SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended January 3, 1997 Commission File No. 33-95058
HMC ACQUISITION PROPERTIES, INC.
Delaware 52-1888825
(State of Incorporation) (I.R.S.Employer Identification Number)
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Securities registered pursuant to Section 12(g) of the Act
Title of Class
$350,000,000 (principal amount at
maturity) Senior Notes
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Document Incorporated by Reference
Host Marriott Corporation Notice of 1997 Annual Meeting and Proxy Statement
<PAGE>
FORWARD LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements within the
meaning of the Private Litigation Reform Act of 1995 and as such may involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance or achievements of the Company to be different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Although the Company believes the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, it can give no assurance that its expectations will be attained.
These risks are detailed from time to time in the Company's filings with the
Securities and Exchange Commission. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
that may be made to reflect any future events or circumstances.
ITEMS 1 AND 2.BUSINESS AND PROPERTIES
General
HMC Acquisition Properties, Inc. (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 and Canada. Fifteen of these properties are operated under the
Marriott brand name, 12 of which are managed by Marriott International, Inc.
("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 and averaged 74.2%
occupancy for 1996 compared to 71.1% average occupancy for competing hotels in
the upscale full-service segment of the lodging industry (the segment which is
most representative of the Company's full-service hotels). Six of the Company's
properties have been 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 Revolving Credit and Term Loan Agreement dated November 1994 (the "Credit
Facility") and a portion of the proceeds of the Company's offering of $350
million of senior notes (the "Senior Notes") in December 1995 (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 upscale full-service hotel segment in
particular, is benefiting from an improved supply and demand relationship in the
United States. Based on data provided by Smith Travel Research, the Company
believes that the demand for upscale full-service rooms, measured as annual
domestic occupied room nights for its competitive set, increased 3.8% in 1994,
1.5% in 1995 and 2.3% in 1996. Management believes that demand increases have
resulted primarily from an improved economic environment and a corresponding
increase in business travel. In spite of increased demand for rooms, the room
supply growth rate in the full-service segment has diminished. Management
believes that this decrease in the supply growth rate is attributable to many
factors including the limited availability of attractive building sites for
full-service hotels, lack of available financing for new full-service hotel
construction and the availability of existing full-service properties for sale
at a discount to their replacement value. The relatively high occupancy rates of
the Company's hotels, along with increased demand for full-service hotel rooms
have allowed the managers of the Company's hotels to increase average daily room
rates primarily by replacing certain discounted group business with higher rated
group and transient business and selectively raising room rates. As a result, on
a comparable basis, room revenues per available room, excluding food and
beverage and other ancillary revenue ("REVPAR") for full-service properties
increased approximately 12% for 1996. Furthermore, because lodging property
operations have a high fixed cost component, increases in REVPAR generally yield
greater percentage increases in EBITDA (as defined herein). Accordingly, the
approximately 12% increase in REVPAR resulted in an approximately 24% increase
in comparable full-service EBITDA for 1996. The Company expects this
supply/demand imbalance, particularly in the upscale full-service sector, to
continue, which should result in improved REVPAR and EBITDA at its hotel
properties in the near term, however, there can be no assurance that REVPAR and
EBITDA will continue to improve.
Business Strategy
The Company's business strategy is to continue to focus on maximizing the
profitability of its existing full-service hotels. The Company believes that the
upscale 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.
There is very limited new supply of upscale full-service hotel rooms currently
under construction. According to Smith Travel Research, from 1988 to 1991,
upscale full-service room supply for the Company's competitive set increased an
average of approximately 4% annually, which resulted in an oversupply of rooms
in the industry. However, this growth slowed to an average of approximately 1.0%
from 1992 to 1996. 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.
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 in the upscale full-service segment through 2000.
The Company intends to continue to grow its full-service hotel portfolio as cash
flow becomes available from operations or additional financing as permitted
under the senior notes indenture. 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, as permitted
under the Company's bond indenture, 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 senior notes 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 the high-quality Marriott brand
name due to its relationship with Marriott International.
In 1996, the Company acquired the 374-room Toronto Delta Meadowvale hotel for
$25 million. The Company also acquired a controlling interest in a venture that
owns the 400-room Pittsburgh City Center Marriott (formerly the Pittsburgh Hyatt
Regency) for $18 million, which was closed for three months, renovated,
converted to the Marriott brand, and re-opened in July 1996.
The Company has acquired a number of properties from inadvertent owners at
significant discounts to replacement costs. Many desirable hotel properties are
held by inadvertent owners such as banks, insurance companies and other
financial institutions which are motivated and willing sellers. While in the
Company's experience to date, these sellers have been primarily United States
financial organizations, the Company believes that numerous international
financial institutions are also inadvertent owners of lodging properties and
have only recently begun to dispose of such properties. The Company expects that
there will be increased opportunities to acquire lodging properties from
international financial institutions.
The Company believes that there are numerous opportunities to improve the
performance of acquired hotels by replacing the existing hotel manager with
Marriott International and converting the hotel to the Marriott brand. Six of
the Company's 17 full- service hotel acquisitions were converted to the Marriott
brand following their acquisition. 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 1996 for the Company's 14 properties that have been operated under
the Marriott brand name for at least two years was 74.8%, compared to an average
occupancy rate of 71.1% for competing upscale full-service hotels. Accordingly,
management anticipates that any additional full- service properties acquired by
the Company in the future and converted from other brands to the Marriott brand,
should achieve higher occupancy rates and average room rates than has previously
been the case for those properties as the properties begin to benefit from
Marriott's brand recognition, reservation system and group sales organization.
Hotel Lodging Industry
The lodging industry as a whole, and the upscale 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 1996, as
demand growth continued to outpace additions to supply. Based on Coopers &
Lybrand data, the Company expects full-service 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
improving occupancy and room rates which should result in improved REVPAR and
operating profit.
Following a period of significant overbuilding in the mid-to- late 1980s, the
lodging industry experienced a severe downturn. Since 1991, new hotel
construction, excluding casino-related construction, has been modest, 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 have improved. According to Coopers & Lybrand,
room demand for upscale full-service properties is expected to grow
approximately 2.4% annually through 1998. Increased room demand should result in
increased hotel occupancy and room rates. According to Smith Travel Research,
upscale full- service occupancy for the Company's competitive set grew in 1996
to 72.4%, while room rate growth exceeded inflation for the fifth straight year.
The Company believes that these recent trends will continue, with overall
occupancy increasing slightly, and room rates increasing at more than
one-and-one-half times the rate of inflation in each of the next two years.
While room demand has been rising, new hotel room supply growth has slowed.
Smith Travel Research data shows that from 1988 to 1991, upscale full-service
room supply increased an average of approximately 4% annually. According to
Smith Travel Research, this growth slowed to an approximate 1.0% average annual
growth rate from 1992 through 1996. 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 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. The
Company believes that numerous international financial institutions are also
inadvertent owners of lodging properties and expects that there will be
increased opportunities to acquire lodging properties from international
financial institutions. While the interest of inadvertent owners to sell has
created attractive acquisition opportunities with strong current yields, the
lack of 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 as of February 28, 1997 consists of 17
upscale full-service hotels with a total of 6,850 rooms. Fifteen of the
Company's 17 properties are operated under the Marriott name. The two remaining
properties representing 596 rooms, or approximately 9% of the Company's total
rooms, achieved favorable operating results relative to competing hotels in
their respective market segments and have not been converted to the Marriott
brand due to either their size and/or contractual prohibitions. The Company's
full-service hotels generally contain from 300 to 600 rooms. Hotel facilities
typically include meeting and banquet facilities, a variety of restaurants and
lounges, swimming pools, gift shops, and parking facilities. The Company's
full-service hotels primarily service business and pleasure travelers and group
meetings at locations in downtown and suburban areas, near airports and at
resort locations throughout the United States and Canada. The average age of the
Company's properties is 14 years, several of which have had substantial
renovations or major additions.
To maintain the overall quality of the Company's lodging properties, each
property undergoes refurbishments and capital improvements on a regularly
scheduled basis. Typically, refurbishing has been provided at intervals of five
years, based on an annual review of the condition of each property. In fiscal
years 1996, 1995 and 1994, the Company spent $15 million, $9 million and $2
million, respectively, on capital improvements to existing properties. As a
result of these expenditures, the Company has been able to maintain high quality
rooms at its properties.
The table below sets forth comparable performance information for the Company's
comparable full-service hotels:
<TABLE>
<CAPTION>
Fiscal Year
1996 1995
---- ----
<S> <C> <C>
Number of properties(1) . . . . . . . . . . 13 13
Number of rooms . . . . . . . . . . . . . . 5,184 5,184
Average daily rate. . . . . . . . . . . . . $107.87 $98.90
Occupancy % . . . . . . . . . . . . . . . . 74.1% 72.0%
REVPAR. . . . . . . . . . . . . . . . . . . $79.92 $71.20
REVPAR % change . . . . . . . . . . . . . . 12.3% --
</TABLE>
The table below sets forth performance information for the Company's properties:
<TABLE>
<CAPTION>
Fiscal Year
1996 1995
---- ----
<S> <C> <C>
Number of properties (2). . . . . . . . . . 17 15
Number of rooms . . . . . . . . . . . . . . 6,850 6,076
Average daily rate. . . . . . . . . . . . . $106.37 $99.08
Occupancy % . . . . . . . . . . . . . . . . 74.2% 72.2%
REVPAR. . . . . . . . . . . . . . . . . . . $78.88 $71.50
REVPAR % change . . . . . . . . . . . . . . 10.3% --
</TABLE>
(1) Includes all properties that were owned by the Company for all of 1995 and
1996.
(2) Does not include the Springfield Radisson which was sold in December 1995.
Revenues for 1996 for nearly all of the Company's full-service hotels, resorts
and suites were improved or comparable to 1995. This improvement was achieved
through steady increases in customer demand, as well as yield management
techniques applied by the managers to maximize REVPAR on a property-by-property
basis. REVPAR for comparable properties increased 12% for 1996, as average room
rates increased 9% and average occupancy increased two percentage points.
Results were further enhanced by a two percentage point increase in the house
profit margin for comparable properties. 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 with higher-rated 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.
Six of the Company's full-service hotel acquisitions were converted to the
Marriott brand upon acquisition. 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 as well as
customer recognition of the Marriott brand name. In connection with the
conversion of these properties, the Company employed additional capital to
upgrade these properties to the Company's and the new managers' standards. The
invested capital with respect to these properties is primarily used for the
improvement of common areas as well as upgrading soft and hard goods (i.e.,
carpets, drapes, paint, furniture and additional amenities). The conversion
process typically causes periods of disruption to these properties as selected
rooms and common areas are temporarily taken out of service. The conversion
properties are already showing improvements as the benefits of Marriott
International's marketing and reservation programs and customer service
initiatives take hold. In addition, these properties have generally been
integrated into Marriott's systems covering purchasing and distribution,
insurance, telecommunications and payroll processing. The Company actively
manages these conversions and, in many cases, has worked closely with the
manager to selectively invest in enhancements to the physical product to make
the property more attractive to guests or more efficient to operate.
The Company's focus is on maximizing profitability throughout the portfolio by
concentrating on key objectives. The Company works with the manager to achieve
these key objectives, which include evaluating marginal restaurant operations,
exiting low-rate airline room contracts in strengthening markets, reducing
property-level overhead by sharing management positions with other jointly
managed hotels in the vicinity, and selectively making additional investments
where favorable incremental returns are expected.
The Company and its managers will continue to focus on cost control such as the
sharing of managerial and administrative functions among hotels in close
proximity to each other, in an attempt to ensure that hotel sales increases
serve to maximize house and operating profit. While control of fixed costs
serves to improve profit margins as hotel sales increase, it also results in
more properties reaching financial performance levels that allow the manager to
share in growth of profits in the form of incentive management fees. The Company
believes that this strengthens the alignment of the Company's and the managers'
interests.
1996 Acquisitions
The Company acquired the 374-room Toronto Delta Meadowvale hotel for
approximately $25 million in February 1996. In April 1996, the Company acquired
the 400-room Pittsburgh City Center Marriott (formerly the Pittsburgh Hyatt
Regency). The hotel was acquired by a limited partnership, of which a subsidiary
of 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 to the limited partnership to fund the acquisition. The property was
renovated, converted to Marriott brand, and re- opened 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.
Marketing
Fifteen of the Company's 17 hotel properties are operated under the Marriott
brand name. Twelve of these Marriott brand hotels are managed by Marriott
International and three are managed by Interstate Hotel Corporation
("Interstate") under franchise agreements with Marriott International.
Interstate manages another property under a franchise agreement with the Delta
brand. The remaining hotel is managed by Durbin Companies, Inc. as a Holiday Inn
Sunspree Resort. The Company believes that its lodging 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 Marriott Honored Guest Awards and its
companion program, Marriott Miles, continue to expand their memberships, and now
include more than nine million members.
The Marriott reservation system was upgraded significantly in 1994 giving
Marriott 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.
Properties
The following table sets forth certain information relating to each of the
full-service hotel properties owned by the Company at February 28, 1997. All
properties are operated by Marriott International unless otherwise indicated.
Also, the land on which the hotel is built is fee owned by the Company unless
otherwise indicated.
<PAGE>
<TABLE>
<CAPTION>
Location Rooms
- -------- -----
<S> <C>
California
Napa Valley ............................. 191
San Francisco Airport ................... 684
San Francisco Fisherman's Wharf (5) ..... 255
Colorado
Denver Tech ............................. 625
Vail Mountain Resort .................... 349
Florida
Fort Lauderdale Marina .................. 580
Singer Island (Holiday Inn) (4).......... 222
Georgia
Atlanta Northwest (1).................... 400
Indiana
South Bend (3)........................... 300
North Carolina
Charlotte (1)(5)......................... 298
Oregon
Portland ................................ 503
Pennsylvania
Pittsburgh (3)(5)(6)..................... 400
Texas
Dallas/Fort Worth (1).................... 492
Dallas Quorum (3)........................ 547
Virginia
Westfields Conference Center ............ 335
Williamsburg............................. 295
Canada
Toronto Delta Meadowvale(2)(4)........... 374
</TABLE>
(1) Property was acquired by the Company in 1995.
(2) Property was acquired by the Company in 1996.
(3) The land on which the hotel is built is leased by the Company under a long
term lease agreement.
(4) Property is not operated as a Marriott and is not managed by Marriott
International.
(5) Property is currently operated as a Marriott franchised property.
(6) Property purchased by a limited partnership in 1996 in which the Company
owns a 95% interest. The remaining 5% is owned by the manager. The property
was converted to a Marriott in 1996 subsequent to its acquisition.
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 upscale 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 Marriott hotels compete with several other major lodging brands,
including Crowne Plaza, Doubletree, Hyatt, Hilton, Radisson, Red Lion, Sheraton,
Westin, 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. All of its management services are provided by
employees of Host Marriott.
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.
<PAGE>
ITEM 3.LEGAL PROCEEDINGS
The Company is from time to time the subject of, or involved in, judicial
proceedings. Management believes that any liability or loss resulting from such
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's stock is not publicly traded.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial
statement data derived from the Company's consolidated financial statements for
fiscal years 1996, 1995 and the period from September 10, 1994 (inception)
through December 30, 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 1992 and 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
1996 1995 1994
---- ---- ----
(In millions, except ratio data)
<S> <C> <C> <C>
Statement of Operations Data:
Revenues .................................................. $103 $ 72 $ 15
Operating profit before corporate expenses and interest ... 55 37 6
Corporate expenses ........................................ 5 4 1
Interest expense .......................................... 33 16 1
Interest income ........................................... 3 1 1
Net income before extraordinary item(1) ................... 12 11 3
Net income ................................................ 12 8 3
Balance Sheet Data:
Total assets .............................................. $586 $588 $384
Total debt ................................................ 350 350 168
Other Data:
EBITDA(2) ................................................. $ 77 $ 49 $ 10
Depreciation and amortization ............................. 21 14 4
Cash provided by operations ............................... 38 37 10
Cash used in investing activities ......................... 90 116 366
Cash provided by (used in) financing activities ........... (21) 177 367
Ratio of earnings to fixed charges(3) ..................... 1.6x 2.1x 6.0x
EBITDA to cash interest expense ........................... 2.4x 3.1x 10.0x
</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 senior notes indenture (the "Indenture"),
consists of the sum of consolidated net income, interest expense, income
taxes, depreciation and amortization and certain other noncash items.
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 alterative to net income,
operating profit, cash flows from operations, or any other operating or
liquidity performance measure prescribed by generally accepted accounting
principles. Cash expenditures for various long-term assets, interest
expense 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.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results Of Operations
The Company was formed on September 10, 1994 as an indirect, wholly-owned
subsidiary of Host Marriott to acquire and own full- service lodging properties.
As of February 28, 1997, the Company owns 17 full-service properties. None of
these properties were 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.
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 properties have experienced
substantial increases in room revenue per available room ("REVPAR") for
comparable hotels. REVPAR is a commonly used indicator of market performance for
hotels which represents the combination of the daily room rate charged and the
average daily occupancy achieved. REVPAR does not include food and beverage or
other ancillary revenues generated by the property. The REVPAR increases
primarily represent strong percentage increases in room rates, while occupancies
have generally increased slightly for properties that were already operating
under the Marriott brand and increased significantly for those properties
converted to the Marriott brand. 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 segment, to continue, which
management believes should result in improved REVPAR and operating profit at its
hotel properties in the near term. However, there can be no assurance that
REVPAR will continue to increase in the future.
Results of Operations
1996 Compared to 1995
Revenues. Revenues increased $31 million, or 43%, to $103 million in 1996 from
$72 million in 1995 as a result of the addition of three full-service properties
during 1995, the addition of two full-service properties during 1996 and strong
growth in REVPAR. In addition, fiscal year 1996 includes 53 weeks compared to 52
weeks for fiscal year 1995.
Improved results were driven by a strong increase in REVPAR of 12% for
comparable hotels. On a comparable basis, average room rates increased 9% while
average occupancy increased two percentage points reflecting the impact of the
properties converted to the Marriott brand. Management believes REVPAR will
continue to grow in the near future through steady increases in average room
rates, combined with less significant increases in occupancy. However, there can
be no assurance that REVPAR will continue to grow in the future.
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 $14 million, or 40%, to $49 million in 1996 from $35 million in 1995,
primarily reflecting the addition of five properties during 1995 and 1996 and
the growth in comparable revenues. As a percentage of revenues, operating costs
and expenses represented 47% of revenues for 1996 and 48% in 1995.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit increased approximately $18 million
to $55 million, or 53% of revenues, in 1996 from $37 million, or 52% of
revenues, in 1995. Several hotels, including the San Francisco Airport Marriott,
the San Francisco Marriott Fisherman's Wharf and Westfields Conference Resort
posted significant improvements in operating profit. Three properties which were
renovated and converted to the Marriott brand in 1995, the Denver Marriott Tech
Center, Marriott's Vail Mountain Resort and the Williamsburg Marriott, have also
shown significant improvement over the prior year. These gains have been
partially offset by the performance of the South Bend Marriott which experienced
lower operating profit due to increased competition.
Corporate Expenses. Corporate expenses increased $1.1 million to $4.6 million in
1996 from $3.5 million in 1995 primarily due to higher average assets of the
Company which resulted in an increase in the allocation of corporate expenses to
the Company. As a percentage of revenues, corporate expenses decreased from 4.9%
of revenues in 1995 to 4.4% of revenues in 1996.
Interest Expense. Interest expense increased approximately $17 million to $33
million, due to the impact of the increase in the overall level of debt, as well
as a higher average interest rate, as a result of the December 1995 debt
offering.
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 $4.1 million to $12.3 million, or 12% of
revenues, in 1996 from $8.2 million, or 11% of revenues, in 1995 due to improved
lodging results, partially offset by the change in interest expense discussed
above.
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. 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 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 purchased 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 1994 and in 1995. As a percentage of revenues, corporate expenses
decreased from 6.1% of revenues in 1994 to 4.9% 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 $8.2 million, or 11% of revenues, in 1995,
from $2.9 million, or 20% 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's cash flow provided by operations was $38 million in 1996, $37
million in 1995 and $10 million in 1994.
The Company's cash used in investing activities was $90 million, $116 million
and $366 million in fiscal years 1996, 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 1996, the Company acquired the 374-room Toronto Delta Meadowvale hotel
for $25 million and a controlling interest in a venture that owns the 400-room
Pittsburgh Marriott City Center for $18 million. Also during the first quarter
of 1996, the Company acquired for $20 million, a minority interest in a joint
venture owned by Host Marriott that controls two hotels in Mexico City, Mexico.
The Company subsequently sold its interest to Host Marriott for $20 million in
the third quarter of 1996. During 1995, the Company acquired three additional
full-service properties totalling 1,189 rooms for $89 million. 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. During 1994, the Company, or affiliates,
acquired thirteen full- service properties totalling 5,085 rooms for $361
million. Affiliates of the Company acquired four of the thirteen 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 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 incurred approximately $16
million and $14 million in conversion costs for the converted hotels in fiscal
years 1996 and 1995, respectively. Also, during 1996 and 1995, the Company
expended $9 million and $7 million, respectively, in other improvement projects
at existing Marriott hotels and expects to incur an additional $14 million for
these or similar projects in early 1997.
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 $15 million, $9 million and $2 million for fiscal years
1996, 1995 and 1994, respectively. The Company anticipates spending
approximately $18 million in capital expenditures for the renovation and
refurbishment of the Company's existing properties in 1997.
The Company's cash used in financing activities was $21 million in fiscal year
1996. The Company's cash provided by financing activities was $177 million and
$367 million in fiscal years 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 dividends to
parent and 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.
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.
On December 20, 1995, the Company issued $350 million of 9% senior notes (the
"Senior Notes"). The Senior Notes were issued at par and have a final maturity
of December 2007. The net proceeds totalled $340 million and were utilized to
repay in full the outstanding borrowings of $210 million under the Company's
$230 million revolving credit facility (the "Credit Facility"), which was then
terminated, to acquire three full-service properties and to finance future
acquisition of full-service hotel properties with the remaining proceeds. 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 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, 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 will be required to offer to purchase the Senior Notes at par value
with the proceeds of certain asset sales. Distributions of the Company's equity,
including earnings accumulated subsequent to December 20, 1995, 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 and the amount of capital contributions to the
Company subsequent to December 20, 1995. During 1996, the Company made dividends
totalling approximately $20 million to Host Marriott as permitted under the
Indenture.
EBITDA
The Company believes that consolidated Earnings Before Interest Expense, Taxes,
Depreciation and Amortization and certain other noncash items ("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
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"). EBITDA increased $28 million, or 57%, to $77 million in 1996 from $49
million in 1995. The increase in EBITDA is due to the acquisition of five hotels
in 1995 and 1996 as well as an increase in comparable properties' EBITDA of 24%
in 1996. The Company's ratio of EBITDA to cash interest expense (defined as GAAP
interest expense less amortization of deferred financing costs) was 2.4 to 1.0
for 1996 and 3.1 to 1.0 for 1995. The ratio of earnings to fixed charges was 1.6
to 1.0 and 2.1 to 1.0 in 1996 and 1995, respectively. The following is a
reconciliation of EBITDA to income before extraordinary item (in thousands):
<TABLE>
<CAPTION>
Fifty-three Weeks Fifty-two Weeks
Ended Ended
January 3, 1997 December 29, 1995
--------------- -----------------
<S> <C> <C>
EBITDA ............................... $76,623 $49,036
Interest expense ..................... (32,591) (16,266)
Depreciation and amortization ........ (21,246) (14,415)
Income taxes applicable to operations. (8,063) (7,519)
Gain (loss) on dispositions of assets and
other non-cash charges, net ......... (2,380) (17)
------ ------
Income before extraordinary item .... $12,343 $10,819
======= =======
</TABLE>
<PAGE>
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.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
The following financial information is included on the pages
indicated:
Page
<S> <C>
Report of Independent Public Accountants ................................ 16
Consolidated Balance Sheets as of January 3, 1997 and December 29,
1995 .................................................................... 17
Consolidated Statements of Operations for the Fiscal Years Ended
January 3, 1997, December 29, 1995, and the Period from September 10,
1994 (inception) through December 30, 1994 ............................. 18
Consolidated Statements of Shareholder's Equity for the Fiscal Years
Ended January 3, 1997, December 29, 1995 and the Period from September
10, 1994 (inception) through December 30, 1994 ......................... 19
Consolidated Statements of Cash Flows for the Fiscal Years Ended
January 3, 1997, December 29, 1995 and the Period from September 10,
1994 (inception) through December 30, 1994 ............................. 20
Notes to Consolidated Financial Statements .............................. 21
</TABLE>
<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 January 3, 1997 and December 29, 1995,
and the related consolidated statements of operations, shareholder's equity and
cash flows for the two fiscal years ended January 3, 1997 and the period from
September 10, 1994 through December 30, 1994. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule 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 January 3, 1997 and December 29, 1995
and the results of their operations and their cash flows for the two fiscal
years in the period ended January 3, 1997 and the period from September 10, 1994
through December 30, 1994 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at Item
14(a)(2) (Schedule III Real Estate and Accumulated Depreciation) is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
February 28, 1997
<PAGE>
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1997 AND DECEMBER 29, 1995
(in thousands, except share data)
<TABLE>
<CAPTION>
1996 1995
---- ----
ASSETS
<S> <C> <C>
Property and equipment, net ....................... $529,130 $455,602
Due from hotel managers ........................... 16,050 10,915
Other assets ...................................... 7,799 14,671
Cash and cash equivalents ......................... 33,282 107,119
-------- -------
$586,261 $588,307
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt ............................................... $350,000 $350,000
Deferred income taxes .............................. 15,676 9,718
Other liabilities .................................. 4,419 4,839
------- --------
Total liabilities ................................. 370,095 364,557
------- --------
Shareholder's equity
Common stock, 100 shares issued and outstanding ... -- --
Additional paid-in capital ........................ 214,374 214,374
Retained earnings ................................. 1,792 9,376
-------- --------
Total shareholder's equity ....................... 216,166 223,750
------- -------
$586,261 $588,307
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995
AND THE PERIOD FROM
SEPTEMBER 10, 1994 (INCEPTION) THROUGH DECEMBER 30, 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUES .......................................... $103,259 $ 72,163 $ 14,649
-------- -------- --------
OPERATING COSTS AND EXPENSES
Depreciation and amortization .................... 21,246 14,401 4,114
Base and incentive management fees (including fees
to Marriott International, Inc. of $13,007,
$9,980, and $2,025, respectively)................ 14,742 10,906 2,044
Property taxes ................................... 7,924 6,327 1,783
Ground rent, insurance and other ................. 4,662 3,266 563
------- ------- -------
Total operating costs and expenses .............. 48,574 34,900 8,504
------- ------- -------
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND INTEREST ................. 54,685 37,263 6,145
Corporate expenses ................................ (4,582) (3,514) (894)
Interest expense .................................. (32,591) (16,266) (875)
Interest income ................................... 2,894 855 592
------- ------- -------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM ........................... 20,406 18,338 4,968
Provision for income taxes ........................ (8,063) (7,519) (2,037)
-------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM .................. 12,343 10,819 2,931
Extraordinary loss on extinguishment of debt
(net of income tax benefit of $1,408 in 1995) .... -- (2,615) --
-------- ------- -------
NET INCOME ........................................ $ 12,343 $ 8,204 $ 2,931
======== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
<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 FOR THE FISCAL YEARS ENDED DECEMBER 29, 1995 AND JANUARY 3,
1997
(in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-In Retained
Stock Capital Earnings
------ ---------- --------
<S> <C> <C> <C>
Balance, September 10, 1994 (inception)
issuance of 100 shares of
no par common stock (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
Net income ................................. -- -- 12,343
Dividend to Host Marriott Corporation ...... -- -- (19,927)
------- ------- -------
Balance, January 3, 1997 .................. $ -- $214,374 $ 1,792
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995
AND THE PERIOD FROM
SEPTEMBER 10, 1994 (INCEPTION) THROUGH DECEMBER 30, 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ................................................. $ 12,343 $ 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 ............................. 21,246 14,401 4,114
Income taxes .............................................. 7,883 7,436 2,037
Other ..................................................... 658 632 47
Changes in operating accounts:
Due from hotel managers .................................. (1,593) (1,426) 38
Other assets ............................................. 760 1,768 (457)
Other liabilities ........................................ (3,779) 3,415 861
------- ------- -------
Cash provided by operations ............................... 37,518 37,045 9,571
------- ------- -------
INVESTING ACTIVITIES
Acquisitions ............................................... (61,405) (88,931) (360,538)
Net proceeds from sale of assets ........................... 20,000 3,182 --
Capital expenditures ....................................... (40,033) (30,861) (2,366)
Other ...................................................... (8,690) 256 (3,519)
------- -------- -------
Cash used in investing activities ......................... (90,128) (116,354) (366,423)
------- -------- --------
FINANCING ACTIVITIES
Dividend to Host Marriott Corporation ...................... (19,927) -- --
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)
Other ...................................................... (1,300) -- --
------- ------- -------
Cash (used in) provided by financing activities ........... (21,227) 176,598 366,682
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........... (73,837) 97,289 9,830
CASH AND CASH EQUIVALENTS, beginning of year ............... 107,119 9,830 --
------- ------- -------
CASH AND CASH EQUIVALENTS, end of year ..................... $33,282 $107,119 $ 9,830
======= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<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. At January 3, 1997, the Company owned 17 hotels
throughout the United States and Canada, 15 of which are operated under the
Marriott brand.
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 January 3, 1997.
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.
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, insurance and administrative services. Through December 20, 1995, the
Company also utilized Host Marriott's centralized systems for cash management
and substantially all cash received by the Company was deposited in and
commingled with Host Marriott's and Acquisition's general corporate funds.
Subsequent to December 20, 1995, the Company maintained separate cash accounts.
The Company has no employees. Host Marriott provides the services of certain
employees to the Company. Certain operating expenses, capital expenditures and
other cash requirements of the Company are paid by Host Marriott and charged
directly or allocated 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. 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.
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.
Fiscal Year
The Company's fiscal year ends on the Friday nearest to December 31. Fiscal year
1996 includes 53 weeks compared to 52 weeks for fiscal year 1995.
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 in the accompanying statement of operations.
<PAGE>
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.
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.
Reclassifications
Certain amounts have been reclassified for comparative purposes.
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 January 3, 1997 and December
29, 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land .................................. $ 71,634 $ 68,077
Building and leasehold improvements ... 414,440 345,428
Furniture and equipment ............... 54,673 38,587
Construction in progress .............. 24,678 20,388
------- -------
565,425 472,480
Less accumulated depreciation and amortization (36,295) (16,878)
------- -------
$529,130 $455,602
======== ========
</TABLE>
Note 3. DEBT
At January 3, 1997, the Company's debt consists of $350 million of 9.0% senior
notes (the "Senior Notes") which are due December 2007. The Company's revolving
credit and term loan agreement ("Credit Facility") was repaid in full, and
terminated, with a portion of the net proceeds from the offering of the Senior
Notes in December 1995 (the "Offering"). In connection with the repayment of the
Credit Facility in 1995, the Company recognized an extraordinary loss of
$2,615,000 (net of an income tax benefit of $1,408,000).
<PAGE>
The Senior Notes will mature in 2007 and are fully and unconditionally
guaranteed on a joint and several basis by the Company's subsidiaries. The
senior note indenture ("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 Host Marriott
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 cash
interest expense (defined as interest expense under generally accepted
accounting principles less amortization of deferred financing costs) plus the
amount of capital contributions to the Company subsequent to December 20, 1995.
The Company made a distribution of $19,927,000 to Host Marriott in 1996.
Cash paid for interest was $31,815,000, $15,459,000 and $37,000 in 1996, 1995
and 1994, respectively. Deferred financing costs, which are included in other
assets, amounted to $9,235,000 and $8,725,000 at January 3, 1997 and December
29, 1995, respectively. Accumulated amortization of the deferred financing costs
was $791,000 and zero at January 3, 1997 and December 29, 1995, 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 January 3, 1997 and December 29, 1995, the Company had deferred
tax liabilities of approximately $15,658,000 and $9,718,000, respectively,
attributable to accelerated depreciation on its property and equipment.
The income tax provision (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current-Federal ................... $ 1,942 $ (595) $ 486
-State ..................... 163 (103) 126
----- ----- -----
2,105 (698) 612
----- ----- -----
Deferred-Federal .................. 4,888 6,413 1,104
-State .................... 1,070 1,804 321
----- ----- -----
5,958 8,217 1,425
----- ----- -----
$ 8,063 $ 7,519 $ 2,037
======= ======= =======
</TABLE>
A reconciliation of the statutory Federal tax rate to the Company's effective
income tax rate follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory Federal tax rate ................... 35.0% 35.0% 35.0%
State income tax, net of Federal tax benefit.. 3.9 6.0 6.0
Additional tax on foreign source income ...... 0.6 -- --
---- ---- ----
Effective income tax rate .................... 39.5% 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 January 3, 1997 and December 29,
1995, the Company was due $206,000 and $2,300,000, respectively, from Host
Marriott for tax-related balances.
Cash paid for taxes was $180,000 in 1996, $83,000, and zero in 1996, 1995 and
1994, respectively.
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
January 3, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997............................................. $ 2,129
1998............................................. 1,799
1999............................................. 1,441
2000............................................. 1,343
2001............................................. 754
Thereafter....................................... 4,584
-------
Total minimum lease payments..................... $ 12,050
========
</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 $1,870,000, $1,538,000 and $253,000, respectively, for the
fiscal years ended January 3, 1997, December 29, 1995 and December 30, 1994,
including contingent rent of $499,000, $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
17 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 Agreements if specified performance thresholds are not met,
subject to 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 cause 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 management
agreements, the working capital will be returned to the Company. Working capital
advances to Managers as of January 3, 1997 and December 29, 1995 totalled
$9,314,000, and $8,241,000, respectively.
Prior to December 20, 1995, 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 five 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 five 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 three 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 terms of the franchise agreements are from 15 to 30 years. Franchise fees
paid to Marriott International for 1996, 1995 and 1994 were $1,123,000, $746,000
and $14,000, respectively.
Two other hotels are subject to franchise agreements with brands other than
Marriott. The terms of the franchise agreements range from three to ten years.
Franchise fees paid range from 1.5% to 5% of room sales and certain other fees
are paid for reservations and advertising. Franchise fees paid for these
properties, including franchise fees related to the hotel sold in December 1995,
were $300,000 and $430,000 for 1996 and 1995, respectively.
<PAGE>
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 and amortization, base and incentive 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>
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Sales
Rooms ................................... $ 190,633 $ 140,286 $ 29,416
Food and beverage ....................... 92,682 71,903 18,648
Other ................................... 18,573 13,573 3,183
-------- -------- --------
Total Hotel Sales ...................... 301,888 225,762 51,247
-------- -------- --------
Department Costs
Rooms ................................... 46,564 34,971 7,994
Food and beverage ....................... 71,422 56,039 14,251
Other ................................... 10,082 7,676 2,018
-------- -------- --------
Total Department Costs ................. 128,068 98,686 24,263
--------- --------- ---------
Department profit ....................... 173,820 127,076 26,984
Other deductions ........................ (70,561) (54,913) (12,335)
--------- --------- ---------
House Profit ............................ $ 103,259 $ 72,163 $ 14,649
========= ========= =========
</TABLE>
Note 8. ACQUISITIONS AND DISPOSITION
In the first quarter of 1996, the Company purchased a hotel for approximately
$25 million. The Company also purchased a controlling interest in a venture that
owns another full-service property for approximately $18 million.
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 a 492-room hotel 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.
Note 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's obligations under the Senior Notes is estimated
to be $354 million and $350 million at January 3, 1997 and December 29, 1995,
respectively. The Senior Notes are valued based on the quoted market price. The
fair values of other financial instruments are estimated to be equal to their
carrying value.
Note 10. SUPPLEMENTAL GUARANTOR SUBSIDIARIES INFORMATION
All of the subsidiaries of the Company guarantee the Senior Notes. The separate
financial statements of each guaranteeing subsidiary (each, a "Guarantor
Subsidiary") are not presented because the Company's management has concluded
that such financial statements are not material to investors. The guarantee of
each Guarantor Subsidiary is full and unconditional and joint and several and
each Guarantor Subsidiary is a wholly-owned subsidiary of the Company. At
February 28, 1997, there is no subsidiary of the Company the capital stock of
which comprises a substantial portion of the collateral for the Senior Notes
within the meaning of Rule 3-10 of Regulation S-X.
<PAGE>
Summarized operating results of the Guarantor Subsidiaries are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues ...................... $ 18,129 $ 10,801 $ 2,808
Operating profit............... 11,413 7,208 1,838
Net income .................... 3,250 2,906 912
</TABLE>
Summarized balance sheet information of the Guarantor Subsidiaries consist of
the following as of January 3, 1997 and December 29, 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Property and equipment, net . . . . . . $ 94,427 $ 63,044
Other assets. . . . . . . . . . . . . . 6,853 5,333
------- -------
Total assets . . . . . . . . . . . . . $ 101,280 $ 68,377
========= =========
Debt. . . . . . . . . . . . . . . . . . $ 60,465 $ 40,679
Other liabilities . . . . . . . . . . . 8,387 --
------- -------
Total liabilities. . . . . . . . . . . 68,852 40,679
Equity. . . . . . . . . . . . . . . . . 32,428 27,698
------- -------
Total liabilities and equity . . . . . $ 101,280 $ 68,377
========= =========
</TABLE>
The operating results and balance sheet information include the pushed down
effects of that portion of the Company's debt and corporate expenses allocated
to the Guarantor Subsidiaries.
Note 11. LITIGATION
The Company is from time to time the subject of, or involved in, judicial
proceedings. Management believes that any liability or loss resulting from such
matters would not have a material adverse effect on the consolidated financial
position or results of operations of the Company.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The Company's directors, executive officers and management are employees of Host
Marriott. Certain information required by Items 10-13 is incorporated by
reference from the Host Marriott 1997 Annual Meeting of Shareholders - Notice
and Proxy Statement.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to the persons who are
executive officers of the Company.
<TABLE>
<CAPTION>
Other Positions and
Business Experience Prior to
Becoming an Executive Officer
Name and Title Age of the Company
- --------------- --- ----------------------------------
<S> <C> <C>
Robert E. Parsons, Jr. 41 Robert E. Parsons, Jr. joined Host Marriott's Corporate Financial Planning
President and Director staff in 1981 and was made Assistant Treasurer in 1988. In 1993, Mr. Parsons 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 of the Company in 1993 and was elected
Senior Vice President in 1995. In 1996, Mr. Parsons was elected President and
Director of the Company.
Christopher G. Townsend 49 Christopher G. Townsend joined Host Marriott's Law Department in 1982 as a
Executive Vice President Senior Attorney. In 1984, Mr. Townsend was made Assistant Secretary of Host
and Director Marriott, and in 1986, he was made Assistant General Counsel. In 1993, Mr. Townsend
was elected Senior Vice President, Corporate Secretary and Deputy General Counsel of
Host Marriott. In January 1997, he was elected General Counsel of Host Marriott.
Mr. Townsend was elected Vice President of the Company in 1993, Senior Vice President
in 1995, and Executive Vice President and Director in 1996.
Bruce D. Wardinski 36 Bruce Wardinski joined Host Marriott in 1987 as a Senior Financial
Vice President and Analyst of Financial Planning & Analysis and was named Manager in June 1988. He was
Treasurer appointed Host Marriott's Director of Financial Planning & Analysis in 1989, Director
of Project Finance in January 1990, Senior Director of Project Finance in June
1993, Vice President of Project Finance in June 1994, and Senior Vice President of
International Development in October 1995. In 1996, Mr. Wardinski was named Senior Vice
President and Treasurer of Host Marriott. Also in 1996, Mr. Wardinski was elected Vice
President and Treasurer of the Company. Prior to joining Host Marriott, Mr. Wardinski
was with the public accounting firm of Price Waterhouse.
Donald D. Olinger 38 Donald D. Olinger joined Host Marriott in 1993 as Director - Corporate Accounting.
Vice President and Later in 1993, Mr. Olinger was promoted to Senior Director and Assistant Controller
Corporate Controller of Host Marriott. He was promoted to Vice President - Corporate Accounting in 1995.
In 1996, he was elected Senior Vice President and Corporate Controller of Host
Marriott. Mr. Olinger was elected Vice President and Corporate Controller of the
Company in 1996. Prior to joining Host Marriott, Mr. Olinger was with the public
accounting firm of Deloitte & Touche.
</TABLE>
Item 11. EXECUTIVE COMPENSATION
The officers and directors of the Company are employees of Host Marriott and are
compensated by Host Marriott. The officers and directors are required to devote
to the Company such time as may be necessary for the proper performance of their
duties, but are not required to devote their full time to the performance of
such duties. No officer or director of the Company receives any compensation
from the Company.
Certain general and administrative costs of Host Marriott are allocated to the
Company; such allocations totaled $4.6 million, $3.5 million and $0.9 million in
1996, 1995 and 1994, respectively.
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company operates as a unit of Host Marriott and HMC Acquisitions, Inc.,
utilizing Host Marriott's employees, insurance and administrative services. Host
Marriott contracts with Marriott International for certain of these services. In
addition, Host Marriott provides certain corporate, general and administrative
services to the Company.
Additional information regarding certain relationships and related transactions
of the Company are incorporated by reference from the Host Marriott 1997 Annual
Meeting of Shareholders - Notice and Proxy Statement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
All financial statements of the registrant as set forth
under Item 8 of this Report on Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
The following financial information is filed herewith on
the pages indicated.
Financial Schedule:
III. Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial
statements or notes thereto.
<PAGE>
(3) EXHIBITS
Exhibit No. Description
3.1 Certificate of Incorporation of the Company
3.2 Bylaws of the Company
4.1 Indenture dated as of December 20, 1995, by and among the Company, HMC SFO,
Inc. as Subsidiary guarantor and Marine Midland Bank, as Trustee, with
respect to the 9% Senior Notes due 2007 to the Company.
4.2 First Supplemental Indenture, dated as of April 16, 1996, by and among the
Company, HMC AP Canada, Inc. as Subsidiary Guarantor and Marine Midland
Bank, as Trustee, with respect to the 9% Senior Notes due 2007 of the
Company.
10.1 Purchase Agreement, dated as of December 15, 1995, by and among the
Company, HMC SFO, Inc. as Subsidiary Guarantor and Donaldson, Lufkin &
Jenrette Securities Corporation, BT Securities Corporation, Goldman Sachs &
Co., Citicorp Securities, Inc., Montgomery Securities, Salomon Brothers,
Inc., and Smith Barney, Inc. as the Initial Purchasers.
10.2 Registration Agreement, dated as of December 20, 1995, by and between the
Company, HMC SFO, Inc. as Subsidiary Guarantor and Donaldson, Lufkin &
Jenrette Securities Corporation, BT Securities Corporation, Goldman Sachs &
Co., Citicorp Securities, Inc., Montgomery Securities, Salomon Brothers,
Inc., and Smith Barney, Inc. as the Initial Purchasers.
10.3 Management Agreement between HMC Acquisition Properties, Inc. and Marriott
Hotel Services, Inc.
12 Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of HMC Acquisition Properties, Inc.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized, on this 27th day of March, 1997.
HMC Acquisition Properties, Inc.
By /s/ Robert E. Parsons,Jr.
-------------------------
Robert E. Parsons Jr.
President and Director
Pursuant to the requirements of the Securities Act of 1934,
this Form 10-K has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ ROBERT E. PARSONS, JR. President and Director March 27, 1997
- ---------------------------
Robert E. Parsons, Jr. (Principal Executive Officer)
/s/ CHRISTOPHER G. TOWNSEND Executive Vice President March 27, 1997
- ---------------------------
Christopher G. Townsend and Director
/s/ BRUCE D. WARDINSKI Vice President and Treasurer March 27, 1997
- ---------------------------
Bruce D. Wardinski (Principal Financial Officer)
/s/ DONALD D. OLINGER Vice President and March 27, 1997
- ---------------------------
Donald D. Olinger Corporate Controller
(Principal Accounting Officer)
</TABLE>
<PAGE>
Schedule III
Page 1 of 2
HMC ACQUISITION PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
January 3, 1997
(in thousands)
<TABLE>
<CAPTION>
Gross Amount at
Initial Costs January 3, 1997
-------------------- ----------------------------
Subsequent Date of
Buildings & Costs Buildings & Accumulated Completion of
Land Improvements Capitalized Land Improvements Total Depreciation Construction
---- ------------ ----------- ---- ------------ ----- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Full-service Hotels:
Dallas Marriott Quorum
Dallas, TX ................. $ 0 $ 26,749 $ 1,139 $ -- $ 27,888 $ 27,888 $ (1,725) N/A
Denver Marriott Tech Center
Denver, CO ................. 6,401 26,200 492 6,401 26,692 33,093 (1,393) N/A
Ft. Lauderdale Marina Marriott
Ft. Lauderdale, FL ......... 6,135 30,036 1,638 6,135 31,674 37,809 (3,265) N/A
Marriott Mountain Resort at Vail
Vail, CO ................... 4,407 19,851 5,956 4,407 25,807 30,214 (1,248) N/A
Portland Marriott
Portland, OR ............... 5,545 39,981 2,102 5,545 42,083 47,628 (2,259) N/A
San Francisco Airport Marriott
San Francisco, CA .......... 11,090 47,724 8,090 11,090 55,814 66,904 (2,863) N/A
San Francisco Marriott-
Fisherman's Wharf
San Francisco, CA .......... 6,000 20,208 -- 6,000 20,208 26,208 (1,052) N/A
Westfields International
Conference Center
Chantilly, VA .............. 6,611 32,187 1,367 6,611 33,554 40,165 (2,089) N/A
Atlanta Northwest Marriott
Atlanta, GA. ............... 4,988 19,848 -- 4,988 19,848 24,836 (501) N/A
Dallas Fort Worth Airport
Marriott
Dallas, TX ................. 5,998 37,262 1,875 5,998 39,137 45,135 (1,563) N/A
Other full-service properties, each
less than 5% of total ...... 14,459 80,566 11,169 14,459 91,735 106,194 (3,165) N/A
------ ------ ------ ------ ------ ------- -------
Total ......................... $ 71,634 $380,612 $ 33,828 $ 71,634 $ 414,440 $ 486,074 $(21,123)
========= ========= ========= ======== ========= ========= =========
<CAPTION>
Depreciation
Description Date Acquired Life
- ----------- ------------- -------------
<S> <C> <C>
Full-service Hotels:
Dallas Marriott Quorum
Dallas, TX. . . . . . . . . . 1994 40
Denver Marriott Tech Center
Denver, CO. . . . . . . . . . 1994 40
Ft. Lauderdale Marina Marriott
Ft. Lauderdale, FL. . . . . . 1994 40
Marriott Mountain Resort at Vail
Vail, Co. . . . . . . . . . . 1994 40
Portland Marriott
Portland, OR 1994 40
San Francisco Airport Marriott
San Francisco, CA. . . . . . 1994 40
San Francisco Marriott-
Fisherman's Wharf
San Francisco, CA. . . . . . 1994 40
Westfields International
Conference Center
Chantilly, VA. . . . . . . . 1994 40
Atlanta Northwest Marriott
Atlanta, GA. . . . . . . . . 1995 40
Dallas Fort Worth Airport
Marriott
Dallas, TX. . . . . . . . . . 1995 40
Other full-service properties,
each less than 5% of total. . Various 40
</TABLE>
<PAGE>
Schedule III
Page 2 of 2
HMC ACQUISITION PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
January 3, 1997
(in thousands)
Notes:
(A) The change in total cost of properties for the fiscal years ended January
3, 1997, December 29, 1995 and December 30, 1994 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1993 $ --
Additions:
Acquisitions 333,762
Capital expenditures 990
-------
Balance at December 30, 1994 334,752
Additions:
Acquisitions 81,908
Capital expenditures 1,902
Deductions:
Dispositions and other (5,057)
-------
Balance at December 29, 1995 413,505
Additions:
Acquisitions 38,862
Capital expenditures 33,707
-------
Balance at January 3, 1997 $ 486,074
=========
</TABLE>
(B) The change in accumulated depreciation and amortization for the fiscal
years ended January 3, 1997, December 29, 1995 and December 30, 1994 is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1993 $ --
Depreciation and amortization 2,268
-------
Balance at December 30, 1994 2,268
Depreciation and amortization 7,310
-------
Balance at December 29, 1995 9,578
Depreciation and amortization 11,545
-------
Balance at January 3, 1997 $ 21,123
=========
</TABLE>
(C) The aggregate cost of properties for Federal income tax purposes is
approximately $405,000 at January 3, 1997.
EXHIBIT 12
HMC ACQUISITION PROPERTIES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands, except ratio amounts)
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Income from operations before income taxes ..... $ 20,405 $ 18,338 $ 4,968
Add (deduct):
Fixed charges ................................. 33,208 16,778 984
------ ------ ------
Adjusted earnings .............................. $ 53,613 $ 35,116 $ 5,952
========= ========= =========
Fixed charges:
Interest on indebtedness and amortization of deferred
financing costs .............................. $ 32,591 $ 16,266 $ 875
Portion of rents representative of the interest factor 617 512 109
------ ------ ------
Total fixed charges ........................... $ 33,208 $ 16,778 $ 984
========= ========= =========
Ratio of earnings to fixed charges ............ 1.6x 2.1x 6.0x
========= ========= =========
</TABLE>
EXHIBIT 21
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE OF SUBSIDIARIES
HMC SFO, Inc.
HMC AP Canada, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from HMC
Acquisition Properties, Inc. and Subsidiaries Consolidated Balance Sheets and
Consolidated Statements of Operations as of and for the year ended January 3,
1997 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001007076
<NAME> HMC Acquisition Properties, Inc.
<MULTIPLIER> 1,000
<CURRENCY> $US
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Jan-03-1997
<PERIOD-START> Dec-30-1995
<PERIOD-END> Jan-03-1997
<EXCHANGE-RATE> 1
<CASH> 33,382
<SECURITIES> 0
<RECEIVABLES> 16,050
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 565,425
<DEPRECIATION> 36,295
<TOTAL-ASSETS> 586,261
<CURRENT-LIABILITIES> 0
<BONDS> 350,000
0
0
<COMMON> 0
<OTHER-SE> 216,166
<TOTAL-LIABILITY-AND-EQUITY> 586,261
<SALES> 0
<TOTAL-REVENUES> 103,259
<CGS> 0
<TOTAL-COSTS> 48,574
<OTHER-EXPENSES> 4,582
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,591
<INCOME-PRETAX> 20,406
<INCOME-TAX> 8,063
<INCOME-CONTINUING> 12,343
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,343
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
