<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 JUNE 19, 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
----- -----
================================================================================
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION (UNAUDITED):
Condensed Consolidated Balance Sheets - 3
June 19, 1998 and January 2, 1998
Condensed Consolidated Statements of Operations - 4
Twelve and Twenty-Four Weeks Ended June 19, 1998
and June 20, 1997
Condensed Consolidated Statements of Cash Flows - 6
Twenty-Four Weeks Ended June 19, 1998 and
June 20, 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 19
</TABLE>
-2-
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 19, January 2,
1998 1998
-------- ---------
(unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net...................................... $2,259 $1,960
Due from hotel managers.......................................... 44 31
Investments in affiliate......................................... 20 18
Other assets..................................................... 163 92
Short-term marketable securities................................. 44 191
Cash and cash equivalents........................................ 288 240
------ ------
$2,818 $2,532
====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Senior notes..................................................... $1,550 $1,550
Notes secured by real estate assets.............................. 368 219
Other notes...................................................... 32 34
------ ------
Total debt..................................................... 1,950 1,803
Deferred income taxes............................................ 123 111
Other liabilities................................................ 183 100
------ ------
Total liabilities.............................................. 2,256 2,014
------ ------
Shareholder's equity
Common stock, 100 shares issued and outstanding, no par value.. -- --
Additional paid-in capital..................................... 527 525
Retained earnings (deficit).................................... 35 (7)
------ ------
Total shareholder's equity.................................. 562 518
------ ------
$2,818 $2,532
====== ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-3-
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
TWELVE WEEKS ENDED JUNE 19, 1998 AND JUNE 20, 1997
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
REVENUES
Hotels........................................................................... $ 145 $ 97
Net gain on property transactions................................................ 11 --
Equity in earnings of affiliate.................................................. 2 1
----- -----
Total revenues................................................................. 158 98
----- -----
OPERATING COSTS AND EXPENSES
Depreciation and amortization.................................................... 27 17
Base and incentive management fees (including Marriott International
management fees of $21 million and $15 million in 1998 and 1997, respectively).. 23 16
Property taxes................................................................... 10 7
Ground rent, insurance and other................................................. 15 9
----- -----
Total operating costs and expenses............................................. 75 49
----- -----
OPERATING PROFIT BEFORE MINORITY INTEREST,
CORPORATE EXPENSES AND INTEREST................................................. 83 49
Minority interest................................................................ (3) --
Corporate expenses............................................................... (4) (3)
Interest expense................................................................. (42) (23)
Interest income.................................................................. 5 5
----- -----
INCOME BEFORE INCOME TAXES....................................................... 39 28
Provision for income taxes....................................................... (16) (12)
----- -----
NET INCOME....................................................................... $ 23 $ 16
===== =====
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-4-
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
TWENTY-FOUR WEEKS ENDED JUNE 19, 1998 AND JUNE 20, 1997
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
REVENUES
Hotels................................................................ $ 288 $ 192
Net gain on property transactions..................................... 11 --
Equity in earnings of affiliate....................................... 4 3
----- -----
Total revenues...................................................... 303 195
----- -----
OPERATING COSTS AND EXPENSES
Depreciation and amortization......................................... 50 35
Base and incentive management fees (including Marriott International
management fees of $43 million and $29 million in 1998 and 1997,
respectively)........................................................ 46 32
Property taxes........................................................ 20 13
Ground rent, insurance and other...................................... 29 21
----- -----
Total operating costs and expenses.................................. 145 101
----- -----
OPERATING PROFIT BEFORE MINORITY INTEREST,
CORPORATE EXPENSES AND INTEREST....................................... 158 94
Minority interest..................................................... (3) --
Corporate expenses.................................................... (8) (6)
Interest expense...................................................... (82) (46)
Interest income....................................................... 11 9
----- -----
INCOME BEFORE INCOME TAXES............................................ 76 51
Provision for income taxes............................................ (31) (21)
----- -----
NET INCOME............................................................ $ 45 $ 30
===== =====
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-5-
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
TWENTY-FOUR WEEKS ENDED JUNE 19, 1998 AND JUNE 20, 19967
(UNAUDITED, IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
OPERATING ACTIVITIES
Net income...................................................... $ 45 $ 30
Adjustments to reconcile to cash from operations:
Depreciation and amortization................................ 50 35
Income taxes................................................. 31 21
Net (gains) losses on property transactions.................. (11) --
Changes in operating accounts
Other assets................................................. -- (5)
Other liabilities............................................ (3) (1)
Other........................................................ 1 1
----- -----
Cash provided by operations.................................. 113 81
----- -----
INVESTING ACTIVITIES
Proceeds from sales of assets................................... 21 --
Sale of short-term marketable securities........................ 231 --
Purchase of short-term marketable securities.................... (84) --
Acquisitions.................................................... (117) (89)
Capital expenditures:
Renewals and replacements..................................... (43) (16)
Other......................................................... (8) (9)
Other........................................................... (23) 12
----- -----
Cash (used in) investing activities.......................... (23) (102)
----- -----
FINANCING ACTIVITIES
Dividends to Host Marriott Corporation and affiliates........... (3) (32)
Repayment of debt............................................... (3) (2)
Debt prepayments................................................ (13) --
Deposits into debt service reserves............................. (23) --
----- -----
Cash used in financing activities............................ (42) (34)
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................ $ 48 $ (55)
===== =====
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 CONDENSES CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed consolidated financial statements of HMH
Properties, Inc. and subsidiaries (the "Company" or "Properties"), a
wholly-owned direct subsidiary of Host Marriott Hospitality, Inc.
("Hospitality") have been prepared by the Company without audit.
Hospitality is a wholly-owned subsidiary of Host Marriott Corporation
("Host Marriott"). During the third quarter of 1997, the Company
completed a consent solicitation with holders of its senior notes to
amend certain provisions of the senior notes indenture. A similar
consent solicitation was conducted by HMC Acquisition Properties, Inc.
("Acquisitions") (together, the "Consent Solicitations"). The Consent
Solicitations facilitated the merger of Acquisitions, a wholly-owned
indirect subsidiary of Host Marriott, which owned 17 full-service hotel
properties, with and into the Company (the "Merger"). The financial
statements present the consolidated financial position, results of
operations and cash flows of Properties and Acquisitions for all periods
presented.
Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. The Company
believes the disclosures made are adequate to make the information
presented not misleading. However, the condensed 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
consolidated financial statements reflect all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
financial position of the Company as of June 19, 1998 and January 2,
1998 and the results of operations for the twelve and twenty-four weeks
ended June 19, 1998 and June 20, 1997 and cash flows for the twenty-four
weeks ended June 19, 1998 and June 20, 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 reorganize its business
operations to qualify as a real estate investment trust ("REIT"),
effective as of January 1, 1999, and to spin-off its senior living
communities business ("SLC") 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.
In June 1998, as part of the REIT Conversion, Host Marriott filed a
preliminary 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, in exchange for
their partnership interests in such Partnerships.
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.
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 $2.5
billion in securities which may include debt, equity or a combination
thereof. On June 26, 1998, the Company commenced offers to purchase any
and all of the Company's (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
"Existing Senior Notes"). Concurrently with each offer to purchase, the
Company is soliciting
-7-
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSES CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
consents from registered holders of the Existing 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 Existing Senior Notes were issued.
As of July 14, 1998, the Company had received valid tenders and executed
consents to substantially all of its Existing Senior Notes. The
Company's obligation to purchase the Existing Senior Notes remains
subject to satisfaction or waiver of certain conditions, including
consummation of the offering of New Senior Notes (as defined below) and
obtaining the New Credit facility (as defined below). The tender offer
expires on August 4, 1998, unless extended.
On July 17, 1998, the Company filed a supplement to the Shelf
Registration for an offering (the "Offering") initially of $1.4 billion
of senior notes (the "New Senior Notes"). On July 29, 1998, the Company
completed the Offering of $1.7 billion of New Senior Notes in two
series, $500 million at 7 7/8% due 2005 and $1.2 billion at 7 7/8% due
in 2008. The Offering is expected to close on August 5, 1998. The New
Senior Notes will be guaranteed by Host Marriott and certain of its
subsidiaries.
The Company is negotiating with a number of financial institutions with
respect to a $1.25 billion credit facility (the "Credit Facility") to be
provided by a syndicate of lenders. The Credit Facility will replace the
Company's existing $500 million credit facility (the "Existing Credit
Facility"). The net proceeds from the Offering and borrowings under the
Credit Facility will be used by the Company to purchase the Existing
Senior Notes and to make bond premium and consent payments and other
expenses expected to total approximately $178 million in connection with
the tender discussed above. These costs, along with the write-off of
deferred financing fees of approximately $55 million related to the
Existing Senior Notes and the Existing Credit Facility, will be recorded
as a pre-tax extraordinary loss on the extinguishment of debt in the
third quarter of 1998 if the transactions are consummated. The Credit
Facility will be guaranteed by Host Marriott and certain of its
subsidiaries and is expected to close on August 5, 1998.
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 Twenty-Four Weeks Ended
------------------ -----------------------
June 19, June 20, June 19, June 20,
1998 1997 1998 1997
-------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
Sales
Rooms.................... $ 235 $ 166 $ 466 $ 328
Food & Beverage.......... 104 64 207 128
Other.................... 25 12 52 28
----- ----- ----- -----
Total Hotel Sales....... 364 242 725 484
----- ----- ----- -----
Department Costs
Rooms.................... 54 39 106 75
Food & Beverage.......... 76 48 152 97
Other.................... 12 6 26 14
----- ----- ----- -----
Total Department Costs.. 142 93 284 186
----- ----- ----- -----
Department Profit......... 222 149 441 298
Other Deductions.......... 77 52 153 106
----- ----- ----- -----
House Profit............ $ 145 $ 97 $ 288 $ 192
===== ===== ===== =====
</TABLE>
-8-
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. During the second quarter of 1998, the Company sold the 191-room Napa
Valley Marriott for approximately $21, million and recorded a pre-tax
gain of approximately $10 million. During the first quarter of 1998, 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 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.
6. The Company paid dividends to Host Marriott of $3 million and $19
million during the second quarter of 1998 and 1997, respectively and $3
million and $32 million year-to-date for 1998 and 1997, respectively, as
permitted under the senior notes indentures.
7. 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 twenty-four weeks ended June 19, 1998 and
June 20, 1997, the Company had no other comprehensive income. Therefore,
comprehensive income is equivalent to net income for all periods
presented.
8. 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 twenty-four weeks ended June 19,
1998 and June 20, 1997 (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended June 19, 1998 Twenty-four Weeks Ended June 19, 1998
---------------------------------- -------------------------------------
Corporate Corporate
Hotels & Other Consolidated Hotels & Other Consolidated
-------- --------- ------------ -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................. $ 145 $13 $ 158 $ 288 $15 $ 303
Operating profit......... 70 13 83 143 15 158
Corporate expense........ -- (4) (4) -- (7) (7)
Interest expense......... (42) -- (42) (82) -- (82)
Interest income.......... 5 -- 5 11 -- 11
Income before taxes...... 30 9 39 68 8 76
Total assets............. $2,798 $20 $2,818 $2,798 $20 $2,818
</TABLE>
<TABLE>
<CAPTION>
Twelve Weeks Ended June 19, 1998 Twenty-four Weeks Ended June 19, 1998
---------------------------------- -------------------------------------
Corporate Corporate
Hotels & Other Consolidated Hotels & Other Consolidated
-------- --------- ------------ -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................. $ 97 $ 1 $ 98 $ 192 $ 3 $ 195
Operating profit......... 48 1 49 91 3 94
Corporate expense........ -- (3) (3) -- (6) (6)
Interest expense......... (23) -- (23) (46) -- (46)
Interest income.......... 5 -- 5 9 -- 9
Income before taxes...... 30 (2) 28 54 (3) 51
Total assets............. $1,873 $18 $1,891 $1,873 $18 $1,891
</TABLE>
9. All but eight of the subsidiaries of the Company guarantee the Existing
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
-9-
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
Mission Valley and HMH HPT Residence Inn, Inc., the lessee of the
Residence Inn properties. At June 20, 1997, there is no subsidiary of
the Company the capital stock of which comprises a substantial portion
of the collateral for the senior notes within the meaning of Rule 3-10
of Regulation S-X.
The following condensed, consolidating financial information sets forth
the combined financial position as of June 19, 1998 and January 2, 1998
and the results of operations for the twelve and twenty-four weeks ended
June 19, 1998 and June 20, 1997 and cash flows for the twenty-four weeks
ended June 19, 1998 and June 20, 1997 of the parent, the Guarantor
Subsidiaries and the Non-Guarantor Subsidiaries.
-10-
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Balance Sheets
---------------------------------------------------
(in millions)
June 19, 1998
-------------
(unaudited)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
--------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Property and equipment, net............ $ 975 $576 $708 $2,259
Investment in affiliate................ 20 -- -- 20
Other assets........................... 87 25 95 207
Short-term marketable securities....... 44 -- -- 44
Cash and cash equivalents.............. 266 12 10 288
------ ---- ---- ------
Total assets.......................... $1,392 $613 $813 $2,818
====== ==== ==== ======
Debt................................... $1,171 $429 $350 $1,950
Deferred income taxes.................. 44 47 32 123
Other liabilities...................... 90 57 36 183
------ ---- ---- ------
Total liabilities..................... 1,305 533 418 2,256
Owner's equity......................... 87 80 395 562
------ ---- ---- ------
Total liabilities and owner's equity.. $1,392 $613 $813 $2,818
====== ==== ==== ======
</TABLE>
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......................... 244 64 210 518
------ ---- ---- ------
Total liabilities and owner's equity.. $1,482 $594 $456 $2,532
====== ==== ==== ======
</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 June 19, 1998
--------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
---------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES................................... $ 73 $42 $43 $158
OPERATING COSTS AND EXPENSES............... 32 19 24 75
---- --- --- ----
OPERATING PROFIT BEFORE MINORITY INTEREST
CORPORATE EXPENSES AND INTEREST........... 41 23 19 83
Minority interest.......................... -- -- (3) (3)
Corporate expenses......................... (1) (1) (2) (4)
Interest expense........................... (27) (8) (7) (42)
Interest income............................ 5 -- -- 5
---- --- --- ----
INCOME BEFORE INCOME TAXES................. 18 14 7 39
Provision for income taxes................. (7) (6) (3) (16)
---- --- --- ----
NET INCOME................................. $ 11 $ 8 $ 4 $ 23
==== === === ====
</TABLE>
Twelve Weeks Ended June 20, 1997
--------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
---------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES.................................... $ 58 $24 $16 $ 98
OPERATING COSTS AND EXPENSES................ 26 10 13 49
---- --- --- ----
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST............................... 32 14 3 49
Corporate expenses.......................... (2) (1) -- (3)
Interest expense............................ (21) (1) (1) (23)
Interest income............................. 2 3 -- 5
---- --- --- ----
INCOME BEFORE INCOME TAXES.................. 11 15 2 28
Provision for income taxes.................. (5) (6) (1) (12)
---- --- --- ----
NET INCOME.................................. $ 6 $ 9 $ 1 $ 16
==== === === ====
</TABLE>
-12-
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statements of Operations
-------------------------------------------------------------
(in millions)
(unaudited)
Twenty-Four Weeks Ended June 19, 1998
-------------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
---------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES.................................... $140 $ 80 $ 83 $303
OPERATING COSTS AND EXPENSES................ 64 37 44 145
---- ---- ---- ----
OPERATING PROFIT BEFORE MINORITY INTEREST,
CORPORATE EXPENSES AND INTEREST............ 76 43 39 158
Minority interest........................... -- -- (3) (3)
Corporate expenses.......................... (3) (2) (3) (8)
Interest expense............................ (53) (17) (12) (82)
Interest income............................. 11 -- -- 11
---- ---- ---- ----
INCOME BEFORE INCOME TAXES.................. 31 24 21 76
Provision for income taxes.................. (13) (8) (10) (31)
---- ---- ---- ----
NET INCOME.................................. $ 18 $ 16 $ 11 $ 45
==== ==== ==== ====
</TABLE>
Twenty-Four Weeks Ended June 20, 1997
-------------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
---------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES.................................... $117 $ 50 $28 $195
OPERATING COSTS AND EXPENSES................ 56 22 23 101
---- ---- --- ----
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST............................... 61 28 5 94
Corporate expenses.......................... (3) (2) (1) (6)
Interest expense............................ (41) (3) (2) (46)
Interest income............................. 3 6 -- 9
---- ---- --- ----
INCOME BEFORE INCOME TAXES.................. 20 29 2 51
Provision for income taxes.................. (9) (11) (1) (21)
---- ---- --- ----
NET INCOME.................................. $ 11 $ 18 $ 1 $ 30
==== ==== === ====
</TABLE>
-13-
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSES CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statement of Cash Flows
------------------------------------------------------------
(in millions)
(unaudited)
Twenty-Four Weeks Ended June 19, 1998
-------------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
---------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS............................. $ 44 $ 35 $ 34 $ 113
----- ---- ----- -----
INVESTING ACTIVITIES
Proceeds from sales of assets.......................... 21 -- -- 21
Sales of short-term marketable securities.............. 231 -- -- 231
Purchase of short-term marketable securities........... (84) -- -- (84)
Acquisitions........................................... -- -- (117) (117)
Capital expenditures................................... (25) (18) (8) (51)
Other.................................................. (23) -- -- (23)
----- ---- ----- -----
Cash used in investing activities................... 120 (18) (125) (23)
----- ---- ----- -----
FINANCING ACTIVITIES
Repayment/prepayment of debt........................... (3) -- (13) (16)
Transfers to/from Parent............................... (111) (12) 123 --
Deposits into debt service reserves.................... -- -- (23) (23)
Dividends to Host Marriott Corporation and affiliates.. (3) -- -- (3)
----- ---- ----- -----
Cash provided by (used in) financing activities..... (117) (12) 87 (42)
----- ---- ----- -----
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................................. $ 47 $ 5 $ (4) $ 48
===== ==== ===== =====
</TABLE>
Twenty-Four Weeks Ended June 20, 1997
-------------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
---------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS............................. $ 37 $ 38 $ 6 $ 81
---- ----- ---- -----
INVESTING ACTIVITIES
Acquisitions........................................... (56) -- (33) (89)
Capital expenditures................................... (13) (11) (1) (25)
Other.................................................. 12 -- -- 12
---- ----- ---- -----
Cash provided by (used in) investing activities...... (57) (11) (34) (102)
---- ----- ---- -----
FINANCING ACTIVITIES
Repayment of debt...................................... (2) -- -- (2)
Transfers to/from Parent............................... (1) (27) 28 --
Dividends to Host Marriott Corporation and affiliates.. (32) -- -- (32)
---- ----- ---- -----
Cash provided by (used in) financing activities...... (35) (27) 28 (34)
---- ----- ---- -----
INCREASE IN CASH AND CASH EQUIVALENTS................... $(55) $ -- $ -- $ (55)
==== ===== ==== =====
</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 are forward-looking statements
within the meaning of the Private Litigation Reform Act of 1995 and as such may
involve known and unknown risks, uncertainties, and other factors which may
cause the actual results, performance or achievements of the Company to be
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Although the Company believes the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions it can give no assurance that its expectations will be
attained. These risks are detailed from time to time in the Company's filings
with the Securities and Exchange Commission. The Company undertakes no
obligation to publicly release the result of any revisions to these forward-
looking statements that may be made to reflect any future events or
circumstances.
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 consist of house profit from the Company's hotel properties
and equity in earnings of an affiliate and net gains on property transactions.
The Company's second quarter 1998 revenues of $158 million represented a $60
million, or 61%, increase from the second quarter of 1997. Year-to-date
revenues increased $108 million, or 55%, to $303 million. The results include a
gain of approximately $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 fifteen
full-service hotel properties during 1997 and 1998, and the sale of the Napa
Valley Marriott.
Hotel revenues increased $48 million, or 49%, to $145 million in the second
quarter of 1998. Year-to-date 1998 hotel revenues increased $96 million, or 50%
to $288 million. The 1998 hotel revenue increases reflect the addition of
fifteen full-service hotel properties in 1997 and 1998 and overall improved
lodging results.
Hotel sales (gross hotel sales, including room sales, food and beverage sales,
and other ancillary sales such as telephone sales) increased $122 million, or
50%, to $364 million for the quarter, and $241 million, or 50%, to $725 million
year-to-date, reflecting 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 the property. Improved results were
driven by strong increases in REVPAR of nearly 6% for comparable units for the
second quarter and 7% year-to-date. On a comparable basis, average room rates
increased 7% for the quarter and over 8%year-to-date, while average occupancy
decreased approximately 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 $26 million to $75 million for the second quarter
of 1998 and $44 million to $145 million year-to-date primarily reflecting the
addition of fifteen 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 52% and 51% of revenues for second quarter 1998 and 1997,
respectively and 50% and 53% 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 $34
million to $83 million, or 53% of revenues, in the second quarter of 1998 from
$49 million, or 50% of revenues, in the second quarter of 1997. Year-to-date
operating profit increased
-15-
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
$64 million to $158 million, or 52% of revenues. Most of the Company's hotels
continue to record substantial improvements in operating results. Several
hotels, including the Atlanta Marriott Northwest, The Ritz-Carlton, Marina del
Rey, the Marriott World Trade Center and the Marina Beach Marriott posted
particularly significant improvements in operating profit for the second quarter
and year-to-date.
MINORITY INTEREST. Minority interest expense increased $3 million for the
second 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 increased $1 million for the second
quarter of 1998 and $2 million year-to-date. As a percentage of revenues,
corporate expenses decreased to 2.5% and 2.6% of revenues for the 1998 second
quarter and year-to-date, respectively, compared to 3.1% of revenues for both
prior year periods.
INTEREST EXPENSE. Interest expense increased $19 million for the second quarter
of 1998 and $36 million year-to-date, primarily reflecting the July 1997
issuance of $600 million in senior notes and the assumption of approximately
$287 million of mortgage notes on two properties acquired in late 1997 and the
first quarter of 1998.
NET INCOME. The Company's net income for the second quarter of 1998 increased
$7 million to $23 million compared to net income of $16 million for the second
quarter of 1997. Year-to-date net income for 1998 was $45 million compared to
$30 million of revenues for 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company reported an increase in cash and cash equivalents of $48 million for
the twenty-four weeks ended June 19, 1998. This increase for 1998 is primarily
due to cash generated from operations and the net sales of short-term marketable
securities, partially offset by the acquisition of, or purchase of a controlling
interests in, four full-service properties and capital expenditures on existing
properties. Cash flow provided by operations increased $32 million to $113
million for the twenty-four weeks ended June 19, 1998.
Cash used in investing activities was $23 million and $102 million for the
twenty-four weeks ended June 19, 1998, and June 20, 1997, respectively. Cash
used in investing activities for 1998 primarily reflect the acquisition 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 used in financing activities was $42 million and $34 million for the
twenty-four weeks ended June 19, 1998 and June 20, 1997, respectively. Cash
used in financing activities primarily reflect debt prepayments of $13 million
and deposits into debt service reserves for two partnerships of $23 million.
The Company also paid $3 million in dividends to Host Marriott or its affiliates
as permitted under the senior notes indentures.
In June 1998, as part of the REIT Conversion, Host Marriott filed a preliminary
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, in exchange for their partnership
interests in such Partnerships.
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
-16-
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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.
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"), effective as of January 1,
1999, and to spin-off its senior living communities business ("SLC") 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.
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 $2.5 billion in securities which may
include debt, equity or a combination thereof.
On June 26, 1998, the Company commenced offers to purchase any and all of the
Company's (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 "Existing Senior Notes"). Concurrently with each offer to
purchase, the Company is soliciting consents from registered holders of the
Existing 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 Existing Senior Notes were issued (the "Offer
and Consent Solicitation").
On July 14, 1998 the Company had received valid tenders and executed consents to
substantially all of the Existing Senior Notes. The Company's obligation to
purchase the Existing Senior Notes remains subject to satisfaction or waiver of
certain conditions, including consummation of the offering of New Senior Notes
(as defined below) and obtaining the New Credit Facility (as defined below).
Each Offer will expire at on August 4, 1998, unless extended by the Company.
On July 17, 1998, the Company filed a supplement to the Shelf Registration for
an offering (the "Offering") initially of $1.4 billion of senior notes (the "New
Senior Notes"). On July 29, 1998, the Company completed the Offering of $1.7
billion of New Senior Notes in two series, $500 million at 7 7/8% due 2005 and
$1.2 billion at 7 7/8% due in 2008. The Offering is expected to close on August
5, 1998. The New Senior Notes will be guaranteed by Host Marriott and certain of
its subsidiaries.
The Company is negotiating with a number of financial institutions with respect
to a $1.25 billion credit facility (the "Credit Facility") to be provided by a
syndicate of lenders. The Credit Facility will replace the Company's existing
$500 million credit facility (the "Existing Credit Facility"). The net proceeds
from the Offering and borrowings under the Credit Facility will be used by the
Company to purchase the Existing Senior Notes and to make bond premium and
consent payments and other expenses expected to total approximately$178 million.
These costs, along with the write-off of deferred financing fees of
approximately $55 million related to the Existing Senior Notes and the Existing
Credit Facility, will be recorded as a pre-tax extraordinary loss on the
extinguishment of debt in the third quarter of 1998 if the transactions are
consummated. The Credit Facility will be guaranteed by Host Marriott and
certain of its subsidiaries and is expected to close August 5, 1998.
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
-17-
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 from operations, or any other operating or liquidity performance
measure prescribed by generally accepted accounting principles.
EBITDA increased $32 million, or 48%, to $99 million for the second quarter of
1998 over second quarter 1997. Year-to-date EBITDA increased $68 million, or
52%, to $199 million for 1998 over 1997. Hotel EBITDA increased $35 million, or
55%, to $99 million for the second quarter of 1998 over second quarter 1997.
Year-to-date hotel EBITDA increased $69 million, or 55%, to $195 million for
1998. The increase in hotel EBITDA is due to the increase in comparable full-
service EBITDA of 7.1%, as well as incremental EBITDA from the addition of
fifteen full-service hotels in 1997 and 1998.
The following is a reconciliation of EBITDA to net income:
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Four Weeks Ended
-------------------- -------------------------
June 19, June 20, June 19, June 20,
1998 1997 1998 1997
--------- --------- ------------ -----------
(in millions)
<S> <C> <C> <C> <C>
EBITDA................................. $ 99 $ 67 $ 199 $ 131
Interest expense....................... (42) (23) (82) (46)
Depreciation and amortization.......... (27) (17) (50) (35)
Income taxes........................... (16) (12) (31) (21)
Gain (loss) on dispositions of assets
and other non-cash charges, net....... 9 1 9 1
----- ----- ----- -----
Net income............................ $ 23 $ 16 $ 45 $ 30
===== ===== ===== =====
</TABLE>
The Company interest coverage, defined as EBITDA divided by cash interest
expense was 2.5 to 1.0 and 2.9 to 1.0 for the twenty-four weeks ended June 19,
1998 and June 20, 1997, respectively. The ratio of earnings to fixed charges
was 1.9 to 1.0 and 2.2 to 1.0 for the twenty-four weeks ended June 19, 1998 and
June 20, 1997, respectively.
-18-
<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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
July 16, 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.)
-19-
<PAGE>
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.
July 31, 1998 /s/ Donald D. Olinger
- -------------- ----------------------------------------
Date Donald D. Olinger
Vice President and Corporate Controller
(Principal Accounting Officer)
-20-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HMH
PROPERTIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED STATEMENTS
OF OPERATIONS AS OF AND FOR THE PERIOD ENDED JUNE 19, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> JUN-19-1998
<CASH> 288
<SECURITIES> 44
<RECEIVABLES> 44
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,622
<DEPRECIATION> 363
<TOTAL-ASSETS> 2,818
<CURRENT-LIABILITIES> 0
<BONDS> 1,550
0
0
<COMMON> 0
<OTHER-SE> 562
<TOTAL-LIABILITY-AND-EQUITY> 2,818
<SALES> 288
<TOTAL-REVENUES> 303
<CGS> 145
<TOTAL-COSTS> 145
<OTHER-EXPENSES> 93
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 82
<INCOME-PRETAX> 76
<INCOME-TAX> 31
<INCOME-CONTINUING> 45
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
