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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 6, 1996
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
Commission File No. 2-75711
POTOMAC HOTEL LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Delaware 52-1240223
(State of Organization) (I.R.S. Employer
Identification Number)
10400 Fernwood Road, Bethesda, MD 20817-1109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 380-2070
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
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<TABLE>
<CAPTION>
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POTOMAC HOTEL LIMITED PARTNERSHIP
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
...........................................................................................PAGE NO.
Item 1. Financial Statements
<S> <C>
Condensed Statements of Operations
Twelve Weeks and Thirty-Six Weeks
Ended September 6, 1996 and September 8, 1995..................................................1
Condensed Balance Sheets
September 6, 1996 and December 31, 1995........................................................2
Condensed Statements of Cash Flows
Thirty-Six Weeks ended September 6, 1996 and September 8, 1995.................................3
Notes to Condensed Financial Statements...........................................................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................5
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................................................7
Item 5. Other Events.........................................................................................7
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per unit amounts)
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 6, September 8, September 6, September 8,
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES
Hotel (Note 2)..................................$ 6,927 $ 8,280 $ 32,267 $ 37,265
Gain on the sale of the Dallas Hotel ........... -- 24,586 -- 24,586
--------------- --------------- --------------- ---------------
.......................................... 6,927 32,866 32,267 61,851
--------------- --------------- --------------- ---------------
OPERATING COSTS AND EXPENSES
Interest........................................ 5,738 2,299 16,852 21,297
Incentive management fee........................ 876 1,156 5,528 6,603
Depreciation and amortization................... 1,273 1,408 3,819 4,159
Base management fee............................. 833 942 2,952 3,324
Property taxes.................................. 847 969 2,599 3,191
Ground rent, insurance and other................ 529 585 1,767 1,611
--------------- --------------- --------------- ---------------
.......................................... 10,096 7,359 33,517 40,185
--------------- --------------- --------------- ---------------
NET (LOSS) INCOME BEFORE
EXTRAORDINARY ITEM.............................. (3,169) 25,507 (1,250) 21,666
--------------- --------------- --------------- ---------------
EXTRAORDINARY ITEM
Gain on forgiveness of deferred fees............ -- 146,303 -- 146,303
--------------- --------------- --------------- ---------------
NET (LOSS) INCOME.....................................$ (3,169) $ 171,810 $ (1,250) $ 167,969
=============== =============== =============== ===============
ALLOCATION OF NET (LOSS) INCOME
General Partner.................................$ (31) $ 7,668 $ (12) $ 7,630
Limited Partners................................ (3,138) 164,142 (1,238) 160,339
--------------- --------------- --------------- ---------------
..........................................$ (3,169) $ 171,810 $ (1,250) $ 167,969
=============== =============== =============== ===============
NET (LOSS) INCOME BEFORE
EXTRAORDINARY ITEM PER
LIMITED PARTNER UNIT
(1,800 Units)...................................$ (1,744) $ 14,029 $ (688) $ 11,916
=============== =============== =============== ===============
NET (LOSS) INCOME PER LIMITED
PARTNER UNIT (1,800 Units)......................$ (1,744) $ 91,190 $ (688) $ 89,077
=============== =============== =============== ===============
</TABLE>
See Notes to Condensed Financial Statements.
1
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
September 6, December 31,
1996 1995
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Property and equipment, net............................................................$ 152,358 $ 151,097
Due from Marriott International, Inc. and affiliates................................... 12,582 12,017
Other assets........................................................................... 5,209 4,320
Restricted cash........................................................................ 6,871 2,948
Cash and cash equivalents.............................................................. 2,380 6,139
------------ ------------
$ 179,400 $ 176,521
============ ============
</TABLE>
LIABILITIES AND PARTNERS' DEFICIT
<TABLE>
<CAPTION>
LIABILITIES
<S> <C> <C>
Mortgage debt..........................................................................$ 182,337 $ 186,000
Due to Host Marriott Corporation and affiliates........................................ 122,209 122,243
Incentive and base management fees due to Marriott International, Inc.
and affiliates....................................................................... 14,846 9,435
Due to Marriott International, Inc. and affiliates..................................... 454 477
Accrued interest and other liabilities................................................. 3,260 822
------------ ------------
Total Liabilities.................................................................. 323,106 318,977
------------ ------------
PARTNERS' DEFICIT
General Partner........................................................................ (34,808) (34,796)
Limited Partners....................................................................... (108,898) (107,660)
------------ ------------
Total Partners' Deficit............................................................ (143,706) (142,456)
------------ ------------
$ 179,400 $ 176,521
============ ============
</TABLE>
See Notes to Condensed Financial Statements.
2
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Thirty-Six Weeks Ended
September 6, September 8,
1996 1995
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income.................................................................$ (1,250) $ 167,969
Extraordinary item................................................................ -- 146,303
--------------- ---------------
Net (loss) income before extraordinary item....................................... (1,250) 21,666
Noncash items:
Gain on sale of the Dallas hotel............................................... -- (24,586)
Other noncash items............................................................ 13,456 15,827
Changes in operating accounts..................................................... 2,887 (964)
--------------- ---------------
Cash provided by operating activities....................................... 15,093 11,943
--------------- ---------------
INVESTING ACTIVITIES
Additions to property and equipment............................................... (5,080) (2,285)
Change in property improvement funds.............................................. (1,349) (3,930)
Working capital advances to Marriott International, Inc........................... (262) --
Proceeds from sale of the Dallas hotel............................................ -- 44,946
--------------- ---------------
Cash (used in) provided by investing activities............................. (6,691) 38,731
--------------- ---------------
FINANCING ACTIVITIES
Principal repayments on mortgage debt............................................. (4,370) (58,163)
Change in collateral accounts..................................................... (3,923) (2,532)
(Repayments to) advances from Host Marriott Corporation
and affiliates, net............................................................ (3,868) 9,962
Payment of financing costs........................................................ -- (1,466)
Increase in amounts due from Marriott International, Inc.......................... -- (624)
Advances from affiliates of Marriott International, Inc........................... -- 350
Change in escrow fund cash........................................................ -- 20
--------------- ---------------
Cash used in financing activities........................................... (12,161) (52,453)
--------------- ---------------
DECREASE IN CASH AND CASH EQUIVALENTS................................................. (3,759) (1,779)
CASH AND CASH EQUIVALENTS at beginning of period...................................... 6,139 7,883
--------------- ---------------
CASH AND CASH EQUIVALENTS at end of period............................................$ 2,380 $ 6,104
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest.........................................$ 9,605 $ 16,397
=============== ===============
</TABLE>
See Notes to Condensed Financial Statements.
3
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed financial statements have been prepared by
Potomac Hotel Limited Partnership (the "Partnership") 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 from the
accompanying statements. The Partnership believes the disclosures made
are adequate to make the information presented not misleading. However,
the condensed financial statements should be read in conjunction with the
Partnership's financial statements and notes thereto included in the
Partnership's Form 10-K for the fiscal year ended December 31, 1995.
In the opinion of the Partnership, the accompanying unaudited condensed
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of the
Partnership as of September 6, 1996, and the results of operations for the
twelve and thirty-six weeks ended September 6, 1996 and September 8, 1995.
Interim results are not necessarily indicative of fiscal year performance
because of seasonal and short-term variations.
For financial reporting purposes, the Partnership's net (loss) income is
allocated 99% to the limited partners and 1% to Host Marriott (the
"General Partner"). Significant differences exist between the net (loss)
income for financial reporting purposes and the net (loss) income
reported for Federal income tax purposes. These differences are due
primarily to the use for income tax purposes of accelerated depreciation
methods and shorter depreciable lives, differing tax bases in contributed
capital and differences in the timing of the recognition of base and
incentive management fee expense.
<PAGE>
2. Revenues represents house profit of the Partnership's Hotels since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Hotels to the manager. House profit
reflects hotel operating results which flow to the Partnership as property owner
and represents gross hotel sales less property-level expenses, excluding
depreciation and amortization, base and incentive management fees, property
taxes, ground rent, insurance and certain other costs, which are disclosed
separately in the condensed statement of operations. Revenues consists of the
following for the twelve and thirty-six weeks ended September 6, 1996 and
September 8, 1995 (in thousands). Due to the sale of the Dallas Hotel in August
1995, 1996 and 1995 Hotel operating results are not comparable:
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 6, September 8, September 6, September 8,
1996 1995 1996 1995
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
HOTEL SALES
Rooms...................................$ 18,135 $ 20,044 $ 62,160 $ 69,277
Food and beverage....................... 7,456 8,986 28,312 32,965
Other................................... 2,165 2,382 7,916 8,573
--------------- --------------- -------------- ---------------
..................................... 27,756 31,412 98,388 110,815
--------------- --------------- -------------- ---------------
HOTEL EXPENSES
Departmental Direct Costs
Rooms................................ 5,084 5,553 15,384 16,949
Food and beverage.................... 6,583 7,520 22,080 25,105
Other hotel operating expenses.......... 9,162 10,059 28,657 31,496
--------------- --------------- -------------- ---------------
..................................... 20,829 23,132 66,121 73,550
--------------- --------------- -------------- ---------------
REVENUES....................................$ 6,927 $ 8,280 $ 32,267 $ 37,265
=============== =============== ============== ===============
</TABLE>
3. In the first quarter of 1996, the Partnership adopted Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of
SFAS No. 121 did not have an effect on its financial statements.
4
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Hotel revenues for 1996 decreased $5.0 million, or 13%, to $32.3 million
year-to-date, and $1.4 million, or 16%, to $6.9 million in the third quarter
when compared to 1995. The decrease in revenues was primarily due to the effect
on Hotel operations of the sale of the Dallas Hotel in August 1995.
For the eight hotels owned continuously during 1995 and 1996, revenues increased
$1.2 million, or 4%, for the 1996 year-to-date period and $0.2 million, or 2%,
for the third quarter when compared to 1995. Combined REVPAR, or revenue per
available room, for these eight hotels increased 6% to $78 for the 1996
year-to-date period and 6% to $68 for the 1996 third quarter due to increases in
combined average room rate and combined average occupancy. For the eight hotels
owned continuously, the combined average room rate increased 4% to $96 for the
1996 year-to-date period and 4% to $87 for the third quarter when compared to
1995; the combined average occupancy increased 1.3 percentage points to 81% for
the 1996 year-to-date period and 0.7 percentage points to 78% for the third
quarter. Demand in the transient segment remains strong, which has allowed the
hotels to restrict discounted rates, thereby increasing average room rates.
Incentive management fee, base management fee, property taxes and depreciation
and amortization expenses for the third quarter and year-to-date 1996 decreased
primarily due to expenses being recorded for the Dallas Hotel in 1995 but not in
1996.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded through loan
agreements with independent financial institutions or with Host Marriott
Corporation ("Host Marriott" and "General Partner") and its affiliates. The
General Partner believes that the Partnership will have sufficient capital
resources and liquidity to continue to conduct its business in the ordinary
course.
Total Partnership interest expense decreased 21% for the thirty-six weeks
ended September 6, 1996 when compared to the same period in 1995 primarily due
to reduced interest expense on the mortgage loan ( the "Bank Loan") for six of
the Partnership's hotels (the "Bank Hotels"). As a result of the August 22, 1995
Bank Loan restructuring, the related sale of the Dallas Hotel and subsequent
principal repayments, the principal balance of the Bank Loan was reduced from
$245.0 million as the restructuring date of the loan to $182.3 million as of
September 6, 1996. For the twelve-week period ended September 6, 1996, interest
expense increased by $3.4 million over the twelve-week period ended September 8,
1995 as a result of an accounting adjustment to reduce interest expense on the
Bank Loan for the 1995 third quarter. During the restructuring period of the
Bank Loan in 1995, the Partnership was required by the Bank Loan agreement to
accrue interest at the default rate of interest of 12.4%. As a result of the
successful restructuring of the Bank Loan in August 1995, the Partnership
adjusted the interest expense recorded during the restructuring period to
reflect the actual interest expense pursuant to the forbearance agreement.
Pursuant to the terms of the restructured Bank Loan, operating profit from the
Bank Hotels in excess of debt service must be held in a collateral account with
The Mitsui Trust and Banking Company (the "Bank Lender"). Also, payment of a
portion of the Marriott International, Inc. ("MII") base management fee equal to
1% of gross Bank Hotel sales is subordinate to debt service on the Bank Loan and
is set aside in the collateral account. After the end of each fiscal year,
excess cash remaining in the collateral account after payment of annual debt
service is applied to repay Bank Loan principal, advances under the $26 million
debt service guaranty (the "Bank Guaranty") provided by Host Marriott and,
depending upon the unadvanced balance of the Bank Guaranty, deferred base
management fees to MII. As a result, on February 22, 1996, the Partnership
repaid $1.2 million in principal on the Bank Loan and $1.2 million to Host
Marriott on the Bank Guaranty from 1995 excess operating cash flow and
subordinated base management fees related to the Bank Hotels. As of September 6,
1996, $17.2 million was available under the Bank Guaranty.
5
<PAGE>
In connection with the restructuring of the Bank Loan, Host Marriott executed an
additional guaranty (the "Interest Guaranty") for $12 million to cover any
shortfalls in the payment of interest after application of all cash flow being
made under the Bank Guaranty or an equivalent "back-up" guaranty provided by MII
(the "MII Back-up Guaranty"). Pursuant to the terms of the Interest Guaranty,
Host Marriott's liability was reduced by $4 million on December 31, 1995.
Therefore, as of September 6, 1996, Host Marriott's liability under the Interest
Guaranty was $8 million.
On March 27, 1996, the Partnership repaid $2.8 million from excess working
capital to Host Marriott which was previously advanced to the Partnership to
fund temporary working capital shortfalls. As of September 6, 1996, the amount
due to Host Marriott for working capital advances was approximately $4.8
million.
On June 24, 1996, the Partnership repaid $2.5 million of principal on the Bank
Loan, along with approximately $6.8 million in interest from cash reserved in
the collateral account. The repayment reduced the balance of the Bank Loan to
approximately $182.3 million. The balance in the collateral account as of
September 6, 1996 was approximately $6.1 million.
In connection with a rooms renovation at the Raleigh Hotel, Marriott Financial
Services, Inc., a wholly-owned subsidiary of Host Marriott, agreed to provide up
to $700,000 to fund costs of the renovation in excess of amounts available in
the Raleigh Hotel property improvement fund. Advances under the unsecured loan
bear interest at the prime rate plus one-half of one percent, and the loan will
mature on December 31, 2003. Payments of principal and interest on the loan will
be funded from an amount equal to 1% of gross hotel sales of the total Raleigh
Hotel property improvement fund contribution of 5% of gross hotel sales.
Payments will be made each accounting period and will be applied first to
accrued interest and thereafter to principal. As of September 6, 1996, $272,000
has been advanced to the Partnership under this loan.
In the first quarter of 1996, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS
No. 121 did not have an effect on its financial statements.
Capital Sources and Uses of Cash
For the thirty-six weeks ended September 6, 1996 and September 8, 1995, cash
provided by operations was $15.1 million and $11.9 million, respectively. The
increase was primarily due to a decrease in interest expense on the Bank Loan
and base management fees, partially offset by the effect of the sale of the
Dallas Hotel in August 1995.
For the thirty-six weeks ended September 6, 1996, cash utilized in investing
activities was $6.7 million whereas $38.7 million was provided by investing
activities during the thirty-six weeks ended September 8, 1995. The variance was
primarily the result of proceeds received from the sale of the Dallas Hotel in
1995 totaling $44.9 million offset by an increase in capital expenditures at the
Hotels of $2.8 million and working capital advances totaling $262,000 to the
Miami, Albuquerque, Mountain Shadows and Houston Hotels.
For the thirty-six weeks ended September 6, 1996 and September 8, 1995, cash
utilized in financing activities was $12.2 million and $52.5 million,
respectively. The variance was primarily due to mortgage debt principal
repayments of $58.2 million combined with financing costs of approximately $1.5
million associated with the restructuring of the Bank Loan in August 1995. In
addition, net advances from Host Marriott for the thirty-six weeks ended
September 8, 1995 were approximately $10 million, while repayments of advances
from Host Marriott for the thirty-six weeks ended September 6, 1996 were $3.9
million.
The General Partner believes that cash from hotel operations, the ability to
defer the payment of certain management fees to the manager and the ability to
standaside a portion of the FF&E reserve contribution will provide adequate
funds to meet debt service requirements of the Partnership. As a result, no
further advances are expected to be required under the Bank Guaranty, the
Interest Guaranty or the MII Back-up Guaranty. However, no cash will be
available for distribution to the partners.
6
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Partnership and the Partnership Hotels are involved in routine litigation
and administrative proceedings arising in the ordinary course of business, some
of which are expected to be covered by liability insurance and which
collectively are not expected to have a material adverse effect on the business,
financial conditions or results of operations of the Partnership.
ITEM 5. OTHER EVENTS
Host Marriott Corporation, the General Partner of the Partnership,
appointed Mr. Robert M. Baylis as a new director in July 1996. Mr. Baylis, 58,
is a director of The International Forum, an executive education program of the
Wharton School at the University of Pennsylvania. He was formerly Vice Chairman
of CS First Boston. Mr. Baylis also serves as a director of New York Life
Insurance Company, Gryphon Holdings, Inc. and Home State Holdings, Inc.
In June 1996, Bruce D. Wardinski replaced Scott LaPorta as Senior Vice President
and Treasurer of Host Marriott Corporation. Mr. Wardinski, 36, joined Host
Marriott in 1987 as a Senior Financial Analyst of Financial Planning and
Analysis and was named Manager in June 1988. He was appointed director,
Financial Planning & Analysis in 1989, director of Project Finance in January
1990, Senior Director of Project Finance in June 1993, Vice President, Project
Finance in June 1994, and Senior Vice President of International Development in
October 1995. Prior to joining Host Marriott, Mr. Wardinski was with the public
accounting firm Price Waterhouse.
7
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
POTOMAC HOTEL LIMITED PARTNERSHIP
By: HOST MARRIOTT CORPORATION
General Partner
October 21, 1996
/s/ Donald D. Olinger
--------------------------------
Donald D. Olinger
Vice President and
Corporate Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
third quarter Form 10-Q and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<CIK> 0000357226
<NAME> POTOMAC HOTEL LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-06-1996
<CASH> 9,251
<SECURITIES> 5,209<F1>
<RECEIVABLES> 12,582
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,042
<PP&E> 222,186
<DEPRECIATION> (69,828)
<TOTAL-ASSETS> 179,400
<CURRENT-LIABILITIES> 3,260
<BONDS> 319,846
0
0
<COMMON> 0
<OTHER-SE> (143,706)
<TOTAL-LIABILITY-AND-EQUITY> 179,400
<SALES> 0
<TOTAL-REVENUES> 32,267
<CGS> 0
<TOTAL-COSTS> 16,665
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,852
<INCOME-PRETAX> (1,250)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,250)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,250)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>THIS IS OTHER ASSETS
</FN>
</TABLE>
