<PAGE>
As filed with the Securities and Exchange Commission on January 11, 1996
REGISTRATION NO. 33-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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 (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION
ORGANIZATION) CODE NUMBER)
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]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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- -------------------------------------------------------------------------------
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE FEE(1)(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par
value per share........ 28,750,000 $11.75 $337,812,500 $116,487.07
- -------------------------------------------------------------------------------
Series A Junior
Participating Preferred
Stock Purchase Rights
("Company Rights")(3).. * * * *
</TABLE>
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*Not applicable.
(1) Amount based on average market price as of January 10, 1996 as required by
Rule 457(c) under the Securities Act of 1933, as amended (the "Securities
Act").
(2) Amount calculated pursuant to Section 6(b) under the Securities Act.
(3) The Company Rights are initially carried and traded with the Company
Common Stock. The value attributable to the Company Rights, if any, is
reflected in the value of the Company Common Stock.
---------------
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
of Prospectus............................. Inside Front and Outside Back Cover
Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges.............. Prospectus Summary; Risk Factors;
Ratio of Earnings to Fixed Charges
(Inapplicable)
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ *
6. Dilution................................... *
7. Selling Security Holders................... *
8. Plan of Distribution....................... Underwriting
9. Description of Securities to be
Registered................................ Description of Capital Stock
10. Interests of Named Experts and Counsel..... Legal Matters; Experts
11. Information With Respect to the
Registrant................................ Business and Properties; Legal
Proceedings; Price Range of Common
Stock and Dividends; Selected
Historical Financial Data;
Management's Discussion and
Analysis of Results of Operations
and Financial Condition; Pro Forma
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 JANUARY 11, 1996
PROSPECTUS
JANUARY , 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 January 10, 1996, the last reported sale
price of the Common Stock, as reported on the New York Stock Exchange Composite
Tape, was $11 5/8 per share. See "Price Range of the Common Stock and
Dividends."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 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>
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<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 exerciseable 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
<PAGE>
[PHOTO]
The Marina Del Rey 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 Marriott
World Trade Center hotel features 820 rooms.
[PHOTO]
The San Francisco Marriott has 1,500 guestrooms and is directly
adjacent to the Moscone Convention Center.
[PHOTO]
The Company has recently reached an agreement to acquire 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."
THE COMPANY
The Company is one of the largest owners of hotels in the world with 90
lodging properties 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. Over
the past two years, the Company has 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. Based on industry data,
the Company believes that its full-service hotels consistently outperform the
industry's average occupancy rate by a significant margin and averaged 77.4%
occupancy for 1994 compared to 68.1% 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 relationship between the supply and
demand of hotel rooms 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 of 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 the First
Three Quarters 1995 (as defined herein) 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 hotel operating profit in the
First Three Quarters 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:
. There is virtually no new supply of upscale full-service hotel rooms
currently under construction. Based on industry data, management believes
that, from 1988 to 1990, upscale full-service room supply increased an
average of approximately 4% annually, which resulted in an oversupply of
rooms in the industry. However, this growth slowed to an average of
approximately 1.7% from 1990 to 1994.
4
<PAGE>
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. Based on industry data, the Company
expects hotel supply in the upscale full-service segment to grow annually
at 1% to 1.5% through 1997. 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 closed for a substantial portion of 1994) experienced a 68.7% average
occupancy rate during 1994 compared to an average occupancy rate of 77.4%
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 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
strategic alliance with Marriott International.
RECENT ACQUISITIONS, DIVESTITURES AND OTHER DEVELOPMENTS
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) in several transactions 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. The Company has also entered into agreements to acquire or purchase
controlling interests in three additional properties totalling approximately
2,150 rooms (the "Pending Acquisitions") and has entered into an agreement to
purchase a controlling interest in two properties totalling approximately 900
rooms, one of which is currently under construction and is scheduled to be
completed during the third quarter of 1996. See "Business and Properties--
Pending Acquisitions and Other Transactions." In addition, the Company holds
minority interests in various partnerships that own, in the aggregate, 263
additional properties operated 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 will consider the acquisition of additional full-service
hotels currently held by such partnerships.
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. The REIT has an option to
purchase and lease back the Company's remaining 17 Courtyard properties. 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. The
Company intends to opportunistically divest its remaining 35 limited-service
lodging properties, which include 17 Courtyard properties and 18 extended-stay
Residence Inn lodging properties ("Residence Inns") and to reinvest such
proceeds in the acquisition of full-service lodging properties.
5
<PAGE>
During the fourth quarter of 1995, the Company determined that one 174 acre
undeveloped land site would no longer be developed into an office project over
an extended time period, but instead has decided to market the site for near
term sale. As a result of this change in strategy, management has determined to
record a charge of $39 million, net of taxes of $21 million, to reduce the
asset to its estimated sales value.
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 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' 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.
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............................... 184.5 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 9.2 million shares of Common Stock subject
to options granted to executive officers and certain employees of the
Company, having a weighted average exercise price of $4.46 per share
(certain of which options are subject to vesting requirements), (ii) up to
2.0 million shares of Common Stock issued to executive officers and certain
employees under deferred stock incentive plans (certain of which shares are
subject to vesting requirements), (iii) up to 7.2 million shares of Common
Stock issuable upon exercise of warrants issued by the Company to certain
plaintiffs as part of a class action settlement, having a current exercise
price of $8.00 per share and (iv) up to .1 million shares of Common Stock
issuable upon conversion of the Company's Series A Cumulative Convertible
Preferred Stock, without par value. 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 thirty-six weeks ended September 8, 1995
(the "First Three Quarters 1995"), the thirty-six weeks ended September 9, 1994
(the "First Three Quarters 1994") and for the fiscal year ended 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 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 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. Such information is unaudited, except for the
historical income statement data and cash flow data for fiscal year 1994. The
Company's fiscal year ends on the Friday closest to December 31.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
----------------------------- --------------------------------
FIRST FIRST
THREE QUARTERS THREE QUARTERS
---------------- FISCAL YEAR ---------------- FISCAL YEAR
1995 1994 1994 1995 1994 1994
------- ------- ----------- ------ -------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................ $ 319 $ 261 $380 $ 376 $343 $496
Operating profit before
corporate expenses and
interest............... 118 108 152 133 122 174
Corporate expenses...... 26 21 32 26 21 32
Interest expense........ 122 114 165 142 125 179
Interest income......... 18 19 29 18 14 24
Loss from continuing
operations............. (13) (7) (13) (16) (8) (11)
Net loss(2)............. (49) (10) (25) -- -- --
OTHER DATA:
EBITDA(3)............... $ 212 $186 $269 $ 231 $201 $294
Depreciation and
amortization(4)........ 85 79 113 93 85 122
Cash from operations.... 155 128 158 N/A N/A N/A
Cash from (used in)
investing activities... 64 (6) (192) N/A N/A N/A
Cash from (used in)
financing activities... (62) 10 26 N/A N/A N/A
Ratio of earnings to
fixed charges(5)....... -- -- -- N/A N/A N/A
Deficiency of earnings
to fixed charges....... 10 8 12 N/A N/A N/A
<CAPTION>
AS OF SEPTEMBER 8, 1995
------------------------
PRO FORMA
ACTUAL AS ADJUSTED(6)
-------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 211 $ 447
Total assets............ 3,401 4,063
Total debt.............. 1,925 2,369
Shareholders' equity.... 670 980
</TABLE>
(footnotes on following page)
7
<PAGE>
HOTEL PERFORMANCE
The following table sets forth key performance statistics of the Company's
properties:
<TABLE>
<CAPTION>
FIRST THREE QUARTERS FISCAL YEAR
--------------------- ------------------
1995 1994 1994 1993
---------- ---------- ------- ------
<S> <C> <C> <C> <C>
COMPARABLE FULL-SERVICE HO-
TELS(7)
Number of properties........ 25 25 23 23
Number of rooms............. 12,881 12,869 10,400 10,400
Average daily rate.......... $111.24 $101.85 $93.89 $89.52
Occupancy %................. 76.9% 78.8% 76.2% 74.9%
REVPAR(8)................... $85.59 $80.25 $71.52 $67.09
REVPAR % change............. 6.7% -- 6.6% --
TOTAL FULL-SERVICE HOTELS(9)
Number of properties........ 48 32 41 23
Number of rooms............. 22,875 15,832 17,195 10,400
Average daily rate.......... $108.53 $100.88(10) $102.82(11) $89.52
Occupancy %................. 76.0% 78.6%(10) 77.4%(11) 74.9%
REVPAR(8)................... $82.44 $79.31(10) $79.61(11) $67.09
REVPAR % change............. 3.9% -- 18.7%(11) --
COURTYARD HOTELS (54
properties with 7,940
rooms)(12)
Average daily rate.......... $73.89 $68.83 $68.86 $64.58
Occupancy %................. 81.2% 81.4% 80.4% 79.7%
REVPAR(8)................... $60.02 $56.05 $55.37 $51.47
REVPAR % change............. 7.1% -- 7.6% --
RESIDENCE INNS (18 properties
with 2,178 rooms)
Average daily rate.......... $84.69 $78.95 $79.58 $74.70
Occupancy %................. 87.7% 86.4% 85.6% 84.5%
REVPAR(8)................... $74.25 $68.21 $68.12 $63.12
REVPAR % change............. 8.9% -- 7.9% --
</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 New York Vista Hotel), 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 Pending
Acquisitions and consummation of the Special Dividend. See "Pro Forma
Condensed Consolidated Financial Data."
(2) During the First Three Quarters 1994 and fiscal year 1994, the Company
recorded extraordinary losses on the extinguishment of debt of $3 million
and $6 million, respectively, after taxes. For the First Three Quarters
1995, the Company recorded an extraordinary loss on the extinguishment of
debt of $17 million after taxes. For the First Three Quarters 1995 and
fiscal year 1994, the Company recorded a loss from discontinued operations
of $19 million and $6 million, respectively, after taxes. There was no
income or loss from discontinued operations for the First Three Quarters
1994.
(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) Reflects depreciation and amortization from continuing operations.
(5) 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 $85 million for the
First Three Quarters 1995, $79 million for the First Three Quarters 1994,
and $113 million for fiscal year 1994.
(6) Pro forma for the fourth quarter 1995 acquisition of four full-service
properties, the Pending Acquisitions, the sale of the Springfield Radisson
Hotel in December 1995, the December 1995 Debt Offering, the fourth
quarter 1995 write down of one undeveloped land site and the Special
Dividend, as further adjusted to give effect to the Offerings. See "Pro
Forma Condensed Consolidated Financial Data."
(7) Consists of the 25 properties owned by the Company for the entire First
Three Quarters 1995 and First Three Quarters 1994 and the 23 properties
owned by the Company for all of 1994 and 1993, except for the 255-room Elk
Grove Suites hotel, which is leased to a national hotel chain through
1997, the Sacramento property, which is operated as an independent hotel,
and the 160-room Detroit Airport Marriott, which was included in the
Special Dividend.
(8) REVPAR represents room revenues generated per available room and excludes
food and beverage and other ancillary revenues generated by the property.
(9) For the First Three Quarters 1995, excludes the four hotels acquired in
the fourth quarter of 1995, the Philadelphia Airport Hotel, which opened
in November 1995, the Springfield Radisson Hotel, which was sold in
December 1995, the Detroit Airport Marriott, which is owned by HM Services
and was distributed as part of the Special Dividend, one leased hotel and
one hotel transferred to the Company by HM Services in conjunction with
the Special Dividend.
(10) Excludes the 684-room San Francisco Airport Marriott and the 335-room
Westfields Conference Center, which were purchased at the end of the third
quarter of 1994.
(11) Excludes six properties acquired in the last two weeks of fiscal year 1994
and the Detroit Airport Marriott included in the Special Dividend.
(12) Includes the 37 properties which the Company sold (subject to a leaseback)
to the REIT in 1995.
8
<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.
LEVERAGE
The Company has substantial indebtedness. As of September 8, 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. The Company's
indentures contain financial and operating covenants, including, but not
limited to, restrictions on the ability of the subsidiaries that have issued
debt 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.
EXPANSION RISK
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. 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 necessary,
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. There is also no assurance that the Company will be able to sell its
limited-service properties on acceptable terms.
COMPETITION AND RISKS OF THE LODGING INDUSTRY
The Company's hotels generally operate in areas that contain numerous other
competitors. 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
9
<PAGE>
outlook for the industry has improved, the lodging industry, including the
Company, may be adversely affected in the future 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. 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. Nevertheless, the
Company believes that there is sufficient mutuality of interest between the
Company and Marriott International to result in a mutually productive
relationship. Moreover, appropriate policies and procedures are followed by
the Board of Directors of each of the companies to limit the involvement of
Messrs. J.W. Marriott, Jr. and Richard E. Marriott (and, if appropriate, other
officers and directors of such companies) in conflict situations, including
requiring them to abstain from voting as directors of either the Company or
Marriott International (or as directors of any of their subsidiaries) on
certain matters which present a conflict between the companies. See
"Relationship Between the Company and Marriott International."
RISKS INVOLVED IN INVESTMENTS THROUGH PARTNERSHIPS OR JOINT VENTURES
Instead of purchasing hotel properties directly, the Company may invest as a
co-venturer. 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.
ANTITAKEOVER PROVISIONS
The Company's Restated Certificate of Incorporation and Bylaws each contain
provisions that will make difficult an acquisition of control of the Company
by means of a tender offer, open market purchases, proxy fight, or otherwise,
that is not approved by the Board of Directors. Provisions that may have an
antitakeover
10
<PAGE>
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. 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 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.
THE COMPANY
The Company is one of the largest owners of lodging properties in the world.
The Company's 90 lodging properties 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 263 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 by
Marriott). 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). 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.
11
<PAGE>
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."
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of September 8, 1995, (ii) the pro forma capitalization of the Company as
of September 8, 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 September 8, 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 $11.625 per share. The capitalization of the Company should be read
in conjunction with the Company's Consolidated and Condensed 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 SEPTEMBER 8, 1995
----------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------ ------------ --------------
(UNAUDITED, IN MILLIONS)
<S> <C> <C> <C>
Cash and cash equivalents.................... $ 211 $ 168 $ 447
====== ====== ======
Debt......................................... $1,925 $2,369 $2,369
Shareholders' equity......................... 670 701 980
------ ------ ------
Total capitalization....................... $2,595 $3,070 $3,349
====== ====== ======
</TABLE>
- --------
(1) Pro Forma for the fourth quarter 1995 acquisition of four full-service
properties, the Pending Acquisitions, the sale of the Springfield Radisson
Hotel in December 1995, the December 1995 Debt Offering, the fourth
quarter 1995 writedown of one undeveloped land site, and the Special
Dividend. See "Pro Forma Condensed Consolidated Financial Data."
(2) As further adjusted to give effect to the Offerings.
12
<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 First Three Quarters
1995, the First Three Quarters 1994 and the fiscal year ended December 30,
1994, as if such transactions had been completed at the beginning of each
period:
. 1995 acquisition of eight full-service hotel properties
. 1995 sale of one full-service hotel property
. 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
. 1995 Special Dividend
. 1995 writedown of one undeveloped land site
. Consummation of the Pending Acquisitions
. 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 acquisition of four full-service properties during the fourth
quarter of 1995, the consummation of the Pending Acquisitions, the
consummation of the December 1995 Debt Offering, the fourth quarter 1995
writedown of one undeveloped land site, and the consummation of the Special
Dividend as if such transactions had been completed on September 8, 1995.
During 1995, the Company acquired nine full-service hotel properties,
including four hotels during the fourth quarter of 1995, and sold one full-
service hotel property in the fourth quarter of 1995. 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.
The Company has also entered into agreements to acquire or purchase
controlling interests in three full-service hotel properties, the Pending
Acquisitions. 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).
In May 1995, HMH Properties, Inc. ("HMH Properties"), an indirect wholly
owned subsidiary of the Company, issued $600 million of debt (the "Properties
Notes") to several initial purchasers (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.
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.
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
13
<PAGE>
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 to finance future acquisitions
of full-service hotel properties, including two of the Pending Acquisitions.
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.
14
<PAGE>
HOST MARRIOTT CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 8, 1995
---------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
ASSETS
<S> <C> <C> <C>
Property and Equipment........................ $2,700 $223 (A) $3,127
267 (B)
(3)(C)
(60)(D)
Investments in Affiliates..................... 209 (13)(B) 196
Accounts Receivable........................... 74 -- 74
Notes Receivable.............................. 40 -- 40
Other Assets.................................. 167 6 (B) 179
10 (E)
(4)(F)
Cash and Cash Equivalents..................... 211 (115)(A) 168
(53)(B)
3 (C)
340 (E)
(210)(F)
(8)(G)
------ ---- ------
$3,401 $383 $3,784
====== ==== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt
Debt carrying a company guarantee of
repayment.................................. $1,067 $350 (E) $1,207
(210)(F)
Debt not carrying a company guarantee of 858 98 (A) 1,162
repayment.................................. 206 (B)
------ ---- ------
1,925 444 2,369
Accounts Payable and Accrued Expenses......... 54 -- 54
Net Investment in Discontinued Operations..... 81 (81)(G) --
Deferred Income Taxes......................... 528 (21)(D) 506
(1)(F)
Other Liabilities............................. 143 10 (A) 154
1 (B)
------ ---- ------
Total Liabilities......................... 2,731 352 3,083
------ ---- ------
Shareholders' Equity
Convertible Preferred Stock................. 1 -- 1
Common Stock................................ 159 -- 159
Additional Paid-in Capital.................. 495 -- 495
Retained Earnings........................... 15 (39)(D) 46
(3)(F)
73 (G)
------ ---- ------
Total Shareholders' Equity................ 670 31 701
------ ---- ------
$3,401 $383 $3,784
====== ==== ======
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Data.
15
<PAGE>
HOST MARRIOTT CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIRST THREE QUARTERS 1995
---------------------------------------------
ACQUISITION
DISPOSITION & OTHER
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues
Hotels........................ $ 315 $ (1)(H) $27 (I) $ 371
30 (J)
Other......................... 4 -- 1 (J) 5
----- ---- --- -----
319 (1) 58 376
----- ---- --- -----
Operating costs and expenses
Hotels........................ 182 (1)(H) 15 (I) 224
10 (K) 18 (J)
Other......................... 19 -- -- 19
----- ---- --- -----
201 9 33 243
----- ---- --- -----
Operating profit................ 118 (10) 25 133
Corporate expenses.............. (26) -- -- (26)
Interest expense................ (122) 4 (L) (3)(I) (142)
(12)(J)
3 (M)
(12)(N)
Interest income................. 18 -- -- 18
----- ---- --- -----
Loss from continuing operations
before income taxes and
extraordinary item............. (12) (6) 1 (17)
(Provision) benefit for income
taxes.......................... (1) 2 (O) -- 1
----- ---- --- -----
Loss from continuing operations
before extraordinary item...... $ (13) $ (4) $ 1 $ (16)
===== ==== === =====
Loss per common share from con-
tinuing operations............. $(.08) $(.10)
===== =====
Weighted average shares out-
standing....................... 157.9 157.9
===== =====
EBITDA(T)....................... $ 212 $ 231
Depreciation and
amortization(U)................ 85 93
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Data.
16
<PAGE>
HOST MARRIOTT CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIRST THREE QUARTERS 1994
----------------------------------------------
ACQUISITION
DISPOSITION & OTHER
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues
Hotels.......................... $ 223 $ (1)(H) $ 28 (I) $ 318
(10)(P) 27 (J)
51 (Q)
Other........................... 38 (14)(R) 1 (J) 25
----- ---- ---- -----
261 (25) 107 343
----- ---- ---- -----
Operating costs and expenses
Hotels.......................... 131 (1)(H) 16 (I) 204
19 (K) 17 (J)
(3)(P) 25 (Q)
Other........................... 22 (5)(R) -- 17
----- ---- ---- -----
153 10 58 221
----- ---- ---- -----
Operating profit.................. 108 (35) 49 122
Corporate expenses................ (21) -- -- (21)
Interest expense.................. (114) 22 (L) (3)(I) (125)
1 (R) (10)(J)
3 (M)
(22)(N)
(2)(Q)
Interest income................... 19 -- (5)(Q) 14
----- ---- ---- -----
Income (loss) from continuing
operations before income taxes
and extraordinary item........... (8) (12) 10 (10)
(Provision) benefit for income
taxes............................ 1 5 (O) (4)(O) 2
----- ---- ---- -----
Income (loss) from continuing
operations before extraordinary
item............................. $ (7) $ (7) $ 6 $ (8)
===== ==== ==== =====
Income (loss) per common share
from continuing operations....... $(.05) $(.05)
===== =====
Weighted average shares
outstanding...................... 151.2 1.0 (S) 152.2
===== ==== =====
EBITDA(T)......................... $186 $201
Depreciation and amortization(U).. 79 85
</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 1994
--------------------------------------------
ACQUISITION
DISPOSITION & OTHER
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues
Hotels.......................... $ 338 $(2)(H) $41 (I) $ 466
(10)(P) 38 (J)
61 (Q)
Other........................... 42 (14)(R) 2 (J) 30
----- --- --- -----
380 (26) 142 496
----- --- --- -----
Operating costs and expenses
Hotels.......................... 198 (1)(H) 23 (I) 297
27 (K) 23 (J)
(3)(P) 30 (Q)
Other........................... 30 (5)(R) -- 25
----- --- --- -----
228 18 76 322
----- --- --- -----
Operating profit.................. 152 (44) 66 174
Corporate expenses................ (32) -- -- (32)
Interest expense.................. (165) 34 (L) (5)(I) (179)
1 (R) (15)(J)
5 (M)
(31)(N)
(3)(Q)
Interest income................... 29 -- (5)(Q) 24
----- --- --- -----
Income (loss) from continuing
operations before income taxes
and extraordinary item........... (16) (9) 12 (13)
(Provision) benefit for income
taxes............................ 3 4 (O) (5)(O) 2
----- --- --- -----
Income (loss) from continuing
operations before extraordinary
item............................. $ (13) $(5) $ 7 $ (11)
===== === === =====
Income (loss) per common share
from continuing operations....... $(.09) $(.07)
===== =====
Weighted average shares
outstanding...................... 151.5 1.0 (S) 152.5
===== === =====
EBITDA(T)......................... $ 269 $ 294
Depreciation and amortization(U).. 113 122
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Data.
18
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL DATA
A. Represents the adjustment to record the fourth quarter 1995 acquisition of
four full-service properties as follows:
--Record property and equipment of $223 million
--Record mortgage debt of $98 million (including $10 million provided by
Marriott International)
--Record advance to the Company of $10 million for one of the properties
from Marriott International, as manager
--Record the use of cash of $115 million for the remaining acquisition cost
B. Represents the adjustment to record the Pending Acquisitions as follows:
--Record property and equipment of $267 million
--Record the mortgage debt of $206 million for one full-service property
--Record the use of cash of $53 million for the acquisition cost
--Record the elimination of the prior investment of $13 million in a
partnership
--Record the property improvement escrow fund of $6 million for one full-
service property
--Record the minority interest of $1 million for the partner of the joint
venture acquiring one full-service property
C. Represents the adjustment to record the fourth quarter 1995 sale of a full-
service hotel property for net cash proceeds of $3 million. No adjustment
has been reflected in the accompanying Unaudited Pro Forma Condensed
Consolidated Statements of Operations due to the immateriality of the
operating results for this property.
D. Represents the adjustment to record the fourth quarter 1995 write down of
$39 million, net of taxes of $21 million, for one undeveloped land site. No
adjustment has been reflected in the accompanying Pro Forma Condensed
Consolidated Statements of Operations due to the unusual and non-recurring
nature of this write down.
E. Represents the adjustment to record the issuance of the Acquisitions Notes
as follows:
--Record the issuance of debt of $350 million
--Record the net cash proceeds of $340 million
--Record the deferred financing fees of $10 million
F. Represents the adjustment to record the repayment of the Revolver as
follows:
--Reduce debt by $210 million with available cash from the issuance of the
Acquisitions Notes
--Record the write-off of the deferred financing fees related to the
Revolver of $4 million before taxes and the related income tax impact of
$1 million
G. Represents the adjustment to record the Special Dividend by eliminating the
net investment in discontinued operations, adjusting shareholders' equity
and recording the payment of $8 million of the remaining expenses related
to the Special Dividend ($1 million of such expenses were paid prior to
September 8, 1995). The entry to record the Special Dividend is subject to
adjustment pursuant to finalization under the Distribution Agreement and
certain other agreements.
H. Represents the adjustment to eliminate the revenues and the operating costs
for the 1995 sale of the four remaining Fairfield Inns.
I. Represents the adjustment to reflect the incremental increase in revenue,
operating costs and secured debt interest expense for the 1995 addition of
eight full-service properties, as if they were added at the beginning of
the 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,
19
<PAGE>
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.
J. Represents the adjustment to record the revenue, operating costs and
secured debt interest expense for the Pending Acquisitions, including the
impact of the new management agreements that are expected to be entered
into with the manager and depreciation expense reflecting the Company's
basis in the assets.
K. 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.
L. 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.
M. 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.
N. 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.
O. Represents the income tax impact of pro forma adjustments at statutory
rates.
P. Represents the adjustment to eliminate the revenues and the operating costs
for the 26 Fairfield Inns sold during 1994.
Q. 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.
R. Represents the adjustments to eliminate the revenues, operating costs and
the secured debt interest expense for the 14 senior living communities sold
during 1994.
S. 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.
T. 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.
U. Represents depreciation and amortization from continuing operations.
20
<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 Condensed Consolidated
and Consolidated Financial Statements as of September 8, 1995 and September 9,
1994 and for the First Three Quarters 1995 and the First Three Quarters 1994
and the five most recent fiscal years ended December 30, 1994. The financial
data for fiscal years 1990 through 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 Condensed Consolidated
Financial Statements of the Company. The selected financial information for
the First Three Quarters 1995 and the First Three Quarters 1994 has been
derived from unaudited Condensed Consolidated Financial Statements of the
Company and reflects all adjustments (consisting of normal recurring
adjustments) that, in the opinion of management of the Company, are necessary
for a fair presentation of such information. 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>
FIRST
THREE QUARTERS FISCAL YEAR
---------------- ----------------------------------------------
1995(1) 1994(1) 1994(1) 1993(1)(2)(3) 1992(3) 1991(4) 1990(5)
------- ------- ------- ------------- ------- ------- -------
(UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............... $ 319 $ 261 $380 $659 $7,778 $7,421 $6,760
Operating profit before
corporate expenses and
interest.............. 118 108 152 92 406 382 260
Income (loss) from
continuing
operations............ (13) (7) (13) 56 75 70 26
Net income (loss) (7).. (49) (10) (25) 50 85 82 47
Earnings (loss) per
common share: (6)
Income (loss) from
continuing
operations .......... (.08) (.05) (.09) .39 .55 .68 .26
Net income (loss)(7).. (.31) (.07) (.17) .35 .64 .80 .46
Cash dividends declared
per common share...... -- -- -- .14 .28 .28 .28
BALANCE SHEET DATA:
Total assets........... $3,401 $3,341 $3,366 $3,362 $5,886 $6,054 $6,583
Debt (8)............... 1,925 1,852 1,871 2,113 2,824 3,067 3,223
</TABLE>
- --------
(1) 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. In the First Three Quarters 1994 and fiscal year 1994, the Company
recognized $3 million and $6 million extraordinary losses, net of taxes,
respectively, on the required redemption of Hospitality Notes. In the
First Three Quarters 1995, the Company recognized a $17 million
extraordinary loss, net of taxes, on the redemption of Hospitality Notes.
(2) 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.
(3) Operating results in 1993 and 1992 included pretax expenses related to the
Marriott International Distribution totaling $13 million and $21 million,
respectively.
(4) Fiscal year 1991 includes 53 weeks.
(5) Operating results in 1990 included pretax restructuring charges and
writeoffs, net of certain nonrecurring gains, of $153 million related to
continuing operations.
(6) 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 fiscal year 1994 and the First Three
Quarters 1995 and First Three Quarters 1994, as they are antidilutive.
(7) The Company recorded a loss from discontinued operations, net of taxes, as
a result of the Special Dividend of $19 million for the First Three
Quarters 1995, $6 million in fiscal year 1994, and $4 million in fiscal
year 1993, and income from discontinued operations, net of taxes, of $10
million in 1992, $12 million in 1991 and $21 million in 1990. There was no
income or loss from discontinued operations for the First Three Quarters
1994.
(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.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following discussion and analysis addresses the results of operations of
the Company for the First Three Quarters 1995 and the First Three Quarters
1994 on a historical basis, fiscal year 1994 on a historical basis compared to
fiscal year 1993 on a pro forma basis and fiscal years 1993 and 1992 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 is not relevant because the significant changes as a result of the
Marriott International Distribution and related transactions make the 1994,
1993 and 1992 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") and to
compare the Distribution Pro Forma operating results for 1993 to the
Distribution Pro Forma operating results for 1992. Accordingly, the Company's
Distribution Pro Forma consolidated statements of operations for fiscal 1993
and 1992 are presented below. These Distribution Pro Forma condensed
consolidated statements of operations were 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 each period and include only the
operations of the businesses retained by the Company, and exclude, among other
items, certain nonrecurring costs totalling $34 million relating to the
Marriott International Distribution, accounting changes, extraordinary losses
and discontinued operations related to the Special Dividend. See Notes 1, 2,
5, 7, 8, 9, 10 and 14 to the Consolidated Financial Statements included
elsewhere herein for discussion of the Marriott International Distribution,
and the related transactions and agreements.
22
<PAGE>
The following Distribution Pro Forma consolidated statements of operations
for 1993 and 1992 and the 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. These Distribution Pro Forma consolidated statements of
operations do 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.
These Distribution Pro Forma consolidated statements of operations only
reflect the consummation of the Marriott International Distribution and do not
include the impact of the additional transactions discussed in the "Pro Forma
Condensed Consolidated Financial Data" included elsewhere herein.
<TABLE>
<CAPTION>
DISTRIBUTION
HISTORICAL PRO FORMA(1)
-------------------- --------------
FIRST THREE FISCAL
QUARTERS YEAR FISCAL YEAR
------------ ------ --------------
1995 1994 1994 1993 1992
----- ----- ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues
Hotels................................ $ 315 $ 223 $ 338 $ 249 $ 237
Senior living communities............. -- 14 14 23 21
Net gains (losses) on property
transactions......................... (5) 5 6 (1) 3
Equity in earnings (losses) of
affiliates........................... (1) 2 -- (27) (24)
Other................................. 10 17 22 17 19
----- ----- ------ ------ ------
Total revenues...................... 319 261 380 261 256
----- ----- ------ ------ ------
Operating costs and expenses
Hotels................................ 182 131 198 155 149
Senior living communities............. -- 5 5 12 10
Other................................. 19 17 25 14 15
----- ----- ------ ------ ------
Total operating costs and expenses.. 201 153 228 181 174
----- ----- ------ ------ ------
Operating profit before corporate
expenses and interest.................. 118 108 152 80 82
Corporate expenses...................... (26) (21) (32) (24) (19)
Interest expense........................ (122) (114) (165) (152) (161)
Interest income......................... 18 19 29 26 28
----- ----- ------ ------ ------
Loss from continuing operations before
income taxes........................... (12) (8) (16) (70) (70)
Benefit (provision) for income taxes.... (1) 1 3 10 10
----- ----- ------ ------ ------
Loss from continuing
operations(2)(3)(4).................... $ (13) $ (7) $ (13) $ (60) $ (60)
===== ===== ====== ====== ======
Loss per common share from continuing
operations............................. $(.08) $(.05) $ (.09) $ (.51) $ (.53)
Weighted average shares outstanding(5).. 157.9 151.2 151.5 116.7 112.2
</TABLE>
23
<PAGE>
- --------
(1) Significant adjustments to the 1993 and 1992 historical financial
statements for the Distribution Pro Forma data include:
. the reduction of hotel revenues by $354 million and $493 million in 1993
and 1992, respectively, 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 1 to the Consolidated Financial Statements included elsewhere
herein;
. the reduction of operating profit by $14 million and $9 million in 1993
and 1992, respectively, to reflect management fees paid to Marriott
International under the lodging management agreements;
. the reduction of property level revenues of $67 million and $62 million
in 1993 and 1992, respectively, to equal rental income of $23 million
and $21 million in 1993 and 1992, respectively, and the reduction of
operating expenses of $46 million and $52 million in 1993 and 1992,
respectively, for senior living communities owned by the Company and
leased to Marriott International. See Note 1 to the Consolidated
Financial Statements included elsewhere herein;
. the elimination of the pretax profit from operations distributed to
Marriott International of $211 million in 1993 and $237 million in 1992;
. the elimination of certain nonrecurring charges of $13 million and $16
million in 1993 and 1992, respectively, directly related to the Marriott
International Distribution; and
. the net decrease to interest expense of $12 million and $14 million in
1993 and 1992, respectively, 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 Notes
7 and 8 to the Consolidated Financial Statements included elsewhere
herein.
Summary historical and Marriott International 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................... 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>
<TABLE>
<CAPTION>
FISCAL YEAR 1992
----------------------------------------------------------------
ADJUSTMENT TO
REFLECT MARRIOTT
INTERNATIONAL ON ADJUSTED PRO FORMA DISTRIBUTION
HISTORICAL THE EQUITY METHOD HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................ $7,778 $(6,971) $807 $(551) $256
Operating profit before
corporate expenses and
interest............... 406 (326) 80 2 82
Corporate expenses...... 102 (67) 35 (16) 19
Interest expense........ 200 (25) 175 (14) 161
Profit from operations
distributed to Marriott
International.......... -- 237 237 (237) --
Income (loss) from
continuing operations.. 75 -- 75 (135) (60)
</TABLE>
(2) SFAS 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. See the Notes to the Consolidated Financial Statements included
elsewhere herein.
(3) The Company recognized a $4 million extraordinary loss, net of taxes, on
the completion of a debt exchange offer in 1993. The Company recognized a
$6 million extraordinary loss, net of taxes, on the required redemption of
Hospitality Notes in 1994. See Notes 2 and 7 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 $19 million in the First Three Quarters 1995,
$6 million in 1994, $4 million in 1993 and the Company's income from
discontinued operations was $10 million in fiscal year 1992. There was no
income or loss from discontinued operations for the First Three Quarters
1994. See the Consolidated Financial Statements included elsewhere herein.
(5) The 1993 and 1992 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.
24
<PAGE>
Subsequent to the Marriott International Distribution, revenues primarily
represent house profit from the Company's hotel properties, lease rentals from
the Company's senior living communities, net gains (losses) on real estate
transactions and equity in the earnings of affiliates. House profit reflects
the net revenues flowing to the Company as property owner and represents hotel
sales less property-level expenses (excluding depreciation, management fees,
real and personal property taxes, ground and equipment rent, insurance and
certain other costs which are classified as operating costs and expenses). The
operating costs and expenses of the senior living communities consist of
depreciation and amortization, while other operating costs and expenses
include idle land carrying costs and certain other costs.
For the periods discussed herein, the Company's properties have experienced
substantial increases in room revenues generated per available room
("REVPAR"). REVPAR is a commonly used indicator of market performance for
hotels which represents the combination of the average daily room rate charged
and the average occupancy achieved. REVPAR does not include food and beverage
or other ancillary revenues generated by the property. The REVPAR increase
primarily represents strong percentage increases in room rates, while
occupancies have generally increased slightly or remained flat. Increases in
room rates have generally been achieved by the managers through shifting
occupancies away from discounted group business to higher-rated group and
transient business. This has been made possible by increased travel due to
improved economic conditions and by the favorable supply/demand
characteristics existing in the lodging industry today, particularly in the
full-service segment. The Company expects this supply/demand imbalance,
particularly in the full-service segment, to continue, which should result in
improved REVPAR and operating profits at its hotel properties in the near
term.
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 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 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. 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 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 manager's
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.
First Three Quarters 1995 Compared to First Three Quarters 1994
Revenues. Revenues primarily represent house profit from the Company's hotel
properties, lease rentals for the Company's senior living communities (in
1994), net gains (losses) on real estate transactions and equity
25
<PAGE>
in earnings of affiliates. Revenues from continuing operations rose $58
million, or 22%, to $319 million for the First Three Quarters 1995. The
Company's revenue and operating profit from continuing operations were
impacted by:
. improved lodging results;
. the addition of 25 full-service hotel properties during 1994 and the
First Three Quarters 1995;
. the 1995 sale and leaseback of 37 of the Company's Courtyard properties;
. a $10 million charge in 1995 to write down the carrying value of certain
Courtyard and Residence Inn properties held for sale to their net
realizable value;
. 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 $92 million, or 41%, to $315 million for the First
Three Quarters 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
$73 million of revenue for the First Three Quarters 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 $20 million, or 12%, for the First Three Quarters 1995 over the
First Three Quarters 1994.
Revenue for nearly all of the Company's full-service hotels, resorts and
suites was improved or comparable to the results for the First Three Quarters
1994. Improved results were driven by increases in REVPAR of 7% for comparable
units (which resulted in a 15% increase in comparable EBITDA). On a comparable
basis, average room rates increased 9%, while average occupancy decreased two
percentage points.
The Company's moderate-price Courtyard properties reported a 7% increase in
REVPAR due to a 7% increase in average room rates, offset slightly by a small
decrease in occupancy.
The Company's extended-stay Residence Inns reported a 9% 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 to be driven by
room rate increases, rather than occupancy increases.
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 the First Three Quarters 1995 for
the four remaining Fairfield Inns prior to their disposition were comparable
to the First Three Quarters 1994.
The net loss on property transactions for the First Three Quarters 1995
includes the $10 million charge to write down the carrying value of five
individual Courtyard and Residence Inn properties to their estimated net
realizable values.
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 $48 million to $201 million for the
First Three Quarters 1995. Hotel operating costs increased $51 million to $182
million for the First Three Quarters 1995. As a percentage of hotel revenues,
however, hotel operating costs and expenses decreased to 58% of revenues in
the First Three Quarters 1995 from 59% of revenues in the First Three Quarters
1994.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's operating profit increased $10
million, or 9%, to $118 million for the First Three Quarters 1995. Hotel
operating profit increased $41 million, or 45%, to $133 million, or 42% of
revenues, for the First Three Quarters 1995 from $92 million, or 41% of
revenues, for the First Three Quarters 1994. The hotels added by the
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Company in 1994 and 1995 provided $40 million of operating profit for the
First Three Quarters 1995. Excluding the impact of the non-comparable items
discussed earlier, hotel operating profit increased $15 million, or 25%, over
the First Three Quarters 1994. Several hotels, including the New York Marriott
Marquis, Fort Lauderdale Marina Marriott and the Miami Airport Marriott,
posted significant improvements in operating profit.
Corporate Expenses. Corporate expenses increased $5 million to $26 million
for the First Three Quarters 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 were unchanged at 8% of revenues.
Interest Expense. Interest expense increased by 7% to $122 million for the
First Three Quarters 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 Hospitality Notes redemptions.
Continuing Operations. The loss from continuing operations for the First
Three Quarters 1995 increased $6 million to $13 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 the First
Three Quarters 1995 of $19 million principally was due to a $10 million
extraordinary loss on the redemption and defeasance of certain debt in 1995,
the 1995 accrual of HM Services' estimated fourth quarter loss of $4 million
and the estimated expenses of $9 million related to the Special Dividend.
During the fourth quarter of 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 required a charge against
current operating results of approximately $47 million before taxes for the
impairment of certain of the leasehold improvement assets of HM Services.
Additionally, during the fourth quarter of 1995, HM Services recorded a $15
million pretax restructuring charge for the restructuring of HM Services'
business processes. Most of these expenditures, primarily severance payments,
will be incurred by HM Services in the first half of 1996.
Extraordinary Item. In connection with the redemption and defeasance of
certain of the Company's debt in the second quarter of 1995, the Company
recognized an extraordinary loss of $26 million ($17 million after taxes),
primarily representing premiums paid on the Hospitality Notes' redemptions of
$13 million and the write-off of deferred financing fees and discounts on the
Hospitality Notes.
Net Loss. The Company's net loss for the First Three Quarters 1995 increased
$39 million to $49 million principally due to the $19 million loss from
discontinued operations, the $17 million extraordinary loss and the $10
million charge to write-down the carrying value of five limited-service hotels
to their estimated net realizable values. The net loss per share for the First
Three Quarters 1995 was $.31 per share, compared to $.07 per share for the
First Three Quarters 1994.
Historical 1994 Compared to Pro Forma 1993
Revenues. Revenues from continuing operations rose $119 million, or 46%, to
$380 million for 1994 from $261 million on a pro forma basis for 1993. The
Company's revenue and operating profit from continuing operations were
impacted by:
. improved lodging results;
. the addition of 18 full-service hotel properties during 1994;
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. the consolidation of the partnership owning the New York Marriott Marquis
on December 31, 1993;
. the 1994 sale of the Company's senior living communities;
. the 1994 sale of 26 of the Company's Fairfield Inns;
. the 1994 reduction in general liability and workers' compensation self-
insurance program reserves related to the Company's continuing operations
of $4 million;
. the 1993 $11 million charge to write-down the carrying value of certain
Fairfield Inn properties held for sale to their net realizable value;
. the 1993 sale of 11 Residence Inns; and
. the 1993 $10 million gain on the sale of the Company's interest in a
hotel partnership.
Hotel revenues increased $89 million, or 36%, to $338 million for 1994, as
all of the Company's lodging concepts reported growth in REVPAR for comparable
units. The hotels added by the Company in 1994 provided $27 million of
revenue. Excluding the impact of the addition of full-service properties, the
sales of the Fairfield Inns and Residence Inns and consolidation of the New
York Marriott Marquis, comparable hotel revenues increased $31 million, or
15%, in 1994 over pro forma 1993.
Revenue for the Company's full-service hotels, resorts, and suites was
improved or comparable to 1993 results with the exception of the Miami Airport
Marriott Hotel which achieved very high occupancy levels in early 1993
resulting from Hurricane Andrew in 1992. The Company's full-service hotels
posted a 7% increase in REVPAR for comparable units. Average occupancy
increased over one percentage point for comparable units, while average room
rates increased 5%.
The Company's moderate-priced Courtyard properties reported significant
increases in revenues in 1994 due to REVPAR increases. REVPAR of the Company's
Courtyard properties increased 8%, due to a 7% increase in average room rates
and almost a one percentage point increase in average occupancy.
The Company's extended-stay Residence Inns also reported significant
increases in revenues in 1994 due to REVPAR increases. REVPAR of the Company's
Residence Inns increased 8% for comparable units due primarily to an increase
in average room rates of 7%, combined with a one percentage point increase in
average occupancy.
On August 5, 1994, the Company sold 26 of its Fairfield Inns to an unrelated
party for net proceeds of approximately $114 million. Prior to their sale,
year-to-date revenues and operating profit were comparable to the prior year.
Year-to-date revenues and operating profit for the four remaining Fairfield
Inns were comparable to the 1993 pro forma amounts.
Senior living communities' revenues consist of rentals earned under the
lease agreements with Marriott International. During the first quarter of
1994, the Company executed an agreement to sell all of its senior living
communities to an unrelated party for approximately $320 million, which
approximated the communities' carrying value. The sale of the communities was
completed during the second and third quarters of 1994. Prior to their sales,
year-to-date revenues and operating profit for senior living communities were
comparable to 1993.
The net gains (losses) on property transactions for 1994 principally
included amortization of the deferred gain on the 1993 sale of Residence Inns,
and for 1993 principally included the Fairfield Inn net realizable value
write-down and the gain on the 1993 sale of the Company's interest in the
partnership owning the Boston Copley Marriott Hotel.
Equity in earnings (losses) of affiliates was break even for 1994, compared
to $27 million of losses recorded in 1993. The significant decrease is
attributable to the consolidation of the partnership owning the New York
Marriott Marquis on December 31, 1993.
Operating costs and expenses. Operating costs and expenses increased $47
million to $228 million in 1994. Hotel operating costs increased $43 million
to $198 million in 1994. As a percentage of hotel revenues,
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hotel operating costs and expenses represented 59% of revenues in 1994 and 62%
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 $32 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.
Pro Forma 1993 Compared to Pro Forma 1992
Revenues. The Company's pro forma 1993 revenues totalled $261 million,
representing a $5 million, or 2%, increase over pro forma 1992 results. Pro
forma hotel revenues of $249 million represented a $12 million, or 5% increase
in 1993 over 1992 amounts, as each of the Company's lodging segments reported
growth in comparable REVPAR.
Revenues for each of the Company's full-service hotels were improved over or
comparable to 1992 results due to improvements in REVPAR. The Company's full-
service hotels posted a 6% increase in REVPAR in 1993. Average occupancy
increased by almost four percentage points, while the average room rate
increased slightly.
The Company's moderate-price Courtyard hotels reported significant increases
in revenues in 1993 primarily due to REVPAR increases. REVPAR of the Company's
Courtyard properties increased 10% due to a 5% increase in the average room
rates and more than a three percentage point increase in average occupancy.
The Company's extended-stay Residence Inns also reported significant
increases in revenues in 1993 primarily due to REVPAR increases. REVPAR of the
Company's Residence Inn properties increased 11% due to an increase in average
room rates of 2% combined with a seven percentage point increase in average
occupancy.
The Company's economy Fairfield Inns reported significant increases in
revenues in 1993 also due to REVPAR increases. The REVPAR for the Company's
Fairfield Inns increased 5% primarily due to a 4% increase in the average room
rates and an almost one percentage point increase in average occupancy.
Senior living communities' pro forma revenues increased to $23 million in
1993 from $21 million in 1992 primarily due to the opening of additional
properties during 1993.
Pro forma net gains (losses) on property transactions decreased to a $1
million loss in 1993 from a $3 million gain in 1992 because of a 1993 $11
million charge to write down the carrying value of certain Fairfield Inns held
as available for sale to their net realizable value, partially offset by an
increase in 1993 in the gains
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recognized from the sales of senior living community condominium units and the
$10 million gain recorded in 1993 from the sale of the Company's 15% interest
in the partnership owning the Boston Copley Marriott Hotel.
The Company's equity in losses of affiliates increased by $3 million to $27
million in 1993 from $24 million in 1992.
Operating Costs and Expenses. The Company's pro forma operating costs and
expenses increased to $181 million, or 69% of revenues, in 1993 from $174
million, or 68% of revenues, in 1992. As a percentage of revenues, hotel
operating costs and expenses decreased to 62% of revenues in 1993 from 63% of
revenues in 1992 primarily as a result of the increase in revenues and the
related operating leverage. Pro forma senior living communities' operating
costs and expenses increased to $12 million in 1993 from $10 million in 1992
also due to the corresponding increase in revenues.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's pro forma operating profit
decreased to $80 million, or 31% of revenues in 1993 from $82 million, or 32%
of revenues in 1992. Pro forma hotel operating profit increased to $94
million, or 38% of revenues, from $88 million, or 37% of revenues, in 1992.
Pro forma senior living communities operating profit remained unchanged at $11
million.
Corporate Expenses. On a pro forma basis, corporate expenses increased $5
million to $24 million in 1993 due to higher administrative costs.
Interest Expense. Interest expense decreased 6% to $152 million in 1993,
principally due to the prepayment of debt from the proceeds of hotel sales in
1992 and other asset sales occurring late in 1993 and declining interest rates
on the Company's variable rate debt and interest rate swap agreements.
Continuing Operations. The Company's pro forma loss from continuing
operations was $60 million in both 1993 and 1992. The 1993 loss is primarily
attributable to the aforementioned $11 million pretax charge recorded in 1993
to write down the carrying value of certain Fairfield Inns held as available
for sale, the $10 million gain recorded in 1993 from the sale of the Company's
interest in a hotel partnership and a 1993 charge of approximately $8 million
related to a one percentage point increase in the Federal income tax rate,
partially offset by the strong operating performance of the lodging properties
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, Acquisitions, an indirect wholly
owned subsidiary of the Company, issued $350 million of 9% senior notes (the
"Acquisitions Notes") to several initial purchasers (the "December 1995 Debt
Offering"). Acquisitions owns 15 of the Company's full-service hotel
properties. The Acquisitions Notes were issued at par and have a final
maturity of December 2007. The net proceeds totalled $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 to finance acquisitions of full-service
hotel properties with the remaining $101 million of proceeds. The Acquisitions
Notes are guaranteed by Acquisitions' subsidiary. The indenture governing the
Acquisitions Notes contains covenants that, among other things, limit the
ability of Acquisitions and its subsidiary to incur additional indebtedness
and issue preferred stock, pay dividends or make other distributions,
repurchase capital stock or subordinated indebtedness, create certain liens,
enter into certain transactions with affiliates, sell certain assets, issue or
sell stock of Acquisitions' subsidiary, and enter into certain mergers and
consolidations. In addition, under certain circumstances, Acquisitions will be
required to offer to purchase the Acquisitions Notes at par value with the
proceeds of certain asset sales. Acquisitions will not be required to make
principal payments on the Acquisitions
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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 to several initial purchasers. 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 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 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 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.
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 were no borrowings outstanding under
the New Line of Credit at September 8, 1995. The New Line of Credit imposes
certain restrictions on the ability of the Company and certain of its
subsidiaries to incur additional debt, create liens or mortgages on their
properties (other than various types of liens arising in the ordinary course
of business), extend new guarantees (other than replacement guarantees), pay
dividends, and repurchase their common stock. When no advances are outstanding
under the New Line of Credit and the Company and certain of its subsidiaries
have adequately reserved for debt maturities over a 6-month term, such
restricted payments as would otherwise be prohibited are permitted in the
amount by which aggregate EBITDA of the Company and certain of its
subsidiaries (as defined in the New Line of Credit) and the proceeds of
specified stock issuances exceed 170% of the aggregate of certain specified
charges.
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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. At September 8, 1995, $210 million was outstanding under the
Revolver. 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 doing so 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. The REIT also has an option, expiring in June
1996, to buy and lease back up to 17 of the Company's remaining Courtyard
properties. In 1995, the Company also sold its four remaining Fairfield Inns
for net cash proceeds of approximately $6 million, which approximated their
carrying value, and the Springfield Radisson Hotel for net cash proceeds of
approximately $3 million, which approximated its carrying value. During the
second and third quarters of 1994, the Company sold 14 senior living
communities to an unrelated party for approximately $320 million, which
approximated the communities' carrying value. Additionally, during the third
quarter of 1994, the Company sold 26 of its Fairfield Inns to an unrelated
party. The net proceeds from the sale of the hotels was approximately $114
million, which exceeded the carrying value of the hotels by approximately $12
million, and such excess has been deferred. Approximately $27 million of the
Fairfield Inn proceeds was payable in the form of a note from the purchaser.
The Company also sold 22 undeveloped land parcels during 1994 and 1995 for
proceeds of approximately $28 million.
In cases where the Company has made a decision to dispose of particular
properties, the Company assesses impairment of each individual property to be
sold on the basis of expected sales price less estimated costs of disposal.
Otherwise, the Company assesses impairment of its real estate properties based
on whether it is probable that undiscounted future cash flows from such
properties will be less than their net book value. 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 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
totalling 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, totalling
$223 million, were completed in the fourth quarter of 1995. During 1994, the
Company acquired 15 full-service hotels totalling approximately 6,100 rooms
(including one 199-room hotel subsequently sold in 1995) for approximately
$440 million. The Company also provided 100% financing totalling 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
(totalling another 684 rooms). Additionally, the Company acquired a
controlling interest in one 662-room, full-service hotel through an equity
investment of $16 million
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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. The Company is continually engaged in discussions with respect to
other acquisition opportunities.
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 $60 million to $65 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 ($102
million outstanding at September 8, 1995). Construction of a second hotel in
Philadelphia, the 419-room Philadelphia Airport Marriott Hotel (the "Airport
Hotel"), was recently completed and opened on November 1, 1995. The Airport
Hotel was financed principally with $40 million of proceeds from an industrial
development financing bond. The Company also is constructing a 300-room
Residence Inn in Pentagon City, Virginia, scheduled for completion in early
1996. Capital expenditures for these three hotels totalled $51 million for the
First Three Quarters 1995, $104 million in 1994 and $60 million in 1993. The
Company anticipates spending approximately $7 million in 1996 to complete
construction of the Residence Inn in Pentagon City.
Debt Payments. At September 8, 1995, the Company had outstanding $736
million in senior notes, excluding $400 million of HMTP senior notes related
to discontinued operations which obligations were included in the Special
Dividend, bearing interest at an average rate of approximately 9.4%. The
Company was also obligated at such date on approximately $331 million of other
recourse debt. Included in this other debt is the $210 million outstanding
balance of the Revolver which bore interest based on LIBOR plus 1.75%. On
December 21, 1995, the Revolver was repaid in full and terminated with certain
proceeds from the issuance of the Acquisitions Notes. Required amortization of
the remaining obligations is generally limited to $132 million over the next
five years.
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
bond indenture, bonds 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 remainder of the Company's debt, approximately $858 million at September
8, 1995, is secured by specific hotel properties and has been classified as
"Debt Not Carrying a Company Guarantee." Payments on this debt generally come
solely from the specific cash flows generated by the assets securing the debt,
and the lender is limited to seizure of the assets as its sole recourse in the
case of nonpayment or other forms of default. Maturities over the next five
years total $375 million, a substantial portion ($317 million) of which
represents the maturity of the mortgage on the New York Marriott Marquis in
1998.
The Company currently is party to four interest rate exchange agreements,
which expire in 1997, with notional amounts of $100 million each. These
agreements with Citibank, N.A., New York and Salomon Brothers (the
"Contracting Parties") require the Company to pay interest based on the
specified floating rate of six month LIBOR (average rate of 5.9% at September
8, 1995) and collect interest at fixed rates (average rate of 7.1% at
September 8, 1995). The Company realized a net reduction of interest expense
of $4 million for the First Three Quarters 1995, $11 million in 1994 and $21
million in both 1993 and 1992, respectively, related to interest rate exchange
agreements. The Company monitors the credit-worthiness 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 nonperformance by the Contracting
Parties; however, the Company does not anticipate nonperformance by the
Contracting Parties.
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Cash Flows. The Company's cash flow from operations for the First Three
Quarters 1995 and in fiscal years 1994, 1993 and 1992 totalled $155 million,
$158 million, $429 million and $410 million, respectively.
The Company's cash from investing activities was $64 million for the First
Three Quarters 1995 and $48 million in fiscal year 1992, while cash used in
investing activities was $192 million and $262 million in fiscal years 1994
and 1993. 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 used in financing activities was $62 million for the
First Three Quarters 1995 and $389 million and $296 million, respectively, for
fiscal years 1993 and 1992, while cash from financing activities totalled $26
million for fiscal year 1994. 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 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 hotels.
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
34
<PAGE>
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 $205 million at
September 8, 1995. Funding under these guarantees amounted to $2 million in
1994 and $10 million for the First Three Quarters 1995.
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 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 participates in four
interest rate swap agreements aggregating $400 million with Citibank, N.A. New
York and Salomon Brothers which expire in 1997. Under these agreements, the
Company collects interest at fixed rates (average rate of 7.1% at September 8,
1995) and pays interest based on the specified floating interest rate of six
month LIBOR (average rate of 5.9% at September 8, 1995). Additionally,
outstanding borrowings under the New Line of Credit, and a portion ($159
million at September 8, 1995) of the New York Marriott Marquis mortgage bear
interest based on variable rates. Accordingly, the amount of the Company's
interest expense under the interest rate swap agreements and the floating rate
debt for a particular year will be affected by changes in short-term interest
rates.
Accounting Standards. In the first quarter of 1995, the Company adopted SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan." Adoption of SFAS
No. 114 did not have a material effect on the Company's consolidated financial
statements. In the fourth quarter of 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 required a charge against
current operating results of approximately $47 million before taxes for the
impairment of certain of the leasehold improvement assets of HM Services.
35
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
The Company is one of the largest owners of lodging properties in the world.
The Company's 90 lodging properties generally are operated under Marriott
brands and managed by 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. Over
the past two years, 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. Based on industry
data, the Company believes that its full-service hotels consistently
outperform the industry's average occupancy rate by a significant margin and
averaged 77.4% occupancy for 1994 compared to 68.1% 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 relationship between supply and
demand of hotel rooms in the United States. Based on a recent industry
publication, the Company believes that demand for rooms in the upscale segment
(the segment which is most representative of the Company's full-service
hotels), as measured by annual domestic occupied room nights, increased 3.4%
in 1993 and 1994. 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 of 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% for the First Three Quarters 1995 over
the First Three Quarters 1994. 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
hotel operating profit in the First Three Quarters 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. Based on industry data, management believes
that from 1988 to 1990, upscale full-service room supply increased an
average of approximately 4% annually, which resulted in an oversupply of
rooms in the industry. However, this growth slowed to an average of
approximately 1.7% from 1990 to 1994. 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.
Based on industry data, the Company expects hotel supply in the upscale
full-service segment to grow annually at 1% to 1.5% through 1997.
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.
36
<PAGE>
. 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 closed for a substantial portion of 1994) experienced a 68.7% average
occupancy rate during 1994 compared to an average occupancy rate of 77.4%
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 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 high-quality lodging brand names due to its
strategic alliance with Marriott International.
During 1994, the Company acquired 15 full-service hotels totalling
approximately 6,100 rooms (including the Springfield Radisson Hotel, a 199-room
hotel subsequently sold in 1995) in several transactions for approximately $440
million. The Company also provided 100% financing totalling 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
(totalling 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). In 1995, the Company acquired nine full-service hotels totalling
approximately 3,900 rooms in separate transactions for approximately $390
million. The Company considers all of these properties as owned hotels for
accounting purposes.
The Company has also entered into agreements to acquire or purchase
controlling interests in three additional properties totalling 2,150 rooms (the
"Pending Acquisitions") and has also entered into an agreement to purchase a
controlling interest in two properties totalling approximately 900 rooms, one
of which is currently under construction and is scheduled to be completed
during the third quarter of 1996. In addition, the Company holds minority
interests in various partnerships, that own, in the aggregate, 263 additional
hotel properties operated by Marriott International. Four of the properties
added by the Company in the last two years were held in a partnership in which
the Company holds a minority interest. As opportunities arise, the Company will
consider the acquisition of additional full-service hotels currently held by
such partnerships.
In addition to the 55 full-service hotels, the Company also owns 17 Courtyard
and 18 Residence Inn properties. The Company intends to opportunistically
divest these remaining 35 limited service properties and to reinvest such
proceeds in the acquisition of full-service lodging properties.
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 properties for approximately $330 million to the REIT
in 1995. Ten percent of the sale amount of the Courtyard transactions was
deferred. The REIT also has an option, expiring in June 1996, to buy and lease
back up to 17 of the remaining Courtyard properties. 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.
37
<PAGE>
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 1994, as demand growth
continued to outpace additions to supply. Based on industry data, the Company
expects hotel room supply growth to remain limited through 1997 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 industry data, the Company expects demand for hotel rooms to grow
approximately 3% annually through 1997. Increased room demand should result in
increases in hotel occupancy and room rates. Overall industry occupancy grew
two percentage points in 1994 to over 65%, while room rate growth exceeded
inflation for the first time since 1987. The Company expects these recent
trends to continue based on recent industry studies, with overall occupancy
climbing to approximately 68% by 1997, and room rate increases outpacing
inflation in each of the next three years.
While room demand has been rising, new hotel supply growth has slowed. From
1988 to 1990, room supply increased an average of 3% to 4% annually. This
growth slowed to an approximate 1% to 2% average annual growth rate from 1990
through 1994. For 1995 through 1997, room supply growth is expected to slow
further to approximately 1% annually, according to a recent industry study. The
increase in room demand and slow down in growth of new hotel supply has also
led to increased room rates. Based on its review of industry studies, the
Company expects room rates to grow approximately 4% annually through 1997.
Based on industry data, the Company expects upscale full-service properties
(full-service hotels with average daily rates generally falling between the
70th and 80th percentile in their market) to experience approximately 3% annual
room demand growth and only approximately 1% to 1.5% annual room supply growth
through 1997. As a result, average occupancy for such hotels is expected to
rise to approximately 72% in 1997 from approximately 68% in 1994, and the
average daily rate is expected to grow 4% to 5% annually through 1997.
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 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.
38
<PAGE>
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(1) 25,897
Courtyard Hotels (moderate-price)..................... 17(2) 2,656
Residence Inns (extended-stay)........................ 18(3) 2,178
--- ------
Total............................................... 90 30,731
=== ======
</TABLE>
- --------
(1) Includes the 459-room Toronto Eaton Centre Hotel acquired for $31 million
in November 1995, the 372-room Marina Del Rey Doubletree (converted to the
Marriott brand subsequent to acquisition), which was acquired through
foreclosure in November 1995 for $16 million, the 400-room Atlanta
Northwest Marriott acquired for $29 million in December 1995, the 820-room
New York Vista Hotel (renamed the Marriott World Trade Center) acquired
for $147 million in December 1995 and the 419-room Philadelphia Airport
Marriott which opened in November 1995. Excludes the 160-room Detroit
Airport Marriott which is owned by HM Services and was included in the
Special Dividend and the Springfield Radisson Hotel which was sold in
December 1995.
(2) Excludes the 37 Courtyard Hotels (5,284 rooms) sold and leased back in
March 1995 and August 1995.
(3) 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
1992 to 1994 and for the First Three Quarters 1995 as compared to the First
Three Quarters 1994.
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
the First Three Quarters 1995 and in fiscal year 1994, the Company spent
approximately $37 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 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 6.6% for
1994, as compared to a REVPAR increase of 5.6% for the upscale full-service
segment of the lodging industry for 1994 (the most recent period which such
information is available). Furthermore, on a comparable basis, REVPAR
increased 6.7% for the First Three Quarters 1995 compared to the First Three
Quarters 1994. 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 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 operating
improvements from the conversion of nine properties to the Marriott brand in
1994 and 1995.
39
<PAGE>
The chart below sets forth comparable performance information for the
Company's comparable full-service hotels:
<TABLE>
<CAPTION>
FIRST THREE QUARTERS FISCAL YEAR
---------------------- --------------
1995 1994 1994 1993
---------- ---------- ------ ------
<S> <C> <C> <C> <C>
COMPARABLE FULL-SERVICE HOTELS (1)
Number of properties.................... 25 25 23 23
Number of rooms......................... 12,881 12,869 10,400 10,400
Average daily rate...................... $111.24 $101.85 $93.89 $89.52
Occupancy percentage.................... 76.9% 78.8% 76.2% 74.9%
REVPAR.................................. $85.62 $80.25 $71.52 $67.09
REVPAR % change......................... 6.7% -- 6.6% --
</TABLE>
- --------
(1) Includes 25 properties owned by the Company for the entire First Three
Quarters 1995 and First Three Quarters 1994 and 23 properties owned by the
Company for all of fiscal years 1994 and 1993, except for the 255-room Elk
Grove Suites hotel, which is leased to a national hotel chain through
1997, the Sacramento property, which is operated as an independent hotel,
and the 160-room Detroit Airport Marriott, which was included in the
Special Dividend.
The chart below sets forth performance information for the Company's full-
service hotels:
<TABLE>
<CAPTION>
FIRST THREE QUARTERS FISCAL YEAR
--------------------- -------------------------------
1995 1994 1994 1993 (2) 1992 (2)(3)
---------- ---------- ------- -------- -----------
<S> <C> <C> <C> <C> <C>
TOTAL FULL-SERVICE HO-
TELS (1)
Number of properties.... 48 32 41 23 22
Number of rooms......... 22,875 15,832 17,195 10,400 10,116
Average daily rate...... $108.53 $ 100.88(4) $102.82(5) $89.52 $88.68
Occupancy percentage.... 76.0% 78.6%(4) 77.4%(5) 74.9% 72.5%
REVPAR.................. $ 82.44 $ 79.31(4) $ 79.61(5) $67.09 $64.26
REVPAR % change......... 3.9% -- 18.7%(5) 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 Sacramento
property, which is operated as an independent hotel, the Springfield
Radisson Hotel, which was sold in December 1995, the 160-room Detroit
Airport Marriott, which was included in the Special Dividend, the four
hotels acquired in the fourth quarter of 1995 and the Philadelphia Airport
Hotel, which opened in November 1995.
(2) Excludes the New York Marriott Marquis, which was not treated as an owned
hotel until December 31, 1993.
(3) Excludes seven properties which were sold during 1992.
(4) Excludes the 684-room San Francisco Airport Marriott and the 335-room
Westfields Conference Center, which were purchased at the end of the third
quarter of 1994.
(5) Excludes the seven properties acquired in the last two weeks of 1994.
Revenues in the First Three Quarters 1995 for nearly all of the Company's
full-service hotels, resorts and suites were improved or comparable to the
First Three Quarters 1994. This improvement was achieved through steady
increases in customer demand, as well as yield management techniques applied
by the manager 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 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 manager's 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. Examples of these initiatives
include the construction of an additional ballroom at the Nashua Marriott
Hotel and the conversion of certain full-service rooms at the Miami Airport
Marriott Hotel to limited-service concepts.
The Company will continue to focus on cost control 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,
40
<PAGE>
it also results in more properties reaching financial performance levels that
allow the manager 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 manager's 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-services 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 operating systems developed for
these hotels allow Courtyard to be price competitive while providing value
through superior product and guest service. 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>
FIRST THREE QUARTERS FISCAL YEAR
----------------------- ----------------------
1995 (1) 1994 1994 1993 1992
------------ ---------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of properties........... 54 54 54 54 54
Number of rooms................ 7,940 7,940 7,940 7,940 7,896
Average daily rate............. $73.89 $68.83 $68.86 $64.58 $61.54
Occupancy percentage........... 81.2% 81.4% 80.4% 79.7% 76.3%
REVPAR......................... $60.02 $56.05 $55.37 $51.47 $46.96
REVPAR % change................ 7.1% -- 7.6% 9.6% --
</TABLE>
- --------
(1) Includes the 37 properties which the Company sold to and leased back from
the REIT in 1995.
The Company's Courtyard properties benefited in the First Three Quarters
1995 from higher demand. REVPAR increased over 7% due to increases in room
rates of over 7% offset slightly by a small occupancy decrease. House profit
margins also increased by almost two percentage points, reflecting the
operating leverage inherent in properties already running at close to
capacity.
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. The REIT also has an
option, expiring in June 1996, to buy and lease back up to 17 of the Company's
remaining Courtyard properties.
Residence Inns. Residence Inns, the market leader in the extended-stay
lodging segment, enjoys solid customer preference, high guest satisfaction and
strong intent-to-return and operates at one of the highest occupancy rates of
any major U.S. hotel chain in 1994. The extended-stay lodging segment caters
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
41
<PAGE>
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>
FIRST THREE QUARTERS FISCAL YEAR
---------------------- ----------------------
1995 1994 1994 1993 1992
---------- ---------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of properties............ 18 18 18 18 18
Number of rooms................. 2,178 2,178 2,178 2,178 2,178
Average daily rate.............. $84.69 $78.95 $79.58 $74.70 $73.38
Occupancy %..................... 87.7% 86.4% 85.6% 84.5% 77.4%
REVPAR.......................... $74.25 $68.21 $68.12 $63.12 $56.80
REVPAR % change................. 8.9% -- 7.9% 11.1% --
</TABLE>
For the First Three Quarters 1995, the Company's Residence Inns performed
well with advances in room rates of over 7%, while also increasing occupancy
by over one percentage point. Continued popularity of this product with
customers combined with increasing business travel resulted in superior
performance for the First Three Quarters 1995. At an average occupancy rate of
87.7% for the First Three Quarters 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 Residence Inn property in Pentagon City, Virginia,
just outside of Washington, D.C., which is scheduled for completion in the
first quarter of 1996.
MARKETING
All but six of the Company's hotel properties 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 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, which was recognized in 1994 as the
best frequent travel program in the hotel industry. 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. Several enhancements
were made in 1994 to Courtyard Club, Courtyard's frequent stay program.
Members now can achieve a new "gold level" of awards, and have additional
flexibility in redeeming points for free room nights or airline miles.
Marriott tested a preferred business travel card program in 1994 with several
major corporate accounts. This program provides travelers with a single card
to accumulate award points in all frequent stay programs of Marriott's lodging
brands. The preferred card not only is convenient for guests, but also
facilitates guest tracking.
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 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.
42
<PAGE>
Hotels, Resorts and Suites
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Alabama
Point Clear(1).................... 306
California
Marina Del Rey(1)(Leased)......... 372
Napa Valley(2).................... 191
Newport Beach..................... 570
Sacramento Airport(3)(Leased)..... 50
San Diego Marina (Pending Acquisi-
tion)(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(Sheraton)(3).............. 255
Indiana
South Bend(2)(Leased)............. 300
Maryland
Bethesda (Leased)................. 407
Gaithersburg-Washingtonian Cen-
ter.............................. 284
Michigan
Detroit Romulus................... 245
Minnesota
Minneapolis City Center(Leased)... 583
Missouri
Kansas City Airport (Leased)...... 382
St. Louis Pavilion(Leased)........ 672
Courtyard Hotels
<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
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
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
Oregon
Portland(2)....................... 503
Pennsylvania
Philadelphia(7)................... 1,200
Philadelphia Airport(7)(Leased)... 419
Pittsburgh Hyatt (Pending
Acquisition)(8)(Leased).......... 400
Texas
Dallas/Fort Worth(1).............. 491
Dallas Quorum(2)(Leased).......... 547
El Paso(Leased)................... 296
Houston Airport (Leased).......... 566
J.W. Marriott Houston(2).......... 503
Plaza San Antonio(1)(5)........... 252
San Antonio Riverwalk(1)
(Leased)......................... 500
Virginia
Dulles Airport(Leased)............ 370
Westfields Conference Center(2)... 335
Williamsburg(2)................... 295
Washington, D.C.
Washington Metro Center(2)........ 456
Barbados
Sam Lord's Castle Resort.......... 234
Bermuda
Castle Harbour Resort(Leased)..... 395
Canada
Toronto Eaton Centre(1)(Leased)... 459
Toronto Delta Meadowvale (Pending
Acquisition)(3).................. 374
Mexico
Mexico City Aeropuerto(9)......... 600
Mexico City Polanco(9)............ 314
<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>
43
<PAGE>
Residence Inns
<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
<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 early 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 has entered into an agreement through which it expects to
obtain a controlling interest in the San Diego Marina Marriott through a
limited partnership in which the Company will own a 51% interest. See "--
Pending 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 totalling
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 was opened in 1995.
(8) 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."
(9) The Company has entered into an agreement to purchase a controlling
interest in two properties in Mexico City. One of the two properties, the
Mexico City Polanco Hotel, is currently under construction and is
scheduled to be completed in the third quarter of 1996.
44
<PAGE>
PENDING ACQUISITIONS AND OTHER TRANSACTIONS
The Company has entered into an agreement which management expects to result
in the Company obtaining a controlling interest in the 1,355-room San Diego
Marriott Hotel & Marina (the "San Diego Marina") through a restructuring of
two limited partnerships which currently own the hotel. The Company currently
owns 5% general partner interests in each of the limited partnerships, and
through a capital contribution of $10 million, will become the managing
general partner with a total general and limited partnership interest of 51%
in one restructured partnership which will own the San Diego Marina.
Management anticipates that this transaction will be consummated in the first
quarter of 1996.
The Company has also entered into an agreement to acquire the 374-room
Toronto Delta Meadowvale for approximately $25 million in the first quarter of
1996. The hotel is currently managed by Interstate Hotel Corporation
("Interstate").
The Company has entered into an agreement to acquire the 400-room Pittsburgh
Hyatt. The Company expects that the Pittsburgh Hyatt will be acquired by a
limited partnership, of which a subsidiary of the Company would be the sole
general partner, for $18.5 million. The Company would own an 95% interest in
this limited partnership and would contribute approximately $17 million of the
proceeds from the issuance of the Acquisitions Notes 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 acquisition of the Pittsburgh Hyatt will be consummated in February
1996 and that the Pittsburgh Hyatt will be converted to the Marriott brand
during 1996. The acquisition of the Pittsburgh Hyatt is subject to termination
of the property's existing Hyatt management agreement. The timing of such
termination is currently disputed by Hyatt.
The Company has entered into an agreement to purchase a controlling interest
for $56 million in two hotels in Mexico City, Mexico totalling approximately
900 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. Management anticipates that the transaction will be consummated in
January 1996.
The transactions 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 transactions discussed above, the Company intends to pursue
expansion opportunities through the acquisition of other full-service lodging
properties.
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 43 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 totalling approximately $204
million at September 8, 1995.
As the managing general partner, the Company or 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 and its subsidiaries oversee and monitor Marriott International's
performance pursuant to these agreements.
45
<PAGE>
The Company's interests in these partnerships range from 1% to 50%. Cash
distributions provided from these partnerships are tied to the overall
performance of the underlying properties and the overall level of debt owed by
the partnership. Partnership distributions to the Company approximated $2
million for the First Three Quarters 1995, $4 million in fiscal year 1994 and
$6 million in fiscal year 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 $205 million at September 8,
1995. 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 GROUP INVESTMENTS
The Company currently owns 45 undeveloped parcels of vacant land, totalling
approximately 250 acres, originally purchased for the development of hotels or
senior living communities. The Company sold 22 parcels during 1994 and 1995
for proceeds of approximately $28 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
has determined that the site would no longer be developed and instead has
decided to attempt to sell the property. Accordingly, the Company has recorded
a charge of $39 million, net of taxes of $21 million, in the fourth quarter of
1995 to reduce the asset to its estimated sales value.
46
<PAGE>
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.
LEGAL PROCEEDINGS
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.
SPECIAL DIVIDEND
Prior to the Special Dividend, the Company directly and through its
subsidiaries, acquired and owned hotels (the "Real Estate Group") and operated
food, beverage and merchandise concession businesses at airports, on tollroads
and at stadiums and arenas (the "Operating Group"). The Board of Directors of
the Company (the "Board") determined that it was in the best interests of the
Company and its stockholders, for the reasons set forth below, to separate the
Real Estate Group and the Operating Group. The Company will continue to
conduct the Real Estate Group business and HM Services will conduct the
Operating Group business.
The Board believes that the Special Dividend will be beneficial to the
Company's stockholders and to each of the businesses. The Real Estate Group
and the Operating Group have markedly different business profiles, in terms of
operating objectives, profit margins and number and types of employees. The
two businesses were operated by separate management teams, and separation of
the businesses should result in greater focus of the management teams on the
core strengths that make each business successful. Separation of the two
businesses (i) facilitates the development of custom-tailored employee
compensation programs which better fit their distinct types of operations,
including stock-based and other incentive programs which will more directly
reward employees of each business segment based on the success of that
segment, (ii) enables the management of each company to concentrate its
attention and financial resources on the core businesses of each company, and
(iii) permits investors to make more focused investment decisions based on the
specific attributes of each of the two businesses.
The Special Dividend was completed on December 29, 1995 and provided Company
shareholders with one share of common stock of HM Services for every five
shares of Company Common Stock held on the record date.
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 are parties to several important ongoing arrangements,
including (i) agreements pursuant to which Marriott International manages or
leases the Company's portfolio of lodging properties and (ii) the New Line of
Credit pursuant to which Marriott International provides a $225 million line
of credit to the Company. In connection with the Marriott International
Distribution, the Company consummated an exchange offer (the "Exchange Offer")
pursuant to which holders of approximately $1.2 billion of Marriott
Corporation's then outstanding senior notes ("Old Notes") exchanged such Old
Notes for a combination of (i) cash, (ii) Common Stock and (iii) Hospitality
Notes. See "Relationship Between the Company and Marriott International."
47
<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 will adopt policies, as described in this
section.
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 7.2 million shares of Host Marriott Common Stock (the "Warrants")
issued 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 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.)
48
<PAGE>
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 the Company 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.
ASSIGNMENT OF TRADEMARKS
In conjunction with the Special Dividend, all of the Company's right, title
and interest in certain trademarks, including the current Company logo, were
conveyed to HM Services. Under the HM Services Distribution
49
<PAGE>
Agreement, the Company and its subsidiaries retain the right to use the name
"Host" without limitation or expiration and the right to use the Company logo
for a period of 18 months following the Special Dividend. The Company may
retain the right to use the Company logo 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 the Company and as the Chairman of the Board of Directors of HM Services.
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. The Company and
HM Services believe that such conflicts will be minimal.
50
<PAGE>
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.
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
In connection with the Marriott International Distribution, Marriott
International and certain of its subsidiaries entered into management
agreements with the Company and certain of its subsidiaries (the "Lodging
Management Agreements") to manage the Marriott Hotels, Resorts and Suites,
Courtyard hotels and Residence Inns owned by the Company and its subsidiaries
as of October 8, 1993. There are three types of Lodging Management Agreements
corresponding to each of these lines of Marriott lodging facilities and a
separate Lodging Management Agreement was entered into for each hotel owned 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,
51
<PAGE>
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 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 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). 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).
Since October 8, 1993, the Company has added 28 full-service hotels
(excluding one full-service hotel acquired in 1994 and sold in 1995). Twenty-
two of these properties are managed by Marriott International using the
Marriott brand name under management agreements that were in place with the
previous owners, or that were negotiated by the Company in connection with the
acquisitions. The terms of the contracts vary, but are generally similar to
the terms outlined above for hotels owned at October 8, 1993, except for the
contracts negotiated by the Company in connection with the acquisitions, where
the incentive management fee is equal to 40% of "Available Cash Flow"
(provided that the annual incentive management fee may not exceed 20% of the
annual operating profit of the hotel).
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
52
<PAGE>
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).
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 set forth below. 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
53
<PAGE>
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. For a description of the New Line of Credit,
see "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Liquidity and Capital Resources."
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 $102 million at
September 8, 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.
54
<PAGE>
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"). 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. See "Risk Factors--
Potential Conflicts with Marriott International."
OTHER TRANSACTIONS
The Company has also entered into certain other transactions with Marriott
International during 1995. Such transactions include Marriott International
providing the Company with approximately $70 million of mortgage financing for
certain full-service properties acquired by the Company. The Company also
acquired a full-service property from a partnership in which Marriott
International owned a 50% interest. Additionally, the Company has entered into
an agreement with Marriott International related to the acquisition of two
hotels in Mexico. See "Business and Properties--Pending Acquisitions and Other
Transactions."
55
<PAGE>
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) 56 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. Richard Marriott is also a direc-
tor 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. Richard Marriott's term as a Direc-
tor of the Company expires at the 1998 annual
meeting of stockholders.
J.W. Marriott, Jr. (1) 63 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 ex-
pires at the 1996 annual meeting of stockhold-
ers.
R. Theodore Ammon 45 Mr. Ammon is a private investor and Chairman of
Director since 1992 BFP Holdings Corp. and Big Flower Press, Inc. He
was
formerly a general partner of Kohlberg Kravis
Roberts & Company (a New York and San Francisco-
based investment firm). He also serves on the
Boards of Directors of Astrum International
Corp., Doskocil Companies, Inc. and the New York
YMCA, and on the Board of Trustees
of Bucknell University. Mr. Ammon's term as Di-
rector
of the Company expires at the 1998 annual meet-
ing of stockholders.
</TABLE>
56
<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, D.R. Horton and the Dis-
Director since 1995 trict of Columbia Early Childhood Collaborative.
He is also a member of the Executive Committee
of the Federal City Council. Prior to joining
the Company in 1995, Mr. Golden was chairman of
Bailey Realty Corporation and prior to that
served as Chief Financial Officer of the Oliver
Carr Company. Prior to joining the Oliver Carr
Company, Mr. Golden served as Administrator of
the General Services Administration, as Assis-
tant Secretary of Treasury and was co-founder
and national managing partner of Trammell Crow
Residential Companies. Mr. Golden's term as Di-
rector of the Company expires at the 1997 annual
meeting of stockholders.
Ann Dore McLaughlin 53 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. 75 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>
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>
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.
</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
(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 $30,000 in compensation to perform the
annual performance appraisal of the chief executive officer on behalf of the
Board, although the final appraisal is determined by the Board.
58
<PAGE>
EXECUTIVE OFFICER COMPENSATION
Summary of Compensation. Table I below sets forth a summary of the
compensation paid by the Company for the last three fiscal years to its former
and current Chief Executive Officer and the four additional most highly
compensated executive officers.
TABLE I
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------- ---------- -------
RESTRICTED
STOCK LTIP
AWARDS PAYOUTS ALL OTHER
NAME AND FISCAL SALARY(2) BONUS(3) (4)(5) (6) COMPENSATION(7)
PRINCIPAL POSITION YEAR ($) ($) ($) ($) ($)
------------------ ------ ---------- --------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard E. Marriott 1995 250,554 -- 0 -- 12,281
Chairman of the Board 1994 261,538 104,615 0 180,225 19,551
1993 230,770 110,769 1,222,157(8) 0 10,693
Terence C. Golden(1) 1995 190,656 -- 0 0 0
President and Chief
Executive Officer
Stephen J. McKenna 1995 237,550 -- 0 -- 13,235
Executive Vice President 1994 220,000 143,000 0 162,203 17,811
and General Counsel 1993 195,178 119,009 595,482(8) 0 7,947
Robert E. Parsons, Jr. 1995 213,767 -- 0 -- 10,511
Executive Vice President 1994 169,855 93,341 0 75,094 8,831
1993 152,971 84,153 171,810(8) 0 7,039
Jeffrey P. Mayer(9) 1995 154,800 -- 0 -- 7,739
Senior Vice President 1994 139,569 69,713 0 75,094 3,634
and Corporate Controller 1993 110,458 51,337 167,426(8) 0 7,824
Stephen F. Bollenbach(9) 1995 190,608 -- 0 -- 1,058,071
Former Chief Executive
Officer 1994 550,000 385,000 0 901,125 50,062
and President 1993 473,077 327,370 6,644,470(8) 0 13,077
Matthew J. Hart(9) 1995 256,872 -- 0 -- 815,507
Former Executive Vice
President 1994 275,000 178,750 0 324,405 22,455
1993 220,191 142,243 1,171,812(8) 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. Bonus amounts for fiscal year 1995 have not yet
been determined.
(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
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1993, 3,096 shares awarded under the Company's Deferred Stock Plan and
144,000 shares awarded under the Comprehensive Stock 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 8
below). Restricted shares with "Performance Restrictions" (see footnote 8
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 402,137 shares valued at
$4,715,056; Mr. McKenna, 176,747 shares valued at $2,072,359; Mr. Parsons,
33,208 shares valued at $389,364; Mr. Hart, 60,347 shares valued at
$707,569; Mr. Mayer, 32,579 shares valued at $381,989. Mr. Golden and Mr.
Bollenbach do not have any Company deferred or restricted stock. 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) The Board has not yet determined whether the Performance Restrictions on
the Performance-Based Restricted Stock Awards relating to fiscal year 1995
have been satisfied. As a result, the value of shares of Restricted Stock
subject to Performance Restrictions, which would comprise LTIP Payouts for
fiscal year 1995, is not currently known. Pursuant to Mr. Hart's separation
agreement with the Company, he may receive up to 55,000 performance based
shares of Company Common Stock subject to attainment of previously
established performance measures. The value of such shares will be
calculated on the date the shares are released which is expected to occur
in February of 1996.
(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. The actual amounts attributable to each of the Plans is
currently unavailable. 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) 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 five or ten year period or at the
end of a 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.
(9) 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.
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<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 3,625 713,686 30,755
HMS 0 0 17,415 725 85,214 3,672
MI 0 0 87,075 3,625 1,787,158 79,552
Total 0 0 191,565 7,975 2,586,058 113,979
R.E. Parsons, Jr........ HM 0 0 22,350 1,625 173,549 13,787
HMS 0 0 4,470 325 20,722 1,646
MI 8,987 145,270 7,988 1,625 137,464 35,661
Total 8,987 145,270 34,808 3,575 331,735 51,904
S.J. McKenna............ HM 46,507 434,208 51,950 2,500 450,036 21,211
HMS 0 0 10,390 500 53,735 2,533
MI 6,150 84,499 43,300 2,500 1,015,012 54,864
Total 52,657 518,707 105,640 5,500 1,518,783 78,608
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 34,997
HMS 0 0 0 825 0 4,179
MI 21,275 436,930 0 4,125 0 90,525
Total 76,013 958,847 0 9,075 0 129,701
J.P. Mayer.............. HM 0 0 13,700 725 113,399 6,151
HMS 0 0 2,740 145 13,540 734
MI 900 13,031 12,800 725 272,960 15,910
Total 900 13,031 29,240 1,595 399,899 22,795
</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 Options 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 $11.725, a per
share price for HM Services Corporation common stock of $7.00 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. For the Company and HM Services
these prices reflect the closing prices of the HM Services common stock on
a "when-issued" basis and of Common Stock on an "ex-dividend" basis.
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<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. 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.
Prior to the Marriott International Distribution, the Company and Marriott
International entered into the Marriott International Distribution Agreement,
which provided for, among other things, (i) certain asset transfers to occur
prior to the Marriott International Distribution, (ii) the Marriott
International Distribution, (iii) the division between the Company and
Marriott International of certain liabilities and (iv) certain other
agreements governing the relationship between the Company and Marriott
International following the Marriott International Distribution. The Company
has also entered into certain other agreements and arrangements with Marriott
International during 1995. See "Relationship Between the Company and Marriott
International."
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<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 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 % OF SHARES
COMMON STOCK OUTSTANDING
BENEFICIALLY OWNED 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........... 5,201,167(2)(3)(4) 3.26
Richard E. Marriott......... 5,797,524(2)(3)(4) 3.63
Ann Dore McLaughlin......... 1,000 0.00
Harry L. Vincent, Jr........ 14,100 0.00
NON-DIRECTOR EXECUTIVE OFFI-
CERS:
Robert E. Parsons, Jr....... 18,409(2) 0.00
Stephen J. McKenna.......... 136,620(2) 0.00
Christopher J. Nassetta..... 0 0.00
Jeffrey P. Mayer............ 0 0.00
Stephen F. Bollenbach....... 0 0.00
Matthew J. Hart............. 1,846(2) 0.00
All directors and executive
officers as a group..........
FMR Corp...................... 18,014,860(5) 11.29
Forstmann-Leff Associates,
Inc.......................... 8,313,970(6) 5.21
Harris Associates L.P......... 8,932,065(7) 5.60
</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. For additional
information, see Tables I and II.
(3) Does not include: (i) 1,568,298 shares held in trust for the children and
grandchildren of J.W. Marriott, Jr. or 1,096,357 shares held by his wife
and children; (ii) 1,408,768 shares held in trust for the children and
grandchildren of Richard E. Marriott or 374,240 shares held by his wife
and children; (iii) 2,536,787 shares held by the J. Willard Marriott
Foundation; (iv) 1,667,385 shares held by a charitable annuity trust,
created by the will of J.Willard Marriott, to which his descendants have a
remainder interest; (v) 2,707,590 shares held by a limited partnership
whose general partner is a corporation of which J.W. Marriott, Jr. is the
controlling shareholder; (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; (vii) 2,302,729 shares held by a limited
partnership whose general partner is a corporation of which Richard E.
Marriott is the controlling shareholder; or (viii) 719,334 shares owned
directly or beneficially by certain other members of the Marriott family.
The shares referred to in this note aggregated 9.39% of the common shares
outstanding as of December 29, 1995.
(4) 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 25,373,351 shares or
16.48% 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 205,177 shares or 0.13% 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.
(5) 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 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 shares, the sole power to vote or direct the voting of shares
and no power to vote or direct the voting of shares, of Common Stock
owned by the institutional accounts. The principal address for FMR is 82
Devonshire Street, Boston, Massachusetts 02109.
(6) 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 shares and shared dispositive
power over shares. Of these shares, Forstmann has reported sole voting
power over shares and shared voting power over shares. The principal
business address of Forstmann, FLA and Stamford is 55 East 52nd Street,
New York, New York 10055.
(7) 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
shares and shared dispositive power over shares. Of these shares,
Harris has reported sole voting power over none of the shares and shared
voting power over the entire shares. The principal business address of
Harris is 2 North LaSalle Street, Suite 500, Chicago, Illinois 60602.
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<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 September
8, 1995, approximately 159.0 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
64
<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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<PAGE>
$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.
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Such holders will vote together with the holders of the Common Stock as a
single class on all matters submitted to a vote of shareholders of the
Company.
In the event of a merger or consolidation of the Company which results in
Common Stock being exchanged or changed for other stock, securities, cash
and/or other property, the shares of Junior Preferred Stock shall similarly be
exchanged or changed in an amount per share equal to 1000 times (subject to
adjustment upon certain dilutive events) the aggregate amount of stock,
securities, cash and/or other property, as the case may be, into which each
share of Common Stock has been exchanged or changed.
In the event of liquidation, dissolution or winding up of the Company, a
holder of Junior Preferred Stock will be entitled to receive $1000 per share,
plus accrued and unpaid dividends and distributions thereon, before any
distribution may be made to holders of shares of stock of the Company ranking
junior to the Junior Preferred Stock, and the holders of Junior Preferred
Stock are entitled to receive an aggregate amount per share equal to 1000
times (subject to adjustment upon certain dilutive events) the aggregate
amount to be distributed per share to holders of Common Stock.
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.
CONVERTIBLE PREFERRED STOCK
At September 8, 1995, the Company had outstanding 13,800 depositary shares
of Convertible Preferred Stock, each having a liquidation preference of
$50.00. The 13,800 outstanding depositary shares of the Convertible Preferred
Stock at September 8, 1995, were convertible into approximately 260,000 shares
of Common Stock. On December 7, 1995, the Company announced its intention to
redeem any and all shares of Convertible Preferred Stock on January 15, 1996
for a redemption price of $62.7925 per share (which includes accrued and
unpaid dividends thereon through and including the redemption date). Under the
terms of the redemption, shares of Convertible Preferred Stock were
convertible into shares of Common Stock until the close of business on
January 5, 1996. As of the close of business on January 5, 1996, approximately
30 depositary shares of Convertible Preferred Stock remained outstanding and
will be redeemed as described herein. On December 20, 1995, the Company
deposited the redemption funds in trust with the First National Bank of
Chicago. As a result, the shares of Convertible Preferred Stock are deemed no
longer outstanding, subject to the holders' right to convert their shares as
noted above and to receive the redemption proceeds.
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
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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 7,200,000 Warrants remain
outstanding.
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 September 8, 1995, there were approximately 58,000
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 (through January 10, 1996)(4)........... $12 5/8 $11 1/2 --
</TABLE>
On January 10, 1996, the last reported sales price of Common Stock on the
New York Stock Exchange Composite Tape was $11 5/8 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.
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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.
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
74
<PAGE>
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.
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
75
<PAGE>
(b) the payment of the proceeds of the sale of Common Stock to or through the
foreign office of a broker. In the case of the payment of proceeds from such a
sale of Common Stock through foreign offices of United States brokers, or
foreign brokers with certain types of relationships to the United States,
however, information reporting (but not backup withholding) is required with
respect to the payment unless the broker has documentary evidence in its files
that the owner is a non-U.S. holder (and has no actual knowledge to the
contrary) and certain other requirements are met or the holder otherwise
establishes an exemption. The payment of the proceeds of a sale of shares of
Common Stock to or through a U.S. office of a broker is subject to information
reporting and possible backup withholding at a rate of 31% unless the owner
certifies its non-U.S. status under penalties of perjury or otherwise
establishes an exemption. Any amounts withheld under the backup withholding
rules from a payment to a non-U.S. holder will be allowed as a refund or a
credit against such non-U.S. holder's United States federal income tax
liability, provided that the required information is furnished to the Internal
Revenue Service.
These information reporting and backup withholding rules are under review by
the United States Treasury and could be changed by future regulations.
THE FOREGOING SUMMARY IS INCLUDED FOR GENERAL INFORMATION ONLY. ACCORDINGLY,
INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH RESPECT TO THE
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION
OF COMMON STOCK, INCLUDING THE APPLICATION AND EFFECT OF THE LAWS OF ANY
STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION.
76
<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 and BT Securities Corporation 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 and Bankers
Trust International PLC are acting as representatives (the "International
Representatives" and, together with the U.S. Representatives, the
"Representatives"), have severally agreed to purchase from the Company an
aggregate of 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..........................................
---
U.S. Offering subtotal...........................................
===
</TABLE>
77
<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....................................
---
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 initial
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
78
<PAGE>
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.
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
Managements, each International Manager has represented 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 shares of Common Stock to persons in the
United Kingdom except to
79
<PAGE>
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 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 Common Stock to a person who is of a kind described in Article 8
of the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
(No. 2) Order 1995 of Great Britain or is a person to whom such document may
otherwise lawfully be issued or passed on.
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
and certain acquired hotel properties (Dallas/Fort Worth Airport Marriott, San
Antonio Marriott Riverwalk and Toronto Eaton Centre Marriott) 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 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.
80
<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 30, 1994 and December 31,
1993..................................................................... F-4
Consolidated Statements of Operations for the Fiscal Years Ended December
30, 1994 and December 31, 1993........................................... F-5
Consolidated Statement of Operations for the Fiscal Year Ended January 1,
1993..................................................................... F-6
Consolidated Statements of Shareholders' Equity for Fiscal Years Ended
December 30, 1994, December 31, 1993 and January 1, 1993................. F-7
Consolidated Statements of Cash Flows for Fiscal Years Ended December 30,
1994, December 31, 1993 and January 1, 1993.............................. F-8
Notes to Consolidated Financial Statements................................ F-9
Condensed Consolidated Balance Sheet as of September 8, 1995 (Unaudited).. F-30
Condensed Consolidated Statements of Operations for the Thirty-Six Weeks
Ended September 8, 1995 and September 9, 1994 (Unaudited)................ F-31
Condensed Consolidated Statements of Cash Flows for the Thirty-Six Weeks
Ended September 8, 1995 and September 9, 1994 (Unaudited)................ F-32
Notes to Condensed Consolidated Financial Statements...................... F-33
FINANCIAL STATEMENTS OF CERTAIN ACQUIRED AND OTHER HOTEL PROPERTIES
DALLAS/FORT WORTH AIRPORT MARRIOTT
Report of Independent Public Accountants................................. F-37
Statement of Assets, Liabilities and Net Advances to PHLP as of December
30, 1994................................................................ F-38
Statement of Operations for the Year Ended December 30, 1994............. F-39
Statement of Cash Flows for the Year Ended December 30, 1994 ............ F-40
Notes to Financial Statements............................................ F-41
Statement of Assets, Liabilities and Net Advances to PHLP as of August
11, 1995 (unaudited).................................................... F-45
Statement of Operations for the Thirty-two Weeks Ended August 11, 1995
and August 12, 1994 (unaudited)......................................... F-46
Statement of Cash Flows for the Thirty-two Weeks Ended August 11, 1995
and August 12, 1994 (unaudited)......................................... F-47
Notes to Financial Statements............................................ F-48
NEW YORK VISTA (renamed Marriott World Trade Center subsequent to acquisition by
the Company)
Report of Independent Auditors........................................... F-49
Statements of Assets and Liabilities as of December 30, 1994 and December
31, 1993 ............................................................... F-50
Statements of Revenues and Expenses for the Years Ended December 31, 1994
and 1993................................................................ F-51
Statements of Cash Flows for the Years Ended December 31, 1994 and 1993.. F-52
Notes to Financial Statements............................................ F-53
Statement of Revenues and Expenses for the Eight Months Ended August 31,
1995 (unaudited)........................................................ F-59
PACIFIC LANDMARK HOTEL, LTD. AND PACIFIC GATEWAY, LTD.(San Diego Marriott Hotel
and Marina)
Report of Independent Public Accountants................................. F-60
Combined Balance Sheets as of December 31, 1994 and 1993................. F-61
Combined Statements of Operations for the Years Ended December 31, 1994
and 1993................................................................ F-62
Combined Statements of Partners' Capital (Deficit) for the Years Ended
December 31, 1994 and 1993.............................................. F-63
Combined Statements of Cash Flows for the Years Ended December 31, 1994
and 1993................................................................ F-64
Notes to Combined Financial Statements................................... F-65
Combined Statements of Operations for the Thirty-six Weeks Ended
September 8, 1995 and September 9, 1994 (unaudited)..................... F-71
Combined Balance Sheet as of September 30, 1995 (unaudited).............. F-72
Combined Statements of Cash Flows for the Thirty-six Weeks Ended
September 8, 1995 and September 8, 1994 (unaudited)..................... F-73
Notes to Financial Statements............................................ F-74
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SAN ANTONIO MARRIOTT RIVERWALK
Report of Independent Public Accountants................................. F-75
Statement of Assets, Liabilities and Net Investment Advances from Parent
as of December 30, 1994................................................. F-76
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
Statements of Assets, Liabilities and Net Advances from Parent as of June
16, 1995 (unaudited).................................................... F-83
Statement of Operations for the Twenty-four Weeks Ended June 17, 1994 and
June 16, 1995 (unaudited)............................................... F-84
Statement of Cash Flows for the Twenty-four Weeks Ended June 17, 1994 and
June 16, 1995 (unaudited)............................................... F-85
Notes to Financial Statements............................................ F-86
TEC ENTITIES (TORONTO EATON CENTRE MARRIOTT)
Report of Independent Accountants........................................ F-87
Combined Statements of Assets, Liabilities and Deficit as of December 30,
1994 and
December 31, 1993....................................................... F-88
Combined Statements of Operations for the Two Fiscal Years in the Period
Ended
December 30, 1994....................................................... F-89
Combined Statements of Cash Flows for the Two Fiscal Years in the Period
Ended
December 30, 1994....................................................... F-90
Notes to Combined Financial Statements................................... F-91
Combined Statement of Assets, Liabilities and Deficit as of September 8,
1995 (unaudited)........................................................ F-94
Combined Statements of Operations for the Thirty-six Weeks Ended
September 8, 1995 and
September 9, 1994 (unaudited)........................................... F-95
Combined Statements of Cash Flows for the Thirty-six Weeks Ended
September 8, 1995 and
September 9, 1994 (unaudited)........................................... F-96
Notes to Combined Financial Statements................................... F-97
</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 30, 1994 and December 31, 1993, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three fiscal years in the period ended December 30, 1994. 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 30, 1994 and December 31,
1993, and the results of their operations and their cash flows for each of the
three fiscal years in the period ended December 30, 1994 in conformity with
generally accepted accounting principles.
As discussed in Notes 3 and 5 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 24, 1995, (except for the matter
discussed in Note 18 as to which the date
is December 29, 1995)
F-3
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 1994 AND DECEMBER 31, 1993
(IN MILLIONS)
<TABLE>
<CAPTION>
1994 1993
------ ------
ASSETS
<S> <C> <C>
Property and Equipment........................................... $2,837 $2,687
Investments in Affiliates........................................ 202 219
Notes Receivable................................................. 49 110
Accounts Receivable.............................................. 80 59
Other Assets..................................................... 131 214
Cash and Cash Equivalents........................................ 67 73
------ ------
$3,366 $3,362
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt
Debt carrying a company guarantee of repayment................. $1,111 $1,316
Debt not carrying a company guarantee of repayment............. 760 777
------ ------
1,871 2,093
Accounts Payable and Accrued Expenses............................ 69 55
Net Investment in Discontinued Operations........................ 41 4
Deferred Income Taxes............................................ 537 517
Other Liabilities................................................ 138 168
Convertible Subordinated Debt.................................... -- 20
------ ------
Total Liabilities............................................ 2,656 2,857
------ ------
Shareholders' Equity
Convertible Preferred Stock.................................... 13 14
Common Stock, 300 million shares authorized; 153.6 million
shares and 129.7 million shares issued and outstanding,
respectively.................................................. 154 130
Additional Paid-in Capital..................................... 479 253
Retained Earnings.............................................. 64 108
------ ------
Total Shareholders' Equity................................... 710 505
------ ------
$3,366 $3,362
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 30, 1994 AND DECEMBER 31, 1993
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1993
----- -----
<S> <C> <C>
REVENUES
Hotels......................................................... $ 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.................... 6 (1)
Equity in earnings (losses) of affiliates...................... -- (27)
Other.......................................................... 22 17
----- -----
Total revenues............................................. 380 659
----- -----
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees of $41
million and $5 million, respectively.......................... 198 495
Senior living communities...................................... 5 58
Other.......................................................... 25 14
----- -----
Total operating costs and expenses......................... 228 567
----- -----
Operating profit before corporate expenses, interest and profit
from distributed operations..................................... 152 92
Corporate expenses............................................... (32) (37)
Interest expense................................................. (165) (164)
Interest income.................................................. 29 26
Profit from operations distributed to Marriott International..... -- 211
----- -----
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES..... (16) 128
Benefit (provision) for income taxes............................. 3 (72)
----- -----
INCOME (LOSS) FROM CONTINUING OPERATIONS ........................ (13) 56
Loss from discontinued operations (net of income taxes of $1
million in 1994 and 1993, respectively)......................... (6) (4)
----- -----
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES................................ (19) 52
Extraordinary item--Loss on extinguishment of debt (net of income
tax benefit of $3 million in 1994 and $3 million in 1993)....... (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)................................................ (25) 50
Dividends on preferred stock..................................... -- (8)
----- -----
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK..................... $ (25) $ 42
===== =====
EARNINGS (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS............................................ $(.09) $ .39
Discontinued operations (net of income taxes).................... (.04) (.03)
Extraordinary item--Loss on extinguishment of debt (net of income
taxes).......................................................... (.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)................................................ $(.17) $ .35
===== =====
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JANUARY 1, 1993
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
1992
------
<S> <C>
SALES
Lodging............................................................. $4,547
Contract Services................................................... 3,255
Equity in losses of affiliates...................................... (24)
------
7,778
------
OPERATING COSTS AND EXPENSES
Lodging............................................................. 4,214
Contract Services................................................... 3,158
------
7,372
------
OPERATING PROFIT (LOSS)
Lodging............................................................. 333
Contract Services................................................... 97
Other............................................................... (24)
------
Operating profit before corporate expenses and interest............. 406
Corporate expenses, (including restructuring charges of $21 million).. (102)
Interest expense...................................................... (200)
Interest income....................................................... 31
------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES................. 135
Provision for income taxes............................................ (60)
------
INCOME FROM CONTINUING OPERATIONS..................................... 75
Income from discontinued operations (net of income taxes of $5
million)............................................................. 10
------
NET INCOME............................................................ 85
Dividends on preferred stock.......................................... (17)
------
NET INCOME AVAILABLE FOR COMMON STOCK................................. $ 68
======
EARNINGS PER COMMON SHARE:
CONTINUING OPERATIONS................................................. $ .55
Discontinued operations (net of income taxes)......................... .09
------
NET INCOME............................................................ $ .64
======
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 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>
95.5 Balance, January 3,
1992................... $ 200 $105 $ 35 $ 583 $(244)
-- Net income.............. -- -- -- 85 --
5.3 Common stock issued for
employee stock
purchase, stock option,
and profit sharing
plans.................. -- -- 1 (68) 135
-- Cash dividends on common
stock ($.28 per share)
and preferred stock
($4.125 per share)..... -- -- -- (45) --
-- Foreign currency
translation
adjustments............ -- -- (2) -- --
- -----------------------------------------------------------------------------------------
100.8 Balance, January 1,
1993................... 200 105 34 555 (109)
-- Net income.............. -- -- -- 50 --
-- Distribution of stock of
Marriott International,
Inc.................... -- -- (40) (417) --
7.9 Common stock issued for
the comprehensive stock
and employee stock
purchase plans -- 4 13 (58) 109
-- Cash dividends on common
stock ($.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
purchase plans......... -- 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 $ --
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -------
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................................... $ (25) $ 50 $ 85
Adjustments to reconcile to cash from operations:
Depreciation and amortization......................... 174 265 284
Income taxes.......................................... (18) 11 (28)
Extraordinary loss on extinguishment of debt, net of
taxes................................................ 6 5 --
Cumulative effect of changes in accounting principles,
net.................................................. -- 2 --
Restructuring charges................................. -- 20 21
Proceeds from sales of timeshare notes receivable..... -- -- 41
Amortization of deferred income....................... (5) (14) (19)
Fairfield Inn net realizable value write-down......... -- 11 --
Equity in net income (losses) of affiliates........... -- 27 24
Other................................................. 35 23 (23)
Changes in operating accounts:
Accounts receivable................................. (6) (101) (40)
Inventories......................................... -- (10) (16)
Accounts payable and accrued expenses............... (3) 132 (14)
Other............................................... -- 8 95
----- ----- -------
Cash from operations.................................. 158 429 410
----- ----- -------
INVESTING ACTIVITIES
Proceeds from sales of assets........................... 480 83 484
Less non-cash proceeds................................ (54) (5) (97)
----- ----- -------
Cash received from sales of assets...................... 426 78 387
Capital expenditures for renewals and replacements...... (62) (60) (57)
Acquisitions............................................ (532) (29) (47)
Acquisition funds held in escrow........................ 40 (40) --
Lodging construction funded by project financing........ (67) (40) --
Other capital expenditures.............................. (69) (135) (153)
Purchases of short-term marketable securities........... (90) -- --
Sales of short-term marketable securities............... 90 -- --
Notes receivable collections............................ 60 37 12
Affiliate collections (advances), net................... 10 (45) (51)
Other................................................... 2 (28) (43)
----- ----- -------
Cash (used in) from investing activities................ (192) (262) 48
----- ----- -------
FINANCING ACTIVITIES
Issuances of debt....................................... 211 375 917
Issuances of common stock............................... 238 12 7
Scheduled principal repayments.......................... (72) (471) (1,124)
Debt prepayments........................................ (351) -- (55)
Dividends paid.......................................... -- (33) (41)
Cash distributed to Marriott International.............. -- (272) --
----- ----- -------
Cash from (used in) financing activities................ 26 (389) (296)
----- ----- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (8) (222) 162
CASH AND CASH EQUIVALENTS, beginning of year............ 103 325 163
----- ----- -------
CASH AND CASH EQUIVALENTS, end of year.................. $ 95 $ 103 $ 325
===== ===== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The structure of Host Marriott Corporation (the "Company," formerly Marriott
Corporation) 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 2 for a description of the Marriott International
Distribution and related transactions. As of December 30, 1994, the Company
owned 119 lodging properties generally operated under Marriott brand names and
managed by Marriott International. The Company also holds minority interests
in various partnerships that own over 260 additional properties operated by
Marriott International. The Company's properties span several market segments,
including full-service (hotels, resorts and suites), moderate-priced
(Courtyard by Marriott), and extended-stay (Residence Inn by Marriott).
On December 29, 1995, the Company distributed to its shareholders through a
special dividend (the "Special Dividend") its operating group which comprises
its food, beverage, and merchandise concessions business at airports, on
tollroads, and at stadiums, arenas and other attractions (the "Operating
Group"). See Note 18 for a discussion of the Special Dividend. The
consolidated financial statements, as presented in prior filings, have been
changed to reflect the results of the Operating Group as discontinued
operations.
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 1992
------- -------
(IN MILLIONS)
<S> <C> <C>
Sales...................................................... $ 5,555 $ 6,971
Operating costs and expenses............................... (5,283) (6,645)
Corporate expenses......................................... (46) (67)
Net interest expense....................................... (15) (22)
------- -------
Income before income taxes............................... $ 211 $ 237
======= =======
</TABLE>
Fiscal Year
The Company's fiscal year ends on the Friday nearest to December 31 for U.S.
operations and on November 30 for most non-U.S. operations. Fiscal 1994, 1993
and 1992, which ended December 30, 1994, December 31, 1993 and January 1, 1993
for U.S. Operations, respectively, include 52 weeks.
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
F-9
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the generation of house profit from its hotels to the manager. Revenues
subsequent to the Marriott International Distribution also include lease
rentals from the Company's senior living communities, net gains (losses) on
real estate transactions and equity in the earnings of affiliates. 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.
Prior to the Marriott International Distribution, revenues included room
sales and food and beverage sales at both owned and managed hotel properties,
franchise fees for franchised hotel properties, sales of timeshare units, and
sales from senior living communities. Contract Services revenues included
contract revenue from various facility management contracts, and distribution
service revenues. 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 151.5 million in 1994, 121.3
million in 1993 and 106.5 million in 1992. Common equivalent shares and other
potentially dilutive securities have been excluded from the weighted average
number of outstanding shares for 1994 as they are anti-dilutive.
During 1993, the Company issued 1.8 million common shares to former holders
of certain Senior Notes and debentures of the Company as part of the Exchange
Offer, 10.9 million common shares to former holders of the Company's preferred
stock and during 1993 and 1994, 9.0 million common shares to holders of the
LYONs notes upon their conversion (see Note 8). Supplemental earnings per
share, giving effect to the transactions discussed above as if they had
occurred as of the first day of the period presented, was $.42 and $.74 for
the fiscal years ended December 31, 1993 and January 1, 1993, respectively.
Weighted average shares outstanding, giving effect to the transactions
discussed above as if they had occurred as of the first day of the period
presented, were 138 million and 128 million for the fiscal years ended
December 31, 1993 and January 1, 1993, respectively.
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 $355
million in 1992, and income before income taxes of $26 million in 1993 and $24
million in 1992. 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.
F-10
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 40 years for buildings and three to 10
years for furniture and equipment. Leasehold improvements are amortized over
the shorter of the lease term or the useful lives of the related buildings.
Gains on sales of properties are recognized at the time of sale or deferred
to the extent required by generally accepted accounting principles. Deferred
gains are recognized as income in subsequent periods as conditions requiring
deferral are satisfied or expire without further cost to the Company.
In cases where management is holding for sale particular lodging properties,
the Company assesses impairment based on whether the net realizable value
(estimated sales price less costs of disposal) of each individual property to
be sold is less than the net book value. A lodging property is considered to
be held for sale when the Company has made the decision to dispose of the
property. Otherwise, the Company assesses impairment of its real estate
properties based on whether it is probable that undiscounted future cash flows
from each individual property will be less than its net book value.
Pre-Opening Costs
Costs of an operating nature incurred prior to opening of lodging and senior
living service properties are deferred and amortized over three years. Such
costs, which are included in other assets, amounted to $6 million and $16
million at December 30, 1994 and December 31, 1993, 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.
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 a
portion of its debt to a variable rate basis. The interest rate differential
to be paid or received on interest rate swap agreements is accrued as interest
rates change and is recognized as an adjustment to interest expense.
New Statements of Financial Accounting Standards
The Company adopted Statements of Financial Accounting Standards ("SFAS")
No. 112, "Employers' Accounting for Postemployment Benefits," and SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
during 1994. Adoption of these statements did not have a material effect on
the Company's consolidated financial statements. The Company is also required
to adopt SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," no
later than its fiscal year ending December 29, 1995. Adoption of SFAS No. 114
will not have any material effect on the Company's consolidated financial
statements.
F-11
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. 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 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 coupon and maturity date for each series of
Hospitality Notes is 100 basis points higher and four years later,
respectively, than the series of Old Notes for which it was exchanged (except
that the maturity of the Hospitality Notes issued in exchange for the Series L
Senior Notes due 2012 was shortened by five years). The Company redeemed all
of the old Series F Senior Notes that did not tender in the Exchange Offer,
and secured the old Series I Notes equally and ratably with the Hospitality
Notes issued in the Exchange Offer. 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.
In connection with the Exchange Offer, the Company effected a Restructuring
(the "Restructuring"). As a result of the Restructuring, the Company's most
significant asset is the capital stock of a wholly-owned subsidiary, HMH
Holdings, Inc. ("Holdings"). Holdings' primary asset is the capital stock of
Hospitality, and Holdings is the borrower under a line of credit (the "Line of
Credit") with Marriott International. In the Restructuring, most of the
Company's real estate and operating assets were transferred to subsidiaries of
Hospitality. Certain assets relating to such businesses were retained directly
by the Company and certain of its other subsidiaries.
The following condensed unaudited pro forma income statement data for
continuing operations for the Company is presented as if the Marriott
International Distribution, Exchange Offer and Restructuring had occurred at
the beginning of each period shown. This pro forma data has been presented for
informational purposes only. It does not purport to be indicative of the
results which may occur in the future.
<TABLE>
<CAPTION>
1993 1992
------ ------
(IN MILLIONS)
<S> <C> <C>
Revenues..................................................... $261 $256
Operating profit before corporate expenses and interest...... 80 82
Loss from continuing operations.............................. (60) (60)
</TABLE>
F-12
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN MILLIONS)
<S> <C> <C>
Land and land improvements................................... $ 417 $ 430
Buildings and leasehold improvements......................... 2,370 2,257
Furniture and equipment...................................... 361 357
Construction in progress..................................... 231 138
------ ------
3,379 3,182
Less accumulated depreciation and amortization............... (542) (495)
------ ------
$2,837 $2,687
====== ======
</TABLE>
Interest cost capitalized in connection with the Company's development and
construction activities totaled $10 million in 1994, $10 million in 1993, and
$13 million in 1992.
Most hotels developed by the Company since the early 1980s were reported as
assets held for sale prior to 1992. In early 1992, the Company decided it was
no longer appropriate to view sales of lodging properties, subject to
operating agreements, as a primary means of long-term financing. Accordingly,
the Company discontinued classification of these properties (with an aggregate
carrying value of approximately $1,150 million at that time) as assets held
for sale.
Following discussions with the Staff of the Securities and Exchange
Commission, the Company agreed in the second quarter of 1993 to change its
method of determining net realizable value of assets reported as held for
sale. The Company previously determined net realizable value of such assets on
a property-by-property basis in the case of full-service hotels, resorts and
suites, and on an aggregate basis, by hotel brand, in the case of Courtyard
hotels, Fairfield Inns and Residence Inns. Beginning in the second fiscal
quarter of 1993 and thereafter, under the Company's new accounting policy, net
realizable value of all assets held for sale is determined on a property-by-
property basis. The after-tax cumulative effect of this change on periods
prior to the second quarter of 1993 of $32 million is reflected as a
cumulative effect of a change in accounting for assets held for sale in the
accompanying consolidated statement of operations for the fiscal year ended
December 31, 1993. The reduction in the annual depreciation charge as a result
of this change did not have a material effect on results of operations. There
was no pro forma effect of this change on the results of operations for 1993
and 1992.
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. 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.
F-13
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INVESTMENTS IN AFFILIATES
Investments in affiliates consist of the following:
<TABLE>
<CAPTION>
OWNERSHIP
INTERESTS 1994 1993
--------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Equity investments
Hotel partnerships which own 45 Marriott Hotels,
120 Courtyard hotels, 50 Residence Inns and 50
Fairfield Inns operated by Marriott Internation-
al, Inc., as of December 30, 1994............... 1%-50% $ 28 $ 30
Receivables........................................ -- 174 189
------ ------
$202 $219
====== ======
</TABLE>
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 30, 1994. In 1993, the Company began reporting substantially all the
losses of Times Square and on December 31, 1993 began consolidating Times
Square. The Company's December 31, 1993 balance sheet was impacted by an
increase in debt and other long-term liabilities of approximately $451
million, and a corresponding increase in assets (principally property and
equipment).
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 and removed $64 million of debt and $96 million
of property and equipment from its consolidated balance sheet 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 totalling
$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 $200 million at
December 30, 1994 and $196 million at December 31, 1993. Receivables from
affiliates at December 30, 1994 included a $150 million mortgage note at 9%
which amortizes through 2003, and net debt service and other advances
totalling $14 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 $236 million at
December 30, 1994. Net amounts funded under these commitments totalled $2
million in 1994 and $14 million in 1993.
F-14
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's pre-tax income from affiliates includes the following:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Management fees, net of direct costs........................ $-- $ 67 $ 82
Ground rental income........................................ -- 14 19
Interest income............................................. 17 16 16
Equity in net income (losses)............................... -- (27) (24)
---- ---- ----
$ 17 $ 70 $ 93
==== ==== ====
</TABLE>
Combined summarized balance sheet information for the Company's affiliates
follows:
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN MILLIONS)
<S> <C> <C>
Property and equipment....................................... $3,358 $3,446
Other assets................................................. 346 369
------ ------
Total assets............................................... $3,704 $3,815
====== ======
Debt, principally mortgages.................................. $3,658 $3,736
Other liabilities............................................ 839 856
Partners' deficit............................................ (793) (777)
------ ------
Total liabilities and partners' deficit.................... $3,704 $3,815
====== ======
</TABLE>
Combined summarized operating results reported by these affiliates follow:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues............................................... $ 705 $ 731 $ 704
Operating expenses:
Cash charges (including interest).................... (491) (511) (548)
Depreciation and other non-cash charges.............. (296) (299) (335)
----- ----- -----
Loss before extraordinary item..................... (82) (79) (179)
Extraordinary item--forgiveness of debt............ 113 -- --
----- ----- -----
Net income (loss).................................. $ 31 $ (79) $(179)
===== ===== =====
</TABLE>
5. INCOME TAXES
The Company adopted Statement of Financial Accounting Standards 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.
F-15
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total deferred tax assets and liabilities at December 30, 1994 and December
31, 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
----- -----
(IN MILLIONS)
<S> <C> <C>
Gross deferred tax assets...................................... $ 149 $ 183
Less: Valuation allowance (5) (5)
----- -----
Net deferred tax assets........................................ 144 178
Gross deferred tax liabilities................................. (681) (695)
----- -----
Net deferred income tax liability.............................. $(537) $(517)
===== =====
</TABLE>
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 1994
and 1993.
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 30, 1994 and December 31, 1993 follows:
<TABLE>
<CAPTION>
1994 1993
----- -----
(IN MILLIONS)
<S> <C> <C>
Investments in affiliates...................................... $(308) $(279)
Property and equipment......................................... (208) (226)
Safe harbor lease investments.................................. (96) (100)
Deferred tax gain.............................................. (69) (90)
Reserves....................................................... 107 140
Tax credit carryforwards....................................... 25 29
Other, net..................................................... 12 9
----- -----
Net deferred income tax liability.............................. $(537) $(517)
===== =====
</TABLE>
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(IN MILLIONS)
<C> <S> <C> <C> <C>
Current -- Federal...................................... $ (5) $ 59 $37
-- State........................................ 1 27 1
-- Foreign...................................... -- 11 20
---- ---- ---
(4) 97 58
---- ---- ---
Deferred -- Federal...................................... 1 (15) (7)
-- State........................................ -- (10) 10
-- Foreign...................................... -- -- (1)
---- ---- ---
1 (25) 2
---- ---- ---
$ (3) $ 72 $60
==== ==== ===
</TABLE>
F-16
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prior to 1993, deferred income taxes resulted from timing differences in the
recognition of income and expenses for financial and tax reporting purposes.
Tax effects of these differences for 1992, as reported under the Company's
previous method of accounting for income taxes, consist of the following at
January 1, 1993 (in millions):
<TABLE>
<S> <C>
Depreciation......................................................... $(8)
Capitalized interest................................................. 2
Partnership interests................................................ 41
Purchased tax lease benefits......................................... (4)
Asset dispositions................................................... (31)
Casualty claims...................................................... (15)
Employee benefit plans............................................... (3)
Restructuring costs.................................................. 1
Other, net........................................................... 19
---
$ 2
===
</TABLE>
At December 30, 1994, the Company has net operating loss carryforwards of
$12 million which expire through 2001. Additionally, the Company has
approximately $23 million of alternative minimum tax credit carryforwards
which do not expire, and $2 million of other tax credits which expire through
2009.
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate follows:
<TABLE>
<CAPTION>
1994 1993 1992
----- ---- ----
<S> <C> <C> <C>
Statutory Federal tax rate............................... (35.0)% 35.0% 34.0%
State income taxes, net of Federal tax benefit........... 16.2 9.0 5.9
Tax credits.............................................. (1.4) (2.2) (2.5)
Additional tax on foreign source income.................. 1.1 4.8 --
Enacted tax rate increase................................ -- 6.2 --
Other, net............................................... 0.3 3.5 7.0
----- ---- ----
Effective income tax rate.............................. (18.8)% 56.3% 44.4%
===== ==== ====
</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 and Marriott International prior to the Marriott International
Distribution. 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 including amounts related to discontinued
operations, net of refunds received, was $14 million in 1994, $64 million in
1993, and $93 million in 1992.
F-17
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. 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>
1995....................................................... $ 2 $ 33
1996....................................................... 2 30
1997....................................................... 2 29
1998....................................................... 2 38
1999....................................................... 1 34
Thereafter................................................. 10 412
--- ----
Total minimum lease payments............................... 19 $576
====
Less amount representing interest.......................... (8)
---
Present value of minimum lease payments.................... $11
===
</TABLE>
The Company leases certain property and equipment under noncancelable
operating leases. Leases include long-term ground leases for certain hotels,
generally with multiple renewal options. Certain leases contain provisions for
the payment of contingent rentals based on a percentage of sales in excess of
stipulated amounts.
The Company also has future minimum rental commitments for noncancelable
operating leases related to its discontinued operations totalling $617 million
as of December 30, 1994.
Certain of the leases included above relate to facilities used in the former
restaurant business. Most leases contain one or more renewal options,
generally for five or 10-year periods. Future rentals on leases have not been
reduced by aggregate minimum sublease rentals of $149 million payable to the
Company under non-cancelable subleases.
The Company remains contingently liable at December 30, 1994 on certain
leases relating to divested properties. Such contingent liabilities aggregated
$156 million at December 30, 1994. 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>
1994 1993 1992
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Minimum rentals on operating leases......................... $18 $96 $121
Additional rentals based on sales........................... 15 12 10
Payments to owners of managed and leased hotels based
primarily on profits....................................... -- 476 607
--- ---- ----
$33 $584 $738
=== ==== ====
</TABLE>
F-18
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. DEBT
Debt related to continuing operations consists of the following:
<TABLE>
<CAPTION>
1994 1993
------ ------
(IN MILLIONS)
<S> <C> <C>
Senior Notes (Hospitality Notes), with an average rate of
10.4% at December 30, 1994, maturing through 2011............ $ 596 $850
Old Senior Notes (Old Notes), with an average rate of 9.0% at
December 30, 1994, maturing through 2012..................... 135 143
Notes secured by $1,086 million of real estate assets, with an
average rate of 8.6% at December 30, 1994, maturing through
2012......................................................... 758 799
Line of Credit, with a variable rate of LIBOR plus 4% (10.125%
at December 30, 1994), due 2008.............................. 112 193
Acquisition Revolver, secured by $358 million of real estate
assets, variable rate of LIBOR plus 1.75% (7.8125% at Decem-
ber 30, 1994), due 2001...................................... 168 --
Other notes, with an average rate of 5.6% at December 30,
1994, maturing through 2017.................................. 91 95
Capital lease obligations..................................... 11 13
------ ------
$1,871 $2,093
====== ======
</TABLE>
In connection with the Marriott International Distribution, the Company
entered into the Line of Credit with Marriott International. Pursuant to the
Line of Credit, Holdings may borrow up to $630 million for certain permitted
uses from Marriott International through 2007, with all unpaid advances due
August 31, 2008. Borrowings under the Line of Credit bear interest at LIBOR
plus 4%, with any interest in excess of 10.5% per annum deferred. An annual
fee of one percent is charged on the unused portion of the commitment. The
Line of Credit is guaranteed by the Company and certain subsidiaries.
The Line of Credit imposes certain restrictions on the ability of the
Company and certain of its subsidiaries to incur additional debt, impose liens
or mortgages on their properties (other than various types of liens arising in
the ordinary course of business), extend new guarantees (other than
replacement guarantees), pay dividends, repurchase their common stock, make
investments and incur capital expenditures.
The Hospitality Notes are secured by a pledge of the stock of, and
guaranteed by, Holdings, Hospitality and certain of its subsidiaries. The
indenture governing these notes contains covenants that, among other things,
limit the ability of Hospitality to pay dividends and make other distributions
and restricted payments, to incur additional debt, create additional liens on
their respective assets, engage in certain transactions with related parties,
enter into agreements which restrict a subsidiary in paying dividends or
making certain other payments and limit the activities and businesses of
Holdings. The net assets of Hospitality at December 30, 1994 were
approximately $650 million, substantially all of which are restricted.
Under the terms of the Hospitality Notes indenture, Hospitality is obligated
to use 50% to 75% of the net proceeds from the sale of certain assets to
prepay Hospitality Notes on a pro rata basis. The Company redeemed
approximately $292 million of Hospitality Notes in 1994. In connection with
the 1994 redemptions, the Company recognized an extraordinary loss of $6
million, net-of-taxes of $3 million. Additionally, under certain circumstances
and subject to certain limitations, the Company is required to redeem the
Hospitality Notes with certain proceeds from refinancing and the sale of
equity interests by Hospitality or its subsidiaries. The Hospitality Notes are
not otherwise subject to redemption prior to maturity.
F-19
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has available up to $125 million of first mortgage financing
from Marriott International for approximately 60% of the construction and
development costs of the Philadelphia Marriott Hotel. As of December 30, 1994,
the outstanding loan balance was $88 million. The loan bears interest at LIBOR
plus 3% (9.0625% at December 30, 1994) 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.
During 1993, the Company defeased $100 million of Old Series G Senior Notes
due in February 1994 for an amount substantially equal to its net carrying
value.
In November 1994, the Company, through its wholly owned indirect subsidiary,
HMC Acquisition Properties, obtained a $230 million secured, seven-year
revolving and term loan facility (the "Revolver") for funding future
acquisitions of full-service hotels and required improvements thereon. The
Revolver bears interest based on LIBOR plus 1.75% and/or the prime rate plus
.75%. In November 1996, the Revolver converts to a five-year amortizing loan
maturing in November 2001. An annual fee of .5% is charged on the unused
portion of the commitment. The Revolver is secured by substantially all of the
assets of HMC Acquisition Properties and its subsidiary and is guaranteed by
the Company.
In August 1994, the Times Square first mortgage loan was extended for five
years from its original maturity of December 1993. In connection with the
extension, $39 million of principal payments were made on the loan. The
principal balance of the loan of $328 million is scheduled to mature as
follows: $5 million in each of 1995 through 1997, and $313 million in 1998.
Interest on $165 million of the loan is fixed at approximately 8.4% and
interest on the remaining portion of the loan is based on LIBOR plus 1.5%.
Annual minimum principal amortization of $5 million a year is required and all
additional cash flow will be applied as additional amortization until the
principal amount of the loan is paid down to $300 million. Once the principal
amount of the loan is paid down to $300 million, 75% of future cash flow in
excess of minimum amortization requirements ranging up to $9 million per year
will be applied to further principal amortization and the remaining 25% will
be available for other obligations of Times Square, including loans due to the
Company. The Company provides a $10 million debt service guarantee of
principal and interest on the loan.
At December 30, 1994, the Company was party to $500 million aggregate
notional amount of interest rate exchange agreements with two financial
institutions and one investment bank (the contracting parties). Under these
agreements, the Company collects interest at fixed rates (average rate of 7.6%
at December 30, 1994) and pays interest based on specified floating interest
rates (average rate of 6.7% at December 30, 1994) through 1997. 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.
F-20
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate debt maturities at December 30, 1994, excluding capital lease
obligations, are:
<TABLE>
<CAPTION>
NOT
CARRYING CARRYING
COMPANY COMPANY
GUARANTEE GUARANTEE
--------- ---------
(IN MILLIONS)
<S> <C> <C>
1995..................................................... $ 62 $ 6
1996..................................................... 70 50
1997..................................................... 50 6
1998..................................................... 20 314
1999..................................................... 37 2
Thereafter............................................... 872 371
------ ----
$1,111 $749
====== ====
</TABLE>
Debt not carrying a Company guarantee includes debt with partial recourse
where the Company's exposure is limited to $22 million.
Cash paid for interest (including amounts related to discontinued
operations), net of amounts capitalized, was $198 million in 1994, $214
million in 1993, and $209 million in 1992. Deferred financing costs, which are
included in other assets, amounted to $31 million and $34 million at December
30, 1994 and December 31, 1993, respectively.
8. 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.
9. SHAREHOLDERS' EQUITY
Three hundred million shares of common stock, with a par value of $1 per
share, are authorized, of which 153.6 million and 129.7 million were issued
and outstanding as of December 30, 1994 and December 31, 1993, respectively.
One million shares of preferred stock, without par value, are authorized, of
which 258 shares (equivalent to 258,000 depositary shares) of 8.25% Series A
cumulative convertible preferred stock ("Series A Preferred") were issued and
outstanding as of December 30, 1994. Additional paid-in capital at December
30, 1994 includes deferred compensation credits of $15 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.
Each Series A Preferred depositary share was convertible at any time at the
option of the holder into approximately 2.87 shares of common stock. In
September 1993, approximately 92%, or 3.7 million depositary shares, were
converted into 10.6 million shares of Company common stock. From the Marriott
International
F-21
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Distribution Date through February 24, 1995, an additional 5% converted. On
September 30, 1993, the Company's Board of Directors adjusted the conversion
rate of the Company's remaining depositary shares to 19.16 shares of common
stock per depository share to reflect the Marriott International Distribution.
Dividends, if declared, are payable quarterly. The Company has not paid six
quarterly dividend payments since the Marriott International Distribution,
and, accordingly, the remaining holders of the Series A Preferred stock would
be entitled to elect two directors of the Company. Beginning on January 15,
1996, the Series A Preferred stock is redeemable, in whole or in part, at the
Company's option, at $52.48 per depositary share, declining ratably to $50 per
depositary share in 2002, plus accrued and unpaid dividends to the redemption
date.
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 nonvoting and will expire on February 2, 1999, unless exercised or
previously redeemed by the Company for $.01 each. If the Company is involved
in a merger or certain other business combinations not approved by the Board
of Directors, each right entitles its holder, other than the acquiring person
or group, to purchase common stock of either the Company or the acquirer
having a value of twice the exercise price of the right.
10. EMPLOYEE STOCK PLANS
Total shares of common stock reserved and available for issuance under
employee stock plans at December 30, 1994 are:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Comprehensive plan........................................... 22.7
Employee stock purchase plan................................. 3.5
----
26.2
====
</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.
F-22
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Employee stock options may be granted to officers and key employees with an
exercise price not less than the fair market value of the common stock on the
date of grant. Options granted before May 11, 1990 expire 10 years after the
date of grant and nonqualified options granted on or after May 11, 1990 expire
up to 15 years after the date of grant. Most options vest ratably over each of
the first four years following the date of the grant. In connection with the
Marriott International Distribution, the Company issued an equivalent number
of Marriott International options and adjusted the exercise prices of its
options then outstanding based on the relative trading prices of shares of the
common stock of the two companies. Therefore, the options outstanding at
December 30, 1994 and December 31, 1993 reflect these revised exercise prices.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
------------- ------------
(IN MILLIONS)
<S> <C> <C>
Balance at January 3, 1992........................ 14.5 $ 7-39
Granted........................................... 3.2 15-19
Exercised......................................... (.8) 7-18
Cancelled......................................... (1.2) 8-37
----
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
====
Exercisable at December 30, 1994.................. 8.1
====
</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 1994, 1993 and 1992, 159,000, 489,000,
and 671,000 shares were granted, respectively, under this plan.
In 1993, restricted stock plan shares under the comprehensive plan were
issued to officers and key executives and will be distributed over the next
three to ten years in annual installments based on continued employment and
the attainment of certain performance criteria. The Company recognizes
compensation expense over the restriction period equal to the fair market
value of the shares on the date of issuance adjusted for forfeitures, and
where appropriate, the level of attainment of performance criteria and
fluctuations in the fair market value of the stock. Prior to 1993, restricted
stock shares were issued to officers and key employees and are distributed
over 10 years in annual installments, subject to certain prescribed conditions
including continued employment. The Company recognizes compensation expense on
these pre-1993 awards over the restriction period equal to the fair market
value of the shares on the date of issuance. The Company issued 3,537,000, and
32,000 shares under these plans in 1993 and 1992, respectively. The Company
recorded compensation expense of $6 million and $400,000 in 1994 and 1993,
respectively, related to these awards.
F-23
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of the stock purchase plan, eligible employees may purchase
common stock through payroll deductions at the lower of market value at the
beginning or end of the plan year.
11. 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 totalled $17
million for 1993, and $21 million for 1992. The Company contributions were not
significant in 1994.
The Company provides medical benefits to a limited number of retired
employees meeting restrictive eligibility requirements. The Company adopted
Statement of Financial Accounting Standards (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.
12. ACQUISITIONS AND DISPOSITIONS
In 1994, the Company acquired 15 full-service hotels totalling approximately
6,000 rooms in several transactions for approximately $443 million. The
Company also provided 100% financing totalling 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 (totalling 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 18 of these properties as owned hotels for accounting
purposes. The Company's summarized, consolidated pro forma results of
operations, assuming the hotel additions occurred on January 2, 1993, are as
follows (in millions, except per share amounts):
<TABLE>
<CAPTION>
1994 1993
------ -----
(UNAUDITED)
<S> <C> <C>
Revenue...................................................... $439 $741
Net income (loss) available for common stock................. (13) 63
Income (loss) per common share............................... (.09) .45
</TABLE>
During 1994, the Company sold its 14 senior living communities to an
unrelated party for $320 million, which approximated the communities' carrying
value. See Note 3 for a discussion of the 1994 sale of 26 Fairfield Inns.
During the fourth quarter of 1993, the Company realized proceeds of
approximately $42 million on the disposition of two preferred stock
investments.
In February 1992, the Company sold 13 Courtyard hotels for $146 million in a
sale/leaseback transaction. The Company also sold seven full-service hotels in
1992, for total proceeds of $200 million. Pre-tax gains on these full-service
hotel sales of approximately $15 million were offset by adjustments to
previously established reserves, resulting in no net gain or loss.
In 1992, the Company sold with recourse certain time-share notes receivable
taken by its vacation resorts division in connection with the sale of time-
sharing units. Net proceeds from these transactions totaled $34 million in
1992.
F-24
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. 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 30, DECEMBER 31,
1994 1993
--------------- ---------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Financial assets
Receivables from affiliates.................. $ 174 $ 172 $ 189 $ 187
Notes receivable and other................... 49 108 149 231
Financial liabilities
Debt......................................... 1,860 1,810 2,080 2,084
Other financial instruments
Affiliate debt service commitments........... -- -- -- 5
Interest rate swap agreements................ -- 12 -- 33
</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 Line of
Credit, the Revolver, 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 $236 million at December 30, 1994 and $271 million at December
31, 1993. 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 $500 million at December 30,
1994 and December 31, 1993.
14. RELATIONSHIP WITH MARRIOTT INTERNATIONAL
In connection with the Marriott International Distribution, the Company and
Marriott International entered into agreements which provide, among other
things, that (i) lodging properties owned by the Company as of the Marriott
International Distribution Date will be managed by Marriott International
under agreements with initial terms of 20 years and which are subject to
renewal at the option of Marriott International for up to three additional 10-
year terms; (ii) the Company will lease its owned senior living communities to
Marriott International prior to their disposal (see Note 12); (iii) Marriott
International guarantees the Company's performance in connection with certain
loans and other obligations; (iv) the Company can borrow up to $630 million
for certain permitted uses under the Line of Credit and up to $125 million of
first mortgage financing for construction of the Philadelphia Marriott Hotel
(see Note 7); and (v) Marriott International assumed 90% of the LYONs
obligation (see Note 8). Additionally, 15 management agreements with Marriott
International were added or extended in 1994 as a result of the 1994 hotel
acquisitions.
The management agreements generally provide for base management or system
fees of three or four percent of gross revenues, a formula based incentive
management fee limited to 20 percent of cumulative hotel operating profit, as
defined, and reimbursement for certain system-wide operating costs. The
Company has the option to terminate certain management agreements if specified
performance thresholds are not satisfied.
F-25
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1994 and from the Marriott International Distribution Date through
December 31, 1993, the Company paid to Marriott International $41 million and
$5 million, respectively, in lodging management fees, $23 million and $5
million in interest and commitment fees under the Line of Credit and
Philadelphia Marriott Hotel mortgage, and $11 million and $3 million under the
various transitional service agreements, and earned $14 million and $5 million
under the senior living community leases during 1994 and 1993.
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.
15. 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 (the "Warrants"). Such 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.
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 and is pending.
The Company believes that all claims of the PPM Group are without merit and
that the appeal will not be successful.
F-26
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. HOTEL OPERATIONS
As discussed in Note 1, subsequent to the Marriott International
Distribution, hotel revenues reflect house profit from the Company's hotel
properties. House profit reflects the net revenues flowing to the Company as
property owner and represents all gross hotel operating revenues, less all
gross property-level expenses, excluding depreciation, management fees, real
and personal property taxes, ground and equipment rent, insurance and certain
other costs, which are classified as operating costs and expenses. Prior to
the Marriott International Distribution, hotel revenues included room sales
and food and beverage sales at hotel properties. Accordingly, the following
table presents the Company's gross hotel revenues and expenses for 1992 and
the details of the Company's house profit for 1993 and 1994. 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>
1994 1993 1992
----- ----- ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues
Rooms............................................... $ 663 $ 520 $2,839
Food and Beverage................................... 250 162 1,190
Other............................................... 56 39 518
----- ----- ------
Total Hotel Revenues.............................. 969 721 $4,547
----- ----- ======
Department Costs
Rooms............................................... 168 129 $ 674
Food and Beverage................................... 195 130 917
Other............................................... 29 19 2,623
----- ----- ------
Total Department Costs............................ 392 278 $4,214
----- ----- ======
Department Profit..................................... 577 443
Other Deductions...................................... (239) (194)
----- -----
House Profit.......................................... $ 338 249
=====
Revenues from Owned Hotels in excess of House Profit
prior to Distribution................................ 354
-----
Revenue per Statement of Operations................... $ 603
=====
</TABLE>
F-27
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
<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)
Net income (loss) available for common
stock.................................. (18) -- 8 (15) (25)
Income (loss) per common share:
Income (loss) from continuing opera-
tions................................. (.07) .04 (.02) (.04) (.09)
Net income (loss)...................... (.12) -- .05 (.10) (.17)
<CAPTION>
1993
--------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ------
(IN MILLIONS, EXCEPT PER COMMON SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues................................ $167 $189 $187 $ 116 $659
Operating profit before profit of
distributed operations, corporate
expenses, and interest................. 19 35 25 13 92
Income (loss) from continuing
operations............................. 24 35 12 (15) 56
Net income (loss)....................... 17 36 27 (30) 50
Dividends on preferred stock............ (4) (4) -- -- (8)
Net income (loss) available for common
stock.................................. 13 32 27 (30) 42
Income (loss) per common share:
Income (loss) from continuing opera-
tions................................ .18 .28 .11 (.11) (.39)
Net income (loss)..................... .12 .29 .25 (.25) .35
</TABLE>
The first three quarters consist of 12 weeks each, and the fourth quarter
includes 16 weeks.
The quarterly financial data, as presented in prior filings, has been
restated to reflect the results of the Operating Group as discontinued
operations (see Note 18).
Third and fourth quarter 1994 results include extraordinary after-tax losses
of $3 million, respectively, 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.
Fourth quarter 1993 results include pre-tax costs of $13 million related to
the Marriott International Distribution (see Note 2). Also, fourth quarter
1993 results include a charge of $11 million related to a write-down of
lodging properties (see Note 3), and the extraordinary after-tax loss of $4
million on the extinguishment of debt (see Note 2). As a result of the
Marriott International Distribution, Marriott International's operations have
been substantially eliminated from the fourth quarter 1993 data.
The sum of the earnings (loss) per common share for the four quarters in
1993 differs from the annual earnings per common share due to the required
method of computing the weighted average number of shares in the respective
periods.
The first and second quarter 1993 income and per share data have been
restated to reflect the cumulative effect of the change in accounting for
assets held for sale as if it had occurred in the first quarter of 1993 (see
Note 3). First quarter 1993 earnings per common share was also impacted by the
Company's accounting change for income taxes (see Note 5).
F-28
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. SUBSEQUENT EVENTS
On May 25, 1995, two wholly owned subsidiaries of Hospitality issued an
aggregate $1 billion of debt in two concurrent offerings (the "Bond
Offerings"). HMH Properties, Inc. and Host Marriott Travel Plazas, Inc.
("HMTP") 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 carry a 9.5% coupon rate with a final maturity of May
2005. The net proceeds from the Bond Offerings were used to defease, and
subsequently redeem, all of the Hospitality Notes and to repay borrowings
under the Line of Credit. In connection with the redemptions and defeasance,
the Company recognized an extraordinary loss in the second quarter of 1995 of
$17 million, after taxes, primarily representing premiums paid on the
redemptions and the write-off of deferred fees and discounts on the
Hospitality Notes.
On August 9, 1995, the Company announced its intention to distribute to its
shareholders through a special dividend (the "Special Dividend") its operating
group which comprises its food, beverage, and merchandise concessions business
at airports, on tollroads, and at stadiums, arenas and other attractions (the
"Operating Group"). Prior to the Special Dividend, the Operating Group
business, primarily conducted by HMTP, was contributed to Host Marriott
Services Corporation ("HM Services"), a newly-formed, wholly owned subsidiary
of the Company. The Special Dividend was completed on December 29, 1995 and
provided the Company's shareholders with one share of common stock of HM
Services for every five shares of the Company's common stock held on the
record date of December 22, 1995.
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 will 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 the Warrants (see Note 15) and to
issue shares or pay cash upon exercise of certain stock options held by
certain former employees of the Company.
The consolidated financial statements have been changed to reflect the
Operating Group as discontinued operations. The net investment in discontinued
operations on the accompanying balance sheets represents the net assets and
liabilities of the Operating Group. As of December 30, 1994, total assets and
liabilities of the discontinued operations were $530 million (including $28
million of cash and cash equivalents) and $571 million (including $388 million
of debt obligations), respectively. Revenues for the Company's discontinued
operations totaled $1,121 million in 1994, $1,067 million in 1993 and $920
million in 1992. Operating profit totaled $39 million, $42 million and $55
million for the same periods, respectively.
F-29
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 8, 1995
(UNAUDITED, IN MILLIONS)
<TABLE>
<S> <C>
ASSETS
Property and Equipment.................................................. $2,700
Investments in Affiliates............................................... 209
Accounts Receivable..................................................... 74
Notes Receivable........................................................ 40
Other Assets............................................................ 167
Cash and Cash Equivalents............................................... 211
------
$3,401
======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt
Debt carrying a company guarantee of repayment........................ $1,067
Debt not carrying a company guarantee of repayment.................... 858
------
1,925
Accounts Payable and Accrued Expenses................................... 54
Net Investment in Discontinued Operations............................... 81
Deferred Income Taxes................................................... 528
Other Liabilities....................................................... 143
------
Total Liabilities................................................... 2,731
------
Shareholders' Equity
Convertible Preferred Stock........................................... 1
Common Stock, 300 million shares authorized; 159.0 million shares
issued............................................................... 159
Additional Paid-in Capital............................................ 495
Retained Earnings..................................................... 15
------
Total Shareholders' Equity.......................................... 670
------
$3,401
======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-30
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THIRTY-SIX WEEKS ENDED SEPTEMBER 8, 1995 AND SEPTEMBER 9, 1994
(UNAUDITED, IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
REVENUES
Hotels....................................................... $ 315 $ 223
Senior living communities (received from Marriott Interna-
tional)..................................................... -- 14
Net gains (losses) on property transactions.................. (5) 5
Equity in earnings (losses) of affiliates.................... (1) 2
Other........................................................ 10 17
------ ------
Total revenues............................................. 319 261
------ ------
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees of
$43 million and $27 million in 1995 and 1994, respective-
ly)......................................................... 182 131
Senior living communities.................................... -- 5
Other........................................................ 19 17
------ ------
Total operating costs and expenses......................... 201 153
------ ------
Operating profit before corporate expenses and interest........ 118 108
Corporate expenses............................................. (26) (21)
Interest expense............................................... (122) (114)
Interest income................................................ 18 19
------ ------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES............ (12) (8)
Benefit (provision) for income taxes........................... (1) 1
------ ------
LOSS FROM CONTINUING OPERATIONS................................ (13) (7)
DISCONTINUED OPERATIONS
Loss from discontinued operations (net of income tax benefit
of $3 million in 1995 and $2 million in 1994)............... (8) --
Provision for loss on disposal (net of income tax benefit of
$2 million)................................................. (11) --
------ ------
LOSS BEFORE EXTRAORDINARY ITEM................................. (32) (7)
Extraordinary item--loss on extinguishment of debt (net of
income taxes of $9 million and $1 million, respectively)...... (17) (3)
------ ------
NET LOSS....................................................... $ (49) $ (10)
====== ======
LOSS PER COMMON SHARE:
CONTINUING OPERATIONS.......................................... $ (.08) $ (.05)
Discontinued operations (net of income taxes).................. (.12) --
Extraordinary item--loss on extinguishment of debt (net of in-
come taxes)................................................... (.11) (.02)
------ ------
NET LOSS....................................................... $ (.31) $ (.07)
====== ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-31
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THIRTY-SIX WEEKS ENDED SEPTEMBER 8, 1995 AND SEPTEMBER 9, 1994
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
1995 1994
------- -----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss........................................................ $ (49) $ (10)
Adjustments to reconcile to cash from operations:
Extraordinary loss on extinguishment of debt, net of taxes.... 27 3
Depreciation and amortization................................. 125 121
Income taxes.................................................. (2) (10)
Limited-service valuation adjustment.......................... 10 --
Discontinued operations reserve............................... 19 --
Changes in operating accounts................................. 6 14
Other......................................................... 19 10
------- -----
Cash from operations............................................ 155 128
------- -----
INVESTING ACTIVITIES
Proceeds from sales of assets................................... 343 450
Less non cash proceeds........................................ (33) (79)
------- -----
Cash received from sales of assets.............................. 310 371
Acquisitions.................................................... (150) (277)
Acquisition funds held in escrow................................ -- 40
Capital expenditures:
Capital expenditures for renewals and replacements............ (51) (52)
Lodging construction funded by project financing.............. (34) (39)
Other capital expenditures.................................... (62) (48)
Note receivable collections..................................... 42 53
Purchases of short-term marketable securities................... -- (90)
Sales of short-term marketable securities....................... -- 40
Advances to affiliates, net..................................... (11) (5)
Other........................................................... 20 1
------- -----
Cash from (used in) investing activities........................ 64 (6)
------- -----
FINANCING ACTIVITIES
Issuances of debt............................................... 1,156 34
Issuances of common stock....................................... 9 237
Scheduled principal repayments.................................. (96) (68)
Debt prepayments................................................ (1,131) (193)
------- -----
Cash from (used in) financing activities........................ (62) 10
------- -----
INCREASE IN CASH AND CASH EQUIVALENTS........................... $ 157 $ 132
======= =====
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-32
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed consolidated financial statements of Host
Marriott Corporation and subsidiaries (the "Company") have been prepared by
the Company without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
generally accepted accounting principles have been condensed or omitted.
The Company believes the disclosures made are adequate to make the
information presented not misleading. However, the condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this
Prospectus for the fiscal year ended December 30, 1994.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
financial position of Host Marriott Corporation and subsidiaries as of
September 8, 1995, the results of operations for the thirty-six weeks ended
September 8, 1995 and September 9, 1994, and cash flows for the thirty-six
weeks ended September 8, 1995 and September 9, 1994. Interim results are
not necessarily indicative of fiscal year performance because of the impact
of seasonal and short-term variations.
2. On August 9, 1995 (the "Announcement Date"), the Company announced its
intention to distribute to its shareholders through a special dividend (the
"Special Dividend") its operating group which comprises its food, beverage,
and merchandise concessions business at airports, on tollroads, and at
stadiums, arenas and other attractions (the "Operating Group"). Prior to
the Special Dividend, the Operating Group business was contributed to Host
Marriott Services Corporation ("HM Services"), a newly-formed, wholly owned
subsidiary of the Company. The Special Dividend was completed on December
29, 1995 and provided the Company's shareholders with one share of common
stock of HM Services for every five shares of the Company's common stock
held on the record date of December 22, 1995.
The condensed consolidated financial statements have been restated to
reflect the results of the Operating Group as discontinued operations. The
income (loss) from discontinued operations for 1995 includes the loss from
December 31, 1994 through the Announcement Date. The provision for loss on
disposal includes estimated future losses from discontinued operations of
$4 million before taxes from the Announcement Date through the anticipated
Special Dividend date of December 29, 1995 and estimated expenses related
to the Special Dividend of $9 million before taxes. The net investment in
discontinued operations on the accompanying condensed consolidated balance
sheets represents the net assets of the Operating Group. As of September 8,
1995, total assets and liabilities of the discontinued operations were $549
million (including $41 million of cash and cash equivalents) and $630
million (including $409 million of debt obligations), respectively.
Revenues for the Company's discontinued operations totalled $799 million
and $788 million, respectively, for the thirty-six weeks ended September 8,
1995 and September 9, 1994. Operating profit totalled $37 million and $26
million for the same periods, respectively.
3. Revenues primarily represent house profit from the Company's hotel
properties, lease rentals for the Company's senior living communities (for
1994), gains/losses on property transactions, and equity in earnings of
affiliates. House profit reflects the net revenues flowing to the Company
as property owner and represents hotel operating results less property-
level expenses excluding depreciation, real and personal property taxes,
ground rent, insurance and management fees which are classified as
operating costs and expenses.
F-33
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
House profit generated by the Company's hotels for 1995 and 1994 consists
of:
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
-------------------------
SEPTEMBER 8, SEPTEMBER 9,
1995 1994
------------ ------------
<S> <C> <C>
Sales
Rooms........................................... $ 609 $ 444
Food & Beverage................................. 232 157
Other........................................... 53 33
----- -----
Total Hotel Sales............................. 894 634
----- -----
Department Costs
Rooms........................................... 151 112
Food & Beverage................................. 180 121
Other........................................... 31 18
----- -----
Total Department Costs........................ 362 251
----- -----
Department Profit................................. 532 383
Other Deductions.................................. (217) (160)
----- -----
House Profit.................................. $ 315 $ 223
===== =====
</TABLE>
4. Earnings (loss) per common share is 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. Common equivalent shares and other
potentially dilutive securities have been excluded from the weighted
average number of outstanding shares for the thirty-six weeks ended
September 8, 1995 and the thirty-six weeks ended September 9, 1994, as they
are antidilutive. The weighted average shares were 157.9 million and 151.2
million for the thirty-six weeks ended September 8, 1995 and September 9,
1994, respectively.
5. The Company has minority interests in 30 affiliates, most of which own
hotels operated by Marriott International or its subsidiaries under long-
term agreements. The Company's equity in net income (losses) of affiliates
was a loss of $1 million and income of $2 million, respectively, for the
thirty-six weeks ended September 8, 1995 and September 9, 1994, and is
included in equity in earnings of affiliates.
Combined summarized operating results reported by affiliates follow:
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
-------------------------
SEPTEMBER 8, SEPTEMBER 9,
1995 1994
------------ ------------
(IN MILLIONS)
<S> <C> <C>
Revenues........................................... $ 566 $ 487
Operating expenses:
Cash charges (including interest)................. (353) (341)
Depreciation and other noncash charges............ (180) (208)
----- -----
Income (loss) before extraordinary item.......... 33 (62)
Extraordinary item--forgiveness of debt.......... 146 115
----- -----
Net income (loss)................................ $ 179 $ 53
===== =====
</TABLE>
F-34
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
6. During the first quarter of 1995, 21 of the Company's Courtyard properties
were sold to and leased back from a real estate investment trust (the
"REIT") for $179 million. During the third quarter of 1995, an additional
16 Courtyard properties were sold to and leased back from the REIT for $150
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. The leases, which are accounted for as operating leases, have an
initial term expiring at the end of fiscal year 2006 and are renewable at
the option of the Company. Minimum rent of approximately $8 million for the
remainder of 1995 and $33 million annually thereafter (with future minimum
obligations at September 8, 1995 aggregating approximately $369 million
over the initial lease term) and additional rent based upon sales levels
are payable to the REIT under the terms of the lease. The REIT also has an
option, expiring in June 1996, to buy and lease back up to 17 of the
Company's remaining Courtyard properties.
7. 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. These properties have a net book
value of $336 million at September 8, 1995.
8. In the first quarter of 1995, the Company acquired the 298-room Charlotte
Executive Park Marriott Hotel for $15 million, with a draw under the
Acquisitions Revolver. In the second quarter of 1995, the Company acquired
the 500-room San Antonio Marriott Riverwalk Hotel for $50 million, $19
million of which was financed through the assumption of an existing first
mortgage loan. In the third quarter of 1995, the Company acquired
Marriott's Grand Hotel in Point Clear, Alabama for $27 million ($24 million
of which was financed by a first mortgage loan provided by Marriott
International), the Dallas/Fort Worth Airport Marriott for $44 million
(financed by a draw on the Revolver), and the 252-room Plaza San Antonio
Hotel for $30 million (financed by available Company cash). In the fourth
quarter of 1995, the Company acquired four additional properties with
approximately 2,050 rooms for approximately $223 million ($108 million of
which was financed by third parties).
9. During the thirty-six weeks ended September 8, 1995, approximately 244,000
depository shares of convertible preferred stock were converted into
approximately 4.7 million shares of common stock. At September 8, 1995,
approximately 13,800 depository shares of convertible preferred stock were
outstanding, which were convertible into approximately 264,000 shares of
common stock.
10. The Company repaid the old Series I Notes (with a principal balance of $87
million) upon their maturity on May 24, 1995 with a draw on its line of
credit (the "Line of Credit") with Marriott International. Additionally,
and pursuant to the then-existing bond indenture, bonds issued by Host
Marriott Hospitality, Inc. ("Hospitality"), a wholly owned, indirect
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 bonds in the second
quarter of 1995.
On May 25, 1995, two wholly owned subsidiaries of Hospitality issued an
aggregate $1 billion of debt in two concurrent offerings to several initial
purchasers (the "Bond 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 the Company's 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 carry a
9.5% coupon rate with a final
F-35
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
maturity of May 2005. The net proceeds from the Bond Offerings were used to
defease, and subsequently redeem, all of Hospitality's remaining bonds and
to repay borrowings under the Line of Credit. In connection with the
redemptions and defeasance, the Company recognized an extraordinary loss in
the second quarter of 1995 of $17 million, after taxes, primarily
representing premiums paid on the redemptions and the write-off of deferred
fees and discounts on the Hospitality bonds.
11. During the third quarter of 1995, the Company replaced its Line of Credit
with a new $225 million revolving line of credit (the "New Line of
Credit") with Marriott International. The New Line of Credit bears
interest at LIBOR plus 3% (4% when the outstanding balance exceeds $112.5
million) and matures in June 1998. An annual commitment fee of 5/8% is
charged on the unused portion of the New Line of Credit. There were no
borrowings outstanding under the New Line of Credit at September 8, 1995.
12. 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.
Acquisitions owns 15 of the Company's full-service properties. The
Acquisitions Notes were issued at par with a final maturity of December
2007. The net proceeds of approximately $340 million were utilized to
repay in full the $210 million of outstanding borrowings under the
Revolver, which was then terminated, and will be utilized to finance
future acquisitions of full-service hotel properties, including the
acquisition of one full-service property for $29 million in December 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.
13. 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. In the fourth quarter of 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 required a
charge against current operating results of approximately $47 million
before taxes for the impairment of certain of the leasehold improvement
assets of HM Services.
F-36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE OWNERS OF THE DALLAS/FORT WORTH AIRPORT MARRIOTT:
We have audited the accompanying statement of assets, liabilities and net
advances to PHLP 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 3, 1995
F-37
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
STATEMENT OF ASSETS, LIABILITIES
AND NET ADVANCES TO PHLP
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-38
<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-39
<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-40
<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 assets, liabilities and net advances
to PHLP, 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 statement of assets, liabilities and net
advances to PHLP.
F-41
<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.
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.
F-42
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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
F-43
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
property improvement fund for the future furniture, fixtures and equipment
needs of the Hotel. Additionally, 1% 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-44
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
STATEMENT OF ASSETS, LIABILITIES AND NET
ADVANCES TO PHLP
(SEE NOTE 1)
AS OF AUGUST 11, 1995
(UNAUDITED, IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net........................................... $ 18,872
Due from Marriott International, Inc.................................. 2,312
Property improvement fund............................................. 515
Restricted cash....................................................... 155
--------
$ 21,854
========
LIABILITIES AND NET ADVANCES TO PHLP
Mortgage debt......................................................... $ 51,462
Due to Host Marriott Corporation...................................... 1,692
Due to Marriott International, Inc.................................... 28,374
Accrued interest...................................................... 219
--------
Total liabilities................................................... 81,747
Net advances to PHLP.................................................. (59,893)
--------
$ 21,854
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<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-46
<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-47
<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 Form 8-K.
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-48
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Hilton International Co.
We have audited the accompanying statements of assets and liabilities 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 revenues and
expenses and cash flows for the years then ended. 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.
As more fully described in Note 6, the Company has not obtained actuarial
information regarding pension expense for the years ended December 31, 1994
and 1993 and the minimum liability, if any, for the unfunded accumulated
benefit obligation over plan assets. Generally accepted accounting principles
require that pension costs and any minimum liability be accounted for in
accordance with Financial Accounting Standards Board Statement No. 87,
"Employers' Accounting for Pensions." The effect of this departure from
generally accepted accounting principles on the assets and liabilities,
revenues and expenses, and cash flows has not been determined.
In our opinion, except for the omission of the information discussed in the
preceding paragraph, the financial statements referred to above present
fairly, in all material respects, the assets and liabilities of New York Vista
at December 31, 1994 and 1993, and its revenues and expenses and cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
As more fully described in Note 7 to the financial statements, during 1993
and 1994, the Company filed insurance claims with its business interruption
insurance carrier requesting reimbursement of damages incurred as a result of
an explosion in February 1993. The total amount to be ultimately received from
the insurance carrier cannot be determined at this time.
Ernst & Young LLP
January 20, 1995 (except for Note 8, which the date is January 5, 1996)
F-49
<PAGE>
NEW YORK VISTA
STATEMENTS OF ASSETS AND LIABILITIES
<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 accompanying notes.
F-50
<PAGE>
NEW YORK VISTA
STATEMENTS OF REVENUES AND EXPENSES
(NOTE 1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1994 1993*
------------ -----------
<S> <C> <C>
OPERATING REVENUES:
Rooms............................................. $ 2,692,164 $ 3,492,775
Food.............................................. 854,246 814,255
Beverage.......................................... 342,000 261,429
Other operated departments........................ 110,523 166,528
Other income (Note 7)............................. 5,930,582 15,946,482
------------ -----------
9,929,515 20,681,469
------------ -----------
OPERATING EXPENSES:
Cost of sales:
Food............................................ 243,100 197,952
Beverage........................................ 52,920 61,060
Other operated departments...................... 117,816 111,360
------------ -----------
Total cost of sales............................... 413,836 370,372
Payroll and related expenses...................... 4,649,422 5,249,580
Provision for operating equipment................. 53,872 11,442
Other operating expenses.......................... 628,666 660,027
------------ -----------
5,745,796 6,291,421
------------ -----------
Gross operating income.............................. 4,183,719 14,390,048
------------ -----------
DEDUCTIONS FROM GROSS OPERATING INCOME:
General and administrative expenses............... 2,384,134 2,620,586
Marketing expenses................................ 912,620 915,555
Property operation, maintenance and energy costs.. 6,111,606 2,896,632
------------ -----------
9,408,360 6,432,773
------------ -----------
Gross operating (loss)/profit....................... (5,224,641) 7,957,275
------------ -----------
OTHER DECUCTIONS/(INCOME):
Real estate taxes (Note 5)........................ 1,707,696 2,620,758
(Credit)/provision for replacement of furniture,
fixtures and equipment (Note 4)................... (809,005) 1,843,078
(Credit)/provision for capital expenditures (Note
4)............................................... (207,022) 413,837
Insurance......................................... 319,332 41,694
Pre-opening and other business restoration costs.. 5,234,869 --
Interest expense.................................. 1,447,900 1,094,213
Other............................................. 317,935 360,785
------------ -----------
8,011,705 6,374,365
------------ -----------
Excess of (expenses over revenues)/revenues over ex-
penses............................................. $(13,236,346) $ 1,582,910
============ ===========
</TABLE>
- --------
* Reclassified and restated to conform with 1994 presentation.
See accompanying notes.
F-51
<PAGE>
NEW YORK VISTA
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1994 1993*
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Excess of (expenses over evenues)/revenues over ex-
penses............................................. $(13,236,346) $ 1,582,910
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
Expenses payable to Port Authority................ 2,187,767 2,838,202
Interest expense.................................. 1,447,900 1,094,213
Changes in operating assets and liabilities:
Accounts receivable, net........................ (1,021,677) 2,975,216
Insurance claim receivable...................... (4,089,804) (6,525,610)
Inventories..................................... (244,792) (42,377)
Prepaid expenses and other assets............... (15,178) 28,764
Accounts payable................................ 1,662,032 87,340
Accrued liabilities............................. 823,807 (1,277,350)
Due to other affiliated companies............... 294,968 --
------------ -----------
Net cash (used in)/provided by operating activi-
ties............................................... (13,207,350) 3,018,223
------------ -----------
INVESTING ACTIVITIES
Transfer of funds from/(to) restricted cash......... 1,790,218 (609,362)
------------ -----------
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 Authority.......... (1,294,035) (60,272)
(Payments to)/advances from Inhil Co., Inc.......... (60,560) 1,028,327
------------ -----------
Net cash provided by/(used in) financing activi-
ties............................................... 8,514,287 (60,272)
------------ -----------
Net (decrease)/increase in cash..................... (2,902,845) 2,348,589
Cash at beginning of year........................... 3,216,248 867,659
------------ -----------
Cash at end of year................................. $ 313,403 $ 3,216,248
============ ===========
</TABLE>
- --------
* Reclassified and restated to conform with 1994 presentation.
See accompanying notes.
F-52
<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 terminate the plan at any
time. Union employees are covered by a noncontributory pension plan under
their union contract.
F-53
<PAGE>
NEW YORK VISTA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Reclassification and Restatement
Certain December 31, 1993 amounts have been reclassified to conform to the
December 31, 1994 presentation. The statement of revenues and expenses for the
year ended December 31, 1993 has been restated to remove rent of $1,349,276
which was previously indicated as to be received from the Port Authority and
to include interest expense of $1,094,213 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 statement of assets and liabilities as of
December 31, 1993 and, accordingly, such amount does not change as a result of
the restatement:
<TABLE>
<S> <C>
Excess of revenues over expenses for the year ended December
31, 1993 as originally reported............................ $ 4,026,399
Removal of rent credit from Port Authority.................. (1,349,276)
Inclusion of interest expense............................... (1,094,213)
------------
Excess of revenues over expenses for the year ended December
31, 1993 as restated....................................... $ 1,582,910
============
</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>
YEAR ENDED DECEMBER 31
------------------------
AGGREGATE
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 ac-
crual.............................. (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 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.
F-54
<PAGE>
NEW YORK VISTA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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 and, as described above, such fees
are forfeitable. 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 and $355,000 for the years ended December 31,
1994 and 1993, respectively.
F-55
<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-56
<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 has not obtained actuarial information for the nonunion plan regarding
pension expense for the years ended December 31, 1994 and 1993 and the minimum
liability, if any, for the unfunded accumulated benefit obligation over plan
assets. Generally accepted accounting principles require that pension costs
and any minimum liability be accounted for in accordance with Financial
Accounting Standards Board Statement No. 87, "Employers' Accounting for
Pensions." The total pension expense for 1994 and 1993 was approximately
$75,000 and $19,000, respectively. Vista makes annual contributions to the
plan equal to the amount accrued for pension expense. The pension liability at
December 31, 1993 approximated $138,000. There was no pension liability at
December 31, 1994.
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 and 1993 was approximately
$77,000 and $117,000, respectively.
F-57
<PAGE>
NEW YORK VISTA
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
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. The total amount
to be ultimately received from the insurance carrier cannot be determined at
this time.
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.
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-58
<PAGE>
NEW YORK VISTA
STATEMENT OF REVENUES AND EXPENSES
EIGHT MONTHS ENDED AUGUST 31, 1995
(UNAUDITED)
<TABLE>
<S> <C>
OPERATING REVENUES:
Rooms............................................................ $15,841,225
Food............................................................. 3,406,572
Beverage......................................................... 1,222,266
Other operated departments....................................... 773,271
Other income..................................................... 2,363,065
-----------
23,606,399
-----------
OPERATING EXPENSES:
Cost of sales:
Food........................................................... 794,587
Beverage....................................................... 314,441
Other operated departments..................................... 288,718
-----------
Total cost of sales.............................................. 1,397,746
Payroll and related expenses..................................... 10,014,146
Provision for operating equipment................................ 109,018
Other operating expenses......................................... 1,827,643
-----------
13,348,553
-----------
Gross operating income............................................. 10,257,846
-----------
DEDUCTIONS FROM GROSS OPERATING INCOME:
General and administrative expenses.............................. 3,187,491
Marketing expenses............................................... 1,479,830
Property operation, maintenance and energy costs................. 5,825,575
-----------
10,492,896
-----------
Gross operating loss............................................... (235,050)
-----------
OTHER DEDUCTIONS/(INCOME):
Real estate taxes ............................................... 1,446,216
Insurance........................................................ 206,267
Pre-opening and other business restoration costs................. 1,442,244
Interest expense................................................. 715,425
Other............................................................ 267,835
-----------
4,077,987
-----------
Excess of expenses over revenues................................... $(4,313,037)
===========
</TABLE>
F-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<PAGE>
PACIFIC LANDMARK HOTEL, LTD AND PACIFIC GATEWAY, LTD
COMBINED BALANCE SHEET
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 8,
1995
------------
<S> <C>
ASSETS
Cash and cash equivalents.................................... $ 3,360
Cash--restricted............................................. 9,632
Accounts receivable, less allowance for doubtful accounts.... 4,861
Inventories.................................................. 480
Property and equipment, net.................................. 140,535
China, glassware, silver and linen........................... 1,152
Other assets................................................. 75
---------
$ 160,095
=========
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable............................................. $ 5,124
Accrued expenses............................................. 1,843
Advance deposits............................................. 977
Long-term debt............................................... 228,427
Accrued interest............................................. 33,065
Due to affiliates of general partners........................ 30,139
Partners' deficit............................................ (139,480)
---------
$ 160,095
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE>
PACIFIC LANDMARK HOTEL, LTD AND PACIFIC GATEWAY, LTD
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
-------------------------
SEPTEMBER 8, SEPTEMBER 9,
1995 1994
------------ ------------
<S> <C> <C>
REVENUES......................................... $25,594 $22,793
------- -------
OPERATING COSTS AND EXPENSES
Interest....................................... 13,830 13,843
Depreciation and amortization.................. 5,225 5,225
Ground rent.................................... 3,778 3,486
Property taxes................................. 2,258 2,272
Base management fee............................ 2,160 2,074
Owner's marketing account and administration
fee........................................... 771 741
Equipment rent and other, net.................. 246 253
------- -------
28,268 27,894
------- -------
NET LOSS......................................... $(2,674) $(5,101)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE>
PACIFIC LANDMARK HOTEL, LTD AND PACIFIC GATEWAY, LTD
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
-------------------------
SEPTEMBER 8, SEPTEMBER 9,
1995 1994
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss............................................. $(2,674) $(5,101)
Noncash items........................................ 9,504 10,652
Changes in operating accounts........................ 1,113 670
------- -------
Cash provided by operating activities.............. 7,943 6,221
------- -------
INVESTING ACTIVITIES
Additions to property and equipment................ (1,335) (1,222)
Change in restricted cash.......................... (3,616) (1,660)
------- -------
Cash used in investing activities.................. (4,951) (2,882)
------- -------
FINANCING ACTIVITIES
Principal payments on long-term debt............... (768) (2,127)
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS................ 2,224 1,212
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..... 1,136 227
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........... $ 3,360 $ 1,439
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................. $10,168 $ 9,008
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
PACIFIC LANDMARK HOTEL, LTD. AND
PACIFIC GATEWAY LTD. (LIMITED PARTNERSHIPS)
NOTES TO FINANCIAL STATEMENTS--(UNAUDITED)
1. The accompanying combined financial statements of the Pacific Landmark
Hotel, Ltd. and Pacific Gateway, Ltd., limited partnerships, (the
"Partnerships") 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 Partnerships believe 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 30, 1994 and December 31, 1993 included
elsewhere herein.
In the opinion of the Partnerships, the accompanying unaudited combined
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of
the Partnerships as of September 8, 1995 and the results of operations and
cash flows for the thirty-six weeks ended September 8, 1995 and September 9,
1994. Interim results are not necessarily indicative of fiscal year
performance because of the impact of seasonal and short-term variations.
2. Revenues represent House Profit which reflects 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 Partnerships for the thirty-six weeks ended
September 8, 1995 and September 9, 1994 consists of (in thousands):
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
-------------------------
SEPTEMBER 8, SEPTEMBER 9,
1995 1994
------------ ------------
<S> <C> <C>
Sales
Rooms............................................... $37,554 $34,401
Food & Beverage..................................... 17,986 18,692
Other............................................... 6,180 6,169
------- -------
Total Hotel Sales................................. 61,720 59,262
------- -------
Department Costs
Rooms............................................... 7,507 7,458
Food & Beverage..................................... 13,496 14,049
Other............................................... 2,932 3,032
------- -------
Total Department Costs............................ 23,935 24,539
------- -------
Department Profit..................................... 37,785 34,723
Other Deductions...................................... 12,191 11,930
------- -------
House Profit.......................................... $25,594 $22,793
======= =======
</TABLE>
F-74
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of the San Antonio Marriott Riverwalk:
We have audited the accompanying statement of assets, liabilities and net
advances from parent 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
STATEMENT OF ASSETS, LIABILITIES AND NET ADVANCES FROM PARENT
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 assets, liabilities and net advances
to Parent, 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 statement of assets, liabilities and net advances
from parent.
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 ASSETS, LIABILITIES AND NET ADVANCES FROM PARENT
AS OF JUNE 16, 1995 (UNAUDITED, IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net.......................................... $27,179
Property improvement fund............................................ 1,018
Accounts receivable.................................................. 1,498
Other assets......................................................... 1,174
-------
$30,869
=======
LIABILITIES AND NET ADVANCES FROM PARENT
Mortgage debt........................................................ $19,268
Accounts payable and accrued expenses................................ 1,949
-------
Total liabilities.................................................... 21,217
Net advances from Parent............................................. 9,652
-------
$30,869
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-83
<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-84
<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-85
<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 Form 8-K/A.
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 financial position
of the Hotel as of June 16, 1995 and 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-86
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE OWNERS OF THE TEC ENTITIES (AS DEFINED IN NOTE 1):
We have audited the accompanying combined statements of assets, liabilities
and deficit 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-87
<PAGE>
TEC ENTITIES
COMBINED STATEMENTS OF ASSETS, LIABILITIES AND DEFICIT
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-88
<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-89
<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-90
<PAGE>
TEC ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
On November 3, 1995 ("Sale Date"), HMC Toronto E.C., 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., Inc. ("TEC Hotels"), T.E.C. Operations,
Ltd. ("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 assets, liabilities and
deficit, 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 incurred losses in all years since
inception. 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-91
<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-92
<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-93
<PAGE>
TEC ENTITIES
COMBINED STATEMENT OF ASSETS, LIABILITIES AND DEFICIT
AS OF SEPTEMBER 8, 1995
(UNAUDITED, IN CANADIAN DOLLARS AND IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents............................................. $ 3,365
Due from manager...................................................... 193
Property and equipment, net........................................... 42,700
Property improvement fund............................................. 1,271
Other assets.......................................................... 680
--------
$ 48,209
========
LIABILITIES AND DEFICIT
Revolving credit facility............................................. $ 15,000
Mortgage debt......................................................... 70,664
Accounts payable and accrued expenses................................. 2,810
--------
Total liabilities................................................... 88,474
Deficit............................................................... (40,265)
--------
$ 48,209
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-94
<PAGE>
TEC ENTITIES
COMBINED STATEMENTS OF OPERATIONS
FOR THE THIRTY-SIX WEEKS ENDED SEPTEMBER 8, 1995 AND SEPTEMBER 9, 1994
(UNAUDITED, IN CANADIAN DOLLARS AND IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
REVENUES...................................................... $ 5,330 $ 3,830
------- -------
OPERATING COSTS AND EXPENSES
Depreciation................................................ 1,570 1,553
Ground rent................................................. 448 405
Real estate tax............................................. 1,857 1,791
Base and incentive management fees.......................... 514 466
Equipment rent, insurance and other......................... 492 514
------- -------
Total operating costs and expenses........................ 4,881 4,729
------- -------
OPERATING INCOME/(LOSS) BEFORE INTEREST....................... 449 (899)
Interest expense.............................................. 5,654 4,154
------- -------
NET LOSS...................................................... $(5,205) $(5,053)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-95
<PAGE>
TEC ENTITIES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-SIX WEEKS ENDED SEPTEMBER 8, 1995 AND SEPTEMBER 9, 1994
(UNAUDITED, IN CANADIAN DOLLARS AND IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss................................................... $(5,205) $(5,053)
Depreciation............................................... 1,928 1,913
Other interest converted to revolver debt.................. 1,511 3,702
Changes in other assets and liabilities.................... 2,767 941
------- -------
Cash provided by operations................................ 1,001 1,503
------- -------
INVESTING ACTIVITIES
Contributions to property improvement fund................. (609) (466)
------- -------
FINANCING ACTIVITIES
Changes in net advances from co-tenants.................... (422) (1,612)
Issuance (repayments) of debt.............................. -- 150
------- -------
Cash used in financing activities.......................... (422) (1,462)
------- -------
CHANGE IN CASH AND CASH EQUIVALENTS.......................... (30) (425)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............... 3,395 2,936
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................... $ 3,365 $ 2,511
======= =======
SUPPLEMENTAL INFORMATION
Cash paid for interest..................................... $ 915 $ 52
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-96
<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 financial
position of the TEC Entities as of September 8, 1995 and the combined results
of operations and cash flows for the thirty-six weeks ended September 8, 1995
and September 9, 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 thirty-six weeks ended September 8, 1995 and
September 9, 1994 consist of (in Canadian dollars and in thousands):
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
-------------------------
SEPTEMBER 8, SEPTEMBER 9,
1995 1994
------------ ------------
<S> <C> <C>
SALES
Rooms............................................ $10,874 $ 9,541
Food and Beverage................................ 4,883 4,727
Other............................................ 1,386 1,261
------- -------
17,143 15,529
------- -------
DEPARTMENTAL COSTS
Rooms............................................ 3,051 2,941
Food and Beverage................................ 4,184 4,353
Other hotel operating expenses................... 4,578 4,405
------- -------
11,813 11,699
------- -------
REVENUES........................................... $ 5,330 $ 3,830
======= =======
</TABLE>
F-97
<PAGE>
LARGEST OWNER OF HOTELS OPERATING UNDER LEADING MARRIOTT BRAND NAMES
[MAP OF UNITED STATES SHOWING PROPERTY LOCATIONS]
Properties
[SOLID BOX] Hotels, Resorts and Suites 55/1/
[BULLET] Courtyard Hotels 17/2/
[TRIANGLE] Residence Inns 18/3/
- ------------------
/1/ Excludes the pending acquisition of the 400-room Pittsburgh Hyatt.
/2/ Excludes 37 Courtyard hotels which were sold and leased back in 1995.
/3/ Excludes a Residence Inn Currently under construction and scheduled for
completion in early 1996.
[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 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
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. 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 MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE AN
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.............................................................. 9
The Company............................................................... 11
Use of Proceeds........................................................... 11
Dividend Policy........................................................... 12
Capitalization............................................................ 12
Pro Forma Condensed Consolidated Financial Data........................... 13
Selected Historical Financial Data........................................ 21
Management's Discussion and Analysis of Results of Operations and
Financial Condition...................................................... 22
Business and Properties................................................... 36
Special Dividend.......................................................... 47
Marriott International Distribution....................................... 47
Relationship Between the Company and HM Services After the Special
Dividend................................................................. 48
Relationship Between the Company and Marriott International............... 51
Management................................................................ 56
Certain Relationships and Transactions.................................... 62
Ownership of Company Securities........................................... 63
Description of Capital Stock.............................................. 64
Price Range of the Common Stock and Dividends............................. 68
Purposes and Antitakeover Effects of Certain Provisions of the Company
Certificate and Bylaws and the Marriott International Purchase Right..... 69
Certain United States Federal Tax Consequences to Non-United States
Holders of Common Stock.................................................. 74
Underwriting.............................................................. 77
Legal Matters............................................................. 80
Experts................................................................... 80
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 & CO.
SALOMON BROTHERS INC
SMITH BARNEY INC.
MONTGOMERY SECURITIES
BT SECURITIES CORPORATION
JANUARY , 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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION, DATED JANUARY 11, 1996
PROSPECTUS
JANUARY , 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 January 10, 1996, the last reported sale
price of the Common Stock, as reported on the New York Stock Exchange Composite
Tape, was $11 5/8 per share. See "Price Range of the Common Stock and
Dividends."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 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
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.............................................................. 9
The Company............................................................... 11
Use of Proceeds........................................................... 11
Dividend Policy........................................................... 12
Capitalization............................................................ 12
Pro Forma Condensed Consolidated Financial Data........................... 13
Selected Historical Financial Data........................................ 21
Management's Discussion and Analysis of Results of Operations and
Financial Condition...................................................... 22
Business and Properties................................................... 36
Special Dividend.......................................................... 47
Marriott International Distribution....................................... 47
Relationship Between the Company and HM Services After the Special
Dividend................................................................. 48
Relationship Between the Company and Marriott International............... 51
Management................................................................ 56
Certain Relationships and Transactions.................................... 62
Ownership of Company Securities........................................... 63
Description of Capital Stock.............................................. 64
Price Range of the Common Stock and Dividends............................. 68
Purposes and Antitakeover Effects of Certain Provisions of the Company
Certificate and Bylaws and the Marriott International Purchase Right..... 69
Certain United States Federal Tax Consequences to Non-United States
Holders of Common Stock.................................................. 74
Underwriting.............................................................. 77
Legal Matters............................................................. 80
Experts................................................................... 80
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
JANUARY , 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................................................ *
Legal Fees......................................................... *
Accounting Fees.................................................... *
Printing........................................................... *
Miscellaneous...................................................... *
--------
$
========
</TABLE>
- --------
* To be filed by Amendment.
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>
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.
3.2 Amended Marriott Corporation Bylaws (incorporated by reference to
Current Report on Form 8-K dated October 23, 1993).
4.1(i) Indenture between Marriott Corporation and The First National Bank
of Chicago dated as of March 1, 1985 (incorporated by reference
from Registration Statement No. 2-97034).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
4.1(ii) Second Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of February 1, 1986
(incorporated by reference from Current Report on Form 8-K dated
February 4, 1986).
4.1(iii) Third Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of December 1, 1986
(incorporated by reference from Current Report on Form 8-K dated
December 10, 1986).
4.1(iv) Fourth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of May 1, 1987
(incorporated by reference from Current Report on Form 8-K dated
May 7, 1987).
4.1(v) Fifth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of June 12, 1987
(incorporated by reference from Current Report on Form 8-K dated
June 18, 1987).
4.1(vi) Sixth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of October 23, 1987
(incorporated by reference from Current Report on Form 8-K dated
October 30, 1987).
4.1(vii) Seventh Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of January 15, 1988
(incorporated by reference from Current Report on Form 8-K dated
January 26, 1988).
4.1(viii) Eighth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of February 1, 1988
(incorporated by reference from Current Report on Form 8-K dated
February 8, 1988).
4.1(ix) Ninth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of May 1, 1988
(incorporated by reference from Current Report on Form 8-K dated
May 9, 1988).
4.1(x) Tenth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of May 2, 1988
(incorporated by reference from Current Report on Form 8-K dated
May 24, 1988).
4.1(xi) Eleventh Supplemental Indenture between Marriott Corporation and
The First National Bank Chicago dated as of August 27, 1990
(incorporated by reference from Current Report on Form 8-K dated
September 4, 1990).
4.1(xii) Twelfth Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of July 11, 1991
(incorporated by reference from Current Report on Form 8-K dated
July 19, 1991).
4.1(xiii) Thirteenth Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of April 22, 1992
(incorporated by reference from Current Report on Form 8-K dated
April 29, 1992).
4.1(xiv) Fourteenth Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of April 28, 1992
(incorporated by reference from Current Report on Form 8-K dated
May 5, 1992).
4.1(xv) Fifteenth Supplemental Indenture between Marriott Corporation and
Bank One, Columbus, NA. dated as of October 8, 1993 ((incorporated
by reference 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).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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.
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 Host Marriott International.
*10.5 Distribution Agreement dated December 29, 1995 by and between Host
Marriott Corporation and Host Marriott Services Corporation.
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.
*10.9 Transitional Corporate Services Agreement dated December 29, 1995
by and between Host Marriott Corporation and Host Marriott
Services Corporation.
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 Noncompetion Agreement dated October 8,
1993 by and between Host Marriott Corporation and Marriott
International, Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
+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).
+10.14(iv) Host Marriott Lodging Management Agreement--Fairfield 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).
10.16(iii) Consolidation Letter Agreement pertaining to Fairfield Inns dated
September 25, 1993 between a subsidiary of Marriott International,
Inc. and a subsidiary of the Company (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
*10.18 Tax Sharing Agreement dated as of December 29, 1995 by and between
Host Marriott Corporation and Host Marriott Services Corporation.
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).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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).
*10.26 Irrevocable Trust Agreement dated as of December 21, 1995 between
Host Marriott Corporation and The First National Bank of Chicago,
as Trustee.
*10.27 Redemption Agent Agreement dated December 7, 1995 between the Host
Marriott Corporation and First Chicago Trust Company of New York,
as Agent.
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 Independent Public Accountants.
23.2 Consent of Independent Public Accountants.
23.3 Consent of Independent Public Accountants.
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.
* To be filed by amendment.
(B) FINANCIAL STATEMENTS SCHEDULES
The following financial statement schedules of Host Marriott Corporation are
included:
Schedule I --Condensed financial information of registrant S-2 to S-6
Schedule III --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 JANUARY 10, 1996.
Host Marriott Corporation
/s/ Robert E. Parsons, Jr.
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.
SIGNATURES TITLE DATE
/s/ Terence C. Golden President, Chief January 10, 1996
- ------------------------------------ Executive Officer
TERENCE C. GOLDEN (Principal
Executive Officer)
and Director
/s/ Robert E. Parsons, Jr. Executive Vice January 10, 1996
- ------------------------------------ President and
ROBERT E. PARSONS, JR. Chief Financial
Officer (Principal
Financial Officer)
/s/ Donald D. Olinger Vice President-- January 10, 1996
- ------------------------------------ Corporate
DONALD D. OLINGER Accounting
(Principal
Accounting
Officer)
/s/ Richard E. Marriott Chairman of the January 10, 1996
- ------------------------------------ Board of Directors
RICHARD E. MARRIOTT
/s/ R. Theodore Ammon Director January 10, 1996
- ------------------------------------
R. THEODORE AMMON
II-7
<PAGE>
SIGNATURES TITLE DATE
/s/ J.W. Marriott, Jr. Director January 10, 1996
- ------------------------------------
J.W. MARRIOTT, JR.
/s/ Ann Dore McLaughlin Director January 10, 1996
- ------------------------------------
ANN DORE MCLAUGHLIN
/s/ Harry L. Vincent Director January 10, 1996
- ------------------------------------
HARRY L. VINCENT
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 24, 1995 except
for the matter discussed in Note 18 to the consolidated financial statements
as to which the date is December 29, 1995. 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
subject 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 24, 1995 (except for the matter
discussed in Note G to Schedule I
and Note E to Schedule III
as to which the date
is December 29, 1995
S-1
<PAGE>
SCHEDULE I
PAGE 1 OF 5
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 31,
1994 1993
------------ ------------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Property and Equipment...... $1,676 $1,171
Investments in Affiliates... 31 66
Notes Receivable............ 11 84
Accounts Receivable......... 46 36
Inventories................. 1 1
Investment in and advances
to Holdings................ 919 848
Other Assets................ 54 159
Cash and Cash Equivalents... 42 47
------ ------
Total Assets............ $2,780 $2,412
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt
Debt carrying a Company
guarantee of repayment... $ 612 $ 488
Debt not carrying a Com-
pany guarantee of repay-
ment..................... 750 747
------ ------
1,362 1,235
Accounts Payable and Accrued
Expenses................... 52 56
Deferred Income Taxes....... 476 442
Other Liabilities........... 139 157
Convertible Subordinated
Debt....................... -- 20
Net Investment in
Discontinued Operations.... 41 (3)
------ ------
Total Liabilities....... 2,070 1,907
------ ------
Shareholders' Equity
Convertible Preferred
Stock.................... 13 14
Common Stock.............. 154 130
Additional Paid-in
Capital.................. 479 253
Retained Earnings......... 64 108
------ ------
710 505
------ ------
Total Liabilities and
Shareholders' Equity... $2,780 $2,412
====== ======
</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 30, 1994; DECEMBER 31, 1993; AND JANUARY 1, 1993
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues.................................................. $163 $ 291 $ 396
Operating costs and expenses.............................. 122 288 351
----- ----- -----
Operating profit before corporate expenses and interest... 41 3 45
Corporate expenses........................................ (20) (28) (48)
Interest expense.......................................... (86) (164) (214)
Interest income........................................... 12 12 7
----- ----- -----
Loss before income taxes, equity in earnings of
subsidiaries and cumulative effect of changes in
accounting principles.................................... (53) (177) (210)
Equity in earnings of Holdings............................ 27 88 112
Benefit for income taxes.................................. 7 22 39
----- ----- -----
Loss from continuing operations before equity in earnings
of Marriott International and cumulative effect of
changes in accounting principles......................... (19) (67) (59)
Equity in earnings of Marriott International, net-of-tax.. -- 123 134
Income (loss) from discontinued operations, net-of-tax.... (6) (4) 10
----- ----- -----
Income (loss) before cumulative effect of changes in
accounting principles.................................... (25) 52 85
Cumulative effect of changes in accounting principles..... -- (2) --
----- ----- -----
Net income (loss)......................................... $ (25) $ 50 $ 85
===== ===== =====
</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 30, 1994; DECEMBER 31, 1993; AND JANUARY 1, 1993
<TABLE>
<CAPTION>
1994 1993 1992
----- ------ -------
(IN MILLIONS)
<S> <C> <C> <C>
CASH FROM OPERATIONS................................... $ 34 $ 81 $ 67
----- ------ -------
INVESTING ACTIVITIES
Net proceeds from sale of assets..................... 45 46 377
Capital expenditures................................. (133) (100) (34)
Acquisitions......................................... (417) -- --
Other................................................ 99 (32) (77)
----- ------ -------
Cash from (used in) investing activities............. (406) (86) 266
----- ------ -------
FINANCING ACTIVITIES
Issuances of debt.................................... 211 287 519
Issuances of common stock............................ 238 12 7
Repayments of debt................................... (91) (453) (1,123)
Transfers from Marriott International and Holdings,
net................................................. 4 357 380
Dividends paid....................................... -- (33) (41)
Cash distributed to Marriott International........... -- (272) --
----- ------ -------
Cash from (used in) financing activities............. 362 (102) (258)
----- ------ -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... $ (10) $ (107) $ 75
===== ====== =======
</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) On October 8, 1993, Host Marriott Corporation (the "Parent Company",
formerly Marriott Corporation) completed a Distribution of Marriott
International common stock and an Exchange Offer. See Note 2 to the
Company's consolidated financial statements for more information about the
Distribution and Exchange Offer.
In connection with the Exchange Offer, the Parent Company effected a
Restructuring (the "Restructuring"). As a result of the Restructuring, the
Parent Company's most significant asset is the capital stock of a wholly-
owned subsidiary, HMH Holdings, Inc. ("Holdings"). Holdings' primary asset
is the capital stock of Host Marriott Hospitality, Inc. ("Hospitality"),
and Holdings is the borrower under a $630 million Line of Credit with
Marriott International.
In the Restructuring, most of the Parent Company's real estate and
operating assets were transferred to subsidiaries of Hospitality. The
remaining assets were retained directly by the Parent Company and certain
of its other subsidiaries (the "Retained Businesses").
Hospitality is the issuer of senior notes (the "New Notes") secured by a
pledge of the stock of, and guaranteed by, Holdings, Hospitality and
certain of its subsidiaries. The indenture governing these New Notes
contain covenants that, among other things, limit the ability of
Hospitality to pay dividends and make other distributions and restricted
payments, incur additional debt, create additional liens on its
subsidiaries' assets, engage in certain transactions with related parties,
enter into agreements which restrict a subsidiary in paying dividends or
making certain other payments and limit the activities and businesses of
Holdings. At December 30, 1994, substantially all of Hospitality's net
assets are restricted.
Accordingly, the accompanying financial statements present the operations
of the Parent Company and Retained Businesses with the investment in, and
operations of, Holdings and Hospitality presented on the equity method of
accounting.
B) The accompanying financial statements present the financial position,
results of operations and cash flows of the Parent Company and Retained
Businesses as if the organizational structure described in Note A was in
place for all periods presented. Marriott Corporation's historical basis in
the assets and liabilities of the Parent Company and Retained Businesses
has been carried over. All material intercompany transactions between the
companies have been eliminated.
C) As a result of the Distribution and its effect on the structure of the
Parent Company and Retained Businesses, the financial statement
presentation has been altered to better reflect the Parent Company and
Retained Businesses' current business segments and operating environment.
Accordingly, certain financial statement information for 1993 and 1992 has
been reformatted and reclassified to reflect the Parent Company and
Retained Businesses' current business segments and operating environment.
D) Under the terms of the Exchange Offer, Hospitality issued New Notes as
partial consideration for Old Notes, originally issued by the Company.
Additionally, the Company has secured the Old Series I Notes as discussed
in Note 2 to the Company's consolidated financial statements. Accordingly,
for the twelve-week period from October 8, 1993 through December 31, 1993,
and for the fiscal year ended December 30, 1994, Hospitality's financial
statements reflect the impact of the New Notes actually issued plus the
effects of the Old Series I Notes which have been pushed down to
Hospitality. For the periods presented up to October 8, 1993, Hospitality's
financial statements reflect the pushed down effects of 100% of that
portion of the Old
S-5
<PAGE>
SCHEDULE I
PAGE 5 OF 5
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION--(CONTINUED)
Notes that would have been replaced with New Notes had the Company received
tenders for 100% of the aggregate amount of Old Notes that were subject to
the Exchange Offer. Investments in and advances to Holdings and debt
include $87 million at December 30, 1994 and December 31, 1993 which has
been pushed down to Hospitality. Related interest expense of $8 million,
$94 million and $125 million fiscal 1994, 1993, and 1992, respectively, is
included in interest expense in the accompanying condensed statements of
income.
Aggregate debt maturities at December 30, 1994 are (in millions):
<TABLE>
<S> <C>
1995................................................................ $ 97
1996................................................................ 118
1997................................................................ 54
1998................................................................ 334
1999................................................................ 25
Thereafter.......................................................... 738
------
$1,366
======
</TABLE>
E) The accompanying statements of income reflect the equity in earnings of
Holdings, including its wholly-owned subsidiary Hospitality after
elimination of interest expense (see Note D) and before income taxes.
Holdings is included in the consolidated income tax returns of Host
Marriott Corporation.
F) Corporate expenses in 1993 and 1992 reflect pre-tax costs of $13 million
and $16 million related to the Distribution discussed in Note A.
G) As more fully described in Note 18 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 30, 1994
(IN MILLIONS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT
INITIAL COSTS DECEMBER 30, 1994
----------------- ------------------------
SUBSEQUENT DATE OF
BUILDINGS & COSTS BUILDINGS & ACCUMULATED COMPLETION OF DATE DEPRECIATION
DESCRIPTION DEBT LAND IMPROVEMENTS CAPITALIZED LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED LIFE
----------- ---- ---- ------------ ----------- ---- ------------ ------ ------------ ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Full-service Hotels:
New York Marriott
Marquis Hotel, New
York, NY.......... $354 $ 0 $ 552 $ 14 $ 0 $ 566 $ 566 $ (81) 1986 N/A 50
San Francisco
Moscone Center,
San Francisco,
CA................ 230 0 278 2 0 280 280 (22) 1989 N/A 50
Other full-service
properties, each
less than 5% of
total............. 254 115 788 193 115 981 1,096 (173) various various 40
---- ---- ------ ---- ---- ------ ------ -----
Total full-
service......... 838 115 1,618 209 115 1,827 1,942 (276)
Courtyard........... 0 112 395 7 112 402 514 (42) various N/A 40
Residence Inn....... 0 38 104 21 40 123 163 (10) various N/A 40
Other properties,
each less than 5%
of total........... 0 127 18 23 150 18 168 (5) various N/A various
---- ---- ------ ---- ---- ------ ------ -----
Total........... $838 $392 $2,135 $260 $417 $2,370 $2,787 $(333)
==== ==== ====== ==== ==== ====== ====== =====
</TABLE>
S-7
<PAGE>
SCHEDULE III
PAGE 2 OF 2
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 30, 1994
(IN MILLIONS)
NOTES:
(A) The change in total cost of properties for the year ended 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
======
</TABLE>
(B) The change in accumulated depreciation and amortization for the year ended
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
====
</TABLE>
(C) The aggregate cost of properties for Federal income tax purposes is
approximately $2,244 million at December 30, 1994.
(D) The total cost of properties excludes construction-in-progress properties.
(E) As more fully described in Note 18 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 schedule has been changed to reflect the Operating Group as
discontinued operations.
S-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NO.
------- ----------- ----
<C> <S> <C>
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.
3.2 Amended Marriott Corporation Bylaws (incorporated by
reference to Current Report on Form 8-K dated October 23,
1993).
4.1(i) Indenture between Marriott Corporation and The First
National Bank of Chicago dated as of March 1, 1985
(incorporated by reference from Registration Statement No.
2-97034).
4.1(ii) Second Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of February
1, 1986 (incorporated by reference from Current Report on
Form 8-K dated February 4, 1986).
4.1(iii) Third Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of December
1, 1986 (incorporated by reference from Current Report on
Form 8-K dated December 10, 1986).
4.1(iv) Fourth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of May 1,
1987 (incorporated by reference from Current Report on Form
8-K dated May 7, 1987).
4.1(v) Fifth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of June 12,
1987 (incorporated by reference from Current Report on Form
8-K dated June 18, 1987).
4.1(vi) Sixth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of October
23, 1987 (incorporated by reference from Current Report on
Form 8-K dated October 30, 1987).
4.1(vii) Seventh Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of January
15, 1988 (incorporated by reference from Current Report on
Form 8-K dated January 26, 1988).
4.1(viii) Eighth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of February
1, 1988 (incorporated by reference from Current Report on
Form 8-K dated February 8, 1988).
4.1(ix) Ninth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of May 1,
1988 (incorporated by reference from Current Report on Form
8-K dated May 9, 1988).
4.1(x) Tenth Supplemental Indenture between Marriott Corporation
and The First National Bank of Chicago dated as of May 2,
1988 (incorporated by reference from Current Report on Form
8-K dated May 24, 1988).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NO.
------- ----------- ----
<C> <S> <C>
4.1(xi) Eleventh Supplemental Indenture between Marriott
Corporation and The First National Bank Chicago dated as
of August 27, 1990 (incorporated by reference from Current
Report on Form 8-K dated September 4, 1990).
4.1(xii) Twelfth Supplemental Indenture between Marriott
Corporation and The First National Bank of Chicago dated
as of July 11, 1991 (incorporated by reference from
Current Report on Form 8-K dated July 19, 1991).
4.1(xiii) Thirteenth Supplemental Indenture between Marriott
Corporation and The First National Bank of Chicago dated
as of April 22, 1992 (incorporated by reference from
Current Report on Form 8-K dated April 29, 1992).
4.1(xiv) Fourteenth Supplemental Indenture between Marriott
Corporation and The First National Bank of Chicago dated
as of April 28, 1992 (incorporated by reference from
Current Report on Form 8-K dated May 5, 1992).
4.1(xv) Fifteenth Supplemental Indenture between Marriott
Corporation and Bank One, Columbus, NA. dated as of
October 8, 1993 (incorporated by reference 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.
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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NO.
------- ----------- ----
<C> <S> <C>
*10.4 Amendment No. 1 to the Distribution Agreement dated
September 15, 1993 by and among Host Marriott Corporation,
Host Marriott Services Corporation and Host Marriott
International.
*10.5 Distribution Agreement dated December 29, 1995 by and
between Host Marriott Corporation and Host Marriott
Services Corporation.
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.
*10.9 Transitional Corporate Services Agreement dated December
29, 1995 by and between Host Marriott Corporation and Host
Marriott Services Corporation.
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 Noncompetion Agreement dated October
8, 1993 by and between Host Marriott Corporation and
Marriott International, Inc.
+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).
+10.14(iv) Host Marriott Lodging Management Agreement--Fairfield 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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NO.
------- ----------- ----
<C> <S> <C>
10.16(iii) Consolidation Letter Agreement pertaining to Fairfield
Inns dated September 25, 1993 between a subsidiary of
Marriott International, Inc. and a subsidiary of the
Company (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
*10.18 Tax Sharing Agreement dated as of December 29, 1995 by and
between Host Marriott Corporation and Host Marriott
Services Corporation.
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).
*10.26 Irrevocable Trust Agreement dated as of December 21, 1995
between Host Marriott Corporation and The First National
Bank of Chicago, as Trustee.
*10.27 Redemption Agent Agreement dated December 7, 1995 between
the Host Marriott Corporation and First Chicago Trust
Company of New York, as Agent.
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 Independent Public Accountants.
23.2 Consent of Independent Public Accountants.
23.3 Consent of Independent Public Accountants.
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.
* To be filed by amendment.
<PAGE>
EXHIBIT 11
PAGE 1 OF 2
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
-------------------------
FISCAL YEAR
------------------ SEPTEMBER 8, SEPTEMBER 9,
1994 1993 1992 1995 1994
----- ----- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net income (loss)................. $ (25) $ 50 $ 85 $ (49) $ (10)
Less: Dividends on convertible
preferred stock.................. -- 8 17 -- --
----- ----- ----- ----- -----
Net income (loss) available for
common shareholders.............. $ (25) $ 42 $ 68 $ (49) $ (10)
===== ===== ===== ===== =====
Primary Earnings (Loss) Per Common
Share
Shares--
Weighted average number of
common shares outstanding...... 151.5 107.4 99.8 157.9 151.2
Assuming distribution of common
shares reserved under employee
stock purchase plan, based on
withholdings to date, less
shares assumed purchased at
average market(1).............. -- .1 .1 -- --
Assuming distribution of common
shares granted under
comprehensive stock plan, less
shares assumed purchased at
average market(1).............. -- 5.5 5.8 -- --
Assuming distribution of common
shares issuable for warrants,
less shares assumed purchased
at average market(1)(2)........ -- -- -- -- --
----- ----- ----- ----- -----
151.5 113.0 105.7 157.9 151.2
===== ===== ===== ===== =====
Primary Earnings (Loss) Per Common
Share............................ $(.17) $ .37 $ .64 $(.31) $(.07)
===== ===== ===== ===== =====
</TABLE>
- --------
(1) Common equivalent shares and other potentially dilutive securities were
antidilutive in 1994 and the thirty-six week periods ended September 8,
1995 and September 9, 1994.
(2) Stock warrants were issued in 1994.
<PAGE>
EXHIBIT 11
PAGE 2 OF 2
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE (CON'T)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
-------------------------
FISCAL YEAR
--------------------- SEPTEMBER 8, SEPTEMBER 9,
1994 1993 1992 1995 1994
------ ------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Fully Diluted Earnings (Loss)
Per Common Share
Shares--
Weighted average number of
common shares outstanding... 151.5 107.4 99.8 157.9 151.2
Assuming distribution of
common shares reserved under
employee stock purchase
plan, based on withholdings
to date, less shares assumed
purchased at higher of
average or ending
market(1)................... -- .1 .2 -- --
Assuming distribution of
common shares granted under
comprehensive stock plan,
less shares assumed
purchased at higher of
average or ending
market(1)................... -- 7.6 6.5 -- --
Assuming distribution of
common shares issuable for
warrants, less shares
assumed purchased at higher
of average or ending
market(1)(2)................ -- -- -- -- --
Assuming issuance of common
shares upon conversion of
subordinated debt(3)........ -- .7 -- -- --
Assuming issuance of common
shares upon conversion of
convertible preferred
stock(3).................... -- 5.5 -- -- --
------ ------ ------ ------ ------
151.5 121.3 106.5 157.9 151.2
====== ====== ====== ====== ======
Fully Diluted Earnings (Loss)
Per Common Share.............. $ (.17) $ .35 $ .64 $ (.31) $ (.07)
====== ====== ====== ====== ======
</TABLE>
- --------
(1) Common equivalent shares and other potentially dilutive securities were
antidilutive in 1994 and the thirty-six week periods ended September 8,
1995 and September 9, 1994.
(2) Stock warrants were issued in 1994.
(3) Convertible subordinated debt and convertible preferred stock were
antidilutive in 1992 and 1994.
<PAGE>
EXHIBIT 12
PAGE 1 OF 1
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS, EXCEPT RATIO AMOUNTS)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
-------------------------
FISCAL YEAR
----------- SEPTEMBER 8, SEPTEMBER 9,
1994 1995 1994
----------- ------------ ------------
<S> <C> <C> <C>
Income from operations before income tax-
es...................................... $ (16) $(12) $ (8)
Add (deduct)
Fixed charges.......................... 184 138 128
Capitalized interest................... (10) (5) (6)
Amortization of capitalized interest... 8 4 4
Net losses related to certain 50% or
less owned affiliate.................. 5 2 1
Minority interest in consolidated
affiliates............................ 1 1 1
----- ---- ----
Adjusted earnings........................ $172 $128 $120
===== ==== ====
Fixed charges:
Interest on indebtedness and
amortization of deferred financing
costs................................. $ 165 $122 $114
Portion of rents representative of the
interest factor....................... 11 8 8
Debt service guarantee interest expense
of unconsolidated affiliates.......... 8 8 6
----- ---- ----
Total fixed charges...................... $ 184 $138 $128
===== ==== ====
Ratio of earnings to fixed charges....... .93 .93 .94
===== ==== ====
</TABLE>
<PAGE>
EXHIBIT 22
PAGE 1 OF 2
HOST MARRIOTT CORPORATION
SUBSIDIARIES
1) Airline Foods, Inc.
2) Beachfront Properties, Inc.
3) Bird-Marriott, Inc.
4) CBM One Corporation
5) CBM Two Corporation
6) East Boston Properties, Inc.
7) Farrell's Ice Cream Parlour Restaurants, Inc.
8) G.L. Insurance Corporation
9) HMC Acquisition Properties, Inc.
10) HMC Acquisitions, Inc.
11) HMC Airport, Inc.
12) HMC Boyton Beach, Inc.
13) HMC California Leasing Corporation
14) HMC Eastside Financial Corporation
15) HMC Eastside, Inc.
16) HMC Gateway, Inc.
17) HMC GP Holdings, Inc.
18) HMC Leisure Park Corporation
19) HMC Mexair, Inc.
20) HMC Mexpark, Inc.
21) HMC Polanco, Inc.
22) HMC Retirement Properties, Inc.
23) HMC SFO, Inc.
24) HMC Toronto Eaton Ctr., Inc
25) HMC Ventures, Inc.
26) HMH HPT Courtyard, Inc.
27) HMH Marina Inc.
28) HMH Pentagon Corporation
29) HMH Properties, Inc.
30) HMH Realty Company, Inc.
31) HMH Restaurants, Inc.
32) HMH Rivers, Inc.
33) HMH Westport Corporation
34) HMH WTC, Inc.
35) Host Airport Hotels, Inc.
36) Host Investment, Inc.
37) Host La Jolla, Inc.
38) Host Marriott BCH Hotel Corporation
39) Host Marriott GTN Corporation
40) Host Marriott Hospitality, Inc.
41) Hot Shoppes, Inc.
42) Hotel Management of Tuscon, Inc
43) Hotel Properties Management, Inc.
44) Marriott Barbados Branch
<PAGE>
EXHIBIT 22
PAGE 2 OF 2
HOST MARRIOTT CORPORATION
SUBSIDIARIES
45) Marriott Barbados, Ltd.
46) Marriott Condominium Development Corporation
47) Marriott Desert Springs Corporation
48) Marriott FIBM One Corporation
49) Marriott Financial Services
50) Marriott Hanover Hotel Corporation
51) Marriott Hotels of NY City
52) Marriott Hotels of San Diego
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 III 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 St. Hotel Corporation
69) RIBM One Corporation
70) Saga Property Leasing Corporation
71) SFM Finance Corporation
72) Sparky's Virgin Islands, Inc.
73) S.D. Hotels, Inc.
74) Wharf Acquisition, Inc.
75) 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.
January 8, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors Host Marriott Corporation:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
San Diego, California
January 9, 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 note 8, as to which the date is January 5, 1996), with respect to the
financial statements of the New York Vista for the years ended December 31,
1994 and 1993, included in the Registration Statement S-1 No. and related
Prospectus of Host Marriott Corporation for the registration of its common
stock.
Ernst & Young LLP
New York, New York
January 5, 1996
