<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 18, 1999 Commission File No. 001-14625
HOST MARRIOTT CORPORATION
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Maryland 53-0085950
-------------------------- -------------------------
(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
---- ----
<TABLE>
<CAPTION>
Shares outstanding
Class at July 27, 1999
--------------------- ----------------
<S> <C>
Common Stock, $0.01 par value
per share 228,103,166
Purchase share rights for Series A Junior Participating
Preferred Stock, $0.01 par value --
</TABLE>
<PAGE>
INDEX
-----
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION (Unaudited): Page No.
--------
<S> <C> <C>
Condensed Consolidated Balance Sheets - 3
June 18, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations - 4
Twelve Weeks and Twenty-four Weeks Ended
June 18, 1999 and June 19, 1998
Condensed Consolidated Statements of Cash Flows - 8
Twenty-four Weeks Ended
June 18, 1999 and June 19, 1998
Notes to Condensed Consolidated Financial Statements 9
Management's Discussion and Analysis of Results of 16
Operations and Financial Condition
Quantitative and Qualitative Disclosures about Market Risk 23
Part II. OTHER INFORMATION AND SIGNATURE 24
</TABLE>
- 2 -
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
June 18, December 31,
1999 1998
------------- -------------
(unaudited)
ASSETS
------
<S> <C> <C>
Property and equipment, net................................................... $7,214 $7,201
Notes and other receivables (including amounts due from
affiliates of $131 million and $134 million, respectively).................. 219 203
Rent receivable............................................................... 86 --
Due from managers............................................................. -- 19
Investments in affiliates..................................................... 45 33
Other assets.................................................................. 420 376
Cash and cash equivalents..................................................... 310 436
------ ------
$8,294 $8,268
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Debt
Senior notes................................................................ $2,546 $2,246
Mortgage debt............................................................... 2,230 2,438
Other....................................................................... 456 447
------ ------
5,232 5,131
Accounts payable and accrued expenses......................................... 150 204
Deferred income taxes......................................................... 96 97
Other liabilities............................................................. 417 460
------ ------
Total liabilities....................................................... 5,895 5,892
------ ------
Minority interest............................................................. 515 515
Company-obligated mandatorily redeemable convertible preferred
securities of a subsidiary whose sole assets are the convertible
subordinated debentures due 2026 ("Convertible Preferred Securities")....... 550 550
Shareholders' equity
Common stock, 750 million shares authorized; 228.1 million shares
and 225.6 million shares issued and outstanding, respectively............ 2 2
Additional paid-in capital.................................................... 1,866 1,867
Accumulated other comprehensive loss.......................................... (3) (4)
Retained deficit.............................................................. (531) (554)
------ ------
Total shareholders' equity............................................. 1,334 1,311
------ ------
$8,294 $8,268
====== ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
- 3 -
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve weeks ended June 18, 1999 and June 19, 1998
(unaudited, in millions)
<TABLE>
<CAPTION>
1999 1998
----- ----
<S> <C> <C>
REVENUES
Rental income (Note 3)........................................................ $325 $ --
Hotel sales
Rooms........................................................................ -- 511
Food and beverage............................................................ -- 222
Other........................................................................ -- 54
Interest income............................................................... 8 10
Net gains on property transactions............................................ 4 51
Equity (loss) in earnings of affiliates....................................... 1 (2)
Other......................................................................... 3 3
---- ----
Total revenues.............................................................. 341 849
---- ----
EXPENSES
Depreciation................................................................. 67 60
Property-level expenses...................................................... 62 60
Hotel operating expenses
Rooms....................................................................... -- 113
Food and beverage........................................................... -- 158
Other department costs and deductions....................................... -- 185
Management fees (including Marriott International
management fees of $47 million in 1998).................................. -- 50
Minority interest............................................................ 28 14
Interest expense............................................................. 101 76
Dividends on Convertible Preferred Securities................................ 8 8
Corporate expenses........................................................... 8 9
REIT conversion expenses..................................................... -- 6
Other expenses............................................................... 6 5
---- ----
280 744
---- ----
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES................................................................. 61 105
Provision for income taxes.................................................... -- (43)
---- ----
INCOME FROM CONTINUING OPERATIONS............................................. 61 62
INCOME FROM DISCONTINUED OPERATIONS, net of taxes............................. -- 4
---- ----
INCOME BEFORE EXTRAORIDNARY ITEM.............................................. 61 66
Extraordinary item--gain on forgiveness of debt............................... 13 --
---- ----
NET INCOME.................................................................... $ 74 $ 66
==== ====
</TABLE>
See Notes to Condensed Consolidated Financial Statements
- 4 -
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
Twelve weeks ended June 18, 1999 and June 19, 1998
(unaudited)
<TABLE>
<S> <C> <C>
BASIC EARNINGS PER COMMON SHARE:
CONTINUING OPERATIONS........................................................ $0.26 $0.29
Discontinued operations (net of income taxes)................................ -- 0.02
Extraordinary item--gain on forgiveness of debt.............................. 0.06 --
----- -----
BASIC EARNINGS PER COMMON SHARE:............................................. $0.32 $0.31
===== =====
DILUTED EARNINGS PER COMMON SHARE:
CONTINUING OPERATIONS........................................................ $0.27 $0.26
Discontinued operations (net of income taxes)................................ -- 0.02
Extraordinary item--gain on forgiveness of debt.............................. 0.04 --
----- -----
DILUTED EARNINGS PER COMMON SHARE............................................ $0.31 $0.28
===== =====
</TABLE>
See Notes to Condensed Consolidated Financial Statements
- 5 -
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twenty-four weeks ended June 18, 1999 and June 19, 1998
(unaudited, in millions)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Rental income (Note 3)........................................................ $611 $ --
Hotel sales
Rooms........................................................................ -- 1,020
Food and beverage............................................................ -- 444
Other........................................................................ -- 110
Interest income............................................................... 16 24
Net gains on property transactions............................................ 16 52
Equity (loss) in earnings of affiliates....................................... 2 (1)
Other......................................................................... 3 5
---- ------
Total revenues............................................................... 648 1,654
---- ------
EXPENSES
Depreciation................................................................. 133 113
Property-level expenses...................................................... 120 122
Hotel operating expenses
Rooms....................................................................... -- 227
Food and beverage........................................................... -- 321
Other department costs and deductions....................................... -- 374
Management fees (including Marriott International
management fees of $102 million in 1998)................................. -- 108
Minority interest............................................................ 46 30
Interest expense............................................................. 200 152
Dividends on Convertible Preferred Securities................................ 17 17
Corporate expenses........................................................... 16 21
REIT conversion expenses..................................................... -- 6
Other expenses............................................................... 10 10
---- ------
542 1,501
---- ------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES................................................................. 106 153
Provision for income taxes.................................................... -- (63)
---- ------
INCOME FROM CONTINUING OPERATIONS............................................. 106 90
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAXES............................. -- 6
---- ------
INCOME BEFORE EXTRAORDINARY ITEM.............................................. 106 96
Extraordinary item--gain on forgiveness of debt............................... 13 --
---- ------
NET INCOME.................................................................... $119 $ 96
==== ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
- 6 -
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
Twenty-four Weeks Ended June 18, 1999 and June 19, 1998
(unaudited)
<TABLE>
<S> <C> <C>
BASIC EARNINGS PER COMMON SHARE:
CONTINUING OPERATIONS.......................................................... $0.46 $0.42
Discontinued operations (net of income taxes).................................. -- 0.03
Extraordinary item--gain on forgiveness of debt................................ 0.06 --
----- -----
BASIC EARNINGS PER COMMON SHARE:............................................... $0.52 $0.45
===== =====
DILUTED EARNINGS PER COMMON SHARE:
CONTINUING OPERATIONS.......................................................... $0.47 $0.39
Discontinued operations (net of income taxes).................................. -- 0.02
Extraordinary item--gain on forgiveness of debt................................ 0.04 --
----- -----
DILUTED EARNINGS PER COMMON SHARE.............................................. $0.51 $0.41
===== =====
</TABLE>
See Notes to Condensed Consolidated Financial Statements
- 7 -
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-four Weeks Ended June 18, 1999 and June 19, 1998
(unaudited, in millions)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations............................................. $ 106 $ 90
Adjustments to reconcile to cash from continuing operations:
Depreciation and amortization.............................................. 135 114
Income taxes............................................................... -- 45
Gain on sale of hotel properties........................................... (16) (51)
Equity in earnings of affiliates.............................................. (2) 1
Changes in operating accounts................................................. (149) (23)
Other......................................................................... 24 27
-- --
Cash from continuing operations............................................ 98 203
Cash from discontinued operations.......................................... -- 3
----- -----
Cash from operations....................................................... 98 206
----- -----
INVESTING ACTIVITIES
Proceeds from sales of assets................................................. 35 209
Acquisitions.................................................................. (4) (358)
Capital expenditures:
Renewals and replacements.................................................. (86) (77)
Development projects....................................................... (75) (18)
Other investment........................................................... (16) (14)
Purchases of short-term marketable securities................................. -- (97)
Sales of short-term marketable securities..................................... -- 405
Note receivable advances net of collections................................... (17) 4
Affiliate collections, net.................................................... -- 14
Other......................................................................... -- (25)
----- -----
Cash (used in) from investing activities from continuing operations........ (163) 43
Cash used in investing activities from discontinued operations............. -- (2)
----- -----
Cash (used in) from investing activities................................... (163) 41
----- -----
FINANCING ACTIVITIES
Issuances of debt, net........................................................ 413 5
Repurchase of common stock.................................................... (3) --
Dividends..................................................................... (117) --
Scheduled principal repayments................................................ (23) (18)
Debt prepayments.............................................................. (323) (49)
Other......................................................................... (8) (31)
----- -----
Cash used in financing activities from continuing operations............... (61) (93)
Cash used in financing activities from discontinued operations............. -- (150)
----- -----
Cash used in financing activities.......................................... (61) (243)
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. (126) $ 4
===== =====
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or purchase of
controlling interests in, certain hotel properties........................ $ -- $ 164
===== =====
</TABLE>
See Notes to Condensed Consolidated Financial Statements
- 8 -
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization
Host Marriott Corporation, a Maryland corporation formerly named HMC Merger
Corporation ("Host REIT"), operating through an umbrella partnership
structure, is the owner of hotel properties. Host REIT operates as a self-
managed and self-administered real estate investment trust ("REIT") with its
operations conducted through an operating partnership and its subsidiaries.
As REITs are not currently permitted to derive revenues directly from the
operations of hotels, Host REIT leases substantially all of its hotels to
subsidiaries of Crestline Capital Corporation ("Crestline" or the "Lessee")
and certain other lessees.
On December 15, 1998, shareholders of Host Marriott Corporation, ("Host
Marriott"), a Delaware corporation and the predecessor to Host REIT, 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. (the "Operating Partnership"). Host Marriott merged into HMC Merger
Corporation, a newly formed Maryland corporation (renamed Host Marriott
Corporation) which intends to qualify, effective January 1, 1999, as a REIT
and is the sole general partner of the Operating Partnership. Host Marriott
and its subsidiaries' contribution of its hotels and certain assets and
liabilities to the Operating Partnership and its subsidiaries in exchange for
units of partnership interest in the Operating Partnership was accounted for
at Host Marriott's historical basis. As of June 18, 1999, Host REIT owned
approximately 78% of the Operating Partnership.
In these condensed consolidated financial statements, the "Company" or "Host
Marriott" refers to Host Marriott Corporation and its consolidated
subsidiaries, both before and after the Merger and its conversion to a REIT
(the "REIT Conversion").
On December 29, 1998, the Company completed the previously discussed 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 common stock owned (the
"Distribution"). As a result of the Distribution, the Company's financial
statements have been restated to present the senior living communities
business results of operations and cash flows as discontinued operations.
All historical financial statements presented have been restated to conform
to this presentation.
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 generally accepted accounting
principles have been condensed or omitted. The Company believes the
disclosures made are adequate to make the information presented not
misleading. However, the 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, 1998.
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 June 18, 1999 and
December 31, 1998, and the results of operations for the twelve and twenty-
four weeks ended June 18, 1999 and June 19, 1998 and cash flows for the
twenty-four weeks ended June 18, 1999 and June
- 9 -
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
19, 1998. Interim results are not necessarily indicative of fiscal year
performance because of the impact of seasonal and short-term variations.
The Company's leases have remaining terms ranging from 2 to 10 years, subject
to earlier termination upon the occurrence of certain contingencies, as
defined. 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 revenue 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. Certain amounts of the percentage rent
recognized are considered contingent until such time as the revenue
recognized exceeds annual thresholds, which are determined individually by
property. For the twelve and twenty-four weeks ended June 18, 1999, $138
million and $253 million of contingent rent is included in the statement of
operations, respectively.
3. Rental Revenue
The Company's 1999 revenue primarily represents the rental income from its
leased hotels and is not comparable to 1998 hotel revenues which reflect
gross sales generated by the properties. Also, in December 1998 the Company
retroactively adopted Emerging Issues Task Force Issue No. 97-2, "Application
of FASB Statement No. 94 and APB Opinion No. 16 to Physician Management
Entities and Certain Other Entities with Contractual Management
Arrangements." The impact of the adoption of issue 97-2 on the condensed
consolidated financial statements for the twelve and twenty-four weeks ended
June 19, 1998 was to increase both revenues and operating expenses by
approximately $456 million and $922 million, respectively, with no impact on
net income or earnings per share.
The comparison of the 1999 quarterly results with 1998 is also affected by a
change in the reporting period for the Company's hotels not managed by
Marriott International, which resulted in the 1998 year-to-date historical
results adjusted to exclude December 1997 and include May 1998 and the 1998
second quarter adjusted to reflect March through May 1998. The 1999 results
reflect comparable periods. The change in reporting was required as part of
the REIT Conversion.
The table below represents hotel sales for all periods presented.
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-four Weeks Ended
---------------------- -----------------------
June 18, June 19, June 18, June 19,
1999 1998 1999 1998
-------- -------- -------- --------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Hotel Sales
Rooms............................................. $ 672 $511 $1,272 $1,020
Food and beverage................................. 310 222 578 444
Other............................................. 72 54 135 110
------ ---- ------ ------
Total sales.................................. $1,054 $787 $1,985 $1,574
====== ==== ====== ======
</TABLE>
4. Earnings Per Share
Basic earnings per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted
earnings per common share is computed by dividing net income as adjusted for
potentially dilutive securities, by the weighted average number of shares of
- 10 -
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
common stock outstanding plus other potentially dilutive securities. Diluted
earnings per common share was adjusted for the impact of the Convertible
Preferred Securities as they were dilutive for all periods presented.
A reconciliation of the number of shares utilized for the calculation of
diluted earnings per common share follows:
<TABLE>
<CAPTION>
Twelve Weeks Twenty-four Weeks
Ended Ended
-------------------- -----------------
June 18, June 19, June 18, June 19,
1999 1998 1999 1998
-------- -------- -------- --------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding.................... 227.9 216.1 227.4 215.9
Assuming distribution of common shares granted under the
comprehensive stock plan, less shares assumed purchased at
average market price................................................... 5.8 4.2 5.8 4.3
Assuming distribution of common shares issuable for warrants,
less shares assumed purchased at average market price.................. -- 0.1 -- --
Assuming conversion of minority operating partnership units
outstanding............................................................ 64.6 -- 64.6 0.1
Assuming conversion of minority operating partnership units
issuable............................................................... 9.2 -- 9.2 --
Assuming conversion of Convertible Preferred Securities................. 35.8 35.8 35.8 35.8
----- ----- ----- -----
Shares utilized for the calculation of diluted earnings per share....... 343.3 256.2 342.8 256.1
===== ===== ===== =====
</TABLE>
A reconciliation of net income to earnings used for the calculation of
diluted earnings per common share follows:
<TABLE>
<CAPTION>
Twelve Weeks Twenty-four Weeks
Ended Ended
------------------ ---------------------
June 18, June 19, June 18, June 19,
1999 1998 1999 1998
-------- -------- -------- --------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Net income........................................................ $ 74 $66 $119 $ 96
Dividends on Convertible Preferred Securities, net of taxes....... 9 5 17 10
Minority interest expense, assuming conversion of OP units........ 23 -- 38 --
---- --- ---- ----
Earnings used for the calculation of diluted earnings per share... $106 $71 $174 $106
==== === ==== ====
</TABLE>
5. Dividends and Distributions Payable
On March 15, 1999 and June 15, 1999, the Board of Directors declared cash
dividends of $0.21 per share of common stock and corresponding distributions
of $0.21 per unit of limited partnership interest ("OP Unit") in the
Company's subsidiary operating partnership. The first quarter dividend and
distribution was paid on April 14, 1999 to shareholders and unitholders of
record on March 31, 1999. The second quarter dividend and distribution was
paid on July 14, 1999 to shareholders and unitholders of record on June 30,
1999.
The 1998 earnings per share has been restated to reflect the impact of the
stock portion of a special dividend totaling 11.9 million shares of common
stock issued in February 1999 as a result of the REIT Conversion.
- 11 -
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. Acquisitions and Property Expansions
On December 30, 1998, the Company acquired a portfolio of twelve luxury
hotels and other assets from the Blackstone Group, a Delaware limited
partnership, and a series of funds controlled by affiliates of Blackstone
Real Estate Partners. The Company issued approximately 47.7 million OP Units
and assumed debt and made cash payments of approximately $920 million and
distributed 1.4 million of the shares of Crestline common stock to the
Blackstone Real Estate Partners. Approximately 23.9 million OP Units were
redeemable as of June 30, 1999.
The Company also completed a 210-room extension of the Philadelphia Marriott
in April 1999 at a cost of approximately $37 million.
7. Dispositions
In February 1999, the Company sold the 479-room Minneapolis/Bloomington
Marriott for $35 million and recorded a gain of $10 million, which was
followed by the May 1999 sale of the 221-room Saddle Brook Marriott for $15
million and recorded a gain of $4 million.
8. Debt Issuances and Refinancing
In February 1999, the Company issued $300 million of 8-3/8% Series D Senior
notes due in 2006. The senior notes were used to refinance, or purchase,
debt which had been acquired through the merger of certain partnerships or
the purchase of hotel properties in connection with the REIT Conversion in
December 1998. The Company has offered to exchange Series D Senior notes for
Series E Senior notes on a one-for-one basis. The terms of the Series E
Senior notes and the Series D Senior notes will be substantially identical
except that the Series E Senior notes will be freely transferable by the
holders. The offer to exchange expires at 5:00 p.m. on August 25, 1999.
In April 1999, a subsidiary of the Company completed the refinancing of the
$245 million mortgage on the New York Marriott Marquis, maturing June 2000.
The Company was required to make a principal payment of $1.25 million on June
30, 1999. In connection with the refinancing, the Company renegotiated the
management agreement and recognized an extraordinary gain of $13 million on
the forgiveness of accrued incentive management fees by the manager. This
mortgage was subsequently refinanced as part of the $665 million financing
agreement discussed in note 11.
9. Geographic and Business Segment Information
The Company operates one business segment, hotel ownership. The Company's
hotels are primarily operated under the Marriott or Ritz-Carlton brands.
Substantially all of the Company's revenues are earned through leases with
Crestline. With respect to 1998, the allocation of taxes is not evaluated at
the segment level or reflected in the following information because the
Company does not believe the information is material to readers of the
financial statements.
The Company's segmented revenues and income (loss) from continuing operations
before income taxes are as follows (in millions):
- 12 -
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended June 18, 1999
-------------------------------------------------------
Hotels Corporate & Other Consolidated
------------ --------------------- ------------------
<S> <C> <C> <C>
Revenues....................................... $ 335 $ 6 $ 341
Income (loss) from continuing operations
before income taxes........................... 77 (16) 61
<CAPTION>
Twelve Weeks Ended June 19, 1998
-------------------------------------------------------
Hotels Corporate & Other Consolidated
------------ -------------------- -------------------
<S> <C> <C> <C>
Revenues....................................... $ 797 $ 52 $ 849
Income from continuing operations before
income taxes.................................. 82 23 105
<CAPTION>
Twenty-four Weeks Ended June 18, 1999
--------------------------------------------------------
Hotels Corporate & Other Consolidated
------------ --------------------- -------------------
<S> <C> <C> <C>
Revenues....................................... $ 639 $ 9 $ 648
Income (loss) from continuing operations
before income taxes........................... 139 (33) 106
<CAPTION>
Twenty-four Weeks Ended June 19, 1998
---------------------------------------------------------
Hotels Corporate & Other Consolidated
------------ ---------------------- --------------------
<S> <C> <C> <C>
Revenues....................................... $1,598 $ 56 $1,654
Income from continuing operations before
income taxes.................................. 153 -- 153
</TABLE>
As of June 18, 1999, 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 rental revenues in
1999 and hotel revenues in 1998 for each of the geographical areas in which
the Company owns hotels (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-four Weeks Ended
-------------------------------- --------------------------------
June 18, June 19, June 18, June 19,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
United States.................................. $ 335 $ 825 $ 638 $1,604
International.................................. 6 24 10 50
----- ----- ----- ------
Total........................................ $ 341 $ 849 $ 648 $1,654
===== ===== ===== ======
</TABLE>
10. Comprehensive Income
The Company's other comprehensive income consists of foreign currency
translation adjustments and the right to receive up to 1.4 million shares of
Host Marriott Services Corporation's common stock or an equivalent cash value
subsequent to the exercise of the options held by certain former and current
employees of Marriott International at Host Marriott Services Corporation's
option. For the twelve and twenty-four weeks ended June 18, 1999,
comprehensive income totaled $76 million and $120 million, respectively.
Comprehensive income was $67 million and $97 million for the twelve and
twenty-four weeks ended June 19, 1998. As of June 18, 1999 and December 31,
1998 the Company's accumulated other comprehensive loss was approximately $3
million and $4 million, respectively.
-13-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11. Subsequent Events
In July 1999, the Company entered into a financing agreement pursuant to
which it borrowed $665 million due 2009 at a fixed rate 7.47 percent. The
New York Marriott Marquis as well as seven other hotels serve as collateral.
The proceeds from this financing were used to refinance existing mortgage
indebtedness maturing at various times through 2000.
In July 1999, the Company sold 4.0 million shares of 10% Class A cumulative
redeemable preferred stock with a $0.01 par value. Holders of the stock are
entitled to receive cumulative cash dividends at a rate of 10% per annum of
the $25.00 per share liquidation preference. Dividends are payable quarterly
in arrears commencing October 15, 1999. After August 3, 2004 the Company has
the option to redeem the Class A preferred stock for $25.00 per share, plus
accrued and unpaid dividends to the date of redemption. The Class A
preferred stock ranks senior to the common stock and the authorized Series A
Junior Participating preferred stock. The Class A preferred stockholders
generally have no voting rights.
In June 1999, the Company acquired by merger Timewell Group, L.P. and
Timeport, L.P. which each own limited partnership interests in the
partnership that owns the New York Marriott Marquis. As part of the merger,
the general partners of Timewell Group, L.P. and Timeport, L.P. received
345,559 and 240,218 cumulative redeemable preferred OP Units, respectively.
The preferred OP Units are convertible into OP Units on a one-for-one basis,
subject to certain adjustments, at any time beginning one year after the
merger at the option of the holders. At any time beginning two years after
the merger, the Company can redeem the preferred OP units for OP Units or
cash.
In June 1999, the Company refinanced the debt on the San Diego Marriott Hotel
and Marina. The mortgage is for $195 million for a term of 10 years at a
rate of 8.45%. In addition, the Philadelphia Marriott was refinanced in July
1999 for $23 million at an interest rate of approximately 8.6%, maturing in
2009.
12. Summarized Lease Pool Financial Statements
As discussed in Note 2, as of June 18, 1999, almost all the properties of the
Company and its subsidiaries were leased to Crestline Capital Corporation and
managed by Marriott International, Inc. 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, 1998. The
results of operations for the twelve and twenty-four weeks ended June 18,
1999 and summarized balance sheet data as of June 18, 1999 of the lease pools
in which the Company's hotels are organized are as follows (in millions):
-14-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended June 18, 1999
------------------------------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Hotel Sales
Rooms.................................. $144 $157 $141 $145 $587
Food and beverage...................... 68 76 67 81 292
Other.................................. 16 16 19 19 70
---- ---- ---- ---- ----
Total hotel sales.................. 228 249 227 245 949
Operating Costs and Expenses
Rooms............................. 33 36 34 31 134
Food and beverage................. 51 55 47 56 209
Other............................. 57 55 57 55 224
Management fees................... 11 16 10 17 54
Lease expense..................... 72 83 76 83 314
---- ---- ---- ---- ----
Total operating expenses..... 224 245 224 242 935
---- ---- ---- ---- ----
Operating Profit....................... 4 4 3 3 14
Corporate and Interest Expenses........ -- (1) -- -- (1)
---- ---- ---- ---- ----
Income before taxes.............. 4 3 3 3 13
Income taxes..................... (2) (1) (1) -- (4)
---- ---- ---- ---- ----
Net Income................... $ 2 $ 2 $ 2 $ 3 $ 9
==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Twenty-four Weeks Ended June 18, 1999
------------------------------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Hotel Sales
Rooms.............................. $273 $294 $268 $273 $1,108
Food and beverage.................. 127 137 128 153 545
Other.............................. 30 29 38 34 131
---- ---- ---- ---- ------
Total hotel sales............. 430 460 434 460 1,784
Operating Costs and Expenses
Rooms.............................. 64 68 63 58 253
Food and beverage.................. 97 102 91 104 394
Other.............................. 110 107 107 103 427
Management fees.................... 20 30 21 33 104
Lease expense...................... 133 147 146 157 583
---- ---- ---- ---- ------
Total operating expenses...... 424 454 428 455 1,761
---- ---- ---- ---- ------
Operating Profit........................ 6 6 6 5 23
Corporate and Interest Expenses......... (1) (1) (1) (1) (4)
---- ---- ---- ---- ------
Income before taxes............... 5 5 5 4 19
Income taxes...................... (2) (2) (2) (1) (7)
---- ---- ---- ---- ------
Net Income.................... $ 3 $ 3 $ 3 $ 3 $ 12
==== ==== ==== ==== ======
</TABLE>
<TABLE>
<CAPTION>
As of June 18, 1999
------------------------------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Assets.................................. $ 49 $ 43 $ 46 $ 46 $184
Liabilities............................. 46 40 43 43 172
Equity.................................. 3 3 3 3 12
</TABLE>
-15-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Forward-looking Statements
--------------------------
Certain matters discussed herein are forward-looking statements. 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," "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 undertake no obligation to publicly release the
result of any revisions to these forward-looking statements that may be made
to reflect any future events or circumstances.
Results of Operations
---------------------
Revenues. Our historical revenues have primarily represented gross property-
level sales from hotels, net gains on property transactions, interest income
and equity in earnings of affiliates. As of January 1, 1999, we lease
substantially all of our hotels to subsidiaries of Crestline Capital
Corporation. As a result of these leases, we no longer record property-level
revenues and expenses, rather we recognize rental income on the leases.
Thus, 1999 revenues and expenses are not comparable with prior periods. Note
3 to the financial statements presents a table comparing gross hotel sales
for all periods presented to facilitate an investor's understanding of the
operation of our properties. The comparison of the 1999 quarterly results
with 1998 is also affected by a change in the reporting period for our hotels
not managed by Marriott International, which resulted in the 1998 year-to-
date historical results adjusted to exclude December 1997 and include May
1998 and the 1998 second quarter adjusted to reflect March through May 1998.
The 1999 results reflect comparable periods. The change in reporting was
required as part of the REIT conversion.
Year-to-date results for 1999 were driven by the addition of 36 properties in
1998. The increase in hotel sales reflects the growth in room revenues
generated per available room or REVPAR. For comparable properties, REVPAR
increased 3.7% to $120.85 for the second quarter of 1999. Year-to-date REVPAR
increased 4% to $120.67. On a comparable basis, average room rates increased
approximately 2% and 3% for the second quarter and year-to-date,
respectively, while average occupancy increased one percent for both periods.
Interest income decreased as the result of a lower level of cash and
marketable securities held during the first half of 1999 compared to the
first half of 1998.
The net gain on property transactions for 1999 primarily resulted from the
$10 million gain on the sale of the 479-room Minneapolis/Bloomington Marriott
for approximately $35 million and the $4 million gain on the sale of the 221-
room Saddle Brook Marriott for approximately $15 million.
Expenses. As discussed above, hotel revenues and hotel operating costs are
not comparable with the prior year. The lessee pays certain property-level
costs including management fees and we receive a rent payment, which is net
of those costs. Property-level costs which are comparable, including
depreciation, property taxes, insurance, ground and equipment rent increased
8% to $129 million for the second quarter
-16-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
1999 versus second quarter 1998 and increased $18 million or 8% to $253
million year-to-date, primarily reflecting the depreciation from 36
properties acquired during 1998.
Minority Interest. Minority interest expense increased $14 million to $28
million for the second quarter of 1999 and increased $16 million to $46
million year-to-date, primarily reflecting the impact of the issuance of
operating partnership units for the acquisition of certain hotel properties
partially offset by the consolidation of partnerships which occurred as part
of the REIT conversion.
Interest Expense. Interest expense increased 33% to $101 million in the
second quarter of 1999 and increased 32% to $200 million year-to-date,
primarily due to the issuance of senior notes, establishment of a new credit
facility and additional mortgage debt on properties acquired in 1998.
Dividends on Convertible Preferred Securities. The dividends on Convertible
Preferred Securities reflect the dividends accrued during the first half of
fiscal year 1999 and 1998 on the $550 million in 6 3/4% Convertible
Preferred Securities.
Corporate Expenses. Corporate expenses decreased $1 million to $8 million
for the second quarter of 1999 and decreased $5 million to $16 million year-
to-date, resulting primarily from the timing of certain project costs not
incurred in 1999 and lower compensation costs.
Income from Discontinued Operations. Income from discontinued operations
represents the senior living communities business' results of operations for
the second quarter of 1998 and year-to-date 1998 as restated for the spin-off
of Crestline.
Extraordinary Gain. 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 for accrued incentive management fees by the manager.
Net Income. Our net income increased $8 million for the second quarter of
1999 to $74 million and increased $23 million to $119 million for year-to-
date 1999.
FFO and EBITDA
--------------
We consider Funds From Operations or FFO as defined by the National
Association of Real Estate Investment Trusts and our consolidated earnings
before interest expense, income taxes, depreciation, amortization and other
non-cash items or EBITDA to be indicative measures of our operating
performance due to the significance of our long-lived assets and because such
data is considered useful by the investment community to better understand
our results, and can be used to measure our ability to service debt, fund
capital expenditures and expand our business. However, such 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 FFO presentation.
Management believes that FFO is a meaningful disclosure that will help the
investment community to better understand our financial performance,
including enabling shareholders and analysts to more easily compare our
performance to other Real Estate Investment Trusts. FFO increased $37
million, or 32%, to $152 million in the second quarter of 1999 over the
second quarter of 1998. However, FFO
-17-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
as presented may not be comparable to amounts calculated by other companies.
For periods prior to 1999, the FFO disclosed represents comparative FFO (FFO
plus deferred tax expenses). The following is a reconciliation of income from
continuing operations to FFO (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-four Weeks Ended
----------------------------- -------------------------------
June 18, June 19, June 18, June 19,
1999 1998 1999 1998
-------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Income from continuing operations.................... $ 61 $ 62 $ 106 $ 90
Depreciation and amortization........................ 67 62 135 114
Other real estate activities......................... (5) (51) (16) (52)
Partnership adjustments.............................. 29 (2) 44 (7)
REIT conversion expenses............................. -- 6 -- 6
Deferred taxes....................................... -- 29 -- 39
Discontinued operations.............................. -- 9 -- 16
----- ----- ----- -----
Funds From Operations............................... $ 152 $ 115 $ 269 $ 206
===== ===== ===== =====
</TABLE>
EBITDA increased $47 million, or 23%, to $255 million in the second quarter
of 1999 and $70 million or 17%, to $481 million year-to-date. Hotel EBITDA
increased $41 million, or 19%, to $263 million in the second quarter of 1999,
and $67 million or 16% to $493 million year-to-date, reflecting comparable
hotel EBITDA growth, as well as incremental EBITDA from 1998 acquisitions
offset by amounts representing hotel sales which are retained by Crestline.
The following is a reconciliation of EBITDA to income from continuing
operations (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-four Weeks Ended
------------------------------ -------------------------------
June 18, June 19, June 18, June 19,
1999 1998 1999 1998
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
EBITDA............................................... $ 255 $ 208 $ 481 $ 411
Interest expense..................................... (101) (76) (200) (152)
Dividends on Convertible Preferred Securities........ (8) (8) (17) (17)
Depreciation and amortization........................ (67) (62) (135) (114)
Minority interest expense............................ (28) (14) (46) (30)
Income taxes......................................... -- (43) -- (63)
Other non-cash charges, net.......................... 10 57 23 55
----- ----- ----- -----
Income from continuing operations................... $ 61 $ 62 $ 106 $ 90
===== ===== ===== =====
</TABLE>
FFO and EBITDA include the amounts available for distribution by the
operating partnership to all holders of its partnership interests, or OP
units. As of June 18, 1999 we owned approximately 78% of the outstanding OP
units. The tables above are consistent with our UPREIT structure and
dividend policy whereby all OP unitholders are entitled to equal
distributions. However, we believe the presentation of FFO and EBITDA before
adjustment for minority interest is helpful because these amounts represent
amounts available to service debt and make capital expenditures and
distributions. FFO and EBITDA as presented would be decreased if the effect
of the 22% minority interest in the operating partnership had been included
in the calculations. FFO as adjusted for the minority interest would be $119
million and $210 million for the twelve weeks and twenty-four weeks ended
June 18, 1999, respectively. EBITDA as adjusted for the minority interest
would be $242 million and $454 million for the twelve and twenty-four weeks
ended June 18, 1999, respectively.
Our interest coverage, defined as EBITDA divided by cash interest expense,
was 2.7 times for the 1999 second quarter, 3.0 times for the 1998 second
quarter and 2.5 times for full year 1998. The ratio of earnings to fixed
charges was 1.7 to 1.0 for the second quarter of 1999 and 2.0 to 1.0 for the
second quarter of 1998.
-18-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Cash Flows and Financial Condition
----------------------------------
We reported a decrease in cash and cash equivalents of $126 million during
the twenty-four weeks ended June 18, 1999. Cash from continuing operations
was $98 million through the second quarter of 1999 and $203 million through
the second quarter of 1998. The $105 million decrease in cash from
continuing operations resulted principally from an increase in rent
receivable resulting from the timing of the receipt of cash payments. There
was no cash activity related to discontinued operations through the second
quarter of 1999; however, cash from discontinued operations totaled $3
million through the second quarter of 1998.
Cash used in investing activities from continuing operations was $163 million
through the second quarter of 1999. Cash from investing activities from
continuing operations was $43 million through the second 1998. Cash used in
investing activities through the second quarter of 1999 includes capital
expenditures of $177 million, mostly related to renewals and replacements on
existing properties and development projects. In addition, we generated $35
million of cash from the net sale of assets, primarily the
Minneapolis/Bloomington property. There was no cash related to investing
activities from discontinued operations through the second quarter 1999;
however, cash used in investing activities from discontinued operations
totaled $2 million year-to-date 1998. Property and equipment balances
include $145 million and $78 million for construction in progress as of June
18, 1999 and December 31, 1998, respectively. The current balance primarily
relates to properties in Tampa, Orlando, Memphis and various other expansion
and development projects.
Cash used in financing activities from continuing operations was $61 million
through the second quarter of 1999 and $93 million through the second quarter
of 1998. Cash used in financing activities includes $323 million in
prepayment of debt, offset by $413 million in debt issuances for 1999. Both
financing activities were related to our February 1999 issuance of $300
million of 8 3/8% Series D Senior notes due in 2006 and the refinancing of
the New York Marriott Marquis.
The Series D Senior notes were used to refinance, or purchase, debt which had
been assumed through the merger of certain partnerships or the purchase of
hotel properties in connection with the REIT conversion in December 1998. In
August 1999, we intend to exchange Series D Senior notes for Series E Senior
notes on a one-for-one basis. The terms of the Series E Senior notes and the
Series D Senior notes will be substantially identical except that the Series
E Senior notes are freely transferable by the holders.
In April 1999, a subsidiary completed the refinancing of the $245 million
mortgage on the New York Marriott Marquis, maturing June 2000. We
subsequently refinanced this mortgage as part of the $665 million financing
agreement completed in the third quarter of 1999.
Cash used in financing activities also reflects $69 million in dividend
payments for a special dividend declared in December 1998 and paid in
February 1999. In addition, on March 15, 1999 and June 15, 1999, the Board
of Directors declared regular cash dividends of $0.21 per share of common
stock. The first quarter dividend was paid on April 14, 1999. The second
quarter dividend was paid on July 14, 1999 to shareholders and is not
reflected in the cash flow statement.
There was no cash related to financing activities from discontinued
operations through the second quarter of 1999; however, cash used in
financing activities from discontinued operations totaled $150 million
through the second quarter of 1998.
-19-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In July 1999, we sold 4.0 million shares of 10% Class A Cumulative Redeemable
Preferred Stock. Holders of the stock are entitled to receive cumulative cash
dividends at a rate of 10% per annum of the $25.00 per share liquidation
preference. Dividends are payable quarterly in arrears commencing October 15,
1999. After August 3, 2004 we have the option to redeem the Class A Preferred
Stock for $25.00 per share, plus accrued and unpaid dividends to the date of
redemption. The Class A preferred stock ranks senior to the common stock and
the authorized Series A Junior Participating preferred stock. The Class A
preferred stockholders generally have no voting rights.
We also entered into a financing agreement for $665 million due 2009 at a
fixed rate of 7.47%. The proceeds from this financing were used to refinance
existing mortgage indebtedness maturing at various times through 2000.
In June 1999, we acquired by merger Timewell Group, L.P. and Timeport, L.P.,
which each own limited partnership interests in the partnership that owns the
New York Marriott Marquis. As part of the merger, the general partners of
Timewell Group, L.P. and Timeport, L.P. received 345,559 and 240,218
cumulative redeemable preferred OP Units, respectively. The preferred OP
Units are convertible into OP Units on a one-for-one basis, subject to
certain adjustments, at any time beginning one year after the merger at the
option of the holders. At any time, beginning two years after the merger, we
can redeem the preferred OP units for OP Units or cash.
Also in June 1999, we refinanced the debt on the San Diego Marriott Marina &
Hotel. The mortgage is for $195 million for a term of 10 years at a rate of
8.45%. In addition, we completed a 210-room extension of the Philadelphia
Marriott in April 1999 at a cost of approximately $37 million. The mortgage
on the Philadelphia Marriott was refinanced in July 1999 for $23 million at
an interest rate of approximately 8.6%, maturing in 2009.
On December 30, 1998, we acquired a portfolio of twelve luxury hotels and
other assets from the Blackstone Group, a Delaware limited partnership, and a
series of funds controlled by affiliates of Blackstone Real Estate Partners.
We issued approximately 47.7 million OP Units and assumed debt and made cash
payments of approximately $920 million and distributed 1.4 million of the
shares of Crestline common stock to the Blackstone Real Estate Partners.
Approximately 23.9 million OP Units were redeemable as of June 30, 1999.
Year 2000 Issue
----------------
Year 2000 issues have arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer
to a year, and therefore do not properly recognize a year that begins with
"20" instead of the familiar "19". If not corrected, many computer
applications could fail or create erroneous results. The following disclosure
provides information regarding the current status of our Year 2000 compliance
program.
We have adopted the compliance program because we recognize the importance of
minimizing the number and seriousness of any disruptions that may occur as a
result of the Year 2000 issue. Our compliance program includes an assessment
of our hardware and software computer systems and embedded systems, as well
as an assessment of the Year 2000 issues relating to third parties with which
we have a material relationship or whose systems are material to the
operations of our hotel properties. Our efforts to ensure that our computer
systems are Year 2000 compliant have been segregated into two separate
phases: in-house systems and third-party systems. Following the REIT
conversion, Crestline,
-20-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
as the lessee of most of our hotels, will deal directly with Year 2000
matters material to the operation of the hotels, and Crestline has agreed to
adopt and implement the program outlined below with respect to third-party
systems for all hotels for which it is lessee.
In-House Systems. Since the distribution of Marriott International on
October 8, 1993, we have invested in the implementation and maintenance of
accounting and reporting systems and equipment that are intended to enable us
to provide adequately for our information and reporting needs and which are
also Year 2000 compliant. Substantially all of our in-house systems have
already been certified as Year 2000 compliant through testing and other
mechanisms and we have not delayed any systems projects due to the Year 2000
issue. We engaged a third party to review our Year 2000 in-house readiness
and found no problems with any mission critical systems. Management believes
that future costs associated with Year 2000 issues for our in-house systems
will be insignificant and therefore not impact our business, financial
condition and results of operations. We have not developed, and do not plan
to develop, a separate contingency plan for our in-house systems due to their
current Year 2000 compliance. We do, however, have the normal disaster
recovery procedures in place should we have a systems failure.
Third-Party Systems. We rely upon operational and financial systems provided
by third parties, primarily the managers and operators of our hotel
properties, to provide the appropriate property-specific operating systems,
including reservation, phone, elevator, security, HVAC and other systems, and
to provide us with financial information. Based on discussion with the third
parties that are critical to our business, including the managers and
operators of our hotels, we believe that these parties are in the process of
studying their systems and the systems of their respective vendors and
service providers and, in many cases, have begun to implement changes, to
ensure that they are Year 2000 compliant. We continue to receive verbal and
written assurances that these third parties are, or will be, Year 2000
compliant on time. To the extent these changes impact property-level systems,
we may be required to fund capital expenditures for upgraded equipment and
software. We do not expect these charges to be material, but we are committed
to making these investments as required. To the extent that these changes
relate to a third party manager's centralized systems, including
reservations, accounting, purchasing, inventory, personnel and other systems,
management agreements generally provide for these costs to be charged to our
properties subject to annual limitations, which costs will be borne by
Crestline under the leases. We expect that the third party managers will
incur Year 2000 costs in lieu of costs for their centralized systems related
to system projects that otherwise would have been pursued and, therefore, the
overall level of centralized systems charges allocated to the properties will
not materially increase as a result of the Year 2000 compliance effort. We
believe that this deferral of certain system projects will not have a
material impact on our future results of operations, although it may delay
certain productivity enhancements at our properties. We and Crestline will
continue to monitor the efforts of these third parties to become Year 2000
compliant and will take appropriate steps to address any non-compliance
issues. We believe that, in the event of material Year 2000 non-compliance,
we will have the right to seek recourse against the manager under our third
party management agreements. The management agreements, however, generally do
not specifically address the Year 2000 compliance issue. Therefore, the
amount of any recovery in the event of Year 2000 non-compliance at a
property, if any, is not determinable at this time, and only a portion of
such recovery would accrue to us through increased lease rental payments from
Crestline.
We and Crestline will work with the third parties to ensure that appropriate
contingency plans will be developed to address the most reasonably likely
worst case Year 2000 scenarios, which may not have been identified fully. In
particular, we and Crestline have had extensive discussions regarding the
Year 2000 problem with Marriott International, the manager of a substantial
majority of our hotel properties.
-21-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Due to the significance of Marriott International to our business, a detailed
description of Marriott International's state of readiness follows.
Marriott International has adopted an eight-step process toward
Year 2000 readiness, consisting of the following: (i) Awareness: fostering
understanding of, and commitment to, the problem and its potential risks;
(ii) Inventory: identifying and locating systems and technology components
that may be affected; (iii) Assessment: reviewing these components for Year
2000 compliance, and assessing the scope of Year 2000 issues; (iv) Planning:
defining the technical solutions and labor and work plans necessary for each
affected system; (v) Remediation/Replacement: completing the programming to
renovate or replace the problem software or hardware; (vi) Testing and
Compliance Validation: conducting testing, followed by independent validation
by a separate internal verification team; (vii) Implementation: placing the
corrected systems and technology back into the business environment; and
(viii) Quality Assurance: utilizing an internal audit team to review
significant projects for adherence to quality standards and program
methodology.
Marriott International has grouped its systems and technology into three
categories for purposes of Year 2000 compliance: (i) information resource
applications and technology (IT Applications)--enterprise-wide systems
supported by Marriott International's centralized information technology
organization ("IR"); (ii) Business-initiated Systems ("BIS")--systems
that have been initiated by an individual business unit, and that are not
supported by Marriott International's IR organization; and (iii) Building
Systems--non-IT equipment at properties that use embedded computer chips,
such as elevators, automated room key systems and HVAC equipment. Marriott
International is prioritizing its efforts based on how severe an effect
noncompliance would have on customer service, core business processes or
revenues, and whether there are viable, non-automated fallback procedures
(System Criticality).
Marriott International measures the completion of each phase based on
documentation and quantified results weighted for System Criticality. As of
June 18, 1999, the Awareness, Inventory, Assessment, and Planning phases were
complete for IT Applications, BIS, and Building Systems. For IT Applications,
the Remediation/Replacement and Testing phases were 95 percent complete.
Compliance Validation had been completed for approximately 85 percent of key
systems, with most of the remaining work in its final stage. For BIS and
Building Systems, Remediation/Replacement is substantially complete with a
target date of September 1999. For BIS, Testing and Compliance Validation is
in progress. Testing is over 95% complete for Building Systems for which
approximately five percent require further remediation/replacement and re-
testing, and Compliance Validation is in progress. Implementation and Quality
Assurance is 80 percent complete for IT Applications. For BIS, Implementation
is substantially complete while Quality Assurance is in progress. Both
Implementation and Quality Assurance are in progress for Building Systems.
Year 2000 compliance communications with Marriott International's significant
third party suppliers, vendors and business partners, including its
franchisees are ongoing. Marriott International's efforts are focused on the
connections most critical to customer service, core business processes and
revenues, including those third parties that support the most critical
enterprise-wide IT Applications, franchisees generating the most revenues,
suppliers of the most widely used Building Systems and BIS, the top 100
suppliers, by dollar volume, of non-IT products and services, and financial
institutions providing the most critical payment processing functions.
Responses have been received from a majority of the firms in this group. A
majority of these respondents have either given assurances of timely Year
2000 compliance or have identified the necessary actions to be taken by them
or Marriott International to achieve timely Year 2000 compliance for their
products. Where Marriott International has not received satisfactory
responses
-22-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
it is addressing the potential risks of failure through its contingency
planning process.
Marriott International has established a common approach for testing and
addressing Year 2000 compliance issues for its managed and franchised
properties. This includes guidance for operated properties, and a Year 2000
"Toolkit" for franchisees containing relevant Year 2000 compliance
information. Marriott International is also utilizing a Year 2000 best-
practices sharing system. Marriott International is monitoring the progress
of the managed and franchised properties towards Year 2000 compliance.
Risks. There can be no assurances that Year 2000 remediation by us or third
parties will be properly and timely completed, and failure to do so could
have a material adverse effect on us, our business and our financial
condition. We cannot predict the actual effects to us of the Year 2000
problem, which depends on numerous uncertainties such as: whether significant
third parties properly and timely address the Year 2000 issue and whether
broad-based or systemic economic failures may occur. Moreover, we are reliant
upon Crestline to interface with third parties in addressing the Year 2000
issue at the hotels leased by Crestline. We are also unable to predict the
severity and duration of any such failures, which could include disruptions
in passenger transportation or transportation systems generally, loss of
utility and/or telecommunications services, the loss or disruption of hotel
reservations made on centralized reservation systems and errors or failures
in financial transactions or payment processing systems such as credit cards.
Due to the general uncertainty inherent in the Year 2000 problem and our
dependence on third parties, including Crestline following the REIT
Conversion, we are unable to determine at this time whether the consequences
of Year 2000 failures will have a material impact on us. Our Year 2000
compliance program and Crestline's adoption thereof are expected to
significantly reduce the level of uncertainty about the Year 2000 problem and
management believes that the possibility of significant interruptions of
normal operations should be reduced.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have certain derivative and other financial instruments that are sensitive
to changes in interest rates, including interest rate swaps and debt
obligations. The interest recognized on the debt obligations and interest
rate swap instruments is based on various LIBOR terms, which were 4.9% and
5.8%, respectively, at June 18, 1999 and 5.1% and 5% at December 31, 1998,
respectively. The interest rates, fair values and future maturities
associated with these financial instruments have not changed materially from
the amounts reported in our annual report on Form 10-K except for the
refinancing and termination discussed below.
We repaid a $40 million variable rate mortgage with proceeds from the $300
million senior notes offering discussed in Note 8 to the financial statements
during the first quarter of 1999. We terminated the associated swap
agreement incurring a termination fee of approximately $1 million.
In July 1999, we completed the refinancing of approximately $790 million of
outstanding variable rate mortgage debt and terminated the related interest
rate swap agreements. See Note 11 to the condensed consolidated financial
statements. As a result of the termination of the interest rate swap
agreements we no longer have derivatives outstanding. As of July 27, 1999,
our remaining variable debt consists of the credit facility and the mortgage
debt on the Ritz-Carlton Amelia Island property.
-23-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time the subject of, or involved in,
judicial proceedings. Management believes that any liability or loss
resulting from such matters will not have a material adverse effect on
the financial position or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
On May 20, 1999, Host Marriott Corporation held its Annual Meeting of
Shareholders to elect members of the Board of Directors, among other
matters.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
. May 3, 1999--Report of earnings release for the
first quarter of 1999.
-24-
<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 CORPORATION
July 27, 1999 /s/ Donald D. Olinger
- ------------- -------------------------------------------
Date Donald D. Olinger
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HOST
MARRIOTT CORPORATION CONDENSED CONSOLIDATED INTERIM BALANCE SHEET AND CONDENSED
CONSOLIDATED INTERIM STATEMENT OF OPERATIONS AS OF AND FOR THE PERIOD ENDED JUNE
18, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-18-1999
<CASH> 310
<SECURITIES> 0
<RECEIVABLES> 305
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 8,308
<DEPRECIATION> 1,094
<TOTAL-ASSETS> 8,294
<CURRENT-LIABILITIES> 0
<BONDS> 2,546
550
0
<COMMON> 2
<OTHER-SE> 1,332
<TOTAL-LIABILITY-AND-EQUITY> 8,294
<SALES> 611
<TOTAL-REVENUES> 648
<CGS> 0
<TOTAL-COSTS> 542
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 200
<INCOME-PRETAX> 106
<INCOME-TAX> 0
<INCOME-CONTINUING> 106
<DISCONTINUED> 0
<EXTRAORDINARY> 13
<CHANGES> 0
<NET-INCOME> 119
<EPS-BASIC> .52
<EPS-DILUTED> .51
</TABLE>
