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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 3, 1997 COMMISSION FILE NO. 1-5664
HOST MARRIOTT CORPORATION
DELAWARE 53-0085950
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION
NUMBER)
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817
(301) 380-9000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock, $1.00 par value.................. New York Stock Exchange
(202,022,710 shares outstanding as of January Chicago Stock Exchange
3, 1997) Pacific Stock Exchange
Philadelphia Stock Exchange
</TABLE>
The aggregate market value of shares of common stock held by non-affiliates
at February 28, 1997 was $3,648,158,910.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
DOCUMENT INCORPORATED BY REFERENCE
Notice of 1997 Annual Meeting and Proxy Statement
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FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements within the
meaning of the Private Litigation Reform Act of 1995 and as such may involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance or achievements of Host Marriott Corporation (the
"Company") to be different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Although
the Company believes the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, it can give no assurance
that its expectations will be attained. These risks are detailed from time to
time in the Company's filings with the Securities and Exchange Commission. The
Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
ITEMS 1 & 2. BUSINESS AND PROPERTIES
GENERAL
The Company is one of the largest owners of hotels in the world, with 84
upscale and luxury full-service lodging properties as of March 25, 1997,
primarily located in the United States. These properties are generally
operated under the Marriott brand and managed by Marriott International, Inc.
("Marriott International"), formerly a wholly-owned subsidiary of the Company.
Four of the Company's properties are operated under the Ritz-Carlton brand in
which Marriott International acquired a 49% interest in April 1995. The
Marriott and Ritz-Carlton brand names are 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. Since the beginning of
1994, the Company has added 55 full-service hotels (including one 199-room
hotel subsequently sold in December 1995) representing 25,300 rooms for an
aggregate purchase price of approximately $2.7 billion. Based on data provided
by Smith Travel Research, the Company believes that its full-service hotels
consistently outperform the industry's average occupancy rate by a significant
margin and averaged 77.3% occupancy for 1996 compared to a 71.1% average
occupancy for competing hotels in 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 upscale and luxury full-service
hotel segments in particular, are benefiting from an improved supply and
demand relationship in the United States. Based on data provided by Smith
Travel Research, the Company believes that demand for upscale full-service
rooms, measured as annual domestic occupied room nights for its competitive
set, increased 3.8% in 1994, 1.5% in 1995 and 2.3% in 1996. Management
believes that 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 diminished. Management believes that this decrease in the supply
growth rate is attributable to many factors including the limited availability
of attractive building sites for full-service hotels, the lack of available
financing for new full-service hotel construction and the availability of
existing full-service properties for sale at a discount to their replacement
value. The relatively high occupancy rates of the Company's hotels, along with
increased demand for full-service hotel rooms have allowed the managers of the
Company's hotels to increase average daily room rates primarily by replacing
certain discounted group business with higher-rated group and transient
business and by selectively raising room rates. As a result, on a comparable
basis, room revenues per available room ("REVPAR") for full-service properties
increased approximately 11% in 1996. Furthermore, because lodging property
operations have a high fixed cost component, increases in REVPAR generally
yield greater percentage increases in EBITDA (as defined herein). Accordingly,
the approximate 11% increase in REVPAR resulted in an approximate 19% increase
in comparable full-service EBITDA in 1996. The Company expects this
supply/demand imbalance, particularly in the upscale and luxury full-service
segments, to continue, which should result in improved REVPAR and EBITDA at
its hotel properties in the near term.
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BUSINESS STRATEGY
The Company's business strategy is to continue to focus on opportunistic
acquisitions of full-service urban, convention, airport, suburban office park
and resort hotels primarily in the United States. The Company believes that
the upscale and luxury full-service segments of the market offer 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 or Ritz-Carlton brands.
There is very limited new supply of upscale and luxury full-service hotel
rooms currently under construction. According to Smith Travel Research, from
1988 to 1991, upscale full-service room supply for the Company's competitive
set 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 1.0% from 1992 to 1996. According to Coopers & Lybrand, hotel
supply in the upscale full-service segment is expected to grow annually at
1.8% to 1.9% through 1998. 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 in the upscale and luxury
full-service segments through 2000.
The Company intends to grow its full-service hotel portfolio. In carrying
out this strategy, the Company evaluates each opportunity on an individual
basis and may from time to time elect to acquire controlling interests in a
hotel joint venture, rather than pursue the outright acquisition of a
property, when it believes its return on investment will be maximized by so
doing. The Company may make acquisitions directly or through its subsidiaries
depending on a variety of factors, including the existence of debt, the form
of investment, the restrictions and requirements of its bond indentures and
the availability of funds.
The Company believes it is well qualified to pursue its acquisition
strategy. Management has extensive experience in acquiring and financing
lodging properties and believes its industry knowledge, relationships and
access to market information provide a competitive advantage with respect to
identifying, evaluating and acquiring hotel assets. In addition, the Company
is well positioned to convert acquired properties to high-quality Marriott and
Ritz-Carlton brand names due to its relationship with Marriott International.
Consistent with its strategy of focusing on the full-service segment of the
lodging industry, the Company sold (subject to a leaseback) 16 Courtyard and
18 Residence Inn properties to a real estate investment trust (the "REIT") in
1996. The Company received net proceeds of $314 million and will receive
approximately $35 million upon expiration of the leases. With the completion
of this transaction, 100% of the Company's owned properties are in the full-
service segment. The Company has reinvested substantially all of the proceeds
in the acquisition of full-service lodging properties.
In 1996, the Company acquired six full-service hotels (1,964 rooms) for an
aggregate purchase price of approximately $189 million and controlling
interests in 17 additional properties (8,917 rooms) for an aggregate purchase
price of approximately $1.1 billion, including $696 million of mortgage debt.
In addition, the Company acquired the mortgage loan secured by the 504-room
New York Marriott Financial Center for $101 million in late 1996 and then
completed the acquisition of the hotel in early 1997.
During 1997, through the date hereof, the Company has acquired one luxury
full-service hotel (306 rooms) for approximately $57 million and controlling
interests in three additional properties (2,324 rooms) for approximately $300
million, including the assumption of $231 million of debt.
The Company has acquired a number of properties from inadvertent owners at
significant discounts to replacement cost, including luxury hotels operating
under the Ritz-Carlton brand. Many desirable hotel properties are currently
held by inadvertent owners such as banks, insurance companies and other
financial institutions which are motivated and willing sellers. While in the
Company's experience to date these sellers have been primarily United States
financial organizations, the Company believes that numerous international
financial
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institutions are also inadvertent owners of lodging properties and have only
recently begun to dispose of such properties. The Company expects that there
will be increased opportunities to acquire lodging properties from
international financial institutions.
The Company 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 and Ritz-
Carlton brands. Fourteen of the 55 full-service hotels added since the
beginning of 1994 were converted to the Marriott brand following their
acquisition. Based on industry data, the Company believes that Marriott
flagged properties have consistently outperformed the industry. Demonstrating
the strength of the Marriott brand name, the average occupancy rate for the
Company's comparable full-service hotels was 78.0% compared to an average
occupancy rate of 71.1% for competing upscale full-service hotels not
operating under the Marriott brand. Accordingly, management anticipates that
any additional full-service properties acquired by the Company in the future
and converted from other brands to the Marriott brand should achieve higher
occupancy rates and average room rates than has previously been the case for
those properties as the properties begin to benefit from Marriott's brand
recognition, reservation system and group sales organization. The Company
intends to pursue additional full-service hotel acquisitions, some of which
may be conversion opportunities.
The Company holds minority interests and serves as general partner in
various partnerships that own, as of March 25, 1997, an aggregate of 251
additional hotel properties, 31 of which are full-service properties, managed
by Marriott International. In 1996, the Company purchased controlling
interests in four affiliated partnerships, adding nine hotels to its
portfolio. In January, the Company acquired a controlling interest in the
1,355-room San Diego Marriott Hotel and Marina. In June, the Company
successfully completed a tender offer for a majority of the limited
partnership units of Marriott Hotel Properties II Limited Partnership
("MHPII"). MHPII owns the 1,290-room New Orleans Marriott, the 999-room San
Antonio Marriott Rivercenter, the 368-room San Ramon Marriott and a 50%
limited partner interest in the 754-room Santa Clara Marriott. In the fourth
quarter of 1996, the Company acquired a controlling interest in the Marriott
Suites Limited Partnership which owns four all-suite hotels. The partnership
owns the 251-room Marriott Suites Scottsdale hotel in Scottsdale, Arizona; the
254-room Marriott Suites Downers Grove hotel in a Chicago suburb; the 254-room
Marriott Suites Atlanta Midtown hotel in Atlanta; and the 253-room Marriott
Suites Costa Mesa hotel in Orange County, California. In November, the Company
acquired the remaining 80% general partner interest in the general partnership
that owns the 510-room Salt Lake City Marriott. Subsequent to year-end, the
Company acquired a controlling interest in the Marriott Hotel Properties
Limited Partnership ("MHPLP"). MHPLP owns the 1,503-room Marriott Orlando
World Center and a 50.5% partnership interest in the 624-room Marriott Harbor
Beach Resort. The Company is actively considering the acquisition of
additional full-service hotels currently held by such partnerships and/or
additional interests in such partnerships.
In addition to investments in partnerships in which it already held minority
interests, the Company has been successful in adding properties to its
portfolio through partnership arrangements with either the seller of the
property or the incoming managers (typically Marriott International or a
Marriott franchisee). During 1996, the Company acquired interests in six such
partnerships which owned eight full-service hotels, including the 463-room
Ritz-Carlton, Naples in Naples, Florida; the 553-room Ritz-Carlton, Buckhead
in Atlanta, Georgia; the 314-room JW Marriott Hotel and the 600-room Airport
Marriott in Mexico City; and the 400-room Pittsburgh City Center Marriott.
Four of the eight hotels were converted to the Marriott brand, which generally
included additional capital expenditures. Subsequent to year-end, the Company
acquired, for $18 million, a controlling interest in the 197-room Waterford
Hotel in Oklahoma City, Oklahoma through a partnership with the hotel's
manager. The hotel has been converted to the Marriott brand. The Company has
the financial flexibility and, due to its existing partnership investment
portfolio, the administrative infrastructure in place to accommodate such
arrangements. The Company views this ability as a competitive advantage and
expects to enter into similar arrangements to add additional properties in the
future.
The Company believes there is a significant opportunity to acquire
additional Ritz-Carlton hotels due to the Company's relationship with Marriott
International and due to the number of Ritz-Carlton brand hotels currently
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owned by inadvertent owners. The Company also intends to purchase luxury
hotels with the intention of converting them to the Ritz-Carlton brand.
While the Company's portfolio of lodging properties consists almost entirely
of upscale and luxury full-service hotels, management continually considers
the merits of diversifying into other compatible lodging related real estate
assets that offer strong current economic benefits and growth prospects. In
early 1997, the Company signed a letter of intent to acquire 29 premier senior
living communities from Marriott International for $433 million. The Company
has developed a plan to add over one thousand expansion units to these
properties by January 1999 for an additional $107 million. The Company intends
to finance its acquisition program through the use of internally generated
funds, additional equity and moderate levels of indebtedness.
HOTEL LODGING INDUSTRY
The lodging industry as a whole, and the upscale and luxury full-service
segments 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 1996, as demand growth continued to outpace additions to supply.
Based on Coopers & Lybrand data, the Company expects full-service hotel room
supply growth to remain limited through 1998 and for the foreseeable 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 have improved. According
to Coopers & Lybrand, room demand for upscale full-service properties is
expected to grow approximately 2.4% annually through 1998. Increased room
demand should result in increased hotel occupancy and room rates. According to
Smith Travel Research, upscale full-service occupancy for the Company's
competitive set grew in 1996 to 72.4%, while room rate growth exceeded
inflation for the fifth straight year. The Company believes that these recent
trends will continue, with overall occupancy increasing slightly and room
rates increasing at more than one and one-half times the rate of inflation in
each of the next two years.
While room demand has been rising, new hotel supply growth has slowed. Smith
Travel Research shows that from 1988 to 1991, upscale full-service room supply
increased an average of approximately 4% annually. According to Smith Travel
Research, this growth slowed to an approximate 1.0% average annual growth rate
from 1990 through 1996. Through 1998, upscale full-service room supply growth
is expected to increase approximately 1.8% annually, according to Coopers &
Lybrand. The increase in room demand and slow down in growth of new hotel
supply has also led to increased room rates. According to Coopers & Lybrand,
room rates for such hotels are expected to grow approximately 4% to 5%
annually, through 1998.
As a result of the overbuilding in the mid-to-late 1980s, many full-service
hotels built have not performed as originally planned. Cash flow has often not
covered debt service requirements, causing lenders (e.g., banks, insurance
companies, and savings and loans) to foreclose and become "inadvertent owners"
who are motivated 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.
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HOTEL LODGING PROPERTIES
The Company's hotel lodging properties represent quality assets in the full-
service lodging segment. All but four of the Company's hotel properties are
operated under the Marriott or Ritz-Carlton brand names, each of which
achieved favorable operating results relative to competing hotels in their
respective market segments. The four hotels (representing an aggregate of 936
rooms, or approximately 2% of the Company's total rooms) that do not carry the
Marriott or Ritz-Carlton brand have not been converted to the Marriott or
Ritz-Carlton brand due to their size, quality and/or contractual commitments
which would not permit such conversion. The Company's lodging portfolio as of
March 25, 1997, consists of 84 upscale and luxury full-service hotels with a
total of 40,344 rooms.
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. The
Company has reported annual increases in REVPAR since 1993.
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
1996 and 1995, the Company spent $87 million and $56 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. The Company's full-service hotels primarily
include Marriott and Ritz-Carlton brand hotels, resorts, and suites. 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 properties
are well situated in locations where there are significant barriers to entry
by competitors. The average age of the full-service properties is 14 years,
several of which have had substantial renovations or major additions.
The chart below sets forth performance information for the Company's
comparable full-service hotels:
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
COMPARABLE FULL-SERVICE HOTELS/(1)/
Number of properties.................................... 44 44
Number of rooms......................................... 21,673 21,673
Average daily rate...................................... $119.21 $110.82
Occupancy percentage.................................... 78.0% 75.8%
REVPAR.................................................. $ 93.02 $ 84.00
REVPAR % change......................................... 10.7% --
</TABLE>
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(1) Consists of 44 properties owned by the Company for all of 1996 and 1995,
except for the 255-room Elk Grove Suites hotel, which is leased to a
national hotel chain through 1997 and the 85-room Sacramento property,
which is operated as an independent hotel.
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The chart below sets forth performance information for the Company's full-
service hotels:
<TABLE>
<CAPTION>
1996 1995 1994
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<S> <C> <C> <C>
TOTAL FULL-SERVICE HOTELS
Number of properties........... 79 55 41
Number of rooms................ 37,210 25,932 19,492
Average daily rate............. $119.94/(1)/ $110.30/(1)/ $102.82/(2)/
Occupancy percentage........... 77.3%/(1)/ 75.5%/(1)/ 77.4%/(2)/
REVPAR......................... $ 92.71/(1)/ $ 83.32/(1)/ $ 79.61/(2)/
REVPAR % change................ 11.3%/(1)/ 4.7%/(1)/ --/(2)/
</TABLE>
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(1) Excludes the information related to the 255-room Elk Grove Suites hotel,
which is leased to a national hotel chain through 1997 and the 85-room
Sacramento property, which is operated as an independent hotel. The 1995
data also excludes the 199-room Springfield Radisson Hotel, which was sold
in December 1995 and the 820-room Marriott World Trade Center acquired in
the last week of 1995.
(2) Excludes the seven properties acquired in the last two weeks of 1994, the
255-room Elk Grove Suites hotel, which is leased to a national hotel chain
through 1997, and the 85-room Sacramento property, which is operated as an
independent hotel.
Revenues in 1996 for nearly all of the Company's full-service hotels,
resorts and suites were improved or comparable to 1995. This improvement was
achieved through steady increases in customer demand, as well as yield
management techniques applied by the managers to maximize REVPAR on a
property-by-property basis. REVPAR for comparable properties increased 11% as
average room rates increased 8% and average occupancy increased two percentage
points. Overall, this resulted in strong house profit margins, which increased
almost two percentage points, and excellent growth in sales, which expanded at
a 12% rate for comparable hotels. Due to the relatively high occupancy rates
of the Company's hotels, the limited supply of new rooms and the recent
increase in business travel, the managers of the Company's hotels have
increased average room rates by replacing certain discounted group business
with higher-rated group and transient business and by selectively increasing
room rates. The Company believes that these favorable REVPAR growth trends
should continue due to the limited new construction of full-service properties
and the expected improvements from the conversion of seven properties to the
Marriott brand in 1995 and 1996.
A number of the Company's full-service hotel acquisitions were converted to
the Marriott brand upon acquisition. The conversion of these properties to the
Marriott brand is intended to increase occupancy and room rates as a result of
Marriott International's nationwide marketing and reservation systems and
Honored Guest Awards Program, as well as customer recognition of the Marriott
brand name. In connection with the conversion of these properties, the Company
employed, or may employ, additional capital to upgrade these properties to the
Company's and the new manager's standards, where necessary. The invested
capital with respect to these properties is primarily used for the improvement
of common areas, as well as upgrading soft and hard goods (i.e., carpets,
drapes, paint, furniture and additional amenities). The conversion process
typically causes periods of disruption to these properties as selected rooms
and common areas are temporarily taken out of service. The conversion
properties are already showing improvements as the benefits of Marriott
International's marketing and reservation programs and customer service
initiatives take hold. In addition, these properties have generally been
integrated into Marriott's systems covering purchasing and distribution,
insurance, telecommunications and payroll processing. 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 focus is on maximizing profitability throughout the portfolio
by concentrating on key objectives. The Company works with the manager to
achieve these key objectives, which include evaluating marginal restaurant
operations, exiting low rate airline room contracts in strengthening markets,
reducing property-level overhead by sharing management positions with other
jointly managed hotels in the vicinity and selectively making additional
investments where favorable incremental returns are expected.
The Company and its managers will continue to focus on cost control in an
attempt to ensure that hotel sales increases serve to maximize house and
operating profit. While control of fixed costs serves to improve profit
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margins as hotel sales increase, it also results in more properties reaching
financial performance levels that allow the managers to share in the growth of
profits in the form of incentive management fees. The Company believes this is
a positive development as it strengthens the alignment of the Company's and
the managers' interests.
Limited-service Properties. During 1996, the Company completed its
divestiture of limited-service properties through the sale and leaseback of 16
Courtyard properties and 18 Residence Inn properties. These properties, along
with 37 Courtyard properties sold and leased back during 1995, continue to be
reflected in the Company's revenues and are managed by Marriott International
under long-term management agreements.
Courtyard Hotels. The Company's leased 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 Courtyard hotels
leased by the Company are among the newest in the Courtyard hotel system,
averaging only six years old. The Company's leased 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 leased Courtyard properties:
<TABLE>
<CAPTION>
1996 1995 1994
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<S> <C> <C> <C>
Number of properties.............................. 53 53 53
Number of rooms................................... 7,606 7,606 7,606
Average daily rate................................ $77.80 $72.61 $67.51
Occupancy percentage.............................. 80.2% 80.3% 80.4%
REVPAR............................................ $62.40 $58.32 $54.23
REVPAR % change................................... 7.0% 7.5% --
</TABLE>
The Company's Courtyard properties benefited in 1996 from higher demand.
REVPAR increased 7% due to increases in room rates of over 7% and a slight
occupancy decrease. House profit margins also increased by almost one
percentage point, 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. However, there can be no
assurance that profitability will continue to improve.
Residence Inns. The Company's leased Residence Inns are extended-stay,
limited-service hotels which cater primarily to business and family travelers
who stay more than five consecutive nights. Residence Inns typically have 80
to 130 studio and two-story penthouse suites. Residence Inns generally are
located in suburban settings throughout the United States and feature a series
of residential style buildings with landscaped walkways, courtyards and
recreational areas. Residence Inns do not have restaurants, but offer
complimentary continental breakfast. In addition, most Residence Inns provide
a complimentary evening hospitality hour. Each suite contains a fully equipped
kitchen, and many suites have woodburning fireplaces. The 18 Residence Inns
leased by the Company are among the newest in the Residence Inn system,
averaging only six years old.
The chart below sets forth performance information for the Company's leased
Residence Inns:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Number of properties.............................. 18 18 18
Number of rooms................................... 2,178 2,178 2,178
Average daily rate................................ $90.82 $85.07 $79.48
Occupancy %....................................... 85.1% 86.6% 85.6%
REVPAR............................................ $77.29 $73.67 $68.12
REVPAR % change................................... 4.9% 8.2% --
</TABLE>
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For 1996, the Company's leased Residence Inns again performed well with
advances in room rates of almost 7%, although occupancy decreased by over one
percentage point. Continued popularity of this product with customers combined
with increasing business travel resulted in strong performance for 1996. At an
average occupancy rate of 85.1% for 1996, 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.
The Company completed construction of the 300-room property in Arlington
(Pentagon City), Virginia, near National Airport, just outside of Washington,
D.C., which opened in March 1996.
MARKETING
All but 11 of the Company's hotel properties, at March 25, 1997, are managed
by Marriott International as Marriott or Ritz-Carlton brand hotels. Seven of
the 11 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 system. 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
as Marriott Honored Guest Awards and its companion program, Marriott Miles,
continue to expand their memberships, and now include more than nine million
members.
The Marriott reservation system was upgraded significantly in 1994 giving
Marriott reservation agents complete descriptions of the rooms available for
sale, and more up-to-date rate information from the properties. The
reservation system also features improved connectivity to airline reservation
systems, providing travel agents with greater access to available rooms
inventory for all Marriott and Ritz-Carlton lodging properties. In addition,
new software at Marriott's centralized reservations centers enables agents to
immediately identify the nearest Marriott or Ritz-Carlton brand property with
available rooms when a caller's first choice is sold out.
8
<PAGE>
PROPERTIES
The following table sets forth certain information as of March 25, 1997,
relating to each of the Company's hotels. All of the properties are operated
under Marriott brands by Marriott International, unless otherwise indicated.
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Alabama
Point Clear(1).................... 306
Arizona
Scottsdale Suites(2).............. 251
California
Costa Mesa Suites(2).............. 253
Marina Beach(1)(3)................ 368
Napa Valley(4).................... 191
Newport Beach..................... 570
Newport Beach Suites(5)........... 250
Sacramento Airport(3)(6).......... 85
San Diego Marriott Hotel and Mari-
na(3)(7)......................... 1,355
San Francisco Airport(4).......... 684
San Francisco Fisherman's
Wharf(4)(8)...................... 255
San Francisco Moscone Center(3)... 1,498
San Ramon(3)(9)................... 368
Santa Clara(3)(9)................. 754
The Ritz-Carlton, Marina del
Rey(20).......................... 306
Colorado
Denver Tech Center(4)............. 625
Denver West(3).................... 307
Marriott's Mountain Resort at
Vail(4).......................... 349
Connecticut
Hartford/Rocky Hill(3)............ 251
Florida
Fort Lauderdale Marina(4)......... 580
Harbor Beach Resort(18)........... 624
Jacksonville(8)(13)............... 256
Miami Airport(3).................. 782
Orlando World Center(18).......... 1,503
Palm Beach Gardens(8)(13)......... 279
Singer Island (Holiday Inn)(4)(6). 222
Tampa Airport(3).................. 295
Tampa Westshore(3)(4)(10)......... 309
The Ritz-Carlton, Naples(14)...... 463
Georgia
Atlanta Midtown Suites(2)(3)...... 254
Atlanta Norcross.................. 222
Atlanta Northwest(1).............. 400
Atlanta Perimeter(3).............. 400
JW Marriott Hotel at Lenox(3)..... 371
The Ritz-Carlton, Atlanta(13)..... 447
The Ritz-Carlton, Buckhead(14).... 553
Illinois
Chicago/Deerfield Suites.......... 248
Chicago/Elk Grove Suites (Shera-
ton)(6).......................... 255
Chicago/Downers Grove Suites(2)... 254
Chicago/Downtown Courtyard........ 334
Indiana
South Bend(3)(4).................. 300
Louisiana
New Orleans(9).................... 1,290
Maryland
Bethesda(3)....................... 407
Gaithersburg/Washingtonian Center. 284
Michigan
Detroit Romulus................... 245
</TABLE>
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Minnesota
Minneapolis City Center(3)........ 583
Missouri
Kansas City Airport(3)............ 382
St. Louis Pavilion(3)............. 672
New Hampshire
Nashua............................ 251
New Jersey
Newark Airport(3)................. 590
New York
New York East Side(4)............. 662
New York Marriott Marquis(3)...... 1,911
New York Marriott Financial Cen-
ter(22).......................... 504
Marriott World Trade Center(1)(3). 820
North Carolina
Charlotte Executive Park(1)(8).... 298
Raleigh Crabtree Valley(4)(10).... 375
Oklahoma
Oklahoma City(13)................. 354
Oklahoma City Waterford(21)....... 197
Oregon
Portland(4)....................... 503
Pennsylvania
Philadelphia (Convention Cen-
ter)(3)(11)...................... 1,200
Philadelphia Airport(3)(11)....... 419
Pittsburgh City Center(3)(8)(12).. 400
Texas
Dallas/Fort Worth(1).............. 492
Dallas Quorum(3)(4)............... 547
El Paso(3)........................ 296
Houston Airport(3)................ 566
J.W. Marriott Houston(4).......... 503
Plaza San Antonio(1)(8)........... 252
San Antonio Riverwalk(1)(3)....... 500
San Antonio Rivercenter(3)(9)..... 999
Utah
Salt Lake City(3)(15)............. 510
Virginia
Dulles Airport(3)................. 370
Pentagon City..................... 300
Washington Dulles Suites(13)...... 254
Westfields Conference Resort(4)... 335
Williamsburg(4)................... 295
Washington, D.C.
Washington Metro Center(4)........ 456
Bermuda
Castle Harbour Resort(3).......... 395
Canada
Calgary(19)....................... 380
Toronto Airport(16)............... 423
Toronto Eaton Centre(1)(3)........ 459
Toronto Delta Meadowvale(6)(13)... 374
Mexico
Mexico City Airport(17)........... 600
JW Marriott Hotel, Mexico
City(17)......................... 314
</TABLE>
9
<PAGE>
- --------
(1) Property was acquired by the Company in 1995.
(2) The Company acquired a controlling interest in an affiliated partnership
that owns the Marriott Suites Costa Mesa, the Marriott Suites Downers
Grove, the Marriott Suites Atlanta Midtown and the Marriott Suites
Scottsdale.
(3) The land on which the hotel is built is leased by the Company under a
long-term lease agreement.
(4) Property was acquired by the Company in 1994.
(5) The Company acquired, through foreclosure, a controlling interest in the
Newport Beach Marriott Suites in 1996. The Company previously had
purchased an 83% interest in the mortgage loans secured by the hotel in
1996.
(6) Property is not operated as a Marriott and is not managed by Marriott
International.
(7) The Company acquired a controlling interest in the San Diego Marriott
Hotel and Marina in 1996 through a limited partnership in which the
Company owned a general partner interest.
(8) Property is currently operated as a Marriott franchised property.
(9) The Company acquired a controlling interest in an affiliated partnership
that owns the San Ramon Marriott, the San Antonio Marriott Rivercenter,
the New Orleans Marriott and a 50% limited partner interest in the Santa
Clara Marriott in June 1996.
(10) Property is owned by an affiliated partnership of the Company. A
subsidiary of the Company provided 100% non-recourse financing totaling
approximately $35 million to the partnership, in which the Company owns
the sole general partner interest, for the acquisition of these two
hotels. The Company accounts for these properties as owned hotels for
accounting purposes.
(11) Property was opened in 1995.
(12) Property purchased by a limited partnership in which the Company owns a
95% interest. The remaining 5% is owned by the manager. The property was
converted to a Marriott in 1996 subsequent to its acquisition and
renovation.
(13) Property was acquired by the Company in 1996.
(14) The Company acquired a controlling interest in a partnership that owns
the Ritz-Carlton in Naples, Florida and the Ritz-Carlton, Buckhead in
Atlanta, Georgia in 1996.
(15) The Company acquired an 80% interest in the partnership that owns the
Salt Lake City Marriott in 1996. The Company already owned the remaining
20% interest.
(16) The Company acquired a controlling interest in a partnership that owns
the Toronto Airport Marriott in 1996.
(17) The Company acquired a controlling interest in these properties in
February 1996. The construction of the JW Marriott Hotel, Mexico City was
recently completed and the hotel opened in August 1996.
(18) The Company acquired a controlling interest in the partnership that owns
Marriott's Orlando World Center and a 50.5% partnership interest in
Marriott's Harbor Beach Resort.
(19) The Company acquired a controlling interest in this property in December
1996.
(20) Property was acquired by the Company in 1997.
(21) The Company acquired a controlling interest in the newly-formed
partnership that owns the Oklahoma City Waterford in February 1997. The
property will be operated as a Marriott franchised property.
(22) The Company completed the acquisition of this property in early 1997. The
Company previously had purchased the mortgage loan secured by the hotel
in late 1996.
1997 ACQUISITIONS
In January 1997, the Company acquired a controlling interest in Marriott
Hotel Properties Limited Partnership ("MHPLP") for approximately $268 million,
including cash of $37 million and $231 million of mortgage debt. MHPLP owns
the 1,503-room Marriott Orlando World Center and a 50.5% partnership interest
in the 624-room Marriott Harbor Beach Resort. In addition, the Company
acquired, for approximately $57 million, the 306-room Ritz-Carlton, Marina del
Rey in Marina del Rey, California. In February 1997, the Company acquired, for
approximately $18 million, a controlling interest in the 197-room Waterford
Hotel in Oklahoma City, Oklahoma through a partnership with the hotel manager.
The hotel has been converted to the Marriott brand. In March 1997, the Company
completed the acquisition of the 504-room New York Marriott Financial Center,
after acquiring the mortgage on the hotel for $101 million in late 1996.
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, at January 3, 1997, the Company and/or its subsidiaries own an equity
investment in, and serve as the general partner or managing general partner
for, 26 partnerships which collectively own 33 Marriott full-service hotels,
120 Courtyard hotels, 50 Residence Inns and 50 Fairfield Inns. In addition,
the Company holds notes receivable (net of reserves) from partnerships
totaling approximately $156 million at January 3, 1997.
As the managing general partner, the Company and its subsidiaries are
responsible for the day-to-day management of partnership operations, which
includes payment of partnership obligations from partnership
10
<PAGE>
funds, preparation of financial reports and tax returns and communications
with lenders, limited partners and regulatory bodies. The Company or its
subsidiary is usually reimbursed for the cost of providing these services.
Hotel properties owned by the partnerships generally were acquired from the
Company or its subsidiaries in connection with limited partnership offerings.
These hotel properties are currently operated under management agreements with
Marriott International. As the managing general partner of such partnerships,
the Company or its subsidiaries oversee and monitor Marriott International's
performance pursuant to these agreements.
The Company's interests in these partnerships range from 1% to 50%. Cash
distributions provided from these partnerships are tied to the overall
performance of the underlying properties and the overall level of debt owed by
the partnership. Partnership distributions to the Company were $5 million for
1996, $3 million in 1995 and $4 million in 1994. 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 $117
million at January 3, 1997. Subsequent to year-end, such maximum commitments
were reduced to $71 million. In most cases, fundings of such guarantees
represent loans to the respective partnerships.
COMPETITION
The cyclical nature of the U.S. lodging industry has been demonstrated over
the past two decades. Low hotel profitability during the 1974-75 recession led
to a prolonged slump in new construction and, over time, high occupancy rates
and real price increases in the late 1970s and early 1980s. Changes in tax and
banking laws during the early 1980s precipitated a construction boom that
created an oversupply of hotel rooms. The Company expects the U.S. upscale
full-service hotel supply/demand imbalance to continue to improve over the
next few years as room demand continues to grow and room supply growth is
expected to be minimal, in particular in the full-service segment.
The Company's hotels compete with several other major lodging brands in each
segment in which they operate. Competition in the industry is based primarily
on the level of service, quality of accommodations, convenience of locations
and room rates. The following table presents key participants in segments of
the lodging industry in which the Company competes:
<TABLE>
<CAPTION>
SEGMENT REPRESENTATIVE PARTICIPANTS
------- ---------------------------
<S> <C>
Luxury Full-Service..... Ritz-Carlton; Four Seasons
Upscale Full-Service.... Marriott Hotels, Resorts and Suites; Crowne Plaza; Doubletree;
Hyatt; Hilton; Radisson; Red Lion; Sheraton; Westin; Wyndham
Moderate-Price.......... Courtyard; Holiday Inn; Ramada Inns; Days Inn; Quality Inns;
Hampton Inn
Extended-Stay........... Residence Inn; Homewood Suites; Embassy Suites; Oakwood
Apartments
</TABLE>
OTHER REAL ESTATE INVESTMENTS
At January 3, 1997, the Company owned 28 undeveloped parcels of vacant land,
totaling approximately 190 acres, originally purchased primarily for the
development of hotels or senior living communities. The Company sold 12
parcels during 1996 for proceeds of approximately $10 million. The Company may
sell its remaining undeveloped parcels from time to time when market
conditions are favorable. Some of the properties may be developed as part of a
long-term strategy to realize the maximum value of these parcels. The Company
also has lease and sublease activity relating primarily to its former
restaurant operations.
In addition, the Company owns a 174-acre parcel of undeveloped land in
Germantown, Maryland, zoned for commercial office building development. The
site was originally purchased in the 1980's for a proposed new corporate
headquarters. Due to Company downsizing, plans for a new corporate
headquarters were dropped. The Company subsequently planned to develop the
site into an office project over an extended time period to recover its
investment, however, the continuing weakness of the real estate market in
Montgomery County, Maryland,
11
<PAGE>
negatively impacted this development plan. In the fourth quarter of 1995,
management instituted a program to aggressively liquidate certain non-income
producing assets and to reinvest the proceeds in the acquisition of full-
service hotels. As part of this program, management determined that the site
would no longer be developed and instead decided to attempt to sell the
property. Accordingly, the Company recorded a pre-tax charge of $60 million in
the fourth quarter of 1995 to reduce the asset to its estimated sales value.
SPECIAL DIVIDEND
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 food, beverage and merchandise
concessions at airports, on tollroads and at stadiums and arenas and other
tourist attractions (the "Operating Group"). The Special Dividend provided
Company shareholders with one share of common stock of HM Services for every
five shares of Company common stock held by such shareholders on the record
date of December 22, 1995.
For the purpose of governing certain of the ongoing relationships between
the Company and HM Services after the Special Dividend, and to provide an
orderly transition, the Company and HM Services have entered into various
agreements, including agreements to a) allocate certain responsibilities with
respect to employee compensation, benefit and labor matters; b) define the
respective 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 Special Dividend and with
respect to certain tax attributes of the Company's after the Special Dividend;
c) provide certain administrative and other support services to each other for
a transitional period on an as-needed basis; and d) to provide for the
issuance of HM Services common stock in connection with the exercise of
certain outstanding warrants to purchase shares of Company common stock.
RELATIONSHIP WITH MARRIOTT INTERNATIONAL; MARRIOTT INTERNATIONAL DISTRIBUTION
Prior to October 8, 1993, the Company was named "Marriott Corporation." In
addition to conducting its existing hotel ownership business and the business
of HM Services (prior to its distribution to shareholders through the Special
Dividend; see Items 1 and 2, "Business and Properties--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 (as defined herein). Marriott International conducts the
Management Business as a separate publicly traded company.
The Company and Marriott International have entered into agreements which
provide, among other things, for Marriott International to (i) manage or
franchise various lodging properties owned or leased by the Company, (ii)
advance up to $225 million to the Company under the Marriott International
line of credit (the "MI Line of Credit") which matures in 1998, (iii) provide
$109 million of first mortgage financing for the Philadelphia Marriott Hotel,
which was repaid in December 1996, (iv) guarantee the Company's performance in
connection with certain loans or other obligations, and (v) provide certain
limited administrative services. The Company views its relationship with
Marriott International as providing various advantages, including access to
high quality management services, strong brand names and superior marketing
and reservation systems.
Marriott International has the right to purchase up to 20% of the voting
stock of the Company if certain events involving a change of control of the
Company occur.
EMPLOYEES
The Company and its subsidiaries collectively have approximately 200
corporate employees, and approximately 800 other employees (primarily employed
at three 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 labor unions and has not
experienced any material business interruptions as a result of labor disputes.
12
<PAGE>
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws may impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, certain
environmental laws and common law principles could be used to impose liability
for release of asbestos-containing materials ("ACMs"), and third parties may
seek recovery from owners or operators of real properties for personal injury
associated with exposure to released ACMs. Environmental laws also may impose
restrictions on the manner in which property may be used or business may be
operated, and these restrictions may require expenditures. In connection with
its current or prior ownership or operation of hotels, the Company may be
potentially liable for any such costs or liabilities. Although the Company is
currently not aware of any material environmental claims pending or threatened
against it, no assurance can be given that a material environmental claim will
not be asserted against the Company.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
<PAGE>
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock is listed on the New York Stock Exchange, the Chicago Stock
Exchange, the Pacific Stock Exchange and the Philadelphia Stock Exchange and
is traded under the symbol "HMT." The following table sets forth, for the
fiscal periods indicated, the high and low sales prices per share of the
common stock as reported on the New York Stock Exchange Composite Tape. The
Company has not declared any cash dividends on the common stock during the two
fiscal years ended January 3, 1997, and through the date hereof. The Special
Dividend was paid 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. Therefore, the high and low sales prices of Company common stock
from and after the first quarter of 1996 are subsequent to the payment of the
Special Dividend and do not reflect the conduct of the Operating Group
business by the Company. The Company currently intends to retain future
earnings, if any, for use in its business and does not anticipate paying
regular cash dividends on the common stock. As of January 3, 1997, there were
approximately 53,316 holders of record of common stock.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1995
1st Quarter............................................. $11 1/4 $ 9 1/8
2nd Quarter............................................. 12 9 3/4
3rd Quarter............................................. 13 10 1/4
4th Quarter/(1)/........................................ 13 7/8 11 1/2
1996
1st Quarter/(2)/........................................ $13 3/4 $11 1/2
2nd Quarter............................................. 14 12 3/8
3rd Quarter............................................. 14 1/4 12 3/8
4th Quarter............................................. 16 1/4 13 1/2
1997
1st Quarter (through March 24, 1997).................... $18 3/4 $15 3/4
</TABLE>
- --------
/(1)/ Prior to the Special Dividend.
/(2)/ Subsequent to the Special Dividend.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table presents certain selected historical financial data of
the Company which has been derived from the Company's audited Consolidated
Financial Statements for the five most recent fiscal years ended January 3,
1997. The financial data for fiscal year 1992 and the income statement data
for fiscal year 1993 do not reflect the Marriott International Distribution
and related transactions and, accordingly, the table presents data for the
Company that include amounts attributable to Marriott International. As a
result of the Marriott International Distribution and related transactions,
the assets, liabilities and businesses of the Company have changed
substantially.
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------
1996(1) 1995(2) 1994(3) 1993(3)(4)(5) 1992(5)
------- ------- ------- ------------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues....................... $ 732 $ 484 $ 380 $ 659 $7,778
Operating profit before
minority interest, corporate
expenses and interest......... 233 114 152 92 406
Income (loss) from continuing
operations.................... (13) (62) (13) 56 75
Net income (loss) (6).......... (13) (143) (25) 50 85
Earnings (loss) per common
share: (7)
Income (loss) from continuing
operations.................. (.07) (.39) (.09) .39 .55
Net income (loss) (6)........ (.07) (.90) (.17) .35 .64
Cash dividends declared per
common share.................. -- -- -- .14 .28
BALANCE SHEET DATA:
Total assets................... $5,152 $3,557 $3,366 $3,362 $5,886
Debt (8)....................... 2,647 2,178 1,871 2,113 2,824
</TABLE>
- --------
(1) Fiscal year 1996 includes 53 weeks.
(2) Operating results for 1995 include a $10 million pre-tax charge to write
down the carrying value of five limited service properties to their net
realizable value and a $60 million pre-tax charge to write down an
undeveloped land parcel to its estimated sales value. In 1995, the Company
recognized a $20 million extraordinary loss, net of taxes, on the
extinguishment of debt.
(3) In 1994, the Company recognized a $6 million extraordinary loss, net of
taxes, on the required redemption of senior notes. In 1993, the Company
recognized a $4 million extraordinary loss, net of taxes, on the
completion of an exchange offer for its then outstanding bonds.
(4) Operating results for 1993 include the operations of Marriott
International only through the Marriott International Distribution date of
October 8, 1993. These operations had a net pre-tax effect on income of
$211 million for the year ended December 31, 1993 and are recorded as
"Profit from operations distributed to Marriott International" on the
Company's consolidated statements of operations and are, therefore, not
included in sales, operating profit before corporate expenses and
interest, interest expense and interest income for the same period. The
net pre-tax effect of these operations is, however, included in income
before income taxes, extraordinary item and cumulative effect of changes
in accounting principles and in net income for the same periods. Statement
of Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income
Taxes," was adopted in the first quarter of 1993. In the second quarter of
1993, the Company changed its accounting method for assets held for sale.
During 1993, the Company recorded a $34 million credit to reflect the
adoption of SFAS No. 109 and a $32 million charge, net of taxes, to
reflect the change in its accounting method for assets held for sale.
(5) Operating results in 1993 and 1992 included pre-tax expenses related to
the Marriott International Distribution totaling $13 million and $21
million, respectively.
(6) The Company recorded a loss from discontinued operations, net of taxes, as
a result of the Special Dividend of $61 million in 1995, $6 million in
1994, and $4 million in 1993, and income from discontinued operations, net
of taxes, of $10 million in 1992. The 1995 loss from discontinued
operations includes a pre-tax charge of $47 million for the adoption of
SFAS No. 121, "Accounting For the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of," a pre-tax $15 million restructuring
charge and an extraordinary loss of $10 million, net of taxes, on the
extinguishment of debt.
(7) Earnings per common share is computed on a fully diluted basis by dividing
net income available for common stock by the weighted average number of
outstanding common and common equivalent shares, plus other potentially
dilutive securities. Common equivalent shares and other potentially
dilutive securities have been excluded from the weighted average number of
outstanding common shares for 1994 through 1996, as they are antidilutive.
(8) Includes convertible subordinated debt of $20 million and $228 million at
December 31, 1993 and January 1, 1993, respectively.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Revenues primarily represent house profit from the Company's hotel
properties, net gains (losses) on property transactions, equity in the
earnings of affiliates and lease rentals from the Company's senior living
communities (1994 only). 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 included in the accompanying
financial statements). 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 for its full-service properties and
remained flat or decreased slightly for its leased limited-service properties.
Increases in room rates have generally been achieved by the managers through
shifting occupancies away from discounted group business to higher-rated group
and transient business. This has been made possible by increased travel due to
improved economic conditions and by the favorable supply/demand
characteristics existing in the lodging industry today, particularly in the
full-service segment. The Company expects this supply/demand imbalance,
particularly in the full-service segment, to continue, which should result in
improved REVPAR and operating profits at its hotel properties in the near
term. However, there can be no assurance that REVPAR will continue to increase
in the future.
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 full-service hotel
performance resulted in certain of the Company's properties reaching levels
which allowed the manager to share in the growth of profits in the form of
higher management fees. The Company views this as a positive development
because it helps to strengthen the alignment of the managers' interest with
the Company's. The Company expects that this trend will continue in 1997 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.
1996 COMPARED TO 1995
Revenues. Revenues primarily represent house profit from the Company's hotel
properties, net gains (losses) on property transactions and equity in earnings
of affiliates. Revenues increased $248 million, or 51%, to $732 million in
1996. The Company's revenue and operating profit were impacted by:
. improved lodging results for comparable full-service hotel properties;
. the addition of nine full-service hotel properties during 1995 and 23
full-service properties during 1996;
. the 1996 and 1995 sale and leaseback of 53 of the Company's Courtyard
properties and 18 of the Company's Residence Inns;
. the 1996 change in the estimated depreciable lives and salvage values for
certain hotel properties which resulted in additional depreciation
expense of $15 million;
16
<PAGE>
. a $4 million charge in 1996 to write down an undeveloped land parcel to
its net realizable value based on expected sales value (included in "Net
gains (losses) on property transactions");
. the 1996 results including 53 weeks versus 52 weeks in 1995;
. the $60 million pre-tax charge in 1995 to write down the carrying value
of one undeveloped land parcel to its estimated sales value;
. a $10 million pre-tax charge in 1995 to write down the carrying value of
certain Courtyard and Residence Inn properties held for sale to their net
realizable values included in "Net gains (losses) on property
transactions"); and
. the 1995 sale of four Fairfield Inns.
Hotel revenues increased $243 million, or 51%, to $717 million in 1996, as
all three of the Company's lodging concepts reported growth in REVPAR. Hotel
sales increased $590 million, or 44%, to $1.9 billion in 1996, reflecting the
REVPAR increases for comparable units and the addition of full-service
properties during 1995 and 1996.
Improved results for the Company's full-service hotels were driven by strong
increases in REVPAR for comparable units of 11% in 1996. Results were further
enhanced by almost a two percentage point increase in the house profit margin
for comparable full-service properties. On a comparable basis for the
Company's full-service properties, average room rates increased 8%, while
average occupancy increased over two percentage points.
The Company's leased limited-service properties continued to perform well.
The Company's moderate price Courtyard properties reported an overall REVPAR
increase of 7%. The increase in REVPAR was primarily a result of a 7% increase
in average room rates and a slight decrease in average occupancy. The
Company's extended-stay Residence Inns reported a REVPAR increase of 5%, due
primarily to increases in average room rates of almost 7%, while average
occupancy decreased over one percentage point. 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. However, there can be
no assurance that REVPAR will continue to increase in the future.
During 1996, the Company recorded a charge of $4 million to write down one
undeveloped land parcel to its current net realizable value based on current
negotiations for the sale of this parcel. Previously, the net realizable value
was based on an agreement to sell the parcel to a single buyer, which was
terminated.
Operating Costs and Expenses. Operating costs and expenses principally
consist of depreciation, management fees, real and personal property taxes,
ground, building and equipment rent, insurance, and certain other costs.
Operating costs and expenses increased $129 million to $499 million for 1996,
primarily representing increased hotel operating costs, including
depreciation, partially offset by the $60 million pre-tax charge in 1995 to
write down the carrying value of one undeveloped land parcel to its estimated
sales value. Hotel operating costs increased $180 million to $461 million,
primarily due to the addition of 32 full-service properties during 1995 and
1996, increased management fees and rentals tied to improved property results
and a change in the depreciable lives and salvage values of certain large
hotel properties ($15 million). As a percentage of hotel revenues, hotel
operating costs and expenses increased to 64% of revenues for 1996, from 59%
of revenues for 1995, reflecting the impact of the lease payments on the
Courtyard and Residence Inn properties which have been sold and leased back,
and the change in depreciable lives and salvage values for certain large hotel
properties discussed above, as well as the shifting emphasis to full-service
properties. Full-service hotel rooms accounted for 100% of the Company's total
hotel rooms on January 3, 1997, versus 84% on December 29, 1995.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's operating profit increased $119
million, or 104%, to $233 million in 1996. Hotel operating profit increased
$63 million, or 33%, to $256 million, or 36% of hotel revenues, for 1996
compared to $193 million,
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or 41% of hotel revenues, for 1995. Across the board, the Company's hotels
recorded substantial improvements in comparable operating results. In
addition, several hotels, including the New York Marriott Marquis, the New
York Marriott East Side, the Philadelphia Marriott, the San Francisco Marriott
and the Miami Airport Marriott posted particularly significant improvements in
operating profit for the year. The Company's Atlanta properties also posted
outstanding results, primarily due to the 1996 Summer Olympics. Additionally,
several hotels which recently converted to the Marriott brand, including the
Denver Marriott Tech Center, the Marriott's Mountain Resort at Vail and the
Williamsburg Marriott, recorded strong results compared to the prior year as
they completed renovations and began to realize the benefit of their
conversions.
Corporate Expenses. Corporate expenses increased $7 million to $43 million
in 1996. As a percentage of revenues, corporate expenses decreased to under 6%
of revenues in 1996 from over 7% of revenues in 1995. This reflects the
Company's efforts to carefully control its corporate administrative expenses
in spite of the substantial growth in revenues.
Interest Expense. Interest expense increased 33% to $237 million in 1996,
primarily due to the additional mortgage debt of approximately $696 million
incurred in connection with the 1996 full-service hotel additions and the
issuance of $350 million of notes issued by HMC Acquisition Properties, Inc.,
a wholly-owned subsidiary of the Company, in December 1995, partially offset
by the net impact of the 1995 redemptions of Host Marriott Hospitality, Inc.
notes ("Hospitality Notes").
Loss from Continuing Operations. The loss from continuing operations for
1996 decreased $49 million to $13 million, as a result of the changes
discussed above.
Net Loss. The Company's net loss in 1996 was $13 million, compared to a net
loss of $143 million in 1995, which included a $61 million loss from
discontinued operations and a $20 million extraordinary loss primarily
representing premiums paid on bond redemptions and the write-off of deferred
financing fees and discounts on the debt. The net loss for 1996 was $.07 per
common share, compared to a loss of $.90 per common share for 1995.
1995 COMPARED TO 1994
Revenues. Revenues increased $104 million, or 27%, to $484 million in 1995.
The Company's revenue and operating profit from continuing operations were
impacted by:
. improved lodging results;
. the net addition of 28 full-service hotel properties during 1994 and
1995;
. the 1995 sale and leaseback of 37 of the Company's Courtyard properties;
. the $60 million pre-tax charge in 1995 to write down the carrying value
of one undeveloped land parcel to its estimated sales value;
. the $10 million pre-tax charge in 1995 to write down the carrying value
of certain Courtyard and Residence Inn properties held for sale to their
net sales values;
. the 1994 sale of the Company's senior living communities;
. the 1994 and 1995 sales of the Company's Fairfield Inns; and
. the 1994 reduction in general liability and workers' compensation self-
insurance program reserves related to the Company's continuing operations
of $4 million.
Hotel revenues increased $136 million, or 40%, to $474 million in 1995, as
all three of the Company's lodging concepts reported growth in REVPAR. The
hotels added by the Company in 1994 and 1995 provided $134 million of revenue
in 1995. Excluding the impact of the addition of full-service properties, the
sales of the Fairfield Inns, and the sale and leaseback of 37 Courtyards,
comparable hotel revenues increased $28 million, or 11%, in 1995 over 1994.
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Revenue for nearly all of the Company's full-service hotels, resorts and
suites for 1995 was improved or comparable to the results for 1994. Increases
in REVPAR of 7% for comparable units led to improved results. On a comparable
basis for the Company's full-service properties, average room rates increased
9%, while average occupancy decreased over one percentage point.
The Company's moderate-price Courtyard properties reported nearly an 8%
increase in REVPAR due to a 7% increase in average room rates and a small
increase in occupancy.
The Company's extended-stay Residence Inns reported an 8% increase in REVPAR
due to an increase in average room rates of 7%, combined with a one percentage
point increase in average occupancy.
In the third quarter of 1994, the Company sold 26 of its 30 Fairfield Inns
for $114 million and in the second quarter of 1995, the Company sold its four
remaining Fairfield Inns to the same buyer for net cash proceeds of $6
million. Revenues and operating profit in 1995 for the four remaining
Fairfield Inns prior to their disposition were comparable to 1994.
The net loss on property transactions for 1995 includes the pre-tax charge
of $10 million to write down the carrying value of five individual Courtyard
and Residence Inn properties held for sale to their estimated net sales
values, partially offset by the deferred gain amortization related to the 1994
and 1993 sales of the Company's remaining limited partner interests in the
Residence Inn USA Limited Partnership.
Operating Costs and Expenses. Operating costs and expenses increased $142
million to $370 million for 1995 primarily representing increased hotel
operating costs, partially offset by the impact on operating costs from the
1994 sale of the senior living communities. Hotel operating costs increased
$83 million to $281 million for 1995 primarily due to the net addition of 28
full-service properties during 1994 and 1995 and increased management fees and
rentals tied to improved property results, net of the impact of the sales of
certain limited-service properties discussed above. As a percentage of hotel
revenues, hotel operating costs and expenses remained unchanged at 59% of
revenues in both 1995 and 1994. During the fourth quarter of 1995, the Company
determined that a 174-acre undeveloped land site would no longer be developed
into an office project over an extended time period as previously planned,
but, instead, the Company decided to market the site for near-term sale. As a
result of this change in strategy, a pre-tax charge of $60 million was
recorded to reduce the asset to its estimated sales value.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's operating profit decreased $38
million, or 25%, to $114 million in 1995. Hotel operating profit increased $53
million, or 38%, to $193 million, or 41% of revenues, for 1995 from $140
million, or 41% of revenues, for 1994. The hotels added by the Company in 1994
and 1995 provided $65 million of operating profit for 1995. Excluding the
impact of the non-comparable items discussed earlier, hotel operating profit
increased $29 million, or 31%, over 1994. Several hotels, including the New
York Marriott Marquis, Santa Clara Marriott and the Newport Beach Marriott
posted significant improvements in operating profit.
Corporate Expenses. Corporate expenses increased $5 million to $36 million
in 1995 primarily due to an increase in the number of employees and overall
higher corporate administrative and travel costs associated with higher
revenues. As a percentage of revenues, corporate expenses decreased to 7% of
revenues in 1995 from 8% in 1994.
Interest Expense. Interest expense increased by 8% to $178 million in 1995
primarily due to the additional debt incurred in connection with the 1994 and
1995 full-service hotel acquisitions, increased interest rates on the
Company's variable rate debt, and the decreased benefit from the Company's
interest rate swap agreements, which was partially offset by the net impact of
the 1994 and 1995 redemptions of certain senior notes and the MI Line of
Credit.
Continuing Operations. The loss from continuing operations for 1995
increased $49 million to $62 million principally due to the changes in
operating profit discussed above and the increase in corporate expenses and
interest expense.
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Discontinued Operations. The loss from discontinued operations for 1995 of
$61 million principally was due to a $10 million extraordinary loss on the
redemption and defeasance of certain debt in 1995, a charge of approximately
$47 million before taxes for the adoption of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
a $15 million pre-tax charge for the restructuring of HM Services' business
processes and $9 million of expenses related to the Special Dividend.
The Company wrote down 15 individual operating units in connection with the
adoption of SFAS No. 121 and the change in accounting to assessment of
impairment on an individual operating unit basis. Approximately 73% of the
write-down related to two operating units, the Florida Turnpike (approximately
$25 million) and the Orlando Airport (approximately $9 million). The Company
wrote off all of the assets related to these two operating units due to
projected future negative cash flows at such operating units. While the
Company was aware that these two operating units had been incurring negative
cash flows since the late 1980s (including negative cash flows totaling
approximately $2.4 million in 1995), the effects on the Company of such
negative cash flows for any period had been offset by positive cash flows from
other operating units comprising the Operating Group's airport and tollroad
business lines. As of December 29, 1995, the total projected net cash flow
deficit for the remaining terms of the leases of the 15 operating units
written down was approximately $45 million. As a result of the consummation of
the Special Dividend on December 29, 1995, the business operations of the
Company no longer include the Operating Group and, therefore, the projected
future negative cash flows from these operating units will have no effect on
the Company's future financial condition or results of operations.
Extraordinary Item. In connection with the redemption and defeasance of
certain of the Company's debt in 1995, the Company recognized an extraordinary
loss of $30 million ($20 million after taxes), primarily representing premiums
paid on the redemption of Hospitality Notes of $13 million and the write-off
of deferred financing fees and discounts on the Hospitality Notes and HMC
Acquisition Properties, Inc.'s $230 million revolving credit facility (the
"Revolver").
Net Loss. The Company's net loss for 1995 increased $118 million to $143
million. The net loss for 1995 was $.90 per share, compared to $.17 per share
for 1994.
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 2, 1996, the Host Marriott Financial Trust
(the "Issuer"), a wholly-owned subsidiary trust of the Company, issued 11
million shares of 6 3/4% convertible quarterly income preferred securities
(the "Convertible Preferred Securities"), with a liquidation preference of $50
per share (for a total liquidation amount of $550 million). The Convertible
Preferred Securities represent an undivided beneficial interest in the assets
of the Issuer and, pursuant to various agreements entered into in connection
with the transaction, are fully, irrevocably and unconditionally guaranteed by
the Company. Proceeds from the issuance of the Convertible Preferred
Securities were invested in 6 3/4% Convertible Subordinated Debentures (the
"Debentures") due December 2, 2026 issued by the Company. The Issuer exists
solely to issue the Convertible Preferred Securities and its own common
securities (the "Common Securities") and invest the proceeds therefrom in the
Debentures, which are its sole assets. Each of the Convertible Preferred
Securities is convertible at the option of the holder into shares of Company
common stock at the rate of 2.6876 shares per Convertible Preferred Security
(equivalent to a conversion price of $18.604 per share of Company common
stock). The Debentures are convertible at the option of the holders into
shares of Company common stock at a conversion rate of 2.6876 shares for each
$50 in principal amount of Debentures. The Issuer will only convert Debentures
pursuant to a notice of conversion by a holder of Securities. During 1996, no
shares were converted into common stock. Holders of the Convertible Preferred
Securities are entitled to receive preferential cumulative cash distributions
at an annual rate of 6 3/4% accruing from the original issue date, commencing
March
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1, 1997, and payable quarterly in arrears thereafter. The distribution rate
and the distribution and other payment dates for the Convertible Preferred
Securities will correspond to the interest rate and interest and other payment
dates on the Debentures. The Company may defer interest payments on the
Debentures for a period not to exceed 20 consecutive quarters. If interest
payments on the Debentures are deferred, so too are payments on the
Convertible Preferred Securities. Under this circumstance, the Company will
not be permitted to declare or pay any cash distributions with respect to its
capital stock or debt securities that rank pari passu with or junior to the
Debentures. Subject to certain restrictions, the Convertible Preferred
Securities are redeemable at the Issuer's option upon any redemption by the
Company of the Debentures after December 2, 1999. Upon repayment at maturity
or as a result of the acceleration of the Debentures upon the occurrence of a
default, the Debentures shall be subject to mandatory redemption, from which
the proceeds will be applied to redeem Convertible Preferred Securities and
Common Securities, together with accrued and unpaid distributions.
On March 27, 1996, the Company completed the issuance of 31.6 million shares
of common stock for net proceeds of nearly $400 million.
On December 20, 1995, HMC Acquisition Properties, Inc. ("Acquisitions"), an
indirect wholly-owned subsidiary of the Company, issued $350 million of 9%
senior notes (the "Acquisitions Notes") to several initial purchasers (the
"December 1995 Debt Offering"). The Acquisitions Notes were issued at par and
have a final maturity of December 2007. The net proceeds totaled $340 million
and were utilized to repay in full the outstanding borrowings of $210 million
under Acquisitions' $230 million revolving credit facility (the "Revolver"),
which was then terminated, to acquire three full-service properties and to
finance future acquisitions of full-service hotel properties with the
remaining proceeds. The Acquisitions Notes are guaranteed by Acquisitions'
subsidiaries. The indenture governing the Acquisitions Notes contains
covenants that, among other things, limit the ability of Acquisitions 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
Acquisitions' subsidiaries, and enter into certain mergers and consolidations.
In addition, under certain circumstances, Acquisitions will be required to
offer to purchase the Acquisitions Notes at par value with the proceeds of
certain asset sales. Acquisitions will not be required to make principal
payments on the Acquisitions Notes until maturity, except in the event of
certain changes in control. Distributions by Acquisitions to the Company are
available through the payment of dividends only to the extent that the
cumulative amount of such dividends from December 20, 1995 does not exceed $15
million plus an amount equal to the excess of Acquisitions' EBITDA over 200%
of Acquisitions' interest expense, as defined in the indenture, plus the
amount of capital contributions to Acquisitions subsequent to December 20,
1995. Acquisitions paid dividends to the Company of $20 million in 1996 as
permitted under the indenture. Acquisitions has the ability to enter into a
revolving credit facility of up to $25 million, which would be available for
Acquisitions' working capital, and other general corporate purposes, and to
incur other indebtedness as specified in the indenture.
On May 25, 1995, two wholly-owned subsidiaries of Host Marriott Hospitality,
Inc. ("Hospitality"), a wholly-owned subsidiary of the Company, issued an
aggregate of $1 billion of 9.5% senior secured notes in two concurrent
offerings. HMH Properties, Inc. ("Properties"), the owner of 31 of the
Company's 79 full-service hotel properties at January 3, 1997 and Host
Marriott Travel Plazas, Inc. ("HMTP"), the operator/manager of HM Services'
food, beverage and merchandise concessions business, issued $600 million and
$400 million, respectively, of senior notes secured by the stock of certain of
their respective subsidiaries. The bonds were issued at par and have a final
maturity of May 2005. The net proceeds of approximately $971 million were used
to defease, and subsequently redeem, all of Hospitality's remaining bonds (the
"Hospitality Notes") and to repay borrowings under the line of credit with
Marriott International. The Properties Notes are secured by a pledge of the
stock of certain of Properties' subsidiaries and are guaranteed, jointly and
severally, by certain of Properties' subsidiaries. The indenture governing the
Properties Notes contains covenants that, among other things, limit the
ability of Properties and its subsidiaries to incur additional indebtedness
and issue preferred stock, pay dividends or make other distributions,
repurchase capital stock or subordinated indebtedness, create certain liens,
enter into certain transactions with affiliates, sell certain assets, issue or
sell stock of Properties' subsidiaries, and enter into
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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
paid dividends to the Company of $9 million and $36 million in 1996 and 1995,
respectively, as permitted under the indenture. Properties has the ability to
enter into a revolving credit facility of up to $35 million, which would be
available for Properties' working capital and other general corporate
purposes, and to incur other indebtedness as specified in the indenture. The
HMTP senior notes were included in the HM Services' Special Dividend.
Under the indentures for the Acquisitions Notes and the Properties Notes,
proceeds from the sale of assets within the subsidiary issuing the notes may
be used for the acquisition of new properties subject to certain limitations.
During 1995, the Company replaced its line of credit with the MI Line of
Credit pursuant to which the Company has the right to borrow up to $225
million to fund (i) obligations under certain guarantees made by the Company,
(ii) payments of principal on specified recourse debt of the Company and its
subsidiaries, (iii) payment of interest on amounts borrowed under the MI 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 MI 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 MI Line of Credit. The MI 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 MI Line of Credit and the Company and
certain of its subsidiaries have adequately reserved for debt maturities over
a six-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 MI Line of Credit) and the
proceeds of specified stock issuances exceed 170% of the aggregate of certain
specified charges.
In January 1994, the Company raised $230 million of net proceeds from the
sale of 20.1 million shares of common stock. Additionally, the Company
obtained the Revolver for up to $230 million with a group of commercial banks
for the acquisition of full-service hotels. The common stock and Revolver
proceeds were utilized to fund the acquisition of full-service hotel
properties. As discussed above, the Revolver was repaid in full, and
terminated, with certain proceeds from the December 1995 Debt Offering.
There are no plans to pay regular cash dividends on the Company's common
stock in the near future, and the Company is prohibited from paying dividends
on its common stock if amounts are outstanding under the MI Line of Credit or
interest on the Debentures is deferred.
Asset Dispositions. The Company historically has sold, and may from time to
time in the future consider opportunities to sell, certain of its real estate
properties at attractive prices when the proceeds could be redeployed into
investments with more favorable returns. During the first and second quarters
of 1996, 16 of the Company's Courtyard properties and 18 of the Company's
Residence Inn properties were sold (subject to a leaseback) to the REIT for
approximately $314 million and the Company will receive approximately $35
million upon expiration of the leases. A gain on the transactions of
approximately $46 million has been deferred and will be amortized over the
initial term of the leases. 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
1995 transactions of approximately $297 million and will receive approximately
$33 million upon expiration of the leases. A deferred gain of $14 million on
the sale/leaseback transactions will be amortized over the initial term of the
leases. In 1995, the Company also sold
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its four remaining Fairfield Inns for net cash proceeds of approximately $6
million, which approximated their carrying value, and the Springfield Radisson
Hotel for net cash proceeds of approximately $3 million, which approximated
its carrying value. During the second and third quarters of 1994, the Company
sold 14 senior living communities to an unrelated party for approximately $320
million, which approximated the communities' carrying value. Additionally,
during the third quarter of 1994, the company sold 26 of its Fairfield Inns to
an unrelated party. The net proceeds from the sale of the hotels was
approximately $114 million, which exceeded the carrying value of the hotels by
approximately $12 million, and such excess has been deferred. Approximately
$27 million of the Fairfield Inn proceeds was payable in the form of a note
from the purchaser.
In cases where the Company has made a decision to dispose of particular
properties, the Company assesses impairment of each individual property to be
sold on the basis of expected sales price less estimated costs of disposal.
Otherwise, the Company assesses impairment of its real estate properties based
on whether it is probable that undiscounted future cash flows from such
properties will be less than their net book value. If a property is impaired,
its basis is adjusted to its fair market value. In the second quarter of 1995,
the Company made a determination that its owned Courtyard and Residence Inn
properties were held for sale and recorded a $10 million charge to write down
the carrying value of five individual Courtyard and Residence Inn properties
to their estimated net sales values.
Capital Acquisitions, Additions and Improvements. The Company seeks to grow
primarily through opportunistic acquisitions of full-service hotels. The
Company believes that the upscale and luxury full-service segments of the
market offer opportunities to acquire assets at attractive multiples of cash
flow and at substantial discounts to replacement value, including under-
performing hotels which can be improved by conversion to the Marriott or Ritz-
Carlton brands. During 1996, the Company acquired six full-service hotels
(1,964 rooms) for an aggregate purchase price of $189 million and controlling
interests in 17 additional full-service properties (8,917 rooms) for an
aggregate purchase price of approximately $1.1 billion (including the
assumption of $696 million of debt). During 1995, the Company acquired nine
hotels totaling approximately 3,900 rooms in separate transactions for
approximately $390 million ($141 million of which was financed through first
mortgage financing on four of the hotels). During 1994, the Company acquired
15 full-service hotels totaling approximately 6,100 rooms (including one 199-
room hotel subsequently sold in 1995) for approximately $440 million. The
Company also provided 100% financing totaling approximately $35 million to an
affiliated partnership, in which the Company owns the sole general partner
interest, for the acquisition of two full-service hotels (totaling another 684
rooms) by the partnership. Additionally, the Company acquired a controlling
interest in one 662-room, full-service hotel through an equity investment of
$16 million and debt financing of $36 million (the debt was subsequently sold
in 1995). The Company considers all of these properties as owned hotels for
accounting purposes. During 1996, the Company also purchased the mortgage loan
secured by the 504-room New York Marriott Financial Center for $101 million
and then completed the acquisition of the hotel in early 1997.
During the first quarter of 1997, the Company acquired a controlling
interest in the Marriott Hotel Properties Limited Partnership ("MHPLP").
MHPLP, an affiliated partnership of the Company, owns the 1,503-room Marriott
Orlando World Center and a 50.5% controlling partnership interest in the 624-
room Marriott Harbor Beach Resort. Also, in 1997, the Company acquired the
306-room Ritz-Carlton, Marina del Rey, for $57 million and a controlling
interest in the 197-room Waterford Hotel in Oklahoma City, Oklahoma, for $18
million, which has been converted to the Marriott brand. The Company is
continually engaged in discussions with respect to other potential acquisition
properties.
Under the terms of its management agreements, the Company is generally
required to spend approximately 5% of gross hotel sales to cover the capital
needs of the properties, including major guest room and common area
renovations which occur every five to six years. The Company anticipates
spending approximately $120 million annually on the renovation and
refurbishment of its 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
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International which was repaid in the fourth quarter of 1996. In March 1997,
the Company obtained a $90 million mortgage which bears interest at a fixed
rate of 8.49% and matures in 2009. Construction of a second hotel in
Philadelphia, the 419-room Philadelphia Airport Marriott Hotel (the "Airport
Hotel"), was completed and opened on November 1, 1995. The Airport Hotel was
financed principally with $40 million of proceeds from an industrial
development bond financing. The Company also completed construction of a 300-
room Residence Inn in Arlington, Virginia, which opened in March 1996. Capital
expenditures for these three hotels totaled $11 million in 1996, $64 million
in 1995 and $104 million in 1994.
While the Company's portfolio of lodging properties consists almost entirely
of upscale and luxury full-service hotels, management continually considers
the merits of diversifying into other compatible lodging related real estate
assets that offer strong current economic benefits and growth prospects. In
early 1997, the Company signed a letter of intent to acquire 29 premier senior
living communities from Marriott International for $433 million. The Company
has developed a plan to add over one thousand expansion units to these
properties by January 1999 for an additional $107 million. The Company intends
to finance its acquisition program through the use of internally generated
funds, additional equity and moderate levels of indebtedness.
Debt Payments. At January 3, 1997, the Company and its subsidiaries had
approximately $1 billion of senior notes ($950 million of which have been
issued and guaranteed by wholly-owned subsidiaries of the Company),
approximately $1.5 billion of non-recourse mortgage debt secured by real
estate assets and approximately $100 million of unsecured and other debt. The
parent company was obligated on approximately $176 million of recourse debt as
of January 3, 1997.
Maturities over the next five years were limited to $723 million as of
January 3, 1997, a substantial portion of which represented the maturity of
the mortgage on the New York Marriott Marquis of approximately $280 million in
1998 and the maturity of the debt on the San Francisco Marriott of
approximately $230 million in 2001. In the first quarter of 1997, the Company
repurchased the debt on the San Francisco Marriott for approximately $219
million, representing an $11 million extraordinary gain before taxes and
closing costs. The Company's interest coverage, defined as EBITDA divided by
cash interest expense, was 2.0 times in 1996 and 1.8 times in 1995.
The Company currently is party to interest rate exchange agreements with
three financial institutions with an aggregate notional amount of $525
million. These agreements are with Citibank, N.A., New York, Salomon Brothers
and the Industrial Bank of Japan Trust Company (the "Contracting Parties").
Under certain of these agreements aggregating $400 million, the Company pays
interest based on the specified floating rates of three- and six-month LIBOR
(average rate of 5.6% at January 3, 1997) and collects interest at fixed rates
(average rate of 7.1% at January 3, 1997) through May 1997. Under the
remaining agreements aggregating $125 million, the Company collects interest
based on specified floating interest rates of one-month LIBOR (rate of 5.8% at
January 3, 1997) and pays interest at fixed rates (average rate of 6.5% at
January 3, 1997). These agreements expire in 1997 and 1998. The Company
realized a net reduction of interest expense of $6 million in 1996, $5 million
in 1995 and $11 million in 1994 related to interest rate exchange agreements.
The Company monitors the creditworthiness of the Contracting Parties by
evaluating credit exposure and referring to the ratings of widely accepted
credit rating services. The Standard and Poors' long-term debt ratings for the
contracting parties are all BBB or better. The Company is exposed to credit
loss in the event of non-performance by the Contracting Parties; however, the
Company does not anticipate non-performance by the Contracting Parties.
Cash Flows. The Company's cash flow from continuing operations in 1996, 1995
and 1994 totaled $205 million, $110 million and $75 million, respectively.
The Company's cash used in investing activities from continuing operations
in 1996, 1995 and 1994 totaled $504 million, $156 million and $135 million,
respectively. Cash used in 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.
24
<PAGE>
The Company's cash from financing activities from continuing operations was
$806 million for 1996, $204 million for 1995 and $24 million for 1994. The
Company's cash from financing activities from continuing operations primarily
consists of the proceeds from equity and debt offerings, borrowings under the
MI Line of Credit, mortgage financing on certain acquired hotels, offset by
redemptions and payments on senior notes, the MI Line of Credit and other
scheduled principal payments.
EBITDA. The Company's consolidated Earnings Before Interest Expense, Taxes,
Depreciation, Amortization and other non-cash items ("EBITDA") increased $131
million, or 42%, to $442 million in 1996 from $311 million in 1995. 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 such data 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 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.
Hotel EBITDA increased $119 million, or 37%, to $439 million in 1996 from
$320 million in 1995. Full-service hotel EBITDA increased $165 million, or
66%, to $416 million in 1996 from $251 million in 1995. Full-service hotel
EBITDA from comparable hotel properties increased 19% on a REVPAR increase of
11%.
The following is a reconciliation of EBITDA to the Company's loss from
continuing operations (in millions):
<TABLE>
<CAPTION>
FIFTY-THREE WEEKS ENDED FIFTY-TWO WEEKS ENDED
JANUARY 3, 1997 DECEMBER 29, 1995
----------------------- ---------------------
<S> <C> <C>
EBITDA..................... $ 442 $ 311
Interest expense........... (237) (178)
Dividends on Convertible
Preferred Securities...... (3) --
Depreciation and amortiza-
tion...................... (168) (122)
Income taxes............... (5) 13
Loss on disposition of
assets and other non-cash
charges, net.............. (42) (86)
----- -----
Loss from continuing
operations.............. $ (13) $ (62)
===== =====
</TABLE>
The ratio of earnings to fixed charges was 1.0 to 1.0, .7 to 1.0 and .9 to
1.0 in 1996, 1995 and 1994, respectively. The deficiency of earnings to fixed
charges of $70 million and $12 million for 1995 and 1994, respectively, is
largely the result of depreciation and amortization of $122 million in 1995
and $113 million in 1994. In addition, the deficiency for 1995 was impacted by
the $60 million pre-tax charge to write down the carrying value of one
undeveloped land parcel to its estimated sales value.
Partnership Activities. The Company serves as general partner or the
managing general partner of numerous limited partnerships which own 253 hotels
as of January 3, 1997, managed by Marriott International. Debt of the hotel
limited partnerships is typically secured by first mortgages on the properties
and is generally nonrecourse to the partnership and the partners. However, the
Company has committed to advance amounts to these affiliated limited
partnerships, if necessary, to cover certain future debt service requirements.
Such commitments were limited, in the aggregate, to $117 million at January 3,
1997. Subsequent to year-end, such commitments were reduced to $71 million.
Net amounts repaid to the Company under these guarantees totaled $13 million
in 1996. Net fundings by the Company under these guarantees amounted to $8
million in 1995 and $2 million for 1994.
Leases. The Company leases certain property and equipment under
noncancelable operating leases, including the long-term ground leases for
certain hotels, generally with multiple renewal options. The leases
25
<PAGE>
related to the 53 Courtyard properties and 18 Residence Inn properties sold
during 1995 and 1996 are non-recourse to the Company and contain provisions
for the payment of contingent rentals based on a percentage of sales in excess
of stipulated amounts. The Company remains contingently liable on certain
leases related to divested non-lodging properties. Management considers the
likelihood of any substantial funding related to these divested properties'
leases to be remote.
Inflation. The Company's lodging properties are impacted by inflation
through its effect on increasing costs and on the managers' ability to
increase room rates. Unlike other real estate, hotels have the ability to
change room rates on a daily basis, so the impact of higher inflation
generally can be passed on to customers.
A substantial portion of the Company's debt bears interest at fixed rates.
This debt structure largely mitigates the impact of changes in the rate of
inflation on future interest costs. However, the Company currently is exposed
to variable interest rates through four interest rate exchange agreements with
an aggregate notional amount of $400 million. These agreements are with
Citibank, N.A., New York, Salomon Brothers and the Industrial Bank of Japan
Trust Company. Under these agreements, the Company pays interest based on the
specified floating rates of three- and six-month LIBOR (average rate of 5.6%
at January 3, 1997) and collects interest at fixed rates (average rate of 7.1%
at January 3, 1997) through May 1997. In addition, outstanding borrowings
under the MI Line of Credit (no borrowings were outstanding at January 3,
1997) and the mortgage on the San Diego Marriott Hotel and Marina ($203
million at January 3, 1997) bear interest based on variable rates.
Accordingly, the amount of the Company's interest expense under the interest
rate swap agreements and the floating rate debt for a particular year will be
affected by changes in short-term interest rates.
Accounting Standards. In the first quarter of 1995, the Company adopted SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan." Adoption of SFAS
No. 114 did not have a material effect on the Company's consolidated financial
statements.
Effective September 9, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." The adoption of SFAS No. 121 did not have any effect on the
Company's continuing operations. See the discussion below for a discussion of
the impact of the adoption of SFAS No. 121 on discontinued operations.
SFAS No. 121 requires that an impairment loss be recognized when the
carrying amount of an asset exceeds the sum of the undiscounted estimated
future cash flows associated with the asset. Under SFAS No. 121, the Company
reviewed the impairment of its assets employed in its operating group business
lines (airport, toll plaza and sports and entertainment) on an individual
operating unit basis. For each individual operating unit determined to be
impaired, an impairment loss equal to the difference between the carrying
value and the fair market value of the unit's assets was recognized. Fair
market value was estimated to be the present value of expected future cash
flows of the individual operating unit, as determined by management, after
considering such factors as future air travel and toll-pay vehicle data and
inflation. As a result of the adoption of SFAS No. 121, the Company recognized
a non-cash, pre-tax charge against earnings during the fourth quarter 1995 of
$47 million, which has been reflected in discontinued operations.
In the fourth quarter of 1996, the Company adopted SFAS No. 123, "Accounting
for Stock Based Compensation." The adoption of SFAS No. 123 did not have a
material effect on the Company's financial statements. The Company continues
to apply APB Opinion 25 in accounting for its employee stock plans.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial information is included on the pages indicated:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. 28
Consolidated Balance Sheets as of January 3, 1997 and December 29, 1995... 29
Consolidated Statements of Operations for the Fiscal Years Ended January
3, 1997, December 29, 1995 and December 30, 1994......................... 30
Consolidated Statements of Shareholders' Equity for Fiscal Years Ended
January 3, 1997, December 29, 1995 and December 30, 1994................. 31
Consolidated Statements of Cash Flows for Fiscal Years Ended January 3,
1997, December 29, 1995 and December 30, 1994............................ 32
Notes to Consolidated Financial Statements................................ 33
</TABLE>
27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Host Marriott Corporation:
We have audited the accompanying consolidated balance sheets of Host
Marriott Corporation and subsidiaries as of January 3, 1997 and December 29,
1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three fiscal years in the period ended
January 3, 1997. These financial statements and the schedules referred to
below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Host
Marriott Corporation and subsidiaries as of January 3, 1997 and December 29,
1995, and the results of their operations and their cash flows for each of the
three fiscal years in the period ended January 3, 1997 in conformity with
generally accepted accounting principles.
As discussed in Notes 1 and 2 to the consolidated financial statements, in
1995 the Company changed its method of accounting for the impairment of long-
lived assets.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index at
Item 14(a)(2) are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
February 28, 1997
28
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1997 AND DECEMBER 29, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
1996 1995
ASSETS ------ ------
<S> <C> <C>
Property and Equipment, net.................................... $3,805 $2,882
Notes and Other Receivables, net (including amounts due from
affiliates of $156 million and $170 million, respectively).... 297 210
Due from Hotel Managers........................................ 89 72
Investments in Affiliates...................................... 11 26
Other Assets................................................... 246 166
Cash and Cash Equivalents...................................... 704 201
------ ------
$5,152 $3,557
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt
Senior notes issued by the company or its subsidiaries....... $1,021 $1,085
Mortgage debt................................................ 1,529 972
Other........................................................ 97 121
------ ------
2,647 2,178
Accounts Payable and Accrued Expenses.......................... 74 52
Deferred Income Taxes.......................................... 464 504
Other Liabilities.............................................. 290 148
------ ------
Total Liabilities.......................................... 3,475 2,882
------ ------
Company-obligated Mandatorily Redeemable Convertible Preferred
Securities of a Subsidiary Trust Holding Company Substantially
All of Whose Assets are the Convertible Subordinated
Debentures Due 2026 ("Convertible Preferred Securities")...... 550 --
------ ------
Shareholders' Equity
Common Stock, 300 million shares authorized; 202.0 million
shares in 1996 and 159.7 million shares in 1995 issued and
outstanding, respectively................................... 202 160
Additional Paid-in Capital................................... 926 499
Retained Earnings............................................ (1) 16
------ ------
Total Shareholders' Equity................................. 1,127 675
------ ------
$5,152 $3,557
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
REVENUES
Hotels................................................... $ 717 $ 474 $ 338
Senior living communities (received from Marriott
International).......................................... -- -- 14
Net gains (losses) on property transactions.............. 1 (3) 6
Equity in earnings of affiliates......................... 3 -- --
Other.................................................... 11 13 22
----- ----- -----
Total revenues.......................................... 732 484 380
----- ----- -----
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees
of $101 million, $67 million and $41 million,
respectively)........................................... 461 281 198
Senior living communities................................ -- -- 5
Other (including a $60 million write-down of undeveloped
land in 1995)........................................... 38 89 25
----- ----- -----
Total operating costs and expenses...................... 499 370 228
----- ----- -----
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
EXPENSES AND INTEREST.................................... 233 114 152
Minority interest......................................... (6) (2) (1)
Corporate expenses........................................ (43) (36) (31)
Interest expense.......................................... (237) (178) (165)
Dividends on Convertible Preferred Securities of
subsidiary trust......................................... (3) -- --
Interest income........................................... 48 27 29
----- ----- -----
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES....... (8) (75) (16)
Benefit (provision) for income taxes...................... (5) 13 3
----- ----- -----
LOSS FROM CONTINUING OPERATIONS........................... (13) (62) (13)
DISCONTINUED OPERATIONS
Loss from discontinued operations (net of income tax
benefit of $3 million in 1995 and $1 million in 1994)... -- (8) (6)
Provision for loss on disposal (net of income tax benefit
of $23 million in 1995)................................. -- (53) --
----- ----- -----
LOSS BEFORE EXTRAORDINARY ITEM............................ (13) (123) (19)
Extraordinary item--Loss on extinguishment of debt (net of
income tax benefit of $10 million in 1995 and $3 million
in 1994)................................................. -- (20) (6)
----- ----- -----
NET LOSS.................................................. $ (13) $(143) $ (25)
===== ===== =====
LOSS PER COMMON SHARE:
CONTINUING OPERATIONS..................................... $(.07) $(.39) $(.09)
Discontinued operations (net of income taxes)............. -- (.39) (.04)
Extraordinary item--Loss on extinguishment of debt (net of
income taxes)............................................ -- (.12) (.04)
----- ----- -----
NET LOSS.................................................. $(.07) $(.90) $(.17)
===== ===== =====
</TABLE>
See Notes to Consolidated Financial Statements.
30
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
<TABLE>
<CAPTION>
COMMON CONVERTIBLE ADDITIONAL
SHARES PREFERRED COMMON PAID-IN RETAINED
OUTSTANDING STOCK STOCK CAPITAL EARNINGS
----------- ----------- ------ ---------- --------
(IN
MILLIONS) (IN MILLIONS, EXCEPT PER COMMON SHARE)
<C> <S> <C> <C> <C> <C>
129.7 Balance, December 31,
1993.................... $ 14 $130 $253 $ 108
-- Net loss................. -- -- -- (25)
-- Adjustment to
distribution of stock of
Marriott International,
Inc..................... -- -- -- (19)
2.5 Common stock issued for
the comprehensive stock
and employee stock...... -- 2 15 --
.7 Conversion of
subordinated debt to
common stock............ -- 1 1 --
.6 Conversion of preferred
stock to common stock... (1) 1 -- --
20.1 Common stock issued in
stock offering.......... -- 20 210 --
- --------------------------------------------------------------------------------
153.6 Balance, December 30,
1994.................... 13 154 479 64
-- Net loss................. -- -- -- (143)
-- Distribution of stock of
Host Marriott Services
Corporation............. -- -- (4) 95
1.3 Common stock issued for
the comprehensive stock
and employee stock
purchase plans.......... -- 1 16 --
4.8 Conversion of preferred
stock to common stock... (13) 5 8 --
- --------------------------------------------------------------------------------
159.7 Balance, December 29,
1995.................... -- 160 499 16
-- Net loss................. -- -- -- (13)
-- Adjustment to Host
Marriott Services
Dividend................ -- -- -- (4)
3.9 Common stock issued for
the comprehensive stock
and employee stock
purchase plans.......... -- 3 17 --
6.8 Common stock issued for
warrants exercised...... -- 7 42 --
31.6 Common stock issued in
stock offering.......... -- 32 368 --
- --------------------------------------------------------------------------------
202.0 Balance, January 3, 1997. $ -- $202 $926 $ (1)
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
31
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Loss from continuing operations........................... $ (13) $ (62) $ (13)
Adjustments to reconcile to cash from operations:
Depreciation and amortization............................ 168 122 113
Income taxes............................................. (35) (35) (16)
Amortization of deferred income.......................... (6) (7) (5)
Net realizable value write-down.......................... 4 70 --
Equity in earnings of affiliates......................... (3) -- --
Other.................................................... 49 33 23
Changes in operating accounts:
Other assets............................................ 9 (2) (11)
Other liabilities....................................... 32 (9) (16)
----- ----- -----
Cash from continuing operations.......................... 205 110 75
Cash from (used in) discontinued operations.............. (4) 32 71
----- ----- -----
Cash from operations..................................... 201 142 146
----- ----- -----
INVESTING ACTIVITIES
Proceeds from sales of assets............................. 373 358 480
Less non-cash proceeds................................... (35) (33) (54)
----- ----- -----
Cash received from sales of assets........................ 338 325 426
Acquisitions.............................................. (702) (392) (532)
Acquisition funds held in escrow.......................... -- -- 40
Capital expenditures:
Capital expenditures for renewals and replacements....... (87) (56) (34)
Lodging construction funded by project financing......... (3) (40) (67)
Other capital expenditures............................... (69) (64) (57)
Purchases of short-term marketable securities............. -- -- (90)
Sales of short-term marketable securities................. -- -- 90
Notes receivable collections.............................. 13 43 60
Affiliate collections, net................................ 21 2 10
Other..................................................... (15) 26 19
----- ----- -----
Cash used in investing activities from continuing
operations.............................................. (504) (156) (135)
Cash used in investing activities from discontinued
operations.............................................. -- (52) (43)
----- ----- -----
Cash used in investing activities........................ (504) (208) (178)
----- ----- -----
FINANCING ACTIVITIES
Issuances of debt......................................... 46 1,251 209
Issuances of Convertible Preferred Securities, net........ 533 -- --
Issuances of common stock................................. 454 13 238
Scheduled principal repayments............................ (82) (100) (72)
Debt prepayments.......................................... (173) (960) (351)
Other..................................................... 28 -- --
----- ----- -----
Cash from financing activities from continuing
operations.............................................. 806 204 24
Cash from (used in) financing activities from discontin-
ued operations.......................................... -- (4) 2
----- ----- -----
Cash from financing activities........................... 806 200 26
----- ----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... 503 134 (6)
CASH AND CASH EQUIVALENTS, beginning of year.............. 201 67 73
----- ----- -----
CASH AND CASH EQUIVALENTS, end of year.................... $ 704 $ 201 $ 67
===== ===== =====
</TABLE>
See Notes to Consolidated Financial Statements.
32
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
As of January 3, 1997, Host Marriott Corporation (the "Company") owned 79
upscale and luxury full-service lodging properties generally located
throughout the United States, most of which are managed by Marriott
International and operated under the Marriott and Ritz-Carlton brand names. At
that date, the Company also held minority interests in various partnerships
that own 253 additional properties, including 33 full-service properties,
managed by Marriott International.
On December 29, 1995, the Company distributed to its shareholders through a
special tax-free dividend (the "Special Dividend") its food, beverage, and
merchandise concessions business at airports, on tollroads, and at arenas and
other attractions (the "Operating Group"). See Note 2 for a discussion of the
Special Dividend. The 1995 and 1994 consolidated financial statements have
been restated to reflect the Operating Group as discontinued operations.
The structure of the Company was substantially altered on October 8, 1993
(the "Marriott International Distribution Date") when the Company distributed
the stock of a wholly-owned subsidiary, Marriott International, Inc.
("Marriott International") in a special dividend (the "Marriott International
Distribution"). See Note 14 for a description of the Marriott International
Distribution and related transactions.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries and controlled affiliates. Investments in 50% or less
owned affiliates over which the Company has the ability to exercise
significant influence, but does not control, are accounted for using the
equity method. All material intercompany transactions and balances have been
eliminated.
Fiscal Year
The Company's fiscal year ends on the Friday nearest to December 31. Fiscal
year 1996 included 53 weeks compared to 52 weeks for fiscal years 1995 and
1994.
Revenues and Expenses
Revenues include house profit from the Company's hotel properties because
the Company has delegated substantially all of the operating decisions related
to the generation of hotel house profit from its hotels to the manager.
Revenues also include net gains (losses) on property transactions, equity in
the earnings of affiliates and lease rentals from senior living communities.
House profit reflects the net revenues flowing to the Company as property
owner and represents hotel operating results, less property-level expenses,
excluding depreciation, management fees, real and personal property taxes,
ground and equipment rent, insurance and certain other costs, which are
classified as operating costs and expenses in the accompanying financial
statements. See Note 17.
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 188.7 million in 1996, 158.3
million in 1995 and 151.5 million in 1994. Common equivalent shares and other
potentially dilutive securities have been excluded from the weighted average
number of outstanding shares for all years presented as they are anti-
dilutive.
33
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
International Operations
The consolidated statements of operations include the following amounts
related to non-U.S. subsidiaries and affiliates; revenues of $18 million in
1996 and a loss before income taxes of $2 million in 1996. International
revenues and income before income taxes in 1995 and 1994 were not material.
Property and Equipment
Property and equipment is recorded at cost. For newly developed properties,
cost includes interest, rent and real estate taxes incurred during development
and construction. Replacements and improvements are capitalized.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 40 years for buildings and three to 10
years for furniture and equipment. Leasehold improvements are amortized over
the shorter of the lease term or the useful lives of the related buildings.
Gains on sales of properties are recognized at the time of sale or deferred
to the extent required by generally accepted accounting principles. Deferred
gains are recognized as income in subsequent periods as conditions requiring
deferral are satisfied or expire without further cost to the Company.
In cases where management is holding for sale particular lodging properties,
the Company assesses impairment based on whether the net realizable value
(estimated sales price less costs of disposal) of each individual property to
be sold is less than the net book value. A lodging property is considered to
be held for sale when the Company has made the decision to dispose of the
property. Otherwise, the Company assesses impairment of its real estate
properties based on whether it is probable that undiscounted future cash flows
from each individual property will be less than its net book value. If a
property is impaired, its basis is adjusted to its fair market value.
Pre-Opening Costs
Costs of an operating nature incurred prior to the opening of lodging
properties are deferred and amortized over three years for hotels opened prior
to September 8, 1995 and one year for hotels opened after September 8, 1995.
Such costs, which are included in other assets, amounted to $3 million and $7
million, net of accumulated amortization, at January 3, 1997 and December 29,
1995, respectively
Deferred Charges
Deferred financing costs related to long-term debt are deferred and
amortized over the remaining life of the debt.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
34
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Self-Insurance Programs
Prior to the Marriott International Distribution Date, the Company was self-
insured for certain levels of general liability, workers' compensation and
employee medical coverage. Estimated costs of these self-insurance programs
were accrued at present values of projected settlements for known and
anticipated claims. The Company discontinued its self-insurance programs for
claims arising subsequent to the Marriott International Distribution Date.
Interest Rate Swap Agreements
The Company has entered into interest rate swap agreements to diversify
certain of its debt to a variable rate or fixed rate basis. The interest rate
differential to be paid or received on interest rate swap agreements is
accrued as interest rates change and is recognized as an adjustment to
interest expense.
New Statements of Financial Accounting Standards
The Company adopted Statements of Financial Accounting Standards ("SFAS")
No. 112, "Employers' Accounting for Postemployment Benefits," and SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
during 1994 and SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," during 1995. Adoption of these statements did not have a material
effect on the Company's consolidated financial statements.
During 1995, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
The adoption of SFAS No. 121 did not have an effect on the Company's
continuing operations. See Note 2 for a discussion of the adoption of SFAS No.
121 on discontinued operations.
During 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." The adoption of SFAS No. 123 did not have a material effect on
the Company's consolidated financial statements. See Note 10.
2. HM SERVICES SPECIAL DIVIDEND
On December 29, 1995, the Company distributed to its shareholders through
the Special Dividend all of the outstanding shares of common stock of Host
Marriott Services Corporation ("HM Services"), formerly a wholly-owned
subsidiary of the Company, which, as of the date of the Special Dividend,
owned and operated food, beverage and merchandise concessions at airports, on
tollroads and at stadiums and arenas and other tourist attractions. The
Special Dividend provided Company shareholders with one share of common stock
of HM Services for every five shares of Company common stock held by such
shareholders on the record date of December 22, 1995. The Company recorded
approximately $9 million of expenses related to the consummation of the
Special Dividend in 1995. Revenues for the Company's discontinued operations
totaled $1,158 million in 1995 and $1,121 million in 1994. The provision for
loss on disposal includes the operating loss from discontinued operations from
August 9, 1995 (measurement date) through December 29, 1995 of $44 million,
net of taxes, and estimated expenses related to the Special Dividend of $9
million.
Effective September 9, 1995, the Company adopted SFAS No. 121, which
requires that an impairment loss be recognized when the carrying amount of an
asset exceeds the sum of the undiscounted estimated future cash flows
associated with the asset. As a result of the adoption of SFAS No. 121, the
Company recognized a non-cash, pre-tax charge during the fourth quarter of
1995 of $47 million. Such charge has been reflected in discontinued operations
for fiscal year 1995.
35
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For purposes of governing certain of the ongoing relationships between the
Company and HM Services after the Special Dividend and to provide for an
orderly transition, the Company and HM Services entered into various
agreements including a Distribution Agreement, an Employee Benefits Allocation
Agreement, a Tax Sharing Agreement and a Transitional Services Agreement.
Effective as of December 29, 1995, these agreements provide, among other
things, for the division between the Company and HM Services of certain assets
and liabilities, including but not limited to liabilities related to employee
stock and other benefit plans and the establishment of certain obligations for
HM Services to issue shares upon exercise of warrants (see Note 7) and to
issue shares or pay cash to the Company upon exercise of stock options held by
certain former employees of the Company (see Note 10).
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
Land and land improvements................................ $ 349 $ 320
Buildings and leasehold improvements...................... 3,507 2,666
Furniture and equipment................................... 548 382
Construction in progress.................................. 82 101
------ ------
4,486 3,469
Less accumulated depreciation and amortization............ (681) (587)
------ ------
$3,805 $2,882
====== ======
</TABLE>
Interest cost capitalized in connection with the Company's development and
construction activities totaled $3 million in 1996, $5 million in 1995 and $10
million in 1994.
In 1996, the Company recorded additional depreciation expense of $15 million
as a result of a change in the estimated depreciable lives and salvage values
for certain hotel properties. Also, in 1996, the Company recorded a $4 million
charge to write down an undeveloped land parcel to its net realizable value
based on its expected sales value.
In 1995, the Company made a determination that its owned Courtyard and
Residence Inn properties were held for sale and recorded a $10 million charge
to write down the carrying value of five of these individual properties to
their estimated net realizable values. 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 1980s
for a proposed new corporate headquarters. Due to Company downsizing, plans
for a new corporate headquarters were dropped. The Company subsequently
planned to develop the site into an office project over an extended time
period to recover its investment, however, the continuing weakness of the real
estate market in Montgomery County, Maryland, negatively impacted this
development plan. In the fourth quarter of 1995, management instituted a
program to liquidate certain non-income producing assets and to reinvest the
proceeds in the acquisition of full service hotels. As part of this program,
management determined that the site would no longer be developed and instead
decided to attempt to sell the property. Accordingly, the Company recorded a
pre-tax charge of $60 million in the fourth quarter of 1995 to reduce the
asset to its estimated sales value.
36
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INVESTMENTS IN AND RECEIVABLES FROM AFFILIATES
Investments in and receivables from affiliates consist of the following:
<TABLE>
<CAPTION>
OWNERSHIP
INTERESTS 1996 1995
--------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Equity investments
Hotel partnerships which own 33 Marriott Hotels, 120
Courtyard hotels, 50 Residence Inns and 50 Fairfield
Inns operated by Marriott International, Inc., as of
January 3, 1997..................................... 1%-50% $ 11 $ 26
Notes and other receivables, net....................... -- 156 170
------ ------
$167 $ 196
====== ======
</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.
In 1996, the Company purchased controlling interests in four affiliated
partnerships for $640 million, including $429 million of existing debt. These
affiliated partnerships included the partnership which owns the 1,355-room San
Diego Marriott Hotel and Marina, the Marriott Hotel Properties II Limited
Partnership ("MHP II"), the Marriott Suites Limited Partnership which owns
four hotels, and the partnership that owns the 510-room Salt Lake City
Marriott. MHP II owns the 1,290-room New Orleans Marriott Hotel; the 999-room
San Antonio Marriott Rivercenter Hotel; the 368-room San Ramon Marriott Hotel;
and a 50% limited partner interest in the 754-room Santa Clara Marriott Hotel.
Subsequent to year-end, the Company acquired a controlling interest in the
Marriott Hotel Properties Limited Partnership ("MHPLP") for approximately $268
million, including $231 million in mortgage debt. MHPLP owns the 1,503-room
Marriott Orlando World Center and a 50.5% controlling partnership interest in
the 624-room Marriott Harbor Beach Resort.
In 1993 and 1994, the Company sold portions of its equity interests in
Residence Inns USA Partnership for $38 million. A gain on the sale
transactions totaling $14 million was deferred and was amortized through 1996.
Receivables from affiliates are reported net of reserves of $227 million at
January 3, 1997 and $221 million at December 29, 1995. Receivables from
affiliates at January 3, 1997 includes a $140 million mortgage note at 9%
which amortizes through 2003. 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
$117 million at January 3, 1997. Net amounts repaid to the Company under these
commitments totaled $13 million in 1996. Net amounts funded by the Company
totaled $8 million in 1995 and $2 million in 1994.
The Company's pre-tax income from affiliates includes the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Interest income............................................ $17 $16 $17
Equity in net income....................................... 3 -- --
--- --- ---
$20 $16 $17
=== === ===
</TABLE>
37
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Combined summarized balance sheet information for the Company's affiliates
follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
Property and equipment.................................... $2,636 $3,125
Other assets.............................................. 334 419
------ ------
Total assets............................................ $2,970 $3,544
====== ======
Debt, principally mortgages............................... $2,855 $3,445
Other liabilities......................................... 672 779
Partners' deficit......................................... (557) (680)
------ ------
Total liabilities and partners' deficit................. $2,970 $3,544
====== ======
</TABLE>
Combined summarized operating results reported by these affiliates follow:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues............................................. $ 737 $ 770 $ 705
Operating expenses:
Cash charges (including interest).................. (465) (506) (491)
Depreciation and other non-cash charges............ (230) (240) (296)
----- ----- -----
Income (loss) before extraordinary items......... 42 24 (82)
Extraordinary items--forgiveness of debt......... 12 181 113
----- ----- -----
Net income..................................... $ 54 $ 205 $ 31
===== ===== =====
</TABLE>
5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
Properties Notes, with a rate of 9.5% due May 2005........ $ 600 $ 600
Acquisitions Notes, with a rate of 9.0% due December 2007. 350 350
Senior Notes (Old Notes), with an average rate of 9.6% at
January 3, 1997, maturing through 2012................... 71 135
------ ------
Total Senior Notes...................................... 1,021 1,085
------ ------
Mortgage debt (non-recourse) secured by $2 billion of real
estate assets, with an average rate of 8.6% at January 3,
1997, maturing through 2012.............................. 1,529 972
------ ------
MI Line of Credit, with a variable rate of LIBOR plus 3%
(8.7% at January 3, 1997) due June 1998.................. -- 22
Other notes, with an average rate of 7.4% at January 3,
1997, maturing through 2017.............................. 86 88
Capital lease obligations................................. 11 11
------ ------
Total other ............................................ 97 121
------ ------
$2,647 $2,178
====== ======
</TABLE>
38
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In May 1995, HMH Properties, Inc. ("Properties"), a wholly-owned subsidiary
of Host Marriott Hospitality, Inc. ("Hospitality"), issued an aggregate of
$600 million of 9.5% senior secured notes ("Properties Notes"). Properties is
the owner of 31 of the Company's 79 lodging properties at January 3, 1997. The
bonds were issued in conjunction with a concurrent $400 million offering by a
subsidiary of the Company's discontinued HM Services' business at par, and
have a final maturity of May 2005. The net proceeds were used to defease, and
subsequently redeem, all of the senior notes ("Hospitality Notes") issued by
Host Marriott Hospitality, Inc. and to repay borrowings under the line of
credit with Marriott International. In connection with the redemptions and
defeasance, the Company recognized an extraordinary loss in 1995 of $17
million, net of taxes, related to continuing operations. The Properties Notes
are secured by a pledge of the stock of certain of Properties' subsidiaries
and are guaranteed, jointly and severally, by certain of Properties'
subsidiaries.
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"). The Acquisitions Notes were issued at
par and have a final maturity of December 2007. A portion of the net proceeds
were utilized to repay in full the outstanding borrowings under the $230
million revolving line of credit (the "Acquisition Revolver"), which was then
terminated. In connection with the termination of the Acquisition Revolver,
the Company recognized an extraordinary loss in 1995 of $3 million. The
Acquisitions Notes are guaranteed by Acquisitions' subsidiaries.
The indentures governing the Properties Notes and the Acquisitions Notes
contain covenants that, among other things, limit the ability 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 subsidiaries, and enter into certain mergers
and consolidations. The net assets of Properties and Acquisitions at January
3, 1997 were approximately $410 million and $216 million, respectively,
substantially all of which were restricted.
In 1996, the company incurred $696 million of mortgage debt in conjunction
with the acquisition of nine hotels. In September 1996, the Company
successfully completed the refinancing of the MHP II mortgage debt, as well as
the mortgage debt of the Santa Clara Partnership under substantially identical
terms. The new mortgages, totalling approximately $266 million, bear interest
at a fixed rate of 8.22% and mature in 2007.
In conjunction with the construction of the Philadelphia Marriott, the
Company obtained first mortgage financing from Marriott International for 60%
of the construction and development costs of the hotel. In the fourth quarter
of 1996, the Company repaid the $109 million mortgage with the proceeds from
the preferred securities offering discussed in Note 6.
During 1995, the Company replaced its $630 million line of credit with a new
line of credit with Marriott International (the "MI Line of Credit") pursuant
to which the Company has the right to borrow up to $225 million for certain
permitted uses. Borrowings under the MI 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 MI Line of Credit. The MI 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.
At January 3, 1997, the Company was party to interest rate exchange
agreements with three financial institutions (the contracting parties) with an
aggregate notional amount of $525 million. Under certain of these agreements
aggregating $400 million, the Company collects interest at fixed rates
(average rate of 7.1% at
39
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
January 3, 1997) and pays interest based on specified floating interest rates
(average rate of 5.6% at January 3, 1997) through May 1997. Under the
remaining agreements aggregating $125 million, the Company collects interest
based on specified floating interest rates of one month LIBOR (rate of 5.8% at
January 3, 1997) and pays interest at fixed rates (average rate of 6.5% at
January 3, 1997). These agreements expire in 1997 and 1998. The Company
realized a net reduction of interest expense of $6 million in 1996, $5 million
in 1995 and $11 million in 1994 related to interest rate exchange agreements.
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.
The Company's debt balance at January 3, 1997 includes $176 million of debt
guaranteed by the parent company. Aggregate debt maturities at January 3,
1997, excluding capital lease obligations, are (in millions):
<TABLE>
<S> <C>
1997............................................................... $ 50
1998............................................................... 315
1999............................................................... 20
2000............................................................... 45
2001............................................................... 293
Thereafter......................................................... 1,913
------
$2,636
======
</TABLE>
Cash paid for interest for continuing operations, net of amounts
capitalized, was $220 million in 1996, $177 million in 1995 and $157 million
in 1994. Deferred financing costs, which are included in other assets,
amounted to $61 million and $37 million at January 3, 1997 and December 29,
1995, respectively.
6. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES
OF A SUBSIDIARY TRUST HOLDING COMPANY SUBSTANTIALLY ALL OF WHOSE ASSETS ARE
THE CONVERTIBLE SUBORDINATED DEBENTURES DUE 2026
In December 1996, Host Marriott Financial Trust (the "Issuer"), a wholly-
owned subsidiary trust of the Company, issued 11 million shares of 6 3/4%
convertible quarterly income preferred securities (the "Convertible Preferred
Securities"), with a liquidation preference of $50 per share (for a total
liquidation amount of $550 million). The Convertible Preferred Securities
represent an undivided beneficial interest in the assets of the Issuer. The
payment of distributions out of moneys held by the Issuer and payments on
liquidation of the Issuer or the redemption of the Convertible Preferred
Securities are guaranteed by the Company to the extent the Issuer has funds
available therefor. This guarantee, when taken together with the Company's
obligations under the indenture pursuant to which the Debentures were issued,
the Debentures, the Company's obligations under the Trust Agreement and its
obligations under the indenture to pay costs, expenses, debts and liabilities
of the Issuer (other than with respect to the Convertible Preferred
Securities) provides a full and unconditional guarantee of amounts due on the
Convertible Preferred Securities. Proceeds from the issuance of the
Convertible Preferred Securities were invested in 6 3/4% Convertible
Subordinated Debentures (the "Debentures") due December 2, 2026 issued by the
Company. The Issuer exists solely to issue the Convertible Preferred
Securities and its own common securities (the "Common Securities") and invest
the proceeds therefrom in the Debentures, which are its sole asset. Separate
financial statements of the Issuer are not presented because of the Company's
guarantee described above, the Company's management has concluded that such
financial statements are not material to investors and the Issuer is wholly-
owned and essentially has no independent operations.
Each of the Convertible Preferred Securities is convertible at the option of
the holder into shares of Company common stock at the rate of 2.6876 shares
per Convertible Preferred Security (equivalent to a conversion price of
$18.604 per share of Company common stock). The Debentures are convertible at
the option
40
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of the holders into shares of Company common stock at a conversion rate of
2.6876 shares for each $50 in principal amount of Debentures. The Issuer will
only convert Debentures pursuant to a notice of conversion by a holder of
Securities. During 1996, no shares were converted into common stock.
Holders of the Convertible Preferred Securities are entitled to receive
preferential cumulative cash distributions at an annual rate of 6 3/4% accruing
from the original issue date, commencing March 1, 1997, and payable quarterly
in arrears thereafter. The distribution rate and the distribution and other
payment dates for the Convertible Preferred Securities will correspond to the
interest rate and interest and other payment dates on the Debentures. The
Company may defer interest payments on the Debentures for a period not to
exceed 20 consecutive quarters. If interest payments on the Debentures are
deferred, so too are payments on the Convertible Preferred Securities. Under
this circumstance, the Company will not be permitted to declare or pay any cash
distributions with respect to its capital stock or debt securities that rank
pari passu with or junior to the Debentures.
Subject to certain restrictions, the Convertible Preferred Securities are
redeemable at the Issuer's option upon any redemption by the Company of the
Debentures after December 2, 1999. Upon repayment at maturity or as a result of
the acceleration of the Debentures upon the occurrence of a default, the
Debentures shall be subject to mandatory redemption, from which the proceeds
will be applied to redeem Convertible Preferred Securities and Common
Securities, together with accrued and unpaid distributions.
7. SHAREHOLDERS' EQUITY
Three hundred million shares of common stock, with a par value of $1 per
share, are authorized, of which 202.0 million and 159.7 million were issued and
outstanding as of January 3, 1997 and December 29, 1995, respectively. One
million shares of no par value preferred stock are authorized. During 1995,
substantially all outstanding shares of such preferred stock were converted
into approximately five million shares of common stock with the remainder
defeased.
On March 27, 1996, the Company completed the issuance of 31.6 million shares
of common stock for net proceeds of nearly $400 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 a class action settlement, the Company issued warrants to
purchase up to 7.7 million shares of the Company's common stock at $8.00 per
share through October 8, 1996 and $10.00 per share thereafter. During 1996, 6.8
million warrants were exercised at $8.00 per share and an equivalent number of
shares of Company common stock issued. As of January 3, 1997, there were
approximately 600,000 warrants outstanding.
In February 1989, the Board of Directors adopted a shareholder rights plan
under which a dividend of one preferred stock purchase right was distributed
for each outstanding share of the Company's common stock. 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 at least 20%, or begins a tender or exchange offer for
at least 30%, of the Company's common stock. Shares owned by a person or group
on February 3, 1989 and held continuously thereafter are exempt for purposes of
determining beneficial ownership under the rights plan. The rights are non-
voting and will expire on February 2, 1999, unless exercised or previously
redeemed by the Company for $.01 each. If the Company is involved in a merger
or certain other business combinations not approved by the Board of Directors,
each right entitles its holder, other than the acquiring person or group, to
purchase common stock of either the Company or the acquirer having a value of
twice the exercise price of the right.
8. INCOME TAXES
The Company records income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes." SFAS 109 requires the recognition of deferred tax assets and
liabilities equal to the expected future tax consequences of temporary
differences.
41
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total deferred tax assets and liabilities at January 3, 1997 and December
29, 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
Gross deferred tax assets................................ $ 144 $ 156
Less: Valuation allowance................................ (5) (5)
------ ------
Net deferred tax assets.................................. 139 151
Gross deferred tax liabilities........................... (603) (655)
------ ------
Net deferred income tax liability...................... $ (464) $ (504)
====== ======
</TABLE>
The valuation allowance primarily represents net operating loss
carryforwards ("NOLs") the benefits of which have been recorded 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 1996
and 1995.
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 January 3, 1997 and December 29, 1995 follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
Investments in affiliates................................ $ (303) $ (305)
Property and equipment................................... (135) (182)
Safe harbor lease investments............................ (73) (87)
Deferred tax gain........................................ (92) (81)
Reserves................................................. 97 108
Alternative minimum tax credit carryforwards............. 26 26
Other, net............................................... 16 17
------ ------
Net deferred income tax liability...................... $ (464) $ (504)
====== ======
</TABLE>
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Current--Federal......................................... $(2) $ 7 $(5)
--State........................................... 3 3 1
--Foreign......................................... 3 -- --
--- ---- ---
4 10 (4)
--- ---- ---
Deferred--Federal........................................ 2 (23) 1
--State.......................................... (1) -- --
--- ---- ---
1 (23) 1
--- ---- ---
$ 5 $(13) $(3)
=== ==== ===
</TABLE>
At January 3, 1997, the Company had net operating loss carryforwards of $11
million for Federal tax purposes which expire through 2001. Additionally, the
Company had approximately $26 million of alternative minimum tax credit
carryforwards which do not expire.
During 1995, the Company settled with the Internal Revenue Service ("IRS")
substantially all issues for tax years 1979 through 1990. The Company expects
to resolve any remaining issues with no material impact on
42
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the consolidated financial statements. The Company made net payments to the
IRS of approximately $45 million and $20 million in 1996 and 1995,
respectively, related to these settlements. Certain adjustments totaling
approximately $2 million and $11 million in 1996 and 1995, respectively, were
made to the tax provision related to those settlements.
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory Federal tax
rate..................... (35.0)% (35.0)% (35.0)%
State income taxes, net of
Federal tax benefit...... 21.7 2.5 16.2
Tax credits............... -- (0.1) (1.4)
Additional tax on foreign
source income............ 40.8 -- 1.1
Tax contingencies......... 25.0 14.6 --
Permanent items........... 9.0 -- --
Other, net................ 1.0 0.7 0.3
----- ----- -----
Effective income tax
rate................... 62.5% (17.3)% (18.8)%
===== ===== =====
</TABLE>
As part of the Marriott International Distribution and the Special Dividend,
the Company, Marriott International and HM Services entered into tax-sharing
agreements which reflect each party's rights and obligations with respect to
deficiencies and refunds, if any, of Federal, state or other taxes relating to
the businesses of the Company, Marriott International and HM Services prior to
the Marriott International Distribution and the Special Dividend. The majority
of the 1994 adjustment to the Marriott International Distribution of stock of
Marriott International related to deferred income taxes.
Cash paid for income taxes, net of refunds received, was $40 million in
1996, $22 million in 1995 and $13 million in 1994.
9. LEASES
The Company leases certain property and equipment under non-cancelable
operating leases. Future minimum annual rental commitments for all non-
cancelable leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN MILLIONS)
<S> <C> <C>
1997.................................................... $ 2 $ 106
1998.................................................... 2 104
1999.................................................... 2 102
2000.................................................... 1 99
2001.................................................... 1 96
Thereafter.............................................. 9 1,221
--- ------
Total minimum lease payments............................ 17 $1,728
======
Less amount representing interest....................... (6)
---
Present value of minimum lease payments............... $11
===
</TABLE>
As discussed in Note 12, the Company sold and leased back 37 of its
Courtyard properties in 1995 and an additional 16 Courtyard properties in 1996
to a real estate investment trust ("REIT"). Additionally, in 1996, the Company
sold and leased back 18 of its Residence Inns to the same REIT. These leases,
which are accounted
43
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
for as operating leases and are included above, have initial terms expiring
through 2012 for the Courtyard properties and 2010 for the Residence Inn
properties, and are renewable at the option of the Company. Minimum rent
payments are $51 million annually for the Courtyard properties and $17 million
annually for the Residence Inn properties, and additional rent based upon
sales levels are payable to the owner under the terms of the leases.
Leases also include long-term ground leases for certain hotels, generally
with multiple renewal options. Certain leases contain provision for the
payment of contingent rentals based on a percentage of sales in excess of
stipulated amounts.
Certain of the lease payments included in the table above relate to
facilities used in the Company's 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 $100 million payable to the Company under non-cancelable subleases.
The Company remains contingently liable at January 3, 1997 on certain leases
relating to divested non-lodging properties. Such contingent liabilities
aggregated $126 million at January 3, 1997. However, management considers the
likelihood of any substantial funding related to these leases to be remote.
Rent expense consists of:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Minimum rentals on operating leases........................ $83 $34 $18
Additional rentals based on sales.......................... 16 17 15
--- --- ---
$99 $51 $33
=== === ===
</TABLE>
10. EMPLOYEE STOCK PLANS
At January 3, 1997, the Company has two stock-based compensation plans which
are described below. 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 "Employee Stock
Purchase Plan"). The principal terms and conditions of the two plans are
summarized below.
Total shares of common stock reserved and available for issuance under
employee stock plans at January 3, 1997 are:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Comprehensive Plan.......................................... 20
Employee Stock Purchase Plan................................ 3
---
23
===
</TABLE>
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.
44
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SFAS No. 123, "Accounting for Stock-Based Compensation," requires companies
to provide new note disclosures about employee stock-based compensation plans
based on a fair value based method of accounting. SFAS No. 123 is effective
for fiscal years that begin after December 15, 1995.
The Company continues to account for expense under its plans under the
provisions of Accounting Principle Board Opinion 25 and related
interpretations as permitted under SFAS 123. Accordingly, no compensation cost
has been recognized for its fixed stock options under the Comprehensive Plan
and its Employee Stock Purchase Plan.
Compensation cost for the Company's two stock-based compensation plans
determined based on the fair value at the grant dates for awards under those
plans granted in 1995 and 1996 consistent with the method of SFAS No. 123 did
not have a material impact on the Company's results of operations. Therefore,
pro forma results have not been presented. Had compensation cost for the
Company's employee stock option plan been determined based on the method of
SFAS No. 123, the fair value of each option grant would have been estimated on
the date of grant using an option-pricing model with the following weighted
average assumptions used for grants in 1996 and 1995, respectively: risk-free
interest rate of 6.6% and 6.8%, respectively, volatility of 36% and 37%,
respectively, expected lives of 12 years and no dividend yield. The weighted
average fair value per option granted during the year was $8.68 in 1996, $5.76
in 1995 and $6.19 in 1994.
The effects of the implementation of SFAS No. 123 are not representative of
the effects on reported net income in future years because only the effects of
stock option awards granted in 1995 and 1996 have been considered.
In connection with the Special Dividend, the then outstanding options held
by current and former employees of the Company were redenominated in both
Company and HM Services stock and the exercise prices of the options were
adjusted based on the relative trading prices of shares of the common stock of
the two companies. For all options held by certain current and former
employees of Marriott International, the number and exercise price of the
options were adjusted based on the trading prices of shares of the Company's
common stock immediately before and after the Special Dividend. Therefore, the
options outstanding reflect these revised exercise prices. Pursuant to the
Distribution Agreement between the Company and HM Services, the Company has
the right to receive up to 1.4 million shares of HM Services' common stock or
an equivalent cash value subsequent to exercise of the options held by the
certain former and current employees of Marriott International. As of January
3, 1997, the Company valued this right at approximately $13 million, which is
included in other assets. A summary of the status of the Company's stock
option plan for 1996, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
(IN MILLIONS) EXERCISE PRICE (IN MILLIONS) EXERCISE PRICE (IN MILLIONS) EXERCISE PRICE
------------- -------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, at beginning of
year................... 10.0 $ 4 11.7 $ 4 13.6 $ 4
Granted................. .2 13 -- -- .6 10
Exercised............... (1.9) 4 (2.3) 4 (2.2) 4
Forfeited/Expired....... -- -- (.3) 4 (.3) 5
Adjustment for Special
Dividend............... -- -- .9 4 -- --
---- ---- ----
Balance, at end of year. 8.3 4 10.0 4 11.7 4
==== ==== ====
Options exercisable at
year-end............... 7.6 8.5 8.1
</TABLE>
45
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
at January 3, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- --------------------------------
SHARES WEIGHTED AVERAGE SHARES
OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
AT CONTRACTUAL EXERCISE AT EXERCISE
RANGE OF EXERCISE PRICES JANUARY 3, 1997 LIFE PRICE JANUARY 3, 1997 PRICE
- ------------------------ --------------- ---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
1-3 5.3 9 $ 2 5.3 $ 2
4-6 1.6 2 6 1.6 6
7-9 1.2 11 8 .7 8
10-12 -- -- -- -- --
12-15 .2 14 13 -- --
--- ---
8.3 7.6
=== ===
</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 for 10 years. 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 1996, 1995 and 1994, 13,000, 158,000 and
159,000 shares were granted, respectively, under this plan. The compensation
cost that has been charged against income for deferred stock was $1 million in
1995 and 1994, respectively, and was not material in 1996. The weighted
average fair value per share granted during each year was $11.81 in 1996,
$8.49 in 1995 and $8.21 in 1994.
In 1993, 3,537,000 restricted stock plan shares under the Comprehensive plan
were issued to officers and key executives to be distributed over the next
three to 10 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 Company's common stock. In 1996,
2,511,000 shares of additional restricted shares were granted to certain key
employees under terms and conditions similar to the 1993 grants. Approximately
161,000 and 500,000 shares were forfeited in 1996 and 1995, respectively. The
Company recorded compensation expense of $11 million, $5 million and $6
million in 1996, 1995 and 1994, respectively, related to these awards. The
weighted average fair value per share granted during each year was $14.01 in
1996. There were no restricted stock shares granted in 1995 and 1994.
Under the terms of the Employee Stock Purchase Plan, eligible employees may
purchase common stock through payroll deductions at the lower of market value
at the beginning or end of the plan year.
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. The Company
contributions were not material in 1994 through 1996. The Company provides
medical benefits to a limited number of retired employees meeting restrictive
eligibility requirements. Such amounts were not material in 1994 through 1996.
12. ACQUISITIONS AND DISPOSITIONS
In 1996, the Company acquired six full-service hotels totaling approximately
1,964 rooms for an aggregate purchase price of approximately $189 million. In
addition, the Company acquired controlling interests in 17 full-
46
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
service hotels totaling approximately 8,917 rooms for an aggregate purchase
price of approximately $1.1 billion, including the assumption of approximately
$696 million of debt. The Company also purchased the first mortgage of the
504-room New York Marriott Financial Center for approximately $101 million.
In 1995, the Company acquired nine full-service hotels totaling
approximately 3,900 rooms in separate transactions for approximately $390
million. In 1994, the Company acquired 15 full-service hotels (approximately
6,000 rooms) in several transactions for approximately $440 million. The
Company also provided 100% financing totaling approximately $35 million to an
affiliated partnership, in which the Company owns the sole general partner
interest, for the acquisition of two full-service hotels (totaling another 684
rooms). Additionally, the Company acquired a controlling interest in one 662-
room, full-service hotel through an equity investment of $16 million and debt
financing of $36 million (the debt was subsequently sold in 1995). The Company
accounts for all of these properties as owned hotels for accounting purposes.
During the first and third quarters of 1995, 37 of the Company's Courtyard
properties were sold and leased back from the REIT for approximately $330
million. The Company received net proceeds from the two transactions of
approximately $297 million and will receive approximately $33 million upon
expiration of the leases. A deferred gain of $14 million on the sale/leaseback
transactions will be amortized over the initial term of the leases.
In the first and second quarters of 1996, the Company completed the sale and
leaseback of 16 of its Courtyard properties and 18 of its Residence Inn
properties for $349 million. The Company received net proceeds of
approximately $314 million and will receive approximately $35 million upon
expiration of the leases. A deferred gain of $45 million on the sale/leaseback
transactions will be amortized over the initial term of the leases.
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, and,
accordingly, the gain on the sale of these hotels has been deferred. During
1994, the Company sold its 14 senior living communities to an unrelated party
for $320 million, which approximated the communities' carrying value.
The Company's summarized, unaudited consolidated pro forma results of
operations, assuming the above transactions and the refinancings and new debt
activity discussed in Note 5 occurred on December 31, 1994, are as follows (in
millions, except per share amounts):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revenue....................................................... $928 $800
Loss from continuing operations............................... (3) (75)
Loss per common share from continuing operations.............. (.02) (.47)
</TABLE>
47
<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 are shown below.
<TABLE>
<CAPTION>
JANUARY 3, 1997 DECEMBER 29, 1995
----------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- ------- ---------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Financial assets
Receivables from affiliates...... $ 156 $ 174 $ 170 $ 177
Notes receivable................. 141 155 40 49
Other............................ 13 13 7 7
Financial liabilities
Debt, net of capital leases...... 2,636 2,654 2,167 2,175
Other financial instruments
Interest rate swap agreements.... -- 1 -- 6
Affiliate debt service commit-
ments........................... -- -- -- --
</TABLE>
Receivables from affiliates, notes and other financial assets are valued
based on the expected future cash flows discounted at risk-adjusted rates.
Valuations for secured debt are determined based on the expected future
payments discounted at risk-adjusted rates. The fair values of the New Line of
Credit and other notes are estimated to be equal to their carrying value.
Senior Notes are valued based on quoted market prices.
The Company is contingently liable under various guarantees of obligations
of certain affiliates (affiliate debt service commitments) with a maximum
commitment of $117 million at January 3, 1997 and $173 million at December 29,
1995. 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 pay or receive to terminate the swap agreements. The
aggregate notional amount of the agreements was $525 million at January 3,
1997 and $545 million at December 29, 1995.
14. MARRIOTT INTERNATIONAL DISTRIBUTION AND RELATIONSHIP WITH MARRIOTT
INTERNATIONAL
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.
The Company and Marriott International have entered into various agreements
in connection with the Marriott International Distribution and thereafter
which provide, among other things, that (i) certain of the Company's lodging
properties are managed by Marriott International under agreements with initial
terms of 15 to 20 years and which are subject to renewal at the option of
Marriott International for up to an additional 16 to 30 years (see Note 15);
(ii) seven of the Company's full-service properties are operated under
franchise
48
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
agreements with Marriott International with terms of 15 to 30 years; (iii) the
Company leased its owned senior living communities to Marriott International
prior to their disposal (see Note 12); (iv) Marriott International guarantees
the Company's performance in connection with certain loans and other
obligations ($126 million at January 3, 1997); (v) the Company can borrow up
to $225 million for certain permitted uses under the MI Line of Credit (see
Note 5); (vi) the Company borrowed and repaid $109 million of first mortgage
financing for construction of the Philadelphia Marriott Hotel (see Note 5);
(vii) Marriott International provided the Company with $70 million of mortgage
financing in 1995 for the acquisition of three full-service properties by the
Company at an average interest rate of 8.5% (Marriott International
subsequently sold one of the loans in November 1996); (viii) Marriott
International and the Company formed a joint venture and Marriott
International provided the Company with $29 million in debt financing at an
average interest rate of 12.7% and $28 million in preferred equity in 1996 for
the acquisition of two full-service properties in Mexico City, Mexico; (ix) in
1995, the Company also acquired a full-service property from a partnership in
which Marriott International owned a 50% interest; and (x) Marriott
International provides certain limited administrative services.
In 1996, 1995 and 1994, the Company paid to Marriott International $101
million, $67 million and $41 million, respectively, in lodging management
fees; $18 million, $21 million and $23 million, respectively, in interest and
commitment fees under the lines of credit with Marriott International, the
Philadelphia Marriott Hotel mortgage and mortgages for three additional full-
service properties; $4 million, $12 million and $11 million, respectively, for
limited administrative services; and earned $14 million under the senior
living community leases during 1994. The Company also paid Marriott
International $2 million and $1 million, respectively, of franchise fees in
1996 and 1995.
Additionally, Marriott International has the right to purchase up to 20% of
the voting stock of the Company if certain events involving a change in
control of the Company occur.
15. MANAGEMENT AGREEMENTS
Most of the Company's hotels are subject to management agreements (the
"Agreements") which provide for Marriott International to manage most of the
Company's hotels, generally for an initial term of 15 to 20 years with renewal
terms at the option of Marriott International of up to an additional 16 to 30
years. The Agreements generally provide for payment of base management fees
equal to one to four percent of sales and incentive management fees generally
equal to 20% to 50% of Operating Profit (as defined in the Agreements) over a
priority return (as defined) to the Company, with total incentive management
fees not to exceed 20% of cumulative Operating Profit. In the event of early
termination of the Agreements, Marriott International will receive additional
fees based on the unexpired term and expected future base and incentive
management fees. The Company has the option to terminate certain management
agreements if specified performance thresholds are not satisfied. No Agreement
with respect to a single lodging facility is cross-collateralized or cross-
defaulted to any other Agreement and a single Agreement may be cancelled under
certain conditions, although such cancellation will not trigger the
cancellation of any other Agreement.
Pursuant to the terms of the Agreements, Marriott International is required
to furnish the hotels with certain services ("Chain Services") which are
generally provided on a central or regional basis to all hotels in the
Marriott International hotel system. Chain Services include central training,
advertising and promotion, a national reservation system, computerized payroll
and accounting services, and such additional services as needed which may be
more efficiently performed on a centralized basis. Costs and expenses incurred
in providing such services are allocated among all domestic hotels managed,
owned or leased by Marriott International or its subsidiaries. In addition,
the full-service hotels also participate in Marriott's Honored Guest Awards
Program and the Courtyard hotels in the Courtyard Club. The costs of these
programs are charged to all hotels in the respective hotel system.
49
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company is obligated to provide the manager with sufficient funds to
cover the cost of (a) certain non-routine repairs and maintenance to the
hotels which are normally capitalized; and (b) replacements and renewals to
the hotels' property and improvements. Under certain circumstances, the
Company will be required to establish escrow accounts for such purposes under
terms outlined in the Agreements.
The Company has entered into franchise agreements with Marriott
International for seven hotels. Pursuant to these franchise agreements, the
Company generally pays a franchise fee based on a percentage of room sales and
food and beverage sales as well as certain other fees for advertising and
reservations. Franchise fees for room sales vary from four to six percent of
sales, while fees for food and beverage sales vary from two to three percent
of sales. The terms of the franchise agreements are from 15 to 30 years.
Franchise fees paid to Marriott International for 1996 and 1995 were $2
million and $1 million, respectively. Franchise fees were not material in
1994.
The Company has entered into management agreements with The Ritz-Carlton
Hotel Company, LLC ("Ritz-Carlton") to manage four of the Company's hotels.
These agreements have an initial term of 15 to 25 years with renewal terms at
the option of Ritz-Carlton of up to an additional 10 to 40 years. Base
management fees vary from two to four percent of sales and incentive
management fees are generally equal to 20% of available cash flow or operating
profit, as defined in the agreements.
At January 3, 1997 and December 29, 1995, $76 million and $65 million,
respectively, have been advanced to the hotel managers for working capital and
are included in "Due From Hotel Managers" in the accompanying balance sheet.
16. LITIGATION
The Company is from time to time the subject of, or involved in, judicial
proceedings. Management believes that any liability or loss resulting from
such matters will not have a material adverse effect on the financial position
or results of operations of the Company.
17. HOTEL OPERATIONS
As discussed in Note 1, 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. Accordingly, the following table presents the details of the
Company's house profit for 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Sales
Rooms............................................... $1,302 $ 908 $ 663
Food and Beverage................................... 515 363 250
Other............................................... 125 81 56
------ ------ -----
Total Hotel Sales................................. 1,942 1,352 969
------ ------ -----
Department Costs
Rooms............................................... 313 226 168
Food and Beverage................................... 406 284 195
Other............................................... 63 43 29
------ ------ -----
Total Department Costs............................ 782 553 392
------ ------ -----
Department Profit..................................... 1,160 799 577
Other Deductions...................................... (443) (325) (239)
------ ------ -----
House Profit.......................................... $ 717 $ 474 $ 338
====== ====== =====
</TABLE>
50
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1996
------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues.................. $ 130 $ 167 $ 167 $ 268 $ 732
Operating profit before
minority interest, corpo-
rate expenses and inter-
est...................... 38 62 49 84 233
Income (loss) from contin-
uing operations.......... (12) 7 (2) (6) (13)
Net income (loss)......... (12) 7 (2) (6) (13)
Income (loss) per common
share:
Income (loss) from con-
tinuing operations..... (.07) .03 (.01) (.03) (.07)
Net income (loss)....... (.07) .03 (.01) (.03) (.07)
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ----------
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues.................. $ 100 $ 109 $ 110 $ 165 $ 484
Operating profit (loss)
before minority interest,
corporate expenses and
interest................. 35 45 38 (4) 114
Loss from continuing oper-
ations................... (8) (1) (4) (49) (62)
Net loss.................. (14) (30) (5) (94) (143)
Loss per common share:
Loss from continuing op-
erations............... (.05) (.01) (.02) (.31) (.39)
Net loss................ (.09) (.19) (.03) (.59) (.90)
</TABLE>
The first three quarters consist of 12 weeks each, and the fourth quarter
includes 16 weeks in 1995 and 17 weeks in 1996.
Second quarter 1996 results include a $4 million charge to write down an
undeveloped land parcel to its net realizable value based on expected sales
value (included in "Net gains (losses) on property transactions"). Results for
1996 reflect a change in estimated depreciable life and salvage value for
certain hotel properties which resulted in additional depreciation expense of
$3 million in the second quarter and $6 million in each of the third and
fourth quarters.
Second quarter 1995 results include a $10 million pre-tax charge to write
down the carrying value of five individual Courtyard and Residence Inn
properties to their net realizable values (see Note 3). Fourth quarter 1995
results include a $60 million pre-tax charge to write down an undeveloped land
parcel to its estimated sales value (see Note 3). The fourth quarter 1995 net
loss includes a pre-tax charge of $47 million for the adoption of SFAS No. 121
(see Note 2) and a pre-tax $15 million restructuring charge, both of which
were related to HM Services and have been included in discontinued operations
in the accompanying 1995 statement of operations. Second and fourth quarter
1995 results include extraordinary after-tax losses of $17 million and $3
million, respectively, on the extinguishment of debt (see Note 5).
The sum of the income (loss) per common share for the four quarters in 1996
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.
51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information called for by Items 10-13 is incorporated by reference from
the Host Marriott Corporation 1997 Annual Meeting of the Shareholders--Notice
and Proxy Statement--(to be filed pursuant to Regulation 14A not later than
120 days after the close of fiscal year).
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
All financial statements of the registrant as set forth under Item 8
of this Report on Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
The following financial information is filed herewith on the pages
indicated.
Financial Schedules:
<TABLE>
<CAPTION>
PAGE
----------
<C> <S> <C>
Condensed Financial Information of
I. Registrant................................ S-1 to S-6
III. Real Estate and Accumulated Depreciation.. S-7 to S-8
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
52
<PAGE>
(3) 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 (incorporated by reference to
Registration Statement No. 33-54545).
3.2 Amended Marriott Corporation Bylaws (incorporated by reference to
Current Report on Form 8-K dated October 23, 1993).
4.1(i) Third Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of December 1, 1986
(incorporated by reference from Current Report on Form 8-K dated
December 10, 1986).
4.1(ii) Fourth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of May 1, 1987
(incorporated by reference from Current Report on Form 8-K dated
May 7, 1987).
4.1(iii) Fifth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of June 12, 1987
(incorporated by reference from Current Report on Form 8-K dated
June 18, 1987).
4.1(iv) Sixth Supplemental Indenture between Marriott Corporation and The
First National Bank of Chicago dated as of October 23, 1987
(incorporated by reference from Current Report on Form 8-K dated
October 30, 1987).
4.1(v) Twelfth Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of July 11, 1991
(incorporated by reference from Current Report on Form 8-K dated
July 19, 1991).
4.1(vi) Thirteenth Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of April 22, 1992
(incorporated by reference from Current Report on Form 8-K dated
April 29, 1992).
4.1(vii) Fourteenth Supplemental Indenture between Marriott Corporation and
The First National Bank of Chicago dated as of April 28, 1992
(incorporated by reference from Current Report on Form 8-K dated
May 5, 1992).
4.1(viii) Fifteenth Supplemental Indenture between Marriott Corporation and
Bank One, Columbus, NA. dated as of October 8, 1993 ((incorporated
by reference from Current Report on Form 8-K dated October 23,
1993).
4.2(i) Rights Agreement between Marriott Corporation and the Bank of New
York as Rights Agent dated February 3, 1989 (incorporated by
reference to Registration Statement No. 33-62444).
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).
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- -----------
<C> <S>
4.3 Indenture by and among HMC Acquisition Properties, Inc., as Issuer,
HMC SFO, Inc., as Subsidiary Guarantors, and Marine Midland Bank, as
Trustee (incorporated by reference to Registration Statement No.
333-00768).
4.4 Indenture by and among HMH Properties Inc., as Issuer, HMH Courtyard
Properties, Inc., HMC Retirement Properties, Inc., Marriott
Financial Services, Inc., Marriott SBM Two Corporation, HMH Pentagon
Corporation and Host Airport Hotels, Inc., as Subsidiary Guarantors,
and Marine Midland Bank, as Trustee (incorporated by reference to
Registration Statement No. 33-95058).
4.5(i) Warrant Agreement dated as of October 14, 1994 by and between Host
Marriott Corporation and First Chicago Trust Company of New York as
Warrant Agent (incorporated by reference to Registration Statement
No. 33-80801).
4.5(ii) First Supplemental Warrant Agreement dated December 22, 1995 by and
among Host Marriott Corporation, Host Marriott Services Corporation
and First Chicago Trust Company as Warrant Agent (incorporated by
reference to Registration Statement No. 33-80801).
10.1 Marriott Corporation Executive Deferred Compensation Plan dated as
of December 6, 1990 (incorporated by reference from Exhibit 19(i) of
the Annual Report on Form 10-K for the fiscal year ended December
28, 1991).
10.2 Host Marriott Corporation 1993 Comprehensive Stock Incentive Plan
effective as of October 8, 1993 (incorporated by reference from
Current Report on Form 8-K dated October 23, 1993).
10.3 Distribution Agreement dated as of September 15, 1993 between
Marriott Corporation and Marriott International, Inc. (incorporated
by reference from Current Report on Form 8-K dated October 23,
1993).
10.4 Amendment No. 1 to the Distribution Agreement dated September 15,
1993 by and among Host Marriott Corporation, Host Marriott Services
Corporation and Marriott International (incorporated by reference
from Current Report on Form 8-K dated January 16, 1996).
10.5 Distribution Agreement dated December 22, 1995 by and between Host
Marriott Corporation and Host Marriott Services Corporation
(incorporated by reference from Current Report on Form 8-K dated
January 16, 1996).
10.6 Tax Sharing Agreement dated as of October 5, 1993 by and between
Marriott Corporation and Marriott International, Inc. (incorporated
by reference from Current Report on Form 8-K dated October 23,
1993).
10.7 Assignment and License Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.8 Amendment No. 1 to the Assignment and License Agreement dated as of
October 8, 1993 by and between Marriott International, Inc. and Host
Marriott Corporation (incorporated by reference from Current Report
on Form 8-K dated January 16, 1996).
10.9 Transitional Corporate Services Agreement dated December 28, 1995 by
and between Host Marriott Corporation and Host Marriott Services
Corporation (incorporated by reference from Current Report on Form
8-K dated January 16, 1996).
10.10 Tax Administration Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.11 Noncompetition Agreement dated as of October 8, 1993 by and between
Marriott Corporation and Marriott International, Inc. (incorporated
by reference from Current Report on Form 8-K dated October 23,
1993).
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
----------- -----------
<C> <S>
10.12 Amendment No. 1 to the Noncompetition Agreement dated October 8,
1993 by and between Host Marriott Corporation and Marriott
International, Inc. (incorporated by reference from Current Report
on Form 8-K dated January 16, 1996).
#10.13 Host Marriott Lodging Management Agreement-Marriott Hotels,
Resorts and Hotels dated September 25, 1993 by and between
Marriott Corporation and Marriott International, Inc.
(incorporated by reference to Registration Statement No. 33-
51707).
#10.14(ii) Host Marriott Lodging Management Agreement-Courtyard Hotels dated
September 25, 1993 by and between Marriott Corporation and
Marriott International, Inc. (incorporated by reference to
Registration Statement No. 33-51707).
#10.14(iii) Host Marriott Lodging Management Agreement-Residence Inns dated
September 25, 1993 by and between Marriott Corporation and
Marriott International, Inc. (incorporated by reference to
Registration Statement No. 33-51707).
10.15(i) Consolidation Letter Agreement pertaining to Courtyard Hotels
dated September 25, 1993 between a subsidiary of Marriott
International, Inc. and a subsidiary of the Company (incorporated
by reference to Registration Statement No. 33-51707).
10.16(ii) Consolidation Letter Agreement pertaining to Residence Inns dated
September 25, 1993 between a subsidiary of Marriott International,
Inc. and a subsidiary of the Company (incorporated by reference to
Registration Statement No. 33-51707).
10.17 Employee Benefits and Other Employment Matters Allocation
Agreement dated as of December 29, 1995 by and between Host
Marriott Corporation and Host Marriott Services Corporation
(incorporated by reference from Current Report on Form 8-K dated
January 16, 1996).
10.18 Tax Sharing Agreement dated as of December 29, 1995 by and between
Host Marriott Corporation and Host Marriott Services Corporation
(incorporated by reference from Current Report on Form 8-K dated
January 16, 1996).
10.19 Marriott/Host Marriott Employees' Profit Sharing Retirement and
Savings Plan and Trust (incorporated by reference from
Registration Statement No. 33-62444).
10.20 Working Capital Agreement by and between Host Marriott Corporation
and Marriott International, Inc. dated as of September 25, 1993
(incorporated by reference from Registration Statement No. 33-
62444).
10.21 Sale-Purchase Agreement dated as of November 2, 1995 between The
Port Authority of New York and New Jersey, as Seller, and Host
Marriott Corporation as Purchaser (incorporated by reference from
Current Report on Form 8-K dated January 8, 1996).
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).
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
11 Statement re: Computation of Per Share Earnings.
21 Subsidiaries of Host Marriott Corporation.
</TABLE>
- --------
# Agreement filed is illustrative of numerous other agreements to which the
Company is a party.
(b) REPORTS ON FORM 8-K
. November 21, 1996--Report of the announcement that the Company
commenced an offer to purchase 45% of the limited partnership units
of Marriott Hotel Properties Limited Partnership.
. December 6, 1996--Report of the announcement that the Company
completed the sale of $550 million of 6.75% Convertible Preferred
Securities through the Host Marriott Financial Trust, a wholly-owned
subsidiary of the Company.
. January 14, 1997--Report to identify certain transactions which have
occurred subsequent to the close of the Company's third quarter, as
well as other events that have occurred throughout fiscal years 1995
and 1996, the effects of which may be relevant to investors.
. January 16, 1997--Report of the announcement that the Company has
named Christopher G. Townsend as General Counsel replacing Stephen J.
McKenna, who will remain with the Company in an of counsel position.
. February 3, 1997--Report of the announcement that the Company
reported a preliminary 1996 Earnings Before Interest Expense, Taxes,
Depreciation and Amortization and other non-cash items ("EBITDA") of
approximately $442 million, a 42% increase over its 1995 full year
results of $311 million.
. March 6, 1997--Report of the announcement that the company reported
its comprehensive results of operations for 1996.
. March 18, 1997--Report of the announcement that the Company and
Marriott International have reached an agreement in principle for the
Company to acquire all of the outstanding common stock of Forum
Group, Inc., from a subsidiary of Marriott International.
(d) OTHER INFORMATION
56
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BETHESDA, STATE OF
MARYLAND, ON MARCH 25, 1997.
Host Marriott Corporation
By /s/ Robert E. Parsons, Jr.
----------------------------------
Robert E. Parsons, Jr.
Executive Vice President
and Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS
BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN
THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
/s/ Terence C. Golden President, Chief March 25, 1997
- -------------------------------
Terence C. Golden Executive Officer
(Principal Executive
Officer) and Director
/s/ Robert E. Parsons, Jr. Executive Vice March 25, 1997
- -------------------------------
Robert E. Parsons, Jr. President and Chief
Financial Officer
(Principal Financial
Officer)
/s/ Donald D. Olinger Senior Vice President March 25, 1997
- -------------------------------
Donald D. Olinger and Corporate
Controller (Principal
Accounting Officer)
/s/ Richard E. Marriott Chairman of the Board March 25, 1997
- -------------------------------
Richard E. Marriott of Directors
/s/ R. Theodore Ammon Director March 25, 1997
- -------------------------------
R. Theodore Ammon
/s/ Robert M. Baylis Director March 25, 1997
- -------------------------------
Robert M. Baylis
/s/ J.W. Marriott, Jr. Director March 25, 1997
- -------------------------------
J.W. Marriott, Jr.
/s/ Ann Dore McLaughlin Director March 25, 1997
- -------------------------------
Ann Dore McLaughlin
/s/ Harry L. Vincent, Jr. Director March 25, 1997
- -------------------------------
Harry L. Vincent, Jr.
57
<PAGE>
SCHEDULE 1
PAGE 1 OF 6
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 29,
1997 1995
ASSETS ---------- ------------
(IN MILLIONS)
<S> <C> <C>
Property and Equipment, net............................ $2,332 $1,427
Investments in Affiliates.............................. 11 26
Notes Receivable, net.................................. 157 65
Due from Hotel Managers................................ 54 38
Investment in and Advances to Restricted Subsidiaries.. 611 598
Other Assets........................................... 181 130
Cash and Cash Equivalents.............................. 563 78
------ ------
Total Assets....................................... $3,909 $2,362
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt................................................... $1,565 $1,094
Accounts Payable and Accrued Expenses.................. 62 40
Deferred Income Taxes.................................. 377 423
Other Liabilities...................................... 228 130
------ ------
Total Liabilities.................................. 2,232 1,687
------ ------
Company-obligated Mandatorily Redeemable Convertible
Preferred Securities of a Subsidiary Trust Holding
Company Substantially All of Whose Assets are the
Convertible Subordinated Debentures Due 2026
("Convertible Preferred Securities").................. 550 --
------ ------
Shareholders' Equity
Common Stock......................................... 202 160
Additional Paid-in Capital........................... 926 499
Retained Earnings.................................... (1) 16
------ ------
1,127 675
------ ------
Total Liabilities and Shareholders' Equity......... $3,909 $2,362
====== ======
</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-1
<PAGE>
SCHEDULE I
PAGE 2 OF 6
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- ----
(IN MILLIONS)
<S> <C> <C> <C>
Revenues................................................... $ 413 $ 229 $163
Operating costs and expenses............................... 324 233 122
----- ----- ----
Operating profit (loss) before minority interest, corporate
expenses and interest..................................... 89 (4) 41
Minority interest.......................................... (6) (2) (1)
Corporate expenses......................................... (28) (23) (19)
Interest expense........................................... (135) (105) (86)
Dividends on Convertible Preferred Securities of subsidiary
trust..................................................... (3) -- --
Interest income............................................ 21 11 12
----- ----- ----
Loss before income taxes and equity in earnings of
Restricted Subsidiaries................................... (62) (123) (53)
Equity in earnings of Restricted Subsidiaries.............. 54 28 27
Benefit (provision) for income taxes....................... (5) 13 7
----- ----- ----
Loss from continuing operations............................ (13) (82) (19)
Loss from discontinued operations, net-of-tax.............. -- (61) (6)
----- ----- ----
Net income............................................... $ (13) $(143) $(25)
===== ===== ====
</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 3 OF 6
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Cash from (used in) operations............................ $ 74 $ (25) $ 34
----- ----- -----
Investing Activities
Net proceeds from sale of assets........................ 23 18 45
Capital expenditures.................................... (66) (88) (133)
Acquisitions............................................ (423) (61) (417)
Dividends from Restricted Subsidiaries.................. 29 36 --
Other................................................... 30 50 99
----- ----- -----
Cash used in investing activities..................... (407) (45) (406)
----- ----- -----
Financing Activities
Issuances of debt....................................... 48 175 211
Issuances of Convertible Preferred Securities, net...... 533 -- --
Issuances of common stock............................... 454 13 238
Repayments of debt...................................... (253) (245) (91)
Transfers from Marriott International and Restricted
Subsidiaries, net....................................... 8 163 4
Other................................................... 28 -- --
----- ----- -----
Cash from financing activities........................ 818 106 362
----- ----- -----
Increase (decrease) in cash and cash equivalents.......... $ 485 $ 36 $ (10)
===== ===== =====
</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 1
PAGE 4 OF 6
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A) The accompanying condensed financial information of Host Marriott
Corporation (the "Parent Company") presents the financial position,
results of operations and cash flows of the Parent Company with the
investment in, and operations of, consolidated subsidiaries with
restricted net assets on the equity method of accounting.
In May 1995, HMH Properties, Inc. ("Properties"), an indirect, wholly-
owned subsidiary of the Parent Company, issued $600 million of 9.5% senior
notes at par value with a final maturity of May 2005 (the "Properties
Notes"). The Properties Notes are secured by a pledge of the stock of
certain of Properties' subsidiaries and are guaranteed, jointly and
severally, by certain of Properties' subsidiaries.
In December 1995, HMC Acquisition Properties, Inc. ("Acquisitions"), an
indirect, wholly-owned subsidiary of the Parent Company, issued $350
million of 9% senior notes (the "Acquisitions Notes") at par value with a
final maturity of December 2007. The Acquisitions Notes are guaranteed by
Acquisitions' subsidiaries.
The indentures governing the Properties Notes and the Acquisitions Notes
contain covenants that, among other things, limit the ability 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 subsidiaries and
enter into certain mergers and consolidations. The net assets of
Properties and Acquisitions at January 3, 1997 were approximately $410
million and $216 million, respectively, substantially all of which were
restricted.
Properties and Acquisitions are restricted subsidiaries of the Parent
Company (the "Restricted Subsidiaries") and are accounted for under the
equity method of accounting on the accompanying condensed financial
information of the Parent Company.
B) On October 8, 1993 (the "Marriott International Distribution Date"), the
Parent Company distributed, through a special tax-free dividend (the
"Marriott International Distribution") to holders of its common stock
(on a share-for-share basis) all outstanding shares of common stock of
an existing wholly-owned subsidiary, Marriott International, Inc.
("Marriott International"). Under the terms of an exchange offer (the
"Exchange Offer"), which the Parent Company completed in connection with
the Marriott International Distribution, the Parent Company secured
certain notes (the "Old Series I Notes") with a principal balance of $87
million equally and ratably with senior notes (the "Hospitality Notes")
issued in the Exchange Offer by Host Marriott Hospitality, Inc.
("Hospitality"), an indirect wholly-owned subsidiary of the Parent
Company. The Old Series I Notes were repaid upon its maturity in May
1995. Investment in and advances to Restricted Subsidiaries include $87
million at December 30, 1994, which were pushed down to Hospitality
prior to its repayment.
Interest expense includes $4 million in 1995 and $8 million in 1994
related to the pushed-down debt discussed above.
C) Properties paid $9 million and $36 million in 1996 and 1995,
respectively, and Acquisitions paid $20 million in 1996 in cash
dividends to the Parent Company as permitted under the indenture
agreements. There were no cash dividends paid to the Parent Company in
1994.
S-4
<PAGE>
SCHEDULE 1
PAGE 5 OF 6
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
D) Aggregate debt maturities at January 3, 1997, excluding $10 million in
capital lease obligations, are (in millions):
<TABLE>
<S> <C>
1997............................................................... $ 48
1998............................................................... 314
1999............................................................... 18
2000............................................................... 44
2001............................................................... 292
Thereafter......................................................... 839
------
$1,555
======
</TABLE>
E) In December 1996, Host Marriott Financial Trust (the "Issuer"), a
wholly-owned subsidiary trust of the Parent Company, issued 11 million
shares of 6 3/4% convertible quarterly income preferred securities (the
"Convertible Preferred Securities"), with a liquidation preference of
$50 per share (for a total liquidation amount of $550 million). The
Convertible Preferred Securities represent an undivided beneficial
interest in the assets of the Issuer and, pursuant to various agreements
entered into in connection with the transaction, are fully, irrevocably
and unconditionally guaranteed by the Parent Company. Proceeds from the
issuance of the Convertible Preferred Securities were invested in 6 3/4%
Convertible Subordinated Debentures (the "Debentures") due December 2,
2026 issued by the Parent Company. The Issuer exists solely to issue the
Convertible Preferred Securities and its own common securities (the
"Common Securities") and invest the proceeds therefrom in the
Debentures, which are its sole asset.
Each of the Convertible Preferred Securities is convertible at the option
of the holder into shares of Parent Company common stock at the rate of
2.6876 shares per Convertible Preferred Security (equivalent to a
conversion price of $18.604 per share of Parent Company common stock).
The Debentures are convertible at the option of the holders into shares
of Parent Company common stock at a conversion rate of 2.6876 shares for
each $50 in principal amount of Debentures. The Issuer will only convert
Debentures pursuant to a notice of conversion by a holder of Securities.
During 1996, no shares were converted into common stock.
Holders of the Convertible Preferred Securities are entitled to receive
preferential cumulative cash distributions at an annual rate of 6 3/4%
accruing from the original issue date, commencing March 1, 1997, and
payable quarterly in arrears thereafter. The distribution rate and the
distribution and other payment dates for the Convertible Preferred
Securities will correspond to the interest rate and interest and other
payment dates on the Debentures. The Parent Company may defer interest
payments on the Debentures for a period not to exceed 20 consecutive
quarters. If interest payments on the Debentures are deferred, so too are
payments on the Convertible Preferred Securities. Under this
circumstance, the Parent Company will not be permitted to declare or pay
any cash distributions with respect to its capital stock or debt
securities that rank pari passu with or junior to the Debentures.
Subject to certain restrictions, the Convertible Preferred Securities are
redeemable at the Issuer's option upon any redemption by the Parent
Company of the Debentures after December 2, 1999. Upon repayment at
maturity or as a result of the acceleration of the Debentures upon the
occurrence of a
S-5
<PAGE>
SCHEDULE 1
PAGE 6 OF 6
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONSOLIDATED FINANCIAL INFORMATION--(CONTINUED)
default, the Debentures shall be subject to mandatory redemption, from
which the proceeds will be applied to redeem Convertible Preferred
Securities and Common Securities, together with accrued and unpaid
distributions.
F) The accompanying statements of income reflect the equity in earnings of
Restricted Subsidiaries, including Hospitality, after elimination of
interest expense (see Note B) and before income taxes. The Restricted
Subsidiaries are included in the consolidated income tax returns of Host
Marriott Corporation.
G) As more fully described in Note 2 to the Company's consolidated
financial statements, the Company completed a special dividend to
shareholders on December 29, 1995 of its operating group (the "Operating
Group") which comprised its food, beverage and merchandise concessions
business. The accompanying condensed financial information has been
restated to reflect the Operating Group as discontinued operations for
the fiscal years ended December 29, 1995 and December 30, 1994.
S-6
<PAGE>
SCHEDULE III
PAGE 1 OF 2
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
JANUARY 3, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT
INITIAL COSTS JANUARY 3, 1997
----------------- SUBSEQUENT ASSET ------------------------ DATE OF
BUILDINGS & COSTS WRITE- BUILDINGS & ACCUMULATED COMPLETION OF DATE
DESCRIPTION DEBT LAND IMPROVEMENTS CAPITALIZED DOWN LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
----------- ------ ---- ------------ ----------- ------ ---- ------------ ------ ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Full-service
Hotels:
New York Marriott
Marquis Hotel,
New York, NY...... $ 318 $ -- $ 552 $ 29 $-- $ -- $ 581 $ 581 $(109) 1986 N/A
San Francisco
Moscone Center,
San Francisco,
CA................ 230 -- 278 7 -- -- 285 285 (33) 1989 N/A
San Diego
Marriott Hotel
and Marina, San
Diego, CA......... 203 -- 202 3 -- -- 205 205 (6) -- 1996
Other full-
service
properties, each
less than 5% of
total............. 778 288 2,112 308 -- 292 2,416 2,708 (278) various various
------ ---- ------ ---- --- ---- ------ ------ -----
Total full-
service......... 1,529 288 3,144 347 -- 292 3,487 3,779 (426)
Other properties,
each less than 5%
of total........... -- 72 6 3 (4) 57 20 77 (20) various N/A
------ ---- ------ ---- --- ---- ------ ------ -----
Total........... $1,529 $360 $3,150 $350 $(4) $349 $3,507 $3,856 $(446)
====== ==== ====== ==== === ==== ====== ====== =====
<CAPTION>
DEPRECIATION
DESCRIPTION LIFE
----------- ------------
<S> <C>
Full-service
Hotels:
New York Marriott
Marquis Hotel,
New York, NY...... 40
San Francisco
Moscone Center,
San Francisco,
CA................ 40
San Diego
Marriott Hotel
and Marina, San
Diego, CA......... 40
Other full-
service
properties, each
less than 5% of
total............. 40
Total full-
service.........
Other properties,
each less than 5%
of total........... various
Total...........
</TABLE>
S-7
<PAGE>
SCHEDULE III
PAGE 2 OF 2
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
JANUARY 3, 1997
(IN MILLIONS)
NOTES:
(A) The change in total cost of properties for the fiscal years ended
January 3, 1997, December 29, 1995 and December 30, 1994 is as follows:
<TABLE>
<S> <C>
Balance at December 31, 1993....................................... $2,681
Additions:
Acquisitions................................................... 502
Capital expenditures........................................... 40
Deductions:
Dispositions and other......................................... (436)
------
Balance at December 30, 1994....................................... 2,787
Additions:
Acquisitions................................................... 356
Capital expenditures........................................... 25
Transfers from construction in progress........................ 185
Deductions:
Dispositions and other......................................... (367)
------
Balance at December 29, 1995....................................... 2,986
Additions:
Acquisitions................................................... 1,087
Capital expenditures........................................... 77
Transfers from construction-in-progress........................ 28
Deductions:
Dispositions and other......................................... (322)
------
Balance at January 3, 1997......................................... $3,856
======
</TABLE>
(B) The change in accumulated depreciation and amortization for the fiscal
years ended January 3, 1997, December 29, 1995 and December 30, 1994 is
as follows:
<TABLE>
<S> <C>
Balance at December 31, 1993....................................... $ 301
Depreciation and amortization.................................... 59
Dispositions and other........................................... (27)
------
Balance at December 30, 1994....................................... 333
Depreciation and amortization.................................... 65
Dispositions and other........................................... (24)
------
Balance at December 29, 1995....................................... 374
Depreciation and amortization.................................... 96
Dispositions and other........................................... (24)
------
Balance at January 3, 1997......................................... $ 446
======
</TABLE>
(C) The aggregate cost of properties for Federal income tax purposes is
approximately $3,445 million at January 3, 1997.
(D) The total cost of properties excludes construction-in-progress
properties.
S-8
<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>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net income (loss)...................................... $ (13) $ (143) $ (25)
====== ====== ======
Primary Earnings (Loss) Per Common Share
Shares:
Weighted average number of common shares outstanding. 188.7 158.3 151.5
Assuming distribution of common shares reserved under
employee stock purchase plan, based on withholdings
to date, less shares assumed purchased at average
market (/1/)........................................ -- -- --
Assuming distribution of common shares granted under
comprehensive stock plan, less shares assumed
purchased at average market (/1/)................... -- -- --
Assuming distribution of common shares issuable for
warrants, less shares assumed purchased at average
market (/1/)........................................ -- -- --
------ ------ ------
188.7 158.3 151.5
====== ====== ======
Primary Earnings (Loss) Per Common Share............... $ (.07) $ (.90) $ (.17)
====== ====== ======
</TABLE>
- --------
(/1/Common)equivalent shares and other potentially dilutive securities were
antidilutive for all years presented.
E-1
<PAGE>
EXHIBIT 11
PAGE 2 OF 2
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Fully Diluted Earnings (Loss) Per Common Share
Shares:
Weighted average number of common shares outstanding. 188.7 158.3 151.5
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/)...................... -- -- --
Assuming distribution of common shares granted under
comprehensive stock plan, less shares assumed
purchased at higher of average or ending market
(/1/)............................................... -- -- --
Assuming distribution of common shares issuable for
warrants, less shares assumed purchased at higher of
average or ending market (/1/)...................... -- -- --
Assuming issuance of common shares upon conversion of
convertible preferred stock (/1/)................... -- -- --
Assuming issuance of common shares upon conversion of
Company-obligated mandatorily redeemable convertible
securities of a subsidiary trust (/1/)(/2/)......... -- -- --
------ ------ ------
188.7 158.3 151.5
====== ====== ======
Fully Diluted Earnings (Loss) Per Common Share......... $ (.07) $ (.90) $ (.17)
====== ====== ======
</TABLE>
- --------
(/1/Common)equivalent shares and other potentially dilutive securities were
antidilutive for all years presented.
(/2/Company-obligated)mandatorily redeemable convertible securities of a
subsidiary trust were issued in 1996.
E-2
<PAGE>
EXHIBIT 21
PAGE 1 OF 2
HOST MARRIOTT CORPORATION
SUBSIDIARIES
<TABLE>
<C> <S>
1) Beachfront Properties, Inc.
2) CBM One Corporation
3) CBM Two Corporation
4) CBM Funding Corporation
5) Calgary Charlotte Holdings, Inc.
6) Courtyard II Associates Management Corporation
7) Courtyard II Finance Company
8) Farrell's Ice Cream Parlour Restaurants, Inc.
9) G.L. Insurance Corporation
10) HMC Acquisition Properties, Inc.
11) HMC Acquisitions, Inc.
12) HMC Airport, Inc.
13) HMC AP Canada, Inc.
14) HMC BN Corporation
15) HMC Boyton Beach, Inc.
16) HMC California Leasing Corporation
17) HMC Capital Corporation
18) HMC Charlotte (Calgary), Inc.
19) HMC East Side Financial Corporation
20) HMC East Side, Inc.
21) HMC Gateway, Inc.
22) HMC Leisure Park Corporation
23) HMC Mexair, Inc.
24) HMC Mexpark, Inc.
25) HMC Polanco, Inc.
26) HMC Retirement Properties, Inc.
27) HMC SFO, Inc.
28) HMC Toronto Air, Inc.
29) HMC Toronto EC, Inc.
30) HMC Ventures, Inc.
31) HMC Waterford, Inc.
32) HMC Westport Corporation
33) HMC Financial Center, Inc.
34) HMH HPT Courtyard, Inc.
35) HMH HPT Residence Inn, Inc.
36) HMH Marina, Inc.
37) HMH Pentagon Corporation
38) HMH Properties, Inc.
39) HMH Realty Company, Inc.
40) HMH Restaurants, Inc.
41) HMH Rivers, Inc.
42) HMH WTC, Inc.
43) Host Airport Hotels, Inc.
44) Host Investment, Inc.
45) Host LaJolla, Inc.
</TABLE>
E-3
<PAGE>
EXHIBIT 21
PAGE 2 OF 2
HOST MARRIOTT CORPORATION
SUBSIDIARIES (CONTINUED)
<TABLE>
<C> <S>
46) Host Marriott BCH Hotel Corporation
47) Host Marriott Financial Trust
48) Host Marriott GTN Corporation
49) Host Marriott Hospitality, Inc.
50) Hot Shoppes, Inc.
51) Hotel Properties Management, Inc.
52) Marriott Condominium Development Corporation
53) Marriott Desert Springs Corporation
54) Marriott Family Restaurants, Inc. of Illinois
55) Marriott Family Restaurants, Inc. of Vermont
56) Marriott Family Restaurants, Inc. of Wisconsin
57) Marriott FIBM One Corporation
58) Marriott Financial Services, Inc.
59) Marriott Hanover Hotel Corporation
60) Marriott Hotels of NY City
61) Marriott Marquis Corporation
62) Marriott MDAH One Corporation
63) Marriott MHP Two Corporation
64) Marriott Park Ridge Corporation
65) Marriott PLP Corporation
66) Marriott Properties, Inc.
67) Marriott Realty Sales, Inc.
68) Marriott RIBM Three Corporation
69) Marriott RIBM Two Corporation
70) Marriott SBM One Corporation
71) Marriott SBM Two Corporation
72) Marriott YBG Corporation
73) Marriott's Bickford Family Fare, Inc.
74) MHP Acquisition Corporation
75) MHP II Acquisition Corporation
76) MOHS Corporation
77) Montana Food and Beverage Services, Inc.
78) Philadelphia Airport Hotel Corporation
79) Philadelphia Market Street Hotel Corporation
80) PM Financial Corporation
81) RIBM One Corporation
82) S.D. Hotels, Inc.
83) Saga Property Leasing Corporation
84) Saga Restaurants, Inc.
85) SFM Finance Corporation
86) Sparky's Virgin Island, Inc.
87) T.E.C. Operations Limited
88) T.E.C. Hotels Ltd.
89) Tecon Hotel Corporation
90) Willmar Distributors, Inc.
</TABLE>
E-4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HOST
MARRIOTT CORPORATION'S CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS
OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000314733
<NAME> HOST MARRIOTT CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1997
<PERIOD-START> DEC-30-1995
<PERIOD-END> JAN-03-1997
<CASH> 704
<SECURITIES> 0
<RECEIVABLES> 89
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 4,486
<DEPRECIATION> 681
<TOTAL-ASSETS> 5,152
<CURRENT-LIABILITIES> 0
<BONDS> 2,647
0
0
<COMMON> 202
<OTHER-SE> 925
<TOTAL-LIABILITY-AND-EQUITY> 5,152
<SALES> 0
<TOTAL-REVENUES> 732
<CGS> 0
<TOTAL-COSTS> 461
<OTHER-EXPENSES> 38
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 237
<INCOME-PRETAX> (8)
<INCOME-TAX> (5)
<INCOME-CONTINUING> (13)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
