ITEM 3. LEGAL PROCEEDINGS
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 Class Action Settlement. In connection with this settlement, the Company issued warrants in 1994 to purchase up to 7.7 million shares of Host Marriott common stock. Such warrants are exercisable for five years from the Distribution Date, at $8.00 per share during the first three years and $10.00 per share during the last two years.
A group of bondholders (the "PPM Group"), who 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, opted out of the Class Action Settlement. The PPM Group alleged that federal securities laws had been violated in connection with the sale by the Company of certain series of its Senior Notes and debentures and claimed damages of approximately $30 million. The group purporting to hold $7.5 million of Senior
Notes settled with the Company in April 1994. Under the terms of the settlement, the Company repurchased the Senior Notes at their par value.
In September 1994, the Company settled with certain members of the PPM Group whose claims represent 40% of the PPM Group's aggregate claims. The claims of the remainder of the PPM Group went to trial in September 1994, and in October 1994 the judge declared a mistrial based on the inability of the jury to reach a verdict. In January 1995, the judge granted the Company's motion for summary judgment to dismiss the PPM Group's claims as a matter of law. An appeal was filed by the PPM Group in February 1995.
The Company believes that all claims of the PPM Group are without merit and that the appeal will not be successful.
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.
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 the cash dividends paid per share of common stock. All periods presented in the table below prior to the fourth quarter of 1993 are prior to the Distribution. Therefore those stock prices and dividends paid are not indicative of the Company's current stock price or dividend policies. As of December 30, 1994, there were approximately 72,000 holders of record of common stock.
-------- (1) Pre-Distribution (2) Post-Distribution
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (in millions, except per share amounts)
-------- (1) Certain revenues and costs and expenses for 1993 have been reclassified to conform to the Company's new income statement presentation. (2) Operating results for 1993 include the operations of Marriott International through the Distribution date of October 8, 1993. These operations had a net pre-tax effect on 1993 pre-tax income of $211 million. They 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 revenues, 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. (3) 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 the Operating Group in 1993. (4) 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 extraordinary loss (net-of-tax) on the completion of the Exchange Offer. (5) Earnings (loss) per common share is computed on a fully diluted basis by dividing net income (loss) available for common stock by the weighted average number of outstanding common and common equivalent shares, plus other potentially dilutive securities. Common equivalent shares and other potentially dilutive securities have been excluded from the weighted average number of outstanding common shares for 1994, as they are antidilutive. (6) Includes convertible subordinated debt of $20 million at December 31, 1993, $228 million at January 1, 1993 and $210 million at January 3, 1992. (7) Operating results in 1994 include a $6 million extraordinary loss, net-of- taxes of $3 million, on the required redemption of New Notes. Operating results in 1990 included pre-tax restructuring charges and write-offs, net of certain non-recurring gains, of $153 million related to continuing operations. (8) Operating results in 1990 included pre-tax restructuring charges and write- offs, net of certain non-recurring gains, of $153 million related to continuing operations.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
As described in Part I, Items 1 & 2, "Business and Properties", the Company's assets, liabilities and business operations substantially changed when the Company completed the Distribution, Exchange Offer and Restructuring on October 8, 1993. Because of these changes, the fiscal year 1994 historical consolidated financial statements differ substantially compared to the 1993 and 1992 historical consolidated financial statements.
Management believes that it is more meaningful and relevant in understanding the present and ongoing Company operations to compare the Company's historical 1994 operating results to the pro forma results for 1993 and to compare the pro forma operating results for 1993 to the pro forma operating results for 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, accounting changes and extraordinary losses. 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 adopted as of January 1, 1994 and reflect the impact of the Distribution and related transactions. 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 food, beverage and merchandise operations at airports, travel plazas and other locations. These pro forma consolidated statements of operations do not purport to be indicative of results which may occur in the future.
The following 1994 historical and 1993 and 1992 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 30, 1994 and December 31, 1993, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period ended December 30, 1994. 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 30, 1994 and December 31, 1993, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 30, 1994 in conformity with generally accepted accounting principles.
As discussed in Notes 3 and 6 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 LLP
Washington, D.C. February 24, 1995
HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 1994 AND DECEMBER 31, 1993 (IN MILLIONS)
See Notes to Consolidated Financial Statements.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 30, 1994 AND DECEMBER 31, 1993 (IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
See Notes to Consolidated Financial Statements.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS--(CONTINUED)
FISCAL YEARS ENDED DECEMBER 30, 1994 AND DECEMBER 31, 1993 (IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
See Notes to Consolidated Financial Statements.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JANUARY 1, 1993 (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 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993
See Notes to Consolidated Financial Statements.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993 AND JANUARY 1, 1993
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 (the "Distribution Date") when the Company distributed the stock of a wholly-owned subsidiary, Marriott International, Inc. ("Marriott International") in a special dividend (the "Distribution"). See Note 2 for a description of the Distribution and related transactions. As of December 30, 1994, the Company owned 119 lodging properties generally operated under Marriott brand names and generally managed by Marriott International. The Company also holds minority interests in various partnerships that own over 260 additional properties operated by Marriott International. The Company's properties span several market segments, including full-service (hotels, resorts and suites), moderate-priced (Courtyard by Marriott), and extended-stay (Residence Inn by Marriott).
The Company also operates restaurants, gift shops and related facilities at over 70 airports, on 14 tollroads (including over 95 travel plazas) and at more than 35 tourist attractions, stadiums and arenas. Many of the Company's concessions operate under branded names utilizing franchise and license agreements.
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 income (losses) of these affiliates is included in the Real Estate Group's other operating costs and expenses for 1994 and 1993. All material intercompany transactions and balances have been eliminated.
The Company's financial statements include the results of operations and cash flows of Marriott International through the Distribution Date. Marriott International's results of operations through the Distribution Date included in the accompanying consolidated financial statements consist of the following:
Financial Statement Presentation
As a result of the Distribution and its effect on the structure of the Company, the Company has altered its financial statement presentation to better reflect the Company's current business segments and operating environment. Certain financial statement information for 1993, as presented in prior filings, has been reformatted and reclassified to reflect the Company's current business segments and operating environment. Additionally, the Company's assets are primarily related to its Real Estate Group and, accordingly, the balance sheet has been presented in a non-classified format. Financial statement information for 1992 is presented as previously filed.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 1994, 1993 and 1992, which ended December 30, 1994, December 31, 1993 and January 1, 1993 for U.S. Operations, respectively, include 52 weeks.
Revenues and Expenses
Subsequent to the Distribution, revenues for the Real Estate Group include house profit from the Company's owned hotel properties, lease rentals for the Company's owned senior living communities and net gains (losses) on property transactions. 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. Operating Group revenues and expenses include sales and related costs of food, beverage and merchandise concession operations of airports, travel plazas and other locations.
Prior to the Distribution, Real Estate Group, or Lodging, revenues included room sales and food and beverage sales at both owned and managed hotel properties, franchise fees for franchised hotel properties, sales of timeshare units, and sales from senior living communities. Operating Group, or Contract Services, revenues included sales of food, beverages and merchandise at various airports, travel plazas and other locations, as well as contract revenue from various facility management contracts, and distribution service revenues. In 1993, revenues related to Marriott International are included in profits from operations distributed to Marriott International in the accompanying statement of operations.
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.
Earnings (Loss) Per Common Share
Earnings (loss) per common share are computed on a fully diluted basis by dividing net income (loss) available for common stock by the weighted average number of outstanding common and common equivalent shares, plus other potentially dilutive securities, aggregating 151.5 million in 1994, 121.3 million in 1993 and 106.5 million in 1992. Common equivalent shares and other potentially dilutive securities have been excluded from the weighted average number of outstanding shares for 1994 as they are anti-dilutive.
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, 10.9 million common shares to former holders of the Company's preferred stock and during 1993 and 1994, 9.0 million common shares to holders of the LYONs notes upon their conversion (see Note 9). 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.
International Operations
The consolidated statements of operations include the following amounts related to non-U.S. subsidiaries and affiliates; revenues of $258 million in 1993 (including $223 million related to Marriott International) and
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$355 million in 1992, and income before income taxes of $26 million in 1993 and $24 million in 1992. 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 lease term or the useful lives of the related buildings.
Gains on sales of properties are recognized at the time of sale or deferred to the extent required by generally accepted accounting principles. Deferred gains are recognized as income in subsequent periods as conditions requiring deferral are satisfied or expire without further cost to the Company.
In cases where management is holding for sale particular lodging properties, the Company assesses impairment based on whether the net realizable value (estimated sales price less costs of disposal) of each individual property to be sold is less than the net book value. A lodging property is considered to be held for sale when the Company has made the decision to dispose of the property. Otherwise, the Company assesses impairment of its real estate properties based on whether it is probable that undiscounted future cash flows from each individual property will be less than its net book value.
Inventories
Merchandise, food items and supplies are stated at the lower of average cost or market. Senior living service condominium units held for sale are carried at a cost of $3 million and $14 million at December 30, 1994 and December 31, 1993, respectively, which did not exceed the net realizable value.
Intangible Assets
Intangible assets amounted to $22 million and $25 million at December 30, 1994 and December 31, 1993, respectively, and primarily consist of contract rights. These intangibles are included in other assets and are being amortized on a straight-line basis over periods of five to 40 years. Amortization expense totalled $3 million in 1994, $26 million in 1993, and $33 million in 1992.
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. Such costs, which are included in other assets, amounted to $6 million and $16 million at December 30, 1994 and December 31, 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.
Self-Insurance Programs
Prior to the 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
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Distribution Date.
Interest Rate Swap Agreements
The Company has entered into interest rate swap agreements to diversify a portion of its debt to a variable rate basis. The interest rate differential to be paid or received on interest rate swap agreements is accrued as interest rates change and is recognized as an adjustment to interest expense.
New Statements of Financial Accounting Standards
The Company adopted Statements of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits," and SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," during 1994. Adoption of these statements did not have a material effect on the Company's consolidated financial statements. 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. Adoption of SFAS No. 114 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 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. Subsequent to the Company's announcement in late 1992 of the planned Distribution, the Company recorded a reserve of $21 million, representing management's best estimate, at that time, of the anticipated costs to complete the Distribution. During 1993, the Company recognized an additional $13 million of charges based on management's revised estimate of the ultimate cost of completing the Distribution. The costs include $30 million payable to attorneys, investment bankers, consultants and financial institutions, and $4 million in employee compensation awards. Substantially all of the unpaid costs at December 31, 1993 were paid during 1994. 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 redeemed all of the old Series F Senior Notes that did not tender in the Exchange Offer, and 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.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the Exchange Offer, the Company effected a Restructuring (the "Restructuring"). As a result of the Restructuring, the Company's most significant 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 line of credit (the "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").
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. 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.
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 $10 million in 1994, $11 million in 1993, and $14 million in 1992.
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-
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 operations 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. There was no pro forma effect of this change on the results of operations for 1993 and 1992.
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. In the third quarter of 1994, the Company completed the sale of 26 of its Fairfield Inns to an unrelated third party. The net proceeds from the sale of such hotels were approximately $114 million, which exceeded the carrying value of the hotels by approximately $12 million. Approximately $27 million of the proceeds was payable in the form of a note from the purchaser. The gain on the sale of these hotels has been deferred.
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.
At December 31, 1993, the Company owned a 50% interest in Times Square Marquis Hotel, L.P. ("Times Square"), formerly Times Square Hotel Company, 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 the first quarter of 1994, the Company foreclosed on a 29% partnership interest and completed the transfer of an additional 7% partnership interest in Times Square in full satisfaction of the loans. As a result, the Company holds an 86% partnership interest in Times Square at December 30, 1994. In 1993, the Company began reporting substantially all the losses of Times Square and on December 31, 1993 began consolidating Times Square. The Company's December 31,
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1993 balance sheet was 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).
In December 1993, the Company sold its 15% interest in the partnership owning the Boston Copley Marriott Hotel for $10.4 million.
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 deconsolidated the partnership and removed $64 million of debt and $96 million of property and equipment from its consolidated balance sheet at December 31, 1993. In 1994, the Company sold an additional portion of its equity interests in the partnership for $7 million. A gain on the sale transactions totalling $14 million has been deferred and is being amortized through 1996.
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.
Receivables from affiliates are reported net of reserves of $200 million at December 30, 1994 and $196 million at December 31, 1993. Receivables from affiliates at December 30, 1994 included a $150 million mortgage note at 9% which amortizes through 2003, and net debt service and other advances totalling $14 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. Such commitments are limited, in the aggregate, to an additional $236 million at December 30, 1994. Net amounts funded under these commitments totalled $2 million in 1994 and $14 million in 1993.
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. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
6. 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 operations for 1993.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total deferred tax assets and liabilities at December 30, 1994 and December 31, 1993 were as follows:
The valuation allowance required under SFAS 109 primarily represents prior purchase business combination tax credits of $17 million and net operating loss carryforwards (NOLs) of $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 1994 and 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 30, 1994 and December 31, 1993 follows:
The provision (benefit) for income taxes consists of:
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 for 1992, as reported under the Company's previous method of accounting for income taxes, consist of the following at January 1, 1993 (in millions):
At December 30, 1994, the Company has net operating loss carryforwards of $12 million which expire through 2001. Additionally, the Company has approximately $41 million of alternative minimum tax credit carryforwards which do not expire, and $5 million of other tax credits which expire through 2009.
A reconciliation of the statutory Federal 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. The majority of the 1994 adjustment to the Distribution of stock of Marriott International related to deferred income taxes.
Cash paid for income taxes, net of refunds received, was $14 million in 1994, $64 million in 1993, and $93 million in 1992.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LEASES
Future minimum annual rental commitments for all non-cancelable leases are as follows:
The Company leases certain property and equipment under non-cancelable operating leases. Leases related to the Company's Real Estate Group include long-term ground leases for certain hotels, generally with multiple renewal options. Leases related to the Company's Operating Group generally do not have renewal or extension provisions. Certain leases contain provisions for the payment of contingent rentals based on a percentage of sales in excess of stipulated amounts. Certain leases also contain contractual rental payment increases throughout the term of the lease. The minimum rent increases are amortized over the term of the applicable lease on a straight-line basis.
Certain of the leases included above relate to facilities used in the 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 $149 million payable to the Company under non-cancelable subleases.
The Company remains contingently liable at December 30, 1994 on certain leases relating to divested properties. Such contingent liabilities aggregated $156 million at December 30, 1994. However, management considers the likelihood of any substantial funding related to these leases to be remote.
Rent expense consists of:
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. DEBT
Debt consists of the following:
In connection with the Distribution, the Company entered into the Line of Credit with Marriott International. Pursuant to the 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 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 Line of Credit is guaranteed by the Company and certain subsidiaries.
The 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, which are 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, to incur additional debt, create additional liens on their respective 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 30, 1994 were approximately $650 million, substantially all of which are restricted.
Under the terms of the New Notes indenture, Hospitality is obligated to use 50% to 75% of the net proceeds from the sale of certain assets to prepay New Notes on a pro-rata basis. The Company redeemed approximately $292 million of New Notes in 1994. In connection with the 1994 redemptions, the Company recognized an extraordinary loss of $6 million, net-of-taxes of $3 million. Additionally, under certain circumstances and subject to certain limitations, the Company is required to redeem the New Notes with certain proceeds from refinancing and the sale of equity interests by Hospitality or its subsidiaries. The New Notes are not otherwise subject to redemption prior to maturity.
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 Marriott Hotel. As of
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 30, 1994, the outstanding loan balance was $88 million. The loan bears interest at LIBOR plus 3% (9.0625% at December 30, 1994) 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.
In November 1994, the Company, through its wholly-owned subsidiary, HMC Acquisition Properties, obtained a $230 million secured, seven-year revolving and term loan facility (the "Revolver") for funding future acquisitions of full-service hotels and required improvements thereon. The Revolver bears interest based on LIBOR plus 1.75% and/or the prime rate plus .75%. In November 1996, the Revolver converts to a five-year amortizing loan maturing in November 2001. An annual fee of .5% is charged on the unused portion of the commitment. The Revolver is secured by substantially all of the assets of HMC Acquisition Properties and its subsidiaries and is guaranteed by the Company.
In August 1994, the Times Square first mortgage loan was extended for five years from its original maturity of December 1993. In connection with the extension, $39 million of principal payments were made on the loan. The principal balance of the loan of $328 million is scheduled to mature as follows: $5 million in each of 1995 through 1997, and $313 million in 1998. Interest on $165 million of the loan is fixed at approximately 8.4% and interest on the remaining portion of the loan is based on LIBOR plus 1.5%. Annual minimum principal amortization of $5 million a year is required and all additional cash flow will be applied as additional amortization until the principal amount of the loan is paid down to $300 million. Once the principal amount of the loan is paid down to $300 million, 75% of future cash flow in excess of minimum amortization requirements ranging up to $9 million per year will be applied to further principal amortization and the remaining 25% will be available for other obligations of Times Square, including loans due to the Company. The Company provides a $10 million debt service guarantee of principal and interest on the loan.
At December 30, 1994, the Company was party to $500 million aggregate notional amount of interest rate exchange agreements with two financial institutions and one investment bank (the contracting parties). Under these agreements, the Company collects interest at fixed rates (average rate of 7.6% at December 30, 1994) and pays interest based on specified floating interest rates (average rate of 6.7% at December 30, 1994) through 1997. The Company monitors the credit worthiness of its contracting parties by evaluating credit exposure and referring to the ratings of widely accepted credit rating services. The Standard and Poors' long-term debt ratings for the contracting parties are all BBB+ or better. The Company is exposed to credit loss in the event of non-performance by the contracting parties to the interest rate swap agreements; however, the Company does not anticipate non-performance by the contracting parties.
Aggregate debt maturities at December 30, 1994, excluding capital lease obligations, are:
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Debt not carrying a Company guarantee includes debt with partial recourse where the Company's exposure is limited to $22 million.
Cash paid for interest, net of amounts capitalized, was $198 million in 1994, $214 million in 1993, and $209 million in 1992. Deferred financing costs, which are included in other assets, amounted to $38 million and $42 million at December 30, 1994 and December 31, 1993, respectively.
9. 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. Pursuant to 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 each of the Company's and Marriott International's common stock for each $1,000 principal amount of LYONs. On December 13, 1993, the Company initiated a call of the LYONs redeemable on January 25, 1994. Substantially all of the LYONs' holders elected to convert their LYONs into common stock prior to the redemption. Such conversions represented 8.3 million shares of the Company's common stock issued in 1993 and .7 million shares issued in 1994.
10. SHAREHOLDERS' EQUITY
Three hundred million shares of common stock, with a par value of $1 per share, are authorized, of which 153.6 million and 129.7 million were issued and outstanding as of December 30, 1994 and December 31, 1993, respectively. One million shares of preferred stock, without par value, are authorized, of which 258 shares (equivalent to 258,000 depositary shares) of 8.25% Series A cumulative convertible preferred stock ("Series A Preferred") were issued and outstanding as of December 30, 1994. Additional paid-in capital at December 30, 1994 includes deferred compensation credits of $15 million.
On January 27, 1994, the Company completed the issuance of 20.1 million shares of common stock for net proceeds of $230 million. In connection with the class action settlement discussed in Note 17, the Company issued warrants to purchase up to 7.7 million shares of the Company's common stock in 1994.
Each Series A Preferred 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. From the Distribution through February 24, 1995, an additional 5% converted. On September 30, 1993, the Company's Board of Directors adjusted the conversion rate of the Company's remaining depositary shares to 19.16 shares of common stock per depository share to reflect the Distribution. Dividends, if declared, are payable quarterly. The Company has not paid six quarterly dividend payments since the Distribution, and, accordingly, the remaining holders of the Series A Preferred stock would be entitled to elect two directors of the Company. 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
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
11. EMPLOYEE STOCK PLANS
Total shares of common stock reserved and available under employee stock plans at December 30, 1994 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 below.
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 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. Therefore, the options outstanding at December 30, 1994 and December 31, 1993 reflect these revised exercise prices. Option activity is summarized as follows:
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1994, 1993 and 1992, 159,000, 489,000, and 671,000 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 ten 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, and 32,000 shares under these plans in 1993 and 1992, respectively. The Company recorded compensation expense of $6 million and $400,000 in 1994 and 1993, respectively, related to these awards.
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.
12. 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, and totalled $2 million for 1994, $20 million for 1993, and $25 million for 1992.
The Company provides medical benefits to a limited number of retired employees meeting restrictive eligibility requirements. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits" during 1994. Adoption of SFAS 112 did not have a material effect on the accompanying financial statements.
13. OPERATING GROUP RESTRUCTURING
In November 1993, the Company's Operating Group announced a plan to redesign its operations structure to improve the effectiveness and competitiveness of the business. Implementation of the new structure was completed in the first quarter of 1994. The Company incurred costs of approximately $7 million, principally for severance, relocation, and the write-off of development costs for a data processing system no longer required under the new organizational structure, which was accrued as a restructuring charge in the fourth quarter of 1993.
14. ACQUISITIONS AND DISPOSITIONS
In 1994, the Company acquired 15 full-service hotels totalling approximately 6,000 rooms in several transactions for approximately $443 million. The Company also provided 100% financing totalling approximately $35 million to an affiliated partnership, in which the Company owns the sole general partner
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
interest, for the acquisition of two full-service hotels (totalling another 684 rooms). Additionally, the Company acquired a controlling interest in one 662- room full-service hotel through an equity investment of $16 million and debt financing of $36 million (the debt was subsequently sold in 1995). The Company accounts for all 18 of these properties as owned hotels for accounting purposes. The Company's summarized, consolidated pro forma results of operations, assuming the hotel additions occurred on January 2, 1993, are as follows (in millions, except per share amounts):
During 1994, the Company sold its 14 senior living communities to an unrelated party for $320 million, which approximated the communities' carrying value. See Note 3 for a discussion of the 1994 sale of 26 Fairfield Inns.
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, 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.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of certain financial assets and liabilities and other financial instruments are shown below.
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, the Revolver, and other notes are estimated to be equal to their carrying value. Senior Notes are valued based on quoted market prices.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company is contingently liable under various guarantees of obligations of certain affiliates (affiliate debt service commitments) with a maximum commitment of $236 million at December 30, 1994 and $271 million at December 31, 1993. A fair value is assigned to commitments with expected future fundings. The fair value of the commitments represents the net expected future payments discounted at risk-adjusted rates. Such payments are accrued on an undiscounted basis.
The fair value of interest rate swap agreements is based on the estimated amount the Company would receive to terminate the swap agreements. The aggregate notional amount of the agreements was $500 million at December 30, 1994 and December 31, 1993.
16. RELATIONSHIP WITH MARRIOTT INTERNATIONAL
In connection with the Distribution, the Company and Marriott International entered into 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 prior to their disposal (see Note 14); (iii) Marriott International guarantees 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 Line of Credit and up to $125 million of first mortgage financing for construction of the Philadelphia Marriott Hotel (see Note 8); and (v) Marriott International assumed 90% of the LYONs obligation (see Note 9). Additionally, 15 management agreements with Marriott International were added or extended in 1994 as a result of the 1994 hotel acquisitions.
The management agreements generally provide for base management or system fees of three or four percent of gross revenues, a formula based incentive management fee limited to 20 percent of cumulative hotel operating profit, as defined, and reimbursement for certain system-wide operating costs. The Company has the option to terminate certain management agreements if specified performance thresholds are not satisfied.
In 1994 and from the Distribution Date through December 31, 1993, the Company paid to Marriott International $41 million and $5 million, respectively, in lodging management fees, $23 million and $5 million in interest and commitment fees under the Revolving Line of Credit and Philadelphia Marriott Hotel mortgage, and $11 million and $3 million under the various transitional service agreements, and earned $14 million and $5 million under the senior living community leases during 1994 and 1993. The Company purchased $65 million and $14 million, respectively, of food and supplies in 1994 and 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 Operating Group.
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 Class Action Settlement. In connection with this settlement, the Company issued warrants in 1994 to purchase up to 7.7 million shares of Host Marriott common stock. Such warrants are exercisable for five years from the Distribution Date, at $8.00 per share during the first three years and $10.00 per share during the last two years.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A group of bondholders (the "PPM Group"), 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, opted out of the Class Action Settlement. The PPM Group alleges that laws had been violated in connection with the sale by the Company of certain series of its Senior Notes and debentures and claimed damages of approximately $30 million. The group purporting to hold $7.5 million of Senior Notes settled with the Company in April 1994. Under the terms of the settlement, the Company repurchased the Senior Notes at their par value in the second quarter of 1994.
In September 1994, the Company settled with certain members of the PPM Group whose claims represented about 40% of the PPM Group's aggregate claims. The claims of the remainder of the PPM Group went to trial in September 1994, and in October 1994, the judge declared a mistrial based on the inability of the jury to reach a verdict. In January 1995, the judge granted the Company's motion for summary judgment to dismiss the PPM Group's claims as a matter of law. An appeal was filed by the PPM Group in February 1995.
The Company believes that all claims of the PPM Group are without merit and that the appeal will not be successful.
18. BUSINESS SEGMENTS
The Real Estate Group is, subsequent to the Distribution, comprised of the Company's owned full-service hotels, resorts and suites, Courtyard hotels, Residence Inns and Fairfield Inns, and senior living communities through their disposition in 1994. Prior to the Distribution, this segment also included the lodging management and vacation ownership resort operations which were distributed to Marriott International.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Operating Group segment now consists of food, beverage and merchandise operations at airports, on tollroads and at stadiums, arenas and other attractions. 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.
The results of operations of the Company's business segments are reported in the consolidated statement of operations. Segment operating expenses include selling, general and administrative expenses directly related to the operations of the businesses, aggregating $54 million in 1994, $61 million in 1993 (excluding $316 million related to Marriott International) and $457 million in 1992. Gains and losses resulting from the disposition of assets identified with each segment are included in segment operating profit.
Current assets and current liabilities of the Operating Group approximated $100 million each at December 30, 1994 and December 31, 1993, respectively.
As discussed in Note 1, subsequent to the Distribution, revenues for the Real Estate Group include house profit from the Company's owned hotel properties. Accordingly, the following table presents the details of hotel revenues for 1994 and 1993, and revenues and expenses for 1992.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. QUARTERLY FINANCIAL DATA
The first three quarters consist of 12 weeks each, and the fourth quarter includes 16 weeks.
Third and fourth quarter 1994 results include extraordinary after-tax losses of $3 million, respectively, on the extinguishment of debt. In the second quarter of 1994, the Company recorded $12 million of termination expenses for the transfer of the Company's rights under an unprofitable concessions contract to a third party, which was partially offset by an $8 million reduction in general liability and workers' compensation insurance reserves due to favorable claims experience.
Fourth quarter 1993 results include pre-tax costs of $13 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 millon related to the Operating Group Restructuring (see Note 13) and the extraordinary after-tax loss of $5 million 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 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.
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 6).
20. SUBSEQUENT EVENT (UNAUDITED)
In March 1995, the Company entered into a sale/leaseback agreement with a real estate investment trust for 21 of the Company's Courtyard properties for $179 million (10% of which is deferred), with the purchaser having the option to buy and lease back up to 33 of the remaining Courtyard properties within one year.
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 1995 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 statement 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
-------- * Filed herewith
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 29TH DAY OF MARCH, 1995.
Host Marriott Corporation
/s/ Matthew J. Hart By___________________________________ 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 I 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 I PAGE 2 OF 5
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
Fiscal years ended December 30, 1994; December 31, 1993; and January 1, 1993
-------- 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 5
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
Fiscal years ended December 30, 1994; December 31, 1993; and January 1, 1993
-------- 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 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 most significant 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 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 (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 New 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 30, 1994, 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) As a result of the Distribution and its effect on the structure of the Parent Company and Retained Businesses, the financial statement presentation has been altered to better reflect the Parent Company and Retained Businesses' current business segments and operating environment. Accordingly, certain financial statement information for 1993 and 1992 has been reformatted and reclassified to reflect the Parent Company and Retained Businesses' current business segments and operating environment.
D) Under the terms of the Exchange Offer, Hospitality issued New Notes as partial consideration for Old Notes, originally issued by the Company. Additionally, the Company has secured the Old Series I Notes as discussed in Note 2 to the Company's consolidated financial statements. Accordingly, for the twelve-week period from October 8, 1993 through December 31, 1993, and for the fiscal year ended December 30, 1994, Hospitality's financial statements reflect the impact of the New Notes actually issued plus the effects of the Old Series I Notes which have been pushed down to Hospitality. For the periods presented up to October 8, 1993, Hospitality's financial statements reflect the pushed down effects of 100% of that portion of the Old Notes that would have been replaced with New Notes had the Company received tenders for 100% of the aggregate amount of Old Notes that were subject to the Exchange Offer.
S-4
SCHEDULE I PAGE 5 OF 5
HOST MARRIOTT CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION--(CONTINUED) Investments in and advances to Holdings and debt include $87 million at December 30, 1994 and December 31, 1993 which has been pushed down to Hospitality. Related interest expense of $8 million, $94 million and $125 million fiscal 1994, 1993, and 1992, respectively, is included in interest expense in the accompanying condensed statements of income.
Aggregate debt maturities at December 30, 1994 are (in millions):
E) 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 D) and before income taxes. Holdings is included in the consolidated income tax returns of Host Marriott Corporation.
F) Corporate expenses in 1993 and 1992 reflect pre-tax costs of $13 million and $16 related to the Distribution discussed in Note A.
S-5
SCHEDULE III PAGE 1 OF 2
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 30, 1994 (IN MILLIONS)
S-6
SCHEDULE III PAGE 2 OF 2
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 30, 1994 (IN MILLIONS)
NOTES:
(A) The change in total cost of properties for the year ended December 30, 1994 is as follows:
(B) The change in accumulated depreciation and amortization for the year ended December 30, 1994 is as follows:
(C) The aggregate cost of properties for Federal income tax purposes is approximately $2,231 million at December 30, 1994.
(D) The total cost of properties excludes construction-in-progress properties.
S-7