<PAGE>
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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 September 10, 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 October 19, 1999
- ------------------------ -------------------
Common Stock, $0.01 par value per share 229,012,438
Purchase share rights for Series A Junior Participating
Preferred Stock, $0.01 par value --
Class A Cumulative Redeemable Preferred Stock 4,160,000
<PAGE>
INDEX
-----
Part I. FINANCIAL INFORMATION (Unaudited): Page No.
--------
Condensed Consolidated Balance Sheets - 3
September 10, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations - 4
Twelve Weeks and Thirty-six Weeks Ended
September 10, 1999 and September 11, 1998
Condensed Consolidated Statements of Cash Flows - 8
Thirty-six Weeks Ended
September 10, 1999 and September 11, 1998
Notes to Condensed Consolidated Financial Statements 10
Management's Discussion and Analysis of Results of 21
Operations and Financial Condition
-2-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
September 10, December 31,
1999 1998
------------- ------------
(unaudited)
ASSETS
------
<S> <C> <C>
Property and equipment, net............................................................. $ 7,221 $ 7,201
Notes and other receivables (including amounts due from
affiliates of $131 million and $134 million, respectively)............................ 244 203
Rent receivable......................................................................... 63 --
Due from managers....................................................................... -- 19
Investments in affiliates............................................................... 48 33
Other assets............................................................................ 464 376
Cash and cash equivalents............................................................... 290 436
------- -------
$8,330 $8,268
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Debt
Senior notes.......................................................................... $ 2,539 $ 2,246
Mortgage debt......................................................................... 2,255 2,438
Other................................................................................. 356 447
------- -------
5,150 5,131
Accounts payable and accrued expenses................................................... 143 204
Deferred income taxes................................................................... 96 97
Deferred rent........................................................................... 339 --
Other liabilities....................................................................... 382 460
------- -------
Total liabilities................................................................. 6,110 5,892
------- -------
Minority interest....................................................................... 445 515
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
Class A cumulative redeemable preferred stock (liquidation preference $25.00 per
share), 50 million shares authorized; 4.16 million shares and
0 shares issued and outstanding, respectively ("Class A Preferred Stock").......... 100 --
Common stock, 750 million shares authorized; 228.7 million shares
and 225.6 million shares issued and outstanding, respectively...................... 2 2
Additional paid-in capital.............................................................. 1,875 1,867
Accumulated other comprehensive income (loss)........................................... 3 (4)
Retained deficit........................................................................ (755) (554)
------- -------
</TABLE>
<TABLE>
<S> <C> <C>
Total shareholders' equity....................................................... 1,225 1,311
------- -------
$ 8,330 $ 8,268
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-3-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve weeks ended September 10, 1999 and September 11, 1998
(unaudited, in millions)
<TABLE>
<CAPTION>
1999 1998
------ -------
<S> <C> <C>
REVENUES
Rental income (Note 2, 3)................................ $ 188 $ --
Hotel sales
Rooms ................................................ -- 494
Food and beverage...................................... -- 198
Other ................................................ -- 49
Interest income.......................................... 10 11
Net gains on property transactions....................... -- 1
Equity in earnings of affiliates......................... 3 2
Other 2 1
------ -------
Total revenues........................................ 203 756
------ -------
EXPENSES
Depreciation and amortization........................ 68 53
Property-level expenses.............................. 62 67
Hotel operating expenses --
Rooms.............................................. -- 121
Food and beverage.................................. -- 156
Other department costs and deductions.............. -- 194
Management fees (including Marriott International
management fees of $36 million in 1998)......... -- 39
Minority interest (benefit).......................... (8) 6
Interest expense..................................... 98 79
Dividends on Convertible Preferred Securities........ 9 9
Corporate expenses................................... 6 12
REIT conversion expenses............................. -- 8
Other expenses....................................... -- 4
------ -------
235 748
------ -------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES........................................... (32) 8
Provision for income taxes............................... -- (6)
------ -------
INCOME (LOSS) FROM CONTINUING OPERATIONS................. (32) 2
INCOME FROM DISCONTINUED OPERATIONS, net of taxes........ -- 2
------ -------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.................. (32) 4
Extraordinary gain (loss)................................ 4 (148)
------ -------
NET LOSS ................................................ $ (28) $ (144)
------- -------
Less: Dividends on preferred stock....................... (1) --
------ -------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS................ $ (29) $ (144)
====== =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-4-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
Twelve weeks ended September 10, 1999 and September 11, 1998
(unaudited)
BASIC EARNINGS (LOSS)PER COMMON SHARE:
Continuing operations.....................................$ (0.15) $ 0.01
Discontinued operations (net of income taxes)............. -- 0.01
Extraordinary gain (loss)................................. 0.02 (0.69)
--------- ---------
BASIC LOSS PER COMMON SHARE:..............................$ (0.13) $ (0.67)
======== =========
DILUTED EARNINGS PER COMMON SHARE:
Continuing operations.....................................$ (0.15) $ 0.01
Discontinued operations (net of income taxes)............. -- 0.01
Extraordinary gain (loss) ................................ 0.02 (0.67)
--------- ---------
DILUTED LOSS PER COMMON SHARE.............................$ (0.13) $ (0.65)
======== =========
See Notes to Condensed Consolidated Financial Statements
-5-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Thirty-six weeks ended September 10, 1999 and September 11, 1998
(unaudited, in millions)
1999 1998
-------- ------
REVENUES
Rental income (Note 2, 3).............................. $ 546 $ --
Hotel sales
Rooms .............................................. -- 1,514
Food and beverage.................................... -- 642
Other .............................................. -- 159
Interest income........................................ 26 35
Net gains on property transactions..................... 16 53
Equity in earnings of affiliates....................... 5 1
Other 5 6
-------- --------
Total revenues...................................... 598 2,410
-------- --------
EXPENSES
Depreciation and amortization...................... 201 166
Property-level expenses............................ 182 189
Hotel operating expenses
Rooms............................................ -- 348
Food and beverage................................ -- 477
Other department costs and deductions............ -- 568
Management fees (including Marriott International
management fees of $138 million in 1998)...... -- 147
Minority interest (benefit)........................ (21) 36
Interest expense................................... 298 231
Dividends on Convertible Preferred Securities...... 26 26
Corporate expenses................................. 22 33
REIT conversion expenses........................... -- 14
Other expenses..................................... 10 14
-------- --------
718 2,249
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES......................................... (120) 161
Provision for income taxes............................. -- (69)
-------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS............... (120) 92
Income from discontinued operations, net of taxes...... -- 8
-------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM................ (120) 100
Extraordinary gain (loss).............................. 17 (148)
-------- --------
NET LOSS .............................................. $ (103) $ (48)
======== ========
Less: Dividends on preferred stock.................... (1) --
-------- --------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS.............. $ (104) $ (48)
======== ========
See Notes to Condensed Consolidated Financial Statements
-6-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Thirty-six weeks ended September 10, 1999 and September 11, 1998
(unaudited)
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations................................. $ (0.53) $ 0.42
Discontinued operations (net of income taxes)......... -- 0.04
Extraordinary gain (loss)............................. 0.07 (0.69)
--------- ---------
BASIC EARNINGS (LOSS) PER COMMON SHARE:............... $ (0.46) $ (0.23)
========= =========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations................................. $ (0.53) $ 0.42
Discontinued operations (net of income taxes)......... -- 0.03
Extraordinary gain (loss)............................. 0.07 (0.67)
--------- ---------
DILUTED EARNINGS (LOSS) PER COMMON SHARE.............. $ (0.46) $ (0.22)
========= =========
See Notes to Condensed Consolidated Financial Statements
-7-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-six Weeks Ended September 10, 1999 and September 11, 1998
(unaudited, in millions)
<TABLE>
<CAPTION>
1999 1998
-------- ------
OPERATING ACTIVITIES
<S> <C> <C>
Income (Loss) from continuing operations................................................ $ (120) $ 92
Adjustments to reconcile to cash from continuing operations:
Depreciation and amortization....................................................... 203 168
Income taxes........................................................................ -- 50
Gain on sale of hotel properties.................................................... (16) (50)
Equity in earnings of affiliates.................................................... (5) (1)
Changes in operating accounts....................................................... 229 (35)
Other............................................................................... (62) 30
------- -------
Cash from continuing operations..................................................... 229 254
Cash from discontinued operations................................................... -- 24
------- -------
Cash from operations................................................................ 229 278
------- -------
INVESTING ACTIVITIES
Proceeds from sales of assets........................................................... 49 211
Acquisitions............................................................................ (17) (607)
Capital expenditures:
Renewals and replacements........................................................... (143) (108)
Development projects................................................................ (102) (32)
Other investments................................................................... (16) (19)
Purchases of short-term marketable securities........................................... -- (134)
Sales of short-term marketable securities............................................... -- 451
Note receivable advances, net of collections............................................ (47) 4
Affiliate collections, net.............................................................. -- 13
Other .................................................................................. -- (12)
------- -------
Cash used in investing activities from continuing operations........................ (276) (233)
Cash used in investing activities from discontinued operations...................... -- (10)
------- -------
Cash used in investing activities................................................... (276) (243)
------- -------
FINANCING ACTIVITIES
Issuances of debt, net.................................................................. 1,282 2,004
Issuances of Class A preferred stock.................................................... 100 --
Issuances of common stock............................................................... 2 --
Dividends............................................................................... (168) --
Scheduled principal repayments.......................................................... (26) (39)
Debt prepayments........................................................................ (1,275) (1,631)
Costs of extinguishment of debt......................................................... (2) (175)
Other .................................................................................. (12) (14)
------- -------
Cash (used in) from financing activities from continuing operations................. (99) 145
Cash used in financing activities from discontinued operations...................... -- (152)
------- -------
Cash used in financing activities................................................... (99) (7)
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................ $ (146) $ 28
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-8-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-six Weeks Ended September 10, 1999 and September 11, 1998
(unaudited, in millions)
Supplemental schedule of noncash investing and financing activities:
Approximately 586,000 Class TS cumulative redeemable preferred limited
partnership units valued at $7.4 million were issued in connection with the
acquisition by merger of two partnerships that own limited partnership interests
in the partnership that owns the New York Marriott Marquis.
Approximately 467,000 shares of common stock were issued during the third
quarter of 1999 upon the conversion of outside Operating Partnership Units
valued at $4.9 million, which were issued in connection with the acquisition of
a portfolio of twelve luxury hotels and other assets from the Blackstone Group.
In the first quarter of 1998, the Company assumed $164 million of mortgage debt
for the acquisition of, or purchase of controlling interests in, certain hotel
properties.
See Notes to Condensed Consolidated Financial Statements
-9-
<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 ("OP Units")
was accounted for at Host Marriott's historical basis. As of September 10,
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 September 10,
1999 and December 31, 1998, and the results of operations for the twelve
and thirty-six weeks ended September 10, 1999 and September 11, 1998 and
cash flows for the thirty-six weeks ended September
-10-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
10, 1999 and September 11, 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, $86 million and $339 million of contingent rent
previously recognized as revenue during the twelve weeks and thirty-six
weeks ended September 10, 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 thirty-six weeks ended
September 11, 1998 was to increase both revenues and operating expenses by
approximately $471 million and $1,393 million, respectively, with no impact
on net income or earnings per share.
The comparison of the 1999 results with 1998 is also affected by a change
in the reporting period for the Company's hotels not managed by Marriott
International. The 1998 year to date historical results would have to be
adjusted to exclude the results of these hotels for December 1997 and
include August 1998 for the thirty-six weeks ended September 11, 1998 in
order to be comparable to the 1999 period results as reported. Also, for
the third quarter the 1998 historical results would have to be adjusted to
exclude the results of these hotels for May 1998 and include August 1998
for the twelve weeks ended September 11, 1998 in order to be comparable to
the 1999 period results as reported.
The table below represents hotel sales for which rental income is computed
for 1999.
-11-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
----------------------------- -------------------------------
September 10, September 11, September 10, September 11,
1999 1998 1999 1998
------------ ------------ ------------ ------------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Hotel Sales
Rooms............................................... $ 609 $ 494 $ 1,881 $ 1,514
Food and beverage................................... 250 198 828 642
Other............................................... 66 49 201 159
------- ------- ------- -------
Total sales.................................... $ 925 $ 741 $ 2,910 $ 2,315
======= ======= ======= =======
</TABLE>
4. Earnings Per Share
Basic earnings per common share is computed by dividing net income less
dividends on preferred stock by the weighted average number of shares of
common stock outstanding. Diluted earnings per share is computed by
dividing net income less dividends on preferred stock as adjusted for
potentially dilutive securities, by the weighted average number of shares
of common stock outstanding plus other potentially dilutive securities.
Dilutive securities may include shares granted under comprehensive stock
plans, warrants and the Convertible Preferred Securities. Dilutive
securities also include those common and preferred Operating Partnership
Units ("OP Units") issuable or outstanding that are held by minority
partners which are assumed to be converted. No effect is shown for
securities if they are anti-dilutive.
<TABLE>
<CAPTION>
Twelve weeks ended
-----------------------------------------------------------------------
September 10, 1999 September 11, 1998
---------------------------------- -----------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net loss..................................... $ (28) 228.3 $ (.12) $ (144) 216.2 $ (.67)
Dividends on Class A preferred stock........ (1) -- (.01) -- -- --
-------- ----- --------- -------- ------ ---------
Basic loss available to common
shareholders per share...................... (29) 228.3 (.13) (144) 216.2 (.67)
Assuming distribution of common shares
granted under the comprehensive stock
plan, less shares assumed purchased at
average market price...................... -- -- -- -- 4.0 .02
Assuming distribution of common shares
issuable for warrants, less shares assumed
purchased at average market price......... -- -- -- -- 0.1 --
Assuming conversion of minority OP Units
outstanding............................... (9) 64.6 -- -- -- --
Assuming conversion of Class TS
cumulative redeemable preferred OP
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Units..................................... -- -- -- -- -- --
Assuming conversion of minority OP Units
issuable.................................. -- -- -- -- -- --
Assuming conversion of Convertible
Preferred Securities...................... -- -- -- -- -- --
-------- ------ -------- -------- ------ ---------
Diluted Loss per Share....................... $ (38) 292.9 $ (.13) $ (144) 220.3 $ (.65)
======== ===== ======= ======== ====== =========
</TABLE>
-12-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Thirty-six Weeks Ended
------------------------------------------------------------------------
September 10, 1999 September 11, 1998
----------------------------------- -----------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net loss...................................... $ (103) 227.7 $ (.45) $ (48) 216.0 $ (.23)
Dividends on Class A preferred stock ........ (1) -- (.01) -- -- --
-------- ------ --------- -------- ----- ---------
Basic loss available to common
shareholders per share....................... (104) 227.7 (.46) (48) 216.0 (.23)
Assuming distribution of common shares
granted under the comprehensive stock
plan, less shares assumed purchased at
average market price....................... -- -- -- -- 4.2 .01
Assuming distribution of common shares
issuable for warrants, less shares assumed
purchased at average market price.......... -- -- -- -- 0.1 --
Assuming conversion of minority OP Units --
outstanding................................ (30) 64.7 -- .01 -- --
Assuming conversion of Class TS
cumulative redeemable preferred OP Units.. -- -- -- -- -- --
Assuming conversion of minority OP Units
issuable................................... -- -- -- -- -- --
Assuming conversion of Convertible
Preferred Securities....................... -- -- -- -- -- --
-------- ------ --------- -------- ----- ---------
Diluted Loss per Share........................ $ (134) 292.4 $ (.46) $ (48) 220.3 $ (.22)
======== ===== ========= ======== ===== =========
</TABLE>
In September 1999, the Board of Directors approved the repurchase, from
time to time on the open market and/or in privately negotiated
transactions, of up to 22 million of the outstanding shares of the
Company's common stock or a corresponding amount (based on the appropriate
conversion ratio) of the Company's Convertible Preferred Securities. Such
repurchases will be made at management's discretion, subject to market
conditions, and may be suspended at any time at the Company's discretion.
Through October 18, 1999, the Company has spent approximately $7.7 million
to repurchase 797,000 shares.
5. Class A Cumulative Redeemable Preferred Stock
In August 1999, the Company sold 4.16 million shares of 10% Class A
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.
Cumulative cash dividends on the Class A Preferred stock have been accrued
from the date of issuance, August 3, 1999, through the balance sheet date.
On September 23, 1999, the Company declared a pro rata dividend of $.50 per
share, which were paid on October 15, 1999 to shareholders of record on
September 30, 1999.
-13-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. Dividends and Distributions Payable
On September 23, 1999, the Board of Directors declared a cash dividend of
$0.21 per share of common stock and a corresponding distribution of $0.21
per unit of limited partnership interest ("OP Unit") in the Company's
subsidiary operating partnership. The third quarter dividend and
distribution were paid on October 15, 1999 to shareholders and unitholders
of record on September 30, 1999. Total dividends and corresponding
distributions year-to-date are $0.63 per share and $0.63 per unit,
respectively.
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.
7. Acquisitions and Property Expansions
On December 30, 1998, the Company acquired a portfolio of twelve luxury
hotels and other assets (the "Blackstone Acquisition") from the Blackstone
Group, a Delaware limited partnership, and a series of funds controlled by
affiliates of Blackstone Real Estate Partners. Approximately 467,000 OP
Units issued in connection with the Blackstone Acquisition were redeemed
for common stock during the third quarter of 1999.
The Company completed a 210-room expansion of the Philadelphia Marriott in
April 1999 at a cost of approximately $37 million.
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 Class TS 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. Also as part of the merger, the Company
repaid in cash outstanding partner loans totaling $5.9 million on behalf of
each of the partnerships.
8. Dispositions
In February 1999, the Company sold the 479-room Minneapolis/Bloomington
Marriott for $35 million and recorded a gain of $10 million. In May 1999,
the Company sold the 221-room Saddle Brook Marriott for $15 million and
recorded a gain of $4 million.
In the fourth quarter, the Company sold the 306-room Grand Hotel Resort and
Golf Club for $28 million, recognizing a loss of $1 million. The Company
also announced it has reached an agreement to sell the Ritz-Carlton Boston
for total proceeds of approximately $122 million in 1999, subject to normal
closing requirements.
9. 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
-14-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
certain partnerships or the purchase of hotel properties in connection with
the REIT Conversion in December 1998. The notes were exchanged during the
third quarter for Series E Senior notes on a one-for-one basis, which are
freely transferable by the holders.
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 below.
In June 1999, the Company refinanced the debt on the San Diego Marriott
Hotel and Marina. The mortgage is for $195 million and a term of 10 years
at a rate of 8.45%. In addition, the Company entered into a mortgage for
the Philadelphia Marriott expansion in July 1999 for $23 million at an
interest rate of approximately 8.6%, maturing in 2009.
In July 1999, the Company entered into a financing agreement pursuant to
which it borrowed $665 million due 2009 at a fixed rate of 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 August 1999, the Company repaid $100 million of the outstanding balance
on a $350 million term loan entered into in August 1998 as part of its
$1.25 billion line of credit. During the fourth quarter, an additional $50
million repayment was made, reducing the outstanding balance of the term
loan to $200 million. Subsequent to these repayments, the available
capacity under the line of credit balance remains $900 million while the
total line has been permanently reduced to $1.1 billion as a result of the
term loan payments.
In August 1999, the Company made a prepayment of $19 million to pay down in
full the mezzanine mortgage on the Marriott Desert Springs Resort and Spa.
In September 1999, the Company made a prepayment of $45 million to pay down
in full the mortgage note on the Philadelphia Four Seasons Hotel.
10. Geographic and Business Segment Information
The Company operates in one business segment, hotel ownership. The 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):
-15-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended September 10, 1999
-------------------------------------
Hotels Corporate & Other Consolidated
------ ----------------- ------------
<S> <C> <C> <C>
Revenues....................................... $ 201 $ 2 $ 203
Income (loss) from continuing operations
before income taxes.......................... (20) (12) (32)
Twelve Weeks Ended September 11, 1998
-------------------------------------
Hotels Corporate & Other Consolidated
------ ----------------- ------------
Revenues....................................... $ 752 $ 4 $ 756
Income (loss) from continuing operations
before income taxes.......................... 38 (30) 8
Thirty-six Weeks Ended September 10, 1999
-----------------------------------------
Hotels Corporate & Other Consolidated
------ ----------------- ------------
Revenues....................................... $ 587 $ 11 $ 598
Income (loss) from continuing operations
before income taxes.......................... (75) (45) (120)
Thirty-six Weeks Ended September 11, 1998
-----------------------------------------
Hotels Corporate & Other Consolidated
------ ----------------- ------------
Revenues....................................... $2,350 $ 60 $ 2,410
Income (loss) from continuing operations
Before income taxes.......................... 191 (30) 161
</TABLE>
As of September 10, 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 sales in 1998 for each of the
geographical areas in which the Company owns hotels (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
----------------------------- -----------------------------
September 10, September 11, September 10, September 11,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
United States.................................. $ 184 $ 713 $ 536 $ 2,237
International.................................. 4 28 10 78
--------- ---------- --------- ---------
Total...................................... $ 188 $ 741 $ 546 $ 2,315
========= ========= ========= =========
</TABLE>
11. 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 at Host Marriott Services Corporation's option subsequent to the
exercise of the options held by certain former and current employees of
Marriott International. For the twelve and thirty-six weeks ended September
10, 1999, comprehensive income totaled $41 million and $161 million,
respectively. The comprehensive loss was $148 million and $51 million for
the twelve and thirty-six weeks ended September 11, 1998. As of September
10, 1999 the Company's accumulated other comprehensive income was
approximately $3 million. As of December 31, 1998, the Company's
accumulated other comprehensive loss was approximately $4 million.
-16-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
On August 27, 1999, Autogrill Acquisition Co., a wholly-owned subsidiary of
Autogrill SpA of Italy, completed its cash tender offer for all of the
outstanding shares of common stock of Host Marriott Services Corporation.
Since Host Marriott Services is no longer publicly traded, the Company has
adjusted the unrealized gain on the receivable to reflect the tender price
of $15.75. Further, all future payments to the Company will be made in cash
as Host Marriott Services Corporation has indicated that the receivable
will not be settled in Autogrill SpA stock.
12. Subsequent Events
In September 1999, the mortgage note receivable on a hotel property matured
and the Company collected the outstanding balance of approximately $65
million. The note was originally acquired as part of the Blackstone
Acquisition.
In October 1999, the Company initiated a tender offer to acquire the
remaining partnership interests in the Hopewell Group, Ltd., a minority
owner in the Atlanta Marriott Marquis, for preferred OP Units and cash.
13. Summarized Lease Pool Financial Statements
As discussed in Note 2, as of September 10, 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 thirty-six weeks ended September 10, 1999 and summarized balance
sheet data as of September 10, 1999 of the lease pools in which the
Company's hotels are organized are as follows (in millions):
-17-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended September 10, 1999
-------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Hotel Sales
Rooms..................................... $ 135 $ 142 $ 126 $ 128 $ 531
Food and beverage......................... 57 59 55 67 238
Other..................................... 16 15 16 17 64
----- ----- ----- ----- -----
Total hotel sales.................... 208 216 197 212 833
Operating Costs and Expenses
Rooms..................................... 34 40 32 30 136
Food and beverage......................... 46 48 44 50 188
Other..................................... 58 50 54 55 217
Management fees........................... 9 13 9 13 44
Lease expense............................. 57 59 56 61 233
----- ----- ----- ----- -----
Total operating expenses............. 204 210 195 209 818
----- ----- ----- ----- -----
Operating Profit............................... 4 6 2 3 15
Corporate and Interest Expenses................ (1) (1) -- (1) (3)
----- ----- ----- ----- -----
Income before taxes...................... 3 5 2 2 12
Income taxes............................. (1) (3) (1) (1) (6)
----- ----- ----- ----- -----
Net Income........................... $ 2 $ 2 $ 1 $ 1 $ 6
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Thirty-six Weeks Ended September 10, 1999
-----------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Hotel Sales
Rooms..................................... $ 408 $ 436 $ 394 $ 401 $ 1,639
Food and beverage......................... 184 196 183 220 783
Other..................................... 46 44 54 51 195
----- ----- ----- ----- -------
Total hotel sales.................... 638 676 631 672 2,617
Operating Costs and Expenses
Rooms..................................... 98 108 95 88 389
Food and beverage......................... 143 150 135 154 582
Other..................................... 168 157 161 158 644
Management fees........................... 29 43 30 46 148
Lease expense............................. 190 206 202 218 816
----- ----- ----- ----- -------
Total operating expenses............. 628 664 623 664 2,579
----- ----- ----- ----- -------
Operating Profit............................... 10 12 8 8 38
Corporate and Interest Expenses................ (2) (2) (1) (2) (7)
----- ----- ----- ----- -------
Income before taxes...................... 8 10 7 6 31
Income taxes............................. (3) (5) (3) (2) (13)
----- ----- ----- ----- -------
Net Income........................... $ 5 $ 5 $ 4 $ 4 $ 18
===== ===== ===== ===== =======
</TABLE>
<TABLE>
<CAPTION>
As of September 10, 1999
------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Assets......................................... $ 43 $ 32 $ 35 $ 34 $ 144
Liabilities.................................... 38 27 31 30 126
Equity......................................... 5 5 4 4 18
</TABLE>
-18-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
14. Contingencies
Courtyard by Marriott II Limited Partnership (CBM II)
-----------------------------------------------------
A group of partners in CBM II filed a lawsuit, Whitey Ford, et al. v. Host
Marriott Corporation, et al., Case No. 96-CI-08327, on June 7, 1996, in the
285th Judicial District Court of Bexar County, Texas against the Company
and others alleging breach of fiduciary duty, breach of contract, fraud,
negligent misrepresentation, tortious interference, violation of the Texas
Free Enterprise and Antitrust Act of 1983 and conspiracy in connection with
the formation, operation and management of CBM II and its hotels. The
plaintiffs are seeking unspecified damages. On January 29, 1998, two other
limited partners, A.R. Milkes and D.R. Burklew, filed a petition in
intervention seeking to convert the lawsuit into a class action. The
defendants have filed an answer, the class has been certified, class
counsel has been appointed, and discovery is underway. On March 11, 1999,
Palm Investors, L.L.C., the assignee of a number of limited partnership
units acquired through various tender offers, filed a plea in intervention
to bring additional claims relating to the 1993 split of Marriott
Corporation and to the 1995 refinancing of CBM II's indebtedness. The
original plaintiffs subsequently filed a second amended complaint on March
19, 1999 and in a third amended complaint, filed May 24, 1999, asserted as
derivative claims, some of the claims previously asserted as individual
claims. On March 25, 1999, Equity Resource, an assignee, through various of
its funds, of a number of limited partnership units, also filed a plea in
intervention similar to that which was filed by Palm Investors. A trial
date of January 3, 2000 has been set.
On August 17, 1999, the general partner of CBM II appointed an independent
special litigation committee (the "SLC"), comprised of the Honorable
William Webster and the Honorable Charles Renfrew, to investigate the
derivative claims described above and to recommend to the general partner
whether it is in the best interests of CBM II for the derivative litigation
to proceed. The general partner has agreed to adopt the recommendation of
the SLC. Under Delaware law, the recommendation of a duly appointed
independent litigation committee is binding on the general partner and the
limited partners. On August 30, 1999, the court held a hearing to consider
the defendant's motion to stay these proceedings until the committee makes
its recommendation. Similarly, the SLC has asked the court to postpone the
trial for up to six months so that the SLC can complete its investigation.
The court has not yet ruled on these requests.
Courtyard by Marriott Limited Partnership I (CBM I) and CBM II Derivative
-------------------------------------------------------------------------
Action
------
After intervening in the CBM II class action, Palm Investors and Equity
Resource, together with Repp Properties, joined in a complaint filed in
April 1999, Equity Resource Fund X et al. v. CBM One Corporation et al.,
Case No. 99-CI-04765, in the 57th Judicial District Court of Bexar County,
Texas. This action asserted as derivative claims, on behalf of CBM I and
CBM II, the same kind of claims asserted individually in the Ford and
Milkes actions described above. After the appointment of the SLC, this
complaint was withdrawn by the plaintiffs in September 1999.
Texas Multi-Partnership Lawsuits
--------------------------------
On March 16, 1998, limited partners in several limited partnerships
sponsored by Host Marriott or its subsidiaries filed a lawsuit, Robert M.
Haas, Sr. and Irwin Randolph Joint Tenants, et al. v. Marriott
-19-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
International, Inc., et al., Case No. 98-CI-04092, in the 57th Judicial
District Court of Bexar County, Texas, alleging that the defendants
conspired to sell hotels to the partnerships for inflated prices and that
they charged the partnerships excessive management fees to operate the
partnerships' hotels. The plaintiffs further allege that the defendants
committed fraud, breached fiduciary duties and violated the provisions of
various contracts. A Marriott International subsidiary manages each of the
hotels involved and, as to some properties, Marriott International, or one
of its subsidiaries, is the ground lessor and collects rent. The Company,
Marriott International, several of their subsidiaries, and J.W. Marriott,
Jr. are among the various named defendants. The plaintiffs are seeking
unspecified damages. Those allegations concerning CBM II have been
transferred to the CBM II lawsuit described above. On March 18, 1999, two
limited partners in CBM I filed a class action petition in intervention
seeking to treat CBM I in a similar manner by converting that portion of
the lawsuit into a class action. On April 29, 1999, the court denied this
petition and refused to certify the class. No trial date has been set.
We are from time to time the subject of, or involved in, judicial
proceedings, including those lawsuits discussed above and also other
lawsuits involving other syndicated partnerships, which could, if adversely
decided, result in losses to our company. We believe that the lawsuits
described above are without merit, and we intend to vigorously defend
against the claims being made against us. we cannot assure you as to the
outcome of these lawsuits, and we are uncertain as to any potential loss to
the Company.
15. Extraordinary Items
In connection with the refinancing of the mortgage and the renegotiation of
the management agreement on the New York Marriott Marquis, we recognized an
extraordinary gain of $13 million on the forgiveness of debt in the form of
accrued incentive management fees in the second quarter. An extraordinary
loss of $3 million representing the write-off of deferred financing fees
occurred in July 1999 when the mortgage debt for eight properties was
refinanced, including the New York Marriott Marquis. In connection with
this refinancing, the interest rate swap agreements associated with some of
the original debt were terminated and a $7 million extraordinary gain was
recognized. In connection with the purchase of the Old Senior Notes, the
Company recognized an extraordinary loss of $148 million in the third
quarter of 1998, which represents the bond premium and consent payments
totaling approximately $175 million and the write-off of deferred financing
fees of approximately $52 million related to the Old Senior Notes, net of
taxes.
-20-
<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 earnings 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 results with 1998 is also affected
by a change in the reporting period for the Company's hotels not managed by
Marriott International. The 1998 year to date historical results would have
to be adjusted to exclude the results of these hotels for December 1997 and
include August 1998 for the thirty-six weeks ended September 11, 1998 in
order to be comparable to the 1999 period results as reported. Also, for
the third quarter the 1998 historical results would have to be adjusted to
exclude the results of these hotels for May 1998 and include August 1998
for the twelve weeks ended September 11, 1998 in order to be comparable to
the 1999 period results as reported. The change in reporting was required
as part of the REIT conversion.
Year-to-date results for 1999 were primarily driven by the addition of 36
properties in 1998. The increase in hotel sales also reflects the growth in
room revenues generated per available room or REVPAR. For comparable
properties, REVPAR increased 2.8% to $106.45 for the third quarter of 1999.
Year-to-date REVPAR increased 3.8% to $115.40. On a comparable basis,
average room rates increased approximately 3% for the third quarter and
year-to-date, while average occupancy decreased less than one percentage
point for the third quarter and increased less than one percentage point
year-to-date.
Interest income decreased as the result of a lower level of cash and
marketable securities held during the first three quarters of 1999 compared
to the first three quarters of 1998.
-21-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 direct
property-level costs including management fees and we receive a rent
payment, which is generally calculated as a percentage of revenue, subject
to a minimum level, net of certain property-level owner costs. All of these
costs were our expenses in 1998. Property-level owner costs which are
comparable, including depreciation, property taxes, insurance, ground and
equipment rent increased 8% to $130 million for the third quarter 1999
versus third quarter 1998 and increased $28 million or 8% to $383 million
year-to-date, primarily reflecting the depreciation from 36 properties
acquired during 1998.
Minority Interest. Minority interest expense increased $14 million to an $8
million benefit for the third quarter of 1999 and increased $57 million to
a $21 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 24% to $98 million in the
third quarter of 1999 and increased 29% to $298 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. Amounts reflect the
dividends accrued during the first three quarters of fiscal year 1999 and
1998 on the $550 million in 63/4% Convertible Preferred Securities.
Corporate Expenses. Corporate expenses decreased $6 million to $6 million
for the third quarter of 1999 and decreased $11 million to $22 million
year-to-date, resulting primarily from lower staffing levels after the
Crestline spin-off, lower costs associated with reduced acquisition
activity and lower costs related to various stock compensation plans.
Income from Discontinued Operations. Income from discontinued operations
represents the senior living communities business' results of operations
for the third quarter of 1998 and year-to-date 1998 as restated for the
spin-off of Crestline.
Extraordinary Gain (Loss). In connection with the refinancing of the
mortgage and the renegotiation of the management agreement on the New York
Marriott Marquis, we recognized an extraordinary gain of $13 million on the
forgiveness of debt in the form of accrued incentive management fees in the
second quarter. An extraordinary loss of $3 million representing the
write-off of deferred financing fees occurred in July 1999 when the
mortgage debt for eight properties was refinanced, including the New York
Marriott Marquis. In connection with this refinancing, the interest rate
swap agreements associated with some of the original debt were terminated
and a $7 million extraordinary gain was recognized. In connection with the
purchase of the Old Senior Notes, the Company recognized an extraordinary
loss of $148 million in the third quarter of 1998, which represents the
bond premium and consent payments totaling approximately $175 million and
the write-off of deferred financing fees of approximately $52 million
related to the Old Senior Notes, net of taxes.
-22-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Net Loss. Our net loss decreased to $29 million for the third quarter of
1999 from $144 million for the third quarter of 1998 and increased to $104
million for year-to-date 1999 compared to $48 million for 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. FFO and
EBITDA are also useful in measuring our ability to service debt, fund
capital expenditures and expand our business. Furthermore, management
believes that FFO and EBITDA are meaningful disclosures that will help
shareholders and the investment community to better understand our
financial performance, including comparing our performance to other Real
Estate Investment Trusts. However, FFO and EBITDA as presented may not be
comparable to amounts calculated by other companies. This information
should not be considered as an alternative to net income, operating profit,
cash from operations, or any other operating or liquidity performance
measure prescribed by generally accepted accounting principles. Cash
expenditures for various long-term assets, interest expense (for EBITDA
purposes only) and income taxes have been, and will be incurred which are
not reflected in the EBITDA and FFO presentation.
FFO increased $36 million, or 47%, to $112 million in the third quarter of
1999 over the third quarter of 1998. For periods prior to 1999, the FFO
disclosed represents comparative FFO (FFO plus deferred tax expense). The
following is a reconciliation of income from continuing operations to FFO
(in millions):
<TABLE>
<CAPTION>
Twelve weeks Ended Thirty-six weeks Ended
----------------------------- ---------------------------
September 10, September 11, September 10, September11,
1999 1998 1999 1998
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
Funds from Operations
Income (loss) from continuing operations...... $ (32) $ 2 $ (120) $ 92
Effect of SAB 101............................. 86 -- 339 --
Depreciation and amortization................. 68 54 203 168
Other real estate activities.................. -- (1) (16) (53)
Partnership adjustments....................... (10) (2) (25) (9)
REIT conversion expenses...................... -- 8 -- 14
Deferred taxes................................ -- 7 -- 46
-------- -------- -------- --------
Funds from continuing operations.............. 112 68 381 258
Discontinued operations....................... -- 8 -- 24
-------- -------- -------- --------
Funds from operations before preferred stock
dividends and minority interest of Host
Marriott, L.P................................ 112 76 381 282
Funds from operations of minority partners of
Host Marriott, L.P........................... (25) -- (84) --
Dividends on preferred stock.................. (1) -- (1) --
-------- -------- -------- --------
Funds from operations available to common ....
shareholders................................. $ 86 $ 76 $ 296 $ 282
======== ======== ======== ========
</TABLE>
During the REIT conversion, we received a number of units of general and
limited partnership interests in the Operating Partnership - which we refer
to as OP Units - equal to the number of then outstanding shares of our
common stock, and the Operating Partnership assumed all of our liabilities.
As a result of
-23-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
this reorganization we are the sole general partner in the Operating
Partnership and as of September 10, 1999 held approximately 78% of the
outstanding OP Units. The $25 million and $84 million deducted for the
twelve weeks and thirty-six weeks ended September 10, 1999 represent the
FFO attributable to the interests in the Operating Partnership held by
those minority partners. OP Units owned by holders other than us are
redeemable at the option of the holder, generally commencing one year after
the issuance of their OP Units. Upon redemption of an OP Unit, the holder
would receive from the Operating Partnership cash in an amount equal to the
market value of one share of our common stock, or at our option, a share of
our common stock.
EBITDA increased $56 million, or 36%, to $212 million in the third quarter
of 1999 and $126 million or 22%, to $694 million year-to-date. Hotel EBITDA
increased $43 million, or 26%, to $210 million in the third quarter of
1999, and $111 million or 19% to $703 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 Thirty-six Weeks Ended
----------------------------- ----------------------------
September 10, September 11, September 10, September 11,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
EBITDA................................................ $ 212 $ 156 $ 694 $ 568
Effect of SAB 101..................................... (86) -- (339) --
Interest expense...................................... (98) (79) (298) (231)
Dividends on Convertible Preferred Securities......... (9) (9) (26) (26)
Depreciation and amortization......................... (68) (54) (203) (168)
Minority interest expense............................. 8 (6) 21 (36)
Income taxes.......................................... -- (6) -- (69)
REIT Conversion expense............................... -- (8) -- (14)
Other non-cash charges, net........................... 9 8 31 68
------- ------- ------- -------
Income (loss) from continuing operations............ $ (32) $ 2 $ (120) $ 92
======== ======= ======= =======
</TABLE>
EBITDA as presented above includes the amounts available for distribution
by the operating partnership to all holders of its partnership interests,
or OP units. As of September 10, 1999 we owned approximately 78% of the
outstanding OP units. However, we believe the presentation of EBITDA before
adjustment for minority interest is helpful because these amounts represent
amounts available to service debt and make capital expenditures and
distributions. EBITDA as presented would be decreased if the effect of the
22% minority interest (including the conversion of the 585,000 shares of
Class TS cumulative redeemable preferred OP Units) in the Operating
Partnership had been included in the calculations. EBITDA as adjusted for
the minority interest would be $197 million and $652 million for the twelve
and thirty-six weeks ended September 10, 1999, respectively. Additionally,
EBITDA as presented does not reflect dividends accrued on the Class A
cumulative redeemable preferred stock which was approximately $1 million
for the twelve and thirty-six weeks ended September 10, 1999.
Our interest coverage, defined as EBITDA divided by cash interest expense,
was 2.4 times year to date for 1999 and 1998, respectively, and 2.7 times
for full year 1998. The deficiency of earnings to fixed charges was $139
million through the third quarter of 1999 and the ratio of earnings to
fixed charges was 1.7 to 1 through the third quarter of 1998.
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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 $146 million during
the thirty-six weeks ended September 10, 1999. Cash from continuing
operations was $229 million through the third quarter of 1999 and $254
million through the third quarter of 1998. The $25 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 third
quarter of 1999; however, cash from discontinued operations totaled $24
million through the third quarter of 1998.
Cash used in investing activities from continuing operations was $276
million and $233 million through the third quarter of 1999 and 1998,
respectively. Cash used in investing activities through the third quarter
includes capital expenditures of $261 million and $159 million for 1999 and
1998, respectively, mostly related to renewals and replacements on existing
properties and development projects. In addition, we generated $49 million
of cash from the net sale of assets, primarily the Minneapolis/Bloomington
and Saddle Brook properties. There was no cash related to investing
activities from discontinued operations through the third quarter 1999;
however, cash used in investing activities from discontinued operations
totaled $10 million year-to-date 1998. Property and equipment balances
include $162 million and $78 million for construction in progress as of
September 10, 1999 and December 31, 1998, respectively. The current balance
primarily relates to properties in Tampa, Orlando, Memphis, Naples and
various other expansion and development projects.
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 Class TS 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 as part of the merger, the re-paid in cash outstanding Partner
loans totaling $5.9 million on behalf of each of the partnerships.
Cash used in financing activities from continuing operations was $99
million through the third quarter of 1999. Cash from financing activities
from continuing operations was $145 million through the third quarter of
1998. Cash used in financing activities includes $1.3 billion in prepayment
of debt, offset by a similar amount of debt issuances, the issuance of
preferred stock and the payment of dividends on our common shares.
The $300 million of 83/8% series D senior notes were issued in February
1999 and 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, the Series D Senior notes were exchanged on a one-for-one
basis for Series E Senior notes, which 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. The financing agreement
for $665 million is secured by eight hotels, and is due 2009 with a fixed
interest rate of 7.47%. The proceeds from
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HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
this financing were used to refinance existing mortgage indebtedness
maturing at various times through 2000 on eight hotels, including the New
York Marriott Marquis.
Also in June 1999, we 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, we completed a 210-room extension of the
Philadelphia Marriott in April 1999 at a cost of approximately $37 million.
We established a mortgage on the extension of the Philadelphia Marriott in
July 1999 for $23 million at an interest rate of approximately 8.6%,
maturing in 2009. In August 1999, we repaid $100 million of the outstanding
balance on a $350 million term loan entered into in August 1998 as part of
our $1.25 billion line of credit. During the fourth quarter, an additional
$50 million repayment was made, reducing the outstanding balance of the
term loan to $200 million. Subsequent to these repayments, the available
capacity under the line of credit balance remains $900 million while the
total line has been permanently reduced to $1.1 billion as a result of the
term loan payments.
In August 1999, the Company made a prepayment of $19 million to pay down in
full the mezzanine mortgage on the Marriott Desert Springs Resort and Spa.
In September 1999 the Company made a prepayment of $45 million to pay down
in full the mortgage note on the Philadelphia Four Seasons Hotel.
Dividend payments reflect the $73 million in payments for a special
dividend declared in December 1998 as well as the $0.42 dividend per share
of common stock paid as of September 11, 1999. In addition, on September
23, 1999, the Board of Directors declared a regular cash dividend of $0.21
per share of common stock. The third quarter dividend was paid on October
15, 1999 to shareholders of record on September 30, 1999. Total dividends
year-to-date are $0.63 per share of common stock.
In August 1999, we sold 4.16 million shares of 10% Class A 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. Cumulative cash
dividends have been accrued from the date of issuance, August 3, 1999,
through the balance sheet date. We declared a dividend of $.50 per share on
September 23, 1999, which was paid on October 15, 1999.
In September 1999, the Board of Directors approved the repurchase, from
time to time on the open market and/or in privately negotiated
transactions, of up to 22 million of the outstanding shares of our common
stock or a corresponding amount (based on the appropriate conversion ratio)
of our Convertible Preferred Securities. Based on current market
conditions, we believe that the stock repurchase program reflects the best
return on investment for our shareholders. However, we will continue to
look at strategic acquisitions as well as evaluate our stock repurchase
program based on changes in market conditions and our stock price. The
repurchases will be financed in part through cash from operations and the
net proceeds from sales of assets, prior to their reinvestment in real
estate assets, such as the fourth quarter sale of the Grand Hotel Resort
and Golf Club or the recently announced contract to sell our interest in
the Ritz-Carlton Boston. This is consistent with our strategy of improving
the overall portfolio by selling assets that may be in suburban locations,
require significant capital improvements or do not fit our long-term
strategy. Such repurchases will be made at management's discretion, subject
to market conditions,
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HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
and may be suspended at any time at our discretion. Subsequent to quarter
end, we have spent approximately $7.7 million to repurchase 797,000 shares.
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. Approximately 467,000 OP Units issued in connection with the
Blackstone Acquisition were redeemed for common stock during the third
quarter of 1999.
There was no cash related to financing activities from discontinued
operations through the third quarter of 1999; however, cash used in
financing activities from discontinued operations totaled $152 million
through the third quarter of 1998.
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
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HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 other centralized costs 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. 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
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HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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
September 10, 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 over 90
percent of key systems, with most of the remaining work in its final stage.
For BIS and Building Systems, Remediation/Replacement is over 95 percent
complete. For BIS, Testing is approximately 80 percent complete and
Compliance Validation is in progress. Testing is over 95% complete for
Building Systems and Compliance Validation is in progress. Implementation
is approximately 85 percent complete and Quality Assurance is 80 percent
complete for IT Applications. For BIS, Implementation is approximately 85
percent complete while Quality Assurance is in progress. Implementation is
over 95 percent complete and Quality Assurance is 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
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HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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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<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
February 16, 2000 /s/ Donald D. Olinger
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Date Donald D. Olinger
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
