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 March 28, 1997 Commission File No. 333-00768
HMC ACQUISITION PROPERTIES, INC.
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Delaware 52-1888825
(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
HMC ACQUISITION PROPERTIES INC. AND SUBSIDIARIES
INDEX
Page
No.
PART I. FINANCIAL INFORMATION (Unaudited):
Condensed Consolidated Balance Sheets - 3
March 28, 1997 and January 3, 1997
Condensed Consolidated Statements of Operations - 4
Twelve Weeks Ended March 28, 1997
and March 22, 1996
Condensed Consolidated Statements of Cash Flows - 5
Twelve Weeks Ended March 28, 1997 and March 22, 1996
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of 8
Operations and Financial Condition
PART II. OTHER INFORMATION AND SIGNATURE 11
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HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 28, January 3,
1997 1997
----------- ------------
ASSETS (unaudited)
Property and equipment, net.................................................... $ 528,007 $ 529,130
Due from hotel managers........................................................ 14,592 16,050
Other assets................................................................... 8,711 7,799
Cash and cash equivalents...................................................... 42,329 33,282
------------- -------------
$ 593,639 $ 586,261
============= =============
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt ........................................................................ $ 350,000 $ 350,000
Deferred income taxes.......................................................... 15,876 15,676
Other liabilities.............................................................. 13,667 4,419
------------- -------------
Total liabilities........................................................ 379,543 370,095
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Shareholder's equity
Common stock, 100 shares issued and outstanding,
no par value............................................................. -- --
Additional paid-in capital................................................. 214,374 214,374
Retained earnings (deficit)................................................ (278) 1,792
------------- -------------
Total shareholder's equity .............................................. 214,096 216,166
------------- -------------
$ 593,639 $ 586,261
============= =============
See Notes to Condensed Consolidated Financial Statements.
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HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve Weeks Ended March 28, 1997 and March 22, 1996
(unaudited, in thousands)
1997 1996
--------- ---------
REVENUES.............................................................................. $ 29,531 $ 22,459
--------- ---------
OPERATING COSTS AND EXPENSES
Depreciation and amortization....................................................... 6,395 4,205
Base and incentive management fees (including Marriott International
management fees of $4,035 and $3,058 in 1997 and 1996,
respectively)..................................................................... 4,659 3,273
Property taxes...................................................................... 1,976 1,875
Ground rent, insurance and other.................................................... 1,225 489
--------- ---------
Total operating costs and expenses................................................ 14,255 9,842
--------- ---------
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND INTEREST..................................................... 15,276 12,617
Corporate expenses.................................................................... (804) (1,146)
Interest expense...................................................................... (7,466) (7,531)
Interest income....................................................................... 461 1,134
--------- ---------
INCOME BEFORE INCOME TAXES............................................................ 7,467 5,074
Provision for income taxes............................................................ (3,000) (2,151)
--------- ---------
NET INCOME............................................................................ $ 4,467 $ 2,923
========= =========
See Notes to Condensed Consolidated Financial Statements.
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HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Weeks Ended March 28, 1997 and March 22, 1996
(unaudited, in thousands)
1997 1996
---------- ---------
OPERATING ACTIVITIES
Net income........................................................................... $ 4,467 $ 2,923
Adjustments to reconcile to cash provided by operations:
Depreciation and amortization..................................................... 6,395 4,205
Income taxes...................................................................... 3,000 2,151
Changes in operating accounts..................................................... 6,831 4,698
Other............................................................................. 178 168
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Cash provided by operations.................................................... 20,871 14,145
---------- ---------
INVESTING ACTIVITIES
Acquisitions......................................................................... -- (44,561)
Capital expenditures................................................................. (3,595) (9,583)
Other................................................................................ (1,692) (1,456)
---------- ---------
Cash used in investing activities.............................................. (5,287) (55,600)
---------- ---------
FINANCING ACTIVITIES
Dividend to Host Marriott Corporation................................................ (6,537) --
Other................................................................................ -- (606)
---------- ---------
Cash used in financing activities.............................................. (6,537) (606)
---------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... $ 9,047 $ (42,061)
========== =========
See Notes to Condensed Consolidated Financial Statements.
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HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying consolidated financial statements of HMC Acquisition
Properties, Inc. and subsidiaries (the "Company"), a wholly-owned indirect
subsidiary of Host Marriott Corporation ("Host Marriott"), have been
prepared by the Company without audit. 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 3, 1997.
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 March 28, 1997 and January 3, 1997
and the results of operations and cash flows for the twelve weeks ended
March 28, 1997 and March 22, 1996. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short-term variations.
2. Revenues represent house profit from the Company's hotel properties. 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, management fees and certain other costs which are classified as
operating costs and expenses.
House profit generated by the Company's hotels for 1997 and 1996 consists
of:
Twelve Weeks Ended
------------------------
March 28, March 22,
1997 1996
---------- ---------
(in thousands)
Sales
Rooms.............................................................. $ 51,674 $ 42,476
Food & Beverage.................................................... 24,195 19,667
Other.............................................................. 4,538 3,841
--------- ---------
Total Hotel Sales............................................... 80,407 65,984
--------- ---------
Department Costs
Rooms.............................................................. 11,908 10,022
Food & Beverage.................................................... 18,432 15,210
Other.............................................................. 2,546 2,294
--------- ---------
Total Department Costs.......................................... 32,886 27,526
--------- ---------
Department Profit.................................................... 47,521 38,458
Other Deductions..................................................... 17,990 15,999
--------- ---------
House Profit.................................................... $ 29,531 $ 22,459
========= =========
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HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. During the first quarter of 1997, a $6.5 million dividend was paid to Host
Marriott, as permitted under the senior notes indenture.
4. On May 12, 1997, the Company commenced a consent solicitation (the "Consent
Solicitation") for the amendment of certain provisions of its senior notes
indenture. The Consent Solicitation, if successful, would facilitate, among
other things, the merger of the Company with and into HMH Properties, Inc.
("Properties"), a wholly-owned indirect subsidiary of Host Marriott which
owns 32 full-service hotel properties, (the "Merger") and the ability of
Properties after the Merger to acquire, through certain subsidiaries,
additional properties subject to non-recourse indebtedness and less than
majority controlling interests in corporations, partnerships and other
entities holding attractive properties. In connection with the Merger, Host
Marriott will make a capital contribution of $50 million to Properties.
The Consent Solicitation is conditioned upon the approval by at least 66
2/3% of the Company's senior notes holders and the completion of a similar
consent solicitation being currently conducted by Properties. As part of
the Consent Solicitation, the Company will make a payment of $875,000 which
will be allocated pro rata by the Company to each registered senior notes
holder who consents to the proposed amendments prior to the execution of a
supplemental indenture adopting the proposed amendments.
The Consent Solicitation will expire at 5:00 p.m., New York City time on
May 23, 1997, unless extended by the Company.
5. All direct and indirect subsidiaries of the Company guarantee the senior
notes. The separate financial statements of each guaranteeing subsidiary
(each, a "Guarantor Subsidiary") are not presented because the Company's
management has concluded that such financial statements are not material to
investors. The guarantee of each Guarantor Subsidiary is full and
unconditional and joint and several and each Guarantor Subsidiary is a
wholly-owned subsidiary of the Company.
Combined summarized operating results of the Guarantor Subsidiaries are as
follows:
Twelve Weeks Ended
-----------------------
March 28, March 22,
1997 1996
--------- ---------
(in thousands)
Revenues...................................................................... $ 5,116 $ 2,926
Operating profit before corporate expenses
and interest................................................................ 3,143 1,895
Net income.................................................................... 1,034 405
Combined summarized balance sheet information of the Guarantor Subsidiaries
is as follows:
March 28, January 3,
1997 1997
----------- -----------
(in thousands)
Property and equipment, net.................................................... $ 96,234 $ 94,427
Other assets................................................................... 7,735 6,853
----------- -----------
Total assets................................................................. $ 103,609 $ 101,280
=========== ===========
Debt........................................................................... $ 60,465 $ 60,465
Other liabilities.............................................................. 10,903 8,387
----------- -----------
Total liabilities............................................................ 71,368 68,852
Equity......................................................................... 32,241 32,428
----------- -----------
Total liabilities and equity................................................. $ 103,609 $ 101,280
=========== ===========
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HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The operating results and balance sheet information include the pushed-down
effect of that portion of the Company's senior notes allocated to the Guarantor
Subsidiaries.
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
Revenues. Revenues represent house profit from the Company's hotel properties.
The Company's first quarter 1997 revenues of $30 million represented a $7
million, or 31%, increase from the first quarter of 1996. The Company's revenues
were impacted by improved lodging results and the addition of two full-service
hotel properties in 1996.
The Company's hotels reported strong growth in revenue per available room
("REVPAR") for comparable hotels. REVPAR is a commonly used indicator of market
performance for hotels which represents the combination of the average daily
room rate charged and the average daily occupancy achieved. REVPAR does not
include food and beverage or other ancillary revenues generated by the property.
Improved results were driven by strong increases in REVPAR of 16% for comparable
units for the quarter. Hotel sales increased $14 million, or 22%, to $80 million
for the quarter, reflecting REVPAR increases for comparable units and the
addition of two full-service properties in 1996. The Company's 1997 first
quarter results were substantially impacted by the exclusion of the New Year's
holiday from the 1997 results due to the timing of the Company's fiscal year end
and the milder winter weather in 1997. On a comparable basis, average room rates
increased 12%, while average occupancy increased approximately three percentage
points reflecting the completion of the conversion of several properties to the
Marriott brand. Results for the quarter were further enhanced by an approximate
four percentage point increase in the house profit margin for comparable
properties. Management believes REVPAR will continue to grow in the near future
through steady increases in average room rates, combined with less significant
increases in occupancy rates. However, there can be no assurance that REVPAR
will continue to grow in the future.
Operating Costs and Expenses. Operating costs and expenses consist of
depreciation and amortization, management fees, property taxes, ground rent,
insurance and certain other costs. The Company's operating costs and expenses
for the first quarter of 1997 increased $4.4 million to $14.3 million. As a
percentage of revenues, operating costs and expenses represented 48% and 44% of
revenues for the first quarter of 1997 and 1996, respectively.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, the Company's operating profit increased nearly $3
million to $15 million, or 52% of revenues, in the first quarter of 1997 from
$13 million, or 56% of revenues, in the first quarter of 1996. Several hotels,
including the San Francisco Airport Marriott, the Westfields Conference Resort,
the Denver Marriott Tech Center, the Charlotte Marriott Executive Park and the
Napa Valley Marriott posted particularly significant improvements in operating
profit for the quarter, which were partially offset by a decrease in the results
for the Atlanta Marriott Northwest due to higher activity in 1996 related to the
Summer Olympics.
-8-
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Corporate Expenses. Corporate expenses decreased $.3 million to $.8 million in
the first quarter of 1997 primarily due to higher average assets for Host
Marriott during the quarter, which resulted in a decrease in the allocation of
corporate expenses to the Company. As a percentage of revenues, corporate
expenses were 3% of revenues for the first quarter of 1997 and 5% of revenues
for the first quarter of 1996.
Interest Expense. Interest expense remained unchanged at $7.5 million in the
first quarter of 1997.
Interest Income. Interest income decreased $.7 million to $.5 million for the
1997 first quarter primarily due to the use of available proceeds from the
December 1995 debt offering for the acquisition of two full- service hotels in
1996.
Net Income. The Company's net income for the first quarter of 1997 increased
$1.5 million to $4.5 million, or 15% of revenues, principally due to improved
lodging results discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company reported an increase in cash and cash equivalents of $9 million in
the twelve weeks ended March 28, 1997 compared to a decrease of $42 million for
the twelve weeks ended March 22, 1996. Cash provided by operations increased $7
million to $21 million for 1997 primarily due to improved hotel operating
results.
Cash used in investing activities was $5 million for the twelve weeks ended
March 28, 1997 compared to $56 million for the twelve weeks ended March 22,
1996. The first quarter 1997 results primarily reflect capital expenditures of
$4 million for the renovation of certain properties and renewals and
replacements on other properties.
Cash used in financing activities was $6.5 million for the twelve weeks ended
March 28, 1997 compared to $.6 million for the twelve weeks ended March 22, 1996
reflecting a dividend to Host Marriott as permitted under the senior notes
indenture.
-9-
HMC ACQUISITION PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
EBITDA
The Company's consolidated Earnings Before Interest Expense, Taxes,
Depreciation, Amortization and other non-cash items ("EBITDA"), increased $5
million, or 27%, to $22 million for the first quarter of 1997. On a comparable
basis, hotel EBITDA increased 26% on a REVPAR increase of 16%. The Company
believes that 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 note indenture 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.
The following is a reconciliation of EBITDA to net income:
Twelve Weeks Ended
--------------------------
March 28, March 22,
1997 1996
------------- ----------
(in thousands)
EBITDA ......................................................................... $ 21,691 $ 17,094
Interest expense................................................................... (7,466) (7,531)
Depreciation and amortization...................................................... (6,395) (4,205)
Income taxes....................................................................... (3,000) (2,151)
Other non-cash charges, net........................................................ (363) (284)
----------- ---------
Net income................................................................... $ 4,467 $ 2,923
=========== =========
The Company interest coverage, defined as EBITDA divided by cash interest
expense, for the quarter improved to 3.0 times from 2.3 times for the 1996 first
quarter and 2.4 times for full year 1996. The ratio of earnings to fixed charges
was 1.9 to 1.0 and 1.6 to 1.0 for the twelve weeks ended March 28, 1997 and
March 22, 1996, respectively, and 1.6 to 1.0 for fiscal year 1996.
- 10 -
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 of 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:
None.
- 11 -
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.
HMC ACQUISITION PROPERTIES, INC.
May 9, 1997 /s/ DONALD D. OLINGER
- ----------- ---------------------------------
Date Donald D. Olinger
Vice President and Corporate Controller
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