<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 29, 1998
HOST MARRIOTT CORPORATION
------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 333-19923 52-2995412
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(STATE OR OTHER JURISDICTION (COMMISSION (I.R.S. EMPLOYER
OF INCORPORATION OF FILE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
10400 FERNWOOD ROAD, BETHESDA, MARYLAND 20817
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES (ZIP)CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (301) 380-9000
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<PAGE>
ITEM 5. OTHER EVENTS
Host Marriott Corporation ("Host Marriott") believes that the following
information is material to its investors and has included the following
information herein. This information is being provided with respect to HMH
Properties Inc.'s ("HMH Properties"), a wholly owned subsidiary of Host
Marriott, public offering (the "Offering") of $1.7 billion of senior notes
(the "Senior Notes"). The net proceeds from the Offering together with
borrowings under a new $1,250 million credit facility to be provided by a
syndicate of lenders (the "Credit Facility") will be used to purchase the HMH
Properties's existing $1,550 million in senior notes (the "Existing Senior
Notes") (together the "Bond Refinancing") pursuant to HMH Properties's
outstanding offers to purchase any and all such Existing Senior Notes and
related consent solicitations. The Credit Facility will replace HMH
Properties's existing $500 million credit facility (the "Existing Credit
Facility").
For purposes of the condensed combined consolidated financial statements of
Host Marriott Hotels, the term "Company" has the meaning set forth in note 1
thereto.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements of Host Marriott Hotels (which represents the
assets and liabilities expected to be included in Host Marriott
Corporation's contribution of certain assets and liabilities to the
Operating Partnership (as defined herein) in conjunction with Host
Marriott Corporation's contemplated REIT Conversion (as defined
herein)) (unaudited)
Condensed Combined Consolidated Balance Sheet as of June 19, 1998 3
Condensed Combined Consolidated Statements of Operations for
the Twenty-four Weeks Ended June 19, 1998 and June 20, 1997 4
Condensed Combined Consolidated Statements of Cash Flows for
the Twenty-four Weeks Ended June 19, 1998 and June 20, 1997 5
Notes to Condensed Combined Consolidated Statements 6
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Host Marriott Corporation
/s/ Donald D. Olinger
---------------------
July 31, 1998 Donald D. Olinger
Senior Vice President and
Corporate Controller
2
<PAGE>
HOST MARRIOTT HOTELS
CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
JUNE 19, 1998
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Property and Equipment, net........................................ $ 5,054
Notes and Other Receivables, net (including amounts due from
affiliates of $112 million)....................................... 137
Due from Managers.................................................. 94
Investments in Affiliates.......................................... 5
Other Assets....................................................... 362
Short-term Marketable Securities................................... 46
Cash and Cash Equivalents.......................................... 496
-------
$6,194
=======
LIABILITIES AND EQUITY
Debt
Senior Notes..................................................... $ 1,585
Mortgage Debt.................................................... 1,890
Other............................................................ 95
-------
3,570
Accounts Payable and Accrued Expenses.............................. 77
Deferred Income Taxes.............................................. 464
Other Liabilities.................................................. 517
-------
Total Liabilities.............................................. 4,628
-------
Obligation to Host Marriott Corporation Related to Mandatorily
Redeemable Convertible Preferred Securities of a Subsidiary Trust
of Host Marriott Corporation Substantially All of Whose Assets are
the Convertible Subordinated Debentures Due 2026 ("Convertible
Preferred Securities")............................................ 550
Equity
Investments and Advances from Host Marriott Corporation.......... 1,016
-------
$6,194
=======
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
3
<PAGE>
HOST MARRIOTT HOTELS
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
TWENTY-FOUR WEEKS ENDED JUNE 19, 1998 AND JUNE 20, 1997
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
REVENUES
Hotels......................................................... $ 652 $ 512
Net gains on property transactions............................. 52 2
Equity in earnings (losses) of affiliates...................... (1) 3
Other.......................................................... 5 5
----- -----
Total revenues............................................... 708 522
----- -----
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees of
$102 million and $78 million, respectively)................... 343 291
Other.......................................................... 10 16
----- -----
Total operating costs and expenses........................... 353 307
----- -----
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE EXPENSES,
REIT CONVERSION EXPENSES AND INTEREST........................... 355 215
Minority interest................................................ (30) (24)
Corporate expenses............................................... (20) (18)
REIT Conversion expenses......................................... (6) --
Interest expense................................................. (151) (122)
Dividends on Convertible Preferred Securities.................... (17) (17)
Interest income.................................................. 26 22
----- -----
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM................ 157 56
Provision for income taxes....................................... (64) (24)
----- -----
INCOME BEFORE EXTRAORDINARY ITEM................................. 93 32
Extraordinary item--Gain on extinguishment of debt (net of
income taxes of $3 million in 1997)............................. -- 5
----- -----
NET INCOME....................................................... $ 93 $ 37
===== =====
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
4
<PAGE>
HOST MARRIOTT HOTELS
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
TWENTY-FOUR WEEKS ENDED JUNE 19, 1998 AND JUNE 20, 1997
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations................................ $ 93 $ 32
Adjustments to reconcile to cash from operations:
Depreciation and amortization.................................. 114 102
Income taxes................................................... 45 --
Gains on sales of hotel properties............................. (51) --
Equity in (earnings) losses of affiliates........................ 1 (3)
Changes in operating accounts.................................... (23) 24
Other............................................................ 27 38
----- -----
Cash from operations......................................... 206 193
----- -----
INVESTING ACTIVITIES
Proceeds from sales of assets.................................... 209 6
Acquisitions..................................................... (358) (156)
Capital expenditures:
Renewals and replacements...................................... (77) (60)
New development projects....................................... (18) --
New investment capital expenditures............................ (14) (18)
Purchases of short-term marketable securities.................... (97) --
Sales of short-term marketable securities........................ 405 --
Notes receivable collections..................................... 4 4
Affiliate collections, net....................................... (78) 10
Other............................................................ (25) 14
----- -----
Cash used in investing activities............................ (49) (200)
----- -----
FINANCING ACTIVITIES
Cash transferred to Host Marriott................................ (62) --
Issuances of debt................................................ 5 84
Issuances of common stock by Host Marriott....................... 1 3
Scheduled principal repayments................................... (18) (44)
Debt prepayments................................................. (49) (236)
Other............................................................ (32) 5
----- -----
Cash used in financing activities............................ (155) (188)
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. $ 2 $(195)
===== =====
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or purchase
of
controlling interests in, certain hotel properties............ $ 164 $ 258
===== =====
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
5
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. On April 16, 1998, the Board of Directors of Host Marriott Corporation
("Host Marriott") approved a plan to reorganize Host Marriott's current
business operations by the spin-off of Host Marriott's senior living
business ("SLC") and the contribution of Host Marriott's hotels and certain
other assets and liabilities to a newly formed Delaware limited
partnership, Host Marriott, L.P. (the "Operating Partnership") whose sole
general partner will be Host Marriott Trust, a newly formed Maryland Real
Estate Investment Trust ("REIT") that will merge with Host Marriott
Corporation, a Delaware corporation. Host Marriott's contribution of its
hotels and certain assets and liabilities to the Operating Partnership (the
"Contribution") in exchange for units of limited partnership interests in
the Operating Partnership will be accounted for at Host Marriott's
historical basis.
The accompanying condensed combined consolidated financial statements
include the accounts of the Host Marriott hotels and the assets and
liabilities expected to be included in the Contribution by Host Marriott to
the Operating Partnership upon its planned conversion to a REIT (the "REIT
Conversion") and is the predecessor to the Operating Partnership. In these
condensed combined consolidated financial statements, the predecessor to
the Operating Partnership is referred to as "Host Marriott Hotels" or the
"Company." The condensed combined consolidated financial statements exclude
the assets, liabilities, equity, operations and cash flows related to Host
Marriott's portfolio of 31 senior living communities. After the REIT
Conversion, SLC will own these assets and lease the existing hotels from
the Company.
In June 1998, as part of the REIT Conversion, Host Marriott filed a
preliminary Prospectus/Consent Solicitation with the Securities and
Exchange Commission. This Prospectus/Consent Solicitation Statement
describes a proposal whereby the Operating Partnership will acquire by
merger (the "Mergers") eight public limited partnerships (the
"Partnerships") that own or control 24 full-service hotels in which Host
Marriott or its subsidiaries are general partners. As more fully described
in the Prospectus/Consent Solicitation Statement, limited partners of those
Partnerships that participate in the Mergers will receive either OP Units
or, at their election, unsecured notes due December 15, 2005 issued by the
Operating Partnership ("Notes"), in exchange for their partnership
interests in such Partnerships.
However, the consummation of the REIT Conversion is subject to significant
contingencies that are outside the control of Host Marriott, including
final Board of Directors approval, consents of shareholders, partners,
bondholders, lenders and ground lessors of Host Marriott, its affiliates
and other third parties. Accordingly, there can be no assurance that the
REIT Conversion will be completed.
On April 20, 1998, Host Marriott and certain of its subsidiaries filed a
shelf registration on Form S-3 (the "Shelf Registration") with the
Securities and Exchange Commission for $2.5 billion in securities, which
may include debt, equity or a combination thereof. Host Marriott
anticipates that any net proceeds from the sale of offered securities will
be used for refinancing of Host Marriott's indebtedness, including the
Existing Senior Notes (as defined below), the potential refinancing of
portions of Host Marriott's approximately $2 billion of mortgage debt,
potential future acquisitions and general corporate purposes.
In June 1998, HMH Properties, Inc., ("HMH Properties") an indirect wholly-
owned subsidiary of Host Marriott, commenced offers to purchase any and all
of HMH Properties' (i) $600 million in 9 1/2% senior notes due 2005, (ii)
$350 million in 9% senior notes due 2007 and (iii) $600 million in 8 7/8%
senior notes due 2007 (collectively, the "Existing Senior Notes").
Concurrently with each offer to purchase, HMH Properties is soliciting
consents from registered holders of the Existing Senior Notes to certain
amendments to eliminate or modify substantially all of the restrictive
covenants and certain other provisions contained in the indentures pursuant
to which the Existing Senior Notes were issued.
As of July 14, 1998, HMH Properties had received valid tenders and executed
consents to substantially all of its Existing Senior Notes. HMH Properties'
obligation to purchase the Existing Senior Notes remains
6
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
subject to satisfaction or waiver of certain conditions, including
consummation of the $1.4 billion offering of New Senior Notes (as defined
below) and obtaining the new credit facility discussed below. The tender
offer expires on August 4, 1998, unless extended.
On July 17, 1998, HMH Properties filed a supplement to the Shelf
Registration for an offering (the "Offering") of $1.4 billion of senior
notes (the "New Senior Notes"). The New Senior Notes are expected to be
issued in two series, $400 million due on 2005 and $1 billion due in 2008.
The New Senior Notes will be guaranteed by Host Marriott and certain of its
subsidiaries until such time as the REIT conversion takes place.
Host Marriott is negotiating with a number of financial institutions with
respect to a $1.25 billion credit facility (the "Credit Facility") to be
provided to HMH Properties by a syndicate of lenders. The Credit Facility
will replace the Company's existing $500 million credit facility (the
"Existing Credit Facility"). The net proceeds from the Offering and
borrowings under the Credit Facility will be used by Host Marriott to
purchase the Existing Senior Notes and to make bond premium and consent
payments and other expenses expected to total approximately $178 million.
These costs, along with the write-off of deferred financing fees of
approximately $55 million related to the Existing Senior Notes and the
Existing Credit Facility, will be recorded as a pre-tax extraordinary loss
on the extinguishment of debt in the third quarter of 1998 if the
transactions are consummated. The Credit Facility will be guaranteed by
Host Marriott and certain of its subsidiaries.
The accompanying condensed combined consolidated financial statements have
been prepared by the Company without audit. Certain information and
footnote disclosures normally included in financial statements presented in
accordance with generally accepted accounting principles have been
condensed or omitted. The Company believes the disclosures made are
adequate to make the information presented not misleading. However, the
condensed combined consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's audited financial statements for the three fiscal
years in the period ended January 2, 1998.
In the opinion of the Company, the accompanying unaudited condensed combined
consolidated financial statements reflect all adjustments necessary to
present fairly the financial position of the Company as of June 19, 1998
and the results of operations and cash flows for the twenty-four weeks
ended June 19, 1998 and June 20, 1997. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short-term variations.
7
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. In April 1998, Host Marriott reached a definitive agreement with various
affiliates of The Blackstone Group and Blackstone Real Estate Partners
(collectively, "Blackstone") to acquire controlling interests in 12 luxury
hotels and a first mortgage interest in another hotel in the U.S. and
certain other assets in a transaction valued at approximately $1.735
billion. The Company expects to pay approximately $862 million in cash and
assumed debt and to issue approximately 43.7 million Operating Partnership
units. Each OP Unit will be exchangeable for one share of Host Marriott
common stock (or its cash equivalent). Upon completion of the acquisition,
Blackstone will own approximately 18% of the outstanding shares of Host
Marriott common stock on a fully converted basis. The Blackstone portfolio
consists of two Ritz- Carltons, two Four Seasons, one Grand Hyatt, three
Hyatt Regencies, four Swissotel properties and a mortgage note on a third
Four Seasons.
The Blackstone transaction is expected to close immediately after the REIT
Conversion. At that time, Blackstone's hotels and other assets will be
contributed into the Operating Partnership. The hotels will continue to be
managed under the existing management contracts. Consummation of the
Blackstone transaction is also subject to certain conditions, including
consummation of the REIT Conversion by March 31, 1999.
3. Revenues primarily represent house profit from the Company's hotel
properties, net gains (losses) on property transactions and equity in
earnings (losses) of affiliates. House profit reflects the net revenues
flowing to the Company as property owner and represents 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.
House profit generated by the Company's hotels for 1998 and 1997 consists
of:
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED
-----------------------
JUNE 19, JUNE 20,
1998 1997
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Sales
Rooms............................................... $1,020 $ 831
Food & Beverage..................................... 444 346
Other............................................... 110 80
----------- -----------
Total Hotel Sales................................. 1,574 1,257
----------- -----------
Department Costs
Rooms............................................... 227 187
Food & Beverage..................................... 321 255
Other............................................... 55 40
----------- -----------
Total Department Costs............................ 603 482
----------- -----------
Department Profit................................... 971 775
Other Deductions.................................... 319 263
----------- -----------
House Profit........................................ $ 652 $ 512
=========== ===========
</TABLE>
4. Basic and diluted earnings per OP Unit have been calculated based on the
number of Host Marriott common shares outstanding for all periods presented
because it is expected that upon the REIT Conversion the Operating
Partnership will issue OP Units to Host Marriott in exchange for the
Contribution equal to the number of shares of outstanding Host Marriott
common stock. Accordingly, the following discussion of earnings per OP Unit
is on a pro forma basis as if the REIT Conversion and Contribution had
occurred.
Basic earnings per OP Unit is computed by dividing net income by the
weighted average number of shares of common stock outstanding of Host
Marriott. Diluted earnings per OP Unit is computed by dividing net
8
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
income plus dividends by the weighted average number of shares of common
stock outstanding plus other potentially dilutive securities of Host
Marriott. Diluted earnings per OP Unit was not adjusted for the impact of
the Convertible Preferred Securities in 1997 as they were anti-dilutive.
Basic and diluted earnings per OP Unit on a pro forma basis are as follows:
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED
-----------------------
JUNE 19, JUNE 20,
1998 1997
----------- -----------
<S> <C> <C>
Basic earnings per OP Unit:
Income before extraordinary item............. $ .46 $ .16
Extraordinary item--Gain on extinguishment of
debt (net of income taxes).................. -- .02
----------- -----------
Basis earnings per OP Unit................. $ .46 $ .18
=========== ===========
Diluted earnings per OP Unit:
Income before extraordinary item............. $ .43 $ .16
Extraordinary item--Gain on extinguishment of
debt (net of income taxes).................. -- .02
----------- -----------
Diluted earnings per OP Unit............... $ .43 $ .18
=========== ===========
</TABLE>
A reconciliation of the number of shares utilized for the calculation of
diluted earnings per OP Unit follows:
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED
-----------------------
JUNE 19, JUNE 20,
1998 1997
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Weighted average number of common shares
outstanding....................................... 204.0 202.6
Assuming distribution of common shares granted
under the comprehensive stock plan, less shares
assumed purchased at average market price......... 4.3 5.0
Assuming distribution of common shares upon
redemption of Convertible Preferred Securities.... 29.6 --
Assuming distribution of common shares issuable for
warrants, less shares assumed purchased at average
market price...................................... .1 .3
----------- -----------
Shares utilized for the calculation of diluted
earnings per OP Unit............................ 238.0 207.9
=========== ===========
</TABLE>
5. As of June 19, 1998, the Company had minority interests in 18 affiliates
that own an aggregate of 240 properties, 20 of which are full-service
properties, managed primarily by Marriott International, Inc. The Company's
equity in earnings (losses) of affiliates was a $1 million loss and $3
million for the twenty-four weeks ended June 19, 1998 and June 20, 1997,
respectively.
Combined summarized operating results reported by affiliates follows:
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED
-----------------------
JUNE 19, JUNE 20,
1998 1997
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Revenues........................................ $ 255 $ 303
Operating expenses:
Cash charges (including interest)............. 152 185
Depreciation and other non-cash charges....... 69 95
----------- -----------
Income (loss) before extraordinary item......... 34 23
Extraordinary item--forgiveness of debt......... 4 12
----------- -----------
Net income.................................. $ 38 $ 35
=========== ===========
</TABLE>
9
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the first quarter of 1998, the Company obtained a controlling interest
in the partnership that owns the 1,671-room Atlanta Marriott Marquis for
approximately $239 million, including $164 million in assumed mortgage
debt. The Company previously owned a 1.3% general and limited partnership
interest.
In second quarter of 1998, the Company acquired the partnership that owns
the 289-room Park Ridge Marriott in Park Ridge, New Jersey for $24 million.
The Company previously owned a 1% managing general partner interest and
held a note receivable interest.
6. In the first quarter of 1998, the Company acquired a controlling interest
in, and became the managing general partner for, the partnership that owns
the 359-room Albany Marriott, the 350-room San Diego Marriott Mission
Valley and the 320-room Minneapolis Marriott Southwest for approximately
$50 million.
In the second quarter of 1998, the Company acquired the 397-room Ritz-
Carlton, Tysons Corner for $96 million and the 281-room Ritz-Carlton,
Phoenix for $75 million. In addition, the Company acquired the 487- room
Torrance Marriott near Los Angeles, California for $52 million. Also in the
second quarter of 1998, the Company sold the 662-room New York Marriott
East Side for approximately $191 million and recorded a pre-tax gain of
approximately $40 million. The Company also sold the 191-room Napa Valley
Marriott for approximately $21 million and recorded a pre-tax gain of
approximately $10 million.
7. In March 1997, Host Marriott purchased 100% of the outstanding bonds
secured by a first mortgage on the San Francisco Marriott Hotel. Host
Marriott purchased the bonds for $219 million, an $11 million discount to
the face value of $230 million. In connection with the redemption and
defeasance of the bonds, the Company recognized an extraordinary gain of $5
million, which represents the $11 million discount and the write-off of
deferred financing fees, net of taxes.
8. The Company operates in the full-service hotel segment of the lodging
industry. The Company's hotels are primarily operated under the Marriott or
Ritz-Carlton brands.
As of June 19, 1998 and June 20, 1997, the Company's foreign operations
consist of four full-service hotel properties located in Canada and two
full-service hotel properties located in Mexico. There were no intercompany
sales between the properties and the Company. The following table presents
revenues for each of the geographical areas in which the Company operates
(in millions):
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED
---------------------------
JUNE 19, 1998 JUNE 20, 1997
------------- -------------
<S> <C> <C>
United States................................. $689 $508
International................................. 19 14
---- ----
Total..................................... $708 $522
==== ====
</TABLE>
9. In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," ("SFAS 130"). SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in
financial statements. The objective of SFAS 130 is to report a measure of
all changes in equity of an enterprise that result from transactions and
other economic events of the period other than transactions with owners.
Comprehensive income is the total of net income and all other nonowner
changes in equity.
The Company's only component of other comprehensive income is the right to
receive up to 1.4 million shares of Host Marriott Services Corporation's
("HMSC") common stock or an equivalent cash value subsequent to exercise of
the options held by certain former and current employees of Marriott
International. For the twenty-four weeks ended June 19, 1998, other
comprehensive income was $1 million and consisted of the unrealized gain on
the appreciation of the HMSC common stock. For the twenty-four weeks ended
June 19, 1998, comprehensive income was $94 million. For the twenty-four
weeks ended June 20, 1997, other comprehensive income was $3 million. For
twenty-four weeks ended June 20, 1997, comprehensive income $40 million. As
of June 19, 1998 and January 2, 1998, the Company's accumulated other
comprehensive income of approximately $11 million and $10 million,
respectively, was included in Investments and Advances from Host Marriott
Corporation.
10
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. The obligation for the Convertible Preferred Securities has been pushed
down to these financial statements because it is expected that upon the
REIT Conversion the Operating Partnership will assume primary liability
for repayment of the convertible debentures of Host Marriott underlying
the Convertible Preferred Securities. Upon conversion by a Convertible
Preferred Securities holder, the Operating Partnership will purchase
common shares from Host Marriott Trust in exchange for a like number of
OP Units and distribute the common shares to the Convertible Preferred
Securities holder.
In December 1996, Host Marriott Financial Trust (the "Issuer"), a wholly-
owned subsidiary trust of Host Marriott, 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 Host Marriott to the extent the
Issuer has funds available therefor. This guarantee, when taken together
with Host Marriott obligations under the indenture pursuant to which the
Debentures were issued, the Debentures, Host Marriott'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 Host Marriott. 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 is
its sole asset. Separate financial statements of the Issuer are not
presented because of Host Marriott's guarantee described above; Host
Marriott'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 Host Marriott 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 Host
Marriott common stock at the 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 Convertible Preferred
Securities. During 1998 and 1997, 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. Host Marriott 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, Host
Marriott 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 Host Marriott 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. As part of the Contribution, the Operating Partnership will
become an Obligor under the Convertible Preferred Securities.
11. In the second quarter of 1998, on behalf of SLC, Host Marriott prepaid
$92 million of 9% unsecured debt provided by Marriott International. Host
Marriott now holds a $92 million, 9% note due from SLC. Host Marriott
also holds a $14.8 million, 6.375% unsecured note due from SLC which
matures in December, 2007. Host Marriott holds a total of approximately
$107 million in notes due from SLC which are included as notes and other
receivables in the accompanying condensed combined consolidated balance
sheet.
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