<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 8, 2000 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 13, 2000
--------------------- -------------------
Common Stock, $.01
par value per share 15,380,000
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<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
INDEX
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<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. FINANCIAL INFORMATION (Unaudited):
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - 3
September 8, 2000 and December 31, 1999
Condensed Consolidated Statements of Operations - 4
Twelve Weeks Ended September 8, 2000 and
September 10, 1999
Condensed Consolidated Statements of Operations - 5
Thirty-six Weeks Ended September 8, 2000 and
September 10, 1999
Condensed Consolidated Statements of Cash Flows - 6
Thirty-six Weeks Ended September 8, 2000 and
September 10, 1999
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>
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<PAGE>
PART I. FINANCIAL INFORMATION
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 8, December 31,
2000 1999
----------- ---------------
(unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net.......................................... $ 732,456 $ 745,615
Hotel working capital................................................ 89,650 89,650
Due from hotel managers.............................................. 49,876 42,259
Due from Marriott Senior Living Services............................. 6,274 5,729
Other assets......................................................... 74,718 44,841
Cash and cash equivalents............................................ 33,143 36,774
----------- -----------
$ 986,117 $ 964,868
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Mortgage debt..................................................... $ 289,118 $ 279,271
Other debt........................................................ 26,581 26,946
----------- -----------
315,699 306,217
Hotel working capital notes payable to Host Marriott.............. 89,650 89,650
----------- -----------
Total debt...................................................... 405,349 395,867
Accounts payable and accrued expenses................................ 11,473 16,912
Lease payable to Host Marriott....................................... 66,366 61,315
Deferred income taxes................................................ 66,526 63,940
Other liabilities.................................................... 33,423 26,086
----------- -----------
Total liabilities............................................... 583,137 564,120
----------- -----------
Shareholders' equity:
Common stock, 75 million shares authorized, 22.1 million and 22.3
million shares issued and outstanding, respectively, $.01 par
value........................................................... 221 223
Additional paid-in capital........................................ 447,377 451,639
Retained earnings................................................. 75,810 46,158
Treasury stock, 6.4 million and 5.1 million shares, respectively.. (120,428) (97,272)
----------- -----------
Total shareholders' equity...................................... 402,980 400,748
----------- -----------
$ 986,117 $ 964,868
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve Weeks Ended September 8, 2000 and
September 10, 1999 (unaudited, in
thousands, except per share data)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
REVENUES
Hotels
Rooms.......................................................................... $ 682,336 $ 605,013
Food and beverage.............................................................. 256,893 240,200
Other.......................................................................... 71,652 66,525
---------- ----------
Total hotel revenues....................................................... 1,010,881 911,738
---------- ----------
Senior living
Routine........................................................................ 55,444 51,550
Ancillary...................................................................... 5,130 4,906
---------- ----------
Total senior living revenues............................................... 60,574 56,456
---------- ----------
Other revenues...................................................................... 808 1,051
Equity in earnings of affiliates.................................................... 131 160
---------- ----------
Total revenues................................................................. 1,072,394 969,405
---------- ----------
OPERATING COSTS AND EXPENSES
Hotels
Property-level operating costs and expenses
Rooms...................................................................... 164,745 152,693
Food and beverage.......................................................... 207,047 191,401
Other...................................................................... 271,845 244,333
Other operating costs and expenses
Management fees............................................................ 59,616 51,098
Lease expense.............................................................. 290,985 253,592
Depreciation and amortization.............................................. 1,342 454
Other...................................................................... 879 -
---------- ----------
Total hotel operating costs and expenses.............................. 996,459 893,571
---------- ----------
Senior living
Property-level operating costs and expenses
Routine.................................................................... 35,955 33,981
Ancillary.................................................................. 3,253 3,300
Other operating costs and expenses
Depreciation and amortization.............................................. 5,689 4,456
Management fees............................................................ 3,603 3,200
Property taxes and other................................................... 2,245 2,510
---------- ----------
Total senior living operating costs and expenses...................... 50,745 47,447
---------- ----------
Other operating costs and expenses.................................................. 878 435
---------- ----------
Total operating costs and expenses......................................... 1,048,082 941,453
---------- ----------
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
EXPENSES AND INTEREST.......................................................... 24,312 27,952
Minority interest expense........................................................... (363) (676)
Corporate expenses.................................................................. (3,391) (3,350)
Interest expense.................................................................... (7,965) (6,775)
Interest income..................................................................... 1,461 394
---------- ----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM................................... 14,054 17,545
Provision for income taxes.......................................................... (5,762) (7,088)
---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM.................................................... 8,292 10,457
Gain on early extinguishment of debt, net of taxes.................................. 253 -
---------- ----------
NET INCOME.......................................................................... $ 8,545 $ 10,457
========== ==========
BASIC EARNINGS PER COMMON SHARE:
Income Before Extraordinary Item.................................................... $ .52 $ .52
========== ==========
Net Income.......................................................................... $ .54 $ .52
========== ==========
DILUTED EARNINGS PER COMMON SHARE:
Income Before Extraordinary Item.................................................... $ .51 $ .51
========== ==========
Net Income.......................................................................... $ .52 $ .51
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Thirty-six Weeks Ended September 8, 2000 and
September 10, 1999 (unaudited, in
thousands, except per share data)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
REVENUES
Hotels
Rooms.......................................................................... $ 2,002,567 $ 1,851,711
Food and beverage.............................................................. 845,186 793,623
Other.......................................................................... 223,624 204,057
----------- -----------
Total hotel revenues....................................................... 3,071,377 2,849,391
----------- -----------
Senior living
Routine........................................................................ 164,446 153,830
Ancillary...................................................................... 16,115 16,200
----------- -----------
Total senior living revenues............................................... 180,561 170,030
----------- -----------
Other revenues...................................................................... 3,049 3,247
Equity in earnings of affiliates.................................................... 384 743
----------- -----------
Total revenues................................................................. 3,255,371 3,023,411
----------- -----------
OPERATING COSTS AND EXPENSES
Hotels
Property-level operating costs and expenses
Rooms...................................................................... 467,210 435,009
Food and beverage.......................................................... 629,722 591,669
Other...................................................................... 775,658 726,427
Other operating costs and expenses
Management fees............................................................ 193,951 172,149
Lease expense.............................................................. 948,125 873,531
Depreciation and amortization.............................................. 3,536 1,271
Other...................................................................... 2,143 -
----------- -----------
Total hotel operating costs and expenses.............................. 3,020,345 2,800,056
----------- -----------
Senior living
Property-level operating costs and expenses
Routine.................................................................... 105,751 99,251
Ancillary.................................................................. 9,982 10,900
Other operating costs and expenses
Depreciation and amortization.............................................. 16,591 14,739
Management fees............................................................ 11,005 10,137
Property taxes and other................................................... 6,654 6,114
----------- -----------
Total senior living operating costs and expenses...................... 149,983 141,141
----------- -----------
Other operating costs and expenses.................................................. 2,746 2,114
----------- -----------
Total operating costs and expenses......................................... 3,173,074 2,943,311
----------- -----------
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
EXPENSES AND INTEREST.......................................................... 82,297 80,100
Minority interest expense........................................................... (950) (1,154)
Corporate expenses.................................................................. (11,796) (12,042)
Interest expense.................................................................... (22,638) (18,416)
Interest income..................................................................... 2,916 1,797
----------- -----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM................................... 49,829 50,285
Provision for income taxes.......................................................... (20,430) (20,511)
----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM.................................................... 29,399 29,774
Gain on early extinguishment of debt, net of taxes.................................. 253 -
----------- -----------
NET INCOME.......................................................................... $ 29,652 $ 29,774
=========== ===========
BASIC EARNINGS PER COMMON SHARE:
Income Before Extraordinary Item.................................................... $ 1.79 $ 1.40
=========== ===========
Net Income.......................................................................... $ 1.80 $ 1.40
=========== ===========
DILUTED EARNINGS PER COMMON SHARE:
Income Before Extraordinary Item.................................................... $ 1.74 $ 1.38
=========== ===========
Net Income.......................................................................... $ 1.75 $ 1.38
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-six weeks ended September 8, 2000 and September 10, 1999
(unaudited, in thousands)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................................... $ 29,652 $ 29,744
Adjustments to reconcile net income to cash from operations:
Gain on early extinguishment of debt, net of taxes.............. (253) -
Depreciation and amortization................................... 20,705 16,524
Amortization of debt premiums and deferred financing costs...... (27) (673)
Income taxes.................................................... 3,057 8,476
Other........................................................... 1,339 1,324
Change in other operating accounts.............................. (4,352) 18,127
----------- -----------
Cash from operations................................................. 50,121 73,552
----------- -----------
INVESTING ACTIVITIES
Acquisitions, net of cash acquired................................ (15,723) (30,486)
Hotel lease security deposits..................................... (12,829) -
Expansions of senior living communities........................... (3,204) (18,451)
Purchase of minority interests in senior living partnership....... - (7,010)
Other capital expenditures........................................ (8,515) (6,562)
Dispositions...................................................... 6,206 -
Other............................................................. (1,854) (3,331)
----------- -----------
Cash used in investing activities.................................... (35,919) (65,840)
----------- -----------
FINANCING ACTIVITIES
Repurchases of common stock....................................... (25,195) (45,583)
Draws on line of credit........................................... 30,000 20,000
Repayments of line of credit...................................... (65,000) -
Repayments of other debt.......................................... (47,087) (4,994)
Issuances of debt................................................. 92,370 -
Other............................................................. (2,921) (2,716)
----------- -----------
Cash used in financing activities.................................... (17,833) (33,293)
----------- -----------
Decrease in cash and cash equivalents................................ (3,631) (25,581)
Cash and cash equivalents, beginning of period....................... 36,774 66,779
----------- -----------
Cash and cash equivalents, end of period............................. $ 33,143 $ 41,198
=========== ===========
SUPPLEMENTAL INFORMATION - NON-CASH ACTIVITY
Assumption of mortgage debt....................................... - 54,478
Sale of common stock to executives through loans.................. - 2,645
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<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 December 31, 1999.
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 8, 2000 and the results
of operations and cash flows for the twelve and thirty-six weeks ended
September 8, 2000 and September 10, 1999. 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 eight months of operations. For these
properties, the Company records two months of operations in the first
quarter, three months of operations in each of the second and third
quarters and four months of operations in the fourth quarter.
2. 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.
A reconciliation of the number of shares utilized for the calculation of
diluted earnings per common share follows:
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
----------------------------- ----------------------------
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding............................................ 15,907 20,175 16,467 21,255
Assuming distribution of common shares granted under
the comprehensive stock plan, less shares assumed
purchased at average market price...................... 486 469 472 308
------ ------ ------ ------
Shares utilized for the calculation of diluted earnings
per share.............................................. 16,393 20,644 16,939 21,563
====== ====== ====== ======
</TABLE>
3. The Company operates in five business segments: hotel management, hotel
ownership, full-service hotel leasing, limited-service hotel leasing and
senior living community ownership. The Company's managed hotels are
upscale limited-service and full-service hotels operated under the
Marriott, Hilton, Hyatt, Sheraton, Courtyard by Marriott, Residence Inn,
Crowne Plaza and Holiday Inn brand names. The Company's owned limited-
service hotels are operated under the Residence Inn brand name. The
Company's leased full-service hotels are operated under the Marriott,
Ritz-Carlton, Four Seasons, Hyatt, Hilton and Swissotel brands. The
Company's leased and subleased limited-service hotels are
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<PAGE>
operated under the Courtyard by Marriott, Residence Inn, TownePlace Suites
by Marriott and Springhill Suites by Marriott 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 September 8, 2000
----------------------------------------------------------------------------------------------
Full-Service Limited-Service Hotel Hotel Senior Corporate
Hotel Leasing Hotel Leasing Ownership Management Living & Other Consolidated
------------- ---------------- --------- ---------- ------ ---------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $898,954 $ 93,157 $ 9,757 $ 9,013 $60,574 $ 939 $1,072,394
Operating profit................ 8,219 2,898 3,186 119 9,829 61 24,312
Interest expense................ (981) (93) (1,059) - (5,832) - (7,965)
Interest income................. 646 149 128 35 413 90 1,461
Other........................... - - (363) - - (3,391) (3,754)
Income (loss) before income
taxes and extraordinary
item........................... 7,884 2,954 1,892 154 4,410 (3,240) 14,054
Depreciation and amortization... - - 885 456 5,689 195 7,225
<CAPTION>
Twelve Weeks Ended September 10, 1999
----------------------------------------------------------------------------------------------
Full-Service Limited-Service Hotel Hotel Senior Corporate
Hotel Leasing Hotel Leasing Ownership Management Living & Other Consolidated
------------- ---------------- --------- ---------- ------ ---------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... $829,458 $ 72,214 $ 10,066 $ - $56,456 $1,211 $ 969,405
Operating profit............... 12,819 1,809 3,539 - 9,009 776 27,952
Interest expense............... (1,033) (95) (1,039) - (4,600) (8) (6,775)
Interest income................ - - 128 - 155 111 394
Other.......................... - - (676) - - (3,350) (4,026)
Income (loss) before income
taxes......................... 11,786 1,714 1,952 - 4,564 (2,471) 17,545
Depreciation and amortization.. - - 454 - 4,456 108 5,018
<CAPTION>
Thirty-six Weeks Ended September 8, 2000
----------------------------------------------------------------------------------------------
Full-Service Limited-Service Hotel Hotel Senior Corporate
Hotel Leasing Hotel Leasing Ownership Management Living & Other Consolidated
------------- ---------------- --------- ---------- ------ ---------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... $2,779,902 $ 239,011 $ 27,960 $ 24,504 $180,561 $3,433 $3,255,371
Operating profit............... 35,675 6,688 8,525 144 30,578 687 82,297
Interest expense............... (2,941) (282) (3,197) - (16,218) - (22,638)
Interest income................ 1,495 158 290 38 640 295 2,916
Other.......................... - - (950) - - (11,796) (12,746)
Income (loss) before income
taxes and extraordinary
item.......................... 34,229 6,564 4,668 182 15,000 (10,814) 49,829
Depreciation and amortization.. - - 2,535 1,001 16,591 578 20,705
<CAPTION>
Thirty-six Weeks Ended September 10, 1999
----------------------------------------------------------------------------------------------
Full-Service Limited-Service Hotel Hotel Senior Corporate
Hotel Leasing Hotel Leasing Ownership Management Living & Other Consolidated
------------- ---------------- --------- ---------- ------ ---------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... $2,616,737 $ 212,869 $ 19,785 $ - $170,030 $ 3,990 $3,023,411
Operating profit............... 37,242 5,468 6,625 - 28,889 1,876 80,100
Interest expense............... (3,140) (323) (2,091) - (12,807) (55) (18,416)
Interest income................ - - 212 - 608 977 1,797
Other.......................... - - (1,154) - - (12,042) (13,196)
Income (loss) before income
taxes......................... 34,102 5,145 3,592 - 16,690 (9,244) 50,285
Depreciation and amortization.. - - 1,271 - 14,739 514 16,524
</TABLE>
4. In February 2000, the Company sold one of its Residence Inns for a net
sales price of $6.2 million, which approximated its carrying value.
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<PAGE>
5. In March 2000, the Company purchased the hotel management business of
Stormont Trice Management Corporation for $9.7 million plus a contingent
purchase price of up to an additional $4.5 million if certain performance
criteria are met. Pursuant to the acquisition, the existing management
contracts for nine hotels and four conference centers and lease agreements
for two hotels were assigned to the Company.
6. In March 2000, the Company purchased the hotel management business of the
Durbin Companies for $4.4 million, plus a contingent purchase price of
$500,000 if one of the leases is renewed under certain conditions.
Pursuant to the acquisition, the existing management contracts for ten
hotels and lease agreements for two hotels were assigned to the Company.
7. The Company recognizes management fee revenue in accordance with Staff
Accounting Bulletin ("SAB") No. 101 which provides that contingent revenue
should be recorded in the period in which the contingency is resolved. For
certain of the Company's management contracts, certain management fees are
earned after specified thresholds for annual operating profit have been
attained. The Company recognizes management fee revenue for these
contracts when thresholds are achieved which usually occurs in the fourth
quarter. If the Company were to accrue these contingent revenues, the
Company would have recorded an additional $88,000 and $393,000 of fee
revenue in the third quarter and year- to-date third quarter,
respectively. SAB No. 101 does not have an impact on the full year revenue
recognition.
8. Through the third quarter of 2000, the Company repurchased approximately
1.3 million shares of its common stock for $23.2 million. Since the
inception of the Company's stock repurchase program in 1999, the Company
has repurchased approximately 6.4 million shares of its common stock for
$120 million. As of September 8, 2000, the Company has Board of Director
authorization to repurchase approximately 2.1 million additional shares of
its common stock.
9. On June 9, 2000, the Company entered into an agreement with Hospitality
Properties Trust, Inc. ("HPT") to lease 19 limited-service hotels under
long-term lease agreements. HPT acquired the hotels from Marriott
International, Inc. ("Marriott International"). Marriott International
will continue to manage the hotels under long-term management agreements
with the Company. The hotels are operated under the Courtyard by Marriott,
Residence Inn by Marriott, Springhill Suites by Marriott and TownePlace
Suites by Marriott brand names. Two of the hotels in the portfolio are
under construction and are expected to open in the fourth quarter of 2000.
Under the terms of the lease agreement, the Company made a $9.6 million
security deposit, which is included in other assets on the accompanying
condensed consolidated balance sheet, and will make an additional $6.0
million security deposit for the remaining two hotels at the inception of
those leases.
10. On June 23, 2000, the Company completed a shareholder-approved 1-for-100
reverse stock split immediately followed by a 100-for-1 forward stock
split of the Company's common stock. Registered shareholders whose shares
of common stock were converted into less than one share of common stock
are entitled to receive cash payments equal to the fair market value of
these fractional interests. The fair market value was determined to be
$19.1375 calculated using the average closing price of the Company's
common stock on the New York Stock Exchange for the ten trading days
immediately before and including June 23, 2000. In connection with the
reverse stock split, 292,000 shares of the Company's common stock were
retired in exchange for the right to receive $5.6 million in cash.
Transmittal letters were delivered to the registered shareholders with
instructions on how to surrender stock certificates for cash payment.
Through September 8, 2000, $2.0 million has been paid to the former
shareholders that have surrendered their stock certificates for cash
payment.
-9-
<PAGE>
11. In July 2000, the Company entered into five loan agreements totaling $92.4
million secured by mortgages on eight senior living communities. The non-
recourse loans bear interest at the 30-day Eurodollar rate plus 275 basis
points. The loans mature in July 2005 and there is no principal
amortization during the term of the loans. The proceeds of the financing
were used to repay the existing loan secured by the communities with a
principal balance of $43.5 million, which bore interest at 9.93% and had a
scheduled maturity of January 1, 2001. In connection with the prepayment
of the existing loan, the Company recognized an extraordinary gain on the
early extinguishment of debt of $428,000 before taxes in the third quarter
of 2000. The remaining proceeds of the financing were used to repay a
portion of the outstanding borrowings under the Company's line of credit.
12. On August 18, 2000, the Company entered into an agreement with CNL
Hospitality Corporation ("CNL") to lease nine limited-service hotels under
long-term lease agreements. CNL acquired the hotels from Marriott
International. Marriott International will continue to manage the hotels
under long-term management agreements with the Company. The hotels are
managed under the Courtyard by Marriott, Residence Inn by Marriott,
Springhill Suites by Marriott and TownePlace Suites by Marriott brand
names. Four of the hotels in the portfolio are under construction and are
expected to open in the fourth quarter of 2000. Under the terms of the
lease agreement, the Company made a $2.6 million security deposit, which
is included in other assets on the accompanying condensed consolidated
balance sheet, and will make an additional $2.4 million security deposit
for the remaining four hotels at the inception of those leases.
-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 the REIT
Modernization Act; and (vii) changes to the public pay systems for medical care
and the need for compliance with environmental, licensure and safety
requirements. 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
Revenues
Hotel revenues represent property-level revenues from owned and leased
hotels as well as managed hotels operated under lease agreements and management
fees from managed hotels operated under management agreements. Senior living
revenues represent property-level revenues. Overall revenues increased by $103
million, or 10.6%, to almost $1.1 billion for the third quarter of 2000 from
less than $1.0 billion for the third quarter of 1999. Year-to-date revenues
increased by $232 million, or 7.7%, to nearly $3.3 billion in 2000. The increase
in revenues is due primarily to the leased hotel full-service hotel REVPAR
growth, the incremental revenues from the acquisition of a controlling interest
in a portfolio of Residence Inns in the second quarter of 1999, the acquisition
of a hotel management portfolio in the first quarter of 2000, and the addition
of two limited-service hotel lease portfolios in the second and third quarters
of 2000.
Revenues by segment were as follows:
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
---------------------------- ----------------------------
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Full-Service Hotel Leasing.............. $ 898,954 $ 829,458 $ 2,779,902 $ 2,616,737
Limited-Service Hotel Leasing........... 93,157 72,214 239,011 212,869
Hotel Ownership......................... 9,757 10,066 27,960 19,785
Hotel Management........................ 9,013 - 24,504 -
Senior Living........................... 60,574 56,456 180,561 170,030
Other................................... 939 1,211 3,433 3,990
----------- ----------- ----------- -----------
$ 1,072,394 $ 969,405 $ 3,255,371 $ 3,023,411
=========== =========== =========== ===========
</TABLE>
-11-
<PAGE>
Full-Service Hotel Leasing. Leased full-service hotel revenues
increased $69.5 million, or 8.4%, to $899 million in the third quarter of 2000.
Year-to-date full-service leased hotel revenues increased $163 million, or 6.2%,
to almost $2.8 billion in 2000. Improved results for the Company's leased full-
service hotels were driven by increases in comparable REVPAR of 8.7% for the
third quarter of 2000 and 6.0% year- to-date. Comparable average room rates
increased 7.6% for the quarter and 6.2% year-to-date, while comparable average
occupancy increased almost one percentage point for the third quarter and
remained relatively unchanged year-to-date.
Limited-Service Hotel Leasing. Leased limited-service revenues
increased $20.9 million, or 29%, to $93.2 million in the third quarter. Year-to-
date limited-service hotel revenues increased $26.1 million, or 12.3%, to $239
million. The significant increase in limited-service hotel revenues is due
primarily to the incremental revenues from the addition of two limited-service
hotel lease portfolios in the second and third quarters of 2000. REVPAR for the
Company's subleased Courtyard by Marriott hotel properties increased 7.1% for
the third quarter and 5.0% year-to-date. The increases in REVPAR were driven by
an increase in average room rates of 5.4% and an increase in average occupancy
of over one percentage point for the quarter and an increase in average room
rates of 5.7% year-to-date despite a slight decrease in average occupancy.
REVPAR for the Company's subleased Residence Inn properties increased 5.5% for
the quarter and 4.3% year-to-date. Average room rates increased 4.2% for the
quarter and 2.9% year-to-date and average occupancy increased one percentage
point for the quarter and increased over one percentage point year-to-date. The
table below sets forth information for the Company's full-service and limited-
service leased hotels:
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
------------------------------ ----------------------------
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Comparable Leased Full-Service Hotels (116 Properties)
Room rate............................................. $ 148.90 $ 138.34 $ 155.58 $ 146.56
Occupancy............................................. 79.6% 78.8% 79.1% 79.2%
REVPAR................................................ $ 118.48 $ 108.95 $ 123.03 $ 116.05
Subleased Courtyard (53 Properties)
Room rate............................................. $ 99.74 $ 94.67 $ 99.25 $ 93.86
Occupancy............................................. 84.3% 83.0% 81.3% 81.8%
REVPAR................................................ $ 84.12 $ 78.54 $ 80.68 $ 76.81
Subleased Residence Inns (18 Properties)
Room rate............................................. $ 105.08 $ 100.83 $ 104.21 $ 101.25
Occupancy............................................. 86.1% 85.1% 85.0% 83.9%
REVPAR................................................ $ 90.48 $ 85.77 $ 88.55 $ 84.92
Leased Limited-Service Hotels (22 Properties)
Room rate............................................. $ 93.01 $ 92.98
Occupancy............................................. 72.6% 72.5%
REVPAR................................................ $ 67.55 $ 67.44
</TABLE>
Hotel Ownership. Revenue for the Company's owned hotels decreased $0.3
million, or 3.1%, to $9.8 million in the third quarter of 2000, due primarily to
the sale of one of the Residence Inns in the first quarter of 2000. Comparable
revenues for the Company's owned hotels increased 4.8% in the third quarter of
2000. Year-to-date revenues were $28.0 million in 2000. Comparable REVPAR for
the Company's owned Residence Inns increased 4.6% for the quarter as a result of
an increase in the comparable average room rate of 2.9% and an increase in
comparable average occupancy of one and one-half percentage point. The table
below sets forth information for the Company's owned hotels:
-12-
<PAGE>
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
---------------------------- ------------------------------
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Comparable Owned Residence Inns (10 Properties)
Room rate........................................ $ 106.01 $ 103.05 $ 103.94 $ 100.86
Occupancy........................................ 90.8% 89.3% 87.4% 87.6%
REVPAR........................................... $ 96.26 $ 92.05 $ 90.87 $ 88.36
</TABLE>
Hotel Management. The Company's managed hotels contributed $9.0 million
of revenues in the third quarter of 2000 and $24.5 million year-to-date. REVPAR
for the Company's managed full-service hotels was $73.63 in the third quarter
due to an average room rate of $108.28 and an average occupancy of 68.0%. Year-
to-date REVPAR for the Company's managed full-service hotels was $83.83 due to
an average room rate of $117.47 and an average occupancy of 71.4%. REVPAR for
the managed limited-service hotels was $60.66 in the third quarter as a result
of an average room rate of $77.03 and an average occupancy of 78.8%. Year-to-
date REVPAR for the managed limited-service hotels was $62.28 due to an average
room rate of $77.41 and an average occupancy of 80.4%.
Senior Living. Senior living community revenues increased by $4.1
million, or 7.3%, to $60.6 million in the third quarter of 2000. Year-to-date
revenues increased by $10.5 million, or 6.2%, to $181 million. The revenue
growth is primarily due to the fill-up of 241 expansion units added in 1999 and
the growth in the average daily rate. For the third quarter, the average daily
rate increased 5.2%, while average occupancy increased over two percentage
points. The year-to-date average daily rate increased by 4.0%, while average
occupancy increased almost two percentage points. The improvement in overall
average occupancy is directly attributable to the fill-up of the expansions
added in 1999. Year-to-date average occupancy on a comparable basis, excluding
communities which added expansion units during 1999, increased less than one
percentage point over the prior year. The table below sets forth information for
the Company's senior living communities:
<TABLE>
<CAPTION>
Twelve Weeks Ended
-----------------------------------------------------------------------
September 8, 2000 September 10, 1999
----------------------------- -----------------------------------
Average Average
Units Daily Rate Occupancy Units Daily Rate Occupancy
----- ---------- --------- ----- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Independent Living.......................... 3,980 $ 82.93 94.3% 4,079 $ 79.75 93.5%
Assisted Living............................. 1,623 93.82 87.7 1,524 90.12 81.1
Special Care................................ 256 124.60 91.0 228 123.54 79.7
Healthcare.................................. 1,638 131.38 89.3 1,638 122.33 88.3
------ --------- --------- ------- --------- --------
Combined................................. 7,497 $ 96.90 91.7% 7,469 $ 92.09 89.4%
====== ========= ========= ======= ========= ========
<CAPTION>
Thirty-six Weeks Ended
-----------------------------------------------------------------------
September 8, 2000 September 10, 1999
---------------------------- -----------------------------------
Average Average
Units Daily Rate Occupancy Units Daily Rate Occupancy
----- ---------- --------- ----- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Independent Living.......................... 3,980 $ 82.49 94.4% 4,079 $ 80.06 93.9%
Assisted Living............................. 1,623 93.12 86.7 1,524 90.50 80.2
Special Care................................ 256 124.30 83.7 228 122.73 82.4
Healthcare.................................. 1,638 129.29 89.5 1,638 122.08 88.8
------ --------- --------- ------- --------- --------
Combined................................. 7,497 $ 96.00 91.3% 7,469 $ 92.33 89.6%
====== ========= ========= ======= ========= ========
</TABLE>
-13-
<PAGE>
Operating Profit
The Company's operating profit decreased $3.6 million, or 13.0%, to
$24.3 million for the third quarter of 2000 and increased $2.2 million, or 2.7%,
to $82.3 million year-to-date. Operating profit by segment was as follows:
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
----------------------------------------------------------
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C>
Full-Service Hotel Leasing....................... $ 8,219 $ 12,819 $ 35,675 $ 37,242
Limited-Service Hotel Leasing.................... 2,898 1,809 6,688 5,468
Hotel Ownership.................................. 3,186 3,539 8,525 6,625
Hotel Management................................. 119 - 144 -
Senior Living.................................... 9,829 9,009 30,578 28,889
Other............................................ 61 776 687 1,876
-------- -------- -------- ---------
$ 24,312 $ 27,952 $ 82,297 $ 80,100
======== ======== ======== =========
</TABLE>
Full-Service Hotel Leasing. Operating profit for the Company's leased
hotels decreased $4.6 million, or 36% to $8.2 million for the quarter and
decreased $1.6 million, or 4.2%, to $35.7 million year-to- date. Operating
profit for the third quarter was impacted by the unusually high full-service
REVPAR growth of 8.7% which pressured the Company's full-service hotel leasing
operating profit as the Company's percentage lease expense increased
significantly over the prior year.
Limited-Service Hotel Leasing. Operating profit for the Company's
leased limited-service hotels increased $1.1 million, or 60%, to $2.9 million in
the third quarter. Year-to-date operating profit for the leased limited-service
hotels increased $1.2 million, or 22%, to $6.7 million.
Hotel Ownership. Operating profit for the Company's owned Residence
Inns acquired in the second quarter of 1999 decreased $0.4 million, or 10.0%, to
$3.2 million due to the sale of one hotel in the first quarter of 2000. On a
comparable basis, operating profit remained unchanged from the prior year. Year-
to- date operating profit for owned hotels was $8.5 million.
Hotel Management. The Company's managed hotels contributed $119,000 and
$144,000 of operating profit in the third quarter and year-to-date,
respectively, since their acquisition during the first quarter of 2000. The
operating results for the Company's hotel management business were impacted by
the timing of the revenue recognition of certain base and incentive management
revenue, the amortization expense of the acquisition cost of the management
business, and the costs incurred in establishing the infrastructure of the hotel
management business. The Company recognizes management fee revenue in accordance
with Staff Accounting Bulletin ("SAB") No. 101 which provides that contingent
revenue should be recorded in the period in which the contingency is resolved.
For certain of the Company's management contracts, certain management fees are
earned after specified thresholds for annual operating profit have been
attained. The Company recognizes management fee revenue for these contracts when
thresholds are achieved which usually occurs in the fourth quarter. If the
Company were to accrue these contingent revenues, the Company would have
recorded an additional $88,000 and $393,000 of fee revenue in the third quarter
and year-to-date third quarter, respectively. SAB No. 101 does not have an
impact on the full year operating profit. In addition, the Company recorded
amortization expense of $456,000 in the third quarter and $1,001,000 year-to-
date representing the amortization of the acquisition cost of the hotel
management contracts and leases.
-14-
<PAGE>
Senior Living. Senior living community operating profit increased $0.8
million, or 9.1%, to $9.8 million in the third quarter of 2000 and $1.7 million,
or 5.8%, to $30.6 million year-to-date. The increase in operating profit is
primarily due to increases in residency fees due to the increase in the average
daily rate, as well as the fill-up of expansions opened in 1999.
Corporate Expenses
Corporate expenses remained unchanged at $3.4 million for the third
quarter of 2000 and decreased $0.2 million to $11.8 million year-to-date.
Interest Expense
Interest expense increased $1.2 million to $8.0 million in the third
quarter of 2000 and $4.2 million to $22.6 million year-to-date. The increase in
interest expense is primarily attributable to the additional interest expense on
the mortgage debt assumed from the acquisition of a controlling interest in a
portfolio of Residence Inns, interest expense on the Company's line of credit,
and interest expense on the incremental debt from the refinancing of the
mortgage debt on certain of the senior living communities. Interest expense
includes $1.1 million in both the third quarters of 2000 and 1999, respectively,
and $3.2 million and $3.5 million in the year-to-date third quarter 2000 and
1999, respectively, related to interest on the hotel working capital notes
payable to Host Marriott.
Interest Income
Interest income increased $1.1 million to $1.5 million for the third
quarter of 2000 and increased $1.1 million to $2.9 million year-to-date.
Income Before Extraordinary Item
Income before extraordinary item for the third quarter of 2000 was $8.3
million, or $.51 per diluted share, compared to $10.5 million, or $.51 per
diluted share, for the third quarter of 1999. Year-to-date income before
extraordinary item was $29.4 million, or $1.74 per diluted share, compared to
$29.8 million, or $1.38 per diluted share in 1999. Although the third quarter
income before extraordinary item decreased from the prior year, the diluted
earnings before extraordinary item per share did not change due to the reduction
of the Company's common stock outstanding as a result of the stock repurchases
during 1999 and 2000. The 26% year-to-date increase in diluted earnings before
extraordinary item per share was due to the growth in operating profit discussed
above as well as a reduction of the Company's common stock outstanding due to
the stock repurchases during 1999 and 2000.
EBITDA
The Company's earnings before interest expense, taxes, depreciation and
amortization and other non- cash items ("EBITDA") decreased $0.5 million, or
1.6%, to $28.2 million in the third quarter of 2000 as compared to the third
quarter of 1999. EBITDA increased $8.2 million, or 10%, to $90.4 million
year-to-date.
-15-
<PAGE>
The following is a summary of EBITDA by segment and a reconciliation of
EBITDA to the Company's net income:
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
------------------------------------------------------
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
--------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Full-service hotel leases..................... $ 7,249 $ 11,786 $ 32,744 $ 34,102
Limited-service hotel leases and subleases.... 2,805 1,714 6,406 5,145
Hotel ownership, net of minority distributions 3,604 3,500 9,869 6,915
Hotel management (1).......................... 520 - 1,206 -
Senior living communities..................... 15,481 13,538 47,169 43,628
Corporate and other, net of interest income... (1,507) (1,910) (6,987) (7,620)
--------- --------- --------- ---------
EBITDA................................... $ 28,152 $ 28,628 $ 90,407 $ 82,170
========= ========= ========= =========
EBITDA........................................ $ 28,152 $ 28,628 $ 90,407 $ 82,170
Interest expense.............................. (7,965) (6,775) (22,638) (18,416)
Hotel working capital note interest expense... 1,074 1,128 3,223 3,463
Depreciation and amortization................. (7,225) (5,018) (20,705) (16,524)
Income taxes.................................. (5,762) (7,088) (20,430) (20,511)
Other non-cash charges, net................... 18 (418) (458) (408)
--------- --------- --------- ---------
Income before extraordinary item......... $ 8,292 $ 10,457 $ 29,399 $ 29,774
========= ========= ========= =========
</TABLE>
____________
(1) In accordance with SAB No. 101, the Company does not recognize certain
contingent management fees until specified thresholds for annual operating
profit have been attained. If the Company were to accrue these contingent
revenues, the Company would have recorded an additional $88,000 and
$393,000 of hotel management EBITDA in the third quarter and year- to-date
third quarter, respectively.
The Company's interest coverage was 4.2 times for the third quarter of
2000 compared to 5.0 times for the third quarter of 1999. Year-to-date interest
coverage was 4.7 times in 2000 compared to 5.3 times in 1999. 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 1.1 to 1.0 for both the third
quarter of 2000 and 1999, respectively. The year-to-date ratio of earnings to
fixed charges was 1.1 to 1.0 in both 2000 and 1999, respectively.
EBITDA data is presented because such data is used by certain
investors to determine the Company's ability to meet debt service requirements
and is used in the Company's line of credit as part of the tests determining its
ability to incur debt and meet certain covenants. 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 and because EBITDA can be used
to measure the Company's ability to service debt, fund capital expenditures and
expand its business; however, such information should not be considered as an
alternative to net income, operating profit, cash 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.
CASH FLOWS AND FINANCIAL CONDITION
The Company's principal sources of liquidity are cash on hand, cash
flow from operations and borrowings under the Company's line of credit. As of
September 8, 2000, the Company had cash and cash equivalents of $33.1 million
and restricted cash of $19.0 million, which is included in other assets in the
-16-
<PAGE>
accompanying condensed consolidated financial statements. The Company's
restricted cash consists of funds transferred into segregated escrow accounts
for (i) debt service, fixed asset, real estate tax and insurance reserves
pursuant to the Company's secured debt agreements for certain of the senior
living communities and owned hotels, and (ii) fixed asset reserves pursuant to
the Company's senior living and owned hotel management agreements. As of
September 8, 2000, the outstanding balance under the Company's $100 million line
of credit was $10 million.
Cash from operations was $50.1 million for the thirty-six weeks ended
September 8, 2000 compared to $73.6 million for the thirty-six weeks ended
September 10, 1999. Comparisons to the prior year are significantly impacted by
the timing of the cash flow of the leases with Host Marriott as a result of the
inception of the leases at the beginning of fiscal year 1999. In 1999, the lease
payable to Host Marriott exceeded the rent receivable from the hotel managers by
$23.5 million at September 10, 1999, while there were no receivables or payables
at January 1, 1999 resulting in a $23.5 million increase to cash from operations
in 1999. In 2000, the lease payable to Host Marriott exceeded the rent
receivable from hotel managers by $16.5 million at September 8, 2000 while the
lease payable to Host Marriott exceeded the rent receivable from hotel managers
by $19.1 million at December 31, 1999 resulting in a $2.6 million net decrease
to cash from operations in 2000.
Cash used in investing activities was $35.9 million for the thirty-six
weeks ended September 8, 2000. The cash used in investing activities principally
consists of the acquisition of the management businesses of two hotel management
companies, funding of lease deposits, expansions for one of its senior living
communities and capital expenditures for renewals and replacements for its owned
hotels and senior living communities, partially offset by the sale proceeds of
one of its owned hotels. Cash used in financing activities was $17.8 million for
the thirty-six weeks ended September 8, 2000. The Company's cash used in
financing activities consists primarily of repurchases of the Company's common
stock , net repayments of the Company's line of credit and debt principal
repayments, partially offset by the additional debt proceeds from the
refinancing of a portfolio of senior living communities.
Investing Activities
In February 2000, the Company sold one of its Residence Inns for a net
sales price of $6.2 million.
In February 2000, the Company entered into an agreement to acquire the
205-room Courtyard by Marriott in the Inner Harbor of Baltimore, Maryland for
$21 million upon the completion of construction. The hotel is scheduled to open
in November 2000. The Company will also manage the hotel pursuant to a franchise
agreement with Marriott International.
In March 2000, the Company purchased the hotel management business of
Stormont Trice Management Corporation ("Stormont Trice") for $9.7 million plus a
contingent purchase price of up to an additional $4.5 million if certain
performance criteria are met. Pursuant to the acquisition, the existing
management contracts for nine hotels and four conference centers (including the
Portsmouth Renaissance Hotel and Waterfront Conference Center and Baltimore
Inner Harbor Courtyard currently under construction) and lease agreements for
two hotels were assigned to the Company. The hotels are generally managed under
franchise agreements that were assigned to the Company and are operated under
the Marriott, Renaissance, Hyatt, Courtyard by Marriott and Residence Inn brand
names.
In March 2000, the Company also purchased the hotel management business
of the Durbin Companies ("Durbin") for $4.4 million, plus a contingent purchase
price of $500,000 if one of the leases is renewed under certain conditions.
Pursuant to the acquisition, the existing management contracts for ten
-17-
<PAGE>
hotels and lease agreements for two hotels were assigned to the Company. All of
the hotels are managed under franchise agreements that were assigned to the
Company and are operated under the Marriott, Hilton, Courtyard by Marriott,
Crowne Plaza, Holiday Inn and Ramada brand names.
On June 2, 2000, the Company entered into a letter of intent to form a
joint venture, Bedrock Partners II, to acquire approximately $235 million of
hotels over the next two to three years. Bedrock II plans to acquire
approximately 15 to 18 primarily mid-priced full-service hotels with significant
turnaround potential, perform extensive renovations and reposition and re-brand
the hotels in the upscale hotel segment. The Company will provide approximately
$7.5 million of the equity for Bedrock II. The Citadel Group Realty Group, LLC
will act as exclusive placement agent for Bedrock II to raise an additional $75
million of private equity and Bedrock II intends to raise additional funds
through debt financing. The Company is expected to manage most or all of the
hotels acquired by Bedrock Partners II under long-term management contracts.
On June 9, 2000, the Company entered into an agreement with
Hospitality Properties Trust, Inc. ("HPT") to lease 19 limited-service hotels
under long-term lease agreements. HPT acquired the hotels from Marriott
International, Inc. ("Marriott International"). Marriott International will
continue to manage the hotels under long-term management agreements with the
Company. The hotels are operated under the Courtyard by Marriott, Residence Inn
by Marriott, Springhill Suites by Marriott and TownePlace Suites by Marriott
brand names. Two of the hotels in the portfolio are under construction and are
expected to open in the fourth quarter of 2000. Under the terms of the lease
agreement, the Company made a $9.6 million security deposit, which is included
in other assets on the accompanying condensed consolidated balance sheet, and
will make an additional $6.0 million security deposit for the remaining two
hotels at the inception of those leases.
On August 18, 2000, the Company entered into an agreement with CNL
Hospitality Corporation ("CNL") to lease nine limited-service hotels under long-
term lease agreements. CNL acquired the hotels from Marriott International.
Marriott International will continue to manage the hotels under long-term
management agreements with the Company. The hotels are managed under the
Courtyard by Marriott, Residence Inn by Marriott, Springhill Suites by Marriott
and TownePlace Suites by Marriott brand names. Four of the hotels in the
portfolio are under construction and are expected to open in the fourth quarter
of 2000. Under the terms of the lease agreement, the Company made a $2.6 million
security deposit, which is included in other assets on the accompanying
condensed consolidated balance sheet, and will make an additional $2.4 million
security deposit for the remaining four hotels at the inception of those leases.
On December 17, 1999, President Clinton signed the Work Incentives
Improvement Act of 1999. Included in this legislation are provisions that,
effective January 1, 2001, will allow a real estate investment trust ("REIT") 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. This law will enable
Host Marriott, beginning in 2001, to lease its hotels to a taxable REIT
subsidiary. Under the terms of the Company's full-service hotel leases, Host
Marriott, at its sole discretion, may purchase the Company's full-service hotel
leases for a price equal to the fair value of the Company's interests in the
leases based upon an agreed upon formula in the leases. The Company is currently
in negotiations with Host Marriott for the possible sale of the Company's full-
service hotel leases and anticipates making an announcement in the fourth
quarter on the results of these negotiations.
Financing Activities
Through the third quarter of 2000, the Company repurchased
approximately 1.3 million shares of its common stock for $23.2 million. Since
the inception of the Company's stock repurchase program in 1999, the Company has
repurchased approximately 6.4 million shares of its common stock for $120
million. As of September 8, 2000, the Company has Board of Director
authorization to repurchase approximately 2.1 million additional shares of its
common stock.
-18-
<PAGE>
On June 23, 2000, the Company completed a shareholder-approved 1-for-
100 reverse stock split immediately followed by a 100-for-1 forward stock split
of the Company's common stock. Registered shareholders whose shares of common
stock were converted into less than one share of common stock are entitled to
receive cash payments equal to the fair market value of these fractional
interests. The fair market value was determined to be $19.1375 calculated using
the average closing price of the Company's common stock on the New York Stock
Exchange for the ten trading days immediately before and including June 23,
2000. In connection with the reverse stock split, 292,000 shares of the
Company's common stock were retired in exchange for the right to receive $5.6
million in cash. Transmittal letters were delivered to the registered
shareholders with instructions on how to surrender stock certificates for cash
payment. Through September 8, 2000, $2.0 million has been paid to the former
shareholders that have surrendered their stock certificates for cash payment.
In July 2000, the Company entered into five loan agreements totaling
$92.4 million secured by mortgages on eight senior living communities. The non-
recourse loans bear interest at the 30-day Eurodollar rate plus 275 basis
points. The loans mature in July 2005 and there is no principal amortization
during the term of the loans. The proceeds of the financing were used to repay
the existing loan secured by the communities with a principal balance of $43.5
million, which bore interest at 9.93% and had a scheduled maturity of January 1,
2001. In connection with the prepayment of the existing loan, the Company
recognized an extraordinary gain on the early extinguishment of debt of $428,000
before taxes in the third quarter of 2000. The remaining proceeds of the
financing were used to repay a portion of the outstanding borrowings under the
Company's line of credit.
-19-
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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. However, the
Company does have certain debt obligations that are sensitive to changes in
interest rates. The interest rates, fair values and future maturities associated
with these financial instruments have not changed materially from the amounts
reported in the Company's annual report on Form 10-K for the fiscal year ended
December 31, 1999.
-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 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
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:
27.1 Financial data schedule
b. Reports on Form 8-K:
None.
-21-
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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 23, 2000 By:/s/ Larry K. Harvey
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Date Larry K. Harvey
Senior Vice President, Treasurer and Controller
(Chief Accounting Officer)
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