<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported) March 29, 1999
-------------------------
CRESTLINE CAPITAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
Maryland 1-14635 52-2151967
(State or Other Jurisdiction of Incorporation) (Commission File Number) (I.R.S. Employer Identification Number)
</TABLE>
10400 Fernwood Road, Bethesda, Maryland 20817
(Address of Principle Executive Offices) (Zip Code)
----------------------------
Registrant's Telephone Number, Including Area Code (240) 694-2000
<PAGE>
FORM 8-K
Item 2. Acquisition or Disposition of Assets
Crestline Capital Corporation (the "Company") hereby amends its Current
Report on Form 8-K dated March 29, 1999 by filing financial statements of an
acquired business, Marriott Residence Inn USA Limited Partnership, and certain
pro forma financial information for the Company.
Certain matters discussed herein or delivered in connection with this Form
8-K/A are forward-looking statements within the meaning of the Private
Litigation Reform Act of 1995. Certain, but not necessarily all, of such
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 comparable terminology. All forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual transactions, results, performance or achievements of the Company to
be materially different from any future transactions, results, performance or
achievements expressed or implied by such forward-looking statements. These may
include: (i) national and local economic and business conditions or
governmental regulations that will affect demand, prices, wages or other costs
for hotels and senior living communities; (ii) the level of rates and occupancy
that can be achieved by such properties; (iii ) the Company's ability to compete
effectively in areas such as access, location, quality of properties and rate
structures; (iv) the ability to maintain the properties in a first-class manner
(including meeting capital expenditure requirements); (v) the availability and
terms of financing; (vi) governmental actions and initiatives including tax law
changes that may eliminate the need for a lease structure by lodging and senior
living REITs; (vii) changes to the public pay systems for medical care and the
need for compliance with environmental, licensure and safety requirements; and
(viii) the effect on the Company of the Year 2000 issue. Although the Company
believes the expectations reflected in such forward-looking statements are based
upon reasonable assumptions and business opportunities, it can give no
assurance that its expectations will be attained or that any deviations will not
be material. The Company undertakes 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.
Item 7. Financial Statements and Exhibits
(a) Financial statements of acquired business.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheet as of March 31, 1999 (unaudited)........ 4
Condensed Statements of Operations for the Three Months Ended
March 31, 1999 and 1998 (unaudited).......................... 5
Condensed Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998 (unaudited).......................... 6
Notes to Condensed Financial Statements (unaudited)............. 7
Report of Independent Accountants............................... 8
Balance Sheets as of December 31, 1998 and 1997................. 9
Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996............................. 10
Statements of Changes in Partners' Capital for the Years Ended
December 31, 1998, 1997 and 1996............................. 11
Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996............................. 12
Notes to Financial Statements................................... 13
</TABLE>
2
<PAGE>
(b) Pro forma financial information.
<TABLE>
<S> <C>
Pro Forma Financial Information................................. 20
Unaudited Pro Forma Consolidated Balance Sheet
as of March 26, 1999......................................... 21
Unaudited Pro Forma Consolidated Statement of Operations
for the Twelve Weeks Ended March 26, 1999.................... 22
Unaudited Pro Forma Statement of Operations for the
Fiscal Year Ended January 1, 1999............................ 23
Notes to Unaudited Pro Forma Financial Statements............... 24
</TABLE>
(c) Exhibits.
SIGNATURES
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 hereunto duly authorized.
Crestline Capital Corporation
By:/s/ Larry K. Harvey
-------------------
Larry K. Harvey
Date: May 26, 1999 Senior Vice President and Corporate Controller
------------
3
<PAGE>
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
As of March 31, 1999
(unaudited)
<TABLE>
<S> <C>
ASSETS
Property and equipment, net........................................ $76,027,932
Cash and cash equivalents.......................................... 8,459,534
Due from Residence Inn by Marriott, Inc............................ 1,906,299
Property improvement fund.......................................... 1,446,601
Other assets....................................................... 704,104
-----------
$88,544,470
===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt.................................................... $54,478,029
Deferred incentive management fee due to Residence Inn by
Marriott, Inc................................................... 1,145,122
Accounts payable and accrued expenses............................ 411,516
-----------
Total Liabilities.............................................. 56,034,667
-----------
PARTNERS' CAPITAL
General Partner.................................................. 3,403,642
Limited Partners................................................. 29,106,162
-----------
Total Partners' Capital........................................ 32,509,803
-----------
$88,544,470
===========
</TABLE>
See Notes to Condensed Financial Statements.
4
<PAGE>
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
1999 1998
----------- -----------
<S> <C> <C>
REVENUES
Inn revenues
Suites............................................ $ 9,287,496 $ 9,074,529
Other............................................. 455,439 440,247
----------- -----------
Total Inn revenues.............................. 9,742,935 9,514,776
----------- -----------
OPERATING COSTS AND EXPENSES
Property-level costs and expenses
Suites............................................ 1,949,878 1,797,638
Other operating departments....................... 229,919 237,216
Other Inn operating expenses...................... 2,511,839 2,418,248
----------- -----------
Total Inn property-level costs and expenses..... 4,691,636 4,453,102
Depreciation and amortization....................... 676,264 958,991
Incentive management fee............................ 232,179 246,365
Residence Inn system fee............................ 371,499 362,981
Property taxes...................................... 372,356 373,700
Base management fee................................. 194,859 190,296
Equipment rent and other............................ 69,278 66,737
----------- -----------
6,608,071 6,652,172
----------- -----------
OPERATING PROFIT...................................... 3,134,864 2,862,604
Interest expense.................................... (1,192,383) (1,432,599)
Interest income..................................... 95,536 63,528
----------- -----------
NET INCOME............................................ $ 2,038,017 $ 1,493,533
=========== ===========
ALLOCATION OF NET INCOME
General Partner..................................... $ 101,901 $ 74,677
Limited Partners.................................... 1,936,116 1,418,856
----------- -----------
$ 2,038,017 $ 1,493,533
=========== ===========
NET INCOME PER LIMITED PARTNER UNIT
(608 Units)......................................... $ 3,184 $ 2,334
=========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
5
<PAGE>
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................... $2,038,017 $1,493,533
Noncash items................................. 698,399 1,056,108
Changes in operating accounts................. (104,154) (518,108)
---------- ----------
Cash provided by operating activities....... 2,632,262 2,031,533
---------- ----------
INVESTING ACTIVITIES
Change in property improvement fund........... (325,604) (405,185)
Additions to property and equipment........... (170,626) (84,079)
---------- ----------
Cash used in investing activities........... (496,230) (489,264)
---------- ----------
FINANCING ACTIVITIES
Principal payments on mortgage debt........... (150,000) (201,765)
Capital distributions to partners............. -- (2,934,400)
---------- ----------
Cash used in financing activities........... (150,000) (3,136,165)
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 1,986,032 (1,593,896)
CASH AND CASH EQUIVALENTS, at beginning of
period......................................... 6,473,502 3,701,029
---------- ----------
CASH AND CASH EQUIVALENTS, at end of period..... $8,459,534 $2,107,133
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for mortgage interest............. $ 772,714 $1,337,113
========== ==========
</TABLE>
See Notes to Condensed Financial Statements.
6
<PAGE>
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed financial statements have been prepared by
Marriott Residence Inn USA Limited Partnership (the "Partnership") 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 from the accompanying financial
statements. The Partnership believes the disclosures made are adequate to make
the information presented not misleading. However, the condensed financial
statements should be read in conjunction with the Partnership's financial
statements and notes thereto included herein.
In the opinion of the Partnership, the accompanying condensed financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of the
Partnership as of March 31, 1999, and the results of operations and cash flows
for the three months ended March 31, 1999 and 1998. Interim results are not
necessarily indicative of fiscal year performance because of seasonal and
short-term variations.
For financial reporting purposes, the net income of the Partnership is
allocated 95% to the limited partners and 5% to RIBM Three LLC (the "General
Partner"). Significant differences exist between the net income for financial
reporting purposes and the net income for Federal income tax purposes. These
differences are due primarily to the use, for Federal income tax purposes, of
accelerated depreciation methods and shorter depreciable lives of the assets
and differences in the timing of the recognition of incentive management fee
expense.
2. Revenues represent the gross sales generated by the Partnership's Inns.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus on EITF 97-2, "Application of
FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements."
EITF 97-2 addresses the circumstances in which a management entity may include
the revenues and expenses of a managed entity in its financial statements.
The Partnership considered the impact of EITF 97-2 on its condensed
financial statements and determined that EITF 97-2 requires the Partnership to
include property-level sales and operating expenses of its Inns in its
statement of operations for the period during which the Partnership operated
the Inns through a management agreement. The Partnership has given retroactive
effect to the adoption of EITF 97-2 in the accompanying condensed statement of
operations. Application of EITF 97-2 to the financial statements for the three
months ended March 31, 1999 and 1998, increased both revenues and operating
expenses by $4.7 million, and $4.5 million, respectively, and had no impact on
operating profit or net income.
3. Certain reclassifications were made to prior year financial statements to
conform to the 1999 presentation.
4. On March 29, 1999, Crestline Capital Corporation acquired 474 limited
partner units, or a 74% interest in the Partnership. In May 1999, Crestline
acquired an additional 20 limited partner units for $1.6 million in cash
increasing Crestline's ownership to a 77% limited partnership interest in the
Partnership.
7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Limited Partners of
Marriott Residence Inn USA Limited Partnership:
We have audited the accompanying balance sheets of Marriott Residence Inn
USA Limited Partnership (a Delaware limited partnership) as of December 31,
1998 and 1997, and the related statements of operations, changes in partners'
capital and cash flows for the years ended December 31, 1998, 1997 and 1996.
These financial statements are the responsibility of the General Partner's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Marriott Residence Inn USA
Limited Partnership as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years ended December 31, 1998, 1997 and
1996 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Partnership has
given retroactive effect to the change to include property-level revenues and
operating expenses of its inns in the statement of operations.
Arthur Andersen LLP
Washington, D.C.
May 18, 1999
8
<PAGE>
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
BALANCE SHEET
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Property and equipment, net....................... $ 76,522,171 $ 79,327,711
Cash and cash equivalents......................... 6,473,502 3,701,029
Property improvement fund......................... 1,120,997 681,891
Due from Residence Inn by Marriott, Inc. and
affiliates....................................... 1,327,153 1,018,453
Other assets...................................... 737,638 1,080,130
------------- ------------
Total assets.................................... $ 86,181,461 $ 85,809,214
============= ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt................................... $ 54,628,029 $ 55,465,042
Accounts payable and accrued expenses........... 13,524 482,931
Deferred incentive management fees payable to
Residence Inn by Marriott, Inc. and
affiliates..................................... 1,068,122 421,346
------------- ------------
Total liabilities............................. 55,709,675 56,369,319
------------- ------------
PARTNERS' CAPITAL
General Partner
Capital contributions, net of offering costs
of $70,681................................... 3,129,319 3,129,319
Cumulative net income......................... 1,542,020 1,247,705
Capital distributions......................... (1,369,601) (953,601)
------------- ------------
Total general partners' capital............. 3,301,738 3,423,423
------------- ------------
Limited Partners
Capital contributions, net of offering costs
of $3,692,932................................ 93,978,130 93,978,130
Cumulative net income......................... 34,578,858 28,986,877
Capital distributions......................... (101,386,940) (96,948,535)
------------- ------------
Total limited partners' capital............. 27,170,048 26,016,472
------------- ------------
Total partners' capital..................... 30,471,786 29,439,895
------------- ------------
Total liabilities and partners' capital....... $ 86,181,461 $ 85,809,214
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Suites............................... $38,766,657 $37,922,552 $36,788,045
Other operating departments.......... 1,997,330 1,953,354 1,936,057
----------- ----------- -----------
Total revenues................... 40,763,987 39,875,906 38,724,102
----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Property-level costs and expenses
Suites............................. 8,020,529 7,522,464 7,297,185
Other operating departments........ 972,812 735,431 717,598
Other Inn operating expenses....... 10,515,512 9,845,183 9,813,711
----------- ----------- -----------
Total property-level costs and
expenses........................ 19,508,853 18,103,078 17,828,494
Depreciation and amortization........ 4,293,394 4,048,361 3,726,389
Residence Inn system fee............. 1,550,666 1,516,902 1,471,520
Property taxes....................... 1,514,981 1,427,637 1,426,548
Incentive management fee............. 1,081,786 1,223,705 467,633
Base management fee.................. 815,280 797,518 774,482
Equipment rent and other............. 680,167 757,442 663,614
----------- ----------- -----------
Total operating costs and
expenses........................ 29,445,127 27,874,643 26,358,680
----------- ----------- -----------
OPERATING PROFIT....................... 11,318,860 12,001,263 12,365,422
Interest expense..................... (5,697,301) (5,895,884) (6,377,022)
Interest income...................... 264,737 307,689 426,748
----------- ----------- -----------
NET INCOME............................. $ 5,886,296 $ 6,413,068 $ 6,415,148
=========== =========== ===========
ALLOCATION OF NET INCOME
General Partner...................... 294,315 $ 320,653 $ 320,757
Limited Partners..................... 5,591,981 6,092,415 6,094,391
----------- ----------- -----------
$ 5,886,296 $ 6,413,068 $ 6,415,148
=========== =========== ===========
NET INCOME PER LIMITED PARTNER UNIT
(608 Units)........................... $ 9,197 $ 10,020 $ 10,024
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
---------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1995................ $3,498,063 $25,998,482 $29,496,545
Capital distributions................... (364,050) (7,031,216) (7,395,266)
Net income.............................. 320,757 6,094,391 6,415,148
---------- ----------- -----------
Balance, December 31, 1996................ 3,454,770 25,061,657 28,516,427
Capital distributions................... (352,000) (5,137,600) (5,489,600)
Net income.............................. 320,653 6,092,415 6,413,068
---------- ----------- -----------
Balance, December 31, 1997................ 3,423,423 26,016,472 29,439,895
Capital distributions................... (416,000) (4,438,405) (4,854,405)
Net income.............................. 294,315 5,591,981 5,886,296
---------- ----------- -----------
Balance, December 31, 1998................ $3,301,738 $27,170,048 $30,471,786
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................... $ 5,886,296 $ 6,413,068 $ 6,415,148
Noncash items:
Depreciation and amortization...... 4,293,394 4,048,361 3,726,389
Amortization of deferred financing
costs as interest expense......... 385,678 388,465 388,465
Working capital changes:
Due from Residence Inn by Marriott,
Inc............................... (308,700) 6,540 (215,850)
Accounts payable and accrued
expenses.......................... 177,369 371,604 (27,653)
----------- ------------ -----------
Cash provided by operations...... 10,434,037 11,228,038 10,286,499
----------- ------------ -----------
INVESTING ACTIVITIES
Additions to property and equipment.. (1,442,258) (4,907,987) (1,916,314)
Change in restricted cash............ -- 3,793,208 --
Changes in property improvement fund,
net................................. (439,106) 2,512,082 (241,522)
----------- ------------ -----------
Cash (used in) provided by
investing activities.............. (1,881,364) 1,397,303 (2,157,836)
----------- ------------ -----------
FINANCING ACTIVITIES
Capital distributions................ (4,854,405) (5,489,600) (7,395,266)
Payment of financing costs........... (88,782) -- --
Repayment of mortgage principal...... (837,013) (760,233) (6,122,816)
(Repayments of) proceeds from note
payable to Host Marriott
Corporation......................... -- (5,392,667) 5,392,667
----------- ------------ -----------
Cash used in financing
activities...................... (5,780,200) (11,642,500) (8,125,415)
----------- ------------ -----------
INCREASE IN CASH AND CASH EQUIVALENTS.. 2,772,473 982,841 3,248
CASH AND CASH EQUIVALENTS, beginning of
year.................................. 3,701,029 2,718,188 2,714,940
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, end of
year.................................. $ 6,473,502 $ 3,701,029 $ 2,718,188
=========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest............... $ 5,758,000 $ 5,556,000 $ 5,989,000
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
Note 1. The Partnership
Description of the Partnership
Marriott Residence Inn USA Limited Partnership (the "Partnership"), a
Delaware limited partnership, was formed to acquire, own and operate 11
Residence Inn by Marriott hotels (the "Inns"). The Inns are located in eight
states and have a total of 1,294 suites. The Inns are managed by Residence Inn
by Marriott, Inc. (the "Manager"), a wholly-owned subsidiary of Marriott
International, Inc. ("MII"), as part of the Residence Inn by Marriott hotel
system.
The Partnership was formed on August 21, 1991 and operations commenced on
December 30, 1991 (the "Closing Date"). On the Closing Date, the Inns were
contributed to the Partnership pursuant to the terms of a contribution
agreement between Host Marriott, the Manager, several wholly-owned subsidiaries
of Host Marriott (collectively, the "Contributing Limited Partners") and the
Partnership. In consideration for their contribution, the Contributing Limited
Partners received 608 limited partner interests ("Units"), representing a 95%
interest, and the proceeds of a $58,000,000 mortgage loan (see Note 5). The
General Partner contributed $3,200,000 for a 5% interest in the Partnership.
On June 30, 1992 (the "Initial Equity Closing Date"), the Contributing
Limited Partners transferred 170 Units to non-Host Marriott investors. All
remaining Units were transferred between December 31, 1992 and December 2,
1994. For U.S. Federal income tax reporting purposes (IRC Section
708(b)(1)(B)), a termination of the Partnership occurred on March 15, 1993 (the
"Remeasurement Date") as a result of the sale of 50% of the interests in the
Partnership's capital and profits in the previous twelve months. As a result of
the termination, for tax purposes, the Partnership was treated as distributing
its properties to the partners who immediately thereafter contributed the
properties to a new partnership. There were no adjustments made to these
financial statements as a result of this termination. However, on a tax basis,
under applicable U.S. Federal income tax regulations, the carrying value of the
property and equipment were adjusted to reflect its fair market value on the
Remeasurement Date.
On April 17, 1998, Host Marriott Corporation ("Host Marriott"), the parent
of RIBM Three LLC, the sole general partner of the partnership (the "General
Partner"), announced that its Board of Directors authorized the Company to
reorganize its business operations to qualify as a real estate investment trust
("REIT") to become effective as of January 1, 1999 (the "REIT Conversion"). On
December 29, 1998, Host Marriott announced that it had completed substantially
all the steps necessary to complete the REIT Conversion, including spinning off
Crestline Capital Corporation, to the shareholders of Host Marriott,
("Crestline Capital") and expected to qualify as a REIT under the applicable
Federal income tax laws beginning January 1, 1999. Subsequent to the REIT
Conversion, Host Marriott is referred to as Host REIT. In connection with the
REIT Conversion, Host REIT contributed substantially all of its hotel assets to
a newly formed partnership, Host Marriott L.P. ("Host LP").
On December 24, 1998, in connection with Host Marriott's conversion to a
real estate investment trust (the "Conversion"), the name of the general
partner changed from Marriott RIBM Three Corporation to RIBM Three LLC. Prior
to the Conversion, the General Partner was a wholly-owned subsidiary of Host
Marriott. Pursuant to the Conversion, Host Marriott contributed a 1% Class A
managing interest in the General Partner to Host Marriott L.P., and a 99% Class
B interest in the General Partner to Rockledge Hotel Properties, Inc., a non-
controlled subsidiary of Host Marriott L.P. In March 1999, Crestline Capital
purchased a 74% limited partner interest in the Partnership for $34.4 million
from the limited partners.
13
<PAGE>
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Partnership Allocations and Distributions
Pursuant to the terms of the partnership agreement, Partnership
allocations, for U.S. Federal income tax purposes, and distributions
subsequent to the Initial Equity Closing Date are generally made as follows:
a. Cash available for distribution will generally be distributed (i)
first, 100% to the limited partners, until the limited partners have
received, with respect to such year, an amount equal to 11% of their
average daily outstanding Net Invested Capital, defined as the excess of
capital contributions over cumulative distributions of net refinancing
and/or sales proceeds ("Capital Receipts"); (ii) second, 100% to the
General Partner until the General Partner has received, with respect to
such year, an amount equal to 11% of Net Invested Capital; (iii) third, 5%
to the General Partner and 95% to the limited partners, until the partners
have received cumulative distributions of Capital Receipts equal to the
partners' capital contributions; and (iv) thereafter, 15% to the General
Partner and 85% to the limited partners.
b. Capital Receipts not retained by the Partnership will be distributed
(i) first, 100% to the limited partners until the limited partners have
received an amount equal to the unpaid portion of a 14% return on Net
Invested Capital; (ii) second, 100% to the limited partners until the
partners have received cumulative distributions of Capital Receipts equal
to their capital contributions; (iii) third, 100% to the General Partner
until the General Partner has received an amount equal to the unpaid
portion of a 14% return on Net Invested Capital; (iv) fourth, 100% to the
General Partner until the General Partner has received cumulative
distributions of Capital Receipts equal to its capital contribution; and
(v) thereafter, 15% to the General Partner and 85% to the limited partners.
c. Proceeds from the sale of substantially all of the assets of the
Partnership will be distributed to the partners in accordance with their
capital account balances as adjusted to take into account gain or loss
resulting from such sale.
d. Net profits will generally be allocated to the partners in proportion
to the distributions of cash available for distribution; however, the
General Partner will not be allocated less than 1%.
e. Net losses will generally be allocated 5% to the General Partner and
95% to the limited partners.
f. Gain recognized by the Partnership will generally be allocated (i)
first, to all partners whose capital accounts have negative balances until
such balances are brought to zero; (ii) next, to all partners in the amount
necessary to bring their respective capital account balances to an amount
equal to their Net Invested Capital plus a 14% return on Net Invested
Capital; and (iii) thereafter, in amounts necessary to bring the ratio of
the General Partner and limited partners' capital account balances in
excess of capital priority amounts, as defined, to 15% and 85%,
respectively.
g. Losses recognized by the Partnership will generally be allocated (i)
first, 85% to limited partners and 15% to the General Partner until
positive capital account balances in excess of capital priority amounts, as
defined, have been eliminated; (ii) next, to all partners whose capital
accounts have positive balances until such balances have been eliminated;
and (iii) thereafter, 100% to the General Partner.
For financial reporting purposes, net profits and losses are allocated
among partners based upon their stated interests in cash available for
distributions.
Note 2. Summary of Significant Accounting Policies
Basis of Accounting
The Partnership's records are maintained on the accrual basis of accounting
and its fiscal year coincides with the calendar year.
14
<PAGE>
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with an original
maturity of three months or less at date of purchase to be cash equivalents.
Property and Equipment
Property and equipment is recorded at cost. Property and equipment
contributed by Host Marriott and its affiliates has been recorded at its
carryover basis. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings and improvements...................................... 40 years
Furniture and equipment......................................... 4-10 years
</TABLE>
All property and equipment is pledged as security for the mortgage debt
described in Note 5.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties on an
individual property basis will be less than their net book value. If a property
is impaired, its basis is adjusted to fair market value.
Restricted Cash Reserve
A restricted cash reserve was available to support distributions to the
limited partners if, and to the extent, cash distributions for any year through
1996 otherwise would be insufficient to provide the limited partners an
annualized return on the limited partners' capital contributions equal to 11%
for 1996 and 10.75% for 1995. The remaining balance in the restricted cash
reserve at February 15, 1997 became part of the Partnership's general working
capital and was used to repay the note payable due to Host Marriott (see Note
5).
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the mortgage debt and amendments (see Note 5) and are amortized using
the straight-line method, which approximates the effective interest method,
over the term of the loan. The Partnership paid $88,782 in financing costs
during the year ended December 31, 1998 in connection with the extension of the
mortgage debt. Accumulated amortization of the deferred financing costs was
$2,719,501 and $2,333,822 as of December 31, 1998 and 1997, respectively.
Revenues and Expenses
Revenues primarily represent gross revenues generated by the Inns.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board ("FASB") reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
15
<PAGE>
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership assessed the impact of EITF 97-2 on its financial statements
and determined that EITF 97-2 requires the Partnership to include property-
level revenues and operating expenses of its Inns in its Statement of
Operations. The Partnership has given retroactive effect to the adoption of
EITF 97-2 in the accompanying statement of operations. Application of EITF 97-2
to the financial statements for the years ended December 31, 1998, 1997 and
1996 increased both revenues and operating expenses by approximately $19.5
million, $18.1 million and $17.8 million, respectively, and had no impact on
operating profit or net income.
Interest Rate Swap Agreement
The Partnership entered into an interest rate swap agreement to convert
certain portions of its variable rate debt to a fixed rate basis. The interest
rate differential to be paid or received on the interest rate swap agreement is
accrued as interest rates change and is recognized as an adjustment to interest
expense (see Note 5).
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes, but rather, allocates its profits and losses to the individual partners.
Significant differences exist between the net income for financial reporting
purposes and the net income as reported in the Partnership's tax return. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods, shorter depreciable lives for the assets,
differences in the timing of recognition of certain fees and straight-line rent
adjustments. As a result of these differences, the excess of the tax basis in
Partnership net liabilities over the Partnership net liabilities reported in
the accompanying financial statements is $7,218,000 and $9,907,000 as of
December 31, 1998 and 1997, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year presentation.
Note 3. Property and Equipment
Property and equipment consists of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Land and improvements............................ $ 9,710,712 $ 9,658,977
Buildings and improvements....................... 73,470,126 73,039,408
Furniture and equipment.......................... 18,742,798 17,782,993
------------ ------------
101,923,636 100,481,378
Less accumulated depreciation.................... (25,401,465) (21,153,667)
------------ ------------
$ 76,522,171 $ 79,327,711
============ ============
</TABLE>
16
<PAGE>
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 4. Estimated Fair Value of Financial Instruments
The estimated fair value of financial instruments is shown below. Fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts:
<TABLE>
<CAPTION>
As of December 31, 1998 As of December 31, 1997
-------------------------- --------------------------
Carrying Estimated Fair Carrying Estimated Fair
Amount Value Amount Value
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Mortgage debt........... $54,628,029 $54,628,029 $55,465,042 $56,808,151
Interest Rate Swap
Agreement.............. $ -- $ -- $ -- $ 532,231
</TABLE>
The estimated fair value of the mortgage debt are based on the expected
future debt service payments discounted at risk adjusted rates.
The estimated fair value of the interest rate swap agreement is based on the
estimated amount the Partnership would pay or receive to terminate the
agreement. The notional amount of the agreement was $25,836,467 at December 31,
1997. The Swap Agreement expired on December 31, 1998.
Note 5. Debt
Term Loan
On the Closing Date, the Partnership entered into a loan agreement with a
life insurance company, as lead lender and servicer, to provide $58,000,000 of
non-recourse debt (the "Term Loan"). The Term Loan was amortized on the basis
of a 25-year amortization schedule which commenced in March 1994 and matured on
December 31, 1998.
The Term Loan was evidenced by (i) promissory notes aggregating $31,000,000
(the "Fixed Rate Notes") which bore interest at a fixed rate of 9.66% per annum
and (ii) promissory notes aggregating $27,000,000 (the "Floating Rate Notes")
which bore interest at 1.85 percentage points over the three-month London
Interbank Offered Rate. On the Closing Date, the Partnership entered into an
interest rate swap agreement (the "Swap Agreement") with a third party to
effectively fix the interest rate on the Floating Rate Notes at 9.66% per annum
until maturity of the Term Loan. The counterparty's obligations under the Swap
Agreement were guaranteed by the parent company of the counterparty, a national
investment banking institution. There was no nonperformance by the counterparty
during the term of the agreement. The Partnership's obligations under the Swap
Agreement were secured by a pledge of collateral by the General Partner. The
Swap Agreement expired on December 31, 1998.
On December 31, 1998, the Term Loan was amended such that its maturity date
was extended from December 31, 1998 to December 31, 1999. The Term Loan was
extended for only one year in anticipation of a possible sale of the
Partnership's hotels in 1999. As a result of the Amendment, the Fixed Rate
Notes and Floating Rate Notes were consolidated into a single indebtedness in
the principal amount of $54,628,029 (the "Amended Term Loan"). The Amended Term
Loan bears interest at 3.3 percentage points over the three-month LIBOR (the
"Contract Rate"). The Contract Rate in effect on December 31, 1998 was 8.6%. On
the Amendment date, the Partnership made the following payments: (1) $529,740
in interest due and payable on the Term Loan, (2) a $50,000 underwriting fee
payable in connection with the Amendment, and (3) $38,782 in legal fees.
Beginning February 1, 1999, monthly principal payments of $75,000 will be made
on the Amended Term Loan, in addition to monthly interest payments calculated
on the basis of the Contract Rate and the outstanding principal balance. All
unpaid principal and interest is due at the maturity of the Amended Term Loan
on December 31, 1999.
17
<PAGE>
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Amended Term Loan is secured by first mortgages on the Partnership's fee
or leasehold interest in ten of the Inns (the "Term Loan Inns"), a security
interest in all personal property associated with the Term Loan Inns including
furniture and equipment, inventory, contracts and other general intangibles,
and an assignment of the Partnership's rights under the management agreement.
Raleigh Mortgage Loan
On the Closing Date, the Partnership assumed one of the Contributing Limited
Partner's obligations under a nonrecourse mortgage loan in the original
principal amount of $5,900,000 with respect to the Raleigh Inn. The loan
carried a fixed interest rate of 10.25% and required monthly payments of
interest and principal, based on a 30-year amortization schedule, until
maturity on July 1, 1996. On July 1, 1996, the Raleigh Mortgage Loan was fully
repaid with proceeds advanced under a loan from Host Marriott.
Note Payable to Host Marriott
On July 1, 1996, the Raleigh Mortgage Loan was repaid in full with proceeds
of a $5,392,667 unsecured nonrecourse loan from Host Marriott. Interest on the
loan accrues at prime plus one percent. The loan matured on April 30, 1997 with
the entire balance due at that time. The Partnership repaid the loan with funds
released from the restricted cash reserve and cash from Partnership operating
activity. During 1997 and 1996, $160,500 and $209,100, respectively, of
interest was paid to Host Marriott. The weighted average interest rate was
9.36% and 9.25% for the years ended December 31, 1997 and 1996, respectively.
Note 6. Management Agreement
The Manager operates the Inns pursuant to a long-term management agreement
with an initial term expiring December 30, 2011. The Manager has the option to
extend the agreement on one or more Inns for up to five 10-year terms. The
Manager earns a base management fee equal to 2% of the Inns' gross revenues,
which is subordinate to payment of qualifying debt service payments, a
provision for Partnership administrative expenses and retention by the
Partnership of annual cash flow from operations of $7,040,000. The Manager is
also entitled to an incentive management fee equal to 20% of operating profit,
as defined, in excess of $9,500,000 for each calendar year. The incentive
management fee is payable out of 50% of cash flow from operations remaining
after payment of debt service, provision for Partnership administrative
expenses, retention by the Partnership of annual cash flow from operations of
$7,040,000, payment of current base management fees, payment of amounts due
pursuant to any loans from Host Marriott and deferred base management fees.
Through December 31, 1996, base and incentive management fees not paid
currently were waived by the Manager. Subsequent to December 31, 1996, any base
and incentive management fees not paid are earned by the Manager and have been
accrued by the Partnership. For the years ended December 31, 1998, 1997 and
1996, $815,280, $797,518 and $774,482 of base management fees and $436,798,
$802,359 and $467,633 of incentive management fees, respectively, were paid to
the Manager. As of December 31, 1998 and 1997, respectively, $1,068,122 and
$421,346 in incentive management fees were deferred.
The management agreement also provides for a Residence Inn system fee equal
to 4% of suite revenues. In addition, the Manager is reimbursed for each Inn's
pro rata share of the actual costs and expenses incurred in providing certain
services ("Chain Services") on a central or regional basis to all hotels
operated by the Manager. As franchiser of the Residence Inn by Marriott system,
the Manager maintains a marketing fund to pay the costs associated with certain
system-wide advertising, promotional and public relations materials and
programs and the operation of a toll-free reservation system. Each Inn
contributes 2.5% of suite revenues to the marketing fund. For the years ended
December 31, 1998, 1997 and 1996, the Partnership paid Residence Inn system
fees of $1,550,666, $1,516,902 and $1,471,520, reimbursed the Manager for
$962,145, $764,094 and
18
<PAGE>
MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(Continued)
$748,229 of Chain Services and contributed $969,166, $948,064 and $919,701 to
the marketing fund, respectively. The Partnership is required to provide the
Manager with working capital to meet the operating needs of the Inns. As of
December 31, 1998 and 1997, $642,500 had been advanced to the Manager for
working capital.
The management agreement also provides for the establishment of a property
improvement fund for the Inns. Contributions to the property improvement fund
are equal to 5% of gross revenues of each Inn. During 1998, 1997 and 1996, the
Partnership contributed $2,038,199, $1,994,000 and $1,936,000, respectively, to
the property improvement fund.
Note 7. Meriden Ground Lease
On the Closing Date, the Partnership assumed all of Host Marriott's rights
and obligations as tenant under the ground lease with respect to the land on
which the Meriden Inn is located. The initial term of the ground lease will
expire on August 14, 2013. The Partnership will have the option to extend the
term thereof for up to ten consecutive periods of five years each. Rent for the
initial term in the amount of $1,200,000 was prepaid by Host Marriott and is
amortized on a straight-line basis over the initial term of the lease. Rent
after the initial term will be prepaid in varying amounts at the beginning of
each applicable extended term. As of December 31, 1998 and 1997, accumulated
amortization of the prepaid ground rent was $319,791 and $274,196,
respectively.
19
<PAGE>
PRO FORMA FINANCIAL INFORMATION
Crestline Capital Corporation's ("the Company") unaudited pro forma
condensed consolidated statement of operations for fiscal year 1998 reflects
the following transactions, as if such transactions had been completed at the
beginning of the fiscal year:
. 1998 acquisition of one senior living community;
. 1998 prepayment of $26 million of debt;
. 1998 repayment and forgiveness of $92 million of unsecured debt and a
$15 million intercompany note treated as a capital contribution from
Host Marriott Corporation ("Host Marriott");
. 1998 and 1999 acquisition of minority interests in the Company's
consolidated subsidiaries;
. 1998 spin-off distribution of the Company by Host Marriott and the
concurrent lease of 120 full-service hotels and sublease of 71 limited-
service hotels;
. The asset management fee charged to Host Marriott;
. Adjustment to corporate expenses as if the Company was operated on a
stand-alone basis; and
. Second quarter 1999 acquisition of a 77% limited partnership interest in
a partnership that owns eleven limited-service hotels.
The Company's unaudited pro forma condensed consolidated statement of
operations for the twelve weeks ended March 26, 1999 reflects the acquisition
of the 77% limited partnership interest in the partnership that owns eleven
limited-service hotels as if the transaction had been completed at the
beginning of the period presented. The Company's unaudited pro forma condensed
consolidated balance sheet as of March 26, 1999 reflects the acquisition of
the 77% limited partnership interest in this partnership as if the transactions
had been completed on March 26, 1999.
In the second quarter of 1999, the Company acquired a 74% limited partnership
interest in the Marriott Residence Inn USA Limited Partnership (the
"Partnership") from a private investor for $34.4 million in cash and the
consolidation of $54.5 million of debt for a total consideration of $89
million. The purchase was partially financed through a $10 million draw on its
revolving credit facility. In a separate transaction, the Company purchased an
additional 3% limited partnership interest in the Partnership in the second
quarter of 1999 for $1.6 million in cash increasing its ownership to a 77%
limited partnership interest in the Partnership. The Partnership owns eleven
Residence Inn limited-service hotels that are managed by Marriott International.
On December 29, 1998, the Company was spun-off from Host Marriott as part
of a series of transactions pursuant to which Host Marriott elected to be
considered a real estate investment trust ("REIT") for federal income tax
purposes. Upon completion of the spin-off distribution, the Company entered
into agreements to lease or sublease 120 full-service hotels and 71 limited-
service hotels from Host Marriott and agreements to provide asset management
services to Host Marriott for its hotel portfolio for an annual fee of
$4.5 million.
During 1998, the Company acquired one senior living community, the Gables at
Winchester, for $21 million. Also during 1998, Host Marriott prepaid
approximately $26 million of the Company's mortgage debt and repaid $92 million
of the Company's unsecured debt to Marriott International. The Company treated
Host Marriott's prepayment of the mortgage debt as a capital contribution. Host
Marriott's repayment of the Company's $92 million unsecured debt was repaid in
exchange for a $92 million note due to Host Marriott with similar terms. The
Company's $92 million note and an additional $15 million intercompany note
were later forgiven by Host Marriott and treated as a capital contribution.
The unaudited pro forma financial statements present the Company's financial
position and results of operations as if the transactions discussed above were
completed. These presentations do not purport to represent what its results of
operations would actually have been if these transactions had in fact occurred
on such date or at the beginning of such period or to project the Company's
results of operations for any future date or period.
The unaudited pro forma financial statements are based upon certain
assumptions, as set forth in the notes to the unaudited pro forma financial
statements, that the Company believes are reasonable under the circumstances and
should be read in conjunction with its consolidated financial statements and
notes thereto included elsewhere in its Form 10-K for the fiscal year ended
January 1, 1999.
20
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of March 26, 1999
(in thousands)
<TABLE>
<CAPTION>
(A)
Hotel
Historical Acquisition Pro Forma
---------- ----------- ----------
<S> <C> <C> <C>
ASSETS
Property and equipment, net................. $669,820 $88,344 $ 758,164
Hotel working capital....................... 94,444 -- 94,444
Due from hotel managers..................... 80,418 1,906 82,324
Due from Marriott Senior Living Services,
net........................................ 13,174 -- 13,174
Other assets................................ 35,122 2,151 37,273
Cash and cash equivalents................... 60,801 (35,965) 43,296
10,000
8,460
-------- ------- ----------
$953,779 $74,896 $1,028,675
======== ======= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Mortgage debt............................. $182,090 $54,478 $ 246,568
10,000
Other debt................................ 29,759 -- 29,759
-------- ------- ----------
211,849 64,478 276,327
Hotel working capital notes payable to
Host Marriott............................ 94,444 -- 94,444
-------- ------- ----------
Total debt................................ 306,293 64,478 370,771
Accounts payable and accrued expenses....... 13,277 1,557 14,834
Other liabilities........................... 21,312 8,861 30,173
Due to Host Marriott........................ 88,011 -- 88,011
Deferred income taxes....................... 61,816 -- 61,816
-------- ------- ----------
Total liabilities......................... 490,709 74,896 565,605
-------- ------- ----------
Shareholders' equity:
Common stock.............................. 223 -- 223
Additional paid-in capital................ 453,071 -- 453,071
Retained earnings......................... 14,170 -- 14,170
Treasury stock............................ (4,394) -- (4,394)
-------- ------- ----------
Total shareholders' equity................ 463,070 -- 463,070
-------- ------- ----------
$953,779 $74,896 $1,028,675
======== ======= ==========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements
21
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
Twelve Weeks Ended March 26, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
(C)
Pro
Historical Hotel Acquisition Forma
---------- ----------------- --------
<S> <C> <C> <C>
REVENUES
Hotels
Room.................................. $582,896 $ 9,288 $592,184
Food and beverage..................... 256,450 -- 256,450
Other................................. 64,638 455 65,093
-------- ------- --------
Total hotels........................ 903,984 9,743 913,727
-------- ------- --------
Senior living communities
Routine............................... 51,505 -- 51,505
Ancillary............................. 5,448 -- 5,448
-------- ------- --------
Total senior living communities..... 56,953 -- 56,953
-------- ------- --------
Asset management........................ 1,188 -- 1,188
Equity in earnings of affiliates........ 223 -- 223
-------- ------- --------
Total revenue....................... 962,348 9,743 972,091
-------- ------- --------
OPERATING COSTS AND EXPENSES
Hotels
Property-level costs and expenses
Rooms................................. 132,583 1,950 134,533
Food and beverage..................... 187,971 -- 187,971
Other department and costs and
deductions........................... 227,690 2,742 230,432
Management fees........................ 58,305 798 59,103
Lease expense.......................... 286,670 -- 286,670
Other operating costs and expenses..... -- 1,256 1,256
-------- ------- --------
Total hotels........................ 893,219 6,746 899,965
-------- ------- --------
Senior living communities
Property-level costs and expenses
Routine............................... 32,402 -- 32,402
Ancillary............................. 4,107 -- 4,107
Other operating costs and expenses..... 10,172 -- 10,172
-------- ------- --------
Total senior living communities..... 46,681 -- 46,681
-------- ------- --------
Asset management........................ 1,067 -- 1,067
-------- ------- --------
Total operating costs and expenses.. 940,967 6,746 947,713
-------- ------- --------
Operating profit........................ 21,381 2,997 24,378
Corporate expenses...................... (3,962) (256) (4,218)
Interest expense........................ (5,106) (1,192) (6,477)
(179)
Interest income......................... 1,072 96 868
(300)
-------- ------- --------
Income before income taxes.............. 13,385 1,166 14,551
Provision for income taxes.............. (5,488) (478) (5,966)
-------- ------- --------
Net income.............................. $ 7,897 $ 688 $ 8,585
======== ======= ========
Earnings per share...................... $ .35 $ .39
======== ========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements
22
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
Fiscal Year Ended January 1, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
(B) (C) (D) (E) (F) (G)
Asset
Senior Living Manage- Debt
Hotel Leases Hotel Community ment Corporate Refinancing/ Pro
Historical and Subleases Acquisition Acquisition Fees Expenses Repayment Forma
---------- ------------- ----------- ------------- ------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Hotels
Room................... $ -- $2,584,921 $38,767 $-- $ -- $ -- $ -- $2,623,688
Food and beverage...... -- 1,202,560 -- -- -- -- -- 1,202,560
Other.................. -- 265,610 1,997 -- -- -- -- 267,607
-------- ---------- ------- ---- ------ -------- ------- ----------
Total hotels........... -- 4,053,091 40,764 -- -- -- -- 4,093,855
-------- ---------- ------- ---- ------ -------- ------- ----------
Senior living
communities
Routine................ 213,378 -- -- 166 -- -- -- 213,544
Ancillary.............. 27,899 -- -- 2 -- -- -- 27,901
-------- ---------- ------- ---- ------ -------- ------- ----------
Total senior living
communities........... 241,277 -- -- 168 -- -- -- 241,445
-------- ---------- ------- ---- ------ -------- ------- ----------
Asset management........ -- -- -- -- 4,500 -- -- 4,500
-------- ---------- ------- ---- ------ -------- ------- ----------
Total revenue.......... 241,277 4,053,091 40,764 168 4,500 -- -- 4,339,800
-------- ---------- ------- ---- ------ -------- ------- ----------
OPERATING COSTS AND
EXPENSES
Hotels
Property-level costs
and expenses
Rooms.................. -- 1,035,922 8,021 -- -- -- -- 1,043,943
Food and beverage...... -- 1,088,769 -- -- -- -- -- 1,088,769
Other department and
costs and deductions.. -- 336,810 11,489 -- -- -- -- 348,299
Management fees........ -- 261,416 3,448 -- -- -- -- 264,864
Lease expense.......... -- 1,285,310 -- -- -- -- -- 1,285,310
Other operating costs
and expenses.......... -- -- 5,729 -- -- -- -- 5,729
-------- ---------- ------- ---- ------ -------- ------- ----------
Total hotels........... -- 4,008,227 28,687 -- -- -- -- 4,036,914
-------- ---------- ------- ---- ------ -------- ------- ----------
Senior living
communities
Property-level costs
and expenses
Routine................ 138,099 -- -- 82 -- -- -- 138,181
Ancillary.............. 21,317 -- -- 1 -- -- -- 21,318
Other operating costs
and expenses.......... 44,642 -- -- 50 -- -- -- 44,692
-------- ---------- ------- ---- ------ -------- ------- ----------
Total senior living
communities........... 204,058 -- -- 133 -- -- -- 204,191
-------- ---------- ------- ---- ------ -------- ------- ----------
Asset management........ -- -- -- -- 4,500 -- -- 4,500
-------- ---------- ------- ---- ------ -------- ------- ----------
Total operating costs
and expenses.......... 204,058 4,008,227 28,687 133 4,500 -- -- 4,245,605
-------- ---------- ------- ---- ------ -------- ------- ----------
Operating profit........ 37,219 44,864 12,077 35 -- -- -- 94,195
Corporate expenses...... (6,360) -- (894) -- -- (11,016) -- (18,270)
Interest expense........ (22,861) (4,864) (5,697) -- -- -- 4,789 (29,408)
(775)
Interest income......... 2,028 567 265 6 -- -- -- 1,568
(1,298)
-------- ---------- ------- ---- ------ -------- ------- ----------
Income (loss) before
income taxes........... 10,026 40,567 3,678 41 -- (11,016) 4,789 48,085
Benefit (provision) for
income taxes........... (4,111) (16,632) (1,508) (17) -- 4,517 (1,963) (19,714)
-------- ---------- ------- ---- ------ -------- ------- ----------
Net income (loss)....... $ 5,915 $ 23,935 $ 2,170 $ 24 $ -- $ (6,499) $ 2,826 $ 28,371
======== ========== ======= ==== ====== ======== ======= ==========
Earnings per share...... $ .27 $ 1.29
======== ==========
</TABLE>
See Notes to Unaudited Pro Forma Financial Statements
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
A. Represents the adjustments to record the Company's acquisition of a 77%
limited partnership interest in a partnership that owns eleven limited-service
hotels in the second quarter of 1999.
B. Represents the adjustments to record the historical hotel revenues and
hotel operating costs and expenses and pro forma lease expense associated with
the Company's leasing of 120 full-service hotels and 71 limited-service hotels
from Host Marriott and the interest expense on the $94 million of hotel working
capital notes from Host Marriott.
C. Represents the adjustment to record the incremental operating results
related to the Company's acquisition of the 77% limited partnership interest
in a partnership that owns eleven limited-service hotels in the second quarter
of 1999 as follows:
--historical hotel revenues and operating costs and expenses including the
depreciation expense reflecting the Company's basis in the assets;
--the historical interest expense on the assumed mortgage;
--interest expense on the $10 million draw on the revolving credit
facility; and
--reduction in interest income earned on the cash proceeds used to acquire
the partnership.
D. Represents the adjustment to record the historical revenues and operating
costs and expenses related to the Company's acquisition of one senior living
community in 1998.
E. Represents the Company's asset management fees charged to Host Marriott
associated with asset management agreements entered into with Host Marriott
for an annual fee of $4.5 million.
F. Represents the adjustment to record additional corporate expenses the
Company would have expected to incur assuming the Company was operated on a
stand-alone basis for the entire fiscal year 1998 and the elimination of
minority interest expense included in corporate expenses related to the
purchase of minority interests in its consolidated subsidiaries in 1998 and
1999. The adjustment for fiscal year 1998 includes the following (in thousands):
<TABLE>
<S> <C>
Payroll costs..................................................... $ 4,747
Rent and insurance................................................ 815
Other general and administrative.................................. 5,454
-------
$11,016
=======
</TABLE>
G. Represents the adjustments to eliminate interest expense on $133 million
of debt either repaid or forgiven by Host Marriott during 1998.
24
