- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
o
X Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
OR
|_| Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: 2-75711
POTOMAC HOTEL LIMITED PARTNERSHIP
------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1240223
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
10400 Fernwood Road
Bethesda, Maryland 20817
- ------------------------------- ----------------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: 301-380-2070
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
- --------------------------------------------------------------------------------
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ] (Not Applicable)
Documents Incorporated by Reference
None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Potomac Hotel Limited Partnership
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE NO.
PART I
Item 1. Business....................................................1
Item 2. Properties..................................................9
Item 3. Legal Proceedings...........................................14
Item 4. Submission of Matters to a Vote of Security Holders.........14
PART II
Item 5. Market For The Partnership's Limited Partnership Units
and Related Security Holder Matters.........................15
Item 6. Selected Financial Data.....................................15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................16
Item 8. Financial Statements and Supplementary Data.................29
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure....................................49
PART III
Item 10. Directors and Executive Officers............................49
Item 11. Management Remuneration and Transactions....................51
Item 12. Security Ownership of Certain Beneficial Owners
and Management..............................................52
Item 13. Certain Relationships and Related Transactions..............52
PART IV
Item 14. Exhibits, Supplemental Financial Statement Schedules
and Reports on Form 8-K.....................................57
<PAGE>
PART I
ITEM 1. BUSINESS
Description of the Partnership
Potomac Hotel Limited Partnership (the "Partnership"), a Delaware limited
partnership, was formed in December 1981 to acquire, develop, own, and
operate hotels. As of December 31, 1996, the Partnership owned eight
full-service hotels (collectively referred to herein as the "Hotels"): (i) the
411-room Albuquerque Marriott Hotel in Albuquerque, New Mexico; (ii) the
299-room Greensboro-High Point Marriott Hotel in Greensboro, North Carolina;
(iii) the 386-room Houston Marriott Medical Center Hotel in Houston, Texas; (iv)
the 606-room Miami Biscayne Bay Hotel in Miami, Florida; (v) the 337-room
Marriott Mountain Shadows Resort in Scottsdale, Arizona; (vi) the 375-room
Raleigh Marriott Hotel in Raleigh, North Carolina; (vii) the 459-room Seattle
Sea-Tac Airport Marriott Hotel in Seattle, Washington; and (viii) the 311- room
Tampa Westshore Marriott Hotel in Tampa, Florida. All of the Partnership's
Hotels were originally owned by, and acquired from, the General Partner. See
Item 2 "Properties."
The sole general partner of the Partnership is Host Marriott Corporation, a
publicly traded Delaware corporation (referred to herein as "Host Marriott" or
the "General Partner"). On December 29, 1995, Host Marriott's operations were
divided into two separate companies: Host Marriott and Host Marriott Services
Corporation.
The Partnership is engaged solely in the business of owning and operating hotels
and, therefore, is engaged in one industry segment. The principal offices of the
Partnership are located at 10400 Fernwood Road, Bethesda, Maryland 20817.
The Hotels are operated as part of the Marriott full-service hotel system and
are managed by Marriott International, Inc. ("MII") or subsidiaries of MII (the
"Manager") under long-term management agreements. The Hotels have the right to
use the Marriott name pursuant to the management agreements, and if these
management agreements are terminated, the Partnership will lose that right for
all purposes. See Item 13 "Certain Relationships and Related Transactions."
The Hotels cater primarily to business travelers and meeting groups at locations
in downtown, suburban areas, and near airports. The Hotels typically contain
meeting space, swimming pools, gift shops, health club facilities, convention
and banquet facilities, a variety of restaurants and lounges, and parking
facilities. The Mountain Shadows Resort Hotel also has a number of additional
recreational facilities, such as tennis courts and access to nearby golf
courses.
The Partnership's financing needs have been funded through loan agreements with
independent financial institutions, Host Marriott or affiliates, and MII or
affiliates. See the "Debt Financing" section below.
1
<PAGE>
Organization of the Partnership
On July 16, 1982, 1,800 limited partnership interests (the "Units") in the
Partnership were sold pursuant to a public offering at $10,000 per Unit. The
Partnership commenced operations on July 17, 1982. The Partnership acquired by
capital contribution from the General Partner five existing Hotels(including one
undergoing substantial renovation), three Hotels under construction, and sites
for three Hotels planned to be developed. Pursuant to the Partnership Agreement,
the General Partner simultaneously withdrew as a return of capital $186,527,000
that was borrowed by the Partnership under its original bank loan (as discussed
below). The Partnership completed the construction and renovation of the Hotels
in progress and developed Hotels on each of the three development sites. At
year-end 1984, the Partnership owned 11 Hotels. On January 31, 1986, the
Partnership sold its 307-room Denver West Hotel to the General Partner in
accordance with the provisions of its original bank loan and the terms of the
Partnership Agreement. On December 17, 1993, the Raleigh Hotel was foreclosed
upon, and on February 4, 1994 and March 23, 1994, the Tampa and Point Clear
Hotels, respectively, were foreclosed upon. The Partnership repurchased the
Raleigh Hotel on May 20, 1994 and the Tampa Hotel on July 11, 1994 using
proceeds from two loans advanced from a subsidiary of Host Marriott. On August
22, 1995, the Partnership sold the Dallas Hotel to a wholly-owned subsidiary of
Host Marriott. The Partnership owned eight Hotels as of December 31, 1996. See
the "Debt Financing" section below.
General
The Partnership's financing needs are funded through loan agreements with (i)
The Mitsui Trust and Banking Company (the "Bank Lender"), (ii) Host Marriott or
affiliates, and (iii) MII or affiliates. The Partnership's debt is discussed
below.
Bank Loan
On December 22, 1987, the Partnership borrowed $245 million (the "Bank Loan")
from the Bank Lender for seven of the Partnership's Hotels. The Bank Loan bore
interest at an effective fixed rate of 10.37% and required monthly interest-only
payments through maturity. The Bank Loan matured on December 22, 1994 and was
not repaid because the Partnership had insufficient funds to do so.
Host Marriott provided a $26 million debt service guaranty (the "Bank
Guaranty") on the Bank Loan, and an equivalent MII " back-up" guaranty (the "MII
Back-up Guaranty") must be funded by MII only if Host Marriott does not fund
under its guaranty.
Restructured Bank Loan
On August 22, 1995, the General Partner and the Bank Lender completed a
restructuring of the Bank Loan. The principal terms of the restructuring are as
follows:
(i) Host Marriott advanced $10 million under the Bank Guaranty, which was
used to pay down principal on the Bank Loan. Advances under the Bank
Guaranty bear interest at an annual rate equal to the prime rate, as
announced by Bankers Trust Company;
2
<PAGE>
(ii) The Partnership used $44 million of proceeds from the sale of the
Dallas Hotel to pay down principal on the Bank Loan;
(iii)The maturity of the Bank Loan extends to December 22, 1997, with two
one-year extensions if certain debt service coverage tests are met;
(iv) Semi-annual payments of interest on the restructured loan at the
six-month LIBOR plus 1.5 percentage points and annual payments of
principal in the amount of $5 million during the first three years of
the restructured loan and $6 million during any extension periods;
(v) Host Marriott's liability under the Bank Guaranty remains at $26 million
(subject to a credit for the advance of $10 million described in (i)
above);
(vi) MII continued its MII Back-up Guaranty;
(vii)Host Marriott ( but not MII) agreed to provide an additional guaranty
(the "Interest Guaranty") for $12 million to cover any shortfalls in
the payment of interest after application of all cash flow available
for debt service (advances in respect to interest will be made first
under the Interest Guaranty then under the Bank Guaranty or the MII
Back- up Guaranty);
(viii)The Interest Guaranty will be reduced each year by$4 million less any
Interest Guaranty advances made as of the date such reduction is
scheduled to occur, and the Interest Guaranty will be increased by$4
million for each extension period, if applicable. The remaining
liability under the Bank Guaranty and the MII Back-up Guaranty in any
event must be at least equal to the scheduled amortization payments due
during the extension period;
(ix) All Partnership cash relating to the Bank Hotels (including the Bank
Hotels FF&E Reserve and the subordinated base management fees)
collateralize the Bank Loan;
(x) The Bank Lender was paid a fee equal to $573,000 for the successful
restructuring of the Bank Loan;
(xi) The Bank Lender required MII to terminate the management agreement related
to the Bank Hotels (the "MII Management Agreement") and forgive the
balances of deferred base and incentive management fees outstanding as of
December 31, 1994. The Partnership recorded an extraordinary gain of
$146.3 million in 1995 to recognize the gain which resulted from the
forgiveness of the deferred fees. In addition, the Bank Lender required a
portion of the base management fee equal to 1% of gross Bank Hotels' sales
and a portion of the FF&E Reserve contribution equal to 1% of gross Bank
Hotels' sales to be subordinate to the payment of debt service.
No amounts have been advanced under the Interest Guaranty. Additionally, in
early 1997, in accordance with the terms of the Interest Guaranty, the amount
available was reduced from $8 million to $4 million.
3
<PAGE>
Pursuant to the terms of the restated Bank Loan, operating profit, as defined,
from the Bank Hotels and the subordinated portion of the base management fee,
equal to 1% of gross Bank Hotels' sales, in excess of debt service must be held
in a collateral account with the Bank Lender. After the end of each fiscal year,
excess cash remaining in the collateral account is applied as follows: (i) 50%
to repay Bank Loan principal and (ii) 50% to pay interest and principal on
advances under the Bank Guaranty, until the unadvanced portion of the Bank
Guaranty is replenished to a balance of $20.0 million. Thereafter, excess cash
in the collateral account is applied as follows: (i) 50% to repay Bank Loan
principal, (ii) 25% to pay deferred base management fees to MII, and (iii) 25%
to pay interest and principal on advances under the Bank Guaranty.
As of December 31, 1996, the balance of the Bank Loan was $179.8 million. As of
December 31, 1996, $10.0 million, including accrued interest, was outstanding
under the Bank Guaranty. On February 24, 1997, in accordance with the cash flow
priorities described in the preceding paragraph, the Partnership repaid $2.2
million to Host Marriott on the Bank Guaranty and $2.2 million in principal on
the Bank Loan. Therefore, as of February 24, 1997, the balance on the Bank Loan
was $177.6 million and $19.4 million was available under the Bank Guaranty.
Raleigh and Tampa Loans
In 1994, a wholly-owned indirect subsidiary of Host Marriott provided
non-recourse loans to the Partnership to purchase the Raleigh and Tampa Hotels.
The non-recourse loan for the Raleigh Hotel totaled $19.4 million to cover the
$18.7 million purchase price and closing costs. Under the terms of the loan, $14
million of principal ("Raleigh Note A") bears interest at a fixed rate of 10%
and requires quarterly payments of interest and principal, based on a 25-year
amortization schedule, with a balloon payment due at maturity on May 20,2001.
The remaining principal of $5.4 million ("Raleigh Note B") bears interest at a
fixed rate of 11.5% and matures on May 20, 2006. All cash flow from the Raleigh
Hotel is used to pay debt service in the following order of priority: (i)
interest on Raleigh Note A, (ii) principal on Raleigh Note A and (iii) interest
on Raleigh Note B. All remaining cash flow is used to pay principal on Raleigh
Note B. If cash flow is insufficient to pay interest on Raleigh Note B, the
unpaid interest rolls into the Raleigh Note B principal balance annually. As of
December 31, 1996, the Raleigh Note A principal balance was $13.5 million, and
the Raleigh Note B principal balance was $4.8 million.
The non-recourse loan for the Tampa Hotel totaled $16.3 million to cover the
$15.7 million purchase price and closing costs. Under the terms of the loan, $10
million of principal ("Tampa Note A") bears interest at a fixed rate of 10% and
requires quarterly payments of interest and principal, based on a 25-year
amortization schedule, with a balloon payment due at maturity on July 11, 2001.
The remaining principal of $6.3 million ("Tampa Note B")bears interest at a
fixed rate of 11.5% and matures on July 11, 2006. All cash flow from the Tampa
Hotel is used to pay debt service in the following order of priority: (i)
interest on Tampa Note A, (ii) principal on Tampa Note A and (iii) interest on
Tampa Note B. All remaining cash flow is used to pay principal on Tampa Note B.
If cash flow is insufficient to pay interest on Tampa Note B, the unpaid
interest rolls into the Tampa Note B principal balance annually.As of December
31, 1996, the Tampa Note A principal balance was $9.7 million, and the Tampa
Note B principal balance was $6.1 million.
4
<PAGE>
Each of the Raleigh and Tampa loans are secured by a first priority lien on the
building; land (the Partnership's leasehold interest in the case of the Tampa
Hotel); furniture, fixtures and equipment; and working capital and supplies
advanced to the Manager.
Furniture, Fixtures and Equipment Loans
Prior to 1995, the Bank Loan required Host Marriott to fund up to $30 million
for furniture, fixtures and equipment ("FF&E") replacements at the Bank Hotels
(the "FF&E Guaranty"). Host Marriott advanced funds (the "Host FF&E Loans") for
the Bank Hotels from 1991 through 1994 pursuant to the FF&E Guaranty. The Host
FF&E Loans bear interest at the prime rate and are to be repaid in annual
installments over six years. As of December 31, 1996, $5.2 million was
outstanding under the Host FF&E Loans. On January 3, 1997, the Partnership
repaid $2.3 million of principal on the Host FF&E Loans leaving $2.9 million of
principal due to Host Marriott on the Host FF&E Loans.
The Host FF&E Loans are non-recourse to the Partnership and its partners and are
secured by payments due from MII under an FF&E lease. Interest payments on these
loans are offset by lease payments received under the MII FF&E lease agreements.
As of December 31, 1996, MII owed $2.9 million including related interest costs
to the Partnership pursuant to these agreements, with the final installment due
December 31, 1999.
Beginning in 1995, the Bank Hotels FF&E funding requirements are being met
through a repairs and equipment reserve for the combined Bank Hotels. Since its
acquisition date in 1994, the FF&E funding requirements for the Tampa Hotel have
been met through a repairs and equipment reserve for the Hotel. However, the
Raleigh Hotel required additional funds, as described below.
Raleigh Hotel Furniture, Fixtures and Equipment Loans
In 1995, Host Marriott and Marriott Hotel Services, Inc. ("MHSI"), a subsidiary
of MII, each provided an unsecured loan to the Partnership in the amount of
$350,000 ("Raleigh $350,000 FF&E Loans") to fund costs of a softgoods rooms
renovation at the Raleigh Hotel in excess of amounts available in the Hotel's
FF&E Reserve. Each Raleigh $350,000 FF&E Loan was fully advanced to the
Partnership by January 24, 1995. The Raleigh $350,000 FF&E Loans bear interest
at the prime rate. Payments on the loans are made each accounting period from a
portion of the FF&E Reserve contribution equal to 1% of gross Hotel sales and
are applied first to interest and then to principal. The Raleigh $350,000 FF&E
Loans will be due and payable on the earlier of the termination of the Raleigh
management agreement or December 31, 2005. Interest accrued in 1995 was added to
the principal balance of each of the loans. As of December 31, 1996, $343,000
was due on each of the Raleigh $350,000 FF&E Loans.
In 1996, Host Marriott provided another unsecured loan to the Partnership in the
amount of $700,000 ("Raleigh $700,000 FF&E Loan") to fund costs of a casegoods
rooms renovation at the Raleigh Hotel in excess of the amounts available in the
Raleigh Hotel's FF&E Reserve. The Raleigh $700,000 FF&E Loan was fully advanced
to the Partnership by December 9, 1996. The Raleigh $700,000 FF&E Loan bears
interest at the prime rate plus 0.5%. Payments on the loan are made each
accounting period from a portion of the FF&E Reserve contribution equal to 1% of
gross Hotel sales and are applied first to interest and then to principal. The
Raleigh $700,000
5
<PAGE>
FF&E Loan will be due and payable on the earlier of the termination of the
Raleigh management agreement or December 31, 2003. As of December 31, 1996,
$658,000 was due on the Raleigh $700,000 FF&E Loan.
Other Loans
As of December 31, 1996, the Partnership owed Host Marriott $83.9 million
(excluding the Raleigh and Tampa loans and related accrued interest) including
accrued interest, as follows: (i) $59.2 million related to the original Host
Marriott Guaranty and the S&L Guaranty, as defined in Note 6 of the financial
statements; (ii) $10.0 million related to the Bank Guaranty; (iii) $5.0 million
related to working capital advances; (iv) $8.2 million for capital improvements
at the Point Clear, Alabama Hotel; and (v) $1.5 million from Host Marriott's
subordination of cash flow from the 66-room Raleigh addition as discussed in
Note 9 to the Financial Statements.
All Partnership indebtedness, including the Bank Loan, guaranty advances, other
General Partner loans, and deferred base and incentive management fees, which is
outstanding upon dissolution of the Partnership must be repaid before any cash
distributions to the General or Limited Partners.
Material Contracts
Bank Hotels Management Agreement
In connection with the restructuring of the Bank Loan, effective December 31,
1994, the Partnership and MII entered into a management agreement which replaced
the original MII Management Agreement (the "Bank Hotels Management Agreement").
The MII Management Agreement provided for a term of 25 years from the opening
date, as specified in the agreement, of each Hotel with renewal terms at the
option of MII of up to an additional 50 years. The MII Management Agreement
provided the Manager with a base management fee equal to 7% or 8% of the Bank
Hotels' gross sales at the Bank Hotels depending upon the length of time the
applicable Hotel had been open. Payment of current base management fees with
respect to the Bank Hotels were subordinated to payment of debt service on the
Bank Loan. Any unpaid base management fees were deferred without interest and
were payable in future years. In addition, the Manager was entitled to receive
incentive management fees equal to 20% of Hotel operating profits (calculated
before debt service on the Bank Loan or other Partnership debt) and additional
incentive fees, after certain returns to the Partnership were realized, ranging
from 20% to 90% depending on the amount of operating profit and the level of
return to the Partners. Through December 31, 1994, no incentive management fees
had been paid since inception. As of December 31, 1994, deferred base management
fees were $47.5 million and deferred incentive fees were $98.8 million. In
connection with the Bank Loan restructuring in 1995, the Bank Lender required
MII to terminate the MII Management Agreement and to forgive the balances of
deferred base and incentive management fees outstanding as of December 31, 1994.
For additional information, see Item 13 "Certain Relationships and Related
Transactions."
6
<PAGE>
The Bank Hotels Management Agreement provides for a base management fee equal to
3% of the Bank Hotels' gross sales and contributions equal to 5% of the Bank
Hotels' gross sales to be made to a Bank Hotels FF&E Reserve. A portion of the
base management fee equal to 1% of the Bank Hotels' gross sales and a portion of
the Bank Hotels FF&E Reserve contributions equal to 1% of the Bank Hotels' gross
sales are subordinate to the payment of debt service on the Bank Loan. The
Manager will continue to earn incentive management fees equal to 20% of Hotel
operating profit (as defined, calculated before debt service on the Bank Loan)
and additional incentive fees, after certain returns to the Partnership.
Incentive management fees will continue to be fully subordinate to the payment
of debt service and to the repayment of all guaranties. As of December 31, 1996,
deferred base and incentive management fees were $2.4 million and $14.8 million,
respectively. For additional information, see Item 13 "Certain Relationships and
Related Transactions."
Raleigh and Tampa Management Agreements
The Raleigh and Tampa Hotels are managed by MHSI pursuant to separate management
agreements ("MHSI Agreements"). The MHSI Agreements provide for an initial term
expiring on December 31, 2009. MHSI, at its option, has the right to renew the
agreements for up to two successive eight-year terms. The MHSI Agreements
provide for payments to MHSI of a base management fee equal to 3% of each
Hotel's gross sales and an incentive management fee equal to 20% of each Hotel's
operating profit. For additional information, see Item 13 "Certain Relationships
and Related Transactions."
Pursuant to the Bank Hotels Management Agreement and the MHSI Agreements, the
Hotels are managed and operated as part of the Marriott full-service hotel
system. The Marriott full-service hotel system consists of hotels, conference
centers, resorts, and suites operated under the Marriott name. At December 31,
1996, the Marriott full-service hotel system included 316 Marriott hotels,
conference centers, resorts, and suite hotels located in 40 states, the District
of Columbia, and 26 foreign countries with a total of 120,787 guest rooms.
Ground Leases
The Partnership leases the land on which the Albuquerque, Greensboro, Houston,
Miami, and Tampa Hotels are located from unrelated parties. For a description of
the terms of the ground leases, see Item 2 "Properties."
Competition
Demand in the U.S. lodging industry continues to be strong as a result of an
improved economic environment and a corresponding increase in domestic business
and leisure travel. Also, the full-service hotel segment has benefited from a
significant decrease in the room supply growth rate, which is attributable to
several factors including the limited availability of attractive building sites
for full-service hotels and the lack of available financing for new full-service
hotel construction. The cyclical nature of the U.S. lodging industry has been
demonstrated over the past two decades. Low hotel profitability during the
1974-1975 recession led to a prolonged slump on new construction, high occupancy
rates, and real price increases in the late 1970s and early 1980s. Changes in
tax and banking laws during the early 1980s precipitated a construction boom
which peaked in 1986 but created an oversupply of hotel rooms that has not yet
been
7
<PAGE>
absorbed fully by increased demand. The General Partner expects the U.S. hotel
supply/demand imbalance to improve gradually over the next few years.
The Manager believes that by emphasizing management and personnel development
and by maintaining a competitive price structure, the Hotels will be able to
maintain or increase their share of the market. The Partnership believes that
its inclusion within the nationwide Marriott full-service hotel system provides
advantages of name recognition; centralized reservations and advertising;
system-wide marketing and promotion; and centralized purchasing, training, and
support services. Additional competitive information is set forth in Item 2
"Properties" with respect to each of the Hotels.
Conflicts of Interest
Since the General Partner, MII, and their affiliates own and/or operate hotels
other than those owned by the Partnership, potential conflicts of interest may
exist. With respect to these potential conflicts of interest, the General
Partner, MII, and their affiliates retain a free right to compete with the
Partnership's Hotels, including the right to retain existing hotels which may
compete with the Partnership's Hotels and to develop competing hotels in markets
in which the Partnership's Hotels are located.
Under Delaware law, the General Partner has unlimited liability for the
obligations of the Partnership, unless those obligations are by contract without
recourse to the partners of the Partnership. Since the General Partner is
entitled to manage and control the business and operations of the Partnership
and since certain actions taken by the General Partner or the Partnership could
expose the General Partner to liability that is not shared by the limited
partners (for example tort liability, environmental liability, or the General
Partner's liability under its guaranties of the Bank Loan and the S&L Loan),
this control could lead to conflicts of interest.
It is the policy of the General Partner that the Partnership's relationship with
the General Partner, any affiliate of the General Partner, or persons employed
by the General Partner or its affiliates be conducted on terms that are fair to
the Partnership and that are commercially reasonable. Agreements and
relationships involving the General Partner or its affiliates and the
Partnership are on terms consistent with the terms on which the General Partner
or its affiliates have dealt with unrelated parties.
The Partnership Agreement provides that agreements, contracts, or arrangements
between the Partnership and the General Partner or its affiliates (other than
arrangements for rendering legal, tax, accounting, financial, engineering, and
procurement services to the Partnership by the General Partner or its
affiliates) will be on commercially reasonable terms and will be subject to the
following conditions:
(i) the General Partner or the applicable affiliate must be actively
engaged in the business of rendering the services or selling or leasing
the goods called for under any such agreement, contract, or
arrangement;
(ii) any such agreement, contract, or arrangement must be embodied in a
written contract which precisely describes the subject matter thereof
and all compensation to be paid therefor;
8
<PAGE>
(iii)no rebates or concessions may be received by the General Partner or the
applicable affiliate, nor may the General Partner or any affiliate
participate in any reciprocal business arrangements which would have
the effect of circumventing any of the provisions of the Partnership
Agreement;
(iv) no such agreement, contract, or arrangement may be amended in a manner
that would increase the fees or other compensation payable to the
General Partner or any affiliate in the absence of the consent of the
holders of a majority in interest of the limited partners; and
(v) any such agreement, contract, or arrangement that relates to or secures
any funds advanced or loaned to the Partnership by the General Partner
or any affiliate must reflect commercially reasonable terms; provided
that the discretion of the General Partner in determining such terms
may not be overruled by the limited partners in the absence of a
showing of bad faith on the part of the General Partner or the
applicable affiliate.
Employees
The Partnership has no employees. However, the employees of the General Partner
are available to perform services for the Partnership. The Partnership
reimburses the General Partner for the costs of providing such services. See
Item 11 "Management Remuneration" for information regarding payments made to the
General Partner for the cost of providing administrative services to the
Partnership.
ITEM 2. PROPERTIES
The Partnership consisted of eight full-service Hotels as of December 31, 1996,
each of which is described below.
Albuquerque Marriott Hotel - Albuquerque, New Mexico
Location
The Albuquerque Marriott Hotel is located on a leased parcel of land of
approximately six acres in the northeastern suburbs of Albuquerque in a
residential, office, and commercial development called Uptown.
Description
The Hotel, which opened in July 1982, consists of a 16-story guest room tower.
The facilities include 411 guest rooms, two restaurants, one lobby bar, and
cocktail service in the lobby. There is approximately 13,800 square feet of
space for conventions and banquets. Parking is provided for approximately 500
cars. In addition, the Hotel offers an indoor/outdoor pool, hydrotherapy pool,
sauna, health club, and gift shop.
9
<PAGE>
Competition
Studies by MII indicate that currently six hotels with approximately 1,800 rooms
directly compete with the Albuquerque Marriott Hotel in the Albuquerque market.
Ground Lease
The Hotel site is subject to a ground lease with an initial term expiring in
July 2032 and with three renewal options of 10-years each. The ground lease
provides for annual rent equal to the greater of (i) 3.5% of annual gross room
sales or (ii) $155,000 for the first 10 years and $165,000 thereafter during the
initial term of the lease. For periods subsequent to the initial term of the
lease, annual rent will equal the greatest of (i) 3.5% of annual gross room
sales, (ii) $165,000, or (iii) 10% of the fair market value of the land,
determined in each case as of each renewal date of the lease.
Greensboro-High Point Marriott Hotel - Greensboro, North Carolina
Location
The Greensboro-High Point Marriott Hotel is located on approximately 15 acres of
leased land on the grounds of the Greensboro-High Point Regional Airport which
serves the cities of Greensboro, High Point, and Winston-Salem.
Description
The Hotel, which opened in June 1983, is a six-story tower containing 299 guest
rooms including a concierge floor, two restaurants, a lounge, and approximately
9,000 square feet of space for banquets and conventions. Parking for 500 cars is
provided. In addition, the Hotel has two lighted tennis courts, an
indoor/outdoor pool with a 1,200-square foot deck for banquet functions, a
hydrotherapy pool, a gift shop, and a health club .
Competition
Studies by MII indicate that currently four hotels containing approximately
1,700 rooms directly compete with the Greensboro-High Point Marriott Hotel in
the Greensboro market.
Ground Lease
The Hotel site is subject to a ground lease from the Greensboro-High Point
Airport Authority with an initial term expiring in June 2008 and with an option
to extend for an additional 15 years. Additional renewal options totaling 20
years are available if the Hotel is expanded to 500 rooms. The lease calls for
an annual rent equal to the greater of (i) a percentage rent of 2.25% of the
annual gross room sales plus 2% of the annual gross alcoholic beverage sales
plus 1% of the annual gross food sales or (ii) a minimum rental of $127,000.
10
<PAGE>
During the first extended term, the percentage rental for the annual gross room
sales will be increased to 3% and, if on the first day of the extended term the
Hotel contains fewer than 400 rooms, the percentage rentals for alcoholic
beverage and food sales will increase to 2.5% and 1.25%, respectively.
Houston Marriott Medical Center Hotel - Houston, Texas
Location
The Houston Marriott Medical Center Hotel is located in the Texas Medical Center
in Houston, Texas, on a leased site of 23,670 square feet, is situated directly
opposite the main building of the Methodist Hospital, and adjoins the Scurlock
Towers which houses the Total Health Care Center of Methodist Hospital and
approximately 200 doctors' offices.
Description
The Hotel, which opened in August 1984, includes 386 guest rooms, two concierge
floors, two restaurants, and a lounge. There is approximately 8,500 square feet
of space with facilities for conventions and banquets. Parking is available for
approximately 380 cars in an adjacent parking structure. Additional facilities
within the Hotel include an indoor pool, a hydrotherapy pool, a gift shop, and a
health club.
Competition
Studies by MII indicate that currently six hotels containing approximately 1,600
rooms directly compete with the Houston Marriott Medical Center Hotel in the
Houston market.
Ground Lease
The land on which the Hotel is located is subject to a ground lease in which the
initial term expires in August 2009 with five 10-year renewal options. The lease
provides for a rental equal to the greater of (i) $160,000 or (ii) a percentage
rental of 3% of the first $15 million of annual gross room sales plus 3.25% of
annual gross room sales in excess of $15 million.
Miami Biscayne Bay Hotel - Miami, Florida
Location
The Miami Biscayne Bay Hotel is located on a leased parcel of land of
approximately 1.9 acres plus space and facilities in an adjacent building in a
residential and commercial project located on Biscayne Bay in downtown Miami.
Description
The Hotel, which opened in December 1983, is a 31-story tower which has 606
guest rooms, one restaurant, an indoor lounge, and cocktail service in the
lobby. Approximately 14,000
11
<PAGE>
square feet of space with facilities for conventions and banquets is available.
Parking is provided for 288 cars. In addition, the Hotel has an outdoor pool, a
recreation deck, a game room, a gift shop, and a health club.
Competition
Studies by MII indicate that currently five hotels containing approximately
2,500 rooms directly compete with the Miami Biscayne Bay Hotel in the Miami
market.
Ground Lease
The Hotel site is subject to a ground lease with an initial term expiring in
December 2008, with renewal options for five successive 10-year periods. The
lease calls for annual rental of the greater of (i) minimum rental of $1.0
million or (ii) a percentage rental composed of 4% annual gross room sales plus
3% annual gross food and beverage sales.
Marriott's Mountain Shadows Resort - Scottsdale, Arizona
Location
The Mountain Shadows Resort Hotel is located on approximately 25 acres of
fee-owned land in Scottsdale, approximately 10 miles north of Phoenix Sky Harbor
International Airport. Host Marriott owns land adjacent to the site, on which an
18-hole executive-style golf course is located.
Description
Mountain Shadows opened in 1959 and was acquired by the Partnership in 1982. A
major renovation program was completed in 1983. The Hotel contains 337 guest
rooms as well as three pools, two hydrotherapy pools, eight lighted tennis
courts, and a state of the art fitness center. Hotel guests have full privileges
at the Mountain Shadows Golf Club which offers an 18-hole executive style golf
course. In addition, guests of the Hotel have access to the Camelback Inn
Country Club owned by MII (which is approximately two miles from the Hotel and
offers two 18-hole championship golf courses) and the Camelback Inn spa located
on the Camelback Inn resort grounds. Dining facilities at the Hotel include the
family restaurant, a specialty seafood restaurant, and the outdoor terrace
associated with these facilities. The Hotel's restaurants can accommodate
seating for 430. In addition, the Mountain Shadows Golf Club offers a
restaurant/snack bar, a bar, and a patio area. The Hotel has more than 15,000
square feet of space for conventions and banquets. Parking is available for
approximately 740 cars.
Competition
Studies by MII indicate that currently five hotels containing approximately
1,500 rooms directly compete with Marriott's Mountain Shadows Resort in the
Scottsdale market.
12
<PAGE>
Raleigh Marriott Hotel - Raleigh, North Carolina
Location
The Raleigh Marriott Hotel is located on approximately 10 acres of fee-owned
land at the entrance to Crabtree Valley Mall in northwest Raleigh. The
Raleigh-Durham Airport and the Research Triangle Park are located ten and
seventeen miles west of the site, respectively.
Downtown Raleigh is two miles east of the site.
Description
The Hotel, which opened in March 1982, includes 375 guest rooms, one restaurant,
a cocktail lounge, and approximately 8,300 square feet of space for conventions
and banquets. Parking for approximately 571 cars is provided. In addition, the
Hotel offers an indoor/outdoor pool, a concierge lounge, sauna and hydrotherapy
facilities, a health club , and a gift shop.
Competition
Studies by MII indicate that currently three hotels with approximately 800 rooms
directly compete with the Raleigh Marriott Hotel in the Raleigh market.
Seattle Marriott Hotel Sea-Tac Airport - Seattle, Washington
Location
The Seattle Marriott Hotel is located on nine acres of fee-owned land near the
entrance to the Seattle-Tacoma International Airport. The Hotel is approximately
ten miles from downtown Seattle and approximately three miles from Interstate 5,
the major north-south route through Washington.
Description
The Hotel, which opened in January 1981, consists of a nine-story tower and
three five-story wings surrounding a landscaped atrium. The facilities include
459 guest rooms, a restaurant, an atrium cocktail service bar, three ballrooms
totaling 18,500 square feet, and meeting and conference rooms. In addition, the
Hotel has two hydrotherapy pools, a health club, a sauna, an indoor pool, a gift
shop, a game room, and parking for 550 cars.
Competition
Studies by MII indicate that currently four hotels containing approximately
1,500 rooms directly compete with the Seattle Marriott Hotel Sea-Tac Airport in
the Seattle market.
13
<PAGE>
Tampa Westshore Hotel - Tampa, Florida
Location
The Tampa Hotel is located on a leased parcel of land of approximately seven
acres in a major office development just off I-75 on North Westshore Boulevard.
The Hotel is approximately two miles from the Tampa International Airport and
five miles from downtown Tampa.
Description
The Hotel, which opened in July 1981, consists of a 13-story Hotel tower, a
one-and-one-half story lobby, and meeting space. The facilities include 311
guest rooms, a restaurant, a sports bar, a concierge lounge, and approximately
8,400 square feet of space for conventions and banquets. Parking for more than
400 cars is provided. In addition, the Hotel has an indoor/outdoor pool, a
hydrotherapy pool, a health club, a game room, and a gift shop.
Competition
Studies by MII indicate that currently eleven hotels containing approximately
3,100 rooms directly compete with the Tampa Westshore Hotel in the Tampa market.
Ground Lease
The Hotel is subject to a ground lease with an initial term expiring in July
2006 with five 10- year renewal options. The lease provides for a percentage
rent equal to the greater of (i) 3% of gross room sales plus 1% of gross food
sales plus 1% of gross alcoholic beverage sales or (ii) $96,000 per year.
ITEM 3. LEGAL PROCEEDINGS
Neither the Partnership nor the Hotels are presently subject to any material
litigation nor, to the General Partner's knowledge, is any material litigation
threatened against the Partnership or the Hotels, other than 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 condition or results of operations of the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
<PAGE>
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP UNITS
AND RELATED SECURITY HOLDER MATTERS
There is currently no public market for the Units, and it is not anticipated
that a public market for the Units will develop. Transfers of Units are limited
to the first day of each fiscal quarter and are subject to approval by the
General Partner and certain other restrictions. As of December 31, 1996, there
were 1,154 holders of record of the 1,800 Units.
In accordance with Section 4.08 of the Partnership Agreement, any cash available
for distribution for any fiscal year will be equally divided among the fiscal
quarters in such fiscal year and will be distributed as soon as practicable
after the close of each fiscal quarter to Partners of record at the end of each
fiscal quarter during such fiscal year. There have been no cash distributions to
the Limited Partners since the inception of the Partnership, and it is unlikely
such distributions will be made in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents historical operating information
for the Partnership for each of the five years ended December 31, 1996,
presented in accordance with generally accepted accounting principles. Due to
the foreclosures on the Raleigh, Tampa, and Point Clear Hotels in 1993 and 1994
and the sale of the Dallas Hotel in 1995, operating results for the years
presented are not comparable:
<TABLE>
1996 1995 1994 1993 1992
(in thousands, except per unit amounts)
<S> <C> <C> <C> <C> <C>
Revenues.......................................$ 46,696 $ 76,632 $ 45,233 $ 48,830 $ 47,910
======== ========= ========= ========= =========
Net (loss) income before
extraordinary items.........................$ (1,841) $ 20,045 $ (22,741) $ (21,729) $ (27,669)
Extraordinary items............................ -- 146,303 47,168 17,148 --
-------- --------- --------- --------- ---------
Net (loss) income..............................$ (1,841) $ 166,348 $ 24,427 $ (4,581) $ (27,669)
======== ========= ========= ========= =========
Net (loss) income per limited partner unit (1,800 Units):
Net (loss) income before
extraordinary items......................$ (1,013) $ 7,720 $ (12,508) $ (11,951) $ (15,218)
Extraordinary items......................... -- 80,467 21,109 9,432 --
-------- --------- --------- --------- ---------
Net (loss) income...........................$ (1,013) $ 88,187 $ 8,601 $ (2,519) $ (15,218)
======== ========= ========= ========= =========
Total assets...................................$179,867 $ 176,521 $ 196,061 $ 203,251 $ 221,523
======== ========= ========= ========= =========
Total liabilities..............................$324,164 $ 318,977 $ 506,865 $ 538,482 $ 552,173
======== ========= ========= ========= =========
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Principal Sources and Uses of Cash
The Partnership's principal sources of cash are Hotel operations and collection
of amounts due from MII under the MII FF&E lease agreements. Its principal uses
of cash are to pay debt service on the Partnership's mortgage debt, to pay
amounts owed to Host Marriott and MII, to fund the FF&E Reserves, and to make
deposits to cash collateral accounts required under the Bank Loan. Total cash
provided by operations was $19.4 million, $14.8 million and $3.5 million for the
years ended December 31, 1996, 1995 and 1994, respectively. Payments from MII
under the MII FF&E lease agreements were $2.4 million, $5.8 million and $17.2
million for the years ended December 31, 1996, 1995 and 1994, respectively.
Payments of mortgage debt were $7.6 million, $60.1 million and $4.3 million for
the years ended December 31, 1996, 1995 and 1994, respectively. Payments to Host
Marriott were $3.9 million, $6.4 million and $11.5 million for the years ended
December 31, 1996, 1995 and 1994, respectively. Net purchases of fixed assets
were $9.9 million, $5.0 million and $.4 million for the years ended December 31,
1996, 1995 and 1994, respectively. Deposits to cash collateral accounts were
$1.6 million and $2.9 million for the years ended December 31, 1996 and 1995,
and no deposits to the cash collateral accounts were made for 1994. No cash was
distributed to the Partners for the years ended December 31, 1996, 1995 and
1994.
As a result of the restructuring of the Bank Loan in 1995, the General Partner
believes that the Partnership will have sufficient capital resources and
liquidity to continue to conduct its business in the ordinary course. However,
there can be no assurance that the Partnership will be able to secure a loan at
the maturity of the restructured Bank Loan, the Raleigh Loan, and the Tampa
Loan. It is anticipated that possible shortfalls in the FF&E Reserve will occur
over the next few years. However, the General Partner believes that any
shortfalls can be resolved.
Bank Loan
The mortgage loan (the "Bank Loan") for seven of the Partnership's hotels (the
"Bank Hotels") matured on December 22, 1994, and the Partnership had
insufficient funds to repay the loan. The Bank Loan required monthly
interest-only payments during the seven-year loan term at an effective rate of
10.37% and repayment of the balance in full at maturity. At December 22, 1994,
the principal balance of the Bank Loan was $245 million. The Bank Loan was
non-recourse to the Partnership and its partners (including the General
Partner), but was supported by a $26 million Host Marriott guaranty (the "Bank
Guaranty") and an equivalent Marriott International, Inc. ("MII") back-up
guaranty (the "MII Back-up Guaranty") to be funded only if Host Marriott did not
fund its guaranty.
16
<PAGE>
Restructured Bank Loan
On August 22, 1995, the General Partner and the Bank Lender completed a
restructuring of the Bank Loan. The principal terms of the restructuring are as
follows:
(i) Host Marriott advanced $10 million under the Bank Guaranty, which was
used to pay down principal on the Bank Loan. Advances under the Bank
Guaranty bear interest at an annual rate equal to the prime rate, as
announced by Bankers Trust Company;
(ii) The Partnership used $44 million of proceeds from the sale of the
Dallas Hotel to pay down principal on the Bank Loan;
(iii)The maturity of the Bank Loan extends to December 22, 1997, with two
one-year extensions if certain debt service coverage tests are met;
(iv) Semi-annual payments of interest on the restructured loan at the
six-month LIBOR plus 1.5 percentage points and annual payments of
principal in the amount of $5 million during the first three years of
the restructured loan and $6 million during any extension periods;
(v) Host Marriott's liability under the Bank Guaranty remains at $26 million
(subject to a credit for the advance of $10 million described in (i)
above);
(vi) MII continued its MII Back-up Guaranty;
(vii)Host Marriott ( but not MII) agreed to provide an additional guaranty
(the "Interest Guaranty") for $12 million to cover any shortfalls in
the payment of interest after application of all cash flow available
for debt service (advances in respect to interest will be made first
under the Interest Guaranty then under the Bank Guaranty or the MII
Back- up Guaranty);
(viii)The Interest Guaranty will be reduced each year by $4 million less any
Interest Guaranty advances made as of the date such reduction is
scheduled to occur, and the Interest Guaranty will be increased by $4
million for each extension period, if applicable. The remaining
liability under the Bank Guaranty and the MII Back-up Guaranty in any
event must be at least equal to the scheduled amortization payments due
during the extension period;
(ix) All Partnership cash relating to the Bank Hotels (including the Bank
Hotels FF&E Reserve and the subordinated base management fees)
collateralize the Bank Loan;
(x) The Bank Lender was paid a fee equal to $573,000 for the successful
restructuring of the Bank Loan;
17
<PAGE>
(xi) The Bank Lender required MII to terminate the management agreement related
to the Bank Hotels (the "MII Management Agreement") and forgive the
balances of deferred base and incentive management fees outstanding as of
December 31, 1994. The Partnership recorded an extraordinary gain of
$146.3 million in 1995 to recognize the gain which resulted from the
forgiveness of the deferred fees. In addition, the Bank Lender required a
portion of the base management fee equal to 1% of gross Bank Hotels' sales
and a portion of the FF&E Reserve contribution equal to 1% of gross Bank
Hotels' sales to be subordinate to the payment of debt service.
No amounts have been advanced under the Interest Guaranty. Additionally, in
early 1997, in accordance with the terms of the Interest Guaranty, the amount
available was reduced from $8 million to $4 million.
Pursuant to the terms of the restated Bank Loan, operating profit, as defined,
from the Bank Hotels and the subordinated portion of the base management fee,
equal to 1% of gross Bank Hotels' sales, in excess of debt service must be held
in a collateral account with the Bank Lender. After the end of each fiscal year,
excess cash remaining in the collateral account is applied as follows: (i) 50%
to repay Bank Loan principal and (ii) 50% to pay interest and principal on
advances under the Bank Guaranty, until the unadvanced portion of the Bank
Guaranty is replenished to a balance of $20.0 million. Thereafter, excess cash
in the collateral account is applied as follows: (i) 50% to repay Bank Loan
principal, (ii) 25% to pay deferred base management fees to MII, and (iii) 25%
to pay interest and principal on advances under the Bank Guaranty.
As of December 31, 1996, the balance of the Bank Loan was $179.8 million. As of
December 31, 1996, $10.0 million, including accrued interest, was outstanding
under to the Bank Guaranty. On February 24, 1997, in accordance with the cash
flow priorities described in the preceding paragraph, the Partnership repaid
$2.2 million to Host Marriott on the Bank Guaranty and $2.2 million in principal
on the Bank Loan. Therefore, as of February 24, 1997, the balance on the Bank
Loan was $177.6 million and $19.4 million was available under the Bank Guaranty.
Raleigh and Tampa Loans
In 1994, a wholly-owned indirect subsidiary of Host Marriott provided
non-recourse loans to the Partnership to purchase the Raleigh and Tampa Hotels.
The non-recourse loan for the Raleigh Hotel totaled $19.4 million to cover the
$18.7 million purchase price and closing costs. Under the terms of the loan, $14
million of principal ("Raleigh Note A") bears interest at a fixed rate of 10%
and requires quarterly payments of interest and principal, based on a 25-year
amortization schedule, with a balloon payment due at maturity on May 20, 2001.
The remaining principal of $5.4 million ("Raleigh Note B") bears interest at a
fixed rate of 11.5% and matures on May 20, 2006. All cash flow from the Raleigh
Hotel is used to pay debt service in the following order of priority: (i)
interest on Raleigh Note A, (ii) principal on Raleigh Note A and (iii) interest
on Raleigh Note B. All remaining cash flow is used to pay principal on Raleigh
Note B. If cash flow is insufficient to pay interest on Raleigh Note B, the
unpaid interest rolls into the Raleigh Note B principal balance annually. As of
December 31, 1996, the Raleigh Note A principal balance was $13.5 million, and
the Raleigh Note B principal balance was $4.8 million.
The non-recourse loan for the Tampa Hotel totaled $16.3 million to cover the
$15.7 million purchase price and closing costs. Under the terms of the loan, $10
million of principal ("Tampa
18
<PAGE>
Note A") bears interest at a fixed rate of 10% and requires quarterly payments
of interest and principal, based on a 25-year amortization schedule, with a
balloon payment due at maturity on July 11, 2001. The remaining principal of
$6.3 million ("Tampa Note B") bears interest at a fixed rate of 11.5% and
matures on July 11, 2006. All cash flow from the Tampa Hotel is used to pay debt
service in the following order of priority: (i) interest on Tampa Note A, (ii)
principal on Tampa Note A and (iii) interest on Tampa Note B. All remaining cash
flow is used to pay principal on Tampa Note B. If cash flow is insufficient to
pay interest on Tampa Note B, the unpaid interest rolls into the Tampa Note B
principal balance annually. As of December 31, 1996, the Tampa Note A principal
balance was $9.7 million,and the Tampa Note B principal balance was $6.1
million.
Each of the Raleigh and Tampa loans are secured by a first priority lien on the
building; land (the Partnership's leasehold interest in the case of the Tampa
Hotel); furniture, fixtures and equipment; and working capital and supplies
advanced to the Manager.
Furniture, Fixtures and Equipment Loans
Prior to 1995, the Bank Loan required Host Marriott to fund up to $30 million
for furniture, fixtures and equipment ("FF&E") replacements at the Bank Hotels
(the "FF&E Guaranty"). Host Marriott advanced funds (the "Host FF&E Loans") for
the Bank Hotels from 1991 through 1994 pursuant to the FF&E Guaranty. The Host
FF&E Loans bear interest at the prime rate and are to be repaid in annual
installments over six years. As of December 31, 1996, $5.2 million was
outstanding under the Host FF&E Loans. On January 3, 1997, the Partnership
repaid $2.3 million of principal on the Host FF&E Loans leaving $2.9 million of
principal due to Host Marriott on the Host FF&E Loans.
The Host FF&E Loans are non-recourse to the Partnership and its partners and are
secured by payments due from MII under an FF&E lease. Interest payments on these
loans are offset by lease payments received under the MII FF&E lease agreements.
As of December 31, 1996, MII owed $2.9 million including related interest costs
to the Partnership pursuant to these agreements, with the final installment due
December 31, 1999.
Beginning in 1995, the Bank Hotels FF&E funding requirements are being met
through a repairs and equipment reserve for the combined Bank Hotels. Since its
acquisition date in 1994, the FF&E funding requirements for the Tampa Hotel have
been met through a repairs and equipment reserve for the Hotel. However, the
Raleigh Hotel required additional funds, as described below.
Raleigh Hotel Furniture, Fixtures and Equipment Loans
In 1995, Host Marriott and Marriott Hotel Services, Inc. ("MHSI"), a subsidiary
of MII, each provided an unsecured loan to the Partnership in the amount of
$350,000 ("Raleigh $350,000 FF&E Loans") to fund costs of a softgoods rooms
renovation at the Raleigh Hotel in excess of amounts available in the Hotel's
FF&E Reserve. Each Raleigh $350,000 FF&E Loan was fully advanced to the
Partnership by January 24, 1995. The Raleigh $350,000 FF&E Loans bear interest
at the prime rate. Payments on the loans are made each accounting period from a
portion of the FF&E Reserve contribution equal to 1% of gross Hotel sales and
are applied first to interest and then to principal. The Raleigh $350,000 FF&E
Loans will be due and payable
19
<PAGE>
on the earlier of the termination of the Raleigh management agreement or
December 31, 2005. Interest accrued in 1995 was added to the principal balance
of each of the loans. As of December 31, 1996, $343,000 was due on each of the
Raleigh $350,000 FF&E Loans.
In 1996, Host Marriott provided another unsecured loan to the Partnership in the
amount of $700,000 ("Raleigh $700,000 FF&E Loan") to fund costs of a casegoods
rooms renovation at the Raleigh Hotel in excess of the amounts available in the
Raleigh Hotel's FF&E Reserve. The Raleigh $700,000 FF&E Loan was fully advanced
to the Partnership by December 9, 1996. The Raleigh $700,000 FF&E Loan bears
interest at the prime rate plus 0.5%. Payments on the loan are made each
accounting period from a portion of the FF&E Reserve contribution equal to 1% of
gross Hotel sales and are applied first to interest and then to principal. The
Raleigh $700,000 FF&E Loan will be due and payable on the earlier of the
termination of the Raleigh management agreement or December 31, 2003. As of
December 31, 1996, $658,000 was due on the Raleigh $700,000 FF&E Loan.
Other Loans
As of December 31, 1996, the Partnership owed Host Marriott $83.9 million
(excluding the Raleigh and Tampa loans and related accrued interest) including
accrued interest, as follows: (i) $59.2 million related to the original Host
Marriott Guaranty and the S&L Guaranty, as defined in Note 6 of the financial
statements; (ii) $10.0 million related to the Bank Guaranty; (iii) $5.0 million
related to working capital advances; (iv) $8.2 million for capital improvements
at the Point Clear, Alabama Hotel; and (v) $1.5 million from Host Marriott's
subordination of cash flow from the 66-room Raleigh addition as discussed in
Note 9 to the Financial Statements.
All Partnership indebtedness, including the Bank Loan, guaranty advances, other
General Partner loans, and deferred base and incentive management fees, which is
outstanding upon dissolution of the Partnership must be repaid before any cash
distributions to the General or Limited Partners.
Material Contracts
Bank Hotels Management Agreement
In connection with the restructuring of the Bank Loan, effective December 31,
1994, the Partnership and MII entered into a management agreement which replaced
the original MII Management Agreement (the "Bank Hotels Management Agreement").
The MII Management Agreement provided for a term of 25 years from the opening
date, as specified in the agreement, of each Hotel with renewal terms at the
option of MII of up to an additional 50 years. The MII Management Agreement
provided the Manager with a base management fee equal to 7% or 8% of the Bank
Hotels' gross sales at the Bank Hotels depending upon the length of time the
applicable Hotel had been open. Payment of current base management fees with
respect to the Bank Hotels were subordinated to payment of debt service on the
Bank Loan. Any unpaid base management fees were deferred without interest and
were payable in future years. In addition, the Manager was entitled to receive
incentive management fees equal to 20% of Hotel operating profits (calculated
before debt service on the Bank Loan or other Partnership debt) and additional
incentive fees, after certain returns to the Partnership were realized, ranging
from 20% to 90% depending on the amount of operating profit and the level of
return to the Partners. Through
20
<PAGE>
December 31, 1994, no incentive management fees had been paid since inception.
As of December 31, 1994, deferred base management fees were $47.5 million and
deferred incentive fees were $98.8 million. In connection with the Bank Loan
restructuring in 1995, the Bank Lender required MII to terminate the MII
Management Agreement and to forgive the balances of deferred base and incentive
management fees outstanding as of December 31, 1994. For additional information,
see Item 13 "Certain Relationships and Related Transactions."
The Bank Hotels Management Agreement provides for a base management fee equal to
3% of the Bank Hotels' gross sales and contributions equal to 5% of the Bank
Hotels' gross sales to be made to a Bank Hotels FF&E Reserve. A portion of the
base management fee equal to 1% of the Bank Hotels' gross sales and a portion of
the Bank Hotels FF&E Reserve contributions equal to 1% of the Bank Hotels' gross
sales are subordinate to the payment of debt service on the Bank Loan. The
Manager will continue to earn incentive management fees equal to 20% of Hotel
operating profit (as defined, calculated before debt service on the Bank Loan)
and additional incentive fees, after certain returns to the Partnership.
Incentive management fees will continue to be fully subordinate to the payment
of debt service and to the repayment of all guaranties. As of December 31, 1996,
deferred base and incentive management fees were $2.4 million and $14.8 million,
respectively. For additional information, see Item 13 "Certain Relationships and
Related Transactions."
Raleigh and Tampa Management Agreements
The Raleigh and Tampa Hotels are managed by MHSI pursuant to separate management
agreements ("MHSI Agreements"). The MHSI Agreements provide for an initial term
expiring on December 31, 2009. MHSI, at its option, has the right to renew the
agreements for up to two successive eight-year terms. The MHSI Agreements
provide for payments to MHSI of a base management fee equal to 3% of each
Hotel's gross sales and an incentive management fee equal to 20% of each Hotel's
operating profit. For additional information, see Item 13 "Certain Relationships
and Related Transactions".
Pursuant to the Bank Hotels Management Agreement and the MHSI Agreements, the
Hotels are managed and operated as part of the Marriott full-service hotel
system. The Marriott full-service hotel system consists of hotels, conference
centers, resorts, and suites operated under the Marriott name. At December 31,
1996, the Marriott full-service hotel system included 316 Marriott hotels,
conference centers, resorts, and suite hotels located in 40 states, the District
of Columbia, and 26 foreign countries with a total of 120,787 guest rooms.
Ground Leases
The Partnership leases the land on which the Albuquerque, Greensboro, Houston,
Miami, and Tampa Hotels are located from unrelated parties. For a description of
the terms of the ground leases, see Item 2 "Properties."
RESULTS OF OPERATIONS
Hotel Revenues in the accompanying financial statements represent house profit
of the Partnership's Hotels since the Partnership has delegated substantially
all of the operating
21
<PAGE>
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, real and personal property taxes, ground and
equipment rent, insurance, and certain other costs, which are disclosed
separately in the statement of operations.
The following chart summarizes REVPAR, or revenues per available room, and the
percentage change in REVPAR from the prior year for each of the Hotels owned by
the Partnership as of December 31, 1996. REVPAR for the Raleigh and Tampa Hotels
is not shown for 1994 because these Hotels were not owned by the Partnership for
the entire year in 1994.
<TABLE>
1996 1995 1994
REVPAR %Change REVPAR %Change REVPAR %Change
<S> <C> <C> <C> <C> <C> <C>
Mountain Shadows $ 99 5% $ 94 7% $ 88 6%
Seattle 82 4% 79 11% 71 8%
Tampa Westshore 80 10% 73 -- -- --
Greensboro 75 (1%) 76 7% 71 8%
Raleigh Crabtree Valley 72 9% 66 -- -- --
Miami Biscayne Bay 71 1% 70 9% 64 (6%)
Albuquerque 69 3% 67 0% 67 6%
Houston Medical Center 67 5% 64 2% 63 5%
</TABLE>
1996 Compared to 1995
Mountain Shadows
REVPAR for 1996 increased 5% to $99. This increase was due to a 3% increase in
the average room rate to $124 combined with a 2 percentage point increase in
occupancy to 80%. Hotel revenues for 1996 increased 4% to $6.2 million. The
increase in average room rate and Hotel revenues is due to the Hotel's
successful efforts in shifting business from lower rated group business to
higher transient rates. The Hotel's marketing promotions include a newsletter to
3,000 past customers as well as newspaper advertising in key cities such as Los
Angeles, Chicago and New York.
Seattle
Hotel revenues increased 7% to $8.5 million in 1996 when compared to the prior
year due to an increase in REVPAR of 4% to $82. The increase in REVPAR was due
to a $6 increase in average room rate to $105 partially offset by a 1 percentage
point decrease in occupancy to 78%. The increase in the average room rate is the
result of the strong transient demand in the growing Seattle economy. The local
economy is tied to the global aerospace industry as well as the availability of
raw timber products. Current projections for each of these industries are strong
and indicate steady growth and reliability.
Tampa Westshore
The Tampa Westshore Hotel experienced a 10% increase in REVPAR to $80 for 1996
as compared to 1995. This increase was due to a 6% increase in the average room
rate to $100
22
<PAGE>
coupled with a 2 percentage point increase in average occupancy to 79%. The
increase in average room rate is attributable to strong market demand and the
successful efforts of Hotel management in restricting discounted corporate
rates. An increase in transient business contributed to thea increase in average
occupancy. In early 1997, the Hotel completed the third phase of a rooms
renovation project which replaced the furniture in approximately 108 guest
rooms. All 311 guest rooms now have new furniture which will enable the Hotel to
compete more effectively in the Tampa market.
Greensboro
For 1996, REVPAR decreased slightly to $75 when compared to 1995. The average
room rate increased 6% to $98; however, this increase was offset by a 6
percentage point decline in average occupancy to 76% as a result of new
competition in the Greensboro area. Hotel revenues decreased 5% to $4.5 million
primarily due to the decline in occupancy. In 1996, the Hotel facade was
painted, and in early 1997 a renovation of the restaurant was completed.
Raleigh
In 1996, REVPAR increased 9% to $72, due to a 9% increase in average room rate
to $88 while the average occupancy remained stable at 82%. The increase in
average room rate was due to a $10 increase in the corporate rate in 1996. Hotel
revenues increased 16% to $5 million primarily due to the increase in average
room rates. During 1996, the Hotel completed a rooms renovation which replaced
the furniture in 375 guest rooms.
Miami Biscayne Bay
REVPAR for 1996 increased slightly to $71 when compared to 1995 due to a 4.5
percentage point increase in average occupancy to 82% partially offset by a 3%
decrease in the average room rate to $87. The increase in average occupancy was
due to the addition of a new contract with United Airlines for 13,000 room
nights in 1996. Hotel revenues decreased 7% to $7.7 million primarily due a
decrease in catering profits as a result of business associated with the 1995
Superbowl not recurring in 1996. During 1996, the Hotel installed new carpet in
the ballrooms and in selected corridors. During 1997, the remaining corridors
will receive new carpet, and 285 rooms will undergo a redo which will include
new carpet and mattresses.
Albuquerque
Hotel revenues for 1996 increased slightly to $5.0 million when compared to the
prior year primarily due a 3% increase in REVPAR to $69. The increase in REVPAR
is primarily due to a 1.5 percentage point increase in average occupancy to 80%
as a result of increased transient demand in the Albuquerque market. The average
room rate remained stable at $86. The Hotel is focusing its marketing efforts on
increasing weekend group business. During 1997, the Hotel will complete a
renovation of its meeting rooms.
23
<PAGE>
Houston Medical Center
REVPAR for 1996 increased 5% to $67 when compared to 1995 due to the 2% increase
in average room rate to $87 and a 2% increase in average occupancy to 77%. Hotel
revenues increased 10% to $4.5 million in 1996. These increases were due to
strong demand in the medical markets, increased business due to city wide
conventions and success in shifting lower rated business to higher corporate
rates.
1996 Compared to 1995 Combined Results of Operations
Hotel Revenues: Hotel revenues decreased 9% to $45.9 million in 1996 primarily
due to the sale of the Dallas Hotel in 1995. For the eight Hotels which were
owned by the Partnership continuously throughout 1996 and 1995 (Albuquerque
Greensboro, Houston, Miami Biscayne Bay, Mountain Shadows, Raleigh, Seattle, and
Tampa (the "Combined Hotels")), Combined Hotel revenues increased 4% in 1996 due
to an increase in Combined Hotels' sales.
Hotel Sales: Hotel sales decreased 6% to $143.3 million in 1996 due to the
sale of the Dallas Hotel in 1995. Combined Hotels' sales increased 5% in
1996 through a 3% increase in the Combined Hotels average room rate to $96
and a slight increase in the Combined Hotel average occupancy to 79%.
Direct Hotel Expenses: Direct Hotel expenses decreased 5% to $97.5 million
in 1996 due to the sale of the Dallas Hotel. Combined direct Hotel expenses
increased 5% in 1996. The increase in Combined direct Hotel expenses is due
to an increase in variable costs related to the increase in Combined Hotels'
sales. Furthermore, direct Hotel expenses as a percentage of Hotel sales
increased to 68% in 1996 from 67% in 1995.
Indirect Hotel Expenses: Indirect Hotel expenses decreased 12% in 1996.
Furthermore, indirect Hotel expenses as a percentage of Hotel sales decreased to
17% in 1996 from 18% in 1995.
Management Fees: Incentive and base management fees decreased 14% to $7.5
million and 6% to $4.3 million, respectively, in 1996 due to a corresponding
decrease in Hotel sales.
Property Taxes: Property taxes decreased 25% to $3.1 million in 1996 due
to the sale of the Dallas Hotel in 1995.
Interest Expense: Interest expense decreased 17% to $24.6 million in 1996 due to
lower principal balances in 1996 and a lower average interest rate on the Bank
Loan in 1996.
Net Income: Net income decreased 101% to a net loss of $1.8 million in 1996. The
decrease is due to the recognition of the gain on the sale of the Dallas Hotel
of $24.6 million and the gain on forgiveness of deferred fees of $146.3 million
in 1995.
24
<PAGE>
1995 Compared to 1994
Albuquerque
Hotel revenues for 1995 remained stable at $4.9 million, and REVPAR increased
slightly to $67. The Hotel achieved a 3% improvement in average room rate to
$86, which was offset by a 1.4 percentage point decrease in average occupancy.
Hotel management significantly reduced the amount of lower-rated contract
business in order to focus more on higher-rated transient segment. The
implementation of seasonal pricing strategies facilitated an increase in
transient business but restricted the growth in the Hotel's average room rate
for the year. Average occupancy was negatively impacted by a decrease in group
business of approximately 2,600 roomnights.
Dallas/Fort Worth Airport
Comparisons of 1995 and 1994 operating results are not meaningful because the
Dallas Hotel was sold on August 22, 1995. REVPAR for the period January 1, 1995
through August 21, 1995 was $90, and Hotel revenues were $6.2 million. Average
occupancy for the same period was 85% and the average room rate was $106. The
Partnership recognized a gain of $24.6 million on the sale of the Dallas Hotel.
Greensboro-High Point
Hotel revenues for 1995 increased 17.5% to $4.8 million, and REVPAR at the Hotel
increased 7% to $76 when compared to 1994. The increase in REVPAR was
attributable to a 7% improvement in the average room rate to $93, while average
occupancy remained stable at 82%. Continued strong economic conditions in the
Greensboro market have allowed the Hotel to restrict discounted rates and cater
toward higher-rated transient business. Also, in order to take advantage of
strong transient demand, Hotel management has focused its group sales efforts on
shifting mid-week group business to the weekends. The Hotel received a $1.3
million rooms renovation in late-1995, which is expected to allow the Hotel to
continue its success in the increasingly competitive Greensboro market.
Houston Medical Center
The Hotel achieved a 2% increase in REVPAR to $64 for 1995 due to a 3% increase
in average room rate to $85, which was offset by a slight decrease in average
occupancy to 76%. The growth in the average rate resulted from the Hotel's
efforts to target higher corporate-rated transient business. However, the
Hotel's average occupancy was negatively affected by a decrease in demand in the
medical market segment, especially from Mexico. Hotel revenues increased 4%
primarily due to success in the Hotel's food and beverage operations. Food and
beverage sales and profit increased 4% and 16%, respectively, as a result of the
Hotel's focus on increasing local and group catering volume, as well as
effective cost containment strategies.
25
<PAGE>
Miami Biscayne Bay
Hotel revenues increased 20% to $8.2 million primarily as a result of increases
in rooms sales and profit of 8% and 9%, respectively. Rooms operations benefited
from an 8% increase in REVPAR to $70 as a result of a 4% increase in average
room rate to $90 combined with a 2.6 percentage point increase in average
occupancy to 77%. The growth in average room rate and average occupancy resulted
from premium-rated business associated with the 1995 Superbowl, which was hosted
by Miami, strong demand from the Brazilian tourist market, and demand generated
by a strong city-wide convention year in Miami. Food and beverage sales and
profit increased 10% and 30%, respectively, primarily due to increased banquet
volume associated with the Superbowl.
Mountain Shadows
Hotel revenues for 1995 increased an impressive 30% to $6.0 million, primarily
due to an 11% increase in rooms profit. REVPAR for 1995 increased 6% to $94, due
to a 9% increase in average room rate to $121, offset by a slight decrease in
average occupancy to 78%. Strong demand in the Scottsdale/Phoenix resort market
has allowed the Hotel to achieve a higher average room rate by restricting
discounted rates and focusing on higher-rated business in the transient market
segment. Additionally, Hotel management has continued its success in controlling
rooms operating costs.
Raleigh
Comparisons of 1995 and 1994 operating results are not meaningful because the
Hotel was owned by the Partnership for only a portion of the year in 1994.
REVPAR for 1995 was $66, and Hotel revenues were $4.3 million. The Hotel's
average occupancy and average room rate were 82% and $80, respectively, for
1995.
Seattle
REVPAR for 1995 improved 12% to $79 as a result of a 10% increase in the average
room rate to $100 combined with a 1.5 percentage point increase in average
occupancy to 79%. Hotel revenues increased 20% to $8.0 million due to a 14%
increase in rooms profit combined with a 13% increase in food & beverage profit.
Hotel management has implemented an aggressive transient sales strategy to take
advantage of increased demand in the greater Seattle area. In the group market
segment, demand increased by 4,900 room nights over 1994 due to an increase in
Seattle's city-wide conventions and sporting events. Food and beverage profit
margins benefited from the catering volume associated with the increased group
business as well as effective cost containment
strategies.
Tampa
Comparisons of 1995 and 1994 operating results are not meaningful because the
Hotel was owned by the Partnership for only a portion of the year in 1994.
REVPAR for 1995 was $73, and Hotel revenues were $3.9 million. The Hotel's
average occupancy and average room rate for 1995 were 78% and $94, respectively.
26
<PAGE>
1995 Compared to 1994 Combined Results of Operations
Hotel Revenues: Hotel revenues increased 16% to $50.6 million in 1995 due
partially to the Partnership owning the Raleigh and Tampa Hotels continuously in
1995 and only for partial periods in 1994. For the six Hotels which were owned
by the Partnership continuously throughout 1995 and 1994 (Albuquerque
Greensboro, Houston, Miami Biscayne Bay, Mountain Shadows, and Seattle), Hotel
revenues increased 15% in 1995 due to an 8% increase in rooms profit.
Hotel Sales: Hotel sales increased 4% to $153.2 million in 1995 due to a 6%
increase in the average room rate to $95.
Direct Hotel Expenses: Direct Hotel expenses decreased 1.5% to $102.6
million in 1995. Furthermore, direct Hotel expenses as a percentage of Hotel
sales decreased to 67% in 1995 from 70% in 1994.
Indirect Hotel Expenses: Indirect Hotel expenses decreased 20% to $27.2 million
in 1995. Furthermore, indirect Hotel expenses as a percentage at Hotel sales
decreased to 18% in 1995 from 23% in 1994.
Management Fees: Incentive management fees increased 17% to $8.7 million in
1995 due to the corresponding increase in Hotel sales. Base management fees
decreased 58% to $4.6 million in 1995 due to a reduction in the base
management fee as a percentage of gross Hotel sales in 1995 based on the
Bank Hotels Management Agreement effective December 31, 1994.
Depreciation and amortization: Depreciation and amortization decreased 18%
to $5.9 million in 1995 due to the sale of the Dallas Hotel in 1995.
Interest Expense: Interest expense decreased 14% to $29.4 million in 1995 due
to lower principal balances in 1995.
Net Income: Net income increased 581% to $166,348 in 1995. The increase is due
to the recognition of a gain on the sale of the Dallas Hotel of $24.6 million
and a gain on forgiveness of deferred fees of $146.3 million in 1995.
Inflation: For the three fiscal years ended December 31, 1996, the rate of
inflation has been relatively low and, accordingly, has not had a significant
impact on the Partnership's revenues and net losses before extraordinary items.
However, the Hotels' room rates and occupancy levels are sensitive to inflation,
and the amount of the Partnership's interest expense under floating rate debt
for a particular year will be affected by changes in short-term interest rates.
27
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements within the
meaning of the Private Litigation Reform Act of 1995 and as such may involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance or achievements of the Partnership to be different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Although the Partnership believes the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
attained. These risks are detailed from time to time in the Partnership's
filings with the Securities and Exchange Commission. The Partnership undertakes
no obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index Page
Report of Independent Public Accountants......................30
Statement of Operations.......................................31
Balance Sheet.................................................32
Statement of Changes in Partners' Deficit.....................33
Statement of Cash Flows.......................................34,35
Notes to Financial Statements.................................36
29
<PAGE>
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
TO THE PARTNERS OF POTOMAC HOTEL LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Potomac Hotel Limited
Partnership, a Delaware limited partnership, (the "Partnership") as of December
31, 1996 and 1995, and the related statements of operations, changes in
partners' deficit and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements and schedule are the
responsibility of the General Partner's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Potomac Hotel Limited
Partnership as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of Item
14(a)(2) is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.,
March 14, 1997
30
<PAGE>
Statement of Operations
Potomac Hotel Limited Partnership
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands, except per Unit amounts)
- --------------------------------------------------------------------------------
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
REVENUES
Hotel (Note 3)...........................................................................$ 45,853 $ 50,598 $ 43,777
Gain on sale of the Dallas Hotel......................................................... -- 24,586 --
Other ................................................................................... 843 1,448 1,456
---------- ---------- ----------
46,696 76,632 45,233
========== ========== ==========
OPERATING COSTS AND EXPENSES
Interest................................................................................. 24,582 29,431 34,060
Incentive management fee................................................................ 7,477 8,651 7,425
Depreciation............................................................................. 5,473 5,912 7,219
Base management fee...................................................................... 4,300 4,597 11,019
Property taxes........................................................................... 3,081 4,082 4,160
Ground rent, insurance and other......................................................... 3,624 3,914 4,091
---------- ---------- ----------
48,537 56,587 67,974
========== ========== ==========
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEMS............................................... (1,841) 20,045 (22,741)
EXTRAORDINARY ITEMS
Gain on forgiveness of deferred fees..................................................... -- 146,303 --
Gain on debt extinguishment resulting from the foreclosure of the S&L Hotels............. -- -- 47,168
---------- ---------- ----------
NET (LOSS) INCOME..........................................................................$ (1,841) $ 166,348 $ 24,427
========== ========== ==========
ALLOCATION OF NET (LOSS) INCOME
General Partner..........................................................................$ (18) $ 7,612 $ 8,945
Limited Partners......................................................................... (1,823) 158,736 15,482
---------- ---------- ----------
$ (1,841) $ 166,348 $ 24,427
========== ========== ==========
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEMS PER
LIMITED PARTNER UNIT (1,800 UNITS).......................................................$ (1,013) $ 7,720 $ (12,508)
========== ========== ==========
NET (LOSS) INCOME PER LIMITED PARTNER UNIT (1,800 Units)...................................$ (1,013) $ 88,187 $ 8,601
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Balance Sheet
Potomac Hotel Limited Partnership
December 31, 1996 and 1995
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
1996 1995
<S> <C> <C>
ASSETS
Property and equipment, net......................................................................$ 155,412 $ 151,097
Due from Marriott International, Inc. and affiliates............................................. 10,870 12,017
Restricted cash.................................................................................. 4,507 2,948
Property improvement funds....................................................................... 3,141 3,078
Deferred financing costs, net of accumulated amortization........................................ 709 946
Other assets..................................................................................... -- 296
Cash and cash equivalents........................................................................ 5,228 6,139
------------ ------------
$ 179,867 $ 176,521
============ ============
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt....................................................................................$ 179,837 $ 186,000
Due to Host Marriott Corporation and affiliates.................................................. 124,370 122,243
Incentive and base management fees due to Marriott International, Inc. .......................... 17,172 9,435
Due to Marriott International, Inc. and affiliates............................................... 1,956 477
Accrued interest and other liabilities........................................................... 829 822
------------ ------------
Total liabilities............................................................................. 324,164 318,977
------------ ------------
PARTNERS' DEFICIT
General Partner
Capital contribution.......................................................................... 172,093 172,093
Cumulative net losses......................................................................... (20,380) (20,362)
Cumulative withdrawals........................................................................ (186,527) (186,527)
------------ ------------
(34,814) (34,796)
------------ ------------
Limited Partners
Capital contributions, net of offering costs.................................................. 15,600 15,600
Cumulative net losses......................................................................... (125,083) (123,260)
------------ ------------
(109,483) (107,660)
------------ ------------
Total Partners' Deficit....................................................................... (144,297) (142,456)
------------ ------------
$ 179,867 $ 176,521
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
Statement of Changes in Partners' Deficit
Potomac Hotel Limited Partnership
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
General Limited
Partner Partners Total
<S> <C> <C> <C>
Balance, December 31, 1993............................................................$ (53,353) $ (281,878) $ (335,231)
Net income.......................................................................... 8,945 15,482 24,427
------------ -------------- ------------
Balance, December 31, 1994............................................................ (44,408) (266,396) (310,804)
Net income.......................................................................... 7,612 158,736 166,348
Capital contribution from forgiveness of debt....................................... 2,000 -- 2,000
------------ -------------- ------------
Balance, December 31, 1995............................................................ (34,796) (107,660) (142,456)
Net loss............................................................................ (18) (1,823) (1,841)
------------ -------------- ------------
Balance, December 31, 1996............................................................$ (34,814) $ (109,483) $ (144,297)
============ ============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
Statement of Cash Flows
Potomac Hotel Limited Partnership
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income.........................................................................$ (1,841) $ 166,348 $ 24,427
Extraordinary item........................................................................ -- 146,303 47,168
---------- ----------- -----------
Net (loss) income before extraordinary items.............................................. (1,841) 20,045 (22,741)
Noncash items:
Deferred incentive and base management fees............................................ 7,737 9,435 11,011
Interest on amounts due to Host Marriott Corporation and affiliates.................... 6,892 6,235 5,161
Depreciation........................................................................... 5,473 5,912 7,219
Amortization of financing costs as interest............................................ 237 310 280
Loss on disposition of property and equipment.......................................... 136 103 6
Interest on amounts due to an affiliate of Marriott International, Inc................. 29 -- --
Gain on sale of the Dallas Hotel....................................................... -- (24,586) --
Changes in operating accounts:
Due from/to Marriott International, Inc. and affiliates................................ 541 (2,719) 2,804
Accrued interest and other liabilities................................................. 180 77 (260)
---------- ----------- -----------
Cash provided by operating activities............................................... 19,384 14,812 3,480
---------- ----------- -----------
INVESTING ACTIVITIES
Additions to property and equipment, net.................................................. (9,924) (4,976) (358)
Working capital (funded to) received by Marriott International, Inc. and affiliates, net.. (262) 400 (1,004)
Change in property improvement funds...................................................... (63) (2,590) (468)
Net proceeds from sale of the Dallas Hotel................................................ -- 44,403 --
Acquisition of Raleigh and Tampa Hotels................................................... -- -- (34,642)
---------- ----------- -----------
Cash (used in) provided by investing activities..................................... (10,249) 37,237 (36,472)
---------- ----------- -----------
FINANCING ACTIVITIES
Principal repayments on debt.............................................................. (7,618) (60,071) (4,346)
(Repayments to) Advances from Host Marriott Corporation and affiliates, net............... (3,215) 4,390 31,042
Collection of amounts due from Marriott International, Inc................................ 2,383 5,755 17,192
Deposits to collateral accounts........................................................... (1,559) (2,948) --
(Repayments to) Advances from affiliates of Marriott International, Inc................... (37) 350 --
Payment of financing costs................................................................ -- (1,112) (144)
Increase in amounts due from Marriott International, Inc.................................. -- (157) (7,571)
Change in escrow fund..................................................................... -- -- 983
---------- ----------- -----------
Cash (used in) provided by financing activities..................................... (10,046) (53,793) 37,156
---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
Statement of Cash Flows (Continued)
Potomac Hotel Limited Partnership
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<S> <C> <C> <C>
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................................ (911) (1,744) 4,164
CASH AND CASH EQUIVALENTS at beginning of year.............................................. 6,139 7,883 3,719
---------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of year....................................................$ 5,228 $ 6,139 $ 7,883
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for mortgage and other interest.................................................$ 17,528 $ 22,555 $ 29,281
========== =========== ===========
NONCASH FINANCING ACTIVITIES:
Forgiveness of obligations due to General Partner
accounted for as a capital contribution................................................$ -- $ 2,000 $ --
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
Notes to Financial Statements
Potomac Hotel Limited Partnership
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Potomac Hotel Limited Partnership (the "Partnership") was formed in Delaware on
December 17, 1981, to acquire, develop, own, and operate up to 11 Hotels (the
"Hotels"). On July 16, 1982, 1,800 limited partnership interests ("Units") were
sold pursuant to a public offering at $10,000 per unit. The Partnership
commenced operations on July 17, 1982. The Hotels are managed by Marriott
International, Inc. ("MII") or a subsidiary of MII as part of the Marriott
full-service Hotel system. The sole general partner of the Partnership is Host
Marriott Corporation. On December 29, 1995, Host Marriott Corporation's
operations were divided into two separate companies: Host Marriott Corporation
("Host Marriott" or the "General Partner") and Host Marriott Services
Corporation.
The General Partner contributed five existing Hotels (including one undergoing
substantial renovation), three Hotels under construction, and sites for three
Hotels planned to be developed to the Partnership in exchange for $186,527,000
and a 1% General Partner interest. These funds were borrowed by the Partnership
under a loan agreement (see Note 6). The Partnership completed the development
and construction of its final Hotel during 1984. On January 31, 1986, the
Partnership sold its 307-room Denver West Hotel to Host Marriott in accordance
with provisions of the loan agreement and the partnership agreement. As
discussed in Note 6, foreclosures on the Raleigh, Tampa, and Point Clear Hotels
occurred in 1993 and 1994. In 1994, the Partnership repurchased the Raleigh and
Tampa Hotels using proceeds from two loans advanced from a subsidiary of Host
Marriott. On August 22, 1995, the Partnership sold the Dallas Hotel to a
wholly-owned subsidiary of Host Marriott and used the proceeds to pay down the
debt in connection with the restructuring of the Bank Loan, as described in Note
6. As of December 31, 1996, the Partnership owned and operated eight Hotels
located in the following cities: Albuquerque, NM; Greensboro, NC; Houston, TX;
Miami, FL; Raleigh, NC; Scottsdale, AZ; Seattle, WA; and Tampa, FL.
Partnership Allocations and Distributions
The partnership agreement provides for the distribution of cash and the
allocation, for tax purposes, of operating income, gains and losses, and
deductions and credits among the partners. Except for all cash proceeds
attributable to the replacement of furniture, fixtures and equipment ("FF&E") as
well as depreciation and interest on indebtedness (all of which are specially
allocated to the General Partner by the partnership agreement), profits and
losses are allocated between the partners as follows:
Profits Losses
Before 1994
General Partner 45% 1%
Limited Partners 55% 99%
1994 and after
General Partner 25% 1%
Limited Partners 75% 99%
Any future distributions of cash will be made in the same percentage that
profits and losses are allocated.
Gains (for financial statement purposes) from the sale or other disposition of
Partnership property are allocated (i) first, to the partners with negative
capital accounts in proportion to their capital investment balances and (ii)
thereafter 25% to the General Partner and 75% to the limited partners.
Therefore, the gain on debt extinguishment resulting from the foreclosure on the
Raleigh, Tampa, and Point Clear Hotels has been allocated using this method for
financial statement purposes. For tax purposes, allocations were based on the
applicable Federal income tax regulations.
36
<PAGE>
- --------------------------------------------------------------------------------
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership records are maintained on the accrual basis of accounting, and
its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Working Capital and Supplies
Pursuant to the terms of the Partnership's management agreements discussed in
Note 8, the Partnership is required to provide the respective manager with
working capital and supplies to meet the operating needs of the Hotels. The
respective manager converts cash advanced by the Partnership into other forms of
working capital consisting primarily of operating cash, inventories, and trade
receivables and payables which are maintained and controlled by the manager.
Upon the termination of the agreements, it is expected that the working capital
and supplies will be converted into cash and returned to the Partnership or
transferred to a subsequent owner or operator for consideration. As a result of
these conditions, the individual components of working capital and supplies
controlled by the respective manager are not reflected in the accompanying
balance sheet.
Revenues and Expenses
Hotel Revenues represent 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, real and
personal property taxes, ground and equipment rent, insurance, and certain other
costs, which are disclosed separately in the statement of operations.
Property and Equipment
Property and equipment is recorded at the cost incurred directly by the
Partnership or at the cost incurred by the General Partner in the case of those
assets contributed by the General Partner. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets as follows:
Buildings and improvements 40 years
Leasehold improvements 40 years
Furniture and equipment 4-10 years
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties will be
less than their net book value. If a property is impaired, its basis is adjusted
to fair market value.
37
<PAGE>
- --------------------------------------------------------------------------------
Deferred Financing Costs
Deferred financing costs consist of legal and accounting fees and other costs
incurred in connection with obtaining Partnership financing. Financing costs are
amortized using the straight-line method, which approximates the effective
interest rate method, over the remaining life of the respective mortgage debt.
As of December 31, 1996 and 1995, deferred financing costs totaled $1,256,000.
Accumulated amortization of deferred financing costs as of December 31, 1996 and
1995 was $547,000 and $310,000, respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements because the Partnership does not pay income
taxes but, rather, allocates profits and losses to the individual partners.
Significant differences exist between the net income or loss for financial
reporting purposes and the net income or loss as reported in the Partnership's
tax return. These differences are due primarily to the use for tax purposes of
differing useful lives and accelerated depreciation methods, differing tax bases
in contributed capital, and differing timings of the recognition of management
fee expenses. As a result of these differences, the excess of the net
liabilities reported on a tax basis over the net liabilities reported in the
accompanying financial statements was $46 million as of December 31, 1996, and
$54 million as of December 31, 1995.
New Statement of Financial Accounting Standards
In 1996, the Partnership adopted Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Adoption of SFAS No. 121 did not have an
effect on its financial statements.
NOTE 3. REVENUES
Hotel Revenues consist of the following Hotel operating results for the three
years ended December 31 (in thousands):
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
HOTEL SALES
Rooms .............................................................................$ 89,916 $ 94,654 $ 88,869
Food and beverage.................................................................. 42,111 46,605 46,373
Other ............................................................................. 11,315 11,977 12,693
------------ ----------- -----------
143,342 153,236 147,935
------------ ----------- -----------
HOTEL EXPENSES
Departmental direct costs
Rooms........................................................................... 22,619 23,443 22,812
Food and beverage............................................................... 32,863 35,569 36,233
Other Hotel operating expenses..................................................... 42,007 43,626 45,113
------------ ----------- -----------
97,489 102,638 104,158
------------ ----------- -----------
HOTEL REVENUES........................................................................$ 45,853 $ 50,598 $ 43,777
============ =========== ===========
</TABLE>
38
<PAGE>
- --------------------------------------------------------------------------------
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
1996 1995
<S> <C> <C>
Land.................................................................................................$ 10,444 $ 10,444
Building and improvements............................................................................ 65,494 64,022
Leasehold improvements............................................................................... 125,955 124,543
Furniture and equipment.............................................................................. 21,727 18,097
Construction in progress............................................................................. 972 --
----------- -----------
224,592 217,106
Less accumulated depreciation........................................................................ (69,180) (66,009)
----------- -----------
$ 155,412 $ 151,097
=========== ===========
</TABLE>
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The
estimated fair values of financial instruments not included in this table are
estimated to be equal to their reported carrying amounts.
<TABLE>
As of December 31, 1996 As of December 31, 1995
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Debt and Other Liabilities
Mortgage debt .....................................................$ 179,837 $ 177,695 $ 186,000 $ 182,199
Due to Host Marriott Corporation and affiliates....................$ 124,370 $ 47,403 $ 122,243 $ 46,854
Due to Marriott International, Inc. and affiliates.................$ 17,515 $ 2,086 $ 9,435 $ 758
</TABLE>
The estimated fair value of mortgage debt is based on the expected future debt
service payments, discounted at estimated market rates adjusted for the presence
of debt service guarantees. "Due to Host Marriott Corporation and affiliates"
and "Due to Marriott International, Inc. and affiliates" are valued based on the
expected future payments from operating cash flow discounted at risk adjusted
rates.
39
<PAGE>
- --------------------------------------------------------------------------------
NOTE 6. DEBT
Host Marriott Guaranty
The Partnership originally entered into a loan agreement dated January 14, 1982,
(the "Original Loan") funding up to $348 million to finance the acquisition and
development of the Hotels. In connection with the Original Loan, the General
Partner agreed to advance up to $42.6 million to cover debt service shortfalls
(the "Host Marriott Guaranty"). The General Partner advanced a total of $33.4
million under the Host Marriott Guaranty. The Partnership repaid $22.3 million
and $5 million from the proceeds of the S&L Loan and the Bank Loan,
respectively, as defined below. Therefore, as of December 31, 1996, $6.1 million
plus accrued interest was outstanding related to the Host Marriott Guaranty.
Savings and Loan Association Loan
On February 28, 1985, the Partnership borrowed $103 million (the "S&L Loan")
from a savings and loan association (the "S&L Lender") to refinance the loans on
three of the Hotels located in Raleigh, North Carolina, Tampa, Florida, and
Point Clear, Alabama (the "S&L Hotels") and to repay a portion of the Host
Marriott Guaranty ($22.3 million). The S&L Loan, with an original maturity of
March 1, 2000, bore interest at 2.75% over the monthly average rate on six-month
Treasury Bills (subject to a 9% floor and a 16% ceiling). For the years 1989
through 1992, the S&L Lender, the manager, and the General Partner agreed to
several modifications including (i) interest rate reductions, (ii) reductions in
base management fees paid to the manager, (iii) increases in the debt service
guarantee provided by Host Marriott (the "S&L Guaranty"), and (iv) Host
Marriott's subordination of cash flow generated from the Host Marriott owned
66-room addition to the Raleigh Hotel.
During 1993, the Partnership defaulted on the S&L Loan and was unsuccessful in
negotiating any further loan modifications. The General Partner and the S&L
Lender agreed to a foreclosure, the principal features of which were as follows:
(i) the Partnership retained $2 million of net operating cash flow from the S&L
Hotels, (ii) the Partnership took no action to contest the foreclosure
proceedings with respect to the S&L Hotels, and (iii) the Partnership was
granted a right of first refusal to reacquire the S&L Hotels in the event the
S&L Lender subsequently offered them for sale. The $2 million was used by the
Partnership to repay the General Partner for working capital advances. On
December 17, 1993, the S&L Lender foreclosed on the Raleigh, North Carolina
Hotel. The Partnership recorded an extraordinary gain of $17.1 million which
represents the difference between the carrying value of the Raleigh Hotel
mortgage debt canceled as a result of the foreclosure ($28.5 million) and the
net book value of the Raleigh Hotel assets ($11.4 million). On February 4, 1994,
and March 23, 1994, the lender foreclosed on the Tampa, Florida Hotel and the
Point Clear, Alabama Hotel, respectively. The Partnership recorded an
extraordinary gain of $47.2 million which represents the difference between the
carrying value of the Tampa, and Point Clear Hotels mortgage debt canceled as a
result of the foreclosures ($74.5 million) and the net book value of the Hotels'
assets ($27.3 million).
Bank Loan
On December 22, 1987, the Partnership borrowed $245 million (the "Bank Loan")
from The Mitsui Trust and Banking Company (the "Bank Lender") to repay the
outstanding indebtedness on seven of its Hotels, a portion of the Host Marriott
Guaranty ($5.0 million), and related transaction costs. The Bank Loan bore
interest at an effective fixed rate of 10.37% and required monthly interest-only
payments with the entire principal balance due at maturity.
The Bank Loan was secured by first priority liens on seven of the Hotels (the
"Bank Hotels") and all related assets, including working capital and supplies
advanced to the manager for each respective Hotel. The Bank Loan established a
priority for distributions of cash from operations, prohibited the Partnership
from creating any other liens on the Bank Hotels, and restricted the Partnership
from incurring certain other indebtedness. The Bank Loan was non-recourse to the
Partnership and its partners,
40
<PAGE>
- --------------------------------------------------------------------------------
but was supported by a $26 million Host Marriott guaranty (the "Bank Guaranty")
and an equivalent MII "back-up" guaranty (to be funded only if Host Marriott did
not fund its guaranty).
The Bank Loan matured on December 22, 1994, with a principal balance of $245
million due and was not repaid because the Partnership had insufficient funds to
do so. On December 22, 1994, the Partnership entered into a forbearance
agreement with the Bank Lender under which the Bank Lender agreed not to
exercise its rights and remedies for nonpayment of the Bank Loan on the maturity
date until February 24, 1995. The forbearance agreement was subsequently
extended until August 22, 1995 to allow the Partnership time to solicit the
consent of its limited partners regarding the sale of the Dallas Hotel to a
subsidiary of the General Partner in connection with the restructuring of the
Bank Loan. In exchange for the Bank Lender's agreement to forbear, the
Partnership made monthly interest payments at the one-month LIBOR plus two
percentage points (2.0%) for the period December 22, 1994 through June 21, 1995
and at the one-month LIBOR plus two-and-one-quarter percentage points (2.25%)
for the period June 22, 1995 through August 21, 1995.
Restructured Bank Loan
On August 22, 1995, the General Partner and the Bank Lender successfully
completed the restructuring and extension of the Bank Loan. The principal terms
of the restructured Bank Loan are as follows: (i) the General Partner advanced
$10 million under the Bank Guaranty, which was used to pay down principal on the
Bank Loan; advances under the Bank Guaranty bear interest at an annual rate
equal to the prime rate, as announced by Bankers Trust Company; (ii) the
Partnership used $44 million of proceeds from the sale of the Dallas Hotel to
pay down principal on the Bank Loan; (iii) the maturity of the Bank Loan extends
to December 22, 1997, with two additional one-year extensions if certain debt
service coverage tests are met; (iv) semi-annual payments of interest on the
restructured loan amount at the six-month LIBOR plus 1.5 percentage points and
annual payments of principal in the amount of $5 million during the first three
years of the restructured loan and $6 million during any extension period; (v)
the General Partner's liability under the Bank Guaranty remains at $26 million
(subject to a credit for the advance of $10 million described in (i) above);
(vi) MII continued its "back-up" guaranty ( the "MII Back-up Guaranty"), under
which MII agrees to advance any amounts not advanced by Host Marriott under the
Bank Guaranty; (vii) Host Marriott (but not MII) agreed to an additional
guaranty (the "Interest Guaranty") for $12 million to cover any shortfalls in
the payment of interest after application of all cash flow available for debt
service (advances in respect to interest will be made first under the Interest
Guaranty then under the Bank Guaranty or the MII Back-up Guaranty); (viii) the
Interest Guaranty will be reduced each year by $4 million less any Interest
Guaranty advances as of the date such reduction is to occur, and the Interest
Guaranty will be increased by $4 million for each extension period, if
applicable; the remaining liability under the Bank Guaranty and the MII Back-up
Guaranty in any event must at least be equal to the scheduled amortization
payments due during the extension period; (ix) all Partnership cash relating to
the Bank Hotels (including the Bank Hotels Property Improvement Fund, as
defined, and the subordinated base management fees) collateralize the Bank Loan;
(x) the Bank Lender was paid a fee of $573,000 for the successful restructuring
of the Bank Loan; and (xi) the Bank Lender required MII to terminate the
management agreement related to the Bank Hotels (the "MII Management Agreement")
and to forgive the deferred balances of base and incentive management fees
outstanding as of December 31, 1994; the Partnership recorded an extraordinary
gain of $146.3 million in 1995 to recognize the gain which resulted from the
forgiveness of the deferred fees. In addition, the Bank Lender required a
portion of the base management fee equal to 1% of gross Bank Hotels' sales and a
portion of the FF&E Reserve contribution equal to 1% of gross Bank Hotels' sales
to be subordinate to the payment of debt service. Based on current debt service
coverage tests, the Partnership expects to be able to exercise the first
one-year extension of the loan upon its maturity on December 22, 1997.
Pursuant to the terms of the restated Bank Loan, operating profit, as defined,
from the Bank Hotels and the subordinated portion of the base management fee,
equal to 1% of gross Bank Hotels' sales in excess of debt service must be held
in a collateral account with the Bank Lender. After the end of each fiscal year,
excess cash remaining in the collateral account is applied as follows: (i) 50%
to repay Bank Loan principal and (ii) 50% to pay interest and principal on
advances under the Bank Guaranty, until the unadvanced portion of the Bank
Guaranty is replenished to a balance of $20.0 million. Thereafter, excess cash
in the
41
<PAGE>
- --------------------------------------------------------------------------------
collateral account is applied as follows: (i) 50% to repay Bank Loan principal,
(ii) 25% to pay deferred base management fees to MII, and (iii) 25% to pay
interest and principal on advances under the Bank Guaranty.
As of December 31, 1996 and 1995, the balance of the Bank Loan was $179.8
million and $186 million, respectively. As of December 31, 1996 and 1995, $10.0
million and $10.3 million including accrued interest, respectively, was
outstanding pursuant to the Bank Guaranty. On February 24, 1997, in accordance
with the cash flow priorities as described in the preceding paragraph, the
Partnership repaid $2.2 million to Host Marriott on the Bank Guaranty and $2.2
million in principal on the Bank Loan using amounts in the cash collateral
account included in restricted cash on the accompanying balance sheet.
Therefore, as of February 24, 1997, the balance on the Bank Loan was $177.6
million and $19.4 million was available under the Bank Guaranty. The weighted
average interest rate for the Bank Loan was 7.26% for 1996 and 7.89% for 1995.
At December 31, 1996, the interest rate on the Bank Loan was 7.41%. The weighted
average interest rate for the Bank Guaranty was 8.27% for 1996 and 8.85% for
1995. At December 31, 1996, the interest rate on the Bank Guaranty was 8.25%.
No amounts were advanced under the Interest Guaranty during 1996 or 1995.
Additionally in early 1997, in accordance with the terms of the Interest
Guaranty, the amount available was reduced from $8 million to $4 million.
Raleigh and Tampa Loans
The Partnership exercised its rights of first refusal given in connection with
the foreclosure of the S&L Hotels and repurchased the Raleigh Hotel and the
Tampa Hotel on May 20, 1994, and July 11, 1994, respectively, with funding
provided by non-recourse loans to the Partnership from a wholly-owned subsidiary
of Host Marriott.
The non-recourse loan for the Raleigh Hotel totaled $19.4 million to cover the
$18.7 million purchase price and closing costs. Under the terms of the loan, $14
million of principal ("Raleigh Note A") bears interest at a fixed rate of 10%
and requires quarterly payments of interest and principal, based on a 25-year
amortization schedule, with a balloon payment due at maturity on May 20, 2001.
The remaining principal of $5.4 million ("Raleigh Note B") bears interest at a
fixed rate of 11.5% and matures on May 20, 2006. Cash flow from the Raleigh
Hotel is used to pay debt service in the following order of priority: (i)
interest on Raleigh Note A, (ii) principal on Raleigh Note A and (iii) interest
on Raleigh Note B. All remaining cash flow is used to pay principal on Raleigh
Note B. If cash flow is insufficient to pay interest on Raleigh Note B, the
unpaid interest rolls into the Raleigh Note B principal balance annually. As of
December 31, 1996 and 1995, the Raleigh Note A principal balance was $13.5
million and $13.7 million, respectively, and the Raleigh Note B principal
balance was $4.8 million and $5.4 million, respectively.
The non-recourse loan for the Tampa Hotel totaled $16.3 million to cover the
$15.7 million purchase price and closing costs. Under the terms of the loan, $10
million of principal ("Tampa Note A") bears interest at a fixed rate of 10% and
requires quarterly payments of interest and principal, based on a 25-year
amortization schedule, with a balloon payment due at maturity on July 11, 2001.
The remaining principal of $6.3 million ("Tampa Note B") bears interest at a
fixed rate of 11.5% and matures on July 11, 2006. All cash flow from the Tampa
Hotel is used to pay debt service in the following order of priority: (i)
interest on Tampa Note A, (ii) principal on Tampa Note A and (iii) interest on
Tampa Note B. All remaining cash flow is used to pay principal on Tampa Note B.
If cash flow is insufficient to pay interest on Tampa Note B, the unpaid
interest rolls into the Tampa Note B principal balance annually. As of December
31, 1996 and 1995, the Tampa Note A principal balance was $9.7 million and $9.8
million, respectively, and the Tampa Note B principal balance was $6.1 million
and $6.2 million, respectively.
Each of the Raleigh and Tampa loans are secured by a first priority lien on the
building; land (the Partnership's leasehold interest in the case of the Tampa
Hotel); furniture, fixtures and equipment; and working capital and supplies
advanced to the Manager.
42
<PAGE>
- --------------------------------------------------------------------------------
As of December 31, 1996, required principal payments related to the Raleigh and
Tampa Loans are as follows (in thousands):
Year Mortgage Debt
1997 $ 292
1998 322
1999 356
2000 393
2001 432
Thereafter 33,000
--------
$ 34,795
========
Furniture, Fixtures and Equipment Loans
Prior to December 22, 1994, the Bank Loan and MII Management Agreement, as
described in Note 8, required the Partnership to deposit funds in an escrow
account (based on a percentage, ranging from 1% to 5%, of sales from the Bank
Hotels, depending on the length of time the applicable Hotel had been open) to
be used to replace FF&E at the Bank Hotels. Prior to 1995, the Bank Loan
required the General Partner to fund up to $30 million of these reserves, if
necessary (the "FF&E Guaranty"). The MII Management Agreement contained a
similar reserve requirement for the S&L Hotels.
Prior to 1991, a third party bank provided funding (the "FF&E Loans") for both
the Bank Hotels' and the S&L Hotels' FF&E replacement and reserve requirements.
During 1994, the Partnership repaid in full the third party FF&E Loans with
amounts received from MII through a voluntary prepayment under the FF&E Lease,
as described in Note 8. The weighted average interest rate was 7.65% for January
1, 1994 through September 25, 1994.
Host Marriott advanced funds (the "Host FF&E Loans") for the Bank Hotels from
1991 through 1994 pursuant to the FF&E Guaranty and also provided loans for the
purchase of FF&E at the S&L Hotels for 1991 and 1992. The Host FF&E Loans bear
interest at the prime rate and are to be repaid in annual installments over six
years. As of December 31, 1996 and 1995, $5.2 million was outstanding to Host
Marriott for the Host FF&E Loans. The weighted average interest rate was 8.27%
for 1996, 8.85% for 1995 and 7.14% for 1994. At December 31, 1996, the interest
rate was 8.25%.
As of December 31, 1996, required principal payments related to the Host FF&E
Loans are as follows (in thousands):
Year Amount
1997 $ 4,000
1998 900
1999 300
-------
$ 5,200
=======
On January 3, 1997, the Partnership repaid $2.3 million of principal to Host
Marriott on the Host FF&E Loans. Therefore, as of January 3, 1997, the balance
on the Host FF&E Loans was $2.9 million.
These loans are non-recourse to the Partnership and its partners and are secured
by payments from MII under the FF&E Lease as described in Note 8. Interest
expense on these loans is offset by lease payments received under the MII FF&E
Lease agreements. As of December 31, 1996 and 1995, MII owed $2.9 million and
$5.2 million, respectively, including related interest costs to the Partnership
pursuant to these agreements, with the final installment due December 31, 1999.
43
<PAGE>
- --------------------------------------------------------------------------------
Beginning in 1995, the Bank Hotels FF&E funding requirements are being met
through an FF&E Reserve for the combined Bank Hotels. Since its acquisition date
in 1994, the FF&E funding requirements for the Tampa Hotel have been met through
the establishment of a repairs and equipment reserve for the Hotel. However, the
Raleigh Hotel required additional funds, as described below. See Note 8 for
further details on the repairs and equipment reserves.
Raleigh Hotel Furniture, Fixtures and Equipment Loans
In 1995, Host Marriott and Marriott Hotel Services, Inc. ("MHSI"), a subsidiary
of MII, each provided an unsecured loan to the Partnership in the amount of
$350,000 ("Raleigh $350,000 FF&E Loans") to fund costs of a softgoods rooms
renovation at the Raleigh Hotel in excess of amounts available in the Hotel's
FF&E Reserve. Each Raleigh $350,000 FF&E Loan was fully advanced to the
Partnership by January 24, 1995. The Raleigh $350,000 FF&E Loans bear interest
at the prime rate. Payments on the loans are made each accounting period from a
portion of the FF&E Reserve contribution equal to 1% of gross Hotel sales and
are applied first to interest and then to principal. The Raleigh $350,000 FF&E
Loans will be due and payable on the earlier of the termination of the Raleigh
management agreement or December 31, 2005. Interest accrued in 1995 was added to
the principal balance of each of the loans. As of December 31, 1996 and 1995,
$342,000 and $380,000, respectively, was due on each of the Raleigh $350,000
FF&E Loans. The weighted average interest rate was 8.27% for 1996 and 8.85% for
1995. At December 31, 1996, the interest rate was 8.25%.
In 1996, Host Marriott provided another unsecured loan to the Partnership in the
amount of $700,000 ("Raleigh $700,000 FF&E Loan") to fund costs of a casegoods
rooms renovation at the Raleigh Hotel in excess of the amounts available in the
Raleigh Hotel's FF&E Reserve. The Raleigh $700,000 FF&E Loan was fully advanced
to the Partnership by December 9, 1996. The Raleigh $700,000 FF&E Loan bears
interest at the prime rate plus 0.5%. Payments on the loan are made each
accounting period from a portion of the FF&E Reserve contribution equal to 1% of
gross Hotel sales and are applied first to interest and then to principal. The
Raleigh $700,000 FF&E Loan will be due and payable on the earlier of the
termination of the Raleigh management agreement or December 31, 2003. As of
December 31, 1996, $658,000 was due on the Raleigh $700,000 FF&E Loan. The
weighted average interest rate was 8.75% for 1996. At December 31, 1996, the
interest rate was 8.75%.
Other Loans
As of December 31, 1996, the Partnership owed Host Marriott $83.9 million
(excluding the Raleigh and Tampa loans and related accrued interest) including
accrued interest, as follows: (i) $59.2 million related to the original Host
Marriott Guaranty and the S&L Guaranty, as defined in Note 6; (ii) $10.0 million
related to the Bank Guaranty; (iii) $5.0 million related to working capital
advances; (iv) $8.2 million for capital improvements at the Point Clear, Alabama
Hotel; and (v) $1.5 million from Host Marriott's subordination of cash flow from
the 66-room Raleigh addition. All of the above-mentioned advances bear interest
at the prime rate as announced by Bankers Trust Company with a weighted average
interest rate of 8.27% for 1996, 8.85% for 1995 and 7.14% for 1994. At December
31, 1996, the interest rate was 8.25%.
All Partnership indebtedness, including the Bank Loan, guaranty advances, other
General Partner loans, and deferred base and incentive management fees, which is
outstanding upon dissolution of the Partnership must be repaid before any cash
distributions to the General or Limited Partners.
44
<PAGE>
- --------------------------------------------------------------------------------
NOTE 7. LEASES
The Partnership's five ground leases have lease terms expiring in 2006 (Tampa),
2008 (Greensboro and Miami), 2009 (Houston) and 2032 (Albuquerque) and contain
one or more renewal options that would allow the Partnership to extend the
leases 15 to 50 additional years. The leases generally provide for minimum base
rent and additional ground rentals to be paid as a percentage of sales in excess
of minimum rentals. Total ground rental expense for the three years ended
December 31 consisted of (in thousands):
1996 1995 1994
Minimum rentals......................$ 1,548 $ 1,548 $ 1,511
Additional rentals based on sales... 706 664 585
------- ------- -------
$ 2,254 $ 2,212 $ 2,096
======= ======= =======
Minimum future rentals for the five Hotels operating under noncancelable leases
for real estate for future years (exclusive of percentage rent) are as follows
(in thousands):
Year Leases
1997 $ 1,548
1998 1,548
1999 1,548
2000 1,548
2001 1,548
Thereafter 14,764
----------
Total minimum lease payments $ 22,504
==========
NOTE 8. MANAGEMENT AGREEMENTS
MII Management Agreement
On July 16, 1982, the Partnership entered into a management agreement with MII
(the "MII Management Agreement") to manage and operate the Hotels for a term of
25 years from the opening of each Hotel with renewal terms, at the option of
MII, of up to an additional 50 years. The MII Management Agreement provided for
payment of base management fees equal to a percentage of sales ranging from 7%
to 8% depending on the length of time the Hotel was open and incentive
management fees equal to a percentage of Hotel operating profits (as defined)
ranging from 20% to 90% depending on the level of returns from operating profit
paid to the Partnership. In connection with obtaining the Bank Loan, the MII
Management Agreement was amended on December 22, 1987, with respect to the Bank
Hotels to provide for the payment of base management fees only after payment of
debt service on the Bank Loan. If funds available after debt service were
insufficient to pay all base management fees related to the Bank Hotels, the
fees were deferred without interest and payable in future years. The Partnership
and the S&L Lender also modified the MII Management Agreement with respect to
the S&L Hotels, providing for reductions in the base management fees for 1989
through 1993. As of December 31, 1994, the balance of deferred base management
fees was $47.5 million. Payment of the incentive management fees was dependent
upon the availability of cash flow after debt service, and incentive management
fees were payable only after repayment of certain debt service guarantee
advances and certain priority returns to the Partnership expressed as a
percentage of limited partner invested equity. Through December 31, 1994, no
incentive management fees had been paid since inception. As of December 31,
1994, deferred incentive management fees were $98.8 million. In connection with
the Bank Loan restructuring in 1995, the MII Management Agreement was terminated
and the deferred balances of base and incentive management fees outstanding as
of December 31, 1994 were forgiven. The Partnership
45
<PAGE>
- --------------------------------------------------------------------------------
recorded an extraordinary gain of $146.3 million in 1995 to recognize the gain
which resulted from the forgiveness of the deferred fees.
Until the termination of the MII Management Agreement, MII entered into leases
from the Partnership for all FF&E replacements for terms of up to six years.
Lease payments represent an amount approximately equal to the principal
amortization, interest, and fees associated with indebtedness incurred by the
Partnership to finance the replacements and any sales and use taxes, personal
property taxes, insurance premiums, and additional costs incurred by the
Partnership in connection with the acquisition and use of such replacements. As
of December 31, 1996 and 1995, MII was obligated to pay $5.2 million to the
Partnership during the term of these agreements.
Bank Hotels Management Agreement
Effective December 31, 1994, in connection with the Bank Loan restructuring, the
Partnership entered into a management agreement (the "Bank Hotels Management
Agreement") with MII. The agreement provides for an initial term of 25 years
from the opening date, as specified in the agreement, of each Hotel with renewal
terms at the option of MII of up to an additional 50 years. The Bank Hotels
Management Agreement provides MII with a base management fee of 3% of gross Bank
Hotels' sales. In accordance with the restructured Bank Loan, a portion of the
base management fee equal to 1% of gross Bank Hotels' sales (the "Subordinated
Base Management Fee") is subordinate to the payment of debt service on the Bank
Loan and repayment of certain advances under the Bank Guaranty. As a result, the
Subordinated Base Management Fee is set aside in a cash collateral account to be
made available for the payment of debt service on the Bank Loan; repay the Bank
Guaranty; and depending on the balance of the Bank Guaranty, pay deferred base
management fees. Any unpaid base management fees are deferred without interest
and are payable in future years. As of December 31, 1996 and 1995, deferred base
management fees were $2.4 million and $1.3 million, respectively.
The Manager will continue to earn incentive management fees equal to 20% of
Hotel operating profit (as defined, calculated before debt service on the Bank
Loan) and additional incentive fees, after certain returns to the Partnership,
ranging from 10% to 70% of Hotel operating profits depending on the level of
returns achieved by the Partnership. Payment of incentive management fees will
continue to be fully subordinated to the payment of debt service and to the
replenishment of all guaranties. As of December 31, 1996 and 1995, deferred
incentive fees were $14.8 million and $8.1 million, respectively.
The Bank Hotels Management Agreement also requires the Partnership to maintain a
repairs and equipment reserve (the "Bank Hotels Property Improvement Fund") to
ensure that the physical condition and product quality of the Bank Hotels are
maintained. Contributions to the Bank Hotels Property Improvement Fund are equal
to 5% of gross Bank Hotels' sales.
On February 24, 1995, the Partnership, the Bank Lender, and MII entered into a
cash collateral agreement with terms effective January 1, 1995, whereby all
Partnership cash relating to the Bank Hotels (including the Bank Hotels Property
Improvement Fund and the Subordinated Base Management fees) was pledged as
collateral for the Bank Loan. Pursuant to the cash collateral agreement, a
portion of the Bank Hotels Property Improvement Fund contribution equal to 4% of
gross Bank Hotels' sales is to be deposited into an escrow account for the
furniture, fixtures and equipment needs of the Bank Hotels. This escrow balance
as of December 31, 1996 and 1995, was $2.4 million and $2.3 million,
respectively. The remaining portion of the Bank Hotels Property Improvement Fund
contribution equal to 1% of gross Bank Hotels' sales is to be deposited into a
restricted cash account which is subordinated to the payment of current debt
service on the Bank Loan. Any balance in the restricted cash account at the end
of each year, after payment of debt service, will be released from any
restrictions. As of December 31, 1996 and 1995, the balance in the restricted
cash account was $1.1 million and $1.3 million, respectively. The balance in the
fund was not required for 1996 and 1995 debt service and was transferred to the
Bank Hotels Property Improvement Fund in early 1997 and 1996, respectively.
46
<PAGE>
- --------------------------------------------------------------------------------
Raleigh and Tampa Management Agreements
Upon the Partnership's reacquisition of the Raleigh and Tampa Hotels, the
Partnership entered into new management agreements (the "MHSI Agreements") with
MHSI for each of the Hotels. These agreements provide for payments to MHSI as
follows: (i) a base management fee equal to 3% of gross Hotel sales and (ii) an
incentive management fee equal to 20% of operating profit, as defined. The MHSI
Agreements provide for an initial term expiring on December 31, 2009. MHSI may
renew each agreement at its option, for up to two successive eight-year terms.
The Partnership may terminate the Raleigh or Tampa management agreement after
June 18, 1999, and July 16, 1999, respectively, if specified minimum operating
results for each Hotel are not achieved. However, MHSI can prevent termination
by waiving its base management fee with respect to each Hotel for a two-year
period.
The MHSI Agreements provide for a priority return to the Partnership equal to
10.75% of the owner's investment, plus ground rent in the case of the Tampa
Hotel. As of December 31, 1996, the Raleigh and Tampa owner's investment was
$19,460,000 and $16,430,000, respectively. The MHSI Agreement for Raleigh
provides for a portion of the base management fee payable to MHSI equal to 1% of
gross Hotel sales to be subordinated to the first 10% of the 10.75% priority
return for five years from the effective date of the Raleigh agreement. Any
unpaid base fees will accrue and are payable from any excess operating profit;
however, any deferred base fees remaining on June 18, 1999, will be waived. As
of December 31, 1996 and 1995, no base management fees were deferred under the
Raleigh management agreement.
Incentive management fees are payable from 40% of available cash flow, as
defined. Any unpaid incentive management fees for Raleigh and Tampa on an annual
basis will be waived. In 1996, incentive management fees paid for Raleigh and
Tampa were $574,000 and $315,000, respectively. In 1995, incentive management
fees paid for Raleigh and Tampa were $327,000 and $162,000, respectively.
Each MHSI Agreement provides for the establishment of a repairs and equipment
reserve ("Property Improvement Fund") for each Hotel. Contributions to the
Property Improvement Fund are in the amount of 5% of gross Hotel sales from each
Hotel. However, effective in August 1996, MHSI and the Partnership agreed to
increase the contribution from 5% to 7% for the Raleigh Hotel until an
additional $300,000 is deposited to cover the cost of certain renovations. It is
expected that this increase will be in effect for approximately one year. In
addition, a portion of the 7% contribution for the Raleigh Hotel equal to 2% of
gross Hotel sales is used to pay interest and principal on the Raleigh $350,000
FF&E Loans and the Raleigh $700,000 FF&E Loan. As of December 31, 1996, the
balances of the Raleigh and Tampa Property Improvement Funds were $678,000 and
$67,000, respectively. As of December 31, 1995, the balances of the Raleigh and
Tampa Property Improvement Funds were $591,000 and $172,000, respectively.
General
Pursuant to the terms of the MII Management Agreement (prior to December 31,
1994), the Bank Hotels Management Agreement, and the MHSI Agreements, MII (for
the Bank Hotels) and MHSI (for Raleigh and Tampa) are required to furnish the
Hotels with certain services ("Chain Services") which are generally provided on
a central or regional basis to all Hotels in the Marriott full-service Hotel
system. Chain Services include central training, advertising and promotion, a
national reservation system, computerized payroll and accounting services, and
such additional services, as needed, which may be performed more efficiently on
a centralized basis. Costs and expenses incurred in providing such services are
allocated among all domestic full-service Hotels managed, owned, or leased by
MII or its subsidiaries. In addition, the Hotels also participate in MII's
Honored Guest Awards Program ("HGA"). The cost of this program is charged to all
Hotels in the Marriott full-service Hotel system based on the HGA sales at each
Hotel. The total amount of Chain Services and HGA costs charged to the
Partnership was $7.1 million in 1996, $7.6 million in 1995, and $7.0 million in
1994.
47
<PAGE>
- --------------------------------------------------------------------------------
Pursuant to the terms of the management agreements, the Partnership is required
to provide the manager with working capital and supplies to meet the operating
needs of the Hotels. In 1994, in connection with the foreclosures of the Raleigh
Hotel, Tampa Hotel, and Point Clear Hotel, the write-off of the Partnership's
working capital and supplies for Raleigh, Tampa, and Point Clear was included in
the gain realized on foreclosure. In 1995, in conjunction with the sale of the
Dallas Hotel, $946,000 was reimbursed by the Dallas Hotel to the Partnership.
These funds were used to pay interest and principal on working capital advances
from Host Marriott. Additionally during 1995, MII returned $400,000 in working
capital to the Partnership. During 1996, the Partnership advanced $262,000 to
MII for working capital. Therefore, as of December 31, 1996 and 1995, $5.3
million and $5.1 million, respectively, has been advanced to the managers for
working capital and supplies for all the Hotels.
NOTE 9. RELATED PARTY TRANSACTIONS
A 66-guest room addition to the Raleigh Hotel was completed and opened on July
18, 1987. The $3.4 million addition was operated as part of the Hotel but was
owned by Host Marriott. Host Marriott subordinated its receipt of cash flow
generated from the Host Marriott-owned Raleigh addition (the "Addition
Deferral") to the payment of debt service on the S&L Loan for the years 1991
through 1993 . The Addition Deferral bears interest at the prime rate. The
weighted average interest rate was 8.27% for 1996, 8.85% for 1995, and 7.14% for
1994. The balance of the Addition Deferral including accrued interest at
December 31, 1996 and 1995, was $1.5 and $1.4 million, respectively. Except for
the balance of $1.5 million, the Partnership's rights and obligations under the
Addition Deferral arrangement terminated with the Raleigh Hotel foreclosure.
Additionally, the 66-room addition was purchased by the Partnership when the
Raleigh Hotel was repurchased during 1994.
On June 28, 1995, the Partnership assigned its right of first refusal to
purchase the Point Clear Hotel to a subsidiary of Host Marriott, which
subsequently purchased the Hotel. In exchange, Host Marriott agreed to forgive
$2 million of accrued interest on certain advances to the Partnership, which has
been accounted for as a capital contribution by the General Partner in the
accompanying balance sheet as of December 31, 1996.
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Partnership has no directors or officers. The business policy making
functions of the Partnership are carried out through the directors and executive
officers of Host Marriott, the General Partner, who are listed below:
<TABLE>
Age at
Name Current Position December 31, 1996
<S> <C> <C>
Terence C. Golden President, Chief Executive Officer and Director 52
Richard E. Marriott* Chairman of the Board of Directors 58
R. Theodore Ammon Director 47
Robert M. Baylis Director 58
J. W. Marriott, Jr.* Director 65
Ann Dore McLaughlin Director 55
Harry L. Vincent, Jr. Director 77
Robert E. Parsons, Jr. Executive Vice President and Chief Financial Officer 41
Christopher J. Nassetta Executive Vice President 34
Christopher G. Townsend Senior Vice President and General Counsel 49
Bruce D. Wardinski Senior Vice President and Treasurer 36
Donald D. Olinger Senior Vice President and Corporate Controller 38
</TABLE>
*J. W. Marriott, Jr. and Richard E. Marriott are brothers.
Business Experience
Terence C. Golden is the President and Chief Executive Officer of Host Marriott
and serves as a Director of certain subsidiaries of Host Marriott. He also
serves as Chairman of Bailey Realty Corporation and Bailey Capital Corporation
and various affiliated companies. In addition, Mr. Golden is a Director of Prime
Retail, Inc., Cousins Properties, Inc. and the District of Columbia early
Childhood Collaborative. He is also a member of the Executive Committee of the
Federal City Council. Prior to joining Host Marriott, Mr. Golden served as Chief
Financial Officer of the Oliver Carr Company. Prior to joining the Oliver Carr
Company, he served as Administrator of the General Services Administration and
as Assistant Secretary of Treasury, and he was co-founder and national managing
partner of Trammel Crow Residential Companies. Mr. Golden's term as a Director
of Host Marriott expires at the 1997 annual meeting of shareholders.
Richard E. Marriott is a Director of Marriott International, Inc., Host Marriott
Services Corporation and Potomac Electric Power Company, and he is Chairman of
the Board of First Media Corporation. He also serves as a Director of certain
subsidiaries of Host Marriott and is a past President of the National Restaurant
Association. Mr. Marriott is also the President and a Trustee of the Marriott
Foundation for People with Disabilities. In 1979, Mr. Marriott was elected to
the Board of Directors of Host Marriott. In 1984, he was elected Executive Vice
President of Host Marriott, and in 1986, he was elected Vice Chairman of the
Board of Directors of Host Marriott. In 1993, Mr. Marriott was elected Chairman
of the Board of Host Marriott. Mr. Marriott also has been responsible for
management of Host Marriott's government affairs functions. Mr. Marriott's term
as a Director of Host Marriott expires at the 1998 annual meeting of
shareholders.
49
<PAGE>
R. Theodore Ammon is a private investor and Chairman and Chief Executive Officer
of Big Flower Press Holdings Inc. and Chairman of Treasure Chest Advertising
Company, Inc. He was formerly a general partner of Kohlberg Kravis Roberts &
Company (a New York and San Francisco-based investment firm). He also serves on
the Boards of Directors of Samsonite Corporation, Foodbrands America, Inc. and
Culligan Water Technologies, Inc. In addition, Mr. Ammon is a member of the
Boards of Directors of the New York YMCA, Jazz at Lincoln Center and the
Institute of International Education, and of the Board of Trustees of Bucknell
University. Mr. Ammon's term as a Director of Host Marriott expires at the 1998
annual meeting of shareholders.
Robert M. Baylis is a Director of The International Forum, an executive
education program of the Wharton School of 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, Covance, Inc., Gryphon Holdings,
Inc., and Home State Holdings, Inc. Mr. Baylis' term as a Director of Host
Marriott expires at the 1997 annual meeting of stockholders.
J.W. Marriott, Jr. is Chairman of the Board and Chief Executive Officer of
Marriott International, Inc., and a Director of Host Marriott Services
Corporation, General Motors Corporation, Outboard Marine Corporation, and the
U.S.-Russia Business Council. He also serves on the Boards of Trustees of the
Mayo Foundation, Georgetown University and the National Geographic Society. He
is on the President's Advisory Committee of the American Red Cross and the
Executive Committee of the World Travel and Tourism Council. Mr. Marriott's term
as a Director of Host Marriott expires at the 1999 annual meeting of
shareholders.
Ann Dore McLaughlin is Chairman of the Aspen Institute. She formerly served as
President of the Federal City Council from 1990 until 1995. Ms. McLaughlin has
served with distinction in several U.S. Administrations in such positions as
Secretary of Labor and Under Secretary of the Department of the Interior. She
also serves as a Director of AMR Corporation, Fannie Mae, General Motors
Corporation, Kellogg Company, Nordstrom, Potomac Electric Power Company, Union
Camp Corporation, Donna Karan International, Inc., Vulcan Materials Company,
Harman International Industries, Inc. and Sedgwick Group Plc. Additionally, Ms.
McLaughlin serves as a member of the governing boards of a number of civic,
non-profit organizations, including the Public Agenda Foundation and the
Conservation Fund. She is also on the Board of Overseers for the Wharton School
of the University of Pennsylvania. Ms. McLaughlin's term as Director of Host
Marriott expires at the 1997 annual meeting of shareholders.
Harry L. Vincent, Jr. is a retired Vice Chairman of Booz-Allen & Hamilton, Inc.
He also served as a Director of Signet Banking Corporation from 1973 until 1989.
Mr. Vincent's term as Director of Host Marriott expires at the 1999 annual
meeting of shareholders.
Robert E. Parsons, Jr. joined Host Marriott's Corporate Financial Planning staff
in 1981 and was made Assistant Treasurer in 1988. In 1993, Mr. Parsons was
elected Senior Vice President and Treasurer of Host Marriott, and in 1995, he
was elected Executive Vice President and Chief Financial Officer of Host
Marriott.
Christopher J. Nassetta joined Host Marriott in October 1995 as Executive Vice
President. Prior to joining Host Marriott, Mr. Nassetta served as President of
Bailey Realty Corporation from 1991 until 1995. He had previously served as
Chief Development Officer and in various other positions with The Oliver Carr
Company from 1984 through 1991.
50
<PAGE>
Christopher G. Townsend joined Host Marriott's Law Department in 1982 as a
Senior Attorney. In 1984, Mr. Townsend was made Assistant Secretary of Host
Marriott, and in 1986, he was made Assistant General Counsel. In 1993, Mr.
Townsend was elected Senior Vice President, Corporate Secretary and Deputy
General Counsel. In January 1997, he was elected General Counsel.
Bruce Wardinski joined Host Marriott in 1987 as a Senior Financial Analyst of
Financial Planning & Analysis and was named Manager in June 1988. He was
appointed Director of Financial Planning & Analysis in 1989, Director of Project
Finance in January 1990, Senior Director of Project Finance in June 1993, Vice
President of Project Finance in June 1994, and Senior Vice President of
International Development in October 1995. In 1996, Mr. Wardinski was named
Senior Vice President and Treasurer of Host Marriott. Prior to joining Host
Marriott, Mr. Wardinski was with the public accounting firm of Price Waterhouse.
Donald D. Olinger joined Host Marriott in 1993 as Director of Corporate
Accounting. Later in 1993, Mr. Olinger was promoted to Senior Director and
Assistant Controller of Host Marriott. He was promoted to Vice President of
Corporate Accounting in 1995. In 1996, he was elected Senior Vice President and
Corporate Controller. Prior to joining Host Marriott, Mr. Olinger was with the
public accounting firm of Deloitte & Touche.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
As noted in Item 10 above, the Partnership has no directors or officers nor does
it have any employees. Under the Partnership Agreement, however, the General
Partner has the exclusive right to conduct the business and affairs of the
Partnership subject only to the management agreements described in Items 1 and
13. The General Partner is required to devote to the Partnership such time as
may be necessary for the proper performance of its duties, but the officers and
directors of the General Partner are not required to devote their full time to
the performance of such duties. No officer or director of the General Partner
devotes a significant percentage of time to Partnership matters. To the extent
that any officer or director does devote time to the Partnership, the General
Partner is entitled to reimbursement for the cost of providing such services.
Any such costs may include a charge for overhead but without a profit to the
General Partner. For the fiscal years ending December 31, 1996, 1995 and 1994,
the Partnership reimbursed the General Partner in the amount of $218,000,
$88,000 and $141,000, respectively, for the cost of providing all administrative
and other services as General Partner. For information regarding all payments
made by the Partnership to Host Marriott and subsidiaries, see Item 13 "Certain
Relationships and Related Transactions" on page of this document.
51
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of December 31, 1996, no person owned of record, or to the Partnership's
knowledge owned beneficially, more than 5% of the total number of Units.
The officers and directors of the General Partner, as a group, own the following
Units:
Amount and Nature of
Title of Class Beneficial Ownership Percent of Class
Limited Partnership Units 114 Units 6%
The officers and directors of MII, as a group, own the following Units:
Amount and Nature of
Title of Class Beneficial Ownership Percent of Class
Limited Partnership Units 118.11 Units 7%
There are 113 Units owned by individuals who are directors of both the General
Partner and MII. These 113 Units are included in each of the ownership tables of
the General Partner and MII.
The Partnership is not aware of any arrangement which may result at a subsequent
date in a change in control of the Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Agreements
As described below, the Partnership is a party to several important ongoing
agreements with MII or its affiliates pursuant to which the Hotels are managed
by MII or affiliates.
Bank Hotels Management Agreement
Effective December 31, 1994, in connection with the Bank Loan restructuring, the
Partnership entered into a management agreement (the "Bank Hotels Management
Agreement") with MII. The agreement provides for an initial term of 25 years
from the opening date, as specified in the agreement, of each Hotel with renewal
terms at the option of MII of up to an additional 50 years. The Bank Hotels
Management Agreement provides MII with a base management fee of 3% of gross Bank
Hotels' sales. In accordance with the restructured Bank Loan, a portion of the
base management fee equal to 1% of gross Bank Hotels' sales (the "Subordinated
Base Management Fee") is subordinate to the payment of debt service on the Bank
Loan and repayment of certain advances under the Bank Guaranty. As a result, the
Subordinated Base Management Fee is set aside in a cash collateral account to be
made available for the payment of debt service on the Bank Loan; repay the Bank
Guaranty; and depending on the balance of the Bank Guaranty, pay deferred base
management fees. Any unpaid base management fees are deferred without interest
and are payable in future years. As of December 31, 1996 and 1995, deferred base
management fees were $2.4 million and $1.3 million, respectively.
52
<PAGE>
The Manager will continue to earn incentive management fees equal to 20% of
Hotel operating profit (as defined, calculated before debt service on the Bank
Loan) and additional incentive fees, after certain returns to the Partnership,
ranging from 10% to 70% of Hotel operating profits depending on the level of
returns achieved by the Partnership. Payment of incentive management fees will
continue to be fully subordinated to the payment of debt service and to the
replenishment of all guaranties. As of December 31, 1996 and 1995, deferred
incentive fees were $14.8 million and $8.1 million, respectively.
The Bank Hotels Management Agreement also requires the Partnership to maintain a
repairs and equipment reserve (the "Bank Hotels Property Improvement Fund") to
ensure that the physical condition and product quality of the Bank Hotels are
maintained. Contributions to the Bank Hotels Property Improvement Fund are equal
to 5% of gross Bank Hotels' sales.
On February 24, 1995, the Partnership, the Bank Lender, and MII entered into a
cash collateral agreement with terms effective January 1, 1995, whereby all
Partnership cash relating to the Bank Hotels (including the Bank Hotels Property
Improvement Fund and the Subordinated Base Management fees) was pledged as
collateral for the Bank Loan. Pursuant to the cash collateral agreement, a
portion of the Bank Hotels Property Improvement Fund contribution equal to 4% of
gross Bank Hotels' sales is to be deposited into an escrow account for the
furniture, fixtures and equipment needs of the Bank Hotels. This escrow balance
as of December 31, 1996 and 1995, was $2.4 million and $2.3 million,
respectively. The remaining portion of the Bank Hotels Property Improvement Fund
contribution equal to 1% of gross Bank Hotels' sales is to be deposited into a
restricted cash account which is subordinated to the payment of current debt
service on the Bank Loan. Any balance in the restricted cash account at the end
of each year, after payment of debt service, will be released from any
restrictions. As of December 31, 1996 and 1995, the balance in the restricted
cash account was $1.1 million and $1.3 million, respectively. The balance in the
fund was not required for 1996 and 1995 debt service and was transferred to the
Bank Hotels Property Improvement Fund in early 1997 and 1996, respectively.
Raleigh and Tampa Management Agreements
Upon the Partnership's reacquisition of the Raleigh and Tampa Hotels, the
Partnership entered into new management agreements (the "MHSI Agreements") with
MHSI for each of the Hotels. These agreements provide for payments to MHSI as
follows: (i) a base management fee equal to 3% of gross Hotel sales and (ii) an
incentive management fee equal to 20% of operating profit, as defined. The MHSI
Agreements provide for an initial term expiring on December 31, 2009. MHSI may
renew each agreement at its option, for up to two successive eight-year terms.
The Partnership may terminate the Raleigh or Tampa management agreement after
June 18, 1999, and July 16, 1999, respectively, if specified minimum operating
results for each Hotel are not achieved. However, MHSI can prevent termination
by waiving its base management fee with respect to each Hotel for a two-year
period.
The MHSI Agreements provide for a priority return to the Partnership equal to
10.75% of the owner's investment, plus ground rent in the case of the Tampa
Hotel. As of December 31, 1996, the Raleigh and Tampa owner's investment was
$19,460,000 and $16,430,000, respectively. The MHSI Agreement for Raleigh
provides for a portion of the base management fee payable to MHSI equal to 1% of
gross Hotel sales to be subordinated to the first 10% of the 10.75% priority
return for five years from the effective date of the Raleigh agreement. Any
unpaid base fees will accrue and are payable from any excess operating profit;
however, any deferred base fees remaining on June 18, 1999, will be waived. As
of December 31, 1996 and 1995, no base management fees were deferred under the
Raleigh management agreement.
53
<PAGE>
Incentive management fees are payable from 40% of available cash flow, as
defined. Any unpaid incentive management fees for Raleigh and Tampa on an annual
basis will be waived. In 1996, incentive management fees paid for Raleigh and
Tampa were $574,000 and $315,000, respectively. In 1995, incentive management
fees paid for Raleigh and Tampa were $327,000 and $162,000, respectively.
Each MHSI Agreement provides for the establishment of a repairs and equipment
reserve ("Property Improvement Fund") for each Hotel. Contributions to the
Property Improvement Fund are in the amount of 5% of gross Hotel sales from each
Hotel. However, effective in August 1996, MHSI and the Partnership agreed to
increase the contribution from 5% to 7% for the Raleigh Hotel until an
additional $300,000 is deposited to cover the cost of certain renovations. It is
expected that this increase will be in effect for approximately one year. In
addition, a portion of the 5% contribution for the Raleigh Hotel equal to 2% of
gross Hotel sales is used to pay interest and principal on the Raleigh $350,000
FF&E Loans and the Raleigh $700,000 FF&E Loan. As of December 31, 1996, the
balances of the Raleigh and Tampa Property Improvement Funds were $678,000 and
$67,000, respectively. As of December 31, 1995, the balances of the Raleigh and
Tampa Property Improvement Funds were $591,000 and $172,000, respectively.
General
Pursuant to the terms of the MII Management Agreement (prior to December 31,
1994), the Bank Hotels Management Agreement, and the MHSI Agreements, MII (for
the Bank Hotels) and MHSI (for Raleigh and Tampa) are required to furnish the
Hotels with certain services ("Chain Services") which are generally provided on
a central or regional basis to all Hotels in the Marriott full-service Hotel
system. Chain Services include central training, advertising and promotion, a
national reservation system, computerized payroll and accounting services, and
such additional services, as needed, which may be performed more efficiently on
a centralized basis. Costs and expenses incurred in providing such services are
allocated among all domestic full-service Hotels managed, owned, or leased by
MII or its subsidiaries. In addition, the Hotels also participate in MII's
Honored Guest Awards Program ("HGA"). The cost of this program is charged to all
Hotels in the Marriott full-service Hotel system based on the HGA sales at each
Hotel. The total amount of Chain Services and HGA costs charged to the
Partnership was $7.1 million in 1996, $7.6 million in 1995, and $7.0 million in
1994.
Pursuant to the terms of the management agreements, the Partnership is required
to provide the manager with working capital and supplies to meet the operating
needs of the Hotels. The manager converts cash advanced by the Partnership into
other forms of working capital consisting primarily of operating cash,
inventories, and trade receivables and payables which are maintained and
controlled by the manager. Upon termination of the agreements, the working
capital and supplies will be returned to the Partnership. The individual
components of working capital and supplies controlled by the respective manager
are not reflected in the Partnership's balance sheet. In 1994, in connection
with the foreclosures of the Raleigh Hotel, Tampa Hotel, and Point Clear Hotel,
the write-off of the Partnership's working capital and supplies for Raleigh,
Tampa, and Point Clear was included in the gain realized on foreclosure. In
1995, in conjunction with the sale of the Dallas Hotel, $946,000 was reimbursed
by the Dallas Hotel to the Partnership. These funds were used to pay interest
and principal on working capital advances from Host Marriott. Additionally
during 1995, MII returned $400,000 in working capital to the Partnership. During
1996, the Partnership advanced $262,000 to MII for working capital. Therefore,
as of December 31, 1996 and 1995, $5.3 million and $5.1 million, respectively,
has been advanced to the managers for working capital and supplies for all the
Hotels.
54
<PAGE>
The following table sets forth the amount paid to the Manager under both the
Bank Hotels Management Agreement and the MHSI Agreements for the years ended
December 31, 1996, 1995, and 1994 (in thousands). The table also includes
accrued but unpaid base and incentive management fees:
<TABLE>
1996 1995 1994
(unaudited)
<S> <C> <C> <C>
Chain Services and HGA costs reimbursed..........................................$ 7,076 $ 7,575 $ 7,040
Base management fees paid........................................................ 3,152 3,324 7,433
Incentive management fees paid................................................... 889 489 --
Interest and principal paid on Raleigh FF&E Loan................................. 67 -- --
------------ ------------ -----------
$ 11,184 $ 11,388 $ 14,473
------------ ------------ -----------
Accrued but unpaid fees:
Incentive management fees........................................................$ 6,589 $ 8,162 $ 7,425
Base management fees............................................................. 1,148 1,273 3,586
------------ ------------ -----------
$ 7,737 $ 9,435 $ 11,011
============ ============ ===========
</TABLE>
Raleigh and Tampa Loans
The Partnership exercised its rights of first refusal given in connection with
the foreclosure of the S&L Hotels and repurchased the Raleigh Hotel and the
Tampa Hotel on May 20, 1994, and July 11, 1994, respectively, with funding
provided by non-recourse loans to the Partnership from a wholly-owned subsidiary
of Host Marriott.
The non-recourse loan for the Raleigh Hotel totaled $19.4 million to cover the
$18.7 million purchase price and closing costs. Under the terms of the loan, $14
million of principal ("Raleigh Note A") bears interest at a fixed rate of 10%
and requires quarterly payments of interest and principal, based on a 25-year
amortization schedule, with a balloon payment due at maturity on May 20, 2001.
The remaining principal of $5.4 million ("Raleigh Note B") bears interest at a
fixed rate of 11.5% and matures on May 20, 2006. All cash flow from the Raleigh
Hotel is used to pay debt service in the following order of priority: (i)
interest on Raleigh Note A, (ii) principal on Raleigh Note A and (iii) interest
on Raleigh Note B. All remaining cash is used to pay principal on Raleigh Note
B. If cash flow is insufficient to pay interest on Raleigh Note B, the unpaid
interest rolls into the Raleigh Note B principal balance annually. As of
December 31, 1996, the Raleigh Note A principal balance was $13.5 million, and
the Raleigh Note B principal balance was $4.8 million.
The non-recourse loan for the Tampa Hotel totaled $16.3 million to cover the
$15.7 million purchase price and closing costs. Under the terms of the loan, $10
million of principal ("Tampa Note A") bears interest at a fixed rate of 10% and
requires quarterly payments of interest and principal, based on a 25-year
amortization schedule, with a balloon payment due at maturity on July 11, 2001.
The remaining principal of $6.3 million ("Tampa Note B") bears interest at a
fixed rate of 11.5% and matures on July 11, 2006. All cash flow from the Tampa
Hotel is used to pay debt service in the following order of priority: (i)
interest on Tampa Note A, (ii) principal on Tampa Note A and (iii) interest on
Tampa Note B. All remaining cash flow is used to pay principal on on Tampa Note
B. If cash flow is insufficient to pay interest on Tampa Note B, the unpaid
interest rolls into the Tampa Note B principal balance annually. As of December
31, 1996, the Tampa Note A principal balance was $9.7 million, and the Tampa
Note B principal balance was $6.1 million.
Each of the Raleigh and Tampa loans are secured by a first priority lien on the
building; land (the Partnership's leasehold interest in the case of the Tampa
Hotel); furniture, fixtures and equipment; and working capital and supplies
advanced to the Manager.
55
<PAGE>
Debt Guaranties and Other Related Party Loans
As of December 31, 1996, the Partnership owed Host Marriott $83.9 million
(excluding the Raleigh and Tampa loans and related accrued interest) including
accrued interest for the following: (i) $59.2 million related to the Host
Marriott Guaranty and the S&L Guaranty; (ii) $10.0 million related to the Bank
Guaranty; (iii) $5.0 million related to working capital advances; (iv) $8.2
million for capital improvements at the Point Clear, Alabama Hotel and (v) $1.5
million from Host Marriott's subordination of cash flow from the 66-room Raleigh
addition. As of December 31, 1995, the Partnership owed Host Marriott $86.8
million (excluding the Raleigh and Tampa loans and related accrued interest)
including accrued interest for the following: (i) $54.6 million related to the
Host Marriott Guaranty and the S&L Guaranty; (ii) $10.3 million related to the
Bank Guaranty; (iii) $7.3 million related to working capital advances; (iv) $7.5
million for capital improvements at the Point Clear, Alabama Hotel; (v) $1.4
million from Host Marriott's subordination of cash flow from the 66-room Raleigh
addition; (vi) $5.3 million related to the Host FF&E Loans, as defined below;
and (vii) $.4 million related to the Raleigh FF&E Loans. All of the
above-mentioned advances bear interest at the prime rate as announced by
Banker's Trust Company with a weighted average interest rate of 8.27% for 1996,
8.85% for 1995 and 7.14% for 1994. At December 31, 1996, the interest rate was
8.25%.
As of December 31, 1996, the Partnership owed MHSI $0.3 million including
accrued interest related to the Raleigh $350,000 FF&E Loan. As of December 31,
1995, the Partnership owed MHSI $0.4 million including accrued interest related
to the Raleigh $350,000 FF&E Loan.
All Partnership indebtedness, including the Bank Loan, guaranty advances, other
General Partner loans, and deferred base and incentive management fees which are
outstanding upon dissolution of the Partnership must be repaid before any cash
distributions to the partners.
Payments to Host Marriott and Subsidiaries
The following table sets forth amounts paid by the Partnership to Host Marriott
and its subsidiaries for the years ended December 31, 1996, 1995 and 1994 (in
thousands):
<TABLE>
(unaudited)
1996 1995 1994
<S> <C> <C> <C>
Interest and principal paid on Raleigh acquisition loan.............................$ 2,852 $ 2,495 $ 971
Interest and principal paid on the working capital advances......................... 2,800 946 --
Interest and principal paid on Tampa loan........................................... 2,239 1,951 613
Interest and principal paid on Bank Guaranty loan................................... 1,163 -- --
Interest and principal paid on FF&E Loans........................................... 304 6,428 12,440
Administrative expenses............................................................. 218 88 141
----------- ----------- ------------
$ 9,576 $ 11,908 $ 14,165
=========== =========== ============
</TABLE>
56
<PAGE>
Other Related Party Transactions
On June 28, 1995, the Partnership assigned its right of first refusal to
purchase the Point Clear Hotel to a subsidiary of Host Marriott, which
subsequently purchased the Hotel. In exchange, Host Marriott agreed to forgive
$2 million of accrued interest on certain advances to the Partnership, which has
been accounted for as a capital contribution by the General Partner in the
accompanying balance sheet as of December 31, 1996.
On August 22, 1995, the Partnership sold the Dallas Hotel to a subsidiary of
Host Marriott. The proceeds from the sale of the Dallas Hotel were used to repay
$44 million of the Bank Loan.
PART IV
ITEM 14. EXHIBITS, SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of This Report
(1) Financial Statements
All financial statements of the registrant as set forth
under Item 8 of this Report on Form 10-K.
(2) Financial Statement Schedules
The following financial information is filed herewith on
the pages indicated.
Schedule III - Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable or the required
information is included in the financial statements or notes thereto.
<TABLE>
<S> <C> <C> <C>
(3) EXHIBITS Page
*2. Purchase and Sale Agreement dated June 7, 1995,
between Potomac Hotel Limited Partnership
(the "Partnership") and Host Marriott Corporation. N/A
*3. Amended and Restated Certificate and Agreement of
Limited Partnership of the Partnership dated July 16, 1982. N/A
*10a. Loan Agreement dated December 22, 1987, between
the Partnership and The Mitsui Trust and Banking Company,
Limited, New York Branch, as amended by an amendment
dated as of October 8, 1993. N/A
*10b. Guaranty dated December 22, 1987, by Host Marriott Corporation
in favor of The Mitsui Trust and Banking Company, Limited,
New York Branch. N/A
*10c. Guaranty dated October 8, 1993, by Marriott International, Inc.
in favor of The Mitsui Trust and Banking Company, Limited,
New York Branch. N/A
57
<PAGE>
*10d. Forbearance Agreement dated as of December 22, 1994,
among The Mitsui Trust and Banking Company, Limited,
New York Branch, the Partnership, Marriott International, Inc.
and Host Marriott Corporation. N/A
*10e. Forbearance Agreement dated as of February 24, 1995,
among The Mitsui Trust and Banking Company, Limited,
New York Branch, the Partnership, Marriott International, Inc.
and Host Marriott Corporation. N/A
*10f. Forbearance Agreement dated as of June 22, 1995,
among The Mitsui Trust and Banking Company, Limited,
New York Branch, the Partnership, Marriott International, Inc.
and Host Marriott Corporation. N/A
*10g. Not Applicable N/A
*10h. Management Agreement dated June 18, 1994, between the Partnership
and Marriott Hotel Services, Inc. (Raleigh). N/A
*10i. Management Agreement dated July 16, 1994,
between the Partnership and Marriott Hotel Services, Inc.
(Tampa). N/A
*10j. Deed of Trust and Security Agreement dated as of May 20, 1994,
between the Partnership, J. Donnell Lassiter, Trustee
and Marriott Financial Services, Inc. (Raleigh). N/A
*10k. Raleigh Promissory Note A dated as of May 20, 1994,
made by the Partnership in favor of Marriott Financial Services,
Inc. N/A
*10l. Raleigh Promissory Note B dated as of May 20, 1994, made by the
Partnership in favor of Marriott Financial Services, Inc. N/A
*10m. Mortgage and Security Agreement dated as of July 11, 1994,
between the Partnership and Marriott Financial Services, Inc.
(Tampa). N/A
*10n. Tampa Promissory Note A dated as of July 11, 1994, made by the
Partnership in favor of Marriott Financial Services, Inc. N/A
*10o. Tampa Promissory Note B dated as of July 11, 1994, made by the
Partnership in favor of Marriott Financial Services, Inc. N/A
*10p. Promissory Note dated as of January 1, 1991, by the Partnership to
Host Marriott Corporation (FF&E). N/A
*10q. Lease Agreement dated as of January 1, 1991, between the Partnership
and Marriott Hotels, Inc. (FF&E). N/A
*10r. Promissory Note dated as of January 1, 1992, by the
Partnership to Host Marriott Corporation (FF&E). N/A
*10s. Promissory Note dated as of January 1, 1993, by the Partnership to
Host Marriott Corporation (FF&E). N/A
58
<PAGE>
*10t. Promissory Note dated January 1, 1994, by the Partnership to
Host Marriott Corporation (FF&E). N/A
*10u. Lease Agreement dated June 30, 1995, between
the Partnership and Marriott Hotels, Inc.
(FF&E for Fiscal Years 1992, 1993 and 1994). N/A
*10v. Land Lease Agreement dated April 10, 1979, between Austin
Development Company and Marriott Corporation, as amended
by First Lease Amendment dated April 16, 1982, and assigned
to the Partnership by Assignment and Assumption of Land Lease
Agreement dated as of July 11, 1994 and recorded July 12, 1994
(Tampa). N/A
*10w. Land Lease dated December 15, 1979, between The Coldwell
Banker Fund and Marriott Corporation, as amended by First
Amendment to Land Lease dated September 9, 1980 and
Memorandum of Lease recorded with the Bernalillo County,
New Mexico Clerk & Recorder on September 30, 1980
(Albuquerque). N/A
*10x. Lease Agreement dated as of May 6, 1981,
between Greensboro-High Point Airport Authority and Marriott
Corporation, as amended by Agreement and Amendment to Lease
dated January 13, 1982 (Greensboro). N/A
*10y. Land and Building Lease dated as of March 9, 1981,
between Florida East Coast Properties, Inc. and Marriott Corporation,
as amended by instrument dated March 18, 1982, and assigned
to the Partnership. N/A
*10z. Land Lease dated as of August 27, 1981, between
The Methodist Hospital and Marriott Corporation,
as assigned to the Partnership by an Assignment of
Lease and Warranty and Assumption of Obligations and
Estoppel Certificate, dated as July 15, 1982. N/A
*10aa. Loan Agreement dated as of July 11, 1994, between the
Partnership and Marriott Financial Services, Inc. (Tampa). N/A
*10bb. Loan Agreement dated as of May 20, 1994, between the
Partnership and Marriott Financial Services, Inc.
(Raleigh). N/A
*10cc. Security Agreement dated as of July 11, 1994,
between the Partnership and Marriott Financial
Services, Inc. (Tampa). N/A
**10dd. Amended and Restated Loan Agreement dated as of
August 22, 1995, between The Mitsui Trust and Banking
Company Ltd., New York Branch, and the Partnership. N/A
**10ee. Amended and Restated Management Agreement dated as of
August 22, 1995, between Marriott International, Inc.
and the Partnership. N/A
**10ff. Note Modification Agreement dated as of August 22, 1995,
between The Mitsui Trust and Banking Company, Ltd.,
New York Branch, and the Partnership. N/A
59
<PAGE>
**10gg. Waiver of Deferred Management Fees dated as of July 13, 1995,
between Marriott International, Inc. and the Partnership. N/A
***10hh. Cash Collateral Agreement dated as of August 22, 1995 between
The Mitsui Trust and Banking Company, Limited, New York Branch,
the Partnership and Host Marriott Corporation. N/A
***10ii. Interest Guaranty Agreement dated as of August 22, 1995 between
Host Marriott Corporation and The Mitsui Trust and Banking Company,
Limited, New York Branch. N/A
***10jj. Amendment and Confirmation of Guaranty agreement
dated as of August 22, 1995 by and between Marriott
International, Inc. and The Mitsui Trust and Banking
Company, Limited, New York Branch. N/A
***10kk. Side Letter Agreement dated as August 22, 1995 between
The Mitsui Trust and Banking Company, Limited, New York Branch
and the Partnership. N/A
***10ll. Certificate of Borrower dated as of August 22, 1995 among the
Partnership, The Mitsui Trust and Banking Company, Limited,
New York Branch, and the undersigned Christopher G. Townsend,
the Senior Vice President and Corporate Secretary of Host
Marriott Corporation. N/A
***10mm. Host Marriott Corporation Corporate and Incumbency Certificate
dated as of August 22, 1995 among the Partnership, The Mitsui
Trust and Banking Company, Limited, New York Branch, the
undersigned Christopher G. Townsend, the Senior Vice President and
Corporate Secretary of Host Marriott Corporation. N/A
***10nn. Marriott International, Inc. Corporate and Incumbency Certificate
dated as of August 22, 1995 among the Partnership, The Mitsui Trust
and Banking Company, Limited, New York Branch and the undersigned
Todd Clist, Vice President of Marriott International, Inc. N/A
***10oo. Host Marriott Corporation Bank Letter to The Mitsui Trust and
Banking Company, Limited, New York Branch dated as of
August 22, 1995. N/A
***10pp. Marriott International, Inc. Bank Letter to The Mitsui Trust
and Banking Company, Limited, New York Branch dated as of
August 22, 1995. N/A
***10qq. First Amendment to Creditors Subordination Agreement dated
as of August 22, 1995 among Marriott International, Inc.,
Host Marriott Corporation, The Mitsui Trust and Banking Company,
Limited, New York Branch, and the Partnership. N/A
***10rr. First Amendment to Hotel Manager's Agreement dated as of
August 22, 1995 among Marriott International, Inc.,
the Partnership, and The Mitsui Trust and Banking Company,
Limited, New York Branch. N/A
60
<PAGE>
***10ss. First Amendment to Mortgage from the Partnership to The Mitsui
Trust and Banking Company, Limited, New York Branch, dated as
of August 22, 1995, (New Mexico). N/A
***10tt. First Amendment to Security Agreement and Assignment of
Contracts dated as of August 22, 1995 by and among the
Partnership and The Mitsui Trust and Banking Company,
Limited, New York Branch. (Houston) N/A
***10uu. First Amendment to Deed of Trust and Security Agreement
among the Partnership Mortgagor, in favor of Mr. Michael E. Wekall
Trustee, and for the benefit of The Mitsui Trust and Banking Company,
Limited, New York Branch Mortgagee dated as of August 22, 1995,
(North Carolina). N/A
***10vv. First Amendment to Security Agreement and Assignment of
Contracts dated as of August 22, 1995 by and among the
Partnership and The Mitsui Trust and Banking Company,
Limited, New York Branch. (Greensboro) N/A
***10ww. First Amendment to Mortgage dated as of August 22, 1995,
among the Partnership and The Mitsui Trust and Banking Company,
Limited, New York Branch. (Tampa) N/A
***10xx. First Amendment to Security Agreement and Assignment of
Contracts dated as of August 22, 1995 by and among the
Partnership and The Mitsui Trust and Banking Company.
(Tampa) N/A
***10yy. First Amendment to Deed of Trust from the Partnership,
to Margaret M. Buttner Holloway, formerly known as
Margaret M. Buttner, Trustee for the use and benefit
of The Mitsui Trust and Banking Company, Limited, New York
Branch, Mortgagee dated as of August 22, 1995, (Texas). N/A
***10zz. First Amendment to Mortgage dated as of August 22, 1995, among
the Partnership, and The Mitsui Trust and Banking Company,
Limited, New York Branch, (Arizona). N/A
***10aaa. First Amendment to Security Agreement and Assignment of
Contracts dated as of August 22, 1995 by and among
the Partnership and The Mitsui Trust and Banking Company,
Limited, New York Branch. (Washington) N/A
***10bbb. Endorsement issued by the Commonwealth Land Title Insurance
Company as of August 22, 1995. N/A
***10ccc. Amended and Restated Guaranty Agreement dated as of August 22, 1995,
by and among Host Marriott Corporation and The Mitsui Trust and
Banking Company, Limited, New York Bank. N/A
10ddd. Promissory Note dated January 24, 1995, by the Partnership
to Marriott Hotel Services, Inc. (Raleigh) 63
10eee. Promissory Note dated January 24, 1995, by the Partnership
to Marriott Financial Services, Inc. (Raleigh) 65
61
<PAGE>
10fff. Promissory Note dated June 1, 1996, by the Partnership
to Marriott Financial Services, Inc. (Raleigh) 67
10ggg. Loan Agreement dated September 13, 1996, between the
Partnership and Marriott Hotel Services, Inc. (Raleigh) 69
10hhh. Loan Agreement dated September 13, 1996, between the
Partnership and Marriott Financial Services, Inc. (Raleigh) 73
10iii. Loan Agreement dated September 13, 1996, between the
Partnership and Marriott Financial Services, Inc. (Raleigh) 77
10jjj. Amendment to Management Agreement dated August 15, 1996,
between the Partnership and Marriott Hotel Services, Inc. (Raleigh) 81
* Incorporated herein by reference to the same numbered exhibit in the
Partnership's Form 10-K for the fiscal year ended December 31, 1994,
previously filed with the Commission on July 14, 1995.
** Incorporated herein by reference to the same numbered exhibit in the
Partnership's Form 8-K dated August 22, 1995 previously filed with the
Commission on September 6, 1995.
*** Incorporated herein by reference to the same numbered exhibit in the
Partnership's Form 10-K for the fiscal year ended December 31, 1995,
previously filed with the Commission on September 6, 1996.
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
</TABLE>
62
<PAGE>
Exhibit 10ddd.
PROMISSORY NOTE
Note Amount: $350,000.00
Date: as of January 24, 1995
For value received, Potomac Hotel Limited Partnership, a Delaware
limited partnership ("Borrower"), hereby promises to pay to the order of
Marriott Hotel Services, Inc., a Delaware corporation, or its successors or
assigns (collectively, "Holder"), at the Holder's offices at 10400 Fernwood
Road, Bethesda, Maryland 20817 or at such other place as Holder may designate to
Borrower in writing from time to time, in lawful money of the United States of
America and in immediately available funds, the principal amount of THREE
HUNDRED FIFTY THOUSAND DOLLARS ($350,000.00), together with interest as
hereinafter provided.
1. Loan Agreement. This Note is entitled to the benefits of the Loan
Agreement dated the date hereof, between Borrower and Holder (the "Loan
Agreement"). Capitalized terms not defined herein shall have the meaning
assigned to them in the Loan Agreement.
2. Payment of Principal and Interest. Interest shall accrue on the
principal amount owing hereunder from time to time at the interest rate and from
the date(s) provided for in Section 2 of the Loan Agreement. Interest and
principal shall be payable by Borrower at the times and in the manner stated in
the Loan Agreement.
3. Event of Default. In the case of event of default shall occur and be
continuing under the Loan Agreement and not be cured within applicable grace
periods, the outstanding principal of and accrued interest on this Note may be
declared to be due and payable in the manner and with the effect provided in the
Loan Agreement, presentment, demand, protest or notice of any kind being
expressly waived.
4. Governing Law. This Note and the rights and obligations of the
Borrower and the Holder shall be construed in accordance with and governed by
the laws of the State of Maryland.
5. Amendment. This Note may not be amended or modified, and no term of
this Note may be waived, without the consent of Holder and, in the case of any
modification or amendment, Borrower. Any such amendment, modification or waiver
shall be binding upon future holders of this Note only if the terms of such
amendment, modification or waiver are endorsed hereon.
6. Notices. Except as provided herein, all notices, requests, demands
or other communications to or upon the respective parties hereto shall be deemed
to have been given or made when deposited in the mails, postage prepaid, or, in
the case of a facsimile, when sent, addressed, if to Borrower, to c/o Host
Marriott Corporation, 10400 Fernwood Road, Bethesda, Maryland 20817, Attention:
Law Department, General Counsel; and if to Holder, c/o Marriott International,
Inc., 10400 Fernwood Road, Bethesda, Maryland 20817, Attention: Law Department,
General Counsel, or to such other address with respect to any party hereto as
such party shall notify the other in writing, except that any communication with
respect to a change of address shall be deemed given or made when received by
the party to whom such communication was sent.
63
<PAGE>
7. Maximum Interest Rate. Notwithstanding anything herein to the
contrary, the obligation of Borrower under this Note shall be subject to the
limitation that payments of interest shall not be required to the extent that
receipt of any such payment by Holder would be contrary to provisions of law
applicable to Holder limiting the maximum rate of interest that may be charged
or collected by Holder.
8. Attorney Fees. Should the indebtedness represented by this Note or
any part thereof be collected at law or in equity, or in bankruptcy,
receivership or any other court proceedings (whether at the trial or appellate
level), or should this Note be placed in the hands of attorneys for collection
upon default, Borrower agrees to pay, in addition to the principal and interest
due and payable hereon, all costs of collection or attempting to collect this
Note, including reasonable attorneys' fees and expenses.
9. Liability of Partners Limited. No partner of Borrower shall have
individual liability with respect to the indebtedness owing to the Holder
hereunder. Holder agrees to look solely to the assets of the Borrower as the
sole source of repayment hereunder.
IN WITNESS WHEREOF, the undersigned has executed this Note the day and
year first above written.
POTOMAC HOTEL LIMITED PARTNERSHIP
By: Host Marriott Corporation,
General Partner
By: /s/ Bruce F. Stemerman
---------------------------------------------
Title: Senior Vice President, Asset Management
---------------------------------------------
Name: Bruce F. Stemerman
---------------------------------------------
64
<PAGE>
Exhibit 10eee.
PROMISSORY NOTE
Note Amount: $350,000.00
Date: as of January 24, 1995
For value received, Potomac Hotel Limited Partnership, a Delaware
limited partnership ("Borrower"), hereby promises to pay to the order of
Marriott Financial Services, Inc., a Delaware corporation, or its successors or
assigns (collectively, "Holder"), at the Holder's offices at 10400 Fernwood
Road, Bethesda, Maryland 20817 or at such other place as Holder may designate to
Borrower in writing from time to time, in lawful money of the United States of
America and in immediately available funds, the principal amount of THREE
HUNDRED FIFTY THOUSAND DOLLARS ($350,000.00), together with interest as
hereinafter provided.
1. Loan Agreement. This Note is entitled to the benefits of the Loan
Agreement dated the date hereof, between Borrower and Holder (the "Loan
Agreement"). Capitalized terms not defined herein shall have the meaning
assigned to them in the Loan Agreement.
2. Payment of Principal and Interest. Interest shall accrue on the
principal amount owing hereunder from time to time at the interest rate and from
the date(s) provided for in Section 2 of the Loan Agreement. Interest and
principal shall be payable by Borrower at the times and in the manner stated in
the Loan Agreement.
3. Event of Default. In the case of event of default shall occur and be
continuing under the Loan Agreement and not be cured within applicable grace
periods, the outstanding principal of and accrued interest on this Note may be
declared to be due and payable in the manner and with the effect provided in the
Loan Agreement, presentment, demand, protest or notice of any kind being
expressly waived.
4. Governing Law. This Note and the rights and obligations of the
Borrower and the Holder shall be construed in accordance with and governed by
the laws of the State of Maryland.
5. Amendment. This Note may not be amended or modified, and no term of
this Note may be waived, without the consent of Holder and, in the case of any
modification or amendment, Borrower. Any such amendment, modification or waiver
shall be binding upon future holders of this Note only if the terms of such
amendment, modification or waiver are endorsed hereon.
6. Notices. Except as provided herein, all notices, requests, demands
or other communications to or upon the respective parties hereto shall be deemed
to have been given or made when deposited in the mails, postage prepaid, or, in
the case of a facsimile, when sent, addressed, if to Borrower, to c/o Host
Marriott Corporation, 10400 Fernwood Road, Bethesda, Maryland 20817, Attention:
Law Department, General Counsel; and if to Holder, to Marriott Financial
Services, Inc., c/o Host Marriott Corporation, 10400 Fernwood Road, Bethesda,
Maryland 20817, Attention: Law Department, Assistant General Counsel/Asset
Management, or to such other address with respect to any party hereto as such
party shall notify the other in writing, except that any communication with
respect to a change of address shall be deemed given or made when received by
the party to whom such communication was sent.
65
<PAGE>
7. Maximum Interest Rate. Notwithstanding anything herein to the
contrary, the obligation of Borrower under this Note shall be subject to the
limitation that payments of interest shall not be required to the extent that
receipt of any such payment by Holder would be contrary to provisions of law
applicable to Holder limiting the maximum rate of interest that may be charged
or collected by Holder.
8. Attorney Fees. Should the indebtedness represented by this Note or
any part thereof be collected at law or in equity, or in bankruptcy,
receivership or any other court proceedings (whether at the trial or appellate
level), or should this Note be placed in the hands of attorneys for collection
upon default, Borrower agrees to pay, in addition to the principal and interest
due and payable hereon, all costs of collection or attempting to collect this
Note, including reasonable attorneys' fees and expenses.
9. Liability of Partners Limited. No partner of Borrower shall have
individual liability with respect to the indebtedness owing to the Holder
hereunder. Holder agrees to look solely to the assets of the Borrower as the
sole source of repayment hereunder.
IN WITNESS WHEREOF, the undersigned has executed this Note the
day and year first above written.
POTOMAC HOTEL LIMITED PARTNERSHIP
By: Host Marriott Corporation,
General Partner
By: /s/ Bruce F. Stemerman
---------------------------------------------
Title: Senior Vice President, Asset Management
---------------------------------------------
Name: Bruce F. Stemerman
---------------------------------------------
66
<PAGE>
Exhibit 10fff.
PROMISSORY NOTE
Note Amount: up to $700,000.00
Date: as of June 1, 1996
For value received, Potomac Hotel Limited Partnership, a Delaware
limited partnership ("Borrower"), hereby promises to pay to the order of
Marriott Financial Services, Inc., a Delaware corporation, or its successors or
assigns (collectively, "Holder"), at the Holder's offices at 10400 Fernwood
Road, Bethesda, Maryland 20817 or at such other place as Holder may designate to
Borrower in writing from time to time, in lawful money of the United States of
America and in immediately available funds, the principal amount of SEVEN
HUNDRED THOUSAND DOLLARS ($700,000.00), or of so much of such principal amount
as may be advanced to Borrower and be outstanding from time to time, together
with interest as hereinafter provided.
1. Loan Agreement. This Note is entitled to the benefits of the Loan
Agreement dated the date hereof, between Borrower and Holder (the "Loan
Agreement"). Capitalized terms not defined herein shall have the meaning
assigned to them in the Loan Agreement.
2. Payment of Principal and Interest. Interest shall accrue on the
principal amount owing hereunder from time to time at the interest rate and from
the date(s) provided for in Section 2 of the Loan Agreement. Interest and
principal shall be payable by Borrower at the times and in the manner stated in
the Loan Agreement.
3. Event of Default. In the case of event of default shall occur and be
continuing under the Loan Agreement and not be cured within applicable grace
periods, the outstanding principal of and accrued interest on this Note may be
declared to be due and payable in the manner and with the effect provided in the
Loan Agreement, presentment, demand, protest or notice of any kind being
expressly waived.
4. Governing Law. This Note and the rights and obligations of the
Borrower and the Holder shall be construed in accordance with and governed by
the laws of the State of Maryland.
5. Amendment. This Note may not be amended or modified, and no term of
this Note may be waived, without the consent of Holder and, in the case of any
modification or amendment, Borrower. Any such amendment, modification or waiver
shall be binding upon future holders of this Note only if the terms of such
amendment, modification or waiver are endorsed hereon.
6. Notices. Except as provided herein, all notices, requests, demands
or other communications to or upon the respective parties hereto shall be deemed
to have been given or made when deposited in the mails, postage prepaid, or, in
the case of a facsimile, when sent, addressed, if to Borrower, to c/o Host
Marriott Corporation, 10400 Fernwood Road, Bethesda, Maryland 20817, Attention:
Law Department, General Counsel; and if to Holder, to Marriott Financial
Services, Inc., c/o Host Marriott Corporation, 10400 Fernwood Road, Bethesda,
Maryland 20817, Attention: Law Department, Assistant General Counsel/Asset
Management, or to such other address with respect to any party hereto as such
party shall notify the other in writing, except that any communication with
respect to a change of address shall be deemed given or made when received by
the party to whom such communication was sent.
67
<PAGE>
7. Maximum Interest Rate. Notwithstanding anything herein to the
contrary, the obligation of Borrower under this Note shall be subject to the
limitation that payments of interest shall not be required to the extent that
receipt of any such payment by Holder would be contrary to provisions of law
applicable to Holder limiting the maximum rate of interest that may be charged
or collected by Holder.
8. Attorney Fees. Should the indebtedness represented by this Note or
any part thereof be collected at law or in equity, or in bankruptcy,
receivership or any other court proceedings (whether at the trial or appellate
level), or should this Note be placed in the hands of attorneys for collection
upon default, Borrower agrees to pay, in addition to the principal and interest
due and payable hereon, all costs of collection or attempting to collect this
Note, including reasonable attorneys' fees and expenses.
9. Liability of Partners Limited. No partner of Borrower shall have
individual liability with respect to the indebtedness owing to the Holder
hereunder. Holder agrees to look solely to the assets of the Borrower as the
sole source of repayment hereunder.
IN WITNESS WHEREOF, the undersigned has executed this Note the day and
year first above written.
POTOMAC HOTEL LIMITED PARTNERSHIP
By: Host Marriott Corporation,
General Partner
By: /s/ Bruce F. Stemerman
---------------------------------------------
Title: Senior Vice President, Asset Management
---------------------------------------------
Name: Bruce F. Stemerman
---------------------------------------------
68
<PAGE>
Exhibit 10ggg.
LOAN AGREEMENT
This LOAN AGREEMENT ("Agreement") is executed this 13th day of
September, 1996, and made effective as of the 24th day of January, 1995 (the
"Effective Date") by and between Potomac Hotel Limited Partnership, a Delaware
limited partnership ("Partnership") and Marriott Hotel Services, Inc., a
Delaware corporation ("Lender").
PRELIMINARY STATEMENT
The Partnership is the owner of that certain hotel known as the Raleigh
Crabtree Valley Marriott Hotel, located in Raleigh, North Carolina (the
"Hotel").
The Partnership and Lender (as "Management Company") are parties to
that certain Management Agreement, dated as of June 18, 1994, as may be amended
from time to time (the "Management Agreement"), whereby the Lender provides
management services for the Hotel.
The Partnership is also party to that certain Loan Agreement dated as
of May 20, 1994 (the "Loan Agreement") with Marriott Financial Services, Inc.
("MFSI"), whereby, among other things, indebtedness of the Partnership to MFSI
in the principal amount of $19,394,579.00 was secured through a first mortgage
lien on the Partnership's interest in the Hotel under that certain Deed of Trust
and Security Agreement with J. Donnell Lassiter, Trustee, and MFSI, dated as of
May 20, 1994 (the "Security Agreement"). The Loan Agreement and Security
Agreement are together hereafter referred to as the "Loan Documents". Under the
Loan Documents, among other things, the Partnership is permitted to incur
unsecured indebtedness without the consent of MFSI.
The Partnership has agreed to fund the acquisition of certain fixtures,
furniture and equipment in connection with a renovation project for the Hotel
beginning in 1994 and completed in 1995 (the "Rooms Redo"), the cost of which
would normally be paid out of funds in the "FF&E Reserve" (as that term is
defined in the Management Agreement). Funds now and hereafter anticipated to be
on deposit in the FF&E Reserve are insufficient to fund the entire Rooms Redo.
Lender has determined that it is in its best interest to advance funds
to the Partnership in the amount of $350,000.00 in order to provide funds
required to pay for the Rooms Redo which are not available in the FF&E Reserve
while maintaining a balance in the FF&E Reserve that is sufficient to meet other
existing or contingent obligations for which the FF&E Reserve was established.
This Agreement is being entered into for the purpose of evidencing the
obligation of Lender to make advances for the purposes set forth above and of
the Partnership to repay Lender the principal amount of any such advances, said
advances to accrue interest as hereafter provided. The mutual obligations
hereunder, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, shall provide consideration to the
entering into of this Agreement.
69
<PAGE>
NOW, THEREFORE, the parties hereby agree as follows:
AGREEMENT
1. Obligation to Make Advances.
(a) Lender agrees by no later than January 24, 1995 to advance directly
to the FF&E Reserve on behalf of the Partnership the amount of $350,000.00 to
fund the Partnership's obligations under the Rooms Redo. The advance made
hereunder is required to meet the Partnership's then current obligations to make
payments for the Rooms Redo (the "Payment Obligations") while maintaining a
balance in the Reserve that is sufficient to meet other existing or contingent
obligations which the Partnership may be required to fund from the FF&E Reserve
pursuant to the Management Agreement.
(b) Lender's obligation to advance funds to the Partnership pursuant to
this Section 1 is not revolving in nature. Accordingly, Lender's outstanding
obligation to advance funds pursuant to Section 1(a) shall be reduced by the
amount of any advance(s) already made thereunder but shall not be increased by
any repayments made pursuant to Section 3 hereof.
2. Advances Constitute Indebtedness.
(a) The advance by Lender to or on behalf of the Partnership under
Section 1 hereof shall constitute indebtedness owing to Lender by the
Partnership. Such indebtedness at any time remaining outstanding and owing shall
accrue interest from the first day of the second Accounting Period of Fiscal
Year 1995 (as those terms are defined in the Management Agreement), at a rate
equal to the Prime Rate (as defined in the Management Agreement), as that Rate
may change from time to time, without compounding or capitalizing any accrued
interest. Any portion of interest that accrues during any full or partial
Accounting Period during Fiscal Year (as defined in the Management Agreement)
1995 which is not paid to Lender as of the last day of Fiscal Year 1995 shall be
added to principal as of the first day of Fiscal Year 1996. All principal and
interest owing to Lender under this Agreement is referred to as the
"Indebtedness".
(b) All Indebtedness then outstanding and owing to Lender shall mature
and be due and payable on the earlier of (i) December 31, 2005 or (ii) the
expiration or earlier termination of the Management Agreement (the "Maturity
Date"). At the request of Lender, the Partnership will execute and deliver one
or more promissory notes to further evidence any Indebtedness owing to Lender
under this Section 2 (the "Promissory Notes").
3. Repayment of Indebtedness.
(a) All Indebtedness shall mature and be due and payable as follows: By
no later than the 25th day following the end of each Accounting Period during
that period beginning with the first Accounting Period of Fiscal Year 1996
through the expiration of Fiscal Year 2005 (the "Repayment Period"), Lender
shall, in its capacity as Management Company, and on behalf of the Partnership,
disburse funds to Lender from the FF&E Reserve in an amount equal to one-half of
one percent (0.5%) of Gross Revenues (as that term is defined in the Management
Agreement) out of the total contribution of five percent (5%) of Gross Revenues
made to the FF&E Reserve pursuant to Section 8.02 B of the Management Agreement
for each Accounting Period during the Repayment Period until all Indebtedness
owing to Lender has been paid in full. All such repayments to Lender shall be
applied first to reimburse Lender for any fees or expenses due to Lender under
this Agreement or under the Promissory Notes; second, to reduce accrued but
unpaid interest hereunder; and third, the balance, if any, applied to repayment
of principal.
70
<PAGE>
(b) All Indebtedness shall be due and payable, to the extent not sooner
paid pursuant to Section 3(a) hereof, on the Maturity Date in accordance with
Section 2 above.
4. Subordination.
Payment of any indebtedness owing to Lender pursuant to Section 2 or 3
of this Agreement shall be subject and subordinate to payment of debt service
and all other amounts due and payable under the Loan Documents.
5. Compliance with Payment Obligations.
The Partnership agrees to use any funds advanced by Lender under this
Agreement to make prompt payment of the Payment Obligations.
6. Exculpation.
No partner of the Partnership shall have any personal liability with
respect to the indebtedness owing to Lender hereunder. Lender agrees to look
solely to the assets of the Partnership as the sole source of repayment
hereunder.
7. Default.
In the event the Partnership defaults in the performance or observation
of any of its obligations hereunder, unless such default (if not a payment
default) is cured within thirty (30) days after written notice thereof is given
by Lender to Borrower or within such longer period as may reasonably be required
to effect a cure in any such non-monetary default, or in the event the
Partnership defaults on its obligations under the Loan Documents, in consequence
of which the maturity of any indebtedness thereunder is accelerated, Lender
shall, in any of such events, have the right, subject to the terms of the Loan
Documents (but not the obligation) to accelerate the maturity of any
Indebtedness owing to it hereunder and upon such acceleration the Indebtedness
hereunder shall be immediately due and payable.
8. Governing Law.
This Agreement shall be governed by and construed under the laws of the
State of Maryland, without regard to principles of conflicts or laws thereof
which might refer such interpretations to the laws of another jurisdiction.
71
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year set forth above.
POTOMAC HOTEL LIMITED PARTNERSHIP
By: Host Marriott Corporation,
General Partner
By: /s/Bruce F. Stemerman
---------------------------------------------
Name: Bruce F. Stemerman
---------------------------------------------
Title: Senior Vice President, Asset Management
---------------------------------------------
MARRIOTT HOTEL SERVICES, INC.
By: /s/ Kevin M. Kimball
---------------------------------------------
Name: Kevin M. Kimball
---------------------------------------------
Title: Vice President
---------------------------------------------
72
<PAGE>
Exhibit 10hhh.
LOAN AGREEMENT
This LOAN AGREEMENT ("Agreement") is executed this 13th day of
September, 1996, and made effective as of the 24th day of January, 1995 (the
"Effective Date") by and between Potomac Hotel Limited Partnership, a Delaware
limited partnership ("Partnership") and Marriott Financial Services, Inc., a
Delaware corporation ("Lender" or "MFSI").
PRELIMINARY STATEMENT
The Partnership is the owner of that certain hotel known as the Raleigh
Crabtree Valley Marriott Hotel, located in Raleigh, North Carolina (the
"Hotel").
The Partnership and Marriott Hotel Services, Inc., a Delaware
corporation (the "Management Company") are parties to that certain Management
Agreement, dated as of June 18, 1994, as may be amended from time to time (the
"Management Agreement"), whereby the Management Company provides management
services for the Hotel.
The Partnership is also party to that certain Loan Agreement dated as
of May 20, 1994 (the "Loan Agreement") with MFSI, whereby, among other things,
indebtedness of the Partnership to MFSI in the principal amount of
$19,394,579.00 was secured through a first mortgage lien on the Partnership's
interest in the Hotel under that certain Deed of Trust and Security Agreement
with J. Donnell Lassiter, Trustee, and MFSI, dated as of May 20, 1994 (the
"Security Agreement"). The Loan Agreement and Security Agreement are together
hereafter referred to as the "Loan Documents". Under the Loan Documents, among
other things, the Partnership is permitted to incur unsecured indebtedness
without the consent of MFSI.
The Partnership has agreed to fund the acquisition of certain fixtures,
furniture and equipment in connection with a renovation project for the Hotel
beginning in 1994 and completed in 1995 (the "Rooms Redo"), the cost of which
would normally be paid out of funds in the "FF&E Reserve" (as that term is
defined in the Management Agreement). Funds now and hereafter anticipated to be
on deposit in the FF&E Reserve are insufficient to fund the entire Rooms Redo.
Lender has determined that it is in its best interest to advance funds
to the Partnership in the amount of $350,000.00 in order to provide funds
required to pay for the Rooms Redo which are not available in the FF&E Reserve
while maintaining a balance in the FF&E Reserve that is sufficient to meet other
existing or contingent obligations for which the FF&E Reserve was established.
This Agreement is being entered into for the purpose of evidencing the
obligation of Lender to make advances for the purposes set forth above and of
the Partnership to repay Lender the principal amount of any such advances, said
advances to accrue interest as hereafter provided. The mutual obligations
hereunder, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, shall provide consideration to the
entering into of this Agreement.
73
<PAGE>
NOW, THEREFORE, the parties hereby agree as follows:
AGREEMENT
1. Obligation to Make Advances.
(a) Lender agrees by no later than January 24, 1995 to advance directly
to the FF&E Reserve on behalf of the Partnership the amount of $350,000.00 to
fund the Partnership's obligations under the Rooms Redo. The advance made
hereunder is required to meet the Partnership's then current obligations to make
payments for the Rooms Redo (the "Payment Obligations") while maintaining a
balance in the Reserve that is sufficient to meet other existing or contingent
obligations which the Partnership may be required to fund from the FF&E Reserve
pursuant to the Management Agreement.
(b) Lender's obligation to advance funds to the Partnership pursuant to
this Section 1 is not revolving in nature. Accordingly, Lender's outstanding
obligation to advance funds pursuant to Section 1(a) shall be reduced by the
amount of any advance(s) already made thereunder but shall not be increased by
any repayments made pursuant to Section 3 hereof.
2. Advances Constitute Indebtedness.
(a) The advance by Lender to or on behalf of the Partnership under
Section 1 hereof shall constitute indebtedness owing to Lender by the
Partnership. Such indebtedness at any time remaining outstanding and owing shall
accrue interest from the first day of the second Accounting Period of Fiscal
Year 1995 (as those terms are defined in the Management Agreement), at a rate
equal to the Prime Rate (as defined in the Management Agreement), as that Rate
may change from time to time, without compounding or capitalizing any accrued
interest. Any portion of interest that accrues during any full or partial
Accounting Period during Fiscal Year (as defined in the Management Agreement)
1995 which is not paid to Lender as of the last day of Fiscal Year 1995 shall be
added to principal as of the first day of Fiscal Year 1996. All principal and
interest owing to Lender under this Agreement is referred to as the
"Indebtedness".
(b) All Indebtedness then outstanding and owing to Lender shall mature
and be due and payable on the earlier of (i) December 31, 2005 or (ii) the
expiration or earlier termination of the Management Agreement (the "Maturity
Date"). At the request of Lender, the Partnership will execute and deliver one
or more promissory notes to further evidence any Indebtedness owing to Lender
under this Section 2.
3. Repayment of Indebtedness.
(a) All Indebtedness shall mature and be due and payable as follows: By
no later then the 25th day following the end of each Accounting Period during
that period beginning with the first Accounting Period of Fiscal Year 1996
through the expiration of Fiscal Year 2005 (the "Repayment Period"), Management
Company shall, on behalf of the Partnership, disburse funds to Lender from the
FF&E Reserve in an amount equal to one-half of one percent (0.5%) of Gross
Revenues (as that term is defined in the Management Agreement) out of the total
contribution of five percent (5%) of Gross Revenues made to the FF&E Reserve
pursuant to Section 8.02 B of the Management Agreement for each Accounting
Period during the Repayment Period until all Indebtedness owing to Lender has
been paid in full. All such repayments to Lender shall be applied first to
reduce accrued but unpaid interest hereunder, with the balance, if any, applied
to repayment of principal.
74
<PAGE>
(b) All Indebtedness shall be due and payable, to the extent not sooner
paid pursuant to Section 3(a) hereof, on the Maturity Date in accordance with
Section 2 above.
4. Subordination.
Payment of any indebtedness owing to Lender pursuant to Section 2 or 3
of this Agreement shall be subject and subordinate to payment of debt service
under the Loan Documents.
5. Compliance with Payment Obligations.
The Partnership agrees to use any funds advanced by Lender under this
Agreement to make prompt payment of the Payment Obligations.
6. Exculpation.
No partner of the Partnership shall have any personal liability with
respect to the indebtedness owing to Lender hereunder. Lender agrees to look
solely to the assets of the Partnership as the sole source of repayment
hereunder.
7. Default.
In the event the Partnership is in default of any of its obligations
hereunder, unless such default is cured within thirty (30) days after written
notice thereof or within such longer period as may reasonably be required to
effect a cure in the case of a non-monetary default, or in the event the
Partnership defaults on its obligations under the Loan Documents, in consequence
of which the maturity of any indebtedness thereunder is accelerated, Lender
shall, in any of such events, have the right, subject to the terms of the Loan
Documents (but not the obligation) to accelerate the maturity of any
Indebtedness owing to it hereunder and upon such acceleration the Indebtedness
hereunder shall be immediately due and payable.
8. Governing Law.
This Agreement shall be governed by and construed under the laws of the
State of Maryland, without regard to principles of conflicts or laws thereof
which might refer such interpretations to the laws of another jurisdiction.
75
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year set forth above.
POTOMAC HOTEL LIMITED PARTNERSHIP
By: Host Marriott Corporation,
General Partner
By: /s/ Bruce F. Stemerman
---------------------------------------------
Name: Bruce F. Stemerman
---------------------------------------------
Title: Senior Vice President, Asset Management
---------------------------------------------
MARRIOTT FINANCIAL SERVICES, INC.
By: /s/ Christopher G. Townsend
---------------------------------------------
Name: Christopher G. Townsend
---------------------------------------------
Title: Vice President
---------------------------------------------
Reviewed and Consented to by:
Marriott Hotel Services, Inc.
By: /s/ Kevin M. Kimball
------------------------------------
Name: Kevin M. Kimball
------------------------------------
Title: Vice President
------------------------------------
76
<PAGE>
Exhibit 10iii.
LOAN AGREEMENT
This LOAN AGREEMENT ("Agreement") is executed this 13th day of
September, 1996, and made effective as of the 1st day of June, 1996 (the
"Effective Date") by and between Potomac Hotel Limited Partnership, a Delaware
limited partnership ("Partnership") and Marriott Financial Services, Inc., a
Delaware corporation ("Lender" or "MFSI").
PRELIMINARY STATEMENT
The Partnership is the owner of that certain hotel known as the Raleigh
Crabtree Valley Marriott Hotel, located in Raleigh, North Carolina (the
"Hotel").
The Partnership and Marriott Hotel Services, Inc., a Delaware
corporation (the "Management Company") are parties to that certain Management
Agreement, dated as of June 18, 1994, as may be amended from time to time (the
"Management Agreement"), whereby the Management Company provides management
services for the Hotel.
The Partnership is also party to that certain Loan Agreement dated as
of May 20, 1994 (the "Loan Agreement") with MFSI, whereby, among other things,
indebtedness of the Partnership to MFSI in the principal amount of
$19,394,579.00 was secured through a first mortgage lien on the Partnership's
interest in the Hotel under that certain Deed of Trust and Security Agreement
with J. Donnell Lassiter, Trustee, and MFSI, dated as of May 20, 1994 (the
"Security Agreement"). The Loan Agreement and Security Agreement are together
hereafter referred to as the "Loan Documents". Under the Loan Documents, among
other things, the Partnership is permitted to incur unsecured indebtedness
without the consent of MFSI.
The Partnership has agreed to fund the acquisition of certain fixtures,
furniture and equipment in connection with a renovation project for the Hotel
occurring in 1996 (the "Rooms Redo"), the cost of which would normally be paid
out of funds in the "FF&E Reserve" (as that term is defined in the Management
Agreement). Funds now and hereafter anticipated to be on deposit in the FF&E
Reserve are insufficient to fund the entire Rooms Redo.
Lender has determined that it is in its best interest to advance funds
to the Partnership up to the amount of Seven Hundred Thousand Dollars
($700,000.00) in order to provide funds required to pay for the Rooms Redo which
are not available in the FF&E Reserve while maintaining a balance in the FF&E
Reserve that is sufficient to meet other existing or contingent obligations for
which the FF&E Reserve was established.
This Agreement is being entered into for the purpose of evidencing the
obligation of Lender to make advances for the purposes set forth above and of
the Partnership to repay Lender the principal amount of any such advances, said
advances to accrue interest as hereafter provided. The mutual obligations
hereunder, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, shall provide consideration to the
entering into of this Agreement.
77
<PAGE>
NOW, THEREFORE, the parties hereby agree as follows:
AGREEMENT
1. Obligation to Make Advances.
(a) Lender agrees by no later than January 1, 1997, unless otherwise
agreed to by both parties, to advance directly to the FF&E Reserve on behalf of
the Partnership up to the amount of $700,000.00 to fund the Partnership's
obligations under the Rooms Redo. Advances made hereunder shall be made only at
such times and in such amounts as Management Company determines, in its
reasonable judgment, are required to meet the Partnership's then current
obligations to make payments for the Rooms Redo (the "Payment Obligations")
while maintaining a balance in the Reserve that is sufficient to meet other
existing or contingent obligations which the Partnership may be required to fund
from the FF&E Reserve pursuant to the Management Agreement. Management Company
shall request each advance by giving Lender at least ten (10) business days
written notice through a disbursement request.
(b) Lender's obligation to advance funds to the Partnership pursuant to
this Section 1 is not revolving in nature. Accordingly, Lender's outstanding
obligation to advance funds pursuant to Section 1(a) shall be reduced by the
amount of any advance(s) already made thereunder but shall not be increased by
any repayments made pursuant to Section 3 hereof.
2. Advances Constitute Indebtedness.
(a) The advances by Lender to or on behalf of the Partnership under
Section 1 hereof shall constitute indebtedness owing to Lender by the
Partnership. Such indebtedness at any time remaining outstanding and owing shall
accrue interest from the first day of any such advance at a rate equal to the
Prime Rate (as defined in the Management Agreement)plus one-half of one percent
(0.5%), as that Rate may change from time to time, without compounding or
capitalizing any accrued interest. All principal and interest owing to Lender
under this Agreement is referred to as the "Indebtedness".
(b) All Indebtedness then outstanding and owing to Lender shall mature
and be due and payable on the earlier of (i) December 31, 2003 or (ii) the
expiration or earlier termination of the Management Agreement (the "Maturity
Date"). At the request of Lender, the Partnership will execute and deliver one
or more promissory notes to further evidence any Indebtedness owing to Lender
under this Section 2.
3. Repayment of Indebtedness.
(a) All Indebtedness shall mature and be due and payable as follows: By
no later then the 25th day following the end of each Accounting Period during
that period beginning with the eighth Accounting Period of Fiscal Year 1996
through the expiration of Fiscal Year 2003 (the "Repayment Period"), Management
Company shall, on behalf of the Partnership, disburse funds to Lender from the
FF&E Reserve in an amount equal to one percent (1.0%) of Gross Revenues (as that
term is defined in the Management Agreement) out of the total contribution of
five percent (5%) of Gross Revenues made to the FF&E Reserve pursuant to Section
8.02 B of the Management Agreement for each Accounting Period during the
Repayment Period until all Indebtedness owing to Lender has been paid in full.
All such repayments to Lender shall be applied first to reduce accrued but
unpaid interest hereunder, with the balance, if any, applied to repayment of
principal.
(b) All Indebtedness shall be due and payable, to the extent not sooner
paid pursuant to Section 3(a) and 3(b) hereof, on the Maturity Date in
accordance with Section 2 above.
78
<PAGE>
(c) The Partnership may prepay any portion of or the entire amount of
Indebtedness then outstanding and owing to Lender at anytime and from time to
time at its option, without penalty, premium or additional unaccrued interest.
4. Subordination.
Payment of any indebtedness owing to Lender pursuant to Section 2 or 3
of this Agreement shall be subject and subordinate to payment of debt service
under the Loan Documents.
5. Compliance with Payment Obligations.
The Partnership agrees to use any funds advanced by Lender under this
Agreement to make prompt payment of the Payment Obligations.
6. Exculpation.
No partner of the Partnership shall have any personal liability with
respect to the indebtedness owing to Lender hereunder. Lender agrees to look
solely to the assets of the Partnership as the sole source of repayment
hereunder.
7. Default.
In the event the Partnership is in default of any of its (monetary or
non-monetary) obligations hereunder, unless such default is cured within thirty
(30) days after written notice thereof or within such longer period as may
reasonably be required to effect a cure in the case of a non-monetary default,
or in the event the Partnership defaults on its obligations under the Loan
Documents, in consequence of which the maturity of any indebtedness thereunder
is accelerated, Lender shall, in any of such events, have the right, subject to
the terms of the Loan Documents (but not the obligation) to accelerate the
maturity of any Indebtedness owing to it hereunder and upon such acceleration
the Indebtedness hereunder shall be immediately due and payable.
8. Governing Law.
This Agreement shall be governed by and construed under the laws of the
State of Maryland, without regard to principles of conflicts or laws thereof
which might refer such interpretations to the laws of another jurisdiction.
79
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year set forth above.
POTOMAC HOTEL LIMITED PARTNERSHIP
By: Host Marriott Corporation,
General Partner
By: /s/ Bruce F. Stemerman
---------------------------------------------
Name: Bruce F. Stemerman
---------------------------------------------
Title: Senior Vice President, Asset Management
---------------------------------------------
MARRIOTT FINANCIAL SERVICES, INC.
By: /s/ Christopher G. Townsend
---------------------------------------------
Name: Christopher G. Townsend
---------------------------------------------
Title: Vice President
---------------------------------------------
Reviewed and Consented to by:
Marriott Hotel Services, Inc.
By: /s/ Kevin M. Kimball
------------------------------------
Name: Kevin M. Kimball
------------------------------------
Title: Vice President
------------------------------------
80
<PAGE>
Exhibit 10jjj.
Amendment to Management Agreement
as of August 15, 1996
Marriott Hotel Services, Inc.
10400 Fernwood Road
Bethesda, Maryland 20817
RE: Raleigh Marriott Crabtree Valley Hotel ("Hotel")
Gentlemen:
1. Reference is made to that certain Management Agreement between
Potomac Hotel Limited Partnership ("Owner") and Marriott Hotel Services, Inc.
("Management Company"), dated as of June 18, 1994, in connection with the
above-described Hotel.
2. The purpose of this letter agreement is to set forth the mutual
agreement of Owner and Management Company for the funding of (i) the conversion
of the Champions lounge currently located in the Hotel to a meeting room and
(ii) to expand the seating capacity of the Quinn's Lounge (together referred to
as the "Conversion Projects"). Management Company has requested up to
$300,000.00 from Owner to complete the Conversion Projects. The combined cost of
the Conversion Projects is estimated at $350,000.00.
3. Owner and Management Company agree, pursuant to Section 8.02 E 1 of
the Management Agreement, to increase the percentage contribution for the FF&E
Reserve from five percent (5%) to seven percent (7%) (the additional 2%
contribution being referred to as the "Additional Contribution") commencing with
the first date of Accounting Period 9, 1996 until, and only until, such time
that the Conversion Projects are fully paid from such Additional Contribution,
up to $300,000.00. It is understood and agreed that $50,000 currently available
in the FF&E Reserve will also be used to pay for the Conversion Projects. The
Additional Contribution shall not be used to pay for any amounts for the
completion of the Conversion Projects in excess of $300,000.00, without Owner's
prior written approval, not to be unreasonably withheld. It is agreed that the
entire Additional Contribution shall be used to pay for the Conversion Projects
and that immediately upon payment in full of the Conversion Projects (not to
exceed $300,000.00) the percentage contribution for the FF&E Reserve shall
revert to five percent (5%) pursuant to Section 8.02 B of the Management
Agreement.
4.All capitalized terms which are not specially defined in this letter
agreement shall have the meaning set forth in the Management Agreement.
5. Other than as specifically amended in this letter agreement, all
provisions of the Management Agreement shall remain unmodified and in full force
and effect.
81
<PAGE>
Agreed to as of August 15, 1996.
POTOMAC HOTEL LIMITED PARTNERSHIP
By: Host Marriott Corporation, as general partner
By: /s/Bruce Wardinski
-----------------------------------
Name: Bruce Wardinski
-----------------------------------
Title: Senior Vice President & Treasurer
-----------------------------------
MARRIOTT HOTEL SERVICES, INC.
By: /s/ Kevin M. Kimball
-----------------------------------
Name: Kevin M. Kimball
-----------------------------------
Title: Vice President
-----------------------------------
82
<PAGE>
<TABLE>
SCHEDULE III
Page 1 of 3
POTOMAC HOTEL LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(in thousands)
Initial Costs Gross Amount at December 31, 1996
------------- ---------------------------------
Subsequent
Buildings & Costs Buildings & Accumulated
Description Debt Land Improvements Capitalized Land Improvements Total Depreciation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Albuquerque Marriott Hotel $22,658 $0 $19,128 $215 $0 $19,343 $19,343 $(6,901)
Albuquerque, New Mexico
Greensboro-High Point 32,607 0 10,514 584 0 11,098 11,098 (3,552)
Marriott Hotel
Greensboro, North Carolina
Houston Marriott Medical Center 17,188 0 28,798 400 0 29,198 29,198 (8,985)
Houston, Texas
Biscayne Bay Marriott Hotel 46,581 0 48,531 768 0 49,299 49,299 (15,928)
Miami, Florida
Marriott's Mountain Shadows 28,200 6,994 25,625 2,105 6,994 27,730 34,724 (11,306)
Resort and Golf Club
Scottsdale, Arizona
Raleigh Marriott Crabtree Valley(e)18,325 1,838 16,097 1,031 1,838 17,128 18,966 (1,297)
Raleigh, North Carolina
Seattle Marriott Sea-Tac Airport 32,603 1,612 22,241 546 1,612 22,787 24,399 (8,029)
Seattle, Washington
Tampa Marriott Westshore (e) 15,728 0 14,347 519 0 14,866 14,866 (1,027)
Tampa, Florida
--------- -------- --------- ------- ------- -------- -------- --------
Totals $213,890 $10,444 $185,281 $6,168 $10,444 $191,449 $201,893 ($57,025)
========= ======== ========= ======= ======= ======== ======== ========
</TABLE>
83
<PAGE>
<TABLE>
SCHEDULE III
Page 2 of 3
POTOMAC HOTEL LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(in thousands)
Date of
Completion of Date Depreciation
Description Construction Acquired Life
<S> <C> <C> <C>
Albuquerque Marriott Hotel 1982 1982 40 years
Albuquerque, New Mexico
Greensboro-High Point 1983 1982 40 years
Marriott Hotel
Greensboro, North Carolina
Houston Marriott Medical Center 1984 1982 40 years
Houston, Texas
Biscayne Bay Marriott Hotel 1983 1982 40 years
Miami, Florida
Marriott's Mountain Shadows 1959 1982 40 years
Resort and Golf Club
Scottsdale, Arizona
Raleigh Marriott Crabtree Valley (e) 1982 1982 & 40 years
Raleigh, North Carolina 1994
Seattle Marriott Sea-Tac Airport 1981 1982 40 years
Seattle, Washington
Tampa Marriott Westshore (e) 1981 1982 & 40 years
Tampa, Florida 1994
</TABLE>
84
<PAGE>
<TABLE>
Schedule III
Page 3 of 3
POTOMAC HOTEL LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(in thousands)
<S> <C> <C> <C>
Notes: 1996 1995 1994
(a) Reconciliation of Real Estate:
Balance at beginning of year.......................................$ 199,009 $ 224,253 $ 233,939
Acquisitions....................................................... -- -- 32,281
Capital expenditures............................................... 2,920 1,908 39
Dispositions and other............................................. (36) (27,152) (42,006)
------------ ------------ -----------
Balance at end of year.............................................$ 201,893 $ 199,009 $ 224,253
============ ============ ===========
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of year.......................................$ 52,568 $ 55,542 $ 55,542
Depreciation....................................................... 4,461 5,300 5,300
Dispositions and other............................................. (4) (8,274) (8,274)
------------ ------------ -----------
Balance at end of year.............................................$ 57,025 $ 52,568 $ 52,568
============ ============ ===========
</TABLE>
(c) The aggregate cost of land, buildings and improvements for Federal income
tax purposes is approximately $183 million at December 31, 1996.
(d) The Debt balance is as of December 31, 1996.
(e) The Raleigh and Tampa Hotels were purchased by the Partnership in 1982.
However, the Raleigh and Tampa Hotels were foreclosed on in 1993 and 1994,
respectively. These Hotels were subsequently repurchased by the
Partnership in 1994. Therefore, the initial costs for Raleigh and Tampa
reflected on this schedule are the costs related to the repurchase in
1994.
85
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 28th of March,
1997.
POTOMAC HOTEL LIMITED PARTNERSHIP
By: HOST MARRIOTT CORPORATION
General Partner
By: /s/Terence C. Golden
--------------------------------
Terence C. Golden
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
the capacities and on the date indicated above.
Signature Title
(HOST MARRIOTT CORPORATION)
/s/Terence C. Golden President, Chief Executive Officer and Director
Terence C. Golden (Principal Executive Officer)
/s/Richard E. Marriott Chairman of the Board of Directors
Richard E. Marriott
/s/R. Theodore Ammon Director
R. Theodore Ammon
/s/Robert M. Baylis Director
Robert M. Baylis
/s/J.W. Marriott, Jr. Director
J.W. Marriott, Jr.
/s/Ann Dore McLaughlin Director
Ann Dore McLaughlin
86
<PAGE>
/s/Harry L. Vincent, Jr. Director
Harry L. Vincent, Jr.
/s/Robert E. Parsons, Jr. Executive Vice President
Robert E. Parsons, Jr. and Chief Financial Officer
(Principal Accounting Officer)
/s/Christopher J. Nassetta Executive Vice President
Christopher J. Nassetta
/s/Christopher G. Townsend Senior Vice President and General Counsel
Christopher G. Townsend
/s/Bruce D. Wardinski Senior Vice President and Treasurer
Bruce D. Wardinski
/s/Donald D. Olinger Vice President and Corporate Controller
Donald D. Olinger (Principal Accounting Officer)
87
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000357226
<NAME> POTOMAC HOTEL LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1.00
<CASH> 9,735
<SECURITIES> 3,850<F1>
<RECEIVABLES> 10,870
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 24,455
<PP&E> 224,592
<DEPRECIATION> (69,180)
<TOTAL-ASSETS> 179,867
<CURRENT-LIABILITIES> 829
<BONDS> 323,335
0
0
<COMMON> 0
<OTHER-SE> (144,297)
<TOTAL-LIABILITY-AND-EQUITY> 179,867
<SALES> 0
<TOTAL-REVENUES> 46,696
<CGS> 0
<TOTAL-COSTS> 23,955
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,582
<INCOME-PRETAX> (1,841)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,841)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,841)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> THIS IS OTHER ASSETS.
</FN>
</TABLE>
