<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 March 26, 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 May 5, 1999
- ------------------ --------------
Common Stock, $.01 par value
par value per share 227, 963,051
Purchase share rights for Series A Junior Participating
Preferred Stock, $.01 par value
<PAGE>
INDEX
-----
Page No.
Part I. FINANCIAL INFORMATION (Unaudited): Page No.
--------
Condensed Consolidated Balance Sheets - 3
March 26, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations - 4
Twelve Weeks Ended March 26, 1999 and
March 27, 1998
Condensed Consolidated Statements of Cash Flows - 6
Twelve Weeks Ended March 26, 1999 and
March 27, 1998
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Results of 14
Operations and Financial Condition
-2-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
March 26, December 31,
1999 1998
---------- ------------
(unaudited)
ASSETS
------
<S> <C> <C>
Property and equipment, net............................................................. $ 7,173 $ 7,201
Notes and other receivables (including amounts due from
affiliates of $133 million and $134 million, respectively)............................ 202 203
Rent receivable......................................................................... 78 --
Due from managers....................................................................... -- 19
Investments in affiliates............................................................... 44 33
Other assets............................................................................ 396 376
Cash and cash equivalents............................................................... 284 436
------- -------
$ 8,177 $ 8,268
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Debt
Senior notes.......................................................................... $ 2,545 $ 2,246
Mortgage debt......................................................................... 2,111 2,438
Other................................................................................. 457 447
------- -------
5,113 5,131
Accounts payable and accrued expenses................................................... 162 204
Deferred income taxes................................................................... 97 97
Deferred rent........................................................................... 115 --
Other liabilities....................................................................... 439 460
------- -------
Total liabilities................................................................. 5,926 5,892
------- -------
Minority interest....................................................................... 487 515
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; 227.6 million shares
and 225.6 million shares issued and outstanding, respectively...................... 2 2
Additional paid-in capital.............................................................. 1,864 1,867
Accumulated other comprehensive loss.................................................... (5) (4)
Retained deficit........................................................................ (647) (554)
------- -------
Total shareholders' equity....................................................... $ 1,214 1,311
------- -------
$ 8,177 $ 8,268
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-3-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve weeks ended March 26, 1999 and March 27, 1998
(unaudited, in millions)
1999 1998
---- ----
REVENUES
Rental income (Note 2, 3)...................................$ 171 $ --
Hotel sales
Rooms ................................................... -- 509
Food and beverage......................................... -- 222
Other ................................................... -- 56
Interest income............................................. 8 14
Net gains on property transactions.......................... 12 1
Equity in earnings of affiliates............................ 1 1
Other -- 2
------ ------
Total revenues.............................................. 192 805
------ ------
EXPENSES
Depreciation............................................ 66 53
Property-level expenses................................. 58 62
Hotel operating expenses
Rooms................................................. -- 114
Food and beverage..................................... -- 163
Other department costs and deductions................. -- 189
Management fees (including Marriott International
management fees of $55 million in 1998)............ -- 58
Minority interest (benefit)............................. (8) 16
Interest expense........................................ 99 76
Dividends on Convertible Preferred Securities........... 9 9
Corporate expenses...................................... 8 12
Other expenses.......................................... 4 5
------ ------
236 757
------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES.............................................. (44) 48
Provision for income taxes.................................. -- (20)
------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS.................... (44) 28
------
Income from discontinued operations......................... -- 2
------ ------
NET INCOME (LOSS)...........................................$ (44) $ 30
====== ======
See Notes to Condensed Consolidated Financial Statements
-4-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
Twelve weeks ended March 26, 1999 and March 27, 1998
(unaudited)
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations..................................$ (.19) $ .13
Discontinued operations (net of income taxes).......... -- .01
--------- ---------
BASIC EARNINGS (LOSS) PER COMMON SHARE:................$ (.19) $ .14
========= =========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations..................................$ (.19) $ .13
Discontinued operations (net of income taxes).......... -- .01
--------- ---------
DILUTED EARNINGS (LOSS) PER COMMON SHARE...............$ (.19) $ .14
========= =========
See Notes to Condensed Consolidated Financial Statements
-5-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Weeks Ended March 26, 1999 and March 27, 1998
(unaudited, in millions)
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations............................................... $ (44) $ 28
Adjustments to reconcile to income from continuing operations:
Depreciation and amortization....................................................... 68 54
Income taxes........................................................................ (4) 18
Gain on sale of hotel properties.................................................... (12) (1)
Equity in earnings of affiliates....................................................... (1) (1)
Changes in operating accounts.......................................................... 5 (20)
Other ................................................................................. (8) 19
----- ---------
Cash from continuing operations..................................................... 4 97
Cash from discontinued operations................................................... -- 2
-------- ---------
Cash from operations................................................................ 4 99
-------- ---------
INVESTING ACTIVITIES
Proceeds from sales of assets.......................................................... 36 1
Acquisitions........................................................................... (4) (118)
Capital expenditures:
Renewals and replacements........................................................... (50) (40)
New development projects............................................................ (20) (12)
New investment capital expenditures................................................. (6) (9)
Purchases of short-term marketable securities.......................................... -- (53)
Sales of short-term marketable securities.............................................. -- 246
Note receivable collections............................................................ 2 --
Affiliate collections, net............................................................. -- 14
Other ................................................................................. -- (6)
----- ---------
Cash (used in) from investing activities from continuing operations................. (42) 23
Cash used in investing activities from discontinued operations...................... -- (28)
-------- ---------
Cash used in investing activities................................................... (42) (5)
-------- ---------
FINANCING ACTIVITIES
Issuances of debt, net................................................................. 299 1
Repurchase of common stock............................................................. (4) --
Dividends.............................................................................. (69) --
Scheduled principal repayments......................................................... (12) (6)
Debt prepayments ...................................................................... (323) (1)
Other ................................................................................. (5) (16)
----- ----------
Cash used in financing activities from continuing operations........................ (114) (22)
Cash used in financing activities from discontinued operations...................... -- (27)
-------- ----------
Cash used in financing activities................................................... (114) (49)
-------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................... $ (152) $ 45
======== =========
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
-6-
<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 full-service hotel properties. Host
REIT operates as a self-managed and self-administered real estate
investment trust ("REIT") and its operations are conducted solely through
an operating partnership and its subsidiaries. As REITs are not 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 former 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 March 26, 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, 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 interim 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 interim
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 March 26, 1999
and December 31, 1998, and the results of operations and cash flows for
the twelve weeks ended
-7-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Uaudited)
March 26, 1999 and March 27, 1998. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal
and short-term variations.
The Company's leases have remaining terms ranging from 2 to 10 years,
subject to earlier termination upon the occurrence of certain
contingencies, as defined. The rent due under each lease is the greater of
base rent or percentage rent, as defined. Percentage rent applicable to
room, food and beverage and other types of hotel revenue varies by lease
and is calculated by multiplying fixed percentages by the total amounts of
such revenues over specified threshold amounts. Both the minimum rent and
the revenue thresholds used in computing percentage rents are subject to
annual adjustments based on increases in the United States Consumer Price
Index and the Labor Index, as defined.
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, $115 million of contingent rent
previously recognized as revenue during the twelve weeks ended March 26,
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 rental revenue represents earnings 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 weeks ended March 27,
1998 was to increase both revenues and operating expenses by approximately
$466 million 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 inclusion of only two months
of results in the 1999 first quarter versus three months in 1998 for the
24 such hotels (8,524 rooms) that the Company owned as of the beginning of
1998. The change in reporting was required as part of the REIT Conversion.
The 1998 hotel revenues include approximately $54 million representing the
incremental month of operations.
The table below represents hotel sales for both periods for comparative
purposes.
-8-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Twelve Weeks Ended
----------------------
March 26, March 27,
1999 1998
--------- ---------
(in millions)
Hotel Sales
Rooms.......................................... $ 600 $ 509
Food and beverage.............................. 268 222
Other.......................................... 63 56
------- -------
Total sales............................... $ 931 $ 787
======= =======
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 Ended
----------------------
March 26, March 27,
1999 1998
--------- ---------
(in millions)
<S> <C> <C>
Weighted average number of common shares outstanding.............................. 226.9 215.7
Assuming distribution of common shares granted under the comprehensive stock
plan, less shares assumed purchased at average market price................... -- 4.4
Assuming distribution of common shares issuable for warrants, less shares
assumed purchased at average market price..................................... -- 0.3
Assuming conversion of minority operating partnership units
outstanding or issuable....................................................... 64.6 --
Assuming conversion of Convertible Preferred Securities........................... -- --
----- -----
Shares utilized for the calculation of diluted earnings per share............. 291.5 220.4
===== =====
</TABLE>
A reconciliation of net income to earnings used for the calculation of
diluted earnings per common share follows:
<TABLE>
<CAPTION>
Twelve Weeks Ended
----------------------
March 26, March 27,
1999 1998
-------- ----------
(in millions)
<S> <C> <C>
Net income........................................................................ $ (44) $ 30
Dividends on Convertible Preferred Securities..................................... -- --
Minority interest expense, assuming conversion of OP units........................ (12) --
-------- --------
Earnings used for the calculation of diluted earnings per share................... $ (56) $ 30
======== ========
</TABLE>
-9-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Uaudited)
5. Dividends and Distributions Payable
On March 15, 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 dividend and distribution was paid
on April 14, 1999 to shareholders and unitholders of record on March 31,
1999.
On December 18, 1998, in conjunction with the REIT Conversion, the Company
declared a special dividend which entitled shareholders of record on
December 28, 1998 to elect to receive either $1.00 in cash or .097 of a
share of common stock of the Company for each outstanding share of the
Company's common stock owned by such shareholder on the record date (the
"Special Dividend"). Cash totaling $73 million and 11.5 million shares of
common stock that were elected in the Special Dividend were paid and/or
issued on February 10, 1999. The 1998 earnings per share has been restated
to reflect the impact of the stock portion of the Special Dividend.
6. Disposition
In February 1999, the Company sold the 479-room Minneapolis/Bloomington
Marriott for $35 million and recorded a pre-tax gain of $11 million.
7. Debt Issuances
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.
8. 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. 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.
The Company's segmented revenues and income (loss) from continuing
operations before income taxes are as follows (in millions):
<TABLE>
Twelve Weeks Ended March 26, 1999
Hotels Corporate & Other Consolidated
<S> <C> <C> <C>
Revenues..................................... $ 189 $ 3 $ 192
Income (loss) from continuing operations
before income taxes........................ (27) (17) (44)
<CAPTION>
Twelve Weeks Ended March 27, 1998
Hotels Corporate & Other Consolidated
<S> <C> <C> <C>
Revenues................................... $ 801 $ 4 $ 805
Income (loss) from continuing operations
before income taxes...................... 71 (23) 48
</TABLE>
-10-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of March 26, 1999, the Company's foreign operations consisted of four
hotel properties located in Canada. There were no intercompany sales
between the properties and the Company. The following table presents rental
revenues in 1999 and hotel revenues in 1998 for each of the geographical
areas in which the Company owns hotels (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended
March 26, March 27,
1999 1998
----------- -----------
<S> <C> <C>
United States........................................... $ 189 $ 779
International........................................... 3 26
----------- -----------
Total............................................... $ 192 $ 805
=========== ===========
</TABLE>
9. 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. For the twelve weeks ended
March 26, 1999, comprehensive income totaled $44 million. Comprehensive
income was equivalent to net income for the twelve weeks ended March 27,
1998. As of March 26, 1999 and December 31, 1998 the Company's accumulated
other comprehensive loss was approximately $5 million and $4 million,
respectively.
10. Subsequent Events
In April 1999, a subsidiary of the Company completed the refinancing of the
mortgage on the New York Marriott Marquis. The mortgage is for $245 million
maturing in June 2000 and bears interest at a rate of LIBOR plus 2.125% for
the period from March 31, 1999 through December 31, 1999 and LIBOR plus
2.5% until maturity. The Company is required to make principal payments of
$1.25 million on June 30, 1999 and September 30, 1999 in addition to $10
million and $5 million on December 31, 1999 and March 31, 2000,
respectively, as well as pay an extension fee of 0.5% of the principal
balance of the loan outstanding at December 31, 1999.
On December 30, 1998, the Operating Partnership 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 Operating Partnership issued
approximately 43.9 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. An
additional 3.8 million OP Units were issued in April 1999 in accordance
with the purchase agreement based on certain adjustments determined on
March 31, 1999.
The Company also completed a 210-room extension of the Philadelphia
Marriott Convention Center in April 1999 at a cost of approximately $43
million including debt of $9 million.
-11-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11. Summarized Lease Pool Financial Statements
As discussed in Note 2, as of March 26, 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 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 weeks ended March 26, 1999 and summarized balance sheet data of the
lease pools in which the Company's hotels are organized are as follows (in
millions):
-12-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Hotel Sales
Rooms..................................... $ 129 $ 137 $ 127 $ 128 $ 521
Food and beverage......................... 59 61 61 72 253
Other..................................... 14 13 19 15 61
----- ----- ----- ----- -----
Total hotel sales.................... 202 211 207 215 835
Operating Costs and Expenses
Rooms..................................... 31 32 29 27 119
Food and beverage......................... 46 47 44 48 185
Other..................................... 53 52 50 48 203
Management fees........................... 9 14 11 16 50
Lease expense............................. 61 64 70 74 269
----- ----- ----- ----- -----
Total operating expenses............. 200 209 204 213 826
----- ----- ----- ----- -----
Operating Profit............................... 2 2 3 2 9
Corporate and Interest Expenses................ (1) -- (1) (1) (3)
------ ----- ------ ------ ------
Income before taxes...................... 1 2 2 1 6
Income taxes............................. -- (1) (1) (1) (3)
----- ------ ----- ----- ------
Net Income........................... $ 1 $ 1 $ 1 $ -- $ 3
===== ===== ===== ===== ======
<CAPTION>
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Assets......................................... $ 47 $ 37 $ 46 $ 47 $ 177
Liabilities.................................... $ 46 $ 36 $ 45 $ 46 $ 173
Equity......................................... $ 1 $ 1 $ 1 $ 1 $ 4
</TABLE>
-13-
<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 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 inclusion of only
two months of results in the 1999 first quarter versus three months in 1998
for the 24 of such hotels (8,524 rooms) the Company owned as of the
beginning of 1998. The change in reporting period was required as part of
the REIT Conversion. Results in the first quarter of 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 4.4% to $120.37 for the first
quarter of 1999. On a comparable basis, average room rates increased
approximately 3%, while average occupancy increased one percentage point.
Interest income decreased as the result of a lower level of cash and
marketable securities held in the first quarter of 1999 compared to the
first quarter of 1998.
The net gain on property transactions for 1999 resulted from the $11
million pre-tax gain on the sale of the 479-room Minneapolis/Bloomington
Marriott for approximately $35 million.
Expenses. As discussed above, hotel revenues and hotel operating costs are
not comparable with the prior year. The lessee pays certain property-level
costs including management fees and we receive a rent payment, which is net
of those costs. Property-level costs which are comparable, including
depreciation, property taxes, insurance, ground and equipment rent
increased $9 million or 8% to $124 million, primarily reflecting the
depreciation from the 36 properties added in 1998.
-14-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Minority Interest. Minority interest expense increased $24 million to an $8
million benefit for the first quarter of 1999, 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 30% to $99 million in the
first quarter of 1999, primarily due to the issuance of senior notes,
establishment of a new credit facility and additional mortgage debt on
properties acquired in connection with the REIT Conversion.
Dividends on Convertible Preferred Securities. The dividends on Convertible
Preferred Securities reflect the accrual for the first twelve weeks of
fiscal year 1999 and 1998 on the $550 million in 63/4% Convertible
Preferred Securities.
Corporate Expenses. Corporate expenses decreased $4 million to $8 million
for the first quarter of 1999 resulting primarily from the timing of
certain project costs not incurred in 1999.
Income from Discontinued Operations. Income from discontinued operations
represents the senior living communities business' results of operations
for the first quarter of 1998 as restated for the spin-off of Crestline.
Net Income (Loss). Our net loss for the first quarter of 1999 was $44
million compared to net income of $30 million for the first quarter of
1998.
EBITDA and FFO
--------------
Our consolidated earnings before interest expense, taxes, depreciation,
amortization and other non-cash items ("EBITDA") increased $23 million, or
11%, to $226 million in the first quarter of 1999. Hotel EBITDA increased
$26 million, or 13%, to $230 million in the first quarter of 1999,
reflecting comparable full-service hotel EBITDA growth, as well as
incremental EBITDA from 1997 and 1998 acquisitions offset by amounts
representing approximately 1% to 1.5% of hotel sales which are retained by
Crestline.
The following is a reconciliation of EBITDA to the Company's income from
continuing operations (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended
-----------------------
March 26, March 27,
1999 1998
-----------------------
<S> <C> <C>
EBITDA................................................ $ 226 $ 203
Effect of SAB 101..................................... (115) --
Interest expense...................................... (99) (76)
Dividends on Convertible Preferred Securities......... (9) (9)
Depreciation and amortization......................... (68) (54)
Minority interest expense............................. 8 (16)
Income taxes.......................................... -- (20)
Other non-cash charges, net........................... 13 --
--------- ---------
Income (loss) from continuing operations............ $ (44) $ 28
========= =========
</TABLE>
-15-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Our interest coverage, defined as EBITDA divided by cash interest expense,
was 2.4 times for the 1999 first quarter, 2.8 times for the 1998 first
quarter and 2.5 times for full year 1998. The deficiency of earnings to
fixed charges was $50 million for the first quarter of 1999 and the ratio
of earnings to fixed charges was 1.7 to 1.0 for the first quarter of 1998.
We also believe that Funds From Operations or FFO as defined by the
National Association of Real Estate Investment Trusts is a meaningful
disclosure that will help the investment community to better understand the
financial performance of the Company, including enabling its shareholders
and analysts to more easily compare the Company's performance to other Real
Estate Investment Trusts ("REITs"). FFO increased $32 million, or 38%, to
$117 million in the first quarter of 1999. For periods prior to 1999, the
FFO disclosed represents comparative FFO (FFO plus deferred tax expenses).
The following is a reconciliation of the Company's income from continuing
operations to FFO (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended
----------------------
March 26, March 27,
1999 1998
----------------------
<S> <C> <C>
Income (loss) from continuing operations......... $ (44) $ 28
Effect of SAB 101................................ 115 --
Depreciation and amortization.................... 68 54
Other real estate activities..................... (11) (1)
Partnership adjustments.......................... (11) (6)
Deferred taxes................................... - 10
--------- ---------
Funds From Operations......................... $ 117 $ 85
========= =========
</TABLE>
On a pro forma basis adjusted for the December 1997 operations discussed
above FFO increased $39 million or 50% in the first quarter of 1999.
The Company considers EBITDA and FFO to be indicative measures of the
Company's operating performance due to the significance of the Company's
long-lived assets and because such data is considered useful by the
investment community to better understand the Company's results, and can be
used to measure the Company's ability to service debt, fund capital
expenditures and expand its business, however, such information should not
be considered as an alternative to net income, operating profit, cash from
operations, or any other operating or liquidity performance measure
prescribed by generally accepted accounting principles. Cash expenditures
for various long-term assets, interest expense (for EBITDA purposes only)
and income taxes have been, and will be incurred which are not reflected in
the EBITDA and FFO presentation.
Cash Flows and Financial Condition
----------------------------------
The Company reported a decrease in cash and cash equivalents of $152
million during the twelve weeks ended March 26, 1999. Cash from continuing
operations was $4 million for the first quarter of 1999 and $97 million for
the first quarter of 1998. The $93 million decrease in cash from continuing
operations resulted principally due to an increase in rent receivable
resulting from the timing of the receipt of cash payments. There was no
cash from (used in) discontinued operations for the first quarter of 1999;
however, cash from discontinued operations totaled $2 million for the first
quarter of 1998.
Cash used in investing activities from continuing operations was $42
million for the first quarter of 1999 and cash from investing activities
from continuing operations was $23 million for the first quarter of 1998.
Cash used in investing activities for the first quarter of 1999 includes
capital expenditures of $76
-16-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
million, mostly related to renewals and replacements on existing
properties. In addition, the Company generated $36 million of cash from the
net sale of assets, primarily the Minneapolis/Bloomington property. There
was no cash from (used in) investing activities for discontinued operations
for the first quarter of 1999; however, cash used in investing activities
of discontinued operations totaled $28 million for the first quarter of
1998.
Cash used in financing activities from continuing operations was $114
million for the first quarter of 1999 and $22 million for the first quarter
of 1998. Cash used in financing activities for the first quarter of 1999
includes $323 million in prepayment of debt, offset by $299 million in debt
issuances. Both financing activities were related to the Company's February
1999 issuance of $300 million of 83/8% Series D Senior notes due in 2006.
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. There was no cash from (used in) financing activities from
discontinued operations in the first quarter of 1999; however, cash used in
financing activities of discontinued operations totaled $27 million in the
first quarter of 1998.
Cash used in financing activities for the first quarter of 1999 also
includes a dividend distribution related to the REIT Conversion of $73
million.
On March 15, 1999, the Board of Directors declared a regular 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 our
subsidiary operating partnership. The dividend and distribution was paid on
April 14, 1999 to shareholders and unitholders of record on March 31, 1999.
In April 1999, a subsidiary of the Company completed the refinancing of the
mortgage on the New York Marriott Marquis. The mortgage is for $245 million
maturing June 2000 and bears interest at a rate of LIBOR plus 2.125% for
the period from March 31, 1999 through December 31, 1999 and LIBOR plus
2.5% until maturity. The Company is required to make principal payments of
$10 million and $5 million on December 31, 1999 and March 31, 2000,
respectively, as well as pay an extension fee of 0.5% of the principal
balance of the loan outstanding at December 31, 1999.
On December 30, 1998, the Operating Partnership 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 Operating Partnership issued
approximately 43.9 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. An
additional 3.8 million OP Units were issued in April 1999 in accordance
with the purchase agreement based on certain adjustments determined on
March 31, 1999.
The Company also completed a 210-room extension of the Philadelphia
Marriott Convention Center in April 1999 at a cost of approximately $43
million, including debt of $9 million.
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
-17-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 have started to
receive written assurances that these third parties will be Year 2000
compliant on time. To the extent these changes impact property-level
systems, we may be required to fund capital expenditures for upgraded
equipment and software. We do not expect these charges to be material, but
we are committed to making these investments as required. To the extent
that these changes relate to a third party manager's centralized systems,
including reservations, accounting, purchasing, inventory, personnel and
other systems, management agreements generally provide for these costs to
be charged to our properties subject to annual limitations, which costs
will be borne by Crestline under the leases. We expect that the third party
managers will incur Year 2000 costs in lieu of costs for their centralized
systems related to system projects that otherwise would have been pursued
and, therefore, the overall level of centralized systems charges allocated
to the properties will not materially increase as a result of the Year 2000
compliance effort. We believe that this deferral of certain system projects
will not have a material impact on our future results of operations,
although it may delay certain productivity enhancements at our properties.
We and Crestline will continue to monitor the efforts of these third
parties to become Year 2000 compliant and will take appropriate steps to
address any non-compliance issues. We believe that, in the event of
material Year 2000 non-compliance, we will have the right to seek recourse
against the manager under our third
-18-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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
documented and quantified results, weighted for System Criticality. As of
March 26, 1999, the Awareness and Inventory phases were complete for IT
Applications, BIS, and Building Systems. For IT Applications, the
Assessment and Planning phases were complete and Remediation/Replacement
and Testing phases were 95 percent complete. Compliance Validation had been
completed for approximately 75 percent of key systems, with most of the
remaining work in its final stage. For BIS and Building Systems, Assessment
and Planning are substantially complete. For BIS, Remediation/Replacement
is substantially complete and Testing is in progress. Marriott
International is on track for completion of Remediation/Replacement and
Testing of Building Systems for September of 1999. Compliance Validation is
in progress for both BIS and Building Systems. Implementation and Quality
Assurance is in progress for IT Applications, BIS and 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
-19-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 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.
Marriott International has established a common approach for testing and
addressing Year 2000 compliance issues for its managed and franchised
properties. This includes a guidance protocol 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.
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.
-20-
<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
- ------------------ ---------------------
Date Donald D. Olinger
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
