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
HMH PROPERTIES, INC.
Delaware 52-1822042
(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
$600,000,000 (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 HMH Properties, Inc. (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
The Company is a direct wholly-owned subsidiary of Host Marriott Hospitality,
Inc. ("Hospitality") which is a direct wholly-owned subsidiary of Host Marriott
Corporation ("Host Marriott"). The Company's assets principally consist of the
Company's 32 full-service hotel properties, one partnership investment and a
note receivable from an affiliate. All but four of the Company's 32 lodging
properties are managed by Marriott International, Inc. ("Marriott
International") and all but one are operated under the Ritz-Carlton or Marriott
brands, which are among the most respected and widely recognized in the lodging
industry. Based on industry data, the Company believes that its hotels
consistently outperform the industry's average occupancy rate by a significant
margin, and averaged 77.8% occupancy for 1996 compared to a 71.1% average
occupancy for competing full-service hotels in the upscale full-service segment
of the lodging industry (the segment which is most representative of the
Company's full-service hotels during the period).
The lodging industry as a whole, and the upscale and luxury full-service hotel
segments in particular, are benefiting from an improved supply and demand
relationship in the United States. 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 in the
full-service segment is attributable to many factors including the limited
availability of attractive building sites for full-service hotels, the lack of
available financing for new full-service hotel construction and the availability
of existing full-service properties for sale at a discount to their replacement
cost. The relatively high occupancy rates of the Company's hotels, along with
the increased demand for full-service hotel rooms have allowed the managers of
the Company's hotels to increase average daily room rates by primarily replacing
certain discounted group business with higher- rated group and transient
business and by selectively raising room rates. As a result, on a comparable
basis, room revenues per available room ("REVPAR") for full-service properties
increased approximately 9% for 1996 over the comparable period for the prior
year. Furthermore, because the lodging property operations have a high-fixed
cost component, increases in REVPAR generally yield greater percentage increases
in EBITDA (as defined herein). Accordingly, the approximate 9% increase in
REVPAR resulted in an approximate 12% increase in comparable full- service hotel
EBITDA in 1996. The Company expects this supply/demand imbalance, particularly
in the upscale and luxury full-service segments to continue, which should result
in improved REVPAR and EBITDA at its hotel properties in the near term, however,
there can be no assurance that 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 portfolio and acquiring additional
high-quality, full-service hotel properties as conditions, principally the
availability of capital, permit. The Company believes that the upscale and
luxury full-service segment of the market offers numerous opportunities to
acquire assets at attractive multiples of cash flow and at substantial discounts
to
<PAGE>
replacement value, including under-performing hotels which can be improved by
conversion to the Marriott or Ritz- Carlton brands.
There is a very limited new supply of upscale and luxury full-service hotel
rooms currently under construction. According to Smith Travel Research, from
1988 to 1991, upscale full-service room supply for the Company's competitive set
increased an average of approximately 4% annually which resulted in an
oversupply of rooms in the industry. However, this growth slowed to an average
of approximately 1.0% 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 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 and luxury full-service segments
through 2000.
The Company intends to grow its full-service hotel portfolio as cash flow
becomes available from operations or through 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, rather than
pursue the outright acquisition of a property, when it believes its return on
investment will be maximized by so doing. However, under the senior notes
indenture, the ability to invest in joint ventures is limited. 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 its bond 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 and
Ritz-Carlton brand names due to its relationship with Marriott International.
Host Marriott and the Company have acquired a number of properties from
inadvertent owners at significant discounts to replacement cost, including
luxury hotels operating under the Ritz-Carlton brand. Many desirable hotel
properties are currently held by inadvertent owners such as banks, insurance
companies and other financial institutions which are motivated and willing
sellers. 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.
In 1996, the Company acquired seven full-service properties with 2,350 rooms for
approximately $249 million, including the acquisition, through foreclosure, of a
controlling interest in the 250-room Newport Beach Marriott Suites. Subsequent
to year end, the Company acquired the 306-room Ritz-Carlton, Marina del Rey, for
approximately $57 million. The Company acquired four full-service properties
(1,944 rooms) for approximately $240 million in 1995. During 1994, the Company
acquired two full-service properties with 959 rooms for approximately $80
million. The Company also provided 100% financing totaling $35 million to a
partnership, in which a related party of the Company owns the sole general
partner interest, for the partnership's acquisition of two full-service hotels
with 684 rooms. The Company accounts for these properties as owned hotels for
accounting purposes.
Consistent with its strategy of focusing on the full-service segment of the
lodging industry, the Company has opportunistically sold certain of its
properties. During 1994, the Company sold 26 of its 30 Fairfield Inns and all of
its 14 senior living communities. During the first and third quarters of 1995,
the Company sold to and leased back from an unrelated real estate investment
trust (the "REIT") 37 of its Courtyard properties. Also, in the second quarter
of 1995, the Company sold its remaining four Fairfield Inns for approximately $6
million in cash. In the first and second quarters of 1996, the Company entered
into an agreement with the REIT and sold and leased back 16 Courtyard properties
and 18 Residence Inns for approximately $349 million (10% of which was
deferred). Host Marriott purchased the Company's rights to the deferred proceeds
and obligations under the lease for the 16 Courtyard properties at their fair
market value. With the completion of these transactions, 100% of the Company's
owned properties are in the full-service segment. The Company has reinvested
substantially all of the proceeds in the acquisition of full-service lodging
properties.
In connection with the May 1995 debt offering, Host Marriott Travel Plazas, Inc.
("HMTP"), a subsidiary of Hospitality, transferred two full-service hotels to
the Company, and the Company transferred certain undeveloped land parcels, a
note receivable and certain leases and the deferred proceeds related to the
Company's Courtyard properties sold in 1995 to subsidiaries of Hospitality.
Hotel Lodging Industry
The lodging industry as a whole, and the upscale and luxury 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 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 continued to exceed inflation. 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 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 1990 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 slow down 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 over-building in the mid-to-late 1980s, many full-service
hotels built have not performed as originally planned. Cash flow has often not
covered debt service requirements, causing lenders (e.g., banks, insurance
companies, and savings and loans) to foreclose and become "inadvertent owners"
who are motivated to sell these assets. In the Company's experience to date,
these sellers have been primarily U.S. financial organizations. The Company
believes that numerous international financial institutions are also inadvertent
owners of lodging properties and expects there will be increased opportunities
to acquire lodging properties from international financial institutions. While
the interest of inadvertent owners to sell has created attractive acquisition
opportunities with strong current yields, the lack of supply growth and
increasing room night demand should contribute to higher long-term returns on
invested capital. Given the relatively long lead time to develop urban,
convention and resort hotels, as well as the lack of project financing,
management believes the growth in room supply in this segment will be limited
for an extended period of time.
<PAGE>
Hotel Lodging Properties
The Company's hotel lodging properties represent quality assets in the
full-service lodging segments. All but one of the Company's hotel properties are
operated under the Marriott or Ritz-Carlton brand names. The Company's lodging
portfolio consists of 32 properties with 12,432 rooms as of February 28, 1997.
One commonly used indicator of market performance for hotels is revenue per
available room, or REVPAR, which measures daily room revenues generated on a per
room basis. This does not include food and beverage or other ancillary revenues
generated by the property. REVPAR represents the combination of the average
daily room rate charged and the average daily occupancy achieved. The Company
has reported annual increases in REVPAR since 1993.
To maintain the overall quality of the Company's lodging properties, each
property undergoes refurbishments and capital improvements on a regularly
scheduled basis. Typically, refurbishing has been provided at intervals of five
years, based on an annual review of the condition of each property. In fiscal
years 1996, 1995 and 1994, the Company spent $24 million, $19 million and $29
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.
Full-Service Hotels. All but four of the full-service hotels owned by the
Company are managed by Marriott International and all but one are part of
Marriott International's full-service hotel system. 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 serve business and pleasure travelers and group meetings at
locations in downtown and suburban areas, near airports and at resort locations
throughout the United States. The average age of the full-service properties is
12 years, several of which have had substantial renovations or major additions.
During 1996, the Company acquired seven full-service properties with 2,350 rooms
for approximately $249 million. In 1995, the Company acquired four full-service
properties with 1,944 rooms for approximately $240 million, including $94
million of mortgage debt on two of the properties. During 1994, the Company
acquired two full-service properties with 959 rooms for approximately $80
million. The Company also provided 100% financing totaling $35 million to a
partnership, in which a related party of the Company owns the sole general
partner interest, for the partnership's acquisition of two full-service hotels
with 684 rooms. The Company accounts for these properties as owned hotels for
accounting purposes.
The chart below sets forth performance information for the Company's comparable
full-service hotels:
<TABLE>
<CAPTION>
1996 1995
--------- -------
<S> <C> <C>
Number of properties. . . . . . . . . . . . . . . . . . . . . . . . 18 18
Number of rooms . . . . . . . . . . . . . . . . . . . . . . . . . . 7,281 7,281
Average daily rate. . . . . . . . . . . . . . . . . . . . . . . . . $100.76 $95.53
Occupancy % . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77.5% 74.8%
REVPAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $78.06 $71.51
REVPAR % change . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2% --
</TABLE>
<PAGE>
The chart below sets forth performance information for the Company's existing
full-service hotels for fiscal years 1994 through 1996.
<TABLE>
<CAPTION>
1996(1) 1995 (1)(2) 1994 (1)
----------- ----------- --------
<S> <C> <C> <C>
Number of properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 20 16
Number of rooms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,871 8,071 6,699
Average daily rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $107.98 $95.24 $83.47
Occupancy % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77.8% 74.7% 77.4%
REVPAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $84.01 $71.15 $64.64
REVPAR % change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.1% 10.1% 6.5%
</TABLE>
(1) Excludes the information related to the 255-room Elk Grove Suites hotel
which is leased to a national hotel chain through 1997.
(2) Excludes the information related to the 820-room Marriott World Trade
Center acquired in the last week of 1995.
Revenues in 1996 for nearly all of the Company's full-service hotels were
improved or comparable to 1995 results. 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 9% as average room rates increased
over 5% and average occupancy increased almost three percentage points. Overall,
this resulted in strong house profit margins, which increased almost two
percentage points, and excellent growth in sales, which expanded at a 9% rate
for comparable hotels. The Company believes that its hotels consistently
outperform the industry's average REVPAR growth rates. The relatively high
occupancy rates of the Company's hotels, along with increased demand for
full-service hotel rooms, have allowed the managers of the Company's hotels to
increase average room rates by primarily replacing certain discounted group
business with higher-rated group and transient business and by selectively
raising room rates. The Company believes that these favorable REVPAR growth
trends should continue due to the limited new construction of full- service
properties.
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 the managers will continue to focus on cost control in an
attempt to ensure that hotel sales increases serve to maximize house and
operating profit. While control of fixed costs serves to improve profit margins
as hotel sales increase, it also results in more properties reaching financial
performance levels that allow the managers to share in growth of profits in the
form of incentive management fees. The Company believes this is a positive
development as it strengthens the alignment of the Company's and the managers'
interests.
Residence Inns. The Company's leased Residence Inns are extended-stay,
limited-service hotels which cater primarily to business and family travelers
who stay more than five consecutive nights. Residence Inns typically have 80 to
130 studio and two-story penthouse suites. Residence Inns generally are located
in suburban settings throughout the United States and feature a series of
residential style buildings with landscaped walkways, courtyards and
recreational areas. Residence Inns do not have restaurants, but offer
complimentary continental breakfast. In addition, most Residence Inns provide a
complimentary evening hospitality hour. Each suite contains a fully equipped
kitchen, and many suites have woodburning fireplaces. The Residence Inns leased
by the Company are among the newest in the Residence Inn system, averaging only
six years old.
<PAGE>
The table below sets forth performance information for the Residence Inns for
fiscal years 1994 through 1996.
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Number of properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 18 18
Number of rooms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,178 2,178 2,178
Average daily rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $90.82 $85.07 $79.58
Occupancy % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85.1% 86.6% 85.6%
REVPAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $77.29 $73.67 $68.12
REVPAR % change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9% 8.2% 7.9%
</TABLE>
For 1996, the Company's Residence Inns performed well with advances in room
rates of almost 7%, although occupancy decreased by over one percentage point.
Continued popularity of this product with customers combined with increasing
business travel resulted in superior performance for 1996. At an average
occupancy rate of 85.1% for 1996, these properties were near full occupancy
during the business week and enjoyed high occupancy during the weekends. Given
this strong demand, the Company's Residence Inns were able to improve room rates
through managing their mix of business.
During the first and second quarters of 1996, the Company entered into an
agreement with the REIT and sold and leased back 18 of the Company's Residence
Inns for approximately $172 million. The Company received net proceeds of $155
million and will receive approximately $17 million upon expiration of the
leases.
Courtyard. During the first and third quarters of 1995, 37 of the Company's
Courtyard properties were sold to and leased back from the REIT. The Company
transferred its rights to receive the deferred proceeds and obligations to
perform under the leases to a subsidiary of Host Marriott in the second and
third quarters of 1995.
During the first and second quarters of 1996, the Company sold and leased back
16 additional Courtyard properties from the REIT. A subsidiary of Host Marriott
purchased the Company's rights to the deferred proceeds and obligations under
the lease for the properties at their fair market value of approximately $13
million. Through the date of their disposition, 1996 revenues and operating
profit for the Courtyard properties were comparable to 1995.
Marketing
All but four of the Company's hotel properties, at February 28, 1997, are
managed by Marriott International as Marriott or Ritz-Carlton brand hotels.
Three of the four remaining hotels are operated as a Marriott brand hotel under
a franchise agreement with Marriott International. 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 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 and Ritz-Carlton 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 fully occupied.
<PAGE>
Properties
The following table sets forth certain information as of February 28, 1997
relating to each of the Company's hotels. All of the properties are operated
under Marriott or Ritz-Carlton brands by Marriott International, unless
otherwise indicated.
Location Rooms
- --------- -----
California
Newport Beach . . . . . . . . . . . . . . . . . . . . . . . . . 570
Newport Beach Suites(7) . . . . . . . . . . . . . . . . . . . . 250
Marina Beach(3)(8). . . . . . . . . . . . . . . . . . . . . . . 368
The Ritz-Carlton,
Marina del Rey(11) . . . . . . . . . . . . . . . . . . . . . 306
Colorado
Denver West(8). . . . . . . . . . . . . . . . . . . . . . . . . 307
Connecticut
Hartford--Rocky Hill(8) . . . . . . . . . . . . . . . . . . . . 251
Florida
Jacksonville(5)(10)(8). . . . . . . . . . . . . . . . . . . . . 256
Miami Airport(8). . . . . . . . . . . . . . . . . . . . . . . . 782
Palm Beach Gardens(5)(10) . . . . . . . . . . . . . . . . . . . 279
Tampa Airport(8). . . . . . . . . . . . . . . . . . . . . . . . 295
Tampa Westshore(1). . . . . . . . . . . . . . . . . . . . . . . 309
Georgia
Atlanta Norcross. . . . . . . . . . . . . . . . . . . . . . . . 222
Atlanta Perimeter(8). . . . . . . . . . . . . . . . . . . . . . 400
The Ritz-Carlton, Atlanta(5). . . . . . . . . . . . . . . . . . 447
Illinois
Chicago-Deerfield Suites(4) . . . . . . . . . . . . . . . . . . 248
Chicago-Elk Grove Suites(4)(9). . . . . . . . . . . . . . . . . 255
Chicago-Downtown Courtyard. . . . . . . . . . . . . . . . . . . 334
Maryland
Bethesda(8). . . . . . . . . . . . . . . . . . . . . . . . . . 407
Gaithersburg-Washingtonian Center. . . . . . . . . . . . . . . 284
Missouri
Kansas City Airport(8) . . . . . . . . . . . . . . . . . . . . 382
New Jersey
Newark Airport(8). . . . . . . . . . . . . . . . . . . . . . . 590
New York
Marriott World Trade Center(3)(8). . . . . . . . . . . . . . . 820
North Carolina
Raleigh Crabtree Valley(1) . . . . . . . . . . . . . . . . . . 375
Oklahoma
Oklahoma City(5) . . . . . . . . . . . . . . . . . . . . . . . 354
Texas
Houston Airport (8). . . . . . . . . . . . . . . . . . . . . . 566
J.W. Marriott Houston(2) . . . . . . . . . . . . . . . . . . . 503
Plaza San Antonio(3)(10) . . . . . . . . . . . . . . . . . . . 252
San Antonio Riverwalk (3)(8) . . . . . . . . . . . . . . . . . 500
Utah
Salt Lake City(5)(8) . . . . . . . . . . . . . . . . . . . . . 510
Virginia
Pentagon City(6) . . . . . . . . . . . . . . . . . . . . . . . 300
Washington-Dulles Suites(5). . . . . . . . . . . . . . . . . . 254
Washington, D.C.
Washington Metro Center(2) . . . . . . . . . . . . . . . . . . 456
(1) These hotels are owned by an affiliated partnership of the Company. A
subsidiary of the Company provided 100% non-recourse financing totaling
approximately $35 million to the partnership, in which an affiliate of the
Company owns the sole general partner interest, for the acquisition of
these hotels. The Company accounts for these properties as owned hotels for
accounting purposes.
(2) Property acquired by the Company in 1994.
(3) Property acquired by the Company in 1995.
(4) Transferred to the Company from a subsidiary of Hospitality in 1995.
(5) Property acquired by the Company in 1996.
(6) The Company completed construction and opened this property in 1996.
(7) The Company acquired, through foreclosure, a controlling interest in the
hotel in 1996. The Company had previously purchased an 83% interest in the
mortgage loans secured by the hotel in 1996.
(8) The land on which the hotel is built is leased by the Company under a
long-term lease agreement.
(9) Property is not operated as Marriott and is not managed by Marriott
International.
(10) Property is operated as a Marriott franchised property.
(11) Property acquired by the Company in 1997.
Senior Living Communities
Until mid-1994, the Company owned 14 senior living communities located in seven
states. These communities offer independent living apartments, assisted living
services and skilled nursing care. Certain of these senior living communities
are operated under the trade names Brighton Gardens and Stratford Court.
Commencing with the Distribution, these communities were leased to and operated
by Marriott International.
During the second and third quarters of 1994, the Company sold its 14 senior
living communities to an unrelated third party for $320 million, which
approximated the communities' carrying value.
Investments In Affiliated Partnerships and Notes Receivable
In connection with the sale of seven hotels to an affiliated partnership in
1984, the Company received as proceeds $168 million ($140 million at January 3,
1997) in notes receivable that are secured by non-recourse mortgages on the
underlying properties. The notes mature on December 31, 2003 and bear interest
at 9%. These notes require principal paydown of approximately 44% of the
original principal amount prior to maturity. While payments on these notes have
been current since 1994, there have been instances in the past when payments
were delinquent, and there can be no assurance that such delinquencies will not
occur in the future.
During 1994, Host Marriott transferred to the Company a 49% limited partner
interest in an affiliate that owns a hotel in Santa Clara, California in
exchange for $30 million in cash. The difference between the cash transferred to
Host Marriott and the carried-over cost basis of the 49% interest, net of the
related tax effects, has been charged to additional paid-in capital. The
investment is accounted for using the equity method.
Competition
The cyclical nature of the U.S. 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 precipitated a construction boom that
created an oversupply of hotel rooms. The Company expects the U.S. upscale
full-service hotel supply/demand imbalance to continue to improve over the next
few years as room demand continues to grow and room supply growth is expected to
be minimal, in particular in the full-service segment.
The Company's hotels compete with several other major lodging brands in each
segment in which they operate. Competition in the industry is based primarily on
the level of service, quality of accommodations, convenience of locations and
room rates. The following table presents key participants in segments of the
lodging industry in which the Company competes:
Segment Representative Participants
- ------------------ ---------------------------
Luxury/Full-Service Ritz-Carlton; Four Seasons
Upscale/Full-Service Marriott Hotels, Resorts and Suites; Crowne Plaza;
Doubletree; Hyatt; Hilton; Radisson; Red Lion;
Sheraton; Westin; Wyndham
Extended-Stay Residence Inn; Homewood Suites; Embassy Suites;
Oakwood Apartments
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, ordinaces 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 materisl ("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.
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.
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common 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 as
of and for the five most recent fiscal years ended January 3, 1997. The
Company's Consolidated Financial Statements present the financial position,
results of operations, and cash flows of the Company as if it were a separate
subsidiary of Hospitality for all periods presented. Host Marriott's historical
basis in the assets and liabilities of the Company have been carried over. The
amount, maturity, dates and interest rates of the push down indebtedness repaid
with proceeds from the May 1995 debt offering have been reflected in the
Company's consolidated financial statements for the periods subsequent to
October 1993. For periods prior to October 1993, the accompanying financial
statements reflect the pushed down effects of an equivalent principal amount of
Host Marriott's then outstanding indebtedness. The consolidated balance sheet
data for 1992 has been derived from unaudited consolidated financial statements
of the Company which in the opinion of management include all material
adjustments necessary for those periods and were prepared as if the Company was
a separate entity for all periods presented.
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------------------
1996(1) 1995 1994 1993 1992
------- ---- ---- ---- ----
(unaudited)
(in millions except for ratio data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues(2)
Hotels . . . . . . . . . . . . . . . . . . . . . . . $ 210 $ 189 $ 199 $ 378 $ 406
Senior living communities. . . . . . . . . . . . . . -- -- 14 68 62
Net gains (losses) on property transactions. . . . . 1 (10) 1 (6) 3
Equity in earnings of affiliate. . . . . . . . . . . 5 4 3 -- --
------ ------ ------ ------ ------
Total revenues . . . . . . . . . . . . . . . . . 216 183 217 440 471
Operating profit before corporate expenses
and interest. . . . . . . . . . . . . . . . . . . 89 80 103 77 66
Corporate expenses . . . . . . . . . . . . . . . . . 10 10 8 8 7
Interest income. . . . . . . . . . . . . . . . . . . 24 15 14 14 14
Interest expense(3). . . . . . . . . . . . . . . . . 69 61 64 60 50
Income before extraordinary item and
cumulative effect of accounting changes(4) . . . 20 15 28 10 14
Net income . . . . . . . . . . . . . . . . . . . . . 20 1 28 6 14
Balance Sheet Data:
Total assets . . . . . . . . . . . . . . . . . . . . $ 1,285 $1,222 $1,350 $1,696 $1,815
Total debt . . . . . . . . . . . . . . . . . . . . . 732 734 617 658 660
Other Data:
EBITDA(5). . . . . . . . . . . . . . . . . . . . . . . $ 149 $ 145 $ 168 $ 166 $ 146
Depreciation and amortization. . . . . . . . . . . . 42 48 60 71 73
Cash provided by operating activities. . . . . . . . 90 75 109 75 84
Cash provided by (used in) investing activities. . . 14 41 259 (23) (38)
Cash used in financing activities(6) . . . . . . . . 12 100 368 52 46
Ratio of earnings to fixed charges(7). . . . . . . . 1.4x 1.3x 1.7x 1.3x 1.3x
EBITDA to cash interest expense. . . . . . . . . . . 2.2x 2.5x 2.7x 2.9x 2.9x
</TABLE>
(1) Fiscal year 1996 includes 53 weeks.
(2) Prior to the Distribution (as defined herein) in October 1993, revenues
included room sales and food and beverage sales at hotel properties, as
well as sales from senior living communities. Subsequent to October 1993,
revenues include house profit from the Company's hotel properties, lease
rentals from the Company's senior living communities, net gains (losses) on
real estate transactions and equity in earnings of an affiliate. House
profit 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. See Note 1 to the Company's Consolidated
Financial Statements.
(3) Interest expense excludes interest costs capitalized in connection with the
Company's development and construction activities of $1 million in 1996, $2
million in 1995, $1 million in 1994, $5 million in 1993, and $10 million in
1992.
(4) Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," was adopted in the first quarter of 1993. In the second
quarter of 1993, the Company changed its accounting method for assets held
for sale. The Company recorded a $24 million credit to reflect the adoption
of SFAS No. 109 and a $28 million charge, net of taxes of $19 million, to
reflect the change in its accounting method for assets held for sale. In
the second quarter of 1995, the Company recorded an extraordinary loss on
the extinguishment of debt of $14 million, net of taxes, in connection with
the redemption and defeasance of senior notes.
(5) EBITDA, as defined in the senior notes indenture, consists of the sum of
consolidated net income, interest expense, income taxes, depreciation and
amortization and certain other noncash items (principally non-cash
write-downs of lodging properties and equity in earnings of an affiliate,
net of distributions received). 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 as part of the tests to determine the
Company's ability to incur debt and to make certain restricted payments.
The Company considers EBITDA to be an indicative measure of the Company's
operating performance due to the significance of the Company's long-lived
assets and because EBITDA can be used to measure the Company's ability to
service debt, fund capital expenditures and expand its business; however,
such information should not be considered as an alternative to net income,
operating profit, cash flows from operations, or any other operating or
liquidity performance measure prescribed by 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.
(6) Cash used in financing activities includes the transfer of asset sales
proceeds and operating cash to Hospitality for the required Hospitality
Notes redemptions and other Hospitality corporate uses.
(7) 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 October 8, 1993 in connection with Host Marriott's pro
rata distribution of Marriott International (the "Distribution"), to hold the
majority of Host Marriott's lodging properties not financed by mortgage debt. At
that time, the Company and Host Marriott entered into lodging management
agreements, a senior living community lease, and various other services
agreements with Marriott International which have impacted the Company's
operating results. The following analysis and the related consolidated financial
statements included elsewhere herein are presented as if the Company were a
separate subsidiary of Host Marriott for all periods presented as discussed in
Note 1 to the Consolidated Financial Statements.
Revenues include house profit from the Company's hotel properties, net gains
(losses) on real estate transactions, equity in the earnings of an affiliate and
lease rentals from the Company's senior living communities. 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 operating costs and expenses of the senior living communities
consist of depreciation and amortization, while other operating costs and
expenses primarily represent idle land carrying costs.
The Company's hotel operating costs and expenses are, to a great extent, fixed.
Therefore, the Company derives substantial operating leverage from increases in
revenue. This operating leverage is somewhat diluted, however, by the impact of
base management fees which are calculated as a percentage of sales, variable
lease payments and incentive management fees tied to operating performance above
certain established levels. Successful full-service hotel performance resulted
in certain of the Company's properties reaching levels which allowed the
managers to share in the growth of profits in the form of higher management
fees. The Company views this as a positive development as it helps to strengthen
the alignment of the managers' interest with the Company's. The Company expects
that this trend will continue in 1997 as the hotel industry continues to
strengthen.
For the periods discussed herein, the Company's properties have experienced
substantial increases in room revenues generated per available room (excluding
food and beverage and other ancillary revenue) ("REVPAR"). REVPAR is a commonly
used indicator of market performance for hotels which represents the combination
of the average daily room rate charged and the average daily occupancy achieved.
The REVPAR increase primarily represents strong percentage increases in room
rates, while occupancies have generally increased slightly or remained flat.
Increases in room rates have generally been achieved by the managers through
shifting occupancies away from discounted group business to higher-rated group
and transient business. This has been made possible by 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 profits at its hotel properties in the near term.
However, there can be no assurance that REVPAR will continue to increase in the
future.
1996 Compared to 1995
Revenues. Revenues consist of house profit from the Company's hotel properties,
net gains (losses) on real estate transactions and equity in earnings of an
affiliate. Revenues increased $33 million, or 18%, to $216 million for 1996. The
Company's revenue and operating profit were impacted by several items,
including:
. the addition of 11 full-service hotel properties during 1995 and 1996;
. improved lodging results for comparable properties;
. the 1996 sale and leaseback of 18 of the Company's Residence Inns;
. the 1995 and 1996 sale of 53 of the Company's Courtyard properties;
. the 1996 results including 53 weeks versus 52 weeks in 1995;
. the $10 million pre-tax charge in 1995 to write down the carrying value of
certain Courtyard and Residence Inn properties held for sale to their net
realizable value; and
. the 1995 sale of four of the Company's Fairfield Inns.
Hotel revenues increased $21 million, or 11%, to $210 million in 1996 as the
Company's full-service hotels and Residence Inn properties reported growth in
REVPAR. Hotel sales increased $79 million, or 16%, to $563 million reflecting
the REVPAR increases for comparable units and the addition of full-service
properties, partially offset by the sale of the Courtyard properties.
Overall 1996 revenue and operating profit for nearly all of the Company's
full-service hotels were improved or comparable to 1995 results. Improved
results were driven by strong increases in REVPAR of 9% for comparable units. On
a comparable basis, average room rates increased 5%, while average occupancy
increased nearly three percentage points. Management believes REVPAR will
continue to grow through steady increases in average room rates, combined with
minor changes in occupancy rates. However, there can be no assurance that REVPAR
will continue to increase in the future.
Residence Inn, the Company's extended-stay lodging concept, also reported
significant increases in revenues in 1996 due to REVPAR increases. REVPAR
increased nearly 5% due primarily to an increase in average room rates of almost
7%, while average occupancy decreased over one percentage point. Due to the high
occupancy of these properties, the Company expects future increases in REVPAR to
be driven by room rate increases rather than occupancy increases. However, there
can be no assurance that REVPAR will continue to increase in the future.
The net loss on property transactions for 1995 includes the pretax charge of $10
million to write down the carrying value of five individual Courtyard and
Residence Inn properties held for sale to their net realizable value.
Operating Costs and Expenses. Operating costs and expenses consist of
depreciation, amortization, management fees, real and personal property taxes,
ground and equipment rent, insurance, lease payments and certain other costs.
The Company's operating costs and expenses for 1996 increased $24 million to
$127 million, primarily reflecting the addition of eleven full-service
properties during 1995 and 1996, increased management fees and rentals tied to
improved operating results and properties sold and leased back, partially offset
by the sale of certain limited-service properties. Hotel operating costs
increased $25 million to $127 million. As a percentage of hotel revenues, hotel
operating costs and expenses represented 60% of revenues in 1996 and 54% of
revenues in 1995, reflecting the shifting emphasis to full-service hotels and
the impact of the lease payments of the Residence Inn properties.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, the Company's operating profit increased $9 million to
$89 million, or 41% of revenues, from $80 million, or 44% of revenues, in 1995.
Hotel operating profit decreased $4 million to $83 million or 40% of revenues,
from $87 million, or 46% of revenues, in 1995. Across the board, the Company's
hotels recorded substantial improvements in operating results. Several hotels,
including the Houston Airport Marriott and the Miami Airport Marriott, posted
particularly significant improvements in operating profit for the year. Portions
of the Miami Airport Marriott were converted to limited-service rooms in order
to increase the overall occupancy and operating results of the property. The
Company's Atlanta properties (622 rooms) also posted outstanding results due, in
part, to the 1996 Summer Olympics.
Corporate Expenses. Corporate expenses remained unchanged at $10 million, or 5%
of revenues, for 1996.
Interest Expense. Interest expense increased $8 million to $69 million primarily
due to a full year of expense related to debt incurred in conjunction with the
acquisition of certain hotel properties in 1995.
Income Before Extraordinary Item. The Company reported income before
extraordinary item of $34 million which represented an $10 million increase from
$24 million in 1995. The increase is due to the change in operating profit
discussed above, including the $10 million charge in 1995 to write down the
carrying value of certain limited service properties held for sale to their net
realizable value.
Extraordinary Item. In connection with the redemption and defeasance of debt in
the second quarter of 1995, the Company recognized an extraordinary loss of $22
million ($14 million after taxes), primarily representing premiums paid on the
redemptions and the write-off of deferred financing fees on the debt.
Net Income. The Company's net income was $20 million for 1996, compared to net
income of $1 million for 1995. The increase is primarily due to the increase in
operating profit discussed above and the $14 million extraordinary loss on the
redemption of debt in 1995.
1995 Compared to 1994
Revenues. The Company's 1995 revenues of $183 million represented a $34 million,
or 16%, decrease from 1994 results. The Company's revenues were impacted by
several items, including:
. the addition of ten full-service hotel properties during 1994 and 1995; .
improved lodging results (see discussion below);
. the 1995 sale of 37 of
the Company's Courtyard properties;
. the $10 million pre-tax charge in 1995 to write down the carrying value of
certain Courtyard and Residence Inn properties held for sale to their net
realizable value;
. the 1994 sal of the Company's senior living communities; and
. the 1994 and 1995 sales of the Company's Fairfield Inns.
Hotel revenues decreased $10 million, or 5%, to $189 million in 1995. The
decrease in hotel revenue for 1995 reflects the sale of the Company's Fairfield
Inns in 1994 and 1995 ($12 million of revenue) and the sale of 37 Courtyard
properties in 1995 ($24 million of revenue), partially offset by the addition of
ten full-service hotel properties in 1994 and 1995 ($22 million of revenue) and
overall improved lodging results. Excluding the impact of these non-comparable
items, 1995 hotel revenues increased approximately $11 million, or 9% over 1994
levels. Each of the Company's lodging segments reported growth in REVPAR for
comparable hotels.
Overall 1995 revenue and operating profit for nearly all of the Company's
full-service hotels were improved or comparable to 1994 results. Improved
results were driven by strong increases in REVPAR of 5% for comparable units. On
a comparable basis, average room rates increased 11%, while average occupancy
decreased four percentage points. Management of the Company believes that the
decrease in occupancies for the period is due to a concentrated effort by its
managers to displace a large amount of deeply discounted group and contract
business, which also resulted in the substantial increase in room rates.
Management believes REVPAR will continue to grow through steady increases in
average room rates, combined with minor changes in occupancy rates. However,
there can be no assurance that REVPAR will continue to increase in the future.
Courtyard, the Company's moderate-priced lodging concept, reported increases in
comparable revenues in 1995 primarily due to a 7% increase in REVPAR for
comparable units due to a 6% increase in average room rates and a slight
increase in average occupancy.
Residence Inn, the Company's extended-stay lodging concept, also reported
significant increases in revenues in 1995 due to REVPAR increases. REVPAR
increased over 8% due primarily to an increase in average room rates of 7%
combined with a one percentage point increase in average occupancy.
In the third quarter of 1994, the Company sold 26 of its 30 Fairfield Inns for
$114 million and in the second quarter of 1995, the Company sold its four
remaining Fairfield Inns to the same party for $6 million. Through their
disposition, 1995 revenues and operating profit for the four remaining Fairfield
Inns were comparable to 1994.
The Company did not report any senior living communities' revenues in 1995
compared to $14 million in 1994 due to the sale of all the senior living
communities during the second and third quarters of 1994.
The net loss on property transactions for 1995 includes the pretax charge of $10
million to write down the carrying value of five individual Courtyard and
Residence Inn properties held for sale to their net realizable value.
Operating Costs and Expenses. The Company's operating costs and expenses for
1995 decreased $11 million to $103 million, primarily reflecting the sale of
limited-service properties and the senior living communities. Hotel operating
costs decreased $3 million to $102 million. As a percentage of hotel revenues,
hotel operating costs and expenses represented 54% of revenues in 1995 and 53%
of revenues in 1994, reflecting the shifting emphasis to full- service hotels.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, the Company's operating profit decreased $23 million
to $80 million, or 44% of revenues, from $103 million, or 47% of revenues, in
1994. Hotel operating profit decreased $7 million to $87 million or 48% of
revenues, from $94 million, or 43% of revenues, in 1994. Excluding the impact of
the non-comparable items discussed earlier, hotel operating profit increased $8
million, or 15%, over 1994 levels.
Corporate Expenses. Corporate expenses increased $2 million to $10 million in
1995 primarily due to overall higher corporate administrative and travel costs
for Host Marriott which resulted in an increase in the allocation of corporate
expenses to the Company. As a percentage of revenues, corporate expenses
increased from 4% of revenues in 1994 to 5% of revenues in 1995.
Interest Expense. Interest expense decreased $3 million to $61 million primarily
due to the lower interest rate on the senior notes as a result of the May 1995
bond offering and the repayment in the second and third quarters of 1994 of
secured debt related to certain senior living community properties.
Income Before Extraordinary Item. The Company reported income before
extraordinary item of $15 million which represented a $13 million decrease from
$28 million in 1994. The decrease is due primarily to the decrease in operating
profit discussed above, including the $10 million charge in the 1995 second
quarter to write down the carrying value of certain limited service properties
held for sale to their net realizable value.
Extraordinary Item. In connection with the redemption and defeasance of debt in
the second quarter of 1995, the Company recognized an extraordinary loss of $22
million ($14 million after taxes), primarily representing premiums paid on the
redemptions and the write-off of deferred financing fees on the debt.
Net Income. The Company's net income was $1 million for 1995, compared to net
income of $28 million for 1994. The decrease is primarily due to the decrease in
operating profit discussed above and the $22 million extraordinary loss on the
redemption of debt in the second quarter of 1995.
Liquidity and Capital Resources
The Company funds its capital requirements with a combination of operating cash
flow, debt financing and proceeds from sales of selected properties. The Company
utilizes these sources of capital to acquire new properties, fund capital
additions and improvements and make principal payments on debt. 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.
On May 25, 1995, the Company issued $600 million of 9.5% senior notes (the
"Senior Notes") to several initial purchasers (the "Offering"). The Company is
required to make semi-annual cash interest payments on the Senior Notes at their
stated interest rate. The Company is not required to make principal payments on
the Senior Notes until maturity except in the event of (i) certain changes in
control or (ii) certain asset sales in which the proceeds are not reinvested in
other hotel properties within a specified period of time. In addition, under the
terms of the Senior Notes indenture, the Company has the ability to enter into a
revolving credit facility of up to $35 million, which would be available for
working capital and other general corporate purposes, and to incur other
indebtedness as specified in the Senior Notes indenture.
The Senior Notes will mature in 2005 and are fully and unconditionally
guaranteed (limited only to the extent necessary to avoid such Guarantees being
considered a fraudulent conveyance under applicable law), on a joint and several
basis, by certain of the Company's subsidiaries and are secured by a pledge of
the stock of certain of the Company's subsidiaries. The Senior Notes indenture
contains covenants that, among other things, limit the ability of the Company
and its subsidiaries to incur additional indebtedness and issue preferred stock,
pay dividends or make other distributions, repurchase capital stock or
subordinated indebtedness, create certain liens, enter into certain transactions
with affiliates, sell certain assets, issue or sell stock of the Company's
subsidiaries, and enter into certain merger and consolidations subsequent to the
consummation of the Offering. Distributions of the Company's equity, including
earnings accumulated subsequent to the Offering (but excluding an amount equal
to capital contributions made by its parent or pursuant to a sale of the
Company's capital stock) are restricted but are available for the payment of
dividends to the extent that the cumulative amount of such dividends from the
date of the Senior Notes indenture does not exceed $25 million plus an amount
equal to the excess of the Company's EBITDA over 200% of the Company's interest
expense. The Company paid dividends to Host Marriott of $9 million and $36
million in 1996 and 1995, respectively, as permitted under the Senior Notes
indenture.
Prior to the Offering, all of the Company's net cash flow was transferred to
Hospitality, and therefore, the Company maintained no cash balances. Subsequent
to the Offering, the Company has established and does maintain separate cash
balances. If amounts are outstanding under Host Marriott's $225 million
revolving line of credit ("New Line of Credit") with Marriott International, the
Company is required to dividend to Host Marriott the lesser of (i) the sum of
the outstanding balance under the line of credit and debt maturities of certain
recourse debt of Host Marriott in the next six months or (ii) the amount
permitted under the restricted payments covenant (the excess of EBITDA (as
defined herein) over 200% of the Company's interest expense). The Company's cash
flow provided by operations in fiscal years 1996, 1995 and 1994 totalled $90
million, $75 million and $109 million, respectively.
The Company's cash provided by investing activities was $14 million, $41 million
and $259 million in fiscal years 1996, 1995 and 1994, respectively. The
Company's cash provided by investing activities consists primarily of net
proceeds of sales of certain assets, offset by the acquisition of hotel and
other real estate assets, and other capital expenditures.
During 1996, the Company acquired seven full-service properties totalling 2,350
rooms for approximately $249 million. The acquisition of the Salt Lake City
Marriott for $67 million included the purchase of a 20% general partner interest
from Host Marriott. The difference between the cash transferred to Host Marriott
and the carried- over cost basis of the 20% interest, net of the related tax
effect, has been charged to additional paid-in capital. The Company also
completed construction and opened the Pentagon City Residence Inn in April 1996.
During the first and second quarters of 1996, the Company completed a sale and
leaseback with a real estate investment trust (the "REIT") for 16 of its
Courtyard properties and 18 of its Residence Inn properties for $349 million
(10% of which was deferred). During the second quarter of 1996, Host Marriott
purchased the Company's rights to the deferred proceeds and obligations under
the lease for the 16 Courtyard properties for $13 million. The Company retained
its rights to the deferred proceeds and obligations under the lease for the 18
Residence Inns.
During 1995, the Company acquired four full-service properties totalling 1,944
rooms for approximately $240 million (including $94 million of first mortgage
financing on two of the hotels).
During 1995, the Company sold to and leased back from the REIT 37 of its
Courtyard properties for a total of $330 million (10% of which was deferred).
The Company transferred its rights to receive the deferred proceeds and
obligations to perform under the leases to a subsidiary of Hospitality during
1995. Also, during 1995, the Company sold its remaining four Fairfield Inns for
net cash proceeds of approximately $6 million.
During the second and third quarters of 1994, the Company sold 14 senior living
communities to an unrelated party for $320 million. Additionally, during the
third quarter of 1994, the Company sold 26 of its Fairfield Inns to an unrelated
party. The net proceeds from the sale of these hotels were approximately $114
million, which exceeded the carrying value of the hotels by approximately $12
million. Approximately $27 million of the proceeds was payable in the form of a
note from the purchaser due in 2001. The gain on the sale of these hotels has
been deferred. The note receivable and deferred gain were transferred to
Hospitality in connection with the Offering.
During the second and third quarters of 1994, the Company acquired two
full-service hotels totalling 959 rooms for approximately $80 million, one of
which was converted to the Marriott brand. A subsidiary of the Company also
provided 100% financing totalling approximately $35 million to an affiliated
partnership, in which a related party of the Company owns the sole general
partner interest, for the acquisition of two full-service hotels totalling
another 684 rooms. These hotels are treated by the Company as owned for
accounting purposes. Additionally, in the first quarter of 1994 the Company
acquired from Host Marriott a 49% limited partner interest in an affiliate that
owns a hotel in Santa Clara, California for $30 million.
The Company's capital expenditures in fiscal years 1996, 1995 and 1994
(excluding the acquisition of properties) totalled $45 million, $41 million and
$27 million, respectively. The Company anticipates spending approximately $35
million to $40 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 $12 million, $100 million
and $368 million in fiscal years 1996, 1995 and 1994, respectively. The
Company's cash used in financing activities consists primarily of cash transfers
to Hospitality, as well as the issuance and repayment of debt as a result of the
Offering. In 1995 and 1994, the Company transferred $151 million and $345
million, respectively, of cash to Hospitality, including $100 million and $292
million in 1995 and 1994, respectively, from asset sales proceeds used by
Hospitality for redemption of senior notes by Hospitality ("Hospitality Notes").
As the net proceeds from the Offering were used to repay Hospitality Notes and a
portion of the outstanding balance on Host Marriott's former $630 million
revolving line of credit with Marriott International ("Line of Credit") the
Company's historical financial statements present the pushed down portion of the
Hospitality Notes and Line of Credit so repaid. Pursuant to the Hospitality
Notes Indenture, Hospitality Notes were required to be repaid to the extent of
50% to 75% of the net proceeds from certain asset sales and 100% of net
refinancing proceeds.
The net proceeds from the Offering, along with the net proceeds from a $400
million concurrent offering by Host Marriott Travel Plazas, Inc. ("HMTP"), were
used to defease all of the remaining Hospitality Notes not redeemed with the
asset sales proceeds discussed above and to repay indebtedness under the Line of
Credit. In connection with the redemptions and defeasance of the Hospitality
Notes, the Company recognized an extraordinary loss in the second quarter of
1995 of $14 million, net of taxes of $8 million, primarily representing premiums
of $11 million paid on the redemptions and the write-off of deferred financing
fees and discounts on the debt.
EBITDA
The Company believes that consolidated Earnings Before Interest Expense, Taxes,
Depreciation, Amortization and other non-cash items (principally non-cash
writedowns of lodging properties and equity in earnings of an affiliate, net of
distribution received) ("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). EBITDA can be used to measure the Company's
ability to service debt, fund capital expenditures and expand its business and
is used in the Senior Notes 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.
EBITDA increased $4 million to $149 million in 1996 from $145 million in 1995.
Hotel EBITDA decreased $7 million to $128 million for 1996. The decrease in
hotel EBITDA is due to the sales of limited-service properties in 1995 and 1996
the proceeds from which could not be immediately reinvested, partially offset by
the increase in comparable full-service EBITDA of 12% and the addition of 11
full-service hotels in 1995 and 1996. Full-service hotel EBITDA increased $44
million, or 62%, to $114 million for 1996. As a percentage of hotel EBITDA,
full- service hotel EBITDA represented 89% of hotel EBITDA in 1996 compared to
52% of hotel EBITDA in 1995. In 1997, the Company anticipates that nearly all of
its hotel EBITDA will be from full-service properties.
The Company's ratio of EBITDA to cash interest expense (defined as GAAP interest
expense less amortization of deferred financing costs) was 2.2 to 1.0, 2.5 to
1.0 and 2.7 to 1.0 in fiscal years 1996, 1995 and 1994, respectively. The ratio
of earnings to fixed charges was 1.4 to 1.0, 1.3 to 1.0 and 1.7 to 1.0 in fiscal
years 1996, 1995 and 1994, respectively.
The following is a reconciliation of EBITDA to income before extraordinary item
(in millions):
<TABLE>
<CAPTION>
Fifty-three Weeks Fifty-two Weeks
Ended Ended
January 3, 1997 December 29, 1995
----------------- -----------------
<S> <C> <C>
EBITDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 149 $ 145
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (69) (61)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . (42) (48)
Income taxes applicable to operations . . . . . . . . . . . . . . . . . . . . . (14) (9)
Gain (loss) on dispositions of assets and
other non-cash charges, net. . . . . . . . . . . . . . . . . . . . . . . . (4) (12)
--------------- --------------
Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . $ 20 $ 15
=============== ==============
</TABLE>
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 SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long- Lived Assets to be Disposed Of" and SFAS 114 "Accounting
for Creditors for Impairment of a Loan" during 1995. The adoption of these
standards did not have a material effect on the Company's consolidated financial
statements.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The following financial information is included on the pages indicated:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . 22
Consolidated Balance Sheets at January 3, 1997 and December 29, 1995 . . . . . . 23
Consolidated Statements of Operations for Fiscal Years Ended January 3, 1997,
December 29, 1995 and December 30, 1994 . . . . . . . . . . . . . . . . . . . 24
Consolidated Statements of Shareholder's Equity for the Fiscal Years
Ended January 3, 1997, December 29, 1995 and December 30, 1994. . . . . . . . 25
Consolidated Statements of Cash Flows for Fiscal Years Ended January 3, 1997,
December 29, 1995, and December 30, 1994. . . . . . . . . . . . . . . . . . . 26
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 27
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To HMH Properties, Inc.:
We have audited the accompanying consolidated balance sheets of HMH 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 each of the three fiscal years in the period ended January 3, 1997.
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 HMH Properties, Inc.
and subsidiaries as of January 3, 1997 and December 29, 1995 and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 3, 1997, 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.
Washington, D.C.
February 28, 1997
<PAGE>
<TABLE>
<CAPTION>
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . $ 944 $ 999
Note receivable from affiliate. . . . . . . . . . . . . . . . . . . . . . . . . 140 145
Due from hotel managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 25
Investment in affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 16
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 21
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 16
------------- ------------
$ 1,285 $ 1,222
============= ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Senior Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 600 $ 600
Notes secured by real estate assets . . . . . . . . . . . . . . . . . . . . . . 98 100
Other notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 34
------------- ------------
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 732 734
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 78
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 26
------------- ------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 875 838
------------- ------------
Shareholder's equity
Common stock, 100 shares issued and outstanding, no par value . . . . . . . -- --
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 412 397
Accumulated loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) (13)
------------- ------------
Total shareholder's equity . . . . . . . . . . . . . . . . . . . . . 410 384
------------- ------------
$ 1,285 $ 1,222
============= ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995
AND DECEMBER 30, 1994
(in millions)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES
Hotels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 210 $ 189 $ 199
Senior living communities (received from Marriott International). . . . . -- -- 14
Net gains (losses) on property transactions . . . . . . . . . . . . . . . 1 (10) 1
Equity in earnings of affiliate . . . . . . . . . . . . . . . . . . . . . 5 4 3
----------- ---------- ----------
216 183 217
----------- ---------- ----------
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees of $32 million,
$28 million and $23 million in 1996, 1995 and 1994, respectively) . . 127 102 105
Senior living communities . . . . . . . . . . . . . . . . . . . . . . . . -- -- 5
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1 4
----------- ---------- ----------
127 103 114
----------- ---------- ----------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 80 103
Corporate expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10) (10) (8)
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (69) (61) (64)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 15 14
----------- ---------- ----------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 24 45
Provision for income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . (14) (9) (17)
----------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM. . . . . . . . . . . . . . . . . . . . . . . 20 15 28
Extraordinary item - loss on extinguishment of debt
(net of income taxes of $8 million) . . . . . . . . . . . . . . . . . . . -- (14) --
----------- ---------- ----------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20 $ 1 $ 28
=========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995
AND DECEMBER 30, 1994
(in millions)
<TABLE>
<CAPTION>
Additional Accumulated
Common Paid-In Earnings Distributions to
Stock Capital (Loss) Hospitality, net
------- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance, January 1, 1994. . . . . . . . . . . . . . . $ -- $ 929 $ (6) $ (7)
Net income. . . . . . . . . . . . . . . . . . . . -- -- 28 --
Purchase of partnership investment (Note 4) . . . -- (6) -- --
Net advances and distributions to Hospitality . . -- -- -- (297)
------- -------- ------- -------
Balance, December 30, 1994. . . . . . . . . . . . . . -- 923 22 (304)
Net income. . . . . . . . . . . . . . . . . . . . -- -- 1 --
Cash transfers to Hospitality . . . . . . . . . . -- -- -- (151)
Non-cash transfers to Hospitality . . . . . . . . -- -- -- (71)
Capitalized distributions pursuant
to the Offering . . . . . . . . . . . . . . . . -- (526) -- 526
Dividends . . . . . . . . . . . . . . . . . . . . -- -- (36) --
------- -------- ------- -------
Balance, December 29, 1995. . . . . . . . . . . . . . -- 397 (13) --
Net income. . . . . . . . . . . . . . . . . . . . -- -- 20
Dividends . . . . . . . . . . . . . . . . . . . . -- -- (9) --
Sale of residual lease interest in
16 Courtyard properties . . . . . . . . . . . . -- 24 -- --
Purchase of general partner interest in
a full-service property (Note 8). . . . . . . . -- (9) -- --
------- -------- ------- -------
Balance, January 3, 1997. . . . . . . . . . . . . . . $ -- $ 412 $ (2) $ --
======= ======== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995
AND DECEMBER 30, 1994
(in millions)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20 $ 1 $ 28
Extraordinary loss on extinguishment of debt, net of taxes. . . . . . . . -- 14 --
Adjustments to reconcile to cash from operations:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 42 48 60
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 8 13
Net realizable value writedown. . . . . . . . . . . . . . . . . . . . -- 10 --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3 1
Changes in operating accounts:
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . -- (5) 5
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 9 (4) 2
------------ ------------ ------------
Cash provided by operations . . . . . . . . . . . . . . . . . . . 90 75 109
------------ ------------ ------------
INVESTING ACTIVITIES
Proceeds from sales of assets . . . . . . . . . . . . . . . . . . . . . . 349 337 473
Less non-cash proceeds. . . . . . . . . . . . . . . . . . . . . . . . (34) (33) (54)
------------ ------------ ------------
Cash received from sales of assets. . . . . . . . . . . . . . . . . . . . 315 304 419
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . (45) (41) (27)
Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (246) (242) (145)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10) 20 12
------------ ------------ ------------
Cash provided by investing activities . . . . . . . . . . . . . . 14 41 259
------------ ------------ ------------
FINANCING ACTIVITIES
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) (589) (23)
Issuances of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 676 --
Transfers to Hospitality, net . . . . . . . . . . . . . . . . . . . . . . -- (151) (345)
Dividends to Hospitality. . . . . . . . . . . . . . . . . . . . . . . . . (9) (36) --
------------ ------------ ------------
Cash used in financing activities . . . . . . . . . . . . . . . . (12) (100) (368)
------------ ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . 92 16 --
CASH AND CASH EQUIVALENTS, beginning of year. . . . . . . . . . . . . . . . . 16 -- --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year. . . . . . . . . . . . . . . . . . . . $ 108 $ 16 $ --
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
HMH Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
HMH Properties, Inc. (the "Company") was formed in 1993 to own many of Host
Marriott Corporation's ("Host Marriott") lodging real estate properties. As of
January 3, 1997, the Company owned, or controlled, 31 lodging properties
generally located throughout the United States and operated primarily under the
Marriott or Ritz-Carlton brands and managed by Marriott International, Inc.
("Marriott International"). The Company's hotel properties represent quality
assets in the luxury and upscale full-service lodging segments.
On October 8, 1993 (the "Distribution Date"), Marriott Corporation distributed,
through a special tax-free dividend (the "Distribution"), to holders of Marriott
Corporation's common stock (on a share-for-share basis) approximately 116.4
million shares of common stock of an existing wholly owned subsidiary, Marriott
International, resulting in the division of Marriott Corporation's operations
into two separate companies. The distributed operations included the former
Marriott Corporation's lodging management, franchising and senior living service
operations. Host Marriott retained the former Marriott Corporation's airport and
tollroad food, beverage and merchandise concession operations, as well as most
of its real estate properties. Effective at the Distribution Date, Marriott
Corporation changed its name to Host Marriott Corporation. Concurrent with the
Distribution, Host Marriott completed an exchange offer ("Exchange Offer")
pursuant to which holders of notes in the aggregate principal amount of
approximately $1.2 billion ("Old Notes") exchanged such Old Notes for a
combination of (i) cash, (ii) common stock of Host Marriott and (iii) senior
notes ("Hospitality Notes") issued by Host Marriott Hospitality, Inc.
("Hospitality").
The Company is a direct wholly-owned subsidiary of Hospitality which is a direct
wholly-owned subsidiary of Host Marriott. In connection with the Distribution,
the majority of Host Marriott's real estate properties were transferred to the
Company and its subsidiaries, while most of the assets relating to the airport
and tollroad operations remained in Host Marriott Travel Plazas, Inc. ("HMTP"),
a wholly-owned subsidiary of Hospitality, and its subsidiaries. In May 1995, the
Company and HMTP consummated concurrent debt offerings totalling $1 billion of
senior notes (the "Offering"), the net proceeds of which were used to repay the
Hospitality Notes and a portion of Host Marriott's $630 million revolving line
of credit with Marriott International ("Line of Credit"). Prior to the Offering,
the accompanying consolidated financial statements present the pushed-down
effects of the debt that was repaid with the proceeds of the Offering as
discussed in Note 7.
The consolidated financial statements present the financial position, results of
operations, and cash flows of the Company as if it were a separate subsidiary of
Hospitality for all periods presented. Host Marriott's historical basis in the
assets and liabilities of the Company have been carried over. All material
intercompany transactions and balances between the Company and its subsidiaries
have been eliminated. Net transfers subsequent to the Distribution Date between
the Company and Hospitality, including the transfer of asset sales proceeds to
Hospitality for bond redemptions of $292 million in 1994, are included in the
statement of shareholder's equity. Such amounts are reflected as a component of
equity because the balance accumulated through the date of consummation of the
Offering was not required to be paid, but rather was a permanent adjustment to
capital on May 25, 1995.
<PAGE>
HMH Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
An analysis of the activity in the "Distributions to Hospitality, net" for the
fiscal year ended December 29, 1995 is as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
Balance, Distributions to Hospitality, net, January 1, 1994. . . . . $ (7)
Increase in taxes payable. . . . . . . . . . . . . . . . . . . . 48
Cash transfers to Hospitality. . . . . . . . . . . . . . . . . . (345)
------------
Balance, Distributions to Hospitality, net, December 30, 1994. . . . (304)
Increase in taxes payable. . . . . . . . . . . . . . . . . . . . 8
Non-cash transfers to Hospitality. . . . . . . . . . . . . . . . (79)
Cash transfers to Hospitality. . . . . . . . . . . . . . . . . . (151)
Amount reclassified as additional paid-in capital. . . . . . . . 526
------------
Balance, Distributions to Hospitality, net, May 25, 1995 . . . . . . $ --
============
</TABLE>
The average balance of Distributions to Hospitality, net for fiscal year 1994
and the period from December 31, 1994 through May 25, 1995 were $132 million and
$461 million, respectively.
The Company operates as a unit of Host Marriott and Hospitality, utilizing Host
Marriott's employees, insurance and administrative services. Through May 25,
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 Hospitality's general corporate funds.
Subsequent to May 25, 1995, the Company has maintained separate cash accounts.
The Company has no employees. Certain operating expenses, capital expenditures
and other cash requirements of the Company are paid by Host Marriott and
Hospitality and charged directly or allocated to the Company. Certain general
and administrative costs of Host Marriott are allocated to Hospitality and, in
turn, 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. Investments in 50% or less owned
affiliates over which the Company has the ability to exercise significant
influence are accounted for using the equity method.
Fiscal Year
The Company's fiscal year ends on the Friday nearest to December 31. Full year
results for 1996 include 53 weeks versus 52 weeks for fiscal years 1995 and
1994.
Revenues and Expenses
Revenues include house profit from the Company's hotel properties because the
Company has delegated substantially all of the operating decisions related to
the generation of house profit from its hotels to the manager. Revenues also
include lease rentals from the Company's senior living communities (in 1994),
net gains (losses) on property transactions and equity in the earnings of an
affiliate. House profit reflects the net revenues flowing to the Company as
property owner and represents hotel operating results, less property-level
expenses, excluding depreciation, management fees, real and personal property
taxes, ground and equipment rent, insurance and certain other costs, which are
classified as operating costs and expenses.
Property and Equipment
Property and equipment is recorded at cost. For newly developed properties, cost
includes interest, rent and real estate taxes incurred during development and
construction. Replacements and improvements are capitalized.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 40 years for buildings and three to 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.
Gains on sales of properties are recognized at the time of sale or deferred to
the extent required by generally accepted accounting principles. Deferred gains
are recognized as income in subsequent periods as conditions requiring deferral
are satisfied or expire.
In cases where management is holding for sale particular lodging properties, the
Company assesses impairment based on whether the net realizable value (estimated
sales price less costs of disposal) of each individual property to be sold is
less than its net book value. A lodging property is considered to be held for
sale when the Company has made the decision to dispose of the property.
Otherwise, the Company assesses impairment of its real estate properties based
on whether 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 Statements of Financial Accounting Standards
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan" and SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" in 1995. The adoption of these
statements did not have a material effect on the Company's consolidated
financial statements.
<PAGE>
HMH Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Property and Equipment
Property and equipment consists of the following (in millions):
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Land and land improvements. . . . . . . . . . . . . . . . . . . . . . . . . $ 99 $ 138
Building and leasehold improvements . . . . . . . . . . . . . . . . . . . . 901 905
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 125 143
Construction in progress. . . . . . . . . . . . . . . . . . . . . . . . . . 23 45
------------- ------------
1,148 1,231
Less accumulated depreciation and amortization. . . . . . . . . . . . . . . (204) (232)
------------- ------------
$ 944 $ 999
============= ============
</TABLE>
Interest cost capitalized in connection with the Company's development and
construction activities totalled $1 million in 1996, $2 million in 1995 and $1
million in 1994.
In the second quarter of 1995, the Company made a determination that its owned
Courtyard and Residence Inn properties were held for sale and recorded a $10
million charge to write down the carrying value of five individual Courtyard and
Residence Inn properties to their estimated net realizable value.
3. Notes Receivable Due From Affiliate
In connection with the sale of several hotels to an affiliated limited
partnership in 1984, a subsidiary of the Company received as proceeds $168
million in notes receivable that are secured by nonrecourse mortgages on the
underlying properties. The notes mature on December 31, 2003 and bear interest
at 9%. These notes require principal paydown of approximately 44% of the
original principal amount prior to maturity. The principal balances as of
January 3, 1997 and December 29, 1995 were $140 million and $145 million,
respectively.
4. Equity Investment in Affiliate
On February 26, 1994, Host Marriott transferred to the Company a 49% limited
partner interest in an affiliate that owns a hotel in Santa Clara, California,
in exchange for $30 million in cash. The difference between the cash transferred
to Host Marriott and the carried-over cost basis of the 49% interest, net of the
related tax effects, has been charged to additional paid-in capital.
The investment is accounted for using the equity method. The Company has a 49%
interest in the operating profits (income before interest costs) in the
partnership which is included in equity in the earnings of an affiliate. The
Company's equity in income of the partnership was $5 million, $4 million and $3
million for 1996, 1995 and 1994, respectively.
<PAGE>
HMH Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The partnership's summarized balance sheet information at January 3, 1997 and
December 29, 1995 is as follows (in millions):
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . $ 30 $ 29
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5
------------ ------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35 $ 34
============ ============
Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44 $ 44
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1
Partners' deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (10) (11)
------------ ------------
Total liabilities and partners' deficit . . . . . . . . . . . . . $ 35 $ 34
============ ============
</TABLE>
The partnership's summarized operating results for the fiscal years 1996, 1995
and for the period from February 26, 1994 through December 30, 1994 (in
millions):
1996 1995 1994
------- ------- ------
Revenues. . . . . . . . . $ 17 $ 15 $ 11
Operating costs . . . . . (8) (7) (5)
Interest expense. . . . . (3) (3) (2)
------ ------ ------
Net income. . . . . . . . $ 6 $ 5 $ 4
====== ====== ======
5. Income Taxes
The Company, Hospitality and Host Marriott record income taxes in accordance
with SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires
the recognition of deferred tax assets and liabilities equal to the expected
future tax consequences of temporary differences.
Total deferred tax assets and liabilities at January 3, 1997 and December 29,
1995 were as follows:
1996 1995
--------- --------
(in millions)
Gross deferred tax assets . . . . . . . . $ 18 $ 17
Gross deferred tax liabilities. . . . . . (89) (95)
------- -------
Net deferred income tax liability . . . . $ (71) $ (78)
======= =======
The tax effect of each type of temporary difference and carryforward that gives
rise to a significant portion of deferred tax assets and liabilities as of
January 3, 1997 and December 29, 1995:
1996 1995
-------- ---------
(in millions)
Tax credit carryforwards. . . . . . $ 9 $ 9
Reserves. . . . . . . . . . . . . . 6 2
Affiliate notes receivable. . . . . (43) (44)
Property and equipment. . . . . . . (46) (51)
Investment in affiliate . . . . . . 3 6
------ -------
$ (71) $ (78)
====== =======
Deferred tax liabilities have been adjusted by $20 million in 1995 as a result
of the transfer of certain assets and liabilities pursuant to the Offering. At
January 3, 1997, the Company had approximately $9 million of alternative minimum
tax credit carryforwards which do not expire.
The provision (benefit) for income taxes consists of (in millions):
1996 1995 1994
----- ------ ------
Current-Federal . . . . . . . $ 17 $ 15 $ 39
-State . . . . . . . . 4 3 9
----- ------ -----
21 18 48
----- ------ -----
Deferred-Federal. . . . . . . (6) (7) 24)
-State . . . . . . .. (1) (2) (7)
----- ------ -----
(7) (9) (31)
----- ------ -----
$ 14 $ 9 $ 17
===== ====== =====
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. . . . . . . . . . . . . . 5.1 2.5 2.8
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 -- --
---- ---- ----
41.1% 37.5% 37.8%
==== ==== ====
</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.
On a separate return basis, net state income tax expense would have been
substantially equal to the expense reported for the fiscal year ended January 3,
1997 and would have been approximately $1 million higher for each of the fiscal
years ended December 29, 1995 and December 30, 1994.
Prior to the Offering and consistent with the existing Host Marriott tax sharing
policy, all current tax provision or benefit amounts were treated as paid to, or
received from, Host Marriott, and as such, there was no current tax provision
related balances due to Host Marriott at December 30, 1994. Subsequent to the
Offering, the Company reimburses Host Marriott for its allocable share of
current taxes payable. At January 3, 1997, $29 million was payable to Host
Marriott. For Federal income tax purposes, the Company is a member of the
affiliated group of Host Marriott and its subsidiaries. The Company's share of
the affiliated group's tax liability is limited to the lesser of the liability
computed as if the Company was in a separate affiliated group, or its allocable
portion of the affiliated group's tax liability. Cash paid to Host Marriott for
income taxes was $1 million, $1 million and $4 million in 1996, 1995 and 1994,
respectively.
<PAGE>
HMH Properties, Inc. and Subsidiaries
Notes to Financial Statements
6. Leases
The Company sold and leased back 18 Residence Inn properties from a real estate
investment trust (the "REIT") in 1996. The initial term of the lease expires in
2010 and can be renewed for a total of 40 years at the Company's option. The
minimum rent payments are $17 million annually with additional contingent rent
equal to 7.5% of the excess of total hotels sales on the leased properties over
1996 total hotel sales on the leased properties. The Residence Inn leases also
require the Company to escrow an amount equal to 5% of the annual hotel sales
into a furniture, fixture and equipment reserve which is available for renewals
and replacements.
The Company leases certain other property and equipment under non-cancelable
leases. Leases include long-term ground leases for certain hotels, generally
with multiple renewal options. Certain leases contain provisions for the payment
of contingent rentals based on a percentage of sales in excess of stipulated
amounts.
Future minimum annual rental commitments for all non-cancelable operating leases
are as follows (in millions):
Fiscal Year
1997. . . . . . . . . . . . . . . . . . . $ 24
1998. . . . . . . . . . . . . . . . . . . 23
1999. . . . . . . . . . . . . . . . . . . 23
2000. . . . . . . . . . . . . . . . . . . 23
2001. . . . . . . . . . . . . . . . . . . 23
Thereafter. . . . . . . . . . . . . . . . 264
-----
Total minimum lease payments. . . . . $ 380
=====
Rent expense consists of (in millions):
Minimum rentals on operating leases . . . . . $ 19 $ 7 $ 8
Additional rentals based on sales . . . . . . 6 4 4
----- ----- -----
$ 25 $ 11 $ 12
===== ===== =====
7. Debt
Debt consists of the following at January 3, 1997 and December 29, 1995 (in
millions):
1996 1995
---- ----
Senior Notes, 9.5%, maturing May 15, 2005 . . . . . . . . $600 $600
Notes secured by $276 million of real estate assets,
with an average rate of 7.5% at January 3, 1997,
maturing through 2002 . . . . . . . . . . . . . . . . . 98 100
Other notes with an average rate of 7.1%
at January 3, 1997, maturing through 2014 . . . . . . . 34 34
---- ----
$732 $734
==== ====
On May 25, 1995, the Company issued $600 million of 9.5% senior secured notes
(the "Senior Notes"). Concurrently, HMTP issued $400 million of senior notes.
The net proceeds of the offerings were used to defease, and subsequently redeem,
all of the remaining Hospitality Notes, remaining bonds and to repay borrowings
under the Line of Credit. In connection with the redemptions and defeasance of
the Hospitality Notes, the Company recognized an extraordinary loss in 1995 of
approximately $22 million ($14 million after taxes), primarily representing
premiums of $11 million paid on the redemptions and the write-off of deferred
fees on the Hospitality Notes.
The Senior Notes were issued at par and have a final maturity of May 2005. The
Senior Notes are senior obligations of the Company secured by a pledge of the
capital stock of certain of the Company's subsidiaries and are guaranteed,
jointly and severally, by certain subsidiaries. The indenture governing the
Senior Notes contains covenants that, among other things, limit the ability of
the Company and its subsidiaries to incur additional indebtedness and issue
preferred stock, pay dividends or make other distributions, repurchase capital
stock or subordinated indebtedness, create certain liens, enter into certain
transactions with affiliates, sell certain assets, issue or sell stock of the
Company's subsidiaries, and enter into certain mergers and consolidations.
Distributions of the Company's equity is restricted but will be available for
the payment of dividends to the extent that the cumulative amount of such
dividends from May 25, 1995 does not exceed $25 million plus an amount equal to
the excess of the Company's EBITDA over 200% of the Company's interest expense,
as defined in the indenture, plus the amount of capital contributions, if any,
to the Company subsequent to May 25, 1995. The Company paid $9 million and $36
million in dividends for 1996 and 1995, respectively, to Host Marriott as
permitted under the Senior Notes indenture.
Under the indenture for the Senior Notes, proceeds from the sale of assets may
be used for the acquisition of new properties subject to certain limitations.
Aggregate debt maturities at January 3, 1997 are as follows (in millions):
1997. . . . . . . . . . . . . . $ 2
1998. . . . . . . . . . . . . . 2
1999. . . . . . . . . . . . . . 2
2000. . . . . . . . . . . . . . 1
2001. . . . . . . . . . . . . . 1
Thereafter. . . . . . . . . . . 724
---
$732
====
Cash paid for interest, net of amounts capitalized, was $68 million in 1996, $61
million in 1995 and $62 million in 1994. Deferred financing costs, which are
included in other assets, amounted to $17 million and $18 million at January 3,
1997 and December 29, 1995, respectively.
<PAGE>
HMH Propeties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Acquisitions and Dispositions
During 1996, the Company acquired seven full-service properties totalling 2,350
rooms for approximately $249 million. The acquisition of the Salt Lake City
Marriott for $67 million included the purchase of a 20% general partner interest
from Host Marriott for $10 million. The difference between the cash transferred
to Host Marriott and the carried-over cost basis of the 20% interest, net of the
related tax effect, has been charged to additional paid- in capital. The 1996
acquisitions included the acquisition, through foreclosure, of a controlling
interest in the 250- room Newport Beach Marriott Suites. The Company had
purchased an 83% interest in the mortgage loans secured by the hotel for $18
million in the first quarter of 1996. The Company also completed construction
and opened the Pentagon City Residence Inn in April 1996. Subsequent to year
end, the Company acquired the 306-room Ritz- Carlton, Marina del Rey for
approximately $57 million.
The Company acquired four full-service hotels in 1995 totalling 1,944 rooms in
separate transactions for approximately $240 million. During 1994, the Company
acquired two full-service hotels totaling 959 rooms in separate transactions
aggregating approximately $80 million. The Company also provided 100%
non-recourse financing totaling approximately $35 million to an affiliated
partnership, in which Host Marriott owns the sole general partner interest, for
the acquisition of two full-service hotels (totaling another 684 rooms). The
Company consolidates these properties for accounting purposes.
During the first and second quarters of 1996, the Company sold and leased back
to the REIT 16 of its Courtyard properties and 18 of its Residence Inn
properties for $349 million (10% of which was deferred). Host Marriott purchased
the Company's rights to the deferred proceeds and obligations under the lease
for the 16 Courtyard properties at their fair market value. The Company's rights
to the deferred proceeds and obligations under the lease for the 18 Residence
Inns remain with the Company. The Company recorded a $14 million deferred gain
in 1996 and is amortizing the gain over the initial term of the lease.
During the first and third quarters of 1995, the Company sold and leased back to
the REIT 37 of its Courtyard properties for $330 million. Ten percent of the
sales amount of these transactions was deferred. The Company transferred its
rights to the deferred proceeds and obligations under the lease to a designated
subsidiary of Hospitality in connection with the Offering.
During 1994, the Company sold its 14 senior living communities to an unrelated
party for $320 million, which approximated the communities' carrying value.
In the third quarter of 1994, the Company sold 26 of its Fairfield Inns to an
unrelated third party. The net proceeds from the sale of such hotels were
approximately $114 million, which exceeded the carrying value of the hotels by
approximately $12 million. Approximately $27 million of the proceeds was payable
in the form of a note from the purchaser due in 2001. The gain on the sale of
these hotels has been deferred. The note receivable and deferred gain were
transferred to Hospitality in connection with the Offering.
In connection with the Offering, HMTP transferred certain hotel assets to the
Company and the Company transferred certain undeveloped land parcels, a note
receivable and the leases and related assets of the 37 Courtyard properties to
Hospitality or a designated subsidiary of Hospitality.
Summarized unaudited pro forma results of operations, assuming the above
transactions (excluding the New York Vista Hotel acquisition in 1995) and the
Offering and debt activity discussed in Note 7 occurred on December 31, 1994,
are as follows (in millions):
1996 1995
----- -----
Revenue . . . . . . . . . . . . . . . . . . . . $ 250 $ 189
Operating profit before corporate expenses
and interest . . . . . . . . . . . . . . . . 107 71
Net income before extraordinary item. . . . . . 30 8
<PAGE>
HMH Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Fair Value of Financial Instruments
The fair values of certain financial instruments are shown below (in millions):
<TABLE>
<CAPTION>
January 3, 1997 December 29, 1995
---------------- ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- ------
<S> <C> <C> <C> <C>
Financial assets
Note receivable from affiliate . . . . . . . . . . . . . . $ 140 $ 150 $ 145 $ 145
Financial liabilities
Senior notes . . . . . . . . . . . . . . . . . . . . . . . 600 627 600 612
Notes secured by real estate assets. . . . . . . . . . . . 98 95 100 100
Other notes. . . . . . . . . . . . . . . . . . . . . . . . 34 34 34 34
</TABLE>
Receivables from affiliates, and other financial assets are valued based on the
expected future cash flows discounted at risk-adjusted rates. The Senior Notes
are valued based on quoted market prices. Valuations for secured and other
unsecured debt are determined based on the expected future payments discounted
at risk-adjusted rates. The fair values of other assets and other liabilities
are estimated to be equal to their carrying value.
10. Relationship Between the Company and Marriott International
In connection with the Distribution, Host Marriott and Marriott International
entered into agreements which provide, among other things, that (i) 26 of the
Company's lodging properties are managed by Marriott International under
agreements with initial terms of 15 to 20 years and which are subject to renewal
at the option of Marriott International for up to 16 to 30 years (see Note 11),
(ii) the Company and its subsidiaries will lease senior living communities to
Marriott International prior to their disposal (see Note 8), (iii) Marriott
International will guarantee Host Marriott's performance in connection with
certain loans and other obligations and (iv) three of the Company's full-service
properties are operated under a franchise agreement with Marriott International.
For fiscal years 1996, 1995 and 1994, the Company paid to Marriott International
$32 million, $28 million and $23 million, respectively, in lodging management
fees and the Company earned $14 million in 1994 under the senior living
community leases.
In connection with the purchase of the Marriott World Trade Center, the Company
received a mortgage loan of $10 million from Marriott International. Marriott
International also provided an additional $10 million to the Company. Repayment
of this amount is contingent on the future earnings of the hotel and has been
included in other liabilities in the accompanying financial statements.
In addition, Marriott International has the right to purchase up to 20% of the
voting stock of Host Marriott if certain events involving a change in control of
Host Marriott occur.
11. Management Agreements
The Company is party to management agreements (the "Agreements") which provide
for Marriott International to manage the hotels generally for an initial term of
15 to 30 years with renewal terms of up to an additional 16 to 30 years. The
Agreements generally provide for payment of base management fees equal to two to
four percent of sales and incentive management fees generally equal to 40% to
50% of hotel operating profits (as defined in the Agreements) over a priority
return (as defined) to the Company, with total incentive management fees not to
exceed 20% of operating profits. For certain full-service hotels acquired after
September 8, 1995, the incentive management fee is equal to 20% of operating
profits. 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 agreement with respect to
a single lodging facility is cross-collateralized or cross-defaulted to any
other agreement and a single agreement may be cancelled under certain
conditions, although such cancellation will not trigger the cancellation of any
other Agreement.
Pursuant to the terms of the Agreements, Marriott International is required to
furnish the hotels with certain services ("Chain Services") which are generally
provided on a central or regional basis to all hotels in the Marriott
International hotel system. Chain Services include central training, advertising
and promotion, a national reservation system, computerized payroll and
accounting services, and such additional services as needed which may be more
efficiently performed on a centralized basis. Costs and expenses incurred in
providing such services are allocated among all domestic hotels managed, owned
or leased by Marriott International or its subsidiaries. In addition, the
full-service hotels also participate in Marriott's Honored Guest Awards Program
and the Courtyard hotels in the Courtyard Club. The costs of these programs are
charged to all hotels in the respective hotel system.
The Company is obligated to provide the manager with sufficient funds to cover
the cost of (a) certain non- routine repairs and maintenance to the hotels which
are normally capitalized; and (b) replacements and renewals to the hotels'
property and improvements. Under certain circumstances, the Company will be
required to establish escrow accounts for such purposes under terms outlined in
the Agreements.
Pursuant to the terms of the Agreements, the Company is required to provide
Marriott International with funding for working capital to meet the operating
needs of the hotels. Marriott International converts cash advanced by the
Company into other forms of working capital consisting primarily of operating
cash, inventories and trade receivables. Under the terms of the Agreements,
Marriott International maintains possession of and sole control over the
components of working capital and accordingly, the Company reports the total
amounts so advanced to Marriott International as a component of other assets.
Upon termination of the Agreements, the working capital will be returned to the
Company.
At January 3, 1997 and December 29, 1995, $25 million and $22 million,
respectively, have been advanced to the hotel managers for working capital and
are included in due from hotel managers in the accompanying balance sheet.
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 based on a percentage of room sales and food and beverage
sales as well as certain other fees for advertising and reservations. Franchise
fees for room sales vary from four to six percent of room sales, while fees for
food and beverage sales vary from two to three percent of sales. The initial
terms of the franchise agreements are from 20 to 25 years. Franchise fees paid
to Marriott International for 1996 were $1 million. Franchise fees were not
material in prior periods.
12. Litigation
The Company is from time to time the subject of, or involved in, judicial
proceedings. Management believes that any liability or loss resulting from such
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
<PAGE>
HMH Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
13. Hotel Operations
Hotel revenues reflect house profit from the Company's hotel properties. House
profit reflects the net revenues flowing to the Company as property owner and
represents all gross hotel operating revenues, less all gross property- level
expenses, excluding depreciation, management fees, real and personal property
taxes, ground and equipment rent, insurance and certain other costs, which are
classified as operating costs and expenses. Accordingly, the following table
presents the Company's house profit for 1996, 1995 and 1994 (in millions).
1996 1995 1994
---- ---- ----
Sales
Rooms. . . . . . . . . . . . . . . . . $390 $351 $382
Food and beverage. . . . . . . . . . . 135 106 95
Other. . . . . . . . . . . . . . . . . 38 27 26
---- ---- ----
Total hotel sales. . . . . . . . . . 563 484 503
---- ---- ----
Department costs
Rooms. . . . . . . . . . . . . . . . . 93 81 91
Food and beverage. . . . . . . . . . . 109 81 73
Other. . . . . . . . . . . . . . . . . 18 14 12
---- ---- ----
Total department costs . . . . . . . 220 176 176
---- ---- ----
Department profit . . . . . . . . . . . 343 308 327
Other deductions. . . . . . . . . . . . 133 119 128
---- ---- ----
House profit . . . . . . . . . . . . $210 $189 $199
==== ==== ====
14. Supplemental Guarantor And Non-Guarantor Subsidiary Information
All but two 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. The non-guarantor subsidiaries (the "Non-Guarantor Subsidiaries") are
the owners of the Marriott World Trade Center, which was acquired by the Company
in late December 1995 and HMH HPT Residence Inn, Inc. the lessee of the
Residence Inn properties. 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.
The following condensed, consolidating financial information sets forth the
combined financial position as of January 3, 1997 and December 29, 1995 and
results of operations for the three fiscal years in the period ended January 3,
1997 of the parent, Guarantor Subsidiaries and the Non-Guarantor Subsidiaries,
along with the cash flows of the parent and Guarantor Subsidiaries and the
Non-Guarantor Subsidiaries for the year ended January 3,1997 and December 29,
1995:
<PAGE>
HMH Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Supplemental Condensed Consolidating Balance Sheets
(in millions)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
January 3, 1997 Parent Subsidiaries Subsidiary Consolidated
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Property and equipment. . . . . . . . . . . . . . . . . . . . . $ 488 $ 316 $ 140 $ 944
Investment in affiliate . . . . . . . . . . . . . . . . . . . . 17 -- -- 17
Notes receivable from affiliate . . . . . . . . . . . . . . . . -- 140 -- 140
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . 31 21 24 76
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . 108 -- -- 108
-------- -------- ----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 644 $ 477 $ 164 $ 1,285
======== ======== =========== ===========
Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 638 $ 19 $ 75 $ 732
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 23 47 1 71
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . 30 15 24 72
-------- -------- ----------- -----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 691 81 100 875
Owner's equity. . . . . . . . . . . . . . . . . . . . . . . . . (47) 396 64 410
-------- -------- ----------- -----------
Total liabilities and owner's equity . . . . . . . . . . . $ 644 $ 477 $ 164 $ 1,285
======== ======== =========== ===========
December 29, 1995
Property and equipment. . . . . . . . . . . . . . . . . . . . . $ 557 $ 298 $ 144 $ 999
Investment in affiliate . . . . . . . . . . . . . . . . . . . . 16 -- -- 16
Notes receivable from affiliate . . . . . . . . . . . . . . . . -- 145 -- 145
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . 24 18 4 46
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . 16 -- -- 16
-------- -------- ----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 613 $ 461 $ 148 $ 1,222
======== ======== =========== ===========
Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 640 $ 19 $ 75 $ 734
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 21 57 -- 78
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . 15 1 10 26
-------- -------- ----------- -----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 676 77 85 838
Owner's equity. . . . . . . . . . . . . . . . . . . . . . . . . (63) 384 63 384
-------- -------- ----------- -----------
Total liabilities and owner's equity . . . . . . . . . . . $ 613 $ 461 $ 148 $ 1,222
======== ======== =========== ===========
</TABLE>
<PAGE>
HMH Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Supplemental Condensed Consolidating Statements of Operations
(in millions)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Year Ended January 3, 1997 Parent Subsidiaries Subsidiary Consolidated
--------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES. . . . . . . . . . . . . . . . . . . . . . . . . . $ 105 $ 67 $ 44 $ 216
OPERATING COSTS AND EXPENSES. . . . . . . . . . . . . . . . 59 34 34 127
-------- --------- ----------- -----------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST. . . . . . . . . . . . . . . . . . . . . . 46 33 10 89
Corporate expenses. . . . . . . . . . . . . . . . . . . . . (4) (4) (2) (10)
Interest expense. . . . . . . . . . . . . . . . . . . . . . (63) (1) (5) (69)
Interest income . . . . . . . . . . . . . . . . . . . . . . 21 3 -- 24
-------- --------- ----------- -----------
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . -- 31 3 35
Provision for income taxes. . . . . . . . . . . . . . . . . -- (13) (1) (14)
-------- --------- ----------- -----------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 18 $ 2 $ 20
======== ========= =========== ===========
Year Ended December 29, 1995
REVENUES. . . . . . . . . . . . . . . . . . . . . . . . . . $ 137 $ 46 $ -- $ 183
OPERATING COSTS AND EXPENSES. . . . . . . . . . . . . . . . 59 44 -- 103
----------- --------- ----------- -----------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST. . . . . . . . . . . . . . . . . . . . . . 78 2 -- 80
Corporate expenses. . . . . . . . . . . . . . . . . . . . . (6) (4) -- (10)
Interest expense. . . . . . . . . . . . . . . . . . . . . . (60) (1) -- (61)
Interest income . . . . . . . . . . . . . . . . . . . . . . 2 13 -- 15
----------- --------- ----------- -----------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM. . . . . . . . . . . . . . . . . . . 14 10 -- 24
Provision for income taxes. . . . . . . . . . . . . . . . . (5) (4) -- (9)
----------- --------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM. . . . . . . . . . . . . . 9 6 -- 15
Extraordinary item -- Loss on extinguishment of debt. . . . (14) -- -- (14)
----------- --------- ----------- -----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . $ (5) $ 6 $ -- $ 1
=========== ========= =========== ===========
Year Ended December 30, 1994
REVENUES. . . . . . . . . . . . . . . . . . . . . . . . . . $ 185 $ 32 $ -- $ 217
OPERATING COSTS AND EXPENSES. . . . . . . . . . . . . . . . 98 16 -- 114
----------- --------- ----------- -----------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST. . . . . . . . . . . . . . . . . . . . . . 87 16 -- 103
Corporate expenses. . . . . . . . . . . . . . . . . . . . . (6) (2) -- (8)
Interest expense. . . . . . . . . . . . . . . . . . . . . . (62) (2) -- (64)
Interest income . . . . . . . . . . . . . . . . . . . . . . -- 14 -- 14
----------- --------- ----------- -----------
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . 19 26 -- 45
Provision for income taxes. . . . . . . . . . . . . . . . . (7) (10) -- (17)
----------- --------- ----------- -----------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 12 $ 16 $ -- $ 28
=========== ========= =========== ===========
</TABLE>
<PAGE>
HMH Properties, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Supplemental Condensed Consolidating Statements of Cash Flows
(in millions)
Year Ended January 3, 1997
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------------ --------------- ---------------- --------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS . . . . . . . . . . . . . . . . $ 53 $ 34 $ 3 $ 90
----------- ----------- ----------- ------------
INVESTING ACTIVITIES
Cash received from sales of assets. . . . . . . . . . . 315 -- -- 315
Capital expenditures. . . . . . . . . . . . . . . . . . (13) (31) (1) (45)
Acquisitions. . . . . . . . . . . . . . . . . . . . . . (246) -- -- (246)
Other . . . . . . . . . . . . . . . . . . . . . . (14) 4 -- (10)
----------- ----------- ----------- ------------
Cash provided by (used in) investing activities . . . . 42 (27) (1) 14
----------- ----------- ----------- ------------
FINANCING ACTIVITIES
Repayment of debt . . . . . . . . . . . . . . . . . . . (3) -- -- (3)
Dividends to Hospitality. . . . . . . . . . . . . . . . -- (7) (2) (9)
----------- ----------- ----------- -----------
Cash provided by (used in) financing activities . . . . (3) (7) (2) (12)
----------- ----------- ----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . 92 -- -- 92
CASH AND CASH EQUIVALENTS, beginning of year. . . . . . . . 16 -- -- 16
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year. . . . . . . . . . . $ 108 $ -- $ -- $ 108
=========== =========== =========== ===========
</TABLE>
Year Ended December 29, 1995
<TABLE>
<CAPTION>
Non-Guarantor
Parent Subsidiaries Consolidated
----------- ------------- ------------
<S> <C> <C> <C>
CASH PROVIDED BY OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75 $ -- $ 75
---------- ----------- ------------
INVESTING ACTIVITIES
Cash received from sales of assets. . . . . . . . . . . . . . . . . . . . . 304 -- 304
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . (41) -- (41)
Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29) (147) (242)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 10 20
---------- ---------- ------------
Cash provided by (used in) investing activities . . . . . . . . . . . . . . 178 (137) 41
---------- ---------- ------------
FINANCING ACTIVITIES
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (589) -- (589)
Issuance of debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601 75 676
Transfers to Hospitality, net . . . . . . . . . . . . . . . . . . . . . . . (151) -- (151)
Transfer from Parent. . . . . . . . . . . . . . . . . . . . . . . . . . . . (62) 62 --
Dividends to Hospitality. . . . . . . . . . . . . . . . . . . . . . . . . . (36) -- (36)
---------- ------------ ------------
Cash provided by (used in) financing activities . . . . . . . . . . . . . . (237) 137 (100)
---------- ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . 16 -- 16
CASH AND CASH EQUIVALENTS, beginning of year. . . . . . . . . . . . . . . . . . -- -- --
---------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of year. . . . . . . . . . . . . . . . . . . . . $ 16 $ -- $ 16
========== ============ ============
</TABLE>
<PAGE>
PART III
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>
<S> <C> <C>
Other Positions and
Business Experience Prior to Becoming
Name and Title Age an Executive Officer of the Company
- ------------------- ---- ---------------------------------------
Robert E. Parsons, Jr. 41 Robert E. Parsons, Jr. joined Host Marriott's Corporate Financial Planning staff in
President and Director 981 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.
Christopher J. Nassetta 34 Christopher J. Nassetta joined Host Marriott in October 1995 as Executive Vice
Executive Vice President President. Mr. Nassetta was elected Vice President of the Company in 1995. Prior
to joining Host Marriott, Mr. Nassetta served as President of Bailey Realty
Corporation from 1991 until 1995. He had previously served as Chief Development
Officer and in various other positions with The Oliver Carr Company
from 1984 through 1991.
Bruce D. Wardinski 36 Bruce Wardinski joined Host Marriott in 1987 as Senior Financial Analyst of
Vice President and Financial Planning & Analysis and was named Manager in June 1988. He was
Treasurer appointed Director of Financial Planning & Analysis in 1989, 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 named 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. 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 $10 million in both 1996 and 1995,
respectively, and $8 million in 1994.
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 Host Marriott
Hospitality, 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 Host Marriott Hospitality,
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.
The Company sold and leased back to a real estate investment trust 16 of its
Courtyard properties in 1996 for $176 million (10% of which was deferred). Host
Marriott purchased the Company's rights and obligations to the deferred proceeds
and obligations under the lease for the properties at their fair market value.
Also in 1996, the Company acquired Host Marriott's 20% general partner interest
in the Salt Lake City Hotel Partners, which owned the Salt Lake City Marriott,
for $10 million.
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 # DESCRIPTION
- --------- --------------------------------------------
3.1 Certificate of Incorporation of the Company (incorporated by reference
to Registration Statement No. 33-95088).
3.2 Restated Bylaws of the Company (incorporated by reference to
Registration Statement No. 33-95058).
4.1 Indenture dated as of May 25, 1995, by and among the Company, HMH
Courtyard Properties, Inc., HMC Retirement Properties, Inc., Marriott
Financial Services, Inc., HMH Pentagon Corporation, Marriott SBM Two
Corporation and Host Airport Hotels, Inc. as Subsidiary Guarantors,
and Marine Midland Bank, as Trustee, with respect to the 91/2% Senior
Secured Notes due 2005 of the Company (incorporated by reference to
Registration Statement No. 33-95058).
10.1 Purchase Agreement, dated as of May 18, 1995, by and among the
Company, HMH Courtyard Properties, Inc., HMC Retirement Properties,
Inc., Marriott Financial Services, Inc., HMH Pentagon Corporation,
Marriott SBM Two Corporation and Host Airport Hotels, Inc. as
Subsidiary Guarantors and Donaldson, Lufkin & Jenrette Securities
Corporation, Goldman Sachs & Co., BT Securities Corporation, Citicorp
Securities, Inc., Montgomery Securities, Salomon Brothers Inc, and
Smith Barney Inc. as the Initial Purchasers (incorporated by reference
to Registration Statement No. 33-95058).
10.2 Registration Rights Agreement, dated as of May 25, 1995, by and
between the Company, HMH Courtyard Properties, Inc., HMC Retirement
Properties, Inc., Marriott Financial Services, Inc., HMH Pentagon
Corporation, Marriott SBM Two Corporation and Host Airport Hotels,
Inc. as Subsidiary Guarantors and Donaldson, Lufkin & Jenrette
Securities Corporation, Goldman Sachs & Co., BT Securities
Corporation, Citicorp Securities, Inc., Montgomery Securities, Salomon
Brothers Inc, and Smith Barney Inc. as the Initial Purchasers
(incorporated by reference to Registration Statement No. 33-95058).
10.3 Consolidation Letter Agreement pertaining to Courtyard Hotels dated
September 25, 1993 between a subsidiary of Marriott International,
Inc. and a subsidiary of Host Marriott Hospitality, Inc.,
(incorporated by reference from Registration Statement No. 33-62444).
10.4 Consolidation Letter Agreement pertaining to Residence Inns dated
September 25, 1993 between a subsidiary of Marriott International,
Inc. and a subsidiary of Host Marriott Hospitality, Inc. (incorporated
by reference from Registration Statement No. 33-62444)
10.5 Corporate Services Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Registration Statement No. 33-62444)
10.6 Host Marriott Lodging Management Agreement -- Courtyard Hotels dated
September 25, 1993 by and between Marriott Corporation and Marriott
International, Inc. (incorporated by reference from Registration
Statement No. 33-62444)
10.7 Host Marriott Lodging Management Agreement-Marriott Hotels, Resorts
and Hotels dated September 25, 1993 by and between Marriott
Corporation and Marriott International, Inc. (incorporated by
reference from Registration Statement No. 33-62444)
10.8 Host Marriott Lodging Management Agreement-Residence Inns dated
September 25, 1993 by and between Marriott Corporation and Marriott
International, Inc. (incorporated by reference from Registration
Statement No. 33-62444)
10.11 Tax Administration Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Registration Statement No. 33-62444)
10.12 Tax Sharing Agreement dated as of October 5, 1993 by and between
Marriott Corporation and Marriott International, Inc. (incorporated by
reference from Registration Statement No. 33-62444)
12 Computation of ratio of earnings to fixed charges
21 Subsidiaries of HMH Properties, Inc.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
. December 6, 1996 - Report of the announcement that the
Company acquired the Salt Lake City Marriott, including
financial statements of the acquired business and pro forma
financial statements for HMH Properties, Inc.
<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.
HMH 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>
<S> <C> <C>
Signatures Title Date
- ---------------------------- ----------------------------- -----------
/s/ ROBERT E. PARSONS, JR. President and Director March 27, 1997
- ---------------------------- (Principal Executive Officer)
Robert E. Parsons, Jr.
/s/ CHRISTOPHER G. TOWNSEND
- ---------------------------- Executive Vice President and Director March 27, 1997
Christopher G. Townsend
/s/ CHRISTOPHER J. NASSETTA
- ---------------------------- Executive Vice President March 27, 1997
Christopher J. Nassetta
/s/ BRUCE D. WARDINSKI
- ---------------------------- Vice President and Treasurer March 27, 1997
Bruce D. Wardinski (Principal Financial Officer)
/s/ DONALD D. OLINGER Vice President and Corporate Controller March 27, 1997
- ---------------------------- (Principle Accounting Officer
Donald D. Olinger
</TABLE>
<PAGE>
SCHEDULE III
Page 1 of 2
HMH PROPERTIES, INC. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
January 3, 1997
(in millions)
<TABLE>
<CAPTION>
Gross Amount at
Initial Costs January 3, 1997
------------- Subsequent ---------------------------
Building & Costs Building & Accumulated
Description Debt Land Improvements Capitalized Land Improvements Total Depreciation
----------- ---- ---- ------------ ----------- ---- ------------ ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Full-service Hotels:
Marriott World Trade Center
New York, NY . . . . . . . . $ 75 $ -- $ 135 $ 1 $ -- $ 136 $ 136 $ (3)
Newport Beach Marriott Hotel
Newport Beach, CA. . . . . . 4 11 13 39 11 52 63 (21)
Ritz-Carlton Atlanta Downtown
Atlanta, GA. . . . . . . . . -- 13 41 -- 13 41 54 (1)
Salt Lake City Marriott
Salt Lake City, UT . . . . . -- -- 54 -- -- 54 54 --
Other full-service properties,
each less than 5% of total . 19 70 498 126 75 618 693 (120)
- ----- ---- ----- ----- ---- ------ ------ -----
TOTAL . . . . . . . . . . . . . $ 98 $ 94 $ 741 $ 166 $ 99 $ 901 $1,000 $(145)
===== ==== ===== ===== ==== ====== ====== =====
<CAPTION>
Date of
Completion of Date Depreciation
Description Construction Acquired Life
------------- -------------- ---------- ------------
<S> <C> <C> <C>
Full-service Hotels:
Marriott World Trade Center
New York, NY. . . . . . . . 1981 1995 40
Newport Beach Marriott Hotel
Newport Beach, CA . . . . . 1975 N/A 40
Ritz-Carlton Atlanta Downtown
Atlanta, GA . . . . . . . . 1984 1996 40
Salt Lake City Marriott
Salt Lake City, UT. . . . . 1981 1996 40
Other full-service properties,
each less than 5% of total. Various Various 40
</TABLE>
<PAGE>
Schedule III
Page 2 of 2
HMH PROPERTIES, INC. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
January 3, 1997
(in millions)
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 . . . . . . . . . . . $ 1,466
Additions:
Acquisitions . . . . . . . . . . . . . . . 104
Capital expenditures . . . . . . . . . . . 34
Deductions:
Dispositions and other . . . . . . . . . . (435)
------------
Balance at December 30, 1994 . . . . . . . . . . . 1,169
Additions:
Acquisitions . . . . . . . . . . . . . . . 222
Capital expenditures . . . . . . . . . . . 13
Deductions:
Dispositions and other . . . . . . . . . . (361)
------------
Balance at December 29, 1995 . . . . . . . . . . . 1,043
Additions:
Acquisitions . . . . . . . . . . . . . . . 220
Capital expenditures . . . . . . . . . . . 21
Transfers from construction in progress. . 28
Deductions:
Dispositions and other . . . . . . . . . . (312)
------------
Balance at January 3, 1997 . . . . . . . . . . . . $ 1,000
============
</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 . . . . . . . . . . $ 146
Depreciation and amortization. . . . . . . . 32
Dispositions and other . . . . . . . . . . . (27)
------------
Balance at December 30, 1994 . . . . . . . . . . 151
Depreciation and amortization. . . . . . . . 27
Dispositions and other . . . . . . . . . . . (27)
------------
Balance at December 29, 1995 . . . . . . . . . . 151
Depreciation and amortization. . . . . . . . 25
Dispositions and other . . . . . . . . . . . (31)
------------
Balance at January 3, 1997 . . . . . . . . . . . $ 145
============
</TABLE>
(C) The aggregate cost of properties for Federal income tax purposes is
approximately $944 million at January 3, 1997.
(D) The total cost of properties excludes construction-in-progress properties.
EXHIBIT 12
HMH PROPERTIES, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in millions, except ratio amounts)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------ ------ ------ ---- ------
<S> <C> <C> <C> <C> <C>
Income from operations before income taxes. . . . . $ 34 $ 24 $ 45 $ 23 $ 23
Add (deduct):
Fixed charges . . . . . . . . . . . . . . . . . . 78 67 68 67 62
Capitalized interest. . . . . . . . . . . . . . . (1) (2) (1) (5) (10)
Amortization of capitalized interest. . . . . . . 2 1 2 3 5
Net losses related to certain 50% or less
owned affiliate. . . . . . . . . . . . . . . . (1) -- (1) -- --
----- ----- ----- ----- -----
Adjusted earnings . . . . . . . . . . . . . . . . . $ 113 $ 90 $ 113 $ 88 $ 80
===== ===== ===== ===== =====
Fixed charges:
Interest on indebtedness and amortization of
deferred financing costs . . . . . . . . . . . $ 70 $ 63 $ 65 $ 65 $ 60
Portion of rents representative of the
interest factor. . . . . . . . . . . . . . . . 8 4 3 2 2
----- ----- ----- ----- -----
Total fixed charges . . . . . . . . . . . . . . . . $ 78 $ 67 $ 68 $ 67 $ 62
===== ===== ===== ===== =====
Ratio of earnings to fixed charges. . . . . . . . . 1.44 1.34 1.66 1.31 1.29
==== ==== ==== ==== ====
</TABLE>
EXHIBIT 21
HMH PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE OF SUBSIDIARIES
HMH Rivers, Inc.
Marriott SBM Two Corporation
HMH WTC, Inc.
HMC Retirement Properties, Inc.
HMH Pentagon Corporation
HMH Marina, Inc.
Host Airport Hotels, Inc.
Marriott Financial Services, Inc.
HMH HPT Residence Inn, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from HMH
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> 0000905038
<NAME> HMH Properties, Inc.
<MULTIPLIER> 1,000,000
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Jan-3-1997
<PERIOD-START> Dec-30-1995
<PERIOD-END> Jan-3-1997
<EXCHANGE-RATE> 1
<CASH> 108
<SECURITIES> 0
<RECEIVABLES> 19
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,148
<DEPRECIATION> 204
<TOTAL-ASSETS> 1,285
<CURRENT-LIABILITIES> 0
<BONDS> 732
0
0
<COMMON> 0
<OTHER-SE> 410
<TOTAL-LIABILITY-AND-EQUITY> 1,285
<SALES> 0
<TOTAL-REVENUES> 216
<CGS> 0
<TOTAL-COSTS> 127
<OTHER-EXPENSES> 10
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69
<INCOME-PRETAX> 34
<INCOME-TAX> 14
<INCOME-CONTINUING> 20
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
