<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 10, 1999 Commission File No. 1-14635
CRESTLINE CAPITAL CORPORATION
6600 Rockledge Drive
Bethesda, Maryland 20817
(240) 694-2000
Maryland 52-2151967
- ------------------------ ----------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
Shares outstanding
Class at October 11, 1999, net of treasury stock
- ------------------- ------------------------------------------
Common Stock, $.01 19,361,687
par value per share
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<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I. FINANCIAL INFORMATION (Unaudited):
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - 3
September 10, 1999 and January 1, 1999
Condensed Consolidated Statements of Operations - 4
Twelve Weeks Ended September 10, 1999 and
September 11, 1998
Condensed Consolidated Statements of Operations - 5
Thirty-Six Weeks Ended September 10, 1999 and
September 11, 1998
Condensed Consolidated Statements of Cash Flows - 6
Thirty-Six Weeks Ended September 10, 1999 and
September 11, 1998
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of 11
Operations and Financial Condition
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Part II. OTHER INFORMATION AND SIGNATURE 21
</TABLE>
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 10, January 1,
1999 1999
----------- ----------
(unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net..................... $756,713 $655,745
Hotel working capital........................... 93,955 95,114
Due from hotel managers......................... 39,873 --
Due from Marriott Senior Living Services, Inc... 11,782 8,884
Other assets.................................... 45,843 32,231
Cash and cash equivalents....................... 41,198 66,779
-------- --------
$989,364 $858,753
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Debt:
Mortgage debt.................................. $254,033 $183,059
Other debt..................................... 27,455 30,017
-------- --------
281,488...................................... 281,488 213,076
Hotel working capital notes payable 93,955 95,114
to Host Marriott.............................. -------- --------
Total debt.................................... 375,443 308,190
Accounts payable and accrued expenses........... 17,144 6,438
Lease payable to Host Marriott.................. 63,323 --
Deferred income taxes........................... 61,957 61,353
Other liabilities............................... 26,850 23,518
-------- --------
Total liabilities............................. 544,717 399,499
-------- --------
Shareholders' equity:
Common stock, 75 million shares authorized,
22.3 million and 21.9 million shares issued,
respectively, $.01 par value.................. 223 219
Additional paid-in capital..................... 451,315 452,762
Retained earnings.............................. 36,047 6,273
Treasury stock, 2.6 million shares............. (42,938) --
-------- --------
Total shareholders' equity.................... 444,647 459,254
-------- --------
$989,364 $858,753
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-3-
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve Weeks Ended September 10, 1999 and September 11, 1998
(unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------- ----------
1999 1998 1998
----------- ------- ----------
<S> <C> <C> <C>
REVENUES
Hotels
Rooms...................................... $605,013 $ -- $579,777
Food and beverage.......................... 240,200 -- 231,221
Other...................................... 66,525 -- 61,018
-------- ------- --------
Total hotel revenues.................... 911,738 -- 872,016
-------- ------- --------
Senior living
Routine.................................... 51,550 49,295 49,295
Ancillary.................................. 4,906 6,519 6,519
-------- ------- --------
Total senior living revenues............ 56,456 55,814 55,814
-------- ------- --------
Asset management revenues.................... 1,051 -- 1,038
Equity in earnings of affiliates............. 160 -- --
-------- ------- --------
Total revenues............................. 969,405 55,814 928,868
-------- ------- --------
OPERATING COSTS AND EXPENSES
Hotels
Property-level operating costs and expenses
Rooms................................... 152,693 -- 145,782
Food and beverage....................... 191,401 -- 173,268
Other................................... 244,333 -- 248,835
Other operating costs and expenses
Lease expense........................... 253,592 -- 245,454
Management fees......................... 51,098 -- 48,601
Depreciation and amortization........... 454 -- --
-------- ------- --------
Total hotel operating costs and
expenses............................. 893,571 -- 861,940
-------- ------- --------
Senior living
Property-level operating costs and expenses
Routine................................. 33,981 32,268 32,268
Ancillary............................... 3,300 4,998 4,998
Other operating costs and expenses
Depreciation and amortization........... 4,456 5,073 5,073
Management fees paid to Marriott
International.......................... 3,200 3,340 3,340
Property taxes and other................ 2,510 2,184 2,184
-------- ------- --------
Total senior living operating costs
and expenses......................... 47,447 47,863 47,863
-------- ------- --------
Asset management operating costs and expenses 941 -- 1,038
-------- ------- --------
Total operating costs and expenses...... 941,959 47,863 910,841
-------- ------- --------
OPERATING PROFIT BEFORE MINORITY INTEREST,
CORPORATE EXPENSES AND INTEREST............ 27,446 7,951 18,027
Minority interest expense.................... (676) -- --
Corporate expenses........................... (3,350) (1,321) (4,010)
Interest expense............................. (6,775) (4,375) (5,639)
Interest income.............................. 900 439 567
-------- ------- --------
INCOME BEFORE INCOME TAXES................... 17,545 2,694 8,945
Provision for income taxes................... (7,088) (1,105) (3,668)
-------- ------- --------
NET INCOME................................... $ 10,457 $ 1,589 $ 5,277
======== ======= ========
BASIC EARNINGS PER COMMON SHARE.............. $.52 $.07 $.24
======== ======= ========
DILUTED EARNINGS PER COMMON SHARE............ $.51 $.07 $.24
======== ======= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-4-
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Thirty-Six Weeks Ended September 10, 1999 and September 11, 1998
(unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Pro Forma
---------------------- ----------
1999 1998 1998
----------- --------- ----------
<S> <C> <C> <C>
REVENUES
Hotels
Rooms...................................... $1,851,711 $ -- $1,771,588
Food and beverage.......................... 793,623 -- 783,919
Other...................................... 204,057 -- 176,180
---------- -------- ----------
Total hotel revenues.................... 2,849,391 -- 2,731,687
---------- -------- ----------
Senior living
Routine.................................... 153,830 146,380 146,546
Ancillary.................................. 16,200 19,611 19,613
---------- -------- ----------
Total senior living revenues............ 170,030 165,991 166,159
---------- -------- ----------
Asset management revenues.................... 3,247 -- 3,115
Equity in earnings of affiliates............. 743 -- --
---------- -------- ----------
Total revenues............................. 3,023,411 165,991 2,900,961
---------- -------- ----------
OPERATING COSTS AND EXPENSES
Hotels
Property-level operating costs and expenses
Rooms................................... 435,009 -- 416,323
Food and beverage....................... 591,669 -- 569,412
Other................................... 726,427 -- 708,382
Other operating costs and expenses
Lease expense........................... 873,531 -- 843,302
Management fees......................... 172,149 -- 163,901
Depreciation and amortization........... 1,271 -- --
---------- -------- ----------
Total hotel operating costs
and expenses......................... 2,800,056 -- 2,701,320
---------- -------- ----------
Senior living
Property-level operating costs and expenses
Routine................................. 99,251 93,320 93,402
Ancillary............................... 10,900 14,871 14,872
Other operating costs and expenses
Depreciation and amortization........... 14,739 14,759 14,786
Management fees paid to Marriott
International.......................... 10,137 9,408 9,416
Property taxes and other................ 6,114 5,636 5,649
---------- -------- ----------
Total senior living operating costs
and expenses......................... 141,141 137,994 138,125
---------- -------- ----------
Asset management operating costs and expenses 3,098 -- 3,115
---------- -------- ----------
Total operating costs and expenses...... 2,944,295 137,994 2,842,560
---------- -------- ----------
OPERATING PROFIT BEFORE MINORITY INTEREST,
CORPORATE EXPENSES AND INTEREST............ 79,116 27,997 58,401
Minority interest expense.................... (1,154) -- --
Corporate expenses........................... (12,042) (2,937) (12,030)
Interest expense............................. (18,416) (17,560) (16,138)
Interest income.............................. 2,781 1,120 1,518
---------- -------- ----------
INCOME BEFORE INCOME TAXES................... 50,285 8,620 31,751
Provision for income taxes................... (20,511) (3,534) (13,018)
---------- -------- ----------
NET INCOME................................... $ 29,774 $ 5,086 $ 18,733
========== ======== ==========
BASIC EARNINGS PER COMMON SHARE.............. $1.40 $.24 $.85
========== ======== ==========
DILUTED EARNINGS PER COMMON SHARE............ $1.38 $.24 $.85
========== ======== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-5-
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-Six Weeks ended September 10, 1999 and September 11, 1998
(unaudited, in thousands)
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income...................................................... $ 29,774 $ 5,086
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization................................. 16,524 14,759
Amortization of debt premiums and deferred
financing costs............................................ (673) (1,073)
Income taxes.................................................. 8,476 3,534
Other......................................................... 1,324 --
Change in other operating accounts............................ 18,127 (2,658)
-------- -------
Cash from operations............................................ 73,552 19,648
-------- -------
INVESTING ACTIVITIES
Acquisition of hotel properties, net of cash acquired.......... (30,486) --
Purchase of minority interests in senior living partnerships... (7,010) --
Expansions of senior living communities........................ (18,451) (3,731)
Acquisition of senior living community......................... -- (1,000)
Other capital expenditures..................................... (6,562) (4,305)
Change in capital improvement reserve.......................... (1,244) (190)
Other.......................................................... (2,087) --
-------- -------
Cash used in investing activities............................... (65,840) (9,226)
-------- -------
FINANCING ACTIVITIES
Draws on credit facility....................................... 20,000 --
Repayments of debt............................................. (4,994) (2,429)
Repurchases of common stock.................................... (45,583) --
Debt issuance costs............................................ (2,722) --
Other.......................................................... 6 867
-------- -------
Cash used in financing activities............................... (33,293) (1,562)
-------- -------
Increase (decrease) in cash and cash equivalents................ (25,581) 8,860
Cash and cash equivalents, beginning of period.................. 66,779 17,644
-------- -------
Cash and cash equivalents, end of period........................ $ 41,198 $26,504
======== =======
SUPPLEMENTAL INFORMATION--NON-CASH ACTIVITY:
Assumption of mortgage debt for the purchase of a controlling
interest in hotel properties.................................. $ 54,478 $ --
Repayment of hotel working capital notes with hotel
working capital............................................... (1,159) --
Sale of common stock to executives through loans............... 2,645 --
Contributions from Host Marriott:
Property and equipment........................................ -- 16,743
Acquisition of minority interests paid by Host Marriott....... -- 6,888
Debt prepayment paid by Host Marriott......................... -- 26,405
Other......................................................... -- (185)
</TABLE>
-6-
<PAGE>
See Notes to Condensed Consolidated Financial Statements.
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed consolidated financial statements of Crestline
Capital Corporation and subsidiaries (the "Company") have been prepared by
the Company 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 condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended January 1, 1999.
The Company is engaged in the lodging and senior living business. As of
September 10, 1999, the Company leased or subleased 119 full-service and 71
limited-service hotels, owned a controlling interest in 11 limited-service
hotels and owned 31 senior living communities.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include only
normal and recurring adjustments) necessary to present fairly the financial
position of the Company as of September 10, 1999, the results of operations
for the twelve and thirty-six weeks ended September 10, 1999 and September
11, 1998 and cash flows for the thirty-six weeks ended September 10, 1999 and
September 11, 1998. Interim results are not necessarily indicative of fiscal
year performance because of the impact of seasonal and short-term variations.
Approximately one-fourth of the Company's leased full-service hotels have
managers that have a different accounting calendar from the Company. For
these hotels, which record revenues on a monthly basis versus the Company's
four week period, the accompanying condensed consolidated financial
statements reflect only eight months of operations for the thirty-six weeks
ended September 10, 1999 and September 11, 1998. The Company recorded two
months of operations in the first quarter and three months of operations in
each of the second and third quarters. The Company will record four months
of operations in the fourth quarter.
2. On December 29, 1998 (the "Distribution Date"), the Company became a publicly
traded company when Host Marriott Corporation ("Host Marriott") completed its
plan of reorganizing its business operations by spinning-off the Company to
the shareholders of Host Marriott (the "Distribution"), as part of a series
of transactions pursuant to which Host Marriott elected to be considered a
real estate investment trust ("REIT"). As part of the Distribution, Host
Marriott distributed 20.5 million, or 94%, of the outstanding shares of
common stock of the Company to the Host Marriott shareholders. The shares
were distributed on the basis of one share of the Company's common stock for
every ten shares of Host Marriott common stock. The remaining 1.4 million,
or six percent, of the outstanding shares were used by Host Marriott as part
of the consideration paid on December 30, 1998 for Host Marriott's
acquisition of certain hotel properties. On December 31, 1998, the Company
entered into lease and sublease agreements to lease substantially all of Host
Marriott's hotels with the existing management agreements of the leased and
subleased hotels assigned to the Company.
3. Prior to the Distribution Date, the Company's historical operating results
consist only of the operations of the senior living communities and do not
reflect the operations related to the leases or subleases of the full-service
and limited-service hotels entered into in conjunction with the Distribution.
The unaudited pro forma condensed consolidated statement of operations for
the twelve and thirty-six weeks ended September 11, 1998 reflect the
following transactions as if such transactions had been completed at the
beginning of fiscal year 1998:
-7-
<PAGE>
. 1998 spin-off of the Company by Host Marriott and the concurrent lease of
120 full-service hotels (one full-service hotel was sold by Host Marriott
in the second quarter of 1999 and the lease was terminated) and sublease
of 71 limited-service hotels from Host Marriott;
. 1998 acquisition of one senior living community;
. 1998 retirement of $26 million of debt;
. 1998 repayment and forgiveness of $92 million of unsecured debt and a $15
million intercompany note with Host Marriott;
. asset management fee charged to Host Marriott; and
. adjustment to corporate expenses as if the Company were operated on a
stand-alone basis.
The unaudited pro forma condensed consolidated statement of operations for
the twelve and thirty-six weeks ended September 11, 1998 do not reflect the
acquisition of a controlling interest in 11 limited-service hotels acquired
in the second quarter of 1999 discussed in Note 5.
4. 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 by the weighted
average number of shares of common stock outstanding plus other potentially
dilutive securities. For the twelve and thirty-six weeks ended September 11,
1998, the weighted average number of outstanding common shares is based on
Host Marriott's weighted average number of outstanding common shares,
adjusted for the one-for-ten distribution ratio.
A reconciliation of the number of shares utilized for the calculation of
diluted earnings per common share follows:
<TABLE>
<CAPTION>
Twelve Weeks Ended
-------------------------------------------
September 10, September 11, September 11,
1999 1998 1998
Historical Historical Pro Forma
------------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Weighted average number of common shares outstanding..... 20,175 21,623 21,988
Assuming distribution of common shares granted under
the comprehensive stock plan, less shares assumed
purchased at average market price....................... 469 -- --
------ ------ -------------
Shares utilized for the calculation of diluted earnings
per share............................................... 20,644 21,623 21,988
====== ====== =============
<CAPTION>
Thirty-Six Weeks Ended
-------------------------------------------
September 10, September 11, September 11,
1999 1998 1998
Historical Historical Pro Forma
------------- ------------- -------------
(in thousands)
Weighted average number of common shares outstanding..... 21,255 21,601 21,966
Assuming distribution of common shares granted under
the comprehensive stock plan, less shares assumed
purchased at average market price....................... 308 -- --
------ ------ -------------
Shares utilized for the calculation of diluted earnings
per share............................................... 21,563 21,601 21,966
====== ====== =============
</TABLE>
5. On March 29, 1999, the Company acquired a 74% limited partner 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. In separate
transactions, the Company acquired an additional 3% limited partner interest
in the Partnership in the second quarter of 1999 for $1.6 million in cash and
the 5% general partner interest in the Partnership from Host Marriott in the
third quarter of 1999 for $2.7 million in cash increasing the Company's
ownership to an 82% interest. The Partnership owns eleven Residence Inn
limited-service hotels that are managed by Marriott International.
-8-
<PAGE>
6. During the first and third quarters of 1999, the Board of Directors
authorized the Company to repurchase up to $50 million of its common stock.
Through the third quarter of 1999, the Company repurchased 2,467,000 shares
of its common stock for approximately $40.4 million, net of common stock sold
through the stock purchase loan program discussed below. Subsequent to the
third quarter through October 20, 1999, the Company repurchased an additional
316,000 shares of its common stock for $7 million. In the fourth quarter of
1999, the Board authorized the Company to repurchase up to an additional 2.5
million shares of its common stock. Over an extended period of time, the
Company intends to purchase additional shares through open market and
privately negotiated transactions at prices deemed advantageous to the
Company. These purchases will be subject to market conditions, applicable
legal requirements and other factors; however, the Company has no commitment
or obligation to purchase any particular amount of common stock and the stock
repurchase program could be suspended at any time at the Company's
discretion.
In addition, the Company completed a voluntary program through which
shareholders of record as of March 4, 1999 holding fewer than 100 shares of
the Company's common stock were able to sell all of their shares to the
Company. The Company repurchased approximately 181,000 shares for
approximately $2.5 million in the second quarter of 1999.
In the third quarter of 1999, the Company initiated a stock purchase loan
program whereby certain Company executives could purchase Company common
stock at market prices through loans from the Company. During the third
quarter of 1999, certain executives purchased approximately 149,000 shares of
common stock for $2.6 million. The loans are secured by the common stock
purchased and are recourse to the executive.
7. During the first quarter of 1999, the Company acquired the remaining 7%
limited partnership interests in Forum Retirement Partners, LP, a partnership
that owns nine senior living communities, for $6.7 million increasing the
Company's ownership to 100%.
8. On April 15, 1999, Crestline Ventures LLC ("Ventures"), a subsidiary of the
Company, entered into a secured, three-year $100 million revolving credit
facility (the "Credit Facility") for funding future investments in the
lodging and senior living industries and for general corporate purposes. The
Credit Facility bears interest at a Eurodollar rate plus 2.75%. An annual
fee of .25% is charged on the unused portion of the commitment. The Credit
Facility is secured by substantially all of the assets of Ventures and its
subsidiaries, consisting of eight senior living communities, and is also
guaranteed by the Company and certain subsidiaries of the Company. As of
September 10, 1999, the Company had $20 million outstanding under the Credit
Facility.
9. The Company operates in three business segments: hotel leasing, hotel
ownership and senior living community ownership. The Company's full-service
hotels are operated under the Marriott or Ritz-Carlton brands as well as,
among others, Four Seasons, Hyatt and Swissotel brands. The Company's
limited-service hotels are operated under the Courtyard by Marriott and
Residence Inn brands. The Company's senior living communities are operated
under Marriott brands.
The Company evaluates the performance of its segments based primarily on
operating profit before depreciation, corporate expenses, and interest
expense. The Company's income taxes are included in the consolidated Federal
income tax return of the Company and its affiliates and are allocated based
upon the relative contribution to the Company's consolidated taxable income
or loss and changes in temporary differences. The allocation of income taxes
is not evaluated at the segment level and, therefore, the Company does not
believe the information is material to the condensed consolidated financial
statements. For the twelve and thirty-six weeks ended September 11, 1998,
the Company's only business segment was senior living community ownership.
-9-
<PAGE>
<TABLE>
<CAPTION>
Twelve Weeks Ended September 10, 1999
------------------------------------------------------------------------------
Hotel Hotel Senior Living
Leasing Ownership Ownership Corporate & Other Consolidated
----------- -------------- -------------- ------------------ -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $ 901,672 $ 10,066 $ 56,456 $ 1,211 $ 969,405
Operating profit before minority
interest, corporate expenses and
interest..................................... 14,628 3,539 9,009 270 27,446
Interest expense.............................. (1,128) (1,039) (4,600) (8) (6,775)
Other......................................... (852) (585) (339) (1,350) (3,126)
Income (loss) before income taxes............. 12,648 1,915 4,070 (1,088) 17,545
<CAPTION>
Thirty-Six Weeks Ended September 10, 1999
------------------------------------------------------------------------------
Hotel Hotel Senior Living
Leasing Ownership Ownership Corporate & Other Consolidated
----------- -------------- -------------- ------------------ -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $2,829,606 $ 19,785 $170,030 $ 3,990 $3,023,411
Operating profit before minority
interest, corporate expenses and
interest..................................... 42,710 6,625 28,889 892 79,116
Interest expense.............................. (3,463) (2,091) (12,807) (55) (18,416)
Other......................................... (3,387) (1,059) (1,017) (4,952) (10,415)
Income (loss) before income taxes............. 35,860 3,475 15,065 (4,115) 50,285
Total assets for the segments are as follows:
September 10, January 1,
1999 1999
---------- --------
(in thousands)
Hotel leasing................................ $ 190,968 $125,114
Hotel ownership.............................. 93,119 --
Senior living ownership...................... 704,818 702,308
Corporate and other.......................... 30,459 61,331
Eliminations................................. (30,000) (30,000)
---------- --------
$ 989,364 $858,753
========== ========
</TABLE>
-10-
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Forward-looking Statements
- --------------------------
Certain matters discussed herein or delivered in connection with this Form
10-Q 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.
Results of Operations (Historical 1999 Compared to Pro Forma 1998)
- ------------------------------------------------------------------
As described in Notes 2 and 3 to the accompanying condensed consolidated
financial statements, the Company's 1998 historical results consist only of the
senior living communities and do not reflect the operations related to the
leases or subleases for the full-service and limited-service hotels and certain
other transactions. Management believes that due to the substantial differences
in comparability between the Company's 1999 and 1998 historical results, the use
of pro forma results for 1998 provides a more meaningful comparison because the
pro forma results assume that the leases and subleases and other transactions
described in Note 3 occurred at the beginning of 1998.
Revenues. Revenues primarily represent gross revenues from owned, leased
and subleased hotels and owned senior living communities and asset management
fees. Revenues increased by $40.5 million, or 4.4%, to $969 million for the
third quarter of 1999. Year-to-date revenues increased by $122 million, or
4.2%, to $3,023 million.
Hotel revenues increased $39.7 million, or 4.6%, to $912 million in the
third quarter of 1999. Year-to-date hotel revenues increased $118 million, or
4.3%, to $2,849 million. The increase in hotel revenues is primarily due to the
full-service hotel room revenue per available room ("REVPAR") growth and the
incremental revenues from the acquisition of 11 limited-service hotels in the
beginning of the second quarter of 1999, which contributed $10.1 million of
revenues in the third quarter of 1999 and $19.8 million year-to-date. The
leased hotel revenues increased $29.7 million, or 3.4%, to $902 million in the
third quarter of 1999 and $97.9 million, or 3.6%, to $2,830 million year-to-
date. Improved results for the Company's leased full-service hotels were driven
by increases in REVPAR of 3.0% to $109.68 for the third quarter of 1999 and 3.6%
to $116.20 year-to-date. Average room rates for the full-service properties
increased 3.6% for the quarter and
-11-
<PAGE>
3.1% year-to-date, while average occupancy decreased slightly for the quarter to
78.9% and increased slightly to 79.2% year-to-date. REVPAR for the Company's
subleased Courtyard by Marriott hotel properties increased 3.5% to $78.54 in the
third quarter of 1999 and 2.7% to $76.81 year-to-date. The growth in REVPAR is
due to an increase in average room rates of 4.7% for the quarter and 2.4% year-
to-date, while average occupancy decreased almost one percentage point to 83.0%
for the quarter and increased slightly to 81.8% year-to-date. REVPAR for the
Company's subleased Residence Inn properties decreased 1.6% to $85.77 in the
quarter and 3.1% to $84.92 year-to-date, reflecting the additional supply that
has entered into the market. The decline in REVPAR for the third quarter is the
result of a decrease in average occupancy of over one percentage point to 85.1%
although the average room rates remained unchanged, while the decrease in the
year-to-date REVPAR is due to a decrease in average occupancy of over one
percentage point to 83.9% and a decrease in the average room rates of 1.7%.
REVPAR for the Company's owned Residence Inn properties was $88.12 for the
quarter as a result of an average room rate of $101.32 and an average occupancy
of 87.0% while year-to-date REVPAR since their acquisition was $86.69 due to an
average room rate of $100.10 and an average occupancy of 86.6%.
Senior living community revenues increased by $0.6 million, or 1.2%, to
$56.5 million in the third quarter of 1999. Year-to-date senior living
community revenues increased by $3.9 million, or 2.3%, to $170 million. For the
quarter, the average per diem increased 3.7% to $92.09, while average occupancy
decreased over three percentage points to 89.4% due mostly to the impact of the
fill-up period for the expansions added in late 1998 and 1999. The average per
diem increased 4.7% year-to-date to $92.33, while average occupancy decreased
over two percentage points to 89.6%. On a comparable basis (excluding
communities which added units during 1998 or 1999), the average occupancy
decreased by two percentage points to 92.2% for the third quarter and less than
one percentage point to 90.8% year-to-date. The revenue growth is due to the
addition of 285 expansion units in 1998 and 1999 and the growth in the average
per diem. These factors driving revenue growth were partially offset by a
significant decrease in ancillary revenues due to a reduction in therapy
services in response to a change in the Medicare billing process.
Operating Costs and Expenses. Hotel operating costs and expenses for the
Company's leased and subleased hotels principally consist of hotel property-
level operating costs and expenses plus hotel management fees and lease
expenses. Hotel operating costs and expenses for the Company's owned hotels
principally consist of hotel property-level operating costs and expenses plus
management fees, depreciation, property taxes, ground rent, insurance and
certain other costs. Senior living community operating costs and expenses
consist of property-level expenses plus management fees, depreciation, property
taxes, ground rent, insurance and certain other costs. Asset management
operating costs and expenses principally consist of salary and related costs and
expenses. Total operating costs and expenses increased $31.1 million, or 3.4%,
to $942 million for the third quarter of 1999 and $102 million, or 3.6%, to
$2,944 million year-to-date.
Hotel operating costs and expenses increased $31.6 million, or 3.7%, to
$894 million in the third quarter of 1999 and increased $98.7 million, or 3.7%,
to $2,800 million year-to-date. Leased hotel operating costs and expenses
increased $25.1 million, or 2.9%, to $887 million for the quarter and increased
$85.6 million, or 3.2%, to $2,787 million year-to-date. Owned hotel operating
costs and expenses were $6.5 million for the third quarter of 1999 and $13.2
million year-to-date. Hotel property-level operating costs and expenses
increased $20.5 million, or 3.6% to $588 million in the quarter and $59.0
million, or 3.5%, to $1,753 million year-to-date. Hotel management fees
increased $2.5 million, or 5.1%, to $51.1 million in the quarter and $8.2
million, or 5.0%, to $172 million year-to-date, while lease expense increased
$8.1 million, or 3.3%, to $254 million in the quarter and $30.2 million, or
3.6%, to $874 million year-to-date.
Senior living operating costs and expenses decreased $0.4 million, or 0.9%,
to $47.4 million for the third quarter of 1999. Year-to-date senior living
operating costs and expenses increased $3.0 million, or 2.2%, to $141 million.
Senior living community property-level operating costs and expenses remained
unchanged at $37.3 million for the quarter and increased $1.9 million, or 1.7%,
to $110 million year-to-date. Other
-12-
<PAGE>
operating costs and expenses decreased $0.4 million, or 4.1%, to $10.2 million
for the quarter and increased $1.1 million, or 3.8%, to $31.0 million year-to-
date. The year-to-date other operating costs and expenses were impacted in 1999
by the payment of central administrative fees to Marriott International in 1999
that were waived through the second quarter of 1998. Excluding the payment of
these central administrative service fees through the second quarter of 1999,
the year-to-date other operating costs and expenses decreased by $0.1 million,
or 0.4%.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, the Company's total operating profit
increased $9.4 million, or 52%, to $27.4 million for the third quarter of 1999.
Year-to-date total operating profit increased $20.7 million, or 35%, to $79.1
million.
Hotel operating profit increased $8.1 million, or 80%, to $18.2 million for
the third quarter of 1999. Year-to-date hotel operating profit increased $19.0
million, or 62%, to $49.3 million. Leased hotel operating profit increased $4.6
million, or 45%, to $14.6 million for the quarter and $12.3 million, or 41%, to
$42.7 million year-to-date. The significant increase in leased hotel operating
profit is attributable mostly to cost controls implemented by the managers of
our hotel properties. Leased hotels in the New York and Los Angeles markets, as
well as the Ritz-Carlton brand hotels, generally reported significant
improvements in operating profit for 1999. Hotel operating profit for the
Company's owned limited-service hotels was $3.5 million for the third quarter of
1999 and $6.6 million year-to-date.
Senior living community operating profit increased $1.1 million, or 13.3%,
to $9.0 million in the third quarter of 1999. Year-to-date senior living
community operating profit increased $0.9 million, or 3.0%, to $28.9 million.
The increase in operating profit is primarily due to the increases in the
revenues and improved operating margins of the communities, partially offset by
payment of central administrative service fees to Marriott International in
1999, which were waived through the second quarter of 1998. Excluding the
impact of these central administrative service fees, operating profit increased
7.6% year-to-date. The Forum at Brookside, Park Summit, and The Remington Club
senior living communities performed particularly well. The Company's independent
living components posted strong results while the assisted living and healthcare
components did not show significant gains due mostly to the over-supply in the
assisted living market.
Corporate Expenses. Corporate expenses decreased $0.7 million to $3.4
million, or 0.3% of total revenues, for the third quarter of 1999 and remained
unchanged at $12.0 million, or 0.4% of total revenues, year-to-date.
Interest Expense. Interest expense increased $1.1 million to $6.8 million
in the third quarter of 1999 and $2.3 million to $18.4 million year-to-date due
primarily to the interest on the mortgage debt assumed in conjunction with the
acquisition of a controlling interest in 11 limited-service hotels in the second
quarter of 1999 and draws on the Company's Credit Facility in 1999. Interest
expense includes $1.1 million and $3.5 million in the third quarter and year-to-
date 1999, respectively, and $1.1 million and $3.4 million in the third quarter
and year-to-date 1998, respectively, related to interest on the hotel working
capital notes payable to Host Marriott.
Interest Income. Interest income increased $0.3 million to $0.9 million
for the third quarter of 1999 and increased $1.3 million to $2.8 million year-
to-date due to higher cash balances in 1999.
Net Income. Net income for the third quarter of 1999 was $10.5 million,
or $.51 per diluted share, compared to $5.3 million, or $.24 per diluted share,
for the third quarter of 1998. Year-to-date net income was $29.8 million, or
$1.38 per diluted share, compared to $18.7 million, or $.85 per diluted share in
1998.
-13-
<PAGE>
EBITDA
The Company's earnings before interest expense, taxes, depreciation and
amortization and other non-cash items ("EBITDA") increased $9.5 million, or
49.8%, to $28.6 million in the third quarter of 1999. Year-to-date EBITDA
increased $21.5 million, or 35.5%, to $82.2 million as compared to the 1998 pro
forma results.
The following is a reconciliation of EBITDA to the Company's net income:
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-Six Weeks Ended
--------------------------- -----------------------------
Pro Forma Pro Forma
September 10, September 11, September 10, September 11,
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
EBITDA................................ $28,628 $19,106 $ 82,170 $ 60,641
Interest expense...................... (6,775) (5,639) (18,416) (16,138)
Hotel working capital note interest
expense.............................. 1,128 1,122 3,463 3,367
Depreciation and amortization......... (5,018) (5,246) (16,524) (15,305)
Income taxes.......................... (7,088) (3,668) (20,511) (13,018)
Other non-cash charges, net........... (418) (398) (408) (814)
------- ------- -------- --------
Net income.......................... $10,457 $ 5,277 $ 29,774 $ 18,733
======= ======= ======== ========
</TABLE>
The Company's interest coverage was 5.0 times for the third quarter of 1999
compared to 3.9 times for the third quarter of 1998 on a pro forma basis. Year-
to-date interest coverage was 5.3 times in 1999 compared to 4.4 times in 1998 on
a pro forma basis. Interest coverage is calculated as EBITDA divided by cash
interest expense, which is defined as GAAP interest expense less amortization of
deferred financing costs, amortization of debt premiums and the interest on the
hotel working capital notes. The ratio of earnings to fixed charges was 1.12 to
1.0 for the third quarter of 1999 and 1.06 to 1.0 for the third quarter of 1998,
on a pro forma basis. The year-to-date ratio of earnings to fixed charges was
1.10 to 1.0 for 1999 and 1.06 to 1.0 for 1998, on a pro forma basis.
EBITDA data is presented because such data is used by certain investors to
determine the Company's ability to meet debt service requirements. The Company
considers EBITDA to be an indicative measure of the Company's operating
performance due to the significance of the Company's long-lived assets. EBITDA
can be used to measure the Company's ability to service debt, fund capital
expenditures and expand its business and is used in the Company's Credit
Facility as part of the tests determining its ability to incur debt and to meet
certain covenants; however, such information should not be considered as an
alternative to net income, operating profit, cash flows from operations, or any
other operating or liquidity performance measure prescribed by GAAP. In
addition, EBITDA as calculated by the Company may not be comparable to similarly
titled measures reported by other companies. Cash expenditures for various
long-term assets, interest expense and income taxes have been, and will be,
incurred which are not reflected in the EBITDA presentation.
-14-
<PAGE>
Cash Flows and Financial Condition
- ----------------------------------
The Company's principal sources of liquidity are cash on hand, cash flow
from operations and borrowings under a revolving credit facility. As of
September 10, 1999, the Company had cash and cash equivalents of $41.2 million.
Cash from operations was $73.6 million for the thirty-six weeks ended September
10, 1999. In addition to the strong operating results of the Company's hotels
and senior living communities, the significant amount of cash from operations is
a result of the timing between the cash received from the hotel managers for the
leased hotel operating results and the lease payment to the hotel owner. As of
September 10, 1999, the lease payable to hotel owners exceeded the receivable
from the hotel managers by $23.5 million.
Cash used in investing activities was $65.8 million for the thirty-six
weeks ended September 10, 1999. The cash used in investing activities
principally consists of capital expenditures for renewals and replacements of
the Company's senior living communities and owned hotels, expansions for its
senior living communities, the acquisition of a controlling interest in a
partnership that owns eleven limited-service hotels, and the purchase of the
remaining limited partnership interest in subsidiaries that own some of the
Company's senior living communities.
Cash used in financing activities was $33.3 million for the thirty-six
weeks ended September 10, 1999. The Company's cash used in financing activities
consists primarily of repurchases of the Company's common stock and debt
principal payments, partially offset by draws on the Company's revolving credit
facility.
On March 29, 1999, the Company acquired a 74% limited partner 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. In separate
transactions, the Company acquired an additional 3% limited partner interest in
the Partnership in the second quarter of 1999 for $1.6 million in cash and the
5% general partner interest in the Partnership from Host Marriott in the third
quarter of 1999 for $2.7 million in cash increasing the Company's ownership to
an 82% interest. The Partnership owns eleven Residence Inn limited-service
hotels that are managed by Marriott International.
During the first quarter of 1999, the Company acquired the remaining 7%
limited partnership interest in Forum Retirement Partners, LP, a partnership
that owns nine senior living communities, for $6.7 million increasing the
Company's ownership to 100%.
During the first two quarters of 1999, the Company opened 211 expansion
units at four of its senior living communities. The Company expended $18.5
million in 1999 related to the expansion units. The addition of these expansion
units increased the Company's total number of units to 7,469 at 31 senior living
communities.
Host Marriott sold the Minneapolis Bloomington Marriott in the first
quarter of 1999, the Saddlebrook Marriott in the second quarter of 1999 and the
Grand Hotel Marriott Resort and Golf Club at Point Clear in the fourth quarter
of 1999. Pursuant to the lease agreements with Host Marriott for these full-
service hotels, the leases were terminated reducing the Company's full-service
hotel lease portfolio to 118 leases.
On April 15, 1999, Crestline Ventures LLC ("Ventures"), a subsidiary of the
Company, entered into a secured, three-year $100 million revolving credit
facility (the "Credit Facility") for funding future investments in the lodging
and senior living industries and for general corporate purposes. The Credit
Facility bears interest at a Eurodollar rate plus 2.75%. An annual fee of .25%
is charged on the unused portion of the commitment. The Credit Facility is
secured by substantially all of the assets of Ventures and its subsidiaries,
consisting of eight senior living communities, and is also guaranteed by the
Company and certain subsidiaries
-15-
<PAGE>
of the Company. As of September 10, 1999, the Company had $20 million
outstanding under the Credit Facility.
During the first and second quarters of 1999, the Board of Directors
authorized the Company to repurchase up to $50 million of its common stock.
Through the third quarter of 1999, the Company repurchased 2,467,000 shares of
its common stock for approximately $40.4 million, net of common stock sold
through the stock purchase loan program discussed below. Subsequent to the
third quarter through October 20, 1999, the Company repurchased an additional
316,000 shares of its common stock for $7 million. In the fourth quarter of
1999, the Board authorized the Company to repurchase up to an additional 2.5
million shares of its common stock. Over an extended period of time, the Company
intends to purchase additional shares through open market and privately
negotiated transactions at prices deemed advantageous to the Company. These
purchases will be subject to market conditions, applicable legal requirements
and other factors; however, the Company has no commitment or obligation to
purchase any particular amount of common stock and the stock repurchase program
could be suspended at any time at the Company's discretion.
In addition, the Company completed a voluntary program through which
shareholders of record as of March 4, 1999 holding fewer than 100 shares of the
Company's common stock were able to sell all of their shares to the Company.
The Company repurchased approximately 181,000 shares for approximately $2.5
million in the second quarter of 1999.
In the third quarter of 1999, the Company initiated a stock purchase loan
program whereby certain Company executives could purchase Company common stock
at market prices through loans from the Company. During the third quarter of
1999, certain executives purchased approximately 149,000 shares of common stock
for $2.6 million. The loans are secured by the common stock purchased and are
recourse to the executive.
Proposals that would allow a REIT to lease hotels to a taxable REIT
subsidiary have been introduced in both the House of Representatives and the
Senate. Such proposals were included in the Taxpayer Refund and Relief Act of
1999, which was passed by both the House of Representatives and the Senate. On
September 23, 1999, the President of the United States vetoed the Taxpayer
Refund and Relief Act of 1999. Under the proposals, a REIT would be able to
lease hotels to a taxable REIT subsidiary if the hotel is operated and managed
on behalf of such subsidiary by an independent third party. In the event the
taxable REIT subsidiary proposal or a similar proposal is enacted, Host Marriott
may, at its discretion, elect to terminate the Company's leases and pay
termination fees. It is presently uncertain whether a proposal regarding
taxable REIT subsidiaries that is similar to the one contained in the Taxpayer
Refund and Relief Act of 1999 will be enacted in subsequent legislation, what
the effective date of any such legislation would be, and if such legislation is
enacted, whether Host Marriott will elect to terminate the Company's leases and
pay termination fees.
Year 2000 Problem
The "Year 2000 Problem" has 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 Company's compliance program includes an assessment of its hardware and
software computer systems and embedded systems, as well as an assessment of the
Year 2000 issues relating to third parties with which the Company has a material
relationship or whose systems are material to the operations of the Company's
hotel or senior living properties. The Company's efforts to ensure that its
computer systems are Year 2000 compliant have been segregated into two separate
phases: in-house systems and third-party systems.
-16-
<PAGE>
In-House Systems. The Company has invested in the implementation and
maintenance of accounting and reporting systems and equipment that are intended
to enable it to provide adequately for its information and reporting needs and
which are also Year 2000 compliant. Substantially all of the Company's in-house
systems have already been certified as Year 2000 compliant through testing and
other mechanisms.
Third-Party Systems. The Company relies upon operational and accounting
systems provided by third parties, primarily the managers and operators of its
hotel and senior living properties, to provide the appropriate property-specific
operating systems (including reservation, phone, elevator, security, HVAC,
emergency call and other systems) and to provide it with financial information.
Based on discussions with the third parties that are critical to the Company's
business, including the managers and operators of its hotels and senior living
properties, the Company believes 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. To the extent these changes impact leased or
subleased hotel property-level systems, Host Marriott may be required to fund
capital expenditures for upgraded equipment and software. However, to the extent
these changes impact the owned hotel or senior living property-level systems,
the Company may be required to fund capital expenditures for upgraded equipment
and software. To the extent that these changes relate to a third party
manager's centralized systems (including reservations, accounting, purchasing,
inventory, personnel and other systems), the Company's management agreements
generally provide for these costs to be charged to the properties subject to
annual limitations which costs will be borne by the Company. The Company expects
that the third party managers will incur Year 2000 costs for its centralized
systems in lieu of costs related to system projects that otherwise would have
been pursued and therefore its overall level of centralized system charges
allocated to the properties will not materially increase as a result of the Year
2000 compliance effort. The Company believes that this deferral of certain
system projects will not have a material impact on their respective future
results of operations, although it may delay certain productivity enhancements
at its properties. The Company 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. The Company believes that in the event of
material Year 2000 non-compliance caused by a breach of the manager's duties,
the Company will have the right to seek recourse against the manager under its
third party management agreements. The management agreements, however, generally
do not specifically address the Year 2000 compliance issue. Therefore, the
amount of any recovery in the event of Year 2000 non-compliance at a property,
if any, is not determinable at this time.
The Company will work with the third parties to ensure that appropriate
contingency plans will be developed. In particular, the Company has had
extensive discussions regarding the Year 2000 problem with Marriott
International, the manager of a substantial majority of its leased, subleased
and owned hotel properties and all of its senior living communities. Due to the
significance of Marriott International to the Company's 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
-17-
<PAGE>
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, emergency call 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 completion of each phase based on
documentation and quantified results weighted for System Criticality. The
following table reflects the status of Marriott International's Year 2000
readiness process at September 10, 1999. Based on progress achieved to date for
areas under its control, Marriott International expects minimal business
disruptions to arise as a result of Year 2000 readiness for the categories
reflected in the table. Nonetheless, Marriott International has prepared
contingency plans (described in more detail below) which address unforseen
circumstances and events beyond its control.
<TABLE>
<CAPTION>
Step IT Application BIS Building Systems
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Awareness Complete Complete Complete
- --------------------------------------------------------------------------------------------------------------------------------
Inventory Complete Complete Complete
- --------------------------------------------------------------------------------------------------------------------------------
Assessment Complete Complete Complete
- --------------------------------------------------------------------------------------------------------------------------------
Planning Complete Complete Complete
- --------------------------------------------------------------------------------------------------------------------------------
Remediation/Replacement Over 95 percent complete Over 95 percent complete Over 95 percent complete
- --------------------------------------------------------------------------------------------------------------------------------
Testing and Testing over 95 percent Testing is approximately 80 Initial testing is over 95
Compliance Validation complete; Compliance percent complete.* Compliance percent
Validation completed for over 90 Validation is in progress* complete.* Compliance
percent of key systems, with Validation is in progress.
most remaining work in its final
stage
- --------------------------------------------------------------------------------------------------------------------------------
Implementation Approximately 85 percent of Approximately 85 percent Over 95 percent complete
implementation projects complete **
complete. Additionally, for the
remaining projects involving
rollout to business locations,
Marriott International has made
substantial progress and expects
to be completed by year-end
1999.
- --------------------------------------------------------------------------------------------------------------------------------
Quality Assurance In progress for approximately 80 In progress In progress
percent of IT applications
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Testing for third party BIS and Building Systems may consist of Marriott
International's receipt and evaluation of vendor compliance documentation and,
where appropriate, further verification by Marriott International of compliance.
** Completion of certain BIS items is dependent on third party software
patches which Marriott International has not yet received.
Marriott International's Year 2000 compliance communications with its
significant third party suppliers, vendors and business partners, including its
franchisees are ongoing. Marriott International is focusing its efforts on the
connections most critical to its customer service, core business processes and
revenues, including those third parties that support the most critical
enterprise-wide IT Applications, franchisees generating the most revenues,
suppliers of the most widely used Building Systems and BIS, the top 100
suppliers, by dollar volume, of non-IT products and services, and financial
institutions providing the
-18-
<PAGE>
most critical payment processing functions. Responses
have been received from a majority of the firms in this group. A majority of
these respondents have either given assurances of timely Year 2000 compliance or
have identified the necessary actions to be taken by them or Marriott
International to achieve timely Year 2000 compliance for their products. Where
Marriott International has not received satisfactory responses, it is addressing
the potential risks of failure through its contingency planning process.
Marriott International is also establishing a common approach for testing
and addressing Year 2000 compliance issues for its managed and franchised
properties. This includes guidance for operated properties, and a Year 2000
''Toolkit'' for franchisees containing relevant Year 2000 compliance
information. Marriott International is also utilizing a Year 2000 best-practices
sharing system. Marriott International is monitoring the progress of the
managed and franchised properties towards Year 2000 compliance.
Marriott International's centralized services and the properties it
operates already have contingency plans in place covering a variety of possible
events, including natural disasters, interruption of utility service, general
computer failure, and the like. Marriott International has reviewed these
contingency plans and has made appropriate modifications to address specific
Year 2000 issues. The modification of master contingency plans is complete,
with conforming changes added to individual unit contingency plans during the
third quarter. Contingency drills and preparations are being conducted.
In addition, to provide support and coordination during the actual turn of
the century, Marriott International has established information and coordination
centers to collect and report status and track and address problems as they
occur.
The Company has also held discussions with each of its other hotel managers
and based on those discussions the Company is not aware of any significant
deficiencies related to Year 2000 that would be material to the Company.
Risks. There can be no assurances that Year 2000 remediation by the
Company or third parties will be properly and timely completed, and failure to
do so could have a material adverse effect on the Company, its business and its
financial condition since the Company is responsible for interfacing with third
parties in addressing Year 2000 issues at the hotels leased, subleased or owned
by the Company and the senior living communities owned by the Company. The
Company cannot predict the actual effects to it of the Year 2000 problem, which
depends on numerous uncertainties such as: (i) whether significant third
parties properly and timely address the Year 2000 issue; and (ii) whether broad-
based or systemic economic failures may occur. The Company is 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 in financial transactions or payment
processing systems such as credit cards. Due to the general uncertainty inherent
in the Year 2000 problem and the Company's responsibilities to Host Marriott and
dependence upon third parties, the Company is unable to determine at this time
whether the consequences of Year 2000 failure will have a material impact on the
Company. Although the Company's efforts to coordinate with its hotel and senior
living managers in implementing their Year 2000 compliance programs are expected
to significantly reduce the level of uncertainty concerning Year 2000 issues and
management believes that the possibility of significant interruptions of normal
operations should be reduced, there is no assurance that this will be the case.
The Company estimates the capital expenditure costs to be incurred by the
Company to be Year 2000 compliant will be less than $1 million.
-19-
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has certain debt obligations that are sensitive to changes in
interest rates. However, the Company does not have significant market risk with
respect to foreign currency exchanges or other market rate or price risks, and
the Company does not hold any financial instruments for trading purposes. As of
September 10, 1999, all of the Company's debt is fixed rate, except the
following:
. Draws on the Company's Credit Facility bear interest at a Eurodollar rate
plus 2.75%. As of September 10, 1999, the Company had $20 million
outstanding under the Credit Facility with an interest rate of 8.16%; and
. The mortgage debt of the Marriott Residence Inn USA Limited Partnership
consolidated by the Company in connection with its acquisition of a
majority interest in this partnership bears interest at a LIBOR rate plus
3.3%. As of September 10, 1999, the debt balance outstanding under this
mortgage was $54.0 million with an interest rate of 8.51%.
In conjunction with the acquisition of Forum Group, Inc. on June 21, 1997,
the Company recorded the debt assumed at its fair value, which exceeded the face
value by approximately $19 million. The Company is amortizing this debt premium
to interest expense over the remaining life of the related debt. As of
September 10, 1999, the Company has $266 million of debt outstanding, excluding
the hotel working capital notes payable to Host Marriott of approximately $94
million and debt premiums of $15.5 million. Excluding these items, the weighted
average interest rate is 9.3% and the average maturity is nine years.
-20-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time the subject of, or involved in, judicial
proceedings. Management believes that any liability or loss resulting from such
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
. February 11, 1999 - Report of the Board of Directors' approval of
changes to the Company's executive compensation and director
compensation plans.
. March 23, 1999 - Report of the amendment to Current Report on
Form 8-K dated February 11, 1999 to clarify the amount of certain
options awarded to Bruce D. Wardinski, President and Chief
Executive Officer of the Company, pursuant to the executive
compensation plan.
. March 31, 1999 - Report of the announcement that the Company
acquired a 74% limited partnership interest in a partnership that
owns eleven Residence Inn limited-service hotels.
. May 26, 1999 - Report of the amendment to the Current Report on
Form 8-K dated March 31, 1999 by filing financial statements of an
acquired business and certain pro forma financial information of
the Company.
. July 14, 1999 - Report of the Board of Directors' approval of
Amendment No. 1 to the Rights Agreement by and between the Company
and the Bank of New York.
. September 20, 1999 - Report of the election of William L. Wilson
to the Board of Directors and the resignation of Christopher J.
Nassetta.
. September 23, 1999 - Report of the amendment to Current Report
on Form 8-K dated September 20, 1999 correcting the date of
resignation for Christopher J. Nassetta.
-21-
<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.
CRESTLINE CAPITAL CORPORATION
October 22, 1999 By:/s/ Larry K. Harvey
- ---------------- ----------------------------------------------
Date Larry K. Harvey
Senior Vice President and Corporate Controller
(Chief Accounting Officer)
-22-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CRESTLINE CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF
OPERATIONS AS OF THE THIRTY-SIX WEEK PERIOD ENDED SEPTEMBER 10, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-02-1999
<PERIOD-END> SEP-10-1999
<CASH> 41,198
<SECURITIES> 0
<RECEIVABLES> 51,655
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 804,840
<DEPRECIATION> 48,127
<TOTAL-ASSETS> 989,364
<CURRENT-LIABILITIES> 0
<BONDS> 375,443
0
0
<COMMON> 223
<OTHER-SE> 444,424
<TOTAL-LIABILITY-AND-EQUITY> 989,364
<SALES> 3,023,411
<TOTAL-REVENUES> 3,023,411
<CGS> 2,944,295
<TOTAL-COSTS> 2,944,295
<OTHER-EXPENSES> 12,042
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,416
<INCOME-PRETAX> 50,285
<INCOME-TAX> 20,511
<INCOME-CONTINUING> 29,774
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,774
<EPS-BASIC> 1.40
<EPS-DILUTED> 1.38
</TABLE>
