ITEM 3. LEGAL PROCEEDINGS
In September 1994, the Company and certain holders and purchasers of certain of the Company's bonds (the "PPM Group") went to trial as a result of litigation initiated by the PPM Group in response to the Marriott International Distribution. In October 1994, the judge declared a mistrial based on the inability of the jury to reach a verdict. In January 1995, the judge granted the Company's motion for judgment in its favor on the PPM Group's claims as a matter of law. An appeal was filed by the PPM Group in February 1995, and the appeal was argued in February 1996. In March 1996, the Company settled the litigation for a payment of $1.25 million. The settlement leaves in place the trial court's judgment in favor of the Company on all of the PPM Group's claims. The settlement did not have a material effect on the Company's financial condition and results of operations.
The Company and its subsidiaries are involved in litigation incidental to their businesses. Management believes that such litigation is not significant and will not have a material adverse effect on the Company's financial condition and results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock is listed on the New York Stock Exchange, the Chicago Stock Exchange, the Pacific Stock Exchange and the Philadelphia Stock Exchange and 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 the cash dividends paid per share of common stock. The Special Dividend of HM Services was completed on December 29, 1995 and provided Company shareholders with one share of common stock of HM Services for every five shares of Host Marriott common stock. Therefore, due to the Special Dividend, stock prices are not indicative of the Company's current stock price or dividend policies except for the first quarter of 1996. The Company currently intends to retain future earnings, if any, for use in its business and does not anticipate paying regular cash dividends on the common stock. As of December 29, 1995, there were approximately 57,032 holders of record of common stock.
- -------- (1) Prior to the Special Dividend. (2) Subsequent to the Special Dividend.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents certain selected historical financial data of the Company which has been derived from the Company's audited Consolidated Financial Statements for the five most recent fiscal years ended December 29, 1995. The financial data for fiscal years 1991 and 1992 and the income statement data for fiscal year 1993 do not reflect the Marriott International 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 Marriott International Distribution and related transactions, the assets, liabilities and businesses of the Company have changed substantially.
- -------- (1) Operating results for 1995 include a $10 million pre-tax charge to write down the carrying value of five limited service properties to their net realizable value and a $60 million pre-tax charge to write down an undeveloped land parcel to its estimated sales value. In 1995, the Company recognized a $20 million extraordinary loss, net of taxes, on the extinguishment of debt. (2) In 1994, the Company recognized a $6 million extraordinary loss, net of taxes, on the required redemption of senior notes. In 1993, the Company recognized a $4 million extraordinary loss, net of taxes, on the completion of an exchange offer for its then outstanding bonds. (3) Operating results for 1993 include the operations of Marriott International only through the Marriott International Distribution date of October 8, 1993. These operations had a net pre-tax effect on income of $211 million for the year ended December 31, 1993 and are recorded as "Profit from operations distributed to Marriott International" on the Company's consolidated statements of operations and are, therefore, not included in sales, operating profit before corporate expenses and interest, interest expense and interest income for the same period. The net pre-tax effect of these operations is, however, included in income before income taxes, extraordinary item and cumulative effect of changes in accounting principles and in net income for the same periods. Statement of Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income Taxes," was adopted in the first quarter of 1993. In the second quarter of 1993, the Company changed its accounting method for assets held for sale. During 1993, the Company recorded a $34 million credit to reflect the adoption of SFAS No. 109 and a $32 million charge, net of taxes, to reflect the change in its accounting method for assets held for sale. (4) Operating results in 1993 and 1992 included pre-tax expenses related to the Marriott International Distribution totaling $13 million and $21 million, respectively. (5) Fiscal year 1991 includes 53 weeks. (6) The Company recorded a loss from discontinued operations, net of taxes, as a result of the Special Dividend of $61 million in 1995, $6 million in 1994, and $4 million in 1993, and income from discontinued operations, net of taxes, of $10 million in 1992 and $12 million in 1991. The 1995 loss from discontinued operations includes a pre-tax charge of $47 million for the adoption of SFAS No. 121, "Accounting For the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," a pre-tax $15 million restructuring charge and an extraordinary loss of $10 million, net of taxes, on the extinguishment of debt. (7) 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. Common equivalent shares and other potentially dilutive securities have been excluded from the weighted average number of outstanding common shares for 1995 and 1994, as they are antidilutive. (8) Includes convertible subordinated debt of $20 million at December 31, 1993, $228 million at January 1, 1993 and $210 million at January 3, 1992.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following discussion and analysis addresses the results of operations of the Company for 1995 and 1994 on a historical basis and 1993 on a pro forma basis. On October 8, 1993, Marriott Corporation (as the Company was formerly known) made a special dividend consisting of the distribution (the "Marriott International 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 Marriott International Distribution held all of the assets relating to the lodging and senior living services management, timeshare resort development and operation, food service and facilities management and other contract services businesses (the "Management Business") formerly conducted by the Company. Marriott International now conducts the Management Business as a separate publicly traded company.
Management believes that a discussion of the Company's historical results of operations for 1993 is not relevant because the significant changes as a result of the Marriott International Distribution and related transactions make the 1994 and 1993 historical results of operations not comparable and that it is more meaningful and relevant in understanding the present and ongoing Company operations to compare the Company's historical 1994 operating results to the pro forma operating results for 1993 reflecting the Marriott International Distribution and related transactions ("Distribution Pro Forma"). Accordingly, the Company's Distribution Pro Forma consolidated statement of operations for fiscal 1993 is presented below. This Distribution Pro Forma condensed consolidated statement of operations was prepared as if the Marriott International Distribution and related transactions and the implementation of the various related agreements entered into with Marriott International, including the lodging management agreements and senior living community leases, occurred at the beginning of the period and include only the operations of the businesses retained by the Company, and exclude, among other items, certain nonrecurring costs totaling $13 million relating to the Marriott International Distribution, accounting changes, extraordinary losses and discontinued operations related to the Special Dividend. See Notes 3, 6, 8, 9, 11, 15 and 16 to the Consolidated Financial Statements included elsewhere herein for discussion of the Marriott International Distribution, and the related transactions and agreements.
The following Distribution Pro Forma consolidated statement of operations for 1993 and management's discussion and analysis related thereto are presented in the format that the Company adopted as of January 1, 1994. The historical and Distribution Pro Forma consolidated statements of operations and related analysis should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto included elsewhere herein. The Distribution Pro Forma consolidated statement of operations does not purport to be indicative of results which may occur in the future 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 Distribution Pro Forma consolidated statement of operations only reflects the consummation of the Marriott International Distribution.
- -------- (1)Significant adjustments to the 1993 historical financial statements for the Distribution Pro Forma data include: . the reduction of hotel revenues by $354 million to equal house profit, which the Company treats as revenue from owned hotels subsequent to the Marriott International Distribution, with a matching decrease in operating costs and expenses. See Note 3 to the Consolidated Financial Statements included elsewhere herein; . the reduction of operating profit by $14 million to reflect management fees paid to Marriott International under the lodging management agreements; . the reduction of property level revenues of $67 million to equal rental income of $23 million and the reduction of operating expenses of $46 million for senior living communities owned by the Company and leased to Marriott International. See Note 3 to the Consolidated Financial Statements included elsewhere herein; . the elimination of the pre-tax profit from operations distributed to Marriott International of $211 million;
. the elimination of certain nonrecurring charges of $13 million directly related to the Marriott International Distribution; and . the net decrease to interest expense of $12 million primarily related to the assumption by Marriott International of 90% of the Liquid Yield Option Notes ("LYONs") issued by Marriott Corporation, partially offset by the increase in interest expense as a result of a debt exchange offer in 1993. See Note 9 to the Consolidated Financial Statements included elsewhere herein.
Summary historical and Marriott International Distribution Pro Forma data are presented below (in millions):
(2) SFAS No. 109 "Accounting for Income Taxes" was adopted in the first quarter of 1993. In the second quarter of 1993, the Company changed its accounting method for assets held for sale. The Company recorded a $34 million credit to reflect the adoption of SFAS No. 109 and a $32 million charge, net of taxes, to reflect the change in its accounting method for assets held for sale in 1993. See the Notes to the Consolidated Financial Statements included elsewhere herein. (3) In 1995, the Company recognized a $20 million extraordinary loss, net of taxes, on the extinguishment of debt. The Company recognized a $6 million extraordinary loss, net of taxes, on the required redemption of senior notes in 1994. The Company recognized a $4 million extraordinary loss, net of taxes, on the completion of a debt exchange offer in 1993. See Notes 3 and 8 to the Consolidated Financial Statements included elsewhere herein. (4) The Company's loss from discontinued operations, net of taxes, as a result of the Special Dividend was $61 million in 1995, $6 million in 1994 and $4 million in 1993. The 1995 loss from discontinued operations includes a pre-tax charge of $47 million for the adoption of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of", a pre-tax $15 million restructuring charge and an extraordinary loss of $10 million, net of taxes, on the extinguishment of debt. See the Consolidated Financial Statements included elsewhere herein. (5) The 1993 pro forma weighted average shares are based on weighted average common shares of the Company adjusted to reflect (i) the conversion of the Company's preferred stock into 10.6 million shares of Common Stock prior to the Marriott International Distribution, and (ii) the issuance by the Company of 1.8 million shares of its Common Stock, prior to the Marriott International Distribution, in connection with the refinancing of certain of its senior debt.
Subsequent to the Marriott International Distribution, revenues primarily represent house profit from the Company's hotel properties, net gains (losses) on real estate transactions, equity in the earnings of affiliates and lease rentals from the Company's senior living communities (1994 and 1993). House profit reflects the net revenues flowing to the Company as property owner and represents hotel sales less property-level expenses (excluding depreciation, management fees, real and personal property taxes, ground and equipment rent, insurance and certain other costs which are classified as operating costs and expenses). The operating costs and expenses of the senior living communities consist of depreciation and amortization, while other operating costs and expenses include idle land carrying costs and certain other costs.
For the periods discussed herein, the Company's properties have experienced substantial increases in room revenues generated per available room ("REVPAR"). REVPAR is a commonly used indicator of market performance for hotels which represents the combination of the average daily room rate charged and the average occupancy achieved. REVPAR does not include food and beverage or other ancillary revenues generated by the property. The REVPAR increase primarily represents strong percentage increases in room rates, while occupancies have generally increased slightly or remained flat. Increases in room rates have generally been achieved by the managers through shifting occupancies away from discounted group business to higher-rated group and transient business. This has been made possible by increased travel due to improved economic conditions and by the favorable supply/demand characteristics existing in the lodging industry today, particularly in the full-service segment. The Company expects this supply/demand imbalance, particularly in the full-service segment, to continue, which should result in improved REVPAR and operating profits at its hotel properties in the near term. However, there can be no assurance that REVPAR will continue to increase in the future.
Nine of the Company's properties were converted to the Marriott brand name following their acquisition by the Company. The conversion of these properties to the Marriott brand is intended to increase occupancy and room rates as a result of Marriott International's nationwide marketing and reservation systems and Honored Guest Awards Program, as well as customer recognition of the Marriott brand name. In connection with the conversion of four of the nine conversion properties, the Company employed, or will employ, additional capital to upgrade these properties to the Company's and the new manager's standards. The invested capital with respect to these properties is primarily used for the improvement of common areas as well as upgrading soft and hard goods (i.e., carpets, drapes, paint, furniture and additional amenities). The conversion process typically causes periods of disruption to these properties as selected rooms and common areas are temporarily taken out of service. Due to these disruptive periods, the time necessary for integration into the nationwide Marriott system and the Company's realization of the anticipated effect of these improvements, the operating results for 1995 do not reflect the full impact of conversion for these four properties. The Company expects to begin to realize the benefits of conversion improvements within six to 12 months of their completion. For three of the four conversion properties, the Company expects to realize the benefits during 1996. For the fourth conversion property, significant conversion improvement efforts will be completed during 1996 and the Company expects to begin to realize the benefits therefrom in 1997. The operating performance of the five properties which did not require significant renovation have begun to reflect the benefits of conversion subsequent to their conversion to the Marriott brand name.
The Company's hotel operating costs and expenses are, to a great extent, fixed. Therefore, the Company derives substantial operating leverage from increases in revenue. This operating leverage is somewhat diluted, however, by the impact of base management fees which are calculated as a percentage of sales, variable lease payments and incentive management fees tied to operating performance above certain established levels. Successful 1994 and 1995 full- service hotel performance resulted in certain of the Company's properties reaching levels which allowed the manager to share in the growth of profits in the form of higher management fees. The Company views this as a positive development because it helps to strengthen the alignment of the managers' interest with the Company's. The Company expects that this trend will continue in 1996 as the hotel industry continues to strengthen.
The Consolidated Financial Statements of the Company have been restated to reflect the results of the Operating Group as discontinued operations for all periods discussed below.
1995 COMPARED TO 1994
Revenues. Revenues primarily represent house profit from the Company's hotel properties, net gains (losses) on real estate transactions, equity in earnings of affiliates and lease rentals for the Company's senior living communities (in 1994). Revenues increased $104 million, or 27%, to $484 million in 1995. The Company's revenue and operating profit from continuing operations were impacted by:
.improved lodging results (see discussion below); .the net addition of 28 full-service hotel properties during 1994 and 1995; .the 1995 sale and leaseback of 37 of the Company's Courtyard properties; . the $60 million pre-tax charge in 1995 to write down the carrying value of one undeveloped land parcel to its estimated sales value; . the $10 million pre-tax charge in 1995 to write down the carrying value of certain Courtyard and Residence Inn properties held for sale to their net sales values; .the 1994 sale of the Company's senior living communities; .the 1994 and 1995 sales of the Company's Fairfield Inns; and . the 1994 reduction in general liability and workers' compensation self- insurance program reserves related to the Company's continuing operations of $4 million.
Hotel revenues increased $136 million, or 40%, to $474 million in 1995, as all three of the Company's lodging concepts reported growth in REVPAR. The hotels added by the Company in 1994 and 1995 provided $134 million of revenue in 1995. Excluding the impact of the addition of full-service properties, the sales of the Fairfield Inns, and the sale and leaseback of 37 Courtyards, comparable hotel revenues increased $28 million, or 11%, in 1995 over 1994.
Revenue for nearly all of the Company's full-service hotels, resorts and suites for 1995 was improved or comparable to the results for 1994. Increases in REVPAR of 7% for comparable units led to improved results. On a comparable basis for the Company's full-service properties, average room rates increased 9%, while average occupancy decreased over one percentage point.
The Company's moderate-price Courtyard properties reported nearly an 8% increase in REVPAR due to a 7% increase in average room rates and a small increase in occupancy.
The Company's extended-stay Residence Inns reported an 8% increase in REVPAR due to an increase in average room rates of 7%, combined with a one percentage point increase in average occupancy. Due to the high occupancy of these properties, the Company expects future increases in REVPAR, if any, to result from room rate increases, rather than occupancy increases. However, there can be no assurance that REVPAR will continue to increase in the future.
In the third quarter of 1994, the Company sold 26 of its 30 Fairfield Inns for $114 million and in the second quarter of 1995, the Company sold its four remaining Fairfield Inns to the same buyer for net cash proceeds of $6 million. Revenues and operating profit in 1995 for the four remaining Fairfield Inns prior to their disposition were comparable to 1994.
The net loss on property transactions for 1995 includes the pre-tax charge of $10 million to write down the carrying value of five individual Courtyard and Residence Inn properties held for sale to their estimated net sales values, partially offset by the deferred gain amortization related to the 1994 and 1993 sales of the Company's remaining limited partner interests in the Residence Inn USA partnership.
Operating Costs and Expenses. Operating costs and expenses principally consist of depreciation, management fees, real and personal property taxes, ground and equipment rent, insurance and certain other costs. The Company's operating costs and expenses increased $142 million to $370 million for 1995 primarily
representing increased hotel operating costs, partially offset by the impact on operating costs from the 1994 sale of the senior living communities. Hotel operating costs increased $83 million to $281 million for 1995 primarily due to the net addition of 28 full-service properties during 1994 and 1995 and increased management fees and rentals tied to improved property results, net of the impact of the sales of certain limited-service properties discussed above. As a percentage of hotel revenues, hotel operating costs and expenses remained unchanged at 59% of revenues in both 1995 and 1994. During the fourth quarter of 1995, the Company determined that a 174-acre undeveloped land site will no longer be developed into an office project over an extended time period as previously planned but, instead, the Company decided to market the site for near-term sale. As a result of this change in strategy, a pre-tax charge of $60 million was recorded to reduce the asset to its estimated sales value.
Operating Profit. As a result of the changes in revenues and operating costs and expenses discussed above, the Company's operating profit decreased $38 million, or 25%, to $114 million in 1995. Hotel operating profit increased $53 million, or 38%, to $193 million, or 41% of revenues, for 1995 from $140 million, or 41% of revenues, for 1994. The hotels added by the Company in 1994 and 1995 provided $65 million of operating profit for 1995. Excluding the impact of the non-comparable items discussed earlier, hotel operating profit increased $29 million, or 31%, over 1994. Several hotels, including the New York Marriott Marquis, Santa Clara Marriott and the Newport Beach Marriott posted significant improvements in operating profit.
Corporate Expenses. Corporate expenses increased $5 million to $36 million in 1995 primarily due to an increase in the number of employees and overall higher corporate administrative and travel costs associated with higher revenues. As a percentage of revenues, corporate expenses decreased to 7% of revenues in 1995 from 8% in 1994.
Interest Expense. Interest expense increased by 8% to $178 million in 1995 primarily due to the additional debt incurred in connection with the 1994 and 1995 full-service hotel acquisitions, increased interest rates on the Company's variable rate debt, and the decreased benefit from the Company's interest rate swap agreements, which was partially offset by the net impact of the 1994 and 1995 redemptions of senior notes of Host Marriott Hospitality, Inc. ("Hospitality Notes") and the line of credit with Marriott International.
Continuing Operations. The loss from continuing operations for 1995 increased $49 million to $62 million principally due to the changes in operating profit discussed above and the increase in corporate expenses and interest expense.
Discontinued Operations. The loss from discontinued operations for 1995 of $61 million principally was due to a $10 million extraordinary loss on the redemption and defeasance of certain debt in 1995, a charge of approximately $47 million before taxes for the adoption of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," a $15 million pre-tax charge for the restructuring of HM Services' business processes and $9 million of expenses related to the Special Dividend.
The Company wrote down 15 individual operating units in connection with the adoption of SFAS No. 121 and the change in accounting to assessment of impairment on an individual operating unit basis. Approximately 73% of the write-down related to two operating units, the Florida Turnpike (approximately $25 million) and the Orlando Airport (approximately $9 million). The Company has written off all of the assets related to these two operating units due to projected future negative cash flows at such operating units. While the Company has been aware that these two operating units have been incurring negative cash flows since the late 1980s (including negative cash flows totaling approximately $2.4 million in 1995), the effects on the Company of such negative cash flows for any period have been offset by positive cash flows from other operating units comprising the Operating Group's airport and tollroad business lines. As of December 29, 1995, the total projected net cash flow deficit for the remaining terms of the leases of the 15 operating units written down was approximately $45 million. As a result of the consummation of the Special Dividend on December 29, 1995, the business operations of the Company no longer include the Operating Group and, therefore, the projected future negative cash flows form these operating units will have no affect on the Company's future financial condition or results of operations.
Extraordinary Item. In connection with the redemption and defeasance of certain of the Company's debt in 1995, the Company recognized an extraordinary loss of $30 million ($20 million after taxes), primarily representing premiums paid on the redemption of Hospitality Notes of $13 million and the write-off of deferred financing fees and discounts on the Hospitality Notes and the Revolver (as defined herein).
Net Loss. The Company's net loss for 1995 increased $118 million to $143 million. The net loss for 1995 was $.90 per share, compared to $.17 per share for 1994.
HISTORICAL 1994 COMPARED TO PRO FORMA 1993
Revenues. Revenues from continuing operations rose $119 million, or 46%, to $380 million for 1994 from $261 million on a pro forma basis for 1993. The Company's revenue and operating profit from continuing operations were impacted by:
. improved lodging results (see discussion below);
. the addition of 18 full-service hotel properties during 1994;
. the consolidation of the partnership owning the New York Marriott Marquis on December 31, 1993;
. the 1994 sale of the Company's senior living communities;
. the 1994 sale of 26 of the Company's Fairfield Inns;
. the 1994 reduction in general liability and workers' compensation self- insurance program reserves related to the Company's continuing operations of $4 million;
. the 1993 $11 million charge to write down the carrying value of certain Fairfield Inn properties held for sale to their net realizable value;
. the 1993 sale of 11 Residence Inns; and
. the 1993 $10 million gain on the sale of the Company's interest in a hotel partnership.
Hotel revenues increased $89 million, or 36%, to $338 million for 1994, as all of the Company's lodging concepts reported growth in REVPAR for comparable units. The hotels added by the Company in 1994 provided $27 million of revenue. Excluding the impact of the addition of full-service properties, the sales of the Fairfield Inns and Residence Inns and consolidation of the New York Marriott Marquis, comparable hotel revenues increased $31 million, or 15%, in 1994 over pro forma 1993.
Revenue for the Company's full-service hotels, resorts, and suites was improved or comparable to 1993 results with the exception of the Miami Airport Marriott Hotel which achieved very high occupancy levels in early 1993 resulting from Hurricane Andrew in 1992. The Company's full-service hotels posted a 7% increase in REVPAR for comparable units. Average occupancy increased over one percentage point for comparable units, while average room rates increased 5%.
The Company's moderate-priced Courtyard properties reported significant increases in revenues in 1994 due to REVPAR increases. REVPAR of the Company's Courtyard properties increased 8%, due to a 7% increase in average room rates and almost a one percentage point increase in average occupancy.
The Company's extended-stay Residence Inns also reported significant increases in revenues in 1994 due to REVPAR increases. REVPAR of the Company's Residence Inns increased 8% for comparable units due primarily to an increase in average room rates of 7%, combined with a one percentage point increase in average occupancy.
On August 5, 1994, the Company sold 26 of its Fairfield Inns to an unrelated party for net proceeds of approximately $114 million. Prior to their sale, year-to-date revenues and operating profit were comparable to the prior year. Year-to-date revenues and operating profit for the four remaining Fairfield Inns were comparable to the 1993 pro forma amounts.
Senior living communities' revenues consist of rentals earned under the lease agreements with Marriott International. During the first quarter of 1994, the Company executed an agreement to sell all of its senior living communities to an unrelated party for approximately $320 million, which approximated the communities' carrying value. The sale of the communities was completed during the second and third quarters of 1994. Prior to their sales, year-to-date revenues and operating profit for senior living communities were comparable to 1993.
The net gains (losses) on property transactions for 1994 principally included amortization of the deferred gain on the 1993 sale of Residence Inns, and for 1993 principally included the Fairfield Inn net realizable value write-down and the gain on the 1993 sale of the Company's interest in the partnership owning the Boston Copley Marriott Hotel.
Equity in earnings (losses) of affiliates was break even for 1994, compared to $27 million of losses recorded in 1993. The significant decrease is attributable to the consolidation of the partnership owning the New York Marriott Marquis on December 31, 1993.
Operating costs and expenses. Operating costs and expenses increased $47 million to $228 million in 1994. Hotel operating costs increased $43 million to $198 million in 1994. As a percentage of hotel revenues, hotel operating costs and expenses represented 59% of revenues in 1994 and 62% of revenues in 1993. Due to favorable claims experience for the general liability and workers' compensation self-insurance programs, the Company reduced its related actuarially estimated reserves by $4 million in 1994, which is reflected as a reduction in the Company's other operating costs and expenses.
Operating Profit. As a result of the changes in revenues and operating costs and expenses discussed above, the Company's operating profit increased $72 million, or 90%, to $152 million in 1994. Hotel operating profit increased $46 million, or 49%, to $140 million, or 41% of hotel revenues for 1994 from $94 million or 38% of hotel revenues for 1993 on a pro forma basis. The hotels added by the Company in 1994 provided $13 million of operating profit for 1994. Excluding the impact of the noncomparable items discussed earlier, hotel operating profit increased $24 million, or 32%, over pro forma 1993 levels.
Corporate expenses. Corporate expenses increased $8 million to $31 million for 1994 primarily due to higher employee restricted stock award expenses and administrative costs. Corporate expenses decreased to 8% of revenues in 1994 from 9% of revenues in 1993.
Interest expense. Interest expense increased by 9% to $165 million for 1994 due to the consolidation of the partnership owning the New York Marriott Marquis and the impact of rising interest rates on the Company's floating rate debt and interest rate swap agreements, partially offset by the impact of bond redemptions in the second half of 1994.
Continuing Operations. The loss from continuing operations for 1994 decreased $47 million to $13 million principally due to the strong performance of the Company's lodging properties as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its capital requirements with a combination of operating cash flow, debt and equity financing, and proceeds from sales of selected properties and other assets. The Company utilizes these sources of capital to acquire new properties, fund capital additions and improvements, and make principal payments on debt.
Capital Transactions. On December 20, 1995, HMC Acquisition Properties, Inc. ("Acquisitions"), an indirect wholly-owned subsidiary of the Company, issued $350 million of 9% senior notes (the "Acquisitions Notes") to several initial purchasers (the "December 1995 Debt Offering"). Acquisitions owns 15 of the Company's 90 full-service hotel properties. The Acquisitions Notes were issued at par and have a final maturity of December 2007. The net proceeds totaled $340 million and were utilized to repay in full the outstanding
borrowings of $210 million under Acquisitions' $230 million revolving credit facility (the "Revolver"), which was then terminated, to acquire one full- service property for $29 million in December 1995 and another full-service property for $25 million in the first quarter of 1996, and to finance future acquisitions of full-service hotel properties with the remaining $76 million of proceeds. The Acquisitions Notes are guaranteed by Acquisitions' subsidiary. The indenture governing the Acquisitions Notes contains covenants that, among other things, limit the ability of Acquisitions and its subsidiary to incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, repurchase capital stock or subordinated indebtedness, create certain liens, enter into certain transactions with affiliates, sell certain assets, issue or sell stock of Acquisitions' subsidiary, and enter into certain mergers and consolidations. In addition, under certain circumstances, Acquisitions will be required to offer to purchase the Acquisitions Notes at par value with the proceeds of certain asset sales. Acquisitions will not be required to make principal payments on the Acquisitions Notes until maturity, except in the event of certain changes in control. Distributions by Acquisitions to the Company are available through the payment of dividends only to the extent that the cumulative amount of such dividends from December 20, 1995 does not exceed $15 million plus an amount equal to the excess of Acquisitions' EBITDA over 200% of Acquisitions' interest expense, as defined in the indenture, plus the amount of capital contributions to Acquisitions subsequent to December 20, 1995. Acquisitions has the ability to enter into a revolving credit facility of up to $25 million, which would be available for Acquisitions' working capital, and other general corporate purposes, and to incur other indebtedness as specified in the indenture.
On May 25, 1995, two wholly-owned subsidiaries of Host Marriott Hospitality, Inc. ("Hospitality"), a wholly-owned subsidiary of the Company, issued an aggregate of $1 billion of 9.5% senior secured notes in two concurrent offerings. HMH Properties, Inc. ("Properties"), the owner of 57 of the Company's 90 lodging properties, and Host Marriott Travel Plazas, Inc. ("HMTP"), the operator/manager of HM Services' food, beverage and merchandise concessions business, issued $600 million and $400 million, respectively, of senior notes secured by the stock of certain of their respective subsidiaries. The bonds were issued at par and have a final maturity of May 2005. The net proceeds of approximately $971 million were used to defease, and subsequently redeem, all of Hospitality's remaining bonds (the "Hospitality Notes") and to repay borrowings under the line of credit with Marriott International. The Properties Notes are secured by a pledge of the stock of certain of Properties' subsidiaries and are guaranteed, jointly and severally, by certain of Properties' subsidiaries. The indenture governing the Properties Notes contains covenants that, among other things, limit the ability of Properties and its subsidiaries to incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, repurchase capital stock or subordinated indebtedness, create certain liens, enter into certain transactions with affiliates, sell certain assets, issue or sell stock of Properties' subsidiaries, and enter into certain mergers and consolidations. Distributions of Properties' equity are restricted but will be available for the payment of dividends to the extent that the cumulative amount of such dividends from May 25, 1995 does not exceed $25 million plus an amount equal to the excess of Properties' EBITDA over 200% of Properties' interest expense, as defined in the indenture, plus the amount of capital contributions to Properties subsequent to May 25, 1995. Properties has the ability to enter into a revolving credit facility of up to $35 million, which would be available for Properties' working capital and other general corporate purposes, and to incur other indebtedness as specified in the indenture. The HMTP senior notes were included in the HM Services Special Dividend.
Under the indentures for the Acquisitions Notes and the Properties Notes, proceeds from the sale of assets within the subsidiary issuing the notes may be used for the acquisition of new properties subject to certain limitations.
During 1995, the Company replaced its $630 million line of credit with a new line of credit with Marriott International (the "New Line of Credit") pursuant to which the Company has the right to borrow up to $225 million to fund (i) obligations under certain guarantees made by the Company, (ii) payments of principal on specified recourse debt of the Company and its subsidiaries, (iii) payment of interest on amounts borrowed under the New Line of Credit and on specified recourse debt of the Company and its subsidiaries, (iv) working capital, and (v) other items approved in advance by Marriott International. Borrowings under the New Line of Credit bear interest at LIBOR plus 3% (4% when the outstanding balance exceeds $112.5 million) and mature in June
1998. Any such borrowings are guaranteed by, or secured by the pledge of the stock of, certain subsidiaries of the Company. An annual commitment fee of 5/8% is charged on the unused portion of the New Line of Credit. There was $22 million outstanding under the New Line of Credit at December 29, 1995. The New Line of Credit imposes certain restrictions on the ability of the Company and certain of its subsidiaries to incur additional debt, create 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, and repurchase their common stock. When no advances are outstanding under the New Line of Credit and the Company and certain of its subsidiaries have adequately reserved for debt maturities over a 6-month term, such restricted payments as would otherwise be prohibited are permitted in the amount by which aggregate EBITDA of the Company and certain of its subsidiaries (as defined in the New Line of Credit) and the proceeds of specified stock issuances exceed 170% of the aggregate of certain specified charges.
In January 1994, the Company raised $230 million of net proceeds from the sale of 20.1 million shares of common stock. Additionally, the Company obtained the Revolver for up to $230 million with a group of commercial banks for the acquisition of full-service hotels. The common stock and Revolver proceeds were utilized to fund the acquisition of full-service hotel properties. As discussed above, the Revolver was repaid in full, and terminated, with certain proceeds from the December 1995 Debt Offering.
There are no plans to pay regular cash dividends on the Company's common stock in the near future, and the Company is prohibited from paying dividends while amounts are outstanding under its New Line of Credit with Marriott International.
Asset Dispositions. The Company historically has and may, from time to time in the future, consider opportunities to sell certain of its real estate properties if price targets can be achieved. During the first and third quarters of 1995, 37 of the Company's Courtyard properties were sold to and leased back from the REIT for approximately $330 million. The Company received net proceeds from the two transactions of approximately $297 million and will receive approximately $33 million upon expiration of the leases. A deferred gain of $14 million on the sale/leaseback transactions will be amortized over the initial term of the leases. In February 1996, the Company entered into an agreement with the REIT to sell and lease back 16 of the Company's remaining Courtyard properties for approximately $176 million and 18 of the Company's Residence Inn properties for approximately $172 million (10% of the sale amount of both transactions would be deferred). The transactions are expected to close in the first and second quarters of 1996. In 1995, the Company also sold its four remaining Fairfield Inns for net cash proceeds of approximately $6 million, which approximated their carrying value, and the Springfield Radisson Hotel for net cash proceeds of approximately $3 million, which approximated its carrying value. During the second and third quarters of 1994, the Company sold 14 senior living communities to an unrelated party for approximately $320 million, which approximated the communities' carrying value. Additionally, during the third quarter of 1994, the Company sold 26 of its Fairfield Inns to an unrelated party. The net proceeds from the sale of the hotels was approximately $114 million, which exceeded the carrying value of the hotels by approximately $12 million, and such excess has been deferred. Approximately $27 million of the Fairfield Inn proceeds was payable in the form of a note from the purchaser. The Company also sold 28 undeveloped land parcels during 1994 and 1995 for proceeds of approximately $33 million.
In cases where the Company has made a decision to dispose of particular properties, the Company assesses impairment 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. If a property is impaired, its basis is adjusted to its fair market value. In the second quarter of 1995, the Company made a determination that its owned Courtyard and Residence Inn properties were held for sale. While management expects to sell these properties as part of one or more portfolios and has currently signed an agreement to do so, the Company recorded a $10 million charge to write down the carrying value of five individual Courtyard and Residence Inn properties to their estimated net sales values. The Company also recorded an $11 million charge in the fourth quarter of 1993 to write down 15 individual Fairfield Inn properties to their net realizable value, although the overall sales transaction generated a net gain.
Capital Acquisitions, Additions and Improvements. The Company seeks to grow primarily through opportunistic acquisitions of full-service hotels. The Company believes that the full-service segment of the market offers 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. During 1995, the Company acquired nine hotels totaling approximately 3,900 rooms in separate transactions for approximately $390 million ($141 million of which was financed through first mortgage financing on four of the hotels). Four of the nine acquisitions, totaling $223 million, were completed in the fourth quarter of 1995. During 1994, the Company acquired 15 full-service hotels totaling approximately 6,100 rooms (including one 199-room hotel subsequently sold in 1995) for approximately $440 million. The Company also provided 100% financing totaling approximately $35 million to an affiliated partnership, in which the Company owns the sole general partner interest, for the acquisition of two full-service hotels (totaling another 684 rooms) by the partnership. Additionally, the Company acquired a controlling interest in one 662-room, full-service hotel through an equity investment of $16 million and debt financing of $36 million (the debt was subsequently sold in 1995). The Company considers all of these properties as owned hotels for accounting purposes.
During the first quarter of 1996, the Company acquired one full-service hotel (374 rooms) for $25 million, controlling interests in three additional properties (2,269 rooms) for approximately $66 million and an 83% interest in the mortgage loans secured by a 250-room full-service property for $18 million. See " "Business and Properties--1996 Acquisitions." The Company has also entered into agreements to purchase two full-service properties (608 rooms) for approximately $51 million and a controlling interest in one full- service property (400 rooms) for approximately $18 million. The Company is continually engaged in discussions with respect to other potential acquisition properties.
Under the terms of its management agreements, the Company is generally required to spend approximately 5% of gross hotel sales to cover the capital needs of the properties, including major guest room and common area renovations which occur every five to six years. The Company anticipates spending approximately $75 million to $80 million annually on the renovation and refurbishment of the Company's existing lodging properties.
The Company completed the construction of the 1,200-room Philadelphia Marriott Hotel, which opened on January 27, 1995. The construction costs of this hotel were funded 60% through a loan from Marriott International ($109 million outstanding at December 29, 1995). Construction of a second hotel in Philadelphia, the 419-room Philadelphia Airport Marriott Hotel (the "Airport Hotel"), also was completed and opened on November 1, 1995. The Airport Hotel was financed principally with $40 million of proceeds from an industrial development bond financing. The Company also is constructing a 300-room Residence Inn in Arlington, Virginia, scheduled for completion in early 1996. Capital expenditures for these three hotels totaled $64 million in 1995, $104 million in 1994 and $60 million in 1993. The Company anticipates spending approximately $7 million in 1996 to complete construction of the Pentagon City Residence Inn in Arlington, Virginia.
Debt Payments. At December 29, 1995, the parent company is obligated on approximately $262 million of recourse debt (which has been classified as "debt carrying a parent company guarantee of repayment"), including $22 million outstanding under the New Line of Credit. Required amortization of these obligations is generally limited to $172 million over the next five years.
The remainder of the Company's debt, approximately $1,916 million at December 29, 1995, is secured by specific hotel properties or has recourse limited to certain subsidiaries of the Company, and has been classified as "debt not carrying a parent company guarantee." Payments on a large portion of this debt generally come from the specific cash flows generated by the assets securing the debt. Maturities over the next five years total $375 million, a substantial portion ($302 million) of which represents the maturity of the mortgage on the New York Marriott Marquis in 1998.
The Company repaid certain indebtedness (with a principal balance of $87 million) upon its maturity on May 24, 1995 with a draw on its line of credit with Marriott International. Additionally, and pursuant to the
then-existing indenture, senior notes issued by Hospitality were required to be repaid to the extent of 50% to 75% of net proceeds from certain asset sales (at par) and 100% of net refinancing proceeds (generally at 103% of the principal amount). Based on net proceeds from qualifying asset sales for the first quarter of 1995, the Company redeemed $100 million of Hospitality bonds in the second quarter of 1995.
The Company currently is party to eight interest rate exchange agreements with an aggregate notional amount of $545 million. These agreements are with Citibank, N.A., New York, Salomon Brothers and the Industrial Bank of Japan Trust Company (the "Contracting Parties"). Under certain of these agreements aggregating $400 million, the Company pays interest based on the specified floating rates of three- and six-month LIBOR (average rate of 5.6% at December 29, 1995) and collects interest at fixed rates (average rate of 7.1% at December 29, 1995) through May 1997. Under the remaining agreements aggregating $145 million, the Company collects interest based on specified floating interest rates of one month LIBOR (rate of 6.1% at December 29, 1995) and pays interest at fixed rates (average rate of 6.4% at December 29, 1995). These agreements expire in 1996 through 1998. The Company realized a net reduction of interest expense of $5 million in 1995, $11 million in 1994 and $21 million in 1993 related to interest rate exchange agreements. The Company monitors the creditworthiness of the Contracting Parties by evaluating credit exposure and referring to the ratings of widely accepted credit rating services. The Standard and Poors' long-term debt ratings for the contracting parties are all BBB+ or better. The Company is exposed to credit loss in the event of non-performance by the Contracting Parties; however, the Company does not anticipate non-performance by the Contracting Parties.
Cash Flows. The Company's cash flow from operations in 1995, 1994 and 1993 totaled $110 million, $75 million and $335 million, respectively.
The Company's cash from investing activities from continuing operations in 1995, 1994 and 1993 totaled $156 million, $135 million and $201 million, respectively. Cash from investing activities primarily consists of net proceeds from the sales of certain assets, offset by the acquisition of hotel and other real estate assets and other capital expenditures previously discussed.
The Company's cash from financing activities from continuing operations was $204 million for 1995 and $24 million in 1994, while cash used in financing activities was $389 million for 1993. The Company's cash from financing activities from continuing operations primarily consists of the proceeds from equity and debt offerings, borrowings under the line of credit with Marriott International and the Revolver, mortgage financing on certain acquired hotels, offset by redemptions and payments on senior notes, the line of credit with Marriott International, the Revolver and other scheduled principal payments.
Lodging Properties Formerly Held For Sale. Prior to the Marriott International Distribution, the Company developed and sold lodging properties 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.
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 the principal method of financing the Company's lodging property development during this period. Sales of such properties also enabled the Company to transfer the risk 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 April 1992, as a result of continuing unfavorable conditions in the real estate markets, the Company decided it was no longer appropriate to view such sales of lodging properties as a primary means of long-term financing. Accordingly, the Company discontinued classification of these properties as assets held for sale.
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, the carrying value of these properties was not in excess of their net realizable value based on estimated selling prices, although, as a result of deteriorating market conditions, certain individual properties within a limited service brand had carrying values in excess of their 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.
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 is 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 properties, 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. The reduction in the annual depreciation charge as a result of this change did not have a material effect on 1993 results of operations.
Partnership Activities. The Company serves as general partner or the managing general partner of numerous limited partnerships which own 261 hotels as of December 29, 1995, managed by Marriott International. Debt of the hotel limited partnerships is typically secured by first mortgages on the properties and is generally nonrecourse to the partnership and the partners. However, the Company has committed to advance amounts to these affiliated limited partnerships, if necessary, to cover certain future debt service requirements. Such commitments were limited, in the aggregate, to $173 million at December 29, 1995. Subsequent to year-end, such maximum commitment was reduced to $128 million. Net fundings under these guarantees amounted to $8 million in 1995 and $2 million for 1994.
Leases. The Company leases certain property and equipment under noncancelable operating leases, including the long-term ground leases for certain hotels, generally with multiple renewal options. The leases related to the 37 Courtyard properties sold during 1995 contain provisions for the payment of contingent rentals based on a percentage of sales in excess of stipulated amounts. The Company remains contingently liable on certain leases related to divested non-lodging properties. Management considers the likelihood of any substantial funding related to these divested properties' leases to be remote.
Inflation. The Company's lodging properties are impacted by inflation through its effect on increasing costs and on the managers' ability to increase room rates. Unlike other real estate, hotels have the ability to change room rates on a daily basis, so the impact of higher inflation generally can be passed on to customers.
A substantial portion of the Company's debt bears interest at fixed rates. This debt structure largely mitigates the impact of changes in the rate of inflation on future interest costs. However, the Company currently is exposed to variable interest rates through four interest rate exchange agreements with an aggregate notional amount of $400 million. These agreements are with Citibank, N.A., New York and Salomon Brothers. Under these agreements, the Company pays interest based on the specified floating rates of three- and six- month LIBOR (average rate of 5.6% at December 29, 1995) and collects interest at fixed rates (average rate of 7.1% at December 29, 1995) through May 1997. In addition, outstanding borrowings under the New Line of Credit ($22 million as of December 29, 1995) and the mortgage on the Philadelphia Marriott Hotel ($109 million at December 29, 1995) bear interest based on variable rates. Accordingly, the amount of the Company's interest expense under the interest rate swap agreements and the floating rate debt for a particular year will be affected by changes in short-term interest rates.
Accounting Standards. In the first quarter of 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." Adoption of SFAS No. 114 did not have a material effect on the Company's consolidated financial statements.
Effective September 9, 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The adoption of SFAS No. 121 did not have any effect on the Company's continuing operations. See the discussion below for a discussion of the impact of the adoption of SFAS No. 121 on discontinued operations.
SFAS No. 121 requires that an impairment loss be recognized when the carrying amount of an asset exceeds the sum of the undiscounted estimated future cash flows associated with the asset. Under SFAS No. 121, the Company reviewed the impairment of its assets employed in its operating group business lines (airport, toll plaza and sports and entertainment) on an individual operating unit basis. For each individual operating unit determined to be impaired, an impairment loss equal to the difference between the carrying value and the fair market value of the unit's assets was recognized. Fair market value was estimated to be the present value of expected future cash flows of the individual operating unit, as determined by management, after considering such factors as future air travel and toll-pay vehicle data and inflation. As a result of the adoption of SFAS No. 121, the Company recognized a non-cash, pre-tax charge against earnings during the fourth quarter 1995 of $47 million, which has been reflected in discontinued operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial information is included on the pages indicated:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Host Marriott Corporation:
We have audited the accompanying consolidated balance sheets of Host Marriott Corporation (formerly Marriott Corporation) and subsidiaries as of December 29, 1995 and December 30, 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period ended December 29, 1995. These financial statements and the schedules referred to below 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 December 29, 1995 and December 30, 1994, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 29, 1995 in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 2 to the consolidated financial statements, in 1995 the Company changed its method of accounting for the impairment of long- lived assets. As discussed in Notes 4 and 6 to the consolidated financial statements, in 1993 the Company changed its methods of accounting for assets held for sale and income taxes.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index at Item 14(a)(2) are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic 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 financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C. February 26, 1996
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 1995 AND DECEMBER 30, 1994 (IN MILLIONS)
See Notes to Consolidated Financial Statements.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 29, 1995, DECEMBER 30, 1994 AND DECEMBER 31, 1993 (IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
See Notes to Consolidated Financial Statements.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED DECEMBER 29, 1995, DECEMBER 30, 1994 AND DECEMBER 31, 1993
See Notes to Consolidated Financial Statements.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 29, 1995, DECEMBER 30, 1994 AND DECEMBER 31, 1993
See Notes to Consolidated Financial Statements.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
As of December 29, 1995, Host Marriott Corporation (the "Company," formerly Marriott Corporation) owned 90 lodging properties generally located throughout the United States and operated under Marriott brand names and managed by Marriott International. The Company also holds minority interests in various partnerships that own 261 additional properties operated by Marriott International. The Company's properties span several market segments, including full-service (hotels, resorts and suites), moderate-price (Courtyard by Marriott) and extended-stay (Residence Inn).
On December 29, 1995, the Company distributed to its shareholders through a special tax-free dividend (the "Special Dividend") its food, beverage, and merchandise concessions business at airports, on tollroads, and at stadiums, arenas and other attractions (the "Operating Group"). See Note 2 for a discussion of the Special Dividend. The consolidated financial statements have been restated to reflect the Operating Group as discontinued operations.
The structure of the Company was substantially altered on October 8, 1993 (the "Marriott International Distribution Date") when the Company distributed the stock of a wholly-owned subsidiary, Marriott International, Inc. ("Marriott International") in a special dividend (the "Marriott International Distribution"). See Note 3 for a description of the Marriott International Distribution and related transactions.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries and controlled affiliates. Investments in 50% or less owned affiliates over which the Company has the ability to exercise significant influence are accounted for using the equity method. All material intercompany transactions and balances have been eliminated.
The Company's financial statements include the results of operations and cash flows of Marriott International through the Marriott International Distribution Date. Marriott International's results of operations through the Marriott International Distribution Date included in the accompanying consolidated financial statements consist of the following:
Fiscal Year
The Company's fiscal year ends on the Friday nearest to December 31.
Revenues and Expenses
Subsequent to the Marriott International Distribution, revenues include house profit from the Company's owned hotel properties because the Company has delegated substantially all of the operating decisions related to the generation of hotel house profit from its hotels to the manager. Revenues subsequent to the Marriott
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
International Distribution also include net gains (losses) on real estate transactions, equity in the earnings of affiliates and lease rentals from the Company's senior living communities. House profit reflects the net revenues flowing to the Company as property owner and represents hotel operating results, less property-level expenses, excluding depreciation, management fees, real and personal property taxes, ground and equipment rent, insurance and certain other costs, which are classified as operating costs and expenses.
In 1993, revenues related to Marriott International are included in profits from operations distributed to Marriott International in the accompanying statement of operations.
Prior to the Marriott International Distribution, the Company operated 388 hotels under long-term management agreements whereby payments to owners were based primarily on hotel profits. Working capital and operating results of managed hotels operated with the Company's employees were consolidated because the operating responsibilities associated with such hotels were substantially the same as those for owned and leased hotels.
Earnings (Loss) Per Common Share
Earnings (loss) per common share are computed on a fully diluted basis by dividing net income (loss) available for common stock by the weighted average number of outstanding common and common equivalent shares, plus other potentially dilutive securities, aggregating 158.3 million in 1995, 151.5 million in 1994 and 121.3 million in 1993. Common equivalent shares and other potentially dilutive securities have been excluded from the weighted average number of outstanding shares for 1995 and 1994 as they are anti-dilutive.
International Operations
The consolidated statements of operations include the following amounts related to non-U.S. subsidiaries and affiliates; revenues of $258 million in 1993 (including $223 million related to Marriott International) and income before income taxes of $26 million in 1993. International sales and income before income taxes, subsequent to the Marriott International Distribution, were not material.
Property and Equipment
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, generally 40 years for buildings and three to 10 years for furniture and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related buildings.
Gains on sales of properties are recognized at the time of sale or deferred to the extent required by generally accepted accounting principles. Deferred gains are recognized as income in subsequent periods as conditions requiring deferral are satisfied or expire without further cost to the Company.
In cases where management is holding for sale particular lodging properties, the Company assesses impairment based on whether the net realizable value (estimated sales price less costs of disposal) of each individual property to be sold is less than the net book value. A lodging property is considered to be held for sale when the Company has made the decision to dispose of the property. Otherwise, the Company assesses impairment of its real estate properties based on whether it is probable that undiscounted future cash flows from each individual property will be less than its net book value. If a property is impaired, its basis is adjusted to its fair market value.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pre-Opening Costs
Costs of an operating nature incurred prior to opening of lodging properties are deferred and amortized over three years for hotels opened prior to September 8, 1995 and one year for hotels opened after September 8, 1995. Such costs, which are included in other assets, amounted to $7 million and $6 million, net of accumulated amortization, at December 29, 1995 and December 30, 1994, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Self-Insurance Programs
Prior to the Marriott International Distribution Date, the Company was self- insured for certain levels of general liability, workers' compensation and employee medical coverage. Estimated costs of these self-insurance programs were accrued at present values of projected settlements for known and anticipated claims. The Company discontinued its self-insurance programs for claims arising subsequent to the Marriott International Distribution Date.
Interest Rate Swap Agreements
The Company has entered into interest rate swap agreements to diversify certain of its debt to a variable rate or fixed rate basis. The interest rate differential to be paid or received on interest rate swap agreements is accrued as interest rates change and is recognized as an adjustment to interest expense.
New Statements of Financial Accounting Standards
The Company adopted Statements of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits," and SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," during 1994 and SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," during 1995. Adoption of these statements did not have a material effect on the Company's consolidated financial statements.
During 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The adoption of SFAS No. 121 did not have any effect on the Company's continuing operations. See Note 2 for a discussion of the adoption of SFAS No. 121 on discontinued operations. The Company is also required to adopt SFAS No. 123, "Accounting for Stock-Based Compensation," no later than its fiscal year ending January 3, 1997. Adoption of SFAS No. 123 will not have any material effect on the Company's consolidated financial statements.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. HM SERVICES SPECIAL DIVIDEND
On December 29, 1995, the Company distributed to its shareholders through the Special Dividend all of the outstanding shares of common stock of HM Services, formerly a wholly-owned subsidiary of the Company, which, as of the date of the Special Dividend, owned and operated food, beverage and merchandise concessions at airports, on tollroads and at stadiums and arenas and other tourist attractions (the "Operating Group"). The Special Dividend provided Company shareholders with one share of common stock of HM Services for every five shares of Company common stock held by such shareholders on the record date of December 22, 1995. The Company recorded approximately $9 million of expenses related to the consummation of the Special Dividend in 1995. Revenues for the Company's discontinued operations totaled $1,158 million in 1995, $1,121 million in 1994 and $1,067 million in 1993. The provision for loss on disposal includes the operating loss from discontinued operations from August 9, 1995 (measurement date) through December 29, 1995 of $44 million, net of taxes, and estimated expenses related to the Special Dividend of $9 million.
Effective September 9, 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that an impairment loss be recognized when the carrying amount of an asset exceeds the sum of the undiscounted estimated future cash flows associated with the asset. Under SFAS No. 121, the Company reviewed the impairment of its assets employed in its Operating Group business lines (airport, toll plaza and sports and entertainment) on an individual operating unit location basis. For each individual operating unit determined to be impaired, an impairment loss equal to the difference between the carrying value and the fair value of the unit's assets was recognized. Fair value was estimated to be the present value of expected future cash flows of the individual operating unit, as determined by management, after considering such factors as future air travel and toll-pay vehicle data and inflation. As a result of the adoption of SFAS No. 121, the Company recognized a non-cash, pre-tax charge during the fourth quarter of $47 million. Such charge has been reflected in discontinued operations for fiscal year 1995.
Prior to September 9, 1995, the Company determined the impairment of concession unit assets on a business line basis, not by individual operating unit, which was consistent with the manner in which the Operating Group has managed its business. Using the business line basis, if the net carrying costs exceeded the estimated future undiscounted cash flows from a business line, such excess costs would be charged to expense.
For purposes of governing certain of the ongoing relationships between the Company and HM Services after the Special Dividend and to provide for an orderly transition, the Company and HM Services entered into various agreements including a Distribution Agreement, an Employee Benefits Allocation Agreement, a Tax Sharing Agreement and a Transitional Services Agreement. Effective as of December 29, 1995, these agreements provide, among other things, for the division between the Company and HM Services of certain assets and liabilities, including but not limited to liabilities related to employee stock and other benefit plans and the establishment of certain obligations for HM Services to issue shares upon exercise of warrants (see Note 10) and to issue shares or pay cash to the Company upon exercise of stock options held by certain former employees of the Company (see Note 11).
3. MARRIOTT INTERNATIONAL DISTRIBUTION
On October 8, 1993 (the "Marriott International Distribution Date"), Marriott Corporation distributed, through a special tax-free dividend (the "Marriott International Distribution"), to holders of Marriott Corporation's common stock (on a share-for-share basis), approximately 116.4 million outstanding shares of common stock of an existing wholly-owned subsidiary, Marriott International, resulting in the division of Marriott Corporation's operations into two separate companies. The distributed operations included the former
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Marriott Corporation's lodging management, franchising and resort timesharing operations, senior living service operations, and the institutional food service and facilities management business. The Company retained the former Marriott Corporation's airport and tollroad food, beverage and merchandise concessions operations, as well as most of its real estate properties. Effective at the Marriott International Distribution Date, Marriott Corporation changed its name to Host Marriott Corporation. Subsequent to the Company's announcement in late 1992 of the planned Marriott International Distribution, the Company recorded a reserve of $21 million, representing management's best estimate, at that time, of the anticipated costs to complete the Marriott International Distribution. During 1993, the Company recognized an additional $13 million of charges based on management's revised estimate of the ultimate cost of completing the Marriott International Distribution. The costs include $30 million payable to attorneys, investment bankers, consultants and financial institutions, and $4 million in employee compensation awards. Substantially all of the unpaid costs at December 31, 1993 were paid during 1994. The other notes to the financial statements discuss further the agreements and events relating to the Marriott International Distribution.
In connection with the Marriott International Distribution, the Company completed an exchange offer ("Exchange Offer") pursuant to which holders of senior notes in an aggregate principal amount of approximately $1.2 billion ("Old Notes") exchanged such Old Notes for a combination of (i) cash, (ii) common stock and (iii) Hospitality Notes ("Hospitality Notes") issued by an indirect wholly-owned subsidiary of the Company, Host Marriott Hospitality, Inc. ("Hospitality"). The Hospitality Notes were redeemed in 1995 (see Note 8). The Exchange Offer was treated as an extinguishment of debt and, accordingly, the Company recognized an extraordinary loss of $4 million, net of taxes of $3 million, in 1993.
The following condensed unaudited pro forma income statement data for continuing operations for the Company is presented as if the Marriott International Distribution and Exchange Offer had occurred at the beginning of fiscal year 1993. 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.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Interest cost capitalized in connection with the Company's development and construction activities totaled $5 million in 1995 and $10 million in 1994 and 1993.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Following discussions with the Staff of the Securities and Exchange Commission, the Company agreed in the second quarter of 1993 to change its method of determining net realizable value of assets reported as held for sale. The Company previously determined 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 hotel brand, in the case of Courtyard hotels, Fairfield Inns and Residence Inns. Beginning in the second fiscal quarter of 1993 and thereafter, under the Company's new accounting policy, net realizable value of all assets held for sale is determined on a property-by- property basis. The after-tax cumulative effect of this change on periods prior to the second quarter of 1993 of $32 million is reflected as a cumulative effect of a change in accounting for assets held for sale in the accompanying consolidated statement of operations for the fiscal year ended December 31, 1993. The reduction in the annual depreciation charge as a result of this change did not have a material effect on results of operations. There was no pro forma effect of this change on the results of operations for 1993.
In cases where the Company has made a decision to dispose of particular properties, the Company assesses impairment 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 the estimated undiscounted future cash flows from such properties will be less than their net book value. In the second quarter of 1995, the Company made a determination that its owned Courtyard and Residence Inn properties were held for sale. While management expects to sell these properties as part of one or more portfolios, the Company recorded a $10 million charge to write down the carrying value of five individual Courtyard and Residence Inn properties to their estimated net realizable values. The Company's Courtyard and Residence Inn properties held for sale have a net book value of $302 million at December 29, 1995.
During the fourth quarter of 1993, the Company engaged in formal negotiations to sell the majority of its Fairfield Inns and executed a letter of intent in January 1994. In the fourth quarter of 1993, the Company considered these hotels as held for sale and recorded a pre-tax charge to earnings of $11 million to write-down the carrying value of 15 such properties to their individual estimated net realizable value.
The Company owns a 174-acre parcel of undeveloped land in Germantown, Maryland, zoned for commercial office building development. The site was originally purchased in the 1980s for a proposed new corporate headquarters. Due to Company downsizing, plans for a new corporate headquarters were dropped. The Company subsequently planned to develop the site into an office project over an extended time period to recover its investment, however, the continuing weakness of the real estate market in Montgomery County, Maryland, has negatively impacted this development plan. In the fourth quarter of 1995, management instituted a program to liquidate certain non-income producing assets and to reinvest the proceeds in the acquisition of full service hotels. As part of this program, management determined that the site will no longer be developed and instead has decided to attempt to sell the property. Accordingly, the Company recorded a pre-tax charge of $60 million in the fourth quarter of 1995 to reduce the asset to its estimated sales value.
5. INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES
Investments in and receivables from affiliates consist of the following:
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Hotel properties owned by affiliates generally were acquired from the Company in connection with limited partnership offerings. The Company or one of its subsidiaries typically serve as a general partner of each partnership and the hotels are operated under long-term agreements by Marriott International.
At December 31, 1993, the Company owned a 50% interest in Times Square Marquis Hotel, L.P. ("Times Square"), formerly Times Square Hotel Company, the owner of the New York Marriott Marquis, and held security interests in an additional 39% of the partnership interests as collateral for loans made to certain partners. The partners were in default on the loans and the Company, for accounting purposes, realized an in-substance foreclosure of their partnership interests. In the first quarter of 1994, the Company foreclosed on a 29% partnership interest and completed the transfer of an additional 7% partnership interest in Times Square in full satisfaction of the loans. As a result, the Company holds an 86% partnership interest in Times Square at December 29, 1995. In 1993, the Company began reporting substantially all the losses of Times Square and on December 31, 1993 began consolidating Times Square.
In December 1993, the Company sold its 15% interest in the partnership owning the Boston Copley Marriott Hotel for $10.4 million.
In 1993, the Company sold portions of its equity interests in Residence Inns USA partnership for $31 million. These sales reduced the Company's ownership by the fourth quarter of 1993 to 16.6% and allowed the Company to be released from certain debt guarantee obligations. Accordingly, the Company deconsolidated the partnership at December 31, 1993. In 1994, the Company sold an additional portion of its equity interests in the partnership for $7 million. A gain on the sale transactions totaling $14 million has been deferred and is being amortized through 1996.
In the fourth quarter of 1993, a Company-owned addition to a hotel owned by a partnership in which the Company is a general partner was taken through foreclosure by the hotel's lender. The Company's investment in the addition was written off at that time.
Receivables from affiliates are reported net of reserves of $210 million at December 29, 1995 and $200 million at December 30, 1994. Receivables from affiliates at December 29, 1995 includes a $145 million mortgage note at 9% which amortizes through 2003, and net debt service and other advances totaling $7 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. Such commitments are limited, in the aggregate, to an additional $173 million at December 29, 1995. Subsequent to year-end, such commitments were reduced to $128 million. Net amounts funded under these commitments totaled $8 million in 1995, $2 million in 1994 and $14 million in 1993.
The Company's pre-tax income from affiliates includes the following:
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Combined summarized balance sheet information for the Company's affiliates follows:
Combined summarized operating results reported by these affiliates follow:
6. INCOME TAXES
The Company adopted SFAS No. 109, "Accounting for Income Taxes", 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 No. 109 requires the recognition of deferred tax assets and liabilities equal to the expected future tax consequences of temporary differences.
The $34 million cumulative credit resulting from this change in accounting principle has been reflected as a cumulative effect of a change in accounting for income taxes in the consolidated statements of operations for 1993.
Total deferred tax assets and liabilities at December 29, 1995 and December 30, 1994 were as follows:
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The valuation allowance required under SFAS No. 109 primarily represents net operating loss carryforwards ("NOLs") the benefits of which were not previously recorded, but which have been recorded under SFAS No. 109 as deferred tax assets with an offsetting valuation allowance. Any subsequent reduction in the valuation allowance related to the NOLs will be recorded as a reduction of income tax expense. There was no change in the valuation allowance during 1995 and 1994.
The tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax assets and liabilities as of December 29, 1995 and December 30, 1994 follows:
The provision (benefit) for income taxes consists of:
At December 29, 1995, the Company has net operating loss carryforwards of $12 million which expire through 2001. Additionally, the Company has approximately $26 million of alternative minimum tax credit carryforwards which do not expire.
During 1995, the Company settled with the Internal Revenue Service ("IRS") substantially all remaining issues through the 1990 tax year, except for one issue which the Company expects to resolve with no material impact on the consolidated financial statements. The Company anticipates net payments to the IRS in 1996 of approximately $45 million related to these settlements. Certain adjustments totaling approximately $11 million in 1995 have been made to the tax provision related to those settlements.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the statutory Federal tax rate to the Company's effective income tax rate follows:
As part of the Marriott International Distribution, the Company and Marriott International entered into a tax-sharing agreement which reflects each party's rights and obligations with respect to deficiencies and refunds, if any, of Federal, state or other taxes relating to the businesses of the Company, Marriott International and HM Services prior to the Marriott International Distribution and the Special Dividend. The majority of the 1994 adjustment to the Marriott International Distribution of stock of Marriott International related to deferred income taxes.
Cash paid for income taxes, net of refunds received, was $22 million in 1995, $13 million in 1994, and $63 million in 1993.
7. LEASES
Future minimum annual rental commitments for all non-cancelable leases related to continuing operations are as follows:
The Company leases certain property and equipment under non-cancelable operating leases. As discussed in Note 13, the Company sold and leased back 37 of its Courtyard properties. The leases, which are accounted for as operating leases and are included above, have initial terms expiring through 2006 and are renewable at the option of the Company. Subsequent to year-end, the initial term of the leases was extended through 2012. Minimum rent payments are $33 million annually and additional rent based upon sales levels are payable to the owner under the terms of the leases. Leases also include long- term ground leases for certain hotels, generally with multiple renewal options. Certain leases contain provision for the payment of contingent rentals based on a percentage of sales in excess of stipulated amounts.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Certain of the leases included above relate to facilities used in the former 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 $116 million payable to the Company under non-cancelable subleases.
The Company remains contingently liable at December 29, 1995 on certain leases relating to divested non-lodging properties. Such contingent liabilities aggregated $142 million at December 29, 1995. However, management considers the likelihood of any substantial funding related to these leases to be remote.
Rent expense related to continuing operations consists of:
8. DEBT
Debt related to continuing operations consists of the following:
The Company repaid certain indebtedness (with a principal balance of $87 million) upon its maturity on May 24, 1995 with a draw on its line of credit with Marriott International. Additionally, and pursuant to the then-existing senior note indenture, senior notes ("Hospitality Notes") issued by Host Marriott Hospitality, Inc. ("Hospitality"), a wholly-owned subsidiary of the Company, were required to be repaid to the extent of 50% to 75% of net proceeds from certain asset sales (at par) and 100% of net refinancing proceeds (generally at 103% of the principal amount). Based on net proceeds from qualifying asset sales for the first quarter of 1995, the Company redeemed $100 million of Hospitality Notes in the second quarter of 1995. The Company also redeemed $292 million of Hospitality Notes in 1994 from the net proceeds from qualifying assets sales. In connection with the 1994 redemptions, the Company recognized an extraordinary loss of $6 million, net of taxes of $3 million, in 1994.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In May 1995, two wholly-owned subsidiaries of Hospitality issued an aggregate of $1 billion of 9.5% senior secured notes in two concurrent offerings to several initial purchasers. HMH Properties, Inc. ("Properties"), the owner of 57 of the Company's 90 lodging properties at December 29, 1995, and Host Marriott Travel Plazas, Inc. ("HMTP"), the operator/manager of HM Services' food, beverage and merchandise concessions business, issued $600 million (the "Properties Notes") and $400 million ("HMTP Notes"), respectively, of senior notes secured by the stock of certain of their respective subsidiaries. The bonds were issued at par and have a final maturity of May 2005. The net proceeds were used to defease, and subsequently redeem, all of Hospitality's Notes and to repay borrowings under the line of credit with Marriott International. In connection with the redemptions and defeasance, the Company recognized an extraordinary loss in 1995 of $17 million, net of taxes, related to continuing operations, primarily representing premiums paid on the redemptions and the write-off of deferred financing fees and discounts on the Hospitality Notes. The Properties Notes are secured by a pledge of the stock of certain of Properties' subsidiaries and are guaranteed, jointly and severally, by certain of Properties' subsidiaries. The indenture governing the Properties Notes contains covenants that, among other things, limit the ability of Properties and its subsidiaries to incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, repurchase capital stock or subordinated indebtedness, create certain liens, enter into certain transactions with affiliates, sell certain assets, issue or sell stock of Properties' subsidiaries, and enter into certain mergers and consolidations. The net assets of Properties at December 29, 1995 were approximately $380 million, substantially all of which were restricted. The HMTP Notes were included in the Special Dividend to HM Services.
In December 1995, HMC Acquisition Properties, Inc. ("Acquisitions"), an indirect, wholly-owned subsidiary of the Company, issued $350 million of 9% senior notes (the "Acquisitions Notes") to several initial purchasers. The Acquisitions Notes were issued at par and have a final maturity of December 2007. A portion of the net proceeds were utilized to repay in full the outstanding borrowings under the $230 million revolving line of credit (the "Acquisition Revolver"), which was then terminated. In connection with the termination of the Acquisition Revolver, the Company recognized an extraordinary loss in 1995 of $3 million, net of taxes of $1 million, representing the write-off of deferred financing fees on the Acquisition Revolver. The Acquisitions Notes are guaranteed by Acquisitions' subsidiary. The indenture governing the Acquisitions Notes contains covenants that, among other things, limit the ability of Acquisitions and its subsidiary to incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, repurchase capital stock or subordinated indebtedness, create certain liens, enter into certain transactions with affiliates, sell certain assets, issue or sell stock of Acquisitions' subsidiary, and enter into certain mergers and consolidations. In addition, under certain circumstances, Acquisitions will be required to offer to purchase the Acquisitions Notes at par value with the proceeds of certain asset sales. The net assets of Acquisitions at December 29, 1995 were approximately $225 million, substantially all of which were restricted.
During 1995, the Company replaced its $630 million line of credit with a new line of credit with Marriott International (the "New Line of Credit") pursuant to which the Company has the right to borrow up to $225 million for certain permitted uses. Borrowings under the New Line of Credit bear interest at LIBOR plus 3% (4% when the outstanding balance exceeds $112.5 million) and mature in June 1998. Any such borrowings are guaranteed by, or secured by the pledge of the stock of, certain subsidiaries of the Company. An annual commitment fee of 5/8% is charged on the unused portion of the New Line of Credit. The New Line of Credit imposes certain restrictions on the ability of the Company and certain of its subsidiaries to incur additional debt, create 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, and repurchase their common stock.
In conjunction with the construction of the Philadelphia Marriott, the Company obtained first mortgage financing from Marriott International for 60% of the construction and development costs of the hotel. As of
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 29, 1995, the outstanding loan balance was $109 million. The loan bears interest at LIBOR plus 3% (8.7% at December 29, 1995) for the period ending two years after construction. For the following 10 years, the loan bears interest at 10% per annum with an additional 2% per annum deferred.
At December 29, 1995, the Company was party to interest rate exchange agreements with three financial institutions (the contracting parties) with an aggregate notional amount of $545 million. Under certain of these agreements aggregating $400 million, the Company collects interest at fixed rates (average rate of 7.1% at December 29, 1995) and pays interest based on specified floating interest rates (average rate of 5.6% at December 29, 1995) through May 1997. Under the remaining agreements aggregating $145 million, the Company collects interest based on specified floating interest rates of one month LIBOR (rate of 6.1% at December 29, 1995) and pays interest at fixed rates (average rate of 6.4% at December 29, 1995). These agreements expire in 1996 through 1998. The Company monitors the creditworthiness of its contracting parties by evaluating credit exposure and referring to the ratings of widely accepted credit rating services. The Standard and Poors' long-term debt ratings for the contracting parties are all BBB+ or better. The Company is exposed to credit loss in the event of non-performance by the contracting parties to the interest rate swap agreements; however, the Company does not anticipate non-performance by the contracting parties.
Aggregate debt maturities at December 29, 1995, excluding capital lease obligations, are:
Cash paid for interest for continuing operations, net of amounts capitalized, was $177 million in 1995, $157 million in 1994 and $174 million in 1993. Deferred financing costs, which are included in other assets, amounted to $37 million and $31 million at December 29, 1995 and December 30, 1994, respectively.
9. 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. Pursuant to the Marriott International Distribution, Marriott International assumed 90% and the Company retained 10% of the debt obligations evidenced by the LYONs. The LYONs were convertible into 13.277 shares each of the Company's and Marriott International's common stock for each $1,000 principal amount of LYONs. On December 13, 1993, the Company initiated a call of the LYONs redeemable on January 25, 1994. Substantially all of the LYONs' holders elected to convert their LYONs into common stock prior to the redemption. Such conversions represented 8.3 million shares of the Company's common stock issued in 1993 and .7 million shares issued in 1994.
10. SHAREHOLDERS' EQUITY
Three hundred million shares of common stock, with a par value of $1 per share, are authorized, of which 159.7 million and 153.6 million were issued and outstanding as of December 29, 1995 and December 30, 1994,
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
respectively. One million shares of no par value preferred stock are authorized. During 1995, substantially all outstanding shares of such preferred stock were converted into approximately five million shares of common stock. The remaining outstanding shares of preferred stock which were not converted were defeased prior to December 29, 1995 and are no longer outstanding. Additional paid-in capital at December 29, 1995 includes obligations for deferred compensation of $9 million.
On January 27, 1994, the Company completed the issuance of 20.1 million shares of common stock for net proceeds of $230 million. In connection with the class action settlement discussed in Note 17, the Company issued warrants to purchase up to 7.7 million shares of the Company's common stock in 1994. The warrants are exercisable for five years from the Marriott International Distribution Date, at $8.00 per share during the first three years and $10.00 per share during the last two years. As of December 29, 1995, there were approximately 7.5 million warrants outstanding.
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 $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 non-voting 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.
11. EMPLOYEE STOCK PLANS
Total shares of common stock reserved and available for issuance under employee stock plans at December 29, 1995 are:
Under the comprehensive stock plan (the "Comprehensive plan"), the Company may award to participating employees (i) options to purchase the Company's common stock, (ii) deferred shares of the Company's common stock and (iii) restricted shares of the Company's common stock. In addition, the Company has an employee stock purchase plan (the "stock purchase plan"). The principal terms and conditions of the two plans are summarized below.
Employee stock options may be granted to officers and key employees with an exercise price not less than the fair market value of the common stock on the date of grant. 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 vest ratably over each of the first four years following the date of the grant. In connection with the Marriott International Distribution, the Company issued an equivalent number of Marriott International options and adjusted the exercise prices of its options then outstanding based on the relative trading prices of shares of the common stock of the two companies.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the Special Dividend, the then outstanding options held by current and former employees of the Company were redenominated in both Company and HM Services stock and the exercise prices of the options were adjusted based on the relative trading prices of shares of the common stock of the two companies. For all options held by certain current and former employees of Marriott International, the number and exercise price of the options were adjusted based on the trading prices of shares of the Company's common stock immediately before and after the Special Dividend. Therefore, the options outstanding reflect these revised exercise prices. Pursuant to the Distribution Agreement between the Company and HM Services, the Company has the right to receive up to 1.4 million shares of HM Services' common stock or cash subsequent to exercise of the options held by the certain former and current employees of Marriott International. As of December 29, 1995, the Company valued this right at approximately $7 million, which is included in other assets. Option activity is summarized as follows:
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 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 1995, 1994 and 1993, 158,000, 159,000, and 489,000 shares were granted, respectively, under this plan.
In 1993, 3,537,000 restricted stock plan shares under the comprehensive plan were issued to officers and key executives and will be distributed over the next three to ten years in annual installments based on continued employment and the attainment of certain performance criteria. The Company recognizes compensation expense over the restriction period equal to the fair market value of the shares on the date of issuance adjusted for forfeitures, and where appropriate, the level of attainment of performance criteria and fluctuations in the fair market value of the stock. Subsequent to year-end, 2,133,000 shares of additional restricted shares were granted to certain key employees under terms and conditions similar to the 1993 grants. The Company recorded compensation expense of $5 million, $6 million and $400,000 in 1995, 1994 and 1993, respectively, related to these awards.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of the stock purchase plan, eligible employees may purchase common stock through payroll deductions at the lower of market value at the beginning or end of the plan year.
12. PROFIT SHARING AND POSTEMPLOYMENT BENEFIT PLANS
The Company contributes to profit sharing and other defined contribution plans for the benefit of employees meeting certain eligibility requirements and electing participation in the plans. The amount to be matched by the Company is determined annually by the Board of Directors, and totaled $17 million for 1993. The Company contributions were not significant in 1994 and 1995.
The Company provides medical benefits to a limited number of retired employees meeting restrictive eligibility requirements. The Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits" during 1994. Adoption of SFAS No. 112 did not have a material effect on the accompanying financial statements.
13. ACQUISITIONS AND DISPOSITIONS
In 1995, the Company acquired nine full service hotels totaling approximately 3,900 rooms in separate transactions for approximately $390 million. In 1994, the Company acquired 15 full service hotels (approximately 6,000 rooms) in several transactions for approximately $440 million. The Company also provided 100% financing totaling approximately $35 million to an affiliated partnership, in which the Company owns the sole general partner interest, for the acquisition of two full-service hotels (totaling another 684 rooms). Additionally, the Company acquired a controlling interest in one 662- room, full-service hotel through an equity investment of $16 million and debt financing of $36 million (the debt was subsequently sold in 1995). The Company accounts for all of these properties as owned hotels for accounting purposes.
During the first and third quarters of 1995, 37 of the Company's Courtyard properties were sold and leased back from a real estate investment trust (the "REIT") for approximately $330 million. The Company received net proceeds from the two transactions of approximately $297 million and will receive approximately $33 million upon expiration of the leases. A deferred gain of $14 million on the sale/leaseback transactions will be amortized over the initial term of the leases.
In February 1996, the Company entered into an agreement with the REIT to sell and lease back 16 of its Courtyard properties and 18 of its Residence Inn properties for $349 million (10% of which would be deferred). This transaction is expected to close in the first and second quarters of 1996. Transactions to acquire, or purchase controlling interests in, five additional full-service hotels have been consummated or are expected to close in early 1996.
In the third quarter of 1994, the Company completed the sale of 26 of its Fairfield Inns to an unrelated third party. The net proceeds from the sale of such hotels were approximately $114 million, which exceeded the carrying value of the hotels by approximately $12 million. Approximately $27 million of the proceeds was payable in the form of a note from the purchaser. The gain on the sale of these hotels has been deferred. During 1994, the Company sold its 14 senior living communities to an unrelated party for $320 million, which approximated the communities' carrying value.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's summarized, unaudited consolidated pro forma results of operations, assuming the above transactions (excluding the New York Vista Hotel acquisition), and the refinancings and new debt activity discussed in Note 8 occurred on January 1, 1994, are as follows (in millions, except per share amounts):
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of certain financial assets and liabilities and other financial instruments related to continuing operations are shown below.
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 debt are determined based on the expected future payments discounted at risk-adjusted rates. The fair values of the New Line of Credit and other notes are estimated to be equal to their carrying value. Senior Notes are valued based on quoted market prices.
The Company is contingently liable under various guarantees of obligations of certain affiliates (affiliate debt service commitments) with a maximum commitment of $173 million at December 29, 1995 and $236 million at December 30, 1994. Subsequent to year-end, such maximum commitment was reduced to $128 million. A fair value is assigned to commitments with expected future fundings. The fair value of the commitments represents the net expected future payments discounted at risk-adjusted rates. Such payments are accrued on an undiscounted basis.
The fair value of interest rate swap agreements is based on the estimated amount the Company would receive to terminate the swap agreements. The aggregate notional amount of the agreements was $545 million at December 29, 1995 and $500 million at December 30, 1994.
15. RELATIONSHIP WITH MARRIOTT INTERNATIONAL
The Company and Marriott International have entered into agreements which provide, among other things, that (i) most of the Company's lodging properties will be managed by Marriott International under agreements with initial terms of 15 to 20 years and which are subject to renewal at the option of Marriott International for up to an additional 16 to 30 years (see Note 16); (ii) the Company leased its owned senior living communities to
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Marriott International prior to their disposal (see Note 13); (iii) Marriott International guarantees the Company's performance in connection with certain loans and other obligations; (iv) the Company can borrow up to $225 million for certain permitted uses under the New Line of Credit (see Note 8); (v) the Company has borrowed $109 million of first mortgage financing for construction of the Philadelphia Marriott Hotel (see Note 8); (vi) Marriott International provided the Company with $70 million of mortgage financing in 1995 for the acquisition of three full-service properties by the Company at an average interest rate of 8.5%; (vii) three of the Company's full-service properties are operated under franchise agreements with Marriott International with terms of 10 to 30 years; and (viii) Marriott International provides certain administrative services under transitional services agreements.
In 1995, 1994 and 1993, the Company paid to Marriott International $67 million, $41 million and $5 million, respectively, in lodging management fees; $21 million, $23 million and $5 million, respectively, in interest and commitment fees under the lines of credit with Marriott International, the Philadelphia Marriott Hotel mortgage and mortgages for three additional full- service properties; $12 million, $11 million and $3 million, respectively, under the various transitional service agreements; and earned $14 million and $5 million under the senior living community leases during 1994 and 1993. The Company also paid Marriott International $1 million of franchise fees in 1995.
Additionally, Marriott International has the right to purchase up to 20% of the voting stock of the Company if certain events involving a change in control of the Company occur.
In 1995, the Company also acquired a full-service property from a partnership in which Marriott International owned a 50% interest.
16. MANAGEMENT AGREEMENTS
The Company is party to management agreements (the "Agreements") which provide for Marriott International to manage most of the Company's hotels generally for an initial term of 15 to 20 years with renewal terms at the option of Marriott International of up to an additional 16 to 30 years. The Agreements generally provide for payment of base management fees equal to one- and-one-half to four percent of sales and incentive management fees generally equal to 40% to 50% of Operating Profit (as defined in the Agreements) over a priority return (as defined) to the Company, with total incentive management fees not to exceed 20% of cumulative Operating Profit. For certain full- service hotels acquired after September 8, 1995, the incentive management fee is equal to 20% of Operating Profits. In the event of early termination of the Agreements, Marriott International will receive additional fees based on the unexpired term and expected future base and incentive management fees. The Company has the option to terminate certain management agreements if specified performance thresholds are not satisfied. No Agreement with respect to a single lodging facility is cross-collateralized or cross-defaulted to any other Agreement and a single Agreement may be cancelled under certain conditions, although such cancellation will not trigger the cancellation of any other Agreement.
The limited-service properties are subject to the terms of a "Consolidation Agreement" pursuant to which (i) certain fees payable under the management agreement with respect to a particular lodging property will be determined on a consolidated basis with certain fees payable under the Agreements for all lodging properties of the same type, and (ii) until December 31, 2000, certain base fees payable under the management agreement with respect to a particular lodging property will be waived in return for payment upon the sale or certain financings of such properties. After any lodging property is sold or financed, the Consolidation Agreement will no longer be applicable to such property. The Agreements with respect to the Company's full-service hotels are not subject to the Consolidation Agreement and the management fees payable to Marriott International under a single Agreement are calculated solely with respect to the lodging facility managed thereunder.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the terms of the Agreements, Marriott International is required to furnish the hotels with certain services ("Chain Services") which are generally provided on a central or regional basis to all hotels in the Marriott International hotel system. Chain Services include central training, advertising and promotion, a national reservation system, computerized payroll and accounting services, and such additional services as needed which may be more efficiently performed on a centralized basis. Costs and expenses incurred in providing such services are allocated among all domestic hotels managed, owned or leased by Marriott International or its subsidiaries. In addition, the full-service hotels also participate in Marriott's Honored Guest Awards Program and the Courtyard hotels in the Courtyard Club. The costs of these programs are charged to all hotels in the respective hotel system.
The Company is obligated to provide the manager with sufficient funds to cover the cost of (a) certain non-routine repairs and maintenance to the hotels which are normally capitalized; and (b) replacements and renewals to the hotels' property and improvements. Under certain circumstances, the Company will be required to establish escrow accounts for such purposes under terms outlined in the Agreements.
At December 29, 1995 and December 30, 1994, $65 million and $52 million, respectively, have been advanced to the hotel managers for working capital and are included in "Due From Hotel Managers" in the accompanying balance sheet.
17. LITIGATION
In March 1993, the Company reached agreement in principle (the "Class Action Settlement") with certain holders and recent purchasers of the Company's Old Notes, who had either instituted or threatened litigation in response to the Marriott International Distribution. In August 1993, the United States District Court approved the Class Action Settlement. In connection with this settlement, the Company issued warrants in 1994 to purchase up to 7.7 million shares of Host Marriott common stock (see Note 10).
A group of bondholders (the "PPM Group"), purported to have at one time owned approximately $120 million of Senior Notes, and another group purporting to hold approximately $7.5 million of Senior Notes, opted out of the Class Action Settlement. The PPM Group alleged that laws had been violated in connection with the sale by the Company of certain series of its Senior Notes and debentures and claimed damages of approximately $30 million. The group purporting to hold $7.5 million of Senior Notes settled with the Company in April 1994. Under the terms of the settlement, the Company repurchased the Senior Notes at their par value in the second quarter of 1994.
In September 1994, the Company settled with certain members of the PPM Group whose claims represented about 40% of the PPM Group's aggregate claims. The claims of the remainder of the PPM Group went to trial in September 1994, and in October 1994, the judge declared a mistrial based on the inability of the jury to reach a verdict. In January 1995, the judge granted the Company's motion for judgment in its favor on the PPM Group's claims as a matter of law. An appeal was filed by the PPM Group in February 1995. The appeal was argued in February 1996. In early 1996, the Company reached an agreement to settle all claims relating to this litigation for an immaterial amount.
The Company is from time to time the subject of, or involved in, judicial proceedings. Management believes that any liability or loss resulting from such matters will not have a material adverse effect on the financial position or results of operations of the Company.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. HOTEL OPERATIONS
As discussed in Note 1, subsequent to the Marriott International Distribution, hotel revenues reflect house profit from the Company's hotel properties. House profit reflects the net revenues flowing to the Company as property owner and represents all gross hotel operating revenues, less all gross property-level expenses, excluding depreciation, management fees, real and personal property taxes, ground and equipment rent, insurance and certain other costs, which are classified as operating costs and expenses. Prior to the Marriott International Distribution, hotel revenues included room sales and food and beverage sales at hotel properties. Accordingly, the following table presents the details of the Company's house profit for 1995, 1994 and 1993. In 1993, the Company's hotel revenues presented in the accompanying Statement of Operations represent the Company's post-Marriott International Distribution house profit (revenues) for 1993 plus the pre-Marriott International Distribution gross hotel sales for 1993.
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The first three quarters consist of 12 weeks each, and the fourth quarter includes 16 weeks.
The quarterly financial data has been restated to reflect the results of the Operating Group as discontinued operations.
Second quarter 1995 results include a $10 million pre-tax charge to write down the carrying value of five individual Courtyard and Residence Inn properties to their net realizable values (see Note 4). Fourth quarter 1995 results include a $60 million pre-tax charge to write down an undeveloped land parcel to its estimated sales value (see Note 4). The fourth quarter 1995 net loss includes a pre-tax charge of $47 million for the adoption of SFAS No. 121 (see Note 1) and a pre-tax $15 million restructuring charge, both of which were related to HM Services and have been included in discontinued operations in the accompanying 1995 statement of operations. Second and fourth quarter 1995 results include extraordinary after-tax losses of $17 million and $3 million, respectively, on the extinguishment of debt (see Note 8).
Third and fourth quarter 1994 results each include extraordinary after-tax losses of $3 million on the extinguishment of debt. In the second quarter of 1994, the Company reduced its general liability and workers' compensation insurance reserves by $4 million due to favorable claims experience.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information called for by Items 10--13 is incorporated by reference from the Host Marriott Corporation 1996 Annual Meeting of the Shareholders--Notice and Proxy Statement--(to be filed pursuant to Regulation 14A not later than 120 days after the close of fiscal year).
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
All financial statements of the registrant as set forth under Item 8 of this Report on Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
The following financial information is filed herewith on the pages indicated.
Financial Schedules:
All other schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto.
(3) EXHIBITS
- -------- #Agreement filed is illustrative of numerous other agreements to which the Company is a party.
(b) REPORTS ON FORM 8-K
. September 28, 1995--Report of the announcement that Robert E. Parsons has been named Executive Vice President and Chief Financial Officer, replacing Matthew J. Hart, and Scott A. LaPorta has been named Senior Vice President and Treasurer.
. November 3, 1995--Report of the announcement that the Company acquired the Toronto Eaton Centre Marriott.
. November 6, 1995--Amendment to Current Report on Form 8-K dated August 22, 1995 by filing financial statements of the Dallas/Fort Worth Airport Hotel and pro forma financial information of the Company.
. December 22, 1995--Report of the announcement that the Company acquired the New York Vista Hotel.
. December 29, 1995--Report of the announcement that (i) the Company completed the Special Dividend of its Operating Group to its shareholders; (ii) the Company adopted SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"; (iii) Host Marriott Services Corporation recorded a restructuring charge in the fourth quarter of 1995; and (iv) the Company filed financial statements to reflect Host Marriott Services Corporation as discontinued operations.
. January 11, 1996--Report of the announcement that the Company (i) has reached agreements to acquire controlling interests in the San Diego Marriott Hotel and Marina, two hotels in Mexico City and the Pittsburgh Hyatt, and to purchase the Delta Meadowvale Hotel and Conference Centre in Toronto, Canada; (ii) has recorded a charge in the fourth quarter of 1995 to reduce an undeveloped land site to its estimated sale value; (iii) filed a registration statement with the Securities and Exchange Commission for the public offering of 25 million shares of the Company's common stock; and (iv) has filed pro forma financial information of the Company.
. January 17, 1996--Amendment to Current Report on Form 8-K dated November 3, 1995 and December 22, 1995 by filing financial statements of the Toronto Eaton Centre Marriott and the New York Vista Hotel.
. February 28, 1996--Report of the announcement that the Company filed amendment no. 1 to a registration statement with the Securities and Exchange Commission for the public offering of 25 million shares of the Company's common stock. The Company filed the amended registration statement as an exhibit.
. March 7, 1996--Amendment to Current Report on Form 8-K/A dated January 17, 1996 by filing updated financial statements of the New York Vista.
(d) OTHER INFORMATION
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BETHESDA, STATE OF MARYLAND, ON MARCH 28, 1996.
Host Marriot Corporation
/s/ Robert E. Parsons, Jr. By __________________________________ Robert E. Parsons, Jr. Executive Vice President and Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SCHEDULE 1 PAGE 1 OF 5
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
- -------- The Notes to Consolidated Financial Statements of Host Marriott Corporation and Subsidiaries are an integral part of these statements.
See Accompanying Notes to Condensed Financial Information.
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SCHEDULE I PAGE 2 OF 5
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 29, 1995, DECEMBER 30, 1994 AND DECEMBER 31, 1993
- -------- The Notes to Consolidated Financial Statements of Host Marriott Corporation and Subsidiaries are an integral part of these statements.
See Accompanying Notes to Condensed Financial Information.
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SCHEDULE I PAGE 3 OF 5
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 29, 1995, DECEMBER 30, 1994 AND DECEMBER 31, 1993
- -------- The Notes to Consolidated Financial Statements of Host Marriott Corporation and Subsidiaries are an integral part of these statements.
See Accompanying Notes to Condensed Financial Information.
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SCHEDULE I PAGE 4 OF 5
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
A) The accompanying condensed financial information of Host Marriott Corporation (the "Parent Company") present the financial position, results of operations and cash flows of the Parent Company with the investment in, and operations of, consolidated subsidiaries with restricted net assets on the equity method of accounting.
In May 1995, HMH Properties, Inc. ("Properties"), an indirect, wholly- owned subsidiary of the Parent Company, issued $600 million of 9.5% senior notes at par value with a final maturity of May 2005 (the "Properties Notes"). The Properties Notes are secured by a pledge of the stock of certain of their respective subsidiaries and are guaranteed, jointly and severally, by all of Properties' subsidiaries. The indenture governing the Properties Notes contains covenants that, among other things, limit the ability of Properties and its subsidiaries to incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, repurchase capital stock or subordinated indebtedness, create liens, enter into certain transactions with affiliates, sell certain assets, issue or sell stock of Properties subsidiaries and enter into certain mergers and consolidations. The net assets of Properties at December 29, 1995 were approximately $380 million, substantially all of which were restricted.
In December 1995, HMC Acquisition Properties, Inc. ("Acquisitions"), an indirect, wholly-owned subsidiary of the Parent Company, issued $350 million of 9% senior notes (the "Acquisition Notes") at par value with a final maturity of December 2007. The Acquisition Notes are guaranteed by Acquisitions' subsidiary. The indenture governing the Acquisition Notes contains covenants that, among other things, limit the ability of Acquisitions and its subsidiary to incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, repurchase capital stock or subordinated indebtedness, create liens, enter into certain transactions with affiliates, sell certain assets, issue or sell stock of Acquisitions' subsidiary and enter into certain mergers and consolidations. The net assets of Acquisitions at December 29, 1995 were approximately $225 million, substantially all of which were restricted.
On October 8, 1993 (the "Marriott International Distribution Date"), the Parent Company distributed, through a special tax-free dividend (the "Marriott International Distribution") to holders of its common stock (on a share-for-share basis) all outstanding shares of common stock of an existing wholly-owned subsidiary, Marriott International, Inc. ("Marriott International"). In connection with the Marriott International Distribution, the Parent Company completed an exchange offer ("Exchange Offer") pursuant to which holders of senior notes in an aggregate principal amount of approximately $1.2 billion ("Old Notes") exchanged such Old Notes for a combination of (i) cash, (ii) common stock and (iii) new senior notes ("Hospitality Notes") issued by Host Marriott Hospitality, Inc. ("Hospitality"), a wholly-owned subsidiary of HMH Holdings, Inc. ("Holdings"), which is a wholly-owned subsidiary of the Parent Company. The Hospitality Notes were redeemed in the second quarter of 1995 partially with the net proceeds from the Properties Notes. The indenture governing the Hospitality Notes contained covenants that, among other things, limited the ability of Hospitality and its subsidiaries to incur additional indebtedness, pay dividends or make other distributions, create liens, enter into certain transactions with affiliates, sell certain assets and limit the activities of Holdings. Substantially all of Hospitality's net assets were restricted. Holdings' primary asset was the capital stock of Hospitality and was the borrower of a $630 million line of credit with Marriott International which was terminated during 1995. During 1995, Holdings was liquidated and merged upstream into Host Marriott.
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SCHEDULE I PAGE 5 OF 5
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Properties, Acquisitions and Holdings are restricted subsidiaries of the Parent Company (the "Restricted Subsidiaries") and are accounted for under the equity method of accounting on the accompanying condensed financial information of the Parent Company.
B) Under the terms of the Exchange Offer, the Parent Company secured the Old Series I Notes with a principal balance of $87 million equally and ratably with the Hospitality Notes issued in the Exchange Offer. The Old Series I Notes were repaid upon its maturity in May 1995. Investment in and advances to restricted subsidiaries include $87 million at December 30, 1994, which were pushed down to Hospitality prior to its repayment.
In fiscal year 1993, for the period from the beginning of the year through October 8, 1993, Hospitality's financial statements reflect the pushed-down effects of 100% of that portion of the Old Notes that would have been replaced with the Hospitality Notes had the Company received tenders for 100% of the aggregate amount of Old Notes that were subject to the Exchange Offer.
Interest expense related to the pushed-down debt discussed above of $4 million in 1995, $8 million in 1994 and $63 million in 1993 is included in interest expense in the accompanying condensed statements of income.
C) In 1995, Properties paid $36 million of cash dividends to the Parent Company as permitted under its indenture agreement. There were no cash dividends paid to the Parent Company in 1994 and 1993.
D)Aggregate debt maturities at December 29, 1995, excluding capital lease obligations, are (in millions):
E) The accompanying statements of income reflect the equity in earnings of Restricted Subsidiaries, including Hospitality, after elimination of interest expense (see Note B) and before income taxes. The Restricted Subsidiaries are included in the consolidated income tax returns of Host Marriott Corporation.
F) As more fully described in Note 2 to the Company's consolidated financial statements, the Company completed a special dividend to shareholders on December 29, 1995 of its operating group ("Operating Group") which comprised its food, beverage and merchandise concessions business. The accompanying condensed financial information has been restated to reflect the Operating Group as discontinued operations.
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SCHEDULE III PAGE 1 OF 2
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 29, 1995 (IN MILLIONS)
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SCHEDULE III PAGE 2 OF 2
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 29, 1995 (IN MILLIONS)
NOTES:
(A) The change in total cost of properties for the fiscal years ended December 29, 1995 and December 30, 1994 is as follows:
(C) The aggregate cost of properties for Federal income tax purposes is approximately $3,075 million at December 29, 1995.
(D)The total cost of properties excludes construction-in-progress properties.
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PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The unaudited Pro Forma Condensed Consolidated Statement of Operations of the Company reflect the following transactions for the fiscal year ended December 29, 1995, as if such transactions had been completed at the beginning of the year:
.1996 acquisition of a controlling interest in the San Diego Marriott Hotel and Marina .1996 acquisition of the Toronto Delta Meadowvale .1996 acquisition of an 83% interest in the mortgage loans secured by the Newport Beach Marriott Suites .Consummation of the Pending Acquisitions .Consummation of the Pending Dispositions .1995 acquisition of eight full-service hotel properties (see discussion below) .1995 sale/leaseback of 37 Courtyard properties .1995 sale of the Company's remaining four Fairfield Inns .May 1995 Debt Offering .December 1995 Debt Offering
The unaudited Pro Forma Condensed Consolidated Balance Sheet of the Company reflects the first quarter 1996 acquisition of a controlling interest in the San Diego Marriott Hotel and Marina, the first quarter 1996 acquisition of the Toronto Delta Meadowvale, the first quarter 1996 purchase of an 83% interest in the mortgage loans secured by the Newport Beach Marriott Suites, the consummation of the Pending Acquisitions and the Pending Dispositions, as if such transactions had been completed on December 29, 1995.
During the first quarter of 1996, the Company acquired the Toronto Delta Meadowvale, a controlling interest in the San Diego Marriott Hotel and Marina and an 83% interest in the mortgage loans secured by the Newport Beach Marriott Suites. In February 1996, the Company entered into an agreement with the REIT to sell and lease back 16 Courtyard properties and 18 Residence Inns, the Pending Dispositions.
The Company has also entered into agreements to purchase two full-service hotel properties and a controlling interest in one full-service hotel property. These transactions comprise the Pending Acquisitions.
During 1995, the Company acquired nine full-service hotel properties. The accompanying Unaudited Pro Forma Condensed Consolidated Statement of Operations does not reflect any pro forma adjustments related to the New York Vista Hotel (renamed the Marriott World Trade Center) due to the suspension of hotel operations and the renovation of the hotel as a result of extensive damage from an explosion on February 26, 1993. Because the hotel did not resume full operations until mid-1995, the historical operations of the hotel during the periods presented are not meaningful.
During 1995, 37 of the Courtyard properties were sold to and leased back from the REIT, and the Company sold its four remaining Fairfield Inns.
HMH Properties, Inc. ("HMH Properties"), an indirect wholly-owned subsidiary of the Company, issued $600 million of debt (the "Properties Notes") in May 1995 (the "May 1995 Debt Offering"). The Properties Notes were issued at par and carry a 9.5% interest rate with a final maturity of May 2005. The net proceeds to the Company were used to defease, and subsequently redeem, bonds which carried a weighted average interest rate of 10.4%, and to pay down a portion of the line of credit with Marriott International. Additionally, the Company replaced its $630 million line of credit with Marriott International with the New Line of Credit.
In December 1995, HMC Acquisition Properties, Inc. ("Acquisitions"), an indirect, wholly-owned subsidiary of the Company, issued $350 million of 9% senior notes (the "Acquisitions Notes") to several initial purchasers (the "December 1995 Debt Offering"). The Acquisitions Notes were issued at par and have a final maturity of December 2007. The proceeds were utilized to repay in full the $210 million of outstanding borrowings under, and terminate, Acquisitions' $230 million revolving credit facility (the "Revolver"), to acquire one full-service hotel in the fourth quarter of 1995, the Toronto Delta Meadowvale in the first quarter of 1996 and to finance future acquisitions of full-service hotel properties, including one of the Pending Acquisitions.
S-8
During 1995, the Company sold the 199-room Springfield Radisson Hotel which was acquired as part of a portfolio of lodging properties by the Company in 1994. No adjustment has been reflected in the accompanying Pro Forma Condensed Consolidated Statement of Operations due to the immateriality of the operating results for this property.
The "Historical" column in the accompanying Pro Forma Condensed Consolidated Statement of Operations excludes the results of the Operating Group, which are considered discontinued operations.
The Pro Forma Condensed Consolidated Financial Data of the Company are unaudited and 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 Condensed Consolidated Financial Data and Notes thereto should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Results of Operations and Financial Condition" included elsewhere herein.
S-9
HOST MARRIOTT CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Data.
S-10
HOST MARRIOTT CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Data.
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NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL DATA
A. Represents the adjustment to record the 1996 acquisition of the San Diego Marriott Hotel and Marina, the Toronto Delta Meadowvale and an 83% interest in the mortgage loans secured by the Newport Beach Marriott Suites as follows:
. Record property and equipment of $245 million . Record the purchase of a mortgage loan securing one full-service property for $18 million . Record the mortgage debt of $206 million for one full-service property . Record the use of cash of $54 million for the acquisition cost . Record the elimination of the prior investment of $12 million in a partnership . Record the property improvement and debt service escrow funds of $9 million for one full-service property
B. Represents the adjustment to record the Pending Acquisitions as follows:
. Record property and equipment of $69 million . Record the use of cash of $68 million for the acquisition cost . Record the minority interest of $1 million for the partner of the joint venture acquiring one full- service property
C. Represents the adjustment to record the Pending Dispositions as follows:
. Reduce property and equipment by the net book value of assets sold of $302 million . Record the net cash proceeds of $308 million . Record the deferred proceeds of $35 million . Record the deferred gain of $41 million
D. Represents the adjustment to eliminate the revenues and the operating costs for the 1995 sale of the four remaining Fairfield Inns.
E. Represents the adjustment to reflect the incremental increase in revenue, operating costs and secured debt interest expense for the 1995 addition of eight full-service properties, as if they were added at the beginning of the fiscal year. On February 26, 1993, an explosion caused damage to the structure and interior of the New York Vista Hotel, as well as the adjoining World Trade Center complex. As a result of the damage, all hotel operations were suspended and the hotel underwent extensive renovation. Because the hotel did not resume full operations until mid-1995, the historical operations of the hotel during the periods presented are not meaningful and the accompanying Unaudited Pro Forma Condensed Consolidated Statement of Operations does not reflect any adjustments related to the hotel.
F. Represents the adjustment to record the revenue and operating costs for the Pending Acquisitions, including depreciation expense reflecting the Company's basis in the assets and the incremental management fees as a result of the new management agreements that will be entered into in conjunction with the transactions.
G. Represents the adjustment to record the revenue, operating costs, secured debt interest expense and interest income for the first quarter 1996 acquisition of the Toronto Delta Meadowvale, the acquisition of a controlling interest in the San Diego Marriott Hotel and Marina, and the purchase of an 83% interest in the mortgage loans secured by the Newport Beach Marriott Suites.
H. Represents the net adjustment to eliminate the depreciation expense and record the incremental lease expense for the 1995 sale/leaseback of the 37 Courtyard properties.
I. Represents the net adjustment to eliminate depreciation expense and record the incremental lease expense for the Pending Dispositions.
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NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED--(CONTINUED)
FINANCIAL DATA
J. Represents the adjustment to reduce interest expense for the redemption of senior notes of Host Marriott Hospitality, Inc. (the "Hospitality Notes") with the net sales proceeds from the 26 Fairfield Inns, 14 senior living communities and 21 Courtyard properties.
K. Represents the adjustment to reduce interest expense to reflect the decrease in interest rates as a result of the issuance of the Properties Notes and the decrease in commitment fees as a result of the New Line of Credit. Extraordinary losses of approximately $17 million, after taxes, related to the 1995 redemption of certain of the Hospitality Notes are not reflected in the accompanying Unaudited Pro Forma Condensed Consolidated Statement of Operations.
L. Represents the adjustment to interest expense to eliminate the interest expense and related amortization of deferred financing fees for the Revolver, and to record the interest expense and related amortization of deferred financing fees as a result of the issuance of the Acquisitions Notes.
M. Represents the income tax impact of pro forma adjustments at statutory rates.
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