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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 2, 1998 COMMISSION FILE NO. 1-5664
HOST MARRIOTT CORPORATION
DELAWARE 53-0085950
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION
NUMBER)
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817
(301) 380-9000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $1.00 par value.................. New York Stock Exchange
(203,808,610 shares outstanding as of January Chicago Stock Exchange
2, 1998) Pacific Stock Exchange
Philadelphia Stock Exchange
The aggregate market value of shares of common stock held by non-affiliates
at February 27, 1998 was $4,041,600,000.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
DOCUMENT INCORPORATED BY REFERENCE
Notice of 1998 Annual Meeting and Proxy Statement
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FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements within the
meaning of the Private Litigation Reform Act of 1995 and as such may involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance or achievements of Host Marriott Corporation (the
"Company") to be different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Although
the Company believes the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, it can give no assurance
that its expectations will be attained. These risks are detailed from time to
time in the Company's filings with the Securities and Exchange Commission. The
Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
ITEMS 1 & 2. BUSINESS AND PROPERTIES
GENERAL
The Company is one of the largest owners of hotels in the world, with 99
upscale and luxury full-service hotel lodging properties in its portfolio as
of March 3, 1998, primarily located in the United States. These properties are
generally operated under the Marriott brand and managed by Marriott
International, Inc. ("Marriott International"), formerly a wholly-owned
subsidiary of the Company. Four of the Company's properties are operated under
the Ritz-Carlton brand in which Marriott International acquired a 49% interest
in April 1995. The Marriott and Ritz-Carlton brand names are among the most
respected and widely recognized brand names in the lodging industry. The
Company also owns 31 senior living communities, all of which are managed by
Marriott International. The Company's primary focus is on the acquisition of
full-service hotel lodging properties. Since the beginning of 1994 through the
end of 1997, the Company has added 68 full-service hotels representing more
than 31,000 rooms for an aggregate purchase price of approximately $3.1
billion. Based on data provided by Smith Travel Research, the Company believes
that its full-service hotels consistently outperform the industry's average
occupancy rate by a significant margin and averaged 78.4% occupancy for 1997
compared to a 71.1% average occupancy for competing hotels in the upscale
full-service segment of the lodging industry (the segment which is most
representative of the Company's full-service hotels).
The upscale and luxury full-service segments of the lodging industry are
benefiting from a favorable supply and demand relationship in the United
States. Management believes that demand increases have resulted primarily from
a strong domestic economic environment and a corresponding increase in
business travel. In spite of increased demand for rooms, the room supply
growth rate in the full-service segment has not increased in kind. Management
believes that this slower increase in the supply growth rate in the full-
service segment is attributable to many factors including the limited
availability of attractive building sites for full-service hotels, the lack of
available financing for new full-service hotel construction and the
availability of existing full-service properties for sale at a discount to
their replacement cost. The relatively high occupancy rates of the Company's
hotels, along with increased demand for full-service hotel rooms, have allowed
the managers of the Company's hotels to increase average daily room rates by
selectively raising room rates and by replacing certain discounted group
business with higher-rate group and transient business. As a result, on a
comparable basis, room revenues per available room ("REVPAR") for the
Company's full-service properties increased approximately 12.6% in 1997.
Furthermore, because the lodging property operations have a high fixed cost
component, increases in REVPAR generally yield greater percentage increases in
EBITDA (as defined herein). Accordingly, the approximate 12.6% increase in
REVPAR resulted in an approximate 17.3% increase in comparable full-service
hotel EBITDA in 1997. The Company expects this supply/demand imbalance in the
upscale and luxury full-service segments to continue, which should result in
improved REVPAR and EBITDA at its hotel properties in the near term, however,
there can be no assurance that such supply/demand imbalance will continue or
that REVPAR and EBITDA will continue to improve.
In 1997, the Company diversified its real estate investment portfolio by
acquiring a portfolio of 29 senior living communities through the acquisition
of the outstanding common stock of Forum Group, Inc., a subsidiary
1
of Marriott International. Subsequently, the Company acquired one additional
senior living community in 1997 and another senior living community in 1998.
All of the properties are operated by Marriott Senior Living Services, Inc., a
subsidiary of Marriott International.
BUSINESS STRATEGY
The Company's primary business strategy is to continue to focus on
maximizing the profitability of its existing full-service hotel portfolio and
acquiring additional high-quality, full-service hotel properties, including
controlling interests in joint ventures, partnerships or other entities
holding such hotel properties. Although competition for acquisitions has
increased, the Company believes that the upscale and luxury full-service
segments of the market offer opportunities to acquire assets at attractive
multiples of cash flow and at discounts to replacement value, including
underperforming hotels which can be improved by conversion to the Marriott or
Ritz-Carlton brands. The Company believes that the upscale full-service
segment is very promising because:
. There is very limited new supply of upscale and luxury full-service hotel
rooms currently under construction. According to Smith Travel Research,
from 1988 to 1991, upscale full-service room supply for the Company's
competitive set increased an average of approximately 4% annually which
resulted in an oversupply of rooms in the industry. However, this growth
slowed to an average of approximately 1% from 1992 through 1997.
Furthermore, the lead time from conception to completion of a full-service
hotel is generally three to five years or more in the markets the Company
is principally pursuing, which management believes will contribute to the
continued low growth of supply in the upscale and luxury full-service
segments through 2000.
. Many desirable hotel properties are currently held by inadvertent owners
such as banks, insurance companies and other financial institutions which
are motivated and willing sellers. In recent years, the Company has
acquired a number of properties from inadvertent owners at significant
discounts to replacement cost, including luxury hotels operating under the
Ritz-Carlton brand. While in the Company's experience to date, these
sellers have been primarily U.S. financial organizations, the Company
believes that numerous international financial institutions are also
inadvertent owners of U.S. lodging properties and have only recently begun
to dispose of such properties. The Company expects that there will be
increased opportunities to acquire U.S. lodging properties from
international financial institutions and expects to dedicate significant
resources to aggressively pursue these opportunities.
. The Company believes that there are numerous opportunities to improve the
performance of acquired hotels by replacing the existing hotel manager with
Marriott International and converting the hotel to the Marriott brand.
Based on data provided by Smith Travel Research, the Company believes that
Marriott-flagged properties have consistently outperformed the industry.
Demonstrating the strength of the Marriott brand name, the average
occupancy rate for the Company's comparable full-service properties was
79.4%, compared to the average occupancy rate of 71.1% for competing
upscale full-service hotels. In addition, the Company's comparable
properties generated a 29% REVPAR premium over its competitive set.
Accordingly, management anticipates that any additional full-service
properties acquired by the Company in the future and converted from other
brands to the Marriott brand should achieve higher occupancy rates and
average room rates than has previously been the case for those properties
as the properties begin to benefit from Marriott's brand recognition,
reservation system and group sales organization. The Company intends to
pursue additional full-service hotel acquisitions, some of which may be
conversion opportunities. Sixteen of the Company's 68 acquired full-service
hotels from the beginning of 1994 through 1997 were converted to the
Marriott brand following their acquisition.
The Company believes it is well qualified to pursue its acquisition
strategy. Management has extensive experience in acquiring and financing
lodging properties and believes its industry knowledge, relationships and
access to market information provide a competitive advantage with respect to
identifying, evaluating and acquiring hotel assets.
2
During 1997, the Company acquired, or purchased controlling interests in, 17
full-service hotels (8,624 rooms) for an aggregate purchase price of
approximately $765 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.
Subsequent to year-end, the Company acquired a controlling interest in the
partnership that owns the Atlanta Marriott Marquis (1,671 rooms) for
approximately $239 million, including the assumption of approximately $164
million of mortgage debt. The Company also acquired a controlling interest in
a partnership that owns three full-service hotels (totaling 1,029 rooms) for
approximately $50 million. The Company is continually engaged in discussions
with respect to other potential acquisition properties and recently entered
into an agreement to acquire the 397-room Ritz-Carlton, Tysons Corner,
Virginia.
The Company holds minority interests and serves as a general partner or
limited partner in various partnerships that own, as of March 3, 1998, an
aggregate of 241 hotel properties, 21 of which are full-service properties,
managed by Marriott International. In 1997, the Company acquired, or obtained
controlling interests in, five affiliated partnerships, adding 10 hotels to
its portfolio. In January, the Company acquired a controlling interest in the
Marriott Hotel Properties Limited Partnership ("MHPLP"). MHPLP owns the 1,503-
room Marriott Orlando World Center and a 50.5% interest in the 624-room
Marriott Harbor Beach Resort. In April, the Company acquired a controlling
interest in the 353-room Hanover Marriott. In the fourth quarter, the Company
acquired the Chesapeake Hotel Limited Partnership ("CHLP"). CHLP owns the 430-
room Boston Marriott Newton; the 681-room Chicago Marriott O'Hare; the 595-
room Denver Marriott Southeast; the 588-room Key Bridge Marriott; the 479-room
Minnesota Airport Marriott; and the 221-room Saddle Brook Marriott in New
Jersey. In December 1997, the Company obtained controlling interests in the
partnerships that own the 884-room Marriott's Desert Springs Resort and Spa
and Leisure Park, a 418-unit senior living community. The Company is
considering the acquisition of additional full-service hotels currently held
by such partnerships and/or additional interests in such partnerships and, as
discussed above, in January 1998 acquired a controlling interest in the
Atlanta Marriott Marquis.
In addition to investments in partnerships in which it already held minority
interests, the Company has been successful in adding properties to its
portfolio through partnership arrangements with either the seller of the
property or the incoming managers (typically Marriott International or a
Marriott franchisee). During 1997, the Company acquired interests in five such
partnerships which owned five full-service hotels, including the 197-room
Waterford Hotel in Oklahoma City, the 404-room Norfolk Waterside Marriott in
Norfolk, Virginia; the 380-room Hartford/Farmington Marriott near Farmington,
Connecticut; the 380-room Manhattan Beach Radisson Plaza in Manhattan Beach,
California; and the 299-room Ontario Airport Marriott in Ontario, California.
The two non-Marriott hotels were converted to the Marriott brand. Subsequent
to year-end, the Company acquired a controlling interest in a partnership that
owns three hotels: the 359-room Albany Marriott in New York, the 350-room San
Diego Marriott Mission Valley in California, and the 320-room Minneapolis
Marriott Southwest in Minnesota. The Company has the financial flexibility
and, due to its existing partnership investment portfolio, the administrative
infrastructure in place to accommodate such arrangements. The Company views
this ability as a competitive advantage and expects to enter into similar
arrangements to add additional properties in the future.
The Company believes there is a significant opportunity to acquire
additional Ritz-Carlton hotels due to the Company's relationship with Marriott
International and due to the number of Ritz-Carlton brand hotels currently
owned by inadvertent owners. The Company also intends to purchase luxury
hotels with the intention of converting them to the Ritz-Carlton brand.
The Company intends to increase its pool of potential acquisition candidates
by considering acquisitions of select non-Marriott and non-Ritz-Carlton hotels
that offer long-term growth potential and are consistent with the overall
quality of its current portfolio, including upscale and luxury full-service
properties in difficult to duplicate locations with high barriers to entry and
quality brands.
3
The Company currently owns six international properties, with 2,550 rooms,
located in Canada and Mexico. The overbuilding and economic stress currently
being experienced in some European and Pacific Rim countries may eventually
lead to additional international acquisition opportunities. The Company will
acquire international properties only when acquisitions achieve satisfactory
returns after adjustments for currency and country risks.
In addition to acquisitions, the Company plans to selectively develop new
full-service hotels in major urban markets and convention/resort locations
with strong growth prospects, unique or hard to duplicate sites, high barriers
to entry of other new hotels and limited new supply. The Company intends to
target only development projects that show promise of providing financial
returns that represent a premium to acquisitions. In 1997, the Company
announced that it will develop the 717-room Tampa Convention Center Marriott
for $104 million, including a $16 million subsidy provided by the City of
Tampa.
The Company may also expand certain existing hotel properties where strong
performance and market demand exists. Expansions to existing properties
creates a lower risk to the Company as the success of the market is generally
known and development time is significantly shorter than new construction. The
Company recently committed to add approximately 500 rooms and an additional
15,000 square feet of meeting space to the 1,503-room Marriott Orlando World
Center.
In addition to its primary business strategy of expanding and maximizing the
profitability of the Company's full-service hotel portfolio, the Company
believes that its diversification into senior living communities will offer
strong current economic benefits and growth prospects. The Company believes
that this diversification is a natural extension of its hotel ownership
strategy: high quality assets operated by Marriott International. The demand
for retirement communities and assisted living facilities is increasing as the
population of the 85 and over age group is expected to double between 1990 and
2000 (per the Bureau of Census). This growth in the 85 and over population
should generate strong demand for senior living communities. The Company
intends to grow its portfolio of quality senior living communities through the
acquisition of existing properties and the development of new communities.
In 1997, the Company acquired a portfolio of 29 senior living communities
with 6,127 units from a subsidiary of Marriott International for approximately
$460 million, including approximately $270 million of debt. The Company plans
to add approximately 1,060 units to these communities for approximately $107
million through an expansion plan which will be completed in 1999 (549 units
of the expansion plan were completed as of January 2, 1998). The Company also
acquired the 418-unit Leisure Park senior living community in Lakewood, New
Jersey in late 1997 and the Gables at Winchester, a 124-unit senior living
community outside of Boston in early 1998. The Gables at Winchester
represented Host Marriott's first acquisition of an independently-operated
community which was converted to Marriott management. In addition, the Company
has conditionally agreed to purchase two Marriott Brighton Gardens senior
living communities totaling 320 units to be built in Denver and Colorado
Springs, Colorado, after the anticipated completion of such communities in the
first quarter of 1999, if they meet certain operating performance criteria.
HOTEL LODGING INDUSTRY
The upscale and luxury full-service segments of the lodging industry
continue to benefit from a favorable cyclical imbalance in the supply/demand
relationship in which room demand growth has exceeded supply growth, which has
remained fairly limited. The lodging industry posted strong gains in revenues
and profits in 1997, as demand growth continued to outpace additions to
supply. The Company believes that upscale and luxury full-service hotel room
supply growth will remain limited through at least 1998. Accordingly, the
Company believes this supply/demand imbalance will result in improving
occupancy and room rates which should result in improved REVPAR and operating
profit.
Following a period of significant overbuilding in the mid-to-late 1980s, the
lodging industry experienced a severe downturn. Since 1991, new hotel
construction, excluding casino-related construction, has been modest and
largely offset by the number of rooms taken out of service each year. Due to
an increase in travel and an
4
improving economy, hotel occupancy has grown steadily over the past several
years, and room rates have improved. The Company believes that room demand for
upscale and luxury full-service properties will continue to grow at
approximately the rate of inflation. Increased room demand should result in
increased hotel occupancy and room rates. According to Smith Travel Research,
upscale full-service occupancy for the Company and its competitive set grew in
1997 to 72.5%, while room rate growth continued to exceed inflation. While
room demand has been rising, new hotel supply growth has been minimal. Smith
Travel Research data shows that upscale full-service room supply increased an
average of only 1% annually from 1991 through 1997. The increase in room
demand and minimal growth in new hotel supply has also led to increased room
rates. The Company believes that these recent trends will continue, with
overall occupancy increasing slightly and room rates increasing at more than
one and one-half times the rate of inflation in 1998.
As a result of the overbuilding in the mid-to-late 1980s, many full-service
hotels built have not performed as originally planned. Cash flow has often not
covered debt service requirements, causing lenders (e.g., banks, insurance
companies, and savings and loans) to foreclose and become "inadvertent owners"
who are motivated to sell these assets. In the Company's experience to date,
these sellers have been primarily U.S. financial organizations. The Company
believes that numerous international financial institutions are also
inadvertent owners of lodging properties and expects there will be increased
opportunities to acquire lodging properties from international financial
institutions. While the interest of inadvertent owners to sell has created
attractive acquisition opportunities with strong current yields, the lack of
supply growth and increasing room night demand should contribute to higher
long-term returns on invested capital. Given the relatively long lead time to
develop urban, convention and resort hotels, as well as the lack of project
financing, management believes the growth in room supply in this segment will
be limited, at least until the year 2000.
HOTEL LODGING PROPERTIES
The Company's lodging portfolio as of March 20, 1998, consists of 99 upscale
and luxury full-service hotels with a total of over 48,000 rooms. The
Company's hotel lodging properties represent quality assets in the upscale and
luxury full-service lodging segment. All but three of the Company's hotel
properties are operated under the Marriott or Ritz-Carlton brand names. The
three hotels (representing an aggregate of 681 rooms, or approximately 1% of
the Company's total rooms) that do not carry the Marriott or Ritz-Carlton
brand have not been converted to the Marriott or Ritz-Carlton brand due to
their size, quality and/or contractual commitments which would not permit such
conversion.
One commonly used indicator of market performance for hotels is room revenue
per available room, or REVPAR, which measures daily room revenues generated on
a per room basis. This does not include food and beverage or other ancillary
revenues generated by the property. REVPAR represents the combination of the
average daily room rate charged and the average daily occupancy achieved. The
Company has reported annual increases in REVPAR since 1993.
To maintain the overall quality of the Company's lodging properties, each
property undergoes refurbishments and capital improvements on a regularly
scheduled basis. Typically, refurbishing has been provided at intervals of
five years, based on an annual review of the condition of each property. For
1997, 1996 and 1995, the Company spent $131 million, $87 million and $56
million, respectively, on capital improvements to existing properties. As a
result of these expenditures, the Company has been able to maintain high
quality rooms at its properties.
The Company's hotels primarily include Marriott and Ritz-Carlton brand
hotels and average nearly 500 rooms. Twelve of the Company's hotels have more
than 750 rooms. Hotel facilities typically include meeting and banquet
facilities, a variety of restaurants and lounges, swimming pools, gift shops,
and parking facilities. The Company's hotels primarily serve business and
pleasure travelers and group meetings at locations in downtown and suburban
areas, near airports and at resort convention locations throughout the United
States. The properties are well situated in locations where there are
significant barriers to entry by competitors. Marriott
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International serves as manager for 83 of the 99 hotels owned by the Company
and all but three are part of Marriott International's full-service hotel
system. The average age of the properties is 15 years, although several of the
properties have had substantial, more recent renovations or major additions.
In 1997, for example, the Company substantially completed a two-year $30
million capital improvement program at the New York Marriott Marquis which
included renovations to all guestrooms, refurbishment of ballrooms, restaurant
updates and retail additions. In early 1998, the Company completed a $15
million capital improvement program at the Denver Marriott Tech Center. The
program included replacement of guestroom interiors, remodeling of the lobby,
ballroom, meeting rooms and corridors, as well as renovations to the exterior
of the building.
The chart below sets forth performance information for the Company's
comparable hotels:
1997 1996
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COMPARABLE FULL-SERVICE HOTELS(1)
Number of properties.................................... 54 54
Number of rooms......................................... 27,074 27,044
Average daily rate...................................... $134.49 $121.58
Occupancy percentage.................................... 79.4% 78.0%
REVPAR.................................................. $106.76 $ 94.84
REVPAR % change......................................... 12.6% --
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(1) Consists of 54 properties owned by the Company for all of 1997 and 1996,
except for the 85-room Sacramento property, which is operated as an
independent hotel.
The chart below sets forth performance information for the Company's hotels:
1997 1996 1995
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Number of properties............ 95 79 55
Number of rooms................. 45,718 37,210 25,932
Average daily rate.............. $133.74(1) $119.94(1) $110.30(1)
Occupancy percentage............ 78.4%(1) 77.3%(1) 75.5%(1)
REVPAR.......................... $104.84(1) $ 92.71(1) $ 83.32(1)
REVPAR % change................. 13.1%(1) 11.3%(1) --
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(1) Excludes the information related to the 255-room Elk Grove Suites hotel,
which was leased to a national hotel chain through September 1997 and the
85-room Sacramento property, which is operated as an independent hotel.
Revenues in 1997 for nearly all of the Company's hotels were improved or
comparable to 1996. This improvement was achieved through steady increases in
customer demand, as well as yield management techniques applied by the manager
to maximize REVPAR on a property-by-property basis. REVPAR for comparable
properties increased 12.6% as average room rates increased almost 11% and
average occupancy increased over one percentage point. Overall, this resulted
in outstanding sales growth. Sales expanded at a 9% rate for comparable hotels
and house profit margins increased by over two percentage points. The Company
believes that its hotels consistently outperform the industry's average REVPAR
growth rates. The relatively high occupancy rates of the Company's hotels,
along with increased demand for upscale and luxury full-service hotel rooms,
allowed the managers of the Company's hotels to increase average room rates by
selectively raising room rates and by replacing certain discounted group
business with higher-rate group and transient business. The Company believes
that these favorable REVPAR growth trends should continue due to the limited
new construction of full-service properties and the expected improvements from
the conversion of seven properties to the Marriott brand in 1996 and 1997.
A number of the Company's full-service hotel acquisitions were converted to
the Marriott brand upon acquisition; most recently the Coronado Island
Marriott Resort and the Manhattan Beach Marriott were converted in the fourth
quarter of 1997. The conversion of these properties to the Marriott brand is
intended to increase occupancy and room rates as a result of Marriott
International's nationwide marketing and reservation systems,
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its Marriott Rewards program, group sales force, as well as customer
recognition of the Marriott brand name. The Marriott brand name has
consistently delivered occupancy and REVPAR premiums over other brands. Based
on data provided by Smith Travel Research, the Company's comparable properties
have an eight percentage point occupancy premium and a 29% REVPAR premium over
its competitive set. The Company actively manages these conversions and, in
many cases, has worked closely with the manager to selectively invest in
enhancements to the physical product to make the property more attractive to
guests or more efficient to operate. The invested capital with respect to
these properties is primarily used for the improvement of common areas, as
well as upgrading soft and hard goods (i.e., carpets, drapes, paint, furniture
and additional amenities). The conversion process typically causes periods of
disruption to these properties as selected rooms and common areas are
temporarily taken out of service. Historically, the conversion properties have
shown improvements as the benefits of Marriott International's marketing and
reservation programs, group sales force and customer service initiatives take
hold. In addition, these properties have generally been integrated into
Marriott International's systems covering purchasing and distribution,
insurance, telecommunications and payroll processing.
The Company's focus is on maximizing profitability throughout the portfolio
by concentrating on key objectives. The Company has assembled a highly skilled
asset management team with extensive experience in hotel management and
operations, including revenue and operations management and capital
expenditure monitoring. The Company's experienced asset management team works
with the hotel managers to achieve these key objectives, which include
reducing property-level overhead by sharing management positions with other
jointly managed hotels in the vicinity, evaluating marginal restaurant
operations and selectively making additional investments where favorable
incremental returns are expected, including the expansion of certain
properties.
The Company and its hotel managers will continue to focus on cost control in
an attempt to ensure that hotel sales increases serve to maximize house and
operating profit. While control of fixed costs serves to improve profit
margins as hotel sales increase, it also results in more properties reaching
financial performance levels that allow the managers to share in the growth of
profits in the form of incentive management fees. The Company believes this is
a positive development as it strengthens the alignment of the Company's and
the managers' interests, which helps to drive further increases in
profitability but moderates operating leverage.
During 1996, the Company completed its divestiture of limited-service
properties through the sale and leaseback of 16 Courtyard properties and 18
Residence Inn properties. These properties, along with 37 Courtyard properties
sold and leased back during 1995, continue to be reflected in the Company's
revenues and are managed by Marriott International under long-term management
agreements. During 1997, limited-service properties represented 2% of the
Company's hotel EBITDA, compared to 5% in 1996, and the Company expects this
percentage to continue to decrease as the Company continues to acquire full-
service properties.
MARKETING
At March 20, 1998, 83 of the Company's 99 hotel properties are managed by
Marriott International as Marriott or Ritz-Carlton brand hotels. Thirteen of
the 16 remaining hotels are operated as Marriott brand hotels under franchise
agreements with Marriott International. The Company believes that these
Marriott-managed and franchised properties will continue to enjoy competitive
advantages arising from their participation in the Marriott International
hotel system. Marriott International's nationwide marketing programs and
reservation systems as well as the advantage of the strong customer preference
for Marriott brands should also help these properties to maintain or increase
their premium over competitors in both occupancy and room rates. Repeat guest
business in the Marriott hotel system is enhanced by the recently created
Marriott Rewards program, which expanded the previous Marriott Honored Guest
Awards program. Marriott Rewards membership includes more than 7.5 million
members.
The Marriott reservation system provides Marriott reservation agents
complete descriptions of the rooms available for sale, and up-to-date rate
information from the properties. The reservation system also features
connectivity to airline reservation systems, providing travel agents with
access to available rooms inventory for
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all Marriott and Ritz-Carlton lodging properties. In addition, software at
Marriott's centralized reservations centers enables agents to immediately
identify the nearest Marriott or Ritz-Carlton brand property with available
rooms when a caller's first choice is fully occupied.
SENIOR LIVING COMMUNITIES
At March 20, 1998, the Company's senior living communities portfolio
consists of 31 upscale properties with over 7,200 units. The Company's senior
living communities represent high quality assets in the senior living lodging
segment. The communities offer a combination of independent living, assisted
living and nursing components that differ mostly by the level of senior care
services provided.
Independent living components, which represent 54% of the Company's senior
living units, contain a variety of accommodations, together with amenities
such as dining facilities, lounges, and game and craft rooms. All residents of
the independent living components are provided security, meals and
housekeeping. Emergency healthcare service is available upon demand 24 hours a
day from on-site staff, and each independent living unit is equipped with an
emergency call system. The independent living components of the properties
generally consist of apartments or villas. Each resident enters into a
residency agreement that may be terminated by the resident on short notice.
Although there can be no assurance that available independent living units
will be reoccupied as residency agreements expire or are terminated, since
1988 at least 80% of the residents of the apartments and villas managed by
Marriott International have renewed their residency agreements from year to
year.
Assisted living components, which represent 22% of the Company's senior
living units, provide a supportive environment that encourages independent
living. Residents have private or semi-private units, eat meals in a private
dining room, and are provided the added services of scheduled activities,
housekeeping and linen service, preventive health surveillance, periodic
health monitoring, assistance with activities of daily living, and emergency
care.
Nursing components, which represent 24% of the Company's senior living
units, provide residents a full range of nursing care. Residents have private
or semi-private rooms and share communal dining and social facilities. In most
instances, each resident of the independent living component of a property is
entitled to priority admission in the assisted living (if any) or nursing
component.
Some communities also provide ancillary healthcare services, including the
operation of adult daycare centers on the premises of some communities. All
communities are managed by Marriott International under long-term management
agreements.
Similar to the hotel segment, one commonly used indicator of market
performance for senior living communities is revenue per available unit,
("REVPAU"), which measures charges for independent living units and assisted
living suites and nursing beds on a per unit basis. This does not include any
ancillary revenues from the properties, which are generated on a "fee for
service" basis for supplementary items requested by residents. REVPAU
represents the combination of the average daily unit rate charged and the
average daily occupancy achieved.
The chart below sets forth performance information for the Company's senior
living communities for 1997:
Number of properties............................................. 30
Number of units.................................................. 7,094
Average daily rate............................................... $ 83.88
Occupancy percentage............................................. 91.7%
REVPAU........................................................... $ 76.92
During 1997, the average occupancy at the Company's senior living
communities was approximately 92% and the average daily rate was $84,
resulting in REVPAU of $77. Overall occupancies for 1997 were lower than
8
the historical and future anticipated occupancies due to the significant
number of expansion units added during the year and the time required to fill
the expansion units.
The Company is an active owner of its senior living communities portfolio.
The Company focuses on maximizing profitability throughout the portfolio. The
Company's asset management department works closely with Marriott
International to identify and evaluate opportunities to increase profitability
by making selective investments where favorable incremental returns are
expected, including the expansion of certain properties, or implementing new
cost control programs.
9
PROPERTIES
HOTEL PROPERTIES
The following table sets forth certain information as of March 20, 1998,
relating to each of the Company's hotels. All of the properties are operated
under Marriott brands by Marriott International, unless otherwise indicated.
LOCATION ROOMS
- -------- -----
Alabama
Point Clear....................... 306
Arizona
Scottsdale Suites................. 251
California
Coronado Island Resort(1)......... 300
Costa Mesa Suites................. 253
Desert Springs Resort and Spa(11). 884
Manhattan Beach(3)................ 380
Marina Beach(4)................... 368
Napa Valley....................... 191
Newport Beach..................... 570
Newport Beach Suites.............. 250
Ontario Airport(5)................ 299
Sacramento Airport(4)(6).......... 85
San Diego Marriott Hotel and Mari-
na(4)............................ 1,355
San Diego Mission Valley(7)....... 350
San Francisco Airport............. 684
San Francisco Fisherman's
Wharf(8)......................... 285
San Francisco Moscone Center(4)... 1,498
San Ramon(4)...................... 368
Santa Clara(4).................... 754
The Ritz-Carlton, Marina del
Rey(9)(13)....................... 306
Colorado
Denver Southeast(2)............... 595
Denver Tech Center................ 625
Denver West(4).................... 307
Marriott's Mountain Resort at
Vail............................. 349
Connecticut
Hartford/Farmington(5)............ 380
Hartford/Rocky Hill(4)............ 251
Florida
Fort Lauderdale Marina............ 580
Harbor Beach Resort(11)........... 624
Jacksonville(8)................... 256
Miami Airport(4).................. 782
Orlando World Center(11).......... 1,503
Palm Beach Gardens(4)(8).......... 279
Singer Island (Holiday Inn)(6).... 222
Tampa Airport(4).................. 295
Tampa Westshore(4)(10)............ 309
The Ritz-Carlton, Naples(13)...... 463
Georgia
Atlanta Marriott Marquis(11)...... 1,671
Atlanta Midtown Suites(4)......... 254
Atlanta Norcross.................. 222
Atlanta Northwest................. 400
Atlanta Perimeter(4).............. 400
JW Marriott Hotel at Lenox(4)..... 371
The Ritz-Carlton, Atlanta(13)..... 447
The Ritz-Carlton, Buckhead(13).... 553
Illinois
Chicago/Deerfield Suites.......... 248
Chicago/Downers Grove Suites...... 254
Chicago/Downtown Courtyard........ 334
Chicago O'Hare(2)................. 681
LOCATION ROOMS
- -------- -----
Indiana
South Bend(4)..................... 300
Louisiana
New Orleans....................... 1,290
Maryland
Bethesda(4)....................... 407
Gaithersburg/Washingtonian Center. 284
Massachusetts
Boston/Newton(2).................. 430
Michigan
Detroit Romulus................... 245
Minnesota
Minneapolis/Bloomington(2)........ 479
Minneapolis City Center(4)........ 583
Minneapolis Southwest(7).......... 320
Missouri
Kansas City Airport(4)............ 382
St. Louis Pavilion(4)............. 672
New Hampshire
Nashua............................ 251
New Jersey
Hanover(11)....................... 353
Newark Airport(4)................. 590
Saddle Brook(2)................... 221
New York
Albany(7)......................... 359
New York East Side................ 662
New York Marriott Financial Cen-
ter(12).......................... 504
New York Marriott Marquis(4)...... 1,911
Marriott World Trade Center(4).... 820
North Carolina
Charlotte Executive Park(8)....... 298
Raleigh Crabtree Valley(10)....... 375
Oklahoma
Oklahoma City..................... 354
Oklahoma City Waterford(3)........ 197
Oregon
Portland.......................... 503
Pennsylvania
Philadelphia (Convention Cen-
ter)(4).......................... 1,200
Philadelphia Airport(4)........... 419
Pittsburgh City Center(4)(8)...... 400
Texas
Dallas/Fort Worth................. 492
Dallas Quorum(4).................. 547
El Paso(4)........................ 296
Houston Airport(4)................ 566
JW Marriott Houston............... 503
Plaza San Antonio(8).............. 252
San Antonio Rivercenter(4)........ 999
San Antonio Riverwalk(4).......... 500
Utah
Salt Lake City(4)................. 510
Virginia
Dulles Airport(4)................. 370
Key Bridge(2)..................... 588
10
HOTEL PROPERTIES (CONTINUED)
LOCATION ROOMS
- -------- -----
Virginia (Continued)
Norfolk Waterside(5)........... 404
Pentagon City.................. 300
Washington Dulles Suites....... 254
Westfields..................... 335
Williamsburg................... 295
Washington, D.C.
Washington Metro Center........ 456
LOCATION ROOMS
- -------- -----
Canada
Calgary........................ 380
Toronto Airport................ 423
Toronto Eaton Centre(4)........ 459
Toronto Delta Meadowvale(6).... 374
Mexico
Mexico City Airport............ 600
JW Marriott Hotel, Mexico City. 314
------
TOTAL.......................... 48,418
======
- --------
(1) Property was acquired by the Company and converted to the Marriott brand
in 1997.
(2) The Company acquired the partnership that owns this property in 1997. The
Company previously owned a general partner interest in the partnership.
(3) The Company acquired a controlling interest in the newly-formed
partnership that owns this property in 1997. The property was converted
to the Marriott brand and is operated as a Marriott franchised property.
(4) The land on which the hotel is built is leased by the Company under a
long-term lease agreement.
(5) The Company acquired a controlling interest in the newly-formed
partnership that owns this property in 1997. The property is operated as
a Marriott franchised property.
(6) Property is not operated as a Marriott and is not managed by Marriott
International.
(7) The Company acquired a controlling interest in the partnership that owns
this property in 1998. The property will be operated as a Marriott
franchised property.
(8) Property is operated as a Marriott franchised property.
(9) Property was acquired by the Company in 1997.
(10) Property is owned by an affiliated partnership of the Company. A
subsidiary of the Company provided 100% non-recourse financing totaling
approximately $35 million to the partnership, in which the Company owns
the sole general partner interest, for the acquisition of these two
hotels. The Company consolidates these properties in the accompanying
financial statements.
(11) The Company acquired a controlling interest in the partnership that owns
this property in 1997 or 1998. The Company previously owned a general
partner interest in the partnership.
(12) The Company completed the acquisition of this property in early 1997. The
Company previously had purchased the mortgage loan secured by the hotel
in late 1996.
(13) Property is operated as a Ritz-Carlton. The Ritz-Carlton Hotel Company,
L.L.C. manages the property and is 49% owned by Marriott International.
11
SENIOR LIVING COMMUNITIES
The following table sets forth certain information as of March 20, 1998,
relating to each of the Company's senior living communities. All of the
properties are operated under Marriott brands by Marriott International.
LOCATION UNITS
- -------- -----
Arizona
The Forum at Desert Harbor........ 240
The Forum--Pueblo Norte........... 293
The Forum at Tucson............... 326
California
The Remington Club I.............. 205
The Remington Club II............. 200
Delaware
Forwood Manor..................... 212
Foulk Manor North................. 115
Foulk Manor South................. 113
Millcroft......................... 198
Shipley Manor..................... 159
Florida
Coral Oaks........................ 256
The Forum at Deer Creek........... 294
Fountainview...................... 340
Park Summit....................... 277
Springwood Court.................. 85
Tiffany House..................... 131
Indiana
The Forum at the Crossing......... 221
LOCATION UNITS
- -------- -----
Kansas
The Forum at Overland Park........ 205
Kentucky
The Forum at Brookside............ 328
The Lafayette at Country Place(3). 100
Lexington at Country Place(3)..... 142
Massachusetts
Gables at Winchester(1)........... 124
New Jersey
Leisure Park(2)................... 418
New Mexico
The Montebello on Academy......... 209
Ohio
The Forum at Knightsbridge(3)..... 316
South Carolina
Myrtle Beach Manor................ 172
Texas
The Forum at Lincoln Heights...... 241
The Forum at Memorial Woods....... 430
The Montevista at Coronado........ 247
The Forum at Park Lane............ 318
The Forum at The Woodlands........ 303
-----
TOTAL.......................... 7,218
=====
- --------
(1) Property was acquired by the Company in 1998.
(2) The Company acquired 49% of the remaining 50% partnership interest in the
partnership that owns this property.
(3) The land on which the community is built is leased by the Company under a
long-term lease agreement.
1998 ACQUISITIONS
In January 1998, the Company acquired a controlling interest in the Atlanta
Marquis Limited Partnership, which owns the 1,671-room Atlanta Marriott
Marquis Hotel, for approximately $239 million, including the assumption of
approximately $164 million of mortgage debt. In March 1998, the Company
acquired a controlling interest in the partnership that owns three hotels: 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 entered into an agreement to acquire The Ritz-Carlton, Tysons
Corner, Virginia (397 rooms).
In January 1998, the Company acquired, for approximately $21 million, the
124-unit senior living community, the Gables at Winchester in suburban Boston.
In February 1998, the Company acquired the remaining 41% interest in FRC I
Limited Partnership ("FRC") for approximately $3 million. FRC owns the
Remington Club II, a 222-unit full-service senior living community in Rancho
Bernardo, California. The Company has also entered into a conditional purchase
agreement to acquire two 160-unit Marriott Brighton Gardens assisted living
communities located in Denver and Colorado Springs, Colorado. After the
completion of construction in the first quarter of 1999, the Company may
acquire these properties for $35 million if they achieve certain operating
performance criteria.
INVESTMENTS IN AFFILIATED PARTNERSHIPS
The Company and certain of its subsidiaries also manage the Company's
partnership investments and conduct the partnership services business. As
such, at January 2, 1998, the Company and/or its subsidiaries own an
investment in, and generally serve as a general partner or managing general
partner for, 20 unconsolidated partnerships which collectively own 22 Marriott
full-service hotels, 120 Courtyard hotels, 50 Residence Inns and 50 Fairfield
Inns. In addition, the Company holds notes receivable (net of reserves) from
partnerships totaling approximately $23 million at January 2, 1998.
12
As the managing general partner, the Company and its subsidiaries are
responsible for the day-to-day management of partnership operations, which
includes payment of partnership obligations from partnership funds,
preparation of financial reports and tax returns and communications with
lenders, limited partners and regulatory bodies. The Company or its
subsidiaries are usually reimbursed for the cost of providing these services.
Hotel properties owned by the unconsolidated partnerships generally were
acquired from the Company or its subsidiaries in connection with limited
partnership offerings. These hotel properties are currently operated under
management agreements with Marriott International. As the managing general
partner of such partnerships, the Company or its subsidiaries oversee and
monitor Marriott International's performance pursuant to these agreements.
The Company's interests in these partnerships range from 1% to 50%. Cash
distributions provided from these partnerships are tied to the overall
performance of the underlying properties and the overall level of debt owed by
the partnership. Partnership distributions to the Company were $5 million in
each of 1997 and 1996 and $3 million in 1995. All partnership debt is
nonrecourse to the Company and its subsidiaries, except that the Company is
contingently liable under various guarantees of debt obligations of certain of
these partnerships. Such commitments are limited in the aggregate to $60
million at January 2, 1998. Subsequent to year-end, such maximum commitments
were reduced to $20 million in connection with the refinancing and acquisition
of a controlling interest in the Atlanta Marriott Marquis. In most cases,
fundings of such guarantees represent loans to the respective partnerships.
In December 1997, the Company, on behalf of six of its subsidiaries, filed a
preliminary Prospectus/Consent Solicitation with the Securities and Exchange
Commission, which describes the potential consolidation of six of the
Company's affiliated partnerships into a single operating partnership and the
formation of a new general partner which would intend to qualify as a real
estate trust (the "Limited Service REIT") and be listed on the New York Stock
Exchange. The partnerships, which own 219 limited-service hotels, that are
anticipated to participate in the consolidation into a Limited Service REIT
are Courtyard by Marriott Limited Partnership; Courtyard by Marriott II
Limited Partnership; Marriott Residence Inn Limited Partnership; Marriott
Residence Inn II Limited Partnership; Marriott Residence Inn USA Limited
Partnership; and Fairfield Inn by Marriott Limited Partnership. The potential
Limited Service REIT would have separate management from the Company and would
focus solely on the ownership and acquisition of limited-service and extended-
stay hotels. The Limited Service REIT, if established, is not expected to have
a significant economic impact on the Company.
To satisfy certain tax requirements related to the nature of the income
received by the REIT, the assets would be leased to subsidiaries of the
Company. All of the hotels are, and will continue to be, managed by Marriott
International.
COMPETITION
The Company's hotels compete with several other major lodging brands in each
segment in which they operate. Competition in the industry is based primarily
on the level of service, quality of accommodations, convenience of locations
and room rates. The following table presents key participants in segments of
the lodging industry in which the Company competes:
SEGMENT REPRESENTATIVE PARTICIPANTS
- ------- ---------------------------
Luxury Full-Service..... Ritz-Carlton; Four Seasons
Upscale Full-Service.... Marriott Hotels, Resorts and Suites; Crowne Plaza; Doubletree;
Hyatt; Hilton; Radisson; Red Lion; Sheraton; Westin; Wyndham
The Company's senior living communities compete with facilities of varying
similarity in the respective geographical market areas in which the
communities are located. Competing facilities are generally operated on a
regional and local basis by religious groups and other nonprofit
organizations, as well as by public and private
13
operators. There are a limited number of operators on a national basis. The
independent living components of the communities face competition from all the
various types of residential opportunities available to the elderly. However,
the number of communities that offer on-premises healthcare services is
limited. The assisted living and nursing components of the communities compete
with other assisted living and nursing facilities. Because the target market
segment of the communities (i.e., full-service retirement communities) is
relatively narrow, the risk of competition may be higher than with some other
types of retirement communities and assisted living and nursing facilities
developed in close proximity to them.
Significant competitive factors for attracting residents to the independent
living components of the communities include price, physical appearance, and
amenities and services offered. Additional competitive factors for attracting
residents to the assisted living and nursing components of the communities
include quality of care, reputation, physician and nursing services available,
and family preferences. The Company believes that its senior living
communities rate high in each of these categories, except that its senior
living communities are generally more expensive than competing facilities.
OTHER REAL ESTATE INVESTMENTS
At January 2, 1998, the Company owned 12 undeveloped parcels of vacant land,
totaling approximately 83 acres, originally purchased primarily for the
development of hotels or senior living communities. The Company sold 17
parcels during 1997 for proceeds of approximately $30 million. The Company may
sell its remaining undeveloped parcels from time to time when market
conditions are favorable. Some of the properties may be developed as part of a
long-term strategy to realize the maximum value of these parcels. The Company
also has lease and sublease activity relating primarily to its former
restaurant operations.
In the fourth quarter of 1995, management instituted a program to
aggressively liquidate certain non-income producing assets and to reinvest the
proceeds in the acquisition of full-service hotels. As part of this program,
management determined that 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
for its approximate net book value of approximately $11 million.
SPECIAL DIVIDEND
On December 29, 1995, the Company distributed to its shareholders through a
special dividend (the "Special Dividend") all of the outstanding shares of
common stock of Host Marriott Services Corporation ("HM Services"), formerly a
direct, wholly-owned subsidiary of the Company which, as of the date of the
Special Dividend, owned and operated the food, beverage and merchandise
concessions at airports, on tollroads and at stadiums and arenas and other
tourist attractions (the "Operating Group"). The Special Dividend provided
Company shareholders with one share of common stock of HM Services for every
five shares of Company common stock held by such shareholders on the record
date of December 22, 1995.
For the purpose of governing certain of the ongoing relationships between
the Company and HM Services after the Special Dividend, and to provide an
orderly transition, the Company and HM Services have entered into various
agreements, including agreements to a) allocate certain responsibilities with
respect to employee compensation, benefit and labor matters; b) define the
respective parties' rights and obligations with respect to deficiencies and
refunds of Federal, state and other income or franchise taxes relating to the
Company's businesses for tax years prior to the Special Dividend and with
respect to certain tax attributes of the Company's after the Special Dividend;
c) provide certain administrative and other support services to each other for
a transitional period on an as-needed basis; and d) to provide for the
issuance of HM Services common stock in connection with the exercise of
certain outstanding warrants to purchase shares of Company common stock.
14
RELATIONSHIP WITH MARRIOTT INTERNATIONAL; MARRIOTT INTERNATIONAL DISTRIBUTION
Prior to October 8, 1993, the Company was named "Marriott Corporation." In
addition to conducting its existing hotel ownership business and the business
of HM Services (prior to its distribution to shareholders through the Special
Dividend; see Items 1 and 2, "Business and Properties--Special Dividend"),
Marriott Corporation engaged in lodging and senior living services management,
timeshare resort development and operation, food service and facilities
management and other contract services businesses (the "Management Business").
On October 8, 1993, the Company completed the Marriott International
Distribution (as defined herein). Marriott International conducts the
Management Business as a separate publicly traded company.
The Company and Marriott International have entered into agreements which
provide, among other things, for Marriott International to (i) manage or
franchise various hotel properties and senior living communities owned or
leased by the Company, (ii) advance up to $225 million to the Company under
the Marriott International line of credit (the "MI Line of Credit") which was
terminated in 1997, (iii) provide first mortgage financing of $109 million for
the Philadelphia Marriott Hotel which was repaid in December 1996, (iv)
provide financing for certain Company acquisitions, (v) guarantee the
Company's performance in connection with certain loans or other obligations,
and (vi) provide certain limited administrative services. The Company views
its relationship with Marriott International as providing various advantages,
including access to high quality management services, strong brand names and
superior marketing and reservation systems.
Marriott International has the right to purchase up to 20% of the voting
stock of the Company if certain events involving a change of control of the
Company occur.
EMPLOYEES
The Company and its subsidiaries collectively have approximately 225
corporate employees, and approximately 300 other employees (primarily employed
at one of its non-U.S. hotels) which are covered by collective bargaining
agreements that are subject to review and renewal on a regular basis. The
Company believes that it has good relations with its labor unions and has not
experienced any material business interruptions as a result of labor disputes.
ENVIRONMENTAL AND REGULATORY MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws may impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, certain
environmental laws and common law principles could be used to impose liability
for release of asbestos-containing materials ("ACMs"), and third parties may
seek recovery from owners or operators of real properties for personal injury
associated with exposure to released ACMs. Environmental laws also may impose
restrictions on the manner in which property may be used or business may be
operated, and these restrictions may require expenditures. In connection with
its current or prior ownership or operation of hotels, the Company may be
potentially liable for any such costs or liabilities. Although the Company is
currently not aware of any material environmental claims pending or threatened
against it, no assurance can be given that a material environmental claim will
not be asserted against the Company.
Healthcare facility operations are subject to federal, state, and local
government regulations. Facilities are subject to periodic inspection by state
licensing agencies to determine whether the standards necessary for continued
licensure are being maintained. In granting and renewing licenses, the state
agencies consider, among other things, buildings, furniture, and equipment;
qualifications of administrative personnel and staff; quality of care; and
compliance with laws and regulations relating to operation of facilities.
State licensure of a nursing facility is a prerequisite to certification for
participation in the Medicare and Medicaid programs. Requirements for
licensure of assisted living components are generally less comprehensive and
stringent than requirements for licensure of nursing facilities. Most states
do not have licensure requirements for the independent living
15
components of senior living communities, except to the extent that such
independent living components are associated with the provision of healthcare
services. The Company's communities are presently in compliance with all
applicable federal, state and local regulations with respect to licensure
requirements. However, because those requirements are subject to change, there
can be no assurance that the Company's communities will be able to maintain
their licenses upon a change in standards, and future changes in those
standards could necessitate substantial expenditures by the Company to comply
therewith.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in litigation incidental to
their businesses. Management believes that such litigation is not significant
and will not have a material adverse effect on the Company's financial
condition and results of operations.
In the fourth quarter of 1997, the Company reached a settlement in a lawsuit
against Trinity Industries and others for claims related to construction on
the New York Marriott Marquis Hotel. In settlement of the lawsuit, the Company
and its affiliate received a cash settlement of approximately $70 million.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock is listed on the New York Stock Exchange, the Chicago Stock
Exchange, the Pacific Stock Exchange and the Philadelphia Stock Exchange and
is traded under the symbol "HMT." The following table sets forth, for the
fiscal periods indicated, the high and low sales prices per share of the
common stock as reported on the New York Stock Exchange Composite Tape. The
Company has not declared any cash dividends on the common stock during the two
fiscal years ended January 2, 1998, and through the date hereof. The Company
currently intends to retain future earnings, if any, for use in its business
and does not anticipate paying regular cash dividends on the common stock. As
of January 2, 1998, there were approximately 50,759 holders of record of
common stock.
HIGH LOW
-------- -------
1996
1st Quarter........................................ $13 3/4 $11 1/2
2nd Quarter........................................ 14 12 3/8
3rd Quarter........................................ 14 1/4 12 3/8
4th Quarter........................................ 16 1/4 13 1/2
1997
1st Quarter........................................ $18 3/4 $15 3/4
2nd Quarter........................................ 18 1/8 15 1/4
3rd Quarter........................................ 20 13/16 17 1/2
4th Quarter........................................ 23 3/4 18 1/16
1998
1st Quarter (through March 20, 1998)............... $20 9/16 $17 1/2
17
ITEM 6. SELECTED FINANCIAL DATA
The following table presents certain selected historical financial data of
the Company which has been derived from the Company's audited Consolidated
Financial Statements for the five most recent fiscal years ended January 2,
1998. The income statement data for fiscal year 1993 does not reflect the
Marriott International Distribution and related transactions and, accordingly,
the table presents data for the Company that includes amounts attributable to
Marriott International. As a result of the Marriott International Distribution
and related transactions, the assets, liabilities and businesses of the
Company have changed substantially.
FISCAL YEAR
------------------------------------------------
1997(3) 1996(1) 1995(2) 1994(3) 1993(3)(4)(5)
------- ------- ------- ------- -------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues....................... $1,147 $ 732 $ 484 $ 380 $ 659
Operating profit before
minority interest, corporate
expenses and interest......... 449 233 114 152 92
Income (loss) from continuing
operations.................... 47 (13) (62) (13) 56
Net income (loss)(6)........... 50 (13) (143) (25) 50
Basic earnings (loss) per
common share:(7)
Income (loss) from continuing
operations................... .23 (.07) (.39) (.09) .45
Net income (loss)(6).......... .25 (.07) (.90) (.17) .39
Diluted earnings (loss) per
common share:(7)
Income (loss) from continuing
operations................... .23 (.07) (.39) (.09) .40
Net income (loss)(6).......... .24 (.07) (.90) (.17) .35
Cash dividends declared per
common share.................. -- -- -- -- .14
BALANCE SHEET DATA:
Total assets................... $6,526 $5,152 $3,557 $3,366 $3,362
Debt........................... 3,783 2,647 2,178 1,871 2,113
- --------
(1) Fiscal year 1996 includes 53 weeks.
(2) Operating results for 1995 include a $10 million pre-tax charge to write
down the carrying value of five limited service properties to their net
realizable value and a $60 million pre-tax charge to write down an
undeveloped land parcel to its estimated sales value. In 1995, the Company
recognized a $20 million extraordinary loss, net of taxes, on the
extinguishment of debt.
(3) In 1997, the Company recognized a $3 million extraordinary gain, net of
taxes, on the extinguishment of certain debt. In 1994, the Company
recognized a $6 million extraordinary loss, net of taxes, on the required
redemption of senior notes. In 1993, the Company recognized a $4 million
extraordinary loss, net of taxes, on the completion of an exchange offer
for its then outstanding bonds.
(4) Operating results for 1993 include the operations of Marriott
International only through the Marriott International Distribution date of
October 8, 1993. These operations had a net pre-tax effect on income of
$211 million for the year ended December 31, 1993 and are recorded as
"Profit from operations distributed to Marriott International" on the
Company's consolidated statements of operations and are, therefore, not
included in sales, operating profit before corporate expenses and
interest, interest expense and interest income for the same period. The
net pre-tax effect of these operations is, however, included in income
before income taxes, extraordinary item and cumulative effect of changes
in accounting principles and in net income for the same periods. Statement
of Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income
Taxes," was adopted in the first quarter of 1993. In the second quarter of
1993, the Company changed its accounting method for assets held for sale.
During 1993, the Company recorded a $34 million credit to reflect the
adoption of SFAS No. 109 and a $32 million charge, net of taxes, to
reflect the change in its accounting method for assets held for sale.
(5) Operating results in 1993 included pre-tax expenses related to the
Marriott International Distribution totaling $13 million.
(6) The Company recorded a loss from discontinued operations, net of taxes, as
a result of the Special Dividend of $61 million in 1995, $6 million in
1994, and $4 million in 1993. The 1995 loss from discontinued operations
includes a pre-tax charge of $47 million for the adoption of SFAS No. 121,
"Accounting For the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of," a pre-tax $15 million restructuring charge and an
extraordinary loss of $10 million, net of taxes, on the extinguishment of
debt.
(7) Basic earnings (loss) per common share is computed by dividing net income
(loss) by the weighted average number of shares of common stock
outstanding. Diluted earnings (loss) per share is computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding plus other dilutive securities. Diluted earnings (loss) per
share 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 1994 through 1996, as they are anti-dilutive.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Revenues primarily represent house profit from the Company's hotel
properties and senior living communities, net gains (losses) on property
transaction and equity in the earnings (losses) of affiliates. House profit
reflects the net revenues flowing to the Company as property owner and
represents gross hotel and senior living communities' sales less property-
level expenses (excluding depreciation, management fees, real and personal
property taxes, ground and equipment rent, insurance and certain other costs
which are classified as operating costs and expenses included in the
accompanying financial statements). Other operating costs and expenses include
idle land carrying costs and certain other costs.
The Company's hotel operating costs and expenses are, to a great extent,
fixed. Therefore, the Company derives substantial operating leverage from
increases in revenue. This operating leverage is somewhat diluted, however, by
the impact of base management fees which are calculated as a percentage of
sales, variable lease payments and incentive management fees tied to operating
performance above certain established levels. Successful hotel performance
resulted in certain of the Company's properties reaching levels which allowed
the manager to share in the growth of profits in the form of higher management
fees. The Company expects that this trend will continue in 1998 as the upscale
and luxury full-service segments continue to strengthen. At these higher
operating levels, the Company's and the managers' interests are closely
aligned, which helps to drive further increases in profitability, but
moderates operating leverage.
For the periods discussed herein, the Company's hotel properties have
experienced substantial increases in room revenues generated per available
room ("REVPAR"). REVPAR is a commonly used indicator of market performance for
hotels which represents the combination of the average daily room rate charged
and the average occupancy achieved. REVPAR does not include food and beverage
or other ancillary revenues generated by the property. The REVPAR increase
primarily represents strong percentage increases in room rates, while
occupancies have generally increased for its full-service properties.
Increases in average room rates have generally been achieved by the managers
through shifting occupancies away from discounted group business to higher-
rated group and transient business and by selectively increasing room rates.
This has been made possible by increased travel due to improved economic
conditions and by the favorable supply/demand characteristics existing in the
upscale and luxury full-service segments of the lodging industry. The Company
expects this favorable relationship between supply growth and demand growth to
continue in the luxury and upscale markets in which it operates, which should
result in improved REVPAR and operating profits at its hotel properties in the
near term. However, there can be no assurance that REVPAR will continue to
increase in the future.
1997 COMPARED TO 1996
Revenues. Revenues primarily represent house profit from the Company's hotel
and senior living communities properties, net gains (losses) on property
transactions and equity in earnings of affiliates. Revenues increased $415
million, or 57%, to $1.1 billion for 1997. The Company's revenue and operating
profit were impacted by:
. improved lodging results for comparable full-service hotel properties;
. the addition of 23 full-service hotel properties during 1996 and 18 full-
service properties during 1997;
. the addition of 30 senior living communities in 1997;
. the 1996 sale and leaseback of 16 Courtyard properties and 18 Residence
Inns;
. the 1997 results including 52 weeks versus 53 weeks in 1996.
Hotel revenues increased $376 million, or 52%, to $1.1 billion in 1997, as
all three of the Company's lodging concepts reported growth in REVPAR. Hotel
sales increased $864 million, or 44%, to over $2.8 billion in 1997, reflecting
the REVPAR increases for comparable units and the addition of full-service
properties during 1996 and 1997.
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Improved results for the Company's full-service hotels were driven by strong
increases in REVPAR for comparable units of 12.6% in 1997. Results were
further enhanced by a more than two percentage point increase in the house
profit margin for comparable full-service properties. On a comparable basis
for the Company's full-service properties, average room rates increased almost
11%, while average occupancy increased over one percentage point.
Revenues generated from the Company's 1997 third quarter acquisition of 29
senior living communities totaled $37 million. During 1997, average occupancy
of the communities was 92% and the average per diem rate was $84, which
resulted in 1997 revenue per available unit of $77. Overall occupancies for
1997 were lower than the historical and anticipated future occupancies due to
the significant number of expansion units added during the year, the overall
disruption to the communities as a result of the construction and the time
required to fill the expansion units. Senior living communities' sales totaled
$111 million for 1997.
Operating Costs and Expenses. Operating costs and expenses principally
consist of depreciation, management fees, real and personal property taxes,
ground, building and equipment rent, insurance, and certain other costs.
Operating costs and expenses increased $199 million to $698 million for 1997,
primarily representing increased hotel and senior living communities'
operating costs, including depreciation and management fees. Hotel operating
costs increased $188 million to $649 million, primarily due to the addition of
41 full-service properties during 1996 and 1997, and increased management fees
and rentals tied to improved property results. As a percentage of hotel
revenues, hotel operating costs and expenses decreased to 59% of revenues for
1997, from 64% of revenues for 1996, reflecting the impact of increased 1997
revenues on relatively fixed operating costs and expenses. The Company's
senior living communities' operating cost and expenses were $20 million (54%
of revenues) for 1997.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's operating profit increased $216
million, or 93%, to $449 million in 1997. Hotel operating profit increased
$188 million, or 73%, to $444 million, or 41% of hotel revenues, for 1997
compared to $256 million, or 36% of hotel revenues, for 1996. In nearly all
markets, the Company's hotels recorded improvements in comparable operating
results. In particular, the Company's hotels in the Northeast, Mid-Atlantic
and Pacific coast regions benefited from the upscale and luxury full-service
room supply and demand imbalance. Hotels in New York City, Philadelphia, San
Francisco/Silicon Valley and in Southern California performed particularly
well. In 1998, the Company expects results to be strong in these markets and
other gateway cities in which the Company owns hotels. In 1997, the Company's
suburban Atlanta properties (three properties totaling 1,022 rooms) generally
reported decreased results due to higher activity in 1996 related to the
Summer Olympics and the impact of the additional supply added to the suburban
areas. However, the majority of the Company's hotel rooms in Atlanta are in
the core business districts in downtown and Buckhead where they realized
strong year-over-year results and were only marginally impacted by the
additional supply.
The Company's senior living communities generated $17 million (46% of
revenues) of operating profit.
Minority Interest. Minority interest expense increased $26 million to $32
million for 1997, primarily reflecting the impact of the consolidation of
affiliated partnerships and the acquisition of controlling interests in newly-
formed partnerships during 1996 and 1997.
Corporate Expenses. Corporate expenses increased $4 million to $47 million
in 1997. As a percentage of revenues, corporate expenses decreased to 4.1% of
revenues in 1997 from 5.9% of revenues in 1996. This reflects the Company's
efforts to carefully control its corporate expenses in spite of the
substantial growth in revenues.
Interest Expense. Interest expense increased $65 million to $302 million in
1997, primarily due to the additional mortgage debt of approximately $1.1
billion assumed in connection with the 1996 and 1997 full-service hotel
additions, approximately $315 million incurred in connection with the
acquisition of the Forum Group, Inc., in the third quarter of 1997 and the
Leisure Park senior living community in December 1997, as well as the issuance
of $600 million of 8 7/8% senior notes (the "New Senior Notes") in July 1997.
20
Dividends on Convertible Preferred Securities of Subsidiary Trust. The
dividends on the Convertible Preferred Securities reflect the dividends on the
$550 million in 6.75% Convertible Preferred Securities issued by the Company
in December 1996.
Interest Income. Interest income increased $4 million to $52 million for
1997, primarily reflecting the interest income on the available proceeds
generated by the December 1996 offering of Convertible Preferred Securities
and the proceeds generated by the issuance of the New Senior Notes in July
1997.
Income (Loss) Before Extraordinary Items. Income before extraordinary items
for 1997 was $47 million, compared to a $13 million loss before extraordinary
items for 1996 as a result of the items discussed above.
Extraordinary Gain (Loss). In March 1997, the Company purchased 100% of the
outstanding bonds secured by a first mortgage on the San Francisco Marriott
Hotel. The Company purchased the bonds for $219 million, which was 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
December 1997, the Company refinanced the mortgage debt secured by the
Marriott's Orlando World Center. 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.
Net (Loss) Income. The Company's net income in 1997 was $50 million,
compared to a net loss of $13 million in 1996. Basic earnings per common share
was $.25 for 1997, compared to a basic loss per common share of $.07 in 1996.
Diluted earnings per common share was $.24 for 1997, compared to a diluted
loss per common share of $.07 in 1996.
1996 COMPARED TO 1995
Revenues. Revenues primarily represent house profit from the Company's hotel
properties, net gains (losses) on property transactions and equity in earnings
of affiliates. Revenues increased $248 million, or 51%, to $732 million in
1996. The Company's revenue and operating profit were impacted by:
. improved lodging results for comparable full-service hotel properties;
. the addition of nine full-service hotel properties during 1995 and 23
full-service properties during 1996;
. the 1996 and 1995 sale and leaseback of 53 of the Company's Courtyard
properties and 18 of the Company's Residence Inns;
. the 1996 change in the estimated depreciable lives and salvage values for
certain hotel properties which resulted in additional depreciation
expense of $15 million;
. the 1996 results including 53 weeks versus 52 weeks in 1995;
. the $60 million pre-tax charge in 1995 to write down the carrying value
of one undeveloped land parcel to its estimated sales value;
. a $10 million pre-tax charge in 1995 to write down the carrying value of
certain Courtyard and Residence Inn properties held for sale to their net
realizable values included in "Net gains (losses) on property
transactions"); and
. the 1995 sale of four Fairfield Inns.
Hotel revenues increased $243 million, or 51%, to $717 million in 1996, as
all three of the Company's lodging concepts reported growth in REVPAR. Hotel
sales increased $590 million, or 44%, to $1.9 billion in 1996, reflecting the
REVPAR increases for comparable units and the addition of full-service
properties during 1995 and 1996.
Improved results for the Company's full-service hotels were driven by strong
increases in REVPAR for comparable units of 11% in 1996. Results were further
enhanced by almost a two percentage point increase in
21
the house profit margin for comparable full-service properties. On a
comparable basis for the Company's full-service properties, average room rates
increased 8%, while average occupancy increased over two percentage points.
Operating Costs and Expenses. Operating costs and expenses principally
consist of depreciation, management fees, real and personal property taxes,
ground, building and equipment rent, insurance, and certain other costs.
Operating costs and expenses increased $129 million to $499 million for 1996,
primarily representing increased hotel operating costs, including
depreciation, partially offset by the $60 million pre-tax charge in 1995 to
write down the carrying value of one undeveloped land parcel to its estimated
sales value. Hotel operating costs increased $180 million to $461 million,
primarily due to the addition of 32 full-service properties during 1995 and
1996, increased management fees and rentals tied to improved property results
and a change in the depreciable lives and salvage values of certain large
hotel properties ($15 million). As a percentage of hotel revenues, hotel
operating costs and expenses increased to 64% of revenues for 1996, from 59%
of revenues for 1995, reflecting the impact of the lease payments on the
Courtyard and Residence Inn properties which have been sold and leased back,
and the change in depreciable lives and salvage values for certain large hotel
properties discussed above, as well as the shifting emphasis to full-service
properties. Full-service hotel rooms accounted for 100% of the Company's total
hotel rooms on January 3, 1997, versus 84% on December 29, 1995.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's operating profit increased $119
million, or 104%, to $233 million in 1996. Hotel operating profit increased
$63 million, or 33%, to $256 million, or 36% of hotel revenues, for 1996
compared to $193 million, or 41% of hotel revenues, for 1995. Across the
board, the Company's hotels recorded substantial improvements in comparable
operating results. In addition, several hotels, including the New York
Marriott Marquis, the New York Marriott East Side, the Philadelphia Marriott,
the San Francisco Marriott and the Miami Airport Marriott posted particularly
significant improvements in operating profit for the year. The Company's
Atlanta properties also posted outstanding results, primarily due to the 1996
Summer Olympics. Additionally, several hotels which recently converted to the
Marriott brand, including the Denver Marriott Tech Center, the Marriott's
Mountain Resort at Vail and the Williamsburg Marriott, recorded strong results
compared to the prior year as they completed renovations and began to realize
the benefit of their conversions.
Corporate Expenses. Corporate expenses increased $7 million to $43 million
in 1996. As a percentage of revenues, corporate expenses decreased to 5.9% of
revenues in 1996 from 7.4% of revenues in 1995. This reflects the Company's
efforts to carefully control its corporate administrative expenses in spite of
the substantial growth in revenues.
Interest Expense. Interest expense increased 33% to $237 million in 1996,
primarily due to the additional mortgage debt of approximately $696 million
incurred in connection with the 1996 full-service hotel additions and the
issuance of $350 million of notes issued by HMC Acquisition Properties, Inc.,
a wholly-owned subsidiary of the Company, in December 1995, partially offset
by the net impact of the 1995 redemptions of Host Marriott Hospitality, Inc.
notes ("Hospitality Notes").
Loss from Continuing Operations. The loss from continuing operations for
1996 decreased $49 million to $13 million, as a result of the changes
discussed above.
Net Loss. The Company's net loss in 1996 was $13 million, compared to a net
loss of $143 million in 1995, which included a $61 million loss from
discontinued operations and a $20 million extraordinary loss primarily
representing premiums paid on bond redemptions and the write-off of deferred
financing fees and discounts on the debt. The basic and diluted loss per
common share was $.07 for 1996 and $.90 for 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its capital requirements with a combination of operating
cash flow measured as EBITDA, debt and equity financing, and proceeds from
sales of selected properties and other assets. The
22
Company utilizes these sources of capital to acquire new properties, fund
capital additions and improvements, and make principal payments on debt.
Capital Transactions. In June 1997, HMC Capital Resources Corporation
("Capital Resources"), a wholly-owned subsidiary of the Company, entered into
a revolving line of credit agreement ("Line of Credit") with a group of
commercial banks under which it may borrow up to $500 million for certain
permitted uses. On June 19, 2000, any then 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 the Company. 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, with a carrying value of approximately $500 million at
January 2, 1998, which were contributed to Capital Resources. The Line of
Credit is guaranteed by the Company. As a result of this transaction, the
Company terminated its line of credit with Marriott International. During the
fourth quarter of 1997, the Company borrowed approximately $22 million under
the Line of Credit for the acquisition of the Ontario Airport Marriott.
In July 1997, HMH Properties, Inc. ("Properties") and HMC Acquisition
Properties, Inc. ("Acquisitions"), indirect, wholly-owned subsidiaries of the
Company, 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 for
distributions to affiliates to the excess of Properties' earnings before
interest expense, income taxes, depreciation and amortization and other non-
cash items subsequent to the Consent Solicitations over 220% of Properties'
interest expense. Properties paid dividends to the Company of $54 million, $29
million and $36 million in 1997, 1996 and 1995, respectively, as permitted
under the indentures.
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. 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 controlling interests in, full-service hotels and other lodging-
related properties, which may include senior living communities.
In December 1996, the Host Marriott Financial Trust (the "Issuer"), a
wholly-owned subsidiary trust of the Company, issued 11 million shares of 6
3/4% convertible quarterly income preferred securities (the "Convertible
Preferred Securities"), with a liquidation preference of $50 per share (for a
total liquidation amount of $550 million). The Convertible Preferred
Securities represent an undivided beneficial interest in the assets of the
Issuer and, pursuant to various agreements entered into in connection with the
transaction, are fully, irrevocably and unconditionally guaranteed by the
Company. Proceeds from the issuance of the Convertible Preferred Securities
were invested in 6 3/4% Convertible Subordinated Debentures (the "Debentures")
due December 2, 2026 issued by the Company. The Issuer exists solely to issue
the Convertible Preferred Securities and its own common securities (the
"Common Securities") and invest the proceeds therefrom in the Debentures,
which are its sole assets. Each of the Convertible Preferred Securities is
convertible at the option of the holder into shares of Company common stock at
the rate of 2.6876 shares per Convertible Preferred Security (equivalent to a
conversion price of $18.604 per share of Company common stock). The Debentures
are convertible at the option of the holders into shares of Company common
stock at a conversion rate of 2.6876 shares for each $50 in principal amount
of Debentures. The Issuer will only convert Debentures pursuant to a notice of
conversion by a holder of Securities. During 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
23
Securities will correspond to the interest rate and interest and other payment
dates on the Debentures. The Company may defer interest payments on the
Debentures for a period not to exceed 20 consecutive quarters. If interest
payments on the Debentures are deferred, so too are payments on the
Convertible Preferred Securities. Under this circumstance, the Company will
not be permitted to declare or pay any cash distributions with respect to its
capital stock or debt securities that rank pari passu with or junior to the
Debentures. Subject to certain restrictions, the Convertible Preferred
Securities are redeemable at the Issuer's option upon any redemption by the
Company of the Debentures after December 2, 1999. Upon repayment at maturity
or as a result of the acceleration of the Debentures upon the occurrence of a
default, the Debentures shall be subject to mandatory redemption, from which
the proceeds will be applied to redeem Convertible Preferred Securities and
Common Securities, together with accrued and unpaid distributions.
In March 1996, the Company completed the issuance of 31.6 million shares of
common stock for net proceeds of nearly $400 million.
In December 1995, Acquisitions 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. The net proceeds totaled $340 million and
were utilized to repay in full the outstanding borrowings of $210 million
under Acquisitions' $230 million revolving credit facility (the "Revolver"),
which was then terminated to acquire three full-service properties and to
finance future acquisitions of full-service hotel properties with the
remaining proceeds.
In May 1995, two wholly-owned subsidiaries of Host Marriott Hospitality,
Inc. ("Hospitality"), a wholly-owned subsidiary of the Company, issued an
aggregate of $1 billion of 9.5% senior secured notes in two concurrent
offerings. Properties, the owner of 58 of the Company's 95 full-service hotel
properties at January 2, 1998 and Host Marriott Travel Plazas, Inc. ("HMTP"),
the operator/manager of HM Services' food, beverage and merchandise
concessions business, issued $600 million (the "Properties Notes") and $400
million, respectively, of senior notes. The bonds were issued at par and have
a final maturity of May 2005. The net proceeds of approximately $971 million
were used to defease, and subsequently redeem, all of Hospitality's remaining
bonds (the "Hospitality Notes") and to repay borrowings under the line of
credit with Marriott International. The HMTP senior notes were included in the
HM Services' Special Dividend.
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. 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 asses, issue or sell stock of
subsidiaries, and enter into certain mergers and consolidations.
During 1995, the Company replaced its line of credit with a line of credit
from Marriott International pursuant to which the Company had the right to
borrow up to $225 million. The line of credit with Marriott International was
terminated as a result of the Capital Resources transaction discussed above.
There are no plans to pay regular cash dividends on the Company's common
stock in the near future, and the Company is prohibited from paying dividends
on its common stock if interest on the Debentures is deferred.
Asset Dispositions. The Company historically has sold, and may from time to
time in the future consider opportunities to sell, certain of its real estate
properties at attractive prices when the proceeds could be redeployed into
investments with more favorable returns. During 1997, the Company sold the
255-room Sheraton Elk Grove Suites for proceeds of approximately $16 million.
The Company also sold 90% of its 174-acre parcel of undeveloped land in
Germantown, Maryland, for approximately $11 million, which approximated its
carrying value. During the first and second quarters of 1996, 16 of the
Company's Courtyard properties and 18 of the Company's Residence Inn
properties were sold (subject to a leaseback) to the REIT for approximately
$314
24
million and the Company will receive approximately $35 million upon expiration
of the leases. A gain on the transactions of approximately $46 million was
deferred and is being amortized over the initial term of the leases. During
the first and third quarters of 1995, 37 of the Company's Courtyard properties
were sold to and leased back from the REIT for approximately $330 million. The
Company received net proceeds from the two 1995 transactions of approximately
$297 million and will receive approximately $33 million upon expiration of the
leases. A deferred gain of $14 million on the sale/leaseback transactions is
being amortized over the initial term of the leases. In 1995, the Company also
sold its four remaining Fairfield Inns for net cash proceeds of approximately
$6 million, which approximated their carrying value.
In cases where the Company has made a decision to dispose of particular
properties, the Company assesses impairment of each individual property to be
sold on the basis of expected sales price less estimated costs of disposal.
Otherwise, the Company assesses impairment of its real estate properties based
on whether it is probable that undiscounted future cash flows from such
properties will be less than their net book value. If a property is impaired,
its basis is adjusted to its fair market value. In the second quarter of 1995,
the Company made a determination that its owned Courtyard and Residence Inn
properties were held for sale and recorded a $10 million charge to write down
the carrying value of five individual Courtyard and Residence Inn properties
to their estimated net sales values.
Capital Acquisitions, Additions and Improvements. The Company seeks to grow
primarily through opportunistic acquisitions of full-service hotels and senior
living communities. The Company believes that the upscale and luxury full-
service hotel segments of the market offer opportunities to acquire assets at
attractive multiples of cash flow and at discounts to replacement value,
including under performing hotels which can be improved by conversion to the
Marriott or Ritz-Carlton brands. During 1997, the Company acquired eight full-
service hotels (3,600 rooms) and controlling interests in nine additional
full-service hotels (5,024 rooms) for an aggregate purchase price of
approximately $766 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. During 1996, the Company acquired six full-
service hotels (1,964 rooms) for an aggregate purchase price of $189 million
and controlling interests in 17 additional full-service properties (8,917
rooms) for an aggregate purchase price of approximately $1.1 billion
(including the assumption of $696 million of debt). During 1995, the Company
acquired nine hotels totaling approximately 3,900 rooms in separate
transactions for approximately $390 million ($141 million of which was
financed through first mortgage financing on four of the hotels).
In the first quarter of 1998, the Company acquired a controlling interest in
the partnership that owns the 1,671-room Atlanta Marriott Marquis Hotel for
$239 million, including the assumption of $164 million of mortgage debt. The
Company also acquired a controlling interest in 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 is continually engaged in discussions with respect to other potential
acquisition properties and, subsequent to January 2, 1998, entered into an
agreement to acquire the 397-room The Ritz-Carlton, Tysons Corner, Virginia.
Under the terms of its hotel management agreements, the Company is generally
required to spend approximately 5% of gross hotel sales to cover the capital
needs of the properties, including major guest room and common area
renovations which occur every five to six years. The Company anticipates
spending approximately $160 million annually on the renovation and
refurbishment of its existing lodging properties.
The Company completed the construction of the 1,200-room Philadelphia
Marriott, which opened on January 27, 1995. The construction costs of this
hotel were funded 60% through a loan from Marriott International which was
repaid in the fourth quarter of 1996. In March 1997, the Company obtained a
$90 million mortgage which bears interest at a fixed rate of 8.49% and matures
in 2009. Construction of a second hotel in Philadelphia, the 419-room
Philadelphia Airport Marriott (the "Airport Hotel"), was completed and opened
on November 1, 1995. The Airport Hotel was financed principally with $40
million of proceeds from an industrial development bond financing. The Company
also completed construction of a 300-room Residence Inn in Arlington,
Virginia, which opened in March 1996. Capital expenditures for these three
hotels totaled $11 million in 1996 and $64 million in 1995.
25
In November 1997, the Company announced that it had committed to develop and
construct the 717-room Tampa Convention Center Marriott for a cost estimated
at approximately $88 million, net of an approximate $16 million subsidy
provided by the City of Tampa.
While the Company's portfolio of lodging properties consists primarily of
upscale and luxury full-service hotels, management continually considers the
merits of diversifying into other compatible lodging related real estate
assets that offer strong current economic benefits and growth prospects. In
1997, the Company acquired the outstanding common stock of the Forum Group
from Marriott Senior Living Services, Inc., ("MSLS") a subsidiary of Marriott
International. The Company purchased the Forum Group portfolio of 29 senior
living communities for approximately $460 million, including approximately
$270 million in debt. The properties will continue to be operated by MSLS. In
addition, the Company plans to add approximately 1,060 units to these
communities for approximately $107 million through an expansion plan which
will be completed in 1999. In 1997, approximately $56 million (549 units) of
the expansion plan had been completed (including $33 million of debt financing
provided by Marriott International). The Company also acquired 49% of the
remaining 50% interest in the venture which owned the 418-unit Leisure Park
senior living community from Marriott International for approximately $23
million, including approximately $15 million of debt.
During the first quarter of 1998, the Company also acquired the Gables at
Winchester in suburban Boston, a 124-unit senior living community, for $21
million and entered into conditional purchase agreements to acquire two
Marriott Brighton Gardens assisted living communities from the Summit
Companies of Denver, Colorado. After the anticipated completion of
construction in the first quarter of 1999, the Company may acquire these two
160-unit properties located in Denver and Colorado Springs, Colorado, for $35
million, if they achieve certain operating performance criteria. All three of
these communities will be operated by MSLS under long-term operating
agreements.
The Company may also expand certain existing hotel properties where strong
performance and market demand exists. Expansions to existing properties
creates a lower risk to the Company as the success of the market is generally
known and development time is significantly shorter than new construction. The
Company recently committed to add approximately 500 rooms and an additional
15,000 square feet of meeting space to the 1,503-room Marriott's Orlando World
Center.
Under the terms of its senior living communities' management agreements, the
Company is generally required to spend an amount of gross revenues to cover
certain routine repairs and maintenance and replacements and renewals to the
communities' property and improvements. The amount the Company is required to
spend will be 2.65% through fiscal year 2002, 2.85% for fiscal years 2003
through 2007, and 3.5% thereafter. The Company anticipates spending
approximately $6 million in 1998.
Debt Payments. At January 2, 1998, the Company and its subsidiaries had
approximately $1,585 million of senior notes ($1,550 million of which have
been issued and guaranteed by wholly-owned subsidiaries of the Company),
approximately $2.0 billion of non-recourse mortgage debt secured by real
estate assets and approximately $219 million of unsecured and other debt. The
parent company was obligated on approximately $232 million of recourse debt as
of January 2, 1998.
Maturities over the next five years were limited to $942 million as of
January 2, 1998, a significant portion of which represents the maturity of the
mortgage on the New York Marriott Marquis of approximately $270 million in
December 1998. Management anticipates that the mortgage will be refinanced by
the end of 1998 on comparable terms. The Company's interest coverage, defined
as EBITDA divided by cash interest expense, improved to nearly 2.5 times in
1997 from 2.0 times in 1996.
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.
26
These agreements 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 ratings for the contracting party is A- for
its sole outstanding interest rate exchange agreement. The Company is exposed
to credit loss in the event of non-performance by the contracting party to the
interest rate swap agreement; however, the Company does not anticipate non-
performance by the contracting party.
Cash Flows. The Company's cash flow from continuing operations in 1997, 1996
and 1995 totaled $464 million, $205 million and $110 million, respectively.
Cash flow from operations increased principally due to improved lodging
results and the significant acquisitions of hotels and senior living
communities.
The Company's cash used in investing activities from continuing operations
in 1997, 1996 and 1995 totaled $1,046 million, $504 million and $156 million,
respectively. Cash used in investing activities primarily consists of net
proceeds from the sales of certain assets, offset by the acquisition of hotel
and other real estate assets and other capital expenditures previously
discussed, as well as the purchases of short-term marketable securities. Cash
used in investing activities was significantly impacted by the purchase of
$354 million of short-term marketable securities in 1997.
The Company's cash from financing activities from continuing operations was
$389 million for 1997, $806 million for 1996 and $204 million for 1995. The
Company's cash from financing activities primarily consists of the proceeds
from debt and equity offerings, the issuance of the Convertible Preferred
Securities, mortgage financing on certain acquired hotels and borrowings under
the Line of Credit, offset by redemptions and payments on senior notes,
prepayments on certain hotel mortgages, and other scheduled principal
payments.
EBITDA and Comparative FFO. The Company's consolidated earnings before
interest expense, taxes, depreciation, amortization and other non-cash items
("EBITDA") increased $266 million, or 60%, to $708 million in 1997 from $442
million in 1996.
Hotel EBITDA increased $252 million, or 57%, to $691 million in 1997 from
$439 million in 1996 reflecting comparable full-service hotel EBITDA growth,
as well as incremental EBITDA from 1996 and 1997 acquisitions. Full-service
hotel EBITDA from comparable hotel properties increased 17.3% on a REVPAR
increase of 12.6%. The Company's senior living communities contributed $27
million of EBITDA in 1997.
The following is a reconciliation of EBITDA to the Company's income (loss)
before extraordinary items (in millions):
FIFTY-TWO FIFTY-THREE
WEEKS ENDED WEEKS ENDED
JANUARY 2, 1998 JANUARY 3, 1997
--------------- ---------------
EBITDA................................... $ 708 $ 442
Interest expense......................... (302) (237)
Dividends on Convertible Preferred
Securities.............................. (37) (3)
Depreciation and amortization............ (240) (168)
Minority interest expense................ (32) (6)
Income taxes............................. (36) (5)
Loss on disposition of assets and other
non-cash charges, net................... (14) (36)
----- -----
Income (loss) before extraordinary items. $ 47 $ (13)
===== =====
The ratio of earnings to fixed charges was 1.3 to 1.0, 1.0 to 1.0 and .7 to
1.0 in 1997, 1996 and 1995, respectively. The deficiency of earnings to fixed
charges of $70 million for 1995 is largely the result of depreciation and
amortization of $122 million. In addition, the deficiency for 1995 was
impacted by the $60 million pre-tax charge to write down the carrying value of
one undeveloped land parcel to its estimated sales value.
The Company also believes that Comparative Funds From Operations
("Comparative FFO," which represents Funds From Operations, as defined by the
National Association of Real Estate Investment Trusts, plus
27
deferred tax expense) is a meaningful disclosure that will help the investment
community to better understand the financial performance of the Company,
including enabling its shareholders and analysts to more easily compare the
Company's performance to Real Estate Investment Trusts ("REITs"). Comparative
FFO increased $131 million, or 80%, to $295 million in 1997. The following is
a reconciliation of the Company's income (loss) before extraordinary items to
Comparative FFO (in millions):
FIFTY-TWO FIFTY-THREE
WEEKS ENDED WEEKS ENDED
JANUARY 2, 1998 JANUARY 3, 1997
--------------- ---------------
Income (loss) before extraordinary
items.................................. $ 47 $(13)
Depreciation and amortization........... 240 168
Other real estate activities............ 6 7
Partnership adjustments................. (13) 1
Deferred taxes.......................... 15 1
---- ----
Comparative Funds From Operations..... $295 $164
==== ====
The Company considers EBITDA and Comparative FFO to be indicative measures
of the Company's operating performance due to the significance of the
Company's long-lived assets and because such data is considered useful by the
investment community to better understand the Company's results, and can be
used to measure the Company's ability to service debt, fund capital
expenditures and expand its business, however, such information should not be
considered as an alternative to net income, operating profit, cash from
operations, or any other operating or liquidity performance measure prescribed
by generally accepted accounting principles. Cash expenditures for various
long-term assets, interest expense (for EBITDA purposes only) and income taxes
have been, and will be, incurred which are not reflected in the EBITDA and
Comparative FFO presentation.
Partnership Activities. The Company has general and limited partner
interests in numerous limited partnerships which own 241 hotels (including 21
full-service hotels) as of March 3, 1998, managed by Marriott International.
Debt of the hotel limited partnerships is typically secured by first mortgages
on the properties and is generally nonrecourse to the partnership and the
partners. However, the Company has committed to advance amounts to certain
affiliated limited partnerships, if necessary, to cover certain future debt
service requirements. Such commitments were limited, in the aggregate, to an
additional $60 million at January 2, 1998. Subsequent to year-end, this amount
was reduced to $20 million in connection with the refinancing and acquisition
of a controlling interest in the partnership which owns the Atlanta Marriott
Marquis. Amounts repaid to the Company under these guarantees totaled $2
million and $13 million in 1997 and 1996, respectively. Fundings by the
Company under these guarantees amounted to $10 million in 1997 and $8 million
for 1995.
In December 1997, the Company, on behalf of six of its subsidiaries, filed a
preliminary Prospectus/Consent Solicitation with the Securities and Exchange
Commission, which describes the potential consolidation of six of the
Company's affiliated partnerships, which own 219 limited-service hotels, into
a single operating partnership and the formation of a new general partner
which would intend to qualify as a real estate investment trust ("REIT") and
be listed on the New York Stock Exchange. The potential REIT would have
separate management from the Company and would focus solely on the ownership
and acquisition of limited-service and extended-stay hotels. To satisfy
certain tax requirements related to the nature of the income received by the
REIT, the assets would be leased to subsidiaries of the Company. The REIT, as
contemplated, and if completed, is not expected to have a significant economic
impact on the Company.
Leases. The Company leases certain property and equipment under
noncancelable operating leases, including the long-term ground leases for
certain hotels, generally with multiple renewal options. The leases related to
the 53 Courtyard properties and 18 Residence Inn properties sold during 1995
and 1996 are non-recourse to the Company and contain provisions for the
payment of contingent rentals based on a percentage of sales in excess of
stipulated amounts. The Company remains contingently liable on certain leases
related to divested non-lodging properties. Management considers the
likelihood of any substantial funding related to these divested properties'
leases to be remote.
28
Inflation. The Company's hotel lodging properties are impacted by inflation
through its effect on increasing costs and on the managers' ability to
increase room rates. Unlike other real estate, hotels have the ability to
change room rates on a daily basis, so the impact of higher inflation
generally can be passed on to customers.
A substantial portion of the Company's debt bears interest at fixed rates.
This debt structure largely mitigates the impact of changes in the rate of
inflation on future interest costs. However, the Company currently is exposed
to variable interest rates through an interest rate exchange agreement with a
financial institution with an aggregate notional amount of $100 million. Under
this agreement, the Company collects interest based on the specified floating
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. The Company's Line of Credit and the mortgage on the San Diego
Marriott Hotel and Marina ($199 million at January 2, 1998) bears interest
based on variable rates. Accordingly, the amount of the Company's interest
expense under the interest rate swap agreements and the floating rate debt for
a particular year will be affected by changes in short-term interest rates.
Year 2000 Issues. Over the last few years, the Company has invested in
implementing new accounting systems which are Year 2000 compliant.
Accordingly, the Company believes that future costs associated with Year 2000
issues will be minimal and not material to the Company's consolidated
financial statements.
However, the Company does rely upon accounting software used by the managers
and operators of its properties to obtain financial information. Management
believes that the managers and operators have begun to implement changes to
the property specific software to ensure that software will function properly
in the Year 2000 and does not expect to incur significant costs related to
these modifications.
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 the
discussion below for a discussion of the impact of the adoption of SFAS No.
121 on discontinued operations.
SFAS No. 121 requires that an impairment loss be recognized when the
carrying amount of an asset exceeds the sum of the undiscounted estimated
future cash flows associated with the asset. Under SFAS No. 121, the Company
reviewed the impairment of its assets employed in its operating group business
lines (airport, toll plaza and sports and entertainment) on an individual
operating unit basis. For each individual operating unit determined to be
impaired, an impairment loss equal to the difference between the carrying
value and the fair market value of the unit's assets was recognized. Fair
market value was estimated to be the present value of expected future cash
flows of the individual operating unit, as determined by management, after
considering such factors as future air travel and toll-pay vehicle data and
inflation. As a result of the adoption of SFAS No. 121, the Company recognized
a non-cash, pre-tax charge against earnings during the fourth quarter 1995 of
$47 million, which was reflected in discontinued operations.
In the fourth quarter of 1996, the Company adopted SFAS No. 123, "Accounting
for Stock Based Compensation." The adoption of SFAS No. 123 did not have a
material effect on the Company's financial statements.
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
consolidated financial statements and the appropriate disclosures required by
these statements have been incorporated herein. The Company will adopt SFAS
No. 130, "Reporting Comprehensive Income" in 1998 and does not expect it to
have a material effect on the Company's consolidated financial statements.
29
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Company is assessing the impact of EITF 97-2 on its policy of excluding
the property-level revenues and operating expenses of its hotels and senior
living communities from its statements of operations (see Note 18). If the
Company concludes that EITF 97-2 should be applied to its hotels and senior
living communities, it would include operating results of those managed
operations in its financial statements. Application of EITF 97-2 to financial
statements as of and for the 52 weeks ended January 2, 1998, would have
increased both revenues and operating expenses by approximately $1.7 billion
and would have had no impact on operating profit, net income or earnings per
share.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial information is included on the pages indicated:
PAGE
----
Report of Independent Public Accountants.................................. 32
Consolidated Balance Sheets as of January 2, 1998 and January 3, 1997..... 33
Consolidated Statements of Operations for the Fiscal Years Ended January
2, 1998, January 3, 1997 and December 29, 1995........................... 34
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended
January 2, 1998, January 3, 1997 and December 29, 1995................... 35
Consolidated Statements of Cash Flows for the Fiscal Years Ended January
2, 1998, January 3, 1997 and December 29, 1995........................... 36
Notes to Consolidated Financial Statements................................ 37
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Host Marriott Corporation:
We have audited the accompanying consolidated balance sheets of Host
Marriott Corporation and subsidiaries as of January 2, 1998 and January 3,
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three fiscal years in the period ended
January 2, 1998. These financial statements and the schedules referred to
below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Host
Marriott Corporation and subsidiaries as of January 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 consolidated financial statements, in
1995 the Company changed its method of accounting for the impairment of long-
lived assets.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index at
Item 14(a)(2) are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
February 27, 1998
32
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 2, 1998 AND JANUARY 3, 1997
(IN MILLIONS)
1997 1996
------ ------
ASSETS
Property and Equipment, net.................................... $5,217 $3,805
Notes and Other Receivables, net (including amounts due from
affiliates of $23 million and $156 million, respectively)..... 54 297
Due from Managers.............................................. 93 89
Investments in Affiliates...................................... 13 11
Other Assets................................................... 284 246
Short-term Marketable Securities............................... 354 --
Cash and Cash Equivalents...................................... 511 704
------ ------
$6,526 $5,152
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt
Senior Notes Issued by the Company or its Subsidiaries........ $1,585 $1,021
Mortgage Debt................................................. 1,979 1,529
Other......................................................... 219 97
------ ------
3,783 2,647
Accounts Payable and Accrued Expenses.......................... 97 74
Deferred Income Taxes.......................................... 508 464
Other Liabilities.............................................. 388 290
------ ------
Total Liabilities........................................... 4,776 3,475
------ ------
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, 600 million shares authorized; 203.8 million
shares in 1997 and 202.0 million shares in 1996 issued and
outstanding.................................................. 204 202
Additional Paid-in Capital.................................... 947 926
Retained Earnings (Deficit)................................... 49 (1)
------ ------
Total Shareholders' Equity.................................. 1,200 1,127
------ ------
$6,526 $5,152
====== ======
See Notes to Consolidated Financial Statements.
33
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
1997 1996 1995
------ ----- -----
REVENUES
Hotels.................................................. $1,093 $ 717 $ 474
Senior living communities............................... 37 -- --
Net gains (losses) on property transactions............. (11) 1 (3)
Equity in earnings of affiliates........................ 5 3 --
Other................................................... 23 11 13
------ ----- -----
Total revenues........................................ 1,147 732 484
------ ----- -----
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees
of $162 million, $101 million and $67 million,
respectively).......................................... 649 461 281
Senior living communities (including Marriott
International management fees of $6 million in 1997)... 20 -- --
Other (including a $60 million write-down of undeveloped
land in 1995).......................................... 29 38 89
------ ----- -----
Total operating costs and expenses.................... 698 499 370
------ ----- -----
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
EXPENSES AND INTEREST................................... 449 233 114
Minority interest........................................ (32) (6) (2)
Corporate expenses....................................... (47) (43) (36)
Interest expense......................................... (302) (237) (178)
Dividends on Convertible Preferred Securities of
subsidiary trust........................................ (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)
====== ===== =====
BASIC EARNINGS (LOSS) PER COMMON SHARE:
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 COMMON SHARE................... $ .25 $(.07) $(.90)
====== ===== =====
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
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 COMMON SHARE................. $ .24 $(.07) $(.90)
====== ===== =====
See Notes to Consolidated Financial Statements.
34
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
COMMON CONVERTIBLE ADDITIONAL
SHARES PREFERRED COMMON PAID-IN RETAINED
OUTSTANDING STOCK STOCK CAPITAL EARNINGS
----------- ----------- ------ ---------- --------
(IN MILLIONS) (IN MILLIONS)
Balance, December 30,
153.6 1994.................... $ 13 $154 $479 $ 64
-- Net loss................. -- -- -- (143)
Distribution of stock of
Host Marriott Services
-- Corporation............. -- -- (4) 95
Common stock issued for
the comprehensive stock
and employee stock
1.3 purchase plans.......... -- 1 16 --
Conversion of preferred
4.8 stock to common stock... (13) 5 8 --
- ---------------------------------------------------------------------------------
Balance, December 29,
159.7 1995.................... -- 160 499 16
-- Net loss................. -- -- -- (13)
Adjustment to Host
Marriott Services
-- Dividend................ -- -- -- (4)
Common stock issued for
the comprehensive stock
and employee stock
3.9 purchase plans.......... -- 3 17 --
Common stock issued for
6.8 warrants exercised...... -- 7 42 --
Common stock issued in
31.6 stock offering.......... -- 32 368 --
- ---------------------------------------------------------------------------------
202.0 Balance, January 3, 1997. -- 202 926 (1)
-- Net income............... -- -- -- 50
Common stock issued for
the comprehensive stock
and employee stock
1.8 purchase plans.......... -- 2 21 --
- ---------------------------------------------------------------------------------
203.8 Balance, January 2, 1998. $ -- $204 $947 $ 49
- ---------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
35
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
1997 1996 1995
------- ----- -----
(IN MILLIONS)
OPERATING ACTIVITIES
Income (loss) from continuing operations................ $ 47 $ (13) $ (62)
Adjustments to reconcile to cash from operations:
Depreciation and amortization.......................... 240 168 122
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....................... (5) (3) --
Other.................................................. 60 49 33
Changes in operating accounts:
Other assets.......................................... 60 9 (2)
Other liabilities..................................... 67 32 (9)
------- ----- -----
Cash from continuing operations........................ 464 205 110
Cash from (used in) discontinued operations............ -- (4) 32
------- ----- -----
Cash from operations................................... 464 201 142
------- ----- -----
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............................................ (596) (702) (392)
Capital expenditures:
Capital expenditures for renewals and replacements..... (131) (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............................................ (1,046) (504) (156)
Cash used in investing activities from discontinued
operations............................................ -- -- (52)
------- ----- -----
Cash used in investing activities...................... (1,046) (504) (208)
------- ----- -----
FINANCING ACTIVITIES
Issuances of debt....................................... 857 46 1,251
Issuances of Convertible Preferred Securities, net...... -- 533 --
Issuances of common stock............................... 6 454 13
Scheduled principal repayments.......................... (93) (82) (100)
Debt prepayments........................................ (403) (173) (960)
Other................................................... 22 28 --
------- ----- -----
Cash from financing activities from continuing
operations............................................ 389 806 204
Cash used in financing activities from discontinued
operations............................................ -- -- (4)
------- ----- -----
Cash from financing activities......................... 389 806 200
------- ----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (193) 503 134
CASH AND CASH EQUIVALENTS, beginning of year............ 704 201 67
------- ----- -----
CASH AND CASH EQUIVALENTS, end of year.................. $ 511 $ 704 $ 201
======= ===== =====
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or
purchase of controlling interests in, certain hotel
properties and senior living communities ............. $ 733 $ 696 $ 141
======= ===== =====
See Notes to Consolidated Financial Statements.
36
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
As of January 2, 1998, Host Marriott Corporation (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. The Company also owned a portfolio
consisting of 30 premier senior living communities as of January 2, 1998, all
of which are managed by Marriott Senior Living Services, Inc. ("MSLS"), a
subsidiary of Marriott International.
On December 29, 1995, the Company distributed to its shareholders through a
special tax-free dividend (the "Special Dividend") its food, beverage, and
merchandise concessions business at airports, on tollroads, and at arenas and
other attractions (the "Operating Group"). See Note 2 for a discussion of the
Special Dividend. The 1995 consolidated financial statements were restated to
reflect the Operating Group as discontinued operations.
The structure of the Company was substantially altered on October 8, 1993
(the "Marriott International Distribution Date") when the Company distributed
the stock of a wholly-owned subsidiary, Marriott International, Inc., in a
special dividend (the "Marriott International Distribution"). See Note 14 for
a description of the Marriott International Distribution and related
transactions.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries and controlled affiliates. Investments in 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 and senior living communities because the Company has delegated
substantially all of the operating decisions related to the generation of
house profit from its hotel properties and senior living communities 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' and
senior living communities' 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 consolidated
financial statements. See Note 18.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
37
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company is assessing the impact of EITF 97-2 on its policy of excluding
the property-level revenues and operating expenses of its hotels and senior
living communities from its statements of operations (see Note 18). If the
Company concludes that EITF 97-2 should be applied to its hotels and senior
living communities, it would include operating results of those managed
operations in its statements of operations. Application of EITF 97-2 to
financial statements as of and for the 52 weeks ended January 2, 1998 would
have increased both revenues and operating expenses by approximately $1.7
billion and would have had no impact on operating profit, net income or
earnings per share.
Earnings (Loss) Per Common Share
Basic earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted
earnings per common share are computed by dividing net income by the weighted
average number of shares of common stock outstanding plus other dilutive
securities. Diluted earnings per common share 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.
A reconciliation of the number of shares utilized for the calculation of
dilutive earnings per common share follows:
1997 1996 1995
----- ----- -----
Weighted average number of common shares outstanding......... 203.1 188.7 158.3
Assuming distribution of common shares granted under compre-
hensive 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....... .3 -- --
----- ----- -----
Shares utilized for the calculation of diluted earnings per
share..................................................... 208.2 188.7 158.3
===== ===== =====
International Operations
The consolidated statements of operations include the following amounts
related to non-U.S. subsidiaries and affiliates: 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 or
senior living communities, 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
38
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $115 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
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.
Unrealized holding gains and losses are included as a separate component of
shareholders' equity until realized.
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.
39
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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
consolidated financial statements and the appropriate disclosures required by
these statements have been incorporated herein. The Company will adopt SFAS
No. 130, "Reporting Comprehensive Income," in 1998 and does not expect it to
have a material effect on the Company's consolidated financial statements.
2. HM SERVICES SPECIAL DIVIDEND
On December 29, 1995, the Company distributed to its shareholders through
the Special Dividend all of the outstanding shares of common stock of Host
Marriott Services Corporation ("HM Services"), formerly a wholly-owned
subsidiary of the Company, which, as of the date of the Special Dividend,
owned and operated food, beverage and merchandise concessions at airports, on
tollroads and at stadiums and arenas and other tourist attractions. The
Special Dividend provided Company shareholders with one share of common stock
of HM Services for every five shares of Company common stock held by such
shareholders on the record date of December 22, 1995. The Company recorded
approximately $9 million of expenses related to the consummation of the
Special Dividend in 1995. Revenues for the Company's discontinued operations
totaled $1,158 million in 1995. 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 the
Company and HM Services after the Special Dividend and to provide for an
orderly transition, the Company and HM Services entered into various
agreements including a Distribution Agreement, an Employee Benefits Allocation
Agreement, a Tax Sharing Agreement and a Transitional Services Agreement.
Effective as of December 29, 1995, these agreements provide, among other
things, for the division between the Company and HM Services of certain assets
and liabilities, including but not limited to liabilities related to employee
stock and other benefit plans and the establishment of certain obligations for
HM Services to issue shares upon exercise of warrants (see Note 7) and to
issue shares or pay cash to the Company upon exercise of stock options held by
certain former employees of the Company (see Note 10).
40
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1997 1996
------ ------
(IN MILLIONS)
Land and land improvements................................... $ 521 $ 349
Buildings and leasehold improvements......................... 4,796 3,507
Furniture and equipment...................................... 710 548
Construction in progress..................................... 35 82
------ ------
6,062 4,486
Less accumulated depreciation and amortization............... (845) (681)
------ ------
$5,217 $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 consolidated financial statements.
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:
OWNERSHIP
INTERESTS 1997 1996
--------- ------ -------
(IN MILLIONS)
Equity investments
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
====== =======
41
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Hotel properties owned by affiliates generally were acquired from the
Company in connection with limited partnership offerings. The Company or one
of its subsidiaries typically serve as a general partner of each partnership
and the hotels are operated 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 four affiliated partnerships for
approximately $550 million, including the assumption of approximately $410
million of debt. These affiliated partnerships included the partnerships that
own the 353-room Hanover Marriott; the 884-room Marriott's Desert Springs
Resort and Spa; 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; and the partnership that owns the
418-unit Leisure Park retirement community. 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.
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 was eliminated
in the consolidation of CHLP 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
=== === ===
42
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Combined summarized balance sheet information for the Company's affiliates
follows:
1997 1996
------ ------
(IN MILLIONS)
Property and equipment....................................... $1,991 $2,636
Other assets................................................. 284 334
------ ------
Total assets............................................... $2,275 $2,970
====== ======
Debt, principally mortgages.................................. $2,185 $2,855
Other liabilities............................................ 412 672
Partners' deficit............................................ (322) (557)
------ ------
Total liabilities and partners' deficit.................... $2,275 $2,970
====== ======
Combined summarized operating results for the Company's affiliates follow:
1997 1996 1995
----- ----- -----
(IN MILLIONS)
Revenues................................................ $ 610 $ 737 $ 770
Operating expenses:
Cash charges (including interest)...................... (381) (465) (506)
Depreciation and other non-cash charges................ (192) (230) (240)
----- ----- -----
Income before extraordinary items....................... 37 42 24
Extraordinary items--forgiveness of debt................ 40 12 181
----- ----- -----
Net income............................................ $ 77 $ 54 $ 205
===== ===== =====
In December 1997, the Company, on behalf of six of its subsidiaries, filed a
preliminary Prospectus/Consent Solicitation with the Securities and Exchange
Commission, which describes the potential consolidation of six limited
partnerships, including 219 limited-service hotel properties, into a single
operating partnership and the formation of a new general partner which would
intend to qualify as a real estate investment trust ("REIT"). Completion of
this transaction is subject to several major contingencies, including a vote by
the partners in each partnership, and no assurance can be given that the
transaction will be consummated.
43
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. DEBT
Debt consists of the following:
1997 1996
------ ------
(IN MILLIONS)
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 $3.0 billion of real
estate assets, with an average rate of 8.6% at January 2,
1998, maturing through 2022.................................. 1,957 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 March 1998.............................. 22 --
------ ------
Total Mortgage Debt......................................... 1,979 1,529
------ ------
Other notes, with an average rate of 8% at January 2, 1998,
maturing through 2027........................................ 200 86
Capital lease obligations..................................... 19 11
------ ------
Total Other................................................. 219 97
------ ------
$3,783 $2,647
====== ======
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
Company's discontinued HM Services' business at par, and have a final maturity
of May 2005. The net proceeds were used to defease, and subsequently redeem,
all of the senior notes 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 the Company, issued $350 million of 9%
senior notes (the "Acquisitions Notes"). The Acquisitions Notes were issued at
par and have a final maturity of December 2007. A portion of the net proceeds
were utilized to repay in full the outstanding borrowings under the $230
million revolving line of credit (the "Acquisition Revolver"), which was then
terminated. In connection with the termination of the Acquisition Revolver,
the Company recognized an extraordinary loss in 1995 of $3 million, 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 "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. Properties received
44
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 interests in, full-service hotels and other lodging-
related properties, which may include senior living communities, 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, the Company, 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 the Company'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 the Company. 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, the Company 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.
The Company also purchased 100% of the outstanding bonds secured by a first
mortgage on the San Francisco Marriott in 1997. The 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
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, the Company incurred approximately $418 million of mortgage debt in
conjunction with the acquisition of 11 hotels. In connection with the
acquisition of the outstanding common stock of Forum Group, Inc. (the "Forum
Group") in June 1997 (see Note 12), the Company also assumed debt of
approximately $270 million. The $270 million of debt is comprised of secured
debt of approximately $198 million and unsecured debt of approximately $72
million ($59 million of which was provided by Marriott International). In
1997, the Company completed $56 million of the $107 million expansion plan for
the Forum Group properties. As a result, an additional $33 million of debt
financing has been provided by Marriott International, and Marriott
International may provide additional financing as the expansion plan is
completed. The Company also assumed approximately $15 million of debt in
conjunction with the acquisition of the Leisure Park retirement community.
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, the Company
repaid the $109 million mortgage, prior to the rate increasing to 10% per
annum with an additional 2% deferred, with the
45
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
proceeds from the convertible preferred securities offering discussed in Note
6. In the first quarter of 1997, the Company 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, the Company 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.
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.
The Company's debt balance at January 2, 1998, includes $232 million of debt
that is recourse to the parent company. Aggregate debt maturities at January
2, 1998, excluding capital lease obligations, are (in millions):
1998................................................................ $ 371
1999................................................................ 58
2000................................................................ 135
2001................................................................ 220
2002................................................................ 158
Thereafter.......................................................... 2,822
------
$3,764
======
Cash paid for interest for continuing operations, net of amounts
capitalized, was $286 million in 1997, $220 million in 1996 and $177 million
in 1995. Deferred financing costs, which are included in other assets,
amounted to $97 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. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES
OF A SUBSIDIARY TRUST HOLDING COMPANY SUBSTANTIALLY ALL OF WHOSE ASSETS ARE
THE CONVERTIBLE SUBORDINATED DEBENTURES DUE 2026
In December 1996, Host Marriott Financial Trust (the "Issuer"), a wholly-
owned subsidiary trust of the Company, issued 11 million shares of 6 3/4%
convertible quarterly income preferred securities (the "Convertible Preferred
Securities"), with a liquidation preference of $50 per share (for a total
liquidation amount of $550 million). The Convertible Preferred Securities
represent an undivided beneficial interest in the assets of the Issuer. The
payment of distributions out of moneys held by the Issuer and payments on
liquidation of the Issuer
46
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
or the redemption of the Convertible Preferred Securities are guaranteed by
the Company to the extent the Issuer has funds available therefor. This
guarantee, when taken together with the Company's obligations under the
indenture pursuant to which the Debentures were issued, the Debentures, the
Company's obligations under the Trust Agreement and its obligations under the
indenture to pay costs, expenses, debts and liabilities of the Issuer (other
than with respect to the Convertible Preferred Securities) provides a full and
unconditional guarantee of amounts due on the Convertible Preferred
Securities. Proceeds from the issuance of the Convertible Preferred Securities
were invested in 6 3/4% Convertible Subordinated Debentures (the "Debentures")
due December 2, 2026 issued by the Company. The Issuer exists solely to issue
the Convertible Preferred Securities and its own common securities (the
"Common Securities") and invest the proceeds therefrom in the Debentures,
which is its sole asset. Separate financial statements of the Issuer are not
presented because of the Company's guarantee described above; the Company's
management has concluded that such financial statements are not material to
investors and the Issuer is wholly-owned and essentially has no independent
operations.
Each of the Convertible Preferred Securities is convertible at the option of
the holder into shares of Company common stock at the rate of 2.6876 shares
per Convertible Preferred Security (equivalent to a conversion price of
$18.604 per share of Company common stock). The Debentures are convertible at
the option of the holders into shares of Company common stock at a conversion
rate of 2.6876 shares for each $50 in principal amount of Debentures. The
Issuer will only convert Debentures pursuant to a notice of conversion by a
holder of 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. The Company may defer interest payments on the Debentures for a
period not to exceed 20 consecutive quarters. If interest payments on the
Debentures are deferred, so too are payments on the Convertible Preferred
Securities. Under this circumstance, the Company will not be permitted to
declare or pay any cash distributions with respect to its capital stock or
debt securities that rank pari passu with or junior to the Debentures.
Subject to certain restrictions, the Convertible Preferred Securities are
redeemable at the Issuer's option upon any redemption by the Company of the
Debentures after December 2, 1999. Upon repayment at maturity or as a result
of the acceleration of the Debentures upon the occurrence of a default, the
Debentures shall be subject to mandatory redemption, from which the proceeds
will be applied to redeem Convertible Preferred Securities and Common
Securities, together with accrued and unpaid distributions.
7. SHAREHOLDERS' EQUITY
Six hundred million shares of common stock, 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
common stock with the remainder defeased.
On March 27, 1996, the Company completed the issuance of 31.6 million shares
of common stock for net proceeds of nearly $400 million.
In connection with a class action settlement, the Company issued warrants to
purchase up to 7.7 million shares of the Company's common stock at $8.00 per
share through October 8, 1996 and $10.00 per share thereafter. During 1996,
6.8 million warrants were exercised at $8.00 per share and an equivalent
number of
47
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
shares of Company common stock were issued. During 1997, approximately 60,000
warrants were exercised at $10.00 per share and an equivalent number of shares
of Company common stock were issued. As of January 2, 1998, there were
approximately 550,000 warrants outstanding.
In February 1989, the Board of Directors adopted a shareholder rights plan
under which a dividend of one preferred stock purchase right was distributed
for each outstanding share of the Company's common stock. Each right entitles
the holder to buy 1/1,000th of a share of a newly issued series of junior
participating preferred stock of the Company at an exercise price of $150 per
share. The rights will be exercisable 10 days after a person or group acquires
beneficial ownership of at least 20%, or begins a tender or exchange offer for
at least 30%, of the Company's common stock. Shares owned by a person or group
on February 3, 1989 and held continuously thereafter are exempt for purposes
of determining beneficial ownership under the rights plan. The rights are non-
voting and will expire on February 2, 1999, unless exercised or previously
redeemed by the Company for $.01 each. If the Company is involved in a merger
or certain other business combinations not approved by the Board of Directors,
each right entitles its holder, other than the acquiring person or group, to
purchase common stock of either the Company or the acquiror having a value of
twice the exercise price of the right.
8. INCOME 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......................................... $ 158 $ 139
Deferred tax liabilities.................................... (666) (603)
------ ------
Net deferred income tax liability......................... $ (508) $ (464)
====== ======
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...................................... (200) (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......................... $ (508) $ (464)
====== ======
48
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, the Company had approximately $41 million of alternative
minimum tax credit carryforwards available which do not expire.
Through 1997, the Company settled with the Internal Revenue Service ("IRS")
substantially all issues for tax years 1979 through 1993. The Company expects
to resolve any remaining issues with no material impact on the consolidated
financial statements. The Company 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........................................ .1 9.0 --
Other, net............................................. .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,
the Company, Marriott International and HM Services entered into tax-sharing
agreements which reflect each party's rights and obligations with respect to
deficiencies and refunds, if any, of Federal, state or other taxes relating to
the businesses of the Company, Marriott International and HM Services prior to
the Marriott International Distribution and the Special Dividend.
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.
49
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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....................................................... $ 3 $ 115
1999....................................................... 3 112
2000....................................................... 3 109
2001....................................................... 3 106
2002....................................................... 3 103
Thereafter................................................. 16 1,361
--- ------
Total minimum lease payments............................... 31 $1,906
======
Less amount representing interest.......................... 12
---
Present value of minimum lease payments.................. $19
===
As discussed in Note 12, the Company sold and leased back 37 of its
Courtyard properties in 1995 and an additional 16 Courtyard properties in 1996
to a REIT. Additionally, in 1996, the Company sold and leased back 18 of its
Residence Inns to the same REIT. 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.
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
==== === ===
50
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. EMPLOYEE STOCK PLANS
At January 2, 1998, the Company has two stock-based compensation plans which
are described below. Under the comprehensive stock plan (the "Comprehensive
Plan"), the Company may award to participating employees (i) options to
purchase the Company's common stock, (ii) deferred shares of the Company's
common stock and (iii) restricted shares of the Company's common stock. In
addition, the Company has an employee stock purchase plan (the "Employee Stock
Purchase Plan"). The principal terms and conditions of the two plans are
summarized below.
Total shares of common stock reserved and available for issuance under
employee stock plans at January 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, the Company issued an equivalent number
of Marriott International options and adjusted the exercise prices of its
options then outstanding based on the relative trading prices of shares of the
common stock of the two companies.
The Company continues to account for expense under its plans under the
provisions of Accounting Principle Board Opinion 25 and related
interpretations as permitted under SFAS 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 share on a pro forma
basis 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 the Company were redenominated in both
Company and HM Services stock and the exercise prices of the options were
adjusted based on the relative trading prices of shares of the common stock of
the two companies. For all options held by certain current and former
employees of Marriott International, the number and exercise price of the
options were adjusted based on the trading prices of shares of the Company's
common stock
51
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
immediately before and after the Special Dividend. Therefore, the options
outstanding reflect these revised exercise prices. Pursuant to the
Distribution Agreement between the Company and HM Services, the Company has
the right to receive up to 1.4 million shares of HM Services' common stock or
an equivalent cash value subsequent to exercise of the options held by certain
former and current employees of Marriott International. As of January 2, 1998,
the Company valued this right at approximately $20 million, which is included
in other assets. A summary of the status of the Company's stock option plan
for 1997, 1996 and 1995 follows:
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
(IN MILLIONS) EXERCISE PRICE (IN MILLIONS) EXERCISE PRICE (IN MILLIONS) EXERCISE PRICE
------------- -------------- ------------- -------------- ------------- --------------
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
The following table summarizes information about stock options outstanding
at January 2, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
SHARES WEIGHTED WEIGHTED SHARES WEIGHTED
RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE AT REMAINING EXERCISE AT EXERCISE
PRICES JANUARY 2, 1998 CONTRACTUAL LIFE PRICE JANUARY 2, 1998 PRICE
-------- --------------- ---------------- -------- --------------- --------
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
=== ===
Deferred stock incentive plan shares granted to officers and key employees
after 1990 generally vest over 10 years in annual installments commencing one
year after the date of grant. Certain employees may elect to defer payments
until termination or retirement. Deferred stock incentive plan shares granted
in 1990 and prior years generally vest in annual installments commencing one
year after the date of grant and continuing for 10 years. Employees also could
elect to forfeit one-fourth of their deferred stock incentive plan award in
exchange for accelerated vesting over a 10-year period. The Company accrues
compensation expense for the fair market value of the shares on the date of
grant, less estimated forfeitures. In 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. The Company recognizes
compensation expense over the restriction period equal to the fair market
value of the shares on the date of issuance adjusted for
52
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
forfeitures, and where appropriate, the level of attainment of performance
criteria and fluctuations in the fair market value of the Company's common
stock. In 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. The Company 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
The Company contributes to profit sharing and other defined contribution
plans for the benefit of employees meeting certain eligibility requirements
and electing participation in the plans. The amount to be matched by the
Company is determined annually by the Board of Directors. The Company 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 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.
Also in 1997, the Company acquired the outstanding common stock of the Forum
Group from MSLS (29 senior living communities) for approximately $460 million,
including approximately $270 million in debt, as described in Note 5. In
addition, the Company plans to add approximately 1,060 units to these
communities for approximately $107 million through an expansion plan which
will be completed in 1999. In 1997, approximately $56 million of the expansion
plan had been completed (including approximately $33 million of debt financing
provided by Marriott International). The Company also acquired 49% of the
remaining 50% interest in the partnership which owned the 418-unit Leisure
Park retirement community for approximately $23 million, including the
assumption of approximately $15 million of debt.
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.
During the first and third quarters of 1995, 37 of the Company's Courtyard
properties were sold and leased back from a REIT for approximately $330
million. The Company received net proceeds from the two transactions of
approximately $297 million and will receive approximately $33 million upon
expiration of the leases. A deferred gain of $14 million on the sale/leaseback
transactions is being amortized over the initial term of the leases.
53
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 consolidated pro forma results of
operations, assuming the above transactions and the refinancings and new debt
activity discussed in Note 5 occurred on December 30, 1995, are as follows (in
millions, except per share amounts):
1997 1996
------ ------
Revenues.................................................... $1,274 $1,121
Income (loss) before extraordinary items.................... 42 (24)
Net income (loss)........................................... 45 (24)
Basic earnings (loss) per common share:
Income (loss) before extraordinary items................... .21 (.13)
Basic earnings (loss) per common share..................... .22 (.13)
Diluted earnings (loss) per common share:
Income (loss) before extraordinary items................... .20 (.13)
Diluted earnings (loss) per common share................... .22 (.13)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of certain financial assets and liabilities and other
financial instruments are shown below:
1997 1996
-------------- --------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(IN MILLIONS)
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................ 3,764 3,815 2,636 2,654
Other financial instruments
Convertible Preferred Securities........... 550 638 550 595
Interest rate swap agreements.............. -- -- -- 1
Affiliate debt service commitments......... -- -- -- --
Short-term marketable securities and 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.
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.
54
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. The Company
retained the former Marriott Corporation's airport and tollroad food, beverage
and merchandise concessions operations, as well as most of its real estate
properties. Effective at the Marriott International Distribution Date,
Marriott Corporation changed its name to Host Marriott Corporation.
The Company and Marriott International have entered into various agreements
in connection with the Marriott International Distribution and thereafter
which provide, among other things, that (i) 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) all of the Company's senior living communities are
managed by MSLS under agreements with initial terms of 25 to 30 years and
which are subject to renewal at the option of Marriott International for an
additional five to ten years (see Note 16); (iv) Marriott International
provided the Company with $92 million of financing at an average rate of 9% in
1997 (and may provide additional financing as the expansion plan is completed)
in conjunction with the acquisition of senior living communities from Marriott
International (see Notes 5 and 12); (v) the Company acquired 49% of Marriott
International's 50% interest in the Leisure Park retirement community in 1997
for $23 million, including approximately $15 million of assumed debt; (vi)
Marriott International guarantees the Company's performance in connection with
certain loans and other obligations ($107 million at January 2, 1998); (vii)
the Company borrowed and repaid $109 million of first mortgage financing for
construction of the Philadelphia Marriott (see Note 5); (viii) 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); (ix) 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; (x) in 1995, the Company also acquired a
full-service property from a partnership in which Marriott International owned
a 50% interest; and (xi) Marriott International provides certain limited
administrative services.
In 1997, 1996 and 1995, the Company paid to Marriott International $162
million, $101 million and $67 million, respectively, in hotel management fees;
$13 million, $18 million and $21 million, respectively, in interest and
commitment fees under the debt financing and line of credit provided by
Marriott International, $3 million, $4 million and $12 million, respectively,
for limited administrative services. The Company also paid Marriott
International $4 million, $2 million and $1 million, respectively, of
franchise fees in 1997, 1996 and 1995. In connection with the acquisition of
the Forum Group, the Company paid Marriott International $6 million in senior
living community management fees during 1997.
Additionally, Marriott International has the right to purchase up to 20% of
the voting stock of the Company if certain events involving a change in
control of the Company occur.
55
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
agreement 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.
The agreement generally provide for payment of base management fees equal to
one to three 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.
56
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 consolidated balance
sheets.
16. SENIOR LIVING COMMUNITY OPERATING AGREEMENTS
The Company's senior living communities (the "Communities") are subject to
operating agreements (the "SLC Agreements") which provide for MSLS to operate
the communities, generally for an initial term of 25 to 30 years with renewal
terms subject to certain performance criteria at the option of MSLS of up to
an additional five to ten years. The SLC Agreements provide for payment of
base management fees generally equal to five to eight percent of gross
revenues and incentive management fees generally equal to zero to 20% of
Operating Profit (as defined in the SLC Agreements) over a priority return to
the Company. In the event of early termination of the SLC Agreements, MSLS
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, but not all, management agreements if specified performance
thresholds are not satisfied. No SLC Agreement with respect to a single
community is cross-collateralized or cross-defaulted to any other SLC
Agreement and any single SLC Agreement may be terminated following a default
by the Company or MSLS, although such termination will not trigger the
cancellation of any other SLC Agreement.
Pursuant to the terms of the SLC Agreements, MSLS is required to furnish the
Communities with certain services ("Central Administrative Services") which
are provided on a central or regional basis to all properties in the Marriott
Retirement Community System. These services include the development and
operation of computer systems, computer payroll and accounting services,
marketing and public relations services, and such additional services as may
from time-to-time be performed more efficiently on a central or regional
level. The SLC Agreements establish payment of Central Administrative Services
fees generally equal to 0% of Gross Revenues for the first year and 2%
thereafter.
MSLS is required under the SLC Agreements to deduct an amount from gross
revenues and place the funds into an interest bearing reserve account to cover
the cost of (a) certain routine repairs and maintenance to the Communities
which are normally capitalized; and (b) replacements and renewals to the
Communities' property and improvements. The annual payment amount (expressed
as a percentage of gross revenues) generally will be 2.65% through fiscal year
2002, 2.85% for fiscal years 2003 through 2007, and 3.5% thereafter. The SLC
Agreements provide that the Company shall provide MSLS with sufficient funds
to cover the cost of certain major or non-routine repairs, alterations,
improvements, renewals and replacements to the Communities which are required
to maintain a competitive, efficient and economical operating condition in
accordance with Marriott standards or for the continued safe and orderly
operation of the Communities.
At January 2, 1998, approximately $6 million has been advanced to MSLS for
working capital for the senior living communities.
17. 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
financial statements.
57
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. HOTEL AND SENIOR LIVING COMMUNITY OPERATIONS
As discussed in Note 1, revenues reflect house profit from the Company's
hotel properties and senior living communities. House profit reflects the net
revenues flowing to the Company as property owner and represents all gross
hotel and senior living communities' 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
====== ====== ======
The following table presents the details of house profit for the Company's
senior living communities for 1997 (in millions):
Senior Living Communities Sales........................................ $111
Department Costs....................................................... 74
----
House Profit........................................................... $ 37
====
19. GEOGRAPHIC AND BUSINESS SEGMENT INFORMATION
The Company operates in two business segments in the lodging industry:
hotels and senior living communities. 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. Senior living communities generally
contain 100 to 300 units and offer a variety of senior care services that
include independent living, assisted living and health care. The communities
provide security, meals, housekeeping, linen service and 24-hour emergency
health care.
The Company evaluates the performance of its segments based primarily on
operating profit before depreciation, corporate expenses, and interest
expense. The Company's income taxes are included in the consolidated Federal
income tax return of the Company and its affiliates and is allocated based
upon the relative contribution to the Company's consolidated taxable
income/loss and changes in temporary differences. The allocation of taxes is
not evaluated at the segment level and, therefore, the Company does not
believe the information is material to the consolidated financial statements.
58
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents revenues and other financial information by
business segment (in millions):
1997
------------------------------------
SENIOR CORPORATE
HOTELS LIVING & OTHER CONSOLIDATED
------ ------ --------- ------------
Revenues................................... $1,093 $ 37 $ 17 $1,147
Operating profit (loss).................... 444 17 (12) 449
Interest expense........................... 281 15 6 302
Interest income............................ 40 1 11 52
Depreciation and amortization ............. 226 9 5 240
Capital expenditures....................... 153 3 4 160
Total assets............................... 5,787 623 116 6,526
1996
------------------------------------
SENIOR CORPORATE
HOTELS LIVING & OTHER CONSOLIDATED
------ ------ --------- ------------
Revenues................................... $ 717 $ -- $ 15 $ 732
Operating profit (loss) ................... 256 -- (23) 233
Interest expense........................... 228 -- 9 237
Interest income............................ 31 -- 17 48
Depreciation and amortization.............. 165 -- 3 168
Capital expenditures....................... 156 -- 3 159
Total assets............................... 4,770 -- 382 5,152
1995
------------------------------------
SENIOR CORPORATE
HOTELS LIVING & OTHER CONSOLIDATED
------ ------ --------- ------------
Revenues................................... $ 474 $ -- $ 10 $ 484
Operating profit (loss) ................... 193 -- (79) 114
Interest expense .......................... 161 -- 17 178
Interest income............................ 11 -- 16 27
Depreciation and amortization.............. 117 -- 5 122
Capital expenditures....................... 154 -- 6 160
Total assets............................... 3,175 -- 382 3,557
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):
1997 1996 1995
------------------- ------------------- -------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUES ASSETS REVENUES ASSETS REVENUES ASSETS
-------- ---------- -------- ---------- -------- ----------
United States...... $1,108 $4,995 $714 $3,587 $482 $2,842
International...... 39 222 18 218 2 40
------ ------ ---- ------ ---- ------
Total............ $1,147 $5,217 $732 $3,805 $484 $2,882
====== ====== ==== ====== ==== ======
59
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
1997
---------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ----------
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
Revenues................ $ 252 $ 270 $ 246 $ 379 $ 1,147
Operating profit before
minority interest,
corporate expenses and
interest............... 91 124 89 145 449
Income before
extraordinary items ... 6 26 6 9 47
Net income.............. 11 26 6 7 50
Basic earnings per
common share:
Income before
extraordinary items .. .03 .13 .03 .04 .23
Net income............. .05 .13 .03 .03 .25
Diluted earnings per
common share:
Income before
extraordinary items .. .03 .13 .03 .04 .23
Net income............. .05 .13 .03 .03 .24
1996
---------------------------------------------------------
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
--------- --------- --------- --------- ----------
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
Revenues................ $ 130 $ 167 $ 167 $ 268 $ 732
Operating profit before
minority interest,
corporate expenses and
interest............... 38 62 49 84 233
Income (loss) before
extraordinary items.... (12) 7 (2) (6) (13)
Net income (loss)....... (12) 7 (2) (6) (13)
Basic earnings (loss)
per common share:
Income (loss) before
extraordinary items .. (.07) .04 (.01) (.03) (.07)
Net income (loss)...... (.07) .04 (.01) (.03) (.07)
Diluted earnings (loss)
per common share:
Income (loss) before
extraordinary items... (.07) .03 (.01) (.03) (.07)
Net income (loss)...... (.07) .03 (.01) (.03) (.07)
The first three quarters consist of 12 weeks each in both 1997 and 1996, and
the fourth quarter includes 16 weeks in 1997 and 17 weeks in 1996. The sum of
the basic and diluted earnings (loss) per common share for the four quarters
in 1997 and 1996 differs from the annual earnings per common share due to the
required method of computing the weighted average number of shares in the
respective periods.
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The information called for by Items 10-13 is incorporated by reference from
the Host Marriott Corporation 1998 Annual Meeting of the Shareholders--Notice
and Proxy Statement--(to be filed pursuant to Regulation 14A not later than
120 days after the close of fiscal year).
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
All financial statements of the registrant as set forth under Item 8
of this Report on Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
The following financial information is filed herewith on the pages
indicated.
Financial Schedules:
PAGE
----------
I. Condensed Financial Information of Registrant............. S-1 to S-7
III. Real Estate and Accumulated Depreciation.................. S-8 to S-9
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
61
(3) EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1(i) Restated Certificate of Incorporation of Marriott Corporation
(incorporated by reference to Current Report on Form 8-K dated
October 23, 1993).
3.1(ii) Certificate of Correction filed to correct a certain error in the
Restated Certificate of Incorporation of Host Marriott Corporation
filed in the Office of the Secretary of State of Delaware on August
11, 1992, filed in the Office of the Secretary of State of Delaware
on October 11, 1994 (incorporated by reference to Registration
Statement No. 33-54545).
3.2 Amended Marriott Corporation Bylaws (incorporated by reference to
Current Report on Form 8-K dated October 23, 1993).
4.2(i) Rights Agreement between Marriott Corporation and the Bank of New
York as Rights Agent dated February 3, 1989 (incorporated by
reference to Registration Statement No. 33-62444).
4.2(ii) First Amendment to Rights Agreement between Marriott Corporation
and Bank of New York as Rights Agent dated as of October 8, 1993
(incorporated by reference to Registration Statement No. 33-51707).
4.3 Indenture by and among HMC Acquisition Properties, Inc., as Issuer,
HMC SFO, Inc., as Subsidiary Guarantors, and Marine Midland Bank,
as Trustee (incorporated by reference to Registration Statement No.
333-00768).
4.4 Indenture by and among HMH Properties Inc., as Issuer, HMH
Courtyard Properties, Inc., HMC Retirement Properties, Inc.,
Marriott Financial Services, Inc., Marriott SBM Two Corporation,
HMH Pentagon Corporation and Host Airport Hotels, Inc., as
Subsidiary Guarantors, and Marine Midland Bank, as Trustee
(incorporated by reference to Registration Statement No. 33-95058).
4.5(i) Warrant Agreement dated as of October 14, 1994 by and between Host
Marriott Corporation and First Chicago Trust Company of New York as
Warrant Agent (incorporated by reference to Registration Statement
No. 33-80801).
4.5(ii) First Supplemental Warrant Agreement dated December 22, 1995 by and
among Host Marriott Corporation, Host Marriott Services Corporation
and First Chicago Trust Company as Warrant Agent (incorporated by
reference to Registration Statement No. 33-80801).
10.1 Marriott Corporation Executive Deferred Compensation Plan dated as
of December 6, 1990 (incorporated by reference from Exhibit 19(i)
of the Annual Report on Form 10-K for the fiscal year ended
December 28, 1991).
10.2 Host Marriott Corporation 1993 Comprehensive Stock Incentive Plan
effective as of October 8, 1993 (incorporated by reference from
Current Report on Form 8-K dated October 23, 1993).
10.3 Distribution Agreement dated as of September 15, 1993 between
Marriott Corporation and Marriott International, Inc. (incorporated
by reference from Current Report on Form 8-K dated October 23,
1993).
10.4 Amendment No. 1 to the Distribution Agreement dated September 15,
1993 by and among Host Marriott Corporation, Host Marriott Services
Corporation and Marriott International (incorporated by reference
from Current Report on Form 8-K dated January 16, 1996).
10.5 Distribution Agreement dated December 22, 1995 by and between Host
Marriott Corporation and Host Marriott Services Corporation (in-
corporated by reference from Current Report on Form 8-K dated Jan-
uary 16, 1996).
10.6 Tax Sharing Agreement dated as of October 5, 1993 by and between
Marriott Corporation and Marriott International, Inc. (incorporated
by reference from Current Report on Form 8-K dated October 23,
1993).
62
EXHIBIT
NO. DESCRIPTION
------- -----------
10.7 Assignment and License Agreement dated as of October 8, 1993 by
and between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.8 Amendment No. 1 to the Assignment and License Agreement dated as
of October 8, 1993 by and between Marriott International, Inc. and
Host Marriott Corporation (incorporated by reference from Current
Report on Form 8-K dated January 16, 1996).
10.9 Transitional Corporate Services Agreement dated December 28, 1995
by and between Host Marriott Corporation and Host Marriott
Services Corporation (incorporated by reference from Current
Report on Form 8-K dated January 16, 1996).
10.10 Tax Administration Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.11 Noncompetition Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Current Report on Form 8-K dated
October 23, 1993).
10.12 Amendment No. 1 to the Noncompetition Agreement dated October 8,
1993 by and between Host Marriott Corporation and Marriott
International, Inc. (incorporated by reference from Current Report
on Form 8-K dated January 16, 1996).
#10.13 Host Marriott Lodging Management Agreement-Marriott Hotels,
Resorts and Hotels dated September 25, 1993 by and between
Marriott Corporation and Marriott International, Inc.
(incorporated by reference to Registration Statement No. 33-
51707).
#10.14(ii) Host Marriott Lodging Management Agreement-Courtyard Hotels dated
September 25, 1993 by and between Marriott Corporation and
Marriott International, Inc. (incorporated by reference to
Registration Statement No. 33-51707).
#10.14(iii) Host Marriott Lodging Management Agreement-Residence Inns dated
September 25, 1993 by and between Marriott Corporation and
Marriott International, Inc. (incorporated by reference to
Registration Statement No. 33-51707).
10.15(i) Consolidation Letter Agreement pertaining to Courtyard Hotels
dated September 25, 1993 between a subsidiary of Marriott
International, Inc. and a subsidiary of the Company (incorporated
by reference to Registration Statement No. 33-51707).
10.16(ii) Consolidation Letter Agreement pertaining to Residence Inns dated
September 25, 1993 between a subsidiary of Marriott International,
Inc. and a subsidiary of the Company (incorporated by reference to
Registration Statement No. 33-51707).
10.17 Employee Benefits and Other Employment Matters Allocation
Agreement dated as of December 29, 1995 by and between Host
Marriott Corporation and Host Marriott Services Corporation
(incorporated by reference from Current Report on Form 8-K dated
January 16, 1996).
10.18 Tax Sharing Agreement dated as of December 29, 1995 by and between
Host Marriott Corporation and Host Marriott Services Corporation
(incorporated by reference from Current Report on Form 8-K dated
January 16, 1996).
10.19 Marriott/Host Marriott Employees' Profit Sharing Retirement and
Savings Plan and Trust (incorporated by reference from
Registration Statement No. 33-62444).
10.20 Working Capital Agreement by and between Host Marriott Corporation
and Marriott International, Inc. dated as of September 25, 1993
(incorporated by reference from Registration Statement
No. 33-62444).
63
EXHIBIT
NO. DESCRIPTION
------- -----------
10.21 $225,000,000 Revolving Line and Guarantee Reimbursement Agreement
dated as of June 26, 1995 among Host Marriott Corporation as Borrower,
Marriott International, Inc. as Lender, and certain Subsidiaries of
Host Marriott Corporation as Guarantors (incorporated by reference
from Current Report on Form 8-K dated July 17, 1995).
10.22 Amendment No. 2 dated as of June 19, 1997 to Revolving Credit Line and
Guarantee Reimbursement Agreement dated as of June 26, 1995, as
amended by Amendment No. 1 dated as of October 4, 1995, among Host
Marriott Corporation as Borrower, Marriott International, Inc. as
Lender and certain Subsidiaries of Host Marriott Corporation signatory
thereto and hereto.
10.23 $500,000,000 Credit Agreement dated as of June 19, 1997 among HMC
Capital Resources Holdings Corporation, HMC Capital Corporation, HMC
Capital Resources Corporation as Borrower, the Banks party hereto from
time-to-time, Credit Lyonnais New York Branch, The Bank of Nova Scotia
and Wells Fargo Bank, National Association as Co-Agents, The Bank of
Nova Scotia as Documentation Agent, Wells Fargo Bank, National
Association as Syndication Agent and Bankers Trust Company as Arranger
and Administrative Agent.
21 Subsidiaries of Host Marriott Corporation.
- --------
# Agreement filed is illustrative of numerous other agreements to which the
Company is a party.
(b) REPORTS ON FORM 8-K
. September 25, 1997--Report of the announcement that the Company
successfully completed the purchase of a majority of the limited
partnership units in the Chesapeake Hotel Limited Partnership which
owns six full-service hotel properties.
. October 23, 1997--Amendment to Current Report on Form 8-K/A dated
August 15, 1997 by filing financial statements of an acquired
business, Manhattan Beach Hotel Partners, L.P., and certain pro forma
financial information for Host Marriott Corporation.
. November 24, 1997--Amendment to Current Report on Form 8-K dated
September 10, 1997 by filing financial statements of an acquired
business, Chesapeake Hotel Limited Partnership, and certain pro forma
financial information for Host Marriott Corporation.
(d) OTHER INFORMATION
64
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BETHESDA, STATE OF
MARYLAND, ON MARCH 25, 1998.
Host Marriott Corporation
By /s/ Robert E. Parsons, Jr.
-----------------------------------
Robert E. Parsons, Jr.
Executive Vice President
and Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS
BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN
THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Terence C. Golden President, Chief March 25, 1998
-------------------------------------- Executive Officer and
Terence C. Golden Director
(Principal Executive
Officer)
/s/ Robert E. Parsons, Jr. Executive Vice President March 25, 1998
-------------------------------------- and Chief Financial
Robert E. Parsons, Jr. Officer (Principal
Financial Officer)
/s/ Donald D. Olinger Senior Vice President March 25, 1998
-------------------------------------- and Corporate Controller
Donald D. Olinger (Principal Accounting
Officer)
/s/ Richard E. Marriott Chairman of the Board of March 25, 1998
-------------------------------------- Directors
Richard E. Marriott
/s/ R. Theodore Ammon Director March 25, 1998
--------------------------------------
R. Theodore Ammon
/s/ Robert M. Baylis Director March 25, 1998
--------------------------------------
Robert M. Baylis
/s/ J.W. Marriott, Jr. Director March 25, 1998
--------------------------------------
J.W. Marriott, Jr.
/s/ Ann Dore McLaughlin Director March 25, 1998
--------------------------------------
Ann Dore McLaughlin
/s/ Harry L. Vincent, Jr. Director March 25, 1998
--------------------------------------
Harry L. Vincent, Jr.
65
SCHEDULE 1
PAGE 1 OF 7
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
JANUARY 2, JANUARY 3,
1998 1997
ASSETS ---------- ----------
(IN MILLIONS)
Property and Equipment, net.............................. $2,786 $2,332
Investments in Affiliates................................ 13 11
Notes Receivable, net.................................... 54 157
Due from Managers........................................ 53 54
Investment in and Advances to Restricted Subsidiaries.... 963 611
Other Assets............................................. 176 181
Short-term marketable securities......................... 163 --
Cash and Cash Equivalents................................ 247 563
------ ------
Total Assets......................................... $4,455 $3,909
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt..................................................... $1,958 $1,565
Accounts Payable and Accrued Expenses ................... 97 62
Deferred Income Taxes ................................... 363 377
Other Liabilities........................................ 287 228
------ ------
Total Liabilities.................................... 2,705 2,232
------ ------
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........................................... 204 202
Additional Paid-in Capital............................. 947 926
Retained Earnings (deficit)............................ 49 (1)
------ ------
1,200 1,127
------ ------
Total Liabilities and Shareholders' Equity .......... $4,455 $3,909
====== ======
- --------
The Notes to Consolidated Financial Statements of Host Marriott Corporation and
Subsidiaries are an integral part of these statements.
See Accompanying Notes to Condensed Financial Information.
S-1
SCHEDULE I
PAGE 2 OF 7
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
1997 1996 1995
----- ----- -----
(IN MILLIONS)
Revenues.................................................. $ 684 $ 413 $ 229
Operating costs and expenses.............................. 447 324 233
----- ----- -----
Operating profit (loss) before minority interest,
corporate expenses and interest.......................... 237 89 (4)
Minority interest......................................... (32) (6) (2)
Corporate expenses ....................................... (30) (28) (23)
Interest expense.......................................... (172) (135) (105)
Dividends on Convertible Preferred Securities of
subsidiary trust......................................... (37) (3) --
Interest income........................................... 24 21 11
----- ----- -----
Loss before income taxes and equity in earnings of
Restricted Subsidiaries ................................. (10) (62) (123)
Equity in earnings of Restricted Subsidiaries............. 93 54 28
(Provision) benefit for income taxes...................... (36) (5) 13
----- ----- -----
Income (loss) from continuing operations.................. 47 (13) (82)
Loss from discontinued operations, net-of-tax............. -- -- (61)
----- ----- -----
Income (loss) before extraordinary items.................. 47 (13) (143)
Extraordinary items--Gain on extinguishment of debt, net
of tax................................................... 3 -- --
----- ----- -----
Net income (loss)........................................ $ 50 $ (13) $(143)
===== ===== =====
- --------
The Notes to Consolidated Financial Statements of Host Marriott Corporation and
Subsidiaries are an integral part of these statements.
See Accompanying Notes to Condensed Financial Information.
S-2
SCHEDULE I
PAGE 3 OF 7
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
1997 1996 1995
------ ----- -----
(IN MILLIONS)
Cash from (used in) operations........................... $ 266 $ 74 $ (25)
------ ----- -----
Investing Activities
Net proceeds from sale of assets....................... 35 23 18
Capital expenditures................................... (82) (66) (88)
Acquisitions........................................... (222) (423) (61)
Dividends from Restricted Subsidiaries................. 54 29 36
Purchases of short-term marketable securities.......... (163) -- --
Other.................................................. (5) 30 50
------ ----- -----
Cash used in investing activities.................... (383) (407) (45)
------ ----- -----
Financing Activities
Issuances of debt...................................... 266 48 175
Issuances of Convertible Preferred Securities, net..... -- 533 --
Issuances of common stock.............................. 6 454 13
Repayments of debt..................................... (493) (253) (245)
Transfers from Marriott International and Restricted
Subsidiaries, net..................................... -- 8 163
Other.................................................. 22 28 --
------ ----- -----
Cash (used in) from financing activities............. (199) 818 106
------ ----- -----
(Decrease) increase in cash and cash equivalents......... $ (316) $ 485 $ 36
====== ===== =====
- --------
The Notes to Consolidated Financial Statements of Host Marriott Corporation and
Subsidiaries are an integral part of these statements.
See Accompanying Notes to Condensed Financial Information.
S-3
SCHEDULE I
PAGE 4 OF 7
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONSOLIDATED FINANCIAL INFORMATION--(CONTINUED)
A) The accompanying condensed financial information of Host Marriott
Corporation (the "Parent Company") presents the financial position,
results of operations and cash flows of the Parent Company with the
investment in, and operations of, consolidated subsidiaries with
restricted net assets on the equity method of accounting.
In May 1995, HMH Properties, Inc. ("Properties"), an indirect, wholly-
owned subsidiary of the Parent Company, issued $600 million of 9.5%
senior notes at par value with a final maturity of May 2005 (the
"Properties Notes").
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 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.
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, 1998, which is a
wholly-owned subsidiary of the Parent Company.
S-4
SCHEDULE I
PAGE 5 OF 7
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONSOLIDATED FINANCIAL INFORMATION--(CONTINUED)
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 95 lodging properties at January 2, 1998.
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 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. The Company paid commitment fees
of $941,000 for the fiscal year ended January 2, 1998. The Company drew
$22.2 million for the acquisition of one property. The loan matures
March 1998 and accrues interest at 7.6%.
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) On October 8, 1993 (the "Marriott International Distribution Date"), the
Parent Company distributed, through a special tax-free dividend (the
"Marriott International Distribution") to holders of its common stock
(on a share-for-share basis) all outstanding shares of common stock of
an existing wholly-owned subsidiary, Marriott International, Inc.
("Marriott International"). Under the terms of an exchange offer (the
"Exchange Offer"), which the Parent Company completed in connection with
the Marriott International Distribution, the Parent Company secured
certain notes (the "Old Series I Notes") with a principal balance of $87
million equally and ratably with senior notes (the "Hospitality Notes")
issued in the Exchange Offer by Host Marriott Hospitality, Inc.
("Hospitality"), an indirect wholly-owned subsidiary of the Parent
Company. The Old Series I Notes were repaid upon its maturity in May
1995. Interest expense includes $4 million in 1995 related to the
pushed-down debt discussed above.
C) Properties paid $54 million, $29 million and $36 million in 1997, 1996
and 1995, respectively, 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 1997.
S-5
SCHEDULE I
PAGE 6 OF 7
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONSOLIDATED FINANCIAL INFORMATION--(CONTINUED)
D) The Parent Company purchased 100% of the outstanding bonds secured by a
first mortgage on the San Francisco Marriott Hotel in 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.
In December 1997, the Parent Company successfully completed the
refinancing of the Marriott Hotel Properties Limited Partnership
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 Parent 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.
Aggregate debt maturities at January 2, 1998, excluding $19 million in
capital lease obligations, are (in millions):
1998................................................................. $ 345
1999................................................................. 54
2000................................................................. 131
2001................................................................. 216
2002................................................................. 63
Thereafter........................................................... 1,130
-------
$ 1,939
=======
E) In December 1996, Host Marriott Financial Trust (the "Issuer"), a
wholly-owned subsidiary trust of the Parent Company, issued 11 million
shares of 6 3/4% convertible quarterly income preferred securities (the
"Convertible Preferred Securities"), with a liquidation preference of
$50 per share (for a total liquidation amount of $550 million). The
Convertible Preferred Securities represent an undivided beneficial
interest in the assets of the Issuer and 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 1997 and 1996, no shares were converted into common stock.
S-6
SCHEDULE I
PAGE 7 OF 7
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONSOLIDATED FINANCIAL INFORMATION--(CONTINUED)
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.
F) 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 consolidated income tax returns of Host Marriott Corporation.
G) As more fully described in Note 2 to the Company's consolidated
financial statements, the Company completed a special dividend to
shareholders on December 29, 1995 of its operating group (the "Operating
Group") which comprised its food, beverage and merchandise concessions
business. The accompanying condensed financial information has been
restated to reflect the Operating Group as discontinued operations for
the fiscal year ended December 29, 1995.
S-7
SCHEDULE III
PAGE 1 OF 2
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
JANUARY 2, 1998
(IN MILLIONS)
GROSS AMOUNT AT
INITIAL COSTS JANUARY 2, 1998
------------------ --------------------------
SUBSEQUENT DATE OF
BUILDINGS & COSTS BUILDINGS & ACCUMULATED COMPLETION OF DATE
DESCRIPTION DEBT LAND IMPROVEMENTS CAPITALIZED LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
----------- ------- ----- ------------ ----------- ----- ------------ ------- ------------ ------------- --------
Full-service
hotels:
New York
Marriott Marquis
Hotel, New York,
NY.............. $ 282 $ -- $ 520 $ 36 $ -- $ 556 $ 556 (127) 1986 N/A
San Francisco
Moscone Center,
San Francisco,
CA.............. -- -- 278 8 -- 286 286 (42) 1989 N/A
Other full-
service
properties, each
less than 5% of
total........... 1,502 394 3,030 446 404 3,466 3,870 (312) various various
------- ----- ------- ----- ----- ------- ------- ------
Total full-serv-
ice............. 1,784 394 3,828 490 404 4,308 4,712 (481)
Senior living
communities...... 195 103 436 35 103 471 574 (8) various 1997
Other properties,
each less than 5%
of total......... -- 14 14 3 14 17 31 (17) various N/A
------- ----- ------- ----- ----- ------- ------- ------
Total........... $ 1,979 $ 511 $ 4,278 $ 528 $ 521 $ 4,796 $ 5,317 $ (506)
======= ===== ======= ===== ===== ======= ======= ======
DEPRECIATION
DESCRIPTION LIFE
----------- ------------
Full-service
hotels:
New York
Marriott Marquis
Hotel, New York,
NY.............. 40
San Francisco
Moscone Center,
San Francisco,
CA.............. 40
Other full-
service
properties, each
less than 5% of
total........... 40
Total full-serv-
ice.............
Senior living
communities...... 40
Other properties,
each less than 5%
of total......... various
Total...........
S-8
SCHEDULE III
PAGE 2 OF 2
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
JANUARY 2, 1998
(IN MILLIONS)
NOTES:
(A) The change in total cost of properties for the fiscal years ended January
2, 1998, January 3, 1997 and December 29, 1995 is as follows:
Balance at December 30, 1994....................................... $2,787
Additions:
Acquisitions................................................... 356
Capital expenditures........................................... 25
Transfers from construction in progress.......................... 185
Deductions:
Dispositions and other......................................... (367)
------
Balance at December 29, 1995....................................... 2,986
Additions:
Acquisitions................................................... 1,087
Capital expenditures........................................... 77
Transfers from construction-in-progress........................ 28
Deductions:
Dispositions and other......................................... (322)
------
Balance at January 3, 1997......................................... 3,856
Additions:
Acquisitions................................................... 1,459
Capital expenditures........................................... 117
Transfers from construction-in-progress........................ 30
Deductions:
Dispositions and other......................................... (145)
------
Balance at January 2, 1998......................................... $5,317
======
(B) The change in accumulated depreciation and amortization of real estate
assets for the fiscal years ended January 2, 1998, January 3, 1997 and
December 29, 1995 is as follows:
Balance at December 30, 1994....................................... $ 333
Depreciation and amortization.................................... 65
Dispositions and other........................................... (24)
------
Balance at December 29, 1995....................................... 374
Depreciation and amortization.................................... 96
Dispositions and other........................................... (59)
------
Balance at January 3, 1997......................................... 411
Depreciation and amortization.................................... 126
Dispositions and other........................................... (31)
------
Balance at January 2, 1998......................................... $ 506
======
(C) The aggregate cost of properties for Federal income tax purposes is
approximately $4,508 million at January 2, 1998.
(D) The total cost of properties excludes construction-in-progress
properties.
S-9