<PAGE>
As filed with the Securities and Exchange Commission on March 26, 1996
REGISTRATION NO. 333-00147
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
HOST MARRIOTT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7011 53-0085950
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817-1109
(301) 380-9000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CHRISTOPHER G. TOWNSEND, ESQ.
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817-1109
(301) 380-9000
(NAME, ADDRESS, INCLUDING ZIP CODE, TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
PLEASE SEND COPIES OF COMMUNICATIONS TO:
BRUCE E. ROSENBLUM, ESQ. NICHOLAS P. SAGGESE, ESQ.
LATHAM & WATKINS SKADDEN, ARPS, SLATE, MEAGHER & FLOM
1001 PENNSYLVANIA AVENUE, N.W., 300 SOUTH GRAND AVENUE, SUITE 3400
SUITE 1300 LOS ANGELES, CA 90071
WASHINGTON, D.C. 20004-2505 (213) 687-5000
(202) 637-2200
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As promptly as practicable after the effective date of this
Registration Statement.
If the securities being registered on this form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
HOST MARRIOTT CORPORATION
CROSS REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
LOCATION OR HEADING IN THE PROSPECTUS
FORM S-1 ITEM NUMBER AND CAPTION OR REGISTRATION STATEMENT
-------------------------------- -------------------------------------
<C> <C> <S>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover
of Prospectus............................. Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges.............. Prospectus Summary; Risk Factors;
Ratio of Earnings to Fixed Charges
(Inapplicable)
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ *
6. Dilution................................... *
7. Selling Security Holders................... *
8. Plan of Distribution....................... Underwriting
9. Description of Securities to be
Registered................................ Description of Capital Stock
10. Interests of Named Experts and Counsel..... Legal Matters; Experts
11. Information With Respect to the Business and Properties; Legal
Registrant................................ Proceedings; Price Range of Common
Stock and Dividends; Selected
Historical Financial Data;
Management's Discussion and
Analysis of Results of Operations
and Financial Condition; Pro Forma
Condensed Consolidated Financial
Data; Index to Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... *
</TABLE>
- --------
* Inapplicable
<PAGE>
EXPLANATORY NOTE
This Registration Statement is being filed with respect to the offering of
25,000,000 shares of common stock, $1.00 par value per share ("Common Stock"),
of Host Marriott Corporation (the "Company") (and an additional 3,750,000
shares of Common Stock issuable upon exercise of the U.S. Underwriters' over-
allotment option) in an underwritten public offering.
The Registration Statement contains two separate prospectuses. The first
prospectus relates to a public offering in the U.S. and Canada of an aggregate
of 20,000,000 shares of Common Stock (the "U.S. Offering"). The second
prospectus relates to a concurrent offering outside the U.S. and Canada of an
aggregate of 5,000,000 shares of Common Stock (the "International Offering").
The prospectuses for the U.S. Offering and the International Offering will be
identical except for alternate front and back cover pages for the
International Offering, which alternate pages appear immediately after the
prospectus for the U.S. Offering.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 26, 1996
PROSPECTUS
MARCH , 1996
25,000,000 SHARES
[LOGO OF HOST MARRIOTT CORPORATION APPEARS HERE]
COMMON STOCK
All of the shares of common stock, $1.00 par value per share (the "Common
Stock"), offered hereby are being sold by Host Marriott Corporation (the
"Company"). Of the 25,000,000 shares of Common Stock offered by the Company,
20,000,000 shares are being offered for sale in the United States and Canada by
the U.S. Underwriters (the "U.S. Offering") and 5,000,000 shares are being
offered for sale outside the United States and Canada in a concurrent offering
by the International Managers (the "International Offering" and, together with
the U.S. Offering, the "Offerings"), subject to transfers between the U.S.
Underwriters and the International Managers. See "Underwriting."
The Common Stock of the Company is traded on the New York Stock Exchange, the
Chicago Stock Exchange, the Pacific Stock Exchange and the Philadelphia Stock
Exchange under the symbol "HMT." On March 25, 1996, the last reported sale price
of the Common Stock, as reported on the New York Stock Exchange Composite Tape,
was $12 7/8 per share. See "Price Range of the Common Stock and Dividends."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF THE RISKS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS (1) COMPANY (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total (3).................................... $ $ $
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the several U.S. Underwriters and
International Managers (collectively, the "Underwriters") against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters an option exercisable within 30
days after the date hereof to purchase up to 3,750,000 additional shares of
Common Stock, on the same terms and conditions as set forth above, at the
Price to the Public, less the Underwriting Discounts and Commissions,
solely to cover over-allotments, if any. If the Underwriters exercise such
option in full, the total Price to the Public, Underwriting Discounts and
Commissions, and Proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting."
The shares of Common Stock are being offered by the several Underwriters
when, as and if delivered to and accepted by the Underwriters and subject to
various prior conditions, including the right of the Underwriters to reject any
order in whole or in part. It is expected that delivery of the shares of Common
Stock will be made in New York, New York on or about , 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
SALOMON BROTHERS INC
SMITH BARNEY INC.
MONTGOMERY SECURITIES
BT SECURITIES CORPORATION
SCHRODER WERTHEIM & CO.
<PAGE>
[PHOTO]
The Marina Beach Marriott, featuring 372 rooms, was acquired through
foreclosure and converted to a Marriott hotel in 1995.
[PHOTO]
The Washington Metro Center Marriott, featuring 456 rooms, was acquired
and converted to a Marriott hotel in 1994.
[PHOTO]
The New York Marriott Marquis has 1,911 guestrooms and over 80,000 square feet
of meeting space.
[PHOTO]
Located in the heart of New York's financial district, the 820-room Marriott
World Trade Center hotel was acquired and converted to the Marriott
brand in December 1995.
[PHOTO]
The San Francisco Marriott has 1,500 guestrooms and is directly adjacent to the
Moscone Convention Center.
[PHOTO]
The Company recently acquired a controlling interest in the 1,355 room
two tower San Diego Marriott Hotel and Marina.
2
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, THE
CHICAGO STOCK EXCHANGE, THE PACIFIC STOCK EXCHANGE, THE PHILADELPHIA STOCK
EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its regional
offices located at Seven World Trade Center, 13th Floor, New York, New York
10048 and Northwestern Atrium Center, 500 West Madison Avenue, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material may be obtained by mail
from the Public Reference Section of the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
Reports, proxy statements and other information regarding the Company may also
be inspected at the offices of the New York Stock Exchange (the "NYSE"), 20
Broad Street, New York, New York 10005, the Chicago Stock Exchange, 440 South
LaSalle Street, Chicago, Illinois 60605, the Pacific Stock Exchange, 301 Pine
Street, San Francisco, California 94104, or the Philadelphia Stock Exchange,
1900 Market Street, Philadelphia, Pennsylvania 19103.
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits thereto. For further information
with respect to the Company and the Common Stock, reference is made to the
Registration Statement and exhibits thereto. The Registration Statement,
together with the exhibits thereto, may be inspected at the Commission's
public reference facilities in Washington, D.C. and copies of all or any part
thereof may be obtained from the Commission upon payment of the prescribed
fees.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless the context otherwise requires, the term "Company" refers to Host
Marriott Corporation and its subsidiaries and their combined operations. Unless
otherwise indicated, the information in this Prospectus does not give effect to
the exercise of the over-allotment option described in "Underwriting."
References herein to "Smith Travel Research" are to industry data provided by
Smith Travel Research. References herein to "Coopers & Lybrand" refer to the
January 1996 Hospitality Directions Quarterly Research Journal published by
Coopers & Lybrand LLP.
THE COMPANY
The Company is one of the largest owners of hotels in the world with 90
lodging properties as of December 29, 1995, primarily located in the United
States. These properties generally are operated under Marriott brands and
managed by Marriott International, Inc. ("Marriott International"), formerly a
wholly owned subsidiary of the Company. The Marriott brand name is among the
most respected and widely recognized brand names in the lodging industry. The
Company's primary focus is on the acquisition of full-service lodging
properties. During 1994 and 1995, the Company added 27 full-service hotels with
approximately 11,300 rooms for an aggregate of approximately $915 million,
bringing the Company's total full-service hotels to 55 at December 29, 1995.
Based on data provided by Smith Travel Research, the Company believes that its
full-service hotels consistently outperform the industry's average occupancy
rate by a significant margin and averaged 75.5% occupancy for 1995 compared to
68.2% average occupancy for the upscale full-service segment of the lodging
industry (the segment which is most representative of the Company's full-
service hotels).
The lodging industry as a whole, and the full-service hotel segment in
particular, is benefiting from an improved supply and demand relationship in
the United States. Management believes that recent demand increases have
resulted primarily from an improved economic environment and a corresponding
increase in business travel. In spite of increased demand for rooms, the room
supply growth rate in the full-service segment has greatly diminished.
Management believes that this decrease in the supply growth rate in the full-
service segment is attributable to many factors including the limited
availability of attractive building sites for full-service hotels, the lack of
available financing for new full-service hotel construction and the
availability of existing full-service properties for sale at a discount to
their replacement value. Due to the relatively high occupancy rates of the
Company's hotels, the limited supply of new rooms and the recent increase in
business travel, the managers of the Company's hotels have increased average
daily room rates by primarily replacing certain discounted group business with
higher-rated group and transient business and by selectively increasing room
rates. As a result, on a comparable basis, room revenues per available room
("REVPAR") for full-service properties increased approximately 7% for 1995 over
the comparable period for the prior year. Furthermore, because lodging property
operations have a high fixed cost component, increases in REVPAR generally
yield greater percentage increases in operating profit. Accordingly, the
approximate 7% increase in REVPAR resulted in a 25% increase in comparable
full-service hotel operating profit for 1995. The Company expects this
supply/demand imbalance, particularly in the upscale full-service segment, to
continue, which should result in improved REVPAR and operating profits at its
hotel properties in the near term.
BUSINESS STRATEGY
The Company's business strategy continues to focus on opportunistic
acquisitions of full-service urban, convention and resort hotels primarily in
the United States. The Company believes that the full-service segment of the
market offers numerous opportunities to acquire assets at attractive multiples
of cash flow and at substantial discounts to replacement value, including
underperforming hotels which can be improved by conversion to the Marriott
brand. The Company believes this segment is very promising because:
4
<PAGE>
. There is virtually no new supply of upscale full-service hotel rooms
currently under construction. According to Smith Travel Research, from
1988 to 1990, upscale full-service room supply increased an average of
approximately 5% annually, which resulted in an oversupply of rooms in
the industry. However, this growth slowed to an average of approximately
1.7% from 1990 to 1995. Management believes that the lead time from
conception to completion of a full-service hotel is generally five years
or more in the types of markets the Company is principally pursuing,
which will contribute to the continued low growth of supply. According to
Coopers & Lybrand, hotel supply in the upscale full-service segment is
expected to grow annually at 1.8% to 1.9% through 1998. Furthermore,
because of the prolonged lead time for construction of new full-service
hotels, management believes that growth in the full-service segment will
continue to be limited at least through 2000.
. Many desirable hotel properties are held by inadvertent owners such as
banks, insurance companies and other financial institutions which are
motivated and willing sellers. The Company has acquired several
properties from these inadvertent owners at significant discounts to
replacement cost.
. Management believes that there are numerous opportunities to improve the
performance of acquired hotels by replacing the existing hotel manager
with Marriott International and converting the hotels to the Marriott
brand. Nine of the 27 full-service hotels added in 1994 and 1995 were
converted to the Marriott brand following their acquisition. These
conversion properties (excluding the Marriott World Trade Center which
was only partially open during 1995) experienced a 66.5% average
occupancy rate during 1995 compared to an average occupancy rate of 75.5%
for all of the Company's full-service hotels. The Company believes these
nine conversion properties will experience improved operations as a
result of increases in occupancy and room rates as the properties begin
to benefit from Marriott's brand recognition, reservation system and
group sales organization. The Company intends to pursue additional full-
service hotel acquisitions, some of which may be conversion
opportunities.
The Company holds minority interests and serves as general partner in various
partnerships that own, as of December 29, 1995, an aggregate of 262 additional
properties, 42 of which are full-service properties, managed by Marriott
International. Four of the properties added by the Company in the last two
years were held by a partnership in which the Company holds a minority
interest. As opportunities arise, the Company intends to pursue the acquisition
of additional full-service hotels currently held by such partnerships and/or
additional interests in such partnerships.
The Company believes it is well qualified to pursue its acquisition strategy.
Management has extensive experience in acquiring and financing lodging
properties and believes its industry knowledge, relationships and access to
market information provide a competitive advantage with respect to evaluating
and acquiring hotel assets. In addition, the Company is well positioned to
convert acquired properties to the high-quality Marriott brand name due to its
relationship with Marriott International. For a description of the Company's
relationship with Marriott International, see "Relationship Between the Company
and Marriott International."
RECENT ACQUISITIONS, PENDING ACQUISITIONS AND DIVESTITURES
During 1994, the Company added 18 full-service hotels with approximately
7,400 rooms (including the Springfield Radisson Hotel, a 199-room hotel
subsequently sold in 1995) for approximately $525 million. In 1995, the Company
acquired nine full-service hotels with approximately 3,900 rooms in separate
transactions for approximately $390 million. In 1996, through the date hereof,
the Company has acquired one full-service hotel (374 rooms), controlling
interests in three additional properties (2,269 rooms), one of which is
currently under construction and is scheduled to be completed during the third
quarter of 1996, and an 83% interest in the mortgage loans secured by a 250-
room full-service property. 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
(together, the "Pending Acquisitions"). See "Business and Properties--Pending
Acquisitions."
5
<PAGE>
Consistent with its strategy of focusing on the full-service segment of the
lodging industry, the Company sold 26 of its 30 Fairfield Inns and all of its
14 senior living communities in 1994. In addition, the Company sold (subject to
a leaseback) 37 Courtyard by Marriott ("Courtyard") properties to an unrelated
real estate investment trust (the "REIT") in 1995. In 1995, the Company also
sold its remaining four Fairfield Inns and the 199-room Springfield Radisson
Hotel (which was acquired as part of a portfolio of lodging properties by the
Company in 1994). Management believes that all of these sales were made at
valuations that were attractive to the Company. 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") for $349 million
(10% of which would be deferred). The Pending Dispositions should be completed
in the first and second quarters of 1996 and the Company intends to reinvest
the proceeds in the acquisition of full-service lodging properties. See
"Business and Properties--Pending Dispositions."
SPECIAL DIVIDEND
The Company previously operated food, beverage and merchandise concessions at
airports, on tollroads and at stadiums and arenas and other tourist attractions
(the "Operating Group"). On December 29, 1995, the Company distributed to its
shareholders through a special dividend (the "Special Dividend") all of the
outstanding shares of common stock of Host Marriott Services Corporation ("HM
Services"), formerly a wholly owned subsidiary of the Company, which, as of the
date of the Special Dividend, owned and operated the Operating Group business.
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 Special Dividend was designed to separate two types of businesses with
distinct financial, investment and operating characteristics and to allow each
business to adopt strategies and pursue objectives appropriate to its specific
needs. The Special Dividend (i) facilitates the development of employee
compensation programs custom-tailored to the operations of each business,
including stock-based and other incentive programs, which will more directly
reward employees of each business based on the success of that business, (ii)
enables the management of each company to concentrate its attention and
financial resources on the core businesses of such company, and (iii) permits
investors to make more focused investment decisions based on the specific
attributes of each of the two businesses.
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock Offered
U.S. Offering.......................... 20.0 million shares
International Offering................. 5.0 million shares
Total................................ 25.0 million shares(1)
Common Stock to be Outstanding after the
Offerings............................... 184.7 million shares(1)(2)
NYSE Trading Symbol...................... HMT
Use of Proceeds.......................... For the acquisition of lodging
properties and for general corporate
purposes
</TABLE>
- --------
(1) Assumes no exercise of the over-allotment option granted to the
Underwriters by the Company.
(2) Based on the number of shares of Common Stock outstanding on December 29,
1995. Does not include (i) up to 10.0 million shares of Common Stock
subject to options held by current and former executive officers and
certain employees of the Company, having a weighted average exercise price
of $3.92 per share (certain of which options are subject to vesting
requirements), (ii) up to 2.0 million shares of Common Stock held by
current and former executive officers and certain employees under deferred
stock incentive plans (certain of which shares are subject to vesting
requirements), (iii) up to 7.5 million shares of Common Stock, issuable
upon exercise of warrants having a current exercise price of $8.00 per
share, issued or reserved for issuance by the Company to certain plaintiffs
as part of a settlement of a class action suit, and (iv) up to 2.1 million
restricted stock plan shares under the Comprehensive Stock Incentive Plan,
approved by the Board of Directors in February 1996. See "Description
of Capital Stock--Warrants" and "Management--Executive Officer
Compensation."
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents summary consolidated historical and pro forma
financial data of the Company for the fiscal years ended December 29, 1995 and
December 30, 1994. The historical financial data provided herein is derived
from the Consolidated Financial Statements of the Company included in this
Prospectus and the unaudited pro forma financial data provided herein is
derived from the Pro Forma Condensed Consolidated Financial Data of the Company
included in this Prospectus and includes the effect of the acquisitions,
dispositions, bond offerings and Special Dividend discussed in this Prospectus.
The pro forma financial data set forth below may not necessarily be indicative
of the results that would have been achieved had such transactions been
consummated as of the dates indicated or that may be achieved in the future.
The information presented below should be read in conjunction with the
Company's audited Consolidated Financial Statements and Notes thereto, the
"Selected Historical Financial Data," "Management's Discussion and Analysis of
Results of Operations and Financial Condition," and the "Pro Forma Condensed
Consolidated Financial Data" included elsewhere herein. The Company's fiscal
year ends on the Friday closest to December 31.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
------------- --------------------------
FISCAL YEAR FISCAL YEAR
1995 1994 1995 1994
----- ------ -------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues........................... $ 484 $ 380 $565 $504
Operating profit before minority
interest, corporate expenses and
interest.......................... 114 152 114 152
Minority interest.................. 2 1 2 1
Corporate expenses................. 36 31 36 31
Interest expense................... 178 165 209 180
Interest income.................... 27 29 28 25
Loss from continuing operations.... (62) (13) (82) (25)
Net loss(2)........................ (143) (25) N/A N/A
OTHER DATA:
EBITDA(3).......................... $311 $ 269 $306 $258
Depreciation and amortization...... 122 113 120 111
Cash from continuing operations.... 110 75 N/A N/A
Cash used in investing activities
from continuing operations ....... (156) (135) N/A N/A
Cash from financing activities from
continuing operations............. 204 24 N/A N/A
Ratio of earnings to fixed
charges(4)........................ -- -- N/A N/A
Deficiency of earnings to fixed
charges........................... 70 12 N/A N/A
<CAPTION>
AS OF DECEMBER 29, 1995
----------------------------------
PRO PRO FORMA
ACTUAL FORMA(5) AS ADJUSTED(5)(6)
------ -------- -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 201 $ 387 $ 694
Total assets....................... 3,557 3,805 4,112
Total debt......................... 2,178 2,384 2,384
Shareholders' equity............... 675 675 982
</TABLE>
(footnotes on following page)
7
<PAGE>
HOTEL PERFORMANCE
The following table sets forth key performance statistics of the Company's
properties:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------
1995 1994
------- -------
<S> <C> <C> <C>
COMPARABLE FULL-SERVICE HOTELS(7)
Number of properties............................... 25 25
Number of rooms.................................... 12,881 12,869
Average daily rate................................. $113.08 $103.53
Occupancy %........................................ 76.6% 77.9%
REVPAR(8).......................................... $86.56 $80.69
REVPAR % change.................................... 7.3% --
TOTAL FULL-SERVICE HOTELS
Number of properties............................... 55 41
Number of rooms.................................... 25,932 19,492
Average daily rate................................. $110.30(9) $102.82(10)
Occupancy %........................................ 75.5%(9) 77.4%(10)
REVPAR(8).......................................... $83.32(9) $79.61(10)
REVPAR % change.................................... 4.7%(9) --
COURTYARD HOTELS (54 properties with 7,940
rooms)(11)
Average daily rate................................. $73.99 $68.86
Occupancy %........................................ 80.5% 80.4%
REVPAR(8).......................................... $59.54 $55.37
REVPAR % change.................................... 7.5% --
RESIDENCE INNS (18 properties with 2,178 rooms)
Average daily rate................................. $85.07 $79.58
Occupancy %........................................ 86.6% 85.6%
REVPAR(8).......................................... $73.69 $68.12
REVPAR % change.................................... 8.2% --
</TABLE>
- --------
(1) Pro forma for the 1994 addition of 18 full-service properties (one of
which was sold in December 1995), the 1994 sale of 14 senior living
communities, the 1994 sale of 26 Fairfield Inns, the 1995 acquisition of
eight full-service properties (excluding the Marriott World Trade Center),
the 1995 sale/leaseback of 37 Courtyard properties, the 1995 sale of the
four remaining Fairfield Inns, the May 1995 Debt Offering (as defined
herein), the December 1995 Debt Offering (as defined herein), the 1996
acquisition of a controlling interest in the San Diego Marriott Hotel and
Marina, the 1996 acquisition of the Toronto Delta Meadowvale, the 1996
purchase of an 83% interest in the mortgage loans secured by the Newport
Beach Marriott Suites, the Pending Acquisitions and the Pending
Dispositions. See "Pro Forma Condensed Consolidated Financial Data."
(2) For fiscal years 1995 and 1994, the Company recorded extraordinary losses
on the extinguishment of debt of $20 million and $6 million, respectively,
after taxes. For fiscal years 1995 and 1994, the Company recorded a loss
from discontinued operations of $61 million and $6 million, respectively,
after taxes.
(3) EBITDA consists of the sum of consolidated net income (loss) from
continuing operations, interest expense, income taxes, depreciation and
amortization and certain other noncash charges (principally noncash write-
downs of lodging properties and equity in earnings of affiliates, net of
distributions received). The Company considers EBITDA to be an indicative
measure of the Company's operating performance due to the significance of
the Company's long-lived assets and because EBITDA can be used to measure
the Company's ability to service debt, fund capital expenditures and
expand its business; however, such information should not be considered as
an alternative to net income, operating profit, cash flows from
operations, or any other operating or liquidity performance measure
prescribed by generally accepted accounting principles. Cash expenditures
for various long-term assets, interest expense and income taxes have been,
and will be, incurred which are not reflected in the EBITDA presentation.
(4) The ratio of earnings to fixed charges is computed by dividing income
(loss) from continuing operations before taxes, interest expense and other
fixed charges by total fixed charges, including interest expense,
amortization of debt issuance costs and the portion of rent expense which
represents interest. The deficiency of earnings to fixed charges is
largely the result of depreciation and amortization of $122 million for
fiscal year 1995, and $113 million for fiscal year 1994.
(5) Pro forma for the 1996 acquisition of a controlling interest in the San
Diego Marriott Hotel and Marina, the 1996 acquisition of the Toronto Delta
Meadowvale, the 1996 purchase of an 83% interest in the mortgage loans
secured by the Newport Beach Marriott Suites, the Pending Acquisitions and
the Pending Dispositions. See "Pro Forma Condensed Consolidated Financial
Data."
(6) As further adjusted to give effect to the Offerings.
(7) Consists of the 25 properties owned by the Company for all of 1995 and
1994, except for the 255-room Elk Grove Suites hotel, which is leased to a
national hotel chain through 1997 and the Sacramento property, which is
operated as an independent hotel.
(8) REVPAR represents room revenues generated per available room and excludes
food and beverage and other ancillary revenues generated by the property.
(9) Excludes the 820-room Marriott World Trade Center acquired in the last
week of 1995.
(10) Excludes six properties acquired in the last two weeks of fiscal year 1994
and the Detroit Airport Marriott included in the Special Dividend.
(11) Includes the 37 properties which the Company sold (subject to a leaseback)
to the REIT in 1995.
8
<PAGE>
CORPORATE STRUCTURE
The chart below presents the organizational corporate structure of Host
Marriott and certain of its subsidiaries, after giving effect to the Special
Dividend (including the Company's properties and other material investments as
of March 15, 1996).
[FLOW CHART APPEARS HERE]
(1) Excludes one full-service property under construction located in Mexico
City, Mexico.
(2) During February 1996, the Company entered into an agreement to sell and
lease back 16 of the 17 Courtyard properties and 18 Residence Inns. See
"Business and Properties--Pending Dispositions."
(3) Excludes one Residence Inn under construction in Arlington (Pentagon City),
Virginia, which the Company will retain.
9
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following factors before
purchasing the securities offered hereby.
SUBSTANTIAL LEVERAGE AND LIMITED FINANCIAL FLEXIBILITY
The Company has substantial indebtedness. As of December 29, 1995, on a pro
forma basis as adjusted to give effect to the Offerings, the Company had
consolidated debt of $2.4 billion, representing 71% of its total
capitalization on a pro forma basis. The Company's business is capital
intensive, and the Company will have significant capital requirements in the
future. The Company's leverage could affect its ability to obtain financing in
the future or to undertake refinancings on terms and subject to conditions
deemed acceptable by the Company.
In the event that the Company's cash flow and working capital are not
sufficient to fund the Company's expenditures or to service its indebtedness,
the Company would be required to raise additional funds through the sale of
additional equity securities, the refinancing of all or part of its
indebtedness, the incurrence of additional permitted indebtedness, or the sale
of assets. There can be no assurance that any of these sources of funds would
be available in amounts sufficient for the Company to meet its obligations.
Moreover, even if the Company were able to meet its obligations, its leveraged
capital structure could significantly limit its ability to finance its
acquisition program and other capital expenditures, to compete effectively or
to operate successfully under adverse economic conditions.
POTENTIAL ADVERSE CONSEQUENCES OF DEBT FINANCING
The indentures relating to senior notes issued by certain of the Company's
subsidiaries contain financial and operating covenants, including, but not
limited to, restrictions on the ability of such subsidiaries to incur
additional indebtedness and issue preferred stock, pay dividends or make other
distributions to the Company, create liens, sell assets, enter into certain
transactions with affiliates, and enter into certain mergers and
consolidations. In addition, the new $225 million revolving line of credit
with Marriott International (the "New Line of Credit") imposes certain
restrictions on the ability of the Company and certain other 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. The above restrictions may limit the Company's
ability to secure additional financing, and may prevent the Company from
engaging in transactions that might otherwise be beneficial to the Company and
to holders of Common Stock.
RISKS OF ACQUISITION STRATEGY
The Company intends to pursue a strategy of growth through the opportunistic
acquisition of full-service urban, convention and resort hotels primarily in
the United States. There can be no assurance that the Company will find
suitable properties for acquisition. The Company incurs certain costs in
connection with the acquisition of new properties and may be required to
provide significant capital expenditures for conversions and upgrades when
acquiring a property operating as other than a Marriott-brand property. See
"Business and Properties--Hotel Lodging Properties--Hotels, Resorts and
Suites." There can be no assurance that any of the properties the Company may
acquire will be profitable following such acquisition. The acquisition of a
property that is not profitable, or the acquisition of a property that results
in significant unanticipated conversion costs, could adversely affect the
Company's profitability. The Company expects to finance new acquisitions from
a combination of the proceeds of the Offerings and, to the extent available,
funds from operations, other indebtedness and proceeds from the sale of
limited-service properties. Depending on the number, size and timing of such
transactions, the Company may in the future require additional financing in
order to continue to make acquisitions. There is no assurance that such
additional financing, if any, will be available to the Company on acceptable
terms.
10
<PAGE>
COMPETITION AND RISKS OF THE LODGING INDUSTRY
The Company's hotels generally operate in areas that contain numerous other
competitors. There can be no assurance that demographic, geographic or other
changes in markets will not adversely affect the convenience or desirability
of the location of the Company's hotels. Furthermore, there can be no
assurance that, in the markets in which the Company's hotels operate,
competing hotels will not pose greater competition for guests than presently
exists, or that new hotels will not enter such markets.
During the 1980s, construction of lodging facilities in the United States
resulted in an excess supply of available rooms. This over-supply had an
adverse effect on occupancy levels and room rates in the industry. Although
the current outlook for the industry has improved, there can be no assurance
that in the future, the lodging industry, including the Company and its
hotels, will not be adversely affected by (i) national and regional economic
conditions, (ii) changes in travel patterns, (iii) seasonality of the hotel
business, (iv) taxes and government regulations which influence or determine
wages, prices, interest rates, construction procedures and costs, and (v) the
availability of credit. Hotel investments are relatively illiquid. Such
illiquidity will tend to limit the ability of the Company to respond to
changes in economic or other conditions.
POTENTIAL CONFLICTS WITH MARRIOTT INTERNATIONAL
The interests of the Company and Marriott International may potentially
conflict due to the ongoing relationships between the companies. In addition,
the Company and Marriott International share two common directors--J.W.
Marriott, Jr. serves as Chairman of the Board of Directors and President of
Marriott International and also serves as a director of the Company, and
Richard E. Marriott serves as Chairman of the Board of Directors of the
Company and also serves as a director of Marriott International. Messrs. J.W.
Marriott, Jr. and Richard E. Marriott, as well as certain other officers and
directors of Marriott International and the Company, also own shares (and/or
options or other rights to acquire shares) in both companies. With respect to
the various contractual arrangements between the two companies, the potential
exists for disagreement as to the quality of services provided by Marriott
International and as to contract compliance. Any such disagreements between
the Company and Marriott International could adversely affect the performance
of one or more of the Company's hotels. Additionally, the possible desire of
the Company, from time to time, to finance, refinance or effect a sale of any
of the properties managed by Marriott International may, depending upon the
structure of such transactions, result in a need to modify the management
agreement with Marriott International with respect to such property. Any such
modification proposed by the Company may not be acceptable to Marriott
International, and the lack of consent from Marriott International could
adversely affect the Company's ability to consummate such financing or sale.
In addition, certain situations could arise where actions taken by Marriott
International in its capacity as manager of competing lodging properties would
not necessarily be in the best interests of the Company. Any such actions by
Marriott International could adversely impact one or more of the Company's
hotels. Nevertheless, the Company believes that there is sufficient mutuality
of interest between the Company and Marriott International to result in a
mutually productive relationship. Moreover, appropriate policies and
procedures are followed by the Board of Directors of each of the companies to
limit the involvement of Messrs. J.W. Marriott, Jr. and Richard E. Marriott
(and, if appropriate, other officers and directors of such companies) in
conflict situations, including requiring them to abstain from voting as
directors of either the Company or Marriott International (or as directors of
any of their subsidiaries) on certain matters which present a conflict between
the companies. For a description of the Company's relationship with Marriott
International, see "Relationship Between the Company and Marriott
International."
RISKS INVOLVED IN INVESTMENTS THROUGH PARTNERSHIPS OR JOINT VENTURES
Historically, the Company has served as a general or limited partner in
hotel partnerships, which typically owned a number of hotel properties and
involved numerous limited partners. More recently, the Company's joint
11
<PAGE>
venture arrangements have been focused on one or a small number of properties,
and have involved only a few partners, which could include the manager or
former owners of such hotels. In the future, the Company intends selectively
to use joint venture arrangements to acquire properties and may consider
acquiring full or controlling interests in partnerships in which it currently
holds general or limited partner interests. Joint venturers may have certain
rights over the operation of the joint venture assets. Therefore, such
investments may, under certain circumstances, involve risks such as the
possibility that the co-venturer in an investment might become bankrupt, or
have economic or business interests or goals that are inconsistent with the
business interests or goals of the Company, or be in a position to take action
contrary to the instructions or the requests of the Company or contrary to the
Company's policies or objectives. Consequently, actions by a co-venturer might
result in subjecting hotel properties owned by the joint venture to additional
risk. Although the Company will seek to maintain sufficient control of any
joint venture to permit the Company's objectives to be achieved, it may be
unable to take action without the approval of its joint venture partners or
its joint venture partners could take actions binding on the joint venture
without the Company's consent. Additionally, should a joint venture partner
become bankrupt, the Company could, in certain circumstances, become liable
for such partner's share of joint venture liabilities.
POTENTIAL ANTITAKEOVER EFFECT OF PROVISIONS IN COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS
The Company's Restated Certificate of Incorporation and Bylaws each contain
provisions that will make difficult an acquisition of control of the Company
by means of a tender offer, open market purchases, proxy fight, or otherwise,
that is not approved by the Board of Directors. Provisions that may have an
antitakeover effect include (i) a staggered board of directors with three
separate classes, (ii) a super-majority vote requirement for removal or
filling of vacancies on the Board of Directors and for amendment to the
Company's Restated Certificate of Incorporation and Bylaws, (iii) a
prohibition on shareholder action by written consent and (iv) super-majority
voting requirements for approval of mergers and other business combinations
involving the Company and interested shareholders. In addition, the Company is
subject to Section 203 of the Delaware General Corporation Law requiring
super-majority approval for certain business combinations. The Company has
also adopted a shareholder rights plan which may discourage or delay a change
in control of the Company. Certain indebtedness issued by subsidiaries of the
Company also have change of control provisions that would require such
indebtedness to be repurchased in the event of a change of control which also
may have the effect of discouraging or delaying a change in control of the
Company. Finally, the Company has granted Marriott International, for a period
expiring in October 2003, the right to purchase up to 20% of each class of the
then outstanding voting stock of the Company at the fair market value thereof
upon the occurrence of certain specified events, generally involving changes
in control of the Company (the "Marriott International Purchase Right"). The
Marriott International Purchase Right may have certain antitakeover effects
with respect to the Company. Any person considering acquiring a substantial or
controlling block of Common Stock would face the possibility that its ability
to exercise control would be impaired by Marriott International's 20%
ownership resulting from exercise of the Marriott International Purchase
Right. It is also possible that the exercise price of the Marriott
International Purchase Right would be lower than the price at which a
potential acquirer might be willing to purchase a 20% block of shares of
Common Stock because the purchase price for the Marriott International
Purchase Right is based on the average trading price during a 30-day period
which may be prior to the announcement of the takeover event. This potential
price difference may have a further antitakeover effect of discouraging
potential acquirers of the Company. See "Purposes and Antitakeover Effects of
Certain Provisions of the Company Certificate and Bylaws and the Marriott
International Purchase Right" and "Description of Capital Stock--Rights and
Junior Preferred Stock."
UNCERTAINTY AS TO MARKET PRICE OF THE COMMON STOCK
Because the market price of Common Stock is subject to fluctuation, the
market value of the shares of Common Stock may increase or decrease prior to
and following the consummation of the Offering. There can be no assurance that
at or after the consummation of the Offering the shares of Common Stock will
trade at the
12
<PAGE>
prices at which such shares have traded in the past. The prices at which the
Common Stock trades after the consummation of the Offering may be influenced
by many factors, including the liquidity of the Common Stock, investor
perceptions of the Company and the real estate industry, the operating results
of the Company and its subsidiaries, the Company's dividend policy, and
general economic and market conditions.
HISTORY OF LOSSES
The Company has sustained losses from continuing operations of $13 million
and $62 million during 1994 and 1995, respectively. The Company's losses have
resulted principally from depreciation, interest expense and write downs of
the carrying values of certain assets to their estimated sales values. There
can be no assurance that the Company will not continue to experience losses
from operations in the future. See "Selected Historical Financial Data" and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
THE COMPANY
The Company is one of the largest owners of lodging properties in the world.
The Company's lodging properties (90 as of December 29, 1995) are generally
operated under Marriott brands and managed by Marriott International, formerly
a wholly owned subsidiary of the Company. The Company is the largest owner of
hotels operated under Marriott brands. The Company also holds minority
interests in various partnerships that own in the aggregate as of December 29,
1995, 262 additional properties operated by Marriott International. The
Company's properties span several market segments, including full-service
(primarily Marriott Hotels, Resorts and Suites), moderate-priced (Courtyard by
Marriott), and extended-stay (Residence Inn). These Marriott brands are among
the most respected and widely recognized in the lodging industry.
The principal executive offices of the Company are located at 10400 Fernwood
Road, Bethesda, Maryland, 20817, and its telephone number is (301) 380-9000.
The Company was incorporated under the laws of the State of Delaware in 1929.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby, after deducting underwriting discounts and commissions and estimated
expenses of the Offerings, are estimated to be approximately $ million
(approximately $ million if the Underwriters' over-allotment option is
exercised in full) based on the last reported sale price per share of Common
Stock on the NYSE Composite Tape on March 25, 1996. The Company expects to use
the net proceeds from the Offerings to fund future acquisitions of primarily
full-service lodging properties or related assets and for general corporate
purposes.
DIVIDEND POLICY
The Company intends to retain future earnings, if any, for use in its
business and does not currently anticipate paying any regular cash dividends
on Common Stock. In addition, the New Line of Credit contains restrictions on
the payment of dividends on Common Stock and the Company's subsidiaries are
subject to certain agreements that limit their ability to pay dividends to the
Company. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition--Liquidity and Capital Resources."
13
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of December 29, 1995, (ii) the pro forma capitalization of the Company as
of December 29, 1995, after giving effect to the transactions described in the
"Pro Forma Condensed Consolidated Financial Data" and (iii) pro forma
capitalization of the Company as of December 29, 1995 further adjusted to
reflect the effects of the Offerings, after deduction of estimated expenses
and underwriting discounts and commissions, at an assumed public offering
price of $12 7/8 per share. The capitalization of the Company should be read
in conjunction with the Company's Consolidated Financial Statements and Notes
thereto, the "Pro Forma Condensed Consolidated Financial Data" and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition," each contained elsewhere herein.
<TABLE>
<CAPTION>
AS OF DECEMBER 29, 1995
----------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------ ------------ --------------
(UNAUDITED, IN MILLIONS)
<S> <C> <C> <C>
Cash and cash equivalents.................... $ 201 $ 387 $ 694
====== ====== ======
Debt......................................... $2,178 $2,384 $2,384
Shareholders' equity......................... 675 675 982
------ ------ ------
Total capitalization....................... $2,853 $3,059 $3,366
====== ====== ======
</TABLE>
- --------
(1) Pro Forma for 1996 acquisition of a controlling interest in the San Diego
Marriott Hotel and Marina, the 1996 acquisition of the Toronto Delta
Meadowvale, the 1996 purchase of an 83% interest in the mortgage loans
secured by the Newport Beach Marriott Suites, the Pending Acquisitions and
the Pending Dispositions. See "Pro Forma Condensed Consolidated Financial
Data."
(2) As further adjusted to give effect to the Offerings.
14
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The unaudited Pro Forma Condensed Consolidated Statements of Operations of
the Company reflect the following transactions for the fiscal year ended
December 29, 1995 and the fiscal year ended December 30, 1994, as if such
transactions had been completed at the beginning of each period:
. 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
. 1994 addition of 18 full-service hotel properties
. 1994 sale of 14 senior living communities
. 1994 sale of 26 Fairfield Inns
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. See "Business and Properties--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 Statements of
Operations do 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 1994, the Company added 18 full-service hotels to its lodging
portfolio (one of which was subsequently sold in 1995), including two hotels
for which a subsidiary of the Company provided 100% nonrecourse financing to
an affiliate of the Company for the acquisition of the hotels (which the
Company treats as owned for accounting purposes).
During 1994, the Company sold all 14 of its senior living communities and 26
of its 30 Fairfield Inns. During 1995, 37 of the Company's 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.
15
<PAGE>
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 and 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.
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 Statements of Operations due to the immateriality of the
operating results for this property.
The "Historical" column in the accompanying Pro Forma Condensed Consolidated
Statements 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.
16
<PAGE>
HOST MARRIOTT CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
AS OF DECEMBER 29, 1995
---------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
ASSETS
<S> <C> <C> <C>
Property and Equipment........................ $2,882 $245 (A) $2,894
69 (B)
(302)(C)
Notes and Other Receivables................... 210 18 (A) 228
Due from Hotel Managers....................... 72 -- 72
Investments in Affiliates..................... 26 (12)(A) 14
Other Assets.................................. 166 9 (A) 210
35 (C)
Cash and Cash Equivalents..................... 201 (54)(A) 387
(68)(B)
308 (C)
------ ---- ------
$3,557 $248 $3,805
====== ==== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt
Debt carrying a parent company guarantee of
repayment.................................. $ 262 $-- $ 262
Debt not carrying a parent company guarantee 1,916
of repayment............................... 206 (A) 2,122
------ ---- ------
2,178 206 2,384
Accounts Payable and Accrued Expenses......... 52 -- 52
Deferred Income Taxes......................... 504 -- 504
Other Liabilities............................. 148 1 (B) 190
41 (C)
------ ---- ------
Total Liabilities......................... 2,882 248 3,130
------ ---- ------
Shareholders' Equity
Common Stock................................ 160 -- 160
Additional Paid-in Capital.................. 499 -- 499
Retained Earnings........................... 16 -- 16
------ ---- ------
Total Shareholders' Equity................ 675 -- 675
------ ---- ------
$3,557 $248 $3,805
====== ==== ======
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Data.
17
<PAGE>
HOST MARRIOTT CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR 1995
---------------------------------------------
ACQUISITION
DISPOSITION & OTHER
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues
Hotels........................ $ 474 $ (1)(D) $30 (E) $ 553
11 (F)
39 (G)
Other......................... 10 -- 2 (G) 12
----- ----- --- -----
484 (1) 82 565
----- ----- --- -----
Operating costs and expenses
Hotels........................ 281 (1)(D) 17 (E) 362
10 (H) 6 (F)
26 (I) 23 (G)
Other......................... 89 -- -- 89
----- ----- --- -----
370 35 46 451
----- ----- --- -----
Operating profit................ 114 (36) 36 114
Minority interest............... (2) -- -- (2)
Corporate expenses.............. (36) -- -- (36)
Interest expense................ (178) 4 (J) (3)(E) (209)
(18)(G)
3 (K)
(17)(L)
Interest income................. 27 -- 1 (G) 28
----- ----- --- -----
Income (loss) from continuing
operations before income taxes
and extraordinary item......... (75) (32) 2 (105)
(Provision) benefit for income
taxes.......................... 13 11 (M) (1)(M) 23
----- ----- --- -----
Income (loss) from continuing
operations before extraordinary
item........................... $ (62) $ (21) $ 1 $ (82)
===== ===== === =====
Loss per common share from con-
tinuing operations............. $(.39) $(.52)
===== =====
Weighted average shares out-
standing....................... 158.3 158.3
===== =====
EBITDA(R)....................... $ 311 $ 306
Depreciation and amortization... 122 120
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Data.
18
<PAGE>
HOST MARRIOTT CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR 1994
---------------------------------------------
ACQUISITION
DISPOSITION & OTHER
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues
Hotels........................ $ 338 $ (2)(D) $41 (E) $ 474
(10)(N) 11 (F)
35 (G)
61 (O)
Other......................... 42 (14)(P) 2 (G) 30
----- ---- --- ------
380 (26) 150 504
----- ---- --- ------
Operating costs and expenses
Hotels........................ 198 (1)(D) 24 (E) 327
27 (H) 7 (F)
25 (I) 21 (G)
(3)(N) 29 (O)
Other......................... 30 (5)(P) -- 25
----- ---- --- ------
228 43 81 352
----- ---- --- ------
Operating profit................ 152 (69) 69 152
Minority interest............... (1) -- -- (1)
Corporate expenses.............. (31) -- -- (31)
Interest expense................ (165) 34 (J) (5)(E) (180)
1 (P) (15)(G)
5 (K)
(32)(L)
(3)(O)
Interest income................. 29 -- (5)(O) 25
1 (G)
----- ---- --- ------
Income (loss) from continuing
operations before income taxes
and extraordinary item......... (16) (34) 15 (35)
(Provision) benefit for income
taxes.......................... 3 12 (M) (5)(M) 10
----- ---- --- ------
Income (loss) from continuing
operations before extraordinary
item........................... $ (13) $(22) $10 $ (25)
===== ==== === ======
Income (loss) per common share
from continuing operations..... $(.09) $ (.16)
===== ======
Weighted average shares
outstanding.................... 151.5 1.0 (Q) 152.5
===== === ======
EBITDA(R)....................... $ 269 $ 258
Depreciation and amortization... 113 111
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Data.
19
<PAGE>
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
See "Business and Properties--Pending Acquisitions."
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
See "Business and Properties--Pending Dispositions."
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 acquisition
of eight full-service properties, as if they were added at the beginning of
the applicable period. 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
Statements of Operations do 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 purchase 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 the depreciation expense and
record the incremental lease expense for the Pending Dispositions.
20
<PAGE>
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
Statements 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.
N. Represents the adjustment to eliminate the revenues and the operating costs
for the 26 Fairfield Inns sold during 1994.
O. Represents the adjustment to reflect the incremental increase in revenue,
operating costs and the secured debt interest expense for the 1994 addition
of 18 full-service properties, mainly utilizing proceeds from the January
1994 issuance of Common Stock by the Company and the Revolver, and the
related decrease in interest income.
P. Represents the adjustments to eliminate the revenues, operating costs and
the secured debt interest expense for the 14 senior living communities sold
during 1994.
Q. Represents the adjustment to increase the weighted average number of common
shares outstanding assuming the January 1994 issuance of common stock by
the Company occurred as of January 1, 1994.
R. EBITDA consists of the sum of consolidated net income (loss) from
continuing operations, interest expense, income taxes, depreciation and
amortization and certain other noncash charges (principally noncash write-
downs of lodging properties and equity in earnings of affiliates, net of
distributions received). The Company considers EBITDA to be an indicative
measure of the Company's operating performance due to the significance of
the Company's long-lived assets and because EBITDA can be used to measure
the Company's ability to service debt, fund capital expenditures and expand
its business; however, such information should not be considered as an
alternative to net income, operating profit, cash flows from operations, or
any other operating or liquidity performance measure prescribed by
generally accepted accounting principles. Cash expenditures for various
long-term assets, interest expense and income taxes have been, and will be,
incurred which are not reflected in the EBITDA presentation.
21
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table presents certain selected historical financial data of
the Company which has been derived from the Company's 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
(as defined herein) 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. The selected financial information for each of the
five annual periods has been derived from the audited Consolidated Financial
Statements of the Company. The information set forth below 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" each included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------------
1995(1) 1994(2) 1993(2)(3)(4) 1992(4) 1991(5)
------- ------- ------------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues........................ $ 484 $380 $659 $7,778 $7,421
Operating profit before minority
interest, corporate expenses
and interest................... 114 152 92 406 382
Income (loss) from continuing
operations..................... (62) (13) 56 75 70
Net income (loss) (6)........... (143) (25) 50 85 82
Earnings (loss) per common
share: (7)
Income (loss) from continuing
operations ................... (.39) (.09) .39 .55 .68
Net income (loss) (6).......... (.90) (.17) .35 .64 .80
Cash dividends declared per
common share................... -- -- .14 .28 .28
BALANCE SHEET DATA:
Total assets.................... $3,557 $3,366 $3,362 $5,886 $6,054
Debt (8)........................ 2,178 1,871 2,113 2,824 3,067
</TABLE>
- --------
(1) Operating results for 1995 include a $10 million pretax charge to write
down the carrying value of five limited service properties to their net
realizable value and a $60 million pretax 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) Certain revenues and costs and expenses for 1993 have been reclassified to
conform to the Company's new income statement presentation. 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 pretax 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 pretax 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 pretax 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 pretax 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 pretax $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.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following discussion and analysis includes 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 totalling $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.
23
<PAGE>
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.
<TABLE>
<CAPTION>
DISTRIBUTION
HISTORICAL PRO FORMA(1)
------------ ------------
1995 1994 1993
----- ----- ------------
(IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues
Hotels........................................... $ 474 $ 338 $ 249
Senior living communities........................ -- 14 23
Net gains (losses) on property transactions...... (3) 6 (1)
Equity in earnings (losses) of affiliates........ -- -- (27)
Other............................................ 13 22 17
----- ----- -----
Total revenues................................. 484 380 261
----- ----- -----
Operating costs and expenses
Hotels........................................... 281 198 155
Senior living communities........................ -- 5 12
Other............................................ 89 25 14
----- ----- -----
Total operating costs and expenses............. 370 228 181
----- ----- -----
Operating profit before minority interest,
corporate expenses and interest................... 114 152 80
Minority interest.................................. (2) (1) (1)
Corporate expenses................................. (36) (31) (23)
Interest expense................................... (178) (165) (152)
Interest income.................................... 27 29 26
----- ----- -----
Loss from continuing operations before income
taxes............................................. (75) (16) (70)
Benefit for income taxes........................... 13 3 10
----- ----- -----
Loss from continuing operations(2)(3)(4)........... $ (62) $ (13) $ (60)
===== ===== =====
Loss per common share from continuing operations... $(.39) $(.09) $(.51)
Weighted average shares outstanding(5)............. 158.3 151.5 116.7
</TABLE>
24
<PAGE>
- --------
(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 pretax 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 Distribution Pro Forma data are presented below (in
millions):
<TABLE>
<CAPTION>
FISCAL YEAR 1993
-----------------------------------
PRO FORMA DISTRIBUTION
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ------------
<S> <C> <C> <C>
Revenues............................. $659 $(398) $261
Operating profit before corporate
expenses and interest............... 92 (12) 80
Corporate expenses and minority
interest............................ 37 (13) 24
Interest expense..................... 164 (12) 152
Profit from operations distributed to
Marriott International.............. 211 (211) --
Income (loss) from continuing
operations.......................... 56 (116) (60)
</TABLE>
(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
pretax 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 pretax $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
25
<PAGE>
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, draperies, 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;
26
<PAGE>
. the $60 million pretax charge in 1995 to write down the carrying value of
one undeveloped land parcel to its estimated sales value;
. the $10 million pretax 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 pretax 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 pretax charge of $60 million was recorded to reduce the asset to
its estimated sales value.
27
<PAGE>
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 Hospitality Notes and the New Line of Credit.
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 pretax 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
totalling 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
toll road 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 from 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.
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.
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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
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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 16 of the
Company's 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 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
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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 line of credit with the New Line of
Credit with Marriott International 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
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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. See "Business and
Properties--Pending Dispositions." 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.
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 realizable 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
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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
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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 continuing operations in 1995, 1994
and 1993 totaled $110 million, $75 million and $335 million, respectively.
The Company's cash used in 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 and cash used in financing
activities from continuing operations was $389 million for 1993. The Company's
cash from financing activities 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
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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 262 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 funding 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) 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 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,
pretax charge against earnings during the fourth quarter 1995 of $47 million,
which has been reflected in discontinued operations.
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BUSINESS AND PROPERTIES
GENERAL
Host Marriott Corporation (the "Company") is one of the largest owners of
lodging properties in the world. The Company owned 90 lodging properties as of
December 29, 1995, which are generally operated under Marriott brands and
managed by Marriott International, Inc. ("Marriott International"), formerly a
wholly owned subsidiary of the Company. The Marriott brand name is among the
most respected and widely recognized brand names in the lodging industry. The
Company's primary focus is on the acquisition of full-service lodging
properties. During 1994 and 1995, the Company has added 27 full-service hotels
(including one 199-room hotel subsequently sold in December 1995) representing
approximately 11,300 rooms for an aggregate of approximately $915 million,
bringing the Company's total full-service hotels to 55 at December 29, 1995.
Based on data provided by Smith Travel Research, the Company believes that its
full-service hotels consistently outperform the industry's average occupancy
rate by a significant margin and averaged 75.5% occupancy for 1995 compared to
68.2% average occupancy for the upscale full-service segment of the lodging
industry (the segment which is most representative of the Company's full-
service hotels).
The lodging industry as a whole, and the full-service hotel segment in
particular, is benefiting from an improved supply and demand relationship in
the United States. Based on data provided by Smith Travel Research, the
Company believes that demand for rooms in the upscale segment, as measured by
annual domestic occupied room nights, increased 3.3% in 1993, 3.0% in 1994 and
2.4% in 1995. Management believes that recent demand increases have resulted
primarily from an improved economic environment and a corresponding increase
in business travel. In spite of increased demand for rooms, the room supply
growth rate in the full service segment has greatly diminished. Management
believes that this decrease in the supply growth rate is attributable to many
factors including the limited availability of attractive building sites for
full-service hotels, the lack of available financing for new full-service
hotel construction and the availability of existing full-service properties
for sale at a discount to their replacement value. Due to the relatively high
occupancy rates of the Company's hotels, the limited supply of new rooms and
the recent increase in business travel, the managers of the Company's hotels
have increased its average daily room rates primarily by replacing certain
discounted group business with higher-rated group and transient business and
by selectively increasing room rates. As a result, on a comparable basis, room
revenues per available room ("REVPAR") for full-service properties increased
approximately 7% in 1995. Furthermore, because lodging property operations
have a high fixed cost component, increases in REVPAR generally yield greater
percentage increases in operating profit. Accordingly, the approximate 7%
increase in REVPAR resulted in a 25% increase in comparable full-service hotel
operating profit in 1995. The Company expects this supply/demand imbalance,
particularly in the upscale full-service segment (the segment which is most
representative of the Company's full-service hotels), to continue, which
should result in improved REVPAR and operating profits at its hotel properties
in the near term.
BUSINESS STRATEGY
The Company's business strategy continues to focus on opportunistic
acquisitions of full-service urban, convention and resort hotels primarily in
the United States. The Company believes that the full-service segment of the
market offers numerous opportunities to acquire assets at attractive multiples
of cash flow and at substantial discounts to replacement value, including
underperforming hotels which can be improved by conversion to the Marriott
brand. The Company believes this segment is very promising because:
. There is virtually no new supply of upscale full-service hotel rooms
currently under construction. According to Smith Travel Research, from
1988 to 1990, upscale full-service room supply increased an average of
approximately 5% annually, which resulted in an oversupply of rooms in
the industry. However, this growth slowed to an average of approximately
1.7% from 1990 to 1995. Management believes that the lead time from
conception to completion of a full-service hotel is generally five years
or more in the types of markets the Company is principally pursuing,
which will contribute to the continued low growth of supply. According to
Coopers & Lybrand, hotel supply in the upscale full-service segment
36
<PAGE>
is expected to grow annually at 1.8% to 1.9% through 1998. Furthermore,
because of the prolonged lead time for construction of new full-service
hotels, management believes that growth in the full-service segment will
continue to be limited at least through 2000.
. Many desirable hotel properties are held by inadvertent owners such as
banks, insurance companies and other financial institutions which are
motivated and willing sellers. The Company has acquired several
properties from these inadvertent owners at significant discounts to
replacement cost.
. Management believes that there are numerous opportunities to improve the
performance of acquired hotels by replacing the existing hotel manager
with Marriott International and converting the hotels to the Marriott
brand. Nine of the 27 full-service hotels added in 1994 and 1995 were
converted to the Marriott brand following their acquisition. These
conversion properties (excluding the Marriott World Trade Center which
was only partially open during 1995) experienced a 66.5% average
occupancy rate during 1995 compared to an average occupancy rate of 75.5%
for all of the Company's full-service hotels. The Company believes these
nine conversion properties will experience improved operations as a
result of increases in occupancy and room rates as the properties begin
to benefit from Marriott's brand recognition, reservation system and
group sales organization. The Company intends to pursue additional full
service hotel acquisitions, some of which may be conversion
opportunities.
The Company holds minority interests and serves as general partner in
various partnerships that own, as of December 29, 1995, an aggregate of 262
additional hotel properties, 42 of which are full-service properties, managed
by Marriott International. Four of the properties added by the Company in the
last two years were held by a partnership in which the Company holds a
minority interest. As opportunities arise, the Company intends to pursue the
acquisition of additional full-service hotels currently held by such
partnerships and/or additional interests in such partnerships.
The Company intends to continue actively to increase its full-service hotel
portfolio. In carrying out this strategy, the Company evaluates each
opportunity on an individual basis and may from time to time elect to acquire
controlling interests in a hotel joint venture, rather than pursue the
outright acquisition of a property, when it believes its return on investment
will be maximized by so doing. The Company may make acquisitions directly or
through its subsidiaries depending on a variety of factors, including the
existence of debt, the form of investment, the restrictions and requirements
of its bond indentures and the availability of funds.
The Company believes it is well qualified to pursue its acquisition
strategy. Management has extensive experience in acquiring and financing
lodging properties and believes its industry knowledge, relationships and
access to market information provide a competitive advantage with respect to
identifying, evaluating and acquiring hotel assets. In addition, the Company
is well positioned to convert acquired properties to high-quality lodging
brand names due to its relationship with Marriott International. For a
description of the Company's relationship with Marriott International, see
"Relationship Between the Company and Marriott International."
During 1994, the Company acquired 15 full-service hotels totaling
approximately 6,100 rooms (including the Springfield Radisson Hotel, a 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 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). In 1995,
the Company acquired nine full-service hotels totaling approximately 3,900
rooms in separate transactions for approximately $390 million. The Company
considers all of these properties as owned hotels for accounting purposes.
In 1996, through the date hereof, the Company has acquired one full-service
hotel (374 rooms) for approximately $25 million, controlling interests in
three additional properties (2,269 rooms), one of which is currently under
construction and is scheduled to be completed during the third quarter of
1996, for a total investment of approximately $66 million and an 83% interest
in the mortgage loans secured by a 250-room full-service property for $18
million. 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.
37
<PAGE>
As of December 29, 1995, the Company also owned 17 Courtyard and 18
Residence Inn properties. In February 1996, the Company entered into an
agreement with the REIT (as defined herein) to sell and lease back 16
Courtyard properties and 18 Residence Inns (comprising the Pending
Dispositions) for $349 million (10% of which will be deferred). The Pending
Dispositions should be completed in the first and second quarters of 1996 and
the Company intends to reinvest the proceeds in the acquisition of full-
service lodging properties. See "Business and Properties--Pending
Dispositions."
Consistent with its strategy of focusing on the full-service segment of the
lodging industry, the Company sold 26 of its 30 Fairfield Inns and all of its
14 senior living communities in 1994. In addition, the Company sold (subject
to a lease back) 37 Courtyard properties for approximately $330 million to the
REIT in 1995. Ten percent of the sale amount of the Courtyard transactions was
deferred. In 1995, the Company also sold its remaining four Fairfield Inns for
net proceeds of approximately $6 million and the Springfield Radisson Hotel
(which was acquired by the Company as part of a portfolio of lodging
properties in 1994) for net proceeds of approximately $3 million. Management
believes that all of these sales were made at valuations that were attractive
to the Company.
Subsequent to the Special Dividend, the Company's assets principally consist
of hotel lodging properties, real estate partnership investments, and
undeveloped and leased land assets.
HOTEL LODGING INDUSTRY
The lodging industry as a whole, and the full-service segment in particular,
is benefiting from a cyclical recovery as well as a shift in the supply/demand
relationship with supply relatively flat and demand strengthening. The lodging
industry posted strong gains in revenues and profits in 1995, as demand growth
continued to outpace additions to supply. Based on Coopers & Lybrand data, the
Company expects hotel room supply growth to remain limited through 1998 and
for the forseeable future thereafter. Accordingly, the Company believes this
supply/demand imbalance will result in improving occupancy and room rates
which should result in improved REVPAR and operating profit.
Following a period of significant overbuilding in the mid-to-late 1980s, the
lodging industry experienced a severe downturn. Since 1991, new hotel
construction, excluding casino-related construction, has been modest, largely
offset by the number of rooms taken out of service each year. Due to an
increase in travel and an improving economy, hotel occupancy has grown
steadily over the past several years, and room rates recently have begun to
improve. According to Coopers & Lybrand, room demand for upscale full-service
properties (full-service hotels with average daily rates generally falling
between the 70th and 80th percentile in their market) is expected to grow
approximately 2.4% annually through 1998. Increased room demand should result
in increases in hotel occupancy and room rates. According to Smith Travel
Research, upscale full-service occupancy grew in 1995 to 68.2%, while room
rate growth exceeded inflation for the third straight year. Based on Coopers &
Lybrand data, the Company expects these recent trends to continue, with
overall occupancy climbing to approximately 70% by 1998, and room rates
increasing at more than one-and-one-half times the rate of inflation in each
of the next three years.
While room demand has been rising, new hotel supply growth has slowed. Smith
Travel Research data shows that, from 1988 to 1990, upscale full-service room
supply increased an average of approximately 5% annually. According to Smith
Travel Research, this growth slowed to an approximate 1.7% average annual
growth rate from 1990 through 1995. Through 1998, upscale full-service room
supply growth is expected to increase to approximately 1.8% annually,
according to Coopers & Lybrand. The increase in room demand and slow down in
growth of new hotel supply has also led to increased room rates. According to
Coopers & Lybrand, room rates for such hotels are expected to grow
approximately 4% to 5% annually through 1998.
As a result of the overbuilding in the mid-to-late 1980s, many full-service
hotels built have not performed as originally planned. Cash flow has often not
covered debt service requirements, causing lenders (e.g., banks, insurance
companies, and savings and loans) to foreclose and become "inadvertent owners"
who are motivated
38
<PAGE>
to sell these assets. In the Company's experience to date, these sellers have
been primarily United States financial organizations. The Company believes
that numerous international financial institutions are also inadvertent owners
of lodging properties and expects that there will be increased opportunities
to acquire lodging properties from international financial institutions. While
the interest of inadvertent owners to sell has created attractive acquisition
opportunities with strong current yields, the lack of supply growth and
increasing room night demand should contribute to higher long-term returns on
invested capital. Given the relatively long lead time to develop urban,
convention and resort hotels, as well as the lack of project financing,
management believes the growth in room supply in this segment will be limited
for an extended period of time.
HOTEL LODGING PROPERTIES
The Company's hotel lodging properties represent quality assets in the full-
service and limited-service (moderate-price and extended-stay) lodging
segments. All but three of the Company's hotel properties are operated under
Marriott brand names, each of which achieved favorable operating results
relative to competing hotels in their respective market segments. The three
hotels (representing an aggregate of 527 rooms, or approximately 2% of the
Company's total rooms) that do not carry the Marriott brand have not been
converted to the Marriott brand due to their size, quality and/or contractual
commitments which would not permit such conversion.
The following table sets forth information as of December 29, 1995 regarding
the hotel properties that comprise the Company's lodging portfolio.
<TABLE>
<CAPTION>
NUMBER NUMBER
OF FACILITIES OF ROOMS
------------- --------
<S> <C> <C>
Hotels, Resorts and Suites (full-service)............. 55 25,932
Courtyard Hotels (moderate-price)..................... 17(1) 2,656
Residence Inns (extended-stay)........................ 18(2) 2,178
--- ------
Total............................................... 90 30,766
=== ======
</TABLE>
- --------
(1) Excludes the 37 Courtyard Hotels (5,284 rooms) sold and leased back in
March 1995 and August 1995.
(2) Excludes a Residence Inn currently under construction and scheduled for
completion in early 1996.
One commonly used indicator of market performance for hotels is revenue per
available room, or REVPAR, which measures daily room revenues generated on a
per room basis. This does not include food and beverage or other ancillary
revenues generated by the property. REVPAR represents the combination of the
average daily room rate charged and the average daily occupancy achieved. Each
of the Company's lodging concepts reported annual increases in REVPAR from
1993 to 1995.
To maintain the overall quality of the Company's lodging properties, each
property undergoes refurbishments and capital improvements on a regularly
scheduled basis. Typically, refurbishing has been provided at intervals of
five years, based on an annual review of the condition of each property. For
1995 and 1994, the Company spent $56 million and $54 million, respectively, on
capital improvements to existing properties. As a result of these
expenditures, the Company has been able to maintain high quality rooms at its
properties.
Hotels, Resorts and Suites. As of December 29, 1995, the Company's full-
service hotels included 52 Marriott-branded hotels, resorts, and suites, and
three other hotel brands offering similar amenities. The Company's full-
service hotels generally contain from 300 to 600 rooms, and the Company's
convention hotels are larger and contain up to 1,900 rooms. Hotel facilities
typically include meeting and banquet facilities, a variety of restaurants and
lounges, swimming pools, gift shops, and parking facilities. The Company's
full-service hotels primarily serve business and pleasure travelers and group
meetings at locations in downtown and
39
<PAGE>
suburban areas, near airports and at resort locations throughout the United
States. The average age of the full-service properties is 14 years, several of
which have had substantial renovations or major additions.
The Company believes that its hotels consistently outperform the industry's
average REVPAR growth rates. On a comparable basis, REVPAR increased 7.3% for
1995, as compared to a REVPAR increase of 4.9% for the upscale full-service
segment of the lodging industry for 1995. Due to the relatively high occupancy
rates of the Company's hotels, the limited supply of new rooms and the recent
increase in business travel, the managers of the Company's hotels have
increased average room rates by replacing certain discounted group business
with higher-rated group and transient business and by selectively increasing
room rates. The Company believes that these favorable REVPAR growth trends
should continue due to the limited new construction of full-service properties
and the expected improvements from the conversion of nine properties to the
Marriott brand in 1994 and 1995.
The chart below sets forth performance information for the Company's
comparable full-service hotels:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
COMPARABLE FULL-SERVICE HOTELS (1)
Number of properties.......................................... 25 25
Number of rooms............................................... 12,881 12,869
Average daily rate............................................ $113.08 $103.53
Occupancy percentage.......................................... 76.6% 77.9%
REVPAR........................................................ $86.56 $80.69
REVPAR % change............................................... 7.3% --
</TABLE>
- --------
(1) Includes 25 properties owned by the Company for all of fiscal years 1995
and 1994, except for the 255-room Elk Grove Suites hotel, which is leased
to a national hotel chain through 1997 and the 85-room Sacramento
property, which is operated as an independent hotel.
The chart below sets forth performance information for the Company's full-
service hotels:
<TABLE>
<CAPTION>
1995 1994 1993(3)
------- ------- -------
<S> <C> <C> <C>
TOTAL FULL-SERVICE HOTELS
Number of properties.............................. 55 41 23
Number of rooms................................... 25,932 19,492 10,400
Average daily rate................................ $110.30(1) $102.82(2) $89.52
Occupancy percentage.............................. 75.5%(1) 77.4%(2) 74.9%
REVPAR............................................ $ 83.32(1) $ 79.61(2) $67.09
REVPAR % change................................... 4.7%(1) 18.7%(2) 4.4%
</TABLE>
- --------
(1) Excludes the information related to the 255-room Elk Grove Suites hotel,
which is leased to a national hotel chain through 1997, the 85-room
Sacramento property, which is operated as an independent hotel, the 199-
room Springfield Radisson Hotel, which was sold in December 1995 and the
820-room Marriott World Trade Center acquired in the last week of 1995.
(2) Excludes the seven properties acquired in the last two weeks of 1994.
(3) Excludes the New York Marriott Marquis, which was not treated as an owned
hotel until December 31, 1993.
Revenues in 1995 for nearly all of the Company's full-service hotels,
resorts and suites were improved or comparable to 1994. This improvement was
achieved through steady increases in customer demand, as well as yield
management techniques applied by the managers to maximize REVPAR on a
property-by-property basis.
A number of the Company's full-service hotel acquisitions were converted to
the Marriott brand upon acquisition. 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 as well
as customer recognition of the Marriott brand name. In connection with the
conversion of these properties, the Company employed, or will employ,
additional capital to upgrade these properties to the Company's and the new
40
<PAGE>
managers' 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. The conversion
properties are already showing improvements as the benefits of Marriott
International's marketing and reservation programs and customer service
initiatives take hold.The Company actively manages these conversions and, in
many cases, has worked closely with the manager to selectively invest in
enhancements to the physical product to make the property more attractive to
guests or more efficient to operate.
The Company's and the managers' focus is on maximizing profitability
throughout the portfolio by concentrating on key objectives. These key
objectives include evaluating marginal restaurant operations, exiting low rate
airline room contracts in strengthening markets, reducing property-level
overhead by sharing management positions with other managed hotels in the
vicinity and selectively making additional investments where favorable
incremental returns are expected. These objectives, while principally manager-
initiated, have the Company's strong support, and the Company seeks to ensure
their prompt implementation wherever practical.
The Company and its managers will continue to focus on cost control, such as
the sharing of managerial and administrative functions among hotels in close
proximity to each other, in an attempt to ensure that hotel sales increases
serve to maximize house and operating profit. While control of fixed costs
serves to improve profit margins as hotel sales increase, it also results in
more properties reaching financial performance levels that allow the managers
to share in the growth of profits in the form of incentive management fees.
The Company believes this strengthens the alignment of the Company's and the
managers' interests.
During 1995, the Company completed construction of the Philadelphia Marriott
Hotel (1,200 rooms; opened in January 1995), which is the largest hotel in
Pennsylvania, and recently completed the construction of the Philadelphia
Airport Hotel (419 rooms; opened in November 1995). The Philadelphia Marriott
Hotel was financed, in part, by a mortgage loan provided by Marriott
International. The Philadelphia Airport Hotel has been largely financed
through the issuance of $40 million of industrial revenue bonds.
Courtyard Hotels. The Company's Courtyard properties are moderate-priced,
limited-service hotels aimed at individual business and pleasure travelers, as
well as families. Courtyard hotels typically have approximately 150 rooms at
locations in suburban areas or near airports throughout the United States. The
Courtyard properties include well-landscaped grounds, a courtyard with a pool
and socializing areas. Each hotel features meeting rooms and a restaurant and
lounge with approximately 80 seats. The Courtyard hotels owned by the Company
are among the newest in the Courtyard hotel system, averaging only five years
old. The Company's Courtyard properties have substantially matured and are
operating at exceptionally high occupancy rates. The Company believes this
competitive position will enable the manager to continue to improve
profitability by adjusting the mix of business to build room rates. The chart
below sets forth comparable performance information for the Company's owned
and leased Courtyard properties:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Number of properties.................................... 54 54 54
Number of rooms......................................... 7,940 7,940 7,940
Average daily rate...................................... $73.99 $68.86 $64.58
Occupancy percentage.................................... 80.5% 80.4% 79.7%
REVPAR.................................................. $59.54 $55.37 $51.47
REVPAR % change......................................... 7.5% 7.6% 9.6%
</TABLE>
The Company's Courtyard properties benefited in 1995 from higher demand.
REVPAR increased almost 8% due to increases in room rates of over 7% and a
small occupancy increase. House profit margins also increased by almost two
percentage points, reflecting the operating leverage inherent in properties
already running at close to capacity.
41
<PAGE>
The Company's Courtyard properties were generally fully occupied during the
business week and enjoyed high occupancies during the weekends. The Company
believes this competitive position will enable the manager to continue to
improve profitability through yield management and selective room rate
increases.
During the first and third quarters of 1995, 37 of the Company's Courtyard
properties were sold to and leased back from the REIT. 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
(10% of which would be deferred). The transaction is expected to close in the
first and second quarters of 1996. See "Business and Properties--Pending
Dispositions." The Company will retain its downtown Chicago, Illinois
Courtyard.
Residence Inns. The Company's Residence Inns are extended-stay, limited-
service hotels which cater primarily to business and family travelers who stay
more than five consecutive nights. Residence Inns typically have 80 to 130
studio and two-story penthouse suites. Residence Inns generally are located in
suburban settings throughout the United States and feature a series of
residential style buildings with landscaped walkways, courtyards and
recreational areas. Residence Inns do not have restaurants, but offer
complimentary continental breakfast. In addition, most Residence Inns provide
a complimentary evening hospitality hour. Each suite contains a fully equipped
kitchen, and many suites have woodburning fireplaces. The 18 Residence Inns
owned by the Company are among the newest in the Residence Inn system,
averaging only five years old. The table below sets forth performance
information for such Inns for the periods presented. The following table
excludes information with respect to the 11 Residence Inns that are no longer
consolidated with the Company as of December 31, 1993.
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Number of properties.................................... 18 18 18
Number of rooms......................................... 2,178 2,178 2,178
Average daily rate...................................... $85.07 $79.58 $74.70
Occupancy %............................................. 86.6% 85.6% 84.5%
REVPAR.................................................. $73.69 $68.12 $63.12
REVPAR % change......................................... 8.2% 7.9% 11.1%
</TABLE>
For 1995, the Company's Residence Inns performed well with advances in room
rates of 7%, while also increasing occupancy by one percentage point.
Continued popularity of this product with customers combined with increasing
business travel resulted in superior performance for 1995. At an average
occupancy rate of 86.6% for 1995, these properties were near full occupancy
during the business week and enjoyed high occupancies during the weekends.
Given this strong demand, the Company's Residence Inns were able to improve
room rates through managing their mix of business.
During 1993, the Company sold the majority of its equity interest in a
partnership owning 11 Residence Inns. The Company is currently constructing
one additional 300-room property in Arlington (Pentagon City), Virginia, near
National Airport, just outside of Washington, D.C., which is scheduled for
completion in the second quarter of 1996.
In February 1996, the Company entered into an agreement with the REIT to
sell and lease back 18 of the Company's Residence Inns for approximately $172
million (10% of which would be deferred). The transaction is expected to close
in the first and second quarters of 1996. See "Business and Properties--
Pending Dispositions." The Company will retain the Pentagon City Residence
Inn.
MARKETING
All but six of the Company's hotel properties, at December 29, 1995, are
managed by Marriott International as Marriott-brand hotels. Three of the six
remaining hotels are operated as Marriott brand hotels under franchise
agreements with Marriott International. The Company believes that its lodging
properties will continue to enjoy competitive advantages arising from their
participation in the Marriott International hotel systems. Marriott
International's nationwide marketing programs and reservation systems as well
as the advantage of increasing
42
<PAGE>
customer preference for Marriott brands should also help these properties to
maintain or increase their premium over competitors in both occupancy and room
rates. Repeat guest business in the Marriott hotel system is enhanced by the
Marriott Honored Guest Awards program. As other hotel chains eliminate or
scale back awards for their frequent stay programs, Marriott Honored Guest
Awards and its companion program, Marriott Miles, continue to expand, and now
include more than 6.4 million members.
The Marriott reservation system was upgraded significantly in 1994 giving
Marriott reservation agents complete descriptions of the rooms available for
sale, and more up-to-date rate information from the properties. The
reservation system also features improved connectivity to airline reservation
systems, providing travel agents with greater access to available rooms
inventory for all Marriott lodging properties. In addition, new software at
Marriott's centralized reservations centers enables agents to immediately
identify the nearest Marriott brand property with available rooms when a
caller's first choice is sold out.
PROPERTIES
The following table sets forth certain information as of March 15, 1996
relating to each of the Company's hotels grouped by lodging concept. All of
the properties are operated under Marriott brands by Marriott International,
unless otherwise indicated. The land on which the hotel is built is fee owned
by the Company unless otherwise indicated.
Hotels, Resorts and Suites
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Alabama
Point Clear(1).................... 306
California
Marina Beach (Leased)(1) ......... 372
Napa Valley(2).................... 191
Newport Beach..................... 570
Sacramento Airport (Leased)(3).... 85
San Diego Marriott Hotel and Mari-
na(4)............................ 1,355
San Francisco Airport(2).......... 684
San Francisco Fisherman's
Wharf(2)(5)...................... 255
San Francisco Moscone Center
(Leased)......................... 1,498
Santa Clara (Leased).............. 754
Colorado
Denver Tech Center(2)............. 625
Denver West (Leased).............. 307
Vail Mountain Resort(2)........... 349
Connecticut
Hartford--Rocky Hill (Leased)..... 251
Florida
Fort Lauderdale Marina(2)......... 580
Miami Airport (Leased)............ 782
Singer Island (Holiday
Inn)(2)(3)....................... 222
Tampa Airport (Leased)............ 295
Tampa Westshore(2)(6)............. 309
Georgia
Atlanta Norcross.................. 222
Atlanta Northwest(1).............. 400
Atlanta Perimeter (Leased)........ 400
JW Marriott Hotel at Lenox
(Leased)......................... 371
Illinois
Chicago--Deerfield Suites......... 248
Chicago--Elk Grove Suites (Shera-
ton)(3).......................... 255
Indiana
South Bend (Leased)(2)............ 300
Maryland
Bethesda (Leased)................. 407
Gaithersburg-Washingtonian Cen-
ter.............................. 284
</TABLE>
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Michigan
Detroit Romulus................... 245
Minnesota
Minneapolis City Center (Leased).. 583
Missouri
Kansas City Airport (Leased)...... 382
St. Louis Pavilion (Leased)....... 672
New Hampshire
Nashua............................ 251
New Jersey
Newark Airport (Leased)........... 590
New York
New York East Side(2)............. 662
New York Marriott Marquis
(Leased)......................... 1,911
Marriott World Trade Center(1).... 820
North Carolina
Charlotte(1)(5)................... 298
Raleigh Crabtree(2)(6)............ 375
Oklahoma
Oklahoma City (Pending Acquisi-
tion)(7)......................... 354
Oregon
Portland(2)....................... 503
Pennsylvania
Philadelphia(8)................... 1,200
Philadelphia Airport (Leased)(8).. 419
Pittsburgh Hyatt
(Pending Acquisition)
(Leased)(9)...................... 400
Texas
Dallas/Fort Worth(1).............. 491
Dallas Quorum (Leased)(2)......... 547
El Paso (Leased).................. 296
Houston Airport (Leased).......... 566
J.W. Marriott Houston(2).......... 503
Plaza San Antonio(1)(5)........... 252
San Antonio Riverwalk
(Leased)(1)...................... 500
</TABLE>
43
<PAGE>
Hotels, Resorts and Suites--(continued)
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Virginia
Dulles Airport (Leased).......... 370
Dulles Suites (Pending Acquisi-
tion) (7)....................... 254
Westfields Conference Center(2).. 335
Williamsburg(2).................. 295
Washington, D.C.
Washington Metro Center(2)....... 456
Barbados
Sam Lord's Castle Resort......... 234
</TABLE>
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Bermuda
Castle Harbour Resort (Leased).... 395
Canada
Toronto Eaton Centre (Leased)(1).. 459
Toronto Delta Meadowvale(3)(10)... 374
Mexico
Mexico City Aeropuerto(11)........ 600
Mexico City Polanco(11)........... 314
</TABLE>
Courtyard Hotels(/1//2/)
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
California
Laguna Hills............ 136
Torrance................ 150
Florida
Jacksonville (Leased)... 146
Miami Lakes............. 151
Illinois
Arlington Heights....... 152
Chicago................. 334
Iowa
Quad Cities............. 107
Maryland
Greenbelt............... 152
</TABLE>
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
New Jersey
Hanover................. 149
Tinton Falls............ 120
New York
Fishkill................ 152
Syracuse (Leased)....... 149
Pennsylvania
Pittsburgh Airport...... 148
Willow Grove (Leased)... 149
Rhode Island
Middletown.............. 148
Virginia
Arlington/Rosslyn....... 162
Williamsburg............ 151
</TABLE>
Residence Inns(/1//2/)
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Arizona
Flagstaff............... 102
Scottsdale.............. 122
Tempe................... 126
California
Fountain Valley......... 122
Rancho Bernardo......... 123
Georgia
Atlanta Alpharetta...... 103
Illinois
Chicago................. 221
Maryland
Annapolis............... 102
Massachusetts
Westborough............. 109
Michigan
Warren.................. 133
</TABLE>
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
New Mexico
Albuquerque....................... 112
New York
Syracuse.......................... 102
North Carolina
Durham............................ 122
Ohio
Columbus.......................... 106
Pennsylvania
Willow Grove...................... 118
Tennessee
Nashville......................... 110
Texas
Dallas Northpark.................. 103
Dallas Market Center.............. 142
Virginia
Arlington (Pentagon City) (opening
in the
second quarter of 1996).......... 300
</TABLE>
- --------
(1) Property was acquired by the Company in 1995.
(2) Property was acquired by the Company in 1994.
(3) Property is not operated as a Marriott and is not managed by Marriott
International.
(4) The Company acquired a controlling interest in the San Diego Marriott
Hotel and Marina in 1996 through a limited partnership in which the
Company owns a 51% interest. See "--1996 Acquisitions."
(5) Property is currently operated as a Marriott franchised property.
(6) Property is owned by an affiliated partnership of the Company. A
subsidiary of the Company provided 100% nonrecourse financing totaling
approximately $35 million to the partnership, in which the Company owns
the sole general partner interest, for the acquisition of these two
hotels. The Company accounts for these properties as owned hotels for
accounting purposes.
(7) Property is expected to be purchased in 1996. See "--Pending
Acquisitions."
(8) Property was opened in 1995.
44
<PAGE>
(9) The Pittsburgh Hyatt will be purchased by a limited partnership in which
the Company will own an 95% interest. The remaining 5% will be owned by
the manager. The property will be converted to a Marriott in 1996
subsequent to its acquisition and operated as a franchised property. See
"--Pending Acquisitions."
(10) Property was acquired by the Company in February 1996.
(11) The Company acquired a controlling interest in this property in February
1996. The Mexico City Polanco Hotel is currently under construction and
is scheduled to be completed in the third quarter of 1996. See "--1996
Acquisitions."
(12) The Company has entered into an agreement with the REIT to sell and lease
back 16 Courtyard properties and 18 Residence Inns. See "--Pending
Dispositions."
1996 ACQUISITIONS
In January 1996, the Company acquired a controlling interest in the 1,355-
room San Diego Marriott Hotel and Marina through a restructuring of two
limited partnerships which previously owned the hotel. The Company previously
owned 5% general partner interests in each of the limited partnerships, and
through a capital contribution of $10 million, became the managing general
partner with a total general and limited partnership interest of 51% in one
restructured partnership which now owns the San Diego Marriott Hotel and
Marina.
In February 1996, the Company also acquired a controlling interest in two
hotels for $56 million in Mexico City, Mexico totaling 914 rooms. One of the
hotels is currently operating and the other hotel is currently under
construction and scheduled for completion in the third quarter of 1996. The
hotels will be owned by a venture which includes the Company, Marriott
International, which will manage the hotels, and the seller of the hotels.
In addition, the Company acquired the 374-room Toronto Delta Meadowvale for
approximately $25 million in February 1996. The hotel is currently managed by
Interstate Hotel Corporation ("Interstate").
Also in February 1996, the Company purchased an 83% interest in the mortgage
loans securing the 250-room Newport Beach Marriott Suites for $18 million.
PENDING ACQUISITIONS
During 1996 through the date hereof, the Company has entered into agreements
to purchase two full-service properties, the Washington Dulles Marriott Suites
(254 rooms) and the Oklahoma City Marriott (354 rooms) and a controlling
interest in one full-service property, the Pittsburgh Hyatt (400 rooms).
Management anticipates that such acquisitions will be consummated in the first
and second quarters of 1996.
The Company expects that the Pittsburgh Hyatt will be acquired for
approximately $18.5 million by a limited partnership, of which a subsidiary of
the Company would be the sole general partner. The Company would own a 95%
interest in this limited partnership and would contribute approximately $17.5
million to the limited partnership to fund the acquisition of the Pittsburgh
Hyatt. Interstate would manage the Pittsburgh Hyatt and contribute
approximately $1 million to the limited partnership for the acquisition of the
hotel. Management anticipates that the Pittsburgh Hyatt will be converted to
the Marriott brand at a cost of approximately $7 million during 1996. There
was a dispute between the seller and the manager of the Pittsburgh Hyatt
concerning the termination of the manager which was settled. The settlement
provides for the manager to vacate the premises on the scheduled closing date
of April 1, 1996, after which time the hotel will be closed for renovations in
preparation for conversion to the Marriott brand. In the unlikely event that
Hyatt does not vacate the premises prior to the scheduled closing, the closing
could be delayed.
The Pending Acquisitions are subject to certain conditions, including
customary due diligence and other closing conditions, and no assurance can be
given that the transactions will be consummated or, if consummated, that the
transactions will be consummated at the time or on the terms currently
contemplated. In addition to the Pending Acquisitions discussed above, the
Company intends to pursue expansion opportunities through the acquisition of
other full-service lodging properties.
PENDING DISPOSITIONS
During February 1996, the Company entered into an agreement with the REIT to
sell and lease back 16 Courtyard properties and 18 Residence Inns for $349
million. Ten percent of the sales price for such properties is deferred. On
March 22, 1996, the parties closed this transaction with respect to three
Courtyard and five Residence Inn properties for proceeds totalling
approximately $91 million (10% of which was deferred). The remainder of the
transaction is expected to be completed in the second quarter of 1996. The
Company expects to invest such proceeds in the acquisition of full-service
lodging properties.
45
<PAGE>
INVESTMENTS IN AFFILIATED PARTNERSHIPS
The Company and certain of its subsidiaries also manage the Company's
partnership investments and conduct the partnership services business. As
such, the Company and/or its subsidiaries own an equity investment in, and
serve as the general partner or managing general partner for, 30 partnerships
which collectively own 42 Marriott full-service hotels, 120 Courtyard hotels,
50 Residence Inns and 50 Fairfield Inns. In addition, the Company holds notes
receivable (net of reserves) from partnerships totaling approximately $170
million at December 29, 1995.
As the managing general partner, the Company and its subsidiaries are
responsible for the day-to-day management of partnership operations, which
includes payment of partnership obligations from partnership funds,
preparation of financial reports and tax returns and communications with
lenders, limited partners and regulatory bodies. The Company or its subsidiary
is usually reimbursed for the cost of providing these services.
Hotel properties owned by the partnerships generally were acquired from the
Company or its subsidiaries in connection with limited partnership offerings.
These hotel properties are currently operated under management agreements with
Marriott International. As the managing general partner of such partnerships,
the Company or its subsidiaries oversee and monitor Marriott International's
performance pursuant to these agreements.
The Company's interests in these partnerships range from 1% to 50%. Cash
distributions provided from these partnerships are tied to the overall
performance of the underlying properties and the overall level of debt owed by
the partnership. Partnership distributions to the Company were $3 million for
1995, $4 million in 1994 and $6 million in 1993. All partnership debt is
nonrecourse to the Company and its subsidiaries, except that the Company is
contingently liable under various guarantees of debt obligations of certain of
these partnerships. Such commitments are limited in the aggregate to $173
million at December 29, 1995. Subsequent to year end, such maximum commitment
was reduced to approximately $128 million. In most cases, fundings of such
guarantees represent loans to the respective partnerships.
COMPETITION
The cyclical nature of the U.S. lodging industry has been demonstrated over
the past two decades. Low hotel profitability during the 1974-75 recession led
to a prolonged slump in new construction and, over time, high occupancy rates
and real price increases in the late 1970s and early 1980s. Changes in tax and
banking laws during the early 1980s precipitated a construction boom that
created an oversupply of hotel rooms. The Company expects the U.S. upscale
full-service hotel supply/demand imbalance to continue to improve over the
next few years as room demand continues to grow and room supply growth is
expected to be minimal, in particular in the full-service segment.
The Company's hotels compete with several other major lodging brands in each
segment in which they operate. Competition in the industry is based primarily
on the level of service, quality of accommodations, convenience of locations
and room rates. The following table presents key participants in segments of
the lodging industry in which the Company competes:
<TABLE>
<CAPTION>
SEGMENT REPRESENTATIVE PARTICIPANTS
------- ---------------------------
<C> <S>
Full-Service........................ Marriott Hotels, Resorts and Suites;
Hyatt; Hilton; Radisson; Doubletree; Red
Lion; Sheraton; Wyndham
Moderate-Price...................... Courtyard; Holiday Inn; Ramada Inns; Days
Inn; Quality Inns; Hampton Inn
Extended-Stay....................... Residence Inn; Homewood Suites; Embassy
Suites; Oakwood Apartments
</TABLE>
OTHER REAL ESTATE INVESTMENTS
The Company currently owns 38 undeveloped parcels of vacant land, totaling
approximately 250 acres, originally purchased primarily for the development of
hotels or senior living communities. The Company sold
46
<PAGE>
13 parcels during 1995 for proceeds of approximately $10 million. The Company
may sell its remaining undeveloped parcels from time to time when market
conditions are favorable. Some of the properties may be developed as part of a
long-term strategy to realize the maximum value of these parcels. The Company
also has lease and sublease activity relating primarily to its former
restaurant operations.
In addition, 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 1980's 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 aggressively
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 has recorded a
pretax charge of $60 million in the fourth quarter of 1995 to reduce the asset
to its estimated sales value.
SPECIAL DIVIDEND
In addition to acquiring and owning hotels (the "Real Estate Group"), the
Company previously operated food, beverage and merchandise concessions at
airports, on tollroads and at stadiums and arenas and other tourist
attractions (the "Operating Group"). On December 29, 1995, the Company
distributed to its shareholders through a special dividend (the "Special
Dividend") all of the outstanding shares of common stock of Host Marriott
Services Corporation ("HM Services"), formerly a direct wholly owned
subsidiary of the Company which, as of the date of the Special Dividend, owned
and operated the Operating Group business. 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 Special Dividend was designed to separate two types of businesses with
distinct financial, investment and operating characteristics and to allow each
business to adopt strategies and pursue objectives appropriate to its specific
needs. The Special Dividend (i) facilitates the development of employee
compensation programs custom-tailored to each business's operations, including
stock-based and other incentive programs, which will more directly reward
employees of each business based on the success of that business, (ii) enables
the management of each company to concentrate its attention and financial
resources on the core businesses of such company, and (iii) permits investors
to make more focused investment decisions based on the specific attributes of
each of the two businesses.
RELATIONSHIP WITH MARRIOTT INTERNATIONAL; MARRIOTT INTERNATIONAL DISTRIBUTION
Prior to October 8, 1993, the Company was named "Marriott Corporation." In
addition to conducting its existing Real Estate Group business and the
Operating Group business (which was recently distributed to shareholders
through the Special Dividend), Marriott Corporation engaged in lodging and
senior living services management, timeshare resort development and operation,
food service and facilities management and other contract services businesses
(the "Management Business"). On October 8, 1993, the Company completed the
Marriott International Distribution. Marriott International conducts the
Management Business as a separate publicly traded company.
The Company and Marriott International have entered into agreements which
provide, among other things, for Marriott International to (i) manage lodging
properties owned or leased by the Company, (ii) advance up to $225 million to
the Company under a line of credit which matures in 1998, (iii) provide $109
million of first mortgage financing for the Philadelphia Marriott Hotel and
(iv) guarantee the Company's performance in connection with certain loans or
other obligations. See "Relationship Between the Company and Marriott
47
<PAGE>
International." The Company views its relationship with Marriott International
as providing various advantages, including access to high quality management
services, strong brand names and superior marketing and reservation systems.
Marriott International has the right to purchase up to 20% of the voting
stock of the Company if certain events involving a change of control of the
Company occur. See "Purposes and Antitakeover Effects of Certain Provisions of
the Company Certificate and Bylaws and the Marriott International Purchase
Right--Marriott International Purchase Right."
EMPLOYEES
The Company and its subsidiaries collectively have approximately 200
corporate employees, and approximately 600 other employees (primarily employed
at two of its non-U.S. hotels) which are covered by collective bargaining
agreements that are subject to review and renewal on a regular basis. The
Company believes that it has good relations with its unions and has not
experienced any material business interruptions as a result of labor disputes.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws may impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, certain
environmental laws and common law principles could be used to impose liability
for release of asbestos-containing materials ("ACMs"), and third parties may
seek recovery from owners or operators of real properties for personal injury
associated with exposure to released ACMs. Environmental laws also may impose
restrictions on the manner in which property may be used or business may be
operated, and these restrictions may require expenditures. In connection with
its current or prior ownership or operation of hotels, the Company may be
potentially liable for any such costs or liabilities. Although the Company is
currently not aware of any material environmental claims pending or threatened
against it, no assurance can be given that a material environmental claim will
not be asserted against the Company.
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.
48
<PAGE>
RELATIONSHIP BETWEEN THE COMPANY AND HM SERVICES AFTER THE SPECIAL DIVIDEND
For the purpose of governing certain of the ongoing relationships between
the Company and HM Services after the Special Dividend and to provide
mechanisms for an orderly transition, the Company and HM Services have entered
into various agreements, and have adopted policies, as described in this
section. The Company believes that the agreements are fair to both parties and
contain terms which generally are comparable to those which would have been
reached in arms-length negotiations with unaffiliated parties. In most cases
(such as the Distribution Agreement, the Tax Sharing Agreement and the
Employee Benefits Allocation Agreement) the agreements are comparable to those
used by others in similar situations. In each case, the terms of these
agreements have been reviewed by individuals who were then and are now at a
senior management level at the Company and by individuals who were then and
are now at a senior management level of HM Services.
DISTRIBUTION AGREEMENT
Subject to certain exceptions, the HM Services Distribution Agreement (the
"HM Services Distribution Agreement") provides for, among other things,
assumptions of liabilities and cross-indemnities designed to allocate,
effective as of December 29, 1995, financial responsibility for the
liabilities arising out of or in connection with the business of the Operating
Group ("Operating Group Business") to HM Services and its subsidiaries, and
financial responsibility for the liabilities arising out of or in connection
with the business of the Real Estate Group ("Real Estate Group Business") to
the Company and its subsidiaries. Other agreements executed in connection with
the HM Services Distribution Agreement set forth certain specific allocations
of liabilities between the Company and HM Services. See "--Employee Benefits
and other Employment Matters," and "--Tax Sharing Agreement," below. Under the
HM Services Distribution Agreement, the Company retains all cash and cash
equivalent balances of HM Services and its subsidiaries, as of the close of
business on December 29, 1995, except for an amount equaling $25 million (the
"Initial Cash Amount"), which is subject to adjustments to reflect certain
restructuring costs, certain budgeted capital expenditures to be incurred by
the HM Services and cash maintained by HM Services at Schiphol Airport in
Amsterdam, Netherlands. The HM Services Distribution Agreement also provides
that HM Services will assume its proportionate share of the Company's current
obligation for certain employee benefit awards denominated in Host Marriott
Common Stock currently held by employees of Marriott International. The
Company and HM Services agreed to share the cost to Host Marriott of such
awards. HM Services may issue up to 1.7 million shares of Common Stock upon
the exercise or distribution of such awards. At the Company's option, HM
Services may satisfy this obligation by paying to the Company cash equal to
the value of such shares of HM Services common stock. Additionally, the
Company and HM Services have agreed to share the exercise price for options
comprising such awards.
To avoid adversely affecting the intended tax consequences of the Special
Dividend and related transactions, the HM Services Distribution Agreement
provides that, until December 29, 1997, HM Services must obtain an opinion of
counsel reasonably satisfactory to the Company or a supplemental tax ruling
before HM Services may make certain material dispositions of its assets,
engage in certain repurchases of HM Services capital stock or cease the active
conduct of its business independently, with its own employees and without
material changes. The Company must also obtain an opinion of counsel
reasonably satisfactory to HM Services or a supplemental tax ruling before the
Company may engage in similar transactions during such period. The Company
does not expect these limitations to inhibit significantly its operations,
growth opportunities or its ability to respond to unanticipated developments.
On December 20, 1995, the Company had outstanding warrants to purchase an
aggregate of 7.5 million shares of Host Marriott Common Stock (the "Warrants")
issued (or reserved for issuance) in connection with the settlement of
litigation brought by certain holders and purchasers of senior notes and
debentures of the Company. In connection with the HM Services Distribution,
the Warrants were adjusted such that, after December 29, 1995, each Warrant is
exercisable for one share of Host Marriott Common Stock and one fifth of a
share of HM Services common stock. The HM Services Distribution Agreement
provides that, upon notice to HM Services of the exercise of Warrants, HM
Services will issue to the exercising holder of the Warrants the
49
<PAGE>
appropriate number of whole shares of HM Services common stock and, if
applicable, a check for the value of any fractional shares of HM Services
otherwise issuable in connection with such exercise; and HM Services will be
entitled to receive a pro rata portion of the exercise price (such pro rata
portion to be established by allocating the exercise price of the HM Services
common stock and the Host Marriott Common Stock issuable upon exercise of the
Warrants in accordance with their relative values immediately following the
Special Dividend.)
EMPLOYEE BENEFITS AND OTHER EMPLOYMENT MATTERS
The Company and HM Services entered into an Employee Benefits Allocation and
Other Employment Matters Agreement (the "Employee Benefits Allocation
Agreement") providing for the allocation of certain responsibilities with
respect to employee compensation, benefit and labor matters. The Employee
Benefits Allocation Agreement provides that, effective as of December 29,
1995, HM Services will assume or retain, as the case may be, all liabilities
of the Company, under employee benefit plans, policies, arrangements,
contracts and agreements, including under collective bargaining agreements,
with respect to employees who, on or after December 29, 1995, will be
employees of HM Services or its subsidiaries, including those former employees
employed by HM Services and its subsidiaries for whom the Company retained
such liabilities in connection with the Marriott International Distribution,
as defined below ("HM Services Employees"). The Employee Benefits Allocation
Agreement also provides that, effective as of December 29, 1995, the Company
will assume or retain, as the case may be, all liabilities of the Company,
under employee benefit plans, policies, arrangements, contracts and
agreements, including under collective bargaining agreements, with respect to
employees who on or after December 29, 1995 will be employees of the Company
or its other subsidiaries, including certain former employees employed by the
Company or one of its other subsidiaries for whom the Company retained such
liabilities in connection with Marriott International Distribution ("Company
Employees"). Pursuant to the Employee Benefits Allocation Agreement, and in
connection with the Special Dividend, the Company also adjusted outstanding
awards under Company employee benefit plans.
TAX SHARING AGREEMENT
The Company and HM Services entered into a tax sharing agreement (the "Tax
Sharing Agreement") that defines the parties' rights and obligations with
respect to deficiencies and refunds of federal, state and other income or
franchise taxes relating to the Company's business for tax years prior to the
Special Dividend and with respect to certain tax attributes of the Company
after the Special Dividend. In general, with respect to periods ending on or
before December 29, 1995, the Company is responsible for (i) filing both
consolidated federal tax returns for the Company affiliated group and combined
or consolidated state tax returns for any group that includes a member of the
Company affiliated group, including in each case HM Services and its
subsidiaries for the relevant periods of time that such companies were members
of the applicable group, and (ii) paying the taxes relating to such returns
(including any subsequent adjustments resulting from the redetermination of
such tax liabilities by the applicable taxing authorities). HM Services will
reimburse the Company for a defined portion of such taxes relating to the
Operating Group. HM Services is responsible for filing returns and paying
taxes related to the Operating Group for subsequent periods. The Company and
HM Services have agreed to cooperate with each other and to share information
in preparing such tax returns and in dealing with other tax matters.
TRANSITIONAL SERVICES AGREEMENT
The Company and HM Services entered into an agreement pursuant to which the
Company or HM Services may provide certain services to the other for a
transitional period on an as-needed basis. The fee for such services will be
based on hourly rates designed to reflect the cost for providing such services
plus reimbursement of certain direct out of pocket expenses. Subject to the
termination provisions of the agreement, HM Services will be free to procure
such services from outside vendors or may develop an in-house capability in
order to provide such services internally. In general, the transitional
services agreement will terminate prior to the end of 1996. The transitional
services to be provided to HM Services pursuant to such agreements may include
corporate secretary services, cash management services, accounting services,
internal audit services, tax administration, litigation management or any
other similar services that HM Services may require.
50
<PAGE>
ASSIGNMENT OF TRADEMARKS
In conjunction with the Special Dividend, all of the Company's right, title
and interest in certain trademarks, including the Company logo, were conveyed
to HM Services. Under the HM Services Distribution Agreement, the Company and
its subsidiaries retain the right to use the name "Host" without limitation or
expiration. The Company does not currently contemplate any change to its name.
The Company has adopted a new logo (presented on the cover of this
Prospectus); although, the Company has retained the right to use its former
logo for a period of 18 months following the Special Dividend, which period
may be extended for up to an additional 12 months with HM Services' consent.
POLICIES AND PROCEDURES FOR ADDRESSING CONFLICTS
The on-going relationship between the Company and HM Services may present
certain conflicts for J.W. Marriott, Jr. who serves as a director of the
Company and HM Services and for Richard E. Marriott who serves as a director
of HM Services and as the Chairman of the Board of Directors of the Company.
Mr. Richard E. Marriott, as well as other executive officers and directors of
the Company and HM Services also own (or have options or other rights to
acquire) a significant number of shares of Common Stock in the Company and HM
Services. The Company and HM Services have adopted appropriate policies and
procedures to be followed by the Board of Directors of each company to limit
the involvement of Richard E. Marriott and J.W. Marriott, Jr. (or such
executive officers and other directors having a significant ownership interest
in the companies) in conflict situations, including matters relating to
contractual relationships or litigation between the Company and HM Services.
Such procedures include requiring Richard E. Marriott and J.W. Marriott, Jr.
(or such executive officers or other directors having a significant ownership
interest in the companies) to abstain from voting as directors of each company
with respect to matters that present a significant conflict of interest
between the companies. Whether or not a significant conflict of interest
exists will be determined on a case-by-case basis depending on such factors as
the dollar value of the matter, the degree of personal interest of Richard E.
Marriott and J.W. Marriott, Jr. (or such executive officers and other
directors having a significant ownership interest in the companies) in the
matter and the likelihood that resolution of the matter has significant
strategic, operational or financial implications for the business of the
Company. It is a principal responsibility of the General Counsel of each of
the Company and HM Services to monitor this issue in consultation with the
Company's or HM Services' (as applicable) board of directors and to determine
when a significant conflict of interest exists. The Company and HM Services
believe that such conflicts will be minimal.
RELATIONSHIP BETWEEN THE COMPANY AND
MARRIOTT INTERNATIONAL
For the purpose of governing certain of the ongoing relationships between
the Company and Marriott International after the Marriott International
Distribution and to provide mechanisms for an orderly transition, the Company
and Marriott International entered into various agreements and adopted
policies, as described in this section. Subsequent to the Marriott
International Distribution, the Company and Marriott International have
entered into additional agreements and arrangements which are also described
below. The Company believes that the agreements are fair to both parties and
contain terms which generally are comparable to those which would have been
reached in arms-length negotiations with unaffiliated parties (although
comparisons are difficult with respect to certain agreements, such as the
Assignment and License Agreement, which relate to the specific circumstances
of certain transactions). In many cases (such as with the Lodging Management
Agreements, the Consolidation Agreement and the Transitional Services
Agreements) the forms of agreements are based on agreements that the Company
has in fact negotiated with third parties. In other cases (such as the
Marriott International Distribution Agreement, the Marriott International Tax
Sharing Agreement and the New Line of Credit) the agreements are comparable to
those used by others in similar situations. In each case, the terms of such
agreements have been reviewed by individuals at a senior management level in
the Company and by individuals at a senior management level in Marriott
International.
51
<PAGE>
DISTRIBUTION AGREEMENT
The Marriott International Distribution Agreement provides for, among other
things, assumptions of liabilities and cross-indemnities designed to allocate,
effective as of the Marriott International Distribution, financial
responsibility for the liabilities arising out of or in connection with the
Management Business to Marriott International and its subsidiaries, and
financial responsibility for the liabilities arising out of or in connection
with the Real Estate Group Business and the Operating Group Business, along
with the Company's liabilities under a substantial portion of its pre-existing
financing and long-term debt obligations, to the Company and its retained
subsidiaries. The agreements executed in connection with the Marriott
International Distribution Agreement also set forth certain specific
allocations of liabilities between the Company and Marriott International.
Under the Marriott International Distribution Agreement, Marriott
International has the Marriott International Purchase Right to purchase up to
20% of each class of the Company's voting stock (determined after assuming
full exercise of the right) at its then fair market value (based on an average
of trading prices during a specified period), upon the occurrence of certain
specified events generally involving a change in control of the Company. The
Marriott International Purchase Right terminates on October 8, 2003. The
Marriott International Purchase Right may have certain antitakeover effects as
described in "Antitakeover Effects of Certain Provisions of the Company's
Certificate and Bylaws and the Marriott International Purchase Right."
LODGING MANAGEMENT AGREEMENTS
Nearly all of the Company's hotels are managed by Marriott International.
The Marriott International Lodging Management Agreements provide for Marriott
International to manage most of the Marriott full-service hotels and all
Courtyard hotels and Residence Inns owned or leased by the Company. Each
Marriott International Lodging Management Agreement reflects market terms and
conditions and is substantially similar to the terms of management agreements
with other third-party owners regarding lodging facilities of a similar type.
The Company paid to Marriott International fees of $67 million, $41 million
and $5 million during 1995, 1994 and 1993, respectively, from the managed and
franchised lodging properties owned or leased by the Company. Additionally,
the Company is a general partner in several unconsolidated partnerships that
own over 260 lodging properties operated by Marriott International under long-
term agreements.
A separate Lodging Management Agreement is typically entered into for each
hotel owned or leased by the Company and operated by Marriott International.
Each Lodging Management Agreement has an initial term of 15 to 20 years and,
at the option of Marriott International, may be renewed for up to two or three
additional terms of eight to ten years each, aggregating 16 to 30 years, for a
total term of up to 50 years. Each Lodging Management Agreement for the
Courtyard hotels and Residence Inns (but not full-service hotels) is also
subject to the terms of a Consolidation Agreement (the "Consolidation
Agreement"), pursuant to which (i) certain fees payable under the Lodging
Management Agreement with respect to a particular lodging facility will be
determined on a consolidated basis with certain fees payable under the Lodging
Management Agreements for all lodging facilities of the same type, and (ii)
certain base fees payable under Lodging Management Agreements with respect to
a particular lodging facility will be waived in return for payment of an
incentive fee upon the sale of such facility. No Lodging Management Agreement
with respect to a single lodging facility is cross-collateralized or cross-
defaulted to any other Lodging Management Agreement and a single Lodging
Management Agreement may be cancelled under certain conditions, although such
cancellation will not trigger the cancellation of any other Lodging Management
Agreement. Marriott International does not have the right to set off amounts
owed to the Company under any Lodging Management Agreement against any other
indebtedness or amounts due from the Company and Marriott International may
not apply cash flows from one lodging facility against cash deficits of other
lodging facilities. Under the Consolidation Agreement (which is discussed
below), all revenues collected, expenses incurred under Lodging Management
Agreements for the Company's limited service hotels are aggregated on the
basis of hotel product line for purposes of calculating certain management
fees payable to Marriott International thereunder. The Lodging Management
Agreements with respect to the Company's full service hotels are not subject
to the Consolidation Agreement and the
52
<PAGE>
management fees payable to Marriott International under a single Lodging
Management Agreement are calculated solely with respect to the lodging
facility managed thereunder. In general, properties remain subject to the
Lodging Management Agreement upon the sale of such property to third parties.
Under each Lodging Management Agreement for full-service hotels, Marriott
International collects all revenue generated at a particular lodging property.
Marriott International holds such amounts on behalf of the Company in
segregated accounts and forwards to the Company every two weeks all amounts in
excess of certain expenses and management fees (as described more fully
below). Under the Lodging Management Agreements for the Company's limited
service hotels and the Consolidation Agreement, all revenues generated at the
Company's limited service hotels are collected and aggregated in a single
segregated account for each limited service product line (i.e., Courtyard and
Residence Inns). Marriott International forwards to the Company amounts in
excess of aggregated expenses and management fees in a manner similar to that
for the full-service hotels. Because amounts collected by Marriott
International are held on the Company's behalf, the Company does not depend
upon the creditworthiness of Marriott International for receipt of such
payments.
Marriott Hotels, Resorts and Suites. The form of Lodging Management
Agreement for full-service hotels in the Marriott Hotels, Resorts and Suites
line provides for a base management fee equal to three percent of annual gross
revenues plus an incentive management fee generally equal to 40% to 50% of
"Available Cash Flow" for each fiscal year (provided that the cumulative
incentive management fee may not on any date exceed 20% of the cumulative
operating profit of the hotel from the Marriott International Distribution
through such date). The Company and Marriott International have agreed that,
subject to certain exceptions, the incentive management fee for full-service
hotels acquired after September 8, 1995 will equal 20% of Available Cash Flow.
Available Cash Flow is defined to be the excess of "Operating Profit" over the
"Owner's Priority." Operating Profit is defined generally in all forms of
Lodging Management Agreements as gross revenues, less all ordinary and
necessary operating expenses, including all base and system fees and
reimbursement for certain system-wide operating costs ("Chain Services"), as
well as a deduction to fund a required reserve for furniture, fixtures and
equipment for certain hotels, before any depreciation or amortization or
similar fixed charges. Owner's Priority in all forms of Lodging Management
Agreements is derived from an agreed-upon base amount assigned to each lodging
facility. Marriott International is also entitled to reimbursement for certain
costs attributable to Chain Services of Marriott International. The Company
has the option to terminate the agreement if specified performance thresholds
regarding Operating Profit are not satisfied and if specified revenue market
share tests are not met (provided that Marriott International can elect to
avoid such termination by making cure payments to the extent necessary to
allow the specified Operating Profit thresholds to be satisfied).
The Company intends to aggressively pursue further hotel acquisitions and it
is anticipated that the Company will engage Marriott International to manage
many of the hotels that are acquired.
Limited Service Hotels. The forms of Lodging Management Agreements for
Courtyard hotels and Residence Inns provide for a system fee equal to three
percent (in the case of Courtyard hotels) or four percent (in the case of
Residence Inns) of annual gross revenue, and a base fee equal to two percent
of annual gross revenues. The base fee is deferred in favor of the Owner's
Priority, and in any fiscal year in which the base fee is greater than
Operating Profit (prior to deduction of the base fee) less Owner's Priority,
the excess base fee is deferred, to be paid in a subsequent fiscal year out of
excess Operating Profit. Owner's Priority and Operating Profit are determined
in substantially the same manner as described above for Marriott Hotels,
Resorts and Suites. In addition, the agreements provide for an incentive
management fee equal to 50% of "Available Cash Flow" for each fiscal year
(provided that the cumulative incentive management fee may not on any date
exceed 20% of the cumulative Operating Profit of the hotel through such date).
Available Cash Flow is defined to be the excess of Operating Profit (after
deduction of the base fee, including any portion of the base fee that is
deferred or waived) over the Owner's Priority. Under such forms of agreement,
Marriott International is also entitled to reimbursement for certain costs
attributable to Chain Services of Marriott International. The Company or its
subsidiaries have the option to terminate the agreement if specified
performance thresholds regarding Operating Profit are not satisfied and if
specified revenue market share tests are not met (provided that Marriott
International can elect to avoid such termination by making cure payments to
the extent necessary to allow the specified Operating Profit thresholds to be
satisfied).
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<PAGE>
Consolidation Agreement. Each Lodging Management Agreement for the Courtyard
hotels and Residence Inns (but not full-service hotels) is subject to the
terms of the Consolidation Agreement. Pursuant to the Consolidation Agreement,
certain revenues, expenses and fees payable under the Lodging Management
Agreements for Courtyard hotels and Residence Inns are consolidated by product
line as discussed herein. With respect to any Courtyard hotels and Residence
Inns managed by Marriott International under a Lodging Management Agreement,
for so long as the Company has not sold or financed any such lodging facility,
then the calculations, distributions and dispositions of gross revenues,
reserves, base fees, Owner's Priority, incentive management fees and system
fees under the Lodging Management Agreement with respect to such lodging
facility will be determined and reported on an aggregate basis, together with
all such facilities governed by a Lodging Management Agreement in the same
product line. After any such lodging facility is sold or financed, the
Consolidation Agreement will no longer be applicable to such facility, and the
gross revenues, reserves, base fee, Owner's Priority, incentive management fee
and system fee for such facility will be determined solely in accordance with
the Lodging Management Agreement applicable to such facility.
In addition, pursuant to the terms of the Consolidation Agreement, the base
fee payable under the Lodging Management Agreements (other than Lodging
Management Agreements for full-service hotels) is modified as set forth below.
Until December 31, 2000, in lieu of the base fees payable to Marriott
International with respect to the Courtyard hotels and Residence Inns managed
by Marriott International under a Lodging Management Agreement, Marriott
International will receive a "Bonus Incentive Fee" upon the sale of any of
such facilities by the Company. The "Bonus Incentive Fee" is defined to be 50%
of the "Net Excess Sale Proceeds" resulting from the sale of such facility
(provided that the Bonus Incentive Fee shall not exceed two percent of the
cumulative gross revenues of such facility, from the date of inception of the
Lodging Management Agreement for such facility through the earlier of December
31, 2000 or the date of sale). Net Excess Sale Proceeds is defined to be the
gross property sales price for the facility less (i) the reasonable costs
incurred by the Company in connection with the sale and (ii) a base amount
assigned to each lodging facility. Any future owners of such facility, and the
Company to the extent that it retains ownership of such facility after
December 31, 2000, will not be subject to the foregoing terms and will be
required to pay to Marriott International the base fee as set forth in the
Lodging Management Agreement applicable to such facility.
FRANCHISE AGREEMENTS
At the time that the Company acquired the San Francisco Marriott--
Fisherman's Wharf, the Charlotte Marriott Executive Park and the Plaza San
Antonio, the Company entered into franchise agreements with Marriott
International to allow the Company to use the Marriott brand, associated
trademarks, research, standards, quality control, reservation systems, food
and beverage services and other related items in connection with its
operations of these properties. Pursuant to these franchise agreements, the
Company pays a franchise royalty fee of six percent of gross room sales plus
three percent of gross food and beverage sales, except for the Plaza San
Antonio for which the Company pays a royalty fee of four percent of gross room
sales in years one and two increasing to five percent in years three and four
and six percent in years five through ten, plus two percent of gross food and
beverage sales in years one and two increasing to three percent in years three
through ten. Additionally, the Company pays an advertising fee of one percent
of gross room sales and a reservations charge on usage of the Marriott
International reservations system, subject to certain agreed upon adjustments.
The term of the franchise agreement for the San Francisco Marriott--
Fisherman's Wharf is 30 years, the term of the franchise agreement for the
Charlotte Marriott Executive Park is 15 years and the term of the franchise
agreement for the Plaza San Antonio is ten years.
NEW LINE OF CREDIT
Marriott International and the Company have entered into the New Line of
Credit under which the Company has the right to borrow from Marriott
International 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
54
<PAGE>
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. 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.
PHILADELPHIA MORTGAGE
Marriott International provided first mortgage financing for a portion of
the development and construction costs for the Philadelphia Marriott hotel
constructed by the Company, pursuant to a mortgage financing agreement (the
"Philadelphia Mortgage") entered into between the Company and Marriott
International. The Philadelphia Mortgage (approximately $109 million at
December 29, 1995) provided for the funding of a portion (approximately 60%)
of the construction and development costs of such hotel, as and when such
costs were incurred, up to a maximum of $125 million of funding. The
Philadelphia Mortgage (i) is a two-year "mini-perm" facility, carrying a
floating interest rate of LIBOR plus 300 basis points, and (ii) will, upon
maturity of the two-year mini-perm, fund into a ten-year term loan, bearing
cash-pay interest at the rate of 10% per annum, plus deferred interest of 2%
per annum. The Philadelphia Mortgage is due on sale of the property (or any
majority interest therein) and is subject to other terms and conditions
customary for first mortgage financings of this type.
TAX SHARING AGREEMENT
The Company and Marriott International have entered into a tax sharing
agreement (the "Marriott International Tax Sharing Agreement") that defines
the parties' rights and obligations with respect to deficiencies and refunds
of federal, state and other income or franchise taxes relating to the
Company's businesses for tax years prior to the Marriott International
Distribution and with respect to certain tax attributes of the Company after
the Marriott International Distribution. In general, with respect to periods
ending on or before the last day of 1993, the Company is responsible for (i)
filing both consolidated federal tax returns for the Company affiliated group
and combined or consolidated state tax returns for any group that includes a
member of the Company affiliated group, including in each case Marriott
International and its subsidiaries for the relevant periods of time that such
companies were members of the applicable group, and (ii) paying the taxes
relating to such returns (including any subsequent adjustments resulting from
the redetermination of such tax liabilities by the applicable taxing
authorities). Marriott International will reimburse the Company for the
portion of such taxes relating to the Management Business. Marriott
International is responsible for filing returns and paying taxes related to
the Management Business for subsequent periods. The Company and Marriott
International have agreed to cooperate with each other and to share
information in preparing such tax returns and in dealing with other tax
matters.
ASSIGNMENT AND LICENSE AGREEMENT
Pursuant to the terms of an Assignment and License Agreement, all of the
Company's right, title and interest in certain trademarks, including the
trademarks "Marriott," "Courtyard," "Residence Inns by Marriott" and
"Fairfield Inns by Marriott," were conveyed to Marriott International. The
Company and its subsidiaries have been granted a license to use such
trademarks in their corporate names, subject to specified terms and
conditions.
NONCOMPETITION AGREEMENT
The Company and Marriott International entered into a Noncompetition
Agreement dated October 8, 1993 which agreement was amended in connection with
the Special Dividend (the "Noncompetition Agreement").
55
<PAGE>
Under the Noncompetition Agreement, the Company and its subsidiaries are
prohibited from entering into, or acquiring an ownership interest in any
entity that operates, any business that competes with the hotel management
business as conducted by Marriott International, subject to certain
exceptions. The Noncompetition Agreement has a term expiring on October 8,
2000.
TRANSITIONAL SERVICES AGREEMENTS
Marriott International and the Company entered into a number of agreements
pursuant to which Marriott International has agreed to provide certain
continuing services to the Company and its subsidiaries for a transitional
period. Such services are provided on market terms and conditions. Subject to
the termination provisions of the specific agreements, the Company and its
subsidiaries are free to procure such services from outside vendors or may
develop an in-house capability in order to provide such services internally.
The Company believes that these agreements are based on commercially
reasonable terms including pricing and payment terms. In general, the
transitional services agreements can be kept in place at least through 1997.
The Company has the right to terminate such agreements upon giving 180 days
(or less) notice.
POLICIES AND PROCEDURES FOR ADDRESSING CONFLICTS
The on-going relationship between Marriott International and the Company may
present certain conflicts for Messrs. J.W. Marriott, Jr. and Richard E.
Marriott, because J.W. Marriott, Jr. serves as Chairman of the Board of
Directors and President of Marriott International and also serves as a
director of the Company, and Richard E. Marriott serves as Chairman of the
Board of Directors of the Company and as a director of Marriott International.
Messrs. J.W. Marriott, Jr. and Richard E. Marriott, as well as other executive
officers and directors of the Company and Marriott International, also own (or
have options or other rights to acquire) a significant number of shares of
common stock in both the Company and Marriott International. The Company and
Marriott International have adopted appropriate policies and procedures to be
followed by the Board of Directors of each company to limit the involvement of
Messrs. J.W. Marriott, Jr. and Richard E. Marriott (or such other executive
officers and directors having a significant ownership interest in both
companies) in conflict situations, including matters relating to contractual
relationships or litigation between the companies. Such procedures include
requiring Messrs. J.W. Marriott, Jr. and Richard E. Marriott (or such other
executive officers or directors having a significant ownership interest in
both companies) to abstain from making management decisions in their
capacities as officers of Marriott International and the Company,
respectively, and to abstain from voting as directors of either company, with
respect to matters that present a significant conflict of interest between the
companies. Whether or not a significant conflict of interest exists is
determined on a case-by-case basis depending on such factors as the dollar
value of the matter, the degree of personal interest of Messrs. J.W. Marriott,
Jr. or Richard E. Marriott (or such other executive officers and directors
having a significant ownership interest in both companies) in the matter, the
interests of the shareholders of the Company and the likelihood that
resolution of the matter has significant strategic, operational or financial
implications for the business of the Company. It is a principal responsibility
of the general counsel of the Company to monitor this issue in consultation
with the Audit Committee of the Board of Directors and to determine when a
significant conflict of interest exists. See "Risk Factors--Potential
Conflicts with Marriott International."
OTHER TRANSACTIONS AND RELATIONSHIPS
The Company has also entered into certain other transactions and
relationships with Marriott International. Marriott International has
provided, and expects in the future to provide, financing to the Company for a
portion of the cost of acquiring properties to be operated or franchised by
Marriott International. In 1995, Marriott International invested an aggregate
of $80 million, principally in the form of mortgage loans. The Company also
acquired a full-service property from a partnership in which Marriott
International owned a 50% interest. In January 1996, Marriott International
provided $57 million in connection with the Company's acquisition of a
controlling interest in two full-service hotels in Mexico City comprising 914
hotel rooms. See "Business and Properties--1996 Acquisitions."
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MANAGEMENT
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board consists of six directors divided into three classes,
each class consisting of two directors. Each director serves a three-year term.
Set forth below is information with respect to those individuals serving as
directors and executive officers of the Company.
<TABLE>
<CAPTION>
OTHER POSITIONS AND BUSINESS EXPERIENCE
PRIOR TO BECOMING AN EXECUTIVE OFFICER OF THE
NAME AND TITLE AGE COMPANY
-------------- --- ---------------------------------------------
<S> <C> <C>
Richard E. Marriott (1) 57 Richard E. Marriott joined the Company in 1965
Chairman of the Board and has served in various executive capacities.
Director since 1979 In 1979, Mr. Marriott was elected to the Board
of Directors. In 1984, he was elected Executive
Vice President and in 1986 he was elected Vice
Chairman of the Board of Directors. In 1993, Mr.
Marriott was elected Chairman of the Board.
Mr. Marriott also has been responsible for man-
agement of the Company's government affairs
functions. Mr. Marriott is also a director of
Marriott International, Potomac Electric Power
Company and Chairman of the Board of First Media
Corporation. He also serves as a director of
certain subsidiaries of the Company and is a
past President of the National Restaurant Asso-
ciation. Mr. Marriott's term as a Director of
the Company expires at the 1998 annual meeting
of stockholders.
J.W. Marriott, Jr. (1) 64 J.W. Marriott, Jr. is Chairman of the Board and
Director since 1964 President of Marriott International and a direc-
tor of General Motors Corporation, Outboard Marine
Corporation and the U.S.-Russia Business
Roundtable. He also serves on the Boards of
Trustees of the Mayo Foundation and the National
Geographic Society, and on the Advisory Board of
the Boy Scouts of America. He is on the
President's Advisory Committee of the American Red
Cross and the Executive Committee of the World
Travel & Tourism Council. Mr. J.W. Marriott's term
as Director of the Company expires at the 1996
annual meeting of stockholders.
R. Theodore Ammon 46 Mr. Ammon is a private investor and Chairman and
Director since 1992 Chief Executive Officer of Big Flower Press
Holdings, Inc. and Chairman of Treasure Chest
Advertising Company, Inc. He was formerly a gen-
eral partner of Kohlberg Kravis Roberts & Com-
pany (a New York and San Francisco-based invest-
ment firm) from 1990 to 1992, and an executive
of such firm prior to 1990. He also serves on
the Boards of Directors of Foodbrands America,
Inc., Culligan Water Technologies, Inc.,
Samsonite Corporation and the New York YMCA, and
on the Board of Trustees of Bucknell University.
Mr. Ammon's term as Director of the Company ex-
pires at the 1998 annual meeting of stockhold-
ers.
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
OTHER POSITIONS AND BUSINESS EXPERIENCE
PRIOR TO BECOMING AN EXECUTIVE OFFICER OF THE
NAME AND TITLE AGE COMPANY
-------------- --- ---------------------------------------------
<S> <C> <C>
Terence C. Golden 51 Mr. Golden is the President and Chief Executive
President and Chief Officer of the Company. He also serves as a di-
Executive Officer rector of Prime Retail, Inc., Cousins Property,
Director since 1995 Inc., D.R. Horton, Inc. and the District of Co-
lumbia Early Childhood Collaborative. He is also
a member of the Executive Committee of the Fed-
eral City Council. Prior to joining the Company
in 1995, Mr. Golden was chairman of Bailey Re-
alty Corporation and prior to that served as
Chief Financial Officer of the Oliver Carr Com-
pany. Prior to joining the Oliver Carr Company,
Mr. Golden served as Administrator of the Gen-
eral Services Administration, as Assistant Sec-
retary of Treasury and was co-founder and na-
tional managing partner of Trammell Crow Resi-
dential Companies. Mr. Golden's term as Director
of the Company expires at the 1997 annual meet-
ing of stockholders.
Ann Dore McLaughlin 54 Ms. McLaughlin is a member of the Executive Com-
Director since 1993 mittee of the Federal City Council and Vice
Chairman of the Aspen Institute. She was for-
merly President and Chief Executive Officer of
New American Schools Development Corporation.
Ms. McLaughlin has served with distinction in
several U.S. Administrations in such positions
as Secretary of Labor and Under Secretary of the
Department of the Interior. Ms. McLaughlin also
serves as a director of AMR Corporation, Federal
National Mortgage Association, General Motors
Corporation, Kellogg Company, Nordstrom, Potomac
Electric Power Company, Union Camp Corporation
and Vulcan Materials Company. Additionally, Ms.
McLaughlin serves as a member of the governing
boards of a number of civic, non-profit organi-
zations, including the Public Agenda Foundation
and the Conservation Fund. Ms. McLaughlin is on
the Board of Overseers for the Wharton School of
the University of Pennsylvania and is a trustee
of the Center for Strategic and International
Studies. Ms. McLaughlin's term as Director of
the Company expires at the 1997 annual meeting
of stockholders.
Harry L. Vincent, Jr. 76 Mr. Vincent is a retired Vice Chairman of Booz-
Director since 1969 Allen & Hamilton, Inc. He also served as a di-
rector of Signet Banking Corporation from 1973
until 1989. Mr. Vincent's term as Director of
the Company expires at the 1996 annual meeting
of stockholders.
Robert E. Parsons, Jr. 40 Robert E. Parsons, Jr. joined the Company's Cor-
Executive Vice President porate Financial Planning staff in 1981, was
and made Director-Project Finance in 1984, Vice
Chief Financial Officer President-Project Finance in 1986 and Assistant
Treasurer in 1988. In 1993, he was elected Se-
nior Vice President and Treasurer of the Compa-
ny, and in 1995, he was elected Executive Vice
President and Chief Financial Officer of the
Company.
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
OTHER POSITIONS AND BUSINESS EXPERIENCE
PRIOR TO BECOMING AN EXECUTIVE OFFICER OF THE
NAME AND TITLE AGE COMPANY
-------------- --- ---------------------------------------------
<S> <C> <C>
Stephen J. McKenna 55 Stephen J. McKenna joined the Company in 1973 as
Executive Vice President an attorney. He was appointed Assistant General
and Counsel in 1976, and was promoted to Vice Presi-
General Counsel dent and Assistant General Counsel in 1986. He
became Vice President and Associate General
Counsel in 1990 and became Senior Vice President
and General Counsel in 1993 and Executive Vice
President and General Counsel in 1995. Prior to
joining the Company, Mr. McKenna was employed as
an attorney in the airline and aircraft manufac-
turing industries.
Christopher J. Nassetta 33 Christopher J. Nassetta joined the Company in
Executive Vice President October 1995 as Executive Vice President. Prior
to joining the Company, Mr. Nassetta served as
President of Bailey Realty Corporation from 1991
to 1995 and as Chief Development Officer and in
various positions with The Oliver Carr Company
from 1984 through 1991.
Donald D. Olinger 37 Donald D. Olinger joined Marriott Corporation in
Vice President and 1993 as Director-Corporate Accounting. Upon the
Corporate Controller Marriott International Distribution in 1993, he
was promoted to Senior Director and Assistant
Controller of Host Marriott and was promoted to
Vice President--Corporate Accounting in 1995.
Mr. Olinger was elected Vice President and Cor-
porate Controller of the Company in 1996. Prior
to joining Marriott Corporation, Mr. Olinger was
with the public accounting firm of Deloitte &
Touche.
</TABLE>
- --------
(1) Richard E. Marriott and J.W. Marriott, Jr. are brothers.
COMPENSATION POLICY COMMITTEE
The Compensation Policy Committee comprises three directors who are not
employees of the Company or any of its subsidiaries: Harry L. Vincent, Jr.
(Chairman), R. Theodore Ammon and Ann Dore McLaughlin. The committee's
functions include recommendations on policies and procedures relating to
senior officers' compensation and various employee stock plans and approvals
of individual salary adjustments and stock awards in those areas.
COMPENSATION OF DIRECTORS
Directors who are also officers of the Company receive no additional
compensation for their services as directors. Directors who are not officers
of the Company receive an annual retainer fee of $25,000, as well as an
attendance fee of $1,250 for each shareholders' meeting, meeting of the Board
or meeting of a committee thereof, regardless of the number of meetings held
on a given day. The chair of each committee of the Board receives an
additional annual retainer fee of $1,000. Directors are also reimbursed for
travel expenses and other out-of-pocket costs incurred in attending meetings.
Mr. Vincent receives an additional $30,000 in compensation to perform the
annual performance appraisal of the chief executive officer on behalf of the
Board, although the final appraisal is determined by the Board.
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EXECUTIVE OFFICER COMPENSATION
Summary of Compensation. Table I below sets forth a summary of the
compensation paid by the Company for the last three fiscal years to its
current Chief Executive Officer, the four additional most highly compensated
executive officers and two former executive officers, including the Company's
former Chief Executive Officer.
TABLE I
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------- ---------- -------
RESTRICTED
STOCK LTIP
OTHER ANNUAL AWARDS PAYOUTS ALL OTHER
NAME AND FISCAL SALARY(2) BONUS(3) COMPENSATION (4)(5) (6) COMPENSATION(7)
PRINCIPAL POSITION YEAR ($) ($) ($) ($) ($) ($)
------------------ ------ --------- -------- ------------ ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard E. Marriott 1995 250,554 100,000 107,463(8) 0 382,500 12,634
Chairman of the Board 1994 261,538 104,615 90,576(8) 0 180,225 19,551
1993 230,770 110,769 93,646(8) 1,222,157(9) 0 10,693
Terence C. Golden(1) 1995 190,656 152,152 0 0 0
President and Chief
Executive Officer
Stephen J. McKenna 1995 237,550 152,210 0 344,250 13,586
Executive Vice President 1994 220,000 143,000 0 162,203 17,811
and General Counsel 1993 195,178 119,009 595,482(9) 0 7,947
Robert E. Parsons, Jr. 1995 213,767 123,649 0 159,375 10,951
Executive Vice President 1994 169,855 93,341 0 75,094 8,831
and Chief Financial Of-
ficer 1993 152,971 84,153 171,810(9) 0 7,039
Jeffrey P. Mayer(10) 1995 154,800 77,966 0 159,375 7,980
Senior Vice President 1994 139,569 69,713 0 75,094 3,634
and Corporate Controller 1993 110,458 51,337 167,426(9) 0 7,824
Stephen F. Bollen-
bach(10) 1995 190,608 0 0 0 1,037,400
Former Chief Executive
Officer 1994 550,000 385,000 0 901,125 50,062
and President 1993 473,077 327,370 6,644,470(9) 0 13,077
Matthew J. Hart(10) 1995 256,872 164,487 0 701,250 815,947
Former Executive Vice
President 1994 275,000 178,750 0 324,405 22,455
1993 220,191 142,243 1,171,812(9) 0 11,172
</TABLE>
- --------
(1) Mr. Golden joined the Company as President and Chief Executive Officer on
September 1, 1995.
(2) Salary amounts include base salary earned and paid in cash during the
fiscal year and the amount of base salary deferred at the election of the
executive officer under the Company's Employees' Profit Sharing,
Retirement and Savings Plan and Trust (the "Profit Sharing Plan") and the
Company's Executive Deferred Compensation Plan (the "Deferred Compensation
Plan").
(3) Bonus includes the amount of cash bonus earned pursuant to the named
individual's bonus plan during the fiscal year and paid subsequent to the
end of each fiscal year.
(4) Under its long-term compensation program for executive officers, the
Company awards shares of restricted stock pursuant to the Company's 1993
Comprehensive Stock Incentive Plan (the "Comprehensive Stock Plan") and
previously awarded such shares under the Company's Restricted Stock Plan
for Key Employees (the "Company's Restricted Stock Plan") and the
Company's Deferred Stock Incentive Plan (the "Company's Deferred Stock
Plan"), predecessor plans to the Comprehensive Stock Plan. For Mr. R.E.
Marriott, such restricted shares are as follows: for 1993, 2,411 shares of
deferred bonus stock awarded under the Company's Deferred Stock Plan and
160,000 shares awarded under the Comprehensive Stock Plan. For Mr.
McKenna, such restricted shares are as follows: for 1993, 2,590 shares
awarded under the Company's Deferred Stock Plan and 72,000 shares awarded
under the Comprehensive Stock Plan. For Mr. Parsons, such restricted
shares are as follows: for 1993, 1,420 shares awarded under the Company's
Deferred Stock Plan and 20,000 shares awarded under the Comprehensive
Stock Plan. For Mr. Bollenbach, such restricted shares are as follows: for
1993, 7,124 shares awarded under the Company's Deferred Stock Plan and
900,000 shares under the Comprehensive Stock Plan. Mr. Bollenbach's
unvested share awards were forfeited upon his resignation from the
Company. For Mr. Hart, such restricted shares of stock are as follows: for
1993, 3,096 shares awarded under the Company's Deferred Stock Plan and
144,000 shares awarded under the Comprehensive Stock
60
<PAGE>
Plan. For Mr. Mayer, such restricted shares are as follows: for 1993, 943
shares awarded under the Company's Deferred Stock Plan and 20,000 shares
awarded under the Comprehensive Stock Plan. The restricted shares reported
in Table I and in this footnote are shares subject to "General
Restrictions" (see footnote 9 below). Restricted shares with "Performance
Restrictions" (see footnote 9 below) awarded as long-term incentive plan
("LTIP") awards are excluded.
(5) The Deferred Stock Bonus Awards granted by the Company are generally
derived based on dividing 20% of each individual's annual cash bonus award
by the average of the high and low trading prices for a share of Company
Common Stock on the last trading day of the fiscal year. No voting rights
or dividends are attributed to award shares until such award shares are
distributed. Awards may be denominated as current awards or deferred
awards. A current award is distributed in 10 annual installments
commencing one year after the award is granted. A deferred award is
distributed in a lump sum or in up to 10 installments following
termination of employment. Deferred award shares contingently vest pro
rata in annual installments commencing one year after the Deferred Stock
Bonus Award is granted to the employee. Awards are not subject to
forfeiture once the employee reaches age 55 or after 10 years of service
with the Company. The aggregate number and value of shares of Company
deferred stock and restricted stock subject to "General Restrictions" and
"Performance Restrictions" (see footnote 8 below) held by each identified
executive officer as of the end of the fiscal year 1995 are as follows:
Mr. R.E. Marriott, 372,137 shares valued at $4,394,938; Mr. McKenna,
149,897 shares valued at $1,770,284; Mr. Parsons, 20,708 shares valued at
$244,561; Mr. Hart, 5,347 shares valued at $63,148; Mr. Mayer, 20,079
shares valued at $237,133. Mr. Bollenbach does not have any Company
deferred or restricted stock. Mr. Golden does not have any deferred stock,
but has restricted stock awards made in 1996. During the period in which
any restrictions apply, holders of restricted stock are entitled to
receive all dividends or other distributions paid with respect to such
stock.
(6) For 1995, the amounts attributed to LTIP payouts represent the value for
the Host Marriott Corporation and Host Marriott Services Performance-Based
Restricted Stock Awards which vested following the close of the fiscal
year based on performance for the fiscal year. The value stated is the
average of the high and low trading prices of a share of stock on the date
the performance restrictions were removed.
(7) With the exceptions of Mr. Bollenbach and Mr. Hart, amounts included in
"All Other Compensation" represent total matching Company contribution
amounts received under the Profit Sharing Plan and the Deferred
Compensation Plan. In 1995, for Messrs. Marriott, McKenna, Parsons and
Mayer, $2,669 was attributable to the Profit Sharing Plan account for each
executive. The amounts attributable to the Deferred Compensation Plan for
each executive were as follows: Mr. Marriott $9,965; Mr. McKenna $10,916;
Mr. Parsons $8,282 and Mr. Mayer $5,311. For Mr. Bollenbach, a total of
$20,671 is attributable to the Profit Sharing and Deferred Compensation
Plans. A total of $37,400 is attributable to a separation leave payment.
The remaining $1,000,000 is attributable to a consulting arrangement
between the Company and Mr. Bollenbach to be paid through July 1996. For
Mr. Hart, $15,507 is attributable to the Profit Sharing and Deferred
Compensation Plans. The remaining $800,000 is attributable to Mr. Hart's
separation arrangement with the Company. Under these arrangements, an
additional payment of $200,000 may be made in the third quarter of 1996 at
the sole discretion of the Company.
(8) Amount includes $86,200 in 1995, $84,200 in 1994 and $86,500 in 1993 for
the allocation of Company personnel for non-Company business.
(9) On October 17, 1993, the Compensation Policy Committee (the "Committee")
of the Board of Directors approved grants of restricted stock to certain
key employees of the Company, including Mr. Hart, Mr. McKenna, Mr. Parsons
and Mr. Mayer. On October 29, 1993, the Board of Directors approved an
award of restricted stock to Mr. Bollenbach, and on December 2, 1993, the
Board of Directors approved a grant of restricted stock to Mr. R.E.
Marriott. Each such grant made in 1993 to Mr. R.E. Marriott, Mr.
Bollenbach, Mr. Hart, Mr. Parsons, Mr. Mayer and Mr. McKenna consists of
two awards: shares subject to restrictions relating primarily to continued
employment ("General Restrictions") which vest ratably over a three, five
or ten year period or at the end of a three, five or ten year-period and
an award of shares subject to performance objectives such as financial
performance of the Company ("Performance Restrictions"). Performance
objectives are established by the Committee and are subject to periodic
review and revision. All restricted stock awards subject only to General
Restrictions are presented on Table I as "Restricted Stock Awards," and
the value stated in Table I is the fair market value on the date of the
grant.
(10) Mr. Bollenbach joined the Company as Executive Vice President and Chief
Financial Officer on March 2, 1992 and resigned his position as President
and Chief Executive Officer effective May 1995. Mr. Hart resigned his
position as Executive Vice President and Chief Financial Officer
effective October 1995. Mr. Mayer resigned his position effective January
1996.
61
<PAGE>
Aggregated Stock Option Exercises and Year-End Value. Table II below sets
forth, on an aggregated basis, information regarding the exercise during the
1995 fiscal year of options to purchase Company Common Stock by each of the
applicable persons listed on Table I above and the value on December 29, 1995
of all unexercised options held by such individuals. The Company did not grant
any stock options to the persons listed on Table I during fiscal year 1995.
TABLE II
AGGREGATED STOCK OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT FISCAL YEAR- VALUE OF UNEXERCISED
SHARES END IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE (#) FISCAL YEAR-END ($)(3)
EXERCISE REALIZED ------------------------- -------------------------
NAME(1) COMPANY(2) (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------- ---------- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
R.E. Marriott........... HM 0 0 87,075 3,625 721,088 31,063
HMS 0 0 17,415 725 79,815 3,447
MI 0 0 87,075 3,625 1,787,158 79,552
Total 0 0 191,565 7,975 2,588,061 114,062
R.E. Parsons, Jr........ HM 0 0 22,350 1,625 175,449 13,925
HMS 0 0 4,470 325 19,336 1,545
MI 8,987 145,270 7,988 1,625 137,464 35,661
Total 8,987 145,270 34,808 3,575 332,249 51,131
S.J. McKenna............ HM 46,507 434,208 51,950 2,500 454,452 21,423
HMS 0 0 10,390 500 50,514 2,378
MI 6,150 84,499 43,300 2,500 1,015,012 54,864
Total 52,657 518,707 105,640 5,500 1,519,978 78,665
S.F. Bollenbach......... HM 127,750 1,029,372 0 0 0 0
HMS 0 0 0 0 0 0
MI 0 0 0 0 0 0
Total 127,750 1,029,372 0 0 0 0
M.J. Hart............... HM 54,738 521,917 0 4,125 0 35,348
HMS 0 0 0 825 0 3,923
MI 21,275 436,930 0 4,125 0 90,525
Total 76,013 958,847 0 9,075 0 129,796
J.P. Mayer.............. HM 0 0 13,700 725 114,564 6,213
HMS 0 0 2,740 145 12,690 689
MI 900 13,031 12,800 725 272,960 15,910
Total 900 13,031 29,240 1,595 400,214 22,812
</TABLE>
- --------
(1) Mr. Golden does not have any options in the companies listed in Table II.
(2) "MI" represents options to purchase Marriott International, Inc. Common
Stock. "HM" represents options to purchase Company Common Stock ("Company
Options"). "HMS" represents options to purchase HM Services common stock.
In connection with the Special Dividend and pursuant to the Host Marriott
Corporation 1993 Comprehensive Incentive Stock Plan (the "Plan"), all
Company Options held by employees of the Company were adjusted to reflect
the Special Dividend by providing each option holder with the option to
purchase one share of HM Services common stock for every five shares of
Common Stock held as of the close of business on December 29, 1995. The
exercise price of the HM Services option was set, and the price of the
Company Option was adjusted, so that the economic value of the Company
Options prior to the Special Dividend was preserved and not increased or
decreased as a result of the Special Dividend.
(3) Based on a per share price for Company Common Stock of $11.81, a per share
price for HM Services Corporation common stock of $6.69 and a per share
price of Marriott International common stock of $37.9375. These prices
reflect the average of the high and low trading prices on the New York
Stock Exchange on December 29, 1995.
62
<PAGE>
TERMINATION OF EMPLOYMENT ARRANGEMENTS
In connection with his resignation as President and Chief Executive Officer
of the Company, Mr. Bollenbach and the Company entered into a consulting
arrangement for a period of one year ending June 1996, whereby Mr. Bollenbach
will provide certain consulting services to the Company, upon its request.
Mr. Bollenbach will be paid a fee for such services of $1,000,000.
In connection with his resignation as Executive Vice President and Chief
Financial Officer of the Company, Mr. Hart will receive from the Company a
payment of $1,000,000, payable in three periodic payments and subject to
satisfaction of certain conditions. Payment of the final $200,000 of this
amount is at the sole discretion of the Company. Mr. Hart will also be
eligible to receive up to 55,000 previously awarded shares of Common Stock
currently subject to time- and performance- based restrictions. See "--
Executive Officer Compensation."
CERTAIN RELATIONSHIPS AND TRANSACTIONS
RELATIONSHIP BETWEEN THE COMPANY AND MARRIOTT INTERNATIONAL
The Company and its subsidiaries and Marriott International and its
subsidiaries are parties to various agreements and have various ongoing
relationships following the Marriott International Distribution. Certain of
these agreements provide for fees to be paid by the Company and its
subsidiaries to Marriott International, including (i) the Lodging Management
Agreements, pursuant to which Marriott International or its subsidiaries
receive fees for managing lodging properties owned by the Company and its
subsidiaries, and (ii) certain transitional services agreements pursuant to
which Marriott International or its subsidiaries receive fees for providing
various services to the Company. Marriott International has also provided
financing to the Company pursuant to (i) the New Line of Credit under which
the Company has the right to borrow from Marriott International up to $225
million, and (ii) the Philadelphia Mortgage under which Marriott International
provided first mortgage financing for a portion of the development and
construction costs for the Philadelphia Marriott hotel constructed by the
Company. The Company has also entered into certain other agreements and
arrangements with Marriott International during 1995. For the specific terms
of such agreements, see "Relationship Between the Company and Marriott
International."
By reason of their ownership of shares of common stock of Marriott
International and their positions as Chairman and director, respectively, J.W.
Marriott, Jr. and Richard E. Marriott, who also are a director and Chairman,
respectively, of the Company, would be deemed in control of Marriott
International within the meaning of the federal securities laws. Other members
of the Marriott family might also be deemed control persons of Marriott
International by reason of their ownership of shares of Marriott International
and/or their relationship to other family members.
63
<PAGE>
OWNERSHIP OF COMPANY SECURITIES
The Company has two outstanding classes of equity or equity-linked
securities: Common Stock and Warrants. The Company is not aware of any
beneficial holder of 5% or more of the Warrants.
Set forth below is the ownership as of December 29, 1995 of Company Common
Stock by directors, the present and former chief executive officer and the
four additional most highly compensated executive officers of the Company, as
well as by all directors and executive officers of the Company as a group, and
to the best of the Company's knowledge, beneficial holders of 5% or more of
Company Common Stock.
<TABLE>
<CAPTION>
SHARES OF COMPANY
COMMON STOCK % OF SHARES
BENEFICIALLY OWNED OUTSTANDING AS OF
NAME AS OF DECEMBER 29, 1995 DECEMBER 29, 1995(1)
---- ----------------------- --------------------
<S> <C> <C>
DIRECTORS:
R. Theodore Ammon........... 10,000 0.00
Terence C. Golden........... 0 0.00
J.W. Marriott, Jr........... 12,553,338(2)(3)(5) 7.86
Richard E. Marriott......... 13,437,573(2)(4)(5) 8.41
Ann Dore McLaughlin......... 1,000 0.00
Harry L. Vincent, Jr........ 14,100 0.00
NON-DIRECTOR EXECUTIVE OFFI-
CERS:
Robert E. Parsons, Jr....... 48,337(2) 0.03
Stephen J. McKenna.......... 164,871(2) 0.10
Jeffrey P. Mayer............ 46,364(2) 0.03
Stephen F. Bollenbach....... 3,534 0.00
Matthew J. Hart............. 55,075(2) 0.03
All directors and executive
officers as a group.......... 22,222,580(6) 13.91
FMR Corp...................... 17,824,459(7) 11.19
Forstmann-Leff Associates,
Inc.......................... 8,482,670(8) 5.30
Harris Associates L.P......... 9,203,265(9) 5.77
</TABLE>
- --------
(1) Ownership of less than l/l00th of 1% is reflected as 0.00 in the table
above.
(2) Does not include shares reserved, contingently vested or awarded under the
Company's 1993 Comprehensive Stock Incentive Plan other than the shares of
unvested restricted stock granted under such plan. Shares of restricted
stock are voted by the holder thereof. For additional information, see
Tables I and II.
(3) Includes: (i) 1,977,450 shares held in trust for which J.W. Marriott, Jr.
is the trustee or a co-trustee; (ii) 67,930 shares held by the wife of
J.W. Marriott, Jr.; (iii) 686,536 shares held in trust for which the wife
of J.W. Marriott, Jr. is the trustee or a co-trustee; (iv) 2,536,787
shares held by the J. Willard Marriott Foundation of which J.W. Marriott,
Jr. is a co-trustee; (v) 2,707,590 shares held by a limited partnership
whose general partner is a corporation of which J.W. Marriott, Jr. is the
controlling shareholder; and (vi) 80,000 shares held by a limited
partnership whose general partner is a corporation of which J.W. Marriott,
Jr. is the controlling shareholder. Does not include shares held by the
adult children of J.W. Marriott, Jr. J.W. Marriott, Jr. disclaims
beneficial ownership of all such shares.
(4) Includes: (i) 1,874,709 shares held in trust for which Richard E. Marriott
is the trustee or a co-trustee; (ii) 67,723 shares held by the wife of
Richard E. Marriott; (iii) 603,828 shares held in trust for which the wife
of Richard E. Marriott is the trustee or a co-trustee; (iv) 2,536,787
shares held by the J. Willard Marriott Foundation of which Richard E.
Marriott is a co-trustee; and (v) 2,302,729 shares held by a limited
partnership whose general partner is a corporation of which Richard E.
Marriott is the controlling shareholder. Does not include shares held by
the adult children of Richard E. Marriott. Richard E. Marriott disclaims
beneficial ownership of all such shares.
(5) By virtue of their ownership of shares of Common Stock and their positions
as Chairman and director, respectively, Richard E. Marriott and J.W.
Marriott, Jr. would be deemed in control of the Company within the meaning
of the federal securities laws. Other members of the Marriott family might
also be deemed control persons by reason of their ownership of shares
and/or their relationship to other family members. J.W. Marriott, Jr.,
Richard E. Marriott, their mother Alice S. Marriott and other members of
the Marriott family and various trusts established by members of the
Marriott family owned beneficially an aggregate of 25,612,964 shares or
16.04% of the total common shares outstanding of the Company as of
December 29, 1995. All directors and current executive officers as a group
(other than members of the Marriott family) owned beneficially an
aggregate of 259,572 shares or 0.16% of the total common shares
outstanding as of December 29, 1995. In addition, the Company's Employees'
Profit Sharing, Retirement and Savings Plan and Trust owned 865,755 shares
or 0.56% of the total common shares outstanding as of December 29, 1995.
(6) Includes the total number of shares held by trusts for which both J.W.
Marriott, Jr. and Richard E. Marriott are co-trustees. Beneficial
ownership of such shares is attributable to each of J.W. Marriott, Jr. and
Richard E. Marriott in the table above under the Director subheading.
(7) Represents shares of Common Stock held by FMR Corp. ("FMR") and its
subsidiaries, Fidelity Management Trust Company ("FMT") and Fidelity
Management & Research ("FM&R"). FMR has reported in a Schedule 13G under
the Securities Exchange Act of 1934, as amended (the "Exchange Act") filed
with the Securities and Exchange Commission (the "Commission") that FMR
through its control of FM&R and certain investment funds for which FM&R
acts as an investment adviser, has sole power to dispose of 17,573,559
shares of Common Stock owned by such investment funds. FMR has no power to
vote or direct the voting of the shares of Common Stock owned by the
investment funds, which power reside with the Board of Trustees of these
investment funds. FMR, through its control of FMT and certain
institutional accounts for which FMT serves as investment manager, has
sole disposition power over 250,900 shares, the sole power to vote or
direct the voting of 140,300 shares and no power to vote or direct the
voting of 110,600 shares, of Common Stock owned by the institutional
accounts. The principal address for FMR is 82 Devonshire Street, Boston,
Massachusetts 02109.
(8) Represents shares of Company Common Stock held by Forstmann-Leff
Associates, Inc. ("Forstmann") and its subsidiaries, FLA Asset Management,
Inc. ("FLA") and Stamford Advisors Corp. ("Stamford"). Forstmann has
reported in a Schedule 13G under the Exchange Act filed with the
Commission, sole dispositive power over 6,140,415 shares and shared
dispositive power over 2,342,255 shares. Of these shares, Forstmann has
reported sole voting power over 5,848,515 shares and shared voting power
over 902,600 shares. The principal business address of Forstmann, FLA and
Stamford is 55 East 52nd Street, New York, New York 10055.
(9) Represents share of Company Common Stock held in client accounts managed
by Harris Associates L.P. and its general partner, Harris Associates, Inc.
(collectively, "Harris"). Harris has reported in a Schedule 13G under the
Exchange Act, filed with the Commission, sole dispositive power over
7,051,565 shares and shared dispositive power over 2,151,700 shares. Of
these shares, Harris has reported sole voting power over none of the
shares and shared voting power over the entire 9,203,265 shares. The
principal business address of Harris is 2 North LaSalle Street, Suite 500,
Chicago, Illinois 60602.
64
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock is a summary and is
subject in all respects to applicable Delaware law and to the provisions of
the Company's Restated Certificate of Incorporation and shareholder's rights
plan listed as exhibits to the Registration Statement of which this Prospectus
is a part.
GENERAL
The Company's Restated Certificate of Incorporation (the "Company
Certificate") authorizes the issuance of a total of 301 million shares of all
classes of stock, of which one million may be shares of preferred stock,
without par value, and 300 million may be shares of Common Stock. At December
29, 1995, approximately 159.7 million shares of Common Stock were outstanding.
The Company Certificate provides that the Board is authorized to provide for
the issuance of shares of preferred stock, from time to time, in one or more
series, and to fix any voting powers, full or limited or none, and the
designations, preferences and relative, participating, optional or other
special rights, applicable to the shares to be included in any such series and
any qualifications, limitations or restrictions thereon.
COMMON STOCK
Voting Rights. Each holder of Common Stock is entitled to one vote for each
share registered in his name on the books of the Company on all matters
submitted to a vote of shareholders. Except as otherwise provided by law, the
holders of Common Stock vote as one class. The shares of Common Stock do not
have cumulative voting rights. As a result, subject to the voting rights, if
any, of the holders of any shares of the Company's preferred stock which may
at the time be outstanding, the holders of Common Stock entitled to exercise
more than 50% of the voting rights in an election of directors will be able to
elect 100% of the directors to be elected if they choose to do so. In such
event, the holders of the remaining Common Stock voting for the election of
directors will not be able to elect any persons to the Board. The Company
Certificate provides that the Board is classified into three classes, each
serving a three-year term, with one class to be elected in each of three
consecutive years.
Dividend Rights. Subject to the rights of the holders of any shares of the
Company's preferred stock which may at the time be outstanding, holders of
Common Stock are entitled to such dividends as the Board of Directors may
declare out of funds legally available therefor. The Company intends to retain
future earnings for use in its business and does not currently intend to pay
regular cash dividends. In addition, the New Line of Credit contains
restrictions on the payment of dividends on the Common Stock. See "Dividend
Policy."
Liquidation Rights and Other Provisions. Subject to the prior rights of
creditors and the holders of any of the Company's preferred stock which may be
outstanding from time to time, the holders of Common Stock are entitled in the
event of liquidation, dissolution or winding up to share pro rata in the
distribution of all remaining assets. The Common Stock is not liable for any
calls or assessments and is not convertible into any other securities. The
Company Certificate provides that the private property of the shareholders
shall not be subject to the payment of corporate debts. There are no
redemption or sinking fund provisions applicable to the Common Stock, and the
Company Certificate provides that there shall be no preemptive rights.
The transfer agent and registrar for the Common Stock is First Chicago Trust
of New York.
RIGHTS AND JUNIOR PREFERRED STOCK
The Company has adopted a shareholder rights plan as set forth in a Rights
Agreement dated February 3, 1989, as amended, between the Company and the Bank
of New York, as rights agent (the "Rights Agreement"). The following is a
summary of the terms of the Rights Agreement.
Rights. Following the occurrence of certain events (the "Occurrence Date")
and except as described below, each right (a "Right," and, collectively, the
"Rights") will entitle the registered holder thereof to
65
<PAGE>
purchase from the Company one one-thousandth of a share (a "Unit") of the
Company's Series A Junior Participating Preferred Stock ("Junior Preferred
Stock") at a price (the "Purchase Price") of $150 per Unit, subject to
adjustment. The Rights are not exercisable until the Occurrence Date. The
Rights expire on the tenth anniversary of the adoption of the Rights
Agreement, unless exercised in connection with a transaction of the type
described below or unless earlier redeemed by the Company.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a shareholder of the Company, including, without limitation, the right to
vote or to receive dividends.
Initially, ownership of the Rights will be attached to all Common Stock
certificates representing shares then outstanding, and no separate
certificates representing the Rights (the "Rights Certificates") will be
distributed. Until the Occurrence Date (or earlier redemption or expiration of
the Rights), the Rights will be transferable only with the Common Stock, and
the surrender or transfer of any certificate of Common Stock will also
constitute the transfer of the Rights associated with the Common Stock
represented by such certificate. The Rights will separate from the Common
Stock and an Occurrence Date will occur upon the earlier of (i) 10 days
following the date (a "Stock Acquisition Date") of a public announcement that
a person or group of affiliates or associated persons (an "Acquiring Person")
has acquired, or obtained the right to acquire, beneficial ownership of 20% or
more of the outstanding Common Stock or (ii) 10 business days following the
commencement of or announcement of an intention to make a tender offer or
exchange offer, the consummation of which would result in the Acquiring Person
becoming the beneficial owner of 30% or more of such outstanding Common Stock
(such date being called the Occurrence Date).
For purposes of the Rights Agreement, a person shall not be deemed to
beneficially own "Exempt Shares" which include (i) shares of Common Stock
acquired by such person by gift, bequest and certain other transfers, which
shares were Exempt Shares immediately prior to such transfer and were held by
such person continuously thereafter and (ii) shares acquired by such person in
connection with certain distributions of Common Stock with respect to Exempt
Shares which were held by such person continuously thereafter. In connection
with the Marriott International Distribution, the Board amended the Rights
Agreement to provide that the shares of Common Stock acquired by Marriott
International upon exercise of the Marriott International Purchase Right will
be deemed "Exempt Shares" under the Rights Agreement, such that the exercise
of such right by Marriott International will not cause Marriott International
to be deemed an "Acquiring Person" under the Rights Agreement and thus trigger
a distribution of the Rights. See "Relationship Between the Company and
Marriott International--Marriott International Purchase Right."
As soon as practicable following an Occurrence Date, Rights Certificates
will be mailed to holders of record of Common Stock as of the close of
business on the Occurrence Date. After such time, such separate Rights
Certificates alone will evidence the Rights and could trade independently from
the Common Stock.
In the event (i) the Company is the surviving corporation in a merger with
an Acquiring Person and the Common Stock is not changed or exchanged, or (ii)
an Acquiring Person becomes the beneficial owner of 30% or more of the then
outstanding shares of Common Stock (except pursuant to an offer for all
outstanding shares of Common Stock which the Board determines to be fair to
and otherwise in the best interests of the Company and its shareholders), each
holder of a Right will, in lieu of the right to receive one one-thousandth of
a share of Junior Preferred Stock, thereafter have the right to receive, upon
exercise, Common Stock (or, in certain circumstances, cash, property or other
securities of the Company) having a value equal to two times the exercise
price of the Right. Notwithstanding any of the foregoing, following the
occurrence of any of the events set forth in this paragraph, all Rights that
are (or, under certain circumstances specified in the Rights Agreement, were)
beneficially owned by any Acquiring Person will be null and void. However, the
Rights are not exercisable following the occurrence of either of the events
set forth above until such time as the Rights are no longer redeemable by the
Company as set forth below.
For example, at an exercise price of $150 per Right, each Right not owned by
an Acquiring Person (or by certain related parties) following an event set
forth in the preceding paragraph would entitle its holder to purchase
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$300 worth of Common Stock (or other consideration, as noted above) for $150.
Assuming that the Common Stock had a per share value of $30 at such time, the
holder of each valid Right would be entitled to purchase 10 shares of Common
Stock for $150.
In the event that, at any time following the Stock Acquisition Date, (i) the
Company is acquired in a merger or other business combination transaction in
which the Company is not the surviving corporation (other than a merger
described in the second preceding paragraph or a merger which follows an offer
described in the second preceding paragraph), or (ii) 50% or more of the
Company's assets or earning power is sold or transferred, each holder of a
Right (except Rights which previously have been voided as set forth above)
shall thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the exercise price of the
Right.
In general, the Board may redeem the Rights in whole, but not in part, at
any time until 10 days following the Stock Acquisition Date, at a price of
$.01 per Right. After the redemption period has expired, the Company's right
of redemption may be reinstated if an Acquiring Person reduces its beneficial
ownership to 10% or less of the outstanding shares of Common Stock in a
transaction or series of transactions not involving the Company. Immediately
upon the action of the Board ordering redemption of the Rights, the Rights
will terminate and the only right of the holders of Rights will be to receive
the $.01 per Right redemption price.
The purchase price payable, and the number of shares of Junior Preferred
Stock or other securities or property issuable upon exercise of the Rights are
subject to adjustment upon the occurrence of certain events with respect to
the Company, including stock dividends, subdivisions, combinations,
reclassifications, rights or warrants offerings of Junior Preferred Stock at
less than the then current market price and certain distributions of property
or evidences of indebtedness of the Company to holders of Junior Preferred
Stock, all as set forth in the Rights Agreement.
The Rights have certain antitakeover effects. The Rights may cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Board, except pursuant to an offer conditioned on
a substantial number of Rights being acquired. The Rights should not interfere
with any merger or other business combination approved by the Board since the
Rights may be redeemed by the Company as set forth above. See "Purposes and
Antitakeover Effects of Certain Provisions of the Company Certificate and
Bylaws and the Marriott International Purchase Right."
Junior Preferred Stock. In connection with the Rights Agreement, 300,000
shares of Junior Preferred Stock are authorized and reserved for issuance by
the Board. No shares of Junior Preferred Stock are currently outstanding. The
material terms of the Junior Preferred Stock are summarized herein; however,
such summary is subject to the terms of the Company Certificate and the
certificate of designation relating to the Junior Preferred Stock (the "Junior
Preferred Stock Certificate of Designation").
Subject to the prior payment of cumulative dividends on any class of
preferred stock ranking senior to the Junior Preferred Stock, a holder of
Junior Preferred Stock will be entitled to cumulative dividends out of funds
legally available therefor, when, as and if declared by the Board, at a
quarterly rate per share of Junior Preferred Stock equal to the greater of (a)
$10.00 or (b) 1000 times (subject to adjustment upon certain dilutive events)
the aggregate per share amount of all cash dividends and 1000 times (subject
to adjustment upon certain dilutive events) the aggregate per share amount
(payable in kind) of all noncash dividends or other distributions (other than
dividends payable in Common Stock or a sub-division of the outstanding shares
of Common Stock) declared on Common Stock, since the immediately preceding
quarterly dividend payment date for the Junior Preferred Stock (or since the
date of issuance of the Junior Preferred Stock if no such dividend payment
date has occurred).
A holder of Junior Preferred Stock will be entitled to 1000 votes (subject
to adjustment upon certain dilutive events) per share of Junior Preferred
Stock on all matters submitted to a vote of shareholders of the Company. Such
holders will vote together with the holders of the Common Stock as a single
class on all matters submitted to a vote of shareholders of the Company.
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In the event of a merger or consolidation of the Company which results in
Common Stock being exchanged or changed for other stock, securities, cash
and/or other property, the shares of Junior Preferred Stock shall similarly be
exchanged or changed in an amount per share equal to 1000 times (subject to
adjustment upon certain dilutive events) the aggregate amount of stock,
securities, cash and/or other property, as the case may be, into which each
share of Common Stock has been exchanged or changed.
In the event of liquidation, dissolution or winding up of the Company, a
holder of Junior Preferred Stock will be entitled to receive $1000 per share,
plus accrued and unpaid dividends and distributions thereon, before any
distribution may be made to holders of shares of stock of the Company ranking
junior to the Junior Preferred Stock, and the holders of Junior Preferred
Stock are entitled to receive an aggregate amount per share equal to 1000
times (subject to adjustment upon certain dilutive events) the aggregate
amount to be distributed per share to holders of Common Stock.
In the event that dividends on the Junior Preferred Stock are in arrears in
an amount equal to six quarterly dividends thereon, all holders of Junior
Preferred Stock, voting separately as a class with the holders of any other
series of preferred stock of the Company with dividends in arrears, will be
entitled to elect two directors pursuant to provisions of the Company
Certificate. Such right to elect two additional directors shall continue at
each annual meeting until all dividends in arrears (including the then-current
quarterly dividend payment) have been paid or declared and set apart for
payment. Upon payment or declaration and reservation of funds for payment of
all such dividends, the term of office of each director elected shall
immediately terminate and the number of directors shall be such number as may
be provided for in the Company Certificate or Bylaws.
The Junior Preferred Stock is not subject to redemption. The terms of the
Junior Preferred Stock provide that the Company is subject to certain
restrictions with respect to dividends and distributions on and redemptions
and purchases of shares of stock of the Company ranking junior to or on a
parity with the Junior Preferred Stock in the event that payments of dividends
or other distributions payable on the Junior Preferred Stock are in arrears.
WARRANTS
The Company agreed to issue warrants (the "Warrants") to acquire 7,700,000
shares of the Company's Common Stock in connection with the settlement of
class action lawsuits instituted against the Company and certain individual
defendants by certain holders and purchasers of senior notes and debentures of
the Company. As adjusted to reflect the Special Dividend, each Warrant
entitles the holder, at any time prior to 5:00 p.m. on October 8, 1998 (the
"Expiration Time"), to purchase one share of Common Stock from the Company and
one-fifth share of HM Services common stock at a price (the "Exercise Price")
of (i) $8.00, if exercised on or before 5:00 p.m. New York City time on
October 8, 1996, or (ii) $10.00, if exercised after 5:00 p.m. New York City
time on October 8, 1996, but on or before 5:00 p.m. New York City time on
October 8, 1998. The portion of the Exercise Price attributable to the HM
Services common stock is payable to HM Services. See "Relationship Between the
Company and HM Services After the Special Dividend." Both the Exercise Price
and the number of shares subject to the Warrants are subject to certain
adjustments. Warrants that are not exercised prior to the Expiration Time
expire and become void. The Company did not receive any proceeds from the
issuance of the Warrants.
Warrantholders will not be entitled to vote or to consent or to receive
notice as shareholders in respect of the meeting of shareholders or the
election of directors of the Company or any other matter, or possess any
rights whatsoever as shareholders of the Company.
The Company has also agreed to use its reasonable best efforts to obtain any
required approvals or registration under state securities laws for the
issuance of the Common Stock upon exercise of the Warrants. Under the Warrant
Agreement, however, Warrants may not be exercised by or, shares of Common
Stock issued to, any Warrant holder in any state where such exercise or
issuance would be unlawful. The Warrants have no established trading market
and no assurance can be given that any such markets will develop.
As of December 29, 1995, approximately 7,500,000 Warrants were outstanding
or reserved for issuance.
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PRICE RANGE OF THE COMMON STOCK AND DIVIDENDS
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,
since consummation of the Marriott International Distribution, is traded under
the symbol "HMT." The following table sets forth, for the fiscal periods
indicated, the high and low sales prices per share of the Common Stock as
reported on the New York Stock Exchange Composite Tape and the cash dividends
paid per share of Common Stock. All periods presented in the table below prior
to the fourth quarter of 1993 are prior to the Marriott International
Distribution. 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 Marriott International Distribution and the Special Dividend, stock
prices and dividends paid are not indicative of the Company's current stock
price or dividend policies except for the 1st 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. See
"Dividend Policy." As of December 29, 1995, there were approximately 57,000
holders of record of Common Stock.
<TABLE>
<CAPTION>
CASH
DIVIDENDS
HIGH LOW PAID
---- ---- ---------
<S> <C> <C> <C>
1993
1st Quarter......................................... $27 3/8 $20 3/4 $.07
2nd Quarter......................................... 26 5/8 24 .07
3rd Quarter......................................... 29 24 3/8 .07
4th Quarter(1)...................................... 33 5/8 27 5/8 --
4th Quarter(2)...................................... 10 6 1/8 --
1994
1st Quarter......................................... $13 3/4 $ 8 3/4 --
2nd Quarter......................................... 11 1/8 8 3/4 --
3rd Quarter......................................... 11 7/8 9 1/2 --
4th Quarter......................................... 11 1/2 8 1/4 --
1995
1st Quarter......................................... $11 1/4 $ 9 1/8 --
2nd Quarter......................................... 12 9 3/4 --
3rd Quarter......................................... 13 10 1/4 --
4th Quarter(3)...................................... 13 7/8 11 1/2 --
1996
1st Quarter (4)..................................... $13 3/4 $11 1/2 --
2nd Quarter (March 25, 1996)(4)..................... 12 7/8 12 3/4 --
</TABLE>
On March 25, 1996, the last reported sales price of Common Stock on the New
York Stock Exchange Composite Tape was $12 7/8 per share.
- --------
(1) Prior to the Marriott International Distribution.
(2) Subsequent to the Marriott International Distribution.
(3) Prior to the Special Dividend.
(4) Subsequent to the Special Dividend.
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PURPOSES AND ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS
OF THE COMPANY CERTIFICATE AND BYLAWS AND THE
MARRIOTT INTERNATIONAL PURCHASE RIGHT
COMPANY CERTIFICATE AND BYLAWS
The Company Certificate contains several provisions that will make difficult
an acquisition of control of the Company by means of a tender offer, open
market purchases, a proxy fight or otherwise, that is not approved by the
Board. The Company's Bylaws (the "Bylaws") also contain provisions that could
have an antitakeover effect.
The purposes of the relevant provisions of the Company Certificate and
Bylaws are to discourage certain types of transactions, described below, which
may involve an actual or threatened change of control of the Company and to
encourage persons seeking to acquire control of the Company to consult first
with the Board to negotiate the terms of any proposed business combination or
offer. The provisions are designed to reduce the vulnerability of the Company
to an unsolicited proposal for a takeover that does not contemplate the
acquisition of all outstanding shares or is otherwise unfair to shareholders
of the Company or an unsolicited proposal for the restructuring or sale of all
or part of the Company. The Company believes that, as a general rule, such
proposals would not be in the best interests of the Company and its
shareholders.
There has been a history of the accumulation of substantial stock positions
in public companies by third parties as a prelude to proposing a takeover or a
restructuring or sale of all or part of the company or another similar
extraordinary corporate action. Such actions are often undertaken by the
third-party without advance notice to, or consultation with, the management or
board of directors of the target company. In many cases, the purchaser seeks
representation on the company's board of directors in order to increase the
likelihood that its proposal will be implemented by the company. If the
company resists the efforts of the purchaser to obtain representation on the
company's board, the purchaser may commence a proxy contest to have its
nominees elected to the board in place of certain directors or the entire
board. In some cases, the purchaser may not truly be interested in taking over
the company, but may use the threat of a proxy fight and/or a bid to take over
the company as a means of forcing the company to repurchase its equity
position at a substantial premium over market price.
The Company believes that the imminent threat of removal of the Company's
management or Board in such situations would severely curtail the ability of
management or the Board to negotiate effectively with such purchasers. The
management or the Board would be deprived of the time and information
necessary to evaluate the takeover proposal, to study alternative proposals
and to help ensure that the best price is obtained in any transaction
involving the Company which may ultimately be undertaken. If the real purpose
of a takeover bid were to force the Company to repurchase an accumulated stock
interest at a premium price, management or the Board would face the risk that,
if it did not repurchase the purchaser's stock interest, the Company's
business and management would be disrupted, perhaps irreparably.
Certain provisions of the Company Certificate and Bylaws, the Company
believes, will help ensure that the Board, if confronted by a surprise
proposal from a third party which has acquired a block of stock, will have
sufficient time to review the proposal and appropriate alternatives to the
proposal and to act in what it believes to be the best interests of the
shareholders. In addition, certain other provisions of the Company Certificate
are designed to prevent a purchaser from utilizing two-tier pricing and
similar inequitable tactics in the event of an attempt to take over the
Company.
These provisions, individually and collectively, will make difficult and may
discourage a merger, tender offer or proxy fight, even if such transaction or
occurrence may be favorable to the interests of the shareholders, and may
delay or frustrate the assumption of control by a holder of a large block of
stock of the Company and the removal of incumbent management, even if such
removal might be beneficial to the shareholders. Furthermore, these provisions
may deter or could be utilized to frustrate a future takeover attempt which is
not approved by the incumbent Board, but which the holders of a majority of
the shares may deem to be in their best
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interests or in which shareholders may receive a substantial premium for their
stock over prevailing market prices of such stock. By discouraging takeover
attempts, these provisions might have the incidental effect of inhibiting
certain changes in management (some or all of the members of which might be
replaced in the course of a change of control) and also the temporary
fluctuations in the market price of the stock which often result from actual
or rumored takeover attempts.
Set forth below is a description of such provisions in the Company
Certificate and Bylaws. Such description is intended as a summary only and is
qualified in its entirety by reference to the Company Certificate and Bylaws
which are exhibits to the Registration Statement on Form S-1 of which this
Prospectus is a part.
Classified Board of Directors. The Company Certificate provides for the
Board to be divided into three classes serving staggered terms so that
directors' current terms will expire at the 1996, 1997 or 1998 annual meeting
of shareholders. See "Management--Board of Directors and Executive Officers."
The classification of directors will have the effect of making it more
difficult for shareholders to change the composition of the Board in a
relatively short period of time. At least two annual meetings of shareholders,
instead of one, will generally be required to effect a change in a majority of
the Board. Such a delay may help ensure that the Board, if confronted by a
holder attempting to force a stock repurchase at a premium above market
prices, a proxy contest or an extraordinary corporate transaction, will have
sufficient time to review the proposal and appropriate alternatives to the
proposal and to act in what it believes are the best interests of the
shareholders.
The classified board provision could have the effect of discouraging a third
party from making a tender offer or otherwise attempting to obtain control of
the Company, even though such an attempt might be beneficial to the Company
and its shareholders. The classified board provision could thus increase the
likelihood that incumbent directors will retain their positions. In addition,
since the classified board provision is designed to discourage accumulations
of large blocks of the Company's stock by purchasers whose objective is to
have such stock repurchased by the Company at a premium, the classified board
provision could tend to reduce the temporary fluctuations in the market price
of the Company's stock that could be caused by accumulations of large blocks
of such stock. Accordingly, shareholders could be deprived of certain
opportunities to sell their stock at a temporarily higher market price.
The Company believes that a classified board of directors helps to assure
the continuity and stability of the Board and business strategies and policies
as determined by the Board, because generally a majority of the directors at
any given time will have had prior experience as directors of the Company. The
classified board provision also helps assure that the Board, if confronted
with an unsolicited proposal from a third party that has acquired a block of
the voting stock of the Company, will have sufficient time to review the
proposal and appropriate alternatives and to seek the best available result
for all shareholders.
Removal; Filling Vacancies. The Company Certificate provides that, subject
to any rights of the holders of preferred stock, only a majority of the Board
then in office shall have the authority to fill any vacancies on the Board,
including vacancies created by an increase in the number of directors. In
addition, the Company Certificate provides that a new director elected to fill
a vacancy on the Board will serve for the remainder of the full term of his or
her class and that no decrease in the number of directors shall shorten the
term of an incumbent. Moreover, the Company Certificate provides that
directors may be removed with or without cause only by the affirmative vote of
holders of at least 66 2/3% of the voting power of the shares entitled to vote
at the election of directors, voting together as a single class. These
provisions relating to removal and filling of vacancies on the Board will
preclude shareholders from enlarging the Board or removing incumbent directors
and filling the vacancies with their own nominees.
Limitations on Shareholder Action By Written Consent; Special Meetings. The
Company Certificate and Bylaws provide that shareholder action can be taken
only at an annual or special meeting of shareholders and prohibit shareholder
action by written consent in lieu of a meeting. The Company Certificate and
Bylaws provide
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that, subject to the rights of holders of any series of preferred stock,
special meetings of shareholders can be called only by a majority of the
entire Board. Shareholders are not permitted to call a special meeting or to
require that the Board call a special meeting of shareholders. Moreover, the
business permitted to be conducted at any special meeting of shareholders is
limited to the business brought before the meeting by or at the direction of
the Board.
The provisions of the Company Certificate and Bylaws restricting shareholder
action by written consent may have the effect of delaying consideration of a
shareholder proposal until the next annual meeting unless a special meeting is
called by a majority of the entire Board. These provisions would also prevent
the holders of a majority of the voting power of the voting stock from using
the written consent procedure to take shareholder action and from taking
action by consent without giving all the shareholders of the Company entitled
to vote on a proposed action the opportunity to participate in determining
such proposed action. Moreover, a shareholder could not force shareholder
consideration of a proposal over the opposition of the Board by calling a
special meeting of shareholders prior to the time the Board believed such
consideration to be appropriate.
The Company believes that such limitations on shareholder action will help
to assure the continuity and stability of the Board and the Company's business
strategies and policies as determined by the Board, to the benefit of all of
the Company's shareholders. If confronted with an unsolicited proposal from
Company shareholders, the Board will have sufficient time to review such
proposal and to seek the best available result for all shareholders, before
such proposal is approved by such shareholders by written consent in lieu of a
meeting or through a special meeting of shareholders.
Nominations of Directors and Shareholder Proposals. The Bylaws establish an
advance notice procedure with regard to the nomination, other than by or at
the direction of the Board, of candidates for election as directors (the
"Nomination Procedure") and with regard to shareholder proposals to be brought
before an annual or special meeting of shareholders (the "Business
Procedure").
The Nomination Procedure provides that only persons who are nominated by or
at the direction of the Board, or by a shareholder who has given timely prior
written notice to the Secretary of the Company prior to the meeting at which
directors are to be elected, will be eligible for election as directors. The
Business Procedure provides that shareholder proposals must be submitted in
writing in a timely manner in order to be considered at any annual or special
meeting. To be timely, notice must be received by the Company (i) in the case
of an annual meeting, not less than 90 days prior to the annual meeting for a
director nomination, and not less than 120 days prior to the annual meeting
for a shareholder proposal or (ii) in the case of a special meeting not later
than the seventh day following the day on which notice of such meeting is
first given to shareholders for both a director nomination and a shareholder
proposal.
Under the Nomination Procedure, notice to the Company from a shareholder who
proposes to nominate a person at a meeting for election as a director must
contain certain information about that person, including age, business and
residence addresses, principal occupation, the class and number of shares of
Common Stock beneficially owned, the consent to be nominated and such other
information as would be required to be included in a proxy statement
soliciting proxies for the election of the proposed nominee, and certain
information about the shareholder proposing to nominate that person. Under the
Business Procedure, notice relating to a shareholder proposal must contain
certain information about such proposal and about the shareholder who proposes
to bring the proposal before the meeting, including the class and number of
shares of Common Stock beneficially owned by such shareholder. If the Chairman
or other officer presiding at a meeting determines that a person was not
nominated in accordance with the Nomination Procedure, such person will not be
eligible for election as a director, or if he determines that the shareholder
proposal was not properly brought before such meeting, such proposal will not
be introduced at such meeting. Nothing in the Nomination Procedure or the
Business Procedure will preclude discussion by any shareholder of any
nomination or proposal properly made or brought before an annual or special
meeting in accordance with the above-mentioned procedures.
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<PAGE>
The purpose of the Nomination Procedure is, by requiring advance notice of
nomination by shareholders, to afford the Board a meaningful opportunity to
consider the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by the Board, to inform shareholders about such
qualifications. The purpose of the Business Procedure is, by requiring advance
notice of shareholder proposals, to provide a more orderly procedure for
conducting annual meetings of shareholders and, to the extent deemed necessary
or desirable by the Board, to provide the Board with a meaningful opportunity
to inform shareholders, prior to such meetings, of any proposal to be
introduced at such meetings, together with any recommendation as to the
Board's position or belief as to action to be taken with respect to such
proposal, so as to enable shareholders better to determine whether they desire
to attend such meeting or grant a proxy to the Board as to the disposition of
any such proposal. Although the Bylaws do not give the Board any power to
approve or disapprove shareholder nominations for the election of directors or
of any other proposal submitted by shareholders, the Bylaws may have the
effect of precluding a nomination for the election of directors or precluding
the conducting of business at a particular shareholder meeting if the proper
procedures are not followed, and may discourage or deter a third-party from
conducting a solicitation of proxies to elect its own slate of directors or
otherwise attempting to obtain control of the Company, even if the conduct of
such solicitation or such attempt might be beneficial to the Company and its
shareholders.
Fair Price Provision. Article Fifteen of the Company Certificate (the "Fair
Price Provision") requires approval by the holders of 66 2/3% of the voting
power of the outstanding capital stock of the Company entitled to vote
generally in the election of directors (the "Voting Stock") as a condition for
mergers and certain other business combinations ("Business Combinations")
involving the Company and any holder of more than 25% of such voting power (an
"Interested Shareholder") unless the transaction is either (i) approved by a
majority of the members of the Board who are not affiliated with the
Interested Shareholder and who were directors before the Interested
Shareholder became an Interested Shareholder (the "Disinterested Directors")
or (ii) certain minimum price and procedural requirements are met.
The Fair Price Provision is designed to prevent a third party from utilizing
two-tier pricing and similar inequitable tactics in a takeover attempt. The
Fair Price Provision is not designed to prevent or discourage tender offers
for the Company. It does not impede an offer for at least 66 2/3% of the
Voting Stock in which each shareholder receives substantially the same price
for his or her shares as each other shareholder or which the Board has
approved in the manner described herein. Nor does the Fair Price Provision
preclude a third party from making a tender offer for some of the shares of
Voting Stock without proposing a Business Combination in which the remaining
shares of Voting Stock are purchased. Except for the restrictions on Business
Combinations, the Fair Price Provision will not prevent an Interested
Shareholder having a controlling interest of the Voting Stock from exercising
control over the Company or increasing its interest in the Company. Moreover,
an Interested Shareholder could increase its ownership to 66 2/3% and avoid
application of the Fair Price Provision. However, the separate provisions
contained in the Company Certificate and the Bylaws relating to "Classified
Boards of Directors" discussed above will, as therein indicated, curtail an
Interested Shareholder's ability to exercise control in several respects,
including such shareholder's ability to change incumbent directors who may
oppose a Business Combination or to implement a Business Combination by
written consent without a shareholder meeting. The Fair Price Provision would,
however, discourage some takeover attempts by persons intending to acquire the
Company in two steps and to eliminate remaining shareholder interests by means
of a business combination involving less consideration per share than the
acquiring person would propose to pay for its initial interest in the Company.
In addition, acquisitions of stock by persons attempting to acquire control
through market purchases may cause the market price of the stock to reach
levels which are higher than would otherwise be the case. The Fair Price
Provision may thereby deprive some holders of the Common Stock of an
opportunity to sell their shares at a temporarily higher market price.
Although the Fair Price Provision is designed to help assure fair treatment
of all shareholders vis-a-vis other shareholders in the event of a takeover,
it is not the purpose of the Fair Price Provision to assure that shareholders
will receive a premium price for their shares in a takeover. Accordingly, the
Board is of the view that the adoption of the Fair Price Provision does not
preclude the Board's opposition to any future takeover proposal
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which it believes would not be in the best interests of the Company and its
shareholders, whether or not such a proposal satisfies the minimum price
criteria and procedural requirements of the Fair Price Provision.
In addition, under Section 203 of the Delaware General Corporation Law as
applicable to the Company, certain "business combinations" (defined generally
to include (i) mergers or consolidations between a Delaware corporation and an
interested shareholder (as defined below) and (ii) transactions between a
Delaware corporation and an interested shareholder involving the assets or
stock of such corporation or its majority-owned subsidiaries, including
transactions which increase the interested shareholder's percentage ownership
of stock) between a Delaware corporation, whose stock generally is publicly
traded or held of record by more than 2,000 shareholders, and an interested
shareholder (defined generally as those shareholders, who, on or after
December 23, 1987, become beneficial owners of 15% or more of a Delaware
corporation's voting stock) are prohibited for a three-year period following
the date that such shareholder became an interested shareholder, unless (i)
prior to the date such shareholder became an interested shareholder, the board
of directors of the corporation approved either the business combination or
the transaction which resulted in the shareholder becoming an interested
shareholder, (ii) upon consummation of the transaction that made such
shareholder an interested shareholder, the interested shareholder owned at
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding voting stock owned by officers who also are
directors and voting stock held in employee benefit plans in which the
employees do not have a confidential right to tender or vote stock held by the
plan), or (iii) the business combination was approved by the board of
directors of the corporation and ratified by two-thirds of the voting stock
which the interested shareholder did not own. The three-year prohibition also
does not apply to certain business combinations proposed by an interested
shareholder following the announcement or notification of certain
extraordinary transactions involving the corporation and a person who had been
an interested shareholder during the previous three years or who became an
interested shareholder with the approval of a majority of the corporation's
directors.
Shareholder Rights Plan. The Company has adopted a shareholder rights plan
which may have anti-takeover effects. See "Description of Capital Stock-Rights
and Junior Preferred Stock."
Amendment of the Company Certificate and Bylaws. The Company Certificate
contains provisions requiring the affirmative vote of the holders of at least
66 2/3% the voting power of the stock entitled to vote generally in the
election of directors to amend certain provisions of the Company Certificate
and Bylaws (including the provisions discussed above). These provisions make
it more difficult for shareholders to make changes in the Company Certificate
or Bylaws, including changes designed to facilitate the exercise of control
over the Company. In addition, the requirement for approval by at least a 66
2/3% shareholder vote will enable the holders of a minority of the Company's
capital stock to prevent holders of a less-than-66 2/3% majority from amending
such provisions of the Company's Certificate or Bylaws.
MARRIOTT INTERNATIONAL PURCHASE RIGHT
The Company granted to Marriott International, for a period of ten years
following the Marriott International Distribution (i.e., until October 2003),
the right to purchase a number of shares equal in amount of up to 20% of each
class of the Company's outstanding voting stock at the then fair market value
upon the occurrence of certain change of control events involving the Company.
The Marriott International Purchase Right may be exercised for a 30-day period
following the date a person or group of affiliated persons has (i) become the
beneficial owner of 20% or more of the total voting power of the then
outstanding shares of the Company's voting stock or (ii) announced a tender
offer for 30% or more of the total voting power of the then outstanding shares
of the Company's voting stock. These change of control events upon which the
Marriott International Purchase Right becomes exercisable are substantially
identical to those events that cause a distribution of the Rights under the
Rights Agreement (see "Description of Capital Stock--Rights and Junior
Preferred Stock"). Accordingly, certain share ownership of the Company's
voting stock by specified persons is exempt under the Rights Agreement, and
consequently will not result in a distribution of Rights, and will not cause
the Marriott International Purchase Right to become exercisable.
74
<PAGE>
In connection with the Marriott International Distribution, the Board
amended the terms of the Rights Agreement to provide that the exercise of the
Marriott International Purchase Right will not result in a distribution of the
Rights. Accordingly, upon exercise of the Marriott International Purchase
Right, Marriott International will be entitled to receive the Rights
associated with the Common Stock and will not be deemed an "Acquiring Person"
under the Rights Agreement.
The purchase price for the Common Stock to be purchased upon the exercise of
the Marriott International Purchase Right is determined by taking the average
of the closing sale price of the Common Stock during the 30 consecutive
trading days preceding the date the Marriott International Purchase Right
becomes exercisable. The specific terms of the Marriott International Purchase
Right are set forth in the Marriott International Distribution Agreement.
The Marriott International Purchase Right will have an antitakeover effect.
Any person considering acquiring a substantial or controlling block of Common
Stock would face the possibility that its ability to exercise control would be
impaired by Marriott International's 20% ownership resulting from exercise of
the Marriott International Purchase Right. Moreover, so long as the Marriott
family's current percentage of ownership of Common Stock continues, the
combined Marriott family (including various trusts established by members of
the Marriott family) and Marriott International ownership following exercise
of the Marriott International Purchase Right may effectively block control by
others (see "Description of Capital Stock"). It is also possible that the
exercise price of the Marriott International Purchase Right would be lower
than the price at which a potential acquiror might be willing to purchase a
20% block of shares of Common Stock because the purchase price for the
Marriott International Purchase Right is based on the average trading price
during a 30-day period which may be prior to the announcement of the takeover
event. This potential price differential may have a further antitakeover
effect by discouraging potential acquirers of the Company. The antitakeover
effect of the Marriott International Purchase Right will be in addition to the
antitakeover effects of the provisions contained in the Company Certificate
and Bylaws.
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS OF COMMON STOCK
The following is a general summary of certain United States federal income
and estate tax consequences of the ownership, sale or other disposition of
Common Stock by a person (a "non-U.S. holder") that, for United States federal
income tax purposes, is a nonresident alien individual, a foreign corporation,
a foreign partnership or a foreign estate or trust, as such terms are defined
in the Internal Revenue Code of 1986, as amended (the "Code"). This summary
does not address all aspects of United States federal income and estate taxes
that may be relevant to non-U.S. holders in light of their particular facts
and circumstances or to certain types of non-U.S. holders that may be subject
to special treatment under United States federal income tax laws (for example,
insurance companies, tax-exempt organizations, financial institutions or
broker-dealers). Furthermore, this summary does not discuss any aspects of
foreign, state or local taxation. This summary is based on current provisions
of the Code, existing and proposed regulations promulgated thereunder and
administrative and judicial interpretations thereof, all of which are subject
to change, possibly retroactively.
DIVIDENDS
Dividends paid to a non-U.S. holder of Common Stock will generally be
subject to withholding of United States federal income tax at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty, unless
the dividends are effectively connected with the conduct of a trade or
business of the non-U.S. holder within the United States. In order to claim
the benefit of an applicable tax treaty rate, a non-U.S. holder may have to
file with the Company or its dividend paying agent an exemption or reduced
treaty rate certificate or letter in accordance with the terms of such treaty.
75
<PAGE>
Dividends that are effectively connected with such holder's conduct of a
trade or business in the United States are generally subject to tax on a net
income basis (that is, after allowance for applicable deductions) at rates
applicable to United States citizens, resident aliens and domestic United
States corporations, and are not generally subject to withholding. Any such
effectively connected dividends received by a non-U.S. corporation may also,
under certain circumstances, be subject to an additional "branch profits tax"
at a 30% rate or such lower rate as may be specified by an applicable income
tax treaty.
Under current United States Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of
such country for purposes of the withholding discussed above (unless the payor
has knowledge to the contrary). Under the current interpretation of United
States Treasury regulations, the same presumption applies for purposes of
determining the applicability of a tax treaty rate; however, under proposed
United States Treasury regulations not currently in effect, a non-U.S. holder
of Common Stock who wishes to claim the benefit of an applicable treaty rate
would be required to satisfy applicable certification and other requirements.
Certain certification and disclosure requirements must be complied with in
order to be exempt from withholding under the effectively connected income
exemption discussed above.
A non-U.S. holder of Common Stock that is eligible for a reduced rate of
United States tax withholding pursuant to an income tax treaty may obtain a
refund of any excess amounts currently withheld by filing an appropriate claim
for refund with the United States Internal Revenue Service.
DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to United States federal
income tax in respect of gain recognized on the disposition of Common Stock
unless (i) the gain is effectively connected with the conduct of a trade or
business of a non-U.S. holder in the United States, (ii) in the case of a non-
U.S. holder who is a nonresident alien individual and holds Common Stock as a
capital asset, such holder is present in the United States for 183 or more
days in the taxable year of the sale and either (a) such individual's "tax
home" for United States federal income tax purposes is in the United States or
(b) the gain is attributable to an office or other fixed place of business
maintained in the United States by such individual, or (iii) if the Company is
or has been a "U.S. real property holding corporation" for federal income tax
purposes at any time during the five-year period ending on the date of the
disposition or, if shorter, the period during which the non-U.S. holder held
the Common Stock (the "applicable period") and the non-U.S. holder holds,
actually or constructively, at any time during the applicable period, more
than 5% of the Common Stock.
The Company expects to be treated as a United States real property holding
company for United States federal tax purposes because of its ownership of
substantial real estate assets in the United States. As a result, a non-U.S.
holder who holds, directly or indirectly, more than 5% of the Common Stock may
be subject to United States federal income taxation on any gain realized from
the sale or other disposition of such stock, unless an exemption is provided
under an applicable tax treaty.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by a holder who is neither a United
States citizen nor a United States resident (as specially defined for United
States federal estate tax purposes) at the time of death will be included in
such holder's gross estate for United States federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise.
UNITED STATES INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company must report annually to the Internal Revenue Service and to each
non-U.S. holder the amount of dividends paid to such holder and the tax
withheld with respect to such dividends. These information reporting
requirements apply regardless of whether withholding is required. Copies of
the information returns reporting such dividends and withholding may also be
made available to the tax authorities in the country in which the non-U.S.
holder resides under the provisions of an applicable income tax treaty.
76
<PAGE>
United States backup withholding (which generally is imposed at a 31% rate)
generally will not apply to (a) the payment of dividends paid on Common Stock
to a non-U.S. holder at an address outside the United States or (b) the
payment of the proceeds of the sale of Common Stock to or through the foreign
office of a broker. In the case of the payment of proceeds from such a sale of
Common Stock through foreign offices of United States brokers, or foreign
brokers with certain types of relationships to the United States, however,
information reporting (but not backup withholding) is required with respect to
the payment unless the broker has documentary evidence in its files that the
owner is a non-U.S. holder (and has no actual knowledge to the contrary) and
certain other requirements are met or the holder otherwise establishes an
exemption. The payment of the proceeds of a sale of shares of Common Stock to
or through a U.S. office of a broker is subject to information reporting and
possible backup withholding at a rate of 31% unless the owner certifies its
non-U.S. status under penalties of perjury or otherwise establishes an
exemption. Any amounts withheld under the backup withholding rules from a
payment to a non-U.S. holder will be allowed as a refund or a credit against
such non-U.S. holder's United States federal income tax liability, provided
that the required information is furnished to the Internal Revenue Service.
These information reporting and backup withholding rules are under review by
the United States Treasury and could be changed by future regulations,
possibly retroactively.
THE FOREGOING SUMMARY IS INCLUDED FOR GENERAL INFORMATION ONLY. ACCORDINGLY,
INVESTORS ARE URGED TO CONSULT WITH THEIR TAX ADVISORS WITH RESPECT TO THE
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION
OF COMMON STOCK, INCLUDING THE APPLICATION AND EFFECT OF THE LAWS OF ANY
STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION.
77
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
(the "Underwriting Agreement"), the United States Underwriters named below
(the "U.S. Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities
Corporation, Goldman, Sachs & Co., Salomon Brothers Inc, Smith Barney Inc.,
Montgomery Securities, BT Securities Corporation and Schroder Wertheim & Co.
Incorporated are acting as representatives (the "U.S. Representatives"), and
the international managers named below (the "International Managers" and,
together with the U.S. Underwriters, the "Underwriters"), for whom Donaldson,
Lufkin & Jenrette Securities Corporation, Goldman Sachs International, Salomon
Brothers International Limited, Smith Barney Inc., Montgomery Securities,
Bankers Trust International PLC and J. Henry Schroder & Co. Limited are acting
as representatives (the "International Representatives" and, together with the
U.S. Representatives, the "Representatives"), have severally agreed to
purchase from the Company an aggregate of 25,000,000 shares of Common Stock.
The number of shares of Common Stock that each Underwriter has agreed to
purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
----------------- ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation................
Goldman, Sachs & Co. ..............................................
Salomon Brothers Inc ..............................................
Smith Barney Inc. .................................................
Montgomery Securities..............................................
BT Securities Corporation..........................................
Schroder Wertheim & Co. Incorporated...............................
---
U.S. Offering subtotal...........................................
===
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
NUMBER
INTERNATIONAL MANAGERS OF SHARES
---------------------- ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation................
Goldman Sachs International........................................
Salomon Brothers International Limited.............................
Smith Barney Inc. .................................................
Montgomery Securities..............................................
Bankers Trust International PLC....................................
J. Henry Schroder & Co. Limited....................................
-----
International Offering subtotal
-----
Total..........................................................
=====
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. If any of the shares of Common Stock are
purchased by the Underwriters pursuant to the Underwriting Agreement, all such
shares (other than shares covered by the over-allotment option described
below) must be purchased. The offering price and underwriting discounts and
commissions per share for the U.S. Offering and the International Offering are
identical.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public initially at a price to the
public set forth on the cover page of this Prospectus and to certain dealers
(who may include the Underwriters) at such price less a concession not to
exceed $ per share. The Underwriters may allow, and such dealers may reallow,
discounts not in excess of $ per share to any other Underwriter and certain
other dealers.
The Company has granted to the U.S. Underwriters an option to purchase up to
an aggregate of 3,750,000 additional shares of Common Stock, at the public
offering price net of underwriting discounts and commissions, solely to cover
over-allotments. Such option may be exercised at any time until 30 days after
the date of this Prospectus. To the extent that the U.S. Representatives
exercise such option, each of the U.S. Underwriters will be committed, subject
to certain conditions, to purchase a number of option shares proportionate to
such U.S. Underwriter's initial commitment as indicated in the preceding
table.
The Company, Richard E. Marriott and J.W. Marriott, Jr. have agreed, subject
to certain exceptions, not to sell or otherwise dispose of shares of Common
Stock or sell or grant rights, options or warrants with respect to Common
Stock or securities convertible or exchangeable into Common Stock prior to the
expiration of 90 days from the date of this Prospectus, without prior written
consent of the Representatives.
79
<PAGE>
Pursuant to an Agreement Between U.S. Underwriters and International
Managers (the "Agreement Between U.S. Underwriters and International
Managers"), each U.S. Underwriter has represented and agreed that, with
respect to the shares included in the U.S. Offering and with certain
exceptions, (a) it is not purchasing any Common Stock for the account of
anyone other than a United States or Canadian Person (as defined below) and
(b) it has not offered or sold, and will not offer or sell, directly or
indirectly, any Common Stock or distribute this Prospectus outside of the
United States or Canada or to anyone other than a United States or Canadian
Person. Pursuant to the Agreement Between U.S. Underwriters and International
Managers, each International Manager has represented and agreed that, with
respect to the shares included in the International Offering and with certain
exceptions, (a) it is not purchasing any Common Stock for the account of any
United States or Canadian Person and (b) it has not offered or sold, and will
not offer or sell, directly or indirectly, any Common Stock or distribute this
Prospectus within the United States or Canada or to any United States or
Canadian Person. The foregoing limitations do not apply to stabilization
transactions and to certain other transactions among the International
Managers and the U.S. Underwriters. As used herein, "United States or Canadian
Person" means any national or resident of the United States or Canada or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States or Canada of
any United States or Canadian Person) and includes any United States or
Canadian branch of a person who is not otherwise a United States or Canadian
Person, and "United States" means the United States of America, its
territories, its possessions and all areas subject to its jurisdiction.
Pursuant to the Agreement Between U.S. Underwriters and International
Managers, sales may be made between the U.S. Underwriters and the
International Managers of any number of shares of Common Stock to be purchased
pursuant to the Underwriting Agreement as may be mutually agreed. The per
share price and currency of settlement of any shares so sold shall be the
public offering price set forth on the cover page hereof, in United States
dollars, less an amount not greater than the per share amount of the
concession to dealers set forth above.
Pursuant to the Agreement Between U.S. Underwriters and International
Managers, each U.S. Underwriter has represented that it has not offered or
sold, and has agreed not to offer or sell, any Common Stock, directly or
indirectly, in Canada in contravention of the securities laws of Canada or any
province or territory thereof and has represented that any offer of Common
Stock in Canada will be made only pursuant to an exemption from the
requirement to file a prospectus in the province or territory of Canada in
which such offer is made. Each U.S. Underwriter has further agreed to send any
dealer who purchases from it any Common Stock a notice stating in substance
that, by purchasing such Common Stock, such dealer represents and agrees that
it has not offered or sold, and will not offer or sell, directly or
indirectly, any of such Common Stock in Canada in contravention of the
securities laws of Canada or any province or territory thereof and that any
offer of Common Stock in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of
Canada in which such offer is made, and that such dealer will deliver to any
other dealer to whom it sells any of such Common Stock a notice to the
foregoing effect.
Each of the Representatives and certain affiliates have from time to time
performed certain investment banking and commercial banking services for the
Company or its affiliates, for which each received customary fees.
Pursuant to the Agreement between U.S. Underwriters and International
Managers, each International Manager has represented and agreed that (i) it
has not offered or sold and during the period of six months from the date of
this Prospectus will not offer or sell any Common Stock to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which do not constitute an offer to the public in the United Kingdom for the
purposes of the Public Offers of Securities Regulations 1995 (the
"Regulations"); (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act of 1986 of Great Britain and the
Regulations with respect to anything done by it in relation to the Common
Stock in, from or otherwise involving the United Kingdom; and (iii) it has
only issued or passed on and will only issue or pass on in the United Kingdom
any document received by it in connection with the issue of the
80
<PAGE>
Common Stock to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1995 of Great Britain or is a person to whom the document may otherwise
lawfully be issued or passed on.
NatWest Securities Limited, a United Kingdom broker-dealer and a member of
the Securities and Futures Authority Limited, has agreed that, as part of the
distribution of Common Stock contemplated hereby and subject to certain
exceptions, it will not offer or sell any Common Stock within the United
States, its territories or possessions or to persons who are citizens thereof
or residents therein.
No action has been taken in any jurisdiction by the Company or the
Underwriters that would permit a public offering of the Common Stock offered
pursuant to the Offering in any jurisdiction where action for that purpose is
required, other than the United States. The distribution of this Prospectus
and the offering or sale of the shares of Common Stock offered hereby in
certain jurisdictions may be restricted by law. Accordingly, the shares of
Common Stock offered hereby may not be offered or sold, directly or
indirectly, and neither this Prospectus nor any other offering material or
advertisements in connection with the Common Stock may be distributed or
published, in or from any jurisdiction, except under circumstances that will
result in compliance with applicable rules and regulations of any such
jurisdiction. Such restrictions may be set out in applicable Prospectus
supplements. Persons into whose possession this Prospectus comes are required
by the Company and the Underwriters to inform themselves about and to observe
any applicable restrictions. This Prospectus does not constitute an offer of,
or an invitation to subscribe for purchase of, any shares of Common Stock and
may not be used for the purpose of an offer to, or solicitation by, anyone in
any jurisdiction or in any circumstances in which such offer or solicitation
is not authorized or is unlawful.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Christopher G. Townsend, Senior Vice President and Deputy General
Counsel of the Company, and certain legal matters with respect to the Common
Stock offered hereby will be passed upon for the Company by Latham & Watkins,
Washington, D.C. Certain legal matters relating to the Offerings will be
passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom, Los
Angeles, California.
Mr. Townsend owns Common Stock, and holds stock options, deferred stock and
restricted stock awards under the Comprehensive Stock Plan and may receive
additional awards under the plan in the future.
EXPERTS
The audited consolidated financial statements and schedules of the Company,
certain acquired hotel properties (Dallas/Fort Worth Airport Marriott, San
Antonio Marriott Riverwalk and Toronto Eaton Centre Marriott) and the entity
owning the San Diego Marriott Hotel and Marina, included in this Prospectus
and elsewhere in the Registration Statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports
with respect thereto and have been included herein in reliance upon the
authority of said firm as experts in giving said reports.
The combined financial statements of Pacific Landmark Hotel, Ltd. and
Pacific Gateway, Ltd. as of December 31, 1994 and 1993, and for each of the
years in the two-year period ended December 31, 1994, have been included in
this Prospectus and in the Registration Statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The audited financial statements of the New York Vista (now the Marriott
World Trade Center) included in this Prospectus have been audited by Ernst &
Young LLP, independent public accountants, as indicated in their report with
respect thereto and have been included herein in reliance upon the authority
of said firm as experts in giving said reports.
81
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants............................... F-3
Consolidated Balance Sheets as of December 29, 1995 and December 30,
1994.................................................................. F-4
Consolidated Statements of Operations for the Fiscal Years Ended
December 29, 1995, December 30, 1994 and December 31, 1993............ F-5
Consolidated Statements of Shareholders' Equity for Fiscal Years Ended
December 29, 1995, December 30, 1994 and December 31, 1993............ F-6
Consolidated Statements of Cash Flows for Fiscal Years Ended December
29, 1995, December 30, 1994 and December 31, 1993..................... F-7
Notes to Consolidated Financial Statements............................. F-8
FINANCIAL STATEMENTS OF CERTAIN ACQUIRED AND OTHER HOTEL PROPERTIES
DALLAS/FORT WORTH AIRPORT MARRIOTT
Report of Independent Public Accountants.............................. F-29
Balance Sheet as of December 30, 1994................................. F-30
Statement of Operations for the Year Ended December 30, 1994.......... F-31
Statement of Cash Flows for the Year Ended December 30, 1994 ......... F-32
Notes to Financial Statements......................................... F-33
Statements of Operations for the Thirty-two Weeks Ended August 11,
1995 and August 12, 1994 (unaudited)................................. F-37
Statements of Cash Flows for the Thirty-two Weeks Ended August 11,
1995 and August 12, 1994 (unaudited)................................. F-38
Notes to Financial Statements......................................... F-39
NEW YORK VISTA (renamed Marriott World Trade Center subsequent to
acquisition by the Company)
Report of Independent Auditors........................................ F-40
Balance Sheets as of December 30, 1994 and December 31, 1993 ......... F-41
Statements of Operations for the Years Ended December 31, 1994, 1993
and 1992............................................................. F-42
Statements of Cash Flows for the Years Ended December 31, 1994, 1993
and 1992............................................................. F-43
Notes to Financial Statements......................................... F-44
Statements of Operations for the Period Ended December 22, 1995 and
1994 (unaudited)..................................................... F-50
Statements of Cash Flows for the Periods Ended December 22, 1995 and
1994 (unaudited)..................................................... F-51
Notes to Financial Statements......................................... F-52
PACIFIC LANDMARK HOTEL, LTD. AND PACIFIC GATEWAY, LTD.(San Diego Marriott
Hotel and Marina)
Report of Independent Public Accountants.............................. F-53
Combined Balance Sheets as of December 31, 1995 and 1994.............. F-54
Combined Statements of Operations for the Years Ended December 31,
1995 and 1994........................................................ F-55
Combined Statements of Changes in Partners' Deficit for the Years
Ended December 31, 1995 and 1994..................................... F-56
Combined Statements of Cash Flows for the Years Ended December 31,
1995 and 1994........................................................ F-57
Notes to Combined Financial Statements................................ F-58
Independent Auditors' Report.......................................... F-64
Combined Balance Sheets as of December 31, 1994 and 1993.............. F-65
Combined Statements of Operations for the Years Ended December 31,
1994 and 1993........................................................ F-66
Combined Statements of Partners' Capital (Deficit) for the Years Ended
December 31, 1994 and 1993........................................... F-67
Combined Statements of Cash Flows for the Years Ended December 31,
1994 and 1993........................................................ F-68
Notes to Combined Financial Statements................................ F-69
SAN ANTONIO MARRIOTT RIVERWALK
Report of Independent Public Accountants.............................. F-75
Balance Sheet as of December 30, 1994................................. F-76
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Statement of Operations for the Year Ended December 30, 1994............. F-77
Statement of Cash Flows for the Year Ended December 30, 1994............. F-78
Notes to Financial Statements............................................ F-79
Statement of Operations for the Twenty-four Weeks Ended June 17, 1994 and
June 16, 1995 (unaudited)............................................... F-83
Statement of Cash Flows for the Twenty-four Weeks Ended June 16, 1995 and
June 17, 1994 (unaudited)............................................... F-84
Notes to Financial Statements............................................ F-85
TEC ENTITIES (TORONTO EATON CENTRE MARRIOTT)
Report of Independent Accountants........................................ F-86
Combined Balance Sheets as of December 30, 1994 and
December 31, 1993....................................................... F-87
Combined Statements of Operations for the Years Ended December 30, 1994
and
December 31, 1993....................................................... F-88
Combined Statements of Cash Flows for the Years Ended December 30, 1994
and
December 31, 1993....................................................... F-89
Notes to Combined Financial Statements................................... F-90
Combined Statements of Operations for the Period Ended October 30, 1995
and1994 (unaudited)..................................................... F-93
Combined Statements of Cash Flows for the Period Ended October 30, 1995
and 1994 (unaudited).................................................... F-94
Notes to Combined Financial Statements................................... F-95
</TABLE>
F-2
<PAGE>
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 are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the 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.
Arthur Andersen LLP
Washington, D.C.
February 26, 1996
F-3
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 1995 AND DECEMBER 30, 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
1995 1994
------ ------
ASSETS
<S> <C> <C>
Property and Equipment........................................... $2,882 $2,837
Notes and Other Receivables (including amounts due from affili-
ates of $170 million and $174 million, respectively)............ 210 223
Due from Hotel Managers.......................................... 72 56
Investments in Affiliates........................................ 26 28
Other Assets..................................................... 166 155
Cash and Cash Equivalents........................................ 201 67
------ ------
$3,557 $3,366
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt
Debt carrying a parent company guarantee of repayment.......... $ 262 $ 317
Debt not carrying a parent company guarantee of repayment...... 1,916 1,554
------ ------
2,178 1,871
Accounts Payable and Accrued Expenses............................ 52 69
Net Investment in Discontinued Operations........................ -- 41
Deferred Income Taxes............................................ 504 537
Other Liabilities................................................ 148 138
------ ------
Total Liabilities............................................ 2,882 2,656
------ ------
Shareholders' Equity
Convertible Preferred Stock.................................... -- 13
Common Stock, 300 million shares authorized; 159.7 million
shares and 153.6 million shares issued and outstanding,
respectively.................................................. 160 154
Additional Paid-in Capital..................................... 499 479
Retained Earnings.............................................. 16 64
------ ------
Total Shareholders' Equity................................... 675 710
------ ------
$3,557 $3,366
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
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)
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -----
<S> <C> <C> <C>
REVENUES
Hotels................................................ $ 474 $ 338 $ 603
Senior living communities (including Marriott
International lease payments of $14 million and $5
million in 1994 and 1993, respectively).............. -- 14 67
Net gains (losses) on property transactions........... (3) 6 (1)
Equity in earnings (losses) of affiliates............. -- -- (27)
Other................................................. 13 22 17
------ ------ -----
Total revenues.................................... 484 380 659
------ ------ -----
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management
fees of $67 million, $41 million and $5 million,
respectively)........................................ 281 198 495
Senior living communities............................. -- 5 58
Other (including a $60 million write-down of
undeveloped land in 1995)............................ 89 25 14
------ ------ -----
Total operating costs and expenses................ 370 228 567
------ ------ -----
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
EXPENSES, INTEREST AND PROFIT FROM DISTRIBUTED
OPERATIONS............................................. 114 152 92
Minority interest....................................... (2) (1) (1)
Corporate expenses...................................... (36) (31) (36)
Interest expense........................................ (178) (165) (164)
Interest income......................................... 27 29 26
Profit from operations distributed to Marriott
International.......................................... -- -- 211
------ ------ -----
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES.................................................. (75) (16) 128
Benefit (provision) for income taxes.................... 13 3 (72)
------ ------ -----
INCOME (LOSS) FROM CONTINUING OPERATIONS................ (62) (13) 56
DISCONTINUED OPERATIONS
Loss from discontinued operations (net of income tax
benefit of $3 million in 1995 and $1 million in 1994
and 1993, respectively)................................ (8) (6) (4)
Provision for loss on disposal (net of income tax
benefit of $23 million in 1995)........................ (53) -- --
------ ------ -----
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES............. (123) (19) 52
Extraordinary item--Loss on extinguishment of debt (net
of income tax benefit of $10 million, $3 million, and
$3 million, respectively).............................. (20) (6) (4)
Cumulative effect of a change in accounting for income
taxes.................................................. -- -- 34
Cumulative effect of a change in accounting for assets
held for sale (net of income taxes of $22 million)..... -- -- (32)
------ ------ -----
NET INCOME (LOSS)....................................... (143) (25) 50
Dividends on preferred stock............................ -- -- (8)
------ ------ -----
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK............ $ (143) $ (25) $ 42
====== ====== =====
EARNINGS (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS................................... $ (.39) $ (.09) $ .39
Discontinued operations (net of income taxes)........... (.39) (.04) (.03)
Extraordinary item--Loss on extinguishment of debt (net
of income taxes)....................................... (.12) (.04) (.03)
Cumulative effect of a change in accounting for income
taxes.................................................. -- -- .28
Cumulative effect of a change in accounting for assets
held for sale
(net of income taxes).................................. -- -- (.26)
------ ------ -----
NET INCOME (LOSS)....................................... $ (.90) $ (.17) $ .35
====== ====== =====
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED DECEMBER 29, 1995, DECEMBER 30, 1994 AND DECEMBER 31, 1993
<TABLE>
<CAPTION>
COMMON CONVERTIBLE ADDITIONAL
SHARES PREFERRED COMMON PAID-IN RETAINED TREASURY
OUTSTANDING STOCK STOCK CAPITAL EARNINGS STOCK
----------- ----------- ------ ---------- -------- --------
(IN
MILLIONS) (IN MILLIONS, EXCEPT PER COMMON SHARE)
<C> <S> <C> <C> <C> <C> <C>
100.8 Balance, January 1, 1993.. $ 200 $105 $ 34 $ 555 $(109)
-- Net income................ -- -- -- 50 --
-- Distribution of stock of
Marriott International,
Inc...................... -- -- (40) (417) --
7.9 Common stock issued for
the comprehensive stock
and employee stock
purchase plans........... -- 4 13 (58) 109
-- Cash dividends on common
stock ($.14 per share)
and preferred stock
($2.062 per share).......... -- -- -- (22) --
8.3 Conversion of subordinated
debt..................... -- 8 15 -- --
1.8 Common stock issued in
conjunction with the
Exchange Offer........... -- 2 58 -- --
10.9 Conversion of preferred
stock to common stock.... (186) 11 175 -- --
-- Foreign currency
translation adjustments.. -- -- (2) -- --
- ---------------------------------------------------------------------------------------------
129.7 Balance, December 31,
1993..................... 14 130 253 108 --
-- Net loss.................. -- -- -- (25) --
-- Adjustment to distribution
of stock of Marriott
International, Inc....... -- -- -- (19) --
2.5 Common stock issued for
the comprehensive stock
and employee stock....... -- 2 15 -- --
.7 Conversion of subordinated
debt to common stock..... -- 1 1 -- --
.6 Conversion of preferred
stock to common stock.... (1) 1 -- -- --
20.1 Common stock issued in
stock offering........... -- 20 210 -- --
- ---------------------------------------------------------------------------------------------
153.6 Balance, December 30,
1994..................... 13 154 479 64 --
-- Net loss.................. -- -- -- (143) --
-- Distribution of stock of
Host Marriott Services
Corporation.............. -- -- (4) 95 --
1.3 Common stock issued for
the comprehensive stock
and employee stock
purchase plans........... -- 1 16 -- --
4.8 Conversion of preferred
stock to common stock.... (13) 5 8 -- --
- ---------------------------------------------------------------------------------------------
159.7 Balance, December 29,
1995..................... $ -- $160 $499 $ 16 $ --
=============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 29, 1995, DECEMBER 30, 1994 AND DECEMBER 31, 1993
<TABLE>
<CAPTION>
1995 1994 1993
------ ----- ----
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations.................. $ (62) $ (13) $ 56
Adjustments to reconcile to cash from operations:
Depreciation and amortization........................... 122 113 196
Income taxes............................................ (35) (16) 9
Restructuring charges................................... -- -- 13
Amortization of deferred income......................... (7) (5) (14)
Net realizable value write-down......................... 70 -- 11
Equity in net losses of affiliates...................... -- -- 27
Other................................................... 33 23 17
Changes in operating accounts:
Other assets.......................................... (2) (11) (122)
Other liabilities..................................... (9) (16) 142
------ ----- ----
Cash from continuing operations......................... 110 75 335
Cash from discontinued operations....................... 32 71 80
------ ----- ----
Cash from operations.................................... 142 146 415
------ ----- ----
INVESTING ACTIVITIES
Proceeds from sales of assets............................. 358 480 83
Less non-cash proceeds.................................. (33) (54) (5)
------ ----- ----
Cash received from sales of assets........................ 325 426 78
Acquisitions.............................................. (392) (532) (20)
Acquisition funds held in escrow.......................... -- 40 (40)
Capital expenditures:
Capital expenditures for renewals and replacements...... (56) (34) (50)
Lodging construction funded by project financing........ (40) (67) (40)
Other capital expenditures.............................. (64) (57) (96)
Purchases of short-term marketable securities............. -- (90) --
Sales of short-term marketable securities................. -- 90 --
Notes receivable collections.............................. 43 60 37
Affiliate collections (advances), net..................... 2 10 (45)
Other..................................................... 26 19 (25)
------ ----- ----
Cash used in investing activities from continuing
operations............................................. (156) (135) (201)
Cash used in investing activities from discontinued
operations............................................. (52) (43) (61)
------ ----- ----
Cash used in investing activities....................... (208) (178) (262)
------ ----- ----
FINANCING ACTIVITIES
Issuances of debt......................................... 1,251 209 375
Issuances of common stock................................. 13 238 12
Scheduled principal repayments............................ (100) (72) (471)
Debt prepayments.......................................... (960) (351) --
Dividends paid............................................ -- -- (33)
Cash distributed to Marriott International................ -- -- (272)
------ ----- ----
Cash from (used in) financing activities from continuing
operations............................................. 204 24 (389)
Cash from (used in) financing activities from
discontinued operations................................ (4) 2 --
------ ----- ----
Cash from (used in) financing activities................ 200 26 (389)
------ ----- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... 134 (6) (236)
CASH AND CASH EQUIVALENTS, beginning of year.............. 67 73 309
------ ----- ----
CASH AND CASH EQUIVALENTS, end of year.................... $ 201 $ 67 $ 73
====== ===== ====
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
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 262 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:
<TABLE>
<CAPTION>
1993
-------------
(IN MILLIONS)
<S> <C>
Sales.......................................................... $ 5,555
Operating costs and expenses................................... (5,283)
Corporate expenses............................................. (46)
Net interest expense........................................... (15)
-------
Income before income taxes................................... $ 211
=======
</TABLE>
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 house profit from its hotels to the manager. Revenues subsequent
to the Marriott International
F-8
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 estimated 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.
F-9
<PAGE>
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 Statement 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.
F-10
<PAGE>
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 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 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 (airport, toll plaza and
sports and entertainment), not by individual operating unit, 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 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
F-11
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
1993
-------------
(IN MILLIONS)
<S> <C>
Revenues....................................................... $261
Operating profit before corporate expenses and interest........ 80
Loss from continuing operations................................ (60)
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1995 1994
------ ------
(IN MILLIONS)
<S> <C> <C>
Land and land improvements................................... $ 320 $ 417
Buildings and leasehold improvements......................... 2,666 2,370
Furniture and equipment...................................... 382 361
Construction in progress..................................... 101 231
------ ------
3,469 3,379
Less accumulated depreciation and amortization............... (587) (542)
------ ------
$2,882 $2,837
====== ======
</TABLE>
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.
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
F-12
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 pretax 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:
<TABLE>
<CAPTION>
OWNERSHIP
INTERESTS 1995 1994
--------- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Equity investments
Hotel partnerships which own 42 Marriott Hotels, 120
Courtyard hotels, 50 Residence Inns and 50 Fairfield
Inns operated by Marriott International, Inc., as of
December 29, 1995................................... 1%-50% $ 26 $ 28
Notes and other receivables............................ -- 170 174
---- ----
$196 $202
==== ====
</TABLE>
F-13
<PAGE>
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 pretax income from affiliates includes the following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Management fees, net of direct costs......................... $-- $-- $ 67
Ground rental income......................................... -- -- 14
Interest income.............................................. 16 17 16
Equity in net income (losses)................................ -- -- (27)
---- ---- ----
$ 16 $ 17 $ 70
==== ==== ====
</TABLE>
F-14
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Combined summarized balance sheet information for the Company's affiliates
follows:
<TABLE>
<CAPTION>
1995 1994
------ ------
(IN MILLIONS)
<S> <C> <C>
Property and equipment....................................... $3,125 $3,358
Other assets................................................. 419 346
------ ------
Total assets............................................... $3,544 $3,704
====== ======
Debt, principally mortgages.................................. $3,445 $3,658
Other liabilities............................................ 779 839
Partners' deficit............................................ (680) (793)
------ ------
Total liabilities and partners' deficit.................... $3,544 $3,704
====== ======
</TABLE>
Combined summarized operating results reported by these affiliates follow:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues............................................... $ 770 $ 705 $ 731
Operating expenses:
Cash charges (including interest).................... (506) (491) (511)
Depreciation and other non-cash charges.............. (240) (296) (299)
----- ----- -----
Income (loss) before extraordinary item............ 24 (82) (79)
Extraordinary item--forgiveness of debt............ 181 113 --
----- ----- -----
Net income (loss).................................. $ 205 $ 31 $ (79)
===== ===== =====
</TABLE>
6. INCOME TAXES
The Company adopted SFAS No. 109, "Accounting for Income Taxes" ("SFAS
109"), during the first quarter of 1993. Prior to such adoption, the Company
deferred the past tax effects of timing differences between amounts recorded
for financial reporting purposes and taxable income. SFAS 109 requires the
recognition of deferred tax assets and liabilities equal to the expected
future tax consequences of 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:
<TABLE>
<CAPTION>
1995 1994
----- -----
(IN MILLIONS)
<S> <C> <C>
Gross deferred tax assets..................................... $ 156 $ 149
Less: Valuation allowance..................................... (5) (5)
----- -----
Net deferred tax assets....................................... 151 144
Gross deferred tax liabilities................................ (655) (681)
----- -----
Net deferred income tax liability............................. $(504) $(537)
===== =====
</TABLE>
F-15
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The valuation allowance required under SFAS 109 primarily represents net
operating loss carryforwards ("NOLs") the benefits of which were not
previously recorded, but which have been recorded under SFAS 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:
<TABLE>
<CAPTION>
1995 1994
----- -----
(IN MILLIONS)
<S> <C> <C>
Investments in affiliates..................................... $(305) $(308)
Property and equipment........................................ (182) (208)
Safe harbor lease investments................................. (87) (96)
Deferred tax gain............................................. (81) (69)
Reserves...................................................... 108 107
Tax credit carryforwards...................................... 26 25
Other, net.................................................... 17 12
----- -----
Net deferred income tax liability............................. $(504) $(537)
===== =====
</TABLE>
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN MILLIONS)
<C> <S> <C> <C> <C>
Current -- Federal...................................... $ 7 $(5) $ 59
-- State........................................ 3 1 27
-- Foreign...................................... -- -- 11
---- --- ----
10 (4) 97
---- --- ----
Deferred -- Federal...................................... (23) 1 (15)
-- State........................................ -- -- (10)
---- --- ----
(23) 1 (25)
---- --- ----
$(13) $(3) $ 72
==== === ====
</TABLE>
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 totalling approximately $11 million in 1995 have been made to the
tax provision related to those settlements.
F-16
<PAGE>
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:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- ----
<S> <C> <C> <C>
Statutory Federal tax rate............................. (35.0)% (35.0)% 35.0%
State income taxes, net of Federal tax benefit......... 2.5 16.2 9.0
Tax credits............................................ (0.1) (1.4) (2.2)
Additional tax on foreign source income................ -- 1.1 4.8
Tax contingencies...................................... 14.6 -- --
Enacted tax rate increase.............................. -- -- 6.2
Other, net............................................. 0.7 0.3 3.5
----- ----- ----
Effective income tax rate............................ (17.3)% (18.8)% 56.3%
===== ===== ====
</TABLE>
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 noncancelable leases
related to continuing operations are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- ------- ---------
(IN MILLIONS)
<S> <C> <C>
1996....................................................... $ 2 $ 64
1997....................................................... 2 61
1998....................................................... 2 59
1999....................................................... 2 56
2000....................................................... 1 54
Thereafter................................................. 9 508
--- ----
Total minimum lease payments............................... 18 $802
====
Less amount representing interest.......................... (7)
---
Present value of minimum lease payments................... $11
===
</TABLE>
The Company leases certain property and equipment under noncancelable
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.
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
F-17
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Minimum rentals on operating leases......................... $34 $18 $ 96
Additional rentals based on sales........................... 17 15 12
Payments to owners of managed and leased hotels based
primarily on profits....................................... -- -- 476
--- --- ----
$51 $33 $584
=== === ====
</TABLE>
8. DEBT
Debt related to continuing operations consists of the following:
<TABLE>
<CAPTION>
1995 1994
------ ------
(IN MILLIONS)
<S> <C> <C>
Properties Notes, with a rate of 9.5% due May 2005............ $ 600 $ --
Acquisitions Notes, with a rate of 9.0% due December 2007..... 350 --
Hospitality Notes............................................. -- 596
Old Senior Notes (Old Notes), with an average rate of 9.0% at
December 29, 1995 maturing through 2012...................... 135 135
Notes secured by $1,438 million of real estate assets, with an
average rate of 8.5% at December 29, 1995, maturing through
2012......................................................... 972 758
New Line of Credit, with a variable rate of LIBOR plus 3% (9%
at December 29, 1995) due June 1998.......................... 22 --
Line of Credit................................................ -- 112
Acquisition Revolver.......................................... -- 168
Other notes, with an average rate of 6.6% at December 29,
1995, maturing through 2017.................................. 88 91
Capital lease obligations..................................... 11 11
------ ------
$2,178 $1,871
====== ======
</TABLE>
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.
F-18
<PAGE>
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
F-19
<PAGE>
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:
<TABLE>
<CAPTION>
NOT
CARRYING CARRYING
PARENT PARENT
COMPANY COMPANY
GUARANTEE GUARANTEE
--------- ---------
(IN MILLIONS)
<S> <C> <C>
1996..................................................... $ 68 $ 52
1997..................................................... 33 9
1998..................................................... 47 281
1999..................................................... -- 5
2000..................................................... 24 28
Thereafter............................................... 90 1,530
---- ------
$262 $1,905
==== ======
</TABLE>
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.
F-20
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 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:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Comprehensive plan........................................... 23
Employee stock purchase plan................................. 3
---
26
===
</TABLE>
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.
F-21
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ------------
(IN MILLIONS)
<S> <C> <C>
Balance at January 1, 1993............................ 15.7 $8-39
Granted............................................... 1.2 8-26
Exercised............................................. (2.3) 2-29
Cancelled............................................. (1.0) 2-39
----
Balance at December 31, 1993.......................... 13.6 2- 8
Granted............................................... .6 10
Exercised............................................. (2.2) 2- 8
Cancelled............................................. (.3) 2- 8
----
Balance at December 30, 1994.......................... 11.7 2-10
Granted............................................... --
Exercised............................................. (2.3) 2-10
Cancelled............................................. (.3) 2-10
Adjustment for Special Dividend....................... .9 1-7
----
Balance at December 29, 1995.......................... 10.0 1-10
====
Exercisable at December 29, 1995...................... 8.5
====
</TABLE>
Deferred stock incentive plan shares granted to officers and key employees
after 1990 generally vest over 10 years in annual installments commencing one
year after the date of grant. Certain employees may elect to defer payments
until termination or retirement. Deferred stock incentive plan shares granted
in 1990 and prior years generally vest in annual installments commencing one
year after the date of grant and continuing 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
F-22
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 interest 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.
F-23
<PAGE>
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):
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(IN MILLIONS EXCEPT
PER COMMON SHARE DATA)
<S> <C> <C>
Revenue........................................ $ 557 $ 496
Loss from continuing operations ............... (84) (28)
Loss per common share from continuing
operations ................................... (.53) (.18)
</TABLE>
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.
<TABLE>
<CAPTION>
DECEMBER 29, 1995 DECEMBER 30, 1994
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------------ ------------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Financial assets
Receivables from affiliates............. $ 170 $ 177 $ 174 $ 172
Notes receivable........................ 40 49 49 108
Other................................... 7 7 -- --
Financial liabilities
Debt.................................... 2,167 2,175 1,860 1,810
Other financial instruments
Interest rate swap agreements........... -- 6 -- 12
Affiliate debt service agreements....... -- -- -- --
</TABLE>
Receivables from affiliates, notes and other financial assets are valued
based on the expected future cash flows discounted at risk-adjusted rates.
Valuations for secured 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 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
F-24
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
F-25
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 cost 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.
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
F-26
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
1995 1994 1993
------ ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues
Rooms.............................................. $ 908 $ 663 $ 520
Food and Beverage.................................. 363 250 162
Other.............................................. 81 56 39
------ ----- -----
Total Hotel Revenues............................. 1,352 969 721
------ ----- -----
Department Costs
Rooms.............................................. 226 168 129
Food and Beverage.................................. 284 195 130
Other.............................................. 43 29 19
------ ----- -----
Total Department Costs........................... 553 392 278
------ ----- -----
Department Profit.................................... 799 577 443
Other Deductions..................................... (325) (239) (194)
------ ----- -----
House Profit......................................... $ 474 $ 338 249
====== =====
Revenues from Owned Hotels in excess of House Profit
prior to Distribution............................... 354
-----
Revenue per Statement of Operations.................. $ 603
=====
</TABLE>
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1995
---------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 100 $ 109 $110 $ 165 $ 484
Operating profit before
corporate expenses and
interest............... 35 45 38 (4) 114
Loss from continuing
operations............. (8) (1) (4) (49) (62)
Net income (loss)....... (14) (30) (5) (94) (143)
Income (loss) per common
share:
Income (loss) from
continuing
operations........... (.05) (.01) (.02) (.31) (.39)
Net income (loss)..... (.09) (.19) (.03) (.59) (.90)
</TABLE>
F-27
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1994
--------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 77 $ 101 $ 83 $ 119 $ 380
Operating profit before
corporate expenses and
interest............... 26 51 31 44 152
Income (loss) from
continuing operations.. (10) 6 (3) (6) (13)
Net income (loss)....... (18) -- 8 (15) (25)
Income (loss) per common
share:
Income (loss) from
continuing
operations........... (.07) .04 (.02) (.04) (.09)
Net income (loss)..... (.12) -- .05 (.10) (.17)
</TABLE>
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.
F-28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE OWNERS OF THE DALLAS/FORT WORTH AIRPORT MARRIOTT:
We have audited the accompanying balance sheet of the Dallas/Fort Worth
Airport Marriott, as defined in Note 1, as of December 30, 1994, and the
related statements of operations and cash flows for the year ended December
30, 1994. These financial statements are the responsibility of the management
of the PHLP, as defined in Note 1. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Dallas/Fort Worth
Airport Marriott (as defined in Note 1) as of December 30, 1994, and the
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.,
November 13, 1995
F-29
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
BALANCE SHEET
AS OF DECEMBER 30, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net........................................... $ 19,164
Due from Marriott International....................................... 1,601
Property improvement fund............................................. 3
--------
$ 20,768
========
LIABILITIES AND NET ADVANCES TO PHLP
Mortgage debt......................................................... $ 51,462
Due to Host Marriott Corporation...................................... 897
Due to Marriott International, Inc.................................... 26,941
Accrued interest...................................................... 104
--------
Total liabilities................................................... 79,404
Net advances to PHLP.................................................. (58,636)
--------
$ 20,768
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 30, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUE................................................................ $ 8,163
-------
OPERATING COSTS AND EXPENSES
Depreciation and amortization........................................ 740
Base and incentive management fees................................... 3,455
Property taxes....................................................... 1,008
Insurance and other.................................................. 54
-------
Total operating costs and expenses................................. 5,257
-------
OPERATING PROFIT BEFORE INTEREST....................................... 2,906
Interest expense....................................................... 5,310
-------
NET LOSS............................................................... $(2,404)
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 30, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss............................................................. $(2,404)
Depreciation and amortization........................................ 740
Deferred incentive and base management fees.......................... 2,263
Loss on fixed asset disposition...................................... 6
Changes in other operating accounts:
Due from Marriott International, Inc. ............................. 302
Accrued interest................................................... (28)
-------
Cash provided by operations.......................................... 879
-------
FINANCING ACTIVITIES
Change in net investment and advances from PHLP...................... (1,338)
Decrease in amounts due from Marriott International, Inc. ........... 499
Repayments to Host Marriott Corporation.............................. (105)
Change in escrow fund cash........................................... 65
-------
Cash used in financing activities.................................... (879)
-------
CHANGE IN CASH AND CASH EQUIVALENTS.................................... --
CASH AND CASH EQUIVALENTS, beginning of year........................... --
-------
CASH AND CASH EQUIVALENTS, end of year................................. $ --
=======
SUPPLEMENTAL INFORMATION
Cash paid for interest............................................... $ 5,451
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
NOTES TO FINANCIAL STATEMENTS
NOTE 1. THE HOTEL
Basis of Presentation
On August 22, 1995 ("Sale Date"), HMC Acquisitions Properties, Inc., a
wholly owned indirect subsidiary of Host Marriott Corporation, purchased the
building, leasehold improvements and furniture, fixtures and equipment related
to the Dallas/Fort Worth Airport Marriott located in Irving, Texas (the
"Hotel") from Potomac Hotel Limited Partnership ("PHLP"), a Delaware limited
partnership, for approximately $45 million. The Hotel was part of a portfolio
of properties owned by PHLP. The Hotel, with approximately 500 rooms, is
operated by Marriott International, Inc. as part of the Marriott Hotels,
Resorts and Suites full-service hotel system.
The Hotel's purchase price at the Sale Date was in excess of its carrying
value. No adjustments related to the resultant sale are reflected in the
accompanying statements.
These financial statements present the financial position, results of
operations and cash flows related to the business of the Dallas/Fort Worth
Airport Marriott which is a lesser component of PHLP for all periods
presented. PHLP's historical basis in assets and liabilities of the Hotel have
been carried over. Changes in Net Advances to PHLP represent the operating
results of the Hotel adjusted for net cash transferred between PHLP and the
Hotel.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Hotel's records are maintained on the accrual basis of accounting and
its fiscal year ends on the Friday nearest to December 31.
Revenues
Revenues represent house profit, which is the Hotel's sales less property-
level expenses excluding depreciation, management fees, real and personal
property taxes, insurance and certain other costs which are classified as
operating costs and expenses.
Property and Equipment
Property and equipment is recorded at cost. Replacements and improvements
are capitalized as incurred. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, generally 30 years for
buildings and five to six years for furniture and equipment.
Working Capital and Supplies
Pursuant to the terms of the Hotel's management agreement discussed in Note
6, the Hotel is required to provide the respective manager with working
capital and supplies to meet its operating needs. The manager converts cash
advanced by PHLP into other forms of working capital consisting primarily of
operating cash, inventories, and trade receivables and payables which are
maintained and controlled by the manager. Upon the termination of the
agreements, it is expected that the working capital and supplies will be
partially reconverted into cash and returned to PHLP or transferred to a
subsequent owner or operator for consideration. Such working capital and
supplies are also pledged as security for the Hotel's share of PHLP's debt as
described in Note 5. As a result of these conditions, the individual
components of working capital and supplies controlled by the manager is not
reflected in the accompanying balance sheet.
F-33
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
Provision for Federal or state income taxes has not been made in the
accompanying financial statements since PHLP does not pay income taxes but,
rather, allocates its profits and losses to individual partners.
NOTE 3. REVENUES
House profit for the year ended December 30, 1994 consists of (in
thousands):
<TABLE>
<S> <C>
HOTEL SALES
Rooms............................................................ $14,516
Food & Beverage.................................................. 7,029
Other............................................................ 1,383
-------
Total Hotel Sales.............................................. 22,928
-------
DEPARTMENT COSTS
Rooms............................................................ 3,648
Food & Beverage.................................................. 5,066
Other............................................................ 799
-------
Total Department Costs......................................... 9,513
-------
DEPARTMENT PROFIT.................................................. 13,415
Other Deductions................................................. (5,252)
-------
HOUSE PROFIT....................................................... $ 8,163
=======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 30, 1994 (in
thousands):
<TABLE>
<S> <C>
Land............................................................. $ 1,407
Building and improvements........................................ 25,576
Furniture and equipment.......................................... 4,527
--------
31,510
Less accumulated depreciation and amortization................... (12,346)
--------
Property and equipment, net...................................... $ 19,164
========
</TABLE>
All property and equipment is pledged as security against the Hotel's
portion of PHLP's indebtedness and in the case of rental payments from the
Hotel's portion of FF&E leases, the loans related to FF&E of the Hotel. The
amounts above reflect PHLP's historical basis in the Hotel's property and
equipment and do not reflect the impact of the sale to HMC Acquisition
Properties Inc. on August 22, 1995.
NOTE 5. DEBT
Bank Loan
On December 22, 1987, PHLP borrowed $245 million (the "Bank Loan") from The
Mitsui Trust and Banking Company (the "Bank Lender") secured by seven of PHLP
hotels (the "Bank Hotels"). The Bank Loan bore interest at an effective fixed
rate of 10.37% and required monthly, interest-only payments.
F-34
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Bank Loan matured on December 22, 1994, and was not repaid because PHLP
had insufficient funds to do so. At December 22, 1994, the principal balance
of the Bank Loan was $245 million.
PHLP entered into a forbearance agreement with the Bank Lender under which
the Lender agreed not to exercise its rights and remedies for nonpayment of
the Bank Loan. PHLP subsequently refinanced (the "Refinancing") the Bank Loan.
Under the Refinancing, PHLP was required to repay $44 million in principal and
Host Marriott Corporation advanced $10 million under an existing Bank Loan
guaranty. In exchange for the lender's agreement to forbear, PHLP agreed to
continue to make monthly interest payments at a rate equal to the one-month
LIBOR plus two percentage points for the period December 22, 1994 through June
21, 1995 and the one-month LIBOR plus two and one quarter percentage points
for the period June 22, 1995 through the end of the extended forbearance
period.
Approximately $51.4 million of the $245 million Bank Loan principal has been
allocated to the Hotel based on the relative amounts of title insurance
specified by the lender to be required for the Hotel as compared to the total
title insurance for the seven hotels when the Bank Loan originated in 1987.
Other Loans
As of December 30, 1994, $897,000 was outstanding to Host Marriott for an
FF&E loan related to the Hotel. The FF&E loan is nonrecourse to the Parent and
is effectively secured by payments from Marriott International, Inc. under the
FF&E Lease, as defined in Note 6 below. As of December 30, 1994, Marriott
International, Inc. owed $980,000, including related interest costs, for the
Hotel FF&E capital lease.
NOTE 6. MANAGEMENT AGREEMENT
Marriott International, Inc. (the "Manager") operates the Hotel pursuant to
a long-term management agreement (the "Management Agreement") for a term of 25
years from the opening of the Hotel with renewal terms, at the option of the
Manager, of up to an additional 50 years. The Management Agreement provides
for payment of base management fees equal to 8% of gross hotel sales and
incentive management fees equal to 20% of hotel operating profits (as defined,
calculated before debt service on total Parent debt), and additional incentive
fees, after certain returns to the Parent, ranging from 10% to 70% depending
on the level of returns made to the partners. Payment of the incentive
management fees is dependent upon the availability of cash flow after debt
service, and payable only after repayment of certain debt service guaranty
advances and certain priority returns to the Parent expressed as a percentage
of limited partner invested equity. Through December 30, 1994, no incentive
fees have been paid since inception. Deferred base fees were $7,360,000 as of
December 30, 1994. Deferred incentive management fees were $19,523,000 as of
December 30, 1994. In the event of early termination of the Management
Agreement, the Manager will be owed additional fees based on the unexpired
term and expected future base and incentive management fees.
In accordance with the Management Agreement, the Manager is required to
lease all FF&E replacements from the Hotel (the "FF&E Lease") for terms of up
to six years. Lease payments represent an amount approximately equal to the
principal amortization, interest and fees associated with indebtedness
incurred by the Hotel to finance the FF&E replacements and any sales and use
taxes, personal property taxes, insurance premiums and additional costs
incurred by the Parent in connection with the acquisition and use of such
replacements. As of December 30, 1994, the Manager was obligated to pay
$980,000 (including related interest costs) to the Hotel during the term of
this agreement.
On February 24, 1995, the Parent, Bank Lender and the Manager entered into a
cash collateral agreement with terms effective January 1, 1995. Effective
January 1, 1995, 4% of gross hotel sales must be deposited in a property
improvement fund for the future furniture, fixtures and equipment needs of the
Hotel. Additionally, 1%
F-35
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of gross hotel sales must be deposited in a restricted cash account and are
subordinated to the payment of debt service on the Bank Loan.
The cash collateral agreement also adjusted the base management fee earned
by the Manager under the management agreement from 8% to 3% of gross hotel
sales effective January 1, 1995. The payment of 1% of the 3% base fee earned
is subordinated to the payment of debt service on the Bank Loan. As a result,
the subordinated base management fees are set aside in a restricted cash
account where it will be held and made available for the payment of debt
service.
In conjunction with the acquisition of the Hotel by HMC Acquisition
Properties, Inc., a new management agreement was entered into with the
Manager. The new agreement provides for payment of base management fees equal
to three percent of sales and a formula based incentive management fee limited
to 20% of fiscal year Hotel operating profit (as defined). Had these terms
been in effect for the year ended December 30, 1994, pro forma base and
incentive management fees would have been $688,000.
In connection with the Refinancing approximately $27 million of deferred
management fees related to the Hotel were forgiven by the Manager on August
22, 1995.
Additionally, the Parent has advanced $946,000 to the manager for working
capital and supplies related to the Hotel which is included in Due from
Marriott International, Inc.
F-36
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
STATEMENT OF OPERATIONS
FOR THE THIRTY-TWO WEEKS ENDED AUGUST 11, 1995 AND AUGUST 12, 1994
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
------ -------
<S> <C> <C>
REVENUE......................................................... $6,192 $ 5,317
------ -------
OPERATING COSTS AND EXPENSES
Depreciation and amortization................................. 396 395
Base and incentive management fees............................ 1,742 2,234
Property taxes................................................ 685 672
Insurance and other........................................... 114 (10)
------ -------
Total operating costs and expenses.......................... 2,937 3,291
------ -------
OPERATING PROFIT BEFORE INTEREST................................ 3,255 2,026
Interest expense................................................ 2,597 3,276
------ -------
NET INCOME (LOSS)............................................... $ 658 $(1,250)
====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
STATEMENTS OF CASH FLOWS
FOR THE THIRTY-TWO WEEKS ENDED AUGUST 11, 1995 AND AUGUST 12, 1994
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 658 $(1,250)
Noncash items:
Depreciation and amortization............................. 396 395
Deferred incentive and base management fees............... 1,433 1,738
Working capital changes:
Due from/to Marriott International, Inc. ................. 58 (504)
Accrued interest.......................................... 115 175
------- -------
Cash provided by operations................................. 2,660 554
------- -------
INVESTING ACTIVITIES
Additions to property and equipment....................... (515) --
Change in property improvement fund....................... (104) (5)
------- -------
Cash used in investing activities......................... (619) (5)
------- -------
FINANCING ACTIVITIES
Change in net advances to PHLP............................ (1,889) (2,011)
Deposit in restricted cash account........................ (155) --
Advances from Host Marriott Corporation................... -- 1,409
Change in escrow fund cash................................ 3 53
------- -------
Cash used in financing activities......................... (2,041) (549)
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS......................... -- --
CASH AND CASH EQUIVALENTS, beginning of period................ -- --
------- -------
CASH AND CASH EQUIVALENTS, end of period...................... $ -- $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying financial statements of the Dallas/Fort Worth Airport
Marriott (the "Hotel") have been prepared without audit. Certain information
and footnote disclosures normally included in financial statements presented
in accordance with generally accepted accounting principles have been omitted.
The Hotel believes the disclosures made are adequate to make the information
presented not misleading. However, the financial statements should be read in
conjunction with the audited financial statements and notes thereto for the
fiscal year ended December 30, 1994 included elsewhere in this Registration
Statement.
In the opinion of the Hotel, the accompanying unaudited financial statements
reflect all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position of the Hotel as of August
11, 1995 and the results of operations and cash flows for the thirty-two weeks
ended August 12, 1994 and August 11, 1995. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short-term variations.
2. House profit represents hotel operating results less property-level
expenses excluding depreciation, management fees, real and personal property
taxes, insurance and certain other costs which are classified as operating
costs and expenses.
House profit generated by the Hotel for the thirty-two weeks ended August
11, 1995 and August 12, 1994 consists of:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
SALES
Rooms................................................... $ 9,983 $ 9,213
Food & Beverage......................................... 4,706 4,331
Other................................................... 776 837
------- -------
Total Hotel Sales..................................... 15,465 14,381
------- -------
DEPARTMENT COSTS
Rooms................................................... 2,364 2,225
Food & Beverage......................................... 3,168 3,102
Other................................................... 511 469
------- -------
Total Department Costs................................ 6,043 5,796
------- -------
DEPARTMENT PROFIT......................................... 9,422 8,585
Other Deductions........................................ (3,230) (3,268)
------- -------
HOUSE PROFIT.............................................. $ 6,192 $ 5,317
======= =======
</TABLE>
F-39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Hilton International Co.
We have audited the accompanying balance sheets of New York Vista (a
facility of The Port Authority of New York and New Jersey) as of December 31,
1994 and 1993, and the related statements of operations and cash flows for the
years ended December 31, 1994, 1993 and 1992. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our report dated January 20, 1995 and January 21, 1994, we expressed an
opinion that the 1994, 1993 and 1992 financial statements did not fairly
present financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles because the Company
had not obtained actuarial information regarding pension expense and minimum
liability for the unfunded accumulated benefit obligation over plan assets. As
described in Note 6, the Company obtained the requisite actuarial information
in January 1996. Such actuarial information indicated that the minimum
liability for unfunded accumulated benefit obligations over plan assets was
not understated and accordingly, no adjustments were necessary in 1994, 1993
and 1992 for the financial statements to conform with generally accepted
accounting principles. Accordingly, our present opinion on the 1994, 1993 and
1992 financial statements, as presented herein, is unqualified rather than
qualified.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of New York Vista at December
31, 1994 and 1993, and the results of its operations and cash flows for the
years ended December 31, 1994, 1993 and 1992, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
January 20, 1995 (except for Notes 6, 7 and 8,
which the date is February 22, 1996)
F-40
<PAGE>
NEW YORK VISTA
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1994 1993*
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................. $ 313,403 $ 3,216,248
Receivables--trade (less allowance for doubtful
accounts of $8,505 in 1994 and $140,276 in
1993)........................................... 1,386,395 364,718
Business interruption insurance claim receivable
(Note 7)........................................ 10,405,062 6,525,610
Inventories:
Food and beverage.............................. 359,298 287,419
Operating supplies............................. 221,826 48,913
Prepaid expenses................................. 6,165 3,437
------------ ------------
Total current assets............................... 12,692,149 10,446,345
Restricted cash (Notes 2 and 4).................... 321,646 2,781,953
Other assets....................................... 16,395 3,945
------------ ------------
Total assets....................................... $ 13,030,190 $ 13,232,243
============ ============
LIABILITIES
Current liabilities:
Accounts payable--trade.......................... $ 2,994,581 $ 1,332,549
Accrued liabilities:
Payroll and related taxes...................... 1,086,344 634,244
Sales and occupancy taxes...................... 538,460 273,280
Hotel renovation............................... 1,200,184 29,605
Other.......................................... 341,559 235,032
Due to Inhil Co., Inc............................ 1,243,950 1,304,510
Due to other affiliated companies................ 377,989 83,021
Deferred revenue................................. 2,367,211 --
------------ ------------
Total current liabilities.......................... 10,150,278 3,892,241
Reserve for replacement of furniture, fixtures and
equipment and for capital expenditures (Notes 2
and 4)............................................ 3,368,254 5,117,370
Loan payable, Inhil Co., Inc. (Note 2)............. 16,837,050 14,565,987
Difference between assets and liabilities repre-
senting amount due from the Port Authority of New
York and New Jersey (Note 3)...................... (17,325,392) (10,343,355)
------------ ------------
Total liabilities.................................. $ 13,030,190 $ 13,232,243
============ ============
</TABLE>
- --------
* Reclassified and restated to conform with 1994 presentation. (See Note 1)
See accompanying notes.
F-41
<PAGE>
NEW YORK VISTA
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1994 1993* 1992*
------------ ----------- -----------
<S> <C> <C> <C>
OPERATING REVENUES:
Rooms................................. $ 2,692,164 $ 3,492,775 $27,469,251
Food.................................. 854,246 814,255 6,078,045
Beverage.............................. 342,000 261,429 1,829,381
Other operated departments............ 110,523 166,528 1,238,985
Other income (Note 7)................. 5,930,582 15,946,482 696,694
------------ ----------- -----------
9,929,515 20,681,469 37,312,356
------------ ----------- -----------
OPERATING EXPENSES:
Cost of sales:
Food................................ 243,100 197,952 1,349,674
Beverage............................ 52,920 61,060 448,900
Other operated departments.......... 117,816 111,360 319,256
------------ ----------- -----------
Total cost of sales................... 413,836 370,372 2,117,830
Payroll and related expenses.......... 4,649,422 5,249,580 14,610,109
Provision for operating equipment..... 53,872 11,442 200,194
Other operating expenses.............. 628,666 660,027 3,107,957
------------ ----------- -----------
5,745,796 6,291,421 20,036,090
------------ ----------- -----------
Gross operating income.................. 4,183,719 14,390,048 17,276,266
------------ ----------- -----------
DEDUCTIONS FROM GROSS OPERATING INCOME:
General and administrative expenses... 2,384,134 2,620,586 3,209,525
Marketing expenses.................... 912,620 915,555 1,511,754
Property operation, maintenance and
energy costs......................... 6,111,606 2,896,632 4,683,992
Basic management fee (Note 2)......... -- -- 363,731
------------ ----------- -----------
9,408,360 6,432,773 9,769,002
------------ ----------- -----------
Gross operating (loss)/profit........... (5,224,641) 7,957,275 7,507,264
------------ ----------- -----------
OTHER DEDUCTIONS/(INCOME):
Real estate taxes (Note 5)............ 1,707,696 2,620,758 2,981,785
(Credit)/provision for replacement of
furniture,
fixtures and equipment (Note 4)....... (809,005) 1,843,078 1,865,618
(Credit)/provision for capital
expenditures (Note 4)................ (207,022) 413,837 373,124
Insurance............................. 319,332 41,694 49,888
Pre-opening and other business
restoration costs.................... 5,234,869 -- --
Interest expense...................... 1,447,900 1,094,213 300,000
Other................................. 317,935 360,785 452,150
------------ ----------- -----------
8,011,705 6,374,365 6,022,565
------------ ----------- -----------
Excess of (expenses over
revenues)/revenues over expenses....... $(13,236,346) $ 1,582,910 $ 1,484,699
============ =========== ===========
</TABLE>
- --------
* Reclassified and restated to conform with 1994 presentation. (See Note 1)
See accompanying notes.
F-42
<PAGE>
NEW YORK VISTA
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1994 1993* 1992*
------------ ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Excess of (expenses over
revenues)/revenues over expenses...... $(13,236,346) $ 1,582,910 $1,484,699
Adjustments to reconcile excess of
(expenses over revenues)/revenues over
expenses to net cash (used
in)/provided by operating activities:
(Credit)/provision for replacement of
furniture, fixtures and equipment
and capital expenditures............ (1,016,027) 2,256,915 2,238,742
Expenses payable to Port Authority... 2,187,767 2,838,202 --
Interest expense..................... 1,447,900 1,094,213 300,000
Changes in operating assets and lia-
bilities:
Accounts receivable, net........... (1,021,677) 2,975,216 (676,810)
Insurance claim receivable......... (4,089,804) (6,525,610) --
Inventories........................ (244,792) (42,377) (49,254)
Prepaid expenses and other assets.. (15,178) 28,764 (7,664)
Accounts payable................... 1,662,032 87,340 (919,814)
Accrued liabilities................ 823,807 (1,277,350) (111,191)
Due to other affiliated companies.. 294,968 -- --
------------ ----------- ----------
Net cash (used in)/provided by operat-
ing activities........................ (13,207,350) 3,018,223 2,258,708
------------ ----------- ----------
INVESTING ACTIVITIES
Transfer of funds from/(to) restricted
cash.................................. 1,790,218 (609,362) (2,207,972)
------------ ----------- ----------
FINANCING ACTIVITIES
Advances from Port Authority, net...... 13,761,490 -- --
Hotel renovation payments.............. (3,892,608) (1,028,327) --
Other payments on behalf of Port Au-
thority............................... (1,294,035) (60,272) (909,764)
(Payments to)/advances from Inhil Co.,
Inc................................... (60,560) 1,028,327 --
------------ ----------- ----------
Net cash provided by/(used in) financ-
ing activities........................ 8,514,287 (60,272) (909,764)
------------ ----------- ----------
Net (decrease)/increase in cash........ (2,902,845) 2,348,589 (859,028)
Cash at beginning of year.............. 3,216,248 867,659 1,726,687
------------ ----------- ----------
Cash at end of year.................... $ 313,403 $ 3,216,248 $ 867,659
============ =========== ==========
</TABLE>
- --------
* Reclassified and restated to conform with 1994 presentation. (See Note 1)
See accompanying notes.
F-43
<PAGE>
NEW YORK VISTA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
New York Vista ("Vista"), the hotel located in the World Trade Center in New
York City, is a facility of The Port Authority of New York and New Jersey (the
"Port Authority"). Significant asset and liability accounts related to Vista
are recorded on the books of the Port Authority and, accordingly, are not
reflected on Vista's financial statements (such amounts relate principally to
property, furnishings and mortgage). Vista is operated by Inhil Co., Inc.
("Inhilco"), a wholly owned subsidiary of Hilton International Co. ("Hilton"),
under a management agreement ("Management Agreement").
Vista has no separate legal status or existence. Vista's assets are legally
available for the satisfaction of debts of the Port Authority and not solely
those appearing on the accompanying statements of assets and liabilities, as
its debts may result in claims against assets not appearing thereon.
On February 26, 1993, an explosion caused damage to the structure and
interior of the Vista, as well as the adjoining World Trade Center complex. As
a result of the damage, all hotel operations were suspended as of that date.
Certain limited hotel operations resumed on November 1, 1994.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
Furniture, Fixtures and Equipment
In accordance with the Management Agreement, annual charges to operations
are made for the replacement of furniture, fixtures and equipment.
Expenditures for the replacement of furniture, fixtures and equipment are
charged to the related reserve (see Note 4).
Operating Equipment
The cost of operating equipment, consisting primarily of linen, silverware
and other utensils, is charged in full to operating expenses when purchased.
Income Taxes
Provisions for Federal, state or local income taxes are not reflected in the
accompanying financial statements since the Port Authority is a nontaxable
entity.
Preopening and Other Business Restoration Costs
Preopening and other business restoration costs, which primarily consists of
contract labor and other clean-up costs as well as employee payroll, employee
training expense and marketing expenses incurred in connection with Vista's
resumption of operations, were charged to expense as incurred.
Pension Plans
Certain nonunion employees of Vista are covered by a noncontributory defined
benefit pension plan of Hilton, which provides for normal retirement at age 65
after a minimum of five years' service. Hilton may
F-44
<PAGE>
NEW YORK VISTA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
terminate the plan at any time. Union employees are covered by a
noncontributory pension plan under their union contract.
Reclassification and Restatement
Certain December 31, 1993 and 1992 amounts have been reclassified to conform
to the December 31, 1994 presentation. The statements of operations for the
years ended December 31, 1993 and 1992 have been restated to remove rent of
$1,349,276 and $2,278,696, respectively, which was previously indicated as to
be received from the Port Authority and to include interest expense of
$1,094,213 and $300,000, respectively, in connection with the loan payable,
Inhil Co., Inc. Such amounts were previously included in the difference
between assets and liabilities representing amount due from The Port Authority
of New York and New Jersey on the balance sheets as of December 31, 1993 and
1992 and, accordingly, such amount does not change as a result of the
restatement:
<TABLE>
<CAPTION>
1993 1992
----------- -----------
<S> <C> <C>
Excess of revenues over expenses for the years
ended December 31, 1993 and 1992 as originally
reported......................................... $ 4,026,399 $ 4,063,395
Removal of rent credit from Port Authority........ (1,349,276) (2,278,696)
Inclusion of interest expense..................... (1,094,213) (300,000)
----------- -----------
Excess of revenues over expenses for the years
ended December 31, 1993 and 1992 as restated..... $ 1,582,910 $ 1,484,699
=========== ===========
</TABLE>
2. MANAGEMENT AGREEMENT
Vista is managed by Inhilco under the terms of an amended Management
Agreement which, among other matters, provides (i) for payment to Inhilco,
under certain circumstances, of a management fee equal to 3% of revenues, as
defined, and an incentive fee based on a formula, as provided, and (ii) for
the refurbishment of the guest rooms over a three-year period which commenced
in May 1992 at a cost not to exceed $17,600,000. Under the agreement, Inhilco
is required to finance the first $15,000,000 of refurbishment costs.
Refurbishment costs in excess of $15,000,000 are to be funded by the reserves
for capital expenditures and replacement of furniture, fixtures and equipment
to the extent such funds are available. Interest expense on amounts advanced
by Inhilco accrues at 10% per annum. The amount payable to Inhilco in
connection with the refurbishment, including accrued interest with respect
thereto, which is reflected as loan payable, Inhil Co., Inc. in the
accompanying balance sheet, includes the following:
Loan payable, Inhil Co., Inc.
<TABLE>
<CAPTION>
AGGREGATE
YEAR ENDED DECEMBER 31 THROUGH
------------------------ DECEMBER 31,
1994 1993 1994
----------- ----------- ------------
<S> <C> <C> <C>
Balance at beginning of year.... $14,565,987 $ 8,558,123 $ --
Expenditures by Inhil Co., Inc.
for hotel renovation........... 858,348 5,223,637 13,740,124
Increase/(decrease) in year-end
accrual........................ (35,185) (309,986) 265,551
Interest........................ 1,447,900 1,094,213 2,831,375
----------- ----------- -----------
$16,837,050 $14,565,987 $16,837,050
=========== =========== ===========
</TABLE>
For the period subsequent to the commencement of refurbishment (May 1992),
Vista is required to expend revenue proceeds, as defined, in the following
priority: (i) the payment of operating expenses, as defined, (ii) the funding
of the reserves for furniture, fixtures and equipment and capital
expenditures, (iii) the payment of current
F-45
<PAGE>
NEW YORK VISTA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
and past due debt service on a certain mortgage payable, (iv) the payment of
current and past due interest on amounts advanced by Inhilco during the
refurbishment period and, after the refurbishment period, the payment of
current and past due principal and interest on amounts advanced by Inhilco
amortized at 10% per annum over 7 years, (v) the payment of past due and
current management fees and (vi) the payment of the incentive fee.
The repayment period with respect to principal and interest on amounts
advanced by Inhilco is based on a 7 year amortization period, but it will be
extended for as long as necessary for Inhilco to recover such amounts.
However, if the repayment period extends beyond 7 years, additional interest
will not accrue. With respect to the management fee, any portion of a
management fee not payable to Inhilco from revenue proceeds in the current or
four subsequent years is forfeited. With respect to the incentive fee, such
fee will commence the later of May 1, 2002 or the date of final repayment of
amounts advanced by Inhilco. There is no carryforward of unpaid incentive fee.
The management fee commenced January 1, 1992. For the period prior to the
commencement of refurbishment, January 1, 1992 through April 30, 1992,
management fee expense approximated $364,000. However, since any portion of a
management fee not payable to Inhilco from revenue proceeds in the current or
four subsequent years is forfeited, no management fee expense was recognized
for any periods between May 1, 1992 through December 31, 1994 as during such
periods revenue proceeds were insufficient to require payment of such fee. The
management fee attributable to such periods, approximately $300,000 (1994),
$620,000 (1993) and $800,000 (1992), will be recognized as expense at such
time as payment is probable.
The Management Agreement expires in March 2021. The Port Authority is
required to either extend the Management Agreement for a single 20-year period
or offer a certain lease agreement to Inhilco for such 20-year period in lieu
of the Management Agreement.
In addition, Vista has agreed to perform and finance certain additional
hotel construction. Vista shall be reimbursed the cost of such additional
construction by the Port Authority upon its completion. Amounts due Vista in
connection with such additional construction, which are included in the
difference between assets and liabilities representing the amount due from the
Port Authority, are as follows:
<TABLE>
<CAPTION>
AGGREGATE
YEAR ENDED DECEMBER 31 THROUGH
----------------------- DECEMBER
1994 1993 31, 1994
----------- ----------- ----------
<S> <C> <C> <C>
Balance at beginning of year............ $ 1,057,932 $ -- $ --
Expenditures for hotel renovation (Port
Authority)............................. 3,892,608 1,028,327 4,920,935
Increase/(decrease) in year-end accru-
al..................................... 1,170,579 29,605 1,200,184
----------- ----------- ----------
5,063,187 1,057,932 6,121,119
----------- ----------- ----------
$ 6,121,119 $1,057,932 $6,121,119
=========== =========== ==========
</TABLE>
3. RELATED PARTY TRANSACTIONS
Hilton
Hilton and various of its subsidiaries charge Vista for certain advertising,
promotion, purchasing and other services which they perform on behalf of
Vista. Such charges, which are billed as agreed upon by the various parties,
totaled approximately $200,000, $355,000 and $1,245,000 for the years ended
December 31, 1994, 1993 and 1992, respectively.
F-46
<PAGE>
NEW YORK VISTA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Port Authority
The amount indicated on the accompanying balance sheet as the difference
between assets and liabilities representing the amount due from the Port
Authority includes the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1994 1993
------------ ------------
<S> <C> <C>
Balance at beginning of year................... $(10,343,355) $ (8,773,349)
Excess of (expenses over revenues)/revenues
over expenses................................. (13,236,346) 1,582,910
Renovation costs incurred by Inhil Co., Inc. on
behalf of Port Authority...................... (823,163) (4,913,651)
Renovation costs incurred by Vista on behalf of
Port Authority................................ (5,063,187) (1,057,932)
Expenses payable to Port Authority............. 2,187,767 2,838,202
Advances from Port Authority, net.............. 13,761,490 --
Other payments on behalf of Port Authority..... (3,871,598) (60,272)
Interest earned on restricted cash account
payable to Port Authority..................... 63,000 40,737
------------ ------------
Balance at end of year......................... $(17,325,392) $(10,343,355)
============ ============
</TABLE>
4. RESERVES FOR REPLACEMENT OF FURNITURE, FIXTURES AND EQUIPMENT AND CAPITAL
EXPENDITURES
The Management Agreement requires annual charges to operations to provide
for the replacement of furniture, fixtures and equipment. The annual charge is
equivalent to 5% of gross revenues, to the extent revenues exceed expenses.
The Management Agreement also requires that beginning January 1, 1992 the
following percentages of gross revenue, to the extent revenues exceed
expenses, be charged to operations for capital expenditures: 1% for the first
three years; 1.5% for the next five years; and 2% for the following years
until termination of the agreement.
Due to the suspension of operations resulting from the explosion in February
1993, the above provisions for 1993 are based on actual revenue through
February 26, 1993 and, for the subsequent period, Vista's operating budget for
such period and related business interruption insurance claim. For 1994, the
credit reflects the reduction to the 1993 provisions to record the effect of
the reimbursement offered by the insurance carrier.
F-47
<PAGE>
NEW YORK VISTA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Management Agreement requires that beginning January 1, 1992 cash from
the operating account equal to the above provisions be deposited by Vista into
a segregated interest bearing bank account. The funds, including interest
earned thereon, shall be used by Vista to pay for capital expenditures,
replacements of furniture, fixtures and equipment and certain refurbishment
costs (see Note 2). As of December 31, 1994 and 1993, unfunded restricted cash
was approximately $3,047,000 and $2,335,000, respectively. Interest earned on
the restricted cash account is reflected as a payable to the Port Authority
and is included with amounts due (from)/to the Port Authority (see Note 3).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993
------------ -----------
<S> <C> <C>
RESTRICTED CASH
Balance at beginning of year.................... $ 2,781,953 $ 2,207,972
Purchases..................................... (733,089) (76,118)
Interest income............................... 63,000 40,737
Transfer (to)/from operating account, net..... (1,790,218) 609,362
------------ -----------
Balance at end of year.......................... $ 321,646 $ 2,781,953
============ ===========
RESERVE FOR REPLACEMENT FOR FURNITURE, FIXTURES
AND EQUIPMENT AND FOR CAPITAL EXPENDITURES
Balance at beginning of year.................... $ 5,117,370 $ 2,936,573
(Credit)/provision............................ (1,016,027) 2,256,915
Purchases..................................... (733,089) (76,118)
------------ -----------
Balance at end of year.......................... $ 3,368,254 $ 5,117,370
============ ===========
</TABLE>
5. REAL ESTATE TAXES
Vista accrues for payments in lieu of real estate taxes to the Port
Authority based upon space occupied by Vista in the World Trade Center. The
hotel is currently disputing the expense attributable to the years ended
December 31, 1994 and 1993.
6. PENSION PLANS
Certain nonunion employees of Vista are covered by a defined benefit
noncontributory pension plan of Hilton, which provides for normal retirement
at age 65 after a minimum of five years' service. Hilton may terminate the
Plan at any time. Unfunded past service costs are amortized over thirty years.
Vista's policy is to fund pension costs accrued, subject to full funding
limitations under the Employee Retirement Income Security Act of 1974. The
assets of the Plan are invested primarily in listed stocks and bonds.
Vista had not obtained actuarial information for the nonunion plan regarding
pension expense for the years ended December 31, 1994, 1993 and 1992 and the
minimum liability, if any, for the unfunded accumulated benefit obligation
over plan assets. Management estimated the minimum liability for unfunded
accumulated benefit obligations and pension costs but was unable to provide
the financial statement disclosure required under Financial Accounting
Standards Board Statement No. 87, "Employers' Accounting for Pensions."
Because of the termination of the Management Agreement (see Note 8), Hilton
obtained the requisite actuarial information in January 1996. Such actuarial
information indicated that the minimum liability for unfunded accumulated
benefit obligations over plan assets was not understated and, accordingly, no
adjustments were necessary in 1994, 1993 and 1992 for the financial statements
to conform with generally accepted accounting principles. In January
F-48
<PAGE>
NEW YORK VISTA
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
1996, Hilton subsequently paid the participants and terminated the Company's
portion of the plan. The total pension expense for 1994, 1993 and 1992 was
approximately $75,000 and $19,000 and $125,000 respectively. Vista makes
annual contributions to the plan equal to the amount accrued for pension
expense. The pension liability approximated $0, $138,000 and $335,000 for the
years ended December 31, 1994, 1993 and 1992, respectively.
Vista, under a Collective Bargaining Agreement with the New York Hotel and
Motel Trade Council AFL-CIO, makes contributions into a multi-employer pension
plan. This plan provides defined benefits to union employees. Pension expense
for this plan for the years ended December 31, 1994, 1993 and 1992 was
approximately $77,000, $117,000 and $513,000, respectively.
7. CONTINGENCIES
During 1993 and 1994, Vista filed insurance claims with its business
interruption insurance carrier requesting reimbursement of damages incurred as
a result of an explosion in February 1993. Other income includes approximately
$5,800,000 (1994) and $15,800,000 (1993) in connection with such insurance
claims. The 1993 financial statements reflect as income the reimbursement
requested for 1993. The 1994 financial statements reflect as income the total
reimbursement offered by the insurance carrier net of the insurance claims
reflected as income in 1993 and amounts applicable to 1995. During 1995, the
claim was settled with the insurance carrier at the total reimbursement
previously offered.
Inhilco has filed a claim against a vendor alleging that damage to the glass
and aluminum facade of Vista resulted from cleaning work performed by such
vendor. The Port Authority has advised Inhilco that if Vista is unable to
recover sufficient amounts from such vendor or the insurer of the hotel to
make the necessary repairs, it would seek to hold Inhilco responsible for the
cost. Inhilco believes it has defenses available to it in the event that such
a claim would be asserted by the Port Authority. Under the terms of the
terminated Management Agreement (see Note 8), Inhilco was released from any
obligation and claims to the Port Authority if the Vista is unable to recover
sufficient amounts from the vendor.
Vista has been named as a defendant in a legal proceeding arising out of a
labor dispute. The management of Vista believes that the ultimate resolution
of such litigation will not have a material adverse effect on Vista's
financial condition.
8. SUBSEQUENT EVENTS
Inhilco terminated their Management Agreement of the Vista with the Port
Authority effective August 31, 1995. This termination also releases and
discharges Inhilco from any obligations and claims. Under the terms of the
terminated Management Agreement, the Port Authority has the right to be
reimbursed by Inhilco for losses sustained greater than $340,000, within six
months after the termination date, as a result of the breach of certain
representations made by Inhilco.
F-49
<PAGE>
NEW YORK VISTA
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 1 THROUGH
DECEMBER 22,
-------------------------
1995 1994
----------- ------------
<S> <C> <C>
OPERATING REVENUES:
Rooms............................................. $27,420,727 $ 2,692,164
Food.............................................. 5,791,832 854,246
Beverage.......................................... 2,191,179 342,000
Other operated departments........................ 1,448,366 110,523
Other income...................................... 2,516,396 5,930,582
----------- ------------
39,368,500 9,929,515
----------- ------------
OPERATING EXPENSES:
Cost of sales:
Food............................................ 1,558,271 243,100
Beverage........................................ 447,141 52,920
Other operated departments...................... 470,169 117,816
----------- ------------
Total cost of sales............................... 2,475,581 413,836
Payroll and related expenses...................... 15,095,536 4,649,422
Provision for operating equipment................. 146,229 53,872
Other operating expenses.......................... 2,804,891 628,666
----------- ------------
20,522,237 5,745,796
----------- ------------
Gross operating income.............................. 18,846,263 4,183,719
----------- ------------
DEDUCTIONS FROM GROSS OPERATING INCOME:
General and administrative expenses............... 5,729,986 2,384,134
Marketing expenses................................ 2,587,313 912,620
Property operation, maintenance and energy costs.. 7,370,729 6,111,606
Basic Management Fee.............................. 201,577 --
----------- ------------
15,889,605 9,408,360
----------- ------------
Gross operating loss................................ 2,956,658 (5,224,641)
----------- ------------
OTHER DEDUCTIONS/(INCOME):
Real estate taxes ................................ 2,032,501 1,707,696
Credit for replacement of furniture, fixtures and
equipment........................................ -- (809,005)
Credit for capital expenditures................... (1,563,371) (207,022)
Insurance......................................... 282,053 319,332
Pre-opening and other business restoration costs.. 1,589,741 5,234,869
Interest expense.................................. 715,425 1,447,900
Other............................................. 381,520 317,935
----------- ------------
3,437,869 8,011,705
----------- ------------
Excess of expenses over revenues.................... $ (481,211) $(13,236,346)
=========== ============
</TABLE>
See accompanying notes.
F-50
<PAGE>
NEW YORK VISTA
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 1 THROUGH
DECEMBER 22,
-------------------------
1995 1994
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Excess of (expenses over revenues)/revenues over ex-
penses............................................. $ (481,211) $(13,236,346)
Adjustments to reconcile excess of (expenses over
revenues)/revenues over expenses to net cash (used
in)/provided by operating activities:
(Credit)/provision for replacement of furniture,
fixtures and equipment and capital expenditures.. (1,563,371) (1,016,027)
Expenses payable to Port Authority................ 3,009,594 2,187,767
Interest expense.................................. -- 1,447,900
Changes in operating assets and liabilities:
Accounts receivable, net........................ (2,263,237) (1,021,677)
Insurance claim receivable...................... 10,405,062 (4,089,804)
Inventories..................................... 371,646 (244,792)
Prepaid expenses and other assets............... 15,410 (15,178)
Accounts payable................................ (2,889,176) 1,662,032
Accrued liabilities............................. (983,448) 823,807
Due to other affiliated companies............... (382,444) 294,968
Deferred revenue................................ (2,367,211) --
----------- ------------
Net cash (used in)/provided by operating activi-
ties............................................... 2,871,614 (13,207,350)
----------- ------------
INVESTING ACTIVITIES
Transfer of funds from/(to) restricted cash......... 103,355 1,790,218
----------- ------------
FINANCING ACTIVITIES
Advances from Port Authority, net................... 50,380,298 13,761,490
Hotel renovation payments........................... (5,781,322) (3,892,608)
Other payments on behalf of Port Authority.......... (22,336,381) (1,294,035)
(Payments to)/advances from Inhil Co., Inc.......... (24,308,708) (60,560)
----------- ------------
Net cash provided by/(used in) financing activi-
ties............................................... (2,046,113) 8,514,287
----------- ------------
Net (decrease)/increase in cash..................... 928,856 (2,902,845)
Cash at beginning of year........................... 313,403 3,216,248
----------- ------------
Cash at end of year................................. $ 1,242,259 $ 313,403
=========== ============
</TABLE>
- --------
See accompanying notes.
F-51
<PAGE>
NEW YORK VISTA
NOTES TO FINANCIAL STATEMENTS--(UNAUDITED)
1. The accompanying combined financial statements of the New York Vista
Hotel (the "Vista") have been prepared without audit. Certain information and
footnote disclosures normally included in financial statements presented in
accordance with generally accepted accounting principles have been omitted.
The Vista believes the disclosures made are adequate to make the information
presented not misleading. However, the financial statements should be read in
conjunction with the audited financial statements and notes thereto for the
fiscal years ended December 31, 1994, 1993 and 1992 included elsewhere herein.
In the opinion of the Vista, the accompanying unaudited financial statements
reflect all adjustments (which include only normal recurring adjustments)
necessary to present fairly the results of operations and cash flows for the
period from January 1, 1995 through December 22, 1995 and the period from
January 1, 1994 through December 22, 1994. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short-term variations.
F-52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Pacific Landmark Hotel, Ltd. and Pacific Gateway, Ltd.
We have audited the accompanying combined balance sheet of Pacific Landmark
Hotel, Ltd. and Pacific Gateway, Ltd., limited partnerships, (the
"Partnerships") as of December 31, 1995, and the related combined statements
of operations, changes in partners' deficit and cash flows for the year then
ended. These financial statements are the responsibility of the General
Partners' management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of the
Partnerships as of December 31, 1994 were audited by other auditors whose
report dated March 10, 1995, except as to Note 6 to the combined financial
statements, which is as of January 5, 1996, expressed an unqualified opinion
on those statements. We also audited the adjustments described in Note 2 that
were applied to restate the 1994 financial statements. In our opinion, such
adjustments are appropriate and have been properly applied.
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 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 financial statements referred to above present fairly,
in all material respects, the financial position of Pacific Landmark Hotel,
Ltd. and Pacific Gateway, Ltd. as of December 31, 1995, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.,
February 22, 1996
F-53
<PAGE>
PACIFIC LANDMARK HOTEL, LTD. AND PACIFIC GATEWAY, LTD.
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
Property and equipment, net............................. $ 140,097 $ 144,425
Due from Marriott International, Inc.................... 419 985
Property improvement fund............................... 1,949 2,333
Restricted cash......................................... 6,560 3,536
Cash and cash equivalents............................... 38 219
--------- ---------
$ 149,063 $ 151,498
========= =========
LIABILITIES AND PARTNERS' DEFICIT
Mortgage debt........................................... $ 206,068 $ 207,195
Due to general partners or affiliates................... 53,484 48,495
Accrued deferred interest............................... 34,323 32,323
Accounts payable and accrued expenses................... 570 290
--------- ---------
Total Liabilities..................................... 294,445 288,303
--------- ---------
Partners' deficit....................................... (145,382) (136,805)
--------- ---------
$ 149,063 $ 151,498
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
PACIFIC LANDMARK HOTEL, LTD. AND PACIFIC GATEWAY, LTD.
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
REVENUES (Note 3).............................................. $35,364 $32,323
OPERATING COSTS AND EXPENSES
Interest..................................................... 22,648 19,995
Depreciation and amortization................................ 8,269 7,547
Ground rent.................................................. 5,274 4,906
Base management fee.......................................... 3,033 2,940
Property taxes............................................... 2,853 2,410
Owner's marketing and administration fee..................... 1,083 1,050
Equipment rent and other, net................................ 781 1,135
------- -------
43,941 39,983
------- -------
NET LOSS....................................................... $ 8,577 $ 7,660
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
PACIFIC LANDMARK HOTEL, LTD. AND PACIFIC GATEWAY, LTD.
COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (IN THOUSANDS)
<TABLE>
<S> <C>
Balance, December 31, 1993.......................................... $(129,145)
Net loss.......................................................... (7,660)
---------
Balance, December 31, 1994.......................................... (136,805)
Net loss.......................................................... (8,577)
---------
Balance, December 31, 1995.......................................... $(145,382)
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
PACIFIC LANDMARK HOTEL, LTD. AND PACIFIC GATEWAY, LTD.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $ (8,577) $ (7,660)
Noncash items:
Depreciation and amortization............................ 8,269 7,547
Deferred interest........................................ 6,938 6,202
Gain on disposition of assets............................ -- (64)
Changes in operating accounts:
Due from Marriott International, Inc..................... 566 (340)
Accounts payable and accrued expenses.................... 296 15
Due to general partners or affiliates.................... 34 833
-------- --------
Cash provided by operating activities.................. 7,526 6,533
-------- --------
INVESTING ACTIVITIES
Additions to property and equipment....................... (3,941) (1,603)
Change in restricted cash................................. (3,024) (535)
Change in property improvement fund....................... 384 (1,572)
-------- --------
Cash used in investing activities...................... (6,581) (3,710)
-------- --------
FINANCING ACTIVITIES
Principal payments on mortgage debt....................... (1,126) (2,756)
-------- --------
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS .......... (181) 67
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............. 219 152
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR................... $ 38 $ 219
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest........................... $15,414 $13,719
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE>
PACIFIC LANDMARK HOTEL, LTD. AND PACIFIC GATEWAY, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Pacific Landmark Hotel, Ltd. ("Landmark"), a California limited partnership,
was formed on October 2, 1981 to develop, construct and own a 681-room hotel
(Tower I) and an adjacent marina. Upon completion of construction, hotel
operations for Tower I commenced on March 15, 1984. On May 1, 1985, Landmark
completed construction of an $11 million conference center. The conference
center is adjacent to Tower I and provides additional meeting and exhibition
space for the hotel.
Pacific Gateway, Ltd. ("Gateway"), a California limited partnership, was
formed on February 28, 1984 to develop, construct and own an adjacent 683-room
hotel (Tower II). On December 15, 1987, construction was completed and the
hotel commenced operations (Landmark and Gateway are collectively referred to
as the "Partnerships"). The accompanying combined financial statements include
Landmark and Gateway.
Tower I, Tower II and the conference center are collectively referred to as
(the "Hotel"). The Hotel is located near downtown San Diego, California on bay
front property. The Hotel is managed as part of the Marriott hotel system by
Marriott International, Inc. (the "Manager").
Host Marriott Corporation, through an affiliate, owns a 5% general partner
interest in the Partnerships. On December 29, 1995, Host Marriott
Corporation's operations were divided into two separate companies: Host
Marriott Corporation ("Host Marriott") and Host Marriott Services Corporation.
Entities controlled by Douglas F. Manchester, the developer of the Hotel, own
a 5% general partner interest in the Partnerships and the remaining limited
partner interests. The developer is the managing general partner.
Partnership Allocations and Distributions
For financial reporting purposes, net income and net losses for the
Partnerships are allocated among the partners based upon their stated
interests in cash available for distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnerships' records are maintained on the accrual basis of accounting
and their fiscal years coincide with the calendar year.
Use of Estimates
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.
Basis of Presentation
The Partnerships changed the presentation of its combined balance sheet to
an unclassified format in order to be consistent with current industry
practice. The 1994 amounts were conformed to be consistent with the 1995
presentation.
F-58
<PAGE>
PACIFIC LANDMARK HOTEL, LTD. AND PACIFIC GATEWAY, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Revenues and Expenses
The Partnerships also changed the presentation of operating revenues and
expenses in the accompanying combined statement of operations. Revenues in the
new presentation represent house profit from the Hotel because the
Partnerships have delegated substantially all of the operating decisions
related to the generation of house profit from the Hotel to the Manager. House
profit reflects the net revenues flowing to the Partnerships as property
owners and represents hotel operating results less property-level expenses,
excluding depreciation and amortization, base management fees, real and
personal property taxes, ground and equipment rent, insurance and certain
other costs, which are classified as operating costs and expenses (see Note
3). There was no effect in any period on reported net loss, net loss per
limited partner unit or partners' deficit as a result of this presentational
change. The 1994 combined statement of operations was conformed to be
consistent with the 1995 presentation.
New Statements of Financial Accounting Standards
The Partnerships are required to adopt Statements of Financial Accounting
Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" no later than its year ending
December 31, 1996. The Partnerships do not expect that the adoption of SFAS
No. 121 will have a material effect on its combined financial statements.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives of the
assets:
<TABLE>
<S> <C>
Building and improvements................................... 40 years
Furniture and equipment..................................... 3 to 20 years
Marina...................................................... 20 years
</TABLE>
Cash and Cash Equivalents
The Partnerships consider all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents.
Income Taxes
Provisions for Federal and state income taxes have not been made in the
accompanying combined financial statements since the Partnerships do not pay
income taxes but rather allocate profits and losses to the individual
partners. Significant differences exist between the net loss reported for
financial reporting purposes and the net loss as reported in the Partnerships'
tax returns. These differences are primarily due to the use, for income tax
purposes, of accelerated depreciation methods and shorter depreciable lives of
assets.
F-59
<PAGE>
PACIFIC LANDMARK HOTEL, LTD. AND PACIFIC GATEWAY, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. REVENUES
Partnership revenues consist of Hotel operating results for the two years
ended December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
HOTEL SALES
Rooms...................................................... $52,072 $49,272
Food and beverage.......................................... 25,863 26,164
Other...................................................... 8,719 8,561
------- -------
86,654 83,997
------- -------
HOTEL EXPENSES
Departmental Direct Costs
Rooms..................................................... 10,654 10,461
Food and beverage......................................... 19,449 20,052
Other hotel operating expenses............................. 21,187 21,161
------- -------
51,290 51,674
------- -------
REVENUES.................................................... $35,364 $32,323
======= =======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Building and improvements................................ $176,890 $176,890
Furniture and equipment.................................. 23,579 19,638
Marina................................................... 6,379 6,379
-------- --------
206,848 202,907
Less accumulated depreciation and amortization........... (66,751) (58,482)
-------- --------
$140,097 $144,425
======== ========
</TABLE>
Substantially all the property and equipment is pledged as security for the
mortgage debt described in Note 6.
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the combined Partnerships' long-term debt to
third party and long-term debt payable accrued interest and amounts due to
affiliates of general partners are shown below. All other financial
instruments are estimated to be equal to their carrying amounts.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995 AS OF DECEMBER 31, 1994
------------------------ ------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ------------ ----------- ------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Instruments..... $ 293,875 $ 220,000 $ 288,013 $ 189,134
</TABLE>
The estimated fair value of financial instruments is based on scheduled
future debt service payments discounted at estimated market rates as of
December 31, 1994. As of December 31, 1995, fair value of financial
instruments is based upon factors arising from the Partnership restructuring
described in Note 10.
F-60
<PAGE>
PACIFIC LANDMARK HOTEL, LTD. AND PACIFIC GATEWAY, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. DEBT
Mortgage Debt
On October 7, 1987, the Partnerships signed Loan Modification Agreements
with a third party lender (the "Loan Agreements") which modified the terms of
the original Landmark and Gateway mortgage loans of $117.4 million and $90.0
million, respectively. Under the Loan Agreements, from October 1992 through
loan maturity on September 30, 1997, the mortgage loans bear interest at a
rate of the lesser of the Eleventh District Average Cost of Funds Index plus
2.5 percentage points or 11% per annum. Monthly payments represent the amount
necessary to amortize the outstanding principal balances over a thirty year
period. Interest is accrued on the amount by which the accrued interest on the
entire unpaid balance of the mortgages exceeds the interest paid. Upon sale or
refinancing, the lender may receive the greater of the accrued deferred
interest or a portion of the net proceeds for sale or refinancing. The
mortgage debt is collaterized by first deeds of trust on all the property and
equipment of the Hotel and an assignment of an operating agreement.
Upon the execution of the Loan Agreements, Host Marriott provided
foreclosure guarantees of $90.0 million on the Gateway mortgage loan and $29.4
million on the Landmark mortgage loan. Pursuant to the foreclosure guarantees,
amounts will be payable upon a foreclosure of the Hotel and only in the event
that proceeds from the foreclosure sale are less than the guaranteed amounts.
First mortgage debt maturities, at December 31, 1995 are (in thousands):
<TABLE>
<S> <C>
1996............................................................. $ 1,454
1997............................................................. 204,614
--------
$206,068
========
</TABLE>
Notes to General Partners or Affiliates
The Partnerships borrowed $10 million from an affiliate of the developer.
The loan bears interest at a rate of 10% per annum compounded annually.
Minimum annual payments ranging from $250,000 to $500,000 were to begin in
1993 and are to be applied first to unpaid interest. As of December 31, 1995,
no payments have been made. Unpaid principal and accrued interest are due in
December 1997. As of December 31, 1995 and 1994, a total of $12,852,000 and
$10,775,000, respectively, of interest had accrued. The note is collaterized
by second deeds of trust on the Partnerships' property.
The Partnerships borrowed $12 million from an affiliate of Host Marriott.
The loan bears interest at an annual compounded rate of 10% per annum with
principal and accrued interest due in October 1997 or upon a refinancing, sale
or other transfer of interest. As of December 31, 1995 and 1994, a total of
$14,342,000 and $11,947,000, respectively, of interest had accrued. The notes
are collateralized by third deeds of trust on the Partnerships' property.
NOTE 7. MANAGEMENT AGREEMENT
In 1987, the Partnerships entered into hotel management agreements (the
"Agreements") with Marriott International Inc. ("MII") to manage the Hotel for
an initial term of 30 years, expiring in 2017. The Agreements automatically
renew for three consecutive periods of ten years. MII earns a base management
fee equal to 3.5% of gross sales. MII also is entitled to an incentive
management fee equal to 30% of available cash flow, as defined. As of December
31, 1995, no incentive management fees have been earned or paid.
F-61
<PAGE>
PACIFIC LANDMARK HOTEL, LTD. AND PACIFIC GATEWAY, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the terms of the Agreements, MII is required to furnish the
Hotel with certain services ("Chain Services") which are generally provided on
a central or regional basis to all hotels in the Marriott full service 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 full service hotels, managed, owned or leased by MII
or its subsidiaries. In addition, the Hotels participate in Marriott's Honored
Guest Awards Program ("HGA"). The cost of this program is charged to all
hotels in the Marriott full service hotel system based upon the HGA sales at
each hotel. The total amount of Chain Services and HGA costs were $2,396,000
and $2,201,000 in 1995 and 1994, respectively.
Pursuant to the terms of the Agreements, the Partnerships are required to
provide MII with working capital and supplies to meet the operating needs of
the Hotels. MII converts cash advanced by the Partnerships into other forms of
working capital consisting primarily of operating cash, inventories, and trade
receivables and payables which are maintained and controlled by MII. Upon
termination of the Agreements, the working capital and supplies will be
returned to the Partnerships. The individual components of working capital and
supplies controlled by MII are not reflected in the Partnerships' combined
balance sheet. As of December 31, 1995 and 1994, amounts have been advanced to
MII for working capital and supplies which are included in Due from Marriott
International, Inc. in the accompanying combined balance sheet.
The Agreements provide for the establishment of a property improvement fund
to pay for replacements and renewals of the Hotel's building, furniture and
equipment. Contributions to the fund are based on a percentage of gross Hotel
sales. Contributions to the fund for the Partnerships were 4% in 1995 and
1994.
NOTE 8. GROUND LEASE
The Partnerships lease the land from the San Diego Unified Port District on
which the Hotel and marina are located. The initial term of the leases expire
on March 31, 2032 with an option to extend the leases to March 31, 2048. Upon
expiration or termination of the leases, title to the Hotel and all
improvements revert to the lessor. The leases require contingent rents based
on specified percentages of gross Hotel sales. Total minimum rents through
March 2007 under existing leases at December 31, 1995 were scheduled to be $1
million per annum. See Note 10.
Minimum annual rent for the period April 2007 through March 31, 2048 is to
be at least 75% of the average contingent rents during the last three years of
the previous rental period. Contingent rentals are based on varying percentage
of total revenues. Rent expense for fiscal year 1995 and 1994 was $5.2 million
and $4.9 million, respectively.
NOTE 9. LITIGATION
In December 1992, the Partnerships filed a complaint against Marriott
International, Inc. and Host Marriott alleging, among other things, breach of
contract and breach of covenant of good faith and fair dealing. The defendants
filed a cross-complaint for damages alleging breach of contract, defamation
and other charges. Subsequent to year end, the Partnerships settled all
litigation (see Note 10). Accordingly, no provision for any liability has been
made in the accompanying combined financial statements.
NOTE 10. SUBSEQUENT EVENT
On January 10, 1996 (the "Effective Date"), the Partnerships were
restructured and the Landmark partnership ceased to exist and all of its
assets and properties were merged and transferred into the Gateway partnership
(the "Restructured Partnership"). On the Effective Date, a subsidiary of Host
Marriott paid $13.5 million in cash and contributed as equity certain notes
receivables from the partnerships and one of the partners.
F-62
<PAGE>
PACIFIC LANDMARK HOTEL, LTD. AND PACIFIC GATEWAY, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In return, a Host Marriott subsidiary became a sole 10% managing general
partner and another Host Marriott subsidiary became a 41% limited partner. The
remaining 49% limited partnership interests continue to be held by entities
controlled by Douglas Manchester.
In conjunction with the restructuring, the mortgage debt was extended and
restructured into two loans, one in the principal amount of $150 million
("Loan A") and the other in the principal amount of $56.1 million ("Loan B").
Both of these loans mature on January 31, 2006. Loan A bears an interest rate
equal to the six month London interbank offered rate ("LIBOR") plus 2.5
percentage points. Interest on Loan B accrues at LIBOR plus 2.75 percentage
points. Loan A and Loan B amortize based on a 25 and 15 year schedule,
respectively. As a condition to the loan restructuring, MII provided a $15
million debt service guarantee on Loan B. As additional security, the
Restructured Partnership pledged a $10 million debt service reserve as
security for obligations under Loan B. All accrued deferred interest on the
old mortgage debt as of the Effective Date, was waived by the lender.
On January 17, 1996, the Restructured Partnership amended and combined the
hotel management agreements into one agreement. The restructured hotel
management agreement expires on December 31, 2010. Beginning in 1996, MII
earns a base management fee equal to 3.0% of gross Hotel sales, excluding
marina, parking and retail revenues, of which 2% of gross Hotel sales, shall
be deferred in any fiscal year that cash flow is less than debt service on
Loan A and Loan B. Any base management fees not paid in a fiscal year are
waived. MII also is entitled to an incentive management fee equal to 10% of
available cash flow, as defined, over $23 million. Incentive management fees
earned but not paid are deferred and payable in subsequent years, without
interest, from 50% of net refinancing or sales proceeds. The required
contribution to the property improvement fund will equal 4% of gross Hotel
sales through 1997 and 5% thereafter of which 1% of gross Hotel sales is
subordinated to debt service on Loan A and Loan B. Fund contributions which
are deferred may be paid in subsequent years based on the cash flow of the
Restructured Partnership.
As a result of the Partnership restructuring, the leases with the San Diego
Unified Port District were amended and combined into one ground lease. The
restructured term expires on November 30, 2061. The lease requires annual
rents through November 30, 2006 of the greater of $3.8 million or varying
percentages of certain hotel sales.
F-63
<PAGE>
INDEPENDENT AUDITORS' REPORT
The General Partners
Pacific Landmark Hotel, Ltd. and Pacific Gateway, Ltd.:
We have audited the combined financial statements of Pacific Landmark Hotel,
Ltd. and Pacific Gateway, Ltd. (limited partnerships), as listed in the
accompanying index to financial statements. These combined financial
statements are the responsibility of the Partnerships' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Pacific
Landmark Hotel, Ltd. and Pacific Gateway, Ltd. as of December 31, 1994 and
1993, and the results of their operations and their cash flows for each of the
years in the two-year period ended December 31, 1994, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
San Diego, California
March 10, 1995, except as to note 6
to the combined financial statements,
which is as of January 5, 1996
F-64
<PAGE>
PACIFIC LANDMARK HOTEL, LTD.
AND PACIFIC GATEWAY, LTD.
(LIMITED PARTNERSHIPS)
COMBINED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 1,136,000 $ 227,000
Cash--restricted (note 2)..................... 6,016,000 3,821,000
Accounts receivable, less allowance for
doubtful accounts of $75,000 in 1994 and
$67,000 in 1993.............................. 2,347,000 2,876,000
Inventories................................... 550,000 690,000
Prepaid expenses and other.................... 61,000 81,000
------------- -------------
Total current assets............................ 10,110,000 7,695,000
Property and equipment, net (notes 3 and 4)..... 144,425,000 150,369,000
China, glassware, silver and linen.............. 1,437,000 1,342,000
Other assets.................................... 70,000 70,000
------------- -------------
$ 156,042,000 $ 159,476,000
============= =============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
Bank overdraft................................ $ -- $ 619,000
Accounts payable.............................. 2,178,000 1,937,000
Accrued expenses.............................. 1,664,000 1,933,000
Current portion, long-term debt payable to
third party (note 4)......................... 2,630,000 2,648,000
Current portion, due to affiliates of general
partners (note 5)............................ 3,773,000 1,967,000
Advance deposits.............................. 992,000 949,000
------------- -------------
Total current liabilities....................... 11,237,000 10,053,000
Long-term debt payable to third party, net of
current portion (note 4)....................... 204,565,000 207,302,000
Long-term debt payable to a general partner and
an affiliate of the general partners (note 4).. 22,000,000 22,000,000
Accrued interest (note 4)....................... 32,323,000 30,609,000
Due to affiliates of general partners, net of
current portion (note 5)....................... 22,722,000 18,657,000
------------- -------------
Total liabilities............................... 292,847,000 288,621,000
Partners' capital (deficit)..................... (136,805,000) (129,145,000)
------------- -------------
Commitments and contingencies (note 7)
Total liabilities and partners' capital......... $ 156,042,000 $ 159,476,000
============= =============
</TABLE>
See accompanying notes to combined financial statements.
F-65
<PAGE>
PACIFIC LANDMARK HOTEL, LTD.
AND PACIFIC GATEWAY, LTD.
(LIMITED PARTNERSHIPS)
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
----------- ------------
<S> <C> <C>
REVENUE............................................. $84,163,000 $ 82,693,000
----------- ------------
DEPARTMENTAL EXPENSES:
Cost of sales..................................... 12,012,000 11,788,000
Payroll and related expenses...................... 24,963,000 24,747,000
Other............................................. 4,387,000 4,780,000
----------- ------------
Total departmental expenses..................... 41,362,000 41,315,000
----------- ------------
Income from operating departments................... 42,801,000 41,378,000
----------- ------------
Undistributed operating expenses:
Related party management fees..................... 2,940,000 2,891,000
Related party administration and marketing fees... 1,050,000 1,032,000
Related party reimbursements...................... 3,523,000 3,786,000
Third-party....................................... 8,151,000 8,389,000
----------- ------------
15,664,000 16,098,000
----------- ------------
Income before fixed charges and interest
income......................................... 27,137,000 25,280,000
----------- ------------
FIXED CHARGES:
Property taxes.................................... 2,410,000 2,938,000
Leases (note 7a).................................. 4,948,000 4,801,000
Interest (including $4,309,000 and $3,868,000 in
1994 and 1993, respectively, relating to
affiliates)...................................... 19,995,000 20,680,000
Insurance......................................... 98,000 112,000
Depreciation and amortization..................... 7,547,000 7,790,000
----------- ------------
Total fixed charges............................. 34,998,000 36,321,000
----------- ------------
Loss before interest income......................... (7,861,000) (11,041,000)
Interest income..................................... 201,000 104,000
----------- ------------
Net loss........................................ $(7,660,000) $(10,937,000)
=========== ============
</TABLE>
See accompanying notes to combined financial statements.
F-66
<PAGE>
PACIFIC LANDMARK HOTEL, LTD.
AND PACIFIC GATEWAY, LTD.
(LIMITED PARTNERSHIPS)
COMBINED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<S> <C>
Balance (deficit), December 31, 1992............................ $(118,208,000)
Net loss........................................................ (10,937,000)
-------------
Balance (deficit), December 31, 1993............................ (129,145,000)
Net loss........................................................ (7,660,000)
-------------
Balance (deficit), December 31, 1994............................ $(136,805,000)
=============
</TABLE>
See accompanying notes to combined financial statements.
F-67
<PAGE>
PACIFIC LANDMARK HOTEL, LTD.
AND PACIFIC GATEWAY, LTD.
(LIMITED PARTNERSHIPS)
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(7,660,000) $(10,937,000)
Adjustments to reconcile net loss to net cash pro-
vided by operating activities:
Depreciation and amortization................... 7,547,000 7,790,000
Gain on retirement of fixed assets.............. (64,000) (32,000)
Changes in assets and liabilities:
(Increase) decrease in cash--restricted....... (2,195,000) 3,450,000
Decrease in accounts receivable, net.......... 529,000 496,000
Decrease in inventories....................... 140,000 40,000
Decrease in prepaid expenses and other as-
sets......................................... 20,000 443,000
Increase in china, glassware, silver and lin-
en........................................... (95,000) (159,000)
Increase in accounts payable.................. 241,000 19,000
Increase (decrease) in accrued expenses....... (269,000) 407,000
Increase in advance deposits.................. 43,000 288,000
Increase in accrued interest.................. 1,714,000 2,138,000
Increase in due to affiliates................. 5,871,000 4,078,000
----------- ------------
Net cash provided by operating activities....... 5,822,000 8,021,000
----------- ------------
Cash flows from investing activities:
Capital expenditures.............................. (1,603,000) (4,622,000)
Proceeds from sale of property and equipment...... 64,000 133,000
----------- ------------
Net cash used in investing activities........... (1,539,000) (4,489,000)
----------- ------------
Cash flows from financing activities:
Principal payments on long-term debt payable to
third party...................................... (2,755,000) (2,954,000)
Decrease in bank overdraft........................ (619,000) (457,000)
----------- ------------
Net cash used in financing activities........... (3,374,000) (3,411,000)
----------- ------------
Net increase in cash and cash equivalents........... 909,000 121,000
Cash and cash equivalents at beginning of year...... 227,000 106,000
----------- ------------
Cash and cash equivalents at end of year............ $ 1,136,000 227,000
=========== ============
Supplemental disclosure of cash flow information:
Cash paid for interest............................ $13,719,000 $ 14,250,000
=========== ============
</TABLE>
See accompanying notes to combined financial statements.
F-68
<PAGE>
PACIFIC LANDMARK HOTEL, LTD.
AND PACIFIC GATEWAY, LTD.
(LIMITED PARTNERSHIPS)
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1993
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Pacific Landmark Hotel, Ltd. (Landmark), a California limited partnership,
was formed on October 2, 1981 to develop, construct and own a 681-room hotel
(Tower I) and an adjacent Marina. Upon completion of construction, hotel
operations for Tower I commenced on March 15, 1984. On May 1, 1985, Landmark
completed construction of an $11 million conference center. The conference
center is adjacent to Tower I and provides additional meeting and exhibition
space for the hotel.
Pacific Gateway, Ltd. (Gateway), a California limited partnership, was
formed on February 28, 1984 to develop, construct and own a 683-room hotel
(Tower II) adjacent to Tower I. On December 15, 1987, construction was
completed and the hotel commenced operations (Landmark and Gateway are
collectively referred to as the "Partnerships" and Tower I, Tower II and the
Marina are collectively referred to as the "Hotel").
The Hotel is located near downtown San Diego, California, on bay front
property leased from the San Diego Unified Port District. The Partnerships
have entered into an agreement with Marriott International, Inc. (Marriott) to
operate and manage the Hotel (Note 5). Host Marriott Corporation, an affiliate
of Marriott, owns a 5% general partnership interest in the Partnerships. The
developer of the Hotel is the other general partner.
The combined financial statements include the Partnerships. The general
partners, through their affiliates, hold general and limited partnership
interests aggregating effectively 100% of the Partnerships. Significant
intercompany accounts and transactions have been eliminated in the combined
financial statements.
Inventories
Food, beverage and operating supplies inventories are stated at the lower of
cost or market. Food and beverage inventories are determined using the first-
in, first-out method. Operating supplies inventories are determined using the
average cost method.
Statements of Cash Flows
For purposes of the statements of cash flows, the Partnerships consider all
highly liquid debt instruments with an original maturity date of three months
or less to be cash equivalents.
China, Glassware, Silver and Linen
China, glassware and silver are stated at the lower of cost or market,
determined on the first-in, first-out method. The initial supply of linen has
been capitalized; subsequent replacements are expensed.
Property and Equipment and Depreciation
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from five to 40 years.
Provision for Impairment Losses
Provision is made for impairment losses if estimated future operating cash
flows (undiscounted and without interest charges) over a long-term holding
period, plus estimated disposition proceeds (undiscounted), are less then
current book value. There was no such provision for 1994 or 1993.
F-69
<PAGE>
PACIFIC LANDMARK HOTEL, LTD.
AND PACIFIC GATEWAY, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
No provision for federal or state income taxes has been made in the
accompanying combined financial statements as the partners are individually
responsible for reporting income or loss based upon their respective share of
the Partnerships' income and expenses as reported for income tax purposes.
Partnership Allocations of Net Loss
According to the partnership agreements, net losses for Gateway are
allocated 99% and 1% to general and limited partnership interests,
respectively. Net losses for Landmark are allocated 95% and 5% to general and
limited partnership interests, respectively.
Net Loss Per Unit
The Partnerships do not report net loss per unit as the partners' interests
are not represented by units.
Fiscal Year
The Partnerships' fiscal years end on December 31; however, the combined
financial statements include the Hotel's operations through the Friday closest
to December 31, in order to conform to the operator's fiscal year.
(2) RESTRICTED CASH
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Cash reserved for payment of debt service (note 4)... $3,536,000 $3,001,000
Cash reserved for replacement of furniture, fixtures
and equipment....................................... 2,265,000 775,000
Cash reserved for payment of property taxes.......... 215,000 45,000
---------- ----------
$6,016,000 $3,821,000
========== ==========
</TABLE>
In accordance with the partnership agreements and the terms of notes payable
to bank (Note 4), InterHotel Company, Ltd., a limited partner of the
Partnerships, has deposited approximately $6,500,000 with the lender to fund
debt service requirements.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Building................ $176,890,000 $176,113,000
Furniture, fixtures and
equipment.............. 19,638,000 19,029,000
Marina.................. 6,379,000 6,379,000
------------ ------------
202,907,000 201,521,000
Less accumulated
depreciation and
amortization........... (58,482,000) (51,152,000)
------------ ------------
$144,425,000 $150,369,000
============ ============
</TABLE>
Virtually all of the Partnerships' property and equipment is collateral for
notes payable (Note 4).
F-70
<PAGE>
PACIFIC LANDMARK HOTEL, LTD.
AND PACIFIC GATEWAY, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(4) LONG-TERM DEBT
The following is a summary of long-term debt payable to third party:
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Notes payable to bank with monthly payments
sufficient to fully amortize the unpaid principal
balance over 360 months with interest at the
lesser of the Eleventh District Average Cost of
Funds Index plus 2 1/2% or 11% per annum adjusted
monthly. At December 31, 1994, the effective
interest rate was approximately equal to 6.9%.
The monthly payment amount is adjusted annually.
Interest is accrued on the amount by which the
accrued interest on the entire unpaid balance of
the loan exceeds the interest paid. Upon sale or
refinancing, the bank may receive the greater of
the accrued deferred interest or a portion of the
net proceeds from sale or refinancing. Unpaid
principal is due in 1997. The notes are
collateralized by first deeds of trust on the
Partnerships' property and equipment and an
assignment of the joint operating agreement. The
Partnerships and the bank are currently in
discussions regarding differing interpretations
of certain sections of the loan modification
agreements regarding the mechanisms and timing of
access to restricted cash held as collateral by
the bank after October 1992 (Note 2). The
Partnerships have paid late charges of $512,000
which they are currently disputing............... $207,195,000 $209,950,000
Less current portion............................ (2,630,000) (2,648,000)
------------ ------------
Long-term portion............................... $204,565,000 $207,302,000
============ ============
</TABLE>
The following is a summary of long-term debt payable to a general partner and
an affiliate of the general partners:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Note payable to an entity originally established by an
affiliate of the developer-general partner. Principal
and interest from January 1993 through December 1997
accrue interest at 10% per annum compounded annually.
Unpaid principal and accrued interest are due in
December 1997. Minimum annual payments ranging from
$250,000 to $500,000 were to begin in 1993 and are to
be applied first to unpaid interest. No payments have
been made. The note is collateralized by second deeds
of trust on the Partnerships' property............... $10,000,000 $10,000,000
Notes payable to a general partner (Marriott
affiliate), with interest compounded annually at 10%
per annum with all principal and interest due in 1997
or upon refinancing, sale or other transfer of
interest. The notes are collateralized by third deeds
of trust on the Partnerships' property............... 12,000,000 12,000,000
----------- -----------
$22,000,000 $22,000,000
=========== ===========
</TABLE>
Long-term debt maturities, based on the effective interest rate at December
31, 1994, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1995.......................................................... $ 2,630,000
1996.......................................................... 2,811,000
1997.......................................................... 223,754,000
------------
$229,195,000
============
</TABLE>
F-71
<PAGE>
PACIFIC LANDMARK HOTEL, LTD.
AND PACIFIC GATEWAY, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(5) RELATED PARTY TRANSACTIONS
In 1987, the Partnerships entered into management contracts with Marriott to
manage and operate Towers I and II. The initial terms of the contracts expire
in 2017 and automatically renew for three consecutive periods of ten years,
and give Marriott first right of refusal on any continued association with the
hotel subsequent to 2017. The agreements provide for annual compensation of 3
1/2% of gross revenue and 30% of available cash flow as defined. Management
fees paid to Marriott in 1994 and 1993 amounted to $2,940,000 and $2,891,000,
respectively.
In addition, during the course of normal operations various supplies,
services and other operating expenses are purchased from or provided by
Marriott and its affiliates.
Amounts included in due to affiliates of general partners at December 31,
1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Operational receivables and other................ $ (851,000) $(1,390,000)
Accrued interest on notes to affiliates.......... 22,722,000 18,657,000
Accrued interest on unpaid administration fees to
developer-general partner....................... 528,000 284,000
Management, administration and marketing fees.... 4,096,000 3,073,000
----------- -----------
26,495,000 20,624,000
Less current portion............................. (3,773,000) (1,967,000)
----------- -----------
$22,722,000 $18,657,000
=========== ===========
</TABLE>
Payments accrued or made to related parties and included in operations for
the years ended December 31, 1994 and 1993 are summarized as follows:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Management fees and reimbursements for operating costs
paid or accrued to Marriott or its affiliates........ $6,463,000 $6,677,000
Administration fees paid or accrued to the developer-
general partner or its affiliates.................... 840,000 826,000
Marketing fees paid or accrued to the developer-
general partner or its affiliates.................... 210,000 206,000
Remodeling fees paid to affiliate of the developer-
general partner...................................... 26,000 200,000
Interest on notes payable to affiliates............... 4,039,000 $3,868,000
</TABLE>
Payments, not included in the above schedule, were made in 1994 and 1993 to
an affiliate of Marriott in order to purchase food, miscellaneous fixed assets
and other inventory.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure includes estimated fair value information at
December 31, 1994 and 1993, as required by FASB Statement 107. Such
information, which pertains to the combined Partnerships' financial
instruments, is based on the requirements set forth in that statement and does
not purport to represent the aggregate net fair value of the Partnerships.
F-72
<PAGE>
PACIFIC LANDMARK HOTEL, LTD.
AND PACIFIC GATEWAY, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following methods and assumptions were used by the Partnerships in
estimating such values:
. The fair values of the Partnerships' long-term debt payable to third
party, long-term debt payable to a general partner and an affiliate of
the general partners, accrued interest, and amounts due to affiliates of
general partners were determined based on the timing of future cash
flows, market interest rates, the relationship of the parties and the
nature of the financial instruments.
The estimated fair values of the combined Partnerships' long-term debt
payable to third party, long-term debt payable to a general partner and an
affiliate of the general partners, accrued interest and amounts due to
affiliates of general partners at December 31, 1994 and 1993 are as
follows:
<TABLE>
<CAPTION>
1994 1993
--------------------------------- -------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C>
$288,013,000 $189,134,000 $283,183,000 $190,149,000
</TABLE>
. For all other financial instruments, the carrying values reasonably
approximate fair values at December 31, 1994 and 1993.
(7) COMMITMENTS AND CONTINGENCIES
(a) Ground Lease Commitments
Landmark is the lessee in a long-term ground lease on which Tower I and the
Marina are located. Gateway has entered into a similar lease agreement for
Tower II. Both leases expire in April 2048 and require contingent rents based
on a percentage of gross income. Minimum annual rents in each of the next five
years and in the aggregate thereafter (through March 2007) are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, LANDMARK GATEWAY TOTAL
------------------------ ---------- ---------- -----------
<S> <C> <C> <C>
1995....................................... $ 600,000 $ 400,000 $ 1,000,000
1996....................................... 600,000 400,000 1,000,000
1997....................................... 600,000 400,000 1,000,000
1998....................................... 600,000 400,000 1,000,000
1999....................................... 600,000 400,000 1,000,000
Thereafter................................. 4,800,000 3,200,000 8,000,000
---------- ---------- -----------
Total.................................... $7,800,000 $5,200,000 $13,000,000
========== ========== ===========
</TABLE>
Minimum annual rent for the period April 2007 through April 2048 is to be at
least 75% of the average "percentage rental" paid, as defined, during the last
three accounting years of the previous rental period.
Rent expense was $4,948,000 and $4,801,000 in 1994 and 1993, respectively,
which included contingent rents of $3,948,000 and $3,801,000 in 1994 and 1993,
respectively.
(b) Litigation
In December 1992, the Partnerships filed a complaint against Marriott and
other defendants alleging, among other things, breach of contract and breach
of covenant of good faith and fair dealing. The defendants have filed a cross-
complaint for damages alleging breach of contract, defamation, and other
charges. Based in part on the
F-73
<PAGE>
PACIFIC LANDMARK HOTEL, LTD.
AND PACIFIC GATEWAY, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
advice of outside counsel, management does not believe that the cross-
complaint will have a material impact on the Partnerships' combined financial
condition or results of operations. Accordingly, no provision for any
liability has been made in the accompanying combined financial statements.
The Partnerships are involved in various other legal proceedings which are
routine litigation incident to their business. In the opinion of management of
the Partnerships, none of the other pending litigation will have a material
adverse effect upon the Partnerships' combined financial position or results
of operations.
F-74
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of the San Antonio Marriott Riverwalk:
We have audited the accompanying balance sheet of the San Antonio Marriott
Riverwalk, as defined in Note 1, as of December 30, 1994, and the related
statements of operations and cash flows for the year ended December 30, 1994.
These financial statements are the responsibility of the management of the
Parent, as defined in Note 1. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the San Antonio Marriott
Riverwalk (as defined in Note 1) as of December 30, 1994, and its operations
and cash flows for the year then ended, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Washington, D.C.
August 18, 1995
F-75
<PAGE>
SAN ANTONIO MARRIOTT RIVERWALK
BALANCE SHEET
AS OF DECEMBER 30, 1994 (IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net.......................................... $26,310
Property improvement fund............................................ 2,159
Accounts receivable.................................................. 875
Other assets......................................................... 557
-------
$29,901
=======
LIABILITIES AND NET ADVANCES FROM PARENT
Mortgage debt........................................................ $19,400
Accounts payable and accrued expenses................................ 828
-------
Total liabilities.................................................... 20,228
Net advances from Parent............................................. 9,673
-------
$29,901
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE>
SAN ANTONIO MARRIOTT RIVERWALK
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 30, 1994 (IN THOUSANDS)
<TABLE>
<S> <C>
REVENUE................................................................ $10,196
-------
OPERATING COSTS AND EXPENSES
Depreciation and amortization........................................ 2,160
Base and incentive management fees................................... 2,030
Property taxes....................................................... 1,201
Rent, insurance and other............................................ 588
-------
Total operating costs and expenses................................. 5,979
-------
OPERATING PROFIT BEFORE INTEREST....................................... 4,217
Interest expense....................................................... 2,152
-------
NET INCOME............................................................. $ 2,065
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE>
SAN ANTONIO MARRIOTT RIVERWALK
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 30, 1994 (IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net Income............................................................ $ 2,065
Depreciation and amortization......................................... 2,160
Working capital changes:
Accounts receivable.................................................. 67
Other assets......................................................... (56)
Accounts payable and accrued expenses................................ (436)
-------
Cash provided by operations........................................... 3,800
-------
INVESTING ACTIVITIES
Additions to property and equipment................................... (3,482)
Change in property improvement fund................................... (1,204)
-------
Cash used in investing activities..................................... (4,686)
-------
FINANCING ACTIVITIES
Change in net advances from Parent.................................... 2,068
Proceeds from mortgage debt........................................... 19,400
Repayments of mortgage debt........................................... (20,388)
Financing costs....................................................... (194)
-------
Cash provided by financing activities................................. 886
-------
CHANGE IN CASH AND CASH EQUIVALENTS.................................... --
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......................... --
-------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................... $ --
=======
SUPPLEMENTAL INFORMATION
Cash paid for interest................................................ $ 2,207
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE>
SAN ANTONIO MARRIOTT RIVERWALK
NOTES TO FINANCIAL STATEMENTS
NOTE 1.
Basis of Presentation
On June 16, 1995 ("Sale Date"), HMH Properties, Inc., a wholly-owned
indirect subsidiary of Host Marriott Corporation, acquired the San Antonio
Marriott Riverwalk (the "Hotel"), located in San Antonio, Texas, from MRI
Business Property Fund Ltd., II (the "Parent"), a California limited
partnership, for approximately $50 million. The Hotel was part of a portfolio
of properties owned by the Parent. The Hotel, with approximately 500 rooms, is
operated by Marriott International, Inc. as a part of the Marriott Hotels,
Resorts and Suites full-service hotel system.
The Hotel's purchase price at the Sale Date was in excess of its carrying
value. No adjustments related to the resultant sale are reflected in the
accompanying statements.
These financial statements present the financial position, results of
operations and cash flows related to the business of the San Antonio Marriott
Riverwalk which is a lesser component of the Parent for all periods presented.
The Parent's historical basis in assets and liabilities of the Hotel have been
carried over. Changes in Net Advances from Parent represent the operating
results of the Hotel adjusted for net cash transferred between the Parent and
the Hotel.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Hotel's records are maintained on the accrual basis of accounting and
its fiscal year ends on the Friday nearest to December 31.
Revenues
Revenue represents house profit, which is the Hotel's 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 (see Note 3).
Property and Equipment
Property and equipment is recorded at cost. Replacements and improvements
are capitalized as incurred. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, generally 30 years for
buildings and 5 to 6 years for furniture and equipment.
Cash and Cash Equivalents
The Hotel considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents. At December 30,
1994, the Hotel's outstanding checks were in excess of then available cash
balances by $126,000 and have been classified as accounts payable and accrued
expenses in the accompanying balance sheet.
Deferred Financing Costs
Deferred financing costs, which are included in other assets, amounted to
$194,000 at December 30, 1994. These costs are being amortized over the life
of the Refinanced Loan, as defined below.
F-79
<PAGE>
SAN ANTONIO MARRIOTT RIVERWALK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
Provision for Federal or state income taxes has not been made in the
accompanying financial statements since the Parent is a partnership and does
not pay income taxes but rather allocates its profits and losses to the
Parent's individual partners.
NOTE 3. REVENUES
House profit for the year ended December 30, 1994 consists of (in
thousands):
<TABLE>
<S> <C>
SALES
Rooms............................................................. $17,037
Food and beverage................................................. 4,649
Other............................................................. 1,404
-------
Total Hotel Sales............................................... 23,090
-------
DEPARTMENTAL COSTS
Rooms............................................................. 3,116
Food and beverage................................................. 3,826
Other............................................................. 758
-------
Total Department Costs.......................................... 7,700
-------
DEPARTMENT PROFIT................................................... 15,390
Other deductions.................................................... 5,194
-------
HOUSE PROFIT........................................................ $10,196
=======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 30, 1994 (in
thousands):
<TABLE>
<S> <C>
Buildings and leasehold improvements............................... $ 33,346
Furniture and equipment............................................ 12,758
--------
46,104
Less accumulated depreciation and amortization..................... (19,794)
--------
Property and equipment, net........................................ $ 26,310
========
</TABLE>
NOTE 5. DEBT
The mortgage debt of the Hotel was refinanced (the "Refinancing") on
December 23, 1994, at which time the existing debt was repaid and a note of
$19,400,000 was issued (the "Refinanced Debt"). Prior to the Refinancing, debt
consisted of three separate notes as described below:
The Hotel's first mortgage consisted of a $19,500,000 note payable to
Connecticut General Life Insurance Company maturing on January 1, 2010. This
note bore interest at a rate of 10.25% per annum and was payable in monthly
installments of $174,850, consisting of both principal and interest. The
remaining principal balance of $16,605,000 was repaid at the time of the
Refinancing. There were no prepayment or other penalties incurred for the
early extinguishment of this debt.
The Hotel's second mortgage consisted of a $2,500,000 note payable to
Connecticut General Life Insurance Company maturing on January 1, 2010. This
note bore interest at a rate of 8.25% per annum and was payable in
F-80
<PAGE>
SAN ANTONIO MARRIOTT RIVERWALK
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
monthly installments of $23,375, consisting of both principal and interest.
The remaining principal balance of $2,422,000 was repaid at the time of the
Refinancing of the Hotel. There were no prepayment or other penalties incurred
for the early extinguishment of this debt.
Marriott International, Inc. funded a renovation that took place at the
Hotel in 1989 with a $2,900,000 note payable due on December 31, 1994. This
note bore interest at a rate of 9% per annum. Both principal and interest were
payable out of the balance in the property improvement fund in excess of
$100,000, first to accrued interest, then to principal reduction. The
remaining principal balance of $1,487,000 was repaid partially with available
cash and partially with proceeds from the Refinancing. There were no
prepayment or other penalties for the early extinguishment of this debt.
The Refinanced Debt consists of a note payable to Connecticut General Life
Insurance Company of $19,400,000 maturing on January 1, 2002. This note bears
interest at a rate of 9.85% per annum payable in monthly installments of
$185,290, consisting of both principal and interest beginning in January 1995.
Principal amortization of the Refinanced Debt is required as follows (in
thousands):
<TABLE>
<S> <C>
1995................................................................. $ 327
1996................................................................. 361
1997................................................................. 398
1998................................................................. 439
1999 and thereafter.................................................. 17,875
-------
Total.............................................................. $19,400
=======
</TABLE>
NOTE 6. MANAGEMENT AGREEMENT
Marriott International, Inc. (the "Manager") operates the Hotel pursuant to
a long-term management agreement (the "Management Agreement") with an initial
term expiring in 2008. The management agreement provides for a base fee equal
to 3% of Hotel sales and an incentive management fee of up to 20% of gross
operating profit, as defined. Pursuant to the terms of the Management
Agreement, the Manager is required to furnish the Hotel with certain services
such as 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 ("Chain Services") and, are generally provided on a central or regional
basis to all hotels in the Manager's full-service hotel system. Costs and
expenses incurred in providing such services are allocated among all domestic
full-service hotels managed, owned and leased by the Manager and its
subsidiaries and, in accordance with these arrangements, the Hotel paid Chain
Services of $734,000 in 1994. In addition, the Hotel also participates in the
Manager's Honored Guest Awards Program. The cost of this program is charged to
all hotels in the Manager's full-service hotel system.
The Management Agreement also provides for the establishment of a property
improvement fund for the Hotel to cover (a) the cost of certain non-routine
repairs and maintenance to the Hotel which are normally capitalized; and (b)
the cost of replacements and renewals to the Hotel's property and
improvements. Contributions to the property improvement fund are 5 1/2% of
Hotel sales and totaled $1,270,000 for 1994.
NOTE 7. LEASES
The land under the Hotel is leased from a third party under a long-term
lease expiring December 31, 2033 (the "Land Lease"). Minimum annual rent is
$50,000 per year. In addition to minimum annual rent, percentage rent equal to
.5% of gross revenues, as defined, is required to be paid. Rent expense
related to the Land Lease was $129,000 for 1994.
F-81
<PAGE>
SAN ANTONIO MARRIOTT RIVERWALK
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
Future minimum annual rental commitments for all non-cancelable operating
leases entered into by the Manager on behalf of the Parent and subsequently
assigned to HMH Properties, Inc., including the Land Lease and leases for
certain other equipment, are as follows (in thousands):
<TABLE>
<S> <C>
1995................................................................ $ 151
1996................................................................ 151
1997................................................................ 151
1998................................................................ 151
1999................................................................ 76
Thereafter.......................................................... 1,650
-------
Total minimum lease payments...................................... $ 2,330
=======
</TABLE>
F-82
<PAGE>
SAN ANTONIO MARRIOTT RIVERWALK
STATEMENT OF OPERATIONS
FOR THE TWENTY-FOUR WEEKS ENDED JUNE 16, 1995 AND JUNE 17, 1994 (UNAUDITED, IN
THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
REVENUE........................................................... $5,119 $5,302
------ ------
OPERATING COSTS AND EXPENSES
Depreciation and amortization................................... 1,250 959
Base and incentive management fees.............................. 1,068 1,082
Property taxes.................................................. 616 557
Rent, insurance and other....................................... 209 233
------ ------
Total operating costs and expenses............................ 3,143 2,831
------ ------
OPERATING PROFIT BEFORE INTEREST.................................. 1,976 2,471
Interest expense.................................................. 878 939
------ ------
NET INCOME........................................................ $1,098 $1,532
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-83
<PAGE>
SAN ANTONIO MARRIOTT RIVERWALK
STATEMENT OF CASH FLOWS
FOR THE TWENTY-FOUR WEEKS ENDED JUNE 16, 1995 AND JUNE 17, 1994
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income.................................................. $ 1,098 $ 1,532
Depreciation and amortization............................... 1,250 959
Working capital changes:
Accounts receivable....................................... (623) (153)
Other assets.............................................. 3 (22)
Accounts payable and accrued expenses..................... 501 (410)
------- -------
Cash provided by operations................................. 2,229 1,906
------- -------
INVESTING ACTIVITIES
Additions to property and equipment......................... (2,138) (353)
Change in property improvement fund......................... 1,141 (76)
------- -------
Cash used in investing activities........................... (997) (429)
------- -------
FINANCING ACTIVITIES
Change in net advances from Parent.......................... (1,100) (1,164)
Repayments of mortgage debt................................. (132) (208)
------- -------
Cash used in financing activities........................... (1,232) (1,372)
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS......................... -- 105
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.............. -- --
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................... $ -- $ 105
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-84
<PAGE>
SAN ANTONIO MARRIOTT RIVERWALK
NOTES TO FINANCIAL STATEMENTS--(UNAUDITED)
1. The accompanying financial statements of the San Antonio Marriott Riverwalk
(the "Hotel") have been prepared without audit. Certain information and
footnote disclosures normally included in financial statements presented in
accordance with generally accepted accounting principles have been omitted.
The Hotel believes the disclosures made are adequate to make the
information presented not misleading. However, the financial statements
should be read in conjunction with the audited financial statements and
notes thereto for the fiscal year ended December 30, 1994 included
elsewhere in this Registration Statement.
In the opinion of the management of the Hotel, the accompanying unaudited
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the results of
operations and cash flows for the twenty-four weeks ended June 16, 1995 and
June 17, 1994. Interim results are not necessarily indicative of fiscal
year performance because of the impact of seasonal and short-term
variations.
2. House profit 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.
House profit generated by the Hotel for the twenty-four weeks ended June
16, 1995 and June 17, 1994 consists of (in thousands):
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED
------------------------
JUNE 16, JUNE 17,
1995 1994
----------- -----------
<S> <C> <C>
SALES
Rooms................................................. $ 8,268 $ 8,307
Food & Beverage....................................... 2,478 2,288
Other................................................. 676 683
----------- -----------
Total Hotel Sales.................................... 11,422 11,278
----------- -----------
DEPARTMENT COSTS
Rooms................................................. 1,420 1,391
Food & Beverage....................................... 1,919 1,766
Other................................................. 367 359
----------- -----------
Total Department Costs............................... 3,706 3,516
----------- -----------
DEPARTMENT PROFIT...................................... 7,716 7,762
Other Deductions....................................... 2,597 2,460
----------- -----------
HOUSE PROFIT........................................... $ 5,119 $ 5,302
=========== ===========
</TABLE>
F-85
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE OWNERS OF THE TEC ENTITIES (AS DEFINED IN NOTE 1):
We have audited the accompanying combined balance sheets of the TEC
Entities, as defined in Note 1, as of December 30, 1994 and December 31, 1993,
and the related combined statements of operations and cash flows for the years
then ended. These financial statements are the responsibility of the
management of the TEC Entities (as defined in Note 1). Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the 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 financial statements referred to above present fairly,
in all material respects, the combined financial position of the TEC Entities
(as defined in Note 1) as of December 30, 1994 and December 31, 1993, and the
combined results of its operations and cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
December 15, 1995
F-86
<PAGE>
TEC ENTITIES
COMBINED BALANCE SHEETS
AS OF DECEMBER 30, 1994 AND DECEMBER 31, 1993
(IN CANADIAN DOLLARS AND IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 3,395 $ 2,936
Due from manager............................................ 374 789
Property and equipment, net................................. 44,054 46,160
Property improvement fund................................... 877 318
Other assets................................................ 1,040 1,561
-------- --------
$ 49,740 $ 51,764
======== ========
LIABILITIES AND DEFICIT
Revolving credit facility................................... $ 13,489 $ 7,689
Mortgage debt............................................... 70,664 70,664
Accounts payable and accrued expenses....................... 224 137
-------- --------
Total liabilities......................................... 84,377 78,490
Deficit..................................................... (34,637) (26,726)
-------- --------
$ 49,740 $ 51,764
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE>
TEC ENTITIES
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 30, 1994 AND DECEMBER 31, 1993
(IN CANADIAN DOLLARS AND IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993
------- --------
<S> <C> <C>
REVENUES..................................................... $ 5,915 $ 4,674
------- --------
OPERATING COSTS AND EXPENSES
Depreciation............................................... 2,246 2,227
Ground rent................................................ 637 541
Base and incentive management fees......................... 699 610
Real estate tax............................................ 2,673 2,642
Equipment rent, insurance and other........................ 757 1,257
------- --------
Total operating costs and expenses....................... 7,012 7,277
------- --------
OPERATING LOSS BEFORE INTEREST AND WRITE-DOWN................ (1,097) (2,603)
Interest expense............................................. 6,001 6,544
Write-down of property....................................... -- 26,565
------- --------
NET LOSS..................................................... $(7,098) $(35,712)
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-88
<PAGE>
TEC ENTITIES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 30, 1994 AND DECEMBER 31, 1993
(IN CANADIAN DOLLARS AND IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $(7,098) $(35,712)
Depreciation and amortization............................. 2,767 2,747
Interest converted to revolver debt....................... 5,481 5,519
Write-down of asset to fair value......................... -- 26,565
Changes in other assets and liabilities................... 502 (888)
-------- --------
Cash provided by (used in) operations................... 1,652 (1,769)
-------- --------
INVESTING ACTIVITIES
Contributions to property improvement fund................ (699) (412)
-------- --------
Cash used in investing activities....................... (699) (412)
-------- --------
FINANCING ACTIVITIES
Changes in net advances from co-tenants................... (813) 15,646
Issuance (repayments) of debt............................. 319 (11,476)
-------- --------
Cash provided by (used in) financing activities......... (494) 4,170
-------- --------
Change in Cash and Cash Equivalents......................... 459 1,989
Cash and Cash Equivalents at beginning of year.............. 2,936 947
-------- --------
Cash and Cash Equivalents at end of year.................... $ 3,395 $ 2,936
-------- --------
Supplemental Information
Cash paid for interest.................................... $ 52 $ 1,159
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-89
<PAGE>
TEC ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
On November 3, 1995 ("Sale Date"), HMC Toronto EC, Inc., a wholly-owned
indirect subsidiary of Host Marriott Corporation, acquired all interests in
the Toronto Eaton Centre Marriott (the "Hotel"), located in Toronto, Canada
from 1028796 Ontario Limited, a subsidiary of the Bank of Nova Scotia, and
Marriott Corporation of Canada, Ltd., a subsidiary of Marriott International
Inc., for approximately $44 million Canadian. These interests included 100%
investments in T.E.C. Hotels, Ltd. ("TEC Hotels"), T.E.C. Operations Limited
("TEC Ops"), and a Canadian co-tenancy between 1028796 Ontario Limited and
Marriott Corporation of Canada Ltd. (the "Co-tenancy") (collectively, as the
"TEC Entities") and the assumption of the ground lease obligation discussed in
Note 8. Under the pre-acquisition organization structure, TEC Ops leased the
Hotel from the Co-tenancy, who in turn, leased the Hotel from TEC Hotels. For
purposes of the combined financial statements presented, these lease
agreements have been eliminated in consolidation. The Hotel, with 459 rooms,
was opened on September 16, 1991 and is operated by Marriott International,
Inc. as part of the Marriott Hotels, Resorts and Suites full-service hotel
system.
These financial statements present the combined financial position, results
of operations and cash flows related to the business of the Toronto Eaton
Centre Marriott (including the Co-tenancy, TEC Hotels and TEC Ops) in Canadian
dollars which represents the functional currency of the Hotel.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Hotel's records are maintained on the accrual basis of accounting and
its fiscal year ends on the Friday nearest to December 31.
Property and Equipment
Property and equipment is recorded at its net realizable value. Replacements
and improvements are capitalized as incurred. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally 40 years for buildings and 5 to 6 years for furniture and equipment.
Cash and Cash Equivalents
The Hotel considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Deferred Financing Costs
Deferred financing costs, net of amortization, and are included in other
assets, amounted to $1,040,424 at December 30, 1994. These costs are being
amortized over the life of the debt. Accumulated amortization as of December
30, 1994 and December 31, 1993 was $1,720,701 and $1,199,701, respectively.
Income Taxes
No net provision for Federal or provincial income taxes has been made in the
accompanying combined financial statements because the individual entities
included in the combined statements utilized tax loss carry forwards to offset
taxable income in all years. Although the cumulative amount of taxable losses
is available to offset future taxable income, management has determined that
it is not likely that the benefits of such losses will be realized.
F-90
<PAGE>
TEC ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. REVENUES
Revenues (house profit) consists of the following Hotel operating results
for the years ended December 30, 1994 and December 31, 1993 (in Canadian
dollars and in thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
SALES
Rooms..................................................... $14,017 $11,892
Food and beverage......................................... 7,442 7,118
Other..................................................... 1,842 1,549
------- -------
23,301 20,559
------- -------
DEPARTMENTAL COSTS
Rooms..................................................... 4,299 3,779
Food and beverage......................................... 6,609 6,186
Other hotel operating expenses............................ 6,478 5,920
------- -------
17,386 15,885
------- -------
REVENUES.................................................... $ 5,915 $ 4,674
======= =======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment as of December 30, 1994 and December 31, 1993
consists of the following (in Canadian dollars and in thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Leasehold land............................................. $ 1,414 $ 1,414
Buildings and leasehold improvements....................... 41,457 41,457
Furniture and equipment.................................... 8,540 8,400
------- -------
51,411 51,271
Less accumulated depreciation and amortization............. (7,357) (5,111)
------- -------
Net property and equipment................................. $44,054 $46,160
======= =======
</TABLE>
During 1993, management concluded that the future estimated cash flows of
the hotel would not be adequate to recover the carrying value of the property
and the property was written down to its estimated market value.
NOTE 5. DEBT
Revolving Credit Agreement
On July 7, 1993, the Co-tenancy entered into a $15,000,000 Canadian
revolving credit facility (the "Facility") with the Bank of Nova Scotia (the
"Lender"), secured by the receivables of the Hotel and a guarantee by the co-
tenants. The Facility matures January 1, 1997 and bears an interest rate equal
to the Canadian prime rate, which was 6.9% for 1994.
Construction Loan
On July 7, 1993, the Co-tenancy borrowed $70,664,000 Canadian (the
"Construction Loan") from the Bank of Nova Scotia, secured by the Hotel. The
Construction Loan matures January 1, 1997 and bears an interest rate equal to
the Canadian prime rate.
F-91
<PAGE>
TEC ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Co-tenancy's operations could not support the interest payments due
under the Construction Loan in 1994, and a majority of the interest payments
due were transferred from the revolving credit facility. As a result, the
Facility was fully utilized and entered into default in 1995. On November 3,
1995, the Lender called the $15 million guarantee from the Co-tenants relating
to the revolver, the Co-tenancy paid down an additional $42 million with the
proceeds of the sale of the Hotel and all remaining debt balances were
forgiven by the Lender. An extraordinary gain of $29 million was recognized in
1995 as a result of this forgiveness.
NOTE 6. MANAGEMENT AGREEMENT
Marriott International, Inc. (the "Manager") operates the Hotel pursuant to
a long-term management agreement (the "Management Agreement") with an initial
term expiring in 2016. The manager maintains the option to renew the
Management Agreement for five successive 10 year terms upon expiration. The
Management Agreement provides for a base fee equal to 3% of Hotel sales (as
defined), totalled $699,000 and $610,000 for 1994 and 1993, respectively. The
Management Agreement also provides for an incentive management fee equal to
20% of operating profit, as defined. There were no incentive management fees
in 1994 or 1993. Pursuant to the terms of the Management Agreement, the
Manager is required to furnish the Hotel with certain services such as 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 ("Chain
Services") and, are generally provided on a central or regional basis to all
hotels in the Manager's full-service hotel system. Costs and expenses incurred
in providing such services are allocated among all domestic full-service
hotels managed, owned or leased by the Manager or its subsidiaries and, in
accordance with these arrangements, the Hotel paid Chain Services of $534,000
and $596,000 in 1994 and 1993, respectively. In addition, the Hotel also
participates in the Manager's Honored Guest Awards Program. The cost of this
program is charged to all hotels in the Manager's full-service hotel system.
The Management Agreement also provides for the establishment of a property
improvement fund for the Hotel to cover (a) the cost of certain non-routine
repairs and maintenance to the Hotel which are normally capitalized; and (b)
the cost of replacements and renewals to the Hotel's property and
improvements. Contributions to the property improvement fund were 3% and 2% of
Hotel sales in 1994 and 1993, respectively.
NOTE 7. OPERATING LEASES
Future minimum and annual rental commitments for all non-cancelable
operating leases entered into by the Manager on behalf of the TEC Entities and
assumed by HMC Toronto E.C. at the Sale Date are as follows (in Canadian
dollars and in thousands):
<TABLE>
<S> <C>
1995.................................................................... $178
1996.................................................................... 113
1997.................................................................... 19
1998.................................................................... 4
1999 and thereafter..................................................... --
----
$314
====
</TABLE>
NOTE 8. GROUND LEASE
TEC Hotels leased the land under the hotel from the Incorporated Synod of
Diocese of Toronto pursuant to an agreement which commenced on September 21,
1983 with an initial term of 99 years, expiring September 2082 (the "Land
Rent"). Annual base rent is $506,000 per year through expiration. Annual
percentage rent is calculated as 4.5% of gross room sales between $11,111,111
and $15,000,000 and 4% of gross room sales over $15,000,000.
F-92
<PAGE>
TEC ENTITIES
COMBINED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED OCTOBER 30, 1995 AND 1994
(UNAUDITED, IN CANADIAN DOLLARS AND IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
REVENUES...................................................... $ 7,007 $ 5,293
------- -------
OPERATING COSTS AND EXPENSES
Depreciation................................................ 1,925 1,899
Ground rent................................................. 619 547
Real estate tax............................................. 2,971 2,889
Base and incentive management fees.......................... 655 596
Equipment rent, insurance and other......................... 731 685
------- -------
Total operating costs and expenses........................ 6,901 6,616
------- -------
OPERATING INCOME/(LOSS) BEFORE INTEREST....................... 106 (1,323)
Interest expense.............................................. 6,260 5,001
------- -------
NET LOSS...................................................... (6,154) (6,324)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-93
<PAGE>
TEC ENTITIES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED OCTOBER 30, 1995 AND 1994
(UNAUDITED, IN CANADIAN DOLLARS AND IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss.................................................. $(6,154) $(6,324)
Depreciation.............................................. 2,359 2,333
Changes in other assets and liabilities................... (542) 1,467
-------- -------
Cash provided by operations............................... (4,337) (2,524)
-------- -------
INVESTING ACTIVITIES
Contributions to property improvement fund................ 655 596
-------- -------
FINANCING ACTIVITIES
Changes in net advances from co-tenants................... 1,617 2,810
Issuance of debt.......................................... 1,511 150
-------- -------
Cash used in financing activities......................... 3,128 2,960
-------- -------
CHANGE IN CASH AND CASH EQUIVALENTS......................... (554) 1,032
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 3,395 2,936
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 2,841 $ 3,968
======== =======
SUPPLEMENTAL INFORMATION
Cash paid for interest.................................... $ 3,783 $ 52
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-94
<PAGE>
TEC ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1.
The accompanying combined financial statements of T.E.C. Hotels, Ltd.,
T.E.C. Operations, Ltd. and a Canadian co-tenancy between 1028796 Ontario
Limited and Marriott Corporation of Canada, Ltd. (collectively, the "TEC
Entities") have been prepared without audit. Certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles have been omitted. The Hotel
believes the disclosures made are adequate to make the information presented
not misleading. However, the combined financial statements should be read in
conjunction with the audited financial statements and notes thereto for the
two fiscal years ended December 30, 1994, specifically with respect to the
sale of the hotel assets and forgiveness of debt in November 1995.
In the opinion of the TEC Entities, the accompanying unaudited combined
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the combined results of
operations and cash flows of the TEC Entities for the period ended October 30,
1995 and 1994. Interim results are not necessarily indicative of fiscal year
performance because of the impact of seasonal and short-term variations.
NOTE 2.
Revenues (house profit) for the periods ended October 30, 1995 and 1994
consist of (in Canadian dollars and in thousands):
<TABLE>
<CAPTION>
PERIODS ENDED
-----------------------
OCTOBER 30, OCTOBER 30,
1995 1994
----------- -----------
<S> <C> <C>
SALES
Rooms................................................. $13,755 $12,156
Food and Beverage..................................... 6,363 6,100
Other................................................. 1,725 1,600
------- -------
21,843 19,856
------- -------
DEPARTMENTAL COSTS
Rooms................................................. 3,805 3,663
Food and Beverage..................................... 5,368 5,434
Other hotel operating expenses........................ 5,663 5,466
------- -------
14,836 14,563
------- -------
REVENUES................................................ $ 7,007 $ 5,293
======= =======
</TABLE>
F-95
<PAGE>
LARGEST OWNER OF HOTELS OPERATING UNDER LEADING MARRIOTT BRAND NAMES
[MAP OF UNITED STATES SHOWING PROPERTY LOCATIONS]
Properties/1/
[SOLID BOX] Hotels, Resorts and Suites 55/2/
[BULLET] Courtyard Hotels 17/3/
[TRIANGLE] Residence Inns 18/4/
- -------------------
/1/ As of December 29, 1995.
/2/ Excludes 4 properties added in 1996 and the Pending Acquisitions.
/3/ Excludes 37 Courtyard hotels which were sold and leased back in 1995.
The Company has entered into an agreement to sell and lease back
16 additional Courtyard properties.
/4/ Excludes a Residence Inn currently under construction and scheduled for
completion in early 1996. The Company has entered into an agreement to
sell and lease back these 18 Residence Inn Properties.
[PHOTO]
The Dallas Marriott Quorum, featuring 547 rooms, was acquired in 1994.
[PHOTO]
The JW Marriott, located in Houston, Texas was acquired in 1994 and features 503
rooms.
[PHOTO]
The Fort Lauderdale Marina Marriott acquired in 1994, is located on Fort
Lauderdale's intercoastal waterway and features 580 rooms.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRIT-
ERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THE SHARES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAK-
ING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE AN IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information..................................................... 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 10
The Company............................................................... 13
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Capitalization............................................................ 14
Pro Forma Condensed Consolidated Financial Data........................... 15
Selected Historical Financial Data........................................ 22
Management's Discussion and Analysis of Results of Operations and
Financial Condition...................................................... 23
Business and Properties................................................... 36
Relationship Between the Company and HM Services After the Special
Dividend................................................................. 49
Relationship Between the Company and Marriott International............... 51
Management................................................................ 57
Certain Relationships and Transactions.................................... 63
Ownership of Company Securities........................................... 64
Description of Capital Stock.............................................. 65
Price Range of the Common Stock and Dividends............................. 69
Purposes and Antitakeover Effects of Certain Provisions of the Company
Certificate and Bylaws and the Marriott International Purchase Right..... 70
Certain United States Federal Tax Consequences to Non-United States
Holders of Common Stock.................................................. 75
Underwriting.............................................................. 78
Legal Matters............................................................. 81
Experts................................................................... 81
Index to Financial Statements............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
25,000,000 SHARES
[LOGO OF HOST MARRIOTT APPEARS HERE]
COMMON STOCK
----------------
PROSPECTUS
----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
SALOMON BROTHERS INC
SMITH BARNEY INC.
MONTGOMERY SECURITIES
BT SECURITIES CORPORATION
SCHRODER WERTHEIM & CO.
MARCH , 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 26, 1996
PROSPECTUS
MARCH , 1996
25,000,000 SHARES
[LOGO OF HOST MARRIOTT CORPORATION APPEARS HERE]
COMMON STOCK
All of the shares of common stock, $1.00 par value per share (the "Common
Stock"), offered hereby are being sold by Host Marriott Corporation (the
"Company"). Of the 25,000,000 shares of Common Stock offered by the Company,
5,000,000 shares are being offered for sale outside the United States and
Canada by the International Managers (the "International Offering") and
20,000,000 shares are being offered for sale in the United States and Canada in
a concurrent offering by the U.S. Underwriters (the "U.S. Offering" and,
together with the International Offering, the "Offerings"), subject to
transfers between the U.S. Underwriters and the International Managers. See
"Underwriting."
The Common Stock of the Company is traded on the New York Stock Exchange, the
Chicago Stock Exchange, the Pacific Stock Exchange and the Philadelphia Stock
Exchange under the symbol "HMT." On March 22, 1996, the last reported sale
price of the Common Stock, as reported on the New York Stock Exchange Composite
Tape, was $12 7/8 per share. See "Price Range of the Common Stock and
Dividends."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF THE RISKS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS (1) COMPANY (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total (3).................................... $ $ $
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the several U.S. Underwriters and
International Managers (collectively, the "Underwriters") against certain
liabilities including liabilities under the Securities Act of 1983, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters an option exercisable within 30
days after the date herein to purchase up to 3,750,000 additional shares of
Common Stock, on the same terms and conditions as set forth above, at the
Price to the Public, less the Underwriting Discounts and Commissions, solely
to cover over-allotments, if any. If the Underwriters exercise such option in
full, the total Price to the Public, Underwriting Discounts and Commissions,
and Proceeds to the Company will be $ , $ and $ , respectively. See
"Underwriting."
The shares of Common Stock are being offered by the several Underwriters
when, as and if delivered to and accepted by the Underwriters and subject to
various prior conditions, including the right of the Underwriters to reject any
order in whole or in part. It is expected that delivery of the shares of Common
Stock will be made in New York, New York on or about , 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN SACHS INTERNATIONAL
SALOMON BROTHERS INTERNATIONAL LIMITED
SMITH BARNEY INC.
MONTGOMERY SECURITIES
BANKERS TRUST INTERNATIONAL PLC
SCHRODERS
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRIT-
ERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THE SHARES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAK-
ING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE AN IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information..................................................... 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 10
The Company............................................................... 13
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Capitalization............................................................ 14
Pro Forma Condensed Consolidated Financial Data........................... 15
Selected Historical Financial Data........................................ 22
Management's Discussion and Analysis of Results of Operations and
Financial Condition...................................................... 23
Business and Properties................................................... 36
Relationship Between the Company and HM Services After the Special
Dividend................................................................. 49
Relationship Between the Company and Marriott International............... 51
Management................................................................ 57
Certain Relationships and Transactions.................................... 63
Ownership of Company Securities........................................... 64
Description of Capital Stock.............................................. 65
Price Range of the Common Stock and Dividends............................. 69
Purposes and Antitakeover Effects of Certain Provisions of the Company
Certificate and Bylaws and the Marriott International Purchase Right..... 70
Certain United States Federal Tax Consequences to Non-United States
Holders of Common Stock.................................................. 75
Underwriting.............................................................. 78
Legal Matters............................................................. 81
Experts................................................................... 81
Index to Financial Statements............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
25,000,000 SHARES
[LOGO OF HOST MARRIOTT CORPORATION APPEARS HERE]
COMMON STOCK
---------------
PROSPECTUS
---------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN SACHS INTERNATIONAL
SALOMON BROTHERS INTERNATIONAL LIMITED
SMITH BARNEY INC.
MONTGOMERY SECURITIES
BANKERS TRUST INTERNATIONAL PLC
SCHRODERS
MARCH , 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized statement of all expenses in connection with
the issuance and distribution of the securities registered hereby. The
information is subject to future contingencies.
<TABLE>
<S> <C>
Registration Fee................................................. $ 116,487
NASD Fees........................................................ 30,500
Blue Sky Fees and Expenses....................................... 25,000
Stock Exchange Fees.............................................. 125,000
Legal Fees....................................................... 300,000
Accounting Fees.................................................. 300,000
Printing......................................................... 900,000
Miscellaneous.................................................... 1,008,013
----------
$2,805,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Article Eleven and Article Sixteen of the Company's Certificate and Section
7.7 of the Bylaws limit the personal liability of directors to the Company or
its shareholders for monetary damages for breach of fiduciary duty. These
provisions of the Company Certificate and Bylaws are collectively referred to
herein as the "Director Liability and Indemnification Provisions." The Company
Certificate and the Bylaws are included as exhibits to the Registration
Statement on Form S-1 of which this Prospectus is a part.
Set forth below is a description of the Director Liability and
Indemnification Provisions. Such description is intended as a summary only and
is qualified in its entirety by reference to the Company Certificate and the
Bylaws.
Elimination of Liability in Certain Circumstances. Article Sixteen of the
Company Certificate protects directors against monetary damages for breaches
of their fiduciary duty of care, except as set forth below. Under the Delaware
General Corporation Law, absent such limitation of liability provisions as are
provided in Article Sixteen, directors could generally be held liable for
gross negligence for decisions made in the performance of their duty of care
but not for simple negligence. Article Sixteen eliminates liability of
directors for negligence in the performance of their duties, including gross
negligence. In a context not involving a decision by the directors (i.e., a
suit alleging loss to the Company due to the directors' inattention to a
particular matter) a simple negligence standard might apply. Directors remain
liable for breaches of their duty of loyalty to the Company and its
shareholders, as well as acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law and transactions from
which a director derives improper personal benefit. Article Sixteen does not
eliminate director liability under Section 174 of the Delaware General
Corporation Law, which makes directors personally liable for unlawful
dividends or unlawful stock repurchases or redemptions and expressly sets
forth a negligence standard with respect to such liability.
While the Director Liability and Indemnification Provisions provide
directors with protection from awards of monetary damages for breaches of the
duty of care, they do not eliminate the directors' duty of care. Accordingly,
these provisions will have no effect on the availability of equitable remedies
such as an injunction or rescission based upon a director's breach of the duty
of care. The provisions of Article Sixteen, which eliminates liability as
described above, will apply to officers of the Company only if they are
directors of the Company and are acting in their capacity as directors, and
will not apply to officers of the Company who are not directors. The
elimination of liability of directors for monetary damages in the
circumstances described above may deter persons from bringing third-party or
derivative actions against directors to the extent such actions seek monetary
damages.
II-1
<PAGE>
Indemnification and Insurance. Under Section 145 of the Delaware General
Corporation Law, directors and officers as well as other employees and
individuals may be indemnified against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation--a
"derivative action") if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard of
care is applicable in the case of the derivative actions, except that
indemnification only extends to expenses (including attorneys' fees) incurred
in connection with defense or settlement of such an action, and the Delaware
General Corporation Law requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation.
Section 7.7 of the Bylaws provides that the Company shall indemnify any
person to whom, and to the extent, indemnification may be granted pursuant to
Section 145 of the Delaware General Corporation Law.
Article Eleven of the Company Certificate provides that a person who was or
is made a party to, or is involved in, any action, suit or proceeding by
reason of the fact that he is or was a director, officer or employee of the
Company will be indemnified by the Company against all expenses and
liabilities, including counsel fees, reasonably incurred by or imposed upon
him, except in such cases where the director, officer or employee is adjudged
guilty of willful misconduct or malfeasance in the performance of his duties.
Article Eleven also provides that the right of indemnification shall be in
addition to and not exclusive of all other rights to which such director,
officer or employee may be entitled.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
*1.(i) Underwriting Agreement dated as of March , 1996 among the
Underwriters and the Company.
*1.(ii) Agreement regarding sale of shares of Common Stock dated as of
March , 1996 among the Underwriters, the Company, Richard E.
Marriott and J.W. Marriott, Jr.
2.(i) Memorandum of Understanding between Marriott Corporation and
Certain Bondholders dated as of March 10, 1993 (incorporated by
reference from Current Report on Form 8-K dated March 17, 1993).
2.(ii) Stipulation and Agreement of Compromise and Settlement
(incorporated by reference from Registration Statement No. 33-
62444).
3.1(i) Restated Certificate of Incorporation of Marriott Corporation
(incorporated by reference to Current Report on Form 8-K dated
October 23, 1993).
3.1(ii) Certificate of Correction filed to correct a certain error in the
Restated Certificate of Incorporation of Host Marriott Corporation
filed in the Office of the Secretary of State of Delaware on
August 11, 1992, filed in the Office of the Secretary of State of
Delaware on October 11, 1994 (incorporated by reference to
Registration Statement No. 33-54545).
3.2 Amended Marriott Corporation Bylaws (incorporated by reference to
Current Report on Form 8-K dated October 23, 1993).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
4.1(i) Third Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of December 1, 1986
(incorporated by reference from Current Report on Form 8-K dated
December 10, 1986).
4.1(ii) Fourth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of May 1, 1987
(incorporated by reference from Current Report on Form 8-K dated
May 7, 1987).
4.1(iii) Fifth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of June 12, 1987
(incorporated by reference from Current Report on Form 8-K dated
June 18, 1987).
4.1(iv) Sixth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of October 23, 1987
(incorporated by reference from Current Report on Form 8-K dated
October 30, 1987).
4.1(v) Twelfth Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of July 11, 1991
(incorporated by reference from Current Report on Form 8-K dated
July 19, 1991).
4.1(vi) Thirteenth Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of April 22, 1992
(incorporated by reference from Current Report on Form 8-K dated
April 29, 1992).
4.1(vii) Fourteenth Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of April 28, 1992
(incorporated by reference from Current Report on Form 8-K dated
May 5, 1992).
4.1(viii) Fifteenth Supplemental Indenture between Marriott Corporation and
Bank One, Columbus, NA. dated as of October 8, 1993 ((incorporated
by reference from Current Report on Form 8-K dated October 23,
1993).
4.2(i) Rights Agreement between Marriott Corporation and the Bank of New
York as Rights Agent dated February 3, 1989 (incorporated by
reference to Registration Statement No. 33-62444).
4.2(ii) First Amendment to Rights Agreement between Marriott Corporation
and Bank of New York as Rights Agent dated as of October 8, 1993
(incorporated by reference to Registration Statement No. 33-
51707).
4.3 Indenture by and among HMC Acquisition Properties, Inc., as
Issuer, HMC SFO, Inc., as Subsidiary Guarantors, and Marine
Midland Bank, as Trustee (incorporated by reference to
Registration Statement No. 333-00768).
4.4 Indenture by and among HMH Properties Inc., as Issuer, HMH
Courtyard Properties, Inc., HMC Retirement Properties, Inc.,
Marriott Financial Services, Inc., Marriott SBM Two Corporation,
HMH Pentagon Corporation and Host Airport Hotels, Inc., as
Subsidiary Guarantors, and Marine Midland Bank, as Trustee
(incorporated by reference to Registration Statement No. 33-
95058).
4.5(i) Warrant Agreement dated as of October 14, 1994 by and between Host
Marriott Corporation and First Chicago Trust Company of New York
as Warrant Agent (incorporated by reference to Registration
Statement No. 33-80801).
4.5(ii) First Supplemental Warrant Agreement dated December 22, 1995 by
and among Host Marriott Corporation, Host Marriott Services
Corporation and First Chicago Trust Company as Warrant Agent
(incorporated by reference to Registration Statement No. 33-
80801).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
* 5 Opinion of Christopher G. Townsend, Esq. as to legality of
securities being registered.
10.1 Marriott Corporation Executive Deferred Compensation Plan dated as
of December 6, 1990 (incorporated by reference from Exhibit 19(i)
of the Annual Report on Form 10-K for the fiscal year ended
December 28, 1991).
10.2 Host Marriott Corporation 1993 Comprehensive Stock Incentive Plan
effective as of October 8, 1993 (incorporated by reference from
Current Report on Form 8-K dated October 23, 1993).
10.3 Distribution Agreement dated as of September 15, 1993 between
Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.4 Amendment No. 1 to the Distribution Agreement dated September 15,
1993 by and among Host Marriott Corporation, Host Marriott
Services Corporation and Marriott International (incorporated by
reference from Current Report on Form 8-K dated January 16, 1996).
10.5 Distribution Agreement dated December 22, 1995 by and between Host
Marriott Corporation and Host Marriott Services Corporation
(incorporated by reference from Current Report on Form 8-K dated
January 16, 1996).
10.6 Tax Sharing Agreement dated as of October 5, 1993 by and between
Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.7 Assignment and License Agreement dated as of October 8, 1993 by
and between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.8 Amendment No. 1 to the Assignment and License Agreement dated as
of October 8, 1993 by and between Marriott International, Inc. and
Host Marriott Corporation (incorporated by reference from Current
Report on Form 8-K dated January 16, 1996).
10.9 Transitional Corporate Services Agreement dated December 28, 1995
by and between Host Marriott Corporation and Host Marriott
Services Corporation (incorporated by reference from Current
Report on Form 8-K dated January 16, 1996).
10.10 Tax Administration Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.11 Noncompetition Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.12 Amendment No. 1 to the Noncompetition Agreement dated October 8,
1993 by and between Host Marriott Corporation and Marriott
International, Inc. (incorporated by reference from Current Report
on Form 8-K dated January 16, 1996).
+10.13 Host Marriott Lodging Management Agreement--Marriott Hotels,
Resorts and Hotels dated September 25, 1993 by and between
Marriott Corporation and Marriott International, Inc.
(incorporated by reference to Registration Statement No. 33-
51707).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
+10.14(ii) Host Marriott Lodging Management Agreement--Courtyard Hotels dated
September 25, 1993 by and between Marriott Corporation and
Marriott International, Inc. (incorporated by reference to
Registration Statement No. 33-51707).
+10.14(iii) Host Marriott Lodging Management Agreement--Residence Inns dated
September 25, 1993 by and between Marriott Corporation and
Marriott International, Inc. (incorporated by reference to
Registration Statement No. 33-51707).
10.15(i) Consolidation Letter Agreement pertaining to Courtyard Hotels
dated September 25, 1993 between a subsidiary of Marriott
International, Inc. and a subsidiary of the Company (incorporated
by reference to Registration Statement No. 33-51707).
10.16(ii) Consolidation Letter Agreement pertaining to Residence Inns dated
September 25, 1993 between a subsidiary of Marriott International,
Inc. and a subsidiary of the Company (incorporated by reference to
Registration Statement No. 33-51707).
10.17 Employee Benefits and Other Employment Matters Allocation
Agreement dated as of December 29, 1995 by and between Host
Marriott Corporation and Host Marriott Services Corporation
(incorporated by reference from Current Report on Form 8-K dated
January 16, 1996).
10.18 Tax Sharing Agreement dated as of December 29, 1995 by and between
Host Marriott Corporation and Host Marriott Services Corporation
(incorporated by reference from Current Report on Form 8-K dated
January 16, 1996).
10.19 Marriott/Host Marriott Employees' Profit Sharing Retirement and
Savings Plan and Trust (incorporated by reference from
Registration Statement No. 33-62444).
10.20 Working Capital Agreement by and between Host Marriott Corporation
and Marriott International, Inc. dated as of September 25, 1993
(incorporated by reference from Registration Statement No. 33-
62444).
10.21 Sale--Purchase Agreement dated as of November 2, 1995 between The
Port Authority of New York and New Jersey, as Seller, and Host
Marriott Corporation as Purchaser (incorporated by reference from
Current Report on Form 8-K dated January 8, 1996).
10.22 Purchase Agreement dated June 2, 1995 by and between MRI Business
Properties Fund, Ltd. II, as Seller, and HMH Rivers, Inc., as
Purchaser (incorporated by reference from Current Report on Form
8-K dated July 3, 1995).
10.23 Purchase Agreement dated October 31, 1995 by and between 1028796
Ontario Limited and Marriott Corporation of Canada Ltd. as
Sellers, and HMC Toronto EC, Inc. as Purchaser (incorporated by
reference from Current Report on Form 8-K dated November 20,
1995).
10.24 Purchase and Sale Agreement dated as of June 7, 1995 between
Potomac Hotel Limited Partnership, as Seller, and Host Marriott
Corporation, as Purchaser (incorporated by reference from Current
Report on Form 8-K dated September 6, 1995).
10.25 $225,000,000 Revolving Line and Guarantee Reimbursement Agreement
dated as of June 26, 1995 among Host Marriott Corporation as
Borrower, Marriott International, Inc. as Lender, and certain
Subsidiaries of Host Marriott Corporation as Guarantors
(incorporated by reference from Current Report on Form 8-K dated
July 17, 1995).
11 Statement re: Computation of Per Share Earnings.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
12 Computation of Ratio of Earnings to Fixed Charges.
*22 Subsidiaries of Host Marriott Corporation.
*23.1 Consent of Arthur Andersen LLP
*23.2 Consent of KPMG Peat Marwick LLP
*23.3 Consent of Ernst & Young LLP
*23.4 Consent of Christopher G. Townsend, Esq. (included in his opinion filed as Exhibit 5).
</TABLE>
- --------
+ Agreement filed is illustrative of numerous other agreements to which the
Company is a party.
* Filed herewith.
(B) FINANCIAL STATEMENTS SCHEDULES
The following financial statement schedules of Host Marriott Corporation are
included:
Schedule I --Condensed financial information of
Schedule III registrant S-2 to S-6
--Real estate and accumulated depreciation S-7
to S-8
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
ITEM 17: UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described under Item 14
above, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of such registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BETHESDA, STATE OF
MARYLAND, ON MARCH 26 1996.
Host Marriott Corporation
*
By____________________________________
ROBERT E. PARSONS, JR.
Executive Vice President and
Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below appoints Christopher G. Townsend
and Pamela J. Murch and each of them, as his or her true and lawful attorney-
in-fact and agent with full power of substitution and resubstitution, for him
or her and in his or her name, place and stead, in any and all capacities, to
sign any or all amendments (including post-effective amendments) to this
Registration Statement, and to file the same, with all exhibits thereto, and
all documents in connection therewith, with the Securities and Exchange
Commission, granting unto each said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the foregoing, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that each said attorney-in-fact and agent, or his substitute, may lawfully do
or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
* President, Chief
- ------------------------------------ Executive Officer March 26, 1996
TERENCE C. GOLDEN (Principal
Executive Officer)
and Director
* Executive Vice
- ------------------------------------ President and March 26, 1996
ROBERT E. PARSONS, JR. Chief Financial
Officer (Principal
Financial Officer)
*
- ------------------------------------ Vice President and March 26, 1996
DONALD D. OLINGER Corporate
Controller
(Principal
Accounting
Officer)
* Chairman of the
- ------------------------------------ Board of Directors March 26, 1996
RICHARD E. MARRIOTT
* Director
- ------------------------------------ March 26, 1996
R. THEODORE AMMON
</TABLE>
II-7
<PAGE>
SIGNATURES TITLE DATE
* Director
- ------------------------------------ March 26, 1996
J.W. MARRIOTT, JR.
* Director
- ------------------------------------ March 26, 1996
ANN DORE MCLAUGHLIN
* Director
- ------------------------------------ March 26, 1996
HARRY L. VINCENT
*By /s/ Christopher G. Townsend
- ------------------------------------
CHRISTOPHER G. TOWNSEND
ATTORNEY-IN-FACT
II-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
TO HOST MARRIOTT CORPORATION
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Host Marriott Corporation and
subsidiaries (formerly Marriott Corporation) included in this registration
statement and have issued our report thereon dated February 26, 1996. Our
audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules appearing on
pages S-2 through S-8 are the responsibility of the Company's management and
are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic consolidated financial
statements. These schedules have been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in
our opinion, fairly state in all material respects the financial data required
to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
February 26, 1996
S-1
<PAGE>
SCHEDULE I
PAGE 1 OF 5
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 30,
1995 1994
------------ ------------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Property and Equipment.............................. $1,427 $1,676
Investments in Affiliates........................... 26 31
Notes Receivable.................................... 65 11
Due from Hotel Managers............................. 38 31
Investment in and Advances to Restricted
Subsidiaries....................................... 598 919
Other Assets........................................ 130 70
Cash and Cash Equivalents........................... 78 42
------ ------
Total Assets.................................... $2,362 $2,780
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt................................................ $1,094 $1,362
Accounts Payable and Accrued Expenses............... 40 52
Deferred Income Taxes............................... 423 476
Other Liabilities................................... 130 139
Net Investment in Discontinued Operations........... -- 41
------ ------
Total Liabilities............................... 1,687 2,070
------ ------
Shareholders' Equity
Convertible Preferred Stock....................... -- 13
Common Stock...................................... 160 154
Additional Paid-in Capital........................ 499 479
Retained Earnings................................. 16 64
------ ------
675 710
------ ------
Total Liabilities and Shareholders' Equity...... $2,362 $2,780
====== ======
</TABLE>
- --------
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.
S-2
<PAGE>
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
<TABLE>
<CAPTION>
1995 1994 1993
----- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues................................................... $ 229 $163 $291
Operating costs and expenses............................... 233 122 288
----- ---- ----
Operating profit (loss) before minority interest,
corporate expenses and interest........................... (4) 41 3
Minority interest.......................................... (2) (1) (1)
Corporate expenses......................................... (23) (19) (27)
Interest expense........................................... (105) (86) (133)
Interest income............................................ 11 12 12
----- ---- ----
Loss before income taxes, equity in earnings of
subsidiaries and
cumulative effect of changes in accounting principles..... (123) (53) (146)
Equity in earnings of Restricted Subsidiaries.............. 28 27 57
Benefit for income taxes................................... 13 7 22
----- ---- ----
Loss from continuing operations before equity in earnings
of Marriott International and cumulative effect of changes
in accounting principles.................................. (82) (19) (67)
Equity in earnings of Marriott International, net-of-tax... -- -- 123
Loss from discontinued operations, net-of-tax.............. (61) (6) (4)
----- ---- ----
Income (loss) before cumulative effect of changes in
accounting principles..................................... (143) (25) 52
Cumulative effect of changes in accounting principles...... -- -- (2)
----- ---- ----
Net income (loss)........................................ $(143) $(25) $ 50
===== ==== ====
</TABLE>
- --------
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.
S-3
<PAGE>
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
<TABLE>
<CAPTION>
1995 1994 1993
---- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
CASH FROM (USED IN) OPERATIONS............................. $(25) $ 34 $ 81
---- ----- -----
INVESTING ACTIVITIES
Net proceeds from sale of assets......................... 18 45 46
Capital expenditures..................................... (88) (133) (100)
Acquisitions............................................. (61) (417) --
Dividends from Restricted Subsidiaries................... 36 -- --
Other.................................................... 50 99 (32)
---- ----- -----
Cash used in investing activities........................ (45) (406) (86)
---- ----- -----
FINANCING ACTIVITIES
Issuances of debt........................................ 175 211 287
Issuances of common stock................................ 13 238 12
Repayments of debt....................................... (245) (91) (453)
Transfers from Marriott International and Restricted
Subsidiaries, net....................................... 163 4 357
Dividends paid........................................... -- -- (33)
Cash distributed to Marriott International............... -- -- (272)
---- ----- -----
Cash from (used in) financing activities................. 106 362 (102)
---- ----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... $ 36 $ (10) $(107)
==== ===== =====
</TABLE>
- --------
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.
S-4
<PAGE>
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 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.
S-5
<PAGE>
SCHEDULE I
PAGE 5 OF 5
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION--(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 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):
<TABLE>
<S> <C>
1996................................................................ $ 118
1997................................................................ 40
1998................................................................ 326
1999................................................................ 3
2000................................................................ 51
Thereafter.......................................................... 545
------
$1,083
======
</TABLE>
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
comprises its food, beverage and merchandise concessions business. The
accompanying condensed financial information has been changed to reflect
the Operating Group as discontinued operations.
S-6
<PAGE>
SCHEDULE III
PAGE 1 OF 2
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 29, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT
INITIAL COSTS DECEMBER 29, 1995
------------------ -------------------------
SUBSEQUENT ASSET DATE OF
BUILDINGS & COSTS WRITE- BUILDINGS & ACCUMULATED COMPLETION OF DATE
DESCRIPTION DEBT LAND IMPROVEMENTS CAPITALIZED DOWN LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
----------- ---- ----- ------------ ----------- ------ ----- ------------ ------ ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Full-service Hotels:
New York Marriott
Marquis Hotel,
New York, NY...... $339 $ -- $ 552 $ 19 $ -- $ -- $ 571 $ 571 $ (93) 1986 N/A
San Francisco
Moscone Center,
San Francisco,
CA................ 230 -- 278 4 -- -- 282 282 (27) 1989 N/A
Other full-service
properties, each
less than 5% of
total............. 403 158 1,288 251 -- 159 1,538 1,697 (216) various various
---- ----- ------ ---- ----- ----- ------ ------ -----
Total full-
service......... 972 158 2,118 274 -- 159 2,391 2,550 (336)
Courtyard........... -- 41 149 3 (6) 41 146 187 (19) various N/A
Residence Inn....... -- 38 104 21 (4) 40 119 159 (13) various N/A
Other properties,
each less than 5% of
total............... -- 132 5 13 (60) 80 10 90 (6) various N/A
---- ----- ------ ---- ----- ----- ------ ------ -----
Total........... $972 $369 $2,376 $311 $ (70) $320 $2,666 $2,986 $(374)
==== ===== ====== ==== ===== ===== ====== ====== =====
<CAPTION>
DEPRECIATION
DESCRIPTION LIFE
----------- ------------
<S> <C>
Full-service Hotels:
New York Marriott
Marquis Hotel,
New York, NY...... 50
San Francisco
Moscone Center,
San Francisco,
CA................ 50
Other full-service
properties, each
less than 5% of
total............. 40
Total full-
service.........
Courtyard........... 40
Residence Inn....... 40
Other properties,
each less than 5% of
total............... various
Total...........
</TABLE>
S-7
<PAGE>
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:
<TABLE>
<S> <C>
Balance at December 31, 1993....................................... $2,681
Additions:
Acquisitions..................................................... 502
Capital expenditures............................................. 40
Deductions:
Dispositions and other........................................... (436)
------
Balance at December 30, 1994....................................... 2,787
Additions:
Acquisitions..................................................... 356
Capital expenditures............................................. 25
Transfers of Construction in Progress............................ 185
Deductions:
Dispositions and other........................................... (367)
------
Balance at December 29, 1995....................................... $2,986
======
</TABLE>
(B) The change in accumulated depreciation and amortization for the fiscal
years ended December 29, 1995 and December 30, 1994 is as follows:
<TABLE>
<S> <C>
Balance at December 31, 1993......................................... $301
Depreciation and amortization....................................... 59
Dispositions and other.............................................. (27)
----
Balance at December 30, 1994......................................... 333
Depreciation and amortization....................................... 65
Dispositions and other.............................................. (24)
----
Balance at December 29, 1995......................................... $374
====
</TABLE>
(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.
S-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
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*1.(i) Underwriting Agreement dated as of March , 1996 among the
Underwriters and the Company.
*1.(ii) Agreement regarding sale of shares of Common Stock dated as
of March , 1996 among the Underwriters, the Company,
Richard E. Marriott and J.W. Marriott, Jr.
2.(i) Memorandum of Understanding between Marriott Corporation
and Certain Bondholders dated as of March 10, 1993
(incorporated by reference from Current Report on Form 8-K
dated March 17, 1993).
2.(ii) Stipulation and Agreement of Compromise and Settlement
(incorporated by reference from Registration Statement No.
33-62444).
3.1(i) Restated Certificate of Incorporation of Marriott
Corporation (incorporated by reference to Current Report on
Form 8-K dated October 23, 1993).
3.1(ii) Certificate of Correction filed to correct a certain error
in the Restated Certificate of Incorporation of Host
Marriott Corporation filed in the Office of the Secretary
of State of Delaware on August 11, 1992, filed in the
Office of the Secretary of State of Delaware on October 11,
1994 (incorporated by reference to Registration Statement
No. 33-54545).
3.2 Amended Marriott Corporation Bylaws (incorporated by
reference to Current Report on Form 8-K dated October 23,
1993).
4.1(i) Third Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of December
1, 1986 (incorporated by reference from Current Report on
Form 8-K dated December 10, 1986).
4.1(ii) Fourth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of May 1,
1987 (incorporated by reference from Current Report on Form
8-K dated May 7, 1987).
4.1(iii) Fifth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of June 12,
1987 (incorporated by reference from Current Report on Form
8-K dated June 18, 1987).
4.1(iv) Sixth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of October
23, 1987 (incorporated by reference from Current Report on
Form 8-K dated October 30, 1987).
4.1(v) Twelfth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of July 11,
1991 (incorporated by reference from Current Report on Form
8-K dated July 19, 1991).
4.1(vi) Thirteenth Supplemental Indenture between Marriott
Corporation and The First National Bank of Chicago dated as
of April 22, 1992 (incorporated by reference from Current
Report on Form 8-K dated April 29, 1992).
4.1(vii) Fourteenth Supplemental Indenture between Marriott
Corporation and The First National Bank of Chicago dated as
of April 28, 1992 (incorporated by reference from Current
Report on Form 8-K dated May 5, 1992).
4.1(viii) Fifteenth Supplemental Indenture between Marriott
Corporation and Bank One, Columbus, NA. dated as of October
8, 1993 (incorporated by reference from Current Report on
Form 8-K dated October 23, 1993).
4.2(i) Rights Agreement between Marriott Corporation and the Bank
of New York as Rights Agent dated February 3, 1989
(incorporated by reference to Registration Statement No.
33-62444).
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4.2(ii) First Amendment to Rights Agreement between Marriott
Corporation and Bank of New York as Rights Agent dated as of
October 8, 1993 (incorporated by reference to Registration
Statement No. 33-51707).
4.3 Indenture by and among HMC Acquisition Properties, Inc., as
Issuer, HMC SFO, Inc., as Subsidiary Guarantors, and Marine
Midland Bank, as Trustee (incorporated by reference to
Registration Statement No. 333-00768).
4.4 Indenture by and among HMH Properties Inc., as Issuer, HMH
Courtyard Properties, Inc., HMC Retirement Properties, Inc.,
Marriott Financial Services, Inc., Marriott SBM Two
Corporation, HMH Pentagon Corporation and Host Airport
Hotels, Inc., as Subsidiary Guarantors, and Marine Midland
Bank, as Trustee (incorporated by reference to Registration
Statement No. 33-95058).
4.5(i) Warrant Agreement dated as of October 14, 1994 by and
between Host Marriott Corporation and First Chicago Trust
Company of New York as Warrant Agent (incorporated by
reference to Registration Statement No. 33-80801).
4.5(ii) First Supplemental Warrant Agreement dated December 22, 1995
by and among Host Marriott Corporation, Host Marriott
Services Corporation and First Chicago Trust Company as
Warrant Agent (incorporated by reference to Registration
Statement No. 33-80801).
* 5 Opinion of Christopher G. Townsend, Esq. as to legality of
securities being registered.
10.1 Marriott Corporation Executive Deferred Compensation Plan
dated as of December 6, 1990 (incorporated by reference from
Exhibit 19(i) of the Annual Report on Form 10-K for the
fiscal year ended December 28, 1991).
10.2 Host Marriott Corporation 1993 Comprehensive Stock Incentive
Plan effective as of October 8, 1993 (incorporated by
reference from Current Report on Form 8-K dated October 23,
1993).
10.3 Distribution Agreement dated as of September 15, 1993
between Marriott Corporation and Marriott International,
Inc. (incorporated by reference from Current Report on Form
8-K dated October 23, 1993).
10.4 Amendment No. 1 to the Distribution Agreement dated
September 15, 1993 by and among Host Marriott Corporation,
Host Marriott Services Corporation and Marriott
International (incorporated by reference from Current Report
on Form 8-K dated January 16, 1996).
10.5 Distribution Agreement dated December 22, 1995 by and
between Host Marriott Corporation and Host Marriott Services
Corporation (incorporated by reference from Current Report
on Report 8-K dated January 16, 1996).
10.6 Tax Sharing Agreement dated as of October 5, 1993 by and
between Marriott Corporation and Marriott International,
Inc. (incorporated by reference from Current Report on Form
8-K dated October 23, 1993) (incorporated by reference from
Current Report on Form 8-K dated January 16, 1996).
10.7 Assignment and License Agreement dated as of October 8, 1993
by and between Marriott Corporation and Marriott
International, Inc. (incorporated by reference from Current
Report on Form 8-K dated October 23, 1993).
10.8 Amendment No. 1 to the Assignment and License Agreement
dated as of October 8, 1993 by and between Marriott
International, Inc. and Host Marriott Corporation
(incorporated by reference from Current Report on Form 8-K
dated January 16, 1996).
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10.9 Transitional Corporate Services Agreement dated December
28, 1995 by and between Host Marriott Corporation and Host
Marriott Services Corporation (incorporated by reference
from Current Report on Form 8-K dated January 16, 1996).
10.10 Tax Administration Agreement dated as of October 8, 1993 by
and between Marriott Corporation and Marriott
International, Inc. (incorporated by reference from Current
Report on Form 8-K dated October 23, 1993).
10.11 Noncompetition Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International,
Inc. (incorporated by reference from Current Report on Form
8-K dated October 23, 1993).
10.12 Amendment No. 1 to the Noncompetition Agreement dated
October 8, 1993 by and between Host Marriott Corporation
and Marriott International, Inc. (incorporated by reference
from Current Report on Form 8-K dated January 16, 1996).
+10.13 Host Marriott Lodging Management Agreement--Marriott
Hotels, Resorts and Hotels dated September 25, 1993 by and
between Marriott Corporation and Marriott International,
Inc. (incorporated by reference to Registration Statement
No. 33-51707).
+10.14(ii) Host Marriott Lodging Management Agreement--Courtyard
Hotels dated September 25, 1993 by and between Marriott
Corporation and Marriott International, Inc. (incorporated
by reference to Registration Statement No. 33-51707).
+10.14(iii) Host Marriott Lodging Management Agreement--Residence Inns
dated September 25, 1993 by and between Marriott
Corporation and Marriott International, Inc. (incorporated
by reference to Registration Statement No. 33-51707).
10.15(i) Consolidation Letter Agreement pertaining to Courtyard
Hotels dated September 25, 1993 between a subsidiary of
Marriott International, Inc. and a subsidiary of the
Company (incorporated by reference to Registration
Statement No. 33-51707).
10.16(ii) Consolidation Letter Agreement pertaining to Residence Inns
dated September 25, 1993 between a subsidiary of Marriott
International, Inc. and a subsidiary of the Company
(incorporated by reference to Registration Statement No.
33-51707).
10.17 Employee Benefits and Other Employment Matters Allocation
Agreement dated as of December 29, 1995 by and between Host
Marriott Corporation and Host Marriott Services Corporation
(incorporated by reference from Current Report on Form 8-K
dated January 16, 1996).
10.18 Tax Sharing Agreement dated as of December 29, 1995 by and
between Host Marriott Corporation and Host Marriott
Services Corporation (incorporated by reference from
Current Report on Form 8-K dated January 16, 1996).
10.19 Marriott/Host Marriott Employees' Profit Sharing Retirement
and Savings Plan and Trust (incorporated by reference from
Registration Statement No. 33-62444).
10.20 Working Capital Agreement by and between Host Marriott
Corporation and Marriott International, Inc. dated as of
September 25, 1993 (incorporated by reference from
Registration Statement No. 33-62444).
10.21 Sale--Purchase Agreement dated as of November 2, 1995
between The Port Authority of New York and New Jersey, as
Seller, and Host Marriott Corporation as Purchaser
(incorporated by reference from Current Report on Form 8-K
dated January 8, 1996).
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10.22 Purchase Agreement dated June 2, 1995 by and between MRI
Business Properties Fund, Ltd. II, as Seller, and HMH Rivers,
Inc., as Purchaser (incorporated by reference from Current
Report on Form 8-K dated July 3, 1995).
10.23 Purchase Agreement dated October 31, 1995 by and between
1028796 Ontario Limited and Marriott Corporation of Canada Ltd.
as Sellers, and HMC Toronto EC, Inc. as Purchaser (incorporated
by reference from Current Report on Form 8-K dated November 20,
1995).
10.24 Purchase and Sale Agreement dated as of June 7, 1995 between
Potomac Hotel Limited Partnership, as Seller, and Host Marriott
Corporation, as Purchaser (incorporated by reference from
Current Report on Form 8-K dated September 6, 1995).
10.25 $225,000,000 Revolving Line and Guarantee Reimbursement
Agreement dated as of June 26, 1995 among Host Marriott
Corporation as Borrower, Marriott International, Inc. as
Lender, and certain Subsidiaries of Host Marriott Corporation
as Guarantors (incorporated by reference from Current Report on
Form 8-K dated July 17, 1995).
11 Statement re: Computation of Per Share Earnings.
12 Computation of Ratio of Earnings to Fixed Charges.
*22 Subsidiaries of Host Marriott Corporation.
*23.1 Consent of Arthur Andersen LLP
*23.2 Consent of KPMG Peat Marwick LLP
*23.3 Consent of Ernst & Young LLP
*23.4 Consent of Christopher G. Townsend, Esq. (included in his
opinion filed as Exhibit 5).
</TABLE>
- --------
+ Agreement filed is illustrative of numerous other agreements to which the
Company is a party.
* Filed herewith.
<PAGE>
EXHIBIT 1.(i)
25,000,000 Shares
Host Marriott Corporation
Common Stock
($1.00 Par Value)
UNDERWRITING AGREEMENT
----------------------
1996
--------- --,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
SALOMON BROTHERS INC
SMITH BARNEY INC.
MONTGOMERY SECURITIES
BT SECURITIES CORPORATION
SCHRODER WERTHEIM & CO. INCORPORATED
As representatives of the several
U.S. Underwriters named in
Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
140 Broadway
New York, New York 10005
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN SACHS INTERNATIONAL
SALOMON BROTHERS INTERNATIONAL LIMITED
SMITH BARNEY INC.
MONTGOMERY SECURITIES
BANKERS TRUST INTERNATIONAL PLC
J. HENRY SCHRODER & CO. LIMITED
As representatives of the several
international managers named in
Schedule II hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
Jupiter House
Trinton Court
14 Finsbury Square
London EC2A 1BR, England
<PAGE>
Ladies and Gentlemen:
Host Marriott Corporation, a Delaware corporation (the "Company"),
confirms its agreement with the several Underwriters (as defined below) as
follows:
1. The Shares. Subject to the terms and conditions herein set forth,
----------
the Company proposes to sell to the Underwriters an aggregate of 25,000,000
shares (the "Firm Shares") of common stock, $1.00 par value per share, of the
Company (the "Common Stock").
It is understood that, subject to the conditions hereinafter stated,
20,000,000 Firm Shares (the "U.S. Firm Shares") will be sold to the several U.S.
Underwriters named in Schedule I hereto (the "U.S. Underwriters") in connection
with the offering and sale of such U.S. Firm Shares in the United States and
Canada to United States and Canadian Persons (as such terms are defined in the
Agreement Between U.S. Underwriters and International Managers of even date
herewith), and 5,000,000 Firm Shares (the "International Shares") will be sold
to the several International Managers named in Schedule II hereto (the
"International Managers") in connection with the offering and sale of such
International Shares outside the United States and Canada to persons other than
United States and Canadian Persons. Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), Goldman, Sachs & Co., Salomon Brothers Inc, Smith Barney
Inc., Montgomery Securities, BT Securities Corporation and Schroder Wertheim &
Co. Incorporated shall act as representatives (the "U.S. Representatives") of
the several U.S. Underwriters, and DLJ, Goldman Sachs International, Salomon
Brothers International Limited, Smith Barney Inc., Montgomery Securities,
Bankers Trust International PLC and J. Henry Schroder & Co. Limited shall act as
representatives (the "International Representatives" and, together with the U.S.
Representatives, the "Representatives") of the several International Managers.
The U.S. Underwriters and the International Managers are hereinafter
collectively referred to as the "Underwriters."
The Company also proposes to sell to the several U.S. Underwriters an
aggregate of not more than 3,750,000 additional shares of Common Stock (the
"Additional Shares"), if requested by the U.S. Underwriters as provided in
Section 3 hereof. The Firm Shares and the Additional Shares are herein
collectively called the "Shares."
2
<PAGE>
2. Registration Statement and Prospectus. The Company has prepared
-------------------------------------
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1 (No. 333-00147), including a
preliminary prospectus, subject to completion, relating to the Shares. The
registration statement contains two prospectuses to be used in connection with
the offering and sale of the Shares: the U.S. prospectus, to be used in
connection with the offering and sale of Shares in the United States and Canada
to United States and Canadian Persons, and the international prospectus, to be
used in connection with the offering and sale of Shares outside the United
States and Canada to persons other than United States and Canadian Persons. The
international prospectus is identical to the U.S. prospectus except for the
outside front and back cover pages. The registration statement, as amended at
the time it becomes effective or, if a post-effective amendment is filed with
respect thereto, as amended by such post-effective amendment at the time of its
effectiveness, including in each case financial statements and exhibits, and the
information (if any) contained in a prospectus subsequently filed with the
Commission pursuant to Rule 424(b) under the Act and deemed to be a part of the
registration statement at the time of its effectiveness pursuant to Rule 430A or
Rule 434 under the Act, and any additional registration statement relating to
the issuance of additional shares of Common Stock filed pursuant to Rule 462(b)
under the Act, is hereinafter referred to as the "Registration Statement;" and
the U.S. prospectus (including any prospectus subject to completion which meets
the requirements of Rule 434(a) under the Act provided by the Company with any
term sheet meeting the requirements of Rule 434(b), taken together with any
prospectus as provided above, which meet the requirements of Section 10(a)(3)
under the Act), and the international prospectus in the respective forms used to
confirm sales of the Shares, whether or not filed with the Commission pursuant
to Rule 424(b) under the Act, are hereinafter referred to as the "Prospectus."
3. Agreements to Sell and Purchase. On the basis of the
-------------------------------
representations and warranties contained in this Agreement, and subject to its
terms and conditions, the Company agrees to issue and sell to each of the U.S.
Underwriters, and each of the U.S. Underwriters agrees, severally and not
jointly, to purchase from the Company, at a price per share of $_____ (the
"Purchase Price") the aggregate number of Firm Shares set forth opposite the
name of such U.S. Underwriter in Schedule I hereto.
3
<PAGE>
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company hereby agrees to
issue and sell the International Shares to the International Managers, and each
of the International Managers agrees, severally and not jointly, to purchase
from the Company at the Purchase Price the aggregate number of Firm Shares set
forth opposite the name of such International Manager in Schedule II hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to the terms and conditions hereof, the Company agrees to
issue and sell to the U.S. Underwriters up to 3,750,000 Additional Shares, and
the U.S. Underwriters shall have a right to purchase, severally and not jointly,
from time to time, up to an aggregate of 3,750,000 Additional Shares at the
Purchase Price. Additional Shares may be purchased as provided in Section 4
hereof solely for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. If any Additional Shares are to be
purchased, each U.S. Underwriter, severally and not jointly, agrees to purchase
the number of Additional Shares (subject to such adjustments to eliminate
fractional shares as the U.S. Representatives may determine) which bears the
same proportion to the total number of Additional Shares to be purchased as the
number of U.S. Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto bears to the total number of U.S. Firm Shares.
The Company hereby agrees, and the Company shall, concurrently with
the execution of this Agreement, deliver an agreement executed by Richard E.
Marriott and by J.W. Marriott, Jr. pursuant to which each such person will
agree, not to, without the prior written consent of DLJ, directly or indirectly,
offer, sell, contract to sell, grant any option to purchase or otherwise dispose
of any shares of Common Stock, or any securities convertible into or exercisable
or exchangeable for, or warrants, options or rights to purchase or acquire,
Common Stock owned by such person or with respect to which such person has the
power of disposition or enter into any agreement to do any of the foregoing for
a period of 90 days after the date of the Prospectus (provided that, such person
shall be permitted to deliver shares of Common Stock to the Company for the sole
purpose of exercising stock options pursuant to the Company's existing stock
option plans).
The Company is advised by you that the Underwriters propose (i) to
make a public offering of their respective portions of the Shares as soon after
the effective date of the Registration Statement as in your judgment is
4
<PAGE>
advisable and (ii) initially to offer the Shares upon the terms set forth in the
Prospectus.
Each U.S. Underwriter hereby makes to the Company the representations
and agreements of such U.S. Underwriter contained in the fifth paragraph of
Section 3 of the Agreement Between U.S. Underwriters and International Managers
of even date herewith. Each International Manager hereby makes to the Company
the representations and agreements of such International Underwriter contained
in the seventh, eighth, ninth and tenth paragraphs of Section 3 of such
Agreement.
4. Delivery and Payment. Delivery to you of and payment for the Firm
--------------------
Shares shall be made at 9:00 A.M., New York City time, on the third or fourth
business day, unless otherwise permitted by the Commission pursuant to Rule
15c6-1 under the Securities Exchange Act of 1934, as amended including the rules
and regulations thereunder (the "Exchange Act"), (such time and date being
referred to as the "Closing Date") following the date of the initial public
offering of the Firm Shares as advised by DLJ to the Company, at such place as
you shall reasonably designate. The Closing Date and the location of delivery
of the Firm Shares may be varied by agreement between DLJ and the Company.
Delivery to the U.S. Underwriters of and payment for any Additional
Shares to be purchased by the U.S. Underwriters shall be made at such place as
DLJ shall designate, at 9:00 A.M., New York City time, on such date or dates
(individually, an "Option Closing Date"), which may be the same as the Closing
Date but shall in no event be earlier than the Closing Date and shall in no
event be later than ten business days after the giving of the notice hereinafter
referred to, as shall be specified in a written notice from DLJ to the Company
of the U.S. Underwriters' determination to purchase a number, specified in said
notice, of Additional Shares. Any such notice may be given at any time not
later than 30 days after the date of this Agreement (provided that if such
notice is not delivered within such 30-day period the option to purchase
Additional Shares shall terminate). Any Option Closing Date and the location of
delivery of and payment for the Additional Shares may be varied by agreement
among DLJ and the Company.
Certificates for the Shares shall be registered in such names and
issued in such denominations as you shall request in writing not later than two
full business days prior to the Closing Date or the applicable Option Closing
Date, as the case may be, and shall be made available to you at the offices of
5
<PAGE>
DLJ (or such other place as shall be acceptable to you) for inspection not later
than 9:30 A.M., New York City time, on the business day next preceding the
Closing Date or the applicable Option Closing Date, as the case may be.
Certificates in definitive form evidencing the Shares shall be delivered to you
on the Closing Date or the applicable Option Closing Date, as the case may be,
with any transfer taxes payable upon initial issuance thereof duly paid by the
Company, for the respective accounts of the Underwriters against payment of the
Purchase Price by check or checks payable in New York Clearing House or similar
next day funds, to the order of the Company.
5. Agreements of the Company. The Company agrees with each
-------------------------
Underwriter that:
(a) It will, if the Registration Statement has not heretofore become
effective under the Act, file an amendment to the Registration Statement
or, if necessary pursuant to Rule 430A under the Act, a post-effective
amendment to the Registration Statement, in each case as soon as
practicable after the execution and delivery of this Agreement, and will
use its reasonable best efforts to cause the Registration Statement or such
post-effective amendment to become effective at the earliest possible time.
The Company will comply fully and in a timely manner with the applicable
provisions of Rule 424 and Rule 430A, and if applicable, Rule 462, under
the Act.
(b) It will advise you promptly and, if requested by any of you,
confirm such advice in writing, (i) when the Registration Statement has
become effective, if and when the Prospectus is sent for filing pursuant to
Rule 424 under the Act and when any post-effective amendment to the
Registration Statement becomes effective, (ii) of the receipt of any
comments from the Commission or any state securities commission or
regulatory authority that relate to the Registration Statement or requests
by the Commission or any state securities commission or regulatory
authority for amendments to the Registration Statement or amendments or
supplements to the Prospectus or for additional information, (iii) of the
issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement, or of the suspension of qualification of the
Shares for offering or sale in any jurisdiction, or the initiation of any
proceeding for such purpose by the Commission or any state securities
commission or other regulatory authority, and (iv) of the happening of any
event during such period as in your reasonable judgment you are required to
deliver a
6
<PAGE>
prospectus in connection with sales of the Shares by you which makes any
statement of a material fact made in the Registration Statement untrue or
which requires the making of any additions to or changes in the
Registration Statement (as amended or supplemented from time to time) in
order to make the statements therein not misleading or that makes any
statement of a material fact made in the Prospectus (as amended or
supplemented from time to time) untrue or which requires the making of any
additions to or changes in the Prospectus (as amended or supplemented from
time to time) in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. If at any time
the Commission shall issue any stop order suspending the effectiveness of
the Registration Statement, or any state securities commission or other
regulatory authority shall issue an order suspending the qualification or
exemption of the Shares under any state securities or Blue Sky laws, the
Company shall use its reasonable efforts to obtain the withdrawal or
lifting of such order at the earliest possible time.
(c) It will furnish to you without charge two (2) signed copies (plus
one (1) additional signed copy to your legal counsel) of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits filed therewith, and will furnish to you such number
of conformed copies of the Registration Statement as so filed and of each
amendment to it, without exhibits, as you may reasonably request.
(d) It will not file any amendment or supplement to the Registration
Statement, whether before or after the time when it becomes effective, or
make any amendment or supplement to the Prospectus, of which you shall not
previously have been advised and provided a copy within a reasonable period
of time prior to the filing thereof or to which you shall, after being so
advised, reasonably object in writing, unless, in the reasonable judgment
of the Company and its counsel, such amendment or supplement is necessary
to comply with law; and it will prepare and file with the Commission,
promptly upon your reasonable request, any amendment to the Registration
Statement or supplement to the Prospectus which may be necessary or
advisable in connection with the distribution of the Shares by you, and
will use its reasonable best efforts to cause any amendment to the
Registration Statement to become effective as promptly as possible.
7
<PAGE>
(e) Promptly after the Registration Statement becomes effective, and
from time to time thereafter for such period in your reasonable judgment as
a prospectus is required to be delivered in connection with sales of the
Shares by you, it will furnish to each Underwriter and dealer without
charge as many copies of the Prospectus (and of any amendment or supplement
to the Prospectus) as such Underwriters and dealers may reasonably request
for the purposes contemplated by the Act and the Exchange Act. The Company
consents to the use of the Prospectus and any amendment or supplement
thereto by any Underwriter or any dealer, both in connection with the
offering or sale of the Shares and for such period of time thereafter as
the Prospectus is required by the Act or the Exchange Act to be delivered
in connection therewith.
(f) If during such period as in your reasonable judgment you are
required to deliver a prospectus in connection with sales of the Shares by
you any event shall occur as a result of which it becomes necessary to
amend or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances existing as of the date the Prospectus is
delivered to a purchaser, not misleading, or if it is necessary to amend or
supplement the Prospectus to comply with any law, it will as promptly as
practicable prepare and file with the Commission an appropriate amendment
or supplement to the Prospectus so that the statements in the Prospectus,
as so amended or supplemented, will not, in the light of the circumstances
existing as of the date the Prospectus is so delivered, be misleading, and
will comply with applicable law, and will furnish to each Underwriter and
dealer without charge such number of copies thereof as such Underwriter or
dealer may reasonably request.
(g) Prior to any public offering of the Shares, it will cooperate
with you and your counsel in connection with the registration or
qualification of the Shares for offer and sale by you under the state
securities or Blue Sky laws of such jurisdictions as you may reasonably
request (provided, that the Company shall not be obligated to qualify as a
foreign corporation in any jurisdiction in which it is not so qualified or
to take any action that would subject it to general consent to service of
process in any jurisdiction in which it is not now so subject). The
Company will continue such qualification in effect so long as required by
law for distribution of the Shares.
8
<PAGE>
(h) It will make generally available to its security holders as soon
as reasonably practicable a consolidated earning statement covering a
period of at least twelve months beginning after the "effective date" (as
defined in Rule 158 under the Act) of the Registration Statement (but in no
event commencing later than 90 days after such date) which shall satisfy
the provisions of Section 11(a) of the Act and Rule 158 thereunder.
(i) It will timely complete all required filings and otherwise fully
comply in a timely manner with all provisions of the Exchange Act in
connection with the public offering of the Shares.
(j) During the period of five years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the
Company mailed to shareholders or filed with the Commission, and (ii) from
time to time such other information concerning the Company as you may
reasonably request.
(k) Whether or not the transactions contemplated hereby are
consummated or this Agreement is terminated, it will pay and be responsible
for all costs, expenses, fees and taxes in connection with or incident to
(i) the printing, processing, filing, distribution and delivery under the
Act or the Exchange Act of the Registration Statement, each preliminary
prospectus, the Prospectus and all amendments or supplements thereto, (ii)
the printing, processing, execution, distribution and delivery of this
Agreement, any memoranda describing state securities or Blue Sky laws and
all other agreements, memoranda, correspondence and other documents
printed, distributed and delivered in connection with the offering of the
Shares, (iii) the registration with the Commission and the issuance and
delivery of the Shares, (iv) the registration or qualification of the
Shares for offer and sale under the securities or Blue Sky laws of the
jurisdictions referred to in paragraph (g) above (including, in each case,
the reasonable fees and disbursements of counsel relating to such
registration or qualification and memoranda relating thereto and any filing
fees in connection therewith), (v) furnishing such copies of the
Registration Statement, Prospectus and preliminary prospectus, and all
amendments and supplements to any of them, as may be reasonably requested
by you for use in connection with the offering or sale of the Shares by the
Underwriters or the dealers to whom the Shares may be sold, (vi) filing,
registration and clearance with the National Association of Securities
Dealers, Inc. (the "NASD") in connection with the offering of the Shares
(including any
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filing fees in connection therewith and the fees and disbursements of
counsel relating thereto), (vii) the listing of the Shares on the New York
Stock Exchange, (viii) any "qualified independent underwriter" if and as
required by Schedule E of the Bylaws of the NASD (including fees and
disbursements of counsel for such qualified independent underwriter) and
(ix) the performance by the Company of its other obligations under this
Agreement, the cost of its personnel and other internal costs, the cost of
printing and engraving the certificates representing the Shares, and all
expenses and taxes incident to the sale and delivery of the Shares to you
(provided that the Company shall not be obligated pursuant to this
paragraph to pay the fees and disbursements of your counsel, except to the
extent set forth in clauses (iv) and (vi) above).
(l) It will use the proceeds from the sale of the Shares in the
manner described in the Prospectus under the caption "Use of Proceeds."
(m) It will cause the Shares to be listed on the New York Stock
Exchange and will use its reasonable best efforts to maintain such listing
while any of the Shares are outstanding.
(n) It will use its reasonable best efforts to do and perform all
things required to be done and performed under this Agreement by it prior
to or after the Closing Date and to satisfy all conditions precedent on its
part to the delivery of the Shares.
6. Representations and Warranties. The Company represents and
------------------------------
warrants to each Underwriter that:
(a) When the Registration Statement becomes effective, including at
the date of any post-effective amendment, at the date of the Prospectus (if
different) and at the Closing Date, the Registration Statement will comply
in all material respects with the provisions of the Act, and will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; the Prospectus and any supplements or
amendments thereto will not at the date of the Prospectus, at the date of
any such supplements or amendments and at the Closing Date contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that
10
<PAGE>
the representations and warranties contained in this paragraph (a) shall
not apply to statements in or omissions from the Registration Statement or
the Prospectus (or any supplement or amendment to them) made in reliance
upon and in conformity with information relating to any Underwriter
furnished to the Company in writing by or on behalf of any Underwriter
through you expressly for use therein. The Company acknowledges for all
purposes under this Agreement that the statements with respect to price and
underwriting discount and the last paragraph all as set forth on the cover
page and the information under the caption "Underwriting" in the Prospectus
(or any amendment or supplement) constitute the only written information
furnished to the Company by any Underwriter expressly for use in the
Registration Statement or the Prospectus (or any amendment or supplement to
them) and that the Underwriters shall not be deemed to have provided any
other information (and therefore are not responsible for any such statement
or omission).
(b) Any term sheet and prospectus subject to completion provided by
the Company to the Underwriters for use in connection with the offering and
sale of the Shares pursuant to Rule 434 under the Act together are not
materially different from the prospectus included in the Registration
Statement (exclusive of any information deemed a part thereof by virtue of
Rule 434(d)).
(c) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, and each Registration Statement filed
pursuant to Rule 462(b) under the Act, if any, complied when so filed in
all material respects with the Act.
(d) The Company and each of its "significant subsidiaries" (as
defined under Regulation S-X promulgated by the Commission) (each, a
"Subsidiary" and, collectively, the "Subsidiaries") has been duly
organized, is validly existing as a corporation in good standing under the
laws of its jurisdiction of organization and has the requisite corporate
power and authority to carry on its business as it is currently being
conducted, to own, lease and operate its properties; and the Company has
the requisite power and authority to authorize the offering of the Shares,
to execute, deliver and perform this Agreement, and to issue, sell and
deliver the Shares; and each of the Company and the Subsidiaries is duly
qualified and is in good standing as a foreign corporation authorized to do
business
11
<PAGE>
in each jurisdiction where the operation, ownership or leasing of property
or the conduct of its business requires such qualification, except where
the failure to be so qualified would not, singly or in the aggregate, have
a material adverse effect on the properties, business, results of
operations, condition (financial or otherwise), business affairs or
prospects of the Company and its subsidiaries taken as a whole (a "Material
Adverse Effect").
(e) All of the issued and outstanding shares of capital stock of, or
other ownership interests in, each Subsidiary have been duly and validly
authorized and issued, and all of the shares of capital stock of, or other
ownership interests in, each Subsidiary are owned, directly or through
Subsidiaries, by the Company. All such shares of capital stock are fully
paid and nonassessable, and are owned free and clear of any security
interest, mortgage, pledge, claim, lien or encumbrance (each, a "Lien"),
except for security interests relating to the Properties Notes (as defined
in the Prospectus) granted pursuant to the Properties Note Indenture (as
defined in the Prospectus). There are no outstanding subscriptions,
rights, warrants, options, calls, convertible securities, commitments of
sale or Liens related to or entitling any person to purchase or otherwise
to acquire any shares of the capital stock of, or other ownership interest
in, any Subsidiary.
(f) The authorized, issued and outstanding capital stock of the
Company was, as of the dates indicated in the Prospectus, as set forth in
the Prospectus under "Unaudited Pro Forma Condensed Consolidated Balance
Sheet" and "Description of Capital Stock;" all the shares of issued and
outstanding Common Stock have been duly authorized and validly issued and
are fully paid, nonassessable and not subject to any preemptive or similar
rights except for the Marriott International Purchase Right (as defined in
the Prospectus); the Shares have been duly authorized for issuance and sale
to the Underwriters pursuant to this Agreement and, when issued and
delivered by the Company pursuant to this Agreement against payment of the
consideration set forth herein, will be validly issued and fully paid and
nonassessable; the capital stock of the Company, including the Common
Stock, conforms in all material respects to all statements relating thereto
in the Prospectus and the Registration Statement; and the issuance of the
Shares by the Company will not be subject to preemptive or other similar
rights.
12
<PAGE>
(g) Neither the Company nor any of its subsidiaries is in violation
of its respective charter or bylaws or in default in the performance of any
bond, debenture, note or any other evidence of indebtedness or any
indenture, mortgage, deed of trust or other contract, lease or other
instrument to which the Company or any of its subsidiaries is a party or by
which any of them is bound, or to which any of the property or assets of
the Company or any of its subsidiaries is subject except for such
violations or defaults which would not have a Material Adverse Effect.
(h) This Agreement has been duly authorized and validly executed and
delivered by the Company and constitutes a valid and legally binding
agreement of the Company, enforceable against the Company in accordance
with its terms (assuming the due execution and delivery hereof by you).
(i) The execution and delivery of this Agreement by the Company, the
issuance and sale of the Shares, the performance of this Agreement and the
consummation of the transactions contemplated by this Agreement will not
(1) conflict with or result in a breach or violation of any of the
respective charters or bylaws of the Company or any of its subsidiaries or
any of the terms or provisions of, or (2) constitute a default or cause an
acceleration of any obligation under or result in the imposition or
creation of (or the obligation to create or impose) a Lien with respect to,
any material bond, note, debenture or other evidence of indebtedness or any
material indenture, mortgage, deed of trust or other agreement or
instrument to which the Company or any of the Subsidiaries is a party or by
which it or any of them is bound, or to which any properties of the Company
or any of the Subsidiaries is or may be subject, or (3) contravene any
order of any court or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their properties, or
violate or conflict with any statute, rule or regulation or administrative
or court decree applicable to the Company or any of its subsidiaries, or
any of their respective properties, except in the case of clause (3) above,
for such conflicts or violations which would not have a Material Adverse
Effect.
(j) Except as set forth in the Prospectus, there is no action, suit
or proceeding before or by any court or governmental agency or body,
domestic or foreign, pending against or affecting the Company or any of the
subsidiaries, or any of their respective properties, which is required to
13
<PAGE>
be disclosed in the Registration Statement or the Prospectus, or which
would result, singly or in the aggregate, in a Material Adverse Effect or
which could reasonably be expected to materially and adversely affect the
consummation of this Agreement or the transactions contemplated hereby, and
to the best of the Company's knowledge, no such proceedings are
contemplated or threatened. No contract or document of a character
required to be described in the Registration Statement or the Prospectus or
to be filed as an exhibit to the Registration Statement is not so described
or filed.
(k) To the best knowledge of the Company, (A) no action has been
taken and no statute, rule or regulation or order has been enacted, adopted
or issued by any governmental agency or body which prevents the issuance of
the Shares, suspends the effectiveness of the Registration Statement,
prevents or suspends the use of any preliminary prospectus or suspends the
sale of the Shares in any jurisdiction referred to in Section 5(g) hereof
and (B) no injunction, restraining order or order of any nature by a
Federal or state court of competent jurisdiction has been issued with
respect to the Company or any of its subsidiaries which would prevent or
suspend the issuance or sale of the Shares, the effectiveness of the
Registration Statement, or the use of any preliminary prospectus in any
jurisdiction referred to in Section 5(g) hereof. Every request of the
Commission or any securities authority or agency of any jurisdiction for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise) has been complied with in all material respects.
(l) Except as would not, singly or in the aggregate, have a Material
Adverse Effect, neither the Company nor any of its subsidiaries is in
violation of any environmental, safety or similar law or regulation
applicable to its business relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), lacks any permits,
licenses or other approvals required of them under applicable Environmental
Laws or is violating any terms and conditions of any such permit, license
or approval.
(m) No labor dispute with the employees of the Company or any of its
subsidiaries exists, or to the knowledge of the Company, is imminent that
would have a Material Adverse Effect; and the Company is not aware of any
existing or imminent labor disturbance by the employees of
14
<PAGE>
any of its principal suppliers, manufacturers or contractors, or of
Marriott International, which would have a Material Adverse Effect.
(n) (i) The Company and each of its Subsidiaries has good and
marketable title, free and clear of all Liens, to all property and assets
described in the Registration Statement as being owned by it, except for
Liens described or reflected in the Prospectus (including all Liens
relating to mortgages reflected on the financial statements included in the
Prospectus and Liens imposed by the Properties Note Indenture) or Liens
that would not have a Material Adverse Effect and (ii) all liens, charges,
encumbrances, claims, or restrictions on or affecting the properties and
assets of the Company or any of its subsidiaries that are required to be
disclosed in the Prospectus are disclosed therein.
(o) The firm of accountants that has certified or shall certify the
applicable consolidated financial statements and supporting schedules of
the Company filed or to be filed with the Commission as part of the
Registration Statement and the Prospectus are independent public
accountants with respect to the Company and its subsidiaries, as required
by the Act. The consolidated historical and pro forma financial
--- -----
statements, together with related schedules and notes, set forth in the
Prospectus and the Registration Statement comply as to form in all material
respects with the requirements of the Act. Such historical financial
statements fairly present the consolidated financial position of the
Company and its subsidiaries at the respective dates indicated and the
results of their operations and their cash flows for the respective periods
indicated, in accordance with generally accepted accounting principles
("GAAP") consistently applied throughout such periods. Such pro forma
--- -----
financial statements have been prepared on a basis consistent with such
historical statements, except for the pro forma adjustments specified
--- -----
therein, and give effect to assumptions made on a reasonable basis and
present fairly the transactions reflected thereby as indicated in the
Prospectus. The other financial and statistical information and data
included in the Prospectus and in the Registration Statement, historical
and pro forma, are, in all material respects, accurately presented and
--- -----
prepared on a basis consistent with such financial statements and the books
and records of the Company.
(p) Except as disclosed in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration
Statement and the Prospectus and up to the Closing Date, neither the
15
<PAGE>
Company nor any of its subsidiaries has incurred any liabilities or
obligations, direct or contingent, which are material to the Company and
its subsidiaries taken as a whole, nor entered into any transaction not in
the ordinary course of business and there has not been, singly or in the
aggregate, any material adverse change, or any development which would
involve a material adverse change, in the properties, business, results of
operations, condition (financial or otherwise), business affairs or
prospects of the Company and its subsidiaries taken as a whole (a "Material
Adverse Change").
(q) No authorization, approval or consent or order of, or filing
with, any court or governmental body or agency is necessary in connection
with the transactions contemplated by this Agreement, except such as may be
required by the NASD or have been obtained and made under the Act, the
Exchange Act or state securities or Blue Sky laws or regulations. Neither
the Company nor any of its affiliates is presently doing business with the
government of Cuba or with any person or affiliate located in Cuba.
(r) (i) Each of the Company and its subsidiaries has all
certificates, consents, exemptions, orders, permits, licenses,
authorizations, or other approvals (each, an "Authorization") of and from,
and has made all declarations and filings with, all Federal, state, local
and other governmental authorities, all self-regulatory organizations and
all courts and other tribunals, necessary or required to own, lease,
license and use its properties and assets and to conduct its business in
the manner described in the Prospectus, and all such Authorizations are in
full force and effect, except to the extent that the failure to obtain or
file or cause to remain in effect would not, singly or in the aggregate,
have a Material Adverse Effect and (ii) the Company and its subsidiaries
are in compliance in all material respects with the terms and conditions of
all such Authorizations and with the rules and regulations of the
regulatory authorities and governing bodies having jurisdiction with
respect thereto.
(s) Neither the Company nor any of the Subsidiaries is an "investment
company" or a company "controlled" by an investment company within the
meaning of the Investment Company Act of 1940, as amended.
16
<PAGE>
(t) No holder of any security of the Company has or will have any
right to require the registration of such security by virtue of any
transaction contemplated by this Agreement.
(u) The Shares have been approved for listing on the New York Stock
Exchange, subject to notice of issuance.
(v) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters pursuant to
Section 8 shall be deemed to be a representation and warranty by the
Company to each Underwriter as to the matters covered thereby.
(w) The Company and each of its consolidated subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (1) transactions are executed in accordance with
management's general or specific authorizations; (2) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain asset accountability; (3) access to
assets is permitted only in accordance with management's general or
specific authorization; and (4) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(x) The Company has not taken, directly or indirectly, any action
designed to cause or to result in, or that has constituted or which could
reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale
of the Shares.
(y) Neither the Company nor any of its subsidiaries is in violation
of any statute, law, ordinance, governmental rule or regulation or any
judgment, decree, rule or order of any court or governmental agency or
authority applicable to the Company or any of its subsidiaries or any of
their properties or assets, except such violations as would not, singly or
in the aggregate, have a Material Adverse Effect.
7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless (i) each of the
Underwriters and (ii) each person, if any, who controls (within the
17
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meaning of Section 15 of the Act or Section 20 of the Exchange Act) any of
the Underwriters (any of the persons referred to in this clause (ii) being
hereinafter referred to as a "controlling person"), and (iii) the
respective officers, directors, partners, employees, representatives and
agents of any of the Underwriters or any controlling person (any person
referred to in clause (i), (ii) or (iii) may hereinafter be referred to as
an "Indemnified Person") to the fullest extent lawful, from and against any
and all losses, claims, damages, liabilities, judgments, actions and
expenses (including, without limitation, and as incurred, reimbursement of
all reasonable costs of investigating, preparing, pursuing or defending any
claim or action, or any investigation or proceeding by any governmental
agency or body, commenced or threatened, including the reasonable fees and
expenses of counsel to any Indemnified Person) directly or indirectly
caused by, related to, based upon, arising out of or in connection with any
untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement (or any amendment thereto), including the
information deemed to be a part of the Registration Statement pursuant to
Rule 430A(b) promulgated under the Act, if applicable, or the Prospectus
(including any amendment or supplement thereto) or any preliminary
prospectus, or any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein (in the case of the Prospectus, in light of the circumstances under
which they were made) not misleading; provided, however, that (i) this
-------- -------
indemnity agreement shall not apply to such losses, claims, damages,
liabilities, judgments, actions or expenses caused by an untrue statement
or omission or alleged untrue statement or omission that is made in
reliance upon and in conformity with information relating to any of the
Underwriters furnished in writing to the Company by any of the Underwriters
expressly for use in the Registration Statement (or any amendment thereto)
or the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus and (ii) the foregoing indemnity agreement with
respect to any untrue statement contained in or omission from a preliminary
prospectus shall not inure to the benefit of the Underwriter from whom the
person asserting any such losses, liabilities, claims, damages or expenses
purchased Shares, or any person controlling such Underwriter, if a copy of
the Prospectus (as then amended or supplemented, if the Company shall have
furnished any amendments or supplements thereto) was not sent or given by
or on behalf of the Underwriters to such person, if such is required by
law, at or prior to the written confirmation of the sale of such Shares to
such person and the untrue statement con-
18
<PAGE>
tained in or omission from such preliminary prospectus was corrected in the
Prospectus (or the Prospectus as amended or supplemented). The Company
shall notify you promptly of the institution, threat or assertion of any
claim, proceeding (including any governmental investigation) or litigation
in connection with the matters addressed by this Agreement which involves
the Company or an Indemnified Person.
(b) In case any action or proceeding (including any governmental
investigation) shall be brought or asserted against any of the Indemnified
Persons with respect to which indemnity may be sought against the Company,
the applicable Underwriter with respect to such Indemnified Person shall
promptly notify the Company in writing (provided, that the failure to give
such notice shall not relieve the Company of its obligations pursuant to
this Agreement unless and only to the extent that such omission results in
the loss or compromise of any material rights or defenses by the Company,
as determined by a court of competent jurisdiction by final judgment) and
the Company shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Persons and payment of
all fees and expenses in connection therewith. Such Indemnified Person
shall have the right to employ its own counsel in any such action and to
participate in the defense thereof but the fees and expenses of such
counsel shall be at the expense of such Indemnified Person unless (i) the
employment of such counsel has been specifically authorized in writing by
the Company, (ii) the Company failed promptly to assume the defense and
employ counsel reasonably satisfactory to the Indemnified Person or
(iii) the named parties to any such action (including any impleaded
parties) include both such Indemnified Person and the Company or an
affiliate of the Company, and such Indemnified Person shall have been
reasonably advised by counsel that either (x) there may be one or more
legal defenses available to it which are different from or additional to
those available to the Company or such affiliate or (y) a conflict may
exist between such Indemnified Person and the Company or such affiliate (in
which case the Company shall not have the right to assume the defense of
such action on behalf of such Indemnified Person, it being understood,
however, that the Company shall not, in connection with any one such action
or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances,
be liable for the fees and expenses of more than one separate firm of
attorneys (in addition to any local counsel) for all such Indemnified
Persons, which firm shall be designated in writing by the
19
<PAGE>
Representatives and that all such fees and expenses shall be reimbursed as
they are incurred). The Company shall not be liable for any settlement of
any such action or proceeding effected without the Company's prior written
consent, and the Company agrees to indemnify and hold harmless any
Indemnified Person from and against any loss, claim, damage, liability or
expense by reason of any settlement of any action effected with the written
consent of the Company. The Company shall not, without the prior written
consent of each Indemnified Person affected thereby (which consent will not
unreasonably be withheld), settle or compromise or consent to the entry of
judgment in or otherwise seek to terminate any pending or threatened
action, claim, litigation or proceeding in respect of which indemnification
or contribution may be sought hereunder (whether or not any Indemnified
Person is a party thereto), unless such settlement, compromise, consent or
termination includes an unconditional release of each Indemnified Person
affected thereby from all liability arising out of such action, claim,
litigation or proceeding.
(c) Each of the Underwriters agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who
sign the Registration Statement, any person controlling (within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act) the Company,
and the officers, directors, partners, employees, representatives and
agents of each such person, to the same extent as the foregoing indemnity
from the Company to each of the Indemnified Persons, but only with respect
to claims and actions based on information relating to such Underwriter in
the Prospectus that is in conformity with information furnished in writing
by such Underwriter expressly for use in the Prospectus. In case any
action or proceeding (including any governmental investigation) shall be
brought or asserted against the Company, any of its directors, any such
officer, or any such controlling person based on the Registration
Statement, the Prospectus or any preliminary prospectus in respect of which
indemnity may be sought against any Underwriter pursuant to the foregoing
sentence, the Underwriter shall have the rights and duties given to the
Company by Section 7(b) above (except that if the Company shall have
assumed the defense thereof, such Underwriter shall not be required to do
so, but may employ separate counsel therein and participate in the defense
thereof but the fees and expenses of such counsel shall be at the expense
of such Underwriter), and the Company, its directors, any such officers,
and each such controlling person shall have
20
<PAGE>
the rights and duties given to the Indemnified Person by Section 7(b)
above.
(d) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party in respect of any losses, claims,
damages, liabilities or expenses referred to herein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to
the amount paid or payable by such indemnified party as a result of such
losses, claims, damages, liabilities judgments, actions and expenses (i) in
such proportion as is appropriate to reflect the relative benefits received
by the indemnifying party on the one hand and the indemnified party on the
other hand from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the
indemnifying parties and the indemnified party, as well as any other
relevant equitable considerations. The relative benefits received by the
Company, on the one hand, and any of the Underwriters, on the other hand,
shall be deemed to be in the same proportion as the total proceeds from the
offering (net of underwriting discounts and commissions but before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by such Underwriter, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
of the Company and the Underwriters shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
related to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The indemnity and
contribution obligations set forth herein shall be in addition to any
liability or obligation such party may otherwise have to any indemnified
party.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity
--- ----
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as
a result of the losses, claims, damages, liabilities or expenses
21
<PAGE>
referred to in the immediately preceding paragraph shall be deemed to
include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7, none of the Underwriters (and its related
Indemnified Persons) shall be required to contribute, in the aggregate, any
amount in excess of the amount by which the total underwriting discount
applicable to the Shares purchased by such Underwriter exceeds the amount
of any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 7(d) are
several in proportion to the respective number of Shares purchased by each
of the Underwriters hereunder and not joint.
8. Conditions of Underwriters' Obligations. The several obligations
---------------------------------------
of the Underwriters to purchase the Shares under this Agreement are subject to
the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained
in this Agreement shall be true and correct on the Closing Date with the
same force and effect as if made on and as of the Closing Date. The
Company shall have performed or complied with all of its obligations and
agreements herein contained and required to be performed or complied with
by it at or prior to the Closing Date.
(b) (i) The Registration Statement shall have become effective (or,
if a post-effective amendment is required to be filed pursuant to Rule 430A
promulgated under the Act, such post-effective amendment shall have become
effective) not later than 5:00 p.m. (and in the case of a Registration
Statement filed under Rule 462(b) of the Act, not later than 10:00 p.m.),
New York City time, on the date of this Agreement or at such later date and
time as you may approve in writing, (ii) at the Closing Date, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that purpose shall have been commenced or
shall be pending before or contemplated by the Commission and every request
for additional information on the part of the Commission shall have been
complied with in all material respects,
22
<PAGE>
and (iii) no stop order suspending the sale of the Shares in any
jurisdiction referred to in Section 5(g) shall have been issued and no
proceeding for that purpose shall have been commenced or shall be pending
or threatened.
(c) No action shall have been taken and no statute, rule, regulation
or order shall have been enacted, adopted or issued by any governmental
agency which would, as of the Closing Date, prevent the issuance of the
Shares; no injunction, restraining order or order of any nature by a
Federal or state court of competent jurisdiction shall have been issued as
of the Closing Date which would prevent the issuance of the Shares and on
the Closing Date, no action, suit or proceeding shall be pending against,
or, to the knowledge of the Company threatened against the Company or any
of its subsidiaries before any court or arbitrator or any governmental
body, agency or official which, if adversely determined, would interfere
with or adversely affect the issuance of the Shares or would have a
Material Adverse Effect.
(d) (i) Since the date hereof, there shall not have been any Material
Adverse Change, and (ii) except as set forth in the Prospectus, since the
date of the latest balance sheet included in the Registration Statement and
the Prospectus, there shall not have been any material change in the
capital stock or long-term debt, or material increase in short-term debt,
of the Company or any of its consolidated subsidiaries taken as a whole.
(e) You shall have received a certificate of the Company, dated the
Closing Date, executed on behalf of the Company, by the President or any
Senior Vice President and a principal financial or accounting officer of
the Company confirming, as of the Closing Date, the matters set forth in
paragraphs (a), (b), (c) and (d) of this Section 8.
(f) On the Closing Date, you shall have received:
(1) an opinion (satisfactory to you and your counsel), dated the
Closing Date, of Latham & Watkins, counsel for the Company, to the effect
that:
(i) (A) based solely on certificates of public officials,
the Company and each of the Subsidiaries is a validly existing
corporation in good standing under the laws of its jurisdic-
23
<PAGE>
tion of incorporation and (B) the Company has the requisite corporate
power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and
the Prospectus, and to execute, deliver and perform this Agreement;
(ii) the Company has full corporate power and authority to
execute, deliver and perform this Agreement and to issue, sell and
deliver the Shares as contemplated by this Agreement;
(iii) this Agreement has been duly authorized, executed and
delivered by the Company;
(iv) the Shares have been duly authorized for issuance and
sale to the Underwriters pursuant to this Agreement and, when issued
and delivered by the Company pursuant to this Agreement against
payment of the consideration set forth herein, will be validly issued
and fully paid and nonassessable; and the issuance of the Shares is
not subject to any preemptive right under the Delaware General
Corporation Law or, to the best knowledge of such counsel, any other
similar rights that entitle or will entitle any person to acquire any
shares of Common Stock from the Company upon the issuance of the
Shares by the Company;
(v) the Registration Statement has become effective under
the Act; any required filing of the Prospectus, and any supplements
thereto, pursuant to Rule 424(b) has been made in the manner and
within the time period required by Rule 424(b); and to the best
knowledge of such counsel no stop order suspending the effectiveness
of the Registration Statement or any part thereof has been issued and
no proceedings therefor have been instituted or are pending or
contemplated under the Act; and
(vi) at the time it became effective and on the Closing
Date, the Registration Statement complied as to form in all material
respects with the requirements for registration on Form S-1 under the
Act (it being understood, however, that such counsel need not express
any opinion with respect to the financial statements, schedules and
other financial and statistical data includ-
24
<PAGE>
ed in the Registration Statement or the Prospectus and in passing upon
the compliance as to form of the Registration Statement and the
Prospectus, such counsel may assume that the statements made therein
are correct and complete); and
(2) an opinion (satisfactory to you and your counsel), dated the
Closing Date, of Christopher G. Townsend, Senior Vice President and Deputy
General Counsel of the Company, to the effect that:
(i) (A)the Company and each of the Subsidiaries is a duly
organized and validly existing corporation in good standing under the
laws of its jurisdiction of incorporation, has the requisite corporate
power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and
the Prospectus, and is duly qualified as a foreign corporation and in
good standing in each jurisdiction where the ownership, leasing or
operation of property or the conduct of its business requires such
qualification, except where the failure to be so qualified would not
have, singly or in the aggregate, a Material Adverse Effect; and (B)
the Company has the requisite corporate power and authority to
execute, deliver and perform this Agreement;
(ii) (A) the authorized, issued and outstanding capital
stock of the Company was, as of the dates indicated in the Prospectus,
as set forth in the Prospectus under "Unaudited Pro Forma Condensed
Consolidated Balance Sheet" and "Description of Capital Stock" and
conforms in all material respects to the descriptions thereof
contained in the Registration Statement and the Prospectus; and (B)
the shares of issued and outstanding Common Stock have been duly
authorized and are validly issued and are fully paid and
nonassessable;
(iii) all of the issued and outstanding shares of capital
stock of, or other ownership interests in, each Subsidiary have been
duly and validly authorized and issued, and the shares of capital
stock of, or other ownership interests in, each Subsidiary are owned,
directly or through Subsidiaries, by the Company, are fully paid and
nonassessable, and, to the best knowledge of such counsel, are owned
free and clear of any Lien, except for Liens
25
<PAGE>
relating to the Properties Notes or the New Credit Agreement or as
otherwise disclosed in the Prospectus;
(iv) to the best knowledge of such counsel, there are no
outstanding subscriptions, rights, warrants, options, calls,
convertible securities, commitments of sale or Liens related to or
entitling any person to purchase or otherwise to acquire any shares of
the capital stock of, or other ownership interest in, any Subsidiary;
(v) neither the Company nor any of the Subsidiaries is an
"investment company" or a company "controlled" by an investment
company within the meaning of the Investment Company Act of 1940, as
amended;
(vi) to the best knowledge of such counsel, no holder of
any security of the Company has any right to require registration of
shares of Common Stock or any other security of the Company;
(vii) to the best knowledge of such counsel, there is no
current, pending or threatened action, suit or proceeding before any
court or governmental agency, authority or body or any arbitrator
involving the Company or any Subsidiary or to which any of their
respective properties is subject of a character required to be
disclosed in the Registration Statement which is not adequately
disclosed in the Prospectus;
(viii) no authorization, approval, consent or order of, or
filing with, any court or governmental body or agency is required for
the issuance and sale of the Shares pursuant to this Agreement, except
such as have been obtained and made under the Act, the Exchange Act,
state securities or Blue Sky laws or regulations or such as may be
required by the NASD; the execution and delivery of this Agreement,
the issuance and sale of the Shares and the performance of this
Agreement will not result in a breach or violation of (A) any of the
respective charters or bylaws of the Company or any of the
Subsidiaries or (B) any of the terms or provisions of any agreement or
instrument which is filed as an exhibit to the Registration Statement
and to which the Company or any of
26
<PAGE>
the Subsidiaries is a party or by which any of them is bound, or to
which any of the properties of the Company or any of the Subsidiaries
is subject, or (C) to the best knowledge of such counsel, constitute
a default under, any statute, rule or regulation to which the Company
or any Subsidiary is bound or to which any of the properties of the
Company or any Subsidiary is subject or (D) to the best knowledge of
such counsel any order of any court or governmental agency or body
having jurisdiction over the Company or any of the Subsidiaries or any
of their properties which conflict, breach or default in each of the
cases described in clauses (B), (C) and (D) would have a Material
Adverse Effect;
(ix) to the best knowledge of such counsel, (A) there are
no franchises, contracts, indentures, mortgages, loan agreements,
notes, leases or other instruments to which the Company or any
Subsidiary is a party or by which any of them may be bound that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
other than those described therein or filed as exhibits thereto and
the descriptions thereof are accurate in all material respects and
present fairly the information required to be shown, (B) no default
exists in the due performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other instrument so described
or filed in the Registration Statement or the Prospectus or to be
filed as exhibits to the Registration Statement, or any agreement
identified on a schedule attached to the opinion except for defaults
which would not have a Material Adverse Effect and (C) the statements
in the Prospectus under the caption "Description of Capital Stock,"
"Purposes and Antitakeover Effects of Certain Provisions of the
Company Certificate and Bylaws and the Marriott International Purchase
Right," "Management's Discussion and Analysis of Results of Operations
and Financial Condition -Liquidity and Capital Resources - Capital
Transactions" and "Relationship Between the Company and Marriott
International" insofar as such statements constitute a summary of
legal matters, documents or proceedings referred to therein, are
accurate in all material respects.
27
<PAGE>
In addition, Latham & Watkins and Christopher G. Townsend shall state
that although such counsel has not undertaken to investigate or verify
independently, and is not passing upon and does not assume any responsibility
for the accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus included therein (except to the extent
expressly referred to in clause (ix)(C) above), during the course of such
counsel's participation in conferences with officers and other representatives
of the Company, representatives of the independent public accountants for the
Company and you, at which the contents of the Registration Statement and the
Prospectus were discussed (relying as to materiality to a large extent upon the
statements of officers and other representatives of the Company), no facts have
come to the attention of such counsel which cause it to (1) believe that (except
for financial statements, financial and statistical data and schedules included
therein or omitted therefrom as to which such counsel need not express any
belief) the Registration Statement (as amended or supplemented, if applicable)
at the time the Registration Statement or any post-effective amendment became
effective contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading or (2) believe that (except for financial
statements, financial and statistical data and schedules included therein or
omitted therefrom as to which such counsel need not express any belief) the
Prospectus (as amended or supplemented) as of its date or the Closing Date
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
In rendering such opinions, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers and other representatives of the Company, certificates of public
officials, and certificates or other written statements of officers of
departments of various jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company and its Subsidiaries,
provided that copies of any such statements or certificates shall be delivered
or otherwise made available to your counsel.
(g) You shall have received an opinion as to certain of the matters set
forth above, dated the Closing Date, of Skadden, Arps, Slate, Meagher &
Flom ("Skadden Arps"), counsel for the Underwriters, in form and substance
reasonably satisfactory to you.
28
<PAGE>
(h) You shall have received letters on and as of the date hereof as
well as on and as of the Closing Date (in the latter case constituting an
affirmation of the statements set forth in the former), in form and
substance satisfactory to you, from Arthur Andersen LLP, independent public
accountants, with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus.
(i) Skadden Arps shall have been furnished with such documents and
opinions, in addition to those set forth above, as they may reasonably
require for the purpose of enabling them to review or pass upon the matters
referred to in this Section 8 and in order to evidence the accuracy,
completeness or satisfaction in all material respects of any of the
representations, warranties or conditions herein contained.
(j) Prior to the Closing Date, the Company shall have furnished to you
such further information, certificates and documents as you may reasonably
request.
(k) At the Closing Date, the Shares shall have been approved for
listing on the New York Stock Exchange, subject to notice of issuance.
(l) If the Option Closing Date is after the Closing Date, each of the
foregoing conditions shall have been satisfied as of the Option Closing
Date as if the references to the "Closing Date" therein were references to
the "Option Closing Date."
(m) Anything herein to the contrary notwithstanding, the respective
closings under this Agreement of the issuance and sale of the U.S. Firm
Shares and the International Shares to the U.S. Underwriters and the
International Managers, respectively, are hereby expressly made conditional
on one another.
9. Defaults. If on the Closing Date or any Option Closing Date, as the
--------
case may be, any of the Underwriters shall fail or refuse to purchase Firm
Shares or Additional Shares, as the case may be, which it has agreed to purchase
hereunder on such date, and the aggregate amount of Firm Shares or Additional
Shares, as the case may be, that such defaulting Underwriter(s) agreed but
failed or refused to purchase does not exceed 10% of the total number of Shares
to be purchased on such date by all of the Underwriters, each non-defaulting
Underwriter shall be obligated severally, in the proportion which the number of
Firm
29
<PAGE>
Shares set forth opposite its name in Schedules I and II hereto bears to the
total number of Firm Shares which all the non-defaulting Underwriters, as the
case may be, have agreed to purchase, or in such other proportion as you may
specify, to purchase the Firm Shares or Additional Shares, as the case may be,
that such defaulting Underwriter or Underwriters, as the case may be, agreed but
failed or refused to purchase on such date; provided that in no event shall the
--------
number of Firm Shares or Additional Shares, as the case may be, that any
Underwriter has agreed to purchase pursuant to Section 3 hereof be increased
pursuant to this Section 9 by an amount in excess of one-ninth of such number of
Firm Shares or Additional Shares, as the case may be, without the written
consent of such Underwriter. If, on the Closing Date or on the Option Closing
Date, as the case may be, any of the Underwriters shall fail or refuse to
purchase the Firm Shares or the Additional Shares, as the case may be, with
respect to which such default exceeds 10% of such total number of the Shares to
be purchased on such date by all Underwriter(s) and arrangements satisfactory to
the other Underwriter(s) and the Company for the purchase of such Shares are not
made within 48 hours after such default, this Agreement shall terminate without
liability on the part of the non-defaulting Underwriter(s) or the Company,
except as otherwise provided in Section 10. In any such case that does not
result in termination of this Agreement, the Underwriters or the Company may
postpone the Closing Date or the Option Closing Date, as the case may be, for
not longer than seven (7) days, in order that the required changes, if any, in
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve a defaulting Underwriter from liability in respect of any default by any
such Underwriter under this Agreement.
10. Effective Date of Agreement and Termination. This Agreement shall
-------------------------------------------
become effective upon the later of (i) the execution and delivery of this
Agreement by the parties hereto, (ii) the effectiveness of the Registration
Statement, and (iii) if a post-effective amendment is required to be filed
pursuant to Rule 430A under the Act, the effectiveness of such post-effective
amendment.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by notice to the Company if any of the following has occurred:
(i) subsequent to the date the Registration Statement is declared effective
or the date of this Agreement, any Material Adverse Change occurs which, in your
judgment, makes it impracticable or inadvisable to market the Shares or to
enforce contracts for the sale of the Shares, (ii) any outbreak or escalation of
hostilities or other national or international calamity or crisis or material
adverse change in the financial markets of the United States or else-
30
<PAGE>
where, or any other substantial national or international calamity or emergency
if the effect of such outbreak, escalation, calamity, crisis or emergency would,
in your judgment, make it impracticable or inadvisable to market the Shares or
to enforce contracts for the sale of the Shares, (iii) any suspension or
limitation of trading generally in securities on the New York Stock Exchange,
the American Stock Exchange, the Nasdaq Stock Market or in the over-the-counter
markets or any setting of minimum prices for trading on such exchanges or
markets, (iv) any declaration of a general banking moratorium by Federal, New
York or Maryland authorities, (v) the taking of any action by any Federal, state
or local government or agency in respect of its monetary or fiscal affairs that
in your judgment has a material adverse effect on the financial markets in the
United States, and would, in your judgment, make it impracticable or inadvisable
to market the Shares or to enforce contracts for the sale of the Shares or (vi)
the enactment, publication, decree, or other promulgation of any Federal or
state statute, regulation, rule or order of any court or other governmental
authority which would, in your judgment, have a Material Adverse Effect.
The indemnities and contribution provisions and the other agreements,
representations and warranties of the Company, its officers and directors and of
the Underwriters set forth in or made pursuant to this Agreement shall remain
operative and in full force and effect, and will survive delivery of and payment
for the Shares, regardless of (i) any investigation, or statement as to the
results thereof, made by or on behalf of any of the Underwriters or by or on
behalf of the Company, the officers or directors of the Company or any
controlling person of the Company, (ii) acceptance of the Shares and payment for
them hereunder and (iii) termination of this Agreement.
If this Agreement shall be terminated by the Underwriters pursuant to
clause (i) of the second paragraph of this Section 10 or because of the failure
or refusal on the part of the Company to comply with the terms or to fulfill any
of the conditions of this Agreement, the Company agrees to reimburse you for all
out-of-pocket expenses (including the reasonable fees and disbursements of
counsel) incurred by you. Notwithstanding any termination of this Agreement,
the Company shall be liable for all expenses which it has agreed to pay pursuant
to Section 5(k) hereof.
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Underwriters, any
Indemnified Person referred to herein and their respective successors and
assigns, all as and to the extent provided in this Agreement, and
31
<PAGE>
no other person shall acquire or have any right under or by virtue of this
Agreement. The terms "successors and assigns" shall not include a purchaser of
any of the Shares from any of the Underwriters merely because of such purchase.
11. Notices. Notices given pursuant to any provision of this Agreement
-------
shall be addressed as follows: (a) if to the Company, to it at Host Marriott
Corporation, 10400 Fernwood Road, Bethesda, Maryland 20817, Attention: General
Counsel, with a copy to Latham & Watkins, 1001 Pennsylvania Avenue, N.W., Suite
1300, Washington, D.C. 20004, Attention: Bruce E. Rosenblum, Esq., and (b) if
to any Underwriter, to Donaldson, Lufkin & Jenrette Securities Corporation, 140
Broadway, New York, New York 10005, Attention: Syndicate Department, and, in
each case, with a copy to Skadden, Arps, Slate, Meagher & Flom at 300 South
Grand Avenue, Suite 3400, Los Angeles, California 90071, Attention: Nicholas P.
Saggese Esq., or in any case to such other address as the person to be notified
may have requested in writing.
12. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK AS APPLIED TO
CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK.
13. Successors. This Agreement will inure to the benefit of and be
----------
binding upon the parties hereto and their respective successors and the officers
and directors and other persons referred to in Section 7, and no other person
will have any right or obligation hereunder.
32
<PAGE>
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument. Please confirm that the foregoing
correctly sets forth the agreement among the Company and you.
Very truly yours,
HOST MARRIOTT CORPORATION
By:
---------------------------
Name:
Title:
The foregoing Underwriting Agreement
is hereby confirmed and accepted
as of the date first above written.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
SALOMON BROTHERS INC
SMITH BARNEY INC.
MONTGOMERY SECURITIES
BT SECURITIES CORPORATION
SCHRODER WERTHEIM & CO. INCORPORATED
Acting severally on behalf of themselves
and as representatives of the several U.S.
Underwriters named in Schedule I
hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
------------------------
Name:
Title:
33
<PAGE>
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN SACHS INTERNATIONAL
SALOMON BROTHERS INTERNATIONAL LIMITED
MONTGOMERY SECURITIES
SMITH BARNEY INC.
BANKERS TRUST INTERNATIONAL PLC
J. HENRY SCHRODER & CO. LIMITED
Acting on behalf of themselves and
as representatives of the several
International Managers named in
Schedule II hereto
By:DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
-------------------------
Name:
Title:
34
<PAGE>
SCHEDULE I
Number of
Firm Shares
to be Purchased
---------------
Donaldson, Lufkin & Jenrette
Securities Corporation........................
Goldman, Sachs & Co............................
Salomon Brothers Inc...........................
Smith Barney Inc...............................
Montgomery Securities..........................
BT Securities Corporation......................
Schroder Wertheim & Co. Incorporated...........
-----------
Total ......................................... 20,000,000
===========
<PAGE>
SCHEDULE II
Number of
Firm Shares
to be Purchased
---------------
Donaldson, Lufkin & Jenrette
Securities Corporation........................
Goldman Sachs International....................
Salomon Brothers International Limited.........
Smith Barney Inc...............................
Montgomery Securities..........................
Bankers Trust International PLC................
J. Henry Schroder & Co. Limited................
----------
Total.......................................... 5,000,000
==========
<PAGE>
Exhibit 1.(ii)
March , 1996
HOST MARRIOTT CORPORATION
10400 Fernwood Road
Bethesda, Maryland 20817
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
SALOMON BROTHERS INC
SMITH BARNEY INC.
MONTGOMERY SECURITIES
BT SECURITIES CORPORATION
as Representatives of the Several
U.S. Underwriters
c/o DONALDSON LUFKIN & JENRETTE
SECURITIES CORPORATION
140 Broadway
New York, New York 10005
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN SACHS INTERNATIONAL
SALOMON BROTHERS INTERNATIONAL LIMITED
SMITH BARNEY INC.
MONTGOMERY SECURITIES
BANKERS TRUST INTERNATIONAL PLC
as Lead Managers of the several
International Managers
c/o DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
Jupiter House
Triton Court
14 Finsbury Square
London, EC2A 1BR
England
<PAGE>
Donaldson, Lufkin & Jenrette
Securities Corporation
March , 1996
Page 2
Re: Sale of Shares of Common
Stock of Host Marriott Corporation
---------------------------------------
Dear Gentlemen:
The undersigned is an executive officer or director of Host Marriott
Corporation, a Delaware corporation (the "Company"), owning beneficially shares
of the Company's common stock, par value $1.00 per share (the "common Stock").
The undersigned understands that the Company has entered into an Underwriting
Agreement (the "Underwriting Agreement") with Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), Goldman, Sachs & Co., Salomon Brothers Inc,
Smith Barney Inc. ("Smith Barney"), Montgomery Securities ("Montgomery"), and
BT Securities Corporation, as Representatives of the several U.S. underwriters
(the "U.S. Underwriters") named in Schedule I thereto, and DLJ, Goldman Sachs
International, Solomon Brothers International Limited, Smith Barney, Montgomery,
and Bankers Trust International PLC, as Lead Managers of the several
International Managers (the "International Managers" and, together with the U.S.
Underwriters, the "Underwriters") in Schedule II thereto, pursuant to which the
Underwriters would purchase from the Company shares of Common Stock (the
"Shares"). The undersigned further understands that the sale of the Shares by
the Company is the subject of Registration Statement No. 333-000147 (the
"Registration Statement"), which was filed with the Securities and Exchange
Commission (the "Commission") on January 11, 1996 and subsequently amended,
includes a Preliminary Prospectus substantially in the form that will be used in
connection with the offering (the "Offering") of the Shares to the public and
will include any subsequent amendments to the Registration Statement which are
filed with the Commission. The undersigned also understands that the Offering
and the sale (the "Sale") of the Shares to the public will be made pursuant to a
final Prospectus, the form of which will either be contained in an amendment to
the Registration Statement (or in a Registration Statement filed pursuant to
Rule 462(b) under the Securities Act of 1933, as amended (the "Securities Act"))
or be filed with the Commission pursuant to Rule
<PAGE>
Donaldson, Lufkin & Jenrette
Securities Corporation
March , 1996
Page 3
424(b) under the Securities Act. The undersigned further understands that the
Preliminary Prospectus to be used in connection with the Offering and the final
Prospectus will each contain statements to the effect that the executive
officers and directors of the Company have agreed as set forth herein.
In light of the foregoing, the undersigned represents, warrants, and
agrees that, for a period of 90 days after the date of the Prospectus, the
undersigned will not, without the prior written consent of DLJ, directly or
indirectly, offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of any Common Stock or any securities convertible into or
exchangeable or exercisable for, or warrants, options or rights to purchase or
acquire, Common Stock owned by the undersigned or with respect to which the
undersigned has the power of disposition, or enter into any agreement to do any
of the foregoing (provided that, the undersigned shall be permitted to deliver
shares of Common Stock to the Company for the sole purpose of exercising stock
options pursuant to the Company's existing Stock Option Plan).
It is understood and agreed that the foregoing representations and
agreements are provided as an inducement to and may be relied upon by the
Company and the Underwriters in connection with the Offering and the Sale.
Very truly yours,
Acknowledged by:
HOST MARRIOTT CORPORATION
By: __________________________
Name:
Title:
<PAGE>
Donaldson, Lufkin & Jenrette
Securities Corporation
March , 1996
Page 4
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
SALOMON BROTHERS INC
SMITH BARNEY INC.
MONTGOMERY SECURITIES
BT SECURITIES CORPORATION
as Representatives of the Several
U.S. Underwriters
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: __________________________
Name:
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN SACHS INTERNATIONAL
SALOMON BROTHERS INTERNATIONAL LIMITED
SMITH BARNEY INC.
MONTGOMERY SECURITIES
BANKERS TRUST INTERNATIONAL PLC
as Lead Managers of the several
International Managers
By: __________________________
Name:
Title:
<PAGE>
Exhibit 5
[HOST MARRIOTT CORPORATION LETTERHEAD]
March 25, 1996
Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
Re: Registration Statement No. 333-00147:
-------------------------------------
Up to 28,750,000 Shares of Common Stock,
----------------------------------------
par value $1.00 per share
-------------------------
Ladies and Gentlemen:
In connection with the registration of up to 28,750,000 shares of
common stock, $1.00 par value per share (the "Shares"), by Host Marriott
Corporation, a Delaware corporation (the "Company"), under the Securities Act of
1933, as amended (the "Act"), on Form S-1 filed with the Securities Exchange
Commission (the "Commission") on January 11, 1996 (File No. 333-00147), as
amended (collectively, the "Registration Statement"), you have requested my
opinion with respect to the matters set forth below.
In my capacity as Deputy General Counsel of Host Marriott Corporation
in connection with such registration, I am familiar with the proceedings taken
and proposed to be taken by the Company in connection with authorization and
issuance of the Shares. In addition, I have made such legal and factual
examinations and inquiries, including an examination of originals or copies
certified or otherwise identified to my satisfaction of such documents,
corporate records and instruments, as I have deemed necessary or appropriate for
purposes of this opinion. In my examination, I have assumed the genuineness of
all signatures, the authenticity of all documents submitted to me as originals,
and the conformity to authentic documents submitted to us as copies.
Capitalized terms used herein without definition have the meanings
ascribed to them in the Registration Statement.
Subject to the foregoing and the other matters set forth herein, it is
my opinion that the Shares have been duly authorized, and upon issuance,
delivery and payment therefore in the manner contemplated by the Registration
Statement, will be validly issued, fully paid and nonassessable.
I consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to me under the heading "Legal
Matters."
Very Truly Yours,
/s/ Christopher G. Townsend
<PAGE>
EXHIBIT 22
PAGE 1 OF 2
HOST MARRIOTT CORPORATION
SUBSIDIARIES
1) Beachfront Properties, Inc.
2) CBM One Corporation
3) CBM Two Corporation
4) East Boston Properties, Inc.
5) Farrell's Ice Cream Parlour Restaurants, Inc.
6) G.L. Insurance Corporation
7) HMC Acquisition Properties, Inc.
8) HMC Acquisitions, Inc.
9) HMC Airport, Inc.
10) HMC AP Canada, Inc.
11) HMC Boyton Beach, Inc.
12) HMC California Leasing Corporation
13) HMC Eastside Financial Corporation
14) HMC Eastside, Inc.
15) HMC Gateway, Inc.
16) HMC Leisure Park Corporation
17) HMC Mexair, Inc.
18) HMC Mexpark, Inc.
19) HMC Polanco, Inc.
20) HMC Retirement Properties, Inc.
21) HMC SFO, Inc.
22) HMC Toronto EC, Inc
23) HMC Ventures, Inc.
24) HMC Westport Corporation
25) HMH HPT Courtyard, Inc.
26) HMH Marina Inc.
27) HMH Pentagon Corporation
28) HMH Properties, Inc.
29) HMH Realty Company, Inc.
30) HMH Restaurants, Inc.
31) HMH Rivers, Inc.
32) HMH WTC, Inc.
33) Host Airport Hotels, Inc.
34) Host Investment, Inc.
35) Host La Jolla, Inc.
36) Host Marriott BCH Hotel Corporation
37) Host Marriott GTN Corporation
38) Host Marriott Hospitality, Inc.
39) Hot Shoppes, Inc.
40) Hotel Properties Management, Inc.
41) Marriott's Bickford's Family Fare, Inc.
42) Marriott Barbados, Ltd.
43) Marriott Condominium Development Corporation
44) Marriott Desert Springs Corporation
45) Marriott Family Restaurants, Inc. of Illinois
46) Marriott Family Restaurants, Inc. of Vermont
<PAGE>
EXHIBIT 22
PAGE 2 OF 2
HOST MARRIOTT CORPORATION
SUBSIDIARIES
47) Marriott Family Restaurants, Inc. of Wisconsin
48) Marriott FIBM One Corporation
49) Marriott Financial Services, Inc.
50) Marriott Hanover Hotel Corporation
51) Marriott Hotels of NY City, Inc.
52) Marriott Hotels of San Diego, Inc.
53) Marriott Marquis Corporation
54) Marriott MDAH One Corporation
55) Marriott MHP Two Corporation
56) Marriott Park Ridge Corporation
57) Marriott PLP Corporation
58) Marriott Properties, Inc.
59) Marriott Realty Sales, Inc.
60) Marriott RIBM Three Corporation
61) Marriott RIBM Two Corporation
62) Marriott SBM One Corporation
63) Marriott SBM Two Corporation
64) Marriott YBG Corporation
65) MOHS Corporation
66) Montana Food and Beverage Services, Inc.
67) Philadelphia Airport Hotel Corporation
68) Philadelphia Market Street Hotel Corporation
69) RIBM One Corporation
70) Saga Property Leasing Corporation
71) Saga Restaurants, Inc.
72) SFM Finance Corporation
73) Sparky's Virgin Islands, Inc.
74) O.T.E.C. Operations Limited
75) O.T.E.C. Hotels Ltd.
76) Wharf Acquisition, Inc.
77) Willmar Distributors, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made a part of this
registration statement.
Arthur Andersen LLP
Washington, D.C.
March 22, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The General Partners
Pacific Landmark Hotel, Ltd. and Pacific Gateway, Ltd.
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KMPG Peat Marwick LLP
San Diego, California
March 22, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 20, 1995 (except for the matter discussed
in Notes 6, 7, and 8, as to which the date is February 22, 1996), with respect
to the financial statements of the New York Vista for the years ended December
31, 1994, 1993 and 1992 included in the Registration Statement S-1 No. 333-
00147 and related prospectus of Host Marriott Corporation for the registration
of its common stock.
Ernst & Young LLP
New York, New York
March 25, 1996
