<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 11, 1998 Commission File No. 33-95058
HMH PROPERTIES, INC.
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Delaware 52-1822042
- ------------------------ ----------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 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
--- ---
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<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
INDEX
-----
Page
No.
----
PART I. FINANCIAL INFORMATION (Unaudited):
Condensed Consolidated Balance Sheets - 3
September 11, 1998 and January 2, 1998
Condensed Consolidated Statements of Operations - 4
Twelve and Thirty-six Weeks Ended September 11, 1998
and September 12, 1997
Condensed Consolidated Statements of Cash Flows - 6
Thirty-six Weeks Ended September 11, 1998 and
September 12, 1997
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Results of 15
Operations and Financial Condition
PART II. OTHER INFORMATION AND SIGNATURE 22
- 2 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
September 11, January 2,
1998 1998
---- ----
(unaudited)
ASSETS
Property and equipment, net........................ $ 2,989 $ 2,431
Due from hotel managers............................ 51 40
Investments in affiliate .......................... 18 18
Other assets....................................... 142 108
Short-term marketable securities................... 36 191
Cash and cash equivalents.......................... 368 264
-------- --------
$ 3,604 $ 3,052
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Senior notes....................................... $ 1,713 $ 1,550
Notes secured by real estate assets................ 717 241
Other notes........................................ 32 34
-------- --------
Total debt.................................... 2,462 1,825
Deferred income taxes.............................. 166 145
Other liabilities.................................. 125 112
-------- --------
Total liabilities............................. 2,753 2,082
-------- --------
Shareholder's equity
Common stock, 100 shares issued and
outstanding, no par value.................... -- --
Additional paid-in capital.................... 958 963
Retained earnings (deficit)................... (107) 7
-------- --------
Total shareholder's equity ............... 851 970
-------- --------
$ 3,604 $ 3,052
======== ========
See Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve Weeks Ended September 11, 1998 and September 12, 1997
(unaudited, in millions)
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
REVENUES
Hotels.............................................................................. $ 138 $ 102
Net gains on property transactions.................................................. -- 1
Equity in earnings of affiliates.................................................... 2 1
--------- --------
Total revenues.................................................................... 140 104
--------- --------
OPERATING COSTS AND EXPENSES
Depreciation and amortization....................................................... 27 23
Base and incentive management fees (including Marriott International
management fees of $17 million and $14 million in 1998 and
1997, respectively)............................................................... 20 19
Property taxes...................................................................... 13 9
Ground rent, insurance, and other................................................... 18 11
--------- --------
Total operating costs and expenses.............................................. 78 62
--------- --------
OPERATING PROFIT...................................................................... 62 42
Minority interest..................................................................... (4) --
Corporate expenses.................................................................... (4) (4)
Interest expense...................................................................... (46) (33)
Interest income....................................................................... 7 9
--------- --------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM..................................... 15 14
Provision for income taxes............................................................ (6) (5)
--------- --------
INCOME BEFORE EXTRAORDINARY ITEM...................................................... 9 9
Extraordinary Item - loss on extinguishment of debt (net of income
taxes of $80 million).............................................................. (148) --
--------- --------
NET INCOME (LOSS)..................................................................... $ (139) $ 9
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 4 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Thirty-Six Weeks Ended September 11, 1998 and September 12, 1997
(unaudited, in millions)
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
REVENUES
Hotels.............................................................................. $ 469 $ 330
Net gain on property transactions................................................... 11 1
Equity in earnings of affiliates.................................................... 6 4
--------- --------
Total revenues.................................................................. 486 335
--------- --------
OPERATING COSTS AND EXPENSES
Depreciation and amortization....................................................... 87 67
Base and incentive management fees (including Marriott International
management fees of $64 million and $46 million in 1998 and
1997, respectively)............................................................... 70 53
Property taxes...................................................................... 37 26
Ground rent, insurance and other.................................................... 50 35
--------- --------
Total operating costs and expenses................................................ 244 181
--------- --------
OPERATING PROFIT...................................................................... 242 154
Minority interest..................................................................... (7) --
Corporate expenses.................................................................... (13) (10)
Interest expense...................................................................... (131) (85)
Interest income....................................................................... 19 19
--------- --------
INCOME BEFORE INCOME TAXES............................................................ 110 78
Provision for income taxes............................................................ (44) (31)
--------- --------
INCOME BEFORE EXTRAORDINARY ITEMS..................................................... 66 47
Extraordinary item - gain (loss) on extinguishment of debt (net of income taxes
of $80 million and $3 million for 1998 and 1997, respectively)...................... (148) 5
--------- --------
NET INCOME (LOSS)..................................................................... $ (82) $ 52
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 5 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-Six Weeks Ended September 11, 1998 and September 12, 1997
(unaudited, in millions)
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Income before extraordinary items.............................................. $ 66 $ 47
Adjustments to reconcile to cash from operations:
Depreciation and amortization............................................... 87 67
Income taxes................................................................ 44 31
Net gains on property transactions.......................................... (11) --
Changes in operating accounts
Other assets............................................................. (12) (38)
Other liabilities........................................................ (4) (26)
Other....................................................................... 9 (2)
-------- ---------
Cash provided by operations.............................................. 179 79
-------- ---------
INVESTING ACTIVITIES
Proceeds from sales of assets.................................................. 22 16
Sale of short-term marketable securities....................................... 275 --
Purchase of short-term marketable securities................................... (120) --
Acquisitions................................................................... (383) (122)
Capital expenditures:
Renewals and replacements.................................................... (63) (26)
Other........................................................................ (15) (11)
Other.......................................................................... (1) 15
-------- ---------
Cash used in investing activities........................................ (285) (128)
-------- ---------
FINANCING ACTIVITIES
Issuances of debt, net of related expenses..................................... 1,996 569
Dividends to Host Marriott Corporation and affiliates.......................... (32) (54)
Repayment of debt.............................................................. (4) (221)
Debt principal prepayments..................................................... (1,564) --
Debt extinguishment costs...................................................... (175) --
Deposits into debt service reserves............................................ (12) --
Capital contributed by parent.................................................. -- 221
-------- ---------
Cash provided by financing activities.................................... 209 515
-------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS.......................................... $ 103 $ 466
======== =========
Non-cash Financing Activities
Assumption of mortgage debt for the purchase of controlling
interest in one property................................................. $ 164 $ --
======== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 6 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. HMH Properties, Inc. (the "Company" or "Properties") was formed on October
8, 1993 in connection with Host Marriott's pro rata distribution of
Marriott International, Inc. ("Marriott International") to hold the
majority of Host Marriott's lodging properties not financed by mortgage
debt. HMC Capital Resources Corporation ("Resources") was incorporated in
Delaware on June 13, 1997, to acquire and own lodging real estate. HMC
Capital Corporation ("Capital") was incorporated as a Delaware corporation
on November 25, 1996, and is the holder of a mortgage on the New York
Marriott Financial Center, which is owned by Resources. Resources and
Capital (collectively, "Capital Resources") are wholly owned subsidiaries
of HMC Capital Resources Holding Corporation ("Holdings"), a Delaware
corporation formed on June 25, 1997, which is a wholly owned subsidiary of
Host Marriott. During June 1998, the Company commenced a consent
solicitation (the "1998 Consent Solicitation") for the amendment of certain
provisions of its senior notes indentures. The 1998 Consent Solicitation
provided for the merger of Holdings with and into Properties (the "1998
Merger") and Host Marriott's REIT Conversion (as defined below).
During the third quarter of 1998, the Company completed the 1998 Consent
Solicitation and the 1998 Merger. The 1998 Merger was accounted for by
Properties as a reorganization in a manner similar to that in a pooling of
interests. The financial statements of Properties have been restated to
present the consolidated financial position, results of operations, and
cash flows of the Company and Capital Resources for all periods presented.
Hereafter, the "Company" refers to the merged entity.
As of September 11, 1998, the Company owned, or had controlling interests
in, 72 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.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes the
disclosures made are adequate to make the information presented not
misleading. However, the condensed consolidated financial statements should
be read in conjunction with the Company's annual report on Form 10-K for
the fiscal year ended January 2, 1998.
In the opinion of the Company, the accompanying unaudited condensed
combined consolidated financial statements reflect all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position of the Company as of September 11, 1998 and January 2,
1998 and the results of operations for the twelve and thirty-six weeks
ended September 11, 1998 and September 12, 1997 and cash flows for the
thirty-six weeks ended September 11, 1998 and September 12, 1997. Interim
results are not necessarily indicative of fiscal year performance because
of the impact of seasonal and short-term variations.
2. On April 17, 1998, Host Marriott announced that its Board of Directors (the
"Board") had authorized Host Marriott to restructure its business
operations to qualify as a real estate investment trust ("REIT"), currently
expected to be effective as of January 1, 1999, and to spin-off its senior
living communities business, (Crestline Capital Corporation or "Crestline")
through a taxable stock dividend to its shareholders (collectively, the
"REIT Conversion"). After the REIT Conversion, which is subject to
shareholder and final Board approval, Host Marriott intends to operate as
an "UPREIT," with all of its assets and operations, including the Company,
conducted through the newly formed Operating Partnership of which Host
Marriott will be the general partner.
As part of the REIT Conversion, Host Marriott filed a Prospectus/Consent
Solicitation Statement with the Securities and Exchange Commission. The
Prospectus/Consent Solicitation Statement describes a proposal whereby the
Operating Partnership will acquire by merger (the "REIT Mergers") eight
limited partnerships (the "Partnerships") that own full-service hotels in
which Host Marriott or its subsidiaries are general partners. As more fully
described in the Prospectus/Consent Solicitation Statement, limited
partners of these Partnerships that participate in the REIT Mergers will
receive either Operating Partnership units or, at their election, unsecured
notes due December 15, 2005 issued by the Operating Partnership or common
stock in the REIT, in exchange for their partnership interests in such
Partnerships. The Prospectus/Consent Solicitation expires on December 12,
1998, unless extended.
- 7 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The REIT expects to qualify as a real estate investment trust under federal
income tax law beginning January 1, 1999. However, consummation of the REIT
Conversion is subject to significant contingencies that are outside the
control of Host Marriott, including final Board approval, consent of
shareholders, partners, bondholders, lenders, and ground lessors of Host
Marriott, its affiliates and other third parties. Accordingly, there can be
no assurance that the REIT Conversion will be completed or that it will be
effective as of January 1, 1999. If the REIT Conversion is not completed on
January 1, 1999, the effectiveness of REIT election could be delayed until
January 1, 2000, which would result in Host Marriott continuing to pay a
substantial amount of corporate level income taxes in 1999.
On September 30, 1998, Host Marriott filed a preliminary Proxy
Statement/Prospectus with the Securities and Exchange Commission. The Proxy
Statement/Prospectus describes the proposed merger by and among Host
Marriott, HMC Merger Corporation ("Host REIT") and Host Marriott, L.P., a
recently formed limited partnership, pursuant to the REIT Conversion. The
Prospectus proposes the restructuring of Host Marriott by contribution of
its wholly owned full-service hotels and its interests in certain hotel
partnerships and other assets, including the Company to the Operating
Partnership and reincorporation of Host Marriott with and into Host REIT.
As a result of the restructuring shares of Host Marriott common stock will
be converted to shares of Host REIT common stock.
3. On April 20, 1998, Host Marriott and certain of its subsidiaries including
the Company filed a Shelf Registration on Form S-3 (the "Shelf
Registration") with the Securities and Exchange Commission for the issuance
of up to $2.5 billion in securities, which may include debt, equity or a
combination thereof. On August 5, 1998, the Company purchased substantially
all of its (i) $600,000,000 in 9 1/2% senior notes due 2005, (ii)
$350,000,000 in 9% senior notes due 2007 and (iii) $600,000,000 in 8 7/8%
senior notes due 2007 (collectively, the "Old Senior Notes"). Concurrently
with each offer to purchase, the Company solicited consents ("1998 Consent
Solicitations") from registered holders of the Old Senior Notes to certain
amendments to eliminate or modify substantially all of the restrictive
covenants and certain other provisions contained in the indentures pursuant
to which the Old Senior Notes were issued. The Company simultaneously
utilized Host Marriott's Shelf Registration to issue an aggregate of $1.7
billion in new senior notes (the "New Senior Notes"). The New Senior Notes
were issued in two series, $500 million of 7 7/8% Series A notes due in
2005 and $1.2 billion of 7 7/8% Series B notes due in 2008. Approximately
$21 million of the Old Senior Notes remain outstanding. The 1998 Consent
Solicitations facilitated the merger of HMC Capital Resources Holding
Corporation, a wholly-owned subsidiary of Host Marriott, with and into the
Company. Capital Resources, the then owner of eight of Host Marriott's
hotel properties was the obligor under the $500 million revolving credit
facility (the "Old Credit Facility").
In conjunction with the issuance of the New Senior Notes, the Company
entered into a $1.25 billion credit facility (the "New Credit Facility")
with a group of commercial banks. The New Credit Facility has a three year
term with two one-year extension options. Borrowings under the New Credit
Facility generally bear interest at the Eurodollar rate plus 1.75%, (7.5%
at September 11, 1998). The interest rate and commitment fee (0.35% at
September 11, 1998) on the unused portion of the New Credit Facility
fluctuate based on certain financial ratios. The New Senior Notes and the
New Credit Facility are guaranteed by Host Marriott and the Company and
certain subsidiaries of the Company and are secured by pledges of equity
interests in certain subsidiaries of the Company. The New Senior Notes and
the New Credit Facility will be assumed by the Operating Partnership in
connection with the REIT Conversion and the guarantee of the Company
expected to terminate upon consummation of the REIT conversion. As of
September 11, 1998, $350 million was outstanding under the New Credit
Facility.
The net proceeds from the offering and borrowings under the New Credit
Facility and New Senior Notes were used by Host Marriott to purchase
substantially all of the Old Senior Notes, to make repayments outstanding
under the Old Credit Facility and to make bond premium and consent payments
totaling approximately $175 million. These costs, along with the write-off
of deferred financing fees of approximately $52 million related to the Old
Senior Notes and the Old Credit Facility, were recorded as a pre-tax
extraordinary loss, on the extinguishment of debt in the third quarter of
1998.
- 8 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The New Credit Facility and the indenture under which the New Senior Notes
were issued contain covenants restricting the ability of the Company and
certain of its subsidiaries to incur indebtedness, grant liens on their
assets, acquire or sell assets or make investments in other entities, and
make distributions to equity holders of the company, Host Marriott, and
(following the REIT Conversion) the Operating Partnership and Host REIT.
The New Credit Facility and the New Senior Notes also contain certain
financial covenants relating to, among other things, maintaining certain
levels of tangible net worth and certain ratios of EBITDA to interest and
fixed charges, total debt to EBITDA, unencumbered assets to unsecured debt
and secured debt to total debt.
4. Revenues represent house profit from the Company's hotel properties, equity
in earnings of an affiliate and net gains on property transactions. 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, property taxes, ground rent,
insurance, lease payments and management fees which are classified as
operating costs and expenses.
House profit generated by the Company's hotels for 1998 and 1997 consists
of:
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
-------------------- ----------------------
Sept. 11, Sept. 12, Sept. 11, Sept. 12,
--------- --------- --------- ---------
1998 1997 1998 1997
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Sales
Rooms................................... $ 266 $ 198 $ 808 $ 591
Food & Beverage......................... 104 69 341 221
Other................................... 30 17 86 51
------- --------- ------ ------
Total Hotel Sales.................. 400 284 1,235 863
------- --------- ------ ------
Department Costs
Rooms................................... 67 46 192 137
Food & Beverage......................... 84 58 258 174
Other................................... 15 12 45 29
------- --------- ------ ------
Total Department Costs............. 166 116 495 340
------- --------- ------ ------
Department Profit.......................... 234 168 740 523
Other Deductions........................... 96 66 271 193
------- --------- ------ ------
House Profit............................ $ 138 $ 102 $ 469 $ 330
======= ========= ====== ======
</TABLE>
5. On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reach 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 has considered the impact of EITF
97-2 on its financial statements and has determined that EITF 97-2 requires
the Company to include property-level sales and operating expenses of its
hotels in its statements of operations. The Company will adopt EITF 97-2 in
the fourth quarter of 1998 with retroactive effect in prior periods to
conform to the new presentation. Application of EITF 97-2 to the combined
consolidated financial statements for the twelve and thirty-six weeks ended
September 11, 1998 and September 12, 1997 would have increased both
revenues and operating expenses by approximately $262 million and $182
million, respectively, and $766 million and $533 million for the thirty-six
weeks ended September 11, 1998 and September 12, 1997, respectively, and
would have no impact on operating profit, net income.
6. During the third quarter of 1998, the company acquired the 308-room
Ritz-Carlton in Dearborn, Michigan for $65 million. The company also
acquired the 334-room Ritz-Carlton in San Francisco, California for $161
million and the 403-room Memphis Marriott, formerly the Crowne Plaza, for
$16 million. During the second quarter of 1998, the Company sold the
191-room Napa Valley Marriott for $21, million and recorded a pre-tax gain
of $10 million. The Company also acquired the 289-room Park Ridge Marriott
in the second quarter for $24 million. During the first quarter of 1998,
the Company acquired a controlling interest in the partnership
- 9 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
that owns the 1,671-room Atlanta Marriott Marquis for $239 million,
including the assumption of $164 million in mortgage debt. The Company also
acquired a controlling interest in a newly formed partnership that owns the
359-room Albany Marriott, the 320-room Minneapolis Marriott Southwest and
the 350-room San Diego Marriott Mission Valley for $50 million.
7. The Company paid dividends to Host Marriott of $12 million and $22 million
during the third quarter of 1998 and 1997, respectively and $32 million and
$54 million year-to-date for 1998 and 1997, respectively, as permitted
under the senior notes indentures.
8. The Company adopted Statement Financial Accounting Standards ("SFAS") No.
130 "Reporting Comprehensive Income," in 1998. The adoption of this
statement did not have a material impact on the Company's consolidated
financial statements. For the thirty-six weeks ended September 11, 1998 and
September 12, 1997, the Company had no other comprehensive income.
Therefore, comprehensive income is equivalent to net income for all periods
presented.
9. The Company operates in the full-service segment of the lodging industry.
The Company evaluates the performance of its segments based primarily on
operating profit before depreciation, corporate expenses and interest
expense. The allocation of income taxes is not evaluated at the segment
level and, therefore, the Company does not believe the information is
material to the condensed consolidated financial statements. The following
table presents revenues and other financial information by business segment
for the thirty-six weeks ended September 11, 1998 and September 12, 1997
(in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended September 11, 1998 Thirty-Six Weeks Ended September 11, 1998
------------------------------------- -----------------------------------------
Corporate Corporate
Hotels & Other Consolidated Hotels & Other Consolidated
------ ------- ------------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................... $ 138 $ 2 $ 140 $ 469 $ 17 $ 486
Operating profit............ 60 2 62 225 17 242
Corporate expense .......... -- (4) (4) -- (13) (13)
Interest expense............ (46) -- (46) (131) -- (131)
Interest income............. 7 -- 7 19 -- 19
Income before taxes......... 17 (2) 15 106 4 110
Total assets................ 3,586 18 3,604 3,586 18 3,604
<CAPTION>
Twelve Weeks Ended September 12, 1997 Thirty-Six Weeks Ended September 12, 1997
------------------------------------- -----------------------------------------
Corporate Corporate
Hotels & Other Consolidated Hotels & Other Consolidated
------ ------- ------------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................... $ 102 $ 2 $ 104 $ 330 $ 5 $ 335
Operating profit............ 40 2 42 149 5 154
Corporate expense........... -- (4) (4) -- (10) (10)
Interest expense............ (33) -- (33) (85) -- (85)
Interest income............. 9 -- 9 19 -- 19
Income before taxes......... 16 (2) 14 83 (5) 78
Total assets................ 2,928 17 2,945 2,928 17 2,945
</TABLE>
10. All but nine of the subsidiaries of the Company guarantee the New 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 Marriott Manhattan Beach, Marriott's Desert Springs Resort
and Spa, the Atlanta Marriott Marquis, the Albany Marriott, the Minneapolis
Marriott Southwest, the San Diego Marriott
- 10 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Mission Valley, the Ontario Airport Marriott and HMH HPT Residence Inn,
Inc., the lessee of the Residence Inn properties.
The following condensed, consolidating financial information sets forth the
combined financial position as of September 11, 1998 and January 2, 1998
and the results of operations for the twelve and thirty-six weeks ended
September 11, 1998 and September 12, 1997 and cash flows for the thirty-six
weeks ended September 11, 1998 and September 12, 1997 of the parent, the
Guarantor Subsidiaries and the Non-Guarantor Subsidiaries.
Supplemental Condensed Consolidating Balance Sheets
---------------------------------------------------
(in millions)
September 11, 1998
------------------
(unaudited)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Property and equipment, net................................... $ 1,210 $1,029 $ 750 $ 2,989
Investment in affiliate....................................... 18 -- -- 18
Other assets.................................................. 86 32 75 193
Short-term marketable securities.............................. 36 -- -- 36
Cash and cash equivalents..................................... 341 19 8 368
------- ------ ------ -------
Total assets............................................... $ 1,691 $1,080 $ 833 $ 3,604
======= ====== ====== =======
Debt.......................................................... $ 1,660 $ 453 $ 349 $ 2,462
Deferred income taxes......................................... 49 85 32 166
Other liabilities............................................. 12 13 100 125
------- ------ ------ -------
Total liabilities.......................................... 1,721 551 481 2,753
Owner's equity ............................................... (30) 529 352 851
------- ------ ------ -------
Total liabilities and owner's equity....................... $ 1,691 $1,080 $ 833 $ 3,604
======= ====== ====== =======
</TABLE>
January 2, 1998
---------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Property and equipment, net................................... $ 986 $ 1,017 $ 428 $ 2,431
Investment in affiliate....................................... 18 -- -- 18
Other assets.................................................. 78 31 39 148
Short-term marketable securities.............................. 191 -- -- 191
Cash and cash equivalents..................................... 237 12 15 264
------- ------- ------ -------
Total assets............................................... $ 1,510 $ 1,060 $ 482 $ 3,052
======= ======= ====== =======
Debt.......................................................... $ 1,176 $ 429 $ 220 $ 1,825
Deferred income taxes......................................... 39 81 25 145
Other liabilities............................................. 20 67 25 112
------- ------- ------ -------
Total liabilities.......................................... 1,235 577 270 2,082
Owner's equity................................................ 275 483 212 970
------- ------- ------ -------
Total liabilities and owner's equity....................... $ 1,510 $ 1,060 $ 482 $ 3,052
======= ======= ====== =======
</TABLE>
- 11 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statements of Operations
-------------------------------------------------------------
(in millions)
(unaudited)
Twelve Weeks Ended September 11, 1998
-------------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES...................................................... $ 55 $ 52 $ 33 $ 140
OPERATING COSTS AND EXPENSES.................................. 33 28 17 78
------- ------- ------ -------
OPERATING PROFIT BEFORE MINORITY INTEREST
CORPORATE EXPENSES AND INTEREST............................ 22 24 16 62
Minority interest............................................. -- -- (4) (4)
Corporate expenses............................................ (2) (2) -- (4)
Interest expense.............................................. (28) (12) (6) (46)
Interest income............................................... 5 1 1 7
------- ------- ------ -------
INCOME BEFORE INCOME TAXES.................................... (3) 11 7 15
Provision for income taxes.................................... 1 (4) (3) (6)
------- -------- ------- -------
NET INCOME BEFORE EXTRAORDINARY ITEM ......................... $ (2) $ 7 $ 4 $ 9
======= ======= ====== =======
</TABLE>
Twelve Weeks Ended September 12, 1997
-------------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES...................................................... $ 59 $ 28 $ 17 $ 104
OPERATING COSTS AND EXPENSES.................................. 35 15 12 62
-------- -------- -------- --------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST............................................... 24 13 5 42
Corporate expenses............................................ (2) (1) (1) (4)
Interest expense.............................................. (24) (7) (2) (33)
Interest income............................................... 8 1 -- 9
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES.................................... 6 6 2 14
Provision for income taxes.................................... (2) (2) (1) (5)
-------- -------- -------- ---------
NET INCOME.................................................... $ 4 $ 4 $ 1 $ 9
======== ======== ======== ========
</TABLE>
- 12 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statements of Operations
-------------------------------------------------------------
(in millions)
(unaudited)
Thirty-Six Weeks Ended September 11, 1998
-----------------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES...................................................... $ 195 $ 173 $ 118 $ 486
OPERATING COSTS AND EXPENSES.................................. 97 85 62 244
------- ------- ------ -------
OPERATING PROFIT BEFORE MINORITY INTEREST,
CORPORATE EXPENSES AND INTEREST............................ 98 88 56 242
Minority interest............................................. -- -- (7) (7)
Corporate expenses............................................ (6) (4) (3) (13)
Interest expense.............................................. (84) (29) (18) (131)
Interest income............................................... 17 1 1 19
------- ------- ------ -------
INCOME BEFORE INCOME TAXES.................................... 25 56 29 110
Provision for income taxes.................................... (10) (22) (12) (44)
------- ------- ------ -------
NET INCOME BEFORE EXTRAORDINARY ITEM.......................... $ 15 $ 34 $ 17 $ 66
======= ======= ====== =======
</TABLE>
Thirty-Six Weeks Ended September 12, 1997
-----------------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES...................................................... $ 141 $ 149 $ 45 $ 335
OPERATING COSTS AND EXPENSES.................................. 74 72 35 181
-------- -------- -------- --------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST............................................... 67 77 10 154
Corporate expenses............................................ (5) (3) (2) (10)
Interest expense.............................................. (47) (34) (4) (85)
Interest income............................................... 10 9 -- 19
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES.................................... 25 49 4 78
Provision for income taxes.................................... (10) (20) (1) (31)
-------- -------- -------- --------
NET INCOME BEFORE EXTRAORDINARY ITEM.......................... $ 15 $ 29 $ 3 $ 47
======== ======== ======== ========
</TABLE>
- 13 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statement of Cash Flows
(in millions)
(unaudited)
Thirty-Six Weeks Ended September 11, 1998
-----------------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS................................... $ 49 $ 89 $ 41 $ 179
------- ------- ------ -------
INVESTING ACTIVITIES
Proceeds from sales of assets.............................. 22 -- -- 22
Sales of short-term marketable securities.................. 275 -- -- 275
Purchase of short-term marketable securities............... (120) -- -- (120)
Acquisitions............................................... (243) (22) (118) (383)
Capital expenditures....................................... (26) (18) (34) (78)
Other...................................................... (1) -- -- (1)
------- ------- ------ -------
Cash used in investing activities....................... (93) (40) (152) (285)
------- ------- ------ -------
FINANCING ACTIVITIES
Issuances of debt.......................................... 1,561 435 -- 1,996
Cost of extinguishment of debt............................. (175) -- -- (175)
Repayment/prepayment of debt............................... (1,568) -- -- (1,568)
Transfers to/from Parent................................... 362 (477) 115 --
Deposits into debt service reserves........................ -- -- (12) (12)
Dividends to Host Marriott Corporation and affiliates...... (32) -- -- (32)
------- ------ ------- -----------
Cash provided by (used in) financing activities......... 148 (42) 103 209
------- ------ ------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................................... $ 104 $ 7 $ (8) $ 103
======= ======= ====== =======
</TABLE>
Thirty-Six Weeks Ended September 12, 1997
-----------------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS................................... $ 35 $ 37 $ 7 $ 79
-------- -------- -------- --------
INVESTING ACTIVITIES
Proceeds from Sales of Assets.............................. -- 16 -- 16
Acquisitions............................................... (61) -- (61) (122)
Capital expenditures....................................... (15) (20) (2) (37)
Other...................................................... 12 3 -- 15
-------- -------- -------- --------
Cash used in investing activities....................... (64) (1) (63) (128)
-------- -------- -------- --------
FINANCING ACTIVITIES
Issuances of debt, net of related expenses................. 569 -- -- 569
Repayment of debt.......................................... (2) (219) -- (221)
Capital contributed by Parent.............................. 221 -- -- 221
Transfers to/from Parent................................... (239) 183 56 --
Dividends to Host Marriott Corporation and affiliates...... (54) -- -- (54)
-------- -------- -------- ---------
Cash provided by (used in) financing activities......... 495 (36) 56 515
-------- -------- -------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS......................... $ 466 $ -- $ -- $ 466
======== ======== ======== ========
</TABLE>
- 14 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q include forward-looking statements
including, without limitation, statements related to the proposed REIT
Conversion, the terms, structure and timing thereof, and the expected effects of
the proposed REIT Conversion, EBITDA, and business and operating strategies in
the future. All forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual transactions,
results, performance or achievements to be materially different from any future
transactions, results, performance or achievements expressed or implied by such
forward-looking statements. Certain of the transactions described herein are
subject to certain consents of shareholders, lenders, debtholders and partners
of Host Marriott and its affiliates including the Company and of other third
parties and various other conditions and contingencies, and future results,
performance and achievements will be affected by general economic, business and
financing conditions, competition and governmental actions. The cautionary
statements set forth in reports filed under the Securities Act of 1934 contain
important factors with respect to such forward-looking statements including the
following factors that could affect such forward-looking statements: (i)
national and local economic and business conditions that will, among other
things, affect demand for hotels and other properties, the level of rates and
occupancy that can be achieved by such properties and the availability and terms
of financing; (ii) the ability to maintain the properties in a first-class
manner; (iii) the ability to compete effectively; (iv) the ability to acquire or
develop additional properties and the risk that potential acquisitions or
developments may not perform in accordance with expectations; (v) the ability to
obtain required consents of shareholders, lenders, debt holders, partners and
ground lessors in connection with Host Marriott's proposed conversion to a real
estate investment trust (REIT) and to consummate all of the transactions
constituting the REIT Conversion; (vi) changes in travel patterns, taxes and
government regulations; (vii) governmental approvals, actions and initiatives;
(viii) the effects of tax legislative action; and (ix) the timing of Host
Marriott's election to be taxed as a REIT and the ability to satisfy complex
rules in order to qualify for taxation as a REIT for federal income tax purposes
and to operate effectively within the limitations imposed by these rules.
Although the Company believes the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, they can give no assurance
that their expectations will be attained or that any deviations will not be
material. 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.
RESULTS OF OPERATIONS
The following discussion and analysis of operations and financial condition
presents the condensed consolidated results of the Company as if the merger
discussed in footnote 1 to the financial statements was effective for all
periods presented.
Revenues. Revenues primarily represent house profit from the Company's hotel
properties and equity in earnings of an affiliate and net gains on property
transactions. The Company's third quarter 1998 revenues of $140 million
represented a $36 million, or 35%, increase from the third quarter of 1997.
Year-to-date revenues increased $151 million, or 45%, to $486 million. The
results include a gain of $10 million on the sale of the Napa Valley Marriott in
the second quarter of 1998. The Company's revenue and operating profit were
impacted by improved lodging results from comparable properties, the addition of
21 full-service hotel properties during 1997 and 1998, and the sale of the Napa
Valley Marriott. Three of the properties were purchased at the end of the
quarter and had no impact on revenue or expenses.
Hotel sales (gross hotel sales, including room sales, food and beverage sales
and other ancillary sales such as telephone sales) increased $116 million, or
41%, to $400 million in the third quarter of 1998. Year-to-date 1998 hotel sales
increased $372 million, or 43% to over $1.2 billion. The 1998 hotel sales
increases reflect the addition of 21 full-service hotel properties in 1997 and
1998.
The increase in hotel sales reflects revenue per available room ("REVPAR")
increases for comparable units and the increase in full-service properties
during 1997 and 1998. REVPAR is a commonly used indicator of market performance
for hotels which represents the combination of the average daily room rate
charged and the average daily occupancy achieved. REVPAR does not include food
and beverage or other ancillary revenues generated by
- 15 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
the property. Improved results were driven by strong increases in REVPAR of 6.1%
for comparable units for the quarter and 6.7% year-to-date. On a comparable
basis, average room rates increased 5.6% for the quarter and 7.2% year-to-date,
while average occupancy increased less than one percentage point for the quarter
and year-to-date. Management believes that future increases in REVPAR will be
driven primarily by increases in average room 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, building and
equipment rent, insurance, lease payments and certain other costs. Operating
costs and expenses increased $16 million to $78 million for the third quarter of
1998 and $63 million to $244 million year-to-date primarily reflecting the
addition of 21 full-service properties during 1997 and 1998, and increased
management fees and rentals tied to improved operating results as well as
depreciation. As a percentage of hotel revenues, hotel operating costs and
expenses were 57% and 61% of revenues for third quarter 1998 and 1997,
respectively and 52% and 55% of revenues for year-to-date 1998 and 1997,
respectively.
Operating Profit. As a result of the changes in revenues, operating costs and
expenses discussed above, the Company's operating profit increased by $20
million to $62 million, or 44% of revenues, in the third quarter of 1998 from
$42 million, or 40% of revenues, in the third quarter of 1997. Year-to-date
operating profit increased $88 million to $242 million, or 50% of revenues.
Several hotels, including the JW Marriott in Houston, the Newport Beach
Marriott, The Ritz-Carlton Marina del Rey, the Marriott World Trade Center, the
New York Financial Center, the Marina Beach Marriott and Toronto Delta
Meadowvale posted particularly significant improvements in operating profit for
the third quarter and year-to-date.
Minority Interest. Minority interest expense increased $4 million and $7 million
for the third quarter of 1998 and year-to-date, respectively. The increase
primarily reflects the acquisition of Marriott's Desert Springs Resort and Spa
at the end of 1997 and the acquisitions of the Atlanta Marriott Marquis, the
Albany Marriott, the Minneapolis Marriott Southwest and the San Diego Marriott
Mission Valley in the first quarter of 1998. Minority interest expense was not
significant in prior periods.
Corporate Expenses. Corporate expenses remained unchanged for the third quarter
of 1998 and increased $3 million year-to-date. As a percentage of revenues,
corporate expenses were 2.8% and 2.7%of revenues for the 1998 third quarter and
year-to-date, respectively, compared to 3.8% and 3.0% of revenues for the prior
year periods.
Interest Expense. Interest expense increased $13 million to $46 million for the
third quarter of 1998 and $46 million to $131 million year-to-date, primarily
reflecting the July 1998 issuance of $1.7 billion in senior notes, the $350
million draw on the New Credit Facility and the assumption of approximately $287
million of mortgage notes on two properties acquired in late 1997 and the first
quarter of 1998.
Income Before Extraordinary Item. Income before extraordinary item was $9
million for the third quarter of 1998 and 1997. Year-to-date income before
extraordinary item for 1998 was $66 million compared to $47 million of income
for 1997.
Extraordinary Gain (Loss). In August 1998, in connection with the purchase of
the Old Senior Notes, the Company recognized an extraordinary loss of $148
million, which represents the bond premium and consent payments totaling
approximately $175 million and the write-off of deferred financing fees of
approximately $52 million related to the Old Senior Notes, net of a tax benefit.
In March 1997, the Company purchased 100% of the outstanding bonds secured by a
first mortgage on the San Francisco Marriott. The Company purchased the bonds
for $219 million, which was an $11 million discount to the face value of $230
million. In connection with the redemption and defeasance of the bonds, the
Company recognized an extraordinary gain of $5 million, which represents the $11
million discount and the write-off of deferred financing fees, net of taxes.
Net Income (Loss). The Company's net loss for the third quarter of 1998 was $139
million compared to net income of $9 million for the third quarter of 1997.
Year-to-date net loss for 1998 was $82 million compared to net income of $52
million for 1997.
- 16 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company reported an increase in cash and cash equivalents of $103 million
for the thirty-six weeks ended September 11, 1998. This increase for 1998 is
primarily due to cash generated from operations, the net sales of short-term
marketable securities, the issuance of New Senior Notes (defined below) and the
New Credit Facility (defined below) partially offset by the acquisition of, or
purchase of a controlling interests in, eight full-service properties and
capital expenditures on existing properties. Cash flow provided by operations
increased $100 million to $179 million for the thirty-six weeks ended September
11, 1998.
Cash used in investing activities was $285 million and $128 million for the
thirty-six weeks ended September 11, 1998, and September 12, 1997, respectively.
Cash used in investing activities for 1998 primarily reflect the acquisition of
eight full-service properties. The acquisition included the purchase of
controlling interests in two partnerships that own four full-service hotels for
$289 million, including the assumption of $164 million in mortgage debt on one
of the properties, as well as capital expenditures on existing properties,
partially offset by the net sales of short-term marketable securities.
Cash provided by financing activities was $209 million and $515 million for the
thirty-six weeks ended September 11, 1998 and September 12, 1997, respectively.
Cash provided by financing activities primarily reflect the issuance of New
Senior Notes and the New Credit Facility loan partially offset by debt payments
of $1.7 billion, including $175 million costs to extinguish the Old Senior
Notes. The Company also paid $32 million in dividends to Host Marriott or its
affiliates as permitted under the senior notes indentures.
On April 17, 1998, Host Marriott announced that its Board of Directors (the
"Board") had authorized Host Marriott to reorganize its business operations to
qualify as a real estate investment trust ("REIT"), currently expected to be
effective as of January 1, 1999, and to spin-off its senior living communities
business, (Crestline Capital Corporation or "Crestline") through a taxable stock
dividend to its shareholders (collectively, the "REIT Conversion"). After the
REIT Conversion, which is subject to shareholder and final Board approval, Host
Marriott intends to operate as an "UPREIT," with all of its assets and
operations, including the Company, conducted through the newly formed Operating
Partnership of which Host Marriott will be the general partner.
As part of the REIT Conversion, Host Marriott filed a Prospectus/Consent
Solicitation Statement with the Securities and Exchange Commission. The
Prospectus/Consent Solicitation Statement describes a proposal whereby the
Operating Partnership will acquire by merger (the "REIT Mergers") eight limited
partnerships (the "Partnerships") that own full-service hotels in which Host
Marriott or its subsidiaries are general partners. As more fully described in
the Prospectus/Consent Solicitation Statement, limited partners of these
Partnerships that participate in the REIT Mergers will receive either Operating
Partnership units or, at their election, unsecured notes due December 15, 2005
issued by the Operating Partnership or common stock in the REIT, in exchange for
their partnership interests in such Partnerships. The Prospectus/Consent
Solicitation period expires December 12, 1998, unless extended.
The REIT expects to qualify as a real estate investment trust under federal
income tax law beginning January 1, 1999. However, consummation of the REIT
Conversion is subject to significant contingencies that are outside the control
of Host Marriott, including final Board approval, consent of shareholders,
partners, bondholders, lenders, and ground lessors of Host Marriott, its
affiliates and other third parties. Accordingly, there can be no assurance that
the REIT Conversion will be completed or that it will be effective as of January
1, 1999. If the REIT Conversion is not completed on January 1, 1999, the
effectiveness of REIT election could be delayed until January 1, 2000 which
would result in Host Marriott continuing to pay a substantial amount of
corporate level income taxes in 1999.
On September 30, 1998, Host Marriott filed a preliminary Proxy
Statement/Prospectus with the Securities and Exchange Commission. The Proxy
Statement/Prospectus describes the proposed merger by and among Host Marriott,
HMC Merger Corporation ("Host REIT") and Host Marriott, L.P., a recently formed
limited partnership, pursuant to the REIT Conversion. The Prospectus proposes
the restructuring of Host Marriott by contribution of its wholly owned
full-service hotels and its interests in certain hotel partnerships and other
assets, including the
- 17 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Company, to the Operating Partnership and reincorporation of Host Marriott with
and into Host REIT. As a result of the restructuring shares of Host Marriott
common stock will be converted to shares of Host REIT common stock.
On April 20, 1998, Host Marriott and certain of its subsidiaries, including the
Company, filed a Shelf Registration on Form S-3 (the "Shelf Registration") with
the Securities and Exchange Commission for the issuance of $2.5 billion in
securities, which may include debt, equity or a combination thereof. On August
5, 1998, the Company purchased substantially all of its (i) $600,000,000 in 9
1/2% senior notes due 2005, (ii) $350,000,000 in 9% senior notes due 2007 and
(iii) $600,000,000 in 8 7/8% senior notes due 2007, (collectively, the "Old
Senior Notes"). Concurrently with each offer to purchase, the Company solicited
consents ("1998 Consent Solicitations") from registered holders of the Old
Senior Notes to certain amendments to eliminate or modify substantially all of
the restrictive covenants and certain other provisions contained in the
indentures pursuant to which the Old Senior Notes were issued. The Company
simultaneously utilized Host Marriott's Shelf Registration to issue an aggregate
of $1.7 billion in new senior notes (the "New Senior Notes"). The New Senior
Notes were issued in two series, $500 million of 7 7/8% Series A notes due in
2005 and $1.2 billion of 7 7/8% Series B notes due in 2008. Approximately $21
million of the Old Senior Notes remain outstanding. The 1998 Consent
Solicitation facilitated the merger of HMC Capital Resources Holding
Corporation, a wholly owned subsidiary of Host Marriott, with and into the
Company. Capital Resources, the then owner of eight of Host Marriott's hotel
properties was the obligor under the $500 million revolving credit facility (the
"Old Credit Facility").
In conjunction with the issuance of the New Senior Notes, the company entered
into a $1.25 billion credit facility (the "New Credit Facility") which initially
has a three year term with two one-year extension options. Borrowings under the
New Credit Facility generally bear interest at the Eurodollar rate plus 1.75%
(7.5% at September 11, 1998). The interest rate and commitment fee (0.35% at
September 11, 1998) on the unused portion of the New Credit Facility fluctuates
based on certain financial ratios. The New Senior Notes and the New Credit
Facility are guaranteed by Host Marriott, the Company and certain subsidiaries
of the Company and are secured by pledges of equity interests in certain
subsidiaries of the company. The New Senior Notes and the New Credit Facility
will be assumed by the Operating Partnership in connection with the REIT
Conversion and the guarantee of the Company is expected to terminate upon
consummation of the REIT Conversion. As of September 11, 1998, $350 million was
outstanding under the New Credit Facility.
The net proceeds from the offering and borrowings under the New Credit Facility
and New Senior Notes were used by Host Marriott to purchase substantially all of
the Old Senior Notes, to make repayments outstanding under the Old Credit
Facility and to make bond premium and consent payments totaling approximately
$175 million. These costs, along with the write-off of deferred financing fees
of approximately $52 million related to the Old Senior Notes and the Old Credit
Facility, were recorded as an extraordinary loss on the extinguishment of debt
in the third quarter of 1998.
The New Credit Facility and the indenture under which the New Senior Notes were
issued contain covenants restricting the ability of the company and certain of
its subsidiaries to incur indebtedness, grant liens on their assets, acquire or
sell assets or make investments in other entities, and make distributions to
equity holders of the company, Host Marriott, and (following the REIT
Conversion) the Operating Partnership and Host REIT. The New Credit Facility and
the New Senior Notes also contain certain financial covenants relating to, among
other things, maintaining certain levels of tangible net worth and certain
ratios of EBITDA to interest and fixed charges, total debt to EBITDA,
unencumbered assets to unsecured debt, and secured debt to total 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
distributions received) ("EBITDA") is a meaningful measure of the Company's
operating performance due to the significance of the Company's long-lived assets
(and the related depreciation thereon) and because EBITDA can be used to measure
the Company's ability to service debt, fund capital expenditures and expand its
business 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,
- 18 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
cash from operations, or any other operating or liquidity performance measure
prescribed by generally accepted accounting principles.
EBITDA increased $22 million, or 31%, to $92 million for the third quarter of
1998 over third quarter 1997. Year- to-date EBITDA increased $93 million, or
41%, to $322 million for 1998 over 1997. Hotel EBITDA increased $27 million, or
43%, to $90 million for the third quarter of 1998 over third quarter 1997.
Year-to-date hotel EBITDA increased $100 million, or 46%, to $317 million for
1998. The increase in hotel EBITDA is due to the increase in comparable
full-service EBITDA of 12.4% and 8.8% for third quarter 1998 and year-to-date,
as well as the incremental EBITDA from the addition of full-service hotels in
1998 and the fourth quarter of 1997.
The following is a reconciliation of EBITDA to net income:
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-Six Weeks Ended
----------------------------- -----------------------------
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
EBITDA............................................ $ 92 $ 70 $ 322 $ 229
Interest expense.................................. (46) (33) (131) (85)
Depreciation and amortization..................... (27) (23) (87) (67)
Income taxes...................................... (6) (5) (44) (31)
Minority interest expense......................... (4) -- (7) --
Gain (loss) on dispositions of assets
and other non-cash charges, net................ -- -- 13 1
--------- -------- --------- ---------
Net income before extraordinary items.......... $ 9 $ 9 $ 66 $ 47
========= ======== ========= =========
</TABLE>
The Company interest coverage, defined as EBITDA divided by cash interest
expense was 2.6 to 1.0 and 2.8 to 1.0 for the thirty-six weeks ended September
11, 1998 and September 12, 1997, respectively. The ratio of earnings to fixed
charges was 1.9 to 1.0 for both the thirty-six weeks ended September 11, 1998
and September 12, 1997, respectively.
Year 2000 Problem
The "Year 2000 Problem" has arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous results. The following disclosure provides information
regarding the current status of the Company's Year 2000 compliance program.
The Company has adopted the compliance program because it recognizes the
importance of minimizing the number and seriousness of any disruptions that may
occur as a result of the Year 2000 issue. The Company's compliance program
includes an assessment of the Company's hardware and software computer systems
and embedded systems, as well as an assessment of the Year 2000 issues relating
to third parties with which the Company has a material relationship or whose
systems are material to the operations of the Company's hotel properties. The
Company's efforts to ensure that its computer systems are Year 2000 compliant
have been segregated into two separate phases: in-house systems and third-party
systems.
In-House Systems. Since the distribution of Marriott International on October 8,
1993, the Company has invested in the implemention and maintenance of accounting
and reporting systems and equipment that are intended to enable the Company to
provide adequately for its information and reporting needs and which are also
Year 2000 compliant. Substantially all of the Company's in-house systems have
already been certified as Year 2000 compliant through testing and other
mechanisms and the Company has not delayed any systems projects due to the Year
2000 issue. The Company is in the process of engaging a third party to review
its Year 2000.
- 19 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
in-house compliance. Management believes that future costs associated with Year
2000 issues for its in-house systems will be insignificant and therefore not
impact the Company's business, financial condition and results of operations.
The Company has not developed, and does not plan to develop, a separate
contingency plan for its in-house systems due to their current Year 2000
compliance. However, the Company does have detailed contingency plans for its
in-house systems covering a variety of possible events, including natural
disasters, interruption of utility service and similar events.
Third-Party Systems. Host Marriott and the Company rely upon operational and
accounting systems provided by third parties, primarily the managers and
operators of its hotel and senior living properties, to provide the appropriate
property-specific operating systems (including reservation, phone, elevator,
security, HVAC and other systems) and to provide it with financial information.
Based on discussion with the third parties that are critical to the Company's
business, including the managers and operators of its hotels, the Company
believes that these parties are in the process of studying their systems and the
systems of their respective vendors and service providers and, in many cases,
have begun to implement changes, to ensure that they are Year 2000 compliant. To
the extent these changes impact property-level systems, the Company may be
required to fund capital expenditures for upgraded equipment and software. The
Company does not expect these charges to be material, but is committed to making
these investments as required. To the extent that these changes relate to a
third party managers' centralized systems (including reservations, accounting,
purchasing, inventory, personnel and other systems), the Company's management
agreements generally provide for these costs to be charged to the Company's
properties subject to annual limitations. The Company expects that its third
party managers will incur Year 2000 costs in lieu of costs for its centralized
systems related to system projects that otherwise would have been pursued and
therefore, its overall level of centralized systems charges allocated to the
properties will not materially increase as a result of the Year 2000 compliance
effort. The Company believes that this deferral of certain system projects will
not have a material impact on its future results of operations, although it may
delay certain productivity enhancements at its properties. The Company will
continue to monitor the efforts of these third parties to become Year 2000
compliant and will take appropriate steps to address any non-compliance issues.
The Company believes that in the event of material Year 2000 non-compliance, the
Company will have the right to seek recourse against the manager under its third
party management agreements. The management agreements generally do not
specifically address the Year 2000 compliance issue. Therefore, the amount of
any recovery in the event of Year 2000 non-compliance at a property, if any, is
not determinable at this time.
The Company will work with the third parties to ensure that appropriate
contingency plans will be developed to address the most reasonably likely worst
case Year 2000 scenarios, which may not have been identified fully. In
particular, the Company has had extensive discussions regarding the Year 2000
problem with Marriott International, the manager of a substantial majority of
its hotel properties and all of its senior living communities. Due to the
significance of Marriott International to the Company's business, a detailed
description of Marriott International's state of readiness follows.
Marriott International has adopted an eight-step process toward Year 2000
readiness, consisting of the following: (i) Awareness: fostering understanding
----------
of, and commitment to, the problem and its potential risks; (ii) Inventory:
----------
identifying and locating systems and technology components that may be affected;
(iii) Assessment: reviewing these components for Year 2000 compliance, and
-----------
assessing the scope of Year 2000 issues; (iv) Planning: defining the technical
---------
solutions and labor and work plans necessary for each particular system; (v)
Remediation/Replacement: completing the programming to renovate or replace the
- ------------------------
problem software or hardware; (vi) Testing and Compliance Validation: conducting
----------------------------------
testing, followed by independent validation by a separate internal verification
team; (vii) Implementation: placing the corrected systems and technology back
---------------
into the business environment; and (viii) Quality Assurance: utilizing a
------------------
dedicated audit team to review and test significant projects for adherence to
quality standards and program methodology.
Marriott International has grouped its systems and technology into three
categories for purposes of Year 2000 compliance: (i) information resource
applications and technology (IT Applications) -- enterprise-wide systems
supported by Marriott International's centralized information technology
organization ("IR"); (ii) Business-initiated Systems ("BIS") - systems that have
been initiated by an individual business unit, and that are not supported by
Marriott International's IR organization; and (iii) Building Systems - non-IT
equipment at properties that use
- 20 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
embedded computer chips, such as elevators, automated room key systems and HVAC
equipment. Marriott International is prioritizing its efforts based on how
severe an effect noncompliance would have on customer service, core business
processes or revenues, and whether there are viable, non-automated fallback
procedures (System Criticality).
Marriott International measures the completion of each phase based on documented
and quantified results, weighted for System Criticality. As of the end of the
1998 third quarter, the awareness and inventory phases were complete for IT
Applications and nearly complete for BIS and Building Systems. For IT
Applications, the Assessment, Planning and Remediation/Replacement phases were
each over 80 percent complete, and Testing and Compliance Validation had been
completed for a number of key systems, with most of the remaining work in its
final stage. For BIS and Building Systems, Assessment and Planning were in the
mid- to upper-range of completion, with a substantial amount of work in process,
while the progress level for Remediation/Replacement and Testing and Compliance
Validation had not yet been documented and quantified. Quality Assurance is also
in progress for IT Applications and is scheduled to begin for BIS and Building
Systems in the near future. Marriott International's goal is to substantially
complete the Remediation/Replacement and Testing phases for its System Critical
IT Applications by the end of 1998, with 1999 reserved for unplanned
contingencies and for Compliance Validation and Quality Assurance. For System
Critical BIS and Building Systems, the same level of completion is targeted for
June 1999 and September 1999, respectively.
Marriott International has initiated Year 2000 compliance communications with
its significant third party suppliers, vendors and business partners, including
its franchisees. Marriott International is focusing its efforts on the business
interfaces most critical to its customer service and revenues, including those
third parties that support the most critical enterprise-wide IT Applications,
franchisees generating the most revenues, suppliers of the most widely used
Building Systems and BIS, the top 100 suppliers, by dollar volume, of non-IT
products, and financial institutions providing the most critical payment
processing functions. Responses have been received from a majority of the firms
in this group.
Marriott International is also establishing a common approach for testing and
addressing Year 2000 compliance issues for its managed and franchised
properties. This includes a guidance protocol for operated properties, and a
Year 2000 "Toolkit" for franchisees containing relevant Year 2000 compliance
information. Marriott International is also utilizing a Year 2000 best-practices
sharing system.
Risks. There can be no assurances that Year 2000 remediation by the Company or
third parties will be properly and timely completed, and failure to do so could
have a material adverse effect on the Company, its business and its financial
condition. The Company cannot predict the actual effects to it of the Year 2000
problem, which depends on numerous uncertainties such as: (i) whether
significant third parties, properly and timely address the Year 2000 issue; and
(ii) whether broad-based or systemic economic failures may occur. The Company
is also unable to predict the severity and duration of any such failures, which
could include disruptions in passenger transportation or transportation systems
generally, loss of utility and/or telecommunications services, the loss or
disruption of hotel reservation made on centralized reservation systems and
errors or failures in financial transactions or payment processing systems such
as credit cards. Due to the general uncertainty inherent in the Year 2000
problem and the Company's dependence on third parties, the Company is unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact on the Company. The Company's Year 2000 compliance program is
expected to significantly reduce the level of uncertainty about the Year 2000
problem and management believes that the possibility of significant
interruptions of normal operations should be reduced.
- 21 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. 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 the Company.
Item 4. Submission of Matters to a Vote of Security Holders
On June 26, 1998 the Company commenced offers to purchase any and all of the
Company's senior notes. Concurrently with each offer to purchase, the Company
solicited consents from registered holders of senior notes to certain amendments
to eliminate or modify substantially all of the restrictive covenants and
certain provisions contained in the indentures pursuant to which the senior
notes were issued. The offering and consent solicitation was successfully
completed on August 5, 1998.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
July 17, 1998 - Report filing Host Marriott Corporation parent only
financial information and Host Marriott Hotels, Inc.
financial statements in conjunction with an initial
prospectus supplement to Host Marriott Corporation's
shelf registration statement filed July 17, 1998
registering $1,400 million in senior notes.
July 30, 1998 - Report filing the final prospectus supplement
offering $1,700 million in senior notes as an
exhibit on Form 8-K.
July 31, 1998 - Report filing the financial statements of Host
Marriott Hotels (which represents the assets and
liabilities expected to be included in Host Marriott
Corporation's contribution of certain assets and
liabilities to the Operating Partnership in
conjunction with Host Marriott Corporation's
contemplated REIT Conversion).
August 6, 1998 - Report filing certain exhibits related to filings
with the Securities & Exchange Commission by HMH
Properties, Inc. which the Company believes is
material to investors. The Company completed the
offer and consent solicitation for its outstanding
$1.55 billion in senior notes, the offering of $1.7
billion of new senior notes and the completion of a
new $1.25 billion credit facility, which included
the merger of another wholly owned subsidiary of
Host Marriott Corporation with and into the Company.
This information provided includes the following:
. Underwriting agreement between HMH
Properties, Inc. certain signatory guarantors
thereto and Donaldson, Lufkin & Jenrette
Securities Corporation, BT Alex Brown,
Incorporated, Bear Stearns & Co., Inc.,
Goldman Sachs & Co., Merrill Lynch, Pierce,
Fenner & Smith, Incorporated, and Nationsbanc
Montgomery Securities, LLP.
- 22 -
<PAGE>
. Amended and Restated Indenture Agreement
dated as of August 5, 1998 between HMH
Properties, Inc., the Guarantors (defined
herein), the Subsidiary Guarantors (defined
herein) and Marine Midland Bank as Trustee.
. First Supplemental Indenture to Amended and
Restated Indenture dated as of August 5, 1998
(including the form of the 7 7/8% Series A
Senior Notes due 2005 and the 7 7/8% Series B
Notes due 2008).
. Statement of Eligibility and Qualifications
on Form T-1 of Marine Midland Bank, as
Trustee, under the Indenture.
September 11, 1998 - Report filing certain exhibits related to
filings by HMH Properties, Inc. for a $1.25
billion credit facility entered into by
Properties on August 6, 1998 which the
Company believes is material to investors.
. Amended and Restated Credit
Agreement dated as of June 19, 1997
and Amended and Restated as of
August 5, 1998 among Host Marriott
Corporation, Host Marriott
Hospitality, Inc., HMH Properties,
Inc. Host Marriott L.P., HMC
Capital Resources Corp., Various
Banks, Wells Fargo Bank, National
Association, The Bank of Nova
Scotia and Credit Lyonnais New York
Branch, as Co-Arrangers, and
Bankers Trust Company, as Arranger
and Administrative Agent.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HMH PROPERTIES, INC.
October 26, 1998 /s/ Donald D. Olinger
- ---------------- ---------------------------------------
Date Donald D. Olinger
Vice President and Corporate Controller
(Principal Accounting Officer)
- 23 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from HMH
Properties, Inc. condensed consolidated balance sheets and condensed
consolidated statements of operations and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
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<NAME> HMH PROPERTIES, INC.
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