<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 2, 1998 COMMISSION FILE NO. 33-95058
HMH PROPERTIES, INC.
DELAWARE 52-1822042
(State of Incorporation) (I.R.S. Employer Identification
Number)
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817
(301) 380-9000
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT
Title of Class
-------------------------------
$1,550,000 (principal amount at
maturity) Senior Notes
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
---
DOCUMENT INCORPORATED BY REFERENCE
HOST MARRIOTT CORPORATION NOTICE OF 1998 ANNUAL MEETING AND PROXY STATEMENT
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FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements within
the meaning of the Private Litigation Reform Act of 1995 and as such may involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance or achievements of HMH Properties, Inc. (the
"Company") to be different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Although the Company
believes the expectations reflected in such forward-looking statements are based
upon reasonable assumptions it can give no assurance that its expectations will
be attained. These risks are detailed from time to time in the Company's
filings with the Securities and Exchange Commission. The Company undertakes no
obligation to publicly release the result of any revisions to these forward-
looking statements that may be made to reflect any future events or
circumstances.
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
GENERAL
The Company is a direct wholly-owned subsidiary of Host Marriott
Hospitality, Inc. ("Hospitality") which is a direct wholly-owned subsidiary of
Host Marriott Corporation ("Host Marriott"). The Company's assets principally
consist of 62 full-service hotel properties. These properties are generally
operated under the Marriott brand and managed by Marriott International, Inc.
("Marriott International"). Two of the Company's properties are operated under
the Ritz-Carlton brand in which Marriott International acquired a 49% interest
in April 1995. The Marriott and Ritz-Carlton brands are among the most
respected and widely recognized in the lodging industry. Based on industry data,
the Company believes that its hotels consistently outperform the industry's
average occupancy rate by a significant margin, and averaged 77.1% occupancy for
1997 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 upscale and luxury full-service segments of the lodging industry
are benefiting from a favorable supply and demand relationship in the United
States. Management believes that demand increases have resulted primarily from
a strong domestic economic environment and a corresponding increase in business
travel. In spite of increased demand for rooms, the room supply growth rate in
the full-service segment has not increased in kind. Management believes that
this slower increase in the supply growth rate in the full-service segment is
attributable to many factors including the limited availability of attractive
building sites for full-service hotels, the lack of available financing for new
full-service hotel construction and the availability of existing full-service
properties for sale at a discount to their replacement cost. The relatively high
occupancy rates of the Company's hotels, along with the increased demand for
full-service hotel rooms have allowed the managers of the Company's hotels to
increase average daily room rates by primarily replacing certain discounted
group business with higher-rated group and transient business and by selectively
raising room rates. As a result, on a comparable basis, room revenues per
available room ("REVPAR") for full-service properties increased approximately
12.8% for 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 12.8% increase in REVPAR resulted
in an approximate 16.3% increase in comparable full-service hotel EBITDA in
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 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. Although competition for acquisitions has increased, the Company
believes that the upscale and luxury full-service segments of the market
continue to offer opportunities to acquire assets at attractive multiples of
cash flow and at 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% from 1991 to 1997.
Furthermore, the lead time from conception to completion of a full-service
hotel is generally three to five years or more in the types of 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 United States financial organizations, the Company believes that
numerous international financial institutions are also inadvertent owners of
lodging properties and have only recently begun to dispose of such properties.
The Company expects that there will be increased opportunities to acquire U.S.
lodging properties from international financial institutions and expects 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 data provided by Smith Travel Research, 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 78.1%, compared to an average
occupancy rate of 71.1% for competing upscale full-service hotels. In
addition, the Company's comparable properties have a 13% REVPAR premium over
its competitive set. Accordingly, management anticipates that any additional
non-Marriott branded full-service properties acquired by the Company in the
future and converted 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. Twelve of the
Company's 43 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 high quality Marriott and Ritz-
Carlton brand names due to its relationship with Marriott International.
The Company intends to grow its full-service hotel portfolio as cash
flow becomes available from operations or through additional financings as
permitted under the senior notes indentures. In carrying out this strategy, the
Company evaluates each opportunity on an individual basis and may from time to
time elect to acquire controlling interests in a hotel joint venture, rather
than pursue the outright acquisition of a property, when it believes its return
on investment will be maximized by so doing. However, under the senior notes
indentures, the ability to invest in joint ventures is
3
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limited. The Company may make acquisitions directly or through its subsidiaries
depending on a variety of factors, including the existence of debt, the form of
investment, the restrictions and requirements of its bond indentures and the
availability of funds.
The Company acquired, or purchased controlling interests in, eleven
full-service properties in 1997, including acquiring the 306-room Ritz-Carlton,
Marina del Rey for $57 million and the 300-room Coronado Island Marriott Resort
(formerly the Le Meridien hotel), which was converted to the Marriott brand, for
$54 million and acquiring controlling interests in the 404-room Norfolk Marriott
Waterside for $33 million, the 884-room Desert Springs Marriott Resort for $184
million and the 380-room Manhattan Beach Marriott Hotel (formerly the Manhattan
Beach Radisson Plaza Hotel), which was converted to the Marriott brand, for $29
million. The Company also acquired a controlling interest in the Chesapeake
Hotels Limited Partnership ("CHLP"), the owner of six full-service properties
(2,994 rooms), along with $105 million CHLP receivables, from Host Marriott for
approximately $135 million. The Company already owned the non-recourse second
mortgages on the CHLP properties. Subsequent to year end, the Company acquired
controlling interests in the partnership that owns the 1,671-room Atlanta
Marriott Marquis for $239 million, including the assumption of $164 million of
mortgage debt, and the partnership that owns the 359-room Albany Marriott, the
350-room San Diego Marriott Mission Valley and the 320-room Minneapolis Marriott
Southwest for $50 million.
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. The Company acquired seven full-
service properties (3,133 rooms) for approximately $329 million in 1995.
The Company believes that these acquisitions were made at an
attractive valuations and at significant discounts to replacement value.
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 1995, the Company sold to and leased back from an unrelated
real estate investment trust (the "REIT") 37 of its Courtyard properties. The
Company transferred its rights to receive the deferred proceeds and obligations
to perform under the lease to a subsidiary of Host Marriott in 1995. Also, in
1995, the Company sold its remaining four Fairfield Inns for approximately $6
million in cash. In 1996, the Company entered into an agreement with the REIT
and sold and leased back 16 Courtyard properties and 18 Residence Inns for
approximately $349 million (10% of which was deferred). Host Marriott purchased
the Company's rights to the deferred proceeds and obligations under the lease
for the 16 Courtyard properties at their fair market value. With the completion
of these transactions, 100% of the Company's owned properties are in the full-
service segment. The Company has reinvested all of the proceeds in the
acquisition of full-service lodging properties. In September 1997, the Company
sold the Sheraton Elk Grove Suites for $16 million (which approximated its
carrying value).
HOTEL LODGING INDUSTRY
The upscale and luxury full-service segments of the lodging industry
continue to benefit from a favorable cyclical imbalance in the supply/demand
relationship in which room demand growth has exceeded supply growth, which has
remained fairly limited. The lodging industry posted strong gains in revenues
and profits in 1997, as demand growth continued to outpace additions to supply.
The Company believes that upscale and luxury 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 and luxury full-service properties will continue to grow at
approximately the rate of inflation.
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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 1997 to 72.5%, while room rate growth
continued to exceed inflation. Smith Travel Research data shows that upscale
full-service room supply increased an average of approximately 1% annually from
1991 through 1997. The increase in room demand and minimal growth in new room
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
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 at
least until the year 2000.
HOTEL LODGING PROPERTIES
The Company's lodging portfolio consists of 62 properties with 26,719
rooms as of March 20, 1998. The Company's hotel lodging properties represent
quality assets in the full-service lodging segment. 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 2% of
the Company's total rooms) do not carry the Marriott or Ritz-Carlton brand
because their size, quality and/or contractual commitments would not permit such
conversion.
One commonly used indicator of market performance for hotels is room
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 refurbishment and capital improvements on a regularly
scheduled basis. Typically, refurbishing has been provided at intervals of five
years, based on an annual review of the condition of each property. In fiscal
years 1997, 1996 and 1995, the Company spent $60 million, $39 million and $28
million, respectively, on capital improvements to existing properties. As a
result of these expenditures, the Company has been able to maintain high quality
rooms at its properties.
The Company's hotels primarily include Marriott and Ritz-Carlton brand
hotels and average 430 rooms. Seven of the Company's hotels have more than 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. Marriott International serves as manager for 49 of the
62 hotels owned by the Company and all but two are part of Marriott
International's full-service hotel system. The average age of the properties is
15 years, several of which have had substantial renovations or major additions.
Consistent with its strategy of acquiring full-service hotel
properties, the Company purchased, or acquired controlling interests in, eleven
full-service properties with 5,268 rooms in 1997 for approximately $492 million,
including $123 million of assumed mortgage debt. Subsequent to year end, the
Company acquired a controlling interest
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in the partnership that owns the 1,671-room Atlanta Marriott Marquis for $239
million, including assumed mortgage debt of $164 million. Additionally, the
Company acquired a controlling interest in the partnership that owns the 359-
room Albany Marriott, the 350-room San Diego Marriott Mission Valley and the
320-room Minneapolis Marriott Southwest for $50 million. During 1996, the
Company purchased, or acquired controlling interests in, nine full-service
properties with 3,124 rooms for approximately $292 million. In 1995, the Company
acquired seven full-service properties with 3,133 rooms for approximately $329
million.
The chart below sets forth performance information for the Company's
comparable full-service hotels.
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Number of properties.............................. 37 37
Number of rooms................................... 15,327 15,297
Average daily rate................................ $ 120.12 $ 108.58
Occupancy %....................................... 78.1% 76.6%
REVPAR............................................ $ 93.81 $ 83.14
REVPAR % change................................... 12.8% --
</TABLE>
The chart below sets forth performance information for the Company's existing
full-service hotels.
<TABLE>
<CAPTION>
1997(1) 1996 (1) 1995 (1)
------- -------- --------
<S> <C> <C> <C>
Number of properties................... 58 48 38
Number of rooms........................ 24,019 18,976 15,552
Average daily rate..................... $119.49 $ 107.38 $ 97.57
Occupancy %............................ 77.1% 76.4% 73.9%
REVPAR................................. $ 92.18 $ 82.03 $ 72.07
REVPAR % change........................ 12.4% 13.8% --
</TABLE>
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(1) Excludes the information related to the 255-room Elk Grove Suites hotel
which was leased to a national hotel chain until September 1997 when it was
sold to the lessee for $16 million.
Revenues in 1997 for nearly all of the Company's full-service hotels
were improved or comparable to 1996 results. This improvement was achieved
through steady increases in customer demand, as well as yield management
techniques applied by the managers to maximize REVPAR on a property-by-property
basis. REVPAR for comparable properties increased 12.8% as average room rates
increased approximately 11% and average occupancy increased one and one half
percentage points. Overall, this resulted in strong house profit margins, which
increased over two percentage points, and excellent growth in sales, which
expanded at a rate of approximately 10% rate for comparable hotels. The Company
believes that its hotels consistently outperform the industry's average REVPAR
growth rates. The relatively high occupancy rates of the Company's hotels,
along with increased demand for full-service hotel rooms, allowed the managers
of the Company's hotels to increase average room rates by selectively increasing
room rates and 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 luxury and
upscale full-service properties.
A number of the Company's full-service hotel acquisitions were
converted to the Marriott brand upon acquisition, most recently the Coronado
Island Marriott Resort and the Manhattan Beach Marriott were converted in the
fourth quarter of 1997. 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, its Marriott
Rewards program, as well as customer recognition of the Marriott brand name. The
Marriott brand name has consistently delivered occupancy and REVPAR premiums
over other brands. Based on data provided by Smith Travel Research, the
Company's comparable properties have a seven percentage point occupancy premium
and a 13% REVPAR premium to its competitive set. 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
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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 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 has assembled a
highly skilled asset management team with extensive experience in hotel
management and operations, including revenue and operations management and
capital expenditure monitoring. The Company's experienced asset management
team works with the hotel managers to achieve these key objectives, which
include reducing property-level overhead by sharing management positions with
other jointly-managed hotels in the vicinity, evaluating marginal restaurant
operations and selectively making additional investments where favorable
incremental returns are expected.
The Company and the managers will continue to focus on cost control in
an attempt to ensure that hotel sales increases serve to maximize house and
operating profit. While control of fixed costs serves to improve profit margins
as hotel sales increase, it also results in more properties reaching financial
performance levels that allow the managers to share in growth of profits in the
form of incentive management fees. At these higher operating levels, the
Company's and managers' interests are very closely aligned, which helps to drive
further increases in profitability, but moderates operating leverage. The
Company expects that this trend will continue in 1998 as the upscale and luxury
full-service segments continue to strengthen.
During 1996, the Company completed its divestiture of limited service
properties through the sale and leaseback of its then remaining Courtyard and
Residence Inn properties. A subsidiary of Host Marriott purchased the Company's
rights to the deferred proceeds and obligations under the lease for the
Courtyard properties at their fair market value of approximately $13 million.
The 18 Residence Inn properties continue to be reflected in the Company's
revenues and are managed by Marriott International under long-term management
agreements. During 1997, these properties represented less than 2% of the
Company's hotel EBITDA, compared to 7% in 1996, and the Company expects this
percentage to continue to decrease as the Company continues to acquire full-
service properties.
MARKETING
All but thirteen of the Company's hotel properties are managed by
Marriott International as Marriott or Ritz-Carlton brand hotels. Eleven of the
thirteen remaining hotels are operated as a Marriott brand hotel 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 Marriott Rewards program which expanded
the previous Marriott Honored Guest Awards program. Marriott Rewards
membership includes more than 7.5 million members.
The Marriott reservation system provides Marriott reservation agents
complete descriptions of the rooms available for sale, and more up-to-date rate
information from the properties. The reservation system also features improved
connectivity to airline reservation systems, providing travel agents with 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.
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PROPERTIES
The following table sets forth certain information as of March 20,
1998 relating to each of the Company's hotels. All of the properties are
operated under Marriott or Ritz-Carlton brands by Marriott International, unless
otherwise indicated.
<TABLE>
<CAPTION>
Location Rooms Location Rooms
- ----------------------------------------------- ----- ----------------------------------------------- -----
<S> <C> <S> <C>
California Minnesota
Coronado Island(6)................... 300 Minneapolis Southwest(7)............. 320
Desert Springs(8).................... 884 Minneapolis Airport.................. 479
Manhattan Beach(7)................... 380 Missouri
Marina Beach(2)...................... 368 Kansas City Airport(2)............... 382
The Ritz-Carlton, Marina del Rey(5).. 306 New Jersey
Napa Valley.......................... 191 Newark Airport(2).................... 590
Newport Beach........................ 570 Saddle Brook(2)(8)................... 221
Newport Beach Suites................. 250 New York
San Diego Mission Valley(7).......... 350 Albany Marriott(7)................... 359
San Francisco Airport................ 684 New York World Trade Center(2)....... 820
San Francisco Fisherman's Wharf(4)... 285 North Carolina
Colorado Charlotte(4)......................... 298
Denver Southeast(2)(8)............... 595 Raleigh Crabtree Valley(1)........... 375
Denver Tech.......................... 625 Oklahoma
Denver West(2)....................... 307 Oklahoma City........................ 354
Vail Mountain Resort................. 349 Oregon
Connecticut Portland............................. 503
Hartford-Rocky Hill(2)............... 251 Pennsylvania
Florida Pittsburgh City Center(2)(4)......... 400
Fort Lauderdale Marina............... 580 Texas
Jacksonville(2)(4)................... 256 Dallas/Fort Worth.................... 492
Miami Airport(2)..................... 782 Dallas Quorum(2)..................... 547
Palm Beach Gardens(4)................ 279 Houston Airport(2)................... 566
Singer Island (Holiday Inn)(3)....... 222 J.W. Marriott Houston................ 503
Tampa Airport(2)..................... 295 Plaza San Antonio(4)................. 252
Tampa Westshore(1)................... 309 San Antonio Riverwalk(2)............. 500
Georgia Utah
Atlanta Marquis(8)................... 1,671 Salt Lake City(2).................... 510
Atlanta Norcross..................... 222 Virginia
Atlanta Northwest.................... 400 Key Bridge(2)(8)..................... 588
Atlanta Perimeter(2)................. 400 Pentagon City........................ 300
The Ritz-Carlton, Atlanta(5)......... 447 Norfolk Waterside(2)(7).............. 404
Illinois Westfields Conference Center......... 335
Chicago O'Hare(8).................... 681 Washington-Dulles Suites............. 254
Chicago-Deerfield Suites............. 248 Williamsburg......................... 295
Chicago-Downtown Courtyard........... 334 Washington, D.C.
Indiana Washington Metro Center.............. 456
South Bend(2)........................ 300 Canada
Maryland Toronto Delta Meadowvale(3).......... 374
Bethesda(2).......................... 407 ------
Gaithersburg-Washingtonian Center.... 284 TOTAL.............................. 26,719
Massachusetts ======
Boston Newton(8)..................... 430
</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.
(5) Property is operated as a Ritz-Carlton. The Ritz-Carlton Hotel Company,
L.L.C. manages the property and is 49% owned by Marriott International.
(6) Property was acquired and converted to the Marriott brand in 1997.
(7) The company acquired a controlling interest in the partnership which owns
this property in 1997 or 1998. The property will be operated as a Marriott
franchised property.
(8) The Company acquired a controlling interest in the partnership which owns
this property in 1997 or 1998. Host Marriott previously owned a general
partner interest in the partnership.
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INVESTMENTS IN AFFILIATED PARTNERSHIPS AND NOTES RECEIVABLE
In connection with the sale of seven hotels to an affiliated
partnership in 1984, the Company received as proceeds $168 million in notes
receivable that are secured by non-recourse mortgages on the underlying
properties. On September 10, 1997, Host Marriott successfully completed the
purchase of the limited partnership units in the Chesapeake Hotel Limited
Partnership ("CHLP"). CHLP owns six hotels, the Key Bridge Marriott, the
Chicago Marriott O'Hare, the Boston Marriott Newton, the Denver Marriott
Southeast, the Minneapolis Airport Marriott and the Saddle Brook Marriott. The
Company acquired a controlling interest in CHLP along with $105 million in
certain receivables from Host Marriott on October 10, 1997 for $135 million and
consolidated CHLP in the fourth quarter.
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:
Segment Representative Participants
- ------- ---------------------------
Luxury/Full-Service Ritz-Carlton; Four Seasons
Upscale/Full-Service Marriott Hotels, Resorts and Suites; Crowne Plaza;
Doubletree; Hyatt; Hilton; Radisson; Red Lion; Sheraton;
Westin; Wyndham
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time the subject of, or involved in,
judicial proceedings. Management believes that any liability or loss resulting
from such matters will not have a material adverse effect on the financial
position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is not publicly traded.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial
statement data derived from the Company's Consolidated Financial Statements as
of and for the five most recent fiscal years ended January 2, 1998. The
Company's Consolidated Financial Statements present the financial position,
results of operations, and cash flows of the Company giving effect to the Merger
(defined herein) for all periods presented. See Note 1 to the Company's
consolidated financial statements. The consolidated balance sheet, income
statement and other data for 1993 has been derived from unaudited consolidated
financial statements of the Company, which in the opinion of management includes
all material adjustments necessary for that period. The financial data for 1993
includes the operating results of the hotels recorded by Host Marriott or its
affiliates for the periods prior to the formation of the Company.
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
1997 1996(1) 1995 1994 1993
------ -------- ------ ------ ----------
(IN MILLIONS EXCEPT FOR RATIO DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(2)
Hotels........................................................ $ 417 $ 313 $ 261 $ 214 $ 378
Senior living communities..................................... -- -- -- 14 68
Net gains (losses) on property transactions................... 1 1 (10) 1 (6)
Equity in earnings of affiliate............................... 6 5 4 3 --
------ ------ ------ ------ ------
Total revenues.......................................... 424 319 255 232 440
Operating profit before corporate expenses and
interest..................................................... 194 144 117 109 77
Corporate expenses.........
Interest income............................................... 27 26 17 15 14
Interest expense (3).......................................... 128 101 77 65 60
Income before extraordinary item and
cumulative effect of accounting changes(4)................... 47 32 26 31 10
Net income.................................................... 47 32 9 31 6
BALANCE SHEET DATA:
Total assets.................................................. $2,532 $1,872 $1,810 $1,734 $1,696
Total debt.................................................... 1,803 1,082 1,084 785 658
OTHER DATA:
EBITDA(5)..................................................... $ 291 $ 226 $ 194 $ 178 $ 166
Depreciation and amortization................................. 80 64 62 64 71
Cash provided by operating activities......................... 178 128 112 118 75
Cash used in investing activities............................. (608) (76) (76) (107) (23)
Cash provided by (used in) financing activities(6)............ 529 (34) 77 (1) (52)
Cash interest expense(7)...................................... 123 99 75 63 55
Ratio of earnings to fixed charges(8)......................... 1.6x 1.5x 1.5x 1.7x 1.3x
EBITDA to cash interest expense............................... 2.4x 2.3x 2.6x 2.8x 3.0x
- --------------
</TABLE>
(1) Fiscal year 1996 includes 53 weeks.
(2) Prior to the Distribution (as defined herein) in October 1993, revenues
included room sales and food and beverage sales at hotel properties, as
well as sales from senior living communities. Subsequent to October 1993,
revenues include house profit from the Company's hotel properties, lease
rentals from the Company's senior living communities, net gains (losses) on
real estate transactions and equity in earnings of an affiliate. House
profit represents hotel sales, less property-level expenses, excluding
depreciation, management fees, property taxes,
10
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ground and equipment rent, insurance and certain other costs, which are
classified as operating costs and expenses. See Note 1 to the Company's
Consolidated Financial Statements.
(3) Interest expense excludes interest costs capitalized in connection with the
Company's development and construction activities of $1 million in 1996,
$2 million in 1995, $1 million in 1994 and $5 million in 1993.
(4) Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," was adopted in the first quarter of 1993. In the second
quarter of 1993, the Company changed its accounting method for assets held
for sale. The Company recorded a $24 million credit to reflect the adoption
of SFAS No. 109 and a $28 million charge, net of taxes of $19 million, to
reflect the change in its accounting method for assets held for sale. In
the second quarter of 1995, the Company recorded an extraordinary loss on
the extinguishment of debt of $14 million and $3 million, net of taxes, in
connection with the redemption and defeasance of senior notes and the
repayment of the Acquisitions Revolver (as defined herein).
(5) EBITDA, as defined in the senior notes indentures, consists of the sum of
consolidated net income, interest expense, income taxes, depreciation and
amortization and certain other noncash items (principally non-cash write-
downs of lodging properties and equity in earnings of an affiliate, net of
distributions received). EBITDA data is presented because such data is used
by certain investors to determine the Company's ability to meet debt
service requirements and is used as part of the tests to determine the
Company's ability to incur debt and to make certain restricted payments.
The Company considers EBITDA to be an indicative measure of the Company's
operating performance due to the significance of the Company's long-lived
assets and because EBITDA can be used to measure the Company's ability to
service debt, fund capital expenditures and expand its business; however,
such information should not be considered as an alternative to net income,
operating profit, cash flows from operations, or any other operating or
liquidity performance measure prescribed by generally accepted accounting
principles. Cash expenditures for various long-term assets, interest
expense and income taxes have been, and will be, incurred which are not
reflected in the EBITDA presentations.
(6) Cash used in financing activities includes the transfer of asset sales
proceeds and operating cash to Hospitality for the required Hospitality
Notes redemptions and other Hospitality corporate uses.
(7) Cash interest expense reflects interest expense, as calculated under
generally accepted accounting principles, less amortization of deferred
financing costs.
(8) The ratio of earnings to fixed charges is computed by dividing net income
before taxes, interest expense and other fixed charges by total fixed
charges, including interest expense, amortization of debt issuance costs
and the portion of rent expense that is deemed to represent interest.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company was formed on October 8, 1993 in connection with Host
Marriott's pro rata distribution of Marriott International (the "Distribution"),
to hold the majority of Host Marriott's lodging properties not financed by
mortgage debt. The following analysis and the related consolidated financial
statements included herein are presented as if the Company were a separate
subsidiary of Host Marriott, as well as giving effect to the Merger (defined
below) for all periods presented. See Note 1 to the Consolidated Financial
Statements.
During the third quarter of 1997, the Company (or "Properties")
completed a consent solicitation with holders of the Properties Notes (defined
herein) 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 owned 17 full-service hotel properties, with
and into the Company (the "Merger"). The financial statements of the Company
present the consolidated financial position, results of operations and cash
flows of Properties and Acquisitions for all periods presented.
Revenues include house profit from the Company's hotel properties, net
gains (losses) on real estate 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 sales less property-level expenses excluding
depreciation, management fees, property taxes, ground and equipment rent,
insurance and certain other costs which are classified as operating costs and
expenses.
The Company's hotel operating costs and expenses are, to a great
extent, fixed. Therefore, the Company derives substantial operating leverage
from increases in revenue. This operating leverage is somewhat diluted, however,
by the impact of base management fees which are calculated as a percentage of
sales, variable lease payments and incentive management fees tied to operating
performance above certain established levels. 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. At these higher operating levels, the Company's and
managers' interests are very closely aligned, which helps to drive further
increases in profitability, but moderates operating leverage. The Company
expects that this trend will continue in 1998 as the upscale and luxury full-
service segments continue 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 upscale and luxury full-service segments of the
lodging industry. The Company expects this supply/demand imbalance in the
upscale and luxury 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.
12
<PAGE>
1997 COMPARED TO 1996
Revenues. The Company's 1997 revenues of $424 million represented a
$105 million, or 33%, increase from 1996 results. The Company's revenues were
impacted by several items, including:
. the addition of 21 full-service hotel properties
during 1997 and 1996;
. improved lodging results for comparable properties;
. the 1996 sale and leaseback of 18 of the Company's Residence
Inns;
. the 1996 sale of 17 of the Company's Courtyard properties; and
. the 1996 results including 53 weeks versus 52 weeks in 1997.
Hotel revenues increased $104 million, or 33%, to $417 million in
1997. The increase in hotel revenue for 1997 reflects the addition of 21 full-
service hotel properties in 1996 and 1997 ($89 million of revenue in 1997) and
overall improved lodging results partially offset by the sale of the Courtyard
properties in 1996.
Overall 1997 revenue and operating profit for nearly all of the
Company's full-service hotels were improved or comparable to 1996 results.
Improved results were driven by strong increases in REVPAR of nearly 12.8% for
comparable units. On a comparable basis, average room rates increased
approximately 11%, while average occupancy increased one and one half percentage
points. Management believes REVPAR will continue to grow through steady
increases in average room rates, combined with minor changes in occupancy rates.
However, there can be no assurance that REVPAR will continue to increase in the
future.
Operating Costs and Expenses. Operating costs and expenses consist of
depreciation, amortization, management fees, property taxes, ground and
equipment rent, insurance, lease payments and certain other costs. The
Company's operating costs and expenses for 1997 increased $55 million to $230
million, primarily reflecting the addition of 21 full-service properties in 1997
and 1996 as well as a full year of lease payments for the Company's Residence
Inns. As a percentage of hotel revenues, hotel operating costs and expenses
were 55% and 56% of hotel revenues in 1997 and 1996, respectively, which
reflects the operating leverage for the Company's full-service properties,
partially offset by the impact of a full year of Residence Inn lease payments.
Operating Profit. As a result of the changes in revenues and
operating costs and expenses discussed above, the Company's operating profit
increased $50 million to $194 million, or 46% of revenues, from $144 million, or
45% of revenues, in 1996. In nearly all markets, the Company's hotels recorded
improvements in comparable operating results. In particular, the Company's
hotels in the Mid-Atlantic and Pacific coast regions benefited from the upscale
full-service room supply and demand imbalance. Hotels in Denver and the New
York World Trade Center performed particularly well, along with properties in
San Francisco/Silicon Valley and in Southern California. The Company expects
1998 results to be strong in these markets and other gateway cities in which the
Company owns hotels. In 1997, the Company's suburban Atlanta properties (three
properties totaling 1,022 rooms) generally reported decreased results due to
higher activity in 1996 related to the Summer Olympics and the impact of the
additional supply added to the suburban areas. However, the Company's downtown
Atlanta hotel performed well and was only marginally impacted by the additional
supply.
Corporate Expenses. Corporate expenses remained unchanged at $15
million in 1997. As a percentage of revenues, corporate expenses decreased to
3.5% of revenues in 1997 from 4.7% of revenues in 1996.
Interest Expense. Interest expense increased $27 million to $128
million primarily due to $600 million in new senior notes issued in July 1997.
Net Income. The Company's net income increased $15 million to $47
million, or 11% of revenues, for 1997, compared to net income of $32 million, or
10% of revenues, for 1996. The increase is primarily due to the increase in
operating profit discussed above, partially offset by the increase in interest
expense.
13
<PAGE>
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
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.
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
revenues, hotel operating costs and expenses represented 56% of hotel revenues
in 1996 and 52% of hotel revenues in 1995, reflecting the shifting emphasis to
full-service hotels and the impact of the lease payments of the Residence Inn
properties.
Operating Profit. As a result of the changes in revenues and
operating costs and expenses discussed above, the Company's operating profit
increased $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. 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. The Company's Atlanta properties (1,469 rooms) also posted
outstanding results due, in part, to the 1996 Summer Olympics.
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
14
<PAGE>
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 change 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 extinguishment 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.
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 "Properties Notes"),
collectively, the "Properties Offering". The Properties 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.
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
"Acquisitions 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.
On July 10, 1997, the Company completed the Consent Solicitations with
holders of Properties Notes and Acquisition Notes to amend certain provisions of
their senior notes indentures. The Consent Solicitations facilitated the merger
of Acquisitions with and into Properties (the "Merger"). The amendments to the
indentures also 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,
15
<PAGE>
income taxes, depreciation and amortization and other non-cash items subsequent
to the Consent Solicitations over 220% of the Company's interest expense.
Concurrent with the Consent Solicitations and Merger, the Company
issued $600 million of 8 7/8% senior notes (the "New Properties Notes") at par
maturing in 2007 (the "Offering"). The Company received net proceeds from the
Offering of approximately $570 million, net of the costs of the Consent
Solicitation and the Offering, which will be used to fund future acquisitions
of, or the purchase of controlling interests in full-service hotels and other
lodging-related properties, which may include senior living communities, as well
as for general corporate purposes.
The Properties Notes, the Acquisition Notes and the New Properties
Notes (collectively, 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 indentures governing the Senior 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. Investment in subsidiaries of the Company
which did not guarantee the Senior Notes are currently limited to 15% of the sum
of parent and guarantor subsidiaries' assets plus the investment in non-
guarantor subsidiaries. The limitation increases to 20% effective July 10,
1998.
The Company paid dividends of approximately $54 million, $28 million
and $36 million in 1997, 1996 and 1995, respectively. Prior to the Properties
Offering, all of the Company's 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 purchased, or acquired controlling interests in, the 306-room
Ritz-Carlton, Marina del Rey for $57 million, the 404-room Norfolk Waterside
Marriott for $33 million, the 884-room Marriott Desert Spring Resort for $184
million, including $123 million in assumed debt, the 380-room Manhattan Beach
Radisson Plaza Hotel, which was converted to the Marriott brand, for $29 million
and the 300-room Coronado Island Marriott Resort (formerly the Le Meridien
Hotel) for $54 million. The Company also acquired a controlling interest in the
Chesapeake Hotels Limited Partnership ("CHLP"), the owner of six full-service
properties (2,994 rooms), along with $105 million in CHLP receivables from Host
Marriott for approximately $135 million. The Company already owned the non-
recourse second mortgages on the CHLP properties. The acquisition of a
controlling interest in CHLP includes the difference between the cash
transferred and Host Marriott's carried-over cost basis of the properties, net
of the related tax effect, which has been charged to additional paid-in capital.
Subsequent to year end the Company acquired a controlling interest in the 1,671-
room Atlanta Marriott Marquis for $239 million including the assumption of $164
million of mortgage debt. Additionally, the Company acquired a controlling
interest in the partnership that owns the 359-room Albany Marriott, the 350-room
San Diego Marriott Mission Valley and the 320-room Minneapolis Marriott
Southwest. During 1996, the Company purchased, or acquired controlling
interests in, nine full-service properties totaling 3,124 rooms for
approximately $292 million. The acquisition of the Salt Lake City Marriott in
1996 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
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minority interest in a joint venture controlled by Host Marriott
that owns two hotels in Mexico City, Mexico. The Company subsequently sold its
interest to Host Marriott for $20 million in the third quarter of 1996. During
1995, the Company acquired seven full-service properties totaling 3,133 rooms
for approximately $329 million (including $94 million of first mortgage
financing on two of the hotels).
The Company's capital expenditures in 1997, 1996 and 1995 (excluding
the acquisition of properties) totaled $73 million, $85 million and $72 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 $6 million, $24 million and $14 million in conversion costs for
the converted hotels in 1997, 1996 and 1995, respectively. The Company
anticipates spending approximately $75 million to $85 million in capital
expenditures for the renovation and refurbishment of the Company's existing
properties in 1998.
Asset Dispositions. The Company historically has sold, and may from
time to time in the future consider selling, certain of its real estate
properties at attractive prices when the proceeds could be redeployed into
investments with more favorable returns. The Company sold the Sheraton Elk
Grove Suites for $16 million in September 1997. 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 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.
Cash Flows. The Company's cash flow provided by operations in 1997,
1996 and 1995 totaled $178 million, $128 million and $112 million, respectively.
The Company's cash used in investing activities was $608 million in
1997 and $76 million in each of 1996 and 1995. The Company's cash used in
investing activities consists primarily of acquisitions of hotel properties,
capital expenditures for conversions, improvements and renewals and replacements
and the purchases of short-term marketable securities, partially offset by the
net proceeds of sales of certain assets previously discussed.
The Company's cash provided by financing activities was $529 million
and $77 million in 1997 and 1995, while cash used in financing activities was
$34 million in 1996. The Company's cash from financing activities consists
primarily of the issuance and repayment of debt as a result of the Offering, the
Properties Offering, the Acquisitions Offering and the Acquisitions Revolver,
dividends and contributed capital. In fiscal year 1995, the Company made draws
on the Acquisitions Revolver of $59 million to fund the acquisition of full-
service properties and made repayments of $226 million. The Acquisitions
Revolver was extinguished in 1995. In 1995, the Company transferred $151
million of cash to Hospitality, including $100 million 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 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
financing proceeds.
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The net proceeds from the Properties Offering, along with the net
proceeds from a $400 million concurrent offering by Host Marriott Travel Plazas,
Inc. ("HMTP"), were used to defease all of the remaining Hospitality Notes not
redeemed with the asset sales proceeds discussed above and to repay indebtedness
under the Line of Credit. In connection with the redemptions and defeasance of
the Hospitality Notes, the Company recognized an extraordinary loss in the
second quarter of 1995 of $14 million, net of taxes of $8 million, primarily
representing premiums of $11 million paid on the redemptions and the write-off
of deferred financing fees and discounts on the debt.
EBITDA
The Company believes that consolidated earnings before interest
expense, taxes, depreciation, amortization and other non-cash items (principally
non-cash writedowns of lodging properties and equity in earnings of an
affiliate, net of distribution received) ("EBITDA") is a meaningful measure of
its operating performance due to the significance of the Company's long-lived
assets (and the related depreciation thereon). EBITDA can be used to measure
the Company's ability to service debt, fund capital expenditures and expand its
business and is used in the senior notes indentures as part of the tests
determining the Company's ability to incur debt and to make certain restricted
payments. EBITDA information should not be considered as an alternative to net
income, operating profit, cash flows from operations, or any other operating or
liquidity performance measure prescribed by generally accepted accounting
principles.
EBITDA increased $65 million to $291 million in 1997 from $226 million
in 1996. Hotel EBITDA increased $63 million to $268 million for 1997. The
increase in hotel EBITDA is due to the increase in comparable full-service
EBITDA of 16% and the addition of 21 full-service hotels in 1997 and 1996
partially offset by the sale of limited-service properties in 1996. Full-
service hotel EBITDA increased $73 million, or 38%, to $264 million for 1997.
The Company's ratio of EBITDA to cash interest expense (defined as
GAAP interest expense less amortization of deferred financing costs) was 2.4 to
1.0, 2.3 to 1.0 and 2.6 to 1.0 in 1997, 1996 and 1995, respectively. The
ratio of earnings to fixed charges was 1.6 to 1.0, 1.5 to 1.0 and 1.5 to 1.0 in
1997, 1996 and 1995, respectively.
The following is a reconciliation of EBITDA to net income (in
millions):
<TABLE>
<CAPTION>
Fifty-two Weeks Ended Fifty-three Weeks Ended
January 2, 1998 January 3, 1997
---------------------- ------------------------
<S> <C> <C>
EBITDA $ 291 $ 226
Interest expense........................... (128) (101)
Depreciation and amortization.............. (80) (64)
Income taxes applicable to operations...... (31) (22)
Gain (loss) on dispositions of assets and
other non-cash charges, net...... (5) (7)
----- -----
Net income..................... $ 47 $ 32
===== =====
</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. 131 "Disclosures About Segments of an
Enterprise and Related Information", and SFAS No. 129 "Disclosure of Information
About Capital Structure. The adoption of these statements did not have a
material effect on the Company's consolidated financial statements.
18
<PAGE>
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Company is assessing the impact of EITF 97-2 on its policy of
excluding the property-level revenues and operating expenses of its hotels from
its statements of operations. If the Company concludes that EITF 97-2 should be
applied to its hotels, it would include operating results of those managed
operations in its financial statements. Application of EITF 97-2 to financial
statements as of and for the 52 weeks ended January 2, 1998, would have
increased both revenues and operating expenses by approximately $692 million and
would have had no impact on operating profit or net income.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The following financial information is included on the pages
indicated:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants 21
Consolidated Balance Sheets at January 2, 1998 and January 3, 1997............. 22
Consolidated Statements of Operations for Fiscal Years Ended January 2, 1998,
January 3, 1997 and December 29, 1995......................................... 23
Consolidated Statements of Shareholder's Equity for Fiscal Years
Ended January 2, 1998, January 3, 1997 and December 29, 1995................. 24
Consolidated Statements of Cash Flows for Fiscal Years Ended January 2, 1998,
January 3, 1997 and December 29, 1995......................................... 25
Notes to Consolidated Financial Statements..................................... 26
</TABLE>
20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To HMH Properties, Inc.:
We have audited the accompanying consolidated balance sheets of HMH
Properties, Inc. and subsidiaries as of January 2, 1998 and January 3, 1997, and
the related consolidated statements of operations, shareholder's equity and cash
flows for each of the three fiscal years in the period ended January 2, 1998.
These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of HMH
Properties, Inc. and subsidiaries as of January 2, 1998 and January 3, 1997 and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended January 2, 1998, in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in the index
at Item 14(a)(2) (Schedule III Real Estate and Accumulated Depreciation) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
February 27, 1998
21
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 2, 1998 AND JANUARY 3, 1997
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
ASSETS ------ ------
<S> <C> <C>
Property and equipment, net................. $1,960 $1,473
Note receivable from affiliate.............. -- 140
Due from hotel managers..................... 31 35
Investment in affiliate..................... 18 17
Other assets................................ 92 66
Short-term marketable securities............ 191 --
Cash and cash equivalents................... 240 141
------ ------
$2,532 $1,872
====== ======
<CAPTION>
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
Senior Notes................................ $1,550 $ 950
Notes secured by real estate assets......... 219 98
Other notes 34 34
------ ------
Total debt............................... 1,803 1,082
Deferred income taxes....................... 111 87
Other liabilities........................... 100 77
------ ------
Total liabilities........................ 2,014 1,246
------ ------
Shareholder's equity
Common stock, 100 shares authorized,
issued and outstanding, no par value...... -- --
Additional paid-in capital................. 525 626
Accumulated deficit........................ (7) --
------ ------
Total shareholder's equity............... 518 626
------ ------
$2,532 $1,872
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND
DECEMBER 29, 1995
(IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
REVENUES
Hotels................................................ $ 417 $ 313 $ 261
Net gains (losses) on property transactions........... 1 1 (10)
Equity in earnings of affiliate....................... 6 5 4
------ ------ ------
424 319 255
----- ----- -----
OPERATING COSTS AND EXPENSES
Depreciation and amortization......................... 80 64 62
Base and incentive management fees
(including Marriott International
management fees of $65 million, $45
million and $38 million in 1997, 1996
and 1995, respectively).............................. 72 49 38
Property taxes........................................ 30 25 21
Ground rent, lease payments, insurance
and other............................................ 48 37 17
----- ----- -----
230 175 138
----- ----- -----
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST.......................................... 194 144 117
Corporate expenses.............................................. (15) (15) (14)
Interest expense................................................ (128) (101) (77)
Interest income................................................. 27 26 17
----- ----- -----
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM............... 78 54 43
Provision for income taxes...................................... (31) (22) (17)
----- ----- -----
INCOME BEFORE EXTRAORDINARY ITEM................................ 47 32 26
Extraordinary item - loss on extinguishment of
debt (net of income taxes of $9 million)....................... -- -- (17)
----- ----- -----
NET INCOME...................................................... $ 47 $ 32 $ 9
===== ===== =====
</TABLE>
See Notes to Consolidated Financial Statements.
23
<PAGE>
<TABLE>
<CAPTION>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND
DECEMBER 29, 1995
(IN MILLIONS)
Additional Accumulated
Common Paid-In Earnings Distributions to
Stock Capital (Deficit) Hospitality, net
------- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance, December 30, 1994................................ $-- $1,133 $ 23 $ (304)
Net income.............................................. -- -- 9 --
Cash transfers to Hospitality........................... -- -- -- (151)
Non-cash transfers to Hospitality....................... -- -- -- (71)
Capital contributions................................... -- 4 -- --
Capitalized distributions pursuant
to the Hospitality Offering........................... -- (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................................ -- 24 -- --
Purchase of general partner interest in
a full-service property (Note 8)....................... -- (9) -- --
------- ---------- ----------- ---------
Balance, January 3, 1997.................................. -- 626 -- --
Net income.............................................. -- -- 47 --
Dividends to Host Marriott and affiliates............... -- -- (54) --
Purchase of controlling interests in two
limited partnerships (Note 8).......................... -- (101) -- --
------- ---------- ----------- ---------
Balance, January 2, 1998.................................. $ -- $ 525 $ (7) $ --
======= ========== =========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
24
<PAGE>
<TABLE>
<CAPTION>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997
AND DECEMBER 29, 1995
(IN MILLIONS)
1997 1996 1995
----- ----- ------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................................... $ 47 $ 32 $ 9
Extraordinary loss on.............................................. -- -- 17
extinguishment of debt, net of
taxes
Adjustments to reconcile to cash from operations:
Depreciation and amortization..................................... 80 64 62
Income taxes...................................................... 31 21 16
Net realizable value writedown................................... -- -- 10
Other............................................................ 4 7 3
Changes in operating accounts:
Other assets..................................................... 7 (1) (4)
Other liabilities................................................ 9 5 (1)
----- ----- -----
Cash provided by operations...................................... 178 128 112
----- ----- -----
INVESTING ACTIVITIES
Proceeds from sales of assets...................................... 16 369 340
Less non-cash proceeds............................................. -- (34) (33)
----- ----- -----
Cash received from sales of assets............................... 16 335 307
Capital expenditures............................................ (73) (85) (72)
Acquisitions....................................................... (376) (307) (331)
Purchases of short-term marketable securities...................... (191) -- --
Other.............................................................. 16 (19) 20
----- ----- -----
Cash used in investing activities................................ (608) (76) (76)
----- ----- -----
FINANCING ACTIVITIES
Repayment of debt.................................................. (3) (4) (815)
Issuances of debt.................................................. 569 -- 1,076
Contributed capital, including advances from affiliates............ -- -- 3
Transfers to Hospitality, net...................................... -- -- (151)
Dividends to Host Marriott and affiliates.......................... (54) (28) (36)
Other.............................................................. 17 (2) --
----- ----- -----
Cash provided by (used in) financing activities.................. 529 (34) 77
----- ----- -----
INCREASE IN CASH AND CASH EQUIVALENTS............................... 99 18 113
CASH AND CASH EQUIVALENTS, beginning of year........................ 141 123 10
----- ----- -----
CASH AND CASH EQUIVALENTS, end of year.............................. $ 240 $ 141 $ 123
===== ===== =====
Non-cash Financing Activities
Assumption of mortgage debt for the acquisition of, or purchase
of controlling interests in, certain hotel properties.............. $ 123 $ -- $ 95
===== ===== ======
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
HMH Properties, Inc. (the "Company" or "Properties") was formed on
October 8, 1993 in connection with Host Marriott Corporation's ("Host Marriott")
pro rata distribution of Marriott International, Inc. ("Marriott International")
(the "Distribution") to hold the majority of Host Marriott's lodging properties
not financed by mortgage debt. The consolidated financial statements are
presented as if the Company were a separate subsidiary of Host Marriott as well
as giving effect to the Merger (defined below) for all periods presented. As of
January 2, 1998, the Company owned, or had controlling interests in, 58 lodging
properties generally located throughout the United States and operated primarily
under the Marriott or Ritz-Carlton brands most of which are managed by Marriott
International. The Company's hotel properties represent quality assets in the
luxury and upscale full-service segments of the lodging industry.
During the third quarter of 1997, the Company completed a consent
solicitation with holders of the Properties Notes (defined herein) 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 owned 17 full-service hotel properties, with and into the Company (the
"Merger"). The financial statements of the Company present the consolidated
financial position, results of operations and cash flows of Properties and
Acquisitions for all periods presented.
The Company is a direct wholly-owned subsidiary of Host Marriott
Hospitality, Inc. ("Hospitality") which is a direct wholly-owned subsidiary of
Host Marriott. All material intercompany transactions and balances between the
Company and its subsidiaries have been eliminated. Net transfers subsequent to
the Distribution between the Company and Hospitality are included in the
statement of shareholder's equity. Such amounts are reflected as a component of
equity because the balance accumulated through the date of consummation of the
Properties Offering (defined herein) 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>
<CAPTION>
<S> <C>
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 the
period from December 31, 1994 through May 25, 1995 was $461 million.
The Company operates as a unit of Host Marriott and Hospitality,
utilizing Host Marriott's employees, insurance and administrative services.
Through May 25, 1995, the Company also utilized Host Marriott's centralized
systems for cash management and substantially all cash received by the Company
was deposited in and commingled with Host Marriott's and Hospitality's general
corporate funds. Subsequent to May 25, 1995, the Company has maintained
separate cash accounts. The Company has no employees. Certain operating
expenses, capital expenditures and other cash
26
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
requirements of the Company are paid by Host Marriott and Hospitality and
charged directly or allocated to the Company. Certain general and administrative
costs of Host Marriott are allocated to Hospitality and, in turn, to the
Company, using a variety of methods, principally including Host Marriott's
specific identification of individual cost items and otherwise through
allocations 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
allocation by Host Marriott of general and administrative costs on a forward-
looking basis.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries and controlled affiliates. Investments in 50% or
less owned affiliates over which the Company has the ability to exercise
significant influence, but does not control, are accounted for using the equity
method. All material intercompany transactions and balances have been
eliminated.
Fiscal Year
The Company's fiscal year ends on the Friday nearest to December 31.
Full year results for 1996 include 53 weeks versus 52 weeks for fiscal years
1997 and 1995.
Revenues and Expenses
Revenues include house profit from the Company's hotel properties
because the Company has delegated substantially all of the operating decisions
related to the generation of house profit from its hotels to the manager.
Revenues also include 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 and amortization, management
fees, property taxes, ground and equipment rent, insurance and lease payments,
which are classified as operating costs and expenses.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Company is assessing the impact of EITF 97-2 on its policy of
excluding the property-level revenues and operating expenses of its hotels from
its statements of operations (see Note 13). If the Company concludes that EITF
97-2 should be applied to its hotels, it would include operating results of
those managed operations in its financial statements. Application of EITF 97-2
to financial statements as of and for the 52 weeks ended January 2, 1998, would
have increased both revenues and operating expenses by approximately $692
million and would have had no impact on operating profit or net income.
27
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment is recorded at cost. For newly developed
properties, cost includes interest, rent and real estate taxes incurred during
development and construction. Replacements and improvements are capitalized.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, generally 40 years for buildings and three
to 10 years for furniture and equipment. Leasehold improvements are amortized
over the shorter of the lease term or the useful lives of the related
improvements.
Gains on sales of properties are recognized at the time of sale or
deferred to the extent required by generally accepted accounting principles.
Deferred gains are recognized as income in subsequent periods as conditions
requiring deferral are satisfied or expire.
In cases where management is holding for sale particular lodging
properties, the Company assesses impairment based on whether the estimated sales
price less costs of disposal of each individual property to be sold is less than
its net book value. A lodging property is considered to be held for sale when
the Company has made the decision to dispose of the property. Otherwise, the
Company assesses impairment of its real estate properties based on whether the
estimated net undiscounted future cash flows from each individual property
(excluding debt service) will be less than its net book value. If a property is
impaired, its basis is adjusted to its fair market value less cost to sell.
Deferred Charges
Deferred financing costs related to long-term debt are deferred and
amortized over the remaining life of the debt.
Cash, Cash Equivalents and Short-Term Marketable Securities
The Company considers all highly liquid investments with a maturity of
90 days or less at the date of purchase to be cash equivalents. Cash and cash
equivalents includes approximately $15 million and $3 million as of January 2,
1998 and January 3, 1997, respectively, of cash related to certain consolidated
partnerships, the use of which is restricted generally to partnership purposes
to the extent it is not distributed to the partners. Short-term marketable
securities include investments with a maturity of 91 days to one year at the
date of purchase. The Company's short-term marketable securities represent
investments in U.S. government agency notes and high quality commercial paper.
The short-term marketable securities are categorized as available for sale and
as a result are stated at fair market value. Unrealized holding gains and
losses are included as a separate component of shareholders' equity until
realized.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash, cash
equivalents and short-term marketable securities. The Company maintains cash
and cash equivalents and short-term marketable securities with high credit-
quality financial institutions. The Company performs periodic evaluations of
the relative credit standing of these financial institutions and limits the
amount of credit exposure with any institution.
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
28
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Statements of Financial Accounting Standards
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" and SFAS No. 129, "Disclosure of Information
About Capital Structure." The adoption of these statements did not have a
material effect on the Company's consolidated financial statements and the
appropriate disclosure required by these statements have been incorporated
herein. The Company will adopt SFAS No. 130, "Reporting Comprehensive Income,"
in 1998 and does not expect it to have a material effect on the Company's
consolidated financial statements.
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 Asses to be Disposed Of" in 1995. The adoption
of these statements did not have a material effect on the Company's
consolidated financial statements.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in millions):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Land and land improvements $ 220 $ 171
Building and leasehold improvements 1,773 1,315
Furniture and equipment 264 180
Construction in progress 18 47
------ ------
2,275 1,713
Less accumulated depreciation
and amortization (315) (240)
------ ------
$1,960 $1,473
====== ======
</TABLE>
Interest cost capitalized in connection with the Company's development
and construction activities totaled $1 million in 1996 and $2 million in 1995.
No interest was capitalized during 1997.
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. NOTE RECEIVABLE 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. On September 10, 1997, Host Marriott successfully
completed the purchase of all of the partnership units in Chesapeake Hotel
Limited Partnership ("CHLP"). The Company acquired a controlling interest along
with $105 million in CHLP receivables, from Host Marriott on October 10, 1997
for $135 million and consolidated CHLP in the fourth quarter.
29
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. 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 $6 million, $5 million and $4
million for 1997, 1996 and 1995, respectively.
5. INCOME TAXES
Total deferred tax assets and liabilities at January 2, 1998 and
January 3, 1997 were as follows:
<TABLE>
<CAPTION>
1997 1996
------- ------
(in millions)
<S> <C> <C>
Gross deferred tax assets.......... $ 30 $ 18
Gross deferred tax liabilities..... (141) (105)
----- -----
Net deferred income tax liability.. $(111) (87)
===== =====
</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 2, 1998 and January 3, 1997 were as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(in millions)
<S> <C> <C>
Tax credit carryforwards........... $ 10 $ 9
Reserves........................... 14 6
Affiliate notes receivable......... (41) (43)
Property and equipment............. (100) (62)
Investment affiliate............... 6 3
----- ----
$(111) $(87)
===== ====
</TABLE>
At January 2, 1998, the Company had approximately $10 million of
alternative minimum tax credit carryforwards which do not expire.
The provision (benefit) for income taxes consists of (in millions):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Current
-Federal......................... $ 14 $ 19 $ 15
-Foreign......................... 2 -- --
-State........................... 4 4 3
----- ----- -----
20 23 18
Deferred
-Federal......................... 9 (1) (1)
-State........................... 2 -- --
----- ----- -----
11 (1) (1)
----- ----- -----
$ 31 $ 22 $ 17
===== ===== =====
</TABLE>
30
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the statutory Federal tax rate to the Company's effective
income tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Statutory Federal tax rate.................................. 35.0% 35.0% 35.0%
State income tax, net of Federal tax benefit................ 4.7 4.7 4.5
Other ...................................................... -- 1.0 --
----- ----- -----
39.7% 40.7% 39.5%
===== ===== =====
</TABLE>
The Company is included in the consolidated Federal income tax return
of Host Marriott and its affiliates (the "Group"). Tax expense allocated to the
Company, as a member of the Group, is based upon the Company's relative
contribution to the Group's consolidated taxable income/loss and changes in
temporary differences. This allocation method results in Federal tax expense
allocated to the Company for all periods presented substantially equal to the
expense that would be recognized if the Company and its subsidiaries filed a
separate return. On a separate return basis, net state income tax expense would
have been substantially equal to the expense reported for the fiscal years ended
January 2, 1998 and January 3, 1997, and would have been approximately $1
million higher for the fiscal year ended December 29, 1995.
The Company reimburses Host Marriott for its allocable share of
current taxes payable. At January 2, 1998, $9 million was payable to Host
Marriott. For Federal income tax purposes, the Company is a member of the
affiliated group of Host Marriott and its subsidiaries. The Company's share of
the affiliated group's tax liability is limited to the lesser of the liability
computed as if the Company was in a separate affiliated group, or its allocable
portion of the affiliated group's tax liability. Cash paid to Host Marriott for
income taxes was $44 million, $1 million and $1 million in 1997, 1996 and 1995,
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>
1998............................. $ 31
1999............................. 30
2000............................. 29
2001............................. 27
2002............................. 26
Thereafter........................ 258
----
Total minimum lease payments.. $401
====
</TABLE>
31
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rent expense consists of (in millions):
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Minimum rentals on operating leases....................... $ 27 $ 20 $ 8
Additional rentals based on sales 10 7 4
----- ----- -----
$ 37 $ 27 $ 12
===== ===== =====
7. DEBT
Debt consists of the following at January 2, 1998 and
January 3, 1997 (in millions):
1998 1997
------ -----
Properties Notes, 9.5%, maturing May 15, 2005............. $ 600 $ 600
Acquisition Notes, 9.0% maturing December 2007............ 350 350
New Properties Notes, 8.875% maturing December 2007....... 600 --
------ ------
Total Senior Notes....................................... 1,550 950
------ ------
Notes secured by $403 million of real estate assets,
with an average rate of 7.9% at January 2, 1998,
maturing through 2002.................................... 219 98
Other notes with an average rate of 7.1%
at January 2, 1998, maturing through 2014................ 34 34
------ ------
$1,803 $1,082
====== ======
</TABLE>
In May 1995, the Company issued $600 million of senior secured notes
at 9.5% (the "Properties Notes"), collectively the "Properties Offering".
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 the senior notes
of Hospitality 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 senior notes.
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.
On July 10, 1997, Properties and Acquisitions completed the Consent
Solicitations with the holders of Properties Notes and Acquisition Notes to
amend certain provisions of their senior note indentures. The Consent
Solicitations facilitated the merger of Acquisitions with and into Properties.
The amendments to the indentures also 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,
32
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
income taxes, depreciation and amortization and other non-cash items subsequent
to the Consent Solicitations over 220% of the Company's interest expense.
Concurrent with the Consent Solicitations and Merger, the Company
issued $600 million of 8 7/8% senior notes ( the "New Properties Notes") at par
maturing in December 2007 (the "Offering"). The Company received net proceeds
from the Offering of approximately $570 million, net of the costs of the Consent
Solicitation and the Offering.
The Properties Notes, the Acquisitions Notes and the New Properties
Notes (collectively, 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 indentures governing the Senior 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. 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 assets in which the
proceeds are not reinvested in other hotel properties within a specified period
of time. Investments in subsidiaries of the Company which do not guarantee the
Senior Notes are currently limited to 15% of the sum of parent and guarantor
subsidiaries' assets plus the investment in non-guarantor subsidiaries. The
limitation increases to 20% effective July 10, 1998.
The Company paid dividends of approximately $54 million, $28 million
and $36 million in 1997, 1996 and 1995, respectively. Prior to the Properties
Offering, all of the Company's 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.
In December 1997, the Company acquired control of the partnership that
owns the Marriott Desert Springs Resort. The hotel's third party mortgage debt
consists of a $103 million senior loan and a $20 million mezzanine loan carrying
fixed interest rates of 7.8% and 10.365%, respectively.
Aggregate debt maturities at January 2, 1998 are as follows (in
millions):
<TABLE>
<CAPTION>
<S> <C>
1998.................. $ 4
1999.................. 4
2000.................. 4
2001.................. 4
2002.................. 95
Thereafter............ 1,692
------
$1,803
======
</TABLE>
Cash paid for interest, net of amounts capitalized, was $124 million
in 1997, $99 million in 1996 and $77 million in 1995. Deferred financing costs,
which are included in other assets, amounted to $56 million and $26 million at
January 2, 1998 and January 3, 1997, respectively. Amortization expense related
to deferred financing costs totaled $4 million in each of 1997 and 1996 and $1
million in 1995.
33
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. ACQUISITIONS AND DISPOSITIONS
In 1997, the Company acquired the 306-room Ritz-Carlton, Marina del
Rey for $57 million and controlling interests in the 404-room Norfolk Waterside
Marriott for $33 million, the 884-room Marriott Desert Springs Resort for $184
million including the assumption of $123 million in mortgage debt, the 380-room
Manhattan Beach Marriott Hotel (formerly the Manhattan Beach Radisson Plaza
Hotel), which was converted to the Marriott brand, for $29 million and the 300-
room Coronado Island Marriott Resort (formerly the Le Meridien Hotel) for $54
million. The Company also acquired a controlling interest in the Chesapeake
Hotels Limited Partnership ("CHLP"), the owner of six full-service properties
(2,994 rooms), along with $105 million in CHLP receivables from Host Marriott
for approximately $135 million. The Company already owned the non-recourse
second mortgages on the CHLP properties. The acquisition of a controlling
interest in CHLP includes the difference between the cash transferred and Host
Marriott's carried-over cost basis of the investment, net of the related tax
effect, which has been charged to additional paid-in capital. Subsequent to
year end, the Company acquired a controlling interest in the partnership that
owns the 1,671-room Atlanta Marriott Marquis for $239 million, including the
assumption of $164 million of mortgage debt.
During 1996, the Company added nine full-service hotel 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, and the acquisition, through foreclosure, of a controlling interest in
the 250-room Newport Beach Marriott Suites. The Company also completed
construction and opened the Pentagon City Residence Inn in April 1996. The
Company added seven full-service hotels in 1995 totaling 1,133 rooms in separate
transactions for approximately $329 million.
In September 1997, the Company sold the Sheraton Elk Grove Suites for
$16 million, which approximated its carrying amount. During the first and
second quarters of 1996, the Company sold and leased back to the REIT 16 of its
Courtyard properties and 18 of its Residence Inn properties for $349 million
(10% of which was deferred). Host Marriott purchased the Company's rights to
the deferred proceeds and obligations under the lease for the 16 Courtyard
properties at their fair market value. The Company's rights to the deferred
proceeds and obligations under the lease for the 18 Residence Inns remain with
the Company. The Company recorded a $14 million deferred gain in 1996 and is
amortizing the gain over the initial term of the lease.
During the first and third quarters of 1995, the Company sold and
leased back to the REIT 37 of its Courtyard properties for $330 million. Ten
percent of the sales amount of these transactions was deferred. The Company
transferred its rights to the deferred proceeds and obligations under the lease
to a designated subsidiary of Hospitality in connection with the 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.
34
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized unaudited pro forma results of operations, assuming the
above transactions (excluding the acquisitions subsequent to year-end) and the
offerings and debt activity discussed in Note 7 occurred on December 30, 1995,
are as follows (in millions):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Revenue................................................ $ 505 $ 444
Operating profit before corporate expenses and interest 236 206
Net income 41 15
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of certain financial instruments are
shown below (in millions):
January 2, 1998 January 3, 1997
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
Financial assets
Short-term marketable securities.......................... $ 191 $ 191 $ -- $ --
Note receivable from affiliate............................ -- -- 140 150
Financial liabilities
Senior Notes.............................................. 1,550 1,649 950 981
Notes secured by real estate assets....................... 219 218 98 95
Other notes............................................... 34 34 34 34
</TABLE>
The fair market value of marketable securities is estimated based on
quoted market prices, when available. If a quoted price is not available, fair
value is estimated using quoted market process for similar instruments.
Receivables from affiliates, and other financial assets are valued based on the
expected future cash flows discounted at risk-adjusted rates. The senior notes
are valued based on quoted market prices. Valuations for secured and other
unsecured debt are determined based on the expected future payments discounted
at risk-adjusted rates. The fair values of other assets and other liabilities
are estimated to be equal to their carrying value.
10. RELATIONSHIP BETWEEN THE COMPANY AND MARRIOTT INTERNATIONAL
In connection with the Distribution and thereafter, Host Marriott and
Marriott International entered into agreements which provide, among other
things, that (i) 48 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) Marriott International will guarantee Host
Marriott's performance in connection with certain loans and other obligations
and (iii) eight of the Company's full-service properties are operated under
franchise agreements with Marriott International.
For 1997, 1996 and 1995, the Company paid to Marriott International
$65 million, $45 million and $38 million, respectively, in lodging management
fees. Franchise fees paid to Marriott International for 1997 and 1996 were $4
million and $2 million, respectively. Franchise fees were not material in 1995.
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 additional funding for the hotel, repayment
35
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of which is contingent on the future earnings of the hotel, which has been
included in other liabilities. The balance was $8 million and $9 million as of
January 2, 1998 and January 3, 1997, respectively.
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 majority of its 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 20% 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, or 20% of
current year operating profit. 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 canceled
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. Similar services
and expenses are incurred and allocated at foreign hotels. In addition, the
hotels also participate in the Marriott Rewards program. The costs of these
programs are charged to all hotels in the respective hotel system.
The Company is obligated to provide the manager with sufficient funds
to cover the cost of (a) certain non-routine repairs and maintenance to the
hotels which are normally capitalized; and (b) replacements and renewals to the
hotels' property and improvements. Under certain circumstances, the Company will
be required to establish escrow accounts for such purposes under terms outlined
in the Agreements.
Pursuant to the terms of the Agreements, the Company is required to
provide Marriott International with funding for working capital to meet the
operating needs of the hotels. Marriott International converts cash advanced by
the Company into other forms of working capital consisting primarily of
operating cash, inventories and trade receivables. Under the terms of the
Agreements, Marriott International maintains possession of and sole control over
the components of working capital and accordingly, the Company reports the total
amounts so advanced to Marriott International as a component of other assets.
Upon termination of the Agreements, the working capital will be returned to the
Company.
At January 2, 1998 and January 3, 1997, $34 million and $35 million,
respectively, have been advanced to the hotel managers for working capital and
are included in due from hotel managers in the accompanying balance sheet.
Franchise Agreements
The Company has entered into franchise agreements with Marriott
International for eight hotels. Pursuant to these franchise agreements, the
Company generally pays a franchise fee based on a percentage of room sales and
food and
36
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Two other hotels are subject to franchise agreements with brands other
than Marriott. The original 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 for 1997 and 1996 and $430,000 for 1995.
The Company has entered into management agreements with The Ritz-
Carlton Hotel Company, LLC ("Ritz-Carlton"), an affiliate of Marriott
International, to manage two of the Company's hotels. These agreements have an
initial term of 15 to 25 years with renewal terms at the option of Ritz-Carlton
of up to an additional 10 to 40 years. Base management fees vary from two to
four percent of sales and incentive management fees are generally equal to 20%
of available cash flow or operating profit, as defined in the agreements.
The Company has also entered into management agreements with hotel
management companies other than Marriott International for ten of its hotels
(eight of which are franchised under the Marriott brand). These agreements
generally provide for an initial term of 10 to 20 years with renewal terms at
the option of either party of up to an additional 1 to 40 years. The agreements
generally provide for payment of base management fees equal to one to three
percent of sales. Three of the ten twelve agreements also provide for incentive
management fees generally equal to 15 to 20 percent of available cash flow, as
defined in the agreements.
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.
37
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. HOTEL OPERATIONS
As discussed in Note 1, 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,
property taxes, ground and equipment rent, insurance and certain other costs,
which are classified as operating costs and expenses. Accordingly, the following
table presents the Company's house profit for 1997, 1996 and 1995 (in millions):
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Sales
Rooms....................................... $ 742 $581 $ 491
Food and beverage........................... 301 227 177
Other....................................... 66 57 41
----- ---- -----
Total hotel sales......................... 1,109 865 709
----- ---- -----
Department costs
Rooms....................................... 175 139 116
Food and beverage........................... 236 180 137
Other....................................... 29 29 21
----- ---- -----
Total department costs.................... 440 348 274
----- ---- -----
Department profit............................ 669 517 435
Other deductions............................. 252 204 174
----- ---- -----
House profit.............................. $ 417 $313 $ 261
===== ==== =====
</TABLE>
14. GEOGRAPHIC AND BUSINESS SEGMENT INFORMATION
The Company operates in one business segment in the lodging industry:
hotels. The Company's hotels are primarily operated under the Marriott or Ritz-
Carlton brands and average 430 rooms, as well as supply other amenities such as
meeting space and banquet facilities, a variety of restaurants and lounges, gift
shops and parking facilities. The hotels are typically located in downtown,
airports, suburban and resort areas throughout the United States. The Company
evaluates the performance of its segment based primarily on operating profit
before depreciation, corporate expenses and interest expense. Company income
taxes are included in the consolidated Federal income tax return of Host
Marriott and its affiliates and are allocated based upon the relative
contribution to Host Marriott's consolidated taxable income/loss and changes in
temporary differences. The allocation of taxes is not evaluated at the segment
level and, therefore, the Company does not believe the information material to
the reader of these financial statements.
The Company's foreign operations consist of one full-service property
that had revenues of $5 million and $4 million, long-lived assets of $28 million
and $24 million in 1996 and 1997, respectively. There were no intercompany
sales between the property and the Company.
38
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents revenues and other financial
information by business segment (in millions):
1997
----
<TABLE>
<CAPTION>
Corporate
Hotels & Other Consolidated
---------- --------- -----------
<S> <C> <C> <C>
Revenues....................... $ 417 $ 7 $ 424
Operating profit............... 187 7 194
Interest expense............... (128) -- (128)
Interest income................ 27 -- 27
Depreciation and amortization.. (80) -- (80)
Capital expenditures........... 73 -- 73
Total assets................... 2,514 18 2,532
</TABLE>
1996
----
<TABLE>
<CAPTION>
Corporate
Hotels & Other Consolidated
---------- --------- -----------
<S> <C> <C> <C>
Revenues....................... $ 313 $ 6 $ 319
Operating profit............... 138 6 144
Interest expense............... (101) -- (101)
Interest income................ 26 -- 26
Depreciation and amortization.. (64) -- (64)
Capital expenditures........... 85 -- 85
Total assets................... 1,855 17 1,872
</TABLE>
1995
----
<TABLE>
<CAPTION>
Corporate
Hotels & Other Consolidated
---------- --------- -----------
<S> <C> <C> <C>
Revenues....................... $ 261 $(6) $ 255
Operating profit............... 123 (6) 117
Interest expense............... (77) -- (77)
Interest income................ 17 -- 17
Depreciation and amortization.. (62) -- (62)
Capital expenditures........... 72 -- 72
Total assets................... 1,794 16 1,810
</TABLE>
15. SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION
All but six 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, the Manhattan Beach Marriott, the Desert
Springs Marriott Resort, and HMH HPT Residence Inn, Inc., the lessee of the
Residence Inn properties. At
39
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 27, 1998, there is no subsidiary of the Company the capital stock of
which comprises a substantial portion of the collateral for the Senior Notes
within the meaning of Rule 3-10 of Regulation S-X.
The following condensed, consolidating financial information sets
forth the combined financial position as of January 2, 1998 and January 3, 1997
and results of operations and cash flows for the three fiscal years in the
period ended January 2, 1998 of the parent, Guarantor Subsidiaries and the Non-
Guarantor Subsidiaries:
40
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Balance Sheets
---------------------------------------------------
(in millions)
January 2, 1998
---------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
--------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Property and equipment, net..................... $ 987 $569 $404 $1,960
Investment in affiliate......................... 18 -- -- 18
Other assets................................... 67 18 38 123
Short-term marketable securities................ 191 -- -- 191
Cash and cash equivalents....................... 219 7 14 240
------ ---- ---- ------
Total assets.......................... $1,482 $594 $456 $2,532
====== ==== ==== ======
Debt............................................ $1,176 $429 $198 $1,803
Deferred income taxes........................... 39 47 25 111
Other liabilities............................... 23 54 23 100
------ ---- ---- ------
Total liabilities..................... 1,238 530 246 2,014
Owner's equity (deficit)........................ 244 64 210 518
------ ---- ---- ------
Total liabilities and owner's equity.. $1,482 $594 $456 $2,532
====== ==== ==== ======
</TABLE>
January 3, 1997
---------------
<TABLE>
<S> <C> <C> <C> <C>
Property and equipment, net..................... $ 895 $410 $168 $1,473
Investment in affiliate......................... 17 -- -- 17
Note 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............................................ $ 710 $297 $ 75 $1,082
Deferred income taxes........................... 27 57 3 87
Other liabilities............................... 19 36 22 77
------ ---- ---- ------
Total liabilities..................... 756 390 100 1,246
Owner's equity.................................. 346 188 92 626
------ ---- ---- ------
Total liabilities and owner's equity.. $1,102 $578 $192 $1,872
====== ==== ==== ======
</TABLE>
41
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statements of Operations
-------------------------------------------------------------
(in millions)
Fiscal Year Ended January 2, 1998
---------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
---------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES............................................. $239 $112 $73 $ 424
OPERATING COSTS AND EXPENSES......................... 124 54 52 230
---- ---- --- -----
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST............................. 115 58 21 194
Corporate expenses................................... (9) (3) (3) (15)
Interest expense..................................... (91) (31) (6) (128)
Interest income...................................... 19 8 -- 27
---- ---- --- -----
INCOME BEFORE INCOME TAXES........................... 34 32 12 78
Provision for income taxes........................... (13) (13) (5) (31)
---- ---- --- -----
NET INCOME........................................... $ 21 $ 19 $ 7 $ 47
==== ==== === =====
</TABLE>
Fiscal Year Ended January 3, 1997
---------------------------------
<TABLE>
<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...................................... (69) (27) (5) (101)
Interest income....................................... 23 3 -- 26
---- ---- --- -----
INCOME BEFORE INCOME TAXES............................. 37 15 2 54
Provision for income taxes............................. (15) (6) (1) (22)
---- ---- --- -----
NET INCOME............................................. $ 22 $ 9 $ 1 $ 32
==== ==== === =====
</TABLE>
Fiscal Year Ended December 29, 1995
-----------------------------------
<TABLE>
<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...................................... (55) (22) -- (77)
Interest income....................................... 4 13 -- 17
---- ---- --- -----
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM........................ 47 (4) -- 43
Provision for income taxes............................ (19) 2 -- (17)
---- ---- --- -----
INCOME BEFORE EXTRAORDINARY ITEM...................... 28 (2) -- 26
Extraordinary item -- loss on extinguishment of debt.. (17) -- -- (17)
---- ---- --- -----
NET INCOME............................................ $ 11 $ (2) $-- $ 9
==== ==== === =====
</TABLE>
42
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statements of Cash Flows
-------------------------------------------------------------
(in millions)
Fiscal Year Ended January 2, 1998
---------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
---------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS.................................. $ 106 $ 53 $ 19 $ 178
----- ----- ----- -----
INVESTING ACTIVITIES
Cash received from sales of assets............... -- 16 -- 16
Capital expenditures............................. (39) (24) (10) (73)
Acquisitions..................................... (115) (134) (127) (376)
Purchases of short-term marketable
securities...................................... (191) -- -- (191)
Other............................................ 13 3 -- 16
----- ----- ----- ------
Cash used in investing activities................ (332) (139) (137) (608)
----- ----- ----- -----
FINANCING ACTIVITIES
Repayment of debt................................ (2) (1) -- (3)
Issuances of debt................................ 435 134 -- 569
Dividends to Parent.............................. (54) -- -- (54)
Other financing.................................. -- -- 17 17
Transfers to/from Parent......................... (75) (40) 115 --
----- ----- ----- -----
Cash provided by financing activities............ 304 93 132 529
----- ----- ----- -----
INCREASE IN CASH AND CASH EQUIVALENTS........................ 78 7 14 99
CASH AND CASH EQUIVALENTS, beginning of year................. 141 -- -- 141
----- ----- ----- -----
CASH AND CASH EQUIVALENTS, end of year....................... $ 219 $ 7 $ 14 $ 240
===== ===== ===== =====
</TABLE>
Fiscal Year Ended January 3, 1997
---------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
---------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS.................................. $ 87 $ 29 $ 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)
Issuances of debt................................ (25) 25 -- --
Dividends to Parent.............................. (28) -- -- (28)
Transfers to/from Parent......................... (16) 1 15 --
Other............................................ (2) -- -- (2)
----- ---- ---- -----
Cash provided by (used in) financing activities.. (75) 26 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
===== ==== ==== =====
</TABLE>
43
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statements of Cash Flows
-------------------------------------------------------------
(in millions)
Fiscal Year Ended December 29, 1995
-----------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS................................. $ 98 $ 14 $ -- $ 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................................. 909 92 75 1,076
Contributed capital.............................. 3 -- -- 3
Transfers to Hospitality, net.................... (151) -- -- (151)
Transfer to/from Parent.......................... (57) (5) 62 --
Dividends to Parent.............................. (36) -- -- (36)
----- ----- ----- ------
Cash provided by (used in) financing activities.. (147) 87 137 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>
44
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
The Company's directors, executive officers and management are
employees of Host Marriott. Certain information required by Items 10-13 is
incorporated by reference from the Host Marriott 1997 Annual Meeting of
Shareholders -Notice and Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to the persons who
are executive officers of the Company.
<TABLE>
<CAPTION>
Other Positions and Business Experience Prior to
Name and Title Age Becoming an Executive Officer of the Company
- -------------- --- ----------------------------------------------------------------------------------------
<S> <C> <C>
Robert E. Parsons, Jr. 42 Robert E. Parsons, Jr. joined Host Marriott's Corporate Financial Planning staff in 1981
President and Director 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 50 Christopher G. Townsend joined Host Marriott's Law Department in 1982 as a Senior
Executive Vice Attorney. In 1984, Mr. Townsend was made Assistant Secretary of Host Marriott, and
President in 1986, he was made Assistant General Counsel. In 1993, Mr. Townsend was elected
and Director Senior Vice President, 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 35 Christopher J. Nassetta joined Host Marriott in October 1995 as Executive Vice Presi-
Executive Vice dent. Mr. Nassetta was elected Executive Vice President of the Company in 1995.
President 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 37 Bruce Wardinski joined Host Marriott in 1987 as Senior Financial Analyst of Financial
Vice President and Planning & Analysis and was named Manager in June 1988. He was appointed Host Marriott's
Treasurer 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.
Donald D. Olinger 39 Donald D. Olinger joined Host Marriott in 1993 as Director - Corporate Accounting.
Vice President and Later in 1993, Mr. Olinger was promoted to Senior Vice President and Director and
Corporate Controller of Host Corporate Controller Marriott. He was Assistant Controller of Host Corporate
Controller Marriott. He waspromoted to Vice President -Corporate Accounting in 1995. In
1996, he was elected Senior Vice President and Corporate Controller of Host Marriott.
Mr. Olinger was elected Vice President and Corporate Controller of the Company in 1996.
Prior to joining Host Marriott, Mr. Olinger was with the public accounting firm of
Deloitte & Touche.
</TABLE>
45
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The officers and directors of the Company are employees of Host
Marriott and are compensated by Host Marriott. The officers and directors are
required to devote to the Company such time as may be necessary for the proper
performance of their duties, but are not required to devote their full time to
the performance of such duties. No officer or director of the Company receives
any compensation from the Company.
Certain general and administrative costs of Host Marriott are
allocated to the Company; such allocations totaled $15 million in each of 1997
and 1996, and $14 million in 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company has 100 shares of common stock with no par value issued
and outstanding, all of which are held beneficially and of record by Host
Marriott Hospitality, Inc. No executive officer or director of the Company owns
any shares of the Company's common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company operates as a unit of Host Marriott and Host Marriott
Hospitality, Inc., utilizing Host Marriott's employees, insurance and
administrative services. Host Marriott contracts with Marriott International
for certain of these services. In addition, Host Marriott provides certain
corporate, general and administrative services to the Company.
The Company acquired a controlling interest in the Chesapeake Hotels
Limited Partnership ("CHLP") the owner of six full-service properties along with
$105 million in CHLP receivables from Host Marriott for approximately $135
million in October 1997. In December 1997, the Company purchased a controlling
interest in the partnership, in which Host Marriott was the general partner,
which owns the Marriott Desert Springs Resort for $184 million including assumed
mortgage debt of $123 million. Subsequent to year end, the Company acquired a
controlling interest in the partnership which owns the Atlanta Marriott Marquis
for $239 million including assumed mortgage debt of $164 million, in which Host
Marriott was also a general partner. Each of the purchases was transacted at
fair market value.
In 1996, the Company acquired Host Marriott's 20% general partner
interest in the Salt Lake City Hotel Partners, which owned the Salt Lake City
Marriott, for $10 million. Also during 1996, the Company sold, for $20 million,
a minority interest in a joint venture controlled by Host Marriott that owns two
hotels in Mexico City, Mexico to Host Marriott. Additionally, the Company sold
and leased back to a real estate investment trust 16 of its Courtyard properties
in 1996 for $176 million (10% of which was deferred). Host Marriott purchased
the Company's rights and obligations to the deferred proceeds and obligations
under the lease for the properties at their fair market value.
Additional information regarding certain relationships and related
transactions of the Company are incorporated by reference from the Host Marriott
1998 Annual Meeting of Shareholders - Notice and Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
All financial statements of the registrant as set forth under
Item 8 of this Report on Form 10-K.
46
<PAGE>
(2) FINANCIAL STATEMENT SCHEDULES
The following financial information is filed herewith on the
pages indicated.
Financial Schedule:
III. Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not
applicable or the required information is included in the
consolidated financial statements or notes thereto.
(3) EXHIBITS
EXHIBIT # DESCRIPTION
- --------- ---------------------------------------------------------------------
3.1 Certificate of Incorporation of the Company (incorporated by
reference to Registration Statement No. 33-95088).
3.2 Restated Bylaws of the Company (incorporated by reference to
Registration Statement No. 33-95058).
4.1 Indenture dated as of July 15, 1997, by and among the Company, HMC
Retirement Properties, Inc., Marriott Financial Services, Inc., HMH
Pentagon Corporation,. Marriott SBM Two Corporation, Host Airport
Hotels, Inc., HMH Rivers, Inc., HMH Marina, Inc., HMC SFO, Inc., HMC
AP Canada, Inc., Host of Houston, Ltd., Host of Boston, Ltd. and Host
of Houston 1979 as Subsidiary Guarantors, Marine Midland Bank, as
Trustee, Marine Midland Bank, as Paying Agent and Marine Midland
Bank, as Collateral Agent, with respect to the 8 7/8% Senior Notes
due 2007 of the Company. (Incorporated by reference to Registration
Statement No. 333-33723.)
4.2 Indenture dated as of May 25, 1995, as amended from time to time, by
and among the Company, HMC Retirement Properties, Inc., HMH Marina,
Inc., HMH Pentagon Corporation, HMH Rivers, Inc., Host Airport
Hotels, Inc., Marriott Financial Services, Inc., Marriott SBM Two
Corporation, Host of Boston, Ltd., Host of Houston, Ltd., Host of
Houston 1979, HMC AP Canada, Inc., HMC SFO, Inc., Marine Midland
Bank, as trustee, Marine Midland Bank, as Collateral Agent, and The
Bankers Trust Company, as Registrar and Paying Agent. (Incorporated
by reference to Registration Statement No. 333-33723.)
4.3 Indenture dated as of December 20, 1995, as amended from time to
time, by and among the Company, as a successor of HMC Acquisition
Properties, Inc., HMC Retirement Properties, Inc., HMH Marina, Inc.,
HMH Pentagon Corporation, HMH Rivers, Inc., Host Airport Hotels,
Inc., Marriott Financial Services, Inc., Marriott SBM Two
Corporation, Host of Boston, Ltd., Host of Houston, Ltd., Host of
Houston 1979, HMC AP Canada, Inc. HMC SFO, Inc., Marine Midland Bank,
as trustee, Marine Midland Bank, as Collateral Agent, and Marine
Midland Bank, as Registrar and Paying Agent. (Incorporated by
reference to Registration Statement No. 333-33723.)
10.4 Consolidation Letter Agreement pertaining to Residence Inns dated
September 25, 1993 between a subsidiary of Marriott International,
Inc. and a subsidiary of Host Marriott Hospitality, Inc.
(incorporated by reference from Registration Statement No. 33-
62444)Vice President and Treasurer
10.5 Corporate Services Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Registration Statement No. 33-62444)
10.7 Host Marriott Lodging Management Agreement--Marriott Hotels, Resorts
and Hotels dated September 25, 1993 by and between Marriott
Corporation and Marriott International, Inc. (incorporated by
reference from Registration Statement No. 33-62444)
10.8 Host Marriott Lodging Management Agreement--Residence Inns dated
September 25, 1993 by and between Marriott Corporation and Marriott
International, Inc. (incorporated by reference from Registration
Statement No. 33-62444)
10.11 Tax Administration Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference from Registration Statement No. 33-62444)
10.12 Tax Sharing Agreement dated as of October 5, 1993 by and between
Marriott Corporation and Marriott International, Inc. (incorporated
by reference from Registration Statement No. 33-62444)
12 Computation of ratio of earnings to fixed charges
21 Subsidiaries of HMH Properties, Inc.
(b) REPORTS ON FORM 8-K
October 27, 1997 - Report of the acquisition of a controlling
interest in the Chesapeake Hotels Limited Partnership.
December 5, 1997 - Amendment to Report Form 8-K filed October 27,
1997 to include pro forma financial statements of HMH Properties, Inc.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 25th day of March,
1998.
HMH PROPERTIES, INC.
By /s/ Robert E. Parsons, Jr.
--------------------------
Robert E. Parsons, Jr.
President and Director
Pursuant to the requirements of the Securities Act of 1934, this Form
10-K has been signed below by the following persons in the capacities and on the
dates indicated.
Signatures Title Date
---------- ----- ----
/s/ ROBERT E. PARSONS, JR. President and Director March 25, 1998
- -------------------------- (Principal Executive Officer)
Robert E. Parsons, Jr.
/s/ CHRISTOPHER G. TOWNSEND Executive Vice President March 25, 1998
- --------------------------- and Director
Christopher G. Townsend
/s/ CHRISTOPHER J. NASSETTA Executive Vice President March 25, 1998
- ---------------------------
Christopher J. Nassetta
/s/ BRUCE D. WARDINSKI Vice President and Treasurer March 25, 1998
- ---------------------- (Principal Financial Officer)
Bruce D. Wardinski
/s/ DONALD D. OLINGER Vice President and March 25, 1998
- --------------------- Corporate Controller
Donald D. Olinger (Principal Accounting Officer)
48
<PAGE>
SCHEDULE III
PAGE 1 OF 2
HMH PROPERTIES, INC. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
JANUARY 2,1998
(IN MILLIONS)
<TABLE>
<CAPTION>
Initial Costs Gross Amount at
---------------- January 2, 1998
Subsequent -----------------------------
Building and Costs Building and
Description Debt Land Improvements Capitalized Land Improvements Total
- ------------ ---- ------ ------------ ----------- ---- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Full-service Hotels:
Desert Springs Marriott Resort
Desert Springs, CA............... $123 $ 14 $ 143 $ -- $ 14 $ 143 $ 157
Marriott World Trade Center
New York, NY..................... 75 -- 135 2 -- 137 137
Other full-service properties,
each less than 5%
of total......................... 21 200 1,255 244 206 1,493 1,699
---- ---- ------ ---- ---- ------ ------
TOTAL.............................. $219 $214 $1,533 $246 $220 $1,773 $1,993
==== ===== ====== ==== ==== ====== ======
XXXXXXXXXXXXXXXXXXXXXOOOOOOOOOOOOOOOOOOOOOOOOXXXXXXXXXXXXXXXXXXXXXXXXOOOOOOOOOOOOOOOOOOOOOOOOXXXXXXXXXXXXXXXOOOOOOOOOO
Date of
Accumulated Completion of Date Depreciable
Description Depreciation Construction Acquired Life
----------- ------------- -------- -----------
<S> <C> <C> <C> <C>
Full-service Hotels:
Desert Springs Marriott Resort
Desert Springs, CA......................... $ 1 1987 1997 40
Marriott World Trade Center
New York, NY............................... 7 1982 1996 40
Other full-service properties,
each less than 5%
of total................................... 197 various various 40
----
TOTAL ........................................ $205
====
</TABLE>
<PAGE>
SCHEDULE III
PAGE 2 OF 2
HMH PROPERTIES, INC. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
JANUARY 2, 1998
(IN MILLIONS)
NOTES:
(A) The change in total cost of properties (excluding furniture and equipment)
for the fiscal years ended January 2, 1998, January 3, 1997 and December 29,
1995 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 30, 1994................. $1,503
Additions:
Acquisitions............................. 304
Capital expenditures..................... 15
Deductions:
Dispositions and other................... (366)
------
Balance at December 29, 1995................. 1,456
Additions:
Acquisitions............................. 259
Capital expenditures..................... 55
Transfers from construction in progress.. 28
Deductions:
Dispositions and other................... (312)
------
Balance at January 3, 1997................... 1,486
Additions:
Acquisitions............................. 479
Capital expenditures..................... 48
Deductions:
Dispositions and other................... (20)
------
Balance at January 2, 1998................... $1,993
======
</TABLE>
(B) The change in accumulated depreciation and amortization for properties
(excluding furniture and equipment) for the fiscal years ended January 2, 1998,
January 3, 1997 and December 29, 1995 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 30, 1994...... $153
Depreciation and amortization.. 35
Dispositions and other......... (27)
----
Balance at December 29, 1995...... 161
Depreciation and amortization.. 36
Dispositions and other (31)
----
Balance at January 3, 1997........ $166
Depreciation and amortization.. 45
Dispositions and other......... (6)
----
Balance at January 2, 1998........ $205
====
</TABLE>
(C) The aggregate cost of properties for Federal income tax purposes is
approximately $135 million at January 2, 1998.
(D) The total cost of properties excludes construction-in-progress properties.
<PAGE>
EXHIBIT 12
HMH PROPERTIES, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS, EXCEPT RATIO AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C>
Income from operations before income taxes....... $ 78 $ 54 $ 43 $ 50 $ 23
Add (deduct):
Fixed charges................................... 137 110 81 69 67
Capitalized interest........................... -- (1) (2) (1) (5)
Amortization of capitalized interest........... 1 2 1 2 3
Net gains (losses) related to certain 50% or less
owned affiliate.. 1 (1) -- (1) --
----- ----- ----- ----- -----
Adjusted earnings.............................. $ 217 $ 164 $ 123 $ 119 $ 88
----- ----- ----- ----- -----
Fixed charges:
Interest on indebtedness and amortization of
deferred financing costs. $ 128 $ 101 $ 77 $ 65 $ 65
Portion of rents representative of the
interest factor.............................. 9 9 4 4 2
----- ----- ----- ----- -----
Total fixed charges................... $ 137 $ 110 $ 81 $ 69 $ 67
===== ===== ===== ===== =====
Ratio of earnings to fixed charges............. 1.58 1.49 1.52 1.72 1.31
===== ===== ===== ===== =====
</TABLE>
<PAGE>
EXHIBIT 21
HMH PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE OF SUBSIDIARIES
HMH Rivers, Inc.
Marriott SBM Two Corporation
HMH WTC, Inc.
HMC Retirement Properties, Inc.
HMH Pentagon Corporation
HMH Marina, Inc.
Host Airport Hotels, Inc.
Marriott Financial Services, Inc.
HMH HPT Residence Inn, Inc.
HMC SFO, Inc.
HMC AP Canada, Inc.
HMC Manhattan Beach, Inc.
HMH Norfolk, Inc.
Marriott PLP Corporation
Marriott Desert Springs Corporation
Host/Interstate Partnership, L.P.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HMH
PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000905038
<NAME> HMH PROPERTIES, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-02-1998
<PERIOD-START> JAN-04-1997
<PERIOD-END> JAN-02-1998
<CASH> 240
<SECURITIES> 191
<RECEIVABLES> 31
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,275
<DEPRECIATION> 315
<TOTAL-ASSETS> 2,532
<CURRENT-LIABILITIES> 0
<BONDS> 1,803
0
0
<COMMON> 0
<OTHER-SE> 518
<TOTAL-LIABILITY-AND-EQUITY> 2,532
<SALES> 0
<TOTAL-REVENUES> 424
<CGS> 0
<TOTAL-COSTS> 230
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128
<INCOME-PRETAX> 78
<INCOME-TAX> 31
<INCOME-CONTINUING> 47
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
