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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter ended March 28, 1997
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
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(Exact name of registrant as specified in its charter)
Delaware 52-1240223
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10400 Fernwood Road
Bethesda, Maryland 20817
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: 301-380-2070
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to
such filing requirements for the past 90 days. Yes x/ No
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<PAGE>
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POTOMAC HOTEL LIMITED PARTNERSHIP
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE NO.
Item 1. Financial Statements
Condensed Statement of Operations
Twelve Weeks Ended March 28, 1997 and March 22, 1996....... 1
Condensed Balance Sheet
March 28, 1997 and December 31, 1996....................... 2
Condensed Statement of Cash Flows
Twelve Weeks ended March 28, 1997 and March 22, 1996....... 3
Notes to Condensed Financial Statements........................ 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 5
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 7
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per unit amounts)
<TABLE>
Twelve Weeks Ended
March 28, March 22,
1997 1996
-------------- --------------
<S> <C> <C>
REVENUES
Hotel ..................................................................................$ 15,914 $ 13,697
Other................................................................................... 177 159
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16,091 13,856
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OPERATING COSTS AND EXPENSES
Interest................................................................................ 5,845 5,525
Incentive management fee................................................................ 3,060 2,701
Depreciation and amortization........................................................... 1,263 1,254
Base management fee..................................................................... 1,197 1,096
Property taxes.......................................................................... 807 873
Ground rent, insurance and other........................................................ 879 678
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13,051 12,127
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NET INCOME.................................................................................$ 3,040 $ 1,729
============== ==============
ALLOCATION OF NET INCOME
General Partner.........................................................................$ 31 $ 17
Limited Partners........................................................................ 3,009 1,712
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$ 3,040 $ 1,729
============== ==============
NET INCOME PER LIMITED
PARTNER UNIT (1,800 Units)..............................................................$ 1,672 $ 951
============== ==============
</TABLE>
See Notes to Condensed Financial Statements.
1
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POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(in thousands)
<TABLE>
March 28, December 31,
1997 1996
(unaudited)
<S> <C> <C>
ASSETS
Property and equipment, net............................................................$ 155,655 $ 155,412
Due from Marriott International, Inc. and affiliates................................... 14,071 10,870
Other assets........................................................................... 4,616 3,850
Restricted cash........................................................................ 6,128 4,507
Cash and cash equivalents.............................................................. 1,555 5,228
--------------- ---------------
$ 182,025 $ 179,867
=============== ===============
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt..........................................................................$ 177,666 $ 179,837
Due to Host Marriott Corporation and affiliates........................................ 120,958 124,370
Incentive and base management fees due to Marriott International, Inc. ................ 20,159 17,172
Due to Marriott International, Inc. and affiliates..................................... 494 1,956
Accrued interest and other liabilities................................................. 4,005 829
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Total Liabilities................................................................... 323,282 324,164
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PARTNERS' DEFICIT
General Partner........................................................................ (34,783) (34,814)
Limited Partners....................................................................... (106,474) (109,483)
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Total Partners' Deficit............................................................. (141,257) (144,297)
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$ 182,025 $ 179,867
=============== ===============
</TABLE>
See Notes to Condensed Financial Statements.
2
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
Twelve Weeks Ended
March 28, March 22,
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net income.............................................................................$ 3,040 $ 1,729
Noncash items.......................................................................... 5,893 5,245
Changes in operating accounts.......................................................... (1,743) (82)
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Cash provided by operating activities............................................... 7,190 6,892
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INVESTING ACTIVITIES
Additions to property and equipment, net............................................... (1,506) (1,302)
Change in property improvement funds................................................... (820) (1,730)
Working capital received from (funded to) Marriott International, Inc.
and affiliates, net................................................................. 90 (150)
--------------- ---------------
Cash used in investing activities................................................... (2,236) (3,182)
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FINANCING ACTIVITIES
Repayments to Host Marriott Corporation and affiliates, net............................ (4,825) (1,036)
Principal repayments on debt........................................................... (2,171) (1,163)
Deposits to collateral accounts, net................................................... (1,621) (2,082)
Repayments to an affiliate of Marriott International, Inc.............................. (10) --
--------------- ---------------
Cash used in financing activities................................................... (8,627) (4,281)
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DECREASE IN CASH AND CASH EQUIVALENTS..................................................... (3,673) (571)
CASH AND CASH EQUIVALENTS at beginning of period.......................................... 5,228 6,139
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CASH AND CASH EQUIVALENTS at end of period................................................$ 1,555 $ 5,568
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for mortgage and other interest..............................................$ 1,149 $ 715
=============== ===============
</TABLE>
See Notes to Condensed Financial Statements.
3
<PAGE>
POTOMAC HOTEL LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed financial statements have been prepared by Potomac
Hotel Limited Partnership (the "Partnership") without audit. Certain
information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles have been condensed or omitted from the accompanying statements.
The Partnership believes the disclosures made are adequate to make the
information presented not misleading. However, the condensed financial
statements should be read in conjunction with the Partnership's financial
statements and notes thereto included in the Partnership's Form 10-K for the
fiscal year ended December 31, 1996.
In the opinion of the Partnership, the accompanying unaudited condensed
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of
the Partnership as of March 28, 1997, and December 31, 1996, and the results
of operations and cash flows for the twelve weeks ended March 28, 1997, and
March 22, 1996. Interim results are not necessarily indicative of fiscal
year performance because of seasonal and short-term variations.
For financial reporting purposes, the Partnership's net income is allocated
99% to the limited partners and 1% to Host Marriott Corporation (the
"General Partner"). Significant differences exist between the net income
for financial reporting purposes and the net income for Federal income tax
reporting purposes. 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 in the
recognition of management fee expense.
Certain reclassifications were made to the prior quarter condensed financial
statements to conform to the current quarter presentation.
2. 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 condensed
statement of operations. Revenues consist of the following operating results
(in thousands):
Twelve Weeks Ended
March 28, March 22,
1997 1996
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HOTEL SALES
Rooms................................... $ 25,935 $ 22,927
Food and beverage....................... 10,927 10,675
Other................................... 3,047 2,917
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39,909 36,519
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HOTEL EXPENSES
Departmental direct costs
Rooms................................ 5,580 5,123
Food and beverage.................... 8,129 7,876
Other hotel operating expenses.......... 10,286 9,823
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23,995 22,822
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HOTEL REVENUES............................ $ 15,914 $ 13,697
============== ==============
4
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ITEM 2. 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 source of cash is cash from operations. Its
principal uses of cash are to pay debt service on the Partnership's mortgage
debt, to pay amounts owed to Host Marriott and Marriott International, Inc.
("MII"), to fund the property improvement funds, and to make deposits to cash
collateral accounts. Total cash provided by operations was $7.2 million and $6.9
million for the twelve weeks ended March 28, 1997, and March 22, 1996,
respectively. Principal payments of mortgage debt were $2.2 million and $1.2
million for the twelve weeks ended March 28, 1997, and March 22, 1996,
respectively. Principal payments to Host Marriott and affiliates were $4.8
million and $1.0 million for the twelve weeks ended March 28, 1997, and March
22, 1996, respectively. Contributions to the property improvement funds were
$2.1 million and $1.8 million for the twelve weeks ended March 28, 1997, and
March 22, 1996, respectively. Net deposits to cash collateral accounts were
$1.6 million and $2.1 million for the twelve weeks ended March 28, 1997, and
March 22, 1996, respectively. No cash was distributed to the Partners for the
twelve weeks ended March 28, 1997, and March 22, 1996.
The General Partner believes that the Partnership will have sufficient capital
resources and liquidity to continue to conduct its business in the ordinary
course. It is anticipated that shortfalls in the furniture, fixtures and
equipment ("FF&E") reserve will occur over the next few years. However, the
General Partner is working to resolve the expected shortfalls.
Debt
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
its affiliates, and (iii) MII or its affiliates.
Total Partnership interest expense increased 6% for the twelve weeks ended March
28, 1997, when compared to the same period in 1996 primarily due to increased
interest expense on the mortgage loan (the "Bank Loan") for six of the
Partnership's hotels (the "Bank Hotels"). The weighted average interest rate on
the Bank Loan was 7.4% for the twelve weeks ended March 28, 1997, as compared to
7.2% for the comparable period in 1996.
The Bank Loan matures on December 22, 1997; however, two one-year extensions are
available. In order to extend the Bank Loan maturity date until December 22,
1998, the Partnership must provide notice to the lender of its intent to extend
the loan along with a debt service coverage ratio calculation with a ratio of
greater than 1.2 by June 22, 1997. Based on current debt service coverage tests,
the Partnership expects to be able to exercise the first one-year extension of
the loan and extend the Bank Loan maturity until December 22, 1998.
Pursuant to the terms of the restated Bank Loan, operating profit from the Bank
Hotels and the subordinated portion of the MII base management fee, equal to 1%
of gross Bank Hotel 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 to repay Bank Loan
principal, advances
5
<PAGE>
under the $26 million debt service guaranty (the "Bank Guaranty") provided by
Host Marriott and, depending upon the unadvanced balance of the Bank Guaranty,
deferred base management fees to MII. As a result, on February 24, 1997, the
Partnership repaid $2.2 million in principal on the Bank Loan and $2.2 million
to Host Marriott on the Bank Guaranty from 1996 excess operating cash flow from
the Bank Hotels. As of March 28, 1997, the balance of the Bank Loan was $177.6
million, and $19.4 million was available under the Bank Guaranty.
In connection with the restructuring of the Bank Loan, Host Marriott 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 with respect to interest will be made
first under the Interest Guaranty and then under the Bank Guaranty or an
equivalent "back-up" guaranty provided by MII (the "MII Back-up Guaranty"). No
amounts have been advanced under the Interest Guaranty. Additionally, in early
1997, in accordance with the terms of the Interest Guaranty, Host Marriott's
liability was reduced from $8 million to $4 million.
Host Marriott advanced funds (the "Host FF&E Loans") to the Partnership from
1991 through 1994 for the purchase of FF&E. The loans are secured by payments
from MII under leases from the Partnership for FF&E replacements. On January 3,
1997, the Partnership repaid $2.3 million of principal to Host Marriott on the
Host FF&E Loans from funds received from MII as payments on the leases.
Therefore, as of March 28, 1997, the balance of the Host FF&E Loans was $2.9
million.
RESULTS OF OPERATIONS
Hotel revenues increased 16% to $15.9 million for the twelve weeks ended March
28, 1997, when compared to the same period in 1996. The increase in revenues is
primarily due to the increases in REVPAR at each of the eight Hotels. For the
first quarter of 1997, the combined average room rate increased 9% to $116, and
the combined average occupancy increased three percentage points to 84%, when
compared to the same period in 1996. On a combined basis, the Hotels have all
been able to increase their average room rates with little or no negative impact
to their average occupancies. It appears that strong demand for the rooms still
exists throughout the country.
Incentive management fees, base management fees, and ground rent are calculated
generally as a percentage of Hotel sales or Hotel revenues. The increases in
these expenses for first quarter 1997 are directly related to the increases in
Hotel sales and Hotel revenues for first quarter 1997.
Net income increased 76% to $3.0 million for the twelve weeks ended March 28,
1997 as compared to $1.7 million for the same period in 1996 due to the increase
in Hotel revenues as discussed above.
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.
6
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. 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 conditions, or results of operations of the Partnership.
7
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
POTOMAC HOTEL LIMITED PARTNERSHIP
By: HOST MARRIOTT CORPORATION
General Partner
May 9, 1997 By: /s/ Donald D. Olinger
Donald D. Olinger
Vice President and Corporate Controller
(Principal Accounting Officer)
8
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000357226
<NAME> POTOMAC HOTEL LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-28-1997
<EXCHANGE-RATE> 1.00
<CASH> 7,683
<SECURITIES> 4,616<F1>
<RECEIVABLES> 14,071
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,370
<PP&E> 226,098
<DEPRECIATION> (70,443)
<TOTAL-ASSETS> 182,025
<CURRENT-LIABILITIES> 4,005
<BONDS> 319,277
0
0
<COMMON> 0
<OTHER-SE> (141,257)
<TOTAL-LIABILITY-AND-EQUITY> 182,025
<SALES> 0
<TOTAL-REVENUES> 16,091
<CGS> 0
<TOTAL-COSTS> 7,206
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,845
<INCOME-PRETAX> 3,040
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,040
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,040
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>THIS IS OTHER ASSETS.
</FN>
</TABLE>
