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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[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 March 26, 1999 Commission File No. 0-25087
HOST MARRIOTT, L.P.
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Delaware 52-2095412
- -------------------------- ------------------
(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
----- -----
Units outstanding
Class at May 5, 1999
- --------------------- --------------
Units of limited partnership interest
292, 541, 480
INDEX
-----
Part I. FINANCIAL INFORMATION (Unaudited): Page No.
--------
Condensed Consolidated Balance Sheets - 3
March 26, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations - 4
Twelve Weeks Ended March 26, 1999 and
March 27, 1998
Condensed Consolidated Statements of Cash Flows - 6
Twelve Weeks Ended March 26, 1999 and
March 27, 1998
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Results of 19
Operations and Financial Condition
-2-
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
March 26, December 31,
1999 1998
------------ ------------
(unaudited)
ASSETS
------
Property and equipment, net.................................................................. $ 7,173 $ 7,201
Notes and other receivables (including amounts due from
affiliates of $133 million and $134 million, respectively)............................... 201 203
Rent receivable.............................................................................. 78 --
Due from managers............................................................................ -- 19
Investments in affiliates.................................................................... 44 33
Other assets................................................................................. 391 370
Cash and cash equivalents.................................................................... 284 436
------- -------
$ 8,171 $ 8,262
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Debt
Senior notes............................................................................. $ 2,545 $ 2,246
Mortgage debt............................................................................ 2,111 2,438
Convertible debt obligation to Host Marriott............................................. 567 567
Other.................................................................................... 457 447
------- -------
5,680 5,698
Accounts payable and accrued expenses........................................................ 161 204
Deferred income taxes........................................................................ 97 97
Deferred rent................................................................................ 115 --
Other liabilities............................................................................ 439 460
------- -------
Total liabilities...................................................................... 6,492 6,459
------- -------
Minority interest............................................................................ 149 147
Limited Partnership interests of third parties at redemption value
(representing 64.6 million units at March 26, 1999
and December 31, 1998)................................................................... 718 892
Partners' Capital
General partner.......................................................................... 1 1
Limited partner.......................................................................... 816 767
Accumulated other comprehensive loss..................................................... (5) (4)
------- -------
Total shareholders' equity............................................................. 812 764
------- -------
$ 8,171 $ 8,262
======= =======
See Notes to Condensed Consolidated Financial Statements
-3-
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve weeks ended March 26, 1999 and March 27, 1998
(unaudited, in millions)
1999 1998
------ ------
REVENUES
Rental income (Note 2)............................................................................. $ 171 $ --
Hotel sales
Rooms............................................................................................ -- 509
Food and beverage................................................................................ -- 222
Other............................................................................................ -- 56
Interest income.................................................................................... 8 14
Net gains on property transactions................................................................. 12 1
Equity in earnings of affiliates................................................................... 1 1
Other.............................................................................................. -- 2
----- -----
Total revenues................................................................................... 192 805
----- -----
EXPENSES
Depreciation....................................................................................... 66 53
Property-level expenses............................................................................ 58 62
Hotel operating expenses
Rooms............................................................................................ -- 114
Food and beverage................................................................................ -- 163
Other department costs and deductions............................................................ -- 189
Management fees (including Marriott International
management fees of $55 million in 1998)..................................................... -- 58
Minority interest (benefit)........................................................................ 4 16
Interest expense................................................................................... 108 76
Dividends on Host Marriott-obligated mandatorily
redeemable convertible preferred securities of a subsidiary
trust whose sole assets are the convertible subordinated
debentures due 2026 ("Convertible Preferred Securities")......................................... -- 9
Corporate expenses................................................................................. 8 12
Other expenses..................................................................................... 4 5
----- -----
248 757
----- -----
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES......................................................................................... (56) 48
Provision for income taxes............................................................................. -- (20)
----- -----
INCOME (LOSS) FROM CONTINUING OPERATIONS............................................................... (56) 28
Income from discontinued operations.................................................................... -- 2
----- -----
NET (LOSS) INCOME...................................................................................... $ (56) $ 30
===== =====
See Notes to Condensed Consolidated Financial Statements
-4-
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
Twelve weeks ended March 26, 1999 and March 27, 1998
(unaudited)
BASIC EARNINGS (LOSS) PER UNIT:
Continuing operations ............................................................... $ (.19) $ .13
Discontinued operations (net of income taxes) ....................................... -- .01
------- -------
BASIC EARNINGS (LOSS) PER UNIT: ..................................................... $ (.19) $ .14
======= =======
DILUTED EARNINGS (LOSS) PER UNIT:
Continuing operations ............................................................... $ (.19) $ .13
Discontinued operations (net of income taxes) ....................................... -- .01
------- -------
DILUTED EARNINGS (LOSS) PER UNIT .................................................... $ (.19) $ .14
======= =======
See Notes to Condensed Consolidated Financial Statements
-5-
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Weeks Ended March 26, 1999 and March 27, 1998
(unaudited, in millions)
1999 1998
-------- --------
OPERATING ACTIVITIES
Income (loss) from continuing operations............................................................ $ (56) $ 28
Adjustments to reconcile to income from continuing operations:
Depreciation and amortization................................................................... 68 54
Income taxes.................................................................................... (4) 18
Gain on sale of hotel properties................................................................ (12) (1)
Equity in earnings of affiliates.................................................................... (1) (1)
Changes in operating accounts....................................................................... (8) (20)
Other............................................................................................... 17 19
----- -----
Cash from continuing operations................................................................. 4 97
Cash from discontinued operations............................................................... -- 2
----- -----
Cash from operations............................................................................ 4 99
----- -----
INVESTING ACTIVITIES
Proceeds from sales of assets....................................................................... 36 1
Acquisitions........................................................................................ (4) (118)
Capital expenditures:
Renewals and replacements....................................................................... (50) (40)
New development projects........................................................................ (20) (12)
New investment capital expenditures............................................................. (6) (9)
Purchases of short-term marketable securities....................................................... -- (53)
Sales of short-term marketable securities........................................................... -- 246
Note receivable collections......................................................................... 2 --
Affiliate collections, net.......................................................................... -- 14
Other............................................................................................... -- (6)
----- -----
Cash (used in) from investing activities from continuing operations............................. (42) 23
Cash used in investing activities from discontinued operations.................................. -- (28)
----- -----
Cash used in investing activities............................................................... (42) (5)
----- -----
FINANCING ACTIVITIES
Issuances of debt, net.............................................................................. 299 1
Repurchase of units................................................................................. (4) --
Distribution........................................................................................ (69) --
Scheduled principal repayments...................................................................... (12) (6)
Debt prepayments.................................................................................... (323) (1)
Other............................................................................................... (5) (16)
----- -----
Cash used in financing activities from continuing operations.................................... (114) (22)
Cash used in financing activities from discontinued operations.................................. -- (27)
----- -----
Cash used in financing activities............................................................... (114) (49)
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................................... $(152) $ 45
===== =====
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or purchase of
controlling interests in, certain hotel properties........................................... $ -- $ 164
===== =====
See Notes to Condensed Consolidated Financial Statements
-6-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization
Host Marriott Corporation ("Host Marriott"), operating through an umbrella
partnership REIT structure, is the owner of full-service hotel properties.
Host Marriott operates as a self-managed and self-administered real estate
investment trust ("REIT") and its operations are conducted solely through
an operating partnership and its subsidiaries. As REITs are not permitted
to derive revenues directly from the operation of hotels, Host Marriott
leases substantially all of its hotels to subsidiaries of Crestline Capital
Corporation ("Crestline" or the "Lessee") and certain other lessees.
In these condensed consolidated interim financial statements, the "Company"
or "Host Marriott" refers to Host Marriott Corporation before, and Host
Marriott, L.P. (the "Operating Partnership"), after Host Marriott
Corporation's conversion to a REIT (the "REIT Conversion"). Host Marriott
Corporation is presented as the predecessor to the Operating Partnership
since the Operating Partnership and its subsidiaries received substantially
all of the continuing operations, assets and liabilities of Host Marriott
Corporation and its subsidiaries.
On December 15, 1998, shareholders of Host Marriott approved a plan to
reorganize Host Marriott's business operations through the spin-off of Host
Marriott's senior living business as part of Crestline and the contribution
of Host Marriott's hotels and certain other assets and liabilities to a
newly formed Delaware limited partnership, Host Marriott, L.P. Host
Marriott merged into HMC Merger Corporation (the "Merger"), a newly formed
Maryland corporation (renamed Host Marriott Corporation) which intends to
qualify, effective January 1, 1999 as a REIT and is the sole general
partner of the Operating Partnership. On December 29, 1998, Host Marriott
completed the previously announced spin-off of Crestline through a taxable
stock dividend to its shareholders. Each Host Marriott shareholder of
record on December 28, 1998 received one share of Crestline for every ten
shares of Host Marriott Corporation owned. In connection with the REIT
Conversion, Host Marriott contributed its hotels and substantially all of
its other assets and liabilities to the Operating Partnership and
subsidiaries (the "Contribution") in exchange for units of partnership
interest in the Operating Partnership. The Contribution was accounted for
at Host Marriott's historical basis. As of March 26, 1999, Host Marriott
owned approximately 78% of the Operating Partnership.
As a result of the spin-off noted above, the Company's financial statements
have been restated to present the senior living communities business
results of operations and cash flows as discontinued operations. All
historical financial statements presented have been restated to conform to
this presentation.
2. Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated interim financial
statements of the Company and its subsidiaries have been prepared 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 unaudited condensed consolidated interim financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on
Form 10-K for the fiscal year ended December 31, 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 March 26,
-7-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1999 and December 31, 1998, and the results of operations and cash flows
for the twelve weeks ended March 26, 1999 and March 27, 1998. The
statements of operations and cash flows for the twelve weeks ended March
27, 1998 reflect the historical results of Host Marriott Corporation as
discussed in Note 1. Interim results are not necessarily indicative of
fiscal year performance because of the impact of seasonal and short-term
variations.
The Company's leases have remaining terms ranging from 2 to 10 years,
subject to earlier termination upon the occurrence of certain
contingencies, as defined. The rent due under each lease is the greater of
base rent or percentage rent, as defined. Percentage rent applicable to
room, food and beverage and other types of hotel sales varies by lease and
is calculated by multiplying fixed percentages by the total amounts of such
revenues over specified threshold amounts. Both the minimum rent and the
revenue thresholds used in computing percentage rents are subject to annual
adjustments based on increases in the United States Consumer Price Index
and the Labor Index, as defined.
The staff of the Securities & Exchange Commission issued Staff Accounting
Bulletin 101 "Revenue Recognition" (SAB 101) in December 1999. SAB 101
discusses factors to consider in determining when contingent revenue should
be recognized during interim periods. The Company has adopted SAB 101
effective January 1, 1999 and has therefore amended its previously filed
Form 10-Q to reflect this change in accounting principle. As a result of
the adoption of SAB 101, $115 million of contingent rent previously
recognized as revenue during the twelve weeks ended March 26, 1999 has been
deferred and recognized in subsequent periods of fiscal year 1999. As of
December 31, 1999 all of the thresholds were reached and all contingent
rent was recognized. SAB 101 has no impact on the Company's annual revenue
recognition, net income or earnings per share. SAB 101 had no effect on
prior year periods as the hotel leases were not in effect prior to the REIT
Conversion.
3. Rental Revenue
The Company's 1999 rental revenue represents earnings from its leased
hotels and is not comparable to 1998 hotel revenues which reflect gross
sales generated by the properties. Also, in December 1998 the Company
retroactively adopted Emerging Issues Task Force Issue No. 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Management Entities and Certain Other Entities with Contractual Management
Arrangements." The impact of the adoption of Issue 97-2 on the condensed
consolidated financial statements for the twelve weeks ended March 27, 1998
was to increase both revenues and operating expenses by approximately $466
million with no impact on net income or earnings per share.
The comparison of the 1999 quarterly results with 1998 is also affected by
a change in the reporting period for the Company's hotels not managed by
Marriott International, which resulted in the inclusion of only two months
of results in the 1999 first quarter versus three months in 1998 for the 24
such hotels (8,524 rooms) that the Company owned as of the beginning of
1998. The change in reporting was required as part of the REIT Conversion.
The 1998 hotel revenues include approximately $54 million representing the
incremental month of operations.
The table below represents hotel sales for both periods for comparative
purposes.
-8-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Twelve Weeks Ended
----------------------
March 26, March 27,
1999 1998
---------- ---------
(in millions)
Hotel Sales
Rooms ....................................... $600 $509
Food and beverage ........................... 268 222
Other ....................................... 63 56
---- ----
Total hotel sales ...................... $931 $787
==== ====
4. Earnings Per Unit
Basic earnings per unit is computed by dividing net income by the weighted
average number of units. Diluted earnings per unit is computed by dividing
net income as adjusted for potentially dilutive securities, by the weighted
average number of units outstanding plus other potentially dilutive
securities. No effect is shown for securities if they are anti-dilutitive.
A reconciliation of the number of units utilized for the calculation of
diluted earnings per unit follows:
Twelve Weeks Ended
--------------------
March 26, March 27,
1999 1998
--------- ---------
(in millions)
Weighted average number of units outstanding ................................ 291.5 215.7
Assuming distribution of units to Host Marriott Corporation for Host Marriott
Corporation common shares granted under the comprehensive stock
plan, less shares assumed purchased at average market price ............. -- 4.4
Assuming distribution of common shares issuable for warrants, less shares
assumed purchased at average market price ............................... -- 0.3
Assuming conversion of minority operating partnership units
outstanding or issuable ................................................. -- --
Assuming conversion of Convertible Preferred Securities ..................... -- --
----- -----
Units utilized for the calculation of diluted earnings per unit ......... 291.5 220.4
===== =====
5. Dividends and Distributions Payable
On March 15, 1999, the Board of Directors of Host Marriott declared a cash
dividend of $0.21 per share of Host Marriott Corporation common stock and a
corresponding distribution of $0.21 per unit of limited partnership
interest ("OP Unit"). The dividend and distribution was paid on April 14,
1999 to shareholders and unitholders of record on March 31, 1999.
On December 18, 1998, in conjunction with the REIT Conversion, the Company
declared a special dividend which entitled shareholders of record on
December 28, 1998 to elect to receive either $1.00 in cash or .087 of a
share of common stock of the Company for each outstanding share of the
Company's common stock owned by such shareholder on the record date (the
"Special Dividend"). Cash totaling $73 million and 11.5 million shares of
common stock that were elected in the Special Dividend were paid and/or
issued on February 10, 1999. The 1998 earnings per share has been restated
to reflect the impact of the stock portion of the Special Dividend.
-9-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. Disposition
In February 1999, the Company sold the 479-room Minneapolis/Bloomington
Marriott for $35 million and recorded a pre-tax gain of $11 million.
7. Debt Issuances
In February 1999, the Company issued $300 million of 83/8% Series D senior
notes due in 2006. The senior notes were used to refinance, or purchase,
debt which had been acquired through the merger of certain partnerships or
the purchase of hotel properties in connection with the REIT Conversion in
December 1998.
8. Geographic and Business Segment Information
The Company operates one business segment, hotel ownership. The Company's
hotels are primarily operated under the Marriott or Ritz-Carlton brands.
Substantially all of the Company's revenues are earned through leases with
Crestline. The allocation of taxes is not evaluated at the segment level or
reflected in the following information because the Company does not believe
the information is material to the consolidated financial statements.
The Company's segmented revenues and income (loss) from continuing
operations before income taxes are as follows (in millions):
Twelve Weeks Ended March 26, 1999
---------------------------------
Hotels Corporate & Other Consolidated
------ ----------------- ------------
Revenues ............................... $ 189 $ 3 $ 192
Income (loss) from continuing operations
before income taxes .................. (39) (17) (56)
-10-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Twelve Weeks Ended March 27, 1998
---------------------------------
Hotels Corporate & Other Consolidated
------ ----------------- ------------
Revenues ............................... $801 $ 4 $805
Income (loss) from continuing operations
before income taxes ................. 71 (23) 48
As of March 26, 1999, the Company's foreign operations consisted of four hotel
properties located in Canada. There were no intercompany sales between the
properties and the Company. The following table presents rental revenues in 1999
and hotel revenues in 1998 for each of the geographical areas in which the
Company owns hotels (in millions):
Twelve Weeks Ended
----------------------
March 26, March 27,
1999 1998
--------- ---------
United States..........................................$ 189 $ 779
International ......................................... 3 26
--------- ---------
Total ............................................$ 192 $ 805
========= =========
9. Comprehensive Income
The Company's other comprehensive income consists of foreign currency
translation adjustments and the right to receive up to 1.4 million shares
of Host Marriott Services Corporation's common stock or an equivalent cash
value subsequent to the exercise of the options held by certain former and
current employees of Marriott International. For the twelve weeks ended
March 26, 1999, comprehensive income totaled $57 million. Comprehensive
income was equivalent to net income for the twelve weeks ended March 27,
1998. As of March 26, 1999 and December 31, 1998 the Company's accumulated
other comprehensive loss was approximately $5 million and $4 million,
respectively.
10. Subsequent Events
In April 1999, a subsidiary of the Company completed the refinancing of the
mortgage on the New York Marriott Marquis. The mortgage is for $245 million
maturing in June 2000 and bears interest at a rate of LIBOR plus 2.125% for
the period from March 31, 1999 through December 31, 1999 and LIBOR plus
2.5% until maturity. The Company is required to make principal payments of
$1.25 million on June 30, 1999 and September 30, 1999 in addition to $10
million and $5 million on December 31, 1999 and March 31, 2000,
respectively, as well as pay an extension fee of 0.5% of the principal
balance of the loan outstanding at December 31, 1999.
On December 30, 1998, the Operating Partnership acquired a portfolio of
twelve luxury hotels and other assets from the Blackstone Group, a Delaware
limited partnership, and a series of funds controlled by affiliates of
Blackstone Real Estate Partners. The Operating Partnership issued
approximately 43.9 million OP Units and assumed debt and made cash payments
of approximately $920 million and distributed 1.4 million of the shares of
Crestline common stock to the Blackstone Real Estate Partners. An
additional 3.8 million OP Units were issued in April 1999 in accordance
with the purchase agreement based on certain adjustments determined on
March 31, 1999.
The Company also completed a 210-room extension of the Philadelphia
Marriott Convention Center in April 1999 at a cost of approximately $43
million including debt of $9 million.
-11-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11. Summarized Lease Pool Financial Statements
As discussed in Note 2, as of March 26, 1999, almost all the properties
of the Company and its subsidiaries were leased to Crestline Capital
Corporation and managed by Marriott International, Inc. In conjunction
with these leases, Crestline and certain of its subsidiaries entered into
limited guarantees of the lease obligations of each lessee. The
full-service hotel leases are grouped into four lease pools, with
Crestline's guarantee limited to the greater of 10% of the aggregate rent
payable for the preceding year or 10% of the aggregate rent payable under
all leases in the respective pool. Additionally, the lessee's obligation
under each lease agreement is guaranteed by all other lessees in the
respective lease pool. As a result, the Company believes that the
operating results of each full-service pool may be material to the
Company's financial statements. Financial information of certain pools
related to the sublease agreements for limited service properties are not
presented, as the Company believes they are not material to the Company's
financial statements. Financial information of Crestline may be found in
its quarterly and annual filings with the Securities and Exchange
Commission. Further information regarding these leases and Crestline's
limited guarantees may be found in the Company's annual report on Form
10-K for the fiscal year ended December 31, 1998. The results of
operations for the twelve weeks ended March 26, 1999 and summarized
balance sheet data of the lease pools in which the Company's hotels are
organized are as follows (in millions):
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
Hotel Sales
Rooms............................................. $ 129 $ 137 $ 127 $ 128 $ 521
Food and beverage................................. 59 61 61 72 253
Other............................................. 14 13 19 15 61
------ ------ ------ ------ ------
Total hotel sales............................ 202 211 207 215 835
Operating Costs and Expenses
Rooms............................................. 31 32 29 27 119
Food and beverage................................. 46 47 44 48 185
Other............................................. 53 52 50 48 203
Management fees................................... 9 14 11 16 50
Lease expense..................................... 61 64 70 74 269
------ ------ ------ ------ ------
-12-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Total operating expenses..................... 200 209 204 213 826
------ ------ ------ ------ ------
Operating Profit....................................... 2 2 3 2 9
Corporate and Interest Expenses........................ (1) -- (1) (1) (3)
------ ------ ------ ------ ------
Income before taxes.............................. 1 2 2 1 6
Income taxes..................................... -- (1) (1) (1) (3)
------ ------ ------ ------ ------
Net Income................................... $ 1 $ 1 $ 1 $ -- $ 3
====== ====== ====== ====== ======
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
Assets................................................. $ 47 $ 37 $ 46 $ 47 $ 177
Liabilities............................................ $ 46 $ 36 $ 45 $ 46 $ 173
Equity................................................. $ 1 $ 1 $ 1 $ 1 $ 4
12. Supplemental Guarantor and Non-Guarantor Subsidiary Information
All subsidiaries of the operating partnership guarantee the Company's
senior notes except those among the twenty full service hotels listed below
and HMH HPT Residence Inn, LLC and HMH HPT Courtyard, LLC, the lessees of
the Residence Inn and Courtyard properties, respectively. The separate
financial statements of each guaranteeing subsidiary (each, a "Guarantor
Subsidiary") are not presented because management has concluded that such
financial statements are not material to investors. The guarantee of each
Guarantor Subsidiary is full and unconditional and joint and several and
each Guarantor Subsidiary is a wholly owned subsidiary of the Company. The
non-guarantor subsidiaries (the "Non-Guarantor Subsidiaries") own the
following full-service hotels: the Albany Marriott; Atlanta Marriott
Marquis; Grand Hyatt, Atlanta; Harbor Beach Resort; Hartford Marriott;
Hyatt Regency, Cambridge; Hyatt Regency, Reston; Manhattan Beach Marriott;
Minneapolis Southwest Marriott; New York Marriott Marquis; Ontario Airport
Marriott; Pittsburgh City Center Marriott; The Ritz-Carlton, Amelia Island;
San Diego Marriott Hotel and Marina; San Diego Mission Valley; Swissotel,
Atlanta; Swissotel, Boston; Swissotel, Chicago; The Drake (Swissotel) New
York; and the Oklahoma City Waterford Marriott.
The following condensed combined consolidating information sets forth the
financial position as of March 26, 1999 and December 31, 1998 and results
of operations and cash flows for the twelve weeks ended March 26, 1999 and
March 27, 1998 of the parent, Guarantor Subsidiaries and the Non-Guarantor
Subsidiaries.
-13-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental Condensed Combined Consolidating Balance Sheets
(in millions)
March 26, 1999
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Property and equipment, net ............................ $ 1,227 $ 3,723 $ 2,223 $ -- $ 7,173
Investments in affiliate ............................... 1,109 -- -- (1,065) 44
Notes and other receivables ............................ 777 51 19 (646) 201
Other assets ........................................... 261 178 167 (137) 469
Cash and cash equivalents .............................. 101 155 28 -- 284
------- ------- ------- ------- -------
Total assets ........................................ $ 3,475 $ 4,107 $ 2,437 $(1,848) $ 8,171
======= ======= ======= ======= =======
Debt ................................................... $ 1,491 $ 2,833 $ 1,113 $ (324) $ 5,113
Convertible debt obligations to Host Marriott .......... 567 -- -- -- 567
Deferred income taxes .................................. 51 39 7 -- 97
Other liabilities ...................................... 113 636 292 (326) 715
------- ------- ------- ------- -------
Total liabilities ................................... 2,222 3,508 1,412 (650) 6,492
Minority interests ..................................... 16 59 74 -- 149
Limited partner interest of third parties at
redemption value ...................................... 718 -- -- -- 718
Owner's capital ........................................ 519 540 951 (1,198) 812
------- ------- ------- ------- -------
Total liabilities and owner's capital .................. $ 3,475 $ 4,107 $ 2,437 $(1,848) $ 8,171
======= ======= ======= ======= =======
December 31, 1998
-14-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
December 31, 1998
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Property and equipment, net ............................ $ 1,225 $ 3,743 $ 2,233 $ -- $ 7,201
Investments in affiliate ............................... 1,038 -- -- (1,005) 33
Notes and other receivables ............................ 783 51 19 (650) 203
Other assets ........................................... 258 146 141 (156) 389
Cash and cash equivalents .............................. 330 91 15 -- 436
------- ------- ------- ------- -------
Total assets ........................................ $ 3,634 $ 4,031 $ 2,408 $(1,811) $ 8,262
======= ======= ======= ======= =======
Debt ................................................... $ 1,438 $ 2,837 $ 1,183 $ (327) $ 5,131
Convertible debt obligation to Host Marriott ........... 567 -- -- -- 567
Deferred income taxes .................................. 51 39 7 -- 97
Other liabilities ...................................... 99 598 252 (285) 664
------- ------- ------- ------- -------
Total liabilities ................................... 2,155 3,474 1,442 (612) 6,459
Minority interests ..................................... 15 56 76 -- 147
Limited partner interest of third parties at
redemption value ...................................... 892 -- -- -- 892
Owner's capital ........................................ 572 501 890 (1,199) 764
------- ------- ------- ------- -------
Total liabilities and owner's capital ................. $ 3,634 $ 4,031 $ 2,408 $(1,811) $ 8,262
======= ======= ======= ======= =======
-15-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental Condensed Combined Statements of Operations
(in millions)
Twelve Weeks Ended March 26, 1999
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
REVENUES............................................. $ 39 $ 101 $ 54 $ (2) $ 192
Depreciation......................................... (13) (35) (18) -- (66)
Property-level expenses.............................. (10) (22) (26) -- (58)
Hotel operating expenses............................. -- -- -- -- --
Minority interest.................................... (1) (3) -- -- (4)
Interest expense..................................... (41) (48) (21) 2 (108)
Dividends on convertible preferred securities........ -- -- -- -- --
Corporate expenses................................... (1) (4) (3) -- (8)
Other expenses....................................... (4) -- -- -- (4)
-------- -------- -------- -------- --------
NET INCOME (LOSS).................................... $ (31) $ (11) $ (14) $ -- $ (56)
======== ======== ======== ======== ========
Twelve Weeks Ended March 27, 1998
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
REVENUES............................................. $ 249 $ 378 $ 194 $ (16) $ 805
Depreciation......................................... (14) (27) (12) -- (53)
Property-level expenses.............................. (11) (20) (31) -- (62)
Hotel operating expenses............................. (152) (251) (121) -- (524)
Minority interest.................................... (12) (13) (4) 13 (16)
Interest expense..................................... (19) (46) (14) 3 (76)
Dividends on convertible preferred securities........ (9) -- -- -- (9)
Corporate expenses................................... (3) (6) (3) - (12)
Other expenses....................................... (5) -- -- -- (5)
-------- -------- -------- -------- --------
Income from continuing operations before taxes....... 24 15 9 -- 48
Provision for income taxes........................... (10) (6) (4) -- (20)
-------- -------- -------- -------- --------
Income from continuing operations.................... 14 9 5 -- 28
Income from discontinued operations.................. 2 -- -- -- 2
-------- -------- -------- -------- --------
NET INCOME........................................... $ 16 $ 9 $ 5 $ - $ 30
-======== ======== ======== ======== ========
-16-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental Condensed Combined Statements of Cash Flows
(in millions)
Twelve Weeks Ended March 26, 1999
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------ ------------
OPERATING ACTIVITIES
Cash (used in) from operations ................................. $ (10) $ 21 $ (7) $ 4
----- ----- ----- -----
INVESTING ACTIVITIES
Cash received from sales of assets ............................. 2 34 -- 36
Capital expenditures ........................................... (21) (46) (9) (76)
Acquisitions ................................................... -- -- (4) (4)
Other .......................................................... 2 -- -- 2
----- ----- ----- -----
Cash used in investing activities .............................. (17) (12) (13) (42)
----- ----- ----- -----
FINANCING ACTIVITIES
Repayment of debt .............................................. (1) (267) (67) (335)
Issuances of debt .............................................. 40 259 -- 299
Transfers to/from Parent ....................................... (162) 62 100 --
Dividends ...................................................... (69) -- -- (69)
Repurchase of common stock ..................................... (4) -- -- (4)
Other .......................................................... (5) -- -- (5)
----- ----- ----- -----
Cash (used in) from financing activities ....................... (201) 54 33 (114)
----- ----- ----- -----
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................................. $(228) $ 63 $ 13 $(152)
===== ===== ===== =====
-17-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Twelve Weeks Ended March 27, 1998
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------ ------------
OPERATING ACTIVITIES
Cash from continuing operations .................................... $ 45 $ 36 $ 16 $ 97
Cash from discontinued operations .................................. 2 -- -- 2
----- ----- ----- -----
Cash from operations ............................................... 47 36 16 99
----- ----- ----- -----
INVESTING ACTIVITIES
Cash received from sales of assets ................................. 1 -- -- 1
Capital expenditures ............................................... (18) (34) (9) (61)
Acquisitions ....................................................... -- -- (118) (118)
Sales of short-term marketable securities .......................... 193 -- -- 193
Other .............................................................. (4) 2 10 8
----- ----- ----- -----
Cash from (used in) investing activities from
continuing operations ........................................... 172 (32) (117) 23
Cash used in investing activities from discontinued
operations ...................................................... (28) -- -- (28)
----- ----- ----- -----
Cash from (used in) investing activities ........................... 144 (32) (117) (5)
----- ----- ----- -----
FINANCING ACTIVITIES
Repayment of debt .................................................. (2) (3) (2) (7)
Issuances of debt .................................................. -- -- 1 1
Transfers to/from Parent ........................................... (119) 4 115 --
Other .............................................................. (16) -- -- (16)
----- ----- ----- -----
Cash (used in) from financing activities from
continuing operations ........................................... (137) 1 114 (22)
Cash used in financing activities from discontinued
operations ...................................................... (27) -- -- (27)
----- ----- ----- -----
Cash (used in) from financing activities ........................... (164) 1 114 (49)
----- ----- ----- -----
INCREASE IN CASH AND CASH EQUIVALENTS .............................. $ 27 $ 5 $ 13 $ 45
===== ===== ===== =====
-18-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Forward-looking Statements
- --------------------------
Certain matters discussed herein are forward-looking statements. Certain, but
not necessarily all, of such forward-looking statements can be identified by the
use of forward-looking terminology, such as "believes," "expects," "may,"
"will," "should," "estimates," or "anticipates," or the negative thereof or
other variations thereof or comparable terminology. All forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause our 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. Although
we believe the expectations reflected in such forward-looking statements are
based upon reasonable assumptions, we can give no assurance that our
expectations will be attained or that any deviations will not be material. We
undertake 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. Our historical revenues have primarily represented gross property-
level sales from hotels, net gains on property transactions, interest income and
equity in earnings of affiliates. As of January 1, 1999, we lease substantially
all of our hotels to subsidiaries of Crestline Capital Corporation. As a result
of these leases, we no longer record property-level revenues and expenses,
rather we recognize rental income on the leases. Also, as discussed in Note 2,
the Company retroactively adopted SAB 101 as of the beginning of its fiscal
year, and restated its results of operations for the first three quarters of
1999 to defer recognition of rental income which is contingent upon annual
thresholds until such period as those thresholds are met. SAB 101 has no impact
on the Company's annual revenue recognition, net income or earnings per unit.
Thus, 1999 revenues and expenses are not comparable with prior periods. Note 3
to the financial statements presents a table comparing gross hotel sales for all
periods presented to facilitate an investor's understanding of the operation of
our properties. The comparison of the 1999 quarterly results with 1998 is also
affected by a change in the reporting period for the Company's hotels not
managed by Marriott International, which resulted in the inclusion of only two
months of results in the 1999 first quarter versus three months in 1998 for the
24 of such hotels (8,524 rooms) the Company owned as of the beginning of 1998.
The change in reporting period was required as part of the REIT Conversion.
Results in the first quarter of 1999 were driven by the addition of 36
properties in 1998. The increase in hotel sales reflects growth in room revenues
generated per available room or REVPAR. For comparable properties, REVPAR
increased 4.4% to $120.37 for the first quarter of 1999. On a comparable basis,
average room rates increased approximately 3%, while average occupancy increased
one percentage point.
Interest income decreased as the result of a lower level of cash and marketable
securities held in the first quarter of 1999 compared to the first quarter of
1998.
The net gain on property transactions for 1999 resulted from the $11 million
pre-tax gain on the sale of the 479-room Minneapolis/Bloomington Marriott for
approximately $35 million.
Expenses. As discussed above, hotel revenues and hotel operating costs are not
comparable with the prior year. The lessee pays certain property-level costs
including management fees and we receive a rent payment, which is net of those
costs. Property-level costs which are comparable, including depreciation,
property taxes, insurance, ground and equipment rent increased $9 million or 8%
to $124 million, primarily reflecting the depreciation from the 36 properties
added in 1998.
-19-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Minority Interest. Minority interest expense decreased $12 million to $4 million
for the first quarter of 1999, primarily reflecting the impact of the
consolidation of partnerships which occurred in connection with the REIT
Conversion.
Interest Expense. Interest expense increased 42% to $108 million in the first
quarter of 1999, primarily due to the issuance of senior notes, establishment of
a new credit facility, interest expense on the convertible debt obligation to
Host Marriott and additional mortgage debt on properties acquired in connection
with the REIT Conversion.
Dividends on Convertible Preferred Securities. The dividends on Convertible
Preferred Securities reflect the accrual for the first twelve weeks of fiscal
year 1998 on the $550 million in 6 3/4% Convertible Preferred Securities. The
Convertible Preferred Securities are held by the REIT. The dividends paid by the
REIT are supported by the $567 million debt obligation to Host Marriott on the
balance sheet. The Operating Partnership incurs interest expense on the debt
obligation, and, therefore, no dividends are included in the current period
statement of operations.
Corporate Expenses. Corporate expenses decreased $4 million to $8 million for
the first quarter of 1999 resulting primarily from the timing of certain project
costs not incurred in 1999.
Income from Discontinued Operations. Income from discontinued operations
represents the senior living communities business' results of operations for the
first quarter of 1998 as restated for the spin-off of Crestline.
Net Income (Loss). Our net loss for the first quarter of 1999 was $56 million
compared to $30 million of income for the first quarter of 1998.
EBITDA and FFO
- --------------
Our consolidated earnings before interest expense, taxes, depreciation,
amortization and other non-cash items ("EBITDA") increased $23 million, or 11%,
to $226 million in the first quarter of 1999. Hotel EBITDA increased $26
million, or 13%, to $230 million in the first quarter of 1999, reflecting
comparable full-service hotel EBITDA growth, as well as incremental EBITDA from
1997 and 1998 acquisitions offset by amounts representing approximately 1% to
1.5% of hotel sales which are retained by Crestline.
The following is a reconciliation of EBITDA to the Company's income from
continuing operations (in millions):
-20-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Twelve Weeks Ended
--------------------
March 26, March 27,
1999 1998
--------- ---------
EBITDA ........................................ $ 226 $ 203
Effect of SAB 101 ............................. (115) --
Interest expense .............................. (108) (76)
Dividends on Convertible Preferred Securities.. -- (9)
Depreciation and amortization ................. (68) (54)
Minority interest expense ..................... (4) (16)
Income taxes .................................. -- (20)
Other non-cash charges, net ................... 13 --
----- -----
Income (loss) from continuing operations .... $ (56) $ 28
===== =====
Our interest coverage, defined as EBITDA divided by cash interest expense, was
2.4 times for the 1999 first quarter, 2.8 times for the 1998 first quarter and
2.5 times for full year 1998. The deficiency of earnings to fixed charges was
$50 million for the first quarter of 1999 and the ratio of earnings to fixed
charges was 1.7 to 1.0 for the first quarter of 1998.
We also believe that Funds From Operations or FFO as defined by the National
Association of Real Estate Investment Trusts 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 Real Estate Investment
Trusts ("REITs"). FFO increased $32 million, or 38%, to $117 million in the
first quarter of 1999. For periods prior to 1999, the FFO disclosed represents
comparative FFO (FFO plus deferred tax expense). The following is a
reconciliation of the Company's income from continuing operations to FFO (in
millions):
Twelve Weeks Ended
-------------------
March 26, March 27,
1999 1998
--------- ---------
Income (loss) from continuing operations....... $ (56) $ 28
Effects of SAB 101 ............................ 115 --
Depreciation and amortization ................. 68 54
Other real estate activities .................. (11) (1)
Partnership adjustments ....................... 1 (6)
Deferred taxes ................................ -- 10
----- -----
Funds From Operations ......................... $ 117 $ 85
===== =====
On a pro forma basis adjusted for the December 1997 operations discussed above
FFO increased $39 million or 50% in the first quarter of 1999.
The Company considers EBITDA and 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
-21-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
purposes only) and income taxes have been, and will be incurred which are not
reflected in the EBITDA and FFO presentation.
Cash Flows and Financial Condition
- ----------------------------------
The Company reported a decrease in cash and cash equivalents of $152 million
during the twelve weeks ended March 26, 1999. Cash from continuing operations
was $4 million for the first quarter of 1999 and $97 million for the first
quarter of 1998. The $93 million decrease in cash from continuing operations
resulted principally due to an increase in rent receivable resulting from the
timing of the receipt of cash payments under the leases versus management
agreements. There was no cash from (used in) discontinued operations for the
first quarter of 1999; however, cash from discontinued operations totaled $2
million for the first quarter of 1998.
Cash used in investing activities from continuing operations was $42 million for
the first quarter of 1999 and cash from investing activities from continuing
operations was $23 million for the first quarter of 1998. Cash used in investing
activities for the first quarter of 1999 includes capital expenditures of $76
million, mostly related to renewals and replacements on existing properties. In
addition, the Company generated $36 million of cash from the net sale of assets,
primarily the Minneapolis/Bloomington property. There was no cash from (used in)
investing activities from discontinued operations for the first quarter of 1999;
however, cash used in investing activities of discontinued operations totaled
$28 million for the first quarter of 1998.
Cash used in financing activities from continuing operations was $114 million
for the first quarter of 1999 and $22 million for the first quarter of 1998.
Cash used in financing activities for the first quarter of 1999 includes $323
million in prepayment of debt, offset by $299 million in debt issuances. Both
financing activities were related to the Company's February 1999 issuance of
$300 million of 83/8% Series D Senior notes due in 2006. The Series D Senior
notes were used to refinance, or purchase, debt which had been assumed through
the merger of certain partnerships or the purchase of hotel properties in
connection with the REIT Conversion in December 1998. There was no cash from
(used in) financing activities from discontinued operations in the first quarter
of 1999; however, cash used in financing activities of discontinued operations
totaled $27 million in the first quarter of 1998.
Cash used in financing activities for the first quarter of 1999 also includes a
dividend distribution related to the REIT Conversion of $73 million.
On March 15, 1999, the Board of Directors of Host Marriott declared a regular
cash dividend of $0.21 per share of common stock and a corresponding
distribution of $0.21 per unit of limited partnership interest ("OP Unit"). The
dividend and distribution was paid on April 14, 1999 to shareholders and
unitholders of record on March 31, 1999.
In April 1999, a subsidiary of the Company completed the refinancing of the
mortgage on the New York Marriott Marquis. The mortgage is for $245 million
maturing June 2000 and bears interest at a rate of LIBOR plus 2.125% for the
period from March 31, 1999 through December 31, 1999 and LIBOR plus 2.5% until
maturity. The Company is required to make principal payments of $10 million and
$5 million on December 31, 1999 and March 31, 2000, respectively, as well as pay
an extension fee of 0.5% of the principal balance of the loan outstanding at
December 31, 1999.
-22-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On December 30, 1998, the Operating Partnership acquired a portfolio of twelve
luxury hotels and other assets from the Blackstone Group, a Delaware limited
partnership, and a series of funds controlled by affiliates of Blackstone Real
Estate Partners. The Operating Partnership issued approximately 43.9 million OP
Units and assumed debt and made cash payments of approximately $920 million and
distributed 1.4 million of the shares of Crestline common stock to the
Blackstone Real Estate Partners. An additional 3.8 million OP Units were issued
in April 1999 in accordance with the purchase agreement based on certain
adjustments determined on March 31, 1999.
The Company also completed a 210-room extension of the Philadelphia Marriott
Convention Center in April 1999 at a cost of approximately $43 million,
including a debt of $9 million.
Year 2000 Issue
- ---------------
Year 2000 issues have 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 our Year 2000 compliance program.
We have adopted the compliance program because we recognize the importance of
minimizing the number and seriousness of any disruptions that may occur as a
result of the Year 2000 issue. Our compliance program includes an assessment of
our hardware and software computer systems and embedded systems, as well as an
assessment of the Year 2000 issues relating to third parties with which we have
a material relationship or whose systems are material to the operations of our
hotel properties. Our efforts to ensure that our computer systems are Year 2000
compliant have been segregated into two separate phases: in-house systems and
third-party systems. Following the REIT Conversion, Crestline, as the lessee of
most of our hotels, will deal directly with Year 2000 matters material to the
operation of the hotels, and Crestline has agreed to adopt and implement the
program outlined below with respect to third-party systems for all hotels for
which it is lessee.
In-House Systems. Since the distribution of Marriott International on October 8,
1993, we have invested in the implementation and maintenance of accounting and
reporting systems and equipment that are intended to enable us to provide
adequately for our information and reporting needs and which are also Year 2000
compliant. Substantially all of our in-house systems have already been certified
as Year 2000 compliant through testing and other mechanisms and we have not
delayed any systems projects due to the Year 2000 issue. We engaged a third
party to review our Year 2000 in-house readiness and found no problems with any
mission critical systems. Management believes that future costs associated with
Year 2000 issues for our in-house systems will be insignificant and therefore
not impact our business, financial condition and results of operations. We have
not developed, and do not plan to develop, a separate contingency plan for our
in-house systems due to their current Year 2000 compliance. We do, however, have
the normal disaster recovery procedures in place should we have a systems
failure.
Third-Party Systems. We rely upon operational and financial systems provided by
third parties, primarily the managers and operators of our hotel properties, to
provide the appropriate property-specific operating systems, including
reservation, phone, elevator, security, HVAC and other systems, and to provide
us with financial information. Based on discussion with the third parties that
are critical to our business, including the managers and operators of our
hotels, we believe that these parties are in the process of studying their
systems and the systems of their respective vendors and service providers and,
in many
-23-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
cases, have begun to implement changes, to ensure that they are Year 2000
compliant. We have started to receive written assurances that these third
parties will be Year 2000 compliant on time. To the extent these changes impact
property-level systems, we may be required to fund capital expenditures for
upgraded equipment and software. We do not expect these charges to be material,
but we are committed to making these investments as required. To the extent that
these changes relate to a third party manager's centralized systems, including
reservations, accounting, purchasing, inventory, personnel and other systems,
management agreements generally provide for these costs to be charged to our
properties subject to annual limitations, which costs will be borne by Crestline
under the leases. We expect that the third party managers will incur Year 2000
costs in lieu of costs for their centralized systems related to system projects
that otherwise would have been pursued and, therefore, the overall level of
centralized systems charges allocated to the properties will not materially
increase as a result of the Year 2000 compliance effort. We believe that this
deferral of certain system projects will not have a material impact on our
future results of operations, although it may delay certain productivity
enhancements at our properties. We and Crestline 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. We believe that, in the
event of material Year 2000 non-compliance, we will have the right to seek
recourse against the manager under our third party management agreements. The
management agreements, however, generally do not specifically address the Year
2000 compliance issue. Therefore, the amount of any recovery in the event of
Year 2000 non-compliance at a property, if any, is not determinable at this
time, and only a portion of such recovery would accrue to us through increased
lease rental payments from Crestline.
We and Crestline 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, we and Crestline have had extensive discussions regarding the Year
2000 problem with Marriott International, the manager of a substantial majority
of our hotel properties. Due to the significance of Marriott International to
our business, a detailed description of Marriott International's state of
readiness follows.
Marriott International has adopted an eight-step process toward Year 2000
readiness, consisting of the following: (i) Awareness: fostering understanding
of, and commitment to, the problem and its potential risks; (ii) Inventory:
identifying and locating systems and technology components that may be affected;
(iii) Assessment: reviewing these components for Year 2000 compliance, and
assessing the scope of Year 2000 issues; (iv) Planning: defining the technical
solutions and labor and work plans necessary for each affected system; (v)
Remediation/Replacement: completing the programming to renovate or replace the
problem software or hardware; (vi) Testing and Compliance Validation: conducting
testing, followed by independent validation by a separate internal verification
team; (vii) Implementation: placing the corrected systems and technology back
into the business environment; and (viii) Quality Assurance: utilizing an
internal audit team to review significant projects for adherence to quality
standards and program methodology.
Marriott International has grouped its systems and technology into three
categories for purposes of Year 2000 compliance: (i) information resource
applications and technology (IT Applications)--enterprise-wide systems supported
by Marriott International's centralized information technology organization
("IR"); (ii) Business-initiated Systems ("BIS")--systems that have been
initiated by an individual business unit, and that are not supported by Marriott
International's IR organization; and (iii) Building Systems--non-IT equipment at
properties that use embedded computer chips, such as elevators, automated room
key systems and HVAC equipment. Marriott International is prioritizing its
efforts based on how severe an effect noncompliance would have on customer
service, core business processes or revenues, and whether
-24-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 March 26, 1999,
the Awareness and Inventory phases were complete for IT Applications, BIS, and
Building Systems. For IT Applications, the Assessment and Planning phases were
complete and Remediation/Replacement and Testing phases were 95 percent
complete. Compliance Validation had been completed for approximately 75 percent
of key systems, with most of the remaining work in its final stage. For BIS and
Building Systems, Assessment and Planning are substantially complete. For BIS,
Remediation/Replacement is substantially complete and Testing is in progress.
Marriott International is on track for completion of Remediation/Replacement and
Testing of Building Systems for September of 1999. Compliance Validation is in
progress for both BIS and Building Systems. Implementation and Quality Assurance
is in progress for IT Applications, BIS and Building Systems.
Year 2000 compliance communications with Marriott International's significant
third party suppliers, vendors and business partners, including its franchisees
are ongoing. Marriott International's efforts are focused on the connections
most critical to customer service, core business processes and revenues,
including those third parties that support the most critical enterprise-wide IT
Applications, franchisees generating the most revenues, suppliers of the most
widely used Building Systems and BIS, the top 100 suppliers, by dollar volume,
of non-IT products, and financial institutions providing the most critical
payment processing functions. Responses have been received from a majority of
the firms in this group. A majority of these respondents have either given
assurances of timely Year 2000 compliance or have identified the necessary
actions to be taken by them or Marriott International to achieve timely Year
2000 compliance for their products.
Marriott International has established 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 us or third
parties will be properly and timely completed, and failure to do so could have a
material adverse effect on us, our business and our financial condition. We
cannot predict the actual effects to us of the Year 2000 problem, which depends
on numerous uncertainties such as: whether significant third parties properly
and timely address the Year 2000 issue and whether broad-based or systemic
economic failures may occur. Moreover, we are reliant upon Crestline to
interface with third parties in addressing the Year 2000 issue at the hotels
leased by Crestline. We are 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 our dependence on third parties, including
Crestline following the REIT Conversion, we are unable to determine at this time
whether the consequences of Year 2000 failures will have a material impact on
us. Our Year 2000 compliance program, and Crestline's adoption thereof are
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-
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, L.P.
BY: HOST MARRIOTT CORPORATION
Its General Partner
February 16, 2000 /s/ Donald D. Olinger
- ----------------- -------------------------------
Date Donald D. Olinger
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
-26-