<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[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
--- ---
Shares outstanding
Class at July 27, 1999
- ------------------ ----------------
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
<PAGE>
INDEX
-----
Part I. FINANCIAL INFORMATION (Unaudited): Page No.
--------
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 18
Operations and Financial Condition
-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
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
Deferred rent........................................................................... 253 --
Other liabilities....................................................................... 417 460
------- -------
Total liabilities................................................................. 6,148 5,892
------- -------
Minority interest....................................................................... 456 515
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........................................................................ (725) (554)
------- -------
Total shareholders' equity....................................................... 1,140 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 2, 3)............................... $ 187 $ --
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....................................... 203 849
------ ------
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 (benefit)......................... (5) 14
Interest expense.................................... 101 76
Dividends on Convertible Preferred Securities....... 8 8
Corporate expenses.................................. 8 9
REIT conversion expenses............................ -- 6
Other expenses...................................... 6 5
------ ------
247 744
------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES.......................................... (44) 105
Provision for income taxes.............................. -- (43)
------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS................ (44) 62
INCOME FROM DISCONTINUED OPERATIONS, net of taxes....... -- 4
------ ------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM................. (44) 66
Extraordinary item--gain on forgiveness of debt......... 13 --
------ ------
NET INCOME (LOSS) ...................................... $ (31) $ 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 (LOSS) PER COMMON SHARE:................... $ (0.19) $ 0.29
Discontinued operations (net of income taxes)............. -- 0.02
Extraordinary item--gain on forgiveness of debt........... 0.05 --
--------- ---------
BASIC EARNINGS (LOSS) PER COMMON SHARE:................... $ (0.14) $ 0.31
========= =========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:................. $ (0.19) $ 0.26
Discontinued operations (net of income taxes)............. -- 0.02
Extraordinary item--gain on forgiveness of debt........... 0.05 --
--------- ---------
DILUTED EARNINGS (LOSS) PER COMMON SHARE.................. $ (0.14) $ 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>
REVENUES
Rental income (Note 2, 3)............................... $ 358 $ --
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....................................... 395 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 (benefit)......................... (13) 30
Interest expense.................................... 200 152
Dividends on Convertible Preferred Securities....... 17 17
Corporate expenses.................................. 16 21
REIT conversion expenses............................ -- 6
Other expenses...................................... 10 10
-------- --------
483 1,501
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES.......................................... (88) 153
Provision for income taxes.............................. -- (63)
-------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS................ (88) 90
INCOME FROM DISCONTINUED OPERATIONS, net of taxes....... -- 6
-------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM................. (88) 96
Extraordinary item--gain on forgiveness of debt......... 13 --
-------- --------
NET INCOME (LOSS) ...................................... $ (75) $ 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 (LOSS) PER COMMON SHARE:
Continuing Operations ............................... $ (0.38) $ 0.42
Discontinued operations (net of income taxes)........ -- 0.03
Extraordinary item--gain on forgiveness of debt...... 0.05 --
--------- --------
BASIC EARNINGS (LOSS) PER COMMON SHARE:.............. $ (0.33) $ 0.45
========= ========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
continuing operations................................ $ (0.38) $ 0.39
Discontinued operations (net of income taxes)........ -- 0.02
Extraordinary item--gain on forgiveness of debt...... 0.05 --
--------- --------
DILUTED EARNINGS (LOSS) PER COMMON SHARE............. $ (0.33) $ 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 (Loss) from continuing operations................................................ $ (88) $ 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........................................................... 104 (23)
Other (35) 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
-9-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
19, 1998 and cash flows for the twenty-four weeks ended June 18, 1999 and
June 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 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.
The staff of the Securities & Exchange Commission issued Staff Accounting
Bulletin 101 "Revenue Recognition" (SAB 101) in December 1999. SAB 101
discusses factors to consider in determining when contingent revenue should
be recognized during interim periods. The Company has adopted SAB 101
effective January 1, 1999 and has therefore amended its previously filed
Form 10-Q to reflect this change in accounting principle. As a result of
the adoption of SAB 101, $138 million and $253 million of contingent rent
previously recognized as revenue during the twelve weeks and twenty-four
weeks ended June 18, 1999 has been deferred and recognized in subsequent
periods of fiscal year 1999. As of December 31, 1999 all of the thresholds
were reached and all contingent rent was recognized. SAB 101 has no impact
on the Company's annual revenue recognition, net income or earnings per
share. SAB 101 had no effect on prior year periods as the hotel leases were
not in effect prior to the REIT Conversion
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.
-10-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<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 common stock outstanding plus other potentially dilutive
securities. No effect is shown for securities if they are anti-dilutive.
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........................................................ -- 4.2 -- 4.3
Assuming distribution of common shares issuable for warrants,
less shares assumed purchased at average market price....................... -- 0.1 -- 0.1
Assuming conversion of minority operating partnership units
outstanding................................................................. 64.6 -- 64.6 --
Assuming conversion of minority operating partnership units
issuable.................................................................... -- -- -- --
Assuming conversion of Convertible Preferred Securities....................... -- 35.8 -- 35.8
----- ----- ----- ------
Shares utilized for the calculation of diluted earnings per share........... 292.5 256.2 292.0 256.1
===== ===== ====== =====
</TABLE>
-11-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 (loss)............................................................. $ (31) $ 66 $ (75) $ 96
Dividends on Convertible Preferred Securities, net of taxes................... -- 5 -- 10
Minority interest expense, assuming conversion of OP units.................... (12) -- (24) --
--- ----- ------ ------
Earnings (loss)used for the calculation of diluted earnings per share......... $ (43) $ 71 $ (99) $ 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 11.5 million shares of common
stock issued in February 1999 as a result of the REIT Conversion.
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.
-12-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 83/8% 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):
<TABLE>
<CAPTION>
Twelve Weeks Ended June 18, 1999
--------------------------------
Hotels Corporate & Other Consolidated
------ ----------------- ------------
<S> <C> <C> <C>
Revenues....................................... $ 197 $ 6 $ 203
Income (loss) from continuing operations
before income taxes.......................... (28) (16) (44)
<CAPTION>
Twelve Weeks Ended June 19, 1998
--------------------------------
Hotels Corporate & Other Consolidated
------ ----------------- ------------
<S> <C> <C> <C>
Revenues....................................... $ 797 $ 52 $ 849
</TABLE>
-13-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<S> <C> <C> <C>
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....................................... $ 386 $ 9 $ 395
Income (loss) from continuing operations
before income taxes.......................... (55) (33) (88)
<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>
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.................................. $ 199 $ 825 $ 389 $1,604
International.................................. 4 24 6 50
------ ------- ------ ------
Total...................................... $ 203 $ 849 $ 395 $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.
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.
-14-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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):
-15-
<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
</TABLE>
-16-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C>
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>
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>
-17-
<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. Also, as discussed in Note 2,
the Company retroactively adopted SAB 101 as of the beginning of its fiscal
year, and restated its results of operations for the first three quarters of
1999 to defer recognition of rental income which is contingent upon annual
thresholds until such period as those thresholds are met. SAB 101 has no impact
on the Company's annual revenue recognition, net income or earning per share.
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.
-18-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 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 $19 million to a $5
million benefit for the second quarter of 1999 and increased $43 million to a
$13 million benefit year-to-date, primarily reflecting the impact of the
issuance of operating partnership units for the acquisition of certain hotel
properties, and the implementation of SAB 101 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 63/4% 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 loss was $31 million for the second quarter of 1999 compared
to net income of $66 million in 1998. For year-to-date 1999 our net loss was $75
million compared to net income of $96 million in 1998.
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
-19-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 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 (loss) from continuing operations.............. $ (44) $ 62 $ (88) $ 90
Effect of SAB 101..................................... 138 -- 253 --
Depreciation and amortization......................... 67 62 135 114
Other real estate activities.......................... (5) (51) (16) (52)
Partnership adjustments............................... (4) (2) (15) (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
Effect of SAB 101..................................... (138) -- (253) --
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............................. 5 (14) 13 (30)
Income taxes.......................................... -- (43) -- (63)
Other non-cash charges, net........................... 10 57 23 55
------- ------- ------- -------
Income (loss) from continuing operations............ $ (44) $ 62 $ (88) $ 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
-20-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 deficiency of earnings to fixed charges was
$100 million for the second quarter of 1999 and the ratio of earnings to fixed
charges was 2.0 to 1.0 for the second quarter of 1998.
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 83/8%
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.
-21-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 $73 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.
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.
-22-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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, 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
-23-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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. 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
-24-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 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.
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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
February 16, 2000 /s/ Donald D. Olinger
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Date Donald D. Olinger
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
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