ITEM 3. LEGAL PROCEEDINGS
Between October 9, 1992 and approximately January 4, 1993, following the announcement of the Distribution, ten plaintiffs (United Apple Sales Incorporated Profit Sharing Trust U/A DTD 8/1/71;
Bernard Fintz, Administrator of the Fintz Pension Plan; John D. Halford, Trustee of the John D. Halford Trust; Harvey Levy, as Trustee for the National Rubber Footwear, Inc. Profit Sharing Plan; Moges Gebremariam, as Trustee for the Moges Gebremariam Profit Sharing Plan; Howard W. Bleiman; Edmond Tomlinson; Robert Seigle; Matthew Harlib and Paul L. Stone, collectively the "Class Action Plaintiffs") filed lawsuits against the Company purportedly brought on behalf of classes of holders and purchasers of Old Notes and other Senior Notes and debentures of the Company (the "Class Action Lawsuits"). The Class Action Plaintiffs were all holders, or former holders, of Old Notes. The Class Action Lawsuits were consolidated under the caption United Apple Sales Incorporated Profit Sharing Trust U/A DTD 8/1/71, et al. v. Marriott Corp., et al. in the United States District Court for the District of Maryland. A similar lawsuit filed by one of the Class Action Plaintiffs in Maryland state court was stayed pending resolution of the cases in the Unites States District Court for the District of Maryland.
On October 29, 1992, a second group of plaintiffs (the "PPM Group") purporting to hold approximately $120 million of principal amount of Old Notes filed lawsuits against the Company (the "PPM Lawsuit"). The PPM Group consists of PPM America, Inc.; London Pacific Life and Annuity Company; Transamerica Life Insurance and Annuity Company; Transamerica Income Shares, Inc.; National Home Life Assurance Company; Commonwealth Life Insurance Company; Provident Mutual Life Insurance Company of Philadelphia; Vanguard Fixed Income Securities Fund, Inc.; Wellington Fund, Inc.; Anchor Series Trust; High Yield Plus Fund, Inc.; New America High Income Fund, Inc.; Security Mutual Life Insurance Company of New York; Security Equity Life Insurance Company; and Utica National Life Insurance Company. People's Security Life Insurance Company, which purchased approximately $16 million in Old Notes, was later added as an additional plaintiff in the PPM Lawsuit. The PPM group alleges that it has incurred damages of approximately $30 million.
On or about March 25, 1993, the State Board of Administration of Florida (the "Florida Plaintiff"), purporting to hold approximately $7.5 million principal amount of Old Notes, filed an additional lawsuit purportedly brought on behalf of certain classes of holders of Old Notes and other Senior Notes and debentures of the Company (the "Florida Lawsuit"). The Florida Lawsuit has been consolidated with the PPM Lawsuit.
The Class Action Lawsuits and the Florida Lawsuit alleged, among other things, that (i) the Distribution, if effected, would violate the terms of the Old Note Indenture, (ii) federal securities laws (and similar state laws) had been violated in connection with the sale by the Company of certain series of its Old Notes (the "Disclosure Claims"), (iii) the Distribution, if effected, would be a fraudulent conveyance as to creditors of the Company and (iv) the Distribution, if effected, would constitute a breach of fiduciary duty and a breach of implied covenants of good faith and fair dealing allegedly owed by the Company to holder of Old Notes. The PPM Lawsuit is limited to claims that the sale by the Company of certain series of its Old Notes was fraudulent and violated federal securities laws and similar state laws. The Company has counterclaimed against certain members of the PPM Group, asserting tortious interference with business relationships.
The Company reached an agreement to settle the Class Action Lawsuits (the "Class Action Settlement"), which settlement was approved by the United States District Court on August 30, 1993. The Class Action Settlement disposes of all legal claims challenging the Distribution, other than Disclosure Claims by certain holders and former holders of Old Notes (principally members of the PPM Group and the Florida Plaintiff) who have "opted out" of the Class Action Settlement. The Florida Plaintiff has filed an appeal with the United States Court of Appeals for the Fourth Circuit, challenging the District Court's approval of the Class Action Settlement.
As part of the Class Action Settlement, the Company effected the Exchange Offer, paid certain legal fees and expenses of the Class Action Plaintiffs and agreed to issue warrants to purchase up to 7.7 million shares of the Company's common stock, subject to acceptance by 100% of the class of claimants. Such warrants
would be exercisable for five years after the Distribution, at $8.00 per share during the first three years and $10.00 per share during the last two years. The warrants are not expected to be issued until the appeal by the Florida Plaintiff is resolved.
The PPM Group and the Florida Plaintiff continue to litigate their Disclosure Claims. On December 17, 1993, the Company filed a motion for summary judgement asking the District Court to enter judgment in favor of the Defendants on all the claims. The PPM Group also filed a motion for summary judgment with respect to the Company's counterclaim. Final briefs by the parties were submitted on March 4, 1994, argument on these motions took place on March 11, 1994 and the parties are awaiting decision from the court. The Company believes the Disclosure Claims are without merit and that the litigation pursued by those who have opted out of the Class Action Settlement will not have a material effect of the financial condition of the Company. Nevertheless, there can be no certainty as to the ultimate outcome of such litigation.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock is listed on the New York Stock Exchange and on several regional exchanges, and since consummation of the Distribution is traded under the symbol "HMT." The following table sets forth, for the fiscal periods indicated, the high and low sales prices per share of the common stock as reported on the New York Stock Exchange Composite Tape and traded during such periods under the symbol "MHS," and the cash dividends paid per share of common stock. Except for the fourth quarter of fiscal 1993, all periods presented in the table below were prior to the Distribution. Therefore the stock prices and dividends paid are not indicative of the Company's current stock price or dividend policies. As of December 31, 1993, there were approximately 66,413 holders of record of common stock.
- -------- (1) The Company currently intends to retain future earnings, if any, for use in its business and does not currently anticipate paying dividends on the common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (in millions, except per share amounts)
- -------- (1) Operating results for 1993 include the operations of Marriott International only through the Distribution date of October 8, 1993. These operations had a net pre-tax effect on income of $211 million and are recorded as "Profit from operations distributed to Marriott International" on the Company's consolidated statement of operations for 1993 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 1993. (2) Operating results in 1993 and 1992 included pre-tax costs related to the Distribution totaling $13 million and $21 million, respectively, and a $7 million pre-tax restructuring charge for Host/Travel Plazas in 1993. (3) Operating results in 1990 included pre-tax Restructuring charges and writeoffs, net of certain non- recurring gains, of $153 million related to continuing operations. (4) Operating results in 1989 included pre-tax Restructuring charges and writeoffs of $256 million related to continuing operations, a $231 million pre-tax gain on the transfer of the airline catering division, and a $39 million after-tax charge recorded in conjunction with the planned disposal of restaurant operations. (5) The Company's restaurant operations were discontinued in 1989. (6) Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," was adopted in the first fiscal quarter of 1993. In the second fiscal quarter of 1993, the Company changed its accounting method for assets held for sale. Also, the Company recognized a $5 million loss (net- of-tax) on the completion of the Exchange Offer. (7) Earnings per common share is computed on a fully diluted basis by dividing net income available for common stock by the weighted average number of outstanding common and common equivalent shares, plus other potentially dilutive securities. (8) Includes convertible subordinated debt of $20 million at December 31, 1993, $228 million at January 1, 1993 and $210 million at January 3, 1992.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
As described in Part I, Items 1 & 2, "Business and Properties", on October 8, 1993, the Company completed the Distribution, Exchange Offer and Restructuring. As a result, the assets, liabilities, and business operations of the Company as of December 31, 1993 and for the fiscal year then ended have changed substantially.
Accordingly, the December 31, 1993 consolidated financial statements differ substantially compared to the 1992 consolidated financial statements. In particular, the most significant differences relate to the following:
. The 1992 and 1991 consolidated statements of operations include revenues, operating costs and expenses, corporate expenses, interest expense and interest income of operations distributed to Marriott International on October 8, 1993. In the 1993 consolidated statement of operations, such operations through the Distribution Date are combined and included as "Profit from operations distributed to Marriott International." See Note 2 to the consolidated financial statements.
. As described in Note 1 to the consolidated financial statements, the Company included the sales and operating expenses of its owned hotels in lodging revenues and lodging operating costs and expenses, respectively, prior to the Distribution. Subsequent to the Distribution, lodging revenues represent house profit from these properties. House profit represents hotel operating results less property level expenses excluding depreciation, real and personal property taxes, ground rent, insurance and management fees which are classified as operating costs and expenses.
Due to these substantial differences in comparability between the Company's historical operating results for 1993 versus 1992, management believes that it is more meaningful and relevant in understanding the present and ongoing Company operations to compare the Company's pro forma operating results for 1993 and 1992. Accordingly, the Company's pro forma consolidated statements of operations for fiscal 1993 and 1992 are presented below. These pro forma consolidated statements of operations were prepared as if the Distribution, Exchange Offer, Restructuring and the implementation of the various related agreements entered into with Marriott International, including the lodging management and senior living community leases, occurred at the beginning of each period and include only the operations of the businesses retained by the Company, and exclude, among other items, certain non-recurring costs. These non-recurring costs include (i) costs of the Distribution of $13 million in 1993 and $21 million in 1992, (ii) an extraordinary loss related to the completion of the Exchange Offer of $5 million, net-of-tax, (iii) the cumulative effect of a change in accounting for income taxes ($30 million credit) adopted in the first quarter of 1993 and (iv) the cumulative effect of a change in accounting for assets held for sale ($32 million after-tax charge) adopted in the second quarter of 1993. See the notes to the consolidated financial statements for discussion of the Distribution, Exchange Offer, Restructuring and the related transactions and agreements.
The following pro forma consolidated statements of operations for 1993 and 1992 and the management's discussion and analysis related thereto are presented in the format that the Company intends to use in its future filings. This format breaks down the Company's operations into the Real Estate Group, consisting of the results of all of the Company's owned hotel properties and senior living communities as well as its partnership investments and investments in certain other financial assets, and the Operating Group, consisting of the Host/Travel Plazas Business and certain discontinued restaurant operations. These pro forma consolidated statements of operations do not purport to be indicative of results which may occur in the future.
The following pro forma consolidated statements of operations and related analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto included in Part II, Item 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial information is included on the pages indicated:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Host Marriott Corporation:
We have audited the accompanying consolidated balance sheets of Host Marriott Corporation (formerly Marriott Corporation) and subsidiaries as of December 31, 1993 and January 1, 1993, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three fiscal years in the period ended December 31, 1993. 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 December 31, 1993 and January 1, 1993, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 1993 in conformity with generally accepted accounting principles.
As discussed in Notes 3 and 7 to the consolidated financial statements, in 1993 the Company changed its methods of accounting for assets held for sale and income taxes.
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 & Co.
Washington, D.C. February 25, 1994
HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1993 AND JANUARY 1, 1993 (IN MILLIONS)
See Notes To Consolidated Financial Statements.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FISCAL YEARS ENDED DECEMBER 31, 1993, JANUARY 1, 1993 AND JANUARY 3, 1992 (IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
See Notes To Consolidated Financial Statements.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED DECEMBER 31, 1993, JANUARY 1, 1993 AND JANUARY 3, 1992
See Notes To Consolidated Financial Statements.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 31, 1993, JANUARY 1, 1993 AND JANUARY 3, 1992
See Notes To Consolidated Financial Statements.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The structure of Host Marriott Corporation (the "Company," formerly Marriott Corporation) was substantially altered on October 8, 1993 when the Company distributed the stock of a wholly-owned subsidiary, Marriott International, Inc. ("Marriott International") in a special dividend (see Note 2). The Company owns 127 lodging properties operated under Marriott brand names and managed by Marriott International. The Company also holds minority interests in various partnerships that own an additional 268 properties operated by Marriott International. The Company's properties span several market segments, including full service (Marriott Hotels, Resorts and Suites), moderate-priced (Courtyard by Marriott), extended stay (Residence Inn by Marriott) and economy (Fairfield Inn by Marriott). In addition, the Company owns 14 senior living communities which are leased to Marriott International under long-term leases.
The Company also operates restaurants, gift shops and related facilities at 73 airports, on 14 tollroads (including 93 travel plazas) and at 42 tourist attractions, stadiums and arenas. Many of the Company's concessions operate under branded names.
The Company's financial statements include the results of operations and cash flows of Marriott International through the Distribution Date (see Note 2). Accordingly, the financial disclosures herein do not reflect the results of operations of the Company as it now exists.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries and controlled affiliates. Investments in 50% or less owned affiliates over which the Company has the ability to exercise significant influence are accounted for using the equity method. The Company's equity in net losses of these affiliates is included in corporate expenses. All material intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform with the 1993 presentation.
In late 1992, the Board of Directors approved the special dividend of Marriott International stock (see Note 2). Marriott International's results of operations through the Distribution Date included in the accompanying consolidated financial statements consist of the following:
Fiscal Year
The Company's fiscal year ends on the Friday nearest to December 31 for U.S. operations and on November 30 for most non-U.S. operations. Fiscal 1993 and 1992, which ended December 31, 1993 and January 1, 1993, respectively, include 52 weeks. Fiscal 1991, which ended January 3, 1992, includes 53 weeks.
Revenues
Subsequent to the Distribution (see Note 2), lodging revenues include house profit from the Company's owned hotel properties, and contract services revenues include sales of food, beverage and merchandise at
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
various Host/Travel Plazas locations and lease revenues from the Company's owned senior living communities. House profit represents hotel operating results, less property-level expenses, excluding depreciation, real and personal property taxes, ground rent, insurance and management fees which are classified as operating costs and expenses.
Prior to the Distribution, lodging revenues included room sales and food and beverage sales at both owned and managed hotel properties, franchise fees for franchised hotel properties, and sales of timeshare units. Contract Services revenues included sales of food, beverages and merchandise at various Host/Travel Plazas locations as well as contract revenue from various facility management contracts, distribution service revenues and sales from senior living communities. In 1993, revenues related to Marriott International are included in profits from operations distributed to Marriott International in the accompanying statement of income.
Prior to the Distribution, the Company operated 388 hotels under long-term management agreements whereby payments to owners were based primarily on hotel profits. Working capital and operating results of managed hotels operated with the Company's employees were consolidated because the operating responsibilities associated with such hotels were substantially the same as those for owned and leased hotels. The consolidated financial statements include the following amounts related to managed hotels: current assets and current liabilities of $246 million at January 1, 1993; sales of $2,276 million in 1993, $2,896 million in 1992, and $2,809 million in 1991; and operating expenses, including payments to owners, of $2,148 million in 1993, $2,721 million in 1992, and $2,616 million in 1991.
International Operations
The consolidated statements of income include the following amounts related to non-U.S. subsidiaries and affiliates; sales of $258 million in 1993 (including $223 million related to Marriott International), $355 million in 1992, and $329 million in 1991; and income before income taxes of $26 million in 1993, $24 million in 1992, and $26 million in 1991. International sales and income before income taxes, subsequent to the Distribution, were not material.
Property and Equipment
Property and equipment is recorded at cost, including interest, rent and real estate taxes incurred during development and construction. Replacements and improvements are capitalized.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 40 years for buildings and three to 10 years for furniture and equipment. Leasehold improvements are amortized over the shorter of the asset life or lease term.
Gains upon the sales of properties are recognized at the time of sale or deferred to the extent required by generally accepted accounting principles. Deferred gains are recognized as income in subsequent periods as conditions requiring deferral are satisfied or expire without further cost to the Company.
In cases where management is holding for sale particular lodging properties, the Company assesses impairment based on whether the net realizable value (estimated sales price less costs of disposal) of each individual property to be sold is less than the net book value. 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 their net book value.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Pre-Opening Costs
Costs of an operating nature incurred prior to opening of lodging and senior living service properties are deferred and amortized over three years.
Self-Insurance Programs
Prior to the Distribution Date (see Note 2), 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 program for claims arising subsequent to the Distribution Date. Self-insurance claims arising prior to the Distribution Date continue to be administered by Marriott International.
Earnings Per Common Share
Earnings per common share are computed on a fully diluted basis by dividing net income available for common stock by the weighted average number of outstanding common and common equivalent shares, plus other potentially dilutive securities, aggregating 121.3 million in 1993, 106.5 million in 1992, and 101.5 million in 1991.
During 1993, the Company issued 1.8 million common shares to former holders of certain Senior Notes and debentures of the Company as part of the Exchange Offer (see Note 2), 10.9 million common shares to former holders of the Company's preferred stock and, during 1993 and subsequent to year-end, 9.0 million common shares to holders of the LYONs notes upon their conversion (see Note 10). Supplemental earnings per share, giving effect to the transactions discussed above as if they had occurred as of the first day of the period presented was $.42 and $.74 for the fiscal years ended December 31, 1993 and January 1, 1993, respectively. Weighted average shares outstanding, giving effect to the transactions discussed above as if they had occurred as of the first day of the period presented, were 138 million and 128 million for the fiscal years ended December 31, 1993 and January 1, 1993, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents.
New Statements of Financial Accounting Standards
The Company is required to adopt Statements of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits," and SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," no later than its fiscal year ending December 30, 1994. The Company is also required to adopt SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," no later than its fiscal year ending December 29, 1995. Application of these statements will not have any material effect on the Company's consolidated financial statements.
2. THE DISTRIBUTION
On October 8, 1993 (the "Distribution Date"), Marriott Corporation distributed, through a special tax-free dividend (the "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
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 Distribution Date, Marriott Corporation changed its name to Host Marriott Corporation. As a result of the Distribution, the Company incurred Restructuring costs of $13 million in 1993 and $21 million in 1992. The other notes to the financial statements discuss further the agreements and events relating to the Distribution.
In connection with the Distribution, the Company completed an Exchange Offer ("Exchange Offer") pursuant to which holders of Senior Notes in an aggregate principal amount of approximately $1.2 billion ("Old Notes") exchanged such Old Notes for a combination of (i) cash, (ii) common stock and (iii) New Notes ("New Notes") issued by an indirect wholly-owned subsidiary of the Company, Host Marriott Hospitality, Inc. ("Hospitality"). The coupon and maturity date for each series of New Notes is 100 basis points higher and four years later, respectively, than the series of Old Notes for which it was exchanged (except that the maturity of the New Notes issued in exchange for the Series L Senior Notes due 2012 was shortened by five years). The Company has redeemed all of the old Series F Senior Notes that did not tender in the Exchange Offer, and has secured the old Series I Notes equally and ratably with the New Notes issued in the Exchange Offer. The Exchange Offer was treated as an extinguishment of debt and, accordingly, the Company recognized an extraordinary loss of $5 million, net of taxes of $4 million.
In connection with the Exchange Offer, the Company effected a Restructuring (the "Restructuring"). As a result of the Restructuring, the Company's primary asset is the capital stock of a wholly-owned subsidiary, HMH Holdings, Inc. ("Holdings"). Holdings' primary asset is the capital stock of Hospitality, and Holdings is the borrower under a Revolving Line of Credit with Marriott International. In the Restructuring, most of the Company's real estate and operating assets were transferred to subsidiaries of Hospitality. Certain assets relating to such businesses (the "retained business") were retained directly by the Company and certain of its other subsidiaries (the "retained business subsidiaries"). In addition, HMC Ventures, Inc. ("HMC Ventures") was created as an unrestricted subsidiary that was capitalized subsequent to year- end with approximately $50 million from recent asset dispositions.
The following condensed unaudited pro forma income statement data for the Company is presented as if the Distribution, Exchange Offer and Restructuring had occurred at the beginning of each period shown, and the unaudited pro forma balance sheet data (the 1993 amounts represent historical data) is presented as if the same transactions had occurred at the end of the fiscal year shown. This pro forma data has been presented for informational purposes only. It does not purport to be indicative of the results which may occur in the future.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Interest cost capitalized in connection with the Company's development and construction activities totaled $11 million in 1993, $14 million in 1992, and $55 million in 1991.
Most hotels developed by the Company since the early 1980s were reported as assets held for sale prior to 1992. In early 1992, the Company decided it was no longer appropriate to view sales of lodging properties, subject to operating agreements, as a primary means of long-term financing. Accordingly, the Company discontinued classification of these properties (with an aggregate carrying value of approximately $1,150 million at that time) as assets held for sale.
Following discussions with the Staff of the Securities and Exchange Commission, the Company agreed in the second quarter of 1993 to change its method of determining net realizable value of assets reported as held for sale. The Company previously determined net realizable value of such assets on a property-by-property basis in the case of full service hotels, resorts and suites, and on an aggregate basis, by hotel brand, in the case of Courtyard hotels, Fairfield Inns and Residence Inns. Beginning in the second fiscal quarter of 1993 and thereafter, under the Company's new accounting policy, net realizable value of all assets held for sale is determined on a property-by- property basis. The after-tax cumulative effect of this change on periods prior to the second quarter of 1993 of $32 million is reflected as a cumulative effect of a change in accounting for assets held for sale in the accompanying consolidated statement of income for the fiscal year ended December 31, 1993. The reduction in the annual depreciation charge as a result of this change did not have a material effect on results of operations.
The following amounts have been adjusted to show the pro forma effect of this change had the new accounting policy been applied in prior years. There is no pro forma impact on the results for 1993. All amounts are in millions, except per common share amounts.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) During the fourth quarter of 1993, the Company engaged in formal negotiations to sell the majority of its Fairfield Inns and executed a letter of intent in January 1994. In the fourth quarter of 1993, the Company considered these hotels as held for sale and recorded a pre-tax charge to earnings of $11 million to write-down the carrying value of 15 such properties to their individual estimated net realizable value. Although these individual hotels had an indicated net realizable value below their carrying value, the proposed transaction is expected to result in an aggregate gain.
4. INVESTMENTS IN AFFILIATES
Investments in affiliates consist of the following:
Hotel properties owned by affiliates generally were acquired from the Company in connection with limited partnership offerings. The Company or one of its subsidiaries typically serve as a general partner of each partnership and the hotels are operated under long-term agreements by Marriott International. Included in the 48 Marriott hotels owned by affiliates is the Company's 49% interest in one international hotel, in Budapest, Hungary.
At year-end, the Company owned a 50% interest in Times Square Hotel Company ("TSHCO"), the owner of the New York Marriott Marquis, and held security interests in an additional 39% of the partnership interests as collateral for loans made to certain partners. The partners were in default on the loans and the Company, for accounting purposes, realized an in-substance foreclosure of their partnership interests. In early 1994, the Company foreclosed on a 29% interest and finalized arrangements to transfer another 7% interest to the Company. In 1993, the Company began reporting substantially all the losses of TSHCO and on December 31, 1993 began consolidating TSHCO. The Company's balance sheet has been impacted by an increase in debt and other long-term liabilities of approximately $451 million, and a corresponding increase in assets (principally property and equipment).
Of the $451 million of long-term liabilities of TSHCO, $375 million represents a non-recourse first mortgage loan, $27 million represents a non- recourse second mortgage loan, and $49 million represents non-recourse deferred ground rent and related accrued interest. The first mortgage loan matured December 7, 1993 and a preliminary agreement has been reached for the extension of the loan for a term of five years, which is subject to final approval of the lenders and completion of definitive documentation. The preliminary agreement calls for a paydown of the loan by $37 million at, or before, closing. However, there can be no assurance that a final agreement will be reached and that the loan will not enter into default.
In December 1993, the Company sold its 15% interest in the partnership owning the Boston Copley Marriott Hotel for $10.4 million.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1993, the Company sold portions of its equity interests in Residence Inns USA partnership for $31 million. These sales reduced the Company's ownership by the fourth quarter of 1993 to 16.6% and allowed the Company to be released from certain debt guarantee obligations. Accordingly, the Company is no longer consolidating the partnership and has removed the $64 million of debt and $96 million of property, plant and equipment from its consolidated balance sheet at December 31, 1993. A gain on this transaction totalling $12 million was deferred and is being amortized over three years.
In the fourth quarter of 1993, a Company-owned addition to a hotel owned by a partnership in which the Company is a general partner was taken through foreclosure by the hotel's lender. The Company's investment in the addition was written off at that time.
The Company recorded a net gain of $4 million in 1993 as a result of the aforementioned affiliate transactions.
The Company's equity in three affiliates exceeded its proportionate share of net assets by $28 million at December 31, 1993. This excess is being amortized over the estimated useful lives of the related assets.
Receivables from affiliates are reported net of reserves of $196 million at December 31, 1993 and $266 million at January 1, 1993. Receivables from affiliates at December 31, 1993 included a $154 million mortgage note at 9% which amortizes through 2003, and net debt service and other advances totalling $20 million which are generally secured by subordinated liens on the properties. The Company has committed to advance additional amounts to affiliates, if necessary, to cover certain debt service requirements and has accrued $7 million in connection therewith. Such commitments are limited, in the aggregate, to an additional $271 million at December 31, 1993. Net amounts funded under these commitments totalled $14 million in 1993 and $22 million in 1992.
The Company's pre-tax income from affiliates includes the following:
Combined summarized balance sheet information for the Company's affiliates follows:
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Combined summarized operating results reported by these affiliates follow:
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
The Company's intangible assets at December 31, 1993 primarily arose from purchase business combinations and are being amortized on a straight-line basis over periods of five to 40 years. The Marriott Management Services contracts, hotel management and franchise agreements, and most of the goodwill were distributed to Marriott International on the Distribution Date. Amortization expense totaled $26 million in 1993 and $33 million in 1992 and 1991.
6. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), during the first quarter of 1993. Prior to such adoption, the Company deferred the past tax effects of timing differences between amounts recorded for financial reporting purposes and taxable income. SFAS 109 requires the recognition of deferred tax assets and liabilities equal to the expected future tax consequences of temporary differences.
The $30 million cumulative credit resulting from this change in accounting principle has been reflected as a cumulative effect of a change in accounting for income taxes in the consolidated statements of income. Adjustments to the carrying values of certain assets and liabilities acquired in prior purchase business combinations, required under SFAS 109, did not affect the Company's income before income taxes for 1993.
Total deferred tax assets and liabilities at December 31, 1993 were as follows (in millions):
The valuation allowance required under SFAS 109 primarily represents prior purchase business combination tax credits ($17 million) and net operating loss carryforwards (NOLs) ($4 million), the benefits of which were not previously recorded, but which have been recorded under SFAS 109 as deferred tax assets with an offsetting valuation allowance. Any subsequent reduction in the valuation allowance related to the prior purchase business combination tax credits and NOLs will be recorded as a reduction of income tax expense. There was no change in the valuation allowance during 1993.
The tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax assets and liabilities as of December 31, 1993 follows (in millions):
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes consists of:
Prior to 1993, deferred income taxes resulted from timing differences in the recognition of income and expenses for financial and tax reporting purposes. Tax effects of these differences, as reported under the Company's previous method of accounting for income taxes, consist of the following:
At December 31, 1993, the Company has net operating loss carryforwards of $12 million which expire in 1997 through 2001. Additionally, the Company has approximately $41 million of alternative minimum tax credit carryforwards which do not expire, and $9 million of other tax credits which expire through 2007.
A reconciliation of the U.S. statutory tax rate to the Company's effective income tax rate follows:
As part of the Distribution, the Company and Marriott International entered into a tax sharing agreement which reflects each party's rights and obligations with respect to deficiencies and refunds, if any, of federal, state or other taxes relating to the businesses of the Company and Marriott International prior to the Distribution.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Cash paid for income taxes, net of refunds received, was $64 million in 1993, $93 million in 1992, and $36 million in 1991.
8. LEASES
Future minimum annual rental commitments for all non-cancelable leases are as follows:
Certain of the leases included above relate to facilities used in the discontinued 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 $194 million payable to the Company under non-cancelable subleases.
The Company remains contingently liable at December 31, 1993 on certain leases relating to divested properties. Such contingent liabilities aggregated $195 million. However, management considers the likelihood of any substantial funding related to these leases to be remote.
Rent expense consists of:
The Company leases its 14 owned senior living communities to Marriott International for initial terms of 20 years, with renewal options covering an additional 20 years. The leases require aggregate fixed rental payments of $28 million per year, with all of the communities open, and additional rentals equal to 4.5% of certain annual revenues from operation of the communities in excess of $72 million on a combined basis beginning in 1994.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. LONG-TERM DEBT
Debt consists of the following:
In connection with the Distribution, the Company entered into the Revolving Line of Credit with Marriott International. Pursuant to the Revolving Line of Credit, Holdings may borrow up to $630 million for certain permitted uses from Marriott International through 2007, with all unpaid advances due August 31, 2008. Borrowings under the Revolving Line of Credit bear interest at LIBOR plus 4%, with any interest in excess of 10.5% per annum deferred. An annual fee of one percent is charged on the unused portion of the commitment. The Revolving Line of Credit is guaranteed by the Company and certain subsidiaries.
The Revolving Line of Credit imposes certain restrictions on the ability of the Company and certain of its subsidiaries to incur additional debt, impose liens or mortgages on their properties (other than various types of liens arising in the ordinary course of business), extend new guarantees (other than replacement guarantees), pay dividends, repurchase their common stock, make investments and incur capital expenditures.
Hospitality is the issuer of the New Notes secured by a pledge of the stock of, and guaranteed by, Holdings, Hospitality and certain of its subsidiaries. The indenture governing these notes contains covenants that, among other things, limit the ability of Hospitality to pay dividends and make other distributions and restricted payments. It also limits the ability of Hospitality and its subsidiaries to incur additional debt, create additional liens on their assets, engage in certain transactions with related parties, enter into agreements which restrict a subsidiary in paying dividends or making certain other payments and limit the activities and businesses of Holdings. The net assets of Hospitality at December 31, 1993 were $655 million, substantially all of which are restricted.
The Company has available up to $125 million of first mortgage financing from Marriott International for approximately 60% of the construction and development costs of the Philadelphia Convention Center Hotel. As of December 31, 1993, the outstanding loan balance was approximately $40 million. The loan bears interest at LIBOR plus 3% for the period ending two years after construction. For the following 10 years, the loan bears interest at 10% per annum with an additional 2% per annum deferred.
During 1993, the Company defeased $100 million of Old Series G Senior Notes due in February 1994 for an amount substantially equal to its net carrying value.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1993, the Company was party to $500 million aggregate notional amount of interest rate exchange agreements. Under these agreements, the Company collects interest at fixed rates (average rate of 7.6% at December 31, 1993), and pays interest based on specified floating interest rates (average rate of 3.5% at December 31, 1993) through 1997.
Aggregate debt maturities at December 31, 1993, excluding capital lease obligations, are (in millions):
- -------- * Includes the outstanding balance of the TSHCO first mortgage loan pending closing of the loan extension (see Note 4).
Cash paid for interest, net of amounts capitalized, was $214 million in 1993, $209 million in 1992, and $224 million in 1991.
Deferred financing costs, which are included in other assets, amounted to $42 million and $32 million at December 31, 1993 and January 1, 1993, respectively.
10. CONVERTIBLE SUBORDINATED DEBT
In June 1991, the Company issued $675 million (principal amount at maturity) of zero coupon convertible subordinated debt in the form of Liquid Yield Option Notes (LYONs) due 2006. Net proceeds from the LYONs issuance approximated $200 million, representing a yield to maturity of 8.25% per annum.
Pursuant to the LYONs Allocation Agreement which was executed in connection with the Distribution, Marriott International assumed 90% and the Company retained 10% of the debt obligations evidenced by the LYONs. The LYONs were convertible into 13.277 shares of the Company common stock and 13.277 shares of Marriott International common stock for each $1,000 principal amount of LYONs.
On December 13, 1993, the Company initiated a call of the LYONs to be redeemed on January 25, 1994. Substantially all of the LYONs' holders elected to convert their LYONs into the Company's common stock and Marriott International common stock prior to the redemption. LYONs were converted into 8.3 million shares of the Company's common stock through December 31, 1993. Subsequent to year-end, substantially all of the remaining LYONs were converted into .7 million additional shares of the Company's common stock.
11. SHAREHOLDERS' EQUITY
Three hundred million shares of common stock, with a par value of $1 per share, are authorized, of which 129.7 million and 105.0 million were issued as of December 31, 1993 and January 1, 1993, respectively. One million shares of preferred stock, without par value, are authorized, of which 286 (equivalent to 286,000 depositary shares) were issued as of December 31, 1993. Additional paid-in capital at December 31, 1993 includes deferred compensation credits of $10 million.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1991, the Company issued four million non-voting depositary shares, each representing 1/1,000th share of 8.25% Series A cumulative convertible preferred stock (no par value) for net proceeds totaling $195 million. Each depositary share was convertible at any time at the option of the holder into approximately 2.87 shares of common stock. In September 1993, approximately 92% or 3.7 million depositary shares were converted into 10.6 million shares of Company common stock. As a result, holders of the common shares issued upon conversion participated in the Distribution. On September 30, 1993, the Company's Board of Directors adjusted the conversion rate of the Company's remaining depositary shares to reflect the Distribution. Each depositary share is currently convertible at any time at the option of the holder into 19.16 shares of common stock of the Company. Dividends, if declared, are payable quarterly. The Company intends to pay dividends only to the extent of earnings, and the Company did not pay a dividend in the fourth quarter of 1993. Beginning on January 15, 1996, the Series A preferred stock is redeemable, in whole or in part, at the Company's option, at $52.48 per depositary share, declining ratably to $50 per depositary share in 2002, plus accrued and unpaid dividends to the redemption date.
In February 1989, the Board of Directors adopted a shareholder rights plan under which a dividend of one preferred stock purchase right was distributed for each outstanding share of the Company's common stock to shareholders of record on February 20, 1989. Each right entitles the holder to buy 1/1,000th of a share of a newly issued series of junior participating preferred stock of the Company at an exercise price of $150 per share. The rights will be exercisable 10 days after a person or group acquires beneficial ownership of 20% or more of the Company's common stock, or begins a tender or Exchange Offer for 30% or more of the Company's common stock. Shares owned by a person or group on February 3, 1989 and held continuously thereafter are exempt for purposes of determining beneficial ownership under the rights plan. The rights are nonvoting and will expire on February 2, 1999, unless exercised or previously redeemed by the Company for $.01 each. If the Company is involved in a merger or certain other business combinations not approved by the Board of Directors, each right entitles its holder, other than the acquiring person or group, to purchase common stock of either the Company or the acquirer having a value of twice the exercise price of the right.
In connection with the class action settlement, the Company has agreed to issue warrants to purchase up to 7.7 million shares of the Company's common stock (see Note 17).
12. EMPLOYEE STOCK PLANS
Total shares of common stock reserved under employee stock plans at December 31, 1993 are:
Under the comprehensive stock plan (the "comprehensive plan"), the Company may award to participating employees (i) options to purchase the Company's common stock, (ii) deferred shares of the Company's common stock and (iii) restricted shares of the Company's common stock. In addition, the Company has an employee stock purchase plan (the "stock purchase plan"). The principal terms and conditions of the two plans are summarized on the following page.
Employee stock options may be granted to officers and key employees at not less than fair market value 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. In connection with the Distribution, the Company issued
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) an equivalent number of Marriott International options and adjusted the exercise prices of its options then outstanding based on the relative trading prices of the common stock of the two companies. Therefore, the options outstanding at December 31, 1993 reflect these revised exercise prices. Option activity is summarized as follows:
Deferred stock incentive plan shares granted to officers and key employees after 1990 generally vest over 10 years in annual installments commencing one year after the date of grant. Certain employees may elect to defer payments until termination or retirement. Deferred stock incentive plan shares granted in 1990 and prior years generally vest in annual installments commencing one year after the date of grant and continuing until retirement. Employees also could elect to forfeit one-fourth of their deferred stock incentive plan award in exchange for accelerated vesting over a 10-year period. The Company accrues compensation expense for the fair market value of the shares on the date of grant, less estimated forfeitures. In 1993, 1992 and 1991, 489,000, 671,000 and 1,180,000 shares were granted, respectively, under this plan.
In 1993, restricted stock plan shares under the comprehensive plan were issued to officers and key executives and will be distributed over the next three to five years in annual installments based on continued employment and the attainment of certain performance criteria. The Company recognizes compensation expense over the restriction period equal to the fair market value of the shares on the date of issuance adjusted for forfeitures, and where appropriate, the level of attainment of performance criteria and fluctuations in the fair market value of the stock. Prior to 1993, restricted stock shares were issued to officers and key employees and are distributed over 10 years in annual installments, subject to certain prescribed conditions including continued employment. The Company recognizes compensation expense on these pre- 1993 awards over the restriction period equal to the fair market value of the shares on the date of issuance. The Company issued 3,537,000, 32,000 and 40,000 shares under these plans in 1993, 1992 and 1991, respectively.
Under the terms of the stock purchase plan, eligible employees may purchase common stock through payroll deductions at the lower of market value at the beginning or end of the plan year.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. PROFIT SHARING PLANS 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. Company contributions are determined annually by the Board of Directors, and totaled $20 million for 1993, $25 million for 1992, and $24 million for 1991.
The Company provides medical benefits to a limited number of retired employees meeting restrictive eligibility requirements. The Company's adoption of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" during 1992 did not have any material effect.
14. HOST/TRAVEL PLAZAS RESTRUCTURING
In November 1993, the Company's Host/Travel Plazas Business announced a plan to redesign its operations structure to improve the effectiveness and competitiveness of the business. Implementation of the new structure is expected to be completed in the first quarter of 1994. The Company will incur costs of approximately $7 million, principally for severance, relocation, and the closing of certain offices. The Company took a restructuring charge in the fourth quarter of 1993 to reflect these costs.
15. DISPOSITIONS
During the fourth quarter of 1993, the Company realized proceeds of approximately $42 million on the disposition of two preferred stock investments.
In February 1992, the Company sold 13 Courtyard hotels for $146 million in a sale/leaseback transaction. The Company also sold seven full service hotels in 1992, for total proceeds of $200 million. Pre-tax gains on these full service hotel sales of approximately $15 million were offset by adjustments to previously established reserves, resulting in no net gain or loss.
In 1992 and 1991, the Company sold with recourse certain timeshare notes receivable taken by its vacation resorts division in connection with the sale of timesharing units. Net proceeds from these transactions totaled $34 million in 1992 and $73 million in 1991.
During 1991, the Company sold four Courtyard hotels to the Marriott Corporation Employees' Profit Sharing, Retirement and Savings Plan and Trust for total proceeds of $33 million. As a result of the Distribution, Marriott International currently operates these hotels under a long-term agreement.
In December 1989, the Company announced a decision to sell its fast food and family restaurant operations. A pre-tax provision of $61 million was recorded at that time to reduce restaurant assets to net realizable value, and to provide for other costs related to the discontinuance of these businesses. In April 1990, the Company sold its Roy Rogers fast food restaurant division to Hardee's Food Systems, Inc. for $365 million in cash, plus the assumption of certain liabilities by the buyer. Sale proceeds were reported as a reduction of the Company's remaining investment in restaurant properties held for sale. The Company sold 10 family restaurants in 1993, 203 in 1992 and 138 in 1991 for cash proceeds of $4 million, $23 million and $43 million, respectively.
16. RELATIONSHIP WITH MARRIOTT INTERNATIONAL
In connection with the Distribution, the Company and Marriott International have entered into various agreements which provide, among other things, that (i) lodging properties owned by the Company as of the Distribution Date will be managed by Marriott International under agreements with initial terms of 20 years and which are subject to renewal at the option of Marriott International for up to three additional 10-year terms, (ii) the Company will lease its owned senior living communities to Marriott International (see Note
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8), (iii) Marriott International will guarantee the Company's performance in connection with certain loans and other obligations, (iv) the Company can borrow up to $630 million for certain permitted uses under the Revolving Line of Credit and up to $125 million of first mortgage financing for construction of the Philadelphia Convention Center Hotel (see Note 9) and (v) Marriott International assumes 90% of the LYONs obligation (see Note 10).
From the Distribution Date through December 31, 1993, the Company paid to Marriott International $5 million in lodging management fees, $5 million in interest and commitment fees under the Revolving Line of Credit and Philadelphia Convention Center Hotel mortgage, and $3 million under the various transitional services agreements, and earned $5 million under the senior living community leases during 1993. The Company purchased $14 million of food and supplies in 1993, after the Distribution Date, from affiliates of Marriott International.
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. Marriott International also has the right of first offer if the Company decides to sell the Host/Travel Plazas Business.
17. LITIGATION
In March 1993, the Company reached agreement in principle (the "class action settlement") with certain holders and recent purchasers of the Company's Old Notes, who had either instituted or threatened litigation in response to the Distribution. In August 1993, the United States District Court approved the settlement with the members of certain classes of the Company's holders and recent purchasers of the Senior Notes.
A group of bond holders, purported to have at one time owned approximately $120 million of Senior Notes, and another group purporting to hold approximately $7.5 million of Senior Notes, have opted out of the settlement. The two groups allege that laws had been violated in connection with the sale by the Company of certain series of its Senior Notes and debentures and claim damages of approximately $30 million. The Company believes the claims are without merit and that the ultimate outcome of such litigation pursued by those who opted out of the settlement will not have a material effect on the financial condition or results of operations of the Company.
The class action settlement included a settlement for the benefit of certain persons who sold Senior Notes of the Company after October 5, 1992, the date on which the planned Distribution was publicly announced and, therefore, were not in position to participate in the Exchange Offer. In connection with this settlement, the Company has agreed to issue warrants to purchase up to 7.7 million shares of Host Marriott common stock, subject to acceptance by 100% of the class of claimants. Such warrants would be exercisable for five years, at $8.00 per share during the first three years and $10.00 per share during the last two years.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of certain financial assets and liabilities and other financial instruments are shown below.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 current assets and current liabilities, the Revolving Line of Credit and other notes are assumed to be equal to their carrying value. Senior Notes are valued based on quoted market prices.
The fair value of affiliate debt service commitments is based on the net expected future payments discounted at risk adjusted rates. A value was not assigned to commitments with no expected fundings. The carrying amount represents the Company's remaining unfunded commitments at December 31, 1993 and January 1, 1993.
The fair value of interest rate swap agreements is based on the estimated amount the Company would receive to terminate the swap agreements. The carrying amount represents the aggregate notional amount of the agreements at December 31, 1993 and January 1, 1993.
19. BUSINESS SEGMENTS
The Lodging segment is, subsequent to the Distribution, comprised of the ownership business which includes the owned properties of Marriott Hotels, Resorts and Suites, Courtyard hotels, Residence Inns and Fairfield Inns. Prior to the Distribution, this segment also included the lodging management and vacation ownership resort operations which were distributed to Marriott International.
The Contract Services segment now consists of food, beverage and merchandise operations at airports, on tollroads and at stadiums, arenas and other attractions and owned senior living communities. The business units providing food and facilities management services, operation of senior living communities, and distribution services of food and related products were also distributed to Marriott International.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The results of operations of the Company's business segments are reported in the consolidated statement of income. Segment operating expenses include selling, general and administrative expenses directly related to the operations of the businesses, aggregating $61 million in 1993 (excluding $316 million related to Marriott International), $457 million in 1992 and 1991. Gains and losses resulting from the disposition of assets identified with each segment are included in segment operating profit.
The following table presents detail of lodging segment revenues and expenses:
- -------- (1) Includes revenues and expenses for the 1993 period prior to the Distribution Date (40 weeks).
20. QUARTERLY FINANCIAL DATA
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The first three quarters consist of 12 weeks each, and the fourth quarter includes 16 weeks.
Fourth quarter 1993 results include pre-tax costs of $13 million and fourth quarter 1992 results include pre-tax costs of $21 million related to the Distribution (see Note 2). Also, fourth quarter 1993 results include a charge of $11 million related to a write-down of lodging properties (see Note 3), a charge of $7 million related to the Host/Travel Plazas Business restructuring (see Note 14) and the extraordinary loss of $5 million (net-of-tax) on the extinguishment of debt (see Note 2). As a result of the Distribution, Marriott International's operations have been substantially eliminated from the fourth quarter 1993 data.
The sum of the earnings (loss) per common share for the four quarters in 1993 and 1992 differs from the annual earnings per common share due to the required method of computing the weighted average number of shares in the respective periods.
The first and second quarter 1993 income and per share data have been restated to reflect the cumulative effect of the change in accounting for assets held for sale as if it had occurred in the first quarter of 1993 (see Note 3). First quarter 1993 earnings per common share was also impacted by the Company's accounting change for income taxes (see Note 7).
21. SUBSEQUENT EVENTS
On January 27, 1994 the Company completed the issuance of 20.1 million shares of common stock for net proceeds of $231 million. HMC Acquisitions, Inc. ("HMC Acquisitions"), a newly-formed subsidiary, was capitalized with a portion of the proceeds from the common stock offering. The amount used to capitalize HMC Acquisitions and any earnings therefrom will be available for investment on an unrestricted basis. HMC Acquisitions is a guarantor under the Revolving Line of Credit.
ITEM 9.
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 1994 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.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, 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:
All other schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto.
(3) EXHIBITS
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS FORM 10-K TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THIS 31ST DAY OF MARCH, 1994.
Host Marriott Corporation
By /s/ Matthew J. Hart ----------------------------------- Matthew J. Hart Executive Vice President and Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS FORM 10-K HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE ---------- -----
/s/ Stephen F. Bollenbach President, Chief Executive Officer - ------------------------------------- (Principal Executive Officer) and Stephen F. Bollenbach Director
/s/ Matthew J. Hart Executive Vice President and Chief - ------------------------------------- Financial Officer (Principal Matthew J. Hart Financial Officer)
/s/ Jeffrey P. Mayer Senior Vice President--Finance and - ------------------------------------- Corporate Controller (Principal Jeffrey P. Mayer Accounting Officer)
/s/ Richard E. Marriott Chairman of the Board of Directors - ------------------------------------- Richard E. Marriott
/s/ R. Theodore Ammon Director - ------------------------------------- R. Theodore Ammon
/s/ J. W. Marriott, Jr. Director - ------------------------------------- J. W. Marriott, Jr.
/s/ Ann Dore McLaughlin Director - ------------------------------------- Ann Dore McLaughlin
/s/ Harry L. Vincent, Jr. Director - ------------------------------------- Harry L. Vincent, Jr.
/s/ Andrew J. Young Director - ------------------------------------- Andrew J. Young
SCHEDULE III PAGE 1 OF 5
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
- -------- 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 III PAGE 2 OF 5
HOST MARRIOTT CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
Fiscal years ended December 31, 1993, January 1, 1993 and January 3, 1992
- -------- 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 III PAGE 3 OF 5
HOST MARRIOTT CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
Fiscal years ended December 31, 1993, January 1, 1993 and January 3, 1992
- -------- 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 III PAGE 4 OF 5
HOST MARRIOTT CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
A) On October 8, 1993, Host Marriott Corporation (the "Parent Company", formerly Marriott Corporation) completed a distribution of Marriott International common stock and an exchange offer. See Note 2 to the Company's consolidated financial statements for more information about the distribution and exchange offer.
In connection with the exchange offer, the Parent Company effected a Restructuring (the "Restructuring"). As a result of the Restructuring, the Parent Company's primary asset is the capital stock of a wholly-owned subsidiary, HMH Holdings, Inc. ("Holdings"). Holdings' primary asset is the capital stock of Host Marriott Hospitality, Inc. ("Hospitality"), and Holdings is the borrower under a $630 million Revolving Line of Credit with Marriott International.
In the Restructuring, most of the Parent Company's real estate and operating assets were transferred to subsidiaries of Hospitality. The remaining assets were retained directly by the Parent Company and certain of its other subsidiaries (the "Retained Businesses") and are unrestricted.
Hospitality is the issuer of Senior Notes secured by a pledge of the stock of, and guaranteed by, Holdings, Hospitality and certain of its subsidiaries. The indenture governing these Notes contain covenants that, among other things, limit the ability of Hospitality to pay dividends and make other distributions and restricted payments, incur additional debt, create additional liens on its subsidiaries' assets, engage in certain transactions with related parties, enter into agreements which restrict a subsidiary in paying dividends or making certain other payments and limit the activities and businesses of Holdings. At December 31, 1993, substantially all of Hospitality's net assets are restricted.
Accordingly, the accompanying financial statements present the operations of the Parent Company and Retained Businesses with the investment in, and operations of, Holdings and Hospitality presented on the equity method of accounting.
B) The accompanying financial statements present the financial position, results of operations and cash flows of the Parent Company and Retained Businesses as if the organizational structure described in Note A was in place for all periods presented. Marriott Corporation's historical basis in the assets and liabilities of the Parent Company and Retained Businesses has been carried over. All material intercompany transactions between the companies have been eliminated.
C) Investment in and advances to Holdings and long-term debt includes $87 million and $1,344 million of debt at December 31, 1993 and January 1, 1993, respectively, which has been "pushed down" to Hospitality on its financial statements. Related interest expense of $94 million, $125 million and $89 million in fiscal 1993, 1992 and 1991, respectively, is included in interest expense in the accompanying condensed statements of income.
Aggregate debt maturities at December 31, 1993 are (in millions):
S-4
SCHEDULE III PAGE 5 OF 5
HOST MARRIOTT CORPORATION CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION--(CONTINUED)
D) The accompanying statements of income reflect the equity in earnings of Holdings, including its wholly-owned subsidiary Hospitality after elimination of interest expense (see Note C) and before income taxes. Holdings is included in the consolidated income tax returns of Host Marriott Corporation.
E) Corporate expenses in 1993 and 1992 reflect pre-tax costs of $13 million and $16 million, respectively, related to the distribution discussed in Note A.
S-5
SCHEDULE V
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
PROPERTY AND EQUIPMENT (IN MILLIONS)
- -------- (1) Principally the sale of family restaurants and four Courtyard hotels. (2) Principally the sale of seven full service hotels and thirteen Courtyard hotels. (3) Principally the distribution of assets to Marriott International offset by the impact of consolidating the New York Marriott Marquis Hotel.
S-6
SCHEDULE VI
HOST MARRIOTT CORPORATION AND SUBSIDIARIES ACCUMULATED DEPRECIATION AND AMORTIZATION
PROPERTY AND EQUIPMENT (IN MILLIONS)
- -------- (1) Principally the distribution of assets to Marriott International offset by the impact of consolidating the New York Marriott Marquis Hotel.
S-7
SCHEDULE X
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION (IN MILLIONS)
See Accompanying Notes to Condensed Financial Information
S-8