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Rule 424(b)(4)
File No. 333-00768
PROSPECTUS
OFFER TO EXCHANGE
$350,000,000 AGGREGATE PRINCIPAL AMOUNT OF ITS
9% SENIOR NOTES DUE 2007, SERIES B FOR ALL OUTSTANDING
9% SENIOR NOTES DUE 2007, SERIES A
OF
HMC ACQUISITION PROPERTIES, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON JUNE 17,
1996, UNLESS EXTENDED.
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HMC Acquisition Properties, Inc., a Delaware corporation (the "Company"),
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange its outstanding 9%
Senior Notes due 2007, Series A (the "Series A Notes"), of which an aggregate
of $350 million in principal amount is outstanding as of the date hereof, for
an equal principal amount of newly issued 9% Senior Notes due 2007, Series B
(the "Series B Notes"). The form and terms of the Series B Notes will be the
same as the form and terms of the Series A Notes except that (i) the Series B
Notes will be registered under the Securities Act of 1933, as amended (the
"Securities Act"), and hence will not bear legends restricting the transfer
thereof and (ii) the holders of Series B Notes will not be entitled to certain
rights of holders of Series A Notes under the Registration Rights Agreement
(as defined herein), which rights will terminate upon the consummation of the
Exchange Offer. The Series B Notes will evidence the same debt as the Series A
Notes and will be entitled to the benefits of an indenture dated as of
December 20, 1995, governing the Series A Notes and the Series B Notes (the
"Indenture"). The Indenture provides for the issuance of both the Series B
Notes and the Series A Notes. The Series B Notes and the Series A Notes are
sometimes referred to herein collectively as the "Senior Notes." The holders
of the Senior Notes are sometimes referred to herein collectively as the
"Holders."
SEE "RISK FACTORS" ON PAGE 18 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN
FACTORS WHICH HOLDERS OF SERIES A NOTES AND PROSPECTIVE PURCHASERS OF SERIES B
NOTES SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE COMPANY WILL ACCEPT FOR EXCHANGE ANY AND ALL VALIDLY TENDERED SERIES A
NOTES ON OR PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON JUNE 17, 1996 (IF AND
AS EXTENDED, THE "EXPIRATION DATE"). TENDERS OF SERIES A NOTES MAY BE
WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE. THE EXCHANGE OFFER IS NOT CONDITIONED UPON ANY MINIMUM
PRINCIPAL AMOUNT OF SERIES A NOTES BEING TENDERED FOR EXCHANGE. SERIES A
NOTES MAY BE TENDERED ONLY IN INTEGRAL MULTIPLES OF $1,000. IN THE EVENT THE
COMPANY TERMINATES THE EXCHANGE OFFER AND DOES NOT ACCEPT FOR EXCHANGE ANY
SERIES A NOTES, THE COMPANY WILL PROMPTLY RETURN ALL PREVIOUSLY TENDERED
SERIES A NOTES TO THE HOLDERS THEREOF.
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THE DATE OF THIS PROSPECTUS IS MAY 10, 1996.
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The Series B Notes will mature on December 15, 2007 and will bear interest
at the rate of 9% per annum from their date of issuance. Interest on the
Series B Notes will be payable semi-annually on June 15 and December 15 of
each year, commencing June 15, 1996. Holders of Series B Notes will receive
interest on June 15, 1996 from the date of initial issuance of the Series B
Notes, plus an amount equal to the accrued interest on the Series A Notes from
the date of original issuance of the Series A Notes to the date of exchange
thereof for the Series B Notes. Such interest will be paid with the first
interest payment on the Series B Notes. Interest on the Series A Notes
accepted for exchange will cease to accrue upon issuance of the Series B
Notes.
The Company will not be required to make any mandatory redemption or sinking
fund payment with respect to the Senior Notes prior to maturity. The Senior
Notes will be redeemable at the option of the Company, in whole or in part, at
any time on or after December 15, 2000 at the redemption prices set forth
herein plus accrued and unpaid interest, if any, to the date of redemption. In
the event of a Change of Control Triggering Event (as defined herein), the
Company will be required to make an offer to repurchase the Senior Notes, at a
price equal to 101% of the aggregate principal amount thereof, plus accrued
and unpaid interest, if any, to the date of purchase. See "Description of
Senior Notes--Certain Covenants--Repurchase of Senior Notes at the Option of
the Holder Upon a Change of Control."
The Senior Notes are senior obligations of the Company and rank equal
without preference in right of payment (hereinafter, "pari passu") with all
senior Indebtedness (as defined herein) of the Company; provided, however,
that certain Indebtedness of the Company and its subsidiaries may be secured
by assets held by the Company or its subsidiaries subject to certain
restrictions described herein. See "Description of Senior Notes--Certain
Covenants--Limitation on Liens." The Indenture contains covenants that, among
other things, limit the ability of the Company and its subsidiaries to incur
additional Indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase capital stock or subordinated indebtedness, create
certain liens, enter into certain transactions with affiliates, sell certain
assets, issue or sell stock of the Company's subsidiaries, and enter into
certain mergers and consolidations. As of March 22, 1996, the aggregate
principal amount of all outstanding Indebtedness of the Company was $350
million, consisting solely of the Indebtedness evidenced by the Senior Notes.
The Senior Notes are fully and unconditionally guaranteed (limited only to
the extent necessary to avoid such Guarantees being considered a fraudulent
conveyance under applicable law) on a joint and several basis (the
"Guarantees") by the Company's existing, wholly owned subsidiaries, HMC SFO,
Inc. and HMC AP Canada, Inc. (the "Initial Guarantors"), and certain of the
Company's future subsidiaries (the "Future Subsidiary Guarantors" and,
together with the Initial Guarantors, the "Guarantors"). The Indenture
provides that all future subsidiaries of the Company which are not prohibited
from guaranteeing the Senior Notes by law or pursuant to the terms of an
agreement will guarantee the Senior Notes, provided, however, that the assets
of all such subsidiaries that do not become Guarantors shall not exceed 15% of
the consolidated assets of the Company and its subsidiaries. The Initial
Guarantors are the Company's only direct or indirect wholly owned
subsidiaries. The Guarantees are senior unsecured obligations of the
Guarantors and rank pari passu in right of payment with all other existing and
future senior Indebtedness of the Guarantors, provided that certain
Indebtedness of the Guarantors and their subsidiaries may be secured by assets
held by such Guarantors and their subsidiaries, subject to certain
restrictions described herein. The Guarantors have no other Indebtedness that
ranks senior to or pari passu with the indebtedness evidenced by the Senior
Notes. Separate financial statements of the Guarantors are not presented
herein because, in the view of the Company's management, such financial
statements would not be material to the investment decision being made by the
Holders in connection with the Exchange Offer.
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that Series B Notes issued pursuant to the
Exchange Offer in exchange for Series A Notes may be offered for resale,
resold, and otherwise transferred by a holder thereof (other than (i) a
broker-dealer who purchases such Series B Notes directly from the Company to
resell pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) a person that is an affiliate of the Company (within
the meaning of Rule 405 under the Securities Act)), without compliance with
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the registration and prospectus delivery provisions of the Securities Act,
provided that the Holder is acquiring the Series B Notes in its ordinary
course of business and is not participating, and has no arrangement or
understanding with any person to participate, in the distribution of Series B
Notes. Holders of Series A Notes wishing to accept the Exchange Offer must
represent to the Company that such conditions have been met.
Each broker-dealer that receives Series B Notes for its own account in
exchange for Series A Notes, where such Series A Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Series B Notes. The Letter of Transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Series B Notes received in exchange for Series A Notes where such Series A
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." The Company believes that none of the registered
holders of the Series A Notes is an affiliate (as such term is defined in Rule
405 under the Securities Act) of the Company.
Prior to the Exchange Offer, there has been no public market for the Senior
Notes. The Company does not intend to list the Series B Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active market for the
Series B Notes will develop. To the extent that a market for the Series B
Notes does develop, the market value of the Series B Notes will depend on
market conditions (such as yields on alternative investments), general
economic conditions, the Company's financial condition and other conditions.
Such conditions might cause the Series B Notes, to the extent that they are
actively traded, to trade at a significant discount from face value. See "Risk
Factors--Absence of Public Market for the Senior Notes."
The Company will not receive any proceeds from this Exchange Offer. The
Company has agreed to bear the expenses of the Exchange Offer. No underwriter
is being used in connection with the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF SERIES A NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON, OTHER THAN OFFICERS OF THE COMPANY AND THE EXCHANGE AGENT, HAS
BEEN AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF
TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
The Series B Notes will be available initially only in book-entry form. The
Company expects that the Series B Notes issued pursuant to the Exchange Offer
will be issued in the form of one or more fully registered global notes that
will be deposited with, or on behalf of, the Depository Trust Company (the
"Depository") and registered in its name or in the name of Cede & Co., as its
nominee. Beneficial interests in the global note representing the Series B
Notes will be shown on, and transfers thereof will be effected only through,
records maintained by the Depository and its participants. After the initial
issuance of such global note, Series B Notes in certificated form will be
issued in exchange for the global note only in accordance with the terms and
conditions set forth in the Indenture. See "Description of Senior Notes--Book
Entry, Delivery and Form" and "Description of Senior Notes--Certificated
Securities."
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the Series B Notes offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information, exhibits and undertakings contained in
the Registration Statement. For further information with respect to the
Company and the Series B Notes offered hereby, reference is made to the
Registration Statement, including the exhibits thereto and the financial
statements, notes and schedules filed as a part thereof. As a result of this
offering, the Company will become subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Registration Statement (and the exhibits and schedules thereto) of which this
Prospectus is a part, as well as the periodic reports and other information
required to be filed by the Company with the Commission in the future, may be
inspected and copied at the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the regional offices of the Commission located at Seven World Trade Center,
Suite 1300, New York, New York 10048 and Suite 1400, Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661-2511. Copies of such materials may be
obtained from the Public Reference Section of the Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its
public reference facilities in New York, New York, and Chicago, Illinois at
the prescribed rates. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete, and
in each instance reference is made to the copy of such contract or document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
Pursuant to the Indenture, the Company has agreed to furnish to the Trustee
(as defined herein) and to registered holders of the Senior Notes, without
cost to the Trustee or such registered holders, copies of all reports and
other information required to be filed by the Company with the Commission
under the Exchange Act, whether or not the Company is then required by the
rules and regulations of the Commission to file reports with the Commission.
The Company will file a copy of all such information and reports with the
Commission for public availability. The Company will also furnish such other
reports as it may determine or as may be required by law.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless the context otherwise requires, (i) the term "Company" refers to HMC
Acquisition Properties, Inc. and the Initial Guarantors, the Company's
existing, wholly owned subsidiaries, and their combined operations, and (ii)
information concerning the Company's lodging properties excludes the
Springfield Radisson Hotel, which was sold by the Company in December 1995.
References herein to "Smith Travel Research" are to industry data provided by
Smith Travel Research. References herein to "Coopers & Lybrand" refer to the
January 1996 Hospitality Directions Quarterly Research Journal published by
Coopers & Lybrand LLP.
THE COMPANY
The Company, an indirect, wholly owned subsidiary of Host Marriott
Corporation ("Host Marriott"), was formed in 1994 to take advantage of
acquisition opportunities in the full-service hotel segment of the lodging
industry. The Company currently owns 17 full-service properties, aggregating
6,850 rooms, located in diverse geographic locations throughout the United
States. Fourteen of these properties are operated under the Marriott brand
name, 12 of which are managed by Marriott International, Inc. and its
subsidiaries ("Marriott International"). The Marriott brand name is among the
most respected and widely recognized in the lodging industry. Based on data
provided by Smith Travel Research, the Company believes that its hotels
consistently outperform the industry average occupancy rate by a significant
margin for the upscale full-service segment of the lodging industry (the
segment which is most representative of the Company's full-service hotels). Six
of the Company's properties have been or will be converted to the Marriott
brand name following acquisition by the Company or an affiliate. The conversion
of such properties is intended to increase occupancy and room rates as a result
of Marriott International's nationwide marketing and reservation systems, as
well as customer recognition and preference for the Marriott brand name.
The Company was originally capitalized by Host Marriott through the
contribution of four unleveraged hotel properties, with a book value of $162
million, purchased in 1994 by affiliates and with an additional contribution of
$48 million in cash. These contributions were made primarily from a portion of
the proceeds of a $230 million public equity offering by Host Marriott
consummated in January 1994. Since its formation, the Company has utilized the
$48 million cash contribution from Host Marriott, as well as borrowings under
the Company's former Revolving Credit and Term Loan Agreement dated
November 24, 1994 (the "Credit Facility") and a portion of the proceeds of the
Company's offering (the "Offering") of the Series A Notes, to acquire an
additional 14 full-service hotels (one of which was sold in December 1995).
The lodging industry as a whole, and the full-service hotel segment in
particular, is benefiting from an improved supply and demand relationship in
the United States. According to Smith Travel Research, the demand for rooms in
the upscale full-service segment (the segment which is most representative of
the Company's hotels), as measured by annual domestic occupied room nights,
increased 2.4% from 1994 to 1995. Management believes that recent demand
increases have resulted primarily from an improved economic environment and a
corresponding increase in business travel. Despite increased demand for rooms,
the room supply growth rate in the full-service segment has greatly diminished.
Management believes that this decrease in the room supply growth rate in the
full-service segment is attributable to many factors including the lack of
attractive building sites for full-service hotels, the limited availability of
financing for new full-service hotel construction and the availability of
existing full-service properties for sale at a discount to their replacement
value. Due to the relatively high occupancy rates of the Company's hotels, the
limited supply of new rooms and the recent increase in business travel, the
managers of the Company's hotels have selectively (i) increased room rates and
(ii) improved their business mix by replacing certain discounted group business
with higher-rated group and transient business. The Company expects this
supply/demand imbalance, particularly in the upscale full-service sector, to
continue, which management believes will result in improved room revenues per
available room ("REVPAR") and higher cash flow at its hotel properties in the
near term.
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BUSINESS STRATEGY
The Company's business strategy continues to focus on maximizing the
profitability of its existing hotels and the opportunistic acquisitions of
full-service urban, convention and resort hotels primarily in the U.S. and, to
a lesser extent, abroad. The Company believes that the full-service segment of
the market offers numerous opportunities to acquire assets at attractive
multiples of cash flow and at discounts to replacement value, including
underperforming hotels which can be improved by conversion to the Marriott
brand. The Company believes this segment is very promising because:
. There is virtually no new supply of upscale full-service hotel rooms
currently under construction. According to Smith Travel Research, from
1988 to 1990, upscale full-service room supply increased an average of
approximately 5% annually, which resulted in an oversupply of rooms in
the industry. However, this growth slowed to an average of approximately
1.7% from 1990 to 1995. Management believes that the lead time from
conception to completion of a full-service hotel is generally five years
or more in the types of markets the Company is principally pursuing,
which will contribute to the continued low growth of supply. According to
Coopers & Lybrand, hotel supply in the upscale full-service segment is
expected to grow annually at 1.8% to 1.9% through 1998. Furthermore,
because of the prolonged lead time for construction of new full-service
hotels, management believes that growth in the full-service segment will
continue to be limited at least through 2000.
. Many desirable hotel properties are held by inadvertent owners such as
banks, insurance companies and other financial institutions which are
motivated and willing sellers. The Company has demonstrated that these
properties can be acquired at a significant discount to replacement cost.
. Management believes that there are numerous opportunities to improve the
performance of acquired hotels by replacing the existing hotel manager
with Marriott International and converting the hotel to the Marriott
brand. Based on industry data, the Company believes that Marriott-flagged
properties have consistently outperformed the industry. Demonstrating the
strength of the Marriott brand name, the average occupancy rate during
1995 for the Company's nine properties that have been operated under the
Marriott brand name for at least two years was 79.4%, compared to an
average occupancy rate of 68.2% for all upscale full-service hotels.
Accordingly, management anticipates that the five properties recently
converted to the Marriott brand name, as well as additional full-service
properties to be acquired by the Company in the future and converted from
other brands to the Marriott system, should achieve significantly higher
occupancy rates and average room rates than has previously been the case
for these properties.
The Company intends to continue to actively increase its full-service hotel
portfolio. In carrying out this strategy, the Company evaluates each
opportunity on an individual basis and may from time to time elect to acquire
controlling interests in a hotel joint venture, rather than pursue the outright
acquisition of a property, when it believes its return on investment will be
maximized by so doing. The Company may make acquisitions directly or through
its subsidiaries depending on a variety of factors, including the existence of
debt, the form of investment, the restrictions and requirements of the
Indenture and the availability of funds.
The Company believes it is well qualified to pursue its acquisition strategy.
Management has extensive experience in acquiring and financing lodging
properties and believes its industry knowledge, relationships and access to
market information provide a competitive advantage with respect to identifying,
evaluating and acquiring hotel assets. In addition, the Company is well
positioned to convert acquired properties to high-quality lodging Marriott
brand names due to its relationship with Marriott International. For a
description of the Company's relationship with Marriott International, see
"Certain Relationships and Related Transactions--Relationship with Marriott
International."
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1996 ACQUISITIONS AND OTHER TRANSACTIONS
During 1996, the Company added two full-service properties, the 374-room
Toronto Delta Meadowvale for approximately $25 million and the 400-room
Pittsburgh Hyatt for approximately $19 million. The Pittsburgh Hyatt was
acquired through a limited partnership in which the Company owns a 95%
interest. The Company also acquired a minority interest in a joint venture
owned by Host Marriott that controls two hotels in Mexico City, Mexico totaling
914 rooms for $20 million. See "Business and Properties--1996 Acquisitions and
Other Transactions."
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CORPORATE STRUCTURE
The chart below presents the organizational corporate structure of Host
Marriott and certain of its subsidiaries, after giving effect to the December
1995 distribution by Host Marriott to its shareholders of the stock of a
subsidiary of Host Marriott, which, at the time of such distribution, comprised
Host Marriott's food, beverage and merchandise concessions business at
airports, on tollroads, and at stadiums, arenas and other tourist attractions.
LOGO
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THE EXCHANGE OFFER
The Exchange Offer............ The Company is offering to exchange $350
million principal amount of Series B Notes for
a like principal amount of Series A Notes.
Series B Notes may be exchanged only in
multiples of $1,000 principal amount. The
Company will issue the Series B Notes on or
promptly after the Expiration Date. See "The
Exchange Offer."
Based on an interpretation by the staff of the
Commission set forth in no-action letters
issued to third parties, the Company believes
that Series B Notes issued pursuant to the
Exchange Offer in exchange for Series A Notes
may be offered for resale, resold and otherwise
transferred by any holder thereof (other than
(i) a broker-dealer who purchases such Series B
Notes directly from the Company to resell
pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) a
person that is an "affiliate" of the Company
within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery provisions
of the Securities Act, provided that the holder
is acquiring the Series B Notes in the ordinary
course of its business and that such holder is
not participating, and has no arrangement or
understanding with any person to participate,
in the distribution of such Series B Notes, and
provided further that each broker-dealer that
receives Series B Notes for its own account in
exchange for Series A Notes must acknowledge
that it will deliver a prospectus in connection
with any resale of such Series B Notes. See
"Plan of Distribution." To comply with the
securities laws of certain jurisdictions, it
may be necessary to qualify for sale or
register the Series B Notes prior to offering
or selling such Series B Notes. If a holder of
Series A Notes does not exchange such Series A
Notes for Series B Notes pursuant to the
Exchange Offer, such Series A Notes will
continue to be subject to the restrictions on
transfer contained in the legend thereon. In
general, Series A Notes may not be offered or
sold unless registered under the Securities
Act, except pursuant to an exemption from, or
in a transaction not subject to, the Securities
Act and applicable state securities laws. See
"The Exchange Offer--Consequences of Failure to
Exchange" and "Description of Senior Notes."
Expiration Date............... The Exchange Offer will expire at 5:00 p.m.,
New York City time, on June 17, 1996, unless
extended, in which case the term "Expiration
Date" shall mean the latest date and time to
which the Exchange Offer is so extended
provided, however, that such date shall not
exceed 180 days from the date the Exchange
Offer is consummated.
Conditions to the Exchange
Offer......................... The Exchange Offer is subject to certain
customary conditions, which may be waived by
the Company in whole or in part and from time
to time in its sole discretion. See "The
Exchange Offer
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--Certain Conditions to the Exchange Offer."
The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Series A
Notes being tendered for exchange.
Procedures for Tendering
Series A Notes................ Each holder of Series A Notes wishing to accept
the Exchange Offer must complete, sign and date
the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal,
or such facsimile, together with such Series A
Notes and any other required documentation, to
the Exchange Agent at the address set forth
herein. By executing the Letter of Transmittal,
each Holder (other than participating broker-
dealers) must represent to the Company that,
among other things, (i) the Series B Notes to
be acquired in exchange for Series A Notes
tendered in the Exchange Offer will have been
acquired in the ordinary course of business of
such Holder or such other person receiving such
Series B Notes, (ii) neither such Holder nor
any such other person has an arrangement or
understanding with any person to participate in
the distribution of such Series B Notes, (iii)
such Holder or any such other person
acknowledges and agrees that any person who is
a broker-dealer registered under the Exchange
Act or is participating in the Exchange Offer
for the purposes of distributing the Series B
Notes must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with a secondary
resale transaction of the Series B Notes
acquired by such person and cannot rely on the
position of the staff of the Commission set
forth in certain no-action letters (see "The
Exchange Offer--Resale of the Series B Notes"),
(iv) the holder or any such other person
understands that a resale transaction described
in clause (iii) above and any resales of Series
B Notes obtained by such Holder or such other
person in exchange for Series A Notes acquired
by such Holder or such other person directly
from the Company should be covered by an
effective registration statement containing the
selling securityholder information required by
Item 507 or Item 508, as applicable, of
Regulation S-K of the Commission and (v)
neither the Holder nor any such other person is
an "affiliate," as defined in Rule 405 under
the Securities Act, of the Company. If the
Holder or any such other person receiving the
Series B Notes is a broker-dealer that will
receive Series B Notes for its own account in
exchange for Series A Notes that were acquired
as a result of market-making activities or
other trading activities, the holder or such
other person is required to acknowledge in the
Letter of Transmittal that it will deliver a
prospectus in connection with any resale of
such Series B Notes; however, by so
acknowledging and by delivering a prospectus,
the Holder or such other person will not be
deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. Any
Series A Note not accepted for exchange for any
reason will be returned without expense to the
tendering Holder thereof as
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promptly as practicable after the expiration or
termination of the Exchange Offer. See "The
Exchange Offer--Procedures for Tendering Series
A Notes."
Special Procedures for
Beneficial Holders............ Any beneficial holder whose Series A Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender such Series A Notes
should contact such registered holder promptly
and instruct such registered holder to tender
on its behalf. If such beneficial holder wishes
to tender on its own behalf, such holder must,
prior to completing and executing the Letter of
Transmittal and delivering such Series A Notes,
either make appropriate arrangements to
register ownership of such Series A Notes in
such holder's name or obtain a properly
completed bond power from the record holder.
The transfer of registered ownership may take
considerable time and may not be able to be
completed prior to the Expiration Date. See
"The Exchange Offer--Procedures for Tendering
Series A Notes."
Guaranteed Delivery
Procedures.................... Holders of Series A Notes who wish to tender
their Series A Notes and whose Series A Notes
are not immediately available or who cannot
deliver their Series A Notes and the Letter of
Transmittal or any other documents required by
the Letter of Transmittal to the Exchange Agent
prior to the Expiration Date, must tender their
Series A Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures."
Withdrawal Rights............. Tenders of Series A Notes may be withdrawn at
any time prior to 5:00 p.m., New York City
time, on the Expiration Date. For a withdrawal
to be effective, a written or facsimile notice
of withdrawal must be received by the Exchange
Agent at its address set forth herein. Such
notice must (i) specify the name of the person
having tendered the Series A Notes to be
withdrawn; (ii) identify the Series A Notes to
be withdrawn (including the certificate number
or numbers and principal amount of Series A
Notes to be withdrawn); (iii) be signed by the
Holder in the same manner as the original
signature on the Letter of Transmittal by which
such Series A Notes were tendered; and (iv)
specify the name in which the Series A Notes
are to be registered, if different from that of
the withdrawing Holder. See "The Exchange
Offer--Withdrawal Rights."
Acceptance of Series A Notes
and Delivery of
Series B Notes................ Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company
will accept for exchange any and all Series A
Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date. The Series B
Notes issued pursuant to the Exchange Offer
will be delivered promptly following the
Expiration Date. See "The Exchange Offer--Terms
of the Exchange Offer."
11
<PAGE>
Consequences of Failure to
Exchange...................... Holders of Series A Notes who do not exchange
their Series A Notes for Series B Notes
pursuant to the Exchange Offer (i) will
continue to be subject to the restrictions on
transfer of such Series A Notes as set forth in
the legend thereon and (ii) will be entitled to
all of the rights and preferences of the
Holders of Series A Notes under the Indenture.
In general, Series A Notes that are not
exchanged pursuant to the Exchange Offer may
not be offered or sold except pursuant to a
registration statement under the Securities Act
or an exemption from registration thereunder
and in compliance with applicable state
securities laws. In the event the Company
completes the Exchange Offer, the interest rate
on Series A Notes will remain as stated thereon
and holders of Series A Notes will have no
further rights under the Registration Rights
Agreement.
Certain Tax Considerations.... Latham & Watkins, counsel to the Company, has
advised the Company that because the Series B
Notes should not be considered to differ
materially from the Series A Notes, the
exchange of the Series A Notes for Series B
Notes should not result in any material federal
income tax consequences to holders exchanging
Series A Notes for Series B Notes. For a full
description of the basis of, and limitations
on, this opinion, see "Material Federal Income
Tax Considerations."
Registration Rights
Agreement..................... Pursuant to a registration rights agreement
(the "Registration Rights Agreement") among the
Company, the Initial Guarantors and the initial
purchasers of the Series A Notes (the "Initial
Purchasers"), the Company and the Initial
Guarantors have agreed (i) to file a
registration statement with respect to an offer
to exchange the Series A Notes for a like
principal amount of Series B Notes and (ii) to
use their reasonable best efforts to cause such
registration statement to become effective
under the Securities Act. The Exchange Offer is
intended to satisfy the obligations of the
Company and the Initial Guarantors to the
holders of Series A Notes under the
Registration Rights Agreement, which
obligations terminate upon consummation of the
Exchange Offer. The holders of the Series B
Notes are not entitled to any exchange or
registration rights with respect to the Series
B Notes.
Exchange Agent................ Marine Midland Bank is the Exchange Agent. The
address and telephone number of the Exchange
Agent are set forth in "The Exchange Offer--
Exchange Agent."
12
<PAGE>
SUMMARY OF TERMS OF THE SERIES B NOTES
The Exchange Offer applies to $350 million aggregate principal amount of the
Series A Notes. The form and terms of the Series B Notes will be the same as
the form and terms of the Series A Notes except that (i) the Series B Notes
will be registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof and (ii) the holders of the Series B
Notes will not be entitled to certain rights of the holders of the Series A
Notes under the Registration Rights Agreement, which rights will terminate upon
consummation of the Exchange Offer. The Series B Notes will evidence the same
debt as the Series A Notes and both series of Senior Notes will be entitled to
the benefits of the Indenture and treated as a single class of debt securities
thereunder. See "Description of Senior Notes."
Issuer........................ HMC Acquisition Properties, Inc.
Securities Offered............ $350 million in aggregate principal amount of
9% Senior Notes due 2007, Series B.
Maturity...................... December 15, 2007.
Interest Payment Dates........ June 15 and December 15, commencing June 15,
1996.
Ranking....................... The Series B Notes will be senior obligations
of the Company and will rank pari passu in
right of payment with all existing and future
senior Indebtedness of the Company; provided,
however, that certain Indebtedness incurred by
the Company and its subsidiaries in the future
may be secured by assets held by the Company or
its subsidiaries subject to certain
restrictions described herein. As of March 22,
1996, the aggregate principal amount of
outstanding senior Indebtedness of the Company
was $350 million, consisting solely of the
Series A Notes. The Indenture permits the
Company to incur additional Indebtedness,
including senior Indebtedness, subject to
certain limitations. For a description of the
limitations on the incurrence of additional
Indebtedness, see "Description of Senior
Notes--Certain Covenants--Limitation on
Incurrence of Additional Indebtedness and
Disqualified Capital Stock." As of March 22,
1996, the Company and its subsidiaries had no
Indebtedness secured by assets of the Company
and its subsidiaries.
Guarantees.................... The Series B Notes will be fully and
unconditionally guaranteed on a joint and
several basis by the Initial Guarantors (the
Company's only direct or indirect wholly owned
subsidiaries), limited only to the extent
necessary for each such Guarantee to not
constitute a fraudulent conveyance under
applicable law. The Series B Notes will also be
fully and unconditionally guaranteed on a joint
and several basis by certain subsidiaries of
the Company formed in the future, limited only
to the extent necessary for each such Guarantee
to not constitute a fraudulent convenyance
under applicable law. See "Description of
Senior Notes--Guarantees." The Indenture
provides that all future subsidiaries of the
Company which are not prohibited from
13
<PAGE>
guaranteeing the Senior Notes by law or
pursuant to the terms of an agreement will
guarantee the Senior Notes, provided, however,
that the assets of all such subsidiaries that
do not become Guarantors shall not exceed 15%
of the consolidated assets of the Company and
its subsidiaries. Separate financial statements
for the Initial Guarantors are not presented
herein because, in the view of the Company's
management, such financial statements would not
be material to the investment decision being
made by holders of Series A Notes in connection
with the Exchange Offer.
Optional Redemption........... The Series B Notes may be redeemed at the
option of the Company, in whole or in part, at
any time on or after December 15, 2000, at a
premium declining to par in 2003, plus accrued
and unpaid interest, if any, to the date of
redemption. See "Description of Senior Notes--
Optional Redemption."
Change of Control............. In the event of a Change of Control Triggering
Event (as defined herein), the Company will be
required to make an offer to repurchase the
Series B Notes, at a price equal to 101% of the
aggregate principal amount thereof, plus
accrued and unpaid interest, if any, to the
date of repurchase. A Change of Control
Triggering Event represents the occurrence of
both a Change of Control (as defined herein)
and a Rating Decline (as defined herein). See
"Description of Senior Notes--Certain
Covenants--Repurchase of Senior Notes at the
Option of the Holder Upon a Change of Control."
Certain highly-leveraged transactions,
reorganizations, restructurings, mergers, spin-
offs or similar transactions (including such
transactions involving the Company's
management) may not constitute a Change of
Control or Change of Control Triggering Event
as these terms are defined in the Indenture.
Certain transactions that do not constitute a
Change of Control or a Change of Control
Triggering Event include: (i) transactions
otherwise constituting a Change of Control
which involve Host Marriott and one or more
wholly owned subsidiaries of Host Marriott,
(ii) a pro rata distribution by Host Marriott
to its shareholders of shares of any Host
Marriott subsidiary, including those of the
Company and (iii) a sale of all or
substantially all of the assets of certain
other subsidiaries of Host Marriott. The
Company's equity securities are not subject to
anti-takeover provisions that would be
triggered by a Change of Control Triggering
Event.
As of December 29, 1995, in the event of a
Change of Control Triggering Event, neither the
Company nor its subsidiary would be required to
repurchase Indebtedness other than Senior
Notes. The Company may not have sufficient
financial resources available to fulfill its
obligation to repurchase the Series B Notes
upon a Change of Control Triggering Event.
14
<PAGE>
Certain Covenants............. The Indenture contains certain covenants that,
among other things, limit the ability of the
Company to (i) incur additional Indebtedness
and issue preferred stock, (ii) pay dividends
or make other distributions, (iii) repurchase
capital stock or subordinated Indebtedness,
(iv) create certain liens, (v) enter into
certain transactions with affiliates, (vi) sell
assets of the Company or its subsidiaries,
(vii) issue or sell capital stock of the
Company's subsidiaries or (viii) enter into
certain mergers and consolidations. In
addition, under certain circumstances, the
Company is required to offer to purchase Series
B Notes at a price equal to 100% of the
principal amount thereof, plus accrued and
unpaid interest, if any, to the date of
purchase, with the proceeds of certain Asset
Sales (as defined herein). See "Description of
Senior Notes--Certain Covenants."
RISK FACTORS
Holders of Series A Notes and prospective purchasers of Series B Notes should
carefully consider the factors set forth under "Risk Factors," as well as other
information and data included elsewhere in this Prospectus.
15
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents summary historical consolidated financial data
derived from the Company's audited Consolidated Financial Statements for the
fiscal years ended December 29, 1995 and December 30, 1994 and summary pro
forma condensed consolidated financial information derived from the Company's
unaudited Pro Forma Condensed Consolidated Financial Data for the fiscal year
ended December 29, 1995 and December 30, 1994. The Company was formed in 1994
as an indirect subsidiary of Host Marriott to acquire full-service lodging
properties. Although the Company currently owns 17 full-service properties,
none of these properties was owned by the Company or Host Marriott prior to
January 1, 1994, and a substantial portion of the properties were acquired by
the Company during the fourth quarter of 1994. The historical financial data
reflect the operating results of the acquired hotels for the periods owned by
the Company or an affiliate of the Company. The pro forma financial data
reflect the Offering and the operating results of acquired hotels (other than
one full-service hotel sold in December 1995), and the 1996 acquisition of two
hotels as if such hotels were acquired by the Company at the beginning of the
periods presented. The pro forma financial data set forth below may not
necessarily be indicative of the results that would have been achieved had the
Offering and hotel transactions been consummated as of the dates indicated or
that may be achieved in the future. The information in the table should be read
in conjunction with "Selected Historical Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," "Pro
Forma Condensed Consolidated Financial Data," the Consolidated Financial
Statements of the Company and the financial statements of certain acquired
hotel properties included elsewhere herein. The Company's fiscal year ends on
the Friday closest to December 31.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
------------ ----------------------
FISCAL YEAR FISCAL YEAR
------------ -----------
1994 1995 1994 1995
----- ----- ---- ----
(IN MILLIONS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ 15 $ 72 $79 $89
Operating profit before corporate ex-
pense and interest..................... 6 37 39 46
Corporate expenses...................... 1 4 3 4
Interest expense........................ 1 16 32 32
Interest income......................... 1 1 1 1
Income before extraordinary item(2)..... 3 11 3 7
Net income.............................. 3 8 N/A N/A
OTHER OPERATING DATA:
EBITDA(3)............................... $ 10 $ 49 $61
Cash Interest Expense(4)................ 1 16 31
Depreciation and amortization........... 4 14 17
Maintenance capital expenditures(5)..... 2 9 12
Cash provided by operations(6).......... 10 37 35
Cash used in investing activities(6).... 366 116 33
Cash provided by financing activi-
ties(6)................................ 367 177 3
RATIO DATA:
EBITDA to Cash Interest Expense(7)...... 10.0x 3.1x 2.0x
EBITDA less maintenance capital
expenditures to Cash Interest
Expense(8)............................. 8.0 2.5 1.6
Net Debt to EBITDA(9)................... 15.8 5.0 4.9
Ratio of earnings to fixed charges(10).. 6.0 2.1 1.3
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 29,
1995
----------------
PRO
ACTUAL FORMA(11)
------ ---------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $107 $ 49
Total assets........................................... 588 574
Total debt............................................. 350 350
Shareholder's equity................................... 224 209
</TABLE>
16
<PAGE>
COMPARABLE HOTEL PERFORMANCE
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
ALL PROPERTIES(12):
Number of properties................................... 17 17 17
Number of rooms........................................ 6,850 6,850 6,850
Average daily rate..................................... $85.83 $90.19 $97.37
Occupancy %............................................ 71.5% 72.4% 72.0%
REVPAR(13)............................................. $61.38 $65.29 $70.10
REVPAR % change........................................ -- 6.4% 7.4%
COMPARABLE MARRIOTT PROPERTIES(14):
Number of properties................................... 9 9 9
Number of rooms........................................ 4,059 4,059 4,059
Average daily rate..................................... $86.30 $91.37 $99.29
Occupancy %............................................ 78.4% 79.0% 79.4%
REVPAR(13)............................................. $67.69 $72.22 $78.81
REVPAR % change........................................ -- 6.7% 9.1%
</TABLE>
- --------------------
(1) Pro forma for the acquisition of all full-service properties currently
owned by the Company, the sale of the Springfield Radisson Hotel in
December 1995, new management agreements for certain full-service
properties and the Offering. See "Pro Forma Condensed Consolidated
Financial Data."
(2) In 1995, the Company recognized a $2.6 million extraordinary loss, net of
taxes, on the repayment of the Company's Credit Facility.
(3) EBITDA, as defined in the Indenture, consists of the sum of consolidated
net income, interest expense, income taxes, depreciation and amortization
and certain other noncash items. There are no non-cash items, other than
depreciation and amortization, included in EBITDA for the periods
presented. EBITDA data is presented because such data is used by certain
investors to determine the Company's ability to meet debt service
requirements and is used in the Indenture as part of the tests determining
the Company's ability to incur debt and to make certain restricted
payments. The Company considers EBITDA to be an indicative measure of the
Company's operating performance due to the significance of the Company's
long-lived assets and because EBITDA can be used to measure the Company's
ability to service debt, fund capital expenditures and expand its business;
however, such information should not be considered as an alternative to net
income, operating profit, cash flows from operations, or any other
operating or liquidity performance measure prescribed by generally accepted
accounting principles ("GAAP"). Cash expenditures for various long-term
assets, interest expense and income taxes have been, and will be, incurred
which are not reflected in the EBITDA presentation.
(4) Cash Interest Expense is calculated as GAAP interest expense less
amortization of deferred financing costs.
(5) Maintenance capital expenditures represent disbursements which are
generally equal to 5% of gross hotel sales and are utilized for renewals
and replacements of the hotels' property and equipment.
(6) Pro forma cash flow information has been prepared as if the 1995 and 1996
net addition of four properties, the Offering and the second quarter 1996
dividend to Host Marriott of $15 million (the "Dividend") occurred on
December 30, 1994. The pro forma cash flow information of the Company is
unaudited and presented for informational purposes only and may not reflect
the Company's future cash flows or what the cash flows of the Company would
have been had such transactions occurred as of December 30, 1994.
(7) The ratio of EBITDA to Net Cash Interest Expense for fiscal 1995 on a pro
forma basis would have been 2.1 to 1.0. Net Cash Interest Expense
represents Cash Interest Expense less interest income from an assumed
investment of available pro forma cash and cash equivalents totalling $49
million at a current money market rate of 5.25% per annum for 1995.
(8) The ratio of EBITDA less maintenance capital expenditures to Net Cash
Interest Expense for fiscal 1995 on a pro forma basis would have been 1.7
to 1.0 after including interest income in Cash Interest Expense from an
assumed investment of available pro forma cash and cash equivalents
totalling $49 million at a current money market rate of 5.25% per annum for
1995 (see footnote 7 above).
(9) Net Debt represents total debt less cash and cash equivalents.
(10) The ratio of earnings to fixed charges is computed by dividing income
before taxes, interest expense and other fixed charges by total fixed
charges, including interest expense, amortization of debt issuance costs
and the portion of rent expense that is deemed to represent interest.
(11) Pro forma for the 1996 addition of two full-service properties and the
Dividend.
(12) Includes the properties currently owned by the Company, except for the
Springfield Radisson Hotel which was sold by the Company in December 1995.
(13) REVPAR represents room revenues generated per available room and excludes
food and beverage and other ancillary revenues generated by the property.
(14) Includes all properties that have operated as Marriott brand hotels during
the periods presented, consisting of: Fort Lauderdale Marina Marriott,
South Bend Marriott, San Francisco Airport Marriott, Dallas Marriott
Quorum, Portland Marriott, San Francisco Marriott-- Fisherman's Wharf,
Charlotte Marriott Executive Park, Dallas/Fort Worth Airport Marriott and
Atlanta Northwest Marriott.
17
<PAGE>
RISK FACTORS
Holders of Series A Notes who are considering participation in the Exchange
Offer and prospective purchasers of Series B Notes should carefully consider
the following risk factors in addition to the other information contained in
this Prospectus.
SUBSTANTIAL LEVERAGE AND LIMITED FINANCIAL FLEXIBILITY
The Company has substantial leverage. As of December 29, 1995, the Company
had $350 million of outstanding Indebtedness, representing approximately 61%
of its total capitalization. The Company's business is capital intensive, and
the Company may have significant capital requirements in the future, including
renovation and conversion costs for certain hotel properties. The Company's
level of debt presents risks to the holders of the Senior Notes, including the
risk that the Company might not generate sufficient cash to service the Senior
Notes. In the event that the Company's cash flow and working capital are not
sufficient to fund the Company's expenditures or to service the Senior Notes
or any Indebtedness incurred in the future, the Company would be required to
raise additional funds through capital contributions, the refinancing of all
or part of its Indebtedness, the incurrence of additional permitted
Indebtedness, or the sale of assets. There can be no assurance that any of
these sources of funds would be available in amounts sufficient for the
Company to meet its obligations. Moreover, even if the Company were able to
meet its obligations, its leveraged capital structure could significantly
limit its ability to finance its acquisition program and other capital
expenditures, to compete effectively or to operate successfully under adverse
economic conditions. The Indenture contains financial and operating covenants,
including, but not limited to, restrictions on the Company's ability to incur
additional Indebtedness and issue preferred stock, pay dividends or make other
distributions, create liens, sell assets, enter into certain transactions with
affiliates, and enter into certain mergers and consolidations. See
"Description of Senior Notes." The Company's ability to comply with the terms
of the Indenture (including its ability to comply with such covenants), to
make cash payments with respect to the Senior Notes and to satisfy its other
obligations will depend on the future performance of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Senior
Notes."
COMPETITION AND RISKS OF THE LODGING INDUSTRY
The Company's hotels generally operate in areas that contain numerous other
competitors. There can be no assurance that demographic, geographic or other
changes in markets will not adversely affect the convenience or desirability
of the location of the Company's hotels. Furthermore, there can be no
assurance that, in the markets in which the Company's hotels operate,
competing hotels will not pose greater competition for guests than presently
exists, or that new hotels will not enter such markets.
During the 1980s, construction of lodging facilities in the United States
resulted in an excess supply of available rooms. This over-supply had an
adverse effect on occupancy levels and room rates in the industry. Although
the current outlook for the industry has improved, there can be no assurance
that in the future the lodging industry, including the Company and its hotels,
will not be adversely affected by (i) national and regional economic
conditions, (ii) changes in travel patterns, (iii) seasonality of the hotel
business, (iv) taxes and government regulations which influence or determine
wages, prices, interest rates, construction procedures and costs, and (v) the
availability of credit. Hotel investments are relatively illiquid. Such
illiquidity will tend to limit the ability of the Company to respond to
changes in economic or other conditions.
POTENTIAL CONFLICTS WITH MARRIOTT INTERNATIONAL
The interests of the Company and Marriott International may potentially
conflict due to the ongoing relationships between the companies. Marriott
International serves as the manager for 12, and franchisor for three, of the
Company's 17 lodging properties and provides various other services to Host
Marriott and its subsidiaries, including the Company. In addition, Host
Marriott, the holder, indirectly, of all the capital stock of the Company, and
Marriott International share two common directors--J.W. Marriott, Jr. serves
as Chairman of the Board of Directors, Chief Executive Officer and President
of Marriott International and also serves as a
18
<PAGE>
director of Host Marriott; and Richard E. Marriott is a director of Marriott
International and Chairman of the Board of Directors of Host Marriott. Messrs.
J.W. Marriott, Jr. and Richard E. Marriott, as well as certain other officers
and directors of Marriott International and Host Marriott, also own shares
(and/or options or other rights to acquire shares) in both companies. With
respect to the various contractual arrangements between the two companies, the
potential exists for disagreement as to the quality of services provided by
Marriott International and as to contract compliance. Any such disagreements
between the Company and Marriott International could adversely affect the
performance of one or more of the Company's hotels. Additionally, the possible
desire of the Company, from time-to-time, to finance, refinance or effect a
sale of any of the properties managed by Marriott International may, depending
upon the structure of such transactions, result in a need to modify the
management agreement with Marriott International with respect to such
property. Any such modification proposed by the Company may not be acceptable
to Marriott International, and the lack of consent from Marriott International
could adversely affect the Company's ability to consummate such financing or
sale. In addition, certain situations could arise where actions taken by
Marriott International in its capacity as manager of competing lodging
properties would not necessarily be in the best interests of the Company. Any
such actions by Marriott International could adversely impact one or more of
the Company's hotels. Nevertheless, the Company believes that there is
sufficient mutuality of interest between the Company and Marriott
International to result in a mutually productive relationship. Moreover,
appropriate policies and procedures are followed by the Board of Directors of
Host Marriott and Marriott International to limit the involvement of Messrs.
J.W. Marriott, Jr. and Richard E. Marriott (and, if appropriate, other
officers and directors of such companies) in conflict situations, including
requiring them to abstain from voting as directors of either Host Marriott or
Marriott International (or as directors of any of their subsidiaries) on
certain matters which present a conflict between the companies. For a
description of the Company's relationship with Marriott International, see
"Certain Relationships and Related Transactions--Relationship with Marriott
International."
RISKS OF REAL ESTATE OWNERSHIP
The Company's ownership of real property is substantial. Real estate values
are sensitive to changes in local market and economic conditions and to
fluctuations in the economy as a whole. Furthermore, equity real estate
investments are relatively illiquid. Such illiquidity will tend to limit the
ability of the Company to respond to changes in economic or other conditions.
There can be no assurance that downturns or prolonged adverse conditions in
real estate or capital markets or the economy as a whole will not have a
material adverse impact on the Company.
GUARANTEES
The Senior Notes are fully and unconditionally guaranteed (limited only to
the extent necessary to avoid such Guarantees being considered a fraudulent
conveyance under applicable law) on a joint and several basis by the
Guarantors, which are the Company's only wholly owned subsidiaries. The
Guarantees are senior unsecured obligations of the Guarantors and rank pari
passu in right of payment with all senior Indebtedness of the Guarantors. The
Guarantors' obligations under certain Indebtedness incurred in the future may
be secured by assets held by such Guarantors, subject to certain restrictions,
and, accordingly, the holders of such Indebtedness would have priority over
the Senior Notes with respect to such assets. In addition, the Indenture
provides that any Guarantor will be fully released from its obligations under
its Guarantee, subject to certain limitations, upon (i) the sale or other
disposition of all or substantially all of the assets or properties of a
Guarantor to persons or entities other than the Company and its subsidiaries
or (ii) the consolidation or merger of any Guarantor with any person or entity
other than the Company or a subsidiary of the Company if, as a result of such
consolidation or merger, persons other than the Company and its subsidiaries
beneficially own more than 50% of the stock of the Guarantor.
FRAUDULENT TRANSFER
The obligations of the Company under the Senior Notes may be subject to
review under state or federal fraudulent transfer laws in the event of the
bankruptcy or other financial difficulty of the Company. Under those laws, if
a court in a lawsuit by an unpaid creditor or representative of creditors of
the Company, such as a trustee in bankruptcy or the Company as debtor in
possession, were to find that (i) the Company issued the Senior Notes
19
<PAGE>
and applied the proceeds thereof with the intent of either hindering, delaying
or defrauding creditors or (ii) the Company received less than a reasonably
equivalent value or fair consideration for issuing the Senior Notes, and,
after so applying the proceeds, the Company (a) was insolvent, (b) was
rendered insolvent, (c) was engaged in a business or transaction for which its
remaining unencumbered assets constituted unreasonably small capital, or (d)
intended to incur or believed that it would incur debts beyond its ability to
pay as such debts matured, such court could avoid the Senior Notes and the
Company's obligations thereunder, and direct the return of any amounts paid
thereunder to the Company or to a fund for the benefit of its creditors.
The Company's obligations under the Senior Notes are guaranteed by the
Guarantors, and the Guarantees may also be subject to review under federal or
state fraudulent transfer laws. If a court were to determine that, at the time
a Guarantor became liable under its Guarantee, it satisfied clause (i) or (ii)
of the foregoing paragraph, the court could avoid the Guarantee and direct the
repayment of amounts paid thereunder.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its property at a fair valuation or
if the present fair salable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and matured.
ABSENCE OF PUBLIC MARKET FOR THE SENIOR NOTES
The Series A Notes have not been registered under the Securities Act and are
subject to significant restrictions on resale. The Series B Notes will
constitute a new issue of securities with no established trading market. The
Company does not intend to list the Senior Notes on any national securities
exchange or to seek the admission thereof to trading in the National
Association of Securities Dealers Automated Quotation system. The Company has
been advised by the Initial Purchasers that they presently intend to make a
market in the Senior Notes. However, the Initial Purchasers are not obligated
to do so and any market-making activities with respect to the Senior Notes may
be discontinued at any time without notice. In addition, such market-making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act, and may be limited during the Exchange Offer. If a trading
market does not develop or is not maintained, holders of the Senior Notes may
experience difficulty in reselling the Senior Notes or may be unable to sell
them at all. If a market for the Senior Notes develops, any such market may be
discontinued at any time. If a public trading market develops for the Senior
Notes, future trading prices of the Senior Notes will depend on many factors,
including, among other things, prevailing interest rates, the Company's
results of operations and the market for similar securities. Depending on
prevailing interest rates, the market for similar securities and other
factors, including the financial condition of the Company, the Senior Notes
may trade at a discount from their principal amount.
MANAGEMENT OF THE COMPANY
The Company has no employees. Host Marriott provides to the Company the
services of certain Host Marriott employees (including the Company's executive
officers). The amount of time that each executive officer will devote to the
business of the Company will be determined by management, based on
management's judgment as to the amount of time necessary to conduct the
business of the Company. However, such executive officers also will devote an
equal or greater portion of their time to the business of Host Marriott and
its other subsidiaries. Implementation of the Company's future business
strategy to acquire full-service hotels primarily in the U.S. will be
dependent upon officers of the Company who may have similar obligations to
Host Marriott or its affiliates. To the extent that opportunities to purchase
economically desirable full service hotels are made available to Host Marriott
and its subsidiaries, management may determine that any such opportunity shall
be pursued by Host Marriott itself or one of its other subsidiaries, rather
than by the Company. Accordingly, there can be no assurance that the Company
will be provided the opportunity to purchase or acquire an economically
desirable full-service hotel which also may be available to Host Marriott or
one of its other subsidiaries.
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RISKS INVOLVED IN INVESTMENTS THROUGH PARTNERSHIPS OR JOINT VENTURES
The Company has entered into joint venture arrangements for certain full-
service properties with the manager of such hotels and/or an affiliate of Host
Marriott. In the future, the Company may selectively use joint venture
arrangements to acquire properties. Joint venturers may have certain rights
over the operation of the joint venture assets. Therefore, such investments
may, under certain circumstances, involve risks such as the possibility that
the co-venturer in an investment might become bankrupt, or have economic or
business interests or goals that are inconsistent with the business interests
or goals of the Company, or be in a position to take action contrary to the
instructions or the requests of the Company or contrary to the Company's
policies or objectives. Consequently, actions by a co-venturer might result in
subjecting hotel properties owned by the joint venture to additional risk.
Although the Company will seek to maintain sufficient control of any joint
venture to permit the Company's objectives to be achieved, it may be unable to
take action without the approval of its joint venture partners or its joint
venture partners could take actions binding on the joint venture without the
Company's consent. Additionally, should a joint venture partner become
bankrupt, the Company could, in certain circumstances, become liable for such
partner's share of joint venture liabilities.
FAILURE TO EXCHANGE SERIES A NOTES
The Series B Notes will be issued in exchange for Series A Notes only after
timely receipt by the Exchange Agent of such Series A Notes, a properly
completed and duly executed Letter of Transmittal and all other required
documents. Therefore, holders of Series A Notes desiring to tender such Series
A Notes in exchange for Series B Notes should allow sufficient time to ensure
timely delivery. Neither the Exchange Agent nor the Company is under any duty
to give notification of defects or irregularities with respect to tenders of
Series A Notes for exchange. Series A Notes that are not tendered, or are
tendered but not accepted, will, following consummation of the Exchange Offer,
continue to be subject to the existing restrictions upon transfer thereof. In
addition, any holder of Series A Notes who tenders in the Exchange Offer for
the purpose of participating in a distribution of the Series B Notes will be
required to comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction. Each broker-
dealer that receives Series B Notes for its own account in exchange for Series
A Notes, where such Series A Notes were acquired by such broker-dealer as a
result of market-making activities or any other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Series B Notes. See "Plan of Distribution." To the extent that Series A
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Series A Notes could be adversely
affected due to the limited amount, or "float," of the Series A Notes that are
expected to remain outstanding following the Exchange Offer. Generally, a
lower "float" of a security could result in less demand to purchase such
security and could, therefore, result in lower prices for such security. For
the same reason, to the extent that a large amount of Series A Notes are not
tendered or are tendered and not accepted in the Exchange Offer, the trading
market for the Series B Notes could be adversely affected. See "The Exchange
Offer."
REPURCHASE OF THE NOTES UPON A CHANGE OF CONTROL
The provisions of the Indenture relating to a Change of Control Triggering
Event may not afford the holders of Senior Notes protection in the event of a
highly-leveraged transaction, reorganization, restructuring, merger, spin-off
or similar transaction (including such transactions involving the Company's
management) that may adversely affect holders of Senior Notes, if such
transaction does not constitute a Change of Control Triggering Event as set
forth in the Indenture. In addition, the Company may not have sufficient
financial resources available to fulfill its obligations to repurchase the
Senior Notes upon a Change of Control Triggering Event. Certain transactions
not constituting a Change of Control or Change of Control Triggering Event
include, but are not limited to, (i) transactions otherwise constituting a
Change of Control of the Company involving Host Marriott or one or more wholly
owned subsidiaries of Host Marriott, (ii) a pro rata distribution by Host
Marriott to its shareholders of shares of any Host Marriott subsidiary,
including those of the Company, and (iii) a sale of all or substantially all
of the assets of certain other subsidiaries of Host Marriott. The phrase "all
or substantially all" is not defined in the Indenture and will likely be
interpreted under applicable state law and be dependent upon particular facts
and circumstances. As a result, there may be a degree of uncertainty in
determining whether a sale or transfer of "all or substantially all" of the
assets of an entity has occurred, and a consequent uncertainty may arise with
respect to a repurchase by the Company of the Senior Notes upon such sale or
transfer.
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THE COMPANY
The Company is a direct, wholly owned subsidiary of HMC Acquisitions, Inc.,
which is a direct, wholly owned subsidiary of Host Marriott. The Company was
formed in 1994 to acquire and own full-service lodging properties. The Company
was originally capitalized by Host Marriott through the contribution of four
hotel properties, with a book value of $162 million, purchased in 1994 by
affiliates, as well as an additional contribution of $48 million in cash.
These contributions were made primarily from a portion of the proceeds of a
$230 million public equity offering by Host Marriott consummated in January
1994. Since its formation, the Company has utilized the cash contributed by
Host Marriott as well as borrowings under the Credit Facility and certain of
the proceeds of the Offering to acquire an additional 14 full-service hotels,
one of which was sold in December 1995. See "Business and Properties--Hotel
Lodging Properties." All but one of the Company's lodging properties are
operated as Marriott brand full-service hotels. Twelve of the Company's 17
lodging properties are managed by Marriott International; four properties are
managed by Interstate, two of which operate under the Marriott brand, one of
which has been closed and is being converted to the Marriott brand, and one of
which is operated under the Delta brand; and the remaining, non-Marriott brand
property is operated as a Holiday Inn Sunspree Resort and managed by a
subsidiary of Vista Host, Inc. ("Vista"), an unrelated third party.
The Company's headquarters are located at 10400 Fernwood Road, Bethesda,
Maryland 20817, and its telephone number is (301) 380-9000.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Series A Notes were sold by the Company on December 20, 1995 (the
"Closing Date") to the Initial Purchasers. The Initial Purchasers subsequently
placed the Series A Notes with qualified institutional buyers and
institutional accredited investors in transactions not requiring registration
under the Securities Act or applicable state securities laws, including sales
pursuant to Rule 144A under the Securities Act. As a condition to the sale of
the Series A Notes, the Company and the Initial Purchasers entered into the
Registration Rights Agreement on December 20, 1995. Pursuant to the
Registration Rights Agreement, the Company agreed that, unless the Exchange
Offer is not permitted by applicable law or Commission policy, it would (i)
file with the Commission a Registration Statement under the Securities Act
with respect to the Series B Notes within 90 days after the Closing Date, (ii)
use its reasonable best efforts to cause such Registration Statement to become
effective under the Securities Act within 150 days after the Closing Date, and
(iii) upon effectiveness of the Registration Statement, commence the Exchange
Offer, maintain the effectiveness of the Registration Statement for at least
30 days (or a longer period if required by law) and deliver to the Exchange
Agent Series B Notes in the same aggregate principal amount as the Series A
Notes that were properly tendered by holders thereof pursuant to the Exchange
Offer. A copy of the Registration Rights Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
Registration Statement of which this Prospectus is a part is intended to
satisfy certain of the Company's obligations under the Registration Rights
Agreement.
RESALE OF THE SERIES B NOTES
With respect to the Series B Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder (other than (i) a broker-dealer
who purchases such Series B Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii)
any such holder which is an "affiliate" of the Company (within the meaning of
Rule 405 under the Securities Act)) who exchanges the Series A Notes for the
Series B Notes in the ordinary course of business and who is not
participating, does not intend to participate, and has no arrangement with any
person to participate, in the distribution of the Series B Notes, will be
allowed to resell the Series B Notes to the public without further
registration under the Securities Act and without delivering to the purchasers
of the Series B Notes a prospectus that satisfies the requirements of Section
10 of the Securities Act. However, if any holder acquires the Series B Notes
in the Exchange Offer for the purpose of distributing or participating in the
distribution of the Series B Notes or is a broker-dealer, such holder cannot
rely on the position of the staff of the Commission enumerated in certain no-
action letters issued to third parties and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction, unless an exemption from registration is otherwise
available. Each broker-dealer that receives Series B Notes for its own account
in exchange for Series A Notes, where such Series A Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Series B Notes. The Letter of Transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Series B Notes received in exchange for Series A Notes where such Series A
Notes were acquired by such broker-dealer as a result of market-making or
other trading activities. Pursuant to the Registration Rights Agreement, the
Company has agreed to make this Prospectus, as it may be amended or
supplemented from time to time, available to broker-dealers for use in
connection with any resale for a period of 180 days after the Expiration Date.
See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Series A
Notes validly tendered and not withdrawn prior to 5:00 p.m., New
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York City time, on the Expiration Date. The Company will issue $1,000
principal amount of Series B Notes in exchange for each $1,000 principal
amount of outstanding Series A Notes accepted in the Exchange Offer. Holders
may tender some or all of their Series A Notes pursuant to the Exchange Offer.
However, Series A Notes may be tendered only in integral multiples of $1,000.
The Series B Notes will evidence the same debt as the Series A Notes for
which they are exchanged, and are entitled to the benefits of the Indenture.
The form and terms of the Series B Notes are the same as the form and terms of
the Series A Notes except that (i) the Series B Notes have been registered
under the Securities Act and hence will not bear legends restricting the
transfer thereof and (ii) Holders of Series B Notes will not be entitled to
certain rights of Holders of Series A Notes under the Registration Rights
Agreement, which rights will terminate upon consummation of the Exchange
Offer.
As of the date of this Prospectus, $350 million in aggregate principal
amount of the Series A Notes are outstanding and registered in the name of
Cede & Co., as nominee for the Depository. Only a registered holder of the
Series A Notes (or such holder's legal representative or attorney-in-fact) as
reflected on the records of the Trustee under the Indenture may participate in
the Exchange Offer. There will be no fixed record date for determining
registered holders of the Series A Notes entitled to participate in the
Exchange Offer.
Holders do not have any appraisal or dissenters' rights under the Delaware
General Corporation Law or the Indenture in connection with the Exchange
Offer. The Company intends to conduct the Exchange Offer in accordance with
the provisions of the Registration Rights Agreement and the applicable
requirements of the Securities Act, the Exchange Act and the rules and
regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Series A Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
for the purpose of receiving the Series B Notes from the Company.
If any tendered Series A Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Series A Notes will be
returned, without expense, to the tendering Holder thereof as promptly as
practicable after the Expiration Date.
Holders whose Series A Notes are not tendered or are tendered but not
accepted in the Exchange Offer will continue to hold such Series A Notes and
will be entitled to all the rights and preferences and subject to the
limitations applicable thereto under the Indenture. Following consummation of
the Exchange Offer, the Holders will continue to be subject to the existing
restrictions upon transfer thereof and the Company will have no other
obligation to such Holders to provide for the registration under the
Securities Act of the Series A Notes held by them. To the extent that Series A
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Series A Notes could be adversely
affected.
Holders who tender Series A Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Series A
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "--Fees and Expenses; Solicitation of Tenders."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean June 17, 1996, unless the Company, in
its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended, provided, however, that such date shall not exceed 180 days from the
date the Exchange Offer is consummated.
In order to extend the Expiration Date, the Company will notify the Exchange
Agent of any extension by oral or written notice and will issue a press
release or other public announcement, each prior to 9:00 a.m., New
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York City time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that the Company is extending the
Exchange Offer for a specified period of time or on a daily basis until 5:00
p.m., New York City time, on the date on which a specified percentage of
Series A Notes are tendered.
The Company reserves the right (i) to delay accepting any Series A Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not accept
Series A Notes not previously accepted if any of the conditions set forth
below under "--Certain Conditions to the Exchange Offer" shall not have been
satisfied and shall not have been waived by the Company, by giving oral or
written notice of such delay, extension or termination to the Exchange Agent,
or (ii) to amend the terms of the Exchange Offer in any manner deemed by it to
be advantageous to the Holders. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof to the Holders. If the Exchange Offer is amended in
a manner determined by the Company to constitute a material change, the
Company will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to all Holders, and the Company will
extend the Exchange Offer for a period of five to ten business days, depending
upon the significance of the amendment and the manner of disclosure to
Holders, if the Exchange Offer would otherwise expire during such five to ten
business day period. During any extension of the Expiration Date, all Series A
Notes previously tendered will remain subject to the Exchange Offer and may be
accepted for exchange by the Company.
Without limiting the manner in which the Company may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely
release to the Dow Jones News Service.
INTEREST ON THE SENIOR NOTES
Interest accrues on the Senior Notes at the rate of 9% per annum and will be
payable in cash semiannually in arrears on each June 15 and December 15 (or,
if not a Business Day, the next succeeding Business Day), commencing on June
17, 1996. On June 17, 1996, Holders of record of Series A Notes on June 1,
1996 will receive interest from the Closing Date to June 17, 1996, and no
interest shall be payable on the Series B Notes for the period (if any) from
the initial issuance thereof to June 17, 1996. In the event the initial
issuance of Series B Notes occurs on or after June 17, 1996, on December 16,
1996, Holders of Series B Notes of record on December 1, 1996 will receive
interest on the Series B Notes from the date of initial issuance thereof, plus
an amount equal to the accrued interest on the Series A Notes from June 17,
1996 to the date of exchange thereof for Series B Notes. Holders of Series A
Notes that are accepted for exchange will be deemed to have waived the right
to receive interest on the Series B Notes for the period (if any) from the
date of the initial issuance thereof to June 17, 1996, or, in the event the
initial issuance of Series B Notes occurs on or after June 17, 1996, will be
deemed to have waived the right to receive any interest accrued on the Series
A Notes for the period commencing June 17, 1996.
PROCEDURES FOR TENDERING SERIES A NOTES
The tender to the Company of Series A Notes by a Holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering Holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a Holder who wishes to
tender Series A Notes for exchange pursuant to the Exchange Offer must
transmit a properly completed and duly executed Letter of Transmittal,
including all other documents required by such Letter of Transmittal, to the
Exchange Agent at the address set forth below under "--Exchange Agent" on or
prior to the Expiration Date. In addition, either (i) certificates for such
Series A Notes must be received by the Exchange Agent along with the Letter of
Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-
Entry Confirmation") of such Series A Notes, if such procedure is available,
into the Exchange Agent's account at The Depository Trust Company (the
"Depository") pursuant to the procedure for book-entry transfer described
below, must be received by the Exchange Agent prior to the Expiration Date, or
(iii) the Holder must comply with the guaranteed delivery procedures described
below.
THE METHOD OF DELIVERY OF SERIES A NOTES, LETTERS OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY
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INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTERS OF TRANSMITTAL OR SERIES A NOTES SHOULD BE SENT TO
THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Series A Notes surrendered for exchange pursuant thereto are
tendered (i) by a registered Holder of the Series A Notes who has not
completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined below). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be made by a firm which is a
member of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. or by a commercial bank or
trust company having an office or correspondent in the United States or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act which is a member of one of the recognized signature guarantee
programs identified in the Letter of Transmittal (collectively, "Eligible
Institutions"). If Series A Notes are registered in the name of a person other
than the person signing the Letter of Transmittal, the Series A Notes
surrendered for exchange must be endorsed by, or be accompanied by a written
instrument or instruments of transfer or exchange, in satisfactory form as
determined by the Company in its sole discretion, duly executed by the
registered Holder with the signature thereon guaranteed by an Eligible
Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Series A Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and
all tenders of any particular Series A Notes not properly tendered or to not
accept any particular Series A Notes which acceptance might, in the judgment
of the Company or its counsel, be unlawful. The Company also reserves the
absolute right in its sole discretion to waive any defects or irregularities
or conditions of the Exchange Offer as to any particular Series A Notes either
before or after the Expiration Date (including the right to waive the
ineligibility of any Holder who seeks to tender Series A Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
as to any particular Series A Notes either before or after the Expiration Date
(including the Letter of Transmittal and instructions thereto) by the Company
shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with the tenders of Series A Notes for exchange
must be cured within such reasonable period of time as the Company shall
determine. Neither the Company, the Exchange Agent nor any other person shall
be under any duty to give notification of any defect or irregularity with
respect to any tender of Series A Notes for exchange, nor shall any of them
incur any liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered Holder or Holders of Series A Notes, such Series A Notes must be
endorsed or accompanied by an appropriate bond power, in either case signed
exactly as the names of the registered Holder or Holders that appear on the
Series A Notes.
If the Letter of Transmittal or any Series A Notes or bond power is signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such person should so indicate when signing and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must
be submitted.
By tendering, each Holder (other than participating broker-dealers) will
represent to the Company that, among other things, (i) the Series B Notes to
be acquired in exchange for Series A Notes tendered in the Exchange Offer will
have been acquired in the ordinary course of business of such Holder or such
other person receiving such Series B Notes, (ii) neither such Holder nor any
such other person has an arrangement or understanding with any person to
participate in the distribution of such Series B Notes, (iii) such Holder or
any such other person acknowledges and agrees that any person who is a broker-
dealer registered under the Exchange Act or is participating in the Exchange
Offer for the purposes of distributing the Series B Notes must comply
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with the registration and prospectus delivery requirements of the Securities
Act in connection with a secondary resale transaction of the Series B Notes
acquired by such person and cannot rely on the position of the staff of the
Commission set forth in certain no-action letters, (iv) the Holder or any such
other person understands that a secondary resale transaction described in
clause (iii) above and any resales of Series B Notes obtained by such Holder
or such other person in exchange for Series A Notes acquired by such Holder or
such other person directly from the Company should be covered by an effective
registration statement containing the selling securityholder information
required by Item 507 or Item 508, as applicable, of Regulation S-K of the
Commission and (v) neither the Holder nor any such other person is an
"affiliate," as defined in Rule 405 under the Securities Act, of the Company.
If the Holder or such other person receiving the Series B Notes is a broker-
dealer that will receive Series B Notes for its own account in exchange for
Series A Notes that were acquired as a result of market-making activities or
other trading activities, the Holder or such other person is required to
acknowledge in the Letter of Transmittal that it will deliver a prospectus in
connection with any resale of such Series B Notes; however, by so
acknowledging and by delivering a prospectus, the Holder or such other person
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
ACCEPTANCE OF SERIES A NOTES FOR EXCHANGE; DELIVERY OF SERIES B NOTES; RETURN
OF SERIES A NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Series A
Notes properly tendered and will issue the Series B Notes promptly after
acceptance of the Series A Notes. See "--Certain Conditions to the Exchange
Offer" below. For purposes of the Exchange Offer, the Company shall be deemed
to have accepted properly tendered Series A Notes for exchange when and if the
Company has given oral or written notice thereof to the Exchange Agent.
In all cases, issuance of Series B Notes for Series A Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Series A Notes
or a timely Book-Entry Confirmation of transfer of such Series A Notes into
the Exchange Agent's account at the Depository, a properly completed and duly
executed Letter of Transmittal and all other required documents. If any
tendered Series A Notes are not accepted for any reason set forth in the terms
and conditions of the Exchange Offer or if certificates representing Series A
Notes are submitted for a greater principal amount than the Holder desires to
exchange, such unaccepted, withdrawn or non-exchanged Series A Notes will be
returned without expense to the tendering Holder thereof (or, in the case of
Series A Notes tendered by book-entry transfer into the Exchange Agent's
account at the Depository pursuant to the book-entry transfer procedures
described below, such non-exchanged Series A Notes will be credited to an
account maintained with the Depository) as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Series A Notes at the Depository for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depository's systems may make book-
entry delivery of Series A Notes by causing the Depository to transfer such
Series A Notes into the Exchange Agent's account at the Depository in
accordance with the Depository's procedure for transfer. However, although
delivery of Series A Notes may be effected through book-entry transfer at the
Depository, the Letter of Transmittal or a facsimile thereof, with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the Exchange Agent at the address set
forth below under "--Exchange Agent" on or prior to the Expiration Date or the
guaranteed delivery procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered Holder of the Series A Notes desires to tender such Series A
Notes and the Series A Notes are not immediately available, or time will not
permit such Holder's Series A Notes or other required documents to reach the
Exchange Agent before the Expiration Date, or the procedure for book-entry
transfer cannot be completed on a timely basis, a tender may be effected if
(i) the tender is made through an Eligible Institution,
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(ii) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery,
substantially in the form provided by the Company (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the Holder of Series A Notes and the amount of Series A Notes
tendered, stating that the tender is being made thereby and guaranteeing that
within three business days after the date of execution of the Notice of
Guaranteed Delivery, the certificates of all physically tendered Series A
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent and (iii) the
certificates for all physically tendered Series A Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal, are received by the Exchange
Agent within three business days after the date of execution of the Notice of
Guaranteed Delivery.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Series A Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL RIGHTS
Tenders of Series A Notes may be withdrawn at any time prior to the
Expiration Date.
For a withdrawal to be effective, a written or facsimile notice of
withdrawal must be received by the Exchange Agent at the address set forth
below under "--Exchange Agent." Any such notice of withdrawal must (i) specify
the name of the person having tendered the Series A Notes to be withdrawn,
(ii) identify the Series A Notes to be withdrawn (including the certificate
number or numbers and the principal amount of Series A Notes to be withdrawn),
(iii) be signed by the Holder in the same manner as the signature on the
Letter of Transmittal by which such Series A Notes were tendered (including
any required signature guarantees) and (iv) specify the name in which such
Series A Notes are to be registered if different from that of the withdrawing
Holder. If Series A Notes have been tendered pursuant to the procedure for
book-entry described above, any notice of withdrawal must specify, in lieu of
certificate numbers, the name and number of the account at the Depository to
be credited with the withdrawn Series A Notes and otherwise comply with the
procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties.
Any Series A Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any Series A Notes
which have been tendered for exchange but which are not exchanged for any
reason will be returned to the Holder thereof without cost to such Holder (or,
in the case of Series A Notes tendered by book-entry transfer into the
Exchange Agent's account at the Depository pursuant to the book-entry transfer
procedures described above, such Series A Notes will be credited to an account
maintained with the Depository for the Series A Notes) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Series A Notes may be retendered by following one of the
procedures described under "--Procedures for Tendering Series A Notes" above
at any time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company's
obligation to accept for exchange, or exchange Series B Notes for, any Series
A Notes not theretofore accepted for exchange is subject to the following
conditions:
(a) no action or proceeding having been instituted or threatened in any
court or by or before any governmental agency with respect to the Exchange
Offer which, in the judgment of the Company, might impair the ability of
the Company to proceed with the Exchange Offer or have a material adverse
effect on the Company and there shall not have occurred any material
adverse development in any existing action or proceeding with respect to
the Company or any of its subsidiaries; and
(b) there shall not have been any material change, or development
involving a prospective change, in the business or financial affairs of the
Company or any of its subsidiaries which, in the judgment of the
28
<PAGE>
Company, would materially impair the Company's ability to consummate the
Exchange Offer or have a material adverse impact on the Company if the
Exchange Offer is consummated; and
(c) there shall not have been proposed, adopted or enacted any law,
statute, rule or regulation which, in the judgment of the Company, might
materially impair the ability of the Company to proceed with the Exchange
Offer or have a material adverse effect on the Company if the Exchange
Offer is consummated; and
(d) all governmental approvals which the Company shall deem necessary for
the consummation of the Exchange Offer as contemplated hereby shall have
been obtained.
If the Company determines in good faith that any of the conditions are not
met, the Company may (i) refuse to accept any Series A Notes and return all
tendered Series A Notes to exchanging Holders, (ii) extend the Exchange Offer
and retain all Series A Notes tendered prior to the expiration of the Exchange
Offer, subject, however, to the rights of Holders to withdraw such Series A
Notes (see "--Withdrawal Rights") or (iii) waive certain of such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Series A Notes which have not been withdrawn. If such waiver constitutes a
material change to the Exchange Offer, the Company will promptly disclose such
waiver by means of a prospectus supplement that will be distributed to all
Holders.
Holders have certain rights and remedies against the Company under the
Registration Rights Agreement. If, notwithstanding a failure of the conditions
stated above, (i) a registration statement concerning the Exchange Offer has
not been filed on or prior to the 90th day after the Closing Date, (ii) such
registration statement is not deemed effective by the Commission on or prior
to the 150th day after the Closing Date, (iii) such registration statement is
declared effective by the Commission and the Company does not exchange Series
B Notes for all Series A Notes validly tendered on or prior to 45 days
following the earlier of the actual effectiveness date or the 150th day after
the Closing Date or (iv) a registration statement for an offering to be made
on a continuous basis pursuant to Rule 415 under the Securities Act has been
declared effective by the Commission and ceases to be effective or usable
during the 36 months after the Closing Date without being cured on the same
day (each, a "Registration Default"), with respect to the first 90-day period
following the date on which such Registration Default occurs, Holders have the
right to receive liquidated damages of $.05 per week per $1,000 principal
amount of Series A Notes for each week or portion thereof that the
Registration Default continues. The amount of such liquidated damages will
increase by $.05 per week per $1,000 principal amount of Series A Notes after
each subsequent 90-day period until all Registration Defaults are cured;
provided, however, that such liquidated damages shall not exceed $.30 per week
per $1,000 principal amount of Series A Notes.The conditions stated above are
not intended to modify these rights or remedies in any respect.
The foregoing conditions are for the benefit of the Company and may be
asserted by the Company in good faith regardless of the circumstances giving
rise to such condition or may be waived by the Company in whole or in part at
any time and from time to time in its discretion. The failure by the Company
at any time to exercise the foregoing rights shall not be deemed a waiver of
any such right and each such right shall be deemed an ongoing right which may
be asserted at any time and from time to time.
TERMINATION OF CERTAIN RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of holders of the Series A Notes eligible to participate in the
Exchange Offer will terminate upon consummation of the Exchange Offer except
with respect to the Company's continuing obligations (i) to indemnify such
holders (including any broker-dealers) and certain parties related to such
holders against certain liabilities (including liabilities under the
Securities Act), (ii) to provide, upon the request of any holder of a
transfer-restricted Series A Note, the information required by Rule 144A(d)(4)
under the Securities Act in order to permit resales of such Series A Notes
pursuant to Rule 144A, (iii) to use its best efforts to keep the Registration
Statement effective to the extent necessary to ensure that it is available for
resales of Series B Notes by broker-dealers for a period of 180 days after the
Expiration Date and (iv) to provide copies of the latest version of the
Prospectus to broker-dealers upon their request for a period of 180 days after
the Expiration Date.
29
<PAGE>
EXCHANGE AGENT
Marine Midland Bank has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies
of this Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
BY REGISTERED OR CERTIFIED MAIL; BY OVERNIGHT COURIER; OR BY HAND
MARINE MIDLAND BANK
140 BROADWAY-LEVEL A
NEW YORK, NEW YORK 10005
(212) 658-5931
ATTENTION: CORPORATE TRUST OPERATIONS
BY FACSIMILE:
(212) 658-2292
ATTENTION: CORPORATE TRUST OPERATIONS
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES; SOLICITATION OF TENDERS
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$350,000 and include registration fees, fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Series A Notes pursuant to the Exchange Offer. If, however, certificates
representing Series B Notes or Series A Notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered
holder of the Series A Notes tendered, or if tendered Series A Notes are
registered in the name of any person other than the person signing the Letter
of Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Series A Notes pursuant to the Exchange Offer, then the amount of
any such other taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the Letter
of Transmittal, the amount of such transfer taxes will be billed directly to
such tendering Holder.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than officers of
the Company and the Exchange Agent. If given or made by any other person, such
information or representations should not be relied upon as having been
authorized by the Company. Neither the delivery of this Prospectus nor any
exchange made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the
respective dates as of which information is given herein. The Exchange Offer
is not being made to (nor will tenders be accepted from or on behalf of)
Holders in any jurisdiction in which the making of the Exchange Offer or the
acceptance thereof would not be in compliance with the laws of such
jurisdiction.
30
<PAGE>
ACCOUNTING TREATMENT
The Series B Notes will be recorded at the same carrying value as the Series
A Notes, which is face value, as reflected in the Company's accounting records
on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized. The costs of the Exchange Offer will be expensed
over the term of the Series B Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Series A Notes who do not exchange their Series A Notes for
Series B Notes pursuant to the Exchange Offer (i) will continue to be subject
to the restrictions on transfer of such Series A Notes as set forth in the
legend thereon and (ii) will be entitled to all of the rights and preferences
of Holders of Series A Notes under the Indenture. In general, the Series A
Notes may not be offered or sold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
intend to register the Series A Notes under the Securities Act. Such
restrictions may impair the ability of such non-tendering Holders to sell
their Series A Notes. In the event the Company completes the Exchange Offer,
the interest rate on the Series A Notes will remain as stated thereon and
holders of Series A Notes will have no further rights under the Registration
Right Agreement.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Series B Notes offered hereby. In consideration for issuing the Series B Notes
as contemplated in this Prospectus, the Company will receive in exchange
Series A Notes in like principal amount, the terms of which are identical to
the Series B Notes except that (i) the Series B Notes will be registered under
the Securities Act and, therefore, will not bear legends restricting the
transfer thereof and (ii) the holders of the Series B Notes will not be
entitled to certain rights of the holder of the Series A Notes under the
Registration Rights Agreement, which rights will terminate upon consummation
of the Exchange Offer. The Series A Notes surrendered in exchange for Series B
Notes will be retained by the Company and the Exchange Offer will not result
in any increase in the indebtedness of the Company.
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
December 29, 1995, and pro forma capitalization as of December 29, 1995, after
giving effect to the transactions described in the "Pro Forma Condensed
Consolidated Financial Data." The capitalization of the Company should be read
in conjunction with the Company's Consolidated Financial Statements and the
notes thereto, the "Pro Forma Condensed Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," each contained elsewhere herein.
<TABLE>
<CAPTION>
AS OF DECEMBER 29, 1995
---------------------------
ACTUAL PRO FORMA(1)
----------- --------------
(IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents...................... $ 107 $ 49
=========== ===========
Debt........................................... $ 350 $ 350
Shareholder's equity........................... 224 209
----------- -----------
Total capitalization......................... $ 574 $ 559
=========== ===========
</TABLE>
- ---------------------
(1) Pro forma for the 1996 addition of two-full service properties and the
Dividend. See "Pro Forma Condensed Consolidated Financial Data."
31
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The unaudited Pro Forma Condensed Consolidated Financial Data of the Company
reflects the following transactions in the case of the Pro Forma Condensed
Consolidated Statements of Operations for the fiscal years ended December 29,
1995 and December 30, 1994, as if such transactions had been completed at the
beginning of the applicable period and, in the case of the Pro Forma Condensed
Consolidated Balance Sheet, as if such transactions, as applicable, had been
completed as of December 29, 1995:
.1994 and 1995 net addition of 15 full-service properties
.1996 addition of two full-service properties
.1996 dividend to Host Marriott
.Consummation of the Offering
During 1994 and 1995, the Company added 15 full-service hotel properties
(excluding one full-service property acquired in 1994 which was sold in
December 1995) and entered into new management agreements for certain
properties. The Company also added two properties in 1996, the Toronto Delta
Meadowvale and the Pittsburgh Hyatt. The impact of the acquisitions and the
new terms of the management agreements have been reflected in the accompanying
Pro Forma Condensed Consolidated Statements of Operations. During the second
quarter of 1996, the Company made a $15 million dividend (the "Dividend") to
Host Marriott as permitted under the Indenture.
The Company issued $350 million of Senior Notes in the fourth quarter of
1995, utilizing the net proceeds to repay in full the outstanding borrowings
under, and terminate, the Credit Facility as well as to finance future
acquisitions of full-service lodging properties.
The Pro Forma Condensed Consolidated Financial Data of the Company are
unaudited and presented for informational purposes only and may not reflect
the Company's future results of operations and financial position or what the
results of operations and financial position of the Company would have been
had such transactions occurred as of the dates indicated. The unaudited Pro
Forma Condensed Consolidated Financial Data and Notes thereto should be read
in conjunction with the Company's Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained elsewhere herein.
32
<PAGE>
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
AS OF DECEMBER 29, 1995
---------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Property and equipment,
net...................... $456 $ 44 (A) $500
Due from hotel manager.... 9 -- 9
Other assets.............. 16 -- 16
Cash and cash equivalents. 107 (43)(A) 49
(15)(B)
---- ----- ----
Total assets............ $588 $(14) $574
==== ===== ====
LIABILITIES AND SHAREHOLD-
ER'S EQUITY
Debt...................... $350 $ -- $350
Other liabilities......... 14 1 (A) 15
---- ----- ----
Total liabilities....... 364 1 365
Shareholder's equity...... 224 (15)(B) 209
---- ----- ----
Total liabilities and
shareholder's equity... $588 $ (14) $574
==== ===== ====
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Data.
33
<PAGE>
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT RATIO DATA)
FISCAL YEAR ENDED DECEMBER 29, 1995
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Revenues....................................... $72 $ 6 (C) $89
11 (D)
Operating costs and expenses................... 35 3 (C) 43
5 (D)
--- ---- ---
Operating profit............................... 37 9 46
Corporate expenses............................. 4 -- 4
Interest expense............................... 16 16 (E) 32
Interest income................................ 1 -- 1
--- ---- ---
Income (loss) before income taxes.............. 18 (7) 11
(Provision) benefit for income taxes........... (7) 3 (F) (4)
--- ---- ---
Income (loss) before extraordinary item........ $11 $ (4) $ 7
=== ==== ===
</TABLE>
FISCAL YEAR ENDED DECEMBER 30, 1994
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Revenues...................................... $15 $ 5 (C) $79
59 (D)
Operating costs and expenses.................. 9 4 (C) 40
27 (D)
--- ---- ---
Operating profit.............................. 6 33 39
Corporate expenses............................ 1 2 (G) 3
Interest expense.............................. 1 31 (E) 32
Interest income............................... 1 -- 1
--- ---- ---
Income before income taxes.................... 5 -- 5
Provision for income taxes.................... (2) -- (2)
--- ---- ---
Net income.................................... $ 3 $-- $ 3
=== ==== ===
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Data.
34
<PAGE>
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
(A) Represents the adjustment to record the 1996 acquisition of two full-
service properties as follows:
--Record property and equipment of $44 million
--Record the use of cash of $43 million for the acquisition cost
--Record the minority interest of $1 million in the joint venture
acquiring the Pittsburgh Hyatt
(B) Represents the adjustment to record the Dividend to Host Marriott.
(C) Represents the adjustment to record the revenue and operating costs for
the 1996 acquisition of two full-service properties, including the
depreciation expense reflecting the Company's basis in the assets and the
incremental management fees as a result of the new management agreements
that were entered into in conjunction with the transactions.
(D) Represents the adjustment to record the incremental revenue and operating
costs for the 15 full-service properties added in 1994 and 1995, as if
they were added at the beginning of the period presented and including the
impact of the depreciation expense reflecting the Company's basis in the
assets and the incremental management fees as a result of the new
management agreements that were entered into for certain of the acquired
properties.
(E) Represents the adjustment to interest expense to eliminate the interest
expense and the related amortization of deferred financing fees for the
Credit Facility, and to record the interest expense and related
amortization of deferred financing fees as a result of the Offering.
(F) Represents the income tax impact of pro forma adjustments at statutory
rates.
(G) Represents the adjustment to record the increase in the allocation of
corporate expenses to the Company including the impact of the assets
related to the full-service properties acquired in 1995 and 1996 as if
they were acquired on January 1, 1994. No pro forma adjustment to
corporate expenses is required for 1995 as a result of the 1996 hotel
acquisitions.
35
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical consolidated financial
statement data derived from the Company's Consolidated Financial Statements
for fiscal years 1995 and 1994. Because the Company had no operations prior to
January 1, 1994 and the acquired properties are not predecessor businesses, no
financial statement data for 1990 through 1993 has been presented. The
following data should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the other
financial information included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------
1995 1994
-------- --------
(IN MILLIONS,
EXCEPT RATIO DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................ $ 72 $ 15
Operating profit........ 37 6
Corporate expenses...... 4 1
Interest expense........ 16 1
Interest income......... 1 1
Net income before
extraordinary item(1).. 11 3
Net income.............. 8 3
OTHER DATA:
EBITDA(2)............... $ 49 $ 10
Depreciation and
amortization........... 14 4
Cash provided by
operating activities... 37 10
Cash used in investing
activities............. 116 366
Cash provided by
financing activities... 177 367
Ratio of earnings to
fixed charges(3)....... 2.1x 6.0x
BALANCE SHEET DATA:
Total assets............ $588 $384
Total debt.............. 350 168
Total shareholder's
equity................. 224 211
</TABLE>
- ---------------------
(1) In 1995, the Company recognized a $2.6 million extraordinary loss, net of
taxes, on the repayment of the Company's Credit Facility.
(2) EBITDA, as defined in the Indenture, consists of the sum of consolidated
net income, interest expense, income taxes, depreciation and amortization
and certain other noncash items. There are no non-cash items, other than
depreciation and amortization, included in EBITDA for the periods
presented. EBITDA data is presented because such data is used by certain
investors to determine the Company's ability to meet debt service
requirements and is used in the Indenture as part of the tests to
determine the Company's ability to incur debt and to make certain
restricted payments. The Company considers EBITDA to be an indicative
measure of the Company's operating performance due to the significance of
the Company's long-lived assets and because EBITDA can be used to measure
the Company's ability to service debt, fund capital expenditures and
expand its business; however, such information should not be considered as
an alternative to net income, operating profit, cash flows from
operations, or any other operating or liquidity performance measure
prescribed by GAAP. Cash expenditures for various long-term assets,
interest expense and income taxes have been, and will be, incurred which
are not reflected in the EBITDA presentations.
(3) The ratio of earnings to fixed charges is computed by dividing net income
before taxes, interest expense and other fixed charges by total fixed
charges, including interest expense, amortization of debt issuance costs
and the portion of rent expense that is deemed to represent interest.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company was formed in 1994 as an indirect subsidiary of Host Marriott to
acquire and own full-service lodging properties. As of April 1, 1996, the
Company owns 17 full-service properties. None of these properties was owned by
the Company or Host Marriott at January 1, 1994 and a substantial portion of
the properties were acquired by the Company during the fourth quarter of 1994.
Accordingly, due to the substantial differences in comparability between
periods, management believes that it is more meaningful and relevant in
understanding the present and ongoing Company operations to discuss the
Company's results of operations on a pro forma basis. See the "Pro Forma
Condensed Consolidated Financial Data" included elsewhere herein. Accordingly,
in addition to the discussion of the Company's consolidated results of
operations for the fiscal years ended December 29, 1995 and December 30, 1994
on a historical basis set forth below, the Company has also provided a
supplemental discussion of the pro forma results of operations of the Company
for the years ended December 29, 1995 and December 30, 1994. Such discussion
gives effect to the adjustments set forth in the Pro Forma Condensed
Consolidated Financial Data of the Company and the notes thereto contained
elsewhere in this Prospectus. The Company's pro forma results of operations do
not purport to present the results of operations of the Company had the
transactions giving rise to such pro forma adjustments occurred on the dates
specified, nor are they necessarily indicative of results of operations that
may be achieved in the future. Such discussion is qualified in its entirety
by, and should be read in conjunction with, management's discussion of the
historical results of operations of the Company and the "Pro Forma Condensed
Consolidated Financial Data" and the Consolidated Financial Statements of the
Company included elsewhere herein.
GENERAL
Revenues represent house profit from the Company's hotel properties. House
profit reflects the net revenues flowing to the Company as property owner and
represents hotel sales less property-level expenses (excluding depreciation,
management fees, real and personal property taxes, ground and equipment rent,
insurance and certain other costs which are classified as operating costs and
expenses). The Company's hotel operating costs and expenses are, to a great
extent, fixed. Therefore, the Company derives substantial operating leverage
from increases in revenue. This operating leverage is somewhat diluted,
however, by the impact of base management fees which are calculated as a
percentage of sales, variable lease payments and incentive management fees
tied to operating performance above certain established levels.
For the periods discussed herein, the Company's comparable Marriott
properties (i.e., the nine hotels that have operated as Marriott brand hotels
during the periods presented, referred to herein as the "Comparable Marriott
Properties") have experienced substantial increases in room revenues per
available room (excluding food and beverage and other ancillary revenue)
("REVPAR"). REVPAR is a commonly used indicator of market performance for
hotels which represents the combination of the average daily room rate charged
and the average daily occupancy achieved per available room. REVPAR increases
have been driven by strong percentage increases in room rates, while
occupancies have generally increased slightly or remained flat. Increases in
room rates have generally been achieved by the managers through shifting
occupancies away from discounted group business to higher-rated group and
transient business. This has been made possible by the increased travel due to
improved economic conditions and by the favorable supply/demand
characteristics existing in the hotel industry today, particularly in the
full-service segment. The Company expects this supply/demand imbalance,
particularly in the full-service sector, to continue, which management
believes will result in improved REVPAR at its hotel properties in the near
term. However, there can be no assurance that REVPAR will continue to increase
in the future.
Five of the Company's properties were converted to the Marriott brand name
following their acquisition by the Company. The conversion of these properties
to the Marriott brand is intended to increase occupancy and room rates as a
result of Marriott International's nationwide marketing and reservation
systems and Honored Guest Awards Program, as well as customer recognition of
the Marriott brand name. In connection with the conversion of three of the
five conversion properties, the Company has employed additional capital to
upgrade these properties to the Company's and the new managers' standards or
enhance the properties' profit potential. The invested capital with respect to
these properties was primarily used for the improvement of common areas
37
<PAGE>
as well as upgrading soft and hard goods (i.e., carpets, drapes, furniture and
additional amenities). The conversion process caused periods of disruption to
these properties as selected rooms and common areas were temporarily taken out
of service. Due to these disruptive periods, the time necessary for
integration into the nationwide Marriott system and the Company's realization
of the anticipated effect of these improvements, 1996 will be the first full
year of operations for these three properties with the full benefit of
conversion. The Company also intends to employ capital to upgrade two
additional conversion properties in 1996. The one conversion property that
will not require significant renovation began to realize the benefits of
conversion shortly following conversion to the Marriott brand name.
HISTORICAL AND PRO FORMA RESULTS OF OPERATIONS
Historical 1995 Compared to 1994
Revenues. Revenues increased $57 million to approximately $72 million in
1995, from $15 million in 1994 as a result of the addition of three full-
service properties during 1995, a full year of revenues from twelve properties
purchased during the third and fourth quarters of 1994, and as a result of
REVPAR growth for the Comparable Marriott Properties. However, revenues for
1995 were adversely impacted by the conversion of five properties. The
conversion process typically causes periods of disruption to these properties
as selected rooms and common areas are temporarily taken out of service. Due
to these disruptive periods, the time necessary for integration into the
nationwide Marriott system and the Company's realization of the anticipated
effect of these improvements, the operating results for 1995 do not reflect
the full impact of conversion for these five properties. The Company expects
to begin to realize the benefits of conversion improvements within six to 12
months of their completion.
Operating Costs and Expenses. Operating costs and expenses consist of
depreciation, management fees, real and personal property taxes, ground and
equipment rent, insurance and certain other costs. Operating costs and
expenses increased to $35 million, or 48% of revenues, in 1995, from
$9 million, or 58% of revenues, in 1994 due to the acquisition of three full-
service properties during 1995 and twelve properties during the third and
fourth quarters of 1994.
Operating Profit. Operating profit increased to $37 million, or 52% of
revenues, in 1995 from $6 million, or 42% of revenues, in 1994, due to the
changes in revenues and operating costs discussed above.
Corporate Expenses. Corporate expenses increased $2.6 million to $3.5
million, from $.9 million in 1994 due to the substantial increase in the
number of hotels acquired in late 1994 and in 1995. As a percentage of
revenues, corporate expenses decreased from 6% of revenues in 1994 to 5% of
revenues in 1995.
Interest Expense. Interest expense increased $15 million, to $16 million,
due to the Company incurring a full year of interest expense on the Credit
Facility (which was entered into during the fourth quarter of 1994), along
with the impact of the substantial increase in debt as a result of the
acquisition of full-service properties during 1995.
Extraordinary Item. In connection with the repayment of the Company's Credit
Facility in 1995, the Company recognized an extraordinary loss of $2.6 million
(net of an income tax benefit of $1.4 million), representing the write-off of
deferred financing fees.
Net Income. Net income increased to $8 million, or 11% of revenues, in 1995,
from $3 million, or 20% of revenues, in 1994 due to the items discussed above.
Pro Forma 1995 Compared to Pro Forma 1994
Pro Forma Revenues. Revenues increased $10 million, or 13%, to $89 million
in 1995 from $79 million in 1994, primarily as a result of REVPAR growth of 9%
for the Comparable Marriott Properties. Overall revenue and operating profit
for all of the Comparable Marriott Properties were improved or comparable to
the prior year. The growth in REVPAR was a result of a 9% increase in the
average daily room rate and a slight increase in occupancy rates. REVPAR for
all of the Company's properties increased over 7% Average room rates for all
of the Company's properties increased 8%, while average occupancy decreased
slightly, reflecting the disruption caused by the conversion of certain of the
properties, as discussed above.
38
<PAGE>
Pro Forma Operating Costs and Expenses. Operating costs and expenses consist
of depreciation, management fees, real and personal property taxes, ground and
equipment rent, insurance and certain other costs. Operating costs and
expenses increased to $43 million, or 48% of revenues in 1995, from
$40 million, or 51% of revenues, in 1994, primarily as a result of greater
operating leverage derived from the increased revenues discussed above.
Pro Forma Operating Profit. Operating profit increased to $46 million, or
52% of revenues, in 1995 from $39 million, or 49% of revenues in 1994, due to
the changes in revenues and operating costs discussed above.
Pro Forma Corporate Expenses. Corporate expenses increased $1 million to $4
million due primarily to overall higher corporate administrative and travel
costs for Host Marriott which resulted in an increase in the allocation of
comparable expenses.
Pro Forma Interest Expense. Interest expense remained unchanged at $32
million.
Pro Forma Income Before Extraordinary Item. Income before extraordinary item
increased to $7 million, or 8% of revenues, in 1995 from $3 million, or 4% of
revenues, in 1994 due to the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its capital requirements with a combination of operating
cash flow and external financing. The Company believes that the financial
resources generated from ongoing operations will be sufficient to enable it to
meet its capital expenditure and debt service needs for the foreseeable
future. However, certain events such as significant acquisitions would require
additional financing.
The Company is required to make semi-annual cash interest payments on the
Senior Notes at their stated interest rate. The Company will not be required
to make principal payments on the Senior Notes until maturity, except in the
event of certain changes in control. In addition, under the terms of the
Indenture, the Company has the ability to enter into a revolving credit
facility of up to $25 million, which would be available for working capital
and other general corporate purposes, and to incur other indebtedness as
specified in the Indenture.
The Senior Notes will mature in 2007 and are fully and unconditionally
guaranteed (limited only to the extent necessary to avoid such Guarantees
being considered a fraudulent conveyance under applicable law), on a joint and
several basis, by the Company's wholly owned subsidiaries. The Indenture
contains covenants that, among other things, limit the ability of the Company
and its subsidiaries to incur additional indebtedness and issue preferred
stock, pay dividends or make other distributions, repurchase capital stock or
subordinated indebtedness, create certain liens, enter into certain
transactions with affiliates, sell certain assets, issue or sell stock of the
Company's subsidiaries, and enter into certain mergers and consolidations.
Distributions of the Company's equity, including earnings accumulated
subsequent to the Offering (but excluding an amount equal to capital
contributions made by its parent or pursuant to a sale of the Company's
capital stock) are restricted but are available for the payment of dividends
to the extent that the cumulative amount of such dividends from the date of
the Indenture does not exceed $15 million plus an amount equal to the excess
of the Company's EBITDA over 200% of the Company's interest expense. During
the second quarter of 1996, the Company made a $15 million dividend to Host
Marriott as permitted under the Indenture.
The Company's cash flow from operations increased to $37 million in 1995
from $10 million in 1994 due to the increase in the number of hotel properties
and the improved operating results.
The Company's cash used in investing activities was $116 million and $366
million, in fiscal years 1995 and 1994, respectively. The Company's cash used
in investing activities consists primarily of acquisitions of hotel
properties, contributions to the property improvement funds and capital
expenditures for upgrading acquired hotels to the Company's and the managers'
standards or to enhance the acquired hotels' profit potential.
During 1994, the Company acquired thirteen full-service properties totalling
5,085 rooms for $361 million. During 1995, the Company acquired three
additional full-service properties totalling 1,189 rooms for $89 million.
Additionally, affiliates of the Company acquired four full-service properties
in 1994 totalling 1,899 rooms for $159 million. These four hotels were
contributed to the Company on September 10, 1994, its formation date. The
Company sold the Springfield Radisson Hotel (which was acquired in December
1994 as part of a portfolio of seven hotels) in December 1995 for net cash
proceeds of $3 million, which approximated its carrying value.
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<PAGE>
The Company incurs capital expenditures for upgrading acquired hotels to the
Company's and the managers' standards as well as a result of certain
improvement projects for non-conversion hotels. The Company had incurred
approximately $14 million in conversion costs for five hotels in fiscal year
1995. The Company anticipates expending approximately $18 million in
additional conversion costs for these hotels and for the conversion of the
Pittsburgh Hyatt during 1996. Also, during 1995, the Company expended $7
million in other improvement projects at existing Marriott hotels and expects
to incur an additional $4 million for these or similar projects in early 1996.
The Company, through the managers, routinely makes disbursements to cover
the cost of certain non-routine repairs and maintenance to the hotels which
are normally capitalized, and the costs of replacements and renewals to the
hotels' property and equipment. Such disbursements are generally equal to 5%
of gross hotel sales and were $9 million and $2 million for fiscal year 1995
and 1994, respectively.
The Company's cash from financing activities was $177 million and $367
million in fiscal year 1995 and 1994, respectively. The Company's cash from
financing activities primarily consisted of the proceeds of the Offering and
the draws and repayments of the Credit Facility, as well as contributed
capital from Host Marriott. The Company made draws on the Credit Facility of
$59 million and $168 million in fiscal year 1995 and 1994, respectively, to
fund the acquisition of full-service properties. During fiscal year 1995 and
1994, the Company made repayments of $226 million and $1 million,
respectively, under the Credit Facility.
A portion of the net proceeds from the Offering of approximately $340
million was used to repay in full the outstanding borrowings under, and
terminate, the Credit Facility and to finance the acquisition of the Atlanta
Northwest Marriott in December 1995, the 1996 addition of two full-service
hotels and the acquisition of a minority equity interest in a venture owned by
Host Marriott that controls two hotels in Mexico City, Mexico. The remaining
net proceeds of the Offering will be used to finance future acquisitions of
other full-service properties by the Company.
The Company believes that EBITDA is a meaningful measure of its operating
performance due to the significance of the Company's long-lived assets (and
the related depreciation thereon), and because EBITDA can be used to measure
the Company's ability to service debt, fund capital expenditures and expand
its business. EBITDA is used by certain investors to determine the Company's
ability to meet debt service requirements and is used in the Indenture as part
of the tests determining the Company's ability to incur debt and to make
certain restricted payments. EBITDA, as defined in the Indenture, consists of
the sum of consolidated net income, interest expense, income taxes,
depreciation and amortization and certain other noncash items. There are no
non-cash items, other than depreciation and amortization, included in EBITDA
for the periods presented. EBITDA information should not be considered as an
alternative to net income, operating profit, cash flows from operations, or
any other operating or liquidity performance measure prescribed by GAAP. Cash
expenditures for various long-term assets, interest expense and income taxes
have been, and will be, incurred which are not reflected in the EBITDA
presentation. The Company reported EBITDA of $49 million and $10 million in
fiscal years 1995 and 1994, respectively. The ratio of earnings to fixed
charges was 2.1 to 1.0 and 6.0 to 1.0 in fiscal years 1995 and 1994,
respectively. The decrease in the ratio of earnings to fixed charges is
primarily due to increased interest expense from the Credit Facility, which
was outstanding for almost the entire year in 1995 and only one month in 1994.
INFLATION
The Company's lodging properties are impacted by inflation through its
effect on increasing costs and on the managers' ability to increase room
rates. Unlike other real estate operations, hotels have the ability to change
room rates on a daily basis, so the impact of higher inflation generally can
be passed on to customers.
NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," during the fourth quarter of 1995. The adoption of
SFAS No. 121 did not have a material effect on the Company's financial
statements.
40
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
The Company, an indirect, wholly owned subsidiary of Host Marriott, was
formed in 1994 to take advantage of acquisition opportunities in the full-
service hotel segment of the lodging industry. The Company currently owns 17
full-service properties, aggregating 6,850 rooms, located in diverse
geographic locations throughout the United States. Fourteen of these
properties are operated under the Marriott brand name, 12 of which are managed
by Marriott International. The Marriott brand name is among the most respected
and widely recognized in the lodging industry. Based on data provided by Smith
Travel Research, the Company believes that its hotels consistently outperform
the industry average occupancy rate by a significant margin for the upscale
full-service segment of the lodging industry (the segment which is most
representative of the Company's full-service hotels). Six of the Company's
properties were or will be converted to the Marriott brand name following
acquisition by the Company or an affiliate. The conversion of such properties
is intended to increase occupancy and room rates as a result of Marriott
International's nationwide marketing and reservation systems, as well as
customer recognition and preference for the Marriott brand name.
The Company was originally capitalized by Host Marriott through the
contribution of four unleveraged hotel properties, with a book value of $162
million, purchased in 1994 by affiliates and with an additional contribution
of $48 million in cash. These contributions were made primarily from a portion
of the proceeds of a $230 million public equity offering by Host Marriott
consummated in January 1994. Since its formation, the Company has utilized the
$48 million in cash contributed by Host Marriott as well as borrowings under
the Company's former Credit Facility and a portion of the proceeds of the
Offering to acquire an additional 14 full-service hotels (one of which was
sold in December 1995).
The lodging industry as a whole, and the full-service hotel segment in
particular, is benefiting from an improved supply and demand relationship in
the United States. According to Smith Travel Research, the demand for rooms in
the upscale full-service segment (the segment which is most representative of
the Company's hotels), as measured by annual domestic occupied room nights,
increased 2.4% from 1994 to 1995. Management believes that recent demand
increases have resulted primarily from an improved economic environment and a
corresponding increase in business travel. Despite increased demand for rooms,
the room supply growth rate in the full-service segment has greatly
diminished. Management believes that this decrease in the room supply growth
rate in the full-service segment is attributable to many factors including the
lack of attractive building sites for full-service hotels, the limited
availability of financing for new full-service hotel construction and the
availability of existing full-service properties for sale at a discount to
their replacement value. Due to the relatively high occupancy rates of the
Company's hotels, the limited supply of new rooms and the recent increase in
business travel, the managers of the Company's hotels have selectively (i)
increased room rates and (ii) improved their business mix by replacing certain
discounted group business with higher-rated group and transient business. The
Company expects this supply/demand imbalance, particularly in the upscale
full-service sector, to continue, which management believes will result in
improved REVPAR and higher cash flow at its hotel properties in the near term.
BUSINESS STRATEGY
The Company's business strategy continues to focus on maximizing the
profitability of its existing hotels and the opportunistic acquisitions of
full-service urban, convention and resort hotels primarily in the U.S. and, to
a lesser extent, abroad. The Company believes that the full-service segment of
the market offers numerous opportunities to acquire assets at attractive
multiples of cash flow and at discounts to replacement value, including
underperforming hotels which can be improved by conversion to the Marriott
brand. The Company believes this segment is very promising because:
. There is virtually no new supply of upscale full-service hotel rooms
currently under construction. According to Smith Travel Research, from
1988 to 1990, upscale full-service room supply increased an average of
approximately 5% annually, which resulted in an oversupply of rooms in
the industry. However, this growth slowed to an average of approximately
1.7% from 1990 to 1995. Management believes that the lead time from
conception to completion of a full-service hotel is generally five years
or more in the types of markets the Company is principally pursuing,
which will contribute to
41
<PAGE>
the continued low growth of supply. According to Coopers & Lybrand, hotel
supply in the upscale full-service segment is expected to grow annually at
1.8% to 1.9% through 1998. Furthermore, because of the prolonged lead time
for construction of new full-service hotels, management believes that
growth in the full-service segment will continue to be limited at least
through 2000.
. Many desirable hotel properties are held by inadvertent owners such as
banks, insurance companies and other financial institutions which are
motivated and willing sellers. The Company has demonstrated that these
properties can be acquired at a significant discount to replacement cost.
. Management believes that there are numerous opportunities to improve the
performance of acquired hotels by replacing the existing hotel manager
with Marriott International and converting the hotel to the Marriott
brand. Based on industry data, the Company believes that Marriott-flagged
properties have consistently outperformed the industry. Demonstrating the
strength of the Marriott brand name, the average occupancy rate during
1995 for the Company's nine properties that have been operated under the
Marriott brand name for at least two years was 79.4%, compared to an
average occupancy rate of 68.2% for all upscale full-service hotels.
Accordingly, management anticipates that the five properties recently
converted to the Marriott brand name, as well as additional full-service
properties to be acquired by the Company in the future and converted from
other brands to the Marriott system, should achieve significantly higher
occupancy rates and average room rates than has previously been the case
for those properties.
The Company intends to continue to actively increase its full-service hotel
portfolio. In carrying out this strategy, the Company evaluates each
opportunity on an individual basis and may from time to time elect to acquire
controlling interests in a hotel joint venture, rather than pursue the
outright acquisition of a property, when it believes its return on investment
will be maximized by so doing. The Company may make acquisitions directly or
through its subsidiaries depending on a variety of factors, including the
existence of debt, the form of investment, the restrictions and requirements
of the Indenture and the availability of funds.
The Company believes it is well qualified to pursue its acquisition
strategy. Management has extensive experience in acquiring and financing
lodging properties and believes its industry knowledge, relationships and
access to market information provide a competitive advantage with respect to
evaluating and acquiring hotel assets. In addition, the Company is well
positioned to convert acquired properties to high-quality lodging brand names
due to its relationship with Marriott International. For a description of the
Company's relationship with Marriott International, see "Certain Relationships
and Related Transactions--Relationship with Marriott International."
1996 ACQUISITIONS AND OTHER TRANSACTIONS
In February 1996, the Company acquired a minority interest in a joint
venture owned by Host Marriott that controls two hotels in Mexico City, Mexico
totalling 914 rooms for $20 million. One of the hotels is currently operating
and the other hotel is currently under construction and scheduled for
completion in the third quarter of 1996. The hotels will be owned by a venture
which includes the Company, another subsidiary of Host Marriott, Marriott
International, which will manage the hotels, and the seller of the hotels. The
Company's investment will be accounted for under the equity method of
accounting.
In addition, the Company acquired the 374-room Toronto Delta Meadowvale for
approximately $25 million in February 1996. The hotel is currently managed by
Interstate Hotel Corporation ("Interstate").
In April 1996, the Company acquired the 400-room Pittsburgh Hyatt. The
Pittsburgh Hyatt was acquired by a limited partnership, of which the Company
is the sole general partner, for $18.5 million. The Company owns a 95%
interest in this limited partnership and contributed approximately $17.5
million of the proceeds from the Offering to the limited partnership to fund
the acquisition. Interstate will manage the Pittsburgh Hyatt and contributed
approximately $1 million to the limited partnership. The hotel has been closed
for renovations and will be converted at a cost of approximately $7 million to
the Marriott brand and reopened in July 1996.
In addition to the acquisitions described above, the Company intends to
pursue opportunities for expansion through the acquisition of other full-
service lodging properties.
42
<PAGE>
HOTEL LODGING INDUSTRY
The lodging industry as a whole, and the full-service segment in particular,
is benefiting from a cyclical recovery as well as a shift in the supply/demand
relationship with supply relatively flat and demand strengthening. The lodging
industry posted strong gains in revenues and profits in 1995, as demand growth
continued to outpace additions to supply. Based on Coopers & Lybrand data, the
Company expects hotel room supply growth to remain limited through 1998 and
for the foreseeable future thereafter. Accordingly, the Company believes this
supply/demand imbalance will result in improved occupancy and room rates which
should result in improved REVPAR and operating profit.
Following a period of significant overbuilding in the late 1980s, the
lodging industry experienced a severe downturn. Since 1991, new hotel
construction, excluding casino related construction, has been modest, largely
offset by the number of rooms taken out of service each year. Due to an
increase in travel and an improving economy, hotel occupancy has grown
steadily over the past several years, and room rates recently have begun to
improve. According to Coopers & Lybrand, room demand for upscale full-service
properties (full-service hotels with average daily rates generally falling
between the 70th and 80th percentile to their market) is expected to grow
approximately 2.4% annually through 1998. Increased room demand should result
in increases in hotel occupancy and room rates. According to Smith Travel
Research, upscale full-service occupancy grew in 1995 to 68.2%, while room
rate growth exceeded inflation for the third straight year. Based on Coopers &
Lybrand data, the Company expects these recent trends to continue, with
overall occupancy for the lodging industry climbing to approximately 70% by
1998, and room rates increasing at more than one-and-one-half times the rate
of inflation in each of the next three years.
While room demand has been rising, new hotel room supply growth has slowed.
Smith Travel Research data shows that from 1988 to 1990, upscale full-service
room supply increased an average of approximately 5% annually. This growth
slowed to an approximate 1.7% average annual growth rate from 1990 through
1995. Through 1998, upscale full-service room supply growth is expected to
increase to approximately 1.8% annually, according to Coopers & Lybrand. The
increase in room demand and slowdown in growth of new hotel room supply has
also led to increased room rates. According to Coopers & Lybrand, room rates
for such hotels are expected to grow approximately 4% to 5% annually through
1998.
As a result of the overbuilding in the mid-to-late 1980s, many full-service
hotels built have not performed as originally planned. Cash flow has often not
covered debt service requirements, causing lenders (e.g., banks, insurance
companies, and savings and loans) to foreclose and become "inadvertent owners"
who are motivated to sell these assets. In the Company's experience to date,
these sellers have been primarily United States financial organizations. While
the interest of inadvertent owners to sell has created attractive acquisition
opportunities with strong current yields, the lack of room supply growth and
increasing room demand should contribute to higher long-term returns on
invested capital. Given the relatively long lead time to develop urban,
convention and resort hotels, as well as the lack of project financing,
management believes the growth in room supply in this segment will be limited
for an extended period of time.
HOTEL LODGING PROPERTIES
The Company's hotel lodging properties represent quality assets in the full-
service lodging segment. Fourteen of the Company's 17 hotel properties are
operated under the Marriott name. The three remaining properties achieved
favorable operating results relative to competing hotels in their respective
market segments. Of the three properties not operating under the Marriott
brand, one was recently acquired by the Company. This hotel has been closed
for renovations and will be converted to the Marriott brand. The remaining two
hotels (representing 596 rooms, or approximately 9% of the Company's total
rooms) that do not carry the Marriott brand have not been converted to the
Marriott brand due to either their size and/or contractual obligations which
would not permit such conversion at this time. The Company's hotel facilities
typically include swimming pools, gift shops, convention and banquet
facilities, a variety of restaurants and lounges, and parking facilities. The
Company's hotels primarily service business and pleasure travelers and group
meetings in downtown, suburban and resort areas throughout the United States.
43
<PAGE>
To maintain the overall quality of the Company's lodging properties, each
property undergoes refurbishments and capital improvements on a regularly
scheduled basis. Typically, refurbishing would be provided at intervals of
five years, based on an annual review of the condition of each property. The
funding for the refurbishments and capital improvements generally equals 5% of
gross hotel sales. For 1995 and 1994 the Company contributed $9 million and $2
million, respectively, for such items. As a result of these expenditures, the
Company is able to maintain high quality rooms at its properties.
One commonly used indicator of market performance for hotels is revenue per
available room, or REVPAR, which measures daily room revenues generated on a
per room basis. This does not include food and beverage or other ancillary
revenues generated by the property. REVPAR represents the combination of the
average daily room rate charged and the average daily occupancy achieved.
The Company believes that its hotels consistently outperform the industry's
average REVPAR growth rates. REVPAR for the properties that have operated as
Marriott brand hotels for the periods presented ("Comparable Marriott
Properties") increased 9.1% for 1995, as compared to a REVPAR increase of 4.9%
for the upscale full-service segment of the lodging industry. Due to the
relatively high occupancy rates of the Company's hotels, the limited supply of
new rooms and the recent increase in business travel, the managers of the
Company's hotels have increased average room rates by replacing certain
discounted group and transient business and by selectively increasing room
rates. The Company believes that these favorable REVPAR growth trends should
continue due to the limited new construction of full-service properties and
the expected operating improvements from the conversion of five properties in
1994.
The table below sets forth comparable performance information for the
Company's existing properties.
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Number of properties............................... 17 17 17
Number of rooms.................................... 6,850 6,850 6,850
Average daily rate................................. $85.83 $90.19 $97.37
Occupancy %........................................ 71.5% 72.4% 72.0%
REVPAR............................................. $61.38 $65.29 $70.10
REVPAR % change.................................... -- 6.4% 7.4%
The table below sets forth comparable performance information for the
Company's properties which operated under the Marriott brand for all periods
presented.
<CAPTION>
FISCAL YEAR
----------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Number of properties............................... 9 9 9
Number of rooms.................................... 4,059 4,059 4,059
Average daily rate................................. $86.30 $91.37 $99.29
Occupancy %........................................ 78.4% 79.0% 79.4%
REVPAR............................................. $67.69 $72.22 $78.81
REVPAR % change.................................... -- 6.7% 9.1%
</TABLE>
The Company's and the managers' focus is on maximizing profitability by
concentrating on key objectives. These key objectives include evaluating
marginal restaurant operations, exiting low-rate airline room contracts in
strengthening markets, reducing property-level overhead by sharing management
positions with other managed hotels in the vicinity, and selectively making
additional investments where favorable incremental returns are expected. These
objectives, while principally manager-initiated, have the Company's strong
support, and the Company seeks to ensure their prompt implementation wherever
practical.
The Company and its managers will continue to focus on cost control such as
sharing of managerial and administrative functions among hotels in close
proximity to each other in an attempt to ensure that hotel sales
44
<PAGE>
increases serve to maximize house and operating profit. While control of fixed
costs serves to improve profit margins as hotel sales increase, it also
results in more properties reaching financial performance levels that allow
the manager to share in growth of profits in the form of incentive management
fees. See "Relationship with Marriott International--Lodging Management
Agreements and Franchise Agreements" and "Relationships with Other Property
Managers and Franchisors." The Company believes that this strengthens the
alignment of the Company's and the managers' interests.
The table below sets forth certain information concerning the Company's
existing full-service hotels. The land on which each hotel is located is owned
by the Company unless otherwise indicated.
<TABLE>
<CAPTION>
OPERATED UNDER
# OF MARRIOTT BRAND CURRENT
ROOMS NAME SINCE BRAND
----- ---------------- --------------------
<S> <C> <C> <C>
Existing Properties:
Atlanta Northwest Marriott........ 400 1980 Marriott
Charlotte Marriott Executive
Park(1).......................... 298 1983 Marriott
Dallas Marriott Quorum(2)......... 547 1982 Marriott
Dallas/Fort Worth Airport
Marriott......................... 492 1986 Marriott
Denver Marriott Tech Center....... 625 Conversion--1994 Marriott
Fort Lauderdale Marina Marriott... 580 1980 Marriott
Marriott Mountain Resort at Vail.. 349 Conversion--1994 Marriott
Napa Valley Marriott.............. 191 Conversion--1994 Marriott
Pittsburgh Hyatt(2)(3)............ 400 To be converted Closed
Portland Marriott................. 503 1980 Marriott
San Francisco Airport Marriott.... 684 1985 Marriott
San Francisco Marriott--
Fisherman's Wharf(1)............. 255 1984 Marriott
Singer Island Holiday Inn
Sunspree Resort(4)............... 222 N/A Holiday Inn Sunspree
South Bend Marriott(2)............ 300 1981 Marriott
Toronto Delta Meadowvale(1)(5).... 374 N/A Delta
Westfields International
Conference Center................ 335 Conversion--1994 Marriott
Williamsburg Marriott............. 295 Conversion--1994 Marriott
-----
TOTAL........................... 6,850
=====
</TABLE>
- ---------------------
(1) Property is operated by Interstate.
(2) The land on which the hotel is located is leased from an unaffiliated
third party.
(3) The Pittsburgh Hyatt was purchased in 1996 by a limited partnership in
which the Company owns a 95% interest. The remaining 5% is owned by
Interstate which will operate the property. The hotel will be closed for
approximately three months for renovations and reopened under the Marriott
brand in July 1996.
(4) Property is operated by Vista.
(5) Acquired during 1996.
MARKETING
All but two of the Company's hotel properties are operated under the
Marriott brand name. Twelve of these hotels are managed by Marriott
International. Four of the hotels are managed by Interstate, two of which are
operated as Marriott branded hotels under franchise agreements with Marriott
International. The remaining hotel is managed by Vista as a Holiday Inn
Sunspree Resort. The Company believes that its Marriott brand properties will
continue to enjoy competitive advantages arising from their participation in
the Marriott International hotel system. Marriott International's nationwide
marketing programs and reservation systems as well as the advantage of
increasing customer preference for Marriott brands should also help these
properties to maintain or increase their premium over competitors in both
occupancy and room rates. Repeat guest business in the Marriott International
hotel system is enhanced by the Marriott Honored Guest Awards program. As
other hotel chains eliminate or scale back awards for their frequent stay
programs, Marriott Honored Guest Awards and its companion program, Marriott
Miles, continue to expand their membership, and now include more than 6.4
million members.
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<PAGE>
The Marriott reservation system was upgraded significantly in 1994, giving
its reservation agents complete descriptions of the rooms available for sale
and more up-to-date rate information from the properties. The reservation
system also features improved connectivity to airline reservation systems,
providing travel agents with greater access to available rooms inventory for
all Marriott lodging properties. In addition, new software at Marriott's
centralized reservations centers enables agents to immediately identify the
nearest Marriott brand property with available rooms when a caller's first
choice is sold out.
COMPETITION
The cyclical nature of the United States lodging industry has been
demonstrated over the past two decades. Low hotel profitability during the
1974-75 recession led to a prolonged slump in new construction and, over time,
high occupancy rates and real price increases in the late 1970s and early
1980s. Changes in tax and banking laws during the early 1980s helped to
precipitate a construction boom that created an oversupply of hotel rooms. The
Company expects the United States hotel supply/demand imbalance to continue to
improve over the next few years as room demand continues to grow and room
supply growth is expected to be minimal, in particular in the full-service
segment.
The Company's hotels compete with several other major lodging brands,
including Hyatt, Hilton, Radisson, Doubletree, Red Lion, Sheraton and Wyndham.
Competition factors in the industry include level of service, quality of
accommodations, convenience of locations and room rates.
EMPLOYEES
The Company has no employees. Certain individuals, in their capacity as
employees of Host Marriott, serve as directors and executive officers of the
Company. All of the Company's management services are provided by employees of
Host Marriott. See "Management."
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws may impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, certain
environmental laws and common law principles could be used to impose liability
for release of asbestos-containing materials ("ACMs"), and third parties may
seek recovery from owners or operators of real properties for personal injury
associated with exposure to released ACMs. Environmental laws also may impose
restrictions on the manner in which property may be used or business may be
operated, and these restrictions may require expenditures. In connection with
its current or prior ownership or operation of hotels, the Company may be
potentially liable for any such costs or liabilities. Although the Company is
currently not aware of any material environmental claims pending or threatened
against it, no assurance can be given that a material environmental claim will
not be asserted against the Company.
LEGAL PROCEEDINGS
In October 1994, the former owners of the land underlying the San Francisco
Airport Marriott filed suit against, among others, HMC SFO, Inc. ("SFO"), the
current owner of that hotel and underlying land, as well as Host Marriott, the
original lessee of the land underlying the hotel, and Marriott International,
the manager of the hotel. The suit, entitled John and Kathleen Bjorner v.
Marriott Corporation, et al., is currently pending in the San Mateo County,
California Superior Court. The suit alleges, among other things, fraud and
conspiracy to deprive the former owners of their interest in the land and
subsequently resell the land to SFO, and breach of the lease for failure to
indemnify the former owners and to make certain refurbishments and repairs.
The plaintiffs are seeking compensatory and punitive damages totalling in
excess of $60 million. SFO, Host Marriott and Marriott International are
vigorously defending this suit and have filed a counterclaim against the
plaintiffs seeking attorneys' fees and recovery of defense costs. Trial for
this action is currently scheduled for September 1996. The Company believes
that the suit is without merit and will not have a material adverse effect on
the financial position or results of operations of the Company.
46
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH HOST MARRIOTT
The Company is an indirect, wholly owned subsidiary of Host Marriott. Host
Marriott, directly and through its subsidiaries, engages in the business of
acquiring and owning lodging properties. In December 1995, Host Marriott
distributed to its shareholders (the "Special Dividend") the stock of a
subsidiary of Host Marriott ("HM Services") which, at the time of such
distribution, comprised Host Marriott's food, beverage and merchandise
concession business at airports, on tollroads, and at stadiums, arenas and
other tourist attractions.
The Company operates as a unit of Host Marriott, utilizing Host Marriott's
employees, centralized systems for cash management and administrative
services. Host Marriott contracts with Marriott International to provide for
certain of these services. Host Marriott provides the services of certain
employees to the Company. Certain general and administrative costs of Host
Marriott are allocated to the Company principally based on Host Marriott's
specific identification of individual cost items and otherwise based upon
estimated levels of effort devoted by its general and administrative
departments to individual entities or relative measures of size of the
entities based on assets.
The Company has no employees. Host Marriott provides the services of certain
employees (including the Company's executive officers) to the Company. In
addition to the directors and executive officers of the Company (see
"Management--Board of Directors and Executive Officers"), the officers of Host
Marriott primarily responsible for rendering administrative services to the
Company include Terence C. Golden, the President and Chief Executive Officer
of Host Marriott and Christopher J. Nassetta, the Executive Vice President of
Host Marriott responsible for real estate operations, asset management and
administration. Prior to his election as President and Chief Executive Officer
of Host Marriott in September 1995, Mr. Golden served as Chairman of Bailey
Realty Corporation and Chief Financial Officer of The Oliver Carr Company.
Prior to joining The Oliver Carr Company, Mr. Golden served as Administrator
of the General Services Administration and Assistant Secretary of Treasury and
was also co-founder and national managing partner of Trammell Crow Residential
Companies. Mr. Nassetta was elected to his position with Host Marriott in
October 1995 and, prior to joining Host Marriott, served as the President of
Bailey Realty Corporation. Prior to joining Bailey Realty Corporation, Mr.
Nassetta spent seven years with The Oliver Carr Company. For biographical
information concerning the directors and executive officers of the Company,
see "Management--Board of Directors and Executive Officers."
The amount of time that each executive officer of the Company will devote to
the business of the Company will be determined by management, based on
management's judgment as to the amount of time necessary to conduct the
business of the Company. However, such individuals also will devote an equal
or greater portion of their time to the business of Host Marriott and its
other subsidiaries. Implementation of the Company's future business strategy
to acquire full-service hotels primarily in the U.S. will be dependent upon
officers of the Company who may have similar obligations to Host Marriott or
its affiliates. To the extent that opportunities to purchase economically
desirable full service hotels are made available to Host Marriott and its
subsidiaries, management may determine that any such opportunity shall be
pursued by Host Marriott itself or one of its other subsidiaries, rather than
by the Company. Accordingly, there can be no assurance that the Company will
be provided the opportunity to purchase or acquire an economically desirable
full-service hotel which also may be available to Host Marriott or one of its
other subsidiaries.
The Indenture imposes certain limitations on transactions between the
Company and related parties. See "Description of Senior Notes--Certain
Covenants--Limitation on Transactions with Affiliates."
RELATIONSHIP WITH MARRIOTT INTERNATIONAL
In addition to the businesses currently engaged in by Host Marriott, prior
to October 1993 Host Marriott was also engaged in lodging and senior living
services management, timeshare resort development and operation,
47
<PAGE>
food service and facilities management and other contract services businesses
(the "Management Business") through certain wholly owned subsidiaries. On
October 8, 1993, Host Marriott contributed its Management Business to Marriott
International and made a special tax-free dividend consisting of the
distribution (the "Distribution") to holders of outstanding shares of common
stock, on a share-for-share basis, of all outstanding shares of Marriott
International. Marriott International now conducts the Management Business as
a separate publicly-traded company. The Company, Host Marriott and Marriott
International and their subsidiaries are parties to several important ongoing
arrangements, including various service arrangements and agreements pursuant
to which Marriott International manages certain of the Company's portfolio
lodging properties. The Company believes that the agreements are fair to both
parties and contain terms which generally are comparable to those which would
have been reached in arms-length negotiations with unaffiliated parties. The
form of Lodging Management Agreement (as defined below) is based on agreements
that Host Marriott has in fact negotiated with third parties. In each case,
the terms of such agreements have been reviewed by individuals at a senior
management level in the Company and by individuals at a senior level in
Marriott International. Currently, Marriott International serves as the
manager for 12 of the Company's 17 lodging properties and provides various
other services to Host Marriott and its subsidiaries, including the Company.
The Company views its relationship with Marriott International as providing
various advantages, including access to high quality management services,
strong brand names and superior marketing and reservation systems.
Lodging Management Agreements and Franchise Agreements
Marriott International and certain of its subsidiaries have entered into
management agreements with the Company (the "Lodging Management Agreements")
to manage certain full-service lodging properties owned by the Company. Under
each Lodging Management Agreement, Marriott International collects all revenue
generated at a particular lodging property. Marriott International holds such
amounts on behalf of the Company in segregated accounts and forwards to the
Company every two weeks all amounts in excess of certain expenses and
management fees (as described more fully below). Because amounts collected by
Marriott International are held on the Company's behalf, the Company does not
depend upon the creditworthiness of Marriott International for receipt of such
payments.
The Company and Marriott International have entered into an arrangement
which generally provides for the principal terms of the Lodging Management
Agreement relating to properties acquired by the Company. The form of Lodging
Management Agreement, which governs the management arrangement with respect to
ten of the Company's properties managed by Marriott International, generally
provides for a base management fee equal to three percent of annual gross
revenues plus an incentive management fee equal to 40% of "Available Cash
Flow" for each fiscal year (provided that the cumulative incentive management
fee may not on any date exceed 20% of the cumulative operating profit of the
hotel from the inception of the agreement through such date). The Company and
Marriott International have agreed that subject to certain exceptions, the
incentive management fee for full-service hotels acquired after September 8,
1995 will equal 20% of Available Cash Flow. Available Cash Flow is defined to
be the excess of "Operating Profit" over the "Owner's Priority." Operating
Profit is defined generally as gross revenues less all ordinary and necessary
operating expenses, which expenses include all base and system fees and
reimbursement for certain system-wide operating costs ("Chain Services"), as
well as a deduction to fund a required reserve for furniture, fixtures and
equipment for certain hotels, but before depreciation or amortization or
similar fixed charges. Owner's Priority is derived from an agreed upon base
amount assigned to each lodging facility. Marriott International is also
entitled to reimbursement for certain costs attributable to Chain Services of
Marriott International. The Company has the option to terminate the agreement
if specified performance thresholds regarding Operating Profit are not
satisfied and if specified revenue market share tests are not met (provided
that Marriott International can elect to avoid such termination by making cure
payments to the extent necessary to allow the specified Operating Profit
thresholds to be satisfied). Each such Lodging Management Agreement has an
initial term of 15 years and, at the option of Marriott International, may be
renewed for up to two additional terms of 8 years each, aggregating 16 years,
for a total term of up to 31 years. In general, a property remains subject to
the Lodging Management Agreement upon the sale of such property to third
parties.
48
<PAGE>
The Lodging Management Agreements for the Fort Lauderdale Marina Marriott
and the Portland Marriott differ somewhat from the terms outlined above. The
main differences are that (i) the incentive management fees for the Portland
and Fort Lauderdale hotels are equal to 50% of Available Cash Flow,
(ii) Portland's incentive management fee is not limited to a percentage of
operating profit, (iii) Fort Lauderdale's incentive management fee is not
limited to a percentage of operating profit until the end of 1999, and (iv)
the term of each such agreement differs from that discussed above.
At the time that the Company acquired the San Francisco Marriott--
Fisherman's Wharf, the Charlotte Marriott Executive Park and the Pittsburgh
Hyatt, the Company entered into franchise agreements with Marriott
International to allow the Company to use the Marriott brand, associated
trademarks, research, standards, quality control, reservation systems, food
and beverage services and other related items in connection with its operation
of these properties. Pursuant to these franchise agreements, the Company pays
or will pay a franchise royalty fee of six percent of gross room sales plus
three percent of gross food and beverage sales, as well as an advertising fee
of one percent of gross room sales and a reservations charge based on usage of
the Marriott International reservations system, subject to certain agreed upon
adjustments. The term of the franchise agreement for the San Francisco
Marriott--Fisherman's Wharf is 30 years, the term of the franchise agreement
for the Charlotte Marriott Executive Park is 15 years, and the term of the
franchise agreement for the Pittsburgh Hyatt is 20 years.
The Indenture imposes certain limitations on transactions between the
Company and related parties. See "Description of Senior Notes--Certain
Covenants--Limitations on Transactions with Affiliates."
Policies and Procedures for Addressing Conflicts
The on-going relationships between Marriott International and Host Marriott
may present certain conflict situations for J.W. Marriott, Jr. who serves as
Chairman of the Board of Directors, Chief Executive Officer and President of
Marriott International and also serves as a director of Host Marriott, and for
Richard E. Marriott, who serves as a director of Marriott International and
also serves as the Chairman of the Board of Directors of Host Marriott. Mr.
Richard E. Marriott, as well as other executive officers and directors of Host
Marriott and Marriott International, also own (or have options or other rights
to acquire) a significant number of shares of common stock in both Host
Marriott and Marriott International. Host Marriott and Marriott International
have adopted appropriate policies and procedures to be followed by the Board
of Directors of each company to limit the involvement of Richard E. Marriott
and J.W. Marriott, Jr. (or such other executive officers and directors having
a significant ownership interest in the companies) in conflict situations,
including matters relating to contractual relationships or litigation between
Marriott International and Host Marriott. Such procedures include requiring
Richard E. Marriott and J.W. Marriott, Jr. (or such other executive officers
or directors having a significant ownership interest in the companies) to
abstain from making management decisions in their capacities as officers of
Marriott International and Host Marriott respectively, and to abstain from
voting as directors of each company, with respect to matters that present a
significant conflict of interest between the companies. Whether or not a
significant conflict of interest situation exists is determined on a case-by-
case basis depending on such factors as the dollar value of the matter, the
degree of personal interest of Richard E. Marriott and J.W. Marriott, Jr. (or
such other executive officers and directors having a significant ownership
interest in the companies) in the matter and the likelihood that resolution of
the matter has significant strategic, operational or financial implications
for the business of the Company. It is a principal responsibility of the
general counsel of Host Marriott to monitor this issue in consultation with
the Board of Directors and to determine when a significant conflict of
interest exists. See "Risk Factors--Potential Conflicts with Marriott
International."
RELATIONSHIPS WITH OTHER PROPERTY MANAGERS AND FRANCHISORS
At the time that the Company acquired the San Francisco Marriott--
Fisherman's Wharf, the Charlotte Marriott Executive Park, the Toronto Delta
Meadowvale and the Pittsburgh Hyatt, the Company entered into management
agreements with Interstate to manage these hotels. For the San Francisco
Marriott--Fisherman's Wharf, the Company pays Interstate a base management fee
equal to 2.5% of annual gross revenues plus an incentive management fee of 15%
of cash flow available from the excess of Operating Profit over the Owner's
49
<PAGE>
Priority. The term of the San Francisco Marriott--Fisherman's Wharf management
agreement is three years, and then becomes year-to-year thereafter unless
terminated by one of the parties. For the Charlotte Marriott Executive Park,
the Company pays Interstate a base management fee equal to 1.5% of annual
gross revenues plus an incentive management fee of 35% of cash flow available
from the excess of Operating Profit over the Owner's Priority. The term of the
Charlotte Marriott Executive Park management agreement is 10 years, and then
becomes year-to-year thereafter unless terminated by one of the parties. For
the Toronto Delta Meadowvale, the Company pays Interstate a base management
fee equal to 2.8% of annual gross revenue. The term of the Toronto Delta
Meadowvale management agreement is 5 years, and then becomes year-to-year
thereafter (unless terminated by one of the parties). The Company may
terminate the agreement after one full year. For the Pittsburgh Hyatt, the
Company pays Interstate a base management fee equal to 2.8% of annual gross
revenues. The term of the Pittsburgh Hyatt Management Agreement is 10 years,
and then becomes year-to-year thereafter (unless terminated by one of the
parties).
At the time that the Company acquired the Singer Island Holiday Inn Sunspree
Resort, the Company entered into a management agreement with Vista and a
franchise agreement with Holiday Inns Franchising, Inc. with respect to the
hotel. The Company's franchise agreement with Holiday Inns Franchising, Inc.
allows the Company to use the Holiday Inn Sunspree Resort brand, associated
trademarks, research, quality control, reservation systems, food and beverage
services and other related items in connection with its operation of the
property. Pursuant to this franchise agreement, the Company pays a franchise
fee of five percent of gross room sales, a marketing contribution of two
percent of gross room sales, a reservations contribution of one percent of
gross room sales, and certain other additional charges based on usage of the
Holiday Inn central reservation system. The term of this franchise agreement
is 10 years. The Company has also entered into a management agreement with
Vista to operate this property. The Company pays Vista a management fee equal
to the greater of $90,000 per year or three percent of annual gross revenues.
The term of this management agreement is month-to-month.
At the time that the Company acquired the Toronto Delta Meadowvale, the
Company entered into a marketing and management services agreement with Delta
Hotels, Ltd. with respect to the hotel. The Company's marketing and management
services agreement with Delta Hotels Ltd. allows the Company to use the Delta
brand, associated trademarks, research, quality control, reservation systems,
food and beverage services and other related items in connection with its
operation of the property. Pursuant to this marketing and management services
agreement, the Company will pay a management services fee of 1.5% of gross
rooms revenue up to a threshold ($10 million in 1996, $10.3 million in 1997,
and $10.6 million in 1998) and 4% above the threshold. The term of this
agreement is for three years which the Company may terminate with 90 days
notice to Delta after April 11, 1997.
50
<PAGE>
MANAGEMENT
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
Certain individuals, in their capacity as employees of Host Marriott, serve
as directors and/or executive officers of the Company. The Company's Board of
Directors comprises two directors. Set forth below is information with respect
to those individuals currently serving as a director or executive officer of
the Company.
<TABLE>
<CAPTION>
OTHER POSITIONS AND BUSINESS EXPERIENCE PRIOR
NAME AND TITLE AGE TO BECOMING AN EXECUTIVE OFFICER OF THE COMPANY
-------------- --- -----------------------------------------------
<S> <C> <C>
Robert E. Parsons, Jr... 40 Robert E. Parsons, Jr. joined Marriott
President and Director Corporation's Corporate Financial Planning staff
in 1981, was made Director-Project Finance in
1984, Vice President-Project Finance in 1986 and
Assistant Treasurer in 1988. Upon the Distribution
in 1993, he was elected Senior Vice President and
Treasurer of Host Marriott, and in 1995, he was
elected Executive Vice President and Chief
Financial Officer of Host Marriott. Mr. Parsons
was elected Vice President and Treasurer of the
Company in 1994 and President and Director of the
Company in 1995. Mr. Parsons serves as Director of
the Company with a term expiring in 1996.
Stephen J. McKenna...... 55 Stephen J. McKenna joined Marriott Corporation in
Executive Vice President 1973 as an attorney, was appointed Assistant
and Director General Counsel in 1976, Vice President and
Assistant General Counsel in 1986 and Vice
President and Associate General Counsel in 1990.
Upon the Distribution in 1993, he was elected
Senior Vice President and General Counsel of Host
Marriott, and in 1995, he was elected Executive
Vice President and General Counsel of Host
Marriott. Mr. McKenna was elected Senior Vice
President of the Company in 1994 and Executive
Vice President and Director of the Company in
1995. Mr. McKenna serves as Director of the
Company with a term expiring in 1996.
Scott A. LaPorta ....... 33 Scott A. LaPorta joined Marriott Corporation in
Senior Vice President 1989 as Senior Financial Analyst-Financial
and Treasurer Planning & Analysis, was named Manager-Financial
Planning & Analysis in 1990 and Director-Financial
Planning & Analysis in 1992. He was promoted to
Director-Corporate Finance in 1993. Following the
Distribution, he was appointed Vice President-
Corporate Finance of Host Marriott, and in 1995,
he was elected Senior Vice President and Treasurer
of Host Marriott. Mr. LaPorta was elected Vice
President of the Company in 1994 and Senior Vice
President and Treasurer of the Company in 1995.
Christopher G. Townsend. 48 Christopher G. Townsend joined Marriott
Senior Vice President Corporation as a Senior Attorney in 1982, was
and Corporate Secretary elected Assistant Secretary in 1984 and was made
Assistant General Counsel in 1986. Upon the
Distribution, he was elected Senior Vice
President, Corporate Secretary and Deputy General
Counsel of Host Marriott. Mr. Townsend was elected
Senior Vice President and Corporate Secretary of
the Company in 1994.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
OTHER POSITIONS AND BUSINESS EXPERIENCE PRIOR
NAME AND TITLE AGE TO BECOMING AN EXECUTIVE OFFICER OF THE COMPANY
-------------- --- -----------------------------------------------
<S> <C> <C>
William E. Einstein..... 43 William E. Einstein joined Marriott Corporation in
Vice President 1982 as Manager-Income Taxes, was made Director-
Income Taxes in 1985, Vice President-Income Taxes
in 1990 and Vice President-Partnership Services in
1991. Upon the Distribution in 1993, he was
elected Vice President-Tax of Host Marriott. Mr.
Einstein was elected Vice President of the Company
in 1994.
Pamela J. Murch......... 36 Pamela J. Murch joined Marriott Corporation in
Vice President 1989 as an attorney in its Law Department and was
appointed Assistant General Counsel and Assistant
Secretary in 1993. Ms. Murch was elected Vice
President of the Company in 1994.
Donald D. Olinger....... 37 Donald D. Olinger joined Marriott Corporation in
Vice President and 1993 as Director-Corporate Accounting. Upon the
Corporate Controller Distribution in 1993, he was promoted to Senior
Director and Assistant Controller of Host Marriott
and was promoted to Vice President-Corporate
Accounting in 1995. Mr. Olinger was elected Vice
President and Principal Accounting Officer of the
Company in 1995 and Corporate Controller in 1996.
Prior to joining Marriott Corporation, Mr. Olinger
was with the public accounting firm of Deloitte &
Touche.
</TABLE>
EXECUTIVE OFFICER COMPENSATION
Since its formation, the Company has operated as a wholly owned subsidiary
of Host Marriott. The following Summary Compensation Table sets forth a
summary of the compensation paid during the past three fiscal years by Host
Marriott to the individuals serving as the Company's chief executive officer
and the Company's other four executive officers, including Mr. Bollenbach, who
was the President of the Company until May 1, 1995, Mr. Hart, who was the
President of the Company from May 1, 1995 through October 7, 1995 and Mr.
Mayer, who was a Senior Vice President and Corporate Controller of the Company
through January 1996. Each of these individuals has been and, with the
exception of Mr. Bollenbach, Mr. Hart and Mr. Mayer continues to be, an
employee of Host Marriott, and the compensation amounts in the following
tables represent all compensation paid to each such individual in connection
with his or her position with Host Marriott and its subsidiaries (including
the Company) taken as a whole. The Company does not compensate an individual
for service as a director. There is no compensation committee or other board
committee performing the equivalent function. Compensation for executive
officers is determined by the Compensation Policy Committee of Host Marriott
and is paid by Host Marriott.
52
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------- ------------------------ ----------
RESTRICTED
STOCK SECURITIES ALL OTHER
AWARDS UNDERLYING LTIP COMPEN-
NAME AND FISCAL SALARY(1) BONUS(2) (3)(4) OPTIONS PAYOUTS(5) SATION(6)
PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($) ($)
------------------ ------ ---------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert E. Parsons, Jr... 1995 213,767 123,649 0 0 159,375 10,951
President and Director 1994 169,855 93,341 0 0 75,094 8,831
1993 152,971 84,153 171,810(7) 0 0 7,039
Stephen J. McKenna...... 1995 237,550 152,210 0 0 344,250 13,586
Executive Vice
President and Director 1994 220,000 143,000 0 0 162,203 17,811
1993 195,178 119,009 595,482(7) 0 0 7,947
Scott A. LaPorta........ 1995 106,343 45,773 0 0 39,844 45,076
Senior Vice President
and Treasurer 1994 89,727 46,305 0 5,000 18,779 4,564
1993 69,562 43,730 48,439(7) 5,000 0 3,146
Christopher G. Townsend. 1995 153,261 93,825 0 0 159,375 33,604
Senior Vice President
and Corporate Secretary 1994 150,577 82,500 0 0 75,094 6,617
1993 120,277 42,902 167,348(7) 0 0 5,410
Jeffrey P. Mayer(8)..... 1995 154,800 77,966 0 0 159,375 7,980
Senior Vice President
and 1994 139,569 69,713 0 0 75,094 3,634
Corporate Controller 1993 110,458 51,337 167,426(7) 0 0 7,824
Stephen F.
Bollenbach(8).......... 1995 190,608 0 0 0 0 1,037,400
Former President 1994 550,000 385,000 0 0 901,125 50,062
1993 473,077 327,370 6,644,470(7) 0 0 13,077
Matthew J. Hart(8)...... 1995 256,872 164,487 0 0 701,250 815,947
Former President and
Director 1994 275,000 178,750 0 0 324,405 22,455
1993 220,191 142,243 1,171,812(7) 0 0 11,172
</TABLE>
- ---------------------
(1) Salary amounts include base salary earned and paid in cash during the
fiscal year and the amount of base salary deferred at the election of the
executive officer under the Host Marriott Employees' Profit Sharing,
Retirement and Savings Plan and Trust (the "Profit Sharing Plan") and the
Host Marriott Executive Deferred Compensation Plan (the "Deferred
Compensation Plan").
(2) Bonus includes the amount of cash bonus earned pursuant to the named
individual's bonus plan during the fiscal year and paid subsequent to the
end of each fiscal year.
(3) As part of its long-term compensation program for executive officers, Host
Marriott currently awards shares of restricted stock pursuant to the Host
Marriott 1993 Comprehensive Stock Incentive Plan (the "Comprehensive Stock
Plan") and previously awarded such shares under the Host Marriott
Restricted Stock Plan for Key Employees (the "Restricted Stock Plan") and
the Host Marriott Deferred Stock Incentive Plan (the "Deferred Stock
Plan"), predecessor plans to the Comprehensive Stock Plan. For Mr.
Parsons, such restricted shares are as follows: for 1993, 1,420 shares
awarded under the Deferred Stock Plan and 20,000 shares awarded under the
Comprehensive Stock Plan. For Mr. McKenna, such restricted shares are as
follows: for 1993, 2,590 shares awarded under the Deferred Stock Plan and
72,000 shares awarded under the Comprehensive Stock Plan. For Mr. LaPorta,
such restricted shares are as follows: for 1993, 952 shares awarded under
the Deferred Stock Plan and 5,000 shares awarded under the Comprehensive
Stock Plan. For Mr. Townsend, such restricted shares are as follows: for
1993, 934 shares awarded under the Deferred Stock Plan and 20,000 shares
awarded under the Comprehensive Stock Plan. For Mr. Mayer, such restricted
shares are as follows: for 1993, 943 shares awarded under the Deferred
Stock Plan and 20,000 shares under the Comprehensive Stock Plan. For Mr.
Bollenbach, such restricted shares are as follows: for 1993, 7,124 shares
awarded under the Deferred Stock Plan and 900,000 shares under the
Comprehensive Stock Plan. Mr. Bollenbach's unvested share awards were
forfeited upon his resignation from Host Marriott. For Mr. Hart, such
restricted shares are as follows: for 1993, 3,096 shares awarded under the
Deferred Stock Plan and 144,000 shares awarded under the Comprehensive
Stock Plan. The restricted shares reported in this table and in this
footnote are shares subject to "General Restrictions" (see footnote 7
below). Restricted shares with "Performance Restrictions" (see footnote 7
below) awarded as long term incentive plan ("LTIP") awards are excluded
from this table. Except as otherwise noted, all shares noted in the tables
in the Prospectus represent shares of Host Marriott Common Stock, par
value $1.00 per share ("Host Marriott Common Stock").
(4) Bonus awards made under the Comprehensive Stock Plan by Host Marriott are
generally derived based on dividing twenty percent of each individual's
annual cash bonus award by the average of the high and low trading prices
for a share of Host Marriott Common Stock on the last trading day of the
fiscal year. No voting rights or dividends are attributed to award shares
until such award shares are distributed. Awards may be denominated as
current awards or deferred awards. A current award is distributed in 10
annual installments commencing one year after the award is granted. A
deferred award is distributed in a lump sum or in up to 10 installments
following termination of employment. Deferred award shares contingently
vest pro rata in annual installments commencing one year after the bonus
award made under the Comprehensive Stock Plan is granted to the employee.
Awards are not subject to forfeiture once the employee reaches age 55 or
after 10 years of service with Host Marriott. The aggregate number and
value of shares of Host Marriott deferred stock and restricted stock
subject to "General Restrictions" and "Performance Restrictions" (see
footnote 7 below) held by
53
<PAGE>
each identified executive officer as of the end of the fiscal year 1995 is
as follows: Mr. Parsons, 20,708 shares valued at $244,561; Mr. McKenna,
149,897 shares valued at $1,770,284; Mr. LaPorta, 6,700 shares valued at
$79,127; Mr. Townsend, 24,397 shares valued at $288,129; Mr. Mayer, 20,079
shares valued at $237,133; Mr. Hart, 5,347 shares valued at $63,148. Mr.
Bollenbach does not have any Host Marriott deferred or restricted stock.
During the period in which any restrictions apply, holders of restricted
stock are entitled to receive all dividends or other distributions paid with
respect to such stock.
(5) For 1995, the amounts attributed to LTIP payouts represent the value for
the Host Marriott Corporation and Host Marriott Services Performance-Based
Restricted Stock Awards which vested following the close of the fiscal
year based on performance for the fiscal year. The value stated is the
average of the high and low trading prices of a share of stock on the date
the performance restrictions were removed.
(6) For Mr. Parsons, Mr. McKenna and Mr. Mayer amounts included in "All Other
Compensation" represent matching Host Marriott contribution amounts
received under the Profit Sharing Plan and the Deferred Compensation Plan.
In 1995, for Messrs. McKenna, Parsons and Mayer, $2,669 was attributable
to the Profit Sharing Plan for each executive. The amounts attributable to
the Deferred Compensation Plan for each officer were as follows: Mr.
McKenna, $10,916; Mr. Parsons, $8,282 and Mr. Mayer, $5,311. For
Mr. LaPorta, $2,664 is attributable to the Profit Sharing Plan, $2,412 was
attributable to the Deferred Compensation Plan and $40,000 was
attributable to a special incentive to reward key performance. For Mr.
Townsend, $2,654 is attributable to the Profit Sharing Plan, $5,949 was
attributable to the Deferred Compensation Plan and $25,000 was
attributable to a special incentive to reward key performance. For Mr.
Bollenbach, a total of $37,400 is attributable to a separation leave
payment. The remaining $1,000,000 is attributable to a consulting
arrangement between the Company and Mr. Bollenbach to be paid through June
1996. For Mr. Hart, $15,507 is attributable to the Profit Sharing and
Deferred Compensation Plans. The remaining $800,000 is attributable to Mr.
Hart's separation arrangement with Host Marriott. Under these
arrangements, an additional payment of $200,000 may be made to Mr. Hart in
the third quarter of 1996 at the sole discretion of Host Marriott.
(7) On October 17, 1993, the Compensation Policy Committee (the "Committee")
of the Board of Directors of Host Marriott approved grants of restricted
stock to certain key employees of Host Marriott, including Messrs.
Parsons, McKenna, LaPorta, Townsend, Mayer, and Hart. On October 29, 1993,
the Board of Directors of Host Marriott approved an award of restricted
stock to Mr. Bollenbach. Each such grant made in 1993 to these individuals
consists of two awards: shares subject to restrictions relating primarily
to continued employment ("General Restrictions") which vest ratably over a
three- or five-year period or in their entirety at the end of a three- or
five-year period and an award of shares subject to performance objectives
such as financial performance of Host Marriott ("Performance
Restrictions"). Performance objectives are established by the Committee
and are subject to periodic review and revision. Only those restricted
stock awards subject to General Restrictions are presented in this table
as "Restricted Stock Awards," and the value stated in this table is the
fair market value on the date of the grant.
(8) Mr. Bollenbach resigned his position as President of the Company effective
May 1, 1995. Mr. Hart assumed the position, on an interim basis from May
1, 1995 through October 7, 1995, the date that Mr. Parsons assumed this
position. Mr. Mayer resigned his position effective January 1996.
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<PAGE>
Aggregated Stock Option Exercises and Year-End Value. The table below sets
forth, on an aggregated basis, information regarding the exercise during the
1995 fiscal year of options to purchase Host Marriott Common Stock by each of
the applicable persons listed on the Summary Compensation Table above and the
value on December 29, 1995 of all unexercised options held by such
individuals. Host Marriott did not grant any stock options to the persons
listed on the Summary Compensation Table during fiscal year 1995.
AGGREGATED STOCK OPTION EXERCISES IN
LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT FISCAL YEAR- VALUE OF UNEXERCISED
SHARES END IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE (#) FISCAL YEAR-END ($)(2)
EXERCISE REALIZED ------------------------- -------------------------
NAME COMPANY(1) (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ---------- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
R.E. Parsons, Jr........ HM 0 0 22,350 1,625 175,449 13,925
HMS 0 0 4,470 325 19,336 1,545
MI 8,987 145,270 7,988 1,625 137,464 35,661
Total 8,987 145,270 34,808 3,575 332,249 51,131
S.J. McKenna............ HM 46,507 434,208 51,950 2,500 454,452 21,423
HMS 0 0 10,390 500 50,514 2,378
MI 6,150 84,499 43,300 2,500 1,015,012 54,864
Total 52,657 518,707 105,640 5,500 1,519,978 78,665
S.A. LaPorta............ HM 0 0 3,000 6,500 17,235 31,289
HMS 0 0 600 1,300 1,841 3,267
MI 0 0 1,750 2,750 33,432 50,406
Total 0 0 5,350 10,550 52,508 84,962
C.G. Townsend........... HM 0 0 6,150 825 52,061 7,070
HMS 0 0 1,230 165 5,772 785
MI 7,738 129,387 0 825 0 18,105
Total 7,738 129,387 7,380 1,815 57,833 25,960
J.P. Mayer.............. HM 0 0 13,700 725 114,564 6,213
HMS 0 0 2,740 145 12,690 689
MI 900 13,031 12,800 725 272,960 15,910
Total 900 13,031 29,240 1,595 400,214 22,812
S.F. Bollenbach......... HM 127,750 1,029,372 0 0 0 0
HMS 0 0 0 0 0 0
MI 0 0 0 0 0 0
Total 127,750 1,029,372 0 0 0 0
M.J. Hart............... HM 54,738 521,917 0 4,125 0 35,348
HMS 0 0 0 825 0 3,923
MI 21,275 436,930 0 4,125 0 90,525
Total 76,013 958,847 0 9,075 0 129,796
</TABLE>
- ---------------------
(1) "HM" represents options to purchase Host Marriott Common Stock ("Host
Marriott Options"). "HMS" represents options to purchase HM Services
common stock. "MI" represents options to purchase Marriott International,
Inc. Common Stock. In connection with the Special Dividend and pursuant to
the Host Marriott Corporation 1993 Comprehensive Incentive Stock Plan (the
"Plan"), all Host Marriott Options held by employees of Host Marriott were
adjusted to reflect the Special Dividend by providing each option holder
with the option to purchase one share of HM Services common stock for
every five shares of Common Stock held as of the close of business on
December 29, 1995. The exercise price of the HM Services option was set,
and the price of the Host Marriott Options was adjusted, so that the
economic value of the Host Marriott Options prior to the Special Dividend
was preserved and not increased or decreased as a result of the Special
Dividend.
(2) Based on a per share price for Host Marriott Common Stock of $11.81, a per
share price for HM Services Corporation common stock of $6.69 and a per
share price of Marriott International common stock of $37.9375. These
prices reflect the average of the high and low trading prices on the New
York Stock Exchange on December 29, 1995.
55
<PAGE>
SOLE SHAREHOLDER
The Company has 100 shares of Common Stock with no par value issued and
outstanding, all of which are held beneficially and of record by HMC
Acquisitions, Inc. No executive officer or director of the Company owns any
shares of the Company's Common Stock.
Set forth below is the ownership as of March 22, 1996 of common stock of
Host Marriott by directors, nominees, the chief executive officer, the four
additional most highly compensated executive officers and certain former
executive officers of the Company as well as by all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES OF HOST MARRIOTT COMMON STOCK
BENEFICIALLY OWNED AS OF % OF SHARES OUTSTANDING AS OF
NAME MARCH 22, 1996(1) MARCH 22, 1996(2)
---- ------------------------------------ -----------------------------
<S> <C> <C>
DIRECTORS:
Robert E. Parsons, Jr... 447,804(4) *
Stephen J. McKenna...... 232,051(4) *
NON-DIRECTOR EXECUTIVE
OFFICERS:
Scott A. LaPorta........ 137,266(4) *
Christopher G. Townsend. 45,890(4) *
Jeffrey P. Mayer(3)..... 24,292 *
CERTAIN FORMER EXECUTIVE
OFFICERS:
Stephen F. Bollenbach... 3,534 *
Matthew J. Hart......... 36,311 *
ALL DIRECTORS AND
EXECUTIVE OFFICERS AS A
GROUP:................. 952,712 *
</TABLE>
- ---------------------
*Less than one percent.
(1) Except as otherwise noted, the Company believes that each named individual
has sole voting and investment power over the shares beneficially owned.
(2) Shares of common stock of Host Marriott Common Stock which each identified
stockholder has the right to acquire within the 60 days of the date of the
table set forth above are deemed to be outstanding in computing the
percentage ownership of such stockholder, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person.
(3) Mr. Mayer resigned his position effective January 1996. He is included as
a non-director executive officer in this table because he was one of the
Company's five most highly compensated executive officers at the end of
the Company's last fiscal year.
(4) Does not include shares reserved, contingently vested or awarded under
Host Marriott's 1993 Comprehensive Stock Incentive Plan other than shares
of unvested restricted stock granted under such plan. Shares of restricted
stock are voted by the holder thereof.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100 shares of no par
value common stock, all of which are outstanding and are held beneficially and
of record by HMC Acquisitions, Inc. There is no public trading market for the
common stock of the Company. The Indenture governing the Senior Notes contains
certain restrictions on the payment of cash dividends with respect to the
Company's common stock. Subject to the limitations contained in such
Indenture, holders of common stock of the Company will be entitled to
dividends when and as declared by the Board of Directors of the Company from
funds legally available therefor, and upon liquidation, will be entitled to
share ratably in any distribution to holders of common stock.
56
<PAGE>
DESCRIPTION OF SENIOR NOTES
Set forth below is a summary of certain provisions of the Senior Notes. The
Series A Notes were issued pursuant to, and, upon consummation of the Exchange
Offer, the Series B Notes will be issued pursuant to an indenture (the
"Indenture") dated as of December 20, 1995, by the Company, the Initial
Guarantors named therein and Marine Midland Bank, as trustee (the "Trustee").
The terms of the Indenture are also governed by certain provisions contained
in the Trust Indenture Act of 1939, as amended. The following description of
certain provisions of the Indenture are summaries only, do not purport to be
complete and are qualified in their entirety by reference to all of the
provisions of the Indenture, a copy of which may be obtained from the Company.
Capitalized terms used herein and not otherwise defined shall have the
meanings assigned to them in the Indenture. Wherever particular provisions of
the Indenture are referred to in this summary, such provisions are
incorporated by reference as a part of the statements made and such statements
are qualified in their entirety by such reference. The Trustee also serves as
trustee under (i) the Indenture dated as of May 25, 1995 by and among HMH
Properties, Inc., certain of its subsidiaries and Marine Midland Bank, as
trustee, and (ii) the Trust and Servicing Agreement dated as of January 24,
1996 by and among CBM Funding Corporation (an affiliate of the Company) and
Marine Midland Bank, as trustee.
GENERAL
The Senior Notes are senior obligations of the Company, limited in aggregate
principal amount to $350 million. The Senior Notes rank pari passu with all
other existing and future senior indebtedness of the Company; provided,
however, certain Indebtedness incurred by the Company and its Subsidiaries in
the future may be secured by assets held by the Company or its Subsidiaries
subject to certain restrictions described herein and thus effectively rank
senior to the Senior Notes to the extent of such security. The Senior Notes
are guaranteed on a senior basis by the Initial Guarantors and, subject to
certain exceptions, each of the Company's future Subsidiaries (see "--Certain
Covenants--Future Subsidiary Guarantors"). The Senior Notes are issued only in
fully registered form, without coupons, in denominations of $l,000 and
integral multiples thereof.
The Senior Notes mature on December 15, 2007. The Senior Notes bear interest
at the rate per annum stated on the cover page hereof from the date of
issuance or from the most recent Interest Payment Date to which interest has
been paid or provided for, payable semi-annually on June 15 and December 15 of
each year, commencing June 15, 1996, to the persons in whose names such Senior
Notes are registered at the close of business on the June 1st or the
December 1st immediately preceding such Interest Payment Date. Interest is
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Principal of, premium, if any, and interest on the Senior Notes is payable,
and the Senior Notes may be presented for registration of transfer or
exchange, at the office or agency of the Company maintained for such purpose,
which office or agency shall be maintained in the Borough of Manhattan, The
City of New York. At the option of the Company, payment of interest may be
made by check mailed to the Holders of the Senior Notes at the addresses set
forth upon the registry books of the Company; provided, however, Holders of
certificated Senior Notes are entitled to receive interest payments (other
than at maturity) by wire transfer of immediately available funds, if
appropriate wire transfer instructions have been received in writing by the
Trustee not less than 15 days prior to the applicable Interest Payment Date.
Such wire instructions, upon receipt by the Trustee, shall remain in effect
until revoked by such Holder. No service charge is made for any registration
of transfer or exchange of Senior Notes, but the Company may require payment
of a sum sufficient to cover any tax or other governmental charge payable in
connection therewith. Until otherwise designated by the Company, the Company's
office or agency is the corporate trust office of the Trustee presently
located at 140 Broadway, New York, New York.
OPTIONAL REDEMPTION
The Company does not have the right to redeem any Senior Notes prior to
December 15, 2000. The Senior Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after December 15, 2000, upon
not less than 30 days nor more than 60 days notice to each Holder of Senior
Notes, at the following redemption prices (expressed as percentages of the
principal amount) if redeemed during the 12-month period
57
<PAGE>
commencing December 15 of the years indicated below, in each case (subject to
the right of Holders of record on a Record Date that is on or prior to such
Redemption Date to receive interest due on an Interest Payment Date) together
with accrued and unpaid interest thereon to the Redemption Date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2000.............................................................. 104.500%
2001.............................................................. 102.250%
2002.............................................................. 101.125%
2003 and thereafter............................................... 100.000%
</TABLE>
In the case of a partial redemption, the Trustee shall select the Senior
Notes or portions thereof for redemption on a pro rata basis, by lot or in
such other manner it deems appropriate and fair. The Senior Notes may be
redeemed in part in multiples of $1,000 only.
The Senior Notes will not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first class mail, at least 30 days
and not more than 60 days prior to the date fixed for redemption to the Holder
of each Senior Note to be redeemed to such Holder's last address as then shown
upon the registry books of the Registrar. Any notice which relates to a Senior
Note to be redeemed in part only must state the portion of the principal
amount equal to the unredeemed portion thereof and must state that on and
after the date of redemption, upon surrender of such Senior Note, a new Senior
Note or Senior Notes in a principal amount equal to the unredeemed portion
thereof will be issued. On and after the date of redemption, interest will
cease to accrue on the Senior Notes or portions thereof called for redemption.
CERTAIN COVENANTS
Repurchase of Senior Notes at the Option of the Holder Upon a Change of
Control
Upon the occurrence of a Change of Control Triggering Event, each Holder of
Senior Notes will have the right to require the Company to repurchase all or
any part (equal to $1,000 or an integral multiple thereof) of such Holder's
Senior Notes pursuant to the offer described below (the "Change of Control
Offer") at an offer price in cash (the "Change of Control Purchase Price")
equal to 101% of the aggregate principal amount thereof plus (subject to the
right of Holders of record on a Record Date that is on or prior to such
repurchase date to receive interest due on an Interest Payment Date) accrued
and unpaid interest thereon to the date of purchase on a date that is not more
than 45 Business Days after the occurrence of such Change of Control
Triggering Event (the "Change of Control Purchase Date").
On or before the Change of Control Purchase Date, the Company will (i)
accept for payment Senior Notes or portions thereof properly tendered pursuant
to the Change of Control Offer, (ii) deposit with the Paying Agent cash
sufficient to pay the Change of Control Purchase Price (together with accrued
and unpaid interest) of all Senior Notes so tendered and (iii) deliver to the
Trustee Senior Notes so accepted together with an Officers' Certificate
listing the aggregate principal amount of the Senior Notes or portions thereof
being purchased by the Company. The Paying Agent will promptly mail to the
Holders of Senior Notes so accepted payment in an amount equal to the Change
of Control Purchase Price (together with accrued and unpaid interest), and the
Trustee will promptly authenticate and mail or deliver (or cause to be
transferred by book entry) to such Holders a new Senior Note equal in
principal amount to any unpurchased portion of the Senior Note surrendered;
provided, that each such new Senior Note will be in a principal amount of
$1,000 or an integral multiple thereof. Any Senior Notes not so accepted will
be promptly mailed or delivered by the Company to the Holder thereof. The
Company will publicly announce the results of the Change of Control Offer on
or as soon as practicable after the consummation thereof.
Under the Indenture, any modification to reduce the Change of Control
Purchase Price or to alter the redemption provisions of the Change of Control
Offer in a manner adverse to holders of Senior Notes requires
58
<PAGE>
the consent of each holder affected thereby and the Company's obligation to
make a Change of Control Offer may not be waived by either the Company's Board
of Directors or the Trustee. See "--Amendments and Supplements." The Change of
Control purchase feature of the Senior Notes may make more difficult or
discourage a takeover of the Company, and, thus, the removal of incumbent
management. The Change of Control purchase feature resulted from negotiations
between the Company and the Initial Purchasers.
The phrase "all or substantially all" of the assets of the Company, as used
in the definition of "Change of Control," will likely be interpreted under
applicable state law and will be dependent upon particular facts and
circumstances. As a result, there may be a degree of uncertainty in
ascertaining whether a sale or transfer of "all or substantially all" of the
assets of the Company has occurred. In addition, no assurances can be given
that the Company will have sufficient financial resources to acquire Senior
Notes tendered upon the occurrence of a Change of Control Triggering Event.
The provisions of the Indenture relating to a Change of Control Triggering
Event may not afford the Holders protection in the event of a highly leveraged
transaction, reorganization, restructuring, merger, spin-off or similar
transaction (including transactions with the Company's management) that may
adversely affect Holders, if such transaction does not constitute a Change of
Control Triggering Event, as set forth above. Certain transactions that do not
constitute a Change of Control or Change of Control Triggering Event include
(i) transactions otherwise constituting a Change of Control which involve Host
Marriott and one or more wholly owned subsidiaries of Host Marriott, (ii) a
pro rata distribution by Host Marriott to its shareholders of shares of any
Host Marriott subsidiary, including those of the Company, and (iii) a sale of
all or substantially all of the assets of certain other subsidiaries of Host
Marriott. As of December 29, 1995, in the event of a Change of Control
Triggering Event, the Company would not be required to repurchase any
Indebtedness other than the Senior Notes. In addition, the Company may not
have sufficient financial resources available to fulfill its obligation to
repurchase the Senior Notes upon a Change of Control Triggering Event. In
addition, the Company may in the future incur additional Indebtedness which
may be required to be repurchased upon the occurrence of an event constituting
a Change of Control Triggering Event.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under
the Exchange Act and the rules thereunder and all other applicable Federal and
state securities laws.
Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock
The Indenture provides that, except as set forth below in this covenant,
neither the Company nor any of the Company's Subsidiaries will, directly or
indirectly, issue, assume, guaranty, incur, become directly or indirectly
liable with respect to (including as a result of an Acquisition), or otherwise
become responsible for, contingently or otherwise (individually and
collectively, to "incur" or, as appropriate, an "incurrence"), any
Indebtedness or any Disqualified Capital Stock (including Acquired
Indebtedness). Notwithstanding the foregoing:
(a) if on the date of such incurrence (the "Incurrence Date"), the
Consolidated Coverage Ratio of the Company for the Reference Period
immediately preceding the Incurrence Date, after giving effect, on a pro
forma basis, to such incurrence of such Indebtedness or Disqualified
Capital Stock and, to the extent set forth in the definition of
Consolidated Coverage Ratio, the use of proceeds thereof, would be at least
(x) 2 to 1 if such incurrence occurs on or before January 1, 1997, or (y)
2.1 to 1 if such incurrence occurs at any time thereafter (the "Debt
Incurrence Ratio"), then the Company and the Subsidiary Guarantors may
incur Indebtedness or Disqualified Capital Stock;
(b) the Company and the Subsidiary Guarantors may incur Indebtedness
evidenced by the Senior Notes and represented by the Indenture up to the
amounts specified therein as of the date thereof;
(c) the Company and its Subsidiaries or Subsidiary Guarantors, as
applicable, may incur Refinancing Indebtedness with respect to any
Indebtedness or Disqualified Capital Stock, as applicable, described in
clauses (a), (b) or (e) of this covenant or described in this clause (c) or
which is outstanding on the Issue Date;
59
<PAGE>
(d) the Company and its Subsidiaries or its Subsidiary Guarantors, as
applicable, may incur Permitted Indebtedness;
(e) the Company and its Subsidiaries may incur Non-recourse Purchase
Money Indebtedness; and
(f) the Company and its Subsidiary Guarantors may incur Indebtedness (in
addition to Indebtedness permitted by any other clause of this paragraph)
in an aggregate amount outstanding at any time (including any Indebtedness
issued to refinance, replace, or refund such Indebtedness) of up to $25
million.
Indebtedness of any Person that is not a Subsidiary of the Company, which
Indebtedness is outstanding at the time such Person becomes a Subsidiary of
the Company or is merged with or into or consolidated with the Company or a
Subsidiary of the Company, shall be deemed to have been incurred at the time
such Person becomes a Subsidiary of the Company or is merged with or into or
consolidated with the Company or a Subsidiary of the Company and Indebtedness
which is assumed at the time of the acquisition of any asset shall be deemed
to have been incurred at the time of such acquisition. This provision may
restrict certain highly leveraged Persons from becoming Subsidiaries of the
Company.
Limitation on Restricted Payments
The Indenture provides that on and after the Issue Date the Company will
not, and will not permit any of its Subsidiaries to, directly or indirectly,
make any Restricted Payment, if (a) on the date of such Restricted Payment a
Default or an Event of Default would exist and be continuing or would occur as
a consequence of (after giving effect, on a pro forma basis, to) such
Restricted Payment or (b) immediately prior to such Restricted Payment or
after giving effect thereto, the aggregate amount of all Restricted Payments
made by the Company and its Subsidiaries, including such proposed Restricted
Payment (if not made in cash, then the Fair Market Value on the date of such
Restricted Payment of any property used therefor as evidenced by a resolution
of the Board of Directors set forth in an Officer's Certificate delivered to
the Trustee) from and after the Issue Date and on or prior to the date of such
Restricted Payment, shall exceed the sum of (i) the amount determined by
subtracting (x) 2.0 times the aggregate Consolidated Interest Expense of the
Company for the period (taken as one accounting period) from the Issue Date to
the last day of the last full fiscal quarter prior to the date of the proposed
Restricted Payment (the "Computation Period") from (y) Consolidated EBITDA of
the Company for the Computation Period, plus (ii) the aggregate Net Cash
Proceeds received by the Company from the sale (other than to a Subsidiary of
the Company and other than in connection with a Qualified Exchange) of its
Qualified Capital Stock or as a capital contribution from its Parent, in
either case, which cash proceeds are received by the Company after the Issue
Date and on or prior to the date of such Restricted Payment, plus (iii) $15
million.
Notwithstanding the foregoing, the provisions set forth in clause (b) of the
immediately preceding paragraph do not prohibit (i) the payment of any
dividend within 60 days after the date of its declaration if such dividend
could have been made on the date of its declaration in compliance with the
foregoing provisions, (ii) a Qualified Exchange, or (iii) a Permitted Sharing
Arrangements Payment; provided, however, that any amounts expended pursuant to
clause (i) of this paragraph shall be included as Restricted Payments made for
purposes of clause (b) of the immediately preceding paragraph, whereas amounts
received and expended in connection with a Qualified Exchange or a Permitted
Sharing Arrangements Payment shall neither be counted as Restricted Payments
made nor be credited as Net Cash Proceeds received for purposes of clause
(b)(ii) of the immediately preceding paragraph.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that neither the Company nor the Subsidiary
Guarantors will, directly or indirectly, create, assume or suffer to exist any
consensual restriction on the ability of any Subsidiary Guarantors to pay
dividends or make other distributions to or on behalf of, or to pay any
obligation to or on behalf of, or otherwise to transfer assets or property to
or on behalf of, or make or pay loans or advances to or on behalf of, the
Company or any other Subsidiary Guarantor except (a) restrictions imposed by
the Senior Notes or the Indenture, (b) restrictions imposed by applicable law,
(c) existing restrictions under Indebtedness outstanding on the Issue Date or
under any Acquired Indebtedness not incurred in violation of the Indenture or
any agreement relating to any
60
<PAGE>
property, asset, or business acquired by the Company or any of the Subsidiary
Guarantors, which restrictions existed at the time of acquisition, were not
put in place in connection with or in anticipation of such acquisition and are
not applicable to any person, other than the person acquired, or to any
property, asset or business, other than the property, assets and business so
acquired, (d) any such restriction or requirement imposed by Indebtedness
incurred under paragraph (e) of the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock," provided such
restriction or requirement relates only to the transfer of the property
subject to such Non-recourse Purchase Money Indebtedness, (e) restrictions
with respect to a Subsidiary Guarantor imposed pursuant to a binding agreement
which has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Subsidiary Guarantor,
provided such restrictions apply solely to the Capital Stock or assets of such
Subsidiary Guarantor which are being sold, and (f) in connection with and
pursuant to permitted refinancings thereof, replacements of restrictions
imposed pursuant to clause (c) or (d) of this paragraph that are not more
restrictive than those being replaced and do not apply to any other person or
assets other than those that would have been covered by the restrictions in
the Indebtedness so refinanced. Notwithstanding the foregoing, customary
provisions restricting subletting or assignment of any lease entered into in
the ordinary course of business, consistent with industry practice, shall not
in and of themselves be deemed to be a restriction on the ability of the
Company or any of its Subsidiary Guarantors to transfer such property.
Limitations on Liens
The Indenture provides that the Company and the Subsidiary Guarantors will
not, and will not permit any of their Subsidiaries to, directly or indirectly,
incur or suffer to exist (i) any Lien on any assets or properties of the
Company or any of its Subsidiaries now owned or hereafter acquired, or any
income or profits therefrom, except Permitted Liens, unless all payments due
under the Indenture and the Senior Notes are secured on an equal and ratable
basis with the obligations so secured until such time as such obligations are
no longer secured by such Lien, or (ii) any Lien on the Subsidiary Shares.
Limitation on Sale of Assets and Subsidiary Stock
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, in one or a series of related transactions convey, sell,
transfer, assign or otherwise dispose of, directly or indirectly, any of its
property, business or assets, including by merger or consolidation (in the
case of a Subsidiary Guarantor or a Subsidiary of the Company), and including
any sale or other transfer or issuance of any Capital Stock of any Subsidiary
of the Company, whether by the Company or a Subsidiary of either or through
the issuance, sale or transfer of Capital Stock by a Subsidiary of the Company
(an "Asset Sale"), unless (i) the Board of Directors of the Company determines
in good faith that the Company or such Subsidiary, as applicable, receives
consideration at the time of such Asset Sale at least equal to the Fair Market
Value of the assets or Capital Stock issued or sold or otherwise disposed of,
(ii) no Default or Event of Default would occur as a consequence of (after
giving effect, on a pro forma basis, to) such Asset Sale, and (iii) at least
75% of the consideration therefor received by the Company or such Subsidiary
is in the form of cash or Cash Equivalents; provided that for purposes of this
provision the amount of (A) any Indebtedness (other than Senior Notes) that is
required to be repaid or assumed (and is either repaid or assumed by the
transferee of the related assets) by virtue of such Asset Sale and which is
secured by a Lien on the property or assets sold and (B) any securities or
other obligations received by the Company or any such Subsidiary from such
transferee that are immediately converted by the Company or such Subsidiary
into cash (or as to which the Company or such Subsidiary has received at or
prior to the consummation of the Asset Sale a commitment (which may be subject
to customary conditions) from a nationally recognized investment, merchant or
commercial bank to convert into cash within 90 days of the consummation of
such Asset Sale and which are thereafter actually converted into cash within
such 90-day period) will be deemed to be cash.
Within 365 days after the receipt of any Net Cash Proceeds from an Asset
Sale, the Company may invest or commit such Net Cash Proceeds, pursuant to a
binding commitment subject only to reasonable, customary
61
<PAGE>
closing conditions, to be invested (and providing such Net Cash Proceeds are,
in fact, so invested, within an additional 180 days) in (x) fixed assets and
property (other than notes, bonds, obligations and securities) which in the
good faith reasonable judgment of the Board of Directors of the Company will
immediately constitute or be part of a Related Business of the Company or such
Subsidiary (if it continues to be a Subsidiary) immediately following such
transaction, (y) Permitted Mortgage Investments or (z) a controlling interest
in the Capital Stock of an entity engaged in a Related Business; provided,
that concurrently with an Investment specified in clause (z), such entity
becomes a Subsidiary Guarantor. Pending the application of any such Net Cash
Proceeds as described above, the Company may invest such Net Cash Proceeds in
any manner that is not prohibited by the Indenture. Any Net Cash Proceeds from
Asset Sales that are not applied or invested as provided in the first sentence
of this paragraph (including any Net Cash Proceeds which were committed to be
invested as provided in such sentence but which are not in fact invested
within the time period provided) will be deemed to constitute "Excess
Proceeds." Within 30 days following each date on which the aggregate amount of
Excess Proceeds exceeds $15 million, the Company will make a cash offer to all
Holders of Senior Notes and holders of any other Indebtedness of the Company
ranking on a parity with the Senior Notes from time to time outstanding with
similar provisions requiring the Company to make an offer to purchase or to
redeem such Indebtedness with the proceeds from such Asset Sale, pro rata in
proportion to the respective principal amounts pursuant to an irrevocable,
unconditional offer (an "Asset Sale Offer") to purchase the maximum principal
amount of Senior Notes and such other senior Indebtedness then outstanding
that may be purchased out of the Excess Proceeds, at an offer price in cash in
an amount equal to 100% of the principal amount thereof plus accrued and
unpaid interest thereon to the date of purchase, in accordance with the
procedures set forth in the Indenture. To the extent that the aggregate amount
of Senior Notes and other senior Indebtedness tendered pursuant to an Asset
Sale Offer is less than the Excess Proceeds, the Company may use any remaining
Excess Proceeds for general corporate purposes. If the aggregate principal
amount of Senior Notes and other senior Indebtedness tendered pursuant to an
Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall
select the Senior Notes to be purchased on a pro rata basis. Upon commencement
of such offer to purchase, the amount of Excess Proceeds existing at the time
of commencement will be reduced to zero, irrespective of the amount of Senior
Notes tendered pursuant to the offer.
Notwithstanding the foregoing provisions of the prior paragraph:
(i) the Company and its Subsidiaries may, in the ordinary course of
business, convey, sell, lease, transfer, assign or otherwise dispose of
inventory acquired and held for resale in the ordinary course of business;
(ii) the Company and its Subsidiaries may convey, sell, lease, transfer,
assign or otherwise dispose of assets pursuant to and in accordance with
the limitation on mergers, sales or consolidations provisions in the
Indenture;
(iii) the Company and its Subsidiaries may sell or dispose of damaged,
worn out or other obsolete property in the ordinary course of business so
long as such property is no longer necessary for the proper conduct of the
business of the Company or such Subsidiary, as applicable;
(iv) the Company and its Subsidiaries may consummate any sale or series
of related sales (including, without limitation, sale and leaseback
transactions) of assets or properties of the Company and its Subsidiaries
having a Fair Market Value of less than $2 million; and
(v) the Company and its Subsidiaries may exchange assets held by the
Company or a Subsidiary for one or more hotels and/or one or more Related
Businesses of any Person or entity owning one or more hotels and/or one or
more Related Businesses; provided, that the Board of Directors of the
Company has determined that the terms of any exchange are fair and
reasonable and the Fair Market Value of the assets received by the Company
are approximately equal to the Fair Market Value of the assets exchanged by
the Company.
Any Asset Sale Offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable, Regulation 14E of the
Exchange Act and the rules and regulations thereunder and all other applicable
Federal and state securities laws.
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Limitation on Transactions with Affiliates
The Indenture provides that neither the Company nor any of its Subsidiaries
will be permitted after the Issue Date to enter into any contract, agreement,
arrangement or transaction with any Affiliate (an "Affiliate Transaction") or
any series of related Affiliate Transactions (other than Exempted Affiliate
Transactions), except for such Affiliate Transactions made in good faith, the
terms of which are fair and reasonable to the Company or such Subsidiary, as
the case may be, and are at least as favorable as the terms which could be
obtained by the Company or such Subsidiary, as the case may be, in a
comparable transaction made on an arm's-length basis with persons who are not
Affiliates.
Without limiting the foregoing, (a) any Affiliate Transaction or series of
related Affiliate Transactions (other than Exempted Affiliate Transactions)
with an aggregate value in excess of $5 million must first be approved
pursuant to a Board Resolution by a majority of the Board of Directors of the
Company who are disinterested in the subject matter of the transaction, and
(b) with respect to any Affiliate Transaction or series of related Affiliate
Transactions (other than Exempted Affiliate Transactions) with an aggregate
value in excess of $20 million, the Company must first obtain (i) a favorable
written opinion from an independent financial advisor of national reputation
as to the fairness from a financial point of view of such transaction to the
Company or such Subsidiary or (ii) in the case of a real estate transaction or
related real estate transactions with an aggregate value in excess of $20
million but not in excess of $50 million an opinion from an independent,
qualified appraiser that the consideration received in connection with such
transaction was comparable to the Fair Market Value of the subject assets;
provided, however, in the case of an individual who serves on the Board of
Directors or as an officer of Host Marriott or any of its Subsidiaries on the
one hand, and of the Company or any of its Subsidiaries on the other hand,
such service, in and of itself, shall not affect such person's status as a
disinterested member of the Board of Directors of the Company for purposes of
clause (a) of this paragraph.
Limitation on Merger, Sale or Consolidation
The Indenture provides that the Company will not, directly or indirectly,
consolidate with or merge with or into another Person or sell, lease, convey
or transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions,
to another Person or group of affiliated Persons, unless (i) either (a) the
Company is the continuing entity or (b) the resulting, surviving or transferee
entity is a corporation organized under the laws of the United States, any
state thereof or the District of Columbia and expressly assumes by
supplemental indenture all of the obligations of the Company in connection
with the Senior Notes and the Indenture; (ii) no Default or Event of Default
would occur as a consequence of (after giving effect, on a pro forma basis,
to) such transaction; (iii) immediately after giving effect to such
transaction on a pro forma basis, the Consolidated Net Worth of the
consolidated resulting, surviving or transferee entity is equal to at least
90% of the Consolidated Net Worth of the Company immediately prior to such
transaction; (iv) immediately after giving effect to such transaction on a pro
forma basis, the consolidated resulting, surviving or transferee entity would
immediately thereafter be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt Incurrence Ratio set forth in paragraph (a)
of the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock"; and (v) the Company has delivered to the Trustee
an Officer's Certificate and an opinion of counsel, each stating that such
consolidation, merger or transfer and, if a supplemental indenture is
required, such supplemental indenture, complies with the Indenture and that
all conditions precedent therein relating to such transaction have been
satisfied.
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such consolidation or into which the Company is merged
or to which such transfer is made shall succeed to, and be substituted for,
and may exercise every right and power of, the Company under the Indenture
with the same effect as if such successor corporation had been named therein
as the Company, and the Company shall be released from the obligations under
the Senior Notes and the Indenture except with respect to any obligations that
arise from, or are related to, such transaction.
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Future Subsidiary Guarantors
The Indenture provides that the Initial Guarantors and all other
Subsidiaries of the Company which are not prohibited from becoming guarantors
by law or the terms of an agreement ("Future Subsidiary Guarantors"), jointly
and severally, will guaranty fully and unconditionally all principal, premium,
if any, and interest on the Senior Notes on a senior basis; provided, however,
that the assets of all Subsidiaries of the Company that do not become
Subsidiary Guarantors shall in no event exceed 15% of the aggregate assets of
the Company and its Subsidiaries on a consolidated basis (determined in
accordance with GAAP).
Limitation on Status as Investment Company
The Indenture prohibits the Company and its Subsidiaries from becoming an
"investment company" (as that term is defined in the Investment Company Act of
1940, as amended), or from otherwise becoming subject to regulation under the
Investment Company Act.
GUARANTEES
The Senior Notes are guaranteed fully and unconditionally as to principal,
premium, if any, and interest, jointly and severally, by the Subsidiary
Guarantors. If the Company or a Subsidiary Guarantor defaults in the payment
of the principal of, premium, if any, or interest on, the Senior Notes when
and as the same shall become due, whether upon maturity, acceleration, call
for redemption, Offer to Purchase or otherwise, without the necessity of
action by the Trustee or any Holder, each Subsidiary Guarantor shall be
required, jointly and severally, to promptly make such payment in full. After
an Event of Default, Holders have the ability to bring suit against the
Subsidiary Guarantors to enforce the Guarantees, subject only to the right of
the Trustee to institute actions and enforce claims under the Indenture and
the concomitant limitation under the Indenture and the rights of Holders to
institute actions other than through the Trustee. See "Description of Senior
Notes--Events of Default and Remedies." The Indenture provides that the
Subsidiary Guarantors will be released from their obligations as guarantors
under the Senior Notes upon (i) the sale or other disposition of all or
substantially all of the assets or properties of such Subsidiary Guarantor, or
50% or more of the capital stock of any such Subsidiary Guarantor to Persons
other than the Company and its Subsidiaries, or (ii) the consolidation or
merger of any such Subsidiary Guarantor with any Person other than the Company
or a Subsidiary of the Company, if, as a result of such consolidation or
merger, Persons other than the Company and its Subsidiaries beneficially own
more than 50% of the capital stock of such Subsidiary Guarantor, provided
that, in either such case, the Net Cash Proceeds of such sale, disposition,
merger or consolidation are applied in accordance with the Indenture, or (iii)
a Legal Defeasance or Covenant Defeasance. The obligations of each Subsidiary
Guarantor under its Guarantee are limited so as to avoid it being construed as
a fraudulent conveyance under applicable law. See "Risk Factors--Fraudulent
Transfer."
Separate financial statements of the Initial Guarantors are not presented
herein because, in the view of the Company's management, such financial
statements would not be material to the investment decision being made by
Holders of Series A Notes in connection with the Exchange Offer.
REPORTS
The Indenture provides that whether or not the Company is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall deliver to the Trustee and to each Holder and to prospective purchasers
of Senior Notes identified to the Company by an Initial Purchaser, within 15
days after it files or would have been required to file such with the
Commission, annual and quarterly financial statements substantially equivalent
to financial statements that would have been included in reports filed with
the Commission, if the Company were subject to the requirements of Section 13
or 15(d) of the Exchange Act, including, with respect to annual information
only, a report thereon by the Company's certified independent public
accountants as such would be required in such reports to the Commission, and,
in each case, together with a management's discussion and analysis of
financial condition and results of operations which would be so
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required. Whether or not required by the rules and regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission for public availability and will make such information
available to securities analysts and prospective investors upon request. In
addition, for so long as the Senior Notes are outstanding, the Company will
continue to provide to Holders of Senior Notes and to prospective purchasers
of the Senior Notes the information required by Rule 144A(d)(4).
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure by the Company
to pay any installment of interest on the Senior Notes as and when the same
becomes due and payable and the continuance of any such failure for 30 days,
(ii) the failure by the Company to pay all or any part of the principal, or
premium, if any, on the Senior Notes when and as the same becomes due and
payable at maturity, redemption, by acceleration or otherwise, including,
without limitation, payment of the Change of Control Purchase Price or the
Asset Sale Offer Price, or otherwise, (iii) the failure by the Company or any
Subsidiary to observe or perform any other covenant or agreement contained in
the Senior Notes or the Indenture and the continuance of such failure for a
period of 30 days after written notice is given to the Company by the Trustee
or to the Company and the Trustee by the Holders of at least 25% in aggregate
principal amount of the Senior Notes outstanding, (iv) certain events of
bankruptcy, insolvency or reorganization in respect of the Company or any of
its Significant Subsidiaries, (v) a default in (1) Non-recourse Purchase Money
Indebtedness of the Company or any of its Subsidiaries with an aggregate
principal amount in excess of 10% of the aggregate assets of the Company and
its Subsidiaries, or (2) other Indebtedness of the Company or any of its
Subsidiaries with an aggregate principal amount in excess of $20 million, in
either case (a) resulting from the failure to pay principal or interest when
due or (b) as a result of which the maturity of such Indebtedness has been
accelerated prior to its stated maturity, and (vi) final unsatisfied judgments
not covered by insurance aggregating in excess of $10 million, at any one time
rendered against the Company or any of its Subsidiaries and not stayed, bonded
or discharged within 60 days. The Indenture provides that if a Default or
Event of Default occurs and is continuing, the Trustee must, within 90 days
after the occurrence of such Default or Event of Default, give to the Holders
notice of such default; provided, that the Trustee may withhold from Holders
of the Senior Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (iv) above, relating to the Company or any of its
Significant Subsidiaries), then in every such case, unless the principal of
all of the Senior Notes shall have already become due and payable, either the
Trustee or the Holders of 25% in aggregate principal amount of the Senior
Notes then outstanding, by notice in writing to the Company (and to the
Trustee if given by Holders) (an "Acceleration Notice"), may declare all
principal, determined as set forth below, and accrued interest thereon to be
due and payable immediately. If an Event of Default specified in clause (iv),
above, relating to the Company or any Significant Subsidiary occurs, all
principal and accrued interest thereon will be immediately due and payable on
all outstanding Senior Notes without any declaration or other act on the part
of the Trustee or the Holders. The Holders of a majority in aggregate
principal amount of Senior Notes generally are authorized to rescind such
acceleration if all existing Events of Default, other than the nonpayment of
the principal of, premium, if any, and interest on the Senior Notes which have
become due solely by such acceleration, have been cured or waived. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Senior Notes may direct the Trustee in its exercise of any trust
or power.
The Holders of a majority in aggregate principal amount of the Senior Notes
at the time outstanding may waive on behalf of all the Holders any default,
except a default with respect to any provision requiring supermajority
approval to amend, which default may only be waived by such a supermajority,
and except a default in the payment of principal of or interest on any Senior
Note not yet cured or a default with respect to any covenant or provision
which cannot be modified or amended without the consent of the Holder of each
outstanding Senior Note affected. Subject to the provisions of the Indenture
relating to the duties of the Trustee, the Trustee is under no obligation to
exercise any of its rights or powers under the Indenture at the request, order
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or direction of any of the Holders, unless such Holders have offered to the
Trustee reasonable security or indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the Senior Notes at the time outstanding have the right to direct
the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred on the
Trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Company may, at its option and at any time
within one year of the Stated Maturity of the Senior Notes, elect to have its
obligations discharged with respect to the outstanding Senior Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire Indebtedness represented, and the
Indenture shall cease to be of further effect as to all outstanding Senior
Notes and Guarantees, except as to (i) rights of Holders to receive payments
in respect of the principal of, premium, if any, and interest on such Senior
Notes when such payments are due from the trust funds described below; (ii)
the Company's obligations with respect to such Senior Notes concerning issuing
temporary Senior Notes, registration of Senior Notes, mutilated, destroyed,
lost or stolen Senior Notes, and the maintenance of an office or agency for
payment of money for security payments held in trust; (iii) the rights,
powers, trusts, duties, and immunities of the Trustee, and the Company's and
the Subsidiary Guarantors' obligations in connection therewith; and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company and
the Guarantors released with respect to certain covenants that are described
in the Indenture ("Covenant Defeasance") and thereafter any failure to comply
with such obligations shall not constitute a Default or Event of Default with
respect to the Senior Notes. In the event Covenant Defeasance occurs, certain
events (not including nonpayment, bankruptcy, receivership, rehabilitation and
insolvency events) described under "Events of Default" will no longer
constitute an Event of Default with respect to the Senior Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Senior Notes, U.S. legal tender, noncallable government
securities or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on such Senior Notes on
the stated date for payment thereof or on the redemption date of such
principal or installment of principal of, premium, if any, or interest on such
Senior Notes; (ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from,
or there has been published by the Internal Revenue Service, a ruling or (B)
since the date of the Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel shall confirm that, the Holders of such Senior Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred; (iii) in the case of
Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to such Trustee
confirming that the Holders of such Senior Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax in the same amount, in
the same manner and at the same times as would have been the case if such
Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit or insofar
as Events of Default from bankruptcy or insolvency events are concerned, at
any time in the period ending on the 91st day after the date of deposit; (v)
such Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under, the Indenture or any other
material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of such Senior Notes over any other creditors
of the Company or with the intent of defeating, hindering, delaying or
defrauding any other creditors of the Company or others;
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and (vii) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the conditions precedent provided for have been
complied with.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Company, the Guarantors and
the Trustee to enter into a supplemental indenture for certain limited
purposes without the consent of the Holders. With the consent of the Holders
of not less than a majority in aggregate principal amount of the Senior Notes
at the time outstanding, the Company, the Subsidiary Guarantors and the
Trustee are permitted to amend or supplement the Indenture or any supplemental
indenture or modify the rights of the Holders, except that any amendments or
supplements to the provisions relating to Future Subsidiary Guarantors shall
require the consent of the holders of not less than 66 2/3% of the aggregate
principal amount of the Senior Notes at the time outstanding; and provided,
further, that no such amendment, supplement or modification may, without the
consent of each Holder affected thereby: (i) change the Stated Maturity on any
Senior Note, or reduce the principal amount thereof or the rate (or extend the
time for payment) of interest thereon or any premium payable upon the
redemption thereof, or change the place of payment where, or the coin or
currency in which, any Senior Note or any premium or the interest thereon is
payable, or impair the right to institute suit for the enforcement of any such
payment on or after the Stated Maturity thereof (or, in the case of
redemption, on or after the Redemption Date), or reduce the Change of Control
Purchase Price or the Asset Sale Offer Price or alter the redemption
provisions or the provisions of the "Repurchase of Senior Notes at the Option
of the Holder Upon a Change of Control" covenant in a manner adverse to the
Holders, or (ii) reduce the percentage in principal amount of the outstanding
Senior Notes, the consent of whose Holders is required for any such amendment,
supplemental indenture or waiver provided for in the Indenture, or (iii)
modify or amend the ranking of the Senior Notes in a manner adverse to the
Holders, or (iv) modify any of the waiver provisions, except to increase any
required percentage or to provide that certain other provisions of the
Indenture cannot be modified or waived without the consent of the Holder of
each outstanding Senior Note affected thereby.
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
The Indenture provides that no direct or indirect stockholder, partner,
employee, officer or director, past, present or future, of the Company, the
Subsidiary Guarantors or any successor entity shall have any personal
liability in respect of the obligations of the Company or the Subsidiary
Guarantors under the Indenture or the Senior Notes by reason of his or its
status as such stockholder, partner, employee, officer or director.
CERTAIN DEFINITIONS
"Acquisition" means the purchase or other acquisition of any Person or
substantially all the assets of any Person by any other Person, whether by
purchase, merger, consolidation, or other transfer, and whether or not for
consideration.
"Affiliate" means any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by
contract, or otherwise; provided, that a beneficial owner of 10% or more of
the total voting power normally entitled to vote in the election of directors,
managers or trustees, as applicable, shall for such purposes be deemed to
constitute control.
"Average Life" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (i) the sum of the
products obtained by multiplying (a) the number of years from the date of
determination to the date of each successive scheduled principal (or
redemption) payment of such security or instrument by (b) the amount of such
respective principal (or redemption) payment, by (ii) the sum of all such
principal (or redemption) payments.
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"Beneficial Owner" or "beneficial ownership" for purposes of the definition
of Change of Control has the meaning attributed to it in Rules 13d-3 and 13d-5
under the Exchange Act (as in effect on the Issue Date), whether or not
applicable, except that a "Person" shall be deemed to have "beneficial
ownership" of all shares that such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capitalized Lease Obligation" means rental obligations under a lease that
are required to be capitalized for financial reporting purposes in accordance
with GAAP, and the amount of Indebtedness represented by such obligations
shall be the capitalized amount of such obligations, as determined in
accordance with GAAP.
"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness), warrants, options, participations or other equivalents of or
interests (however designated) in stock issued by that corporation.
"Cash Equivalent" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America are pledged in support thereof), or (ii) time deposits and
certificates of deposit and commercial paper issued by the parent corporation
of any domestic commercial bank of recognized standing having capital and
surplus in excess of $500 million and commercial paper issued by others rated
at least A-2 or the equivalent thereof by S&P or at least P-2 or the
equivalent thereof by Moody's and in each case maturing within one year after
the date of acquisition.
"Change of Control" means (i) any sale, transfer or other conveyance,
whether direct or indirect, of all or substantially all of the assets of the
Company or Host Marriott (for so long as Host Marriott is a Parent of the
Company), on a consolidated basis, in one transaction or a series of related
transactions, if, immediately after giving effect to such transaction, any
"person" or "group" (as such terms are used for purposes of Sections 13(d) and
14(d) of the Exchange Act, whether or not applicable) other than an Excluded
Person is or becomes the "beneficial owner," directly or indirectly, of more
than 50% of the total voting power in the aggregate normally entitled to vote
in the election of directors, managers, or trustees, as applicable, of the
transferee, (ii) any "person" or "group" (as such terms are used for purposes
of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable)
other than an Excluded Person is or becomes the "beneficial owner," directly
or indirectly, of more than 50% of the total voting power in the aggregate of
all classes of Capital Stock of the Company or Host Marriott (for so long as
Host Marriott is a Parent of the Company) then outstanding normally entitled
to vote in elections of directors, (iii) during any period of 12 consecutive
months after the Issue Date, individuals who at the beginning of such 12-month
period constituted the Board of Directors of the Company or Host Marriott (for
so long as Host Marriott is a Parent of the Company) (together with any new
directors whose election by such Board or whose nomination for election by the
shareholders of the Company or Host Marriott, as applicable, was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company or Host Marriott, as
applicable, then in office, (iv) a "change of control" or similar event shall
occur under any other issue of Indebtedness of the Company, Host Marriott (for
so long as Host Marriott is a Parent of the Company) or their respective
Subsidiaries with an aggregate principal amount in excess of $20 million, or
(v) in the case of the Company only, Host Marriott ceases to own directly or
indirectly a majority of the equity interests of the Company; provided,
however, that the pro rata distribution by Host Marriott to its shareholders
of shares of the Company or shares of any of Host Marriott's other
Subsidiaries shall not, in and of itself, constitute a Change of Control for
purposes of this paragraph.
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"Change of Control Triggering Event" means the occurrence of both a Change
of Control and a Rating Decline.
"Consolidated Coverage Ratio" of any Person on any date of determination
(the "Transaction Date") means the ratio, on a pro forma basis, of (a) the
aggregate amount of Consolidated EBITDA of such Person attributable to
continuing operations and businesses (exclusive of amounts attributable to
operations and businesses permanently discontinued or disposed of) for the
Reference Period to (b) the aggregate Consolidated Interest Expense of such
person (exclusive of amounts attributable to operations and businesses
permanently discontinued or disposed of, but only to the extent that the
obligations giving rise to such Consolidated Interest Expense would no longer
be obligations contributing to such person's Consolidated Interest Expense
subsequent to the Transaction Date) during the Reference Period; provided,
that for purposes of such calculation, (i) acquisitions of operations,
businesses or other income-producing assets (including any reinvestment of
disposition proceeds in income-producing assets held as of and not disposed on
the Transaction Date) which occurred during the Reference Period or subsequent
to the Reference Period and on or prior to the Transaction Date shall be
assumed to have occurred on the first day of the Reference Period, (ii)
transactions giving rise to the need to calculate the Consolidated Coverage
Ratio shall be assumed to have occurred on the first day of the Reference
Period, (iii) the incurrence of any Indebtedness or issuance of any
Disqualified Capital Stock during the Reference Period or subsequent to the
Reference Period and on or prior to the Transaction Date (and the application
of the proceeds therefrom to the extent used to refinance or retire other
Indebtedness or invested in income-producing assets held as of and not
disposed on the Transaction Date) shall be assumed to have occurred on the
first day of such Reference Period, and (iv) the Consolidated Interest Expense
of such Person attributable to interest on any Indebtedness or dividends on
any Disqualified Capital Stock bearing a floating interest (or dividend) rate
shall be computed on a pro forma basis as if the average rate in effect from
the beginning of the Reference Period to the Transaction Date had been the
applicable rate for the entire period, unless such Person or any of its
Subsidiaries is a party to an Interest Swap or Hedging Obligation (which shall
remain in effect for the 12-month period immediately following the Transaction
Date) that has the effect of fixing the interest rate on the date of
computation, in which case such rate (whether higher or lower) shall be used.
"Consolidated EBITDA" means, for any Person and period, the Consolidated Net
Income of such Person for such period adjusted to add thereto (to the extent
deducted from net revenues in determining Consolidated Net Income), without
duplication, the sum of (A)(i) Consolidated Interest Expense, (ii) provisions
for taxes based on income, (iii) depreciation and amortization expense
(provided, that the depreciation and amortization expense of a Consolidated
Subsidiary that is not wholly owned shall be included only to the extent of
the interest of the referent Person in such Subsidiary), (iv) any other
noncash items reducing the Consolidated Net Income of such Person for such
period, (v) any dividends or distributions during such period to such Person
or a Consolidated Subsidiary of such Person from any other Person which is not
a Subsidiary of such Person or which is accounted for by such Person by the
equity method of accounting, to the extent that (a) such dividends or
distributions are not included in the Consolidated Net Income of such Person
for such period and (b) (x) the sum of such dividends and distributions, plus
the aggregate amount of dividends or distributions from such other Person
since the date of this Indenture that have been included in Consolidated
EBITDA pursuant to this clause (v), do not exceed (y) the cumulative net
income of such other Person attributable to the equity interests of the Person
(or Subsidiary of the Person) whose Consolidated EBITDA is being determined,
and (vi) any cash receipts of such Person or a Consolidated Subsidiary of such
Person during such period that represent items included in Consolidated Net
Income of such Person for a prior period which were excluded from Consolidated
EBITDA of such Person for such prior period by virtue of clause (B) of this
definition, minus (B) the sum of (i) all noncash items increasing the
Consolidated Net Income of such Person for such period and (ii) any cash
expenditures of such Person during such period to the extent such cash
expenditures (x) did not reduce the Consolidated Net Income of such Person for
such period and (y) were applied against reserves or accruals that constituted
noncash items reducing the Consolidated Net Income of such Person when
reserved or accrued; all as determined on a consolidated basis for such Person
and its Subsidiaries in conformity with GAAP.
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"Consolidated Interest Expense" of any Person means, for any period, the
aggregate amount (without duplication and determined in each case in
accordance with GAAP) of (a) interest expensed or capitalized, paid, accrued,
or scheduled to be paid or accrued (including, in accordance with the
following sentence, interest attributable to Capitalized Lease Obligations but
excluding the amortization of fees or expenses incurred in order to consummate
the sale of the Senior Notes as described herein) of such Person and its
Consolidated Subsidiaries during such period, including (i) original issue
discount and noncash interest payments or accruals on any Indebtedness, (ii)
the interest portion of all deferred payment obligations, and (iii) all
commissions, discounts and other fees and charges owed with respect to
bankers' acceptances and letters of credit financings and Interest Swap and
Hedging Obligations, in each case to the extent attributable to such period,
and (b) the amount of dividends accrued or payable by such Person or any of
its Consolidated Subsidiaries in respect of Disqualified Capital Stock (other
than by Subsidiaries of such Person to such Person or such Person's Subsidiary
Guarantors); provided, however, that interest, dividends or other payments or
accruals of a Consolidated Subsidiary that is not wholly owned shall be
included only to the extent of the interest of the referent Person in such
Subsidiary. For purposes of this definition, (x) interest on a Capitalized
Lease Obligation shall be deemed to accrue at an interest rate reasonably
determined by the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP and (y) interest expense
attributable to any Indebtedness represented by the guaranty by such Person or
a Subsidiary of such Person of an obligation of another Person shall be deemed
to be the interest expense attributable to the Indebtedness guaranteed.
"Consolidated Net Income" means, with respect to any Person for any period,
the net income (or loss) of such Person and its Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP; provided, that (i)
net income (or loss) of any other Person which is not a Subsidiary of the
Person or is accounted for by such specified Person by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid to the specified Person or a Subsidiary of such Person,
(ii) the net income (or loss) of any other Person acquired by such specified
Person or a Subsidiary of such Person in a pooling of interests transaction
for any period prior to the date of such acquisition shall be excluded, (iii)
all gains and losses which are either extraordinary (as determined in
accordance with GAAP) or are either unusual or nonrecurring (including any
gain from the sale or other disposition of assets outside the ordinary course
of business or from the issuance or sale of any capital stock), shall be
excluded, and (iv) the net income, if positive, of any of such Person's
Consolidated Subsidiaries (other than Non-Guarantor Subsidiaries) to the
extent that the declaration or payment of dividends or similar distributions
is not at the time permitted by operation of the terms of its charter or
bylaws or any other agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to such Consolidated Subsidiary
shall be excluded; provided, however, in the case of exclusions from
Consolidated Net Income set forth in clauses (ii), (iii) and (iv), such
amounts shall be excluded only to the extent included in computing such net
income (or loss) in accordance with GAAP and without duplication.
"Consolidated Net Worth" of any Person at any date means the aggregate
consolidated stockholders' equity of such Person (plus amounts of equity
attributable to preferred stock) and its Consolidated Subsidiaries, as would
be shown on the consolidated balance sheet of such Person prepared in
accordance with GAAP, adjusted to exclude (to the extent included in
calculating such equity) (a) the amount of any such stockholders' equity
attributable to Disqualified Capital Stock or treasury stock of such Person
and its Consolidated Subsidiaries, (b) all upward revaluations and other
write-ups in the book value of any asset of such Person or a Consolidated
Subsidiary of such Person subsequent to the Issue Date, and (c) all
investments in Subsidiaries that are not Consolidated Subsidiaries and in
Persons that are not Subsidiaries.
"Consolidated Subsidiary" means, for any Person, each Subsidiary of such
Person (whether now existing or hereafter created or acquired) the financial
statements of which are consolidated for financial statement reporting
purposes with the financial statements of such Person in accordance with GAAP.
"Disqualified Capital Stock" means (a) except as set forth in clause (b),
with respect to any person, Capital Stock of such person that, by its terms or
by the terms of any security into which it is convertible, exercisable or
exchangeable, is, or upon the happening of an event or the passage of time
would be, required to be redeemed or
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repurchased (including at the option of the holder thereof) by such person or
any of its Subsidiaries, in whole or in part, on or prior to the Stated
Maturity of the Senior Notes and (b) with respect to any Subsidiary of such
person (including with respect to any Subsidiary of the Company), any Capital
Stock other than any common stock with no preference or redemption or
repayment provisions.
"Excluded Person" means, in the case of the Company, Host Marriott or any
wholly owned subsidiary of Host Marriott.
"Exempted Affiliate Transactions" means (a) employee compensation
arrangements approved by a majority of independent (as to such transactions)
members of the Board of Directors of the Company, (b) payments of reasonable
directors' fees and expenses, (c) transactions solely between the Company and
any of its Subsidiaries or solely among wholly owned Subsidiaries of the
Company, (d) Permitted Tax Payments, (e) Permitted Sharing Arrangements, (f)
Procurement Contracts, (g) Management Agreements and (h) Restricted Payments
permitted under the "Limitation on Restricted Payments" covenant.
"Existing Assets" means (i) assets of the Company and its Subsidiaries
existing at the Issue Date (other than cash, Cash Equivalents or inventory
held for resale in the ordinary course of business) and including proceeds of
any sale, transfer or other disposition of such assets and assets acquired in
whole or in part with proceeds from the sale of any such assets and (ii) that
portion of the net cash proceeds received by the Company from the offering of
the Senior Notes (the "Offering") that is not used to repay Indebtedness
substantially contemporaneously with consummation of the Offering or to pay
expenses related to the Offering, any assets purchased with such proceeds and
any assets generated from the sale, transfer or other disposition of such
assets.
"Fair Market Value" means, with respect to any assets or properties, the
amount at which such assets or properties would change hands between a willing
buyer and a willing seller, within a commercially reasonable time, each having
reasonable knowledge of the relevant facts, neither being under a compulsion
to sell or buy, as such amount is determined by (i) the Board of Directors of
the Company acting in good faith or (ii) an appraisal or valuation firm of
national or regional standing selected by the Company, with experience in the
appraisal or valuation of properties or assets of the type for which Fair
Market Value is being determined.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession as in effect from time to time.
"Indebtedness" of any person means, without duplication, (a) all liabilities
and obligations, contingent or otherwise, of such person, (i) in respect of
borrowed money (whether or not the recourse of the lender is to the whole of
the assets of such person or only to a portion thereof), (ii) evidenced by
bonds, notes, debentures or similar instruments, (iii) representing the
balance deferred and unpaid of the purchase price of any property or services,
except those incurred in the ordinary course of its business that would
constitute ordinarily a trade payable to trade creditors, (iv) evidenced by
bankers' acceptances, (v) for the payment of money relating to a Capitalized
Lease Obligation, or (vi) evidenced by a letter of credit or a reimbursement
obligation of such person with respect to any letter of credit; (b) all net
obligations of such person under Interest Swap and Hedging Obligations; (c)
all liabilities and obligations of others of the kind described in the
preceding clause (a) or (b) that such Person has guaranteed or that is
otherwise its legal liability or which are secured by any assets or property
of such Person; and (d) all obligations to purchase, redeem or acquire any
Capital Stock.
"Interest Swap and Hedging Obligation" means any obligation of any Person
pursuant to any interest rate swaps, caps, collars and similar arrangements
providing protection against fluctuations in interest rates. For purposes of
the Indenture, the amount of such obligations shall be the amount determined
in respect thereof as of the end of the then most recently ended fiscal
quarter of such Person, based on the assumption that such obligation had
terminated at the end of such fiscal quarter, and in making such
determination, if any agreement
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relating to such obligation provides for the netting of amounts payable by and
to such Person thereunder or if any such agreement provides for the
simultaneous payment of amounts by and to such Person, then in each such case,
the amount of such obligations shall be the net amount so determined, plus any
premium due upon default by such Person.
"Investment" by any person in any other Person means (without duplication)
(a) the acquisition (whether by purchase, merger, consolidation or otherwise)
by such Person (whether for cash, property, services, securities or otherwise)
of capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities, including any options or warrants, of such
other Person or any agreement to make any such acquisition; (b) the making by
such Person of any deposit with, or advance, loan or other extension of credit
to, such other Person (including the purchase of property from another Person
subject to an understanding or agreement, contingent or otherwise, to resell
such property to such other Person) or any commitment to make any such
advance, loan or extension (but excluding accounts receivable or deposits
arising in the ordinary course of business); (c) other than the guarantees of
Indebtedness of the Company or any Subsidiary to the extent permitted by the
covenant "Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock," the entering into by such Person of any guarantee of, or other
credit support or contingent obligation with respect to, Indebtedness or other
liability of such other Person; (d) the making of any capital contribution by
such Person to such other Person; and (e) the designation by the Board of
Directors of the Company of any Person to be an Unrestricted Subsidiary. The
Company shall be deemed to make an Investment in an amount equal to the Fair
Market Value of the net assets of any Subsidiary (or, if neither the Company
nor any of its Subsidiaries has theretofore made an Investment in such
Subsidiary, in an amount equal to the Investments being made) at the time that
such Subsidiary is designated an Unrestricted Subsidiary, and any property
transferred to an Unrestricted Subsidiary from the Company or a Subsidiary
shall be deemed an Investment valued at its Fair Market Value at the time of
such transfer.
"Investment Grade" means a currently effective rating by S&P of BBB- (or
subsequent equivalent rating) or higher, and Moody's of Baa3 (or subsequent
equivalent rating) or higher (or if S&P or Moody's or both shall not make a
rating of the Senior Notes publicly available, a nationally recognized
securities rating agency or agencies, as the case may be, reasonably selected
by the Company in good faith, which shall be substituted for S&P or Moody's or
both, as the case may be).
"Issue Date" means the date of first issuance of the Senior Notes under the
Indenture.
"Management Agreements" means the management agreements and franchise
agreements between the Company and Marriott International relating to the
operation of the Company's lodging properties.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means the aggregate amount of cash or Cash Equivalents
received by the Company, in the case of a sale of Qualified Capital Stock and
by the Company and its Subsidiaries in respect of an Asset Sale plus, in the
case of an issuance of Qualified Capital Stock upon any exercise, exchange or
conversion of securities (including options, warrants, rights and convertible
or exchangeable debt) of the Company that were issued for cash on or after the
Issue Date, the amount of cash originally received by the Company upon the
issuance of such securities (including options, warrants, rights and
convertible or exchangeable debt) less, in each case, (i) the sum of all
payments, fees, commissions and (in the case of Asset Sales, reasonable and
customary) expenses (including, without limitation, the fees and expenses of
legal counsel and investment banking fees and expenses) incurred in connection
with such Asset Sale or sale of Qualified Capital Stock, and (ii) (in the case
of an Asset Sale only) less the amount (estimated reasonably and in good faith
by the Company) of income, franchise, sales and other applicable taxes
required to be paid by the Company or any of its respective
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Subsidiaries in connection with such Asset Sale; provided, however, that in
the case of cash or Cash Equivalents received, or expenses paid or payable, by
a Subsidiary that is not a wholly owned Subsidiary of the Company, only that
portion of the receipts and expenses which are equal to the Company's
proportionate ownership of such Subsidiary shall be included in calculating
Net Cash Proceeds.
"Non-Guarantor Subsidiary" means any Subsidiary that is not a Subsidiary
Guarantor.
"Non-recourse Purchase Money Indebtedness" means Indebtedness of the Company
or its Subsidiaries to the extent that, (i) under the terms thereof or
pursuant to law, no personal recourse may be had against the Company or its
Subsidiaries (other than Special Purpose Subsidiaries) for the payment of the
principal of or interest or premium on such Indebtedness (or such portion),
and enforcement of obligations on such Indebtedness (or such portion) (except
with respect to fraud, willful misconduct, misrepresentation, misapplication
of funds, reckless damage to assets and undertakings with respect to
environmental matters or construction defects) is limited only to recourse
against interests in specified assets and property (the "Subject Assets"),
accounts and proceeds arising therefrom, and rights under purchase agreements
or other agreements with respect to such Subject Assets; (ii) such
Indebtedness is incurred in connection with the acquisition of such Subject
Assets for the business of the Company or its Subsidiaries (including through
acquisition of a Person holding such Subject Assets), including Indebtedness
assumed which Indebtedness existed at the time of the acquisition of such
Subject Assets; (iii) such Indebtedness was incurred at the time of such
acquisition of such Subject Assets; and (iv) no Existing Assets or proceeds
from the sale, transfer or other disposition of Existing Assets were used to
acquire such Subject Assets.
"Offering Memorandum" means the confidential Offering Memorandum dated
December 15, 1995 distributed to prospective purchasers of Senior Notes in
connection with the sale of Senior Notes by the Company.
"Parent" of any Person means a corporation which at the date of
determination owns, directly or indirectly, a majority of the Voting Stock of
such Person or of a Parent of such Person.
"Permitted Indebtedness" means any of the following:
(a) The Company and its Subsidiaries may incur Indebtedness solely in
respect of surety and appeal bonds, performance bonds and other obligations
of a like nature (to the extent that such incurrence does not result in the
incurrence of any obligation to repay any obligation relating to borrowed
money of others), all in the ordinary course of business in accordance with
customary industry practices;
(b) The Company and its Subsidiary Guarantors may incur Indebtedness
under revolving credit loans for funded Indebtedness from time to time in
the ordinary course of business, and Indebtedness in respect of bankers
acceptances and letters of credit in the ordinary course of business in
accordance with customary industry practices, up to an aggregate amount
outstanding (including any Indebtedness issued to refinance, refund or
replace such Indebtedness) of $25 million;
(c) The Company and its Subsidiaries may incur Indebtedness under
Interest Swap and Hedging Obligations that do not increase the Indebtedness
of the Company other than as a result of fluctuations in interest or
foreign currency exchange rates provided that such Interest Swap and
Hedging Obligations are incurred for the purpose of providing interest rate
protection with respect to Indebtedness permitted under the Indenture or to
provide currency exchange protection in connection with revenues generated
in currencies other than U.S. dollars;
(d) The Company may incur Indebtedness to any Subsidiary Guarantor, and
any Subsidiary Guarantor may incur Indebtedness to any other Subsidiary
Guarantor or to the Company and any Subsidiary may incur Indebtedness to
the Company or a Subsidiary Guarantor (subject to the requirements of the
"Limitation on Restricted Payments" covenant); provided, that, in the case
of Indebtedness of the Company, such obligations shall be unsecured and
subordinated in all respects to the Company's obligations pursuant to the
Senior Notes; and
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(e) The Company and its Subsidiary Guarantors may guarantee Indebtedness
of the Company, the Subsidiary Guarantors or the Subsidiaries, as
applicable, to the extent such guaranteed Indebtedness was permitted to be
incurred under the Indenture.
"Permitted Investment" means (a) an Investment in Cash Equivalents; (b)
Investments in a Person substantially all of whose assets are of a type
generally used in a Related Business (an "Acquired Person") if, as a result of
such Investments, (i) the Acquired Person immediately thereupon is or becomes
a Subsidiary of the Company, or (ii) the Acquired Person immediately thereupon
either (1) is merged or consolidated with or into the Company or any of its
Subsidiaries and the surviving Person is the Company or a Subsidiary of the
Company or (2) transfers or conveys all or substantially all of its assets to,
or is liquidated into, the Company or any of its Subsidiaries; (c) an
Investment in a Person, provided that (i) such Person is principally engaged
in a Related Business; (ii) the Company or one or more of its Subsidiaries
participates in the management of such Person, as a general partner, member of
such Person's governing board or otherwise and (iii) the aggregate amount of
Investments made in reliance on this clause (c) subsequent to the date of the
Indenture shall not exceed in the aggregate $20 million; (d) Permitted Sharing
Arrangement Payments; (e) securities received in connection with an Asset Sale
so long as such Asset Sale complied with the Indenture including the covenant
"Limitation on Sale of Assets and Subsidiary Stock" (but only to the extent
the fair market value of such securities and all other noncash and noncash
equivalent consideration received complies with clause (iii) of the
"Limitation on Sale of Assets and Subsidiary Stock" covenant); and (f)
Permitted Mortgage Investments.
"Permitted Lien" means (a) Liens existing on the Issue Date; (b) Liens
imposed by governmental authorities for taxes, assessments or other charges
not yet subject to penalty or which are being contested in good faith and by
appropriate proceedings, if adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP, (c) statutory
liens of carriers, warehousemen, mechanics, materialmen, landlords, repairmen
or other like Liens arising by operation of law in the ordinary course of
business provided that (i) the underlying obligations are not overdue for a
period of more than 30 days, or (ii) such Liens are being contested in good
faith and by appropriate proceedings and adequate reserves with respect
thereto are maintained on the books of the Company in accordance with GAAP;
(d) Liens securing the performance of bids, trade contracts (other than
borrowed money), leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature incurred in the
ordinary course of business; (e) easements, rights-of-way, zoning, similar
restrictions and other similar encumbrances or title defects which, singly or
in the aggregate, do not in any case materially detract from the value of the
property subject thereto (as such property is used by the Company or any of
its Subsidiaries) or interfere with the ordinary conduct of the business of
the Company or any of its Subsidiaries; (f) Liens arising by operation of law
in connection with judgments, only to the extent, for an amount and for a
period not resulting in an Event of Default with respect thereto; (g) pledges
or deposits made in the ordinary course of business in connection with
workers' compensation, unemployment insurance and other types of social
security legislation; (h) Liens securing Indebtedness of a Person existing at
the time such Person becomes a Subsidiary or is merged with or into the
Company or a Subsidiary or Liens securing Indebtedness incurred in connection
with an Acquisition, provided that (y) such Liens were in existence prior to
the date of such acquisition, merger or consolidation, were not incurred in
anticipation thereof, and do not extend to any other assets and (z) no
Existing Assets or proceeds from the sale, transfer or other disposition of
Existing Assets were used to acquire such Person or in connection with such
Acquisition; (i) Liens arising from Non-recourse Purchase Money Indebtedness
permitted to be incurred under the Indenture provided such Liens relate only
to the property which is subject to such Non-recourse Purchase Money
Indebtedness; (j) Liens securing Refinancing Indebtedness incurred to
refinance any Indebtedness that was previously so secured in a manner no more
adverse to the Holders of the Senior Notes than the terms of the Liens
securing such refinanced Indebtedness (provided, however, that cross-
collateralization, creation of "collateral pools" or similar arrangements in
and of themselves shall not be considered more adverse to the Holders of the
Senior Notes for the purposes of the foregoing); and (k) Liens securing (i)
Indebtedness incurred under revolving credit loans from time to time in the
ordinary course of business and (ii) Indebtedness in respect of bankers
acceptances and letters of credit, incurred in the ordinary course of business
in accordance with industry practices, in each case, permitted to be incurred
under the covenant "Limitation on Incurrence of Additional Indebtedness and
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Disqualified Capital Stock;" provided that Indebtedness secured by Liens
described in this clause (k) outstanding at any time shall not exceed $40
million in aggregate principal amount.
"Permitted Mortgage Investment" means an Investment in Indebtedness secured
by lodging property assets provided that (i) the Company is able to
consolidate the operations of the lodging property in its consolidated GAAP
financial statements, or (ii) such Investment is made with a view toward
acquiring ownership of the lodging properties securing such Indebtedness;
provided, however, that the aggregate Investments (the value of each such
investment to be determined at the time of such investment) made in reliance
on this clause (ii) with respect to lodging properties as to which the Company
has not consolidated the operations in its consolidated GAAP financial
statements, as set forth in clause (i), shall not at any time exceed 10% of
the Company's aggregate assets.
"Permitted Sharing Arrangements" means any contracts, agreements or other
arrangements between the Company or one or more Subsidiaries of the Company
and a Parent of the Company or one or more Subsidiaries of such Parent,
pursuant to which such Persons share centralized services, establish joint
payroll arrangements, procure goods or services jointly, or otherwise make
payments with respect to goods or services on a joint basis, or allocate
corporate expenses (other than taxes based on income); provided that (i) such
Permitted Sharing Arrangements are, in the determination of management of the
Company, in the best interests of the Company and its Subsidiaries and (ii)
the liabilities of the Company and its Subsidiaries under such Permitted
Sharing Arrangements are determined in good faith and on a reasonable basis.
"Permitted Sharing Arrangements Payments" means payments under Permitted
Sharing Arrangements.
"Permitted Tax Payments" means (for any taxable year of the Company in which
it joins in filing a consolidated Federal income tax return with a Parent) a
payment (including any estimated tax payment based on any estimated tax
liability for such year) by the Company to the Parent in an amount not in
excess of the lesser of (i) the separate return Federal income tax liability
(if any) of the affiliated group (within the meaning of Section 1504 of the
Internal Revenue Code of 1986, as amended) of which the Company would be the
ultimate Parent (the "Company Group") if it were not, and never had been, a
member of another affiliated group for that or any other taxable year and (ii)
the actual Federal income tax liability (if any) of the affiliated group of
which the Company is actually a member (the "Parent Group") for such year that
is allocable to the Company Group. In the event that a Parent of the Company
and any member of the Company Group join in filing any combined or
consolidated (or similar) state or local income or franchise tax returns, then
the term Permitted Tax Payment shall also include payments with respect to
such state or local income or franchise taxes determined in a manner as
similar as possible to that provided in the preceding sentence for Federal
income tax.
"Procurement Contracts" means contracts for the procurement of goods and
services entered into in the ordinary course of business and consistent with
industry practices.
"Qualified Capital Stock" means any Capital Stock of the Company that is not
Disqualified Capital Stock.
"Qualified Exchange" means (i) any legal defeasance, redemption, retirement,
repurchase or other acquisition of then outstanding Capital Stock or
Indebtedness of the Company issued on or after the Issue Date with the Net
Cash Proceeds received by the Company from the substantially concurrent sale
of Qualified Capital Stock or (ii) any exchange of Qualified Capital Stock for
any then outstanding Capital Stock or Indebtedness issued on or after the
Issue Date.
"Rating Agencies" means (i) S&P and (ii) Moody's or (iii) if S&P or Moody's
or both shall not make a rating of the Senior Notes publicly available, a
nationally recognized securities rating agency or agencies, as the case may
be, selected by the Company, which shall be substituted for S&P or Moody's or
both, as the case may be.
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"Rating Category" means (i) with respect to S&P, any of the following
categories: BB, B, CCC, CC, C and D (or equivalent successor categories); (ii)
with respect to Moody's, any of the following categories: Ba, B, Caa, Ca, C
and D (or equivalent successor categories); and (iii) the equivalent of any
such category of S&P or Moody's used in another Rating Agency. In determining
whether the rating of the Senior Notes has decreased by one or more
gradations, gradations within Rating Categories (+ and - for S&P, 1, 2 and 3
for Moody's; or the equivalent gradations for another Rating Agency) shall be
taken into account (e.g., with respect to S&P, a decline in a rating from BB+
to BB, as well as from BB- to B+, will constitute a decrease of one
gradation).
"Rating Date" means the date which is 90 days prior to the earlier of (i) a
Change of Control and (ii) the first public notice of the occurrence of a
Change of Control or of the intention by the Company to effect a Change of
Control.
"Rating Decline" means the occurrence, on or within 90 days after the
earliest to occur of (i) a Change of Control and (ii) the date of the first
public notice of the occurrence of a Change of Control, or of the intention by
the Company to effect a Change of Control (which period shall be extended so
long as the rating of the Senior Notes is under publicly announced
consideration for possible downgrade by any of the Rating Agencies), of: (a)
in the event the Senior Notes are rated by either Moody's or S&P on the Rating
Date as Investment Grade, a decrease in the rating of the Senior Notes by
either of such Rating Agencies to a rating that is below Investment Grade, or
(b) in the event the Senior Notes are rated below Investment Grade by both
Rating Agencies on the Rating Date, a decrease in the rating of the Senior
Notes by either Rating Agency by one or more gradations (including gradations
within Rating Categories as well as between Rating Categories).
"Reference Period" with regard to any Person means the four full fiscal
quarters ended immediately preceding any date upon which any determination is
to be made pursuant to the terms of the Senior Notes or the Indenture.
"Refinancing Indebtedness" means Indebtedness or Disqualified Capital Stock
(a) issued in exchange for, or the proceeds from the issuance and sale of
which are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part, or
(b) constituting an amendment, modification or supplement to, or a deferral or
renewal of ((a) and (b) above are, collectively, a "Refinancing"), any
Indebtedness or Disqualified Capital Stock in a principal amount or, in the
case of Disqualified Capital Stock, liquidation preference, not to exceed the
sum of (x) the reasonable and customary fees and expenses incurred in
connection with the Refinancing plus (y) the lesser of (i) the principal
amount or, in the case of Disqualified Capital Stock, liquidation preference,
of the Indebtedness or Disqualified Capital Stock so Refinanced and (ii) if
such Indebtedness being Refinanced was issued with an original issue discount,
the accreted value thereof (as determined in accordance with GAAP) at the time
of such Refinancing; provided, that (A) such Refinancing Indebtedness of any
Subsidiary of the Company shall be used only to Refinance outstanding
Indebtedness or Disqualified Capital Stock of such Subsidiary, and (B)
Refinancing Indebtedness shall (x) not have an Average Life shorter than the
Indebtedness or Disqualified Capital Stock to be so Refinanced at the time of
such Refinancing and (y) in all respects, be no less subordinated or junior,
if applicable, to the rights of Holders of the Senior Notes than was the
Indebtedness or Disqualified Capital Stock to be Refinanced.
"Related Business" means the businesses conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the Issue Date and any
and all businesses that in the good faith judgment of the Board of Directors
of the Company are materially related businesses. Without limiting the
generality of the foregoing, Related Business shall include the ownership and
operation of lodging properties.
"Restricted Investment" means, in one or a series of related transactions,
any Investment, other than a Permitted Investment.
"Restricted Payment" means, with respect to any Person, (a) the declaration
or payment of any dividend or other distribution in respect of Capital Stock
of such Person or the Parent or any Subsidiary of such Person, (b) any payment
on account of the purchase, redemption or other acquisition or retirement for
value of Capital
76
<PAGE>
Stock of such Person or the Parent or any Subsidiary of such Person, (c) other
than with the proceeds from the substantially concurrent sale of, or in
exchange for, Refinancing Indebtedness, any purchase, redemption, or other
acquisition or retirement for value of, any payment in respect of any
amendment of the terms of or any defeasance of, any Subordinated Indebtedness,
directly or indirectly, by such Person or the Parent or a Subsidiary of such
Person prior to the scheduled maturity, any scheduled repayment of principal,
or scheduled sinking fund payment, as the case may be, of such Indebtedness,
(d) any Restricted Investment by such Person, (e) the payment to any affiliate
in respect of taxes owed by any consolidated group of which both such Person
or a Subsidiary of such Person and such affiliate are members, and (f) any
loan or advance to, or guarantee of any indebtedness of, any affiliate of such
Person or any Subsidiary of such Person; provided, however, that the term
"Restricted Payment" does not include (i) any dividend, distribution or other
payment on or with respect to Capital Stock of the Company to the extent
payable solely in shares of Qualified Capital Stock of the Company; (ii) any
dividend, distribution or other payment to the Company, or to any of the
Subsidiary Guarantors, by the Company or any of its Subsidiaries; (iii)
Permitted Tax Payments; or (iv) the declaration or payment of dividends or
other distributions by any Subsidiary of the Company provided such
distributions are made to the Company (or a Subsidiary of the Company, as
applicable) on a pro rata basis (and in like form) to all distributions so
made.
"S&P" means Standard & Poor's Ratings Services and its successors.
"Significant Subsidiary" means any Subsidiary which is a "significant
subsidiary" of the Company within the meaning of Rule 1.02(v) of Regulation S-
X promulgated by the SEC as in effect as of the date of the Indenture.
"Special Purpose Subsidiary" means any Subsidiary of the Company, the sole
assets of which consist of (i) Subject Assets securing Non-recourse Purchase
Money Indebtedness, (ii) other assets subject to Permitted Liens, and (iii) de
minimis other assets incidental to the foregoing.
"Stated Maturity," when used with respect to any Senior Note, means December
15, 2007.
"Subordinated Indebtedness" means (i) Indebtedness of the Company or a
Subsidiary Guarantor that is subordinated in right of payment to the Senior
Notes or a Guarantee, as applicable, or (ii) Indebtedness of the Company or a
Subsidiary Guarantor (other than secured Indebtedness or Indebtedness ranking
pari passu with the Senior Notes or a Guarantee, as applicable) that has a
stated maturity on or after the Stated Maturity.
"Subsidiary," with respect to any Person, means (i) a corporation a majority
of whose Capital Stock with voting power, under ordinary circumstances, to
elect directors is at the time, directly or indirectly, owned by such Person,
by such Person and one or more Subsidiaries of such Person or by one or more
Subsidiaries of such Person, (ii) any other Person (other than a corporation)
in which such Person, one or more Subsidiaries of such Person, or such Person
and one or more Subsidiaries of such Person, directly or indirectly, at the
date of determination thereof has at least majority ownership interest, or
(iii) a partnership in which such Person or one or more Subsidiaries of such
Person is, at the time, a general partner and owns alone or together with the
Company a majority of the partnership interests. Notwithstanding the
foregoing, an Unrestricted Subsidiary shall not be deemed to be a Subsidiary
of the Company or of any Subsidiary of the Company for purposes of the
Indenture.
"Subsidiary Guarantors" means (i) the Initial Guarantors and (ii) any Future
Subsidiary Guarantors that become Subsidiary Guarantors pursuant to the terms
of the Indenture, but excluding any Persons whose guarantees have been
released pursuant to the terms of the Indenture.
"Subsidiary Shares" means the Capital Stock of the Subsidiaries of the
Company.
77
<PAGE>
"Unrestricted Subsidiary" means any Subsidiary of the Company that does not
own any Capital Stock of, or own or hold any Lien on any property of, the
Company or any other Subsidiary of the Company and that, at the time of
determination, shall be an Unrestricted Subsidiary (as designated by the Board
of Directors of the Company); provided, that (i) such Subsidiary is
principally engaged in a Related Business, (ii) neither immediately prior
thereto nor after giving pro forma effect to such designation would there
exist a Default or Event of Default and (iii) immediately after giving pro
forma effect thereto, the Company could incur at least $1.00 of Indebtedness
pursuant to the Debt Incurrence Ratio in paragraph (a) of the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock." The Board of Directors of the Company may designate any Unrestricted
Subsidiary to be a Subsidiary, provided, that (i) no Default or Event of
Default is existing or will occur as a consequence thereof and (ii)
immediately after giving effect to such designation, on a pro forma basis, the
Company could incur at least $1.00 of Indebtedness pursuant to the Debt
Incurrence Ratio in paragraph (a) of the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock." Each such designation
shall be evidenced by filing with the Trustee a certified copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions.
"Voting Stock" means, with respect to any specified Person, capital stock
with voting power, under ordinary circumstances, to elect directors of such
Person.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the Senior Notes (and the related guarantees)
will initially be represented by one or more global certificates for each
series comprising the Senior Notes in definitive, registered form (the "Global
Senior Notes") deposited with, or on behalf of, The Depository Trust Company
(the "Depository") and registered in the name of Cede & Co., as nominee of the
Depository.
The Depository has advised the Company that it is a limited-purpose trust
company that was created to hold securities for its participating
organizations (collectively, the "Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depository's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depository's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly.
Pursuant to procedures established by the Depository (i) the Depository
credits the accounts of Participants with an interest in the Global Senior
Notes and (ii) ownership of the Senior Notes will be shown on, and the
transfer of ownership thereof will be effected only through, records
maintained by the Depository (with respect to the interests of Participants),
the Participants and the Indirect Participants. The laws of some states
require that certain persons take physical delivery in definitive form of
securities that they own and that security interests in negotiable instruments
can only be perfected by delivery of certificates representing the
instruments. Consequently, the ability to transfer Senior Notes or to pledge
the Senior Notes as collateral will be limited to such extent.
So long as the Depository or its nominee is the registered owner of a Global
Senior Note, the Depository or such nominee, as the case may be, will be
considered the sole owner or holder of the Senior Notes represented by such
Global Senior Note for all purposes under the Indenture. Except as provided
below, owners of beneficial interests in a Global Senior Note will not be
entitled to have Senior Notes represented by such Global Senior Note
registered in their names, will not receive or be entitled to receive physical
delivery of certificates in registered form ("Certificated Securities"), and
will not be considered the owners or holders thereof under the Indenture for
any purpose, including with respect to the giving of any directions,
instructions or approvals to the Trustee thereunder. As a result, the ability
of a person having a beneficial interest in Senior Notes represented by a
Global Senior Note to pledge such interest to persons or entities that do not
participate in the Depository's
78
<PAGE>
system, or to otherwise take actions with respect to such interest, may be
affected by the lack of a physical certificate evidencing such interest.
Payments with respect to the principal of, premium, if any, and interest of
any Senior Notes represented by a Global Senior Note registered in the name of
the Depository or its nominee on the applicable record date will be payable by
the Trustee to or at the direction of the Depository or its nominee in its
capacity as the registered Holder of the Global Senior Note representing such
Senior Notes under the Indenture. Under the terms of the Indenture, the
Company and the Trustee may treat the persons in whose names the Senior Notes,
including the Global Senior Notes, are registered as the owners thereof for
the purpose of receiving such payments and for any and all other purposes
whatsoever. Consequently, neither the Company nor the Trustee has or will have
any responsibility or liability for the payment of such amounts to beneficial
owners of Senior Notes (including principal, premium, if any, and interest),
or to immediately credit the accounts of the relevant Participants with such
payment, in amounts proportionate to their respective holdings in principal
amount of beneficial interest in the Global Senior Note as shown on the
records of the Depository. Payments by the Participants and the Indirect
Participants to the beneficial owners of Senior Notes will be governed by
standing instructions and customary practice and will be the responsibility of
the Participants or the Indirect Participants.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that the Depository is no
longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its
option, notifies the Trustee in writing that it elects to cause the issuance
of Senior Notes in definitive form under the Indenture, then, upon surrender
by the Depository of its Global Senior Note, Certificated Securities will be
issued to each person that the Depository identifies as the beneficial owner
of the Senior Notes represented by the Global Senior Note. In addition,
subject to certain conditions, any person having a beneficial interest in a
Global Senior Note may, upon request to the Trustee, exchange such beneficial
interest for Certificated Securities. Upon any such issuance, the Trustee is
required to register such Certificated Securities in the name of such person
or persons (or the nominee of any thereof), and cause the same to be delivered
thereto.
Neither the Company nor the Trustee shall be liable for any delay by the
Depository or any Participant or Indirect Participant in identifying the
beneficial owners of the related Senior Notes and each such person may
conclusively rely on, and shall be protected in relying on, instructions from
the Depository for all purposes (including with respect to the registration
and delivery, and the respective principal amounts, of the Senior Notes to be
issued).
The information in this section concerning the Depository and the
Depository's book-entry system has been obtained from sources that the Company
believes to be reliable. The Company will have no responsibility for the
performance by the Depository or its Participants of their respective
obligations as described hereunder or under the rules and procedures governing
their respective operations.
79
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
Latham & Watkins, counsel to the Company, has advised the Company that the
following discussion expresses its opinion as to the material federal income
tax consequences expected to result to holders whose Series A Notes are
exchanged for Series B Notes in the Exchange Offer. The signed opinion of
Latham & Watkins is filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. Such opinion is based upon current provisions of
the Internal Revenue Code of 1986, as amended, applicable Treasury
Regulations, judicial authority and administrative rulings and practice. There
can be no assurance that the Internal Revenue Service (the "Service") will not
take a contrary view, and no ruling from the Service has been or will be
sought. Legislative, judicial or administrative changes or interpretations may
be forthcoming that could alter or modify the statements and conclusions set
forth herein. Any such changes or interpretations may or may not be
retroactive and could affect the tax consequences to holders. Certain Holders
(including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) may be subject to special rules
not discussed below. EACH HOLDER OF SERIES A NOTES SHOULD CONSULT HIS OR HER
OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING SERIES A
NOTES FOR SERIES B NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE,
LOCAL OR FOREIGN TAX LAWS.
The exchange of Series A Notes for Series B Notes should be treated as a
"non-event" for federal income tax purposes because the Series B Notes should
not be considered to differ materially in kind or extent from the Series A
Notes. As a result, no material federal income tax consequences should result
to holders exchanging Series A Notes for Series B Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that participates in the Exchange Offer (a "Participating
Broker-Dealer") and receives Series B Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Series B Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with the resale of Series B Notes received in
exchange for Series A Notes where such Series A Notes were acquired as a
result of market-making activities or other trading activities. The Company
has agreed that for a period of 180 days after the Expiration Date, it will
make this Prospectus, as amended or supplemented, available to any
Participating Broker-Dealer for use in connection with any such resale. In
addition, until August 8, 1996, all dealers effecting transactions in the
Series B Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Series B Notes
by Participating Broker-Dealers. Series B Notes received by Participating
Broker-Dealers for their own account pursuant to the Exchange Offer may be
sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the
Series B Notes or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any Participating Broker-Dealer
and/or the purchasers of any such Series B Notes. Any Participating Broker-
Dealer that resells Series B Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Series B Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such sale of Series B Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
80
<PAGE>
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal.
The Company has agreed in the Registration Rights Agreement to indemnify
each Participating Broker-Dealer reselling Series B Notes pursuant to this
Prospectus, and their officers, directors and controlling persons, against
certain liabilities in connection with the offer and sale of the Series B
Notes, including liabilities under the Securities Act, or to contribute to
payments that such Participating Broker-Dealers may be required to make in
respect thereof.
LEGAL MATTERS
Legal matters in connection with the issue and sale of the Senior Notes
offered hereby will be passed upon for the Company by Christopher G. Townsend,
Senior Vice President of the Company and Senior Vice President and Deputy
General Counsel of Host Marriott, and certain legal matters with respect to
the issue and sale of the Senior Notes offered hereby will be passed upon for
the Company by Latham & Watkins, Washington, D.C.
Mr. Townsend holds vested and unvested restricted and deferred awards for
Host Marriott Common Stock and options to purchase shares of Host Marriott
Common Stock.
EXPERTS
The consolidated financial statements and schedule of the Company included
in this Registration Statement, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports, dated February
26, 1996, included at pages F-3 and S-1, in reliance upon the authority of
said firm as experts in giving said reports.
The financial statements of certain acquired hotel properties listed on the
index to financial statements on pages F-1 and F-2 have been audited by Arthur
Andersen LLP, independent public accountants, as set forth in their reports,
dated November 13, 1995 or November 20, 1995 included at pages F-15, F-23, F-
30, F-38, F-45, F-53, F-60 and F-65 respectively, in reliance upon the
authority of said firm as experts in giving said reports.
81
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................................. F-3
Consolidated Balance Sheets as of December 29, 1995 and
December 30, 1994........................................................ F-4
Consolidated Statements of Operations for the Fiscal Years Ended December
29, 1995 and December 30, 1994........................................... F-5
Consolidated Statements of Shareholder's Equity for the Period from
September 10, 1994 (inception) through December 30, 1994 and the Fiscal
Year Ended December 29, 1995............................................. F-6
Consolidated Statements of Cash Flows for the Fiscal Years Ended December
29, 1995 and December 30, 1994........................................... F-7
Notes to Consolidated Financial Statements................................ F-8
FINANCIAL STATEMENTS OF CERTAIN ACQUIRED HOTEL PROPERTIES
DALLAS MARRIOTT QUORUM
Report of Independent Public Accountants................................. F-15
Balance Sheet as of December 31, 1993.................................... F-16
Statements of Operations for the Years Ended December 31, 1992 and 1993
and the Period from January 1, 1994 to October 23, 1994 ................ F-17
Statements of Cash Flows for the Years Ended December 31, 1992 and 1993
and the Period from January 1, 1994 to October 23, 1994................. F-18
Notes to Financial Statements............................................ F-19
EQUITABLE HOTEL PORTFOLIO
Report of Independent Public Accountants................................. F-23
Combined Statement of Assets, Liabilities and Net Investment In and
Advances to Parent as of December 31, 1993.............................. F-24
Combined Statements of Revenues and Expenses, Excluding Income Taxes for
the Year Ended December 31, 1993 and the Period from January 1, 1994 to
December 15, 1994 ...................................................... F-25
Combined Statements of Cash Flows for the Year Ended December 31, 1993
and the Period from January 1, 1994 to December 15, 1994 ............... F-26
Notes to Combined Financial Statements................................... F-27
SAN FRANCISCO AIRPORT MARRIOTT HOTEL
Report of Independent Public Accountants................................. F-30
Statements of Operations for the Years Ended December 31, 1992 and 1993.. F-31
Statement of Revenues and Certain Expenses for the Period from January 1,
1994 through
August 29, 1994......................................................... F-32
Statements of Cash Flows for the Years Ended December 31, 1992 and 1993.. F-33
Notes to Financial Statements............................................ F-34
WESTFIELDS INTERNATIONAL CONFERENCE CENTER
Report of Independent Public Accountants................................. F-38
Statement of Revenues and Expenses, Excluding Income Taxes for the Period
from February 5, 1993 to December 31, 1993.............................. F-39
Statement of Revenues and Certain Expenses for the Period from January 1,
1994 to August 25, 1994................................................. F-40
Statement of Cash Flows for the Period from February 5, 1993 to
December 31, 1993....................................................... F-41
Notes to Financial Statements............................................ F-42
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DALLAS/FORT WORTH AIRPORT MARRIOTT
Report of Independent Public Accountants................................. F-45
Balance Sheets as of December 31, 1993, December 30, 1994 and
August 11, 1995........................................................ F-46
Statements of Operations for the Three Fiscal Years in the Period Ended
December 30, 1994 and the 32 weeks ended August 12, 1994 (unaudited) and
August 11, 1995 ........................................................ F-47
Statements of Cash Flows for the Three Fiscal Years in the Period Ended
December 30, 1994 and the 32 weeks ended August 12, 1994 (unaudited) and
August 11, 1995......................................................... F-48
Notes to Financial Statements............................................ F-49
ATLANTA NORTHWEST MARRIOTT
Report of Independent Public Accountants................................. F-53
Statements of Assets, Liabilities and Net Investment In and Advances to
Parent as of December 30, 1994 and October 6, 1995...................... F-54
Statements of Revenues and Expenses, Excluding Income Taxes for the Years
Ended December 31, 1993 and December 30, 1994 and the Period from
December 31, 1994 to October 6, 1995.................................... F-55
Statements of Cash Flows for the Years Ended December 31, 1993 and
December 30, 1994 and the Period from December 31, 1994 to
October 6, 1995........................................................ F-56
Notes to Financial Statements............................................ F-57
CHARLOTTE MARRIOTT EXECUTIVE PARK HOTEL
Report of Independent Public Accountants................................. F-60
Statement of Revenues and Certain Expenses for the Year Ended
December 31, 1994....................................................... F-61
Notes to Financial Statements............................................ F-62
FORT LAUDERDALE HOTEL AND MARINA
Report of Independent Public Accountants.................................. F-65
Statement of Operations for the Year Ended December 31, 1993.............. F-66
Statement of Cash Flows for the Year Ended December 31, 1993.............. F-67
Notes to Financial Statements............................................. F-68
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To HMC Acquisition Properties, Inc.:
We have audited the accompanying consolidated balance sheets of HMC
Acquisition Properties, Inc. and Subsidiaries as of December 29, 1995 and
December 30, 1994, and the related consolidated statements of operations, and
cash flows for the two fiscal years in the period ended December 29, 1995 and
the consolidated statements of shareholder's equity for the fiscal year ended
December 29, 1995 and the period from September 10, 1994 through December 30,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 HMC
Acquisition Properties, Inc. and Subsidiaries as of December 29, 1995 and
December 30, 1994 and the results of their operations and their cash flows for
each of the two fiscal years in the period ended December 29, 1995 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
February 26, 1996
F-3
<PAGE>
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 29, 1995 AND DECEMBER 30, 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Property and equipment, net................................... $455,602 $358,045
Due from hotel managers....................................... 8,994 6,072
Other assets.................................................. 16,592 9,633
Cash and cash equivalents..................................... 107,119 9,830
-------- --------
$588,307 $383,580
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt.......................................................... $350,000 $167,505
Deferred income taxes......................................... 9,718 1,501
Other liabilities............................................. 4,839 3,402
-------- --------
Total liabilities......................................... 364,557 172,408
-------- --------
Shareholder's equity
Common stock, 100 shares issued and outstanding............. -- --
Additional paid-in capital.................................. 214,374 210,000
Retained earnings........................................... 9,376 1,172
-------- --------
Total shareholder's equity................................ 223,750 211,172
-------- --------
$588,307 $383,580
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 29, 1995 AND DECEMBER 30, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
REVENUES.................................................... $ 72,163 $14,649
-------- -------
OPERATING COSTS AND EXPENSES
Depreciation and amortization............................. 14,401 4,114
Base and incentive management fees (including fees to
Marriott International, Inc. of $9,980 and $2,025,
respectively)............................................ 10,906 2,044
Property taxes............................................ 6,327 1,783
Ground rent, insurance and other.......................... 3,266 563
-------- -------
Total operating costs and expenses...................... 34,900 8,504
-------- -------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST..... 37,263 6,145
Corporate expenses.......................................... (3,514) (894)
Interest expense............................................ (16,266) (875)
Interest income............................................. 855 592
-------- -------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM........... 18,338 4,968
Provision for income taxes.................................. (7,519) (2,037)
-------- -------
INCOME BEFORE EXTRAORDINARY ITEM............................ 10,819 2,931
Extraordinary loss on extinguishment of debt (net of income
tax benefit of $1,408)..................................... (2,615) --
-------- -------
NET INCOME.................................................. $ 8,204 $ 2,931
======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE PERIOD FROM SEPTEMBER 10, 1994 (INCEPTION) THROUGH DECEMBER 30, 1994
AND THE FISCAL YEAR ENDED DECEMBER 29, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------ ---------- --------
<S> <C> <C> <C>
Issuance of 100 shares of no par common stock at
inception (Note 1)............................... $-- $210,000 $ --
Net income (since inception)........................ -- -- 1,172
---- -------- ------
Balance, December 30, 1994........................ -- 210,000 1,172
Net income.......................................... -- -- 8,204
Capital Contribution................................ -- 4,374 --
---- -------- ------
Balance, December 29, 1995........................ $-- $214,374 $9,376
==== ======== ======
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 29, 1995 AND DECEMBER 30, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................. $ 8,204 $ 2,931
Extraordinary loss on extinguishment of debt, net of
taxes................................................. 2,615 --
Adjustments to reconcile to cash provided by
operations:
Depreciation and amortization........................ 14,401 4,114
Income taxes......................................... 7,436 2,037
Other................................................ 632 47
Changes in operating accounts:
Due from hotel managers ........................... (1,426) 38
Other assets....................................... 1,768 (457)
Other liabilities.................................. 3,415 861
--------- ---------
Cash provided by operations.......................... 37,045 9,571
--------- ---------
INVESTING ACTIVITIES
Acquisitions........................................... (88,931) (360,538)
Net proceeds from sale of assets....................... 3,182 --
Capital expenditures................................... (30,861) (2,366)
Other ................................................. 256 (3,519)
--------- ---------
Cash used in investing activities.................... (116,354) (366,423)
--------- ---------
FINANCING ACTIVITIES
Proceeds from borrowings, net ......................... 399,830 164,169
Repayments of debt..................................... (226,427) (1,000)
Contributed capital, including advances from affiliates
...................................................... 3,195 210,000
Transfers to HMC Acquisitions, Inc. ................... -- (6,487)
--------- ---------
Cash provided by financing activities................ 176,598 366,682
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS ................... 97,289 9,830
CASH AND CASH EQUIVALENTS, beginning of year............. 9,830 --
--------- ---------
CASH AND CASH EQUIVALENTS, end of year................... $ 107,119 $ 9,830
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
HMC Acquisition Properties, Inc. (the "Company"), a wholly owned subsidiary
of HMC Acquisitions, Inc. ("Acquisitions"), which is a wholly owned subsidiary
of Host Marriott Corporation ("Host Marriott"), was formed as a Delaware
corporation on September 10, 1994 ("Formation Date") to acquire and own a
number of full-service hotels (the "Hotels"). At December 29, 1995, the
Company owned 15 Hotels throughout the United States, 14 of which were
operated as part of the Marriott Hotels, Resorts and Suites full-service hotel
system.
Acquisitions, or another affiliate of the Company, acquired four of the
Hotels during 1994 prior to the Formation Date. These hotels, with a total net
book value of $162 million on the Formation Date, were contributed to the
Company. The consolidated financial statements present the accounts of each of
the Hotels for the period from the date of acquisition of each such property
by Acquisitions, or another affiliate of the Company, through December 29,
1995. Acquisitions made an additional capital contribution to the Company on
the Formation Date in the form of a receivable totalling $48 million, which
was subsequently collected by the Company and the proceeds utilized to acquire
additional full-service hotel properties. During December 1995, the Company
received an additional capital contribution from Acquisitions of approximately
$4.4 million, including $3.2 million in cash and property and equipment of
$1.2 million.
The consolidated financial statements present the financial position,
results of operations, and cash flows of the Company as if it were a separate
indirect subsidiary of Host Marriott for all periods presented.
The Company operates as a unit of Host Marriott, utilizing Host Marriott's
employees, centralized systems for cash management and administrative
services. Host Marriott contracts with Marriott International, Inc. ("Marriott
International") to provide certain of these services. The Company has no
employees. Host Marriott provides the services of certain employees to the
Company. Certain general and administrative costs of Host Marriott are
allocated to the Company principally based on Host Marriott's specific
identification of individual cost items and otherwise based upon estimated
levels of effort devoted by its general and administrative departments to
individual entities or relative measures of size of the entities based on
assets. Such allocated amounts included in corporate expenses were $3,514,000
and $894,000 in 1995 and 1994, respectively. In the opinion of management, the
methods for allocating corporate, general and administrative expenses and
other direct costs are reasonable. It is not practicable to estimate the costs
that would have been incurred by the Company if it had been operated on a
stand-alone basis, however, management believes that these expenses are
comparable to the expected expense levels on a forward-looking basis.
The pro forma impact of the acquisitions of certain hotel properties is
discussed in Note 8.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries and controlled affiliates. All material intercompany
transactions and balances have been eliminated. For the purposes of
comparability, certain prior year amounts have been reclassified to the 1995
presentation.
FISCAL YEAR
The Company's fiscal year ends on the Friday nearest to December 31.
REVENUES AND EXPENSES
Revenues represent house profit from the Company's Hotels because the
Company has delegated substantially all of the operating decisions related to
the generation of house profit from the Hotels to Marriott International and
other hotel managers (together the "Managers"). House profit reflects the net
revenues flowing to the Company as property owner and represents hotel
operating results less property-level expenses, excluding depreciation and
amortization, base and incentive management fees, real and personal property
taxes, ground rent and equipment rent, insurance and certain other costs,
which are classified as operating costs and expenses.
F-8
<PAGE>
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. 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
3 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 improvements.
The Company assesses impairment of its real estate properties based on
whether the estimated net undiscounted future cash flows from each individual
property (excluding debt service) will be less than its net book value. If a
property is impaired, its basis is adjusted to its fair market value less cost
to sell.
DEFERRED CHARGES
Deferred financing costs related to long-term debt are deferred and
amortized over the remaining life of the debt on a straight-line basis.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" during the fourth quarter of 1995. The adoption of
SFAS No. 121 did not have a material effect on the Company's consolidated
financial statements.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 29, 1995 and
December 30, 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Land..................................................... $ 68,077 $ 54,018
Building and leasehold improvements...................... 345,428 280,734
Furniture and equipment.................................. 38,587 25,868
Construction in progress................................. 20,388 1,539
-------- --------
472,480 362,159
Less accumulated depreciation and amortization........... (16,878) (4,114)
-------- --------
$455,602 $358,045
======== ========
</TABLE>
NOTE 3. DEBT
Debt consists of the following at December 29, 1995 and December 30, 1994
(in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Senior Notes, with a rate of 9.0% due December 2007....... $350,000 $ --
Credit Facility........................................... -- 167,505
-------- --------
$350,000 $167,505
======== ========
</TABLE>
F-9
<PAGE>
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In November 1994, the Company entered into an agreement for a $230 million
Credit Facility (the "Credit Facility") with a group of commercial banks.
Borrowings under the Credit Facility were secured by substantially all of the
assets of the Company and its subsidiaries and were also guaranteed in their
entirety by Acquisitions and Host Marriott. The Credit Facility bore interest
at either the prime rate plus .75% or LIBOR plus 1.75%.
The Credit Facility was repaid in full, and terminated, with a portion of
the net proceeds from the offering of $350 million of 9% senior notes (the
"Senior Notes") in December 1995 (the "Offering"). In connection with the
repayment of the Credit Facility, the Company recognized an extraordinary loss
of $2,615,000 (net of an income tax benefit of $1,408,000).
The Senior Notes will mature in 2007 and are fully and unconditionally
guaranteed on a joint and several basis by the Company's existing, wholly
owned subsidiaries, HMC SFO, Inc. and HMC AP Canada, Inc. and certain of the
Company's future subsidiaries. The senior note indenture (the "Indenture")
governing the Senior Notes contains covenants that, among other things, limit
the ability of the Company and its subsidiaries to incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase capital stock or subordinated indebtedness, create
certain liens, enter into certain transactions with affiliates, sell certain
assets, issue or sell stock of the Company's subsidiaries, and enter into
certain mergers and consolidations. In addition, under certain circumstances,
the Company is required to offer to purchase the Senior Notes at par value
with the proceeds of certain asset sales. The Company will be required to make
semi-annual interest payments on the Senior Notes at their stated interest
rate. The Company will not be required to make principal payments on the
Senior Notes until maturity, except in the event of certain changes in
control.
Under the terms of the Offering, distributions by the Company to
Acquisitions are available through the payment of dividends generally only to
the extent that the cumulative amount of such dividends from the date of the
Indenture does not exceed $15 million plus an amount equal to the excess of
the Company's earnings before interest expense, taxes, depreciation,
amortization and other non cash items ("EBITDA"), as defined by the Indenture,
over 200% of the Company's interest expense.
Cash paid for interest was $15,459,000 and $37,000 in 1995 and 1994,
respectively. Deferred financing costs, which are included in other assets,
amounted to $8,725,000 and $4,289,000 at December 29, 1995 and December 30,
1994, respectively. Accumulated amortization of the deferred financing costs
was zero and $47,000 at December 29, 1995 and December 30, 1994, respectively.
NOTE 4. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 109,
"Accounting for Income Taxes." SFAS 109 requires the recognition of deferred
tax assets and liabilities equal to the expected future tax consequences of
temporary differences. At December 29, 1995 and December 30, 1994, the Company
had deferred tax liabilities of approximately $9,718,000 and $1,501,000,
respectively, attributable to accelerated depreciation on its property and
equipment.
The income tax provision (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Current -- Federal .......................................... $ (595) $ 486
-- State ............................................ (103) 126
------ ------
(698) 612
------ ------
Deferred -- Federal .......................................... 6,413 1,104
-- State ............................................ 1,804 321
------ ------
8,217 1,425
------ ------
$7,519 $2,037
====== ======
</TABLE>
F-10
<PAGE>
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Statutory Federal tax rate....................................... 35.0% 35.0%
State income tax, net of Federal tax benefit..................... 6.0 6.0
---- ----
Effective income tax rate........................................ 41.0% 41.0%
==== ====
</TABLE>
The Company is included in the consolidated Federal income tax return of
Host Marriott and its affiliates (the "Group"). Tax expense allocated to the
Company, as a member of the Group, is based upon the Company's relative
contribution to the Group's consolidated taxable income/loss and changes in
temporary differences. This allocation method results in Federal tax expense
allocated to the Company for all periods presented substantially equal to the
expense that would be recognized if the Company and its subsidiaries filed a
separate return.
Substantially all income taxes of the Group, including income taxes
allocated to the Company, are paid by Host Marriott. As of December 29, 1995
and December 30, 1994, the Company was due $2,300,000 and $382,000,
respectively, from Host Marriott for tax related balances.
Cash paid for taxes was $83,000 in 1995 and zero in 1994.
NOTE 5. LEASES
The Company leases certain property and equipment, including land, under
non-cancelable operating leases, generally with multiple renewal options.
Future minimum annual rental commitments for all non-cancelable operating
leases at December 29, 1995 are as follows (in thousands):
<TABLE>
<S> <C>
1996.................................................................. $1,682
1997.................................................................. 1,266
1998.................................................................. 1,021
1999.................................................................. 689
2000.................................................................. 656
Thereafter............................................................ 3,603
------
Total minimum lease payments........................................ $8,917
======
</TABLE>
One ground lease contains contingent rental provisions whereby rent is equal
to the greater of $350,000 per year, or 5% of gross room revenue. Rental
expense under all leases was $1,538,000 and $253,000, respectively, for the
year ended December 29, 1995 and December 30, 1994 including contingent rent
of $419,000 and $59,000, respectively.
NOTE 6. MANAGEMENT AND FRANCHISE AGREEMENTS
MANAGEMENT AGREEMENTS
The Company is party to management agreements (the "Agreements") for 12 of
its 15 Hotels which provide for Marriott International to manage the hotels
generally, for a term of 15 years with renewal terms of up to an additional 16
years. The Agreements generally provide for payment of base management fees
equal to three percent of gross revenues and incentive management fees
generally equal to 40% of hotel operating profits (as defined in the
Agreements) over a priority return (as defined) to the Company, with total
annual incentive management fees not to exceed 20% of cumulative hotel
operating profit (as defined). For certain full-service hotels acquired after
September 8, 1995, the incentive management fee is equal to 20% of operating
profit. The Company may terminate the management agreement if specified
performance thresholds are not met, subject to
F-11
<PAGE>
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the right of Marriott International to cure. In the event of early termination
of the Agreements, Marriott International will receive additional fees based
on the unexpired term and expected future base and incentive management fees.
No management agreement with respect to a single lodging facility is cross-
collateralized or cross-defaulted to any other agreement and a single
agreement may be cancelled under certain conditions, although such
cancellation will not trigger the cancellation of any other management
agreement.
Pursuant to the terms of the Agreements with Marriott International,
Marriott International is required to furnish the hotels with certain services
("Chain Services") which are generally provided on a central or regional basis
to all hotels in the Marriott International full-service hotel system. Chain
Services include central training, advertising and promotion, a national
reservation system, computerized payroll and accounting services, and such
additional services as needed which may be more efficiently performed on a
centralized basis. Costs and expenses incurred in providing such services are
allocated among all domestic full-service hotels managed, owned or leased by
Marriott International or its subsidiaries. In addition, the full-service
hotels also participate in Marriott's Honored Guest Awards Program. The cost
of this program is charged to all hotels in the Marriott International full-
service hotel system.
Pursuant to the terms of the management agreements, the Company is required
to provide the Managers with working capital to meet the operating needs of
the Hotels. The Managers convert cash advanced by the Company into other forms
of working capital consisting primarily of operating cash, inventories, and
trade receivables and payables. Under the terms of the Agreements, the
Managers maintain possession of, and sole control over, the components of
working capital and, accordingly, the Company reports total amounts so
advanced to the Managers as a component of due from hotel managers. Upon
termination of the Agreements, the working capital will be returned to the
Company. Working capital advances to Managers as of December 29, 1995 and
December 30, 1994 totalled $8,241,000 and $6,072,000, respectively.
The management agreements with Marriott International also provided for the
establishment of a property improvement fund for the Hotels to cover the cost
of certain non-routine repairs and maintenance to the Hotels which are
normally capitalized, and the cost of replacements and renewals to the Hotels'
property and improvements. Contributions to the property improvement fund were
generally equal to 5% of gross hotel sales. Aggregate contributions to the
property improvement fund for all the Hotels were $9,118,000 and $2,366,000
for 1995 and 1994, respectively. In conjunction with the consummation of the
Offering, a separate property improvement fund is no longer required, however,
the Company expects to expend approximately 5% of gross hotel sales on such
capital expenditures in the future.
Agreements with managers other than Marriott International exist for three
of the Company's hotels. Such agreements generally contain similar terms as
the agreements with Marriott International, however, incentive management fees
are only earned on two of the three properties and the duration ranges from
month-to-month to ten years.
FRANCHISE AGREEMENTS
The Company has entered into franchise agreements with Marriott
International for two Hotels. Pursuant to these franchise agreements, the
Company generally pays a franchise fee of six percent of room sales plus three
percent of food and beverage sales as well as certain other fees for
advertising and reservations. The term of the franchise agreements are 30 and
15 years, respectively. Franchise fees paid to Marriott International for the
years ended December 29, 1995 and December 30, 1994 were $746,000 and $14,000,
respectively.
One other Hotel is subject to a 10-year franchise agreement with a brand
other than Marriott. Franchise fees are paid equal to 5% of room sales and
certain other fees are paid for reservations and advertising. Franchise fees
paid to other brands, including franchise fees related to the Hotel sold in
December 1995, were $430,000 for 1995.
F-12
<PAGE>
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. REVENUES
As discussed in Note 1, revenues reflect house profit from the Company's
Hotels. House profit reflects the net revenues flowing to the Company as
property owner and represents all gross hotel operating revenues, less all
gross property-level expenses, excluding depreciation, management fees, real
and personal property taxes, ground and equipment rent, insurance and certain
other costs, which are classified as operating costs and expenses. The
following table presents the details of the Company's house profit (in
thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
HOTEL REVENUES
Rooms.................................................. $140,286 $ 29,416
Food and beverage...................................... 71,903 18,648
Other.................................................. 13,573 3,183
-------- --------
Total hotel revenues................................. 225,762 51,247
-------- --------
DEPARTMENTAL COSTS
Rooms.................................................. 34,971 7,994
Food and beverage...................................... 56,039 14,251
Other.................................................. 7,676 2,018
-------- --------
Total departmental costs............................. 98,686 24,263
-------- --------
Departmental profit...................................... 127,076 26,984
Other deductions......................................... (54,913) (12,335)
-------- --------
HOUSE PROFIT............................................. $ 72,163 $ 14,649
======== ========
</TABLE>
NOTE 8. ACQUISITIONS AND DISPOSITION
In the first quarter of 1995, the Company purchased a hotel for
approximately $15 million using proceeds from a draw under the Credit
Facility. In the third quarter of 1995, the Company purchased the Dallas/Fort
Worth Airport Marriott from a partnership in which Host Marriott serves as
general partner for approximately $44 million, also using proceeds from a draw
under the Credit Facility. A third hotel was purchased in the fourth quarter
of 1995 for approximately $29 million using proceeds from the Offering. The
Company purchased 13 hotels for a total of $361 million at various points
during 1994, primarily in the fourth quarter. The results of operations of the
acquired hotels are included in the Company's results of operations from their
date of acquisition as discussed above. During the fourth quarter of 1995, the
Company sold one of the hotels acquired in 1994 for $3 million, which
approximated its carrying value.
In the first quarter of 1996, the Company purchased a hotel for
approximately $25 million. The Company has also acquired a minority equity
interest in a venture that controls two hotels in Mexico City, Mexico
totalling 914 rooms for $20 million. The Company will account for this
investment under the equity method. The Company has also entered into an
agreement to purchase a controlling interest in another full-service property
for approximately $18 million in the second quarter of 1996.
Summarized unaudited pro forma income statement data, assuming the
acquisitions and disposition described above occurred on January 1, 1994, and
additionally adjusted for the effects of the Offering to increase interest
expense (by $16 million and $31 million for the years ended December 29, 1995
and December 30, 1994, respectively) and the increase in allocated corporate
expenses of $2 million for the year ended December 30, 1994 are as follows (in
millions):
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Revenue............................................................ $89 $79
Operating profit before corporate expenses and interest............ 46 39
Net income before extraordinary item............................... 7 3
</TABLE>
F-13
<PAGE>
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's obligations under the Senior Notes at
December 29, 1995 is estimated to be $356,000,000. The Senior Notes are valued
based on the quoted market price. The fair values of other assets and other
liabilities are estimated to be equal to their carrying value.
NOTE 10. SUPPLEMENTAL GUARANTOR SUBSIDIARIES INFORMATION
The Company's wholly owned subsidiary, HMC SFO, Inc. ("SFO"), whose assets
comprise one hotel, guaranteed the Credit Facility and guarantees the Senior
Notes. The separate financial statements of SFO are not presented because the
Company's management has concluded that such financial statements are not
material to investors. The Company has one other subsidiary, which guarantees
the Senior Notes, but which as of December 29, 1995 has no assets or
operations. The guarantees of the subsidiaries are joint and several and full
and unconditional.
Summarized operating results of the guarantor subsidiaries are as follows
(in thousands):
<TABLE>
<CAPTION>
1995 1994
------- ------
<S> <C> <C>
Revenues (See Note 1)......................................... $10,801 $2,808
Operating profit.............................................. 7,208 1,838
Net income.................................................... 2,906 912
</TABLE>
Summarized balance sheet information of the guarantor subsidiaries consist
of the following as of December 29, 1995 and December 30, 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Property and equipment, net................................. $63,044 $60,584
Other assets................................................ 5,333 1,612
------- -------
Total assets.............................................. $68,377 $62,196
======= =======
Debt........................................................ $40,679 $28,308
Equity...................................................... 27,698 33,888
------- -------
Total liabilities and equity.............................. $68,377 $62,196
======= =======
</TABLE>
The operating results and balance sheet information include the pushed down
effects of that portion of the Company's debt allocated to the guarantor
subsidiaries.
NOTE 11. LITIGATION
In October 1994, the former owners of the land underlying the San Francisco
Airport Marriott filed suit against, among others, SFO, the current owner of
that hotel and underlying land, as well as Host Marriott, the original lessee
of the land underlying the hotel, and Marriott International, the manager of
the hotel. The suit, entitled John and Kathleen Bjorner v. Marriott
Corporation, et al., is currently pending in the San Mateo County, California
Superior Court. The suit alleges, among other things, fraud and conspiracy to
deprive the former owners of their interest in the land and subsequently
resell the land to SFO, and breach of the lease for failure to indemnify the
former owners and to make certain refurbishments and repairs. The plaintiffs
are seeking compensatory and punitive damages totalling in excess of $60
million. As yet, no trial date has been set for this action. SFO, Host
Marriott and Marriott International are vigorously defending this suit and
have filed a counterclaim against the plaintiffs seeking attorneys' fees and
recovery of defense costs. The Company believes that the suit is without merit
and will not have a material adverse effect on the financial position or
results of operations of the Company.
F-14
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of the Dallas Marriott Quorum:
We have audited the accompanying balance sheet of the Dallas Marriott
Quorum, as defined in Note 1, as of December 31, 1993, and the related
statements of operations, and cash flows for the period from January 1, 1994
through October 23, 1994 and for each of the two years in the period ended
December 31, 1993. These financial statements are the responsibility of the
management of the Dallas Marriott Quorum. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the 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 financial statements referred to above present fairly,
in all material respects, the financial position of the Dallas Marriott Quorum
(see Note 1) as of December 31, 1993, and the results of its operations and
its cash flows for the period from January 1, 1994 through October 23, 1994
and for each of the two years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.,
November 13, 1995
F-15
<PAGE>
DALLAS MARRIOTT QUORUM
BALANCE SHEET
DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net............................................ $26,483
Property improvement fund.............................................. 1,433
Accounts receivable.................................................... 1,002
Other assets........................................................... 591
Cash and cash equivalents.............................................. 271
-------
$29,780
=======
LIABILITIES AND NET INVESTMENT IN AND ADVANCES FROM PARENT
Mortgage debt.......................................................... $30,576
Accrued interest....................................................... 2,397
Accounts payable and accrued expenses.................................. 1,159
-------
Total liabilities.................................................... 34,132
Net investment in and advances from Parent............................. (4,352)
-------
$29,780
=======
</TABLE>
See the accompanying notes to these financial statements
F-16
<PAGE>
DALLAS MARRIOTT QUORUM
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1992 AND 1993 AND THE PERIOD FROM
JANUARY 1, 1994 TO OCTOBER 23, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1992 1993 1994
------- ------- --------------
(PARTIAL YEAR)
<S> <C> <C> <C>
REVENUES....................................... $ 4,507 $ 4,697 $5,061
------- ------- ------
OPERATING COSTS AND EXPENSES
Interest..................................... 3,417 3,434 2,775
Depreciation and amortization................ 1,890 1,856 1,388
Property taxes............................... 733 661 533
Ground rent.................................. 399 592 563
------- ------- ------
Total operating costs and expenses......... 6,439 6,543 5,259
------- ------- ------
NET LOSS....................................... $(1,932) $(1,846) $ (198)
======= ======= ======
</TABLE>
See the accompanying notes to these financial statements
F-17
<PAGE>
DALLAS MARRIOTT QUORUM
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1992 AND 1993 AND THE PERIOD FROM
JANUARY 1, 1994 TO OCTOBER 23, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1992 1993 1994
------- ------- --------------
(PARTIAL YEAR)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................... $(1,932) $(1,846) $ (198)
Noncash items:
Depreciation and amortization............... 1,890 1,856 1,388
Deferred interest........................... 384 389 --
Working capital changes:
Accounts receivable....................... (174) (230) (126)
Other assets.............................. 43 (24) 1
Accrued property taxes.................... 13 (148) (141)
Accrued interest.......................... (211) 826 666
Accounts payable and accrued expenses..... 170 (198) 240
------- ------- ------
Cash provided by operations................. 183 625 1,830
------- ------- ------
INVESTING ACTIVITIES
Additions to property and equipment......... (952) (387) (501)
Change in property improvement fund......... 129 (558) (546)
------- ------- ------
Cash used in investing activities........... (823) (945) (1,047)
------- ------- ------
FINANCING ACTIVITIES
Change in net investment and advances from
Parent..................................... 699 644 (321)
Repayment of mortgage debt.................. -- (306) (283)
------- ------- ------
Cash (used in) provided by financing
activities................................. 699 338 (604)
------- ------- ------
INCREASE IN CASH AND CASH EQUIVALENTS......... 59 18 179
CASH AND CASH EQUIVALENTS at beginning of
period....................................... 194 253 271
------- ------- ------
CASH AND CASH EQUIVALENTS at end of period.... $ 253 $ 271 $ 450
======= ======= ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest...................... $ 2,539 $ 2,525 $2,564
======= ======= ======
</TABLE>
See the accompanying notes to these financial statements
F-18
<PAGE>
DALLAS MARRIOTT QUORUM
NOTES TO FINANCIAL STATEMENTS
NOTE 1.
BASIS OF PRESENTATION
On October 23, 1994 (the "Sale Date"), HMC Acquisition Properties, Inc., an
indirect wholly owned subsidiary of Host Marriott Corporation (formerly
Marriott Corporation) purchased the buildings, leasehold improvements and
furniture, fixtures and equipment related to the Dallas Marriott Quorum hotel
located in Dallas, Texas (the "Hotel") from MRI Business Property Fund, Ltd.
("Parent"), a California limited partnership, for $29,815,000. The Hotel was
part of a portfolio of properties owned by the Parent. The Hotel was leased to
Marriott International, Inc. (the "Tenant"), and operated as a part of the
Marriott Hotels, Resorts and Suites full-service hotel system. No adjustments
relating to the sale are reflected in the accompanying financial statements.
These financial statements present the financial position, operations, and
cash flows related to the business of the Hotel which was a lesser component
of the Parent for all periods presented. Assets and liabilities of the Hotel
have been stated at the Parent's historical cost. Changes in net investment in
and advances from Parent represent the net loss, of the Hotel adjusted for
cash transferred between the Parent and the Hotel.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Hotel's records are maintained on the accrual basis of accounting and
its fiscal year ends on December 31.
REVENUES
Revenues in the accompanying statement of operations represents rental
income, as defined in the lease.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Replacements and improvements
are capitalized as incurred.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 30 years for buildings and five to six
years for furniture and equipment.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less at
date of purchase are considered to be cash equivalents.
INCOME TAXES
Provision for Federal or state income taxes has not been made in the
accompanying financial statements since the Parent is a partnership and does
not pay income taxes but rather allocates its profits and losses to the
Parent's individual partners.
F-19
<PAGE>
DALLAS MARRIOTT QUORUM
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. REVENUES
Revenues representing rental income, as defined in the lease, for the years
ended December 31, 1992 and 1993 and the period from January 1, 1994 to
October 23, 1994, consist of (in thousands):
<TABLE>
<CAPTION>
1992 1993 1994
------- ------- --------------
(PARTIAL YEAR)
<S> <C> <C> <C>
HOTEL SALES
Rooms.......................................... $10,974 $11,836 $11,266
Food and beverages............................. 4,789 4,907 4,211
Other.......................................... 818 945 805
------- ------- -------
Total hotel sales............................ 16,581 17,688 16,282
------- ------- -------
HOTEL EXPENSES
Departmental costs
Rooms........................................ 2,726 3,081 2,659
Food and beverages........................... 3,792 4,008 3,361
Other hotel operating expenses............... 4,835 5,084 4,350
------- ------- -------
11,353 12,173 10,370
------- ------- -------
Central office fee............................. 497 531 481
Equipment rent, insurance and other............ 224 287 370
------- ------- -------
REVENUES (see Note 6)............................ $ 4,507 $ 4,697 $ 5,061
======= ======= =======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1993 consists of the following (in
thousands):
<TABLE>
<S> <C>
Buildings and leasehold improvements................................ $36,813
Furniture and equipment............................................. 13,094
-------
49,907
Less accumulated depreciation and amortization...................... (23,424)
-------
Net property and equipment.......................................... $26,483
=======
</TABLE>
NOTE 5. MORTGAGE DEBT
As of December 31, 1993, mortgage debt consisted of a $22.3 million first
mortgage note with no principal amortization required until January 1, 1994.
Interest accrued on the loan at 11.75% per annum (the "Contract Rate") and was
paid at a rate of 10% per annum (the "Pay Rate") from January 1, 1992 through
December 31, 1993. The difference between the Contract Rate and the Pay Rate
was added to the balance of the note. Beginning on January 1, 1994, monthly
payments were based on a 30-year amortization period of the outstanding
principal balance (including deferred interest added to principal) and
interest at the Contract Rate. The note was repaid by the Parent with the
proceeds from the Hotel sale.
Mortgage debt also includes a $5 million second mortgage note payable to
Marriott International, Inc. (the "Tenant Loan") which was advanced to the
Parent in installments through 1988. The note required no principal
amortization prior to maturity in 1998. The note bore interest at 10% which is
payable only to the extent of available cash flow as defined. The balance of
the loan and accrued interest was $10,454,000 as of December 31, 1993. During
the period January 1, 1994 through the Sale Date, $864,000 of accrued interest
was repaid with available cash flow. No amounts were paid in 1993 or 1992.
F-20
<PAGE>
DALLAS MARRIOTT QUORUM
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1993, required principal amortization of the two loans
above was as follows (in thousands):
<TABLE>
<S> <C>
1994................................................................. $ 85
1995................................................................. 96
1996................................................................. 108
1997................................................................. 121
1998................................................................. 30,166
-------
Total................................................................ $30,576
=======
</TABLE>
The Hotel deferred certain costs in connection with the mortgage loans and
was amortizing those costs over the life of the loan. Deferred financing costs
of $188,000 on December 31, 1993, net of $515,000 of accumulated amortization
are included in other assets in the accompanying balance sheet.
NOTE 6. OPERATING LEASE
The Parent leased the Hotel to the Tenant pursuant to an agreement which
commenced in 1984, with an initial 23-year term expiring in 2007 (the
"Lease"). The Tenant had the option to extend the Lease for five additional
periods of ten fiscal years each.
Annual rent is equal to the sum of the following:
1. Base rental equal to the lesser of (i) $2,787,623 plus rental payable
under the ground lease, amounts contributed to the furniture, fixtures and
equipment escrow fund, and real estate and personal property taxes or (ii)
operating profit, as defined, plus
2. 65% of excess, if any, operating profit, as defined, over base rental
until the Parent has received $2,835,000; plus 60% of any remaining excess
until the Parent has received another $315,000; plus 55% of any remaining
excess until Parent has received another $630,000; plus 50% of the balance
of operating profit.
Notwithstanding the above, to the extent that advances and accrued interest
under the Tenant Loan remain outstanding, operating profit over base rental is
used to repay the Tenant Loan. During 1992, 1993 and in 1994 through the Sale
Date, only base rental equal to operating profit, as defined, was paid to the
Parent.
Under the terms of the Lease, the Tenant received a central office fee equal
to 3% of total sales of the Hotel. Amounts paid to the Tenant for this fee
were $497,000, $531,000 and $481,000 for 1992, 1993 and for the period January
1, 1994 to October 23, 1994, respectively.
The Lease terminated on the Sale Date. There were no termination fees paid
to the Tenant as a result of the termination. Effective after the Sale Date,
HMC Acquisition Properties, Inc. and Marriott Hotel Services, Inc. ("MHS"), a
wholly-owned subsidiary of the Tenant, entered into a long-term management
agreement (the "Management Agreement") expiring at fiscal year end 2010. Fees
payable to MHS consists of a base fee equal to 3% of Hotel gross revenues, as
defined and an incentive fee equal to 40% of Available Cash Flow, as defined,
not to exceed 20% of Hotel operating profit, as defined.
The Lease also provided for the establishment of a property improvement fund
for the Hotel. Contributions to the property improvement fund for 1992, 1993
and for the period from January 1, 1994 to the Sale Date were $829,000,
$884,000 and $814,000, respectively.
F-21
<PAGE>
DALLAS MARRIOTT QUORUM
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. LEASES
Future minimum annual rental commitments for all non-cancelable operating
leases entered into by the Tenant on behalf of the Parent and assumed by HMC
Acquisition Properties, Inc. at the Sale Date are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
<S> <C>
1994................................................................. $ 440
1995................................................................. 440
1996................................................................. 419
1997................................................................. 379
1998................................................................. 350
Thereafter........................................................... 3,150
------
Total minimum lease payments....................................... $5,178
======
</TABLE>
The Parent leased the land under the hotel from a third party under a long-
term lease expiring December 31, 2007 (the "Land Lease") with five optional
ten year extensions. Minimum annual rent is $350,000 per year. In addition to
minimum annual rent, the Parent is required to pay percentage rent equal to 5%
of gross room rentals in excess of the minimum annual rent.
Through 1992, annual percentage rent was reduced in accordance with the
terms of the Land Lease, to the extent it exceeded minimum annual rent with a
maximum reduction of $150,000 per year. Total ground rent expense was
$399,000, $592,000 and $563,000 for 1992, 1993 and for the period from January
1, 1994 through the Sale Date, respectively.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of the Equitable Hotel Portfolio:
We have audited the accompanying combined statement of assets, liabilities
and net investments in and advances to Parent of the Equitable Hotel
Portfolio, as defined in Note 1, as of December 31, 1993 and the related
combined statements of revenues and expenses, excluding income taxes, and cash
flows for the period from January 1, 1994 through December 15, 1994, and for
the year ended December 31, 1993. These financial statements are the
responsibility of the management of the Equitable Hotel Portfolio. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the 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.
The accompanying financial statements have been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for the inclusion in a registration statement of HMC Acquisition
Properties, Inc.) as described in Note 1 and are not intended to be a complete
presentation of the Equitable Hotel Portfolio's assets and liabilities,
revenues and expenses or cash flows.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets, liabilities and net investments in and
advances to Parent of the Equitable Hotel Portfolio as of December 31, 1993
and its revenues and expenses, excluding income taxes, and cash flows for the
period from January 1, 1994 through December 15, 1994 and for the year ended
December 31, 1993 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.,
November 13, 1995
F-23
<PAGE>
EQUITABLE HOTEL PORTFOLIO
COMBINED STATEMENT OF ASSETS, LIABILITIES
AND NET INVESTMENT IN AND ADVANCES TO PARENT
DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net......................................... $ 97,797
Accounts receivable................................................. 2,558
Other assets........................................................ 2,210
Cash and cash equivalents........................................... 3,958
--------
$106,523
========
LIABILITIES AND NET INVESTMENT IN AND ADVANCES TO PARENT
Debt................................................................ $ 9,200
Accounts payable and accrued expenses............................... 5,102
Other liabilities................................................... 526
--------
Total liabilities................................................. 14,828
Net investment in and advances to Parent............................ 91,695
--------
$106,523
========
</TABLE>
See the accompanying notes to these financial statements.
F-24
<PAGE>
EQUITABLE HOTEL PORTFOLIO
COMBINED STATEMENTS OF REVENUES AND EXPENSES, EXCLUDING INCOME TAXES
FOR THE YEAR ENDED DECEMBER 31, 1993 AND THE PERIOD FROM
JANUARY 1, 1994 TO DECEMBER 15, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994
------- -------
<S> <C> <C>
REVENUES....................................................... $22,437 $24,793
------- -------
EXPENSES
Interest..................................................... 1,273 1,262
Depreciation and amortization................................ 4,921 5,312
Management fees.............................................. 2,892 3,037
Property taxes............................................... 1,541 2,300
Equipment rent and other..................................... 1,467 823
------- -------
Total expenses............................................. 12,094 12,734
------- -------
REVENUES OVER EXPENSES, EXCLUDING INCOME TAXES................. $10,343 $12,059
======= =======
</TABLE>
See the accompanying notes to these financial statements.
F-25
<PAGE>
EQUITABLE HOTEL PORTFOLIO
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993 AND THE PERIOD FROM
JANUARY 1, 1994 TO DECEMBER 15, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Revenues over expenses, excluding income taxes.............. $10,343 $12,059
Noncash items:
Depreciation and amortization............................... 4,921 5,312
Working capital changes:
Accounts receivable....................................... (351) (1,036)
Other assets.............................................. (1,285) 574
Accounts payable and accrued expenses..................... 1,592 (1,170)
Other liabilities......................................... 210 1,076
------- -------
Cash provided by operations................................. 15,430 16,815
------- -------
INVESTING ACTIVITIES
Additions to property and equipment......................... (6,055) (3,051)
------- -------
FINANCING ACTIVITIES
Debt payments............................................... (190) (216)
Change in net investment in and advances to Parent.......... (9,847) (10,672)
------- -------
Cash used in financing activities........................... (10,037) (10,888)
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. (662) 2,876
CASH AND CASH EQUIVALENTS, beginning of year.................. 4,620 3,958
------- -------
CASH AND CASH EQUIVALENTS, end of year........................ $ 3,958 $ 6,834
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest...................................... $ 1,238 $ 1,270
======= =======
</TABLE>
See the accompanying notes to these financial statements.
F-26
<PAGE>
EQUITABLE HOTEL PORTFOLIO
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1.
BASIS OF PRESENTATION
On December 15, 1994 (the "Sale Date") HMC Acquisition Properties, Inc. (the
"Company"), an indirect wholly owned subsidiary of Host Marriott Corporation
(formerly, Marriott Corporation) purchased the land, building, improvements
and furniture, fixtures and equipment related to the Equitable Hotel Portfolio
from the Equitable Life Insurance Company ("Equitable" or "Parent"). The
Equitable Hotel Portfolio ("Equitable Hotel Portfolio") consists of the
following seven properties; the Sheraton Inn Napa Valley located in Napa
Valley, California; the Springfield Radisson located in Springfield, Missouri;
the Holiday Inn Sunspree Singer Island located in Riviera Beach, Florida; the
Fisherman's Wharf Marriott located in San Francisco, California; the
Williamsburg Hilton located in Williamsburg, Virginia; the Portland Marriott
located in Portland, Oregon; and the Denver Technical Center located in
Denver, Colorado (collectively, the "Hotels"). The purchase price of the
Equitable Hotel Portfolio was $148,500,000. The Equitable Hotel Portfolio
consists of full-service properties and five of the properties are part of the
Marriott Hotels Resorts and Suites brand system, the remaining two properties
are branded under other major hotel systems. No adjustments relating to the
sale are reflected (on the Sale Date three hotels were converted to the
Marriott brand) in the accompanying financial statements.
These financial statements present the combined assets, liabilities and net
advances to Parent, revenues and expenses, excluding income taxes, and cash
flows related to the business of the Equitable Hotel Portfolio which was a
lesser component of the Parent for all periods presented. Assets and
liabilities of the Equitable Hotel Portfolio have been stated at the Parent's
historical cost. Changes in net investment in and advances to Parent represent
the revenues over expenses of the Equitable Hotel Portfolio adjusted for cash
transferred between the Parent and the Hotels. An analysis of activity in net
investment in and advances to Parent for 1993 and the period from January 1,
1994 through December 15, 1994 is as follows (in thousands):
<TABLE>
<S> <C>
Balance, January 1, 1993.......................................... $91,199
Cash transfers to Parent, net....................................... (9,847)
Revenues over expenses, excluding income taxes...................... 10,343
-------
Balance, December 31, 1993........................................ 91,695
Cash transfers to Parent, net....................................... (10,672)
Revenues over expenses, excluding income taxes...................... 12,059
-------
Balance, December 15, 1994........................................ $93,082
=======
</TABLE>
The average balance for the fiscal year 1993 and the period January 1, 1994
to December 15, 1994 was $91,580 and $92,385, respectively.
The accompanying combined statement of revenues and expenses excluding
income taxes includes no provision for Federal or state income taxes because
the Equitable Hotel Portfolio does not pay income taxes directly and the
Parent does not allocate or charge these expenses to its individual units. The
Company's acquisition of the Equitable Hotel Portfolio creates a new income
tax structure; the Company's management believes that historical data related
to income taxes prior to the sale date is not material to investors of the
Company.
These financial statements have been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission for
inclusion in a registration statement of HMC Acquisition Properties, Inc., and
are not intended to be a complete presentation of the Hotels' assets and
liabilities, revenues and expenses, or cash flows in that income taxes are
excluded.
F-27
<PAGE>
EQUITABLE HOTEL PORTFOLIO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Equitable Hotel Portfolio's records are maintained on the accrual basis
of accounting and its fiscal year ends on December 31, 1994. Revenues and
expenses, excluding income taxes, have been presented from January 1, 1994
through December 15, 1994 (the Sale Date).
REVENUES AND EXPENSES
Revenues represent house profit from the Parent's hotel properties because
the Parent has delegated substantially all of the operating decisions related
to the generation of house profit from its hotels to the manager. House profit
reflects the net revenues flowing to the Parent as property owner and
represents hotel operating results, less property-level expenses, excluding
depreciation, management fees, real and personal property taxes, ground rent
and equipment rent, insurance and certain other costs, which are classified as
operating costs and expenses.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Replacements and improvements
are capitalized.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 30 years for buildings and five to seven
years for furniture and equipment.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less at
date of purchase are considered to be cash equivalents.
NOTE 3. REVENUES
Revenues (house profit) for the year ended December 31, 1993 and for the
period from January 1, 1994 to December 15, 1994 consist of (in thousands):
<TABLE>
<CAPTION>
1993 1994
------- -------
<S> <C> <C>
HOTEL SALES
Rooms...................................................... $48,149 $49,230
Food and beverages......................................... 22,578 21,996
Other...................................................... 4,120 4,542
------- -------
Total hotel sales...................................... 74,847 75,768
------- -------
EXPENSES
Departmental costs
Rooms.................................................... 12,233 11,828
Food and beverages....................................... 17,869 17,208
Other.................................................... 22,308 21,939
------- -------
Total hotel expenses................................... 52,410 50,975
------- -------
REVENUES..................................................... $22,437 $24,793
======= =======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1993 consists of the following (in
thousands):
<TABLE>
<S> <C>
Land............................................................... $ 22,965
Buildings, improvements, furniture and equipment................... 104,471
Construction in progress........................................... 5,310
--------
132,746
Less accumulated depreciation and amortization..................... (34,949)
--------
Net property and equipment......................................... $ 97,797
========
</TABLE>
F-28
<PAGE>
EQUITABLE HOTEL PORTFOLIO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. MANAGEMENT AGREEMENTS
Prior to the Sale Date, the Equitable Hotel Portfolio was managed by various
management companies (the "Managers") pursuant to individual management
agreements. The management agreements provided for base fees which ranged from
1.75% to 4% of Hotel sales. Base fees for the year ended December 31, 1993 and
for the period from January 1, 1994 through December 15, 1994 were $2,092,000
and $2,278,000, respectively.
In addition, the Managers were entitled to incentive management fees which
ranged from 17% to 30% of operating profit, as defined. Incentive management
fees earned for the year ended December 31, 1993 and for period from January
1, 1994 through December 15, 1994 were $800,000 and $759,000, respectively.
Certain of the management agreements provided for the establishment of a
property improvement fund for the Hotels. Contributions to the property
improvement fund ranged from 3% to 5% of gross hotel sales. Contributions to
the property improvement fund for the year ended December 31, 1993 and for the
period from January 1, 1994 to December 15, 1994 were $1,412,000 and
$1,295,000, respectively. As of December 31, 1993, the property improvement
fund balance was $684,000.
NOTE 6. LEASES
Future minimum annual rental commitments for all non-cancelable operating
leases entered into by the Managers on behalf of the Parent and assumed by HMC
Acquisition Properties, Inc. at the Sale Date are as follows (in thousands):
<TABLE>
<S> <C>
1994................................................................. $ 318
1995................................................................. 318
1996................................................................. 179
1997................................................................. 105
1998................................................................. 82
1999................................................................. 9
------
Total minimum lease payments....................................... $1,011
======
</TABLE>
NOTE 7. DEBT
Long-term debt consists of a 12% mortgage loan payable to Equitable. The
note contains contingent interest payments under which the Equitable Hotel
portfolio pays an amount equal to the greater of 5% of annual room revenue
between $3,300,000 and $4,300,000 or 2 1/2% of annual room revenue in excess
of $4,300,000. Principal and interest payments are made in monthly
installments of $108,981 with the final payment due in March 2008. The note is
collateralized by property and equipment of the Denver Technical Center.
Maturities of debt are summarized as follows (in thousands):
<TABLE>
<S> <C>
1994.................................................................. $ 353
1995.................................................................. 385
1996.................................................................. 421
1997.................................................................. 374
1998.................................................................. 407
Thereafter............................................................ 7,260
------
Total............................................................... $9,200
======
</TABLE>
F-29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of San Francisco Airport Marriott Hotel:
We have audited the accompanying statements of operations and cash flows of
San Francisco Airport Marriott Hotel, as defined in Note 1, for each of the
two years in the period ended December 31, 1993 and the statement of revenues
and certain expenses as described in Note 1 for the period from January 1,
1994 through August 29, 1994. These financial statements are the
responsibility of the management of San Francisco Airport Marriott Hotel. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the 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.
The accompanying financial statements have been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for the inclusion in a registration statement of HMC Acquisition
Properties, Inc.) as described in Note 1 and are not intended to be a complete
presentation of the San Francisco Airport Marriott Hotel's revenues and
expenses or cash flows.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of the San
Francisco Airport Marriott Hotel for each of the two years in the period ended
December 31, 1993, and the revenues and certain expenses as described in Note
1 for the period from January 1, 1994 through August 29, 1994, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
November 13, 1995
F-30
<PAGE>
SAN FRANCISCO AIRPORT MARRIOTT HOTEL
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1992 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1992 1993
------- -------
<S> <C> <C>
REVENUES (NOTE 4)............................................ $ 7,912 $ 7,623
------- -------
OPERATING COSTS AND EXPENSES
Incentive management fee................................... 980 1,091
Base management fee........................................ 834 852
Property taxes............................................. 884 337
Equipment rent and other................................... 130 199
Interest expense........................................... 5,951 5,446
Depreciation and amortization.............................. 3,267 3,232
Ground rent................................................ 914 937
------- -------
12,960 12,094
------- -------
REVENUES UNDER EXPENSES...................................... $(5,048) $(4,471)
======= =======
</TABLE>
See the accompanying notes to these financial statements.
F-31
<PAGE>
SAN FRANCISCO AIRPORT MARRIOTT HOTEL
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE PERIOD FROM JANUARY 1, 1994 THROUGH AUGUST 29, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES................................................................ $5,049
------
OPERATING COSTS AND EXPENSES
Incentive management fee.............................................. 643
Base management fee................................................... 590
Property taxes........................................................ 364
Equipment rent and other.............................................. 94
------
1,691
------
REVENUES OVER CERTAIN EXPENSES.......................................... $3,358
======
</TABLE>
The financial information included on this page is not comparable to the
information presented on page F-31 for the years ended December 31, 1993 and
1992 because certain information, such as depreciation, interest, ground rent
and income taxes has been omitted for the period from January 1, 1994 through
August 25, 1994 as such information is not available. See Notes 1 and 7.
See the accompanying notes to these financial statements.
F-32
<PAGE>
SAN FRANCISCO AIRPORT MARRIOTT HOTEL
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1992 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1992 1993
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Revenues under expenses...................................... $(5,048) $(4,471)
Noncash items:
Depreciation and amortization.............................. 3,267 3,232
Deferred interest.......................................... 1,195 1,137
Deferred management fees................................... 1,258 978
Amortization of deferred financing costs as interest....... 100 100
Changes in operating accounts:
Due from Manager........................................... 316 96
Other assets............................................... (13) (54)
Accounts payable and accrued expenses...................... (117) 2,616
------- -------
Cash provided by operations.............................. 958 3,634
------- -------
INVESTING ACTIVITIES
Additions to property and equipment........................ (231) (410)
Change in property improvement fund........................ 276 (715)
------- -------
Cash (used in) provided by investing activities.......... 45 (1,125)
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS........................ 1,003 2,509
CASH AND CASH EQUIVALENTS, beginning of year................. 28 1,031
------- -------
CASH AND CASH EQUIVALENTS, end of year....................... $ 1,031 $ 3,540
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest..................................... $ 5,005 $ 2,071
======= =======
</TABLE>
See the accompanying notes to these financial statements.
F-33
<PAGE>
SAN FRANCISCO AIRPORT MARRIOTT HOTEL
NOTES TO FINANCIAL STATEMENTS
NOTE 1.
BASIS OF PRESENTATION
On August 30, 1994 (the "Sale Date") a wholly owned subsidiary of Host
Marriott Corporation (the "Company") purchased the land, building,
improvements and furniture, fixtures and equipment related to the San
Francisco Airport Marriott Hotel (the "Hotel") from Glendale Federal Savings
and Loan Association ("Glendale") or (the "Parent"), for approximately $62.3
million. The Hotel is a full-service property and operated as a part of the
Marriott Hotels, Resorts and Suites full-service hotel system. No adjustments
related to the sale are reflected in the accompanying financial statements.
The Hotel was purchased from Host Marriott Corporation ("Host Marriott") in
1985 by Mutual Benefit/Marriott Hotel Associates II, L.P., a Delaware limited
partnership (the "Partnership"), of which a subsidiary of Host Marriott was
the managing general partner. The Partnership was created to acquire, own and
operate the Hotel. On March 22, 1993 the Partnership filed a voluntary
petition for relief under Chapter 11 of the U.S. Bankruptcy Code, and
continued to operate the Hotel until January 6, 1994, as described below. The
accompanying financial statements for the two years in the period ended
December 31, 1993 present the historical results of operations and cash flows
of the Hotel.
The Partnership owned and operated the Hotel until January 6, 1994 when the
Partnership's petition for relief under the U.S. Bankruptcy Code was denied.
Also on this date, the ground lessor (see Note 6) exercised its right to take
possession of the Hotel due to the Partnership's failure to pay rent as due.
Subsequently, the ground lessor, in possession of the Hotel, failed to make
required payments to the mortgage lender, Glendale, and Glendale foreclosed on
the Hotel. No adjustments related to the bankruptcy, ground lessor
repossession of the hotel or the lender foreclosure are reflected in the
accompanying financial statements.
The accompanying financial statements for the period from January 1, 1994
through August 29, 1994 present the revenues and certain expenses related to
the business of the Hotel, and omit depreciation, interest, ground rent and
income taxes for such period and any gain or loss on the change in possession
and foreclosure of the Hotel for such period. These expenses and any gain or
loss on the change in possession and foreclosure of the Hotel have been
omitted because, with the changes in ownership/possession, it is not possible
to obtain such information. The Company's acquisition of the Hotel creates a
new carrying basis for the property and a new financing and income tax
structure; the Company's management believes that historical data related to
income taxes, depreciation and interest expense prior to the Sale Date are not
material to investors in the Company. However, should the Hotel have remained
in possession of the Partnership through August 29, 1994, and assuming the
agreements of the Partnership remained in place, depreciation and interest
expense would have been approximately $2,156,000 (unaudited), and $3,631,000
(unaudited), respectively, for the period from January 1, 1994 through August
29, 1994. These financial statements have been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission for inclusion in a registration statement of HMC Acquisition
Properties, Inc. and are not intended to be a complete presentation of the
Hotel's revenues and expenses.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Hotel's records are maintained on the accrual basis of accounting.
REVENUES AND EXPENSES
Revenues represent house profit from the hotel because the Partnership has
delegated substantially all of the operating decisions related to the
generation of house profit from its hotel to the manager. House profit
reflects the net revenues flowing to the Partnership as property owner and
represents hotel operating results, less
F-34
<PAGE>
SAN FRANCISCO AIRPORT MARRIOTT HOTEL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
property-level expenses, excluding depreciation, management fees, real and
personal property taxes, ground rent and equipment rent, insurance and certain
other costs, which are classified as operating costs and expenses (see Note
3).
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 as follows:
<TABLE>
<S> <C>
Building and improvements..................................... 40 years
Furniture and equipment....................................... 3--10 years
</TABLE>
OTHER ASSETS
Certain organization costs, financing costs and fees were deferred and
amortized on a straight-line basis over periods ranging from five to twenty-
five years.
INCOME TAXES
Provision for Federal and state income taxes has not been made in the
accompanying financial statements for the two years in the period ending
December 31, 1993 since the Partnership did not pay income taxes, but rather
allocated its profits and losses to partners for inclusion in their respective
tax returns. As disclosed in Note 1, income taxes have been excluded from the
statement of revenues and certain expenses for the period from January 1, 1994
through August 29, 1994.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less at
date of purchase are considered to be cash equivalents.
NOTE 3. REVENUES
Revenues (house profit) consist of the following Hotel operating results for
the two years in the period ended December 31, 1993 and the period from
January 1, 1994 through August 29, 1994 (in thousands):
<TABLE>
<CAPTION>
1992 1993 1994
------- ------- --------------
(PARTIAL YEAR)
<S> <C> <C> <C>
HOTEL SALES
Rooms.......................................... $16,600 $17,039 $12,318
Food and beverage.............................. 9,605 9,637 5,821
Other.......................................... 1,575 1,720 1,526
------- ------- -------
27,780 28,396 19,665
------- ------- -------
HOTEL EXPENSES
Departmental Direct Costs
Rooms........................................ 4,697 5,082 3,558
Food and beverage............................ 7,630 7,868 5,078
Other hotel operating expenses................. 7,541 7,823 5,980
------- ------- -------
19,868 20,773 14,616
------- ------- -------
REVENUES......................................... $ 7,912 $ 7,623 $ 5,049
======= ======= =======
</TABLE>
F-35
<PAGE>
SAN FRANCISCO AIRPORT MARRIOTT HOTEL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. MANAGEMENT AGREEMENT
Prior to the Sale Date, an affiliate of Marriott International, Inc. (the
"Manager") operated the Hotel pursuant to a long-term management agreement
with an initial term expiring on December 31, 2010. The management agreement
provided for a base fee equal to 3% of gross Hotel sales. In addition, the
Manager was reimbursed for certain actual costs and expenses incurred in
providing certain services ("Chain Services") on a central or regional basis
to all hotels operated by the Manager. Under these arrangements, for 1992,
1993 and for the period from January 1, 1994 to the Sale Date, the Hotel paid
base management fees of $834,000, $852,000 and $590,000, and reimbursed the
Manager for $547,400, $612,000 and $470,000 of Chain Services, respectively.
In addition, the Manager was entitled to an incentive management fee ("IMF")
equal to 20% of operating profit, as defined. However, until December 31,
1994, 50% of the IMF was deferred if cash flow was not sufficient to cover
ground rent and debt service. For 1992 and 1993 and for the period from
January 1, 1994 to the Sale Date, $980,000, $1,091,000 and $643,000,
respectively, of incentive management fees were earned and deferred. During
the Modification Term (see Note 6) the Manager agreed to defer receipt of the
portion of the IMF not previously subject to deferral and one percentage point
of the base management fee.
The management agreement also provided for the establishment of a property
improvement fund for the Hotel. Contributions to the property improvement fund
were 4% of gross Hotel sales for 1992 and 1993. Contributions to the property
improvement fund for 1992, 1993 and for the period from January 1, 1994 to the
Sale Date were $1,111,000, $1,136,000 and $787,000, respectively.
NOTE 5. DEBT
The Partnership's mortgage loan with Glendale included a $70 million loan
(the "Principal Loan") plus up to an additional $10 million loan (the "Accrual
Loan"). Interest only was payable on the loans until January 1991, at which
time monthly installments of principal became payable based on a 20-year
amortization at an assumed interest rate of 12.25% until maturity in 2010. The
Principal Loan was to accrue interest until December 31, 1995 based on the
average 90-day Treasury Bill rate plus 3.125% (the "Borrowing Rate"), but
interest was payable at the lower of this rate or 11.5% through 1991
increasing to 12% through 1995.
Any excess interest accrued at the Borrowing Rate over interest paid at the
scheduled interest rates was funded from the Accrual Loan. Advances under the
Accrual Loan were rolled up in the Principal Loan balance and bore interest at
the Borrowing Rate. Beginning on January 1, 1996 and continuing until
maturity, interest was to be paid on the outstanding principal balance at the
Borrowing Rate. The outstanding balance of the Accrual Loan totaled $614,000
at December 31, 1993.
The Principal Loan was secured by a deed of trust on the Hotel and a
security interest in the furniture, fixtures and equipment. As additional
security, the Partnership assigned its interest in the hotel management
agreement (the "Management Agreement") to the lender. Host Marriott agreed to
advance to the Partnership amounts necessary to fund debt service on the
Principal and Accrual Loans in excess of available Partnership funds up to a
maximum of $10 million (the "Host Marriott Guarantee"). All such advances bore
interest at the Borrowing Rate and, except as noted below, were payable,
first, out of the Partnership's cash available for distribution and second,
out of the proceeds from a sale of the Hotel or a refinancing of the Principal
and/or Accrual Loan. Advances made under the Host Marriott Guarantee, together
with accrued interest, were recoverable by Host Marriott from subsequent cash
available for distribution. As of December 31, 1993, $10,000,000 had been
advanced under the Host Marriott Guarantee and remained outstanding.
Effective October 1, 1991, the Partnership, Host Marriott, the Manager,
Glendale and the ground lessor agreed to modify certain terms of the Principal
Loan, Marriott Guarantee, Management Agreement (see Note 4),
F-36
<PAGE>
SAN FRANCISCO AIRPORT MARRIOTT HOTEL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
and ground lease (see Note 6). Under the terms of this agreement (the
"Modification Agreement"), the Partnership was required to use certain amounts
from the property improvement fund to pay certain debt service and, in
addition, the Lender agreed to temporarily waive all principal payments due
from October 1, 1991 through December 31, 1992. The payments of ground rent
and hotel management fees were also adjusted as part of the Modification
Agreement (see Notes 4 and 6). The Modification Agreement expired on December
31, 1992. The Partnership did not generate sufficient cash flow from
operations in 1993 to service the Principal and Accrual Loans to pay ground
rent. In early 1993, the Partnership discontinued payments on the mortgage
debt and ground lease, constituting an event of default under the Principal
Loan.
OTHER LOANS
The general partners received a $3,000,000 note (the "Deferred Equity Note")
for its agreement to admit limited partners into the Partnership. The Deferred
Equity Note accrued interest at the Borrowing Rate and was payable on the
earlier of (a) November 15, 1995, (b) sale of the Hotel, or (c) refinancing of
the Principal Loan.
In consideration for its evaluation and advisory services, the other general
partner received a $1,500,000 note which accrued interest and is payable on
the same terms as the Deferred Equity Note.
NOTE 6. LEASE COMMITMENT
The land on which the Hotel is located was leased by the Partnership with
the initial term of the lease expiring on December 31, 2010. Annual rentals
were the greater of 5 1/2% of gross room sales or $400,000 per year. Under the
terms of the Modification Agreement, the ground lessor agreed to defer payment
of $130,000 in rent during 1992. This amount was scheduled for repayment in
1993. In early 1993 the Partnership discontinued ground rent payment in view
of its current projections that cash flow would be insufficient to pay
mortgage debt service and ground rent.
NOTE 7. SUPPLEMENTARY INFORMATION (UNAUDITED):
Capital additions of $178,000 for furniture, fixtures and equipment
additions were made to the Hotel during the period from January 1, 1994
through August 29, 1994. Had the Company acquired the Hotel on January 1,
1994, depreciation expense would have been as follows:
<TABLE>
<CAPTION>
DEPRECIATION EXPENSE
PURCHASE FOR THE PERIOD FROM
PRICE JANUARY 1, 1994
ALLOCATION USEFUL LIFE DEPRECIATION METHOD TO AUGUST 29, 1994
----------- ----------- -------------------- --------------------
<S> <C> <C> <C> <C>
Land.................... $10,200,000 -- -- $ --
Building................ 48,292,000 40 years Straight-line method 804,867
Furniture, fixtures &
equipment.............. 2,609,000 3-7 years Straight-line method 347,836
----------- ----------
$61,101,000 $1,152,703
=========== ==========
</TABLE>
F-37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of Westfields International Conference Center:
We have audited the accompanying statement of revenues and expenses,
excluding income taxes, and cash flows of Westfields International Conference
Center (see Note 1) for the period from February 5, 1993 to December 31, 1993
and the statement of revenues and certain expenses for the period from January
1, 1994 through August 25, 1994. These financial statements are the
responsibility of the management of Westfields International Conference
Center. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the 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.
The accompanying financial statements have been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for inclusion in a registration statement of HMC Acquisition
Properties, Inc.) as described in Note 1 and are not intended to be a complete
presentation of Westfields International Conference Center's revenues and
expenses or cash flows.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the revenues and expenses, excluding income taxes,
and cash flows of Westfields International Conference Center for the period
from February 5, 1993 to December 31, 1993 and the revenues and certain
expenses for the period from January 1, 1994 through August 25, 1994 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.,
November 13, 1995
F-38
<PAGE>
WESTFIELDS INTERNATIONAL CONFERENCE CENTER
STATEMENT OF REVENUES AND EXPENSES, EXCLUDING INCOME TAXES
FOR THE PERIOD FROM FEBRUARY 5, 1993 TO DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES.............................................................. $ 6,073
-------
EXPENSES
Interest............................................................ 4,918
Depreciation and amortization....................................... 1,416
Base management fee................................................. 400
Property taxes...................................................... 666
Equipment rent and other............................................ 386
-------
Total expenses.................................................... 7,786
-------
REVENUES UNDER EXPENSES, EXCLUDING INCOME TAXES....................... $(1,713)
=======
</TABLE>
See the accompanying notes to these financial statements.
F-39
<PAGE>
WESTFIELDS INTERNATIONAL CONFERENCE CENTER
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE PERIOD FROM JANUARY 1, 1994 TO AUGUST 25, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES................................................................ $3,365
------
EXPENSES
Property taxes........................................................ 402
Equipment rent and other.............................................. 221
------
Total expenses...................................................... 623
------
REVENUES OVER CERTAIN EXPENSES.......................................... $2,742
======
</TABLE>
The financial information included on this page is not comparable to the
information presented on page F-39 for the period from February 5, 1993 to
December 31, 1993 because certain information, such as depreciation and
interest, has been omitted for the period from January 1, 1994 to August 25,
1994 as such information is not available. See Notes 1 and 7.
See the accompanying notes to these financial statements.
F-40
<PAGE>
WESTFIELDS INTERNATIONAL CONFERENCE CENTER
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM FEBRUARY 5, 1993 TO DECEMBER 31, 1993
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Revenues under expenses, excluding income taxes..................... $(1,713)
Noncash items:
Depreciation and amortization....................................... 1,705
Working capital changes:
Accounts receivable................................................. (594)
Other assets........................................................ 8
Accrued interest payable............................................ 4,341
Accounts payable and accrued expenses............................... (20)
-------
Cash provided by operations.......................................... 3,727
-------
INVESTING ACTIVITIES
Additions to property and equipment................................. (489)
-------
FINANCING ACTIVITIES
Repayments of debt.................................................. (771)
-------
INCREASE IN CASH AND CASH EQUIVALENTS................................. 2,467
CASH AND CASH EQUIVALENTS at beginning of year........................ --
-------
CASH AND CASH EQUIVALENTS at end of year.............................. $ 2,467
=======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.............................................. $ 203
=======
</TABLE>
See the accompanying notes to these financial statements.
F-41
<PAGE>
WESTFIELDS INTERNATIONAL CONFERENCE CENTER
NOTES TO FINANCIAL STATEMENTS
NOTE 1.
BASIS OF PRESENTATION
On August 26, 1994 ("Sale Date"), a wholly owned subsidiary of Host Marriott
Corporation (the "Company") purchased the land, building, improvements and
furniture, fixtures and equipment related to the Westfields International
Conference Center located in Fairfax County, Virginia (the "Hotel") from
Conference Center Interests, Inc. ("Parent"), for $48,500,000. The Hotel is a
full-service property that subsequent to the Sale Date was converted to and
became a part of the Marriott Hotels, Resorts and Suites brand system.
Pursuant to a stock transfer agreement (the "Transfer Agreement") dated
February 5, 1993, between the former owners of the Hotel and the primary
lender to the Hotel, the former owners transferred all of their assets, as
defined in the Transfer Agreement, to the Parent and the Parent assumed
specified liabilities of the former owner, as defined in the Transfer
Agreement. In addition, the former owners, who held the outstanding stock of
the Parent, transferred the stock to an affiliate of the primary lender.
The financial statements for the period from February 5, 1993 to December
31, 1993 present the revenues and expenses, excluding income taxes, and cash
flows related to the business of the Hotel, which was a lesser component of
the Parent. The accompanying statement of revenues and expenses, excluding
income taxes, includes no provision for Federal or state income taxes because
the Hotel did not pay income taxes directly and the Parent did not allocate or
charge these expenses to its individual units during the periods presented.
The accompanying financial statements for the period from January 1, 1994
through August 25, 1994 present the revenues over certain expenses related to
the business of the Hotel, and omit depreciation, interest and income taxes
for such period. These expenses have been omitted because it is not possible
to obtain such information due to the changes in management during 1994. The
Company's acquisition of the Hotel creates a new carrying basis for the
property and a new financing and income tax structure; the Company's
management believes that historical data related to income taxes, depreciation
and interest expense prior to the Sale Date are not material to investors in
the Company. However, should the Hotel have remained in the possession of the
Parent through August 25, 1994, and assuming the agreements of the Parent
remained in place, depreciation and interest expense would have been
approximately $1,142,000 (unaudited), and approximately $3,576,000
(unaudited), respectively, for the period from January 1, 1994 through August
25, 1994.
These financial statements have been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission for
inclusion in a registration statement of HMC Acquisition Properties, Inc. and
are not intended to be a complete presentation of the Hotel's revenues and
expenses or cash flows.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Hotel's records are maintained on the accrual basis of accounting and
its fiscal year ends on December 31.
REVENUES AND EXPENSES
Revenues represent house profit from the hotel because for the period from
February 5, 1993 to December 31, 1993 the Parent has delegated substantially
all of the operating decisions related to the generation of house profit from
its hotel to the manager. House profit reflects the net revenues flowing to
the Parent as property owner and represents hotel operating results, less
property-level expenses, excluding depreciation, management fees, real and
personal property taxes, ground rent and equipment rent, insurance and certain
other costs, which are classified as operating costs and expenses.
F-42
<PAGE>
WESTFIELDS INTERNATIONAL CONFERENCE CENTER
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Replacements and improvements
are capitalized as incurred.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 40 years for building and five to seven
years for furniture and equipment.
DEFERRED FINANCING COSTS
Costs associated with obtaining financing for the property are deferred and
amortized over the term of the loan. Such amortization expenses were $289,000
for the year ended December 31, 1993 and are included in interest expense in
the accompanying statement of revenues and expenses excluding income taxes.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less at
date of purchase are considered to be cash equivalents.
NOTE 3. REVENUES
Revenues (house profit) for the year ended December 31, 1993 and for the
period from January 1, 1994 to August 25, 1994 consist of (in thousands):
<TABLE>
<CAPTION>
1993 1994
------- --------------
(PARTIAL YEAR)
<S> <C> <C>
HOTEL SALES
Rooms............................................... $ 5,826 $ 8,452
Food and beverages.................................. 7,141 9,483
Other............................................... 2,615 3,432
------- -------
Total hotel sales................................. 15,582 21,367
------- -------
HOTEL EXPENSES
Departmental costs
Rooms............................................. 1,499 1,911
Food and beverages................................ 4,449 5,839
Other hotel operating expenses.................... 6,269 7,544
------- -------
12,217 15,294
------- -------
REVENUES.............................................. $ 3,365 $ 6,073
======= =======
</TABLE>
NOTE 4. MANAGEMENT AGREEMENT
For the period from February 5, 1993 (date of the Transfer Agreement) to
December 31, 1993, International Conference Resorts of America, L.P. (the
"Manager"), operated the Hotel pursuant to a long-term management agreement.
The management agreement provided for a base fee equal to 2% of Hotel sales.
Under these arrangements, the Hotel paid base fees of $400,000 in 1993.
In addition, the Manager was entitled to an incentive management fee equal
to 5% of the increase in the net income of the Hotel over the net income for
the preceding year. The incentive management fee was payable out of operating
cash flow, as defined. No incentive management fees were earned for the period
from February 5, 1993 through December 31, 1993.
The management agreement also provided for the establishment of a property
improvement fund for the Hotel. Contributions to the property improvement fund
were determined each year in connection with the preparation of the operating
plan. There were no contributions to the property improvement fund for the
year ended December 31, 1993.
F-43
<PAGE>
WESTFIELDS INTERNATIONAL CONFERENCE CENTER
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On December 31, 1993, the management agreement with the Manager was
terminated and management of the Hotel assumed by the Parent. The Parent did
not charge a management fee for the period from January 1, 1994 to August 25,
1994. No termination fee was paid to the Manager in connection with the
termination.
NOTE 5. LEASES
Property and equipment includes equipment under capital leases. These
capital leases expired during 1994 and include $177,038 for buyout provisions
under the leases, which is included in accounts payable and accrued
liabilities.
NOTE 6. MORTGAGE DEBT
Pursuant to the Transfer Agreement, the Parent assumed two notes payable and
a revolving demand loan which are all payable to a bank. The bank and the
Parent are related parties based on their common control and management. The
notes payable were in default at the Transfer Date. Default provisions of the
notes provided for immediate payment to the bank.
Mortgage debt consisted of a note of $30,000,000 with an original maturity
date of May 31, 1995. Interest was payable at 8% per annum through June 30,
1992 and at a rate of the greater of 8% or LIBOR plus 100 basis points
thereafter. An additional 4% was applied to the principal amount of both the
first and second notes in the event of default. Any interest over 8% was
accrued and not due until the maturity date. To the extent that there is net
operating income in excess of a working capital reserve, as defined, accrued
and unpaid interest was due quarterly.
Mortgage debt also consisted of a note of $10,162,292 with an original
maturity date of May 31, 1995. Interest was calculated using the LIBOR rate
plus 200 basis points applied to the principal of both the first and second
notes less any interest accrued under the first note. An additional 4% was
applied to the principal amount of both the first and second notes in the
event of default. Interest was payable on the second note at the end of each
month, provided that a working capital reserve, as defined, was equal to or
greater than $2,000,000.
The notes were both secured by a first deed of trust on all land and
improvements.
The notes provided for a loan fee payable on the maturity date or upon any
refinancing or early payment. The fee ranged from $2,000,000 to $4,000,000
depending on the payment date. As a result of the notes being in default, the
full $4,000,000 was due and payable at December 31, 1993.
The Parent was required to set aside certain percentages of quarterly gross
revenues for capital replacement reserves. At December 31, 1993, the Parent
was in default under these provisions.
Mortgage debt also consisted of a revolving demand loan agreement with the
bank to fund amounts up to the lesser of 80% of certain outstanding accounts
receivable of $4,000,000. The loan bears interest at the prime rate plus 1%.
The revolving demand loan agreement is secured by a first priority perfected
security interest of all accounts receivable of the Hotel. $2,947,000 was
outstanding under this agreement at December 31, 1993.
NOTE 7. SUPPLEMENTARY INFORMATION (UNAUDITED):
Capital additions of $489,000, including $10,000 for building additions and
$479,000 for furniture, fixtures and equipment additions, were made to the
Hotel during the period from February 5, 1993 to December 31, 1993. Capital
additions for the period from January 1, 1994 to August 25, 1994 are not
available due to the changes in management discussed in Note 1. Had the
Company acquired the Hotel on January 1, 1994, depreciation expense would have
been as follows:
<TABLE>
<CAPTION>
DEPRECIATION EXPENSE
---------------------------------------
PERIOD FROM PERIOD FROM
PURCHASE PRICE FEBRUARY 5, 1993 JANUARY 1, 1994
ALLOCATION USEFUL LIFE DEPRECIATION METHOD TO DECEMBER 31, 1993 TO AUGUST 25, 1994
-------------- ----------- -------------------- -------------------- ------------------
<S> <C> <C> <C> <C> <C>
Land.................... $ 6,611,000 -- -- $ -- $ --
Building................ 32,187,000 40 years Straight-line method 737,608 536,442
Furniture, fixtures &
equipment.............. 6,632,000 3-7 years Straight-line method 1,215,848 884,253
----------- ---------- ----------
$45,430,000 $1,953,456 $1,420,695
=========== ========== ==========
</TABLE>
F-44
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of the Dallas/Fort Worth Airport Marriott:
We have audited the accompanying balance sheets of the Dallas/Fort Worth
Airport Marriott, as defined in Note 1, as of December 31, 1993, December 30,
1994 and August 11, 1995, and the related statements of operations and cash
flows for each of the three fiscal years in the period ended December 30, 1994
and the thirty-two weeks ended August 11, 1995. These financial statements are
the responsibility of the management of the Partnership, as defined in Note 1.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the 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 provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Dallas/Fort Worth
Airport Marriott (as defined in Note 1) as of December 31, 1993, December 30,
1994 and August 11, 1995, and the results of its operations and its cash flows
for the three fiscal years in the period ended December 30, 1994 and the
thirty-two weeks ended August 11, 1995 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Washington, D.C.
November 13, 1995
F-45
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
BALANCE SHEETS
AS OF DECEMBER 31, 1993, DECEMBER 30, 1994 AND AUGUST 11, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30, AUGUST 11,
1993 1994 1995
------------ ------------ ----------
<S> <C> <C> <C>
ASSETS
Property and equipment, net............. $ 19,910 $ 19,164 $ 18,872
Due from Marriott International, Inc. .. 2,495 1,601 2,312
Property improvement fund............... 68 3 515
Restricted cash......................... -- -- 155
Cash and cash equivalents............... -- -- --
-------- -------- --------
$ 22,473 $ 20,768 $ 21,854
======== ======== ========
LIABILITIES AND NET INVESTMENT IN
AND ADVANCES FROM THE PARTNERSHIP
LIABILITIES
Mortgage debt........................... $ 51,462 $ 51,462 $ 51,462
Due to Host Marriott Corporation........ 1,002 897 1,692
Due to Marriott International, Inc...... 24,771 26,941 28,374
Accrued interest........................ 132 104 219
-------- -------- --------
77,367 79,404 81,747
-------- -------- --------
NET INVESTMENT IN AND ADVANCES FROM
THE PARTNERSHIP.......................... (54,894) (58,636) (59,893)
-------- -------- --------
$ 22,473 $ 20,768 $ 21,854
======== ======== ========
</TABLE>
See the accompanying notes to these financial statements.
F-46
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
STATEMENTS OF OPERATIONS
FOR THE THREE FISCAL YEARS IN THE PERIOD ENDED DECEMBER 30, 1994 AND THE
THIRTY-TWO WEEKS ENDED AUGUST 12, 1994 AND AUGUST 11, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTY-TWO WEEKS ENDED
----------------------
FISCAL YEAR ENDED
------------------------- AUGUST 12, AUGUST 11,
1992 1993 1994 1994 1995
------- ------- ------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES..................... $ 6,392 $ 6,698 $ 8,163 $ 5,317 $6,192
------- ------- ------- ------- ------
OPERATING COSTS AND EXPENSES
Interest................... 5,338 5,338 5,310 3,276 2,597
Base management fee........ 1,403 1,678 1,834 1,150 464
Incentive management fee... 1,164 1,135 1,621 1,084 1,278
Depreciation............... 1,002 598 740 395 396
Property taxes............. 1,118 1,162 1,008 672 685
Insurance and other........ 129 208 54 (10) 114
------- ------- ------- ------- ------
Total operating costs and
expenses................ 10,154 10,119 10,567 6,567 5,534
------- ------- ------- ------- ------
NET (LOSS) INCOME............ $(3,762) $(3,421) $(2,404) $(1,250) $ 658
======= ======= ======= ======= ======
</TABLE>
See the accompanying notes to these financial statements.
F-47
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
STATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS IN THE PERIOD ENDED DECEMBER 30, 1994 AND THE
THIRTY-TWO WEEKS ENDED AUGUST 12, 1994 AND AUGUST 11, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTY-TWO WEEKS ENDED
----------------------
FISCAL YEAR ENDED
------------------------- AUGUST 12, AUGUST 11,
1992 1993 1994 1994 1995
------- ------- ------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income........... $(3,762) $(3,421) $(2,404) $(1,250) $ 658
Noncash items:
Depreciation............... 1,002 598 740 395 396
Deferred incentive and base
management fees........... 2,104 2,024 2,263 1,738 1,433
Loss on fixed asset
dispositions.............. -- -- 6 -- --
Changes in operating
accounts:
Due from/to Marriott
International, Inc. ...... (181) (34) 302 (504) 58
Accrued interest........... -- -- (28) 175 115
------- ------- ------- ------- -------
Cash provided by (used in)
operating activities..... (837) (833) 879 554 2,660
------- ------- ------- ------- -------
INVESTING ACTIVITIES
Change in property
improvement fund.......... -- -- -- -- (515)
Additions to property and
equipment................. -- -- -- (5) (104)
------- ------- ------- ------- -------
Cash used in investing
activities............... -- -- -- (5) (619)
------- ------- ------- ------- -------
FINANCING ACTIVITIES
Change in net investment in
and advances from the
partnership............... 335 629 (1,338) (2,011) (1,889)
Deposit in restricted cash
account................... -- -- -- -- (155)
Decrease (increase) in
amounts due from Marriott
International, Inc........ 92 (208) 499 -- --
(Repayments to) advances
from Host Marriott
Corporation............... 330 248 (105) 1,409 --
Change in escrow fund cash. 80 164 65 53 3
------- ------- ------- ------- -------
Cash provided by (used in)
financing activities..... 837 833 (879) (549) (2,041)
------- ------- ------- ------- -------
CHANGE IN CASH AND CASH
EQUIVALENTS................. -- -- -- -- --
CASH AND CASH EQUIVALENTS at
beginning of period......... -- -- -- -- --
CASH AND CASH EQUIVALENTS at
end of period............... -- -- -- -- --
------- ------- ------- ------- -------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for mortgage and
other interest............ $ 3,582 $ 5,405 $ 5,451 $ 3,100 $ 2,482
======= ======= ======= ======= =======
</TABLE>
See the accompanying notes to these financial statements.
F-48
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
NOTES TO FINANCIAL STATEMENTS
NOTE 1. THE HOTEL
BASIS OF PRESENTATION
On August 22, 1995 (the "Sale Date"), HMC Acquisitions Properties, Inc., a
wholly-owned indirect subsidiary of Host Marriott Corporation ("Host
Marriott"), purchased the building, leasehold improvements and furniture,
fixtures and equipment related to the Dallas/Fort Worth Airport Marriott
located in Irving, Texas (the "Hotel") from Potomac Hotel Limited Partnership
(the "Partnership"), a Delaware limited partnership, for approximately $45
million. The Hotel was part of a portfolio of properties owned by the
Partnership, in which Host Marriott is a General Partner. The Hotel is
operated by Marriott International, Inc. as part of the Marriott Hotels,
Resorts and Suites full-service hotel system.
The Hotel's purchase price at the Sale Date was in excess of its carrying
value. No adjustments related to the resultant sale are reflected in the
accompanying financial statements.
These financial statements present the financial position, results of
operations and cash flows related to the business of the Hotel which is a
lesser component of the Partnership for all periods presented. Assets and
liabilities have been stated at the Partnership's historical cost. Changes in
net investment in and advances from the Partnership represent the net income
(loss) of the Hotel adjusted for net cash transferred between the Partnership
and the Hotel. The statement of operations includes no provision for Federal
or state income taxes because the Partnership does not pay income taxes
directly, but rather allocates its taxable income or loss to its individual
partners.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Hotel's records are maintained on the accrual basis of accounting, and
its fiscal year ends on the Friday nearest to December 31.
INTERIM FINANCIAL STATEMENTS
The accompanying August 12, 1994 interim period financial statements are
unaudited but, in the opinion of management, reflect all adjustments
(consisting principally of normal recurring adjustments) necessary for a fair
presentation of the results for the interim period presented. The results for
the interim periods are not necessarily indicative of the results to be
obtained for the full fiscal year due to the seasonal nature of the Hotel's
business.
WORKING CAPITAL AND SUPPLIES
Pursuant to the terms of the Hotel's management agreement discussed in Note
6, the Hotel is required to provide the respective manager with working
capital and supplies to meet its operating needs. The manager converts cash
advanced by the Partnership into other forms of working capital consisting
primarily of operating cash, inventories, and trade receivables and payables
which are maintained and controlled by the managers. Upon the termination of
the agreements, it is expected that the working capital and supplies will be
partially reconverted into cash and returned to the Partnership or transferred
to a subsequent owner or operator for consideration. Such working capital and
supplies are also pledged as security for the Hotel's share of Partnership's
debt as described in Note 5. As a result of these conditions, the individual
components of working capital and supplies controlled by the manager are not
reflected in the accompanying balance sheets.
REVENUES AND EXPENSES
Revenues represent house profit from the Hotel because the Partnership has
delegated substantially all of the operating decisions related to the
generation of house profit from the Hotel to the manager. House profit
reflects the net revenues flowing to the Partnership as property owner and
represents hotel operating results, less
F-49
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
property-level expenses, excluding depreciation, management fees, real and
personal property taxes, ground rent and equipment rent, insurance and certain
other costs, which are classified as operating costs and expenses (see Note
3).
NET INVESTMENT IN AND ADVANCES FROM PARTNERSHIP
Net investment in and advances from Partnership represent the Hotel's
cumulative excess of expenses over revenues since inception adjusted for cash
transferred between the Partnership and the Hotel.
NOTE 3. REVENUES
Revenues consist of the following Hotel operating results (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THIRTY-TWO WEEKS ENDED
------------------------- ----------------------
AUGUST 12, AUGUST 11,
1992 1993 1994 1994 1995
------- ------- ------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
HOTEL SALES
Rooms................... $12,234 $13,267 $14,516 $ 9,213 $ 9,983
Food and beverage....... 6,032 6,440 7,029 4,331 4,706
Other................... 1,158 1,266 1,383 837 776
------- ------- ------- ------- -------
19,424 20,973 22,928 14,381 15,465
------- ------- ------- ------- -------
HOTEL EXPENSES
Departmental Direct Costs
Rooms................... 3,023 3,414 3,648 2,225 2,364
Food and beverage....... 4,453 4,858 5,066 3,102 3,168
Total Department
Costs................ 730 767 799 469 511
------- ------- ------- ------- -------
8,206 9,039 9,513 5,796 6,043
------- ------- ------- ------- -------
DEPARTMENT PROFIT......... 11,218 11,934 13,415 8,585 9,422
Other Deductions........ (4,826) (5,236) (5,252) (3,268) (3,230)
------- ------- ------- ------- -------
HOUSE PROFIT.............. $ 6,392 $ 6,698 $ 8,163 $ 5,317 $ 6,192
======= ======= ======= ======= =======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30, AUGUST 11,
1993 1994 1995
------------ ------------ ----------
<S> <C> <C> <C>
Land................................... $ 1,407 $ 1,407 $ 1,407
Building and improvements.............. 25,584 25,576 25,576
Furniture and equipment................ 4,724 4,527 4,632
-------- -------- --------
31,715 31,510 31,615
Less accumulated depreciation and
amortization.......................... (11,805) (12,346) (12,743)
-------- -------- --------
Property and equipment, net............ $ 19,910 $ 19,164 $ 18,872
======== ======== ========
</TABLE>
All property and equipment is pledged as security against the Hotel's
portion of the Bank Loan (see Note 5) and, in the case of rent streams from
the Hotel's portion of the FF&E Lease (see Note 6), the FF&E Loans related to
the Hotel.
F-50
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. DEBT
BANK LOAN
On December 22, 1987, the Partnership borrowed $245 million (the "Bank
Loan") from The Mitsui Trust and Banking Company (the "Bank Lender"), secured
by seven of the Partnership hotels (the "Bank Hotels"). The Bank Loan bore
interest at an effective fixed rate of 10.37% and required monthly interest-
only payments.
The Bank Loan matured on December 22, 1994, and was not repaid because the
Partnership had insufficient funds to do so. At December 22, 1994, the
principal balance of the Bank Loan was $245 million.
On December 22, 1994, the Partnership entered into a forbearance agreement
with the Bank Lender under which the Lender agreed not to exercise its rights
and remedies for nonpayment of the Bank Loan on the maturity date until
February 24, 1995. The Bank Lender and the Partnership also entered into a
non-binding term sheet for restructuring the Bank Loan that requires the
Partnership to repay $44 million in principal and Host Marriott to advance $10
million under the bank guaranty. The forbearance agreement was extended until
August 22, 1995 to allow the Partnership time to solicit the consent of its
limited partners to sell the Hotel to raise the $44 million repayment amount.
In exchange for the lender's agreement to forbear, the Partnership agreed to
continue to make monthly interest payments at a rate equal to the one-month
LIBOR plus two percentage points for the period December 22, 1994 through June
21, 1995 and the one-month LIBOR plus two and one quarter percentage points
for the period June 22, 1995 through August 21, 1995 and to negotiate with the
Bank Lender to reach an agreement for the restructuring of the Bank Loan that
is consistent with the non-binding term sheet.
Approximately $51.5 million of the $245 million Bank Loan principal has been
allocated to the Hotel based on the amount of title insurance for the Hotel as
compared to the total title insurance for the seven hotels when the Bank Loan
originated in 1987. The Bank Loan bore interest at an effective fixed rate of
10.37% and required monthly interest-only payments until its maturity on
December 22, 1994.
OTHER LOANS
As of December 31, 1994 and August 11, 1995, $897,000 and $1,692,000,
respectively, were outstanding to Host Marriott for FF&E loans related to the
Hotel. The FF&E loans are nonrecourse to the Partnership and are effectively
secured by payments from Marriott International, Inc. under the FF&E Lease, as
defined in Note 6 below. As of December 31, 1994 and August 11, 1995, Marriott
International, Inc. owed $980,000 and $1,749,000, respectively, including
related interest costs for the Hotel FF&E capital lease.
NOTE 6. MANAGEMENT AGREEMENT
Marriott International, Inc. (the "Manager") operates the Hotel pursuant to
a long-term management agreement (the "Management Agreement") for a term of 25
years from the opening of the Hotel with renewal terms, at the option of the
Manager, of up to an additional 50 years. The Management Agreement provides
for payment of base management fees equal to 8% of gross hotel sales and
incentive management fees equal to 20% of hotel operating profits (as defined,
calculated before debt service on total Partnership debt), and additional
incentive fees, after certain returns to the Partnership, ranging from 10% to
70% depending on the level of returns made to the partners. Payment of the
incentive management fees is dependent upon the availability of cash flow
after debt service, and payable only after repayment of certain debt service
guaranty advances and certain priority returns to the Parent expressed as a
percentage of limited partner invested equity. Through December 30, 1994, no
incentive fees have been paid since inception. Deferred base fees were
$6,718,000 and $7,360,000 as of December 31, 1993 and December 30, 1994,
respectively. Deferred incentive management fees were $17,902,000 and
$19,523,000 as of December 31, 1993 and December 30, 1994, respectively. In
the event of early termination of the Management Agreement, the Manager will
be owed additional fees based on the unexpired term and expected future base
and incentive management fees.
F-51
<PAGE>
DALLAS/FORT WORTH AIRPORT MARRIOTT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In accordance with the Management Agreement, the Manager is required to
lease all FF&E replacements from the Hotel (the "FF&E Lease") for terms of up
to six years. Lease payments represent an amount approximately equal to the
principal amortization, interest and fees associated with indebtedness
incurred by the Hotel to finance the FF&E replacements and any sales and use
taxes, personal property taxes, insurance premiums and additional costs
incurred by the Partnership in connection with the acquisition and use of such
replacements. As of December 31, 1993 and December 30, 1994, the Manager was
obligated to pay $1,479,000 and $980,000 (including related interest costs) to
the Hotel during the term of this agreement.
On February 24, 1995, the Partnership, Bank Lender and the Manager entered
into a cash collateral agreement with terms effective January 1, 1995.
Effective January 1, 1995, 4% of gross hotel sales must be deposited in a
property improvement fund for the future furniture, fixtures and equipment
needs of the Hotel. Additionally, 1% of gross hotel sales must be deposited in
a restricted cash account and are subordinated to the payment of debt service
on the Bank Loan.
The cash collateral agreement also adjusted the base management fee earned
by the Manager under the Management Agreement from 8% to 3% of gross hotel
sales effective January 1, 1995. The payment of 1% of the 3% base fee earned
is subordinated to the payment of debt service on the Bank Loan. As a result,
the subordinated base management fees are set aside in a restricted cash
account where it will be held and made available for the payment of debt
service.
In conjunction with the acquisition of the Hotel by HMC Acquisition
Properties, Inc., a new management agreement was entered into with the
Manager. The new agreement provides for payment of base management fees equal
to three percent of sales and a formula based incentive management fee limited
to 20% of fiscal year Hotel operating profit (as defined). Had these terms
been in effect for the year ended December 30, 1994, pro forma base and
incentive management fees would have been $688,000.
In connection with the refinancing, approximately $27 million of deferred
management fees related to the Hotel were forgiven by the Manager on August
22, 1995.
Additionally, the Partnership has advanced $946,000 to the Manager for
working capital and supplies related to the Hotel, which is included in Due
from Marriott International, Inc.
F-52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of the Atlanta Northwest Marriott:
We have audited the accompanying statements of assets, liabilities and net
investment in and advances to Parent of the Atlanta Northwest Marriott, as
defined in Note 1, as of December 30, 1994 and October 6, 1995, and the
related statements of revenues and expenses, excluding income taxes, and cash
flows for each of the two fiscal years in the period ended December 30, 1994
and for the forty weeks ended October 6, 1995. These financial statements are
the responsibility of the management of the Atlanta Northwest Marriott. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the 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.
The accompanying financial statements have been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for the inclusion in a registration statement of HMC Acquisition
Properties, Inc.) as described in Note 1 and are not intended to be a complete
presentation of the Atlanta Northwest Marriott's assets and liabilities,
revenues and expenses or cash flows.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets, liabilities and net investment in and
advances to Parent of the Atlanta Northwest Marriott (see Note 1) as of
December 30, 1994 and October 6, 1995, and its revenues and expenses,
excluding income taxes, and cash flows for each of the two fiscal years in the
period ended December 30, 1994 and for the forty weeks ended October 6, 1995
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.,
November 20, 1995
F-53
<PAGE>
ATLANTA NORTHWEST MARRIOTT
STATEMENTS OF ASSETS, LIABILITIES AND NET INVESTMENT IN
AND ADVANCES TO PARENT (SEE NOTE 1)
DECEMBER 30, 1994 AND OCTOBER 6, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
ASSETS
Property and equipment, net.................................. $17,116 $17,322
Property improvement fund.................................... 117 291
Accounts receivable.......................................... 376 623
Other assets................................................. 347 364
Cash and cash equivalents.................................... 317 179
------- -------
$18,273 $18,779
======= =======
LIABILITIES AND NET INVESTMENT IN AND ADVANCES TO PARENT
Accounts payable and accrued expenses........................ $ 352 $ 247
------- -------
Total liabilities............................................ 352 247
Net investment in and advances to Parent..................... 17,921 18,532
------- -------
$18,273 $18,779
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
ATLANTA NORTHWEST MARRIOTT
STATEMENTS OF REVENUES AND EXPENSES, EXCLUDING INCOME TAXES
FOR THE YEARS ENDED DECEMBER 31, 1993 AND DECEMBER 30, 1994
AND THE PERIOD FROM DECEMBER 31, 1994 TO OCTOBER 6, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ --------------
(PARTIAL YEAR)
<S> <C> <C> <C>
REVENUES........................................... $2,867 $3,534 $3,690
------ ------ ------
OPERATING COSTS AND EXPENSES
Depreciation and amortization.................... 718 860 788
Management fees.................................. 375 561 560
Property taxes................................... 289 294 228
Equipment rent and other......................... 3 154 44
------ ------ ------
1,385 1,869 1,620
------ ------ ------
REVENUES OVER EXPENSES, EXCLUDING
INCOME TAXES..................................... $1,482 $1,665 $2,070
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
ATLANTA NORTHWEST MARRIOTT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND DECEMBER 30, 1994
AND THE PERIOD FROM DECEMBER 31, 1994 TO OCTOBER 6, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ --------------
(PARTIAL YEAR)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Revenues over expenses, excluding income
taxes......................................... $1,482 $1,665 $2,070
Noncash items:
Depreciation and amortization................. 718 860 788
Working capital changes:
Accounts receivable......................... (102) 141 (247)
Other assets................................ 15 (28) (17)
Accounts payable and accrued expenses....... 1 116 (105)
------ ------ ------
Cash provided by operations................... 2,114 2,754 2,489
------ ------ ------
INVESTING ACTIVITIES
Additions to property and equipment........... (22) (3,311) (994)
Change in property improvement fund........... -- (117) (174)
------ ------ ------
Cash used in investing activities............. (22) (3,428) (1,168)
------ ------ ------
FINANCING ACTIVITIES
Change in net investment and advances to
Parent........................................ (2,099) 922 (1,459)
------ ------ ------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... (7) 248 (138)
CASH AND CASH EQUIVALENTS at beginning of
period.......................................... 76 69 317
------ ------ ------
CASH AND CASH EQUIVALENTS at end of period...... $ 69 $ 317 $ 179
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
ATLANTA NORTHWEST MARRIOTT
NOTES TO FINANCIAL STATEMENTS
NOTE 1.
BASIS OF PRESENTATION
HMC Acquisition Properties, Inc. (the "Company"), an indirect wholly owned
subsidiary of Host Marriott Corporation entered into a purchase agreement in
the fourth quarter of 1995 to buy the buildings, leasehold improvements and
furniture, fixtures and equipment related to the Atlanta Northwest Marriott
hotel located in Atlanta, Georgia (the "Hotel") from Metropolitan Life
Insurance Company, Ltd. ("Parent") for $28,500,000. The Hotel is managed by
Marriott International, Inc. (the "Manager") and is operated as a part of the
Marriott Hotels, Resorts and Suites full-service hotel system.
These financial statements present the assets, liabilities and net advances
to Parent, revenues and expenses, excluding income taxes, and cash flows
related to the business of the Hotel which is a lesser component of the Parent
for all periods presented. Assets and liabilities of the Hotel are stated at
Parent's historical cost. Changes in net advances to Parent represent the
revenues over expenses, excluding taxes, of the Hotel adjusted for cash
transferred between the Parent and the Hotel. The accompanying statement of
revenues and expenses, excluding income taxes, includes no provision for
Federal or state income taxes because the Hotel did not pay income taxes
directly and the Parent did not allocate or charge these expenses to its
individual units during the periods presented. The Company's acquisition of
the Hotel creates a new income tax structure; the Company's management
believes that historical data related to income taxes prior to the sale is not
material to investors of the Company.
These financial statements have been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission for
inclusion in a registration statement of HMC Acquisition Properties, Inc., and
are not intended to be a complete presentation of the Hotel's assets and
liabilities, revenues and expenses, or cash flows in that income taxes are
excluded.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Hotel's records are maintained on the accrual basis of accounting and
its fiscal year ends on the Friday closest to December 31.
REVENUES AND EXPENSES
Revenues represent house profit from the Hotel because the Parent has
delegated substantially all of the operating decisions related to the
generation of house profit from its hotels to the manager. House profit
reflects the net revenues flowing to the Parent as property owner and
represents hotel operating results, less property-level expenses, excluding
depreciation, management fees, real and personal property taxes, ground rent
and equipment rent, insurance and certain other costs, which are classified as
operating costs and expenses.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Replacements and improvements
are capitalized as incurred.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, 30 years for buildings and 5 years for furniture
and equipment.
CASH AND CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less at
date of purchase are considered to be cash equivalents.
F-57
<PAGE>
ATLANTA NORTHWEST MARRIOTT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. REVENUE
Revenues (house profit) for the two fiscal years ended December 30, 1994 and
the period from December 31, 1994 to October 6, 1995 consists of (in
thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ --------------
(PARTIAL YEAR)
<S> <C> <C> <C>
HOTEL SALES
Rooms............................................ $7,906 $8,682 $7,865
Food and beverages............................... 3,598 3,284 2,672
Other............................................ 727 953 769
------ ------ ------
Total hotel sales.............................. 12,231 12,919 11,306
------ ------ ------
HOTEL EXPENSES
Departmental costs
Rooms.......................................... 2,084 2,294 1,961
Food and beverages............................. 3,092 2,867 2,258
Other hotel operating expenses................. 4,188 4,224 3,397
------ ------ ------
9,364 9,385 7,616
------ ------ ------
REVENUES........................................... $2,867 $3,534 $3,690
====== ====== ======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment as of December 30, 1994 and October 6, 1995 consists
of the following (in thousands):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Land.................................................... $ 1,080 $ 1,080
Buildings and leasehold improvements.................... 24,070 24,530
Furniture and equipment................................. 3,413 3,947
------- -------
28,563 29,557
Less accumulated depreciation and amortization.......... (11,447) (12,235)
------- -------
Net property and equipment.............................. $17,116 $17,322
======= =======
</TABLE>
NOTE 5. MANAGEMENT AGREEMENT
The Manager operates the Hotel pursuant to a long-term management agreement
with an initial term expiring in 2003. The management agreement provided for a
base fee and an incentive management fee as described below. In addition, the
Manager was reimbursed for certain actual costs and expenses incurred in
providing certain services ("Chain Services") on a central or regional basis
to all hotels operated by the Manager. In accordance with these arrangements
the Hotel paid Chain Services for the two fiscal years ended December 30, 1994
and for the forty weeks ended October 6, 1995 of $331,492, $255,406, $314,068
and respectively.
Prior to September 7, 1993 the Hotel paid the manager a fee of $30,000 each
four-week period under the management agreement. On September 7, 1993, the
management agreement of the Hotel was amended and a base fee equal to 3% of
Hotel sales and an incentive fee equal to 20% of the operating profit (as
defined) over an owner's priority amount (as defined). Incentive management
fees for the fiscal year ended December 30, 1994 and for the forty weeks ended
October 6, 1995 were $172,895 and $220,625, respectively. There were no
incentive management fees for the fiscal year ended December 31, 1993.
F-58
<PAGE>
ATLANTA NORTHWEST MARRIOTT
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The amended management agreement provides for the establishment of a
property improvement fund for the Hotel. Contributions to the property
improvement fund are 4% of Hotel sales. Contributions to the property
improvement fund for the two fiscal years ended December 30, 1994 and for the
forty weeks ended October 6, 1995 were $145,103, $516,760 and $452,241,
respectively.
NOTE 6. LEASES
Future minimum annual rental commitments for all non-cancelable operating
leases entered into by the Manager on behalf of the Parent are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1995................................................................ $ 4
1996................................................................ 22
1997................................................................ 22
1998................................................................ 8
1999................................................................ 1
Thereafter.......................................................... --
---
Total minimum lease payments...................................... $57
===
</TABLE>
F-59
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of the Charlotte Marriott Executive Park Hotel:
We have audited the accompanying statement of revenues and certain expenses
of the Charlotte Marriott Executive Park Hotel, as defined in Note 1, for the
year ended December 31, 1994. This financial statement is the responsibility
of the management of the Charlotte Marriott Executive Park Hotel. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statement is 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 audit provides a reasonable basis
for our opinion.
The accompanying financial statement has been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for the inclusion in the registration statement of HMC Acquisition
Properties, Inc.) as described in Note 1 and are not intended to be a complete
presentation of the Charlotte Marriott Executive Park Hotel's revenues and
expenses.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the revenues and certain expenses of the Charlotte
Marriott Executive Park Hotel (see Note 1) for the year ended December 31,
1994 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.,
November 13, 1995
F-60
<PAGE>
CHARLOTTE MARRIOTT EXECUTIVE PARK HOTEL
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES (Note 3)........................................................ $3,438
OPERATING COSTS AND EXPENSES
Management fee......................................................... 453
Property taxes......................................................... 223
Franchise fee.......................................................... 484
Equipment rent and other............................................... 180
------
REVENUES OVER CERTAIN EXPENSES........................................... $2,098
======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-61
<PAGE>
CHARLOTTE MARRIOTT EXECUTIVE PARK HOTEL
NOTES TO FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
On January 5, 1995 ("Sale Date"), HMC Acquisition Properties, Inc. (the
"Company"), an indirect wholly-owned subsidiary of Host Marriott Corporation
(formerly, Marriott Corporation) purchased the land, building and furniture,
fixtures and equipment related to the Charlotte Marriott Executive Park Hotel
located in Charlotte, North Carolina (the "Hotel") from the Travelers
Insurance Company, ("Parent") for $14,500,000. The Hotel, with 298 rooms is a
full service property, that prior to and subsequent to purchase was a part of
the Marriott Hotels Resorts and Suites franchise system. No adjustments
relating to the sale are reflected in the accompanying financial statement.
It was not possible for the Company to access the books and records of the
former owner for the period prior to the time of acquisition, and therefore,
these financial statements present revenues and certain expenses, excluding
income taxes, depreciation, interest expense (if any), and cash flows related
to the business of the Hotel which is a lesser component of the Parent. The
accompanying statement of revenues and certain expenses includes no provision
for Federal or state income taxes because the Hotel does not pay income taxes
directly and the Parent does not allocate or charge these expenses to its
individual units. The Company's acquisition of the Hotel creates a new
carrying basis for the property and a new financing and income tax structure;
the Company's management believes that such historical data related to income
taxes, depreciation and interest expense prior to the Sale Date are not
material to investors in the Company.
These financial statements have been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission for
inclusion in the registration statement of HMC Acquisitions Properties, Inc.
and are not intended to be a complete presentation of the Hotel's revenues and
expenses.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Hotel's records are maintained on the accrual basis of accounting and
its fiscal year ends on December 31.
REVENUES AND EXPENSES
Revenues represent house profit from the Hotel because the Parent has
delegated substantially all of the operating decisions related to the
generation of house profit from the Hotel to the manager. House profit
reflects the net revenues flowing to the Parent as property owner and
represents the hotel operating results, less property-level expenses,
excluding depreciation, management fees, real and personal property taxes, and
equipment rent, insurance and certain other costs, which are classified as
operating costs and expenses (see Note 3).
CASH AND CASH EQUIVALENTS
The Hotel considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
REPAIRS AND MAINTENANCE
Expenditures for repairs and maintenance, which do not extend the useful
life of the related assets, are expensed when incurred.
F-62
<PAGE>
CHARLOTTE MARRIOTT EXECUTIVE PARK HOTEL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. REVENUES
Revenues (house profit) for the year ended December 31, 1994 consist of the
following (in thousands):
<TABLE>
<CAPTION>
1994
-------
<S> <C>
HOTEL SALES
Rooms............................................................. $ 7,046
Food and beverages................................................ 3,574
Other............................................................. 713
-------
11,333
-------
HOTEL EXPENSES
Departmental costs
Rooms........................................................... 1,810
Food and beverages.............................................. 2,729
Other hotel operating expenses.................................... 3,356
-------
7,895
-------
REVENUES............................................................ $ 3,438
=======
</TABLE>
NOTE 4. MANAGEMENT AND FRANCHISE AGREEMENTS
MANAGEMENT AGREEMENT
Prior to the Sale Date, Interstate Hotel Corporation, Inc. (the "Manager")
operated the Hotel pursuant to a long-term management agreement (the
"Agreement") with an initial term expiring in 2035. The Agreement provided for
a base fee equal to 4% of Hotel revenues. The Hotel paid $453,000 of base
management fees during 1994.
The Agreement also provides for the establishment of a property improvement
fund for the Hotel to cover (a) the cost of certain non-routine repairs and
maintenance to the Hotel which is normally capitalized; and (b) the cost of
replacements and renewals to the Hotel's property and improvements.
Contributions to the property improvement fund are 3% of gross revenues
subject to a maximum balance of $2,000 per guest room, as adjusted based on
incremental increases in the Consumer Price Index. Contributions to the
property improvement fund for the year ended December 31, 1994 were $340,000.
As of the Sale Date, the Agreement with the Manager was terminated.
Effective immediately following the sale of the Hotel, a new management
agreement between the Manager and HMC Acquisition Properties, Inc. was entered
into.
FRANCHISE AGREEMENT
The Hotel was operated as a Marriott full-service hotel by the Manager
pursuant to a franchise agreement between the Parent and Marriott
International, Inc. ("MII"), under which 6% of gross room sales and 2% of
gross food and beverage sales were paid monthly by the Hotel to MII. During
1994 $484,000 of franchise fees were paid to MII under this agreement.
As of the Sale Date, the franchise agreement was terminated. Effective
immediately following the sale of the Hotel, a new franchise agreement
expiring January 5, 2010 between MII and the Company was entered into under
which franchise fees are equal to the sum of (1) 6% of gross room sales; (2)
3% of gross food and beverage sales; (3) less 1.5% of total gross sales; plus
(4) 50% of available cash flow, as defined in the agreement, not to exceed
1.5% of total gross sales.
F-63
<PAGE>
CHARLOTTE MARRIOTT EXECUTIVE PARK HOTEL
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. LEASES
The Hotel leases certain property and equipment under non-cancelable
operating leases, generally with multiple renewal options. Future minimum
annual rental commitments for all non-cancelable operating leases at December
31, 1994 are as follows (in thousands):
<TABLE>
<S> <C>
1995.................................................................... $105
1996.................................................................... 77
1997.................................................................... 5
1998.................................................................... --
1999.................................................................... --
Thereafter.............................................................. --
----
Total minimum lease payments............................................ $187
====
</TABLE>
Rental expense under all leases was $32,128 in 1994 and is included in
equipment rent and other in the accompanying statement of revenues and certain
expenses.
NOTE 6. SUPPLEMENTARY INFORMATION (UNAUDITED):
Capital additions of $157,000, including $117,000 for building additions and
$40,000 for furniture, fixtures and equipment additions, were made to the
Hotel during the year ended December 31, 1994. Had the Company acquired the
Hotel on January 1, 1994, depreciation expense would have been as follows:
<TABLE>
<CAPTION>
DEPRECIATION
EXPENSE
FOR THE
PURCHASE PRICE USEFUL YEAR ENDED
ALLOCATION LIFE DEPRECIATION METHOD DECEMBER 31, 1994
-------------- --------- -------------------- -----------------
<S> <C> <C> <C> <C>
Land.................... $ 2,472,000 -- -- $ --
Building................ 10,783,000 40 years Straight-line method 269,586
Furniture, fixtures &
equipment.............. 1,326,000 3-7 years Straight-line method 265,157
----------- --------
$14,581,000 $534,743
=========== ========
</TABLE>
F-64
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of Ft. Lauderdale Hotel and Marina:
We have audited the accompanying statement of operations and cash flows of
Ft. Lauderdale Hotel and Marina, as defined in Note 1, for the year ended
December 31, 1993. These financial statements are the responsibility of the
management of Ft. Lauderdale Hotel and Marina. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the 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 financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Ft.
Lauderdale Hotel and Marina (see Note 1) for the year ended December 31, 1993,
in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.,
November 13, 1995
F-65
<PAGE>
FT. LAUDERDALE HOTEL AND MARINA
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993 (IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES............................................................. $ 7,451
--------
OPERATING COSTS AND EXPENSES
Interest........................................................... 9,747
Depreciation and amortization...................................... 2,692
Base and incentive management fees................................. 601
Property taxes..................................................... 1,035
--------
Total operating costs and expenses............................... 14,075
--------
NET LOSS............................................................. $ (6,624)
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
FT. LAUDERDALE HOTEL AND MARINA
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993 (IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss............................................................. $(6,624)
Noncash items:
Depreciation and amortization........................................ 2,692
Working capital changes:
Accounts receivable................................................. (348)
Other assets........................................................ 127
Accrued interest.................................................... 5,477
Accounts payable and accrued expenses............................... (861)
-------
Cash provided by operations.......................................... 463
-------
INVESTING ACTIVITIES
Additions to property and equipment.................................. (2,516)
Change in property improvement fund.................................. 144
-------
Cash used in investing activities.................................... (2,372)
-------
FINANCING ACTIVITIES
Advances from Travelers.............................................. 1,774
-------
DECREASE IN CASH AND CASH EQUIVALENTS.................................. (135)
-------
CASH AND CASH EQUIVALENTS at beginning of year......................... 330
-------
CASH AND CASH EQUIVALENTS at end of year............................... $ 195
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
FT. LAUDERDALE HOTEL AND MARINA
NOTES TO FINANCIAL STATEMENTS
NOTE 1.
Basis of Presentation
On January 7, 1994 ("Sale Date") Host Marriott Corporation (formerly,
Marriott Corporation) through one of its subsidiaries purchased the land,
building, improvements and furniture, fixtures and equipment related to the
Ft. Lauderdale Hotel and Marina located in Ft. Lauderdale, Florida (the
"Hotel") from the Travelers Insurance Company ("Travelers") for approximately
$40,000,000. This transaction immediately followed Travelers' foreclosure on
the Hotel (the "Foreclosure") from Ft. Lauderdale Hotel and Marina Limited
Partnership (the "Partnership") (see Note 6). The Hotel, with 580 rooms, is a
full-service property, and is managed by Marriott International, Inc. (the
"Manager") as part of the Marriott Hotels Resorts and Suites brand system.
During 1991, the Partnership filed a Plan for Reorganization (the "Plan")
under Chapter 11 of the United States Bankruptcy Code. The Plan was approved
on March 18, 1992. Under the Plan, Travelers agreed to (i) pay certain
administrative expenses of the Hotel and (ii) allow the Partnership, until
January 1994, to sell or refinance the Hotel in exchange for the Partnership
either entering into a new management agreement for the Hotel and, (iii) if
the Partnership did not sell or refinance the Hotel in an amount sufficient to
pay the mortgage payable to Travelers, the transfer of the Hotel to Travelers.
The Partnership failed to sell or refinance the Hotel within the required time
frame and as such, ownership of the Hotel was transferred to Travelers on the
Sale Date.
No adjustments related to the sale of the Hotel, the Foreclosure or any
other settlement of obligations between Travelers and the Partnership are
reflected in the accompanying financial statements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership's records are maintained on the accrual basis of accounting.
Revenues and Expenses
Revenues represent house profit from the Hotel because the Partnership has
delegated substantially all of the operating decisions related to the
generation of house profit from its hotels to the manager. House profit
reflects the net revenues flowing to the Partnership as property owner and
represents hotel operating results, less property-level expenses, excluding
depreciation, management fees, real and personal property taxes, ground rent
and equipment rent, insurance and certain other costs, which are classified as
operating costs and expenses.
Income Taxes
The accompanying statement of revenues and expenses includes no provision
for Federal or state income taxes because the Partnership does not pay income
taxes directly, but rather allocates its taxable income or loss to its
individual partners.
Property and Equipment
Property and equipment is recorded at historical cost, including interest,
rent and real estate taxes incurred during development and construction.
Replacements and improvements are capitalized.
F-68
<PAGE>
FORT LAUDERDALE HOTEL AND MARINA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, 40 years for building and 5 to 7 years for
furniture and equipment.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less at
date of purchase are considered to be cash equivalents.
NOTE 3. REVENUES
Revenues (house profit) for the year ended December 31, 1993 consists of (in
thousands):
<TABLE>
<S> <C>
HOTEL SALES
Rooms............................................................... $ 14,061
Food and beverages.................................................. 8,050
Other............................................................... 1,330
--------
Total hotel sales................................................. 23,441
--------
HOTEL EXPENSES
Departmental costs
Rooms.............................................................. 3,431
Food and beverages................................................. 6,016
Other hotel operating expenses..................................... 6,543
--------
Total hotel expenses.............................................. 15,990
--------
REVENUES.............................................................. $ 7,451
========
</TABLE>
NOTE 4. MANAGEMENT AGREEMENT
Prior to the Sale Date, the Manager operated the Hotel pursuant to a long-
term management agreement with an initial term expiring in 2013. The
management agreement provided for a base fee equal to 3% of Hotel Sales and an
incentive management fee as described below. In addition, the Manager was
reimbursed for certain actual costs and expenses incurred in providing certain
services ("Chain Services") on a central or regional basis to all hotels
operated by the Manager. In accordance with these arrangements the Hotel paid
Chain Services for the year ended December 31, 1993 of approximately $784,000.
On November 7, 1992, the management agreement of the Hotel was amended and
restated. Pursuant to this amendment, the incentive management fee calculation
was changed from 20% of operating profit, as defined, to 5% of the Hotel's
first $4.0 million of operating profit plus 33% of operating profit between
$4.0 and $4.5 million plus 20% thereafter. Also pursuant to the amendment,
total base and incentive fees for 1993 were reduced by approximately $422,000.
The management agreement provided for the establishment of a property
improvement fund for the Hotel. Contributions to the property improvement fund
were to be 5% of Hotel sales. During the year ended December 31, 1993, cash
generated by the property was insufficient to fund the required escrow, and
contributions to the property improvement fund for the year ended December 31,
1993 were $144,000. As a result of this shortfall, and under the terms of the
amended management agreement, Travelers made certain advances to the property
for funding of certain property renovations, as described in Note 6.
F-69
<PAGE>
FORT LAUDERDALE HOTEL AND MARINA
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
NOTE 5. LEASES
Future minimum annual rental commitments for all non-cancelable leases
entered into by the Partnership, or by the Manager on behalf of the
Partnership and assumed by Host Marriott at the Sale Date are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING LEASES
- ----------- ----------------
<S> <C>
1994......................................................... $143
1995......................................................... 143
1996......................................................... 113
1997......................................................... 109
1998......................................................... 97
Thereafter................................................... 206
----
Total minimum lease payments............................... $811
====
</TABLE>
NOTE 6. DEBT
Debt consists of the following at December 31, 1993:
A $49,500,000 first mortgage payable to Travelers with interest at a coupon
rate of 12.5% per anum through maturity of November 30, 1997. Interest was
payable on the original principle balance at a pay rate of 5% per annum
through February 1990. Commencing March 1, 1990 interest was payable on the
original principle balance at a pay rate of 10% through July, 1990. Thereafter
the then total outstanding balance on the note was payable in monthly
installments of principle and interest of $635,018 including interest at 12.5%
based on a 30 year amortization. In addition, any net cash flow after debt
service was to be paid to the lender quarterly. All accrued interest
compounded monthly at 12.25%. The note was collateralized by a first mortgage
on the Hotel.
A second mortgage note of $4,000,000 payable to an affiliate of the general
partner of the Partnership with interest payable monthly at a rate of 8% per
anum to the extent of remaining cash flow of the Hotel. Unpaid interest was
accrued and the payment thereof was contingent upon the sale or refinancing of
the Hotel generating sufficient net proceeds. Under the terms of an agreement
between the Partnership and the noteholders, no interest was charged to the
note for the two years in the period ending December 31, 1993. The note was
collateralized by a second mortgage on the Hotel.
Debt also includes a third mortgage note payable of $2,500,000 to an
affiliate of the general partner of the Partnership with interest payable
monthly at a rate that, when combined with the interest on the second mortgage
note, yields an effective combined interest rate of 16.34% for both
obligations through April 1, 1987. Thereafter interest was payable by the same
terms as the second mortgage note. Under the term of an agreement between the
Partnership and the noteholders, no interest was charged to the note for the
two years in the period ending December 31, 1993. The note is collateralized
by a third mortgage on the Hotel.
Debt also includes a fourth mortgage note of $4,000,000 payable to an
affiliate of the general partner of the Partnership with an effective interest
rate of 12.125% compounded quarterly, but payable quarterly to the extent of
remaining cash flow with all principal and unpaid interest due on November 13,
1993. This note is collateralized by a fourth mortgage on the Hotel. On
October 20, 1992 (the "Assignment Date") this note was assigned to an
affiliate of the general partner of the Partnership. The note was assigned for
consideration of $50,000. No interest was charged on the note subsequent to
the Assignment Date.
During 1992 and 1993, Travelers loaned the Partnership $2.6 million to fund
certain capital improvements. This amount remained outstanding as of the Sale
Date.
F-70
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REP-
RESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY
OFFER TO BUY, ANY OF THE SENIOR NOTES OFFERED HEREBY, TO ANY PERSON OR BY ANY-
ONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SO-
LICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUN-
DER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMA-
TION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF
OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information..................................................... 4
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 18
The Company............................................................... 22
The Exchange Offer........................................................ 23
Use of Proceeds........................................................... 31
Capitalization............................................................ 31
Pro Forma Condensed Consolidated Financial Data........................... 32
Selected Historical Financial Data........................................ 36
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 37
Business and Properties................................................... 41
Certain Relationships and Related Transactions............................ 47
Management................................................................ 51
Sole Shareholder.......................................................... 56
Description of Capital Stock.............................................. 56
Description of Senior Notes............................................... 57
Material Federal Income Tax Considerations................................ 80
Plan of Distribution...................................................... 80
Legal Matters............................................................. 81
Experts................................................................... 81
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL AUGUST 8, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE SERIES B
NOTES, WHETHER OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO
DELIVER A PROSPECTUS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
HMC ACQUISITION
PROPERTIES, INC.
OFFER TO EXCHANGE
9% SENIOR NOTES
DUE 2007, SERIES B FOR ALL
OUTSTANDING 9% SENIOR NOTES
DUE 2007, SERIES A
--------------------------------
PROSPECTUS
--------------------------------
MAY 10, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
