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Pursuant to Rule 424(b)(3)
Registration No. 333-33723
PROSPECTUS
OFFER TO EXCHANGE
8 7/8% SENIOR NOTES DUE 2007, SERIES B FOR ALL OUTSTANDING
8 7/8% SENIOR NOTES DUE 2007, SERIES A
OF
HMH PROPERTIES, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON OCTOBER 24,
1997, UNLESS EXTENDED
---------------
HMH Properties, Inc., a Delaware corporation (the "Company" or "Properties")
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange its outstanding 8 7/8%
senior notes due 2007, series A (the "Original Notes"), of which an aggregate
of $600 million in principal amount is outstanding as of the date hereof, for
an equal principal amount of newly issued 8 7/8% senior notes due 2007, series
B (the "Exchange Notes"). The Company is a wholly owned subsidiary of Host
Marriott Hospitality, Inc. ("Hospitality"), which is a wholly owned subsidiary
of Host Marriott Corporation ("Host Marriott").
The form and terms of the Exchange Notes will be the same as the form and
terms of the Original Notes except that (i) the Exchange Notes will be
registered under the Securities Act of 1933, as amended (the "Securities Act")
and hence will not bear legends restricting the transfer thereof, and (ii) the
holders of the Exchange Notes will not be entitled to certain rights of
holders of Original Notes under the Registration Rights Agreement (as defined)
which rights will terminate upon the consummation of the Exchange Offer. The
Exchange Notes will evidence the same debt as the Original Notes and will be
entitled to the benefits of an indenture dated as of July 15, 1997 governing
the Original Notes and the Exchange Notes (the "Indenture"). The Indenture
provides for the issuance of both the Exchange Notes and the Original Notes.
The Exchange Notes and the Original Notes are sometimes referred to herein
collectively as the "Senior Notes." Interest on the Exchange Notes will be
payable semi-annually on July 15 and January 15 of each year, commencing
January 15, 1998. Holders of the Exchange Notes will receive interest on
January 15, 1998 from the date of initial issuance of the Exchange Notes, plus
an amount equal to the accrued interest on the Original Notes from the date of
initial delivery to, but not including, the date of exchange thereof for the
Exchange Notes. Such interest will be paid with the first interest payment on
the Exchange Notes. Interest on the Original Notes accepted for exchange will
cease to accrue upon issuance of the Exchange Notes. The Company will not be
required to make any mandatory redemption or sinking fund payment with respect
to the Senior Notes prior to maturity. The Senior Notes will be redeemable at
the option of the Company, in whole or in part, at any time on or after July
15, 2002 at the redemption prices set forth herein, plus accrued and unpaid
interest, if any, to the date of redemption. In the event of a Change of
Control Triggering Event (as defined herein), the Company will be required to
make an offer to repurchase the Senior Notes, at a price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest, if any,
to the date of purchase. See "Description of Senior Notes."
The Original Notes are, and the Exchange Notes will be, senior obligations
of the Company secured on an equal and ratable basis with certain other
Indebtedness (as defined herein) of the Company by a pledge of the capital
stock of all but one of the Subsidiary Guarantors (as defined herein) and will
rank pari passu in right of payment with all existing and future senior
Indebtedness of the Company; provided, however, that certain Indebtedness of
the Company and its subsidiaries currently is, and Indebtedness incurred by
the Company and its subsidiaries may be, secured by assets held by the Company
or its subsidiaries subject to certain restrictions described herein. See
"Description of Senior Notes--Limitation on Liens." At June 20, 1997 on a pro
forma basis as adjusted to give effect to the Offering (as defined herein),
the aggregate principal amount of senior Indebtedness of the Company was
approximately $1.7 billion, of which approximately $100 million is secured by
assets held by the Company or its subsidiaries. The Indenture limits the
ability of the Company and its subsidiaries to incur additional Indebtedness.
The Original Notes are, and the Exchange Notes will be, guaranteed on a
joint and several basis (the "Guarantees") by certain of the Company's
existing and future subsidiaries (collectively, the "Subsidiary Guarantors"),
which Guarantees will be senior obligations of the Subsidiary Guarantors and
will rank pari passu in right of payment with all other existing and future
senior Indebtedness of the Subsidiary Guarantors, provided that certain
Indebtedness of the Subsidiary Guarantors
(continued on next page)
SEE "RISK FACTORS" ON PAGE 16 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN
FACTORS WHICH HOLDERS OF ORIGINAL NOTES SHOULD CONSIDER IN CONNECTION WITH
THIS EXCHANGE OFFER.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 23, 1997.
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(Continued from previous page)
and their subsidiaries is, and Indebtedness incurred by the Subsidiary
Guarantors and their subsidiaries may be secured by assets held by such
Subsidiary Guarantors and their subsidiaries, subject to certain restrictions
described herein.
The Company will accept for exchange any and all validly tendered Original
Notes on or prior to 5:00 p.m., New York City time, on October 24, 1997 (if
and as extended, the "Expiration Date"). Tenders of Original Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of notes being tendered for exchange. The Original Notes may
be tendered only in integral multiples of $1,000. In the event the Company
terminates the Exchange Offer and does not accept for exchange any Original
Notes, the Company will promptly return all previously tendered Original Notes
to the Holders thereof.
The Original Notes were originally issued and sold on July 15, 1997 in a
transaction not registered under the Securities Act in reliance upon the
exemption provided in Rule 144A and Regulation S of the Securities Act (the
"Offering"). Accordingly, the Original Notes may not be reoffered, resold or
otherwise pledged, hypothecated or transferred in the United States unless so
registered or unless an applicable exemption from the registration
requirements of the Securities Act is available. Based upon interpretations by
the staff (the "Staff") of the Securities and Exchange Commission (the
"Commission") set forth in no-action letters issued to third parties, the
Company believes that the Exchange Notes issued pursuant to the Exchange Offer
in exchange for the Original Notes may be offered for resale, resold and
otherwise transferred by holders thereof (other than any such holder which is
(i) an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, (ii) a broker-dealer who acquired the Original Notes directly
from the Company or (iii) a broker-dealer who acquired the Original Notes as a
result of market making or other trading activities) without compliance with
the registration and prospectus delivery requirements of the Securities Act
provided that such Exchange Notes are acquired in the ordinary course of such
holder's business and such holder is not engaged in, and does not intend to
engage in, and has no arrangement or understanding with any person to
participate in, a distribution of such Exchange Notes. Each broker-dealer that
receives the Exchange Notes for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in connection with any
resale of such Exchange Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Broker-dealers who acquired Original Notes as a result of
market making or other trading activities may use this Prospectus, as
supplemented or amended, in connection with resales of the Exchange Notes. The
Company has agreed that, for a period not to exceed 180 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution." Any
holder that cannot rely upon such interpretations must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction.
Any Original Notes not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that Original Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered, and
tendered but unaccepted, Original Notes could be adversely affected. Following
consummation of the Exchange Offer, the holders of Original Notes will
continue to be subject to the existing restrictions on transfer thereof and
the Company will have no further obligation to such holders to provide for the
registration under the Securities Act of the Original Notes. (See "Original
Notes Registration Rights; Liquidated Damages.") No assurance can be given as
to the liquidity of the trading market for either the Original Notes or the
Exchange Notes.
The Company believes that none of the registered holders of the Original
Notes (the "Registered Holders") is an affiliate (as such term is defined in
Rule 405 under the Securities Act) of the Company. Prior to this Exchange
Offer, there has been no public market for the Exchange Notes. The Company
does not intend to list the Exchange Notes on any securities exchange or to
seek approval for quotation through any automated quotation system. There can
be no assurance that an active market for the Exchange Notes will develop. To
the extent that a market for the Exchange Notes does develop, the market value
of the Senior Notes will depend on market conditions (such as yields on
alternative investments), general economic conditions, the Company's financial
condition and other conditions. Such conditions might cause the Senior Notes,
to the extent that they are actively traded, to trade at a significant
discount from face value. See "Risk Factors--Absence of Public Market for the
Senior Notes."
The Company will not receive any proceeds from this Exchange Offer. The
Company has agreed to bear the expenses of this Exchange Offer. No underwriter
is being used in connection with this Exchange Offer.
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NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THIS EXCHANGE OFFER COVERED BY THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
EXCHANGE NOTES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect
to the financial condition, results of operations, business and prospects of
the Company and the lodging industry generally, including, without limitation,
statements under the captions "Prospectus Summary," and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein. These forward-looking statements involve certain risks and
uncertainties, and as such may involve known and unknown risks, uncertainties,
and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such forward-looking statements contained herein speak
only as of the date of this Prospectus. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in its
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based. Further information on
other factors that could affect the financial results of the Company and such
forward-looking statements is included in the section herein entitled "Risk
Factors."
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the Exchange Offer. As permitted
by the rules and regulations of the Commission, this Prospectus omits certain
information, exhibits and undertakings contained in the Registration
Statement. For further information with respect to the Company and this
Exchange Offer, reference is made to the Registration Statement, including the
exhibits thereto and the financial statements, notes and schedules filed as a
part thereof.
The Company is subject to the informational requirements of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy materials and other information with the
Commission. The reports, proxy materials and other information filed by the
Company with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Regional Offices of the Commission at Seven
World Trade Center, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
also can be obtained from the Public Reference Section of the Commission,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the
Commission. The address of such site is http://www.sec.gov. The Indenture
requires the Company to file with the Commission and provide to holders of the
Senior Notes the reports and other information required to be filed with the
Commission by the Exchange Act, whether or not the Company is then subject to
such requirements. See "Description of Senior Notes--Reports."
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The Company will provide without charge to each person to whom this
Prospectus is delivered, on the request of any such person, a copy of any or
all of the above documents incorporated herein by reference (other than
exhibits to such documents, unless such exhibits are specifically incorporated
by reference into the documents that this Prospectus incorporates). Requests
should be directed to HMH Properties, Inc., Office of General Counsel, 10400
Fernwood Road, Bethesda, Maryland, 20817-1109 (telephone: (301) 380-9000).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference in this Prospectus the
following documents, each of which has been filed with the Commission:
(i)the Company's Annual Report on Form 10-K for the fiscal year ended
January 3, 1997 (the "Form 10-K");
(ii)the Company's Quarterly Report on Form 10-Q for the quarters ended
March 28, 1997 and June 20, 1997; and
(iii)the Company's Current Report on Form 8-K dated July 10, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the Exchange Offer shall be deemed to be incorporated by
reference in the Prospectus and made a part hereof from the date of filing of
such documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other document subsequently filed with the
Commission which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the request of any such person, a copy of any or
all of the above documents incorporated herein by reference (other than
exhibits to such documents, unless such exhibits are specifically incorporated
by reference into the documents that this Prospectus incorporates). Requests
should be directed to HMH Properties, Inc., 10400 Fernwood Road, Bethesda,
Maryland, 20817-1109, Attention: Christopher G. Townsend, Esq., Executive Vice
President, (301) 380-7574.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 3
Incorporation of Certain Documents by Reference.......................... 4
Prospectus Summary....................................................... 5
Risk Factors............................................................. 16
The Exchange Offer....................................................... 19
Use of Proceeds.......................................................... 28
Capitalization........................................................... 28
Pro Forma Condensed Combined Consolidated Financial Data................. 29
Selected Historical Financial Data....................................... 35
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 37
Business and Properties ................................................. 47
Management............................................................... 55
Sole Shareholder......................................................... 56
Relationship with Host Marriott.......................................... 56
Relationship with Marriott International................................. 57
Description of Senior Notes.............................................. 59
Material Federal Income Tax Considerations............................... 86
Plan of Distribution..................................................... 87
Legal Matters............................................................ 87
Experts.................................................................. 87
Index to Financial Statements ........................................... F-1
</TABLE>
4
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Unless the context otherwise requires, the term "Company" refers to HMH
Properties, Inc. and its subsidiaries. On July 10, 1997, HMC Acquisition
Properties, Inc. ("Acquisitions"), an indirect wholly owned subsidiary of Host
Marriott, was merged with and into the Company. The following information and
the combined consolidated financial statements included elsewhere herein are
presented as if Acquisitions was merged into the Company for all periods
presented as discussed in Note 1 to the combined consolidated financial
statements. References herein to "Smith Travel Research" and to "industry data"
are to industry data provided by Smith Travel Research, which data has been
customized to reflect that of the upscale full-service lodging segment, in
which the Company primarily competes. "Upscale full-service" lodging segment,
as used herein, includes Marriott Hotels, Resorts and Suites; Crowne Plaza;
Doubletree; Hyatt; Hilton; Radisson; Red Lion; Sheraton; Westin; and Wyndham.
THE COMPANY
The Company, an indirect wholly owned subsidiary of Host Marriott, owns the
majority of Host Marriott's lodging properties. The Company's assets
principally consist of 50 full-service hotel properties, one partnership
investment and a note receivable from an affiliate. All but ten of the
Company's 50 full-service lodging properties are managed by Marriott
International, Inc. ("Marriott International") and all but two are operated
under the Marriott or Ritz-Carlton brands, which are among the most respected
and widely recognized in the lodging industry. Based on industry data, the
Company believes that its hotels as a group consistently outperform the
industry's average occupancy rate by a significant margin, and averaged 76.4%
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).
The lodging industry as a whole, and the upscale and luxury full-service
hotel segments in particular, are benefiting from a favorable supply and demand
relationship in the United States. Based on data provided by Smith Travel
Research, the Company believes that demand for upscale full-service rooms,
measured as annual domestic occupied room nights for its competitive set,
increased 3.8% in 1994, 1.5% in 1995 and 2.3% in 1996. Management believes that
demand increases have resulted primarily from an improved economic environment
and a corresponding increase in business travel. In spite of increased demand
for rooms, the room supply growth rate in the upscale full-service segment has
been minimal. Management believes that the low supply growth rate in the
upscale 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 selectively raising room rates and by replacing certain discounted
group business with higher-rated group and transient business. As a result, on
a comparable basis, room revenues per available room ("REVPAR") for the
Company's full-service properties increased approximately 15% for the twenty-
four weeks ended June 20, 1997 ("First Two Quarters 1997") 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 15% increase in REVPAR resulted in an approximate 23% increase in
comparable full-service hotel EBITDA for the First Two Quarters 1997. The
Company expects this supply/demand imbalance 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. There can be no assurance, however,
that such supply/demand imbalance will continue or that REVPAR and EBITDA will
continue to improve.
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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, including controlling interests in
joint ventures, partnerships or other entities holding such properties. The
Company believes that the upscale and luxury full-service segments of the
market offer numerous opportunities to acquire assets at attractive multiples
of cash flow and at substantial discounts to replacement value, including
under-performing hotels which can be improved by conversion to the Marriott or
Ritz-Carlton brands. The Company believes that the upscale full-service segment
is very promising because:
. The Company believes that 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 through 1996. Furthermore, the lead time
from conception to completion of a full-service hotel is generally five
years or more in the markets the Company is principally pursuing, which
management believes will contribute to the continued low growth of
supply in the upscale and luxury full-service segments through 2000.
. 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. In recent years, the Company
has acquired a number of properties from inadvertent owners at
significant discounts to replacement cost, including luxury hotels
operating under the Ritz-Carlton brand. While 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 U.S. lodging
properties and have only recently begun to dispose of such properties.
The Company expects that there will be increased opportunities to
acquire U.S. lodging properties from international financial
institutions and expects to dedicate significant resources to
aggressively pursue these opportunities.
. The Company believes that there are numerous opportunities to improve
the performance of acquired hotels by replacing the existing hotel
manager with Marriott International and converting the hotel to the
Marriott brand. Based on industry data, the Company believes that
Marriott-flagged properties have consistently outperformed the industry.
Demonstrating the strength of the Marriott brand name, the average
occupancy rate for the Company's comparable full-service properties was
76.1%, compared to an average occupancy rate of 71.1% for competing
upscale full-service hotels. Accordingly, management anticipates that
any additional full-service properties acquired by the Company in the
future and converted from other brands to the Marriott brand should
achieve higher occupancy rates and average room rates than has
previously been the case for those properties as the properties begin to
benefit from Marriott's brand recognition, reservation system and group
sales organization. Eleven of the Company's 36 acquired full-service
hotels were converted to the Marriott brand following their acquisition.
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 Marriott and Ritz-Carlton
brand names due to its relationship with Marriott International.
In 1996, the Company acquired nine full-service properties with 3,124 rooms
for approximately $292 million, including the acquisition, through foreclosure,
of a controlling interest in the 250-room Newport Beach Marriott Suites and the
acquisition of a controlling interest in a venture that owns the 400-room
Pittsburgh Marriott City Center. In 1997, the Company has acquired the 306-room
Ritz-Carlton, Marina del Rey for approximately $57 million and controlling
interests in the 404-room Norfolk Waterside Marriott for approximately $33
million and the Manhattan Beach Radisson Plaza Hotel, which was converted to
the Marriott
6
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brand, for $38 million. The Company acquired seven full-service properties
(3,133 rooms) for approximately $329 million in 1995. During 1994, the Company
acquired 15 full-service properties with 6,044 rooms for approximately $441
million. In 1994, 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 which the Company consolidates in the accompanying financial
statements. The Company believes that each of these acquisitions was made at an
attractive valuation and at a significant discount to replacement value.
On September 10, 1997, Host Marriott successfully completed the purchase of
98.6% of the limited partnership units in Chesapeake Hotel Limited Partnership
("CHLP"), increasing its ownership of CHLP to 99.9%. CHLP owns six hotels, the
Key Bridge Marriott, the Chicago O'Hare Marriott, the Boston Newton Marriott,
the Denver Southeast Marriott, the Bloomington Minnesota Marriott and the
Saddlebrook New Jersey Marriott. The Company is considering the acquisition of
Host Marriott's general and limited partnership interests, along with certain
notes and other receivables due from CHLP, which would allow the Company to
consolidate CHLP. The Company currently owns the nonrecourse second mortgages
on the six properties (totalling $139 million at June 20, 1997).
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. The leases and
related obligations were transferred to Host Marriott in 1995. Also, in the
second quarter of 1995, the Company sold its remaining four Fairfield Inns. In
the first and second quarters of 1996, the Company sold to and leased back from
the REIT its remaining 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, although the Company retains the rights to the deferred
proceeds and the lease obligation with respect to the 18 Residence Inns. The
Company has reinvested substantially all of the proceeds in the acquisition of
full-service lodging properties.
The Company is a Delaware corporation and its principal executive office is
located at 10400 Fernwood Road, Bethesda, Maryland, 20817-1109 (telephone:
(301) 380-9000).
THE CONSENT SOLICITATION
On May 12, 1997, the Company commenced a solicitation of consents (the
"Consent Solicitation") of registered holders of its 9 1/2% Senior Notes due
2005 (the "Existing Senior Notes") to certain amendments to the indenture
pursuant to which the Existing Senior Notes were issued (the "Existing Senior
Notes Indenture"). Such amendments facilitated Properties' ability to merge
with HMC Acquisition Properties, Inc. ("Acquisitions"), another indirect,
wholly owned subsidiary of Host Marriott (the "Merger"), and such amendments
facilitate the Company's ability to acquire (i) through certain subsidiaries,
additional properties subject to non-recourse indebtedness and (ii) less than
majority controlling interests in corporations, partnerships and other entities
holding attractive hotel lodging properties. On May 12, 1997, Acquisitions
commenced a substantially similar consent solicitation (the "Acquisitions
Consent Solicitation") of registered holders of its 9% Senior Notes due 2007
(the "Acquisitions Notes"). The Consent Solicitation expired on July 9, 1997
with the Company having obtained the consents to the amendments required under
the Existing Senior Notes Indenture. On July 10, 1997, the Company executed a
supplemental indenture adopting the amendments to the Existing Senior Notes
Indenture. The Acquisitions Consent Solicitation was also successfully
consummated. As part of the Consent Solicitation, the Company made a payment
(the "Consent Payment") of $7,500,000 which
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was allocated pro rata by the Company to each registered holder consenting
thereto. As part of the Acquisitions Consent Solicitation, Acquisitions made a
consent payment of $4,375,000 which was allocated pro rata by Acquisitions to
each registered holder consenting thereto.
The Merger was consummated on July 10, 1997 and the proposed amendments to
the Existing Senior Notes Indenture and to the indenture governing the
Acquisitions Notes became effective on such date. As a result of the Merger,
the Company conducts the operations and business formerly conducted by
Acquisitions. The terms of the respective indentures governing the Existing
Senior Notes and the Acquisition Notes, as amended pursuant to the
aforementioned consent solicitations, are substantially similar to those of the
Indenture. See "Description of Senior Notes."
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THE EXCHANGE OFFER
The Exchange Offer.......... The Company is offering to exchange up to $600
million principal amount of Exchange Notes for a
like principal amount of Original Notes. The
Exchange Notes may be exchanged only in multiples
of $1,000 principal amount. The Company will
issue the Exchange Notes on or promptly after the
Expiration Date. See "The Exchange Offer."
Based on interpretations by the Staff set forth
in no-action letters issued to third parties, the
Company believes that the Exchange Notes issued
pursuant to the Exchange Offer in exchange for
the Original Notes may be offered for resale,
resold and otherwise transferred by any holder
thereof (other than any such holder which is (i)
an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act, (ii) a
broker-dealer who acquired the Original Notes
directly from the Company or (iii) a broker-
dealer who acquired the Original Notes as a
result of market making or other trading
activities) without compliance with the
registration and prospectus delivery requirements
of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary
course of such holder's business and such holder
is not engaged in, and does not intend to engage
in, and has no arrangement or understanding with
any person to participate in the distribution of
such Exchange Notes. Each broker-dealer that
receives the Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan
of Distribution." To comply with the securities
laws of certain jurisdictions, it may be
necessary to qualify for sale or register the
Exchange Notes prior to offering or selling such
Exchange Notes. If a holder of Original Notes
does not exchange such Original Notes for the
Exchange Notes pursuant to the Exchange Offer,
such Original Notes will continue to be subject
to the restrictions on transfer contained in the
legend thereon. In general, the Original Notes
may not be offered or sold, unless registered
under the Securities Act, except pursuant to an
exception from, or in a transaction not subject
to the Securities Act and applicable state
securities laws. See "The Exchange Offer--
Consequences of Failure to Exchange" and
"Description of Senior Notes."
Expiration Date............. The Exchange Offer will expire at 5:00 p.m., New
York City time, on October 24, 1997, unless
extended in which case the term "Expiration Date"
shall mean the latest date and time to which the
Exchange Offer is so extended.
Conditions to the Exchange
Offer...................... The Exchange Offer is subject to certain
customary conditions, which may be waived by the
Company in whole or in part and from time to time
in its sole discretion. See "The Exchange Offer--
Certain Conditions to the Exchange Offer." The
Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Original
Notes being tendered for exchange.
Procedures for Tendering
the Original Notes.........
Each Registered Holder of Original Notes wishing
to accept the Exchange Offer must complete, sign
and date the Letter of
9
<PAGE>
Transmittal, or a facsimile thereof in accordance
with the instructions contained herein and
therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile,
together with such Original Notes and any other
required documentation, to the Exchange Agent at
the address set forth herein; or indicate assent
to the terms of the Letter of Transmittal by
complying with the Automated Tender Offer Program
("ATOP") procedures of the Depository Trust
Company ("DTC"). By executing the Letter of
Transmittal, each holder of the Original Notes
(other than participating broker-dealers) will
represent to the Company that, among other
things, the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained in the
ordinary course of business of the person
receiving such Exchange Notes, whether or not the
holder of the Original Notes, that neither the
holder of the Original Notes nor any such other
person has an arrangement or understanding with
any person to participate in the distribution of
such Original Notes and that neither the holder
nor any such person is an "affiliate," as defined
in Rule 405 under the Securities Act, of the
Company. Any Original Notes not accepted for
exchange for any reason will be returned without
expense to the tendering holder thereof as
promptly as practicable after the expiration or
termination of the Exchange Offer. See "The
Exchange Offer--Procedures for Tendering Original
Notes."
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Original Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender, should contact such
Registered Holder promptly and instruct such
Registered Holder to tender on such beneficial
owner's behalf. If such beneficial holder wishes
to tender on its own behalf, such beneficial
holder must, prior to completing and executing
the Letter of Transmittal, and delivering its
Original Notes, either make appropriate
arrangements to register ownership of the
Original Notes in such holder's name or obtain a
properly completed bond power from the Registered
Holder. The transfer of registered ownership may
take considerable time and may not be able to be
completed prior to the Expiration Date. See "The
Exchange Offer--Procedures for Tendering Original
Notes."
Guaranteed Delivery
Procedures.................. Holders of the Original Notes who wish to tender
their Original Notes and whose Original Notes are
not immediately available or who cannot deliver
their Original Notes or any other documents
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date, must
tender their Original Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
Withdrawal Rights........... Tenders of Original Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on
the Expiration Date. For a withdrawal to be
effective, a written or facsimile notice of
withdrawal must be received by the Exchange Agent
at its address set forth herein or
10
<PAGE>
holders must comply with the appropriate
procedures of DTC's ATOP. Any such notice must
(i) specify the name of the person having
tendered the Original Notes to be withdrawn; (ii)
identify the Original Notes to be withdrawn
(including the serial number or numbers and
principal amount of Original Notes to be
withdrawn); (iii) be signed by the holder in the
same manner as the original signature on the
Letter of Transmittal by which such Original
Notes were tendered; and (iv) specify the name in
which the Original Notes are to be registered, if
different from that of the withdrawing holder.
See "The Exchange Offer--Withdrawal Rights."
Acceptance of Original
Notes and Delivery of
Exchange Notes............. The Company will accept for exchange any and all
Original Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Notes
issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date.
See "The Exchange Offer--Terms of the Exchange
Offer."
Consequences of Failure to
Exchange................... Holders of Original Notes who do not exchange
their Original Notes for the Exchange Notes
pursuant to the Exchange Offer will continue to
be subject to the restrictions on transfer of
such Original Notes as set forth in the legend
thereon. In general, the Original Notes that are
not exchanged pursuant to the Exchange Offer may
not be offered or sold except pursuant to a
registration statement under Securities Act or an
exemption from registration thereunder and in
compliance with applicable state securities laws.
In the event the Company completes the Exchange
Offer, the interest rate on Original Notes will
remain as stated thereon and holders of Original
Notes will have no further rights under the
Registration Rights Agreements (as defined
below).
Certain Tax
Considerations............. Latham & Watkins, counsel to the Company, has
advised the Company that because the Exchange
Notes should not be considered to differ
materially from the Original Notes, the exchange
of the Original Notes for Exchange Notes should
not result in any material federal income tax
consequences to holders exchanging the Original
Notes for the Exchange Notes. For a full
description of the basis of, and limitations on,
this opinion, see "Material Federal Income Tax
Considerations."
Registration Rights
Agreement.................. Pursuant to a registration rights agreement (the
"Registration Rights Agreement") among the
Company, the Subsidiary Guarantors and the
initial purchasers of the Original Notes (the
"Initial Purchasers"), the Company and the
Subsidiary Guarantors have agreed (i) to file a
registration statement with respect to an offer
to exchange the Original Notes for a like
principal amount of Exchange Notes and (ii) to
use their reasonable best efforts to cause such
registration statement to become effective under
the Securities Act. The Exchange Offer is
intended to satisfy the rights of holders of
Original Notes under the Registration Rights
Agreement, which rights terminate upon
consummation of the Exchange Offer. The holders
of the Exchange Notes are not entitled to any
exchange or registration rights with respect to
the Exchange Notes.
Exchange Agent.............. Marine Midland Bank is the Exchange Agent. The
address and telephone number of the Exchange
Agent are set forth in the "The Exchange Offer--
Exchange Agent."
11
<PAGE>
SUMMARY TERMS OF THE SENIOR NOTES
The Exchange Offer applies to $600 million aggregate principal amount of the
Original Notes. The form and terms of the Exchange Notes will be the same as
the form and terms of the Original Notes except that (i) the Exchange Notes
will be registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof and (ii) the holders of the Exchange
Notes will not be entitled to certain rights of the holders of the Original
Notes under the Registration Rights Agreement, which rights will terminate upon
consummation of the Exchange Offer. The Exchange Notes will evidence the same
debt as the Original Notes and both series of Senior Notes will be entitled to
the benefits of the Indenture and treated as a single class of debt securities
thereunder. See "Description of Senior Notes."
Issuer...................... HMH Properties, Inc.
Securities Offered.......... $600 million in aggregate principal amount of 8
7/8% Senior Notes due 2007.
Maturity.................... July 15, 2007
Interest Payment Dates...... July 15 and January 15, commencing January 15,
1998.
Ranking..................... The Senior Notes are senior obligations of the
Company. The Senior Notes rank pari passu in
right of payment with all existing and future
senior Indebtedness of the Company, provided,
however, that certain Indebtedness of the Company
and its subsidiaries currently is, and
Indebtedness incurred by the Company and its
subsidiaries may be, secured by assets held by
the Company or its subsidiaries subject to
certain restrictions described herein. As of June
20, 1997, on a pro forma basis as adjusted to
give effect to the Offering, the aggregate
principal amount of outstanding senior
Indebtedness of the Company was approximately
$1.7 billion, of which approximately $100 million
was secured by assets held by the Company or its
subsidiaries.
Security.................... The Senior Notes are secured (on an equal and
ratable basis with the Existing Senior Notes, the
Acquisitions Notes and pari passu indebtedness)
by a first priority pledge of all of the capital
stock of all but one of the Subsidiary
Guarantors, subject to certain exceptions.
Guarantees.................. The Senior Notes will be guaranteed on a joint
and several basis by the Subsidiary Guarantors.
Optional Redemption......... The Senior Notes may be redeemed at the option of
the Company, in whole or in part, on or after
July 15, 2002 at a premium to par declining to
par in 2005, plus accrued and unpaid interest, if
any, through the redemption date.
Change of Control........... Upon the occurrence of a Change of Control
Triggering Event (as defined herein), the Company
will be required to make an offer to repurchase
the Senior Notes at a price equal to 101% of the
aggregate principal amount thereof, plus accrued
and unpaid interest, if any, to the date of
repurchase.
Certain Covenants........... The Indenture contains certain covenants that,
among other things, restrict the ability of the
Company and its subsidiaries to (i) incur
additional Indebtedness and issue preferred
stock, (ii) pay dividends
12
<PAGE>
or make other distributions, (iii) repurchase
capital stock or subordinated Indebtedness, (iv)
create certain liens, (v) enter into certain
transactions with affiliates, (vi) issue or sell
capital stock of the Company's subsidiaries,
(vii) enter into certain mergers and
consolidations or (viii) invest in Subsidiaries
that are not, or do not become, Subsidiary
Guarantors. In addition, under certain
circumstances, the Company will be required to
offer to purchase the Exchange Notes at a price
equal to 100% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the
date of purchase, with the proceeds of certain
Asset Sales (as defined herein).
RISK FACTORS
Holders of the Original Notes should carefully consider the matters set forth
herein under "Risk Factors," as well as other information and data included
elsewhere in this Prospectus.
13
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents summary combined consolidated historical
financial data of the Company (after giving effect to the Merger) for the
fiscal year ended January 3, 1997 and First Two Quarters 1997 and summary
combined consolidated pro forma financial data of the Company for the fiscal
year ended January 3, 1997, the twenty-four weeks ended June 14, 1996 ("First
Two Quarters 1996") and First Two Quarters 1997. The unaudited pro forma
financial data reflects (i) inclusion of the operating results of hotels
acquired in 1996 and First Two Quarters 1997 and exclusion of operating results
of hotels sold in 1996 as if each acquisition or disposition had occurred at
the beginning of the period indicated and (ii) the sale of the Original Notes.
The pro forma financial data set forth below may not necessarily be indicative
of the results that would have been achieved had such transactions been
consummated as of the dates indicated or that may be achieved in the future.
The information presented below is derived from and should be read in
conjunction with the Company's audited Combined Consolidated Financial
Statements and Notes thereto, the unaudited First Two Quarters 1997 Combined
Consolidated Financial Statements and Notes thereto, the "Selected Historical
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the "Pro Forma Condensed Combined Consolidated
Financial Data" included elsewhere herein. The data presented below is
unaudited except for the historical income statement data for fiscal year 1996
which has been audited. The Company's fiscal year ends on the Friday closest to
December 31.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(1)
--------------- -----------------
FIRST FIRST TWO
FISCAL TWO FISCAL QUARTERS
YEAR QUARTERS YEAR ----------
1996 1997 1996 1996 1997
------ -------- ------ ---- ----
(IN MILLIONS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.............................. $319 $195 $358 $166 $198
Operating profit...................... 144 94 164 78 95
Corporate expenses.................... 15 6 15 6 6
Interest expense...................... 101 46 158 72 72
Interest income....................... 26 9 16 11 9
Net income............................ 32 30 4 6 15
OTHER OPERATING DATA:
EBITDA(2)............................. $226 $131 $239 $115 $133
Cash interest expense(3).............. 99 45 152 70 70
Depreciation and amortization......... 64 35 68 33 36
Maintenance capital expenditures(4)... 39 21 43 25 22
RATIO DATA:
EBITDA to cash interest expense....... 2.3x 2.9x 1.6x 1.6x 1.9x
EBITDA less maintenance capital
expenditures to cash interest
expense.............................. 1.9x 2.4x 1.3x 1.3x 1.6x
Ratio of earnings to fixed
charges(5)........................... 1.5x 2.0x 1.1x 1.1x 1.3x
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 20, 1997
-------------------
ACTUAL PRO FORMA(6)
------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 86 $ 656
Total assets.............................................. 1,891 2,491
Total debt................................................ 1,080 1,680
Shareholder's equity...................................... 624 624
</TABLE>
(footnotes on following page)
14
<PAGE>
HOTEL PERFORMANCE
The following table sets forth key performance statistics of the Company's
properties:
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- ----------------
1997 1996 1996 1995
--------- --------- ------- -------
<S> <C> <C> <C> <C>
COMPARABLE FULL-SERVICE HOTELS(7)
Number of properties.................. 36 36 31 31
Number of rooms....................... 15,327 15,297 12,465 12,465
Average daily rate.................... $ 121.12 $ 107.73 $103.64 $ 96.91
Occupancy %........................... 79.7% 77.6% 76.1% 73.7%
REVPAR(8)............................. $ 96.47 $ 83.57 $ 78.84 $ 71.38
REVPAR % change....................... 15.4% -- 10.5% --
TOTAL FULL-SERVICE HOTELS
Number of properties.................. 50 44 48 38
Number of rooms....................... 19,716 17,490 18,976 15,552
Average daily rate(9)(10)............. $ 120.84 $ 107.47 $107.38 $ 97.57
Occupancy %(9)(10).................... 78.9% 77.6% 76.4% 73.9%
REVPAR(8)(9)(10)...................... $ 95.31 $ 83.36 $ 82.03 $ 72.07
REVPAR % change....................... 14.3% -- 13.8% --
</TABLE>
- --------------------
(1) See "Pro Forma Condensed Combined Consolidated Financial Data."
(2) EBITDA consists of the sum of consolidated net income, interest expense,
income taxes, depreciation and amortization and certain other noncash
charges (principally noncash write-downs of lodging properties and equity
in earnings of affiliates, net of distributions received). 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
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 Company's indentures as part of the tests
determining the Company's ability to incur debt and to make certain
restricted payments. However, such information should not be considered as
an alternative to net income, operating profit, cash flows from operations,
or any other operating or liquidity performance measure prescribed by
generally accepted accounting principles ("GAAP"). Cash expenditures for
various long-term assets, interest expense and income taxes have been, and
will be, incurred which are not reflected in the EBITDA presentation. On a
historical basis, cash from operations totaled $128 million and $81 million
for fiscal year 1996 and First Two Quarters 1997, respectively. On a
historical basis, cash used in investing activities totaled $76 million and
$102 million for fiscal year 1996 and First Two Quarters 1997,
respectively. On a historical basis, cash used in financing activities
totaled $34 million, for each of fiscal year 1996 and First Two Quarters
1997.
(3) Cash interest expense is calculated as GAAP interest expense less
amortization of deferred financing costs.
(4) Maintenance capital expenditures represent disbursements which are
generally equal to 5% of gross hotel sales and are utilized for renewals
and replacements of the hotels' property and equipment.
(5) 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 which represents interest.
(6) Pro Forma for the Offering. See "Pro Forma Condensed Combined Consolidated
Financial Data."
(7) Consists of 31 properties owned by the Company for the entire 1996 and 1995
fiscal years, respectively, and the 36 properties owned by the Company for
the entire First Two Quarters 1997 and 1996, respectively, except for the
255-room Elk Grove Suites Hotel, which was leased to a national hotel chain
through August 1997 and was recently sold to the lessee for $16 million.
(8) REVPAR represents room revenues generated per available room and excludes
food and beverage and other ancillary revenues generated by the property.
(9) Excludes the 255-room Elk Grove Suites Hotel, which was leased to a
national hotel chain through August 1997 and was recently sold to the
lessee and the Springfield Radisson which was sold in December 1995.
(10) Financial data for fiscal year 1995 excludes the 820-room Marriott World
Trade Center, which was acquired in December 1995.
15
<PAGE>
RISK FACTORS
Holders of Original Notes that are considering participation in the Exchange
Offer should carefully consider the following risk factors in addition to the
other information contained in this Prospectus.
SUBSTANTIAL LEVERAGE
At June 20, 1997, on a pro forma basis as adjusted to give effect to the
Offering, the Company had approximately $1.7 billion of outstanding
Indebtedness, representing 73% of its total capitalization. The Company's
level of debt presents risks to the holders of the Senior Notes, including the
risk that the Company might not generate sufficient cash to service the Senior
Notes. In the event that the Company's cash flow and working capital are not
sufficient to fund the Company's expenditures or to service its Indebtedness,
including the Senior Notes, the Company would be required to raise additional
funds through capital contributions, the refinancing of all or part of its
Indebtedness, the incurrence of additional permitted Indebtedness, or the sale
of assets. There can be no assurance that any of these sources of funds, if
available at all, would be available in amounts sufficient for the Company to
meet its obligations. Moreover, even if the Company were able to meet its
obligations, its leveraged capital structure could significantly limit its
ability to finance its acquisition program and other capital expenditures to
compete effectively or to operate successfully, especially under adverse
economic conditions. The Indenture and the indentures governing the Existing
Senior Notes and the Acquisitions Notes each contain financial and operating
covenants, including, but not limited to, restrictions on the Company's
ability to incur additional Indebtedness and issue preferred stock, pay
dividends or make other distributions, create liens, sell assets, enter into
certain transactions with affiliates, and enter into certain mergers and
consolidations. See "Description of Senior Notes." The Company's ability to
comply with the terms of the Indenture (including its ability to comply with
such covenants), to make cash payments with respect to the Senior Notes and to
satisfy its other debt obligations will depend on the future performance of
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Liquidity and Capital Resources" and "Description of
Senior Notes. "
COMPETITION AND RISKS OF THE LODGING INDUSTRY
The Company's hotels generally operate in areas that contain numerous other
competitors. During the 1980s, construction of lodging facilities in the
United States resulted in an excess supply of available rooms. This over-
supply had an adverse effect on occupancy levels and room rates in the
industry. Although the current outlook for the industry has improved, the
lodging industry, including the Company, may be adversely affected in the
future by (i) national and regional economic conditions, (ii) changes in
travel patterns, (iii) taxes and government regulations which influence or
determine wages, prices, interest rates, construction procedures and costs and
(iv) the availability of credit. Hotel investments are relatively illiquid.
Such illiquidity will tend to limit the ability of the Company to respond to
changes in economic or other conditions. There can be no assurance that
downturns or prolonged adverse conditions in real estate or capital markets or
the economy as a whole will not have a material adverse impact on the Company.
RELATIONSHIP WITH MARRIOTT INTERNATIONAL
Marriott International serves as the manager for all but ten of the
Company's lodging properties and provides various other services to Host
Marriott and its subsidiaries including the Company. With respect to these
various contractual arrangements, the potential exists for disagreement as to
contract compliance. Additionally, the possible desire of the Company, from
time-to-time, to finance, refinance or effect a sale of any of the properties
managed by Marriott International may, depending upon the structure of such
transactions, result in a need to modify the management agreements with
Marriott International with respect to such property. Any such modification
proposed by the Company may not be acceptable to Marriott International, and
the lack of consent from Marriott International could adversely affect the
Company's ability to consummate such financing or sale. In addition, certain
situations could arise where actions taken by Marriott International in its
capacity as manager of competing lodging properties would not necessarily be
in the best interests of the Company. Nevertheless, the
16
<PAGE>
Company believes that there is sufficient mutuality of interest between the
Company and Marriott International to result in a mutually productive
relationship. In addition, Host Marriott and Marriott International share two
common directors:--J.W. Marriott, Jr. serves as Chairman of the Board of
Directors, Chief Executive Officer and President of Marriott International and
also serves as a director of Host Marriott; Richard E. Marriott is a director
of Marriott International and Chairman of the Board of Directors of Host
Marriott. Messrs. J.W. Marriott, Jr., Richard E. Marriott, as well as certain
other officers and directors of Marriott International and Host Marriott, also
own shares (and/or options or other rights to acquire shares) in both
companies. Appropriate policies and procedures are followed by the Board of
Directors of Host Marriott and Marriott International to limit the involvement
of Messrs. J.W. Marriott, Jr. and Richard E. Marriott (and, if appropriate,
other officers and directors of such companies) in conflict situations,
including requiring them to abstain from voting as directors of either Host
Marriott or Marriott International (or as directors of any of their
subsidiaries) on certain matters which present a conflict between the
companies. See "Relationship with Marriott International."
FRAUDULENT TRANSFER
The Company's obligations under the Senior Notes will be guaranteed by the
Subsidiary Guarantors. The Guarantees may be subject to review under state or
Federal fraudulent transfer laws in the event of the bankruptcy or other
financial difficulty of a Subsidiary Guarantor. Under those laws, if a court
in a lawsuit by an unpaid creditor or representative of creditors of a
Subsidiary Guarantor, such as a trustee in bankruptcy or a Subsidiary
Guarantor as debtor in possession, were to find that at the time the
Subsidiary Guarantor issued its Guarantee, it either (i) was insolvent, (ii)
was rendered insolvent, (iii) was engaged in a business or transaction for
which its remaining unencumbered assets constituted unreasonably small
capital, or (iv) intended to incur or believed that it would incur debts
beyond its ability to pay as such debts matured, such court could avoid the
Guarantee and the Subsidiary Guarantor's obligations thereunder, and direct
the return of any amounts paid thereunder to the Company or to a fund for the
benefit of its creditors. Moreover, regardless of the factors identified in
the foregoing clauses (i) through (iv), the court could avoid the Guarantee
and direct such repayment if it found that the Guarantee was issued with
actual intent to hinder, delay, or defraud the Subsidiary Guarantor's
creditors.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its property at a fair valuation or
if the present fair salable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and matured.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Exchange Notes will be issued in exchange for Original Notes only after
timely receipt by the Exchange Agent of such Original Notes, a properly
completed and duly executed Letter of Transmittal and all other required
documents. Therefore, holders of Original Notes desiring to tender such
Original Notes in exchange for the Exchange Notes should allow sufficient time
to ensure timely delivery. Neither the Exchange Agent nor the Company is under
any duty to give notification of defects or irregularities with respect to
tenders of Original Notes for exchange. Original Notes that are not tendered
or are tendered but not accepted will, following consummation of the Exchange
Offer, continue to be subject to the existing restrictions upon transfer
thereof. In addition, any holder of Original Notes who tenders in the Exchange
Offer for the purpose of participating in a distribution of the Exchange Notes
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Original Notes, where such Original Notes were acquired by such
broker-dealer as a result of market-making activities or any other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution." To the
extent that Original Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Original Notes
could be adversely affected. See "Exchange Offer."
17
<PAGE>
ABSENCE OF PUBLIC MARKET FOR THE SENIOR NOTES
The Original Notes have not been registered under the Securities Act and are
subject to significant restrictions. The Exchange Notes will constitute a new
issue of securities with no established trading market. The Company does not
intend to list the Senior Notes on any national securities exchange or to seek
the admission thereof to trading in the National Association of Securities
Dealers Automated Quotation system. The Company has been advised by Donaldson,
Lufkin & Jenrette Securities Corporation, BT Securities Corporation, Goldman,
Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Montgomery
Securities, the initial purchasers of the Original Notes (the "Initial
Purchasers") that they presently intend to make a market in the Exchange
Notes. However, the Initial Purchasers are not obligated to do so, and any
market-making activity with respect to the Exchange Notes may be discontinued
at any time without notice. In addition, such market-making activity will be
subject to the limits imposed by the Exchange Act, and may be limited during
the Exchange Offer. If a trading market does not develop or is not maintained,
holders of the Exchange Notes may experience difficulty in reselling the
Exchange Notes or may be unable to sell them at all. If a trading market does
not develop or is not maintained, holders of the Senior Notes may experience
difficulty in reselling the Senior Notes or may be unable to sell them at all.
If a market for the Senior Notes develops, any such market may be discontinued
at any time. If a public trading market develops for the Senior Notes, future
trading prices of the Senior Notes will depend on many factors, including,
among other things, prevailing interest rates, the Company's results of
operations and the market for similar securities. Depending on prevailing
interest rates, the market for similar securities and other factors, including
the financial condition of the Company, the Senior Notes may trade at a
discount from their principal amount.
RISK INVOLVED IN INVESTMENTS THROUGH PARTNERSHIPS OR JOINT VENTURES
Instead of purchasing hotel properties directly, the Company may invest as a
co-venturer. Joint venturers often have equal control over the operation of
the joint venture assets. Therefore, such investments may, under certain
circumstances, involve risks such as the possibility that the co-venturer in
an investment might become bankrupt, or have economic or business interests or
goals that are inconsistent with the business interests or goals of the
Company, or be in a position to take action contrary to the instructions or
the requests of the Company or contrary to the Company's policies or
objectives. Consequently, actions by a co-venturer might result in subjecting
hotel properties owned by the joint venture to additional risk. Although the
Company will seek to maintain sufficient control of any joint venture to
permit the Company's objectives to be achieved, it may be unable to take
action without the approval of its joint venture partners or its joint venture
partners could take actions binding on the joint venture without the Company's
consent. Additionally, should a joint venture partner become bankrupt, the
Company could become liable for such partner's share of joint venture
liabilities.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Original Notes were sold by the Company on July 15, 1997 (the "Closing
Date") to the Initial Purchasers. The Initial Purchasers subsequently placed
the Original Notes in transactions not requiring registration under the
Securities Act or applicable state securities laws, including sales to persons
the Initial Purchasers reasonably believe to be qualified institutional buyers
in reliance on Rule 144A and to certain persons outside the United States
pursuant to Regulation S under the Securities Act. As a condition to the sale
of the Original Notes, the Company and the Initial Purchasers entered into the
Registration Rights Agreement on July 15, 1997. Pursuant to the Registration
Rights Agreement, the Company agreed that, unless the Exchange Offer is not
permitted by applicable law or Commission policy, it would (i) file with the
Commission a registration statement (the "Registration Statement") under the
Securities Act with respect to the Exchange Notes as soon as practicable after
the Closing Date, but in no event later than the 60th day after the Closing
Date, (ii) use its reasonable best efforts to cause such Registration
Statement to become effective under the Securities Act on or before the 150th
day after the Closing Date, (iii) keep the Exchange Offer open for not less
than 30 days (or such longer period required by applicable law) after the date
that the notice of the Exchange Offer (as defined in the Registration Rights
Agreement), and (iv) consummate the Exchange Offer within 180 days after the
Closing Date, and deliver to the Exchange Agent, Exchange Notes in the same
aggregate principal amount as the Original Notes that were properly tendered
by holders thereof pursuant to the Exchange Offer. A copy of the Registration
Rights Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The Registration Statement of which this
Prospectus is a part is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Original
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
of Exchange Notes in exchange for each $1,000 principal amount of outstanding
Original Notes accepted in the Exchange Offer. Holders may tender some or all
of their Original Notes pursuant to the Exchange Offer. However, the Original
Notes may be tendered only in integral multiples of $1,000.
The Exchange Notes will evidence the same debt as the Original Notes for
which they are exchanged, and are entitled to the benefits of the Indenture.
The form and terms of the Exchange Notes are the same as the form and terms of
the Original Notes except that the Exchange Notes have been registered under
the Securities Act and hence will not bear legends restricting the transfer
thereof.
Holders do not have any appraisal or dissenters' rights under the Delaware
General Corporation Law or under the Indenture in connection with the Exchange
Offer. The Company intends to conduct the Exchange Offer in accordance with
the applicable requirements of Regulation 14E under the Exchange Act.
The Company shall be deemed to have accepted validly tendered Exchange Notes
when, as and if, the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
for the purpose of receiving the Exchange Notes from the Company.
If any tendered Original Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Original Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders whose Original Notes are not tendered or are tendered but not
accepted in the Exchange Offer will continue to hold such Original Notes and
will be entitled to all the rights and preferences and subject to the
limitations applicable thereto under the Indenture. Following consummation of
the Exchange Offer, the holders will continue to be subject to the existing
restrictions upon transfer thereof and the Company will have no further
obligation to such holders to provide for the registration under the
Securities Act of the Original Notes held by
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them. To the extent that Original Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Original Notes could be adversely affected.
Holders who tender Original Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of the
Original Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than certain applicable taxes, in connection with
the Exchange Offer. See "--Fees and Expenses; Solicitation of Tenders."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean October 24, 1997, unless the Company,
in its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is so
extended.
In order to extend the Expiration Date, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
Registered Holders an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date. Such announcement may state that the Company is extending the Exchange
Offer for a specified period of time or on a daily basis until 5:00 p.m., New
York City time, on the date on which a specified percentage of Original Notes
are tendered.
The Company reserves the right (i) to delay accepting any Original Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not accept
Original Notes not previously accepted if any of the conditions set forth
below under "--Certain Conditions to the Exchange Offer" shall have occurred
and shall not have been waived by the Company, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent, or (ii)
to amend the terms of the Exchange Offer in any manner deemed by it to be
advantageous to the holders. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof to the holders. If the Exchange Offer is amended in
a manner determined by the Company to constitute a material change, the
Company will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to all Registered Holders, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner of disclosure
to Registered Holders, if the Exchange Offer would otherwise expire during
such five to ten business day period. During any extension of the Expiration
Date, all Original Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Company.
Without limiting the manner in which the Company may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely
release to the Dow Jones News Service.
INTEREST ON THE SENIOR NOTES
Interest will accrue on the Exchange Notes from and including their
respective dates of issuance, at the rate of 8 7/8% per annum and will be
payable in cash semiannually in arrears on each July 15 and January 15,
commencing on January 15, 1998. Holders whose Original Notes are accepted for
exchange will receive accrued interest thereon to, but not including, the date
of issuance of the Exchange Notes, such interest to be payable with the first
interest payment on the Exchange Notes, but will not receive any payment in
respect of interest on the Original Notes accrued after the issuance of the
Exchange Notes. No interest will be payable on the Original Notes on the date
of the exchange for the Exchange Notes and therefore no interest will be paid
thereon to the holders at such time.
PROCEDURES FOR TENDERING ORIGINAL NOTES
The tender to the Company of the Original Notes by a holder thereof as set
forth below and the acceptance thereof by the Company will constitute a
binding agreement between the tendering holder and the Company upon the terms
and subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal. Except as set forth below, a holder who
wishes to tender the Original Notes for exchange pursuant
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<PAGE>
to the Exchange Offer must transmit a properly completed and duly executed
Letter of Transmittal, including all other documents required by such Letter
of Transmittal, to the Exchange Agent at the addresses set forth below under
"--Exchange Agent" and on the back cover of this Prospectus on or prior to the
Expiration Date or, in the alternative, comply with the approved procedures of
DTC's ATOP. In addition, either (i) certificates for such Original Notes must
be received by the Exchange Agent, (ii) a timely confirmation of a book-entry
transfer (a "Book-Entry Confirmation") of such Original Notes, if such
procedure is available, into the Exchange Agent's account at DTC pursuant to
the procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date, or (iii) the holder must comply
with the guaranteed delivery procedures described below. THE METHOD OF
DELIVERY OF THE ORIGINAL NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED, IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY. NO LETTER OF TRANSMITTAL OR ORIGINAL NOTES SHOULD BE
SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Original Notes surrendered for exchange
pursuant thereto are tendered (i) by a Registered Holder of the Original Notes
who has not completed the boxes entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution (as defined below). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantees must be by a firm (an
"Eligible Institution") that is a member of a recognized signature guarantee
medallion program (an "Eligible Program") within the meaning of Rule 17Ad-15
under the Exchange Act. If the Exchange Notes and/or Original Notes not
exchanged are to be delivered to an address other than that of the Registered
Holder appearing on the note register for the Original Notes, the signature on
the Letter of Transmittal must be guaranteed by an Eligible Institution. If
the Original Notes are registered in the name of a person other than the
person signing the Letter of Transmittal, the Original Notes surrendered for
exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by the
Company in its sole discretion, duly executed by the Registered Holder with
the signature thereon guaranteed by an Eligible Institution.
Any beneficial owner whose Original Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Original Notes should contact the Registered Holder promptly and
instruct such Registered Holder to tender Original Notes on such beneficial
owner's behalf. If such beneficial owner wishes to tender such Original Notes
himself, such beneficial owner must, prior to completing and executing the
Letter of Transmittal and delivering such Original Notes in such beneficial
owner's name, either make appropriate arrangements to register ownership of
the Original Notes in such beneficial owner's name or obtain a properly
completed bond power from the Registered Holder of the Original Notes. The
transfer of registered ownership may take considerable time and may not be
able to be completed prior to the Expiration Date.
The Exchange Agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may utilize DTC's ATOP to tender.
Accordingly, participants in DTC's ATOP may, in lieu of physically completing
and signing the Letter of Transmittal and delivering it to the Exchange Agent,
electronically transmit their acceptance of the Exchange Offer by causing the
Depositary to transfer the Original Notes to the Exchange Agent in accordance
with the Depositary's ATOP procedures for transfer. The Depositary will then
send an Agent's Message to the Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC received by
the Exchange Agent and forming part of the Book-Entry Confirmation, which
states that the Depositary has received an express acknowledgment from a
participant in DTC's ATOP that is tendering Original Notes which are the
subject of such book entry confirmation, that such participant has received
and agrees to be bound by the terms of the Letter of Transmittal (or, in the
case of an Agent's Message relating to guaranteed delivery, that such
participant has received and agrees to be bound by the applicable Notice of
Guaranteed Delivery), and that the agreement may be enforced against such
participant.
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<PAGE>
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of the Original Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and
all tenders of any particular Original Note not properly tendered or to not
accept any particular Original Note which acceptance might, in the judgment of
the Company or its counsel, be unlawful. The Company also reserves the
absolute right at its sole discretion to waive any defects or irregularities
or conditions of the Exchange Offer as to any particular Original Note either
before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender the Original Notes in the
Exchange Offer). The interpretation of the terms and conditions of the
Exchange Offer as to any particular Original Note either before or after the
Expiration Date (including the Letter of Transmittal and instructions thereto)
by the Company shall be final and binding on all parties. Unless waived, any
defects or irregularities in connection with the tenders of Original Notes for
exchange must be cured within such reasonable period of time as the Company
shall determine. Neither the Company, the Exchange Agent nor any other person
shall be under any duty to give notification of any defect or irregularity
with respect to any tender of the Original Notes for exchange, nor shall any
of them incur any liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
Registered Holder or holders of Original Notes, such Original Notes must be
endorsed or accompanied by a properly completed bond power, in either case
signed exactly as the names of the Registered Holder or holders that appear on
the Original Notes with the signature thereon guaranteed by an Eligible
Institution.
If the Letter of Transmittal or any Original Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such person should so indicate when signing and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
By tendering, each holder will represent to the Company that, among other
things, the Exchange Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder, that neither the
holder nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such Exchange Notes and that
neither the holder nor any such other person is an "affiliate," as defined in
Rule 405 under the Securities Act, of the Company.
ACCEPTANCE OF ORIGINAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Original
Notes properly tendered and will issue the Exchange Notes promptly after
acceptance of the Original Notes. See "--Certain Conditions to the Exchange
Offer" below. For purposes of the Exchange Offer, the Company shall be deemed
to have accepted properly tendered Original Notes for exchange when, and if,
the Company has given oral or written notice thereof to the Exchange Agent.
In all cases, issuance of Exchange Notes for Original Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Original Notes
or a timely Book-Entry Confirmation of such Original Notes into the Exchange
Agent's account at DTC, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Original Notes
are not accepted for any reason set forth in the terms and conditions of the
Exchange Offer or if certificates representing the Original Notes are
submitted for a greater principal amount than the holder desires to exchange,
such unaccepted or non-exchanged Original Notes will be returned without
expense to the tendering holder thereof (or, in the case of Original Notes
tendered by book-entry transfer into the Exchange Agent's account at DTC
pursuant to the book-entry transfer procedures described below, such non-
exchanged Original Notes will be credited to an account maintained with DTC)
as promptly as practicable after the expiration or termination of the Exchange
Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Original Notes at DTC for purposes of the Exchange Offer within two
business days after the date of this Prospectus, and any financial institution
that is a participant in DTC's systems may make book-entry delivery of the
Original Notes by causing
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DTC to transfer such Original Notes into the Exchange Agent's account at DTC
in accordance with DTC's procedure for transfer. However, although delivery of
the Original Notes may be effected through book-entry transfer at DTC, the
Letter of Transmittal or a facsimile thereof, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at one of the addresses set forth below
under "--Exchange Agent" on or prior to the Expiration Date, or the guaranteed
delivery procedures described below must be complied with or DTC's ATOP
procedures must be complied with. Delivery of documents to the book-entry
transfer facility does not constitute delivery to the Exchange Agent.
THE METHOD OF DELIVERY OF ORIGINAL NOTES AND ALL OTHER DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE BE
OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION
DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION
DATE.
Unless an exemption applies under the applicable law and regulations
concerning "backup withholding" of Federal income tax, the Exchange Agent will
be required to withhold, and will withhold, 31% of the gross proceeds
otherwise payable to a holder pursuant to the Exchange Offer if the holder
does not provide its taxpayer identification number (social security number or
employer identification number) and certify that such number is correct. Each
tendering holder should complete and sign the main signature form and the
Substitute Form W-9 included as part of the Letter of Transmittal, so as to
provide the information and certification necessary to avoid backup
withholding, unless an applicable exemption exists and is proved in a manner
satisfactory to the Company and the Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Original Notes desires to tender such Original
Notes and the Original Notes are not immediately available, or time will not
permit such holder's Original Notes or other required documents to reach the
Exchange Agent before the Expiration Date, or the procedure for book-entry
transfer cannot be completed on a timely basis, a tender may be effected if
(i) the tender is made through an Eligible Institution, (ii) prior to the
Expiration Date, the Exchange Agent receives from such Eligible Institution a
properly completed and duly executed Letter of Transmittal (or a facsimile
thereof), and Notice of Guaranteed Delivery (by telegram, telex, facsimile
transmission, mail or hand delivery), setting forth the name and address of
the holder of the Original Notes and the principal amount of Original Notes
tendered, stating that the tender is being made thereby and guaranteeing that
within three business days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered Original
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent, or,
alternatively, the holder has complied with DTC's ATOP procedures and (iii)
the certificates for all physically tendered Original Notes, in proper form
for transfer, or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal, are received by the Exchange
Agent within three business days after the date of execution of the Notice of
Guaranteed Delivery. Unless Original Notes being tendered by the above-
described method (or a timely Book-Entry Confirmation) are deposited with the
Exchange Agent within the time period set forth above (accompanied or preceded
by a properly completed Letter of Transmittal and any other required
documents), the Company may, at its option, reject the tender. Copies of a
Notice of Guaranteed Delivery which may be used by Eligible Institutions for
the purposes described in this paragraph are being delivered with this
Prospectus and the related Letter of Transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal,
accompanied by the Original Notes or, alternatively, when a Book-Entry
Confirmation and corresponding Agent's Message is received by the Exchange
Agent. Issuances of Exchange Notes in exchange for Original Notes tendered
pursuant to a Notice of Guaranteed Delivery or letter, telegram or
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facsimile transmissions to similar effect (as provided above) by an Eligible
Institution will be made only against deposit of the Letter of Transmittal
(and any other required documents) and the tendered Original Notes (or a
timely Book-Entry Confirmation and corresponding Agent's Message).
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Original Notes for exchange (the "Transferor")
exchanges, assigns and transfers the Original Notes to the Company and
irrevocably constitutes and appoints the Exchange Agent as the Transferor's
agent and attorney-in-fact to cause the Original Notes to be assigned,
transferred and exchanged. The Transferor represents and warrants that it has
full power and authority to tender, exchange, assign and transfer the Original
Notes and to acquire Exchange Notes issuable upon the exchange of such
tendered Original Notes, and that, when the same are accepted for exchange,
the Company will acquire good and unencumbered title to the tendered Original
Notes, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim. The Transferor also warrants that it will,
upon request, execute and deliver any additional documents
deemed by the Company to be necessary or desirable to complete the exchange,
assignment and transfer of tendered Original Notes. The Transferor further
agrees that acceptance of any tendered Original Notes by the Company and the
issuance of Exchange Notes in exchange therefor shall constitute performance
in full by the Company of its obligations under the Registration Rights
Agreement and that the Company shall have no further obligations or
liabilities thereunder (except in certain limited circumstances). All
authority conferred by the Transferor will survive the death or incapacity of
the Transferor and every obligation of the Transferor shall be binding upon
the heirs, legal representatives, successors, assigns, executors and
administrators of such Transferor.
By tendering Original Notes, the Transferor certifies (a) that it is not an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act, that it is not a broker-dealer that owns Original Notes acquired directly
from the Company or an affiliate of the Company, that it is acquiring the
Exchange Notes offered hereby in the ordinary course of such Transferor's
business and that such Transferor has no arrangement with any person to
participate in the distribution of such Exchange Notes or (b) that it is an
"affiliate" (as so defined) of the Company or of the Initial Purchasers, and
that it will comply with the registration and prospectus delivery requirements
of the Securities Act to the extent applicable to it.
WITHDRAWAL RIGHTS
Tenders of Original Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date.
For a withdrawal to be effective, (i) a written or facsimile notice of
withdrawal must be received by the Exchange Agent at its address set forth
below under "--Exchange Agent" or (ii) holders must comply with the
appropriate procedures of DTC's ATOP. Any such notice of withdrawal must (i)
specify the name of the person having tendered the Original Notes to be
withdrawn, (ii) identify the Original Notes to be withdrawn (including the
serial number or numbers and the principal amount of Original Notes to be
withdrawn), (iii) be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which such Original Notes were
tendered and (iv) specify the name in which such Original Notes are to be
registered, if different from that of the withdrawing holder. If Original
Notes have been tendered pursuant to the procedure for book-entry described
above, any notice of withdrawal must specify, in lieu of certificate numbers,
the name and number of the account at DTC to be credited with the withdrawn
Original Notes and otherwise comply with the procedures of such facility. Any
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company, whose determination shall
be final and binding on all parties. Any Original Notes so withdrawn will be
deemed not to have been validly tendered for exchange for purposes of the
Exchange Offer. Any Original Notes which have been tendered for exchange but
which are not exchanged for any reason
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will be returned to the holder thereof without cost to such holder (or, in the
case of Original Notes tendered by book-entry transfer into the Exchange
Agent's account at DTC pursuant to the book-entry transfer procedures
described above, such Original Notes will be credited to an account maintained
with DTC for the Original Notes) as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Original Notes may be retendered by following one of the procedures described
under "--Procedures for Tendering Original Notes" above at any time on or
prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company's
obligation to accept for exchange, or exchange Exchange Notes for, any
Original Notes not theretofore accepted for exchange is subject to the
following conditions:
(a) no action or proceeding having been instituted or threatened in any
court or by or before any governmental agency with respect to the Exchange
Offer which, in the judgment of the Company, might impair the ability of
the Company to proceed with the Exchange Offer or have a material adverse
effect on the Company or there shall not have occurred any material adverse
development in any existing action or proceeding with respect to the
Company or any of its subsidiaries;
(b) there shall not have been any material change, or development
involving a prospective change, in the business or financial affairs of the
Company or any of its subsidiaries which, in the judgment of the Company,
would materially impair the Company's ability to consummate the Exchange
Offer or have a material adverse impact on the Company if the Exchange
Offer is consummated;
(c) there shall not have been proposed, adopted or enacted any law,
statute, rule or regulation which, in the judgment of the Company, might
materially impair the ability of the Company to proceed with the Exchange
Offer or have a material adverse effect on the Company if the Exchange
Offer is consummated; or
(d) all governmental approvals which the Company shall deem necessary for
the consummation of the Exchange Offer as contemplated hereby shall have
been obtained.
If the Company determines in good faith that any of the conditions are not
met, the Company may (i) refuse to accept any Original Notes and return all
tendered Original Notes to exchanging Holders, (ii) extend the Exchange Offer
and retain all Original Notes tendered prior to the expiration of the Exchange
Offer, subject, however, to the rights of holders to withdraw such Original
Notes (see "--Withdrawal Rights") or (iii) waive certain of such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Original Notes which have not been withdrawn or revoked. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to all Registered Holders.
Holders have certain rights and remedies against the Company under the
Registration Rights Agreement, including liquidated damages of up to $.30 per
week per $1,000 principal amount of Original Notes, should the Company fail to
consummate the Exchange Offer, notwithstanding a failure of the conditions
stated above. Such conditions are not intended to modify those rights or
remedies in any respect.
The foregoing conditions are solely for the benefit of the Company and may
be asserted by the Company in good faith regardless of the circumstances
giving rise to such conditions or may be waived by the Company in whole or in
part at any time and from time to time in its discretion. The failure by the
Company at any time to exercise the foregoing rights shall not be deemed a
waiver of any such right and each such right shall be deemed an ongoing right
which may be asserted at any time and from time to time. In addition, the
Company has reserved the right, notwithstanding the satisfaction of each of
the foregoing, to terminate or amend the Exchange Offer.
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EXCHANGE AGENT
Marine Midland Bank has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies
of this Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
By Registered or Certified Mail; By Overnight Courier; or By Hand:
Marine Midland Bank
140 Broadway
A Level
New York, New York 10005-1180
Attention: Corporate Trust Services
(212) 658-5931
By Facsimile:
(212) 658-2292
Attention: Corporate Trust Services
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES; SOLICITATION OF TENDERS
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be $500,000 and
include fees and expenses of the Exchange Agent and accounting and legal fees.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Original Notes pursuant to the Exchange Offer. If, however,
certificates representing Exchange Notes, or the Original Notes not tendered
or tendered but not accepted for exchange, are to be delivered to, or are to
be registered or issued in the name of, any person other than the Registered
Holder of the Original Notes tendered, or if tendered Original Notes are
registered in the name of any person other than the person signing the Letter
of Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of the Original Notes pursuant to the Exchange Offer, then the amount
of any such transfer taxes (whether imposed on the original Registered Holder
or any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those
contained in this Prospectus or the accompanying Letter of Transmittal. If
given or made, such information or representations must not be relied upon as
having been authorized by the Company. This Prospectus and/or the accompanying
Letter of Transmittal does not constitute an offer to sell, or a solicitation
of an offer to buy, the Exchange Notes in any jurisdiction where, or to any
person to whom, it is unlawful to make such an offer or a solicitation.
Neither the delivery of the Prospectus or the accompanying
26
<PAGE>
Letter of Transmittal, nor any sale made thereunder shall, under any
circumstances, create any implication that there has not been any change in
the facts set forth in this Prospectus or in the affairs of the Company since
the date hereof.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Original Notes, which is face value, as reflected in the Company's accounting
records on the date of the exchange. Accordingly, no gain or loss for
accounting purposes will be recognized. The costs of the Exchange Offer will
be expensed over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Original Notes who do not exchange their Original Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Original Notes as set forth in the legend
thereon. In general, the Original Notes may not be offered or sold, unless
registered under the Securities Act, except pursuant to an exemption from, or
in a transaction not subject to, the Securities Act and applicable state
securities laws. The Company does not intend to register the Original Notes
under the Securities Act. The Company believes that, based upon
interpretations contained in no-action letters issued to third parties by the
Staff, the Exchange Notes issued pursuant to the Exchange Offer in exchange
for Original Notes may be offered for resale, resold or otherwise transferred
by holders thereof (other than any such holder which is (i) an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act, (ii) a
broker-dealer who acquired the Original Notes directly from the Company or
(iii) a broker-dealer who acquired the Original Notes as a result of market
making or other trading activities) without compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holders' business
and such holder is not engaged in, and does not intend to engage in, and has
no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. Each broker-dealer that receives Exchange
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution." If any Holder (other than a broker-dealer
described in the preceding sentence) has any arrangement or understanding with
respect to the distribution of the Exchange Notes to be acquired pursuant to
the Exchange Offer, such Holder (i) may not rely on the applicable
interpretations of the Staff and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. In addition, to comply with the securities laws of certain
jurisdictions, if applicable, the Exchange Notes may not be offered or sold
unless they have been registered or qualified for sale in such jurisdiction or
an exemption from registration or qualification is available and is complied
with.
FEDERAL INCOME TAX CONSEQUENCES
The exchange of Original Notes for Exchange Notes by holders will not be a
taxable exchange for federal income tax purposes, and holders should not
recognize any taxable gain or loss or any interest income as a result of such
exchange. See "Material Federal Income Tax Considerations."
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Original Notes are urged
to consult their financial and tax advisors in making their own decisions on
what action to take.
To the extent that Original Notes are tendered and accepted in the Exchange
Offer, the trading market, if any, for the Original Notes could be adversely
affected. See "Risk Factors--Consequences of Failure to Exchange." The Company
may in the future seek to acquire untendered Original Notes in open market or
privately negotiated transactions, through subsequent exchange offers or
otherwise. The Company has no present plan to acquire any Original Notes which
are not tendered in the Exchange Offer.
27
<PAGE>
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes hereby. In consideration for issuing the Exchange Notes as
contemplated in this Prospectus, the Company will receive in exchange,
Original Notes in like principal amount, the terms of which are identical to
the Exchange Notes. The Original Notes surrendered in exchange for the
Exchange Notes will not result in any increase in the indebtedness of the
Company.
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of June 20, 1997, and (ii) the pro forma capitalization of the Company as
of June 20, 1997, after giving effect to the Offering. The capitalization of
the Company should be read in conjunction with the Company's Combined
Consolidated Financial Statements and Notes thereto, the "Pro Forma Condensed
Combined Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," each contained
elsewhere herein.
<TABLE>
<CAPTION>
AS OF JUNE 20, 1997
--------------------------
ACTUAL PRO FORMA
------------ -------------
(UNAUDITED, IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents.................... $ 86 $ 656(1)
============ ============
9 1/2% Senior Secured Notes due 2005......... $ 600 $ 600
9% Senior Notes due 2007..................... 350 350
8 7/8% Senior Notes due 2007................. -- 600
Notes secured by real estate assets.......... 97 97
Other notes.................................. 33 33
------------ ------------
Total debt................................. 1,080 1,680
Shareholder's equity......................... 624 624
------------ ------------
Total capitalization....................... $ 1,704 $ 2,304
============ ============
</TABLE>
- ---------------------
(1) Amount is net of the expenses of the Offering, the Consent Solicitation
and the Acquisitions Consent Solicitation.
28
<PAGE>
PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL DATA
The unaudited Pro Forma Condensed Combined Consolidated Financial Data of
the Company reflect the following transactions for First Two Quarters 1997,
First Two Quarters 1996 and for the fiscal year ended January 3, 1997, as if
such transactions had been completed at the beginning of each of the periods:
. 1997 acquisition of The Ritz-Carlton, Marina del Rey and a controlling
interest in Norfolk Waterside Marriott;
. 1996 acquisition of nine full-service hotel properties;
. 1996 sale/leaseback of 18 Residence Inn properties;
. 1996 sale of 16 Courtyard properties;
. Consummation of the Offering, the Consent Solicitation, the Acquisitions
Consent Solicitation and the Exchange Offer.
The unaudited Pro Forma Condensed Combined Consolidated Balance Sheet of the
Company as of June 20, 1997 reflects the issuance of the $600 million
aggregate principal amount of Original Notes in the Offering.
In 1996, the Company acquired nine full-service properties with 3,124 rooms
for approximately $292 million, including the acquisition, through
foreclosure, of a controlling interest in the 250-room Newport Beach Marriott
Suites and the acquisition of a controlling interest in a venture that owns
the 400-room Pittsburgh Marriott City Center. During the first half of 1996,
the Company sold, subject to leaseback, 18 Residence Inns to the REIT. The
Company also sold 16 Courtyard properties to the REIT during 1996, the
deferred proceeds and gain related to the sale of which were sold to Host
Marriott for $13 million.
The Pro Forma Condensed Combined Consolidated Financial Data of the Company
are unaudited and presented for informational purposes only and may not
reflect the Company's future results of operations and financial position or
what the results of operations and financial position of the Company would
have been had such transactions occurred as of the dates indicated. The
unaudited Pro Forma Condensed Combined Consolidated Financial Data and Notes
thereto should be read in conjunction with the Company's Combined Consolidated
Financial Statements and Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained elsewhere
herein.
29
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
AS OF JUNE 20, 1997
---------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Property and equipment, net................... $1,555 $-- $1,555
Note receivables from affiliate............... 139 -- 139
Due from hotel managers....................... 40 -- 40
Investment in affiliate....................... 18 -- 18
Other assets.................................. 53 30 (A) 83
Cash and cash equivalents..................... 86 570 (A) 656
------ ---- ------
$1,891 $600 $2,491
====== ==== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
9 1/2% Senior Secured Notes due 2005.......... $ 600 $-- $ 600
9% Senior Notes due 2007...................... 350 -- 350
8 7/8% Senior Notes due 2007.................. -- 600 (A) 600
Notes secured by real estate assets........... 97 -- 97
Other notes................................... 33 -- 33
------ ---- ------
Total debt.................................. 1,080 600 1,680
Deferred income taxes......................... 89 -- 89
Other liabilities............................. 98 -- 98
------ ---- ------
Total liabilities........................... 1,267 600 1,867
Shareholder's equity.......................... 624 -- 624
------ ---- ------
$1,891 $600 $2,491
====== ==== ======
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial
Data.
30
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
FIRST TWO QUARTERS 1997
---------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Revenues
Hotels.................................... $192 $ 3 (B) $195
Other..................................... 3 -- 3
---- ---- ----
195 3 198
Operating costs and expenses
Hotels.................................... 101 2 (B) 103
---- ---- ----
Operating profit before corporate expenses
and interest............................... 94 1 95
Corporate expenses.......................... (6) -- (6)
Interest expense............................ (46) (26)(F) (72)
Interest income............................. 9 -- 9
---- ---- ----
Income (loss) before income taxes........... 51 (25) 26
Benefit (provision) for income taxes........ (21) 10 (G) (11)
---- ---- ----
Net income (loss)........................... $ 30 $(15) $ 15
==== ==== ====
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial
Data.
31
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
FIRST TWO QUARTERS 1996
----------------------------------------------
DISPOSITION ACQUISITION
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues
Hotels....................... $142 $ (5)(D) $ 7 (B) $164
20 (E)
Other........................ 2 -- -- 2
---- ---- ---- ----
144 (5) 27 166
---- ---- ---- ----
Operating costs and expenses
Hotels....................... 75 3 (C) 4 (B) 88
(3)(D) 9 (E)
---- ---- ---- ----
75 -- 13 88
---- ---- ---- ----
Operating profit before corpo-
rate expenses and interest.... 69 (5) 14 78
Corporate expenses............. (6) -- -- (6)
Interest expense............... (46) -- (26)(F) (72)
Interest income................ 11 -- -- 11
---- ---- ---- ----
Income (loss) before income
taxes......................... 28 (5) (12) 11
Benefit (provision) for income
taxes......................... (12) 2 (G) 5 (G) (5)
---- ---- ---- ----
Net income (loss).............. $ 16 $ (3) $ (7) $ 6
==== ==== ==== ====
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial
Data.
32
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR 1996
----------------------------------------------
DISPOSITION ACQUISITION
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues
Hotels....................... $ 313 $ (5)(D) $ 16 (B) $ 352
28 (E)
Other........................ 6 -- -- 6
----- ---- ---- -----
319 (5) 44 358
----- ---- ---- -----
Operating costs and expenses
Hotels....................... 175 4 (C) 8 (B) 194
(4)(D) 11 (E)
----- ---- ---- -----
175 -- 19 194
----- ---- ---- -----
Operating profit before corpo-
rate expenses and interest.... 144 (5) 25 164
Corporate expenses............. (15) -- -- (15)
Interest expense............... (101) -- (57)(F) (158)
Interest income................ 26 -- (3)(B) 16
(7)(E)
----- ---- ---- -----
Income (loss) before income
taxes......................... 54 (5) (42) 7
Benefit (provision) for income
taxes......................... (22) 2 (G) 17 (G) (3)
----- ---- ---- -----
Net income (loss).............. $ 32 $ (3) $(25) $ 4
===== ==== ==== =====
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial
Data.
33
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED FINANCIAL DATA
A. Represents the adjustment to record the consummation of the Offering, the
Consent Solicitation, the Acquisitions Consent Solicitation and the Exchange
Offer as follows:
-- Record the issuance of the Original Notes of $600 million.
-- Record the net cash proceeds of $570 million.
-- Record the deferred financing fees of $30 million.
B. Represents the adjustment to record the revenue, operating costs and to
reduce interest income for the 1997 acquisition of The Ritz-Carlton, Marina
del Rey and the acquisition of a controlling interest in the Norfolk
Waterside Marriott.
C. Represents the net adjustment to eliminate the depreciation expense and
record the incremental lease expense for the 1996 sale/leaseback of the 18
Residence Inns.
D. Represents the net adjustment to eliminate revenues, operating costs and
depreciation for the 1996 sale of 16 Courtyard properties.
E. Represents the adjustment to record the revenue and operating costs, and to
reduce interest income for the 1996 acquisitions of nine full-service hotel
properties, including the acquisition of controlling interests in two full-
service properties.
F. Represents the adjustment to record interest expense and related
amortization of deferred financing fees as a result of the Offering, the
Consent Solicitation, the Acquisitions Consent Solicitation and the Exchange
Offer.
G. Represents the income tax impact of pro forma adjustments at statutory
rates.
34
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical combined consolidated
financial statement data derived from the Company's Combined Consolidated
Financial Statements as of and for First Two Quarters 1997, First Two Quarters
1996 and for the five most recent fiscal years ended January 3, 1997. The
Company's Combined Consolidated Financial Statements present the combined
financial position, results of operations, and cash flows of the Company and
Acquisitions giving effect to the Merger as if Acquisitions was merged into
the Company for all periods presented. See Note 1 to the Company's Combined
Consolidated Financial Statements. The combined consolidated balance sheet
data for 1992 through 1994 and the income statement and other data for 1992
and 1993 and the financial data for First Two Quarters 1997 and First Two
Quarters 1996, respectively, has been derived from unaudited combined
consolidated financial statements of the Company, which in the opinion of
management include all material adjustments necessary for those periods. The
financial data for fiscal year 1992 and 1993 includes the operating results of
the hotels recorded by Host Marriott or its affiliates for the periods prior
to formation of the Company.
<TABLE>
<CAPTION>
FIRST TWO
QUARTERS FISCAL YEAR
-------------- ---------------------------------------
1997 1996 1996(1) 1995 1994 1993 1992
------ ------ ------- ------ ------ ------ ------
(IN MILLIONS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues(2)............ $ 195 $ 144 $ 319 $ 255 $ 232 $ 440 $ 471
Operating profit before
corporate expenses and
interest.............. 94 69 144 117 109 77 66
Income before
extraordinary item and
cumulative effect of
accounting
changes(3)............ 30 16 32 26 31 10 14
Net income............. 30 16 32 9 31 6 14
BALANCE SHEET DATA:
Total assets........... $1,891 $1,872 $1,872 $1,810 $1,734 $1,696 $1,815
Debt................... 1,080 1,082 1,082 1,084 785 658 660
OTHER DATA:
EBITDA(4).............. $ 131 $ 102 $ 226 $ 194 $ 178 $ 166 $ 146
Depreciation and amor-
tization.............. 35 29 64 62 64 71 73
Cash provided by oper-
ating activities...... 81 57 128 112 118 75 84
Cash provided by (used
in) investing activi-
ties.................. (102) 70 (76) (76) (107) (23) (38)
Cash provided by (used
in) financing activi-
ties(5)............... (34) (18) (34) 77 (1) (52) (46)
Ratio of earnings to
fixed charges(6)...... 2.0x 1.6x 1.5x 1.5x 1.7x 1.3x 1.3x
</TABLE>
- ---------------------
(1) Fiscal year 1996 includes 53 weeks.
(2) Prior to 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 (in 1994), 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
Combined Consolidated Financial Statements.
(3) 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 and fourth quarters of 1995, the Company recorded
extraordinary losses on the extinguishments of debt of $14 million and $3
million, respectively, net of taxes, in connection with the redemption and
defeasance of senior notes and the repayment of the Acquisitions Revolver
(as defined herein).
(4) EBITDA consists of the sum of consolidated net income, interest expense,
income taxes, depreciation and amortization and certain other noncash
charges (principally noncash write-downs of lodging properties and equity
in earnings of affiliates, net of distributions received). The Company
considers EBITDA to be an indicative measure of it's 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 Company's indentures as part of the tests to determine
the Company's ability to incur debt and to make certain restricted
payments. However, such information should not be considered as an
alternative to net income, operating profit, cash flows from operations,
or any other operating or liquidity performance measure prescribed by
GAAP. Cash expenditures for various long-term assets, interest expense and
income taxes have been, and will be, incurred which are not reflected in
the EBITDA presentations.
35
<PAGE>
(5) Cash used in financing activities includes the transfer of asset sales
proceeds and operating cash to Hospitality for the required Hospitality
Notes (as defined herein) redemptions, dividends by Acquisitions to HMC
Acquisitions, Inc. prior to the Merger and dividends by the Company to
Hospitality, as well as other Hospitality corporate uses.
(6) 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 which represents interest.
36
<PAGE>
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. The following analysis and the related combined consolidated financial
statements included elsewhere herein are presented as if Acquisitions was
merged into the Company for all periods presented as discussed in Note 1 to
the Combined 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,
lease payments, 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 for properties that were already operating under the Marriott
brand and increased significantly for those properties converted to the
Marriott brand. Increases in room rates have generally been achieved by the
managers through shifting occupancies away from discounted group business to
higher-rated group and transient business. This has been made possible by
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.
FIRST TWO QUARTERS 1997 COMPARED TO FIRST TWO QUARTERS 1996
The following discussion and analysis of operations and financial condition
presents the combined consolidated results of the Company as if the merger
discussed in footnote 1 to the financial statements was effective for all
periods presented.
Revenues. Revenues consist of house profit from the Company's hotel
properties and equity in earnings of an affiliate. The Company's second
quarter 1997 revenues of $98 million represented a $24 million, or 32%,
increase from the second quarter of 1996. Year-to-date revenues increased $51
million, or 35%, to $195 million. The Company's revenue and operating profit
were impacted by:
37
<PAGE>
. improved lodging results from comparable properties;
. the addition of eleven full-service hotel properties during 1996 and 1997;
. the 1996 sale and leaseback of 18 of the Company's Residence Inn
properties; and
. the sale of 16 of the Company's Courtyard properties during 1996.
Hotel revenues increased $24 million, or 33%, to $97 million in the second
quarter of 1997. Year-to-date 1997 hotel revenues increased $50 million, or
35% to $192 million. The 1997 hotel revenue increases reflect the addition of
eleven full-service hotel properties in 1996 and 1997 and overall improved
lodging results, partially offset by the sale of 16 Courtyard properties in
the first and second quarters of 1996. The Company's full-service hotels and
Residence Inn properties reported growth in revenue per available room
("REVPAR") for comparable hotels. REVPAR is a commonly used indicator of
market performance for hotels which represents the combination of the average
daily room rate charged and the average daily occupancy achieved. REVPAR does
not include food and beverage or other ancillary revenues generated by the
property.
Overall second quarter revenues for nearly all of the Company's full-service
hotels were improved or comparable to second quarter of 1996 results. Improved
results were driven by strong increases in REVPAR of nearly 13% for comparable
units for the second quarter and 15% year-to-date. The Company's 1997 year-to-
date results were substantially impacted by the exclusion of the New Year's
holiday from the 1997 results due to the timing of the Company's fiscal year-
end and the milder winter weather in 1997. Hotel sales increased $51 million,
or 27%, to $242 million for the quarter, and $103 million, or 27%, to $484
million year-to-date, reflecting REVPAR increases for comparable units and the
increase in full-service properties during 1996 and 1997. On a comparable
basis, average room rates increased 12% for the quarter and year-to-date,
while average occupancy increased one percentage point for the quarter and two
percentage points year-to-date because the Company's hotels are obtaining
better operating leverage as a result of increased room rates. Results were
further enhanced by an increase in the house profit margin for comparable
properties of two percentage points for the quarter and three percentage
points year-to-date. 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.
The Company's extended-stay Residence Inn properties, reported a 9% increase
in REVPAR for second quarter 1997 due primarily to an increase in average room
rates of 12%, while average occupancy decreased over two percentage points.
Year-to-date REVPAR increased 8% with an increase in average room rates of
11%, partially offset by a decrease in occupancy of almost three percentage
points. 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.
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 increased $10 million to $49
million for the second quarter of 1997. Year-to-date operating costs and
expenses increased $26 million to $101 million primarily reflecting the
addition of eleven full-service properties during 1996 and 1997, increased
management fees and rentals tied to improved operating results and the impact
of the lease payments on the Residence Inn properties which have been sold and
leased back. As a percentage of hotel revenues, hotel operating costs and
expenses were 51% and 53% of revenues for second quarter 1997 and 1996,
respectively. Hotel operating costs and expenses were 53% of revenues for both
year-to-date 1997 and 1996.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's operating profit increased by $14
million to $49 million, or 50% of revenues, in the second quarter of 1997 from
$35 million, or 47% of revenues, in the second quarter of 1996. Year-to-date
operating profit increased $25 million to $94 million, or 48% of revenues.
Most of the Company's hotels recorded substantial improvements in operating
results. Several hotels, including the Bethesda Marriott, the Denver Marriott
West, the Denver Marriott Tech Center, the Marriott World Trade Center, the
Marina Beach Marriott
38
<PAGE>
and the San Francisco Airport Marriott posted particularly significant
improvements in operating profit for the quarter, which were partially offset
by a decrease in the results for some of the Company's suburban Atlanta
properties due to higher activity in 1996 related to the Summer Olympics.
Corporate Expenses. Corporate expenses remained unchanged at $3 million for
the second quarter of 1997 and $6 million year-to-date. As a percentage of
revenues, corporate expenses decreased to 3% of revenues for the 1997 second
quarter and year-to-date, respectively, compared to 4% of revenues for the
prior year periods.
Interest Expense. Interest expense remained unchanged at $23 million for the
second quarter of 1997 and $46 million year-to-date.
Net Income. The Company's net income for the second quarter of 1997
increased $7 million to $16 million, or 16% of revenues, compared to net
income of $9 million, or 12% of revenues, for the second quarter of 1996.
Year-to-date net income for 1997 was $30 million, or 15% of revenues, compared
to $16 million, or 11% of revenues for 1996.
1996 COMPARED TO 1995
Revenues. Revenues increased $64 million, or 25%, to $319 million for 1996.
The Company's revenue and operating profit were impacted by several items,
including:
. the addition of 16 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 hotel 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 $52 million, or 20%, to $313 million in 1996 as the
Company's full-service hotels and Residence Inn properties reported growth in
REVPAR. Hotel sales increased $156 million, or 22%, to $865 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 10% for comparable units.
On a comparable basis, average room rates increased 7%, while average
occupancy increased over two percentage points.
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.
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
1996 increased $37 million to $175 million, primarily reflecting the addition
of 16 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 $38 million to $175 million. Hotel operating
costs and expenses represented 56% of hotel revenues in 1996 and 52% of hotel
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revenues in 1995, reflecting the shifting emphasis to full-service hotels and
the impact of the lease payments on 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 $27
million to $144 million, or 45% of revenues, from $117 million, or 46% of
revenues, in 1995. Hotel operating profit increased $14 million to $138
million, or 44% of hotel revenues, from $124 million, or 48% of hotel
revenues, in 1995. Nearly all of the Company's hotels recorded substantial
improvements in operating results. Several hotels, including the San Francisco
Airport Marriott, the San Francisco Marriott Fisherman's Wharf, Westfields
Conference Resort, 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 (1,469 rooms) also posted
outstanding results due, in part, to the 1996 Summer Olympics. Three
properties which were renovated and converted to the Marriott brand in 1995,
the Denver Marriott Tech Center, Marriott's Mountain Resort at Vail and the
Williamsburg Marriott, have also shown significant improvement over the prior
year.
Corporate Expenses. Corporate expenses increased $1 million to $15 million,
primarily due to higher average assets for the Company during the year, which
resulted in an increase in the allocation of corporate expenses to the
Company. As a percentage of revenues, corporate expenses were 4.7% of revenues
for 1996 and 5.5% of revenues for 1995.
Interest Expense. Interest expense increased $24 million to $101 million
primarily due to the increase in the overall level of debt, as well as a
higher average interest rate, as a result of the Acquisitions Offering (as
defined herein), a full year of expense related to debt incurred in
conjunction with the acquisition of certain hotel properties in 1995 and the
impact of the Properties Offering (as defined herein).
Income Before Extraordinary Item. The Company reported income before
extraordinary item of $32 million which represented a $6 million increase from
$26 million in 1995. The increase is due to the changes in operating profit
and interest expense 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 and the repayment of the Acquisitions Revolver
(as defined herein) in December 1995, the Company recognized an extraordinary
loss of $17 million, after taxes, primarily representing premiums paid on the
redemption of debt and the write-off of deferred financing fees.
Net Income. The Company's net income was $32 million for 1996, compared to
net income of $9 million for 1995. The increase is primarily due to the
increase in operating profit discussed above and the $17 million extraordinary
loss on the extinguishment of debt in 1995, partially offset by the increase
in interest expense discussed above.
1995 COMPARED TO 1994
Revenues. The Company's 1995 revenues of $255 million represented a $23
million, or 10%, increase from 1994 results. The Company's revenues were
impacted by several items, including:
. the addition of 25 full-service hotel properties during 1994 and 1995;
. improved lodging results for comparable properties;
. the 1995 sale of 37 of the Company's Courtyard hotel 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 sale of the Company's senior living communities;
and
. the 1994 and 1995 sales of the Company's Fairfield Inns.
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Hotel revenues increased $47 million, or 22%, to $261 million in 1995. The
increase in hotel revenue for 1995 reflects the addition of 25 full-service
hotel properties in 1994 and 1995 and overall improved lodging results,
partially offset by the sale of the Company's Fairfield Inns in 1994 and 1995
and the sale of 37 Courtyard hotel properties in 1995. 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, however, the
revenues for 1995 for five properties were adversely impacted by the
conversion of five properties to the Marriott brand. The conversion process
typically causes periods of disruption to those properties as selected rooms
and common areas are taken out of service. Due to these disruptive periods,
the time necessary for integration into the nationwide Marriott system and the
Company's realization of the anticipated effect of these improvements, the
operating results for 1995 do not reflect the full impact of conversion for
these five properties. The Company expects to begin to realize the benefits of
conversion improvements within six to 12 months of their completion. Improved
results were driven by strong increases in REVPAR of approximately 4% for
comparable units. On a comparable basis, average room rates increased nearly
11%, while average occupancy decreased over 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.
Courtyard, the Company's moderate-priced lodging properties, 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 properties, 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 increased $15 million to $138 million, primarily reflecting the addition
of 25 full-service hotel properties, partially offset by the sale of limited-
service properties and the senior living communities. Hotel operating costs
increased $23 million to $137 million. As a percentage of hotel revenues,
hotel operating costs and expenses represented 52% of revenues in 1995 and 53%
of revenues in 1994.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, the Company's operating profit increased $8
million to $117 million, or 46% of revenues, from $109 million, or 47% of
revenues, in 1994. Hotel operating profit increased $24 million to $124
million, or 48% of hotel revenues, from $100 million, or 47% of hotel
revenues, in 1994.
Corporate Expenses. Corporate expenses increased $5 million to $14 million
in 1995 primarily due to the substantial increase in the number of hotels
acquired in 1994 and 1995 and overall higher corporate
41
<PAGE>
administrative and travel costs for Host Marriott, which resulted in an
increase in the allocation of corporate expenses to the Company.
Interest Expense. Interest expense increased $12 million to $77 million
primarily due to the Company incurring a full year of interest expense on the
Acquisitions Revolver (which was entered into during the fourth quarter of
1994) and the impact of the substantial increase in debt as a result of the
acquisition of full-service properties during 1995, partially offset by the
lower interest rate as a result of the Properties 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 $26 million which represented a $5 million decrease from
$31 million in 1994. The decrease is due primarily to the increase in interest
expense and corporate expenses, partially offset by the increase in operating
profit discussed above.
Extraordinary Item. In connection with the redemption and defeasance of debt
in the second quarter of 1995 and the repayment of the Acquisitions Revolver
in December 1995, the Company recognized an extraordinary loss of $17 million,
after taxes, primarily representing premiums paid on the redemption of debt
and the write-off of deferred financing fees.
Net Income. The Company's net income was $9 million for 1995, compared to
net income of $31 million for 1994. The decrease is primarily due to the $17
million extraordinary loss on the extinguishment of debt in 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.
Capital Transactions. In May 1995, the Company issued an aggregate of $600
million of 9 1/2% senior secured notes (the "Existing Senior Notes"),
collectively, the "Properties Offering." The Existing Senior Notes were issued
at par and have a final maturity of May 2005. The net proceeds were used to
defease, and subsequently redeem, all of the senior notes (the "Hospitality
Notes") issued by Host Marriott Hospitality, Inc. and to repay borrowings
under the line of credit with Marriott International. In connection with the
redemptions and defeasance, the Company recognized an extraordinary loss in
1995 of $14 million, net of taxes. The Existing Senior Notes are secured (on
an equal and ratable basis with the Acquisition Notes discussed below) by a
pledge of the stock of certain of the Company's subsidiaries and are
guaranteed, jointly and severally, by certain of the Company's subsidiaries.
In December 1995, Acquisitions issued $350 million of 9% senior notes (the
"Acquisitions Notes"), collectively the "Acquisitions Offering." The
Acquisitions Notes were issued at par and have a final maturity of December
2007. A portion of the net proceeds were utilized to repay in full the
outstanding borrowings under the $230 million revolving line of credit (the
"Acquisition Revolver"), which was then terminated. In connection with the
termination of the Acquisition Revolver, the Company recognized an
extraordinary loss in 1995 of $3 million, net of taxes. As a result of the
Merger, the Company became the principal obligor under the Acquisitions Notes,
which are guaranteed, jointly and severally, by certain of the Company's
subsidiaries and which are secured (on an equal and ratable basis with the
Existing Senior Notes) by a pledge of the stock of certain of the Company's
subsidiaries.
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<PAGE>
The indentures governing the Existing Senior Notes and the Acquisitions
Notes each contain covenants that, among other things, limit the ability 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 subsidiaries, and enter into certain
mergers and consolidations. The Company is required to make semi-annual cash
interest payments on the notes at their stated interest rate. The Company is
not required to make principal payments 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.
On July 10, 1997, the Company completed the Consent Solicitation and
Acquisitions completed the Acquisitions Consent Solicitation. In connection
with the completion of the Consent Solicitation and the Acquisitions Consent
Solicitation, the Merger was consummated on July 10, 1997. In addition to the
Merger, the consent solicitations increased the ability of the Company to
acquire, through certain subsidiaries, additional properties subject to non-
recourse indebtedness and controlling interests in corporations, partnerships
and other entities holding attractive properties and increased the threshold
for distributions to affiliates to the excess of the Company's earnings before
interest expense, income taxes, depreciation and amortization and other non-
cash items (EBITDA) subsequent to the consent solicitations over 220% of the
Company's interest expense.
On July 15, 1997, the Company issued $600 million of 8 7/8% senior notes
(the "Senior Notes") at par maturing in 2007 (the "Offering"). The Company
received net proceeds from the Offering of approximately $570 million, which
will be used to fund future acquisitions of, or the purchase of interests in,
full-service hotels and other lodging-related properties, which may include
senior living communities, as well as for general corporate purposes. The
Senior Notes are guaranteed on a joint and several basis by certain of the
Company's subsidiaries and rank pari passu in right of payment with all other
existing and future senior indebtedness of the Company.
The Company (excluding Acquisitions) paid dividends of approximately $12
million, $9 million and $36 million in First Two Quarters 1997, and fiscal
years 1996 and 1995, respectively, and Acquisitions paid dividends of
approximately $7 million, $13 million and $20 million in First Two Quarters
1997, First Two Quarters 1996 and fiscal year 1996, respectively. Prior to the
Properties Offering, all of the Company's (excluding Acquisitions') net cash
flow was transferred to Hospitality, and therefore, the Company maintained no
cash balances. Subsequent to the Properties Offering, the Company established
and maintains separate cash balances.
Capital Acquisitions, Additions and Improvements. The Company continues 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 segments of the market offer
opportunities to acquire assets at attractive multiples of cash flow and at
substantial discounts to replacement value, including under-performing hotels
which can be improved by conversion to the Marriott or Ritz-Carlton brands. In
1997, the Company acquired the 306-room Ritz-Carlton, Marina del Rey for
approximately $57 million and controlling interests in the 404-room Norfolk
Waterside Marriott for approximately $33 million and the Manhattan Beach
Radisson Plaza Hotel, which was converted to the Marriott brand, for $38
million. During 1996, the Company acquired nine full-service properties
totaling 3,124 rooms for approximately $292 million, including the
acquisition, through foreclosure, of a controlling interest in the 250-room
Newport Beach Marriott Suites and a controlling interest in a venture that
owns the 400-room Pittsburgh Marriott City Center. 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. In addition, during the first quarter of
1996, the Company acquired, for $20 million, a minority interest in a joint
venture owned by Host Marriott that controls two hotels in Mexico City,
Mexico. The Company subsequently sold its interest to Host Marriott for $20
million in the third quarter of 1996.
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During 1995, the Company acquired seven full-service properties totaling
3,133 rooms for approximately $329 million (including $94 million of first
mortgage financing on two of the hotels). During 1994, the Company acquired 15
full-service hotels totaling 6,044 rooms for approximately $441 million. A
subsidiary of the Company also provided 100% financing totaling 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 totaling another 684 rooms. The Company consolidates these
properties in the accompanying financial statements. 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 First Two Quarters 1997, First Two
Quarters 1996, and fiscal years 1996, 1995 and 1994 (excluding the acquisition
of properties) totaled $21 million, $23 million, $85 million, $72 million and
$29 million, respectively. The Company incurs capital expenditures for
upgrading acquired hotels to the Company's and the managers' standards as well
as a result of certain improvement projects for non-conversion hotels. The
Company incurred approximately $24 million and $14 million in conversion costs
for the converted hotels in fiscal years 1996 and 1995, respectively. The
Company anticipates spending approximately $55 million to $60 million in
capital expenditures for the renovation and refurbishment of the Company's
existing properties in 1997.
Asset Dispositions. The Company historically has sold, and may from time to
time in the future consider opportunities to sell, certain of its real estate
properties at attractive prices when the proceeds could be redeployed into
investments with more favorable returns. During the first and second quarters
of 1996, the Company completed a sale and leaseback with the REIT for its 16
remaining Courtyard properties and all 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 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. The Company sold the Springfield Radisson Hotel (which was acquired in
December 1994 as part of a portfolio of seven hotels) in December 1995 for net
cash proceeds of $3 million, which approximated its carrying value. 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 all 14 of its
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
Properties Offering.
Cash Flows. The Company's cash flow provided by operations in 1996, 1995 and
1994 totaled $128 million, $112 million and $118 million, respectively. The
Company's cash flow provided by operations for First Two Quarters 1997 and
First Two Quarters 1996 totaled $81 million and $57 million, respectively.
The Company's cash used in investing activities was $76 million in each of
1996 and 1995 and $107 million in 1994. Cash used in investing activities for
First Two Quarters 1997 was $102 million. The Company's cash used in investing
activities consists primarily of acquisitions of hotel properties and capital
expenditures for conversions, improvements and renewals and replacements,
partially offset by the net proceeds of sales of certain assets previously
discussed. Cash provided by investing activities for First Two Quarters 1996
was $70 million which primarily represents the sale of the Courtyard and
Residence Inn properties, net of acquisitions and capital expenditures.
44
<PAGE>
The Company's cash used in financing activities was $34 million in 1996, and
$1 million in 1994, while cash provided by financing activities was $77
million in 1995. Cash used in financing activities for First Two Quarters 1997
and First Two Quarters 1996 was $34 million and $18 million, respectively. The
Company's cash from financing activities consists primarily of the issuance
and repayment of debt as a result of the Properties Offering, the Acquisitions
Offering and the Acquisitions Revolver, dividends and contributed capital. The
Company made draws on the Acquisitions Revolver of $59 million and $168
million in fiscal year 1995 and 1994, respectively, to fund the acquisition of
full-service properties. During fiscal year 1995 and 1994, the Company made
repayments of $226 million and $1 million, respectively, under the
Acquisitions Revolver which was extinguished in 1995. 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
the Hospitality Notes. As the net proceeds from the Properties 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 (the "Line of Credit") the Company's historical financial
statements present the pushed down portion of the Hospitality Notes and the
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.
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 Company's indentures as part of the tests
determining the Company's ability to incur debt and to make certain restricted
payments. 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 presentation.
For First Two Quarters 1997, EBITDA increased $29 million to $131 million
from $102 million in First Two Quarters 1996. Hotel EBITDA increased $30
million, or 32%, to $126 million for First Quarter 1997. The increase in hotel
EBITDA is due to the increase in comparable full-service EBITDA of 23% and the
addition of ten properties during 1996 and First Two Quarters 1997, partially
offset by the sale and leaseback of limited-service properties in 1996. Full-
service EBITDA increased $40 million, or 48%, to $124 million for First Two
Quarters 1997. On a comparable basis, full-service EBITDA increased 23% on a
REVPAR increase of 15%.
For fiscal year 1996, EBITDA increased $32 million to $226 million from $194
million in 1995. Hotel EBITDA increased $18 million to $205 million for 1996.
The increase in hotel EBITDA is due to the increase in comparable full-service
EBITDA of nearly 18% and the addition of 16 full-service hotels in 1995 and
1996, partially offset by the sales of limited-service properties in 1995 and
1996, the proceeds from which could not be immediately reinvested. On a
comparable basis, full-service EBITDA increased nearly 18% on a REVPAR
increase of over 10% for fiscal year 1996. Full-service hotel EBITDA increased
$69 million, or 57%, to $191 million for 1996. As a percentage of hotel
EBITDA, full-service hotel EBITDA represented 93% of hotel EBITDA in 1996
compared to 65% 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 2.3 to
1.0, 2.6 to 1.0, 2.8 to 1.0, 2.9 to 1.0 and 2.2 to 1.0 in fiscal years 1996,
1995, 1994, First Two Quarters 1997 and First Two Quarters 1996, respectively.
The ratio of earnings to fixed charges was 1.5 to 1.0, 1.5 to 1.0 and 1.7 to
1.0, 2.0 to 1.0 and 1.6 to 1.0 in fiscal years 1996, 1995, 1994, First Two
Quarters 1997 and First Two Quarters 1996, respectively.
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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................................... $226 $194
Interest expense......................... (101) (77)
Depreciation and amortization............ (64) (62)
Income taxes applicable to operations.... (22) (17)
Gain (loss) on dispositions of assets and
other non-cash charges, net............. (7) (12)
---- ----
Income before extraordinary item....... $ 32 $ 26
==== ====
<CAPTION>
FIRST TWO QUARTERS FIRST TWO QUARTERS
1997 1996
------------------ ------------------
<S> <C> <C>
EBITDA................................... $131 $102
Interest expense......................... (46) (46)
Depreciation and amortization............ (35) (29)
Income taxes applicable to operations.... (21) (12)
Gain (loss) on dispositions of assets and
other non-cash charges, net............. 1 1
---- ----
Net income............................. $ 30 $ 16
==== ====
</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 combined
consolidated financial statements.
The Company is required to adopt Statement Financial Accounting Standards
("SFAS") No. 130 "Reporting Comprehensive Income," and SFAS No. 131
"Disclosures About Segments of an Enterprise and Related Information" in
fiscal year 1998. The adoption of these statements is not expected to have a
material impact on the Company's combined consolidated financial statements.
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BUSINESS AND PROPERTIES
GENERAL
The Company is an indirect wholly owned subsidiary of Host Marriott and owns
the majority of Host Marriott's lodging properties. The Company's assets
principally consist of 50 full-service hotel properties, one partnership
investment and a note receivable from an affiliate. All but ten of the
Company's 50 lodging properties are managed by Marriott International and all
but two are operated under the Marriott or Ritz-Carlton brands, which are
among the most respected and widely recognized in the lodging industry. Based
on industry data, the Company believes that its hotels as a group consistently
outperform the industry's average occupancy rate by a significant margin, and
averaged 76.4% 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).
The lodging industry as a whole, and the upscale and luxury full-service
hotel segments in particular, are benefiting from a favorable supply and
demand relationship in the United States. Based on data provided by Smith
Travel Research, the Company believes that demand for upscale full-service
rooms, measured as annual domestic occupied room nights for its competitive
set, increased 3.8% in 1994, 1.5% in 1995 and 2.3% in 1996. Management
believes that demand increases have resulted primarily from an improved
economic environment and a corresponding increase in business travel. In spite
of increased demand for rooms, the room supply growth rate in the upscale
full-service segment has been minimal. Management believes that this low
supply growth rate in the upscale 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 selectively raising room rates and by
primarily replacing certain discounted group business with higher-rated group
and transient business. As a result, on a comparable basis, room revenues per
available room ("REVPAR") for the Company's full-service properties increased
nearly 15% for First Two Quarters 1997 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 15%
increases in REVPAR resulted in an approximate 23% increase in comparable
full-service hotel EBITDA in First Two Quarters 1997. The Company expects this
supply/demand imbalance 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 such
supply/demand imbalance will continue or 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, including controlling interests
in joint ventures, partnerships or other entities holding such properties. The
Company believes that the upscale and luxury full-service segments of the
market offer numerous opportunities to acquire assets at attractive multiples
of cash flow and at substantial discounts to replacement value, including
under-performing hotels which can be improved by conversion to the Marriott or
Ritz-Carlton brands. The Company believes that the upscale full-service
segment is very promising because:
. The Company believes that 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 through 1996. Furthermore, the lead time
from conception to completion of a full-service hotel is generally five
years or more in the markets the Company is principally pursuing, which
management believes will contribute to the continued low growth of
supply in the upscale and luxury full-service segments through 2000.
47
<PAGE>
. 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. In recent years, the Company
has acquired a number of properties from inadvertent owners at
significant discounts to replacement cost, including luxury hotels
operating under the Ritz-Carlton brand. While 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 U.S. lodging
properties and have only recently begun to dispose of such properties.
The Company expects that there will be increased opportunities to
acquire U.S. lodging properties from international financial
institutions and expects to dedicate significant resources to
aggressively pursue these opportunities.
. The Company believes that there are numerous opportunities to improve
the performance of acquired hotels by replacing the existing hotel
manager with Marriott International and converting the hotel to the
Marriott brand. Based on industry data, the Company believes that
Marriott-flagged properties have consistently outperformed the industry.
Demonstrating the strength of the Marriott brand name, the average
occupancy rate for the Company's comparable full-service properties was
76.1%, compared to an average occupancy rate of 71.1% for competing
upscale full-service hotels. Accordingly, management anticipates that
any additional full-service properties acquired by the Company in the
future and converted from other brands to the Marriott brand should
achieve higher occupancy rates and average room rates than has
previously been the case for those properties as the properties begin to
benefit from Marriott's brand recognition, reservation system and group
sales organization. The Company intends to pursue additional full-
service hotel acquisitions, some of which may be conversion
opportunities. Eleven of the Company's 36 acquired full-service hotels
were converted to the Marriott brand following their acquisition.
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 Marriott and Ritz-
Carlton brand names due to its relationship with Marriott International.
In 1996, the Company acquired nine full-service properties with 3,124 rooms
for approximately $292 million, including the acquisition, through
foreclosure, of a controlling interest in the 250-room Newport Beach Marriott
Suites and the acquisition of a controlling interest in a venture that owns
the 400-room Pittsburgh Marriott City Center. Subsequent to year end, the
Company acquired the 306-room Ritz-Carlton, Marina del Rey, for approximately
$57 million and controlling interests in the 404-room Norfolk Waterside
Marriott for approximately $33 million and the Manhattan Beach Radisson Plaza
Hotel, which was converted to the Marriott brand, for $38 million. The Company
acquired seven full-service properties (3,133 rooms) for approximately $329
million in 1995. During 1994, the Company acquired 15 full-service properties
with 6,044 rooms for approximately $441 million. In 1994, 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 which the
Company consolidates in the accompanying financial statements. The Company
believes that each of these acquisitions were made at an attractive valuation
and at a significant discount to replacement value.
On September 10, 1997, Host Marriott successfully completed the purchase of
98.6% of the limited partnership units in Chesapeake Hotel Limited Partnership
("CHLP"), increasing its ownership of CHLP to 99.9%. CHLP owns six hotels, the
Key Bridge Marriott, the Chicago O'Hare Marriott, the Boston Newton Marriott,
the Denver Southeast Marriott, the Bloomington Minnesota Marriott and the
Saddlebrook New Jersey Marriott. The Company is considering the acquisition of
Host Marriott's general and limited partnership interests, along with certain
notes and other receivables due from CHLP, which would allow the Company to
consolidate CHLP. The Company currently owns the nonrecourse second mortgages
on the six properties (totalling $139 million at June 20, 1997).
48
<PAGE>
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 the REIT 37 of its Courtyard
properties. The leases and rental obligations were transferred to Host
Marriott in 1995. Also, in the second quarter of 1995, the Company sold its
remaining four Fairfield Inns. In the first and second quarters of 1996, the
Company sold to and leased back from the REIT its remaining 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, although the
Company retains the rights to the deferred proceeds and the lease obligations
with respect to the 18 Residence Inns. The Company has reinvested
substantially all of the proceeds in the acquisition of full-service lodging
properties.
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.
The Company believes that upscale full-service hotel room supply growth will
remain limited through at least 1998. 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. The
Company believes that room demand for upscale full-service properties will
continue to grow at approximately the rate of inflation. Increased room demand
should result in increased hotel occupancy and room rates. According to Smith
Travel Research, upscale full-service occupancy for the Company and its
competitive set grew in 1996 to 72.4%, while room rate growth continued to
exceed inflation. While room demand has been rising, new hotel supply growth
has been minimal. Smith Travel Research data shows that upscale full-service
room supply increased an average of only 1.0% annually from 1990 through 1996.
The increase in room demand and minimal growth in new hotel supply has also
led to increased room rates. 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 1997
and 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.
HOTEL LODGING PROPERTIES
The Company's hotel lodging properties represent quality assets in the full-
service lodging segments. All but two of the Company's hotel properties are
operated under the Marriott or Ritz-Carlton brand names. The two hotels
(representing an aggregate of 596 rooms, or approximately 3% of the Company's
total rooms) that do not
49
<PAGE>
carry the Marriott or Ritz-Carlton brand have not been converted to the
Marriott or Ritz-Carlton brand because their size, quality and/or contractual
commitments would not permit such conversion. The Company's lodging portfolio
consists of 50 properties with 19,841 rooms as of September 15, 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
the First Two Quarters 1997, First Two Quarters 1996 and fiscal years 1996,
1995 and 1994, the Company spent $21 million, $23 million, $39 million, $28
million and $31 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. The Company's full-service hotels primarily include
Marriott and Ritz-Carlton brand hotels and generally contain from 300 to 600
rooms. Hotel facilities typically include meeting and banquet facilities, a
variety of restaurants and lounges, swimming pools, gift shops and parking
facilities. The Company's full-service hotels primarily 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
properties are well situated in locations where there are significant barriers
to entry by competitors. All but ten of the full-service hotels owned by the
Company are managed by Marriott International and all but three are part of
Marriott International's full-service hotel system. The average age of the
full-service properties is 12 years, several of which have had substantial
renovations or major additions.
The chart below sets forth performance information for the Company's
comparable full-service hotels:
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- ----------------
1997 1996 1996 1995
--------- --------- ------- -------
<S> <C> <C> <C> <C>
Number of properties(1).............. 36 36 31 31
Number of rooms...................... 15,327 15,297 12,465 12,465
Average daily rate................... $ 121.12 $ 107.73 $103.64 $ 96.91
Occupancy %.......................... 79.7% 77.6% 76.1% 73.7%
REVPAR............................... $ 96.47 $ 83.57 $ 78.84 $ 71.38
REVPAR % change...................... 15.4% -- 10.5% --
</TABLE>
The chart below sets forth performance information for the Company's
existing full-service hotels.
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- -------------------------
1997 1996 1996 1995 1994
--------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of properties...... 50 44 48 38 30
Number of rooms........... 19,716 17,490 18,976 15,552 12,032
Average daily
rate(1)(2)(3)............ $ 120.84 $ 107.47 $107.38 $ 97.57 $ 85.50
Occupancy %(1)(2)(3)...... 78.9% 77.6% 76.4% 73.9% 76.6%
REVPAR(1)(2)(3)........... $ 95.31 $ 83.36 $ 82.03 $ 72.07 $ 65.49
REVPAR % change........... 14.3% -- 13.8% 10.0% --
</TABLE>
- ---------------------
(1) Excludes the 255-room Elk Grove Suites hotel, which was leased to a
national hotel chain through August 1997 and was recently sold to the
lessee for $16 million, and the Springfield Radisson which was sold in
December 1995.
(2) Financial data for fiscal year 1995 excludes the 820-room Marriott World
Trade Center which was acquired in December 1995.
(3) Financial data for fiscal year 1994 does not include seven properties
purchased in December 1994.
50
<PAGE>
Revenues for First Two Quarters 1997 for nearly all of the Company's full-
service hotels were improved or comparable to First Quarter 1996 results.
REVPAR for comparable properties increased 15% as average room rates increased
12% and average occupancy increased two percentage points. Overall, this
resulted in excellent growth in sales, which expanded at a 13% rate for
comparable hotels including a three percentage point increase in house profit
margin. 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, allowed the managers of the Company's hotels to increase average room
rates by selectively raising room rates and by replacing certain discounted
group business with higher-rated group and transient business. The Company
believes that these favorable REVPAR growth trends should continue due to the
limited new construction of full-service properties.
A number of the Company's full-service hotel acquisitions were converted to
the Marriott brand upon acquisition. The conversion of these properties to the
Marriott brand is intended to increase occupancy and room rates as a result of
Marriott International's nationwide marketing and reservation systems and
Marriott Rewards program, as well as customer recognition of the Marriott
brand name. The Company actively manages these conversions and, in many cases,
has worked closely with the manager to selectively invest in enhancements to
the physical product to make the property more attractive to guests or more
efficient to operate. The invested capital with respect to these properties is
primarily used for the improvement of common areas, as well as upgrading soft
and hard goods (i.e., carpets, drapes, paint, furniture and additional
amenities). The conversion process typically causes periods of disruption to
these properties as selected rooms and common areas are temporarily taken out
of service. Historically, conversion properties have shown improvements as the
benefits of Marriott International's marketing and reservation programs and
customer service initiatives take hold. In addition, these properties have
generally been integrated into Marriott's systems covering purchasing and
distribution, insurance, telecommunications and payroll processing.
The Company's focus is on maximizing profitability throughout the portfolio
by concentrating on key objectives. The Company works with the hotel managers
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 hotel 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.
The table below sets forth performance information for the Residence Inns:
<TABLE>
<CAPTION>
FIRST TWO QUARTERS FISCAL YEAR
-------------------- ----------------------
1997 1996 1996 1995 1994
--------- --------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Number of properties.............. 18 18 18 18 18
Number of rooms................... 2,178 2,178 2,178 2,178 2,178
Average daily rate................ $ 99.09 $ 89.29 $90.82 $85.07 $79.58
Occupancy %....................... 83.3% 86.0% 85.1% 86.6% 85.6%
REVPAR............................ $ 82.54 $ 76.79 $77.29 $73.67 $68.12
REVPAR % change................... 7.5% -- 4.9% 8.1% --
</TABLE>
51
<PAGE>
For First Two Quarters 1997, the Company's Residence Inns performed well
with advances in room rates of 11%, although occupancy decreased by
approximately three percentage points. Continued popularity of this product
with customers combined with increasing business travel resulted in superior
performance for 1997. At an average occupancy rate of almost 83% for First Two
Quarters 1997, 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 Two Quarters 1996, the Company entered into an agreement
with the REIT whereby it sold and leased back all 18 of its 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 Two 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 ten of the Company's hotel properties are managed by Marriott
International as Marriott or Ritz-Carlton brand hotels. Eight of the ten
remaining hotels are operated as Marriott brand hotels under franchise
agreements with Marriott International. The Company believes that these
Marriott managed and franchised 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 the strong 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 recently created
Marriott Rewards program, which expanded the previous Marriott Honored Guest
Awards program. Marriott Rewards membership includes more than nine million
members.
The Marriott reservation system provides Marriott reservation agents
complete descriptions of the rooms available for sale, and up-to-date rate
information from the properties. The reservation system also features
connectivity to airline reservation systems, providing travel agents with
access to available rooms inventory for all Marriott and Ritz-Carlton lodging
properties. In addition, 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.
PROPERTIES
The following table sets forth certain information relating to each of the
Company's hotels. All of the properties are operated as full-service Marriott
hotels by Marriott International, unless otherwise indicated.
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
California
Napa Valley.................. 191
Newport Beach................ 570
Newport Beach Suites......... 250
San Francisco Airport........ 684
San Francisco Fisherman's
Wharf(4).................... 285
</TABLE>
<TABLE>
<CAPTION>
LOCATION ROOMS
- -------- -----
<S> <C>
Manhattan Beach(4)........... 380
Marina Beach(2).............. 368
The Ritz-Carlton, Marina del
Rey(3)...................... 306
Colorado
Denver Tech.................. 625
Denver West(2)............... 307
Vail Mountain Resort......... 349
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
LOCATION ROOMS
-------- -----
<S> <C>
Connecticut
Hartford--Rocky Hill(2)...... 251
Florida
Fort Lauderdale Marina....... 580
Jacksonville(2)(4)........... 256
Miami Airport(2)............. 782
Palm Beach Gardens(4)........ 279
Singer Island (Holiday
Inn)(3)..................... 222
Tampa Airport(2)............. 295
Tampa Westshore(1)........... 309
Georgia
Atlanta Norcross............. 222
Atlanta Northwest............ 400
Atlanta Perimeter(2)......... 400
The Ritz-Carlton,
Atlanta(3).................. 447
Illinois
Chicago-Deerfield Suites..... 248
Chicago-Downtown Courtyard... 334
Indiana
South Bend(2)................ 300
Maryland
Bethesda(2).................. 407
Gaithersburg-Washingtonian
Center...................... 284
Missouri
Kansas City Airport(2)....... 382
New Jersey
Newark Airport(2)............ 590
</TABLE>
<TABLE>
<CAPTION>
LOCATION ROOMS
-------- -----
<S> <C>
New York
Marriott World Trade
Center(2)................... 820
North Carolina
Charlotte(4)................. 298
Raleigh Crabtree Valley(1)... 375
Oklahoma
Oklahoma City................ 354
Oregon
Portland..................... 503
Pennsylvania
Pittsburgh(2)(4)............. 400
Texas
Dallas/Fort Worth............ 492
Dallas Quorum(2)............. 547
Houston Airport (2).......... 566
J.W. Marriott Houston........ 503
Plaza San Antonio(4)......... 252
San Antonio Riverwalk (2).... 500
Utah
Salt Lake City(2)............ 510
Virginia
Pentagon City................ 300
Norfolk Waterside(2)(4)...... 404
Westfields Conference
Center...................... 335
Washington-Dulles Suites..... 254
Williamsburg................. 295
Washington, D.C.
Washington Metro Center...... 456
Canada
Toronto Delta Meadowvale(3).. 374
</TABLE>
- ---------------------
(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 consolidates these properties in the
accompanying financial statements.
(2) The land on which the hotel is built is leased by the Company under a
long-term lease agreement.
(3) Property is not operated as Marriott and is not managed by Marriott
International.
(4) Property is operated as a Marriott franchised property.
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. 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.
While the Company's portfolio of lodging properties currently consists
almost entirely of upscale and luxury full-service hotels, management
continually considers the merits of diversifying into other compatible
lodging- related properties. Host Marriott has recently acquired 29 senior
living communities with 6,127 units. The Company may, from time to time, seek
to opportunistically invest in senior living communities.
53
<PAGE>
INVESTMENTS IN AFFILIATED PARTNERSHIP AND NOTES RECEIVABLE
In connection with the 1984 sale of seven hotels to Chesapeake Hotel Limited
Partnership ("CHLP"), an affiliated partnership, the Company received $168
million ($139 million at June 20, 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.
On September 10, 1997, Host Marriott successfully completed the purchase of
98.6% of the limited partnership units in CHLP, increasing its ownership of
CHLP to 99.9%. CHLP owns six hotels, the Key Bridge Marriott, the Chicago
O'Hare Marriott, the Boston Newton Marriott, the Denver Southeast Marriott,
the Bloomington Minnesota Marriott and the Saddlebrook New Jersey Marriott.
The Company is considering the acquisition of Host Marriott's general and
limited partnership interests, along with certain notes and other receivables
due from CHLP, which would allow the Company to consolidate CHLP.
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 Company's hotels compete with several other major lodging brands.
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:
<TABLE>
<CAPTION>
SEGMENT REPRESENTATIVE PARTICIPANTS
- ------- ---------------------------
<S> <C>
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
</TABLE>
EMPLOYEES
The Company has no employees. All of its management services are provided by
employees of Host Marriott.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws may impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, certain
environmental laws and common law principles could be used to impose liability
for release of asbestos-containing materials ("ACMs"), and third parties may
seek recovery from owners or operators of real properties for personal injury
associated with exposure to released ACMs. Environmental laws also may impose
restrictions on the manner in which property may be used or business may be
operated, and these restrictions may require expenditures. In connection with
its current or prior ownership or operation of hotels, the Company may be
potentially liable for any such costs or liabilities. Although the Company is
currently not aware of any material environmental claims pending or threatened
against it, no assurance can be given that a material environmental claim will
not be asserted against the Company.
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.
54
<PAGE>
MANAGEMENT
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors, executive officers and management are employees of
Host Marriott. Set forth below is certain information with respect to the
persons who are executive officers of the Company.
<TABLE>
<CAPTION>
OTHER POSITIONS AND BUSINESS EXPERIENCE PRIOR TO BECOMING AN
NAME AND TITLE AGE EXECUTIVE OFFICER OF THE COMPANY
- -------------- --- ------------------------------------------------------------
<S> <C> <C>
Robert E. Parsons, Jr.
President and
Director.............. 42 Robert E. Parsons, Jr. joined Host Marriott's
Corporate Financial Planning staff in 1981 and was
made Assistant Treasurer in 1988. In 1993, Mr.
Parsons was elected Senior Vice President and
Treasurer of Host Marriott, and in 1995, he was
elected Executive Vice President and Chief Financial
Officer of Host Marriott. Mr. Parsons was elected
Vice President of the Company in 1993 and was
elected Senior Vice President in 1995. In 1996, Mr.
Parsons was elected President and Director of the
Company.
Christopher G. Townsend
Executive Vice
President and
Director.............. 50 Christopher G. Townsend joined Host Marriott's Law
Department in 1982 as a Senior Attorney. In 1984,
Mr. Townsend was made Assistant Secretary of Host
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
Executive Vice
President............. 34 Christopher J. Nassetta joined Host Marriott in
October 1995 as Executive Vice President. Mr.
Nassetta was elected Executive 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
Vice President and
Treasurer............. 37 Bruce Wardinski joined Host Marriott in 1987 as
Senior Financial Analyst of Financial Planning &
Analysis and was named Manager in June 1988. He was
appointed Host Marriott's 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.
</TABLE>
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<TABLE>
<CAPTION>
OTHER POSITIONS AND BUSINESS EXPERIENCE PRIOR TO BECOMING AN
NAME AND TITLE AGE EXECUTIVE OFFICER OF THE COMPANY
- -------------- --- ------------------------------------------------------------
<S> <C> <C>
Donald D. Olinger
Vice President and
Corporate Controller.. 38 Donald D. Olinger joined Host Marriott in 1993 as
Director of Corporate Accounting. Later in 1993, Mr.
Olinger was promoted to Senior Director and
Assistant Controller of Host Marriott. He was
promoted to Vice President of Corporate Accounting
in 1995. In 1996, he was elected Senior Vice
President and Corporate Controller of Host Marriott.
Mr. Olinger was elected Vice President and Corporate
Controller of the Company in 1996. Prior to joining
Host Marriott, Mr. Olinger was with the public
accounting firm of Deloitte & Touche.
</TABLE>
DIRECTOR AND EXECUTIVE OFFICER COMPENSATION
The directors and executive officers of the Company are employees of Host
Marriott and are compensated by Host Marriott. The directors and executive
officers are required to devote to the Company such time as may be necessary
for proper performance of their duties, but are not required to devote their
full time to the performance of such duties. No directors and executive
officers of the Company receive any compensation from the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There is no compensation committee or other board committee performing the
equivalent function. Compensation for executive officers is determined by the
Compensation Policy Committee of Host Marriott.
SOLE SHAREHOLDER
The Company has 100 shares of common stock with no par value issued and
outstanding, all of which are held beneficially and of record by Hospitality.
No executive officer or director of the Company owns any shares of the
Company's common stock.
RELATIONSHIP WITH HOST MARRIOTT
The Company operates as a unit of Host Marriott, utilizing Host Marriott's
employees, centralized systems for cash management, 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. Certain of
these expenses have been allocated to the Company primarily based on the
Company's utilization of specific functions.
The Company has no employees. Host Marriott provides the services of certain
employees (including the Company's executive officers) to the Company. The
Company anticipates that each of its executive officers will generally devote
a sufficient portion of his or her time to the business of the Company.
However, such executive officers also will devote a significant portion of his
or her time to the business of Host Marriott and its other subsidiaries.
Implementation of the Company's future business strategy to acquire full-
service hotels primarily in the U.S. will be dependent upon officers of the
Company who may have similar obligations to Host Marriott or its affiliates.
Accordingly, there can be no assurance that the Company will be provided the
opportunity to purchase or acquire an economically desirable full-service
hotel which also may be available to Host Marriott or one of its other
subsidiaries.
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The Internal Revenue Service (the "Service"), as a result of an examination
of Host Marriott's tax returns for the taxable years 1986-1990, has proposed
certain adjustments that would result in the acceleration of significant tax
liabilities of Host Marriott for such years. Host Marriott is currently
contesting such adjustments. Under tax sharing arrangements between the
Company and Host Marriott, Host Marriott would be principally responsible for
any such liability should the Service prevail in these matters, and no
material portion of any resulting liability would be a Permitted Tax Payment
under the Senior Notes Indenture. Management believes that Host Marriott will
have adequate financial resources to pay any such liability should the Service
prevail in this matter. Nevertheless, if Host Marriott were not to pay any
such tax liability, the Service could seek payment from the Company or its
subsidiaries.
RELATIONSHIP WITH MARRIOTT INTERNATIONAL
Marriott International serves as the manager for all but ten of the
Company's full-service hotels and for the 18 Residence Inns leased by the
Company. Marriott International also provides various other services to Host
Marriott and its subsidiaries, including the Company.
MANAGEMENT AGREEMENTS
The Company is party to management agreements with respect to 40 of its 50
full service hotels (the "Management 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 Management
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 over a priority return to the Company, with
total incentive management fees not to exceed 20% of operating profits. For
full-service hotels acquired after September 1995, the incentive management
fee is generally equal to 20% of operating profits. The Company may terminate
certain Management Agreements if specified performance threshholds are not
met, subject to the right of Marriott International to cure. In the event of
early termination of any Management Agreement, Marriott International will
receive additional fees based on the unexpired term and expected future base
and incentive management fees. No Management Agreement with respect to a
single lodging facility is cross-collateralized with or cross-defaulted to any
other Management Agreement and a single Management Agreement may be cancelled
under certain conditions without triggering a cancellation of any other
Management Agreement. Under each Management Agreement for full-service hotels,
Marriott International collects all revenue generated at a particular lodging
property. Marriott International holds such amounts on behalf of the Company
in segregated accounts and forwards to the Company every two weeks all amounts
in excess of certain expenses and management fees (as described more fully
below). Because amounts collected by Marriott International are held on the
Company's behalf, the Company does not depend upon the creditworthiness of
Marriott International for receipt of such payments.
Pursuant to the terms of the Management 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, all the Company's properties participate in the
Marriott Rewards program which replaced the Marriott Honored Guest Awards
program as well as other Marriott frequent guest programs as of May 1997. The
Marriott Rewards program generally includes all Marriott brand properties as
well as select Ritz-Carlton properties. The cost of this program is 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 certain non-routine repairs and maintenance to the hotels
which are normally capitalized and replacements and renewals to the hotels'
property and improvements. Under certain circumstances, the Company will be
required to establish
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escrow accounts for such purposes under terms outlined in the Management
Agreements. The Company is also 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 Management 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 Management Agreements, the working capital will be returned
to the Company.
FRANCHISE AGREEMENTS
The Company has entered into franchise agreements with Marriott
International for eight 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 were $2 million and $1
million for 1996 and 1995, respectively.
RESIDENCE INNS
The agreements pursuant to which Marriott International operates the 18
Residence Inns subject to the sale-leaseback transaction with the REIT (the
"Residence Inn Agreements"), each provide for a system fee equal to four
percent of annual gross revenue, and a base fee equal to two percent of annual
gross revenues. In addition, the agreements provide for an incentive
management fee equal to 50% of "Available Cash Flow" for each fiscal year
(provided that the cumulative incentive management fee may not on any date
exceed 20% of the cumulative Operating Profit (as defined in the Residence Inn
Agreements) of the hotel through such date). Available Cash Flow is defined to
be the excess of Operating Profit (after deduction of the base fee, including
any portion of the base fee that is deferred or waived) over the Owner's
Priority (as defined in the Residence Inn Agreements). Under such forms of
agreement, Marriott International is also entitled to reimbursement for
certain costs attributable to Chain Services of Marriott International. The
Company or its subsidiaries have the option to terminate the agreement if
specified performance thresholds regarding Operating Profit are not satisfied
and if specified revenue market share tests are not met (provided that
Marriott International can elect to avoid such termination by making cure
payments to the extent necessary to allow the specified Operating Profit
thresholds to be satisfied).
POLICIES AND PROCEDURES FOR ADDRESSING CONFLICTS
The on-going relationships between Marriott International and Host Marriott
may present certain conflict situations for J.W. Marriott, Jr. who serves as
Chairman of the Board of Directors, Chief Executive Officer and President of
Marriott International and also serves as a director of Host Marriott and for
Richard E. Marriott, who serves as a director of Marriott International, and
as the Chairman of the Board of Directors of Host Marriott. Mr. Richard E.
Marriott and J.W. Marriott, Jr., as well as other executive officers and
directors of Host Marriott and Marriott International, also own (or have
options or other rights to acquire) a significant number of shares of common
stock in both Host Marriott and Marriott International. Host Marriott and
Marriott International have adopted appropriate policies and procedures to be
followed by the Board of Directors of each company to limit the involvement of
Richard E. Marriott and J.W. Marriott, Jr. (or such other executive officers
and directors having a significant ownership interest in the companies) in
conflict situations, including matters relating to contractual relationships
or litigation between Marriott International and Host Marriott. Such
procedures include requiring Richard E. Marriott and J.W. Marriott, Jr. (or
such other executive officers or directors having a significant ownership
interest in the companies) to abstain from making management decisions in
their capacities as officers of Marriott International and Host Marriott
respectively, and to abstain from voting as directors of each company, with
respect to matters that present a significant conflict of interest between the
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<PAGE>
companies. Whether or not a significant conflict of interest situation exists
is determined on a case-by-case basis depending on such factors as the dollar
value of the matter, the degree of personal interest of Richard E. Marriott
and J.W. Marriott, Jr. (or such other executive officers and directors having
a significant ownership interest in the companies) in the matter and the
likelihood that resolution of the matter has significant strategic,
operational or financial implications for the business of the Company. It is a
principal responsibility of the general counsel of the Company to monitor this
issue in consultation with the Board of Directors. See "Risk Factors--
Relationship with Marriott International."
DESCRIPTION OF SENIOR NOTES
Set forth below is a summary of certain provisions of the Senior Notes. The
Original Notes were issued pursuant to the Indenture dated as of July 15,
1997, by and among the Company, the Subsidiary Guarantors and Marine Midland
Bank, as trustee (the "Trustee"). The terms of the Indenture are also governed
by certain provisions contained in the Trust Indenture Act of 1939, as amended
(the "TIA"). The following summaries of certain provisions of the Indenture
are summaries only, do not purport to be complete and are qualified in their
entirety by reference to all of the provisions of the Indenture, a copy of
which may be obtained from the Company. Capitalized terms used herein and not
otherwise defined shall have the meanings assigned to them in the Indenture.
Wherever particular provisions of the Indenture are referred to in this
summary, such provisions are incorporated by reference as a part of the
statements made and such statements are qualified in their entirety by such
reference.
GENERAL
The Senior Notes are senior obligations of the Company secured by the
Capital Stock of the Subsidiary Guarantors and are limited in aggregate
principal amount to $600 million. The Senior Notes rank pari passu with all
other existing and future senior Indebtedness of the Company (including the
Existing Senior Notes and the Acquisitions Notes); provided, however, certain
Indebtedness of the Company and its Subsidiaries currently is, and
Indebtedness incurred by the Company and its Subsidiaries may be, secured by
assets held by the Company or its Subsidiaries subject to certain restrictions
described herein. The Senior Notes are guaranteed on a senior basis by the
Initial Subsidiary Guarantors, and subject to certain exceptions, will be
guaranteed by each of the Company's future Subsidiaries. See "--Future
Subsidiary Guarantors." The Initial Subsidiary Guarantors are: HMH Rivers
Inc., Marriott SBM Two Corporation, Host of Houston, Ltd., Host of Boston,
Ltd., HMC Retirement Properties, Inc., HMH Marina, Inc., HMH Pentagon
Corporation, Host Airport Hotels, Inc., Marriott Financial Services, Inc., HMC
SFO, Inc., HMC AP Canada, Inc. and Host of Houston 1979.
The Senior Notes mature on July 15, 2007. The Senior Notes bear interest at
the rate of 8 7/8% per annum from the respective date of issuance or from the
most recent Interest Payment Date to which interest has been paid or provided
for, payable semi-annually on July 15 and January 15 of each year, commencing
January 15, 1998, to the persons in whose names such Senior Notes are
registered at the close of business on the July 1 or the January 1 immediately
preceding such Interest Payment Date. Interest is calculated on the basis of a
360-day year consisting of twelve 30-day months. The Senior Notes are issued
only in fully registered form, without coupons, in denominations of $1,000 and
integral multiples thereof.
Principal of, premium, if any, and interest on the Senior Notes is payable,
and the Senior Notes may be presented for registration of transfer or
exchange, at the office or agency of the Company maintained for such purpose,
which office or agency shall be maintained in the Borough of Manhattan, The
City of New York. At the option of the Company, payment of interest may be
made by check mailed to the holders of the Senior Notes (the "Holders") at the
addresses set forth upon the registry books of the Company; provided, however,
Holders of Certificated Senior Notes are entitled to receive interest payments
(other than at maturity) by wire transfer of immediately available funds, if
appropriate wire transfer instructions have been received in writing by the
Trustee not less than 15 days prior to the applicable Interest Payment Date.
Such wire instructions, upon receipt by the
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Trustee, shall remain in effect until revoked by such Holder. No service
charge is made for any registration of transfer or exchange of Senior Notes,
but the Company may require payment of a sum sufficient to cover any tax or
other governmental charge payable in connection therewith. Until otherwise
designated by the Company, the Company's office or agency is the corporate
trust office of the Trustee presently located at 140 Broadway, New York, New
York.
OPTIONAL REDEMPTION
The Company does not have the right to redeem any Senior Notes prior to July
15, 2002. The Senior Notes will be redeemable at the option of the Company, in
whole or in part, at any time on or after July 15, 2002 upon not less than 30
days nor more than 60 days notice to each Holder of Senior Notes, at the
following redemption prices (expressed as percentages of the principal amount)
if redeemed during the 12-month period commencing July 15 of the years
indicated below, in each case (subject to the right of Holders of record on a
Record Date that is on or prior to such Redemption Date to receive interest
due on the corresponding Interest Payment Date) together with accrued and
unpaid interest thereon to the Redemption Date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2002.............................................................. 104.438%
2003.............................................................. 102.958%
2004.............................................................. 101.479%
2005 and thereafter............................................... 100.000%
</TABLE>
In the case of a partial redemption, the Trustee shall select the Senior
Notes or portions thereof for redemption on a pro rata basis, by lot or in
such other manner it deems appropriate and fair. The Senior Notes may be
redeemed in part in multiples of $1,000 only.
The Senior Notes do not have the benefit of any sinking fund.
Notice of any redemption will be sent, by first class mail, at least 30 days
and not more than 60 days prior to the date fixed for redemption to the Holder
of each Senior Note to be redeemed to such Holder's last address as then shown
upon the registry books of the Registrar. Any notice which relates to a Senior
Note to be redeemed in part only must state the portion of the principal
amount equal to the unredeemed portion thereof and must state that on and
after the date of redemption, upon surrender of such Senior Note, a new note
or notes in a principal amount equal to the unredeemed portion thereof will be
issued. On and after the date of redemption, interest will cease to accrue on
the Senior Notes or portions thereof called for redemption.
CERTAIN COVENANTS
REPURCHASE OF SENIOR NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF
CONTROL
Upon the occurrence of a Change of Control Triggering Event, each Holder of
Senior Notes will have the right to require the Company to repurchase all or
any part (equal to $1,000 or an integral multiple thereof) of such Holder's
Senior Notes pursuant to the offer described below (the "Change of Control
Offer") at an offer price in cash (the "Change of Control Payment") equal to
101% of the aggregate principal amount thereof plus (subject to the right of
Holders of record on a Record Date to receive interest due on the
corresponding Interest Payment Date) accrued and unpaid interest thereon to
the date of purchase on a date that is not more than 45 Business Days after
the occurrence of such Change of Control Triggering Event (the "Change of
Control Payment Date").
On or before the Change of Control Payment Date, the Company will (i) accept
for payment Senior Notes or portions thereof properly tendered pursuant to the
Change of Control Offer, (ii) deposit with the Paying Agent cash sufficient to
pay the Change of Control Payment (together with accrued and unpaid interest)
of all Senior Notes so tendered and (iii) deliver to the Trustee Senior Notes
so accepted together with an Officers' Certificate listing the aggregate
principal amount of the Senior Notes or portions thereof being purchased by
the Company.
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The Paying Agent will promptly mail to the Holders of Senior Notes so accepted
payment in an amount equal to the Change of Control Payment, and the Trustee
will promptly authenticate and mail or deliver (or cause to be transferred by
book entry) to such Holders a new Note equal in principal amount to any
unpurchased portion of the Senior Note surrendered; provided, that each such
new Note will be in a principal amount of $1,000 or an integral multiple
thereof. Any Senior Notes not so accepted will be promptly mailed or delivered
by the Company to the Holder thereof. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
consummation thereof.
The provisions of the Indenture relating to a Change of Control Triggering
Event may not afford the Holders protection in the event of a highly leveraged
transaction, reorganization, restructuring, merger, spin-off or similar
transaction that may adversely affect Holders, if such transaction does not
constitute a Change of Control Triggering Event, as defined. In addition, the
Company may not have sufficient financial resources available to fulfill its
obligation to repurchase the Senior Notes upon a Change of Control Triggering
Event.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under
the Exchange Act and the rules thereunder and all other applicable Federal and
state securities laws.
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND DISQUALIFIED CAPITAL
STOCK
The Indenture provides that, except as set forth below in this covenant,
neither the Company nor any of the Company's Subsidiaries will, directly or
indirectly, issue, assume, guaranty, incur, become directly or indirectly
liable with respect to (including as a result of an Acquisition), or otherwise
become responsible for, contingently or otherwise (individually and
collectively, to "incur" or, as appropriate, an "incurrence"), any
Indebtedness or any Disqualified Capital Stock (including Acquired
Indebtedness). Notwithstanding the foregoing:
(a) if on the date of such incurrence (the "Incurrence Date"), the
Consolidated Coverage Ratio of the Company for the Reference Period
immediately preceding the Incurrence Date, after giving effect, on a pro
forma basis, to such incurrence of such Indebtedness or Disqualified
Capital Stock and, to the extent set forth in the definition of
Consolidated Coverage Ratio, the use of proceeds thereof, would be at least
2.2 to 1 (the "Debt Incurrence Ratio"), then the Company and its
Subsidiaries may incur Indebtedness or Disqualified Capital Stock;
provided, however, any Indebtedness incurred by the Non-Guarantor
Subsidiaries in reliance on this clause (a) shall be limited to an
aggregate amount outstanding at any time of up to $100 million of
Indebtedness, which Indebtedness shall be secured by liens permitted under
clause (m) of the definition of "Permitted Liens;"
(b) the Company and the Subsidiary Guarantors may incur Indebtedness
evidenced by the Senior Notes and represented by the Indenture up to the
amounts specified therein as of the date thereof;
(c) the Company and its Subsidiaries or Subsidiary Guarantors, as
applicable, may incur Refinancing Indebtedness with respect to any
Indebtedness or Disqualified Capital Stock, as applicable, described in
clauses (a), (b) or (e) of this covenant or described in this clause (c) or
which was outstanding on the date of issuance of the Existing Senior Notes
or that was outstanding at Acquisitions or its Subsidiaries as of the
Acquisitions Issue Date;
(d) the Company and its Subsidiaries or its Subsidiary Guarantors, as
applicable, may incur Permitted Indebtedness;
(e) the Company and its Subsidiaries may incur Non-recourse Purchase
Money Indebtedness; and
(f) the Company and its Subsidiary Guarantors may incur Indebtedness (in
addition to Indebtedness permitted by any other clause of this paragraph)
in an aggregate amount outstanding at any time (including any Indebtedness
issued to refinance, replace, or refund such Indebtedness) of up to $65
million.
Notwithstanding the foregoing, no Non-Guarantor Subsidiary may Incur any
Indebtedness or Disqualified Capital Stock unless on the Incurrence Date the
Consolidated Coverage Ratio for all Non-Guarantor Subsidiaries,
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on a combined basis, for the Reference Period immediately preceding the
Incurrence Date, after giving effect, on a pro forma basis to such incurrence
of such Indebtedness or Disqualified Capital Stock and, to the extent set
forth in the definition of Consolidated Coverage Ratio, the use of proceeds
thereof, would be at least 2.0 to 1.
Indebtedness of any Person that is not a Subsidiary of the Company, which
Indebtedness is outstanding at the time such Person becomes a Subsidiary of
the Company or is merged with or into or consolidated with the Company or a
Subsidiary of the Company, shall be deemed to have been incurred at the time
such Person becomes a Subsidiary of the Company or is merged with or into or
consolidated with the Company or a Subsidiary of the Company and Indebtedness
which is assumed at the time of the acquisition of any asset shall be deemed
to have been incurred at the time of such acquisition.
LIMITATION ON RESTRICTED PAYMENTS
The Indenture provides that on and after the Issue Date the Company will
not, and will not permit any of its Subsidiaries to, directly or indirectly,
make any Restricted Payment, if (a) on the date of such Restricted Payment a
Default or an Event of Default would exist and be continuing or would occur as
a consequence of (after giving effect, on a pro forma basis, to) such
Restricted Payment or (b) immediately prior to such Restricted Payment or
after giving effect thereto, the aggregate amount of all Restricted Payments
made by the Company and its Subsidiaries, including such proposed Restricted
Payment (if not made in cash, then the fair market value of any property used
therefor as evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) from and after the
Amendment Date and on or prior to the date of such Restricted Payment, shall
exceed the sum of (i) the amount determined by subtracting (x) 2.2 times the
aggregate Consolidated Interest Expense of the Company for the period (taken
as one accounting period) from the first day of the fiscal quarter in which
the Amendment Date occurs to the last day of the last full fiscal quarter
prior to the date of the proposed Restricted Payment (the "Computation
Period") from (y) Consolidated EBITDA of the Company for the Computation
Period, plus (ii) the aggregate Net Cash Proceeds received by the Company from
the sale (other than to a Subsidiary of the Company and other than in
connection with a Qualified Exchange) of its Qualified Capital Stock or as a
capital contribution from its Parent, in either case, which Net Cash Proceeds
are received by the Company after the Amendment Date and on or prior to the
date of such Restricted Payment.
Notwithstanding the foregoing, the provisions set forth in clause (b) of the
immediately preceding paragraph will not prohibit (i) the payment of any
dividend within 60 days after the date of its declaration if such dividend
could have been made on the date of its declaration in compliance with the
foregoing provisions, (ii) a Qualified Exchange, or (iii) a Permitted Sharing
Arrangements Payment; provided, however, that any amounts expended pursuant to
clause (i) of this paragraph shall be included as Restricted Payments made for
purposes of clause (b) of the immediately preceding paragraph, whereas amounts
received and expended in connection with a Qualified Exchange or a Permitted
Sharing Arrangements Payment shall neither be counted as Restricted Payments
made nor be credited as Net Cash Proceeds received for purposes of clause
(b)(ii) of the immediately preceding paragraph.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that neither the Company nor the Subsidiary
Guarantors will, directly or indirectly, create, assume or suffer to exist any
consensual restriction on the ability of any Subsidiary Guarantors to pay
dividends or make other distributions to or on behalf of, or to pay any
obligation to or on behalf of, or otherwise to transfer assets or property to
or on behalf of, or make or pay loans or advances to or on behalf of, the
Company or any Subsidiary Guarantor except (a) restrictions imposed by the
Senior Notes or the Indenture, (b) restrictions imposed by applicable law, (c)
existing restrictions under specified Indebtedness outstanding on the Issue
Date or under any Acquired Indebtedness not incurred in violation of the
Indenture or any agreement relating to any property, asset, or business
acquired by the Company or any of the Subsidiary Guarantors, which
restrictions existed at the time of acquisition, were not put in place in
connection with or in anticipation of such acquisition and are not applicable
to any person, other than the person acquired, or to any property, asset or
business, other than the property, assets and business so acquired, (d) any
such restriction or requirement imposed by
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Indebtedness incurred under paragraph (e) of the covenant "Limitation of
Incurrence of Additional Indebtedness and Disqualified Capital Stock,"
provided such restriction or requirement relates only to the transfer of the
property subject to such Non-recourse Purchase Money Indebtedness, (e)
restrictions with respect to a Subsidiary Guarantor imposed pursuant to a
binding agreement which has been entered into for the sale or disposition of
all or substantially all of the Capital Stock or assets of such Subsidiary
Guarantor, provided such restrictions apply solely to the Capital Stock or
assets of such Subsidiary Guarantor which are being sold, and (f) in
connection with and pursuant to permitted refinancings thereof, replacements
of restrictions imposed pursuant to clause (c) or (d) of this paragraph that
are not more restrictive than those being replaced and do not apply to any
other person or assets other than those that would have been covered by the
restrictions in the Indebtedness so refinanced. Notwithstanding the foregoing,
customary provisions restricting subletting or assignment of any lease entered
into in the ordinary course of business, consistent with industry practice
shall not in and of themselves be deemed to be a restriction on the ability of
the Company or any of its Subsidiary Guarantors to transfer such property.
LIMITATIONS ON LIENS
The Indenture provides that the Company and the Subsidiary Guarantors will
not, and will not permit any of their Subsidiaries to, directly or indirectly,
incur, or suffer to exist any Lien on any assets or properties of the Company
or any of its Subsidiaries now owned or hereafter acquired, or any income or
profits therefrom, except Permitted Liens, unless all payments due under the
Indenture and the Senior Notes are secured on an equal and ratable basis with
the obligations so secured until such time as such obligations are no longer
secured by such Lien.
LIMITATION ON SALE OF ASSETS AND SUBSIDIARY STOCK
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, in one or a series of related transactions convey, sell,
transfer, assign or otherwise dispose of, directly or indirectly, any of its
property, business or assets, including by merger or consolidation (in the
case of a Subsidiary Guarantor or a Subsidiary of the Company), and including
any sale or other transfer or issuance of any Capital Stock of any Subsidiary
of the Company, whether by the Company or a Subsidiary of either or through
the issuance, sale or transfer of Capital Stock by a Subsidiary of the Company
(an "Asset Sale"), unless (i) the Board of Directors of the Company determines
in good faith that the Company or such Subsidiary, as applicable, receives
consideration at the time of such Asset Sale at least equal to the Fair Market
Value of the assets or Capital Stock issued or sold or otherwise disposed of,
(ii) no Default or Event of Default would occur as a consequence of (after
giving effect, on a pro forma basis, to) such Asset Sale, and (iii) at least
75% of the consideration therefor received by the Company or such Subsidiary
is in the form of cash or Cash Equivalents: provided that for purposes of this
provision, the amount of (A) any Indebtedness (other than Senior Notes) that
is required to be repaid or assumed (and is either repaid or assumed by the
transferee of the related assets) by virtue of such Asset Sale and which is
secured by a Lien on the property or assets sold and (B) any securities or
other obligations received by the Company or any such Subsidiary from such
transferee that are immediately converted by the Company or such Subsidiary
into cash (or as to which the Company or such Subsidiary has received at or
prior to the consummation of the Asset Sale a commitment (which may be subject
to customary conditions) from a nationally recognized investment, merchant or
commercial bank to convert into cash within 90 days of the consummation of
such Asset Sale and which are thereafter actually converted into cash within
such 90-day period) will be deemed to be cash.
Within 365 days after the receipt of any Net Cash Proceeds from an Asset
Sale, the Company may invest or commit such Net Cash Proceeds, pursuant to a
binding commitment subject only to reasonable, customary closing conditions,
to be invested (and providing such Net Cash Proceeds are, in fact, so
invested, within an additional 180 days) in (x) fixed assets and property
(other than notes, bonds, obligations and securities) which in the good faith
reasonable judgment of the Board of Directors of the Company will immediately
constitute or be part of a Related Business of the Company or such Subsidiary
(if it continues to be a Subsidiary) immediately following such transaction,
(y) Permitted Mortgage Investments or (z) a controlling interest in the
Capital Stock
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of an entity engaged in a Related Business; provided, that concurrently with
an Investment specified in clause (z), such entity becomes a Subsidiary
Guarantor. Pending the application of any such Net Cash Proceeds as described
above, the Company may invest such Net Cash Proceeds in any manner that is not
prohibited by the Indenture. Any Net Cash Proceeds from Asset Sales that are
not applied or invested as provided in the first sentence of this paragraph
(including any Net Cash Proceeds which were committed to be invested as
provided in such sentence but which are not in fact invested within the time
period provided) will be deemed to constitute "Excess Proceeds." Within 30
days following each date on which the aggregate amount of Excess Proceeds
exceeds $15 million, the Company will make a cash offer to all Holders of
Senior Notes and holders of any other Indebtedness of the Company ranking on a
parity with the Senior Notes from time to time outstanding with similar
provisions requiring the Company to make an offer to purchase or to redeem
such Indebtedness with the proceeds from such Asset Sale, pro rata in
proportion to the respective principal amounts pursuant to an irrevocable,
unconditional offer (an "Asset Sale Offer") to purchase the maximum principal
amount of Senior Notes and such other senior Indebtedness then outstanding
that may be purchased out of the Excess Proceeds, at an offer price in cash in
an amount equal to 100% of the principal amount thereof plus accrued and
unpaid interest thereon to the date of purchase, in accordance with the
procedures set forth in the Indenture. To the extent that the aggregate amount
of Senior Notes and other senior Indebtedness tendered pursuant to an Asset
Sale Offer is less than the Excess Proceeds, the Company may use any remaining
Excess Proceeds for general corporate purposes. If the aggregate principal
amount of Senior Notes and other senior Indebtedness tendered pursuant to an
Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall
select the Senior Notes to be purchased on a pro rata basis. Upon completion
of such offer to purchase, the amount of Excess Proceeds shall be reset at
zero.
Notwithstanding the foregoing provisions of the prior paragraph:
(i) the Company and its Subsidiaries may, in the ordinary course of
business, convey, sell, lease, transfer, assign or otherwise dispose of
inventory acquired and held for resale in the ordinary course of business;
(ii) the Company and its Subsidiaries may convey, sell, lease, transfer,
assign or otherwise dispose of assets pursuant to and in accordance with
the limitation on mergers, sales or consolidations provisions in the
Indenture;
(iii) the Company and its Subsidiaries may sell or dispose of damaged,
worn out or other obsolete property in the ordinary course of business so
long as such property is no longer necessary for the proper conduct of the
business of the Company or such Subsidiary, as applicable;
(iv) the Company and its Subsidiaries may consummate any sale or series
of related sales (including, without limitation, sale and leaseback
transactions) of assets or properties of the Company and its Subsidiaries
having a Fair Market Value of less than $2 million; and
(v) the Company and its Subsidiaries may exchange assets held by the
Company or a Subsidiary for one or more hotels and/or one or more Related
Businesses of any person or entity owning one or more hotels and/or one or
more Related Businesses; provided, that the Board of Directors of the
Company has determined that the terms of any exchange are fair and
reasonable and the Fair Market Value of the assets received by the Company
are approximately equal to the Fair Market Value of the assets exchanged by
the Company.
Any Asset Sale Offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable, Regulation 14E of the
Exchange Act and the rules and regulations thereunder and all other applicable
Federal and state securities laws.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Indenture provides that neither the Company nor any of its Subsidiaries
will be permitted after the Issue Date to enter into any contract, agreement,
arrangement or transaction with any Affiliate (an "Affiliate Transaction") or
any series of related Affiliate Transactions (other than Exempted Affiliate
Transactions), except
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for such Affiliate Transactions made in good faith, the terms of which are
fair and reasonable to the Company or such Subsidiary, as the case may be, and
are at least as favorable as the terms which could be obtained by the Company
or such Subsidiary, as the case may be, in a comparable transaction made on an
arm's-length basis with persons who are not Affiliates.
Without limiting the foregoing, (a) any Affiliate Transaction or series of
related Affiliate Transactions (other than Exempted Affiliate Transactions)
with an aggregate value in excess of $5 million must first be approved
pursuant to a Board Resolution by a majority of the Board of Directors of the
Company who are disinterested in the subject matter of the transaction, and
(b) with respect to any Affiliate Transaction or series of related Affiliate
Transactions (other than Exempted Affiliate Transactions) with an aggregate
value in excess of $20 million the Company must first obtain (i) a favorable
written opinion from an independent financial advisor of national reputation
as to the fairness from a financial point of view of such transaction to the
Company or such Subsidiary or (ii) in the case of a real estate transaction or
related real estate transactions with an aggregate value in excess of $20
million but not in excess of $50 million an opinion from an independent,
qualified appraiser that the consideration received in connection with such
transaction was comparable to the Fair Market Value of the subject assets;
provided, however, in the case of an individual who serves on the Board of
Directors or as an officer of Host Marriott or any of its Subsidiaries on the
one hand, and of the Company or any of its Subsidiaries on the other hand,
such service, in and of itself, shall not affect such person's status as a
disinterested member of the Board of Directors of the Company for purposes of
clause (a) of this paragraph.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that the Company will not, directly or indirectly,
consolidate with or merge with or into another person or sell, lease, convey
or transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions,
to another Person or group of affiliated Persons, unless (i) either (a) the
Company is the continuing entity or (b) the resulting, surviving or transferee
entity is a corporation organized under the laws of the United States, any
state thereof or the District of Columbia and expressly assumes by
supplemental indenture all of the obligations of the Company in connection
with the Senior Notes and the Indenture; (ii) no Default or Event of Default
would occur as a consequence of (after giving effect, on a pro forma basis,
to) such transaction; (iii) immediately after giving effect to such
transaction on a pro forma basis, the Consolidated Net Worth of the
consolidated resulting, surviving or transferee entity is at least equal to
90% of the Consolidated Net Worth of the Company immediately prior to such
transaction; and (iv) immediately after giving effect to such transaction on a
pro forma basis, the consolidated resulting, surviving or transferee entity
would immediately thereafter be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Debt Incurrence Ratio set forth in
paragraph (a) of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock."
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such consolidation or into which the Company is merged
or to which such transfer is made, shall succeed to, and be substituted for,
and may exercise every right and power of, the Company under the Indenture
with the same effect as if such successor corporation had been named therein
as the Company, and the Company shall be released from the obligations under
the Senior Notes and the Indenture except with respect to any obligations that
arise from, or are related to, such transaction.
FUTURE SUBSIDIARY GUARANTORS
The Indenture provides that all Initial Subsidiary Guarantors and each
future Subsidiary of the Company other than any Leaseback Subsidiary, Excluded
Guaranty Subsidiary or Special Purpose Subsidiary (each, a "Future Subsidiary
Guarantor"), jointly and severally, will guaranty irrevocably and
unconditionally all principal, premium, if any, and interest on the Senior
Notes on a senior basis. No Leaseback Subsidiary or Special Purpose Subsidiary
will be required to become a Subsidiary Guarantor and no Subsidiary of the
Company or any Subsidiary Guarantor that is prohibited by law or by the terms
of an agreement from
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guaranteeing the Senior Notes (each, an "Excluded Guaranty Subsidiary") will
be required to become a Subsidiary Guarantor, provided, however that the
assets of all Excluded Guaranty Subsidiaries may not exceed 15% of the
aggregate assets of the Company and its Subsidiaries (other than Leaseback
Subsidiaries) on a consolidated basis.
LIMITATION ON INVESTMENTS IN NON-GUARANTOR SUBSIDIARIES
The Indenture provides that from and after the Issue Date, the Company will
not, and will not permit any Subsidiary Guarantor to, directly or indirectly,
make any Investment in a Non-Guarantor Subsidiary if, after giving effect
thereto, the Net Non-Guarantor Investment would exceed an amount equal to (a)
the aggregate of all capital contributions made to the Company on or after the
Amendment Date, plus (b) the Applicable Percentage of the sum of (i) the
combined total assets of the Company and the Subsidiary Guarantors, excluding
the assets of the Non-Guarantor Subsidiaries (determined by the Company in
accordance with GAAP) plus (ii) the Net Non-Guarantor Investment.
LIMITATION OF STATUS AS INVESTMENT COMPANY
The Indenture prohibits the Company and its Subsidiaries from being required
to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended), or from otherwise becoming
subject to regulation under the Investment Company Act.
SECURITY
The obligations of the Company to pay the principal of, premium, if any, and
interest on the Senior Notes are secured, on an equal and ratable basis with
other indebtedness ranking pari passu with the Senior Notes, including without
limitation, the Existing Senior Notes and the Acquisitions Notes, by a pledge
of the capital stock of each Initial Subsidiary Guarantor, other than Marriott
Financial Services, Inc. The Indenture also provides that the capital stock of
any Person that becomes a Future Subsidiary Guarantor, or that is a successor
of any Subsidiary Guarantor and assumes such Subsidiary Guarantor's
obligations under the Indenture, will be pledged to secure the Senior Notes on
an equal and ratable basis with other indebtedness ranking pari passu with the
Senior Notes, including, without limitation, the Existing Senior Notes and the
Acquisitions Notes; provided, however, that any shares of the capital stock of
any Future Subsidiary Guarantor (an "Excluded Share Subsidiary") will not be
pledged to secure the Senior Notes if the pledge of or grant of a security
interest in such shares is prohibited by law or the terms of an agreement
(other than an agreement entered into in connection with the transaction
resulting in such Person becoming a Future Subsidiary Guarantor) binding on
such Future Subsidiary Guarantor or the Person owning such shares of such
Future Subsidiary Guarantor, and provided that the assets of all Excluded
Share Subsidiaries (determined in accordance with GAAP) shall in no event
exceed 15% of the aggregate assets of the Company and its Subsidiaries (other
than Leaseback Subsidiaries) on a consolidated basis (determined in accordance
with GAAP).
Upon the release of any Subsidiary Guarantor from its obligations under its
guarantee of the Senior Notes in accordance with the Indenture, the pledge of
such Subsidiary Guarantor's capital stock and the Capital Stock of any of its
Subsidiaries shall be automatically released; provided, however, that if any
such Subsidiary Guarantor ceases to be a Subsidiary Guarantor as a result of
the sale of less than 100% of the capital stock of such Subsidiary Guarantor,
the pledge of any security interest in the capital stock of such Subsidiary
Guarantor shall not be released with respect to the capital stock of such
Subsidiary Guarantor that continues to be held by the Company or any
Subsidiary Guarantor after the consummation of such sale, unless otherwise
released pursuant to the Indenture.
GUARANTEES
The Senior Notes are guaranteed irrevocably and unconditionally as to
principal, premium, if any, and interest, jointly and severally, by the
Subsidiary Guarantors. If the Company or a Subsidiary Guarantor defaults
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in the payment of the principal of, premium, if any, or interest on, the
Senior Notes when and as the same shall become due, whether upon maturity,
acceleration, call for redemption, Offer to Purchase or otherwise, without the
necessity of action by the Trustee or any Holder, each Subsidiary Guarantor
shall be required, jointly and severally, to promptly make such payment in
full. The Indenture provides that the Subsidiary Guarantors will be released
from their obligations as guarantors under the Senior Notes under certain
circumstances. The obligations of each Subsidiary Guarantor under its
Guarantee is limited so as to avoid it being construed as a fraudulent
conveyance under applicable law. See "Risk Factors--Fraudulent Transfer."
REPORTS
The Indenture provides that whether or not the Company is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall deliver to the Trustee and to each Holder and to prospective purchasers
of Senior Notes identified to the Company by an Initial Purchaser, within 15
days after it is or would have been required to file such with the Commission,
annual and quarterly financial statements substantially equivalent to
financial statements that would have been included in reports filed with the
Commission, if the Company were subject to the requirements of Section 13 or
15(d) of the Exchange Act, including, with respect to annual information only,
a report thereon by the Company's certified independent public accountants as
such would be required in such reports to the Commission, and, in each case,
together with a management's discussion and analysis of financial condition
and results of operations which would be so required. Whether or not required
by the rules and regulations of the Commission, the Company will file a copy
of all such information and reports with the Commission for public
availability and will make such information available to securities analysts
and prospective investors upon request. In addition, for so long as the Senior
Notes are outstanding, the Company will continue to provide to holders of
Senior Notes and to prospective purchasers of the Senior Notes the information
required by Rule 144A(d)(4).
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure by the Company
to pay any installment of interest on the Senior Notes as and when the same
becomes due and payable and the continuance of any such failure for 30 days,
(ii) the failure by the Company to pay all or any part of the principal of, or
premium, if any, on, the Senior Notes when and as the same becomes due and
payable at maturity, redemption, by acceleration or otherwise, including,
without limitation, payment of the Change of Control Purchase Price or the
Asset Sale Offer Price, or otherwise, (iii) the failure by the Company or any
Subsidiary to observe or perform any other covenant or agreement contained in
the Senior Notes or the Indenture and, subject to certain exceptions, the
continuance of such failure for a period of 30 days after written notice is
given to the Company by the Trustee or to the Company and the Trustee by the
Holders of at least 25% in aggregate principal amount of the Senior Notes
outstanding, (iv) certain events of bankruptcy, insolvency or reorganization
in respect of the Company or any of its Significant Subsidiaries, (v) a
default in any (1) Non-recourse Purchase Money Indebtedness of the Company or
any of its Subsidiaries with an aggregate principal amount in excess of 10% of
the aggregate assets of the Company and its Subsidiaries, or (2) other
Indebtedness of the Company or any of its Subsidiaries with an aggregate
principal amount in excess of $20 million, in either case (a) resulting from
the failure to pay principal or interest when due or (b) as a result of which
the maturity of such Indebtedness has been accelerated prior to its stated
maturity; and (vi) final unsatisfied judgments not covered by insurance
aggregating in excess of $10 million, at any one time rendered against the
Company or any of its Subsidiaries and not stayed, bonded or discharged within
60 days. The Indenture provides that if a Default occurs and is continuing,
the Trustee must, within 90 days after the occurrence of such default, give to
the Holders notice of such default; provided, that the Trustee may withhold
from Holders of the Senior Notes notice of any continuing Default or Event of
Default (except a Default or Events of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (iv) above, relating to the Company or certain of
its Subsidiaries), then in every such case, unless the principal of all of the
Senior Notes shall have already become due and payable, either the Trustee or
the Holders of 25% in
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aggregate principal amount of the Senior Notes then outstanding, by notice in
writing to the Company (and to the Trustee if given by Holders) (an
"Acceleration Notice"), may declare all principal, determined as set forth
below, and accrued interest thereon to be due and payable immediately. If an
Event of Default specified in clause (iv), above, relating to the Company or
certain of its Subsidiaries occurs, all principal and accrued interest thereon
will be immediately due and payable on all outstanding Senior Notes without
any declaration or other act on the part of Trustee or the Holders. The
Holders of a majority in aggregate principal amount of Senior Notes generally
are authorized to rescind such acceleration if all existing Events of Default,
other than the non-payment of the principal of, premium, if any, and interest
on the Senior Notes which have become due solely by such acceleration, have
been cured or waived. Subject to certain limitations, Holders of a majority in
principal amount of the then outstanding Senior Notes may direct the Trustee
in its exercise of any trust or power.
The Holders of a majority in aggregate principal amount of the Senior Notes
at the time outstanding may waive on behalf of all the Holders any default,
except a default with respect to any provision requiring supermajority
approval to amend, which default may only be waived by such a supermajority,
and except a default in the payment of principal of or interest on any Senior
Note not yet cured or a default with respect to any covenant or provision
which cannot be modified or amended without the consent of the Holder of each
outstanding Senior Note affected. Subject to the provisions of the Indenture
relating to the duties of the Trustee, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request,
order or direction of any of the Holders, unless such Holders have offered to
the Trustee reasonable security or indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the Senior Notes at the time outstanding will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred on the
Trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Company may, at its option and at any time
within one year of the Stated Maturity of the Senior Notes, elect to have its
obligations discharged with respect to the outstanding Senior Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented, and the
Indenture shall cease to be of further effect as to all outstanding Senior
Notes and Guarantees, except as to (i) rights of Holders to receive payments
in respect of the principal of, premium, if any, and interest on such Senior
Notes when such payments are due from the trust funds; (ii) the Company's
obligations with respect to such Senior Notes concerning issuing temporary
Senior Notes, registration of Senior Notes, mutilated, destroyed, lost or
stolen Senior Notes, and the maintenance of an office or agency for payment
and money for security payments held in trust; (iii) the rights, powers,
trust, duties, and immunities of the Trustee, and the Company's and the
Subsidiary Guarantors' obligations in connection therewith; and (iv) the Legal
Defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company and the
Subsidiary Guarantors released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any failure
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Senior Notes. In the event Covenant Defeasance
occurs, certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Senior Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Senior Notes, U.S. legal tender, noncallable government
securities or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on such Senior Notes on
the stated date for payment thereof or on the redemption date of such
principal or installment of principal of, premium, if any, or interest on such
Senior Notes; (ii) in the case of the Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to Trustee confirming that (A) the Company has received from, or
there has been published by the Internal Revenue Service, a ruling or (B)
since the date of the Indenture, there has been a change in the
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applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the Holders of such
Senior Notes will not recognize income, gain or loss for Federal income tax
purposes as a result of such Legal Defeasance and will be subject to Federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to
such Trustee confirming that the Holders of such Senior Notes will not
recognize income, gain or loss for Federal income tax purposes as a result of
such Covenant Defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Covenant Defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit or
insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in
a breach or violation of, or constitute a default under the Indenture or any
other material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of such Senior Notes over any other creditors
of the Company or with the intent of defeating, hindering, delaying or
defrauding any other creditors of the Company or others; and (vii) the Company
shall have delivered to the Trustee an Officers' Certificate stating that the
conditions precedent provided for have been complied with.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Company, the Subsidiary
Guarantors and the Trustee to enter into a supplemental indenture for certain
limited purposes without the consent of the Holders. With the consent of the
Holders of not less than a majority in aggregate principal amount of the
Senior Notes at the time outstanding, the Company, the Subsidiary Guarantors
and the Trustee are permitted to amend or supplement the Indenture or any
supplemental indenture or modify the rights of the Holders, except that any
amendments or supplements to the provisions relating to Article 12 (with
respect to security interests) or Section 13.3 (with respect to Future
Subsidiary Guarantors) shall require the consent of the Holders of not less
than 66 2/3% of the aggregate principal amount of the Senior Notes at the time
outstanding; and provided, further, that no such modification may, without the
consent of each Holder affected thereby: (i) change the Stated Maturity on any
Senior Note, or reduce the principal amount thereof or the rate (or extend the
time for payment) of interest thereon or any premium payable upon the
redemption thereof, or change the place of payment where, or the coin or
currency in which, any Senior Note or any premium or the interest thereon is
payable, or impair the right to institute suit for the enforcement of any such
payment on or after the Stated Maturity thereof (or, in the case of
redemption, on or after the Redemption Date), or reduce the Change of Control
Payment or the Asset Sale Offer or alter the redemption provisions or the
provisions of the "Repurchase of Securities at the Option of the Holder Upon a
Change of Control" covenant in a manner adverse to the Holders, or (ii) reduce
the percentage in principal amount of the outstanding Senior Notes, the
consent of whose Holders is required for any such amendment, supplemental
indenture or waiver provided for in the Indenture, (iii) modify or amend the
ranking of the Senior Notes in a manner adverse to the Holders, or (iv) modify
any of the waiver provisions, except to increase any required percentage or to
provide that certain other provisions of the Indenture cannot be modified or
waived without the consent of the Holder of each outstanding Senior Note
affected thereby.
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
The Indenture provides that no direct or indirect stockholder, partner,
employee, officer or director, as such, past, present or future of the
Company, the Subsidiary Guarantors or any successor entity shall have any
personal liability in respect of the obligations of the Company or the
Subsidiary Guarantors under the Indenture or the Senior Notes by reason of his
or its status as such stockholder, partner, employee, officer or director.
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CERTAIN DEFINITIONS
"Acquisition" means the purchase or other acquisition of any person or
substantially all the assets of any person by any other person, whether by
purchase, merger, consolidation, or other transfer, and whether or not for
consideration.
"Acquisitions" means HMC Acquisition Properties, Inc., a Delaware
corporation and an indirect subsidiary of Host Marriott.
"Acquisitions Indenture" means the indenture dated as of December 20, 1995,
as amended by that certain First Supplemental Indenture dated as of June 6,
1997, among Acquisitions, the Initial Guarantor named therein and Marine
Midland Bank, as trustee pursuant to which the Acquisitions Notes were issued,
as amended and restated.
"Acquisitions Notes" means the 9% Senior Notes due 2007 of Acquisitions,
which became the principal obligations of the Company upon consummation of the
Merger.
"Acquisitions Notes Issue Date" means the date of first issuance of the
Acquisitions Notes under the Acquisitions Indenture.
"Affiliate" means any person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by
contract, or otherwise; provided, that a beneficial owner of 10% or more of
the total voting power normally entitled to vote in the election of directors,
managers or trustees, as applicable, shall for such purposes be deemed to
constitute control.
"Amendment Date" means July 10, 1997.
"Applicable Percentage" means (i) 15% for the 12 month period commencing on
the Amendment Date and (ii) 20% thereafter.
"Average Life" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (i) the sum of the
products obtained by multiplying (a) the number of years from the date of
determination to the date of each successive scheduled principal (or
redemption) payment of such security or instrument times (b) the amount of
such respective principal (or redemption) payment by (ii) the sum of all such
principal (or redemption) payments.
"Beneficial Owner" or "beneficial ownership" for purposes of the definition
of Change of Control has the meaning attributed to it in Rules 13d-3 and 13d-5
under the Exchange Act (as in effect on the Issue Date), whether or not
applicable, except that a "person" shall be deemed to have "beneficial
ownership" of all shares that such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness), warrants, options, participation or other equivalents of or
interests (however designated) in stock issued by that corporation.
"Cash Equivalent" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America are pledged in support thereof), or (ii) time deposits and
certificates of deposit and commercial
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paper issued by the parent corporation of any domestic commercial bank of
recognized standing having capital and surplus in excess of $500 million and
commercial paper issued by others rated at least A-2 or the equivalent thereof
by Standard & Poor's Corporation or at least P-2 or the equivalent thereof by
Moody's Investors Service, Inc. and in each case maturing within one year
after the date of acquisition.
"Change of Control" means (i) any sale, transfer or other conveyance,
whether direct or indirect, of all or substantially all of the assets of the
Company or Host Marriott (for so long as Host Marriott is a Parent of the
Company), on a consolidated basis, in one transaction or a series of related
transactions, if, immediately after giving effect to such transaction, any
"person" or "group" (as such terms are used for purposes of Sections 13(d) and
14(d) of the Exchange Act, whether or not applicable) other than an Excluded
Person is or becomes the "beneficial owner," directly or indirectly, of more
than 50% of the total voting power in the aggregate normally entitled to vote
in the election of directors, managers, or trustees, as applicable, of the
transferee, (ii) any "person" or "group" (as such terms are used for purposes
of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable)
other than an Excluded Person is or becomes the "beneficial owner," directly
or indirectly, of more than 50% of the total voting power in the aggregate of
all classes of Capital Stock of the Company or Host Marriott for so long as
Host Marriott is a Parent of the Company then outstanding normally entitled to
vote in elections of directors, (iii) during any period of 12 consecutive
months after the Issue Date, individuals who at the beginning of such 12-month
period constituted the Board of Directors of the Company or Host Marriott (for
so long as Host Marriott is a Parent of the Company) (together with any new
directors whose election by such Board or whose nomination for election by the
shareholders of the Company or Host Marriott, as applicable, was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company or Host Marriott, as
applicable, then in office, (iv) a "change of control" or similar event shall
occur under any other issue of Indebtedness of the Company, Host Marriott (for
so long as Host Marriott is a Parent of the Company) or their respective
Subsidiaries with an aggregate principal amount in excess of $20 million, or
(v) in the case of the Company only, Host Marriott ceases to own directly or
indirectly a majority of the equity interests of the Company; provided,
however, the pro rata distribution by Host Marriott to its shareholders of
shares of the Company or shares of any of Host Marriott's other Subsidiaries,
shall not, in and of itself, constitute a Change of Control for purposes of
this paragraph.
"Change of Control Triggering Event" means the occurrence of both a Change
of Control and a Rating Decline.
"Consolidated Coverage Ratio" of any person on any date of determination
(the "Transaction Date") means the ratio, on a pro forma basis, of (a) the
aggregate amount of Consolidated EBITDA of such person attributable to
continuing operations and businesses (exclusive of amounts attributable to
operations and businesses permanently discontinued or disposed of) for the
Reference Period to (b) the aggregate Consolidated Interest Expense of such
person (exclusive of amounts attributable to operations and businesses
permanently discontinued or disposed of, but only to the extent that the
obligations giving rise to such Consolidated Interest Expense would no longer
be obligations contributing to such person's Consolidated Interest Expense
subsequent to the Transaction Date) during the Reference Period; provided,
that for purposes of such calculation, (i) acquisitions of operations,
businesses or other income-producing assets (including any reinvestment of
disposition proceeds in income-producing assets held as of and not disposed on
the Transaction Date) which occurred during the Reference Period or subsequent
to the Reference Period and on or prior to the Transaction Date shall be
assumed to have occurred on the first day of the Reference Period, (ii)
transactions giving rise to the need to calculate the Consolidated Coverage
Ratio shall be assumed to have occurred on the first day of the Reference
Period, (iii) the incurrence of any Indebtedness or issuance of any
Disqualified Capital Stock during the Reference Period or subsequent to the
Reference Period and on or prior to the Transaction Date (and the application
of the proceeds therefrom to the extent used to refinance or retire other
Indebtedness or invested in income-producing assets held as of and not
disposed on the Transaction Date) shall be assumed to have occurred on the
first day of such Reference Period, and (iv) the Consolidated Interest Expense
of such person attributable
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to interest on any Indebtedness or dividends on any Disqualified Capital Stock
bearing a floating interest (or dividend) rate shall be computed on a pro
forma basis as if the average rate in effect from the beginning of the
Reference Period to the Transaction Date had been the applicable rate for the
entire period, unless such Person or any of its Subsidiaries is a party to an
Interest Swap or Hedging Obligation (which shall remain in effect for the 12-
month period immediately following the Transaction Date) that has the effect
of fixing the interest rate on the date of computation, in which case such
rate (whether higher or lower) shall be used.
"Consolidated EBITDA" means, for any Person and period, the Consolidated Net
Income of such Person for such period adjusted to add thereto (to the extent
deducted from net revenues in determining Consolidated Net Income), without
duplication, the sum of (A)(i) Consolidated Interest Expense, (ii) provisions
for taxes based on income, (iii) depreciation and amortization expense
(provided, that the depreciation and amortization expense of a Consolidated
Subsidiary that is not wholly owned shall be included only to the extent of
the interest of the referent person in such Subsidiary), (iv) any other
noncash items reducing the Consolidated Net Income of such Person for such
period, (v) any dividends or distributions during such period to such Person
or a Consolidated Subsidiary of such Person from any other Person which is not
a Subsidiary of such Person or which is accounted for by such Person by the
equity method of accounting, to the extent that (a) such dividends or
distributions are not included in the Consolidated Net Income of such Person
for such period and (b) (x) the sum of such dividends and distributions, plus
the aggregate amount of dividends or distributions from such other Person
since the Issue Date that have been included in Consolidated EBITDA pursuant
to this clause (v), do not exceed (y) the cumulative net income of such other
Person attributable to the equity interests of the Person (or Subsidiary of
the Person) whose Consolidated EBITDA is being determined, and (vi) any cash
receipts of such Person or a Consolidated Subsidiary of such Person during
such period that represent items included in Consolidated Net Income of such
Person for a prior period which were excluded from Consolidated EBITDA of such
Person for such prior period by virtue of clause (B) of this definition, minus
(B) the sum of (i) all non-cash items increasing the Consolidated Net Income
of such Person for such period and (ii) any cash expenditures of such Person
during such period to the extent such cash expenditures (x) did not reduce the
Consolidated Net Income of such Person for such period and (y) were applied
against reserves or accruals that constituted noncash items reducing the
Consolidated Net Income of such Person when reserved or accrued; all as
determined on a consolidated basis for such Person and its Subsidiaries in
conformity with GAAP.
"Consolidated Interest Expense" of any person means, for any period, the
aggregate amount (without duplication and determined in each case in
accordance with GAAP) of (a) interest expensed or capitalized, paid, accrued,
or scheduled to be paid or accrued (including, in accordance with the
following sentence, interest attributable to Capitalized Lease Obligations but
excluding the amortization of fees or expenses incurred in order to consummate
the sale of the Senior Notes as described herein) of such person and its
Consolidated Subsidiaries during such period, including (i) original issue
discount and noncash interest payments or accruals on any Indebtedness, (ii)
the interest portion of all deferred payment obligations, and (iii) all
commissions, discounts and other fees and charges owed with respect to
bankers' acceptances and letters of credit financings and Interest Swap and
Hedging Obligations, in each case to the extent attributable to such period,
(b) the amount of dividends accrued or payable by such person or any of its
Consolidated Subsidiaries in respect of Disqualified Capital Stock (other than
by Subsidiaries of such person to such person or such person's Subsidiary
Guarantors); provided, however, that interest, dividends or other payments or
accruals of a Consolidated Subsidiary that is not wholly owned shall be
included only to the extent of the interest of the referent Person in such
Subsidiary. For purposes of this definition, (x) interest on a Capitalized
Lease Obligation shall be deemed to accrue at an interest rate reasonably
determined by the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP and (y) interest expense
attributable to any Indebtedness represented by the guaranty by such person or
a Subsidiary of such person of an obligation of another person shall be deemed
to be the interest expense attributable to the Indebtedness guaranteed.
"Consolidated Net Income" means, with respect to any person for any period,
the net income (or loss) of such Person and its Consolidated Subsidiaries for
such period, determined on a consolidated basis in accordance with GAAP;
provided, that (i) net income (or loss) of any other Person which is not a
Subsidiary of the Person
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or is accounted for by such specified Person by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid to the specified Person or a Subsidiary of such Person,
(ii) the net income (or loss) of any other Person acquired by such specified
Person or a Subsidiary of such Person in a pooling of interests transaction
for any period prior to the date of such acquisition shall be excluded, (iii)
all gains and losses which are either extraordinary (as determined in
accordance with GAAP) or are either unusual or nonrecurring (including any
gain from the sale or other disposition of assets or from the issuance or sale
of any capital stock), shall be excluded, and (iv) the net income, if
positive, of any of such Person's Consolidated Subsidiaries (other than Non-
Guarantor Subsidiaries) to the extent that the declaration or payment of
dividends or similar distributions is not at the time permitted by operation
of the terms of its charter or bylaws or any other agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable
to such Consolidated Subsidiary shall be excluded; provided, however, in the
case of exclusions from Consolidated Net Income set forth in clauses (ii),
(iii) and (iv), such amounts shall be excluded only to the extent included in
computing such net income (or loss) in accordance with GAAP and without
duplication.
"Consolidated Net Worth" of any person at any date means the aggregate
consolidated stockholders' equity of such person (plus amounts of equity
attributable to preferred stock) and its Consolidated Subsidiaries, as would
be shown on the consolidated balance sheet of such person prepared in
accordance with GAAP, adjusted to exclude (to the extent included in
calculating such equity), (a) the amount of any such stockholders' equity
attributable to Disqualified Capital Stock or treasury stock of such person
and its Consolidated Subsidiaries, (b) all upward revaluations and other
write-ups in the book value of any asset of such person or a Consolidated
Subsidiary of such person subsequent to the Issue Date, and (c) all
investments in Subsidiaries that are not Consolidated Subsidiaries and in
persons that are not Subsidiaries.
"Consolidated Subsidiary" means, for any person, each Subsidiary of such
person (whether now existing or hereafter created or acquired) the financial
statements of which are consolidated for financial statement reporting
purposes with the financial statements of such person in accordance with GAAP.
"Disqualified Capital Stock" means (a) except as set forth in clause (b),
with respect to any person, Capital Stock of such person that, by its terms or
by the terms of any security clause into which it is convertible, exercisable
or exchangeable, is, or upon the happening of an event or the passage of time
would be, required to be redeemed or repurchased (including at the option of
the holder thereof) by such person or any of its Subsidiaries, in whole or in
part, on or prior to the Stated Maturity of the Senior Notes and (b) with
respect to any Subsidiary of such person (including with respect to any
Subsidiary of the Company), any Capital Stock other than any common stock with
no preference, or redemption or repayment provisions.
"Excluded Person" means, in the case of the Company, Host Marriott or any
wholly owned subsidiary of Host Marriott.
"Exempted Affiliate Transaction" means (a) employee compensation
arrangements approved by a majority of independent (as to such transactions)
members of the Board of Directors of the Company, (b) payments of reasonable
directors' fees and expenses, (c) transactions solely between the Company and
any of its Subsidiaries or solely among Subsidiaries of the Company, (d)
Permitted Tax Payments, (e) Permitted Sharing Arrangements, (f) Procurement
Contracts, (g) Management Agreements and (h) Restricted Payments permitted
under the "Limitation on Restricted Payments" covenant.
"Existing Assets" means assets of the Company and its Subsidiaries existing
at the Amendment Date (other than cash, Cash Equivalents or inventory held for
resale in the ordinary course of business) and including proceeds of any sale,
transfer or other disposition of such assets and assets acquired in whole or
in part with proceeds from the sale, transfer or other distribution from any
such assets.
"Existing Senior Notes Indenture" means the indenture, dated as of May 25,
1995, as amended by that certain First Supplemental Indenture thereto dated
October 20, 1995 and that certain Second Supplemental
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Indenture thereto dated as of June 6, 1997 (as amended, the "Indenture"),
among the Company, the Subsidiary Guarantors named therein, and Marine Midland
Bank, as trustee, as amended and restated.
"Existing Senior Notes" means the 9 1/2% Senior Notes due 2005 issued under
the Existing Company Indenture.
"Existing Senior Notes Issue Date" means May 25, 1995, the date on which the
Existing Senior Notes were issued.
"Fair Market Value" means, with respect to any assets or properties, the
amount at which such assets or properties would change hands between a willing
buyer and a willing seller, within a commercially reasonable time, each having
reasonable knowledge of the relevant facts, neither being under a compulsion
to sell or buy, as such amount is determined by (i) the Board of Directors of
the Company acting in good faith or (ii) an appraisal or valuation firm of
national or regional standing selected by the Company, with experience in the
appraisal or valuation of properties or assets of the type for which Fair
Market Value is being determined.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession as in effect from time to time.
"Indebtedness" of any person means, without duplication, (a) all liabilities
and obligations, contingent or otherwise, of such person, (i) in respect of
borrowed money (whether or not the recourse of the lender is to the whole of
the assets of such person or only to a portion thereof), (ii) evidenced by
bonds, notes, debentures or similar instruments, (iii) representing the
balance deferred and unpaid of the purchase price of any property or services,
except those incurred in the ordinary course of its business that would
constitute ordinarily a trade payable to trade creditors, (iv) evidenced by
bankers' acceptances, (v) for the payment of money relating to a Capitalized
Lease Obligation, or (vi) evidenced by a letter of credit or a reimbursement
obligation of such person with respect to any letter of credit; (b) all net
obligations of such person under Interest Swap and Hedging Obligations; (c)
all liabilities and obligations of others of the kind described in the
preceding clause (a) or (b) that such person has guaranteed or that is
otherwise its legal liability or which are secured by any assets or property
of such person; and (d) all obligations to purchase, redeem or acquire any
Capital Stock.
"Interest Swap and Hedging Obligation" means any obligation of any Person
pursuant to any interest rate swaps, caps, collars and similar arrangements
providing protection against fluctuations in interest rates. For purposes of
the Indenture, the amount of such obligations shall be the amount determined
in respect thereof as of the end of the then most recently ended fiscal
quarter of such Person, based on the assumption that such obligation had
terminated at the end of such fiscal quarter, and in making such
determination, if any agreement relating to such obligation provides for the
netting of amounts payable by and to such Person thereunder or if any such
agreement provides for the simultaneous payment of amounts by and to such
Person, then in each such case, the amount of such obligations shall be the
net amount so determined, plus any premium due upon default by such Person.
"Investment" by any person in any other person means (without duplication)
(a) the acquisition (whether by purchase, merger, consolidation or otherwise)
by such person (whether for cash, property, services, securities or otherwise)
of capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities, including any options or warrants, of such
other person or any agreement to make any such acquisition; (b) the making by
such person of any deposit with, or advance, loan or other extension of credit
to, such other person (including the purchase of property from another person
subject to an understanding or agreement, contingent or otherwise, to resell
such property to such other person) or any commitment to make any such
advance, loan or extension (but excluding accounts receivable or deposits
arising in the ordinary course of business); (c) other than guarantees of
Indebtedness of the Company or any Subsidiary to the extent permitted
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by the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock," the entering into by such person of any guarantee
of, or other credit support or contingent obligation with respect to,
Indebtedness or other liability of such other person; (d) the making of any
capital contribution by such person to such other person, and (e) the
designation by the Board of Directors of the Company of any person to be an
Unrestricted Subsidiary. The Company shall be deemed to make an Investment in
an amount equal to the fair market value of the net assets of any Subsidiary
or, if neither the Company nor any of its Subsidiaries has theretofore made an
Investment in such Subsidiary, in an amount equal to the Investments being
made) at the time that such Subsidiary is designated an Unrestricted
Subsidiary, and any property transferred to an Unrestricted Subsidiary from
the Company or a Subsidiary shall be deemed an Investment valued at its fair
market value at the time of such transfer.
"Investment Grade" means a currently effective rating by Standard & Poor's
Corporation and its successors ("S&P") of BBB- (or subsequent equivalent
rating) or higher, and Moody's Investors Service, Inc. and its successors
("Moody's") of Baa3 (or subsequent equivalent rating) or higher (or if S&P or
Moody's or both shall not make a rating of the Senior Notes publicly
available, a nationally recognized securities rating agency or agencies, as
the case may be, reasonably selected by the Company in good faith, which shall
be substituted for S&P or Moody's or both, as the case may be).
"Issue Date" means the date of first issuance of the Senior Notes under the
Indenture.
"Leaseback Subsidiary" means a Subsidiary of the Company which has no assets
other than (i) leases, management agreements, rights to deferred sales
proceeds, and other rights pertaining to Residence Inns sold to an
unaffiliated Person by the Company or its Subsidiaries and leased back by such
Subsidiary, (ii) working capital and other assets associated with the
Residence Inns leased by such Subsidiary and (iii) a de minimis amount of
other assets related to the foregoing.
"Management Agreements" means the management agreements and franchise
agreements between the Company and Marriott International or another person
relating to the operation of the Company's lodging properties.
"Merger" means the merger of Acquisitions with and into the Company.
"Net Cash Proceeds" means the aggregate amount of Cash or Cash Equivalents
received by the Company, in the case of a sale of Qualified Capital Stock and
by the Company and its Subsidiaries in respect of an Asset Sale plus, in the
case of an issuance of Qualified Capital Stock upon any exercise, exchange or
conversion of securities (including options, warrants, rights and convertible
or exchangeable debt) of the Company that were issued for cash on or after the
Issue Date, the amount of cash originally received by the Company, upon the
issuance of such securities (including options, warrants, rights and
convertible or exchangeable debt) less, in each case, (i) the sum of all
payments, fees, commissions and (in the case of Asset Sales, reasonable and
customary) expenses (including, without limitation, the fees and expenses of
legal counsel and investment banking fees and expenses) incurred in connection
with such Asset Sale or sale of Qualified Capital Stock, and (ii) (in the case
of an Asset Sale only) less the amount (estimated reasonably and in good faith
by the Company) of income, franchise, sales and other applicable taxes
required to be paid by the Company or any of its respective Subsidiaries in
connection with such Asset Sale; provided, however, that in the case of Cash
or Cash Equivalents received, or expenses paid or payable by a Subsidiary that
is not a wholly owned Subsidiary of the Company, only that portion of the
receipts and expenses which are equal to the Company's proportionate ownership
of such Subsidiary shall be included in calculating Net Cash Proceeds.
"Net Non-Guarantor Investment" means the amount equal to the aggregate
Investments made by the Company and the Subsidiary Guarantors in Non-Guarantor
Subsidiaries from and after the Amendment Date, minus the aggregate amount of
any dividends, distributions or other payments received from and after the
Amendment Date by the Company and/or any Subsidiary Guarantor(s) in respect of
Investments in Non-Guarantor Subsidiaries.
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"Non-Guarantor Subsidiary" means any Subsidiary that is not a Subsidiary
Guarantor.
"Non-recourse Purchase Money Indebtedness" means Indebtedness of the Company
or its Subsidiaries to the extent that, (i) under the terms thereof or
pursuant to law, no personal recourse may be had against the Company or its
Subsidiaries (other than Special Purpose Subsidiaries) for the payment of the
principal of or interest or premium on such Indebtedness, and enforcement of
obligations on such Indebtedness (except with respect to fraud, willful
misconduct, misrepresentation, misapplication of funds, reckless damage to
assets and undertakings with respect to environmental matters or construction
defects) is limited only to recourse against interests in specified assets and
property (the "Subject Assets"), accounts and proceeds arising therefrom, and
rights under purchase agreements or other agreements with respect to such
Subject Assets; (ii) such Indebtedness (x) is incurred concurrently with the
acquisition by the Company or its Subsidiaries of such Subject Assets or a
Person (or interests in a Person) holding such Subject Assets, or (y)
constitutes Refinancing Indebtedness with respect to Indebtedness so incurred;
and (iii) the Subject Assets are not Existing Assets and no Existing Assets or
proceeds from the sale, transfer of other disposition of Existing Assets were
used to acquire such Subject Assets.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Offering Memorandum" means the confidential Offering Memorandum dated July
10, 1997, distributed to prospective purchasers of the Original Notes in
connection with the sale of the Original Notes by the Company.
"Parent" of any person means a corporation which at the date of
determination owns, directly or indirectly, a majority of the Voting Stock of
such person or of a Parent of such person.
"Permitted Indebtedness" means any of the following:
(a) The Company and its Subsidiaries may incur Indebtedness solely in
respect of surety and appeal bonds, performance bonds and other obligations
of a like nature (to the extent that such incurrence does not result in the
incurrence of any obligation to repay any obligation relating to borrowed
money of others), all in the ordinary course of business in accordance with
customary industry practices;
(b) The Company and its Subsidiary Guarantors may incur Indebtedness
under revolving credit loans for funded Indebtedness from time to time in
the ordinary course of business up to an aggregate amount outstanding of
$60 million;
(c) The Company and its Subsidiaries may incur Indebtedness under
Interest Swap and Hedging Obligations that do not increase the Indebtedness
of the Company other than as a result of fluctuations in interest or
foreign currency exchange rates provided that such Interest Swap and
Hedging Obligations are incurred for the purpose of providing interest rate
protection with respect to Indebtedness permitted under the Indenture or to
provide currency exchange protection in connection with revenues generated
in currencies other than U.S. dollars;
(d) The Company may incur Indebtedness to any Subsidiary Guarantor, and
any Subsidiary Guarantor may incur Indebtedness to any other Subsidiary
Guarantor or to the Company and any Subsidiary may incur Indebtedness to
the Company or a Subsidiary Guarantor (subject to the requirements of the
"Limitation on Restricted Payments" covenant); provided, that, in the case
of Indebtedness of the Company, such obligations shall be unsecured and
subordinated in all respects to the Company's obligations pursuant to the
Senior Notes;
(e) The Company and its Subsidiary Guarantors may guarantee Indebtedness
of the Company, the Subsidiary Guarantors or the Subsidiaries, as
applicable, to the extent such guaranteed Indebtedness was permitted to be
incurred under the Indenture; and
(f) The Company and its Subsidiaries may incur Indebtedness solely in
respect of bankers' acceptances and letters of credit all in the ordinary
course of business in accordance with customary industry practices
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in an aggregate amount outstanding at any time, not to exceed $100 million
less the aggregate principal amount of revolving Indebtedness incurred
pursuant to clause (b) above.
"Permitted Investment" means any of the following: (a) an Investment in Cash
Equivalents; (b) Investments in a Person substantially all of whose assets are
of a type generally used in a Related Business (an "Acquired Person") if, as a
result of such Investments, (i) the Acquired Person immediately thereupon is
or becomes a Subsidiary of the Company, or (ii) the Acquired Person
immediately thereupon either (1) is merged or consolidated with or into the
Company or any of its Subsidiaries and the surviving Person is the Company or
a Subsidiary of the Company or (2) transfers or conveys all or substantially
all of its assets to, or is liquidated into, the Company or any of its
Subsidiaries; (c) an Investment in a Person, provided that (i) such Person is
principally engaged in a Related Business; (ii) the Company or one or more of
its Subsidiaries participates in the management of such Person, as a general
partner, member of such Person's governing board or otherwise and (iii) the
aggregate amount of (x) Investments made in reliance on this clause (c)
subsequent to the date of the Issue Date, (y) Investments made by Acquisitions
or its Subsidiaries from and after the Acquisitions Notes Issue Date to the
date of the Merger in reliance on clause (c) of the definition of Permitted
Investments under the Acquisitions Indenture, and (z) Investments made by the
Company or its Subsidiaries from and after the Existing Senior Notes Issue
Date to the date of this Indenture in reliance on clause (c) of the definition
of Permitted Investments under the Existing Senior Notes Indenture shall not
exceed in the aggregate $50 million; (d) Permitted Sharing Arrangement
Payments; (e) securities received in connection with an Asset Sale so long as
such Asset Sale complied with the Indenture including the covenant "Limitation
on Sale of Assets and Subsidiary Stock" (but, only to the extent the Fair
Market Value of such securities and all other non-cash and non-cash equivalent
consideration received complies with clause (iii) of the "Limitation on Sale
of Assets and Subsidiary Stock" covenant); and (f) Permitted Mortgage
Investments.
"Permitted Lien" means any of the following: (a) Liens existing on the Issue
Date; (b) Liens imposed by governmental authorities for taxes, assessments or
other charges not yet subject to penalty or which are being contested in good
faith and by appropriate proceedings, if adequate reserves with respect
thereto are maintained on the books of the Company in accordance with GAAP;
(c) statutory liens of carriers, warehousemen, mechanics, materialmen,
landlords, repairmen or other like Liens arising by operation of law in the
ordinary course of business provided that (i) the underlying obligations are
not overdue for a period of more than 30 days, or (ii) such Liens are being
contested in good faith and by appropriate proceedings and adequate reserves
with respect thereto are maintained on the books of the Company in accordance
with GAAP; (d) Liens securing the performance of bids, trade contracts (other
than for borrowed money), leases, statutory obligations, surety and appeal
bonds, performance bonds and other obligations of a like nature incurred in
the ordinary course of business; (e) easements, rights-of-way, zoning, similar
restrictions and other similar encumbrances or title defects which, singly or
in the aggregate, do not in any case materially detract from the value of the
property, subject thereto (as such property is used by the Company or any of
its Subsidiaries) or interfere with the ordinary conduct of the business of
the Company or any of its Subsidiaries; (f) Liens arising by operation of law
in connection with judgments, only to the extent, for an amount and for a
period not resulting in an Event of Default with respect thereto; (g) pledges
or deposits made in the ordinary course of business in connection with
workers' compensation, unemployment insurance and other types of social
security legislation; (h) Liens securing on an equal and ratable basis the
Senior Notes and any other Indebtedness, including without limitation, the
Existing Senior Notes and the Acquisitions Notes, (i) Liens securing
Indebtedness of a Person existing at the time such Person becomes a Subsidiary
or is merged with or into the Company or a Subsidiary or Liens securing
Indebtedness incurred in connection with an Acquisition, provided that (i)
such Liens were in existence prior to the date of such acquisition, merger or
consolidation, were not incurred in anticipation thereof, and do not extend to
any other assets and (ii) no Existing Assets or proceeds from the sale,
transfer or other disposition of Existing Assets were used to acquire such
Person; (j) Liens arising from Non-recourse Purchase Money Indebtedness
permitted to be incurred under the Indenture provided such Liens relate only
to the property which is subject to such Non-recourse Purchase Money
Indebtedness; (k) Liens securing Refinancing Indebtedness incurred to
refinance any, Indebtedness that was previously so secured in a manner no more
adverse to the Holders of the Senior Notes than the terms of the Liens
securing such refinanced Indebtedness (provided, however, that cross-
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collateralization, creation of "collateral pools" or similar arrangements in
and of themselves shall not be considered more adverse to the Holders of the
Senior Notes for the purposes of the foregoing); (l) Liens securing revolving
debt incurred under clause (b) of the definition of Permitted Indebtedness
which revolving debt shall not exceed an aggregate principal amount
outstanding at any time of $60 million; (m) Liens securing any other
Indebtedness permitted to be incurred under the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock" not to
exceed an aggregate principal amount outstanding at any time of $100 million;
and (n) Liens securing bankers' acceptances and letters of credit incurred
under clause (f) of the definition of Permitted Indebtedness which do not
exceed an aggregate principal amount outstanding at any time of $115 million
less the aggregate principal amount of revolving debt secured pursuant to
clause (1) above.
"Permitted Mortgage Investment" means an investment in Indebtedness secured
by lodging property assets provided that (i) the Company is able to
consolidate the operations of the lodging property in its consolidated GAAP
financial statements, or (ii) such Investment is made with a view toward
acquiring ownership of the lodging properties securing such Indebtedness;
provided, however, that the aggregate investments (the value of each such
investment to be determined at the time of such investment) made in reliance
on this clause (ii) with respect to lodging properties as to which the Company
has not consolidated the operations in its consolidated GAAP financial
statements, as set forth in clause (i), shall not at any time exceed 10% of
the Company's aggregate assets.
"Permitted Sharing Arrangements" means any contracts, agreements or other
arrangements between the Company or one or more Subsidiaries of the Company
and a Parent of the Company or one or more Subsidiaries of such Parent,
pursuant to which such Persons share centralized services, establish joint
payroll arrangements, procure goods or services jointly or otherwise make
payments with respect to goods or services on a joint basis, or allocate
corporate expenses (other than taxes based on income) (provided that (i) such
Permitted Sharing Arrangements are, in the determination of management of the
Company, in the best interests of the Company and its Subsidiaries and (ii)
the liabilities of the Company and its Subsidiaries under such Permitted
Sharing Arrangements are determined in good faith and on a reasonable basis).
"Permitted Sharing Arrangements Payments" means payments under Permitted
Sharing Arrangements.
"Permitted Tax Payments" means (for any taxable year of the Company in which
it joins in filing a consolidated Federal income tax return with a Parent) a
payment (including any estimated tax payment based on any estimated tax
liability for such year) by the Company to the Parent in an amount not in
excess of the lesser of (i) the separate return Federal income tax liability
(if any) of the affiliated group (within the meaning of Section 1504 of the
Internal Revenue Code of 1986, as amended) of which the Company would be the
ultimate Parent (the "Company Group") if it were not, and never had been, a
member of another affiliated group for that or any other taxable year and (ii)
the actual Federal income tax liability (if any) of the affiliated group of
which the Company is actually a member (the "Parent Group") for such year that
is allocable to the Company Group. In the event that a Parent of the Company
and any member of the Company Group join in filing any combined or
consolidated (or similar) state or local income or franchise tax returns, then
the term Permitted Tax Payment shall also include payments with respect to
such state or local income or franchise taxes determined in a manner as
similar as possible to that provided in the preceding sentence for Federal
income tax.
"Pledged Shares" means the Capital Stock of the Subsidiary Guarantors
pledged to secure the Senior Notes.
"Procurement Contracts" means contracts for the procurement of goods and
services entered into in the ordinary course of business and consistent with
industry practices.
"Qualified Capital Stock" means any Capital Stock of the Company that is not
Disqualified Capital Stock.
"Qualified Exchange" means (i) any legal defeasance, redemption, retirement,
repurchase or other acquisition of then outstanding Capital Stock or
Indebtedness of the Company issued on or after the Issue Date
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with the Net Cash Proceeds received by the Company from the substantially
concurrent sale of Qualified Capital Stock or (ii) any exchange of Qualified
Capital Stock for any then outstanding Capital Stock or Indebtedness issued on
or after the Issue Date.
"Rating Agencies" means (i) S&P and (ii) Moody's or (iii) if S&P or Moody's
or both shall not make a rating of the Senior Notes publicly available, a
nationally recognized securities rating agency or agencies, as the case may
be, selected by the Company, which shall be substituted for S&P or Moody's or
both, as the case may be.
"Rating Category" means (i) with respect to S&P, any of the following
categories: BB, B, CCC, CC, C and D (or equivalent successor categories); (ii)
with respect to Moody's, any of the following categories: Ba, B, Caa, Ca, C
and D (or equivalent successor categories); and (iii) the equivalent of any
such category of S&P or Moody's used in another Rating Agency. In determining
whether the rating of the Senior Notes has decreased by one or more
gradations, gradations within Rating Categories (+ and-for S&P, 1, 2 and 3 for
Moody's; or the equivalent gradations for another Rating Agency) shall be
taken into account (e.g., with respect to S&P, a decline in a rating from BB+
to BB, as well as from BB-to B +, will constitute a decrease of one
gradation).
"Rating Date" means the date which is 90 days prior to the earlier of (i) a
Change of Control and (ii) the first public notice of the occurrence of a
Change of Control or of the intention by the Company to effect a Change of
Control.
"Rating Decline" means the occurrence, on or within 90 days after the
earliest to "occur of (i) a Change of Control and (ii) the date of the first
public notice of the occurrence of a Change of Control or of the intention by
the Company to effect a Change of Control (which period shall be extended so
long as the rating of the Senior Notes is under publicly announced
consideration for possible downgrade by any of the Rating Agencies), of: (a)
in the event the Senior Notes are rated by either Moody's or S&P on the Rating
Date as Investment Grade, a decrease in the rating of the Senior Notes by
either of such Rating Agencies to a rating that is below Investment Grade, or
(b) in the event the Senior Notes are rated below Investment Grade by both
Rating Agencies on the Rating Date, a decrease in the rating of the Senior
Notes by either Rating Agency by one or more gradations (including gradations
within Rating Categories as well as between Rating Categories).
"Reference Period" with regard to any person means the four full fiscal
quarters ended immediately preceding any date upon which any determination is
to be made pursuant to the terms of the Senior Notes or the Indenture.
"Refinancing Indebtedness" means Indebtedness or Disqualified Capital Stock
(a) issued in exchange for, or the proceeds from the issuance and sale of
which are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part, or
(b) constituting an amendment, modification or supplement to, or a deferral or
renewal of ((a) and (b) above are, collectively, a "Refinancing"), any
Indebtedness or Disqualified Capital Stock in a principal amount or, in the
case of Disqualified Capital Stock, liquidation preference, not to exceed the
sum of (x) the reasonable and customary fees and expenses incurred in
connection with the Refinancing plus (y) the lesser of (i) the principal
amount or, in the case of Disqualified Capital Stock, liquidation preference,
of the Indebtedness or Disqualified Capital Stock so refinanced and (ii) if
such Indebtedness being refinanced was issued with an original issue discount,
the accreted value thereof (as determined in accordance with GAAP) at the time
of such Refinancing; provided, that (A) such Refinancing Indebtedness of any
Subsidiary of the Company shall only be used to Refinance outstanding
Indebtedness or Disqualified Capital Stock of such Subsidiary, and (B)
Refinancing Indebtedness shall (x) not have an Average Life shorter than the
Indebtedness or Disqualified Capital Stock to be so refinanced at the time of
such Refinancing and (y) in all respects, be no less subordinated or junior,
if applicable, to the rights of Holders of the Senior Notes than was the
Indebtedness or Disqualified Capital Stock to be refinanced.
"Related Business" means the businesses conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the Issue Date and any
and all businesses that in the good faith judgment of the Board of
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Directors of the Company are materially related businesses. Without limiting
the generality of the foregoing, Related Business shall include the ownership
and operation of lodging properties and senior living facilities.
"Restricted Investment" means, in one or a series of related transactions,
any Investment, other than a Permitted Investment.
"Restricted Payment" means, with respect to any person, (a) the declaration
or payment of any dividend or other distribution in respect of Capital Stock
of such person or the Parent or any Subsidiary of such person, (b) any payment
on account of the purchase, redemption or other acquisition or retirement for
value of Capital Stock of such person or the Parent or any Subsidiary of such
person, (c) other than with the proceeds from the substantially concurrent
sale of, or in exchange for, Refinancing Indebtedness any purchase,
redemption, or other acquisition or retirement for value of, any payment in
respect of any amendment of the terms of or any defeasance of, any
Subordinated Indebtedness, directly or indirectly, by such person or the
Parent or a Subsidiary of such person prior to the scheduled maturity, any
scheduled repayment of principal, or scheduled sinking fund payment, as the
case may be, of such Indebtedness, (d) any Restricted Investment by such
person, (e) the payment to any affiliate in respect of taxes owed by any
consolidated group of which both such person or a Subsidiary of such person
and such affiliate are members, and (f) any loan or advance to, or guarantee
of any indebtedness of, any affiliate of such person or any Subsidiary of such
person; provided, however, that the term "Restricted Payment" does not include
(i) any dividend, distribution or other payment on or with respect to Capital
Stock of the Company to the extent payable solely in shares of Qualified
Capital Stock of the Company; (ii) any dividend, distribution or other payment
to the Company, or to any of the Subsidiary Guarantors, by the Company or any
of its Subsidiaries; (iii) Permitted Tax Payments; or (iv) the declaration or
payment of dividends or other distributions by any Subsidiary of the Company
provided such distributions are made to the Company (or a Subsidiary of the
Company, as applicable) on a pro rata basis (and in like form) to all
distribution's so made.
"Significant Subsidiary" means any Subsidiary which is a "significant
subsidiary" of the Company within the meaning of Rule 1.02(v) of Regulation S-
X promulgated by the SEC as in effect as of the date of the Indenture.
"Special Purpose Subsidiary" means any Subsidiary of the Company, (x) the
assets of which do not include Existing Assets and were not acquired with
Existing Assets or proceeds from the sale, transfer or other disposition of
Existing Assets, (y) which has no Indebtedness other than Non-recourse
Purchase Money Indebtedness and/or Permitted Indebtedness of the type
described in clauses (a), (c), (d) and (e) of the definition of Permitted
Indebtedness.
"Stated Maturity" when used with respect to any Senior Note, means July 15,
2007.
"Subordinated Indebtedness" means (i) Indebtedness of the Company or a
Subsidiary Guarantor that is subordinated in right of payment to the Senior
Notes or a Guarantee, as applicable, or (ii) Indebtedness of the Company or a
Subsidiary Guarantor (other than secured Indebtedness or Indebtedness ranking
pari passu with the Senior Notes or a Guarantee, as applicable) that has a
stated maturity on or after the Stated Maturity.
"Subsidiary" with respect to any Person, means (i) a corporation a majority
of whose Capital Stock with voting power, under ordinary circumstances, to
elect directors is at the time, directly or indirectly, owned by such person,
by such person and one or more Subsidiaries of such person or by one or more
Subsidiaries of such person, or which is controlled by such Person in a manner
sufficient to permit its financial statements to be consolidated with the
financial statements of such Person in conformance with GAAP, and the
financial statements of which are so consolidated (ii) any other Person (other
than a corporation or a partnership) in which such person, one or more
Subsidiaries of such Person, or such Person and one or more Subsidiaries of
such Person, directly or indirectly, at the date of determination thereof has
at least majority ownership interest or which is controlled by such Person in
a manner sufficient to permit its financial statements to be consolidated with
the financial statements of such Person in conformance with GAAP and the
financial statements of which
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are so consolidated, or (iii) a partnership (x) in which such Person or one or
more Subsidiaries of such Person is, at the time, a general partner and owns
alone or together with the Company a majority of the partnership interests or
(y) in which such Person or one or more Subsidiaries of such Person is, at the
time, a general partner and which is controlled by such person in a manner
sufficient to permit its financial statements to be consolidated with the
financial statements of such Person in conformance with GAAP and the financial
statements of which are so consolidated. Notwithstanding the foregoing, an
Unrestricted Subsidiary shall not be deemed to be a Subsidiary of the Company
or of any Subsidiary of the Company for purposes of the Indenture.
"Subsidiary Guarantors" means (i) the Initial Subsidiary Guarantors
identified in the following sentence and (ii) any Future Subsidiary Guarantors
that become Subsidiary Guarantors pursuant to the terms of the Indenture, but
excluding any Persons whose guarantees have been released pursuant to the
terms of the Indenture. The Initial Subsidiary Guarantors consist of HMC
Retirement Properties, Inc., Marriott Financial Services, Inc., Marriott SBM
Two Corporation, Host Airport Hotels, Inc., Host of Houston, Ltd., Host of
Boston, Ltd., HMH Marina, Inc., HMH Rivers Inc., HMH Pentagon Corporation, HMC
SFO, Inc. and HMC AP Canada, Inc. and Host of Houston 1979.
"Unrestricted Subsidiary" means any Subsidiary of the Company that does not
own any Capital Stock of, or own or hold any Lien on any property of, the
Company or any other Subsidiary of the Company and that, at the time of
determination, shall be an Unrestricted Subsidiary (as designated by the Board
of Directors of the Company); provided, that (i) such Subsidiary is
principally engaged in a Related Business, (ii) neither immediately prior
thereto nor after giving pro forma effect to such designation would there
exist a Default or Event of Default and (iii) immediately after giving pro
forma effect thereto, the Company could incur at least $1.00 of Indebtedness
pursuant to the Debt Incurrence Ratio in paragraph (a) of the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock." The Board of Directors of the Company may designate any Unrestricted
Subsidiary to be a Subsidiary, provided, that (i) no Default or Event of
Default is existing or will occur as a consequence thereof and (ii)
immediately after giving effect to such designation, on a pro forma basis, the
Company could incur at least $1.00 of Indebtedness pursuant to the Debt
Incurrence Ratio in paragraph (a) of the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock." Each such designation
shall be evidenced by filing with the Trustee a certified copy of the
resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions.
"Voting Stock" means, with respect to any specified person, capital stock
with voting power, under ordinary circumstances, to elect directors of such
Person.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the Exchange Notes (and related guarantees)
initially will be represented by one or more global notes in registered global
form without interest coupons (collectively, the "Global Note"). The Global
Note will be deposited upon issuance with the Trustee as custodian for The
Depository Trust Company ("DTC"), in New York, New York and registered in the
name of DTC or its nominee, in each case for credit to an account of a direct
or indirect participant in DTC as described below.
DEPOSITARY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
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Participants or the Indirect Participants. The ownership interests and
transfer of ownership interests of each actual purchaser of each security held
by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Exchange Agent with portions of the principal
amount of the Global Notes and (ii) ownership of such interests in the Global
Notes will be shown on, and the transfer of ownership thereon will be effected
only through, records maintained by DTC (with respect to the Participants) or
by the Participants and the Indirect Participants (with respect to other
owners of beneficial interests in the Global Notes).
Investors in the Global Note may hold their interests therein directly
through DTC, if they are Participants in such system, or indirectly through
organizations (including Euroclear and CEDEL) which are Participants in such
system. Investors in the Regulation S Global Note must initially hold their
interests therein through Euroclear or CEDEL, if they are participants in such
systems, or indirectly through organizations which are participants in such
systems. Euroclear and CEDEL will hold interests in the Regulation S Global
Note on behalf of their participants through customers' securities accounts in
their respective names on the books of their respective depositaries, which
are Morgan Guaranty Trust Company of New York, Brussels office, as operator of
Euroclear, and Citibank, N.A., as operator of CEDEL. The depositaries, in
turn, will hold such interests in the Regulation S Global Note in customers'
securities accounts in the depositaries' names on the books of DTC. All
interests in a Global Note, including those held through Euroclear or CEDEL,
may be subject to the procedures and requirements of DTC. Those interests held
through Euroclear or CEDEL may also be subject to the procedures and
requirements of such systems. The laws of some states require that certain
persons take physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in a Global Note to
such persons will be limited to that extent. Because DTC can act only on
behalf of Participants, which in turn act on behalf of Indirect Participants
and certain banks, the ability of a person having beneficial interests in a
Global Note to pledge such interests to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interests, may be affected by the lack of a physical certificate evidencing
such interests. For certain other restrictions on the transferability of the
Senior Notes, see "--Exchange of Book-Entry Senior Notes for Certificated
Senior Notes."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE SENIOR NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL
DELIVERY OF SENIOR NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE
REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of and premium, if any, and interest on
a Global Note registered in the name of DTC or its nominee will be payable by
the Trustee to DTC in its capacity as the registered Holder under the
Indenture. Under the terms of the Indenture, the Company and the Trustee will
treat the persons in whose names the Senior Notes, including the Global Note,
are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, neither
the Company, the Trustee nor any agent of the Company or the Trustee has or
will have any responsibility or liability for (i) any aspect of DTC's records
or any Participant's or Indirect Participant's records relating to or payments
made on account of beneficial ownership interests in the Global Note, or for
maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in the Global Note or (ii) any other matter relating to
the actions and practices of DTC or any of its Participants or Indirect
Participants. DTC has advised the Company that its current practice, upon
receipt of any payment in respect of securities such as the Senior Notes
(including principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in the principal amount of beneficial interests in
the relevant security as shown on the records of DTC unless DTC has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of Senior
Notes will be governed by standing instructions and customary practices and
will be the responsibility of the Participants or the Indirect Participants
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and will not be the responsibility of DTC, the Trustee or the Company. Neither
the Company nor the Trustee will be liable for any delay by DTC or any of its
Participants in identifying the beneficial owners of the Senior Notes, and the
Company and the Trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee for all purposes.
Except for trades involving only Euroclear and CEDEL participants, interests
in the Global Note are expected to be eligible to trade in DTC's Same-Day
Funds Settlement System and secondary market trading activity in such
interests will therefore settle in immediately available funds, subject in all
cases to the rules and procedures of DTC and its participants. Transfers
between participants in Euroclear and CEDEL will be effected in the ordinary
way in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Senior Notes described herein, cross-market transfers between the Participants
in DTC, on the one hand, and Euroclear or CEDEL participants, on the other
hand, will be effected through DTC in accordance with DTC's rules on behalf of
Euroclear of CEDEL, as the case may be, by its respective depositaries;
however such cross-market transactions will require delivery of instructions
to Euroclear or CEDEL, as the case may be, by the counterparty in such system
in accordance with the rules and procedures and within the established
deadlines (Brussels time) of such system. Euroclear or CEDEL, as the case may
be, will, if the transaction meets its settlement requirements, deliver
instructions to its respective depositaries to take action to effect final
settlement on its behalf by delivering or receiving interests in the relevant
Global Note in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. Euroclear
participants and CEDEL participants may not deliver instructions directly to
the depositaries for Euroclear or CEDEL.
Because of time zone differences, the securities account of a Euroclear or
CEDEL participant purchasing an interest in a Global Note from a Participant
in DTC will be credited, and any such crediting will be reported to the
relevant Euroclear or CEDEL participant, during the securities settlement
processing day (which must be a business day for Euroclear and CEDEL)
immediately following the settlement date of DTC. DTC has advised the Company
that cash received in Euroclear or CEDEL as a result of sales of interests in
a Global Note by or through a Euroclear or CEDEL participant to a Participant
in DTC will be received with value on the settlement date of DTC but will be
available in the relevant Euroclear or CEDEL cash account only as of the
business day for Euroclear or CEDEL following DTC's settlement date.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Senior Notes only at the direction of one or more
Participants to whose account with DTC interests in the Global Notes are
credited and only in respect of such portion of the aggregate principal amount
of the Senior Notes as to which such Participant or Participants has or have
given such direction. However, if there is an Event of Default under the
Senior Notes, DTC reserves the right to exchange the Global Note for legended
Senior Notes in certificated form, and to distribute such Senior Notes to its
Participants.
The information in this section concerning DTC, Euroclear and CEDEL and
their book-entry systems has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures to
facilitate transfers of interests in the Regulation S Global Note among
participants in DTC, Euroclear and CEDEL, they are under no obligation to
perform or to continue to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC, Euroclear or CEDEL or their
respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
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EXCHANGE OF BOOK-ENTRY SENIOR NOTES FOR CERTIFICATED SENIOR NOTES
A Global Note is exchangeable for definitive Senior Notes in registered
certificated form if (i) DTC (x) notifies the Company that it is unwilling or
unable to continue as depositary for the Global Note and the Company thereupon
fails to appoint a successor depositary or (y) has ceased to be a clearing
agency registered under the Exchange Act, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of the
Senior Notes in certificated form or (iii) there shall have occurred and be
continuing an Event of Default or any event which after notice or lapse of
time or both would be an Event of Default with respect to the Senior Notes. In
all cases, certificated Senior Notes delivered in exchange for any Global Note
or beneficial interests therein will be registered in the names, and issued in
any approved denominations, requested by or on behalf of the depositary (in
accordance with its customary procedures).
ORIGINAL NOTES REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company, the Initial Purchasers and the Subsidiary Guarantors named
therein entered into the Registration Rights Agreement on July 15, 1997 (the
"Closing Date"). Pursuant to the Registration Rights Agreement, the Company
agreed to file with the Commission as soon as practicable but in no event
later than the 60th day after the Closing Date, the Registration Statement on
the appropriate form under the Securities Act with respect to the Exchange
Notes. Upon the effectiveness of the Exchange Offer Registration Statement,
pursuant to the Exchange Offer, the Company will offer to the Holders of
Transfer Restricted Securities (as defined below), who are able to make
certain representations, the opportunity to exchange their Transfer Restricted
Securities for Exchange Notes. If (1) prior to the consummation of the
Exchange Offer, applicable interpretations of the Staff do not permit the
Company to effect the Exchange Offer as contemplated in the Registration
Rights Agreement, or (2) the Exchange Offer is commenced and not consummated
within 180 days of the Closing Date for any reason, then the Company shall
promptly deliver to the Holders and the Trustee written notice thereof (the
"Shelf Notice") and the Company shall file a Shelf Registration Statement.
Following the delivery of a Shelf Notice to the Holders of Transfer Restricted
Securities (as defined below), the Company shall not have any further
obligation to conduct the Exchange Offer, provided that the Company shall have
the right, nonetheless, to proceed to consummate the Exchange Offer
notwithstanding their obligations under the Registration Rights Agreement
(and, upon such consummation, their obligation to consummate a Shelf
Registration shall terminate). If a Shelf Notice is delivered, then: (a) the
Company shall use its reasonable best efforts to prepare and file with the
SEC, as promptly as practicable following the delivery of the Shelf Notice, a
Shelf Registration Statement for an offering covering all of the Transfer
Restricted Securities (the "Shelf Registration"). Transfer Restricted
Securities means the Original Notes, until in the case of any such Original
Notes (i) a Registration Statement covering such Original Notes has been
declared effective by the SEC and such Original Notes have been disposed of in
accordance with such effective Registration Statement, (ii) such Original
Notes have been transferred in compliance with Rule 144 under the Securities
Act (or any successor provision thereto), or are transferable pursuant to
paragraph (k) of such Rule 144 (or any successor provision thereto),
(iii) such Original Notes have been sold in compliance with Regulation S under
the Securities Act (or any successor provision thereto) and do not constitute
the unsold allotment of a distribution within the meaning of Regulation S
under the Securities Act, (iv) such Original Notes have otherwise been
transferred and a new Security not subject to transfer restrictions under the
Securities Act have been delivered by or on behalf of the Company in
accordance with the terms of the Indenture, or (v) such Original Notes cease
to be outstanding.
The Registration Rights Agreement provides that (i) the Company will file
Registration Statement with the Commission as soon as practicable after the
Closing Date, but in no event later than the 60th date after the Closing Date;
(ii) the Company will cause the Exchange Offer Registration Statement to
become effective pursuant to the Securities Act on or before the 150th day
following the Closing Date; (iii) the Company will keep the Exchange Offer
open for not less than 30 days (or such longer period required by applicable
law) after the date that the notice of the Exchange Offer (as set forth in the
Registration Rights Agreement) is mailed to Holders; (iv) the Company will
consummate the Exchange Offer within 180 days after the Closing Date; and
(v) if obligated to file the Shelf Registration Statement, the Company will
use its reasonable best efforts to prepare and file such Shelf Registration
Statement as promptly as practicable following the delivery of the Shelf
84
<PAGE>
Notice. If (a) the Company fails to file either of the Registration Statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (b) either of such Registration Statements is not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) the Company fails to
consummate the Exchange Offer within 180 days of the Closing Date with respect
to the Registration Statement, or (d) the Shelf Registration Statement is
declared effective but thereafter ceases to be effective or usable in
connection with resales of Transfer Restricted Securities during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above a "Registration Default"), then the Company will
pay Liquidated Damages to each Holder of Transfer Restricted Securities, with
respect to the first 90-day period immediately following the occurrence of
such Registration Default, in an amount equal to $0.05 per week per $1,000 in
principal amount of notes constituting Transfer Restricted Securities held by
such Holder. The amount of the Liquidated Damages will increase by an
additional $0.05 per week per $1,000 in principal amount of notes constituting
Transfer Restricted Securities with respect to each subsequent 90-day period
until all Registration Defaults have been cured, up to a maximum amount of
Liquidated Damages of $0.30 per week per $1,000 in principal amount of notes
constituting Transfer Restricted Securities. All accrued Liquidated Damages
will be paid by the Company to the Holders by wire transfer of immediately
available funds or by mailing checks to their registered addresses. Following
the cure of all Registration Defaults, the accrual of Liquidated Damages will
cease.
Holders of Original Notes will be required to make certain representations
to the Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information
to be used in connection with the Shelf Registration Statement in order to
have their Original Notes included in the Shelf Registration Statement and
benefit from the provisions regarding Liquidated Damages set forth above.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which will be available upon request to the Company.
85
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
Latham & Watkins, counsel to the Company, has advised the Company that the
following discussion represents its opinion as to the material federal income
tax consequences expected to result to Holders whose Original Notes are
exchanged for the Exchange Notes in the Exchange Offer. The signed opinion of
Latham & Watkins is filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. Such opinion is based upon current provisions of
the Internal Revenue Code of 1986, as amended, applicable Treasury
regulations, judicial authority and administrative rulings and practice. There
can be no assurance that the Internal Revenue Service (the "Service") will not
take a contrary view, and no ruling from the Service has been or will be
sought. Legislative, judicial or administrative changes or interpretations may
be forthcoming that could alter or modify the statements and conclusions set
forth herein. Any such changes or interpretations may or may not be
retroactive and could affect the tax consequences to holders. Certain Holders
(including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and person who are not
citizens or residents of the United States) may be subject to special rules
not discussed below. EACH HOLDER OF THE ORIGINAL NOTES SHOULD CONSULT HIS OR
HER OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING THE
ORIGINAL NOTES FOR THE EXCHANGE NOTES, INCLUDING THE APPLICABILITY AND EFFECT
OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
The exchange of the Original Notes for the Exchange Notes should be treated
as a "non-event" for federal income tax purposes because the Exchange Notes
should not be considered to differ materially in kind or extent from the
Original Notes. As a result, no material federal income tax consequences
should result to holders exchanging Original Notes for Exchange Notes.
86
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that participates in the Exchange Offer ("Participating
Broker-Dealer") and receives the Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with the resale of the Exchange Notes received in
exchange for the Original Notes where such Original Notes were acquired as a
result of market-making activities or other trading activities. The Company
has agreed that for a period of 180 days after the Expiration Date, it will
make this Prospectus, as amended or supplemented, available for any
Participating Broker-Dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sale of the Exchange
Notes by Participating Broker-Dealers. The Exchange Notes received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the over-
the-counter market, in negotiated transactions, through the writing of options
on the Exchange Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any Participating Broker-Dealer
and/or the purchasers of any such Exchange Notes. Any Participating Broker-
Dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal.
The Company has agreed in the Registration Rights Agreement to indemnify
each Participating Broker-Dealer reselling the Exchange Notes pursuant to this
Prospectus, and their officers, directors and controlling persons, against
certain liabilities in connection with the offer and sale of the Exchange
Notes, including liabilities under the Securities Act, or to contribute to
payments that such Participating Broker-Dealers may be required to make in
respect thereof.
LEGAL MATTERS
Legal matters in connection with the issue and sale of the Exchange Notes
offered hereby will be passed upon for the Company by Christopher G. Townsend,
Executive Vice President and Director of the Company and Senior Vice President
and General Counsel of Host Marriott.
EXPERTS
The combined consolidated financial statements and schedule of the Company
included in this Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto and have been included herein in reliance upon the authority of said
firm as experts in giving said reports.
87
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Combined Consolidated Balance Sheets at January 3, 1997 and December 29,
1995..................................................................... F-3
Combined Consolidated Statements of Operations for the Fiscal Years Ended
January 3, 1997,
December 29, 1995 and December 30, 1994.................................. F-4
Combined Consolidated Statements of Shareholder's Equity for the Fiscal
Years Ended January 3, 1997, December 29, 1995 and December 30, 1994..... F-5
Combined Consolidated Statements of Cash Flows for the Fiscal Years Ended
January 3, 1997,
December 29, 1995 and December 30, 1994.................................. F-6
Notes to Combined Consolidated Financial Statements....................... F-7
Condensed Combined Consolidated Balance Sheet at June 20, 1997 (Unau-
dited)................................................................... F-23
Condensed Combined Consolidated Statements of Operations for the Twenty-
Four Weeks Ended June 20, 1997 and June 14, 1996 (Unaudited)............. F-24
Condensed Combined Consolidated Statements of Cash Flows for the Twenty-
Four Weeks Ended June 20, 1997 and June 14, 1996 (Unaudited)............. F-26
Notes to Condensed Combined Consolidated Financial Statements (Unau-
dited)................................................................... F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To HMH Properties, Inc.:
We have audited the accompanying combined consolidated balance sheets of HMH
Properties, Inc. and subsidiaries and HMC Acquisition Properties, Inc. and
subsidiaries as of January 3, 1997 and December 29, 1995, and the related
combined 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 schedule referred to below were prepared in
connection with the consent solicitation discussed in Note 1 and 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 combined consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the combined
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 combined consolidated financial statements referred to
above present fairly, in all material respects, the combined financial
position of HMH Properties, Inc. and subsidiaries and HMC Acquisition
Properties, Inc. and subsidiaries as of January 3, 1997 and December 29, 1995
and the combined results of their operations and 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
combined consolidated financial statements taken as a whole. The schedule
listed in the index at Item 21(b) is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
combined consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in the audits of the basic combined
consolidated 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 combined consolidated financial statements taken as a
whole.
Arthur Andersen LLP
Washington, D.C.
May 21, 1997
F-2
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
COMBINED CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1997 AND DECEMBER 29, 1995
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
ASSETS
Property and equipment, net..................................... $1,473 $1,454
Note receivable from affiliate.................................. 140 145
Due from hotel managers......................................... 35 36
Investment in affiliate......................................... 17 16
Other assets.................................................... 66 36
Cash and cash equivalents....................................... 141 123
------ ------
$1,872 $1,810
====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Senior Notes.................................................... $ 950 $ 950
Notes secured by real estate assets............................. 98 100
Other notes..................................................... 34 34
------ ------
Total debt.................................................... 1,082 1,084
Deferred income taxes........................................... 87 88
Other liabilities............................................... 77 31
------ ------
Total liabilities............................................. 1,246 1,203
------ ------
Shareholder's equity
Common stock, 100 shares issued and outstanding, no par value... -- --
Additional paid-in capital...................................... 626 611
Accumulated earnings (deficit).................................. -- (4)
------ ------
Total shareholder's equity.................................. 626 607
------ ------
$1,872 $1,810
====== ======
</TABLE>
See Notes to Combined Consolidated Financial Statements.
F-3
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
COMBINED 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.................................................... $313 $261 $214
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
----- ---- ----
319 255 232
----- ---- ----
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees
of $45 million, $38 million and $25 million in 1996, 1995
and 1994, respectively).................................. 175 137 114
Senior living communities................................. -- -- 5
Other..................................................... -- 1 4
----- ---- ----
175 138 123
----- ---- ----
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST..... 144 117 109
Corporate expenses.......................................... (15) (14) (9)
Interest expense............................................ (101) (77) (65)
Interest income............................................. 26 17 15
----- ---- ----
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS.......... 54 43 50
Provision for income taxes.................................. (22) (17) (19)
----- ---- ----
INCOME BEFORE EXTRAORDINARY ITEMS........................... 32 26 31
Extraordinary items--loss on extinguishment of debt (net of
income taxes of $9 million)................................ -- (17) --
----- ---- ----
NET INCOME.................................................. $ 32 $ 9 $ 31
===== ==== ====
</TABLE>
See Notes to Combined Consolidated Financial Statements.
F-4
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
COMBINED 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.................... -- -- 29 --
Capital contribution (Note
1)........................... -- 210 -- --
Purchase of partnership
investment (Note 4).......... -- (6) -- --
Net advances and distributions
to Hospitality............... -- -- -- (297)
----- ------ ----- -----
Balance, December 30, 1994...... -- 1,133 23 (304)
Net income.................... -- -- 9 --
Cash transfers to
Hospitality.................. -- -- -- (151)
Non-cash transfers to
Hospitality.................. -- -- -- (71)
Capital contribution (Note
1)........................... -- 4 -- --
Capitalized distributions
pursuant to the Hospitality
Offering (Note 1)............ -- (526) -- 526
Dividends to Host Marriott and
affiliates................... -- -- (36) --
----- ------ ----- -----
Balance, December 29, 1995...... -- 611 (4) --
Net income.................... -- -- 32
Dividends to Host Marriott and
affiliates................... -- -- (28) --
Sale of residual lease
interest in 16 Courtyard
properties (Note 8).......... -- 24 -- --
Purchase of general partner
interest in a full-service
property (Note 8)............ -- (9) -- --
----- ------ ----- -----
Balance, January 3, 1997........ $ -- $ 626 $ -- $ --
===== ====== ===== =====
</TABLE>
See Notes to Combined Consolidated Financial Statements.
F-5
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
COMBINED 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.............................................. $ 32 $ 9 $ 31
Extraordinary losses on extinguishment of debt, net of
taxes.................................................. -- 17 --
Adjustments to reconcile to cash from operations:
Depreciation and amortization.......................... 64 62 64
Income taxes........................................... 21 16 15
Net realizable value writedown......................... -- 10 --
Other.................................................. 7 3 1
Changes in operating accounts:
Other assets.......................................... (1) (4) 4
Other liabilities..................................... 5 (1) 3
----- ----- -----
Cash provided by operations............................ 128 112 118
----- ----- -----
INVESTING ACTIVITIES
Proceeds from sales of assets........................... 369 340 473
Less non-cash proceeds................................. (34) (33) (54)
----- ----- -----
Cash received from sales of assets...................... 335 307 419
Capital expenditures.................................... (85) (72) (29)
Acquisitions............................................ (307) (331) (506)
Other................................................... (19) 20 9
----- ----- -----
Cash used in investing activities....................... (76) (76) (107)
----- ----- -----
FINANCING ACTIVITIES
Repayment of debt....................................... (4) (815) (24)
Issuances of debt....................................... -- 1,076 164
Contributed capital, including advances from affili-
ates................................................... -- 3 210
Transfers to Hospitality, net........................... -- (151) (345)
Transfers to Host Marriott and affiliates............... -- -- (6)
Dividends to Host Marriott and affiliates............... (28) (36) --
Other................................................... (2) -- --
----- ----- -----
Cash provided by (used in) financing activities......... (34) 77 (1)
----- ----- -----
INCREASE IN CASH AND CASH EQUIVALENTS..................... 18 113 10
CASH AND CASH EQUIVALENTS, beginning of year.............. 123 10 --
----- ----- -----
CASH AND CASH EQUIVALENTS, end of year.................... $ 141 $ 123 $ 10
===== ===== =====
</TABLE>
See Notes to Combined Consolidated Financial Statements.
F-6
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
HMH Properties, Inc. (the "Company" or "Properties"), a wholly-owned direct
subsidiary of Host Marriott Hospitality, Inc. ("Hospitality"), was formed in
1993 to own many of Host Marriott Corporation's ("Host Marriott") lodging
properties. Hospitality is a wholly-owned subsidiary of Host Marriott. During
May 1997, the Company commenced a consent solicitation (the "Consent
Solicitation") for the amendment of certain provisions of its senior notes
indentures. The Consent Solicitation, if successful, would facilitate, among
other things, the merger of HMC Acquisition Properties, Inc. ("Acquisitions"),
an indirect wholly-owned subsidiary of Host Marriott, with and into the
Company (the "Merger") and the ability of the Company after the Merger to
acquire through certain subsidiaries, additional properties subject to non-
recourse indebtedness and less than majority controlling interest in
corporations, partnerships and other entities holding attractive properties.
The Consent Solicitation is conditioned upon the approval by at least 66 2/3%
of the Company's holders of the $600 million of 9 1/2% senior notes
("Properties Notes") and the completion of a similar consent solicitation
being currently conducted by Acquisitions. These financial statements of the
Company present the combined consolidated financial position, results of
operations, and cash flows of Properties and Acquisitions for all periods
presented. Hereafter, the "Company" refers to the merged entity. As of January
3, 1997, the Company owned, or controlled, 48 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.
Acquisitions was formed as a Delaware corporation on September 10, 1994 to
acquire and own full-service hotels. Affiliates of Acquisitions acquired four
hotels prior to September 1994. These hotels, with a total net book value of
$162 million on September 10, 1994, were contributed to Acquisitions. The
combined consolidated financial statements of the Company present the accounts
of each of the hotels for the period from the date of acquisition of each such
property by another affiliate of the Company, through January 3, 1997.
Affiliates made an additional capital contribution to Acquisitions on
September 10, 1994 in the form of a receivable totaling $48 million, which was
subsequently collected by Acquisitions and the proceeds utilized to acquire
additional full-service hotel properties. During December 1995, Acquisitions
received an additional capital contribution of approximately $4 million,
including $3 million in cash.
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. 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 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.
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
F-7
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Hospitality.
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 totaling $1 billion of senior notes (the
"Properties 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
Properties Offering, the accompanying combined consolidated financial
statements present the pushed-down effects of the debt that was repaid with
the proceeds of the Properties Offering.
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 of
the Company because the balance accumulated through the date of consummation
of the Properties Offering was not required to be paid, but rather was a
permanent adjustment to capital on May 25, 1995.
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>
<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 was $132
million and $461 million, respectively.
Principles of Consolidation
The combined 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. Fiscal
year results for 1996 include 53 weeks versus 52 weeks for fiscal years 1995
and 1994.
F-8
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Marriott International
and other hotel managers (together, the "Managers"). 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, lease payments, 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 ten
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 it is probable that undiscounted future cash flows
from each individual property will be less than its net book value. If a
property is impaired, its basis is adjusted to its fair market value.
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.
F-9
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 combined
consolidated financial statements.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at January 3, 1997 and
December 29, 1995 (in millions):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Land and land improvements...................................... $ 171 $ 206
Building and leasehold improvements............................. 1,315 1,250
Furniture and equipment......................................... 180 182
Construction in progress........................................ 47 65
------ ------
1,713 1,703
Less accumulated depreciation and amortization.................. (240) (249)
------ ------
$1,473 $1,454
====== ======
</TABLE>
Interest cost capitalized in connection with the Company's development and
construction activities totaled $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.
5. INCOME TAXES
The Company 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.
F-10
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total deferred tax assets and liabilities at January 3, 1997 and December
29, 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
Gross deferred tax assets...................................... $ 18 $ 17
Gross deferred tax liabilities................................. (105) (105)
------ ------
Net deferred income tax liability.............................. $ (87) $ (88)
====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
Tax credit carryforwards....................................... $ 9 $ 9
Reserves....................................................... 6 2
Affiliate notes receivable..................................... (43) (44)
Property and equipment......................................... (62) (61)
Investment in affiliate........................................ 3 6
------ ------
$ (87) $ (88)
====== ======
</TABLE>
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
Properties 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):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current-Federal............................................... $ 19 $ 15 $ 40
-State..................................................... 4 3 9
---- ---- ----
23 18 49
---- ---- ----
Deferred-Federal.............................................. (1) (1) (23)
-State..................................................... -- -- (7)
---- ---- ----
(1) (1) (30)
---- ---- ----
$ 22 $ 17 $ 19
==== ==== ====
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate follows:
<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.................. 4.7 4.5 3.0%
Other......................................................... 1.0 -- --
---- ---- ----
40.7% 39.5% 38.0%
==== ==== ====
</TABLE>
The Company is included in the consolidated Federal income tax return of
Host Marriott and its affiliates (the "Group"). Tax expense allocated to the
Company, as a member of the Group, is based upon the Company's relative
contribution to the Group's consolidated taxable income/loss and changes in
temporary differences. This allocation method results in Federal tax expense
allocated to the Company for all periods presented substantially
F-11
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Properties 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 Properties Offering, the Company reimburses Host
Marriott for its allocable share of current taxes payable. 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. At January 3, 1997, $29 million was payable to Host
Marriott and included in other liabilities. Cash paid to Host Marriott for
income taxes was $1 million, $1 million and $4 million in 1996, 1995 and 1994,
respectively.
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):
<TABLE>
<CAPTION>
FISCAL YEAR
<S> <C>
1997................................................................... $ 26
1998................................................................... 25
1999................................................................... 24
2000................................................................... 24
2001................................................................... 24
Thereafter............................................................. 269
----
Total minimum lease payments........................................... $392
====
</TABLE>
Rent expense consists of (in millions):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Minimum rentals on operating leases.............................. $20 $ 8 $ 8
Additional rentals based on sales................................ 7 4 4
--- --- ---
$27 $12 $12
=== === ===
</TABLE>
F-12
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. DEBT
Debt consists of the following at January 3, 1997 and December 29, 1995 (in
millions):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Properties Notes, 9.5%, maturing May 2005........................ $ 600 $ 600
Acquisitions Notes, 9.0%, maturing December 2007................. 350 350
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
------ ------
$1,082 $1,084
====== ======
</TABLE>
In May 1995, the Company issued the Properties Notes. Concurrently, HMTP,
the operator/manager of HM Services' food, beverage and merchandise
concessions business, issued $400 million of senior notes. The bonds were
issued at par and have a final maturity of May 2005. The net proceeds were
used to defease, and subsequently redeem, all of Hospitality's Notes and to
repay borrowings under the line of credit with Marriott International. In
connection with the redemptions and defeasance, the Company recognized an
extraordinary loss in 1995 of $14 million, net of taxes, primarily
representing premiums paid on the redemptions and the write-off of deferred
financing fees and discounts on the Hospitality Notes. The Properties Notes
are secured by a pledge of the stock of certain of the Company's subsidiaries
and are guaranteed, jointly and severally, by certain subsidiaries. The net
assets of Properties at January 3, 1997 were approximately $410 million,
substantially all of which were restricted.
In December 1995, Acquisitions issued $350 million of 9% senior notes (the
"Acquisitions Notes"). The Acquisitions Notes were issued at par and have a
final maturity of December 2007. A portion of the net proceeds were utilized
to repay in full the outstanding borrowings under the $230 million revolving
line of credit (the "Acquisitions Revolver"), which was then terminated. In
connection with the termination of the Acquisitions Revolver, the Company
recognized an extraordinary loss in 1995 of $3 million, net of taxes,
representing the write-off of deferred financing fees on the Acquisitions
Revolver. The Acquisitions Notes are fully and unconditionally guaranteed on a
joint and several basis by all but one of Acquisitions' subsidiaries. The net
assets of Acquisitions at January 3, 1997 were approximately $216 million,
substantially all of which were restricted.
The indentures governing the Properties Notes and Acquisitions Notes contain
covenants that, among other things, limit the ability 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 subsidiaries, and enter into certain mergers
and consolidations. In addition, under certain circumstances, the Company will
be required to offer to purchase the Properties Notes and Acquisitions Notes
at par value with the proceeds of certain assets sales. Certain of these
covenants will be amended pending successful completion of the Consent
Solicitation (see Note 1).
Distributions of the Company's equity are restricted but are available
through the payment of dividends only to the extent that the cumulative amount
of such dividends from the date of the indentures does not exceed $25 million
for Properties and $15 million for Acquisitions plus an amount equal to the
excess of earnings before interest expense, taxes, depreciation, amortization
and other non-cash items ("EBITDA"), as defined by the indentures over 200% of
cash interest expense (defined as interest expense under generally accepted
accounting principles less amortization of deferred financing costs) plus the
amount of capital contributions to Properties subsequent to May 25, 1995 and
Acquisitions subsequent to December 20, 1995. Properties paid dividends of
approximately $9 million and $36 million in 1996 and 1995, respectively, and
Acquisitions paid dividends of approximately $20 million in 1996 as permitted
under the indentures.
F-13
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate debt maturities at January 3, 1997 are as follows (in millions):
<TABLE>
<S> <C>
1997.................................................................. $ 2
1998.................................................................. 2
1999.................................................................. 2
2000.................................................................. 1
2001.................................................................. 1
Thereafter............................................................ 1,074
------
$1,082
======
</TABLE>
Cash paid for interest, net of amounts capitalized, was $99 million in 1996,
$77 million in 1995 and $62 million in 1994. Deferred financing costs, which
are included in other assets, amounted to $26 million and $27 million, net of
accumulated amortization of $4 million and $1 million as of January 3, 1997
and December 29, 1995, respectively.
8. ACQUISITIONS AND DISPOSITIONS
During 1996, the Company added nine full-service properties totaling 3,124
rooms for approximately $292 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 of a controlling
interest in a venture that owns the Pittsburgh City Center Marriott for $18
million in the first quarter of 1996 and 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 and a controlling interest in the 404-
room Norfolk Waterside Marriott for approximately $33 million.
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.
The Company added seven full-service hotels in 1995 totaling 3,133 rooms in
separate transactions for approximately $329 million. During 1994, the Company
added 15 full-service hotels totaling 6,044 rooms in separate transactions
aggregating approximately $441 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 those properties in the accompanying combined
consolidated financial statements.
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
Properties Offering.
F-14
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Properties Offering.
In connection with the Properties 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 and the Properties Offering, Acquisitions Offering and debt
activity discussed in Note 7 occurred on December 31, 1994, are as follows (in
millions):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revenue........................................................... $358 $283
Operating profit before corporate expenses and interest........... 164 118
Net income (loss) before extraordinary item....................... 12 (6)
</TABLE>
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 affiliates... $ 140 $ 150 $ 145 $ 145
Financial liabilities
Properties Notes.................. 600 627 600 612
Acquisitions Notes................ 350 354 350 350
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
Properties Notes and Acquisitions 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 WITH MARRIOTT INTERNATIONAL
In connection with the Distribution, Host Marriott and Marriott
International entered into agreements which provide, among other things, that
(i) 38 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 leased 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) six of the
Company's full-service properties are operated under a franchise agreement
with Marriott International.
F-15
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For fiscal years 1996, 1995 and 1994, the Company paid to Marriott
International $45 million, $38 million and $25 million, respectively, in hotel
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 combined
consolidated 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. The Company may terminate certain
agreements if specified performance thresholds are not met, subject to the
right of Marriott International to cure. In the event of early termination of
the Agreements, Marriott International will receive additional fees based on
the unexpired term and expected future base and incentive management fees. No
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,
certain hotels also participate in the Marriott Rewards program. The cost of
this program is 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.
F-16
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Agreements with managers other than Marriott International exist for nine of
the Company's hotels. Such agreements generally contain similar terms as the
agreements with Marriott International, however, incentive management fees are
only earned on five of the nine properties and the duration ranges from month-
to-month to ten years.
At January 3, 1997 and December 29, 1995, $35 million and $31 million,
respectively, have been advanced to the hotel managers for working capital and
are included in due from hotel managers in the accompanying combined
consolidated balance sheet.
Franchise Agreements
The Company has entered into franchise agreements with Marriott
International for six 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 were $2 million and $1
million for 1996 and 1995, respectively. Franchise fees were not material in
prior periods.
Two other hotels are subject to franchise agreements with brands other
Marriott. The terms of the franchise agreements range from three to ten years.
Franchise fees paid range from 1.5% to 5% of room sales and certain other fees
are paid for reservations and advertising. Franchise fees paid for these
properties, including franchise fees related to the hotel sold in December
1995, were $300,000 and $430,000 for 1996 and 1995, respectively.
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.
F-17
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, lease payments, 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).
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales
Rooms.......................................................... $581 $491 $411
Food and beverage.............................................. 227 177 114
Other.......................................................... 57 41 29
---- ---- ----
Total hotel sales............................................ 865 709 554
---- ---- ----
Department costs
Rooms.......................................................... 139 116 99
Food and beverage.............................................. 180 137 87
Other.......................................................... 29 21 14
---- ---- ----
Total department costs....................................... 348 274 200
---- ---- ----
Department profit................................................ 517 435 354
Other deductions................................................. 204 174 140
---- ---- ----
House profit................................................. $313 $261 $214
==== ==== ====
</TABLE>
14. SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION
All but one of the subsidiaries of Acquisitions guarantee the Acquisitions
Notes and all but two of the subsidiaries of Properties guarantee the
Properties 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,
the owners of the Pittsburgh Marriott City Center and HMH HPT Residence Inn,
Inc., the lessee of the Residence Inn properties. At May 21, 1997, there is no
subsidiary of the Company the capital stock of which comprises a substantial
portion of the collateral for the Acquisitions or Properties Notes within the
meaning of Rule 3-10 of Regulation S-X.
The following condensed, combining financial information sets forth the
combined financial position as of January 3, 1997 and December 29, 1995 and
results of operations and cash flows for the three fiscal years in the period
ended January 3, 1997 of the parent, Guarantor Subsidiaries and the Non-
Guarantor Subsidiaries:
F-18
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
JANUARY 3, 1997
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Property and equipment, net.. $ 895 $410 $168 $1,473
Investment in affiliate...... 17 -- -- 17
Notes receivable from
affiliate................... -- 140 -- 140
Other assets................. 49 28 24 101
Cash and cash equivalents.... 141 -- -- 141
------ ---- ---- ------
Total assets............... $1,102 $578 $192 $1,872
====== ==== ==== ======
Debt......................... $ 927 $ 80 $ 75 $1,082
Deferred income taxes........ 39 47 1 87
Other liabilities............ 30 23 24 77
------ ---- ---- ------
Total liabilities.......... 996 150 100 1,246
Owner's equity............... 106 428 92 626
------ ---- ---- ------
Total liabilities and
owner's equity............ $1,102 $578 $192 $1,872
====== ==== ==== ======
<CAPTION>
DECEMBER 29, 1995
<S> <C> <C> <C> <C>
Property and equipment....... $ 949 $361 $144 $1,454
Investment in affiliate...... 16 -- -- 16
Notes receivable from
affiliate................... -- 145 -- 145
Other assets................. 45 23 4 72
Cash and cash equivalents.... 123 -- -- 123
------ ---- ---- ------
Total assets............... $1,133 $529 $148 $1,810
====== ==== ==== ======
Debt......................... $ 949 $ 60 $ 75 $1,084
Deferred income taxes........ 31 57 -- 88
Other liabilities............ 20 1 10 31
------ ---- ---- ------
Total liabilities.......... 1,000 118 85 1,203
Owner's equity............... 133 411 63 607
------ ---- ---- ------
Total liabilities and
owner's equity............ $1,133 $529 $148 $1,810
====== ==== ==== ======
</TABLE>
F-19
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 3, 1997
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES.................... $ 189 $ 85 $ 45 $ 319
OPERATING COSTS AND
EXPENSES................... 98 41 36 175
----- ---- ----- -----
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND
INTEREST................... 91 44 9 144
Corporate expenses.......... (8) (5) (2) (15)
Interest expense............ (89) (7) (5) (101)
Interest income............. 23 3 -- 26
----- ---- ----- -----
INCOME BEFORE INCOME TAXES.. 17 35 2 54
Provision for income taxes.. (7) (14) (1) (22)
----- ---- ----- -----
NET INCOME.................. $ 10 $ 21 $ 1 $ 32
===== ==== ===== =====
<CAPTION>
YEAR ENDED DECEMBER 29, 1995
<S> <C> <C> <C> <C>
REVENUES.................... $ 198 $ 57 $ -- $ 255
OPERATING COSTS AND
EXPENSES................... 90 48 -- 138
----- ---- ----- -----
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND
INTEREST................... 108 9 -- 117
Corporate expenses.......... (10) (4) -- (14)
Interest expense............ (74) (3) -- (77)
Interest income............. 4 13 -- 17
----- ---- ----- -----
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM..... 28 15 -- 43
Provision for income taxes.. (11) (6) -- (17)
----- ---- ----- -----
INCOME BEFORE EXTRAORDINARY
ITEM....................... 17 9 -- 26
Extraordinary item--Loss on
extinguishment of debt..... (17) -- -- (17)
----- ---- ----- -----
NET INCOME.................. $ -- $ 9 $ -- $ 9
===== ==== ===== =====
<CAPTION>
YEAR ENDED DECEMBER 30, 1994
<S> <C> <C> <C> <C>
REVENUES.................... $ 197 $ 35 $ -- $ 232
OPERATING COSTS AND
EXPENSES................... 106 17 -- 123
----- ---- ----- -----
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND
INTEREST................... 91 18 -- 109
Corporate expenses.......... (7) (2) -- (9)
Interest expense............ (62) (3) -- (65)
Interest income............. 1 14 -- 15
----- ---- ----- -----
INCOME BEFORE INCOME TAXES.. 23 27 -- 50
Provision for income taxes.. (9) (10) -- (19)
----- ---- ----- -----
NET INCOME.................. $ 14 $ 17 $ -- $ 31
===== ==== ===== =====
</TABLE>
F-20
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 3, 1997
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY
OPERATIONS................ $ 76 $ 40 $ 12 $ 128
------ ----- ------ ------
INVESTING ACTIVITIES
Cash received from sales
of assets............... 335 -- -- 335
Capital expenditures..... (42) (34) (9) (85)
Acquisitions............. (264) (25) (18) (307)
Other.................... (23) 4 -- (19)
------ ----- ------ ------
Cash provided by (used
in) investing
activities.............. 6 (55) (27) (76)
------ ----- ------ ------
FINANCING ACTIVITIES
Repayment of debt........ (4) -- -- (4)
Dividends to Parent...... (28) -- -- (28)
Transfers to/from
Parent.................. (30) 15 15 --
Other.................... (2) -- -- (2)
------ ----- ------ ------
Cash provided by (used in)
financing activities...... (64) 15 15 (34)
------ ----- ------ ------
INCREASE IN CASH AND CASH
EQUIVALENTS............... 18 -- -- 18
CASH AND CASH EQUIVALENTS,
beginning of year......... 123 -- -- 123
------ ----- ------ ------
CASH AND CASH EQUIVALENTS,
end of year............... $ 141 $ -- $ -- $ 141
====== ===== ====== ======
<CAPTION>
YEAR ENDED DECEMBER 29, 1995
<S> <C> <C> <C> <C>
CASH PROVIDED BY
OPERATIONS................ $ 87 $ 25 $ -- $ 112
------ ----- ------ ------
INVESTING ACTIVITIES
Cash received from sales
of assets............... 307 -- -- 307
Capital expenditures..... (67) (5) -- (72)
Acquisitions............. (88) (96) (147) (331)
Other.................... 10 -- 10 20
------ ----- ------ ------
Cash provided by (used
in) investing
activities.............. 162 (101) (137) (76)
------ ----- ------ ------
FINANCING ACTIVITIES
Repayment of debt........ (815) -- -- (815)
Issuance of debt......... 985 16 75 1,076
Contributed Capital...... 3 -- -- 3
Transfers to Hospitality,
net..................... (151) -- -- (151)
Transfers to/from
Parent.................. (122) 60 62 --
Dividends to Parent...... (36) -- -- (36)
------ ----- ------ ------
Cash provided by (used
in) financing
activities.............. (136) 76 137 77
------ ----- ------ ------
INCREASE IN CASH AND CASH
EQUIVALENTS............... 113 -- -- 113
CASH AND CASH EQUIVALENTS,
beginning of year......... 10 -- -- 10
------ ----- ------ ------
CASH AND CASH EQUIVALENTS,
end of year............... $ 123 $ -- $ -- $ 123
====== ===== ====== ======
</TABLE>
F-21
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 30, 1994
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY
OPERATIONS................ $ 109 $ 9 $ -- $ 118
----- ----- ----- ------
INVESTING ACTIVITIES
Cash received from sales
of assets............... 419 -- -- 419
Capital expenditures..... (20) (9) -- (29)
Acquisitions............. (390) (116) -- (506)
Other.................... 9 -- -- 9
----- ----- ----- ------
Cash provided by (used
in) investing
activities.............. 18 (125) -- (107)
----- ----- ----- ------
FINANCING ACTIVITIES
Repayment of debt........ (24) -- -- (24)
Issuance of debt......... 164 -- -- 164
Contributed Capital...... 210 -- -- 210
Transfers to
Hospitality............. (345) -- -- (345)
Transfers to Host
Marriott................ (6) -- -- (6)
Transfers to/from
Parent.................. (116) 116 -- --
----- ----- ----- ------
Cash used in financing
activities................ (117) 116 -- (1)
----- ----- ----- ------
INCREASE IN CASH AND CASH
EQUIVALENTS............... 10 -- -- 10
CASH AND CASH EQUIVALENTS,
beginning of year......... -- -- -- --
----- ----- ----- ------
CASH AND CASH EQUIVALENTS,
end of year............... $ 10 $ -- $ -- $ 10
===== ===== ===== ======
</TABLE>
F-22
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 20,
1997
--------
<S> <C>
ASSETS
Property and equipment, net............................................ $1,555
Note receivable from affiliate......................................... 139
Due from hotel managers................................................ 40
Investments in affiliate............................................... 18
Other assets........................................................... 53
Cash and cash equivalents.............................................. 86
------
$1,891
======
LIABILITIES AND SHAREHOLDER'S EQUITY
Senior notes........................................................... $ 950
Notes secured by real estate assets.................................... 97
Other notes............................................................ 33
------
Total debt........................................................... 1,080
Deferred income taxes.................................................. 89
Other liabilities...................................................... 98
------
Total liabilities.................................................... 1,267
------
Shareholder's equity
Common stock, 100 shares issued and outstanding, no par value........ --
Additional paid-in capital........................................... 626
Retained deficit..................................................... (2)
------
Total shareholder's equity......................................... 624
------
$1,891
======
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
F-23
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
TWELVE WEEKS ENDED JUNE 20, 1997 AND JUNE 14, 1996
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REVENUES
Hotels........................................................... $ 97 $ 73
Equity in earnings of affiliate.................................. 1 1
---- ----
Total revenues................................................. 98 74
---- ----
OPERATING COSTS AND EXPENSES
Depreciation and amortization.................................... 17 14
Base and incentive management fees (including Marriott
International management fees of $15 million and $11 million in
1997 and 1996, respectively).................................... 16 11
Property taxes................................................... 7 5
Ground rent, insurance and other................................. 9 9
---- ----
Total operating costs and expenses............................. 49 39
---- ----
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST............ 49 35
Corporate expenses................................................. (3) (3)
Interest expense................................................... (23) (23)
Interest income.................................................... 5 6
---- ----
INCOME BEFORE INCOME TAXES......................................... 28 15
Provision for income taxes......................................... (12) (6)
---- ----
NET INCOME......................................................... $ 16 $ 9
==== ====
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
F-24
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
TWENTY-FOUR WEEKS ENDED JUNE 20, 1997 AND JUNE 14, 1996
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REVENUES
Hotels........................................................... $192 $142
Equity in earnings of affiliate.................................. 3 2
---- ----
Total revenues..................................................... 195 144
---- ----
OPERATING COSTS AND EXPENSES
Depreciation and amortization.................................... 35 29
Base and incentive management fees (including Marriott Interna-
tional management fees of $29 million and $21 million in 1997
and 1996, respectively)......................................... 32 22
Property taxes................................................... 13 11
Ground rent, insurance and other................................. 21 13
---- ----
Total operating costs and expenses............................. 101 75
---- ----
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST............ 94 69
Corporate expenses................................................. (6) (6)
Interest expense................................................... (46) (46)
Interest income.................................................... 9 11
---- ----
INCOME BEFORE INCOME TAXES......................................... 51 28
Provision for income taxes......................................... (21) (12)
---- ----
NET INCOME......................................................... $ 30 $ 16
==== ====
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
F-25
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
TWENTY-FOUR WEEKS ENDED JUNE 20, 1997 AND JUNE 14, 1996
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income.......................................................... $ 30 $ 16
Adjustments to reconcile to cash from operations:
Depreciation and amortization..................................... 35 29
Income taxes...................................................... 21 12
Changes in operating accounts..................................... (6) 1
Other............................................................. 1 (1)
---- ----
Cash provided by operations..................................... 81 57
---- ----
INVESTING ACTIVITIES
Proceeds from sales of assets....................................... -- 342
Less noncash proceeds............................................... -- (33)
---- ----
Cash received from sales of assets................................ -- 309
Acquisitions........................................................ (89) (132)
Capital expenditures................................................ (25) (46)
Other............................................................... 12 (61)
---- ----
Cash provided by (used in) investing activities................. (102) 70
---- ----
FINANCING ACTIVITIES
Dividends to Host Marriott Corporation and affiliates............... (32) (15)
Repayment of debt................................................... (2) (1)
Other............................................................... -- (2)
---- ----
Cash used in financing activities............................... (34) (18)
---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... $(55) $109
==== ====
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
F-26
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed combined consolidated financial statements of
HMH Properties, Inc. and subsidiaries (the "Company" or "Properties"), a
wholly-owned direct subsidiary of Host Marriott Hospitality, Inc.
("Hospitality"), have been prepared by the Company without audit.
Hospitality is a wholly-owned subsidiary of Host Marriott Corporation
("Host Marriott"). During the third quarter of 1997, the Company completed
a consent solicitation with holders of its senior notes to amend certain
provisions of the senior notes indenture. A similar consent solicitation
was conducted by HMC Acquisition Properties, Inc. ("Acquisitions")
(together, the "Consent Solicitations"). The Consent Solicitations
facilitated the merger of Acquisitions, a wholly-owned indirect subsidiary
of Host Marriott, which owns 17 full-service hotel properties, with and
into the Company (the "Merger"). The financial statements of the Company
present the combined consolidated financial position, results of operations
and cash flows of Properties and Acquisitions for all periods presented.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes the
disclosures made are adequate to make the information presented not
misleading. However, the condensed combined consolidated financial
statements should be read in conjunction with the Company's annual report
on Form 10-K for the fiscal year ended January 3, 1997.
In the opinion of the Company, the accompanying unaudited condensed
combined consolidated financial statements reflect all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position of the Company as of June 20, 1997 and January 3, 1997
and the results of operations for the twelve and twenty-four weeks ended
June 20, 1997 and June 14, 1996 and cash flows for the twenty-four weeks
ended June 20, 1997 and June 14, 1996. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short-term variations.
2. Revenues represent house profit from the Company's hotel properties and
equity in 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 and
amortization, real and personal property taxes, ground rent, insurance,
lease payments and management fees which are classified as operating costs
and expenses.
House profit generated by the Company's hotels for 1997 and 1996 consists
of:
<TABLE>
<CAPTION>
TWENTY-FOUR
TWELVE WEEKS ENDED WEEKS ENDED
--------------------- -----------------
JUNE 20, JUNE 14, JUNE 20, JUNE 14,
1997 1996 1997 1996
--------- --------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Sales
Rooms........................... $ 166 $ 129 $328 $258
Food & Beverage................. 64 50 128 98
Other........................... 12 12 28 25
--------- --------- ---- ----
Total Hotel Sales............. 242 191 484 381
--------- --------- ---- ----
Department Costs
Rooms........................... 39 30 75 61
Food & Beverage................. 48 37 97 75
Other........................... 6 8 14 14
--------- --------- ---- ----
Total Department Costs........ 93 75 186 150
--------- --------- ---- ----
Department Profit................. 149 116 298 231
Other Deductions.................. 52 43 106 89
--------- --------- ---- ----
House Profit.................. $ 97 $ 73 $192 $142
========= ========= ==== ====
</TABLE>
F-27
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
3. The Company's 49% limited partner interest in an affiliate that owns a
Marriott hotel in Santa Clara, California is accounted for using the equity
method. The Company's 49% interest in the operating profits (income before
interest costs) of the partnership is included in equity in earnings of
affiliate and was $1 million for each of the twelve weeks ended June 20,
1997 and June 14, 1996, respectively, and $3 million and $2 million for the
twenty-four weeks ended June 20, 1997 and June 14, 1996, respectively.
4. The Company acquired the 306-room Ritz-Carlton Hotel Marina del Rey for $57
million in the first quarter of 1997. In the second quarter of 1997, the
Company acquired a controlling interest in the 404-room Norfolk Waterside
Marriott for $33 million.
5. The Company paid dividends to Host Marriott of $19 million during the
second quarter of 1997 and $32 million year-to-date as permitted under the
senior notes indentures.
6. In addition to the Merger, the Consent Solicitations increased the ability
of the Company to acquire, through certain subsidiaries, additional
properties subject to non-recourse indebtedness and controlling interests
in corporations, partnerships and other entities holding attractive
properties and increased the threshold for distributions to affiliates to
the excess of the Company's earnings before interest expense, income taxes,
depreciation and amortization and other non-cash items ("EBITDA")
subsequent to the Consent Solicitations over 220% of the Company's interest
expense. Fees totalling approximately $12 million were paid to certain
holders of the senior notes for the Consent Solicitations.
Concurrent with the Consent Solicitations and the Merger, the Company issued
$600 million of 8 7/8% senior notes (the "New Senior Notes") at par maturing
in 2007 (the "Offering"). The Company received net proceeds from the Offering
of approximately $570 million, which will be used to fund future acquisitions
of, or the purchase of interests in, full-service hotels and other lodging-
related properties, which may include senior living communities, as well as
for general corporate purposes. The New Senior Notes are guaranteed on a
joint and several basis by certain of the Company's subsidiaries and rank
pari passu in right of payment with all other existing and future senior
indebtedness of the Company.
7. The Company is required to adopt Statement Financial Accounting Standards
("SFAS") No. 130 "Reporting Comprehensive Income," and SFAS No. 131
"Disclosures About Segments of an Enterprise and Related Information" in
fiscal year 1998. The adoption of these statements is not expected to have
a material impact on the Company's combined consolidated financial
statements.
8. All but four 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,
the Pittsburgh Marriott City Center, the Norfolk Waterside Marriott and HMH
HPT Residence Inn, Inc., the lessee of the Residence Inn properties. At
June 20, 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 June 20, 1997 and January 3, 1997 and the
results of operations for the twelve and twenty-four weeks ended June 20,
1997 and June 14, 1996 and cash flows for the twenty-four weeks ended June
20, 1997 and June 14, 1996 of the parent, the Guarantor Subsidiaries and the
Non-Guarantor Subsidiaries.
F-28
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS
(IN MILLIONS)
JUNE 20, 1997
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Property and equipment,
net........................ $ 940 $415 $200 $1,555
Note receivable from
affiliate.................. -- 139 -- 139
Investment in affiliate..... 18 -- -- 18
Other assets................ 44 23 26 93
Cash and cash equivalents... 86 -- -- 86
------ ---- ---- ------
Total assets.............. $1,088 $577 $226 $1,891
====== ==== ==== ======
Debt........................ $ 926 $ 79 $ 75 $1,080
Deferred income taxes....... 29 57 3 89
Other liabilities........... 16 24 58 98
------ ---- ---- ------
Total liabilities......... 971 160 136 1,267
Owner's equity.............. 117 417 90 624
------ ---- ---- ------
Total liabilities and
owner's equity........... $1,088 $577 $226 $1,891
====== ==== ==== ======
</TABLE>
F-29
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED JUNE 20, 1997
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES..................... $ 58 $24 $ 16 $ 98
OPERATING COSTS AND
EXPENSES.................... 26 10 13 49
---- --- ---- ----
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND
INTEREST.................... 32 14 3 49
Corporate expenses........... (2) (1) -- (3)
Interest expense............. (21) (1) (1) (23)
Interest income.............. 2 3 -- 5
---- --- ---- ----
INCOME BEFORE INCOME TAXES... 11 15 2 28
Provision for income taxes... (5) (6) (1) (12)
---- --- ---- ----
NET INCOME................... $ 6 $ 9 $ 1 $ 16
==== === ==== ====
<CAPTION>
TWELVE WEEKS ENDED JUNE 14, 1997
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES..................... $ 42 $21 $ 11 $ 74
OPERATING COSTS AND
EXPENSES.................... 21 10 8 39
---- --- ---- ----
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND
INTEREST.................... 21 11 3 35
Corporate expenses........... (1) (1) (1) (3)
Interest expense............. (21) (1) (1) (23)
Interest income.............. 3 3 -- 6
---- --- ---- ----
INCOME BEFORE INCOME TAXES... 2 12 1 15
Provision for income taxes... -- (6) -- (6)
---- --- ---- ----
NET INCOME................... $ 2 $ 6 $ 1 $ 9
==== === ==== ====
</TABLE>
F-30
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED JUNE 20, 1997
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES..................... $117 $ 50 $ 28 $195
OPERATING COSTS AND
EXPENSES.................... 56 22 23 101
---- ---- ----- ----
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND
INTEREST.................... 61 28 5 94
Corporate expenses........... (3) (2) (1) (6)
Interest expense............. (41) (3) (2) (46)
Interest income.............. 3 6 -- 9
---- ---- ----- ----
INCOME BEFORE INCOME TAXES... 20 29 2 51
Provision for income taxes... (9) (11) (1) (21)
---- ---- ----- ----
NET INCOME................... $ 11 $ 18 $ 1 $ 30
==== ==== ===== ====
<CAPTION>
TWENTY-FOUR WEEKS ENDED JUNE 14, 1996
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES..................... $ 91 $ 40 $ 13 $144
OPERATING COSTS AND
EXPENSES.................... 47 18 10 75
---- ---- ----- ----
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND
INTEREST.................... 44 22 3 69
Corporate expenses........... (3) (2) (1) (6)
Interest expense............. (42) (2) (2) (46)
Interest income.............. 5 6 -- 11
---- ---- ----- ----
INCOME BEFORE INCOME TAXES... 4 24 -- 28
Provision for income taxes... (2) (10) -- (12)
---- ---- ----- ----
NET INCOME................... $ 2 $ 14 $ -- $ 16
==== ==== ===== ====
</TABLE>
F-31
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED JUNE 20, 1997
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY
OPERATIONS................. $ 37 $ 38 $ 6 $ 81
---- ----- ----- ----
INVESTING ACTIVITIES
Acquisitions.............. (56) -- (33) (89)
Capital expenditures...... (13) (11) (1) (25)
Other..................... 12 -- -- 12
---- ----- ----- ----
Cash used in investing
activities.............. (57) (11) (34) (102)
---- ----- ----- ----
FINANCING ACTIVITIES
Repayment of debt......... (2) -- -- (2)
Transfers to/from Parent.. (1) (27) 28 --
Dividends to Host Marriott
Corporation and
affiliates............... (32) -- -- (32)
---- ----- ----- ----
Cash provided by (used
in) financing
activities.............. (35) (27) 28 (34)
---- ----- ----- ----
DECREASE IN CASH AND CASH
EQUIVALENTS................ $(55) $ -- $ -- $(55)
==== ===== ===== ====
<CAPTION>
TWENTY-FOUR WEEKS ENDED JUNE 14, 1996
<S> <C> <C> <C> <C>
CASH PROVIDED BY
OPERATIONS................. $ 15 $ 36 $ 6 $ 57
---- ----- ----- ----
INVESTING ACTIVITIES
Cash received from sales
of assets, net........... 309 -- -- 309
Acquisitions.............. (91) (25) (16) (132)
Capital expenditures...... (32) (12) (2) (46)
Other..................... (60) -- (1) (61)
---- ----- ----- ----
Cash provided by (used
in) investing
activities.............. 126 (37) (19) 70
---- ----- ----- ----
FINANCING ACTIVITIES
Repayment of debt......... (1) -- -- (1)
Transfers to/from Parent.. (14) 1 13 --
Dividends to Host Marriott
Corporation and
affiliates............... (15) -- -- (15)
Other..................... (2) -- -- (2)
---- ----- ----- ----
Cash provided by (used
in) financing
activities.............. (32) 1 13 (18)
---- ----- ----- ----
INCREASE IN CASH AND CASH
EQUIVALENTS................ $109 $ -- $ -- $109
==== ===== ===== ====
</TABLE>
F-32
<PAGE>
HMH PROPERTIES, INC.
All tendered Original Notes, executed Letters of Transmittal, and other
related documents should be directed to the Exchange Agent. Requests for
assistance and for additional copies of the Prospectus, the Letter of
Transmittal and other related documents should be directed to the Exchange
Agent.
The Exchange Agent
for the Exchange Offer is
MARINE MIDLAND BANK
by Facsimile:
(212) 658-2292
Attention: Marcia A. Markowski
Confirm by telephone
(212) 658-5931
By Registered or Certified Mail:
Marine Midland Bank
140 Broadway
A Level
New York, New York 10005-1180
Att: Corporate Trust Services
By Hand
Marine Midland Bank
140 Broadway
A Level
New York, New York 10005-1180
Att: Corporate Trust Services
By Overnight Courier:
Marine Midland Bank
140 Broadway
A Level
New York, New York 10005-1180
Att: Corporate Trust Services
(212) 658-5931
