<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 11, 1998 Commission File No. 1-5664
HOST MARRIOTT CORPORATION
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Delaware 53-0085950
- ------------------------ --------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
Shares outstanding
Class at October 9, 1998
- ----------------- ------------------
Common Stock, $1.00
par value per share 204,744,077
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<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
INDEX
-----
Page No.
--------
Part I. FINANCIAL INFORMATION (Unaudited):
Condensed Consolidated Balance Sheets - 3
September 11, 1998 and January 2, 1998
Condensed Consolidated Statements of Operations - 4
Twelve Weeks and Thirty-six Weeks Ended
September 11, 1998 and September 12, 1997
Condensed Consolidated Statements of Cash Flows - 6
Thirty-six Weeks Ended September 11, 1998 and
September 12, 1997
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Results of 15
Operations and Financial Condition
Part II. OTHER INFORMATION AND SIGNATURE 26
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
September 11, January 2,
1998 1998
------------- -----------
(unaudited)
ASSETS
------
<S> <C> <C>
Property and Equipment, net............................................................ $ 5,937 $ 5,217
Notes and Other Receivables (including amounts due from
affiliates of $4 million and $23 million, respectively).............................. 32 54
Due from Managers...................................................................... 88 93
Investments in Affiliates.............................................................. 18 13
Other Assets........................................................................... 319 284
Short-Term Marketable Securities....................................................... 36 354
Cash and Cash Equivalents.............................................................. 539 511
-------- --------
$ 6,969 $ 6,526
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Debt
Senior Notes Issued by the Company or its Subsidiaries............................... $ 1,747 $ 1,585
Mortgage Debt........................................................................ 2,003 1,979
Other................................................................................ 474 219
-------- --------
4,224 3,783
Accounts Payable and Accrued Expenses.................................................. 70 97
Deferred Income Taxes.................................................................. 526 508
Other Liabilities...................................................................... 447 388
-------- --------
Total Liabilities................................................................. 5,267 4,776
--------- --------
Company-obligated Mandatorily Redeemable Convertible Preferred
Securities of a Subsidiary Trust Whose Assets are the
Convertible Subordinated Debentures Due 2026 ("Convertible Preferred
Securities")......................................................................... 550 550
-------- --------
Shareholders' Equity
Common Stock, 600 million shares authorized; 204.5 million shares
and 203.8 million shares issued and outstanding, respectively...................... 205 204
Additional Paid-in Capital........................................................... 939 937
Retained Earnings.................................................................... 1 49
Accumulated Other Comprehensive Income............................................... 7 10
-------- --------
Total Shareholders' Equity........................................................ 1,152 1,200
-------- --------
$ 6,969 $ 6,526
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve weeks ended September 11, 1998 and September 12, 1997
(unaudited, in millions, except per common share amounts)
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
REVENUES
Hotels............................................................................. $ 270 $ 224
Senior living communities.......................................................... 19 16
Net gains on property transactions................................................. 1 1
Equity in earnings of affiliates................................................... 2 --
Other.............................................................................. 1 5
--------- --------
Total revenues................................................................... 293 246
--------- --------
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees of
$36 million and $33 million in 1998 and 1997, respectively)...................... 159 142
Senior living communities (including Marriott International
management fees of $3 million in 1998 and 1997).................................. 11 9
Other.............................................................................. 4 6
--------- --------
Total operating costs and expenses............................................... 174 157
--------- --------
OPERATING PROFIT....................................................................... 119 89
Minority interest...................................................................... (6) --
Corporate expenses..................................................................... (12) (9)
REIT Conversion expenses............................................................... (8) --
Interest expense....................................................................... (83) (76)
Dividends on Convertible Preferred Securities of a subsidiary trust.................... (9) (9)
Interest income........................................................................ 11 15
--------- --------
INCOME BEFORE INCOME TAXES............................................................. 12 10
Provision for income taxes............................................................. (8) (4)
--------- --------
INCOME BEFORE EXTRAORDINARY ITEM....................................................... 4 6
Extraordinary item - loss on extinguishment of debt (net of income
taxes of $80 million in 1998)....................................................... (148) --
--------- --------
NET INCOME (LOSS)...................................................................... $ (144) $ 6
========= ========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income before extraordinary item....................................................... $ .02 $ .03
Extraordinary item..................................................................... (.73) --
--------- --------
NET INCOME (LOSS)...................................................................... $ (.71) $ .03
========= ========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income before extraordinary item....................................................... $ .02 $ .03
Extraordinary item..................................................................... (.71) --
--------- --------
NET INCOME (LOSS)...................................................................... $ (.69) $ .03
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 4 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Thirty-six weeks ended September 11, 1998 and September 12, 1997
(unaudited, in millions, except per common share amounts)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
REVENUES
Hotels............................................................................. $ 922 $ 736
Senior living communities.......................................................... 58 16
Net gains (losses) on property transactions........................................ 53 3
Equity in earnings of affiliates................................................... 1 3
Other.............................................................................. 6 10
--------- --------
Total revenues................................................................... 1,040 768
--------- --------
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees of
$138 million and $111 million in 1998 and 1997, respectively).................... 502 433
Senior living communities (including Marriott International management fees
of $9 million and $3 million in 1998 and
1997, respectively).............................................................. 31 9
Other.............................................................................. 14 22
--------- --------
Total operating costs and expenses............................................... 547 464
--------- --------
OPERATING PROFIT....................................................................... 493 304
Minority interest...................................................................... (36) (24)
Corporate expenses..................................................................... (33) (27)
REIT Conversion expenses............................................................... (14) --
Interest expense....................................................................... (245) (198)
Dividends on Convertible Preferred Securities of a subsidiary trust.................... (26) (26)
Interest income........................................................................ 36 37
--------- --------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM...................................... 175 66
Provision for income taxes............................................................. (75) (28)
--------- --------
INCOME BEFORE EXTRAORDINARY ITEM....................................................... 100 38
Extraordinary item - gain (loss) on extinguishment of debt
(net of income taxes of $80 million in 1998 and $3 million in 1997).................. (148) 5
--------- --------
NET INCOME (LOSS)...................................................................... $ (48) $ 43
========= ========
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Income before extraordinary item....................................................... $ .49 $ .19
Extraordinary item..................................................................... (.73) .02
--------- --------
NET INCOME (LOSS)...................................................................... $ (.24) $ .21
========= ========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Income before extraordinary item....................................................... $ .48 $ .19
Extraordinary item..................................................................... (.71) .02
--------- --------
NET INCOME (LOSS)...................................................................... $ (.23) $ .21
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 5 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-six weeks ended September 11, 1998 and September 12, 1997
(unaudited, in millions)
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Income before extraordinary item....................................................... $ 100 $ 38
Adjustments to reconcile to cash from continuing operations:
Depreciation and amortization...................................................... 184 158
Income taxes....................................................................... 50 --
Gains on sales of hotel properties................................................. (50) --
Equity in (earnings) losses of affiliates.............................................. -- (3)
Changes in operating accounts.......................................................... (33) 78
Other.................................................................................. 27 42
-------- ---------
Cash from operations................................................................... 278 313
-------- ---------
INVESTING ACTIVITIES
Proceeds from sales of assets.......................................................... 211 35
Acquisitions........................................................................... (636) (441)
Capital expenditures:
Renewals and replacements.......................................................... (113) (86)
New development projects........................................................... (36) --
New investment capital expenditures................................................ (19) (22)
Purchases of short-term marketable securities.......................................... (134) --
Sales of short-term marketable securities.............................................. 451 --
Note receivable collections............................................................ 3 5
Affiliate collections, net............................................................. 13 --
Other.................................................................................. (13) 12
-------- ---------
Cash used in investing activities.................................................. (273) (497)
-------- ---------
FINANCING ACTIVITIES
Issuances of debt, net of related expenses............................................. 2,004 682
Issuances of common stock.............................................................. 2 4
Scheduled principal repayments......................................................... (42) (77)
Debt prepayments ...................................................................... (1,750) (241)
Costs of extinguishment of debt........................................................ (175) --
Other.................................................................................. (16) 23
-------- ---------
Cash used in financing activities.................................................. 23 391
-------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS.................................................. $ 28 $ 207
======== =========
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or purchase of
controlling interests in, certain hotel properties and senior living
communities...................................................................... $ 164 $ 585
======== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 6 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed consolidated financial statements of Host
Marriott Corporation and subsidiaries (the "Company" or "Host Marriott")
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
2, 1998.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to
present fairly the financial position of the Company as of September 11,
1998 and January 2, 1998, and the results of operations for the twelve and
thirty-six weeks ended September 11, 1998 and September 12, 1997 and cash
flows for the thirty-six weeks ended September 11, 1998 and September 12,
1997. Interim results are not necessarily indicative of fiscal year
performance because of the impact of seasonal and short-term variations.
2. In April 1998, the Company reached a definitive agreement with various
affiliates of The Blackstone Group and Blackstone Real Estate Partners
(collectively, "Blackstone") to acquire controlling interests in 12 luxury
hotels and a first mortgage interest in another hotel in the United States
and certain other assets. The Company expects to pay approximately $862
million in cash and assumed debt and to issue approximately 43.7 million
operating partnership units ("OP Units") of the new operating partnership
(the "Operating Partnership") (based upon a negotiated value of $20.00 per
OP Unit) and distribute up to 18% of the shares of Crestline (defined
below), to be formed as part of the Company's reorganization, described
below. Each OP Unit will be exchangeable for one share of Host Marriott
common stock (or its cash equivalent). Upon completion of the acquisition,
Blackstone will own approximately 16% of the outstanding shares of Host
Marriott common stock on a fully converted basis. The Blackstone portfolio
consists of two Ritz-Carlton, two Four Seasons, one Grand Hyatt, three
Hyatt Regency and four Swissotel properties, and a mortgage on a third Four
Seasons property.
The Blackstone transaction is expected to close immediately after the REIT
Conversion, as described below. At that time, Blackstone's hotels and other
assets will be contributed into the Operating Partnership, and the hotels
leased to subsidiaries of Crestline (defined below). The hotels will
continue to be managed on behalf of the lessees under the existing
management contracts. Consummation of the Blackstone transaction is also
subject to certain conditions, including consummation of the REIT
Conversion no later than March 31, 1999 and Host Marriott qualifying as a
REIT for 1999.
3. The Company's board of directors (the "Board") has authorized the Company
to restructure its business operations to qualify as a real estate
investment trust ("REIT"), currently expected to be effective as of January
1, 1999, and to spin-off its senior living communities business (Crestline
Capital Corporation, "Crestline") through a taxable stock dividend to its
shareholders (collectively, the "REIT Conversion"). After the REIT
Conversion, which is subject to shareholder and final Board approval, the
Company intends to operate as an "UPREIT," with substantially all of its
assets and operations conducted through the newly formed Operating
Partnership of which Host Marriott will be the general partner.
Host Marriott will distribute shares in Crestline to its shareholders at
the time of the REIT Conversion and Host Marriott expects to make a cash
distribution at that time. The aggregate value of the Crestline capital
stock and the cash to be distributed to shareholders and Blackstone, if the
Blackstone acquisition is consummated and which is expected to be treated
as a taxable dividend, is currently estimated to be approximately $525
million to $625 million. The actual amount of the distribution will be
based, in part, upon the estimated amount of accumulated earnings and
profits of Host Marriott as of the last day of its taxable year in which
the REIT Conversion is consummated. To the extent that the distributions
made are not sufficient to eliminate Host Marriott's accumulated earnings
and profits, one or more
- 7 -
<PAGE>
additional taxable distributions will be made prior to the last day of the
first full taxable year as a REIT (currently expected to be December 31,
1999). The distribution satisfies the requirement that a "C" corporation
converting to a REIT distribute all of its accumulated earnings and profits
at the time of conversion to a REIT. Crestline is expected to own Host
Marriott's portfolio of senior living properties. This portfolio currently
consists of 31 retirement communities, totaling 7,259 units in 13 states.
The communities will continue to be managed by Marriott International. In
addition, Crestline will lease substantially all of the hotels currently
owned by the Operating Partnership. Crestline will operate independently of
Host Marriott.
Following the REIT Conversion, Host Marriott will own OP Units equal to the
number of outstanding shares of Host Marriott common stock at the time of
the REIT Conversion. The UPREIT structure will not affect the ownership by
shareholders of their existing Host Marriott shares.
As part of the REIT Conversion, the Company filed a Prospectus/Consent
Solicitation with the Securities and Exchange Commission. This
Prospectus/Consent Solicitation Statement describes a proposal whereby the
Operating Partnership will acquire by merger (the "Mergers") eight limited
partnerships (the "Partnerships") that own full-service hotels in which the
Company or its subsidiaries are general partners. As more fully described
in the Prospectus/Consent Solicitation Statement, limited partners of those
Partnerships that participate in the Mergers will receive either OP Units
or, at their election, unsecured notes due December 15, 2005 issued by the
Operating Partnership ("Notes") or common stock in the REIT, in exchange
for their partnership interests in such Partnerships. The
Prospectus/Consent Solicitation period expires on December 12, 1998, unless
extended.
The REIT expects to qualify as a real estate investment trust under federal
income tax law, beginning January 1, 1999. However, consummation of the
REIT Conversion is subject to significant contingencies that are outside
the control of the Company, including final Board approval, consent of
shareholders, partners, bondholders, lenders, and ground lessors of Host
Marriott, its affiliates and other third parties. Accordingly, there can be
no assurance that the REIT Conversion will be completed or that it will be
effective as of January 1, 1999. If the REIT Conversion is not completed on
January 1, 1999, the effectiveness of REIT election could be delayed until
January 1, 2000, which would result in the Company continuing to pay a
substantial amount of corporate-level income taxes in 1999.
On April 20, 1998, the Company and certain of its subsidiaries filed a
shelf registration on Form S-3 (the "Shelf Registration") with the
Securities and Exchange Commission for the issuance of up to $2.5 billion
in securities, which may include debt, equity or a combination thereof. The
Company utilized $1.7 billion of the capacity under this Shelf Registration
to issue the New Senior Notes (defined below) and anticipates that any net
proceeds from the sale of additional offered securities will be used for
refinancing of the Company's indebtedness, acquisitions and general
corporate purposes.
HMH Properties, Inc. ("HMH Properties") an indirect wholly owned subsidiary
of the Company, which currently owns 72 of Host Marriott's hotels, utilized
the Shelf Registration to issue an aggregate of $1.7 billion in new senior
notes (the "New Senior Notes"). The New Senior Notes were issued in two
series, $500 million of 7 7/8% Series A notes due in 2005 and $1.2 billion
of 7 7/8% Series B notes due in 2008. Approximately $21 million of the Old
Senior Notes remain outstanding. The 1998 Consent Solicitations facilitated
the merger of HMC Capital Resources Holdings Corporation ("Capital
Resources"), a wholly owned subsidiary of the Company, with and into HMH
Properties. Capital Resources, the then owner of eight of Host Marriott's
hotel properties, was the obligor under the $500 million revolving credit
facility (the "Old Credit Facility").
In conjunction with the issuance of the New Senior Notes, HMH Properties
entered into a $1.25 billion credit facility (the "New Credit Facility")
with a group of commercial banks. The New Credit Facility has an initial
three-year term with two one-year extension options. Borrowings under the
New Credit Facility generally bear interest at the Eurodollar rate plus
1.75% (7.5% at September 11, 1998). The interest rate and commitment fee
(0.35% at September 11, 1998) on the unused portion of the New Credit
Facility fluctuate based on certain financial ratios. The New Senior Notes
and the New Credit Facility are guaranteed by the Company and its wholly
owned subsidiary, Host Marriott Hospitality, Inc., and certain subsidiaries
of HMH Properties and are secured by pledges of equity interests in certain
- 8 -
<PAGE>
subsidiaries of HMH Properties. The New Senior Notes and the New Credit
Facility will be assumed by the Operating Partnership in connection with
the REIT Conversion and the guarantee of the Company is expected to
terminate upon consumation of the REIT Conversion. As of September 11,
1998, $350 million was outstanding under the New Credit Facility.
The New Credit Facility and the indenture under which the New Senior Notes
were issued contain covenants restricting the ability of HMH Properties and
certain of its subsidiaries to incur indebtedness, grant liens on their
assets, acquire or sell assets or make investments in other entities, and
make certain distributions to equityholders of HMH Properties, the Company,
and (following the REIT Conversion) the Operating Partnership and Host
REIT. The New Credit Facility and the New Senior Notes also contain certain
financial covenants relating to, among other things, maintaining certain
levels of tangible net worth and certain ratios of EBITDA to interest and
fixed charges, total debt to EBITDA, unencumbered assets to unsecured debt,
and secured debt to total debt.
On August 5, 1998, simultaneously with the issuance of the New Senior Notes
and the New Credit Facility, HMH Properties, Inc. purchased substantially
all of its (i) $600 million in 9 1/2% senior notes due 2005, (ii) $350
million in 9% senior notes due 2007 and (iii) $600 million in 8 7/8% senior
notes due 2007 (collectively, the "Old Senior Notes"). Concurrently with
each offer to purchase, HMH Properties successfully solicited consents (the
"1998 Consent Solicitations") from registered holders of the Old Senior
Notes to certain amendments to eliminate or modify substantially all of the
restrictive covenants and certain other provisions contained in the
indentures pursuant to which the Old Senior Notes were issued.
The net proceeds from the offering and borrowings under the New Credit
Facility were used by Host Marriott to purchase substantially all of the
Old Senior Notes, to repay amounts outstanding under the Old Credit
Facility and to make bond premium and consent payments totaling $175
million. These costs, along with the write-off of deferred financing fees
of approximately $52 million related to the Old Senior Notes and the Old
Credit Facility, were recorded as a pre-tax extraordinary loss on the
extinguishment of debt in the third quarter of 1998.
On September 30, 1998, the Company filed a preliminary Proxy
Statement/Prospectus with the Securities and Exchange Commission. The Proxy
Statement/Prospectus describes the proposed merger by and among Host
Marriott, HMC Merger Corporation ("Host REIT") and Host Marriott, L.P., a
recently formed limited partnership, pursuant to the REIT Conversion. The
Prospectus proposes the restructuring of Host Marriott by contribution of
its wholly owned full-service hotels and its interests in certain hotel
partnerships and other assets to the Operating Partnership and
reincorporation of Host Marriott with and into Host REIT. As a result of
the restructuring, shares of Host Marriott common stock will be converted
to shares of Host REIT common stock.
4. Revenues primarily represent house profit from the Company's hotel
properties and senior living communities, net gains (losses) on property
transactions and equity in earnings (losses) of affiliates. House profit
reflects the net revenues flowing to the Company as property owner and
represents gross hotel and senior living communities' operating revenues,
less all gross property-level expenses, excluding depreciation, management
fees, real and personal property taxes, ground and equipment rent,
insurance and certain other costs, which are classified as operating costs
and expenses.
- 9 -
<PAGE>
House profit generated by the Company's hotels for 1998 and 1997 consists
of:
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
-------------------------------- --------------------------------
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
------------- ------------- ------------ -------------
(in millions)
<S> <C> <C> <C> <C>
Sales
Rooms ............................................... $ 494 $ 415 $1,514 $1,246
Food & Beverage ..................................... 198 154 642 500
Other ............................................... 49 40 159 120
------ ------ ------ ------
Total Hotel Sales ................................. 741 609 2,315 1,866
------ ------ ------ ------
Department Costs
Rooms ............................................... 121 98 348 285
Food & Beverage ..................................... 156 126 477 381
Other ............................................... 25 23 80 63
------ ------ ------ ------
Total Department Costs ............................ 302 247 905 729
------ ------ ------ ------
Department Profit ...................................... 439 362 1,410 1,137
Other Deductions ....................................... 169 138 488 401
------ ------ ------ ------
House Profit ...................................... $ 270 $ 224 $ 922 $ 736
====== ====== ====== ======
</TABLE>
House profit generated by the Company's senior living communities for 1998
consists of (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
-------------------------------- -------------------------------
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
------------- ------------- ------------- -------------
(in millions)
<S> <C> <C> <C> <C>
Sales .............................................. $ 56 $ 47 $166 $ 47
Department Costs ................................... 37 31 108 31
---- ---- ---- ----
House Profit ................................. $ 19 $ 16 $ 58 $ 16
==== ==== ==== ====
</TABLE>
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity
in its financial statements. The Company has considered the impact of EITF
97-2 on its financial statements and has determined that EITF 97-2 requires
the Company to include property-level sales and operating expenses of its
hotels and senior living communities in its statements of operations. The
Company will adopt EITF 97-2 in the fourth quarter of 1998 with retroactive
effect in prior periods to conform to the new presentation. Application of
EITF 97-2 to the consolidated financial statements for the twelve weeks
ended September 11, 1998 and September 12, 1997 would have increased both
revenues and operating expenses by approximately $508 million and $416
million and $1,501 million and $1,161 million for the thirty-six weeks then
ended, respectively, and would have had no impact on operating profit, net
income or earnings per share.
5. 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 plus dividends
by the weighted average number of shares of common stock outstanding plus
other potentially dilutive securities. Diluted earnings per common share
was not adjusted for the impact of the Convertible Preferred Securities as
they were anti-dilutive for all periods presented.
- 10 -
<PAGE>
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 11, September 12, September 11, September 12,
1998 1997 1998 1997
------------- ------------- ------------- -------------
(in millions)
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding................................ 204.4 203.1 204.1 202.8
Assuming distribution of common shares
granted under the comprehensive stock
plan, less shares assumed purchased at
average market price.............................. 3.9 4.6 4.2 4.8
Assuming distribution of common shares upon
redemption of Convertible Preferred Securities.... -- -- -- --
Assuming distribution of common shares
issuable for warrants, less shares assumed
purchased at average market price................. .1 .3 .1 .2
------ ------ ----- -----
Shares utilized for the calculation of diluted
earnings per share............................ 208.4 208.0 208.4 207.8
====== ====== ===== =====
</TABLE>
6. As of September 11, 1998, the Company had minority interests in 18
affiliates that own an aggregate of 240 properties, 20 of which are
full-service properties, managed primarily by Marriott International, Inc.
The Company's equity in earnings of affiliates was $2 million and $1
million for the twelve weeks and thirty-six weeks ended September 11, 1998,
respectively. For the twelve weeks ended September 12, 1997, the Company's
equity in earnings of affiliates was not significant. The Company's equity
in earnings of affiliates was $3 million for the thirty-six weeks ended
September 12, 1997.
Combined summarized operating results reported by affiliates follows:
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
------------------------------ ------------------------------
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
------------- ------------- ------------ -------------
(in millions)
<S> <C> <C> <C> <C>
Revenues............................................ $ 114 $ 144 $ 369 $ 447
Operating expenses:
Cash charges (including interest)................ (71) (93) (223) (278)
Depreciation and other non-cash charges.......... (32) (45) (101) (140)
--------- -------- ------- -------
Income before extraordinary item.................... 11 6 45 29
Extraordinary item - forgiveness of debt............ -- -- 4 12
--------- -------- ------- -------
Net income..................................... $ 11 $ 6 $ 49 $ 41
========= ======== ======= =======
</TABLE>
In the first quarter of 1998, the Company obtained a controlling interest
in the partnership that owns the 1,671-room Atlanta Marriott Marquis for
approximately $239 million, including $164 million in assumed mortgage
debt. The Company previously owned a 1.3% general and limited partnership
interest.
In the second quarter of 1998, the Company acquired the partnership that
owns the 289-room Park Ridge Marriott in Park Ridge, New Jersey for $24
million. The Company previously owned a 1% managing general partner
interest and held a note receivable interest of approximately $5 million.
7. In the first quarter of 1998, the Company acquired a controlling interest
in, and became the managing general partner for, the partnership that owns
the 359-room Albany Marriott, the 350-room San Diego Marriott Mission
Valley and the 320-room Minneapolis Marriott Southwest for approximately
$50 million. Also, during the first quarter of 1998, the Company acquired
the Gables at Winchester in suburban Boston, a 124-unit senior living
community, for $21 million and entered into conditional purchase agreements
to acquire two Marriott Brighton Gardens assisted living communities in
Denver
- 11 -
<PAGE>
and Colorado Springs, Colorado, for $35 million in 1999 after the
anticipated completion of construction, if they achieve certain operating
performance criteria. All three of these communities will be operated by
Marriott Senior Living Services, Inc. ("MSLS") under long-term operating
agreements.
In the second quarter of 1998, the Company sold the 662-room New York
Marriott East Side for approximately $191 million and recorded a pre-tax
gain of approximately $40 million. The Company also sold the 191-room Napa
Valley Marriott for approximately $21 million and recorded a pre-tax gain
of approximately $10 million. Also, during the second quarter of 1998, the
Company acquired the 397- room Ritz-Carlton, Tysons Corner for
approximately $96 million and the 281-room Ritz-Carlton, Phoenix for
approximately $75 million. In addition, the Company acquired the 487-room
Torrance Marriott near Los Angeles, California for approximately $52
million.
During the third quarter of 1998, the Company acquired the 308-room
Ritz-Carlton, Dearborn, Michigan for approximately $65 million, the
336-room Ritz-Carlton, San Francisco for approximately $161 million and the
404-room Memphis Marriott (which was converted to the Marriott brand upon
acquisition) for approximately $16 million.
8. In March 1997, the Company purchased 100% of the outstanding bonds secured
by a first mortgage on the San Francisco Marriott. The Company purchased
the bonds for $219 million, an $11 million discount to the face value of
$230 million. In connection with the redemption and defeasance of the
bonds, the Company recognized an extraordinary gain of $5 million, which
represents the $11 million discount and the write-off of deferred financing
fees, net of taxes.
9. The Company operates in two business segments in the lodging industry:
hotels and senior living communities. The Company's hotels are primarily
operated under the Marriott or Ritz-Carlton 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 is
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>
Thirty-six Weeks Ended September 11, 1998
-------------------------------------------------------
Hotels Senior Living Corporate & Other Consolidated
------ ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues.................................. $ 922 $ 58 $ 60 $ 1,040
Operating profit.......................... 420 27 46 493
Interest income........................... 35 1 -- 36
Interest expense.......................... (228) (14) (3) (245)
Other..................................... (36) -- (73) (109)
Income (loss) before income taxes......... 191 14 (30) 175
<CAPTION>
Thirty-six Weeks Ended September 12, 1997
-------------------------------------------------------
Hotels Senior Living Corporate & Other Consolidated
------ ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues.................................. $ 736 $ 16 $ 16 $ 768
Operating profit (loss)................... 303 7 (6) 304
Interest income........................... 25 1 11 37
Interest expense.......................... (186) (7) (5) (198)
Other..................................... (24) -- (53) (77)
Income (loss) before income taxes......... 118 1 (53) 66
</TABLE>
- 12 -
<PAGE>
<TABLE>
<CAPTION>
Twelve Weeks Ended September 11, 1998
-------------------------------------------------------
Hotels Senior Living Corporate & Other Consolidated
------ ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues.................................. $ 270 $ 19 $ 4 $ 293
Operating profit.......................... 111 8 -- 119
Interest income........................... 11 -- -- 11
Interest expense.......................... (78) (4) (1) (83)
Other..................................... (6) -- (29) (35)
Income before income taxes................ 38 4 (30) 12
<CAPTION>
Twelve Weeks Ended September 12, 1997
-------------------------------------------------------
Hotels Senior Living Corporate & Other Consolidated
------ ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues.................................. $ 224 $ 16 $ 6 $ 246
Operating profit.......................... 82 7 -- 89
Interest income........................... 9 1 5 15
Interest expense.......................... (67) (7) (2) (76)
Other..................................... -- -- (18) (18)
Income (loss) before income taxes......... 24 1 (15) 10
</TABLE>
As of September 11, 1998 and September 12, 1997, the Company's foreign
operations consist of four full-service hotel properties located in Canada
and two full-service hotel properties located in Mexico. There were no
intercompany sales between the properties and the Company. The following
table presents revenues for each of the geographical areas in which the
Company operates (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
---------------------------------- ---------------------------------
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
United States ............................. $ 281 $ 235 $1,009 $ 743
International ............................. 12 11 31 25
------ ------ ------ ------
Total ............................... $ 293 $ 246 $1,040 $ 768
====== ====== ====== ======
</TABLE>
10. In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," ("SFAS 130"). SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in
financial statements. The objective of SFAS 130 is to report a measure of
all changes in equity of an enterprise that result from transactions and
other economic events of the period other than transactions with owners.
Comprehensive income is the total of net income and all other nonowner
changes in equity.
The Company's only component of other comprehensive income is the right to
receive up to 1.4 million shares of Host Marriott Services Corporation's
("HMSC") common stock or an equivalent cash value subsequent to exercise of
the options held by certain former and current employees of Marriott
International. For the twelve and thirty-six weeks ended September 11,
1998, the other comprehensive loss was $4 million and $3 million,
respectively. For the twelve and thirty-six weeks ended September 11, 1998,
the comprehensive loss was $148 million and $51 million, respectively. For
the twelve and thirty-six weeks ended September 12, 1997, other
comprehensive income was $5 million and $8 million, respectively. For the
twelve and thirty-six weeks ended September 12, 1997, comprehensive income
was $11 million and $51 million, respectively. As of September 11, 1998 and
January 2, 1998, the Company's accumulated other comprehensive income was
approximately $7 million and $10 million, respectively.
11. In the second quarter of 1998, the Company prepaid $92 million of 9%
unsecured debt provided by Marriott International related to the Company's
senior living communities.
12. In December 1996, Host Marriott Financial Trust (the "Issuer"), a
wholly-owned subsidiary trust of the Company, issued 11 million shares of 6
3/4% convertible quarterly income preferred securities (the "Convertible
Preferred Securities"), with a liquidation preference of $50 per share (for
a total
- 13 -
<PAGE>
liquidation amount of $550 million). The Convertible Preferred Securities
represent an undivided beneficial interest in the assets of the Issuer. The
payment of distributions out of moneys held by the Issuer and payments on
liquidation of the Issuer or the redemption of the Convertible Preferred
Securities are guaranteed by the Company to the extent the Issuer has funds
available therefor. This guarantee, when taken together with the Company's
obligations under the indenture pursuant to which the Debentures were
issued, the Debentures, the Company's obligations under the Trust Agreement
and its obligations under the indenture to pay costs, expenses, debts and
liabilities of the Issuer (other than with respect to the Convertible
Preferred Securities) provides a full and unconditional guarantee of
amounts due on the Convertible Preferred Securities. Proceeds from the
issuance of the Convertible Preferred Securities were invested in 6 3/4%
Convertible Subordinated Debentures (the "Debentures") due December 2, 2026
issued by the Company. The Issuer exists solely to issue the Convertible
Preferred Securities and its own common securities (the "Common
Securities") and invest the proceeds therefrom in the Debentures, which is
its sole asset. Separate financial statements of the Issuer are not
presented because of the Company's guarantee described above; the Company's
management has concluded that such financial statements are not material to
investors and the Issuer is wholly-owned and essentially has no independent
operations.
Each of the Convertible Preferred Securities is convertible at the option
of the holder into shares of Company common stock at the rate of 2.6876
shares per Convertible Preferred Security (equivalent to a conversion price
of $18.604 per share of Company common stock). The Debentures are
convertible at the option of the holders into shares of Company common
stock at a conversion rate of 2.6876 shares for each $50 in principal
amount of Debentures. The Issuer will only convert Debentures pursuant to a
notice of conversion by a holder of Convertible Preferred Securities.
Holders of the Convertible Preferred Securities are entitled to receive
preferential cumulative cash distributions at an annual rate of 6 3/4%
accruing from the original issue date, commencing March 1, 1997, and
payable quarterly in arrears thereafter. The distribution rate and the
distribution and other payment dates for the Convertible Preferred
Securities will correspond to the interest rate and interest and other
payment dates on the Debentures. The Company may defer interest payments on
the Debentures for a period not to exceed 20 consecutive quarters. If
interest payments on the Debentures are deferred, so too are payments on
the Convertible Preferred Securities. Under this circumstance, the Company
will not be permitted to declare or pay any cash distributions with respect
to its capital stock or debt securities that rank pari passu with or junior
to the Debentures.
Subject to certain restrictions, the Convertible Preferred Securities are
redeemable at the Issuer's option upon any redemption by the Company of the
Debentures after December 2, 1999. Upon repayment at maturity or as a
result of the acceleration of the Debentures upon the occurrence of a
default, the Debentures shall be subject to mandatory redemption, from
which the proceeds will be applied to redeem Convertible Preferred
Securities and Common Securities, together with accrued and unpaid
distributions.
- 14 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Forward-looking Statements
- --------------------------
Certain matters discussed in this Form 10-Q include forward-looking statements
including, without limitation, statements related to the proposed REIT
conversion, the terms, structure and timing thereof, and the expected effects of
the proposed REIT conversion and the Blackstone portfolio acquisition on FFO,
EBITDA, and business and operating strategies in the future. All forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual transactions, results, performance or achievements to
be materially different from any future transactions, results, performance or
achievements expressed or implied by such forward-looking statements. Certain of
the transactions described herein are subject to certain consents of
shareholders, lenders, debtholders and partners of Host Marriott and its
affiliates and of other third parties and various other conditions and
contingencies, and future results, performance and achievements will be affected
by general economic, business and financing conditions, competition and
governmental actions. The cautionary statements set forth in reports filed under
the Securities Act of 1934 contain important factors with respect to such
forward-looking statements, including the following factors that could affect
such forward-looking statements: (i) national and local economic and business
conditions that will, among other things, affect demand for hotels and other
properties, the level of rates and occupancy that can be achieved by such
properties and the availability and terms of financing; (ii) the ability to
maintain the properties in a first-class manner; (iii) the ability to compete
effectively; (iv) the ability to acquire or develop additional properties and
the risk that potential acquisitions or developments may not perform in
accordance with expectations; (v) the ability to obtain required consents of
shareholders, lenders, debtholders, partners and ground lessors in connection
with the Company's proposed conversion to a real estate investment trust (REIT)
and to consummate all of the transactions constituting the REIT conversion; (vi)
changes in travel patterns, taxes and government regulations; (vii) governmental
approvals, actions and initiatives; (viii) the effects of tax legislative
action; and (ix) the timing of the Company's election to be taxed as a REIT and
the ability to satisfy complex rules in order to qualify for taxation as a REIT
for federal income tax purposes and to operate effectively within the
limitations imposed by these rules. Although the Company believes the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, they can give no assurance that their 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. Revenues primarily represent house profit from the Company's hotel
properties and senior living communities, net gains (losses) on property
transactions and equity in earnings (losses) of affiliates. Revenues increased
$47 million, or 19%, to $293 million for the third quarter of 1998 from $246
million for the third quarter of 1997. Year-to-date revenues rose $272 million,
or 35%, to $1,040 million. The Company's revenue and operating profit were
impacted by:
. improved lodging results for comparable full-service hotel properties;
. the addition of 18 full-service hotel properties during 1997 and 11
full-service properties during the first three quarters of 1998;
. the addition of 30 senior living communities in 1997 and one senior living
community in the first three quarters of 1998; and
. the gain on the sales of two hotel properties in the second quarter of
1998.
Hotel revenues increased $46 million, or 21%, to $270 million in the third
quarter of 1998 and $186 million, or 25%, to $922 million for year-to-date 1998
due to growth in room revenues generated per available room
- 15 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
("REVPAR") and the addition of 29 full-service properties acquired in 1997 and
through the first three quarters of 1998.
Hotel sales (gross hotel sales, including room sales, food and beverage sales,
and other ancillary sales such as telephone sales) increased $132 million, or
22%, to $741 million in the third quarter of 1998 and $449 million, or 24%, to
over $2.3 billion year-to-date, reflecting the REVPAR increases for comparable
units and the addition of full-service properties in 1997 and 1998. Improved
results for the Company's full-service hotels were driven by strong increases in
REVPAR for comparable units of 7.2% to $106.65 for the 1998 third quarter and
7.9% to $113.27 year-to-date. Results were further enhanced by a one percentage
point increase in the house profit margin for comparable full-service properties
for the quarter and year-to-date. On a comparable basis for the Company's
full-service hotel properties, average room rates increased over 6% for the 1998
third quarter and nearly 8% year-to-date, while average occupancy increased over
one-half percentage point for the 1998 third quarter, with no change in
occupancy year-to-date.
Revenues generated from the Company's 31 senior living communities totaled $19
million for the 1998 third quarter and $58 million year-to-date, compared to $16
million for the 1997 third quarter and year-to-date (as the assets were
purchased in the third quarter of 1997). During the third quarter of 1998,
average occupancy of the communities was over 92% and the average per diem rate
was $88.78, which resulted in revenue per available unit ("REVPAU") of $81.86
compared to REVPAU of $76.24 in the third quarter of 1997. On a year-to-date
basis, average occupancy was nearly 92% and the average per diem rate was
$88.19, which resulted in REVPAU of $81.05. Senior living communities' sales
totaled $56 million for the third quarter of 1998 and $166 million for
year-to-date 1998.
Revenues were also impacted by the gains on the sales of two hotel properties.
The New York East Side Marriott was sold for $191 million resulting in a pre-tax
gain of approximately $40 million. The Napa Valley Marriott was sold for $21
million resulting in a pre-tax gain of approximately $10 million.
Operating Costs and Expenses. Operating costs and expenses principally consist
of depreciation, management fees, real and personal property taxes, ground,
building and equipment rent, insurance and certain other costs. Operating costs
and expenses increased $17 million to $174 million in the third quarter of 1998
from $157 million in the third quarter of 1997, primarily representing increased
hotel and senior living communities operating costs. Year-to-date operating
costs and expenses increased $83 million to $547 million. Hotel operating costs
increased $17 million to $159 million for the third quarter of 1998 and $69
million to $502 million year-to-date, primarily due to the addition of 29
full-service hotel properties during 1997 and through the first three quarters
of 1998 and increased management fees and rentals tied to improved property
results. As a percentage of hotel revenues, hotel operating costs and expenses
decreased to 59% and 54% of revenues in the third quarter of 1998 and
year-to-date, respectively, from 63% and 59% of revenues in the third quarter of
1997 and year-to-date 1997, respectively, due to the significant increases in
REVPAR discussed above, as well as the operating leverage as a result of a
significant portion of the Company's hotel operating costs and expenses being
fixed. The Company's senior living communities' operating costs and expenses
were $11 million for the third quarter of 1998 and $31 million for year-to-date
1998, compared to $9 million for the third quarter of 1997 and year-to-date
1997. As the senior living communities were purchased at the beginning of the
1997 third quarter, year-to-date operating costs and expenses are not
comparable.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, the Company's operating profit increased $30 million,
or 34%, to $119 million for the third quarter of 1998 and $189 million, or 62%,
to $493 million year-to-date. Hotel operating profit increased $29 million, or
35%, to $111 million, or 41% of hotel revenues, for the third quarter of 1998
from $82 million, or 37% of hotel revenues, for the third quarter of 1997.
Year-to-date hotel operating profit increased $117 million, or
- 16 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
39%, to $420 million, or 46% of hotel revenues, for 1998 compared to $303
million, or 41% of hotel revenues, for 1997. Specifically, hotels in New York
City, San Francisco, Toronto and Atlanta reported significant improvements for
the 1998 third quarter over the third quarter of 1997.
The Company's senior living communities generated $8 million of operating profit
for the third quarter of 1998 and $27 million of operating profit for
year-to-date 1998, compared to $7 million for the third quarter of 1997 and
year-to-date 1997.
Minority Interest. Minority interest expense increased $6 million to $6 million
for the third quarter of 1998 and $12 million to $36 million for year-to-date
1998, primarily reflecting the impact of the consolidation of affiliated
partnerships and the acquisition of controlling interests in newly-formed
partnerships during 1997 and 1998.
Corporate Expenses. Corporate expenses increased $3 million to $12 million for
the 1998 third quarter and increased $6 million to $33 million for year-to-date
1998. As a percentage of revenues, corporate expenses remained at 4% of revenues
for the third quarter of 1998 and decreased to 3% of revenues for year-to-date
1998 from 4% of revenues for year-to-date 1997, reflecting the Company's efforts
to control its corporate expenses in spite of the substantial growth in
revenues.
REIT Conversion Expenses. REIT Conversion expenses reflect the professional fees
and other expenses associated with the Company's conversion to a REIT.
Interest Expense. Interest expense increased 9% to $83 million in the third
quarter of 1998 and 24% to $245 million year-to-date 1998, primarily due to the
additional debt assumed in connection with the 1997 and 1998 additions of
full-service hotels and senior living communities, as well as the issuance of
the New Senior Notes and the New Credit Facility.
Dividends on Convertible Preferred Securities. The Dividends on Convertible
Preferred Securities reflect the dividends accrued during the first three
quarters of 1998 and 1997 on the $550 million in 6.75% Convertible Preferred
Securities issued by the Company in December 1996.
Interest Income. Interest income decreased $4 million to $11 million for the
third quarter of 1998. On a year-to-date basis, interest income decreased $1
million to $36 million. These decreases primarily reflect the lower level of
cash and marketable securities held in 1998 compared to 1997.
Income before Extraordinary Item. Income before extraordinary item for the third
quarter of 1998 was $4 million, compared to $6 million for 1997. The 1998
year-to-date income before extraordinary item was $100 million compared to $38
million for 1997.
Extraordinary Gain (Loss). In connection with the purchase of the Old Senior
Notes, the Company recognized an extraordinary loss of $148 million, which
represents the bond premium and consent payments totaling approximately $175
million and the write-off of deferred financing fees of approximately $52
million related to the Old Senior Notes, net of taxes. In March 1997, the
Company purchased 100% of the outstanding bonds secured by a first mortgage on
the San Francisco Marriott. The Company purchased the bonds for $219 million,
which was an $11 million discount to the face value of $230 million. In
connection with the redemption and defeasance of the bonds, the Company
recognized an extraordinary gain of $5 million, which represents the $11 million
discount and the write-off of deferred financing fees, net of taxes.
- 17 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Net Income (Loss). The Company's net loss for the third quarter of 1998 was $144
million compared to net income of $6 million for 1997. The significant net loss
for the third quarter of 1998 was due to the $148 million extraordinary loss on
the extinguishment of debt. Net loss for year-to-date 1998 was $48 million
compared to net income of $43 million for 1997. Basic and diluted earnings
(loss) per common share were $(.71) and $(.69), respectively, for the third
quarter of 1998 and $.03 for 1997. On a year-to-date basis, basic and diluted
earnings (loss) per common share were $(.24) and $(.23), respectively, for 1998
and $.21 for 1997.
EBITDA and Comparative FFO
- --------------------------
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") increased $19
million, or 13%, to $170 million in the 1998 third quarter and $132 million, or
28%, to $611 million year-to-date.
Hotel EBITDA increased $28 million, or 20%, to $167 million in the third quarter
of 1998 and $126 million, or 27%, to $592 million year-to-date, reflecting
comparable full-service hotel EBITDA growth, as well as incremental EBITDA from
1997 and 1998 acquisitions. Full-service hotel EBITDA from comparable hotel
properties increased 11.0% and 11.5%, respectively, on REVPAR increases of 7.2%
and 7.9%, respectively, for the 1998 third quarter and year-to-date. The
Company's senior living communities contributed $13 million of EBITDA during the
1998 third quarter and $43 million of EBITDA for 1998 year-to-date compared to
$11 million for the 1997 third quarter and year-to-date, respectively.
The following is a reconciliation of EBITDA to the Company's income before
extraordinary item (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
------------------------------ ------------------------------
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
EBITDA ................................................. $ 170 $ 151 $ 611 $ 479
Interest expense ....................................... (83) (76) (245) (198)
Dividends on Convertible Preferred Securities .......... (9) (9) (26) (26)
Depreciation and amortization .......................... (59) (56) (184) (158)
Minority interest expense .............................. (6) -- (36) (24)
REIT Conversion expenses ............................... (8) -- (14) --
Income taxes ........................................... (8) (4) (75) (28)
Other non-cash charges, net ............................ 7 -- 69 (7)
----- ----- ----- -----
Income before extraordinary item .................. $ 4 $ 6 $ 100 $ 38
===== ===== ===== =====
</TABLE>
The Company's interest coverage, defined as EBITDA divided by cash interest
expense, was 2.6 times for both year-to-date 1998 and year-to-date 1997. On a
full year basis, management anticipates that the interest coverage will be 2.5
times for 1998, which is comparable to 1997. The ratio of earnings to fixed
charges was 1.7 to 1.0 for the third quarter of 1998 and 1.4 to 1.0 for the
third quarter of 1997.
The Company also believes that Comparative Funds From Operations ("Comparative
FFO," which represents Funds From Operations, as defined by the National
Association of Real Estate Investment Trusts, plus deferred tax expense) is a
meaningful disclosure that will help the investment community to better
understand the financial performance of the Company, including enabling its
shareholders and analysts to more easily compare the Company's performance to
other REITs. Comparative FFO increased $19 million, or 33%, to $76 million in
the third quarter of 1998 and $80 million, or 40%, to $282 million year-to-date.
- 18 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following is a reconciliation of the Company's income before extraordinary
item to Comparative FFO (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
----------------------------- -----------------------------
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income before extraordinary item ....................... $ 4 $ 6 $ 100 $ 38
Depreciation and amortization .......................... 59 57 184 158
Other real estate activities ........................... (1) (1) (53) 1
Partnership adjustments ................................ (1) (6) (9) (6)
REIT expenses .......................................... 8 -- 14 --
Deferred taxes ......................................... 7 1 46 11
----- ----- ----- -----
Comparative Funds From Operations ................. $ 76 $ 57 $ 282 $ 202
===== ===== ===== =====
</TABLE>
The Company considers EBITDA and Comparative FFO to be indicative measures of
the Company's operating performance due to the significance of the Company's
long-lived assets and because such data is considered useful by the investment
community to better understand the Company's results, and can be used to measure
the Company's ability to service debt, fund capital expenditures and expand its
business, however, such information should not be considered as an alternative
to net income, operating profit, cash from operations, or any other operating or
liquidity performance measure prescribed by generally accepted accounting
principles. Cash expenditures for various long-term assets, interest expense
(for EBITDA purposes only) and income taxes have been, and will be, incurred
which are not reflected in the EBITDA and Comparative FFO presentation.
Cash Flows and Financial Condition
- ----------------------------------
The Company reported an increase in cash and cash equivalents of $28 million
during the thirty-six weeks ended September 11, 1998. Cash flow from operations
through the third quarter of 1998 decreased $35 million to $278 million
principally due to changes in operating accounts, offset by improved lodging
results.
Cash used in investing activities was $273 million through the third quarter of
1998, while cash used in investing activities was $497 million through the third
quarter of 1997. Cash from investing activities through the third quarter of
1998 includes capital expenditures of $168 million, primarily related to
renewals and replacements on existing properties, and $636 million for the
acquisition of 11 full-service hotel properties and one senior living community.
The Company also received proceeds of approximately $209 million from the sale
of two hotel properties in the second quarter of 1998, which is included in
proceeds from sales of assets. In addition, the Company generated $317 million
of cash from the net sales of short-term marketable securities.
During the first quarter of 1998, the Company acquired a controlling interest
in, and became the managing general partner for, the partnership that owns the
359-room Albany Marriott, the 350-room San Diego Marriott Mission Valley and the
320-room Minneapolis Marriott Southwest for approximately $50 million. In
addition, the Company obtained a controlling interest in the partnership that
owns the 1,671-room Atlanta Marriott Marquis for approximately $239 million,
including a $164 million in assumed mortgage debt. The Company previously owned
a 1.3% general and limited partnership interest. Also, during the first quarter
of 1998, the Company acquired the Gables at Winchester in suburban Boston, a
124-unit senior living community, for $21 million and entered into conditional
purchase agreements to acquire two Marriott Brighton Gardens assisted living
communities in Denver and Colorado Springs, Colorado, for $35 million in 1999
after the anticipated completion of construction, if they achieve certain
operating performance criteria. All three of these communities would be operated
by Marriott International under long-term operating agreements.
- 19 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
During the second quarter of 1998, the Company acquired the partnership that
owns the 289-room Park Ridge Marriott in Park Ridge, New Jersey for $24 million.
The Company previously owned a 1% managing general partnership interest and held
a note receivable interest of approximately $5 million. In addition, the Company
acquired the 397-room Ritz-Carlton, Tysons Corner for approximately $96 million
and the 281- room Ritz-Carlton, Phoenix for approximately $75 million. The
Company also acquired the 487-room Torrance Marriott near Los Angeles,
California for approximately $52 million.
During the third quarter of 1998, the Company acquired the 308-room
Ritz-Carlton, Dearborn, Michigan for approximately $65 million, the 336-room
Ritz-Carlton, San Francisco for approximately $161 million and the 404-room
Memphis Marriott (which was converted to the Marriott brand upon acquisition)
for approximately $16 million.
In the second quarter of 1998, the Company sold the 662-room New York Marriott
East Side for $191 million and recorded a pre-tax gain of approximately $40
million. The Company also sold the 191-room Napa Valley Marriott for
approximately $21 million and recorded a pre-tax gain of approximately $10
million.
Cash used in financing activities was $23 million through the third quarter of
1998 and $391 million through the third quarter of 1997. Cash used in financing
activities through the third quarter of 1998 includes $1,750 million in
prepayments of debt and a $16 million increase in debt service and capital
expenditure reserves that relate to debt assumed for certain hotel properties
and planned capital improvements. Cash provided by financing activities includes
$2,004 million of debt issuances consisting mostly of $1.7 billion in senior
notes and a $350 million draw on the $1.25 billion credit facility established
during the third quarter. Cash used in financing activities through the third
quarter of 1997 includes the $219 million prepayment of the outstanding bonds
secured by the San Francisco Marriott, partially offset by the $90 million in
mortgage financing obtained on the Philadelphia Marriott and the issuance of
$600 million in New Senior Notes.
In April 1998, the Company reached a definitive agreement with various
affiliates of The Blackstone Group and Blackstone Real Estate Partners
(collectively, "Blackstone") to acquire controlling interests in 12 luxury
hotels and a first mortgage interest in another hotel in the United States and
certain other assets. The Company expects to pay approximately $862 million in
cash and assumed debt and to issue approximately 43.7 million Operating
Partnership units of the new operating partnership (the "Operating
Partnership"), (based upon a negotiated value of $20.00 per OP Unit) and
distribute up to 18% of the shares of Crestline to be formed as part of the
Company's REIT Conversion, described below. Each Operating Partnership unit ("OP
Unit") will be exchangeable for one share of Host Marriott common stock. Upon
completion of the acquisition, Blackstone will own approximately 16% of the
outstanding shares of Host Marriott common stock on a fully converted basis. The
Blackstone portfolio consists of two Ritz-Carlton, two Four Seasons, one Grand
Hyatt, three Hyatt Regency and four Swissotel properties, and a mortgage on a
third Four Seasons property.
The pending acquisition of the Blackstone properties represents the first
acquisitions in the Company's multi-brand strategy which includes establishing
relationships with high-quality, well-recognized brands such as Four Seasons,
Hyatt and Swissotel, among others, in addition to Marriott and Ritz-Carlton.
This multi-brand strategy will allow the Company to diversify its existing hotel
portfolio (as many markets already have a strong representation of Marriott
brand hotels) and increase the Company's pool of potential acquisitions. The
Company will focus on upscale and luxury full-service hotels in
difficult-to-duplicate locations with high barriers to entry, such as hotels
located in downtown, airport and resort/convention locations, which are operated
by quality managers.
- 20 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Blackstone transaction is expected to close immediately after the REIT
Conversion. At that time, the Blackstone hotels and other assets will be
contributed into the Operating Partnership. The hotels will continue to be
managed under the existing management contracts. Consummation of the Blackstone
transaction is subject to certain conditions, including consummation of the REIT
Conversion no later than March 31, 1999 and the REIT qualifying as a REIT in
1999.
In addition, the Company's board of directors (the "Board") has authorized the
Company to reorganize its business operations to qualify as a real estate
investment trust ("REIT"), currently expected to be effective as of January 1,
1999, and to spin-off its senior living communities business ("SLC") through a
taxable stock dividend to its shareholders (collectively, the "REIT
Conversion"). After the REIT Conversion, which is subject to shareholder and
final Board approval, the Company intends to operate as an "UPREIT," with all of
its assets and operations conducted through the newly formed Operating
Partnership of which Host Marriott will be the general partner.
Host Marriott will distribute shares in Crestline to its shareholders at the
time of the REIT Conversion and Host Marriott expects to make a cash
distribution at that time. The aggregate value of the Crestline capital stock
and the cash to be distributed to shareholders and Blackstone, if the Blackstone
acquisition is consummated and which is expected to be treated as a taxable
dividend, is currently estimated to be approximately $525 million to $625
million. The actual amount of the distribution will be based, in part, upon the
estimated amount of accumulated earnings and profits of Host Marriott as of the
last day of its taxable year in which the REIT Conversion is consummated. To the
extent that the distributions are not sufficient to eliminate Host Marriott's
accumulated earnings and profits, one or more additional taxable distributions
will be made prior to the last day of the first full taxable year as a REIT
(currently expected to be December 31, 1999). The distribution satisfies the
requirement that a "C" corporation converting to a REIT distribute all of its
accumulated earnings and profits at the time of conversion to a REIT. Crestline
is expected to own Host Marriott's portfolio of senior living properties. This
portfolio currently consists of 31 retirement communities, totaling 7,259 units
in 13 states. The communities will continue to be managed by Marriott
International. In addition, Crestline will lease substantially all of the hotels
owned by the Operating Partnership. Crestline will operate independently of Host
Marriott.
Following the REIT Conversion, Host Marriott will own OP Units equal to the
number of outstanding shares of Host Marriott common stock at the time of the
REIT Conversion. The UPREIT structure will not affect the ownership by
shareholders of their existing Host Marriott shares.
As part of the REIT Conversion, the Company filed a Prospectus/Consent
Solicitation with the Securities and Exchange Commission. This
Prospectus/Consent Solicitation Statement describes a proposal whereby the
Operating Partnership will acquire by merger (the "Mergers") eight limited
partnerships (the "Partnerships") that own full-service hotels in which the
Company or its subsidiaries are general partners. As more fully described in the
Prospectus/Consent Solicitation Statement, limited partners of those
Partnerships that participate in the Mergers will receive either OP Units or, at
their election, unsecured notes due December 15, 2005 issued by the Operating
Partnership ("Notes") or common stock in the REIT, in exchange for their
partnership interests in such Partnerships. The Prospectus/Consent solicitation
period expires on December 12, 1998, unless extended.
The REIT expects to qualify as a real estate investment trust under federal
income tax law beginning January 1, 1999. However, consummation of the REIT
Conversion is subject to significant contingencies that are outside the control
of the Company, including final Board approval, consent of shareholders,
partners, bondholders, lenders, and ground lessors of Host Marriott, its
affiliates and other third parties. Accordingly, there can be no assurance that
the REIT Conversion will be completed or that it will be effective as of
- 21 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
January 1, 1999. If the REIT Conversion is not completed on January 1, 1999, the
effectiveness of REIT election could be delayed until January 1, 2000, which
would result in the Company continuing to pay a substantial amount of
corporate-level income taxes in 1999.
On April 20, 1998, the Company and certain of its subsidiaries filed a shelf
registration on Form S-3 (the "Shelf Registration") with the Securities and
Exchange Commission for the issuance of up to $2.5 billion in securities, which
may include debt, equity or a combination thereof. The Company utilized $1.7
billion of the capacity under this Shelf Registration to issue the New Senior
Notes (defined below) and anticipates that any net proceeds from the sale of
additional offered securities will be used for refinancing of the Company's
indebtedness, acquisitions and general corporate purposes.
HMH Properties, Inc. ("HMH Properties") an indirect wholly owned subsidiary of
the Company, which currently owns 71 of Host Marriott's hotels, utilized the
Shelf Registration to issue an aggregate of $1.7 billion in new senior notes
(the "New Senior Notes"). The New Senior Notes were issued in two series, $500
million of 7 7/8% Series A notes due in 2005 and $1.2 billion of 7 7/8% Series B
notes due in 2008. Approximately $21 million of the Old Senior Notes remain
outstanding. The 1998 Consent Solicitations facilitated the merger of HMC
Capital Resources Holdings Corporation ("Capital Resources"), a wholly owned
subsidiary of the Company, with and into HMH Properties. Capital Resources, the
then owner of eight of Host Marriott's hotel properties, was the obligor under
the $500 million revolving credit facility (the "Old Credit Facility").
In conjunction with the issuance of the New Senior Notes, HMH Properties entered
into a $1.25 billion credit facility (the "New Credit Facility") with a group of
commercial banks. The New Credit Facility has an initial three-year term with
two one-year extension options. Borrowings under the New Credit Facility
generally bear interest at the Eurodollar rate plus 1.75% (7.5% at September 11,
1998). The interest rate and commitment fee (0.35% at September 11, 1998) on the
unused portion of the New Credit Facility fluctuate based on certain financial
ratios. The New Senior Notes and the New Credit Facility are guaranteed by the
Company and its wholly owned subsidiary, Host Marriott Hospitality, Inc., and
certain subsidiaries of HMH Properties and are secured by pledges of equity
interests in certain subsidiaries of HMH Properties. The New Senior Notes and
the New Credit Facility will be assumed by the Operating Partnership in
connection with the REIT Conversion and the guarantee of the Company is expected
to terminate upon the consummation of the REIT conversion. As of September 11,
1998, $350 million was outstanding under the New Credit Facility.
The New Credit Facility and the indenture under which the New Senior Notes were
issued contain covenants restricting the ability of HMH Properties and certain
of its subsidiaries to incur indebtedness, grant liens on their assets, acquire
or sell assets or make investments in other entities, and make certain
distributions to equityholders of HMH Properties, the Company, and (following
the REIT Conversion) the Operating Partnership and Host REIT. The New Credit
Facility and the New Senior Notes also contain certain financial covenants
relating to, among other things, maintaining certain levels of tangible net
worth and certain ratios of EBITDA to interest and fixed charges, total debt to
EBITDA, unencumbered assets to unsecured debt, and secured debt to total debt.
On August 5, 1998, simultaneously with the issuance of the New Senior Notes and
the New Credit Facility, HMH Properties purchased substantially all of its (i)
$600 million in 9 1/2% senior notes due 2005, (ii) $350 million in 9% senior
notes due 2007 and (iii) $600 million in 8 7/8% senior notes due 2007
(collectively, the "Old Senior Notes"). Concurrently with each offer to
purchase, HMH Properties successfully solicited consents (the "1998 Consent
Solicitations") from registered holders of the Old Senior Notes to certain
amendments to eliminate or modify substantially all of the restrictive covenants
and certain other provisions contained in the indentures pursuant to which the
Old Senior Notes were issued.
- 22 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The net proceeds from the offering and borrowings under the New Credit Facility
were used by Host to purchase substantially all of the Old Senior Notes, to
repay amounts outstanding under the Old Credit Facility and to make bond premium
and consent payments totaling $175 million. These costs, along with the
write-off of deferred financing fees of approximately $52 million related to the
Old Senior Notes and the Old Credit Facility, were recorded as a pre-tax
extraordinary loss on the extinguishment of debt in the third quarter of 1998.
On September 30, 1998, the Company filed a preliminary Proxy
Statement/Prospectus with the Securities and Exchange Commission. The Proxy
Statement/Prospectus describes the proposed merger by and among Host Marriott,
HMC Merger Corporation ("Host REIT") and Host Marriott, L.P., a recently formed
limited partnership, pursuant to the REIT Conversion. The Prospectus proposes
the restructuring of Host Marriott by contribution of its wholly owned
full-service hotels and its interests in certain hotel partnerships and other
assets to the Operating Partnership and reincorporation of Host Marriott with
and into Host REIT. As a result of the restructuring, shares of Host Marriott
common stock will be converted to shares of Host REIT common stock.
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 following disclosure provides information
regarding the current status of the Company's Year 2000 compliance program.
The Company has adopted the compliance program because it recognizes the
importance of minimizing the number and seriousness of any disruptions that may
occur as a result of the Year 2000 issue. The Company's compliance program
includes an assessment of the Company's 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. Since the distribution of Marriott International on October 8,
1993, the Company has invested in the implementation and maintenance of
accounting and reporting systems and equipment that are intended to enable the
Company 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 and the Company has not delayed any systems projects due to the
Year 2000 issue. The Company is in the process of engaging a third party to
review its Year 2000 in-house compliance. Management believes that future costs
associated with Year 2000 issues for its in-house systems will be insignificant
and therefore not impact the Company's business, financial condition and results
of operations. The Company has not developed, and does not plan to develop, a
separate contingency plan for its in-house systems due to their current Year
2000 compliance. However, the Company does have detailed contingency plans for
its in-house systems covering a variety of possible events, including natural
disasters, interruption of utility service and similar events.
Third-Party Systems. Host Marriott 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 and
- 23 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 property-level systems, the
Company may be required to fund capital expenditures for upgraded equipment and
software. The Company does not expect these charges to be material, but is
committed to making these investments as required. To the extent that these
changes relate to a third party managers' 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 Company's properties subject to annual limitations. The Company
expects that its third party managers will incur Year 2000 costs for its
centralized systems in lieu of costs related to system projects that otherwise
would have been pursued and therefore its overall level of centralized system
charges allocated to the properties will not materially increase as a result of
the Year 2000 compliance effort. The Company believes that this deferral of
certain system projects will not have a material impact on its 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 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 to address the most reasonably likely worst
case Year 2000 scenarios, which may not have been identified fully. In
particular, the Company has had extensive discussions regarding the Year 2000
problem with Marriott International, the manager of a substantial majority of
its 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 particular 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 a
------------------
dedicated audit team to review and test significant projects for adherence to
quality standards and program methodology.
Marriott International has grouped its systems and technology into three
categories for purposes of Year 2000 compliance: (i) information resource
applications and technology (IT Applications) -- enterprise-wide systems
supported by Marriott International's centralized information technology
organization ("IR"); (ii) Business-initiated Systems ("BIS") - systems that have
been initiated by an individual business unit, and that are not supported by
Marriott International's IR organization; and (iii) Building Systems - non-IT
equipment at properties that use embedded computer chips, such as elevators,
automated room key systems and HVAC equipment. Marriott International is
prioritizing its efforts based on how severe an effect noncompliance
- 24 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
would have on customer service, core business processes or revenues, and whether
there are viable, non-automated fallback procedures (System Criticality).
Marriott International measures the completion of each phase based on documented
and quantified results, weighted for System Criticality. As of the end of the
1998 third quarter, the awareness and inventory phases were complete for IT
Applications and nearly complete for BIS and Building Systems. For IT
Applications, the Assessment, Planning and Remediation/Replacement phases were
each over 80 percent complete, and Testing and Compliance Validation had been
completed for a number of key systems, with most of the remaining work in its
final stage. For BIS and Building Systems, Assessment and Planning were in the
mid- to upper-range of completion, with a substantial amount of work in process,
while the progress level for Remediation/Replacement and Testing and Compliance
Validation had not yet been documented and quantified. Quality Assurance is also
in progress for IT Applications and is scheduled to begin for BIS and Building
Systems in the near future. Marriott International's goal is to substantially
complete the Remediation/Replacement and Testing phases for its System Critical
IT Applications by the end of 1998, with 1999 reserved for unplanned
contingencies and for Compliance Validation and Quality Assurance. For System
Critical BIS and Building Systems, the same level of completion is targeted for
June 1999 and September 1999, respectively.
Marriott International has initiated Year 2000 compliance communications with
its significant third party suppliers, vendors and business partners, including
its franchisees. Marriott International is focusing its efforts on the business
interfaces most critical to its customer service and revenues, including those
third parties that support the most critical enterprise-wide IT Applications,
franchisees generating the most revenues, suppliers of the most widely used
Building Systems and BIS, the top 100 suppliers, by dollar volume, of non-IT
products, and financial institutions providing the most critical payment
processing functions. Responses have been received from a majority of the firms
in this group.
Marriott International is also establishing a common approach for testing and
addressing Year 2000 compliance issues for its managed and franchised
properties. This includes a guidance protocol for operated properties, and a
Year 2000 "Toolkit" for franchisees containing relevant Year 2000 compliance
information. Marriott International is also utilizing a Year 2000 best-practices
sharing system.
Risks. There can be no assurances that Year 2000 remediation by 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. 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 services, the loss or
disruption of hotel reservations made on centralized reservation systems and
errors or failures in financial transactions or payment processing systems such
as credit cards. Due to the general uncertainty inherent in the Year 2000
problem and the Company's dependence on third parties, the Company is unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact on the Company. The Company's Year 2000 compliance program is
expected to significantly reduce the level of uncertainty about the Year 2000
problem and management believes that the possibility of significant
interruptions of normal operations should be reduced.
- 25 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time the subject of, or involved in, judicial
proceedings. Management believes that any liability or loss resulting from such
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
. July 17, 1998 -- Report that includes information that the
Company believes is material to its investors. This includes
the following:
- The condensed financial statements of the Parent
Company (as defined) which represents the investment
in, and operations of, subsidiaries with restricted
net assets accounted for on the equity method of
accounting.
- The consolidated financial statements of Host
Marriott Hotels (as defined) which represents the
assets and liabilities expected to be included in the
Company's contribution of certain assets and
liabilities to the Operating Partnership (as defined
herein) in conjunction with the Company's
contemplated REIT Conversion (as defined herein).
. July 28, 1998 -- Report filing as an exhibit the prospectus
supplement filed by a wholly owned subsidiary, HMH Properties,
Inc., for a public offering of $1.4 billion of senior notes.
. July 30, 1998 -- Report filing as an exhibit an amended
prospectus supplement for $1.7 billion of senior notes for the
Company's wholly owned subsidiary HMH Properties, Inc.
. July 31, 1998 -- Report filing information the Company
believes is material to investors. This includes the
following:
- The consolidated financial statements of Host
Marriott Hotels (as defined) which represents the
assets and liabilities expected to be included in the
Company's contribution of certain assets and
liabilities to the Operating Partnership (as defined
- 26 -
<PAGE>
herein) in conjunction with the Company's
contemplated REIT Conversion (as defined herein).
. August 6, 1998 -- Report filing certain exhibits related to
filings with the Securities & Exchange Commission by a wholly
owned subsidiary of the Company, HMH Properties, Inc.
("Properties") which the Company believes is material to
investors. Properties completed the offer and consent
solicitation for its outstanding $1.55 billion in senior
notes, the offering of $1.7 billion of new senior notes and
the completion of a new $1.25 billion credit facility, which
included the merger of another wholly owned subsidiary of the
Company with and into Properties. This information provided
includes the following:
- Underwriting agreement between HMH Properties, Inc.,
certain signatory guarantors thereto and Donaldson,
Lufkin & Jenrette Securities Corporation, BT Alex
Brown, Inc., Bear Stearns & Co., Inc., Goldman Sachs
& Co., Merrill Lynch, Pierce, Fenner & Smith, Inc.,
and Nationsbank Montgomery Securities LLP.
- Amended and Restated Indenture Agreement dated as of
August 5, 1998 between HMH Properties, Inc., the
Guarantors (defined herein), the Subsidiary
Guarantors (defined herein) and Marine Midland Bank
as Trustee.
- First Supplemental Indenture to Amended and Restated
Indenture dated as of August 5, 1998 (including the
form of the 7 7/8% Series A Senior Notes due 2005 and
the 7 7/8% Series B Senior Notes due 2008).
- Statement of Eligibility and Qualifications on Form
T-1 of Marine Midland Bank, as Trustee, under the
Indenture.
. September 11, 1998 -- Report filing certain exhibits related
to filings of a wholly owned subsidiary of the Company, HMH
Properties, Inc. ("Properties") for a $1.25 credit facility
entered into by Properties on August 6, 1998 which the Company
believes is material to investors.
- Amended and Restated Credit Agreement dated as of
June 19, 1997 and Amended and Restated as of August
5, 1998 among Host Marriott Corporation; Host
Marriott Hospitality, Inc.; HMH Properties, Inc.;
Host Marriott L.P.; HMC Capital Resources
Corporation; various banks: Wells Fargo Bank;
National Association; The Bank of Nova Scotia and
Credit Lyonnais New York Branch, as Co-Arrangers; and
Bankers Trust Company, as Arranger and Administrative
Agent.
- 27 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOST MARRIOTT CORPORATION
October 26, 1998 /s/ Donald D. Olinger
- ---------------- ----------------------------
Date Donald D. Olinger
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HOST
MARRIOTT CORPORATION'S CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> HOST MARRIOTT CORPORATION
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