<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported) July 10, 1997
HMH PROPERTIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
52-1822042 33-95058
(I.R.S. Employer Identification Number) (Commission File Number)
10400 Fernwood Road, Bethesda, Maryland 20817
(Address of Principle Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (301) 380-9000
(Former Name or Former Address, if changed since last report.)
<PAGE>
Item 2. Acquisition or Disposition of Assets
HMH Properties, Inc. (the "Company" or "Properties"), a wholly-owned, indirect
subsidiary of Host Marriott Corporation, completed a consent solicitation with
holders of its senior notes to amend certain provisions of its 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 Corporation, which owns 17 full-service
hotel properties, with and into the Company (the "Merger"). The financial
statements of the Company included herein present the combined consolidated
financial position, results of operations and cash flows of Properties and
Acquisitions for all periods presented.
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.
Certain matters discussed within this Form 8-K are forward-looking statements
within the meaning of the Private Litigation Reform Act of 1995 and, as such,
may involve known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the Company to be
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Although the Company believes the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
attained. These risks are detailed from time to time in the company's filings
with the Securities and Exchange Commission. The Company undertakes no
obligation to publicly release the result of any revisions to these forward-
looking statements that may be made to reflect any future events or
circumstances.
Included herein are the financial statements of the Company and certain pro
forma financial information for the Registrant.
Item 7. Financial Statements and Exhibits
(a) Financial statements of HMH Properties, Inc.
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants 3
Combined Consolidated Balance Sheet as of January 3, 1997 and
December 29, 1995 4
Statements of Combined Consolidated Operations for the fiscal years
ended January 3, 1997, December 29, 1995 and December 30, 1994 5
Combined Consolidated Statements of Shareholder's Equity for
fiscal years ended January 3, 1997, December 29, 1995 and
December 30, 1994 6
Combined Consolidated Statements of Cash Flows for the fiscal years
ended January 3, 1997, December 29, 1995 and December 30, 1994 7
Notes to Combined Consolidated Financial Statements 8
Condensed Combined Consolidated Balance Sheet as of March 28, 1997 24
Condensed Combined Consolidated Statements of Operations for the
twelve weeks ended March 28, 1997 and March 22, 1996 25
Condensed Combined Consolidated Statements of Cash Flows for the
twelve weeks ended March 28, 1997 and March 22, 1996 26
Notes to Condensed Combined Consolidated Financial Statements 27
</TABLE>
(b) Pro Forma financial information as of March 28, 1997 and for the
twelve weeks ended March 28, 1997 and March 22, 1996 and the fiscal year ended
January 3, 1997 of the Company reflecting the Merger, the Offering and other
transactions are included herein.
<TABLE>
<CAPTION>
Page
<S> <C>
Pro Forma Condensed Combined Consolidated Financial Data 32
Pro Forma Condensed Combined Consolidated Balance Sheet
as of March 28, 1997 33
Pro Forma Condensed Combined Consolidated Statement of Operations
for the period ended March 28, 1997 34
Pro Forma Condensed Combined Consolidated Statement of Operations
for the period ended March 22, 1996 35
Pro Forma Condensed Combined Consolidated Statement of Operations
for the year ended January 3, 1997 36
Notes to Pro Forma Condensed Combined Consolidated Financial Data 37
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HMH PROPERTIES, INC.
By: /s/ Donald D. Olinger
-----------------------------
Donald D. Olinger
July 24, 1997 Vice President and
Corporate Controller
-2-
<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 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 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.
Arthur Andersen LLP
Washington, D.C.
May 21, 1997
3
<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.
4
<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 Interna-
tional).................................................. -- -- 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.
5
<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 in-
vestment (Note 4)............ -- (6) -- --
Net advances and distributions
to Hospitality............... -- -- -- (297)
----- ------ ----- -----
Balance, December 30, 1994...... -- 1,133 23 (304)
Net income.................... -- -- 9 --
Cash transfers to Hospitali-
ty........................... -- -- -- (151)
Non-cash transfers to Hospi-
tality....................... -- -- -- (71)
Capital contribution (Note
1)........................... -- 4 -- --
Capitalized distributions pur-
suant to the Hospitality Of-
fering (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 inter-
est in 16 Courtyard proper-
ties (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.
6
<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.
7
<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
8
<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.
9
<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.
10
<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.
11
<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
12
<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>
13
<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 av-
erage 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, ma-
turing 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.
14
<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.
15
<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 as-
sets............................... 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.
16
<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.
17
<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.
18
<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:
19
<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 affili-
ate.......................... -- 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 own-
er'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 affili-
ate.......................... -- 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 own-
er's equity................ $1,133 $529 $ 148 $1,810
====== ==== ===== ======
</TABLE>
20
<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 CORPO-
RATE 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 CORPO-
RATE 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 CORPO-
RATE 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>
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 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>
22
<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>
23
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
MARCH 28, 1997
(UNAUDITED, IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net........................................... $1,519
Note receivable from affiliate........................................ 140
Due from hotel managers............................................... 44
Investments in affiliate.............................................. 19
Other assets.......................................................... 55
Cash and cash equivalents............................................. 125
------
$1,902
======
LIABILITIES AND SHAREHOLDER'S EQUITY
Senior notes.......................................................... $ 950
Notes secured by real estate assets................................... 97
Other notes........................................................... 34
------
Total debt.......................................................... 1,081
Deferred income taxes................................................. 89
Other liabilities..................................................... 105
------
Total liabilities................................................... 1,275
------
Shareholder's equity
Common stock, 100 shares issued and outstanding, no par value....... --
Additional paid-in capital.......................................... 626
Retained earnings................................................... 1
------
Total shareholder's equity........................................ 627
------
$1,902
======
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
24
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
TWELVE WEEKS ENDED MARCH 28, 1997 AND MARCH 22, 1996
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REVENUES
Hotels............................................................. $95 $69
Equity in earnings of affiliate.................................... 2 1
--- ---
97 70
--- ---
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees of $14
million and $9 million in 1997 and 1996, respectively)............ 52 36
--- ---
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST.............. 45 34
Corporate expenses................................................... (3) (3)
Interest expense..................................................... (23) (23)
Interest income...................................................... 4 5
--- ---
INCOME BEFORE INCOME TAXES........................................... 23 13
Provision for income taxes........................................... (9) (6)
--- ---
NET INCOME........................................................... $14 $ 7
=== ===
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
25
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
TWELVE WEEKS ENDED MARCH 28, 1997 AND MARCH 22, 1996
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income.......................................................... $ 14 $ 7
Adjustments to reconcile to cash from operations:
Depreciation and amortization..................................... 19 15
Income taxes...................................................... 9 6
Changes in operating accounts..................................... 15 15
Other............................................................. (1) (1)
---- ---
Cash provided by operations..................................... 56 42
---- ---
INVESTING ACTIVITIES
Proceeds from sales of assets....................................... -- 88
Less noncash proceeds............................................... -- (9)
---- ---
Cash received from sales of assets................................ -- 79
Acquisitions........................................................ (57) (62)
Capital expenditures................................................ (13) (21)
Other............................................................... 12 (28)
---- ---
Cash used in investing activities............................... (58) (32)
---- ---
FINANCING ACTIVITIES
Dividends to Host Marriott and affiliates........................... (13) --
Repayment of debt................................................... (1) (1)
---- ---
Cash used in financing activities............................... (14) (1)
---- ---
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... $(16) $ 9
==== ===
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
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"). On July 10,
1997, the Company completed a consent solicitation (the "Consent
Solicitation") for the amendment of certain provisions of its senior notes
indenture. The Consent Solicitation, facilitates, 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 was 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 conducted by
Acquisitions. On July 10, 1997, the Merger was consummated. These financial
statements present the condensed combined consolidated financial position,
results of operations and cash flows of the Company and Acquisitions for all
periods presented. Hereafter, the "Company" refers to the merged entity.
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 audited combined
consolidated financial statements included in this Offering Memorandum.
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 March 28, 1997 and January 3, 1997 and the
results of operations and cash flows for the twelve weeks ended March 28,
1997 and March 22, 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.
27
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
House profit generated by the Company's hotels for 1997 and 1996 consists
of:
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
-------------------
MARCH 28, MARCH 22,
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Sales
Rooms.................................................. $162 $129
Food & Beverage........................................ 64 48
Other.................................................. 16 13
---- ----
Total Hotel Sales.................................... 242 190
---- ----
Department Costs
Rooms.................................................. 36 30
Food & Beverage........................................ 49 39
Other.................................................. 8 6
---- ----
Total Department Costs............................... 93 75
---- ----
Department Profit........................................ 149 115
Other Deductions......................................... 54 46
---- ----
House Profit......................................... $ 95 $ 69
==== ====
</TABLE>
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 $1.5 million and $1.3 million for the twelve weeks ended
March 28, 1997 and March 22, 1996, respectively.
4. The Company acquired the 306-room Ritz-Carlton, 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 approximately $33 million.
5. The Company paid a $13 million dividend to Host Marriott during the first
quarter of 1997 as permitted under the senior notes indenture.
6. All but one of the subsidiaries of Acquisitions guarantee the Acquisition
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 the HMH HPT
Residence Inn, Inc., the lessee of the Residence Inn properties. At June 30,
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 combining financial information sets forth the
combined financial position as of March 28, 1997 and January 3, 1997 and the
results of operations and cash flows for the twelve weeks ended March 28,
1997 and March 22, 1996 of the parent, the Guarantor Subsidiaries and the
Non-Guarantor Subsidiaries.
28
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CONDENSED COMBINING BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 28, 1997
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Property and equipment, net.. $ 941 $413 $165 $1,519
Note receivable from affili-
ate......................... -- 140 -- 140
Investment in affiliate...... 19 -- -- 19
Other assets................. 40 34 25 99
Cash and cash equivalents.... 125 -- -- 125
------ ---- ---- ------
Total assets............... $1,125 $587 $190 $1,902
====== ==== ==== ======
Debt......................... $ 926 $ 80 $ 75 $1,081
Deferred income taxes........ 40 48 1 89
Other liabilities............ 51 30 24 105
------ ---- ---- ------
Total liabilities.......... 1,017 158 100 1,275
Owner's equity............... 108 429 90 627
------ ---- ---- ------
Total liabilities and own-
er's equity............... $1,125 $587 $190 $1,902
====== ==== ==== ======
</TABLE>
29
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CONDENSED COMBINING STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED MARCH 28, 1997
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES..................... $ 59 $26 $ 12 $ 97
OPERATING COSTS AND EX-
PENSES...................... 30 12 10 52
----- --- ----- ----
OPERATING PROFIT BEFORE COR-
PORATE EXPENSES AND INTER-
EST......................... 29 14 2 45
Corporate expenses........... (1) (1) (1) (3)
Interest expense............. (20) (2) (1) (23)
Interest income.............. 1 3 -- 4
----- --- ----- ----
INCOME BEFORE INCOME TAXES... 9 14 -- 23
Provision for income taxes... (4) (5) -- (9)
----- --- ----- ----
NET INCOME .................. $ 5 $ 9 $ -- $ 14
===== === ===== ====
<CAPTION>
TWELVE WEEKS ENDED MARCH 22, 1996
<S> <C> <C> <C> <C>
REVENUES..................... $ 51 $19 $ -- $ 70
OPERATING COSTS AND EX-
PENSES...................... 28 8 -- 36
----- --- ----- ----
OPERATING PROFIT BEFORE COR-
PORATE EXPENSES AND INTER-
EST......................... 23 11 -- 34
Corporate expenses........... (2) (1) -- (3)
Interest expense............. (21) (2) -- (23)
Interest income.............. 2 3 -- 5
----- --- ----- ----
INCOME BEFORE INCOME TAXES... 2 11 -- 13
Provision for income taxes... (2) (4) -- (6)
----- --- ----- ----
NET INCOME .................. $ -- $ 7 $ -- $ 7
===== === ===== ====
</TABLE>
30
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
SUPPLEMENTAL CONDENSED COMBINING STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED MARCH 28, 1997
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS.. $ 43 $ 12 $ 1 $ 56
---- ----- ----- ----
INVESTING ACTIVITIES
Acquisitions............... (57) -- -- (57)
Capital expenditures....... (6) (6) (1) (13)
Other...................... 12 -- -- 12
---- ----- ----- ----
Cash used in investing
activities............... (51) (6) (1) (58)
---- ----- ----- ----
FINANCING ACTIVITIES
Repayment of debt.......... (1) -- -- (1)
Transfers to/from Parent... 6 (6) -- --
Dividend to Parent......... (13) -- -- (13)
---- ----- ----- ----
Cash used in financing
activities............... (8) (6) -- (14)
---- ----- ----- ----
DECREASE IN CASH AND CASH
EQUIVALENTS................. $(16) $ -- $ -- $(16)
==== ===== ===== ====
<CAPTION>
TWELVE WEEKS ENDED MARCH 22, 1996
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS.. $ 33 $ 9 $ -- $ 42
---- ----- ----- ----
INVESTING ACTIVITIES
Cash received from sales of
assets, net............... 79 -- -- 79
Acquisitions............... (19) (25) (18) (62)
Capital expenditures....... (14) (7) -- (21)
Other...................... (27) (1) -- (28)
---- ----- ----- ----
Cash provided by (used in)
investing activities..... 19 (33) (18) (32)
---- ----- ----- ----
FINANCING ACTIVITIES
Repayment of debt.......... (1) -- -- (1)
Transfers to/from Parent... (42) 24 18 --
---- ----- ----- ----
Cash used in financing
activities............... (43) 24 18 (1)
---- ----- ----- ----
INCREASE IN CASH AND CASH
EQUIVALENTS................. $ 9 $ -- $ -- $ 9
==== ===== ===== ====
</TABLE>
31
<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 the twelve weeks ended March 28,
1997, the twelve weeks ended March 22, 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 two full-service hotel properties;
. 1996 acquisition of nine full-service hotel properties;
. 1996 sale/leaseback of 18 Residence Inn properties;
. 1996 sale of 16 Courtyard properties;
. the Offering and the Consent Solicitations.
The unaudited Pro Forma Condensed Combined Consolidated Balance Sheet of the
Company as of March 28, 1997 reflects the issuance of $600 million aggregate
principal amount of New Senior Notes in the Offering and the acquisition of a
controlling interest in the 404-room Norfolk Waterside Marriott.
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 an unrelated real estate
investment trust (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.
32
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
AS OF MARCH 28, 1997
---------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Property and equipment, net................... $1,519 $ 36 (B) $1,555
Note receivables from affiliate............... 140 -- 140
Due from hotel managers....................... 44 -- 44
Investment in affiliate....................... 19 -- 19
Other assets.................................. 55 30 (A) 85
Cash and cash equivalents..................... 125 570 (A) 662
(33)(B)
------ ---- ------
$1,902 $603 $2,505
====== ==== ======
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................................... 34 -- 34
------ ---- ------
Total debt.................................. 1,081 600 1,681
Deferred income taxes......................... 89 -- 89
Other liabilities............................. 105 3 (B) 108
------ ---- ------
Total liabilities........................... 1,275 603 1,878
Shareholder's equity.......................... 627 -- 627
------ ---- ------
$1,902 $603 $2,505
====== ==== ======
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial
Data.
33
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT RATIO DATA)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
MARCH 28, 1997
--------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Revenues
Hotels...................................... $95 $ 2(C) $97
Other....................................... 2 - 2
--- --- ---
97 2 99
Operating costs and expenses
Hotels...................................... 52 1(C) 53
--- --- ---
Operating profit before corporate expenses and
interest..................................... 45 1 46
Corporate expenses............................ (3) - (3)
Interest expense.............................. (23) (13)(G) (36)
Interest income............................... 4 - 4
--- --- ---
Income (loss) before income taxes............. 23 (12) 11
Benefit (provision) for income taxes.......... (9) 5 (H) (4)
--- --- ---
Net income (loss)............................. $14 $(7) $ 7
=== === ===
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial
Data.
34
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT RATIO DATA)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED MARCH 22, 1996
----------------------------------------------
DISPOSITION ACQUISITION
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues
Hotels.......................... $ 69 $ (5)(E) $ 2 (C) $ 80
14 (F)
Other........................... 1 - - 1
---- ---- ---- ----
70 (5) 16 81
---- ---- ---- ----
Operating costs and expenses
Hotels.......................... 36 3 (D) 1 (C) 43
(3)(E) 6 (F)
---- ---- ---- ----
36 - 7 43
---- ---- ---- ----
Operating profit before corporate
expenses and interest............ 34 (5) 9 38
Corporate expenses................ (3) - - (3)
Interest expense.................. (23) - (13)(G) (36)
Interest income................... 5 - 5
---- ---- ---- ----
Income (loss) before income tax-
es............................... 13 (5) (4) 4
Benefit (provision) for income
taxes............................ (6) 2 (H) 2 (H) (2)
---- ---- ---- ----
Net income (loss)................. $ 7 $ (3) $ (2) $ 2
==== ==== ==== ====
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial
Data.
35
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT RATIO DATA)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 3, 1997
----------------------------------------------
DISPOSITION ACQUISITION
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues
Hotels.......................... $ 313 $ (5)(E) $ 16 (C) $ 352
28 (F)
Other........................... 6 - - 6
----- ---- ---- -----
319 (5) 44 358
----- ---- ---- -----
Operating costs and expenses
Hotels.......................... 175 4 (D) 8 (C) 194
(4)(E) 11 (F)
----- ---- ---- -----
175 - 19 194
----- ---- ---- -----
Operating profit before corporate
expenses and interest............ 144 (5) 25 164
Corporate expenses................ (15) - - (15)
Interest expense.................. (101) - (57)(G) (158)
Interest income................... 26 - (3)(C) 16
(7)(F)
----- ---- ---- -----
Income (loss) before income tax-
es............................... 54 (5) (42) 7
Benefit (provision) for income
taxes............................ (22) 2(H) 17 (H) (3)
----- ---- ---- -----
Net income (loss)................. $ 32 $ (3) $(25) $ 4
===== ==== ==== =====
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Consolidated Financial
Data.
36
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED FINANCIAL DATA
A. Represents the adjustment to record consummation of the Offering and the
Consent Solicitations as follows:
-- Record the issuance of the New Senior 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 acquisition of a controlling
interest in the Norfolk Waterside Marriott as follows:
-- Record the property and equipment of $36 million.
-- Record the use of cash of $33 million.
-- Record a minority interest liability of $3 million.
C. 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.
D. 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.
E. Represents the net adjustment to eliminate revenues, operating costs and
depreciation for the 1996 sale of 16 Courtyard properties.
F. 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.
G. Represents the adjustment to record interest expense and related amortization
of deferred financing fees as a result of the Offering and the Consent
Solicitations.
H. Represents the income tax impact of pro forma adjustments at statutory
rates.
37
