The Company's Bylaws (the "Bylaws") also contain provisions that could have an antitakeover effect. The purposes of the relevant provisions of the Company Certificate and Bylaws are to discourage certain types of transactions, described below, which may involve an actual or threatened change of control of the Company and to encourage persons seeking to acquire control of the Company to consult first with the Board of Directors to negotiate the terms of any proposed business combination or offer. The provisions are designed to reduce the vulnerability of the Company to an unsolicited proposal for a takeover that does not contemplate the acquisition of all outstanding shares or is otherwise unfair to shareholders of the Company or an unsolicited proposal for the restructuring or sale of all or part of the Company. The Company believes that, as a general rule, such proposals would not be in the best interests of the Company and its shareholders. There has been a history of the accumulation of substantial stock positions in public companies by third parties as a prelude to proposing a takeover or a restructuring or sale of all or part of the company or another similar extraordinary corporate action. Such actions are often undertaken by the third- party without advance notice to, or consultation with, the management or board of directors of the target company. In many cases, the purchaser seeks representation on the company's board of directors in order to increase the likelihood that its proposal will be implemented by the company. If the company resists the efforts of the purchaser to obtain representation on the company's board, the purchaser may commence a proxy contest to have its 55 nominees elected to the board in place of certain directors or the entire board. In some cases, the purchaser may not truly be interested in taking over the company, but may use the threat of a proxy fight and/or a bid to take over the company as a means of forcing the company to repurchase its equity position at a substantial premium over market price. The Company believes that the imminent threat of removal of the Company's management or Board in such situations would severely curtail the ability of management or the Board to negotiate effectively with such purchasers. The management or the Board would be deprived of the time and information necessary to evaluate the takeover proposal, to study alternative proposals and to help ensure that the best price is obtained in any transaction involving the Company which may ultimately be undertaken. If the real purpose of a takeover bid were to force the Company to repurchase an accumulated stock interest at a premium price, management or the Board would face the risk that, if it did not repurchase the purchaser's stock interest, the Company's business and management would be disrupted, perhaps irreparably. Certain provisions of the Company Certificate and Bylaws, in the view of the Company, will help ensure that the Board, if confronted by a surprise proposal from a third-party which has acquired a block of stock, will have sufficient time to review the proposal and appropriate alternatives to the proposal and to act in what it believes to be the best interests of the shareholders. In addition, certain other provisions of the Company Certificate are designed to prevent a purchaser from utilizing two-tier pricing and similar inequitable tactics in the event of an attempt to take over the Company. These provisions, individually and collectively, will make difficult and may discourage a merger, tender offer or proxy fight, even if such transaction or occurrence may be favorable to the interests of the shareholders, and may delay or frustrate the assumption of control by a holder of a large block of stock of the Company and the removal of incumbent management, even if such removal might be beneficial to the shareholders. Furthermore, these provisions may deter or could be utilized to frustrate a future takeover attempt which is not approved by the incumbent Board of Directors, but which the holders of a majority of the shares may deem to be in their best interests or in which shareholders may receive a substantial premium for their stock over prevailing market prices of such stock. By discouraging takeover attempts, these provisions might have the incidental effect of inhibiting certain changes in management (some or all of the members of which might be replaced in the course of a change of control) and also the temporary fluctuations in the market price of the stock which often result from actual or rumored takeover attempts. Set forth below is a description of such provisions in the Company Certificate and Bylaws. Such description is intended as a summary only and is qualified in its entirety by reference to the Company Certificate and Bylaws which are exhibits to the Registration Statement on Form S-1 of which this Prospectus is a part. Classified Board of Directors. The Company Certificate provides for the Board to be divided into three classes serving staggered terms so that directors' current terms will expire either at the 1994, 1995 or 1996 annual meeting of shareholders. See "Management--Board of Directors." The classification of directors will have the effect of making it more difficult for shareholders to change the composition of the Board in a relatively short period of time. At least two annual meetings of shareholders, instead of one, will generally be required to effect a change in a majority of the Board. Such a delay may help ensure that the Board, if confronted by a holder attempting to force a stock repurchase at a premium above market prices, a proxy contest or an extraordinary corporate transaction, will have sufficient time to review the proposal and appropriate alternatives to the proposal and to act in what it believes are the best interests of the shareholders. The classified board provision could have the effect of discouraging a third- party from making a tender offer or otherwise attempting to obtain control of the Company, even though such an attempt might be beneficial to the Company and its shareholders. The classified board provision could thus increase the likelihood that incumbent directors will retain their positions. In addition, since the classified board provision 56 is designed to discourage accumulations of large blocks of the Company's stock by purchasers whose objective is to have such stock repurchased by the Company at a premium, the classified board provision could tend to reduce the temporary fluctuations in the market price of the Company's stock that could be caused by accumulations of large blocks of such stock. Accordingly, shareholders could be deprived of certain opportunities to sell their stock at a temporarily higher market price. The Company believes that a classified board of directors helps to assure the continuity and stability of the Board and business strategies and policies as determined by the Board, because generally a majority of the directors at any given time will have had prior experience as directors of the Company. The classified board provision also helps assure that the Board, if confronted with an unsolicited proposal from a third-party that has acquired a block of the voting stock of the Company, will have sufficient time to review the proposal and appropriate alternatives and to seek the best available result for all shareholders. Removal; Filling Vacancies. The Company Certificate provides that, subject to any rights of the holders of preferred stock, only a majority of the Board then in office shall have the authority to fill any vacancies on the Board, including vacancies created by an increase in the number of directors. In addition, the Company Certificate provides that a new director elected to fill a vacancy on the Board will serve for the remainder of the full term of his or her class and that no decrease in the number of directors shall shorten the term of an incumbent. Moreover, the Company Certificate provides that directors may be removed with or without cause only by the affirmative vote of holders of at least 66 2/3% of the voting power of the shares entitled to vote at the election of directors, voting together as a single class. These provisions relating to removal and filling of vacancies on the Board will preclude shareholders from enlarging the Board or removing incumbent directors and filling the vacancies with their own nominees. Limitations on Shareholder Action By Written Consent; Special Meetings. The Company Certificate and Bylaws provide that shareholder action can be taken only at an annual or special meeting of shareholders and prohibit shareholder action by written consent in lieu of a meeting. The Company Certificate and Bylaws provide that, subject to the rights of holders of any series of preferred stock, special meetings of shareholders can be called only by a majority of the entire Board. Shareholders are not permitted to call a special meeting or to require that the Board call a special meeting of shareholders. Moreover, the business permitted to be conducted at any special meeting of shareholders is limited to the business brought before the meeting by or at the direction of the Board. The provisions of the Company Certificate and Bylaws restricting shareholder action by written consent may have the effect of delaying consideration of a shareholder proposal until the next annual meeting unless a special meeting is called by a majority of the entire Board. These provisions would also prevent the holders of a majority of the voting power of the voting stock from using the written consent procedure to take shareholder action and from taking action by consent without giving all the shareholders of the Company entitled to vote on a proposed action the opportunity to participate in determining such proposed action. Moreover, a shareholder could not force shareholder consideration of a proposal over the opposition of the Company Board by calling a special meeting of shareholders prior to the time the Board believed such consideration to be appropriate. The Company believes that such limitations on shareholder action will help to assure the continuity and stability of the Board and the Company's business strategies and policies as determined by the Board, to the benefit of all of the Company's shareholders. If confronted with an unsolicited proposal from Company shareholders, the Board will have sufficient time to review such proposal and to seek the best available result for all shareholders, before such proposal is approved by such shareholders by written consent in lieu of a meeting or through a special meeting of shareholders. Nominations of Directors and Shareholder Proposals. The Bylaws establish an advance notice procedure with regard to the nomination, other than by or at the direction of the Board, of candidates for election as directors (the "Nomination Procedure") and with regard to shareholder proposals to be brought before an annual or special meeting of shareholders (the "Business Procedure"). 57 The Nomination Procedure provides that only persons who are nominated by or at the direction of the Board of Directors, or by a shareholder who has given timely prior written notice to the Secretary of the Company prior to the meeting at which directors are to be elected, will be eligible for election as directors. The Business Procedure provides that shareholder proposals must be submitted in writing in a timely manner in order to be considered at any annual or special meeting. To be timely, notice must be received by the Company (i) in the case of an annual meeting, not less than 90 days prior to the annual meeting for a director nomination, and not less than 120 days prior to the annual meeting for a shareholder proposal or (ii) in the case of a special meeting not later than the seventh day following the day on which notice of such meeting is first given to shareholders for both a director nomination and a shareholder proposal. Under the Nomination Procedure, notice to the Company from a shareholder who proposes to nominate a person at a meeting for election as a director must contain certain information about that person, including age, business and residence addresses, principal occupation, the class and number of shares of Common Stock beneficially owned, the consent to be nominated and such other information as would be required to be included in a proxy statement soliciting proxies for the election of the proposed nominee, and certain information about the shareholder proposing to nominate that person. Under the Business Procedure, notice relating to a shareholder proposal must contain certain information about such proposal and about the shareholder who proposes to bring the proposal before the meeting, including the class and number of shares of Common Stock beneficially owned by such shareholder. If the Chairman or other officer presiding at a meeting determines that a person was not nominated in accordance with the Nomination Procedure, such person will not be eligible for election as a director, or if he determines that the shareholder proposal was not properly brought before such meeting, such proposal will not be introduced at such meeting. Nothing in the Nomination Procedure or the Business Procedure will preclude discussion by any shareholder of any nomination or proposal properly made or brought before an annual or special meeting in accordance with the above-mentioned procedures. The purpose of the Nomination Procedure is, by requiring advance notice of nomination by shareholders, to afford the Board a meaningful opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the Board, to inform shareholders about such qualifications. The purpose of the Business Procedure is, by requiring advance notice of shareholder proposals, to provide a more orderly procedure for conducting annual meetings of shareholders and, to the extent deemed necessary or desirable by the Board, to provide the Board with a meaningful opportunity to inform shareholders, prior to such meetings, of any proposal to be introduced at such meetings, together with any recommendation as to the Board's position or belief as to action to be taken with respect to such proposal, so as to enable shareholders better to determine whether they desire to attend such meeting or grant a proxy to the Board as to the disposition of any such proposal. Although the Bylaws do not give the Board any power to approve or disapprove shareholder nominations for the election of directors or of any other proposal submitted by shareholders, the Bylaws may have the effect of precluding a nomination for the election of directors or precluding the conducting of business at a particular shareholder meeting if the proper procedures are not followed, and may discourage or deter a third-party from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of the Company, even if the conduct of such solicitation or such attempt might be beneficial to the Company and its shareholders. Fair Price Provision. Article Fifteenth of the Company Certificate (the "Fair Price Provision") requires the approval by the holders of 66 2/3% of the voting power of the outstanding capital stock of the Company entitled to vote generally in the election of directors (the "Voting Stock") as a condition for mergers and certain other business combinations ("Business Combinations") involving the Company and any holder of more than 25% of such voting power (an "Interested Shareholder") unless the transaction is either (i) approved by a majority of the members of the Board who are not affiliated with the Interested Shareholder and who were directors before the Interested Shareholder became an Interested Shareholder (the "Disinterested Directors") or (ii) certain minimum price and procedural requirements are met. 58 The Fair Price Provision is designed to prevent a third-party from utilizing two-tier pricing and similar inequitable tactics in a takeover attempt. The Fair Price Provision is not designed to prevent or discourage tender offers for the Company. It does not impede an offer for at least 66 2/3% of the Voting Stock in which each shareholder receives substantially the same price for his or her shares as each other shareholder or which the Board has approved in the manner described herein. Nor does the Fair Price Provision preclude a third- party from making a tender offer for some of the shares of Voting Stock without proposing a Business Combination in which the remaining shares of Voting Stock are purchased. Except for the restrictions on Business Combinations, the Fair Price Provision will not prevent an Interested Shareholder having a controlling interest of the Voting Stock from exercising control over the Company or increasing its interest in the Company. Moreover, an Interested Shareholder could increase its ownership to 66 2/3% and avoid application of the Fair Price Provision. However, the separate provisions contained in the Company Certificate and the Bylaws relating to "Classified Boards of Directors" discussed above will, as therein indicated, curtail an Interested Shareholder's ability to exercise control in several respects, including such shareholder's ability to change incumbent directors who may oppose a Business Combination or to implement a Business Combination by written consent without a shareholder meeting. The Fair Price Provision would, however, discourage some takeover attempts by persons intending to acquire the Company in two steps and to eliminate remaining shareholder interests by means of a business combination involving less consideration per share than the acquiring person would propose to pay for its initial interest in the Company. In addition, acquisitions of stock by persons attempting to acquire control through market purchases may cause the market price of the stock to reach levels which are higher than would otherwise be the case. The Fair Price Provision may thereby deprive some holders of the Common Stock of an opportunity to sell their shares at a temporarily higher market price. Although the Fair Price Provision is designed to help assure fair treatment of all shareholders vis-a-vis other shareholders in the event of a takeover, it is not the purpose of the Fair Price Provision to assure that shareholders will receive a premium price for their shares in a takeover. Accordingly, the Board is of the view that the adoption of the Fair Price Provision does not preclude the Board's opposition to any future takeover proposal which it believes would not be in the best interests of the Company and its shareholders, whether or not such a proposal satisfies the minimum price criteria and procedural requirements of the Fair Price Amendment. In addition, under Section 203 of the Delaware General Corporation Law as applicable to the Company, certain "business combinations" (defined generally to include (i) mergers or consolidations between a Delaware corporation and an interested shareholder (as defined below) and (ii) transactions between a Delaware corporation and an interested shareholder involving the assets or stock of such corporation or its majority-owned subsidiaries, including transactions which increase the interested shareholder's percentage ownership of stock) between a Delaware corporation, whose stock generally is publicly traded or held of record by more than 2,000 shareholders, and an interested shareholder (defined generally as those shareholders, who, on or after December 23, 1987, become beneficial owners of 15 percent or more of a Delaware corporation's voting stock) are prohibited for a three-year period following the date that such shareholder became an interested shareholder, unless (i) prior to the date such shareholder became an interested shareholder, the board of directors of the corporation approved either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder, (ii) upon consummation of the transaction that made such shareholder an interested shareholder, the interested shareholder owned at least 85 percent of the voting stock of the corporation outstanding at the time the transaction commenced (excluding voting stock owned by officers who also are directors and voting stock held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan), or (iii) the business combination was approved by the board of directors of the corporation and ratified by two-thirds of the voting stock which the interested shareholder did not own. The three-year prohibition also does not apply to certain business combinations proposed by an interested shareholder following the announcement or notification of certain extraordinary transactions involving the corporation 59 and a person who had been an interested shareholder during the previous three years or who became an interested shareholder with the approval of a majority of the corporation's directors. Shareholder Rights Plan. The Company has adopted a shareholder rights plan which may have anti-takeover effects. See "Description of Capital Stock--Rights and Junior Preferred Stock." Amendment of the Company Certificate and Bylaws. The Company Certificate contains provisions requiring the affirmative vote of the holders of at least 66 2/3 percent of the voting power of the stock entitled to vote generally in the election of directors to amend certain provisions of the Company Certificate and Bylaws (including the provisions discussed above). These provisions make it more difficult for shareholders to make changes in the Company Certificate or Bylaws, including changes designed to facilitate the exercise of control over the Company. In addition, the requirement for approval by at least a 66 2/3 percent shareholder vote will enable the holders of a minority of the Company's capital stock to prevent holders of a less-than-66 2/3 percent majority from amending such provisions of the Company's Certificate or Bylaws. MARRIOTT INTERNATIONAL PURCHASE RIGHT Pursuant to the terms of the Distribution Agreement, the Company granted to Marriott International, for a period of ten years following the Distribution, the right to purchase a number of shares equal in amount of up to 20% of each class of the Company's outstanding voting stock at the then fair market value upon the occurrence of certain change of control events involving the Company. The Marriott International Purchase Right may be exercised for a 30-day period following the date a person or group of affiliated persons has (i) become the beneficial owner of 20% or more of the total voting power of the then outstanding shares of the Company's voting stock or (ii) announced a tender offer for 30% or more of the total voting power of the then outstanding shares of the Company's voting stock. These change of control events upon which the Marriott International Purchase Right becomes exercisable are substantially identical to those events that cause a distribution of the Rights under the Rights Agreement (see "Description of Capital Stock--Rights and Junior Preferred Stock"). Accordingly, certain share ownership of the Company's voting stock by specified persons that is exempt under the Rights Agreement, and consequently will not result in a distribution of Rights, also will not cause the Marriott International Purchase Right to become exercisable. The Board amended the terms of the Rights Agreement to provide that the exercise of the Marriott International Purchase Right will not result in a distribution of the Rights. Accordingly, upon exercise of the Marriott International Purchase Right, Marriott International will be entitled to receive the Rights associated with the Common Stock and will not be deemed an "Acquiring Person" under the Rights Agreement. The purchase price for the Common Stock to be purchased upon the exercise of the Marriott International Purchase Right is determined by taking the average of the closing sale price of the Common Stock during the 30 consecutive trading days preceding the date the Marriott International Purchase Right becomes exercisable. The specific terms of the Marriott International Purchase Right are set forth in the Distribution Agreement. The Marriott International Purchase Right will have an antitakeover effect. Any person considering acquiring a substantial or controlling block of Common Stock would face the possibility that its ability to exercise control would be impaired by Marriott International's 20% ownership resulting from exercise of the Marriott International Purchase Right. So long as the Marriott family's current percentage of ownership of Common Stock continues, the combined Marriott family (including various trusts established by members of the Marriott family) and Marriott International ownership following exercise of the Marriott International Purchase Right would effectively block control by others (see "Description of Capital Stock"). It is also possible that the exercise price of the Marriott International Purchase Right would be lower than the price at which a potential acquiror might be willing to purchase a 20% block of shares of Common Stock because the purchase price for the Marriott International Purchase Right is based on the average trading price during a 30- day period which may be prior to the announcement of the takeover event. This potential price differential may have a further antitakeover effect by discouraging potential acquirors of the Company. The antitakeover effect of the Marriott International Purchase Right will be in addition to the antitakeover effects of the provisions contained in the Company Certificate and Bylaws. 60 CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS OF COMMON STOCK The following is a general summary of certain United States federal income and estate tax consequences of the ownership, sale or other disposition of Common Stock by a person (a "non-U.S. holder") that, for United States federal income tax purposes, is a nonresident alien individual, a foreign corporation, a foreign partnership or a foreign estate or trust, as such terms are defined in the Internal Revenue Code of 1986, as amended (the "Code"). This summary does not address all aspects of United States federal income and estate taxes that may be relevant to non-U.S. holders in light of their particular facts and circumstances or to certain types of non-U.S. holders that may be subject to special treatment under United States federal income tax laws (for example, insurance companies, tax-exempt organizations, financial institutions or broker-dealers). Furthermore, this summary does not discuss any aspects of foreign, state or local taxation. This summary is based on current provisions of the Code, existing and proposed regulations promulgated thereunder and administrative and judicial interpretations thereof, all of which are subject to change, possibly retroactively. DIVIDENDS Dividends paid to a non-U.S. holder of Common Stock will generally be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty, unless the dividends are effectively connected with the conduct of a trade or business of the non-U.S. holder within the United States. In order to claim the benefit of an applicable tax treaty rate, a non-U.S. holder may have to file with the Company or its dividend paying agent an exemption or reduced treaty rate certificate or letter in accordance with the terms of such treaty. Dividends that are effectively connected with such holder's conduct of a trade or business in the United States are generally subject to tax on a net income basis (that is, after allowance for applicable deductions) at rates applicable to U.S. citizens, resident aliens and domestic U.S. corporations, and are not generally subject to withholding. Any such effectively connected dividends received by a non-U.S. corporation may also, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Under current United States Treasury regulations, dividends paid to an address outside the United States are presumed to be paid to a resident of such country for purposes of the withholding discussed above (unless the payor has knowledge to the contrary). Under the current interpretation of United States Treasury regulations, the same presumption applies for purposes of determining the applicability of a tax treaty rate; however, under proposed United States Treasury regulations not currently in effect, a non-U.S. holder of Common Stock who wishes to claim the benefit of an applicable treaty rate would be required to satisfy applicable certification and other requirements. Certain certification and disclosure requirements must be complied with in order to be exempt from withholding under the effectively connected income exemption discussed above. A non-U.S. holder of Common Stock that is eligible for a reduced rate of United States tax withholding pursuant to an income tax treaty may obtain a refund of any excess amounts currently withheld by filing an appropriate claim for refund with the United States Internal Revenue Service. DISPOSITION OF COMMON STOCK A non-U.S. holder generally will not be subject to United States federal income tax in respect of gain recognized on the disposition of Common Stock unless (i) the gain is effectively connected with the conduct of a trade or business of a non-U.S. holder in the United States, (ii) in the case of a non- U.S. holder who is a nonresident alien individual and holds Common Stock as a capital asset, such holder is present in the United States for 183 or more days in the taxable year of the sale and either (a) such individual's "tax home" for United States federal income tax purposes is in the United States, or (b) the gain is attributable to an office or 61 other fixed place of business maintained in the United States by such individual, or (iii) if the Company is or has been a "U.S. real property holding corporation" for federal income tax purposes at any time during the five-year period ending on the date of the disposition or, if shorter, the period during which the non-U.S. holder held the Common Stock (the "applicable period") and the non-U.S. holder holds, actually or constructively, at any time during the applicable period, more than 5% of the Common Stock. The Company expects to be treated as a U.S. real property holding company for United States federal tax purposes because of its ownership of substantial real estate assets in the United States. As a result, a non-U.S. holder who holds, directly or indirectly, more than 5% of the Common Stock may be subject to United States federal income taxation on any gain realized from the sale or other disposition of such stock, unless an exemption is provided under an applicable tax treaty. FEDERAL ESTATE TAXES Common Stock owned or treated as owned by a holder who is neither a United States citizen nor a United States resident (as specially defined for United States federal estate tax purposes) at the time of death will be included in such holder's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. UNITED STATES INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX The Company must report annually to the Internal Revenue Service and to each non-U.S. holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends. These information reporting requirements apply regardless of whether withholding is required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder resides under the provisions of an applicable income tax treaty. United States backup withholding (which generally is imposed at a 31% rate) generally will not apply to (a) the payment of dividends paid on Common Stock to a non-U.S. holder at an address outside the United States or (b) the payment of the proceeds of the sale of Common Stock to or through the foreign office of a broker. In the case of the payment of proceeds from such a sale of Common Stock through foreign offices of United States brokers, or foreign brokers with certain types of relationships to the United States, however, information reporting (but not backup withholding) is required with respect to the payment unless the broker has documentary evidence in its files that the owner is a non-U.S. holder (and has no actual knowledge to the contrary) and certain other requirements are met or the holder otherwise establishes an exemption. The payment of the proceeds of a sale of shares of Common Stock to or through a U.S. office of a broker is subject to information reporting and possible backup withholding at a rate of 31% unless the owner certifies its non-U.S. status under penalties of perjury or otherwise establishes an exemption. Any amounts withheld under the backup withholding rules from a payment to a non-U.S. holder will be allowed as a refund or a credit against such non-U.S. holder's United States federal income tax liability, provided that the required information is furnished to the Internal Revenue Service. These information reporting and backup withholding rules are under review by the United States Treasury and could be changed by future regulations. THE FOREGOING SUMMARY IS INCLUDED FOR GENERAL INFORMATION ONLY. ACCORDINGLY, INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH RESPECT TO THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF COMMON STOCK, INCLUDING THE APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION. 62 UNDERWRITING Subject to certain conditions contained in the Underwriting Agreement, the United States Underwriters named below (the "U.S. Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities Corporation, Montgomery Securities, Smith Barney Shearson Inc. and BT Securities Corporation ("BT Securities") are acting as representatives (the "U.S. Representatives"), and the international managers named below (the "International Managers" and, together with the U.S. Underwriters, the "Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities Corporation, Montgomery Securities, Smith Barney Shearson Inc. and Bankers Trust International PLC are acting as representatives (the "International Representatives" and, together with the U.S. Representatives, the "Representatives"), have severally agreed to purchase from the Company an aggregate of 17,500,000 shares of Common Stock. The number of shares of Common Stock that each Underwriter has agreed to purchase is set forth opposite its name below:
NUMBER U.S. UNDERWRITERS OF SHARES ----------------- ---------- Donaldson, Lufkin & Jenrette Securities Corporation............... Montgomery Securities............................................. Smith Barney Shearson Inc. ....................................... BT Securities Corporation......................................... ---------- U.S. Offering Subtotal.......................................... 14,000,000 ---------- INTERNATIONAL MANAGERS ---------------------- Donaldson, Lufkin & Jenrette Securities Corporation............... Montgomery Securities............................................. Smith Barney Shearson Inc. ....................................... Bankers Trust International PLC................................... ---------- International Offering Subtotal................................. 3,500,000 ---------- Total......................................................... 17,500,000 ==========
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase shares of Common Stock are subject to the approval of certain legal matters by counsel and to certain other conditions. If any of the shares of Common Stock are purchased by the Underwriters pursuant to the Underwriting Agreement, all such shares of Common Stock (other than the shares of Common Stock covered by the over-allotment option described below) must be so purchased. The offering price and underwriting discounts and commissions per share for the U.S. Offering and the International Offering are identical. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments that the Underwriters may be required to make in respect thereof. 63 The Company has been advised by the Representatives that the Underwriters propose to offer the Common Stock to the public initially at the price to the public set forth on the cover page of this Prospectus and to certain dealers (who may include the Underwriters) at such price less a concession not to exceed $ per share. The Underwriters may allow, and such dealers may reallow, discounts not in excess of $ per share to any other Underwriter and certain other dealers. The Company has granted to the U.S. Underwriters an option to purchase up to an aggregate of 2,625,000 additional shares of Common Stock at the initial public offering price less underwriting discounts and commissions, solely to cover over-allotments. Such option may be exercised at any time until 30 days after the date of this Prospectus. To the extent that the U.S. Representatives exercise such option, each of the U.S. Underwriters will be committed, subject to certain conditions, to purchase approximately the same percentage of the option shares that the number of shares of Common Stock to be purchased initially by the Underwriter bears to the total number of shares to be purchased initially by such U.S. Underwriters. The Company and its executive officers have agreed, and its directors are each expected to agree, subject to certain exceptions, not to sell or otherwise dispose of shares of Common Stock or sell or grant rights, options or warrants with respect to Common Stock or securities convertible into Common Stock prior to the expiration of 90 days from the date of this Prospectus, without prior written consent of the Representatives. Pursuant to the Agreement Among U.S. Underwriters and International Managers, each U.S. Underwriter has represented and agreed that, with certain exceptions, (a) it is not purchasing any shares of Common Stock for the account of anyone other than a United States or Canadian Person (as defined below) and (b) it has not offered or sold, and will not offer or sell, directly or indirectly, any shares of Common Stock or distribute this Prospectus outside of the United States or Canada or to anyone other than a United States or Canadian Person. Pursuant to the Agreement Among U.S. Underwriters and International Managers, each International Manager has represented and agreed that, with certain exceptions, (a) it is not purchasing any shares of Common Stock for the account of any United States or Canadian Person and (b) it has not offered or sold, and will not offer or sell, directly or indirectly, any shares of Common Stock or distribute this Prospectus within the United States or Canada or to any United States or Canadian Person. The foregoing limitations do not apply to stabilization transactions and to certain other transactions among the International Managers and the U.S. Underwriters. As used herein, "United States or Canadian Person" means any national or resident of the United States or Canada or any corporation, pension, profit-sharing or other trust or other entity organized under the laws of the United States or Canada or of any political subdivision thereof (other than a branch located outside the United States or Canada of any United States or Canadian Person) and includes any United States or Canadian branch of a person who is not otherwise a United States or Canadian Person, and "United States" means the United States of America, its territories, its possessions and all areas subject to its jurisidiction. Pursuant to the Agreement Among U.S. Underwriters and International Managers, sales may be made between the U.S. Underwriters and the International Managers of any number of shares of Common Stock to be purchased pursuant to the Underwriting Agreement as may be mutually agreed. The per share price and currency of settlement of any shares so sold shall be the public offering price set forth on the cover page hereof, in United States dollars, less an amount not greater than the per share amount of the concession to dealers set forth above. Pursuant to the Agreement Among U.S. Underwriters and International Managers, each U.S. Underwriter has represented that it has not offered or sold, and has agreed not to offer or sell, any shares of Common Stock, directly or indirectly, in Canada in contravention of the securities laws of Canada or any province or territory thereof and has represented that any offer of Common Stock in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada 64 in which such offer is made. Each U.S. Underwriter has further agreed to send any dealer who purchases from it any shares of Common Stock a notice stating in substance that, by purchasing such Common Stock, such dealer represents and agrees that it has not offered or sold, and will not offer or sell, directly or indirectly, any of such Common Stock in Canada in contravention of the securities laws of Canada or any province or territory thereof and that any offer of Common Stock in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer is made, and that such dealer will deliver to any other dealer to whom it sells any of such Common Stock a notice to the foregoing effect. BT Securities, and its affiliates, from time to time provide financial services for the Company and its affiliates and in connection therewith receive customary fees. In 1993, BT Securities acted as financial advisor and dealer manager to the Company in connection with the Exchange Offer and received from the Company fees in connection therewith. Bankers Trust Company, an affiliate of BT Securities, acted as exchange agent for the Exchange Offer and received customary compensation for such services. No document issued in connection with the Offering may be passed on to any person in the United Kingdom unless that person is of a kind described in Article 9(3) of the Financial Services Act 1986 (Investment Advertisement) (Exemptions) Order 1988. In addition, each Underwriter has informed the Company that: (i) it is not carrying on an investment business in the United Kingdom in contravention of Section 3 of the Financial Services Act of 1986 (the "UKFSA"); (ii) it has not offered or sold, and it will not offer or sell, in the United Kingdom, by means of this Prospectus, any amendment or supplement hereto or any other document, any of the shares of Common Stock offered hereby other than to persons whose ordinary business it is to buy or sell shares or debentures, whether as principal or agent (except in circumstances that do not constitute an offer to the public within the meaning of the Companies Act 1985); (iii) subject to Part V of the UKFSA, it will not issue or cause to be issued in the United Kingdom any advertisement offering the shares of Common Stock offered hereby which is a primary or secondary offer within the meaning of the UKFSA except in compliance with the provisions applicable under the UKFSA; (iv) it has not issued or caused to be issued and it will not issue or cause to be issued in the United Kingdom any investment advertisement within the meaning of the UKFSA relating to the shares of Common Stock offered hereby except in compliance with the provisions applicable under the UKFSA, and in particular, it has not given and will not give copies of this Prospectus, any amendment or supplement hereto or any other document relating to the offer and sale of the shares of Common Stock offered hereby to any person in the United Kingdom who does not fall within Article 9(3) of the Financial Services Act 1986 (Investment Advertisement) (Exemptions) Order 1988, and (v) it has complied and will comply with all applicable provisions of the UKFSA with respect to anything done by it in relation to the shares of Common Stock offered hereby in, from or otherwise involving the United Kingdom. No action has been taken in any jurisdiction by the Company or the Underwriters that would permit a public offering of the Common Stock offered pursuant to the Offering in any jurisdiction where action for that purpose is required, other than the United States. The distribution of this Prospectus and the offering or sale of the shares of Common Stock offered hereby in certain jurisdictions may be restricted by law. Accordingly, the shares of Common Stock offered hereby may not be offered or sold, directly or indirectly, and neither this Prospectus nor any other offering material or advertisements in connection with the Common Stock may be distributed or published, in or from any jurisdiction, except under circumstances that will result in compliance with applicable rules and regulations of any such jurisdiction. Such restrictions may be set out in applicable Prospectus Supplements. Persons into whose possession this Prospectus comes are required by the Company and the Underwriters to inform themselves about and to observe any applicable restrictions. This Prospectus does not constitute an offer of, or an invitation to subscribe for purchase, any shares of Common Stock and may not be used for the purpose of an offer to, or solicitation by, anyone in any jurisdiction or in any circumstances in which such offer or solicitation is not authorized or is unlawful. 65 LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Stephen J. McKenna, Esq., Senior Vice President and General Counsel of the Company, and certain legal matters with respect to the Common Stock offered hereby will be passed upon for the Company by Latham & Watkins, Washington, D.C. and by Potter, Anderson & Corroon, Wilmington, Delaware and for the Underwriters by Skadden, Arps, Slate, Meagher & Flom, Los Angeles, California. Mr. McKenna owns Common Stock, and holds stock options, deferred stock and restricted stock awards under the Comprehensive Stock Plan and may receive additional awards under the plan in the future. EXPERTS The consolidated financial statements and schedules of the Company as included in this Registration Statement have been audited by Arthur Andersen & Co., independent public accountants, as indicated in their reports with respect thereto and have been included herein in reliance upon the authority of said firm as experts in giving said reports. 66 HOST MARRIOTT CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants.................................. F-2 Consolidated Statement of Income for Fiscal Years Ended January 1, 1993, January 3, 1992 and December 28, 1990.................................... F-3 Consolidated Balance Sheet at January 1, 1993 and January 3, 1992......... F-4 Consolidated Statement of Cash Flows for Fiscal Years Ended January 1, 1993, January 3, 1992 and December 28, 1990.............................. F-5 Consolidated Statement of Shareholders' Equity for Fiscal Years Ended Jan- uary 1, 1993, January 3, 1992 and December 28, 1990...................... F-6 Notes to Consolidated Financial Statements................................ F-7 Condensed Consolidated Statement of Income for the Thirty-Six Weeks Ended September 10, 1993 and September 11, 1992 (Unaudited).................... F-22 Condensed Consolidated Balance Sheet at September 10, 1993 (Unaudited).... F-24 Condensed Consolidated Statement of Cash Flows for the Thirty-Six Weeks Ended September 10, 1993 and September 11, 1992 (Unaudited).............. F-25 Notes to Condensed Consolidated Financial Statements...................... F-26
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS OF HOST MARRIOTT CORPORATION: We have audited the accompanying consolidated balance sheet of Host Marriott Corporation and subsidiaries (formerly Marriott Corporation) as of January 1, 1993 and January 3, 1992, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three fiscal years in the period ended January 1, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Host Marriott Corporation and subsidiaries as of January 1, 1993 and January 3, 1992, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 1, 1993 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN & CO. Washington, D.C. March 10, 1993 (except with respect to thematter discussed in the "Special Dividend--Subsequent Event" note, as to which the date is December 23, 1993) F-2 HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME FISCAL YEARS ENDED JANUARY 1, 1993, JANUARY 3, 1992 AND DECEMBER 28, 1990
1992 1991 1990 -------- -------- -------- (IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS) SALES Lodging Rooms........................................ $ 2,843 $ 2,699 $ 2,374 Food and beverage............................ 1,190 1,194 1,146 Other......................................... 518 486 422 -------- -------- -------- 4,551 4,379 3,942 Contract Services.............................. 4,171 3,952 3,704 -------- -------- -------- 8,722 8,331 7,646 -------- -------- -------- OPERATING COSTS AND EXPENSES Lodging Departmental direct costs Rooms........................................ 676 628 554 Food and beverage............................ 917 915 870 Other, including payments to hotel owners and, in 1990, net restructuring charges of $65 million...................................... 2,620 2,511 2,279 Contract Services, including restructuring charges of $57 million in 1990................ 4,013 3,799 3,590 -------- -------- -------- 8,226 7,853 7,293 -------- -------- -------- OPERATING PROFIT Lodging........................................ 338 325 239 Contract Services.............................. 158 153 114 -------- -------- -------- Operating profit before corporate expenses and interest...................................... 496 478 353 Corporate expenses, including restructuring charges of $21 million in 1992 and $31 million in 1990....................................... (129) (111) (137) Interest expense................................. (248) (265) (183) Interest income.................................. 31 43 47 -------- -------- -------- INCOME BEFORE INCOME TAXES....................... 150 145 80 Provision for income taxes....................... 65 63 33 -------- -------- -------- NET INCOME....................................... 85 82 47 Dividends on preferred stock..................... (17) (1) -- -------- -------- -------- NET INCOME AVAILABLE FOR COMMON STOCK............ $ 68 $ 81 $ 47 ======== ======== ======== EARNINGS PER COMMON SHARE........................ $ .64 $ .80 $ .46 ======== ======== ========
See "Notes to Consolidated Financial Statements." F-3 HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JANUARY 1, 1993 AND JANUARY 3, 1992
1992 1991 ------ ------ (IN MILLIONS) ASSETS Current Assets Cash and equivalents......................................... $ 325 $ 163 Accounts receivable.......................................... 606 527 Inventories, at lower of average cost or market.............. 316 244 Other........................................................ 249 221 ------ ------ 1,496 1,155 ------ ------ Property and Equipment......................................... 3,461 3,847 Investments in Affiliates...................................... 445 457 Intangibles.................................................... 452 477 Notes Receivable and Other..................................... 556 573 ------ ------ $6,410 $6,509 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable............................................. $ 710 $ 706 Accrued payroll and benefits................................. 331 313 Other payables and accruals.................................. 434 374 Notes payable and capital leases............................. 21 52 ------ ------ 1,496 1,445 ------ ------ Long-Term Debt................................................. 2,732 2,979 Other Long-Term Liabilities.................................... 401 350 Deferred Income................................................ 183 232 Deferred Income Taxes.......................................... 585 614 Convertible Subordinated Debt.................................. 228 210 Shareholders' Equity Convertible preferred stock.................................. 200 200 Common stock, 105 million shares issued...................... 105 105 Additional paid-in capital................................... 34 35 Retained earnings............................................ 555 583 Treasury stock, 4.2 million common shares and 9.5 million common shares, respectively, at cost........................ (109) (244) ------ ------ Total Shareholders' Equity..................................... 785 679 ------ ------ $6,410 $6,509 ====== ======
See "Notes to Consolidated Financial Statements." F-4 HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FISCAL YEARS ENDED JANUARY 1, 1993, JANUARY 3, 1992 AND DECEMBER 28, 1990
1992 1991 1990 ------- ------- ------- (IN MILLIONS) OPERATING ACTIVITIES Net income........................................ $ 85 $ 82 $ 47 Adjustments to reconcile to cash from operations: Depreciation and amortization................... 284 272 208 Income taxes.................................... (28) 27 18 Net restructuring charges....................... 21 -- 153 Proceeds from sales of timeshare notes receiv- able........................................... 41 83 -- Amortization of deferred income................. (19) (38) (50) Other........................................... 1 6 49 Working capital changes: Accounts receivable........................... (40) 88 (76) Inventories................................... (16) 63 (22) Other current assets.......................... (14) 13 (5) Accounts payable and accruals................. 106 (47) 63 ------- ------- ------- Cash from continuing operations................... 421 549 385 Cash from (used in) discontinued operations....... (11) 3 (10) ------- ------- ------- Cash from operations.............................. 410 552 375 ------- ------- ------- INVESTING ACTIVITIES Proceeds from sales of assets..................... 484 84 990 Less noncash proceeds........................... (97) -- (15) ------- ------- ------- Cash received from sales of assets................ 387 84 975 Capital expenditures.............................. (210) (427) (1,094) Acquisitions...................................... (47) -- (118) Other............................................. (82) (126) (129) ------- ------- ------- Cash from (used in) investing activities.......... 48 (469) (366) ------- ------- ------- FINANCING ACTIVITIES Issuances of long-term and convertible subordi- nated debt....................................... 917 815 1,317 Issuance of convertible preferred stock........... -- 195 -- Issuances of common stock......................... 7 3 24 Repayment of long-term debt....................... (1,179) (1,316) (846) Purchases of treasury stock....................... -- -- (294) Dividends paid.................................... (41) (27) (27) ------- ------- ------- Cash from (used in) financing activities.......... (296) (330) 174 ------- ------- ------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS......... 162 (247) 183 CASH AND EQUIVALENTS, beginning of year............. 163 410 227 ------- ------- ------- CASH AND EQUIVALENTS, end of year................... $ 325 $ 163 $ 410 ======= ======= =======
SEE "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS." F-5 HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FISCAL YEARS ENDED JANUARY 1, 1993, JANUARY 3, 1992 AND DECEMBER 28, 1990
COMMON CONVERTIBLE ADDITIONAL SHARES PREFERRED COMMON PAID-IN RETAINED TREASURY OUTSTANDING STOCK STOCK CAPITAL EARNINGS STOCK - ----------------------------------------------------------------------------------------- (IN MILLIONS) (IN MILLIONS) 102.8 Balance, December 29, 1989................... $-- $125 $78 $1,059 $(634) -- Net income.............. -- -- -- 47 -- 1.2 Common stock issued for employee stock purchase and stock option plans. -- -- (3) -- 35 -- Cash dividends on common stock ($.28 per share). -- -- -- (27) -- .3 Deferred stock compensation........... -- -- (5) -- 8 -- Foreign currency translation adjustments............ -- -- 5 -- -- (10.7) Purchases of treasury stock.................. -- -- -- -- (281) -- Retirement of treasury stock.................. -- (20) (6) (551) 577 - ----------------------------------------------------------------------------------------- 93.6 Balance, December 28, 1990................... -- 105 69 528 (295) -- Net income.............. -- -- -- 82 -- -- Issuance of convertible preferred stock........ 200 -- (5) -- -- 1.5 Common stock issued for employee stock purchase and stock option plans. -- -- (22) -- 40 -- Cash dividends ($.28 per share)................. -- -- -- (27) -- .4 Deferred stock compensation........... -- -- (2) -- 11 -- Foreign currency translation adjustments............ -- -- (5) -- -- - ----------------------------------------------------------------------------------------- 95.5 Balance, January 3, 1992................... 200 105 35 583 (244) -- Net income.............. -- -- -- 85 -- 5.0 Common stock issued for employee stock purchase, stock option, and profit sharing plans.................. -- -- (1) (68) 127 -- Cash dividends on common stock ($.28 per share). -- -- -- (28) -- -- Cash dividends on convertible preferred stock ($4.125 per share)................. -- -- -- (17) -- .3 Deferred stock compensation........... -- -- 2 -- 8 -- Foreign currency translation adjustments............ -- -- (2) -- -- - ----------------------------------------------------------------------------------------- 100.8 Balance, January 1, 1993................... $200 $105 $34 $ 555 $(109) - ----------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------
See "Notes to Consolidated Financial Statements." F-6 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Host Marriott Corporation (previously, Marriott Corporation) and its subsidiaries and controlled affiliates (collectively, "the Company"). Investments in 50% or less owned affiliates over which the Company has the ability to exercise significant influence are accounted for using the equity method. The Company's equity in net losses of these affiliates is included in corporate expenses. All material intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform with the 1992 presentation. Fiscal Year The Company's fiscal year ends on the Friday nearest to December 31 for U.S. operations and on November 30 for most non-U.S. operations. Fiscal 1992 and 1990, which ended January 1, 1993 and December 28, 1990, respectively, include 52 weeks. Fiscal 1991, which ended January 3, 1992, includes 53 weeks. Managed Hotel Operations The Company operates 365 hotels under long-term management agreements whereby payments to owners are based primarily on hotel profits. Working capital and operating results of managed hotels operated with the Company's employees are consolidated because the operating responsibilities associated with such hotels are substantially the same as those for owned and leased hotels. The consolidated financial statements include the following amounts related to managed hotels: current assets and current liabilities of $246 million at January 1, 1993, $269 million at January 3, 1992, and $282 million at December 28, 1990; sales of $2,896 million in 1992, $2,809 million in 1991, and $2,752 million in 1990; and operating expenses, including payments to owners, of $2,721 million in 1992, $2,616 million in 1991, and $2,553 million in 1990. International Operations The consolidated statement of income includes the following amounts related to non-U.S. subsidiaries and affiliates: sales of $355 million in 1992, $329 million in 1991, and $317 million in 1990; and income before income taxes of $24 million in 1992, and $26 million in both 1991 and 1990. Pre-Opening Costs Costs of an operating nature incurred prior to opening of lodging and senior living service properties are deferred and amortized over three years. Profit Sharing Plans The Company contributes to profit sharing and other defined contribution plans for the benefit of employees meeting certain eligibility requirements and electing participation in the plans. Company contributions are determined annually by the Board of Directors, and totaled $25 million for 1992, $24 million for 1991, and $27 million for 1990. Self-Insurance Programs The Company is self-insured for certain levels of general liability, workers' compensation and employee medical coverage. Estimated costs of these self- insurance programs are accrued at present values of projected settlements for known and anticipated claims. F-7 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Earnings Per Common Share Earnings per common share is computed on a fully diluted basis by dividing net income available for common stock by the weighted average number of outstanding common and common equivalent shares, plus other potentially dilutive securities, aggregating 106.5 million in 1992, 101.5 million in 1991, and 101.7 million in 1990. Cash and Equivalents The Company considers all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents. Postretirement and Postemployment Benefits The Company provides medical benefits to a limited number of retired employees meeting restrictive eligibility requirements. The Company's adoption of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" during 1992 did not have any material effect. The Company is also required to adopt Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits," no later than its fiscal year ending December 30, 1994. Application of this statement will not have any material effect. SPECIAL DIVIDEND In October 1992, the Board of Directors of Marriott Corporation approved, subject to approval of final terms and conditions and shareholder ratification, the distribution to holders of Marriott Corporation common stock (on a share- for-share basis) of all outstanding shares of common stock of an existing wholly-owned subsidiary, Marriott International, Inc. ("Marriott International") (the "Distribution"). Under the proposed plan (the "Plan"), Marriott International will become a publicly traded company that will include Marriott Corporation's lodging management, franchising and resort timesharing operations, senior living service operations, and institutional food service and facilities management businesses. The Company will retain Marriott Corporation's airport and tollroad food, beverage and merchandise concession operations, as well as most of its real estate properties. Additionally, the Company or its subsidiaries will continue to act as general partner in Marriott Corporation's lodging partnerships. The Distribution is conditioned upon, among other things: declaration of the special dividend by the Company's Board of Directors; ratification of the Distribution by a majority of the Company shareholders; and receipt of an affirmative ruling from the Internal Revenue Service that the Distribution will be tax-free. It is expected that the Distribution will be made in the second half of 1993, once these conditions are met. The Company may borrow (i) up to $600 million from Marriott International under a revolving line of credit available through December 1999, at which time any outstanding balance will convert to a term loan due December 31, 2001 ("Credit Agreement") and (ii) up to $125 million to finance approximately 60% of the construction and development cost of the Philadelphia Marriott Hotel under a first mortgage loan due 12 years after completion of construction. If the proposed exchange offer is effected, the line of credit will be $630 million and final maturity will be 2008. In addition, Marriott International will assume 90% of the LYONs debt obligations and will guarantee the Company's performance to certain lenders and other third parties under certain Company guarantees and other obligations. Fundings by Marriott International pursuant to such guarantees will constitute loans to the Company. F-8 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A number of holders of the Company's senior notes instituted legal proceedings alleging, among other things, that (i) the Distribution, if effected, would violate the terms of the Indenture under which senior notes were issued, (ii) federal securities laws (and similar state laws) had been violated in connection with the sale by the Company of certain series of its senior notes, (iii) the Distribution, if effected, would be a fraudulent conveyance as to creditors of the Company, and (iv) the Distribution, if effected, would constitute a breach of fiduciary duty and a breach of implied covenants of good faith and fair dealing allegedly owed by the Company to the holders of the Company's senior notes. All but one of these cases has been consolidated for all purposes in the United States District Court for the District of Maryland. The other case has been stayed pending resolution of the cases in that court. The Company believes these suits to be without merit and that the ultimate outcome will not have a material effect on the Company's financial position or results of operations. The Company has reached agreements in principle--to modify certain terms of its planned special dividend--with representatives of institutions holding approximately $400 million of its senior notes, and with representatives of the plaintiffs who have instituted class action litigation on behalf of noteholders. Under the terms of the agreements, the Company will make an exchange offer ("Exchange Offer") prior to the distribution under which holders of certain series of the notes in the principal amount of approximately $1.5 billion will have the right to exchange their notes for a combination of (i) cash and/or Marriott International obligations, (ii) Company stock and (iii) new senior notes to be issued by a new subsidiary of the Company. Interest rates on the exchange bonds would be 100 basis points higher and maturities on most of the bonds would be extended by approximately four years, beyond 1998. Participants in the exchange offer would be required to release any claims and abandon any litigation related to the special dividend. The agreement in principle with class action plaintiffs includes a settlement for the benefit of certain persons who sold senior notes of the Company after October 5, 1992, the date on which the planned Distribution was publicly announced, and therefore are not in a position to participate in the Exchange Offer. The Company has agreed to make available for distribution to this class of plaintiffs warrants to purchase up to 7.7 million shares of the Company's common stock, exercisable for five years, at $8.00 per share during the first three years and $10.00 per share during the last two years. Marriott has not reached an agreement with several other institutions that have filed suit against the Company and are said to represent about $120 million of its senior notes. The Distribution is not conditioned upon the consummation of the Exchange Offer, and the Board of Directors' intention is to proceed with the Distribution whether or not the Exchange Offer is consummated. If the Exchange Offer is consummated, Marriott Corporation will make certain structural modifications to the composition of the Company and Marriott International and to the terms of certain arrangements relating to the Distribution. The Exchange Offer will be made only by means of a prospectus contained in a registration statement to be filed with the Securities and Exchange Commission (or under an exemption from registration). Certain anticipated terms and conditions of the Exchange Offer are described in further detail in the Exchange Offer and Restructuring section of this Prospectus. The following condensed pro forma financial information does not reflect the Exchange Offer. The following condensed unaudited pro forma income statement data of Marriott International and the Company is presented as if the Distribution had occurred at the beginning of each period shown and the unaudited pro forma balance sheet data is presented as if the Distribution had occurred at the end of the applicable years shown. This pro forma data has been presented for informational purposes only. It does not purport to be indicative of the results which may occur in the future. F-9 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARRIOTT INTERNATIONAL HOST MARRIOTT ----------------------- -------------- 1992 1991 1992 1991 ----------- ----------- ------ ------ (IN MILLIONS) Sales.................................. $7,787 $7,427 $1,209 $1,137 Operating profit before corporate ex- penses and interest................... 330 328 153 136 Net income (loss)...................... 137 139 (43) (65) Total assets........................... 2,787 2,597 3,922 4,153 Long-term debt (including LYONs)....... 583 570 2,590 2,811 Shareholders' equity................... 524 521 261 158
Subsequent Event On October 8, 1993, Marriott Corporation distributed, through a special dividend, to holders of Marriott Corporation's common stock, 116,444,561 outstanding shares of common stock of Marriott International, Inc., and closed on the Exchange Offer. The Internal Revenue Service has ruled the Distribution tax free. Also on October 8, 1993, Marriott Corporation changed its name to Host Marriott Corporation (the "Company"). The Company retained Marriott Corporation's airport and tollroad food, beverage and merchandise concession operations, as well as most of its real estate properties. Additionally, Host Marriott or its subsidiaries continue as general partner in most of Marriott Corporation's lodging partnerships. Marriott International became a publicly traded company that includes Marriott Corporation's former lodging management, franchising and resort timesharing operations, senior living service operations, and institutional food service and facilities management businesses. As a result, the assets, liabilities and businesses of the Company have changed substantially. Accordingly, the accompanying financial statements and related disclosures do not reflect the financial condition and results of operations of the Company as it exists subsequent to the Distribution Date. See "Pro Forma Financial Data" included elsewhere in this registration statement for the adjustments required to reflect the effect of the Distribution and Exchange Offer on the Company's financial statements and Notes 6 and 10 of Notes to Condensed Consolidated Financial Statements for discussion of conversion of Series A cumulative preferred stock into 10.6 million shares of common stock and the Exchange Offer, respectively. PROPERTY AND EQUIPMENT
1992 1991 ------ ------ (IN MILLIONS) Land and land improvements...................................... $ 776 $ 814 Buildings and leasehold improvements............................ 2,550 2,488 Furniture and equipment......................................... 899 901 Construction in progress........................................ 133 424 ------ ------ 4,358 4,627 Less accumulated depreciation and amortization.................. (897) (780) ------ ------ $3,461 $3,847 ====== ======
Property and equipment is recorded at cost, including interest, rent and real estate taxes incurred during development and construction. Replacements and improvements are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the asset life or lease term. Upon the sale of Courtyard hotels, Residence Inns or Fairfield Inns, the gains and losses with respect to individual properties are aggregated, with the net gain on the sale recognized as operating profit at the time of sale or deferred to the extent required by generally accepted accounting principles. Deferred gains are recognized as income in subsequent periods as conditions requiring deferral are satisfied or expire without further cost to the Company. F-10 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company assesses impairment of its property and equipment based on whether it is probable that undiscounted future cash flows from such properties will be less than their net book value. Interest cost capitalized in connection with the Company's development and construction activities totaled $14 million in 1992, $55 million in 1991, and $141 million in 1990. Most hotels developed by the Company since the early 1980s were reported as Assets Held for Sale prior to 1992. In early 1992, the Company decided it was no longer appropriate to view sales of lodging properties, subject to operating agreements, as a primary means of long-term financing. Accordingly, the Company discontinued classification of these properties (with an aggregate carrying value of approximately $1,150 million at that time) as Assets Held for Sale. The Company determined the net realizable value of the Assets Held for Sale on a property-by-property basis in the case of full-service hotels, resorts and suites, and on an aggregate basis, by hotel brand, in the case of Courtyard hotels, Residence Inns and Fairfield Inns. On this basis, the carrying value of these properties was not in excess of their net realizable value based on estimated selling prices and, accordingly, no loss was recognized with respect thereto. With respect to the Courtyard hotels, Residence Inns and Fairfield Inns formerly classified as Assets Held for Sale, the Company did not accumulate data about estimated unrealized gains except to the extent necessary to determine that they exceeded estimated unrealized losses on an aggregate basis by hotel brand. The following table presents, for 1991, 1990 and 1989, the estimated aggregate unrealized losses on those individual properties within each such brand with a book value in excess of net realizable value (with parenthetical indication, first, of the number of such properties and, second, of the total number of properties within such brand classified as held for sale).
ESTIMATED UNREALIZED LOSSES ------------------------------------------- 1991 1990 1989 -------------- -------------- ------------- ($ MILLIONS) Courtyard hotels.................... $23 (18 of 64) $19 (15 of 56) $12 (7 of 22) Residence Inns...................... $17 (7 of 28) $ 8 (4 of 15) -- Fairfield Inns...................... $12 (10 of 30) $ 8 (7 of 23) -- --- --- --- Total............................... $52 $35 $12 === === ===
INVESTMENTS IN AFFILIATES
OWNERSHIP INTERESTS 1992 1991 --------- ------ ------ (IN MILLIONS) Equity investments Times Square Hotel Company, owner of the New York Marriott Marquis hotel (foreclosure on 28.7% additional interest in process)..................... 50% $ 62 $ 58 Other hotel partnerships which own 56 Marriott hotels, 120 Courtyard hotels, 40 Residence Inns and 50 Fairfield Inns operated by the Company, including 117 properties located on land leased from the Company as of January 1, 1993....................... 1%-50% 32 58 Other................................................ 20%-50% 57 52 Receivables, net of amounts due currently of $14 million in 1992 and $9 million in 1991................ 294 289 ------ ------ $ 445 $ 457 ====== ======
Hotel properties owned by affiliates generally were acquired from the Company in connection with limited partnership offerings. The Company or its subsidiaries typically serve as a general partner of the F-11 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) partnerships and operate the hotels under long-term agreements. Proceeds from sales of hotels to affiliates totaled $498 million in 1990. In the 1992 fourth quarter, as a consequence of a partner's default of certain obligations, the Company recognized an in-substance foreclosure of the partner's 28.7% interest in the Times Square Hotel Company ("TSHCO"). TSHCO has not been consolidated because the Company expects its majority ownership to be temporary. TSHCO total assets and total liabilities of $470 million and $459 million, respectively, and sales and operating expenses (including noncash charges) of $131 million and $156 million, respectively, are included in the 1992 combined summarized affiliate financial data set forth below. The Company's equity in four affiliates exceeded its proportionate share of net assets by $51 million at January 1, 1993. This excess is being amortized over the estimated useful lives of the related assets. Receivables from affiliates are reported net of certain deferred income and reserves for uncollectible amounts of $197 million at January 1, 1993 and $178 million at January 3, 1992. Receivables from affiliates at January 1, 1993 included a $155 million mortgage note at 9% which amortizes through 2003, and net debt service and other advances totaling $19 million which are generally secured by subordinated liens on the properties. The Company has committed to advance additional amounts to affiliates, if necessary, to cover certain debt service requirements and has accrued $21 million in connection therewith. Such commitments are limited, in the aggregate, to an additional $328 million at January 1, 1993. Amounts funded under these commitments totaled $22 million in 1992, $26 million in 1991 and $27 million in 1990. The Company's pretax income from affiliates includes the following:
1992 1991 1990 ---- ---- ---- (IN MILLIONS) Management fees, net of direct costs....................... $ 82 $ 81 $ 76 Ground rental income....................................... 19 18 17 Interest income............................................ 16 19 21 Equity in net losses....................................... (24) (21) (16) ---- ---- ---- $ 93 $ 97 $ 98 ==== ==== ====
Combined summarized balance sheet information for the Company's affiliates follows:
1992 1991 ------ ------ (IN MILLIONS) Current assets................................................ $ 204 $ 158 Noncurrent assets............................................. 4,589 4,842 Current liabilities........................................... 1,464 445 Long-term debt, principally mortgages......................... 3,162 4,233 Other long-term liabilities................................... 694 565
Combined summarized operating results reported by these affiliates follow:
1992 1991 1990 ------- ------- ------- (IN MILLIONS) Sales............................................ $ 1,900 $ 1,855 $ 1,801 Operating expenses, including depreciation and other noncash charges of $347 million in 1992 and 1991, and $344 million in 1990.............. (2,082) (2,076) (2,053) ------- ------- ------- $ (182) $ (221) $ (252) ======= ======= =======
During 1990, the Company sold 50 Fairfield Inns and seven Marriott hotels to affiliates in which it owns equity interests of up to 11%, for an aggregate price of $461 million. Gains on the sales, aggregating $21 million, were deferred. The Company continues to operate these properties under long-term agreements. F-12 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) INTANGIBLE ASSETS
1992 1991 ------ ------ (IN MILLIONS) Marriott Management Services contracts....................... $ 366 $ 366 Hotel management and franchise agreements.................... 107 107 Goodwill..................................................... 147 143 Other........................................................ 14 10 ------ ------ 634 626 Less accumulated amortization................................ (182) (149) ------ ------ $ 452 $ 477 ====== ======
Intangible assets primarily arose from purchase business combinations and are being amortized on a straight-line basis over periods of 10 to 40 years. Amortization expense totaled $33 million in 1992 and 1991, and $34 million in 1990. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
1992 1991 ------ ------ (IN MILLIONS) Accounts receivable Trade receivables........................................... $ 543 $ 478 Other....................................................... 63 49 ------ ------ $ 606 $ 527 ====== ====== Other current assets Current deferred income taxes............................... $ 159 $ 157 Other....................................................... 90 64 ------ ------ $ 249 $ 221 ====== ====== Other payables and accruals Casualty insurance.......................................... $ 89 $ 79 Other....................................................... 345 295 ------ ------ $ 434 $ 374 ====== ======
INCOME TAXES The provision for income taxes consists of:
1992 1991 1990 ---- ---- ----- (IN MILLIONS) Current--Federal.......................................... $ 39 $ (2) $ (18) State................................................... 3 8 (28) Foreign................................................. 20 10 16 ---- ---- ----- 62 16 (30) ---- ---- ----- Deferred--Federal......................................... (6) 38 33 State................................................... 10 4 36 Foreign................................................. (1) 5 (6) ---- ---- ----- 3 47 63 ---- ---- ----- $ 65 $ 63 $ 33 ==== ==== =====
No provision for U.S. income taxes has been made on the cumulative unremitted earnings of non-U.S. subsidiaries ($61 million as of January 1, 1993) because management considers these earnings to be permanently invested. Deferred income taxes result from timing differences in the recognition of income and expenses for financial and tax reporting purposes. Tax effects of these differences consist of the following: F-13 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1992 1991 1990 ---- ---- ---- (IN MILLIONS) Depreciation............................................... $(15) $ (3) $10 Capitalized interest....................................... 2 13 15 Partnership interests...................................... 41 45 26 Purchased tax lease benefits............................... (4) (2) 4 Asset dispositions......................................... (31) 38 10 Capitalized operations..................................... -- (3) (7) Casualty claims............................................ (17) (33) (3) Employee benefit plans..................................... (2) (8) (1) Restructuring costs........................................ 1 16 (3) Other, net................................................. 28 (16) 12 ---- ---- --- $ 3 $ 47 $63 ==== ==== ===
A reconciliation of the U.S. statutory tax rate to the Company's effective income tax rate follows:
1992 1991 1990 ---- ---- ---- U.S. statutory tax rate.................................... 34.0% 34.0% 34.0% State income taxes, net of U.S. tax benefit................ 6.4 5.7 7.6 Goodwill amortization...................................... 1.8 1.9 3.5 Tax credits................................................ (2.3) (3.1) (5.7) Additional tax on foreign source income.................... -- 2.2 -- Other, net................................................. 3.4 2.7 1.9 ---- ---- ---- Effective income tax rate.................................. 43.3% 43.4% 41.3% ==== ==== ====
Cash paid for income taxes, net of refunds received, was $93 million in 1992, $36 million in 1991, and $49 million in 1990 (including $34 million applicable to divested discontinued operations). The Company will adopt Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," in the first quarter of fiscal 1993. The standard will be implemented on a prospective basis and management anticipates that its application will increase shareholders' equity by approximately $30 million. LEASES
CAPITAL OPERATING FISCAL YEAR LEASES LEASES ----------- ------- --------- (IN MILLIONS) 1993..................................................... $ 11 $ 219 1994..................................................... 9 209 1995..................................................... 7 159 1996..................................................... 5 148 1997..................................................... 3 139 Thereafter............................................... 22 1,890 ---- ------ Total minimum lease payments............................. 57 $2,764 ====== Less amount representing interest........................ (20) ---- Present value of minimum lease payments.................. $ 37 ====
F-14 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Certain of the leases included above relate to facilities used in the discontinued restaurant business. Most leases contain one or more renewal options, generally for five or 10-year periods. Future rentals on leases have not been reduced by aggregate minimum sublease rentals of $135 million payable to the Company under noncancelable subleases. The Company remains contingently liable on certain leases relating to divested properties. Such contingent liabilities aggregated $235 million at January 1, 1993. However, management considers the likelihood of any substantial funding related to these leases to be remote. Rent expense consists of:
1992 1991 1990 ---- ---- ---- (IN MILLIONS) Minimum rentals on operating leases.......................... $195 $166 $157 Additional rentals based on sales............................ 88 80 79 Payments to owners of managed and leased hotels based primar- ily on profits.............................................. 607 596 583 ---- ---- ---- $890 $842 $819 ==== ==== ====
LONG-TERM DEBT
1992 1991 ------ ------ (IN MILLIONS) Secured notes, with an average rate of 8.3% at January 1, 1993, maturing through 2010................................ $ 485 $ 527 Unsecured debt Senior notes, with an average rate of 9.3% at January 1, 1993, maturing through 2012 Debentures, 9.4%, due 2007................................ 1,618 1,323 Revolving loans, with an average rate of 4.3% at January 1, 1993, maturing through 1995........................... 250 250 Other notes, with an average rate of 7.2% at January 1, 1993, maturing through 2023.............................. 175 676 Capital lease obligations 188 193 37 62 ------ ------ 2,753 3,031 Less current portion........................................ (21) (52) ------ ------ $2,732 $2,979 ====== ======
At January 1, 1993, the Company had total revolving loan commitments of $682 million. Borrowings under these commitments bear interest at variable rates. The Company's loan agreements require the maintenance of certain financial ratios and minimum shareholders' equity, and also include, among others, limitations on additional indebtedness and the pledging of assets. At January 1, 1993, retained earnings of $285 million were unrestricted, and assets with a net book value of $827 million were pledged or mortgaged. At January 1, 1993, the Company was party to $627 million aggregate notional amount of interest rate exchange agreements. Under $600 million of these agreements, the Company collects interest at fixed rates (average rate of 7.8% at January 1, 1993), and pays interest based on specified floating interest rates (average rate of 3.7% at January 1, 1993) through 1997. Under $27 million of these agreements, the Company collects interest based on a specified floating interest rate (5.6% at January 1, 1993) and pays interest at a fixed rate (9.7%) through 1998. F-15 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Aggregate debt maturities, excluding capital lease obligations, are: 1993-- $15 million; 1994--$213 million; 1995--$588 million; 1996--$368 million; 1997-- $258 million; and $1,274 million thereafter. Senior note maturities in 1993 are classified as noncurrent based on availability of funds under the Company's revolving loan agreements maturing beyond one year. Cash paid for interest, net of amounts capitalized, was $209 million in 1992, $224 million in 1991, and $171 million in 1990. CONVERTIBLE SUBORDINATED DEBT In June 1991, the Company issued $675 million (principal amount at maturity) of zero coupon convertible subordinated debt in the form of Liquid Yield Option Notes (LYONs) due 2006. Net proceeds from the LYONs issuance approximated $200 million. The LYONs are convertible into the Company's common stock at the rate of 13.277 shares per $1,000 maturity amount. The issuance price of the LYONs represents a yield to maturity of 8.25% per annum. At the option of the holder the Company may be required to purchase the LYONs in June 1996 and June 2001 for $445.56 (an aggregate of $301 million for all LYONs) and $667.51 (an aggregate of $451 million for all LYONs) per LYON, respectively. These redemption values represent the accreted values at those dates. In such event, the Company may purchase the LYONs for cash, common stock or any combination thereof. The LYONs are redeemable by the Company prior to June 1993 only if the closing price of the Company's common stock equals or exceeds $33.60 per share for at least 20 of 30 consecutive trading days ending not more than five trading days prior to the date of notice of redemption. Subject to the foregoing, the LYONs are redeemable for cash at any time at the option of the Company, at the issue price plus accrued original issue discount to the date of redemption. SHAREHOLDERS' EQUITY Three hundred million shares of common stock, with a par value of $1 per share, are authorized, of which 105.0 million were issued as of January 1, 1993 and January 3, 1992. One million shares of preferred stock, without par value, are authorized, of which four thousand (equivalent to four million depositary shares) were issued as of January 1, 1993. In December 1991, the Company issued four million non-voting depositary shares, each representing 1/1,000th share of 8.25% Series A cumulative convertible preferred stock (no par value) for net proceeds totaling $195 million. Each depositary share is convertible at any time at the option of the holder into approximately 2.87 shares of common stock. Dividends, if declared, are payable quarterly, commencing on April 15, 1992. Beginning on January 15, 1996, the Series A preferred stock is redeemable, in whole or in part, at the Company's option, at $52.48 per depositary share, declining ratably to $50 per depositary share in 2002, plus accrued and unpaid dividends to the redemption date. Additional paid-in capital at January 1, 1993 includes deferred compensation credits of $48 million and cumulative foreign currency translation charges of $5 million. During 1990, the Company retired 20.0 million shares of treasury stock having an average cost of $28.87 per share. In February 1989, the Board of Directors adopted a shareholder rights plan under which a dividend of one preferred stock purchase right was distributed for each outstanding share of the Company's common stock to shareholders of record on February 20, 1989. Each right entitles the holder to buy 1/1,000th of a share of a newly issued series of junior participating preferred stock of the Company at an exercise price of F-16 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) $150 per share. The rights will be exercisable 10 days after a person or group acquires beneficial ownership of 20% or more of the Company's common stock, or begins a tender or exchange offer for 30% or more of the Company's common stock. Shares owned by a person or group on February 3, 1989 and held continuously thereafter are exempt for purposes of determining beneficial ownership under the rights plan. The rights are nonvoting and will expire on February 2, 1999, unless exercised or previously redeemed by the Company for $.01 each. If the Company is involved in a merger or certain other business combinations not approved by the Board of Directors, each right entitles its holder, other than the acquiring person or group, to purchase common stock of either the Company or the acquirer having a value of twice the exercise price of the right. EMPLOYEE STOCK PLANS Total shares of common stock reserved under employee stock plans at January 1, 1993 are (in millions): Employee stock option plan............................................ 16.9 Deferred stock incentive plan......................................... 6.5 Restricted stock plan................................................. 1.5 Employee stock purchase plan.......................................... 2.1 ---- 27.0 ====
Under the terms of the employee stock option plan, options to purchase shares of common stock may be granted to officers and key employees at not less than fair market value on the date of grant. Options granted before May 11, 1990 expire 10 years after the date of grant and nonqualified options granted on or after May 11, 1990 expire up to 15 years after the date of grant. Most options are exercisable in cumulative installments of one-fourth at the end of each of the first four years. No charges to income are made for options granted under the employee stock option plan. Activity under the plan is summarized below:
NUMBER OF OPTION PRICE SHARES PER SHARE ------------- ------------ (IN MILLIONS) Balance at December 29, 1989...................... 9.5 $ 5-39 Granted......................................... 4.6 9-26 Exercised....................................... (.6) 5-32 Canceled........................................ (.6) 15-37 ---- Balance at December 28, 1990...................... 12.9 7-39 Granted......................................... 3.3 16 Exercised....................................... (.5) 7-20 Canceled........................................ (1.2) 9-39 ---- Balance at January 3, 1992........................ 14.5 7-39 Granted......................................... 3.2 15-19 Exercised....................................... (.8) 7-18 Canceled........................................ (1.2) 8-37 ---- Balance at January 1, 1993........................ 15.7 8-39 ==== Exercisable at January 1, 1993.................... 7.5 ====
Deferred stock incentive plan shares granted to officers and key employees after 1990 generally vest over 10 years in annual installments commencing one year after the date of grant. Certain employees may elect to defer payments until termination or retirement. Deferred stock incentive plan shares granted in 1990 and prior years generally vest in annual installments commencing one year after the date of grant and continuing F-17 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) until retirement. Employees also could elect to forfeit one-fourth of their deferred stock incentive plan award in exchange for accelerated vesting over a 10-year period. The Company accrues compensation expense for the fair market value of the shares on the date of grant, less estimated forfeitures. In 1992, 1991 and 1990, 671,000, 1,180,000 and 361,000 shares were granted, respectively, under this plan. At January 1, 1993, 760,000 shares were available for additional grants. Restricted stock plan shares are issued to officers and key employees and distributed over 10 years in annual installments, subject to certain prescribed conditions including continued employment. The Company recognizes compensation expense over the restriction period equal to the fair market value of the shares on the date of issuance. The Company issued 32,000, and 40,000 shares under this plan in 1992 and 1991, respectively, and canceled 59,000 shares in 1990. Under the terms of the employee stock purchase plan, eligible employees may purchase common stock through payroll deductions at the lower of market value at the beginning or end of the plan year. BUSINESS RESTRUCTURING AND WRITEOFFS During 1992, the Company accrued pretax costs of $21 million related to the Plan (see "Special Dividend"). During 1990, the Company incurred pretax restructuring charges and writeoffs, net of $42 million of nonrecurring gains, aggregating $153 million associated principally with the: delay or cancellation of construction starts on most new lodging and senior living services projects; reduction of 1991 capital expenditures to less than $500 million; and, implementation of comprehensive reorganizations and downsizings within each business unit and at the corporate staff level. DISPOSITIONS In February 1992, the Company sold 13 Courtyard hotels for $146 million in a sale/leaseback transaction. The Company also sold seven full-service hotels in 1992, for total proceeds of $200 million. Pretax gains on these full-service hotel sales of approximately $15 million were offset by adjustments to previously established reserves, resulting in no net gain or loss. In 1992 and 1991, the Company sold with recourse certain timeshare notes receivable taken by its vacation resorts division in connection with the sale of timesharing units. Net proceeds from these transactions totaled $34 million in 1992 and $73 million in 1991. At January 1, 1993 the unpaid balance of all timeshare notes sold with recourse was $93 million. During 1991, the Company sold four Courtyard hotels to the Marriott Corporation Employees' Profit Sharing, Retirement and Savings Plan and Trust for total proceeds of $33 million. The Company continues to operate these hotels under a long-term agreement. In December 1989, the Company announced a decision to sell its fast food and family restaurant operations. A pretax provision of $61 million was recorded at that time to reduce restaurant assets to net realizable value, and to provide for other costs related to the discontinuance of these businesses. In April 1990, the Company sold its Roy Rogers fast food restaurant division to Hardee's Food Systems, Inc. for $365 million in cash, plus the assumption of certain liabilities by the buyer. Sale proceeds were reported as a reduction of the Company's remaining investment in restaurant properties held for sale. The Company sold 203 family restaurants in 1992 and 138 in 1991 for total proceeds of $84 million and $52 million, respectively. The Company expects to sell many of the remaining 50 family restaurants in 1993. F-18 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of noncurrent financial assets and liabilities and other financial instruments are shown below. The fair values of current assets and current liabilities are assumed to be equal to their reported carrying amounts.
AS OF JANUARY 1, 1993 ------------------------- CARRYING FAIR AMOUNT VALUE -------------- ---------- (IN MILLIONS) NONCURRENT FINANCIAL ASSETS Long-term receivables from affiliates............. $ 263 $ 185 Notes receivable and other........................ 316 423 NONCURRENT FINANCIAL LIABILITIES Long-term debt.................................... 2,701 2,628 Convertible subordinated debt..................... 228 226 OTHER FINANCIAL INSTRUMENTS Affiliate debt service commitments................ 328 44 Interest rate swap agreements..................... 627 24
Receivables from affiliates, notes and other financial assets are valued based on the expected future cash flows discounted at risk adjusted rates. Valuations for secured long-term debt are determined based on the expected future payments discounted at risk adjusted rates. The fair value of revolving loans and other notes are assumed to be equal to their carrying value. Long- term senior notes and convertible subordinated debt are valued based on quoted market prices. The fair value of affiliate debt service commitments is based on the expected future payments discounted at risk adjusted rates. A value was not assigned to commitments with no expected fundings. The carrying amount represents the Company's remaining unfunded commitments at January 1, 1993. The fair value of interest rate swap agreements is based on the estimated amount the Company would receive to terminate the swap agreements. The carrying amount represents the aggregate notional amount of the agreements at January 1, 1993. F-19 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) BUSINESS SEGMENTS
1992 1991 1990 ------- ------- ------- (IN MILLIONS) Identifiable assets Lodging........................................... $ 3,600 $ 3,952 $ 4,234 Contract Services................................. 1,886 1,839 1,819 Corporate......................................... 880 592 797 ------- ------- ------- 6,366 6,383 6,850 Discontinued operations........................... 44 126 184 ------- ------- ------- $ 6,410 $ 6,509 $ 7,034 ======= ======= ======= Capital expenditures Lodging........................................... $ 86 $ 256 $ 804 Contract Services................................. 118 159 231 Corporate......................................... 4 7 45 ------- ------- ------- 208 422 1,080 Discontinued operations........................... 2 5 14 ------- ------- ------- $ 210 $ 427 $ 1,094 Depreciation and amortization Lodging........................................... 131 $ 130 $ 75 Contract Services................................. 139 125 119 Corporate......................................... 14 17 14 ------- ------- ------- $ 284 $ 272 $ 208 ======= ======= =======
The Company is a diversified hospitality company with continuing operations in two business segments. The Lodging segment includes Marriott hotels, resorts and suites, Courtyard hotels, Residence Inns, Fairfield Inns and vacation ownership resorts. The Contract Services segment consists of: food and facilities management services for clients in business, healthcare and education; food, beverage and merchandise operations at airports, on tollroads and at stadiums, arenas and other attractions; development and operation of retirement communities; and distribution of food and related products. The results of operations of the Company's business segments are reported in the consolidated statement of income. Segment operating expenses include selling, general and administrative expenses directly related to the operations of the businesses, aggregating $457 million in 1992 and 1991, and $394 million in 1990. Gains and losses resulting from the disposition of assets identified with each segment are included in segment operating profit. F-20 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) QUARTERLY FINANCIAL DATA (unaudited, in millions, except per common share amounts)
1992 ------------------------------------------ FIRST SECOND THIRD FOURTH FISCAL QUARTER QUARTER QUARTER QUARTER YEAR ------- ------- ------- ------- ------ Sales.................................. $1,953 $2,036 $1,948 $2,785 $8,722 Operating profit before corporate ex- penses and interest................... 95 125 124 152 496 Net income............................. 11 29 26 19 85 Dividends on preferred stock........... (4) (4) (4) (5) (17) Net income available for common stock.. 7 25 22 14 68 Fully diluted earnings per common share................................. .07 .24 .21 .13 .64
1991 -------------------------------------- FIRST SECOND THIRD FOURTH FISCAL QUARTER QUARTER QUARTER QUARTER YEAR ------- ------- ------- ------- ------ Sales................................... $1,827 $1,940 $1,835 $2,729 $8,331 Operating profit before corporate ex- penses and interest.................... 93 123 109 153 478 Net income.............................. 10 27 18 27 82 Fully diluted earnings per common share. .10 .27 .18 .25 .80
The first three quarters consist of 12 weeks each. The fourth quarter includes 16 weeks in 1992 and 17 weeks in 1991. Fourth quarter 1992 results include pretax costs of $21 million related to the Company's plan to divide its present operations into two separate companies (see "Special Dividend" note to consolidated financial statements). The sum of the earnings per common share for the four quarters in 1992 differs from the annual earnings per common share due to the required method of computing the weighted average number of shares in the respective periods. F-21 HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THIRTY-SIX WEEKS ENDED --------------------------- SEPTEMBER 10, SEPTEMBER 11, 1993 1992 ------------- ------------- (IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS) SALES Lodging Rooms........................................... $ 2,037 $ 2,004 Food and beverage............................... 802 809 Other........................................... 413 353 ------- ------- 3,252 3,166 Contract Services................................ 3,011 2,771 ------- ------- 6,263 5,937 ------- ------- OPERATING COSTS AND EXPENSES Lodging Departmental direct costs Rooms.......................................... 492 474 Food and beverage.............................. 625 629 Other operating expenses, including payments to hotel owners................................... 1,868 1,820 ------- ------- 2,895 2,923 Contract Services................................ 2,985 2,670 ------- ------- 5,880 5,593 ------- ------- OPERATING PROFIT Lodging.......................................... 267 243 Contract Services................................ 116 101 ------- ------- Operating profit before corporate expenses and interest....................................... 383 344 Corporate expenses................................. (80) (74) Interest expense................................... (166) (171) Interest income.................................... 21 20 ------- ------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES.................. 158 119 Provision for income taxes......................... 76 53 ------- -------
See "Notes to Condensed Consolidated Financial Statements." F-22 HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF INCOME--(CONCLUDED) (UNAUDITED)
THIRTY-SIX WEEKS ENDED --------------------------- SEPTEMBER 10, SEPTEMBER 11, 1993 1992 ------------- ------------- (IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS) INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES............................. 82 66 Cumulative effect of a change in accounting for in- come taxes........................................ 30 -- Cumulative effect of a change in accounting for as- sets held for sale (net of income taxes of $22 million).......................................... (32) -- ----- ----- NET INCOME......................................... 80 66 Dividends on preferred stock....................... 12 12 ----- ----- NET INCOME AVAILABLE FOR COMMON STOCK.............. $ 68 $ 54 ===== ===== EARNINGS PER COMMON SHARE Income before cumulative effect of changes in ac- counting principles............................. $ .65 $ .51 Cumulative effect of a change in accounting for income taxes.................................... .27 -- Cumulative effect of a change in accounting for assets held for sale (net of income taxes)...... (.29) -- ----- ----- Net income....................................... $ .63 $ .51 ===== ===== CASH DIVIDENDS PER COMMON SHARE.................... $ .21 $ .21 ===== =====
See "Notes to Condensed Consolidated Financial Statements." F-23 HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 10, 1993 ------------- (IN MILLIONS) ASSETS CURRENT ASSETS Cash and equivalents........................................ $ 322 Accounts receivable......................................... 612 Other current assets........................................ 499 ------- 1,433 ------- PROPERTY AND EQUIPMENT........................................ 4,412 Accumulated depreciation.................................... (1,013) ------- 3,399 ------- INVESTMENTS IN AFFILIATES..................................... 463 INTANGIBLES................................................... 442 NOTES RECEIVABLE AND OTHER.................................... 604 ------- $ 6,341 ------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable............................................ $ 754 Other current liabilities................................... 755 ------- 1,509 ------- LONG-TERM DEBT................................................ 2,614 OTHER LONG-TERM LIABILITIES................................... 467 DEFERRED INCOME............................................... 161 DEFERRED INCOME TAXES......................................... 473 CONVERTIBLE SUBORDINATED DEBT................................. 241 SHAREHOLDERS' EQUITY Convertible preferred stock................................. 200 Common stock................................................ 105 Additional paid-in capital.................................. 41 Retained earnings........................................... 581 Treasury stock, 1.9 million common shares and 4.2 million common shares, respectively, at cost....................... (51) ------- Total Shareholders' Equity................................ 876 ------- $ 6,341 =======
See "Notes to Condensed Consolidated Financial Statements." F-24 HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
THIRTY-SIX WEEKS ENDED --------------------------- SEPTEMBER 10, SEPTEMBER 11, 1993 1992 ------------- ------------- (IN MILLIONS) OPERATING ACTIVITIES Net income......................................... $ 80 $ 66 Adjustments to reconcile to cash from operations: Depreciation and amortization.................... 200 196 Proceeds from sale of timeshare notes receivable. -- 41 Cumulative effect of a change in accounting for income taxes.................................... (30) -- Cumulative effect of a change in accounting for assets held for sale............................ 32 -- Income taxes and other........................... 30 -- Working capital changes.......................... 77 72 ----- ------- Cash from operations............................... 389 375 ----- ------- INVESTING ACTIVITIES Proceeds from sales of assets...................... 44 429 Less noncash proceeds............................ (3) (89) Cash received from sales of assets................. 41 340 Capital expenditures............................... (184) (152) Other.............................................. (103) (27) ----- ------- Cash (used in) from investing activities........... (246) 161 ----- ------- FINANCING ACTIVITIES Issuances of long-term debt........................ 159 885 Issuances of common stock.......................... 10 3 Repayment of long-term debt........................ (281) (1,016) Dividends paid..................................... (34) (30) ----- ------- Cash used in financing activities.................. (146) (158) ----- ------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS........ $ (3) $ 378 ===== =======
See "Notes to Condensed Consolidated Financial Statements." F-25 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Subsequent to the date of the accompanying condensed consolidated financial statements, on October 8, 1993 (the "Distribution Date"), Marriott Corporation distributed, through a special dividend (the "Distribution"), to holders of Marriott Corporation's common stock (on a share-for-share basis), 116,444,561 outstanding shares of common stock of an existing wholly-owned subsidiary, Marriott International, Inc. ("Marriott International"), resulting in the division of Marriott Corporation's present operations into two separate companies. The Internal Revenue Service has ruled the Distribution tax free. Also on the Distribution Date, Marriott Corporation changed its name to Host Marriott Corporation (the "Company"). The Company retained Marriott Corporation's airport and tollroad food, beverage and merchandise concession operations, as well as most of its real estate properties. Additionally, the Company or its subsidiaries continue as general partner in most of Marriott Corporation's lodging partnerships. Marriott International became a publicly traded company that includes Marriott Corporation's former lodging management, franchising and resort timesharing operations, senior living service operations, and institutional food service and facilities management businesses. As a result, the assets, liabilities and businesses of the Company have changed substantially. Accordingly, the financial disclosures herein do not reflect the financial condition and results of operations of the Company as it now exists. See "Pro Forma Financial Data" for pro forma information of the Company. As a result of the completion of the Distribution, the Company will expense approximately $13 million in the fourth quarter of 1993 related to costs of the transaction. 2. The accompanying condensed consolidated financial statements of the Company have been prepared by the Company without audit. Certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes the disclosures made are adequate to make the information presented not misleading. However, the condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in this Prospectus. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position of Host Marriott Corporation and subsidiaries as of September 10, 1993 and the results of operations for the thirty-six weeks ended September 10, 1993 and September 11, 1992, and cash flows for the thirty-six weeks ended September 10, 1993 and September 11, 1992. Interim results are not necessarily indicative of fiscal year performance because of the impact of seasonal and short-term variations. Additionally, the Distribution referred to in Note 1 has materially altered the constitution of the Company. Therefore, operations occurring after the Distribution Date will not be comparable to those prior to the Distribution Date. 3. Earnings per common share is computed on a fully diluted basis by dividing net income available for common stock by the weighted average number of outstanding common and common equivalent shares, plus other potentially dilutive securities, aggregating 109.8 million and 105.3 million for the thirty-six weeks ended September 10, 1993 and September 11, 1992, respectively, the Company issued 1.8 million common shares to former holders of certain senior notes and debentures of the Company as part of the Exchange Consideration (see note 10, below). Additionally, subsequent to September 10, 1993 the Company issued 10.6 million common shares to former holders of the Company's preferred stock. Supplemental earnings per share, giving effect to these transactions as if they had occurred as of the first day of the period presented, was $0.67 and $0.57 for the thirty-six weeks ended September 10, 1993 and September 11, 1992, respectively. Weighted average shares outstanding for supplemental earnings per share were 122.3 million and 117.6 million for the thirty-six weeks ended September 10, 1993 and September 11, 1992, respectively. Supplemental earnings per share, giving effect to the transactions discussed above and the potential LYONs conversion (discussed in F-26 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) Note 11) as if they had occurred as of the first day of the period presented, was $0.68 and $0.59 for the thirty-six weeks ended September 10, 1993 and September 11, 1992, respectively. Weighted average shares outstanding, giving effect to the transactions discussed above and the potential LYONs conversions (discussed in Note 11) as if they had occurred as of the first day of the period presented, were 131.3 million and 126.6 million for the thirty-six weeks ended September 10, 1993 and September 11, 1992, respectively. 4. The Company has minority interests in 37 affiliates, most of which own hotels operated by Marriott International or its subsidiaries under long-term agreements. The Company's equity in net losses of affiliates of $21 million and $17 million for the thirty-six weeks then ended September 10, 1993 and September 11, 1992 respectively, is included in corporate expenses. Combined summarized operating results reported by affiliates follow:
THIRTY-SIX WEEKS ENDED --------------------------- SEPTEMBER 10, SEPTEMBER 11, 1993 1992 ------------- ------------- (IN MILLIONS) Sales........................................... $ 1,377 $ 1,325 Operating expenses, including depreciation and other noncash charges of $227 million and $240 million for the thirty-six week periods then ended September 10, 1993 and September 11, 1992, respectively............................. (1,478) (1,473) ------- ------- $ (101) $ (148) ======= =======
5. Beginning in the second fiscal quarter of 1993, under a new accounting policy adopted by the Company, net realizable value of assets held for sale are determined on a property-by-property basis as to all lodging properties, whereas, formerly such determination was made on an aggregate basis, by hotel brand, as to Courtyard hotels, Fairfield Inns and Residence Inns. The after-tax cumulative effect of this change on years prior to 1993 of $32 million was recorded in the quarter ended June 18, 1993 and is reflected in the accompanying condensed consolidated statement of income for the thirty-six weeks ended September 10, 1993. The reduction in the annual depreciation charge as a result of this change has not had a material effect on 1993 results of operations. 6. In September 1993, approximately 92% or 3,673,634 depositary shares representing the Company's 8.25% Series A cumulative convertible preferred stock (no par value) were converted into 10.6 million shares of Company common stock. As a result, holders of the common shares issued upon conversion participated in the Distribution. On October 1, 1993, the Company's Board of Directors adjusted the conversion rate of the Company's remaining 326,366 depositary shares to reflect the special dividend. Each depositary share is currently convertible at any time at the option of the holder into 19.16 shares of common stock of the Company. 7. The Company adopted Statement of Financial Accounting Standard No. 109, "Accounting for Income Taxes" ("SFAS 109"), during the first quarter of 1993. Prior to such adoption, the Company deferred the past tax effects of timing differences between amounts recorded for financial reporting purposes and taxable income. SFAS 109 requires the recognition of deferred tax assets and liabilities equal to the expected future tax consequences of the temporary differences. The $30 million cumulative credit resulting from this change in accounting principle is included in the Company's condensed consolidated statement of income for the thirty-six weeks ended September 10, 1993. In the 1993 third quarter, as a result of recent tax legislation which increased the federal income tax rate retroactively to the beginning of fiscal year 1993, the Company increased the provision for income taxes by approximately $6 million as a result of non-cash income tax adjustments as required by SFAS 109. F-27 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED) 8. As described in "Risk Factors--Pending Litigation," the Company is involved in legal proceedings related to the Distribution. The Company believes that the ultimate outcome of these legal proceedings will not have a material effect on the financial position or results of operations of the Company. 9. The Company is required to adopt Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," for fiscal years beginning after December 15, 1994, and Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," for fiscal years beginning after December 15, 1993. Management anticipates that application of these statements will not have a material effect on the Company's financial statements. 10. The Company began exchange offers on July 19, 1993 for certain of its senior notes and debentures (the "Exchange Offer") with an aggregate principal amount of approximately $1.5 billion (the "Old Notes"). On October 8, 1993, the Exchange Offer closed, leaving approximately $283 million principal amount of the Old Notes outstanding, exclusive of (1) the Series F Senior Notes, (2) the remaining amount of notes which have been called for redemption and (3) the Series G Senior Notes which have been defeased. Under the Exchange Offer, holders of the Company's Series B, C, D, E, K, L and M senior notes and the Company's debentures received $950.74 principal amount of new notes (the "New Notes") of a wholly-owned indirect subsidiary of the Company, Host Marriott Hospitality, Inc. ("Hospitality") and $49.26 market value of Company common stock for each $1,000 principal amount held (collectively, the "Exchange Consideration"). The coupon and maturity date for each series of New Notes was 100 basis points higher and four years later, respectively, than the series of existing notes for which it was exchanged (except the maturity of the New Notes exchanged for Series L Senior Notes, which was shortened by five years). The New Notes contain various new covenants and are secured by the stock of Hospitality and certain of its subsidiaries. All of Hospitality's material subsidiaries guarantee the New Notes. Hospitality's parent, HMH Holdings, Inc., also guarantees the New Notes, and is the borrower under a $630 million line of credit provided by Marriott International. See "Risk Factors--Substantial Leverage; Restrictive Covenants" for a more detailed discussion of restrictive covenants. As part of the Exchange Offer, the Company solicited consents for certain proposed amendments to the Indenture under which the Old Notes were issued, a waiver of any claims, rights or defaults under such Indenture, and a release and discharge of all legal or equitable claims or exchanging noteholders relating to the Distribution (collectively the "Consents and Releases"). It was a condition to participation of each holder in the Exchange Offer that such holder have delivered the Consents and Releases. Since the Company did not receive tenders representing more than 50 percent of the aggregate principal amount of the Series F Senior Notes, the Company elected to call for redemption on October 8, 1993, at par plus accrued interest, all of the Series F Senior Notes which where not tendered (approximately $51 million principal amount). Also, since the Company did not receive tenders representing more than 50 percent of the aggregate principal amount of the Series I Senior Notes as of October 8, 1993, the Company elected to modify the provisions of the Indentures governing, respectively, the Series I Senior Notes and the notes issued by Hospitality in connection with the Exchange Offer. These modifications of the two indentures secured the Series I Senior Notes equally and ratably with the New Notes issued in the Exchange. In addition, the Company defeased the Series G Senior Notes due February 1, 1994 ($100 million aggregate principal amount outstanding). The exchange will be treated as an extinguishment of debt and the Company will recognize an extraordinary pre-tax loss of approximately $9 million in the 1993 fourth quarter, equal to the difference between the carrying amount of the Company's Old Notes and the market value of the Exchange Consideration. F-28 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) (UNAUDITED) 11. In connection with the Distribution, the Company entered into an agreement with Marriott International pursuant to which Marriott International assumed 90% of the debt obligations evidenced by the Company's convertible subordinated Liquid Yield Option Notes due 2006 (the "LYONs") and caused the LYONs indenture (the "Indenture") to be amended to reflect such assumptions by Marriott International. On December 13, 1993, the Company and Marriott International jointly announced that they will redeem LYONs for $367.60 per $1,000 principal amount on January 25, 1994. The aggregate redemption price as of the redemption date of all LYONs outstanding on December 13, 1993 will be approximately $197 million, of which $177 million is payable by Marriott International. The Company's share of this LYONs obligation is $20 million. If the LYONs outstanding at September 10, 1993 are converted prior to January 25, 1994, shares outstanding for the Company as of September 10, 1993 will increase by approximately nine million. F-29 ANNEX A MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION As a result of the Distribution, the assets, liabilities and businesses of the Company have changed substantially. Accordingly, the discussion and analysis set forth below are not reflective of the Company as it now exists. See "Management's Discussion and Analysis of Pro Forma Financial Data." RESULTS OF OPERATIONS Thirty-Six Weeks Ended September 10, 1993 Compared to Thirty-Six Weeks Ended September 11, 1992 Total sales increased 5% in 1993, primarily due to lodging unit growth, occupancy gains and increased timeshare sales, new food service and facilities management accounts, and expansion of management services to existing clients, the acquisition of the Dobbs airport concession operations in the 1992 fourth quarter and sales at new senior living services properties. Income before the cumulative effect of changes in accounting principles increased 24% in 1993. Net income in 1993 reflects (i) an after-tax charge of $32 million (29 cents per common share) resulting from a change in accounting for assets held for sale, (ii) an increase in non-cash income tax expense of $6 million as required by SFAS 109 to reflect the impact of recent tax legislation, partially offset by (iii) $30 million (27 cents per common share) credit resulting from the change in accounting for income taxes to comply with SFAS 109. Excluding these accounting changes and the impact of the income tax adjustments as well as lodging dispositions in both years, the Company posted 38% higher net income. Lodging operations reported sales growth of 3% in 1993, as comparable unit sales rose in all four of the Company's hotel brands. Operating profit rose 10%, including profit realized in connection with the disposition of the equity interest in an international hotel. Lodging operations benefited from the net addition of 70 hotels (9,300 rooms) since the beginning of 1992, including 22 hotels (3,500 rooms) during 1993, and higher occupancy for all four of the Company's lodging brands. Room sales grew by 2%. Food and beverage sales decreased 1%, primarily due to restaurant closings during non-peak hours at certain limited service units. The Company had 768 hotels, totaling approximately 171,000 rooms, at September 10, 1993, in the Marriott hotel system. Marriott Hotels, Resorts and Suites, the Company's full-service lodging product, posted an increase in occupancy for comparable units of more than three percentage points for 1993--to the upper 70s. Average room rates for 1993 were in line with year-earlier levels. Higher room sales and food and beverage sales reflected increased demand in the transient and group meeting segments. Courtyard, the Company's moderately priced lodging product, achieved increases in occupancy for comparable units of over two percentage points for 1993--to the mid-80s, aided by strong weekend business. Growth in average room rates exceeded inflation for 1993. Residence Inn, the Company's extended stay product, posted over three percentage points higher occupancy for comparable units for 1993--to the high 80s. Average room rates were up slightly while occupancy benefited from continuing emphasis on promoting weekend business. Fairfield Inn, the Company's economy lodging product, reported one percentage point higher occupancy for comparable units for 1993--to the upper 80s while average room rate growth exceeded inflation. Comparable unit sales were up solidly, reflecting strong response to a complimentary continental breakfast program rolled out across the system in the spring of 1993. A-1 Marriott Ownership Resorts, the Company's timeshare division, posted substantial increases in sales and operating profits in the 1993 third quarter, benefiting from strong sales at existing timesharing projects and the impact of new national marketing programs. Contract Services reported increases in operating profit of 15% for 1993 reflecting earnings growth for three of the four major businesses in the group. Sales grew by 9% year-to-date. Marriott Management Services posted slightly higher sales and strong overall profit growth in 1993. Results benefited from a profit increase in the health care product line due to growth in comparable units and new business. Results for other key product lines, including corporate services, higher education and school services, were slightly lower than the prior year. The Host/Travel Plazas division reported higher sales in 1993, while operating profits were down moderately. Sales benefited from the third quarter 1992 acquisition of the former Dobbs airport operations, but 1993 profit comparisons for airport food, beverage and merchandise operations were hurt by a decrease in U.S. enplanements and higher rent at one key airport. Airport traffic, which had been boosted by airline "fare wars" in 1992, continued to be affected by route cutbacks by major carriers in 1993. Increased sales for travel plazas business reflected completion of several units on a major tollroad, while operating profits were flat due to unit remodeling on one tollroad and reduced traffic on two other key tollroad systems. Marriott Senior Living Services reported substantially higher sales and profits in 1993. Results benefited from the maturing of three properties opened in 1992, including a condominium retirement community which continued to have strong sales in the first three quarters of 1993. Comparable occupancy increased nearly seven percentage points for the 1993 third quarter--to the low 90s. Marriott Distribution Services, which supplies food and related products to Company operations and external clients, posted increased sales and slightly higher operating profits in 1993. Sales benefited from the opening of two distribution centers since mid-1992 and the start of service to a large regional restaurant chain during the 1993 third quarter. Corporate expenses increased 8% over 1992, primarily due to reduced joint venture results. Interest expense decreased 3% from 1992, reflecting lower rates and lower average debt balances. The Company's effective tax rate increased to 48.1% compared to 44.5% in the comparable prior year period, primarily due to the 1993 third quarter income tax adjustments cited above. 1992 Compared to 1991 Net income totaled $85 million in 1992, compared to $82 million in 1991, on a 5% increase in sales. The Company's earnings per common share were $.64, down from $.80 in 1991. Comparisons of 1992 earnings to the preceding year were affected by several noncomparable items, including operating results and financing costs for recently opened lodging and senior living services properties, reduced gain amortization from earlier asset sales, lodging dispositions in both years, the issuance of preferred stock in late 1991, and approximately $21 million of costs related to the Distribution. Excluding the impact of these items, the Company's operating profit and net income increased by 11% and 56%, respectively, principally due to strong improvement in four of the Company's five lodging divisions and growth in its senior living services operations. A-2 Lodging sales and operating profit both increased 4% in 1992. Excluding the impact of the noncomparable items cited above, lodging profits were up 14% compared to the preceding year. Lodging sales growth was generated primarily by the net addition of 107 hotels (16,750 rooms) since the beginning of 1991, and higher occupancy rates. Average room rates across the Marriott system increased slightly. Food and beverage sales were flat with the prior year due to more rapid expansion of product lines with limited food service facilities, and the closing of certain low volume restaurants. At year-end 1992, the Company's lodging business encompassed 746 hotels with over 167,000 rooms, including the net addition of 48 hotels (5,800 rooms) during 1992. Marriott Hotels, Resorts and Suites, the full-service lodging division, posted increases in occupancy for comparable U.S. hotels of two percentage points for the 1992--to the mid-70s--while the average room rate was unchanged. Profits were flat excluding the impact of the aforementioned noncomparable items. Courtyard, the moderate price lodging product, posted strong increases in sales and profits for 1992. Occupancy for comparable units advanced nearly eight percentage points for 1992 to the upper 70s. Average room rates were slightly lower, reflecting the division's strategy of increasing occupancy and total revenues. Reduced administrative expenses also aided results. Residence Inn, the extended stay lodging product, reported solid sales and profit growth for 1992. Occupancy for comparable units increased nearly three percentage points--to the low 80s--as business travel and weekend leisure business improved from 1991 levels. Average room rates were slightly higher. Fairfield Inn, the economy lodging product, generated higher sales and profits for 1992 on occupancy growth of more than three percentage points--to the upper 70s--for comparable units. Average room rate growth matched inflation. Marriott Ownership Resorts, the timeshare division, posted higher sales and profits in 1992 due to increased sales at existing timesharing properties, the addition of two new properties, and greater cost efficiencies in marketing and product development. Contract Services reported increases in sales and operating profit of 6% and 3% respectively, compared to 1991, largely due to significant growth for Marriott Senior Living Services, although all four divisions in the group reported higher sales. Marriott Management Services, benefited from increased profits in its health care, higher education and school services division. Overall results increased only modestly due to the offsetting effect of losses at a west coast laundry facility and lower profits for Canadian operations. Host/Travel Plazas results were helped by operating efficiencies, and the increased travel resulting from low summer airfares, the September 1992 acquisition of the Dobbs airport concessions, and improved performance in stadiums and arenas. However, lower profits reflected reduced results on several major tollroads served by the Company, and at merchandise operations in Las Vegas and Atlantic City. Marriott Senior Living Services reported strong sales and profit increases in 1992, aided by the sale of condominium units at a new retirement community in the Washington, D.C. area, and the maturing of units opened in prior years. Occupancy for comparable units increased by more than nine percentage points to nearly 90 percent. Marriott Distribution Services had higher sales in 1992. Profits were slightly lower due to costs associated with new distribution center openings, and reduced volume at certain distribution centers resulting from the Company's disposition of its family restaurant division. Corporate expenses increased 16% in 1992 due to $21 million of costs associated with the planned special dividend. Corporate expenses decreased 3% in 1992 excluding these costs, following a 19% decline in the preceding year. After a major administrative downsizing program conducted in 1990-91, the Company eliminated additional administrative staff positions in 1992. A-3 Interest expense declined 6% in 1992 due to lower average borrowings as well as lower interest rates, which were partially offset by reduced interest capitalization. Interest income was down 28% primarily as a result of lower temporary cash investments. The Company's effective tax rate was 43.3% in 1992 compared to 43.4% in the preceding year. During 1992, the Company sold thirteen Courtyard hotels for $146 million in a sale/leaseback transaction. The Company also sold seven full service hotels in 1992 for total proceeds of $200 million. Pre-tax gains on these full-service hotel sales of approximately $15 million were offset by adjustments to previously established reserves, resulting in no net gain or loss. Most of the reserve adjustment was a valuation allowance, related to the in-substance foreclosure of a 28.7% interest in the Times Square Hotel Company, equal to the difference between the estimated fair value of the in-substance foreclosed ownership interest and carrying the amount of the receivable. 1991 Compared to 1990 Income from continuing operations increased 74% to $82 million in 1991 compared to $47 million in 1990. The Company's earnings per share from continuing operations was $.80 in 1991, up from $.46 in 1990. Reported results reflected the impact of several noncomparable items, including: operating results and financing costs for recently opened hotels and other assets held for sale in both years; lower deferred gain amortization in 1991; and writeoffs and reserves in 1990 primarily related to overhead cost reductions and the cancellation of new unit development. Excluding these noncomparable items in both years, operating profit was down 3% in 1991 and net income decreased 10%. Lodging operations reported an 11% sales gain and 36% higher operating profit in fiscal 1991. Excluding the noncomparable items, sales increased 4% and profits were flat. Rooms sales increased 14% from the prior year, benefiting from the net addition of 159 hotels (27,000 rooms) since the beginning of 1990. Food and beverage sales increased at the lower rate of 4% for 1991, primarily due to more rapid expansion of product lines with limited food service facilities. Despite industry overcapacity in many U.S. markets, and the impact of the recession and the Gulf war, sales and occupancy for comparable units increased in three of the Company's four major lodging product lines. Operating margins declined slightly in 1991 primarily due to lower average room rates. Overall, lodging room rates declined about 2%. At year-end 1991, the Company's lodging business encompassed 698 properties with over 161,000 rooms, including the net addition of 59 hotels during 1991. Marriott Hotels, Resorts and Suites reported 1991 occupancy rates for comparable units in the mid-70s, down one percentage point from 1990, while room rates declined approximately 2%. Courtyard, the Company's moderate price lodging product, posted occupancy rates for comparable units in the low 70s-- nearly one percentage point higher than 1990 levels--while room rates declined less than 1%. Residence Inn, the extended stay product, reported a gain of more than one percentage point in occupancy, remaining in the upper 70s--while room rates declined nearly 2%. Fairfield Inn, Marriott's economy lodging product, reported an operating profit in 1991, compared to a loss for the prior year. Occupancy for comparable Fairfield Inns rose more than five percentage points-- to the upper 70s--while room rates declined approximately 3%. Marriott Ownership Resorts posted a 44% increase in sales and a 32% increase in profits due to the successful roll-out of several new timesharing resorts. Contract Services reported 7% higher sales and 34% higher operating profit for 1991. Excluding the impact of restructuring charges and writeoffs in 1990, operating profit declined 8%. Operating margin percentages declined due to start-up losses associated with the new stadiums and arenas operations and a new centralized laundry facility on the West Coast. Marriott Management Services' sales and profits increased, benefiting from solid gains in its health care and school food service operations and reduced administrative costs. Profits for higher education operations were slightly below the 1990 levels, while corporate services profits were hurt by the recession. Profits for facilities management declined primarily due to lower results for laundry operations. A-4 Sales for Host/Travel Plazas were up slightly, but profits declined because of lower U.S. airline enplanements and highway travel due to the recession and the Gulf war. Results also were affected by start-up losses for the new stadiums and arenas operations. Marriott Senior Living Services reported a solid sales increase and posted its first profitable year, helped by strong gains at several Company-developed retirement communities. Comparable occupancy for the Company's retirement communities rose by more than six percentage points, into the mid-80s. Corporate expenses decreased 19% in 1991, reflecting savings from downsizing most administrative functions during the past two years. Staffing has been reduced by approximately 17% since the beginning of 1990. Interest expense increased 45% in 1991 due to financing costs for recently opened lodging properties and other assets held for sale, which exceeded the impact of lower interest rates. Interest income declined 9%, largely due to collection of affiliate notes receivable. The Company's effective income tax rate increased to 43.4% in 1991, compared to 41.3% in 1990, primarily due to higher foreign taxes. 1990 Compared to 1989 Income from continuing operations declined to $47 million in 1990 compared to $181 million in 1989. The Company's earnings per share from continuing operations was $.46 in 1990, down from $1.62 in 1989. Excluding noncomparable items (primarily divestitures, restructuring write-offs and reserves in both years, and 1990 start-up losses for new hotels) income from continuing operations declined 7%. Comparisons of operating results between the two years are affected by the following items: . In 1990 the Company recorded pretax restructuring charges and writeoffs of $153 million, net of $42 million of previously deferred hotel disposition gains. The 1990 charges principally related to reductions in new unit development for lodging and senior living services, and implementation of overhead cost reduction programs throughout the Company. Restructuring charges of $256 million (pretax) associated with continuing operations were recognized in 1989. . Delays in the Company's asset disposition program due to difficult market conditions in 1990 resulted in the recognition of start-up losses for many new hotels. By contrast, the Company generated pretax gains of $34 million on hotel development and related activities in 1989. . The Company's airline catering business was divested in December 1989 and its fast food division was sold in April 1990. Fiscal 1989 results of continuing operations include an after-tax gain of $136 million related to the airline catering divestiture, and discontinued operations include an after-tax $39 million charge related to the Company's decision to exit the fast food and family restaurant businesses. Lodging operations reported a 9% sales gain and 4% higher operating profit in fiscal 1990, excluding the noncomparable items discussed above. Room sales increased 13% from the prior year, benefiting from the addition of over 16,000 rooms added during the year. Food and beverage sales for the Lodging segment increased at the lower rate of 6% for 1990, primarily due to more rapid expansion of product lines with limited food service facilities. Lodging results reflected the addition of 100 properties during 1990. Despite weak industry conditions, all four major product lines--Marriott Hotels, Resorts and Suites; Courtyard hotels; Residence Inn; and Fairfield Inn--posted sales gains for comparable units in 1990. Average room rates for comparable units across the Marriott lodging system advanced nearly in line with inflation, while occupancy was down less than 1%, remaining in the mid-70s. At year-end 1990, the Company's lodging group encompassed 639 properties with over 150,000 rooms. Marriott Hotels, Resorts and Suites reported 1990 occupancy rates for comparable hotels in the mid-70s, down less than one percentage point from the prior year. Increased group business was offset by a decline in transient business due to the recession and the Middle East situation. A-5 Courtyard hotels, the Company's moderate price product line, posted a comparable unit occupancy increase of over one percentage point, remaining in the low 70s. Residence Inn, the extended stay product, experienced a decline of about two percentage points in occupancy for comparable units, which remained in the upper 70s. Fairfield Inn, Marriott's economy lodging product line, posted a reduced operating loss from the year-earlier level as it achieved greater national distribution. Occupancy for comparable Fairfield Inn units was up slightly, remaining in the mid-70s, and increases in average room rates were well ahead of inflation. Marriott Ownership Resorts reported higher sales, but profits declined due to marketing and start-up costs for new timeshare developments. Net lodging restructuring charges and writeoffs, totaling $65 million (pretax) in 1990, reflected costs associated with management's decisions to delay construction starts on most new lodging units and cancel certain development projects, and to implement comprehensive reorganizations and administrative staff downsizings within each business unit. Contract Services reported a 19% sales gain and 15% higher operating profit for fiscal 1990, excluding noncomparable items. Operating margins declined due to 1990 restructuring charges in excess of those recorded in 1989 and lower profits for Host/Travel Plaza operations as a result of declines in air and highway travel. Marriott Management Services sales increases reflected strong new account growth, including acquisitions, and expansion of services to existing clients. Excluding noncomparable items, solid sales and profit growth was experienced in all five major segments of the division--business, healthcare, higher education, schools, and facilities management. Sales increased in airport and travel plaza operations, but profits were down slightly due to reduced operating margins. Senior living services posted strong sales gains, and start-up losses narrowed in 1990 as a result of profit contributions from the initial retirement communities developed by the Company. Contract Services restructuring charges and writeoffs, totaling $57 million (pretax) in 1990, included costs related to management's decisions to delay or cancel most new senior living service units and several Host development projects, and to reorganize and downsize division organizations. Restructuring charges and writeoffs also included a $14 million pretax, special charge recorded in the third quarter by the Marriott Management Services division. Corporate expenses rose 5% in 1990, excluding restructuring charges in both years and the impact of the Corporate headquarters building sale/leaseback in mid-1989. Corporate restructuring charges, totaling $31 million (pretax) in 1990, primarily related to decisions to reorganize and downsize various corporate staff functions. Corporate staffing levels were trimmed by nearly 15%. Interest expense was 1% lower in 1990 as financing costs associated with new units placed in service and share repurchases were offset by the impact of business divestitures, property sales and lower interest rates. The Company sold nearly $1 billion of assets in 1990. Interest income declined 15% largely due to tax refund interest earned in 1989 and interest income on cash balances maintained in 1989 for tax purposes. The Company's effective income tax rate increased to 41.3%, compared to 39.3% in 1989, due to the effect of goodwill amortization and other nondeductible items on lower pretax income. Special Dividend and Exchange Offer In October 1992, the Board of Directors of the Company approved, subject to approval of final terms and conditions and shareholder ratification, the distribution to holders of Common Stock (on a share-for-share basis) of all outstanding shares of common stock of an existing wholly-owned subsidiary, Marriott A-6 International, Inc. ("Marriott International") (the "Distribution"). Subsequent to the Distribution on October 8, 1993, the Company changed its name to Host Marriott Corporation ("Host Marriott"). Host Marriott retained Marriott Corporation's airport and tollroad food, beverage and merchandise concession operations, as well as most of its real estate properties. Additionally, Host Marriott retained a major portion of Marriott Corporation's long-term debt obligations, and it or its subsidiaries continue to act as general partner in Marriott Corporation's lodging partnerships. As part of the Distribution, Marriott International became a publicly traded company that includes substantially all of lodging management, franchising and resort timesharing operations, senior living service operations, and institutional food service and facilities management businesses. The Company began exchange offers and consent solicitation (the "Exchange Offer") on July 19, 1993, pursuant to which holders of its senior notes (the "Old Notes") in aggregate principal amount of approximately $1.5 billion were offered the right to exchange Old Notes for a combination of (i) cash, (ii) Common Stock and (iii) new notes issued by Host Marriott Hospitality, Inc. ("Hospitality"), an indirect wholly-owned subsidiary of the Company. The purpose of the Exchange Offer was to (i) extend the maturities of its outstanding debt and (ii) resolve the objections of, and settle litigation and potential litigation with, holders of Old Notes relating to the Distribution. As described in the Notes to Condensed Consolidated Financial Statements, on October 8, 1993, the Exchange Offers closed. As a result of the Distribution, the Company is substantially more leveraged than it was prior to the Distribution. However, the Company believes that financial resources for ongoing operations as well as funds available under a $630 million line of credit from Marriott International will be sufficient to enable it to meet its debt service needs and finance its capital expenditures. Since the transaction is completed, Marriott International will have operations in 50 states and 19 foreign countries, and approximately 172,000 employees. Host Marriott will have operations or properties in 43 states and six countries, with approximately 23,000 employees. The Special Dividend footnote to the consolidated financial statements and the Notes to Condensed Consolidated Financial Statements contain additional data related to the Distribution. Sources and Uses of Capital The Company has funded its capital requirements with a combination of cash flow from operations, proceeds from sales of hotels and other properties, and debt and equity financing. Cash from operations. Cash from operations is significantly greater than net income due to depreciation, deferred taxes and other items. As expected, cash from continuing operations decreased $128 million in 1992, primarily due to higher income tax payments, lower sales of timeshare notes and reduced cash flow from working capital. Income tax payments were higher in 1992 due to settlement of certain prior year tax liabilities. The Company has provided financing for qualified purchasers of timeshare intervals, and periodically packaged and sold the buyers' notes to financial institutions. Lower operating working capital was a significant source of cash for the Company in 1991, and additional reductions were achieved in 1992. Cash from operations increased to $389 million in the first three quarters of 1993 compared to $375 million in 1992, primarily due to higher pretax income in 1993 partially offset by proceeds from the sale of timeshare notes receivable and lower cash taxes in 1992. Lodging properties formerly held for sale. Historically, the Company developed and sold lodging frequently to syndicated limited partnerships, while continuing to operate the properties under long-term agreements. Those agreements provided the Company with specified percentages of sales and operating profits as compensation for operating the properties for the owners. A-7 Most lodging properties developed by the Company since the early 1980s were reported as assets held for sale prior to 1992. The Company used this classification because the sale of newly-developed lodging properties, subject to long-term operating agreements, was a principal method of financing the Company's lodging property development during this period. Sales of such properties also enabled the Company to transfer the risks of real estate ownership. Most of these properties were in the Company's Courtyard, Fairfield Inn and Residence Inn brands, and were sold in large groups with a balanced geographical mix of properties of the same brand. In 1990, deterioration in the real estate and financing markets slowed the Company's property disposition program. While the Company continued to explore possibilities for sales of properties to syndicated partnerships, both domestically and internationally, the scarcity of real property debt financing made such sales difficult. Nevertheless, the Company completed $600 million of lodging property sales, including the sale of six full service hotels and 50 Fairfield Inns to affiliated partnerships. In 1990, the Company also discontinued virtually all of its lodging property development, thus limiting its future financing needs and providing it with flexibility to hold its lodging properties until market conditions improved. At the end of 1990, the Company's assets held for sale included one full service hotel, 56 Courtyard hotels, 15 Residence Inns and 23 Fairfield Inns, nearly all of which had opened in 1989 and 1990. In 1991, persistent weak conditions in the hotel industry and in the real estate and capital markets continued to hamper the Company's efforts to sell lodging properties. Because such properties generated solid cash flow for the Company, the Company was unwilling to sacrifice value to expedite sales transactions. For this reason, the Company increased its focus on other sources of financing, including senior and subordinated debt and preferred stock, and decreased its efforts to sell properties. The only sale of lodging properties by the Company in 1991 was of four Courtyard hotels to the Company's profit sharing plan. The Company also negotiated a sale/leaseback of an additional 13 Courtyard hotels (for $146 million), which closed in the first quarter of 1992. At the end of 1991, the Company's assets held for sale included one full service hotel, 64 Courtyard hotels, 28 Residence Inns and 30 Fairfield Inns, consisting of unsold properties held since year-end 1990 and units which opened during 1991. In April 1992, as a result of continuing unfavorable conditions in the real estate markets and the fact that during 1991 and 1992 the Company had completed $925 million in long-term corporate debt and equity financings (thus eliminating the need to raise capital through sales of properties), the Company decided it was no longer appropriate to view sales of lodging properties, subject to operating agreements, as a primary means of long-term financing. Accordingly, the Company discontinued classification of these properties (consisting of one full service hotel, 51 Courtyard hotels, 28 Residence Inns and 30 Fairfield Inns, with an aggregate carrying value of approximately $1,150 million at that time) as assets held for sale. In addition to the Courtyard sale/leaseback transaction noted above, the Company sold seven full-service hotels to other chains in 1992, for total proceeds of $200 million, in two separate transactions negotiated in the first quarter of 1992. During the period the Company classified lodging properties as assets held for sale, it determined the net realizable value of such assets on a property- by-property basis in the case of full-service hotels, resorts and suites, and on an aggregate basis, by brand, in the case of its limited service (i.e., Courtyard, Fairfield Inn and Residence Inn) lodging properties. On this basis, carrying value of these properties was not in excess of their net realizable value based on estimated selling prices, although, as a result of the deteriorating market conditions referenced above, certain individual properties within a limited service brand had carrying values in excess of their estimated selling prices. The "Property and Equipment" note to the consolidated financial statements included herein provides data as to the estimated unrealized losses of certain properties within each brand which had a book value in excess of net realizable value (determined based on estimated selling prices). In certain cases, these unrealized losses related to properties constructed during 1990 and 1991 where total development and construction costs exceeded net realizable value. Following the reclassification of these properties, the Company assesses impairment of its owned real estate properties based on whether it is probable that undiscounted future cash flows from such properties will be less than their net book value. A-8 Beginning in the second fiscal quarter of 1993, under a new accounting policy adopted by the Company, net realizable value of assets held for sale are determined on a property-by-property basis as to all lodging properties, whereas formerly such determination was made on an aggregate basis by hotel brand as to Courtyard hotels, Fairfield Inns and Residence Inns. The after-tax cumulative effect of this change on years prior to 1993 of $32 million was recorded in the quarter ended June 18, 1993 and is reflected in the accompanying condensed consolidated statement of income for the thirty-six weeks ended September 10, 1993. The reduction in the annual depreciation charge as a result of this change did not have a material effect on 1993 results of operations. Capital expenditures and acquisitions. The Company's 1992 capital expenditures and acquisitions were reduced to $257 million, compared to $427 million in 1991 and over $1.2 billion in 1990. The 1992 outlays largely represented refurbishments of existing properties and completion of construction on new lodging and senior living services projects started prior to 1991. Capital expenditures of approximately $350 million are planned for 1993, including construction costs for three hotels and two Senior Living Services properties. The Company acquired Dobbs House concessions at 19 airports in September 1992 for approximately $47 million. The acquired units are contributing to earnings and cash flows in their first full year of operations. Capital expenditures increased to $184 million in the first three quarters of 1993, compared to $152 million in 1992. The 1993 outlays were primarily for refurbishment of existing properties, and construction of two full-service hotels, two retirement communities and several units on two major tollroads. Proceeds from sales of assets totaled $44 million in the first three quarters of 1993, compared to $429 million in 1992. Asset dispositions during the first three quarters of 1992 included the sale of 13 Courtyard hotels for $146 million in a sale/leaseback transaction, 149 family restaurants for total proceeds of $74 million and seven full-service hotels for total proceeds of $200 million. The Company continues to renovate its properties to maintain their competitive position. Such renovation outlays totaled $163 million in 1992, including $123 million financed by hotel owners. Partnership Activities. The Company serves as the managing general partner of numerous limited partnerships which own hotels. Debt of the hotel limited partnerships is typically secured by first mortgages on the properties and generally is nonrecourse to the partners. However, the Company has committed to advance amounts to affiliates, if necessary, to cover certain future debt service requirements. Such commitments were limited, in the aggregate, to $296 million at October 8, 1993. Other investing activities of $103 million for the first three quarters of 1993 included $20 million invested in a joint venture which acquired the 339- room Duna Hotel in Budapest, Hungary, and $32 million in net advances for certain hotel joint ventures. Other investing activities in the first three quarters of 1992 also included $18 million in fundings for certain hotel joint ventures. Divestitures. The Company disposes of businesses that no longer meet its financial return or growth objectives. In 1989, the Company divested its airline catering business for over $500 million. In 1990, the Company sold its fast food restaurant division for more than $365 million. In 1991, 138 family restaurants were sold for total proceeds of approximately $52 million. The Company sold an additional 203 family restaurants for total proceeds of $84 million in 1992 and expects to sell many of its remaining 50 family restaurants by year-end 1993. Debt financing. The Company utilizes both fixed and variable rate debt to minimize interest costs and provide flexibility while protecting against the impact of short-term interest rate fluctuations. During 1992 the Company issued $200 million of Series L senior notes due in 2012 and $200 million of Series M senior notes due in 2002. Proceeds from these transactions primarily were used to repay other senior notes and revolving bank debt, which declined from $676 million at year-end 1991 to $175 million at January 1, 1993. Fixed rate debt was 65% of total debt at January 1, 1993 (compared to 64% at January 3, 1992), after consideration of interest rate exchange agreements. A-9 Cash flow coverage of interest (defined as operating cash flow before interest expense, income taxes, proceeds from sales of timeshare notes and changes in working capital; divided by total interest, including amounts capitalized) was 2.6 times for 1992 and 2.0 times for 1991, and substantially exceeded the requirements of the Company's lenders. Liquidity The Company believes it has adequate financial resources to support ongoing operations, meet debt service requirements and finance its capital expenditure program. In addition, the Company structured the Distribution to provide each of the separate companies with sufficient financial resources to meet their business objectives: . Marriott International will have strong operating cash flows from its lodging, food and facilities management operations. This cash flow is expected to exceed the annual capital needed for its management and franchise programs by a comfortable margin. . Host Marriott Corporation will have substantial cash flows both from its portfolio of recently-developed real estate, and its airport and tollroads concession business. The real estate owned is largely unencumbered, and can be sold or mortgaged to meet capital needs going forward. In addition, Marriott International will provide Host Marriott with a $630 million revolving line of credit to provide financial flexibility and a $125 million mortgage loan to finance up to 60% of the construction and development costs of the Philadelphia Convention Center Marriott Hotel, scheduled for completion in January 1995. Financial Position Working Capital. The Company's ratio of current assets to current liabilities increased to 1.0 at January 1, 1993, compared to .80 at year-end 1991, primarily due to higher temporary cash investments, and new inventories of retirement condominiums and resort timeshares pending sale at year end 1992. In 1991, the Company generated over $117 million of cash through an aggressive working capital reduction program which included tightened credit policies, intensified receivable collection efforts and lower inventory levels. The program was continued in 1992, however, as expected, accounts receivable, inventories and other current assets increased due to business growth. The 1992 working capital cash flow of $36 million was primarily due to a low level of payables at year end 1991, due in part, to the 53 week fiscal year. Working capital and operating results of managed hotels operated with the Company's employees are consolidated because the operating responsibilities associated with such hotels are substantially the same as those for owned hotels. The consolidated financial statements include the following amounts related to managed hotels: current assets and current liabilities of $246 million at January 1, 1993, $269 million at January 3, 1992, and $282 million at December 28, 1990; sales of $2,896 million in 1992, $2,809 million in 1991 and $2,752 million in 1990; and operating expenses, including payments to owners, of $2,721 million in 1992, $2,616 million in 1991 and $2,553 million in 1990. Property and Equipment. Property and equipment, net of depreciation, declined by $386 million in 1992, reflecting the sale of 20 lodging properties during the year, depreciation expense, and a lower level of new unit construction for the Company's lodging and senior living services businesses. Debt. Long-term debt, including convertible subordinated debt, decreased $229 million in 1992 primarily due to repayment of the Company's revolving bank debt from cash generated from operations and asset sales, which significantly exceeded capital expenditures, and from the issuance of $400 million of long- term senior notes. The Company repaid $501 million of revolving bank debt and also prepaid $100 million of senior notes during 1992. A-10 In the first three quarters of 1993, the Company repaid its 8 3/4% Series H Senior Notes ($100 million) and its 9 1/8% Series J Senior Notes ($150 million). In 1992, the Company issued $200 million of 10% Series L Senior Notes due May 2012 and $200 million of 9 1/2% Series M Senior Notes due May 2002. Proceeds from the 1992 issuances were used primarily to repay other indebtedness, including $100 million of 11 1/8% Series A Senior Notes. In response to the Company's announcement of the Distribution, the Company's senior notes have been downgraded below investment grade by two debt ratings agencies, Moody's Investor Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P"). Moody's currently rates the Old Notes at B2 and the New Notes at B1, while S&P currently rates the Old Notes at B and the New Notes at BB-. The Company's existing loan agreements contain certain restrictive covenants including, among others, limitations on additional indebtedness and the pledging of assets. At the present time, the Company expects it will remain in compliance with all debt covenants. Shareholders' Equity. Shareholders' equity increased by $106 million in 1992 primarily as a result of earnings reinvested in the business and the issuance of common stock under various employee plans. Shareholders' equity increased $91 million in the first three quarters of 1993, principally due to earnings retained in the business and common stock issuances under employee plans. The Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," in the first quarter of fiscal 1993. The standard was implemented on a prospective basis. Its application increased shareholders' equity by approximately $30 million. Deferred income taxes decreased $112 million in the first three quarters of 1993, primarily due to the impact of implementing SFAS 109 and certain reclassifications. Inflation The rate of inflation has been moderate in recent years and, accordingly, has not had a significant impact on the Company's businesses. A-11 -------------------------------------------- BRAND AFFILIATIONS* * The Company's properties are operated under the brands "Marriott Hotels, Resorts and Suites," "Courtyard by Marriott," "Residence Inn" and "Fairfield Inn" pursuant to management agreements with Marriott International, Inc. These brand names, and the logos reproduced above, are registered trademarks of Marriott International, Inc. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN- FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDER- WRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITA- TION OF AN OFFER TO BUY, THE SHARES OFFERED HEREBY BY ANYONE IN ANY JURISDIC- TION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE AN IMPLI- CATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSE- QUENT TO ITS DATE. ---------------- TABLE OF CONTENTS
PAGE Prospectus Summary........................................................ 4 Risk Factors.............................................................. 9 The Company............................................................... 12 Use of Proceeds........................................................... 13 Dividend Policy........................................................... 13 Pro Forma Capitalization.................................................. 14 Pro Forma Financial Data.................................................. 15 Management's Discussion and Analysis of Pro Forma Financial Data.......... 21 Selected Historical Financial Data........................................ 23 Business and Properties................................................... 24 Legal Proceedings......................................................... 28 The Distribution.......................................................... 29 The Exchange Offer and Restructuring...................................... 29 Financing................................................................. 31 Relationship Between the Company and Marriott International............... 33 Management................................................................ 40 Certain Transactions...................................................... 48 Ownership of Company Securities........................................... 49 Description of Capital Stock.............................................. 50 Price Range of the Common Stock and Dividends............................. 55 Purposes and Antitakeover Effects of Certain Provisions of the Company Certificate and Bylaws and the Marriott International Purchase Right..... 55 Certain United States Federal Tax Consequences To Non-United States Hold- ers of Common Stock...................................................... 61 Underwriting.............................................................. 63 Legal Matters............................................................. 66 Experts................................................................... 66 Index to Financial Statements............................................. F-1 Management's Discussion and Analysis of Results of Operations and Finan- cial Condition........................................................... A-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 17,500,000 SHARES [LOGO] COMMON STOCK ---------------- PROSPECTUS ---------------- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MONTGOMERY SECURITIES SMITH BARNEY SHEARSON INC. BT SECURITIES CORPORATION JANUARY , 1994 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ + + +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] SUBJECT TO COMPLETION, DATED JANUARY 19, 1994 PROSPECTUS JANUARY , 1994 17,500,000 SHARES (LOGO TO COME) COMMON STOCK Of the 17,500,000 shares of Common Stock offered by the Company, 3,500,000 shares are being offered for sale outside the United States and Canada by the International Managers (the "International Offering") and 14,000,000 shares are being offered for sale in the United States and Canada in a concurrent offering by the U.S. Underwriters (the "U.S. Offering" and, together with the International Offering, the "Offerings"), subject to transfers between the U.S. Underwriters and the International Managers. See "Underwriting." The Common Stock of the Company is traded on the New York Stock Exchange and on the Chicago Stock Exchange, the Pacific Stock Exchange and the Philadelphia Stock Exchange under the symbol "HMT". On January 18, 1994, the last reported sale price of the Common Stock, as reported on the New York Stock Exchange Composite Tape, was $11.25 per share. See "Price Range of the Common Stock and Dividends." SEE "RISK FACTORS" FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. - -------------------------------------------------------------------------------- - -
PRICE UNDERWRITING PROCEEDS TO THE DISCOUNTS AND TO THE PUBLIC COMMISSIONS(1) COMPANY(2) - -------------------------------------------------------------------------------- - - Per Share...................................... $ $ $ Total (3)...................................... $ $ $ - -------------------------------------------------------------------------------- - -
(1) See "Underwriting" for indemnification arrangements with the Underwriters. (2) Before deducting expenses payable by the Company estimated at $ . (3) The Company has granted to the Underwriters an option to purchase up to 2,625,000 additional shares of Common Stock, on the same terms and conditions as set forth above, at the Price to the Public, less the Underwriting Discounts and Commissions, solely to cover over-allotments, if any. If the Underwriters exercise such option in full, the total Price to the Public, Underwriting Discounts and Commissions, and Proceeds to the Company will be $ , $ and $ , respectively. See "Underwriting." The shares are offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters and subject to various prior conditions, including the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares will be made in New York, New York on or about January , 1994. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MONTGOMERY SECURITIES SMITH BARNEY SHEARSON INC. BANKERS TRUST INTERNATIONAL PLC [ALTERNATE] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR- MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO- SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRIT- ERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SHARES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAK- ING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. --------------- TABLE OF CONTENTS
PAGE Prospectus Summary........................................................ 4 Risk Factors.............................................................. 9 The Company............................................................... 12 Use of Proceeds........................................................... 13 Dividend Policy........................................................... 13 Pro Forma Capitalization.................................................. 14 Pro Forma Financial Data.................................................. 15 Management's Discussion and Analysis of Pro Forma Financial Data.......... 21 Selected Historical Financial Data........................................ 23 Business and Properties................................................... 24 Legal Proceedings......................................................... 28 The Distribution.......................................................... 29 The Exchange Offer and Restructuring...................................... 29 Financing................................................................. 31 Relationship Between the Company and Marriott International............... 33 Management................................................................ 40 Certain Transactions...................................................... 48 Ownership of Company Securities........................................... 49 Description of Capital Stock.............................................. 50 Price Range of the Common Stock and Dividends............................. 55 Purposes and Antitakeover Effects of Certain Provisions of the Company Certificate and Bylaws and the Marriott International Purchase Right..... 55 Certain United States Federal Tax Consequences To Non-United States Hold- ers of Common Stock...................................................... 61 Underwriting.............................................................. 63 Legal Matters............................................................. 66 Experts................................................................... 66 Index to Financial Statements............................................. F-1 Management's Discussion and Analysis of Results of Operations and Finan- cial Condition........................................................... A-1
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 17,500,000 SHARES [LOGO] COMMON STOCK --------------- PROSPECTUS --------------- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MONTGOMERY SECURITIES SMITH BARNEY SHEARSON INC. BANKERS TRUST INTERNATIONAL PLC JANUARY , 1994 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following is an itemized statement of all expenses in connection with the issuance and distribution of the securities registered hereby. The information is subject to future contingencies. Registration Fee................................................... $ 58,988 NASD Fees.......................................................... $ 17,607 Blue Sky Fees and Expenses......................................... $ 15,000 Stock Exchange Fees................................................ $ 86,688 Legal Fees......................................................... $200,000 Accounting Fees.................................................... $100,000 Printing........................................................... $350,000 Miscellaneous...................................................... $ 21,717 -------- $850,000 ========
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS Article Eleventh and Article Sixteenth of the Company's Certificate and Section 7.7 of the Bylaws limit the personal liability of directors to the Company or its shareholders for monetary damages for breach of fiduciary duty. These provisions of the Company Certificate and Bylaws are collectively referred to herein as the "Director Liability and Indemnification Provisions." The Company Certificate and the Bylaws are included as exhibits to the Registration Statement on Form S-1 of which this Prospectus is a part. The Director Liability and Indemnification Provisions define and clarify the rights of certain individuals, including Company directors and officers, to indemnification by the Company in the event of personal liability or expenses incurred by them as a result of certain litigation against them. Such provisions are consistent with Section 102(b)(7) of the Delaware General Corporation Law, which is designed, among other things, to encourage qualified individuals to serve as directors of Delaware corporations by permitting Delaware corporations to include in their articles or certificates of incorporation a provision limiting or eliminating directors' liability for monetary damages and with other existing Delaware General Corporation Law provisions permitting indemnification of certain individuals, including directors and officers. The limitations of liability in the Director Liability and Indemnification Provisions may not affect claims arising under the federal securities laws. In performing their duties, directors of a Delaware corporation are obligated as fiduciaries to exercise their business judgment and act in what they reasonably determine in good faith, after appropriate consideration, to be the best interests of the corporation and its shareholders. Decisions made on that basis are protected by the so-called "business judgment rule." The business judgment rule is designed to protect directors from personal liability to the corporation or its shareholders when business decisions are subsequently challenged. However, the expense of defending lawsuits, the frequency with which unwarranted litigation is brought against directors and the inevitable uncertainties with respect to the outcome of applying the business judgment rule to particular facts and circumstances mean that, as a practical matter, directors and officers of a corporation rely on indemnity from, and insurance procured by, the corporation they serve, as a financial backstop in the event of such expenses or unforeseen liability. The Delaware legislature has recognized that adequate insurance and indemnity provisions are often a condition of an individual's willingness to serve as director of a Delaware corporation. The Delaware General Corporation Law has for some time specifically permitted corporations to provide indemnity and procure insurance for its directors and officers. Recent changes in the market for directors and officers liability insurance have resulted in the unavailability for directors and officers of many corporations of any meaningful liability insurance coverage. Insurance carriers have in certain cases declined to renew existing directors and officers liability policies, or have increased premiums to such an extent that the cost of obtaining such insurance becomes prohibitive. Moreover, current policies often exclude coverage for areas where the service of qualified independent II-1 directors is most needed. For example, many policies do not cover liabilities or expenses arising from directors' and officers' activities in response to attempts to take over a corporation. Such limitations on the scope of insurance coverage, along with high deductibles and low limits of liability, have undermined meaningful directors and officers liability insurance coverage. The unavailability of meaningful directors and officers liability insurance is attributable to a number of factors, many of which are affecting the liability insurance industry generally, including granting of unprecedented damages awards and reduced investment income on insurance company investments. According to published sources, the inability of corporations to provide meaningful directors and officers liability insurance has had a damaging effect on the ability of public corporations to recruit and retain corporate directors. Although the Company has not directly experienced this problem, the Company believes it is necessary to take every possible step to ensure that it will be able to attract the best possible officers and directors. Set forth below is a description of the Director Liability and Indemnification Provisions. Such description is intended as a summary only and is qualified in its entirety by reference to the Company Certificate and the Bylaws. Elimination of Liability in Certain Circumstances. Article Sixteenth of the Company Certificate protects directors against monetary damages for breaches of their fiduciary duty of care, except as set forth below. Under the Delaware General Corporation Law, absent such limitation of liability provisions as are provided in Article Sixteenth, directors could generally be held liable for gross negligence for decisions made in the performance of their duty of care but not for simple negligence. Article Sixteenth eliminates liability of directors for negligence in the performance of their duties, including gross negligence. In a context not involving a decision by the directors (i.e., a suit alleging loss to the Company due to the directors' inattention to a particular matter) a simple negligence standard might apply. Directors remain liable for breaches of their duty of loyalty to the Company and its shareholders, as well as acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law and transactions from which a director derives improper personal benefit. Article Sixteenth does not eliminate director liability under Section 174 of the Delaware General Corporation Law, which makes directors personally liable for unlawful dividends or unlawful stock repurchases or redemptions and expressly sets forth a negligence standard with respect to such liability. While the Director Liability and Indemnification Provisions provide directors with protection from awards of monetary damages for breaches of the duty of care, they do not eliminate the directors' duty of care. Accordingly, these provisions will have no effect on the availability of equitable remedies such as an injunction or rescission based upon a director's breach of the duty of care. The provisions of Article Sixteenth, which eliminates liability as described above, will apply to officers of the Company only if they are directors of the Company and are acting in their capacity as directors, and will not apply to officers of the Company who are not directors. The elimination of liability of directors for monetary damages in the circumstances described above may deter persons from bringing third-party or derivative actions against directors to the extent such actions seek monetary damages. Indemnification and Insurance. Under Section 145 of the Delaware General Corporation Law, directors and officers as well as other employees and individuals may be indemnified against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with specified actions, suits or proceedings, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation--a "derivative action") if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard of care is applicable in the case of the derivative actions, except that indemnification only extends to expenses (including attorneys' fees) incurred in connection with defense or settlement of such an action, and II-2 the Delaware General Corporation Law requires court approval before there can be any indemnification where the person seeking indemnification has been found liable to the corporation. Section 7.7 of the Bylaws provides that the Company shall indemnify any person to whom, and to the extent, indemnification may be granted pursuant to Section 145 of the Delaware General Corporation Law. Article Eleventh of the Company Certificate provides that a person who was or is made a party to, or is involved in, any action, suit or proceeding by reason of the fact that he is or was a director, officer or employee of the Company will be indemnified by the Company against all expenses and liabilities, including counsel fees, reasonably incurred by or imposed upon him, except in such cases where the director, officer or employee is adjudged guilty of willful misconduct or malfeasance in the performance of his duties. Article Eleventh also provides that the right of indemnification shall be in addition to and not exclusive of all other rights to which such director, officer or employee may be entitled. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES None. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS
EXHIBIT NO. DESCRIPTION ----------- ----------- ***1. Form of Underwriting Agreement between the Company and the Representatives of the Underwriters. 2.(i) Memorandum of Understanding between Marriott Corporation and Certain Bondholders dated as of March 10, 1993 (incorporated by reference to Current Report on Form 8-K dated March 17, 1993). 2.(ii) Stipulation and Agreement of Compromise and Settlement (incorporated by reference to Registration Statement No. 33-62444). 3.1 Restated Certificate of Incorporation of Host Marriott Corporation (incorporated by reference to Current Report on Form 8-K dated October 23, 1993). 3.2 Amended Host Marriott Corporation Bylaws (incorporated by reference to Current Report on Form 8-K dated October 23, 1993). 4.1(i) Indenture between Marriott Corporation and The First National Bank of Chicago dated as of March 1, 1985 (incorporated by reference to Registration Statement No. 2- 97034). 4.1(ii) Second Supplemental Indenture between Marriott Corporation and The First National Bank of Chicago dated as of February 1, 1986 (incorporated by reference to Current Report on Form 8-K dated February 4, 1986). 4.1(iii) Third Supplemental Indenture between Marriott Corporation and The First National Bank of Chicago dated as of December 1, 1986 (incorporated by reference to Current Report on Form 8-K dated December 10, 1986). 4.1(iv) Fourth Supplemental Indenture between Marriott Corporation and The First National Bank of Chicago dated as of May 1, 1987 (incorporated by reference to Current Report on Form 8-K dated May 7, 1987). 4.1(v) Fifth Supplemental Indenture between Marriott Corporation and The First National Bank of Chicago dated as of June 12, 1987 (incorporated by reference to Current Report on Form 8-K dated June 18, 1987). 4.1(vi) Sixth Supplemental Indenture between Marriott Corporation and The First National Bank of Chicago dated as of October 23, 1987 (incorporated by reference to Current Report on Form 8-K dated October 30, 1987).
II-3
EXHIBIT NO. DESCRIPTION ----------- ----------- 4.1(vii) Seventh Supplemental Indenture between Marriott Corporation and The First National Bank of Chicago dated as of January 15, 1988 (incorporated by reference to Current Report on Form 8-K dated January 26, 1988). 4.1(viii) Eighth Supplemental Indenture between Marriott Corporation and The First National Bank of Chicago dated as of February 1, 1988 (incorporated by reference to Current Report on Form 8-K dated February 8, 1988). 4.1(ix) Ninth Supplemental Indenture between Marriott Corporation and The First National Bank of Chicago dated as of May 1, 1988 (incorporated by reference to Current Report on Form 8-K dated May 9, 1988). 4.1(x) Tenth Supplemental Indenture between Marriott Corporation and The First National Bank of Chicago dated as of May 2, 1988 (incorporated by reference to Current Report on Form 8-K dated May 24, 1988). 4.1(xi) Eleventh Supplemental Indenture between Marriott Corporation and The First National Bank Chicago dated as of August 27, 1990 (incorporated by reference to Current Report on Form 8-K dated September 4, 1990). 4.1(xii) Twelfth Supplemental Indenture between Marriott Corporation and The First National Bank of Chicago dated as of July 11, 1991 (incorporated by reference to Current Report on Form 8-K dated July 19, 1991). 4.1(xiii) Thirteenth Supplemental Indenture between Marriott Corporation and The First National Bank of Chicago dated as of April 22, 1992 (incorporated by reference to Current Report on Form 8-K dated April 29, 1992). 4.1(xiv) Fourteenth Supplemental Indenture between Marriott Corporation and The First National Bank of Chicago dated as of April 28, 1992 (incorporated by reference to Current Report on Form 8-K dated May 5, 1992). 4.1(xv) Fifteenth Supplemental Indenture between Marriott Corporation and Bank One, Columbus, NA. dated as of October 8, 1993 (incorporated by reference to Current Report on Form 8-K dated October 23, 1993). 4.2(i) Indenture between Marriott Corporation and Chemical Bank dated as of June 5, 1991 (incorporated by reference to Registration Statement No. 33-39858). 4.2(ii) First Supplemental Indenture dated as of September 30, 1993 among Marriott Corporation, Chemical Bank and Marriott International, Inc. (incorporated by reference to Current Report on Form 8-K dated October 23, 1993). 4.3(i) Marriott Corporation Certificate of Designation of the Series A Cumulative Convertible Preferred Stock dated December 17, 1991 (incorporated by reference to Current Report on Form 8-K dated December 23, 1991). 4.3(ii) Marriott Corporation Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (incorporated by reference to Registration Statement No. 33-39858). 4.4(i) Rights Agreement between Marriott Corporation and the Bank of New York as Rights Agent dated February 3, 1989 (incorporated by reference to Registration Statement No. 33-62444). ***4.4(ii) First Amendment to Rights Agreement between Marriott Corporation and Bank of New York as Rights Agent dated as of October 8, 1993. 4.5 Indenture by and among Host Marriott Hospitality, Inc., as Issuer, HMH Holdings, Inc., as Parent Guarantor, HMH Properties, Inc., Host Marriott Travel Plazas, Inc., Gladieux Corporation, Host International, Inc., Marriott Family Restaurants, Inc., Marriott Financial Services, Inc., HMH Courtyard Properties, Inc., and Marriott Retirement Communities, Inc. and certain of their Subsidiaries as Subsidiary Guarantors and Marine Midland Bank, N.A., as Trustee, with respect to the New Notes (including the Form of New Notes) (incorporated by reference to Current Report on Form 8-K dated October 23, 1993).
II-4
EXHIBIT NO. DESCRIPTION ----------- ----------- ***5 Opinion of Stephen J. McKenna, Esq. as to legality of securities being registered. ***7 Opinion of Potter, Anderson & Corroon as to liquidation preference of Series A Cumulative Convertible Preferred Stock. 10.1 Marriott Corporation Executive Deferred Compensation plan dated as of December 6, 1990 (incorporated by reference to Exhibit 19(i) of the Annual Report on Form 10-K for the fiscal year ended December 28, 1991). 10.2 Host Marriott Corporation 1993 Comprehensive Stock Incentive Plan effective as of October 8, 1993 (incorporated by reference to Current Report on Form 8-K dated October 23, 1993). 10.3 Distribution Agreement dated as of September 15, 1993 between Marriott Corporation and Marriott International, Inc. (incorporated by reference to Current Report on Form 8-K dated October 23, 1993). 10.4 Tax Sharing Agreement dated as of October 5, 1993 by and between Marriott Corporation and Marriott International, Inc. (incorporated by reference to Current Report on Form 8-K dated October 23, 1993). 10.5 Assignment and License Agreement dated as of October 8, 1993 by and between Marriott Corporation and Marriott International, Inc. (incorporated by reference to Current Report on Form 8-K dated October 23, 1993). 10.6 Corporate Services Agreement dated as of October 8, 1993 by and between Marriott Corporation and Marriott International, Inc. (incorporated by reference to Current Report on Form 8-K dated October 23, 1993). 10.7 Procurement Services Agreement dated as of October 8, 1993 by and between Marriott Corporation and Marriott International, Inc. (incorporated by reference to Current Report on Form 8-K dated October 23, 1993). 10.8 Supply Agreement dated as of October 8, 1993 by and between Marriott Corporation and Marriott International, Inc. (incorporated by reference to Current Report on Form 8-K dated October 23, 1993). 10.9 Casualty Claims Administration Agreement dated as of October 8, 1993 by and between Marriott Corporation and Marriott International, Inc. (incorporated by reference to Current Report on Form 8-K dated October 23, 1993). 10.10 Employee Benefits Administration Agreement dated as of October 8, 1993 by and between Marriott Corporation and Marriott International, Inc. (incorporated by reference to Current Report on Form 8-K dated October 23, 1993). 10.11 Tax Administration Agreement dated as of October 8, 1993 by and between Marriott Corporation and Marriott International, Inc. (incorporated by reference to Current Report on Form 8-K dated October 23, 1993). 10.12 Employee Benefits and Other Employment Matters Allocation Agreement dated as of October 8, 1993 by and between Marriott Corporation and Marriott International, Inc. (incorporated by reference to Current Report on Form 8-K dated October 23, 1993). 10.13 Noncompetition Agreement dated as of October 8, 1993 by and between Marriott Corporation and Marriott International, Inc. (incorporated by reference to Current Report on Form 8-K dated October 23, 1993). +*10.14(i) Host Marriott Lodging Management Agreement--Marriott Hotels, Resorts and Suites by and between Marriott Corporation and Marriott International, Inc. dated September 25, 1993. +***10.14(ii) Host Marriott Lodging Management Agreement--Courtyard Hotels by and between Marriott Corporation and Marriott International, Inc. dated September 25, 1993. +***10.14(iii) Host Marriott Lodging Management Agreement--Residence Inns by and between Marriott Corporation and Marriott International, Inc. dated September 25, 1993. +***10.14(iv) Host Marriott Lodging Management Agreement--Fairfield Inns by and between Marriott Corporation and Marriott International, Inc. dated September 25, 1993. ***10.15(i) Consolidation Letter Agreement pertaining to Courtyard Hotels dated September 25, 1993 between a subsidiary of Marriott International, Inc. and a subsidiary of the Company.
II-5
EXHIBIT NO. DESCRIPTION ----------- ----------- ***10.15(ii) Consolidation Letter Agreement pertaining to Residence Inns dated September 25, 1993 between a subsidiary of Marriott International, Inc. and a subsidiary of the Company. ***10.15(iii) Consolidation Letter Agreement pertaining to Fairfield Inns dated September 25, 1993 between a subsidiary of Marriott International, Inc. and a subsidiary of the Company. +***10.16 Marriott Senior Living Services Facilities Lease by and between Marriott Corporation and Marriott International, Inc. 10.17(i) Line of Credit and Guarantee Reimbursement Agreement by and among HMH Holdings, Inc. as borrower, Marriott International, Inc. as lender and Host Marriott Corporation and certain subsidiaries as guarantors dated as of October 8, 1993 (incorporated by reference to Current Report on Form 8-K dated October 23, 1993). ***10.17(ii) Form of Amendment No. 1 to Line of Credit and Guarantee Reimbursement Agreement among HMH Holdings, Inc. as Borrower, Marriott International, Inc. as Lender and Host Marriott Corporation; HMC Acquisitions, Inc.; Host Marriott GTN Corporation; Host La Jolla, Inc.; Marriott Properties, Inc. and Willmar Distributors, Inc. as Guarantors. *10.18 Philadelphia Convention Center Hotel Mortgage dated as of October 8, 1993 by and between Philadelphia Market Street Marriott Hotel Limited Partnership and Marriott International, Inc. 10.19 LYONs Allocation Agreement dated as of September 30, 1993 by and between Marriott Corporation and Marriott International, Inc. (incorporated by reference to Current Report on Form 8-K dated October 23, 1993) 10.20 Host Consulting Agreement dated as of October 8, 1993 by and between Marriott Corporation and Marriott International, Inc. (incorporated by reference to Current Report on Form 8-K dated October 23, 1993) 10.21 Architecture and Construction Services Agreement dated as of October 8, 1993 by and between Marriott Corporation and Marriott International, Inc. (incorporated by reference to Current Report on Form 8-K dated October 23, 1993) 10.22 Marriott/Host Marriott Employees' Profit Sharing Retirement and Savings Plan and Trust (incorporated by reference to Registration Statement No. 33-62444). ***10.23 Working Capital Agreement by and between Host Marriott Corporation and Marriott International, Inc. dated as of September 25, 1994. *11. Statement re: Computation of Per Share Earnings *22. Subsidiaries of Host Marriott Corporation. ***23.1 Consent of Arthur Andersen & Co. ***23.2 Consent of Stephen J. McKenna, Esq. (included in his opinion filed as exhibit 5). ***23.3 Consent of Potter, Anderson & Corroon (included in its opinion filed as exhibit 7). 24 Powers of Attorney (included on the signature pages on II-8 and II-9).
- -------- * Filed on December 23, 1993 ** Filed on January 4, 1994 *** Filed herewith + Agreement filed is illustrative of numerous other agreements to which the Company is a party. II-6 (B) FINANCIAL STATEMENTS SCHEDULES The following consolidated financial statement schedules of Host Marriott Corporation are included: Schedule V--Property, plant and equipment Schedule VI--Accumulated depreciation and depletion of property, plant and equipment Schedule X--Supplementary Income Statement Information All other schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. ITEM 17: UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of registrant pursuant to the provisions described under Item 14 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of such registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BETHESDA, STATE OF MARYLAND, ON JANUARY 19, 1994. Host Marriott Corporation /s/ Matthew J. Hart By___________________________________ MATTHEW J. HART Executive Vice President and Chief Financial Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURES TITLE DATE * President, Chief - ------------------------------------- Executive Officer January 19, STEPHEN F. BOLLENBACH (Principal 1994 Executive Officer) and Director /s/ Matthew J. Hart Executive Vice - ------------------------------------- President and Chief January 19, MATTHEW J. HART Financial Officer 1994 (Principal Financial Officer) Senior Vice * President--Finance January 19, - ------------------------------------- and Corporate 1994 JEFFREY P. MAYER Controller (Principal Accounting Officer) II-8 SIGNATURES TITLE DATE * Chairman of the - ------------------------------------- Board of Directors January 19, RICHARD E. MARRIOTT 1994 * Director - ------------------------------------- January 19, R. THEODORE AMMON 1994 * Director - ------------------------------------- January 19, J.W. MARRIOTT, JR. 1994 Director - ------------------------------------- January 19, ANNE DORE MCLAUGHLIN 1994 * Director - ------------------------------------- January 19, HARRY L. VINCENT 1994 * Director - ------------------------------------- January 19, ANDREW J. YOUNG 1994 /s/ Matthew J. Hart *By: ________________________________ January 19, MATTHEW J. HART 1994 Attorney-in-fact II-9 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES TO HOST MARRIOTT CORPORATION: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements of Host Marriott Corporation and subsidiaries (formerly Marriott Corporation), included in this registration statement and have issued our report thereon dated March 10, 1993. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedules appearing on pages S-2 through S-5 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen & Co. Washington, D.C. March 10, 1993 S-1 SCHEDULE V HOST MARRIOTT CORPORATION AND SUBSIDIARIES PROPERTY AND EQUIPMENT (IN MILLIONS)
ADDITIONS AT COST ---------------------- BALANCE BALANCE BEGINNING OTHER RETIREMENTS TRANSFERS AT END OF CLASSIFICATION OF YEAR ACQUISITIONS ADDITIONS OR SALES AND OTHER YEAR -------------- --------- ------------ --------- ----------- --------- --------- For Fiscal Year Ended December 28, 1990 Land and Land Improve- ments................ $ 730 $ 20 $ 106 $ (61) $ (6) $ 789 Buildings and Lease- hold Improvements.... 1,184 79 817 (396) 510 2,194 Furniture and Equip- ment................. 631 14 180 (120) 132 837 Construction in Proc- ess.................. 1,213 -- -- -- (582) 631 ------- ---- ------ ----- ----- ------ Total Property and Equipment.......... $ 3,758 $113 $1,103 $(577)(1) $ 54 (2) $4,451 ======= ==== ====== ===== ===== ====== For Fiscal Year Ended January 3, 1992 Land and Land Improve- ments................ $ 789 $-- $ 69 $ (44) $ -- 814 Buildings and Lease- hold Improvements.... 2,194 -- 256 (51) 89 2,488 Furniture and Equip- ment................. 837 -- 83 (52) 33 901 Construction in Proc- ess.................. 631 -- -- (13) (194) 424 ------- ---- ------ ----- ----- ------ Total Property and Equipment.......... $ 4,451 $-- $ 408 $(160)(3) $ (72) $4,627 ======= ==== ====== ===== ===== ====== For Fiscal Year Ended January 1, 1993 Land and Land Improve- ments................ $ 814 $-- $ 29 $ (69) $ 2 $ 776 Buildings and Lease- hold Improvements.... 2,488 28 112 (264) 186 2,550 Furniture and Equip- ment................. 901 12 44 (113) 55 899 Construction in Proc- ess.................. 424 -- -- (6) (285) 133 ------- ---- ------ ----- ----- ------ Total Property and Equipment.......... $ 4,627 $ 40 $ 185 $(452)(4) $ (42) $4,358 ======= ==== ====== ===== ===== ======
- -------- (1) Principally sale to investors of 63 hotels that the Company continued to operate under long-term agreements, and sale of the fast food restaurant division. (2) Principally excess of proceeds from sale of fast food restaurant division over net book value. (3) Principally sale of family restaurants and four Courtyard hotels that the Company continued to operate under a long-term agreement. (4) Principally sale of seven full service hotels and sale/leaseback of thirteen Courtyard hotels. S-2 SCHEDULE VI HOST MARRIOTT CORPORATION AND SUBSIDIARIES ACCUMULATED DEPRECIATION AND AMORTIZATION PROPERTY AND EQUIPMENT (IN MILLIONS)
BALANCE AT INCREASES BEGINNING CHARGED TO RETIREMENTS TRANSFERS BALANCE AT CLASSIFICATION OF YEAR INCOME OR SALES AND OTHER END OF YEAR -------------- ---------- ---------- ----------- --------- ----------- For Fiscal Year Ended December 28, 1990 Buildings and Lease- hold Improvements... $225 $ 68 $(12) $ -- $281 Furniture and Equip- ment................ 276 104 (39) -- 341 ---- ---- ---- ----- ---- Total Accumulated Depreciation and Amortization...... $501 $172 $(51) $ -- $622 ==== ==== ==== ===== ==== For Fiscal Year Ended January 3, 1992 Buildings and Lease- hold Improvements... $281 $ 91 $ (8) $ -- $364 Furniture and Equip- ment................ 341 120 (42) (3) 416 ---- ---- ---- ----- ---- Total Accumulated Depreciation and Amortization...... $622 $211 $(50) $ (3) $780 ==== ==== ==== ===== ==== For Fiscal Year Ended January 1, 1993 Buildings and Lease- hold Improvements... $364 $ 96 $(32) $ (3) $425 Furniture and Equip- ment................ 416 121 (64) (1) 472 ---- ---- ---- ----- ---- Total Accumulated Depreciation and Amortization...... $780 $217 $(96) $ (4) $897 ==== ==== ==== ===== ====
S-3 SCHEDULE IX HOST MARRIOTT CORPORATION AND SUBSIDIARIES SHORT-TERM BORROWINGS (DOLLARS IN MILLIONS)
WEIGHTED MAXIMUM AVERAGE AVERAGE AMOUNT AMOUNT INTEREST WEIGHTED OUTSTANDING OUTSTANDING RATE CATEGORY OF AGGREGATE BALANCE AT AVERAGE DURING DURING DURING SHORT-TERM BORROWINGS(A) END OF YEAR INTEREST RATE THE YEAR THE YEAR THE YEAR - ------------------------ ----------- ------------- ----------- ----------- -------- For Fiscal Year Ended December 28, 1990 Primarily Commercial Paper................ $61 8.7% $1,646 $1,194 8.7% For Fiscal Year Ended January 3, 1992 Primarily Commercial Paper................ $-- --% $ 95 $ 12 8.0% For Fiscal Year Ended January 1, 1993 Primarily Commercial Paper................ $-- --% $ -- $ -- -- %
- -------- (a) The Company classifies short-term borrowings as noncurrent indebtedness to the extent funds are available under its revolving loan agreements maturing beyond one year. S-4 SCHEDULE X HOST MARRIOTT CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INCOME STATEMENT INFORMATION (IN MILLIONS)
ITEM 1992 1991 1990 ---- ---- ---- ---- Maintenance, repairs and minor replacements...................... $253 $243 $224 Real and personal property taxes, licenses, etc.................. 193 183 149 Advertising expenses............................................. 256 253 228
S-5 GRAPHICS APPENDIX LIST EDGAR Version Typeset Version - ------------- --------------- Inside Front Cover - Photo of a Residence Inn with a Six-photo layout with captions caption: "Residence Inns have (clockwise from top left): approximately 120 suites and resemble garden apartments. They are designed for the extended stay market." Photo of a Courtyard by Marriott hotel with a caption: "Courtyard by Marriott hotels are moderately priced for the business transient market. Each Courtyard has approx- imately 150 guestrooms." Photo of the New York Marriott Mar- quis with a caption: "The New York Marriott Marquis has 1,871 guest- rooms and over 80,000 square feet of meeting space." Photo of a Fairfield Inn with a caption: "Fairfield Inns are designed for the economy minded traveler and have approximately 120 guestrooms." Photo of the San Francisco Marriott with a caption: "The San Francisco Marriott has 1,500 guestrooms and is directly adjacent to the Moscone Convention Center." Photo of the Fort Lauderdale Marina Marriott with a caption: "The Fort Lauderdale Marina Marriott has 580 guestrooms. The Company recently acquired this property. Inside back cover - Layout of the Host Marriott Cor- poration logo with the caption "Brand Affiliations" centered over the following logos: starting from top left: Marriott Hotels, Resorts and Suites; Courtyard by Marriott; Residence Inn and Fairfield Inn. Underneath, a caption reads as follows: "The Company's properties are operated under the brands "Marriott Hotels, Resorts and Suites," "Courtyard by Marriott," "Residence Inn" and "Fairfield Inn" pursuant to management agreements with Marriott International, Inc. These brand names, and the logos reproduced above, are registered trademarks of Marriott Internation- al, Inc." EX-1 2 EXHIBIT 1 Exhibit 1 17,500,000 Shares Host Marriott Corporation Common Stock ($1.00 Par Value) UNDERWRITING AGREEMENT ---------------------- January __, 1994 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MONTGOMERY SECURITIES SMITH BARNEY SHEARSON INC. BT SECURITIES CORPORATION As representatives of the several U.S. Underwriters named in Schedule I hereto c/o Donaldson, Lufkin & Jenrette Securities Corporation 140 Broadway New York, New York 10005 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MONTGOMERY SECURITIES SMITH BARNEY SHEARSON INC. BANKERS TRUST INTERNATIONAL PLC As representatives of the several international managers named in Schedule II hereto c/o Donaldson, Lufkin & Jenrette Securities Corporation Moorgate Hall 155 Moorgate London EC2M 6XB England Ladies and Gentlemen: Host Marriott Corporation, a Delaware corporation (the "Company"), confirms its agreement with the several Underwriters (as defined below) as follows: 1. The Shares. Subject to the terms and conditions herein set forth, ---------- the Company proposes to sell to the Underwriters an aggregate of 17,500,000 shares (the "Firm Shares") of common stock, $1.00 par value per share, of the Company (the "Common Stock"). It is understood that, subject to the conditions hereinafter stated, 14,000,000 Firm Shares (the "U.S. Firm Shares") will be sold to the several U.S. Underwriters named in Schedule I hereto (the "U.S. Underwriters") in connection with the offering and sale of such U.S. Firm Shares in the United States and Canada to United States and Canadian Persons (as such terms are defined in the Agreement Between U.S. Underwriters and International Managers of even date herewith), and 3,500,000 Firm Shares (the "International Shares") will be sold to the several International Managers named in Schedule II hereto (the "International Managers") in connection with the offering and sale of such International Shares outside the United States and Canada to persons other than United States and Canadian Persons. Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), Montgomery Securities, Smith Barney Shearson Inc. and BT Securities Corporation shall act as representatives (the "U.S. Representatives") of the several U.S. Underwriters, and DLJ, Montgomery Securities, Smith Barney Shearson Inc. and Bankers Trust International PLC shall act as representatives (the "International Representatives" and, together with the U.S. Representatives, the "Representatives") of the several International Managers. The U.S. Underwriters and the International Managers are hereinafter collectively referred to as the "Underwriters." The Company also proposes to sell to the several U.S. Underwriters an aggregate of not more than 2,625,000 additional shares of Common Stock (the "Additional Shares"), if requested by the U.S. Underwriters as provided in Section 3 hereof. The Firm Shares and the Additional Shares are herein collectively called the "Shares." 2. Registration Statement and Prospectus. The Company has prepared and ------------------------------------- filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Act"), a registration statement on Form S-1 (No. 33-51707), including a prelimi- 2 nary prospectus, subject to completion, relating to the Shares. The registration statement contains two prospectuses to be used in connection with the offering and sale of the Shares: the U.S. prospectus, to be used in connection with the offering and sale of Shares in the United States and Canada to United States and Canadian Persons, and the international prospectus, to be used in connection with the offering and sale of Shares outside the United States and Canada to persons other than United States and Canadian Persons. The international prospectus is identical to the U.S. prospectus except for the outside front and back cover pages. The registration statement, as amended at the time it becomes effective or, if a post-effective amendment is filed with respect thereto, as amended by such post-effective amendment at the time of its effectiveness, including in each case financial statements and exhibits, and the information (if any) contained in a prospectus subsequently filed with the Commission pursuant to Rule 424(b) under the Act and deemed to be a part of the registration statement at the time of its effectiveness pursuant to Rule 430A under the Act, is hereinafter referred to as the "Registration Statement;" and the U.S. prospectus and the international prospectus in the respective forms used to confirm sales of the Shares, whether or not filed with the Commission pursuant to Rule 424(b) under the Act, are hereinafter referred to as the "Prospectus." 3. Agreements to Sell and Purchase. On the basis of the ------------------------------- representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to issue and sell to each of the U.S. Underwriters, and each of the U.S. Underwriters agrees, severally and not jointly, to purchase from the Company, at a price per share of $_______ (the "Purchase Price") the aggregate number of Firm Shares set forth opposite the name of such U.S. Underwriter in Schedule I hereto. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company hereby agrees to issue and sell the International Shares to the International Managers, and each of the International Managers agrees, severally and not jointly, to purchase from the Company at the Purchase Price the aggregate number of Firm Shares set forth opposite the name of such International Manager in Schedule II hereto. On the basis of the representations and warranties contained in this Agreement, and subject to the terms and conditions hereof, the Company agrees to issue and sell to the U.S. Underwriters up to 2,625,000 Additional Shares, and the U.S. Underwriters shall have a right to purchase, severally and not jointly, from time to time, up to an aggregate of 2,625,000 Additional Shares at the Pur- 3 chase Price. Additional Shares may be purchased as provided in Section 4 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. If any Additional Shares are to be purchased, each U.S. Underwriter, severally and not jointly, agrees to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as the U.S. Representatives may determine) which bears the same proportion to the total number of Additional Shares to be purchased as the number of U.S. Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto bears to the total number of U.S. Firm Shares. The Company hereby agrees, and the Company shall, concurrently with the execution of this Agreement, deliver an agreement executed by each of the directors and executive officers of the Company pursuant to which each such person will agree, not to, without the prior written consent of DLJ, directly or indirectly, offer, sell, contract to sell, grant any option to purchase or otherwise dispose of any shares of Common Stock, or any securities convertible into or exercisable or exchangeable for, or warrants, options or rights to purchase or acquire, Common Stock or enter into any agreement to do any of the foregoing, for a period of 90 days after the date of the Prospectus, except (A) pursuant to this Agreement, (B) pursuant to stock options or stock option plans referred to in the Prospectus or (C) warrants or convertible securities, and Common Stock issuable upon exercise of warrants, issued or to be issued in connection with the settlement of the Class Action Lawsuits (as defined in the Prospectus). The Company is advised by you that the Underwriters propose (i) to make a public offering of their respective portions of the Shares as soon after the effective date of the Registration Statement as in your judgment is advisable and (ii) initially to offer the Shares upon the terms set forth in the Prospectus. Each U.S. Underwriter hereby makes to the Company the representations and agreements of such U.S. Underwriter contained in the fifth paragraph of Section 3 of the Agreement Between U.S. Underwriters and International Managers of even date herewith. Each International Manager hereby makes to the Company the representations and agreements of such International Underwriter contained in the seventh, eighth, ninth and tenth paragraphs of Section 3 of such Agreement. 4. Delivery and Payment. Delivery to you of and payment for the Firm -------------------- Shares shall be made at 9:00 A.M., New York City time, on the fifth 4 business day (such time and date being referred to as the "Closing Date") following the date of the initial public offering of the Firm Shares as advised by DLJ to the Company, at such place as you shall reasonably designate. The Closing Date and the location of delivery of the Firm Shares may be varied by agreement between DLJ and the Company. Delivery to the U.S. Underwriters of and payment for any Additional Shares to be purchased by the U.S. Underwriters shall be made at such place as DLJ shall designate, at 9:00 A.M., New York City time, on such date or dates (individually, an "Option Closing Date"), which may be the same as the Closing Date but shall in no event be earlier than the Closing Date and shall in no event be later than ten business days after the giving of the notice hereinafter referred to, as shall be specified in a written notice from DLJ to the Company of the U.S. Underwriters' determination to purchase a number, specified in said notice, of Additional Shares. Any such notice may be given at any time within 30 days after the date of this Agreement. Any Option Closing Date and the location of delivery of and payment for the Additional Shares may be varied by agreement among DLJ and the Company. Certificates for the Shares shall be registered in such names and issued in such denominations as you shall request in writing not later than two full business days prior to the Closing Date or the applicable Option Closing Date, as the case may be, and shall be made available to you at the offices of DLJ (or such other place as shall be acceptable to you) for inspection not later than 9:30 A.M., New York City time, on the business day next preceding the Closing Date or the applicable Option Closing Date, as the case may be. Certificates in definitive form evidencing the Shares shall be delivered to you on the Closing Date or the applicable Option Closing Date, as the case may be, with any transfer taxes payable upon initial issuance thereof duly paid by the Company, for the respective accounts of the Underwriters against payment of the Purchase Price by check or checks payable in New York Clearing House or similar next day funds, to the order of the Company. 5. Agreements of the Company. The Company agrees with each ------------------------- Underwriter that: (a) It will, if the Registration Statement has not heretofore become effective under the Act, file an amendment to the Registration Statement or, if necessary pursuant to Rule 430A under the Act, a post-effective amendment to the Registration Statement, in each case as soon as practica- 5 ble after the execution and delivery of this Agreement, and will use its reasonable best efforts to cause the Registration Statement or such post-effective amendment to become effective at the earliest possible time. The Company will comply fully and in a timely manner with the applicable provisions of Rule 424 and Rule 430A under the Act. (b) It will advise you promptly and, if requested by any of you, confirm such advice in writing, (i) when the Registration Statement has become effective, if and when the Prospectus is sent for filing pursuant to Rule 424 under the Act and when any post-effective amendment to the Registration Statement becomes effective, (ii) of the receipt of any comments from the Commission or any state securities commission or regulatory authority that relate to the Registration Statement or requests by the Commission or any state securities commission or regulatory authority for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, or of the suspension of qualification of the Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for such purpose by the Commission or any state securities commission or other regulatory authority, and (iv) of the happening of any event during such period as in your reasonable judgment you are required to deliver a prospectus in connection with sales of the Shares by you which makes any statement of a material fact made in the Registration Statement untrue or which requires the making of any additions to or changes in the Registration Statement (as amended or supplemented from time to time) in order to make the statements therein not misleading or that makes any statement of a material fact made in the Prospectus (as amended or supplemented from time to time) untrue or which requires the making of any additions to or changes in the Prospectus (as amended or supplemented from time to time) in order to make the statements therein, in light of the circumstances under which they were made, not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption of the Shares under any state securities or Blue Sky laws, the Company shall use its reasonable efforts to obtain the withdrawal or lifting of such order at the earliest possible time. 6 (c) It will furnish to you without charge two (2) signed copies (plus one (1) additional signed copy to your legal counsel) of the Registration Statement as first filed with the Commission and of each amendment to it, including all exhibits filed therewith, and will furnish to you such number of conformed copies of the Registration Statement as so filed and of each amendment to it, without exhibits, as you may reasonably request. (d) It will not file any amendment or supplement to the Registration Statement, whether before or after the time when it becomes effective, or make any amendment or supplement to the Prospectus, of which you shall not previously have been advised and provided a copy within a reasonable period of time prior to the filing thereof or to which you shall, after being so advised, reasonably object in writing, unless, in the reasonable judgment of the Company and its counsel, such amendment or supplement is necessary to comply with law; and it will prepare and file with the Commission, promptly upon your reasonable request, any amendment to the Registration Statement or supplement to the Prospectus which may be necessary or advisable in connection with the distribution of the Shares by you, and will use its reasonable best efforts to cause the same to become effective as promptly as possible. (e) Promptly after the Registration Statement becomes effective, and from time to time thereafter for such period in your reasonable judgment as a prospectus is required to be delivered in connection with sales of the Shares by you, it will furnish to each Underwriter and dealer without charge as many copies of the Prospectus (and of any amendment or supplement to the Prospectus) as such Underwriters and dealers may reasonably request for the purposes contemplated by the Act. The Company consents to the use of the Prospectus and any amendment or supplement thereto by any Underwriter or any dealer, both in connection with the offering or sale of the Shares and for such period of time thereafter as the Prospectus is required by the Act to be delivered in connection therewith. (f) If during such period as in your reasonable judgment you are required to deliver a prospectus in connection with sales of the Shares by you any event shall occur as a result of which it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing as of the date the Pro- 7 spectus is delivered to a purchaser, not misleading, or if it is necessary to amend or supplement the Prospectus to comply with any law, it will as promptly as practicable prepare and file with the Commission an appropriate amendment or supplement to the Prospectus so that the statements in the Prospectus, as so amended or supplemented, will not, in the light of the circumstances existing as of the date the Prospectus is so delivered, be misleading, and will comply with applicable law, and will furnish to each Underwriter and dealer without charge such number of copies thereof as such Underwriter or dealer may reasonably request. (g) Prior to any public offering of the Shares, it will cooperate with you and your counsel in connection with the registration or qualification of the Shares for offer and sale by you under the state securities or Blue Sky laws of such jurisdictions as you may reasonably request (provided, that the Company shall not be obligated to qualify as a foreign corporation in any jurisdiction in which it is not so qualified or to take any action that would subject it to general consent to service of process in any jurisdiction in which it is not now so subject). The Company will continue such qualification in effect so long as required by law for distribution of the Shares. (h) It will make generally available to its security holders as soon as reasonably practicable a consolidated earning statement covering a period of at least twelve months beginning after the "effective date" (as defined in Rule 158 under the Act) of the Registration Statement (but in no event commencing later than 90 days after such date) which shall satisfy the provisions of Section 11(a) of the Act and Rule 158 thereunder. (i) It will timely complete all required filings and otherwise fully comply in a timely manner with all provisions of the Securities Exchange Act of 1934, as amended, including the rules and regulations thereunder (collectively, the "Exchange Act") in connection with the public offering of the Shares. (j) During the period of five years hereafter, the Company will furnish to you (i) as soon as available, a copy of each report of the Company mailed to shareholders or filed with the Commission, and (ii) from time to time such other information concerning the Company as you may reasonably request. 8 (k) Whether or not the transactions contemplated hereby are consummated or this Agreement is terminated, it will pay and be responsible for all costs, expenses, fees and taxes in connection with or incident to (i) the printing, processing, filing, distribution and delivery under the Act of the Registration Statement, each preliminary prospectus, the Prospectus and all amendments or supplements thereto, (ii) the printing, processing, execution, distribution and delivery of this Agreement, any memoranda describing state securities or Blue Sky laws and all other agreements, memoranda, correspondence and other documents printed, distributed and delivered in connection with the offering of the Shares, (iii) the registration with the Commission and the issuance and delivery of the Shares, (iv) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the jurisdictions referred to in paragraph (g) above (including, in each case, the reasonable fees and disbursements of counsel relating to such registration or qualification and memoranda relating thereto and any filing fees in connection therewith), (v) furnishing such copies of the Registration Statement, Prospectus and preliminary prospectus, and all amendments and supplements to any of them, as may be reasonably requested by you for use in connection with the offering or sale of the Shares by the Underwriters or the dealers to whom the Shares may be sold, (vi) filing, registration and clearance with the National Association of Securities Dealers, Inc. (the "NASD") in connection with the offering of the Shares (including any filing fees in connection therewith and the fees and disbursements of counsel relating thereto), (vii) the listing of the Shares on the New York Stock Exchange, (viii) any "qualified independent underwriter" if and as required by Schedule E of the Bylaws of the NASD (including fees and disbursements of counsel for such qualified independent underwriter) and (ix) the performance by the Company of its other obligations under this Agreement, the cost of its personnel and other internal costs, the cost of printing and engraving the certificates representing the Shares, and all expenses and taxes incident to the sale and delivery of the Shares to you (provided that the Company shall not be obligated pursuant to this paragraph to pay the fees and disbursements of your counsel, except to the extent set forth in clauses (iv) and (vi) above). (l) It will use the proceeds from the sale of the Shares in the manner described in the Prospectus under the caption "Use of Proceeds." 9 (m) It will cause the Shares to be listed on the New York Stock Exchange and will use its reasonable best efforts to maintain such listing while any of the Shares are outstanding. (n) It will use its reasonable best efforts to do and perform all things required to be done and performed under this Agreement by it prior to or after the Closing Date and to satisfy all conditions precedent on its part to the delivery of the Shares. 6. Representations and Warranties. The Company represents and ------------------------------ warrants to each Underwriter that: (a) When the Registration Statement becomes effective, including at the date of any post-effective amendment, at the date of the Prospectus (if different) and at the Closing Date, the Registration Statement will comply in all material respects with the provisions of the Act, and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; the Prospectus and any supplements or amendments thereto will not at the date of the Prospectus, at the date of any such supplements or amendments and at the Closing Date contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties contained in this paragraph (a) shall not apply to statements in or omissions from the Registration Statement or the Prospectus (or any supplement or amendment to them) made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by or on behalf of any Underwriter through you expressly for use therein. The Company acknowledges for all purposes under this Agreement that the statements with respect to price and underwriting discount and the last paragraph all as set forth on the cover page and under the caption "Underwriting" in the Prospectus (or any amendment or supplement) constitute the only written information furnished to the Company by any Underwriter expressly for use in the Registration Statement or the Prospectus (or any amendment or supplement to them) and that the Underwriters shall not be deemed to have provided any other information (and therefore are not responsible for any such statement or omission). 10 (b) Each preliminary prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the Act. (c) The Company and each of its "significant subsidiaries" (as defined under Regulation S-X promulgated by the Commission) (each, a "Subsidiary" and, collectively, the "Subsidiaries") has been duly organized, is validly existing as a corporation in good standing under the laws of its jurisdiction of organization and has the requisite corporate power and authority to carry on its business as it is currently being conducted, to own, lease and operate its properties; and the Company has the requisite power and authority to authorize the offering of the Shares, to execute, deliver and perform this Agreement, and to issue, sell and deliver the Shares; and each of the Company and the Subsidiaries is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction where the operation, ownership or leasing of property or the conduct of its business requires such qualification, except where the failure to be so qualified would not, singly or in the aggregate, have a material adverse effect on the properties, business, results of operations, condition (finincial or otherwise), business affairs or prospects of the Company and its subsidiaries taken as a whole (a "Material Adverse Effect"). (d) All of the issued and outstanding shares of capital stock of, or other ownership interests in, each Subsidiary have been duly and validly authorized and issued, and all of the shares of capital stock of, or other ownership interests in, each Subsidiary are owned, directly or through Subsidiaries, by the Company. All such shares of capital stock are fully paid and nonassessable, and are owned free and clear of any security interest, mortgage, pledge, claim, lien or encumbrance (each, a "Lien"), except for (i) security interests relating to the New Notes (as defined in the Prospectus) granted pursuant to the New Note Indenture (as defined in the Prospectus), (ii) security interests relating to the Old Series I Notes (as defined in the Prospectus) granted pursuant to the Old Note Indenture (as defined in the Prospectus) and (iii) security interests granted to Marriott International, Inc. pursuant to the Credit Agreement (as defined in the Prospectus). There are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or Liens related to 11 or entitling any person to purchase or otherwise to acquire any shares of the capital stock of, or other ownership interest in, any Subsidiary. (e) The authorized, issued and outstanding capital stock of the Company was, as of the date of the Prospectus, as set forth in the Prospectus under "Pro Forma Consolidated Balance Sheet" and "Description of Capital Stock;" all the shares of issued and outstanding Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and not subject to any preemptive or similar rights except for the Marriott International Purchase Right (as defined in the Prospectus); the Shares have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement against payment of the consideration set forth herein, will be validly issued and fully paid and nonassessable; the capital stock of the Company, including the Common Stock, conforms in all material respects to all statements relating thereto in the Prospectus and the Registration Statement; and the issuance of the Shares by the Company will not be subject to preemptive or other similar rights. (f) Neither the Company nor any of its subsidiaries is in violation of its respective charter or bylaws or in default in the performance of any bond, debenture, note or any other evidence of indebtedness or any indenture, mortgage, deed of trust or other contract, lease or other instrument to which the Company or any of its subsidiaries is a party or by which any of them is bound, or to which any of the property or assets of the Company or any of its subsidiaries is subject except for such violations or defaults which could not reasonably be expected to have a Material Adverse Effect. (g) This Agreement has been duly authorized and validly executed and delivered by the Company and constitutes a valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms (assuming the due execution and delivery hereof by you). (h) The execution and delivery of this Agreement by the Company, the issuance and sale of the Shares, the performance of this Agreement and the consummation of the transactions contemplated by this Agreement will not (i) conflict with or result in a breach or violation of any of the respective charters or bylaws of the Company or any of its subsidiaries or 12 any of the terms or provisions of, or (ii) constitute a default or cause an acceleration of any obligation under or result in the imposition or creation of (or the obligation to create or impose) a Lien with respect to, any material bond, note, debenture or other evidence of indebtedness or any material indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any of the Subsidiaries is a party or by which it or any of them is bound, or to which any properties of the Company or any of the Subsidiaries is or may be subject, or (iii) contravene any order of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties, or violate or conflict with any statute, rule or regulation or administrative or court decree applicable to the Company or any of its subsidiaries, or any of their respective properties except in the case of clause (iii) above, for such conflicts, or violations which would not have a Material Adverse Effect. (i) Except as set forth in the Prospectus, there is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, pending against or affecting the Company or any of the Subsidiaries, or any of their respective properties, which is required to be disclosed in the Registration Statement or the Prospectus, or which could reasonably be expected to result, singly or in the aggregate, in a Material Adverse Effect or which could reasonably be expected to materially and adversely affect the consummation of this Agreement or the transactions contemplated hereby, and to the best of the Company's knowledge, no such proceedings are contemplated or threatened. No contract or document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement is not so described or filed. (j) To the best knowledge of the Company, no action has been taken and no statute, rule or regulation or order has been enacted, adopted or issued by any governmental agency or body which prevents the issuance of the Shares, suspends the effectiveness of the Registration Statement, prevents or suspends the use of any preliminary prospectus or suspends the sale of the Shares in any jurisdiction referred to in Section 5(g) hereof; and no injunction, restraining order or order of any nature by a Federal or state court of competent jurisdiction has been issued with respect to the Company or any of its Subsidiaries which would prevent or suspend the issuance or sale of the Shares, the effectiveness of the Regis- 13 tration Statement, or the use of any preliminary prospectus in any jurisdiction referred to in Section 5(g) hereof. Every request of the Commission or any securities authority or agency of any jurisdiction for additional information (to be included in the Registration Statement or the Prospectus or otherwise) has been complied with in all material respects. (k) Except as would not, singly or in the aggregate, have a Material Adverse Effect, neither the Company nor any of its subsidiaries is in violation of any environmental, safety or similar law or regulation applicable to its business relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), lacks any permits, licenses or other approvals required of them under applicable Environmental Laws or is violating any terms and conditions of any such permit, license or approval. (l) No labor dispute with the employees of the Company which is or could reasonably be expected to become material to the Company exists or, to the knowledge of the Company, is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors, or of Marriott International, which would have a Material Adverse Effect. (m) (i) The Company and each of its Subsidiaries has good and marketable title, free and clear of all Liens, to all property and assets described in the Registration Statement as being owned by it, except for Liens described or reflected in the Prospectus (including all Liens relating to mortgages reflected on the financial statements included in the Prospectus) or Liens that would not have a Material Adverse Effect and (ii) all liens, charges, encumbrances, claims, or restrictions on or affecting the properties and assets of the Company or any of its subsidiaries that are required to be disclosed in the Prospectus are disclosed therein. (n) The firm of accountants that has certified or shall certify the applicable consolidated financial statements and supporting schedules of the Company filed or to be filed with the Commission as part of the Registration Statement and the Prospectus are independent public accountants with respect to the Company and its subsidiaries, as required by the Act. The consolidated historical and pro forma financial --- ----- statements, 14 together with related schedules and notes, set forth in the Prospectus and the Registration Statement comply as to form in all material respects with the requirements of the Act. Such historical financial statements fairly present the consolidated financial position of the Company and its subsidiaries at the respective dates indicated and the results of their operations and their cash flows for the respective periods indicated, in accordance with generally accepted accounting principles ("GAAP") consistently applied throughout such periods. Such pro forma financial --- ----- statements have been prepared on a basis consistent with such historical statements, except for the pro forma adjustments specified therein, and --- ----- give effect to assumptions made on a reasonable basis and present fairly the transactions reflected thereby as indicated in the Prospectus. The other financial and statistical information and data included in the Prospectus and in the Registration Statement, historical and pro forma, --- ----- are, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. (o) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and up to the Closing Date, neither the Company nor any of the Subsidiaries has incurred any liabilities or obligations, direct or contingent, which are material to the Company and its subsidiaries taken as a whole, nor entered into any transaction not in the ordinary course of business and there has not been, singly or in the aggregate, any material adverse change, or any development which would involve a material adverse change, in the properties, business, results of operations, condition (financial or otherwise), business affairs or prospects of the Company and its subsidiaries taken as a whole (a "Material Adverse Change"). (p) No authorization, approval or consent or order of, or filing with, any court or governmental body or agency is necessary in connection with the transactions contemplated by this Agreement, except such as may be required by the NASD or have been obtained and made under the Act, the Exchange Act or state securities or Blue Sky laws or regulations. Neither the Company nor any of its affiliates is presently doing business with the government of Cuba or with any person or affiliate located in Cuba. (q) (i) Each of the Company and its subsidiaries has all certificates, consents, exemptions, orders, permits, licenses, authorizations, or 15 other approvals (each, an "Authorization") of and from, and has made all declarations and filings with, all Federal, state, local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals, necessary or required to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus, and all such Authorizations are in full force and effect, except to the extent that the failure to obtain or file or cause to remain in effect would not, singly or in the aggregate, have a Material Adverse Effect and (ii) the Company and its subsidiaries are in compliance in all material respects with the terms and conditions of all such Authorizations and with the rules and regulations of the regulatory authorities and governing bodies having jurisdiction with respect thereto. (r) Neither the Company nor any of the Subsidiaries is an "investment company" or a company "controlled" by an investment company within the meaning of the Investment Company Act of 1940, as amended. (s) No holder of any security of the Company has or will have any right to require the registration of such security by virtue of any transaction contemplated by this Agreement. (t) The Shares have been approved for listing on the New York Stock Exchange, subject to notice of issuance. (u) Each certificate signed by any officer of the Company and delivered to the Underwriters or counsel for the Underwriters pursuant to Section 8 shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters covered thereby. (v) The Company and each of its consolidated subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specific authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability; (3) access to assets is permitted only in accordance with management's general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 16 (w) The Company has not taken, directly or indirectly, any action designed to cause or to result in, or that has constituted or which could reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. (x) Neither the Company nor any of its subsidiaries is in violation of any statute, law, ordinance, governmental rule or regulation or any judgment, decree, rule or order of any court or governmental agency or authority applicable to the Company or any of its subsidiaries or any of their properties or assets, except such violations as would not, singly or in the aggregate, have a Material Adverse Effect. 7. Indemnification. --------------- (a) The Company agrees to indemnify and hold harmless (i) each of the Underwriters and (ii) each person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) any of the Underwriters (any of the persons referred to in this clause (ii) being hereinafter referred to as a "controlling person"), and (iii) the respective officers, directors, partners, employees, representatives and agents of any of the Underwriters or any controlling person (any person referred to in clause (i), (ii) or (iii) may hereinafter be referred to as an "Indemnified Person") to the fullest extent lawful, from and against any and all losses, claims, damages, liabilities, judgments, actions and expenses (including, without limitation, and as incurred, reimbursement of all reasonable costs of investigating, preparing, pursuing or defending any claim or action, or any investigation or proceeding by any governmental agency or body, commenced or threatened, including the reasonable fees and expenses of counsel to any Indemnified Person) directly or indirectly caused by, related to, based upon, arising out of or in connection with any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the information deemed to be a part of the Registration Statement pursuant to Rule 430A(b) promulgated under the Act, if applicable, or the Prospectus (including any amendment or supplement thereto) or any preliminary prospectus, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading; provided, however, that (i) this -------- ------- 17 indemnity agreement shall not apply to such losses, claims, damages, liabilities or expenses are caused by an untrue statement or omission or alleged untrue statement or omission that is made in reliance upon and in conformity with information relating to any of the Underwriters furnished in writing to the Company by any of the Underwriters expressly for use in the Registration Statement (or any amendment thereto) or the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus and (ii) the foregoing indemnity agreement with respect to any untrue statement contained in or omission from a preliminary prospectus shall not inure to the benefit of the Underwriter from whom the person asserting any such losses, liabilities, claims, damages or expenses purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented, if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of the Underwriters to such person, if such is required by law, at or prior to the written confirmation of the sale of such Shares to such person and the untrue statement contained in or omission from such preliminary prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented). The Company shall notify you promptly of the institution, threat or assertion of any claim, proceeding (including any governmental investigation) or litigation in connection with the matters addressed by this Agreement which involves the Company or an Indemnified Person. (b) In case any action or proceeding (including any governmental investigation) shall be brought or asserted against any of the Indemnified Persons with respect to which indemnity may be sought against the Company, the applicable Underwriter with respect to such Indemnified Person shall promptly notify the Company in writing (provided, that the failure to give such notice shall not relieve the Company of its obligations pursuant to this Agreement unless and only to the extent that such omission results in the loss or compromise of any material rights or defenses by the Company, as determined by a court of competent jurisdiction by final judgment). The Company shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for such Indemnified Persons, which firm shall be designated in writing by the Representatives. The Company shall not be liable for any 18 settlement of any such action or proceeding effected without the Company's prior written consent, and the Company agrees to indemnify and hold harmless any Indemnified Person from and against any loss, claim, damage, liability or expense by reason of any settlement of any action effected with the written consent of the Company. The Company shall not, without the prior written consent of each Indemnified Person affected thereby (which consent will not unreasonably be withheld), settle or compromise or consent to the entry of judgment in or otherwise seek to terminate any pending or threatened action, claim, litigation or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not any Indemnified Person is a party thereto), unless such settlement, compromise, consent or termination includes an unconditional release of each Indemnified Person affected thereby from all liability arising out of such action, claim, litigation or proceeding. (c) Each of the Underwriters agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, any person controlling (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company, and the officers, directors, partners, employees, representatives and agents of each such person, to the same extent as the foregoing indemnity from the Company to each of the Indemnified Persons, but only with respect to claims and actions based on information relating to such Underwriter furnished in writing by such Underwriter expressly for use in the Prospectus. In case any action or proceeding (including any governmental investigation) shall be brought or asserted against the Company, any of its directors, any such officer, or any such controlling person based on the Registration Statement, the Prospectus or any preliminary prospectus in respect of which indemnity may be sought against any Underwriter pursuant to the foregoing sentence, the Underwriter shall have the rights and duties given to the Company by Section 7(b) above (except that if the Company shall have assumed the defense thereof, such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof but the fees and expenses of such counsel shall be at the expense of such Underwriter), and the Company, its directors, any such officers, and each such controlling person shall have the rights and duties given to the Indemnified Person by Section 7(b) above. 19 (d) If the indemnification provided for in this Section 7 is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or expenses referred to herein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party on the one hand and the indemnified party on the other hand from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying parties and the indemnified party, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and any of the Underwriters, on the other hand, shall be deemed to be in the same proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by such Underwriter, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact related to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The indemnity and contribution obligations set forth herein shall be in addition to any liability or obligation such party may otherwise have to any indemnified party. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity --- ---- for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or expenses referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the 20 provisions of this Section 7, none of the Underwriters (and its related Indemnified Persons) shall be required to contribute, in the aggregate, any amount in excess of the amount by which the total underwriting discount applicable to the Shares purchased by such Underwriter exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7(d) are several in proportion to the respective number of Shares purchased by each of the Underwriters hereunder and not joint. 8. Conditions of Underwriters' Obligations. The several obligations of --------------------------------------- the Underwriters to purchase the Shares under this Agreement are subject to the satisfaction of each of the following conditions: (a) All the representations and warranties of the Company contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the Closing Date. The Company shall have performed or complied with all of its obligations and agreements herein contained and required to be performed or complied with by it at or prior to the Closing Date. (b) (i) The Registration Statement shall have become effective (or, if a post-effective amendment is required to be filed pursuant to Rule 430A promulgated under the Act, such post-effective amendment shall have become effective) not later than 5:00 p.m., New York City time, on the date of this Agreement or at such later date and time as you may approve in writing, (ii) at the Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before or contemplated by the Commission and every request for additional information on the part of the Commission shall have been complied with in all material respects, and (iii) no stop order suspending the sale of the Shares in any jurisdiction referred to in Section 5(g) shall have been issued and no proceeding for that purpose shall have been commenced or shall be pending or threatened. 21 (c) No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any governmental agency which would, as of the Closing Date, prevent the issuance of the Shares; no injunction, restraining order or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Shares and on the Closing Date, no action, suit or proceeding shall be pending against, or, to the knowledge of the Company threatened against the Company or any of its subsidiaries before any court or arbitrator or any governmental body, agency or official which, if adversely determined, would interfere with or adversely affect the issuance of the Shares or could reasonably be expected to have a Material Adverse Effect, or in any manner invalidate this Agreement or the Shares. (d) (i) Since the date hereof, there shall not have been any Material Adverse Change, and (ii) except as set forth in the Prospectus, since the date of the latest balance sheet included in the Registration Statement and the Prospectus, there shall not have been any material change in the capital stock or long-term debt, or material increase in short-term debt, of the Company or any of its consolidated subsidiaries. (e) You shall have received a certificate of the Company, dated the Closing Date, executed on behalf of the Company, by the President or any [Vice President] and a principal financial or accounting officer of the Company confirming, as of the Closing Date, the matters set forth in paragraphs (a), (b), (c) and (d) of this Section 8. (f) On the Closing Date, you shall have received: (1) an opinion (satisfactory to you and your counsel), dated the Closing Date, of Latham & Watkins, counsel for the Company, to the effect that: (i) the Company and each of the Subsidiaries is a validly existing corporation in good standing under the laws of its jurisdiction of incorporation and has the requisite corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus, and to execute, deliver and perform this Agreement; 22 (ii) the Company has full corporate power and authority to execute, deliver and perform this Agreement and to issue, sell and deliver the Shares as contemplated by this Agreement; (iii) this Agreement has been duly authorized, executed and delivered by the Company; (iv) the Shares have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement against payment of the consideration set forth herein, will be validly issued and fully paid and nonassessable; and the issuance of the Shares is not subject to any preemptive or, to the best knowledge of such counsel, any other similar rights that entitle or will entitle any person to acquire any shares of Common Stock from the Company upon the issuance of the Shares by the Company; (v) the Registration Statement has become effective under the Act; any required filing of the Prospectus, and any supplements thereto, pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and to the best knowledge of such counsel no stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued and no proceedings therefor have been instituted or are pending or contemplated under the Act; and (vi) at the time it became effective and on the Closing Date, the Registration Statement complied as to form in all material respects with the Act; and (2) an opinion (satisfactory to you and your counsel), dated the Closing Date, of Christopher Townsend, Vice President and Deputy General Counsel of the Company, to the effect that: (i) the Company and each of the Subsidiaries is a duly organized and validly existing corporation in good standing under the laws of its jurisdiction of incorporation, has the requisite corporate power and authority to own, lease and operate 23 its properties and to conduct its business as described in the Registration Statement and the Prospectus, and to execute, deliver and perform this Agreement, and is duly qualified as a foreign corporation and in good standing in each jurisdiction where the ownership, leasing or operation of property or the conduct of its business requires such qualification, except where the failure to be so qualified would not have, singly or in the aggregate, a Material Adverse Effect; (ii) (A) the authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under "Pro Forma Consolidated Balance Sheet" and "Description of Capital Stock" and conforms in all material respects to the descriptions thereof contained in the Registration Statement and the Prospectus; and (B) the shares of issued and outstanding Common Stock have been duly authorized and are validly issued and are fully paid and nonassessable; (iii) all of the issued and outstanding shares of capital stock of, or other ownership interests in, each Subsidiary have been duly and validly authorized and issued, and the shares of capital stock of, or other ownership interests in, each Subsidiary are owned, directly or through Subsidiaries, by the Company, are fully paid and nonassessable, and, to the best knowledge of such counsel, are owned free and clear of any Lien, except for Liens relating to the Old Series I Notes, the New Notes or the Credit Agreement or as otherwise disclosed in the Prospectus; (iv) to the best knowledge of such counsel, there are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or Liens related to or entitling any person to purchase or otherwise to acquire any shares of the capital stock of, or other ownership interest in, any Subsidiary; (v) neither the Company nor any of the Subsidiaries is an "investment company" or a company "controlled" by an investment company within the meaning of the Investment Company Act of 1940, as amended; 24 (vi) to the best knowledge of such counsel, no holder of any security of the Company has any right to require registration of shares of Common Stock or any other security of the Company; (vii) to the best knowledge of such counsel, there is no current, pending or threatened action, suit or proceeding before any court or governmental agency, authority or body or any arbitrator involving the Company or any Subsidiary or to which any of their respective properties is subject of a character required to be disclosed in the Registration Statement which is not adequately disclosed in the Prospectus; (viii) no authorization, approval, consent or order of, or filing with, any court or governmental body or agency is required for the issuance and sale of the Shares pursuant to this Agreement, except such as have been obtained and made under the Act, the Exchange Act, state securities or Blue Sky laws or regulations or such as may be required by the NASD; the execution and delivery of this Agreement, the issuance and sale of the Shares and the performance of this Agreement will not result in a breach or violation of (A) any of the respective charters or bylaws of the Company or any of the Subsidiaries or (B) any of the terms or provisions of any agreement or instrument which is filed as an exhibit to the Registration Statement and to which the Company or any of the Subsidiaries is a party or by which any of them is bound, or to which any of the properties of the Company or any of the Subsidiaries is subject, or (C) to the best knowledge of such counsel, constitute a default under, any statute, rule or regulation to which the Company or any Subsidiary is bound or to which any of the properties of the Company or any Subsidiary is subject or (D) to the best knowledge of such counsel any order of any court or governmental agency or body having jurisdiction over the Company or any of the Subsidiaries or any of their properties which conflict, breach or default in each of the cases described in clauses (B), (C) and (D) would have a Material Adverse Effect; (ix) to the best knowledge of such counsel, (A) there are no franchises, contracts, indentures, mortgages, loan 25 agreements, notes, leases or other instruments to which the Company or any Subsidiary is a party or by which any of them may be bound that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement other than those described therein or filed as exhibits thereto and the descriptions thereof are accurate in all material respects and present fairly the information required to be shown, (B) no default exists in the due performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument so described or filed, or any agreement identified on a schedule attached to the opinion, except for defaults which would not have a Material Adverse Effect and (C) the statements in the Prospectus under the caption "Description of Capital Stock," "Purposes and Anti-takeover Effects of Certain Provisions of the Company Certificate and Bylaws and the Marriott International Purchase Right," "Risk Factors - Pending Litigation," "Financing" and "Relationship Between the Company and Marriott International" insofar as such statements constitute a summary of legal matters, documents or proceedings referred to therein, are accurate in all material respects. In addition, Latham & Watkins and Christopher Townsend shall state that although such counsel has not undertaken to investigate or verify independently, and is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus included therein (except to the extent expressly referred to in clause (xv)(C) above), during the course of such counsel's participation in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company and you, at which the contents of the Registration Statement and the Prospectus were discussed (relying as to materiality to a large extent upon the statements of officers and other representatives of the Company), no facts have come to the attention of such counsel which cause it to (1) believe that (except for financial statements, financial [and statistical] data and schedules included therein or omitted therefrom as to which such counsel need not express any belief) the Registration Statement (as amended or supplemented, if applicable) at the time the Registration Statement or any post-effective amendment became effective contained any untrue statement of a material fact or omitted to state a material fact 26 required to be stated therein or necessary to make the statements therein not misleading or (2) believe that (except for financial statements, financial [and statistical] data and schedules included therein or omitted therefrom as to which such counsel need not express any belief) the Prospectus (as amended or supplemented) as of its date or the Closing Date contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. In rendering such opinions, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers and other representatives of the Company, certificates of public officials, and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company and its Subsidiaries, provided that copies of any such statements or certificates shall be delivered or otherwise made available to your counsel. (g) You shall have received an opinion, dated the Closing Date, of Skadden, Arps, Slate, Meagher & Flom ("Skadden Arps"), counsel for the Underwriters, in form and substance reasonably satisfactory to you. (h) You shall have received letters on and as of the date hereof as well as on and as of the Closing Date (in the latter case constituting an affirmation of the statements set forth in the former), in form and substance satisfactory to you, from Arthur Andersen & Co., independent public accountants, with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. (i) Skadden Arps shall have been furnished with such documents and opinions, in addition to those set forth above, as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in this Section 8 and in order to evidence the accuracy, completeness or satisfaction in all material respects of any of the representations, warranties or conditions herein contained. (j) Prior to the Closing Date, the Company shall have furnished to you such further information, certificates and documents as you may reasonably request. 27 (k) At the Closing Date, the Shares shall have been approved for listing on the New York Stock Exchange, subject to notice of issuance. (l) The Line of Credit and Guarantee Reimbursement Agreement by and among HMH Holdings, Inc. as borrower, Marriott International, Inc. as lender and the Company and certain subsidiaries as guarantors dated as of October 8, 1993 shall have been amended to waive the requirement that net proceeds received by the Company from the sale of the Shares be used to repay amounts outstanding thereunder and to permit the Company to use such net proceeds as set forth in the Prospectus under "Use of Proceeds." (m) If the Option Closing Date is after the Closing Date, each of the foregoing conditions shall have been satisfied as of the Option Closing Date as if the references to the "Closing Date" therein were references to the "Option Closing Date." 9. Defaults. If on the Closing Date or any Option Closing Date, as the -------- case may be, any of the Underwriters shall fail or refuse to purchase Firm Shares or Additional Shares, as the case may be, which it has agreed to purchase hereunder on such date, and the aggregate amount of Firm Shares or Additional Shares, as the case may be, that such defaulting Underwriter(s) agreed but failed or refused to purchase does not exceed 10% of the total number of Shares to be purchased on such date by all of the Underwriters, each non-defaulting Underwriter shall be obligated severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedules I and II hereto bears to the total number of Firm Shares which all the non-defaulting Underwriters, as the case may be, have agreed to purchase, or in such other proportion as you may specify, to purchase the Firm Shares or Additional Shares, as the case may be, that such defaulting Underwriter or Underwriters, as the case may be, agreed but failed or refused to purchase on such date; provided that in no event shall the -------- number of Firm Shares or Additional Shares, as the case may be, that any Underwriter has agreed to purchase pursuant to Section 3 hereof be increased pursuant to this Section 9 by an amount in excess of one-ninth of such number of Firm Shares or Additional Shares, as the case may be, without the written consent of such Underwriter. If, on the Closing Date or on the Option Closing Date, as the case may be, any of the Underwriters shall fail or refuse to purchase the Firm Shares or the Additional Shares, as the case may be, with respect to which such default exceeds 10% of such total number of the Shares to be purchased on such date by all Underwriter(s) and arrangements satisfactory to the other Underwriter(s) and 28 the Company for the purchase of such Shares are not made within 48 hours after such default, this Agreement shall terminate without liability on the part of the non-defaulting Underwriter(s) or the Company, except as otherwise provided in Section 10. In any such case that does not result in termination of this Agreement, the Underwriters or the Company may postpone the Closing Date or the Option Closing Date, as the case may be, for not longer than seven (7) days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve a defaulting Underwriter from liability in respect of any default by any such Underwriter under this Agreement. 10. Effective Date of Agreement and Termination. This Agreement shall ------------------------------------------- become effective upon the later of (i) the execution and delivery of this Agreement by the parties hereto, (ii) the effectiveness of the Registration Statement, and (iii) if a post-effective amendment is required to be filed pursuant to Rule 430A under the Act, the effectiveness of such post-effective amendment. This Agreement may be terminated at any time on or prior to the Closing Date by you by notice to the Company if any of the following has occurred: (i) subsequent to the date the Registration Statement is declared effective or the date of this Agreement, any Material Adverse Change occurs which, in your judgment, makes it impracticable or inadvisable to market the Shares or to enforce contracts for the sale of the Shares, (ii) any outbreak or escalation of hostilities or other national or international calamity or crisis or material adverse change in the financial markets of the United States or elsewhere, or any other substantial national or international calamity or emergency if the effect of such outbreak, escalation, calamity, crisis or emergency would, in your judgment, make it impracticable or inadvisable to market the Shares or to enforce contracts for the sale of the Shares, (iii) any suspension or limitation of trading generally in securities on the New York Stock Exchange, the American Stock Exchange, the Nasdaq Stock Market or in the over-the-counter markets or any setting of minimum prices for trading on such exchanges or markets, (iv) any declaration of a general banking moratorium by Federal, New York or Maryland authorities, (v) the taking of any action by any Federal, state or local government or agency in respect of its monetary or fiscal affairs that in your judgment has a material adverse effect on the financial markets in the United States, and would, in your judgment, make it impracticable or inadvisable to market the Shares or to enforce contracts for the sale of the Shares or (vi) the enactment, publication, decree, or other promulgation of any Federal or state statute, regulation, rule or order of any court or other 29 governmental authority which would, in your judgment, have a Material Adverse Effect. The indemnities and contribution provisions and the other agreements, representations and warranties of the Company, its officers and directors and of the Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Shares, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any of the Underwriters or by or on behalf of the Company, the officers or directors of the Company or any controlling person of the Company, (ii) acceptance of the Shares and payment for them hereunder and (iii) termination of this Agreement. If this Agreement shall be terminated by the Underwriters pursuant to clauses (i) or (vii) of the second paragraph of this Section 10 or because of the failure or refusal on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement, the Company agrees to reimburse you for all out-of-pocket expenses (including the fees and disbursements of counsel) incurred by you. Notwithstanding any termination of this Agreement, the Company shall be liable for all expenses which it has agreed to pay pursuant to Section 5(k) hereof. Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Underwriters, any Indemnified Person referred to herein and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The terms "successors and assigns" shall not include a purchaser of any of the Shares from any of the Underwriters merely because of such purchase. 11. Notices. Notices given pursuant to any provision of this Agreement ------- shall be addressed as follows: (a) if to the Company, to it at Host Marriott Corporation, 10400 Fernwood Road, Bethesda, Maryland 20817, Attention: General Counsel, with a copy to Latham & Watkins, 1001 Pennsylva- 30 nia Avenue, N.W., Suite 1300, Washington, D.C. 20004, Attention: Bruce E. Rosenblum, Esq., and (b) if to any Underwriter, to Donaldson, Lufkin & Jenrette Securities Corporation, 140 Broadway, New York, New York 10005, Attention: Syndicate Department, and, in each case, with a copy to Skadden, Arps, Slate, Meagher & Flom at 300 South Grand Avenue, Suite 3400, Los Angeles, California 90071, Attention: Gregg A. Noel, Esq., or in any case to such other address as the person to be notified may have requested in writing. 12. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED ------------- IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK AS APPLIED TO CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK. 13. Successors. This Agreement will inure to the benefit of and be ---------- binding upon the parties hereto and their respective successors and the officers and directors and other persons referred to in Section 7, and no other person will have any right or obligation hereunder. 31 This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. Please confirm that the foregoing correctly sets forth the agreement among the Company and you. Very truly yours, HOST MARRIOTT CORPORATION By: ------------------------ Name: Title: The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MONTGOMERY SECURITIES SMITH BARNEY SHEARSON INC. BT SECURITIES CORPORATION Acting severally on behalf of themselves and as representatives of the several U.S. Underwriters named in Schedule I hereto By: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: ------------------------- Name: Title: 32 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MONTGOMERY SECURITIES SMITH BARNEY SHEARSON INC. BANKERS TRUST INTERNATIONAL PLC Acting on behalf of themselves and as representatives of the several International Managers named in Schedule II hereto By: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: ------------------------- Name: Title: SCHEDULE I Number of Firm Shares to be Purchased --------------- Donaldson, Lufkin & Jenrette Securities Corporation ............... Montgomery Securities ................. Smith Barney Shearson Inc ............. BT Securities Corporation ............. [additional names] ------------ Total ................................. 14,000,000 =========== SCHEDULE II Number of Firm Shares to be Purchased --------------- Donaldson, Lufkin & Jenrette Securities Corporation ............... Montgomery Securities ................. Smith Barney Shearson Inc ............. Bankers Trust International PLC ....... [additional names] ----------- Total ................................. 3,500,000 ========== EX-4.4.II 3 EXHIBIT 4.4(II) Exhibit 4.4(ii) - -------------------------------------------------------------------------------- FIRST AMENDMENT DATED OCTOBER 8, 1993 TO RIGHTS AGREEMENT DATED AS OF FEBRUARY 3, 1989 BETWEEN MARRIOTT CORPORATION AND THE BANK OF NEW YORK - -------------------------------------------------------------------------------- This First Amendment ("Amendment") to the Rights Agreement dated as of February 3, 1989 ("Rights Agreement") between Marriott Corporation (the "Company") and The Bank of New York, a New York banking corporation (the "Rights Agent") is entered into as of this 8th day of October, 1993 between the Company and the Rights Agent. WITNESSETH: ---------- WHEREAS, the Company has declared a special dividend (the "Special Dividend"), consisting of the distribution to holders of outstanding shares of common stock, par value $1.00 per share of the Company (the "Common Stock") of all the outstanding shares of common stock, par value $1.00 per share (the "MII Common Stock") of the Company's wholly-owned subsidiary, Marriott International, Inc. ("MII"); WHEREAS, in connection with the Special Dividend, the Company and MII have entered into a Distribution Agreement (the "Distribution Agreement"), pursuant to which the Company has granted to MII, effective upon consummation of the Special Dividend, the right (the "MII Purchase Right") to purchase up to 20% of each class of the then outstanding voting stock of the Company upon the occurrence of certain events involving changes in control of the Company as specified in the Distribution Agreement, at the fair market value per share of the Common Stock determined as set forth in the Distribution Agreement; WHEREAS, the Company desires to amend the Rights Agreement to provide that (i) if MII exercises the MII Purchase Right within 10 days following the Distribution Date (as defined in the Rights Agreement), MII shall be entitled to receive the Rights attached to the Common Stock as provided in Section 3(a) of the Rights Agreement and (ii) that shares of Common Stock acquired by MII upon exercise of the MII Purchase Right will be "Exempt Shares" under the Rights Agreement and will not render MII an "Acquiring Person" under the Rights Agreement; WHEREAS, the Board of Directors by resolution dated September 29, 1993 has directed the Company to enter into this Amendment; and WHEREAS, the Distribution Date under the Rights Agreement has not yet occurred, and pursuant to Section 26 of the Rights Agreement, the Company and the Rights Agent may amend the Rights Agreement without the approval of any holders of shares of Common Stock. NOW THEREFORE, pursuant to Section 26 of the Rights Agreement, the parties hereby amend the Rights Agreement as follows: SECTION 1. CAPITALIZED TERMS. All capitalized terms used herein, ----------------- and not defined herein, shall have the meanings ascribed to such terms in the Rights Agreement. SECTION 2. DEFINITIONS. ----------- a) The definition of "Beneficial Owner" set forth in Section 1(f) shall be amended by adding the following clause to the end of Section 1(f)(i): "or (D) any shares of Common Stock issuable upon exercise of the MII Purchase Right." b) The definition of "Exempt Shares" set forth in Section 1(r) shall be amended by adding the following clause to the end of the first sentence of such definition: "and (v) any shares of Common Stock acquired by such Person as a result of the exercise of the MII Purchase Right." c) The following additional defined terms shall be added to Section 1: ""Distribution Agreement" shall mean that certain Distribution Agreement dated September 30, 1993 between the Company and Marriott International, Inc. "Exercise Notice" shall mean a written notice delivered by MII (or any successor or assignee of MII to the extent permitted under the Distribution Agreement) to the Company pursuant to Section 6.07 of the Distribution Agreement, which notice constitutes an irrevocable commitment to purchase a specified number of shares of Common Stock through exercise of the MII Purchase Right. "MII" shall mean Marriott International, Inc., a Delaware corporation. "MII Purchase Right" shall mean the right granted by the Company pursuant to Section 6.07 of the Distribution Agreement to MII (or any successor or assignee of MII to the extent permitted under the Distribution Agreement). SECTION 3. ISSUANCE OF RIGHTS CERTIFICATES. The following ------------------------------- Section 3(d) shall be added immediately following Section 3(c) of the rights agreement: 2 "(d) Notwithstanding anything to the contrary set forth herein, if an Exercise Notice with respect to the MII Purchase Right is delivered to the Company on or prior to the Distribution Date, the shares of Common Stock issuable upon exercise of the MII Purchase Right as specified in the Exercise Notice shall be deemed to have been issued prior to the Distribution Date, and any holder of a share of Common Stock issued upon exercise of the MII Purchase Right shall be entitled to receive the same number of Rights per share of Common Stock as if such holder were a record holder of Common Stock as of the Close of Business on the Distribution Date as provided in Section 3(a), even if the closing with respect to the sale of shares of Common Stock upon exercise of the MII Purchase Right occurs after the Distribution Date. MII shall notify the Rights Agent of any Exercise Notice delivered with respect to the MII Purchase Right and shall list the names and addresses of any Persons that are entitled to receive Rights Certificates as a result of the exercise of the MII Purchase Right on the stockholder records of the Company that are provided to the Rights Agent pursuant to Section 3(a) for the purpose of mailing and distributing Rights Certificates to holders of Common Stock." SECTION 4. NO RECITALS, ETC.. The Rights Agent assumes no ----------------- responsibility for or in respect of the validity or sufficiency of this Amendment or the due execution thereof by the Company, or for or in respect of the recitals and statements contained herein, all of which recitals and statements are made solely by the Company. SECTION 5. COUNTERPARTS. This Amendment may be simultaneously ------------ executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but such counterparts together shall constitute but one and the same instrument. 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. Attest: MARRIOTT CORPORATION By By /s/ WILLIAM O. KAFES -------------------- ------------------------- Name: William O. Kafes Title: Vice President Attest THE BANK OF NEW YORK, as Rights Agent By By /s/ JOHN I. SIVERTSEN -------------------- --------------------------- Name: John I. Sivertsen Title: Vice President 4 EX-5 4 EXHIBIT 5 Exhibit 5 January 19, 1994 Host Marriott Corporation 10400 Fernwood Road Bethesda, Maryland 20817 Re: Registration Statement No. 33-51707; 20,125,000 Shares of Common Stock, Par Value $1.00 Per Share ------------------------------------------------- Ladies and Gentlemen: In connection with the registration of up to 20,125,000 shares of common stock of the Company, par value $1.00 per share (the "Shares"), under the Securities Act of 1933, as amended (the "Act"), by Host Marriott Corporation, a Delaware corporation (the "Company"), on Form S-1 filed with the Securities and Exchange Commission (the "Commission") on December 23, 1993 (File No. 33-51707), as amended by Amendment No. 1 filed with the Commission on January 4, 1994 and as amended by Amendment No. 2 filed with the Commission on January 19, 1994 (collectively, the "Registration Statement"), you have requested my opinion with respect to the matters set forth below. In my capacity as General Counsel to the Company, I am familiar with the proceedings taken and proposed to be taken by the Company in connection with the authorization, issuance and sale of the Shares, and for the purposes of this opinion, have assumed such proceedings will be timely completed in the manner presently proposed. In addition, I have made such legal and factual examinations and inquiries, including an examination of originals or copies certified or otherwise identified to my satisfaction of such documents, corporate records and instruments, as I have deemed necessary or appropriate for purposes of this opinion. In my examination, I have assumed the genuineness of all signatures, the authenticity of all documents submitted to me as originals and the conformity to authentic original documents of all documents submitted to me as copies. I am opining herein as to the effect on the subject transaction only of the General Corporation Law of the State of Delaware, and I express no opinion with respect to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction or of any other laws of Delaware, or as to any Host Marriott Corporation January 18, 1994 Page 2 matters of municipal law or the laws of any other local agencies within the state. Subject to the foregoing, it is my opinion that the Shares have been duly authorized, and, upon issuance, delivery and payment therefor in the manner contemplated by the Registration Statement, will be validly issued, fully paid and nonassessable. I consent to your filing this opinion as an exhibit to the Registration Statement and to the reference to this opinion contained under the heading "Legal Matters." Very truly yours, /s/ Stephen J. McKenna Stephen J. McKenna EX-7 5 EXHIBIT 7 EXHIBIT 7 January 19, 1994 Host Marriott 10400 Fernwood Road Bethesda, Maryland 20817 Re: Series A Cumulative Convertible Preferred Stock Registration Statement on Form S-1 ----------------------------------------------- Gentlemen: You have requested our opinion under Delaware law with respect to the Series A Cumulative Convertible Preferred Stock ("the Preferred Stock") of Host Marriott Corporation, a Delaware corporation ("the Company"), in connection with the above referenced Registration Statement on Form S-1 under the Securities Act of 1933 relating to the registration of the common stock of the Company (the "Registration Statement"). You have advised us that the Preferred Stock will have a liquidation preference of $50,000.00 per share plus an amount in cash equal to all accrued but unpaid dividends thereon to the date of distribution. Although the Preferred Stock is no par its stated capital is $50,000 per share. The specific questions posed are whether under Delaware law, exclusive of any restrictions Host Marriott January 17, 1994 Page 2 contained in the Certificate of Incorporation, imposed by the board of directors, or contained in any agreement or instrument by which the Company is bound, (i) there will exist any restriction upon the Company's surplus solely by reason of the excess of the Preferred Stock's liquidation preference over its stated capital, and (ii) any remedy will be available to holders of the Preferred Stock before or after payment of any dividend that would reduce surplus to an amount less than the excess of the liquidation preference over the stated capital of the Preferred Stock. In our opinion, the answer to each question is no. With respect to the excess of the Preferred Stock's liquidation preference over the stock's stated capital, the Delaware General Corporation Law ("DGCL") does not require a sinking fund, reserve or other restriction on surplus where the liquidation value of preferred stock exceeds its stated capital, and we have found no decision of the Delaware courts imposing such a restriction. This conclusion finds support in the provisions of Section 170 of the Delaware statute which regulates the payment of dividends. Section 170(a) of the DGCL provides that a corporation may declare and pay dividends either (1) "out of its surplus" (as elsewhere defined in the statute), or (2) if there is no surplus, "out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year." 8 Del.C. (S)170(a). Host Marriott January 17, 1994 Page 3 With respect to the latter, Section 170 provides that when there is a capital deficit, and capital has been depleted to an amount less than the aggregate amount of capital represented by outstanding stock of all classes having a preference upon a distribution of assets, no dividend on any outstanding shares may be legally paid out of such net profits until the deficiency in the amount of capital represented by the stock having a liquidation preference shall have been restored. Id. Thus, the only statutory -- restriction upon payment of dividends arises when the capital of the corporation has been depleted to an amount less than the aggregate stated capital of the outstanding stock having a liquidation preference. With respect to the former, surplus is defined in Section 154 of the DGCL as follows: The excess, if any, at any given time, of the net assets of the corporation over the amount so determined to be capital shall be surplus. Net assets means the amount by which total assets exceed total liabilities. Capital and surplus are not liabilities for this purpose. 8 Del.C. (S)154 This formula for determining surplus available for dividends does not explicitly require or recognize any restriction for a liquidation preference in excess of stated capital. Thus it appears that the mere existence of a spread between aggregate Host Marriott January 17, 1994 Page 4 stated capital and total liquidation preference does not limit or restrict the use of surplus for the payment of dividends. The question remains, however, whether the value of a liquidation preference should be treated as a liability in calculating net assets for purposes of Section 154. While our courts have not ruled upon this precise question, the decision of the Delaware Supreme Court in Rothschild Int'l Corp. ---------------------- v. Liggett Group Inc., Del. Supr., 474 A.2d 133 (1984) lends further support to - --------------------- our conclusion that such a contention would not prevail. In that decision, preferred stockholders of a merged corporation asserted that the merger amounted to a liquidation of the company, triggering their liquidation preference. Rejecting this claim, the Court observed that "[o]nly upon a liquidation of its assets would Liggett's preferred shareholders' charter rights to payment of par value 'spring into being'."Id. at 136. Similarly, in Dart v. Kohlberg, Kravis, -- ------------------------- Roberts & Co., Del.Ch., C.A. No. 7366, Hartnett, V.C. (May 6, 1985), the court - ------------- rejected a claim asserted by preferred stockholders that a leveraged buy-out merger of the corporation constituted a redemption entitling them to be paid either the redemption price or liquidation price provided in the certificate of incorporation. Other Delaware decisions have held that a preferred stockholder is not a creditor of the corporation with respect to accumulated but unpaid dividends. See Federal --- ------- Host Marriottt January 17, 1994 Page 5 United Corp. v. Havender, Del.Supr., 11 A.2d 331, 339 (1940); Treves v. Menzies, - ------------------------ ----------------- Del,Ch., 142 A.2d 520, 523 (1958). Finally, two decisions in the United States District Court for Delaware, applying Delaware law, indicate that a liquidation preference does not constitute a matured liability until liquidation actually occurs (or, possibly, when it becomes reasonably foreseeable). In Goldman v. Postal Telegraph. Inc., ---------------------------------- 52 F.Supp. 763 (D.Del. 1943), plaintiff attacked a plan which included amendment of the defendant corporation's certificate of incorporation to eliminate the right of a class of preferred stockholders to receive a $60 per share liquidation preference. Plaintiff contended that the elimination of the preference was an unconstitutional interference with his "fixed", "vested" or "contractual" rights. In ruling that plaintiff's constitutional rights were not violated, the court stated it had little doubt the Delaware courts . . . would have held the plaintiff's right to $60 on liquidation did not enjoy the qualities of a matured debt, but is indistinguishable from any other "preference" which is subject to alteration. 52 F.Supp. at 769. In Bailey v. Tubize Rayon Corp., 56F.Supp. 415 (D.Del. 1944), plaintiff ---------------------------- contended that an amendment that would have eliminated a class of preferred stock, and with it its liquidation Host Marriott January 17, 1994 Page 6 preference, was invalid. The court rejected this argument, stating . . . the preferential right of the Class A stockholdes [sic] to receive $100 in liquidation gives them no present --------------------- interest in any portion of the defendant's assets. That ------------------------------------------------- right would arise only upon the liquidation of the defendant and, since defendant is engaged in a profitable going business, it is impossible to foresee ultimate liquidation values of the company. 56 F.Supp. at 423 (emphasis added). These authorities indicate that until liquidation occurs (or, possibly, becomes reasonably foreseeable), a liquidation preference is not a matured debt and does not represent a present or vested interest in a corporation's assets./1/ This would strongly suggest that such a preference is not a liability that must be taken into account under Section 154 of the DGCL in computing surplus available for dividends in a going concern. It could also be argued that the liquidation preference should be reflected when determining capital under the formula set forth in Section 154. It is clear under the terms of that section, however, that stated capital in the case of shares having no par value consists only of the aggregate stated capital of such - --------------- /1/ Whether the foreseeability as opposed to the occurrence of liquidation would convert the liquidation preference of the preferred to a "matured debt" need not be and is not addressed here, since we have assumed that liquidation of the Company is not now reasonably foreseeable. Host Marriott January 17, 1994 Page 7 shares unless the board otherwise expressly provides for a higher capital account. The liquidation preference therefore plays no part in this computation under the terms of the statute. We therefore conclude that the difference between the stated capital and the higher liquidation preference of the Preferred Stock does not result in any restriction on the Company's surplus. Dividends which would reduce surplus to a level within the spread between the aggregated stated capital and the liquidation preference of the Preferred Stock would be permissible under Delaware law. Consequently, in our view there are no remedies under Delaware law available to holders of the Preferred Stock either before or after payment of a dividend having that effect. The opinions expressed herein are limited to the laws, rules, regulations and judicial practices of the State of Delaware currently in effect. We express no opinion on the laws, rules, regulations or judicial practices of the federal government (including securities laws) or of any other jurisdiction. We consent to the filing of this opinion as an exhibit to the Registration Statement and to any reference to our opinion therein. POTTER ANDERSON & CORROON By /s/ MICHAEL D. GOLDMAN ----------------------- Michael D. Goldman EX-10.14.II 6 EXHIBIT 10.14(II) Exhibit 10.14(ii) COURTYARD BY MARRIOTT MANAGEMENT AGREEMENT -------------------- This Management Agreement ("Agreement") is executed as of the 25th day of September, 1993 ("Effective Date"), by HMH COURTYARD PROPERTIES, INC. ("Owner"), a Delaware corporation, with a mailing address at 10400 Fernwood Road, Bethesda, Maryland 20817 and COURTYARD MANAGEMENT CORPORATION ("Management Company"), a Delaware corporation, with a mailing address at 10400 Fernwood Road, Bethesda, Maryland 20817. R E C I T A L S : A. Owner is the owner of the Hotel (as defined and more fully described in Section 1.01) which is located as set forth on Exhibit "A" hereto; and B. Owner desires to have Management Company manage and operate the Hotel, and Management Company is willing to perform such services for the account of Owner on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I DEFINITION OF TERMS ------------------- 1.01 Definition of Terms ------------------- The following terms when used in this Agreement shall have the meanings indicated: "Accounting Period" shall mean each of the four (4) week accounting periods ----------------- which are used in Management Company's accounting system, except that an Accounting Period may occasionally contain five (5) weeks when necessary to conform Management Company's accounting system to the calendar. "Accounting Period Statement" shall have the meaning set forth in Section --------------------------- 5.03. "Additional Invested Capital" shall mean the cumulative total, as of any --------------------------- given date during the Term, of the following: (i) any expenditures made by Owner in response to a Building Estimate, pursuant to Section 8.03, and any expenditures by Owner pursuant to Section 20.10.C; (ii) any contributions by Owner to the FF&E Reserve (beyond the funding described in Section 8.02.B and E); other than those contributions which are reimbursed to Owner under Section 8.02.F; (iii) any payments by Owner with regard to special assessments or impact fees, pursuant to Section 13.01.B(2) or 13.01.B.(3); and (iv) any costs, expenses and charges which are described on Exhibit "F" hereto as "Capital Charges" pursuant to Section 2.05.A. Owner shall give Management Company prompt notice of any amounts it has provided funding for which constitute "Additional Invested Capital" together with such evidence of funding as Management Company may reasonably require. "Affiliate" shall mean any individual or entity directly or indirectly --------- through one or more intermediaries, controlling, controlled by or under common control with a party. The term "control," as used in the immediately preceding sentence, means, with respect to a corporation, the right to the exercise, directly or indirectly, of fifty-one percent (51%) or more of the voting rights attributable to the shares of the controlled corporation, and, with respect to an entity that is not a corporation, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the controlled entity. "Agreement" shall have the meaning set forth in the Preamble. --------- "Annual Operating Projection" shall have the meaning set forth in Section --------------------------- 9.03. "Annual Operating Statement" shall have the meaning set forth in Section -------------------------- 9.01. "Available Cash Flow" shall mean an amount, with respect to each Fiscal ------------------- Year or portion thereof (prorated for any partial Fiscal Years) during the Term of this Agreement, equal to the excess, if any, of Operating Profit over the sum of: (i) the applicable Owner's Priority in such Fiscal Year; plus, (ii) the Base Management Fee; plus, (iii) Deferred Contingent Base Management Fees paid to Manager in such Fiscal Year. "Base Management Fee" shall mean, for each Fiscal Year (prorated for any ------------------- partial Fiscal Years) during the Term of this Agreement, an amount equal to two percent (2%) of Gross Revenues as payment to Management Company for Central Office Services which are for the general benefit of the Courtyard by Marriott System. "Building Estimate" shall have the meaning set forth in Section 8.03.A. ----------------- "Capitalization Multiple" shall mean the number ten (10). ----------------------- "Case Goods" shall mean furniture and furnishings used in the Hotel, ---------- including, without limitation: chairs, beds, chests, headboards, desks, lamps, tables, television sets, mirrors, pictures, wall decorations and similar items. "CC&R's" shall have the meaning set forth in Section 2.05. ------ "Central Office Services" shall mean certain services performed by ----------------------- personnel not normally located at the Hotel and include corporate planning and policy services, corporate financial planning, legislative and governmental representation, corporate human resources and benefits planning, in-house legal services and trademark protection relating to Proprietary Marks which are used generally in the Courtyard by Marriott System. Any service which is defined as being included within the term "Chain Services" shall not also be included within "Central Office Services." The Central Office Services which are provided to the Hotel shall be generally consistent with those Central Office Services which are provided to other comparable Courtyard by Marriott hotels within the Courtyard by Marriott System. "Chain Services" shall mean those certain services furnished to the Hotel -------------- which are furnished generally on a central or regional basis to other hotels in the Courtyard by Marriott System. Chain Services shall include: (i) national sales office services; central operational support for rooms, food and beverage and engineering; central training services; career development; management personnel relocation; central safety and loss prevention services; central advertising and promotion (including direct and image media and advertising administration); consumer affairs; to the extent not charged or allocated directly to the Hotel as a Deduction, the national and regional reservations system service and inventory and revenue management services; centralized computer payroll and accounting services; computer system development, support and operating costs; central monitoring and management support from "line management" personnel such as area managers; (ii) such additional central or regional services as are or may be, from time to time, furnished for the benefit of hotels in the Courtyard by Marriott System or in substitution for services now performed at individual hotels which may be more efficiently performed on a group basis; provided, however, that services not currently included in chain services pursuant to (i) and (ii) above shall only be added to "Chain Services" if, and to the extent that such services: (a) are not Central Office Services (it being understood that Management Company's sole compensation for providing the Central Office Services shall be receipt of the Base Management Fee); (b) are not services relating to non-routine work (it being understood that the cost and expense of such non-routine services shall be Deductions as set forth in paragraph 6 of the definition of Operating Profit); and (c) are either (x) new services (i.e., not previously performed at or for the Hotel) or (y) services which theretofore had been performed at the Hotel, but which can be performed more efficiently and economically on a centralized, regional or other basis. "Communications, Computer and Office Equipment" shall mean: the following --------------------------------------------- equipment used in the Hotel and all ancillary equipment; (i) telephone; (ii) all computer equipment and all ancillary equipment used in the Hotel or for the benefit of the Hotel; (iii) miscellaneous office equipment such as copiers, postage meters, etc. (iv) television sets; and (v) audio-visual equipment. "Courtyard by Marriott System" shall mean the hotel system managed by ---------------------------- Management Company (or one or more of its Affiliates) which is, as of the Effective Date, operated under the trade name "Courtyard by Marriott". "Courtyard by Marriott System Standards" shall mean both the operational -------------------------------------- standards (for example, staffing, amenities offered to guests, advertising, etc.) and the physical standards (for example, the quality, condition and utility of the FF&E, etc.) generally required of hotels in the Courtyard by Marriott System as such operational and physical standards may fluctuate from time to time (provided, however, that the Courtyard by Marriott System Standards shall in no event be lower than the operational and physical standards, as of the date in question, of comparable hotels in comparable hotel systems). "Courtyard by Marriott System Fee" shall during any given Fiscal Year (or -------------------------------- portion thereof), be equal to three percent (3%) of Gross Revenues. It shall mean an amount paid to Management Company, in each Fiscal Year (prorated for any partial Fiscal Years) during the Term of this Agreement, as payment to Management Company for certain services ("System Services") which are for the benefit of the Courtyard by Marriott System, are not Central Office Services or Chain Services, and are performed by personnel not normally located at the Hotel. System Services shall be limited to divisional executive management, divisional financial planning, divisional contracting, divisional product planning and development, divisional human resources planning and development, divisional marketing planning, and services of Management Company's technical and operational experts making periodic inspection and consultation visits to the Hotel (but specifically excluding "line management" personnel such as area managers and services of Management Company's Architecture and Construction personnel who provide design, procurement construction or related services). "Coverage Ratio" shall mean the number one and three-tenths (1.3). -------------- "Cure Payment" shall have the meaning set forth in Section 4.03.B. ------------ "Deductions" shall have the meaning set forth in the definition of ---------- Operating Profit. "Default" shall have the meaning set forth in Section 16.01. ------- "Deferred Contingent Base Management Fees" shall mean an amount equal to ---------------------------------------- (a) the sum of all unpaid Base Management Fees deferred in accordance with Section 5.02.B(i) less (b) all sums paid to Management Company in accordance with the provisions of Section 5.02.B(ii). "Effective Date" shall have the meaning set forth in the Preamble. -------------- "Employee Claims" shall mean any and all claims (including all fines, --------------- judgments, penalties, costs, Litigation and/or arbitration expenses, attorneys' fees and expenses, and costs of settlement with respect to any such claim) by any employee or employees of Management Company against Owner or Management Company with respect to the employment at the Hotel of such employee or employees. "Employee Claims" shall include, without limitation, the following: (i) claims which are eventually resolved by arbitration, by Litigation or by settlement; (ii) claims which also involve allegations that any applicable employment-related contracts affecting the employees at the Hotel have been breached; and (iii) claims which involve allegations that one or more of the Employment Laws has been violated; provided, however, that "Employee Claims" shall not include claims for worker compensation benefits (which shall be governed by Article XII hereof) or for unemployment benefits. "Employment Laws" shall mean any federal, state or local law (including the --------------- common law), statute, ordinance, rule, regulation, order or directive with respect to employment, conditions of employment, benefits, compensation, or termination of employment that currently exists or may exist at any time during the Term of this Agreement, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Workers Adjustment and Retraining Notification Act, the Occupational Safety and Health Act, the Immigration Reform and Control Act of 1986, the Polygraph Protection Act of 1988 and the Americans With Disabilities Act of 1990. "Environmental Laws" shall mean: any federal, state or local law, rule or ------------------ regulation (both present and future) dealing with the use, generation, treatment, storage, disposal or abatement of Hazardous Materials, including, but not limited to, (i) the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., as amended; (ii) the regulations -- --- promulgated thereunder, from time to time; (iii) all federal, state and local laws, rules and regulations (now or hereafter in effect) dealing with the use, generation, treatment, storage, disposal or abatement of Hazardous Materials; and (iv) the regulations promulgated thereunder, from time to time. "Event of Default" shall have the meaning set forth in Section 16.02. ---------------- "Existing CC&R's" shall have the meaning set forth in Section 2.05.A. --------------- "Existing Ground Leases" shall mean the ground leases which are listed on ---------------------- Exhibit "F", but for purposes of this Agreement shall not include any amendments or modifications thereof after the Effective Date. "Existing Mortgages" shall mean the Mortgages which are listed on Exhibit ------------------ "F", but for purposes of this Agreement shall not include any amendments or modifications thereof after the Effective Date. "FF&E" shall mean furniture, furnishings, fixtures, Soft Goods, Case Goods, ---- signage and equipment at the Hotel (including, without limitation, facsimile machines, Communications, Computer and Office Equipment, Shuttle Vehicles, audio-visual equipment, and all computer and other equipment needed for the reservation system and the property management system, and all other electronic systems needed for the Hotel from time to time, as well as similar systems based on other technologies which may be developed in the future. "FF&E Estimate" shall have the meaning set forth in Section 8.02.C. ------------- "FF&E Reserve" shall have the meaning set forth in Section 8.02.A. ------------ "First Notice" shall have the meaning set forth in Section 6.02. ------------ "Fiscal Year" shall mean Management Company's Fiscal Year which now ends at ----------- midnight on the Friday closest to December 31 in each calendar year; the new Fiscal Year begins on the Saturday immediately following said Friday. Any partial Fiscal Year between the Effective Date and the commencement of the first full Fiscal Year and any partial Fiscal Year between the end of the last full Fiscal Year and the Termination of this Agreement, shall constitute a separate Fiscal Year. If Management Company's Fiscal Year is changed in the future, appropriate adjustment to this Agreement's reporting and accounting procedures shall be made; provided, however, that no such change or adjustment shall alter the Term of this Agreement, or in any way reduce the distributions of Operating Profit or other payments due to Owner hereunder, or otherwise significantly and adversely affect Owner's rights or obligations under this Agreement. "Fixed Asset Supplies" shall mean supply items included within "Property --------------------- and Equipment" under the Uniform System of Accounts, including linen, cleaning supplies, china, glassware, tableware, uniforms, and similar items. "Force Majeure" shall mean acts of God, acts of war, civil disturbance, ------------- governmental action (including the revocation or refusal to grant Licenses, where such revocation or refusal is not due to the fault of the party whose performance is to be excused for reasons of Force Majeure), strikes, lockouts, fire, unavoidable casualties or any other causes beyond the reasonable control of either party (excluding, however: (i) lack of financing; or (ii) general economic and/or market factors). "Foreclosure" shall mean any exercise of the remedies available to a ----------- Holder, upon a default under the Secured Loan held by such Holder, which results in a transfer of title to or possession of the Hotel. The term "Foreclosure" shall include, without limitation, any one or more of the following events, if they occur in connection with a default under a Secured Loan: (i) a transfer by judicial foreclosure; (ii) a transfer by deed in lieu of foreclosure; (iii) the appointment by a court of a receiver to assume possession of the Hotel; (iv) a transfer of either ownership or control of the Owner, by exercise of a stock pledge or otherwise; (v) if title to the Hotel is held by a tenant under a ground lease, an assignment of the tenant's interest in such ground lease; or (vi) any similar judicial or non-judicial exercise of the remedies held by the Holder. "Foreclosure Date" shall mean the date on which title to or possession of ---------------- the Hotel is transferred by means of a Foreclosure. "Future CC&R's" shall have the meaning set forth in Section 2.05.B. ------------- "GDP Deflator" shall mean the "Gross Domestic Product Implicit Price ------------ Deflator" issued from time to time by the United States Bureau of Economic Analysis of the Department of Commerce, or if the aforesaid GDP Deflator is not at such time so prepared and published, any comparable index selected by Owner and reasonably satisfactory to Management Company (a "Substitute Index") then prepared and published by an agency of the Government of the United States, appropriately adjusted for changes in the manner in which such index is prepared and/or year upon which such index is based. Any dispute regarding the selection of the Substitute Index or the adjustments to be made thereto shall be settled by arbitration in accordance with Section 20.13. Except as otherwise expressly stated herein, whenever a number or amount is required to be "adjusted by the GDP Deflator", or similar terminology, such adjustment shall be equal to the percentage increase or decrease (except that, for purposes of this Agreement, the GDP Deflator shall not be decreased below its level as of the Effective Date) in the GDP Deflator which is issued for the month in which such adjustment is to be made (or, if the GDP Deflator for such month is not yet publicly available, the GDP Deflator for the most recent month for which the GDP Deflator is publicly available) as compared to the GDP Deflator which was issued for the month in which the Effective Date occurred. "Gross Revenues" shall mean, for each Fiscal Year during the Term of this -------------- Agreement, all revenues and receipts of every kind derived from operating the Hotel and parts thereof, including, but not limited to: income (from both cash and credit transactions), before commissions and discounts for prompt or cash payments, from rental of rooms, stores, offices, meeting, exhibit or sales space of every kind; license, lease and concession fees and rentals (not including gross receipts of licensees, lessees and concessionaires); income from vending machines; health club membership fees; food and beverage sales; wholesale and retail sales of merchandise (other than proceeds from the sale of FF&E no longer necessary to the operation of the Hotel, which shall be deposited in the FF&E Reserve as set forth in Section 8.02.D hereof); service charges, to the extent not distributed to the employees at the Hotel as gratuities; and proceeds, if any, from business interruption or other loss of income insurance; provided, however, that Gross Revenues shall not include the following: gratuities to Hotel employees; federal, state or municipal excise, sales, use or similar taxes collected directly from patrons or guests or included as part of the sales price of any goods or services; insurance proceeds (other than proceeds from business interruption or other loss of income insurance); condemnation proceeds (other than for a temporary taking); any proceeds from any Sale of the Hotel or from the refinancing of any debt encumbering the Hotel; proceeds from the disposition of FF&E no longer necessary for the operation of the Hotel; or interest which accrues on amounts deposited in either the FF&E Reserve or any escrow accounts which are established in accordance with Section 13.01.C; or Cure Payments. "Ground Lease Rental" shall mean the annual rental, as of the Effective ------------------- Date, under the Existing Ground Lease. "Ground Lessor" shall mean the landlord under the Existing Ground Lease. ------------- "Hazardous Materials" shall mean and include any substance or material ------------------- containing one or more of any of the following: "hazardous material", "hazardous waste", "hazardous substance", "regulated substance", "petroleum", "pollutant", "contaminant", or "asbestos" as such terms are defined in any applicable Environmental Law in such concentration(s) or amount(s) as may impose clean-up, removal, monitoring or other responsibility under the Environmental Laws, as the same may be amended from time to time, or which may present a significant risk of harm to guests, invitees or employees of the Hotel. "Holder" shall mean any holder, from time to time, of any Secured Loan. ------ "Hotel" shall mean the hotel, containing approximately the number of guest ----- rooms which are set forth on Exhibit "A-1" hereto, which Owner owns at the location specified in the Recitals; the term "Hotel" shall include the Site, the improvements built thereon, and all FF&E, Fixed Asset Supplies and Inventories installed therein. "Hotel Retention" shall have the meaning set forth in Section 12.03 hereof. --------------- "Impositions" shall mean all real estate and personal property taxes, ----------- levies, assessments and similar charges (other than those which are specifically excluded pursuant to Section 13.01.B) including, without limitation, the following: all water, sewer or similar fees, rates, charges, excises or levies; license fees; permit fees; inspection fees and other authorization fees and other governmental charges of any kind or nature whatsoever, whether general or special, ordinary or extraordinary, foreseen or unforeseen, or hereinafter levied or assessed of every character (including all interest and penalties thereon), which at any time during or in respect of the Term of this Agreement may be assessed, levied, confirmed or imposed on Owner with respect to the Hotel or otherwise in respect of or be a lien upon the Hotel. Impositions shall not include any income or franchise taxes payable by Owner or Management Company. Impositions shall include any taxes, levies, assessments and similar charges which may be enacted by the applicable governmental authority in lieu of, or in complete or partial substitution for, Impositions. "Incentive Management Fee" shall mean, for each Fiscal Year, during the ------------------------ Term of this Agreement the payments which shall be made to Management Company, as compensation (in addition to the Base Management Fee and Courtyard by Marriott System Fee) to Management Company for its services under this Agreement, in the amount of fifty percent (50%) of the Available Cash Flow in each Fiscal Year (or portion thereof); provided, however, that the cumulative Incentive Management Fee received by Management Company, from the Effective Date through any given point in time during the Term of this Agreement, shall not exceed twenty percent (20%) of the cumulative Operating Profit from the Effective Date through such point in time; provided further, however, that in no event shall the aforesaid cumulative limitation require Management Company to refund to Owner any Incentive Management Fees which were paid in a previous Fiscal Year and which were within such limitation as of the time when they were paid. "Initial Term" shall have the meaning set forth in Section 4.01. ------------ "Intellectual Property" shall mean: (i) all Software; and (ii) all --------------------- manuals, brochures and directives issued by Management Company to its employees at the Hotel regarding the procedures and techniques to be used in operating the Hotel. "Interest Rate" shall mean an annual rate of interest equal to the Prime ------------- Rate (as adjusted from time to time) plus three hundred (300) basis points; provided, however that in no event shall the Interest Rate exceed the maximum rate which is permitted under applicable Legal Requirements. "Inventories" shall mean "Inventories" as defined in the Uniform System of ----------- Accounts, such as provisions in storerooms, refrigerators, pantries and kitchens; beverages in wine cellars and bars; other merchandise intended for sale; fuel; mechanical supplies; stationery; and other expensed supplies and similar items. "Legal Requirements" shall mean any federal, state or local law, code, ------------------ rule, ordinance, regulation or order of any governmental authority or agency having jurisdiction over the business or operation of the Hotel or the matters which are the subject of this Agreement, including, without limitation, the following: (i) any building, zoning or use laws, ordinances, regulations or orders, and (ii) Environmental Laws. "License" shall mean any license, permit, decree, act, order, authorization ------- or other approval or instrument which is necessary in order to operate the Hotel in accordance with Legal Requirements and pursuant to the Courtyard by Marriott System Standards and otherwise in accordance with this Agreement. "Litigation" shall mean: (i) any cause of action commenced in a federal, ---------- state or local court; and (ii) any claim brought before an administrative agency or body (for example, without limitation, employment discrimination claims). "Loan Priority Basis" shall mean the sum total, as of any given point in ------------------- time during the Term, of (i) the amount shown on Exhibit "A"-1; plus (ii) any Additional Invested Capital expended by Owner, less the amount of any condemnation award received by Owner and not applied to restoration of the Hotel pursuant to Section 15.02.B.. "Management Analysis Report" shall mean a report which, if required -------------------------- pursuant to Section 9.01.B, shall be prepared by Management Company and delivered to Owner (at the time of the delivery of the Annual Operating Statement), which shall include a description regarding the preceding Fiscal Year, of: (i) the Hotel's operating performance, including significant variations from the Annual Operating Projection; (ii) an analysis of any significant variation of the actual average daily rate and occupancy from what was set forth in the Annual Operating Projection; (iii) a review of the competitive hotel market; (iv) a description of any significant promotional or other marketing programs in which the Hotel participated, which were not anticipated as part of the Annual Operating Projection for the preceding Fiscal Year; (v) a calculation of the Revenue Index, and Operating Profit less Ground Lease Rental, if any, compared to the Performance Termination Threshold; (vi) such other supplementary information as shall be reasonably necessary to an understanding of the financial results of the Hotel; and (vii) a reasonably detailed report setting forth the components of Chain Services, the amounts billed for each such component during the Fiscal Year in question and the method of allocation for each such component, but only if Owner requests such a report in writing not later than the date which is thirty days (30) prior to the date upon which Management Company must deliver the Annual Operating Statement to Owner. "Management Company" shall have the meaning set forth in the Preamble. ------------------ "Management Fees" shall mean the Courtyard by Marriott System Fee, the Base --------------- Management Fee, Deferred Contingent Base Management Fees and the Incentive Management Fee. "Marriott" shall mean Marriott International, Inc., a Delaware corporation -------- having an address at 10400 Fernwood Road, Bethesda, Maryland 20817. "Mortgage" shall mean any security instrument which encumbers real -------- property, including, without limitation, mortgages, deeds of trust, security deeds and similar instruments. "Net Operating Profit" shall mean the greater of: (i) the excess, if any, -------------------- of Operating Profit over Owner's Priority; or (ii) zero (0). "Non-Disturbance Agreement" shall mean an agreement, in recordable form in ------------------------- the jurisdiction in which the Hotel is located, executed and delivered by a Holder (which agreement shall by its terms be binding upon all Subsequent Owners), for the benefit of Management Company, pursuant to which, in the event such Holder or any Subsequent Owner comes into possession of or acquires title to the Hotel either at or following a Foreclosure, such Holder and all Subsequent Owners shall (x) recognize Management Company's rights under this Agreement, and (y) shall not name Management Company as a party in any Foreclosure action or proceeding, and (z) shall not disturb Management Company in its right to continue to manage the Hotel pursuant to this Agreement; provided, however, that at such time, (i) this Agreement has not expired or otherwise been earlier terminated in accordance with its terms; (ii) there are no outstanding Events of Default by Management Company, and (iii) no material event has occurred and no material condition exists which, after notice or the passage of time or both, would entitle Owner to terminate this Agreement. "Operating Accounts" shall have the meaning set forth in Section 9.02. ------------------ "Operating Loss" shall mean a negative Operating Profit. -------------- "Operating Profit" shall mean, in each Fiscal Year during the Term of this ---------------- Agreement, the excess of Gross Revenues over the following deductions ("Deductions") incurred by Management Company or its Affiliates (or, in the case of any Owner Deductions, by Owner) in operating the Hotel: 1. The cost of sales including, without limitation, salaries, wages, employee benefits, Employee Claims (except to the extent specifically set forth to the contrary in Section 14.01.C or 14.01.D), payroll taxes and other costs related to Hotel employees (the foregoing costs shall not include salaries and other employee costs of executive personnel of Manager who do not work at the Hotel on a regular basis except that the foregoing costs shall include the allocable portion of the salary and other employee costs of area or regional personnel the cost of whom are not included within the definitions of Chain Services or System Services assigned to a "cluster" of hotels which includes the Hotel; provided, however, that such allocable portion of salary and employee costs shall be a Deduction only to the extent that they relate directly to the Hotel); 2. Departmental expenses; administrative and general expenses; the cost of Hotel advertising, marketing and business promotion; all utility costs including but not limited to the cost of heat, light, power and water; and the cost of routine repairs, maintenance and minor alterations which are treated as Deductions under Section 8.01; 3. The cost of Inventories and Fixed Asset Supplies consumed in the operation of the Hotel; 4. A reasonable reserve for uncollectible accounts receivable as determined by Management Company; 5. All reasonable costs and fees of independent professionals or other third parties who are retained by Management Company to perform services required or permitted hereunder; provided that Management Company will notify Owner at least thirty (30) days in advance of any proposed expenditure under this paragraph 5 which is in excess of Twenty-five Thousand Dollars ($25,000.00), subject to adjustment by the GDP Deflator on each anniversary of the Effective Date, and which was not specifically identified in the Annual Operating Projection, and Management Company shall consider in good faith any comments which Owner may have with respect to such proposed expenditure; and provided, further, that if such expenditure involves immediately-needed repair work to the Hotel or if immediate action is otherwise required, the above-described requirement regarding thirty (30) days' prior notice shall be modified to require whatever notice period is reasonable under the circumstances (including notification after the fact, if necessary); 6. The reasonable cost and expense of technical consultants and operational experts who are employees of Management Company or one of its Affiliates, and who perform specialized services in connection with non-routine Hotel work; provided, however, that the costs and expenses so incurred shall only be Deductions to the extent such costs and expenses are reasonable and competitively priced, as compared to similar work done by outside consultants or experts; and provided, further, that Management Company will notify Owner at least thirty (30) days in advance of any proposed expenditure under this paragraph 6 which is in excess of Twenty-five Thousand Dollars ($25,000), subject to adjustment by the GDP Deflator on each anniversary of the Effective Date, and which was not specifically identified in the Annual Operating Projection, and Management Company shall consider in good faith any comments which Owner may have with respect to such proposed expenditure; and provided, further, that if immediate action is otherwise in the best interests of the Hotel required, the above-described requirement regarding thirty (30) days' prior notice shall be modified to require whatever notice period is reasonable under the circumstances (including notification after the fact, if necessary); 7. The Courtyard by Marriott System Fee; 8. Subject to Section 11.03.B, the Hotel's pro rata share of costs and expenses incurred by Management Company (or its Affiliate) in providing Chain Services; 9. The Hotel's pro rata share of costs and expenses incurred in connection with sales, advertising, marketing and/or promotional programs developed for or within the Courtyard by Marriott System, such as (without limitation) the Courtyard Club, where such costs and expenses are not deducted as either departmental expenses under paragraph 2 above or as Chain Services under paragraph 8 above; 10. Insurance costs and expenses as provided in Section 12.04.B; 11. Taxes, if any, payable by or assessed against Management Company related to this Agreement or to Management Company's operation of the Hotel (exclusive of Management Company's income taxes or franchise taxes) and all Impositions assessed against the Hotel; 12. Amounts which are required to be transferred into the FF&E Reserve in accordance with the provisions of Section 8.02; 13. Lease payments pursuant to leases of Shuttle Vehicles and of Communications, Computer and Office Equipment (to the extent Management Company has not elected to make such payments from the FF&E Reserve); 14. All sums charged to the Hotel for room reservations obtained for the Hotel through the reservation system used by Management Company, but in no event in excess of the amount charged, on a per reservation basis for similarly computed activity to other Hotels in the Courtyard by Marriott System using such reservation system. 15. The reimbursement to Owner of the amount of any Owner Deductions; 16. The payment to Management Company of the cost of preparing the Management Analysis Report pursuant to Section 9.01.B; and 17. Such other costs and expenses incurred by Management Company or its Affiliates (not including the costs and expenses of providing the Central Office Services) as are specifically provided for elsewhere in this Agreement or are otherwise reasonably necessary for the proper and efficient operation of the Hotel (including, without limitation, the costs and expenses of all functions described in Section 2.03, to the extent such costs and expenses are not already treated as Deductions elsewhere in this definition of Operating Profit, unless, and to the extent that, any such costs and expenses are specifically stated not to be Deductions under any provision of this Agreement). The term "Deductions" shall not include (i) debt service payments pursuant to any Secured Loan, nor (ii) rental payments pursuant to any ground lease of the Site; both of the foregoing shall be paid by Owner from its own funds, and not from Gross Revenues nor from the FF&E Reserve. In no event shall the costs or expenses of providing the Central Office Services be treated as Deductions, or otherwise be reimbursed out of Gross Revenues; it being the intent of the parties that all such costs and expenses are to be paid by Management Company (or its Affiliates) from its own funds. "Owner" shall have the meaning set forth in the Preamble. Subject to ----- compliance with Articles XVIII and XIX of this Agreement, the term "Owner" shall include all successors and assigns of the entity identified as the "Owner" in the Preamble. "Owner Deductions" shall mean amounts paid by Owner with respect to: (i) ---------------- premiums for the insurance policies described in Section 12.05; and (ii) reasonable costs of any negotiations or Litigation with respect to any contest of Impositions, as described in Section 13.01.A; provided, however, that to the extent Owner spends in excess of Five Thousand Dollars ($5,000.00) with respect to any contest of Impositions and has not received Management Company's consent as provided in Section 13.01.A, then any amount in excess of such Five Thousand Dollars ($5,000.00) or such greater amount as may be approved by Management Company, shall not be considered an Owner Deduction. Except as specifically set forth in Section 8.02.F.2, the amount of any Owner Deductions paid by Owner shall be reimbursed to Owner (as a Deduction) in the Fiscal Year in which they were paid. Owner shall give Management Company prompt notice of any amounts it has paid which constitute "Owner Deductions" together with such evidence of payments as Management Company may reasonably require. "Owner's Distribution" shall mean, with respect to each Fiscal Year or -------------------- portion thereof during the Term of this Agreement, funds distributed to Owner in accordance with the provisions of Section 5.02 hereof which shall equal Operating Profit less any Base Management Fee, Deferred Contingent Base Management Fees and Incentive Management Fees paid to Management Company. "Owner's Priority" shall mean, with respect to each Fiscal Year (prorated ---------------- for any partial Fiscal Years) during the Term of this Agreement, a dollar amount equal to ten percent (10%) of the Priority Basis for that Fiscal Year. If the Hotel has an Existing Ground Lease, the annual rental payments for such Fiscal Year (prorated for any partial Fiscal Year) shall be added to the Owner's Priority. "Performance Termination Threshold" shall mean, with respect to each full --------------------------------- Fiscal Year during the Term of this Agreement, the dollar amount set forth on Exhibit "A-1", plus eight percent (8%) of any Additional Invested Capital expended by Owner pursuant to clause (ii) of the definition of the Priority Basis; provided, however, that the aforesaid dollar amount shall be adjusted, as of the tenth (10th) anniversary of the Effective Date, in an amount equal to seventy-five percent (75%) of the percentage change in the GDP Deflator between the Effective Date and the tenth (10th) anniversary of the Effective Date; provided that, in no event will the Performance Termination Threshold be lower than it is as of the Effective Date and provided further, that in calculating the aforesaid change in the GDP Deflator during such period of time, both: (i) the two (2) years having the highest annual rates of change in the GDP Deflator during such period; and (ii) the two (2) years having the lowest annual rates of change in the GDP Deflator during such period, shall be ignored, and such percentage change in the GDP Deflator between the Effective Date and the tenth (10th) anniversary of the Effective Date shall be recalculated, for purposes of this Agreement, using as the rate of change in the GDP Deflator for each of such four (4) excluded years (i.e., those years described in clauses (i) and (ii), above) the average annual rate of change in the GDP Deflator during the non-excluded years; and provided further that, to the extent that certain portions of the Performance Termination Threshold, as of immediately prior to such tenth (10th) anniversary adjustment, reflect expenditures which qualify as Additional Invested Capital, the aforesaid GDP Deflator adjustment shall be calculated with respect to such portions by using, as the base, not the GDP Deflator as of the Effective Date, but rather the GDP Deflator as of either the date of such expenditure or (if construction is involved) the date on which the items in question were substantially completed. "Post-Foreclosure Decision Date" shall have the meaning set forth in ------------------------------ Section 6.06. "Prime Rate" shall mean the "prime rate" as published in the "Money Rates" ---------- section of The Wall Street Journal; however, if such rate is, at any time during ----------------------- the Term, no longer so published, the term "Prime Rate" shall mean the average of the prime interest rates which are announced, from time to time, by the three (3) largest banks (by assets) headquartered in the United States which publish a "prime rate." "Priority Basis" shall mean the sum total, as of any given point in time -------------- during the Term, of: (i) the dollar amount shown on Exhibit "A-1"; plus (ii) any Additional Invested Capital expended by Owner; provided that each expenditure of Additional Invested Capital shall be added to the Priority Basis at such date or dates as the expenditure occurred, taking into consideration at what point (or points) during such Fiscal Year such expenditure occurred; less (iii) the amount of any condemnation award received by Owner and not applied to restoration of the Hotel pursuant to Section 15.02.B. "Proprietary Marks" shall mean all trademarks, trade names, symbols, logos, ----------------- slogans, designs, insignia, emblems, devices, service marks and distinctive designs of buildings and signs, or combinations thereof, which are used to identify hotels in the Courtyard by Marriott System. The names "Marriott", "Courtyard" "Courtyard by Marriott" and "Courtyard Club", and any of the foregoing used in conjunction with other words or names, are examples, without limitation of Proprietary Marks. The term "Proprietary Marks" shall include all present and future Proprietary Marks, whether they are now or hereafter owned by Management Company or one of its Affiliates, and whether or not they are registered under the laws of the United States or any other country. The term "Proprietary Marks" shall also include all trade names, trademarks, symbols, logos, designs, etc. which are used in connection with the operation of the Hotel during the Term (such as, without limitation, the names of the restaurants and lounges). Notwithstanding the foregoing, those trade names, trademarks, symbols, logos, designs, etc., which are specifically set forth on Exhibit "E" hereto shall be deemed to be "Proprietary Marks" only for so long as this Agreement is in effect, and such Proprietary Marks shall revert to the exclusive control of Owner as of the date of Termination. "Proprietary Signage" shall mean any signage used in connection with the ------------------- Hotel (including both interior and exterior signage, and including billboards and other signage not located on the Site) which contains one or more Proprietary Marks; any signage which contains the word "Marriott" or "Courtyard" shall automatically be deemed to be Proprietary Signage. "Prospectus" shall have the meaning set forth in Section 20.05. ---------- "Qualified Lender" shall mean any Holder, from time to time, of any ---------------- Qualified Loan with respect to which Management Company has received a written notice (pursuant to Section 20.09 of this Agreement) stating: (i) the name and address of such Holder; and (ii) that such Holder is a "Qualified Lender" pursuant to the terms of this Agreement. "Qualified Loan" shall mean any Secured Loan in which the initial principal -------------- amount, as of the date such Secured Loan is incurred, when added to the current principal balance of all existing Secured Loans as of that date, is less than or equal to the greater of the following: (i) Seventy percent (70%) of the Loan Priority Basis; or (ii) the result obtained by (a) dividing the Operating Profit for the thirteen (13) most recent full Accounting Periods by the Coverage Ratio; then, (b) multiplying the result of clause (a) by the Capitalization Multiple; or (iii) the existing balance of any Secured Loans encumbering the Hotel immediately prior to the date of the incurrence of such Qualified Loan, plus commercially reasonable Transaction Costs associated with such refinancing, up to an amount equal to four percent (4%) of the principal amount of such Qualified Loan. In addition, regardless of whether or not the above test set forth in clauses (i), (ii) and (iii) is satisfied, the existing (as of the Effective Date) balance of any Secured Loan which is secured by any Existing Mortgage shall be deemed to be a "Qualified Loan." "Qualified Loan Acceleration" shall mean the acceleration of the --------------------------- indebtedness incurred pursuant to any Qualified Loan, as a result of a default under the terms and conditions of such Qualified Loan. "Renewal Terms" shall have the meaning set forth in Section 4.01. ------------- "Restricted Area" shall mean that area which is shown on the map attached --------------- hereto as Exhibit "D", as described in the narrative which is set forth in Exhibit "D-1". "Restricted Hotel" shall mean any hotel whose size, facilities and market ---------------- positioning are such that, if such hotel had been operated by Management Company or one of its Affiliates as of the Effective Date, it would have been operated as a member of the Courtyard by Marriott System (that is, as a limited service hotel, as opposed to a full service hotel or one of the other limited service brands (Residence Inn or Fairfield Inn) also operated by Affiliates of Management Company. The term "Restricted Hotel" shall not include any one or more of the following: (i) any existing (as of the Effective Date) member of the Courtyard by Marriott System which is within the Restricted Area; (ii) any full service Marriott hotel or Marriott suite hotel (or other similar full service lodging product) or any Residence Inn by Marriott (or other similar extended-stay lodging product) or any Fairfield Inn (or other similar economy-priced lodging product); (iii) any hotel or hotels which are members of a chain of hotels (provided that such chain has a minimum of four (4) or more hotels in operation), all or substantially all (but in no event less than four (4) hotels) of which is acquired by, or merged with, or franchised by or joined through marketing agreement with Management Company or one of its Affiliates (or the operation of which is transferred to Management Company or one of its Affiliates); (iv) any hotel or hotels which are members of a group of hotels which is (in a single transaction with a single seller or transferor) acquired by or merged with, or franchised by or joined through marketing agreement, with Management Company or one of its Affiliates (or the operation of which is transferred to Management Company or one of its Affiliates), provided that such group of hotels contains no fewer than four (4) hotels; (v) any future lodging product developed by Management Company or one of its Affiliates which is not a lodging product which would have been included within the Courtyard by Marriott System, as such system existed as of the Effective Date; or (vi) any existing non-Marriott hotel within the Restricted Area which is specifically designated on Exhibit D-1 as not being a Restricted Hotel. "Revenue Data Publication" shall mean Smith's STAR Report, a monthly ------------------------ publication distributed by Smith Travel Research, Inc. of Gallatin, Tennessee, or an alternative source, reasonably satisfactory to both parties, of data regarding the Revenue Per Room of hotels in the general trade area of the Hotel. The "competitive set" for the Hotel shall be determined (with periodic adjustments) by Management Company, subject to Owner's approval (such approval not to be unreasonably withheld). If such Smith's STAR Report is discontinued in the future, or ceases (in the reasonable opinion of either Owner or Management Company) to be a satisfactory source of data regarding the Revenue Per Room of various hotels in the general trade area of the Hotel, Management Company shall select an alternative source, subject to Owner's approval (such approval not to be unreasonably withheld). If the parties fail to agree on either such competitive set or such alternative source, as the case may be, within a reasonable period of time, the matter shall be resolved by arbitration pursuant to Section 20.13. "Revenue Index" shall mean that fraction which is equal to (a) the Revenue ------------- Per Room for the Hotel, divided by (b) the average Revenue Per Room for the hotels in the Hotel's competitive set (including the Hotel), as set forth in the Revenue Data Publication. "Revenue Index Threshold" shall mean the number set forth on Exhibit "A-1" ----------------------- hereto. However, if the entry of a new hotel into the Hotel's competitive set (or the removal of a hotel from such competitive set) causes significant variations in the Revenue Index which do not reflect the Hotel's true position in the relevant market, appropriate adjustments shall be made to the Revenue Index Threshold by mutual consent of Owner and Management Company (neither such consent to be unreasonably withheld). "Revenue Per Room" shall mean, (i) the term "revenue per room" as defined ---------------- by the Revenue Data Publication; or (ii) if the Revenue Data Publication is no longer being used (as more particularly set forth in the definition of "Revenue Data Publication"), the aggregate gross room revenues of the hotel in question for a given period of time divided by the total room nights for such period. If clause (ii) of the preceding sentence is being used, a "room" shall be a hotel guest room which is keyed as a single unit, and shall include rooms which are temporarily unavailable due to: (i) maintenance or (ii) ongoing renovation work. "Sale/Leaseback Transaction" shall have the meaning set forth in Section -------------------------- 6.10. "Sale of the Hotel" shall mean any sale, assignment, transfer or other ----------------- disposition, for value or otherwise, voluntary or involuntary, of Owner's title to the Hotel or the Site (either fee or leasehold title, as the case may be), but shall not include a collateral assignment intended to provide security for a loan. For purposes of this Agreement, a "Sale of the Hotel" shall also include a lease (or sublease) of the entire Hotel or Site. The phrase "Sale of the Hotel" shall also include any sale, transfer, or other disposition, for value or otherwise, in a single transaction or a series of related transactions, of the controlling interest in Owner. If Owner is a corporation, the phrase "controlling interest" shall mean the right to exercise, directly or indirectly, fifty percent (50%) or more of the voting rights attributable to the shares of Owner (through ownership of such shares or by contract). If Owner is not a corporation, the phrase "controlling interest" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of Owner. Notwithstanding the foregoing, the term "Sale of the Hotel" shall not include any sale, assignment, transfer or other disposition of the Hotel or the Site by Owner to an Affiliate of Owner. "Second Notice" shall have the meaning set forth in Section 6.02. ------------- "Secured Loan" shall mean and include: (i) any indebtedness secured by a ------------ Mortgage encumbering the Hotel or all or any part of Owner's interest therein; and (ii) all amendments, modifications, supplements and extensions of any such Mortgage. "Settlement Threshold Amount" shall mean the greater of (i) One Hundred --------------------------- Thousand Dollars ($100,000) (as adjusted by the GDP Deflator); or (ii) a dollar amount (to be re-determined whenever reasonably necessary) equal to the highest amount paid in a representative sampling of Employee Claims, which have been settled within the preceding twelve (12) months where each of such settlements can be reasonably characterized as being (i) within the normal course of business at the Hotel, and (ii) within the range of similar settlements at other hotels comparable to the Hotel. Any dispute between the parties as to the appropriate amount under clause (ii) of the preceding sentence shall be submitted to arbitration under Section 20.13. "Shuttle Vehicles" shall mean any car, van, bus or similar motor vehicle ---------------- used primarily for the purpose of transporting Hotel guests. "Site" shall mean the parcel or parcels of land described in Exhibit "A" ---- attached hereto. "Soft Goods" shall mean all fabric, textile and flexible plastic products ---------- (not including items which are classified as "Fixed Asset Supplies" under the Uniform System of Accounts)which are used in furnishing the Hotel, including, without limitation: carpeting, drapes, bedspreads, wall and floor coverings, mats, shower curtains and similar items. "Software" shall mean all computer software and accompanying documentation -------- (including all future upgrades, enhancements, additions, substitutions and modifications thereof), other than computer software which is commercially available, which are used by Management Company in connection with the property management system, the reservation system and all future electronic systems developed by Management Company for use in the Hotel. "Subsequent Owner" shall mean any individual or entity which acquires title ---------------- to or possession of the Hotel at or through a Foreclosure. "Term" shall mean the Initial Term plus all Renewal Terms. ---- "Termination" shall mean the expiration or sooner cessation of this ----------- Agreement. "Transaction Costs" shall mean, with respect to the incurring of any ----------------- Secured Loan, all normal transaction costs (to the extent actually incurred) including, without limitation, the following: state and local transfer taxes; escrow fees; recording costs; Mortgage recording taxes; costs of any survey required by the Holder; reasonable fees of the Holder's outside attorneys and accountants; appraisal fees; title insurance premiums; financing costs (including "points"); reasonable attorneys' fees of Owner in connection with such Secured Loan; environmental inspection, testing and reporting fees to the extent required by the Holder; and brokerage commissions (provided that no such brokerage commissions shall be recognized as "Transaction Costs" hereunder if they are made to a person or entity affiliated with Owner, to the extent (if any) that such payments exceed the normal customary amounts). "Uniform System of Accounts" shall mean the Uniform System of Accounts for -------------------------- Hotels, Eighth Revised Edition, 1986, as published by the Hotel Association of New York City, Inc. "Working Capital" shall mean assets which are used in the day-to-day --------------- operation of the Hotel's business, including, without limitation, amounts kept in petty cash funds, amounts deposited in operating bank accounts, receivables, prepaid expenses and funds expended to purchase Inventories, less accounts payable and accrued current liabilities. END OF ARTICLE I ARTICLE II APPOINTMENT OF MANAGEMENT COMPANY --------------------------------- 2.01 Appointment ----------- Owner hereby appoints and employs Management Company as Owner's exclusive agent to supervise, direct and control the management and operation of the Hotel for the Term provided in Article IV. Management Company accepts said appointment and agrees to manage the Hotel during the Term of this Agreement in accordance with the terms and conditions hereinafter set forth. The performance of all activities by Management Company hereunder shall be for the account of Owner. 2.02 Delegation of Authority ----------------------- Except as otherwise specifically set forth in this Agreement, Hotel operations shall be under the exclusive supervision and control of Management Company which, except as otherwise specifically provided in this Agreement, shall be responsible for the proper and efficient operation of the Hotel. Management Company shall have discretion and control, free from interference, interruption or disturbance, but in all respects subject to the provisions of this Agreement, in all matters relating to management and operation of the Hotel, including, without limitation, the following: charges for rooms and commercial space; credit policies; food and beverage prices and services; employment policies; granting of leases, parking services, Licenses and concessions for shops and agencies within the Hotel (provided that the term of any such lease, License or concession shall not exceed the Term of this Agreement; and provided further that Owner's consent shall be required prior to the execution by Management Company of any such lease, License or concession which (i) has a term of more than five (5) years; or (ii) involves more than one thousand (1,000) square feet of space within the Hotel); receipt, holding and disbursement of funds; maintenance of bank accounts; procurement of Inventories, supplies and services; participation in marketing, advertising plans, promotion and publicity; and, generally, all activities necessary for operation of the Hotel. 2.03 Operational Standards --------------------- In accordance with the Courtyard by Marriott System Standards and the other terms of this Agreement, Management Company shall, in connection with the Hotel, perform each of the following functions (provided that in all cases, except as otherwise specifically set forth in this Agreement, the costs and expenses of performing such functions shall be Deductions): A. Obtain and keep in full force and effect, either in its own name on behalf of Owner or in Owner's name, as may be required by the Legal Requirements, any and all Licenses necessary for the operation of the Hotel, to the extent the same is within the control of Management Company (or, if same is not within the control of Management Company, Management Company shall use all due diligence and reasonable efforts to obtain and keep same in full force and effect). B. Recruit, employ, supervise, direct and (when appropriate) discharge the employees at the Hotel. C. Establish and revise, as necessary, administrative policies and procedures, including policies and procedures for the control of revenue and expenditures, for the purchasing of supplies and services, for the control of credit, and for the scheduling of maintenance, and verify that the foregoing procedures are operating in a sound manner. D. Plan, execute, and supervise repairs and maintenance at the Hotel. E. Procure (as agent for Owner) all Fixed Asset Supplies and Inventories. F. Maintain the Operating Accounts. G. Prepare and deliver Accounting Period Statements, Annual Operating Statements, Annual Operating Projections, Building Estimates, FF&E Estimates, and such other budgets and reports as are required by this Agreement. H. Establish prices, rates and charges for services provided in the Hotel, including room rates. I. As agent for Owner, negotiate and enter into leases, concessions and Licenses for shops and other facilities within the Hotel. J. Administer the leases, concessions and Licenses for shops and other facilities within the Hotel (whether entered into pursuant to subsection I, above, or otherwise). K. Provide the Central Office Services and the Chain Services. L. Provide, or cause to be provided, risk management services relating to the types of insurance required to be obtained or provided by Management Company under this Agreement, provided that the costs and expenses of providing such services are to be paid as described in Section 12.04.B. M. Reasonably cooperate with Owner concerning (i) disputes with any Holder regarding the Hotel, (ii) contests of Impositions and Legal Requirements, and (iii) adjustments of insurance claims and condemnation awards involving the Hotel. N. Reasonably cooperate (provided that Management Company shall not, except as otherwise specifically set forth in Section 6.01, be obligated to enter into any amendments of this Agreement) with Owner in any attempt(s) by Owner to effectuate a Sale of the Hotel (provided that nothing herein shall affect the provisions of Section 20.05), or to obtain any Secured Loan. If given reasonable notice, such cooperation shall include, without limitation: (i) answering any reasonable questions by prospective purchasers and Holders; (ii) preparing lists and schedules of leases, concessions, FF&E, Fixed Asset Supplies, Inventories, and similar items (but specifically excluding customer lists); and (iii) making such certifications and representations to Owner, to such purchasers and to such Holders, regarding the Hotel and the operation thereof, as Owner may reasonably request (taking into account the extent of Management Company's control and responsibility provided for hereunder). Owner shall promptly reimburse Management Company, from its own funds and not as a Deduction, for the reasonable costs and expenses incurred by Management Company in connection with any actions necessary to comply with the requirements of this Section 2.03.N, provided that such actions are not otherwise required under other provisions of this Agreement. O. Arrange for and supervise public relations and advertising, and prepare annual marketing plans. P. Endeavor to manage the timing of expenditures to replenish Inventories, Fixed Asset Supplies, payments on accounts payable and collections of accounts receivable, so as to avoid or minimize any cash deficits with respect to Hotel operations, which deficits would otherwise require additional funding of Working Capital by Owner. Q. Comply with all provisions in the Existing Ground Lease and in any Existing Mortgages which are by their terms applicable to the operation of the Hotel; provided, however, that all practices and procedures used by Management Company in the operation of the Hotel as of the Effective Date shall be deemed to be in compliance with the Existing Ground Lease and all Existing Mortgages; and provided further, that if either the Ground Lessor or any Holder under an Existing Mortgage shall, from time to time, notify Management Company that it has determined that certain practices and procedures which are used by Management Company in the operation of the Hotel are not in compliance with the provisions of the Existing Ground Lease or such Existing Mortgage (as the case may be), Management Company shall promptly alter such practices and procedures to ensure such compliance; and provided further, that if such compliance would require work by Management Company which is beyond the normal course of Hotel operations, or would impose additional financial burdens on the Hotel which are beyond the normal course of Hotel operations, Owner (from its own funds, not as a Deduction) shall compensate Management Company for such work and such additional burdens. 2.04 Limitations on Authority ------------------------ A. Notwithstanding anything in Section 2.02 or elsewhere in this Agreement to the contrary (unless otherwise stated in this Section 2.04), and in addition to the various other provisions of this Agreement which prohibit Management Company from taking certain actions or which allow certain actions only if Owner's consent thereto has been obtained, Management Company shall not, without the prior written approval of Owner, which approval Owner may withhold in its sole discretion, perform any of the following actions in connection with the Hotel and on behalf of or burdening Owner: 1. Acquiring any land or interest therein; 2. Acquiring any capital assets or interest therein except (i) items in the approved Building Estimate, and (ii) FF& E, Fixed Asset Supplies and Inventories (to the extent the same constitute capital assets) in the ordinary course of business as expressly provided for in this Agreement; 3. Financing, refinancing or mortgaging of any portion of the Hotel or the revenue due to Owner therefrom; 4. Selling (other than dispositions of FF&E, Fixed Asset Supplies and Inventories in the ordinary course of business as expressly provided for in this Agreement), leasing (other than as expressly provided for in this Agreement, including without limitation, Section 2.02 of this Agreement), or other transferring of, or the pledging or placing of any lien or encumbrance on, any part of the Hotel; 5. In the event of a total or partial condemnation, consenting to any award or participating in any condemnation proceeding, except as expressly provided for in this Agreement; 6. Entering into, modifying or terminating any lease, concession or License, except to the extent permitted under Section 2.02; 7. Adjusting any claim or settling any Litigation which (a) is not covered by any of the insurance policies described in Article XII and is not an Employee Claim, and which would result in a Deduction or payment in excess of Five Hundred Thousand Dollars ($500,000) in any Fiscal Year, as adjusted by the GDP Deflator, or (b) would impose on Owner any material liability or obligation other than the payment of money, or would require Owner to make any material admission; or 8. Adjusting any claim, under applicable property insurance policies, regarding injury or damage to the Hotel or its contents, where the estimated cost of restoration is in excess of One Million Dollars ($1,000,000), as adjusted by the GDP Deflator. 2.05 Covenants, Conditions or Restrictions -------------------------------------- A. As of the Effective Date, there are existing covenants, conditions, restrictions and/or agreements, including reciprocal easements or cost-sharing arrangements (all of the foregoing types of encumbrances on the Hotel, or agreements relating to the Hotel, whether existing as of the Effective Date or not, shall be collectively referred to as "CC&R's"; those CC&R's which are in existence as of the Effective Date shall be referred to in this Agreement as "Existing CC&R's"). Management Company hereby gives its consent to all Existing CC&R's. Except as otherwise specifically set forth to the contrary in Exhibit "F" hereto, all costs, expenses and charges which are imposed on the Hotel under the Existing CC&R's shall be paid from Gross Revenues as Deductions. Those certain costs, expenses and charges which are described on Exhibit "F" hereto as "capital charges" shall be paid by Owner, from its own funds, and all such payments shall be treated for purposes of this Agreement as Additional Invested Capital expended by Owner. B. CC&R's which are entered into, or become encumbrances on the Hotel and/or the Site, after the Effective Date shall be referred to in this Agreement as "Future CC&R's". Owner agrees that it will give Management Company, for Management Company's prior approval, written notice of its intention to execute any Future CC&R's, such notice to be reasonably in advance of the execution thereof. Owner covenants that, during the Term of this Agreement, there will not be (unless Management Company has given its prior written consent thereto) any Future CC&R's affecting the Site or the Hotel: (i) which purport to impose any material financial obligations on the Hotel; (ii) which would prohibit or limit Management Company from operating the Hotel, including cocktail lounges, restaurants and other facilities customarily a part of or related to a first-class limited service hotel, in accordance with the Courtyard by Marriott System Standards; or (iii) which would allow Hotel facilities (for example, parking spaces) to be used by persons other than guests, invitees or employees of the Hotel. C. All financial obligations imposed on Owner or on Management Company or on the Hotel pursuant to any Future CC&R's shall be paid by Owner from its own funds, and not from Gross Revenues or from the FF&E Reserve, unless Management Company has given its prior written consent to such Future CC&R's. Management Company agrees that it will not unreasonably withhold its consent to any such Future CC&R's; provided, however, that Management Company shall be entitled to withhold its consent in its discretion if a proposed Future CC&R would have a material impact on the operation of the Hotel, as described in clauses (i), (ii) or (iii) of Section 2.05.B. Upon receipt of such consent from Management Company, such sums shall be Deductions in computing Operating Profit. D. Owner shall not waive any protections which benefit the Hotel pursuant to existing restrictive covenants without the prior written consent of Management Company which consent shall not be unreasonably withheld, conditioned or delayed. 2.06 Licenses and Permits -------------------- Owner agrees that, upon request by Management Company, it will sign promptly and without charge applications for Licenses. END OF ARTICLE II ARTICLE III OWNERSHIP OF THE HOTEL ---------------------- 3.01 Ownership of the Hotel ---------------------- A. Each party acknowledges that the status of title to the Site and to the Hotel is as described on Exhibit "F" hereto; neither party will hold the other party responsible for any defects in said status of title, and each party hereby releases the other party from all claims stemming from any such defects. B. Owner hereby covenants that, throughout the Term of this Agreement, it will not change the status of title to the Site from that which is described on Exhibit "F" hereto, except that Owner shall have the right either (i) to effectuate a Sale of the Hotel in accordance with Article XIX, or (ii) to encumber the Site and the Hotel with the following: 1. Mortgages which are given to secure any one or more Qualified Loans; 2. Liens for Impositions or other public charges not yet due or which are being contested in good faith; and 3. Easements or other encumbrances (not including those described in subsection 1 or 2 above) which do not adversely affect the operation of the Hotel by Management Company and which are not prohibited pursuant to Section 2.05.B of this Agreement. C. Owner shall indemnify, defend and hold Management Company and its Affiliates harmless from claims by entities which have loaned money to Owner that Management Company (or any of such Affiliates) owes any such lender all or any portion of such indebtedness. D. Management Company shall indemnify, defend and hold Owner and its Affiliates harmless from claims by entities which have loaned money to Management Company that Owner (or any of such Affiliates) owes any such lender all or any portion of such indebtedness. END OF ARTICLE III ARTICLE IV TERM ---- 4.01 Term ---- A. The initial term ("Initial Term") of this Agreement shall commence with the Effective Date and, unless sooner terminated as herein provided, shall continue until the expiration of Fiscal Year 2013. The Term shall thereafter be automatically renewed for each of three (3) successive periods of ten (10) full Fiscal Years each ("Renewal Terms"), unless either: (i) Management Company, at its option, notifies Owner, in accordance with Section 20.09, at any time within the period of eighteen (18) months prior to the expiration of the Initial Term or the then current Renewal Term, as the case may be, of its intention not to renew; or (ii) Management Company has committed an Event of Default, and has been notified by Owner of such Event of Default, under Article XVI of this Agreement, as of the date of any such renewal. B. If Management Company so notifies Owner of its intention not to renew pursuant to Section 4.01.A, Management Company shall continue to manage the Hotel pursuant to this Agreement until the termination date set forth in such notice, provided that such termination date shall be: (i) no less than twelve (12) months after the date of such notice; and (ii) in no event earlier than the expiration date of the Initial Term or the then current Renewal Term, as the case may be. Such termination date may be after the expiration of the Initial Term or the then current Renewal Term, as the case may be, provided that the requirements of the preceding sentence are satisfied. However, if Management Company has so notified Owner of its intention not to renew, Owner may, at its option, by written notice to Management Company at least ninety (90) days prior to the date on which Owner desires Termination to occur, reduce the period of time prior to Termination to any shorter period of time which Owner desires, provided that such shorter period of time shall be at least the greater of: (a) ninety (90) days, (beginning as of the date of such notice from Owner), or (b) the minimum period of time which Management Company reasonably decides is prudent, given the requirements of the applicable Employment Laws regarding employee discharges. In no event shall the fact that Management Company may, pursuant to the preceding sentence, be managing the Hotel after the expiration of the Initial Term or the then current Renewal Term, as the case may be, be construed as an election by Management Company to renew the Term, if Management Company has elected (in accordance with this Section 4.01) in writing not to so renew. C. If Owner has the right, under the provisions of the Existing Ground Lease, to elect to renew or extend the term of the Existing Ground Lease, Owner shall so notify Management Company at least one hundred eighty (180) days (but no more than one (1) year) prior to the expiration of the period within which Owner is obligated to notify the Ground Lessor of its election to renew or extend the term of the Existing Ground Lease. Such notice from Owner shall contain all of the relevant facts about the impending election to renew or extend, including the length of the period of renewal or extension. Unless Management Company notifies Owner, within a period of ninety (90) days after receipt of the foregoing notice from Owner, that Management Company disapproves the renewal or extension of the term of the Existing Ground Lease, Owner will, by proper notice to the Ground Lessor, within the applicable time period under the Existing Ground Lease, elect to renew or extend the term of the Existing Ground Lease. D. If, after proper notice from Owner in accordance with Section 4.01.C, Management Company fails to disapprove the renewal or extension of the term of the Existing Ground Lease, the Term of this Agreement shall be deemed to be automatically extended to the later of: (i) the expiration of the term of the Existing Ground Lease, as renewed or extended in accordance with Section 4.01.C; or (ii) the date on which the Term of this Agreement would otherwise have expired absent this sentence. If, in order to comply with the preceding sentence, it is necessary for Management Company to waive its option not to renew with respect to one or more Renewal Terms, such waiver shall be deemed to have been given; however, Management Company shall retain the right not to renew (as more particularly described in Section 4.01 A) as to any portion of such Renewal Term(s) which would occur after the expiration of the term of the Existing Ground Lease, as renewed or extended in accordance with Section 4.01.C. E. If, after proper notice from Owner in accordance with Section 4.01.C, Management Company disapproves the renewal or extension of the term of the Existing Ground Lease, the Term of this Agreement shall be deemed to be automatically reduced to the earlier of: (i) the expiration of the term of the Existing Ground Lease; or (ii) the date on which the Term of this Agreement would otherwise have expired absent this sentence. 4.02 Actions to be Taken Upon Termination ------------------------------------ Upon a Termination of this Agreement, the following shall be applicable: A. Management Company shall, within sixty (60) days after Termination of this Agreement, prepare and deliver to Owner a final accounting statement with respect to the Hotel, as more particularly described in Section 9.01 hereof, along with a statement of any sums due from Owner to Management Company pursuant hereto, dated as of the date of Termination. Within thirty (30) days after the receipt by Owner of such final accounting statement, the parties will make whatever cash adjustments are necessary pursuant to such final statement. The cost of preparing such final accounting statement shall be a Deduction, unless the Termination occurs as a result of an Event of Default by either party, in which case the defaulting party shall pay such cost. Management Company and Owner acknowledge that there may be certain adjustments for which the necessary information will not be available at the time of such final accounting, and the parties agree to readjust such amounts and make the necessary cash adjustments when such information becomes available; provided, however, that (unless there are ongoing disputes of which each party has received notice) all accounts shall be deemed final as of one hundred eighty (180) days after such Termination. B. As of the date of the final accounting referred to in subsection A above, Management Company shall release and transfer to Owner any of Owner's funds which are held or controlled by Management Company with respect to the Hotel, with the exception of funds to be held in escrow pursuant to Section 12.04, and Section 14.01.F. During the period between the date of Termination and the date of such final accounting, Management Company shall pay (or reserve against) all Deductions which accrued (but were not paid) prior to the date of Termination, using for such purpose any Gross Revenues prior to the date of Termination. C. Management Company shall make available to Owner such books and records respecting the Hotel (including those from prior years, subject to Management Company's reasonable records retention policies) as will be needed by Owner to prepare the accounting statements, in accordance with the Uniform System of Accounts, for the Hotel for the year in which the Termination occurs and for any subsequent year. Such books and records shall not include: (i) employee records which must remain confidential either under Legal Requirements or under reasonable system-wide corporate policies of Management Company; (ii) any Intellectual Property; or (iii) customer lists. D. Management Company shall (to the extent permitted by Legal Requirements) assign to Owner or any other manager employed by Owner to operate and manage the Hotel, all Licenses for the Hotel which have been issued in Management Company's name; provided that if Management Company has expended any of its own funds in acquiring such Licenses or in transferring any such Licenses to Owner, Owner shall reimburse Management Company therefor if it has not done so already. E. All Proprietary Signage shall be removed by Management Company from the Hotel and from the Site (and from any locations other than the Site). The cost of such removal shall be a Deduction, unless the Termination occurs either: (i) as a result of an Event of Default by either party, in which case the defaulting party shall pay the cost of such removal from its own funds, and not as a Deduction; or (ii) as a result of Management Company's election not to renew the Term, as of the expiration of either the Initial Term or any Renewal Term (as the case may be), in which case Management Company shall pay the cost of such removal from its own funds, and not as a Deduction. F. Various other actions shall be taken, as described in this Agreement, including, but not limited to, the actions described in Sections 7.01, 10.02, 10.03, 10.04, 12.04.B, and 14.01.F. G. Management Company shall peacefully vacate and surrender the Hotel to Owner. The provisions of this Section 4.02 shall survive any Termination. 4.03 Performance Termination ----------------------- A. Subject to the provisions of Section 4.03.B below, Owner shall have the option to terminate this Agreement if: 1. With respect to any two (2) consecutive full Fiscal Years (not including any Fiscal Year prior to Fiscal Year 1996), Operating Profit less the amount of Ground Lease Rental, if applicable, for each of such two (2) Fiscal Years is less than the Performance Termination Threshold; and 2. The Revenue Index of the Hotel during each of such two (2) consecutive Fiscal Years is less than the Revenue Index Threshold; and 3. The fact that the Hotel is not meeting the tests set forth in Section 4.03.A(1) and (2) is not the result of either (x) Force Majeure, or (y) any major renovation of the Hotel. Such option to terminate shall be exercised by serving written notice thereof on Management Company no later than sixty (60) days after the receipt by Owner of the annual accounting under Section 9.01 hereof for the second (2nd) of the two (2) Fiscal Years referred to in Section 4.03.A(1). If Management Company does not elect to avoid such Termination pursuant to Section 4.03.B below, this Agreement shall terminate as of the end of the fourth (4th) full Accounting Period following the date on which Management Company receives Owner's written notice of its intent to terminate this Agreement; provided that such period of time shall be extended as required by applicable Legal Requirements pertaining to the termination of the employment of the employees at the Hotel. Owner's failure to exercise its right to terminate this Agreement pursuant to Section 4.03.A with respect to any given Fiscal Year shall not be deemed an estoppel or waiver of Owner's right to terminate this Agreement with respect to subsequent Fiscal Years to which this Section 4.03.A may apply. B. Upon receipt of Owner's written notice of Termination under Section 4.03.A, Management Company shall have the option, to be exercised within sixty (60) days after receipt of said notice, to avoid such Termination by paying Owner an amount (the "Cure Payment") equal to one hundred five percent (105%) of the amount by which Operating Profit less Ground Lease Rental, if any, for either of the two (2) Fiscal Years in question (i.e., the two (2) Fiscal Years referred to in Section 4.03.A(1)) was less than the Performance Termination Threshold. Any such Cure Payment shall be accounted for as a fee to Owner in connection with the avoidance of such Termination. In the event Management Company makes a Cure Payment pursuant to this Section 4.03.B, the Fiscal Year with respect to which such Cure Payment was made shall thereafter not be treated, for purposes of subsequent elections by Owner pursuant to Section 4.03.A, as a Fiscal Year in which the circumstances described in Section 4.03.A(1) have occurred. If Management Company exercises such option to make such Cure Payment, then the foregoing Owner's election to terminate this Agreement under Section 4.03.A shall be cancelled and of no force or effect with respect to the two (2) Fiscal Years in question and this Agreement shall not terminate. Such cancellation, however, shall not affect the right of Owner, as to each subsequent Fiscal Year to which Section 4.03.A applies, to again elect to terminate this Agreement pursuant to the provisions of Section 4.03.A (which subsequent election shall again be subject to Management Company's rights under this Section 4.03.B). If Management Company does not exercise its option to make the Cure Payment, then this Agreement shall be terminated as of the date set forth in Section 4.03.A. Any Cure Payment which is paid by Management Company pursuant to this Section 4.03.B shall not be recoverable by Management Company. Any Cure Payment which is paid by Management Company pursuant to this Section 4.03.B shall only operate to cancel Owner's election to terminate this Agreement under Section 4.03.A, and shall not operate to cure any outstanding Defaults by Management Company under Article XVI. END OF ARTICLE IV ARTICLE V COMPENSATION OF MANAGEMENT COMPANY; DISTRIBUTIONS ------------------------------------------------- 5.01 Management Fees --------------- A. In consideration of the services it provides pursuant to this Agreement, Management Company shall retain the Management Fees. Owner's Priority, the Base Management Fee, Deferred Contingent Base Management Fees, the Courtyard by Marriott System Fee and the Incentive Management Fee shall be appropriately prorated for any Partial Fiscal Year. B. Notwithstanding the provisions of Article IX of this Agreement permitting the consolidation of reports and co-mingling of certain funds with other hotels owned by Owner, the Base Management Fee, Deferred Contingent Management Fees, Courtyard by Marriott System Fee and Incentive Management Fee shall be calculated based on the revenues generated by the Hotel and not on a consolidated basis with any other hotels which may be owned by Owner. 5.02 Distribution of Operating Profit In each Fiscal Year, Operating -------------------------------- Profit shall be distributed to Owner and Management Company in accordance with the following priorities: A. Owner shall first receive an amount equal to the lesser of: (i) Owner's Priority; or (ii) Operating Profit. B. Management Company shall next receive (i) the Base Management Fee, provided, however, that if, in any Fiscal Year, the Base Management Fee exceeds Net Operating Profit, Management Company's right to receive the Base Management Fee shall be deferred to the extent of such excess, and such deferred sums shall become Deferred Contingent Base Management Fees; (ii) the Deferred Contingent Base Management Fees; to the extent that Net Operating Profit is otherwise sufficient for such purposes; and (iii) an amount equal to the Incentive Management Fee. C. Owner shall receive all Operating Profit remaining after the distributions made pursuant to the preceding subparagraphs of this Section 5.02. 5.03 Accounting and Interim Payments ------------------------------- A. On or before the twentieth (20th) day after the close of each Accounting Period, Management Company shall deliver to Owner a reasonably detailed accounting statement (the "Accounting Period Statement") in substantially the form set forth in Exhibit "B" hereto. Upon Owner's written request therefor, Management Company shall forward copies of any such Accounting Period Statement to any Holders or Ground Lessors, at the addresses specified by Owner. Such Accounting Period Statement shall set forth the results of the operations of the Hotel for the preceding Accounting Period and for the Fiscal Year-to-date, all in accordance with generally accepted accounting principles applied on a consistent basis. Each Accounting Period Statement shall be accompanied by a statement, by either the controller, assistant controller of the Hotel or other authorized financial representative of Management Company, that, to the best of his or her knowledge and belief, and subject to routine year-end audit and adjustment, such Accounting Period Statement is true and correct in all material respects. Each Accounting Period Statement shall include: (i) average rate and occupancy, Gross Revenues, Operating Profit, Owner's Priority, the Management Fees, and the interim Owner's Distribution; and (ii) comparisons with the categories for the prior Fiscal Year. With each such Accounting Period Statement, Management Company shall transfer any interim Owner's Distribution due to Owner, and shall retain any interim Management Fees due to Management Company. Calculations and payments of the Management Fees and the Owner's Distribution with respect to each Accounting Period within a Fiscal Year shall be accounted for cumulatively. B. Within seventy-five (75) days after the close of each Fiscal Year, Management Company shall submit an Annual Operating Statement, as more fully described in Section 9.01, for such Fiscal Year to Owner, which Annual Operating Statement shall be controlling over the interim Accounting Period Statements. Any adjustments or payments required by any such Annual Operating Statement shall be made promptly by the parties. Operating Losses shall not be carried forward or backward to subsequent or prior Fiscal Years. 5.04 Accounting for Period Prior to Effective Date --------------------------------------------- A. It shall be a general principle in the accounting for the Hotel that all liabilities incurred and/or income generated prior to the Effective Date, or properly allocated to the period prior to the Effective Date under generally accepted accounting principles, shall be included in the Accounting Period Statements and the Annual Operating Statements for the Hotel pursuant to this Agreement for the Fiscal Year in which such liabilities are paid or such income is received, provided, however, that the foregoing shall not be reflected in the computation of Operating Profit for purposes of Section 4.03. B. As of the Effective Date, the cash on hand at the Hotel shall be deposited in one of the Operating Accounts set up by Management Company pursuant to Section 9.02, and shall be treated as part of the Working Capital described in Section 7.01. END OF ARTICLE V ARTICLE VI FINANCING OF THE HOTEL ---------------------- 6.01 Amendments of Management Agreement ---------------------------------- A. If requested by any Qualified Lender or prospective Qualified Lender (in which event such amendments shall take effect as of the funding of such Qualified Loan), Management Company agrees to execute and deliver any amendment of this Agreement which is reasonably required by such Qualified Lender or prospective Qualified Lender, provided that Management Company shall be under no obligation to amend this Agreement if the result of such amendment would be: (i) to reduce, defer or delay the amount of any payment to be made to Management Company hereunder; (ii) to materially increase Management Company's obligations under this Agreement; (iii) to change the Term of this Agreement; (iv) to cause the Hotel to be operated other than pursuant to the Courtyard by Marriott System Standards; (v) to amend either Section 8.02 or Section 14.01; or (vi) to otherwise materially affect Management Company's rights under this Agreement. Any such amendment shall take effect as of the funding of such Qualified Loan. B. In addition to the provisions of Section 6.01.A, if a Qualified Lender or prospective Qualified Lender requests that Management Company enter into an amendment of this Agreement, and if such amendment would impose additional duties (for example, an increase in the reporting requirements or in the record-keeping requirements, or adding the obligation to prepare parallel accounting statements using a different fiscal year) on Management Company or would otherwise adversely affect Management Company's rights under this Agreement, but not to the degree described in clauses (i) through (vi) of Section 6.01.A, Management Company hereby agrees that it will execute and deliver such requested amendment of this Agreement, provided that Owner compensates Management Company for the additional burden imposed by such amendment out of Owner's funds and not as a Deduction. It is understood that the word "burden", as used in the preceding sentence, shall encompass not only additional work to be performed by Management Company, but also any adverse effect on the Incentive Management Fee which would be caused by requiring increased services by third parties. Any dispute as to whether Management Company is entitled to any compensation pursuant to this Section 6.01.B, or as to the amount of such compensation, shall be resolved by arbitration pursuant to Section 20.13. C. Proposed amendments to this Agreement which are requested by any Qualified Lender or prospective Qualified Lender, and which would affect the insurance provisions set forth in Article XII, shall be governed exclusively by Article XII. 6.02 Notice and Opportunity to Cure ------------------------------ A. In the event of: (i) a Default by Owner in the performance or observance of any of the terms and conditions of this Agreement; or (ii) any other occurrence which entitles Management Company to terminate this Agreement, and in the event that Management Company gives written notice thereof to Owner pursuant to Article XVI of this Agreement, Management Company shall also give a duplicate copy (herein referred to as the "First Notice") of such notice to each Qualified Lender, at the address previously provided to Management Company. Any such notice will be sent in the manner described in Section 20.09 hereof. In addition, in the event that such Default is not cured within the applicable cure period under Article XVI of this Agreement, and Management Company intends to exercise its remedy of terminating this Agreement, Management Company shall send a second notice (the "Second Notice"), to each Qualified Lender, at the same address and in the same manner applicable to the First Notice stating Management Company's intention to terminate this Agreement. Management Company shall forbear from taking any action to terminate this Agreement for a period of thirty (30) days after the service of the First Notice, and for an additional period of thirty (30) days after the service of the Second Notice (if such Second Notice is required, as set forth above). B. In the event of a Default by Owner under the provisions of this Agreement, Management Company agrees to accept performance by any Qualified Lender with the same force and effect as if same were performed by Owner, in accordance with the provisions and within the cure periods prescribed in this Agreement (except that each Qualified Lender shall have such additional cure periods, not available to Owner, as are set forth in this Section 6.02). C. No notice given by Management Company to Owner shall be effective as a notice under Article XVI of this Agreement unless the applicable duplicate notice to each Qualified Lender which is required under Section 6.02.A (either the First Notice or the Second Notice, as the case may be) has been given. It is understood that any failure by Management Company to give such a duplicate notice (either the First Notice or the Second Notice, as the case may be) to any Qualified Lender shall not itself be a Default by Management Company under this Agreement, but rather shall operate only to void the effectiveness of any such notice by Management Company to Owner under Article XVI of this Agreement. D. Except as specifically limited by this Section 6.02, nothing herein shall preclude Management Company from exercising any of its rights or remedies against Owner with respect to any Default by Owner under this Agreement. 6.03 Assignment of Management Agreement ---------------------------------- Owner shall have the right to collaterally assign to any Qualified Lender, as additional security for the indebtedness evidenced by a Qualified Loan, all of Owner's right, title and interest in and to this Agreement, including the right to distributions payable to Owner pursuant to Article V thereof. If, pursuant to any such assignment (or subsequent loan documentation entered into between Owner and a Qualified Lender with a similar purpose), and provided that Management Company has previously received a copy of such assignment and such subsequent documentation, Management Company may receive (from time to time) a notice or notices from such Qualified Lender directing Management Company to pay to such Qualified Lender subsequent distributions under Article V of this Agreement which would otherwise be payable to Owner, Management Company shall comply with any such notice. Management Company shall continue to make payments in compliance with any such notice from such Qualified Lender until Management Company receives written instructions to the contrary from such Qualified Lender. Owner hereby gives its consent to any such payments by Management Company to such Qualified Lender which are in compliance with any such notice. The foregoing consent by Owner shall be deemed to be irrevocable until the entire Qualified Loan has been discharged, as evidenced either by the recordation of a satisfaction or release executed by such Qualified Lender, or by the delivery of a written statement to that effect from such Qualified Lender to Management Company. Management Company shall comply with the direction set forth in any such notice without any necessity to investigate why such Qualified Lender sent such notice, or to confirm whether or not Owner is in fact in default under the terms of such Qualified Loan. If Management Company receives such notices from more than one Qualified Lender, Management Company shall (at its option) either (i) comply with the provisions of the notice sent by the Qualified Lender whose Qualified Loan has the senior lien priority, or (ii) institute Litigation for a declaratory judgment to determine to whom payments under this Agreement shall be made (in which case, the costs and expenses of such Litigation, including attorneys' fees, shall be Deductions). 6.04 Subordination of Management Agreement ------------------------------------- A. This Agreement, and Management Company's right to continue to manage and operate the Hotel pursuant to this Agreement, are and shall be subject and subordinate to the lien of any Qualified Loan, (i.e., upon a Foreclosure of any such Qualified Loan, such Qualified Lender, at its option, unless it has otherwise agreed to the contrary in a Non-Disturbance Agreement, shall have the right to terminate this Agreement). Notwithstanding the foregoing, during the Term of this Agreement, all debt service (including increased or accelerated payments after a default) payable with respect to any Qualified Loan shall be paid exclusively from Owner's Distribution. B. Section 6.04.A is intended to be, and is, fully effective and binding, as between Management Company and any such Qualified Lender; however, Management Company agrees to execute such confirmatory documentation (in recordable form in the jurisdiction in which the Hotel is located) as such Qualified Lender shall reasonably request. C. Notwithstanding the possible termination of this Agreement which is set forth in the foregoing provisions of this Section 6.04, it is understood that, until such time as this Agreement is validly terminated either (i) pursuant to the applicable provision of this Agreement, or (ii) pursuant to a court order in connection with the Foreclosure of a Qualified Loan (assuming that such termination does not breach any binding Non-Disturbance Agreement), the Holder of each Qualified Loan will honor and recognize the right of Management Company to operate the Hotel in accordance with this Agreement (including the right of Management Company to collect all Gross Revenues and make expenditures in accordance with this Agreement). 6.05 Non-Disturbance Agreement ------------------------- A. Owner agrees that, in connection with the obtaining by Owner of any Secured Loan or Secured Loans, from time to time, Owner will use good faith reasonable efforts to obtain a Non-Disturbance Agreement from each Holder or Holders. The phrase "good faith reasonable efforts" shall be determined by reference to the following: (i) normal loan underwriting procedures and practices (including those practices relating to non-disturbance agreements) which are generally being implemented by entities which are making loans similar to such Secured Loan, as of that point in time; and (ii) the concessions which Management Company is, as of that point in time, reasonably prepared to make in order to satisfy the objectives of lenders in connection with the lender-manager relationship after a Foreclosure. In no event, however, shall the failure of Owner to obtain such a Non-Disturbance Agreement affect or modify any of the responsibilities of Management Company towards Qualified Lenders which are contained elsewhere in this Article VI. B. Notwithstanding Section 6.05.A, Owner agrees that, prior to obtaining any Qualified Loan, it will obtain from each prospective Holder or Holders thereof a Non Disturbance Agreement pursuant to which Management Company's rights under this Agreement will not be disturbed as a result of a loan default stemming from non-monetary factors, which (i) relate to Owner, and (ii) are not Defaults by Management Company under Article XVI of this Agreement . 6.06 Attornment ---------- A. Management Company agrees that, subject to the provisions of Section 6.06.B, upon a Foreclosure of any Qualified Loan, provided that this Agreement has not expired or otherwise been earlier terminated in accordance with its terms, Management Company shall attorn to any Subsequent Owner and shall remain bound by all of the terms, covenants and conditions of this Agreement for the balance of the remaining Term (including any Renewal Terms) with the same force and effect as if such Subsequent Owner were the "Owner" under this Agreement; provided, however, that Management Company shall be under no such obligation to so attorn, and, to the contrary, shall thereupon have the right to terminate this Agreement on thirty (30) days' prior written notice to both Owner and such Subsequent Owner: (i) if such Subsequent Owner would not qualify as a permitted transferee under Section 19.01.A of this Agreement; or (ii) unless such Subsequent Owner, within twenty (20) days after the Foreclosure Date (or, in the event such Subsequent Owner acquires title to the Hotel after the Foreclosure Date, within twenty (20) days after the date of such acquisition of title to the Hotel), assumes all of the obligations of the "Owner" under this Agreement which arise from and after the Foreclosure Date (or such later date of acquisition of title to the Hotel), pursuant to a written assumption agreement which shall be delivered to Management Company. Upon the written request of any Qualified Lender, Management Company shall periodically execute and deliver a statement, in a form reasonably satisfactory to such Qualified Lender, reaffirming Management Company's obligation to attorn as set forth in this Section 6.06.A. B. It is understood by the parties that, in view of the fact that a Qualified Lender will have the right to terminate this Agreement on a Foreclosure under the provisions of Section 6.04, Management Company has an interest in being informed, within a reasonable period of time after a Qualified Loan Acceleration, of whether or not such Qualified Lender intends to exercise such right of termination. Accordingly, if, by no later than that date (the "Post-Foreclosure Decision Date") which is ninety (90) days after the date of any Qualified Loan Acceleration, Management Company has not received a Non-Disturbance Agreement executed by the Holder of such Qualified Loan, Management Company shall, as of the Post-Foreclosure Decision Date and thereafter, no longer be under any obligation to attorn (pursuant to the provisions of Section 6.06.A) with respect to any Foreclosure of that Qualified Loan, and Management Company shall have the option to terminate this Agreement, by written notice to both Owner and the Holder of each existing Qualified Loan, at any time within the sixty (60) day period immediately following the Post-Foreclosure Decision Date. 6.07 No Modification or Termination of Agreement ------------------------------------------- If the documents evidencing and securing a Qualified Loan require the consent of the Qualified Lender to any amendment or modification of this Agreement which materially affects such Qualified Lender, no such amendment or modification of this Agreement shall be binding or effective unless such Qualified Lender shall have consented in writing thereto. 6.08 Owner's Right to Finance the Hotel ---------------------------------- Owner shall have the right, from time to time, without Management Company's prior consent or approval, to obtain Qualified Loans, and to encumber the Hotel with Mortgages securing such Qualified Loans. Owner shall not, without the prior consent of Management Company, have the right to obtain Secured Loans which are not Qualified Loans. 6.09 Cross Collateralization ----------------------- A. In connection with obtaining Qualified Loans, Owner shall have the right to cross collateralize the Hotel with other hotels which it owns in the Courtyard by Marriott System, provided that: 1. the hotels to be the subject of the Qualified Loans are owned by Owner or an Affiliate of Owner; 2. the Qualified Loans are secured only by hotels in the Courtyard by Marriott System which are managed by Management Company or its Affiliates and are not cross collateralized with any property other than hotels managed by Management Company or its Affiliates in the Courtyard by Marriott System; 3. the basic terms and conditions of the Qualified Loans for the Hotel and each other hotel securing such loan are intended to be part of an integrated transaction; and 4. the closing of the Qualified Loans shall take place within six (6) months of each other. B. Any Mortgage secured by the Hotel shall contain a provision requiring Holder to provide Management Company prior written notice of any default under such Mortgage. Further, upon receipt of any notice of default by such Holder, Owner shall forward a copy of such notice to Management Company within three (3) days thereafter, in accordance with the notice provisions set forth in Section 20.09. 6.10 Sale/Leaseback Transactions --------------------------- Any single transaction or related series of transactions in which (i) Owner's interest in the Hotel is sold or transferred by the then Owner ("Seller") to a buyer ("Buyer"), and (ii) the Buyer (as "Landlord") leases the Hotel to the Seller (as "tenant"), is hereby defined as a "Sale/Leaseback Transaction". With respect to each Sale/Leaseback Transaction during the Term of this Agreement, the following provisions will apply: (a) the sale or transfer of the Hotel will be considered a Sale of the Hotel; however, the Seller (as tenant under the aforesaid lease), not the Buyer, shall thereafter be treated as the "Owner" for purposes of this Agreement; (b) the purchase price will not be a Secured Loan, but any mortgage financing placed (either at the time of the transaction or later) on the Buyer's interest in the Hotel will be treated as a Secured Loan, and the proceeds of each such Secured Loan will be aggregated with all outstanding Secured Loans which encumber either the Buyer's interest in the Hotel or the Seller's leasehold interest in the Hotel, for purposes of determining whether a given Secured Loan qualifies as a Qualified Loan; (c) payments pursuant to such lease shall not be treated as Deductions, except for Impositions and similar items which would have been treated as Deductions in the absence of such Sale/Leaseback Transaction; and (d) all subsequent sales, transfers or assignments of either Buyer's interest in the Hotel or Seller's interest in the Hotel will be treated as Sales of the Hotel. Owner will not enter into any Sale/Leaseback Transaction unless Management Company and the proposed Buyer have previously executed a mutually satisfactory attornment agreement pursuant to which, as of the date of the termination of Seller's leasehold interest, the provisions of this Agreement will (unless there has been an Event of Default or other event entitling either party to terminate this Agreement) be binding both on Management Company and on Buyer (as the successor "Owner"); such attornment agreement will also contain an immediately effective provision which will incorporate the terms of Section 6.08 of this Agreement, binding both on Management Company and on Buyer. END OF ARTICLE VI ARTICLE VII WORKING CAPITAL AND FIXED ASSET SUPPLIES ---------------------------------------- 7.01 Working Capital --------------- A. Owner shall, from time to time during the Term of this Agreement, provide Management Company, within thirty (30) days after Owner's receipt of written request therefor by Management Company, with the funds necessary to maintain Working Capital at levels determined by Management Company to be reasonably necessary to operate the Hotel in accordance with the Courtyard by Marriott System Standards. Any such request by Management Company shall be accompanied by a detailed explanation of the reasons for the request. If Owner fails to respond to any such request within thirty (30) days after Owner's receipt thereof, Management Company shall be entitled, at its option, without affecting other remedies which may be available pursuant to Article XVI, to lend Owner the necessary additional Working Capital from Management Company's own funds, which loan will bear interest at the Interest Rate (compounded annually), and will be secured by a security interest (subordinate to any Qualified Loan) encumbering all Working Capital previously or thereafter provided by either Owner or Management Company, and will be repaid in accordance with such terms and conditions as Management Company shall at that time reasonably determine. B. Management Company will manage the Working capital of the Hotel prudently and in accordance with the Courtyard by Marriott System Standards. Management Company shall review and analyze the Working Capital needs of the Hotel on an annual basis. If Management Company reasonably determines that there is excess Working Capital, such excess shall be returned to Owner. C. Working Capital provided by Owner pursuant to this Section 7.01 shall remain the property of Owner throughout the Term of this Agreement. Upon Termination, Owner shall retain any of its unused Working Capital, except for Inventories purchased by Management Company pursuant to Section 10.02. D. If Owner owns other hotels in the Courtyard by Marriott System which are operated by Management Company, Management Company, at its option, may co-mingle the Working Capital for the Hotel with the Working Capital account for Owner's other hotel(s) in a single bank account. 7.02 Fixed Asset Supplies -------------------- As of the Effective Date, Owner shall provide the Hotel with the Fixed Asset Supplies which are necessary to operate the Hotel in accordance with the Courtyard by Marriott System Standards. Owner shall, from time to time thereafter during the Term of this Agreement, provide Management Company, within thirty (30) days after Owner's receipt of written request therefor by Management Company, with any additional funds necessary to maintain Fixed Asset Supplies at levels determined by Management Company to be necessary to operate the Hotel in accordance with the Courtyard by Marriott System Standards. Fixed Asset Supplies shall remain the property of Owner throughout the Term of this Agreement, except for Fixed Asset Supplies purchased by Management Company pursuant to Section 10.02. END OF ARTICLE VII ARTICLE VIII REPAIRS, MAINTENANCE AND REPLACEMENTS ------------------------------------- 8.01 Routine Repairs and Maintenance ------------------------------- Management Company shall maintain the Hotel in good repair and condition, to a standard comparable with competitive hotels and in conformity with applicable Legal Requirements and the Courtyard by Marriott System Standards, and shall make or cause to be made such routine maintenance, repairs and minor alterations, the cost of which can be expensed under generally accepted accounting principles, as it, from time to time, deems reasonably necessary for such purposes. The cost of such maintenance, repairs and alterations shall be paid from Gross Revenues and shall be treated as a Deduction in determining Operating Profit. 8.02 FF&E Reserve ------------ A. Management Company shall establish a reserve account (the "FF&E Reserve") in a bank designated by Management Company (and approved by Owner, such approval not to be unreasonably withheld) to cover the cost of: 1. Replacements and renewals to the Hotel's FF&E ; 2. Certain routine repairs and maintenance to the Hotel building which are normally capitalized under generally accepted accounting principles such as exterior and interior repainting, resurfacing building walls, floors, roofs and parking areas, and replacing folding walls and the like (but which are not major repairs, alterations, improvements, renewals or replacements to the Hotel's buildings' structure, roof, or exterior facade, or to its mechanical, electrical, heating, ventilating, air conditioning, plumbing or vertical transportation systems, the cost of which shall be governed exclusively by Sections 8.03.C and 8.03.D); and 3. At Management Company's option, lease payments for Shuttle Vehicles and Communications, Computer and Office Equipment used in connection with the operation of the Hotel. Management Company agrees that it will, from time to time, execute such reasonable documentation as may be requested by any Qualified Lender to assist such Qualified Lender in establishing or perfecting its security interest in the funds which are in the FF&E Reserve; provided, however, that no such documentation shall contain any amendment or modification of any of the provisions of this Agreement, including this Section 8.02. B. During the period of time from the Effective Date through the Termination of this Agreement, subject to the provisions of Sections 8.02.E and 8.02.F, Management Company shall transfer (as of the end of each Accounting Period) into the FF&E Reserve an amount equal to five percent (5%) of Gross Revenues for that Accounting Period. All such amounts transferred into the FF&E Reserve after the Effective Date shall be paid from Gross Revenues and shall constitute Deductions in determining Operating Profit. C. Each year, at the same time as Management Company submits the Annual Operating Projection described in Section 9.03, Management Company shall prepare an estimate (the "FF&E Estimate") of the expenditures necessary during the ensuing Fiscal Year, for (i) replacements and renewals to the Hotel's FF&E, (ii) repairs to the Hotel building of the nature described in Section 8.02.A.2, and (iii) if elected by Management Company, lease payments for Shuttle Vehicles, and Communications, Computer and Office Equipment used in connection with the operation of the Hotel, and shall submit such FF&E Estimate to Owner for its review. All expenditures from the FF&E Reserve will be (as to both the amount of each such expenditure and the timing thereof) both reasonable and necessary, given the objective that the Hotel will be maintained and operated to a standard comparable to competitive hotels and in accordance with the Courtyard by Marriott System Standards. Notwithstanding the foregoing, Management Company shall not be required to enumerate on the FF&E Estimate any individual project which will cost less than Ten Thousand Dollars ($10,000.00) as adjusted by the GDP Deflator on each anniversary of the Effective Date. D. Management Company shall from time to time make such (i) replacements and renewals to the Hotel's FF&E, and (ii) repairs to the Hotel building of the nature described in Section 8.02.A.2, as it deems necessary, and (iii) lease payments as described in Section 8.02.A.3 as it deems necessary provided that Management Company shall not expend more than the balance in the FF&E Reserve without the prior approval of Owner. Management Company will endeavor to follow the applicable FF&E Estimate, but shall be entitled to depart therefrom, in its reasonable discretion, provided that: (a) such departures from the applicable FF&E Estimate result from circumstances which could not reasonably have been foreseen at the time of the submission of such FF&E Estimate; (b) such departures from the applicable FF&E Estimate are in the best interest of the Hotel; and (c) if the deviations from the FF&E Estimate are greater than Ten Thousand Dollars ($10,000.00), as adjusted by the GDP Deflator on each anniversary of the Effective Date, Management Company has submitted to Owner a revised FF&E Estimate setting forth and explaining such departures. At the end of each Fiscal Year, any amounts remaining in the FF&E Reserve shall be retained in the FF&E Reserve, and shall be carried forward to the next Fiscal Year. Upon a Sale of the Hotel, funds in the FF&E Reserve will not be affected (or, if withdrawn, will be replaced as set forth in Section 19.01.D), and all dispositions of such funds (both before and after such Sale of the Hotel) will continue to be made exclusively pursuant to the provisions of this Agreement. Proceeds from the sale of FF&E no longer necessary to the operation of the Hotel shall be deposited in the FF&E Reserve, as shall any interest which accrues on amounts placed in the FF&E Reserve. Neither (i) proceeds from the disposition of FF&E, nor (ii) interest which accrues on amounts held in the FF&E Reserve, shall either (x) result in any reduction in the required contributions to the FF&E Reserve set forth in subsection B above, or (y) be included in Gross Revenues. Shuttle Vehicles and Communications, Computer and Office Equipment are the only items of FF&E which Management Company is authorized to lease (rather than purchase). At Management Company's option, lease payments with respect to Shuttle Vehicles and Communications, Computer and Office Equipment shall be paid from the FF&E Reserve. If Management Company proposes that other items of FF&E (other than Shuttle Vehicles and Communications, Computer and Office Equipment) should be leased rather than purchased, Management Company shall submit such proposal to Owner for Owner's approval (not to be unreasonably withheld; provided, however that in connection with the foregoing, it is understood that the failure of a Qualified Lender to approve such leasing proposal shall justify Owner in withholding its approval thereof, regardless of whether withholding such approval would otherwise be deemed to be unreasonable. E. The percentage contribution for the FF&E Reserve which is described in Section 8.02.B is an estimate. As the Hotel ages, this percentage may not be sufficient to keep the FF&E Reserve at the levels necessary to make the replacements and renewals to the Hotel's FF&E, or to make the repairs to the Hotel building of the nature described in Section 8.02.A.2, which are required to maintain the Hotel in accordance with the Courtyard by Marriott System Standards and comparable with competitive hotels. If (i) any FF&E Estimate prepared in good faith by Management Company exceeds the available funds in the FF&E Reserve or would cause a shortfall to occur in future years, and (ii) Management Company has prepared and delivered to Owner a financial plan describing the shortages in the available funding in the FF&E Reserve for the Fiscal Years in question, Management Company will have the right, during the time periods described in such financial plan, to increase the percentage of Gross Revenues set forth in Section 8.02.B to a higher percentage, provided that in no event will such percentage exceed six percent (6%) of Gross Revenues per Fiscal Year. F. If any FF&E Estimate which is prepared in accordance with clauses (i) and (ii) of Section 8.02.E would require funding in excess of six percent (6%) of Gross Revenues per Fiscal Year, Owner may either: 1. Agree to increase the percentages of Gross Revenues set forth in Section 8.02.B to provide the additional funds required, or 2. Make a lump-sum contribution to the FF&E Reserve in the necessary amount (in which case, such lump-sum contribution shall be an Owner Deduction and shall be reimbursed to Owner in equal annual payments over the useful life of the FF&E which is purchased, and such reimbursements shall be Deductions). If Owner elects not to agree to either option 1 or option 2 above within thirty (30) days after the submission of such FF&E Estimate (or, if Owner has elected option 2, and has not funded the required amount within sixty (60) days after expiration of the aforesaid thirty (30) day period), Management Company shall be entitled, at its option, to terminate this Agreement by written notice to Owner, (with a copy to each Qualified Lender) which notice shall be delivered no later than ninety (90) days after the expiration of the sixty (60) day period described in the preceding sentence. The effective date of such Termination shall be the date set forth in such notice, provided that in no event shall the effective date of such Termination be less than one hundred eighty (180) days, and no more than three hundred sixty five (365) days after the date of such notice. Such failure to fund by Owner shall not be deemed a Default by Owner under Article XVI, and Management Company shall not be entitled to any remedies with respect to such failure other than such termination of this Agreement and as set forth in Section 8.03.E. G. If Owner owns any other hotel(s) in the Courtyard by Marriott System which is (are) operated by Management Company, Management Company shall co-mingle the FF&E Reserve for the Hotel with the FF&E reserve account for Owner's other hotel(s) in a single bank account unless such co-mingling is prohibited by any Qualified Lender. 8.03 Building Alterations, Improvements, Renewals, and Replacements -------------------------------------------------------------- A. Management Company shall prepare an annual estimate (the "Building Estimate") of the expenditures necessary for major repairs, alterations, improvements, renewals and replacements (which repairs, alterations, improvements, renewals and replacements are not among those referred to in Section 8.02.A.2) to the structure or exterior facade of the Hotel, or to the mechanical, electrical, heating, ventilating, air conditioning, plumbing, or vertical transportation elements of the Hotel building. Management Company shall submit each such Building Estimate to Owner for its approval at the same time the Annual Operating Projection is submitted, and Management Company shall not make any expenditures for such purposes without the prior written consent of Owner. Owner shall not unreasonably withhold its consent with respect to such changes, repairs, alterations, improvements, renewals or replacements to the Hotel as are required by reason of any Legal Requirement, or required under Management Company's current life-safety standards (provided that, in order for any such life-safety standards to be "required" within the meaning of this Section 8.03.A, such standards must be both required and in the process of being implemented at a majority of the hotels within the Courtyard by Marriott System operated by Management Company, which are comparable to the Hotel), or otherwise required for the continued safety of guests or prevention of material damage to property, including the removal of Hazardous Materials in compliance with all Environmental Laws pursuant to Section 20.10). B. In the event of the receipt by Management Company of a governmental order or other circumstances described in Section 8.03.A above, Management Company shall give Owner notice thereof within five (5) business days thereafter or sooner if circumstances reasonably warrant; Management Company shall then be authorized (but not obligated) to take appropriate remedial action without receiving Owner's prior consent as follows: (i) in an emergency threatening the Hotel, its guests, invitees or employees; or (ii) if the continuation of the given condition could (in Management Company's reasonable judgment) potentially subject Management Company and/or Owner to either criminal or more than de minimis civil liability, and Owner has either -- ------- failed to remedy the situation or has failed to take appropriate legal action to stay the effectiveness of any applicable Legal Requirement. Management Company shall cooperate with Owner in the pursuit of any such action and shall have the right to participate therein. Owner shall reimburse Management Company for any costs incurred by Management Company in connection with any such remedial action within thirty (30) days after Owner's receipt of notice from Management Company of the amount of such costs. C. The cost of all changes, repairs, alterations, improvements, renewals or replacements referred to in Section 8.03.A or 8.03.B (including the expenses incurred by either Owner or Management Company in connection with any civil or criminal proceeding described above) shall be borne solely by Owner, and shall not be paid from Gross Revenues or from the FF&E Reserve. Any failure of Owner to either (i) approve and provide funding for any proposed expenditures pursuant to the last sentence of Section 8.03.A, within seventy-five (75) days after Management Company's request therefor, or (ii) in the case of any Legal Requirement which is described in Section 8.03.B, to either comply therewith or to stay the effectiveness of such Legal Requirement during the period of any contesting thereof, shall be a Default by Owner. In such event, Management Company shall be entitled (without affecting its other remedies under Article XVI) to terminate this Agreement upon ninety (90) days' written notice to Owner; (with a copy to each Qualified Lender); provided, however, that Management Company shall have the right to stipulate such shorter period of time as may be appropriate, given the time periods which are mandated by Legal Requirements, as described in Section 8.03.A, or given Management Company's good faith concerns about its own civil and/or criminal liability. D. Management Company shall have the right, from time to time, to set forth in any Building Estimate (in addition to the expenditures described in Section 8.03.A), such changes, alterations or improvements to the Hotel as are required, in Management Company's reasonable judgment, to keep the Hotel in a competitive, efficient and economical operating condition, in accordance with the Courtyard by Marriott System Standards (which Management Company shall substantiate by demonstrating a reasonable return on the proposed investment to be made by Owner). The cost of all changes, alterations or improvements referred to in this Section 8.03.D shall be paid, to the extent reasonably possible (given the requirement, set forth in Section 8.02, that the balance in the FF&E Reserve be maintained at a level sufficient to maintain the Hotel in accordance with the Courtyard by Marriott System Standards) from the FF&E Reserve, and Owner shall pay such costs from its own funds only to the extent there are not adequate funds for such purpose in the FF&E Reserve. Any failure of Owner to approve and provide funding for the Owner's portion of any proposed expenditures pursuant to Section 8.03 D, as described in the preceding sentence, or provide funding for items in Section 8.03.A (other than those items included in the last sentence of Section 8.03.A) within sixty (60) days after Management Company's request therefor, shall not be a Default by Owner but shall entitle Management Company to terminate this Agreement and receive payment of the fee set forth in Section 8.03.E. Such Termination shall be evidenced by a written notice to Owner, (with a copy to each Qualified Lender) which notice shall be delivered to Owner no later than ninety (90) days after the expiration of the sixty (60) day period described in the preceding sentence. The effective date of such Termination shall be the date stated by Management Company in such notice, provided that such effective date shall be no less than one hundred eighty (180) days, and no more than three hundred sixty (360) days, after the date of such notice. It is understood that "alterations" and "improvements" which either (a) increase or decrease the number of guest rooms in the Hotel, or (b) involve changing the architectural footprint of the Hotel or involve other significant changes in the structural design of the Hotel, in any case by more than a de minimis amount, are beyond the scope of this Article VIII, and would -- ------- require an amendment of this Agreement prior to implementation by either party. E. Notwithstanding anything to the contrary in Section 8.02.F and 8.03.D, if Owner owns five (5) or fewer hotels in the Courtyard by Marriott System which are managed by Management Company, and Management Company elects to terminate the Management Agreement due to: (i) Owner's failure to elect either option 1 or 2 in Section 8.02.F; (ii) Owner's failure to fund the required amount in Section 8.02.F, having elected option 2, or (iii) Owner's failure to fund pursuant to Section 8.03.D, as applicable, then upon Management Company's election to terminate the Management Agreement, which pursuant to both Sections 8.02.F and 8.03.D must (a) be made within ninety (90) days following the expiration of the time period in which Owner must provide such additional funds, and (b) set forth an effective date of such Termination which is no less than one hundred eighty (180) days and no more than three hundred sixty five (365) days after the date of such notice, then, Owner agrees to pay to Management Company a fee equal to three (3) times the Base Management Fee for the prior Fiscal Year (regardless of whether said Base Management Fee was actually paid to Management Company); provided, however, that if, within ten (10) days from receipt of Management Company's notice to terminate, Owner provides the funds required pursuant to Section 8.02.F or 8.03.D, as applicable, then upon receipt of such funds by Management Company, Management Company's notice to terminate shall be deemed null and void and this Agreement shall continue in full force and effect. Said fee shall be paid to Management Company upon the termination date set forth in the written notice from Management Company to Owner terminating this Agreement. This fee shall be compensation for lost revenue and expenses and not as a penalty. If Owner fails to pay such fee within the time period set forth herein, then Management Company shall have the right (without affecting Management Company's other right under this Agreement) to withhold the amount of such fee from Owner's Distribution. 8.04 Liens ----- Management Company and Owner shall use their best efforts to prevent any liens from being filed against the Hotel which arise from any maintenance, repairs, alterations, improvements, renewals or replacements in or to the Hotel. They shall cooperate fully in obtaining the release of any such liens, and the cost thereof, if the lien was not occasioned by the fault of either party, shall be treated the same as the cost of the matter to which it relates. If the lien arises as a result of the fault of either party, then the party at fault shall bear the full cost (including, without limitation, all legal fees, court costs, bonding fees and underlying debt) of obtaining the lien release. 8.05 Ownership of Replacements, Etc. ------------------------------- All repairs, alterations, improvements, renewals or replacements of the Hotel which are made pursuant to Article VIII or otherwise shall be the property of Owner. Subject to the provisions of Section 8.02, the funds in the FF&E Reserve shall be the property of Owner. END OF ARTICLE VIII ARTICLE IX BOOKKEEPING AND BANK ACCOUNTS ----------------------------- 9.01 Books and Records ----------------- A. Books of control and account shall, in all material respects, be kept on the accrual basis and in accordance with the Uniform System of Accounts, with the exceptions provided in this Agreement. Owner may at reasonable intervals during Management Company's normal business hours examine such records. Within seventy-five (75) days following the close of each Fiscal Year, Management Company shall furnish Owner a statement (the "Annual Operating Statement") substantially in the form of Exhibit G hereto for such Fiscal Year and a certificate of Management Company's chief accounting officer (or its controller or any vice-president), certifying that to the best of his or her knowledge and belief such year-end Annual Operating Statement is true and correct. Owner shall have sixty (60) days after receipt to examine or review (at Owner's sole expense, and not as a Deduction) said Annual Operating Statement. If Owner raises no objections within said sixty (60) day period, the Annual Operating Statement shall be deemed to have been accepted by Owner as true and correct, and Owner shall have no further right to question its accuracy. If Owner does raise such an objection, by notice to Management Company, Owner shall arrange for an audit to be commenced within sixty (60) days after the date of such objection, and shall diligently cause such audit to be completed within a reasonable period of time. Owner shall pay all costs and expenses of such audit at its sole expense (and not as a Deduction); however, if such audit establishes that Management Company has understated the Operating Profit for that Fiscal Year by five percent (5%) or more, the reasonable costs and expenses of such audit shall be paid as a Deduction. B. Upon written request by Owner, but in no event more frequently than annually, Management Company shall, prepare and deliver to Owner the Management Analysis Report. In addition, Management Company shall, in connection with an impending Sale of the Hotel or commitment by a Qualified Lender to make a Qualified Loan, within thirty (30) days after written request therefor from Owner, prepare and deliver to Owner an updated Management Analysis Report describing significant changes since the effective date of the most recent Management Analysis Report; provided, however that Management Company shall not be required to prepare such updated Management Analysis Report if a report has been delivered within the previous one hundred twenty (120) days. The cost and expense of preparing the Management Analysis Report shall be paid as a Deduction. 9.02 Hotel Accounts, Expenditures ---------------------------- A. All funds derived from operation of the Hotel shall be deposited by Management Company in Hotel bank accounts (the "Operating Accounts") in a bank or banks designated by Management Company and approved by Owner, which approval shall not be unreasonably withheld. Withdrawals from said accounts shall be made only by representatives of Management Company whose signatures have been authorized. Reasonable petty cash funds shall be maintained at the Hotel. B. All payments made by Management Company hereunder shall be made from authorized bank accounts, petty cash funds, or from Working Capital provided by Owner pursuant to Section 7.01. Management Company shall not be required to make any advance or payment to or for the account of Owner except out of such funds, and Management Company shall not be obligated to incur any liability or obligation for Owner's account without assurances that necessary funds for the discharge thereof will be provided by Owner. Debts and liabilities incurred by Management Company as a result of its operation and management of the Hotel pursuant to the terms hereof, whether asserted before or after the Termination of this Agreement, will be paid by Owner to the extent funds are not available to Management Company for that purpose from Gross Revenues. 9.03 Annual Operating Projection --------------------------- A. Management Company shall submit to Owner for its review, at least thirty (30) days prior to the beginning of each full Fiscal Year after the Effective Date, a preliminary draft of the projection of the estimated financial results of the operation of the Hotel during the next Fiscal Year substantially in the form of Exhibit H (the "Annual Operating Projection"). Such Annual Operating Projection shall project the estimated Gross Revenues and Operating Profit for the forthcoming Fiscal Year for the Hotel. In preparing the Annual Operating Projection for each Fiscal Year, Management Company's goal will be the maximization of the long-term Operating Profit of the Hotel, in keeping with Courtyard by Marriott System Standards and the general standards of the hotel industry for similar properties. At Owner's request, Management Company agrees to take reasonable steps to ensure that qualified personnel from Management Company's staff are available to explain the preliminary draft of the Annual Operating Projection including any material items which are expected to be significantly different amounts from the amounts actually experienced (or projected) for the same items in the preceding Fiscal Year. A meeting (or meetings) for such purpose shall be held, at Owner's request, within a reasonable period of time after the submission to Owner of the preliminary draft of the Annual Operating Projection. Management Company will at all times give good faith consideration to Owner's suggestions regarding any Annual Operating Projection. Management Company shall thereafter submit to Owner, twenty (20) days after the beginning of such Fiscal Year, the final Annual Operating Projection. B. Management Company shall use reasonable efforts to adhere to the Annual Operating Projection. It is understood, however, that the Annual Operating Projection is an estimate only and that unforeseen circumstances such as, but not limited to, the costs of labor, materials, services and supplies, casualty, operation of law, or economic and market conditions may make adherence to the Annual Operating Projection impracticable, and Management Company shall be entitled to depart therefrom for such reasons. 9.04 Operating Losses; Credit ------------------------ A. To the extent there is an Operating Loss, additional funds in the amount of any such Operating Loss shall be provided by Owner within thirty (30) days after Management Company has given written notice thereof to Owner; provided, however, that if Owner has already received a request from Management Company for additional Working Capital pursuant to Section 7.01.A, and if such request under Section 7.01.A reflects fundamentally the same cash shortage which resulted in a request under this Section 9.04.A, Owner and Management Company shall mutually discuss the extent to which the requests under Section 7.01.A and Section 9.04.A may overlap, and such requests shall be modified accordingly. B. In no event shall either party borrow money in the name of or pledge the credit of the other. 9.05 Consolidated Reports --------------------- With respect to Management Company's reports, books and records required to be kept and provided to Owner pursuant to Sections 9.01.A, 9.01.B and 9.03.A hereof provided that Owner is also the owner of other hotels in the Courtyard by Marriott System and that said Hotels are managed by Management Company, Management Company shall have the right, at Management Company's option, to prepare said reports on a consolidated basis rather than by individual hotel; provided, however that if Owner reasonably determines that it requires individual reports for each individual hotel and requests individual reports from Management Company, in writing, together with Owner's reasons for requesting individual reports, Management Company shall comply with such request. END OF ARTICLE IX ARTICLE X PROPRIETARY MARKS; INTELLECTUAL PROPERTY ---------------------------------------- 10.01 Proprietary Marks ----------------- A. During the Term of this Agreement, the Hotel shall be known as a Courtyard by Marriott System, with such additional identification as may be agreed to by Owner and Management Company to provide local identification. If the name of the "Courtyard by Marriott System" is changed, Management Company shall have the right to change the name of the Hotel to conform thereto. B. The names "Marriott", "Courtyard", "Courtyard by Marriott" and "Courtyard Club", whether used alone or in connection with another word or words, and all other Proprietary Marks shall in all events remain the exclusive property of Management Company and its Affiliates. Owner shall have no right to use the foregoing names or any other Proprietary Mark; provided, however, that Owner shall have the right, during the Term of this Agreement, to have Proprietary Signage installed (in strict conformance with the specifications provided by Management Company prior to the Effective Date, or subsequent specifications provided by Management Company from time to time during the Term) in the Hotel and on the Site. C. Except as provided in Section 10.02, upon Termination, any use of or right to use the Proprietary Marks under this Agreement by Owner shall immediately cease. As of the date of Termination, Management Company shall remove all Proprietary Signage from the Hotel and from the Site (and from any locations other than the Site). The cost of such removal shall be paid as set forth in Section 4.02.E. D. Notwithstanding the foregoing, those trademarks, trade names, symbols, logos and designs which are specifically listed on Exhibit "E" shall be deemed "Proprietary Marks" only during the Term of this Agreement; upon a Termination, the exclusive control of such Proprietary Marks shall revert to Owner. 10.02 Purchase of Inventories and Fixed Asset Supplies ------------------------------------------------ Upon Termination, Management Company shall have the option, to be exercised no later than thirty (30) days prior to Termination, to elect to purchase, at their then book value, any items of the Hotel's Inventories and Fixed Asset Supplies as may be marked with the Courtyard by Marriott name or any other Proprietary Mark. In the event Management Company does not exercise such option, Owner agrees that it will use any such items not so purchased exclusively in connection with the Hotel until they are consumed. 10.03 Computer Software and Equipment ------------------------------- A. All Software is and shall remain the exclusive property of Management Company or one of its Affiliates (or the licensor of such Software, as the case may be), and Owner shall have no right to use, or to copy, any Software. B. Upon Termination, Management Company shall have the right to remove from the Hotel, without compensation to Owner, all Software. Furthermore, upon Termination, Management Company shall be entitled to remove from the Hotel any computer equipment which is utilized as part of a centralized reservation or property management system or is otherwise considered proprietary by Management Company. If any of such removed computer equipment is owned by Owner, Management Company shall reimburse Owner for all previous expenditures made by Owner for the purchase of such equipment, subject to a reasonable allowance for depreciation. 10.04 Intellectual Property --------------------- All Intellectual Property shall at all times be proprietary to Management Company or its Affiliates, and shall be the exclusive property of Management Company or its Affiliates. During the Term of this Agreement, Management Company shall be entitled to take all reasonable steps to ensure that the Intellectual Property remains confidential and is not disclosed to anyone other than Management Company's employees at the Hotel. Upon Termination, all Intellectual Property shall be removed from the Hotel by Management Company, without compensation to Owner. 10.05 Breach of Covenant ------------------ Management Company and/or its Affiliates shall be entitled, in case of any breach of the covenants of Article X by Owner or others claiming through it, to injunctive relief and to any other right or remedy available at law. Article X shall survive Termination. END OF ARTICLE X ARTICLE XI POSSESSION AND USE OF HOTEL --------------------------- 11.01 Quiet Enjoyment --------------- Owner covenants that, so long as: (i) an Event of Default by Management Company has not occurred under Article XVI of this Agreement; and (ii) Owner does not have the right to terminate this Agreement under any other Section of this Agreement, Management Company shall quietly hold, occupy and enjoy the Hotel throughout the Term hereof free from hindrance or ejection by Owner or other party claiming under, through or by right of Owner (except as may be otherwise set forth in Section 6.04). Owner agrees to pay and discharge any payments and charges and, at its expense, to prosecute all appropriate actions, judicial or otherwise, necessary to assure such free and quiet occupation. Nothing set forth in the preceding sentence, however, shall be deemed to create a recourse obligation by Owner to pay any payment or charge pursuant to a contract which is non-recourse to Owner. 11.02 Use --- A. Management Company shall use the Hotel solely for the operation of a hotel pursuant to the Courtyard by Marriott System Standards, and for all activities in connection therewith which are customary and usual to such an operation. B. Management Company shall comply with and abide by all applicable Legal Requirements pertaining to the operation of the Hotel, provided that: (i) all costs and expenses (other than those which are specifically described in clauses (ii) or (iii) of this Section 11.02.B) of such compliance shall be paid from Gross Revenues as Deductions in the computation of Operating Profit; (ii) all costs and expenses of compliance with Environmental Laws shall be paid as set forth in Section 20.10; (iii) all costs and expenses of compliance with the Legal Requirements which are described in Section 8.03.A shall be paid as set forth in Section 8.03; and (iv) Management Company shall have the right, but not the obligation, in its reasonable discretion, to contest or oppose, by appropriate proceedings, any such Legal Requirements (provided that the consent of Owner, not to be unreasonably withheld, shall be obtained prior to initiating any such proceedings which directly involve Owner's ownership interest in the Hotel in a material manner. The reasonable expenses of any such contest shall be paid from Gross Revenues as Deductions. 11.03 Chain Services -------------- A. Management Company shall, beginning with the Effective Date and thereafter during the Term of this Agreement, cause Chain Services to be furnished to the Hotel. B. Costs and expenses incurred in the providing of Chain Services shall be allocated on a fair and equitable basis among all Courtyard by Marriott hotels owned, leased or managed by Management Company in the United States which benefit from these services. Such allocation shall be made without regard to any "caps" or other limitations on the amount which Management Company or its Affiliates may charge to a given hotel, pursuant to agreements which Management Company (or its Affiliates) may have with the owner of such hotel. Any excess of that portion of such costs and expenses which is fairly allocated to a given hotel over the "cap" which may be in effect with regard to that hotel shall be paid by Management Company from its own funds. Management Company shall make no profit from Chain Services. Upon Owner's written request, an explanation of the current Chain Services will be given to Owner, and the basis for the allocation of the charge for each Chain Service will be explained to Owner, in reasonable detail, at the time of the submission of the Annual Operating Statement (as more particularly set forth in Section 9.01). In no event will the total charge for all of the Chain Services which are described in the definition of Chain Services in Section 1.01 (exclusive of reservation system services), for any given Fiscal Year, exceed five percent (5%) of Gross Revenues for such Fiscal Year. The parties hereby stipulate that the limitation set forth in the preceding sentence is intended to apply only to the services which are currently listed (as of the Effective Date) in the definition of Chain Services in Section 1.01; accordingly, if there are types of expenditures which were originally treated as Deductions (other than pursuant to paragraph 8 of the definition of "Operating Profit" in Section 1.01), but which are later determined to be more properly treated as Chain Services, such expenditures shall be treated as Deductions pursuant to said paragraph 8 of the definition of "Operating Profit" without regard to the aforesaid limitation. 11.04 Owner's Right to Inspect ------------------------ Owner or its agents shall have access to the Hotel at any and all reasonable times for the purpose of inspection or showing the Hotel to prospective purchasers, tenants or Holders. 11.05 Indemnity --------- A. Management Company shall indemnify and hold harmless Owner (and any officer, director, employee, advisor, partner or shareholder of Owner) in respect of, and, at Owner's request, shall defend any action, cause of action, suit, debt, cost, expense (including, without limitation, reasonable attorneys' fees), claim or demand whatsoever brought or asserted by any third person whomsoever, at law or in equity, arising by reason of: (i) liabilities stemming from general corporate matters of Management Company or its Affiliates, to the extent the same are not directly and primarily related to the Hotel; (ii) infringement and other claims relating to the Proprietary Marks; (iii) if Management Company intentionally or negligently fails to maintain insurance coverage that it is required to maintain pursuant to this Agreement, the excess of the amount of any liability or loss that would have been covered over the amount of any applicable deductible; and (iv) the bad faith or willful misconduct of Management Company or its Affiliates, or any of their employees, servants or agents or other persons for whom they are responsible, resulting in a claim for bodily injury, death or property damage occurring on, in or in conjunction with the business of the Hotel, to the extent that such claim exceeds the insurance proceeds (including Hotel Retentions) which are available to pay such claim. B. If any claim, action or proceeding is made or brought against Owner, against which claim, action or proceeding Management Company shall be obligated to indemnify pursuant to the terms of this Agreement, then, upon demand by Owner, Management Company, at its sole cost and expense, shall resist or defend such claim, action or proceeding (in Owner's name, if necessary), using such attorneys as Owner shall approve, which approval shall not be unreasonably withheld. If, in the Owner's reasonable opinion, (i) there exists a conflict of interest which would make it inadvisable to be represented by counsel for Management Company, or (ii) there are legal defenses available to Management Company that are different from or inconsistent with those available to the Owner, or (iii) there are claims at issue which are not covered by Management Company's insurance, the Owner shall be entitled to retain its own attorneys, and Management Company shall pay the reasonable fees and disbursements of such attorneys. C. Matters with respect to which Management Company has specifically agreed to indemnify Owner under other provisions of this Agreement (for example, Section 14.01 regarding "Employee Claims", and Section 20.11 regarding environmental matters) are to be treated exclusively under such other provisions and not under this Section 11.05. END OF ARTICLE XI ARTICLE XII INSURANCE --------- 12.01 Interim Insurance ----------------- [Intentionally omitted] 12.02 Property and Operational Insurance ---------------------------------- Management Company shall, commencing with the Effective Date and thereafter during the Term of this Agreement, procure and maintain, either with insurance companies of recognized responsibility or by legally qualifying itself as a self insurer, a minimum of the following insurance: A. Property insurance on the Hotel building(s) and contents against loss or damage by fire, lightning and all other risks covered by the usual extended coverage endorsement, all in an amount not less than one hundred percent (100%) of the replacement cost thereof (excluding the cost of foundations and excavations); B. Boiler and machinery insurance against loss or damage from explosion of boilers or pressure vessels to the extent applicable to the Hotel; C. Business interruption insurance covering loss of profits and necessary continuing expenses for interruptions caused by any occurrence covered by the insurance referred to in Section 12.02.A and B, which shall be of a type and in such amounts (but such coverage shall in no event be for less than one (1) year) as are generally established by Management Company at similar hotels it owns, leases or manages under the Courtyard by Marriott name in the United States; D. General liability insurance against claims for bodily injury, death or property damage occurring on, in, or in conjunction with the business of the Hotel, and automobile liability insurance on vehicles operated in conjunction with the Hotel, with a combined single limit for each occurrence of not less than One Hundred Million Dollars ($100,000,000); representatives of Management Company and Owner shall meet, at Owner's request, at intervals of approximately once every five (5) years, to review the adequacy of such limit; E. Workers' compensation and employer's liability insurance as may be required under applicable laws covering all of Management Company's employees at the Hotel; F. Fidelity bonds, with reasonable limits to be determined by Management Company, covering its employees in job classifications normally bonded in other similar hotels it leases or manages under the Courtyard by Marriott name in the United States or as otherwise required by law, and comprehensive crime insurance to the extent Management Company and Owner mutually agree it is necessary for the Hotel; and G. Such other insurance in amounts as Management Company and Owner, in their reasonable judgment, mutually deem advisable for protection against claims, liabilities and losses arising out of or connected with the operation of the Hotel. 12.03 General Insurance Provisions ---------------------------- A. All insurance described in Section 12.02 may be obtained by Management Company by endorsement or equivalent means under its blanket insurance policies, provided that such blanket policies substantially fulfill the requirements specified herein. Upon the request of either Owner or any Qualified Lender, representatives of the requesting party shall be entitled to examine, at Management Company's corporate headquarters, all insurance policies maintained by Management Company regarding the Hotel. B. Management Company may self insure or otherwise retain such risks or portions thereof as it does with respect to other similar hotels it owns, leases or manages under the Marriott name in the United States. C. All policies of insurance required under Section 12.02 shall be carried in the name of Management Company. The policies required under Sections 12.02.A, B, C and D shall include the Owner as an additional insured. Upon notice by the Owner, Management Company shall also have the policies required under Sections 12.02 A, B, C and D include any Qualified Lender as an additional insured. Any property losses thereunder shall be payable to the respective parties as their interests may appear. Any Mortgage on the Hotel shall contain provisions to the effect that proceeds of the insurance policies required to be carried under Section 12.02.A and B shall, with respect to any casualty involving less than twenty-five percent (25%) of the replacement cost of the Hotel, be available for repair and restoration of the Hotel. D. Management Company shall deliver to the Owner certificates of insurance with respect to all policies so procured and, in the case of insurance policies about to expire, shall deliver certificates with respect to the renewal thereof. E. All certificates of insurance provided for under Article XII shall, to the extent obtainable, state that the insurance shall not be cancelled or materially changed without at least thirty (30) days' prior written notice to Owner. F. The term "Hotel Retention" shall mean the amount of any loss or reserve under Management Company's blanket insurance or self-insurance programs which is allocated to the Hotel, not to exceed the higher of (a) the maximum per occurrence limit established for similar hotels participating in such programs, or (b) the insurance policy deductible on any loss which may fall within high hazard classifications as mandated by the insurer (e.g., earthquake, flood, windstorm on coastal properties, etc.). If the Hotel is not a participant under Management Company's blanket insurance or self-insurance programs, "Hotel Retention" shall mean the amount of any loss or reserve allocated to the Hotel, not to exceed the insurance policy deductible. 12.04 Cost and Expense ---------------- A. [Intentionally omitted] B. Insurance premiums and any other costs or expenses with respect to the insurance or self-insurance required under Section 12.02, including any Hotel Retention, shall be paid from Gross Revenues as Deductions. To the extent that such costs or expenses include reimbursement by Management Company of its own costs or expenses, or those of one of its Affiliates, such costs or expenses shall be generally competitive (as calculated over the Term of this Agreement) with costs and expenses of non-affiliated entities providing similar services. Such premiums and costs shall be allocated on an equitable basis to the hotels participating under Management Company's blanket insurance or self-insurance programs. Any reserves, losses, costs or expenses which are uninsured shall be treated as a cost of insurance and shall be Deductions. Upon Termination, an escrow fund in an amount reasonably acceptable to Management Company shall be established from Gross Revenues (or, if Gross Revenues are not sufficient, with funds provided by Owner) to cover the amount of any Hotel Retention and all other costs which will eventually have to be paid by either Owner or Management Company with respect to pending or contingent claims, including those which arise after Termination for causes arising during the Term of this Agreement. Upon the final disposition of all such pending or contingent claims, any unexpended funds remaining in such escrow shall be paid to Owner. 12.05 Owner's Option to Obtain Certain Insurance ------------------------------------------ Owner may, at its option, by written notice to Management Company which shall be delivered no later than ninety (90) days prior to the natural expiration of the insurance policies which Management Company has obtained pursuant to Section 12.02.A, B and C, procure and maintain the insurance specified in Section 12.02.A, B and C (in which case Management Company shall allow such policies obtained by it under Section 12.02.A, B, and C to expire), subject to the following terms and conditions: A. All such policies of insurance shall be carried in the name of Owner, with Management Company as an additional insured. Any property losses thereunder shall be payable to the respective parties as their interests may appear. The documentation with respect to each Secured Loan shall contain provisions to the effect that proceeds of the insurance policies required to be carried under Section 12.01.A and B shall be available for repair and restoration of the Hotel, to the extent required pursuant to Section 12.03.C. However, any Holder of such Secured Loan shall be entitled to impose reasonable conditions on the disbursement of insurance proceeds for the repair and/or restoration of the Hotel, including a demonstration by Owner and/or Management Company that the amount of such proceeds (together with other funds Owner agrees to make available) is sufficient for such purpose. B. Owner shall deliver to Management Company certificates of insurance with respect to all policies so procured and, in the case of insurance policies about to expire, shall deliver certificates with respect to the renewal thereof. C. All such certificates of insurance shall, to the extent obtainable, state that the insurance shall not be canceled or materially changed without at least thirty (30) days' prior written notice to the certificate holder. D. Premiums for such insurance coverage shall be treated as Deductions, provided that if the cost of such insurance procured by Owner exceeds the cost of Management Company's comparable coverage by more than ten percent (10%), all such excess costs shall be the sole responsibility of Owner and shall not be a Deduction. E. Should Owner exercise its option to procure the insurance described in this Section 12.05, Owner hereby waives its rights of recovery from Management Company or any of its Affiliates (and their respective directors, officers, shareholders, agents and employees) for loss or damage to the Hotel, and any resultant interruption of business. F. Should Owner exercise its right to obtain the insurance described in this Section 12.05, Owner acknowledges that Management Company is under no obligation to thereafter include the Hotel in its blanket insurance program (with respect to the coverage described in Section 12.02.A, B and C) for the balance of the Term of this Agreement. However, upon a Sale of the Hotel, a successor Owner shall have the right, notwithstanding the fact that the previous Owner may have obtained insurance in accordance with this Section 12.05, to have the Hotel included in Management Company's blanket insurance program (provided that the Hotel, as of that point in time, satisfies the applicable criteria for admission to such program, as established by the program's insurance carriers) by making a written request to Management Company for such inclusion not later than thirty (30) days after the date on which such party becomes the Owner. G. All insurance procured by Owner hereunder shall be obtained from reputable insurance companies reasonably acceptable to Management Company. END OF ARTICLE XII ARTICLE XIII TAXES ----- 13.01 Real Estate and Personal Property Taxes --------------------------------------- A. Except as specifically set forth in subsection B below, all Impositions which accrue during the Term of this Agreement (or are properly allocable to such Term under generally accepted accounting principles) shall be paid by Management Company from Gross Revenues, as a Deduction, before any fine, penalty, or interest is added thereto or lien placed upon the Hotel or the Agreement, unless payment thereof is stayed; provided, however, that Management Company shall not be responsible for any fine, penalty or interest resulting through no fault of Management Company or caused by Owner. Owner shall within five (5) business days after the receipt of any invoice, bill, assessment, notice or other correspondence relating to any Imposition, furnish Management Company with a copy thereof. Management Company shall, within the earlier of thirty (30) days of payment or fifteen (15) business days following written demand by Owner, furnish Owner with copies of official tax bills and assessments which Management Company has received, and evidence of payment or contest thereof. Either Owner or Management Company (in which case each party agrees to sign the required applications and otherwise cooperate with the other party in expediting the matter) may initiate proceedings to contest any Imposition, and all reasonable costs of any negotiations or proceedings with respect to any such contest shall either (i) be paid from Gross Revenues and be a Deduction in determining Operating Profit; or (ii) be considered an Owner Deduction; provided, however that in the event either Owner or Management Company spends in excess of Five Thousand Dollars ($5,000.00) with respect to such contest, such party shall provide written notice to the other party and the other party shall approve or disapprove of such expenditure within ten (10) days following receipt of such notice. Failure of such party to approve or disapprove such expenditure shall be deemed approval. In the event that either party's expenditures in excess of Five Thousand Dollars ($5,000.00) are not approved by the other party such party may nevertheless proceed to spend whatever funds are necessary with respect to such contest; provided, however, that any amounts in excess of Five Thousand Dollars ($5,000.00) (or such higher amount as may have been approved by the other party) shall be at the sole cost of Owner or Management Company, as the case may be, and shall not be considered an Owner Deduction by Owner nor be considered a Deduction from Operating Profit by either Owner or Management Company. B. The word "Impositions", as used in this Agreement, shall not include the following, all of which shall be paid solely by Owner, not from Gross Revenues nor from the FF&E Reserve: 1. Any franchise, corporate, estate, inheritance, succession, capital levy or transfer tax imposed on Owner, or any income tax imposed on any income of Owner (including distributions to Owner pursuant to Article V hereof); 2. Special assessments (regardless of when due or whether they are paid as a lump sum or in installments over time) imposed because of facilities which are constructed by or on behalf of the assessing jurisdiction (for example, roads, sidewalks, sewers, culverts, etc.) which directly benefit the Hotel (regardless of whether or not they also benefit other buildings), which assessments shall not be treated as Deductions, but rather shall be added to the Additional Invested Capital as of each payment by Owner with respect thereto; provided, however, that any installments (after the Effective Date) of any assessments which were levied or imposed prior to the Effective Date shall be Deductions; 3. "Impact Fees" (regardless of when due or whether they are paid as a lump sum or in installments over time) which are required of Owner as a condition to the issuance of site plan approval, zoning variances or building permits, which impact fees shall not be treated as Deductions, but rather shall be added to the Additional Invested Capital as of each payment by Owner with respect thereto; provided, however, that any installments (after the Effective Date) of any impact fees which were levied or imposed prior to the Effective Date shall be Deductions; and 4. "Tax-increment financing" or similar financing whereby the municipality or other taxing authority has assisted in financing the construction of the Hotel by temporarily reducing or abating normal Impositions in return for substantially higher levels of Impositions at later dates. C. Owner shall have the right to require Management Company to establish an escrow account (with either any Qualified Lender or another entity reasonably acceptable to both Owner and Management Company) from which Impositions will be paid. Payments into such escrow account will be Deductions. Any interest which accrues on amounts deposited in such escrow account shall be added to the balance in such escrow account and used to pay Impositions. END OF ARTICLE XIII ARTICLE XIV HOTEL EMPLOYEES --------------- 14.01 Employees --------- A. All personnel employed at the Hotel shall be the employees of Management Company. Management Company shall have absolute discretion to hire, promote, supervise, direct, train and discharge all employees at the Hotel, to fix their compensation and, generally, establish and maintain all policies relating to employment. B. Management Company shall decide which, if any, of the Hotel's employees shall reside at the Hotel (provided that,Owner's prior approval shall be obtained if more than one (1) such employee and their immediate families reside at the Hotel), and shall be permitted to provide free accommodations and amenities to its employees and representatives living at or visiting the Hotel in connection with its management or operation. No person shall otherwise be given gratuitous accommodations or services without prior joint approval of Owner and Management Company except in accordance with usual practices of the hotel and travel industry. C. Any proposed settlement of any Employee Claim where the amount proposed to be offered to the employee by Management Company is in excess of the Settlement Threshold Amount shall be jointly approved by Management Company and Owner. Any dispute between Owner and Management Company as to whether Management Company's settlement recommendation is reasonable, where such proposed settlement is in excess of the Settlement Threshold Amount, shall be resolved by arbitration under Section 20.13 hereof; provided that Management Company shall have the right to settle any Employee Claim (prior to the arbitration on the reasonableness of the settlement, as described in this sentence) based on Management Company's recommendation, which shall be Management Company's reasonable estimate, in good faith, by using: (i) funds from Gross Revenues (as a Deduction) up to the amount of Owner's settlement recommendation, which shall be Owner's reasonable estimate, in good faith and (ii) Management Company's own funds to the extent Management Company's recommendation exceeds the amount described in subparagraph (i) above. Following the settlement of such Employee Claim, the parties will arbitrate under Section 20.13 the issue of whether Management Company's settlement recommendation was reasonable under the circumstances. If the arbitrators decide that Management Company's recommendation was reasonable, Management Company shall be entitled to reimburse itself from Gross Revenues (as a Deduction) in the amount of the funds advanced under subparagraph (ii) above, together with accrued interest thereon at the Prime Rate. If the arbitrators decide that Management Company's settlement recommendation was not reasonable, then Management Company shall not be entitled to any reimbursement of the amounts advanced by it under subparagraph (ii) above, nor to accrued interest thereon. D. Management Company shall pay from its own funds, and not from Gross Revenues, any Employee Claim where the basis of such Employee Claim is conduct by Management Company which: (i) is a substantial violation of the standards of responsible labor relations as generally practiced by prudent owners or operators of similar hotel properties in the general geographic area of the Hotel; and (ii) is not the isolated act of individual employees, but rather is a direct result of corporate policies of Management Company which either encourage or fail to discourage such conduct. In addition, Management Company shall indemnify, defend and hold harmless Owner from and against any fines or judgments arising out of such conduct, and all Litigation expenses (including reasonable attorneys' fees and expenses) incurred in connection therewith. Any dispute between Owner and Management Company as to whether or not certain conduct by Management Company is not in accordance with the aforesaid standards shall be resolved by arbitration under Section 20.13 hereof. The arbitration proceedings described in the preceding sentence shall be conducted independently of any arbitration proceedings with respect to such Employee Claim pursuant to the applicable employee-related contract and/or pursuant to Section 14.01.C of this Agreement. E. With respect to all Litigation or arbitration involving Employee Claims in which both Management Company and Owner are involved as actual or potential defendants, Management Company shall have exclusive and complete responsibility (subject to the rights of Owner to approve certain settlements, as set forth in Section 14.01.C) for the resolution of such Employee Claims. In the event that any Employee Claim is made against Owner, but not against Management Company, Owner shall give notice to Management Company of the Employee Claim in a timely manner so as to avoid any prejudice to the defense of the Employee Claim, provided that Management Company shall in all events be so notified within twenty (20) days after the date such Employee Claim is made against Owner. Management Company will thereafter assume exclusive and complete responsibility for the resolution of such Employee Claim. F. At Termination, other than by reason of an Event of Default of Management Company hereunder, an escrow fund shall be established from Gross Revenues (or, if Gross Revenues are not sufficient, with funds provided by Owner) to reimburse Management Company for all costs and expenses incurred by Management Company which arise out of either the transfer or the termination of employment of Management Company's employees at the Hotel, such as reasonable transfer costs, severance pay, unemployment compensation and other employee liability costs. END OF ARTICLE XIV ARTICLE XV DAMAGE, CONDEMNATION AND FORCE MAJEURE -------------------------------------- 15.01 Damage and Repair ----------------- A. If, during the Term hereof, the Hotel is damaged or destroyed by fire, casualty or other cause, Owner shall, with all reasonable diligence, to the extent that proceeds from the insurance described in Section 12.02 are available (subject to the provisions of any Mortgage encumbering the Hotel, but with the limitations described in Section 12.03.C) for such purpose, repair or replace the damaged or destroyed portion of the Hotel to the same condition as existed previously. B. In the event damage or destruction to the Hotel from any cause materially and adversely affects the operation of the Hotel and Owner fails to timely (subject to Force Majeure, and subject to unreasonable delays caused by Management Company, including unreasonable delays in adjusting the insurance claim with the carriers which participate in Management Company's blanket insurance program) commence and complete the repairing, rebuilding or replacement of the same so that the Hotel shall be substantially the same as it was prior to such damage or destruction, such action shall be deemed an Event of Default by Owner pursuant to Section 16.01.E and Management Company may, at its option, elect to terminate this Agreement upon one hundred twenty (120) days' written notice, in addition to its other remedies under Section 16.03. 15.02 Condemnation ------------ A. In the event all or substantially all of the Hotel shall be taken in any eminent domain, condemnation, compulsory acquisition, or similar proceeding by any competent authority for any public or quasi-public use or purpose, or in the event a portion of the Hotel shall be so taken, but the result is that it is unreasonable to continue to operate the Hotel, this Agreement shall terminate. B. In the event a portion of the Hotel shall be taken by the events described in Section 15.02.A, or the entire Hotel is affected but on a temporary basis, and the result is not to make it unreasonable to continue to operate the Hotel, this Agreement shall not terminate. However, so much of any award for any such partial taking or condemnation as shall be necessary to render the Hotel equivalent to its condition prior to such event shall be used for such purpose; the balance of such award, if any, shall be fairly and equitably apportioned between Owner and Management Company in accordance with their respective interests. The amount of any award received by Owner and not applied to restoration of the Hotel pursuant to Section 15.02.B shall be deducted from the Priority Basis and the Loan Priority Basis at such time as the award is received by Owner. In addition, the Performance Termination Threshold shall be reduced by an amount equal to eight percent (8%) of such total amount (if any) of any award received by Owner pursuant to this Section 15.02.B which is not used to restore the Hotel. C. In the event of any proceeding described in Section 15.02.A or 15.02.B, Owner and Management Company shall each have the right to initiate such proceedings as they deem advisable to recover any damages to which they may be entitled; provided, however, that Management Company shall be entitled to retain the award or compensation it may obtain through proceedings which are conducted separately from those of Owner only if such award or compensation does not reduce the award or compensation otherwise available to Owner. (For this purpose, any award or compensation received by any Holder shall be deemed to be an award or compensation received by Owner). 15.03 Force Majeure ------------- A. The withdrawal or revocation of any License which is material to the operation of the Hotel in accordance with the Courtyard by Marriott System Standards, where such withdrawal or revocation: (i) is not due to the fault of either Management Company or Owner; and (ii) is not otherwise within the reasonable control of either Management Company or Owner, shall not be an Event of Default under Article XVI of this Agreement. Management Company and Owner shall each, in good faith, use all commercially reasonable efforts (including the diligent pursuit of all available appeals), during the period of one hundred twenty (120) days after the date of such withdrawal or revocation, to have such License reinstated. If, notwithstanding such efforts, such License is not reinstated prior to the expiration of the aforesaid period of one hundred twenty (120) days, either Owner or Management Company shall have the right, at its option, to terminate this Agreement upon no less than sixty (60) days' notice to the other party; provided, however, that the terminating party must deliver such notice of Termination to the other party by no later than ninety (90) days after the expiration of such one hundred twenty (120) day period; and provided further, that no such Termination shall be effective if, prior to the effective date of such Termination, such License is reinstated or such withdrawal or revocation of such License is stayed. B. If an order, judgment or directive by a court or administrative body is issued, in connection with any legal or Litigation involving Owner, which restricts or prevents Management Company, in a material adverse manner, from operating the Hotel in accordance with the Courtyard by Marriott System Standards, and which, in Management Company's reasonable opinion, will have a significant adverse effect upon operations of the Hotel, Management Company shall be entitled, at its option, to terminate this Agreement upon sixty (60) days' written notice; provided, however, that upon making such election, Management Company shall deliver such notice of Termination to Owner by no later than ninety (90) days after the issuance of such order, judgment or directive (or, if such order, judgment or directive is appealed, within ninety (90) days after the final disposition of such appeal). END OF ARTICLE XV ARTICLE XVI DEFAULTS -------- 16.01 Definition of "Default" ----------------------- Any one or more of the following shall constitute a "Default," to the extent permitted by applicable law: A. The filing of a voluntary petition in bankruptcy or insolvency or a petition for reorganization under any bankruptcy law by either party, or the admission by either party that it is unable to pay its debts as they become due; B. The consent to an involuntary petition in bankruptcy or the failure to vacate, within ninety (90) days from the date of entry thereof, any order approving an involuntary petition by either party; C. The entering of an order, judgment or decree by any court of competent jurisdiction, on the application of a creditor, adjudicating either party as bankrupt or insolvent or approving a petition seeking reorganization or appointing a receiver, trustee, or liquidator of all or a substantial part of such party's assets, and such order, judgment or decree's continuing unstayed and in effect for any period of ninety (90) days; D. The failure of either party to make any payment required to be made in accordance with the terms of this Agreement, as of the due date which is specified in this Agreement; E. The failure of either party to perform, keep or fulfill any of the other covenants, undertakings, obligations or conditions set forth in this Agreement. 16.02 Definition of "Event of Default" -------------------------------- A. Upon the occurrence of any Default by either party hereto (hereinafter referred to as the "defaulting party") under Section 16.01.A, B or C, such Default shall immediately and automatically, without the necessity of any notice to the defaulting party, constitute an "Event of Default" under this Agreement. B. Upon the occurrence of any Default by defaulting party under Section 16.01.D, such Default shall constitute an "Event of Default" under this Agreement if the defaulting party fails to cure such Default within ten (10) days after written notice from the non-defaulting party specifying such Default and demanding such cure. C. Upon the occurrence of any Default by either party hereto under Section 16.01.E, such Default shall constitute an "Event of Default" under this Agreement if the defaulting party fails to cure such Default within thirty (30) days after written notice from the non-defaulting party and demanding such cure, or, if the Default is such that it cannot reasonably be cured within said thirty (30) day period of time, if the defaulting party fails to commence the cure of such Default within said thirty (30) day period of time or thereafter fails to diligently pursue such efforts to completion. 16.03 Remedies Upon an Event of Default --------------------------------- A. Upon the occurrence of an Event of Default under the provisions of Section 16.02, the non-defaulting party shall have the right to pursue any one or more of the following courses of action: (i) in the event of a material breach by the defaulting party of its obligations under this Agreement, to terminate this Agreement by written notice to the defaulting party, which termination shall be effective as of the effective date which is set forth in said notice, provided that said effective date shall be at least thirty (30) days after the date of said notice; and provided further that, if the defaulting party is the employer of all or a substantial portion of the employees at the Hotel, the foregoing period of thirty (30) days shall be extended to seventy-five (75) days (or such longer period of time as may be necessary under applicable Legal Requirements pertaining to termination of employment); (ii) to institute forthwith any and all proceedings permitted by law or equity, including, without limitation, actions for specific performance and/or damages; and (iii) to avail itself of any one or more of the other remedies described in this Section 16.03. B. Upon the occurrence of a Default by either party under the provisions of Section 16.01.D, the amount owed to the non-defaulting party shall accrue interest, at the Interest Rate, from and after the date on which such payment was originally due to the non-defaulting party. C. The rights granted hereunder are intended to be cumulative, and shall not be in substitution for, but shall be in addition to, any and all rights and remedies available to the non-defaulting party (including, without limitation, injunctive relief and damages; provided that the satisfaction of damage awards against Owner shall be limited by the provisions of Section 16.04) by reason of applicable provisions of law or equity. 16.04 Owner's Estate -------------- Notwithstanding any other provisions of this Agreement, in the event of any Event of Default by Owner pursuant to the terms of this Agreement, Management Company shall look only to Owner's estate and interest in the Site and the Hotel (which shall, for this purpose, include (i) amounts deposited in the Operating Accounts and the FF&E Reserve, and (ii) accounts receivable) for the satisfaction of a money judgment against Owner resulting from such Event of Default, and no other property or assets of Owner, or of its partners, officers, directors, shareholders or principals, shall be subject to levy, execution or other enforcement procedure for the satisfaction of such judgment. Management Company's right to look to Owner's estate and interest in the Site and the Hotel for satisfaction of such a money judgment against Owner shall survive Termination and shall not be affected by any one or more Sales of the Hotel. Nothing contained in this Section 16.04 shall be deemed to affect or diminish Management Company's remedies under this Article XVI other than money damages against Owner (including, without limitation, Termination of this Agreement). END OF ARTICLE XVI ARTICLE XVII WAIVER AND PARTIAL INVALIDITY ----------------------------- 17.01 Waiver ------ The failure of either party to insist upon a strict performance of any of the terms or provisions of this Agreement, or to exercise any option, right or remedy herein contained, shall not be construed as a waiver or as a relinquishment for the future of such term, provision, option, right or remedy, but the same shall continue and remain in full force and effect. No waiver by either party of any term or provision hereof shall be deemed to have been made unless expressed in writing and signed by such party. 17.02 Partial Invalidity ------------------ If any portion of this Agreement shall be declared invalid by order, decree or judgment of a court, this Agreement shall be construed as if such portion had not been inserted herein except when such construction would operate as an undue hardship on Management Company or Owner, or constitute a substantial deviation from the general intent and purpose of said parties as reflected in this Agreement. END OF ARTICLE XVII ARTICLE XVIII ASSIGNMENT ---------- 18.01 Assignment ---------- A. Management Company shall not assign or transfer its management responsibilities under this Agreement without the prior written consent of Owner; provided, however, that Management Company shall have the right, without such consent, to (1) assign its interest in this Agreement to any of its Affiliates, and any such Affiliate shall be deemed to be the Management Company for the purposes of this Agreement, and (2) sublease shops or grant Licenses or concessions at the Hotel so long as the terms of any such subleases, Licenses or concessions; are consistent with the provisions of Section 2.02 and provided further that Owner's consent shall be required prior to the execution by Management Company of any such lease, license or concession which (a) has a term of more than five (5) years, or (b) involves more than one thousand (1,000) square feet of space within the Hotel. In the event of such an assignment by Management Company of its interest in this Agreement to an Affiliate, the Management Company which is named in the Preamble to this Agreement: (i) shall automatically be deemed to guarantee the performance of such Affiliate under this Agreement; (ii) shall, at the request of Owner, execute a guaranty, in form and substance reasonably satisfactory to both parties, of the performance of such Affiliate under this Agreement (provided that the failure of Owner to obtain an executed guaranty pursuant to this clause (ii) shall not affect the validity or enforceability of the guaranty which is automatically created pursuant to clause (i); and provided further, that, when Owner does so receive an executed guaranty pursuant to this clause (ii), such executed guaranty shall be deemed to have superseded the guaranty described in clause (i) above); and (iii) shall make available to such Affiliate, in connection with the performance by such Affiliate under this Agreement, Management Company's skill, personnel, facilities and resources. B. Owner shall not assign or transfer its interest in this Agreement other than (i) in connection with a Sale of the Hotel which complies with the provisions of Article XIX hereof, or (ii) as set forth in Section 18.01.C. C. Nothing contained herein shall prevent: (i) the collateral assignment of this Agreement by Owner as security for any Mortgage which complies with the provisions of Section 3.01; or (ii) the transfer of this Agreement in connection with a merger or consolidation or a sale of all or substantially all of the assets of either party, provided that (x) if such transfer is by Owner, the provisions of Article XIX hereof shall be complied with, and (y) if such transfer is by Management Company, such transfer is being done as a part of a merger, consolidation, etc., of all or substantially all of the business which consists of managing the Courtyard by Marriott System. D. In the event either party consents to an assignment of this Agreement by the other, no further assignment shall be made without the express consent in writing of such party, unless such assignment may otherwise be made without such consent pursuant to the terms of this Agreement. E. An assignment (either voluntarily or by operation of law) by Owner of its interest in this Agreement (in compliance with Article XVIII) shall not relieve Owner from its obligations under this Agreement which accrued prior to the date of such assignment, but shall relieve Owner of such obligations accruing after such date, if the assignment complies with Section 18.01.B and if Management Company has received an assumption agreement executed by the assignee (in form and substance reasonably satisfactory to Management Company). An assignment (either voluntarily or by operation of law) by Management Company of its interest in this Agreement shall not relieve Management Company from its obligations under this Agreement, unless Owner so agrees in writing. F. Subject to the provisions of this Article XVIII, the terms and conditions of this Agreement shall inure to the benefit of, and be binding upon, the respective successors, heirs, legal representatives, or assigns of each of the parties hereto. END OF ARTICLE XVIII ARTICLE XIX SALE OF THE HOTEL ----------------- 19.01 Sale of the Hotel ----------------- A. Owner shall not enter into any Sale of the Hotel to any individual or entity which: (i) does not have sufficient financial resources and liquidity to fulfill Owner's obligations under this Agreement; (ii) is in control of or controlled by persons who have been convicted of felonies involving moral turpitude in any state or federal court; or (iii) is engaged in the business of operating or franchising (as distinguished from owning) a branded hotel chain having fifteen hundred (1,500) or more guest rooms in competition with Management Company. An individual or entity shall not be deemed to be in the business of operating hotels in competition with Management Company solely by virtue of (x) the ownership of such hotels, either directly or indirectly through subsidiaries, affiliates and partnerships, or (y) holding a Mortgage or Mortgages secured by one or more hotels. Notwithstanding the foregoing, if Owner or an Affiliate of Owner is a corporation whose shares are listed on a public stock exchange, and if a Sale of the Hotel occurs as a result of purchases of such shares, through such public stock exchange, in sufficient quantities to cause a transfer of the "controlling interest" in Owner (as described in the definition of "Sale of the Hotel"), and if such Sale of the Hotel is not in compliance with the provisions of this Section 19.01.A, Management Company shall have the right, at its option, to terminate this Agreement by written notice to Owner (as more particularly described in Section 19.01.B), but such non-compliance with this Section 19.01.A shall not be an Event of Default nor shall it subject Owner to claims for damages by Management Company pursuant to Article XVI. B. If Owner receives a bona fide written offer to enter into a Sale of the Hotel, Owner shall give written notice thereof to Management Company, stating the name of the prospective purchaser or tenant, as the case may be. Such notice shall include appropriate information relating to such prospective purchaser or tenant demonstrating compliance with the provisions of Section 19.01.A together with such additional information as Management Company may reasonably request. If Management Company decides that a Sale of the Hotel to such prospective purchaser or tenant would violate the provisions of Section 19.01.A, Management Company shall so notify Owner by no later than thirty (30) days after receipt of such notice from Owner; provided, however, that any decision by Management Company regarding any such prospective purchaser or tenant shall not be binding if the information furnished by Owner pursuant to the preceding sentence is inaccurate. Concurrently with the finalization of such Sale of the Hotel, the purchaser or tenant, as the case may be, shall, by appropriate instrument reasonably satisfactory to Management Company, assume all of Owner's obligations hereunder. An executed copy of such assumption agreement shall be delivered to Management Company. If the proposed Sale of the Hotel would violate the provisions of Section 19.01.A, Owner will not enter into any agreement relating to such Sale of the Hotel. However, if Owner does enter into such an agreement, Management Company shall have the right to terminate this Agreement by written notice to Owner, which notice will set an effective date for such Termination not earlier than thirty (30) days, nor more than one hundred twenty (120) days, following the date of the giving of such notice. Management Company shall have the right to change such effective date of Termination to coincide with the date of the finalization of the proposed Sale of the Hotel. At Management Company's election, said notice of Termination shall not be effective if such Sale of the Hotel is not finalized. If such Termination by Management Company results from a Default by Owner under Section 19.01.A, such Termination shall not relieve Owner (except as otherwise set forth to the contrary in the last sentence of Section 19.01.A) of liability to Management Company for such Default. C. In connection with the possibility of a Sale of the Hotel achieved by means of a transfer of the controlling interest in Owner, Owner, upon written request of Management Company, shall (unless Owner is a publicly-traded corporation which is registered under Section 12 or Section 15 of the Securities Act of 1934) furnish Management Company with a list of the names and addresses of the owners of the capital stock, (but only those owners which hold an ownership interest of thirty percent (30%) or more), or the partnership interests, (both (i) general partner and (ii) any limited partner holding an ownership interest of thirty percent (30%) or more, or other ownership interests in Owner. In addition, Owner shall notify Management Company of any transaction or series of transactions in which Owner reduces its ownership interest in the Hotel below fifty percent (50%) or in which the former controlling interest in Owner is reduced below fifty percent (50%). Management Company agrees to use diligent efforts to keep all such lists confidential. D. It is understood that no Sale of the Hotel (which is otherwise in compliance with the provisions of this Article XIX) shall reduce or otherwise affect: (i) the current level of Working Capital; (ii) the current amount deposited in the FF&E Reserve; or (iii) any of the Operating Accounts maintained by Management Company pursuant to this Agreement. If, in connection with any Sale of the Hotel, the selling Owner intends to withdraw, for its own use, any of the cash deposits described in the preceding sentence, the selling Owner must obtain the contractual obligation of the buying Owner to replenish those deposits (in the identical amounts) simultaneously with such withdrawal. The selling Owner is hereby contractually obligated to Management Company to ensure that such replenishment in fact occurs. The obligations described in this Section 19.01.D shall survive such Sale of the Hotel and shall survive Termination. E. Management Company shall have the right to terminate this Agreement, on thirty (30) days' written notice, if title to or possession of the Hotel is transferred by judicial or administrative process (including, without limitation, a Foreclosure, or a sale pursuant to an order of a bankruptcy court, or a sale by a court-appointed receiver) to an individual or entity which would not qualify as a permitted transferee under clause (i), (ii) or (iii) of Section 19.01.A, regardless of whether or not such transfer is the voluntary action of the transferring Owner, or whether (under applicable law) the Owner is in fact the transferor; provided, however, that Management Company shall not have the right to so terminate this Agreement based on the assertion that a Qualified Lender fails to so qualify as a permitted transferee under said clauses (i), (ii) or (iii) of Section 19.01.A. END OF ARTICLE XIX ARTICLE XX MISCELLANEOUS ------------- 20.01 Right to Make Agreement ----------------------- A. Each party warrants, with respect to itself, that neither the execution of this Agreement nor the finalization of the transactions contemplated hereby shall: (i) violate any provision of law or any judgment, writ, injunction, order or decree of any court or governmental authority having jurisdiction over it; (ii) result in or constitute a breach or default under any indenture, contract, other commitment or restriction to which it is a party or by which it is bound; to the extent that the remedies for such breach or default would have a material adverse effect on such party's ability to perform under this Agreement, or (iii) require any consent, vote or approval which has not been taken, or at the time of the transaction involved shall not have been given or taken. Each party covenants that it has and will continue to have throughout the Term of this Agreement and any extensions thereof, the full right to enter into this Agreement and perform its obligations hereunder. B. Each party agrees that it will, as of the Effective Date, provide the other party with: (i) certified copies of the applicable resolutions of its board of directors (if it is a corporation), or written authorization by all general partners (if it is a partnership) or other appropriate documentation establishing its authority to execute this Agreement; and (ii) such opinions of counsel as the other party shall reasonably request regarding the matters described in this Section 20.01. 20.02 Consents -------- Wherever in this Agreement the consent or approval of Owner or Management Company is required, such consent or approval shall (except to the extent that such consent or approval is specifically designated as being "within the discretion" of a party, or words to that effect, in the applicable provision) not be unreasonably withheld, shall be in writing and shall be executed by a duly authorized officer or agent of the party granting such consent or approval. If either Owner or Management Company fails to respond within thirty (30) days to a request by the other party for a consent or approval, such consent or approval shall be deemed to have been given. 20.03 Agency ------ The relationship of Owner and Management Company shall be that of principal and agent, and nothing contained in this Agreement shall be construed to create a partnership or joint venture between them or their successors in interest. Management Company's agency established by this Agreement is coupled with an interest and may not be terminated by Owner until the expiration of the Term of this Agreement, except as provided in Section 4.03 and in Articles XV or XVI. Notwithstanding the agency relationship created by this Agreement, except to the extent specifically set forth to the contrary in Section 20.12, nothing contained herein shall prohibit, limit or restrict Management Company or any of its Affiliates from developing, owning, operating, leasing, managing or franchising hotels in the market area where the Hotel is located. The agency coupled with an interest herein was created by a complex, single, integrated transaction between Marriott Corporation (the parent corporation of Owner and Managment Company as of the Effective Date) and its subsidiaries whereby Marriott Corporation and its subsidiaries developed, constructed, own and manage the Hotel. This agency is further intended to provide security for the covenants, promises and guarantees herein. The agency was purchased for valuable consideration, and is not terminable except as specifically allowed by the express provisions of this agreement. The parties intend for this agency to be coupled with an interest, waive any right to claim it is terminable at will, and further agree to be equitably estopped from asserting that the agency is not coupled with an interest. 20.04 Confidentiality --------------- The parties hereto agree that the matters set forth in this Agreement are strictly confidential and each party will make every effort to ensure that such matters are not disclosed to any outside person or entities (including the press) without the written consent of the other party; provided, however, that such consent will not be required with respect to: (i) legally required filings and other disclosures mandated by Legal Requirements; and (ii) in the case of Owner, disclosure to any Qualified Lender or prospective Qualified Lender, or to prospective purchasers of the Hotel (subject to the provisions of Section 20.05, if applicable). 20.05 Equity Offerings ---------------- No reference to Management Company or to any of its Affiliates will be made in any prospectus, private placement memorandum, offering circular or offering documentation related thereto (herein collectively referred to as the "Prospectus"), issued by Owner or one of its Affiliates, which is designed to interest potential investors in the Hotel, unless Management Company has previously received a copy of all such references. However, regardless of whether Management Company does or does not so receive a copy of all such references, neither Management Company nor any of its Affiliates will be deemed a sponsor of the offering described in the Prospectus, nor will it have any responsibility for the Prospectus, and the Prospectus will so state. Unless Management Company agrees in advance, the Prospectus will not include: (i) any Proprietary Mark; or (ii) except as required by applicable securities laws, the text of this Agreement. Owner shall be entitled, however, to include in the Prospectus an accurate summary of this Agreement; if there are no Legal Requirements pursuant to which such information must be disclosed, appropriate measures shall be taken to ensure entities or individuals receiving such Prospectus shall acknowledge the confidentiality of such information. Owner shall indemnify, defend and hold Management Company and its Affiliates (and their respective directors, officers, shareholders, employees and agents) harmless from and against all loss, costs, liability and damage (including attorneys' fees and expenses, and the cost of Litigation) arising out of any Prospectus or the offering described therein. 20.06 Applicable Law -------------- This Agreement shall be construed under and shall be governed by the laws of the state where the Hotel is located. 20.07 Recordation ----------- The terms and provisions of this Agreement shall run with the land designated as the Site, and with Owner's interest therein, and shall be binding upon all successors to such interest. At the request of either party, the parties shall execute an appropriate memorandum of this Agreement in recordable form and cause the same to be recorded in the jurisdiction where the Hotel is located. Any cost of such recordation shall be borne by Management Company. 20.08 Headings -------- Headings of Articles and Sections are inserted only for convenience and are in no way to be construed as a limitation on the scope of the particular Articles or Sections to which they refer. 20.09 Notices ------- Notices, statements and other communications to be given under the terms of this Agreement shall be in writing, and shall be either (i) delivered by hand against receipt, or (ii) sent by certified or registered mail, postage prepaid, return receipt requested or (iii) sent by either a nationally utilized overnight delivery service or by facsimile machine (provided that, in either case, a confirmatory copy is thereafter sent by certified or registered mail): To Owner: -------- c/o Host Marriott Corporation 10400 Fernwood Road Bethesda, Maryland 20817 Attn: Law Department with a copy to: --------------- c/o Host Marriott Corporation 10400 Fernwood Road Bethesda, Maryland 20817 Attn: Asset Management Department 72-1AD-02 To Management Company: --------------------- Courtyard Management Corporation c/o Marriott International, Inc. 10400 Fernwood Road Bethesda, Maryland 20817 Attn: Law Department with a copy to: --------------- Courtyard Management Corporation c/o Marriott International, Inc. 10400 Fernwood Road Bethesda, Maryland 20817 Attn: Courtyard by Marriott Vice President - Finance or at such other address as is from time to time designated by the party receiving the notice. Any such notice which is properly mailed, as described above, shall be deemed to have been served as of three (3) business days after said posting. 20.10 Environmental Matters --------------------- A. Management Company shall indemnify, defend and hold Owner and its Affiliates (and their respective directors, officers, shareholders, employees and agents) harmless from and against all loss, cost, liability and damage (including, without limitation, engineers' and attorneys' fees and expenses, and the cost of Litigation) arising from the placing, discharge, leakage, use or storage of Hazardous Materials, in violation of applicable Environmental Laws, on the Site or in the Hotel by Management Company's employees, representatives or agents during the Term of this Agreement. Regardless of whether or not a given Hazardous Material is permitted on the Site under applicable Environmental Law, Management Company shall only bring on the Site such Hazardous Materials as are needed in the normal course of business of the Hotel. B. In the event of the discovery of Hazardous Materials on any portion of the Site or in the Hotel during the Term of this Agreement, Owner shall (except to the extent such removal is Management Company's responsibility pursuant to Section 20.10.A) promptly remove (if required by applicable Environmental Law) such Hazardous Materials, together with all contaminated soil and containers, and shall otherwise remedy the problem in accordance with all Environmental Laws. Owner shall (except to the extent that the removal of such Hazardous Materials is Management Company's responsibility pursuant to Section 20.10.A) indemnify, defend and hold Management Company and its Affiliates (and their respective directors, officers, shareholders, employees and agents) harmless from and against all loss, cost, liability and damage (including, without limitation, engineers' and attorneys' fees and expenses, and the cost of Litigation) arising from the presence of Hazardous Materials on the Site or in the Hotel. C. All costs and expenses of the removal of Hazardous Materials from the Site or the Hotel pursuant to Section 20.10.B, and of the aforesaid compliance with all Environmental Laws, and any amounts paid to Management Company pursuant to the indemnity set forth in the last sentence of Section 20.10.B, shall be paid by Owner from its own funds, not as a Deduction nor from the FF&E Reserve, and shall be treated as an expenditure by Owner pursuant to Section 8.03. 20.11 Estoppel Certificates --------------------- Each party to this Agreement shall at any time and from time to time, upon not less than thirty (30) days' prior notice from the other party, execute, acknowledge and deliver to such other party, or to any third party specified by such other party, a statement in writing: (i) certifying that this Agreement is unmodified and in full force and effect (or if there have been modifications, that the same, as modified, is in full force and effect and stating the modifications); (ii) stating whether or not to the best knowledge of the certifying party (a) there is a continuing default by the non-certifying party in the performance or observance of any covenant, agreement or condition contained in this Agreement, or (b) there shall have occurred any event which, with the giving of notice or passage of time or both, would become such a default, and, if so, specifying each such default or occurrence of which the certifying party may have knowledge; and (iii) stating such other information as the non-certifying party may reasonably request. Such statement shall be binding upon the certifying party and may be relied upon by the non-certifying party and/or such third party specified by the non-certifying party as aforesaid. The obligations set forth in this Section 21.11 shall survive Termination (that is, each party shall, on request, within the time period described above, execute and deliver to the non-certifying party and to any such third party a statement certifying that this Agreement has been terminated). 20.12 Trade Area Restriction ---------------------- Neither Management Company nor any of its Affiliates shall own, build, franchise, manage or operate any Restricted Hotel, under the Courtyard by Marriott brand name, within the Restricted Area during the period from the Effective Date through the sixth (6th) anniversary of the Effective Date. 20.13 Arbitration ----------- A. In the event of a dispute between Owner and Management Company with respect to any issue of fact specifically mentioned herein as a matter to be decided by arbitration, such dispute shall be determined by arbitration as provided in this Section 20.13. B. Disputes shall be resolved in accordance with the Commercial Arbitration Rules of the American Arbitration Association then pertaining. The decision of the arbitrators shall be binding, final and conclusive on the parties. C. Owner and Management Company shall each appoint and pay all fees of a fit and impartial person as arbitrator who shall have had at least ten (10) years' recent professional experience in the general subject matter of the dispute. Notice of such appointment shall be sent in writing by each party to the other, and the arbitrators so appointed, in the event of their failure to agree within thirty (30) days after the appointment of the second arbitrator upon the matter so submitted, shall appoint a third arbitrator. If either Owner or Management Company shall fail to appoint an arbitrator, as aforesaid, for a period of twenty (20) days after written notice from the other party to make such appointment, then the arbitrator appointed by the party having made such appointment shall appoint a second arbitrator and the two so appointed shall, in the event of their failure to agree upon any decision within thirty (30) days thereafter, appoint a third arbitrator. If such arbitrators fail to agree upon a third arbitrator within forty-five (45) days after the appointment of the second arbitrator, then such third arbitrator shall be appointed by the American Arbitration Association from its qualified panel of arbitrators, and shall be a person having at least ten (10) years' recent professional experience as to the subject matter in question. The fees of the third arbitrator and the expenses incident to the proceedings shall be borne equally between Owner and Management Company, unless the arbitrators decide otherwise. The fees of respective counsel engaged by the parties, and the fees of expert witnesses and other witnesses called for the parties, shall be paid by the respective party engaging such counsel or calling or engaging such witnesses. D. The decision of the arbitrators shall be rendered within thirty (30) days after appointment of the third arbitrator. Such decision shall be in writing and in duplicate, one counterpart thereof to be delivered to Owner and one to Management Company. A judgment of a court of competent jurisdiction may be entered upon the award of the arbitrators in accordance with the rules and statutes applicable thereto then obtaining. 20.14 Entire Agreement ---------------- This Agreement, together with other writings signed by the parties which are expressly stated to be supplemental hereto and together with any instruments to be executed and delivered pursuant to this Agreement, constitutes the entire agreement between the parties, and supersedes all prior written and oral understandings. This Agreement may be amended only by a writing signed by both parties hereto. END OF ARTICLE XX IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. Attest: OWNER: HMH COURTYARD PROPERTIES, INC. By: /s/ Pamela J. Murch By: /s/ Christopher G. Townsend -------------------- ---------------------------- Attest: MANAGEMENT COMPANY: COURTYARD MANAGEMENT CORPORATION By: /s/ Peter J. Swift By: /s/ James Sullivan ------------------- -------------------
EXHIBITS ATTACHED TO ORIGINAL AGREEMENT Exhibit "A" Location of Hotel and Legal Description Exhibit "A-1 "Number of Suites and Brief Description of Facilities; Priority Basis; Performance Termination Threshold; Loan Priority Basis (number set forth in (i) of Definition); Revenue Index Threshold Exhibit "B" Form of Accounting Period Statement Exhibit "C" [Intentionally Deleted] Exhibit "D" Map of Restricted Area Exhibit "D-1" Narrative Description of Restricted Area Exhibit "E" Proprietary Marks which will remain the property of Owner after Termination Exhibit "F" Title Encumbrances; Existing CC&R's (separately describing those charges thereunder which will be treated as capital expenditures under Section 8.03); Existing Ground Lease (if applicable); Existing Mortgages (if any) Exhibit "G" Form of Annual Operating Statement Exhibit "H" Form of Annual Operating Projection
EX-10.14.III 7 EXHIBIT 10.14(III) Exhibit 10.14(iii) RESIDENCE INN MANAGEMENT AGREEMENT -------------------- This Management Agreement ("Agreement") is executed as of the 25th day of September, 1993 ("Effective Date"), by HMH PROPERTIES, INC., ("Owner"), a Delaware corporation, with a mailing address at 10400 Fernwood Road, Bethesda, Maryland 20817 and RESIDENCE INN BY MARRIOTT, INC. (Management Company"), a Delaware corporation, with a mailing address at 10400 Fernwood Road, Bethesda, Maryland 20817. R E C I T A L S : A. Owner is the owner of the Inn (as defined and more fully described in Section 1.01) which is located as set forth on Exhibit "A" hereto; and B. Owner desires to have Management Company manage and operate the Inn, and Management Company is willing to perform such services for the account of Owner on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I DEFINITION OF TERMS ------------------- 1.01 Definition of Terms ------------------- The following terms when used in this Agreement shall have the meanings indicated: "Accounting Period" shall mean each of the four (4) week accounting periods ----------------- which are used in Management Company's accounting system, except that an Accounting Period may occasionally contain five (5) weeks when necessary to conform Management Company's accounting system to the calendar. "Accounting Period Statement" shall have the meaning set forth in Section --------------------------- 5.03. "Additional Invested Capital" shall mean the cumulative total, as of any --------------------------- given date during the Term, of the following: (i) any expenditures made by Owner in response to a Building Estimate, pursuant to Section 8.03, and any expenditures by Owner pursuant to Section 20.10.C; (ii) any contributions by Owner to the FF&E Reserve (beyond the funding described in Section 8.02.B and 8.02.E); other than those contributions which are reimbursed to Owner under Section 8.02.F; (iii) any payments by Owner with regard to special assessments or impact fees, pursuant to Section 13.01.B(2) or 13.01.B(3); and (iv) any costs, expenses and charges which are described on Exhibit "F" hereto as "capital charges" pursuant to Section 2.05.A. Owner shall give Management Company prompt notice of any amounts for which it has provided funding which constitute "Additional Invested Capital" 2 together with such evidence of funding as Management Company may reasonably require. "Affiliate" shall mean any individual or entity directly or indirectly --------- through one or more intermediaries, controlling, controlled by or under common control with a party. The term "control," as used in the immediately preceding sentence, means, with respect to a corporation, the right to the exercise, directly or indirectly, of fifty-one percent (51%) or more of the voting rights attributable to the shares of the controlled corporation, and, with respect to an entity that is not a corporation, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the controlled entity. "Agreement" shall have the meaning set forth in the Preamble. --------- "Annual Operating Budget" shall have the meaning set forth in Section 9.03. ----------------------- "Annual Operating Statement" shall have the meaning set forth in Section -------------------------- 9.01. "Available Cash Flow" shall mean an amount, with respect to each Fiscal ------------------- Year or portion thereof, (prorated for any partial Fiscal Year) during the Term of this Agreement, equal to the excess, if any, of the Operating Profit for such Fiscal Year over the sum of: (i) the applicable Owner's Priority in such Fiscal Year, plus; (ii) the Base Management Fee, plus; (iii) Deferred 3 Contingent Base Management Fees paid to Manager in such Fiscal Year. "Base Management Fee" shall mean for each Fiscal Year (prorated for any ------------------- partial Fiscal Year) during the Term of this Agreement, an amount equal to two percent (2%) of Gross Revenues, which shall be paid to Management Company as compensation (in addition to the Residence Inn System Fee and Incentive Management Fee) for the services performed pursuant to this Agreement. "Building Estimate" shall have the meaning set forth in Section 8.03.A. ----------------- "Capitalization Multiple" shall mean the number ten (10). ----------------------- "Case Goods" shall mean furniture and furnishings used in the Inn, ---------- including, without limitation: chairs, beds, chests, headboards, desks, lamps, tables, television sets, kitchen equipment, mirrors, pictures, wall decorations and similar items. "CC&R's" shall have the meaning set forth in Section 2.05. ------ "Chain Services" shall have the meaning set forth in Section 11.03. -------------- "Coverage Ratio" shall mean the number one and three-tenths (1.3). -------------- "Cure Payment" shall have the meaning set forth in Section 4.03.B. ------------ "Deductions" shall have the meaning set forth in the definition of ---------- Operating Profit. "Default" shall have the meaning set forth in Section 16.01. ------- 4 "Deferred Contingent Base Management Fees" shall mean an amount equal to ---------------------------------------- (a) the sum of all unpaid Base Management Fees deferred in accordance with Section 5.02.B less (b) all sums paid to Management Company in accordance with the provisions of Section 5.02.C. "Effective Date" shall have the meaning set forth in the Preamble. -------------- "Employee Claims" shall mean any and all claims (including all fines, --------------- judgments, penalties, costs, Litigation and/or arbitration expenses, attorneys' fees and expenses, and costs of settlement with respect to any such claim) by any employee or employees of Management Company against Owner or Management Company with respect to the employment at the Inn of such employee or employees. "Employee Claims" shall include, without limitation, the following: (i) claims which are eventually resolved by arbitration, by Litigation or by settlement; (ii) claims which also involve allegations that any applicable employment-related contracts affecting the employees at the Inn have been breached; and (iii) claims which involve allegations that one or more of the Employment Laws has been violated; provided, however, that "Employee Claims" shall not include claims for worker compensation benefits (which shall be governed by Article XII hereof) or for unemployment benefits. "Employment Laws" shall mean any federal, state or local law (including the --------------- common law), statute, ordinance, rule, regulation, order or directive with respect to employment, conditions of 5 employment, benefits, compensation, or termination of employment that currently exists or may exist at any time during the Term of this Agreement, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Workers Adjustment and Retraining Notification Act, the Occupational Safety and Health Act, the Immigration Reform and Control Act of 1986, the Polygraph Protection Act of 1988 and the Americans With Disabilities Act of 1990. "Environmental Laws" shall mean: any federal, state or local law, rule or ------------------ regulation (both present and future) dealing with the use, generation, treatment, storage, disposal or abatement of Hazardous Materials, including, but not limited to, (i) the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., as amended; (ii) the regulations -- --- promulgated thereunder, from time to time; (iii) all federal, state and local laws, rules and regulations (now or hereafter in effect) dealing with the use, generation, treatment, storage, disposal or abatement of Hazardous Materials; and (iv) the regulations promulgated thereunder, from time to time. "Event of Default" shall have the meaning set forth in Section 16.02. ---------------- "Existing CC&R's" shall have the meaning set forth in Section 2.05.A. --------------- "Existing Ground Leases" shall mean the ground leases which are listed on ---------------------- Exhibit "F", but for purposes of this Agreement 6 shall not include any amendments or modifications after the Effective Date. "Existing Mortgages" shall mean the Mortgages which are listed on Exhibit ------------------ "F", but for purposes of this Agreement shall not include any amendments or modifications after the Effective Date. "FF&E" shall mean furniture, furnishings, fixtures, Soft Goods, Case Goods, ---- Shuttle Vehicles, signage and equipment at the Inn (including, without limitation, facsimile machines, communication systems, audio-visual equipment, and all computer and other equipment needed for the reservation system and the property management system, and all other electronic systems needed for any Inn, from time to time, as well as similar systems based on other technologies which may be developed in the future). "FF&E Estimate" shall have the meaning set forth in Section 8.02.C. ------------- "FF&E Reserve" shall have the meaning set forth in Section 8.02.A. ------------ "First Notice" shall have the meaning set forth in Section 6.02. ------------ "Fiscal Year" shall mean Management Company's Fiscal Year which now ends at ----------- midnight on the Friday closest to December 31 in each calendar year; the new Fiscal Year begins on the Saturday immediately following said Friday. Any partial Fiscal Year between the Effective Date and the commencement of the first full 7 Fiscal Year and any partial Fiscal Year between the end of the last full Fiscal Year and the Termination of this Agreement, shall constitute a separate Fiscal Year. If Management Company's Fiscal Year is changed in the future, appropriate adjustment to this Agreement's reporting and accounting procedures shall be made; provided, however, that no such change or adjustment shall alter the Term of this Agreement, or in any way reduce the distributions of Operating Profit or other payments due Owner hereunder, or otherwise significantly and adversely affect Owner's rights or obligations under this Agreement. "Fixed Asset Supplies" shall mean supply items included within "Property -------------------- and Equipment" under the Uniform System of Accounts, including linen, cleaning supplies, china, glassware, tableware, uniforms, and similar items. "Force Majeure" shall mean acts of God, acts of war, civil disturbance, ------------- governmental action (including the revocation or refusal to grant a License, where such revocation or refusal is not due to the fault of the party whose performance is to be excused for reasons of Force Majeure), strikes, lockouts, fire, unavoidable casualties or any other causes beyond the reasonable control of either party (excluding, however: (i) lack of financing; or (ii) general economic and/or market factors). "Foreclosure" shall mean any exercise of the remedies available to a ----------- Holder, upon a default under the Secured Loan held by such Holder, which results in a transfer of title to or possession of the Inn. The term "Foreclosure" shall include, 8 without limitation, any one or more of the following events, if they occur in connection with a default under a Secured Loan: (i) a transfer by judicial foreclosure; (ii) a transfer by deed in lieu of foreclosure; (iii) the appointment by a court of a receiver to assume possession of the Inn; (iv) a transfer of either ownership or control of the Owner, by exercise of a stock pledge or otherwise; (v) if title to the Inn is held by a tenant under a ground lease, an assignment of the tenant's interest in such ground lease; or (vi) any similar judicial or non-judicial exercise of the remedies held by the Holder. "Foreclosure Date" shall mean the date on which title to or possession of ---------------- the Inn is transferred by means of a Foreclosure. "Future CC&R's" shall have the meaning set forth in Section 2.05.B. ------------- "GDP Deflator" shall mean the "Gross Domestic Product Implicit Price ------------ Deflator" issued from time to time by the United States Bureau of Economic Analysis of the Department of Commerce, or if the aforesaid GDP Deflator is not at such time so prepared and published, any comparable index selected by Owner and reasonably satisfactory to Management Company (a "Substitute Index") then prepared and published by an agency of the Government of the United States, appropriately adjusted for changes in the manner in which such index is prepared and/or year upon which such index is based. Any dispute regarding the selection of the Substitute Index or the adjustments to be made thereto shall be settled by arbitration in accordance with 9 Section 20.13. Except as otherwise expressly stated herein, whenever a number or amount is required to be "adjusted by the GDP Deflator", or similar terminology, such adjustment shall be equal to the percentage increase or decrease (except that, for purposes of this Agreement, the GDP Deflator shall not be decreased below its level as of the Effective Date) in the GDP Deflator which is issued for the month in which such adjustment is to be made (or, if the GDP Deflator for such month is not yet publicly available, the GDP Deflator for the most recent month for which the GDP Deflator is publicly available) as compared to the GDP Deflator which was issued for the month in which the Effective Date occurred. "Gross Revenues" shall mean, for each Fiscal Year during the Term of this -------------- Agreement, all revenues and receipts of every kind derived from operating the Inn and parts thereof, including, but not limited to: income (from both cash and credit transactions), before commissions and discounts for prompt or cash payments, from rental of rooms, stores, offices, meeting, exhibit or sales space of every kind; parking fees, license, lease and concession fees and rentals (not including gross receipts of licensees, lessees and concessionaires); income from vending machines; health club membership fees; food and beverage sales; wholesale and retail sales of merchandise (other than proceeds from the sale of FF&E no longer necessary to the operation of the Inn, which shall be deposited in the FF&E Reserve as set forth in Section 8.02.D hereof); service charges, to the extent not 10 distributed to the employees at the Inn as gratuities; and proceeds, if any, from business interruption or other loss of income insurance; provided, however, that Gross Revenues shall not include the following: gratuities to Inn employees; federal, state or municipal excise, sales, use or similar taxes collected directly from patrons or guests or included as part of the sales price of any goods or services; insurance proceeds (other than proceeds from business interruption or other loss of income insurance); condemnation proceeds (other than for a temporary taking); any proceeds from any Sale of the Inn or from the refinancing of any debt encumbering the Inn; proceeds from the disposition of FF&E no longer necessary for the operation of the Inn; interest which accrues on amounts deposited in either the FF&E Reserve or any escrow accounts which are established in accordance with Section 13.01.C; or Cure Payments. "Ground Lease Rental" shall mean the annual rental, as of the Effective ------------------- Date, under the Existing Ground Lease. "Ground Lessor" shall mean the landlord under the Existing Ground Lease. ------------- "Hazardous Materials" shall mean and include any substance or material ------------------- containing one or more of any of the following: "hazardous material", "hazardous waste", "hazardous substance", "regulated substance", "petroleum", "pollutant", "contaminant", or "asbestos", as such terms are defined in any applicable Environmental Law, in such concentration(s) or amount(s) as may impose clean-up, removal, monitoring or other responsibility 11 under any applicable Environmental Laws, or which may present a significant risk of harm to guests, invitees or employees of the Inn. "Holder" shall mean any holder, from time to time, of any Secured Loan. ------ "Impositions" shall mean all real estate and personal property taxes, ----------- levies, assessments and similar charges (other than those which are specifically excluded pursuant to Section 13.01.B) including, without limitation, the following: all water, sewer or similar fees, rates, charges, excises or levies; license fees; permit fees; inspection fees and other authorization fees and other governmental charges of any kind or nature whatsoever, whether general or special, ordinary or extraordinary, foreseen or unforeseen, or hereinafter levied or assessed of every character (including all interest and penalties thereon), which at any time during or in respect of the Term of this Agreement may be assessed, levied, confirmed or imposed on Owner with respect to the Inn or otherwise in respect of or be a lien upon the Inn. Impositions shall not include any income or franchise taxes payable by Owner or Management Company. Impositions shall include any taxes, levies, assessments and similar charges which may be enacted by the applicable governmental authority in lieu of, or in complete or partial substitution for, Impositions. "Incentive Management Fee" shall mean, for each Fiscal Year during the Term ------------------------ of this Agreement, the payments which shall be 12 made to Management Company, as compensation (in addition to the Base Management Fee and the Residence Inn System Fee) to Management Company for its services under this Agreement, in the amount of fifty percent (50%) of the Available Cash Flow in each Fiscal Year (or portion thereof); provided, however, that the cumulative Incentive Management Fee received by Management Company, from the Effective Date through any given point in time during the Term of this Agreement, shall not exceed twenty percent (20%) of the cumulative Operating Profit from the Effective Date through such point in time; provided further, however, that in no event shall the aforesaid cumulative limitation require Management Company to refund to Owner any Incentive Management Fees which were paid in a previous Fiscal Year and which were within such limitation as of the time when they were paid. "Initial Term" shall have the meaning set forth in Section 4.01. ------------ "Inn" shall mean the hotel, containing approximately the number of Suites --- which are set forth on Exhibit "A"-1 hereto, which Owner owns at the location specified in Exhibit "A"; the term "Inn" shall include the Site, the improvements built thereon, and all FF&E, Fixed Asset Supplies and Inventories installed therein. "Inn Retention" shall have the meaning set forth in Section 12.03 hereof. ------------- 13 "Intellectual Property" shall mean: (i) all Software; and (ii) all --------------------- manuals, brochures and directives issued by Management Company to its employees at the Inn regarding the procedures and techniques to be used in operating the Inn. "Interest Rate" shall mean an annual rate of interest equal to the Prime ------------- Rate (as adjusted from time to time) plus three hundred (300) basis points provided; however, that in no event shall the Interest Rate exceed the maximum rate which is permitted under applicable Legal Requirements. "Inventories" shall mean "Inventories" as defined in the Uniform System of ----------- Accounts, such as provisions in storerooms, refrigerators, pantries and kitchens; beverages in wine cellars and bars; other merchandise intended for sale; fuel; mechanical supplies; stationery; and other expensed supplies and similar items. "Legal Requirement" shall mean any federal, state or local law, code, rule, ----------------- ordinance, regulation or order of any governmental authority or agency having jurisdiction over the business or operation of the Inn or the matters which are the subject of this Agreement, including , without limitation, the following: (i) any building, zoning or use laws, ordinances, regulations or orders and (ii) Environmental Laws. "License" shall mean any license, permit, decree, act, order, authorization ------- or other approval or instrument which is necessary in order to operate the Inn in accordance with Legal 14 Requirements and pursuant to the Residence Inn System Standards and otherwise in accordance with this Agreement. "Litigation" shall mean: (i) any cause of action commenced in a federal, ---------- state or local court; and (ii) any claim brought before an administrative agency or body (for example, without limitation, employment discrimination claims). "Loan Priority Basis" shall mean the sum total, as of any given point in ------------------- time during the Term, of: (i) the amount shown on Exhibit "A-1"; plus (ii) any Additional Invested Capital expended by Owner, less the amount of any condemnation award received by Owner and not applied to restoration of the Inn pursuant to Section 15.02.B. "Management Analysis Report" shall mean a report which, if required -------------------------- pursuant to Section 9.01.B, shall be prepared by Management Company and delivered to Owner and shall include a narrative description regarding the preceding Fiscal Year, of: (i) the Inn's operating performance, including significant variations from the Annual Operating Budget; (ii) an analysis of any significant variation of the actual average daily revenue per available room from what was set forth in the Annual Operating Budget; (iii) a review of the competitive hotel market; (iv) a calculation of the Revenue Index, and Operating Profit less Ground Lease Rental, if any, compared to the Performance Termination Threshold; and (v) such other supplementary information as Owner or Management Company shall reasonably deem necessary to an understanding of the operation of the Inn. 15 "Management Company" shall have the meaning set forth in the Preamble. ------------------ "Management Fees" shall mean the Base Management Fee, the Deferred --------------- Contingent Base Management Fees, the Residence Inn System Fee and the Incentive Management Fee. "Marriott" shall mean Marriott International, Inc., a Delaware corporation -------- having an address at 10400 Fernwood Road, Bethesda, Maryland 20817. "Mortgage" shall mean any security instrument which encumbers real -------- property, including, without limitation, mortgages, deeds of trust, security deeds and similar instruments. "Net Operating Profit" shall mean the greater of (i) the excess, if any, of -------------------- Operating Profit less Owner's Priority, or (ii) zero (0). "Non-Disturbance Agreement" shall mean an agreement, in recordable form in ------------------------- the jurisdiction in which the Inn is located, executed and delivered by a Holder (which agreement shall by its terms be binding upon all Subsequent Owners), for the benefit of Management Company, pursuant to which, in the event such Holder or any Subsequent Owner comes into possession of or acquires title to the Inn either at or following a Foreclosure, such Holder and all Subsequent Owners shall (x) recognize Management Company's rights under this Agreement, and (y) shall not name Management Company as a party in any Foreclosure action or proceeding, and (z) shall not disturb Management Company in its 16 right to continue to manage the Inn pursuant to this Agreement; provided, however, that at such time: (i) this Agreement has not expired or otherwise been earlier terminated in accordance with its terms; (ii) there are no outstanding Events of Default by Management Company, and (iii) no material event has occurred and no material condition exists which, after notice or the passage of time or both, would entitle Owner to terminate this Agreement. "Operating Accounts" shall have the meaning set forth in Section 9.02. ------------------ "Operating Loss" shall mean a negative Operating Profit. -------------- "Operating Profit" shall mean, in each Fiscal Year during the Term of this ---------------- Agreement, the excess of Gross Revenues over the following deductions ("Deductions") incurred by Management Company or its Affiliates (or, in the case of any Owner Deductions, by Owner) in operating the Inn: 1. The cost of sales including, without limitation, salaries, wages, employee benefits, Employee Claims (except to the extent specifically set forth to the contrary in Section 14.01.C or 14.01.D), payroll taxes and other costs related to Inn employees; 2. Departmental expenses; administrative and general expenses; the cost of Inn advertising and business promotion; all utility costs, including but not limited to the cost of heat, light, power and water; and the cost of routine repairs, maintenance and minor alterations which are treated as Deductions under Section 8.01; 17 3. The cost of Inventories and Fixed Asset Supplies consumed in the operation of the Inn; 4. A reasonable reserve for uncollectible accounts receivable as determined by Management Company; 5. All reasonable costs and fees of independent professionals or other third parties who are retained by Management Company to perform services required or permitted hereunder; provided that Management Company will notify Owner at least thirty (30) days in advance of any proposed expenditure under this paragraph 5 which is in excess of Twenty Thousand Dollars ($20,000) and which was not specifically identified in the Annual Operating Budget, and Management Company shall consider in good faith any comments which Owner may have with respect to such proposed expenditure; and provided, further, that if such expenditure involves immediately-needed repair work to the Inn or if immediate action is otherwise required, the above-described requirement regarding thirty (30) days' prior notice shall be modified to require whatever notice period is reasonable under the circumstances; 6. The reasonable cost and expense of technical consultants and operational experts who are employees of Management Company or one of its Affiliates, and who perform specialized services in connection with non-routine Inn work; provided, however, that the costs and expenses so incurred shall only be Deductions to the extent such costs and expenses are reasonable and competitively priced, as compared to similar work 18 done by outside consultants or experts; and provided, further, that Management Company will notify Owner at least thirty (30) days in advance of any proposed expenditure under this paragraph 6 which is in excess of Twenty Thousand Dollars ($20,000.00) and which was not specifically identified in the Annual Operating Budget, and Management Company shall consider in good faith any comments which Owner may have with respect to such proposed expenditure; and provided, further, that if such expenditure involves immediately-needed repair work to the Inn or if immediate action is otherwise required, the above-described requirement regarding thirty (30) days' prior notice shall be modified to require whatever notice period is reasonable under the circumstances; 7. The Residence Inn System Fee; 8. Subject to Section 11.03.B, the Inn's pro rata share of costs and expenses incurred by Management Company (or its Affiliate) in providing Chain Services; 9. Insurance costs and expenses as provided in Section 12.04.B; 10. Taxes, if any, payable by or assessed against Management Company related to this Agreement or to Management Company's operation of the Inn (exclusive of Management Company's income taxes or franchise taxes) and all Impositions assessed against the Inn; 19 11. Amounts which are required to be transferred into the FF&E Reserve in accordance with the provisions of Section 8.02; 12. Transfers required to be made, as they may change from time to time, to the System Marketing Fund, in order for the Inn to remain a member of the System; (such contributions are presently two and one-half percent (2 1/2%) of Suite Revenues); 13. The reimbursement to Owner of the amount of any Owner Deductions; 14. Lease payments pursuant to the leases of Shuttle Vehicles and Telephone and Office Equipment (to the extent Management Company has not elected to make such payments from the FF&E Reserve); 15. The payment to Management Company of the cost of preparing the Management Analysis Report pursuant to Section 9.01.B; and 16. Such other costs and expenses incurred by Management Company or its Affiliates (not including the costs and expenses included in the Residence Inn System Fee) as are specifically provided for elsewhere in this Agreement or are otherwise reasonably necessary for the proper and efficient operation of the Inn (including, without limitation, the costs and expenses of all functions described in Section 2.03, to the extent such costs and expenses are not already treated as Deductions elsewhere in this definition of Operating Profit, unless, and to the extent that, any such costs and expenses are 20 specifically stated not to be Deductions under any provision of this Agreement). The term "Deductions" shall not include: (i) debt service payments pursuant to any Secured Loan; nor (ii) rental payments pursuant to any ground lease of the Site; both of the foregoing shall be paid by Owner from its own funds, and not from Gross Revenues nor from the FF&E Reserve. "Owner" shall have the meaning set forth in the Preamble. Subject to ----- compliance with Articles XVIII and XIX of this Agreement, the term "Owner" shall include all successors and assigns of the entity identified as the "Owner" in the Preamble. "Owner Deductions" shall mean amounts paid by Owner with respect to: (i) ---------------- premiums for the insurance policies described in Section 12.04; and (ii) reasonable costs of any negotiations or Litigation with respect to any contest of Impositions, as described in Section 13.01.A; provided, however, that to the extent Owner spends in excess of Five Thousand Dollars ($5,000.00) with respect to any contest of Impositions and has not received Management Company's consent as provided in Section 13.01.A, then any amount in excess of such Five Thousand Dollars ($5,000.00) or such greater amount as may be approved by Management Company, shall not be considered an Owner Deduction. Except as specifically set forth in Section 8.02.F.2, the amount of any Owner Deductions paid by Owner shall be reimbursed to Owner (as a Deduction) in the Fiscal Year in which they were paid. Owner shall give Management Company prompt notice of any 21 amounts it has paid which constitute Owner Deductions together with such evidence of payment as Management Company may reasonable require. "Owner's Distribution" shall mean, with respect to each Fiscal Year or -------------------- portion thereof during the Term, funds distributed to Owner in accordance with the provisions of Section 5.02 hereof which shall equal Operating Profit less any Base Management Fees, Deferred Contingent Base Management Fees and Incentive Management Fees paid to Management Company. "Owner's Priority" shall mean, with respect to each Fiscal Year (prorated ---------------- for any partial Fiscal Years) during the Term of this Agreement, a dollar amount equal to ten percent (10%) of the Priority Basis for that Fiscal Year. If the Inn has an Existing Ground Lease, the annual rental payments for such Fiscal Year (prorated for any partial Fiscal Year), shall be added to the Owner's Priority. "Performance Termination Threshold" shall mean, with respect to each full --------------------------------- Fiscal Year during the Term of this Agreement, the dollar amount set forth on Exhibit "A-1", plus eight percent (8%) of any Additional Invested Capital expended by Owner pursuant to clause (ii) of the definition of Priority Basis; provided, however, that the aforesaid dollar amount shall be adjusted, as of the tenth (10th) anniversary of the Effective Date, in an amount equal to seventy-five percent (75%) of the percentage change in the GDP Deflator between the Effective Date and the tenth (10th) anniversary of the Effective Date; provided that, in 22 no event will the Performance Termination Threshold be lower than it is as of the Effective Date; and provided further, that in calculating the aforesaid change in the GDP Deflator during such period of time, both (i) the two (2) years having the highest annual rates of change in the GDP Deflator during such period, and (ii) the two (2) years having the lowest annual rates of change in the GDP Deflator during such period, shall be ignored, and such percentage change in the GDP Deflator between the Effective Date and the tenth (10th) anniversary of the Effective Date shall be recalculated, for purposes of this Agreement, using as the rate of change in the GDP Deflator for each of such four (4) excluded years (i.e., those years described in clauses (i) and (ii), above) the average annual rate of change in the GDP Deflator during the non-excluded years; and provided further that, to the extent that certain portions of the Performance Termination Threshold, as of immediately prior to such tenth (10th) anniversary adjustment, reflect expenditures which qualify as Additional Invested Capital, the aforesaid GDP Deflator adjustment shall be calculated with respect to such portions by using, as the base, not the GDP Deflator as of the Effective Date, but rather the GDP Deflator as of either the date of such expenditure or (if construction is involved) the date on which the items in question were substantially completed. "Post-Foreclosure Decision Date" shall have the meaning set forth in ------------------------------ Section 6.06. 23 "Prime Rate" shall mean the "prime rate" as published in the "Money Rates" ---------- section of The Wall Street Journal; however, if such rate is, at any time during ----------------------- the Term, no longer so published, the term "Prime Rate" shall mean the average of the prime interest rates which are announced, from time to time, by the three (3) largest banks (by assets) headquartered in the United States which publish a "prime rate." "Priority Basis" shall mean the sum total, as of any given point in time -------------- during the Term, of: (i) the dollar amount shown on Exhibit "A-1"; plus (ii) any Additional Invested Capital expended by Owner; provided that each expenditure of Additional Invested Capital shall be added to the Priority Basis at such date or dates as the expenditure occurred, taking into consideration at what point (or points) during the Fiscal Year such expenditure occurred; less (iii) the amount of any condemnation award received by Owner and not applied to restoration of the Inn pursuant to Section 15.02.B. "Proprietary Marks" shall mean all trademarks, trade names, symbols, logos, ----------------- slogans, designs, insignia, emblems, devices, service marks and distinctive designs of buildings and signs, or combinations thereof, which are used to identify inns in the Residence Inn chain. The names "Marriott", "Residence Inn" and "Residence Inn By Marriott", and any of the foregoing used in conjunction with other words or names, are examples without limitation of Proprietary Marks. The term "Proprietary Marks" shall include all present and future Proprietary Marks, whether 24 they are now or hereafter owned by Management Company or one of its Affiliates, and whether or not they are registered under the laws of the United States or any other country. The term "Proprietary Marks" shall also include all trade names, trademarks, symbols, logos, designs, etc. which are used in connection with the operation of the Inn during the Term (such as, without limitation, the names of the restaurants and lounges). Notwithstanding the foregoing, those trade names, trademarks, symbols, logos, designs, etc., which are specifically set forth on Exhibit "E" hereto shall be deemed to be "Proprietary Marks" only for so long as this Agreement is in effect, and such Proprietary Marks shall revert to the exclusive control of Owner as of the date of Termination. "Proprietary Signage" shall mean any signage used in connection with the ------------------- Inn (including both interior and exterior signage, and including billboards and other signage not located on the Site) which contains one or more Proprietary Marks; any signage which contains the word "Marriott" or "Residence Inn" shall automatically be deemed to be Proprietary Signage. "Prospectus" shall have the meaning set forth in Section 20.05. ---------- "Qualified Lender" shall mean any Holder, from time to time, of any ---------------- Qualified Loan with respect to which Management Company has received a written notice (pursuant to Section 20.09 of this Agreement) stating: (i) the name and address of such Holder; and 25 (ii) that such Holder is a "Qualified Lender" pursuant to the terms of this Agreement. "Qualified Loan" shall mean any Secured Loan in which the initial principal -------------- amount, as of the date such Secured Loan is incurred, when added to the current principal balance of all existing Secured Loans as of that date, is less than or equal to the greater of the following: (i) Seventy percent (70%) of the Loan Priority Basis; or (ii) the result obtained by (a) dividing the Operating Profit for the thirteen (13) most recent full Accounting Periods by the Coverage Ratio; then, (b) multiplying the result of clause (a) by the Capitalization Multiple; or (iii) the existing balance of any Secured Loans encumbering the Inn immediately prior to the date of the incurrence of such Qualified Loan, plus commercially reasonable Transaction Costs associated with such refinancing, up to an amount equal to four percent (4%) of the principal amount of such Qualified Loan. In addition, regardless of whether or not the above test set forth in clauses (i), (ii) and (iii) is satisfied, the existing (as of the Effective Date) balance of any Secured Loan which is secured by an Existing Mortgage shall be deemed to be a "Qualified Loan". "Qualified Loan Acceleration" shall mean the acceleration of the --------------------------- indebtedness incurred pursuant to any Qualified Loan, as a result of a default under the terms and conditions of such Qualified Loan. 26 "Renewal Terms" shall have the meaning set forth in Section 4.01. ------------- "Residence Inn System Fee" shall during any given Fiscal Year (or portion ------------------------ thereof), be equal to four percent (4%) of Gross Revenues. It shall mean an amount paid to Management Company for the Residence Inn System Services. "Residence Inn System" shall mean the Residence Inn hotel system managed by -------------------- Marriott (or one or more of its Affiliates) which is, as of the Effective Date, operated under the trade name "Residence Inn by Marriott" or Marriott Residence Inn". "Residence Inn System Services" shall mean the following services which are ----------------------------- paid for by the Residence Inn System Fee: System financial planning and policy services; product planning and development; human resources management and planning for the Residence Inn System (but not any particular inn within the Residence Inn System); protection of the "Marriott Residence Inn" "Residence Inn by Marriott," and "Residence Inn" trade names, trademarks, logos and servicemarks; and the development and implementation of Management Company's technical and operational programs designed for the periodic inspection and consultation visits to the inns in the Residence Inn System (but not the services of the personnel of the Architecture and Construction Division of Management Company providing architectural, technical or procurement services for the Inn, which shall be treated as a Deduction described in paragraph 6 of the definition of "Operating Profit"). 27 "Residence Inn System Standards" shall mean both the operational standards ------------------------------ (for example, staffing, amenities offered to guests, advertising, etc.) and the physical standards (for example, the quality, condition, utility and age of the FF&E, etc.) of Residence Inn hotels in the Marriott chain as such operational and physical standards may fluctuate from time to time (provided, however, that the Residence Inn System Standards shall in no event be lower than the operational and physical standards, as of the date in question, of comparable extended stay hotels in other hotel systems which are comparable to the Residence Inn System). "Restricted Area" shall mean that area which is shown on the map attached --------------- hereto as Exhibit "D", as described in the narrative which is set forth in Exhibit "D-1". "Restricted Inn" shall mean any hotel whose size, facilities and market -------------- positioning are such that, if such hotel had been operated by Management Company or one of its Affiliates as of the Effective Date, it would have been operated as a member of the Residence Inn System (that is, as an extended-stay hotel, as opposed to a full service hotel or one of the other limited service brands also operated by Affiliates of Management Company i.e. Courtyard by Marriott or Fairfield Inn). The term "Restricted Inn" shall not include any one or more of the following: (i) any existing (as of the Effective Date) member of the Residence Inn System which is within the Restricted Area; (ii) any Courtyard by Marriott (or other similar moderate-price 28 lodging product) or any Fairfield Inn (or other similar economy-priced lodging product); (iii) any full service, suite or resort hotel; (iv) any hotel or hotels which are members of a chain of hotels (provided that such chain has a minimum of four (4) or more hotels in operation), all or substantially all (but in no event less than four (4) hotels) of which is acquired by, or merged with, or franchised by or joined through marketing agreement with, Management Company or one of its Affiliates (or the operation of which is transferred to Management Company or one of its Affiliates); (v) any hotel or hotels which are members of a group of hotels which is (in a single transaction with a single seller or transferor) acquired by or merged with, or franchised by or joined through marketing agreement, with Management Company or one of its Affiliates (or the operation of which is transferred to Management Company or one of its Affiliates), provided that such group of hotels contains no fewer than four (4) hotels; (vi) any future lodging product developed by Management Company or one of its Affiliates which is not a lodging product which would have been included within the Residence Inn System, as such system existed as of the Effective Date; or (vii) any existing non-Marriott hotel within the Restricted Area which is specifically designated on Exhibit D-1 as not being a Restricted Inn. "Revenue Data Publication" shall mean Smith's STAR Report, a monthly ------------------------ publication distributed by Smith Travel Research, Inc. of Gallatin, Tennessee or an alternative source, reasonably 29 satisfactory to both parties, of data regarding the Revenue Per Room of hotels in the general trade area of the Inn. The "competitive set" for the Inn shall be determined (with periodic adjustments) by Management Company, subject to Owner's approval (such approval not to be unreasonably withheld). If such Smith's STAR Report is discontinued in the future, or ceases (in the reasonable opinion of either Owner or Management Company) to be a satisfactory source of data regarding the Revenue Per Room of various hotels in the general trade area of the Inn, Management Company shall select an alternative source, subject to Owner's approval (such approval not to be unreasonably withheld). If the parties fail to agree on either such competitive set or such alternative source, as the case may be, within a reasonable period of time, the matter shall be resolved by arbitration pursuant to Section 20.13. "Revenue Index" shall mean that fraction which is equal to (a) the Revenue ------------- Per Room for the Inn, divided by (b) the average Revenue Per Room for the hotels in the Inn's competitive set (including the Inn), as set forth in the Revenue Data Publication. Appropriate adjustments shall be made in the event of a major renovation of the Inn. "Revenue Index Threshold" shall mean the number set forth on Exhibit "A-1" ----------------------- hereto. However, if the entry of a new hotel into the Inn's competitive set (or the removal of a hotel from such competitive set) causes significant variations in the Revenue Index which do not reflect the Inn's true position in the 30 relevant market, appropriate adjustments shall be made to the Revenue Index Threshold by mutual consent of Owner and Management Company (neither such consent to be unreasonably withheld). "Revenue Per Room" shall mean, (i) the term "revenue per room" as defined ---------------- by the Revenue Data Publication; or (ii) if the Revenue Data Publication is no longer being used (as more particularly set forth in the definition of "Revenue Data Publication"), the aggregate gross room revenues of the hotel in question for a given period of time divided by the total room nights for such period. If clause (ii) of the preceding sentence is being used, a "room" shall be a hotel guest room which is keyed as a single unit, and shall include rooms which are temporarily unavailable due to: (i) maintenance, or (ii) ongoing renovation work. "Sale/Leaseback Transaction" shall have the meaning set forth in Section -------------------------- 6.10. "Sale of the Inn" shall mean any sale, assignment, transfer or other --------------- disposition, for value or otherwise, voluntary or involuntary, of Owner's title to the Inn or the Site (either fee or leasehold title, as the case may be), but shall not include a collateral assignment intended to provide security for a loan. For purposes of this Agreement, a "Sale of the Inn" shall also include a lease (or sublease) of the entire Inn or Site. The phrase "Sale of the Inn" shall also include any sale, transfer, or other disposition, for value or otherwise, in a single transaction or a series of related transactions, of the 31 controlling interest in Owner. If Owner is a corporation, the phrase "controlling interest" shall mean the right to exercise, directly or indirectly, fifty percent (50%) or more of the voting rights attributable to the shares of Owner (through ownership of such shares or by contract). If Owner is not a corporation, the phrase "controlling interest" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of Owner. Notwithstanding the foregoing, the term "Sale of the Inn" shall not include any sale, assignment, transfer or other disposition of the Inn or the Site by Owner to an Affiliate of Owner. "Second Notice" shall have the meaning set forth in Section 6.02. ------------- "Secured Loan" shall mean and include: (i) any indebtedness secured by a ------------ Mortgage encumbering the Inn or all or any part of Owner's interest therein; and (ii) all amendments, modifications, supplements and extensions of any such Mortgage. "Settlement Threshold Amount" shall mean the greater of (i) One Hundred --------------------------- Thousand Dollars ($100,000) ( as adjusted by the GDP Deflator); or (ii) a dollar amount (to be re-determined whenever reasonably necessary) equal to the highest amount paid in a representative sampling of Employee Claims, which have been settled within the preceding twelve (12) months where each of such settlements can be reasonably characterized as being (i) within the normal course of business at the Inn, and (ii) within the range of similar settlements at other hotels comparable to 32 the Inn. Any dispute between the parties as to the appropriate amount under clause (ii) of the preceding sentence shall be submitted to arbitration under Section 20.13. "Shuttle Vehicles" shall mean any car, van, bus or similar motor vehicle ---------------- used primarily for the purpose of transporting Inn guests. "Site" shall mean the parcel or parcels of land described in Exhibit "A" ---- attached hereto. "Soft Goods" shall mean all fabric, textile and flexible plastic products ---------- (not including items which are classified as "Fixed Asset Supplies" under the Uniform System of Accounts) which are used in furnishing the Inn, including, without limitation: carpeting, drapes, bedspreads, wall and floor coverings, mats, shower curtains and similar items. "Software" shall mean all computer software and accompanying documentation -------- (including all future upgrades, enhancements, additions, substitutions and modifications thereof), other than computer software which is commercially available, which are used by Management Company in connection with the property management system, the reservation system and all future electronic systems developed by Management Company for use in the Inn. "Subsequent Owner" shall mean any individual or entity which acquires title ---------------- to or possession of the Inn at or through a Foreclosure. "Suite" shall mean a lodging unit in the Inn. ----- 33 "Suite Revenues" shall mean that portion of the Gross Revenues of the Inn -------------- which is attributable to the rental of Suites. "System Marketing Fund" shall mean that certain fund (or any successor to --------------------- such fund) maintained by Management Company or one of its Affiliates, in its capacity as franchisor of the System, to pay for the following System costs: all costs associated with developing, preparing, producing, directing, administering, conducting, maintaining and disseminating advertising, marketing, promotional and public relations materials, programs, campaigns, sales and marketing seminars and training programs, and similar activities of every kind and nature, including the Residence Inn directory; conducting market research; and paying the central operational costs of the Residence Inn reservation system; provided, however, that any costs described in this definition of System Marketing Fund may, at the option of the Management Company and The Residence Inn Association, be charged directly to each inn in the System on the basis of actual use by or benefit to each inn and, in such event, shall become Deductions. "Telephone and Office Equipment" shall mean the following equipment used in ------------------------------ the Inn and all ancillary equipment: (i) telephones; (ii) miscellaneous office equipment such as copiers, postage meters, etc.; (iii) television sets; and (iv) audio-visual equipment. "Term" shall mean the Initial Term plus all Renewal Terms. ---- 34 "Termination" shall mean the expiration or sooner cessation of this ----------- Agreement. "The Residence Inn Association" (TRIA) is an advisory council to owners and ----------------------------- franchisees of the Residence Inn System with respect to advertising, marketing, reservations and other matters relating to Residence Inn System hotels. All owners, franchisees of the Residence Inn System and Owner shall be members of TRIA. "Transaction Costs" shall mean, with respect to the incurring of any ----------------- Secured Loan, all normal transaction costs (to the extent actually incurred) including, without limitation, the following: state and local transfer taxes; escrow fees; recording costs; Mortgage recording taxes; costs of any survey required by the Holder; reasonable fees of the Holder's outside attorneys and accountants; appraisal fees; title insurance premiums; financing costs (including "points"); reasonable attorneys' fees of Owner in connection with such Secured Loan; environmental inspection, testing and reporting fees to the extent required by the Holder; and brokerage commissions (provided that no such brokerage commissions shall be recognized as "Transaction Costs" hereunder if they are made to a person or entity affiliated with Owner, to the extent (if any) that such payments exceed the normal customary amounts). "Uniform System of Accounts" shall mean the Uniform System of Accounts for -------------------------- Hotels, Eighth Revised Edition, 1986, as published by the Hotel Association of New York City, Inc. 35 "Working Capital" shall mean assets which are used in the day-to-day --------------- operation of the Inn's business, including, without limitation, amounts kept in petty cash funds, amounts deposited in operating bank accounts, receivables, prepaid expenses and funds expended to purchase Inventories, less accounts payable and accrued current liabilities. END OF ARTICLE I 36 ARTICLE II APPOINTMENT OF MANAGEMENT COMPANY --------------------------------- 2.01 Appointment ----------- Owner hereby appoints and employs Management Company as Owner's exclusive agent to supervise, direct and control the management and operation of the Inn for the Term provided in Article IV. Management Company accepts said appointment and agrees to manage the Inn during the Term of this Agreement in accordance with the terms and conditions hereinafter set forth. The performance of all activities by Management Company hereunder shall be for the account of Owner. 2.02 Delegation of Authority ----------------------- Except as otherwise specifically set forth in this Agreement, Inn operations shall be under the exclusive supervision and control of Management Company which, shall be responsible for the proper and efficient operation of the Inn. Management Company shall have discretion and control, free from interference, interruption or disturbance, but in all respects subject to the provisions of this Agreement, in all matters relating to management and operation of the Inn, including, without limitation, the following: charges for Suites and commercial space; credit policies; food and beverage services; employment policies; granting of leases, parking services, licenses and concessions for shops and agencies within the Inn 37 (provided that the term of any such lease, license or concession shall not exceed the Term of this Agreement; and provided further that Owner's consent shall be required prior to the execution by Management Company of any such lease, license or concession which pertains to the Inn, and which (i) has a term of more than five (5) years; or (ii) involves more than five hundred (500) square feet of space within the Inn); receipt, holding and disbursement of funds; maintenance of bank accounts; procurement of Inventories, supplies and services; promotion and publicity; and, generally, all activities necessary for operation of the Inn. 2.03 Operational Standards --------------------- In accordance with the Residence Inn System Standards and the other terms of this Agreement, Management Company shall, in connection with the Inn, perform each of the following functions (provided that in all cases, except as otherwise specifically set forth in this Agreement, the costs and expenses of performing such functions shall be Deductions): A. Obtain and keep in full force and effect, either in its own name on behalf of Owner or in Owner's name, as may be required by the Legal Requirements, any and all Licenses to the extent same is within the control of Management Company (or, if same is not within the control of Management Company, Management Company shall use all due diligence and reasonable efforts to obtain and keep same in full force and effect). 38 B. Recruit, employ, supervise, direct and (when appropriate) discharge all of the employees at the Inn. C. Establish and revise, as necessary, administrative policies and procedures, including policies and procedures for the control of revenue and expenditures, for the purchasing of supplies and services, for the control of credit, and for the scheduling of maintenance, and verify that the foregoing procedures are operating in a sound manner. D. Plan, execute, and supervise repairs and maintenance at the Inn. E. Procure (as agent for Owner) all Fixed Asset Supplies and Inventories. F. Maintain the Operating Accounts. G. Prepare and deliver Accounting Period Statements, Annual Operating Statements, Annual Operating Budgets, Building Estimates, FF&E Estimates, and such other budgets and reports as are required by this Agreement. H. Establish prices, rates and charges for services provided in the Inn, including Suite rates. I. As agent for Owner, negotiate and enter into leases, concessions and licenses for shops and other facilities within the Inn. J. Administer the leases, concessions and licenses for shops and other facilities within the Inn (whether entered into pursuant to subsection I, above, or otherwise). 39 K. Provide services included in the Residence Inn System Fee and the Chain Services. L. Provide, or cause to be provided, risk management services relating to the types of insurance required to be obtained or provided by Management Company under this Agreement, provided that the costs and expenses of providing such services are to be paid as described in Section 12.04.B. M. Reasonably cooperate with Owner concerning: (i) disputes with any Holder regarding the Inn, (ii) contests of Impositions and Legal Requirements; and (iii) adjustments of insurance claims and condemnation awards involving the Inn. N. Reasonably cooperate (provided that Management Company shall not, except as otherwise specifically set forth in Section 6.01, be obligated to enter into any amendments of this Agreement) with Owner in any attempt(s) by Owner to effectuate a Sale of the Inn (provided that nothing herein shall affect the provisions of Section 20.05), or to obtain any Secured Loan. If given reasonable notice, such cooperation shall include, without limitation: (i) answering any reasonable questions by prospective purchasers and Holders; (ii) preparing lists and schedules of leases, concessions, FF&E, Fixed Asset Supplies, Inventories, and similar items (but specifically excluding customer lists); and (iii) making such certifications and representations to Owner, to such purchasers and to such Holders, regarding the Inn and the operation thereof, as Owner may reasonably request (taking into account the extent of Management 40 Company's control and responsibility provided for hereunder). Owner shall promptly reimburse Management Company, from its own funds and not as a Deduction, for the reasonable costs and expenses incurred by Management Company in connection with any actions necessary to comply with the requirements of this Section 2.03.N, provided that such actions are not otherwise required under other provisions of this Agreement. O. Arrange for and supervise public relations and advertising, and prepare annual marketing plans. P. Endeavor to manage the timing of expenditures to replenish Inventories, Fixed Asset Supplies, payments on accounts payable and collections of accounts receivable, so as to avoid or minimize any cash deficits with respect to Inn operations, which deficits would otherwise require additional funding of Working Capital by Owner. Q. Comply with all provisions in the Existing Ground Lease and in any Existing Mortgages which are by their terms applicable to the operation of the Inn; provided, however, that all practices and procedures used by Management Company in the operation of the Inn as of the Effective Date shall be deemed to be in compliance with the Existing Ground Lease and all Existing Mortgages; and provided further, that if either the Ground Lessor or any Holder under an Existing Mortgage shall, from time to time, notify Management Company that it has determined that certain practices and procedures which are used by Management Company in the operation of the Inn are not in compliance with 41 the provisions of the Existing Ground Lease or such Existing Mortgage (as the case may be), Management Company shall promptly alter such practices and procedures to ensure such compliance; and provided further, that if such compliance would require work by Management Company which is beyond the normal course of Inn operations, or would impose additional financial burdens on the Inn which are beyond the normal course of Inn operations, Owner (from its own funds, not as a Deduction) shall compensate Management Company for such work and such additional burdens. 2.04 Limitations on Authority ------------------------ A. Notwithstanding anything in Section 2.02 or elsewhere in this Agreement to the contrary (unless otherwise stated in this Section 2.04), and in addition to the various other provisions of this Agreement which prohibit Management Company from taking certain actions or which allow certain actions only if Owner's consent thereto has been obtained, Management Company shall not, without the prior written approval of Owner, which approval Owner may withhold in its sole discretion, perform any of the following actions in connection with the Inn and on behalf of or burdening Owner: 1. Acquiring any land or interest therein; 2. Acquiring any capital assets or interest therein except: (i) items in the approved Building Estimate, and (ii) FF&E, Fixed Asset Supplies and Inventories (to the extent the 42 same constitute capital assets) in the ordinary course of business as expressly provided for in this Agreement; 3. Financing, refinancing or mortgaging of any portion of the Inn or the revenue due to Owner therefrom; 4. Selling (other than dispositions of FF&E, Fixed Asset Supplies and Inventories in the ordinary course of business as expressly provided for in this Agreement), leasing (other than as expressly provided for in this Agreement, including without limitation, Section 2.02 of this Agreement) or other transferring of, or the pledging or placing of any lien or encumbrance on, any part of the Inn; 5. In the event of a total or partial condemnation, consenting to any award or participating in any condemnation proceeding, except as expressly provided for in this Agreement; 6. Entering into, modifying or terminating any lease, concession or License, except to the extent permitted under Section 2.02; 7. Adjusting any claim or settling any Litigation which (i) is not covered by any of the insurance policies described in Article XII and is not an Employee Claim, and which would result in a Deduction or payment in excess of Two Hundred Fifty Thousand Dollars ($250,000.00) in any Fiscal Year, as adjusted by the GDP Deflator, or (ii) would impose on Owner any material liability or obligation other than the payment of money, or would require Owner to make any material admission; or 43 8. Adjusting any claim, under the applicable property insurance policies, regarding injury or damage to the Inn or its contents, where the estimated cost of restoration is in excess of Five Hundred Thousand Dollars ($500,000.00), as adjusted by the GDP Deflator. 2.05 Covenants, Conditions or Restrictions ------------------------------------- A. As of the Effective Date, there are existing covenants, conditions, restrictions and/or agreements, including reciprocal easements or cost-sharing arrangements (all of the foregoing types of encumbrances on the Inn, or agreements relating to the Inn, whether existing as of the Effective Date or not, shall be collectively referred to as "CC&R's"; those CC&R's which are in existence as of the Effective Date shall be referred to in this Agreement as "Existing CC&R's"). Management Company hereby gives its consent to all Existing CC&R's. Except as otherwise specifically set forth to the contrary in Exhibit "F" hereto, all costs, expenses and charges which are imposed on the Inn under the Existing CC&R's shall be paid from Gross Revenues as Deductions. Those certain costs, expenses and charges which are described on Exhibit "F" hereto as "capital charges" shall be paid by Owner, from its own funds, and all such payments shall be treated for purposes of this Agreement as Additional Invested Capital expended by Owner. B. CC&R's which are entered into, or become encumbrances on the Inn and/or the Site, after the Effective Date shall be 44 referred to in this Agreement as "Future CC&R's". Owner agrees that it will give Management Company, for Management Company's prior approval, written notice of its intention to execute any Future CC&R's, such notice to be reasonably in advance of the execution thereof. Owner covenants that, during the Term of this Agreement, there will not be (unless Management Company has given its prior written consent thereto) any Future CC&R's affecting the Site or the Inn: (i) which purport to impose any material financial obligations on the Inn; (ii) which would prohibit or limit Management Company from operating the Inn in accordance with the Residence Inn System Standards; or (iii) which would allow Inn facilities (for example, parking spaces) to be used by persons other than guests, invitees or employees of the Inn. C. All financial obligations imposed on Owner or on Management Company or on the Inn pursuant to any Future CC&R's shall be paid by Owner from its own funds, and not from Gross Revenues or from the FF&E Reserve, unless Management Company has given its prior written consent to such Future CC&R's. Management Company agrees that it will not unreasonably withhold its consent to any such Future CC&R's; provided, however, that Management Company shall be entitled to withhold its consent in its discretion if a proposed Future CC&R would have a material impact on the operation of the Inn, as described in clauses (i), (ii) or (iii) of Section 2.05.B. Upon receipt of such consent from Management Company, such sums shall be Deductions in computing Operating Profit. 45 D. Owner shall not waive any protections which benefit the Hotel pursuant to existing restrictive covenants without the prior written consent of Management Company which consent shall not be unreasonably withheld, conditioned or delayed. 2.06 Licenses and Permits -------------------- Owner agrees that, upon request by Management Company, it will sign promptly and without charge applications for Licenses. END OF ARTICLE II 46 ARTICLE III OWNERSHIP OF THE INN -------------------- 3.01 Ownership of the Inn -------------------- A. Each party acknowledges that the status of title to the Site and to the Inn is as described on Exhibit "F" hereto; neither party will hold the other party responsible for any defects in said status of title, and each party hereby releases the other party from all claims stemming from any such defects. B. Owner hereby covenants that, throughout the Term of this Agreement, it will not change the status of title to the Site from that which is described on Exhibit "F" hereto, except that Owner shall have the right either (i) to effectuate a Sale of the Inn in accordance with Article XIX, or (ii) to encumber the Site and the Inn with the following: 1. Mortgages which are given to secure any one or more Qualified Loans; 2. Liens for Impositions or other public charges not yet due or which are being contested in good faith; and 3. Easements or other encumbrances (not including those described in subsection 1 or 2 above) which do not adversely affect the operation of the Inn by Management Company and which are not prohibited pursuant to Section 2.05.B of this Agreement. C. Owner shall indemnify, defend and hold Management Company and its Affiliates harmless from claims by entities which 47 have loaned money to Owner that Management Company (or any of such Affiliates) owes any such lender all or any portion of such indebtedness. D. Management Company shall indemnify, defend and hold Owner and its Affiliates harmless from claims by entities which have loaned money to Management Company that Owner (or any of such Affiliates) owes any such lender all or any portion of such indebtedness. END OF ARTICLE III 48 ARTICLE IV TERM ---- 4.01 Term ---- A. The initial term ("Initial Term") of this Agreement shall commence with the Effective Date and, unless sooner terminated as herein provided, shall continue until the expiration of Fiscal Year 2013. The Term shall thereafter be automatically renewed for each of three (3) successive periods of ten (10) full Fiscal Years each ("Renewal Terms"), unless either: (i) Management Company, at its option, notifies Owner, in accordance with Section 20.09, at any time within the period of eighteen (18) months prior to the expiration of the Initial Term or the then current Renewal Term, as the case may be, of its intention not to renew; or (ii) Management Company has committed an Event of Default, and has been notified by Owner of such Event of Default, under Article XVI of this Agreement, as of the date of any such renewal. B. If Management Company so notifies Owner of its intention not to renew pursuant to Section 4.01.A, Management Company shall continue to manage the Inn pursuant to this Agreement until the termination date set forth in such notice, provided that such termination date shall be: (i) no less than twelve (12) months after the date of such notice; and (ii) in no event earlier than the expiration date of the Initial Term or the then current Renewal Term, as the case may be. Such termination date may be 49 after the expiration of the Initial Term or the then current Renewal Term, as the case may be, provided that the requirements of the preceding sentence are satisfied. However, if Management Company has so notified Owner of its intention not to renew, Owner may, at its option, by written notice to Management Company at least ninety (90) days prior to the date on which Owner desires Termination to occur, reduce the period of time prior to Termination to any shorter period of time which Owner desires, provided that such shorter period of time shall be at least the greater of: (a) ninety (90) days (beginning as of the date of such notice from Owner), or (b) the minimum period of time which Management Company reasonably decides is prudent, given the requirements of the applicable Employment Laws regarding employee discharges. In no event shall the fact that Management Company may, pursuant to the preceding sentence, be managing the Inn after the expiration of the Initial Term or the then current Renewal Term, as the case may be, be construed as an election by Management Company to renew the Term, if Management Company has elected (in accordance with this Section 4.01) in writing not to so renew. C. If Owner has the right, under the provisions of the Existing Ground Lease, to elect to renew or extend the term of the Existing Ground Lease, Owner shall so notify Management Company at least one hundred eighty (180) days (but no more than one (1) year) prior to the expiration of the period within which Owner is obligated to notify the Ground Lessor of its election to 50 renew or extend the term of the Existing Ground Lease. Such notice from Owner shall contain all of the relevant facts about the impending election to renew or extend, including the length of the period of renewal or extension. Unless Management Company notifies Owner, within a period of ninety (90) days after receipt of the foregoing notice from Owner, that Management Company disapproves the renewal or extension of the term of the Existing Ground Lease, Owner will, by proper notice to the Ground Lessor, within the applicable time period under the Existing Ground Lease, elect to renew or extend the term of the Existing Ground Lease. D. If, after proper notice from Owner in accordance with Section 4.01 C, Management Company fails to disapprove the renewal or extension of the term of the Existing Ground Lease, the Term of this Agreement shall be deemed to be automatically extended to the later of: (i) the expiration of the term of the Existing Ground Lease, as renewed or extended in accordance with Section 4.01 C; or (ii) the date on which the Term of this Agreement would otherwise have expired absent this sentence. If, in order to comply with the preceding sentence, it is necessary for Management Company to waive its option not to renew with respect to one or more Renewal Terms, such waiver shall be deemed to have been given; however, Management Company shall retain the right not to renew (as more particularly described in Section 4.01 A) as to any portion of such Renewal Term(s) which would 51 occur after the expiration of the term of the Existing Ground Lease, as renewed or extended in accordance with Section 4.01 C. E. If, after proper notice from Owner in accordance with Section 4.01 C, Management Company disapproves the renewal or extension of the term of the Existing Ground Lease, the Term of this Agreement shall be deemed to be automatically reduced to the earlier of: (i) the expiration of the term of the Existing Ground Lease; or (ii) the date on which the Term of this Agreement would otherwise have expired absent this sentence. 4.02 Actions to be Taken Upon Termination ------------------------------------ Upon a Termination of this Agreement, the following shall be applicable: A. Management Company shall, within sixty (60) days after Termination of this Agreement, prepare and deliver to Owner a final accounting statement with respect to the Inn, as more particularly described in Section 9.01 hereof, along with a statement of any sums due from Owner to Management Company pursuant hereto, dated as of the date of Termination. Within thirty (30) days after the receipt by Owner of such final accounting statement, the parties will make whatever cash adjustments are necessary pursuant to such final statement. The cost of preparing such final accounting statement shall be a Deduction, unless the Termination occurs as a result of an Event of Default by either party, in which case the defaulting party 52 shall pay such cost. Management Company and Owner acknowledge that there may be certain adjustments for which the necessary information will not be available at the time of such final accounting, and the parties agree to readjust such amounts and make the necessary cash adjustments when such information becomes available; provided, however, that (unless there are ongoing disputes of which each party has received notice) all accounts shall be deemed final as of one hundred eighty (180) days after such Termination. B. As of the date of the final accounting referred to in subsection A above, Management Company shall release and transfer to Owner any of Owner's funds which are held or controlled by Management Company with respect to the Inn, with the exception of funds to be held in escrow pursuant to Section 12.04, and Section 14.01.F. During the period between the date of Termination and the date of such final accounting, Management Company shall pay (or reserve against) all Deductions which accrued (but were not paid) prior to the date of Termination, using for such purpose any Gross Revenues prior to the date of Termination. C. Management Company shall make available to Owner such books and records respecting the Inn (including those from prior years, subject to Management Company's reasonable records retention policies) as will be needed by Owner to prepare the accounting statements, in accordance with the Uniform System of Accounts, for the Inn for the year in which the Termination occurs and for any subsequent year. Such books and records shall 53 not include: (i) employee records which must remain confidential either under Legal Requirements or under reasonable system-wide corporate policies of Management Company; or (ii) any Intellectual Property; or (iii) customer lists. D. Management Company shall (to the extent permitted by Legal Requirements) assign to Owner or any other manager employed by Owner to operate and manage the Inn, all Licenses for the Inn which have been issued in Management Company's name; provided that if Management Company has expended any of its own funds in the acquisition or transfer of any of such Licenses, Owner shall reimburse Management Company therefor if it has not done so already. E. All Proprietary Signage shall be removed by Management Company from the Inn and from the Site (and from any locations other than the Site). The cost of such removal shall be a Deduction, unless the Termination occurs either: (i) as a result of an Event of Default by either party, in which case the defaulting party shall pay the cost of such removal from its own funds, and not as a Deduction; or (ii) as a result of Management Company's election not to renew the Term, as of the expiration of either the Initial Term or any Renewal Term (as the case may be), in which case Management Company shall pay the cost of such removal from its own funds, and not as a Deduction. F. Various other actions shall be taken, as described in this Agreement, including, but not limited to, the actions 54 described in Sections 7.01, 10.02, 10.03, 10.04, 12.04.B, and 14.01.F. G. Management Company shall peacefully vacate and surrender the Inn to Owner. The provisions of this Section 4.02 shall survive any Termination. 4.03 Performance Termination ----------------------- A. Subject to the provisions of Section 4.03.B below, Owner shall have the option to terminate this Agreement if: 1. With respect to any two (2) consecutive full Fiscal Years (not including any Fiscal Year prior to Fiscal Year 1996), Operating Profit less the amount of Ground Lease Rental, if applicable, for each of such two (2) Fiscal Years is less than the Performance Termination Threshold; and 2. The Revenue Index of the Inn during each of such two (2) consecutive Fiscal Years; is less than the Revenue Index Threshold; and 3. The fact that the Inn is not meeting the tests set forth in Section 4.03.A(1) and (2) is not the result of either (x) Force Majeure, or (y) any major renovation of the Inn. Such option to terminate shall be exercised by serving written notice thereof on Management Company no later than sixty (60) days after the receipt by Owner of the annual accounting under Section 9.01 hereof for the second (2nd) of the two (2) Fiscal Years referred to in Section 4.03.A(1). If Management Company does not 55 elect to avoid such Termination pursuant to Section 4.03.B below, this Agreement shall terminate as of the end of the fourth (4th) full Accounting Period following the date on which Management Company receives Owner's written notice of its intent to terminate this Agreement; provided that such period of time shall be extended as required by applicable Legal Requirements pertaining to the termination of the employment of the employees at the Inn. Owner's failure to exercise its right to terminate this Agreement pursuant to Section 4.03.A with respect to any given Fiscal Year shall not be deemed an estoppel or waiver of Owner's right to terminate this Agreement with respect to subsequent Fiscal Years to which this Section 4.03.A may apply. B. Upon receipt of Owner's written notice of Termination under Section 4.03.A, Management Company shall have the option, to be exercised within sixty (60) days after receipt of said notice, to avoid such Termination by paying Owner an amount (the "Cure Payment") equal to one hundred five percent (105%) of the amount by which Operating Profit less Ground Lease Rental, if any, for either of the two (2) Fiscal Years in question (i.e., the two (2) Fiscal Years referred to in Section 4.03.A(1)) was less than the Performance Termination Threshold. Any such Cure Payment shall be accounted for as a fee to Owner in connection with the avoidance of such Termination. In the event Management Company makes a Cure Payment pursuant to this Section 4.03.B, the Fiscal Year with respect to which such Cure Payment was made shall thereafter not be treated, for purposes of subsequent elections by Owner pursuant 56 to Section 4.03.A, as a Fiscal Year in which the circumstances described in Section 4.03.A(1) have occurred. If Management Company exercises such option to make such Cure Payment, then the foregoing Owner's election to terminate this Agreement under Section 4.03.A shall be cancelled and of no force or effect with respect to the two (2) Fiscal Years in question and this Agreement shall not terminate. Such cancellation, however, shall not affect the right of Owner, as to each subsequent Fiscal Year to which Section 4.03.A applies, to again elect to terminate this Agreement pursuant to the provisions of Section 4.03.A (which subsequent election shall again be subject to Management Company's rights under this Section 4.03.B). If Management Company does not exercise its option to make the Cure Payment then this Agreement shall be terminated as of the date set forth in Section 4.03.A. Any Cure Payment which is paid by Management Company pursuant to this Section 4.03.B shall not be recoverable by Management Company. Any Cure Payment which is paid by Management Company pursuant to this Section 4.03.B shall only operate to cancel Owner's election to terminate this Agreement under Section 4.03.A, and shall not operate to cure any outstanding Defaults by Management Company under Article XVI. END OF ARTICLE IV 57 ARTICLE V COMPENSATION OF MANAGEMENT COMPANY; DISTRIBUTIONS ------------------------------------------------- 5.01 Management Fees --------------- A. In consideration of services to be performed during the Term of this Agreement, Management Company shall retain the Management Fees. Owner's Priority and the Management Fees shall be appropriately prorated for any partial Fiscal Year. B. Notwithstanding the provisions of Article IX of this Agreement permitting the consolidation of reports and co-mingling of certain funds with other hotels owned by Owner, the Base Management Fee, Deferred Contingent Base Management Fees, Residence Inn System Fee and Incentive Management Fee shall be calculated based on the revenues generated by the Inn and not on a consolidated basis with any other hotels which may be owned by Owner. 5.02 Distribution of Operating Profit -------------------------------- In each Fiscal Year, Operating Profit shall be distributed to Owner and Management Company in accordance with the following priorities: A. Owner shall first receive an amount equal to the lesser of: (i) Owner's Priority; or (ii) Operating Profit. B. Management Company shall next receive the Base Management Fee; provided, however, that if, in any Fiscal Year the Base Management Fee exceeds Net Operating Profit, such Base 58 Management Fee shall be deferred to the extent of such excess and such deferred sums shall become "Deferred Contingent Base Fees". C. Management Company shall next receive an amount equal to the Deferred Contingent Base Fees to the extent that Net Operating Profit is otherwise sufficient for such purposes. D. Management Company shall next receive an amount equal to the Incentive Management Fee. E. Owner shall receive all Operating Profit remaining after the distributions made pursuant to the preceding subparagraphs of this Section 5.02. 5.03 Accounting and Interim Payments ------------------------------- A. On or before the twentieth (20th) day after the close of each Accounting Period, Management Company shall deliver to Owner a reasonably detailed accounting statement (the "Accounting Period Statement") in substantially the form set forth in Exhibit "B" hereto. Upon Owner's written request therefor, Management Company shall forward copies of any such Accounting Period Statement to any Holders or Ground Lessors, at the addresses specified by Owner. Such Accounting Period Statement shall set forth the results of the operations of the Inn for the preceding Accounting Period and for the Fiscal Year-to-date, all in accordance with generally accepted accounting principles applied on a consistent basis. Each Accounting Period Statement shall be accompanied by a statement, by the Controller, Assistant Controller or Vice President of the Management Company that, to the best of his or 59 her knowledge and belief, and subject to routine year-end audit and adjustment, such Accounting Period Statement is true and correct in all material respects. Each Accounting Period Statement shall include: (i) calculations of Gross Revenues, Deductions, Operating Profit, the Management Fees; and (ii) comparisons with the applicable categories for the prior Fiscal Year. With each such Accounting Period Statement, Management Company shall transfer any interim Owner's Distribution due to Owner, and shall retain any interim Management Fees due to Management Company. Calculations and payments of the Management Fees and the Owner's Distribution with respect to each Accounting Period within a Fiscal Year shall be accounted for cumulatively. B. Within seventy-five (75) days after the close of each Fiscal Year, Management Company shall submit an Annual Operating Statement, as more fully described in Section 9.01, for such Fiscal Year to Owner, which Annual Operating Statement shall be controlling over the interim Accounting Period Statements. Any adjustments or payments required by any such Annual Operating Statement shall be made promptly by the parties. Operating Losses shall not be carried forward or backward to subsequent or prior Fiscal Years. 60 5.04 Accounting for Period Prior to Effective Date --------------------------------------------- A. It shall be a general principle in the accounting for the Inn that all liabilities incurred and/or income generated prior to the Effective Date, or properly allocated to the period prior to the Effective Date under generally accepted accounting principles, shall be included in the Accounting Period Statements and the Annual Operating Statements for the Inn pursuant to this Agreement for the Fiscal Year in which such liabilities are paid or such income is received, provided, however, that the foregoing shall not be reflected in the computation of Operating Profit for purposes of Section 4.03. B. As of the Effective Date, the cash on hand at the Inn shall be deposited in one of the Operating Accounts set up by Management Company pursuant to Section 9.02, and shall be treated as part of the Working Capital described in Section 7.01. END OF ARTICLE V 61 ARTICLE VI FINANCING OF THE INN -------------------- 6.01 Amendments of Management Agreement ---------------------------------- A. If requested by any Qualified Lender or prospective Qualified Lender (in which event such amendments shall take effect as of the funding of such Qualified Loan), Management Company agrees to execute and deliver any amendment of this Agreement which is reasonably required by such Qualified Lender or prospective Qualified Lender, provided that Management Company shall be under no obligation to amend this Agreement if the result of such amendment would be: (i) to reduce, defer or delay the amount of any payment to be made to Management Company hereunder; (ii) to materially increase Management Company's obligations under this Agreement; (iii) to change the Term of this Agreement; (iv) to cause the Inn to be operated other than pursuant to the Residence Inn System Standards; (v) to amend either Section 8.02 or Section 14.01; or (vi) to otherwise materially affect Management Company's rights under this Agreement. Any such amendment shall take effect as of the funding of such Qualified Loan. B. In addition to the provisions of Section 6.01.A, if a Qualified Lender or prospective Qualified Lender requests that Management Company enter into an amendment of this Agreement, and if such amendment would impose additional duties (for example, an increase in the reporting requirements or in the record-keeping 62 requirements, or adding the obligation to prepare parallel accounting statements using a different fiscal year) on Management Company or would otherwise adversely affect Management Company's rights under this Agreement, but not to the degree described in clauses (i) through (vi) of Section 6.01.A, Management Company hereby agrees that it will execute and deliver such requested amendment of this Agreement, provided that Owner compensates Management Company for the additional burden imposed by such amendment out of Owner's funds and not as a Deduction. It is understood that the word "burden", as used in the preceding sentence, shall encompass not only additional work to be performed by Management Company, but also any adverse effect on the Incentive Management Fee which would be caused by requiring increased services by third parties. Any dispute as to whether Management Company is entitled to any compensation pursuant to this Section 6.01.B, or as to the amount of such compensation, shall be resolved by arbitration pursuant to Section 20.13. C. Proposed amendments to this Agreement which are requested by any Qualified Lender or prospective Qualified Lender, and which would affect the insurance provisions set forth in Article XII, shall be governed exclusively by Article XII. 6.02 Notice and Opportunity to Cure ------------------------------ A. In the event of: (i) a Default by Owner in the performance or observance of any of the terms and conditions of this Agreement; or (ii) any other occurrence which entitles 63 Management Company to terminate this Agreement, and in the event that Management Company gives written notice thereof to Owner pursuant to Article XVI of this Agreement, Management Company shall also give a duplicate copy (herein referred to as the "First Notice") of such notice to, each Qualified Lender, at the address previously provided to Management Company. Any such notice will be sent in the manner described in Section 20.09 hereof. In addition, in the event that such Default is not cured within the applicable cure period under Article XVI of this Agreement, and Management Company intends to exercise its remedy of terminating this Agreement, Management Company shall send a second notice (the "Second Notice") to each Qualified Lender, at the same address and in the same manner applicable to the First Notice stating Management Company's intention to terminate this Agreement. Management Company shall forbear from taking any action to terminate this Agreement for a period of thirty (30) days after the service of the First Notice, and for an additional period of thirty (30) days after the service of the Second Notice (if such Second Notice is required, as set forth above). B. In the event of a Default by Owner under the provisions of this Agreement, Management Company agrees to accept performance by any Qualified Lender with the same force and effect as if same were performed by Owner, in accordance with the provisions and within the cure periods prescribed in this Agreement (except that each Qualified Lender shall have such additional cure periods, not available to Owner, as are set forth in this Section 6.02). 64 C. No notice given by Management Company to Owner shall be effective as a notice under Article XVI of this Agreement unless the applicable duplicate notice to each Qualified Lender which is required under Section 6.02.A (either the First Notice or the Second Notice, as the case may be) has been given. It is understood that any failure by Management Company to give such a duplicate notice (either the First Notice or the Second Notice, as the case may be) to any Qualified Lender shall not itself be a Default by Management Company under this Agreement, but rather shall operate only to void the effectiveness of any such notice by Management Company to Owner under Article XVI of this Agreement. D. Except as specifically limited by this Section 6.02, nothing herein shall preclude Management Company from exercising any of its rights or remedies against Owner with respect to any Default by Owner under this Agreement. 6.03 Collateral Assignment of Management Agreement --------------------------------------------- Owner shall have the right to collaterally assign to any Qualified Lender, as additional security for the indebtedness evidenced by a Qualified Loan, all of Owner's right, title and interest in and to distributions payable to Owner pursuant to Article V thereof. If, pursuant to any such assignment (or subsequent loan documentation entered into between Owner and a Qualified Lender with a similar purpose), and provided that Management Company has previously received a copy of such assignment and such subsequent documentation, Management Company 65 may receive (from time to time) a notice or notices from such Qualified Lender directing Management Company to pay to such Qualified Lender subsequent distributions under Article V of this Agreement which would otherwise be payable to Owner, Management Company shall comply with any such notice. Management Company shall continue to make payments in compliance with any such notice from such Qualified Lender until Management Company receives written instructions to the contrary from such Qualified Lender. Owner hereby gives its consent to any such payments by Management Company to such Qualified Lender which are in compliance with any such notice. The foregoing consent by Owner shall be deemed to be irrevocable until the entire Qualified Loan has been discharged, as evidenced either by the recordation of a satisfaction or release executed by such Qualified Lender, or by the delivery of a written statement to that effect from such Qualified Lender to Management Company. Management Company shall comply with the direction set forth in any such notice without any necessity to investigate why such Qualified Lender sent such notice, or to confirm whether or not Owner is in fact in default under the terms of such Qualified Loan. If Management Company receives such notices from more than one Qualified Lender, Management Company shall (at its option) either: (i) comply with the provisions of the notice sent by the Qualified Lender whose Qualified Loan has the senior lien priority; or (ii) institute Litigation for a declaratory judgment to determine to whom payments under this 66 Agreement shall be made (in which case, the costs and expenses of such Litigation, including attorneys' fees, shall be Deductions). 6.04 Subordination of Management Agreement ------------------------------------- A. This Agreement, and Management Company's right to continue to manage and operate the Inn pursuant to this Agreement, are and shall be subject and subordinate to the lien of any Qualified Loan, (i.e., upon a Foreclosure of any such Qualified Lender, at its option, unless such Qualified Lender has otherwise agreed to the contrary in a Non-Disturbance Agreement shall have the right to terminate this Agreement). Notwithstanding the foregoing, during the Term of this Agreement, all debt service (including increased or accelerated payments after a default) payable with respect to any Qualified Loan shall be paid exclusively from Owner's Distribution. B. Section 6.04.A is intended to be, and is, fully effective and binding, as between Management Company and any such Qualified Lender; however, Management Company agrees to execute such confirmatory documentation (in recordable form in the jurisdiction in which the Inn is located) as such Qualified Lender shall reasonably request. C. Notwithstanding the possible termination of this Agreement which is set forth in the foregoing provisions of this Section 6.04, it is understood that, until such time as this Agreement is validly terminated either (i) pursuant to the applicable provision of this Agreement, or (ii) pursuant to a 67 court order in connection with the Foreclosure of a Qualified Loan (assuming that such termination does not breach any binding Non-Disturbance Agreement), the Holder of each Qualified Loan will honor and recognize the right of Management Company to operate the Inn in accordance with this Agreement (including the right of Management Company to collect all Gross Revenues and to make expenditures in accordance with this Agreement). 6.05 Non-Disturbance Agreement ------------------------- A. Owner agrees that, in connection with the obtaining by Owner of any Secured Loan or Secured Loans, from time to time, Owner will use good faith reasonable efforts to obtain a Non-Disturbance Agreement from each Holder or Holders. The phrase "good faith reasonable efforts" shall be determined by reference to the following: (i) normal loan underwriting procedures and practices (including those practices relating to non-disturbance agreements) which are generally being implemented by entities which are making loans similar to such Secured Loan, as of that point in time; and (ii) the concessions which Management Company is, as of that point in time, reasonably prepared to make in order to satisfy the objectives of lenders in connection with the lender-manager relationship after a Foreclosure. In no event, however, shall the failure of Owner to obtain such a Non-Disturbance Agreement affect or modify any of the responsibilities of Management Company toward Qualified Lenders which are contained elsewhere in this Article VI. 68 B. Notwithstanding Section 6.05.A, Owner agrees that, prior to obtaining any Qualified Loan, it will obtain from each prospective Holder or Holders thereof a Non-Disturbance Agreement pursuant to which Management Company's rights under this Agreement will not be disturbed as a result of a loan default stemming from non-monetary factors which (i) relate to Owner and (ii) are not Defaults by Management Company under Article XVI of this Agreement. 6.06 Attornment ---------- A. Management Company agrees that, subject to the provisions of Section 6.06.B, upon a Foreclosure of any Qualified Loan, provided that this Agreement has not expired or otherwise been earlier terminated in accordance with its terms, Management Company shall attorn to any Subsequent Owner and shall remain bound by all of the terms, covenants and conditions of this Agreement for the balance of the remaining Term (including any Renewal Terms) with the same force and effect as if such Subsequent Owner were the "Owner" under this Agreement; provided, however, that Management Company shall be under no such obligation to so attorn, and, to the contrary, shall thereupon have the right to terminate this Agreement on thirty (30) days' prior written notice to both Owner and such Subsequent Owner: (i) if such Subsequent Owner would not qualify as a permitted transferee under Section 19.01.A of this Agreement; or (ii) unless such Subsequent Owner, within twenty (20) days after the 69 Foreclosure Date (or, in the event such Subsequent Owner acquires title to the Inn after the Foreclosure Date, within twenty (20) days after the date of such acquisition of title to the Inn), assumes all of the obligations of the "Owner" under this Agreement which arise from and after the Foreclosure Date (or such later date of acquisition of title to the Inn), pursuant to a written assumption agreement which shall be delivered to Management Company. Upon the written request of any Qualified Lender, Management Company shall periodically execute and deliver a statement, in a form reasonably satisfactory to such Qualified Lender, reaffirming Management Company's obligation to attorn as set forth in this Section 6.06.A. B. It is understood by the parties that, in view of the fact that a Qualified Lender will have the right to terminate this Agreement on a Foreclosure under the provisions of Section 6.04, Management Company has an interest in being informed, within a reasonable period of time after a Qualified Loan Acceleration, of whether or not such Qualified Lender intends to exercise such right of termination. Accordingly, if, by no later than that date (the "Post-Foreclosure Decision Date") which is ninety (90) days after the date of any Qualified Loan Acceleration, Management Company has not received a Non-Disturbance Agreement executed by the Holder of such Qualified Loan, Management Company shall, as of the Post-Foreclosure Decision Date and thereafter, no longer be under any obligation to attorn (pursuant to the provisions of Section 6.06.A) with 70 respect to any Foreclosure of that Qualified Loan, and Management Company shall have the option to terminate this Agreement, by written notice to both Owner and the Holder of each existing Qualified Loan, at any time within the sixty (60) day period immediately following the Post-Foreclosure Decision Date. 6.07 No Modification or Termination of Agreement ------------------------------------------- If the documents evidencing and securing a Qualified Loan require the consent of the Qualified Lender to any amendment or modification of this Agreement which materially affects such Qualified Lender, no such amendment or modification of this Agreement shall be binding or effective unless such Qualified Lender shall have consented in writing thereto. 6.08 Owner's Right to Finance the Inn -------------------------------- Owner shall have the right, from time to time, without Management Company's prior consent or approval, to obtain Qualified Loans, and to encumber the Inn with Mortgages securing such Qualified Loans. Owner shall not, without the prior consent of Management Company, have the right to obtain Secured Loans which are not Qualified Loans. 71 6.09 Cross Collateralization ----------------------- A. In connection with obtaining Qualified Loans, Owner shall have the right to cross collateralize the Inn with other inns which it owns in the Residence Inn System, provided that: 1. the inns to be the subject of the Qualified Loans are owned by Owner or an Affiliate of Owner; 2. the Qualified Loans are secured only by inns in the Residence Inn System which are managed by Management Company or its Affiliates and are not cross collateralized with any property other than inns managed by Management Company or its Affiliates in the Residence Inn System; 3. the basic terms and conditions of the Qualified Loans for the Inn and each other inn securing such loan are intended to be part of an integrated transaction; and 4. the closing of the Qualified Loans shall take place within six (6) months of each other. B. Any Mortgage secured by the Inn shall contain a provision requiring Holder to provide Management Company prior written notice of any default under such Mortgage. Further, upon receipt of any notice of default by such Holder, Owner shall forward a copy of such notice to Management Company within three (3) days thereafter, in accordance with the notice provisions set forth in Section 20.09. 72 6.10 Sale/Leaseback Transactions --------------------------- Any single transaction or related series of transactions in which (i) Owner's interest in the Inn is sold or transferred by the then Owner ("Seller") to a buyer ("Buyer"), and (ii) the Buyer (as "landlord") leases the Inn to the Seller (as "tenant"), is hereby defined as a "Sale/Leaseback Transaction". With respect to each Sale/Leaseback Transaction during the Term of this Agreement, the following provisions will apply: (a) the sale or transfer of the Inn will be considered a Sale of the Inn; however, the Seller (as tenant under the aforesaid lease), not the Buyer, shall thereafter be treated as the "Owner" for purposes of this Agreement; (b) the purchase price will not be a Secured Loan, but any mortgage financing placed (either at the time of the transaction or later) on the Buyer's interest in the Inn will be treated as a Secured Loan, and the proceeds of each such Secured Loan will be aggregated with all outstanding Secured Loans, which encumber either the Buyer's interest in the Inn or the Seller's leasehold interest in the Inn, for purposes of determining whether a given Secured Loan qualifies as a Qualified Loan; (c) payments pursuant to such lease shall not be treated as Deductions, except for Impositions and similar items which would have been treated as Deductions in the absence of such Sale/Leaseback Transaction; and (d) all subsequent sales, transfers or assignments of either Buyer's interest in the Inn or Seller's interest in the Inn will be treated as Sales of the Inn. Owner will not enter into any Sale/Leaseback Transaction unless 73 Management Company and the proposed Buyer have previously executed a mutually satisfactory attornment agreement pursuant to which, as of the date of the termination of Seller's leasehold interest, the provisions of this Agreement will (unless there has been an Event of Default or other event entitling either party to terminate this Agreement) be binding both on Management Company and on Buyer (as the successor "Owner"); such attornment agreement will also contain an immediately-effective provision which will incorporate the terms of Section 6.08 of this Agreement, binding both on Management Company and on Buyer. END OF ARTICLE VI 74 ARTICLE VII WORKING CAPITAL AND FIXED ASSET SUPPLIES ---------------------------------------- 7.01 Working Capital --------------- A. Owner shall, from time to time during the Term of this Agreement, provide Management Company, within thirty (30) days after Owner's receipt of written request therefor by Management Company, with the funds necessary to maintain Working Capital at levels determined by Management Company to be reasonably necessary to operate the Inn in accordance with the Residence Inn System Standards. Any such request by Management Company shall be accompanied by a detailed explanation of the reasons for the request. If Owner fails to respond to any such request within thirty (30) days after Owner's receipt thereof, Management Company shall be entitled, at its option, without affecting other remedies which may be available pursuant to Article XVI, to lend Owner the necessary additional Working Capital from Management Company's own funds, which loan will bear interest at the Interest Rate (compounded annually), and will be secured by a security interest subordinate to any Qualified Loan encumbering all Working Capital previously or thereafter provided by either Owner or Management Company, and will be repaid in accordance with such terms and conditions as Management Company shall at that time reasonably determine. B. Management Company will manage the Working capital of the Inn prudently and in accordance with the Residence Inn System 75 Standards. Management Company shall review and analyze the Working Capital needs of the Inn on an annual basis. If Management Company reasonably determines that there is excess Working Capital, such excess shall be returned to Owner. C. Working Capital provided by Owner pursuant to this Section 7.01 shall remain the property of Owner throughout the Term of this Agreement. Upon Termination, Owner shall retain any of its unused Working Capital, except for Inventories purchased by Management Company pursuant to Section 10.02. D. If Owner owns other inns in the Residence Inn By Marriott System which are operated by Management Company, Management Company, at its option, may co-mingle the Working Capital for the Inn with the Working Capital account for Owner's other inn(s) in a single bank account. 7.02 Fixed Asset Supplies -------------------- As of the Effective Date, Owner shall provide the Inn with the Fixed Asset Supplies which are necessary to operate the Inn in accordance with the Residence Inn System Standards. Owner shall, from time to time thereafter during the Term of this Agreement, provide Management Company, within thirty (30) days after Owner's receipt of written request therefor by Management Company, with any additional funds necessary to maintain Fixed Asset Supplies at levels determined by Management Company to be necessary to operate the Inn in accordance with the Residence Inn System Standards. Fixed Asset Supplies shall remain the property 76 of Owner throughout the Term of this Agreement, except for Fixed Asset Supplies purchased by Management Company pursuant to Section 10.02. END OF ARTICLE VII 77 ARTICLE VIII REPAIRS, MAINTENANCE AND REPLACEMENTS ------------------------------------- 8.01 Routine Repairs and Maintenance ------------------------------- Management Company shall maintain the Inn in good repair and condition, to a standard comparable with competitive hotels and in conformity with applicable Legal Requirements and the Residence Inn System Standards, and shall make or cause to be made such routine maintenance, repairs and minor alterations, the cost of which can be expensed under generally accepted accounting principles, as it, from time to time, deems reasonably necessary for such purposes. The cost of such maintenance, repairs and alterations shall be paid from Gross Revenues and shall be treated as a Deduction in determining Operating Profit. 8.02 FF&E Reserve ------------ A. Management Company shall establish a reserve account (the "FF&E Reserve") in a bank designated by Management Company (and approved by Owner, such approval not to be unreasonably withheld) to cover the cost of: 1. Replacements and renewals to the Inn's FF&E; 2. Certain routine repairs and maintenance to the Inn building which are normally capitalized under generally accepted accounting principles, such as exterior and interior repainting, resurfacing building walls, floors, roofs and parking areas, and replacing folding walls and the like (but which are not major 78 repairs, alterations, improvements, renewals or replacements to the Inn's buildings' structure, roof, or exterior facade, or to its mechanical, electrical, heating, ventilating, air conditioning, plumbing or vertical transportation systems, the cost of which shall be governed exclusively by Section 8.03); and 3. At Management Company's option, lease payments for Telephone and Office Equipment, Shuttle Vehicles and computer equipment used in connection with the operation of the Inn. Management Company agrees that it will, from time to time, execute such reasonable documentation as may be requested by any Qualified Lender to assist such Qualified Lender in establishing or perfecting its security interest in the funds which are in the FF&E Reserve; provided, however, that no such documentation shall contain any amendment or modification of any of the provisions of this Agreement, including this Section 8.02. B. During the period of time from the Effective Date through the Termination of this Agreement, subject to the provisions of Sections 8.02.E and 8.02.F, Management Company shall transfer (as of the end of each Accounting Period) into the FF&E Reserve an amount equal to five percent (5%) of Gross Revenues for that Accounting Period. All such amounts transferred into the FF&E Reserve after the Effective Date shall be paid from Gross Revenues and shall constitute Deductions in determining Operating Profit. C. Each year, at the same time as Management Company submits the Annual Operating Budget described in Section 9.03, 79 Management Company shall prepare an estimate (the "FF&E Estimate") of the expenditures necessary for (i) replacements and renewals to the Inn's FF&E, (ii) repairs to the Inn building of the nature described in Section 8.02.A.2, and (iii) lease payments for Telephone and Office Equipment, Shuttle Vehicles and computer equipment used in connection with the operation of the Inn, during the ensuing Fiscal Year, and shall submit such FF&E Estimate to Owner for its review. All expenditures from the FF&E Reserve will be (as to both the amount of each such expenditure and the timing thereof) both reasonable and necessary, given the objective that the Inn will be maintained and operated to a standard comparable with competitive hotels and in accordance with the Residence Inn System Standards. Notwithstanding the foregoing, Management Company shall not be required to enumerate on the FF&E Estimate any individual project which will cost less than Ten Thousand Dollars ($10,000.00) as adjusted by the GDP Deflator on each anniversary of the Effective Date. D. Management Company shall from time to time make such (i) replacements and renewals to the Inn's FF&E, (ii) repairs to the Inn building of the nature described in Section 8.02.A.2, as it deems necessary, and (iii) lease payments for Telephone and Office Equipment, Shuttle Vehicles and computer equipment as set forth in Section 8.03.A as it deems necessary, provided that Management Company shall not expend more than the balance in the FF&E Reserve without the prior approval of Owner. Management Company will endeavor to follow the applicable FF&E Estimate, but 80 shall be entitled to depart therefrom, in its reasonable discretion, provided that: (a) such departures from the applicable FF&E Estimate result from circumstances which could not reasonably have been foreseen at the time of the submission of such FF&E Estimate; and (b) such departures from the applicable FF&E Estimate are in the best interest of the Inn; and (c) if the deviations from the FF&E Estimate are greater than Ten Thousand Dollars ($10,000) as adjusted by the GDP Deflator on each anniversary of the Effective Date, Management Company has submitted to Owner a revised FF&E Estimate setting forth and explaining such departures. At the end of each Fiscal Year, any amounts remaining in the FF&E Reserve shall be retained in the FF&E Reserve, and shall be carried forward to the next Fiscal Year. Upon a Sale of the Inn funds in the FF&E Reserve will not be affected (or, if withdrawn, will be replaced as set forth in Section 19.01.D), and all dispositions of such funds (both before and after such Sale of the Inn) will continue to be made exclusively pursuant to the provisions of this Agreement. Proceeds from the sale of FF&E no longer necessary to the operation of the Inn shall be deposited in the FF&E Reserve, as shall any interest which accrues on amounts placed in the FF&E Reserve. Neither (i) proceeds from the disposition of FF&E, nor (ii) interest which accrues on amounts held in the FF&E Reserve, shall either (x) result in any reduction in the required contributions to the FF&E Reserve set forth in subsection B above, or (y) be included in Gross Revenues. Telephone and 81 Office Equipment, as well as Shuttle Vehicles and computer equipment used in connection with the operation of the Inn are the only items of FF&E which Management Company is authorized to lease (rather than purchase). At Management Company's option, lease payments with respect to Telephone and Office Equipment, and Shuttle Vehicles and computer equipment used in connection with the operation of the Inn shall be paid out of the FF&E Reserve, as set forth in Section 8.02.A above. If Management Company proposes that other items of FF&E (other than Telephone and Office Equipment, as well as Shuttle Vehicles and computer equipment used in connection with the operation of Inn) should be leased rather than purchased, Management Company shall submit such proposal to Owner for Owner's approval (not to be unreasonably withheld); in connection with the foregoing, it is understood that the failure of a Qualified Lender to approve such leasing proposal shall justify Owner in withholding its approval thereof, regardless of whether withholding such approval would otherwise be deemed to be unreasonable. E. The percentage contribution for the FF&E Reserve which is described in Section 8.02.B is an estimate. As the Inn ages, this percentage may not be sufficient to keep the FF&E Reserve at the levels necessary to make the replacements and renewals to the Inn's FF&E, or to make the repairs to the Inn building of the nature described in Section 8.02.A.2, which are required to maintain the Inn in accordance with the Residence Inn System Standards and comparable with competitive hotels. If (i) any 82 FF&E Estimate prepared in good faith by Management Company exceeds the available funds in the FF&E Reserve or would cause a shortfall to occur in future years , and (ii) Management Company has prepared and delivered to Owner a financial plan describing the shortages in the available funding in the FF&E Reserve for the Fiscal Years in question, Management Company will have the right, during the time periods described in such financial plan, to increase the percentage of Gross Revenues set forth in Section 8.02.B to a higher percentage, provided that in no event will such percentage exceed six percent (6%) of Gross Revenues per Fiscal Year. F. If any FF&E Estimate which is prepared in accordance with clauses (i) and (ii) of Section 8.02.E would require funding in excess of six percent (6%) of Gross Revenues per Fiscal Year, Owner may either: 1. Agree to increase the percentages of Gross Revenues set forth in Section 8.02.B to provide the additional funds required; or 2. Make a lump-sum contribution to the FF&E Reserve in the necessary amount (in which case, such lump-sum contribution shall be an Owner Deduction and shall be reimbursed to Owner in equal annual payments over the useful life of the FF&E which is purchased, and such reimbursements shall be Deductions). If Owner elects not to agree to either option 1 or option 2 above within thirty (30) days after the submission of such FF&E 83 Estimate (or, if Owner has elected option 2, and has not funded the required amount within sixty (60) days after expiration of the aforesaid thirty (30) day period), Management Company shall be entitled, at its option, to terminate this Agreement by written notice to Owner, (with a copy to each Qualified Lender) which notice shall be delivered no later than ninety (90) days after the expiration of the sixty (60) day period described in the preceding sentence. The effective date of such Termination shall be the date set forth in such notice, provided that in no event shall the effective date of such Termination be less than one hundred eighty (180) days, and no more than three hundred sixty five (365) days after the date of such notice. Such failure to fund by Owner shall not be deemed a Default by Owner under Article XVI, and Management Company shall not be entitled to any remedies with respect to such failure other than such termination of this Agreement and as set forth in Section 8.03.E. G. If Owner owns any other inn(s) in the Residence Inn By Marriott System which is (are) operated by Management Company, Management Company shall co-mingle the FF&E Reserve for the Inn with the FF&E reserve account for Owner's other inn(s) in a single bank account unless such co-mingling is prohibited by any Qualified Lender. 84 8.03 Building Alterations, Improvements, Renewals, and Replacements -------------------------------------------------------------- A. Management Company shall prepare an annual estimate (the "Building Estimate") of the expenditures necessary for major repairs, alterations, improvements, renewals and replacements (which repairs, alterations, improvements, renewals and replacements are not among those referred to in Section 8.02.A.2) to the structure or exterior facade of the Inn, or to the mechanical, electrical, heating, ventilating, air conditioning, plumbing, or vertical transportation elements of the Inn building. Management Company shall submit each such Building Estimate to Owner for its approval at the same time the Annual Operating Budget is submitted, and Management Company shall not make any expenditures for such purposes without the prior written consent of Owner. Owner shall not unreasonably withhold its consent with respect to such changes, repairs, alterations, improvements, renewals or replacements to the Inn as are required by reason of any Legal Requirement, or required under Management Company's current life-safety standards (provided that, in order for any such life-safety standards to be "required" within the meaning of this Section 8.03.A, such standards must be both required and in the process of being implemented at a majority of the inns within the Residence Inn System operated by Management Company which are comparable to the Inn), or otherwise required for the continued safety of guests or prevention of material 85 damage to property, including the removal of Hazardous Materials in compliance with all Environmental Laws pursuant to Section 20.10). B. In the event of the receipt by Management Company of a governmental order or other circumstances described in Section 8.03.A above, Management Company shall give Owner notice thereof within five (5) business days thereafter or sooner if circumstances reasonably warrant. Management Company shall then be authorized (but not obligated) to take appropriate remedial action without receiving Owner's prior consent as follows: (i) in an emergency threatening the Inn, its guests, invitees or employees; or (ii) if the continuation of the given condition could (in Management Company's reasonable judgment) subject Management Company and/or Owner to either criminal or more than de minimis civil ---------- liability, and Owner has either failed to remedy the situation or has failed to take appropriate legal action to stay the effectiveness of any applicable Legal Requirement. Management Company shall cooperate with Owner in the pursuit of any such action and shall have the right to participate therein. Owner shall reimburse Management Company for any costs incurred by Management Company in connection with any such remedial action within thirty (30) days after Owner's receipt of notice from Management Company of the amount of such costs. C. The cost of all changes, repairs, alterations, improvements, renewals or replacements referred to in Section 86 8.03.A or 8.03.B (including the expenses incurred by either Owner or Management Company in connection with any civil or criminal proceeding described above) shall be borne solely by Owner, and shall not be paid from Gross Revenues or from the FF&E Reserve. Any failure of Owner to either (i) approve and provide funding for any proposed expenditures pursuant to the last sentence of Section 8.03.A, within seventy-five (75) days after Management Company's request therefor, or (ii) in the case of any Legal Requirement which is described in Section 8.03.B, to either comply therewith or to stay the effectiveness of such Legal Requirement during the period of any contesting thereof, shall be a Default by Owner. In such event, Management Company shall be entitled (without affecting its other remedies under Article XVI) to terminate this Agreement upon ninety (90) days' written notice to Owner; (with a copy to each Qualified Lender); provided, however, that Management Company shall have the right to stipulate such shorter period of time as may be appropriate, given the time periods which are mandated by Legal Requirements, as described in Section 8.03.A, or given Management Company's good faith concerns about its own civil and/or criminal liability. D. Management Company shall have the right, from time to time, to set forth in any Building Estimate (in addition to the expenditures described in Section 8.03.A) such changes, alterations or improvements to the Inn as are required, in Management Company's reasonable judgment, to keep the Inn in a 87 competitive, efficient and economical operating condition, in accordance with the Residence Inn System Standards (which Management Company shall substantiate by demonstrating a reasonable return on the proposed investment to be made by Owner). The cost of all changes, alterations or improvements referred to in this Section 8.03.D shall be paid, to the extent reasonably possible (given the requirement, set forth in Section 8.02, that the balance in the FF&E Reserve be maintained at a level sufficient to maintain the Inn in accordance with the Residence Inn System Standards) from the FF&E Reserve, and Owner shall pay such costs from its own funds only to the extent there are not adequate funds for such purpose in the FF&E Reserve. Any failure of Owner to approve and fund the Owner's portion of any proposed expenditures pursuant to Section 8.03.D, as described in the preceding sentence, or provide funding for items in Section 8.03.A (other than those items included in the last sentence of Section 8.03.A) within sixty (60) days after Management Company's request therefor, shall not be a Default by Owner but shall entitle Management Company to terminate this Agreement and receive payment of the fee set forth in Section 8.03.E. Such Termination shall be evidenced by written notice to Owner, (with a copy to each Qualified Lender) which notice shall be delivered to Owner no later than ninety (90) days after the expiration of the sixty (60) day period described in the preceding sentence. The effective date of such Termination shall be the date stated by Management Company in such notice, provided that such 88 effective date shall be no less than one hundred eighty (180) days, and no more than three hundred sixty (360) days, after the date of such notice. It is understood that "alterations" and "improvements" which either (a) increase or decrease the number of guest rooms in the Inn, or (b) involve changing the architectural footprint of the Inn or involve other significant changes in the structural design of the Inn, in any case by more than a de minimis amount, are -- ------- beyond the scope of this Article VIII, and would require an amendment of this Agreement prior to implementation by either party. E. Notwithstanding anything to the contrary in Section 8.02.F or 8.03.D, if Owner owns five (5) or fewer inns in the Residence Inn System which are managed by Management Company, and Management Company elects to terminate the Management Agreement due to: (i) Owner's failure to elect either option 1 or 2 in Section 8.02.F; (ii) Owner's failure to fund the required amount in Section 8.02.F, having elected option 2, or (iii) Owner's failure to fund pursuant to Section 8.03.D, as applicable, then upon Management Company's election to terminate the Management Agreement, which pursuant to both Sections 8.02.F and 8.03.D must (a) be made within ninety (90) days following the expiration of the time period in which Owner must provide such additional funds, and (b) set forth an effective date of such Termination which is no less than one hundred eighty (180) days and no more than three hundred sixty five (365) days after the date of such notice, then, Owner agrees to pay to Management Company a fee 89 equal to three (3) times the Base Management Fee for the prior Fiscal Year (regardless of whether said Base Management Fee was actually paid to Management Company); provided, however, that if, within ten (10) days from receipt of Management Company's notice to terminate, Owner provides the funds required pursuant to Section 8.02.F or 8.03.D, as applicable, then upon receipt of such funds by Management Company, Management Company's notice to terminate shall be deemed null and void and this Agreement shall continue in full force and effect. Said fee shall be paid to Management Company upon the termination date set forth in the written notice from Management Company to Owner terminating this Agreement. This fee shall be compensation for lost revenue and expenses and not as a penalty. If Owner fails to pay such fee within the time period set forth herein, then Management Company shall have the right (without affecting Management Company's other right under this Agreement) to withhold the amount of such fee from Owner's Distribution. 8.04 Liens ----- Management Company and Owner shall use their best efforts to prevent any liens from being filed against the Inn which arise from any maintenance, repairs, alterations, improvements, renewals or replacements in or to the Inn. They shall cooperate fully in obtaining the release of any such liens, and the cost thereof, if the lien was not occasioned by the fault of either party, shall be treated the same as the cost of the matter to 90 which it relates. If the lien arises as a result of the fault of either party, then the party at fault shall bear the full cost (including without limitation, all legal fees, court costs, bonding fees and underlying debt) of obtaining the lien release. 8.05 Ownership of Replacements,Etc. ----------------------------- All repairs, alterations, improvements, renewals or replacements of the Inn which are made pursuant to Article VIII or otherwise shall be the property of Owner. Subject to the provisions of Section 8.02, the funds in the FF&E Reserve shall be the property of Owner. END OF ARTICLE VIII 91 ARTICLE IX BOOKKEEPING AND BANK ACCOUNTS ----------------------------- 9.01 Books and Records ----------------- A. Books of control and account shall be kept on the accrual basis and in material respects in accordance with the Uniform System of Accounts, with the exceptions provided in this Agreement. Owner may at reasonable intervals during Management Company's normal business hours examine such records. Within seventy-five (75) days following the close of each Fiscal Year, Management Company shall furnish Owner a statement (the "Annual Operating Statement") in reasonable detail summarizing the Inn operations for such Fiscal Year and a certificate of Management Company's chief accounting officer (or its controller or any vice-president), certifying that to the best of his or her knowledge and belief such year-end Annual Operating Statement is true and correct. Owner shall have sixty (60) days after receipt to examine or review (at Owner's sole expense, and not as a Deduction) said Annual Operating Statement. If Owner raises no objections within said sixty (60) day period, the Annual Operating Statement shall be deemed to have been accepted by Owner as true and correct, and Owner shall have no further right to question its accuracy. If Owner does raise such an objection, by notice to Management Company, Owner shall arrange for an audit to be commenced within sixty (60) days after the date of such objection, and shall diligently cause such audit to be completed 92 within a reasonable period of time. Owner shall pay all costs and expenses of such audit at its sole expense (and not as a Deduction); however, if such audit establishes that Management Company has understated the Operating Profit for that Fiscal Year by five percent (5%) or more, the reasonable costs and expenses of such audit shall be paid as a Deduction. B. Upon written request by Owner, but in no event more frequently than annually, Management Company shall prepare and deliver to Owner the Management Analysis Report. In addition, Management Company shall, in connection with an impending Sale of the Inn or proposed commitment by a Qualified Lender to make a Qualified Loan, within thirty (30) days after written request therefor from Owner, prepare and deliver to Owner an updated Management Analysis Report describing significant changes since the effective date of the most recent Management Analysis Report; provided, however that Management Company shall not be required to prepare such updated Management Analysis Report if a report has been delivered within the previous one hundred twenty (120) days. The cost and expense of preparing the Management Analysis Report shall be paid as a Deduction. C. Owner shall have the right to require that any given Annual Operating Statement will include a reasonably detailed report setting forth the components of Chain Services, the amounts billed for each such component during the Fiscal Year in question and the method of allocation for each such component; provided, however, that Owner must request Management Company to 93 prepare such report by no later than thirty (30) days prior to the date of such Annual Operating Statement. 9.02 Inn Accounts, Expenditures -------------------------- A. All funds derived from operation of the Inn shall be deposited by Management Company in Inn bank accounts (the "Operating Accounts") in a bank or banks designated by Management Company and approved by Owner. Withdrawals from said accounts shall be made only by representatives of Management Company whose signatures have been authorized. Reasonable petty cash funds shall be maintained at the Inn. B. All payments made by Management Company hereunder shall be made from authorized bank accounts, petty cash funds, or from Working Capital provided by Owner pursuant to Section 7.01. Management Company shall not be required to make any advance or payment to or for the account of Owner except out of such funds, and Management Company shall not be obligated to incur any liability or obligation for Owner's account without assurances that necessary funds for the discharge thereof will be provided by Owner. Debts and liabilities incurred by Management Company as a result of its operation and management of the Inn pursuant to the terms hereof, whether asserted before or after the Termination of this Agreement, will be paid by Owner to the extent funds are not available to Management Company for that purpose from Gross Revenues. 94 9.03 Annual Operating Budget ----------------------- A. Management Company shall submit to Owner for its review, at least thirty (30) days prior to the beginning of each full Fiscal Year after the Effective Date, a preliminary draft of the projection of the estimated financial results of the operation of the Inn during the next Fiscal Year (the "Annual Operating Budget"). Such Annual Operating Budget shall project the estimated Gross Revenues and Operating Profit for the forthcoming Fiscal Year for the Inn. In preparing the Annual Operating Budget for each Fiscal Year, Management Company's goal will be the maximization of the long-term Operating Profit of the Inn, in keeping with the Residence Inn System Standards and the general standards of the hotel industry for similar properties. At Owner's request, Management Company agrees to take reasonable steps to ensure that qualified personnel from Management Company's staff are available to explain the preliminary draft of the Annual Operating Budget, including any material items which have been budgeted at significantly different amounts from the amounts actually experienced (or projected) for the same items in the preceding Fiscal Year. A meeting (or meetings) for such purpose shall be held, at Owner's request, within a reasonable period of time after the submission to Owner of the preliminary draft of the Annual Operating Budget. Management Company will at all times give good faith consideration to Owner's suggestions regarding any Annual Operating Budget. Management Company shall 95 thereafter submit to Owner, within ten (10) days after the beginning of such Fiscal Year, the final Annual Operating Budget. B. Management Company shall use its best efforts to adhere to the Annual Operating Budget. It is understood, however, that the Annual Operating Budget is an estimate only and that unforeseen circumstances such as, but not limited to, the costs of labor, materials, services and supplies, casualty, operation of law, or economic and market conditions may make adherence to the Annual Operating Budget impracticable, and Management Company shall be entitled to depart therefrom for such reasons. 9.04 Operating Losses; Credit ------------------------ A. To the extent there is an Operating Loss, additional funds in the amount of any such Operating Loss shall be provided by Owner within thirty (30) days after Management Company has given written notice thereof to Owner; provided, however, that if Owner has already received a request from Management Company for additional Working Capital pursuant to Section 7.01.A, and if such request under Section 7.01.A reflects fundamentally the same cash shortage which resulted in a request under this Section 9.04.A, Owner and Management Company shall mutually discuss the extent to which the requests under Section 7.01.A and Section 9.04.A may overlap, and such requests shall be modified accordingly. B. In no event shall either party borrow money in the name of or pledge the credit of the other. 96 9.05 Consolidated Reports --------------------- With respect to Management Company's reports, books and records required to be kept and provided to Owner pursuant to Sections 9.01.A, 9.01.B and 9.03.A hereof provided that Owner is also the owner of other hotels in the Residence Inn System and that said Inns are managed by Management Company, Management Company shall have the right, at Management Company's option, to prepare said reports on a consolidated basis rather than by individual inn; provided, however that if Owner reasonably determines that it requires individual reports for each individual inn and requests individual reports from Management Company in writing, together with Owner's reasons for requesting such individual reports, Management Company shall comply with such request. END OF ARTICLE IX 97 ARTICLE X PROPRIETARY MARKS; INTELLECTUAL PROPERTY ---------------------------------------- 10.01 Proprietary Marks ----------------- A. During the Term of this Agreement, the Inn shall be known as a "Residence Inn", "Residence Inn by Marriott" or "Marriott Residence Inn" with such additional identification as may be agreed to by Owner and Management Company to provide local identification. If the name of the "Residence Inn System" is changed, Management Company shall have the right to change the name of the Inn to conform thereto. B. The name "Marriott", "Residence Inn", "Residence Inn by Marriott" and "Marriott Residence Inn" whether used alone or in connection with another word or words, and all other Proprietary Marks shall in all events remain the exclusive property of Management Company and its Affiliates. Owner shall have no right to use the Marriott or Residence Inn name or any other Proprietary Mark; provided, however, that Owner shall have the right, during the Term of this Agreement, to have Proprietary Signage installed (in strict conformance with the specifications provided by Management Company prior to the Effective Date, or subsequent specifications provided by Management Company from time to time during the Term) in the Inn and on the Site. C. Except as provided in Section 10.02, upon Termination, any use of or right to use the Marriott or Residence Inn name or any other Proprietary Mark under this Agreement by Owner shall 98 immediately cease. As of the date of Termination, Management Company shall remove all Proprietary Signage from the Inn and from the Site (and from any locations other than the Site). The cost of such removal shall be paid as set forth in Section 4.02.E. D. Notwithstanding the foregoing, those trademarks, trade names, symbols, logos and designs which are specifically listed on Exhibit "E" shall be deemed "Proprietary Marks" only during the Term of this Agreement; upon a Termination, the exclusive control of such Proprietary Marks shall revert to Owner. 10.02 Purchase of Inventories and Fixed Asset Supplies ------------------------------------------------ Upon Termination, Management Company shall have the option, to be exercised no later than thirty (30) days prior to Termination, to elect to purchase, at their then book value, any items of the Inn's Inventories and Fixed Asset Supplies as may be marked with the Marriott or Residence Inn name or any other Proprietary Mark. In the event Management Company does not exercise such option, Owner agrees that it will use any such items not so purchased exclusively in connection with the Inn until they are consumed. 10.03 Computer Software and Equipment ------------------------------- A. All Software is and shall remain the exclusive property of Management Company or one of its Affiliates (or the licensor 99 of such Software, as the case may be), and Owner shall have no right to use, or to copy, any Software. B. Upon Termination, Management Company shall have the right to remove from the Inn, without compensation to Owner, all Software. Furthermore, upon Termination, Management Company shall be entitled to remove from the Inn any computer equipment which is utilized as part of a centralized reservation or property management system or is otherwise considered proprietary by Management Company. If any of such removed computer equipment is owned by Owner, Management Company shall reimburse Owner for all previous expenditures made by Owner for the purchase of such equipment, subject to a reasonable allowance for depreciation. 10.04 Intellectual Property --------------------- All Intellectual Property shall at all times be proprietary to Management Company or its Affiliates, and shall be the exclusive property of Management Company or its Affiliates. During the Term of this Agreement, Management Company shall be entitled to take all reasonable steps to ensure that the Intellectual Property remains confidential and is not disclosed to anyone other than Management Company's employees at the Inn. Upon Termination, all Intellectual Property shall be removed from the Inn by Management Company, without compensation to Owner. 100 10.05 Breach of Covenant ------------------ Management Company and/or its Affiliates shall be entitled, in case of any breach of the covenants of Article X by Owner or others claiming through it, to injunctive relief and to any other right or remedy available at law. Article X shall survive Termination. END OF ARTICLE X 101 ARTICLE XI POSSESSION AND USE OF INN ------------------------- 11.01 Quiet Enjoyment --------------- Owner covenants that, so long as: (i) an Event of Default by Management Company has not occurred under Article XVI of this Agreement; and (ii) Owner does not have the right to terminate this Agreement under any other Section of this Agreement, Management Company shall quietly hold, occupy and enjoy the Inn throughout the Term hereof free from hindrance or ejection by Owner or other party claiming under, through or by right of Owner (except as may be otherwise set forth in Section 6.04). Owner agrees to pay and discharge any payments and charges and, at its expense, to prosecute all appropriate actions, judicial or otherwise, necessary to assure such free and quiet occupation. Nothing set forth in the preceding sentence, however, shall be deemed to create a recourse obligation by Owner to pay any payment or charge pursuant to a contract which is non-recourse to Owner. 11.02 Use --- A. Management Company shall use the Inn solely for the operation of a hotel pursuant to the Residence Inn System Standards, and for all activities in connection therewith which are customary and usual to such an operation. 102 B. Management Company shall comply with and abide by all applicable Legal Requirements pertaining to its operation of the Inn, provided that: (i) all costs and expenses (other than those which are specifically described in clauses (ii) or (iii) of this Section 11.02.B) of such compliance shall be paid from Gross Revenues as Deductions in the computation of Operating Profit; (ii) all costs and expenses of compliance with Environmental Laws shall be paid as set forth in Section 20.10; (iii) all costs and expenses of compliance with the Legal Requirements which are described in Section 8.03.A shall be paid as set forth in Section 8.03; and (iv) Management Company shall have the right, but not the obligation, in its reasonable discretion, to contest or oppose, by appropriate proceedings, any such Legal Requirements (provided that the consent of Owner, not to be unreasonably withheld, shall be obtained prior to initiating any such proceedings which directly involve Owner's ownership interest in the Inn in a material manner. The reasonable expenses of any such contest shall be paid from Gross Revenues as Deductions. 11.03 Chain Services -------------- A. Management Company shall, beginning with the Effective Date and thereafter during the Term of this Agreement, cause to be furnished to the Inn certain services ("Chain Services") which are furnished generally on a central or regional basis to other Residence Inn hotels in the Residence Inn System managed by the Manager. Chain Services shall include: (i) national sales 103 office services; central training services; career development; and the Residence Inn computer payroll and central accounting services; and (ii) such additional central or regional services as are or may be, from time to time, furnished for the benefit of hotels in the Residence Inn System or in substitution for services now performed at individual inns which may be more efficiently performed on a group basis; including, but not limited to, regional managers and accounting staff; provided, however, that services not currently included in chain services pursuant to subsections 11.03.A(i) and 11.03.A(ii) above, shall only be added to "Chain Services" if, and to the extent that, such services: (a) are not services included in the Residence Inn System Fee (it being understood that Management Company's sole compensation for providing the Residence Inn System Services shall be receipt of the Residence Inn System Fee); (b) are not services relating to non-routine work (it being understood that the cost and expense of such non-routine services shall be Deductions as set forth in paragraph 6 of the definition of Operating Profit); and (c) are either (x) new services (i.e., not previously performed at or for the Inn) or (y) services which theretofore had been performed at the Inn, but which can be performed more efficiently and economically on a centralized or regional basis. B. Costs and expenses incurred in the providing of Chain Services shall be allocated on a fair and equitable basis among all Residence Inns owned, leased or managed by Management Company 104 in the United States. Such allocation shall be made without regard to any "caps" or other limitations on the amount which Management Company or its Affiliates may charge to a given inn, pursuant to agreements which Management Company (or its Affiliates) may have with the owner of such inn. Any excess of that portion of such costs and expenses which is fairly allocated to a given inn over the "cap" which may be in effect with regard to that inn shall be paid by Management Company from its own funds. Management Company shall make no profit from Chain Services. Upon Owner's written request, an explanation of the current Chain Services will be given to Owner, and the basis for the allocation of the charge for each Chain Service will be explained to Owner, in reasonable detail, at the time of the submission of the Annual Operating Statement (as more particularly set forth in Section 9.01). In no event will the total charge for all of the Chain Services which are described in clause (i) of Section 11.03.A for any given Fiscal Year, exceed three percent (3%) of Gross Revenues for such Fiscal Year. The parties hereby stipulate that the limitation set forth in the preceding sentence is intended to apply only to the services which are currently listed (as of the Effective Date) in Section 11.03.A(i); accordingly, if there are types of expenditures which were originally treated as Deductions (other than pursuant to paragraph 8 of the definition of "Operating Profit" in Section 1.01), but which are later determined to be more properly treated as Chain Services, such expenditures shall be treated as 105 Deductions pursuant to said paragraph 8 of the definition of "Operating Profit" without regard to the aforesaid limitation. 11.04 Owner's Right to Inspect ------------------------ Owner or its agents shall have access to the Inn at all reasonable times for the purpose of inspection or showing the Inn to prospective purchasers, tenants or Holders. 11.05 Indemnity --------- A. Management Company shall indemnify and hold harmless Owner (and any officer, director, employee, advisor, partner or shareholder of Owner) in respect of, and, at Owner's request, shall defend any action, cause of action, suit, debt, cost, expense (including, without limitation, reasonable attorneys' fees), claim or demand whatsoever brought or asserted by any third person whomsoever, at law or in equity, arising by reason of: (i) liabilities stemming from general corporate matters of Management Company or its Affiliates, to the extent the same are not directly and primarily related to the Inn; (ii) infringement and other claims relating to the Proprietary Marks; (iii) if Management Company intentionally or negligently fails to maintain insurance coverage that it is required to maintain pursuant to this Agreement, the excess of the amount of any liability or loss that would have been covered over the amount of any applicable deductible; and (iv) the bad faith or willful misconduct of 106 Management Company or its Affiliates, or any of their employees, servants or agents or other persons for whom they are responsible, resulting in a claim for bodily injury, death or property damage occurring on, in or in conjunction with the business of the Inn, to the extent that such claim exceeds the insurance proceeds (including Inn Retentions) which are available to pay such claim. B. If any claim, action or proceeding is made or brought against Owner, against which claim, action or proceeding Management Company shall be obligated to indemnify pursuant to the terms of this Agreement, then, upon demand by the Owner, Management Company, at its sole cost and expense, shall resist or defend such claim, action or proceeding (in Owner's name, if necessary), using such attorneys as the Owner shall approve, which approval shall not be unreasonably withheld. If, in the Owner's reasonable opinion, (i) there exists a conflict of interest which would make it inadvisable to be represented by counsel for Management Company, or (ii) there are legal defenses available to Management Company that are different from or inconsistent with those available to Owner, or (iii) there are claims at issue which are not covered by Management Company's insurance, Owner shall be entitled to retain its own attorneys, and Management Company shall pay the reasonable fees and disbursements of such attorneys. C. Matters with respect to which Management Company has specifically agreed to indemnify Owner under other provisions of 107 this Agreement (for example, Section 14.01 regarding "Employee Claims", and Section 20.11 regarding environmental matters) are to be treated exclusively under such other provisions and not under this Section 11.05. END OF ARTICLE XI 108 ARTICLE XII INSURANCE --------- 12.01 Interim Insurance ----------------- [Intentionally omitted] 12.02 Property and Operational Insurance ---------------------------------- Management Company shall, commencing with the Effective Date and thereafter during the Term of this Agreement, procure and maintain, either with insurance companies of recognized responsibility or by legally qualifying itself as a self insurer, a minimum of the following insurance: A. Property insurance on the Inn building(s) and contents against loss or damage by fire, lightning and all other risks covered by the usual extended coverage endorsement, all in an amount not less than one hundred percent (100%) of the replacement cost thereof (excluding the cost of foundations and excavations); B. Boiler and machinery insurance against loss or damage from explosion of boilers or pressure vessels to the extent applicable to the Inn; C. Business interruption insurance covering loss of profits and necessary continuing expenses for interruptions caused by any occurrence covered by the insurance referred to in Section 12.02 A and B, which shall be of a type and in such amounts (but such coverage shall in no event be for less than one (1) year) as are 109 generally established by Management Company at similar hotels it owns, leases or manages under the Residence Inn name in the United States; D. General liability insurance against claims for bodily injury, death or property damage occurring on, in, or in conjunction with the business of the Inn, and automobile liability insurance on vehicles operated in conjunction with the Inn, with a combined single limit for each occurrence of not less than Twenty-Five Million Dollars ($25,000,000.00); representatives of Management Company and Owner shall meet, at Owner's request, at intervals of approximately once every five (5) years, to review the adequacy of such limit; E. Workers' compensation and employer's liability insurance as may be required under applicable laws covering all of Management Company's employees at the Inn; F. Fidelity bonds, with reasonable limits to be determined by Management Company, covering its employees in job classifications normally bonded in other similar hotels it leases or manages under the Residence Inn name in the United States or as otherwise required by law, and comprehensive crime insurance to the extent Management Company and Owner mutually agree it is necessary for the Inn; and G. Such other insurance in amounts as Management Company and Owner, in their reasonable judgment, mutually deem advisable for protection against claims, liabilities and losses arising out of or connected with the operation of the Inn. 110 12.03 General Insurance Provisions ---------------------------- A. All insurance described in Section 12.02 may be obtained by Management Company by endorsement or equivalent means under its blanket insurance policies, provided that such blanket policies substantially fulfill the requirements specified herein. Upon the request of either Owner or any Qualified Lender, representatives of the requesting party shall be entitled to examine, at Management Company's corporate headquarters, all insurance policies maintained by Management Company regarding the Inn. B. Management Company may self insure or otherwise retain such risks or portions thereof as it does with respect to other similar hotels it owns, leases or manages under the Residence Inn name in the United States. C. All policies of insurance required under Section 12.02 shall be carried in the name of Management Company. The policies required under Sections 12.02.A, B, C and D shall include the Owner as an additional insured. Upon notice by the Owner, Management Company shall also have the policies required under Sections 12.02.A, B, C and D include any Qualified Lender as an additional insured. Any property losses thereunder shall be payable to the respective parties as their interests may appear. Any Mortgage on the Inn shall contain provisions to the effect that proceeds of the insurance policies required to be carried under Section 12.02.A and B shall, with respect to any casualty 111 involving less than fifty percent (50%) of the replacement cost of the Inn, be available for repair and restoration of the Inn. D. Management Company shall deliver to the Owner certificates of insurance with respect to all policies so procured and, in the case of insurance policies about to expire, shall deliver certificates with respect to the renewal thereof. E. All certificates of insurance provided for under Article XII shall, to the extent obtainable, state that the insurance shall not be cancelled or materially changed without at least thirty (30) days' prior written notice to Owner. F. The term "Inn Retention" shall mean the amount of any loss or reserve under Management Company's blanket insurance or self-insurance programs which is allocated to the Inn, not to exceed the higher of (a) the maximum per occurrence limit established for similar hotels participating in such programs, or (b) the insurance policy deductible on any loss which may fall within high hazard classifications as mandated by the insurer (e.g., earthquake, flood, windstorm on coastal properties, etc.). If the Inn is not a participant under Management Company's blanket insurance or self-insurance programs, "Inn Retention" shall mean the amount of any loss or reserve allocated to the Inn, not to exceed the insurance policy deductible. 12.04 Cost and Expense ---------------- A. [Intentionally omitted] 112 B. Insurance premiums and any other costs or expenses with respect to the insurance or self-insurance required under Section 12.02, including any Inn Retention, shall be paid from Gross Revenues as Deductions. To the extent that such costs or expenses include reimbursement by Management Company of its own costs or expenses, or those of one of its Affiliates, such costs or expenses shall be generally competitive (as calculated over the Term of this Agreement) with costs and expenses of non-affiliated entities providing similar services. Such premiums and costs shall be allocated on an equitable basis to the hotels participating under Management Company's blanket insurance or self-insurance programs. Any reserves, losses, costs or expenses which are uninsured shall be treated as a cost of insurance and shall be Deductions. Upon Termination, an escrow fund in an amount reasonably acceptable to Management Company shall be established from Gross Revenues (or, if Gross Revenues are not sufficient, with funds provided by Owner) to cover the amount of any Inn Retention and all other costs which will eventually have to be paid by either Owner or Management Company with respect to pending or contingent claims, including those which arise after Termination for causes arising during the Term of this Agreement. Upon the final disposition of all such pending or contingent claims, any unexpended funds remaining in such escrow shall be paid to Owner. 113 12.05 Owner's Option to Obtain Certain Insurance ------------------------------------------ Owner may, at its option, by written notice to Management Company which shall be delivered no later than ninety (90) days prior to the natural expiration of the insurance policies which Management Company has obtained pursuant to Section 12.02.A, B and C, procure and maintain the insurance specified in Section 12.02.A, B and C (in which case Management Company shall allow such policies obtained by it under Section 12.02.A, B, and C to expire), subject to the following terms and conditions: A. All such policies of insurance shall be carried in the name of Owner, with Management Company as an additional insured. Any property losses thereunder shall be payable to the respective parties as their interests may appear. The documentation with respect to each Secured Loan shall contain provisions to the effect that proceeds of the insurance policies required to be carried under Section 12.01.A and B shall be available for repair and restoration of the Inn, to the extent required pursuant to Section 12.03.C. However, any Holder of such Secured Loan shall be entitled to impose reasonable conditions on the disbursement of insurance proceeds for the repair and/or restoration of the Inn, including a demonstration by Owner and/or Management Company that the amount of such proceeds (together with other funds Owner agrees to make available) is sufficient for such purpose. B. Owner shall deliver to Management Company certificates of insurance with respect to all policies so procured and, in the 114 case of insurance policies about to expire, shall deliver certificates with respect to the renewal thereof. C. All such certificates of insurance shall, to the extent obtainable, state that the insurance shall not be canceled or materially changed without at least thirty (30) days' prior written notice to the certificate holder. D. Premiums for such insurance coverage shall be treated as Deductions, provided that if the cost of such insurance procured by Owner exceeds the cost of Management Company's comparable coverage by more than ten percent (10%), all such excess costs shall be the sole responsibility of Owner and shall not be a Deduction. E. Should Owner exercise its option to procure the insurance described in this Section 12.05, Owner hereby waives its rights of recovery from Management Company or any of its Affiliates (and their respective directors, officers, shareholders, agents and employees) for loss or damage to the Inn, and any resultant interruption of business. F. Should Owner exercise its right to obtain the insurance described in this Section 12.05, Owner acknowledges that Management Company is under no obligation to thereafter include the Inn in its blanket insurance program (with respect to the coverage described in Section 12.02.A, B and C) for the balance of the Term of this Agreement. However, upon a Sale of the Inn, a successor Owner shall have the right, notwithstanding the fact that the previous Owner may have obtained insurance in accordance 115 with this Section 12.05, to have the Inn included in Management Company's blanket insurance program (provided that the Inn, as of that point in time, satisfies the applicable criteria for admission to such program, as established by the program's insurance carriers) by making a written request to Management Company for such inclusion not later than thirty (30) days after the date on which such party becomes the Owner. G. All insurance procured by Owner hereunder shall be obtained from reputable insurance companies reasonably acceptable to Management Company. END OF ARTICLE XII 116 ARTICLE XIII TAXES ----- 13.01 Real Estate and Personal Property Taxes --------------------------------------- A. Except as specifically set forth in subsection B below, all Impositions which accrue during the Term of this Agreement (or are properly allocable to such Term under generally accepted accounting principles) shall be paid by Management Company from Gross Revenues, as a Deduction, before any fine, penalty, or interest is added thereto or lien placed upon the Inn or the Agreement, unless payment thereof is stayed; provided, however, that Management Company shall not be responsible for any fine, penalty or interest resulting through no fault of Management Company or caused by Owner. Owner shall within five (5) business days after the receipt of any invoice, bill, assessment, notice or other correspondence relating to any Imposition, furnish Management Company with a copy thereof. Management Company shall, within the earlier of thirty (30) days of payment or five (5) business days following written demand by Owner, furnish Owner with copies of official tax bills and assessments which Management Company has received, and evidence of payment or contest thereof. Either Owner or Management Company (in which case each party agrees to sign the required applications and otherwise cooperate with the other party in expediting the matter) may initiate proceedings to contest any Imposition, and all reasonable costs of any negotiations or proceedings with 117 respect to any such contest shall either (i) be paid from Gross Revenues and be a Deduction in determining Operating Profit; or (ii) be considered an Owner Deduction; provided, however that in the event either Owner or Management Company spends in excess of Five Thousand Dollars ($5,000.00) with respect to such contest, such party shall provide written notice to the other party and the other party shall approve or disapprove of such expenditure within ten (10) days following receipt of such notice. Failure of such party to approve or disapprove such expenditure shall be deemed approval. In the event that either party's expenditures in excess of Five Thousand Dollars ($5,000.00) are not approved by the other party such party may nevertheless proceed to spend whatever funds are necessary with respect to such contest; provided, however, that any amounts in excess of Five Thousand Dollars ($5,000.00) (or such higher amount as may have been approved by the other party) shall be at the sole cost of Owner or Management Company, as the case may be, and shall not be considered an Owner Deduction by Owner nor be considered a Deduction from Operating Profit by either Owner or Management Company. B. The word "Impositions", as used in this Agreement, shall not include the following, all of which shall be paid solely by Owner, not from Gross Revenues nor from the FF&E Reserve: 1. Any franchise, corporate, estate, inheritance, succession, capital levy or transfer tax imposed on Owner, or any 118 income tax imposed on any income of Owner (including distributions to Owner pursuant to Article V hereof); 2. Special assessments (regardless of when due or whether they are paid as a lump sum or in installments over time) imposed because of facilities which are constructed by or on behalf of the assessing jurisdiction (for example, roads, sidewalks, sewers, culverts, etc.) which directly benefit the Inn (regardless of whether or not they also benefit other buildings), which assessments shall not be treated as Deductions, but rather shall be added to the Additional Invested Capital as of each payment by Owner with respect thereto; provided, however, that any installments (after the Effective Date) of any assessments which were levied or imposed prior to the Effective Date shall be Deductions; 3. "Impact Fees" (regardless of when due or whether they are paid as a lump sum or in installments over time) which are required of Owner as a condition to the issuance of site plan approval, zoning variances or building permits, which impact fees shall not be treated as Deductions, but rather shall be added to the Additional Invested Capital as of each payment by Owner with respect thereto; provided, however, that any installments (after the Effective Date) of any impact fees which were levied or imposed prior to the Effective Date shall be Deductions; and 4. "Tax-increment financing" or similar financing whereby the municipality or other taxing authority has assisted in financing the construction of the Inn by temporarily reducing 119 or abating normal Impositions in return for substantially higher levels of Impositions at later dates. C. Owner shall have the right to require Management Company to establish an escrow account (with either any Qualified Lender or another entity reasonably acceptable to both Owner and Management Company) from which Impositions will be paid. Payments into such escrow account will be Deductions. Any interest which accrues on amounts deposited in such escrow account shall be added to the balance in such escrow account and used to pay Impositions. END OF ARTICLE XIII 120 ARTICLE XIV INN EMPLOYEES ------------- 14.01 Employees --------- A. All personnel employed at the Inn shall be the employees of Management Company. Management Company shall have absolute discretion to hire, promote, supervise, direct, train and discharge all employees at the Inn, to fix their compensation and, generally, establish and maintain all policies relating to employment. B. Management Company shall decide which, if any, of the Inn's employees shall reside at the Inn (provided that Owner's prior approval shall be obtained if more than one such employee and his or her immediate families reside at the Inn), and shall be permitted to provide free accommodations and amenities to its employees and representatives living at or visiting the Inn in connection with its management or operation. No person shall otherwise be given gratuitous accommodations or services without prior joint approval of Owner and Management Company except in accordance with usual practices of the hotel and travel industry. C. Any proposed settlement of any Employee Claim where the amount proposed to be offered to the employee by Management Company is in excess of the Settlement Threshold Amount shall be jointly approved by Management Company and Owner. Any dispute between Owner and Management Company as to whether Management Company's settlement recommendation is reasonable, where such 121 proposed settlement is in excess of the Settlement Threshold Amount shall be resolved by arbitration under Section 20.13 hereof; provided that Management Company shall have the right to settle any Employee Claim (prior to the arbitration on the reasonableness of the settlement, as described in this sentence) based on Management Company's recommendation, which shall be Management Company's reasonable estimate, in good faith, by using: (i) funds from Gross Revenues (as a Deduction) up to the amount of Owner's settlement recommendation, which shall be Owner's reasonable estimate, in good faith; and (ii) Management Company's own funds to the extent Management Company's recommendation exceeds the amount described in subparagraph (i) above. Following the settlement of such Employee Claim, the parties will arbitrate under Section 20.13 the issue of whether Management Company's settlement recommendation was reasonable under the circumstances. If the arbitrators decide that Management Company's recommendation was reasonable, Management Company shall be entitled to reimburse itself from Gross Revenues (as a Deduction) in the amount of the funds advanced under subparagraph (ii) above, together with accrued interest thereon at the Prime Rate. If the arbitrators decide that Management Company's settlement recommendation was not reasonable, then Management Company shall not be entitled to any reimbursement of the amounts advanced by it under subparagraph (ii) above, nor to accrued interest thereon. 122 D. Management Company shall pay from its own funds, and not from Gross Revenues, any Employee Claim where the basis of such Employee Claim is conduct by Management Company which: (i) is a substantial violation of the standards of responsible labor relations as generally practiced by prudent owners or operators of similar hotel properties in the general geographic area of the Inn; and (ii) is not the isolated act of individual employees, but rather is a direct result of corporate policies of Management Company which either encourage or fail to discourage such conduct. In addition, Management Company shall indemnify, defend and hold harmless Owner from and against any fines or judgments arising out of such conduct, and all Litigation expenses (including reasonable attorneys' fees and expenses) incurred in connection therewith. Any dispute between Owner and Management Company as to whether or not certain conduct by Management Company is not in accordance with the aforesaid standards shall be resolved by arbitration under Section 20.13 hereof. The arbitration proceedings described in the preceding sentence shall be conducted independently of any arbitration proceedings with respect to such Employee Claim pursuant to the applicable employee-related contract and/or pursuant to Section 14.01.C of this Agreement. E. With respect to all Litigation or arbitration involving Employee Claims in which both Management Company and Owner are involved as actual or potential defendants, Management Company shall have exclusive and complete responsibility (subject to the 123 rights of Owner to approve certain settlements, as set forth in Section 14.01.C) for the resolution of such Employee Claims. In the event that any Employee Claim is made against Owner, but not against Management Company, Owner shall give notice to Management Company of the Employee Claim in a timely manner so as to avoid any prejudice to the defense of the Employee Claim, provided that Management Company shall in all events be so notified within twenty (20) days after the date such Employee Claim is made against Owner. Management Company will thereafter assume exclusive and complete responsibility for the resolution of such Employee Claim. F. At Termination, other than by reason of an Event of Default of Management Company hereunder, an escrow fund shall be established from Gross Revenues (or, if Gross Revenues are not sufficient, with funds provided by Owner) to reimburse Management Company for all costs and expenses incurred by Management Company which arise out of either the transfer or the termination of employment of Management Company's employees at the Inn, such as reasonable transfer costs, severance pay, unemployment compensation and other employee liability costs. END OF ARTICLE XIV 124 ARTICLE XV DAMAGE, CONDEMNATION AND FORCE MAJEURE -------------------------------------- 15.01 Damage and Repair ----------------- A. If, during the Term hereof, the Inn is damaged or destroyed by fire, casualty or other cause, Owner shall, with all reasonable diligence, to the extent that proceeds from the insurance described in Section 12.02 are available (subject to the provisions of any Mortgage encumbering the Inn, but with the limitations described in Section 12.03.C) for such purpose, repair or replace the damaged or destroyed portion of the Inn to the same condition as existed previously. B. In the event damage or destruction to the Inn from any cause materially and adversely affects the operation of the Inn and Owner fails to timely (subject to Force Majeure, and subject to unreasonable delays caused by Management Company, including unreasonable delays in adjusting the insurance claim with the carriers which participate in Management Company's blanket insurance program) commence and complete the repairing, rebuilding or replacement of the same so that the Inn shall be substantially the same as it was prior to such damage or destruction, such action shall be deemed an Event of Default by Owner pursuant to Section 16.01.E and Management Company may, at its option, elect to terminate this Agreement upon one hundred twenty (120) days' written notice in addition to its remedies under Section 16.03. 125 15.02 Condemnation ------------ A. In the event all or substantially all of the Inn shall be taken in any eminent domain, condemnation, compulsory acquisition, or similar proceeding by any competent authority for any public or quasi-public use or purpose, or in the event a portion of the Inn shall be so taken, but the result is that it is unreasonable to continue to operate the Inn, this Agreement shall terminate. B. In the event a portion of the Inn shall be taken by the events described in Section 15.02.A, or the entire Inn is affected but on a temporary basis, and the result is not to make it unreasonable to continue to operate the Inn, this Agreement shall not terminate. However, so much of any award for any such partial taking or condemnation as shall be necessary to render the Inn equivalent to its condition prior to such event shall be used for such purpose; the balance of such award, if any, shall be fairly and equitably apportioned between Owner and Management Company in accordance with their respective interests. The amount of any award received by Owner pursuant to Section 15.02.B and not applied to restoration of the Inn shall be deducted from the Priority Basis and the Loan Priority Basis at such time as the award is received by Owner. In addition, the Performance Termination Threshold shall be reduced by an amount equal to eight percent (8%) of such total amount (if any) of any award received by Owner pursuant to this Section 15.02.B which is not used to restore the Inn. 126 C. In the event of any proceeding described in Section 15.02.A or 15.02.B, Owner and Management Company shall each have the right to initiate such proceedings as they deem advisable to recover any damages to which they may be entitled; provided, however, that Management Company shall be entitled to retain the award or compensation it may obtain through proceedings which are conducted separately from those of Owner only if such award or compensation does not reduce the award or compensation otherwise available to Owner. (For this purpose, any award or compensation received by any Holder shall be deemed to be an award or compensation received by Owner). 15.03 Force Majeure ------------- A. The withdrawal or revocation of any License which is material to the operation of the Inn in accordance with the Residence Inn System Standards, where such withdrawal or revocation: (i) is not due to the fault of either Management Company or Owner, and (ii) is not otherwise within the reasonable control of either Management Company or Owner, shall not be an Event of Default under Article XVI of this Agreement. Management Company and Owner shall each, in good faith, use all commercially reasonable efforts (including the diligent pursuit of all available appeals), during the period of one hundred twenty (120) days after the date of such withdrawal or revocation, to have such License reinstated. If, notwithstanding such efforts, such License is not reinstated prior to the expiration of the 127 aforesaid period of one hundred twenty (120) days, either Owner or Management Company shall have the right, at its option, to terminate this Agreement upon no less than sixty (60) days' notice to the other party; provided, however, that the terminating party must deliver such notice of Termination to the other party by no later than ninety (90) days after the expiration of such one hundred twenty (120) day period; and provided further, that no such Termination shall be effective if, prior to the effective date of such Termination, such License is reinstated or such withdrawal or revocation of such License is stayed. B. If an order, judgment or directive by a court or administrative body is issued, in connection with any legal or Litigation involving Owner, which order, judgement or directive restricts or prevents Management Company, in a material adverse manner, from operating the Inn in accordance with the Residence Inn System Standards, and which, in Management Company's reasonable opinion, will have a significant adverse effect upon operations of the Inn, Management Company shall be entitled, at its option, to terminate this Agreement upon sixty (60) days' written notice; provided, however, that Management Company shall (if it so elects) deliver such notice of Termination to Owner by 128 no later than ninety (90) days after the issuance of such order, judgment or directive (or, if such order, judgment or directive is appealed, within ninety (90) days after the final disposition of such appeal). END OF ARTICLE XV 129 ARTICLE XVI DEFAULTS -------- 16.01 Definition of "Default" ----------------------- Any one or more of the following shall constitute a "Default," to the extent permitted by applicable law: A. The filing of a voluntary petition in bankruptcy or insolvency or a petition for reorganization under any bankruptcy law by either party, or the admission by either party that it is unable to pay its debts as they become due; B. The consent to an involuntary petition in bankruptcy or the failure to vacate, within ninety (90) days from the date of entry thereof, any order approving an involuntary petition by either party; C. The entering of an order, judgment or decree by any court of competent jurisdiction, on the application of a creditor, adjudicating either party as bankrupt or insolvent or approving a petition seeking reorganization or appointing a receiver, trustee, or liquidator of all or a substantial part of such party's assets, and such order, judgment or decree's continuing unstayed and in effect for any period of ninety (90) days; D. The failure of either party to make any payment required to be made in accordance with the terms of this Agreement, as of the due date which is specified in this Agreement; 130 E. The failure of either party to perform, keep or fulfill any of the other covenants, undertakings, obligations or conditions set forth in this Agreement. 16.02 Definition of "Event of Default" -------------------------------- A. Upon the occurrence of any Default by either party hereto (hereinafter referred to as the "defaulting party") under Section 16.01.A, B or C, such Default shall immediately and automatically, without the necessity of any notice to the defaulting party, constitute an "Event of Default" under this Agreement. B. Upon the occurrence of any Default by a defaulting party under Section 16.01.D, such Default shall constitute an "Event of Default" under this Agreement if the defaulting party fails to cure such Default within ten (10) days after written notice from the non-defaulting party specifying such Default and demanding such cure. C. Upon the occurrence of any Default by either party hereto under Section 16.01.E, such Default shall constitute an "Event of Default" under this Agreement if the defaulting party fails to cure such Default within thirty (30) days after written notice from the non-defaulting party and demanding such cure, or, if the Default is such that it cannot reasonably be cured within said thirty (30) day period of time, if the defaulting party fails to commence the cure of such Default within said thirty 131 (30) day period of time or thereafter fails to diligently pursue such efforts to completion. 16.03 Remedies Upon an Event of Default --------------------------------- A. Upon the occurrence of an Event of Default under the provisions of Section 16.02, the non-defaulting party shall have the right to pursue any one or more of the following courses of action: (i) in the event of a material breach by the defaulting party of its obligations under this Agreement, to terminate this Agreement by written notice to the defaulting party, which termination shall be effective as of the effective date which is set forth in said notice, provided that said effective date shall be at least thirty (30) days after the date of said notice; and provided further that, if the defaulting party is the employer of all or a substantial portion of the employees at the Inn, the foregoing period of thirty (30) days shall be extended to seventy-five (75) days (or such longer period of time as may be necessary under applicable Legal Requirements pertaining to termination of employment); (ii) to institute forthwith any and all proceedings permitted by law or equity, including, without limitation, actions for specific performance and/or damages; and (iii) to avail itself of any one or more of the other remedies described in this Section 16.03. B. Upon the occurrence of a Default by either party under the provisions of Section 16.01.D, the amount owed to the non-defaulting party shall accrue interest, at the Interest Rate, 132 from and after the date on which such payment was originally due to the non-defaulting party. C. The rights granted hereunder are intended to be cumulative, and shall not be in substitution for, but shall be in addition to, any and all rights and remedies available to the non-defaulting party (including, without limitation, injunctive relief and damages; provided that the satisfaction of damage awards against Owner shall be limited by the provisions of Section 16.04) by reason of applicable provisions of law or equity. 16.04 Owner's Estate -------------- Notwithstanding any other provision of this Agreement, in the event of any Event of Default by Owner pursuant to the terms of this Agreement, Management Company shall look only to Owner's estate and interest in the Site and the Inn (which shall for this purpose, include (i) amounts deposited in the Operating Accounts and the FF&E Reserve, and (ii) accounts receivable) for the satisfaction of a money judgment against Owner resulting from such Event of Default, and no other property or assets of Owner, or of its partners, officers, directors, shareholders or principals, shall be subject to levy, execution or other enforcement procedure for the satisfaction of such judgment. Management Company's right to look to Owner's estate and interest in the Site and the Inn for satisfaction of such a money judgment against Owner shall survive Termination and shall not be affected 133 by any one or more Sales of the Inn. Nothing contained in this Section 16.04 shall be deemed to affect or diminish Management Company's remedies under this Article XVI other than money damages against Owner (including, without limitation, Termination of this Agreement). END OF ARTICLE XVI 134 ARTICLE XVII WAIVER AND PARTIAL INVALIDITY ----------------------------- 17.01 Waiver ------ The failure of either party to insist upon a strict performance of any of the terms or provisions of this Agreement, or to exercise any option, right or remedy herein contained, shall not be construed as a waiver or as a relinquishment for the future of such term, provision, option, right or remedy, but the same shall continue and remain in full force and effect. No waiver by either party of any term or provision hereof shall be deemed to have been made unless expressed in writing and signed by such party. 17.02 Partial Invalidity ------------------ If any portion of this Agreement shall be declared invalid by order, decree or judgment of a court, this Agreement shall be construed as if such portion had not been inserted herein except when such construction would operate as an undue hardship on Management Company or Owner, or constitute a substantial deviation from the general intent and purpose of said parties as reflected in this Agreement. END OF ARTICLE XVII 135 ARTICLE XVIII ASSIGNMENT ---------- 18.01 Assignment ---------- A. Management Company shall not assign or transfer its management responsibilities under this Agreement without the prior written consent of Owner; provided, however, that Management Company shall have the right, without such consent, to: (i) assign its interest in this Agreement to any of its Affiliates and any such Affiliate shall be deemed to be the Management Company for the purposes of this Agreement, and (ii) sublease shops or grant Licenses or concessions at the Inn so long as the terms of any such subleases, Licenses or concessions are consistent with the provisions of Section 2.02 and provided further that Owner's consent shall be required prior to the execution by Management Company of any such lease, License or concession which (a) has a term of more than five (5) years, or (b) involves more than five hundred (500) square feet of space within the Inn. In the event of such an assignment by Management Company of its interest in this Agreement to an Affiliate, the Management Company which is named in the Preamble to this Agreement: (i) shall automatically be deemed to guarantee the performance of such Affiliate under this Agreement; (ii) shall, at the request of Owner, execute a guaranty, in form and substance reasonably satisfactory to both parties, of the performance of such Affiliate under this Agreement (provided that 136 the failure of Owner to obtain an executed guaranty pursuant to this clause (ii) shall not affect the validity or enforceability of the guaranty which is automatically created pursuant to clause (i); and provided further, that, when Owner does so receive an executed guaranty pursuant to this clause (ii), such executed guaranty shall be deemed to have superseded the guaranty described in clause (i) above); and (iii) shall make available to such Affiliate, in connection with the performance by such Affiliate under this Agreement, Management Company's skill, personnel, facilities and resources. B. Owner shall not assign or transfer its interest in this Agreement other than (i) in connection with a Sale of the Inn which complies with the provisions of Article XIX hereof; or (ii) as set forth in Section 18.01.C. C. Nothing contained herein shall prevent: (i) the collateral assignment of this Agreement by Owner as security for any Mortgage which complies with the provisions of Section 3.01; or (ii) the transfer of this Agreement in connection with a merger or consolidation or a sale of all or substantially all of the assets of either party, provided that (x) if such transfer is by Owner, the provisions of Article XIX hereof shall be complied with, and (y) if such transfer is by Management Company, such transfer is being done as a part of a merger, consolidation, etc., of all or substantially all of the business which consists of managing the Residence Inn System. 137 D. In the event either party consents to an assignment of this Agreement by the other, no further assignment shall be made without the express consent in writing of such party, unless such assignment may otherwise be made without such consent pursuant to the terms of this Agreement. E. An assignment (either voluntarily or by operation of law) by Owner of its interest in this Agreement (in compliance with Article XVIII) shall not relieve Owner from its obligations under this Agreement which accrued prior to the date of such assignment, but shall relieve Owner of such obligations accruing after such date, if the assignment complies with Section 18.01.B and if Management Company has received an assumption agreement executed by the assignee (in form and substance reasonably satisfactory to Management Company). An assignment (either voluntarily or by operation of law) by Management Company of its interest in this Agreement shall not relieve Management Company from its obligations under this Agreement, unless Owner so agrees in writing. F. Subject to the provisions of this Article XVIII, the terms and conditions of this Agreement shall inure to the benefit of, and be binding upon, the respective successors, heirs, legal representatives, or assigns of each of the parties hereto. END OF ARTICLE XVIII 138 ARTICLE XIX SALE OF THE INN --------------- 19.01 Sale of the Inn --------------- A. Owner shall not enter into any Sale of the Inn to any individual or entity which: (i) does not have sufficient financial resources and liquidity to fulfill Owner's obligations under this Agreement; (ii) is in control of or controlled by persons who have been convicted of felonies involving moral turpitude in any state or federal court; or (iii) is engaged in the business of operating or franchising (as distinguished from owning) a branded hotel chain having five hundred (500) or more guest rooms in competition with Management Company. An individual or entity shall not be deemed to be in the business of operating hotels in competition with Management Company solely by virtue of (x) the ownership of such hotels, either directly or indirectly through subsidiaries, affiliates and partnerships, or (y) holding a Mortgage or Mortgages secured by one or more hotels. Notwithstanding the foregoing, if Owner or an Affiliate of Owner is a corporation whose shares are listed on a public stock exchange, and if a Sale of the Inn occurs as a result of purchases of such shares, through such public stock exchange, in sufficient quantities to cause a transfer of the "controlling interest" in Owner (as described in the definition of "Sale of the Inn"), and if such Sale of the Inn is not in compliance with the provisions of this Section 19.01.A, Management Company shall 139 have the right, at its option, to terminate this Agreement by written notice to Owner (as more particularly described in Section 19.01.B), but such non-compliance with this Section 19.01.A shall not be an Event of Default nor shall it subject Owner to claims for damages by Management Company pursuant to Article XVI. B. If Owner receives a bona fide written offer to enter into a Sale of the Inn, Owner shall give written notice thereof to Management Company, stating the name of the prospective purchaser or tenant, as the case may be. Such notice shall include appropriate information relating to such prospective purchaser or tenant demonstrating compliance with the provisions of Section 19.01.A together with such additional information as Management Company shall reasonably request. If Management Company decides that a Sale of the Inn to such prospective purchaser or tenant would violate the provisions of Section 19.01.A, Management Company shall so notify Owner by no later than thirty (30) days after receipt of such notice; provided, however, that any decision by Management Company regarding any such prospective purchaser or tenant shall not be binding if the information furnished by Owner pursuant to the preceding sentence is inaccurate. Concurrently with the finalization of such Sale of the Inn, the purchaser or tenant, as the case may be, shall, by appropriate instrument reasonably satisfactory to Management Company, assume all of Owner's obligations hereunder. An executed copy of such assumption agreement shall be delivered to 140 Management Company. If the proposed Sale of the Inn would violate the provisions of Section 19.01.A, Owner will not enter into any agreement relating to such Sale of the Inn. However, if Owner does enter into such an agreement, Management Company shall have the right to terminate this Agreement by written notice to Owner, which notice will set an effective date for such Termination not earlier than thirty (30) days, nor more than one hundred twenty (120) days, following the date of the giving of such notice. Management Company shall have the right to change such effective date of Termination to coincide with the date of the finalization of the proposed Sale of the Inn. At Management Company's election, said notice of Termination shall not be effective if such Sale of the Inn is not finalized. If such Termination by Management Company results from a Default by Owner under Section 19.01.A, such Termination shall not relieve Owner (except as otherwise set forth to the contrary in the last sentence of Section 19.01.A) of liability to Management Company for such Default. C. In connection with the possibility of a Sale of the Inn achieved by means of a transfer of the controlling interest in Owner, Owner, upon written request of Management Company, shall (unless Owner is a publicly-traded corporation which is registered under Section 12 or Section 15 of the Securities Act of 1934) furnish Management Company with a list of the names and addresses of the owners of the capital stock, (but only those owners which hold an ownership interest of thirty percent (30%) 141 or more), or the partnership interests (both (i) general partner, and (ii) any limited partner holding an ownership interest of thirty percent (30%) or more), or other ownership interests in Owner. In addition, Owner shall notify Management Company of any transaction or series of transactions in which Owner reduces its ownership interest in the Inn below fifty percent (50%) or in which the former controlling interest in Owner is reduced below fifty percent (50%). Management Company agrees to use diligent efforts to keep all such lists confidential in accordance with the provisions of Section 12.04. D. It is understood that no Sale of the Inn (which is otherwise in compliance with the provisions of this Article XIX) shall reduce or otherwise affect: (i) the current level of Working Capital; (ii) the current amount deposited in the FF&E Reserve; or (iii) any of the Operating Accounts maintained by Management Company pursuant to this Agreement. If, in connection with any Sale of the Inn, the selling Owner intends to withdraw, for its own use, any of the cash deposits described in the preceding sentence, the selling Owner must obtain the contractual obligation of the buying Owner to replenish those deposits (in the identical amounts) simultaneously with such withdrawal. The selling Owner is hereby contractually obligated to Management Company to ensure that such replenishment in fact occurs. The obligations described in this Section 19.01.D shall survive such Sale of the Inn and shall survive Termination. 142 E. Management Company shall have the right to terminate this Agreement, on thirty (30) days' written notice, if title to or possession of the Inn is transferred by judicial or administrative process (including, without limitation, a Foreclosure, or a sale pursuant to an order of a bankruptcy court, or a sale by a court-appointed receiver) to an individual or entity which would not qualify as a permitted transferee under clause (i), (ii) or (iii) of Section 19.01.A, regardless of whether or not such transfer is the voluntary action of the transferring Owner, or whether (under applicable law) the Owner is in fact the transferor; provided, however, that Management Company shall not have the right to so terminate this Agreement based on the assertion that a Qualified Lender fails to so qualify as a permitted transferee under said clauses (i), (ii) or (iii) of Section 19.01.A. END OF ARTICLE XIX 143 ARTICLE XX MISCELLANEOUS ------------- 20.01 Right to Make Agreement ----------------------- A. Each party warrants, with respect to itself, that neither the execution of this Agreement nor the finalization of the transactions contemplated hereby shall: (i) violate any provision of law or any judgment, writ, injunction, order or decree of any court or governmental authority having jurisdiction over it; (ii) result in or constitute a breach or default under any indenture, contract, other commitment or restriction to which it is a party or by which it is bound to the extent that the remedies for such breach or default would have a material adverse effect on such party's ability to perform under this Agreement; or (iii) require any consent, vote or approval which has not been taken, or at the time of the transaction involved shall not have been given or taken. Each party covenants that it has and will continue to have throughout the Term of this Agreement and any extensions thereof, the full right to enter into this Agreement and perform its obligations hereunder. B. Each party agrees that it will, as of the Effective Date, provide the other party with: (i) certified copies of the applicable resolutions of its board of directors (if it is a corporation), or written authorization by all general partners (if it is a partnership) or other appropriate documentation establishing its authority to execute this Agreement; and (ii) 144 such opinions of counsel as the other party shall reasonably request regarding the matters described in this Section 20.01. 20.02 Consents -------- Wherever in this Agreement the consent or approval of Owner or Management Company is required, such consent or approval shall (except to the extent that such consent or approval is specifically designated as being "within the discretion" of a party, or words to that effect, in the applicable provision) not be unreasonably withheld, shall be in writing and shall be executed by a duly authorized officer or agent of the party granting such consent or approval. If either Owner or Management Company fails to respond within thirty (30) days to a request by the other party for a consent or approval, such consent or approval shall be deemed to have been given. 20.03 Agency ------ The relationship of Owner and Management Company shall be that of principal and agent, and nothing contained in this Agreement shall be construed to create a partnership or joint venture between them or their successors in interest. Management Company's agency established by this Agreement is coupled with an interest and may not be terminated by Owner until the expiration of the Term of this Agreement, except as provided in Section 4.03 and in Articles XV or XVI. Notwithstanding the agency relationship created by this Agreement, except to the extent 145 specifically set forth to the contrary in Section 20.12, nothing contained herein shall prohibit, limit or restrict Management Company or any of its Affiliates from developing, owning, operating, leasing, managing or franchising hotels in the market area where the Inn is located. The agency coupled with an interest herein was created by a complex, single, integrated transaction between Marriott Corporation (the parent corporation of Owner and Management Company as of the Effective Date) and its subsidiaries whereby Marriott Corporation and its subsidiaries developed, constructed, own and manage the Hotel. This agency is further intended to provide security for the covenants, promises and guarantees herein. The agency was purchased for valuable consideration, and is not terminable except as specifically allowed by the express provisions of this Agreement. The parties intend for this agency to be coupled with an interest, waive any right to claim it is terminable at will, and further agree to be equitably estopped from asserting that the agency is not coupled with an interest. 20.04 Confidentiality --------------- The parties hereto agree that the matters set forth in this Agreement are strictly confidential and each party will make every effort to ensure that such matters are not disclosed to any outside person or entities (including the press) without the written consent of the other party; provided, however, that such consent will not be required with respect to: (i) legally 146 required filings and other disclosures mandated by Legal Requirements; and (ii) in the case of Owner, disclosure to any Qualified Lender or prospective Qualified Lender, or to prospective purchasers of the Inn (subject to the provisions of Section 20.05, if applicable). 20.05 Equity Offerings ---------------- No reference to Management Company or to any of its Affiliates will be made in any prospectus, private placement memorandum, offering circular or offering documentation related thereto (herein collectively referred to as the "Prospectus"), issued by Owner or one of its Affiliates, which is designed to interest potential investors in the Inn, unless Management Company has previously received a copy of all such references. However, regardless of whether Management Company does or does not so receive a copy of all such references, neither Management Company nor any of its Affiliates will be deemed a sponsor of the offering described in the Prospectus, nor will it have any responsibility for the Prospectus, and the Prospectus will so state. Unless Management Company agrees in advance, the Prospectus will not include: (i) any Proprietary Mark; or (ii) except as required by applicable securities laws, the text of this Agreement. Owner shall be entitled, however, to include in the Prospectus an accurate summary of this Agreement; If there are no Legal Requirements pursuant to which such information must be disclosed, appropriate measures shall be taken to ensure that 147 entities or individuals receiving such Prospectus shall acknowledge the confidentiality of such information. Owner shall indemnify, defend and hold Management Company and its Affiliates (and their respective directors, officers, shareholders, employees and agents) harmless from and against all loss, costs, liability and damage (including attorneys' fees and expenses, and the cost of Litigation) arising out of any Prospectus or the offering described therein. 20.06 Applicable Law -------------- This Agreement shall be construed under and shall be governed by the laws of the state where the Inn is located. 20.07 Recordation ----------- The terms and provisions of this Agreement shall run with the land designated as the Site, and with Owner's interest therein, and shall be binding upon all successors to such interest. At the request of either party, the parties shall execute an appropriate memorandum of this Agreement in recordable form and cause the same to be recorded in the jurisdiction where the Inn is located. Any cost of such recordation shall be borne by Management Company. 20.08 Headings -------- Headings of Articles and Sections are inserted only for convenience and are in no way to be construed as a limitation on 148 the scope of the particular Articles or Sections to which they refer. 20.09 Notices ------- Notices, statements and other communications to be given under the terms of this Agreement shall be in writing, and shall be either: (i) delivered by hand against receipt; or (ii) sent by certified or registered mail, postage prepaid, return receipt requested or (iii) sent by either a nationally utilized overnight delivery service or by "facsimile" machine (provided that, in either case, a confirmatory copy is thereafter sent by certified or registered mail): To Owner: -------- c/o Host Marriott, Inc. 10400 Fernwood Road Bethesda, Maryland 20817 Attn: Law Department with a copy to: -------------- c/o Host Marriott, Inc. 10400 Fernwood Road Bethesda, Maryland 20817 Attn: Asset Management Department 72-1AD-2 To Management Company: --------------------- Residence Inn by Marriott, Inc. c/o Marriott International, Inc. 10400 Fernwood Road Bethesda, Maryland 20817 Attn: Law Department - Hotel Operations Residence Inn by Marriott, Inc. 149 c/o Marriott International, Inc. 10400 Fernwood Road Bethesda, Maryland 20817 Attn: Residence Inn, Vice President, Finance or at such other address as is from time to time designated by the party receiving the notice. Any such notice which is properly mailed, as described above, shall be deemed to have been served as of three (3) business days after said posting. 20.10 Environmental Matters --------------------- A. Management Company shall indemnify, defend and hold Owner and its Affiliates (and their respective directors, officers, shareholders, employees and agents) harmless from and against all loss, cost, liability and damage (including, without limitation, engineers' and attorneys' fees and expenses, and the cost of Litigation) arising from the placing, discharge, leakage, use or storage of Hazardous Materials, in violation of applicable Environmental Laws, on the Site or in the Inn by Management Company's employees, representatives or agents during the Term of this Agreement. Regardless of whether or not a given Hazardous Material is permitted on the Site under applicable Environmental Law, Management Company shall only bring on the Site such Hazardous Materials as are needed in the normal course of business of the Inn. B. In the event of the discovery of Hazardous Materials on any portion of the Site or in the Inn during the Term of this Agreement, Owner shall (except to the extent such removal is 150 Management Company's responsibility pursuant to Section 20.10.A) promptly remove (if required by applicable Environmental Law) such Hazardous Materials, together with all contaminated soil and containers, and shall otherwise remedy the problem in accordance with all Environmental Laws. Owner shall (except to the extent that the removal of such Hazardous Materials is Management Company's responsibility pursuant to Section 20.10.A) indemnify, defend and hold Management Company and its Affiliates (and their respective directors, officers, shareholders, employees and agents) harmless from and against all loss, cost, liability and damage (including, without limitation, engineers' and attorneys' fees and expenses, and the cost of Litigation) arising from the presence of Hazardous Materials on the Site or in the Inn. C. All costs and expenses of the removal of Hazardous Materials from the Site or the Inn pursuant to Section 20.10.B, and of the aforesaid compliance with all Environmental Laws, and any amounts paid to Management Company pursuant to the indemnity set forth in the last sentence of Section 20.10.B, shall be paid by Owner from its own funds, not as a Deduction nor from the FF&E Reserve, and shall be treated as an expenditure by Owner pursuant to Section 8.03. 20.11 Estoppel Certificates --------------------- Each party to this Agreement shall at any time and from time to time, upon not less than thirty (30) days' prior notice from the other party, execute, acknowledge and deliver to such other 151 party, or to any third party specified by such other party, a statement in writing: (i) certifying that this Agreement is unmodified and in full force and effect (or if there have been modifications, that the same, as modified, is in full force and effect and stating the modifications); (ii) stating whether or not to the best knowledge of the certifying party (a) there is a continuing default by the non-certifying party in the performance or observance of any covenant, agreement or condition contained in this Agreement, or (b) there shall have occurred any event which, with the giving of notice or passage of time or both, would become such a default, and, if so, specifying each such default or occurrence of which the certifying party may have knowledge; and (iii) stating such other information as the non-certifying party may reasonably request. Such statement shall be binding upon the certifying party and may be relied upon by the non-certifying party and/or such third party specified by the non-certifying party as aforesaid. The obligations set forth in this Section 21.11 shall survive Termination (that is, each party shall, on request, within the time period described above, execute and deliver to the non-certifying party and to any such third party a statement certifying that this Agreement has been terminated). 152 20.12 Trade Area Restriction ---------------------- Neither Management Company nor any of its Affiliates shall own, build, franchise, manage or operate any Restricted Inn, under the "Residence Inn by Marriott" or "Residence Inn" brand name, within the Restricted Area during the period from the Effective Date through the sixth (6th) anniversary of the Effective Date. 20.13 Arbitration ----------- A. In the event of a dispute between Owner and Management Company with respect to any issue of fact specifically mentioned herein as a matter to be decided by arbitration, such dispute shall be determined by arbitration as provided in this Section 20.13. B. Disputes shall be resolved in accordance with the Commercial Arbitration Rules of the American Arbitration Association then pertaining. The decision of the arbitrators shall be binding, final and conclusive on the parties. C. Owner and Management Company shall each appoint and pay all fees of a fit and impartial person as arbitrator who shall have had at least ten (10) years' recent professional experience in the general subject matter of the dispute. Notice of such appointment shall be sent in writing by each party to the other, and the arbitrators so appointed, in the event of their failure to agree within thirty (30) days after the appointment of the second arbitrator upon the matter so submitted, shall appoint a 153 third arbitrator. If either Owner or Management Company shall fail to appoint an arbitrator, as aforesaid, for a period of twenty (20) days after written notice from the other party to make such appointment, then the arbitrator appointed by the party having made such appointment shall appoint a second arbitrator and the two so appointed shall, in the event of their failure to agree upon any decision within thirty (30) days thereafter, appoint a third arbitrator. If such arbitrators fail to agree upon a third arbitrator within forty-five (45) days after the appointment of the second arbitrator, then such third arbitrator shall be appointed by the American Arbitration Association from its qualified panel of arbitrators, and shall be a person having at least ten (10) years' recent professional experience as to the subject matter in question. The fees of the third arbitrator and the expenses incident to the proceedings shall be borne equally between Owner and Management Company, unless the arbitrators decide otherwise. The fees of respective counsel engaged by the parties, and the fees of expert witnesses and other witnesses called for the parties, shall be paid by the respective party engaging such counsel or calling or engaging such witnesses. D. The decision of the arbitrators shall be rendered within thirty (30) days after appointment of the third arbitrator. Such decision shall be in writing and in duplicate, one counterpart thereof to be delivered to Owner and one to Management Company. A judgment of a court of competent jurisdiction may be entered 154 upon the award of the arbitrators in accordance with the rules and statutes applicable thereto then obtaining. 20.14 Entire Agreement ---------------- This Agreement, together with other writings signed by the parties which are expressly stated to be supplemental hereto and together with any instruments to be executed and delivered pursuant to this Agreement, constitutes the entire agreement between the parties, and supersedes all prior written and oral understandings. This Agreement may be amended only by a writing signed by both parties hereto. END OF ARTICLE XX 155 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. Attest: OWNER: HMH PROPERTIES, INC. By: /s/ Pamela J. Murch By: /s/ Christopher G. Townsend -------------------- ---------------------------- Attest: MANAGER: RESIDENCE INN BY MARRIOTT, INC. By: /s/ Peter J. Swift By: /s/ James Sullivan ------------------- ------------------- 156
EXHIBITS ATTACHED TO ORIGINAL AGREEMENT Exhibit "A" Location of Inn and Legal Description Exhibit "A-1" Number of Suites and Brief Description of Facilities; Priority Basis; Performance Termination Threshold; Loan Priority Basis (number set forth in (i) of Definition); Revenue Index Threshold Exhibit "B" Form of Accounting Period Statement Exhibit "C" [Intentionally Deleted] Exhibit "D" Map of Restricted Area Exhibit "D-1" Narrative Description of Restricted Area Exhibit "E" Proprietary Marks which will remain the property of Owner after Termination Exhibit "F" Title Encumbrances; Existing CC&R's (separately describing those charges thereunder which will be treated as capital expenditures under Section 8.03); Existing Ground Lease (if applicable); Existing Mortgages (if any)
157 EX-10.14.IV 8 EXHIBIT 10.14(IV) Exhibit 10.14(iv) FAIRFIELD INN MANAGEMENT AGREEMENT This Management Agreement ("Agreement") is executed as of the 25th day of September, 1993 ("Effective Date"), by HMH PROPERTIES, INC. ("Owner"), a Delaware corporation, with a mailing address at 10400 Fernwood Road, Bethesda, Maryland 20817 and FAIRFIELD FMC CORPORATION ("Management Company"), a Delaware corporation, with a mailing address at 10400 Fernwood Road, Bethesda, Maryland 20817. R E C I T A L S : A. Owner is the owner of the Hotel (as defined and more fully described in Section 1.01) which is located as set forth on Exhibit "A" hereto; and B. Owner desires to have Management Company manage and operate the Hotel, and Management Company is willing to perform such services for the account of Owner on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I DEFINITION OF TERMS ------------------- 1.01 Definition of Terms ------------------- The following terms when used in this Agreement shall have the meanings indicated: "Accounting Period" shall mean each of the four (4) week accounting periods ----------------- which are used in Management Company's accounting system, except that an Accounting Period may occasionally contain five (5) weeks when necessary to conform Management Company's accounting system to the calendar. "Accounting Period Statement" shall have the meaning set forth in Section --------------------------- 5.03. "Additional Invested Capital" shall mean the cumulative total, as of any --------------------------- given date during the Term, of the following: (i) any expenditures made by Owner in response to a Building Estimate, pursuant to Section 8.03, and any expenditures by Owner pursuant to Section 20.10.C; (ii) any contributions by Owner to the FF&E Reserve (beyond the funding described in Section 8.02.B and E); other than those contributions which are reimbursed to Owner under Section 8.02.F; (iii) any payments by Owner with regard to special assessments or impact fees, pursuant to Section 13.01.B(2) or 13.01.B.(3); and (iv) any costs, expenses and charges which are described on Exhibit "F" hereto as "Capital Charges" pursuant to Section 2.05.A. Owner shall give Management Company prompt notice -2- of any amounts it has provided funding for which constitute "Additional Invested Capital" together with such evidence of funding as Management Company may reasonably require. "Affiliate" shall mean any individual or entity directly or indirectly --------- through one or more intermediaries, controlling, controlled by or under common control with a party. The term "control," as used in the immediately preceding sentence, means, with respect to a corporation, the right to the exercise, directly or indirectly, of fifty-one percent (51%) or more of the voting rights attributable to the shares of the controlled corporation, and, with respect to an entity that is not a corporation, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the controlled entity. "Agreement" shall have the meaning set forth in the Preamble. --------- "Annual Operating Projection" shall have the meaning set forth in Section --------------------------- 9.03. "Annual Operating Statement" shall have the meaning set forth in Section -------------------------- 9.01. "Available Cash Flow" shall mean an amount, with respect to each Fiscal ------------------- Year or portion thereof (prorated for any partial Fiscal Years) during the Term of this Agreement, equal to the excess, if any, of Operating Profit over the sum of: (i) the applicable Owner's Priority in such Fiscal Year; plus, (ii) the -3- Base Management Fee; plus, (iii) Deferred Contingent Base Management Fees paid to Manager in such Fiscal Year. "Base Management Fee" shall mean, for each Fiscal Year (prorated for any ------------------- partial Fiscal Years) during the Term of this Agreement, an amount equal to two percent (2%) of Gross Revenues as payment to Management Company for Central Office Services which are for the general benefit of the Fairfield Inn System. "Building Estimate" shall have the meaning set forth in Section 8.03.A. ----------------- "Capitalization Multiple" shall mean the number ten (10). ----------------------- "Case Goods" shall mean furniture and furnishings used in the Hotel, ---------- including, without limitation: chairs, beds, chests, headboards, desks, lamps, tables, television sets, mirrors, pictures, wall decorations and similar items. "CC&R's" shall have the meaning set forth in Section 2.05. ------ "Central Office Services" shall mean certain services performed by ----------------------- personnel not normally located at the Hotel and include corporate planning and policy services, corporate financial planning, legislative and governmental representation, corporate human resources and benefits planning, in-house legal services and trademark protection relating to Proprietary Marks which are used generally in the Fairfield Inn System. Any service which is defined as being included within the term "Chain Services" shall not also be included within "Central Office Services." The Central Office Services which are provided to the Hotel shall be generally -4- consistent with those Central Office Services which are provided to other comparable Fairfield Inn hotels within the Fairfield Inn System. "Chain Services" shall mean those certain services furnished to the Hotel -------------- which are furnished generally on a central or regional basis to other hotels in the Fairfield Inn System. Chain Services shall include: (i) central operational support for rooms, food and beverage and engineering; central training services; career development; management personnel relocation; central safety and loss prevention services; marketing fund contributions; consumer affairs; to the extent not charged or allocated directly to the Hotel as a Deduction, the national and regional reservations system service and inventory and revenue management services; centralized computer payroll and accounting services; computer system development, support and operating costs; central monitoring and management support from "line management" personnel such as area managers; (ii) such additional central or regional services as are or may be, from time to time, furnished for the benefit of hotels in the Fairfield Inn System or in substitution for services now performed at individual hotels which may be more efficiently performed on a group basis; provided, however, that services not currently included in chain services pursuant to (i) and (ii) above shall only be added to "Chain Services" if, and to the extent that such services: (a) are not Central Office Services (it being understood that Management Company's sole compensation for -5- providing the Central Office Services shall be receipt of the Base Management Fee); (b) are not services relating to non-routine work (it being understood that the cost and expense of such non-routine services shall be Deductions as set forth in paragraph 6 of the definition of Operating Profit); and (c) are either (x) new services (i.e., not previously performed at or for the Hotel) or (y) services which theretofore had been performed at the Hotel, but which can be performed more efficiently and economically on a centralized, regional or other basis. [Moved from Section 11.03] "Communications, Computer and Office Equipment" shall mean: the following --------------------------------------------- equipment used in the Hotel and all ancillary equipment; (i) telephone; (ii) all computer equipment and all ancillary equipment used in the Hotel or for the benefit of the Hotel; (iii) miscellaneous office equipment such as copiers, postage meters, etc. (iv) television sets; and (v) audio-visual equipment. "Coverage Ratio" shall mean the number one and three-tenths (1.3). -------------- "Cure Payment" shall have the meaning set forth in Section 4.03.B. ------------ "Deductions" shall have the meaning set forth in the definition of ---------- Operating Profit. "Default" shall have the meaning set forth in Section 16.01. ------- -6- "Deferred Contingent Base Management Fees" shall mean an amount equal to ---------------------------------------- (a) the sum of all unpaid Base Management Fees deferred in accordance with Section 5.02.B(i) less (b) all sums paid to Management Company in accordance with the provisions of Section 5.02.B(ii). "Effective Date" shall have the meaning set forth in the Preamble. -------------- "Employee Claims" shall mean any and all claims (including all fines, --------------- judgments, penalties, costs, Litigation and/or arbitration expenses, attorneys' fees and expenses, and costs of settlement with respect to any such claim) by any employee or employees of Management Company against Owner or Management Company with respect to the employment at the Hotel of such employee or employees. "Employee Claims" shall include, without limitation, the following: (i) claims which are eventually resolved by arbitration, by Litigation or by settlement; (ii) claims which also involve allegations that any applicable employment-related contracts affecting the employees at the Hotel have been breached; and (iii) claims which involve allegations that one or more of the Employment Laws has been violated; provided, however, that "Employee Claims" shall not include claims for worker compensation benefits (which shall be governed by Article XII hereof) or for unemployment benefits. "Employment Laws" shall mean any federal, state or local law (including the --------------- common law), statute, ordinance, rule, regulation, -7- order or directive with respect to employment, conditions of employment, benefits, compensation, or termination of employment that currently exists or may exist at any time during the Term of this Agreement, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Workers Adjustment and Retraining Notification Act, the Occupational Safety and Health Act, the Immigration Reform and Control Act of 1986, the Polygraph Protection Act of 1988 and the Americans With Disabilities Act of 1990. "Environmental Laws" shall mean: any federal, state or local law, rule or ------------------ regulation (both present and future) dealing with the use, generation, treatment, storage, disposal or abatement of Hazardous Materials, including, but not limited to, (i) the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., as amended; (ii) the regulations -- --- promulgated thereunder, from time to time; (iii) all federal, state and local laws, rules and regulations (now or hereafter in effect) dealing with the use, generation, treatment, storage, disposal or abatement of Hazardous Materials; and (iv) the regulations promulgated thereunder, from time to time. "Event of Default" shall have the meaning set forth in Section 16.02. ---------------- "Existing CC&R's" shall have the meaning set forth in Section 2.05.A. --------------- -8- "Existing Ground Leases" shall mean the ground leases which are listed on ---------------------- Exhibit "F", but for purposes of this Agreement shall not include any amendments or modifications thereof after the Effective Date. "Existing Mortgages" shall mean the Mortgages which are listed on Exhibit ------------------ "F", but for purposes of this Agreement shall not include any amendments or modifications thereof after the Effective Date. "FF&E" shall mean furniture, furnishings, fixtures, Soft Goods, Case Goods, ---- signage and equipment at the Hotel (including, without limitation, facsimile machines, Communications, Computer and Office Equipment, Shuttle Vehicles, audio-visual equipment, and all computer and other equipment needed for the reservation system and the property management system, and all other electronic systems needed for the Hotel from time to time, as well as similar systems based on other technologies which may be developed in the future. "FF&E Estimate" shall have the meaning set forth in Section 8.02.C. ------------- "FF&E Reserve" shall have the meaning set forth in Section 8.02.A. ------------ "Fairfield Inn System" shall mean the hotel system managed by Management -------------------- Company (or one or more of its Affiliates) which is, as of the Effective Date, operated under the trade name "Fairfield Inn". -9- "Fairfield Inn System Fee" shall during any given Fiscal Year (or portion ------------------------ thereof), be equal to three percent (3%) of Gross Revenues. It shall mean an amount paid to Management Company, in each Fiscal Year (prorated for any partial Fiscal Years) during the Term of this Agreement, as payment to Management Company for certain services ("System Services") which are for the benefit of the Fairfield Inn System, are not Central Office Services or Chain Services, and are performed by personnel not normally located at the Hotel. System Services shall be limited to divisional executive management, divisional financial planning, divisional contracting, divisional product planning and development, divisional human resources planning and development, divisional marketing planning, and services of Management Company's technical and operational experts making periodic inspection and consultation visits to the Hotel (but specifically excluding "line management" personnel such as area managers and services of Management Company's Architecture and Construction personnel who provide design, procurement construction or related services). "Fairfield Inn System Standards" shall mean both the operational standards ------------------------------ (for example, staffing, amenities offered to guests, advertising, etc.) and the physical standards (for example, the quality, condition and utility of the FF&E, etc.) generally required of hotels in the Fairfield Inn System such operational and physical standards may fluctuate from time to time (provided, however, that the Fairfield Inn System Standards shall in no event -10- be lower than the operational and physical standards, as of the date in question, of comparable hotels in comparable hotel systems). "First Notice" shall have the meaning set forth in Section 6.02. ------------ "Fiscal Year" shall mean Management Company's Fiscal Year which now ends at ----------- midnight on the Friday closest to December 31 in each calendar year; the new Fiscal Year begins on the Saturday immediately following said Friday. Any partial Fiscal Year between the Effective Date and the commencement of the first full Fiscal Year and any partial Fiscal Year between the end of the last full Fiscal Year and the Termination of this Agreement, shall constitute a separate Fiscal Year. If Management Company's Fiscal Year is changed in the future, appropriate adjustment to this Agreement's reporting and accounting procedures shall be made; provided, however, that no such change or adjustment shall alter the Term of this Agreement, or in any way reduce the distributions of Operating Profit or other payments due to Owner hereunder, or otherwise significantly and adversely affect Owner's rights or obligations under this Agreement. "Fixed Asset Supplies" shall mean supply items included within "Property --------------------- and Equipment" under the Uniform System of Accounts, including linen, cleaning supplies, china, glassware, tableware, uniforms, and similar items. -11- "Force Majeure" shall mean acts of God, acts of war, civil disturbance, ------------- governmental action (including the revocation or refusal to grant Licenses , where such revocation or refusal is not due to the fault of the party whose performance is to be excused for reasons of Force Majeure), strikes, lockouts, fire, unavoidable casualties or any other causes beyond the reasonable control of either party (excluding, however: (i) lack of financing; or (ii) general economic and/or market factors). "Foreclosure" shall mean any exercise of the remedies available to a ----------- Holder, upon a default under the Secured Loan held by such Holder, which results in a transfer of title to or possession of the Hotel. The term "Foreclosure" shall include, without limitation, any one or more of the following events, if they occur in connection with a default under a Secured Loan: (i) a transfer by judicial foreclosure; (ii) a transfer by deed in lieu of foreclosure; (iii) the appointment by a court of a receiver to assume possession of the Hotel; (iv) a transfer of either ownership or control of the Owner, by exercise of a stock pledge or otherwise; (v) if title to the Hotel is held by a tenant under a ground lease, an assignment of the tenant's interest in such ground lease; or (vi) any similar judicial or non-judicial exercise of the remedies held by the Holder. "Foreclosure Date" shall mean the date on which title to or possession of ---------------- the Hotel is transferred by means of a Foreclosure. -12- "Future CC&R's" shall have the meaning set forth in Section 2.05.B. ------------- "GDP Deflator" shall mean the "Gross Domestic Product Implicit Price ------------ Deflator" issued from time to time by the United States Bureau of Economic Analysis of the Department of Commerce, or if the aforesaid GDP Deflator is not at such time so prepared and published, any comparable index selected by Owner and reasonably satisfactory to Management Company (a "Substitute Index") then prepared and published by an agency of the Government of the United States, appropriately adjusted for changes in the manner in which such index is prepared and/or year upon which such index is based. Any dispute regarding the selection of the Substitute Index or the adjustments to be made thereto shall be settled by arbitration in accordance with Section 20.13. Except as otherwise expressly stated herein, whenever a number or amount is required to be "adjusted by the GDP Deflator", or similar terminology, such adjustment shall be equal to the percentage increase or decrease (except that, for purposes of this Agreement, the GDP Deflator shall not be decreased below its level as of the Effective Date) in the GDP Deflator which is issued for the month in which such adjustment is to be made (or, if the GDP Deflator for such month is not yet publicly available, the GDP Deflator for the most recent month for which the GDP Deflator is publicly available) as compared to the GDP Deflator which was issued for the month in which the Effective Date occurred. -13- "Gross Revenues" shall mean, for each Fiscal Year during the Term of this -------------- Agreement, all revenues and receipts of every kind derived from operating the Hotel and parts thereof, including, but not limited to: income (from both cash and credit transactions), before commissions and discounts for prompt or cash payments, from rental of rooms, stores, offices, meeting, exhibit or sales space of every kind; license, lease and concession fees and rentals (not including gross receipts of licensees, lessees and concessionaires); income from vending machines; health club membership fees; food and beverage sales; wholesale and retail sales of merchandise (other than proceeds from the sale of FF&E no longer necessary to the operation of the Hotel, which shall be deposited in the FF&E Reserve as set forth in Section 8.02.D hereof); service charges, to the extent not distributed to the employees at the Hotel as gratuities; and proceeds, if any, from business interruption or other loss of income insurance; provided, however, that Gross Revenues shall not include the following: gratuities to Hotel employees; federal, state or municipal excise, sales, use or similar taxes collected directly from patrons or guests or included as part of the sales price of any goods or services; insurance proceeds (other than proceeds from business interruption or other loss of income insurance); condemnation proceeds (other than for a temporary taking); any proceeds from any Sale of the Hotel or from the refinancing of any debt encumbering the Hotel; proceeds from the disposition of FF&E no longer -14- necessary for the operation of the Hotel; or interest which accrues on amounts deposited in either the FF&E Reserve or any escrow accounts which are established in accordance with Section 13.01.C; or Cure Payments. "Ground Lease Rental" shall mean the annual rental, as of the Effective ------------------- Date, under the Existing Ground Lease. "Ground Lessor" shall mean the landlord under the Existing Ground Lease. ------------- "Hazardous Materials" shall mean and include any substance or material ------------------- containing one or more of any of the following: "hazardous material", "hazardous waste", "hazardous substance", "regulated substance", "petroleum", "pollutant", "contaminant", or "asbestos" as such terms are defined in any applicable Environmental Law in such concentration(s) or amount(s) as may impose clean-up, removal, monitoring or other responsibility under the Environmental Laws, as the same may be amended from time to time, or which may present a significant risk of harm to guests, invitees or employees of the Hotel. "Holder" shall mean any holder, from time to time, of any Secured Loan. ------ "Hotel" shall mean the hotel, containing approximately the number of guest ----- rooms which are set forth on Exhibit "A-1" hereto, which Owner owns at the location specified in the Recitals; the term "Hotel" shall include the Site, the improvements built -15- thereon, and all FF&E, Fixed Asset Supplies and Inventories installed therein. "Hotel Retention" shall have the meaning set forth in Section 12.03 hereof. --------------- "Impositions" shall mean all real estate and personal property taxes, ----------- levies, assessments and similar charges (other than those which are specifically excluded pursuant to Section 13.01.B) including, without limitation, the following: all water, sewer or similar fees, rates, charges, excises or levies; license fees; permit fees; inspection fees and other authorization fees and other governmental charges of any kind or nature whatsoever, whether general or special, ordinary or extraordinary, foreseen or unforeseen, or hereinafter levied or assessed of every character (including all interest and penalties thereon), which at any time during or in respect of the Term of this Agreement may be assessed, levied, confirmed or imposed on Owner with respect to the Hotel or otherwise in respect of or be a lien upon the Hotel. Impositions shall not include any income or franchise taxes payable by Owner or Management Company. Impositions shall include any taxes, levies, assessments and similar charges which may be enacted by the applicable governmental authority in lieu of, or in complete or partial substitution for, Impositions. "Incentive Management Fee" shall mean, for each Fiscal Year, during the ------------------------ Term of this Agreement the payments which shall be made to Management Company, as compensation (in addition to the Base -16- Management Fee and Fairfield Inn System Fee) to Management Company for its services under this Agreement, in the amount of fifty percent (50%) of the Available Cash Flow in each Fiscal Year (or portion thereof); provided, however, that the cumulative Incentive Management Fee received by Management Company, from the Effective Date through any given point in time during the Term of this Agreement, shall not exceed twenty percent (20%) of the cumulative Operating Profit from the Effective Date through such point in time; provided further, however, that in no event shall the aforesaid cumulative limitation require Management Company to refund to Owner any Incentive Management Fees which were paid in a previous Fiscal Year and which were within such limitation as of the time when they were paid. "Initial Term" shall have the meaning set forth in Section 4.01. ------------ "Intellectual Property" shall mean: (i) all Software; and (ii) all --------------------- manuals, brochures and directives issued by Management Company to its employees at the Hotel regarding the procedures and techniques to be used in operating the Hotel. "Interest Rate" shall mean an annual rate of interest equal to the Prime ------------- Rate (as adjusted from time to time) plus three hundred (300) basis points; provided, however that in no event shall the Interest Rate exceed the maximum rate which is permitted under applicable Legal Requirements. -17- "Inventories" shall mean "Inventories" as defined in the Uniform System of ----------- Accounts, such as provisions in storerooms, refrigerators, pantries and kitchens; beverages in wine cellars and bars; other merchandise intended for sale; fuel; mechanical supplies; stationery; and other expensed supplies and similar items. "Legal Requirements" shall mean any federal, state or local law, code, ------------------ rule, ordinance, regulation or order of any governmental authority or agency having jurisdiction over the business or operation of the Hotel or the matters which are the subject of this Agreement, including, without limitation, the following: (i) any building, zoning or use laws, ordinances, regulations or orders, and (ii) Environmental Laws. "License" shall mean any license, permit, decree, act, order, authorization ------- or other approval or instrument which is necessary in order to operate the Hotel in accordance with Legal Requirements and pursuant to the Fairfield Inn System Standards and otherwise in accordance with this Agreement. "Litigation" shall mean: (i) any cause of action commenced in a federal, ---------- state or local court; and (ii) any claim brought before an administrative agency or body (for example, without limitation, employment discrimination claims). "Loan Priority Basis" shall mean the sum total, as of any given point in ------------------- time during the Term, of (i) the amount shown on Exhibit "A"-1; plus (ii) any Additional Invested Capital expended -18- by Owner, less the amount of any condemnation award received by Owner and not applied to restoration of the Hotel pursuant to Section 15.02.B.. "Management Analysis Report" shall mean a report which, if required -------------------------- pursuant to Section 9.01.B, shall be prepared by Management Company and delivered to Owner (at the time of the delivery of the Annual Operating Statement), which shall include a description regarding the preceding Fiscal Year, of: (i) the Hotel's operating performance, including significant variations from the Annual Operating Projection; (ii) an analysis of any significant variation of the actual average daily rate and occupancy from what was set forth in the Annual Operating Projection; (iii) a review of the competitive hotel market; (iv) a description of any significant promotional or other marketing programs in which the Hotel participated, which were not anticipated as part of the Annual Operating Projection for the preceding Fiscal Year; (v) a calculation of the Revenue Index, and Operating Profit less Ground Lease Rental, if any, compared to the Performance Termination Threshold; (vi) such other supplementary information as shall be reasonably necessary to an understanding of the financial results of the Hotel; and (vii) a reasonably detailed report setting forth the components of Chain Services, the amounts billed for each such component during the Fiscal Year in question and the method of allocation for each such component, but only if Owner requests such a report in writing not later than the date -19- which is thirty days (30) prior to the date upon which Management Company must deliver the Annual Operating Statement to Owner. "Management Company" shall have the meaning set forth in the Preamble. ------------------ "Management Fees" shall mean the Fairfield Inn System Fee, the Base --------------- Management Fee, Deferred Contingent Base Management Fees and the Incentive Management Fee. "Marriott" shall mean Marriott International, Inc., a Delaware corporation -------- having an address at 10400 Fernwood Road, Bethesda, Maryland 20817. "Mortgage" shall mean any security instrument which encumbers real -------- property, including, without limitation, mortgages, deeds of trust, security deeds and similar instruments. "Net Operating Profit" shall mean the greater of: (i) the excess, if any, -------------------- of Operating Profit over Owner's Priority; or (ii) zero (0). "Non-Disturbance Agreement" shall mean an agreement, in recordable form in ------------------------- the jurisdiction in which the Hotel is located, executed and delivered by a Holder (which agreement shall by its terms be binding upon all Subsequent Owners), for the benefit of Management Company, pursuant to which, in the event such Holder or any Subsequent Owner comes into possession of or acquires title to the Hotel either at or following a Foreclosure, such Holder and all Subsequent Owners shall (x) recognize Management Company's rights under this Agreement, and (y) shall not name Management Company as -20- a party in any Foreclosure action or proceeding, and (z) shall not disturb Management Company in its right to continue to manage the Hotel pursuant to this Agreement; provided, however, that at such time, (i) this Agreement has not expired or otherwise been earlier terminated in accordance with its terms; (ii) there are no outstanding Events of Default by Management Company, and (iii) no material event has occurred and no material condition exists which, after notice or the passage of time or both, would entitle Owner to terminate this Agreement. "Operating Accounts" shall have the meaning set forth in Section 9.02. ------------------ "Operating Loss" shall mean a negative Operating Profit. -------------- "Operating Profit" shall mean, in each Fiscal Year during the Term of this ---------------- Agreement, the excess of Gross Revenues over the following deductions ("Deductions") incurred by Management Company or its Affiliates (or, in the case of any Owner Deductions, by Owner) in operating the Hotel: 1. The cost of sales including, without limitation, salaries, wages, employee benefits, Employee Claims (except to the extent specifically set forth to the contrary in Section 14.01.C or 14.01.D), payroll taxes and other costs related to Hotel employees (the foregoing costs shall not include salaries and other employee costs of executive personnel of Manager who do not work at the Hotel on a regular basis except that the foregoing costs shall include the allocable portion of the salary and other employee -21- costs of area or regional personnel the cost of whom are not included within the definitions of Chain Services or System Services assigned to a "cluster" of hotels which includes the Hotel; provided, however, that such allocable portion of salary and employee costs shall be a Deduction only to the extent that they relate directly to the Hotel); 2. Departmental expenses; administrative and general expenses; the cost of Hotel advertising, marketing and business promotion; all utility costs including but not limited to the cost of heat, light, power and water; and the cost of routine repairs, maintenance and minor alterations which are treated as Deductions under Section 8.01; 3. The cost of Inventories and Fixed Asset Supplies consumed in the operation of the Hotel; 4. A reasonable reserve for uncollectible accounts receivable as determined by Management Company; 5. All reasonable costs and fees of independent professionals or other third parties who are retained by Management Company to perform services required or permitted hereunder; provided that Management Company will notify Owner at least thirty (30) days in advance of any proposed expenditure under this paragraph 5 which is in excess of Twenty-five Thousand Dollars ($25,000.00), subject to adjustment by the GDP Deflator on each anniversary of the Effective Date, and which was not specifically identified in the Annual Operating Projection, and Management -22- Company shall consider in good faith any comments which Owner may have with respect to such proposed expenditure; and provided, further, that if such expenditure involves immediately-needed repair work to the Hotel or if immediate action is otherwise required, the above-described requirement regarding thirty (30) days' prior notice shall be modified to require whatever notice period is reasonable under the circumstances (including notification after the fact, if necessary); 6. The reasonable cost and expense of technical consultants and operational experts who are employees of Management Company or one of its Affiliates, and who perform specialized services in connection with non-routine Hotel work; provided, however, that the costs and expenses so incurred shall only be Deductions to the extent such costs and expenses are reasonable and competitively priced, as compared to similar work done by outside consultants or experts; and provided, further, that Management Company will notify Owner at least thirty (30) days in advance of any proposed expenditure under this paragraph 6 which is in excess of Twenty-five Thousand Dollars ($25,000), subject to adjustment by the GDP Deflator on each anniversary of the Effective Date, and which was not specifically identified in the Annual Operating Projection, and Management Company shall consider in good faith any comments which Owner may have with respect to such proposed expenditure; and provided, further, that if immediate action is otherwise in the best interests of the Hotel required, the above- -23- described requirement regarding thirty (30) days' prior notice shall be modified to require whatever notice period is reasonable under the circumstances (including notification after the fact, if necessary); 7. The Fairfield Inn System Fee; 8. Subject to Section 11.03.B, the Hotel's pro rata share of costs and expenses incurred by Management Company (or its Affiliate) in providing Chain Services; 9. The Hotel's pro rata share of costs and expenses incurred in connection with sales, advertising, marketing and/or promotional programs developed for or within the Fairfield Inn System, such as (without limitation) the INNsiders Club, where such costs and expenses are not deducted as either departmental expenses under paragraph 2 above or as Chain Services under paragraph 8 above; 10. Insurance costs and expenses as provided in Section 12.04.B; 11. Taxes, if any, payable by or assessed against Management Company related to this Agreement or to Management Company's operation of the Hotel (exclusive of Management Company's income taxes or franchise taxes) and all Impositions assessed against the Hotel; 12. Amounts which are required to be transferred into the FF&E Reserve in accordance with the provisions of Section 8.02; 13. Lease payments pursuant to leases of Shuttle -24- Vehicles and of Communications, Computer and Office Equipment (to the extent Management Company has not elected to make such payments from the FF&E Reserve); 14. All sums charged to the Hotel for room reservations obtained for the Hotel through the reservation system used by Management Company, but in no event in excess of the amount charged, on a per reservation basis for similarly computed activity to other Hotels in the Fairfield Inn System using such reservation system. 15. The reimbursement to Owner of the amount of any Owner Deductions; 16. The payment to Management Company of the cost of preparing the Management Analysis Report pursuant to Section 9.01.B; and 17. Such other costs and expenses incurred by Management Company or its Affiliates (not including the costs and expenses of providing the Central Office Services) as are specifically provided for elsewhere in this Agreement or are otherwise reasonably necessary for the proper and efficient operation of the Hotel (including, without limitation, the costs and expenses of all functions described in Section 2.03, to the extent such costs and expenses are not already treated as Deductions elsewhere in this definition of Operating Profit, unless, and to the extent that, any such costs and expenses are specifically stated not to be Deductions under any provision of this Agreement). -25- The term "Deductions" shall not include (i) debt service payments pursuant to any Secured Loan, nor (ii) rental payments pursuant to any ground lease of the Site; both of the foregoing shall be paid by Owner from its own funds, and not from Gross Revenues nor from the FF&E Reserve. In no event shall the costs or expenses of providing the Central Office Services be treated as Deductions, or otherwise be reimbursed out of Gross Revenues; it being the intent of the parties that all such costs and expenses are to be paid by Management Company (or its Affiliates) from its own funds. "Owner" shall have the meaning set forth in the Preamble. Subject to ----- compliance with Articles XVIII and XIX of this Agreement, the term "Owner" shall include all successors and assigns of the entity identified as the "Owner" in the Preamble. "Owner Deductions" shall mean amounts paid by Owner with respect to: (i) ---------------- premiums for the insurance policies described in Section 12.05; and (ii) reasonable costs of any negotiations or Litigation with respect to any contest of Impositions, as described in Section 13.01.A; provided, however, that to the extent Owner spends in excess of Five Thousand Dollars ($5,000.00) with respect to any contest of Impositions and has not received Management Company's consent as provided in Section 13.01.A, then any amount in excess of such Five Thousand Dollars ($5,000.00) or such greater amount as may be approved by Management Company, shall not be considered an Owner Deduction. Except as specifically set forth in -26- Section 8.02.F.2, the amount of any Owner Deductions paid by Owner shall be reimbursed to Owner (as a Deduction) in the Fiscal Year in which they were paid. Owner shall give Management Company prompt notice of any amounts it has paid which constitute "Owner Deductions" together with such evidence of payments as Management Company may reasonably require. "Owner's Distribution" shall mean, with respect to each Fiscal Year or -------------------- portion thereof during the Term of this Agreement, funds distributed to Owner in accordance with the provisions of Section 5.02 hereof which shall equal Operating Profit less any Base Management Fee, Deferred Contingent Base Management Fees and Incentive Management Fees paid to Management Company. "Owner's Priority" shall mean, with respect to each Fiscal Year (prorated ---------------- for any partial Fiscal Years) during the Term of this Agreement, a dollar amount equal to ten percent (10%) of the Priority Basis for that Fiscal Year. If the Hotel has an Existing Ground Lease, the annual rental payments for such - ------------------------------------------------------------------------------ Fiscal Year (prorated for any partial Fiscal Year) shall be added to the Owner's - -------------------------------------------------------------------------------- Priority. - -------- "Performance Termination Threshold" shall mean, with respect to each full --------------------------------- Fiscal Year during the Term of this Agreement, the dollar amount set forth on Exhibit "A-1", plus eight percent (8%) of any Additional Invested Capital expended by Owner pursuant to clause (ii) of the definition of the Priority Basis; provided, however, that the aforesaid dollar amount shall be adjusted, as of -27- the tenth (10th) anniversary of the Effective Date, in an amount equal to seventy-five percent (75%) of the percentage change in the GDP Deflator between the Effective Date and the tenth (10th) anniversary of the Effective Date; provided that, in no event will the Performance Termination Threshold be lower than it is as of the Effective Date and provided further, that in calculating the aforesaid change in the GDP Deflator during such period of time, both: (i) the two (2) years having the highest annual rates of change in the GDP Deflator during such period; and (ii) the two (2) years having the lowest annual rates of change in the GDP Deflator during such period, shall be ignored, and such percentage change in the GDP Deflator between the Effective Date and the tenth (10th) anniversary of the Effective Date shall be recalculated, for purposes of this Agreement, using as the rate of change in the GDP Deflator for each of such four (4) excluded years (i.e., those years described in clauses (i) and (ii), above) the average annual rate of change in the GDP Deflator during the non-excluded years; and provided further that, to the extent that certain portions of the Performance Termination Threshold, as of immediately prior to such tenth (10th) anniversary adjustment, reflect expenditures which qualify as Additional Invested Capital, the aforesaid GDP Deflator adjustment shall be calculated with respect to such portions by using, as the base, not the GDP Deflator as of the Effective Date, but rather the GDP Deflator as of either the date -28- of such expenditure or (if construction is involved) the date on which the items in question were substantially completed. "Post-Foreclosure Decision Date" shall have the meaning set forth in ------------------------------ Section 6.06. "Prime Rate" shall mean the "prime rate" as published in the "Money Rates" ---------- section of The Wall Street Journal; however, if such rate is, at any time during ----------------------- the Term, no longer so published, the term "Prime Rate" shall mean the average of the prime interest rates which are announced, from time to time, by the three (3) largest banks (by assets) headquartered in the United States which publish a "prime rate." "Priority Basis" shall mean the sum total, as of any given point in time -------------- during the Term, of: (i) the dollar amount shown on Exhibit "A-1"; plus (ii) any Additional Invested Capital expended by Owner; provided that each expenditure of Additional Invested Capital shall be added to the Priority Basis at such date or dates as the expenditure occurred, taking into consideration at what point (or points) during such Fiscal Year such expenditure occurred; less (iii) the amount of any condemnation award received by Owner and not applied to restoration of the Hotel pursuant to Section 15.02.B. "Proprietary Marks" shall mean all trademarks, trade names, symbols, logos, ----------------- slogans, designs, insignia, emblems, devices, service marks and distinctive designs of buildings and signs, or combinations thereof, which are used to identify hotels in the -29- Fairfield Inn System. The names "Marriott", "Fairfield Inn" and "INNsiders Club", and any of the foregoing used in conjunction with other words or names, are examples, without limitation of Proprietary Marks. The term "Proprietary Marks" shall include all present and future Proprietary Marks, whether they are now or hereafter owned by Management Company or one of its Affiliates, and whether or not they are registered under the laws of the United States or any other country. The term "Proprietary Marks" shall also include all trade names, trademarks, symbols, logos, designs, etc. which are used in connection with the operation of the Hotel during the Term (such as, without limitation, the names of the restaurants and lounges). Notwithstanding the foregoing, those trade names, trademarks, symbols, logos, designs, etc., which are specifically set forth on Exhibit "E" hereto shall be deemed to be "Proprietary Marks" only for so long as this Agreement is in effect, and such Proprietary Marks shall revert to the exclusive control of Owner as of the date of Termination. "Proprietary Signage" shall mean any signage used in connection with the ------------------- Hotel (including both interior and exterior signage, and including billboards and other signage not located on the Site) which contains one or more Proprietary Marks; any signage which contains the word "Marriott" or "Fairfield Inn" shall automatically be deemed to be Proprietary Signage. "Prospectus" shall have the meaning set forth in Section 20.05. ---------- -30- "Qualified Lender" shall mean any Holder, from time to time, of any ---------------- Qualified Loan with respect to which Management Company has received a written notice (pursuant to Section 20.09 of this Agreement) stating: (i) the name and address of such Holder; and (ii) that such Holder is a "Qualified Lender" pursuant to the terms of this Agreement. "Qualified Loan" shall mean any Secured Loan in which the initial principal -------------- amount, as of the date such Secured Loan is incurred, when added to the current principal balance of all existing Secured Loans as of that date, is less than or equal to the greater of the following: (i) Seventy percent (70%) of the Loan Priority Basis; or (ii) the result obtained by (a) dividing the Operating Profit for the thirteen (13) most recent full Accounting Periods by the Coverage Ratio; then, (b) multiplying the result of clause (a) by the Capitalization Multiple; or (iii) the existing balance of any Secured Loans encumbering the Hotel immediately prior to the date of the incurrence of such Qualified Loan, plus commercially reasonable Transaction Costs associated with such refinancing, up to an amount equal to four percent (4%) of the principal amount of such Qualified Loan. In addition, regardless of whether or not the above test set forth in clauses (i), (ii) and (iii) is satisfied, the existing (as of the Effective Date) balance of any Secured Loan which is secured by any Existing Mortgage shall be deemed to be a "Qualified Loan." "Qualified Loan Acceleration" shall mean the acceleration of the --------------------------- indebtedness incurred pursuant to any Qualified Loan, as a -31- result of a default under the terms and conditions of such Qualified Loan. "Renewal Terms" shall have the meaning set forth in Section 4.01. ------------- "Restricted Area" shall mean that area which is shown on the map attached --------------- hereto as Exhibit "D", as described in the narrative which is set forth in Exhibit "D-1". "Restricted Hotel" shall mean any hotel whose size, facilities and market ---------------- positioning are such that, if such hotel had been operated by Management Company or one of its Affiliates as of the Effective Date it would have been operated as a member of the Fairfield Inn System (that is, as a limited service hotel, as opposed to full service hotel or one of the other limited service brands also operated by Affiliates of Management Company i.e. Residence Inn or Courtyard by Marriott. The term "Restricted Hotel" shall not include any one or more of the following: (i) any existing (as of the Effective Date) member of the Fairfield Inn System which is within the Restricted Area; (ii) any Courtyard by Marriott (or other similar moderate-price lodging product) or any Residence Inn by Marriott (or other similar extended-stay lodging product); (iii) any full service, suite or resort hotel; (iv) any hotel or hotels which are members of a chain of hotels (provided that such chain has a minimum of four (4) or more hotels in operation), all or substantially all (but in no event less than four (4) hotels) of which is acquired by, or merged with, or -32- franchised by or joined through marketing agreement with, Management Company or one of its Affiliates (or the operation of which is transferred to Management Company or one of its Affiliates); (v) any future lodging product developed by Management Company or one of its Affiliates which is not a lodging product which would have been included within the Fairfield Inn System, as such system existed as of the Effective Date; or (vi) any existing non-Marriott hotel within the Restricted Area which is specifically designated on Exhibit D-1 as not being a Restricted Hotel. "Revenue Data Publication" shall mean Smith's STAR Report, a monthly ------------------------ publication distributed by Smith Travel Research, Inc. of Gallatin, Tennessee, or an alternative source, reasonably satisfactory to both parties, of data regarding the Revenue Per Room of hotels in the general trade area of the Hotel. The "competitive set" for the Hotel shall be determined (with periodic adjustments) by Management Company, subject to Owner's approval (such approval not to be unreasonably withheld). If such Smith's STAR Report is discontinued in the future, or ceases (in the reasonable opinion of either Owner or Management Company) to be a satisfactory source of data regarding the Revenue Per Room of various hotels in the general trade area of the Hotel, Management Company shall select an alternative source, subject to Owner's approval (such approval not to be unreasonably withheld). If the parties fail to agree on either such competitive set or such alternative source, as the case may be, within a reasonable period -33- of time, the matter shall be resolved by arbitration pursuant to Section 20.13. "Revenue Index" shall mean that fraction which is equal to (a) the Revenue ------------- Per Room for the Hotel, divided by (b) the average Revenue Per Room for the hotels in the Hotel's competitive set (including the Hotel), as set forth in the Revenue Data Publication. "Revenue Index Threshold" shall mean the number set forth on Exhibit "A-1" ----------------------- hereto. However, if the entry of a new hotel into the Hotel's competitive set (or the removal of a hotel from such competitive set) causes significant variations in the Revenue Index which do not reflect the Hotel's true position in the relevant market, appropriate adjustments shall be made to the Revenue Index Threshold by mutual consent of Owner and Management Company (neither such consent to be unreasonably withheld). "Revenue Per Room" shall mean, (i) the term "revenue per room" as defined ---------------- by the Revenue Data Publication; or (ii) if the Revenue Data Publication is no longer being used (as more particularly set forth in the definition of "Revenue Data Publication"), the aggregate gross room revenues of the hotel in question for a given period of time divided by the total room nights for such period. If clause (ii) of the preceding sentence is being used, a "room" shall be a hotel guest room which is keyed as a single unit, and shall include rooms which are temporarily unavailable due to: (i) maintenance or (ii) ongoing renovation work. -34- "Sale/Leaseback Transaction" shall have the meaning set forth in Section -------------------------- 6.10. "Sale of the Hotel" shall mean any sale, assignment, transfer or other ----------------- disposition, for value or otherwise, voluntary or involuntary, of Owner's title to the Hotel or the Site (either fee or leasehold title, as the case may be), but shall not include a collateral assignment intended to provide security for a loan. For purposes of this Agreement, a "Sale of the Hotel" shall also include a lease (or sublease) of the entire Hotel or Site. The phrase "Sale of the Hotel" shall also include any sale, transfer, or other disposition, for value or otherwise, in a single transaction or a series of related transactions, of the controlling interest in Owner. If Owner is a corporation, the phrase "controlling interest" shall mean the right to exercise, directly or indirectly, fifty percent (50%) or more of the voting rights attributable to the shares of Owner (through ownership of such shares or by contract). If Owner is not a corporation, the phrase "controlling interest" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of Owner. Notwithstanding the foregoing, the term "Sale of the Hotel" shall not include any sale, assignment, transfer or other disposition of the Hotel or the Site by Owner to an Affiliate of Owner. "Second Notice" shall have the meaning set forth in Section 6.02. ------------- -35- "Secured Loan" shall mean and include: (i) any indebtedness secured by a ------------ Mortgage encumbering the Hotel or all or any part of Owner's interest therein; and (ii) all amendments, modifications, supplements and extensions of any such Mortgage. "Settlement Threshold Amount" shall mean the greater of (i) One Hundred --------------------------- Thousand Dollars ($100,000) (as adjusted by the GDP Deflator); or (ii) a dollar amount (to be re-determined whenever reasonably necessary) equal to the highest amount paid in a representative sampling of Employee Claims, which have been settled within the preceding twelve (12) months where each of such settlements can be reasonably characterized as being (i) within the normal course of business at the Hotel, and (ii) within the range of similar settlements at other hotels comparable to the Hotel. Any dispute between the parties as to the appropriate amount under clause (ii) of the preceding sentence shall be submitted to arbitration under Section 20.13. "Shuttle Vehicles" shall mean any car, van, bus or similar motor vehicle ---------------- used primarily for the purpose of transporting Hotel guests. "Site" shall mean the parcel or parcels of land described in Exhibit "A" ---- attached hereto. "Soft Goods" shall mean all fabric, textile and flexible plastic products ---------- (not including items which are classified as "Fixed Asset Supplies" under the Uniform System of Accounts)which are used in furnishing the Hotel, including, without limitation: -36- carpeting, drapes, bedspreads, wall and floor coverings, mats, shower curtains and similar items. "Software" shall mean all computer software and accompanying documentation -------- (including all future upgrades, enhancements, additions, substitutions and modifications thereof), other than computer software which is commercially available, which are used by Management Company in connection with the property management system, the reservation system and all future electronic systems developed by Management Company for use in the Hotel. "Subsequent Owner" shall mean any individual or entity which acquires title ---------------- to or possession of the Hotel at or through a Foreclosure. "Term" shall mean the Initial Term plus all Renewal Terms. ---- "Termination" shall mean the expiration or sooner cessation of this ----------- Agreement. "Transaction Costs" shall mean, with respect to the incurring of any ----------------- Secured Loan, all normal transaction costs (to the extent actually incurred) including, without limitation, the following: state and local transfer taxes; escrow fees; recording costs; Mortgage recording taxes; costs of any survey required by the Holder; reasonable fees of the Holder's outside attorneys and accountants; appraisal fees; title insurance premiums; financing costs (including "points"); reasonable attorneys' fees of Owner in connection with such Secured Loan; environmental inspection, testing and reporting fees to the extent required by the Holder; -37- and brokerage commissions (provided that no such brokerage commissions shall be recognized as "Transaction Costs" hereunder if they are made to a person or entity affiliated with Owner, to the extent (if any) that such payments exceed the normal customary amounts). "Uniform System of Accounts" shall mean the Uniform System of Accounts for -------------------------- Hotels, Eighth Revised Edition, 1986, as published by the Hotel Association of New York City, Inc. "Working Capital" shall mean assets which are used in the day-to-day --------------- operation of the Hotel's business, including, without limitation, amounts kept in petty cash funds, amounts deposited in operating bank accounts, receivables, prepaid expenses and funds expended to purchase Inventories, less accounts payable and accrued current liabilities. END OF ARTICLE I -38- ARTICLE II APPOINTMENT OF MANAGEMENT COMPANY --------------------------------- 2.01 Appointment ----------- Owner hereby appoints and employs Management Company as Owner's exclusive agent to supervise, direct and control the management and operation of the Hotel for the Term provided in Article IV. Management Company accepts said appointment and agrees to manage the Hotel during the Term of this Agreement in accordance with the terms and conditions hereinafter set forth. The performance of all activities by Management Company hereunder shall be for the account of Owner. 2.02 Delegation of Authority ----------------------- Except as otherwise specifically set forth in this Agreement, Hotel operations shall be under the exclusive supervision and control of Management Company which, except as otherwise specifically provided in this Agreement, shall be responsible for the proper and efficient operation of the Hotel. Management Company shall have discretion and control, free from interference, interruption or disturbance, but in all respects subject to the provisions of this Agreement, in all matters relating to management and operation of the Hotel, including, without limitation, the following: charges for rooms and commercial space; credit policies; food and beverage prices and services; employment -39- policies; granting of leases, parking services, Licenses and concessions for shops and agencies within the Hotel (provided that the term of any such lease, License or concession shall not exceed the Term of this Agreement; and provided further that Owner's consent shall be required prior to the execution by Management Company of any such lease, License or concession which (i) has a term of more than five (5) years; or (ii) involves more than one thousand (1,000) square feet of space within the Hotel); receipt, holding and disbursement of funds; maintenance of bank accounts; procurement of Inventories, supplies and services; participation in marketing, advertising plans, promotion and publicity; and, generally, all activities necessary for operation of the Hotel. 2.03 Operational Standards --------------------- In accordance with the Fairfield Inn System Standards and the other terms of this Agreement, Management Company shall, in connection with the Hotel, perform each of the following functions (provided that in all cases, except as otherwise specifically set forth in this Agreement, the costs and expenses of performing such functions shall be Deductions): A. Obtain and keep in full force and effect, either in its own name on behalf of Owner or in Owner's name, as may be required by the Legal Requirements, any and all Licenses necessary for the operation of the Hotel, to the extent the same is within the control of Management Company (or, if same is not within the -40- control of Management Company, Management Company shall use all due diligence and reasonable efforts to obtain and keep same in full force and effect). B. Recruit, employ, supervise, direct and (when appropriate) discharge the employees at the Hotel. C. Establish and revise, as necessary, administrative policies and procedures, including policies and procedures for the control of revenue and expenditures, for the purchasing of supplies and services, for the control of credit, and for the scheduling of maintenance, and verify that the foregoing procedures are operating in a sound manner. D. Plan, execute, and supervise repairs and maintenance at the Hotel. E. Procure (as agent for Owner) all Fixed Asset Supplies and Inventories. F. Maintain the Operating Accounts. G. Prepare and deliver Accounting Period Statements, Annual Operating Statements, Annual Operating Projections, Building Estimates, FF&E Estimates, and such other budgets and reports as are required by this Agreement. H. Establish prices, rates and charges for services provided in the Hotel, including room rates. I. As agent for Owner, negotiate and enter into leases, concessions and Licenses for shops and other facilities within the Hotel. -41- J. Administer the leases, concessions and Licenses for shops and other facilities within the Hotel (whether entered into pursuant to subsection I, above, or otherwise). K. Provide the Central Office Services and the Chain Services. L. Provide, or cause to be provided, risk management services relating to the types of insurance required to be obtained or provided by Management Company under this Agreement, provided that the costs and expenses of providing such services are to be paid as described in Section 12.04.B. M. Reasonably cooperate with Owner concerning (i) disputes with any Holder regarding the Hotel, (ii) contests of Impositions and Legal Requirements, and (iii) adjustments of insurance claims and condemnation awards involving the Hotel. N. Reasonably cooperate (provided that Management Company shall not, except as otherwise specifically set forth in Section 6.01, be obligated to enter into any amendments of this Agreement) with Owner in any attempt(s) by Owner to effectuate a Sale of the Hotel (provided that nothing herein shall affect the provisions of Section 20.05), or to obtain any Secured Loan. If given reasonable notice, such cooperation shall include, without limitation: (i) answering any reasonable questions by prospective purchasers and Holders; (ii) preparing lists and schedules of leases, concessions, FF&E, Fixed Asset Supplies, Inventories, and similar items (but specifically excluding customer lists); and (iii) making such -42- certifications and representations to Owner, to such purchasers and to such Holders, regarding the Hotel and the operation thereof, as Owner may reasonably request (taking into account the extent of Management Company's control and responsibility provided for hereunder). Owner shall promptly reimburse Management Company, from its own funds and not as a Deduction, for the reasonable costs and expenses incurred by Management Company in connection with any actions necessary to comply with the requirements of this Section 2.03.N, provided that such actions are not otherwise required under other provisions of this Agreement. O. Arrange for and supervise public relations and advertising, and prepare annual marketing plans. P. Endeavor to manage the timing of expenditures to replenish Inventories, Fixed Asset Supplies, payments on accounts payable and collections of accounts receivable, so as to avoid or minimize any cash deficits with respect to Hotel operations, which deficits would otherwise require additional funding of Working Capital by Owner. Q. Comply with all provisions in the Existing Ground Lease and in any Existing Mortgages which are by their terms applicable to the operation of the Hotel; provided, however, that all practices and procedures used by Management Company in the operation of the Hotel as of the Effective Date shall be deemed to be in compliance with the Existing Ground Lease and all Existing Mortgages; and provided further, that if either the Ground Lessor -43- or any Holder under an Existing Mortgage shall, from time to time, notify Management Company that it has determined that certain practices and procedures which are used by Management Company in the operation of the Hotel are not in compliance with the provisions of the Existing Ground Lease or such Existing Mortgage (as the case may be), Management Company shall promptly alter such practices and procedures to ensure such compliance; and provided further, that if such compliance would require work by Management Company which is beyond the normal course of Hotel operations, or would impose additional financial burdens on the Hotel which are beyond the normal course of Hotel operations, Owner (from its own funds, not as a Deduction) shall compensate Management Company for such work and such additional burdens. 2.04 Limitations on Authority ------------------------ A. Notwithstanding anything in Section 2.02 or elsewhere in this Agreement to the contrary (unless otherwise stated in this Section 2.04), and in addition to the various other provisions of this Agreement which prohibit Management Company from taking certain actions or which allow certain actions only if Owner's consent thereto has been obtained, Management Company shall not, without the prior written approval of Owner, which approval Owner may withhold in its sole discretion, perform any of the following -44- actions in connection with the Hotel and on behalf of or burdening Owner: 1. Acquiring any land or interest therein; 2. Acquiring any capital assets or interest therein except (i) items in the approved Building Estimate, and (ii) FF& E, Fixed Asset Supplies and Inventories (to the extent the same constitute capital assets) in the ordinary course of business as expressly provided for in this Agreement; 3. Financing, refinancing or mortgaging of any portion of the Hotel or the revenue due to Owner therefrom; 4. Selling (other than dispositions of FF&E, Fixed Asset Supplies and Inventories in the ordinary course of business as expressly provided for in this Agreement), leasing (other than as expressly provided for in this Agreement, including without limitation, Section 2.02 of this Agreement), or other transferring of, or the pledging or placing of any lien or encumbrance on, any part of the Hotel; 5. In the event of a total or partial condemnation, consenting to any award or participating in any condemnation proceeding, except as expressly provided for in this Agreement; 6. Entering into, modifying or terminating any lease, concession or License, except to the extent permitted under Section 2.02; 7. Adjusting any claim or settling any Litigation which (a) is not covered by any of the insurance policies described in -45- Article XII and is not an Employee Claim, and which would result in a Deduction or payment in excess of Five Hundred Thousand Dollars ($500,000) in any Fiscal Year, as adjusted by the GDP Deflator, or (b) would impose on Owner any material liability or obligation other than the payment of money, or would require Owner to make any material admission; or 8. Adjusting any claim, under applicable property insurance policies, regarding injury or damage to the Hotel or its contents, where the estimated cost of restoration is in excess of One Million Dollars ($1,000,000), as adjusted by the GDP Deflator. 2.05 Covenants, Conditions or Restrictions ------------------------------------- A. As of the Effective Date, there are existing covenants, conditions, restrictions and/or agreements, including reciprocal easements or cost-sharing arrangements (all of the foregoing types of encumbrances on the Hotel, or agreements relating to the Hotel, whether existing as of the Effective Date or not, shall be collectively referred to as "CC&R's"; those CC&R's which are in existence as of the Effective Date shall be referred to in this Agreement as "Existing CC&R's"). Management Company hereby gives its consent to all Existing CC&R's. Except as otherwise specifically set forth to the contrary in Exhibit "F" hereto, all costs, expenses and charges which are imposed on the Hotel under the Existing CC&R's shall be paid from Gross Revenues as Deductions. Those certain costs, expenses and charges which are -46- described on Exhibit "F" hereto as "capital charges" shall be paid by Owner, from its own funds, and all such payments shall be treated for purposes of this Agreement as Additional Invested Capital expended by Owner. B. CC&R's which are entered into, or become encumbrances on the Hotel and/or the Site, after the Effective Date shall be referred to in this Agreement as "Future CC&R's". Owner agrees that it will give Management Company, for Management Company's prior approval, written notice of its intention to execute any Future CC&R's, such notice to be reasonably in advance of the execution thereof. Owner covenants that, during the Term of this Agreement, there will not be (unless Management Company has given its prior written consent thereto) any Future CC&R's affecting the Site or the Hotel: (i) which purport to impose any material financial obligations on the Hotel; (ii) which would prohibit or limit Management Company from operating the Hotel, including cocktail lounges, restaurants and other facilities customarily a part of or related to a first-class limited service hotel, in accordance with the Fairfield Inn System Standards; or (iii) which would allow Hotel facilities (for example, parking spaces) to be used by persons other than guests, invitees or employees of the Hotel. C. All financial obligations imposed on Owner or on Management Company or on the Hotel pursuant to any Future CC&R's shall be paid by Owner from its own funds, and not from Gross -47- Revenues or from the FF&E Reserve, unless Management Company has given its prior written consent to such Future CC&R's. Management Company agrees that it will not unreasonably withhold its consent to any such Future CC&R's; provided, however, that Management Company shall be entitled to withhold its consent in its discretion if a proposed Future CC&R would have a material impact on the operation of the Hotel, as described in clauses (i), (ii) or (iii) of Section 2.05.B. Upon receipt of such consent from Management Company, such sums shall be Deductions in computing Operating Profit. D. Owner shall not waive any protections which benefit the Hotel pursuant to existing restrictive covenants without the prior written consent of Management Company which consent shall not be unreasonably withheld, conditioned or delayed. 2.06 Licenses and Permits -------------------- Owner agrees that, upon request by Management Company, it will sign promptly and without charge applications for Licenses. END OF ARTICLE II -48- ARTICLE III OWNERSHIP OF THE HOTEL ---------------------- 3.01 Ownership of the Hotel ---------------------- A. Each party acknowledges that the status of title to the Site and to the Hotel is as described on Exhibit "F" hereto; neither party will hold the other party responsible for any defects in said status of title, and each party hereby releases the other party from all claims stemming from any such defects. B. Owner hereby covenants that, throughout the Term of this Agreement, it will not change the status of title to the Site from that which is described on Exhibit "F" hereto, except that Owner shall have the right either (i) to effectuate a Sale of the Hotel in accordance with Article XIX, or (ii) to encumber the Site and the Hotel with the following: 1. Mortgages which are given to secure any one or more Qualified Loans; 2. Liens for Impositions or other public charges not yet due or which are being contested in good faith; and 3. Easements or other encumbrances (not including those described in subsection 1 or 2 above) which do not adversely affect the operation of the Hotel by Management Company and which are not prohibited pursuant to Section 2.05.B of this Agreement. C. Owner shall indemnify, defend and hold Management Company and its Affiliates harmless from claims by entities which have -49- loaned money to Owner that Management Company (or any of such Affiliates) owes any such lender all or any portion of such indebtedness. D. Management Company shall indemnify, defend and hold Owner and its Affiliates harmless from claims by entities which have loaned money to Management Company that Owner (or any of such Affiliates) owes any such lender all or any portion of such indebtedness. END OF ARTICLE III -50- ARTICLE IV TERM ---- 4.01 Term ---- A. The initial term ("Initial Term") of this Agreement shall commence with the Effective Date and, unless sooner terminated as herein provided, shall continue until the expiration of Fiscal Year 2013. The Term shall thereafter be automatically renewed for each of three (3) successive periods of ten (10) full Fiscal Years each ("Renewal Terms"), unless either: (i) Management Company, at its option, notifies Owner, in accordance with Section 20.09, at any time within the period of eighteen (18) months prior to the expiration of the Initial Term or the then current Renewal Term, as the case may be, of its intention not to renew; or (ii) Management Company has committed an Event of Default, and has been notified by Owner of such Event of Default, under Article XVI of this Agreement, as of the date of any such renewal. B. If Management Company so notifies Owner of its intention not to renew pursuant to Section 4.01.A, Management Company shall continue to manage the Hotel pursuant to this Agreement until the termination date set forth in such notice, provided that such termination date shall be: (i) no less than twelve (12) months after the date of such notice; and (ii) in no event earlier than the expiration date of the Initial Term or the then current Renewal Term, as the case may be. Such termination date may be after the -51- expiration of the Initial Term or the then current Renewal Term, as the case may be, provided that the requirements of the preceding sentence are satisfied. However, if Management Company has so notified Owner of its intention not to renew, Owner may, at its option, by written notice to Management Company at least ninety (90) days prior to the date on which Owner desires Termination to occur, reduce the period of time prior to Termination to any shorter period of time which Owner desires, provided that such shorter period of time shall be at least the greater of: (a) ninety (90) days, (beginning as of the date of such notice from Owner), or (b) the minimum period of time which Management Company reasonably decides is prudent, given the requirements of the applicable Employment Laws regarding employee discharges. In no event shall the fact that Management Company may, pursuant to the preceding sentence, be managing the Hotel after the expiration of the Initial Term or the then current Renewal Term, as the case may be, be construed as an election by Management Company to renew the Term, if Management Company has elected (in accordance with this Section 4.01) in writing not to so renew. C. If Owner has the right, under the provisions of the Existing Ground Lease, to elect to renew or extend the term of the Existing Ground Lease, Owner shall so notify Management Company at least one hundred eighty (180) days (but no more than one (1) year) prior to the expiration of the period within which Owner is obligated to notify the Ground Lessor of its election to renew or -52- extend the term of the Existing Ground Lease. Such notice from Owner shall contain all of the relevant facts about the impending election to renew or extend, including the length of the period of renewal or extension. Unless Management Company notifies Owner, within a period of ninety (90) days after receipt of the foregoing notice from Owner, that Management Company disapproves the renewal or extension of the term of the Existing Ground Lease, Owner will, by proper notice to the Ground Lessor, within the applicable time period under the Existing Ground Lease, elect to renew or extend the term of the Existing Ground Lease. D. If, after proper notice from Owner in accordance with Section 4.01.C, Management Company fails to disapprove the renewal or extension of the term of the Existing Ground Lease, the Term of this Agreement shall be deemed to be automatically extended to the later of: (i) the expiration of the term of the Existing Ground Lease, as renewed or extended in accordance with Section 4.01.C; or (ii) the date on which the Term of this Agreement would otherwise have expired absent this sentence. If, in order to comply with the preceding sentence, it is necessary for Management Company to waive its option not to renew with respect to one or more Renewal Terms, such waiver shall be deemed to have been given; however, Management Company shall retain the right not to renew (as more particularly described in Section 4.01 A) as to any portion of such Renewal Term(s) which would occur after the expiration of the term of the -53- Existing Ground Lease, as renewed or extended in accordance with Section 4.01.C. E. If, after proper notice from Owner in accordance with Section 4.01.C, Management Company disapproves the renewal or extension of the term of the Existing Ground Lease, the Term of this Agreement shall be deemed to be automatically reduced to the earlier of: (i) the expiration of the term of the Existing Ground Lease; or (ii) the date on which the Term of this Agreement would otherwise have expired absent this sentence. 4.02 Actions to be Taken Upon Termination ------------------------------------ Upon a Termination of this Agreement, the following shall be applicable: A. Management Company shall, within sixty (60) days after Termination of this Agreement, prepare and deliver to Owner a final accounting statement with respect to the Hotel, as more particularly described in Section 9.01 hereof, along with a statement of any sums due from Owner to Management Company pursuant hereto, dated as of the date of Termination. Within thirty (30) days after the receipt by Owner of such final accounting statement, the parties will make whatever cash adjustments are necessary pursuant to such final statement. The cost of preparing such final accounting statement shall be a Deduction, unless the Termination occurs as a result of an Event of Default by either party, in which case the defaulting party shall pay such cost. Management Company -54- and Owner acknowledge that there may be certain adjustments for which the necessary information will not be available at the time of such final accounting, and the parties agree to readjust such amounts and make the necessary cash adjustments when such information becomes available; provided, however, that (unless there are ongoing disputes of which each party has received notice) all accounts shall be deemed final as of one hundred eighty (180) days after such Termination. B. As of the date of the final accounting referred to in subsection A above, Management Company shall release and transfer to Owner any of Owner's funds which are held or controlled by Management Company with respect to the Hotel, with the exception of funds to be held in escrow pursuant to Section 12.04, and Section 14.01.F. During the period between the date of Termination and the date of such final accounting, Management Company shall pay (or reserve against) all Deductions which accrued (but were not paid) prior to the date of Termination, using for such purpose any Gross Revenues prior to the date of Termination. C. Management Company shall make available to Owner such books and records respecting the Hotel (including those from prior years, subject to Management Company's reasonable records retention policies) as will be needed by Owner to prepare the accounting statements, in accordance with the Uniform System of Accounts, for the Hotel for the year in which the Termination occurs and for any subsequent year. Such books and records shall not include: (i) -55- employee records which must remain confidential either under Legal Requirements or under reasonable system-wide corporate policies of Management Company; (ii) any Intellectual Property; or (iii) customer lists. D. Management Company shall (to the extent permitted by Legal Requirements) assign to Owner or any other manager employed by Owner to operate and manage the Hotel, all Licenses for the Hotel which have been issued in Management Company's name; provided that if Management Company has expended any of its own funds in acquiring such Licenses or in transferring any such Licenses to Owner, Owner shall reimburse Management Company therefor if it has not done so already. E. All Proprietary Signage shall be removed by Management Company from the Hotel and from the Site (and from any locations other than the Site). The cost of such removal shall be a Deduction, unless the Termination occurs either: (i) as a result of an Event of Default by either party, in which case the defaulting party shall pay the cost of such removal from its own funds, and not as a Deduction; or (ii) as a result of Management Company's election not to renew the Term, as of the expiration of either the Initial Term or any Renewal Term (as the case may be), in which case Management Company shall pay the cost of such removal from its own funds, and not as a Deduction. F. Various other actions shall be taken, as described in this Agreement, including, but not limited to, the actions -56- described in Sections 7.01, 10.02, 10.03, 10.04, 12.04.B, and 14.01.F. G. Management Company shall peacefully vacate and surrender the Hotel to Owner. The provisions of this Section 4.02 shall survive any Termination. 4.03 Performance Termination ----------------------- A. Subject to the provisions of Section 4.03.B below, Owner shall have the option to terminate this Agreement if: 1. With respect to any two (2) consecutive full Fiscal Years (not including any Fiscal Year prior to Fiscal Year 1996), Operating Profit less the amount of Ground Lease Rental, if applicable, for each of such two (2) Fiscal Years is less than the Performance Termination Threshold; and 2. The Revenue Index of the Hotel during each of such two (2) consecutive Fiscal Years is less than the Revenue Index Threshold; and 3. The fact that the Hotel is not meeting the tests set forth in Section 4.03.A(1) and (2) is not the result of either (x) Force Majeure, or (y) any major renovation of the Hotel. Such option to terminate shall be exercised by serving written notice thereof on Management Company no later than sixty (60) days after the receipt by Owner of the annual accounting under Section 9.01 hereof for the second (2nd) of the two (2) Fiscal Years -57- referred to in Section 4.03.A(1). If Management Company does not elect to avoid such Termination pursuant to Section 4.03.B below, this Agreement shall terminate as of the end of the fourth (4th) full Accounting Period following the date on which Management Company receives Owner's written notice of its intent to terminate this Agreement; provided that such period of time shall be extended as required by applicable Legal Requirements pertaining to the termination of the employment of the employees at the Hotel. Owner's failure to exercise its right to terminate this Agreement pursuant to Section 4.03.A with respect to any given Fiscal Year shall not be deemed an estoppel or waiver of Owner's right to terminate this Agreement with respect to subsequent Fiscal Years to which this Section 4.03.A may apply. B. Upon receipt of Owner's written notice of Termination under Section 4.03.A, Management Company shall have the option, to be exercised within sixty (60) days after receipt of said notice, to avoid such Termination by paying Owner an amount (the "Cure Payment") equal to one hundred five percent (105%) of the amount by which Operating Profit less Ground Lease Rental, if any, for either of the two (2) Fiscal Years in question (i.e., the two (2) Fiscal Years referred to in Section 4.03.A(1)) was less than the Performance Termination Threshold. Any such Cure Payment shall be accounted for as a fee to Owner in connection with the avoidance of such Termination. In the event Management Company makes a Cure Payment pursuant to this Section 4.03.B, the Fiscal Year with -58- respect to which such Cure Payment was made shall thereafter not be treated, for purposes of subsequent elections by Owner pursuant to Section 4.03.A, as a Fiscal Year in which the circumstances described in Section 4.03.A(1) have occurred. If Management Company exercises such option to make such Cure Payment, then the foregoing Owner's election to terminate this Agreement under Section 4.03.A shall be cancelled and of no force or effect with respect to the two (2) Fiscal Years in question and this Agreement shall not terminate. Such cancellation, however, shall not affect the right of Owner, as to each subsequent Fiscal Year to which Section 4.03.A applies, to again elect to terminate this Agreement pursuant to the provisions of Section 4.03.A (which subsequent election shall again be subject to Management Company's rights under this Section 4.03.B). If Management Company does not exercise its option to make the Cure Payment, then this Agreement shall be terminated as of the date set forth in Section 4.03.A. Any Cure Payment which is paid by Management Company pursuant to this Section 4.03.B shall not be recoverable by Management Company. Any Cure Payment which is paid by Management Company pursuant to this Section 4.03.B shall only operate to cancel Owner's election to terminate this Agreement under Section 4.03.A, and shall not operate to cure any outstanding Defaults by Management Company under Article XVI. END OF ARTICLE IV -59- ARTICLE V COMPENSATION OF MANAGEMENT COMPANY; DISTRIBUTIONS ------------------------------------------------- 5.01 Management Fees --------------- A. In consideration of the services it provides pursuant to this Agreement, Management Company shall retain the Management Fees. Owner's Priority, the Base Management Fee, Deferred Contingent Base Management Fees, the Fairfield Inn System Fee and the Incentive Management Fee shall be appropriately prorated for any Partial Fiscal Year. B. Notwithstanding the provisions of Article IX of this Agreement permitting the consolidation of reports and co-mingling of certain funds with other hotels owned by Owner, the Base Management Fee, Deferred Contingent Base Management Fees, Fairfield Inn System Fee and Incentive Management Fee shall be calculated based on the revenues generated by the Hotel and not on a consolidated basis with any other hotels which may be owned by Owner. 5.02 Distribution of Operating Profit In each Fiscal Year, Operating -------------------------------- Profit shall be distributed to Owner and Management Company in accordance with the following priorities: A. Owner shall first receive an amount equal to the lesser of: (i) Owner's Priority; or (ii) Operating Profit. -60- B. Management Company shall next receive (i) the Base Management Fee, provided, however, that if, in any Fiscal Year, the Base Management Fee exceeds Net Operating Profit, Management Company's right to receive the Base Management Fee shall be deferred to the extent of such excess, and such deferred sums shall become Deferred Contingent Base Management Fees; (ii) the Deferred Contingent Base Management Fees; to the extent that Net Operating Profit is otherwise sufficient for such purposes; and (iii) an amount equal to the Incentive Management Fee. C. Owner shall receive all Operating Profit remaining after the distributions made pursuant to the preceding subparagraphs of this Section 5.02. 5.03 Accounting and Interim Payments ------------------------------- A. On or before the twentieth (20th) day after the close of each Accounting Period, Management Company shall deliver to Owner a reasonably detailed accounting statement (the "Accounting Period Statement") in substantially the form set forth in Exhibit "B" hereto. Upon Owner's written request therefor, Management Company shall forward copies of any such Accounting Period Statement to any Holders or Ground Lessors, at the addresses specified by Owner. Such Accounting Period Statement shall set forth the results of the operations of the Hotel for the preceding Accounting Period and for the Fiscal Year-to-date, all in accordance with generally accepted accounting principles applied on a consistent basis. Each -61- Accounting Period Statement shall be accompanied by a statement, by either the controller, assistant controller of the Hotel or other authorized financial representative of Management Company, that, to the best of his or her knowledge and belief, and subject to routine year-end audit and adjustment, such Accounting Period Statement is true and correct in all material respects. Each Accounting Period Statement shall include: (i) average rate and occupancy, Gross Revenues, Operating Profit, Owner's Priority, the Management Fees, and the interim Owner's Distribution; and (ii) comparisons with the categories for the prior Fiscal Year. With each such Accounting Period Statement, Management Company shall transfer any interim Owner's Distribution due to Owner, and shall retain any interim Management Fees due to Management Company. Calculations and payments of the Management Fees and the Owner's Distribution with respect to each Accounting Period within a Fiscal Year shall be accounted for cumulatively. B. Within seventy-five (75) days after the close of each Fiscal Year, Management Company shall submit an Annual Operating Statement, as more fully described in Section 9.01, for such Fiscal Year to Owner, which Annual Operating Statement shall be controlling over the interim Accounting Period Statements. Any adjustments or payments required by any such Annual Operating Statement shall be made promptly by the parties. Operating Losses shall not be carried forward or backward to subsequent or prior Fiscal Years. -62- 5.04 Accounting for Period Prior to Effective Date --------------------------------------------- A. It shall be a general principle in the accounting for the Hotel that all liabilities incurred and/or income generated prior to the Effective Date, or properly allocated to the period prior to the Effective Date under generally accepted accounting principles, shall be included in the Accounting Period Statements and the Annual Operating Statements for the Hotel pursuant to this Agreement for the Fiscal Year in which such liabilities are paid or such income is received, provided, however, that the foregoing shall not be reflected in the computation of Operating Profit for purposes of Section 4.03. B. As of the Effective Date, the cash on hand at the Hotel shall be deposited in one of the Operating Accounts set up by Management Company pursuant to Section 9.02, and shall be treated as part of the Working Capital described in Section 7.01. END OF ARTICLE V -63- ARTICLE VI FINANCING OF THE HOTEL ---------------------- 6.01 Amendments of Management Agreement ---------------------------------- A. If requested by any Qualified Lender or prospective Qualified Lender (in which event such amendments shall take effect as of the funding of such Qualified Loan), Management Company agrees to execute and deliver any amendment of this Agreement which is reasonably required by such Qualified Lender or prospective Qualified Lender, provided that Management Company shall be under no obligation to amend this Agreement if the result of such amendment would be: (i) to reduce, defer or delay the amount of any payment to be made to Management Company hereunder; (ii) to materially increase Management Company's obligations under this Agreement; (iii) to change the Term of this Agreement; (iv) to cause the Hotel to be operated other than pursuant to the Fairfield Inn System Standards; (v) to amend either Section 8.02 or Section 14.01; or (vi) to otherwise materially affect Management Company's rights under this Agreement. Any such amendment shall take effect as of the funding of such Qualified Loan. B. In addition to the provisions of Section 6.01.A, if a Qualified Lender or prospective Qualified Lender requests that Management Company enter into an amendment of this Agreement, and if such amendment would impose additional duties (for example, an increase in the reporting requirements or in the record-keeping -64- requirements, or adding the obligation to prepare parallel accounting statements using a different fiscal year) on Management Company or would otherwise adversely affect Management Company's rights under this Agreement, but not to the degree described in clauses (i) through (vi) of Section 6.01.A, Management Company hereby agrees that it will execute and deliver such requested amendment of this Agreement, provided that Owner compensates Management Company for the additional burden imposed by such amendment out of Owner's funds and not as a Deduction. It is understood that the word "burden", as used in the preceding sentence, shall encompass not only additional work to be performed by Management Company, but also any adverse effect on the Incentive Management Fee which would be caused by requiring increased services by third parties. Any dispute as to whether Management Company is entitled to any compensation pursuant to this Section 6.01.B, or as to the amount of such compensation, shall be resolved by arbitration pursuant to Section 20.13. C. Proposed amendments to this Agreement which are requested by any Qualified Lender or prospective Qualified Lender, and which would affect the insurance provisions set forth in Article XII, shall be governed exclusively by Article XII. -65- 6.02 Notice and Opportunity to Cure ------------------------------ A. In the event of: (i) a Default by Owner in the performance or observance of any of the terms and conditions of this Agreement; or (ii) any other occurrence which entitles Management Company to terminate this Agreement, and in the event that Management Company gives written notice thereof to Owner pursuant to Article XVI of this Agreement, Management Company shall also give a duplicate copy (herein referred to as the "First Notice") of such notice to each Qualified Lender, at the address previously provided to Management Company. Any such notice will be sent in the manner described in Section 20.09 hereof. In addition, in the event that such Default is not cured within the applicable cure period under Article XVI of this Agreement, and Management Company intends to exercise its remedy of terminating this Agreement, Management Company shall send a second notice (the "Second Notice"), to each Qualified Lender, at the same address and in the same manner applicable to the First Notice stating Management Company's intention to terminate this Agreement. Management Company shall forbear from taking any action to terminate this Agreement for a period of thirty (30) days after the service of the First Notice, and for an additional period of thirty (30) days after the service of the Second Notice (if such Second Notice is required, as set forth above). B. In the event of a Default by Owner under the provisions of this Agreement, Management Company agrees to accept performance by any Qualified Lender with the same force and effect as if same were -66- performed by Owner, in accordance with the provisions and within the cure periods prescribed in this Agreement (except that each Qualified Lender shall have such additional cure periods, not available to Owner, as are set forth in this Section 6.02). C. No notice given by Management Company to Owner shall be effective as a notice under Article XVI of this Agreement unless the applicable duplicate notice to each Qualified Lender which is required under Section 6.02.A (either the First Notice or the Second Notice, as the case may be) has been given. It is understood that any failure by Management Company to give such a duplicate notice (either the First Notice or the Second Notice, as the case may be) to any Qualified Lender shall not itself be a Default by Management Company under this Agreement, but rather shall operate only to void the effectiveness of any such notice by Management Company to Owner under Article XVI of this Agreement. D. Except as specifically limited by this Section 6.02, nothing herein shall preclude Management Company from exercising any of its rights or remedies against Owner with respect to any Default by Owner under this Agreement. 6.03 Assignment of Management Agreement ---------------------------------- Owner shall have the right to collaterally assign to any Qualified Lender, as additional security for the indebtedness evidenced by a Qualified Loan, all of Owner's right, title and interest in and to this Agreement, including the right to -67- distributions payable to Owner pursuant to Article V thereof. If, pursuant to any such assignment (or subsequent loan documentation entered into between Owner and a Qualified Lender with a similar purpose), and provided that Management Company has previously received a copy of such assignment and such subsequent documentation, Management Company may receive (from time to time) a notice or notices from such Qualified Lender directing Management Company to pay to such Qualified Lender subsequent distributions under Article V of this Agreement which would otherwise be payable to Owner, Management Company shall comply with any such notice. Management Company shall continue to make payments in compliance with any such notice from such Qualified Lender until Management Company receives written instructions to the contrary from such Qualified Lender. Owner hereby gives its consent to any such payments by Management Company to such Qualified Lender which are in compliance with any such notice. The foregoing consent by Owner shall be deemed to be irrevocable until the entire Qualified Loan has been discharged, as evidenced either by the recordation of a satisfaction or release executed by such Qualified Lender, or by the delivery of a written statement to that effect from such Qualified Lender to Management Company. Management Company shall comply with the direction set forth in any such notice without any necessity to investigate why such Qualified Lender sent such notice, or to confirm whether or not Owner is in fact in default under the terms of such Qualified Loan. If Management Company -68- receives such notices from more than one Qualified Lender, Management Company shall (at its option) either (i) comply with the provisions of the notice sent by the Qualified Lender whose Qualified Loan has the senior lien priority, or (ii) institute Litigation for a declaratory judgment to determine to whom payments under this Agreement shall be made (in which case, the costs and expenses of such Litigation, including attorneys' fees, shall be Deductions). 6.04 Subordination of Management Agreement ------------------------------------- A. This Agreement, and Management Company's right to continue to manage and operate the Hotel pursuant to this Agreement, are and shall be subject and subordinate to the lien of any Qualified Loan, (i.e., upon a Foreclosure of any such Qualified Loan, such Qualified Lender, at its option, unless it has otherwise agreed to the contrary in a Non-Disturbance Agreement, shall have the right to terminate this Agreement). Notwithstanding the foregoing, during the Term of this Agreement, all debt service (including increased or accelerated payments after a default) payable with respect to any Qualified Loan shall be paid exclusively from Owner's Distribution. B. Section 6.04.A is intended to be, and is, fully effective and binding, as between Management Company and any such Qualified Lender; however, Management Company agrees to execute such confirmatory documentation (in recordable form in the jurisdiction -69- in which the Hotel is located) as such Qualified Lender shall reasonably request. C. Notwithstanding the possible termination of this Agreement which is set forth in the foregoing provisions of this Section 6.04, it is understood that, until such time as this Agreement is validly terminated either (i) pursuant to the applicable provision of this Agreement, or (ii) pursuant to a court order in connection with the Foreclosure of a Qualified Loan (assuming that such termination does not breach any binding Non-Disturbance Agreement), the Holder of each Qualified Loan will honor and recognize the right of Management Company to operate the Hotel in accordance with this Agreement (including the right of Management Company to collect all Gross Revenues and make expenditures in accordance with this Agreement). 6.05 Non-Disturbance Agreement ------------------------- A. Owner agrees that, in connection with the obtaining by Owner of any Secured Loan or Secured Loans, from time to time, Owner will use good faith reasonable efforts to obtain a Non-Disturbance Agreement from each Holder or Holders. The phrase "good faith reasonable efforts" shall be determined by reference to the following: (i) normal loan underwriting procedures and practices (including those practices relating to non-disturbance agreements) which are generally being implemented by entities which are making loans similar to such Secured Loan, as of that point in -70- time; and (ii) the concessions which Management Company is, as of that point in time, reasonably prepared to make in order to satisfy the objectives of lenders in connection with the lender-manager relationship after a Foreclosure. In no event, however, shall the failure of Owner to obtain such a Non-Disturbance Agreement affect or modify any of the responsibilities of Management Company towards Qualified Lenders which are contained elsewhere in this Article VI. B. Notwithstanding Section 6.05.A, Owner agrees that, prior to obtaining any Qualified Loan, it will obtain from each prospective Holder or Holders thereof a Non Disturbance Agreement pursuant to which Management Company's rights under this Agreement will not be disturbed as a result of a loan default stemming from non-monetary factors, which (i) relate to Owner, and (ii) are not Defaults by Management Company under Article XVI of this Agreement . 6.06 Attornment ---------- A. Management Company agrees that, subject to the provisions of Section 6.06.B, upon a Foreclosure of any Qualified Loan, provided that this Agreement has not expired or otherwise been earlier terminated in accordance with its terms, Management Company shall attorn to any Subsequent Owner and shall remain bound by all of the terms, covenants and conditions of this Agreement for the balance of the remaining Term (including any Renewal Terms) with the same force and effect as if such Subsequent Owner were the -71- "Owner" under this Agreement; provided, however, that Management Company shall be under no such obligation to so attorn, and, to the contrary, shall thereupon have the right to terminate this Agreement on thirty (30) days' prior written notice to both Owner and such Subsequent Owner: (i) if such Subsequent Owner would not qualify as a permitted transferee under Section 19.01.A of this Agreement; or (ii) unless such Subsequent Owner, within twenty (20) days after the Foreclosure Date (or, in the event such Subsequent Owner acquires title to the Hotel after the Foreclosure Date, within twenty (20) days after the date of such acquisition of title to the Hotel), assumes all of the obligations of the "Owner" under this Agreement which arise from and after the Foreclosure Date (or such later date of acquisition of title to the Hotel), pursuant to a written assumption agreement which shall be delivered to Management Company. Upon the written request of any Qualified Lender, Management Company shall periodically execute and deliver a statement, in a form reasonably satisfactory to such Qualified Lender, reaffirming Management Company's obligation to attorn as set forth in this Section 6.06.A. B. It is understood by the parties that, in view of the fact that a Qualified Lender will have the right to terminate this Agreement on a Foreclosure under the provisions of Section 6.04, Management Company has an interest in being informed, within a reasonable period of time after a Qualified Loan Acceleration, of whether or not such Qualified Lender intends to exercise such right -72- of termination. Accordingly, if, by no later than that date (the "Post-Foreclosure Decision Date") which is ninety (90) days after the date of any Qualified Loan Acceleration, Management Company has not received a Non-Disturbance Agreement executed by the Holder of such Qualified Loan, Management Company shall, as of the Post-Foreclosure Decision Date and thereafter, no longer be under any obligation to attorn (pursuant to the provisions of Section 6.06.A) with respect to any Foreclosure of that Qualified Loan, and Management Company shall have the option to terminate this Agreement, by written notice to both Owner and the Holder of each existing Qualified Loan, at any time within the sixty (60) day period immediately following the Post-Foreclosure Decision Date. 6.07 No Modification or Termination of Agreement ------------------------------------------- If the documents evidencing and securing a Qualified Loan require the consent of the Qualified Lender to any amendment or modification of this Agreement which materially affects such Qualified Lender, no such amendment or modification of this Agreement shall be binding or effective unless such Qualified Lender shall have consented in writing thereto. 6.08 Owner's Right to Finance the Hotel ---------------------------------- Owner shall have the right, from time to time, without Management Company's prior consent or approval, to obtain Qualified -73- Loans, and to encumber the Hotel with Mortgages securing such Qualified Loans. Owner shall not, without the prior consent of Management Company, have the right to obtain Secured Loans which are not Qualified Loans. 6.09 Cross Collateralization ----------------------- A. In connection with obtaining Qualified Loans, Owner shall have the right to cross collateralize the Hotel with other hotels which it owns in the Fairfield Inn System, provided that: 1. the hotels to be the subject of the Qualified Loans are owned by Owner or an Affiliate of Owner; 2. the Qualified Loans are secured only by hotels in the Fairfield Inn System which are managed by Management Company or its Affiliates and are not cross collateralized with any property other than hotels managed by Management Company or its Affiliates in the Fairfield Inn System; 3. the basic terms and conditions of the Qualified Loans for the Hotel and each other hotel securing such loan are intended to be part of an integrated transaction; and 4. the closing of the Qualified Loans shall take place within six (6) months of each other. B. Any Mortgage secured by the Hotel shall contain a provision requiring Holder to provide Management Company prior written notice of any default under such Mortgage. Further, upon receipt of any notice of default by such Holder, Owner shall -74- forward a copy of such notice to Management Company within three (3) days thereafter, in accordance with the notice provisions set forth in Section 20.09. 6.10 Sale/Leaseback Transactions --------------------------- Any single transaction or related series of transactions in which (i) Owner's interest in the Hotel is sold or transferred by the then Owner ("Seller") to a buyer ("Buyer"), and (ii) the Buyer (as "Landlord") leases the Hotel to the Seller (as "tenant"), is hereby defined as a "Sale/Leaseback Transaction". With respect to each Sale/Leaseback Transaction during the Term of this Agreement, the following provisions will apply: (a) the sale or transfer of the Hotel will be considered a Sale of the Hotel; however, the Seller (as tenant under the aforesaid lease), not the Buyer, shall thereafter be treated as the "Owner" for purposes of this Agreement; (b) the purchase price will not be a Secured Loan, but any mortgage financing placed (either at the time of the transaction or later) on the Buyer's interest in the Hotel will be treated as a Secured Loan, and the proceeds of each such Secured Loan will be aggregated with all outstanding Secured Loans which encumber either the Buyer's interest in the Hotel or the Seller's leasehold interest in the Hotel, for purposes of determining whether a given Secured Loan qualifies as a Qualified Loan; (c) payments pursuant to such lease shall not be treated as Deductions, except for Impositions and similar items which would have been -75- treated as Deductions in the absence of such Sale/Leaseback Transaction; and (d) all subsequent sales, transfers or assignments of either Buyer's interest in the Hotel or Seller's interest in the Hotel will be treated as Sales of the Hotel. Owner will not enter into any Sale/Leaseback Transaction unless Management Company and the proposed Buyer have previously executed a mutually satisfactory attornment agreement pursuant to which, as of the date of the termination of Seller's leasehold interest, the provisions of this Agreement will (unless there has been an Event of Default or other event entitling either party to terminate this Agreement) be binding both on Management Company and on Buyer (as the successor "Owner"); such attornment agreement will also contain an immediately effective provision which will incorporate the terms of Section 6.08 of this Agreement, binding both on Management Company and on Buyer. END OF ARTICLE VI -76- ARTICLE VII WORKING CAPITAL AND FIXED ASSET SUPPLIES ---------------------------------------- 7.01 Working Capital --------------- A. Owner shall, from time to time during the Term of this Agreement, provide Management Company, within thirty (30) days after Owner's receipt of written request therefor by Management Company, with the funds necessary to maintain Working Capital at levels determined by Management Company to be reasonably necessary to operate the Hotel in accordance with the Fairfield Inn System Standards. Any such request by Management Company shall be accompanied by a detailed explanation of the reasons for the request. If Owner fails to respond to any such request within thirty (30) days after Owner's receipt thereof, Management Company shall be entitled, at its option, without affecting other remedies which may be available pursuant to Article XVI, to lend Owner the necessary additional Working Capital from Management Company's own funds, which loan will bear interest at the Interest Rate (compounded annually), and will be secured by a security interest (subordinate to any Qualified Loan) encumbering all Working Capital previously or thereafter provided by either Owner or Management Company, and will be repaid in accordance with such terms and conditions as Management Company shall at that time reasonably determine. -77- B. Management Company will manage the Working capital of the Hotel prudently and in accordance with the Fairfield Inn System Standards. Management Company shall review and analyze the Working Capital needs of the Hotel on an annual basis. If Management Company reasonably determines that there is excess Working Capital, such excess shall be returned to Owner. C. Working Capital provided by Owner pursuant to this Section 7.01 shall remain the property of Owner throughout the Term of this Agreement. Upon Termination, Owner shall retain any of its unused Working Capital, except for Inventories purchased by Management Company pursuant to Section 10.02. D. If Owner owns other hotels in the Fairfield Inn System which are operated by Management Company, Management Company, at its option, may co-mingle the Working Capital for the Hotel with the Working Capital account for Owner's other hotel(s) in a single bank account. 7.02 Fixed Asset Supplies -------------------- As of the Effective Date, Owner shall provide the Hotel with the Fixed Asset Supplies which are necessary to operate the Hotel in accordance with the Fairfield Inn System Standards. Owner shall, from time to time thereafter during the Term of this Agreement, provide Management Company, within thirty (30) days after Owner's receipt of written request therefor by Management Company, with any additional funds necessary to maintain Fixed -78- Asset Supplies at levels determined by Management Company to be necessary to operate the Hotel in accordance with the Fairfield Inn System Standards. Fixed Asset Supplies shall remain the property of Owner throughout the Term of this Agreement, except for Fixed Asset Supplies purchased by Management Company pursuant to Section 10.02. END OF ARTICLE VII -79- ARTICLE VIII REPAIRS, MAINTENANCE AND REPLACEMENTS ------------------------------------- 8.01 Routine Repairs and Maintenance ------------------------------- Management Company shall maintain the Hotel in good repair and condition, to a standard comparable with competitive hotels and in conformity with applicable Legal Requirements and the Fairfield Inn System Standards, and shall make or cause to be made such routine maintenance, repairs and minor alterations, the cost of which can be expensed under generally accepted accounting principles, as it, from time to time, deems reasonably necessary for such purposes. The cost of such maintenance, repairs and alterations shall be paid from Gross Revenues and shall be treated as a Deduction in determining Operating Profit. 8.02 FF&E Reserve ------------ A. Management Company shall establish a reserve account (the "FF&E Reserve") in a bank designated by Management Company (and approved by Owner, such approval not to be unreasonably withheld) to cover the cost of: 1. Replacements and renewals to the Hotel's FF&E ; 2. Certain routine repairs and maintenance to the Hotel building which are normally capitalized under generally accepted accounting principles such as exterior and interior repainting, resurfacing building walls, floors, roofs and parking areas, and -80- replacing folding walls and the like (but which are not major repairs, alterations, improvements, renewals or replacements to the Hotel's buildings' structure, roof, or exterior facade, or to its mechanical, electrical, heating, ventilating, air conditioning, plumbing or vertical transportation systems, the cost of which shall be governed exclusively by Sections 8.03.C and 8.03.D); and 3. At Management Company's option, lease payments for Shuttle Vehicles and Communications, Computer and Office Equipment used in connection with the operation of the Hotel. Management Company agrees that it will, from time to time, execute such reasonable documentation as may be requested by any Qualified Lender to assist such Qualified Lender in establishing or perfecting its security interest in the funds which are in the FF&E Reserve; provided, however, that no such documentation shall contain any amendment or modification of any of the provisions of this Agreement, including this Section 8.02. B. During the period of time from the Effective Date through the Termination of this Agreement, subject to the provisions of Sections 8.02.E and 8.02.F, Management Company shall transfer (as of the end of each Accounting Period) into the FF&E Reserve an amount equal to five percent (5%) of Gross Revenues for that Accounting Period. All such amounts transferred into the FF&E Reserve after the Effective Date shall be paid from Gross Revenues and shall constitute Deductions in determining Operating Profit. -81- C. Each year, at the same time as Management Company submits the Annual Operating Projection described in Section 9.03, Management Company shall prepare an estimate (the "FF&E Estimate") of the expenditures necessary during the ensuing Fiscal Year, for (i) replacements and renewals to the Hotel's FF&E, (ii) repairs to the Hotel building of the nature described in Section 8.02.A.2, and (iii) if elected by Management Company, lease payments for Shuttle Vehicles, and Communications, Computer and Office Equipment used in connection with the operation of the Hotel, and shall submit such FF&E Estimate to Owner for its review. All expenditures from the FF&E Reserve will be (as to both the amount of each such expenditure and the timing thereof) both reasonable and necessary, given the objective that the Hotel will be maintained and operated to a standard comparable to competitive hotels and in accordance with the Fairfield Inn System Standards. Notwithstanding the foregoing, Management Company shall not be required to enumerate on the FF&E Estimate any individual project which will cost less than Ten Thousand Dollars ($10,000.00) as adjusted by the GDP Deflator on each anniversary of the Effective Date. D. Management Company shall from time to time make such (i) replacements and renewals to the Hotel's FF&E, and (ii) repairs to the Hotel building of the nature described in Section 8.02.A.2, as it deems necessary, and (iii) lease payments as described in Section 8.02.A.3 as it deems necessary provided that Management -82- Company shall not expend more than the balance in the FF&E Reserve without the prior approval of Owner. Management Company will endeavor to follow the applicable FF&E Estimate, but shall be entitled to depart therefrom, in its reasonable discretion, provided that: (a) such departures from the applicable FF&E Estimate result from circumstances which could not reasonably have been foreseen at the time of the submission of such FF&E Estimate; (b) such departures from the applicable FF&E Estimate are in the best interest of the Hotel; and (c) if the deviations from the FF&E Estimate are greater than Ten Thousand Dollars ($10,000.00), as adjusted by the GDP Deflator on each anniversary of the Effective Date, Management Company has submitted to Owner a revised FF&E Estimate setting forth and explaining such departures. At the end of each Fiscal Year, any amounts remaining in the FF&E Reserve shall be retained in the FF&E Reserve, and shall be carried forward to the next Fiscal Year. Upon a Sale of the Hotel, funds in the FF&E Reserve will not be affected (or, if withdrawn, will be replaced as set forth in Section 19.01.D), and all dispositions of such funds (both before and after such Sale of the Hotel) will continue to be made exclusively pursuant to the provisions of this Agreement. Proceeds from the sale of FF&E no longer necessary to the operation of the Hotel shall be deposited in the FF&E Reserve, as shall any interest which accrues on amounts placed in the FF&E Reserve. Neither (i) proceeds from the disposition of FF&E, nor (ii) interest which accrues on amounts held in the FF&E Reserve, -83- shall either (x) result in any reduction in the required contributions to the FF&E Reserve set forth in subsection B above, or (y) be included in Gross Revenues. Shuttle Vehicles and Communications, Computer and Office Equipment are the only items of FF&E which Management Company is authorized to lease (rather than purchase). At Management Company's option, lease payments with respect to Shuttle Vehicles and Communications, Computer and Office Equipment shall be paid from the FF&E Reserve. If Management Company proposes that other items of FF&E (other than Shuttle Vehicles and Communications, Computer and Office Equipment) should be leased rather than purchased, Management Company shall submit such proposal to Owner for Owner's approval (not to be unreasonably withheld; provided, however that in connection with the foregoing, it is understood that the failure of a Qualified Lender to approve such leasing proposal shall justify Owner in withholding its approval thereof, regardless of whether withholding such approval would otherwise be deemed to be unreasonable. E. The percentage contribution for the FF&E Reserve which is described in Section 8.02.B is an estimate. As the Hotel ages, this percentage may not be sufficient to keep the FF&E Reserve at the levels necessary to make the replacements and renewals to the Hotel's FF&E, or to make the repairs to the Hotel building of the nature described in Section 8.02.A.2, which are required to maintain the Hotel in accordance with the Fairfield Inn System Standards and comparable with competitive hotels. If (i) any FF&E -84- Estimate prepared in good faith by Management Company exceeds the available funds in the FF&E Reserve or would cause a shortfall to occur in future years, and (ii) Management Company has prepared and delivered to Owner a financial plan describing the shortages in the available funding in the FF&E Reserve for the Fiscal Years in question, Management Company will have the right, during the time periods described in such financial plan, to increase the percentage of Gross Revenues set forth in Section 8.02.B to a higher percentage, provided that in no event will such percentage exceed six percent (6%) of Gross Revenues per Fiscal Year. F. If any FF&E Estimate which is prepared in accordance with clauses (i) and (ii) of Section 8.02.E would require funding in excess of six percent (6%) of Gross Revenues per Fiscal Year, Owner may either: 1. Agree to increase the percentages of Gross Revenues set forth in Section 8.02.B to provide the additional funds required, or 2. Make a lump-sum contribution to the FF&E Reserve in the necessary amount (in which case, such lump-sum contribution shall be an Owner Deduction and shall be reimbursed to Owner in equal annual payments over the useful life of the FF&E which is purchased, and such reimbursements shall be Deductions). If Owner elects not to agree to either option 1 or option 2 above within thirty (30) days after the submission of such FF&E Estimate (or, if Owner has elected option 2, and has not funded the -85- required amount within sixty (60) days after expiration of the aforesaid thirty (30) day period), Management Company shall be entitled, at its option, to terminate this Agreement by written notice to Owner, (with a copy to each Qualified Lender) which notice shall be delivered no later than ninety (90) days after the expiration of the sixty (60) day period described in the preceding sentence. The effective date of such Termination shall be the date set forth in such notice, provided that in no event shall the effective date of such Termination be less than one hundred eighty (180) days, and no more than three hundred sixty five (365) days after the date of such notice. Such failure to fund by Owner shall not be deemed a Default by Owner under Article XVI, and Management Company shall not be entitled to any remedies with respect to such failure other than such termination of this Agreement and as set forth in Section 8.03.E. G. If Owner owns any other hotel(s) in the Fairfield Inn System which is (are) operated by Management Company, Management Company shall co-mingle the FF&E Reserve for the Hotel with the FF&E reserve account for Owner's other hotel(s) in a single bank account unless such co-mingling is prohibited by any Qualified Lender. -86- 8.03 Building Alterations, Improvements, Renewals, and Replacements -------------------------------------------------------------- A. Management Company shall prepare an annual estimate (the "Building Estimate") of the expenditures necessary for major repairs, alterations, improvements, renewals and replacements (which repairs, alterations, improvements, renewals and replacements are not among those referred to in Section 8.02.A.2) to the structure or exterior facade of the Hotel, or to the mechanical, electrical, heating, ventilating, air conditioning, plumbing, or vertical transportation elements of the Hotel building. Management Company shall submit each such Building Estimate to Owner for its approval at the same time the Annual Operating Projection is submitted, and Management Company shall not make any expenditures for such purposes without the prior written consent of Owner. Owner shall not unreasonably withhold its consent with respect to such changes, repairs, alterations, improvements, renewals or replacements to the Hotel as are required by reason of any Legal Requirement, or required under Management Company's current life-safety standards (provided that, in order for any such life-safety standards to be "required" within the meaning of this Section 8.03.A, such standards must be both required and in the process of being implemented at a majority of the hotels within the Fairfield Inn System operated by Management Company, which are comparable to the Hotel), or otherwise required for the continued safety of guests or prevention of material damage -87- to property, including the removal of Hazardous Materials in compliance with all Environmental Laws pursuant to Section 20.10). B. In the event of the receipt by Management Company of a governmental order or other circumstances described in Section 8.03.A above, Management Company shall give Owner notice thereof within five (5) business days thereafter or sooner if circumstances reasonably warrant; Management Company shall then be authorized (but not obligated) to take appropriate remedial action without receiving Owner's prior consent as follows: (i) in an emergency threatening the Hotel, its guests, invitees or employees; or (ii) if the continuation of the given condition could (in Management Company's reasonable judgment) potentially subject Management Company and/or Owner to either criminal or more than de -- minimis civil liability, and Owner has either failed to remedy the situation or - ------- has failed to take appropriate legal action to stay the effectiveness of any applicable Legal Requirement. Management Company shall cooperate with Owner in the pursuit of any such action and shall have the right to participate therein. Owner shall reimburse Management Company for any costs incurred by Management Company in connection with any such remedial action within thirty (30) days after Owner's receipt of notice from Management Company of the amount of such costs. C. The cost of all changes, repairs, alterations, improvements, renewals or replacements referred to in Section 8.03.A or 8.03.B (including the expenses incurred by either Owner -88- or Management Company in connection with any civil or criminal proceeding described above) shall be borne solely by Owner, and shall not be paid from Gross Revenues or from the FF&E Reserve. Any failure of Owner to either (i) approve and provide funding for any proposed expenditures pursuant to the last sentence of Section 8.03.A, within seventy-five (75) days after Management Company's request therefor, or (ii) in the case of any Legal Requirement which is described in Section 8.03.B, to either comply therewith or to stay the effectiveness of such Legal Requirement during the period of any contesting thereof, shall be a Default by Owner. In such event, Management Company shall be entitled (without affecting its other remedies under Article XVI) to terminate this Agreement upon ninety (90) days' written notice to Owner; (with a copy to each Qualified Lender); provided, however, that Management Company shall have the right to stipulate such shorter period of time as may be appropriate, given the time periods which are mandated by Legal Requirements, as described in Section 8.03.A, or given Management Company's good faith concerns about its own civil and/or criminal liability. D. Management Company shall have the right, from time to time, to set forth in any Building Estimate (in addition to the expenditures described in Section 8.03.A), such changes, alterations or improvements to the Hotel as are required, in Management Company's reasonable judgment, to keep the Hotel in a competitive, efficient and economical operating condition, in -89- accordance with the Fairfield Inn System Standards (which Management Company shall substantiate by demonstrating a reasonable return on the proposed investment to be made by Owner). The cost of all changes, alterations or improvements referred to in this Section 8.03.D shall be paid, to the extent reasonably possible (given the requirement, set forth in Section 8.02, that the balance in the FF&E Reserve be maintained at a level sufficient to maintain the Hotel in accordance with the Fairfield Inn System Standards) from the FF&E Reserve, and Owner shall pay such costs from its own funds only to the extent there are not adequate funds for such purpose in the FF&E Reserve. Any failure of Owner to approve and provide funding for the Owner's portion of any proposed expenditures pursuant to Section 8.03 D, as described in the preceding sentence, or provide funding for items in Section 8.03.A (other than those items included in the last sentence of Section 8.03.A) within sixty (60) days after Management Company's request therefor, shall not be a Default by Owner but shall entitle Management Company to terminate this Agreement and receive payment of the fee set forth in Section 8.03.E. Such Termination shall be evidenced by a written notice to Owner, (with a copy to each Qualified Lender) which notice shall be delivered to Owner no later than ninety (90) days after the expiration of the sixty (60) day period described in the preceding sentence. The effective date of such Termination shall be the date stated by Management Company in such notice, provided that such effective date shall be no less -90- than one hundred eighty (180) days, and no more than three hundred sixty (360) days, after the date of such notice. It is understood that "alterations" and "improvements" which either (a) increase or decrease the number of guest rooms in the Hotel, or (b) involve changing the architectural footprint of the Hotel or involve other significant changes in the structural design of the Hotel, in any case by more than a de minimis amount, are beyond the scope of this Article -- ------- VIII, and would require an amendment of this Agreement prior to implementation by either party. E. Notwithstanding anything to the contrary in Section 8.02.F and 8.03.D, if Owner owns five (5) or fewer hotels in the Fairfield Inn System which are managed by Management Company, and Management Company elects to terminate the Management Agreement due to: (i) Owner's failure to elect either option 1 or 2 in Section 8.02.F; (ii) Owner's failure to fund the required amount in Section 8.02.F, having elected option 2, or (iii) Owner's failure to fund pursuant to Section 8.03.D, as applicable, then upon Management Company's election to terminate the Management Agreement, which pursuant to both Sections 8.02.F and 8.03.D must (a) be made within ninety (90) days following the expiration of the time period in which Owner must provide such additional funds, and (b) set forth an effective date of such Termination which is no less than one hundred eighty (180) days and no more than three hundred sixty five (365) days after the date of such notice, then, Owner agrees to pay to Management Company a fee equal to three (3) times the Base -91- Management Fee for the prior Fiscal Year (regardless of whether said Base Management Fee was actually paid to Management Company); provided, however, that if, within ten (10) days from receipt of Management Company's notice to terminate, Owner provides the funds required pursuant to Section 8.02.F or 8.03.D, as applicable, then upon receipt of such funds by Management Company, Management Company's notice to terminate shall be deemed null and void and this Agreement shall continue in full force and effect. Said fee shall be paid to Management Company upon the termination date set forth in the written notice from Management Company to Owner terminating this Agreement. This fee shall be compensation for lost revenue and expenses and not as a penalty. If Owner fails to pay such fee within the time period set forth herein, then Management Company shall have the right (without affecting Management Company's other right under this Agreement) to withhold the amount of such fee from Owner's Distribution. 8.04 Liens ----- Management Company and Owner shall use their best efforts to prevent any liens from being filed against the Hotel which arise from any maintenance, repairs, alterations, improvements, renewals or replacements in or to the Hotel. They shall cooperate fully in obtaining the release of any such liens, and the cost thereof, if the lien was not occasioned by the fault of either party, shall be treated the same as the cost of the matter to which it relates. If -92- the lien arises as a result of the fault of either party, then the party at fault shall bear the full cost (including, without limitation, all legal fees, court costs, bonding fees and underlying debt) of obtaining the lien release. 8.05 Ownership of Replacements, Etc. ------------------------------- All repairs, alterations, improvements, renewals or replacements of the Hotel which are made pursuant to Article VIII or otherwise shall be the property of Owner. Subject to the provisions of Section 8.02, the funds in the FF&E Reserve shall be the property of Owner. END OF ARTICLE VIII -93- ARTICLE IX BOOKKEEPING AND BANK ACCOUNTS ----------------------------- 9.01 Books and Records ----------------- A. Books of control and account shall, in all material respects, be kept on the accrual basis and in accordance with the Uniform System of Accounts, with the exceptions provided in this Agreement. Owner may at reasonable intervals during Management Company's normal business hours examine such records. Within seventy-five (75) days following the close of each Fiscal Year, Management Company shall furnish Owner a statement (the "Annual Operating Statement") substantially in the form of Exhibit G hereto for such Fiscal Year and a certificate of Management Company's chief accounting officer (or its controller or any vice-president), certifying that to the best of his or her knowledge and belief such year-end Annual Operating Statement is true and correct. Owner shall have sixty (60) days after receipt to examine or review (at Owner's sole expense, and not as a Deduction) said Annual Operating Statement. If Owner raises no objections within said sixty (60) day period, the Annual Operating Statement shall be deemed to have been accepted by Owner as true and correct, and Owner shall have no further right to question its accuracy. If Owner does raise such an objection, by notice to Management Company, Owner shall arrange for an audit to be commenced within sixty (60) days after the date of such objection, and shall diligently cause such audit to be -94- completed within a reasonable period of time. Owner shall pay all costs and expenses of such audit at its sole expense (and not as a Deduction); however, if such audit establishes that Management Company has understated the Operating Profit for that Fiscal Year by five percent (5%) or more, the reasonable costs and expenses of such audit shall be paid as a Deduction (provided, however, that the amount of such costs and expenses so paid as a Deduction, as opposed to being paid as Owner's sole expense, shall in no event exceed the dollar amount of such understatement of Operating Profit). B. Upon written request by Owner, but in no event more frequently than annually, Management Company shall, prepare and deliver to Owner the Management Analysis Report. In addition, Management Company shall, in connection with an impending Sale of the Hotel or commitment by a Qualified Lender to make a Qualified Loan, within thirty (30) days after written request therefor from Owner, prepare and deliver to Owner an updated Management Analysis Report describing significant changes since the effective date of the most recent Management Analysis Report; provided, however that Management Company shall not be required to prepare such updated Management Analysis Report if a report has been delivered within the previous one hundred twenty (120) days. The cost and expense of preparing the Management Analysis Report shall be paid as a Deduction. -95- 9.02 Hotel Accounts, Expenditures ---------------------------- A. All funds derived from operation of the Hotel shall be deposited by Management Company in Hotel bank accounts (the "Operating Accounts") in a bank or banks designated by Management Company and approved by Owner, which approval shall not be unreasonably withheld. Withdrawals from said accounts shall be made only by representatives of Management Company whose signatures have been authorized. Reasonable petty cash funds shall be maintained at the Hotel. B. All payments made by Management Company hereunder shall be made from authorized bank accounts, petty cash funds, or from Working Capital provided by Owner pursuant to Section 7.01. Management Company shall not be required to make any advance or payment to or for the account of Owner except out of such funds, and Management Company shall not be obligated to incur any liability or obligation for Owner's account without assurances that necessary funds for the discharge thereof will be provided by Owner. Debts and liabilities incurred by Management Company as a result of its operation and management of the Hotel pursuant to the terms hereof, whether asserted before or after the Termination of this Agreement, will be paid by Owner to the extent funds are not available to Management Company for that purpose from Gross Revenues. -96- 9.03 Annual Operating Projection --------------------------- A. Management Company shall submit to Owner for its review, at least thirty (30) days prior to the beginning of each full Fiscal Year after the Effective Date, a preliminary draft of the projection of the estimated financial results of the operation of the Hotel during the next Fiscal Year substantially in the form of Exhibit H (the "Annual Operating Projection"). Such Annual Operating Projection shall project the estimated Gross Revenues and Operating Profit for the forthcoming Fiscal Year for the Hotel. In preparing the Annual Operating Projection for each Fiscal Year, Management Company's goal will be the maximization of the long-term Operating Profit of the Hotel, in keeping with Fairfield Inn System Standards and the general standards of the hotel industry for similar properties. At Owner's request, Management Company agrees to take reasonable steps to ensure that qualified personnel from Management Company's staff are available to explain the preliminary draft of the Annual Operating Projection including any material items which are expected to be significantly different amounts from the amounts actually experienced (or projected) for the same items in the preceding Fiscal Year. A meeting (or meetings) for such purpose shall be held, at Owner's request, within a reasonable period of time after the submission to Owner of the preliminary draft of the Annual Operating Projection. Management Company will at all times give good faith consideration to Owner's suggestions regarding any Annual Operating Projection. Management Company -97- shall thereafter submit to Owner, twenty (20) days after the beginning of such Fiscal Year, the final Annual Operating Projection. B. Management Company shall use reasonable efforts to adhere to the Annual Operating Projection. It is understood, however, that the Annual Operating Projection is an estimate only and that unforeseen circumstances such as, but not limited to, the costs of labor, materials, services and supplies, casualty, operation of law, or economic and market conditions may make adherence to the Annual Operating Projection impracticable, and Management Company shall be entitled to depart therefrom for such reasons. 9.04 Operating Losses; Credit ------------------------ A. To the extent there is an Operating Loss, additional funds in the amount of any such Operating Loss shall be provided by Owner within thirty (30) days after Management Company has given written notice thereof to Owner; provided, however, that if Owner has already received a request from Management Company for additional Working Capital pursuant to Section 7.01.A, and if such request under Section 7.01.A reflects fundamentally the same cash shortage which resulted in a request under this Section 9.04.A, Owner and Management Company shall mutually discuss the extent to which the requests under Section 7.01.A and Section 9.04.A may overlap, and such requests shall be modified accordingly. -98- B. In no event shall either party borrow money in the name of or pledge the credit of the other. 9.05 Consolidated Reports --------------------- With respect to Management Company's reports, books and records required to be kept and provided to Owner pursuant to Sections 9.01.A, 9.01.B and 9.03.A hereof provided that Owner is also the owner of other hotels in the Fairfield Inn System and that said Hotels are managed by Management Company, Management Company shall have the right, at Management Company's option, to prepare said reports on a consolidated basis rather than by individual hotel; provided, however that if Owner reasonably determines that it requires individual reports for each individual hotel and requests individual reports from Management Company, in writing, together with Owner's reasons for requesting individual reports, Management Company shall comply with such request. END OF ARTICLE IX -99- ARTICLE X PROPRIETARY MARKS; INTELLECTUAL PROPERTY ---------------------------------------- 10.01 Proprietary Marks ----------------- A. During the Term of this Agreement, the Hotel shall be known as a "Fairfield Inn", "Fairfield Inn by Marriott" or "Marriott Fairfield Inn" with such additional identification as may be agreed to by Owner and Management Company to provide local identification. If the name of the "Fairfield Inn" system is changed, Management Company shall have the right to change the name of the Hotel to conform thereto. B. The names "Marriott", "Fairfield Inn", "Fairfield Inn by Marriott" and "Marriott Fairfield Inn" whether used alone or in connection with another word or words, and all other Proprietary Marks shall in all events remain the exclusive property of Management Company and its Affiliates. Owner shall have no right to use the Marriott or Fairfield Inn name or any other Proprietary Marks; provided, however, that Owner shall have the right, during the Term of this Agreement, to have Proprietary Signage installed (in strict conformance with the specifications provided by Management Company prior to the Effective Date, or subsequent specifications provided by Management Company from time to time during the Term) in the Hotel and on the Site. C. Except as provided in Section 10.02, upon Termination, any use of or right to use the Marriott or Fairfield Inn name or any other Proprietary Marks by Owner shall immediately cease. As of -100- the date of Termination, Management Company shall remove all Proprietary Signage from the Hotel and from the Site (and from any locations other than the Site). The cost of such removal shall be paid as set forth in Section 4.02.E. D. Notwithstanding the foregoing, those trademarks, trade names, symbols, logos and designs which are specifically listed on Exhibit "E" shall be deemed "Proprietary Marks" only during the Term of this Agreement; upon a Termination, the exclusive control of such Proprietary Marks shall revert to Owner. 10.02 Purchase of Inventories and Fixed Asset Supplies ------------------------------------------------ Upon Termination, Management Company shall have the option, to be exercised no later than thirty (30) days prior to Termination, to elect to purchase, at their then book value, any items of the Hotel's Inventories and Fixed Asset Supplies as may be marked with the Fairfield Inn name or any other Proprietary Marks. In the event Management Company does not exercise such option, Owner agrees that it will use any such items not so purchased exclusively in connection with the Hotel until they are consumed. 10.03 Computer Software and Equipment ------------------------------- A. All Software is and shall remain the exclusive property of Management Company or one of its Affiliates (or the licensor of such Software, as the case may be), and Owner shall have no right to use, or to copy, any Software. -101- B. Upon Termination, Management Company shall have the right to remove from the Hotel, without compensation to Owner, all Software. Furthermore, upon Termination, Management Company shall be entitled to remove from the Hotel any computer equipment which is utilized as part of a centralized reservation or property management system or is otherwise considered proprietary by Management Company. If any of such removed computer equipment is owned by Owner, Management Company shall reimburse Owner for all previous expenditures made by Owner for the purchase of such equipment, subject to a reasonable allowance for depreciation. 10.04 Intellectual Property --------------------- All Intellectual Property shall at all times be proprietary to Management Company or its Affiliates, and shall be the exclusive property of Management Company or its Affiliates. During the Term of this Agreement, Management Company shall be entitled to take all reasonable steps to ensure that the Intellectual Property remains confidential and is not disclosed to anyone other than Management Company's employees at the Hotel. Upon Termination, all Intellectual Property shall be removed from the Hotel by Management Company, without compensation to Owner. -102- 10.05 Breach of Covenant ------------------ Management Company and/or its Affiliates shall be entitled, in case of any breach of the covenants of Article X by Owner or others claiming through it, to injunctive relief and to any other right or remedy available at law. Article X shall survive Termination. END OF ARTICLE X -103- ARTICLE XI POSSESSION AND USE OF HOTEL --------------------------- 11.01 Quiet Enjoyment --------------- Owner covenants that, so long as: (i) an Event of Default by Management Company has not occurred under Article XVI of this Agreement; and (ii) Owner does not have the right to terminate this Agreement under any other Section of this Agreement, Management Company shall quietly hold, occupy and enjoy the Hotel throughout the Term hereof free from hindrance or ejection by Owner or other party claiming under, through or by right of Owner (except as may be otherwise set forth in Section 6.04). Owner agrees to pay and discharge any payments and charges and, at its expense, to prosecute all appropriate actions, judicial or otherwise, necessary to assure such free and quiet occupation. Nothing set forth in the preceding sentence, however, shall be deemed to create a recourse obligation by Owner to pay any payment or charge pursuant to a contract which is non-recourse to Owner. 11.02 Use --- A. Management Company shall use the Hotel solely for the operation of a hotel pursuant to the Fairfield Inn System Standards, and for all activities in connection therewith which are customary and usual to such an operation. -104- B. Management Company shall comply with and abide by all applicable Legal Requirements pertaining to the operation of the Hotel, provided that: (i) all costs and expenses (other than those which are specifically described in clauses (ii) or (iii) of this Section 11.02.B) of such compliance shall be paid from Gross Revenues as Deductions in the computation of Operating Profit; (ii) all costs and expenses of compliance with Environmental Laws shall be paid as set forth in Section 20.10; (iii) all costs and expenses of compliance with the Legal Requirements which are described in Section 8.03.A shall be paid as set forth in Section 8.03; and (iv) Management Company shall have the right, but not the obligation, in its reasonable discretion, to contest or oppose, by appropriate proceedings, any such Legal Requirements (provided that the consent of Owner, not to be unreasonably withheld, shall be obtained prior to initiating any such proceedings which directly involve Owner's ownership interest in the Hotel in a material manner. The reasonable expenses of any such contest shall be paid from Gross Revenues as Deductions. 11.03 Chain Services -------------- A. Management Company shall, beginning with the Effective Date and thereafter during the Term of this Agreement, cause Chain Services to be furnished to the Hotel. B. Costs and expenses incurred in the providing of Chain Services shall be allocated on a fair and equitable basis among all -105- Fairfield Inn hotels owned, leased or managed by Management Company in the United States which benefit from these services. Such allocation shall be made without regard to any "caps" or other limitations on the amount which Management Company or its Affiliates may charge to a given hotel, pursuant to agreements which Management Company (or its Affiliates) may have with the owner of such hotel. Any excess of that portion of such costs and expenses which is fairly allocated to a given hotel over the "cap" which may be in effect with regard to that hotel shall be paid by Management Company from its own funds. Management Company shall make no profit from Chain Services. Upon Owner's written request, an explanation of the current Chain Services will be given to Owner, and the basis for the allocation of the charge for each Chain Service will be explained to Owner, in reasonable detail, at the time of the submission of the Annual Operating Statement (as more particularly set forth in Section 9.01). In no event will the total charge for all of the Chain Services which are described in the definition of Chain Services in Section 1.01 (exclusive of reservation system services), for any given Fiscal Year, exceed four and one half percent (4 1/2%) of Gross Revenues for such Fiscal Year. The parties hereby stipulate that the limitation set forth in the preceding sentence is intended to apply only to the services which are currently listed (as of the Effective Date) in the definition of Chain Services in Section 1.01; accordingly, if there are types of expenditures which were originally treated as -106- Deductions (other than pursuant to paragraph 8 of the definition of "Operating Profit" in Section 1.01), but which are later determined to be more properly treated as Chain Services, such expenditures shall be treated as Deductions pursuant to said paragraph 8 of the definition of "Operating Profit" without regard to the aforesaid limitation. 11.04 Owner's Right to Inspect ------------------------ Owner or its agents shall have access to the Hotel at any and all reasonable times for the purpose of inspection or showing the Hotel to prospective purchasers, tenants or Holders. 11.05 Indemnity --------- A. Management Company shall indemnify and hold harmless Owner (and any officer, director, employee, advisor, partner or shareholder of Owner) in respect of, and, at Owner's request, shall defend any action, cause of action, suit, debt, cost, expense (including, without limitation, reasonable attorneys' fees), claim or demand whatsoever brought or asserted by any third person whomsoever, at law or in equity, arising by reason of: (i) liabilities stemming from general corporate matters of Management Company or its Affiliates, to the extent the same are not directly and primarily related to the Hotel; (ii) infringement and other claims relating to the Proprietary Marks; (iii) if Management Company intentionally or negligently fails to maintain insurance -107- coverage that it is required to maintain pursuant to this Agreement, the excess of the amount of any liability or loss that would have been covered over the amount of any applicable deductible; and (iv) the bad faith or willful misconduct of Management Company or its Affiliates, or any of their employees, servants or agents or other persons for whom they are responsible, resulting in a claim for bodily injury, death or property damage occurring on, in or in conjunction with the business of the Hotel, to the extent that such claim exceeds the insurance proceeds (including Hotel Retentions) which are available to pay such claim. B. If any claim, action or proceeding is made or brought against Owner, against which claim, action or proceeding Management Company shall be obligated to indemnify pursuant to the terms of this Agreement, then, upon demand by Owner, Management Company, at its sole cost and expense, shall resist or defend such claim, action or proceeding (in Owner's name, if necessary), using such attorneys as Owner shall approve, which approval shall not be unreasonably withheld. If, in the Owner's reasonable opinion, (i) there exists a conflict of interest which would make it inadvisable to be represented by counsel for Management Company, or (ii) there are legal defenses available to Management Company that are different from or inconsistent with those available to the Owner, or (iii) there are claims at issue which are not covered by Management Company's insurance, the Owner shall be entitled to -108- retain its own attorneys, and Management Company shall pay the reasonable fees and disbursements of such attorneys. C. Matters with respect to which Management Company has specifically agreed to indemnify Owner under other provisions of this Agreement (for example, Section 14.01 regarding "Employee Claims", and Section 20.11 regarding environmental matters) are to be treated exclusively under such other provisions and not under this Section 11.05. END OF ARTICLE XI -109- ARTICLE XII INSURANCE --------- 12.01 Interim Insurance ----------------- [Intentionally omitted] 12.02 Property and Operational Insurance ---------------------------------- Management Company shall, commencing with the Effective Date and thereafter during the Term of this Agreement, procure and maintain, either with insurance companies of recognized responsibility or by legally qualifying itself as a self insurer, a minimum of the following insurance: A. Property insurance on the Hotel building(s) and contents against loss or damage by fire, lightning and all other risks covered by the usual extended coverage endorsement, all in an amount not less than one hundred percent (100%) of the replacement cost thereof (excluding the cost of foundations and excavations); B. Boiler and machinery insurance against loss or damage from explosion of boilers or pressure vessels to the extent applicable to the Hotel; C. Business interruption insurance covering loss of profits and necessary continuing expenses for interruptions caused by any occurrence covered by the insurance referred to in Section 12.02.A and B, which shall be of a type and in such amounts (but such coverage shall in no event be for less than one (1) year) as are -110- generally established by Management Company at similar hotels it owns, leases or manages under the Fairfield Inn name in the United States; D. General liability insurance against claims for bodily injury, death or property damage occurring on, in, or in conjunction with the business of the Hotel, and automobile liability insurance on vehicles operated in conjunction with the Hotel, with a combined single limit for each occurrence of not less than One Hundred Million Dollars ($100,000,000); representatives of Management Company and Owner shall meet, at Owner's request, at intervals of approximately once every five (5) years, to review the adequacy of such limit; E. Workers' compensation and employer's liability insurance as may be required under applicable laws covering all of Management Company's employees at the Hotel; F. Fidelity bonds, with reasonable limits to be determined by Management Company, covering its employees in job classifications normally bonded in other similar hotels it leases or manages under the Fairfield Inn name in the United States or as otherwise required by law, and comprehensive crime insurance to the extent Management Company and Owner mutually agree it is necessary for the Hotel; and G. Such other insurance in amounts as Management Company and Owner, in their reasonable judgment, mutually deem advisable for -111- protection against claims, liabilities and losses arising out of or connected with the operation of the Hotel. 12.03 General Insurance Provisions ---------------------------- A. All insurance described in Section 12.02 may be obtained by Management Company by endorsement or equivalent means under its blanket insurance policies, provided that such blanket policies substantially fulfill the requirements specified herein. Upon the request of either Owner or any Qualified Lender, representatives of the requesting party shall be entitled to examine, at Management Company's corporate headquarters, all insurance policies maintained by Management Company regarding the Hotel. B. Management Company may self insure or otherwise retain such risks or portions thereof as it does with respect to other similar hotels it owns, leases or manages under the Marriott name in the United States. C. All policies of insurance required under Section 12.02 shall be carried in the name of Management Company. The policies required under Sections 12.02.A, B, C and D shall include the Owner as an additional insured. Upon notice by the Owner, Management Company shall also have the policies required under Sections 12.02 A, B, C and D include any Qualified Lender as an additional insured. Any property losses thereunder shall be payable to the respective parties as their interests may appear. Any Mortgage on the Hotel shall contain provisions to the effect that proceeds of -112- the insurance policies required to be carried under Section 12.02.A and B shall, with respect to any casualty involving less than twenty-five percent (25%) of the replacement cost of the Hotel, be available for repair and restoration of the Hotel. D. Management Company shall deliver to the Owner certificates of insurance with respect to all policies so procured and, in the case of insurance policies about to expire, shall deliver certificates with respect to the renewal thereof. E. All certificates of insurance provided for under Article XII shall, to the extent obtainable, state that the insurance shall not be cancelled or materially changed without at least thirty (30) days' prior written notice to Owner. F. The term "Hotel Retention" shall mean the amount of any loss or reserve under Management Company's blanket insurance or self-insurance programs which is allocated to the Hotel, not to exceed the higher of (a) the maximum per occurrence limit established for similar hotels participating in such programs, or (b) the insurance policy deductible on any loss which may fall within high hazard classifications as mandated by the insurer (e.g., earthquake, flood, windstorm on coastal properties, etc.). If the Hotel is not a participant under Management Company's blanket insurance or self-insurance programs, "Hotel Retention" shall mean the amount of any loss or reserve allocated to the Hotel, not to exceed the insurance policy deductible. -113- 12.04 Cost and Expense ---------------- A. [Intentionally omitted] B. Insurance premiums and any other costs or expenses with respect to the insurance or self-insurance required under Section 12.02, including any Hotel Retention, shall be paid from Gross Revenues as Deductions. To the extent that such costs or expenses include reimbursement by Management Company of its own costs or expenses, or those of one of its Affiliates, such costs or expenses shall be generally competitive (as calculated over the Term of this Agreement) with costs and expenses of non-affiliated entities providing similar services. Such premiums and costs shall be allocated on an equitable basis to the hotels participating under Management Company's blanket insurance or self-insurance programs. Any reserves, losses, costs or expenses which are uninsured shall be treated as a cost of insurance and shall be Deductions. Upon Termination, an escrow fund in an amount reasonably acceptable to Management Company shall be established from Gross Revenues (or, if Gross Revenues are not sufficient, with funds provided by Owner) to cover the amount of any Hotel Retention and all other costs which will eventually have to be paid by either Owner or Management Company with respect to pending or contingent claims, including those which arise after Termination for causes arising during the Term of this Agreement. Upon the final disposition of all such pending or contingent claims, any unexpended funds remaining in such escrow shall be paid to Owner. -114- 12.05 Owner's Option to Obtain Certain Insurance ------------------------------------------ Owner may, at its option, by written notice to Management Company which shall be delivered no later than ninety (90) days prior to the natural expiration of the insurance policies which Management Company has obtained pursuant to Section 12.02.A, B and C, procure and maintain the insurance specified in Section 12.02.A, B and C (in which case Management Company shall allow such policies obtained by it under Section 12.02.A, B, and C to expire), subject to the following terms and conditions: A. All such policies of insurance shall be carried in the name of Owner, with Management Company as an additional insured. Any property losses thereunder shall be payable to the respective parties as their interests may appear. The documentation with respect to each Secured Loan shall contain provisions to the effect that proceeds of the insurance policies required to be carried under Section 12.01.A and B shall be available for repair and restoration of the Hotel, to the extent required pursuant to Section 12.03.C. However, any Holder of such Secured Loan shall be entitled to impose reasonable conditions on the disbursement of insurance proceeds for the repair and/or restoration of the Hotel, including a demonstration by Owner and/or Management Company that the amount of such proceeds (together with other funds Owner agrees to make available) is sufficient for such purpose. B. Owner shall deliver to Management Company certificates of insurance with respect to all policies so procured and, in the case -115- of insurance policies about to expire, shall deliver certificates with respect to the renewal thereof. C. All such certificates of insurance shall, to the extent obtainable, state that the insurance shall not be canceled or materially changed without at least thirty (30) days' prior written notice to the certificate holder. D. Premiums for such insurance coverage shall be treated as Deductions, provided that if the cost of such insurance procured by Owner exceeds the cost of Management Company's comparable coverage by more than ten percent (10%), all such excess costs shall be the sole responsibility of Owner and shall not be a Deduction. E. Should Owner exercise its option to procure the insurance described in this Section 12.05, Owner hereby waives its rights of recovery from Management Company or any of its Affiliates (and their respective directors, officers, shareholders, agents and employees) for loss or damage to the Hotel, and any resultant interruption of business. F. Should Owner exercise its right to obtain the insurance described in this Section 12.05, Owner acknowledges that Management Company is under no obligation to thereafter include the Hotel in its blanket insurance program (with respect to the coverage described in Section 12.02.A, B and C) for the balance of the Term of this Agreement. However, upon a Sale of the Hotel, a successor Owner shall have the right, notwithstanding the fact that the previous Owner may have obtained insurance in accordance with this -116- Section 12.05, to have the Hotel included in Management Company's blanket insurance program (provided that the Hotel, as of that point in time, satisfies the applicable criteria for admission to such program, as established by the program's insurance carriers) by making a written request to Management Company for such inclusion not later than thirty (30) days after the date on which such party becomes the Owner. G. All insurance procured by Owner hereunder shall be obtained from reputable insurance companies reasonably acceptable to Management Company. END OF ARTICLE XII -117- ARTICLE XIII TAXES ----- 13.01 Real Estate and Personal Property Taxes --------------------------------------- A. Except as specifically set forth in subsection B below, all Impositions which accrue during the Term of this Agreement (or are properly allocable to such Term under generally accepted accounting principles) shall be paid by Management Company from Gross Revenues, as a Deduction, before any fine, penalty, or interest is added thereto or lien placed upon the Hotel or the Agreement, unless payment thereof is stayed; provided, however, that Management Company shall not be responsible for any fine, penalty or interest resulting through no fault of Management Company or caused by Owner. Owner shall within five (5) business days after the receipt of any invoice, bill, assessment, notice or other correspondence relating to any Imposition, furnish Management Company with a copy thereof. Management Company shall, within the earlier of thirty (30) days of payment or fifteen (15) business days following written demand by Owner, furnish Owner with copies of official tax bills and assessments which Management Company has received, and evidence of payment or contest thereof. Either Owner or Management Company (in which case each party agrees to sign the required applications and otherwise cooperate with the other party in expediting the matter) may initiate proceedings to contest any Imposition, and all reasonable costs of any negotiations or -118- proceedings with respect to any such contest shall either (i) be paid from Gross Revenues and be a Deduction in determining Operating Profit; or (ii) be considered an Owner Deduction; provided, however that in the event either Owner or Management Company spends in excess of Five Thousand Dollars ($5,000.00) with respect to such contest, such party shall provide written notice to the other party and the other party shall approve or disapprove of such expenditure within ten (10) days following receipt of such notice. Failure of such party to approve or disapprove such expenditure shall be deemed approval. In the event that either party's expenditures in excess of Five Thousand Dollars ($5,000.00) are not approved by the other party such party may nevertheless proceed to spend whatever funds are necessary with respect to such contest; provided, however, that any amounts in excess of Five Thousand Dollars ($5,000.00) (or such higher amount as may have been approved by the other party) shall be at the sole cost of Owner or Management Company, as the case may be, and shall not be considered an Owner Deduction by Owner nor be considered a Deduction from Operating Profit by either Owner or Management Company. B. The word "Impositions", as used in this Agreement, shall not include the following, all of which shall be paid solely by Owner, not from Gross Revenues nor from the FF&E Reserve: 1. Any franchise, corporate, estate, inheritance, succession, capital levy or transfer tax imposed on Owner, or any -119- income tax imposed on any income of Owner (including distributions to Owner pursuant to Article V hereof); 2. Special assessments (regardless of when due or whether they are paid as a lump sum or in installments over time) imposed because of facilities which are constructed by or on behalf of the assessing jurisdiction (for example, roads, sidewalks, sewers, culverts, etc.) which directly benefit the Hotel (regardless of whether or not they also benefit other buildings), which assessments shall not be treated as Deductions, but rather shall be added to the Additional Invested Capital as of each payment by Owner with respect thereto; provided, however, that any installments (after the Effective Date) of any assessments which were levied or imposed prior to the Effective Date shall be Deductions; 3. "Impact Fees" (regardless of when due or whether they are paid as a lump sum or in installments over time) which are required of Owner as a condition to the issuance of site plan approval, zoning variances or building permits, which impact fees shall not be treated as Deductions, but rather shall be added to the Additional Invested Capital as of each payment by Owner with respect thereto; provided, however, that any installments (after the Effective Date) of any impact fees which were levied or imposed prior to the Effective Date shall be Deductions; and 4. "Tax-increment financing" or similar financing whereby the municipality or other taxing authority has assisted in -120- financing the construction of the Hotel by temporarily reducing or abating normal Impositions in return for substantially higher levels of Impositions at later dates. C. Owner shall have the right to require Management Company to establish an escrow account (with either any Qualified Lender or another entity reasonably acceptable to both Owner and Management Company) from which Impositions will be paid. Payments into such escrow account will be Deductions. Any interest which accrues on amounts deposited in such escrow account shall be added to the balance in such escrow account and used to pay Impositions. END OF ARTICLE XIII -121- ARTICLE XIV HOTEL EMPLOYEES --------------- 14.01 Employees --------- A. All personnel employed at the Hotel shall be the employees of Management Company. Management Company shall have absolute discretion to hire, promote, supervise, direct, train and discharge all employees at the Hotel, to fix their compensation and, generally, establish and maintain all policies relating to employment. B. Management Company shall decide which, if any, of the Hotel's employees shall reside at the Hotel (provided that,Owner's prior approval shall be obtained if more than one (1) such employee and their immediate families reside at the Hotel), and shall be permitted to provide free accommodations and amenities to its employees and representatives living at or visiting the Hotel in connection with its management or operation. No person shall otherwise be given gratuitous accommodations or services without prior joint approval of Owner and Management Company except in accordance with usual practices of the hotel and travel industry. C. Any proposed settlement of any Employee Claim where the amount proposed to be offered to the employee by Management Company is in excess of the Settlement Threshold Amount shall be jointly approved by Management Company and Owner. Any dispute between Owner and Management Company as to whether Management Company's -122- settlement recommendation is reasonable, where such proposed settlement is in excess of the Settlement Threshold Amount, shall be resolved by arbitration under Section 20.13 hereof; provided that Management Company shall have the right to settle any Employee Claim (prior to the arbitration on the reasonableness of the settlement, as described in this sentence) based on Management Company's recommendation, which shall be Management Company's reasonable estimate, in good faith, by using: (i) funds from Gross Revenues (as a Deduction) up to the amount of Owner's settlement recommendation, which shall be Owner's reasonable estimate, in good faith and (ii) Management Company's own funds to the extent Management Company's recommendation exceeds the amount described in subparagraph (i) above. Following the settlement of such Employee Claim, the parties will arbitrate under Section 20.13 the issue of whether Management Company's settlement recommendation was reasonable under the circumstances. If the arbitrators decide that Management Company's recommendation was reasonable, Management Company shall be entitled to reimburse itself from Gross Revenues (as a Deduction) in the amount of the funds advanced under subparagraph (ii) above, together with accrued interest thereon at the Prime Rate. If the arbitrators decide that Management Company's settlement recommendation was not reasonable, then Management Company shall not be entitled to any reimbursement of the amounts advanced by it under subparagraph (ii) above, nor to accrued interest thereon. -123- D. Management Company shall pay from its own funds, and not from Gross Revenues, any Employee Claim where the basis of such Employee Claim is conduct by Management Company which: (i) is a substantial violation of the standards of responsible labor relations as generally practiced by prudent owners or operators of similar hotel properties in the general geographic area of the Hotel; and (ii) is not the isolated act of individual employees, but rather is a direct result of corporate policies of Management Company which either encourage or fail to discourage such conduct. In addition, Management Company shall indemnify, defend and hold harmless Owner from and against any fines or judgments arising out of such conduct, and all Litigation expenses (including reasonable attorneys' fees and expenses) incurred in connection therewith. Any dispute between Owner and Management Company as to whether or not certain conduct by Management Company is not in accordance with the aforesaid standards shall be resolved by arbitration under Section 20.13 hereof. The arbitration proceedings described in the preceding sentence shall be conducted independently of any arbitration proceedings with respect to such Employee Claim pursuant to the applicable employee-related contract and/or pursuant to Section 14.01.C of this Agreement. E. With respect to all Litigation or arbitration involving Employee Claims in which both Management Company and Owner are involved as actual or potential defendants, Management Company shall have exclusive and complete responsibility (subject to the -124- rights of Owner to approve certain settlements, as set forth in Section 14.01.C) for the resolution of such Employee Claims. In the event that any Employee Claim is made against Owner, but not against Management Company, Owner shall give notice to Management Company of the Employee Claim in a timely manner so as to avoid any prejudice to the defense of the Employee Claim, provided that Management Company shall in all events be so notified within twenty (20) days after the date such Employee Claim is made against Owner. Management Company will thereafter assume exclusive and complete responsibility for the resolution of such Employee Claim. F. At Termination, other than by reason of an Event of Default of Management Company hereunder, an escrow fund shall be established from Gross Revenues (or, if Gross Revenues are not sufficient, with funds provided by Owner) to reimburse Management Company for all costs and expenses incurred by Management Company which arise out of either the transfer or the termination of employment of Management Company's employees at the Hotel, such as reasonable transfer costs, severance pay, unemployment compensation and other employee liability costs. END OF ARTICLE XIV -125- ARTICLE XV DAMAGE, CONDEMNATION AND FORCE MAJEURE -------------------------------------- 15.01 Damage and Repair ----------------- A. If, during the Term hereof, the Hotel is damaged or destroyed by fire, casualty or other cause, Owner shall, with all reasonable diligence, to the extent that proceeds from the insurance described in Section 12.02 are available (subject to the provisions of any Mortgage encumbering the Hotel, but with the limitations described in Section 12.03.C) for such purpose, repair or replace the damaged or destroyed portion of the Hotel to the same condition as existed previously. B. In the event damage or destruction to the Hotel from any cause materially and adversely affects the operation of the Hotel and Owner fails to timely (subject to Force Majeure, and subject to unreasonable delays caused by Management Company, including unreasonable delays in adjusting the insurance claim with the carriers which participate in Management Company's blanket insurance program) commence and complete the repairing, rebuilding or replacement of the same so that the Hotel shall be substantially the same as it was prior to such damage or destruction, such action shall be deemed an Event of Default by Owner pursuant to Section 16.01.E and Management Company may, at its option, elect to terminate this Agreement upon one hundred twenty (120) days' -126- written notice, in addition to its other remedies under Section 16.03. 15.02 Condemnation ------------ A. In the event all or substantially all of the Hotel shall be taken in any eminent domain, condemnation, compulsory acquisition, or similar proceeding by any competent authority for any public or quasi-public use or purpose, or in the event a portion of the Hotel shall be so taken, but the result is that it is unreasonable to continue to operate the Hotel, this Agreement shall terminate. B. In the event a portion of the Hotel shall be taken by the events described in Section 15.02.A, or the entire Hotel is affected but on a temporary basis, and the result is not to make it unreasonable to continue to operate the Hotel, this Agreement shall not terminate. However, so much of any award for any such partial taking or condemnation as shall be necessary to render the Hotel equivalent to its condition prior to such event shall be used for such purpose; the balance of such award, if any, shall be fairly and equitably apportioned between Owner and Management Company in accordance with their respective interests. The amount of any award received by Owner and not applied to restoration of the Hotel pursuant to Section 15.02.B shall be deducted from the Priority Basis and the Loan Priority Basis at such time as the award is received by Owner. In addition, the Performance Termination -127- Threshold shall be reduced by an amount equal to eight percent (8%) of such total amount (if any) of any award received by Owner pursuant to this Section 15.02.B which is not used to restore the Hotel. C. In the event of any proceeding described in Section 15.02.A or 15.02.B, Owner and Management Company shall each have the right to initiate such proceedings as they deem advisable to recover any damages to which they may be entitled; provided, however, that Management Company shall be entitled to retain the award or compensation it may obtain through proceedings which are conducted separately from those of Owner only if such award or compensation does not reduce the award or compensation otherwise available to Owner. (For this purpose, any award or compensation received by any Holder shall be deemed to be an award or compensation received by Owner). 15.03 Force Majeure ------------- A. The withdrawal or revocation of any License which is material to the operation of the Hotel in accordance with the Fairfield Inn System Standards, where such withdrawal or revocation: (i) is not due to the fault of either Management Company or Owner; and (ii) is not otherwise within the reasonable control of either Management Company or Owner, shall not be an Event of Default under Article XVI of this Agreement. Management Company and Owner shall each, in good faith, use all commercially -128- reasonable efforts (including the diligent pursuit of all available appeals), during the period of one hundred twenty (120) days after the date of such withdrawal or revocation, to have such License reinstated. If, notwithstanding such efforts, such License is not reinstated prior to the expiration of the aforesaid period of one hundred twenty (120) days, either Owner or Management Company shall have the right, at its option, to terminate this Agreement upon no less than sixty (60) days' notice to the other party; provided, however, that the terminating party must deliver such notice of Termination to the other party by no later than ninety (90) days after the expiration of such one hundred twenty (120) day period; and provided further, that no such Termination shall be effective if, prior to the effective date of such Termination, such License is reinstated or such withdrawal or revocation of such License is stayed. B. If an order, judgment or directive by a court or administrative body is issued, in connection with any legal or Litigation involving Owner, which restricts or prevents Management Company, in a material adverse manner, from operating the Hotel in accordance with the Fairfield Inn System Standards, and which, in Management Company's reasonable opinion, will have a significant adverse effect upon operations of the Hotel, Management Company shall be entitled, at its option, to terminate this Agreement upon sixty (60) days' written notice; provided, however, that upon making such election, Management Company shall deliver such notice -129- of Termination to Owner by no later than ninety (90) days after the issuance of such order, judgment or directive (or, if such order, judgment or directive is appealed, within ninety (90) days after the final disposition of such appeal). END OF ARTICLE XV -130- ARTICLE XVI DEFAULTS -------- 16.01 Definition of "Default" ----------------------- Any one or more of the following shall constitute a "Default," to the extent permitted by applicable law: A. The filing of a voluntary petition in bankruptcy or insolvency or a petition for reorganization under any bankruptcy law by either party, or the admission by either party that it is unable to pay its debts as they become due; B. The consent to an involuntary petition in bankruptcy or the failure to vacate, within ninety (90) days from the date of entry thereof, any order approving an involuntary petition by either party; C. The entering of an order, judgment or decree by any court of competent jurisdiction, on the application of a creditor, adjudicating either party as bankrupt or insolvent or approving a petition seeking reorganization or appointing a receiver, trustee, or liquidator of all or a substantial part of such party's assets, and such order, judgment or decree's continuing unstayed and in effect for any period of ninety (90) days; D. The failure of either party to make any payment required to be made in accordance with the terms of this Agreement, as of the due date which is specified in this Agreement; -131- E. The failure of either party to perform, keep or fulfill any of the other covenants, undertakings, obligations or conditions set forth in this Agreement. 16.02 Definition of "Event of Default" -------------------------------- A. Upon the occurrence of any Default by either party hereto (hereinafter referred to as the "defaulting party") under Section 16.01.A, B or C, such Default shall immediately and automatically, without the necessity of any notice to the defaulting party, constitute an "Event of Default" under this Agreement. B. Upon the occurrence of any Default by defaulting party under Section 16.01.D, such Default shall constitute an "Event of Default" under this Agreement if the defaulting party fails to cure such Default within ten (10) days after written notice from the non-defaulting party specifying such Default and demanding such cure. C. Upon the occurrence of any Default by either party hereto under Section 16.01.E, such Default shall constitute an "Event of Default" under this Agreement if the defaulting party fails to cure such Default within thirty (30) days after written notice from the non-defaulting party and demanding such cure, or, if the Default is such that it cannot reasonably be cured within said thirty (30) day period of time, if the defaulting party fails to commence the cure of such Default within said thirty (30) day period of time or thereafter fails to diligently pursue such efforts to completion. -132- 16.03 Remedies Upon an Event of Default --------------------------------- A. Upon the occurrence of an Event of Default under the provisions of Section 16.02, the non-defaulting party shall have the right to pursue any one or more of the following courses of action: (i) in the event of a material breach by the defaulting party of its obligations under this Agreement, to terminate this Agreement by written notice to the defaulting party, which termination shall be effective as of the effective date which is set forth in said notice, provided that said effective date shall be at least thirty (30) days after the date of said notice; and provided further that, if the defaulting party is the employer of all or a substantial portion of the employees at the Hotel, the foregoing period of thirty (30) days shall be extended to seventy-five (75) days (or such longer period of time as may be necessary under applicable Legal Requirements pertaining to termination of employment); (ii) to institute forthwith any and all proceedings permitted by law or equity, including, without limitation, actions for specific performance and/or damages; and (iii) to avail itself of any one or more of the other remedies described in this Section 16.03. B. Upon the occurrence of a Default by either party under the provisions of Section 16.01.D, the amount owed to the non-defaulting party shall accrue interest, at the Interest Rate, from and after the date on which such payment was originally due to the non-defaulting party. -133- C. The rights granted hereunder are intended to be cumulative, and shall not be in substitution for, but shall be in addition to, any and all rights and remedies available to the non-defaulting party (including, without limitation, injunctive relief and damages; provided that the satisfaction of damage awards against Owner shall be limited by the provisions of Section 16.04) by reason of applicable provisions of law or equity. 16.04 Owner's Estate -------------- Notwithstanding any other provisions of this Agreement, in the event of any Event of Default by Owner pursuant to the terms of this Agreement, Management Company shall look only to Owner's estate and interest in the Site and the Hotel (which shall, for this purpose, include (i) amounts deposited in the Operating Accounts and the FF&E Reserve, and (ii) accounts receivable) for the satisfaction of a money judgment against Owner resulting from such Event of Default, and no other property or assets of Owner, or of its partners, officers, directors, shareholders or principals, shall be subject to levy, execution or other enforcement procedure for the satisfaction of such judgment. Management Company's right to look to Owner's estate and interest in the Site and the Hotel for satisfaction of such a money judgment against Owner shall survive Termination and shall not be affected by any one or more Sales of the Hotel. Nothing contained in this Section 16.04 shall be deemed to affect or diminish Management Company's remedies under -134- this Article XVI other than money damages against Owner (including, without limitation, Termination of this Agreement). END OF ARTICLE XVI -135- ARTICLE XVII WAIVER AND PARTIAL INVALIDITY ----------------------------- 17.01 Waiver ------ The failure of either party to insist upon a strict performance of any of the terms or provisions of this Agreement, or to exercise any option, right or remedy herein contained, shall not be construed as a waiver or as a relinquishment for the future of such term, provision, option, right or remedy, but the same shall continue and remain in full force and effect. No waiver by either party of any term or provision hereof shall be deemed to have been made unless expressed in writing and signed by such party. 17.02 Partial Invalidity ------------------ If any portion of this Agreement shall be declared invalid by order, decree or judgment of a court, this Agreement shall be construed as if such portion had not been inserted herein except when such construction would operate as an undue hardship on Management Company or Owner, or constitute a substantial deviation from the general intent and purpose of said parties as reflected in this Agreement. END OF ARTICLE XVII -136- ARTICLE XVIII ASSIGNMENT ---------- 18.01 Assignment ---------- A. Management Company shall not assign or transfer its management responsibilities under this Agreement without the prior written consent of Owner; provided, however, that Management Company shall have the right, without such consent, to (1) assign its interest in this Agreement to any of its Affiliates, and any such Affiliate shall be deemed to be the Management Company for the purposes of this Agreement, and (2) sublease shops or grant Licenses or concessions at the Hotel so long as the terms of any such subleases, Licenses or concessions; are consistent with the provisions of Section 2.02 and provided further that Owner's consent shall be required prior to the execution by Management Company of any such lease, license or concession which (a) has a term of more than five (5) years, or (b) involves more than one thousand (1,000) square feet of space within the Hotel. In the event of such an assignment by Management Company of its interest in this Agreement to an Affiliate, the Management Company which is named in the Preamble to this Agreement: (i) shall automatically be deemed to guarantee the performance of such Affiliate under this Agreement; (ii) shall, at the request of Owner, execute a guaranty, in form and substance reasonably satisfactory to both parties, of -137- the performance of such Affiliate under this Agreement (provided that the failure of Owner to obtain an executed guaranty pursuant to this clause (ii) shall not affect the validity or enforceability of the guaranty which is automatically created pursuant to clause (i); and provided further, that, when Owner does so receive an executed guaranty pursuant to this clause (ii), such executed guaranty shall be deemed to have superseded the guaranty described in clause (i) above); and (iii) shall make available to such Affiliate, in connection with the performance by such Affiliate under this Agreement, Management Company's skill, personnel, facilities and resources. B. Owner shall not assign or transfer its interest in this Agreement other than (i) in connection with a Sale of the Hotel which complies with the provisions of Article XIX hereof, or (ii) as set forth in Section 18.01.C. C. Nothing contained herein shall prevent: (i) the collateral assignment of this Agreement by Owner as security for any Mortgage which complies with the provisions of Section 3.01; or (ii) the transfer of this Agreement in connection with a merger or consolidation or a sale of all or substantially all of the assets of either party, provided that (x) if such transfer is by Owner, the provisions of Article XIX hereof shall be complied with, and (y) if such transfer is by Management Company, such transfer is being done as a part of a merger, consolidation, etc., of all or -138- substantially all of the business which consists of managing the Fairfield Inn System. D. In the event either party consents to an assignment of this Agreement by the other, no further assignment shall be made without the express consent in writing of such party, unless such assignment may otherwise be made without such consent pursuant to the terms of this Agreement. E. An assignment (either voluntarily or by operation of law) by Owner of its interest in this Agreement (in compliance with Article XVIII) shall not relieve Owner from its obligations under this Agreement which accrued prior to the date of such assignment, but shall relieve Owner of such obligations accruing after such date, if the assignment complies with Section 18.01.B and if Management Company has received an assumption agreement executed by the assignee (in form and substance reasonably satisfactory to Management Company). An assignment (either voluntarily or by operation of law) by Management Company of its interest in this Agreement shall not relieve Management Company from its obligations under this Agreement, unless Owner so agrees in writing. -139- F. Subject to the provisions of this Article XVIII, the terms and conditions of this Agreement shall inure to the benefit of, and be binding upon, the respective successors, heirs, legal representatives, or assigns of each of the parties hereto. END OF ARTICLE XVIII -140- ARTICLE XIX SALE OF THE HOTEL ----------------- 19.01 Sale of the Hotel ----------------- A. Owner shall not enter into any Sale of the Hotel to any individual or entity which: (i) does not have sufficient financial resources and liquidity to fulfill Owner's obligations under this Agreement; (ii) is in control of or controlled by persons who have been convicted of felonies involving moral turpitude in any state or federal court; or (iii) is engaged in the business of operating or franchising (as distinguished from owning) a branded hotel chain having fifteen hundred (1,500) or more guest rooms in competition with Management Company. An individual or entity shall not be deemed to be in the business of operating hotels in competition with Management Company solely by virtue of (x) the ownership of such hotels, either directly or indirectly through subsidiaries, affiliates and partnerships, or (y) holding a Mortgage or Mortgages secured by one or more hotels. Notwithstanding the foregoing, if Owner or an Affiliate of Owner is a corporation whose shares are listed on a public stock exchange, and if a Sale of the Hotel occurs as a result of purchases of such shares, through such public stock exchange, in sufficient quantities to cause a transfer of the "controlling interest" in Owner (as described in the definition of "Sale of the Hotel"), and if such Sale of the Hotel is not in compliance with the provisions of this Section 19.01.A, Management -141- Company shall have the right, at its option, to terminate this Agreement by written notice to Owner (as more particularly described in Section 19.01.B), but such non-compliance with this Section 19.01.A shall not be an Event of Default nor shall it subject Owner to claims for damages by Management Company pursuant to Article XVI. B. If Owner receives a bona fide written offer to enter into a Sale of the Hotel, Owner shall give written notice thereof to Management Company, stating the name of the prospective purchaser or tenant, as the case may be. Such notice shall include appropriate information relating to such prospective purchaser or tenant demonstrating compliance with the provisions of Section 19.01.A together with such additional information as Management Company may reasonably request. If Management Company decides that a Sale of the Hotel to such prospective purchaser or tenant would violate the provisions of Section 19.01.A, Management Company shall so notify Owner by no later than thirty (30) days after receipt of such notice from Owner; provided, however, that any decision by Management Company regarding any such prospective purchaser or tenant shall not be binding if the information furnished by Owner pursuant to the preceding sentence is inaccurate. Concurrently with the finalization of such Sale of the Hotel, the purchaser or tenant, as the case may be, shall, by appropriate instrument reasonably satisfactory to Management Company, assume all of Owner's obligations hereunder. An executed copy of such assumption -142- agreement shall be delivered to Management Company. If the proposed Sale of the Hotel would violate the provisions of Section 19.01.A, Owner will not enter into any agreement relating to such Sale of the Hotel. However, if Owner does enter into such an agreement, Management Company shall have the right to terminate this Agreement by written notice to Owner, which notice will set an effective date for such Termination not earlier than thirty (30) days, nor more than one hundred twenty (120) days, following the date of the giving of such notice. Management Company shall have the right to change such effective date of Termination to coincide with the date of the finalization of the proposed Sale of the Hotel. At Management Company's election, said notice of Termination shall not be effective if such Sale of the Hotel is not finalized. If such Termination by Management Company results from a Default by Owner under Section 19.01.A, such Termination shall not relieve Owner (except as otherwise set forth to the contrary in the last sentence of Section 19.01.A) of liability to Management Company for such Default. C. In connection with the possibility of a Sale of the Hotel achieved by means of a transfer of the controlling interest in Owner, Owner, upon written request of Management Company, shall (unless Owner is a publicly-traded corporation which is registered under Section 12 or Section 15 of the Securities Act of 1934) furnish Management Company with a list of the names and addresses of the owners of the capital stock, (but only those owners which -143- hold an ownership interest of thirty percent (30%) or more), or the partnership interests, (both (i) general partner and (ii) any limited partner holding an ownership interest of thirty percent (30%) or more, or other ownership interests in Owner. In addition, Owner shall notify Management Company of any transaction or series of transactions in which Owner reduces its ownership interest in the Hotel below fifty percent (50%) or in which the former controlling interest in Owner is reduced below fifty percent (50%). Management Company agrees to use diligent efforts to keep all such lists confidential. D. It is understood that no Sale of the Hotel (which is otherwise in compliance with the provisions of this Article XIX) shall reduce or otherwise affect: (i) the current level of Working Capital; (ii) the current amount deposited in the FF&E Reserve; or (iii) any of the Operating Accounts maintained by Management Company pursuant to this Agreement. If, in connection with any Sale of the Hotel, the selling Owner intends to withdraw, for its own use, any of the cash deposits described in the preceding sentence, the selling Owner must obtain the contractual obligation of the buying Owner to replenish those deposits (in the identical amounts) simultaneously with such withdrawal. The selling Owner is hereby contractually obligated to Management Company to ensure that such replenishment in fact occurs. The obligations described in this Section 19.01.D shall survive such Sale of the Hotel and shall survive Termination. -144- E. Management Company shall have the right to terminate this Agreement, on thirty (30) days' written notice, if title to or possession of the Hotel is transferred by judicial or administrative process (including, without limitation, a Foreclosure, or a sale pursuant to an order of a bankruptcy court, or a sale by a court-appointed receiver) to an individual or entity which would not qualify as a permitted transferee under clause (i), (ii) or (iii) of Section 19.01.A, regardless of whether or not such transfer is the voluntary action of the transferring Owner, or whether (under applicable law) the Owner is in fact the transferor; provided, however, that Management Company shall not have the right to so terminate this Agreement based on the assertion that a Qualified Lender fails to so qualify as a permitted transferee under said clauses (i), (ii) or (iii) of Section 19.01.A. END OF ARTICLE XIX -145- ARTICLE XX MISCELLANEOUS ------------- 20.01 Right to Make Agreement ----------------------- A. Each party warrants, with respect to itself, that neither the execution of this Agreement nor the finalization of the transactions contemplated hereby shall: (i) violate any provision of law or any judgment, writ, injunction, order or decree of any court or governmental authority having jurisdiction over it; (ii) result in or constitute a breach or default under any indenture, contract, other commitment or restriction to which it is a party or by which it is bound; to the extent that the remedies for such breach or default would have a material adverse effect on such party's ability to perform under this Agreement, or (iii) require any consent, vote or approval which has not been taken, or at the time of the transaction involved shall not have been given or taken. Each party covenants that it has and will continue to have throughout the Term of this Agreement and any extensions thereof, the full right to enter into this Agreement and perform its obligations hereunder. B. Each party agrees that it will, as of the Effective Date, provide the other party with: (i) certified copies of the applicable resolutions of its board of directors (if it is a corporation), or written authorization by all general partners (if it is a partnership) or other appropriate documentation -146- establishing its authority to execute this Agreement; and (ii) such opinions of counsel as the other party shall reasonably request regarding the matters described in this Section 20.01. 20.02 Consents -------- Wherever in this Agreement the consent or approval of Owner or Management Company is required, such consent or approval shall (except to the extent that such consent or approval is specifically designated as being "within the discretion" of a party, or words to that effect, in the applicable provision) not be unreasonably withheld, shall be in writing and shall be executed by a duly authorized officer or agent of the party granting such consent or approval. If either Owner or Management Company fails to respond within thirty (30) days to a request by the other party for a consent or approval, such consent or approval shall be deemed to have been given. 20.03 Agency ------ The relationship of Owner and Management Company shall be that of principal and agent, and nothing contained in this Agreement shall be construed to create a partnership or joint venture between them or their successors in interest. Management Company's agency established by this Agreement is coupled with an interest and may not be terminated by Owner until the expiration of the Term of this Agreement, except as provided in Section 4.03 and in Articles XV or -147- XVI. Notwithstanding the agency relationship created by this Agreement, except to the extent specifically set forth to the contrary in Section 20.12, nothing contained herein shall prohibit, limit or restrict Management Company or any of its Affiliates from developing, owning, operating, leasing, managing or franchising hotels in the market area where the Hotel is located. The agency coupled with an interest herein was created by a complex, single, integrated transaction between Marriott Corporation (the parent corporation of Owner and Management Company as of the Effective Date) and its subsidiaries whereby Marriott Corporation and its subsidiaries developed, constructed, own and manage the Hotel. This agency is further intended to provide security for the covenants, promises and guarantees herein. The agency was purchased for valuable consideration, and is not terminable except as specifically allowed by the express provisions of this agreement. The parties intend for this agency to be coupled with an interest, waive any right to claim it is terminable at will, and further agree to be equitably estopped from asserting that the agency is not coupled with an interest. 20.04 Confidentiality --------------- The parties hereto agree that the matters set forth in this Agreement are strictly confidential and each party will make every effort to ensure that such matters are not disclosed to any outside person or entities (including the press) without the written -148- consent of the other party; provided, however, that such consent will not be required with respect to: (i) legally required filings and other disclosures mandated by Legal Requirements; and (ii) in the case of Owner, disclosure to any Qualified Lender or prospective Qualified Lender, or to prospective purchasers of the Hotel (subject to the provisions of Section 20.05, if applicable). 20.05 Equity Offerings ---------------- No reference to Management Company or to any of its Affiliates will be made in any prospectus, private placement memorandum, offering circular or offering documentation related thereto (herein collectively referred to as the "Prospectus"), issued by Owner or one of its Affiliates, which is designed to interest potential investors in the Hotel, unless Management Company has previously received a copy of all such references. However, regardless of whether Management Company does or does not so receive a copy of all such references, neither Management Company nor any of its Affiliates will be deemed a sponsor of the offering described in the Prospectus, nor will it have any responsibility for the Prospectus, and the Prospectus will so state. Unless Management Company agrees in advance, the Prospectus will not include: (i) any Proprietary Marks; or (ii) except as required by applicable securities laws, the text of this Agreement. Owner shall be entitled, however, to include in the Prospectus an accurate summary of this Agreement; if there are no Legal Requirements pursuant to -149- which such information must be disclosed, appropriate measures shall be taken to ensure entities or individuals receiving such Prospectus shall acknowledge the confidentiality of such information. Owner shall indemnify, defend and hold Management Company and its Affiliates (and their respective directors, officers, shareholders, employees and agents) harmless from and against all loss, costs, liability and damage (including attorneys' fees and expenses, and the cost of Litigation) arising out of any Prospectus or the offering described therein. 20.06 Applicable Law -------------- This Agreement shall be construed under and shall be governed by the laws of the state where the Hotel is located. 20.07 Recordation ----------- The terms and provisions of this Agreement shall run with the land designated as the Site, and with Owner's interest therein, and shall be binding upon all successors to such interest. At the request of either party, the parties shall execute an appropriate memorandum of this Agreement in recordable form and cause the same to be recorded in the jurisdiction where the Hotel is located. Any cost of such recordation shall be borne by Management Company. -150- 20.08 Headings -------- Headings of Articles and Sections are inserted only for convenience and are in no way to be construed as a limitation on the scope of the particular Articles or Sections to which they refer. 20.09 Notices ------- Notices, statements and other communications to be given under the terms of this Agreement shall be in writing, and shall be either (i) delivered by hand against receipt, or (ii) sent by certified or registered mail, postage prepaid, return receipt requested or (iii) sent by either a nationally utilized overnight delivery service or by facsimile machine (provided that, in either case, a confirmatory copy is thereafter sent by certified or registered mail): To Owner: -------- c/o Host Marriott Corporation 10400 Fernwood Road Bethesda, Maryland 20817 Attn: Law Department with a copy to: --------------- c/o Host Marriott Corporation 10400 Fernwood Road Bethesda, Maryland 20817 Attn: Asset Management Department 72-1AD-02 -151- To Management Company: --------------------- Fairfield FMC Corporation c/o Marriott International, Inc. 10400 Fernwood Road Bethesda, Maryland 20817 Attn: Law Department with a copy to: --------------- Fairfield FMC Corporation c/o Marriott International, Inc. 10400 Fernwood Road Bethesda, Maryland 20817 Attn: Fairfield Inn Vice President - Finance or at such other address as is from time to time designated by the party receiving the notice. Any such notice which is properly mailed, as described above, shall be deemed to have been served as of three (3) business days after said posting. 20.10 Environmental Matters --------------------- A. Management Company shall indemnify, defend and hold Owner and its Affiliates (and their respective directors, officers, shareholders, employees and agents) harmless from and against all loss, cost, liability and damage (including, without limitation, engineers' and attorneys' fees and expenses, and the cost of Litigation) arising from the placing, discharge, leakage, use or storage of Hazardous Materials, in violation of applicable Environmental Laws, on the Site or in the Hotel by Management Company's employees, representatives or agents during the Term of -152- this Agreement. Regardless of whether or not a given Hazardous Material is permitted on the Site under applicable Environmental Law, Management Company shall only bring on the Site such Hazardous Materials as are needed in the normal course of business of the Hotel. B. In the event of the discovery of Hazardous Materials on any portion of the Site or in the Hotel during the Term of this Agreement, Owner shall (except to the extent such removal is Management Company's responsibility pursuant to Section 20.10.A) promptly remove (if required by applicable Environmental Law) such Hazardous Materials, together with all contaminated soil and containers, and shall otherwise remedy the problem in accordance with all Environmental Laws. Owner shall (except to the extent that the removal of such Hazardous Materials is Management Company's responsibility pursuant to Section 20.10.A) indemnify, defend and hold Management Company and its Affiliates (and their respective directors, officers, shareholders, employees and agents) harmless from and against all loss, cost, liability and damage (including, without limitation, engineers' and attorneys' fees and expenses, and the cost of Litigation) arising from the presence of Hazardous Materials on the Site or in the Hotel. C. All costs and expenses of the removal of Hazardous Materials from the Site or the Hotel pursuant to Section 20.10.B, and of the aforesaid compliance with all Environmental Laws, and any amounts paid to Management Company pursuant to the indemnity -153- set forth in the last sentence of Section 20.10.B, shall be paid by Owner from its own funds, not as a Deduction nor from the FF&E Reserve, and shall be treated as an expenditure by Owner pursuant to Section 8.03. 20.11 Estoppel Certificates --------------------- Each party to this Agreement shall at any time and from time to time, upon not less than thirty (30) days' prior notice from the other party, execute, acknowledge and deliver to such other party, or to any third party specified by such other party, a statement in writing: (i) certifying that this Agreement is unmodified and in full force and effect (or if there have been modifications, that the same, as modified, is in full force and effect and stating the modifications); (ii) stating whether or not to the best knowledge of the certifying party (a) there is a continuing default by the non-certifying party in the performance or observance of any covenant, agreement or condition contained in this Agreement, or (b) there shall have occurred any event which, with the giving of notice or passage of time or both, would become such a default, and, if so, specifying each such default or occurrence of which the certifying party may have knowledge; and (iii) stating such other information as the non-certifying party may reasonably request. Such statement shall be binding upon the certifying party and may be relied upon by the non-certifying party and/or such third party specified by the non-certifying party as aforesaid. The -154- obligations set forth in this Section 21.11 shall survive Termination (that is, each party shall, on request, within the time period described above, execute and deliver to the non-certifying party and to any such third party a statement certifying that this Agreement has been terminated). 20.12 Trade Area Restriction Neither Management Company nor any of its ---------------------- Affiliates shall own, build, franchise, manage or operate any Restricted Hotel, under the Fairfield Inn brand name, within the Restricted Area during the period from the Effective Date through the sixth (6th) anniversary of the Effective Date. 20.13 Arbitration ----------- A. In the event of a dispute between Owner and Management Company with respect to any issue of fact specifically mentioned herein as a matter to be decided by arbitration, such dispute shall be determined by arbitration as provided in this Section 20.13. B. Disputes shall be resolved in accordance with the Commercial Arbitration Rules of the American Arbitration Association then pertaining. The decision of the arbitrators shall be binding, final and conclusive on the parties. C. Owner and Management Company shall each appoint and pay all fees of a fit and impartial person as arbitrator who shall have had at least ten (10) years' recent professional experience in the general subject matter of the dispute. Notice of such appointment -155- shall be sent in writing by each party to the other, and the arbitrators so appointed, in the event of their failure to agree within thirty (30) days after the appointment of the second arbitrator upon the matter so submitted, shall appoint a third arbitrator. If either Owner or Management Company shall fail to appoint an arbitrator, as aforesaid, for a period of twenty (20) days after written notice from the other party to make such appointment, then the arbitrator appointed by the party having made such appointment shall appoint a second arbitrator and the two so appointed shall, in the event of their failure to agree upon any decision within thirty (30) days thereafter, appoint a third arbitrator. If such arbitrators fail to agree upon a third arbitrator within forty-five (45) days after the appointment of the second arbitrator, then such third arbitrator shall be appointed by the American Arbitration Association from its qualified panel of arbitrators, and shall be a person having at least ten (10) years' recent professional experience as to the subject matter in question. The fees of the third arbitrator and the expenses incident to the proceedings shall be borne equally between Owner and Management Company, unless the arbitrators decide otherwise. The fees of respective counsel engaged by the parties, and the fees of expert witnesses and other witnesses called for the parties, shall be paid by the respective party engaging such counsel or calling or engaging such witnesses. D. The decision of the arbitrators shall be rendered within thirty (30) days after appointment of the third arbitrator. Such decision -156- shall be in writing and in duplicate, one counterpart thereof to be delivered to Owner and one to Management Company. A judgment of a court of competent jurisdiction may be entered upon the award of the arbitrators in accordance with the rules and statutes applicable thereto then obtaining. 20.14 Entire Agreement ---------------- This Agreement, together with other writings signed by the parties which are expressly stated to be supplemental hereto and together with any instruments to be executed and delivered pursuant to this Agreement, constitutes the entire agreement between the parties, and supersedes all prior written and oral understandings. This Agreement may be amended only by a writing signed by both parties hereto. END OF ARTICLE XX -157- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. Attest: OWNER: HMH PROPERTIES, INC. By: /s/ Pamela J. Murch By: /s/ Christopher G. Townsend -------------------- ---------------------------- Attest: MANAGEMENT COMPANY: FAIRFIELD FMC CORPORATION By: /s/ Peter J. Swift By: /s/ James Sullivan ------------------- ------------------- -158- EXHIBITS ATTACHED TO ORIGINAL AGREEMENT Exhibit "A" Location of Hotel; and Legal Description Exhibit "A-1" Number of Suites and Brief Description of Facilities; Priority Basis; Performance Termination Threshold; Loan Priority Basis (number set forth in (i) of Definition); Revenue Index Threshold Exhibit "B" Form of Accounting Period Statement Exhibit "C" [Intentionally Deleted] Exhibit "D" Map of Restricted Area Exhibit "D-1" Narrative Description of Restricted Area Exhibit "E" Proprietary Marks which will remain the property of Owner after Termination Exhibit "F" Title Encumbrances; Existing CC&R's (separately describing those charges thereunder which will be treated as capital expenditures under Section 8.03); Existing Ground Lease (if applicable); Existing Mortgages (if any) Exhibit "G" Form of Annual Operating Statement Exhibit "H" Form of Annual Operating Projection EX-10.15.I 9 EXHIBIT 10.15(I) Exhibit 10.15(i) HMH COURTYARD PROPERTIES, INC. 10400 Fernwood Road Bethesda, Maryland 20817 September 25, 1993 Courtyard Management Corporation 10400 Fernwood Road Bethesda, Maryland 20817 Gentlemen: Reference is made to those certain Management Agreements ("Management Agreements") of even date hereof between HMH Courtyard Properties, Inc. as "Owner" thereunder and Courtyard Management Corporation as "Management Company" thereunder relating to the operation of fifty-four (54) Courtyards By Marriott (the "Hotel(s)") in those locations set forth in Exhibit A to this letter agreement ("Letter Agreement"). This Letter Agreement, when executed by you, will constitute Owner's and Management Company's further mutual agreement with respect to certain matters set forth in the Management Agreements. 1. Definitions. The following terms, when used in this Letter Agreement, ----------- shall have the meanings indicated. "Actual FF&E Balance" shall have the meaning set forth in paragraph 6(f) of ------------------- this Letter Agreement. "Average FF&E Balance" shall have the meaning set forth in paragraph 6(f) -------------------- of this Letter Agreement. "Bonus Incentive Fee" shall mean (a) with respect to any Sale or Partial ------------------- Sale of any Hotel(s), the lesser of (i) fifty percent (50%) of the Net Excess Sales Proceeds with respect to such Sale or Partial Sale, or (ii) the cumulative amount of the Base Management Fee which is calculated in accordance with, and (but for the provisions of paragraph 2(a) and 6(a) of this Letter Agreement) would be otherwise payable to Management Company pursuant to the Management Agreement applicable to such Hotel(s) (to the extent not deferred under Section 5.02 B of such Management Agreement) and paragraph 6(a) of this Letter Agreement from the period between the date hereof and the earlier of (x) the closing date of such Sale and (y) the close of Fiscal Year 2000; and (b) with respect to any one or more Financing Transactions, the lesser of (i) fifty percent (50%) of the Cumulative Net Financing Proceeds with respect to such Financing Transactions or (ii) the cumulative amount of the Base Management Fee which is calculated in accordance with and (but for the provisions of paragraph 2(a) and 6(a) of this Letter Agreement) would be otherwise payable to Management Company pursuant to the Management Agreement applicable to such Hotel(s) (to the extent not deferred under Section 5.02 B of such Management Agreement) and paragraph 6(a) of this Letter Agreement for the period between the date hereof and the earlier of the dates referred to in clauses (x) and (y) of provision (a) of this definition; provided, however, that there shall be no Bonus Incentive Fee payable from Cumulative Net Financing Proceeds in accordance with this provision (b) of this definition until the date which is thirty (30) days after the date upon which all of the Exchange Bonds have been retired and paid in full. In calculating the Bonus Incentive Fee, any amounts paid under provision (b) of this definition shall be credited against amounts payable under provision (a). "Consolidated Hotel" shall mean any Hotel which is subject to the ------------------ consolidation provisions of paragraph 6(a) and has not been the subject of a Deconsolidation Event. "Consolidated FF&E Reserve" shall mean the consolidated FF&E Reserve ------------------------- maintained pursuant to paragraph 6(a). "Cumulative Net Financing Proceeds" shall mean the cash proceeds actually --------------------------------- received by Owner or its Affiliates from one or more Financing Transactions, net of any Transaction Costs payable by Owner in connection therewith, of any Hotel(s) from and after the date hereof in excess of (i) Owner's then Priority Basis for such Hotel(s) and (ii) any amounts funded by Owner in connection with a Deconsolidation Event pursuant to paragraph 6(f). In the event a Hotel is the subject of more than one Financing Transaction due to a refinancing of debt incurred in any prior Financing Transactions, Cumulative Net Financing Proceeds shall be the excess of the highest principal amount borrowed in any one such Financing Transaction over (x) Owner's then Priority Basis, (y) all Transaction Costs incurred with respect to all such Financing Transactions, and (z) any amounts funded by Owner in connection with a Deconsolidation Event pursuant to paragraph 6(f). In the event any Hotel is the subject of more than one Financing Transactions but in differing pools or groups of Hotels, Cumulative Net Financing Proceeds will be allocated to such Hotel on a fair and equitable basis. "Deconsolidated Hotel" shall mean any Hotel which has been subject to a -------------------- Deconsolidation Event. -2- "Deconsolidation Event" shall have the meaning set forth in paragraph 6(a). --------------------- "Deferred Payments" shall have the meaning set forth in paragraph (b) in ----------------- the definition of "Gross Sales Price". "Exchange Bonds" shall have the same meaning set forth (at page 48) in -------------- Marriott Corporation's June 19, 1993 "Notice of 1993 Annual Meeting and Proxy Statement." "Financing Transaction" shall mean, with respect to any Hotel(s), any --------------------- transaction which results in one or more mortgages, deeds of trust or other security devices affecting such Hotel(s) and which secures a debt or liability (absolute or contingent) of the Owner or any of its Affiliates in an amount equal to at least 25% of the then Priority Basis of the Hotel. A Financing Transaction shall not include leases of any of the Hotel's FF&E or lines of credit pursuant to which Owner finances any Hotel's Working Capital, FF&E or building improvements or additions agreed to by both Owner and Management Company under Section 8.03 of the Management Agreements or required to be made by Owner with its own funds under any of the provisions of the Management Agreements. "Gross Sales Price" shall mean all of the consideration actually received ----------------- by Owner in connection with a Sale or one or more Partial Sales of any of the Hotels, as and when received. In calculating Gross Sales Price the following shall apply: (a) There shall be excluded from Gross Sales Price the aggregate amount of all deposits in cash reserve accounts (excluding the FF&E Reserve), house banks and similar cash accounts not transferred as part of a Sale. There shall be added to Gross Sales Price the amount of the FF&E Reserve if such Reserve is retained by Owner and not transferred to the purchaser. (b) There shall be included in Gross Sales Price only consideration which is actually received and available to Owner. Accordingly (but without limiting the foregoing), any portion of the purchase price which is "held back", deposited in escrow or which is payable on some future date or event (including purchase money indebtedness, "earnout" payments or other payments based in whole or in part on some future date or event (collectively, "Deferred Payments") shall be excluded from Gross Sales Price except if, and to the extent the same are actually received by, and become available to, Owner. If any interest is payable to Owner in connection with any Deferred Payments, Management Company -3- shall receive interest on the payment of any Bonus Incentive Fees attributable to such Deferred Payments at the same time Owner receives such interest, such interest to be calculated for the same period of time for which Owner receives such interest and at a rate equal to the interest rate applicable to the Deferred Payment. (c) Except with respect to Deferred Payments as provided in (b) above, the Gross Sales Price shall not be reduced by any (i) contingent liabilities of, or claims against, Owner and its Affiliates, including, without limitation, claims or liabilities under indemnities, representations, warranties or claims or liabilities based on torts arising in connection with any Sale or Partial Sale or other similar agreements (collectively, "Liabilities"), or (ii) cash flow or other guarantees (including without limitation any such guarantees related to future performance, value or other contingencies, or repurchase or similar obligations relating to the Hotel (collectively, "Guarantees")). If, following the date of a Sale or a Partial Sale with respect to which a Bonus Incentive Fee was paid to Management Company out of Net Excess Sales Proceeds, any payment is made by Owner or its Affiliates on account of such Guarantees, Gross Sales Price and the Bonus Incentive Fee shall be recalculated based on the amount of such payment, and Management Company shall be obligated to make the remittance to Owner in accordance with paragraph 5 of this Letter Agreement. (d) If all or any portion of the consideration for any Sale or Partial Sale is non-cash consideration ("Non-Cash Consideration") (excluding instruments or agreements reflecting Deferred Payment obligations which shall be governed by (b) above), then (subject to the other provisions of this definition) the Gross Sales Price shall be calculated based upon the fair market value of the consideration received. If such fair market value is set forth in, or determinable by reference to the agreement of purchase and sale between the purchaser and Owner, then such value shall, absent bad faith, be binding for purposes of this Letter Agreement. In all other cases, the fair market value of such consideration shall be determined by agreement of Owner and Management Company, or absent agreement, by arbitration in accordance with Section 20.13 of the Management Agreement. (e) For the purposes of determining a Bonus Incentive Fee to be paid from the Net Excess Sales Proceeds of a Partial Sale, Owner's Priority Basis shall be prorated based upon the percentage of ownership interest transferred in each such Partial Sale. The Priority Basis shall be -4- similarly prorated on a cumulative basis for each subsequent Partial Sale until 100% of Owner's title and ownership interest in any Hotel which is the subject of a Partial Sale (or the entity constituting the Owner of such Hotel) has been sold. "Host Marriott" shall mean Host Marriott Corporation, a Delaware ------------- corporation, and any entity which succeeds thereto, including any successor by merger, recapitalization, reorganization, or by acquisition of all or substantially all of the stock or assets of Host Marriott. The term "Host Marriott" shall also include any entity to which there has been transferred all or substantially all of the Hotels with respect to which a Sale has not occurred (or all or substantially all of Host Marriott's interest in the entities owning such Hotels) together with other assets of Host Marriott (or any Affiliate thereof) with a fair market value equal to at least 25% of the fair market value of such Hotels. "Net Excess Sales Proceeds" shall mean the Gross Sales Price, less the sum ------------------------- of (i) the then Priority Basis of such Hotel, or in the event of a Partial Sale, the prorated Priority Basis of such Hotel as set forth in paragraph (e) of the definition of "Gross Sales Price", plus (ii) Transaction Costs incurred in connection with such Sale or Partial Sale, plus (iii) any amounts funded by Owner in connection with a Deconsolidation Event pursuant to paragraph 6(e). "Owner" shall mean HMH Courtyard Properties, Inc. or any entity to which ----- there has been transferred any Hotel with respect to which a Sale has not occurred. "Non-Cash Consideration" shall have the meaning set forth in paragraph (d) ---------------------- of the definition of "Gross Sales Price". "Partial Sale" shall mean any sale or transfer of less than all of the ------------ ownership interest of any Hotel(s) or the Owner of any Hotel(s) which results in a reduction of the beneficial ownership (directly and indirectly) of such Owner in such Hotel(s). Notwithstanding anything to the contrary contained herein, a Partial Sale shall not include the sale of any stock of Host Marriott over any public stock exchange. A Partial Sale shall, however, be subject to the same provisions set forth in the definition of a Sale which begin with the "provided, however" clause in the first sentence of such definition and continue for the balance of such definition. -5- "Sale" shall mean the conveyance of all of Owner's title and ownership ---- interest (whether as fee owner or ground lessee) in a Hotel or group of Hotels or of the entity constituting the Owner of such Hotel or Hotels in a single or a related sales transaction, including a Sale/Leaseback and shall include a condemnation (or conveyance in lieu thereof) of all or substantially all of a Hotel; provided, however, a Sale shall not include (a) conveyance of a Hotel to a direct or indirect wholly owned Affiliate of Owner or Host Marriott, (b) conveyance of a Hotel through foreclosure or exercise of a power of sale or other remedy under a mortgage, deed of trust or other security device or by deed in lieu thereof, (c) the termination or expiration of the Owner's interest as lessee under a lease (or other terminable possessory interest) or the dispossession of Owner by summary or other eviction proceedings or the surrender by Owner of its rights as lessee (or of possession) in lieu of any of the foregoing, (d) condemnation of a Hotel or conveyance in lieu thereof of less than all or substantially all of a Hotel, or a conveyance of a Hotel following material casualty and the election of Owner not to restore, or (e) the granting of a mortgage, deed of trust or other security device. For the purpose of this definition of a "Sale", a "related sales transaction" shall be deemed to constitute a Sale of two (2) or more Hotels when (i) the basic terms and conditions of such conveyance were intended to be an integrated transaction, (ii) the purchaser or the general partner or controlling stockholder of the purchaser or such purchaser's general partner, are the same person, firm or entity, and (iii) the closing on the Sale and the conveyance of title to such Hotels occurs within six (6) months of each other and within six (6) months after the date of the contract of Sale with respect to such Hotels. In the case of a related sales transaction, a "Sale" of any Hotel which is part of any related sales transaction shall not be deemed to have occurred until the last Hotel which is the subject of such transaction has been sold, but in no event later than six (6) months after the date of the contract of sale with respect to such Hotel. At any time on or after a conveyance described in (a) above, the Owner originally named herein shall still be liable to pay the Bonus Incentive Fee as and when the same shall be due hereunder and otherwise to perform the "Owner's" obligations hereunder with respect to such Hotels. "Sale/Leaseback" shall mean any transaction in which, contemporaneously -------------- with the conveyance of the Hotel to the purchaser, the purchaser or a related party leases the Hotel to Owner or an Affiliate of Owner. -6- "Transaction Costs" shall mean all of the reasonable costs actually paid ----------------- by or on behalf of Owner or its Affiliates to third parties who are not Affiliates of Owner in connection with a Sale, Partial Sale or Financing Transaction, including, without limitation, brokerage commissions, underwriting fees and discounts, title insurance, escrow and other title fees and expenses, recording costs, survey costs, legal, accounting, engineering and other professional fees and expenses, deed, transfer, sales, gains, use and other taxes (other than income taxes). Unless the context requires otherwise, all other capitalized terms used in this Letter Agreement shall have the same meaning they have in the Management Agreements, as in effect on the date hereof. 2. Bonus Incentive Fee. ------------------- (a) With respect to each Hotel, until the earlier to occur of (i) the close of Fiscal Year 2000, or (ii) a Sale of such Hotel (including one or more Partial Sales, but only if, on a cumulative basis, at least fifty percent (50%) of the ownership interest in such Hotel or in the Owner of such Hotel has been sold), or (iii) conveyance of a Hotel through the occurrence of an event described in clause (b) and clause (c) in the definition of "Sale", the cumulative amount of the Base Management Fee (to the extent not deferred pursuant to Section 5.02 B thereof) and Deferred Contingent Base Fee otherwise payable pursuant to the Management Agreement shall not be paid to Management Company but shall be retained by Owner; provided, however, that for purposes of all calculations, payments (other than the actual payment of Base Management Fee) distributions and determinations under the Management Agreement (including, without limitation, Owner's Priority, Incentive Management Fee, Operating Profit, but excluding Owner's right to terminate the Management Agreement) Management Company shall be deemed to have received such Base Management Fee or Deferred Contingent Base Fee. The Base Management Fee or Deferred Contingent Base Fee shall be remitted to Owner at the same times as it would have been paid to Management Company under the Management Agreements. (b) In lieu of the payment of the Base Management Fee and Deferred Contingent Base Fee during the period provided for in paragraph 2(a), Owner shall, so long as Owner has not terminated the Management Agreement because of an Event of Default by Management Company, upon a Sale of any Hotel(s) (including, without limitation, a Partial Sale) or upon a Financing Transaction with respect to any Hotel(s), pay to Management Company the Bonus Incentive Fee with respect to such Hotel(s). In the event of a contemporaneous Sale or Partial Sale of Hotel(s) to a single third party purchaser or related purchasers (including, -7- without limitation, a Partial Sale) who are not Affiliates of Owner, the Net Excess Sale Proceeds for all such Hotel(s) shall be aggregated together and the Bonus Incentive Fee shall be calculated on a combined (as opposed to a Hotel-by-Hotel) basis. (c) For each Hotel, from and after the earlier to occur of (i) a Sale (including one or more Partial Sales, but only if, on a cumulative basis, at least fifty percent (50%) of the ownership interest in such Hotel or in the Owner of such Hotel has been sold) or (ii) the close of Fiscal Year 2000, the Base Management Fee shall no longer be retained by Owner under paragraph 2(a) above, but shall be paid to Management Company in accordance with the terms of the Management Agreement relating to such Hotel. If no Sale or Financing Transaction has occurred prior to the close of Fiscal Year 2000, Owner shall remain obligated to pay the Bonus Incentive Fee upon the occurrence of a Sale, a Partial Sale, or, to the extent otherwise permitted by this Letter Agreement, upon the occurrence of a Financing Transaction. After a Sale of a Hotel has occurred, Management Company shall no longer be entitled to receive a Bonus Incentive Fee with respect to any subsequent Sale, Partial Sale or Financing Transaction with respect to such Hotel. (d) Notwithstanding the foregoing, or anything to the contrary contained in this Letter Agreement, in the Management Agreement, or in any Non-Disturbance Agreement now or hereafter entered into with the Holder of a Secured Loan, or the landlord under a lease of a Hotel or the land thereunder, in the event of the occurrence of any of the events described in clauses (b) or (c) of the definition of "Sale" neither Owner nor any other party, including any Holder or lessor (except as provided below), shall then or thereafter have any obligation to make any payment of the Bonus Incentive Fee to Management Company, and from and after the occurrence of any such event, Management Company (to the extent it is entitled to continue to manage the Hotel pursuant to the terms of a Non-Disturbance Agreement or other arrangement with a successor owner of the Hotel) shall be entitled to receive the Base Management Fee accruing from and after the occurrence of any such event. (e) Thirty (30) days after the date upon which all Exchange Bonds have been retired and paid in full, Owner shall (i) present to Management Company a computation of Cumulative Net Financing Proceeds from all Financing Transactions occurring prior to such date and (ii) pay to Management Company any Bonus Incentive Fee due with respect to such Cumulative Net Financing Proceeds. -8- 3. Notice of Sales and Financing Transactions. ------------------------------------------ (a) Owner shall give Management Company written notice no later than ten (10) days prior to the scheduled closing date for any proposed Sale or Partial Sale. Promptly, but in no event later than ten (10) days after (i) Owner has concluded a Sale or a Partial Sale and (ii) Management Company has delivered to Owner the Accounting Period Statement for the Accounting Period ending on or immediately prior to the closing of the Sale or Partial Sale (and, if the closing did not occur on the last day of an Accounting Period, a statement of Gross Revenues for the period from the first day of the Accounting Period in which the closing occurred to the closing date), Owner shall give notice thereof to Management Company. The post closing notice with respect to a Sale or Partial Sale shall include: (A) the amount of the Gross Sales Price paid on the closing (and, in the case of a Partial Sale, paid at the time of all prior Partial Sales, if any); (B) the Priority Basis of the Hotel(s) subject to the Sale or a Partial Sale on the closing date and if such Priority Basis was other than the Priority Basis on the Effective Date, a statement setting forth the amounts and types of increases or decreases; (C) a statement of Transaction Costs; (D) the calculation of Net Excess Sales Proceeds and Bonus Incentive Fee; (E) any contractual Guarantees created or assumed by Owner or its Affiliates in connection therewith (which obligation may be satisfied by delivery to Management Company of copies of the agreements relating to such Guarantees); (F) copies of the sales contract with respect to such Sale or Partial Sale; and (G) in the case of a Partial Sale, copies of appropriate documentation evidencing the percentage of the ownership interest which was transferred. If all or part of the consideration for the Sale or Partial Sale includes Deferred Payments, Owner shall also notify Management Company of the terms thereof and shall send Management Company copies of executed documents or other appropriate evidence describing the Deferred Payments. If Owner has accepted Non-Cash Consideration as all or part of the consideration for the Sale or Partial Sale, Owner shall describe such Non-Cash Consideration and state the fair market value thereof. (b) Owner shall give Management Company written notice no later than ten (10) days prior to the scheduled closing date for any proposed Financing Transaction. Promptly, but in no event later than ten (10) days after (i) Owner has concluded a Financing Transaction with respect to a Hotel and (ii) Management Company has delivered to Owner the Accounting Period Statement for the Accounting Period ending on or immediately prior to the closing of the Financing Transaction (and if the closing did not occur on the last day of an Accounting Period, a statement of Gross Revenues for the period from the first day of the Accounting Period in which the closing occurred to the closing date), Owner shall give notice thereof to the Management Company. Any post closing notice -9- with respect to a Financing Transaction shall include: (A) the amount of the Cumulative Net Financing Proceeds received on the date of the closing, plus the amount of all such Proceeds received from all prior Financing Transactions; (B) the Priority Basis of the Hotel(s) subject to the Financing Transaction on the closing date, and if such Priority Basis was other than the Priority Basis on the date hereof, a statement setting forth the amounts and types of increases or decreases; (C) a statement of Transaction Costs; (D) the calculation of any Bonus Incentive Fee; and (E) any contractual Guarantees created or assumed in connection therewith (which obligations may be satisfied by delivery to Management Company of copies of agreements relating to such Guarantees). (c) At the time of the giving of any notice of a Sale or a Partial Sale or a Financing Transaction which relates to more than one Hotel (or a Hotel and other assets), Owner shall also set forth in such notice a statement allocating, as appropriate, the Gross Sales Price, Net Excess Sales Proceeds and the Cumulative Net Financing Proceeds between the sold or financed Hotels and such other assets. (d) Absent bad faith, the statements of Owner set forth in notices given under (a), (b) and (c) of this paragraph 3 shall be binding and conclusive upon the parties with respect to the matters set forth therein, unless within ninety (90) days after the giving of such notice Management Company sends Owner notice (i) stating that it disputes one or more items set forth in Owner's notice and (ii) sets forth in reasonable detail the disputed item, the amount of the disputed item as calculated by Management Company and the basis for such calculation. Notwithstanding the foregoing, if the Gross Revenues for the period preceding the closing date shall be revised as a result of an Annual Operating Statement (or audit thereof) the Bonus Incentive Fee shall be recalculated based upon such revised figures. 4. Payment of Bonus Incentive Fee. ------------------------------ (a) Simultaneously with delivery of Owner's notice under paragraph 3, Owner shall pay to Management Company any Bonus Incentive Fee then payable in immediately available funds, as calculated pursuant to this Letter Agreement. (b) When actually received by Owner, the principal amount of any Deferred Payments shall be prorated between Owner and Management Company based upon the ratio that existed at the time of such Sale or Partial Sale between Owner's Priority Basis and the amount of the Bonus Incentive Fee that would have been paid on the date of such Sale or Partial Sale, had the Net Excess Sales Proceeds been received in full on such date, until the Bonus -10- Incentive Fee with respect to such Deferred Payments has been paid in full. (c) If Owner subsequently receives a Deferred Payment and such Deferred Payment would increase Management Company's Bonus Incentive Fee, Owner shall, subject to paragraph 5 below, promptly (but in any event within ten (10) days following receipt) (i) notify Management Company of receipt of such Deferred Payment together with a calculation of (x) the additional Bonus Incentive Fee due to Management Company and (y) any interest due thereon in accordance with the provisions of clause (b) in the definition of Gross Sales Price, and (ii) remit to Management Company such additional Bonus Incentive Fee plus any interest due thereon. If Owner shall fail to pay any amount due to Management Company within the time period provided for in paragraph 4(c), (i) such amounts shall bear interest at the Interest Rate, and (ii) Management Company shall have all rights and remedies available to it at law or in equity with respect to Owner's failure to make such payments. (d) Notwithstanding any election by Owner to negotiate, sell or monetize any note or similar instrument evidencing an obligation to make Deferred Payment at a discount (i.e., for consideration which is less than the face value of the principal amount outstanding of such Deferred Payments), no such discount shall apply with respect to the calculation of Net Excess Sales Proceeds for the purpose of determining any amounts due on account of any Bonus Incentive Fee, and the Bonus Incentive Fee shall continue to be calculated and paid as if Owner still owned such note or similar instrument. (e) No payment of any Bonus Incentive Fee shall be payable from the NetExcess Sales Proceeds of any one or more Partial Sales unless and until the cumulative amount of such proceeds equals ten percent (10%) or more of the Priority Basis of the Hotel(s) which were the subject of such Partial Sales or which are owned by the ownership entity which was the subject of such Partial Sales. (f) If, due to an Event of Default by Owner under a Management Agreement with respect to a particular Hotel, Management Company terminates the Management Agreement pursuant to Section 16.03 A thereof, the amount of any Base Management Fee with respect to such Hotel which has not been paid to Management Company but has been retained by Owner pursuant to paragraph 2(a) of this Letter Agreement shall become immediately due and payable by Owner. (g) Host Marriott hereby guarantees the timely payments to Management Company by Owner under this paragraph 4. -11- 5. Adjustment for Guarantees. ------------------------- (a) At any time and from time to time up to the tenth (10th) anniversary date of the closing of a Sale, Partial Sale or a Financing Transaction, Owner may notify Management Company that it or its Affiliate has paid a Guarantee in connection with such Sale, Partial Sale or Financing Transaction. Such notice shall be accompanied by a calculation indicating the reduction, if any, in the Bonus Incentive Fee which has resulted from the payment of such Guarantee. Within thirty (30) days after receipt of such notice, Management Company shall remit to Owner any overpayment in the Bonus Incentive Fee previously paid to Management Company. In addition, any additional payments of Bonus Incentive Fee (pursuant to paragraph 4(c) or otherwise) with respect to such Hotel shall be made only after taking into account the Guarantees theretofore paid by Owner with respect to such Hotel. (b) If, at any time and from time to time until the full amount of all Deferred Payments with respect to a particular sale have been received in full, there shall be a default in the payment of any such Deferred Payments, Owner may notify Management Company that such a default has occurred. Such notice shall be accompanied by a calculation indicating the reduction, if any, in the Bonus Incentive Fee which has resulted from such default. Within thirty (30) days after the receipt of such notice Management Company shall refund to Owner any overpayment in the Bonus Incentive Fee previously paid to Management Company. To the extent defaulted amounts are subsequently recovered by Owner, Owner shall promptly remit to Management Company any portion thereof attributable to such refunded Bonus Incentive Fee. (c) If Management Company shall fail to pay any amount due to Owner within the time period provided for in paragraph 5(a) and 5(b), (i) such amounts shall bear interest at the Interest Rate, and (ii) Owner shall have all rights and remedies available to it at law or in equity with respect to Management Company's failure to make such payments. (d) Marriott International hereby guarantees the timely payments to Owner by Management Company under this paragraph 5. 6. Consolidation. ------------- (a) Until the earlier of (i) the close of the year 2000 or (ii) such time as any given Hotel has been the subject of either a Sale or one or more Partial Sales but only if, on a cumulative basis, at least 50% of the ownership interest has been sold, or a Financing Transaction (a "Deconsolidation Event"), (x) Management Company shall be permitted to commingle all of such Hotel's Working Capital and banking accounts, including the FF&E -12- Reserve, into one or more accounts under Management Company's control in accordance with practices currently in effect as of the date of the Management Agreement, and (y) the reporting requirements of each such Hotel pursuant to the Management Agreement therefor and the calculation, payment, distribution, determination or deposit, as the case may be, of each such Hotel's Gross Revenues, FF&E Reserve, Owner's Priority, Management Company's Base Management Fee, Courtyard by Marriott System Fee, Incentive Management Fee, Chain Services, Operating Profit and Owner's right to terminate the Management Agreement with respect to each such Hotel shall be consolidated with the reporting requirements and the calculation, payment, distribution, determination or deposit, as the case may be, with respect to all Consolidated Hotel(s). (b) From and after the occurrence of a Deconsolidation Event with respect to any Hotel, except with respect to a Financing Transaction (provision for which is made in paragraph 6(c) hereof), the reporting requirements for such Hotel and the calculation, payment, distribution, determination or deposit, as the case may be, of such Hotel's Gross Revenues, FF&E Reserve, Owner's Priority, Base Management Fee, System Fee, Incentive Management Fee, Operating Profit and Owner's right to terminate shall be done solely with respect to such Hotel and shall not be consolidated with the reporting requirements and such calculation, payment, distribution, determination or deposit with any other Hotel without Management Company's prior consent. (c) Notwithstanding the provision of clause (i) of paragraph 6(a) above, from and after the occurrence of a Deconsolidation Event which is due to a Financing Transaction which occurs prior to the close of the year 2000 with respect to all or any group of the Hotels, the reporting requirements for all such Hotels and the calculation, payment, distribution, determination or deposit, as the case may be, of such Hotels' Gross Revenues, FF&E Reserve, Owner's Priority, Base Management Fee, the Courtyard by Marriott System Fee, Incentive Management Fee, Operating Profit and Owner's right to terminate shall be consolidated with respect to all Hotels which are the subject of the same or related Financing Transaction until the later of (i) the close of the year 2000 or (ii) the earlier to occur of (x) the maturity of the loan or loans which is the subject of such Financing Transaction or (y) the close of the year 2002. (d) Owner shall give Management Company prompt notice of any Deconsolidation Event accompanied by reasonable documentation evidencing the occurrence thereof, and paragraph 6(a) of this Letter Agreement shall terminate with respect to the Deconsolidated Hotels as of the Deconsolidation Event, except with respect to Hotels which are subject to a Financing Transaction, special provision for which is made in paragraph 6(c), above. -13- (e) Notwithstanding the provisions of paragraph (a) above, to the extent the determination of a Hotel's Gross Revenues, FF&E Reserve, Owner's Priority, Base Management Fee, Courtyard by Marriott System Fee, Incentive Management Fee, Operating Profit or Owner's termination rights after a Deconsolidation Event requires calculation of such Hotel's Gross Revenues, FF&E Reserve, Owner's Priority, Base Management Fee, Courtyard by Marriott System Fee, Incentive Management Fee, Operating Profit or Owner's termination rights prior to such Deconsolidation Event, then, for such purposes only, the calculation of such Revenues, Reserve, Priority, Fee or Profit prior to such Deconsolidation Event shall be maintained on a deconsolidated (i.e., Hotel-by-Hotel) basis. Accordingly, in order to be able to utilize the same after a Deconsolidation Event or a Partial Sale, and in order to determine the amount of a Qualified Loan with respect to any Hotel or Hotel(s) Management Company shall, during the period from and after the date hereof and prior to a Deconsolidation Event, in addition to the reporting required under paragraph (a) above, maintain records and provide reports on a quarterly basis to Owner describing each Hotel's Gross Revenues, FF&E Reserve, Owner's Priority, Priority Basis, Management Company's Base Management Fee, System Fee, Incentive Management Fee and Operating Profit on a deconsolidated (i.e., Hotel-by-Hotel) basis as if paragraph (a) above did not exist. Such quarterly reports shall be subject to Fiscal Year end audit and adjustments. However, in no event shall the foregoing in any manner modify the amounts owed by Management Company or Owner with respect to the period prior to the Deconsolidation Event, calculated on a consolidated basis. So long as the original Owner named herein, or Host Marriott or any of its subsidiaries or Afiliates, is the Owner of any Hotel, that portion of Section 9.05, if any, which grants Owner the right to request Management Analysis Reports on any individual Hotels shall be waived. (f) Upon the occurrence of a Deconsolidation Event with respect to any Hotel, such Hotel, as a Deconsolidated Hotel, shall no longer be a participant in the Consolidated FF&E Reserve maintained under paragraph 6(a). Accordingly, upon receipt of Owner's notice of a proposed Deconsolidation Event, Management Company shall compute the "Average FF&E Balance" (defined below) and the "Actual FF&E Balance" (defined below) as of the close of the Accounting Period immediately preceding the Deconsolidation Event. For purposes of this computation: (i) "Actual FF&E Balance" shall mean, with respect to any ------------------- Consolidated Hotel which is about to become a Deconsolidated Hotel, the difference between (x) the actual aggregate amount (per guestroom) which has been contributed to the Consolidated FF&E Reserve by such Hotel; less (y) the actual aggregate amount ---- (per guestroom) which has been -14- withdrawn from the Consolidated FF&E Reserve by such Hotel. (ii) "Average FF&E Balance" shall mean, with respect to all -------------------- Consolidated Hotels, including those in (i) above, the difference between (x) the average aggregate amount (per guestroom) which has been contributed to the Consolidated FF&E Reserve by all such Consolidated Hotels; less (y) the average aggregate amount (per ---- guestroom) which has been withdrawn from the Consolidated FF&E Reserve by all such Consolidated Hotels. The contributions and withdrawals referred to in (i) and (ii) above shall be those which were made from the period between the Effective Date of the Management Agreements and the close of the Accounting Period immediately prior to the date of the Deconsolidation Event. If seventy-five percent (75%) of the Average FF&E Balance exceeds the Actual FF&E Balance, the amount of such excess (multiplied by the number of guestrooms in the Hotel in question) shall be paid by Owner into the consolidated FF&E Reserve for use, in accordance with the Management Agreement, at the Consolidated Hotels. If the Actual FF&E Balance exceeds one hundred twenty-five percent (125%) of the Average FF&E Balance, the amount of such excess (multiplied by the number of guestrooms in the Hotel in question) shall be transferred (such transfer to occur after the completion of the calculations referred to in this subsection (e) but in no event prior to the Deconsolidation Event) by Management Company from such consolidated FF&E Reserve to the separate FF&E Reserve for the Deconsolidated Hotel which shall be established as of the date of such Deconsolidation Event, for use in accordance with the Management Agreement applicable to such Deconsolidated Hotel. All such payments and transfers shall be made either on or immediately after the date of the Deconsolidation Event. 7. Interim Distributions. So long as the Original Owner named herein, or --------------------- Host Marriott or any of its subsidiaries or Affiliates, is the Owner of any Inn, Management Company agrees that the interim distributions of Owner's Distribution which are described in the second to last sentence of Section 5.02 A of the Management Agreement which is applicable to such Inn shall (notwithstanding the provisions of said Section 5.02 A regarding the frequency of such distributions) be made twice per Accounting Period, rather than once per Accounting Period. The first interim distribution (in the amount of one-half of the estimated Owner's Distribution for each Accounting Period) shall be made by no later than the twentieth (20th) day after the beginning of such Accounting Period. The second interim distribution (in the amount of the remainder of such Owner's Distribution) with respect to -15- such Accounting Period shall be made by no later than the fifth (5th) day after the end of such Accounting Period. In addition, there will be an adjustment (if necessary) of these interim distributions as of the delivery of the Accounting Period Statement with respect to such Accounting Period, and any such adjustment shall be included in the first interim distribution referred to above for the following Accounting Period. The foregoing shall have no effect on the frequency of the preparation of Accounting Period Statements, which shall continue to be as set forth in Section 5.02 of the Management Agreement. 8. Conflict With Management Agreement. In the event of a conflict between ---------------------------------- the terms, conditions and provisions hereof and the Management Agreements, the terms, conditions and provisions of this Letter Agreement shall prevail. 9. Ratification. As amended hereby, the Management Agreements remain in ------------ full force and effect and are hereby ratified and confirmed. 10. Governing Law. This Letter Agreement shall be governed by and ------------- construed in accordance with the laws of the State of Maryland without giving effect to principles of conflicts of law. 11. Notices. Any notices by either party to this Letter Agreement shall ------- be given in accordance with Section 20.09 of the Management Agreements. If the foregoing correctly sets forth our agreement with respect to the matters contained herein, please indicate your agreement by signing a copy of this Letter Agreement in the space provided and returning it to us. Very truly yours, HMH COURTYARD PROPERTIES, INC. By: /s/ Christopher G. Townsend ------------------------------ Vice President Accepted and agreed: COURTYARD MANAGEMENT CORPORATION By: /s/ James Sullivan --------------------- Vice President -16- Accepted and agreed: MARRIOTT INTERNATIONAL, INC. By: /s/ James Sullivan --------------------- Vice President [FORM OF GUARANTEE ATTACHED TO ORIGINAL] Accepted and agreed: HOST MARRIOTT CORPORATION By: /s/ Stephen J. McKenna ----------------------- Vice President [FORM OF GUARANTEE ATTACHED TO ORIGINAL] -17- EX-10.15.II 10 EXHIBIT 10.15(II) Exhibit 10.15(ii) HMH PROPERTIES, INC. 10400 Fernwood Road Bethesda, Maryland 20817 September 25, 1993 Residence Inn By Marriott, Inc. 10400 Fernwood Road Bethesda, Maryland 20817 Gentlemen: Reference is made to those certain Management Agreements ("Management Agreements") of even date hereof between HMH Properties, Inc. as "Owner" thereunder and Residence Inn by Marriott, Inc. as "Management Company" thereunder relating to the operation of eighteen (18) Residence Inns By Marriott (the "Inn(s)") in those locations set forth in Exhibit A to this letter agreement ("Letter Agreement"). This Letter Agreement, when executed by you, will constitute Owner's and Management Company's further mutual agreement with respect to certain matters set forth in the Management Agreements. 1. Definitions. The following terms, when used in this Letter Agreement, ----------- shall have the meanings indicated. "Actual FF&E Balance" shall have the meaning set forth in paragraph 6(f) of ------------------- this Letter Agreement. "Average FF&E Balance" shall have the meaning set forth in paragraph 6(f) -------------------- of this Letter Agreement. "Bonus Incentive Fee" shall mean (a) with respect to any Sale or Partial ------------------- Sale of any Inn(s), the lesser of (i) fifty percent (50%) of the Net Excess Sales Proceeds with respect to such Sale or Partial Sale, or (ii) the cumulative amount of the Base Management Fee which is calculated in accordance with, and (but for the provisions of paragraph 2(a) and 6(a) of this Letter Agreement) would be otherwise payable to Management Company pursuant to the Management Agreement applicable to such Inn(s) (to the extent not deferred under Section 5.02 B of such Management Agreement) and paragraph 6(a) of this Letter Agreement from the period between the date hereof and the earlier of (x) the closing date of such Sale and (y) the close of Fiscal Year 2000; and (b) with respect to any one or more Financing Transactions, the lesser of (i) fifty percent (50%) of the Cumulative Net Financing Proceeds with respect to such Financing Transactions or (ii) the cumulative amount of the Base Management Fee which is calculated in accordance with and (but for the provisions of paragraph 2(a) and 6(a) of this Letter Agreement) would be otherwise payable to Management Company pursuant to the Management Agreement applicable to such Inn(s) (to the extent not deferred under Section 5.02 B of such Management Agreement) and paragraph 6(a) of this Letter Agreement for the period between the date hereof and the earlier of the dates referred to in clauses (x) and (y) of provision (a) of this definition; provided, however, that there shall be no Bonus Incentive Fee payable from Cumulative Net Financing Proceeds in accordance with this provision (b) of this definition until the date which is thirty (30) days after the date upon which all of the Exchange Bonds have been retired and paid in full. In calculating the Bonus Incentive Fee, any amounts paid under provision (b) of this definition shall be credited against amounts payable under provision (a). "Consolidated Inn" shall mean any Inn which is subject to the consolidation ---------------- provisions of paragraph 6(a) and has not been the subject of a Deconsolidation Event. "Consolidated FF&E Reserve" shall mean the consolidated FF&E Reserve ------------------------- maintained pursuant to paragraph 6(a). "Cumulative Net Financing Proceeds" shall mean the cash proceeds actually --------------------------------- received by Owner or its Affiliates from one or more Financing Transactions, net of any Transaction Costs payable by Owner in connection therewith, of any Inn(s) from and after the date hereof in excess of (i) Owner's then Priority Basis for such Inn(s) and (ii) any amounts funded by Owner in connection with a Deconsolidation Event pursuant to paragraph 6(f). In the event an Inn is the subject of more than one Financing Transaction due to a refinancing of debt incurred in any prior Financing Transactions, Cumulative Net Financing Proceeds shall be the excess of the highest principal amount borrowed in any one such Financing Transaction over (x) Owner's then Priority Basis, (y) all Transaction Costs incurred with respect to all such Financing Transactions, and (z) any amounts funded by Owner in connection with a Deconsolidation Event pursuant to paragraph 6(f). In the event any Inn is the subject of more than one Financing Transactions but in differing pools or groups of Inns, Cumulative Net Financing Proceeds will be allocated to such Inn on a fair and equitable basis. "Deconsolidated Inn" shall mean any Inn which has been subject to a ------------------ Deconsolidation Event. -2- "Deconsolidation Event" shall have the meaning set forth in paragraph 6(a). --------------------- "Deferred Payments" shall have the meaning set forth in paragraph (b) in ----------------- the definition of "Gross Sales Price". "Exchange Bonds" shall have the same meaning set forth (at page 48) in -------------- Marriott Corporation's June 19, 1993 "Notice of 1993 Annual Meeting and Proxy Statement." "Financing Transaction" shall mean, with respect to any Inn(s), any --------------------- transaction which results in one or more mortgages, deeds of trust or other security devices affecting such Inn(s) and which secures a debt or liability (absolute or contingent) of the Owner or any of its Affiliates in an amount equal to at least 25% of the then Priority Basis of the Inn. A Financing Transaction shall not include leases of any of the Inn's FF&E or lines of credit pursuant to which Owner finances any Inn's Working Capital, FF&E or building improvements or additions agreed to by both Owner and Management Company under Section 8.03 of the Management Agreements or required to be made by Owner with its own funds under any of the provisions of the Management Agreements. "Gross Sales Price" shall mean all of the consideration actually received ----------------- by Owner in connection with a Sale or one or more Partial Sales of any of the Inns, as and when received. In calculating Gross Sales Price the following shall apply: (a) There shall be excluded from Gross Sales Price the aggregate amount of all deposits in cash reserve accounts (excluding the FF&E Reserve), house banks and similar cash accounts not transferred as part of a Sale. There shall be added to Gross Sales Price the amount of the FF&E Reserve if such Reserve is retained by Owner and not transferred to the purchaser. (b) There shall be included in Gross Sales Price only consideration which is actually received and available to Owner. Accordingly (but without limiting the foregoing), any portion of the purchase price which is "held back", deposited in escrow or which is payable on some future date or event (including purchase money indebtedness, "earnout" payments or other payments based in whole or in part on some future date or event (collectively, "Deferred Payments") shall be excluded from Gross Sales Price except if, and to the extent the same are actually received by, and become available to, Owner. If any interest is payable to Owner in connection with any Deferred Payments, Management Company -3- shall receive interest on the payment of any Bonus Incentive Fees attributable to such Deferred Payments at the same time Owner receives such interest, such interest to be calculated for the same period of time for which Owner receives such interest and at a rate equal to the interest rate applicable to the Deferred Payment. (c) Except with respect to Deferred Payments as provided in (b) above, the Gross Sales Price shall not be reduced by any (i) contingent liabilities of, or claims against, Owner and its Affiliates, including, without limitation, claims or liabilities under indemnities, representations, warranties or claims or liabilities based on torts arising in connection with any Sale or Partial Sale or other similar agreements (collectively, "Liabilities"), or (ii) cash flow or other guarantees (including without limitation any such guarantees related to future performance, value or other contingencies, or repurchase or similar obligations relating to the Inn (collectively, "Guarantees")). If, following the date of a Sale or a Partial Sale with respect to which a Bonus Incentive Fee was paid to Management Company out of Net Excess Sales Proceeds, any payment is made by Owner or its Affiliates on account of such Guarantees, Gross Sales Price and the Bonus Incentive Fee shall be recalculated based on the amount of such payment, and Management Company shall be obligated to make the remittance to Owner in accordance with paragraph 5 of this Letter Agreement. (d) If all or any portion of the consideration for any Sale or Partial Sale is non-cash consideration ("Non-Cash Consideration") (excluding instruments or agreements reflecting Deferred Payment obligations which shall be governed by (b) above), then (subject to the other provisions of this definition) the Gross Sales Price shall be calculated based upon the fair market value of the consideration received. If such fair market value is set forth in, or determinable by reference to the agreement of purchase and sale between the purchaser and Owner, then such value shall, absent bad faith, be binding for purposes of this Letter Agreement. In all other cases, the fair market value of such consideration shall be determined by agreement of Owner and Management Company, or absent agreement, by arbitration in accordance with Section 20.13 of the Management Agreement. (e) For the purposes of determining a Bonus Incentive Fee to be paid from the Net Excess Sales Proceeds of a Partial Sale, Owner's Priority Basis shall be prorated based upon the percentage of ownership interest transferred in each such Partial Sale. The Priority Basis shall be -4- similarly prorated on a cumulative basis for each subsequent Partial Sale until 100% of Owner's title and ownership interest in any Inn which is the subject of a Partial Sale (or the entity constituting the Owner of such Inn) has been sold. "Host Marriott" shall mean Host Marriott Corporation, a Delaware ------------- corporation, and any entity which succeeds thereto, including any successor by merger, recapitalization, reorganization, or by acquisition of all or substantially all of the stock or assets of Host Marriott. The term "Host Marriott" shall also include any entity to which there has been transferred all or substantially all of the Inns with respect to which a Sale has not occurred (or all or substantially all of Host Marriott's interest in the entities owning such Inns) together with other assets of Host Marriott (or any Affiliate thereof) with a fair market value equal to at least 25% of the fair market value of such Inns. "Net Excess Sales Proceeds" shall mean the Gross Sales Price, less the sum ------------------------- of (i) the then Priority Basis of such Inn, or in the event of a Partial Sale, the prorated Priority Basis of such Inn as set forth in paragraph (e) of the definition of "Gross Sales Price", plus (ii) Transaction Costs incurred in connection with such Sale or Partial Sale, plus (iii) any amounts funded by Owner in connection with a Deconsolidation Event pursuant to paragraph 6(e). "Owner" shall mean HMH Properties, Inc. or any entity to which there has ----- been transferred any Inn with respect to which a Sale has not occurred. "Non-Cash Consideration" shall have the meaning set forth in paragraph (d) ---------------------- of the definition of "Gross Sales Price". "Partial Sale" shall mean any sale or transfer of less than all of the ------------ ownership interest of any Inn(s) or the Owner of any Inn(s) which results in a reduction of the beneficial ownership (directly and indirectly) of such Owner in such Inn(s). Notwithstanding anything to the contrary contained herein, a Partial Sale shall not include the sale of any stock of Host Marriott over any public stock exchange. A Partial Sale shall, however, be subject to the same provisions set forth in the definition of a Sale which begin with the "provided, however" clause in the first sentence of such definition and continue for the balance of such definition. "Sale" shall mean the conveyance of all of Owner's title and ownership ---- interest (whether as fee owner or ground lessee) -5- in an Inn or group of Inns or of the entity constituting the Owner of such Inn or Inns in a single or a related sales transaction, including a Sale/Leaseback and shall include a condemnation (or conveyance in lieu thereof) of all or substantially all of an Inn; provided, however, a Sale shall not include (a) conveyance of an Inn to a direct or indirect wholly owned Affiliate of Owner or Host Marriott, (b) conveyance of an Inn through foreclosure or exercise of a power of sale or other remedy under a mortgage, deed of trust or other security device or by deed in lieu thereof, (c) the termination or expiration of the Owner's interest as lessee under a lease (or other terminable possessory interest) or the dispossession of Owner by summary or other eviction proceedings or the surrender by Owner of its rights as lessee (or of possession) in lieu of any of the foregoing, (d) condemnation of an Inn or conveyance in lieu thereof of less than all or substantially all of an Inn, or a conveyance of an Inn following material casualty and the election of Owner not to restore, or (e) the granting of a mortgage, deed of trust or other security device. For the purpose of this definition of a "Sale", a "related sales transaction" shall be deemed to constitute a Sale of two (2) or more Inns when (i) the basic terms and conditions of such conveyance were intended to be an integrated transaction, (ii) the purchaser or the general partner or controlling stockholder of the purchaser or such purchaser's general partner, are the same person, firm or entity, and (iii) the closing on the Sale and the conveyance of title to such Inns occurs within six (6) months of each other and within six (6) months after the date of the contract of Sale with respect to such Inns. In the case of a related sales transaction, a "Sale" of any Inn which is part of any related sales transaction shall not be deemed to have occurred until the last Inn which is the subject of such transaction has been sold, but in no event later than six (6) months after the date of the contract of sale with respect to such Inn. At any time on or after a conveyance described in (a) above, the Owner originally named herein shall still be liable to pay the Bonus Incentive Fee as and when the same shall be due hereunder and otherwise to perform the "Owner's" obligations hereunder with respect to such Inns. "Sale/Leaseback" shall mean any transaction in which, contemporaneously -------------- with the conveyance of the Inn to the purchaser, the purchaser or a related party leases the Inn to Owner or an Affiliate of Owner. "Transaction Costs" shall mean all of the reasonable costs actually paid by ----------------- or on behalf of Owner or its Affiliates to third parties who are not Affiliates of Owner in connection -6- with a Sale, Partial Sale or Financing Transaction, including, without limitation, brokerage commissions, underwriting fees and discounts, title insurance, escrow and other title fees and expenses, recording costs, survey costs, legal, accounting, engineering and other professional fees and expenses, deed, transfer, sales, gains, use and other taxes (other than income taxes). Unless the context requires otherwise, all other capitalized terms used in this Letter Agreement shall have the same meaning they have in the Management Agreements, as in effect on the date hereof. 2. Bonus Incentive Fee. ------------------- (a) With respect to each Inn, until the earlier to occur of (i) the close of Fiscal Year 2000, or (ii) a Sale of such Inn (including one or more Partial Sales, but only if, on a cumulative basis, at least fifty percent (50%) of the ownership interest in such Inn or in the Owner of such Inn has been sold), or (iii) conveyance of an Inn through the occurrence of an event described in clause (b) and clause (c) in the definition of "Sale", the cumulative amount of the Base Management Fee (to the extent not deferred pursuant to Section 5.02 B thereof) and Deferred Contingent Base Fee otherwise payable pursuant to the Management Agreement shall not be paid to Management Company but shall be retained by Owner; provided, however, that for purposes of all calculations, payments (other than the actual payment of Base Management Fee) distributions and determinations under the Management Agreement (including, without limitation, Owner's Priority, Incentive Management Fee, Operating Profit, but excluding Owner's right to terminate the Management Agreement) Management Company shall be deemed to have received such Base Management Fee or Deferred Contingent Base Fee. The Base Management Fee or Deferred Contingent Base Fee shall be remitted to Owner at the same times as it would have been paid to Management Company under the Management Agreements. (b) In lieu of the payment of the Base Management Fee and Deferred Contingent Base Fee during the period provided for in paragraph 2(a), Owner shall, so long as Owner has not terminated the Management Agreement because of an Event of Default by Management Company, upon a Sale of any Inn(s) (including, without limitation, a Partial Sale) or upon a Financing Transaction with respect to any Inn(s), pay to Management Company the Bonus Incentive Fee with respect to such Inn(s). In the event of a contemporaneous Sale or Partial Sale of Inn(s) to a single third party purchaser or related purchasers (including, without limitation, a Partial Sale) who are not Affiliates of Owner, the Net Excess Sale Proceeds for all such Inn(s) shall be aggregated -7- together and the Bonus Incentive Fee shall be calculated on a combined (as opposed to an Inn-by-Inn) basis. (c) For each Inn, from and after the earlier to occur of (i) a Sale (including one or more Partial Sales, but only if, on a cumulative basis, at least fifty percent (50%) of the ownership interest in such Inn or in the Owner of such Inn has been sold) or (ii) the close of Fiscal Year 2000, the Base Management Fee shall no longer be retained by Owner under paragraph 2(a) above, but shall be paid to Management Company in accordance with the terms of the Management Agreement relating to such Inn. If no Sale or Financing Transaction has occurred prior to the close of Fiscal Year 2000, Owner shall remain obligated to pay the Bonus Incentive Fee upon the occurrence of a Sale, a Partial Sale, or, to the extent otherwise permitted by this Letter Agreement, upon the occurrence of a Financing Transaction. After a Sale of an Inn has occurred, Management Company shall no longer be entitled to receive a Bonus Incentive Fee with respect to any subsequent Sale, Partial Sale or Financing Transaction with respect to such Inn. (d) Notwithstanding the foregoing, or anything to the contrary contained in this Letter Agreement, in the Management Agreement, or in any Non-Disturbance Agreement now or hereafter entered into with the Holder of a Secured Loan, or the landlord under a lease of an Inn or the land thereunder, in the event of the occurrence of any of the events described in clauses (b) or (c) of the definition of "Sale" neither Owner nor any other party, including any Holder or lessor (except as provided below), shall then or thereafter have any obligation to make any payment of the Bonus Incentive Fee to Management Company, and from and after the occurrence of any such event, Management Company (to the extent it is entitled to continue to manage the Inn pursuant to the terms of a Non-Disturbance Agreement or other arrangement with a successor owner of the Inn) shall be entitled to receive the Base Management Fee accruing from and after the occurrence of any such event. (e) Thirty (30) days after the date upon which all Exchange Bonds have been retired and paid in full, Owner shall (i) present to Management Company a computation of Cumulative Net Financing Proceeds from all Financing Transactions occurring prior to such date and (ii) pay to Management Company any Bonus Incentive Fee due with respect to such Cumulative Net Financing Proceeds. 3. Notice of Sales and Financing Transactions. ------------------------------------------ (a) Owner shall give Management Company written notice no later than ten (10) days prior to the scheduled closing date for any proposed Sale or Partial Sale. Promptly, but in no event later than ten (10) days after (i) Owner has concluded a Sale or a -8- Partial Sale and (ii) Management Company has delivered to Owner the Accounting Period Statement for the Accounting Period ending on or immediately prior to the closing of the Sale or Partial Sale (and, if the closing did not occur on the last day of an Accounting Period, a statement of Gross Revenues for the period from the first day of the Accounting Period in which the closing occurred to the closing date), Owner shall give notice thereof to Management Company. The post closing notice with respect to a Sale or Partial Sale shall include: (A) the amount of the Gross Sales Price paid on the closing (and, in the case of a Partial Sale, paid at the time of all prior Partial Sales, if any); (B) the Priority Basis of the Inn(s) subject to the Sale or a Partial Sale on the closing date and if such Priority Basis was other than the Priority Basis on the Effective Date, a statement setting forth the amounts and types of increases or decreases; (C) a statement of Transaction Costs; (D) the calculation of Net Excess Sales Proceeds and Bonus Incentive Fee; (E) any contractual Guarantees created or assumed by Owner or its Affiliates in connection therewith (which obligation may be satisfied by delivery to Management Company of copies of the agreements relating to such Guarantees); (F) copies of the sales contract with respect to such Sale or Partial Sale; and (G) in the case of a Partial Sale, copies of appropriate documentation evidencing the percentage of the ownership interest which was transferred. If all or part of the consideration for the Sale or Partial Sale includes Deferred Payments, Owner shall also notify Management Company of the terms thereof and shall send Management Company copies of executed documents or other appropriate evidence describing the Deferred Payments. If Owner has accepted Non-Cash Consideration as all or part of the consideration for the Sale or Partial Sale, Owner shall describe such Non-Cash Consideration and state the fair market value thereof. (b) Owner shall give Management Company written notice no later than ten (10) days prior to the scheduled closing date for any proposed Financing Transaction. Promptly, but in no event later than ten (10) days after (i) Owner has concluded a Financing Transaction with respect to an Inn and (ii) Management Company has delivered to Owner the Accounting Period Statement for the Accounting Period ending on or immediately prior to the closing of the Financing Transaction (and if the closing did not occur on the last day of an Accounting Period, a statement of Gross Revenues for the period from the first day of the Accounting Period in which the closing occurred to the closing date), Owner shall give notice thereof to the Management Company. Any post closing notice with respect to a Financing Transaction shall include: (A) the amount of the Cumulative Net Financing Proceeds received on the date of the closing, plus the amount of all such Proceeds received from all prior Financing Transactions; (B) the Priority Basis of the Inn(s) subject to the Financing Transaction on the closing date, and if such Priority Basis was other than the Priority Basis -9- on the date hereof, a statement setting forth the amounts and types of increases or decreases; (C) a statement of Transaction Costs; (D) the calculation of any Bonus Incentive Fee; and (E) any contractual Guarantees created or assumed in connection therewith (which obligations may be satisfied by delivery to Management Company of copies of agreements relating to such Guarantees). (c) At the time of the giving of any notice of a Sale or a Partial Sale or a Financing Transaction which relates to more than one Inn (or an Inn and other assets), Owner shall also set forth in such notice a statement allocating, as appropriate, the Gross Sales Price, Net Excess Sales Proceeds and the Cumulative Net Financing Proceeds between the sold or financed Inns and such other assets. (d) Absent bad faith, the statements of Owner set forth in notices given under (a), (b) and (c) of this paragraph 3 shall be binding and conclusive upon the parties with respect to the matters set forth therein, unless within ninety (90) days after the giving of such notice Management Company sends Owner notice (i) stating that it disputes one or more items set forth in Owner's notice and (ii) sets forth in reasonable detail the disputed item, the amount of the disputed item as calculated by Management Company and the basis for such calculation. Notwithstanding the foregoing, if the Gross Revenues for the period preceding the closing date shall be revised as a result of an Annual Operating Statement (or audit thereof) the Bonus Incentive Fee shall be recalculated based upon such revised figures. 4. Payment of Bonus Incentive Fee. ------------------------------ (a) Simultaneously with delivery of Owner's notice under paragraph 3, Owner shall pay to Management Company any Bonus Incentive Fee then payable in immediately available funds, as calculated pursuant to this Letter Agreement. (b) When actually received by Owner, the principal amount of any Deferred Payments shall be prorated between Owner and Management Company based upon the ratio that existed at the time of such Sale or Partial Sale between Owner's Priority Basis and the amount of the Bonus Incentive Fee that would have been paid on the date of such Sale or Partial Sale, had the Net Excess Sales Proceeds been received in full on such date, until the Bonus Incentive Fee with respect to such Deferred Payments has been paid in full. (c) If Owner subsequently receives a Deferred Payment and such Deferred Payment would increase Management Company's Bonus Incentive Fee, Owner shall, subject to paragraph 5 below, promptly (but in any event within ten (10) days following receipt) -10- (i) notify Management Company of receipt of such Deferred Payment together with a calculation of (x) the additional Bonus Incentive Fee due to Management Company and (y) any interest due thereon in accordance with the provisions of clause (b) in the definition of Gross Sales Price, and (ii) remit to Management Company such additional Bonus Incentive Fee plus any interest due thereon. If Owner shall fail to pay any amount due to Management Company within the time period provided for in paragraph 4(c), (i) such amounts shall bear interest at the Interest Rate, and (ii) Management Company shall have all rights and remedies available to it at law or in equity with respect to Owner's failure to make such payments. (d) Notwithstanding any election by Owner to negotiate, sell or monetize any note or similar instrument evidencing an obligation to make Deferred Payment at a discount (i.e., for consideration which is less than the face value of the principal amount outstanding of such Deferred Payments), no such discount shall apply with respect to the calculation of Net Excess Sales Proceeds for the purpose of determining any amounts due on account of any Bonus Incentive Fee, and the Bonus Incentive Fee shall continue to be calculated and paid as if Owner still owned such note or similar instrument. (e) No payment of any Bonus Incentive Fee shall be payable from the Net Excess Sales Proceeds of any one or more Partial Sales unless and until the cumulative amount of such proceeds equals ten percent (10%) or more of the Priority Basis of the Inn(s) which were the subject of such Partial Sales or which are owned by the ownership entity which was the subject of such Partial Sales. (f) If, due to an Event of Default by Owner under a Management Agreement with respect to a particular Inn, Management Company terminates the Management Agreement pursuant to Section 16.03 A thereof, the amount of any Base Management Fee with respect to such Inn which has not been paid to Management Company but has been retained by Owner pursuant to paragraph 2(a) of this Letter Agreement shall become immediately due and payable by Owner. (g) Host Marriott hereby guarantees the timely payments to Management Company by Owner under this paragraph 4. 5. Adjustment for Guarantees. ------------------------- (a) At any time and from time to time up to the tenth (10th) anniversary date of the closing of a Sale, Partial Sale or a Financing Transaction, Owner may notify Management Company that it or its Affiliate has paid a Guarantee in connection with such -11- Sale, Partial Sale or Financing Transaction. Such notice shall be accompanied by a calculation indicating the reduction, if any, in the Bonus Incentive Fee which has resulted from the payment of such Guarantee. Within thirty (30) days after receipt of such notice, Management Company shall remit to Owner any overpayment in the Bonus Incentive Fee previously paid to Management Company. In addition, any additional payments of Bonus Incentive Fee (pursuant to paragraph 4(c) or otherwise) with respect to such Inn shall be made only after taking into account the Guarantees theretofore paid by Owner with respect to such Inn. (b) If, at any time and from time to time until the full amount of all Deferred Payments with respect to a particular sale have been received in full, there shall be a default in the payment of any such Deferred Payments, Owner may notify Management Company that such a default has occurred. Such notice shall be accompanied by a calculation indicating the reduction, if any, in the Bonus Incentive Fee which has resulted from such default. Within thirty (30) days after the receipt of such notice Management Company shall refund to Owner any overpayment in the Bonus Incentive Fee previously paid to Management Company. To the extent defaulted amounts are subsequently recovered by Owner, Owner shall promptly remit to Management Company any portion thereof attributable to such refunded Bonus Incentive Fee. (c) If Management Company shall fail to pay any amount due to Owner within the time period provided for in paragraph 5(a) and 5(b), (i) such amounts shall bear interest at the Interest Rate, and (ii) Owner shall have all rights and remedies available to it at law or in equity with respect to Management Company's failure to make such payments. (d) Marriott International hereby guarantees the timely payments to Owner by Management Company under this paragraph 5. 6. Consolidation. ------------- (a) Until the earlier of (i) the close of the year 2000 or (ii) such time as any given Inn has been the subject of either a Sale or one or more Partial Sales but only if, on a cumulative basis, at least 50% of the ownership interest has been sold, or a Financing Transaction (a "Deconsolidation Event"), (x) Management Company shall be permitted to commingle all of such Inn's Working Capital and banking accounts, including the FF&E Reserve, into one or more accounts under Management Company's control in accordance with practices currently in effect as of the date of the Management Agreement, and (y) the reporting requirements of each such Inn pursuant to the Management Agreement therefor and the calculation, payment, distribution, determination or deposit, as the case may be, of each such Inn's Gross Revenues, -12- FF&E Reserve, Owner's Priority, Management Company's Base Management Fee, Residence Inn by Marriott System Fee, Incentive Management Fee, Chain Services, Operating Profit and Owner's right to terminate the Management Agreement with respect to each such Inn shall be consolidated with the reporting requirements and the calculation, payment, distribution, determination or deposit, as the case may be, with respect to all Consolidated Inn(s). (b) From and after the occurrence of a Deconsolidation Event with respect to any Inn, except with respect to a Financing Transaction (provision for which is made in paragraph 6(c) hereof), the reporting requirements for such Inn and the calculation, payment, distribution, determination or deposit, as the case may be, of such Inn's Gross Revenues, FF&E Reserve, Owner's Priority, Base Management Fee, System Fee, Incentive Management Fee, Operating Profit and Owner's right to terminate shall be done solely with respect to such Inn and shall not be consolidated with the reporting requirements and such calculation, payment, distribution, determination or deposit with any other Inn without Management Company's prior consent. (c) Notwithstanding the provision of clause (i) of paragraph 6(a) above, from and after the occurrence of a Deconsolidation Event which is due to a Financing Transaction which occurs prior to the close of the year 2000 with respect to all or any group of the Inns, the reporting requirements for all such Inns and the calculation, payment, distribution, determination or deposit, as the case may be, of such Inns' Gross Revenues, FF&E Reserve, Owner's Priority, Base Management Fee, the Residence Inn System Fee, Incentive Management Fee, Operating Profit and Owner's right to terminate shall be consolidated with respect to all Inns which are the subject of the same or related Financing Transaction until the later of (i) the close of the year 2000 or (ii) the earlier to occur of (x) the maturity of the loan or loans which is the subject of such Financing Transaction or (y) the close of the year 2002. (d) Owner shall give Management Company prompt notice of any Deconsolidation Event accompanied by reasonable documentation evidencing the occurrence thereof, and paragraph 6(a) of this Letter Agreement shall terminate with respect to the Deconsolidated Inns as of the Deconsolidation Event, except with respect to Inns which are subject to a Financing Transaction, special provision for which is made in paragraph 6(c), above. (e) Notwithstanding the provisions of paragraph (a) above, to the extent the determination of an Inn's Gross Revenues, FF&E Reserve, Owner's Priority, Base Management Fee, Residence Inn System Fee, Incentive Management Fee, Operating Profit or Owner's termination rights after a Deconsolidation Event requires calculation of such Inn's Gross Revenues, FF&E Reserve, Owner's -13- Priority, Base Management Fee, Residence Inn System Fee, Incentive Management Fee, Operating Profit or Owner's termination rights prior to such Deconsolidation Event, then, for such purposes only, the calculation of such Revenues, Reserve, Priority, Fee or Profit prior to such Deconsolidation Event shall be maintained on a deconsolidated (i.e., Inn-by-Inn) basis. Accordingly, in order to be able to utilize the same after a Deconsolidation Event or a Partial Sale, and in order to determine the amount of a Qualified Loan with respect to any Inn or Inn(s) Management Company shall, during the period from and after the date hereof and prior to a Deconsolidation Event, in addition to the reporting required under paragraph (a) above, maintain records and provide reports on a quarterly basis to Owner describing each Inn's Gross Revenues, FF&E Reserve, Owner's Priority, Priority Basis, Management Company's Base Management Fee, System Fee, Incentive Management Fee and Operating Profit on a deconsolidated (i.e., Inn-by-Inn) basis as if paragraph (a) above did not exist. Such quarterly reports shall be subject to Fiscal Year end audit and adjustments. However, in no event shall the foregoing in any manner modify the amounts owed by Management Company or Owner with respect to the period prior to the Deconsolidation Event, calculated on a consolidated basis. So long as the original Owner named herein, or Host Marriott or any of its subsidiaries or Afiliates, is the Owner of any Inn, that portion of Section 9.05, if any, which grants Owner the right to request Management Analysis Reports on any individual Inns shall be waived. (f) Upon the occurrence of a Deconsolidation Event with respect to any Inn, such Inn, as a Deconsolidated Inn, shall no longer be a participant in the Consolidated FF&E Reserve maintained under paragraph 6(a). Accordingly, upon receipt of Owner's notice of a proposed Deconsolidation Event, Management Company shall compute the "Average FF&E Balance" (defined below) and the "Actual FF&E Balance" (defined below) as of the close of the Accounting Period immediately preceding the Deconsolidation Event. For purposes of this computation: (i) "Actual FF&E Balance" shall mean, with respect to any ------------------- Consolidated Inn which is about to become a Deconsolidated Inn, the difference between (x) the actual aggregate amount (per guestroom) which has been contributed to the Consolidated FF&E Reserve by such Inn; less (y) the actual aggregate amount (per ---- guestroom) which has been withdrawn from the Consolidated FF&E Reserve by such Inn. (ii) "Average FF&E Balance" shall mean, with respect to all -------------------- Consolidated Inns, including those in (i) above, the difference between (x) the average aggregate amount (per guestroom) which has been contributed to the Consolidated FF&E Reserve by all -14- such Consolidated Inns; less (y) the average aggregate amount ---- (per guestroom) which has been withdrawn from the Consolidated FF&E Reserve by all such Consolidated Inns. The contributions and withdrawals referred to in (i) and (ii) above shall be those which were made from the period between the Effective Date of the Management Agreements and the close of the Accounting Period immediately prior to the date of the Deconsolidation Event. If seventy-five percent (75%) of the Average FF&E Balance exceeds the Actual FF&E Balance, the amount of such excess (multiplied by the number of guestrooms in the Inn in question) shall be paid by Owner into the consolidated FF&E Reserve for use, in accordance with the Management Agreement, at the Consolidated Inns. If the Actual FF&E Balance exceeds one hundred twenty-five percent (125%) of the Average FF&E Balance, the amount of such excess (multiplied by the number of guestrooms in the Inn in question) shall be transferred (such transfer to occur after the completion of the calculations referred to in this subsection (e) but in no event prior to the Deconsolidation Event) by Management Company from such consolidated FF&E Reserve to the separate FF&E Reserve for the Deconsolidated Inn which shall be established as of the date of such Deconsolidation Event, for use in accordance with the Management Agreement applicable to such Deconsolidated Inn. All such payments and transfers shall be made either on or immediately after the date of the Deconsolidation Event. 7. Interim Distributions. So long as the Original Owner named herein, or --------------------- Host Marriott or any of its subsidiaries or Affiliates, is the Owner of any Inn, Management Company agrees that the interim distributions of Owner's Distribution which are described in the second to last sentence of Section 5.02 A of the Management Agreement which is applicable to such Inn shall (notwithstanding the provisions of said Section 5.02 A regarding the frequency of such distributions) be made twice per Accounting Period, rather than once per Accounting Period. The first interim distribution (in the amount of one-half of the estimated Owner's Distribution for each Accounting Period) shall be made by no later than the twentieth (20th) day after the beginning of such Accounting Period. The second interim distribution (in the amount of the remainder of such Owner's Distribution) with respect to such Accounting Period shall be made by no later than the fifth (5th) day after the end of such Accounting Period. In addition, there will be an adjustment (if necessary) of these interim distributions as of the delivery of the Accounting Period Statement with respect to such Accounting Period, and any such adjustment shall be included in the first interim distribution referred to above for the following Accounting Period. The foregoing shall have no effect on the frequency of the preparation -15- of Accounting Period Statements, which shall continue to be as set forth in Section 5.02 of the Management Agreement. 8. Conflict With Management Agreement. In the event of a conflict between ---------------------------------- the terms, conditions and provisions hereof and the Management Agreements, the terms, conditions and provisions of this Letter Agreement shall prevail. 9. Ratification. As amended hereby, the Management Agreements remain in ------------ full force and effect and are hereby ratified and confirmed. 10. Governing Law. This Letter Agreement shall be governed by and ------------- construed in accordance with the laws of the State of Maryland without giving effect to principles of conflicts of law. 11. Notices. Any notices by either party to this Letter Agreement shall ------- be given in accordance with Section 20.09 of the Management Agreements. If the foregoing correctly sets forth our agreement with respect to the matters contained herein, please indicate your agreement by signing a copy of this Letter Agreement in the space provided and returning it to us. Very truly yours, HMH PROPERTIES, INC. By: /s/ Christopher G. Townsend ------------------------------ Vice President Accepted and agreed: Residence Inn by Marriott, Inc. By: /s/ James Sullivan --------------------- Vice President -16- Accepted and agreed: MARRIOTT INTERNATIONAL, INC. By: /s/ James Sullivan --------------------- Vice President [FORM OF GUARANTEE ATTACHED TO ORIGINAL] Accepted and agreed: HOST MARRIOTT CORPORATION By: /s/ Stephen J. McKenna ----------------------- Vice President [FORM OF GUARANTEE ATTACHED TO ORIGINAL] -17- EX-10.15.III 11 EXHIBIT 10.15(III) Exhibit 10.15(iii) HMH PROPERTIES, INC. 10400 Fernwood Road Bethesda, Maryland 20817 September 25, 1993 Fairfield FMC Corporation 10400 Fernwood Road Bethesda, Maryland 20817 Gentlemen: Reference is made to those certain Management Agreements ("Management Agreements") of even date hereof between HMH Properties, Inc. as "Owner" thereunder and Fairfield FMC Corporation as "Management Company" thereunder relating to the operation of thirty (30) Fairfield Inns (the "Hotel(s)") in those locations set forth in Exhibit A to this letter agreement ("Letter Agreement"). This Letter Agreement, when executed by you, will constitute Owner's and Management Company's further mutual agreement with respect to certain matters set forth in the Management Agreements. 1. Definitions. The following terms, when used in this Letter Agreement, ----------- shall have the meanings indicated. "Actual FF&E Balance" shall have the meaning set forth in paragraph 6(f) of ------------------- this Letter Agreement. "Average FF&E Balance" shall have the meaning set forth in paragraph 6(f) -------------------- of this Letter Agreement. "Bonus Incentive Fee" shall mean (a) with respect to any Sale or Partial ------------------- Sale of any Hotel(s), the lesser of (i) fifty percent (50%) of the Net Excess Sales Proceeds with respect to such Sale or Partial Sale, or (ii) the cumulative amount of the Base Management Fee which is calculated in accordance with, and (but for the provisions of paragraph 2(a) and 6(a) of this Letter Agreement) would be otherwise payable to Management Company pursuant to the Management Agreement applicable to such Hotel(s) (to the extent not deferred under Section 5.02 B of such Management Agreement) and paragraph 6(a) of this Letter Agreement from the period between the date hereof and the earlier of (x) the closing date of such Sale and (y) the close of Fiscal Year 2000; and (b) with respect to any one or more Financing Transactions, the lesser of (i) fifty percent (50%) of the Cumulative Net Financing Proceeds with respect to such Financing Transactions or (ii) the cumulative amount of the Base Management Fee which is calculated in accordance with and (but for the provisions of paragraph 2(a) and 6(a) of this Letter Agreement) would be otherwise payable to Management Company pursuant to the Management Agreement applicable to such Hotel(s) (to the extent not deferred under Section 5.02 B of such Management Agreement) and paragraph 6(a) of this Letter Agreement for the period between the date hereof and the earlier of the dates referred to in clauses (x) and (y) of provision (a) of this definition; provided, however, that there shall be no Bonus Incentive Fee payable from Cumulative Net Financing Proceeds in accordance with this provision (b) of this definition until the date which is thirty (30) days after the date upon which all of the Exchange Bonds have been retired and paid in full. In calculating the Bonus Incentive Fee, any amounts paid under provision (b) of this definition shall be credited against amounts payable under provision (a). "Consolidated Hotel" shall mean any Hotel which is subject to the ------------------ consolidation provisions of paragraph 6(a) and has not been the subject of a Deconsolidation Event. "Consolidated FF&E Reserve" shall mean the consolidated FF&E Reserve ------------------------- maintained pursuant to paragraph 6(a). "Cumulative Net Financing Proceeds" shall mean the cash proceeds actually --------------------------------- received by Owner or its Affiliates from one or more Financing Transactions, net of any Transaction Costs payable by Owner in connection therewith, of any Hotel(s) from and after the date hereof in excess of (i) Owner's then Priority Basis for such Hotel(s) and (ii) any amounts funded by Owner in connection with a Deconsolidation Event pursuant to paragraph 6(f). In the event a Hotel is the subject of more than one Financing Transaction due to a refinancing of debt incurred in any prior Financing Transactions, Cumulative Net Financing Proceeds shall be the excess of the highest principal amount borrowed in any one such Financing Transaction over (x) Owner's then Priority Basis, (y) all Transaction Costs incurred with respect to all such Financing Transactions, and (z) any amounts funded by Owner in connection with a Deconsolidation Event pursuant to paragraph 6(f). In the event any Hotel is the subject of more than one Financing Transactions but in differing pools or groups of Hotels, Cumulative Net Financing Proceeds will be allocated to such Hotel on a fair and equitable basis. "Deconsolidated Hotel" shall mean any Hotel which has been subject to a -------------------- Deconsolidation Event. -2- "Deconsolidation Event" shall have the meaning set forth in paragraph 6(a). --------------------- "Deferred Payments" shall have the meaning set forth in paragraph (b) in ----------------- the definition of "Gross Sales Price". "Exchange Bonds" shall have the same meaning set forth (at page 48) in -------------- Marriott Corporation's June 19, 1993 "Notice of 1993 Annual Meeting and Proxy Statement." "Financing Transaction" shall mean, with respect to any Hotel(s), any --------------------- transaction which results in one or more mortgages, deeds of trust or other security devices affecting such Hotel(s) and which secures a debt or liability (absolute or contingent) of the Owner or any of its Affiliates in an amount equal to at least 25% of the then Priority Basis of the Hotel. A Financing Transaction shall not include leases of any of the Hotel's FF&E or lines of credit pursuant to which Owner finances any Hotel's Working Capital, FF&E or building improvements or additions agreed to by both Owner and Management Company under Section 8.03 of the Management Agreements or required to be made by Owner with its own funds under any of the provisions of the Management Agreements. "Gross Sales Price" shall mean all of the consideration actually received ----------------- by Owner in connection with a Sale or one or more Partial Sales of any of the Hotels, as and when received. In calculating Gross Sales Price the following shall apply: (a) There shall be excluded from Gross Sales Price the aggregate amount of all deposits in cash reserve accounts (excluding the FF&E Reserve), house banks and similar cash accounts not transferred as part of a Sale. There shall be added to Gross Sales Price the amount of the FF&E Reserve if such Reserve is retained by Owner and not transferred to the purchaser. (b) There shall be included in Gross Sales Price only consideration which is actually received and available to Owner. Accordingly (but without limiting the foregoing), any portion of the purchase price which is "held back", deposited in escrow or which is payable on some future date or event (including purchase money indebtedness, "earnout" payments or other payments based in whole or in part on some future date or event (collectively, "Deferred Payments") shall be excluded from Gross Sales Price except if, and to the extent the same are actually received by, and become available to, Owner. If any interest is payable to Owner in connection with any Deferred Payments, Management Company -3- shall receive interest on the payment of any Bonus Incentive Fees attributable to such Deferred Payments at the same time Owner receives such interest, such interest to be calculated for the same period of time for which Owner receives such interest and at a rate equal to the interest rate applicable to the Deferred Payment. (c) Except with respect to Deferred Payments as provided in (b) above, the Gross Sales Price shall not be reduced by any (i) contingent liabilities of, or claims against, Owner and its Affiliates, including, without limitation, claims or liabilities under indemnities, representations, warranties or claims or liabilities based on torts arising in connection with any Sale or Partial Sale or other similar agreements (collectively, "Liabilities"), or (ii) cash flow or other guarantees (including without limitation any such guarantees related to future performance, value or other contingencies, or repurchase or similar obligations relating to the Hotel (collectively, "Guarantees")). If, following the date of a Sale or a Partial Sale with respect to which a Bonus Incentive Fee was paid to Management Company out of Net Excess Sales Proceeds, any payment is made by Owner or its Affiliates on account of such Guarantees, Gross Sales Price and the Bonus Incentive Fee shall be recalculated based on the amount of such payment, and Management Company shall be obligated to make the remittance to Owner in accordance with paragraph 5 of this Letter Agreement. (d) If all or any portion of the consideration for any Sale or Partial Sale is non-cash consideration ("Non-Cash Consideration") (excluding instruments or agreements reflecting Deferred Payment obligations which shall be governed by (b) above), then (subject to the other provisions of this definition) the Gross Sales Price shall be calculated based upon the fair market value of the consideration received. If such fair market value is set forth in, or determinable by reference to the agreement of purchase and sale between the purchaser and Owner, then such value shall, absent bad faith, be binding for purposes of this Letter Agreement. In all other cases, the fair market value of such consideration shall be determined by agreement of Owner and Management Company, or absent agreement, by arbitration in accordance with Section 20.13 of the Management Agreement. (e) For the purposes of determining a Bonus Incentive Fee to be paid from the Net Excess Sales Proceeds of a Partial Sale, Owner's Priority Basis shall be prorated based upon the percentage of ownership interest transferred in each such Partial Sale. The Priority Basis shall be -4- similarly prorated on a cumulative basis for each subsequent Partial Sale until 100% of Owner's title and ownership interest in any Hotel which is the subject of a Partial Sale (or the entity constituting the Owner of such Hotel) has been sold. "Host Marriott" shall mean Host Marriott Corporation, a Delaware ------------- corporation, and any entity which succeeds thereto, including any successor by merger, recapitalization, reorganization, or by acquisition of all or substantially all of the stock or assets of Host Marriott. The term "Host Marriott" shall also include any entity to which there has been transferred all or substantially all of the Hotels with respect to which a Sale has not occurred (or all or substantially all of Host Marriott's interest in the entities owning such Hotels) together with other assets of Host Marriott (or any Affiliate thereof) with a fair market value equal to at least 25% of the fair market value of such Hotels. "Net Excess Sales Proceeds" shall mean the Gross Sales Price, less the sum ------------------------- of (i) the then Priority Basis of such Hotel, or in the event of a Partial Sale, the prorated Priority Basis of such Hotel as set forth in paragraph (e) of the definition of "Gross Sales Price", plus (ii) Transaction Costs incurred in connection with such Sale or Partial Sale, plus (iii) any amounts funded by Owner in connection with a Deconsolidation Event pursuant to paragraph 6(e). "Owner" shall mean HMH Properties, Inc. or any entity to which there has ----- been transferred any Hotel with respect to which a Sale has not occurred. "Non-Cash Consideration" shall have the meaning set forth in paragraph (d) ---------------------- of the definition of "Gross Sales Price". "Partial Sale" shall mean any sale or transfer of less than all of the ------------ ownership interest of any Hotel(s) or the Owner of any Hotel(s) which results in a reduction of the beneficial ownership (directly and indirectly) of such Owner in such Hotel(s). Notwithstanding anything to the contrary contained herein, a Partial Sale shall not include the sale of any stock of Host Marriott over any public stock exchange. A Partial Sale shall, however, be subject to the same provisions set forth in the definition of a Sale which begin with the "provided, however" clause in the first sentence of such definition and continue for the balance of such definition. -5- "Sale" shall mean the conveyance of all of Owner's title and ownership ---- interest (whether as fee owner or ground lessee) in a Hotel or group of Hotels or of the entity constituting the Owner of such Hotel or Hotels in a single or a related sales transaction, including a Sale/Leaseback and shall include a condemnation (or conveyance in lieu thereof) of all or substantially all of a Hotel; provided, however, a Sale shall not include (a) conveyance of a Hotel to a direct or indirect wholly owned Affiliate of Owner or Host Marriott, (b) conveyance of a Hotel through foreclosure or exercise of a power of sale or other remedy under a mortgage, deed of trust or other security device or by deed in lieu thereof, (c) the termination or expiration of the Owner's interest as lessee under a lease (or other terminable possessory interest) or the dispossession of Owner by summary or other eviction proceedings or the surrender by Owner of its rights as lessee (or of possession) in lieu of any of the foregoing, (d) condemnation of a Hotel or conveyance in lieu thereof of less than all or substantially all of a Hotel, or a conveyance of a Hotel following material casualty and the election of Owner not to restore, or (e) the granting of a mortgage, deed of trust or other security device. For the purpose of this definition of a "Sale", a "related sales transaction" shall be deemed to constitute a Sale of two (2) or more Hotels when (i) the basic terms and conditions of such conveyance were intended to be an integrated transaction, (ii) the purchaser or the general partner or controlling stockholder of the purchaser or such purchaser's general partner, are the same person, firm or entity, and (iii) the closing on the Sale and the conveyance of title to such Hotels occurs within six (6) months of each other and within six (6) months after the date of the contract of Sale with respect to such Hotels. In the case of a related sales transaction, a "Sale" of any Hotel which is part of any related sales transaction shall not be deemed to have occurred until the last Hotel which is the subject of such transaction has been sold, but in no event later than six (6) months after the date of the contract of sale with respect to such Hotel. At any time on or after a conveyance described in (a) above, the Owner originally named herein shall still be liable to pay the Bonus Incentive Fee as and when the same shall be due hereunder and otherwise to perform the "Owner's" obligations hereunder with respect to such Hotels. "Sale/Leaseback" shall mean any transaction in which, contemporaneously -------------- with the conveyance of the Hotel to the purchaser, the purchaser or a related party leases the Hotel to Owner or an Affiliate of Owner. -6- "Transaction Costs" shall mean all of the reasonable costs actually paid ----------------- by or on behalf of Owner or its Affiliates to third parties who are not Affiliates of Owner in connection with a Sale, Partial Sale or Financing Transaction, including, without limitation, brokerage commissions, underwriting fees and discounts, title insurance, escrow and other title fees and expenses, recording costs, survey costs, legal, accounting, engineering and other professional fees and expenses, deed, transfer, sales, gains, use and other taxes (other than income taxes). Unless the context requires otherwise, all other capitalized terms used in this Letter Agreement shall have the same meaning they have in the Management Agreements, as in effect on the date hereof. 2. Bonus Incentive Fee. ------------------- (a) With respect to each Hotel, until the earlier to occur of (i) the close of Fiscal Year 2000, or (ii) a Sale of such Hotel (including one or more Partial Sales, but only if, on a cumulative basis, at least fifty percent (50%) of the ownership interest in such Hotel or in the Owner of such Hotel has been sold), or (iii) conveyance of a Hotel through the occurrence of an event described in clause (b) and clause (c) in the definition of "Sale", the cumulative amount of the Base Management Fee (to the extent not deferred pursuant to Section 5.02 B thereof) and Deferred Contingent Base Fee otherwise payable pursuant to the Management Agreement shall not be paid to Management Company but shall be retained by Owner; provided, however, that for purposes of all calculations, payments (other than the actual payment of Base Management Fee) distributions and determinations under the Management Agreement (including, without limitation, Owner's Priority, Incentive Management Fee, Operating Profit, but excluding Owner's right to terminate the Management Agreement) Management Company shall be deemed to have received such Base Management Fee or Deferred Contingent Base Fee. The Base Management Fee or Deferred Contingent Base Fee shall be remitted to Owner at the same times as it would have been paid to Management Company under the Management Agreements. (b) In lieu of the payment of the Base Management Fee and Deferred Contingent Base Fee during the period provided for in paragraph 2(a), Owner shall, so long as Owner has not terminated the Management Agreement because of an Event of Default by Management Company, upon a Sale of any Hotel(s) (including, without limitation, a Partial Sale) or upon a Financing Transaction with respect to any Hotel(s), pay to Management Company the Bonus Incentive Fee with respect to such Hotel(s). In the event of a contemporaneous Sale or Partial Sale of Hotel(s) to a single third party purchaser or related purchasers (including, -7- without limitation, a Partial Sale) who are not Affiliates of Owner, the Net Excess Sale Proceeds for all such Hotel(s) shall be aggregated together and the Bonus Incentive Fee shall be calculated on a combined (as opposed to a Hotel-by-Hotel) basis. (c) For each Hotel, from and after the earlier to occur of (i) a Sale (including one or more Partial Sales, but only if, on a cumulative basis, at least fifty percent (50%) of the ownership interest in such Hotel or in the Owner of such Hotel has been sold) or (ii) the close of Fiscal Year 2000, the Base Management Fee shall no longer be retained by Owner under paragraph 2(a) above, but shall be paid to Management Company in accordance with the terms of the Management Agreement relating to such Hotel. If no Sale or Financing Transaction has occurred prior to the close of Fiscal Year 2000, Owner shall remain obligated to pay the Bonus Incentive Fee upon the occurrence of a Sale, a Partial Sale, or, to the extent otherwise permitted by this Letter Agreement, upon the occurrence of a Financing Transaction. After a Sale of a Hotel has occurred, Management Company shall no longer be entitled to receive a Bonus Incentive Fee with respect to any subsequent Sale, Partial Sale or Financing Transaction with respect to such Hotel. (d) Notwithstanding the foregoing, or anything to the contrary contained in this Letter Agreement, in the Management Agreement, or in any Non-Disturbance Agreement now or hereafter entered into with the Holder of a Secured Loan, or the landlord under a lease of a Hotel or the land thereunder, in the event of the occurrence of any of the events described in clauses (b) or (c) of the definition of "Sale" neither Owner nor any other party, including any Holder or lessor (except as provided below), shall then or thereafter have any obligation to make any payment of the Bonus Incentive Fee to Management Company, and from and after the occurrence of any such event, Management Company (to the extent it is entitled to continue to manage the Hotel pursuant to the terms of a Non-Disturbance Agreement or other arrangement with a successor owner of the Hotel) shall be entitled to receive the Base Management Fee accruing from and after the occurrence of any such event. (e) Thirty (30) days after the date upon which all Exchange Bonds have been retired and paid in full, Owner shall (i) present to Management Company a computation of Cumulative Net Financing Proceeds from all Financing Transactions occurring prior to such date and (ii) pay to Management Company any Bonus Incentive Fee due with respect to such Cumulative Net Financing Proceeds. -8- 3. Notice of Sales and Financing Transactions. ------------------------------------------ (a) Owner shall give Management Company written notice no later than ten (10) days prior to the scheduled closing date for any proposed Sale or Partial Sale. Promptly, but in no event later than ten (10) days after (i) Owner has concluded a Sale or a Partial Sale and (ii) Management Company has delivered to Owner the Accounting Period Statement for the Accounting Period ending on or immediately prior to the closing of the Sale or Partial Sale (and, if the closing did not occur on the last day of an Accounting Period, a statement of Gross Revenues for the period from the first day of the Accounting Period in which the closing occurred to the closing date), Owner shall give notice thereof to Management Company. The post closing notice with respect to a Sale or Partial Sale shall include: (A) the amount of the Gross Sales Price paid on the closing (and, in the case of a Partial Sale, paid at the time of all prior Partial Sales, if any); (B) the Priority Basis of the Hotel(s) subject to the Sale or a Partial Sale on the closing date and if such Priority Basis was other than the Priority Basis on the Effective Date, a statement setting forth the amounts and types of increases or decreases; (C) a statement of Transaction Costs; (D) the calculation of Net Excess Sales Proceeds and Bonus Incentive Fee; (E) any contractual Guarantees created or assumed by Owner or its Affiliates in connection therewith (which obligation may be satisfied by delivery to Management Company of copies of the agreements relating to such Guarantees); (F) copies of the sales contract with respect to such Sale or Partial Sale; and (G) in the case of a Partial Sale, copies of appropriate documentation evidencing the percentage of the ownership interest which was transferred. If all or part of the consideration for the Sale or Partial Sale includes Deferred Payments, Owner shall also notify Management Company of the terms thereof and shall send Management Company copies of executed documents or other appropriate evidence describing the Deferred Payments. If Owner has accepted Non-Cash Consideration as all or part of the consideration for the Sale or Partial Sale, Owner shall describe such Non-Cash Consideration and state the fair market value thereof. (b) Owner shall give Management Company written notice no later than ten (10) days prior to the scheduled closing date for any proposed Financing Transaction. Promptly, but in no event later than ten (10) days after (i) Owner has concluded a Financing Transaction with respect to a Hotel and (ii) Management Company has delivered to Owner the Accounting Period Statement for the Accounting Period ending on or immediately prior to the closing of the Financing Transaction (and if the closing did not occur on the last day of an Accounting Period, a statement of Gross Revenues for the period from the first day of the Accounting Period in which the closing occurred to the closing date), Owner shall give notice thereof to the Management Company. Any post closing notice -9- with respect to a Financing Transaction shall include: (A) the amount of the Cumulative Net Financing Proceeds received on the date of the closing, plus the amount of all such Proceeds received from all prior Financing Transactions; (B) the Priority Basis of the Hotel(s) subject to the Financing Transaction on the closing date, and if such Priority Basis was other than the Priority Basis on the date hereof, a statement setting forth the amounts and types of increases or decreases; (C) a statement of Transaction Costs; (D) the calculation of any Bonus Incentive Fee; and (E) any contractual Guarantees created or assumed in connection therewith (which obligations may be satisfied by delivery to Management Company of copies of agreements relating to such Guarantees). (c) At the time of the giving of any notice of a Sale or a Partial Sale or a Financing Transaction which relates to more than one Hotel (or a Hotel and other assets), Owner shall also set forth in such notice a statement allocating, as appropriate, the Gross Sales Price, Net Excess Sales Proceeds and the Cumulative Net Financing Proceeds between the sold or financed Hotels and such other assets. (d) Absent bad faith, the statements of Owner set forth in notices given under (a), (b) and (c) of this paragraph 3 shall be binding and conclusive upon the parties with respect to the matters set forth therein, unless within ninety (90) days after the giving of such notice Management Company sends Owner notice (i) stating that it disputes one or more items set forth in Owner's notice and (ii) sets forth in reasonable detail the disputed item, the amount of the disputed item as calculated by Management Company and the basis for such calculation. Notwithstanding the foregoing, if the Gross Revenues for the period preceding the closing date shall be revised as a result of an Annual Operating Statement (or audit thereof) the Bonus Incentive Fee shall be recalculated based upon such revised figures. 4. Payment of Bonus Incentive Fee. ------------------------------ (a) Simultaneously with delivery of Owner's notice under paragraph 3, Owner shall pay to Management Company any Bonus Incentive Fee then payable in immediately available funds, as calculated pursuant to this Letter Agreement. (b) When actually received by Owner, the principal amount of any Deferred Payments shall be prorated between Owner and Management Company based upon the ratio that existed at the time of such Sale or Partial Sale between Owner's Priority Basis and the amount of the Bonus Incentive Fee that would have been paid on the date of such Sale or Partial Sale, had the Net Excess Sales Proceeds been received in full on such date, until the Bonus -10- Incentive Fee with respect to such Deferred Payments has been paid in full. (c) If Owner subsequently receives a Deferred Payment and such Deferred Payment would increase Management Company's Bonus Incentive Fee, Owner shall, subject to paragraph 5 below, promptly (but in any event within ten (10) days following receipt) (i) notify Management Company of receipt of such Deferred Payment together with a calculation of (x) the additional Bonus Incentive Fee due to Management Company and (y) any interest due thereon in accordance with the provisions of clause (b) in the definition of Gross Sales Price, and (ii) remit to Management Company such additional Bonus Incentive Fee plus any interest due thereon. If Owner shall fail to pay any amount due to Management Company within the time period provided for in paragraph 4(c), (i) such amounts shall bear interest at the Interest Rate, and (ii) Management Company shall have all rights and remedies available to it at law or in equity with respect to Owner's failure to make such payments. (d) Notwithstanding any election by Owner to negotiate, sell or monetize any note or similar instrument evidencing an obligation to make Deferred Payment at a discount (i.e., for consideration which is less than the face value of the principal amount outstanding of such Deferred Payments), no such discount shall apply with respect to the calculation of Net Excess Sales Proceeds for the purpose of determining any amounts due on account of any Bonus Incentive Fee, and the Bonus Incentive Fee shall continue to be calculated and paid as if Owner still owned such note or similar instrument. (e) No payment of any Bonus Incentive Fee shall be payable from the Net Excess Sales Proceeds of any one or more Partial Sales unless and until the cumulative amount of such proceeds equals ten percent (10%) or more of the Priority Basis of the Hotel(s) which were the subject of such Partial Sales or which are owned by the ownership entity which was the subject of such Partial Sales. (f) If, due to an Event of Default by Owner under a Management Agreement with respect to a particular Hotel, Management Company terminates the Management Agreement pursuant to Section 16.03 A thereof, the amount of any Base Management Fee with respect to such Hotel which has not been paid to Management Company but has been retained by Owner pursuant to paragraph 2(a) of this Letter Agreement shall become immediately due and payable by Owner. (g) Host Marriott hereby guarantees the timely payments to Management Company by Owner under this paragraph 4. -11- 5. Adjustment for Guarantees. ------------------------- (a) At any time and from time to time up to the tenth (10th) anniversary date of the closing of a Sale, Partial Sale or a Financing Transaction, Owner may notify Management Company that it or its Affiliate has paid a Guarantee in connection with such Sale, Partial Sale or Financing Transaction. Such notice shall be accompanied by a calculation indicating the reduction, if any, in the Bonus Incentive Fee which has resulted from the payment of such Guarantee. Within thirty (30) days after receipt of such notice, Management Company shall remit to Owner any overpayment in the Bonus Incentive Fee previously paid to Management Company. In addition, any additional payments of Bonus Incentive Fee (pursuant to paragraph 4(c) or otherwise) with respect to such Hotel shall be made only after taking into account the Guarantees theretofore paid by Owner with respect to such Hotel. (b) If, at any time and from time to time until the full amount of all Deferred Payments with respect to a particular sale have been received in full, there shall be a default in the payment of any such Deferred Payments, Owner may notify Management Company that such a default has occurred. Such notice shall be accompanied by a calculation indicating the reduction, if any, in the Bonus Incentive Fee which has resulted from such default. Within thirty (30) days after the receipt of such notice Management Company shall refund to Owner any overpayment in the Bonus Incentive Fee previously paid to Management Company. To the extent defaulted amounts are subsequently recovered by Owner, Owner shall promptly remit to Management Company any portion thereof attributable to such refunded Bonus Incentive Fee. (c) If Management Company shall fail to pay any amount due to Owner within the time period provided for in paragraph 5(a) and 5(b), (i) such amounts shall bear interest at the Interest Rate, and (ii) Owner shall have all rights and remedies available to it at law or in equity with respect to Management Company's failure to make such payments. (d) Marriott International hereby guarantees the timely payments to Owner by Management Company under this paragraph 5. 6. Consolidation. ------------- (a) Until the earlier of (i) the close of the year 2000 or (ii) such time as any given Hotel has been the subject of either a Sale or one or more Partial Sales but only if, on a cumulative basis, at least 50% of the ownership interest has been sold, or a Financing Transaction (a "Deconsolidation Event"), (x) Management Company shall be permitted to commingle all of such Hotel's Working Capital and banking accounts, including the FF&E -12- Reserve, into one or more accounts under Management Company's control in accordance with practices currently in effect as of the date of the Management Agreement, and (y) the reporting requirements of each such Hotel pursuant to the Management Agreement therefor and the calculation, payment, distribution, determination or deposit, as the case may be, of each such Hotel's Gross Revenues, FF&E Reserve, Owner's Priority, Management Company's Base Management Fee, Fairfield Inn System Fee, Incentive Management Fee, Chain Services, Operating Profit and Owner's right to terminate the Management Agreement with respect to each such Hotel shall be consolidated with the reporting requirements and the calculation, payment, distribution, determination or deposit, as the case may be, with respect to all Consolidated Hotel(s). (b) From and after the occurrence of a Deconsolidation Event with respect to any Hotel, except with respect to a Financing Transaction (provision for which is made in paragraph 6(c) hereof), the reporting requirements for such Hotel and the calculation, payment, distribution, determination or deposit, as the case may be, of such Hotel's Gross Revenues, FF&E Reserve, Owner's Priority, Base Management Fee, System Fee, Incentive Management Fee, Operating Profit and Owner's right to terminate shall be done solely with respect to such Hotel and shall not be consolidated with the reporting requirements and such calculation, payment, distribution, determination or deposit with any other Hotel without Management Company's prior consent. (c) Notwithstanding the provision of clause (i) of paragraph 6(a) above, from and after the occurrence of a Deconsolidation Event which is due to a Financing Transaction which occurs prior to the close of the year 2000 with respect to all or any group of the Hotels, the reporting requirements for all such Hotels and the calculation, payment, distribution, determination or deposit, as the case may be, of such Hotels' Gross Revenues, FF&E Reserve, Owner's Priority, Base Management Fee, the Fairfield Inn System Fee, Incentive Management Fee, Operating Profit and Owner's right to terminate shall be consolidated with respect to all Hotels which are the subject of the same or related Financing Transaction until the later of (i) the close of the year 2000 or (ii) the earlier to occur of (x) the maturity of the loan or loans which is the subject of such Financing Transaction or (y) the close of the year 2002. (d) Owner shall give Management Company prompt notice of any Deconsolidation Event accompanied by reasonable documentation evidencing the occurrence thereof, and paragraph 6(a) of this Letter Agreement shall terminate with respect to the Deconsolidated Hotels as of the Deconsolidation Event, except with respect to Hotels which are subject to a Financing Transaction, special provision for which is made in paragraph 6(c), above. -13- (e) Notwithstanding the provisions of paragraph (a) above, to the extent the determination of a Hotel's Gross Revenues, FF&E Reserve, Owner's Priority, Base Management Fee, Fairfield Inn System Fee, Incentive Management Fee, Operating Profit or Owner's termination rights after a Deconsolidation Event requires calculation of such Hotel's Gross Revenues, FF&E Reserve, Owner's Priority, Base Management Fee, Fairfield Inn System Fee, Incentive Management Fee, Operating Profit or Owner's termination rights prior to such Deconsolidation Event, then, for such purposes only, the calculation of such Revenues, Reserve, Priority, Fee or Profit prior to such Deconsolidation Event shall be maintained on a deconsolidated (i.e., Hotel-by-Hotel) basis. Accordingly, in order to be able to utilize the same after a Deconsolidation Event or a Partial Sale, and in order to determine the amount of a Qualified Loan with respect to any Hotel or Hotel(s) Management Company shall, during the period from and after the date hereof and prior to a Deconsolidation Event, in addition to the reporting required under paragraph (a) above, maintain records and provide reports on a quarterly basis to Owner describing each Hotel's Gross Revenues, FF&E Reserve, Owner's Priority, Priority Basis, Management Company's Base Management Fee, System Fee, Incentive Management Fee and Operating Profit on a deconsolidated (i.e., Hotel-by-Hotel) basis as if paragraph (a) above did not exist. Such quarterly reports shall be subject to Fiscal Year end audit and adjustments. However, in no event shall the foregoing in any manner modify the amounts owed by Management Company or Owner with respect to the period prior to the Deconsolidation Event, calculated on a consolidated basis. So long as the original Owner named herein, or Host Marriott or any of its subsidiaries or Afiliates, is the Owner of any Hotel, that portion of Section 9.05, if any, which grants Owner the right to request Management Analysis Reports on any individual Hotels shall be waived. (f) Upon the occurrence of a Deconsolidation Event with respect to any Hotel, such Hotel, as a Deconsolidated Hotel, shall no longer be a participant in the Consolidated FF&E Reserve maintained under paragraph 6(a). Accordingly, upon receipt of Owner's notice of a proposed Deconsolidation Event, Management Company shall compute the "Average FF&E Balance" (defined below) and the "Actual FF&E Balance" (defined below) as of the close of the Accounting Period immediately preceding the Deconsolidation Event. For purposes of this computation: (i) "Actual FF&E Balance" shall mean, with respect to any ------------------- Consolidated Hotel which is about to become a Deconsolidated Hotel, the difference between (x) the actual aggregate amount (per guestroom) which has been contributed to the Consolidated FF&E Reserve by such Hotel; less (y) the actual aggregate amount ---- (per guestroom) which has been -14- withdrawn from the Consolidated FF&E Reserve by such Hotel. (ii) "Average FF&E Balance" shall mean, with respect to all -------------------- Consolidated Hotels, including those in (i) above, the difference between (x) the average aggregate amount (per guestroom) which has been contributed to the Consolidated FF&E Reserve by all such Consolidated Hotels; less (y) the average aggregate amount (per ---- guestroom) which has been withdrawn from the Consolidated FF&E Reserve by all such Consolidated Hotels. The contributions and withdrawals referred to in (i) and (ii) above shall be those which were made from the period between the Effective Date of the Management Agreements and the close of the Accounting Period immediately prior to the date of the Deconsolidation Event. If seventy-five percent (75%) of the Average FF&E Balance exceeds the Actual FF&E Balance, the amount of such excess (multiplied by the number of guestrooms in the Hotel in question) shall be paid by Owner into the consolidated FF&E Reserve for use, in accordance with the Management Agreement, at the Consolidated Hotels. If the Actual FF&E Balance exceeds one hundred twenty-five percent (125%) of the Average FF&E Balance, the amount of such excess (multiplied by the number of guestrooms in the Hotel in question) shall be transferred (such transfer to occur after the completion of the calculations referred to in this subsection (e) but in no event prior to the Deconsolidation Event) by Management Company from such consolidated FF&E Reserve to the separate FF&E Reserve for the Deconsolidated Hotel which shall be established as of the date of such Deconsolidation Event, for use in accordance with the Management Agreement applicable to such Deconsolidated Hotel. All such payments and transfers shall be made either on or immediately after the date of the Deconsolidation Event. 7. Interim Distributions. So long as the Original Owner named herein, or --------------------- Host Marriott or any of its subsidiaries or Affiliates, is the Owner of any Hotel, Management Company agrees that the interim distributions of Owner's Distribution which are described in the second to last sentence of Section 5.02 A of the Management Agreement which is applicable to such Hotel shall (notwithstanding the provisions of said Section 5.02 A regarding the frequency of such distributions) be made twice per Accounting Period, rather than once per Accounting Period. The first interim distribution (in the amount of one-half of the estimated Owner's Distribution for each Accounting Period) shall be made by no later than the twentieth (20th) day after the beginning of such Accounting Period. The second interim distribution (in the amount of the remainder of such Owner's Distribution) with respect to -15- such Accounting Period shall be made by no later than the fifth (5th) day after the end of such Accounting Period. In addition, there will be an adjustment (if necessary) of these interim distributions as of the delivery of the Accounting Period Statement with respect to such Accounting Period, and any such adjustment shall be included in the first interim distribution referred to above for the following Accounting Period. The foregoing shall have no effect on the frequency of the preparation of Accounting Period Statements, which shall continue to be as set forth in Section 5.02 of the Management Agreement. 8. Conflict With Management Agreement. In the event of a conflict between ---------------------------------- the terms, conditions and provisions hereof and the Management Agreements, the terms, conditions and provisions of this Letter Agreement shall prevail. 9. Ratification. As amended hereby, the Management Agreements remain in ------------ full force and effect and are hereby ratified and confirmed. 10. Governing Law. This Letter Agreement shall be governed by and ------------- construed in accordance with the laws of the State of Maryland without giving effect to principles of conflicts of law. 11. Notices. Any notices by either party to this Letter Agreement shall ------- be given in accordance with Section 20.09 of the Management Agreements. If the foregoing correctly sets forth our agreement with respect to the matters contained herein, please indicate your agreement by signing a copy of this Letter Agreement in the space provided and returning it to us. Very truly yours, HMH PROPERTIES, INC. By: /s/ Christopher G. Townsend ------------------------------ Vice President Accepted and agreed: Fairfield FMC Corporation By: /s/ James Sullivan --------------------- Vice President -16- Accepted and agreed: MARRIOTT INTERNATIONAL, INC. By: /s/ James Sullivan --------------------- Vice President [FORM OF GUARANTEE ATTACHED TO ORGINAL] Accepted and agreed: HOST MARRIOTT CORPORATION By: /s/ Stephen J. McKenna ----------------------- Vice President [FORM OF GUARANTEE ATTACHED TO ORGINAL] -17- EX-10.16 12 EXHIBIT 10.16 Exhibit 10.16 FACILITIES LEASE AGREEMENT -------------------------- THIS LEASE is made as of the 8th day of October, 1993 ("Commencement Date"), by and between HMC RETIREMENT PROPERTIES, INC. ("Landlord"), a Delaware corporation with a mailing address at 10400 Fernwood Road, Bethesda, Maryland 20817, and MARRIOTT SENIOR LIVING SERVICES, INC. ("Tenant"), a Delaware corporation, with a mailing address at 10400 Fernwood Road, Bethesda, Maryland 20817. R E C I T A L S: A. The Premises were developed by a corporation which was an Affiliate of Tenant. Both such corporations were subsidiaries of Landlord and engaged in the business of owning and/or operating senior living retirement and health care facilities under the Marriott trade name. B. The lease transaction described herein is a portion of a larger transaction involving multiple properties. As a material inducement to the other party, each party hereto has agreed to also enter into the Related Landlord Lease(s). ARTICLE 1 LEASE OF PREMISES ----------------- Section 1.01 "As-Is" Letting --------------- A. In consideration of the Rentals, covenants and agreements to be paid, kept and performed hereunder, Landlord, for the term and upon the conditions hereinafter set forth, leases to Tenant and Tenant leases and takes from Landlord, the Premises, together with all privileges, easements and appurtenances beneficial thereto. B. The Premises are leased to Tenant "as is" and Landlord makes no representation or warranty, express or implied, with respect to the condition of the Premises, or as to the compliance of the Premises with any Legal Requirements. Tenant has examined the Premises and title to the Premises and has found all of the same satisfactory for its purposes. Tenant accepts the Premises subject to the existing state of title. During the term of this Lease, Tenant shall have the nonexclusive right to use, enforce and obtain the benefits of all guaranties and warranties relating to the construction, improvement, alteration and repair of the Premises and all architectural and engineering plans, drawings and specifications related thereto, and during the term of this Lease Landlord shall execute such assignments or other transfer instruments as are necessary to transfer the benefits of all such guaranties, warranties and rights to Tenant, and shall not waive, surrender or modify any of Landlord's rights with respect thereto without obtaining Tenant's prior written consent. - 1 - Section 1.02 Tenant's Right of Possession ---------------------------- During the term of this Lease, Tenant shall have exclusive possession (subject to the rights of existing residents therein) and control of the Premises. Section 1.03 Landlord's Cooperation ---------------------- A. Landlord agrees upon request by Tenant to provide all information relevant to Landlord, its officers and directors, and to execute, and to cause its officers and directors to sign, promptly, and without charge, all applications (including all documents related thereto) for licenses, permits, instruments or other general approvals required to be submitted to any governmental authority that are necessary for the proper and successful conduct of Tenant's lawful business operations at the Premises if and to the extent such execution and/or information by or from Landlord and/or any of its officers and directors is required by law, regulation or governmental practice in order for Tenant to obtain any such license, permit, instrument or other governmental approval; provided, however, that all costs and expenses associated therewith shall be the sole obligation of Tenant, and Tenant shall promptly pay and discharge the same, and provided further, that the proper execution of any such application shall not expose Landlord to any personal liability. In all cases, Landlord shall have a reasonable amount of time to comply with Tenant's requests pursuant to this Section 1.03A, Landlord and Tenant shall, in good faith, cooperate with each other in determining and complying with relevant governmental requirements, and Tenant shall afford Landlord every reasonable opportunity to question and challenge by appropriate administrative and/or judicial process any relevant governmental requirement so long as such challenge does not materially and adversely affect any material license, permit or governmental approval of Tenant. Tenant hereby agrees that it will fully indemnify, defend and save Landlord harmless from and against any and all costs, losses and expenses, including, without limitation, any and all legal fees and court costs incurred or suffered by Landlord as a result of its compliance with the obligations imposed upon Landlord under this Section 1.03 except in the case of Landlord's fraud or willful misconduct. B. If Landlord should fail to comply with the requirements of Section 1.03A above, and such failure should continue for more than thirty (30) days after Notice from Tenant specifying the required cooperation and informing Landlord that Tenant intends to act pursuant to this Section 1.03B if such cooperation is not provided within said thirty (30) day period and such failure results, or with reasonable certainty will result, in the denial, non-renewal or withdrawal of a material license, permit or governmental approval that will materially and adversely affect Tenant's business at the Premises, then, in addition and not as a substitution for any remedies available to Tenant under Section 24.24 of this Lease, if such failure is not cured within such thirty (30) day period, Tenant shall have the right to terminate this Lease by so notifying Landlord not later than the date which is sixty (60) days after the date of the aforesaid Notice. If Tenant elects to exercise the right described in the preceding sentence, it shall, simultaneously with its delivery of its Notice of termination, deliver to Landlord its irrevocable offer to purchase the Premises for an amount equal to the Leasehold Purchase Price. C. Landlord may accept or reject Tenant's irrevocable offer to purchase the Premises by sending Tenant a Notice of rejection or acceptance within thirty (30) days from the date upon which Landlord received Tenant's Notice of termination. If Landlord fails to send Tenant a - 2 - Notice of rejection or acceptance within thirty (30) days of its receipt of Tenant's irrevocable offer to purchase the Premises, Landlord shall be deemed to have accepted such offer. If Landlord accepts or is deemed to have accepted Tenant's offer to purchase, the Lease shall terminate and closing of such purchase shall occur in accordance with the provisions of Article 21. Upon such termination, Tenant shall pay to Landlord all Rental due through such date of termination. Landlord shall convey the Premises to Tenant in accordance with the provisions of Section 21.01. D. If Landlord rejects Tenant's irrevocable offer to purchase pursuant to Section 1.03B, this Lease shall terminate on a Minimum Rental payment date specified by Tenant in its Notice of termination which occurs not earlier than ninety (90) days nor later than one hundred twenty (120) days after delivery to Landlord of Tenant's irrevocable offer to purchase, provided that this Lease shall not terminate unless and until Tenant shall have paid all sums due hereunder (including, without limitation, all taxes and insurance premiums) as of the actual date of termination. Upon such termination, Tenant shall vacate the Premises in accordance with the provisions of Section 3.04. E. Landlord shall have the right at all times prior to either a closing date for any purchase under Section 1.03C or the termination date under Section 1.03D, to cancel the right of Tenant to so purchase or terminate pursuant to said sections, by complying with the requirements of Section 1.03A in sufficient time and manner so that the subject license, permit or approval is obtained or reinstated by a date that is prior to the aforesaid closing date or termination date as the case may be. END OF ARTICLE 1 ARTICLE 2 DEFINITION OF TERMS ------------------- Section 2.01 Definition of Terms ------------------- The following terms when used in this Lease shall have the meanings indicated: "Accounting Period" shall mean the four (4) week accounting periods ----------------- having the same beginning and ending dates as Tenant's four (4) week accounting periods, except that an Accounting Period may occasionally contain five (5) weeks when necessary to conform Tenant's accounting system to the calendar. "Additional Rental" shall mean any obligation of Tenant to pay money to ----------------- Landlord under this Lease, other than Minimum Rental or Percentage Rental. "Affiliate" shall mean any individual or entity directly or indirectly --------- through one or more intermediaries, controlling, controlled by or under common control with a party. The term "control," as used in the immediately preceding sentence, means, with respect to a corporation, the right to the exercise, directly or indirectly, of more than fifty percent (50%) of the voting - 3 - rights attributable to the shares of the controlled corporation, and, with respect to an entity that is not a corporation, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the controlled entity. "Alternative Rental" shall have the meaning set forth in Section 5.05. ------------------ "Business Day(s)" means Monday through Friday (except holidays); "normal --------------- business hours" means 8:00 a.m. to 6:00 p.m. on Business Days; and "holidays" means New Year's Day, President's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. "Change of Use" shall have the meaning set forth in Section 7.02. ------------- "Commencement Date" shall have the meaning set forth in the Preamble. ----------------- "Effective Extended Term" means any Extended Term that has become ----------------------- effective by reason of the occurrence of the first day of such Extended Term or because Tenant has irrevocably exercised its option to extend the Term through such Extended Term. "Environmental Laws" shall mean: (a) the Comprehensive Environmental ------------------ Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., as now -- --- or hereafter amended and the Resource Conservation and Recovery Act of 1976, as now or hereafter amended; (b) the regulations promulgated thereunder, from time to time; (c) all federal, state and local laws, rules and regulations (now or hereafter in effect) dealing with the use, generation, treatment, management, storage, disposal or abatement of Hazardous Materials or protection of human health or the environment. "Environmental Violation" shall mean any violation of any Environmental ----------------------- Law at or relating to the Premises. "Event of Default" shall have the meaning set forth in Section 20.01 ---------------- "Expansion" shall have the meaning set forth in Section 9.01. --------- "Expansion Rental" shall have the meaning set forth in Section 5.06B. ---------------- "Extended Term(s)" shall have the meaning set forth in Section 3.02. ---------------- "FF&E" shall mean all of the furniture, furnishings, and equipment ---- (including trade fixtures and equipment) owned by Landlord and/or Tenant, situated at or on the Premises and used in connection with Tenant's use and occupancy of the Premises. "Fiscal Quarter" shall mean the period of time which (i) commences on -------------- the first day of a Fiscal Year and ends on the last day of the third (3rd) Accounting Period of such Fiscal Year; (ii) commences on the first day of the fourth (4th) Accounting Period of a Fiscal Year and ends on the last day of the sixth (6th) Accounting Period of such Fiscal Year; (iii) commences on the first day of the seventh (7th) Accounting Period of a Fiscal Year and ends on the last day of the - 4 - ninth (9th) Accounting Period of such Fiscal Year; and (iv) commences on the first day of the tenth (10th) Accounting Period of a Fiscal Year and ends on the last day of such Fiscal Year. "Fiscal Year" shall mean Tenant's Fiscal Year which now ends at midnight ----------- on the Friday closest to December 31 in each calendar year; the new Fiscal Year begins on the Saturday immediately following said Friday. If Tenant's Fiscal Year is changed in the future, appropriate adjustment to this Lease's reporting and accounting procedures shall be made; provided, however, that no such change or adjustment shall alter the Term of this Lease or in any way reduce the payment of Percentage Rental or other payments due Landlord hereunder. "Fixed Asset Supplies" shall mean supply items included within "Property -------------------- and Equipment" under the Uniform System of Accounts including linen, china, glassware, silver, uniforms, and similar items. "GDP Deflator" shall mean the "Gross Domestic Product Implicit Price ------------ Deflator" issued from time to time by the United States Bureau of Economic Analysis of the Department of Commerce, or if the aforesaid GDP Deflator is not at such time so prepared and published, any comparable index selected by Landlord and reasonably satisfactory to Tenant (a "Substitute Index") then prepared and published by an agency of the Government of the United States, appropriately adjusted for changes in the manner in which such index is prepared and/or year upon which such index is based. Except as otherwise expressly stated herein, whenever a number or amount is required to be "adjusted by the GDP Deflator", or similar terminology, such adjustment shall be equal to the percentage increase in the GDP Deflator which is issued for the month in which such adjustment is to be made (or, if the GDP Deflator for such month is not yet publicly available, the GDP Deflator for the most recent month for which the GDP Deflator is publicly available) as compared to the GDP Deflator which was issued for the month in which the Commencement Date occurred, it being agreed that for purposes of this Lease, no GDP Deflator adjustment shall operate to decrease any sum or number specified in this Lease. "Guaranty" means that certain Agreement of Guaranty between Landlord and -------- Guarantor of even date herewith. "Guarantor" shall mean Marriott International, Inc., a Delaware --------- corporation, whose mailing address is 10400 Fernwood Road, Bethesda, Maryland 20817. "Hazardous Materials" shall mean and include any substance or material ------------------- containing one or more of any of the following: "hazardous material", "hazardous waste", "hazardous substance", "regulated substance", "petroleum", "petroleum products", "pollutant", "contaminant", "polychlorinated biphenyls", "pesticides", "asbestos", or "asbestos containing materials" as such terms are defined in any applicable Environmental Law. "Improvements" shall mean the buildings, parking lots, structures, and ------------ all other improvements and fixtures (other than trade fixtures owned by Tenant) now or hereafter located on the Land together with the electrical, mechanical, plumbing and HVAC systems installed therein. "Indemnified Parties" shall have the meaning set forth in Section 8.01. ------------------- - 5 - "Initial Term" shall have the meaning set forth in Section 3.01. ------------ "Insubstantial Taking" shall mean a condemnation of a portion of the -------------------- Premises that is less than all or substantially all of the Premises if (i) the Improvements can be restored to substantially the same physical condition which prevailed therein and thereon prior to such condemnation at a cost not exceeding the condemnation award payable with respect thereto, (ii) the condemnation does not cause a material reduction in the size or useability of any building on the Premises or any material disruption to Tenant's use and occupancy of the Premises, and (iii) such condemnation will not materially reduce the operating profitability of its business on the Premises after any restoration when compared to such profitability before the condemnation. "Insurance Requirements" shall mean the requirements of any and all ---------------------- insurance policies procured in accordance with the terms hereof. "Insurance Trustee" shall mean a bank, insurance company, pension fund, ----------------- real estate investment trust or commercial lending institution, with financial statements audited by an independent public accounting firm and a net worth of at least One Hundred Million Dollars ($100,000,000). The Senior Mortgagee shall be the Insurance Trustee if the Senior Mortgagee fulfills the requirements of the first sentence of this paragraph. If there is no Senior Mortgagee that fulfills the requirements of the first sentence of this paragraph, the Insurance Trustee shall be such qualifying institution as is selected by Tenant and approved by Landlord, such approval not to be unreasonably withheld, conditioned, or delayed. "Inventories" shall mean "Inventories" as defined in the Uniform System ----------- of Accounts, such as provisions in storerooms, refrigerators, pantries and kitchens; beverages in wine cellars and bars; other merchandise intended for sale; fuel; mechanical supplies; stationery; and other expensed supplies and similar items. "Land" shall mean the real property described in Exhibit A hereto, or ---- such lesser area that from time to time may be leased by Tenant hereunder as set forth in this Lease. "Landlord" shall have the meaning set forth in the Preamble and its -------- successors and assigns. "Landlord's Audit" shall have the meaning set forth in Section 5.03. ---------------- "Landlord's Temporary Taking Award" shall have the meaning set forth in --------------------------------- Section 15.03. "Lease" shall mean this Facilities Lease Agreement between Landlord and ----- Tenant dated as of the Commencement Date. "Lease Interest Rate" shall mean the Prime Rate as set from time to time ------------------- by Bankers Trust Company, New York, New York plus two (2) percentage points per annum, but in no event shall the Lease Interest Rate be less than ten percent (10%) per annum; provided, however, that the Lease Interest Rate shall not exceed the maximum rate of interest from time - 6 - to time permitted to be charged under applicable law with respect to the indebtedness and party for which and against whom such interest is charged under this Lease. "Lease Memorandum" shall have the meaning set forth in Section 23.01. ---------------- "Leasehold Purchase Price" shall be at any particular time during the ------------------------ Term, the dollar amount equal to the present value as of the date of such purchase of the payments of Minimum Rental, Alternative Rental if any, and Expansion Rental if any, that would have been payable during the period commencing on the date of such purchase and ending on the date of expiration of the current term of this Lease (including any Effective Extended Term) discounted to the date of purchase at an interest rate equal to the effective interest rate on United States Treasury obligations as of the month preceding the date of such purchase and having a maturity most nearly equal to the number of months remaining in the current term of this Lease (including any Effective Extended Term) as of the date of such purchase. "Legal Requirement(s)" shall have the meaning set forth in Section 6.05. -------------------- "Major Casualty" shall mean any damage to or destruction of all or any -------------- portion of the Premises when such casualty is likely to result in a significant reduction in the operating profitability of Tenant's business on the Premises for a period exceeding twelve (12) months based upon the assumption that the casualty will be repaired with reasonable diligence. "Mandated Expenditure(s)" shall mean all costs in excess of Twenty Five ----------------------- Thousand Dollars ($25,000) adjusted by the GDP Deflator, in the aggregate in any Fiscal Year that are: (i) incurred by Tenant to (x) repair, renovate, or improve the Premises or (y) remedy or mitigate any condition therein, thereon or thereunder if such actions referred to in clause (x) or clause (y) (1) are required to be made by reason of any Legal Requirement not in effect on the Commencement Date, (2) are made to enable Tenant to continue its then current operations in the Premises and (3) would be capitalized under generally accepted accounting principles; (ii) incurred by Tenant pursuant to Section 8.02, Section 12.01 or Section 12.02 that are attributable to (A) remediating or correcting a condition on the Premises that existed on the Commencement Date (whether or not such condition was a violation of any Environmental Laws in effect on the Commencement Date), or (B) the migration of any Hazardous Materials to the Premises from real property other than the Premises, or (C) the adoption or amendment of any Environmental Law that results in any act or omission occurring after the Commencement Date constituting a violation of any Environmental Law if and to the extent that such act or omission was not a violation of any Environmental Law when it occurred; or (iii) costs that constitute Mandated Expenditures pursuant to Section 14.06B. "Minimum Rental" shall have the meaning set forth in Section 5.01. -------------- "Mortgage" shall mean any security instrument which encumbers the -------- Premises, including, without limitation, mortgages, deeds of trust, security deeds and similar instruments. "Mortgagee" shall mean the holder of, or beneficiary under, any Mortgage --------- on Landlord's interest in the Premises. - 7 - "Notice" shall have the meaning set forth in Section 22.01. ------ "Operating Revenues" shall mean the aggregate of all monies received by ------------------ Tenant from or with respect to the Premises, including without limitation, moneys received for (i) the sale of goods, wares and merchandise, and (ii) the provision of accommodations and food services and (iii) the provision of nursing, health care and retirement community services, and (iv) the provision of any other services or the sale of any other goods, for cash or credit on or from the Premises during the Term hereof including, but not limited to income arising from: rental of rooms, stores, offices and meeting and sales spaces of every kind; license, lease and concession fees and rentals paid to Tenant (but not including gross receipts of licensees, lessees and concessionaires); food and beverage sales and services; sales of merchandise; service charges, to the extent not distributed to Tenant's employees as gratuities; net receipts from ancillary health care related services provided by third party contractors, vending machines, stamp machines, telephones, and the like (but not including gross receipts of same collected by or paid to others except to the extent hereafter provided); provided, however, that Operating Revenues shall not include the following: (a) returns or refunds, or credits received in settlement of claims for loss or damage to goods, wares, merchandise, or deficient services; (b) all sales taxes, excise taxes, occupational taxes, gross receipt taxes and similar taxes paid, whether imposed under any existing or future rules, regulations, laws or ordinances, provided, however, that any income, excess profits, franchise, or other taxes based upon, or measured by, Tenant's income shall not be excluded from Operating Revenues; (c) any receipts from the transfer of goods, wares or merchandise from the Premises to any other facility operated by Tenant or its Affiliates; (d) all receipts from sales to employees made at a discount; provided, however, if the Premises are converted to a store which is closed to the general public, but offers merchandise for sale to its employees, then such sales are to be included in the definition of Operating Revenues; (e) gratuities to Tenant's employees; (f) insurance proceeds; (g) condemnation award(s) (other than any condemnation award for a temporary taking as described in Section 15.03 hereof); and (h) proceeds from the sale of Tenant's FF&E or all or a substantial part of its stock-in-trade and merchandise at a sale other than in the ordinary course of business. "Partial Condemnation Reduction Percentage" shall mean that percentage ----------------------------------------- applicable in the event of a condemnation equal to the fraction whose numerator is the fair market value of the Premises immediately prior to the effective date of such condemnation less the fair market value of the Premises remaining immediately after such condemnation has become effective and excluding the portion of the Premises taken by the condemning authority and whose denominator is the fair market value of the Premises immediately prior to the effective date of such condemnation. Thus, for example, if the fair market value of the Premises immediately prior to such condemnation was $20 million and the fair market value of the premises remaining immediately after such condemnation was $15 million, the Partial Condemnation Reduction Percentage would be 25%. - 8 - "Partial Fiscal Year" shall mean (i) the period between the Commencement ------------------- Date and the commencement of the first full Fiscal Year of this Lease, and (ii) the period between the end of the last full Fiscal Year of this Lease and the termination of this Lease, and (iii) the period between the first day of the Fiscal Year in which Alternative Rental or Expansion Rental becomes payable in -- lieu of Percentage Rental and the date upon which Percentage Rental ceases. - ---- "Percentage Rental" shall have the meaning set forth in Section 5.01. ----------------- "Premises" shall mean all of the Land and the Improvements or such -------- lesser area or portion that from time to time may be leased by Tenant hereunder as set forth in this Lease. "Prospectus" shall have the meaning set forth in Section 24.17. ---------- "Related Landlord Lease" as of any date shall mean each of those leases ---------------------- described in Exhibit E hereto with respect to which as of such date Landlord hereunder or any Affiliate of Landlord hereunder is also the landlord under such lease or leases as of such date. "Rental(s)" shall mean Minimum Rental, Percentage Rental, Alternative --------- Rental, Additional Rental, and Expansion Rental either collectively or any one or more of same as the context may indicate. "Sale of the Premises" shall mean any sale, assignment, transfer or -------------------- other disposition, for value or otherwise, voluntary or involuntary, of the fee simple title to the Land and/or the Premises. For purposes of this Lease, a Sale of the Premises shall also include a lease (subject to this Lease) of all or substantially all of the Premises or Land and any sale, assignment, transfer or other disposition, for value or otherwise, voluntary or involuntary, in a single transaction or a series of related transactions, of the controlling interest in Landlord. If Landlord is a corporation, the phrase "controlling interest" shall mean the right to exercise, directly or indirectly, more than fifty percent (50%) of the voting rights attributable to the shares of Landlord (through ownership of such shares or by contract). If Landlord is not a corporation, the phrase "controlling interest" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of Landlord. "Senior Mortgagee" shall mean the holder, of, or beneficiary under, from ---------------- time to time the most senior Mortgage against Landlord's interest in the Premises. "Site Assessment" shall have the meaning ascribed to it in Section --------------- 12.02. "Site Reviewer" shall have the meaning ascribed to it in Section 12.02. ------------- "Special Rental Advance" shall have the meaning ascribed to it in ---------------------- Section 5.07. "Substantial Taking" shall mean a condemnation of a portion of the ------------------ Premises that is less than all or substantially all of the Premises and that is not an Insubstantial Taking. - 9 - "Surviving Obligations" shall mean any obligations of Tenant under this --------------------- Lease, actual or contingent, which arise on or prior to the expiration or prior termination of this Lease and which survive such expiration or termination by their own terms. "Tenant" shall have the meaning set forth in the Preamble and its ------ successors and assigns. "Term" shall have the meaning set forth in Section 3.01. ---- "Uniform System of Accounts" shall mean the Uniform System of Accounts -------------------------- for Hotels, Eighth Revised Edition, 1986, as published by the Hotel Association of New York City, Inc. "Use Award" shall have the meaning set forth in Section 15.03. --------- "Year" shall mean a calendar year commencing on January 1 and ending on ---- December 31. A Partial Year shall mean that portion of a Year that occurs during the Term in the case of the Year in which the Commencement Date occurs and the Year in which the expiration or termination of this Lease occurs. END OF ARTICLE 2 ARTICLE 3 TERM ---- Section 3.01 Term ---- The "Term" shall consist of the Initial Term, the Extended Term(s), if any, and any extensions of the Term of this Lease pursuant to Section 9.03A. The Initial Term of this Lease shall commence on the Commencement Date, and, unless sooner terminated as otherwise provided herein, shall expire on December 31, 2013. Section 3.02 Extended Term ------------- If Tenant has not given Notice of its intention to terminate this Lease pursuant to Section 3.03 and the Initial Term has not been sooner terminated, the Term of this Lease shall automatically be extended on the same terms and conditions as set forth herein for an Extended Term of five (5) years (the "First Extended Term"). If Tenant has not given Notice of its intention to terminate pursuant to Section 3.03 and the Initial Term and the First Extended Term has not been sooner terminated, the Term of the Lease shall automatically be extended on the same terms and conditions as set forth herein for one (1) additional Extended Term of five (5) full Years (the "Second Extended Term"). If Tenant has not given Notice of its intention to terminate pursuant to Section 3.03 and the Initial Term, the First Extended Term or the Second Extended Term have not been sooner terminated, the Term of the Lease shall automatically be extended on the same terms and conditions as set forth herein for one (1) additional Extended Term of five (5) full years (the "Third Extended Term"). If Tenant has not given Notice of its intention to terminate pursuant to Section 3.03 and the Initial Term, the First Extended Term, the Second Extended Term and the Third Extended Term have not been sooner terminated, the - 10 - Term of the Lease shall automatically be extended on the same terms and conditions as set forth herein for one (1) additional Extended Term of five (5) Years (the "Fourth Extended Term"). Notwithstanding the foregoing, Tenant may elect at any time throughout the Term to exercise, by Notice to Landlord, its option to extend the Term through any or all Extended Terms. If and to the extent Tenant elects by written notice to Landlord to exercise its option to extend the Term through any Extended Term, Tenant's option to terminate this Lease pursuant to Section 3.03 with respect to such Extended Term for which Tenant has exercised its extension option shall no longer be applicable, but such option to terminate pursuant to Section 3.03 shall continue to apply to any Extended Term with respect to which such option to extend was not exercised pursuant to this Section 3.02. All elections to extend the Term shall be irrevocable after exercised. Section 3.03 Notice of Termination --------------------- Tenant may terminate the Lease at the end of the Initial Term or at the end of any Extended Term upon Notice to Landlord not less than twenty-four (24) calendar months prior to the expiration of the Initial Term or the then current Extended Term, as the case may be. In addition, Tenant may terminate this Lease if Tenant gives a Notice of termination to Landlord after the date which is twenty-four (24) months prior to the expiration of the Initial Term or the then current Extended Term, as the case may be (but prior to the last day of the Initial Term or the then current Extended Term and prior to the expiration of the thirty (30) day period referenced below), and in such event this Lease shall terminate on the date which is twenty-four (24) months after the date upon which Tenant delivers such Notice; except that if, after the beginning of the twenty-four (24) month period prior to the expiration of the Initial Term or the then current Extended Term, as the case may be, Tenant does not give a Notice of termination within thirty (30) days after Landlord requests Tenant to notify Landlord whether Tenant intends to terminate this Lease, the Term of this Lease shall be automatically extended for the next Extended Term and Tenant's right to terminate this Lease prior to the expiration of the next Extended Term shall cease to have any further force or effect. Section 3.04 Obligations of Parties at Termination ------------------------------------- A. Promptly upon the effective date of any termination of this Lease, Tenant shall peaceably surrender the Premises to Landlord in the same condition as the Premises were in as of the Commencement Date subject only to such additions and alterations as have been permitted pursuant to Article 9 hereof and subject to reasonable wear and tear. Tenant shall assign and deliver to Landlord Tenant's entire interest in any and all service contracts, guaranties and warranties relating to the construction, improvement, alteration and repair of the Premises and all architectural and engineering plans, drawings and specifications related thereto; and if Landlord so requests, cause any person or entity occupying the Premises by, through or under Tenant to be evicted and removed from the Premises. B. Rental shall be paid through the date of termination. Within ninety (90) days after this Lease terminates, Tenant shall deliver to Landlord a complete and final accounting, prepared in accordance with the provisions of Section 5.03 hereof of Operating Revenues together with - 11 - all payments of Rental due hereunder. Landlord's right to audit Tenant's books and records as described in Section 5.03 and to receive Percentage Rental and Additional Rental, if any, together with interest at the Lease Interest Rate shall survive the termination of this Lease. C. If Landlord, directly or indirectly, intends to conduct upon termination of this Lease a business or use at the Premises similar to Tenant's business or use, Tenant, at Landlord's request, shall (i) make available to Landlord such books and records as are appropriate to such business and/or use (but not including employee or resident records which must remain confidential either under Legal Requirements or reasonable policies of Tenant, or any proprietary information or property of Tenant), and (ii) assign or transfer to Landlord or its designee, to the extent permitted by Legal Requirements, all licenses, permits, permissions and approvals pertinent to the conduct of such business or use on the Premises, provided that if Tenant has expended any of its own funds within the five (5) year period preceding the termination date in the acquisition or maintenance of any such license, permit, permission or approval (other than annual license fees whether prepaid or paid currently), or if there are any deposits or escrow funds relevant thereto that Tenant assigns and transfers to Landlord, Landlord shall, as a condition of receiving an assignment or transfer of such license, permit, deposit, escrow fund, permission or approval (if requested by Landlord), reimburse Tenant therefor. The cost of effectuating any such transfer of any licenses, permits, permissions or approvals shall be borne by Landlord except when termination is due to Tenant's default. D. The provisions of Section 10.02 shall apply upon termination of this Lease and Tenant shall take all other appropriate actions as required under all other applicable provisions of this Lease. The provisions of this Section 3.04, as well as all Surviving Obligations, Landlord's right to receive the late charges described in Section 5.02B, interest on sums outstanding at the Lease Interest Rate and legal fees (but if termination was not due to an Event of Default such Legal Fees shall be reasonable legal fees) and court costs, shall survive termination of this Lease. END OF ARTICLE 3 ARTICLE 4 ABSOLUTELY NET LEASE -------------------- Section 4.01 Net Lease --------- Notwithstanding any other provision of this Lease - other than Sections 5.03 and 9.03C -it is expressly understood and agreed by and between the parties that this Lease is an absolutely net lease, and the Rentals and all other sums payable hereunder to or on behalf of Landlord shall be paid without Notice or demand and without set-off, counterclaim, abatement, suspension, deduction, or defense, and Landlord is not obligated to expend any of its funds in connection with the Premises or this Lease. - 12 - Section 4.02 Non-Terminability of Lease -------------------------- A. Except as otherwise expressly provided herein, this Lease shall not terminate, nor shall Tenant have any right to terminate this Lease, nor shall the obligations hereunder of Tenant be otherwise affected, by reason of any damage to or destruction of all or any part of the Premises from whatever cause, the taking of the Premises or any portion thereof by condemnation, the prohibition, limitation or restriction of Tenant's use of the Premises, or interference with such use by any private person or corporation or by reason of any eviction or otherwise, or Tenant's acquisition of ownership of the Premises otherwise than pursuant to an express provision of this Lease, or for any other cause whether similar or dissimilar to the foregoing, any present or future Legal Requirement to the contrary notwithstanding, it being the intention of the parties hereto that the Rental and all other charges payable hereunder to or on behalf of Landlord, shall continue to be payable in all events and the obligations of Tenant hereunder shall continue unaffected, unless the requirement to pay or perform the same shall be terminated pursuant to an express provision of this Lease. B. Tenant covenants and agrees that it will remain obligated under this Lease in accordance with its terms, and that Tenant will not take any action to terminate, rescind, reject or avoid this Lease or any term, part, or provision hereof, notwithstanding the bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding-up or other proceeding affecting Landlord or any assignee of Landlord in any such proceeding and notwithstanding any action with respect to this Lease which may be taken by any trustee or receiver of Landlord or of any assignee of Landlord in any such proceeding or by any court in any such proceeding. C. Except as otherwise expressly provided in this Lease, Tenant waives all rights now or hereafter conferred by law or obtainable in equity (i) to quit, terminate or surrender this Lease or the Premises, or any part thereof, or (ii) to any abatement, suspension, deferment or reduction of any Rentals or charges payable hereunder to or on behalf of Landlord, regardless of whether such rights shall arise from any present or future constitution, statute or rule of law. END OF ARTICLE 4 ARTICLE 5 RENTAL ------ Section 5.01 Rental ------ Tenant covenants to pay Landlord Rental for the Premises as follows: (i) Commencing with the Commencement Date and continuing to the end of the Term (including all Extended Terms), Minimum Rental in an amount equal to Three Million Three Hundred Nineteen Thousand Dollars ($3,319,000) per Year for each Year; plus (ii) For each Fiscal Year or Partial Fiscal Year (including all Extended Terms), Percentage Rental equal to four and one-half percent (4.5%) of that portion of the Operating Revenues for such Fiscal Year or Partial Fiscal Year that exceed $9,326,000.00 - 13 - multiplied, in the case of a Partial Fiscal Year, by a fraction the numerator of which is the number of days in such Partial Fiscal Year and the denominator of which is 365. Section 5.02 Payment of Rental ----------------- A. Minimum Rental shall be paid quarterly, in advance, on or before the first day of January, April, July and October during each Year. Minimum Rental for any Partial Fiscal Year shall be prorated and computed by multiplying the annual Minimum Rental by a fraction, the numerator of which is the number of days in such partial Year and the denominator of which is three hundred and sixty-five (365) or three hundred sixty-six (366) as the case may be. Payments for any Partial Fiscal Year shall be made in the same manner and at the same times as payments are to be made during a full Fiscal Year as provided in this Section. Percentage Rental shall be calculated on a Fiscal Year (or Partial Fiscal Year) basis and shall be paid in arrears on or before forty-five (45) days after the end of each Fiscal Year or Partial Fiscal Year in which Percentage Rental become due. All installments of Rental not paid by Tenant when same become due shall bear interest from the date due until paid at the Lease Interest Rate. Time is of the essence, and installments of Rental shall become due and payable without Notice or demand. All Rental payments shall be made in lawful money of the United States of America and shall be paid to Landlord at Landlord's address for receipt of Notices or to such other party and/or to such other address as Landlord may from time to time designate by Notice to Tenant in accordance with this Lease. B. Tenant acknowledges that late payment of Rental by Tenant to Landlord will cause Landlord to incur costs not contemplated in this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges and late charges that may be imposed upon Landlord by the terms of any mortgage covering the Premises. Accordingly, in addition to the interest payable by Tenant pursuant to Section 5.02A, after a period of five (5) days following the date all or any portion of Rental is due and unpaid Tenant shall pay to Landlord an amount equal to five percent (5%) of the amount of such unpaid installment or portion thereof. The parties agree such late charges represent a fair and reasonable estimate of the cost Landlord will incur by reason of the late payment by Tenant. C. In the event that the Premises are damaged by fire or other casualty and Tenant discontinues all or substantially all business operations therein, Tenant's obligation to pay Percentage Rental for the Fiscal Year in which Tenant has so discontinued its business operations shall be computed as if such Fiscal Year was a Partial Fiscal Year and as if the number of days in such Partial Fiscal Year excluded the number of days during which Tenant discontinued all or substantially all of its business operations in the Premises. D. If, at any time during the Term, there is a good faith dispute between Landlord and Tenant with respect to the amount of Percentage Rental properly due hereunder Tenant's failure to pay the disputed amount shall not be deemed an Event of Default with respect to the provisions of Section 20.01 and 20.02 until such time as the dispute is resolved; provided, that Tenant shall pay any such disputed amount of Percentage Rental into an escrow account to be held and invested by the Insurance Trustee or such other escrow agent as may be mutually approved by Landlord and Tenant (specifically created for such purpose with interest to follow - 14 - final distribution of principal) as soon as such disputed amount becomes known, and the provisions of Section 5.02B shall apply to any such disputed amount ultimately determined to be due Landlord but with payment into the escrow account being deemed payment to Landlord for purposes of Section 5.02B. Section 5.03 Records; Audit by Landlord -------------------------- A. Tenant shall keep, in appropriate detail and in accordance with standard accounting practices, at its principal business office, records of all sums constituting, and specifically excluded from, Operating Revenues with respect to each Fiscal Year for a period of not less than four (4) Fiscal Years after the expiration of the Fiscal Year to which such records relate. Tenant shall deliver to Landlord a statement from an appropriate corporate officer, or general partner of Tenant, certifying the annual Operating Revenues within sixty (60) days after the end of each Fiscal Year. If there is any overpayment of Percentage Rental, the excess shall be credited against any future Percentage Rental when next due. If Landlord delivers its written request to Tenant, within thirty (30) days after receipt of any such certified statement, for copies of records and data to support such statement, then Tenant shall provide same to Landlord within thirty (30) days after receipt of such written request. Landlord shall be entitled, at its own expense, to audit such statement and supporting records and data, provided Landlord shall cause such audit to commence within ninety (90) days after receipt of said statement and to be completed within one hundred twenty (120) days after receipt of all information requested by Landlord reasonably related to such audit. In order to provide finality, absent fraud and, except as otherwise provided below in this Section, Tenant shall be entitled to treat such statement as being correct if Landlord does not so audit or otherwise challenge said statement within the time period above provided, and Landlord shall have no right thereafter to question or examine the same. If the audit or any audit hereinafter referred to in this Section (collectively a "Landlord's Audit") discloses an understatement of annual Operating Revenues, Tenant shall immediately pay Landlord the additional Percentage Rental found to be due plus interest thereon at the Lease Interest Rate. However, if Landlord's Audit discloses that Percentage Rental has been overpaid by Tenant, the excess shall be credited against any future Percentage Rental when next due hereunder. Tenant shall have the right to be informed as to any interim and/or final results of any such audit. In addition, if Landlord's Audit discloses any underpayment of the total payment of Percentage Rental for any Fiscal Year so audited, which underpayment is in excess of three percent (3%) of the Percentage Rental due for such Fiscal Year, Tenant shall, upon demand and receipt of evidence of payment, pay Landlord as Additional Rental the reasonable cost of Landlord's Audit; and Landlord shall have the option, at Tenant's expense, to audit the certified statements and supporting records and data for the two (2) immediately preceding Fiscal Years, with such audit to be commenced by Landlord within sixty (60) days after Landlord's receipt of the initial audit showing an underpayment of Percentage Rental, and to be completed within one hundred twenty (120) days after receipt of all information requested by Landlord reasonably related to such audit. B. Landlord shall keep all information regarding annual Operating Revenues with respect to the Premises in strict confidence and shall not divulge such information to third parties except (i) to Landlord's accountants and attorneys, or (ii) to then existing or prospective purchasers, Mortgagees, partners, lenders, or trustees of Landlord, or (iii) in connection with any claim relating to Percentage Rental payable under this Lease, or (iv) as may be required by - 15 - law, or (v) to the holders of direct and indirect beneficial ownership interests in Landlord and its Affiliates. Section 5.04 Subleases, Licenses and Concessions ----------------------------------- A. If Tenant should sublease all or substantially all of the Premises, then notwithstanding any other provision of this Lease to the contrary, Operating Revenues shall not include any rent or other consideration paid by such subtenant to Tenant but Operating Revenues shall include all gross receipts of such subtenant that would be included in Operating Revenues if realized by Tenant. B. If Tenant should ever contract with a third party subtenant, licensee or concessionaire to deliver goods or services to the residents, clients or customers at the Premises, which goods and services had previously been provided by Tenant to Tenant's residents, clients or customers at the Premises, then notwithstanding any other provision of this Lease to the contrary, the gross receipts of such subtenant(s), licensee(s) and concessionaire(s) that would be included in Operating Revenues if realized by Tenant shall be included in Operating Revenues; and in any case in which the gross receipts of any subtenant, licensee, or concessionaire are included in Operating Revenues hereunder the rental, license, or concession fees, if any, paid by such subtenant, licensee, or concessionaire to Tenant shall not be included in Operating Revenues; provided, however, that the provisions of this Section 5.04B shall not apply to the gross receipts of any one or more subtenants, licensees or concessionaires in the event that the gross receipts of all such subtenants, licensees or concessionaires in the applicable Fiscal Year do not exceed Fifty Thousand Dollars ($50,000), which $50,000 amount shall be increased on the fifth (5th) anniversary of the Commencement Date and every fifth (5th) anniversary thereof by an amount proportionate to the percentage increase in the GDP Deflator over the preceding five (5) year period. C. If any subtenant, licensee or concessionaire that delivers goods or services to Tenant's residents, clients or customers at the Premises is an Affiliate of Tenant, the gross receipts of such subtenant, licensee or concessionaire that would be included in Operating Revenues if realized by Tenant shall be included in Operating Revenues and the rental, license or concession fees, if any, paid by such subtenant, licensee or concessionaire to Tenant shall not be included in Operating Revenues. D. Tenant shall not enter into any sublease, license or concession agreement or amendment thereto in which the determination of the amount of rent, license or concession fee depends in whole or in part on, or is expressed in whole or in part as, a percentage of the income or profits derived by such subtenant, licensee or concessionaire or any other person or entity. In any lease, license or concession agreement or amendment thereto executed by Tenant in which the amount of rent, license or concession fee is determined in whole or in part by reference to the gross sales or gross receipts of the subtenant, licensee or concessionaire or any other person or entity, such sublease, license or concession agreement shall contain a provision stating that the gross receipts or gross sales of the subtenant, licensee or concessionaire or any other person or entity shall not be determined in whole or in part by reference to the income or profits derived by the subtenant, licensee or concessionaire or any other person or entity from the Premises or the subject matter or such lease, license or concession agreement (other than an - 16 - amount based on a fixed percentage or percentages of gross receipts or gross sales). In the event that Tenant violates the provisions of this paragraph with respect to any sublease, license or concession agreement, then in addition to any other rights and remedies that Landlord may have under this Lease or applicable law, the gross receipts of such subtenant, licensee or concessionaire under such sublease, license or concession agreement that would be included in Operating Revenues if realized by Tenant shall be included in Operating Revenues and the rental, license or concession fee, if any, paid by such subtenant, licensee or concessionaire shall not be included in Operating Revenues. Section 5.05 Rental Upon Change of Use ------------------------- Upon any Change of Use as described in Section 7.02, Tenant's obligation to pay Percentage Rental pursuant to Section 5.01(ii) shall cease and in lieu thereof Tenant shall pay Alternative Rental for each Fiscal Year during the remainder of the Term of this Lease in an amount equal to the average amount per Fiscal Year of Percentage Rental payable by Tenant for the two (2) full Fiscal Years immediately preceding the earlier of (i) the commencement of construction of improvements for such Change of Use, or (ii) the commencement of such Change of Use; provided, however, that the amount of Alternative Rental shall be increased on the anniversary of the occurrence of the Change of Use and each annual anniversary thereafter by an amount proportionate to the percentage increase in the GDP Deflator over the preceding twelve (12) month period. Such Alternative Rental will be paid in arrears within forty five (45) days after the end of each Fiscal Year and will be prorated for any partial Fiscal Years. Section 5.06 Rental Upon Certain Expansions ------------------------------ A. If Tenant completes any Expansion at the Premises and Tenant is either then paying, or as the result of said Expansion will be paying, Alternative Rental pursuant to the provisions of Section 5.05, the provisions of this Section 5.06 shall not apply. B. If Tenant completes any Expansion at the Premises that does not constitute a Change of Use and no such Change of Use has previously occurred with respect to which (i) the cost of such Expansion exceeds One Million Dollars ($1,000,000), and (ii) such Expansion results, either by itself or aggregated with any and all prior Expansions, in an increase greater than five percent (5%) in the capacity (measured either in terms of net useable building square footage, or the aggregate number of independent living units, assisted living units, and nursing care rooms) of the buildings on the Premises, then, from the first day of the first month following the date of completion of such Expansion throughout the remaining Term of this Lease, Tenant shall pay in lieu of Percentage Rental the lesser of either (x) Percentage Rental calculated pursuant to Section 5.01(ii) hereof, or (y) Expansion Rental for each Fiscal Quarter during the remainder of the Term hereof in an amount equal to the average amount of Percentage Rental payable by Tenant for the two (2) full Fiscal Years immediately preceding the commencement of construction of such Expansion; provided, however, that the amount of Expansion Rental shall be increased on each anniversary of the date such Expansion Rental first became effective by an amount proportionate to the percentage increase in the GDP Deflator over the preceding twelve (12) month period. - 17 - Section 5.07 Special Rental Advance ---------------------- A. Guarantor shall maintain a long-term debt rating of either (i) "BBB-" (triple B minus) or greater by Standard & Poor's Corporation or (ii) "Baa3" or greater by Moody's (an "Investment Grade Rating"). If throughout any period of time during the Term Guarantor fails to maintain an Investment Grade Rating, Tenant shall pay a Special Rental Advance to Landlord to be held by Landlord as security against Tenant's obligation to pay Rental hereunder. The Special Rental Advance shall be in an amount equal to one quarterly payment of Minimum Rental and shall be paid as follows: thirty (30) days after the date on which Guarantor's long-term debt rating was downgraded as aforesaid, Tenant shall pay Landlord one-third (1/3) of the Special Rental Advance, thirty (30) days later Tenant shall pay Landlord an additional one-third (1/3) of the Special Rental Advance, and thirty (30) days later Tenant shall pay Landlord the final one-third (1/3) of the Special Rental Advance. Tenant shall continue to make all Rental payments due under this Lease without regard to the payment of the Special Rental Advance. If Landlord should apply all or any portion of the Special Rental Advance to any Rental due from Tenant under this Lease, Tenant, within two (2) business days after Notice from Landlord, shall replace said amount. If Guarantor subsequently achieves an Investment Grade Rating, or, on the last day of the penultimate Fiscal Quarter of the Term of this Lease, Tenant may then credit the Special Rental Advance against its next due Rental under this Lease. B. Throughout the Term, Tenant shall cause Guarantor at all times to maintain a long-term debt rating of its senior, unsecured debt by either Standard & Poor's Corporation or Moody's (or a successor of each or both of them acceptable to Landlord) provided that if either or both of such companies (or any successor(s)) shall not issue such a credit rating notwithstanding Tenant's best efforts to obtain same, then Tenant shall propose a substitute rating agency and such substitute rating agency's ratings for purposes of this Section 5.07 and Landlord shall in its reasonable discretion approve or disapprove such proposed substitute rating agency and its ratings. If Tenant shall fail to propose such a substitute rating agency, or if Landlord shall disapprove a substitute rating agency proposed by Tenant, then Landlord, on notice to Tenant shall have the right to reasonably designate such substitute rating agency and rating. END OF ARTICLE 5 ARTICLE 6 OPERATION AND MAINTENANCE OF PREMISES ------------------------------------- Section 6.01 Operation and Maintenance of Premises ------------------------------------- Throughout the Term, Tenant, at its own expense, shall keep and maintain the Premises in good condition and repair, reasonable wear and tear excepted, and in conformity with all Legal Requirements and shall make or cause to be made all ordinary and extraordinary, foreseen and unforeseen items of maintenance, repair, replacement and alteration to the Premises as necessary for such purpose. Landlord shall not be required to maintain, repair, or rebuild all or any part of the Premises. Tenant shall provide all services required and perform all - 18 - obligations incurred in connection with the use, operation and maintenance of the Premises, and Tenant shall be responsible for the payment of all costs and expenses incurred in the use, operation, or maintenance of the Premises, including, but not limited to, management fees, real estate taxes, insurance, supplies and materials used in the operation and maintenance of the Premises, the cost of all maintenance, janitorial, security and service agreements for the Premises and the equipment therein and thereon, and the cost of electricity, water and any and all other utilities supplied to the Premises, but not including any costs or expenses affirmatively incurred by Landlord that are not attributable to a default by Tenant in the performance of Tenant's obligations under this Lease. Section 6.02 Taxes ----- A. Tenant shall pay, prior to delinquency: (i) all taxes, including sales, excise, value added, use and real estate taxes, assessments, levies, fees, water and sewer rents and charges, and all other governmental charges, general and special, ordinary and extraordinary, foreseen and unforeseen, which are imposed or levied upon or assessed against or which arise with respect to the Premises, any Rental or other sums payable hereunder, this Lease or the leasehold estate hereby created or which arise in respect of the operation, possession or use of the Premises by Tenant or the leasing, operation, possession or use of the Premises; (ii) all gross receipts, sales, excise or similar taxes (i.e., taxes based upon gross income which fail to take into account deductions with respect to the Premises, such as depreciation, interest, taxes or ordinary and necessary business expenses) imposed or levied upon, assessed against or measured by any Rental or other sums payable hereunder; and (iii) all charges of utilities, communications and other services serving the Premises. B. Notwithstanding the foregoing provisions of Section 6.02A but subject to the provisions of Section 6.02C, Tenant shall not be required to pay any franchise, estate, inheritance, transfer, income or similar tax assessed or imposed against Landlord, any Rental or other sums payable hereunder, this Lease, the Land or Improvements (other than any tax referred to in clause (ii) of Section 6.02A). Tenant will furnish to Landlord, within ten (10) days after demand therefor, proof of payment of all items referred to above which are payable by Tenant. C. If, at any time, any Federal, state or local governmental entity shall impose upon the Rental payable to Landlord any tax or other imposition in lieu of any existing real estate or other tax payable by Tenant as of the Commencement Date, then notwithstanding the provisions of Section 6.02B, Tenant, at its sole cost and expense, shall pay such tax or imposition on Landlord's behalf the same as if such tax or imposition had been levied against Tenant or Tenant's interest in the Premises as well as any additional income taxes assessed against Landlord with respect to such payment. Section 6.03 Compliance with Requirements, Covenants and Restrictions -------------------------------------------------------- Tenant shall comply with and cause the Premises to comply with all obligations and liabilities with respect to all Insurance Requirements (including, without limitation, to the extent necessary to prevent cancellation thereof and to insure full payment of any claims made under such policies) required to be maintained by Tenant under this Lease. Tenant shall comply with, - 19 - cause the Premises to comply with, and shall assume all easements, agreements, covenants, conditions and restrictions applicable to the Premises or the ownership, operation, use or possession thereof that are of record on the Commencement Date or are hereafter executed by Tenant or are hereafter consented to by Tenant in a writing. B. During the Term, Tenant will not enter into or consent to any easements, covenants, conditions or restrictions which would affect the Premises beyond the Term or any termination of this Lease without the prior consent of Landlord, which consent will not be unreasonably withheld, conditioned, or delayed. Section 6.04 Landlord's Right to Perform Tenant Obligations ---------------------------------------------- If Tenant fails promptly to make any repairs, payments or otherwise take any actions that are Tenant's obligation to make or do under this Lease, Landlord, at its option, may make or perform same at the expiration of any applicable Notice and grace period provided for herein (except that in the event of any emergency presenting immediate danger to person or property, such Notice and grace period shall only be what is reasonable under the circumstances), and Tenant shall pay Landlord, upon demand and receipt of evidence of payment, as Additional Rental, Landlord's actual costs plus interest thereon from the date of expenditure until paid at the Lease Interest Rate. The provisions of this Section 6.04 shall be for the sole and exclusive benefit of Landlord. Nothing contained herein shall be construed so as to require Landlord to exercise any of its rights under this Section 6.04. Section 6.05 Compliance with Laws -------------------- Subject to the provisions of Section 6.06, Tenant, at its sole expense, shall comply with and cause the Premises to comply with, and assume all obligations and liabilities with respect to all laws, orders, ordinances, and regulations of Federal, state, county, municipal and other authorities having jurisdiction over the Premises and/or the business or operations conducted thereon, or the matters which are the subject of this Lease, including but not limited to any building, zoning or use laws, ordinances, regulations or orders, Environmental Laws, fire department rules, and health department regulations; whether such rules, orders, and regulations are presently in effect or hereafter enacted (whether or not presently contemplated) which would impose any violation, requirement, order or duty with respect to the Premises, or the use, ownership, operation or occupation thereof (such laws, orders, ordinances and regulations being herein referred to as "Legal Requirements"). Section 6.06 Tenant's Right to Contest ------------------------- Notwithstanding any other provision of this Lease, Tenant shall have the right to contest (i) the payment of any tax or other imposition, (ii) compliance with any Legal Requirement or (iii) any lien referred to in Section 6.07 so long as (w) at the time of any such contest, no Event of Default exists, (x) no such contest shall subject Landlord to the risk of criminal liability, (y) any such taxes or impositions are paid prior to the assessment of penalties or interest thereon unless such payment would deprive Tenant of the right to contest the validity or amount of such taxes or impositions, and (z) Tenant shall contest, in good faith, the existence, amount or validity thereof, the amount of the damages caused thereby, or the extent of its or Landlord's - 20 - liability therefor by appropriate proceedings which shall operate during the pendency thereof to prevent or stay (1) the collection of, or other realization upon, the matter contested, (2) the sale, forfeiture or loss of any of the Premises or any portion thereof or any Rental to satisfy or to pay any damages caused by any of the matters described in clauses (i), (ii), and (iii), (3) any interference with the use or occupancy of any of the Premises (4) any interference with the payment of any Rental (5) the cancellation of any insurance policy and (6) the enforcement or execution of any injunction, order or Legal Requirement with respect to such matter. Tenant further agrees that any such contest shall be prosecuted to a final conclusion or settled as expeditiously as is reasonably possible under the circumstances. Any rebate made on account of any taxes or other impositions shall be repaid to the party who made such payment. If and to the extent required by applicable law or regulation, Landlord shall render to Tenant, at no cost to Landlord, any and all reasonable assistance in contesting the validity or amount of any impositions, including (if requested by Tenant) joining in the signing of any protests or pleading which Tenant may reasonably deem advisable to file. Tenant shall pay any and all losses, judgments, decrees and costs in connection with any such contest and shall, promptly after the final determination of such contest, fully pay and discharge the amounts which shall be levied, assessed, charged or imposed or be determined to be payable therein or in connection therewith, together with all penalties, fines, interest and costs thereof or in connection therewith, and perform all acts the performance of which shall be ordered or decreed as a result thereof. Upon termination of this Lease for any reason other than an Event of Default, Landlord shall promptly reimburse Tenant for any such payment made by Tenant for taxes and impositions described in Section 6.02A attributable to the Premises applicable to any period subsequent to the termination of the Lease. Section 6.07 Liens ----- Tenant shall keep the Premises free from any liens arising from any work performed, materials furnished, or obligations incurred by or at the request of Tenant or any subtenant, licensee or concessionaire of Tenant or arising from any breach by Tenant of its obligations under this Lease, and any liens with respect to any taxes Tenant is obligated to pay under this Lease or Legal Requirements. If any lien is filed against the Premises or Tenant's leasehold interest therein, or if any lien is filed against the Premises which arises out of any purported act or agreement of Tenant, or any subtenant, licensee or concessionaire of Tenant, Tenant shall discharge the same within thirty (30) days after Tenant receives Notice of its filing by payment, filing of the bond required by law or otherwise. If Tenant fails to discharge such lien within such period, then, in addition to any other right or remedy of Landlord, Landlord may, at its election, discharge the lien by paying the amount claimed to be due, by obtaining the discharge by deposit with a court or a title company, or by bonding. Tenant shall pay on demand, as Additional Rental, any amount paid by Landlord for the discharge or satisfaction of any such lien, together with interest thereon from the date of such expenditure until paid at the Lease Interest Rate, and all reasonable attorneys' fees and other costs and expenses of Landlord incurred in defending any such action or in obtaining the discharge of such lien, together with all necessary disbursements in connection therewith. Nothing contained in this Lease shall be construed as constituting the consent or request of Landlord, express or implied, to or for the performance by any contractor, laborer, materialman, or vendor of any labor or services or for the furnishing of any materials for any construction, alteration, addition, repair or demolition of or to the Premises or any part thereof. Notice is hereby given that Landlord will not be liable - 21 - for any labor, services or materials furnished or to be furnished to Tenant, or to anyone holding an interest in the Premises or any part thereof through or under Tenant, and that no mechanic's, materialmen's or other liens for any such labor, services or materials shall attach to or affect the interest of Landlord in and to the Premises; and appropriate notice to this effect will be included in the Lease Memorandum and all construction contracts entered into by Tenant. END OF ARTICLE 6 ARTICLE 7 USE --- Section 7.01 Use --- Tenant shall have the right to use the Premises for a residential retirement community, including nursing care, congregate care, and all other uses reasonably incidental thereto. Section 7.02 Change of Use ------------- In addition to the uses permitted under Section 7.01, Tenant may discontinue the uses permitted under Section 7.01 and use the Premises for office, retail sales, commercial uses and residential purposes other than a retirement community and for any other lawful business or commercial purpose permitted under applicable Legal Requirements (a "Change of Use"), provided such Change of Use is commercially reasonable and does not diminish the value of the Premises and provided further that such Change of Use occurs prior to the date that is three (3) years prior to the expiration of the Term of this Lease (including all Effective Extended Terms). At the request of Tenant, Landlord shall execute such applications, petitions or other documents that may be required to be filed with any governmental authority that are reasonably necessary to seek and obtain such a Change of Use, provided, that Landlord shall not be required to incur any expense in connection therewith, and provided further that the execution of any such document shall not expose Landlord to any personal liability. END OF ARTICLE 7 ARTICLE 8 INDEMNIFICATION --------------- Section 8.01 General Indemnification by Tenant --------------------------------- A. In addition to the provisions of any indemnity provided elsewhere in this Lease (other than Section 8.02 hereof), Tenant shall pay, protect, indemnify, defend, save and hold harmless, Landlord, any Mortgagee, ground lessor, and any Affiliate, partner, trustee, officer, director, employee, agent or shareholder of Landlord, or any holder of any beneficial interest in any of them (the "Indemnified Parties"), from and against all liabilities, obligations, claims, damages (including punitive damages), penalties and causes of action or judgments of any nature - 22 - whatsoever, howsoever caused and arising out of events or circumstances causing personal injury or property damage during the Term (except that this indemnity shall not cover liabilities or claims arising by reason of the gross negligence or willful misconduct of an Indemnified Party or its employees or agents), without regard to the form of action and whether based on strict or statutory liability, gross negligence, negligence (including the negligence of any Indemnified Party) or any other theory of recovery at law or in equity, and all reasonable and documented costs and expenses (including reasonable attorneys' fees and legal costs and expenses), imposed upon or incurred by or asserted against any of the Indemnified Parties by reason of or in connection with: (a) Any matter pertaining to the leasing, use, non-use, occupancy, operation, management, condition, design, construction, maintenance, repair or restoration of any of the Premises or the employment of any persons on the Premises; (b) Any casualty in any manner arising from or in connection with any of the Premises or any operations or activities thereon, whether or not Landlord has or should have knowledge or notice of any default or condition causing or contributing to the casualty; (c) Any violation by Tenant (or any subtenant, concessionaire or licensee of Tenant) of any provision of this Lease, any contract or agreement to which Tenant (or any subtenant, concessionaire or licensee of Tenant) is a party, any violation or alleged violation of any Legal Requirement (including anti-discrimination laws) or any Insurance Requirement; (d) Any contest undertaken by or on behalf of Tenant with respect to any Legal Requirement, Insurance Requirement, tax imposition or otherwise, regardless of whether the same is permitted pursuant to the terms hereof; except in each case to the extent the same directly result from the gross negligence or willful misconduct by an Indemnified Party; and B. In addition to the provisions of any indemnity provided elsewhere in this Lease (other than Section 8.02 hereof), Tenant shall pay, protect, indemnify, defend, save and hold harmless, the Indemnified Parties, from and against all liabilities, obligations, claims, damages (including punitive damages), penalties and causes of action or judgments of any nature whatsoever, howsoever caused, arising out of events or circumstances causing personal injury or property damage prior to the Commencement Date (except that this indemnity shall not cover liabilities or claims arising by reason of the gross negligence or willful misconduct of an Indemnified Party or its employees or agents), without regard to the form of action and whether based on strict or statutory liability, gross negligence, negligence (including the negligence of any Indemnified Party) or any other theory of recovery at law or in equity, and all reasonable and documented costs and expenses (including reasonable attorneys' fees and legal costs and expenses), imposed upon or incurred by or asserted against any of the Indemnified Parties by reason of or in connection with: (a) Any matter pertaining to the leasing, use, non-use, occupancy, operation, management, maintenance, or repair (but not to the design, development or construction) of all or any part of the Premises, or the employment of any persons on the Premises; (b) Any casualty in any manner arising from or in connection with any operations or activities on the Premises (but not casualties arising from the structural condition, design, development, or construction of the Premises), whether or not Landlord has or should have knowledge or notice of any default or condition causing or contributing to the casualty; (c) Any violation by Landlord (or any tenant, affiliate, concessionaire or licensee of Landlord) of any provision of any contract or agreement pertaining to the retirement community operations of Landlord at the Premises, any violation or alleged violation of any - 23 - Legal Requirement (including anti-discrimination laws) or any Insurance Requirement pertaining to the retirement community operations of Landlord at the Premises; (d) Any contest undertaken by or on behalf of Landlord with respect to any Legal Requirement, Insurance Requirement, tax imposition or otherwise relating to the Premises, regardless of whether the same is permitted pursuant to the terms hereof; except in each case to the extent the same directly result from the gross negligence or willful misconduct by an Indemnified Party; and C. Any matter covered by Section 8.02 shall be deemed excluded from this Section 8.01. Section 8.02 Environmental Indemnification ----------------------------- Tenant shall pay, protect, indemnify, defend, save and hold harmless the Indemnified Parties, from and against all liabilities, obligations, claims (including without limitation, claims by third parties alleging violation of or liability under any Environmental Law), damages (including punitive damages), penalties and causes of action or judgments, without regard to the form of action and whether based on strict or statutory liability, Tenant's gross negligence, negligence (including the negligence of any Indemnified Party or their agents but not including liabilities, obligations, claims, damages, causes of action, or judgments arising out of any gross negligence or willful misconduct of any Indemnified Party or their agents) any other theory of recovery at law or in equity, and all reasonable and documented costs and expenses (including reasonable attorneys' fees, expert's legal costs and expenses), imposed upon or incurred by or asserted against any of the Indemnified Parties by reason of or in connection with: (a) Tenant's failure to perform its duties and obligations as set forth in Article 12; and (b) All claims asserted during or after the Term by any third party for personal or bodily injury or death where such claims allege injury or damages as a result of exposure, that occurred during the Term, to Hazardous Material that existed at or were located in, on, or under the Premises at any time prior to or during the Term provided, however, that this indemnity shall not cover claims arising by reason of the gross negligence or willful misconduct of Landlord and its agents, or an Indemnified Party and their agents. Section 8.03 Defense of Indemnified Parties ------------------------------ Promptly after receipt by an Indemnified Party of Notice of the commencement or assertion against it of any claim, action or proceeding, such Indemnified Party shall, if a claim in respect thereof is to be made against Tenant under this Article Eight, notify Tenant thereof; but the omission so to notify Tenant shall not relieve Tenant from any liability which it may have to such Indemnified Party under this Article Eight except to the extent that Tenant shall have been prejudiced by such failure. As long as no Event of Default exists and provided that representation by counsel selected by Tenant will not, in Indemnified Party's reasonable judgment, prejudice Indemnified Party in any manner, Tenant, at its sole cost and expense, shall have the right by counsel reasonably satisfactory to the Indemnified Party, to contest, resist and defend any claim, action or proceeding with respect to which it shall have received the Notice described in the preceding sentence; provided, however, that Tenant may not compromise or otherwise dispose of the same without the prior written approval of the Indemnified Party, such - 24 - approval not to be unreasonably withheld, conditioned, or delayed so long as the Indemnified Party receives a full release with respect to the claim, action or proceeding. If an Event of Default exists, or, in Indemnified Party's judgment, representation by counsel selected by Tenant will prejudice Indemnified Party in any manner, such Indemnified Party shall have the right to retain its own counsel and defend such action. If Tenant shall have assumed responsibility for such contest and defense, Tenant shall not be obligated to pay any attorneys' fees or other legal costs incurred by or on behalf of the Indemnified Party unless an Event of Default exists. Notwithstanding the foregoing, each Indemnified Party shall, at Tenant's request and expense, cooperate with Tenant, at no cost or expense to the Indemnified Party, in the defense of any such claim, action or proceeding. Section 8.04 Payment by Tenant ----------------- Any amounts which become payable by Tenant under this Article Eight shall be paid as Additional Rental no later than ten (10) days after demand by the Indemnified Party entitled thereto (which demand shall not be made more than ten (10) days prior to the proposed date of actual payment by the Indemnified Party to a third party) and, if such payment is not timely paid, shall bear interest at the Lease Interest Rate from the date when due to the date of payment. Section 8.05 Survival -------- Tenant's liability under this Article Eight shall survive the expiration or earlier termination of this Lease. The failure or inability on the part of Tenant to carry insurance required to be maintained under Article Thirteen shall not affect in any way its indemnification obligations hereunder. Section 8.06 Continuing Obligations ---------------------- The indemnities set forth herein shall in no way affect or impact any other obligations on the part of Tenant or any of its Affiliates that may exist under law or under any other agreement in favor of any Indemnified Party. END OF ARTICLE 8 ARTICLE 9 ALTERATIONS AND EXPANSIONS -------------------------- Section 9.01 Alterations and Expansions -------------------------- A. Tenant may at its expense and without Landlord's prior written consent, make any replacements or alterations to the Premises and may expand the existing Improvements or construct additional Improvements on the Land (an "Expansion"), provided, that (i) the fair market value of the Premises shall not be lessened thereby, and (ii) no structural elements of the Improvements shall be demolished without obtaining Landlord's prior written consent, which - 25 - consent shall not be unreasonably withheld, conditioned, or delayed, and (iii) such replacements, alterations and/or Expansions will not adversely affect the structure or the safety of the Improvements, or adversely affect the electrical, heating, ventilating, air-conditioning, plumbing or mechanical systems or the functioning thereof. Landlord has the right to require from Tenant assurances, reasonably acceptable to Landlord, to be delivered to Landlord prior to the commencement of any work, that Tenant will fully perform and complete its Expansion, free and clear of any mechanics' and materialmen's liens. Tenant shall procure at its own expense such governmental approvals and permits as may be required for any alterations made by Tenant. At Tenant's expense, Landlord shall join in submitting Tenant's plans for any necessary governmental approval, if required by Legal Requirements. All such construction, alterations, and maintenance work done by, or for, Tenant shall comply with all Legal Requirements and Insurance Requirements, be completed in a good and workmanlike manner and with reasonable diligence, and will be completed in all material respects in accordance with plans prepared by a licensed architect. In the event any Expansion will cost more than One Million Dollars ($1,000,000), adjusted by the GDP Deflator, (w) Tenant shall furnish Landlord with the plans and specifications therefor prior to commencing work, (x) the contractor selected by Tenant to perform the work shall be subject to Landlord's approval, which approval shall not be unreasonably withheld, conditioned, or delayed, (y) Tenant shall carry builder's risk insurance in amounts reasonably sufficient to cover the cost of replacement of the work during the course of such construction, and (z) upon the request of Landlord or any Mortgagee, provide appropriate securities, completion bonds, or like reasonable assurances that construction will be completed. Tenant shall also furnish Landlord with copies of any and all final plans and specifications (including all changes and modifications thereto) and all necessary governmental permits prepared or issued for all alterations (whether or not Landlord's consent was required in connection with such alterations). B. All replacements, alterations, substitutions and Expansions made to the Premises (but not the FF&E, Fixed Asset Supplies, or Inventories) pursuant to this Article 9 shall be and remain part of the realty and the property of Landlord and shall be subject to this Lease. Section 9.02 Alterations and Expansions During Last Five Years of Term --------------------------------------------------------- Landlord's prior written consent, which may be withheld in Landlord's sole, absolute, and subjective discretion, shall be required for any replacements, alterations or Expansions of or to the Premises to be constructed during the last five (5) years of the Term (including any Effective Extended Term), provided however, if Tenant shall then exercise its rights under Section 3.02 to extend the Term hereof so that at least ten (10) years will remain in the Term once the construction is completed, then the provisions of Section 9.01A shall apply. Section 9.03 Recovery of Mandated Expenditures --------------------------------- A. Mandated Expenditures shall be amortized by Tenant in equal monthly installments in accordance with generally accepted accounting principles consistently applied, but in no event shall any category of Mandated Expenditures be amortized for longer than fifteen (15) years. If, as of any date that would otherwise be a date of expiration or termination of the Term of this Lease, there exists an unamortized balance of Mandated Expenditures, Tenant shall have the right, exercisable by giving Landlord Notice to such effect at least ninety (90) days - 26 - prior to the end of the then current term, but not the obligation, to extend the Term as hereinafter provided and receive a credit against Minimum Rental as herein provided. If Tenant exercises its right to extend the Term under this Section 9.03A, Tenant shall have no further right to extend the Term of the Lease pursuant to any of the provisions of Article 3. B. The length of any extension of the Lease Term pursuant to this Section 9.03, shall be determined as follows: the unamortized balance of Mandated Expenditures shall be divided by a number equal to forty percent (40%) of the annual Minimum Rental; the result shall be rounded to the next whole number; and, the Term shall be extended by a number of years equal to said whole number. C. During any such extended Term, Tenant shall receive a credit against Minimum Rental equal to 50% of such Minimum Rental until such time as the aggregate amount of such rent credit equals the unamortized balance of Mandated Expenditures plus interest thereon at the Lease Interest Rate. D. Landlord shall have the right, but not the obligation, of avoiding any extension of the Term pursuant to this Section 9.03, by paying to Tenant, within thirty (30) days after Tenant's Notice pursuant to Section 9.03A, an amount equal to the unamortized balance of Mandated Expenditures. E. The provisions of this Section 9.03 shall not apply in the case of any termination of this Lease due to the default of Tenant. F. Within six (6) months after the close of each Fiscal Year, Tenant shall deliver to Landlord a written statement of (i) the amount of Mandated Expenditures incurred by Tenant during such Fiscal Year with sufficient information to establish that such expenditure qualifies as a Mandated Expenditure, (ii) the amortization period that will be applicable to each such Mandated Expenditure and (iii) the unamortized balance of all Mandated Expenditures as of the last day of such Fiscal Year that has been incurred during the Term. No expenditure shall be treated as a Mandated Expenditure unless included within the annual statement referred to in the preceding sentence. END OF ARTICLE 9 ARTICLE 10 FF&E, FIXED ASSET SUPPLIES AND INVENTORIES ------------------------------------------ Section 10.01 FF&E Upon Commencement Date --------------------------- On the Commencement Date, Landlord shall make available to Tenant all of the FF&E, Fixed Asset Supplies, and Inventories indicated on the schedules attached hereto as Exhibit C located at the Premises and to be used and consumed at the Premises during the Term at no further cost to Tenant. Landlord shall have no further obligations to provide any additional FF&E, Fixed Asset Supplies or Inventories. Thereafter during the Term, Tenant shall, at its - 27 - own cost, replace FF&E, Fixed Asset Supplies, and Inventories as it deems necessary and all such replacement FF&E, Fixed Asset Supplies and Inventories shall be and remain the property of Tenant. Any net proceeds realized by Tenant from the sale or other disposition of any FF&E owned by Landlord and identified in Exhibit C shall be paid promptly by Tenant to Landlord. Section 10.02 FF&E Upon Termination --------------------- A. Landlord shall have the option, to be exercised by sending Notice to Tenant on or before the date that is either (i) six (6) months prior to the date of expiration of the Term of this Lease or (ii) the date of expiration or termination of the Term of this Lease, if this Lease terminates prior to the expiration of the Term, to purchase from Tenant upon the date of termination of this Lease any or all of the items of FF&E, Fixed Asset Supplies, and Inventories then located at the Premises at their then fair market value. If the parties are unable to agree upon such fair market value within thirty (30) days following such expiration or termination, the parties shall appoint an independent appraiser mutually agreeable to them to determine such fair market value, which determination shall be net of the cost to Tenant to remove such items from the Premises, and which shall be binding on the parties. The costs of such appraiser shall be shared equally by the parties. If Landlord exercises its option to purchase, Landlord shall have the right to use, after the date of expiration or termination of this Lease, the items of FF&E, Fixed Asset Supplies and Inventories so elected to be purchased by Landlord and Landlord shall pay such fair market value to Tenant within thirty (30) days after agreement by the parties or determination by the appraiser; and this provision shall survive such expiration or termination. Landlord shall not have the option of purchasing from Tenant any computer software that is proprietary to Tenant, any Affiliate, or the licensor of any of them (including without limitation applications used by Tenant as part of Tenant's accounting, centralized or local sales, business management systems and otherwise), or any leased equipment. B. Subject to the provisions of Section 10.02A, Tenant shall remove, at Tenant's expense, all of its FF&E, Fixed Asset Supplies, and Inventories from the Premises on or before the date of expiration or termination of this Lease and repair any damage caused to the Premises by such removal. If Tenant fails to remove such items by such date and/or fails to repair such damage, Landlord shall have the right to do so and charge Tenant the cost therefor together with interest thereon from the date of such expenditure until paid at the Lease Interest Rate. The provisions of this Section 10.02 shall survive the expiration or termination of this Lease. Section 10.03 Landlord's Security Interest in Tenant's FF&E, Fixed ---------------------------------------------------- Asset Supplies and Inventories - ------------------------------ As security for payment by Tenant of the Rentals payable hereunder and the performance of all of Tenant's obligations under this Lease, Tenant hereby grants to Landlord a security interest under the Uniform Commercial Code of the jurisdiction in which the Premises are situated in all FF&E, Fixed Asset Supplies and Inventories now or hereafter owned by Tenant and now or hereafter ordinarily used on or in the Premises. Tenant shall execute and deliver to Landlord such Uniform Commercial Code financing statements and continuation statements as Landlord determines to be necessary from time to time to perfect and continue the perfection of Landlord's security interest in such collateral. Tenant shall have the right to replace any such - 28 - collateral, to remove any such collateral from the Premises and dispose of any such collateral, in the ordinary course of Tenant's business. END OF ARTICLE 10 ARTICLE 11 TRADEMARKS, TRADE NAMES AND SERVICE MARKS ----------------------------------------- Section 11.01 Trademarks, Trade Names and Service Marks ----------------------------------------- A. During the Term, the Premises may be known as a Marriott Retirement Community, or such other name as Tenant may from time to time designate with additional identification utilizing one or more trademarks and/or trade names of Tenant as may be necessary to provide local identification. All Tenant's trademarks, service marks, trade names, logos, symbols and designs shall in all events remain the exclusive property of Tenant and its Affiliates, and nothing contained herein shall confer on Landlord the right to use such names, trademarks, service marks, trade names, logos, symbols or designs other than in strict accordance with the terms of this Lease. Except as provided in Section 11.01B, upon the expiration or termination of this Lease, any use of or right to use said names, trademarks, service marks, trade names, logos, symbols or designs by Landlord shall cease forthwith and Tenant shall (at Tenant's sole cost and expense) promptly remove from the Premises any signs or similar items which contain any of Tenant's names, trademarks, trade names, service marks, logos, symbols or designs, provided however, that Tenant shall be responsible for the cost of any resulting repairs that may be necessary as a result of such removal. Included under the terms of this Section are all trademarks, service marks, trade names, symbols, logos or designs used in conjunction with the Premises, including but not limited to restaurant names, lounge names, etc., whether or not the marks contain the "Marriott" name. The right to use such trademarks, service marks, trade names, symbols, logos or designs belongs exclusively to Tenant, and the use thereof inures to the benefit of Tenant whether or not the same are registered and regardless of the source of the same. B. Landlord covenants that any items of FF&E, Inventories or Fixed Asset Supplies which are purchased by Landlord upon the expiration or termination of this Lease, and which are marked with the Tenant's name or any Tenant trademark, trade name, logo, symbol or design, shall be used exclusively in connection with the Premises until they are consumed. C. Any computer software (including upgrades and replacements) at the Premises owned by Tenant, an Affiliate, or the licensor of any of them is proprietary to Tenant, such Affiliate, or the licensor of any of them and shall in all events remain the exclusive property of Tenant, the Affiliate, or the licensor of any of them, as the case may be, and nothing contained in this Lease shall confer on Landlord the right to use any of such software. Upon expiration or termination of this Lease, Tenant shall have the right to remove from the Premises without compensation to Landlord any computer software (including upgrades and replacements) owned by Tenant, any Affiliate, or the licensor of any of them. Notwithstanding anything contained in this Section 11.01C to the contrary, any computer software directly relating to the operation - 29 - and maintenance of the Improvements and their various systems shall be and remain the property of Landlord through the term hereof and upon any expiration or termination of this Lease. D. Notwithstanding any provision of Section 11.01 to the contrary, the parties acknowledge and agree that the trade name(s), trademark(s), service mark(s), logo(s), symbol(s) or design(s) shown on Exhibit D associated with the Premises, are proprietary to, and the property of, Landlord and upon expiration or termination of this Lease Tenant shall not, thereafter, make any further use thereof. E. Tenant and/or its Affiliates and Landlord and/or its Affiliates shall each be entitled, in case of any breach of the covenants of Article 11 by Landlord or Tenant or others claiming through Landlord or Tenant, to injunctive relief and to any other right or remedy available at law. The provisions of Article 11 shall survive expiration or termination of this Lease. F. Nothing contained herein shall diminish or abrogate the rights of Landlord, its subsidiaries and Affiliates to use the trademarks of Tenant and its subsidiaries and Affiliates granted under that certain Assignment & License Agreement of even date herewith between Host Marriott Corporation and Marriott International, Inc. Nothing contained herein shall be construed so as to require Landlord, after the expiration or termination of this Lease, to remove any trade names, trademarks, logos, symbols, service marks or designs which are integral to the Improvements, including without limitation marked wallpaper, marked plumbing and electrical fixtures, floors, carpets and distinctive color schemes. END OF ARTICLE 11 ARTICLE 12 ENVIRONMENTAL HAZARDS --------------------- Section 12.01 Compliance with Environmental Law --------------------------------- A. During the Term, Tenant at its cost shall cause the Premises to be in compliance with all Environmental Laws, whether or not such noncompliance is the result of a breach of Tenant's obligations under Section 12.01B or 12.01C. B. Tenant shall never during the Term permit to be discharged at, released at, or otherwise disposed of Hazardous Materials in, on or under the Premises other than in insignificant concentrations or amounts that do not impose a significant risk of any clean up, removal, monitoring or, responsibility under any applicable Environmental Laws and do not impose a significant risk of harm to guests, invitees, or employees of the Premises. In the event that with or without Tenant's knowledge or permission there is any discharge at, release at or disposal of Hazardous Materials in, on or under the Premises during the Term other than in insignificant concentrations or amounts that do not impose a significant risk of any clean up, removal, monitoring or responsibility under any applicable Environmental Law and do not impose a materially significant risk of harm to guests, invitees or employees of the Premises, - 30 - Tenant shall, subject to the provisions of this Article 12, diligently clean up and remove such Hazardous Materials. C. During the Term and for a period of five (5) years commencing after the expiration of the Term, if any Hazardous Materials are discovered in, on or under the Premises and result from, are introduced by, or arise out of, or the damage from which is materially expanded as a result of Tenant's acts, its negligence, or the acts or negligence of its employees or agents, or the acts or negligence of any subtenants, licensees, concessionaires, contractors or entities acting on behalf of Tenant or any of their employees or agents, the cost incurred in complying with Environmental Laws with respect to such Hazardous Materials shall be borne by Tenant. Tenant's obligation under this sub-paragraph C shall continue after expiration of the Term until no further compliance is required with respect to such Hazardous Materials. D. If during the Term any Hazardous Materials are discovered in, on or under the Premises and are the result of migration from a source other than the Premises and are not a result of Tenant's acts, its negligence, or the acts or negligence of its employees or agents, or the acts or negligence of any subtenants, licensees, concessionaires, contractors or entities acting on behalf of Tenant or any of their employees or agents, the cost incurred in complying with Environmental Laws for such Hazardous Materials shall be borne by Tenant until the expiration of the Term. After the expiration of the Term, Tenant shall have no further liability to Landlord for complying with Environmental Laws for such Hazardous Materials and Landlord shall indemnify Tenant for any liability associated with the compliance of Environmental Laws with respect to such Hazardous Materials. E. In the event Tenant is required to implement a plan to investigate, monitor, abate or remove Hazardous Materials pursuant to the requirements of any Environmental Law, Tenant shall notify Landlord of its planned method, time and procedure for such implementation and Landlord shall have the right to require reasonable changes in such method, time or procedure. Nothing contained herein shall be deemed to vest any control whatsoever in Landlord with respect to Tenant's use, management, or disposal of Hazardous Materials on the Premises. F. During the Term, Landlord may not enter into any agreement, settlement or consent order with any third party or governmental entity concerning the payment or possible payment of funds, or the investigation, monitoring, abatement or removal of Hazardous Materials located in, on, or near the Premises without the written consent of Tenant which consent shall not be unreasonably withheld, conditioned or delayed. If Landlord fails to obtain Tenant's written consent prior to entering into any such agreement, settlement or consent order, any terms, conditions, obligations or liabilities contained therein shall be non-binding on Tenant, Tenant shall have no responsibility to Landlord under this Article 12, and Landlord shall indemnify Tenant for any costs or losses incurred by Tenant as a result of such agreement, settlement or consent order. G. During the Term, Tenant may not enter into any agreement, settlement or consent order with any third party or governmental entity concerning the payment or possible payment of funds, or the investigation, monitoring, abatement or removal of Hazardous Materials located in, on, or near the Premises without the written consent of Landlord if such agreement, settlement or consent order will impose any financial obligations on Tenant or Landlord, which - 31 - are to be paid in whole or in part, after the expiration of the Term. Landlord's consent shall not be unreasonably withheld, conditioned or delayed. Failure by Tenant to obtain the Landlord's written consent shall be an Event of Default. H. During the Term, Tenant may elect to defend any imposition, order, demand, decree, lawsuit or governmental action that seeks to impose liability on Tenant or Landlord due to the existence of Hazardous Materials in, on, or near the Premises. If Tenant elects to take such action, Tenant shall not be deemed to be in violation of any provision of this Article 12 so long as such action or contest by Tenant does not result in a risk of the imposition of any criminal sanctions against Landlord or any of its directors, officers or employees, provided however, if Landlord or Tenant is ultimately held liable for the costs associated with the existence of such Hazardous Materials, Tenant's liability shall not be reduced by reason of any delay in such remediation. Section 12.02 Environmental Assessments ------------------------- A. If Landlord has reasonable cause to believe that an Environmental Violation may exist on the Premises, or if Landlord desires to sell or finance the Premises, or if any Mortgagee desires to sell or participate its interest in the Premises, or if requested by the Senior Mortgagee, or if an Event of Default exists, or if there is less than one (1) year remaining prior to the expiration of the Term, then, upon written direction by Landlord to Tenant, Tenant shall engage such persons as Tenant shall select ("Site Reviewers"), such selection subject to the reasonable approval of Landlord, to visit the Premises and perform, as agents of Tenant, such environmental site investigations and assessments ("Site Assessments") as may be necessary to determine whether there exists on the Premises any Environmental Violation, and, if any Environmental Violation exists, to estimate the cost of remediating any such Environmental Violation; provided, however, if an Event of Default exists or if there is less than one year remaining prior to the expiration of the Term, Tenant shall select the Site Reviewer from a list of no less than five (5) nationally recognized Site Reviewers, such list to be provided by Landlord, and Landlord shall have the right to approve the Site Reviewer, such approval to be exercised in a reasonable manner recognizing Landlord's significant interest in the adequacy of the report and the scope of work to be performed by such Site Reviewer. Landlord shall have the right to approve any guidance or instruction requested by such Site Reviewer during the Site Assessment, and Landlord shall have the right to confirm that any draft or final reports furnished by such Site Reviewers conform to approved scope of work, guidance and instructions. If Tenant fails or refuses to engage Site Reviewers within thirty (30) days after such direction, Landlord may engage the Site Reviewers. If an Event of Default or a material Environmental Violation exists that was caused by Tenant, its employees or agents, or by any Subtenant, licensee, concessionaire, contractor or entity acting on behalf of Tenant, or any of their employees or agents, the cost of any Site Assessment shall be paid by Tenant. In all other cases, the costs of an Environmental Assessment shall be paid by Landlord (or Landlord shall cause such costs to be paid by any Mortgagee requesting such Environmental Assessment) and Tenant may demand adequate assurances that such costs will be paid before engaging the Site Reviewers. Such Site Assessments may, at the option of Landlord, include both above and below the ground testing and such other tests as may be necessary, in the reasonable opinion of the Site Reviewers, to verify the existence of an Environmental Violation or to estimate the cost of remediating any such Environmental Violation. Tenant shall supply to the Site Reviewers - 32 - such historical and operational information regarding the Premises as may be reasonably requested by the Site Reviewers to facilitate the Site Assessments, and shall make available for meetings with the Site Reviewers appropriate personnel having knowledge of such matters. The Site Reviewers shall include in their report a statement estimating the cost of any remediation, monitoring and other compliance program, if any, necessary to cure or remediate such Environmental Violation. All of the Site Reviewers' work shall be made available to Landlord and Tenant. B. If Tenant fails diligently to pursue any of its obligations under this Section 12.02 and such failure continues for a period of thirty (30) days after Notice from Landlord, Landlord shall have the right (but no obligation), in addition to any other rights or remedies it may have pursuant to this Lease or under applicable law, to take any and all reasonable actions as Landlord shall deem necessary or advisable in order to effect such compliance, for and on behalf of Tenant and at the cost and expense of Tenant, including to enter the Premises for the purpose of making tests, obtaining samples and surveys and performing any other acts as may be reasonably necessary or desirable in the reasonable discretion of Landlord, and reimbursement to Landlord of the cost thereof shall be due and payable by Tenant as Additional Rental on demand with interest thereon at the Lease Interest Rate from the date such cost is incurred. C. If, during the Term, an Environmental Violation occurs or is found to exist at the Premises which shall impose a liability to Tenant after the expiration of the Term pursuant to this Article 12, and in the judgment of the Site Reviewers, remediation, monitoring or other compliance program relating to any such Environmental Violation has not or will not be completed as required by any applicable Environmental Laws by the expiration or earlier termination of the Term, then Tenant shall provide to Landlord, no later than thirty (30) days prior to the expiration or earlier termination of the Term, a bond, letter of credit or other security reasonably satisfactory to Landlord for 110% of the amount determined by the Site Reviewers to be necessary to complete such remediation, monitoring or other compliance program. If an Environmental Violation occurs because of the existence of Hazardous Material in, on or under the Premises in excess of any reportable quantity established under any Environmental Law, and Tenant makes all notifications and undertakes and diligently prosecutes to completion all regulatory, remedial or other actions which are required by any applicable Environmental Law by any federal, state or local governmental agency having jurisdiction over such affected Premises, then Tenant shall not be in default under this Lease so long as Tenant diligently pursues any and all such actions toward completion, and any action or non-action by Tenant does not result in a risk of the imposition of any criminal sanctions against Landlord or any of its directors, officers or employees. END OF ARTICLE 12 - 33 - ARTICLE 13 INSURANCE --------- Section 13.01 Property & Business Interruption Insurance ------------------------------------------ Tenant shall, at its own expense, commencing with the Commencement Date and continuing throughout the Term, procure and maintain with insurance companies of recognized responsibility (with a rating of no less than A-VII by A.M. Best, except that such rating shall not be applicable to those insurers providing flood and earthquake insurance under this Section) property insurance with the following minimum coverages: (i) insurance on the Premises (including contents) against loss or damage by fire, lightning and all other risks covered by the usual standard extended coverage endorsement, and with coverage in the amount of not less than one hundred percent (100%) of the replacement cost thereof, exclusive of footings and foundations; (ii) insurance against loss or damage from explosion of boilers, pressure vessels, pressure pipes and sprinklers installed in the Premises; (iii) business interruption insurance covering loss of profits and necessary continuing expenses (including Rentals payable under this Lease) for interruptions caused by any occurrences covered by the insurance referred to in subparagraphs (i) and (ii) of this Section 13.01, for a period of at least eighteen (18) months and of a type and in amounts generally carried by prudent owners of similar properties; (iv) flood insurance in an amount not less than the maximum limit available under the National Flood Insurance Program (but only if the Premises are located in a zone identified by the Federal Emergency Management Agency as a flood hazard area); (v) earthquake insurance and, if the Premises are not located in a zone identified by the Federal Emergency Management Agency as a flood hazard area, flood insurance (but only to the extent such insurance is then carried by prudent owners of similar properties); and (vi) such other property risk insurance, as may from time to time be generally carried by prudent owners of similar properties, in such amounts and against such risks as are then customary for property similar in use to the Premises. Section 13.02 Application of Proceeds ----------------------- A. All proceeds of any insurance payable on account of any casualty other than proceeds attributable to Tenant's personal property and other than the proceeds of insurance referred to in Section 13.01(iii) shall be paid to the Insurance Trustee who shall hold said proceeds in trust for the parties in accordance with the provisions of this Section 13.02; provided, however, that in the event that the aggregate amount of such proceeds with respect to any such casualty is less than Two Hundred Fifty Thousand Dollars ($250,000), such proceeds shall be paid to Tenant who shall use such proceeds for the purpose of restoration of the Premises. Insurance proceeds attributable to Tenant's personal property shall be paid directly to Tenant and shall not be considered when making calculations pursuant to the preceding sentence. The proceeds of the insurance referred to in Section 13.01(iii) shall be paid to Tenant except that any such proceeds attributable to the Rentals payable under this Lease shall - 34 - be paid to Landlord (as a credit against such Rentals) to the extent that such Rentals have not been previously paid by Tenant to Landlord. B. Provided that no default hereunder has occurred and is continuing, and provided that Tenant complies with all of the terms and conditions of this Section 13.02, all insurance proceeds received with respect to a casualty shall be applied to the restoration of the Premises. C. Tenant shall commence the restoration of the Premises not later than the date which is one hundred eighty (180) days after the date upon which the casualty occurred and thereafter prosecute the restoration with diligence and continuity. D. In the case of any casualty, prior to commencing any restoration work that will cost more than Five Hundred Thousand Dollars ($500,000) to repair, as adjusted by the GDP Deflator, Tenant, at its sole cost shall (i) obtain the services of a licensed architect to prepare any required plans and specifications for such restoration to the extent that such restoration work cannot be performed based upon previously existing plans and specifications for the Improvements; and (ii) submit a set of final plans and specifications to Landlord and the Senior Mortgagee for approval to the extent that such restoration work involves a departure from or addition to previously existing plans and specifications for the Premises (which approval may not be unreasonably withheld, conditioned, or delayed); and further, with respect to any casualty that will cost more than One Million Dollars to repair, (iii) the contractor selected by Tenant to perform the work shall be subject to Landlord's approval, which approval shall not be unreasonably withheld, conditioned or delayed, and (iv) Tenant shall carry builder's risk insurance in amounts reasonably sufficient to cover the cost of replacement of the work during the course of such construction. E. In proceeding with such restoration work, Tenant shall first expend an amount, if any, equal to the excess of the projected cost of the restoration work over the amount of all insurance proceeds paid to the Insurance Trustee. Thereafter, Tenant shall be entitled to submit to the Insurance Trustee, not more frequently than once every thirty (30) days, an invoice together with such other documentation (including mechanics lien waivers and title insurance policy endorsements obtained at Tenant's sole cost and expense) as is customarily required by lenders at such time making construction loans. Upon receipt of an invoice in proper form, the Insurance Trustee shall make a disbursement within ten (10) business days equal to ninety percent (90%) of the amount shown on the invoice, provided, however, that upon final completion of the restoration work, the Insurance Trustee shall disburse the final amount due Tenant, but only if it has received any of the following: (a) final mechanics lien waivers from all parties having rights to mechanics liens against the Premises on account of such restoration work, (b) appropriate endorsements or policies of title insurance protecting Landlord and Mortgagee against mechanics liens arising out of the restoration work, or (c) a mechanic's lien bond. In the event that the amount disbursed upon final completion of the restoration work in accordance with the previous sentence shall be less than the total insurance proceeds then held by the Insurance Trustee, such excess shall be paid to Tenant. F. In the event that Tenant shall fail to prosecute the restoration work with diligence and continuity until completion, regardless of whether an Event of Default has occurred, Landlord shall have the right to use any proceeds held by Insurance Trustee to complete such - 35 - renovation work. Tenant shall be liable for any sums incurred by Landlord to complete such restoration work in excess of the amount held and disbursed by the Insurance Trustee. G. In the event that an Event of Default has occurred, Tenant shall not have access to any insurance proceeds unless and until Tenant shall have cured such Event of Default, and until such time, Tenant shall use its own funds to prosecute the restoration work. H. Upon the expiration or termination of the Term of this Lease, all insurance proceeds received by the Insurance Trustee or Tenant and not applied to the costs of restoration shall be paid to Landlord except as otherwise provided in Article 21. Section 13.03 Waiver of Rights of Subrogation ------------------------------- Landlord and Tenant hereby waive their rights of recovery against each other, their respective officers, directors, agents and employees for loss or damage to the Premises and any resultant business interruption to the extent covered by the insurance maintained under Section 13.01. Should any such policies of insurance require an endorsement to effect such a waiver, the Tenant shall cause them to be so endorsed. Section 13.04 Operational Insurance --------------------- Tenant shall, at its own expense, commencing with the Commencement Date and continuing throughout the Term, procure and maintain operational insurance with reputable insurance companies of recognized responsibility; provided, however, that, with respect to the first One Million Dollars ($1,000,000) of coverage required by this Section such coverage shall be obtained from insurance companies authorized to do business in the United States with a rating of no less than A-VII by A.M. Best. All other coverage shall be obtained from one or more insurance companies with an A.M. Best rating of no less than B+V with respect to domestic insurance companies or of at least comparable standing if a foreign-based insurer. Operational insurance required herein shall have the following minimum coverage: (i) comprehensive or commercial general liability insurance against claims for death, bodily injury, or property damage occurring on, in or about the Premises, and automobile liability insurance on vehicles operated in conjunction with the Premises with a combined single limit of not less than One Hundred Million Dollars ($100,000,000) per occurrence. (ii) such other insurance as Tenant in its reasonable judgment deems advisable for protection against claims, liabilities and losses arising out of or connected with its operation of the Premises. Section 13.05 Blanket and Self-Insurance -------------------------- All insurance described in Sections 13.01 and 13.04 may be obtained by Tenant by endorsement or equivalent means under its blanket insurance policies, provided that such blanket policies fulfill the requirements specified herein. With respect to the insurance described in Section 13.04 the deductible or self-insured retention limits shall not exceed Two Hundred Fifty Thousand Dollars ($250,000) (to be increased on the fifth (5th) anniversary of the Commencement Date and every subsequent fifth (5th) anniversary thereof, by an amount proportionate to the percentage increase in the GDP Deflator over the preceding five (5) year - 36 - period) or such lesser amount as is then applicable to a majority of the other properties covered under Tenant's company wide insurance program. As to all insurance described in Section 13.01, deductible limits or self-insured retentions shall not exceed Fifty Thousand Dollars ($50,000) (to be increased on the fifth (5th) anniversary of the Commencement Date and every subsequent fifth (5th) anniversary thereof, by an amount proportionate to the percentage increase in the GDP Deflator over the preceding five (5) year period) or, with respect to "high hazard classification" (as such term is customarily understood in the insurance industry), such other amount as may then be required by responsible insurance companies for similar properties and risks. Section 13.06 Costs of Insurance ------------------ Insurance premiums and any costs or expenses with respect to the insurance described in this Article 13 shall be borne by Tenant. Any losses, costs, damages or expenses which fall within the deductible limits or are included within an allowed self-insurance program pursuant to Section 13.05 above shall be borne by Tenant. If Tenant shall fail to pay any premium for any such insurance, or if an Event of Default with respect to any of the provisions of this Article 13 shall occur, Landlord may pay such premium or procure the insurance coverages required by this Article 13 and all amounts paid by Landlord in accordance herewith shall become Additional Rent which is due and payable within five (5) Business Days after such expenditures are made. Section 13.07 Defense of Claims after Termination ----------------------------------- With respect to any claim relating to an accident or other occurrence within a given Year for which Tenant is obligated to indemnify Landlord under Article 8 which is not finally resolved either through litigation or settlement prior to the expiration or termination of this Lease, Tenant shall be obligated to continue to defend such accrued claims regardless of such expiration or termination. Section 13.08 Coverage and Certificates ------------------------- All insurance policies provided for under Section 13.01 or Section 13.04 above shall be carried in the name of Tenant, with Landlord and any Mortgagee on the Premises as additional insureds, and with loss payable, in the case of any policies procured under Section 13.01, in accordance with the provisions of Section 13.02. Tenant shall deliver to Landlord certificates of insurance with respect to all policies so procured under Section 13.01 or Section 13.04, including existing, additional and renewal policy certificates and, in the case of insurance about to expire, shall deliver certificates of insurance with respect to the renewal policies prior to the respective dates of expiration. All insurance policies provided for under Section 13.01 or Section 13.04 above shall, to the extent obtainable, have attached thereto an endorsement that such policy shall not be cancelled or materially changed without at least thirty (30) days' prior written Notice to Landlord, Tenant, and the holder of any Mortgage. Upon request by Landlord or any Mortgagee, the requesting party or its representatives shall be entitled to examine at Tenant's corporate headquarters all insurance policies maintained by Tenant with respect to the Premises. - 37 - Section 13.09 Alternative Insurance Coverage ------------------------------ Notwithstanding any other provisions of this Lease to the contrary, if at any time during the Term hereof Tenant is not able to obtain any one or more of the insurance coverages required pursuant to this Article 13 because the subject insurance coverage(s) are not then reasonably available in the insurance marketplace, then, Tenant's failure to so obtain such insurance coverage(s) shall not constitute an Event of Default so long as Tenant does obtain coverage as similar to that required under this Lease as is reasonably available. For purposes of this Section 13.09 the term "reasonably available" means that type of coverage then obtainable from reputable insurance companies for properties similar to the Premises and purchased by prudent owners of businesses similar to that operated by Tenant at the Premises. END OF ARTICLE 13 ARTICLE 14 DAMAGE BY FIRE OR OTHER CASUALTY -------------------------------- Section 14.01 Damage by Fire or Other Casualty -------------------------------- Subject to the provisions of Section 14.06, if during the Term the Premises shall be damaged or destroyed by fire, or any other casualty or cause whatsoever, Tenant shall forthwith proceed to repair and/or rebuild the same, free of all liens, claims and encumbrances, to the same general design and specification as existed immediately before such damage or destruction occurred, subject to such delays as may be reasonably attributable to governmental restrictions or failure to obtain materials or labor, or other causes (other than financial), whether similar or dissimilar, beyond the control of Tenant. Materials used in repair shall be as nearly like or superior in quality to original materials as may then be reasonably procured in regular channels of supply. All proceeds of insurance carried on the Premises pursuant to Article 13 hereof, payable as a result of such damage or destruction, shall be used for the purpose of such repair or rebuilding in accordance with the provisions of Article 13, and, if such insurance proceeds are not so made available by the Insurance Trustee or Landlord in accordance with the provisions of Article 13 and such failure shall continue for a period of 90 days after Notice of such failure is delivered by Tenant to Landlord, Tenant's obligation to repair and rebuild hereunder shall be suspended until such time as such insurance proceeds are so made available. If such insurance proceeds are not so made available within one (1) year thereafter, Tenant, at its option may terminate this Lease upon ninety (90) days prior Notice to Landlord. Upon any such termination, Landlord shall have all rights to any insurance proceeds. In the event Tenant is not required to repair or rebuild by the terms or conditions of this Lease, all such insurance proceeds (whether paid to the Insurance Trustee or Tenant) shall be paid to Landlord. If Tenant is required to, and does repair or rebuild, any excess insurance proceeds shall be paid to Tenant. - 38 - Section 14.02 Partial Damage by Fire or Other Casualty ---------------------------------------- In the event of any partial damage or destruction, Tenant shall continue to occupy and use the Premises to the extent that it may be practicable to do so, and Tenant shall proceed to repair and/or rebuild the Premises in the manner and at the time described in Sections 13.02 and 14.01. Section 14.03 Damage Occurring After the 10th Anniversary of ---------------------------------------------- Commencement Date - ----------------- A. In the event of a Major Casualty occurring after the tenth (10th) anniversary of the Commencement Date, Tenant shall have the right to terminate this Lease by so notifying Landlord not later than the date which is sixty (60) days after the occurrence of such Major Casualty. If Tenant elects to exercise the right described in the preceding sentence, it shall, simultaneously with its delivery of its Notice of termination, deliver to Landlord its irrevocable offer to purchase the Premises for an amount equal to the Lease Purchase Price. B. Landlord may accept or reject Tenant's irrevocable offer to purchase the Premises by sending Tenant a Notice of rejection or acceptance within thirty (30) days from the date upon which Landlord received Tenant's Notice of termination. If Landlord fails to send Tenant a Notice of rejection or acceptance within thirty (30) days of its receipt of Tenant's irrevocable offer to purchase the Premises, Landlord shall be deemed to have accepted such offer. If Landlord accepts or is deemed to have accepted Tenant's offer to purchase, the Lease shall terminate and closing of such purchase shall occur in accordance with the provisions of Article 21. Upon such termination, Tenant shall pay to Landlord all Rental due through such date of termination. Landlord shall convey the Premises to Tenant in accordance with the provisions of Section 21.01. C. If Landlord rejects Tenant's irrevocable offer to purchase pursuant to Section 14.03A, this Lease shall terminate on a Minimum Rental payment date specified by Tenant in its Notice of termination which occurs not earlier than ninety (90) days nor later than one hundred twenty (120) days after Landlord's receipt of Tenant's irrevocable offer to purchase, provided that this Lease shall not terminate unless and until Tenant shall have paid all sums due hereunder (including, without limitation, all taxes and insurance premiums) as of the actual date of termination. Upon such termination, Tenant shall vacate the Premises in accordance with the provisions of Section 3.04. Section 14.04 No Abatement of Rent Due to Casualty ------------------------------------ No damages, compensation, or claim shall be payable by Landlord for inconvenience, loss of business, or annoyance arising from any repair or restoration of any portion of the Premises or the Improvements. If this Lease is not terminated as a result of a casualty pursuant to Section 14.03, all proceeds of insurance carried pursuant to Section 13.01(iii) shall be paid to Tenant (except as otherwise provided in Section 13.02). There shall be no abatement of Rentals following any casualty and during any period of repair or reconstruction contemplated in this Article 14. - 39 - Section 14.05 Early Termination ----------------- In the event of the termination of this Lease pursuant to the provisions of Sections 14.03 or 15.04 of this Lease, the Term and the estate hereby granted shall expire as of the date of such termination in the same manner and with the same effect as if it were the date set for the normal expiration of the Term, and Rental shall be apportioned as of the date of termination. Section 14.06 Uninsurable Loss ---------------- A. If there is a casualty at or to the Premises with respect to which all or a portion of such loss is an "uninsurable loss", then Tenant's obligations under this Lease to repair and/or rebuild the Premises shall be limited to only such casualties where the cost of repair and/or rebuilding (in addition to any available insurance proceeds and exclusive of all applicable deductible limits and self-insured retentions) will not exceed forty percent (40%) of the fair market value of the Premises immediately prior to the casualty. In all other circumstances, Tenant shall have the right, but not the obligation, to terminate this Lease upon ninety (90) days Notice to Landlord and, upon such termination, Tenant shall have no further obligations to pay any Rentals or otherwise under this Lease. B. All costs incurred by Tenant in repairing and/or replacing the Premises in the event of an "uninsurable loss" shall constitute Mandated Expenditures. C. As used in this Section 14.06, the term "uninsurable loss" shall mean any casualty for which insurance coverage was not then obtainable from reputable insurance companies for properties similar to the Premises and being purchased by prudent owners of businesses similar to that operated by Tenant at the Premises. In no event shall the phrase "uninsurable loss" mean a loss which is uninsurable because such loss was caused by the intentional, willful or grossly negligent acts of Tenant, its agents, employees or contractors. D. Upon receipt of any Notice from Tenant of a proposed termination of this Lease pursuant to the provisions of Section 14.04A above, Landlord shall have the right, but not any obligation, to avoid such termination by paying to Tenant a sum equal to the amount by which the costs (in addition to any available insurance proceeds and exclusive of all applicable deductible limits and self-insured retention) to repair and/or rebuild the Premises in the event of an uninsurable loss that exceeds forty percent (40%) of the fair market value of the Premises immediately prior to the casualty. Such right in Landlord shall be exercised by Landlord giving Notice to such effect to Tenant within ten (10) days following Landlord's receipt of Tenant's Notice of Termination, and by Landlord paying the requisite sum to the Insurance Trustee within thirty (30) days thereafter, to be disbursed by the Insurance Trustee in accordance with the provisions of Section 13.02. END OF ARTICLE 14 - 40 - ARTICLE 15 CONDEMNATION ------------ Section 15.01 Notice of Condemnation and Assignment of Rights ----------------------------------------------- A. The party receiving any Notice of the kinds specified below shall promptly give the other party Notice of the receipt, contents and date of the Notice received: (i) Notice of intended condemnation; (ii) Service of any legal process relating to condemnation of any portion of the Premises or Improvements; (iii) Notice in connection with any proceedings or negotiations with respect to such a condemnation; or (iv) Notice of intent or willingness to make or negotiate a private purchase, sale, or transfer in lieu of condemnation. B. Subject to the rights of each party as set forth in this Article 15, each party hereby irrevocably assigns to Insurance Trustee any award or payment to which they may be or become entitled by reason of any taking of the Premises or any part thereof, in or by condemnation or other eminent domain proceedings pursuant to any law, general or special. Insurance Trustee shall distribute all such condemnation proceeds to the benefit of Landlord and/or Tenant in accordance with the provisions of this Article 15. Each party shall be entitled to participate at its own expense in any such proceedings. Section 15.02 Tenant's Right to Pursue a Claim -------------------------------- Notwithstanding anything herein to the contrary, Tenant shall have the right to pursue a claim with and retain any award from the condemning authority or entity for damage to or loss of Tenant's leasehold estate in the Premises as well as for any other separate damages that Tenant may suffer, provided, however, that such award or payment to Tenant is completely separate from and shall in no manner reduce the award or payment to Landlord for the value of the Premises unencumbered by the Lease. If the foregoing contingency is not met, any Tenant's award or payment shall be deemed assigned to the Insurance Trustee pursuant to Section 15.01. Section 15.03 Temporary Taking ---------------- In the event that the use of the Premises or any part thereof is taken in condemnation by any governmental authority under the power of eminent domain for a period of time, whether definite or indefinite (but less than the acquisition of a fee simple interest in perpetuity), or whether less than, equal to or greater than the unexpired portion of the Term of this Lease, this Lease shall nevertheless continue in full force and effect and Tenant shall have the right (except as hereinafter provided) to receive the entire award ("Use Award") attributable to the unexpired portion of the Term of this Lease (including any Effective Extended Term), and Landlord shall have the right to receive the entire award ("Landlord's Temporary Taking Award") attributable to the period after the expiration of the Term of this Lease (including any Effective Extended Term), and no claim or demand of any kind shall be made by Tenant against Landlord by reason - 41 - of such taking, no claim for abatement of Minimum Rental or Percentage Rental and other amounts which may become due under this Lease shall be made by reason of such taking and the rights and liabilities of the parties hereto shall be the same as if there had been no such taking. B. The Use Award, in such amount as may be eventually determined, shall be paid to and held in trust by the Insurance Trustee and shall be administered as hereinafter set forth. There shall first be deducted therefrom and paid out all legal and other expenses, reasonable in amount, which were incurred in obtaining such Use Award, except that Landlord shall pay that portion of such expenses (but not to exceed the amount of Landlord's Temporary Taking Award) that Landlord's Temporary Taking Award bears to the sum of Landlord's Temporary Taking Award and the Use Award. The Use Award shall be administered as follows: (i) If any such Use Award shall be in the form of rent recoverable for such taking and shall be payable in quarterly (or more frequent) installments, the Insurance Trustee shall pay to Landlord quarterly such installments of the Use Award on account of and to the extent of Tenant's obligations to pay Minimum Rental and Percentage Rental under this Lease; any balance remaining from each such quarterly (or more frequent) installment shall be paid by the Insurance Trustee to Tenant. The entire amount of such quarterly (or more frequent) installments of the Use Award received by the Insurance Trustee (whether paid to Landlord or Tenant) shall be included in the cash receipts of Tenant during the quarter when received by the Insurance Trustee for purposes of determining Operating Revenues. (ii) If any such Use Award is made in a lump sum or in the form of rent recoverable for such taking and is payable in installments less frequently than quarterly, the lump sum or other installment shall be divided by the number of calendar quarters included in the period for which such award has been paid, and the Insurance Trustee shall pay to Landlord such quotient quarterly on account of and to the extent of Tenant's obligation to pay Minimum Rental and Percentage Rental under this Lease; any balance remaining from each such quarterly quotient shall be paid by the Insurance Trustee to Tenant. The entire amount of such quarterly installments of the Use Award received by the Insurance Trustee (whether paid to Landlord or Tenant) shall be included in the cash receipts of Tenant during the quarter in which such quarterly quotient is distributed by the Insurance Trustee to Landlord and Tenant for purposes of determining Operating Revenues. (iii) If any such Use Award shall be made for the cost of repairs and restoration following termination of such temporary taking, then the Insurance Trustee shall apply the same to Tenant's obligation hereunder to repair and restore as herein provided. C. Any Use Award deposited with the Insurance Trustee shall be invested by the Insurance Trustee in an interest-bearing account, with interest to be added to the amount of the Use Award and distributed as part of the Use Award in accordance with the provisions of this Section 15.03. All such interest shall be included in Operating Revenues for the month in which such interest is distributed by the Insurance Trustee. Section 15.04 Total Taking ------------ If, during the Term, all or substantially all of the Premises shall be taken in or by condemnation or other eminent domain proceedings pursuant to any law, general or special, then this Lease shall terminate on the date such taking becomes effective. Tenant shall pay all Rental - 42 - and all other sums due hereunder (including, without limitation, all taxes and insurance premiums) through such date. All condemnation proceeds shall belong to and be paid to Landlord, except that to the extent such proceeds exceed the Leasehold Purchase Price as of such termination date, such excess shall first be payable to Tenant up to an amount equal to any unamortized Mandated Expenditures, with any remaining portion of such excess being payable to Landlord. Section 15.05 Substantial Taking ------------------ A. In the event of a Substantial Taking, Tenant shall have the right to terminate this Lease by so notifying Landlord not later than the date which is sixty (60) days after the occurrence of such Substantial Taking. If Tenant elects to exercise the right described in the preceding sentence, it shall, simultaneously with its delivery of its Notice of termination, deliver to Landlord its irrevocable offer to purchase the Premises for an amount equal to the Lease Purchase Price. B. Landlord may reject or accept Tenant's irrevocable offer to purchase the Premises by sending Tenant a Notice of such rejection or acceptance within thirty (30) days from the date upon which Landlord received Tenant's Notice of termination. If Landlord fails to send Tenant a Notice of rejection or acceptance within thirty (30) days of its receipt of Tenant's irrevocable offer to Purchase the Premises, Landlord shall be deemed to have accepted such offer. If Landlord accepts or is deemed to have accepted Tenant's offer to purchase, the Lease shall terminate on a Minimum Rental payment date specified by Tenant in its Notice of termination which occurs not earlier than ninety (90) days nor later than one hundred twenty (120) days after Landlord's receipt of Tenant's irrevocable offer to purchase. Upon such termination, Tenant shall pay Landlord all Rental due through such date and Landlord and the Insurance Trustee shall assign all their right, title and interest in condemnation proceeds payable and shall deliver any condemnation proceeds previously paid to, and then held by, the Insurance Trustee with respect to such Substantial Taking to Tenant and Landlord shall convey the Premises to Tenant in accordance with the provisions of Section 21.01. C. If Landlord rejects Tenant's irrevocable offer to purchase pursuant to Section 15.05A, this Lease shall terminate on a Minimum Rental payment date specified by Tenant in its Notice of termination which occurs not earlier than ninety (90) days nor later than one hundred twenty (120) days after Landlord's receipt of Tenant's irrevocable offer to purchase, provided that this Lease shall not terminate unless and until Tenant shall have paid all sums due hereunder (including, without limitation, all taxes and insurance premiums) as of the actual date of termination. Upon such termination, all condemnation proceeds shall be delivered to Landlord and Tenant shall vacate the Premises in accordance with the provisions of Section 3.04. Section 15.06 Partial Taking -------------- A. In the event of a Substantial Taking pursuant to which this Lease is not terminated pursuant to the provisions of Section 15.05, then, in the event of any condemnation of less than all or substantially all of the Premises, Tenant shall be obligated to restore the Premises not taken by the governmental authority to a condition as good as or better than the condition which - 43 - prevailed thereon and therein prior to such condemnation as is practicable under the circumstances; provided, however, that Tenant shall not be obligated to expend any sums in excess of the condemnation proceeds. In the event of an Insubstantial Taking, the Tenant shall not be obligated to replace any landscaping or facilities taken by the governmental authority but shall only be obligated to repair any damage to the Premises not taken by the governmental authority. Materials used in repair and restoration shall be as nearly like or superior in quality to the original materials as may then be reasonably procured in regular channels of supply, and construction shall be completed in a workmanlike manner free of all liens and encumbrances. All condemnation proceeds payable on account of such condemnation other than proceeds attributable to Tenant's personal property shall be paid to the Insurance Trustee who shall hold said proceeds in trust for the parties in accordance with the provisions of this Section 15.06. B. Tenant shall commence the restoration of the Premises as soon as practicable not later than the date which is one hundred eighty (180) days after the date upon which the condemnation occurred and thereafter prosecute the restoration with diligence and continuity. C. Prior to commencing any restoration work, Tenant, at its sole cost shall (i) obtain the services of a licensed architect to prepare any required plans and specifications for such restoration; and (ii) submit a set of final plans and specifications to Landlord and the Senior Mortgagee for approval (which approval may not be unreasonably withheld, conditioned or delayed), and further, with any restoration that will cost more than One Million Dollars ($1,000,000), (iii) the contractor selected by Tenant to perform the work shall be subject to Landlord's approval, which approval shall not be unreasonably withheld, conditioned, or delayed, or (iv) Tenant shall carry builder's risk insurance in amounts reasonably sufficient to cover the cost of replacement of the work during the course of such construction. D. In proceeding with such restoration work, Tenant shall first expend an amount, if any, equal to the excess of the projected cost of the restoration work over the amount of all condemnation proceeds. Thereafter, Tenant shall be entitled to submit to the Insurance Trustee, not more frequently than once every thirty (30) days, an invoice together with such other documentation (including mechanics lien waivers and title insurance policy endorsements obtained at Tenant's sole cost and expense) as is customarily required by lenders at such time making construction loans. Upon receipt of an invoice in proper form, the Insurance Trustee shall make a disbursement equal to ninety percent (90%) of the amount shown on the invoice, provided, however, that upon final completion of the restoration work, the Insurance Trustee shall disburse to Tenant the final ten percent (10%) due that has been so retained, but only if it has received either final mechanics lien waivers from all parties having rights to mechanics liens against the Premises on account of such restoration work or appropriate endorsements or policies of title insurance protecting Landlord and Mortgagee against mechanics liens arising out of the restoration work. In the event that the amount disbursed in accordance with the previous sentence shall be less than the total condemnation proceeds, such excess shall be distributed to Landlord and Tenant as hereinafter provided in Section 15.06F and Section 15.06G. - 44 - E. Any award attributable to personal property owned by Tenant that is not attributable to FF&E shall be paid to Tenant. Any award attributable to FF&E shall be paid to Tenant and applied by Tenant for the purpose of replacing such FF&E in the event and to the extent that the Premises remaining after such condemnation requires such replacement FF&E to be fully operational. F. In the event of a condemnation that is an Insubstantial Taking, the condemnation proceeds remaining after application thereof to the cost of the restoration work shall be paid to Landlord and Tenant in the following proportions: Landlord shall receive that portion of said remaining proceeds equal to a fraction whose numerator is the number of years in the Term of this Lease (including all Effective Extended Terms as of the date Tenant receives notice of such condemnation) that have elapsed as of the effective date of such condemnation and whose denominator is the number of years in the Term of this Lease (including all Effective Extended Terms as of the date Tenant receives notice of such condemnation) and Tenant shall receive the balance of such remaining proceeds. Thus, for example, if such condemnation occurred on the last day of the 21st year of the Term and the only Effective Extended Term was the First Extended Term, Landlord would receive 21/25th of such remaining condemnation proceeds and Tenant would receive 4/25th of such remaining condemnation proceeds. G. In the event of a condemnation that is a Substantial Taking and in the event that this Lease is not terminated pursuant to Section 15.05, the condemnation proceeds remaining after application thereof to the cost of the restoration work shall be allocated between Landlord and Tenant in proportion to the value of their respective interests in the Premises; provided, however, that in no event shall Landlord receive a portion of such remaining proceeds that is less than the Leasehold Purchase Price multiplied by the Partial Condemnation Reduction Percentage. H. In the event of a condemnation that is an Insubstantial Taking, there shall be no reduction in or abatement of the Minimum Rental or Percentage Rental thereafter payable by Tenant. In the event of a condemnation that is a Substantial Taking and in the event that this Lease is not terminated pursuant to Section 15.05, there shall be a reduction in the Minimum Rental payable by Tenant effective as of the date of the Substantial Taking in an amount equal to nine percent (9%) of the lesser of (i) the portion of the condemnation award so distributed to Landlord or (ii) eleven and one tenths (11.1) multiplied by the annual Minimum Rental multiplied by the Partial Condemnation Reduction Percentage and there shall be a reduction in the Alternative Rental or Expansion Rental (if then applicable) in an amount equal to the Alternative Rental or Expansion Rental payable immediately prior to such condemnation multiplied by the Partial Condemnation Reduction Percentage. I. In the event that Tenant shall fail to prosecute the restoration work with diligence and continuity until completion, regardless of whether an Event of Default has occurred, Landlord shall have the right to use any proceeds held by Insurance Trustee to complete such restoration work. Tenant shall be liable for any sums incurred by Landlord to complete such restoration work in excess of the amount held and disbursed by the Insurance Trustee. - 45 - J. In the event that an Event of Default has occurred Tenant shall not have access to any condemnation proceeds unless and until Tenant shall have cured such Event of Default, and until such time, Tenant shall use its own funds to prosecute the restoration work. END OF ARTICLE 15 ARTICLE 16 ASSIGNMENT, SALE AND SUBLETTING ------------------------------- Section 16.01 Sale or Assignment by Landlord ------------------------------ Landlord shall have the right to assign or transfer its interest in this Lease in connection with a Sale of the Premises subject to this Lease which shall remain in full force and effect, provided Tenant's ability to obtain and maintain the licenses and permits necessary for the operation of its retirement and health care facilities is not materially and adversely affected by any proposed sale or assignment of Landlord's interest in the Premises. Furthermore, Landlord shall have the right to assign or transfer without restriction its interest in this Lease as collateral security with respect to any financing secured by an interest in the Premises. Upon any Sale of the Premises, Landlord shall assign this Lease to the purchaser and, concurrently with the finalization thereof, the purchaser shall, by an appropriate written instrument, assume (subject to the provisions of Section 24.21) all of Landlord's obligations hereunder. Any attempted sale or assignment in violation of the provisions of this Section 16.01 shall be void and without effect. Within thirty (30) days after Landlord sends Notice to Tenant advising Tenant of the name, identity and address of any proposed assignee or transferee and requesting a determination as to whether the proposed assignment or transfer would violate the requirements of the first sentence of this Section 16.01, Tenant shall advise Landlord by Notice to Landlord whether or not such proposed assignment or transfer would violate such requirements and, if so, setting forth in reasonable detail the basis for such violation (which Notice shall be binding upon Tenant), and if Tenant fails to send such Notice to Landlord prior to the expiration of such thirty (30) day period, such assignment or transfer shall be deemed to comply with the requirements of the first sentence of this Section 16.01. Section 16.02 Assignment by Tenant -------------------- Tenant shall have the right to transfer or assign its interest in this Lease without Landlord's consent provided that (w) the transferee or assignee is a corporation organized under the laws of any state in the United States and in good standing and authorized to do business in the state in which the Premises is located, (x) such transferee or assignee assumes this Lease by an appropriate writing, (y) Tenant shall continue to remain liable under all of the provisions of this Lease, and (z) the Guaranty of Tenant's performance hereunder shall not be terminated or altered by any such assignment. - 46 - Section 16.03 Tenant's Right to Sublease -------------------------- Tenant may sublease space or grant concessions or licenses at the Premises so long as the terms of any such subleases, concessions or licenses do not exceed the Term and shall expire upon any termination of this Lease. END OF ARTICLE 16 ARTICLE 17 HOLDING OVER ------------ Section 17.01 Holdover -------- Should Tenant continue to hold the Premises after the termination of this Lease, whether the termination occurs by lapse of time or otherwise, such holding over, unless otherwise agreed to by Landlord in writing, shall constitute and be construed as a tenancy at sufferance at a daily Rental equal to 1/91st of an amount equal to two hundred percent (200%) of the quarterly Minimum Rental last in effect and subject to all of the other obligations imposed on Tenant hereunder, but the foregoing shall not constitute a consent by Landlord to such holding over and shall not prevent Landlord from exercising any of its remedies under this Lease or applicable law by reason of such holding over. END OF ARTICLE 17 ARTICLE 18 ESTOPPEL CERTIFICATES --------------------- Section 18.01 Estoppel Certificates --------------------- Tenant agrees to furnish periodically, within ten (10) days after written request therefor by Landlord, or any actual or prospective Mortgagee covering the Premises, or any interest of Landlord therein or any actual or prospective purchaser of Landlord's interest, a certificate signed by Tenant (which may require a true and correct copy of this Lease and any and all amendments hereto to be attached) certifying (to the extent same is true) that this Lease is in full force and effect and unmodified; that the Term has commenced and the full Rental is then accruing hereunder; that, subject to the provisions of Section 5.07, no Rental under this Lease has been paid more than ninety (90) days in advance of its due date; that the address for Notices to be sent to Tenant is as set forth in this Lease (or has been changed by Notice duly given and is as set forth in the certificate); that Tenant has no knowledge of any default by Landlord then existing under this Lease; and such other matters as may be reasonably requested by Landlord or any Mortgagee, prospective Mortgagee or prospective purchaser. If Tenant is unable to so certify as to one or more of the foregoing items, Tenant shall specify its reason therefor in writing. Any such certificate may be relied upon by any prospective purchaser, ground lessor, Mortgagee, or any beneficiary under any deed of trust on the Improvements or the Land or any - 47 - part thereof. Landlord agrees to furnish periodically, within ten (10) days after written request therefor by Tenant, a certificate signed by Landlord containing substantially the same information as described above. END OF ARTICLE 18 ARTICLE 19 LANDLORD FINANCING ------------------ Section 19.01 Right to Finance ---------------- Landlord shall have the right, at any time, and from time to time, to subject its interest in the Premises to one or more Mortgages without Tenant's consent. Section 19.02 Priority -------- A. Landlord agrees that this Lease and any extensions, renewals, replacements or modifications thereto and all right and interest of Tenant in and to the Premises shall be superior to any and all Mortgages now or hereafter granted by Landlord. B. As more particularly described herein, Tenant has no right to cancel, rescind or terminate this Lease except as expressly provided in the particular provisions specified herein. Without limiting the foregoing or the effect of Tenant's waivers set forth herein or any other provisions herein that negates Tenant's right to cancel, terminate or rescind this Lease or any of its obligations hereunder, if any circumstances nevertheless as a matter of law or otherwise would give Tenant the right, immediately or after lapse of a period of time, to cancel, rescind or terminate this Lease, or to claim a partial or total eviction, Tenant shall not exercise such right (a) until it has given written notice of such circumstance to the Senior Mortgagee and (b) until a reasonable period for remedying such circumstance shall have elapsed following such written notice by Tenant to the Senior Mortgagee (which reasonable period, if required by the Senior Mortgagee, shall in no event be less than the greater of (i) the period to which Landlord would be entitled (under this Lease or otherwise), after similar notice, to effect such remedy, plus ninety (90) days, and (ii) the period of time needed by the Senior Mortgagee to obtain possession of the Premises by foreclosure or otherwise), plus ninety (90) days, provided that the Senior Mortgagee shall be entitled to the additional time period referred to in the preceding clause (i) only if the Senior Mortgagee shall with due diligence (a) give Tenant notice of intention to remedy such circumstance and (b) commence and continue to remedy such circumstance to the extent it is reasonably able to do so without possession or seek possession, directly or through a receiver, and upon obtaining possession of the Premises, commence and continue to remedy such circumstance. C. If at any time there shall occur a foreclosure action with respect to the interest of Landlord under this Lease, or a deed in lieu of foreclosure, or any similar action or proceeding, then (i) this Lease shall not terminate, and (ii) Tenant shall attorn to and recognize the purchaser at such foreclosure sale (whether such person is the Mortgagee or another person or entity) or - 48 - the grantee of a deed in lieu of foreclosure as Tenant's landlord under this Lease, except that neither such purchaser or grantee, nor anyone claiming by, through or under any such person or grantee, shall be: (x) liable for any action or omission of Landlord (or its predecessors in interest); (y) subject to any offsets or defenses which Tenant may have against Landlord (or its predecessors in interest); or (z) bound by any payment of Rental, other than the Special Rental Advance if any, which Tenant might have made to Landlord (or its predecessors in interest) for more than one Fiscal Quarter in advance of the date the same was due under this Lease; but the foregoing shall not relieve any such purchaser or grantee, or anyone claiming by, through or under any such purchaser or grantee from performing all obligations of Landlord under this Lease after it acquires title to the Premises. Section 19.03 Mortgagee Amendments -------------------- If at any time, any prospective Mortgagee requests any change or modification to this Lease as a condition of granting a Mortgage to Landlord, Tenant shall consent to such change or modification provided that (i) Landlord bears the cost of preparing all documentation required to effect such change or modification; (ii) such change or modification does not materially and adversely increase Tenant's cost of operating the Premises or performing its obligations under this Lease; and (iii) such change does not materially and adversely affect Tenant's rights hereunder. Examples of modifications to which Tenant shall consent include, without limitation, obligations to give copies of notices and other documents to Mortgagees where Tenant has previously agreed to give same to Landlord, to obtain a Mortgagee's consent or approval where Tenant has previously agreed to obtain Landlord's consent or approval, to allow a Mortgagee to act for Landlord in the event that Landlord fails to exercise a right granted to Landlord hereunder, and provisions which govern the relationship between Landlord and Mortgagee. END OF ARTICLE 19 ARTICLE 20 DEFAULT BY TENANT ----------------- Section 20.01 Events of Default ----------------- The occurrence of any one or more of the following events shall constitute an Event of Default by Tenant under this Lease: A. Tenant shall fail to pay any Rental or other sums payable by Tenant hereunder as and when such Rental or other sums become due and payable and such failure shall continue for more than five (5) Business Days after Notice; - 49 - B. Tenant shall fail to perform or observe any covenant or obligation hereunder (other than the financial obligations referred to in subparagraph A above) and such failure shall continue for more than thirty (30) days after Notice; or, if such failure cannot be cured with reasonable diligence within such thirty (30) day period, if Tenant does not commence to correct same within said thirty (30) day period and thereafter prosecute the correction of same with reasonable diligence and continuity to completion; C. Any petition is filed by or against Tenant or Guarantor under any section or chapter of the present or any future Federal Bankruptcy Code or under any similar law or statute of the United States or any state thereof (which, in the case of an involuntary proceeding, is not permanently discharged, dismissed, stayed, or vacated, as the case may be, within ninety (90) days of its filing), or if any order for relief shall be entered against Tenant in proceedings filed under any section or chapter of the present or any future Federal Bankruptcy Code or under any similar law or statute of the United States or any state thereof; D. A receiver, trustee or liquidator of Tenant or Guarantor or of all or substantially all of the assets of Tenant or Guarantor shall be appointed. E. An Event of Default shall have occurred under any lease that is a Related Landlord Lease as of the date of such Event of Default thereunder. IN THIS REGARD, IT IS SPECIFICALLY UNDERSTOOD AND AGREED THAT THE PRECEDING SENTENCE IS A MATERIAL PART OF THE CONSIDERATION DUE LANDLORD FROM TENANT WITH RESPECT TO THIS LEASE AND THAT LANDLORD WOULD NOT HAVE ENTERED INTO THIS LEASE WITH TENANT WITHOUT INCLUSION IN THIS LEASE OF THE PRECEDING SENTENCE. F. A third party lender to either Guarantor or Tenant accelerates any indebtedness of Guarantor or Tenant, the amount of which then equals or exceeds Fifty Million Dollars ($50,000,000), and Guarantor or Tenant fails to fully satisfy such accelerated indebtedness within five (5) business days next following the date such indebtedness was accelerated. Section 20.02 Landlord's Rights Upon an Event of Default ------------------------------------------ A. If an Event of Default occurs, then, subject to the provisions of Section 20.02B and C, Landlord may commence doing any one or more of the following provided that such commencement is prior to the date that Tenant or Guarantor cures such default: (1) Terminate this Lease upon ten (10) days Notice to Tenant, in which event Tenant shall immediately surrender the Premises to Landlord and Tenant shall be liable to Landlord for all Surviving Obligations and to the extent provided in Section 17.01 and to the extent hereinafter provided in this Section 20.02A. If Tenant fails to do so, Landlord may, without Notice and without prejudice to any other remedy Landlord may have, enter upon and take possession of the Premises and expel or remove Tenant and its effects without being liable to prosecution or any claim for damages therefor. Tenant shall indemnify Landlord for all loss and damage which Landlord may suffer by reason of such Termination, whether through inability to relet the Premises or otherwise, including any loss of Rental for the remainder of the Term. In connection with Landlord's exercise of the remedy described in this Subparagraph, Landlord shall have the right to seize and take possession of all of Tenant's FF&E located on - 50 - the Premises and either use same in connection with operating the property or dispose of same as Landlord sees fit to do. To the greatest extent permitted by law, Tenant hereby fully, finally and forever waives any and all protections provided by applicable law against Landlord's right of distraint. (2) Enter upon and take possession of the Premises as Tenant's agent, with the right but not the obligation of terminating this Lease and without being liable to prosecution or any claim for damages therefor, and Landlord may relet the Premises either in its own name or as Tenant's agent and in either event receive the rent therefor, in any of which events Tenant shall pay to Landlord on demand (i) any and all costs of re-leasing, renovating, repairing, and altering the Premises (including but not limited to advertising costs, commissions, finders fees, legal fees and other costs) for a new tenant or tenants and (ii) any deficiency that may arise by reason of such reletting from the net income from the Premises that Landlord would have received if there had not been a default by Tenant. In addition, to the extent the Premises are not relet, Tenant shall continue to be obligated to satisfy all of its obligations under this Lease. In connection with Landlord's exercise of the remedy described in this Subparagraph, Landlord shall have the right to seize and take possession of all of Tenant's FF&E located on the Premises and either use same in connection with operating the property or dispose of same as Landlord sees fit to do. To the greatest extent permitted by law, Tenant hereby fully, finally and forever waives any and all protections provided by applicable law against Landlord's right of distraint. (3) Do whatever Tenant is obligated to do under this Lease and enter the Premises without being liable to prosecution or any claim for damages therefor to accomplish this purpose. Tenant shall reimburse Landlord, as Additional Rental, immediately upon demand for any expenses which Landlord incurs in thus effecting compliance with this Lease on Tenant's behalf, together with interest thereon from the date of such expenditure until paid at the Lease Interest Rate. (4) Bring a summary proceeding/action for ejectment in order to recover possession of the Premises. (5) Landlord hereby reserves the right to institute successive legal actions to collect any damages payable to Landlord hereunder, it being intended that a suit for damages shall not bar any subsequent suit for damages that have subsequently accrued. (6) Accelerate the Minimum Rentals due under this Lease. The discount rate to be used in computing the amount of Minimum Rental due hereunder shall be equal to the effective annual yield prevailing on the date the Event of Default occurred with respect to United States treasury obligations having a maturity date that is the same or nearest to the date on which this Lease would have expired if no Event of Default occurred. B. If an Event of Default has occurred under Section 20.01A, or if an Event of Default has occurred under Section 20.01E that consists of the failure of Tenant to pay any Rental or other sums payable to the Landlord under a Related Landlord Lease as and when such Rental or other sums become due and payable, Landlord, prior and as a condition precedent to exercising any rights pursuant to Subsections 20.02(A)(1), (2), (4) or (6) above, shall give Guarantor Notice of the Event of Default and afford Guarantor a period of five (5) Business Days after Guarantor receives Notice pursuant to this Section 20.02B within which to cure such Event of Default. If Guarantor cures such Event of Default, Landlord shall have no further rights under this Section 20.02 with respect to the particular Event of Default in question. - 51 - C. If an Event of Default has occurred under Section 20.01B, or under Section 20.01B of any Related Landlord Lease Landlord, prior and as a condition precedent to exercising any rights pursuant to Subsections 20.02A(1), (2), (4) or (6) above, shall give Guarantor notice of such Event of Default and Guarantor shall have thirty (30) days within which either to cure such Event of Default; or, if such Event of Default cannot be cured with reasonable diligence within such thirty (30) day period, to commence to correct same within said thirty (30) day period and thereafter prosecute the correction of same with reasonable diligence and continuity to completion. If and so long as Guarantor commences and continues to take action to cure such Event of Default as required pursuant to the preceding sentence and cures such Event of Default, Landlord shall have no further rights under this Section 20.02 with respect to the particular Event of Default in question. D. If an Event of Default has occurred under Section 20.01A, or if an Event of Default has occurred under Section 20.01E that consists of the failure of Tenant to pay any Rental or other sums payable to the Landlord under a Related Landlord Lease as and when such Rental or other sums become due and payable, then, notwithstanding anything in applicable law to the contrary, Landlord shall have no obligation whatsoever to mitigate any of its damages. If any other Event of Default shall have occurred, Landlord shall be obligated to mitigate its damages only to the extent it is required to do so under applicable law. Section 20.03 Implied Waiver -------------- A. No act or thing done by Landlord or its agents during the Term shall constitute an acceptance of an attempted surrender of the Premises, and no agreement to accept a surrender of the Premises shall be valid unless made in writing and signed by Landlord. No re-entry or taking possession of the Premises by Landlord pursuant to Section 20.02(B) or otherwise shall constitute an election by Landlord to terminate this Lease, unless a written Notice of such intention is given to Tenant. No waiver by Landlord of any breach of this Lease shall constitute a waiver of any other violation or breach of any of the terms hereof. B. No provision of this Lease shall be deemed to have been waived by Landlord or Tenant unless such waiver is in writing and signed by such party. The rights granted to Landlord and Tenant in this Lease shall be cumulative of every other right or remedy which Landlord or Tenant may otherwise have at law or in equity or by statute, and the exercise of one or more rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of other rights or remedies. Section 20.04 Injunctive Relief ----------------- Landlord shall be entitled to obtain injunctive relief in case of the violation, or attempted or threatened violation, of any of the provisions hereof, or to a decree compelling performance of any of the provisions hereof, to the extent that any such relief is provided by a court of equity. END OF ARTICLE 20 - 52 - ARTICLE 21 PROVISIONS APPLICABLE TO PURCHASE --------------------------------- BY TENANT OF THE PREMISES ------------------------- Section 21.01 Procedures Upon Purchase ------------------------ A. If Tenant is to acquire the Premises pursuant to Section 1.03, Section 14.03 or Section 15.05 of this Lease, the Premises shall be transferred "As Is" on the date of transfer and otherwise as provided in Section 1.01 hereof. Landlord shall convey title to the Premises to Tenant in the same condition of title (including all restrictions, limitations, covenants and easements of record and all encroachments) that existed as of the Commencement Date, subject, however, to (i) the lien of real estate taxes, water and sewer charges and other governmental charges that are not then due and payable, (ii) all restrictions, limitations, covenants, easements and encroachments that were created after the Commencement Date other than those created by Landlord without the written consent of Tenant, and (iii) all Legal Requirements, but free of the following items ("Landlord Obligations"): (x) the lien of any security interest created by any Mortgage on Landlord's interest, (y) the lien of any judgment, tax assessment or other obligation incurred by Landlord that is not the responsibility of Tenant under this Lease, and (z) any liens created on and after the Commencement Date which have been created by or resulted solely from acts of Landlord undertaken without the written consent of Tenant. Landlord shall pay off and discharge all Landlord Obligations at closing of Tenant's purchase of the Premises, but Landlord shall have the right to apply the purchase price proceeds for the purpose of discharging such Landlord Obligations. B. If Landlord accepts Tenant's irrevocable offer pursuant to Section 1.03, Section 14.03 or Section 15.05 to purchase the Premises, closing of such purchase shall be held on the date (the "Purchase Closing Date") specified by Tenant in its notice of Termination pursuant to Section 1.03, Section 14.03 or Section 15.05 which occurs not earlier than ninety (90) days nor later than one hundred twenty (120) days after Landlord's receipt of Tenant's irrevocable offer to purchase. Closing of such purchase shall be conducted by an escrow agent (the "Closing Escrow Agent") which shall be a national title insurance company designated by Tenant that meets with the reasonable satisfaction of Landlord. C. On the Purchase Closing Date, Landlord shall deliver to the Closing Escrow Agent a deed ("Landlord's Deed") conveying the Premises to Tenant or Tenant's designee and containing no warranties other than a warranty that the Premises are not subject to (i) the lien of any security interest created by any Mortgage executed by Landlord on Landlord's interest, (ii) the lien of any judgment, tax assessment or other obligation incurred by Landlord that is not the responsibility of Tenant under this Lease and (iii) any liens created on or after the Commencement Date which have been created by or resulted solely from acts of Landlord undertaken without the consent of Tenant. D. On the Purchase Closing Date, Landlord shall deliver to the Closing Escrow Agent a written instrument (the "Assignment"), without warranty of title, assigning and transferring to Tenant or Tenant's designee (i) Landlord's interest in any FF&E leased by - 53 - Landlord to Tenant hereunder and any licenses or permits relating to the Premises and (ii) Landlord's interest in any insurance proceeds payable with respect to any casualty that has previously occurred to the Premises (if any) (which assignment of insurance proceeds shall be consented to by the Insurance Trustee). If and to the extent that there are any insurance proceeds previously paid to Landlord or the Insurance Trustee which have not been applied for the purpose of repair or restoration and are then held by Landlord or the Insurance Trustee, Landlord and the Insurance Trustee, as the case may be, shall deliver such insurance proceeds (the "Escrowed Insurance Proceeds") to the Closing Escrow Agent. The Tenant shall deliver to the Closing Escrow Agent current immediately available funds in the amount of the purchase price and any costs payable by Tenant hereunder that are set forth in Section 21.01H ("Tenant's Funds"). Closing Agent shall then proceed to consummate the Closing in accordance with local custom and practice. E. In the event that Tenant fails to perform its obligations under this Section 21.01 on the Purchase Closing Date for any reason other than the default of Landlord, the Tenant's Notice of Termination pursuant to Section 1.03, Section 14.03 or Section 15.05 shall be rescinded and deemed null and void, the Lease shall continue in full force and effect and neither Tenant nor Landlord shall have any liability or obligation to the other by reason of such failure to consummate settlement of such purchase except that Tenant shall pay to Landlord, as fixed, agreed and liquidated damages for Tenant's default, the sum of Fifty Thousand Dollars ($50,000). F. In the event that Landlord fails to perform its obligations under this Section 21.01 on the Purchase Closing Date for any reason other than the default of Tenant and an order of specific performance is not obtained by Tenant and complied with, the Lease shall terminate as of the Purchase Closing Date and neither Tenant nor Landlord shall have any liability or obligation to the other by reason of such failure to consummate settlement of such purchase except that Landlord shall pay to Tenant, as fixed, agreed and liquidated damages for Landlord's default, the sum of Fifty Thousand Dollars ($50,000). G. All costs and expenses in connection with any such purchase, including title insurance, transfer taxes, recording costs and the reasonable attorney's fees of Landlord and any Mortgagee, shall be paid by Tenant. H. Percentage Rental shall be prorated as of the date of such purchase based upon the number of days in the Fiscal Year in which such purchase occurs that precede the date of such purchase by prorating the dollar figure set forth in Section 5.01(ii) so that such dollar figure is multiplied by a fraction whose numerator is the number of days in such Fiscal Year that precede the date of such purchase and whose denominator is three hundred sixty five (365). END OF ARTICLE 21 - 54 - ARTICLE 22 NOTICES ------- Section 22.01 Notices ------- A. Any Notice or demand, consent, approval or disapproval, or statement (collectively called "Notice" or "Notices") required or permitted to be given by the terms and provisions of this Lease, or by any law or governmental regulation, shall be in writing (unless otherwise specified herein) and unless otherwise required by such law or regulation, shall be personally delivered with receipt acknowledged in writing or sent by United States mail postage prepaid as registered or certified mail, return receipt requested or by courier service guarantying overnight delivery. Any Notice shall be addressed to Landlord or Tenant, as applicable, at its address specified below as said address may be changed from time to time as hereinafter provided. By giving the other party at least ten (10) days' prior written Notice, either party may designate a different address or addresses for Notices. Landlord may elect to require Tenant to send a copy of any Notice of Landlord's default to Landlord's Mortgagee(s) simultaneously with the sending of Notice to Landlord, provided that Landlord shall have supplied to Tenant the name and address of such Mortgagee(s). B. Any Notice shall be deemed given as of the date of delivery as indicated by affidavit in case of personal delivery or by the return receipt in the case of mailing or by the confirmation of the courier service making delivery; and in the event of failure to deliver by reason of changed address of which no Notice was given or refusal to accept delivery, as of the date of such failure as indicated by affidavit or on the return receipt or by Notice of the postal service or by the confirmation of the courier service making delivery, as the case may be. C. A copy of each Notice given pursuant to Section 22.01A above shall also be sent to the addressee by FAX. D. Notices shall be sent as follows: To Tenant: Marriott Senior Living Services, Inc. 10400 Fernwood Road Bethesda, Maryland 20817 Attn: President FAX No: (301) 380-8957 - 55 - With a copy to: Marriott International, Inc. 10400 Fernwood Road Bethesda, Maryland 20817 Attn: Chief Financial Officer FAX No: (301) 380-3969 and, Marriott International, Inc. 10400 Fernwood Road Bethesda, Maryland 20817 Attn: General Counsel FAX No: (301) 380-6727 To Landlord: Host Marriott, Inc. 10400 Fernwood Road Bethesda, Maryland 20817 Attn: Chief Financial Officer FAX No: (301) 380-5067 and, Host Marriott, Inc. 10400 Fernwood Road Bethesda, Maryland 20817 Attn: General Counsel FAX No: (301) 380-6727 and, The Senior Mortgagee (as identified by Notice from Landlord to Tenant) END OF ARTICLE 22 - 56 - ARTICLE 23 MEMORANDUM OF LEASE ------------------- Section 23.01 Memorandum of Lease ------------------- A. Landlord and Tenant shall execute, acknowledge and deliver a memorandum of this Lease (a "Lease Memorandum") in recordable form setting forth the date of this Lease, the names of the parties hereto, the Commencement Date, the Expiration Date, a description of the Land and the Premises, Tenant's rights to renew this Lease, Landlord's disclaimer of liability for mechanic's liens attributable to Tenant's use, occupancy and possession of the Premises, and such other provisions of this Lease as either party may designate. Said Lease Memorandum shall not in any circumstances be deemed to modify or to change any of the provisions of this Lease. B. Tenant shall after the expiration or termination of the Term, at the request of Landlord, execute, acknowledge and deliver to Landlord a memorandum in recordable form evidencing the expiration or Termination of this Lease. END OF ARTICLE 23 ARTICLE 24 MISCELLANEOUS ------------- Section 24.01 Partial Invalidity ------------------ In the event that any portion of this Lease shall be declared invalid by order, decree or judgment of a court, or governmental agency having jurisdiction, this Lease shall be construed as if such portion had not been inserted herein, except when such construction would operate as an undue hardship on Tenant or Landlord, constitute a substantial deviation from the general intent and purpose of said parties as reflected in this Lease, or deny either Tenant or Landlord to a material extent a right or benefit pursuant to this Lease as originally written, in which event this Lease in pertinent part shall be reformed so as to place both Landlord and Tenant to the greatest extent permitted by law in the same relative positions as they would have enjoyed under the Lease as originally written. Section 24.02 Headings -------- The article and section headings and the Table of Contents contained in this Lease are for convenience only and shall not enlarge or limit the scope or meaning of the various and several provisions hereof. - 57 - Section 24.03 Binding Effect -------------- All agreements and covenants herein contained shall be binding upon the respective heirs, personal representatives, successors, and, to the extent permitted under this Lease, assigns of the parties hereto. Section 24.04 Representations --------------- Neither Landlord nor Landlord's agents have made any representations or promises with respect to the Premises except as herein expressly set forth and all reliance with respect to any representations or promises is based solely on those contained herein. Section 24.05 Amendments ---------- No amendment or modification of this Lease shall be binding or valid unless expressed in a writing executed by both parties hereto. Section 24.06 Brokers ------- Neither party has engaged any agents or brokers with respect to the negotiation and execution of this Lease and each party shall indemnify and defend the other with respect to any claim by an agent or broker claiming through the indemnifying party against the indemnified party. Section 24.07 Authority to Execute -------------------- A. Tenant represents and warrants that Tenant has the full right and authority to enter into this Lease, and that all persons signing on behalf of the Tenant were authorized to do so by any and all necessary or appropriate corporate actions. B. Landlord represents and warrants that Landlord has the full right and authority to enter into this Lease, and that all persons signing on behalf of Landlord were authorized to do so by any and all necessary or appropriate corporate or partnership actions. Section 24.08 Applicable Law -------------- This Lease shall be governed by and construed under the laws of the state within which the Land is located. Section 24.09 Construction ------------ All exhibits referred to in this Lease are by this reference incorporated fully herein. The term "this Lease" shall be considered to include all such exhibits. - 58 - Section 24.10 Impossibility of Performance ---------------------------- In the event that any covenant or obligation of Tenant under this Lease (other than a covenant or obligation to pay Rental or other sums payable by Tenant hereunder) as applied to a particular circumstance cannot be fully performed by any person or entity that had funds available for the performance of such covenants or obligations under this Lease, then Tenant shall only be obligated to perform such covenant or obligation as applied to such circumstance to the extent that such covenant or obligation can be so performed. Section 24.11 Time of Essence --------------- Time is of the essence with respect to the rights and obligations of Landlord and Tenant under this Lease. Section 24.12 Attorney's Fees --------------- Except as otherwise provided herein, in any action or proceeding (including without limitation appellate proceedings) brought by either party against the other under this Lease, the prevailing party shall be entitled to recover from the other party reasonable attorneys' fees, investigation costs, and other reasonable legal expenses and court costs incurred by such party in such action or proceeding. Section 24.13 No Merger --------- There shall be no merger of this Lease or of the leasehold estate hereby created with the fee estate in the Premises by reason of the fact that the same person acquires or holds, directly or indirectly, this Lease or the leasehold estate hereby created or any interest herein or in such leasehold estate as well as the fee estate in the Premises or any interest in such fee estate. Section 24.14 Landlord's Right to Enter ------------------------- Landlord and its agents and designees may enter upon and examine the Premises at reasonable times, accompanied by a representative of Tenant that Tenant shall make available to Landlord, and show the Premises to prospective purchasers, partners, investors, mortgagees or lessees as long as such examination or showing shall not unreasonably interfere with the business operations of Tenant on the Premises. Section 24.15 Corporate Reorganization of Tenant ---------------------------------- In the event of the merger of Tenant into another corporation where Tenant is not the surviving corporation or the consolidation of Tenant with one or more other corporations where Tenant is not the surviving corporation, or the sale or other disposition of all or substantially all of the assets of Tenant to one or more other entities, the surviving entity or transferee of assets, as the case may be, shall be deemed to have assumed all obligations, covenants and responsibilities of Tenant under this Lease. Promptly after such corporate reorganization, such entity shall deliver to Landlord an instrument in recordable form reasonably acceptable to counsel for both parties, evidencing such assumption. - 59 - Section 24.16 No Waiver --------- The failure of either party to insist upon a strict performance of any of the terms or provisions of this Lease or to exercise any option, right or remedy herein contained shall not be construed as a waiver or as a relinquishment for the future of such term, provision, option, right or remedy, but the same shall continue and remain in full force and effect. No waiver by either party of any term or provision hereof shall be deemed to have been made unless expressed in writing and signed by such party. Section 24.17 Confidentiality --------------- The parties hereby agree that the matters set forth in this Lease are strictly confidential and each party will make every effort to ensure that such information is not disclosed to any outside persons or entities (including the press) without the consent of the other party, except as required by ERISA or any other Legal Requirement reporting and disclosure rules or otherwise specifically provided herein. For purposes of the preceding sentence, the words "outside persons or entities" do not include the parties' attorneys, accountants, consultants, shareholders, lenders, partners, investors, or any prospective lenders, partners and investors. No references to Tenant or to any Affiliate will be made in any prospectus, private placement memorandum, offering circular or offering documentation related thereto (collectively referred to as the "Prospectus"), issued by Landlord or one of its affiliates, which is designated to interest potential investors in the Premises, unless Tenant has previously received a copy of all such references. However, regardless of whether Tenant does or does not so receive a copy of all such references, neither Tenant nor any Affiliate will be deemed a sponsor of the offering described in the Prospectus, nor will it have any responsibility for the Prospectus, and the Prospectus will so state. Landlord shall indemnify, defend and hold Tenant harmless from and against all loss, costs, liability and damage (including reasonable attorneys' fees and expenses, and the cost of litigation) arising out of any Prospectus or the offering described therein; and this obligation of Landlord shall survive Termination of this Lease. Section 24.18 Gender and Number ----------------- Words of any gender used in the Lease shall be held to include any other gender, and words in the singular shall be held to include the plural and vice ---- versa, when the sense requires and the following words and phrases shall have - ----- the following meanings: (i) "including" shall mean "including without limitation"; (ii) "provisions" shall mean "provisions, terms, agreements, covenants and/or conditions"; (iii) "lien" shall mean "lien, charge, encumbrance, title retention agreement, pledge, security interest, mortgage and/or deed of trust"; (iv) "obligation" shall mean "obligation, duty, agreement, liability, covenant and/or condition"; (v) "any of the Premises" shall mean "the Premises or any part thereof or interest therein"; (vi) "any of the Land" shall mean "the Land or any part thereof or interest therein"; (vii) "any of the Improvements" shall mean "the Improvements or any part thereof or interest therein"; and (viii) "any of the personal property" shall mean "the personal property or any part thereof or interest therein." - 60 - Section 24.19 Survival -------- All claims and liabilities of either party existing or arising prior to the expiration or earlier termination of the Lease, unless otherwise specifically provided herein, and all Surviving Obligations shall survive such expiration or earlier Termination. Section 24.20 Acceptance of Surrender ----------------------- No surrender to Landlord of this Lease or of the Premises or of any part thereof or of any interest therein shall be valid or effective unless agreed to and accepted in writing by Landlord and the Senior Mortgagee if any, and no act by Landlord or any representative or agent of Landlord, other than a written acceptance, shall constitute an acceptance of any such surrender. Section 24.21 Non-Recourse as to Landlord --------------------------- Anything contained herein to the contrary notwithstanding, any claim based on or in respect of any liability of Landlord under this Lease shall be enforced only against the Premises and not against any other tangible or intangible assets, properties or funds of (i) Landlord, (ii) any shareholder of Landlord or any director, officer, general partner, limited partner, employee or agent of Landlord, (or any legal representative, heir, estate, successor or assign of any thereof), (iii) any predecessor or successor partnership or corporation (or other entity) of Landlord, or any of its shareholders, either directly or through Landlord or its shareholders or any predecessor or successor partnership or corporation or their shareholders, officers, directors, employees or agents (or other entity), or (iv) any other Affiliate of any of the foregoing, or any director, officer, employee or agent of any thereof; provided, however, that if, as a result of a judicial foreclosure of any Mortgage, the interest of Landlord in the Premises is transferred to a Mortgagee or any other person or entity and at the date of such foreclosure, Tenant has a legal proceeding against Landlord, which is determined adversely to Landlord after the exhaustion of all appeal periods, Tenant shall have the right to enforce any judgment from any assets or other properties of Landlord but not against any Mortgagee or any other person or any of the parties listed at (ii) through (iv) above. Section 24.22 Entire Agreement; Integration ----------------------------- A. The Lease contains all the agreements and conditions made between the parties hereto with respect to the matters contained herein and may not be modified orally or in any manner other than by an agreement in writing signed by all the parties hereto or their respective successors and assigns. All prior written and oral understandings and agreements shall be deemed to have merged into the Lease and have no further force and effect. B. Landlord and Tenant are business entities having substantial experience with the subject matter of this Lease and have each fully participated in the negotiation and drafting of this Lease. Accordingly, this Lease shall be construed without regard to the rule that ambiguities in a document are to be construed against the drafter. - 61 - C. No inferences shall be drawn from the fact that the final, duly executed Lease differs in any respect from any previous draft hereof. D. If there is more than one Tenant, the obligations of each shall be joint and several. Section 24.23 Waiver of Trial by Jury ----------------------- The parties hereto each waive all right to elect a trial by jury in any litigation relative to this Lease. Section 24.24 Tenant's Remedies ----------------- Tenant shall have the right to seek all remedies at law and/or in equity, including an order for specific performance, to obtain full performance of all Landlord's obligations under this Lease, and/or to recover damages for any breach by Landlord hereunder; provided, however, that Tenant shall not have the right (i) to terminate this Lease (except as otherwise specifically provided in this Lease) by reason of any breach of Landlord's obligations hereunder; (ii) to set-off against Rentals hereunder any amounts owing to Tenant by Landlord; or (iii) to assert by way of defense, cross-claim or counterclaim in any action by Landlord to recover Rental or other sums due from Tenant any right to withhold Rental or to pay less than the amount due hereunder. Any exercise of Tenant's rights hereunder shall be through a separate and independent action unrelated to any claim Landlord has against Tenant for Rental due hereunder. Section 24.25 Landlord and Tenant Relationship -------------------------------- The parties hereto specifically acknowledge and agree that, notwithstanding any other provision contained in this Lease (including the provisions for payment of Percentage Rental), it is the intent of the parties that their relationship hereunder is and shall at all times be that of Landlord and Tenant and not that of partners, joint venturers, lender and borrower, or any other relationship other than that of Landlord and Tenant. END OF ARTICLE 24 ARTICLE 25 SPECIAL PROVISIONS ------------------ Section 25.01 Supremacy of Article 25 ----------------------- Notwithstanding anything contained in this Lease to the contrary, the provisions of this Article 25 shall be controlling and any inconsistencies between the provisions of this Article 25 and any other provision contained in this Lease shall be decided in favor of this Article 25. - 62 - Section 25.02 Definitions ----------- The capitalized terms contained in this Article 25 which are not defined below or elsewhere in this Lease shall have the meanings ascribed to them in the Reimbursement Agreement (the "Reimbursement Agreement"), dated as of April 15, 1991, between Landlord and Allied Irish Banks, p.l.c. Section 25.03 Landlord's Bond Obligations --------------------------- In 1991, Landlord refinanced its Indebtedness related to the Premises by entering into, among other agreements with the Bank, the Reimbursement Agreement, the Borrower Documents, and the Related Documents. Landlord remains obligated to the Bank under the terms of the Reimbursement Agreement, the Borrower Documents, and the Related Documents, and Landlord intends to restructure this Indebtedness (the "Restructuring") in accordance with the terms of that certain Letter of Intent, dated July 29, 1993, between Landlord and the Bank. In the event that Tenant is dispossessed of the Premises as a direct result of Landlord's default under the terms of the Reimbursement Agreement, the Borrower Documents, or the Related Documents, this Lease shall automatically terminate and Tenant's obligations to Landlord hereunder shall expire. Section 25.04 Lease Subordination ------------------- Notwithstanding anything to the contrary contained in this Lease, including, without limitation, the provisions of Section 19.02, all rights and interests of Tenant in and to the Premises are and shall be expressly junior, subject and subordinate in all respects to (i) that certain Mortgage Security Agreement and Assignment of Leases and Occupancy Agreements, Rents and Profits dated as of May 8, 1991 and recorded on that date with the Recorder's Office of Orange County, Florida (the "Mortgage"), (ii) the Reimbursement Agreement; and (iii) any other Related Documents; provided, however, that the Bank, at any time, may permit, in its sole and absolute discretion, upon written confirmation, this Lease to be treated as having priority over the lien of the Mortgage. Notwithstanding any provision of this Lease to the contrary, the terms of the Mortgage shall govern with respect to the disposition of any insurance proceeds or eminent domain awards, and any obligations of Landlord to restore the Property shall, insofar as they apply to the Bank, be limited to insurance proceeds or eminent domain awards received by the Bank after the deduction of all reasonable costs and expenses incurred in obtaining such proceeds or awards. Section 25.05 Asbestos -------- Landlord and Tenant acknowledge the presence of Asbestos Containing Material ("ACM") in the Premises. Landlord is in the preliminary stages of litigation against Versar, Inc., a consulting firm (the "Consultant") that erroneously represented to Landlord that there was no ACM in the Premises. If Tenant, as a result of the assignment set forth in Section 25.07, is successful in its suit against the Consultant and recovers monetary damages attributable to the presence of ACM in the Premises, Tenant shall deduct from the gross award obtained in such litigation or settlement thereof (the "Gross Award") all costs incurred in pursuing said litigation such as, but not limited to, reasonable attorneys' fees, consultant fees, in-house expenses, and - 63 - court costs and place the remainder of such award (the "Net Award") in an interest bearing escrow account controlled by Tenant ("Escrow Account"). The Net Award and all interest earned thereon, shall be used by Tenant to pay for any and all costs associated with the presence of ACM in the Premises and to pay for the remediation, monitoring or removal of such ACM by Tenant which may be performed at Tenant's sole discretion, unless required pursuant to any Environmental Law ("ACM Costs"). Tenant shall be reimbursed for its ACM Costs to the extent there are funds available in the Escrow Account. Tenant shall provide notice to Landlord prior to drawing any funds out of the Escrow Account and shall provide Landlord with documentation reasonably satisfactory to Landlord evidencing that the funds withdrawn from the Escrow Account will be used to reimburse Tenant for its ACM Costs. Upon expiration of the Lease any funds remaining in the Escrow Account, plus accrued interest, shall become the property of Landlord. Section 25.06 Landlord's Cooperation ---------------------- Landlord agrees upon request by Tenant to sign promptly, and without charge, any documents (i) required by any governmental authority or (ii) that Tenant determines are necessary or reasonably desirable to pursue litigation against the Consultant; provided, however, that all costs and expenses associated therewith shall be the sole obligation of Tenant, and shall not be deducted from the Gross Award, and Tenant shall promptly pay and discharge the same, and provided further, that the execution of any such document shall not expose Landlord to any personal liability. Tenant hereby agrees that it will fully indemnify, defend and save Landlord harmless from and against any and all costs, losses and expenses, including, without limitation, any and all legal fees and court costs incurred or suffered by Landlord as a result of its compliance with the obligations imposed upon Landlord under this Section 25.06 or as a result of Tenant's actions or failure to act in connection with ACM in the Premises and the suit against the Consultant. Section 25.07 Assignment of Rights -------------------- During the Term, and except as otherwise provided in this Article 25, Landlord hereby assigns to Tenant all of its right, title and interest to any awards or damages resulting from the presence of ACM in the Premises and Landlord will not pursue any independent right of recovery against any entity by reason of the presence of ACM in the Premises during the Term. - 64 - Section 25.08 Notices ------- Tenant agrees to give to the Bank a copy of any notice of default under the Lease served by Tenant upon Landlord. Landlord agrees to give to the Bank a copy of any notice of default under the Lease served by Landlord upon Tenant. Section 25.09 Limitation on Termination Rights -------------------------------- Tenant hereby waives, to the extent permitted by law, the provisions of any statute or rule of law now or hereafter in effect which may give or purport to give Tenant any right or election to terminate or otherwise adversely affect this Lease or the obligations of Tenant under this Lease by reason of any foreclosure proceedings, so long as the Bonds remain outstanding. END OF ARTICLE 25 EXECUTED under seal as of the date first written above. TENANT: ------ ATTEST: MARRIOTT SENIOR LIVING SERVICES, INC. By: /s/ Kevin E. Montano By: /s/ Paul E. Johnson, Jr. ----------------------- --------------------------- Vice President President [CORPORATE SEAL] LANDLORD: -------- ATTEST: HMC RETIREMENT PROPERTIES, INC. By: /s/ Michael J. Stein By: /s/ Robert E. Parsons, Jr. ----------------------- ----------------------------- Vice President Vice President [CORPORATE SEAL] - 65 - EXHIBITS ATTACHED TO ORIGINAL LEASE A Description of Land and Premises with Site Plan B [This Exhibit Intentionally Not Used] C Schedules of Landlord's FF&E, Fixed Asset Supplies and Inventories D Landlord's Trademarks, Etc. E Related Landlord Leases - 66 - EX-10.17.II 13 EXHIBIT 10.17(II) EXHIBIT 10.17(ii) - -------------------------------------------------------------------------------- Amendment No. 1 to Line of Credit and Guarantee Reimbursement Agreement -------------- Dated as of January __, 1994 -------------- Among HMH Holdings, Inc. as Borrower, Marriott International, Inc. as Lender, and Host Marriott Corporation; HMC Acquisitions, Inc.; Host Marriott GTN Corporation; Host La Jolla, Inc.; Marriott Properties, Inc.; and Willmar Distributors, Inc. as Guarantors - -------------------------------------------------------------------------------- [Form of] AMENDMENT NO. 1 TO LINE OF CREDIT AND GUARANTEE REIMBURSEMENT AGREEMENT This Amendment No. 1 to Line of Credit and Guarantee Reimbursement Agreement (the "Amendment") dated as of January __, 1994 between HMH Holdings, Inc., a Delaware corporation, as borrower, Marriott International, Inc., a Delaware corporation, as lender, and Host Marriott Corporation (formerly Marriott Corporation), a Delaware corporation ("Host Marriott"), as guarantor, HMC Acquisitions, Inc. ("Acquisitions"), a Delaware corporation, as guarantor, and those certain other Subsidiaries of Host Marriott signatory to this Amendment, as additional guarantors. RECITALS: Whereas, the parties hereto, other than Acquisitions, entered into that certain Line of Credit and Guarantee Reimbursement Agreement dated as of October 8, 1993 (the "Original Agreement"); and Whereas, the Host Marriott 1994 Common Stock Offering (as defined below) will improve Host Marriott's financial position and enhance the ability of the Host Marriott Parties (as defined below) to perform their obligations under the Original Agreement; and Whereas, the mandatory prepayment provisions of the Original Agreement require that 1994 Fiscal Year Net Cash Flow of Holdings (which would include the proceeds of the Host Marriott 1994 Common Stock Offering to the extent not used during such Fiscal Year for purposes permitted under the Original Agreement) be used to repay Advances under the Original Agreement and that requirement may prevent or impair the consummation of said common stock offering; and Whereas, the parties hereto have therefore agreed that the proceeds of the Host Marriott 1994 Common Stock Offering may, under the terms and conditions set forth below (including the guarantee by Acquisitions of the Agreement) be contributed to Acquisitions rather than used to repay Advances under the Agreement; and Whereas, subject to the terms and conditions set forth below, the parties hereto have agreed to amend the Original Agreement as hereafter provided; AGREEMENT: Now, therefore, it is agreed: A. CAPITALIZED TERMS. All capitalized terms used herein, unless otherwise defined herein, shall have the same meanings as set forth in the Original Agreement. B. SECTION 1.1 AND EXHIBIT A; DEFINED TERMS. 1. The following defined terms are added to Exhibit A to the Agreement (as defined below): "1994 STOCK OFFERING REGISTRATION STATEMENT" means Registration Statement No. 33-51707 as filed with the SEC by Host Marriott on December 23, 1993. "ACQUISITIONS" means HMC Acquisitions, Inc., a Delaware corporation and a wholly-owned direct Subsidiary of Host Marriott. "ACQUISITIONS GROUP" means the group of Persons consisting of Acquisitions and each of its Subsidiaries. The composition of the Acquisitions Group is illustrated on Exhibit F. "ACQUISITIONS INVESTMENT" means the Investment in Acquisitions made by Host Marriott not later than 45 days after the closing of the Host Marriott 1994 Common Stock Offering in an amount not greater than the Net Proceeds of said offering. "ACQUISITIONS RELEASE DATE" means the first date on which Acquisitions has distributed to Host Marriott cumulative cash dividends of not less than the amount of the Acquisitions Investment. Notwithstanding the foregoing, the Acquisitions Release Date shall not occur (and any release or discharge pursuant thereto shall be delayed) until such time as the aggregate principal amount of Advances is less than $280,000,000. "AGREEMENT" means this Line of Credit and Guarantee Reimbursement Agreement, as amended or otherwise modified from time to time. "AMENDMENT" means that certain Amendment No. 1 to the Agreement dated as of the Amendment Date among Marriott International and the Host Marriott Parties. "AMENDMENT DATE" means January __, 1994. "HOST MARRIOTT 1994 COMMON STOCK OFFERING" means the public offering of up to 17,500,000 shares, plus up to an additional 2,625,000 shares to cover over-allotments, of Host Marriott Common Stock pursuant to the 1994 Stock Offering Registration Statement. 2. The following defined terms amend and replace the same terms as defined in Exhibit A to the Original Agreement: "GUARANTORS" means (a) Host Marriott, (b) Acquisitions, and (c) the Subsidiary Guarantors, other than any such Persons whose guarantees have been 2 released pursuant to Article Eight; and the term "Guarantor" means any one of the Guarantors. "HOST MARRIOTT GROUP" means the group of Persons consisting of Host Marriott and each of its Subsidiaries (and as such on the Amendment Date consists of Holdings, each Hospitality Group Member, each Parent Group Member, each Ventures Group Member, and each Acquisitions Group Member). The composition of the Host Marriott Group as of the Amendment Date is illustrated on Exhibit F. "HOST MARRIOTT PARTY" means Holdings, Host Marriott, Acquisitions, and each and every Subsidiary of any of the foregoing that is a party to this Agreement, or later becomes a party pursuant to Article Eight hereof. "MARRIOTT INTERNATIONAL OPERATING AGREEMENT" means each agreement between a Host Marriott Group Member and Marriott International or one of its Affiliates (regardless of whether such agreement is termed a management agreement, an operating lease, or otherwise), pursuant to which Marriott International or such Affiliate operates a lodging or senior living facility for such Host Marriott Group Member. "MEMBER" means, with reference to the Hospitality Group, the Host Marriott Group, the Parent Group, the Ventures Group, or the Acquisitions Group, any Person within such group. See Exhibit F for an illustration of the organizational structure of each such group. "PARENT GROUP" means Host Marriott and each of its Subsidiaries other than (i) Holdings, (ii) any Member of the Hospitality Group, (iii) any Member of the Ventures Group, and (iv) any Member of the Acquisitions Group. The composition of the Parent Group is illustrated on Exhibit F. "RESTRICTED PAYMENT BASKET-PARENT GROUP" means, during any given Fiscal Quarter, (A) EBITDA-Parent Group plus (B) all distributions from Holdings to the Parent Group, plus (C) the Net Proceeds of any issuance by Parent Group of any Equity Interest or Preferred Stock (other than the Host Marriott 1994 Common Stock Offering) to the extent such Net Proceeds are not applied to prepay Advances, minus (D) 170 percent of Interest Expense of the Parent Group on a Combined basis plus the aggregate amount of Dividends paid pursuant to clauses (C), (D) and (E) of Section 5.2(e)(1), excluding dividends on Permitted PIK Indebtedness; in each case determined on the basis of the prior Fiscal Quarter. "SPECIAL PURPOSE SUBSIDIARY" means any Parent Group Member or Acquisitions Group Member (other than, in any case, Host Marriott or Acquisitions) the sole assets of which consist of Subject Assets securing Non-Recourse 3 Indebtedness permitted under this Agreement (other than de minimis other assets incidental to such Subject Assets). C. SECTION 2.5(A); MANDATORY PREPAYMENTS. Section 2.5(a) of the Original Agreement is amended and restated as follows: (a) Mandatory Prepayments. During any period in which any Advance is outstanding, not later than forty-five (45) days after the end of (1) the 1994 Fiscal Year, and (2) thereafter, each Fiscal Quarter, Holdings shall prepay, and Host Marriott, Acquisitions, and the Subsidiary Guarantors shall cause Holdings to prepay, any outstanding Advances in an amount equal to the lesser of (A) the Net Cash Flow of Holdings and the Parent Group, determined on a Combined basis, for such Fiscal Year or Fiscal Quarter, as the case may be, or (B) the aggregate outstanding amount of principal and accrued interest on all Advances; provided, however, that Holdings may, at Host Marriott's request, reduce the prepayment required by this paragraph by the amount necessary to allow Host Marriott to maintain a cash reserve of up to (i) $25,000,000 with respect to Fiscal Year 1994, and (ii) $10,000,000 thereafter. The parties hereto acknowledge that the Net Cash Flow, as defined in Exhibit A, of the Parent Group for the 1994 Fiscal Year does not include the Net Proceeds of the Host Marriott 1994 Common Stock Offering to the extent of the Acquisitions Investment. D. SECTIONS 4.7 AND 4.8; REPRESENTATIONS AND WARRANTIES AS OF THE AMENDMENT DATE. The following is added as Sections 4.7 and 4.8 of the Agreement: Section 4.7. Representations and Warranties as of the Amendment Date. Each Host Marriott Party (including Acquisitions) represents and warrants that (a) each of the representations and warranties contained in Sections 4.1 through 4.4, inclusive, is true and correct with respect to such Host Marriott Party on and as of the Amendment Date, as though made on and as of such date and (b) no Default or Event of Default has occurred and is continuing on the Amendment Date. Without limiting the generality of the foregoing, each representation made in clause (a) with respect to this Agreement shall be deemed to apply independently to both (i) the Amendment and (ii) the Agreement, as amended by the Amendment. Section 4.8. Acquisitions. Host Marriott represents and warrants that as of the Amendment Date (i) Acquisitions is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation, (ii) Acquisitions is a wholly owned direct Subsidiary of Host Marriott, (iii) Acquisitions has issued no capital stock or Equity Interests other than the [100] shares of no par value common stock owned by Host Marriott, and (iv) said Acquisitions common stock is free and clear of all Liens. E. SECTION 5.2(c)(1)(C); CERTAIN PARENT GROUP GUARANTEES. Section 5.2(c)(1)(C) of the Original Agreement is amended and restated as follows: 4 (C) (i) any new Guarantee of obligations of a disadvantaged business enterprise in connection with a Host Travel Plaza contract ("DBE Guarantees"). (ii) any new Guarantee of Parent Group Non-Recourse Indebtedness secured by lodging or senior living service properties owned by a Member of the Parent Group and any new Guarantee which supports a Guarantee by Hospitality of Non-Recourse Indebtedness secured by lodging or senior living service properties owned by a Member of the Hospitality Group, in each case where (v) the Maximum Guarantee Exposure of Parent Group Members under such new Guarantee does not exceed 20% of the principal amount of the Indebtedness Guaranteed thereby, (w) the principal amount of the Indebtedness Guaranteed thereby does not exceed 70% of the Fair Market Value of the Subject Assets, as determined on the basis of a then-current appraisal, (x) in the case of a Guarantee supporting a Guarantee by Hospitality, the Parent Group Guarantee can only be drawn upon in the event that Hospitality fails to perform on its Guarantee, (y) such Guarantee is entered into in connection with a Parent Group or, in the case of a Guarantee described in clause (x) only, a Hospitality Group, asset sale or financing that is permitted under this Agreement, and (z) such Guarantee is not a Foreclosure Guarantee. (iii) any new Guarantee of Acquisitions Group Indebtedness where (y) the Maximum Guarantee Exposure of Parent Group Members under such new Guarantee does not exceed 20% of the principal amount of the Indebtedness Guaranteed thereby, and (z) the principal amount of the Indebtedness Guaranteed thereby does not exceed 70% of the Fair Market Value of the Subject Assets, as determined on the basis of a then-current appraisal. (iv) Notwithstanding the foregoing, the aggregate Maximum Guarantee Exposure of Parent Group Members under all Guarantees permitted by this Section 5.2(c)(1)(C), including DBE Guarantees, may not exceed $150,000,000 at any time outstanding. F. SECTION 5.2(e)(1)(K); RESTRICTED PAYMENTS, INVESTMENTS, CAPITAL EXPENDITURES--PARENT GROUP. The following is added as Section 5.2(e)(1)(K) of the Agreement: (K) The Acquisitions Investment. 5 G. SECTIONS 5.4; COVENANTS PERTAINING TO ACQUISITIONS GROUP. The following is added as Section 5.4 of the Agreement: Section 5.4. Covenants pertaining to Acquisitions Group. At all times during the Revolving Credit Period: (a) Acquisitions Group Capital Stock. (1) Host Marriott shall at all times prior to the Acquisitions Release Date own directly 100% of (and not dispose of any of) the capital stock of Acquisitions. (2) Host Marriott and Acquisitions shall not create, incur, assume, permit or suffer to exist any Lien of any character on or with respect to any of the Capital Stock of Acquisitions. Host Marriott and Acquisitions shall not create, incur, assume, permit or suffer to exist any Lien of any character on or with respect to any of the Capital Stock of any other Acquisitions Group Member other than Liens which secure Indebtedness for Borrowed Money of any Acquisitions Group Member. (b) Sales, Dispositions, and Financings of Acquisitions Group Assets. Host Marriott and Acquisitions shall not permit the Acquisitions Group to sell, transfer, otherwise dispose of, or finance, whether in a single transaction or a series of related transactions, (A) any Common Stock, Preferred Stock, or Equity Interest owned by any Acquisitions Group Member, or (B) any other asset or property of the Acquisitions Group, unless (x) the Net Proceeds received by the Acquisitions Group are either reinvested in the Acquisitions Group or distributed by dividend to Host Marriott, and (y) in the case of any sale, transfer or disposition, such assets are disposed of for fair value. For purposes of this Section 5.4(b), "reinvested in the Acquisitions Group" includes payments of Indebtedness of Acquisitions Group Members and Investments and Capital Expenditures permitted under subsections (1) and (2) of Section 5.4(d). (c) Dividends. Host Marriott and Acquisitions shall not permit any Acquisitions Group Member to declare or make any dividend payment or other distribution of assets, properties, cash, rights or obligations or securities on account of any shares of any class of capital stock of, or other ownership interest in, any Acquisitions Group Member to any Person other than the Parent of such Acquisitions Group Member, unless such dividend is paid pro-rata on the basis of the equity ownership of such Acquisitions Group Member to all Persons who hold capital stock, partnership interests, or venture interests, as the case may be, in such Acquisitions Group Member. (d) Investments and Guarantees. (1) Host Marriott and Acquisitions shall not permit any Acquisitions Group Member to make any Capital Expenditures or Investments other than: 6 (A) Investments in Cash Equivalents; (B) Investments or Capital Expenditures in any Acquisitions Group Member or any Guarantor (other than any person who becomes a Guarantor pursuant to Section 8.5(d)); (C) Investments or Capital Expenditures in any asset or property which is (or will be as a result of such Investment or Capital Expenditure) wholly-owned by the Acquisitions Group or a Guarantor (other than any person who becomes a Guarantor pursuant to Section 8.5(d)); or (D) Other Investments or Capital Expenditures which do not, in the aggregate, exceed an amount equal to $25,000,000 plus the aggregate amount of any distributions received from Investments made pursuant to this Section 5.2(d)(1)(D). (2) Host Marriott and Acquisitions also shall not permit any Acquisitions Group Member to make any Capital Expenditure or Investment (other than Investments in Cash Equivalents), whether or not permitted by Section 5.4(d)(1), unless such Capital Expenditure or Investment (i) is consistent with the investment objective set forth on page 12 of the 1994 Stock Offering Registration Statement that "[t]he Company expects to use the proceeds from the Offering for acquisition of lodging properties or related assets," (ii) supports the ongoing businesses of the Acquisitions Group at the time such Investment or Capital Expenditure is made, or (iii) is otherwise consistent with the description of the Host Marriott Group's business on the Amendment Date as described under the heading "BUSINESS AND PROPERTIES" in the 1994 Stock Offering Registration Statement. (3) Host Marriott and Acquisitions shall not permit any Acquisitions Group Member to enter into any Guarantee other than (A) a Guarantee of the Indebtedness of another Acquisitions Group Member or (B) a Guarantee which replaces all liabilities of Marriott International under an existing Guarantee of Marriott International. (4) Except to the extent of any recourse which is permitted under Section 5.2(c), Host Marriott and Acquisitions shall cause any instrument evidencing any Indebtedness of any Acquisitions Group Member with a principal amount, or Guarantee Exposure, as the case may be, in excess of $1,000,000 to contain an unqualified statement that neither Host Marriott nor any of its subsidiaries, other than the applicable Acquisitions Group Member(s), is liable thereon. (e) Outstanding Advances in Excess of $450 Million. 7 (1) Within forty-five (45) days after the end of any Fiscal Quarter at any time during which the aggregate principal balance of outstanding Advances exceeds $450,000,000, (A) Acquisitions shall dividend to Host Marriott an amount in cash equal to 100% of Acquisitions Group Net Cash Flow for such Fiscal Quarter (plus any portion of the Acquisition Investment which, at the end of such Fiscal Quarter, remains held by any Acquisitions Group Member in the form of cash or Cash Equivalents) and (B) Host Marriott and Holdings shall cause the outstanding Advances to be prepaid by such amount. Any prepayment pursuant to this paragraph shall be in addition to any prepayment required under Section 2.5(a). (2) At any time during which the aggregate principal balance of outstanding Advances exceeds $450,000,000, no Acquisitions Group Member may make any Investment or Capital Expenditures other than: (A) expenditures that would fall within the definition of Existing Unit Expenditures if that definition were made applicable to the Acquisitions Group, or (B) any dividend permitted under Section 5.4(c) or required under Section 5.4(e)(1). (f) Transactions with Affiliates. Host Marriott and Acquisitions shall cause each Acquisitions Group Member to conduct all transactions otherwise permitted under this Agreement with any Affiliate of any Acquisitions Group Member on Commercially Reasonable Terms. For purposes of this paragraph, "Commercially Reasonable Terms" means, (i) if applicable, on terms comparable to those afforded generally by Host Marriott Group Members to parties that are not Affiliates, or (ii) in all other cases, on terms which are commercially reasonable from the standpoint of the applicable Acquisitions Group Member (including a requirement that any goods or services provided are to be paid for on a timely basis at an amount in excess of the provider's variable cost). H. SECTION 6.1; EVENTS OF DEFAULT. 1. Section 6.1(c) of the Original Agreement is amended and restated as follows: (c) Any Host Marriott Party shall fail to perform or observe any term, covenant or agreement contained in Section 5.1(a), Section 5.1(b), Section 5.2, or Section 5.4 at any time during the Revolving Credit Period. 2. All references to "Holdings or any Parent Group Member" in Sections 6.1(e) and 6.1(g) of the Original Agreement shall be replaced with "Holdings, any Parent Group Member or any Acquisitions Group Member." 3. The reference to "Host Marriott, Holdings, or any other Parent Group Member" in the first line of Section 6.1(f) shall be replaced with "Host Marriott, Holdings, Acquisitions, or any other Parent Group or Acquisitions Group Member." 8 I. SECTION 6.2(C); CERTAIN REMEDIES. Section 6.2(c) of the Original Agreement is amended and restated as follows: (c) By notice to Host Marriott, require the Net Cash Flow of (i) all Parent Group Members and Acquisitions on a Combined basis, and/or (ii) all Hospitality Group Members on a Consolidated basis, to be directed and utilized in accordance with Section 6.4. J. SECTION 6.4(A); UTILIZATION OF PARENT GROUP AND ACQUISITIONS GROUP NET CASH FLOW DURING DEFAULT. The first paragraph of Section 6.4(a) of the Original Agreement is amended and restated as follows: (a) Parent Group Net Cash Flow. From the occurrence and during the continuation of an Event of Default, Marriott International may, by notice to Host Marriott, direct that all Parent Group and Acquisitions Group Combined Net Cash Flow (plus, without duplication, any portion of the Acquisitions Investment which at such time remains held by any Acquisitions Group Member in the form of cash or Cash Equivalents) be provided to Marriott International (in accordance with the provisions of Section 2.5(a), but whether or not any Advances are outstanding, and on a quarterly basis even if prior to Fiscal Year 1995) to be held in trust for the benefit of Host Marriott and Holdings and utilized on behalf of Host Marriott and Holdings as follows: K. SECTION 8.6; GUARANTEE BY ACQUISITIONS. The following is added as Section 8.6 of the Agreement: Section 8.6. Guarantee by Acquisitions. (a) Acquisitions confirms and agrees that, as of the Amendment Date, it shall constitute a Guarantor, but not a Subsidiary Guarantor or an Additional Subsidiary Guarantor, for all purposes under this Agreement. Without limiting the generality of the foregoing, the release provisions of Section 8.5 are not available to Acquisitions. In addition, Acquisitions and Marriott International each confirms that it is the intention of both such parties that the guarantee by Acquisitions pursuant to Section 8.1(a) and this Section 8.6(a) not constitute a fraudulent transfer or conveyance for purpose of any bankruptcy law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar Federal or state law. To effectuate the foregoing intention, Marriott International and Acquisitions hereby irrevocably agree that the obligations of Acquisitions under its guarantee set forth in Section 8.1(a) shall be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of Acquisitions and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such other Guarantor under its guarantee or result in the obligations of Acquisitions under such guarantee not constituting such a fraudulent transfer or conveyance. 9 (b) Without any further notice or action being required by any Person, Acquisitions shall be fully and unconditionally released and discharged from all obligations under its guarantee on the Acquisitions Release Date. (c) At the request of Holdings, Marriott International shall promptly execute and deliver appropriate instruments in forms reasonably acceptable to Holdings evidencing and further implementing any release and discharge pursuant to the foregoing provision. If Host Marriott desires the instruments evidencing or implementing any releases or discharges to be executed prior to the effectiveness of such release and discharge as set forth above, such instruments may be made conditional upon the occurrence of the events necessary to cause the effectiveness of such release and discharge, as specified in the definition of Acquisitions Release Date. L. EXHIBIT E; REPORTING REQUIREMENTS. The following additional reporting requirements are added to Exhibit E to the Original Agreement: X. REPORTS PERTAINING TO ACQUISITIONS. A. As soon as available and in any event within 105 days after the end of each Fiscal Year (or, if such 105th day is not a Business Day, on the next succeeding Business Day), (1) a condensed Consolidated balance sheet of the Acquisitions Group, (2) condensed Consolidated statements of income and detailed Net Cash Flows, with supporting backup of key line items, of the Acquisitions Group for such Fiscal Year, setting forth the corresponding figures for the corresponding period of the preceding Fiscal Year, all in reasonable detail and duly certified by a Financial Officer of Host Marriott as having been prepared in accordance with generally accepted accounting principles consistently applied (except to the extent required or permitted by changes in generally accepted accounting principles). B. Quarterly financial statements or reports pertaining to Acquisitions, the Acquisitions Group or any Acquisitions Group Member to the extent and at the time any such statements or reports may be provided to any third party. C. At any time during which the aggregate principal balance of outstanding Advances equals or exceeds $450,000,000: 1. statements and reports pertaining to Acquisitions and the Acquisitions Group of the type described in, and within the time periods specified by, Sections II and III of this Exhibit E; and 2. as soon as available and in any event within 60 days after the end of each of Fiscal Year (or if such day is not a Business Day, on the 10 next succeeding Business Day), a calculation of the reduction of Indebtedness required under Section 5.4(e)(1)(B). M. EXHIBIT F; ORGANIZATIONAL STRUCTURE. Exhibit F to the Original Agreement is deleted and replaced with Exhibit F to this Amendment. N. CONDITIONS OF EFFECTIVENESS. This Amendment shall become effective when (such date, the "Amendment Effective Date"), and only when: 1. Marriott International shall have received (i) an original of this Amendment fully executed by all Persons who are Host Marriott Parties as of the Amendment Effective Date, (ii) certified copies of the resolutions of the Board of Directors of each such Host Marriott Party which authorize such Host Marriott Party to enter into this Amendment, and (iii) an opinion of counsel dated as of the Amendment Date substantially the form attached hereto as Exhibit D-1; 2. Holdings shall have received (i) an original of this Amendment fully executed by Marriott International, (ii) a certified copy of the resolutions of the Board of Directors of Marriott International which authorize Marriott International to enter into this Amendment, and (iii) an opinion of counsel dated as of the Amendment Date substantially the form attached hereto as Exhibit D-2; and 3. The Host Marriott 1994 Common Stock Offering shall have been consummated. O. REFERENCE TO AND EFFECT ON THE AGREEMENT. On and after the occurrence of the Amendment Effective Date each reference in the Original Agreement to "This Agreement", "hereunder", "hereof" or words of like import referring to the Agreement shall mean and be a reference to the Agreement as amended hereby. Except as specifically amended hereby, the Original Agreement is and shall continue to be in full force and effect and is hereby in all respects ratified and confirmed. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Marriott International nor constitute a waiver of any provision of the Agreement. P. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Q. GOVERNING LAW. This Amendment shall be governed by, and construed in accordance with, the laws of the State of Maryland. 11 In witness whereof, the parties hereto have caused this Amendment to be executed and delivered by their respective duly authorized officers as of the Amendment Date. LENDER: BORROWER: Marriott International, Inc. HMH Holdings, Inc. By: By: ----------------------------- ----------------------------- Vice President Vice President GUARANTORS: Host Marriott Corporation By: ----------------------------- Vice President HMC Acquisitions, Inc. By: ----------------------------- Vice President SUBSIDIARY GUARANTORS: Host Marriott GTN Corporation Host La Jolla, Inc. Marriott Properties, Inc. Willmar Distributors, Inc. By: ----------------------------- Vice President of each of the Subsidiary Guarantors listed above 12 EX-10.23 14 EXHIBIT 10.23 Exhibit 10.23 WORKING CAPITAL AGREEMENT ------------------------- THIS WORKING CAPITAL AGREEMENT (the "Agreement") is entered into as of the 25th day of September, 1993 ("Effective Date"), between (i) HMH PROPERTIES, INC., a Delaware corporation with an address c/o Host Marriott Corporation, 10400 Fernwood Road, Bethesda, Maryland 20817; (ii) MARRIOTT CORPORATION, a Delaware corporation with an address c/o Host Marriott Corporation, 10400 Fernwood Road, Bethesda, Maryland 20817; (iii) MARRIOTT SBM TWO CORPORATION, a Delaware corporation with an address c/o Host Marriott Corporation, 10400 Fernwood Road, Bethesda, Maryland 20817; (iv) MICHIGAN HOST, INC., a Delaware corporation with an address c/o Host Marriott Corporation, 10400 Fernwood Road, Bethesda, Maryland 20817; (v) CITY CENTER HOTEL LIMITED PARTNERSHIP, a Minnesota limited partnership with an address c/o Host Marriott Corporation, 10400 Fernwood Road, Bethesda, Maryland 20817; (vi) HOST OF BOSTON, LTD., a Massachusetts limited partnership with an address c/o Host Marriott Corporation, 10400 Fernwood Road, Bethesda, Maryland 20817; (vii) HOST OF HOUSTON, LTD., a Texas limited partnership with an address c/o Host Marriott Corporation, 10400 Fernwood Road, Bethesda, Maryland 20817 (each of the foregoing shall be referred to as the "Owner", and they shall be collectively referred to as the "Owners"); and (viii) MARRIOTT HOTEL SERVICES, INC. ("Management Company"), a Delaware corporation, with a mailing address at 10400 Fernwood Road, Bethesda, Maryland 20817. R E C I T A L S A. Each of the Owners owns one or more of the hotels (the "Hotels") which are listed on Exhibit "A" hereto. B. The Owner of each of the Hotels has executed, either as of the date hereof or previously, a management agreement or operating lease (the "Management Agreement", and collectively, the "Management Agreements") with Management Company (or an Affiliate of Management Company) pursuant to which Management Company (or an Affiliate of Management Company) will manage that Hotel pursuant to the terms and conditions which are set forth in the Management Agreement. C. Pursuant to Section 7.01 of each of the Management Agreements, the "Owner" (as identified in such Management Agreement) is required to provide Management Company with the funds necessary to maintain Working Capital at certain levels. D. The Owners and Management Company have determined that it will be in the best interests of the Hotels for the cash component of the Working Capital at all of the Hotels to be aggregated together in a single "Cash Concentration System" (as defined below). E. With respect to the St. Louis Pavilion Hotel, Marriott Corporation (acting as one of the general partners of the Owner) is making the Initial Deposit on behalf of the Owner. Until it - 2 - notifies Management Company to the contrary, Marriott Corporation will continue to act on behalf of the Owner of the St. Louis Pavilion Hotel with respect to the various rights and responsibilities described in this Agreement. F. As of the Effective Date, Marriott Corporation will be renamed "Host Marriott Corporation". NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE I DEFINITION OF TERMS ------------------- 1.01 Definition of Terms ------------------- The following terms, when used in this Agreement, shall have the meanings indicated: "Affiliate" shall mean any individual or entity directly or indirectly --------- through one or more intermediaries, controlling, controlled by or under common control with a party. The term "control," as used in the immediately preceding sentence, means, with respect to a corporation, the right to exercise, directly or indirectly, fifty percent (50%) or more of the voting rights attributable to the shares of the controlled corporation, and, with respect to an entity that is not a corporation, the possession, directly or indirectly, of the power to direct or - 3 - cause the direction of the management or policies of the controlled entity. "Balance" shall have the meaning set forth in Section 2.05. ------- "Cash Concentration System" shall mean all of the procedures described in ------------------------- Article II. A Hotel shall become a member of the Cash Concentration System by depositing into the Concentration Account the amounts described in Section 2.02. A Hotel shall remain in the Cash Concentration System until the occurrence of a Deconsolidation Event with respect to that Hotel. As a member of the Cash Concentration System, each Hotel shall be entitled to withdraw from the Disbursement Account the amounts described in Section 2.03. "Concentration Account" shall mean that certain account, which shall be --------------------- opened by Management Company pursuant to Section 2.01, into which will be deposited the amounts described in Section 2.02. "Deconsolidation" shall mean the withdrawal of a given Hotel from the Cash --------------- Concentration System. "Deconsolidation Event" shall mean any event which, under the provisions of --------------------- Article III, causes a Deconsolidation to occur. "Concentration Bank" shall mean the bank at which the Concentration Account ------------------ is, from time to time, being maintained. "Disbursement Account" shall mean that certain bank account from which the -------------------- disbursements described in Section 2.03 shall be made. - 4 - "Disbursement Bank" shall mean the bank at which the Disbursement Account ----------------- is, from time to time, being maintained. "Effective Date" shall have the meaning set forth in the Preamble hereto. -------------- "Financing Transaction" shall mean any transaction in which the Owner of a --------------------- given Hotel obtains a Secured Loan. "Hotel" shall mean each of the hotels listed on Exhibit "A" hereto, but ----- only for so long as such hotel has not had a Deconsolidation Event. "Initial Deposit" shall mean that amount, with respect to each Hotel, which --------------- is set forth on Exhibit "A" hereto. "Maximum Concentration Balance" shall have the meaning set forth in Section ----------------------------- 2.04. "Minimum Concentration Balance" shall have the meaning set forth in Section ----------------------------- 2.04. "Transfer Notice" shall have the meaning set forth in Section 2.03. --------------- "Working Capital" shall mean assets which are used in the day-to-day --------------- operation of the Hotel's business, including, without limitation, amounts kept in petty cash funds, amounts deposited in operating bank accounts, receivables, prepaid expenses and funds expended to purchase Inventories, less accounts payable and accrued current liabilities. - 5 - 1.02 Other Defined Terms ------------------- Any capitalized term which is not specifically defined in this Agreement shall have the meaning set forth in the Management Agreement. END OF ARTICLE I - 6 - ARTICLE II CASH CONCENTRATION SYSTEM ------------------------- 2.01 Accounts -------- Management Company will open and maintain, in its name, the Concentration Account and the Disbursement Account. The Concentration Account and the Disbursement Account will each be opened at a bank designated by Management Company and approved (such approval not to be unreasonably withheld) by each of the Owners. As of the Effective Date, it is anticipated that the Concentration Account will be opened at Mellon Bank, and the Disbursement Account will be opened at Citibank; however, Management Company reserves the right to transfer either the Concentration Account or the Disbursement Account to a different bank or banks, from time to time, subject to the approval of the Owners as described in the preceding sentence. 2.02 Deposits -------- A. As of the Effective Date, each Owner will deposit into the Concentration Account, with respect to each Hotel which is owned by such Owner, the Initial Deposit. Thereafter, Management Company shall deposit into the Concentration Account, with respect to each of the Hotels, the sum of the following: (i) collections of pre-Effective-Date receivables; and (ii) the cash component of all Gross Revenues (including, without limitation, collections of - 7 - post-Effective-Date receivables) derived from the operation of such Hotel. B. All interest which accrues on any funds deposited in the Concentration Account shall be retained in the Concentration Account, to be used as additional Working Capital for all of the Hotels. Subject to the cash management policies described in Section 2.04, such interest shall be distributed to the respective Owners of each of the Hotels approximately once a year. 2.03 Disbursements ------------- A. Expenditures by Management Company with respect to each Hotel for all purposes which are authorized by and are in accordance with the Management Agreement for such Hotel, including expenditures arising from periods prior to the Effective Date, shall be made by checks or wire transfers drawn on the Disbursement Account. Withdrawals from the Disbursement Account shall be made only by representatives of Management Company who have been designated by Management Company as having such withdrawal authority (as set forth in a notice from Management Company to Owner). The Disbursement Bank will be authorized and instructed to send a notice (the "Transfer Notice") to the Concentration Bank at appropriate intervals (which are expected to be once every business day). The Transfer Notice will set forth the amount necessary to be transferred into the Disbursement Account to cover checks written on the Disbursement Account. The Concentration Bank will be authorized and instructed to transfer - 8 - from the Concentration Account into the Disbursement Account, within an appropriate time period after the receipt of each Transfer Notice, the amount set forth in each such Transfer Notice, in order to cover such checks. The Disbursement Bank shall be authorized and instructed to maintain the balance in the Disbursement Account at zero, or as close thereto as is reasonably practicable. B. If Management Company so elects, various expenditures and/or transfers of funds (e.g., the transfer to the Owner of any Owner's Distribution and the payment to Management Company of the Management Fees), which are authorized under the respective Management Agreement for each Hotel, may be implemented by direct payment from the Concentration Account, rather than payment from the Disbursement Account. C. Service charges imposed by the bank or banks which participate in the Cash Concentration System shall be deducted from the funds deposited at such bank or banks, and shall be accounted for as Deductions under the respective Management Agreements for each of the Hotels. 2.04 Cash Management Policies ------------------------ A. Management Company and the respective Owners of the Hotels will consult together on a regular basis and will establish (exercising reasonable judgment) mutually acceptable cash management policies regarding the Concentration Account and the Disbursement Account. Among other things, the cash management - 9 - policies will address the issue of short-term investment of the funds in the Concentration Account. As a part of the establishment of such cash management policies, Management Company shall establish and periodically adjust (subject to the approval of each of the Owners, such approval not to be unreasonably withheld) the appropriate minimum balance ("Minimum Concentration Balance") which should be maintained in the Concentration Account, as well as the maximum balance ("Maximum Concentration Balance") which should be maintained in the Concentration Account. The Minimum Concentration Balance and the Maximum Concentration Balance shall each be consistent with the cash management requirements of other full-service hotels in the Marriott Hotel System and shall take into account (with respect to each Hotel, and with respect to all of the Hotels collectively) such Hotel's size, its operational and economic performance, and any seasonal fluctuations in cash needs. B. If, from time to time, the balance in the Concentration Account is regularly falling below the Minimum Concentration Balance, Management Company shall identify which Hotel or Hotels are experiencing cash needs which are higher than previously expected. The Owner or Owners of such Hotel or Hotels shall, within thirty (30) days after receipt of a notice from Management Company, arrange for additional funds, in the amount set forth in Management Company's notice, to be deposited into the Concentration Account. Such additional funds shall be accounted for as Working Capital (i.e., a capital asset) provided by such - 10 - Owner(s) pursuant to Section 7.01 of the respective Management Agreement. C. If, from time to time, the balance in the Concentration Account is regularly above the Maximum Concentration Balance, Management Company shall identify which Hotel or Hotels are contributing cash in excess of their respective operating needs to the Concentration Account. Management Company shall promptly pay to the Owner(s) of such Hotel(s) the amount of such excess, which shall be accounted for as a return of excess Working Capital to such Owner(s) pursuant to Section 7.01 of the respective Management Agreement. D. During the period of time during which each Hotel is a member of the Cash Concentration System, Management Company agrees that the interim distributions of Owner's Distribution which are described in the last sentence of Section 5.02 A of the Management Agreement which is applicable to such Hotel shall (notwithstanding the provisions of said Section 5.02 A regarding the frequency of such distributions) be made twice per Accounting Period, rather than once per Accounting Period. The first interim distribution (in the amount of one-half of the estimated Owner's Distribution for each Accounting Period) shall be made by no later than the twentieth (20th) day after the beginning of such Accounting Period. The second interim distribution (in the amount of the remainder of such Owner's Distribution) with respect to such Accounting Period shall be made by no later than the fifth (5th) day after the end of such Accounting Period. In addition, there - 11 - will be an adjustment (if necessary) of these interim distributions as of the delivery of the Accounting Period Statement with respect to such Accounting Period. The foregoing shall have no effect on the frequency of the preparation of Accounting Period Statements, which shall continue to be as set forth in Section 5.02 of the Management Agreement. E. Operating Losses (if any) at any of the Hotels shall be funded as set forth in the Management Agreement for such Hotel. 2.05 Balances -------- Management Company will maintain an accounting of each Hotel's balance (the "Balance") in the Concentration Account. The Balance with respect to each Hotel will be the cumulative total through the date in question of the following: (i) the Initial Deposit; (ii) all collections of pre-Effective-Date receivables with respect to such Hotel; (iii) if applicable, any additional deposit pursuant to Section 2.04 B or Section 2.06 which has been made into the Concentration Account; (iv) all deposits into the Concentration Account of the cash component of Gross Revenues (including, without limitation, collections of post-Effective-Date receivables) derived from the operation of such Hotel; (v) any interest which has accrued in accordance with Section 2.02 B, other than interest which has previously been distributed to the Owner of such Hotel under said Section 2.02 B; less (vi) all withdrawals made by Management Company from ---- the Disbursement Account with respect to such Hotel pursuant to Section 2.03; and - 12 - (vii) all other withdrawals from the Concentration Account by Management Company which are authorized by the respective Management Agreement. 2.06 Overdrafts ---------- The Owner of each Hotel agrees that if the Concentration Account ever becomes overdrawn, each Owner will, within thirty (30) days after the date on which the Concentration Account became overdrawn, deposit in the Concentration Account its portion (such allocation, as between the Hotels, to be determined by Management Company) of the total amount necessary to restore the Concentration Account to at least the sum of all the Initial Deposits (plus such additional amount as Management Company reasonably determines is necessary for the continued proper cash management of the Hotels). END OF ARTICLE II - 13 - ARTICLE III DECONSOLIDATION --------------- 3.01 Deconsolidation Events ---------------------- Each of the following shall be a Deconsolidation Event with respect to the Hotel in question: (i) the Sale of the Hotel; (ii) any funding under a Financing Transaction with respect to the Hotel; and (iii) at Management Company's election, a failure to comply with the provisions of Section 2.04 B or Section 2.06 of this Agreement. Notwithstanding the foregoing, if, in the case of a Financing Transaction, consent is given to such Hotel remaining as a member of the Cash Concentration System by the Holder, then such Hotel will remain such a member after such Deconsolidation Event, until such time as (a) such consent is withdrawn, or (b) a subsequent Deconsolidation Event occurs with respect to such Hotel. 3.02 Actions to be Taken Upon Deconsolidation ---------------------------------------- Upon any Deconsolidation with respect to any Hotel, such Hotel shall no longer have any withdrawal privileges from the Disbursement Account, nor shall such Hotel otherwise participate as a member of the Cash Concentration System. In addition, one of the following (whichever is applicable) will be implemented: (i) the Concentration Bank shall be authorized and instructed to withdraw from the Concentration Account the amount of any positive Balance with respect to such Hotel, as of the date of - 14 - Deconsolidation, and to pay such Balance to the Owner of such Hotel; or (ii) the Owner of such Hotel shall, as of the date of Deconsolidation, pay into the Concentration Account the amount of any negative Balance with respect to such Hotel. END OF ARTICLE III - 15 - ARTICLE IV MISCELLANEOUS ------------- 4.01 Conflict with Management Agreement ---------------------------------- Except as specifically set forth in Section 2.04 D regarding the frequency of interim distributions of Owner's Distribution, nothing in this Agreement is intended to amend or modify any of the terms and provisions of any of the Management Agreements. In the event of a conflict (other than the aforesaid Section 2.04 D) between the terms and conditions of this Agreement and those of any one or more of the Management Agreements, the terms and conditions of such Management Agreements shall prevail. 4.02 Ownership of Accounts --------------------- Notwithstanding the fact that only employees of Management Company will be authorized to make withdrawals from the Concentration Account or the Disbursement Account, the Balance attributed to each Hotel shall be the property of the Owner of that Hotel. 4.03 Defaults -------- Any default by any party pursuant to the terms and provisions of this Agreement shall be deemed to be a Default under the Management Agreement applicable to the Hotel in question. - 16 - 4.04 New Hotels ---------- Additional hotels (other than those listed on Exhibit "A"), which are managed by Management Company or one of its Affiliates, and owned by Host Marriott Corporation or one of its Affiliates, may become members of the Cash Concentration System, if Management Company and the owners of such hotels so decide. Each such decision to enter the Cash Concentration System will be implemented by Management Company and the owner of the hotel in question each signing a counterpart copy of this Agreement. Each such counterpart shall be deemed to be incorporated into this Agreement, and the signatories to such counterpart shall become parties to this Agreement, regardless of whether or not all parties to this Agreement sign such counterpart. 4.05 Notices ------- Any notices given by any party to this Agreement to any other party shall be given in accordance with Section 20.09 of the Management Agreement. END OF ARTICLE IV - 17 - IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year written above. Attest: HMH PROPERTIES, INC. By: /s/ Pamela J. Murch By: /s/ Christopher G. Townsend -------------------- ---------------------------- Attest: MARRIOTT CORPORATION By: /s/ Pamela J. Murch By: /s/ Stephen J. McKenna -------------------- ----------------------- Attest: MARRIOTT SBM TWO CORPORATION By: /s/ Pamela J. Murch By: /s/ Christopher G. Townsend -------------------- ---------------------------- Attest: MICHIGAN HOST, INC. By: /s/ Pamela J. Murch By: /s/ Christopher G. Townsend -------------------- ---------------------------- Attest: CITY CENTER HOTEL LIMITED PARTNERSHIP By: MARRIOTT CORPORATION, General Partner By: /s/ Pamela J. Murch By: /s/ Stephen J. McKenna -------------------- ----------------------- (signatures are continued on following page) - 18 - Attest: HOST OF BOSTON, LTD. By: HOST INTERNATIONAL, INC., General Partner By: /s/ Pamela J. Murch By: /s/ Christopher G. Townsend -------------------- ---------------------------- Attest: HOST OF HOUSTON, LTD. By: HOST INTERNATIONAL, INC., General Partner By: /s/ Pamela J. Murch By: /s/ Christopher G. Townsend -------------------- ---------------------------- Attest: MARRIOTT HOTEL SERVICES, INC. By: /s/ Peter J. Swift By: /s/ James Sullivan ------------------- ------------------- - 19 - EXHIBIT "A" -----------
================================================================================ INITIAL DEPOSIT OWNER OF HOTEL HOTEL (in dollars) (on and after Effective Date) - -------------------------------------------------------------------------------- Tampa Airport 100,000 Host of Boston, Ltd. Houston Airport 100,000 Host of Houston, Ltd. Denver West 50,000 HMH Properties, Inc. Newark 50,000 HMH Properties, Inc. Detroit 100,000 Michigan Host, Inc. Atlanta Peachtree 50,000 HMH Properties, Inc. Nashua 75,000 Marriott Corporation Romulus 100,000 Marriott Corporation Rocky Hill 150,000 HMH Properties, Inc. Atlanta Lenox 300,000 Marriott Corporation Deerfield 75,000 Marriott SBM Two Corporation Newport Beach 300,000 HMH Properties, Inc. Dulles 50,000 Marriott Corporation Kansas City 50,000 HMH Properties, Inc. Miami 600,000 HMH Properties, Inc. Bethesda 200,000 HMH Properties, Inc. Atlanta Perimeter 150,000 HMH Properties, Inc. Minneapolis 200,000 City Center Hotel Limited Partnership St. Louis Pavilion 300,000 One Broadway Hotel Venture* El Paso 100,000 Marriott Corporation Washingtonian 200,000 HMH Properties, Inc. TOTAL $3,300,000 ================================================================================
* The Initial Deposit with respect to St. Louis Pavilion is being made by Marriott Corporation, in its capacity as one of the general partners of One Broadway Hotel Venture. EX-23.1 15 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our firm included in or made a part of this registration statement. Arthur Andersen & Co. Washington, D.C. January 18, 1994 -----END PRIVACY-ENHANCED MESSAGE-----