<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 15, 1998
HMH Properties, Inc.
-----------------------------------------------
(Exact name of registrant as specified in its
charter)
Delaware 33-95058 52-1822042
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(State or other jurisdiction of (Commission File (I.R.S Employer
incorporation of organization) Number) Identification No.)
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.
HMH Properties, Inc. (the "Company") believes that the following
information is material to its investors and has included the following
information herein:
. The condensed financial statements of Host Marriott Corporation,
the Parent Company (as defined herein) set forth in clause (1) of
Item 7 which represents the investment in, and operations of,
subsidiaries with restricted net assets accounted for on the
equity method of accounting.
. The combined consolidated financial statements of Host Marriott
Hotels (as defined herein), set forth in clause (2) of Item 7
which represents the assets and liabilities expected to be
included in the Host Marriott Corporation's contribution of
certain assets and liabilities to the Operating Partnership (as
defined herein) in conjunction with the Host Marriott
Corporation's contemplated REIT Conversion (as defined herein).
. The Calculation of the Ratio of Earnings to Fixed Charges which
is derived from the combined consolidated financial statements of
HMH Properties, Inc. and HMC Capital Resources Holdings
Corporation and subsidiaries.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
(a) Financial Statements of the Parent Company Page
----
Condensed Balance Sheets as of March 27, 1998 and
January 2, 1998 3
Condensed Statements of Operations for the twelve weeks
ended March 27, 1998 and March 28, 1997 4
Condensed Statements of Cash Flows for the twelve weeks
ended March 27, 1998 and March 28, 1997 5
Notes to the condensed financial statements 6
(b) Financial Statements of Host Marriott Hotels
(predecessor to the Operating Partnership)
Report of Independent Public Accountants 11
Combined Consolidated Balance Sheets as of January 2,
1998 and January 3, 1997 12
Combined Consolidated Statements of Operations for the
Fiscal Years Ended January 2, 1998, January 3, 1997
and December 29, 1995 13
Combined Consolidated Statements of Cash Flows for the
Fiscal Years Ended January 2, 1998, January 3, 1997
and December 29, 1995 14
Notes to Combined Consolidated Financial Statements 15
Condensed Combined Consolidated Balance Sheet as of
March 27, 1998 (unaudited) 38
Condensed Combined Consolidated Statements of Operations
for the Twelve Weeks Ended March 27, 1998 and March 28,
1997 (unaudited) 39
Condensed Combined Consolidated Statements of Cash Flows
for the Twelve Weeks Ended March 27, 1998 and March 28,
1997 (unaudited) 40
Notes to Condensed Combined Consolidated Financial
Statements (unaudited) 41
(2) Exhibits
12 Ratio of Earnings to Fixed Charges
23 Consent of Independent Public Accountants
Pursuant to the requirements at the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigner hereunto duly authorized.
Host Marriott Corporation
July 15, 1998 /s/ Donald D. Olinger
-----------------------------
Vice President
and Corporate Controller
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<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 27, January 2,
1998 1998
--------- -----------
(in millions)
<S> <C> <C>
ASSETS
Property and Equipment, net....................................... $2,800 $2,786
Investments in Affiliates......................................... 6 13
Notes Receivable, net............................................. 40 54
Due from Managers................................................. 65 53
Investment in and Advances to Restricted Subsidiaries............. 980 963
Other Assets...................................................... 170 176
Short-term Marketable Securities.................................. 63 163
Cash and Cash Equivalents......................................... 303 247
------ ------
Total Assets.................................................... $4,427 $4,455
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt.............................................................. $1,928 $1,958
Accounts Payable and Accrued Expenses............................. 106 97
Deferred Income Taxes............................................. 351 363
Other Liabilities................................................. 264 287
------ ------
Total Liabilities............................................... 2,649 2,705
------ ------
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").................... 550 550
------ ------
Shareholders' Equity
Common Stock..................................................... 204 204
Additional Paid-in Capital....................................... 935 937
Retained Earnings................................................ 79 49
Accumulated Other Comprehensive Income........................... 10 10
------ ------
1,228 1,200
------ ------
Total Liabilities and Shareholders' Equity...................... $4,427 $4,455
====== ======
</TABLE>
See Accompanying Notes to Condensed Financial Information.
-3-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
Twelve weeks ended March 27, 1998 and March 28, 1997
(unaudited, in millions)
<TABLE>
<CAPTION>
1998 1997
------- -------
(in millions)
<S> <C> <C>
Revenues................................................................................ $ 179 $ 155
Operating costs and expenses.......................................................... 107 109
---- ----
Operating profit before minority interest,
corporate expenses and interest....................................................... 72 46
Minority interest....................................................................... (16) (11)
Corporate expenses...................................................................... (7) (6)
Interest expense........................................................................ (42) (40)
Dividends on Convertible Preferred Securities of subsidiary trust....................... (9) (9)
Interest income......................................................................... 8 8
---- ----
Income (loss) before income taxes and equity in earnings of
Restricted Subsidiaries............................................................... 5 (12)
Equity in earnings of Restricted Subsidiaries........................................... 47 23
Provision for income taxes.............................................................. (22) (5)
---- ----
Income before extraordinary items....................................................... 30 6
Extraordinary items - Gain on extinguishment of debt, net of taxes...................... 5
---- ----
Net income.............................................................................. $ 30 $ 11
==== ====
</TABLE>
See Accompanying Notes to Condensed Financial Information.
-4-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
TWELVE WEEKS ENDED MARCH 27, 1998 AND MARCH 28, 1997
(UNAUDITED IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
------ ------
(in millions)
<S> <C> <C>
Cash from operations.............................. $ 39 $ 34
----- -----
Investing Activities
Net proceeds from sale of assets................. 1 3
Capital expenditures............................. (38) (29)
Acquisitions..................................... (22) (58)
Dividends from Restricted Subsidiaries........... - 13
Purchases of short-term marketable securities.... (53) -
Sales of short-term marketable securities........ 153 -
Notes Receivable Collections..................... - 1
Notes Receivable and Affiliate Collections, net.. 14 4
Other............................................ (6) 2
----- -----
Cash from (used in) investing activities....... 49 (64)
----- -----
Financing Activities
Issuances of debt................................ 1 90
Issuances of common stock........................ - 2
Repayments of debt............................... (32) (225)
Deposits into Debt Service Reserves.............. 15 -
Other............................................. (16) 5
----- -----
Cash used in financing activities.............. (32) (128)
----- -----
Increase (decrease) in cash and cash equivalents.. $ 56 $(158)
===== =====
</TABLE>
See Accompanying Notes to Condensed Financial Information.
-5-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
A) The accompanying condensed financial information of Host Marriott
Corporation (the "Parent Company") as of March 27, 1998 and the twelve weeks
ended March 27, 1998 and March 28, 1997 present the financial position,
results of operations and cash flows of the Parent Company with the
investment in, and operations of, subsidiaries with restricted net assets
accounted for on the equity method of accounting. The Parent Company's
restricted subsidiaries are HMH Properties, Inc., HMC Acquisition Properties
(prior to the merger of HMH Properties, Inc. and HMC Acquisitions, Inc.),
and HMC Capital Resources Corporation.
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").
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.
On July 10, 1997, Properties and Acquisitions completed consent
solicitations (the "Consent Solicitations") with holders of their senior
notes to amend certain provisions of their senior notes indentures. The
Consent Solicitations facilitated the merger of Acquisitions with and into
Properties (the "Merger"). The amendments to the indentures also increased
the ability of Properties to acquire, through certain subsidiaries,
additional properties subject to non-recourse indebtedness and controlling
interests in corporations, partnerships and other entities holding
attractive properties and increased the threshold required to permit
Properties to make distributions to affiliates.
Concurrent with the Consent Solicitations and the Merger, Properties issued
an aggregate of $600 million of 8-7/8% senior notes (the "New Properties
Notes") at par with a maturity of July 2007.
The Properties Notes, the Acquisitions Notes and the New Properties Notes
are guaranteed on a joint and several basis by certain of Properties'
subsidiaries and rank pari passu in right of payment with all other existing
future senior indebtedness of Properties. Properties is the owner of 62 of
the Company's 99 lodging properties at March 27, 1998.
The net assets of Properties at March 27, 1998 and January 2, 1998 were
approximately $542 million and $518 million, respectively, substantially all
of which were restricted. The indentures governing the Properties Notes, the
Acquisitions Notes and the New Properties 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.
HMC Capital Resources Corporation ("Resources") was incorporated in Delaware
on June 5, 1997, to acquire and own full-service hotels. HMC Capital
Corporation ("Capital") was incorporated as a Delaware Corporation on
November 25, 1996, and is the holder of a mortgage on the New York Marriott
Financial Center Hotel, which is owned by Resources. The combined companies
(collectively "Capital Resources") are wholly-owned subsidiaries of HMC
Capital Resources Holding Corporation ("Holdings"), a Delaware corporation
formed on June 5, 1997, which is a wholly-owned subsidiary of the Parent
Company.
On June 19, 1997, the Parent Company contributed six full-service hotels and
other assets to Resources which, when combined with the mortgage for one of
the six hotels held by Capital, represented a total contribution of
approximately $447 million. Capital Resources is the owner of seven of the
Company's 99 lodging properties at March 27, 1998.
-6-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION - (Continued)
On June 19, 1997, Resources entered into a revolving line of credit
agreement (the "Credit Agreement") with a group of commercial banks under
which it may borrow up to $500 million for certain permitted uses. Any
outstanding borrowings on the Credit Agreement as of June 19, 2000, will be
converted to a term loan arrangement with all unpaid advances due June 19,
2004. Borrowings under the Credit Agreement are secured by substantially all
of the assets of Capital Resources and its subsidiaries and are also
guaranteed in their entirety by the Parent Company and Holdings.
The net assets of Capital Resources at March 27, 1998 and January 2, 1998
were approximately $453 million and $451 million, substantially all of which
were restricted. The Credit Agreement contains covenants that, among other
things, limit Capital Resources' ability to pay dividends, incur additional
debt, create additional liens on its assets, engage in certain transactions
with affiliates, make investments and incur certain capital expenditures.
Capital Resources is also required to make certain contributions to a
property improvement fund and to maintain certain debt coverage and leverage
ratios.
Interest on the Credit Agreement is accrued at either the Eurodollar rate
plus 170 basis points or at the prime rate plus 70 basis points at Capital
Resources' option. Capital Resources also owes a commitment fee of 35 basis
points on the unused commitment, with payments due quarterly in February,
May, August and November. As of March 27, 1998 $22.2 million is outstanding
related to a draw down for the acquisition of one property during fiscal
year 1997. In June 2000 any balance outstanding under the Credit Agreement
converts to a term loan which matures in June 2004. The interest rate at
March 27, 1998 was 7.61%.
Properties and Capital Resources 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) Properties paid $13 million in the first quarter of 1997, in cash dividends
to the Parent Company as permitted under the indenture agreements. There
were no cash dividends paid to the Parent Company by Capital Resources in
the first quarter of 1998.
C) The Parent Company purchased 100% of the outstanding bonds secured by a
first mortgage on the San Francisco Marriott Hotel in the first quarter of
1997. The Parent Company 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 Parent Company recognized an
extraordinary gain of $5 million, which represents the $11 million discount
less the write-off of unamortized deferred financing fees, net of taxes. The
San Francisco Marriott Hotel was contributed to Capital Resources in June
1997.
Aggregate debt maturities at March 27, 1998, excluding $17 million in
capital lease obligations, are (in millions):
<TABLE>
<S> <C>
1998..................................................... $ 317
1999..................................................... 54
2000..................................................... 131
2001..................................................... 216
2002..................................................... 63
Thereafter............................................... 1,130
------
$1,911
======
</TABLE>
-7-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION - (CONTINUED)
D) 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 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 the first quarter of
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. 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
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.
E) In April 1998, the Parent Company reached a definitive agreement with
various affiliates of the Blackstone Group and Blackstone Real Estate
Partners (collectively, "Blackstone") to acquire interests in 12 world-class
luxury hotels in the U.S. and certain other assets in a transaction valued
at approximately $1.735 billion, including the assumption of two mortgages,
one of which is secured by a thirteenth hotel. The Company expects to pay
approximately $862 million in cash and assumed debt and to issue
approximately 43.7 million Operating Partnership units of the new operating
partnership (the "Operating Partnership"), to be formed as part of the
Company's reorganization, described below. Each Operating Partnership unit
will be exchangeable for one share of Parent Company common stock (or its
cash equivalent). Upon completion of the acquisition, Blackstone will own
approximately 18% of the shares outstanding of Parent Company common stock
on a fully converted basis. The Blackstone portfolio consists of two Ritz-
Carltons, two Four Seasons, one Grand Hyatt, three Hyatt Regencies and four
Swissotel properties. The acquisition of one of the Four Seasons hotels is
subject to a letter of intent. Should the Company be unable to complete a
definitive agreement for the acquisition of that property, its interest
would consist of a mortgage note secured by the hotel. There is no assurance
that the Company will be able to reach a definitive agreement.
In addition, the Parent Company's board of directors (the "Board") has
authorized the Parent Company to reorganize its remaining business
operations to qualify as a real estate investment trust ("REIT"), effective
as of
-8-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION - (CONTINUED)
January 1, 1999, and to spin-off its senior living communities ("SLC")
through a taxable stock dividend to its shareholders (collectively, the
"REIT Conversion"). After the REIT Conversion which is subject to
shareholder and final Board approval, the Parent Company intends to operate
as an "UPREIT", with all of its assets and operations conducted through the
newly formed Operating Partnership of which the Parent Company will be the
general partner.
The Parent Company will distribute shares in SLC to its shareholders at the
time of the REIT Conversion and the Parent Company expects to make a cash
distribution at that time. The projected aggregate value of these
distributions, which are expected to be treated as taxable dividends to
shareholders, is currently estimated between $400 million and $550 million.
An additional taxable distribution may be required in 1999. SLC is expected
to own the Parent Company's portfolio of senior living properties. This
portfolio currently consists of 31 retirement communities, totaling 7,218
units in 13 states. The communities will continue to be managed by Marriott
International. In addition, SLC will lease substantially all of the hotels
owned by the REIT and its affiliates. SLC will operate independently of the
Parent Company. In order to facilitate the transition, there may initially
be some board of directors overlap, which will be eliminated over time.
Following the REIT Conversion, Host Marriott will own Operating Partnership
units in the Operating Partnership equal to the number of outstanding shares
of Host Marriott common stock at the time of the REIT Conversion. The UPREIT
structure will not affect the ownership by shareholders of their existing
Parent Company shares. As part of the REIT Conversion, limited partners in
the Parent Company's full-service hotel partnerships and joint ventures are
expected to be given an opportunity to receive, on a tax-deferred basis,
Operating Partnership units in the new Operating Partnership in exchange for
their current partnership interests. Furthermore, the Parent Company
anticipates adjusting the conversion ratio of its Convertible Preferred
Securities to reflect the distribution of SLC and cash to Company
stockholders and issuing additional debt and equity securities.
The Blackstone transaction is expected to close simultaneously with the REIT
Conversion. At that time, Blackstone's hotels and other assets will be
contributed in the Operating Partnership. The hotels will continue to be
managed under the existing management contracts.
The REIT expects to qualify as a real estate investment trust under federal
income tax law, beginning January 1, 1999. However, consummation of the REIT
Conversion is subject to significant contingencies that are outside the
control of the Company, including final Board approval, consent 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 or that it will be
effective as of January 1, 1999. Consummation of the Blackstone transaction
is also subject to certain conditions, including consummation of the REIT
Conversion by March 31, 1999.
F) On June 26, 1998 Host Marriott Corporation announced its intention to merge
Holdings with and into Properties. In connection with this transaction,
Properties commenced an offer to purchase the $1.55 billion in outstanding
senior notes (the "Old Senior Notes"). In conjunction with this transaction,
Properties intends to enter into a credit facility (the "Credit Facility")
and issue $1.4 billion of senior notes (the "New Senior Notes"). The net
proceeds from borrowings under the Credit Facility and the New Senior Notes
will be used by Properties to purchase the Old Senior Notes. It is
anticipated that the Parent Company will guarantee the New Senior Notes and,
following the REIT Conversion, that the New Senior Notes will become the
direct obligation of the Operating Partnership.
G) The accompanying statements of income reflect the equity in earnings of
Restricted Subsidiaries after elimination of interest expense (see Note B)
and before income taxes. The Restricted Subsidiaries are included in the
-9-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION - (CONTINUED)
consolidated income tax returns of Host Marriott Corporation.
-10-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Host Marriott Corporation:
We have audited the accompanying combined consolidated balance sheets of Host
Marriott Hotels (as defined in Note 1) as of January 2, 1998 and January 3,
1997, and the related combined consolidated statements of operations and cash
flows for each of the three fiscal years in the period ended January 2, 1998.
These financial statements are the responsibility of Host Marriott Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the combined 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 combined consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Host
Marriott Hotels as of January 2, 1998 and January 3, 1997, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 2, 1998, in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 2 to the combined consolidated financial
statements, in 1995 Host Marriott Hotels changed its method of accounting for
the impairment of long-lived assets.
Arthur Andersen LLP
Washington, D.C.
May 22, 1998
11
<PAGE>
HOST MARRIOTT HOTELS
COMBINED CONSOLIDATED BALANCE SHEETS
January 2, 1998 and January 3, 1997
(in millions)
1997 1996
------ ------
ASSETS
Property and Equipment, net..................................... $4,634 $3,805
Notes and Other Receivables, net (including amounts due from
affiliates of $23 million and $156 million, respectively)...... 54 297
Due from Managers............................................... 87 89
Investments in Affiliates....................................... 13 11
Other Assets.................................................... 271 246
Short-term Marketable Securities................................ 354 -
Cash and Cash Equivalents....................................... 494 704
------ ------
$5,907 $5,152
====== ======
LIABILITIES AND EQUITY
Debt
Senior Notes................................................... $1,585 $1,021
Mortgage Debt.................................................. 1,784 1,529
Other.......................................................... 97 97
------ ------
3,466 2,647
Accounts Payable and Accrued Expenses........................... 59 74
Deferred Income Taxes........................................... 487 464
Other Liabilities............................................... 371 290
------ ------
Total Liabilities.............................................. 4,383 3,475
------ ------
Obligation to Host Marriott Corporation Related to Mandatorily
Redeemable Convertible Preferred Securities of a Subsidiary
Trust Holding Company of Host Marriott Corporation
Substantially All of Whose Assets are the Convertible
Subordinated Debentures Due 2026 ("Convertible Preferred
Securities")................................................... 550 550
Equity
Investments and Advances from Host Marriott Corporation........ 974 1,127
------ ------
$5,907 $5,152
====== ======
See Notes to Combined Consolidated Financial Statements.
12
<PAGE>
HOST MARRIOTT HOTELS
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal years ended January 2, 1998, January 3, 1997 and December 29, 1995
(in millions)
1997 1996 1995
------- ------ ------
REVENUES
Hotels................................................ $1,093 $ 717 $ 474
Net gains (losses) on property transactions........... (11) 1 (3)
Equity in earnings of affiliates...................... 5 3 -
Other................................................. 23 11 13
------ ----- -----
Total revenues....................................... 1,110 732 484
------ ----- -----
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management
fees of $162 million, $101 million and $67 million,
respectively)....................................... 649 461 281
Other (including a $60 million write-down of
undeveloped land in 1995)............................ 29 38 89
------ ----- -----
Total operating costs and expenses................... 678 499 370
------ ----- -----
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
EXPENSES AND INTEREST................................. 432 233 114
Minority interest...................................... (32) (6) (2)
Corporate expenses..................................... (45) (43) (36)
Interest expense....................................... (287) (237) (178)
Dividends on Convertible Preferred Securities.......... (37) (3) -
Interest income........................................ 52 48 27
------ ----- -----
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES.......................................... 83 (8) (75)
Benefit (provision) for income taxes................... (36) (5) 13
------ ----- -----
INCOME (LOSS) FROM CONTINUING OPERATIONS............... 47 (13) (62)
DISCONTINUED OPERATIONS
Loss from discontinued operations (net of income tax
benefit of $3 million in 1995)....................... - - (8)
Provision for loss on disposal (net of income tax
benefit of $23 million in 1995)...................... - - (53)
------ ----- -----
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS............... 47 (13) (123)
Extraordinary items-Gain (loss) on extinguishment of
debt (net of income tax expense (benefit) of $1
million in 1997 and ($10) million in 1995)............ 3 - (20)
------ ----- -----
NET INCOME (LOSS)...................................... $ 50 $ (13) $(143)
====== ===== =====
See Notes to Combined Consolidated Financial Statements.
13
<PAGE>
HOST MARRIOTT HOTELS
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal years ended January 2, 1998, January 3, 1997 and December 29, 1995
(in millions)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations................. $ 47 $ (13) $ (62)
Adjustments to reconcile to cash from operations:
Depreciation and amortization........................... 231 168 122
Income taxes............................................ (20) (35) (35)
Amortization of deferred income......................... (4) (6) (7)
Net (gains) losses on property transactions............. 19 4 70
Equity in earnings of affiliates........................ (4) (3) -
Other................................................... 62 49 33
Changes in operating accounts:
Other assets.......................................... 57 9 (2)
Other liabilities..................................... 44 32 (9)
----- ----- ------
Cash from continuing operations......................... 432 205 110
Cash from (used in) discontinued operations............. - (4) 32
----- ----- ------
Cash from operations.................................... 432 201 142
----- ----- ------
INVESTING ACTIVITIES
Proceeds from sales of assets............................ 51 373 358
Less non-cash proceeds.................................. - (35) (33)
----- ----- ------
Cash received from sales of assets....................... 51 338 325
Acquisitions............................................. (359) (702) (392)
Capital expenditures:
Capital expenditures for renewals and replacements...... (129) (87) (56)
Lodging construction funded by project financing........ - (3) (40)
New investment capital expenditures..................... (29) (69) (64)
Purchases of short-term marketable securities............ (354) - -
Notes receivable collections............................. 6 13 43
Affiliate notes receivable and collections, net.......... (6) 21 2
Other.................................................... 13 (15) 26
----- ----- ------
Cash used in investing activities from continuing
operations............................................. (807) (504) (156)
Cash used in investing activities from discontinued
operations............................................. - - (52)
----- ----- ------
Cash used in investing activities....................... (807) (504) (208)
----- ----- ------
FINANCING ACTIVITIES
Issuances of debt........................................ 857 46 1,251
Issuances of Convertible Preferred Securities, net....... - 533 -
Issuances of common stock by Host Marriott............... 6 454 13
Scheduled principal repayments........................... (90) (82) (100)
Debt prepayments......................................... (403) (173) (960)
Cash transfers to Host Marriott.......................... (226) - -
Other.................................................... 21 28 -
----- ----- ------
Cash from financing activities from continuing
operations............................................. 165 806 204
Cash used in financing activities from discontinued
operations............................................. - - (4)
----- ----- ------
Cash from financing activities.......................... 165 806 200
----- ----- ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... (210) 503 134
CASH AND CASH EQUIVALENTS, beginning of year............. 704 201 67
----- ----- ------
CASH AND CASH EQUIVALENTS, end of year................... $ 494 $ 704 $ 201
===== ===== ======
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or
purchase of controlling interests in, certain hotel
properties............................................. $ 394 $ 696 $ 141
===== ===== ======
</TABLE>
See Notes to Combined Consolidated Financial Statements.
14
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
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 spin-off of Host Marriott's senior living business ("Senior
Living") and 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 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 combined consolidated
financial statements, the predecessor to the Operating Partnership is referred
to as "Host Marriott Hotels" or the "Company." The 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 reorganization, Senior Living will own these assets and lease the
existing hotels from the Company.
In connection with the REIT Conversion, the Operating Partnership is
proposing the purchase of the remaining interests in eight public limited
partnerships in which Host Marriott or its subsidiaries are general partners
that own or control 24 full-service hotels. Five of the partnerships (nine
hotels) are already controlled and consolidated by Host Marriott as are two of
the hotels in another of the partnerships for which a subsidiary of Host
Marriott provided 100% non-recourse financing for the acquisition of these two
hotels. The Operating Partnership is also proposing to purchase certain private
partnerships in which Host Marriott or its subsidiaries are general partners in
exchange for units in the Operating Partnership ("OP Units"). OP Units will be
convertible into one share of Host Marriott common stock for each OP Unit owned
or, at the election of Host Marriott Trust, cash in an amount equal to the
market value of such shares beginning one year after the issuance of the OP
Unit.
However, consummation of the REIT Conversion is subject to significant
contingencies that are outside the control of the Company, including final Board
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.
Description of Business
As of January 2, 1998, the Company owned, or had controlling interests in,
95 upscale and luxury full-service hotel lodging properties generally located
throughout the United States and operated under the Marriott and Ritz-Carlton
brand names. Most of these properties are managed by Marriott International,
Inc. ("Marriott International"). At that date, the Company also held minority
interests in various partnerships that own 242 additional properties, including
22 full-service hotel properties, managed by Marriott International.
On December 29, 1995, Host Marriott 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 financial statements were restated to reflect the
Operating Group as discontinued operations.
15
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
The structure of Host Marriott 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., in a
special dividend (the "Marriott International Distribution"). See Note 14 for a
description of the Marriott International Distribution and related transactions.
An analysis of the activity in the "Investments and Advances from Host
Marriott Corporation" follows (in millions):
Balance, December 30, 1994 $ 710
Net loss (143)
Distribution of Host Marriott Services Corporation 91
Issuances of common stock and other activity of Host Marriott 17
------
Balance, December 29, 1995 675
Net loss (13)
Adjustment for distribution of Host Marriott Services Corporation (4)
Issuances of common stock and other activity of Host Marriott 469
------
Balance January 3, 1997 1,127
Net income 50
Cash transfers to Host Marriott (226)
Issuances of common stock and other activity of Host Marriott 23
------
Balance, January 2, 1998 $ 974
======
The average balance in the "Investment and Advances from Host Marriott
Corporation" was $692 million for 1995, $901 million for 1996 and $1,051 million
for 1997. The "Cash transfers to Host Marriott" reflects cash transfers to Host
Marriott for the purchase of the Senior Living assets which, as contemplated,
will be spun-off in conjunction with the REIT Conversion.
Principles of Consolidation
The combined consolidated financial statements include the accounts of the
Company and its subsidiaries and controlled affiliates. Investments in
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 years 1997 and 1995 included 52 weeks compared to 53 weeks for fiscal
year 1996.
Revenues and Expenses
Revenues primarily represent house profit from the Company's hotel
properties because the Company has delegated substantially all of the operating
decisions related to the generation of house profit from its hotel properties
to the manager. Revenues also include net gains (losses) on property
transactions and equity in the earnings of affiliates. House profit reflects
the net revenues flowing to the Company as property owner and represents hotel
properties' 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 combined consolidated financial
statements. See Note 17.
16
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
Earnings (Loss) Per OP Unit
Basic and diluted earnings (loss) 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 (loss) per OP Unit is on a pro forma basis as
if the REIT Conversion and the Contribution had occurred.
Basic earnings (loss) per OP Unit are computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding of
Host Marriott. Diluted earnings (loss) per OP Unit are computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding plus other dilutive securities of Host Marriott. Diluted earnings
(loss) per OP Unit has not been adjusted for the impact of the Convertible
Preferred Securities for 1997 and 1996 and for the comprehensive stock plan and
warrants for 1996 and 1995 as they are anti-dilutive.
Basic and diluted earnings (loss) per OP Unit on a pro forma basis are as
follows:
1997 1996 1995
------ ------ ------
Basic earnings (loss) per OP Unit:
Continuing operations............................ $ .23 $(.07) $(.39)
Discontinued operations (net of income taxes).... - - (.39)
Extraordinary items--Gain (loss) on
extinguishment of debt
(net of income taxes)........................... .02 - (.12)
----- ----- -----
Basic earnings (loss) per OP Unit............... $ .25 $(.07) $(.90)
===== ===== =====
Diluted earnings (loss) per OP Unit:
Continuing operations............................ $ .23 $(.07) $(.39)
Discontinued operations (net of income taxes).... - - (.39)
Extraordinary items--Gain (loss) on
extinguishment of debt
(net of income taxes)........................... .01 (.12)
----- ----- -----
Diluted earnings (loss) per OP Unit............. $ .24 $(.07) $(.90)
===== ===== =====
17
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
A reconciliation of the number of shares utilized (based on Host Marriott
shares) for the calculation of dilutive earnings per OP Unit follows (in
millions):
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Weighted average number of common shares outstanding.. 203.1 188.7 158.3
Assuming distribution of common shares granted under
comprehensive stock plan, less shares assumed
purchased at average market price.................... 4.8 -- --
Assuming distribution of common shares issuable for
warrants, less shares assumed purchased at average
market price......................................... 0.3 -- --
----- ----- -----
Shares utilized for the calculation of diluted
earnings per OP Unit.............................. 208.2 188.7 158.3
===== ===== =====
</TABLE>
International Operations
The combined consolidated statements of operations include the following
amounts related to non-U.S. subsidiaries and affiliates of Host Marriott:
revenues of $39 million and $18 million and loss before income taxes of $9
million and $2 million in 1997 and 1996, respectively. International revenues
and income before income taxes in 1995 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 ten
years for furniture and equipment. Leasehold improvements are amortized over the
shorter of the lease term or the useful lives of the related assets.
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 hotel properties, the
Company assesses impairment based on whether the estimated sales price less
costs of disposal of each individual property to be sold is less than the net
book value. A 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.
Deferred Charges
Deferred financing costs related to long-term debt are deferred and amortized
over the remaining life of the debt.
Cash, Cash Equivalents and Short-term Marketable Securities
The Company considers all highly liquid investments with a maturity of 90 days
or less at the date of purchase to be cash equivalents. Cash and cash
equivalents includes approximately $103 million and $67 million at January 2,
1998 and January 3, 1997, respectively, of cash related to certain consolidated
partnerships, the use of which is restricted generally for partnership purposes
to the extent it is not distributed to the partners. Short-term marketable
securities include investments with a maturity of 91
18
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
days to one year at the date of purchase. The Company's short-term marketable
securities represent investments in U.S. government agency notes and high
quality commercial paper. The short-term marketable securities are categorized
as available for sale and, as a result, are stated at fair market value.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents and
short-term marketable securities. The Company maintains cash and cash
equivalents and short-term marketable securities with various high credit-
quality financial institutions. The Company performs periodic evaluations of
the relative credit standing of these financial institutions and limits the
amount of credit exposure with any institution.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Self-Insurance Programs
Prior to the Marriott International Distribution Date, the Company was self-
insured for certain levels of general liability, workers' compensation and
employee medical coverage. Estimated costs of these self-insurance programs
were accrued at present values of projected settlements for known and
anticipated claims. The Company discontinued its self-insurance programs for
claims arising subsequent to the Marriott International Distribution Date.
Interest Rate Swap Agreements
The Company has entered into a limited number of 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.
114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" during 1995. Adoption of these statements did not have a
material 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 combined consolidated financial statements. (See Note 10.)
During 1997, the Company adopted SFAS No. 128, "Earnings Per Share" SFAS No.
129, "Disclosure of Information About Capital Structure" and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
adoption of these statements did not have a material effect on the Company's
combined consolidated financial statements and the appropriate disclosures
required by these statements have been incorporated herein. The Company will
adopt SFAS No. 130, "Reporting
19
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
Comprehensive Income," in 1998 and does not expect it to have a material effect
on the Company's combined consolidated financial statements.
2. HM Services Special Dividend
On December 29, 1995, Host Marriott 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 Host Marriott, 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 Host Marriott shareholders with one share of common stock of
HM Services for every five shares of Host Marriott common stock held by such
shareholders on the record date of December 22, 1995. Host Marriott recorded
approximately $9 million of expenses related to the consummation of the Special
Dividend in 1995. Revenues for Host Marriott's discontinued operations totaled
$1,158 million in 1995. 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.
For purposes of governing certain of the ongoing relationships between Host
Marriott and HM Services after the Special Dividend and to provide for an
orderly transition, Host Marriott 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 Host Marriott 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 Host Marriott upon exercise of stock options held by
certain former employees of Host Marriott (see Note 10).
3. Property and Equipment
Property and equipment consists of the following:
1997 1996
------- -------
(in millions)
Land and land improvements...................... $ 418 $ 349
Buildings and leasehold improvements............ 4,325 3,507
Furniture and equipment......................... 688 548
Construction in progress........................ 38 82
------ ------
5,469 4,486
Less accumulated depreciation and amortization.. (835) (681)
------ ------
$4,634 $3,805
====== ======
Interest cost capitalized in connection with the Company's development and
construction activities totaled $1 million in 1997, $3 million in 1996 and $5
million in 1995.
In 1997, the Company, through an agreement with the ground lessor of one of
its properties terminated its ground lease and recorded a $15 million loss on
the write-off of its investment, including certain transaction costs, which has
been included in net gains (losses) on property transactions in the accompanying
combined consolidated financial statements.
20
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
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 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 a 174-acre parcel of undeveloped land
in Germantown, Maryland that was to be developed into an office project over an
extended period of time 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. In 1997, the Company sold a portion of the land parcel
at its approximate net book value of $11 million.
4. Investments in and Receivables from Affiliates
Investments in and receivables from affiliates consist of the following:
<TABLE>
<CAPTION>
Ownership
Interests 1997 1996
----------- ------ ------
Equity investments (in millions)
<S> <C> <C> <C>
Hotel partnerships which own 22 full-
service Marriott Hotels, 120 Courtyard
hotels, 50 Residence Inns and 50
Fairfield Inns operated by Marriott
International, as of January 2, 1998... 1%-50% $ 13 $ 11
Notes and other receivables, net........ -- 23 156
----- -----
$ 36 $ 167
===== =====
</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 by Marriott International under long-term agreements.
In 1997, the Company acquired all of the outstanding interests in the
Chesapeake Hotel Limited Partnership ("CHLP") that owns six hotels and acquired
controlling interests in three affiliated partnerships for approximately $510
million, including the assumption of approximately $395 million of debt. These
affiliated partnerships included the partnerships that own the 353-room Hanover
Marriott and the 884-room Marriott's Desert Springs Resort and Spa and the
Marriott Hotel Properties Limited Partnership ("MHPLP") that owns the 1,503-room
Marriott Orlando World Center and a 50.5% interest in the 624-room Marriott
Harbor Beach Resort. Subsequent to year-end, the Company obtained a controlling
interest in the partnership that owns the 1,671-room Atlanta Marriott Marquis
for approximately $239 million, including the assumption of $164 million of
mortgage debt.
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 that owns the 1,355-room San
Diego Marriott Hotel and Marina; the Marriott Hotel Properties II Limited
Partnership that 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; the Marriott Suites
Limited Partnership that owns four hotels; and the partnership that owns the
510-room Salt Lake City Marriott.
21
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
Receivables from affiliates are reported net of reserves of $144 million at
January 2, 1998 and $227 million at January 3, 1997. Receivables from
affiliates at January 2, 1998 include a $10 million debt service guarantee for
the partnership that owns the Atlanta Marriott Marquis, which was repaid in
early 1998. Receivables from affiliates at January 3, 1997 included a $140
million mortgage note at 9% that amortizes through 2003, which is eliminated in
these consolidated financial statements in 1997. 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 $60 million at January 2, 1998. Subsequent to January 2, 1998, this
amount was reduced to $20 million in connection with the refinancing and
acquisition of a controlling interest in the Atlanta Marriott Marquis. Net
amounts repaid to the Company under these commitments totaled $2 million and $13
million in 1997 and 1996, respectively. Net amounts funded by the Company
totaled $10 million in 1997 and $8 million in 1995. There were no fundings in
1996.
The Company's pre-tax income from affiliates includes the following:
1997 1996 1995
------ ------ ------
(in millions)
Interest income....................................... $ 11 $ 17 $ 16
Equity in net income.................................. 5 3 -
------ ------ ------
$ 16 $ 20 $ 16
====== ====== ======
Combined summarized balance sheet information for the Company's affiliates
follows:
1997 1996
------ ------
(in millions)
Property and equipment................................ $1,980 $2,605
Other assets.......................................... 283 331
------ ------
Total assets........................................ $2,263 $2,936
====== ======
Debt, principally mortgages........................... $2,179 $2,834
Other liabilities..................................... 412 672
Partners' deficit..................................... (328) (570)
------ ------
Total liabilities and partners' deficit............. $2,263 $2,936
====== ======
Combined summarized operating results for the Company's affiliates follow:
1997 1996 1995
------ ------ ------
(in millions)
Revenues.............................................. $ 603 $ 731 $ 759
Operating expenses:
Cash charges (including interest).................... (376) (460) (495)
Depreciation and other non-cash charges.............. (190) (229) (240)
----- ------ ------
Income before extraordinary items..................... 37 42 24
Extraordinary items--forgiveness of debt.............. 40 12 181
----- ------ ------
Net income.......................................... $ 77 $ 54 $ 205
===== ====== ======
22
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
5. Debt
Debt consists of senior notes, mortgage notes and other debt, all of which
are included in these financial statements because the debt or replacement debt
is expected to be contributed to the Company upon the REIT Conversion. Prior to
the REIT Conversion, the Company plans to exchange or repay the Properties
Notes, New Properties Notes and Acquisitions Notes described below. Debt
consists of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
(in millions)
<S> <C> <C>
Properties Notes, with a rate of 9 1/2% due May 2005............ $ 600 $ 600
New Properties Notes, with a rate of 8 7/8% due July 2007....... 600 --
Acquisitions Notes, with a rate of 9% due December 2007......... 350 350
Senior Notes, with an average rate of 9 3/4% at January 2, 1998,
maturing through 2012.......................................... 35 71
------ ------
Total Senior Notes............................................ 1,585 1,021
------ ------
Mortgage debt (non-recourse) secured by $2.4 billion of real
estate assets, with an average rate of 8.5% at January 2, 1998,
maturing through 2022.......................................... 1,762 1,529
Line of Credit, secured by $500 million of real estate assets,
with a variable rate of Eurodollar plus 1.7% or Base Rate (as
defined) plus 0.7% at the option of the Company (7.6% at
January 2, 1998) due June 2004................................. 22 -
------ ------
Total Mortgage Debt........................................... 1,784 1,529
------ ------
Other notes, with an average rate of 7.4% at January 2, 1998,
maturing through 2017.......................................... 89 86
Capital lease obligations....................................... 8 11
------ ------
Total Other 97 97
------ ------
$3,466 $2,647
====== ======
</TABLE>
In May 1995, HMH Properties, Inc. ("Properties"), a wholly-owned subsidiary
of Host Marriott Hospitality, Inc., issued an aggregate of $600 million of 9
1/2% senior secured notes (the "Properties Notes"). The bonds were issued in
conjunction with a concurrent $400 million offering by a subsidiary of the
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 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.
In December 1995, HMC Acquisition Properties, Inc. ("Acquisitions"), an
indirect, wholly-owned subsidiary of Host Marriott, 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, net of taxes.
On July 10, 1997, Properties and Acquisitions completed consent
solicitations (the "Consent Solicitations") with holders of their senior notes
to amend certain provisions of their senior notes' indentures. The Consent
Solicitations facilitated the merger of Acquisitions with and into Properties
(the "Properties Merger"). The amendments to the indentures also increased the
ability of Properties to acquire, through certain subsidiaries, additional
properties subject to non-recourse indebtedness and controlling interests in
corporations, partnerships and other entities holding attractive properties and
increased the threshold required to permit Properties to make distributions to
affiliates.
Concurrent with the Consent Solicitations and the Properties Merger,
Properties issued an aggregate of $600 million of 8 7/8% senior notes (the "New
Properties Notes") at par with a maturity of July 2007. Properties received net
proceeds of approximately $570 million, net of the costs of the Consent
Solicitations and the Offering, which will be used to fund future acquisitions
of, or the purchase of
23
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
interests in, full-service hotels and other lodging-related properties, as
well as for general corporate purposes.
The Properties Notes, the Acquisitions Notes and the New Properties Notes
are guaranteed on a joint and several basis by certain of Properties'
subsidiaries and rank pari passu in right of payment with all other existing
future senior indebtedness of Properties. Properties was the owner of 58 of the
Company's 95 lodging properties at January 2, 1998.
The net assets of Properties at January 2, 1998 were approximately $518
million, substantially all of which were restricted. The indentures governing
the Properties Notes, the Acquisitions Notes and the New Properties 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.
During 1997, Host Marriott, through a newly-created, wholly-owned
subsidiary, HMC Capital Resources Corporation ("Capital Resources"), entered
into a revolving line of credit agreement (the "Line of Credit") with a group of
commercial banks under which it may borrow up to $500 million for the
acquisition of lodging real estate and for Host Marriott's working capital
purposes. On June 19, 2000, any outstanding borrowings on the Line of Credit
convert to a term loan arrangement with all unpaid advances due June 19, 2004.
Borrowings under the Line of Credit bear interest at either the Eurodollar rate
plus 1.7% or the Base Rate (as defined in the agreement) plus 0.7%, at the
option of Host Marriott. An annual fee of 0.35% is charged on the unused
portion of the commitment. The Line of Credit was originally secured by six
hotel properties contributed to Capital Resources, with a carrying value of
approximately $500 million as of January 2, 1998, and is guaranteed by the
Company. As a result of this transaction, Host Marriott terminated its line of
credit with Marriott International. As of January 2, 1998, outstanding
borrowings on the Line of Credit were approximately $22 million as a result of a
borrowing to fund the acquisition of the Ontario Airport Marriott.
Host Marriott also purchased 100% of the outstanding bonds secured by a
first mortgage on the San Francisco Marriott in 1997. 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 less the write-off of unamortized deferred financing fees, net
of taxes.
In 1997, Host Marriott incurred approximately $418 million of mortgage debt
in conjunction with the acquisition of 11 hotels.
In conjunction with the construction of the Philadelphia Marriott, which
was completed and opened in January 1995, 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, Host Marriott
repaid the $109 million mortgage, prior to the rate increasing to 10% per annum
with an additional 2% deferred, with the proceeds from the convertible preferred
securities offering discussed in Note 6. In the first quarter of 1997, Host
Marriott obtained $90 million in first mortgage financing from two insurance
companies secured by the Philadelphia Marriott. The mortgage bears interest at
a fixed rate of 8.49% and matures in April 2009.
In December 1997, Host Marriott successfully completed the refinancing of
the MHPLP mortgage debt for approximately $152 million. The new mortgage bears
interest at 7.48% and matures in January 2008. In connection with the
refinancing, the Company recognized an extraordinary loss of $2 million which
represents payment of a prepayment penalty and the write-off of unamortized
deferred financing fees, net of taxes.
24
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
At January 2, 1998, the Company was party to an interest rate exchange
agreement with a financial institution (the contracting party) with an aggregate
notional amount of $100 million. Under this agreement, the Company collects
interest based on specified floating interest rates of one month LIBOR (rate of
6% at January 2, 1998) and pays interest at fixed rates (rate of 7.99% at
January 2, 1998). This agreement expires in 1998 in conjunction with the
maturity of the mortgage on the New York Marriott Marquis. Also in 1997, the
Company was party to two additional interest rate swap agreements with an
aggregate notional amount of $400 million which expired in May 1997. The
Company realized a net reduction of interest expense of $1 million in 1997, $6
million in 1996 and $5 million in 1995 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 rating
for the contracting party is A-. The Company is exposed to credit loss in the
event of non-performance by the contracting party to the interest rate swap
agreements; however, the Company does not anticipate non-performance by the
contracting party.
Aggregate debt maturities at January 2, 1998, excluding capital lease
obligations, are (in millions):
1998.......................................... $ 316
1999.......................................... 28
2000.......................................... 131
2001.......................................... 132
2002.......................................... 156
Thereafter.................................... 2,695
------
$3,458
======
Cash paid for interest for continuing operations, net of amounts
capitalized, was $278 million in 1997, $220 million in 1996 and $177 million in
1995. Deferred financing costs, which are included in other assets, amounted to
$96 million and $61 million, net of accumulated amortization, as of January 2,
1998 and January 3, 1997, respectively. Amortization of deferred financing
costs totaled $7 million, $5 million and $4 million in 1997, 1996 and 1995,
respectively.
6. Obligation to Host Marriott Corporation Related to Mandatorily Redeemable
Convertible Preferred Securities of a Subsidiary Trust Holding Company of
Host Marriott Corporation Substantially All of Whose Assets are the
Convertible Subordinated Debentures Due 2026
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
25
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
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 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 Convertible Preferred Securities. During 1997 and 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. 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.
7. Shareholders' Equity of Host Marriott
It is expected that upon the REIT Conversion that the Company will issue OP
Units to Host Marriott in exchange for the Contribution equal to the number of
shares of outstanding Host Marriott common stock. Additionally, limited
partnership units issued to partners of the eight public limited partnerships
and five private limited partnerships will be convertible on a one for one basis
into a share of stock of Host Marriott for each OP Unit owned or at the election
of Host Marriott Trust, in an amount equal to the market value of such shares
beginning one year after the issuance of the OP Unit.
Six hundred million shares of common stock of Host Marriott, with a par
value of $1 per share, are authorized, of which 203.8 million and 202.0 million
were issued and outstanding as of January 2, 1998 and January 3, 1997,
respectively. One million shares of no par value preferred stock are authorized
with none outstanding. During 1995, substantially all outstanding shares of
such preferred stock were converted into approximately five million shares of
Host Marriott common stock with the remainder defeased.
26
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
On March 27, 1996, Host Marriott completed the issuance of 31.6 million
shares of common stock for net proceeds of nearly $400 million.
In connection with a class action settlement, Host Marriott issued warrants
to purchase up to 7.7 million shares of Host Marriott'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 Host Marriott common stock were issued. During 1997, approximately
60,000 warrants were exercised at $10.00 per share and an equivalent number of
shares of Host Marriott common stock were issued. As of January 2, 1998, there
were approximately 550,000 warrants outstanding.
In February 1989, the Board of Directors of Host Marriott adopted a
shareholder rights plan under which a dividend of one preferred stock purchase
right was distributed for each outstanding share of Host Marriott'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 Host Marriott 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 Host Marriott'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 Host Marriott for $.01 each. If Host
Marriott 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 Host Marriott
or the acquiror having a value of twice the exercise price of the right.
8. Income Taxes
The accompanying financial statements reflect the deferred income taxes
related to the expected future tax consequences of those temporary differences
specifically allocable to the Company based on the Contribution. Upon the REIT
Conversion and the Contribution it is expected that the Company will be a
limited partnership and taxable income or loss will be allocated among its
partners. Further, Host Marriott expects to qualify as a REIT and will allocate
its taxable income or loss to its shareholders. Accordingly, upon the REIT
Conversion and the Contribution, the Company will not have a Federal tax
provision or a state tax provision in many states and in accordance with
Statement of Financial Accounting Standards No. 109 will record an adjustment to
the tax provision in the fiscal year during which the REIT Conversion takes
place for the tax effect of the reversal of certain of the Company's deferred
taxes.
Total deferred tax assets and liabilities at January 2, 1998 and January 3,
1997 were as follows:
1997 1996
------ ------
(in millions)
Deferred tax assets............................. $ 159 $ 139
Deferred tax liabilities........................ (646) (603)
----- -----
Net deferred income tax liability.............. $(487) $(464)
===== =====
27
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
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 2, 1998 and January 3, 1997 follows:
1997 1996
------ ------
(in millions)
Investments in affiliates..................... $(310) $(303)
Property and equipment........................ (179) (135)
Safe harbor lease investments................. (65) (73)
Deferred tax gain............................. (92) (92)
Reserves...................................... 103 97
Alternative minimum tax credit carryforwards.. 41 26
Other, net.................................... 15 16
----- -----
Net deferred income tax liability............. $(487) $(464)
===== =====
The provision (benefit) for income taxes consists of:
1997 1996 1995
------ ------ ------
(in millions)
Current -- Federal............ $ 19 $ (2) $ 7
-- State.............. 4 3 3
-- Foreign............ 3 3 --
------ ------ ------
26 4 10
------ ------ ------
Deferred -- Federal............ 8 2 (23)
-- State.............. 2 (1) --
------ ------ ------
10 1 (23)
------ ------ ------
$ 36 $ 5 $ (13)
====== ====== ======
At January 2, 1998, Host Marriott had approximately $41 million of
alternative minimum tax credit carryforwards available which do not expire.
Through 1997, Host Marriott settled with the Internal Revenue Service
("IRS") substantially all issues for tax years 1979 through 1993. Host Marriott
expects to resolve any remaining issues with no material impact on the combined
consolidated financial statements. Host Marriott made net payments to the IRS
of approximately $10 million and $45 million in 1997 and 1996, 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:
1997 1996 1995
------ ------- -------
Statutory Federal tax rate...................... 35.0% (35.0)% (35.0)%
State income taxes, net of Federal tax benefit.. 4.9 21.7 2.5
Tax credits..................................... (2.7) -- (0.1)
Additional tax on foreign source income......... 6.0 40.8 --
Tax contingencies............................... -- 25.0 14.6
Permanent items................................. 0.1 9.0 --
Other, net...................................... 0.1 1.0 0.7
---- ------ ------
Effective income tax rate...................... 43.4% 62.5% (17.3)%
==== ====== ======
As part of the Marriott International Distribution and the Special
Dividend, Host Marriott, Marriott International and HM Services entered into
tax-sharing agreements which reflect each party's
28
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
rights and obligations with respect to deficiencies and refunds, if any, of
Federal, state or other taxes relating to the businesses of Host Marriott,
Marriott International and HM Services prior to the Marriott International
Distribution and the Special Dividend.
Cash paid for income taxes, including IRS settlements, net of refunds
received, was $56 million in 1997, $40 million in 1996 and $22 million in 1995.
9. Leases
The Company leases certain property and equipment under non-cancelable
operating and capital leases. Future minimum annual rental commitments for all
non-cancelable leases are as follows:
Capital Operating
Leases Leases
--------- ---------
(in millions)
1998 ....................................$ 2 $ 115
1999 ..................................... 2 111
2000 ..................................... 1 108
2001 ..................................... 1 106
2002 ..................................... 1 103
Thereafter................................. 5 1,358
------ ------
Total minimum lease payments............... 12 $1,901
======
Less amount representing interest.......... (4)
------
Present value of minimum lease payments... $ 8
======
As discussed in Note 12, Host Marriott sold and leased back 37 of its
Courtyard properties in 1995 and an additional 16 Courtyard properties in 1996
to Hospitality Properties Trust. Additionally, in 1996, Host Marriott sold and
leased back 18 of its Residence Inns to Hospitality Properties Trust. These
leases, which are accounted 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
$124 million payable to the Company under non-cancelable subleases.
The Company remains contingently liable at January 2, 1998 on certain
leases relating to divested non-lodging properties. Such contingent liabilities
aggregated $110 million at January 2, 1998. However, management considers the
likelihood of any substantial funding related to these leases to be remote.
29
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
Rent expense consists of:
1997 1996 1995
------ ------ ------
(in millions)
Minimum rentals on operating leases............... $ 98 $ 83 $ 34
Additional rentals based on sales................. 20 16 17
------ ------ ------
$ 118 $ 99 $ 51
====== ====== ======
10. Employee Stock Plans
It is expected that upon the REIT Conversion the Company will issue OP
Units to Host Marriott in exchange for the Contribution equal to the number of
shares of outstanding Host Marriott common stock. Additionally, OP Units issued
to partners of the eight public limited partnerships and five private limited
partnerships will be convertible on a one for one basis into shares of Host
Marriott stock for each OP Unit owned or, at the election of Host Marriott
Trust, in an amount equal to the market value of such shares beginning one year
after the issuance of the OP Unit.
At January 2, 1998, Host Marriott has two stock-based compensation plans
which are described below. Under the comprehensive stock plan (the
"Comprehensive Plan"), Host Marriott may award to participating employees (i)
options to purchase Host Marriott common stock, (ii) deferred shares of Host
Marriott's common stock and (iii) restricted shares of Host Marriott's common
stock. In addition, Host Marriott 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 2, 1998 are:
(in millions)
Comprehensive Plan............................... 28
Employee Stock Purchase Plan..................... 3
----
31
====
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, Host Marriott issued an equivalent number
of Marriott International options and adjusted the exercise prices of its
options, then outstanding, based on the relative trading prices of shares of the
common stock of the two companies.
Host Marriott continues to account for expense under its plans under the
provisions of Accounting Principle Board Opinion 25 and related interpretations
as permitted under SFAS No. 123. Accordingly, no compensation cost has been
recognized for its fixed stock options under the Comprehensive Plan and its
Employee Stock Purchase Plan.
For purposes of the following disclosures required by SFAS No. 123, the
fair value of each option granted has been estimated on the date of grant using
an option-pricing model with the following weighted average assumptions used for
grants in 1997, 1996 and 1995, respectively: risk-free interest rate of 6.2%,
6.6% and 6.8%, respectively, volatility of 35%, 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 $13.13 in 1997, $8.68 in 1996 and
$5.76 in 1995.
Pro forma compensation cost for 1997, 1996 and 1995 would have reduced
(increased) net income (loss) by approximately $330,000, ($150,000) and
($5,000), respectively. Basic and diluted earnings per
30
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
share on a pro forma basis for Host Marriott were not impacted by the pro forma
compensation cost in 1997, 1996 and 1995.
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, 1996 and 1997 have been considered.
In connection with the Special Dividend, the then outstanding options held
by current and former employees of Host Marriott were redenominated in both Host
Marriott 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 Host Marriott'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, Host Marriott 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 certain former and
current employees of Marriott International. As of January 2, 1998, Host
Marriott valued this right at approximately $20 million, which is included in
other assets. A summary of the status of Host Marriott's stock option plan for
1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------- -------------------------------- --------------------------------
Weighted Weighted Weighted Average
Shares Average Shares Average Shares Exercise
(in millions) Exercise Price (in millions) Exercise Price (in millions) Price
---------------- ----------------- --------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, at beginning of
year...................... 8.3 $ 4 10.0 $ 4 11.7 $4
Granted.................... .1 20 .2 13 - -
Exercised.................. (1.6) 4 (1.9) 4 (2.3) 4
Forfeited/Expired.......... - - - - (.3) 4
Adjustment for Special
Dividend.................. - - - - .9 4
---- ----- -----
Balance, at end of year 6.8 4 8.3 4 10.0 4
==== ===== =====
Options exercisable at
year-end.................. 6.4 7.6 8.5
</TABLE>
The following table summarizes information about stock options outstanding at
January 2, 1998:
<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 2, 1998 Life Price January 2, 1998 Price
- ------------------------ ---------------- ----------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
1-3 4.4 9 $ 2 4.4 $ 2
4-6 1.7 4 6 1.7 6
7-9 .4 12 9 .3 9
10-12 .1 14 12 - -
13-15 .1 14 15 - -
19-22 .1 15 20 - -
---- -----
6.8 6.4
==== =====
</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
31
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
over a 10-year period. Host Marriott accrues compensation expense for the fair
market value of the shares on the date of grant, less estimated forfeitures. In
1997, 1996 and 1995, 14,000, 13,000 and 158,000 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 was not material in
1996 and 1997. The weighted average fair value per share granted during each
year was $15.81 in 1997, $11.81 in 1996 and $8.49 in 1995.
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. Host Marriott 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 Host Marriott's common stock. In 1997 and 1996,
198,000 and 2,511,000 shares of additional restricted stock plan 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. There were no shares forfeited in 1997. Host Marriott
recorded compensation expense of $13 million, $11 million and $5 million in
1997, 1996 and 1995, respectively, related to these awards. The weighted
average fair value per share granted during each year was $16.88 in 1997 and
$14.01 in 1996. There were no restricted stock plan shares granted in 1995.
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
Host Marriott 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 Host Marriott
is determined annually by the Board of Directors. Host Marriott provides
medical benefits to a limited number of retired employees meeting restrictive
eligibility requirements. Amounts for these items were not material in 1995
through 1997.
12. Acquisitions and Dispositions
In 1998, the Company acquired, or purchased controlling interest in, six
full-service hotels totaling 3,270 rooms for an aggregate purchase price of
approximately $388 million and entered into an agreement to acquire a
controlling interest in the 397-room Ritz-Carlton in Tysons Corner, Virginia.
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 interests in 12 world-class luxury
hotels in the U.S. and certain other assets in a transaction valued at
approximately $1.735 billion, including the assumption of two mortgages, one of
which is secured by a thirteenth hotel. 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 and four Swissotel properties and a mortgage on a third Four Seasons.
In 1998, the Company sold two hotels totalling 854 rooms for approximately
$212 million.
In 1997, the Company acquired eight full-service hotels totaling 3,600
rooms for approximately $145 million. In addition, the Company acquired
controlling interests in nine full-service hotels totaling 5,024 rooms for
approximately $621 million, including the assumption of approximately $418
million of debt. The Company also 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.
In 1996, the Company acquired six full-service hotels totaling 1,964 rooms
for an aggregate purchase price of approximately $189 million. In addition, the
Company acquired controlling interests in 17 full-service hotels totaling 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.
32
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
During the first and third quarters of 1995, 37 of the Company's Courtyard
properties were sold and leased back from Hospitality Properties Trust 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 is being 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 is
being amortized over the initial term of the leases.
The Company's summarized, unaudited combined consolidated pro forma results
of operations, assuming the above transactions, the refinancings and new debt
activity discussed in Note 5 occurred, along with the purchase of the remaining
interests in the eight public partnerships and five private partnerships, the
Contribution and the REIT Conversion, on December 30, 1995, are as follows (in
millions):
1997 1996
-------- --------
Revenues...................................... $1,061 $ 972
Operating profit.............................. 529 454
Income (loss) before extraordinary items
and REIT Conversion expenses................ 37 (42)
13. Fair Value of Financial Instruments
The fair values of certain financial assets and liabilities and other financial
instruments are shown below:
<TABLE>
<CAPTION>
1997 1996
------------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(in millions)
<S> <C> <C> <C> <C>
Financial assets
Short-term marketable securities.............. $ 354 $ 354 $ - $ -
Receivables from affiliates................... 23 26 156 174
Notes receivable.............................. 31 48 141 155
Other......................................... 20 20 13 13
Financial liabilities
Debt, net of capital leases................... 3,458 3,492 2,636 2,654
Other financial instruments
Obligation to Host Marriott for Convertible
Preferred Securities......................... 550 638 550 595
Interest rate swap agreements................ - - - 1
Affiliate debt service commitments............. - - - -
</TABLE>
Short-term marketable securities and the obligation to Host Marriott for
Convertible Preferred Securities are valued based on quoted market prices.
Receivables from affiliates, notes and other financial assets are valued based
on the expected future cash flows discounted at risk-adjusted rates. Valuations
for secured debt are determined based on the expected future payments discounted
at risk-adjusted rates. The fair values of the Line of Credit and other notes
are estimated to be equal to their carrying value. Senior Notes are valued based
on quoted market prices.
33
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
The Company is contingently liable under various guarantees of obligations
of certain affiliates (affiliate debt service commitments) with a maximum
commitment of $60 million at January 2, 1998 and $117 million at January 3,
1997. 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 $100 million at January 2, 1998
and $525 million at January 3, 1997.
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. Host Marriott 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.
Host Marriott and Marriott International have entered into various
agreements in connection with the Marriott International Distribution and
thereafter which provide, among other things, that (i) the majority of the
Company's hotel 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) 10 of the Company's full-service properties are operated
under franchise agreements with Marriott International with terms of 15 to 30
years; (iii) Marriott International guarantees the Company's performance in
connection with certain loans and other obligations ($107 million at January 2,
1998); (iv) the Company borrowed and repaid $109 million of first mortgage
financing for construction of the Philadelphia Marriott (see Note 5); (v)
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); (vi) 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; (vii) in 1995, the Company also acquired a
full-service property from a partnership in which Marriott International owned a
50% interest; and (viii) Marriott International provides certain limited
administrative services.
In 1997, 1996 and 1995, Host Marriott paid to Marriott International $162
million, $101 million and $67 million, respectively, in hotel management fees;
$9 million, $18 million and $21 million, respectively, in interest and
commitment fees under the debt financing and line of credit provided by Marriott
International and $3 million, $4 million and $12 million, respectively, for
limited administrative services. Host Marriott also paid Marriott International
$4 million, $2 million and $1 million, respectively, in franchise fees in 1997,
1996 and 1995.
Additionally, Marriott International has the right to purchase up to 20% of
the voting stock of Host Marriott if certain events involving a change in
control of Host Marriott occur.
34
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
15. Hotel Management Agreements
Most of the Company's hotels are subject to management agreements (the
"Agreements") under which Marriott International manages 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, or 20% of current year 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 canceled
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
Company's hotels also participate in the Marriott Rewards program. The cost of
this program is charged to all hotels in the Marriott hotel system.
The Company is obligated to provide the manager with sufficient funds to
cover the cost of (a) certain non-routine repairs and maintenance to the hotels
which are normally capitalized; and (b) replacements and renewals to the hotels'
property and improvements. Under certain circumstances, the Company will be
required to establish escrow accounts for such purposes under terms outlined in
the Agreements.
The Company has entered into franchise agreements with Marriott
International for ten 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.
The Company has entered into management agreements with The Ritz-Carlton
Hotel Company, LLC ("Ritz-Carlton"), an affiliate of Marriott International, 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.
The Company has also entered into management agreements with hotel
management companies other than Marriott International and Ritz-Carlton for 12
of its hotels (10 of which are franchised under the Marriott brand). These
agreements generally provide for an initial term of 10 to 20 years with renewal
terms at the option of either party of up to an additional one to 15 years.
These agreements generally provide for payment of base management fees equal to
one to three
35
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
percent of sales. Seven of the 12 agreements also provide for incentive
management fees generally equal to 15 to 20 percent of available cash flow, as
defined in the agreements.
At January 2, 1998 and January 3, 1997, $75 million and $76 million,
respectively, have been advanced to the hotel managers for working capital and
are included in "Due From Managers" in the accompanying combined consolidated
balance sheets.
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.
In the fourth quarter of 1997, the Company reached a settlement in a
lawsuit against Trinity Industries and others for claims related to construction
of the New York Marriott Marquis. In settlement of the lawsuit, the Company and
its affiliate received a cash settlement of approximately $70 million, the
majority of which was considered a recovery of construction costs and $10
million of which has been recorded as other revenues in the accompanying
combined consolidated financial statements.
17. Hotel Operations
As discussed in Note 1, 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 house profit for
the Company's hotels for 1997, 1996 and 1995:
1997 1996 1995
------- ------- -------
(in millions)
Sales
Rooms................................... $1,850 $1,302 $ 908
Food and Beverage....................... 776 515 363
Other................................... 180 125 81
------ ------ ------
Total Hotel Sales..................... 2,806 1,942 1,352
------ ------ ------
Department Costs
Rooms................................... 428 313 226
Food and Beverage....................... 592 406 284
Other................................... 189 63 43
------ ------ ------
Total Department Costs................ 1,209 782 553
------ ------ ------
Department Profit........................ 1,597 1,160 799
Other Deductions......................... (504) (443) (325)
------ ------ ------
House Profit............................. $1,093 $ 717 $ 474
====== ====== ======
18. Geographic and Business Segment Information
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, contain an average of nearly 500 rooms, as well as supply
other amenities such as meeting space and banquet facilities; a variety of
restaurants and lounges; gift shops; and swimming pools. They are typically
located in downtown, airport, suburban and resort areas throughout the United
States.
36
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Cont'd.)
As of January 2, 1998, 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 and long-
lived assets for each of the geographical areas in which the Company operates
(in millions):
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
Long-lived Long-lived Long-lived
Revenues Assets Revenues Assets Revenues Assets
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
United States...................... $1,071 $4,412 $714 $3,587 $482 $2,842
International...................... 39 222 18 218 2 40
------ ------ ---- ------ ---- ------
Total............................ $1,110 $4,634 $732 $3,805 $484 $2,882
====== ====== ==== ====== ==== ======
</TABLE>
37
<PAGE>
HOST MARRIOTT HOTELS
CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
March 27, 1998
(unaudited, in millions)
ASSETS
Property and Equipment, net............................................. $4,926
Notes and Other Receivables, net (including amounts due from
affiliates of $9 million).............................................. 37
Due from Managers....................................................... 133
Investments in Affiliates............................................... 6
Other Assets............................................................ 318
Short-term Marketable Securities........................................ 161
Cash and Cash Equivalents............................................... 539
------
$6,120
======
LIABILITIES AND EQUITY
Debt
Senior Notes........................................................... $1,585
Mortgage Debt.......................................................... 1,943
Other.................................................................. 96
------
3,624
Accounts Payable and Accrued Expenses................................... 70
Deferred Income Taxes................................................... 488
Other Liabilities....................................................... 447
------
Total Liabilities...................................................... 4,629
------
Obligation to Host Marriott Corporation Related to Mandatorily
Redeemable Convertible Preferred Securities of a Subsidiary Trust
Holding Company 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................ 941
------
$6,120
======
See Notes to Condensed Combined Consolidated Financial Statements.
38
<PAGE>
HOST MARRIOTT HOTELS
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve weeks ended March 27, 1998 and March 28, 1997
(unaudited, in millions)
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
REVENUES
Hotels.......................................................... $ 321 $ 248
Net gains on property transactions.............................. 1 1
Equity in earnings of affiliates................................ 1 1
Other........................................................... 2 2
----- -----
Total revenues................................................. 325 252
----- -----
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees of
$55 million and $42 million, respectively)..................... 173 151
Other........................................................... 5 10
----- -----
Total operating costs and expenses............................. 178 161
----- -----
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
EXPENSES AND INTEREST........................................... 147 91
Minority interest................................................ (16) (11)
Corporate expenses............................................... (11) (9)
Interest expense................................................. (76) (63)
Dividends on Convertible Preferred Securities.................... (9) (9)
Interest income.................................................. 14 12
----- -----
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM................ 49 11
Provision for income taxes....................................... (21) (5)
----- -----
INCOME BEFORE EXTRAORDINARY ITEM................................. 28 6
Extraordinary item--Gain on extinguishment of debt (net of
income taxes of $3 million)..................................... - 5
----- -----
NET INCOME....................................................... $ 28 $ 11
===== =====
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
39
<PAGE>
HOST MARRIOTT HOTELS
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve weeks ended March 27, 1998 and March 28, 1997
(unaudited, in millions)
1998 1997
------ ------
OPERATING ACTIVITIES
Income from continuing operations............................... $ 28 $ 6
Adjustments to reconcile to cash from operations:
Depreciation and amortization.................................. 54 51
Income taxes................................................... 18 1
Equity in earnings of affiliates................................ (1) (1)
Changes in operating accounts................................... (19) 8
Other........................................................... 18 25
----- -----
Cash from operations........................................... 98 90
----- -----
INVESTING ACTIVITIES
Proceeds from sales of assets................................... 1 3
Acquisitions.................................................... (118) (115)
Capital expenditures:
Renewals and replacements...................................... (40) (35)
New development projects....................................... (12) --
New investment capital expenditures............................ (9) (7)
Purchases of short-term marketable securities................... (53) --
Sales of short-term marketable securities....................... 246 --
Notes receivable collections.................................... 1 1
Affiliate collections, net...................................... 14 4
Other........................................................... (6) 14
----- -----
Cash provided by (used in) investing activities................ 24 (135)
----- -----
FINANCING ACTIVITIES
Cash tranferred to Host Marriott................................ (55) --
Issuances of debt............................................... 1 90
Issuances of common stock by Host Marriott...................... -- 2
Scheduled principal repayments.................................. (6) (4)
Debt prepayments................................................ (1) (222)
Other........................................................... (16) 5
----- -----
Cash used in financing activities.............................. (77) (129)
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................ $ 45 $(174)
===== =====
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or
purchase of controlling interests in, certain hotel
properties.................................................... $ 164 $ 231
===== =====
See Notes to Condensed Combined Consolidated Financial Statements.
40
<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 connection with the REIT Conversion, the Operating Partnership is
proposing the purchase of the remaining interests in eight public limited
partnerships in which Host Marriott or its subsidiaries are general
partners that own or control 24 full-service hotels. Five of the
partnerships (nine hotels) are already controlled and consolidated by Host
Marriott as are two of the hotels in another of the partnerships for which
a subsidiary of Host Marriott provided 100% non-recourse financing for the
acquisition of these two hotels. The Operating Partnership is also
proposing to purchase certain private partnerships in which Host Marriott
or its subsidiaries are general partners in exchange for units in the
Operating Partnership ("OP Units"). OP Units will be convertible into one
share of Host Marriott common stock for each OP Unit owned or, at the
election of Host Marriott Trust, cash in an amount equal to the market
value of such shares beginning one year after the issuance of the OP Unit.
However, the consummation of the REIT Conversion is subject to significant
contingencies that are outside the control of the Company, including final
Board 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.
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
March 27, 1998 and the results of operations and cash flows for the twelve
weeks ended March 27, 1998 and March 28, 1997. Interim results are not
necessarily indicative of fiscal year performance because of the impact of
seasonal and short-term variations.
41
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
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 interests in 12 world-class luxury
hotels in the U.S. and certain other assets in a transaction valued at
approximately $1.735 billion, including the assumption of two mortgages one
of which is secured by a thirteenth hotel. 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 and four
Swissotel properties and a mortgage note for a third Four Seasons.
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 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:
Twelve Weeks Ended
--------------------
March 27, March 28,
1998 1997
--------- ---------
(in millions)
Sales
Rooms.............................................. $ 509 $ 408
Food & Beverage.................................... 222 171
Other.............................................. 56 41
----- -----
Total Hotel Sales................................. 787 620
----- -----
Department Costs
Rooms.............................................. 114 92
Food & Beverage.................................... 163 127
Other.............................................. 28 21
----- -----
Total Department Costs............................ 305 240
----- -----
Department Profit..................................... 482 380
Other Deductions...................................... 161 132
----- -----
House Profit.......................................... $ 321 $ 248
===== =====
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 (loss) 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 income by the
weighted average number of shares of common stock outstanding plus other
potentially dilutive securities of Host Marriott. Diluted earnings per OP
Unit has not been adjusted for the impact of the Convertible Preferred
Securities as they are anti-dilutive.
42
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Basic and diluted earnings per OP Unit on a pro forma basis are as follows:
Twelve Weeks Ended
------------------------
March 27, March 28,
1998 1997
--------- -------------
Basic earnings per OP Unit:
Income before extraordinary item.................. $ .14 $ .03
Extraordinary item -- Gain on extinguishment of
debt (net of income taxes)....................... -- .02
------ ------
Basis earnings per OP Unit...................... $ .14 $ .05
====== ======
Diluted earnings per OP Unit:
Income before extraordinary item.................. $ .13 $ .03
Extraordinary item -- Gain on extinguishment of
debt (net of income taxes)....................... -- .02
------ ------
Diluted earnings per OP Unit.................... $ .13 $ .05
====== ======
A reconciliation of the number of shares utilized for the calculation of
dilutive earnings per OP Unit follows:
Twelve Weeks Ended
------------------------
March 27, March 28,
1998 1997
------ ------
(in millions)
Weighted average number of common shares
outstanding........................................ 203.9 202.3
Assuming distribution of common shares granted
under the comprehensive stock plan, less shares
assumed purchased at average market price.......... 4.4 5.2
Assuming distribution of common shares issuable for
warrants, less shares assumed purchased at average
market price....................................... .3 .3
------ ------
Shares utilized for the calculation of diluted
earnings per OP Unit............................ 208.6 207.8
====== ======
5. As of March 27, 1998, the Company had minority interests in 19 affiliates
that own an aggregate of 241 properties, 21 of which are full-service
properties, managed primarily by Marriott International, Inc. The Company's
equity in earnings of affiliates was $1 million for each of the twelve weeks
ended March 27, 1998 and March 28, 1997, respectively.
Combined summarized operating results reported by affiliates follows:
Twelve Weeks Ended
---------------------
March 27, March 28,
1998 1997
--------- ----------
(in millions)
Revenues....................................... $ 124 $ 141
Operating expenses:
Cash charges (including interest)............. 79 94
Depreciation and other non-cash charges....... 35 50
----- -----
Income (loss) before extraordinary item........ 10 (3)
Extraordinary item - forgiveness of debt....... 4 18
----- -----
Net income.................................... $ 14 $ 15
===== =====
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.
43
<PAGE>
HOST MARRIOTT HOTELS
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
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 a note
receivable interest.
6. In the first quarter of 1998, the Company acquired a controlling interest in,
and will become 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. The Company also acquired the 281-room Ritz-Carlton, Phoenix for $75
million. In addition the Company entered into an agreement to purchase the
397-room Ritz-Carlton, Tysons Corner located in Northern Virginia.
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 and the 192-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 March 27, 1998 and March 28, 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):
Twelve Weeks Ended
-----------------------------------
March 27, 1998 March 28, 1997
---------------- ----------------
United States.............. $ 315 $ 244
International.............. 10 8
--------------- ---------------
Total.................... $ 325 $ 252
=============== ===============
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
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 twelve weeks ended March 27, 1998 and March 28, 1997,
the Company had no other comprehensive income. As of March 27, 1998 and
January 2, 1998, the Company's accumulated other comprehensive income was
approximately $10 million.
44
<PAGE>
EXHIBIT 12
<TABLE>
<CAPTION>
HMH Properties, Inc. and subsidiaries and
HMC Capital Resources Holdings Corporation and subsidiaries
Ratio of Earnings to Fixed Changes
(in millions, except ratios)
Fiscal Year 1st Quarter
------------------------------------------ ---------------
1997 1996 1995 1994 1993 1998 1997
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing operations pre tax 105.0 46.0 35.0 37.8 10.8 45.8 27.3
Add (Deduct)
Fixed Charges 149.0 135.0 105.0 91.8 89.8 44.4 30.4
Capitalized Interest (1.0) (2.0) (1.0) (5.0)
Amortization of capitalized interest 1.0 2.0 1.0 2.0 3.0 0.2 0.3
Losses (gains) of 50% or less owned affiliates 1.0 (1.0) - (1.0) - (0.1) (1.4)
Minority Interest 1.0 - - - - 0.5 -
------ ------ ------ ------ ------ ------ ------
Adjusted Earnings 257.0 181.0 139.0 129.6 98.6 90.8 56.6
Fixed Charges
Interest on indebtedness, capitalized interest and
amortization of debt expense and premiums 135.0 125.0 100.0 87.8 87.8 41.4 28.3
Portion of rents representative of interest factor 14.0 10.0 5.0 4.0 2.0 3.0 2.1
------ ------ ------ ------ ------ ------ ------
Total Fixed Charges 149.0 135.0 105.0 91.8 89.8 44.4 30.4
------ ------ ------ ------ ------ ------ ------
Ratio of Earnings to Fixed Charges 1.72 1.34 1.32 1.41 1.10 2.05 1.86
====== ====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 8-K, into the Company's previously filed
Registration Statement File No. 333-50729.
Arthur Andersen LLP
Washington, DC
July 15, 1998
