<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 8, 2000 Commission File No. 0-25087
HOST MARRIOTT, L.P.
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Delaware 52-2095412
-------------------------- -------------------------
(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
----- ____
Units outstanding
Class at October 16, 2000
--------------------- -------------------
Units of limited partnership interest 284,049,210
================================================================================
<PAGE>
INDEX
-----
Part I. FINANCIAL INFORMATION (Unaudited): Page No.
--------
Condensed Consolidated Balance Sheets -
September 8, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations -
Twelve Weeks and Thirty-six Weeks Ended
September 8, 2000 and September 10, 1999 4
Condensed Consolidated Statements of Cash Flows -
Thirty-six Weeks Ended September 8, 2000 and
September 10, 1999 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Results of
Operations and Financial Condition 22
Quantitative and Qualitative Disclosures about Market Risk 28
Part II. OTHER INFORMATION AND SIGNATURE 29
-2-
<PAGE>
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
September 8, December 31,
2000 1999
------------ ------------
(unaudited)
ASSETS
------
<S> <C> <C>
Property and equipment, net............................................... $ 7,101 $ 7,108
Notes and other receivables (including amounts due from
affiliates of $125 million and $127 million, respectively)............. 172 175
Rent receivable........................................................... 72 72
Investments in affiliates................................................. 99 49
Other assets.............................................................. 395 345
Restricted cash........................................................... 155 170
Cash and cash equivalents................................................. 188 277
-------- --------
$ 8,182 $ 8,196
======== ========
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Debt
Senior notes........................................................... $ 2,540 $ 2,539
Mortgage debt.......................................................... 2,289 2,309
Convertible debt obligation to Host Marriott........................... 492 514
Other.................................................................. 272 221
-------- --------
5,593 5,583
Accounts payable and accrued expenses..................................... 147 148
Deferred income taxes..................................................... 48 49
Deferred rent............................................................. 366 --
Other liabilities......................................................... 373 426
-------- --------
Total liabilities.................................................. 6,527 6,206
-------- --------
Minority interest......................................................... 133 136
Cumulative redeemable preferred limited partnership interests of third
parties at redemption value ("Preferred OP Units") (representing 0.6
million units)........................................................... 7 5
Limited Partnership interests of third parties at redemption value
(representing 63.2 million and 64.0 million units at September 8, 2000
and December 31, 1999)................................................. 687 528
Partners' Capital.........................................................
General partner........................................................ 1 1
Cumulative redeemable preferred limited partner........................ 196 196
Limited partner........................................................ 628 1,120
Accumulated other comprehensive income................................. 3 4
-------- --------
Total partners' capital............................................ 828 1,321
-------- --------
$ 8,182 $ 8,196
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-3-
<PAGE>
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve Weeks Ended September 8, 2000 and September 10, 1999
(unaudited, in millions, except per unit amounts)
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
REVENUES
Rental income.......................................................... $ 224 $ 188
Interest income........................................................ 9 10
Net gains on property transactions..................................... 1 --
Equity in earnings of affiliates....................................... 2 3
Other.................................................................. 3 2
------ ------
Total revenues..................................................... 239 203
------ ------
EXPENSES
Depreciation and amortization.......................................... 75 68
Property-level owner expenses.......................................... 66 62
Minority interest expense.............................................. 1 2
Interest expense....................................................... 107 108
Corporate expenses..................................................... 7 5
Other expenses......................................................... -- 1
------ ------
Total expenses..................................................... 256 246
------ ------
LOSS FROM OPERATIONS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEMS.................................................... (17) (43)
Provision for income taxes................................................ (4) (1)
------ ------
LOSS FROM OPERATIONS BEFORE EXTRAORDINARY ITEMS........................... (21) (44)
Extraordinary gain........................................................ -- 4
------ ------
NET LOSS.................................................................. $ (21) $ (40)
====== ======
Less: Distributions on preferred limited partner units.................... (6) (1)
------ ------
NET LOSS AVAILABLE TO COMMON UNITHOLDERS.................................. $ (27) $ (41)
====== ======
BASIC LOSS PER UNIT:
Loss from operations before extraordinary items........................... $(0.09) $(0.16)
Extraordinary gain (loss)................................................. -- 0.02
------ ------
BASIC LOSS PER UNIT....................................................... $(0.09) $(0.14)
====== ======
DILUTED LOSS PER UNIT:
Loss from operations before extraordinary items........................... $(0.09) $(0.16)
Extraordinary gain (loss)................................................. -- 0.02
------ ------
DILUTED LOSS PER UNIT..................................................... $(0.09) $(0.14)
====== ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-4-
<PAGE>
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Thirty-six Weeks Ended September 8, 2000 and September 10, 1999
(unaudited, in millions, except per units amounts)
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
REVENUES
Rental income............................................................ $ 580 $ 546
Interest income.......................................................... 26 26
Net gains on property transactions....................................... 4 16
Equity in earnings of affiliates......................................... 5 5
Other.................................................................... 8 5
------ ------
Total revenues....................................................... 623 598
------ ------
EXPENSES
Depreciation and amortization............................................ 224 203
Property-level owner expenses............................................ 191 184
Minority interest expense................................................ 11 13
Interest expense......................................................... 315 325
Corporate expenses....................................................... 27 20
Other expenses........................................................... 9 5
------ ------
Total expenses....................................................... 777 750
------ ------
LOSS FROM OPERATIONS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEMS...................................................... (154) (152)
Provision for income taxes................................................ (7) (3)
------ ------
LOSS FROM OPERATIONS BEFORE EXTRAORDINARY ITEMS........................... (161) (155)
Extraordinary gain........................................................ 3 17
------ ------
NET LOSS.................................................................. $ (158) $ (138)
====== ======
Less: Distributions on preferred limited partner units................... (16) (1)
------ ------
NET LOSS AVAILABLE TO COMMON UNITHOLDERS.................................. $ (174) $ (139)
====== ======
BASIC LOSS PER UNIT:
Loss from operations before extraordinary items........................... $(0.62) $(0.54)
Extraordinary gain........................................................ 0.01 0.06
------ ------
BASIC LOSS PER UNIT:...................................................... $(0.61) $(0.48)
====== ======
DILUTED LOSS PER UNIT:
Loss from operations before extraordinary items........................... $(0.62) $(0.54)
Extraordinary gain........................................................ 0.01 0.06
------ ------
DILUTED LOSS PER UNIT..................................................... $(0.61) $(0.48)
====== ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-5-
<PAGE>
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-six Weeks Ended September 8, 2000 and September 10, 1999
(unaudited, in millions)
<TABLE>
<CAPTION>
2000 1999
----- -------
<S> <C> <C>
OPERATING ACTIVITIES
Loss from operations before extraordinary items........................... $(161) $ (155)
Adjustments to reconcile to cash from continuing operations:
Depreciation and amortization.......................................... 224 203
Income taxes........................................................... (20) (20)
Deferred contingent rental income...................................... 366 339
Net gains on property transactions..................................... (4) (16)
Equity in earnings of affiliates....................................... (5) (5)
Changes in operating accounts.......................................... 22 (90)
Other.................................................................. 17 --
----- -------
Cash from operations............................................... 439 256
----- -------
INVESTING ACTIVITIES
Proceeds from sales of assets............................................. -- 49
Acquisitions.............................................................. (40) (17)
Capital expenditures:
Capital expenditures for renewals and replacements..................... (155) (143)
New investment capital expenditures.................................... (88) (102)
Other investments...................................................... (28) (16)
Note receivable collections, net.......................................... 4 (47)
----- -------
Cash used in investing activities.................................. (307) (276)
----- -------
FINANCING ACTIVITIES
Issuances of debt, net.................................................... 292 1,282
Issuances of Class A Preferred Units...................................... -- 100
Costs of extinguishment of debt........................................... -- (2)
Scheduled principal repayments............................................ (27) (26)
Debt prepayment........................................................... (245) (1,275)
Issuances of common units................................................. 3 2
Distributions............................................................. (194) (195)
Redemptions or repurchases of OP Units.................................... (47) --
Repurchases of Convertible Preferred Securities........................... (15) --
Other..................................................................... 12 (12)
----- -------
Cash used in financing activities.................................. (221) (126)
----- -------
DECREASE IN CASH AND CASH EQUIVALENTS..................................... $ (89) $ (146)
===== =======
</TABLE>
Supplemental schedule of noncash investing and financing activities:
Approximately 586,000 Class TS Preferred Units valued at $7.4 million were
issued during the third quarter of 1999 in connection with the acquisition by
merger of two partnerships that own limited partnership interests in the
partnership that owns the New York Marriott Marquis.
See Notes to Condensed Consolidated Financial Statements
-6-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization
Host Marriott, L.P. (the "Operating Partnership" or "Host LP") is a Delaware
limited partnership whose sole general partner is Host Marriott Corporation
("Host REIT"). Host REIT, a Maryland corporation operating through an
umbrella partnership structure, is a self-managed and self-administered real
estate investment trust ("REIT") with its operations conducted solely through
the Operating Partnership and its subsidiaries. As REITs are not currently
permitted to derive revenues directly from the operation of hotels, Host
REIT leases all of the hotels to subsidiaries of Crestline Capital
Corporation ("Crestline") or other lessees (collectively the "Lessee").
In these condensed consolidated financial statements, the "Company" or "Host
Marriott" refers to Host Marriott Corporation before, and Host LP, after Host
Marriott Corporation's conversion to a REIT (the "REIT Conversion"). Host
Marriott Corporation is presented as the predecessor to the Operating
Partnership since the Operating Partnership and its subsidiaries received
substantially all of the continuing operations, assets and liabilities of
Host Marriott Corporation and its subsidiaries.
On December 15, 1998, shareholders of Host Marriott Corporation approved a
plan to reorganize Host Marriott's business operations through the spin-off
of Host Marriott's senior living business as part of Crestline and the
contribution of Host Marriott's hotels and certain other assets and
liabilities to a newly formed Delaware limited partnership, Host Marriott,
L.P. Host REIT has elected, effective January 1, 1999, to be treated as a
REIT for federal income tax purposes and is the sole general partner of the
Operating Partnership. On December 29, 1998, Host Marriott completed the
previously announced spin-off of Crestline through a taxable stock dividend
to its shareholders. Each Host Marriott shareholder of record on December
28, 1998 received one share of Crestline for every ten shares of Host
Marriott Corporation owned. In connection with the REIT Conversion, Host
Marriott contributed its hotels and substantially all of its other assets and
liabilities to the Operating Partnership and subsidiaries (the
"Contribution") in exchange for units of partnership interest in the
Operating Partnership. The Contribution was accounted for at Host Marriott's
historical basis. As of September 8, 2000, Host REIT owned approximately 78%
of the Operating Partnership.
2. Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of the
Company and its subsidiaries have been prepared without audit. Certain
information and footnote disclosures normally included in financial
statements presented in accordance with accounting principles generally
accepted in the United States have been condensed or omitted. The Company
believes the disclosures made are adequate to make the information presented
not misleading. However, the unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K for the fiscal year ended December 31, 1999.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to
present fairly the financial position of the Company as of September 8, 2000,
and the results of operations for the twelve and thirty-six weeks ended
September 8, 2000 and September 10, 1999, and cash flows for the thirty-six
weeks ended September 8, 2000 and September 10, 1999. Interim results are not
necessarily indicative of fiscal year performance because of the impact of
seasonal and short-term variations.
Certain reclassifications were made to the prior year financial statements to
conform to the current presentation.
-7-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company's leases have initial terms ranging from 2 to 10 years, subject
to earlier termination upon the occurrence of certain contingencies, as
defined. Effective November 15, 1999, the leases with Crestline were amended
to give Crestline the right to renew each of these leases for up to four
additional terms of seven years each. The rent due under each lease is the
greater of base rent or percentage rent, as defined. Percentage rent
applicable to room, food and beverage and other types of hotel sales varies
by lease and is calculated by multiplying fixed percentages by the total
amounts of such revenues over specified threshold amounts. Both the minimum
rent and the revenue thresholds used in computing percentage rents are
subject to annual adjustments based on increases in the United States
Consumer Price Index and the Labor Index, as defined.
Under the REIT Modernization Act, which was passed in December 1999 and is
effective beginning January 1, 2001, the Company will be able to lease its
hotels to a wholly-owned subsidiary that is a taxable corporation and that
elects to be treated as a "taxable REIT subsidiary," rather than to a third
party. Under the terms of the leases with Crestline, the Company has the
right to purchase the leases from Crestline on or after January 1, 2001, for
a price equal to the fair rental value of such leases.
The Company recognizes percentage rent when all contingencies have been met,
that is, when annual thresholds for percentage rent have been met or
exceeded. Percentage rent received pursuant to the leases but not recognized
is included on the balance sheet as deferred rent. Contingent rental revenue
of $75 million and $86 million, respectively, for the twelve weeks ended
September 8, 2000 and September 10, 1999, and $366 million and $339 million,
respectively, for the thirty-six weeks ended September 8, 2000 and September
10, 1999, have been deferred.
3. Earnings Per Unit
Basic earnings per unit is computed by dividing net income available to
common unitholders by the weighted average number of common units
outstanding. Diluted earnings per unit is computed by dividing net income
available to common unitholders as adjusted for potentially dilutive
securities, by the weighted average number of common units outstanding plus
other potentially dilutive securities. Dilutive securities may include units
distributed to Host Marriott Corporation for Host Marriott Corporation common
shares granted under comprehensive stock plans and the Convertible Preferred
Securities. Dilutive securities may also include those common and preferred
Operating Partnership Units ("OP Units") issuable or outstanding that are
held by minority partners which are assumed to be converted. No effect is
shown for securities if they are anti-dilutive.
-8-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended
--------------------------------------------------------------------------
September 8, 2000 September 10, 1999
------------------------------------ ------------------------------------
Income Units Per Unit Income Units Per Unit
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Loss...................................... $ (21) 283.8 $ (.07) $ (40) 292.9 $ (.14)
Distributions on preferred limited partner
units and Preferred OP Units................ (6) -- (.02) (1) -- --
---------- ----- -------- --------- ----- --------
Basic loss available to common
unitholders per unit......................... (27) 283.8 (.09) (41) 292.9 (.14)
Assuming distribution of units to Host
Marriott Corporation for Host Marriott
Corporation common shares granted under
the Host Marriott comprehensive stock
plan, less shares assumed purchased at
average market price........................ -- -- -- -- -- --
Assuming conversion of Preferred OP Units.... -- -- -- -- -- --
Assuming issuance of minority OP Units
issuable under certain purchase
agreements.................................. -- -- -- -- -- --
Assuming conversion of Convertible
Preferred Securities........................ -- -- -- -- -- --
---------- ----- -------- --------- ----- --------
Diluted Loss per Unit........................ $ (27) 283.8 $ (.09) $ (41) 292.9 $ (.14)
========== ===== ======== ========= ===== ========
</TABLE>
<TABLE>
<CAPTION>
Thirty-six Weeks Ended
--------------------------------------------------------------------------
September 8, 2000 September 10, 1999
------------------------------------ ------------------------------------
Income Units Per Unit Income Units Per Unit
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Loss...................................... $ (158) 284.2 $ (.55) $ (138) 292.4 $ (.48)
Distributions on preferred limited partner
units and Preferred OP Units................ (16) -- (.06) (1) -- --
---------- ----- -------- --------- ----- --------
Basic loss available to common
unitholders per unit......................... (174) 284.2 (.61) (139) 292.4 (.48)
Assuming distribution of units to Host
Marriott Corporation for Host Marriott
Corporation common shares granted under
the Host Marriott comprehensive stock
plan, less shares assumed purchased at
average market price........................ -- -- -- -- -- --
Assuming conversion of Preferred OP Units.... -- -- -- -- -- --
Assuming issuance of minority OP Units
issuable under certain purchase
agreements.................................. -- -- -- -- -- --
Assuming conversion of Convertible
Preferred Securities........................ -- -- -- -- -- --
---------- ----- -------- --------- ----- --------
Diluted Loss per Unit......................... $ (174) 284.2 $ (.61) $ $(139) 292.4 $ (.48)
========== ===== ======== ========= ===== ========
</TABLE>
-9-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. Unit Repurchases
In September 1999, the Board of Directors of Host Marriott Corporation
approved the repurchase, from time to time on the open market and/or in
privately negotiated transactions, of up to 22 million of the outstanding
shares of Host REIT common stock, OP Units, or a corresponding amount (based
on the appropriate conversion ratio) of Host REIT's Convertible Preferred
Securities. Additionally, under the terms of the partnership agreement, an
equivalent number of OP Units will also be repurchased on a one-to-one basis
from Host Marriott Corporation. Such repurchases will be made at management's
discretion, subject to market conditions, and may be suspended at any time at
Host Marriott Corporation's discretion. During the twelve weeks ended March
24, 2000, Host Marriott repurchased approximately 4.9 million common shares,
325,000 OP Units, and 435,000 shares of the Convertible Preferred Securities
for a total investment of $62 million. During the first quarter of 2000, we
extinguished approximately $22 million of the convertible debt obligation to
Host REIT through the purchase of 435,000 shares of Host REIT's Convertible
Preferred Securities on the open market. We recorded an extraordinary gain of
approximately $5 million on this transaction, based on the discount at which
we purchased the Convertible Preferred Securities. No repurchases were made
during the second and third quarters of 2000. Since the inception of the
program in September 1999, Host Marriott has spent, in the aggregate,
approximately $150 million to repurchase 16.2 million equivalent shares.
5. Dividends and Distributions Payable
On September 19, 2000, the Board of Directors of Host Marriott declared
quarterly cash dividends of $0.23 per share of Host REIT common stock and
corresponding distributions of $0.23 per unit of limited partnership
interest. The third quarter dividends and distributions were paid on October
16, 2000 to shareholders and unitholders of record on September 29, 2000.
First and second quarter cash distributions of $0.21 per common OP Unit were
paid on April 14 and July 14, 2000.
On September 19, 2000, the Board of Directors declared quarterly
distributions of $0.625 per cumulative redeemable preferred limited partner
unit, which were paid on October 16, 2000, to unitholders of record on
September 29, 2000. First and second quarter cash distributions of $0.625 per
cumulative redeemable preferred limited partner unit were paid on April 14
and July 14, 2000.
6. Acquisitions and Developments
In February 2000, construction of the 717-room Tampa Waterside Marriott
adjacent to the convention center in downtown Tampa, Florida was completed at
a total development cost of approximately $104 million, not including a $16
million tax subsidy provided by the City of Tampa.
On May 16, 2000, the Company acquired a non-controlling partnership interest
in the JWDC Limited Partnership, which owns the JW Marriott Hotel, a 772-room
hotel located on Pennsylvania Avenue in Washington, DC. The Company, which
previously held a small interest in the venture, invested approximately $40
million in the form of a preferred equity contribution.
In late June 2000, an expansion that included the additions of a 500-room
tower and 15,000 square feet of meeting space at the Orlando World Center
Marriott was completed at an approximate development cost of $88 million. The
convention/resort property now offers 2,000 guest rooms.
-10-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7. Debt Issuances and Refinancings
In February 2000, the Company refinanced the $80 million mortgage on
Marriott's Harbor Beach Resort property in Fort Lauderdale, Florida. The new
mortgage is for $84 million, at a rate of 8.58%, and matures in March 2007.
During June 2000, the Company modified its bank credit facility. As
modified, the total facility has been permanently reduced to $775 million,
consisting of a $150 million term loan and a $625 million revolver. In
addition, the original term was extended for two additional years, through
August 2003. In connection with the renegotiation of the bank credit
facility, the Company recognized an extraordinary loss of approximately $2
million during the second quarter of 2000, representing the write-off of
deferred financing costs and certain fees paid to the lender. As of September
8, 2000, $176 million was outstanding under the bank credit facility, and the
available capacity under the line of credit balance was $599 million.
In October 2000, the Company issued $250 million of 9 1/4% Series F senior
notes due in 2007, under the same indenture and with the same covenants as
the Series A, Series B, Series C, and Series E senior notes. The net
proceeds to the Company were approximately $245 million, after deduction of a
discount at issuance of approximately $3 million and commissions and expenses
of approximately $2 million. The proceeds have been used for the $26 million
repayment of the outstanding balance of the revolver portion of the bank
credit facility, and the remainder will be used for general working capital
purposes, which may include the purchase of the leases from Crestline, and
litigation settlements, as discussed in Note 12. As a result of the
repayment, the available capacity under the revolver was increased to $625
million, and total borrowings under the bank credit facility were reduced to
$150 million, representing the term loan.
8. Geographic Information
As of September 8, 2000, the Company's foreign operations consisted of four
hotel properties located in Canada. There were no intercompany sales between
the properties and the Company. The following table presents revenues for
each of the geographical areas in which the Company owns hotels (in
millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
-------------------------------- --------------------------------
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States.................................... $ 236 $ 199 $ 615 $ 588
International.................................... 3 4 8 10
----- ----- ----- -----
Total.......................................... $ 239 $ 203 $ 623 $ 598
===== ===== ===== =====
</TABLE>
9. Comprehensive Income
The Company's other comprehensive income consists of unrealized gains and
losses on foreign currency translation adjustments and the right to receive
cash from Host Marriott Services Corporation subsequent to the exercise of
the options held by certain former and current employees of Marriott
International, pursuant to the distribution agreement between the Company and
Host Marriott Services Corporation. For the twelve and thirty-six weeks ended
September 8, 2000, the comprehensive loss totaled $22 million and $159
million, respectively. The comprehensive loss was $34 million and
$131million for the twelve and thirty-six weeks ended September 10, 1999,
respectively. As of September 8, 2000 and December 31, 1999, the Company's
accumulated other comprehensive income was $3 million and $4 million,
respectively.
-11-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
10. Summarized Lease Pool Financial Statements
As discussed in Note 2, as of September 8, 2000, almost all the properties
of the Company and its subsidiaries were leased to Crestline. In
conjunction with these leases, Crestline and certain of its subsidiaries
entered into limited guarantees of the lease obligations of each lessee.
The full-service hotel leases are grouped into four lease pools, with
Crestline's guarantee limited to the greater of 10% of the aggregate rent
payable for the preceding year or 10% of the aggregate rent payable under
all leases in the respective pool. Additionally, the lessee's obligation
under each lease agreement is guaranteed by all other lessees in the
respective lease pool. As a result, the Company believes that the operating
results of each full-service lease pool may be material to the Company's
financial statements. Financial information of certain pools related to the
sublease agreements for limited service properties are not presented, as
the Company believes they are not material to the Company's financial
statements. Financial information of Crestline may be found in its
quarterly and annual filings with the Securities and Exchange Commission.
Further information regarding these leases and Crestline's limited
guarantees may be found in the Company's annual report on Form 10-K for the
fiscal year ended December 31, 1999. The results of operations for the
twelve and thirty-six weeks ended September 8, 2000 and September 10, 1999
and summarized balance sheet data as of September 8, 2000 and December 31,
1999 of the lease pools in which the Company's hotels are organized are as
follows (in millions):
-12-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended September 8, 2000
------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Hotel Sales
Rooms...................................... $ 147 $ 156 $ 137 $ 141 $ 581
Food and beverage.......................... 60 66 57 69 252
Other...................................... 14 16 16 19 65
----- ----- ----- ----- -----
Total hotel sales..................... 221 238 210 229 898
Operating Costs and Expenses
Rooms...................................... 36 40 34 33 143
Food and beverage.......................... 49 54 45 54 202
Other...................................... 62 58 57 57 234
Management fees............................ 10 15 10 14 49
Lease expense.............................. 63 67 62 70 262
----- ----- ----- ----- -----
Total operating expenses.............. 220 234 208 228 890
----- ----- ----- ----- -----
Operating Profit................................ 1 4 2 1 8
Corporate and Interest Expenses................. -- -- (1) -- (1)
----- ----- ----- ----- -----
Income before taxes....................... 1 4 1 1 7
Income taxes.............................. (1) (2) -- -- (3)
----- ----- ----- ----- -----
Net Income............................ $ -- $ 2 $ 1 $ 1 $ 4
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Twelve Weeks Ended September 10, 1999
-------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Hotel Sales
Rooms...................................... $ 135 $ 142 $ 126 $ 128 $ 531
Food and beverage.......................... 57 59 55 67 238
Other...................................... 16 15 16 17 64
----- ----- ----- ----- -----
Total hotel sales..................... 208 216 197 212 833
Operating Costs and Expenses
Rooms...................................... 34 40 32 30 136
Food and beverage.......................... 46 48 44 50 188
Other...................................... 58 50 54 55 217
Management fees............................ 9 13 9 13 44
Lease expense.............................. 57 59 56 61 233
----- ----- ----- ----- -----
Total operating expenses.............. 204 210 195 209 818
----- ----- ----- ----- -----
Operating Profit................................ 4 6 2 3 15
Corporate and Interest Expenses................. (1) (1) -- (1) (3)
----- ----- ----- ----- -----
Income before taxes....................... 3 5 2 2 12
Income taxes.............................. (1) (3) (1) (1) (6)
----- ----- ----- ----- -----
Net Income............................ $ 2 $ 2 $ 1 $ 1 $ 6
===== ===== ===== ===== =====
</TABLE>
-13-
<PAGE>
HOST MARRIOT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Thirty-six Weeks Ended September 8, 2000
----------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Hotel Sales
Rooms...................................... $428 $469 $409 $433 $1,739
Food and beverage.......................... 188 219 189 235 831
Other...................................... 44 46 59 60 209
---- ---- ---- ---- ------
Total hotel sales..................... 660 734 657 728 2,779
Operating Costs and Expenses
Rooms...................................... 102 116 96 96 410
Food and beverage.......................... 145 165 140 167 617
Other...................................... 173 167 166 170 676
Management fees............................ 32 50 32 52 166
Lease expense.............................. 200 224 214 237 875
---- ---- ---- ---- ------
Total operating expenses.............. 652 722 648 722 2,744
---- ---- ---- ---- ------
Operating Profit................................ 8 12 9 6 35
Corporate and Interest Expenses................. (1) (1) (1) (1) (4)
---- ---- ---- ---- ------
Income before taxes....................... 7 11 8 5 31
Income taxes.............................. (3) (5) (3) (2) (13)
---- ---- ---- ---- ------
Net Income............................ $ 4 $ 6 $ 5 $ 3 $ 18
==== ==== ==== ==== ======
</TABLE>
<TABLE>
<CAPTION>
Thirty-six Weeks Ended September 8, 2000
----------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Hotel Sales
Rooms...................................... $408 $436 $394 $401 $1,639
Food and beverage.......................... 184 196 183 220 783
Other...................................... 46 44 54 51 195
---- ---- ---- ---- ------
Total hotel sales..................... 638 676 631 672 2,617
Operating Costs and Expenses
Rooms...................................... 98 108 95 88 389
Food and beverage.......................... 143 150 135 154 582
Other...................................... 168 157 161 158 644
Management fees............................ 29 43 30 46 148
Lease expense.............................. 190 206 202 218 816
---- ---- ---- ---- ------
Total operating expenses.............. 628 664 623 664 2,579
---- ---- ---- ---- ------
Operating Profit................................ 10 12 8 8 38
Corporate and Interest Expenses................. (2) (2) (1) (2) (7)
---- ---- ---- ---- ------
Income before taxes....................... 8 10 7 6 31
Income taxes.............................. (3) (5) (3) (2) (13)
---- ---- ---- ---- ------
Net Income............................ $ 5 $ 5 $ 4 $ 4 $ 18
==== ==== ==== ==== ======
</TABLE>
<TABLE>
<CAPTION>
As of September 8, 2000
-----------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Assets.......................................... $37 $34 $40 $37 $148
Liabilities..................................... 30 27 34 34 125
Equity.......................................... 7 7 6 3 23
</TABLE>
<TABLE>
<CAPTION>
As December 31, 1999
--------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Assets.......................................... $39 $37 $41 $38 $155
Liabilities..................................... 36 36 40 38 150
Equity.......................................... 3 1 1 -- 5
</TABLE>
-14-
<PAGE>
HOST MARRIOT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11. Supplemental Guarantor and Non-Guarantor Subsidiary Information
All subsidiaries of the operating partnership guarantee the Company's senior
notes except those among the twenty full service hotels listed below and HMH
HPT Residence Inn, LLC and HMH HPT Courtyard, LLC, the lessees of the
Residence Inn and Courtyard properties, respectively. The separate financial
statements of each guaranteeing subsidiary (each, a "Guarantor Subsidiary")
are not presented because 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. Certain of the
Guarantor Subsidiaries are not wholly-owned subsidiaries of the Company. In
these cases, however, the outside ownership percentage is less than 1%.
Separate financial information of those non-wholly-owned Guarantor
Subsidiaries are not presented, as the Company believes they are not material
to investors. The non-guarantor subsidiaries (the "Non-Guarantor
Subsidiaries") own the following full-service hotels: the Albany Marriott;
Atlanta Marriott Marquis; Marriott's Harbor Beach Resort; Hartford Marriott;
Hyatt Regency, Cambridge; Hyatt Regency, Reston; Manhattan Beach Marriott;
Minneapolis Southwest Marriott; New York Marriott Marquis; Ontario Airport
Marriott; Pittsburgh City Center Marriott; The Ritz-Carlton, Amelia Island;
San Diego Marriott Hotel and Marina; San Diego Mission Valley; Swissotel,
Atlanta; Swissotel, Boston; Swissotel, Chicago; The Drake (Swissotel) New
York; and the Oklahoma City Waterford Marriott.
The following condensed combined consolidating information sets forth the
financial position as of September 8, 2000 and December 31, 1999, and results
of operations for the twelve weeks and thirty-six weeks ended September 8,
2000 and September 10, 1999, respectively, and cash flows for the thirty-six
weeks ended September 8, 2000 and September 10, 1999 of the parent, Guarantor
Subsidiaries and the Non-Guarantor Subsidiaries.
-15-
<PAGE>
HOST MARRIOT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental Condensed Combined Consolidating Balance Sheets
(in millions)
September 8, 2000
<TABLE>
<CAPTION>
Non
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Property and equipment, net.......................... $1,217 $3,791 $2,093 $ -- $7,101
Notes and other receivables.......................... 393 208 23 (452) 172
Rent receivable...................................... 16 28 28 -- 72
Investments in affiliate............................. 1,646 -- -- (1,547) 99
Other assets......................................... 11 232 207 (55) 395
Cash and cash equivalents............................ 275 43 25 -- 343
------ ------ ------ ------- ------
Total assets...................................... $3,558 $4,302 $2,376 $(2,054) $8,182
====== ====== ====== ======= ======
Debt................................................. $1,198 $2,974 $1,148 $ (219) $5,101
Convertible debt obligations to Host Marriott........ 492 -- -- -- 492
Deferred income taxes................................ 9 32 7 -- 48
Deferred rent........................................ 78 193 95 -- 366
Other liabilities.................................... 257 373 178 (288) 520
------ ------ ------ ------- ------
Total liabilities................................. 2,034 3,572 1,428 (507) 6,527
Minority interests................................... 2 131 -- -- 133
Limited partner interest of third parties at
redemption value.................................... 694 -- -- -- 694
Owner's capital...................................... 828 599 948 (1,547) 828
------ ------ ------ ------- ------
Total liabilities and owner's capital............. $3,558 $4,302 $2,376 $(2,054) $8,182
====== ====== ====== ======= ======
</TABLE>
December 31, 1999
<TABLE>
<CAPTION>
Non
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Property and equipment, net.......................... $1,221 $3,755 $2,132 $ -- $7,108
Notes and other receivables.......................... 421 212 22 (480) 175
Rent receivable...................................... 10 26 36 -- 72
Investments in affiliate............................. 1,794 -- -- (1,745) 49
Other assets......................................... 173 225 175 (58) 515
Cash and cash equivalents............................ 199 58 20 -- 277
------ ------ ------ ------- ------
Total assets..................................... $3,818 $4,276 $2,385 $(2,283) $8,196
====== ====== ====== ======= ======
Debt................................................. $1,139 $3,007 $1,168 $ (245) $5,069
Convertible debt obligation to Host Marriott......... 514 -- -- -- 514
Deferred income taxes................................ 10 32 7 -- 49
Other liabilities.................................... 297 375 195 (293) 574
------ ------ ------ ------- ------
Total liabilities................................ 1,960 3,414 1,370 (538) 6,206
Minority interests................................... 4 132 -- -- 136
Limited partner interest of third parties at
redemption value.................................... 533 -- -- -- 533
Owner's capital...................................... 1,321 730 1,015 (1,745) 1,321
------ ------ ------ ------- ------
Total liabilities and owner's capital............ $3,818 $4,276 $2,385 $(2,283) $8,196
====== ====== ====== ======= ======
</TABLE>
-16-
<PAGE>
HOST MARRIOT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental Condensed Combined Statements of Operations
(in millions)
Twelve Weeks Ended September 8, 2000
<TABLE>
<CAPTION>
Non
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES............................................. $ 42 $122 $ 73 $ 2 $ 239
Depreciation......................................... (17) (39) (19) -- (75)
Property-level expenses.............................. (17) (23) (26) -- (66)
Minority interest.................................... -- (1) -- -- (1)
Interest expense..................................... (29) (66) (23) 11 (107)
Corporate expenses................................... (1) (4) (2) -- (7)
Other expenses....................................... 5 (3) (2) -- --
---- ---- ---- --- -----
(Loss) income before income taxes.................... (17) (14) 1 13 (17)
(Provisions for) benefit from income taxes........... (4) -- -- -- (4)
---- ---- ---- --- -----
(Loss) income before extraordinary item.............. (21) (14) 1 13 (21)
Extraordinary loss................................... -- -- -- -- --
---- ---- ---- --- -----
NET INCOME (LOSS).................................... $(21) $(14) $ 1 $13 $ (21)
==== ==== ==== === =====
</TABLE>
Twelve Weeks Ended September 10, 1999
<TABLE>
<CAPTION>
Non
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES............................................. $ 29 $ 98 $ 64 $12 $ 203
Depreciation......................................... (14) (35) (19) -- (68)
Property-level expenses.............................. (12) (24) (26) -- (62)
Minority interest.................................... (5) 3 -- -- (2)
Interest expense..................................... (34) (57) (23) 6 (108)
Corporate expenses................................... (5) (2) 1 -- (6)
Other expenses....................................... 2 (1) (1) -- --
---- ---- ---- --- -----
(Loss) income before income taxes and (39) (18) (4) 18 (43)
extraordinary item..................................
Provision for income tax............................. (1) -- -- -- (1)
---- ---- ---- --- -----
(Loss) income before extraordinary item.............. (40) (18) (4) 18 (44)
Extraordinary gain................................... -- 1 3 -- 4
---- ---- ---- --- -----
NET INCOME (LOSS).................................... $(40) $(17) $ (1) $18 $ (40)
==== ==== ==== === =====
</TABLE>
-17-
<PAGE>
HOST MARRIOTT
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental Condensed Combined Statements of Operations
(in millions)
Thirty-six Weeks Ended September 8, 2000
<TABLE>
<CAPTION>
Non
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
REVENUES............................................. $ 37 $ 310 $208 $ 68 $ 623
Depreciation......................................... (51) (115) (58) -- (224)
Property-level expenses.............................. (41) (69) (81) -- (191)
Minority interest.................................... (3) (8) -- -- (11)
Interest expense..................................... (91) (188) (69) 33 (315)
Corporate expenses................................... (2) (16) (9) -- (27)
Other expenses....................................... (2) (5) (2) -- (9)
----- ----- ---- ---- -----
(Loss) income before income taxes and
extraordinary items................................. (153) (91) (11) 101 (154)
(Provision for) benefit from income taxes............ (8) 1 -- -- (7)
----- ----- ---- ---- -----
(Loss) income before extraordinary item.............. (161) (90) (11) 101 (161)
Extraordinary gain................................... 3 -- -- -- 3
----- ----- ---- ---- -----
NET INCOME (LOSS).................................... $(158) $ (90) $(11) $101 $(158)
===== ===== ==== ==== =====
</TABLE>
Thirty-six Weeks Ended September 10, 1999
<TABLE>
<CAPTION>
Non
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
REVENUES............................................. $ 60 $ 297 $195 $46 $ 598
Depreciation......................................... (44) (105) (54) -- (203)
Property-level expenses.............................. (34) (69) (79) -- (182)
Minority interest.................................... (7) (6) -- -- (13)
Interest expense..................................... (102) (172) (68) 17 (325)
Corporate expenses................................... (4) (11) (6) -- (21)
Other expenses....................................... (3) (2) (1) -- (6)
----- ----- ---- --- -----
(Loss) income before income taxes and
extraordinary item.................................. (134) (68) (13) 63 (152)
Provision for income taxes........................... (4) 1 -- -- (3)
----- ----- ---- --- -----
(Loss) income before extraordinary item.............. (138) (67) (13) 63 (155)
Extraordinary gain................................... -- 1 16 -- 17
----- ----- ---- --- -----
NET INCOME (LOSS).................................... $(138) $ (66) $ 3 $63 $(138)
===== ===== ==== === =====
</TABLE>
-18-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental Condensed Combined Statements of Cash Flows
(in millions)
Thirty-six Weeks Ended September 8, 2000
<TABLE>
<CAPTION>
Non
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Cash from operations............................................. $ 146 $ 178 $115 $ 439
----- ----- ---- -----
INVESTING ACTIVITIES
Cash received from sales of assets............................... -- -- -- --
Acquisitions..................................................... (40) -- -- (40)
Capital expenditures and other investments....................... (63) (168) (40) (271)
Other............................................................ 4 -- -- 4
----- ----- ---- -----
Cash used in investing activities................................ (99) (168) (40) (307)
----- ----- ---- -----
FINANCING ACTIVITIES
Issuances of debt................................................ 207 2 83 292
Repayment of debt................................................ (167) (9) (96) (272)
Issuances of common units........................................ 3 -- -- 3
Distributions.................................................... (194) -- -- (194)
Redemption or repurchase of OP Units............................. (47) -- -- (47)
Repurchase of Convertible Preferred Securities................... (15) -- -- (15)
Other............................................................ (9) 22 (1) 12
Transfers to/from Parent......................................... 96 (40) (56) --
----- ----- ---- -----
Cash used in financing activities................................ (126) (25) (70) (221)
----- ----- ---- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. $ (79) $ (15) $ 5 $ (89)
===== ===== ==== =====
</TABLE>
-19-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental Condensed Combined Statements of Cash Flows
(in millions)
Thirty-six Weeks Ended September 10, 1999
<TABLE>
<CAPTION>
Non
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Cash from operations............................................. $ 11 $ 153 $ 92 $ 256
----- ----- ----- -------
INVESTING ACTIVITIES
Cash received from sales of assets............................... 1 48 -- 49
Capital expenditures and other investments....................... (58) (173) (30) (261)
Acquisitions..................................................... -- (12) (5) (17)
Other............................................................ (47) -- -- (47)
----- ----- ----- -------
Cash used in investing activities................................ (104) (137) (35) (276)
----- ----- ----- -------
FINANCING ACTIVITIES
Repayment of debt................................................ (111) (333) (857) (1,301)
Issuances of debt................................................ 290 35 957 1,282
Distributions.................................................... (195) -- -- (195)
Issuances of common units........................................ 2 -- -- 2
Issuance of Class A Preferred Units.............................. 100 -- -- 100
Cost of extinguishment of debt................................... -- -- (2) (2)
Transfers to/from Parent......................................... (192) 339 (147) --
Other............................................................ (12) -- -- (12)
----- ----- ----- -------
Cash used in financing activities................................ (118) 41 (49) (126)
----- ----- ----- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................................... $(211) $ 57 $ 8 $ (146)
===== ===== ===== =======
</TABLE>
12. Contingencies
On March 16, 1998, limited partners in several limited partnerships filed a
lawsuit, the Texas Multi-Partnership Lawsuit, naming the Company, Marriott
International Inc. ("Marriott International"), and others as defendants and
claiming that they conspired to sell hotels to the partnerships for inflated
prices, that they charged the partnerships excessive management fees to operate
the partnerships' hotels and otherwise breached their fiduciary duties. The
lawsuit involved the following partnerships: Courtyard by Marriott Limited
Partnership, Courtyard by Marriott II Limited Partnership, Marriott Residence
Inn Limited Partnership, Marriott Residence Inn II Limited Partnership,
Fairfield Inn by Marriott Limited Partnership, Desert Springs Marriott Limited
Partnership and Atlanta Marriott Marquis Limited Partnership. Three other
lawsuits, collectively, the Partnership Lawsuits, involving limited partners of
some of the aforementioned partnerships had also been filed, at various dates
beginning in June 1996, and include similar actions naming the Company,
Marriott International and others as defendants.
The Company and Marriott International have executed a definitive settlement
agreement to resolve the Texas Multi-Partnership Lawsuit and the Partnership
Lawsuits. The proposed settlement would involve a resolution of claims against
all defendants in all seven partnerships, except with respect to those partners
who have elected to opt out of the settlement. The holders of fewer than three
units in a single partnership have made such an election, however. The proposed
settlement would include an acquisition of the limited partner interests in two
partnerships by an unconsolidated joint venture between a non-
-20-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
controlled subsidiary of the Company and a subsidiary of Marriott
International for approximately $372 million plus interest and legal fees,
of which the Company will pay approximately $91 million. The Company's
share of funds required to resolve the litigation with all seven
partnerships, including the acquisitions, is expected to be approximately
$124 million. Of this amount, the Company funded the settlement escrow for
$31 million in cash on September 28, 2000, in settlement of litigation with
the plaintiffs in four of the partnerships. As part of the settlement, the
Company also expects to contribute to the joint venture its existing
interests in the partnerships. All conditions have been removed and
judicial fairness determinations have been obtained with respect to five of
the seven partnerships and they have been severed by court order from the
remaining two settlements. Accordingly, the defendants have consummated the
settlements with respect to those partnerships by funding the settlement
escrows. Various consents remain conditions to consummation with respect to
the other two partnerships, and there can be no assurance that these
settlements will occur. In the event the Company does not successfully
finalize these two settlements, the two cases could go to trial. As a
result of the proposed settlement, the Company recorded a one-time, non-
recurring, pre-tax charge of $40 million in 1999.
The Company has also been named a defendant in other lawsuits involving
various hotel partnerships. The lawsuits are ongoing, and although the
ultimate resolution of lawsuits is not determinable, the Company does not
believe the outcome will be material to the financial position, statement
of operations or cash flows of the Company. See "Item 1 - Legal
Proceedings" for further detail regarding current litigation.
13. Subsequent Event
On September 21, 2000, one of our non-controlled subsidiaries acquired for
$4.5 million a 4% preferred equity interest in STSN, a privately held
company that is a provider of in-room, high speed internet access to the
lodging industry, from an affiliate of First Media Corporation. Richard E.
Marriott, a director and officer of the Company is also an officer,
director and controlling shareholder of First Media Corporation. The
purchase price was determined based on First Media's original investment in
STSN in December 1999, plus investment costs and accrued interest through
September 2000.
-21-
<PAGE>
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Forward-looking Statements
--------------------------
Certain matters discussed herein are forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. Certain, but not necessarily all, of such forward-looking
statements can be identified by the use of forward-looking terminology, such as
"believes," "expects," "may," "intends," "predicts," "projects," "plan,"
"objective," "will," "should," "estimates," or "anticipates," or the negative
thereof or other variations thereof or comparable terminology. All forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause our 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. Although we believe the expectations reflected in such forward-
looking statements are based upon reasonable assumptions, we can give no
assurance that our expectations will be attained or that any deviations will not
be material. We disclaim any obligations or undertaking to publicly release any
updates or revisions to any forward-looking statement contained in this
quarterly report on Form 10-Q to reflect any change in our expectations with
regard thereto or any change in events, conditions or circumstances on which any
such statement is based.
Overview
--------
In December 1999, the REIT Modernization Act was passed, effective for taxable
years beginning after December 31, 2000, which significantly amends the REIT
laws applicable to us. Under the REIT Modernization Act, beginning January 1,
2001, (i) we will be able to lease our hotels to a subsidiary that is a taxable
corporation and that elects to be treated as a "taxable REIT subsidiary" rather
than to a third party such as Crestline and (ii) we will be permitted to own all
of the voting stock of such taxable REIT subsidiary. In addition, as a result of
passage of the REIT Modernization Act, and under the terms of our leases with
Crestline subsidiaries, we have the right to purchase the leases from Crestline
on or after January 1, 2001, for a price equal to the fair rental value of the
lessee's interest in the leases over their remaining terms based on an agreed
upon formula, excluding any option periods, the amount of which is likely to be
between $200 million and $250 million. We currently are engaged in discussions
with Crestline regarding a transaction in which a taxable REIT subsidiary owned
by us would purchase all or substantially all of the leases for our hotels with
Crestline subsidiaries. If any transaction is consummated, we would lease these
hotels to a subsidiary of ours that qualifies as a taxable REIT subsidiary. In
connection therewith, we would recognize the revenues and expenses generated by
the hotels subject to the leases and we would no longer recognize rental income
from these leases. Consummation of a transaction would be subject to various
conditions, including the receipt of any required third party consents and the
negotiation of definitive documentation. We have not reached a definitive
agreement with Crestline with respect to a purchase and there can be no
assurance that we will be able to reach an agreement or that any purchase, if
agreed to, would be consummated. We are also considering pursuing a transaction
with Host Marriott Statutory Employee/Charitable Trust that would allow us to
acquire control of the non-controlled subsidiaries which we expect would elect
to be treated as taxable REIT subsidiaries, although we have not reached any
such agreement and cannot assure you that any such agreement will be reached.
We and Marriott International have executed a definitive settlement agreement
with plaintiffs to resolve specific pending litigation involving seven limited
partnerships in which we act as general partner. The proposed settlement would
involve an acquisition of the limited partner interests in two partnerships by a
joint venture between one of our affiliates and a subsidiary of Marriott
International, the contribution by our non-controlled subsidiaries of their
general partnership interests in the partnerships and cash payments to partners
in the other five partnerships, in exchange for resolution of claims against all
defendants in all seven partnerships, except with respect to those partners who
have elected to opt out of the settlement. The holders of three units have made
such an election. Our share of the cash required to resolve the litigation,
including the acquisition by a joint venture formed by us and Marriott
International of two of the partnerships, is expected to be approximately $124
million. Of this amount, $31 million in cash was funded during September 2000 in
settlement of
-22-
<PAGE>
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
litigation with the plaintiffs from four of the partnerships. Unitholders from
five of the partnerships have finalized the settlement of their claims with us.
The proposed settlement for the remaining two partnerships is subject to
numerous conditions, including various consents, and no assurance can be given
that those settlements will occur. As a result of the proposed settlement, we
recorded a one-time non-recurring, pre-tax charge of $40 million in the fourth
quarter of 1999.
Results of Operations
---------------------
Revenues. Our revenues primarily represent rental income from our leased
hotels, net gains on property transactions, interest income and equity in
earnings of affiliates. As discussed in Note 2 to the condensed consolidated
financial statements, percentage rental revenues of $75 million and $86 million
for the twelve weeks ended September 8, 2000 and September 10, 1999,
respectively, and $366 million and $339 for the thirty-six weeks ended September
8, 2000 and September 10, 1999, respectively, were deferred in accordance with
the Securities and Exchange Commission's Staff Accounting Bulletin No. 101 ("SAB
101"). Percentage rent will be recognized as income during the year once
specified hotel sales thresholds are achieved.
The table below represents hotel sales from which rental income is computed as
discussed in Note 2 to the condensed consolidated financial statements. The
table is presented in order to facilitate an investor's reconciliation of hotel
sales to rental income.
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
---------------------------- ----------------------------
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
------------ ------------- ------------ -------------
(millions) (in millions)
<S> <C> <C> <C> <C>
Hotel Sales
Rooms.................................................. $ 656 $ 609 $1,979 $1,881
Food and beverage...................................... 258 250 862 828
Other.................................................. 71 66 224 201
----- ----- ------ ------
Total hotel sales................................. $ 985 $ 925 $3,065 $2,910
===== ===== ====== ======
</TABLE>
Rental income increased $36 million, or 19%, to $224 million for the third
quarter of 2000 and increased $34 million, or 6% to $580 million year-to-date,
primarily driven by the growth in room revenues generated per available room or
REVPAR for comparable properties, and the completion of the new Tampa Waterside
Marriott in February 2000 and the 500-room expansion at the Orlando World Center
Marriott in June 2000, partially offset by the sale of five properties in 1999.
REVPAR increased 9.4% to $119.74 for the third quarter of 2000 and 6.6% to
$124.31 year-to-date for comparable properties, which consist of the 114
properties owned, directly or indirectly, by us for the same period of time in
each period covered, excluding two properties where significant expansion at the
hotels affected operations and five properties where reported results were
affected by a change in reporting period. On a comparable basis, average room
rates increased approximately 7.9% and 6.3%, while average occupancy increased
one percentage point and less than one percentage point for the third quarter of
2000 and 2000 year-to-date, respectively.
Depreciation and Amortization. Depreciation and amortization increased $7
million or 10% for the third quarter of 2000 and increased $21 million or 10%
year-to-date, reflecting an increase in depreciable assets, which is primarily
the result of new capital projects placed in service in 2000, including the
Tampa Waterside Marriott and the expansion at the Orlando World Center Marriott,
partially offset by net asset disposals of approximately $174 million in
connection with the sale of five hotels during 1999.
Property-level Owner Expenses. Property-level owner expenses primarily consist
of property taxes, insurance, and ground and equipment rent. These expenses
increased $4 million, or 6%, to $66 million for the third quarter of 2000 and
increased $7 million, or 4%, to $191 million year-to-date, primarily due to an
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HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
increase in ground lease expense, which is commensurate with the increase in
hotel sales, and an increase in equipment rent expense due to technology
initiatives at the hotels during 2000.
Minority Interest Expense. Minority interest expense decreased 50% to $1 million
in the third quarter of 2000 and 15% to $11 million year-to-date. The decrease
in minority interest expense reflects the minority owners' share in the net
losses for the periods, which is primarily the result of the deferral of
contingent rental revenue.
Interest Expense. Interest expense decreased 1% to $107 million in the third
quarter of 2000, primarily due to a decrease in the outstanding balance of the
convertible debt obligation to Host REIT, as approximately $75 million of the
debt obligation was extinguished in connection with the repurchase of
approximately 1.5 million shares of Host REIT's Convertible Preferred Securities
during the fourth quarter of 1999 and first quarter of 2000, and partially
offset by a decrease in capitalized interest as the development projects at the
Tampa Waterside Marriott and Orlando World Center Marriott were completed in
February and June 2000, respectively. Interest expense decreased 3% to $315
million year-to-date, primarily due to the aforementioned decrease in the
convertible debt obligation to Host REIT and repayments totaling $225 million on
the term loan portion of the bank credit facility during the fourth quarter of
1999.
Corporate Expenses. Corporate expenses were $7 million and $5 million for the
third quarters of 2000 and 1999, respectively, and increased $7 million to $27
million year-to-date, resulting primarily from an increase in compensation
expense related to employee stock plans.
Extraordinary Gain (Loss). There were no extraordinary items recognized during
the third quarter of 2000. During the first quarter of 2000, we extinguished
approximately $22 million of the convertible debt obligation to Host REIT
through the purchase of 435,000 shares of Host REIT's Convertible Preferred
Securities on the open market. We recorded an extraordinary gain of
approximately $5 million on this transaction, based on the discount at which we
purchased the Convertible Preferred Securities. During the twelve weeks ended
June 16, 2000, we recorded an extraordinary loss of approximately $2 million
representing the write off of deferred financing costs and certain fees paid to
our lender in connection with the renegotiation of the bank credit facility.
In connection with the refinancing of the mortgage and the renegotiation of the
management agreement on the New York Marriott Marquis, we recognized an
extraordinary gain of $13 million on the forgiveness of debt in the form of
accrued incentive management fees in the second quarter of 1999. An
extraordinary loss of $3 million representing the write-off of deferred
financing fees was recognized in July 1999 when the mortgage debt for eight
properties was refinanced, including the New York Marriott Marquis. In
connection with this refinancing, the interest rate swap agreements associated
with some of the original debt were terminated and a $7 million extraordinary
gain was recognized.
Net Loss. Our net loss decreased $19 million to $21 million for the third
quarter of 2000 and increased $20 million to $158 million year-to-date as a
result of the items discussed above.
Net Loss Available to Common Unitholders. The net loss available to common
unitholders decreased $14 million to $27 million for the third quarter of 2000
and increased $35 million to $174 million year-to-date. The net loss available
to common unitholders reflects year-to-date distributions in 2000 and 1999 of
$16 million and $1 million, respectively, on preferred limited partner units,
which were issued during the second half of 1999.
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<PAGE>
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
COMPARATIVE FFO and EBITDA
--------------------------
We consider Comparative Funds From Operations ("Comparative FFO"), which
consists of Funds From Operations, as defined by the National Association of
Real Estate Investment Trusts, plus contingent rent, as well as our consolidated
earnings before interest expense, income taxes, depreciation, amortization and
other non-cash items (including contingent rent) ("EBITDA") to be indicative
measures of our operating performance due to the significance of our long-lived
assets. Comparative FFO and EBITDA are also useful in measuring our ability to
service debt, fund capital expenditures and expand our business. Furthermore,
management believes that Comparative FFO and EBITDA are meaningful disclosures
that will help shareholders and the investment community to better understand
our financial performance, including comparing our performance to other Real
Estate Investment Trusts. However, Comparative FFO and EBITDA as presented may
not be comparable to FFO and EBITDA amounts calculated by other companies. This
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. Cash
expenditures for various long-term assets, interest expense (for EBITDA purposes
only) and income taxes have been, and will be incurred which are not reflected
in the EBITDA and Comparative FFO presentations.
Comparative FFO available to common unitholders increased $17 million, or 15%,
to $128 million in the third quarter of 2000 and increased $39 million, or 10%,
to $419 million year-to-date. The following is a reconciliation of the loss from
operations before extraordinary items to Comparative FFO (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
---------------------------------- ----------------------------------
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Funds from Operations
Loss from operations before extraordinary items... $(21) $(44) $(161) $(155)
Depreciation and amortization..................... 74 68 220 203
Other real estate activities...................... (1) -- (2) (16)
Partnership adjustments........................... 7 5 18 19
---- ---- ----- -----
Funds from operations of Host LP................... 59 29 75 51
Effect on funds from operations of SAB 101...... 74 83 359 330
---- ---- ----- -----
Comparative funds from operations of Host LP....... 133 112 434 381
Distributions on preferred units.................. (5) (1) (15) (1)
---- ---- ----- -----
Comparative funds from operations of Host LP
available to common unitholders................... $128 $111 $ 419 $ 380
==== ==== ===== =====
</TABLE>
EBITDA increased $24 million, or 11%, to $236 million in the third quarter of
2000 and increased $55 million, or 8%, to $749 million year-to-date, reflecting
primarily EBITDA growth from owned properties, partially offset by EBITDA
related to assets sold during 1999. In 2000 and 1999, respectively, Hotel EBITDA
was $157 million and $124 million for the third quarters, and $390 million and
$362 million year-to-date, which does not include deferred rental income of $75
million and $86 million, and $366 million and $339 million for the quarters and
year-to-date, respectively.
The following schedule presents our EBITDA as well as a reconciliation of EBITDA
to the loss from operations before extraordinary items (in millions):
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<PAGE>
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
---------------------------------- ----------------------------------
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
EBITDA
Hotels.......................................... $157 $124 $390 $362
Office buildings and other investments.......... 2 2 5 3
Interest income................................. 9 10 26 26
Corporate and other expenses.................... (7) (10) (38) (36)
Effect on revenue of SAB 101.................... 75 86 366 339
---- ---- ---- ----
EBITDA of Host LP.................................. $236 $212 $749 $694
==== ==== ==== ====
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
---------------------------------- ----------------------------------
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
EBITDA of Host LP.................................. $ 236 $ 212 $ 749 $ 694
Effect on revenue of SAB 101....................... (75) (86) (366) (339)
Interest expense................................... (107) (108) (315) (325)
Income taxes....................................... (4) (1) (7) (3)
Depreciation and amortization...................... (75) (68) (224) (203)
Minority interest expense.......................... (1) (2) (11) (13)
Other non-cash charges, net........................ 5 9 13 34
----- ----- ----- -----
Loss from operations before extraordinary $ (21) $ (44) $(161) $(155)
items........................................... ===== ===== ===== =====
</TABLE>
Our interest coverage, defined as EBITDA divided by cash interest expense, was
2.4 times and 2.2 times for the thirty-six week periods of 2000 and 1999,
respectively, and 2.2 times for full year 1999. The deficiency of earnings to
fixed charges was $145 million through the third quarter of 2000 and $140
million through the third quarter of 1999, which is primarily due to the
deferral of contingent rent of $366 million and $339 million for the same
periods, respectively.
Cash Flows and Financial Condition
-----------------------------------
We reported a decrease in cash and cash equivalents of $89 million during the
thirty-six weeks ended September 8, 2000. Cash from operations was $439 million
through the third quarter of 2000 and $256 million through the third quarter of
1999. The $183 million increase in cash from operations primarily relates to
changes in operating accounts. 1999 cash from operations were affected by the
addition of 36 properties as of December 30, 1998 and the timing of the receipt
of cash payments as a result of our hotel leases, which was effective beginning
January 1, 1999 in connection with the REIT Conversion. 1999 cash from
operations was also affected by cash expenditures incurred in connection with
the REIT Conversion and the renegotiation of the management agreement and ground
lease for the New York Marriott Marquis.
Cash used in investing activities was $307 million and $276 million through the
third quarters of 2000 and 1999, respectively. Cash used in investing activities
through the third quarter includes capital expenditures of $271 million and $261
million for 2000 and 1999, respectively, mostly related to renewals and
replacements on existing properties and new development projects. Property and
equipment balances include $101 million and $243 million for construction in
progress as of September 8, 2000 and December 31, 1999, respectively. The
reduction in construction in progress is due to the completion of the Tampa
Waterside Marriott, which was placed in service in February 2000, and the
expansion at the Orlando World Center Marriott, which was completed in late June
2000. The current balance primarily relates to properties in Naples, Chicago,
Harbor Beach and various other expansion and development projects.
26
<PAGE>
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On May 16, 2000, we acquired a non-controlling partnership interest in the JWDC
Limited Partnership, which owns the JW Marriott Hotel, a 772-room hotel located
on Pennsylvania Avenue in Washington, DC. The Company, which previously held a
small interest in the venture, invested approximately $40 million in the form of
a preferred equity contribution.
Cash used in financing activities was $221 million through the third quarter of
2000 and $126 million through the third quarter of 1999. Cash used in financing
activities through the third quarter of 2000 includes repurchases under our
stock buyback program and the payment of distributions. Increased borrowings
under our bank credit facility of approximately $51 million primarily funded the
investment in the JWDC Limited Partnership discussed above.
In February 2000, we refinanced the $80 million mortgage on Marriott's Harbor
Beach Resort property in Fort Lauderdale, Florida. The new mortgage is for $84
million, at a rate of 8.58%, and matures in March 2007.
During June 2000, we modified our bank credit facility. As modified, the total
facility has been permanently reduced to $775 million, consisting of a $150
million term loan and a $625 million revolver. In addition, the original term
was extended for two additional years, through August 2003. As of September 8,
2000, $176 million was outstanding under the bank credit facility, and the
available capacity under the line of credit balance was $599 million.
In October 2000, we repaid approximately $26 million of the outstanding balance
on the revolver portion of the bank credit facility from a portion of the
proceeds from the bond offering discussed below. As a result of the repayment,
the available capacity under the revolver was increased to $625 million, and
total borrowings under the bank credit facility were reduced to $150 million.
On September 19, 2000, the Board of Directors of Host Marriott Corporation
declared cash distributions of $0.23 per OP Unit and $0.625 per unit of
cumulative redeemable preferred limited partner interest, which were paid on
October 16, 2000 to unitholders of record on September 29, 2000. First and
second quarter cash distributions of $0.21 per OP Unit and $0.625 per unit of
cumulative redeemable preferred limited partner interest were paid on April 14
and July 14, 2000.
During the first quarter of 2000, we continued our stock repurchase program
making repurchases of approximately 4.9 million common shares, 325,000 OP Units,
and 435,000 shares of Convertible Preferred Securities, for a total investment
of $62 million. No repurchases were made during the second and third quarters of
2000. Since the inception of the repurchase program in September 1999,
repurchases under the program total 16.2 million common shares or equivalents
for a total investment of $150 million. We will continue to look at strategic
acquisitions offering superior returns, such as the investment in the JW
Marriott Hotel in Washington, DC, as well as stock repurchases based on market
conditions and our stock price. To the extent they can be made in a manner that
is relatively leverage neutral, we anticipate that any stock repurchases would
be made from future asset sale proceeds, if any, with a portion of any such
proceeds being used to pay down debt. There are no such asset sales pending at
this time.
In April 2000, the 222-room resort property in Singer Island, Florida was
renovated to upgrade the property and convert it to the Hilton brand at a cost
of approximately $6 million. The property represents our first property under
the Hilton brand.
On June 21, 2000, an expansion that included the additions of a 500-room tower
and 15,000 square feet of meeting space at the Orlando World Center Marriott,
which now has 2,000 rooms, was completed at an approximate development cost of
$88 million.
27
<PAGE>
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In September 2000, we funded approximately $31 million cash in settlement of
litigation with four partnerships. We expect to pay approximately $91 million in
the near future to resolve the litigation with two additional partnerships,
including the acquisition by a joint venture formed by us and Marriott
International of those two partnerships, subject to numerous conditions,
including various consents. See discussion at "Item 1 - Legal Proceedings."
In October 2000, we issued $250 million of 9 1/4% Series F senior notes due in
2007, under the same indenture and with the same covenants as the Series A,
Series B, Series C, and Series E senior notes. The net proceeds to us were
approximately $245 million, after deduction of a discount at issuance of
approximately $3 million and commissions and expenses of approximately $2
million. A portion of the proceeds have been used for the $26 million repayment
of the outstanding balance under the revolver portion of the bank credit
facility as discussed above, and the remainder will be use for general working
capital purposes, which may include the purchase of the leases from Crestline
and litigation settlements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our borrowings under the term loan portion of the bank credit facility as well
as the mortgage on The Ritz-Carlton, Amelia Island are sensitive to changes in
interest rates. The interest rates on these debt obligations, which were $265
million and $215 million, respectively, at September 8, 2000 and December 31,
1999, are based on various LIBOR terms plus 200 to 225 basis points. The
weighted average interest rate for these financial instruments are 8.80% for the
thirty-six weeks ended September 8, 2000 and 7.58% for the year ended December
31, 1999.
28
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Texas Multi-Partnership Lawsuit. On March 16, 1998, limited partners in several
limited partnerships sponsored by Host REIT or its subsidiaries filed a lawsuit,
Robert M. Haas, Sr. and Irwin Randolph Joint Tenants, et al. v. Marriott
International, Inc., et al., Case No. 98-CI-04092, in the 57th Judicial District
Court of Bexar County Texas, alleging that the defendants conspired to sell
hotels to the partnerships for inflated prices and that they charged the
partnerships excessive management fees to operate the partnerships' hotels. A
Marriott International subsidiary manages each of the hotels involved and, as to
some properties, Marriott International, or one of its subsidiaries, is the
ground lessor and collects rent. Host REIT, Marriott International, several of
their subsidiaries, and J.W. Marriott, Jr. are among the various named
defendants. The Haas lawsuit originally involved the following partnerships:
1.) Courtyard by Marriott Limited Partnership ("CBM I");
2.) Courtyard by Marriott II Limited Partnership ("CBM II");
3.) Marriott Residence Inn Limited Partnership ("Res I");
4.) Marriott Residence Inn II Limited Partnership ("Res II");
5.) Fairfield Inn by Marriott Limited Partnership ("Fairfield");
6.) Desert Springs Marriott Limited Partnership ("Desert Springs"); and
7.) Atlanta Marriott Marquis Limited Partnership ("AMMLP").
Host REIT has settled the claims of the AMMLP unitholders as part of a
settlement of a separate class action suit, pursuant to which settlement we paid
$4.25 million in return for a release of all claims. This settlement, which has
been finalized, is not contingent on any portion of the Partnership Litigation
Settlement, discussed more fully below. In addition, we consummated settlements
with the unitholders of Res I, Res II, Fairfield and Desert Springs, under the
umbrella of the Partnership Litigation Settlement. The CBM I and CBM II
settlements remain to be completed, as described below.
Courtyard by Marriott II Limited Partnership (CBM II). CBM II is a Delaware
limited partnership formed in 1987 to own 70 Courtyard by Marriott hotels. A
subsidiary of ours is the sole general partner of CBM II and Marriott
International or one of its subsidiaries manages all of the hotels owned by CBM
II. A group of partners in CBM II filed a lawsuit, Whitey Ford, et al v. Host
Marriott Corporation, et al., Case No. 96-CI-08327, on June 7, 1996, in the
285th Judicial District Court of Bexar County, Texas against Host REIT, Marriott
International, and others alleging breach of fiduciary duty, breach of contract,
fraud, negligent misrepresentation, tortious interference, violation of the
Texas Free Enterprise and Antitrust Act of 1983 and conspiracy in connection
with the formation, operation and management of CBM II and its hotels. The
plaintiffs are seeking unspecified damages. On January 29, 1998, two other
limited partners, A.R. Milkes and D.R. Burklew, filed a petition in intervention
that converted the Whitey Ford lawsuit into a class action with a certified
class of limited partners. This case is separate from the CBM II lawsuit, filed
as part of the Haas lawsuit; however it will be resolved by the Partnership
Litigation Settlement described below.
29
<PAGE>
Courtyard by Marriott Limited Partnership (CBM I). CBM I is a Delaware limited
partnership formed in 1986 to own 50 Courtyard by Marriott hotels. A subsidiary
of ours is the sole general partner of CBM I and Marriott International or one
of its subsidiaries manages all of the hotels owned by CBM I. Two members of an
ad hoc committee of CBM I limited partners, Marvin Schick and Jack Hirsch, filed
a putative class action lawsuit, Marvin Schick, et al. v. Host Marriott
Corporation, et al., Civil Action No. 15991, in the Delaware Court of Chancery
against Host REIT, Marriott International, and others on October 16, 1997,
regarding the 1995 refinancing of CBM I's mortgage debt. The complaint contains
allegations of breach of fiduciary duty, breach of contract, tortious
interference, and aiding and abetting liability in connection with the
refinancing. This lawsuit will be mooted upon consummation of the Partnership
Litigation Settlement described below.
Pursuant to the terms of the Partnership Litigation Settlement, CBM I and CBM II
are currently subject to the tender offers described below, the completion of
which will release us and the other defendants from all claims by CBM I and CBM
II unitholders who have not opted out of these settlements. The holders of three
units have elected such treatment.
Partnership Litigation Settlement. On March 9, 2000, Host REIT and Marriott
International entered into a settlement agreement that will resolve the Texas
Multi-Partnership (the Haas case), the CBM II (including the Whitey Ford/Milkes
case), and the CBM I (the Schick case) litigation. Under this settlement, we and
Marriott International have settled with the Res I, Res II, Fairfield and Desert
Springs Plaintiffs for an aggregate payment of approximately $62 million (of
which we and our subsidiaries have paid approximately $31 million) in return for
a general release of all claims. The Res I, Res II, Fairfield and Desert Springs
settlements were severed from the CBM I and CBM II settlements by a court order
dated September 25, 2000. This settlement is subject to a thirty day appeal
period beginning September 28, 2000, during which time any class members can
appeal the settlement.
We are currently in the process of finalizing the settlements for the CBM I and
CBM II partnerships. The principal feature of the proposed settlements is the
acquisition of all CBM I and CBM II limited partner units by a joint venture
formed by us (through non-controlled subsidiaries) and Marriott International
and a full release of all claims from all limited partners (other than those who
have opted out of the class settlement) for an aggregate payment of
approximately $372 million plus interest and attorneys' fees of the plaintiffs'
counsels (of which we will pay approximately $91 million). The joint venture
would acquire CBM I and CBM II by acquiring partnership units pursuant to a
tender offer for such units followed by a merger of each of CBM I and CBM II
with and into subsidiaries of the joint venture. The joint venture will finance
the acquisition of CBM I and CBM II with mezzanine indebtedness borrowed from
Marriott International and with cash and other assets contributed to it by us
(through our non-controlled subsidiaries) and Marriott International. Upon
consummation of the acquisition of CBM I and CBM II, we will own a 50% interest
in the joint venture.
We and Marriott International may terminate the settlement with respect to CBM I
and CBM II if we and Marriott International fail to receive any necessary third
party consents to the merger. The CBM I and CBM II settlements are mutually
conditioned on each other, so that, we and Marriott International will not be
required to consummate the settlement with respect to one partnership if the
settlement with respect to the other partnership is not successfully completed.
The condition is waivable by us and Marriott International in our sole
discretion.
The consent solicitation periods expired with sufficient votes to complete the
mergers. The fairness hearing for the CBM II settlement was held on September
28, 2000 and the settlement with respect to CBM II was approved. The fairness
hearing for CBM I was held on October 19, 2000 and the settlement with respect
to CBM I was approved. The CBM I and CBM II settlements remain subject to
certain third party consents. If these third party consents are not obtained,
the CBM I and CBM II settlements would be terminated and the cases would go to
trial, unless we and Marriott International waive the condition. These
settlements, if
30
<PAGE>
finalized by court orders, will be subject to thirty day appeal periods running
from the entry of the court's judgment orders (presently expected to coincide
with the receipt of the third party consents) during which time any class member
may appeal the approval of the settlements.
Marriott Hotel Properties II Limited Partnership (MHP). Limited partners of MHP
II have filed putative class action lawsuits in Palm Beach County Circuit Court
on May 10, 1996, Leonard Rosenblum, as Trustee of the Sylvia Bernice Rosenblum
Trust, et. al. v. Marriott MHP Two Corporation, et. al., Case No. CL-96-4087-AD,
and, in the Delaware Court of Chancery on April 24, 1996, Cary W. Salter, Jr.,
et. al. v. MHP II Acquisition Corp., et. al., respectively, against Host REIT
and certain of its affiliates alleging that the defendants violated their
fiduciary duties and engaged in fraud and coercion in connection with the tender
offer for MHP II units and with our acquisition of MHP II in connection with the
REIT conversion. The plaintiffs in these actions are seeking unspecified
damages.
In the Florida case, the defendants removed the case to the United States
District Court for the Southern District of Florida and, after hearings on
various procedural motions, the District Court remanded the case to state court
on July 25, 1998. In light of the court's decision in the Delaware case,
detailed below, the defendants in the Florida action filed a supplemental
memorandum in support of their motions to dismiss, and attached a copy of the
Delaware opinion to the memorandum. The Florida court has not yet ruled on the
motions.
In the Delaware case, the Delaware Court of Chancery initially granted the
plaintiffs' motion to voluntarily dismiss the case with the proviso that the
plaintiffs could refile in the aforementioned action in federal court in
Florida. After the District Court's remand of the Florida action back to Florida
state court, two of the three original Delaware plaintiffs asked the Court of
Chancery to reconsider its order granting their voluntary dismissal. The Court
of Chancery refused to allow the plaintiffs to join the Florida action and,
instead, reinstated the Delaware case, now styled In Re Marriott Hotel
Properties II Limited Partnership Unitholders Litigation, Consolidated Civil
Action No. 14961. On January 29, 1999, Cary W. Salter, one of the original
plaintiffs, alone filed an Amended Consolidated Class Action Complaint in the
Delaware action, adding the allegations that related to our acquisition of MHP
II in connection with the REIT conversion. On January 24, 2000, the Delaware
Court of Chancery issued a memorandum opinion in which the court dismissed all
but one of the plaintiff's claims, concerning the adequacy of disclosure during
the initial tender offer.
A subsequent lawsuit, Accelerated High Yield Growth Fund, Ltd., et al. v. HMC
Hotels Properties II Limited Partnership, et. al., C.A. No. 18254NC, was filed
on August 23, 2000 in the Delaware Court of Chancery by the MacKenzie Patterson
group of funds, one of the three original Delaware plaintiffs, against Host REIT
and certain of its affiliates alleging breach of contract, fraud and coercion in
connection with the acquisition of MHP II during the REIT conversion. The
plaintiffs allege that our acquisition of MHP II by merger in connection with
the REIT conversion violated the partnership agreement and that our subsidiary
acting as the general partner of MHP II breached its fiduciary duties by
allowing it to occur. The plaintiffs in this action are seeking unspecified
damages. The defendants filed their original answers to the complaint on October
16, 2000.
Marriott Suites Limited Partnership (MSLP). On December 10, 1999, KSK Hawaii
Co., Ltd. ("KSK"), a limited partner in MSLP, filed a lawsuit, KSK Hawaii Co.,
Ltd. v. Marriott SBM One Corporation, et al., Civil Action No. 17657-NC, in the
Delaware Court of Chancery. This lawsuit relates to a 1996 recapitalization of
MSLP by our subsidiary, the general partner of MSLP, and the merger of MSLP into
Host REIT in 1998. KSK claims that it was coerced into selling 19 of its 20
partnership units in the 1996 recapitalization and alleges that the 1998 merger
was a 'freeze-out' merger that was designed solely to eliminate KSK's interest
in MSLP. KSK maintains that it lost slightly more than $15 million as a result
of its investment in MSLP. The defendants have filed their answer, and this case
is in the early stages of discovery.
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<PAGE>
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P. ("O'Hare Suites"). On
October 5, 2000, Joseph S. Roth and Robert M. Niedelman, limited partners in
O'Hare Suites, filed a putative class action lawsuit, Joseph S. Roth, et al., v.
MOHS Corporation, et al., Case No. 00CH14500, in the Circuit Court of Cook
County, Illinois, Chancery Division, against Host REIT, Host LP, Marriott
International, and MOHS Corporation, a subsidiary of Host LP and a former
general partner of O'Hare Suites. The plaintiffs allege that an improper
calculation of the hotel manager's incentive management fees resulted in
inappropriate payments in 1997 and 1998, and, consequently, in an inadequate
appraised value for their limited partner units in connection with the roll-up
of O'Hare Suites into Host LP. The plaintiffs are seeking damages of
approximately $13 million.
32
<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.
HOST MARRIOTT, L.P.
BY: HOST MARRIOTT CORPORATION
Its General Partner
October 17, 2000 /s/ Donald D. Olinger
---------------- ----------------------------------
Date Donald D. Olinger
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
