<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 June 18, 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 July 23, 1999, net of treasury stock
----- ---------------------------------------
Common Stock, $.01 20,681,725
par value per share
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<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
==============================================
INDEX
-----
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. FINANCIAL INFORMATION (Unaudited):
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - 3
June 18, 1999 and January 1, 1999
Condensed Consolidated Statements of Operations - 4
Twelve Weeks Ended June 18, 1999 and
June 19, 1998
Condensed Consolidated Statements of Operations - 5
Twenty-Four Weeks Ended June 18, 1999 and
June 19, 1998
Condensed Consolidated Statements of Cash Flows - 6
Twenty-Four Weeks Ended June 18, 1999 and
June 19, 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>
June 18, January 1,
1999 1999
---------- ----------
(unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net..................... $ 759,645 $ 655,745
Hotel working capital........................... 93,955 95,114
Due from hotel managers......................... 52,487 --
Due from Marriott Senior Living Services, Inc... 10,418 8,884
Other assets.................................... 49,003 32,231
Cash and cash equivalents....................... 71,514 66,779
---------- ----------
$1,037,022 $ 858,753
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Mortgage debt................................. $ 255,312 $ 183,059
Other debt.................................... 29,750 30,017
---------- ----------
285,062 213,076
Hotel working capital notes payable to Host
Marriott.......... 93,955 95,114
---------- ----------
Total debt................................... 379,017 308,190
Accounts payable and accrued expenses.......... 12,916 6,438
Other liabilities.............................. 31,136 23,518
Lease payable to Host Marriott................. 98,895 --
Deferred income taxes.......................... 60,053 61,353
---------- ----------
Total liabilities............................ 582,017 399,499
---------- ----------
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.................... 453,785 452,762
Retained earnings............................. 25,590 6,273
Treasury stock, 1.6 million shares............ (24,593) --
---------- ----------
Total shareholders' equity................... 455,005 459,254
---------- ----------
$1,037,022 $ 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 June 18, 1999 and June 19, 1998
(unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------- ---------
1999 1998 1998
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Hotels
Rooms.................................................. $ 663,802 $ -- $ 633,055
Food and beverage...................................... 296,973 -- 301,253
Other.................................................. 72,894 -- 59,301
---------- ---------- ----------
Total hotel revenues................................ 1,033,669 -- 993,609
---------- ---------- ----------
Senior living
Routine................................................ 50,775 48,781 48,781
Ancillary.............................................. 5,846 6,342 6,342
---------- ---------- ----------
Total senior living revenues........................ 56,621 55,123 55,123
---------- ---------- ----------
Asset management revenues................................ 1,008 -- 1,039
Equity in earnings of affiliates......................... 360 -- --
---------- ---------- ----------
Total revenues......................................... 1,091,658 55,123 1,049,771
---------- ---------- ----------
OPERATING COSTS AND EXPENSES
Hotels
Property-level operating costs and expenses
Rooms............................................... 149,733 -- 143,468
Food and beverage................................... 212,297 -- 211,657
Other............................................... 254,404 -- 243,519
Other operating costs and expenses
Lease expense....................................... 333,269 -- 323,697
Management fees..................................... 62,746 -- 59,476
Depreciation and amortization....................... 817 -- --
---------- ---------- ----------
Total hotel operating costs and expenses.......... 1,013,266 -- 981,817
---------- ---------- ----------
Senior living
Property-level operating costs and expenses
Routine............................................. 32,868 30,801 30,801
Ancillary........................................... 3,493 4,627 4,627
Other operating costs and expenses
Depreciation and amortization....................... 5,214 4,893 4,893
Management fees paid to Marriott International...... 3,515 3,098 3,098
Property taxes and other............................ 1,923 1,688 1,688
---------- ---------- ----------
Total senior living operating costs and expenses.. 47,013 45,107 45,107
---------- ---------- ----------
Asset management operating costs and expenses............ 1,090 -- 1,039
---------- ---------- ----------
Total operating costs and expenses.................. 1,061,369 45,107 1,027,963
---------- ---------- ----------
OPERATING PROFIT BEFORE MINORITY INTEREST,
CORPORATE EXPENSES AND INTEREST........................ 30,289 10,016 21,808
Minority interest expense................................ (478) -- --
Corporate expenses....................................... (4,730) (862) (4,010)
Interest expense......................................... (6,535) (6,666) (5,289)
Interest income.......................................... 809 359 491
---------- ---------- ----------
INCOME BEFORE INCOME TAXES............................... 19,355 2,847 13,000
Provision for income taxes............................... (7,935) (1,167) (5,330)
---------- ---------- ----------
NET INCOME............................................... $ 11,420 $ 1,680 $ 7,670
========== ========== ==========
BASIC EARNINGS PER COMMON SHARE.......................... $ .54 $ .08 $ .35
========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE........................ $ .53 $ .08 $ .35
========== ========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-4-
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twenty-Four Weeks Ended June 18, 1999 and June 19, 1998
(unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------- ---------
1999 1998 1998
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Hotels
Rooms.................................................. $1,246,698 $ -- $1,191,811
Food and beverage...................................... 553,423 -- 552,698
Other.................................................. 137,532 -- 115,162
---------- ---------- ----------
Total hotel revenues................................ 1,937,653 -- 1,859,671
---------- ---------- ----------
Senior living
Routine................................................ 102,280 97,085 97,251
Ancillary.............................................. 11,294 13,092 13,094
---------- ---------- ----------
Total senior living revenues........................ 113,574 110,177 110,345
---------- ---------- ----------
Asset management revenues................................ 2,196 -- 2,077
Equity in earnings of affiliates......................... 583 -- --
---------- ---------- ----------
Total revenues......................................... 2,054,006 110,177 1,972,093
---------- ---------- ----------
OPERATING COSTS AND EXPENSES
Hotels
Property-level operating costs and expenses
Rooms............................................... 282,316 -- 270,541
Food and beverage................................... 400,268 -- 396,144
Other............................................... 482,094 -- 459,547
Other operating costs and expenses
Lease expense....................................... 619,939 -- 597,848
Management fees..................................... 121,051 -- 115,300
Depreciation and amortization....................... 817 -- --
---------- ---------- ----------
Total hotel operating costs and expenses.......... 1,906,485 -- 1,839,380
---------- ---------- ----------
Senior living
Property-level operating costs and expenses
Routine............................................. 65,270 61,052 61,134
Ancillary........................................... 7,600 9,873 9,874
Other operating costs and expenses
Depreciation and amortization....................... 10,283 9,686 9,713
Management fees paid to Marriott International...... 6,937 6,068 6,076
Property taxes and other............................ 3,604 3,452 3,465
---------- ---------- ----------
Total senior living operating costs and expenses.. 93,694 90,131 90,262
---------- ---------- ----------
Asset management operating costs and expenses............ 2,157 -- 2,077
---------- ---------- ----------
Total operating costs and expenses.................. 2,002,336 90,131 1,931,719
---------- ---------- ----------
OPERATING PROFIT BEFORE MINORITY INTEREST,
CORPORATE EXPENSES AND INTEREST........................ 51,670 20,046 40,374
Minority interest expense................................ (478) -- --
Corporate expenses....................................... (8,692) (1,616) (8,020)
Interest expense......................................... (11,641) (13,185) (10,499)
Interest income.......................................... 1,881 681 951
---------- ---------- ----------
INCOME BEFORE INCOME TAXES............................... 32,740 5,926 22,806
Provision for income taxes............................... (13,423) (2,429) (9,350)
---------- ---------- ----------
NET INCOME............................................... $ 19,317 $ 3,497 $ 13,456
========== ========== ==========
BASIC EARNINGS PER COMMON SHARE.......................... $ .89 $ .16 $ .61
========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE........................ $ .88 $ .16 $ .61
========== ========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-5-
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-Four Weeks ended June 18, 1999 and June 19, 1998
(unaudited, in thousands)
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income...................................................... $ 19,317 $ 3,497
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization................................. 11,506 9,686
Amortization of debt premiums and deferred financing costs.... (563) (715)
Income taxes.................................................. 2,158 2,429
Other......................................................... 882 --
Change in other operating accounts............................ 39,875 (7,911)
-------- --------
Cash from operations............................................ 73,175 6,986
-------- --------
INVESTING ACTIVITIES
Acquisition, net of cash acquired.............................. (27,710) (1,000)
Purchase of minority interests................................. (6,982) --
Expansions senior living communities........................... (18,451) --
Other capital expenditures..................................... (3,956) (2,270)
Change in capital improvement reserve.......................... (924) (1,090)
Other.......................................................... (1,120) --
-------- --------
Cash used in investing activities............................... (59,143) (4,360)
-------- --------
FINANCING ACTIVITIES
Draws on credit facility....................................... 20,000 --
Repayments of debt............................................. (1,776) (1,064)
Repurchases of common stock.................................... (24,593) --
Change in financing reserves................................... (487) (93)
Other.......................................................... (2,441) --
-------- --------
Cash used in financing activities............................... (9,297) (1,157)
-------- --------
Increase in cash and cash equivalents........................... 4,735 1,469
Cash and cash equivalents, beginning of period.................. 66,779 17,644
-------- --------
Cash and cash equivalents, end of period........................ $ 71,514 $ 19,113
======== ========
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) --
Contributions from Host Marriott:
Property and equipment........................................ - 16,217
Acquisition of minority interests paid by Host Marriott....... -- 7,537
Debt prepayment paid by Host Marriott......................... -- 26,405
Other......................................................... -- (185)
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-6-
<PAGE>
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
June 18, 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 June 18, 1999, the results of
operations for the twelve and twenty-four weeks ended June 18, 1999 and
June 19, 1998 and cash flows for the twenty-four weeks ended June 18, 1999
and June 19, 1998. Interim results are not necessarily indicative of fiscal
year performance because of the impact of seasonal and short-term
variations.
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 four week
period for the Company, the accompanying condensed consolidated financial
statements reflect only five months of operations for the twenty-four weeks
ended June 18, 1999 and June 19, 1998. The Company recorded two months of
operations in the first quarter and three months of operations in the
second quarter. The Company will record three months of operations in the
third quarter and 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 twenty-four weeks ended June 19, 1998 reflect
the following transactions as if such transactions had been completed at
the beginning of fiscal year 1998:
. 1998 spin-off of the Company by Host Marriott and the concurrent lease
of 120 full-service hotels
-7-
<PAGE>
(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 twenty-four weeks ended June 19, 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 twenty-four weeks ended
June 19, 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
---------------------------------
June 18, June 19, June 19,
1999 1998 1998
Historical Historical Pro Forma
---------- ---------- ---------
(in thousands)
<S> <C> <C> <C>
Weighted average number of common shares outstanding..... 21,297 21,607 21,972
Assuming distribution of common shares granted under
the comprehensive stock plan, less shares assumed
purchased at average market price....................... 344 -- --
---------- ---------- ---------
Shares utilized for the calculation of diluted earnings
per share............................................... 21,641 21,607 21,972
========== ========== =========
<CAPTION>
Twenty-Four Weeks Ended
---------------------------------
June 18, June 19, June 19,
1999 1998 1998
Historical Historical Pro Forma
---------- ---------- ---------
(in thousands)
<S> <C> <C> <C>
Weighted average number of common shares outstanding..... 21,795 21,590 21,955
Assuming distribution of common shares granted under
the comprehensive stock plan, less shares assumed
purchased at average market price....................... 146 -- --
---------- ---------- ---------
Shares utilized for the calculation of diluted earnings
per share............................................... 21,941 21,590 21,955
========== ========== =========
</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 a separate
transaction, the Company acquired an additional 3% limited partner interest
in the Partnership for $1.6 million in cash increasing the Company's
ownership to a 77% limited partner interest. The Partnership owns eleven
Residence Inn limited-service hotels that are managed by Marriott
International. Host Marriott owns a 5% general partner interest in the
Partnership.
-8-
<PAGE>
6. On March 24, 1999, the Company announced a plan to repurchase up to 1.5
million shares of its common stock. Through the second quarter of 1999, the
Company repurchased 1,465,000 shares of its common stock for approximately
$22.1 million. On July 2, 1999, the Company announced a plan to expand its
stock repurchase program by purchasing up to an additional $25 million of
its common stock. Over an extended period of time, the Company intends to
purchase 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 commenced 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.
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.
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 June 18, 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.
<TABLE>
<CAPTION>
Twelve Weeks Ended June 18, 1999
--------------------------------------------------------------------------
Hotel Hotel Senior Living Corporate
Leasing Ownership Ownership & Other Consolidated
----------- ----------- ----------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $ 1,023,950 $ 9,719 $ 56,621 $ 1,368 $ 1,091,658
Operating profit before minority
interest, corporate expenses and
interest..................................... 17,317 3,086 9,608 278 30,289
Interest expense.............................. (1,198) (1,052) (4,262) (23) (6,535)
Other......................................... (814) (474) (363) (2,748) (4,399)
Income (loss) before income taxes............. 15,305 1,560 4,983 (2,493) 19,355
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
Twelve Weeks Ended June 19, 1998
--------------------------------------------------------------------------
Hotel Hotel Senior Living Corporate
Leasing Ownership Ownership & Other Consolidated
----------- ----------- ----------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $ -- $ -- $ 55,123 $ -- $ 55,123
Operating profit before minority
interest, corporate expenses and
interest..................................... - - 10,016 -- 10,016
Interest expense.............................. - - (6,666) -- (6,666)
Other......................................... - - (503) -- (503)
Income before income taxes.................... - - 2,847 -- 2,847
<CAPTION>
Twelve Weeks Ended June 18, 1999
--------------------------------------------------------------------------
Hotel Hotel Senior Living Corporate
Leasing Ownership Ownership & Other Consolidated
----------- ----------- ----------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $ 1,927,934 $ 9,719 $ 113,574 $ 2,779 $ 2,054,006
Operating profit before minority
interest, corporate expenses and
interest..................................... 28,082 3,086 19,880 622 51,670
Interest expense.............................. (2,335) (1,052) (8,207) (47) (11,641)
Other......................................... (2,535) (474) (678) (3,602) (7,289)
Income (loss) before income taxes............. 23,212 1,560 10,995 (3,027) 32,740
<CAPTION>
Twelve Weeks Ended June 19, 1998
--------------------------------------------------------------------------
Hotel Hotel Senior Living Corporate
Leasing Ownership Ownership & Other Consolidated
----------- ----------- ----------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $ -- $ -- $ 110,177 $ -- $ 110,177
Operating profit before minority
interest, corporate expenses and
interest..................................... - - 20,046 -- 20,046
Interest expense.............................. - - (13,185) -- (13,185)
Other......................................... - - (935) -- (935)
Income before income taxes.................... - - 5,926 -- 5,926
</TABLE>
Total assets for the segments are as follows:
<TABLE>
<CAPTION>
June 18, January 1,
1999 1999
---------- ----------
(in thousands)
<S> <C> <C>
Hotel leasing................................ $ 231,932 $ 125,114
Hotel ownership.............................. 102,792 --
Senior living ownership...................... 708,891 702,308
Corporate and other.......................... 23,407 61,331
Eliminations................................. (30,000) (30,000)
---------- ----------
$1,037,022 $ 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 basis for 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 $42 million, or 4.0%, to $1,092 million for the
second quarter of 1999. Year-to-date revenues increased by $82 million, or 4.2%,
to $2,054 million.
Hotel revenues increased $40 million, or 4.0%, to $1,034 million in the
second quarter of 1999. Year-to-date hotel revenues increased $78 million, or
4.2%, to $1,938 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 $9.7 million of
revenues in the second quarter of 1999. The leased hotel revenues increased $30
million, or 3.1%, to $1,024 million in the second quarter of 1999 and $68
million, or 3.7%, to $1,928 million year-to-date. Improved results for the
Company's leased full-service hotels were driven by strong increases in REVPAR
of 3.7% to $121.92 for the second quarter of 1999 and 3.9% to $119.59 year-to-
-11-
<PAGE>
date. Average room rates for the full-service properties increased 2.8% for both
the quarter and year-to-date, while average occupancy increased almost one
percentage point for both the quarter and year-to-date to 80.6% and 79.4%,
respectively. REVPAR for the Company's subleased Courtyard by Marriott hotel
properties increased 2.4% to $78.81 in the second quarter of 1999 and 2.2% to
$75.94 year-to-date due to an increase in average room rates of 1.8% for the
quarter and 1.2% year-to-date and an increase in average occupancy of one-half
of a percentage point to 83.5% for the quarter and almost one percentage point
to 81.3% year-to-date. REVPAR for the Company's subleased Residence Inn
properties decreased 3.4% to $87.16 in the quarter and 3.8% to $84.50 year-to-
date due to a decrease in average room rates of 2.5% for both the quarter and
year-to-date and a decrease in average occupancy of almost one percentage point
to 85.3% for the quarter and over one percentage point to 83.3% year-to-date
reflecting the additional supply that has entered into the market. REVPAR for
the Company's owned Residence Inn properties was $85.25 for the quarter as a
result of an average room rate of $98.87 and average occupancy of 86.2%.
Senior living community revenues increased by $1.5 million, or 2.7%, to
$56.6 million in the second quarter of 1999. Year-to-date senior living
community revenues increased by $3.2 million, or 2.9%, to $113.6 million. For
the quarter, the average per diem increased 4.4% to $91.87, while average
occupancy decreased almost three percentage points to 89.0% due mostly to the
impact of the fill-up period for the expansions added in late 1998 and 1999. The
average per diem increased 4.8% year-to-date to $92.08, while average occupancy
decreased over two percentage points to 89.7%. On a comparable basis (excluding
communities which added units during 1998 or 1999), the average occupancy
remained unchanged at 91.0% for the quarter and 91.4% 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 $33 million, or 3.2%, to
$1,061 million for the second quarter of 1999 and $71 million, or 3.7%, to
$2,002 million year-to-date.
Hotel operating costs and expenses increased $31 million, or 3.2%, to
$1,013 million in the second quarter of 1999 and increased $67 million, or 3.6%,
to $1,906 million year-to-date. Leased hotel operating costs and expenses
increased $25 million, or 2.5%, to $1,007 million for the quarter and increased
$60 million, or 3.3%, to $1,900 million year-to-date. Owned hotel operating
costs and expenses were $6.6 million for the second quarter of 1999. Hotel
property-level operating costs and expenses increased $17.8 million, or 3.0% to
$616 million in the quarter and $38.5 million, or 3.4%, to $1,165 million year-
to-date. Hotel management fees increased $3.3 million, or 5.5%, to $63 million
in the quarter and $5.8 million, or 5.0%, to $121 million year-to-date, while
lease expense increased $9.6 million, or 3.0%, to $333 million in the quarter
and $22.1 million, or 3.7%, to $620 million year-to-date.
Senior living operating costs and expenses increased $1.9 million, or 4.2%,
to $47.0 million for the second quarter of 1999. Year-to-date senior living
operating costs and expenses increased $3.4 million, or 3.8%, to $93.7 million.
Senior living community property-level operating costs and expenses increased
$0.9 million, or 2.6%, to $36.4 million, while other operating costs and
expenses increased $1.0 million, or 10.1%, to $10.7 million for the second
quarter of 1999. Year-to-date senior living community property-level operating
costs and expenses increased $1.9 million, or 2.6%, to $72.9 million, while
year-to-date other operating costs
-12-
<PAGE>
and expenses increased $1.6 million, or 8.2%, to $20.8 million. The property-
level operating costs and expenses have been adversely impacted by the low
national unemployment as the communities experienced a significant increase in
labor costs particularly in their nursing departments. Other operating costs and
expenses were impacted in 1999 by the payment of central administrative fees to
Marriott International in 1999 of $0.7 million for the quarter and $1.3 million
year-to-date that were waived through the second quarter of 1998.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, the Company's total operating profit
increased $8.5 million, or 39%, to $30.3 million for the second quarter of 1999.
Year-to-date total operating profit increased $11.3 million, or 28%, to $51.7
million.
Hotel operating profit increased $8.6 million, or 73%, to $20.4 million for
the second quarter of 1999. Year-to-date hotel operating profit increased $10.9
million, or 54%, to $31.2 million. Leased hotel operating profit increased $5.5
million, or 47%, to $17.3 million for the quarter and $7.8 million, or 38%, to
$28.1 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, Los Angeles and Washington,
D.C. 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 $3.1 million for the second
quarter of 1999.
Senior living community operating profit decreased $0.4 million, or 4.1%,
to $9.6 million in the second quarter of 1999. Year-to-date senior living
community operating profit decreased $0.2 million, or 1.0%, to $19.9 million.
The decrease in operating profit is primarily due to 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 2.7% for the second
quarter and 5.3% year-to-date. The decrease in the operating profit from the
Company's senior living communities is also a result of the short-term negative
impact of the expansions. However, The Forum at Tucson, Park Summit, and
Lexington at Country Place 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 increased $0.7 million to $4.7
million, or 0.4% of total revenues, for the second quarter of 1999 and increased
$0.7 million to $8.7 million, or 0.4% of total revenues, year-to-date.
Interest Expense. Interest expense increased $1.2 million to $6.5 million
in the second quarter of 1999 and $1.1 million to $11.6 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. Interest expense includes $1.2 million and $2.3 million in the
second quarter and year-to-date 1999, respectively, and $1.1 million and $2.2
million in the second 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 $0.8 million for
the second quarter of 1999 and increased $0.9 million to $1.9 million year-to-
date due to higher cash balances in 1999.
Net Income. Net income for the second quarter of 1999 was $11.4 million, or
$.53 per share, compared to $7.7 million, or $.35 per share, for the second
quarter of 1998. Year-to-date net income was $19.3 million, or $.88 per share,
compared to $13.5 million, or $.61 per share in 1998.
-13-
<PAGE>
EBITDA
The Company's earnings before interest expense, taxes, depreciation and
amortization and other non-cash items ("EBITDA") increased $8.4 million, or 37%,
to $30.8 million in the second quarter of 1999. Year-to-date EBITDA increased
$12.0 million, or 29%, to $53.5 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 Twenty-Four Weeks Ended
---------------------- -----------------------
Pro Forma Pro Forma
June 18, June 19, June 18, June 19,
1999 1998 1999 1998
-------- -------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
EBITDA....................................... $ 30,820 $ 22,424 $ 53,542 $ 41,535
Interest expense............................. (6,535) (5,289) (11,641) (10,499)
Hotel working capital note interest expense.. 1,198 1,123 2,335 2,245
Depreciation and amortization................ (6,221) (5,066) (11,506) (10,059)
Income taxes................................. (7,935) (5,330) (13,423) (9,350)
Other non-cash charges, net.................. 93 (192) 10 (416)
-------- -------- -------- --------
Net income................................. $ 11,420 $ 7,670 $ 19,317 $ 13,456
======== ======== ======== ========
</TABLE>
The Company's interest coverage was 5.6 times for the second quarter of
1999 compared to 5.0 times for the second quarter of 1998 on a pro forma basis.
Year-to-date interest coverage was 5.4 times in 1999 compared to 4.6 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 1.11 to 1.0 for the second quarter of 1999 and 1.07 to 1.0 for the
second quarter of 1998, on a pro forma basis. The year-to-date ratio of earnings
to fixed charges was 1.09 to 1.0 for 1999 and 1.07 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
- ----------------------------------
As of June 18, 1999, the Company has cash and cash equivalents of $72
million. Cash from operations was $73.2 million for the twenty-four weeks ended
June 18, 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 June 18, 1999, the lease payable to hotel owners exceeded the
receivable from the hotel managers by $46 million. Cash used in investing
activities was $59.1 million. The cash used in investing activities principally
consists of capital expenditures for renewals and replacements and 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 $9.3
million for the twenty-four weeks ended June 18, 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 a separate
transaction, the Company acquired an additional 3% limited partner interest in
the Partnership for $1.6 million in cash increasing the Company's ownership to a
77% limited partner interest. The Partnership owns eleven Residence Inn limited-
service hotels that are managed by Marriott International. Host Marriott owns a
5% general partner interest in the Partnership.
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.
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 7,457 at 31 senior living
communities.
Host Marriott sold the Minneapolis Bloomington Marriott in the first
quarter of 1999 and the Saddlebrook Marriott in the second 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 119 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 of the Company. As of June 18, 1999, the
Company had $20 million outstanding under the Credit Facility.
On March 24, 1999, the Company announced a plan to repurchase up to 1.5
million shares of its common stock. Through the second quarter of 1999, the
Company repurchased 1,465,000 shares of its common stock for approximately $22.1
million. On July 2, 1999, the Company announced a plan to expand its stock
repurchase program by purchasing up to an additional $25 million of its common
stock. Over an extended period of time, the Company intends to purchase shares
through open market transactions at prices
-15-
<PAGE>
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 commenced 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.
On April 28, 1999, the Real Estate Investment Trust Modernization Act of
1999 was introduced in the House of Representatives. The bill's central feature
would allow a REIT to own up to 100% of the stock of taxable REIT subsidiaries.
If the bill becomes law, Host Marriott could establish taxable REIT subsidiaries
which could directly operate the hotels currently leased to the Company and Host
Marriott could terminate the hotel leases by paying the fair market value of the
remaining terms of the leases. There is no certainty that this bill or the
provisions similar to those contained in the bill will become law.
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.
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
-16-
<PAGE>
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 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").
-17-
<PAGE>
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 June 18, 1999:
- -------------------------------------------------------------------------------
Step IT Application BIS Building Systems
- -------------------------------------------------------------------------------
Awareness Complete Complete Complete
- -------------------------------------------------------------------------------
Inventory Complete Complete Complete
- -------------------------------------------------------------------------------
Assessment Complete Complete Complete
- -------------------------------------------------------------------------------
Planning Complete Complete Complete
- -------------------------------------------------------------------------------
Remediation/Replacement Over 95 percent Substantially Substantially
complete complete; complete;critical
critical systems systems targeted
targeted for completion
for completion by September 1999
September 1999
- -------------------------------------------------------------------------------
Testing and Testing over 95 Testing is in Initial testing
Compliance percent complete; progress.* is over 95 percent
Validation Compliance Complete complete** for
of key systems, validation which less than
completed with most in progress 5 percent require
remaining work further
in its final stage remediation/
replacement and
re-testing.
Completion for
critical systems
targeted for
September 1999;
Compliance
Validation is in
progress.
- -------------------------------------------------------------------------------
Implementation Approximately 80 Substantially In progress
percent of complete
implementation
projects complete,
with rollout to
business locations
underway
- -------------------------------------------------------------------------------
Quality Assurance In progress for In progress In progress
approximately 80
percent of IT
applications
- -------------------------------------------------------------------------------
* Testing for third party BIS and Building Systems may consist of Marriott
International's receipt and evaluation of vendor compliance
** Completion of certain BIS items is dependent on third party software
patches which we have 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 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
-18-
<PAGE>
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.
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
June 18, 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 June 18, 1999, the Company had $20 million outstanding
under the Credit Facility with an interest rate of 7.81%; 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 June 18, 1999, the debt balance outstanding under this
mortgage was $54.3 million with an interest rate of 8.23%.
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 adjustment to
interest expense over the remaining life of the related debt. As of June 18,
1999, the Company has $269 million of debt outstanding, excluding the hotel
working capital notes payable to Host Marriott of approximately $94 million and
debt premiums of $16 million. Excluding these items, the weighted average
interest rate is 9.2% 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
The Company held its annual meeting of shareholders on May 6, 1999. The
shareholders voted on the following proposals:
. Approved the election of Bruce D. Wardinski, John W. Marriott III and
Louise M. Cromwell as directors for three-year terms expiring at the
2002 annual meeting by a vote of:
For Withheld
--- ---------
Bruce D. Wardinski 18,086,018 43,425
John W. Marriott III 18,075,810 53,633
Louise M. Cromwell 18,076,659 52,784
. Approved the Company's Amended and Restated 1998 Comprehensive Stock
Incentive Plan by a vote of 17,209,218 for, 885,886 against, and 34,339
abstentions; and
. Approved the appointment of Arthur Andersen LLP as independent auditors
of the Company to serve for the 1999 fiscal year by a vote of
18,103,112 for, 12,128 against, and 14,203 abstentions.
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
-21-
<PAGE>
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.
-22-
<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
July 28, 1999 By: /s/ Larry K. Harvey
- ------------- --------------------
Date Larry K. Harvey
Senior Vice President and Corporate Controller
(Chief Accounting Officer)
-23-
<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 TWENTY-FOUR WEEK PERIOD ENDED JUNE 18, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-02-1999
<PERIOD-END> JUN-18-1999
<CASH> 71,514
<SECURITIES> 0
<RECEIVABLES> 62,905
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 802,677
<DEPRECIATION> 43,032
<TOTAL-ASSETS> 1,037,022
<CURRENT-LIABILITIES> 0
<BONDS> 379,017
0
0
<COMMON> 223
<OTHER-SE> 454,782
<TOTAL-LIABILITY-AND-EQUITY> 1,037,022
<SALES> 2,054,006
<TOTAL-REVENUES> 2,054,006
<CGS> 2,002,336
<TOTAL-COSTS> 2,002,336
<OTHER-EXPENSES> 8,692
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,641
<INCOME-PRETAX> 32,740
<INCOME-TAX> 13,423
<INCOME-CONTINUING> 19,317
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,317
<EPS-BASIC> .89
<EPS-DILUTED> .88
</TABLE>
