Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
X Annual Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 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
(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 offices) (Zip Code)
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
Index to Exhibits is located on pages 53 to 58
<PAGE>
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POTOMAC HOTEL LIMITED PARTNERSHIP
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TABLE OF CONTENTS
PAGE NO.
PART I
Item 1. Business..................................................... 1
Item 2. Properties....................................................10
Item 3. Legal Proceedings.............................................15
Item 4. Submission of Matters to a Vote of Security Holders...........15
PART II
Item 5. Market For The Partnership's Limited Partnership Units
and Related Security Holder Matters...........................16
Item 6. Selected Financial Data.......................................16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................17
Item 8. Financial Statements and Supplementary Data...................26
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure................ .....................44
PART III
Item 10. Directors and Executive Officers..............................44
Item 11. Management Remuneration and Transactions......................46
Item 12. Security Ownership of Certain Beneficial
Owners and Management.........................................46
Item 13. Certain Relationships and Related Transactions................47
PART IV
Item 14. Exhibits, Supplemental Financial Statement Schedules
and Reports on Form 8-K.......................................53
<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.
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, 1997, the Partnership owned eight full-service hotels
(collectively 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 605-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 310-room Tampa Westshore Marriott Hotel in Tampa,
Florida. All of the Partnership's Hotels were originally owned by, and acquired
from, Host Marriott Corporation. See Item 2 "Properties."
The sole general partner of the Partnership is Host Marriott Corporation, a
publicly traded Delaware corporation ("Host Marriott" or the "General Partner").
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 Marriott Hotel Services,
Inc. ("MHSI"), which is a subsidiary of MII, (collectively the "Managers"). 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."
<PAGE>
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.
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 loan. 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. 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 its
Dallas Hotel to a wholly-owned subsidiary of Host Marriott. The Partnership
owned eight hotels as of December 31, 1997.
Debt Financing
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 Hotels").
The Bank Loan bore interest at an effective fixed rate of 10.37% and required
monthly interest payments with the entire principal balance due at maturity. The
Bank Loan matured on December 22, 1994, and was not repaid at that time 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 MII
<PAGE>
provided an equivalent "backup" guaranty which must be funded only if Host
Marriott does not fund under its guaranty.
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
repay principal on the Bank Loan; (iii) the maturity of the Bank Loan was
extended to December 22, 1997, with two additional one-year extensions available
if certain debt service coverage tests are met; (iv) semi-annual payments of
interest at the six-month London Interbank Offered Rate ("LIBOR") plus 1.5
percentage points and annual payments of principal of $5 million during the
first three years of the restructured loan and $6 million during any extension
periods; (v) the General Partner's liability under the Bank Guaranty remained at
$26 million (subject to a credit for the advance of $10 million described in (i)
above); (vi) MII continued its "backup" guaranty ( the "MII Backup Guaranty"),
under which MII agreed 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 Backup
Guaranty); (viii) the Interest Guaranty is to 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 Backup Guaranty in any event must at least be equal to the scheduled
amortization payments due during the extension periods); (ix) all Partnership
cash relating to the Bank Hotels (including the Bank Hotels property improvement
fund 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 Hotel sales and a portion of the
property improvement fund contribution equal to 1% of gross Bank Hotel sales to
be subordinated to the payment of debt service.
The Bank Loan was scheduled to mature on December 22, 1997; however, two
one-year extensions were available. As required under the Bank Loan, on June 19,
1997, the Partnership provided notice to the lender of its intent to extend the
loan along with a debt service coverage ratio calculation with a required ratio
greater than 1.2 and successfully extended the Bank Loan maturity to December
22, 1998. An additional one-year extension is available under the Bank Loan, and
in order to extend the loan to December 22, 1999, the Partnership must provide
notice of its intent to extend the loan along with adequate debt service
coverage tests to the lender by June 22, 1998. Based on current debt service
coverage tests, the Partnership expects to be able to exercise the additional
one-year extension of the loan upon its maturity on December 22, 1998.
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Pursuant to the terms of the restated Bank Loan, operating profit, as defined,
and the subordinated portion of the base management fee from the Bank Hotels 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 principal and interest 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 principal and
interest on advances under the Bank Guaranty, and (iii) 25% to repay deferred
base management fees to MII.
As of December 31, 1997 and 1996, the principal balance of the Bank Loan was
$172.7 million and $179.8 million, respectively. As of December 31, 1997 and
1996, $8.5 million and $10.0 million including accrued interest, respectively,
was outstanding pursuant to the Bank Guaranty. On February 23, 1998, in
accordance with the cash flow priorities described in the preceding paragraph,
the Partnership repaid $3.8 million in principal on the Bank Loan, $2.2 million
to Host Marriott on the Bank Guaranty, and $1.5 million to MII for deferred base
management fees using amounts in the collateral account. Therefore, as of
February 23, 1998, the balance on the Bank Loan was $168.9 million, $21.6
million was available under the Bank Guaranty, and deferred base management fees
payable to MII were $2.1 million. The weighted average interest rate on the Bank
Loan was 7.46% for 1997, 7.26% for 1996, and 7.89% for 1995. At December 31,
1997, the interest rate on the Bank Loan was 8.25%. The weighted average
interest rate on the Bank Guaranty was 8.44% for 1997, 8.27% for 1996, and 8.85%
for 1995. At December 31, 1997, the interest rate on the Bank Guaranty was
8.50%.
No amounts were advanced under the Interest Guaranty during 1997. Additionally
on December 22, 1997, in accordance with the terms of the Interest Guaranty, the
amount available was increased from $4 million to $8 million, and in early 1998,
the amount available was reduced to $4 million.
Raleigh and Tampa Loans
The Partnership 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,
$14.0 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
<PAGE>
on Raleigh Note B. The 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, 1997 and 1996, the Raleigh Note A principal balance was $13.5
million, and the Raleigh Note B principal balance was $3.8 million and $4.8
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,
$10.0 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. 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. The 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, 1997 and 1996, the Tampa Note A principal balance was $9.7 million, and the
Tampa Note B principal balance was $5.4 million and $6.1 million, respectively.
Both 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 December 22, 1994, the Bank Loan and MII Management Agreement, as
defined in Item 13 "Certain Relationships and Related Transactions", required
the Partnership to deposit funds in an escrow account (based on a percentage,
ranging from 1% to 5%, of Bank Hotel sales) to be used to replace furniture,
fixtures and equipment ("FFE") at the Bank Hotels. Additionally, 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 Raleigh Hotel, Tampa Hotel, and Point Clear
Hotel (the "S&L Hotels").
Host Marriott advanced funds (the "Host FF&E Loans") for the purchase of FF&E
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, 1997 and 1996, $2.9
million and $5.2 million was outstanding under the Host FF&E Loans. The weighted
average interest rate was 8.44% for 1997, 8.27% for 1996 and 8.85% for 1995. At
December 31, 1997, the interest rate was 8.50%.
Subsequent to year-end, the Partnership repaid $1.4 million of principal to Host
Marriott on the Host FF&E Loans, thereby reducing the balance on the Host FF&E
Loans to $1.5 million.
These loans are non-recourse to the Partnership and its partners and are secured
by payments from MII under the FF&E Leases, as defined in Note 8. Interest
expense on these loans is offset by lease payments received under the MII FF&E
Leases. As of December 31, 1997 and 1996, MII owed $2.9 million plus accrued
<PAGE>
interest to the Partnership pursuant to these agreements with the final
installment due on December 31, 1999. Subsequent to year-end, MII repaid $1.5
million of principal to the Partnership on the MII FF&E Leases.
Since 1995 the Bank Hotels' FF&E funding requirements have been met through
contributions to a property improvement fund 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 property improvement fund for the
Hotel. However, the Raleigh Hotel required additional funds, as described below.
See Note 8 for further details on the property improvement funds.
Raleigh Hotel Furniture, Fixtures and Equipment Loans
In 1995, Host Marriott and MHSI 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 property improvement fund. 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 property improvement fund
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 are 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, 1997 and 1996, $298,000 and $342,000,
respectively, was due on each of the Raleigh $350,000 FF&E Loans. The weighted
average interest rate was 8.44% for 1997, 8.27% for 1996, and 8.85% for 1995. At
December 31, 1997, the interest rate on the Raleigh $350,000 FF&E Loans was
8.50%.
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
Hotel's property improvement fund. 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 property improvement fund 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 is due and payable on the earlier of
the termination of the Raleigh management agreement or December 31, 2003. As of
December 31, 1997 and 1996, $571,000 and $658,000, respectively, was due on the
Raleigh $700,000 FF&E Loan. The weighted average interest rate was 8.94% for
1997 and 8.75% for 1996. At December 31, 1997, the interest rate was 9.00%.
Other Loans
As of December 31, 1997, the Partnership also owed Host Marriott $88.8 million
including accrued interest, as follows: (i) $64.4 million related to the
original debt service guaranty advances provided by Host Marriott (the "Host
Marriott Guaranty" and the "S&L Guaranty"); (ii) $8.5 million related to the
Bank Guaranty; (iii) $5.4 million related to working capital advances; (iv) $8.9
<PAGE>
million for capital improvements at the Point Clear, Alabama Hotel; and (v) $1.6
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
8.44% for 1997, 8.27% for 1996, and 8.85% for 1995. At December 31, 1997, the
interest rate was 8.50%.
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 can be made to the 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 (the "Bank
Hotels Management Agreement") which replaced the original MII Management
Agreement. The Bank Hotels Management Agreement provides for a base management
fee equal to 3% of gross Bank Hotel sales and contributions equal to 5% of gross
Bank Hotel sales to be made to the Bank Hotels' property improvement fund. A
portion of the base management fee equal to 1% of gross Bank Hotel sales and a
portion of the Bank Hotels' property improvement fund contribution equal to 1%
of gross Bank Hotel 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 management fees, after certain returns to
the Partnership. Incentive management fees will continue to be subordinate to
the payment of debt service and to the repayment of all guaranties. As of
December 31, 1997, deferred base and incentive management fees were $3.6 million
and $22.2 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 payment 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."
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."
<PAGE>
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 upscale full-service hotel segment has benefited
from a continued low 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 in new construction, to high
occupancy rates, and to 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 had not been absorbed fully by increased demand. This caused a significant
decrease in new hotel development the early 1990s which has resulted in a
gradual U.S. hotel supply/demand imbalance.
The Partnership's Hotels compete with other major lodging brands in the regions
in which they operate. Competition in the regions is based primarily on the
level of service, quality of accommodations, convenience of locations, and room
rates of each hotel. 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 a fiduciary duty to the Partnership and is required to exercise good
faith and loyalty in all its dealings with respect to Partnership affairs.
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), this control could lead to conflicts
of interest.
Policies with Respect 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
<PAGE>
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;
(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 and Transactions" for information regarding
payments made to the General Partner for the cost of providing administrative
services to the Partnership.
The Hotels are staffed by employees of MII and/or MHSI.
<PAGE>
ITEM 2. PROPERTIES
The Partnership consisted of eight full-service hotels as of December 31, 1997,
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.
Competition
Studies 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.
<PAGE>
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 indicate that currently three hotels containing approximately 1,500
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) 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) $127,000.
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.
<PAGE>
Competition
Studies 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 with an
initial term expiring in August 2009 with five 10-year renewal options. The
lease provides for annual rental equal to the greater of (i) $160,000 or (ii) 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 605
guest rooms, one restaurant, an indoor lounge, and cocktail service in the
lobby. Approximately 14,000 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 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) $1.0 million or (ii) 4% of
annual gross room sales plus 3% of 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 the Phoenix Sky
<PAGE>
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 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 a family
restaurant, a specialty seafood restaurant, and an outdoor terrace. 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 indicate that currently five hotels containing approximately 1,500 rooms
directly compete with Marriott's Mountain Shadows Resort in the Scottsdale
market.
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 indicate that currently three hotels with approximately 900 rooms
directly compete with the Raleigh Marriott Hotel in the Raleigh market.
<PAGE>
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 indicate that currently four hotels containing approximately 1,500 rooms
directly compete with the Seattle Marriott Hotel Sea-Tac Airport in the Seattle
market.
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 310
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 indicate that currently eleven hotels containing approximately 3,200
rooms directly compete with the Tampa Westshore Hotel in the Tampa market.
<PAGE>
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.
<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, 1997, 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, 1997,
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>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except per unit amounts)
<S> <C> <C> <C> <C> <C>
Revenues ..................................$ 51,038 $ 46,696 $ 76,632 $ 45,233 $ 48,830
=========== =========== =========== =========== ===========
Net (loss) income before
extraordinary items.........................$ (2,825) $ (1,841) $ 20,045 $ (22,741) $ (21,729)
Extraordinary items............................ -- -- 146,303 47,168 17,148
----------- ----------- ----------- ----------- -----------
Net (loss) income..............................$ (2,825) $ (1,841) $ 166,348 $ 24,427 $ (4,581)
=========== =========== =========== =========== ===========
Net (loss) income per limited partner unit (1,800 Units):
Net (loss) income before
extraordinary items......................$ (1,554) $ (1,013) $ 7,720 $ (12,508) $ (11,951)
Extraordinary items......................... -- -- 80,467 21,109 9,432
----------- ----------- ----------- ----------- -----------
Net (loss) income...........................$ (1,554) $ (1,013) $ 88,187 $ 8,601 $ (2,519)
=========== =========== =========== =========== ===========
Total assets ................................. $ 178,224 $ 179,867 $ 176,521 $ 196,061 $ 203,251
============ =========== =========== =========== ============
Total liabilities..............................$ 325,346 $ 324,164 $ 318,977 $ 506,865 $ 538,482
=========== =========== =========== =========== ===========
</TABLE>
<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 reported a decrease in cash and cash equivalents of $2.0 million
for 1997. This decrease was due to the use of cash for investing and financing
activities partially offset by cash provided by operating activities.
The Partnership's principal source of cash is cash from Hotel operations. Total
cash provided by operations increased $1.5 million, to $20.9 million, for 1997
due to improved Hotel operating results.
The Partnership's principal uses of cash are (i) to pay for capital expenditures
and to fund the property improvement funds, (ii) to make deposits to the
restricted cash accounts, (iii) to pay debt service on the Partnership's
mortgage debt, and (iv) to pay amounts owed to Host Marriott and MII. No cash
was distributed to the Partners for the years ended December 31, 1997, 1996 and
1995. Amounts owed by the Partnership to Host Marriott and MII are significant,
and it will be many years before cash from operations would be available to the
Partners.
Cash used in investing activities decreased to $7.8 million in 1997 from $10.2
million in 1996. Cash used in investing activities included cash paid for FF&E
of $7.3 million in 1997 compared to $9.9 million in 1996.
Cash used in financing activities increased to $15.1 in 1997 from $10.0 million
in 1996. Cash used in financing activities for 1997 included repayments on the
Partnership's mortgage debt of $7.2 million, repayments to Host Marriott and
affiliates of $6.1 million, and net deposits to restricted cash accounts of $1.8
million.
Liquidity/Capital Expenditures
The General Partner believes that the Partnership will have sufficient capital
resources and liquidity to continue to conduct its business in the ordinary
course during 1998. However, it is anticipated that shortfalls in the property
improvement fund for the Bank Hotels will occur after 1998. The General Partner
is currently working with the Manager to resolve the expected shortfalls.
Mortgage Debt
Restructured Bank Loan
During 1997, the Partnership repaid $7.1 million on the restructured mortgage
debt related to six of the Partnership hotels (the "Bank Loan"). The outstanding
<PAGE>
principal balance on December 31, 1997 was $172.7 million. On February 23, 1998,
in accordance with the cash flow priorities, the Partnership repaid an
additional $3.8 million in principal on the Bank Loan. Therefore, as of February
23, 1998, the balance on the Bank Loan was $168.9 million. The weighted average
interest rate on the Bank Loan was 7.46% for 1997. At December 31, 1997, the
interest rate on the Bank Loan was 8.25%.
The Bank Loan was scheduled to mature on December 22, 1997; however, two
one-year extensions were available. As required under the Bank Loan, on June 19,
1997, the Partnership provided notice to the lender of its intent to extend the
loan along with a debt service coverage ratio calculation with a required ratio
greater than 1.2 and successfully extended the Bank Loan maturity to December
22, 1998. An additional one-year extension is available under the Bank Loan, and
in order to extend the loan to December 22, 1999, the Partnership must provide
notice of its intent to extend the loan along with adequate debt service
coverage tests to the lender by June 22, 1998. Based on current debt service
coverage tests, the Partnership expects to be able to exercise the additional
one-year extension of the loan upon its maturity on December 22, 1998.
Raleigh and Tampa Loans
During 1997, the Partnership repaid $1.7 million on the mortgage debt related to
the Raleigh and Tampa hotels (the "Raleigh and Tampa Loans"). As of December 31,
1997, the outstanding principal balances on the Raleigh and Tampa Loans were
$17.3 million and $15.1 million, respectively.
For additional information regarding the mortgage debt and other Partnership
loans, see Note 6 of the financial statements.
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 (the "Bank
Hotels Management Agreement") which replaced the original MII Management
Agreement. The Bank Hotels Management Agreement provides for a base management
fee equal to 3% of gross Bank Hotel sales and contributions equal to 5% of gross
Bank Hotel sales to be made to the Bank Hotels' property improvement fund. A
portion of the base management fee equal to 1% of gross Bank Hotel sales and a
portion of the Bank Hotels' property improvement fund contribution equal to 1%
of gross Bank Hotel 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 management fees, after certain returns to
the Partnership. Incentive management fees will continue to be subordinate to
the payment of debt service and to the repayment of all guaranties. As of
December 31, 1997, deferred base and incentive management fees were $3.6 million
and $22.2 million, respectively. For additional information, see Item 13
"Certain Relationships and Related Transactions."
<PAGE>
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 payment 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."
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 decisions related to the generation of house profit of the
Hotels to the Managers. House profit reflects hotel operating results which flow
to the Partnership as property owner and represents gross hotel sales less
property-level expenses, excluding depreciation and amortization, base and
incentive management fees, property taxes, ground rent, insurance, and certain
other costs, which are disclosed separately in the 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 Hotel owned by the
Partnership as of December 31, 1997. The percentage change in REVPAR for the
Raleigh and Tampa Hotels from 1994 to 1995 is not shown because these Hotels
were not owned by the Partnership for the entire year in 1994.
<TABLE>
1997 1996 1995
------------------------- ------------------------- --------------------------
REVPAR %Change REVPAR %Change REVPAR %Change
<S> <C> <C> <C> <C> <C> <C>
Mountain Shadows $ 105 6% $ 99 5% $ 94 7%
Seattle 91 11% 82 4% 79 11%
Tampa Westshore 87 9% 80 10% 73 -
Greensboro 80 7% 75 (1%) 76 7%
Miami Biscayne Bay 80 13% 71 1% 70 9%
Raleigh Crabtree Valley 76 6% 72 9% 66 -
Houston Medical Center 75 12% 67 5% 64 2%
Albuquerque 70 1% 69 3% 67 0%
</TABLE>
<PAGE>
1997 Compared to 1996
Mountain Shadows
The Mountain Shadows Resort's revenues increased 10% to $6.8 million in 1997
when compared to 1996 due primarily to a 6% increase in REVPAR to $105. The
increase in REVPAR was due to an 11% increase in the average room rate to $138
offset by a four percentage point decrease in average occupancy to 76%. The
increase in the average room rate was attributable to the increases in the
Hotel's corporate rate by $15 to $151 and in the group rates by $9 to $135. The
decrease in average occupancy was related to unexpected group cancellations
during the second quarter of 1997. In 1997, the Hotel combined its sales center
with two other Marriott properties in the Scottsdale region which improved its
sales and marketing efficiency. Additionally during 1997, the Hotel completed a
renovation of its Cactus Flower Restaurant and its Shells Seafood Restaurant. In
early 1998, the Hotel replaced the carpet in the ballroom.
Seattle
The Seattle Marriott Hotel reported an increase in revenues of 14% to $9.7
million for 1997 when compared to the prior year due to an 11% increase in
REVPAR to $91. The increase in REVPAR was due to a $12 increase in the average
room rate to $117. The Hotel's average occupancy remained stable at 78%. The
increase in average room rate is the result of the Hotel's ability to increase
room rates with little to no price resistance due to the strong transient demand
in the Seattle area. The Hotel's food and beverage revenues increased $365,000
or 17% to $2.5 million when compared to 1996. This increase is attributable to
the increase in catering sales. The Hotel completed renovations of its
Snoqualmie Ballroom and Yukon Restaurant in February 1998. In addition, the
Hotel will be adding coffee makers, reading chairs, and ergonomic workstations
to its guest rooms in 1998. The current outlook for the Seattle area remains
strong due to continued growth of large companies such as Boeing and Microsoft
in the region.
Tampa Westshore
The Tampa Marriott Westshore Hotel experienced a 2% increase in revenues to $4.6
million in 1997 as compared to 1996. REVPAR increased 9% to $87 in 1997 due to
an $8 increase in the average room rate to $108 coupled with a two percentage
point increase in average occupancy to 81%. Rooms revenues increased 7%, or
$500,000, in 1997 when compared to 1996. This increase was partially offset by
an increase in repairs and maintenance expense related to the air conditioning
system. In 1998, the Hotel plans to replace the cooling tower related to the air
conditioning system. In early 1997, the Hotel completed the third phase of the
rooms renovation project that replaced the furniture in approximately 108 guest
rooms. All the guest rooms now feature new furniture. During the summer of 1998,
the Hotel plans to replace the guest room carpet, draperies, and bedspreads.
These improvements will enable the Hotel to compete more effectively in the
Tampa market in the future.
<PAGE>
Greensboro
In 1997, the Greensboro Hotel's revenues increased 4% to $4.7 million when
compared to 1996. REVPAR increased 7% to $80 due to increases in the average
room rate of $3 to $101 and in average occupancy of three percentage points to
79%. The increase in occupancy was primarily due to the addition of 2,000 new
contract roomnights. During 1997, the Hotel filled an open Director of Marketing
position that has helped increase revenues at the Hotel, especially revenue from
group and contract sales. In early 1997 the Hotel renovated the restaurant, and
in 1998 the Hotel will replace fixtures and tiles in all its guest bathrooms.
The Partnership expects the Greensboro market to continue to improve in 1998 due
to the increased popularity of the North Carolina furniture market.
Miami Biscayne Bay
Miami Biscayne Bay Hotel revenues for 1997 increased an impressive 18% to $9.1
million when compared to 1996 due primarily to increased rooms revenues. REVPAR
for 1997 increased 13% to $80 when compared to 1996 due to a $10 increase in
average room rate to $97 and a one percentage point increase in average
occupancy to 83%. In 1997, the Hotel reduced its lower-rated airline contract
roomnights by approximately 19,000 roomnights and replaced a majority of these
roomnights with higher-rated corporate roomnights. During 1997, the Hotel sold
64% corporate-rated rooms and 36% group and contract-rated rooms as compared to
1996 when the Hotel sold 55% corporate-rated rooms and 45% group and
contract-rated rooms. During 1997, the Hotel replaced the furniture in its guest
rooms. During the summer of 1998, the Hotel plans to renovate the lobby,
restaurant and lounges.
Raleigh
In 1997, revenues increased 4% to $5.2 million for the Raleigh Hotel as compared
to 1996. REVPAR increased 6% to $76 due to a 7% increase in the average room
rate to $94. Average occupancy declined slightly to 81%. The increase in average
room rate was due to a $10 increase in the corporate rate in 1997 to $119 as
well as increases in some of the Hotel's special corporate rates. During 1997,
the Hotel began projects to expand its restaurant and to convert its lounge to
additional meeting space. These projects will be completed in early 1998.
Additionally, the Hotel plans to replace its ballroom carpeting and create a
Hotel business center in 1998. The Hotel currently is marketing to local
universities to attract weekend business during the fall sports season.
Houston Medical Center
Revenues for the Houston Medical Center Hotel increased an impressive 20% to
$5.4 million in 1997 when compared to 1996. REVPAR increased 12% to $75 due to a
12% increase in average room rate to $97 and a one percentage point increase in
average occupancy to 78%. The Hotel increased its corporate room rate by $20 to
$149 in 1997. Rooms revenues increased 13% due to the increase in the average
room rate. In 1998, the Hotel plans to complete a rooms renovation that will
replace the bedspreads, drapery, upholstery, carpet, and furniture in all its
guest rooms. This renovation will enable the Hotel to have a more competitive
<PAGE>
product, and the General Partner anticipates that it will allow the Hotel to
increase its average room rate further in the future.
Albuquerque
Although REVPAR increased $1 to $70, revenues for the Albuquerque Hotel
decreased slightly in 1997 to $4.8 million when compared to the prior year. The
increase in REVPAR was due to the 13% increase in average room rate to $97
offset significantly by the eight percentage point decrease in average occupancy
to 72%. The decrease in revenues was due to the increase in salaries and wages
expenses related to the addition of a director of group sales and the increase
in sales promotion costs. These costs were necessary to address the declining
average occupancy. During 1998, the Hotel plans to replace a major portion of
the roof on the building and renovate the Allies American Grille restaurant.
1997 Compared to 1996 Combined Results of Operations
Hotel Revenues: Hotel revenues increased 10% to $50.3 million in 1997 primarily
due to an increase in REVPAR at each of the Partnership's Hotels in 1997 when
compared to 1996.
Hotel Sales: Hotel sales increased 5% to $150.5 million in 1997 due to
increased rooms sales in 1997. The combined average room rate increased
9% to $105 while combined average occupancy remained stable at 79%.
Direct Hotel Expenses: Direct hotel expenses increased 3% to $100.2
million in 1997. The increase in direct hotel expenses is due to higher
variable costs related to the increase in hotel sales. However, direct
hotel expenses as a percentage of hotel sales decreased to 67% in 1997
from 68% in 1996.
Depreciation: Depreciation increased in 1997 due to property and equipment
additions and the change in the estimated useful lives of certain assets.
Management Fees: Incentive and base management fees increased 12% to $8.4
million and 5% to $4.5 million, respectively, in 1997 due to the corresponding
increase in hotel sales.
Net Loss: Net loss increased 53% to $2.8 million in 1997. The increase in net
loss primarily is attributable to increased depreciation expense on the
Partnership's property and equipment and an increase in management fees in 1997
as compared to 1996.
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 two 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
<PAGE>
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 one
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 coupled with a two 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 the 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 six
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.
Miami Biscayne Bay
REVPAR for 1996 increased slightly to $71 when compared to 1995 due to a four
and one-half 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.
<PAGE>
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.
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 two percentage point 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.
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 one and one-half 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.
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 Hotel sales.
Hotel Sales: Hotel sales decreased 6% to $143.3 million in 1996 due to
the sale of the Dallas Hotel in 1995. Combined Hotel sales increased 5%
in 1996 through a 3% increase in the Combined Hotel 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 Hotel sales. Furthermore, direct hotel expenses as
a percentage of Hotel sales increased to 68% in 1996 from 67% 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.
<PAGE>
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.
Inflation
For the three fiscal years ended December 31, 1997, 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
Hotel's 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.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index Page
----- ----
Report of Independent Public Accountants........................27
Statement of Operations.........................................28
Balance Sheet...................................................29
Statement of Changes in Partners' Deficit.......................30
Statement of Cash Flows.........................................31
Notes to Financial Statements...................................33
<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, 1997 and 1996, 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, 1997. These financial statements and the schedule referred to below
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, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, 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 4, 1998
<PAGE>
STATEMENT OF OPERATIONS
Potomac Hotel Limited Partnership
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands, except per Unit amounts)
<TABLE>
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Hotel (Note 3)...........................................................................$ 50,323 $ 45,853 $ 50,598
Gain on sale of the Dallas Hotel......................................................... -- -- 24,586
Other ................................................................................... 715 843 1,448
------- ------- --------
51,038 46,696 76,632
--------- ---------- ----------
OPERATING COSTS AND EXPENSES
Interest................................................................................. 24,596 24,582 29,431
Depreciation............................................................................. 8,430 5,473 5,912
Incentive management fee................................................................. 8,408 7,477 8,651
Base management fee...................................................................... 4,515 4,300 4,597
Property taxes........................................................................... 3,071 3,081 4,082
Ground rent, insurance and other......................................................... 4,843 3,624 3,914
--------- ---------- ----------
53,863 48,537 56,587
--------- ---------- ----------
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM................................................ (2,825) (1,841) 20,045
EXTRAORDINARY ITEM
Gain on forgiveness of deferred fees..................................................... -- -- 146,303
--------- ---------- ----------
NET (LOSS) INCOME..........................................................................$ (2,825) $ (1,841) $ 166,348
========= ========== ==========
ALLOCATION OF NET (LOSS) INCOME
General Partner..........................................................................$ (28) $ (18) $ 7,612
Limited Partners......................................................................... (2,797) (1,823) 158,736
--------- ---------- ----------
$ (2,825) $ (1,841) $ 166,348
========= ========== ==========
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM PER
LIMITED PARTNER UNIT (1,800 UNITS).......................................................$ (1,554) $ (1,013) $ 7,720
========= ========== ==========
NET (LOSS) INCOME PER LIMITED PARTNER UNIT (1,800 UNITS)...................................$ (1,554) $ (1,013) $ 88,187
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
BALANCE SHEET
Potomac Hotel Limited Partnership
December 31, 1997 and 1996
(in thousands)
<TABLE>
1997 1996
<S> <C> <C>
------------ ------------
ASSETS
Property and equipment, net......................................................................$ 154,253 $ 155,412
Due from Marriott International, Inc. and affiliates............................................. 10,173 10,870
Restricted cash.................................................................................. 6,351 4,507
Property improvement funds....................................................................... 3,792 3,141
Deferred financing costs, net.................................................................... 473 709
Cash and cash equivalents........................................................................ 3,182 5,228
------------ ------------
$ 178,224 $ 179,867
============ ============
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt....................................................................................$ 172,667 $ 179,837
Due to Host Marriott Corporation and affiliates.................................................. 125,549 124,370
Incentive and base management fees due to Marriott International, Inc. .......................... 25,868 17,172
Due to Marriott International, Inc. and affiliates............................................... 398 1,956
Accrued interest and other liabilities........................................................... 864 829
------------ ------------
Total Liabilities............................................................................. 325,346 324,164
------------ ------------
PARTNERS' DEFICIT
General Partner
Capital contribution.......................................................................... 172,093 172,093
Cumulative net losses......................................................................... (20,408) (20,380)
Cumulative withdrawals........................................................................ (186,527) (186,527)
------------ ------------
(34,842) (34,814)
Limited Partners
Capital contributions, net of offering costs.................................................. 15,600 15,600
Cumulative net losses......................................................................... (127,880) (125,083)
------------ ------------
(112,280) (109,483)
Total Partners' Deficit....................................................................... (147,122) (144,297)
------------ ------------
$ 178,224 $ 179,867
============ ============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
STATEMENT OF CHANGES IN PARTNERS' DEFICIT
Potomac Hotel Limited Partnership
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
General Limited
Partner Partners Total
<S> <C> <C> <C>
Total
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)
Net loss............................................................................ (28) (2,797) (2,825)
----------- -------------- -----------
Balance, December 31, 1997............................................................$ (34,842) $ (112,280) $ (147,122)
=========== ============== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
STATEMENT OF CASH FLOWS
Potomac Hotel Limited Partnership
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income.........................................................................$ (2,825) $ (1,841) $ 166,348
Extraordinary item........................................................................ -- -- 146,303
--------- ---------- ----------
Net (loss) income before extraordinary item............................................... (2,825) (1,841) 20,045
Noncash items:
Deferred incentive and base management fees............................................ 8,696 7,737 9,435
Depreciation........................................................................... 8,430 5,473 5,912
Interest on amounts due to Host Marriott Corporation and affiliates.................... 7,084 6,892 6,235
Amortization of financing costs as interest............................................ 236 237 310
Loss on disposition of property and equipment.......................................... -- 136 103
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................................ (985) 541 (2,719)
Accrued interest and other liabilities................................................. 250 180 77
--------- ---------- ----------
Cash provided by operating activities............................................... 20,886 19,384 14,812
--------- ---------- ----------
INVESTING ACTIVITIES
Additions to property and equipment, net.................................................. (7,271) (9,924) (4,976)
Change in property improvement funds...................................................... (651) (63) (2,590)
Working capital received from (funded to) Marriott International, Inc. and affiliates, net 168 (262) 400
Net proceeds from sale of the Dallas Hotel................................................ -- -- 44,403
--------- ---------- ----------
Cash (used in) provided by investing activities..................................... (7,754) (10,249) 37,237
--------- ---------- ----------
FINANCING ACTIVITIES
Principal repayments on mortgage debt..................................................... (7,170) (6,163) (59,000)
(Repayments to) advances from Host Marriott Corporation and affiliates, net............... (6,120) (4,670) 3,319
Change in restricted cash................................................................. (1,844) (1,559) (2,948)
(Repayments to) advances from affiliates of Marriott International, Inc................... (44) (37) 350
Collection of amounts due from Marriott International, Inc................................ -- 2,383 5,755
Payment of financing costs................................................................ -- -- (1,112)
Increase in amounts due from Marriott International, Inc.................................. -- -- (157)
--------- ---------- ----------
Cash used in financing activities................................................... (15,178) (10,046) (53,793)
--------- ---------- ----------
</TABLE>
<PAGE>
STATEMENT OF CASH FLOWS (CONTINUED)
Potomac Hotel Limited Partnership
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
DECREASE IN CASH AND CASH EQUIVALENTS....................................................... (2,046) (911) (1,744)
CASH AND CASH EQUIVALENTS at beginning of year.............................................. 5,228 6,139 7,883
--------- --------- ----------
CASH AND CASH EQUIVALENTS at end of year....................................................$ 3,182 $ 5,228 $ 6,139
========= ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest.................................................$ 17,046 $ 17,528 $ 22,555
========= ========= ==========
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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Potomac Hotel Limited Partnership
For the Years Ended December 31, 1997 and 1996
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 operated as part of the
Marriott full-service hotel system and are managed by Marriott International,
Inc. ("MII") or Marriott Hotel Services, Inc. ("MHSI"), which is a subsidiary of
MII, (collectively the "Managers"). The sole general partner of the Partnership
is Host Marriott Corporation ("Host Marriott" or the "General Partner").
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 by a subsidiary of Host
Marriott. On August 22, 1995, the Partnership sold its Dallas Hotel to a
wholly-owned subsidiary of Host Marriott and used the proceeds to repay a
portion of its mortgage debt in connection with the restructuring of the Bank
Loan, as described in Note 6. As of December 31, 1997, the Partnership owned and
operated eight hotels located in the following cities: Albuquerque, New Mexico;
Greensboro, North Carolina; Houston, Texas; Miami, Florida; Raleigh, North
Carolina; Scottsdale, Arizona; Seattle, Washington; and Tampa, Florida.
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
General Partner 25% 1%
Limited Partners 75% 99%
Any future distributions of cash will be made in the same percentages 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.
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.
<PAGE>
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 Managers with working capital
and supplies to meet the operating needs of the Hotels. The Managers convert
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 Managers. 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
Managers 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 Managers. 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, base and incentive management fees, property taxes, ground rent,
insurance, and certain other costs, which are disclosed separately in the
statement of operations.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus on EITF 97-2, "Application of
FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements."
EITF 97-2 addresses the circumstances in which a management entity may include
the revenues and expenses of a managed entity in its financial statements.
The Partnership is assessing the impact of EITF 97-2 on its policy of excluding
the property-level revenues and operating expenses of the Hotels from its
statements of operations (see Note 3). If the Partnership concludes that EITF
97-2 should be applied to the Hotels, it would include operating results of
those managed operations in its financial statements. Application of EITF 97-2
to financial statements as of and for the year ended December 31, 1997, would
have increased both revenues and operating expenses by approximately $100.2
million and would have had no impact on the net loss.
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.
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 life of the mortgage debt. As of December 31,
1997 and 1996, deferred financing costs totaled $1,256,000. Accumulated
amortization of deferred financing costs as of December 31, 1997 and 1996, was
$783,000 and $547,000, respectively.
<PAGE>
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 for assets,
differing 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 $36 million as of December 31, 1997,
and $46 million as of December 31, 1996.
Statement of Financial Accounting Standards
In 1996, the Partnership adopted Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Adoption of SFAS No. 121 did not have
an effect on its financial statements.
Reclassifications
Certain reclassifications were made to the prior years financial statements to
conform to the current year presentation.
NOTE 3. REVENUES
Hotel revenues consist of the following hotel operating results for the three
years ended December 31 (in thousands):
<TABLE>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
HOTEL SALES
Rooms..............................................................................$ 95,761 $ 89,916 $ 94,654
Food and beverage.................................................................. 43,385 42,111 46,605
Other.............................................................................. 11,348 11,315 11,977
------------ ------------ -----------
150,494 143,342 153,236
------------ ------------ -----------
HOTEL EXPENSES
Departmental direct costs
Rooms ......................................................................... 23,556 22,619 23,443
Food and beverage............................................................... 33,231 32,863 35,569
Other hotel operating expenses..................................................... 43,384 42,007 43,626
------------ ------------ -----------
100,171 97,489 102,638
------------ ------------ -----------
HOTEL REVENUES........................................................................$ 50,323 $ 45,853 $ 50,598
============ ============ ===========
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
1997 1996
------------ -------
<S> <C> <C>
Land.................................................................................................$ 10,444 $ 10,444
Building and improvements............................................................................ 194,661 191,449
Furniture and equipment.............................................................................. 26,758 22,699
------------ -----------
231,863 224,592
Less accumulated depreciation........................................................................ (77,610) (69,180)
------------ -----------
$ 154,253 $ 155,412
============ ===========
</TABLE>
<PAGE>
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts.
<TABLE>
As of December 31, 1997 As of December 31, 1996
---------------------------- --------------------------
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 .....................................................$ 172,667 $ 173,474 $ 179,837 $ 177,695
Due to Host Marriott Corporation and affiliates....................$ 122,356 $ 40,803 $ 118,280 $ 41,313
Due to Marriott International, Inc. and affiliates.................$ 26,168 $ 3,208 $ 17,515 $ 2,086
</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 guaranties. "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.
NOTE 6. DEBT
Host Marriott Guaranty
The Partnership originally entered into a loan agreement dated January 14, 1982,
(the "Original Loan") which funded 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, 1997, $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 its 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) reductions in the interest rate, (ii)
reductions in the base management fees paid to the Manager, (iii) increases in
the debt service guaranty 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.
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 (the "Bank 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 payments with the entire principal balance due at maturity.
The Bank Loan was secured by first priority liens on the Bank Hotels and all
related assets, including working capital and supplies advanced to the Manager
for each Bank 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
<PAGE>
indebtedness. The Bank Loan was non-recourse to the Partnership and its
partners, but was supported by a $26 million Host Marriott guaranty (the "Bank
Guaranty") and an equivalent MII "backup" 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, and was not repaid at that time 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 London
Interbank Offered Rate ("LIBOR") plus two percentage points for the period
December 22, 1994, through June 21, 1995, and at the one-month LIBOR rate plus
two-and-one-quarter percentage points 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
repay principal on the Bank Loan; (iii) the maturity of the Bank Loan was
extended to December 22, 1997, with two additional one-year extensions available
if certain debt service coverage tests are met; (iv) semi-annual payments of
interest at the six-month LIBOR rate plus 1.5 percentage points and annual
payments of principal of $5 million during the first three years of the
restructured loan and $6 million during any extension periods; (v) the General
Partner's liability under the Bank Guaranty remained at $26 million (subject to
a credit for the advance of $10 million described in (i) above); (vi) MII
continued its "backup" guaranty ( the "MII Backup Guaranty"), under which MII
agreed 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 Backup Guaranty); (viii) the Interest
Guaranty is to 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 Backup Guaranty in any
event must at least be equal to the scheduled amortization payments due during
the extension periods); (ix) all Partnership cash relating to the Bank Hotels
(including the Bank Hotels property improvement fund 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 Hotel sales and a portion of the property improvement fund
contribution equal to 1% of gross Bank Hotel sales to be subordinated to the
payment of debt service.
The Bank Loan was scheduled to mature on December 22, 1997; however, two
one-year extensions were available. As required under the Bank Loan, on June 19,
1997, the Partnership provided notice to the lender of its intent to extend the
loan along with a debt service coverage ratio calculation with a required ratio
greater than 1.2 and successfully extended the Bank Loan maturity to December
22, 1998. An additional one-year extension is available under the Bank Loan, and
in order to extend the loan to December 22, 1999, the Partnership must provide
notice of its intent to extend the loan along with adequate debt service
coverage tests to the lender by June 22, 1998. Based on current debt service
coverage tests, the Partnership expects to be able to exercise the additional
one-year extension of the loan upon its maturity on December 22, 1998.
Pursuant to the terms of the restated Bank Loan, operating profit, as defined,
and the subordinated portion of the base management fee from the Bank Hotels 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 principal and interest 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
<PAGE>
follows: (i) 50% to repay Bank Loan principal, (ii) 25% to pay principal and
interest on advances under the Bank Guaranty, and (iii) 25% to repay deferred
base management fees to MII.
As of December 31, 1997 and 1996, the principal balance of the Bank Loan was
$172.7 million and $179.8 million, respectively. As of December 31, 1997 and
1996, $8.5 million and $10.0 million including accrued interest, respectively,
was outstanding pursuant to the Bank Guaranty. On February 23, 1998, in
accordance with the cash flow priorities described in the preceding paragraph,
the Partnership repaid $3.8 million in principal on the Bank Loan, $2.2 million
to Host Marriott on the Bank Guaranty, and $1.5 million to MII for deferred base
management fees using amounts in the collateral account. Therefore, as of
February 23, 1998, the balance on the Bank Loan was $168.9 million, $21.6
million was available under the Bank Guaranty, and deferred base management fees
payable to MII were $2.1 million. The weighted average interest rate on the Bank
Loan was 7.46% for 1997, 7.26% for 1996, and 7.89% for 1995. At December 31,
1997, the interest rate on the Bank Loan was 8.25%. The weighted average
interest rate on the Bank Guaranty was 8.44% for 1997, 8.27% for 1996, and 8.85%
for 1995. At December 31, 1997, the interest rate on the Bank Guaranty was
8.50%.
No amounts were advanced under the Interest Guaranty during 1997. Additionally
on December 22, 1997, in accordance with the terms of the Interest Guaranty, the
amount available was increased from $4 million to $8 million, and in early 1998,
the amount available was reduced to $4 million.
Raleigh and Tampa Loans
The Partnership 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,
$14.0 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. The 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, 1997 and 1996, the Raleigh Note A principal balance was $13.5
million, and the Raleigh Note B principal balance was $3.8 million and $4.8
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,
$10.0 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. 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. The 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, 1997 and 1996, the Tampa Note A principal balance was $9.7 million, and the
Tampa Note B principal balance was $5.4 million and $6.1 million, respectively.
Both 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.
As of December 31, 1997, required principal payments related to the Raleigh and
Tampa Loans are as follows (in thousands):
Year Mortgage Debt
---- -------------
1998 $ 325
1999 357
2000 393
2001 22,125
2002 0
Thereafter 9,200
-------------
$ 32,400
=============
<PAGE>
Furniture, Fixtures and Equipment Loans
Prior to December 22, 1994, the Bank Loan and MII Management Agreement, as
defined in Note 8, required the Partnership to deposit funds in an escrow
account (based on a percentage, ranging from 1% to 5%, of Bank Hotel sales) to
be used to replace FF&E at the Bank Hotels. Additionally, 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.
Host Marriott advanced funds (the "Host FF&E Loans") for the purchase of FF&E
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, 1997 and 1996, $2.9
million and $5.2 million was outstanding under the Host FF&E Loans. The weighted
average interest rate was 8.44% for 1997, 8.27% for 1996 and 8.85% for 1995. At
December 31, 1997, the interest rate was 8.50%.
As of December 31, 1997, required principal payments related to the Host FF&E
Loans are as follows (in thousands):
Year Amount
-------- --------
1998 $ 2,600
1999 300
-----------
$ 2,900
Subsequent to year-end, the Partnership repaid $1.4 million of principal to Host
Marriott on the Host FF&E Loans, thereby reducing the balance on the Host FF&E
Loans to $1.5 million.
These loans are non-recourse to the Partnership and its partners and are secured
by payments from MII under the FF&E Leases, as defined in Note 8. Interest
expense on these loans is offset by lease payments received under the MII FF&E
Leases. As of December 31, 1997 and 1996, MII owed $2.9 million plus accrued
interest to the Partnership pursuant to these agreements with the final
installment due on December 31, 1999. Subsequent to year-end, MII repaid $1.5
million of principal to the Partnership on the MII FF&E Leases.
Since 1995 the Bank Hotels' FF&E funding requirements have been met through
contributions to a property improvement fund 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 property improvement fund for the
Hotel. However, the Raleigh Hotel required additional funds, as described below.
See Note 8 for further details on the property improvement funds.
Raleigh Hotel Furniture, Fixtures and Equipment Loans
In 1995, Host Marriott and MHSI 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 property improvement fund. 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 property improvement fund
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 are 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, 1997 and 1996, $298,000 and $342,000,
respectively, was due on each of the Raleigh $350,000 FF&E Loans. The weighted
average interest rate was 8.44% for 1997, 8.27% for 1996, and 8.85% for 1995. At
December 31, 1997, the interest rate on the Raleigh $350,000 FF&E Loans was
8.50%.
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
Hotel's property improvement fund. 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 property improvement fund 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 is due and payable on the earlier of
the termination of the Raleigh management agreement or December 31, 2003. As of
December 31, 1997 and 1996, $571,000 and $658,000, respectively, was due on the
<PAGE>
Raleigh $700,000 FF&E Loan. The weighted average interest rate was 8.94% for
1997 and 8.75% for 1996. At December 31, 1997, the interest rate was 9.00%.
Other Loans
As of December 31, 1997, the Partnership also owed Host Marriott $88.8 million
including accrued interest, as follows: (i) $64.4 million related to the
original Host Marriott Guaranty and the S&L Guaranty; (ii) $8.5 million related
to the Bank Guaranty; (iii) $5.4 million related to working capital advances;
(iv) $8.9 million for capital improvements at the Point Clear, Alabama Hotel;
and (v) $1.6 million from Host Marriott's subordination of cash flow from the
66-room Raleigh addition. All of the above-mentioned advances bear interest at
the prime rate as announced by Bankers Trust Company with a weighted average
interest rate of 8.44% for 1997, 8.27% for 1996, and 8.85% for 1995. At December
31, 1997, the interest rate was 8.50%.
All Partnership indebtedness, including the Bank Loan, guaranty advances, other
General Partner loans, and deferred base and incentive management fees, which is
outstanding upon dissolution of the Partnership must be repaid before any cash
distributions can be made to the partners.
NOTE 7. LEASES
The Partnership's five ground leases have lease terms expiring in 2006 (Tampa),
2008 (Greensboro and Miami), 2009 (Houston), and 2032 (Albuquerque) and contain
one or more renewal options that allow the Partnership to extend the leases from
15 to 50 additional years. The leases generally provide for minimum base rentals
as well as additional ground rentals which are calculated as a percentage of
sales in excess of minimum base rentals. Total ground rental expense for the
three years ended December 31 consisted of (in thousands):
1997 1996 1995
----------- ----------- ----------
Minimum rentals....................$ 1,548 $ 1,548 $ 1,548
Additional rentals based on sales.. 719 706 664
----------- ----------- ----------
$ 2,267 $ 2,254 $ 2,212
=========== =========== ==========
Minimum rentals for the five Hotels operating under noncancelable leases for
real estate for future years (exclusive of percentage rentals) are as follows
(in thousands):
Minimum
Year Rentals
--------- ---------
1998 $ 1,548
1999 1,548
2000 1,548
2001 1,548
2002 1,548
Thereafter 13,216
------
Total minimum lease payments$ 20,956
===========
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 had been open as well as
incentive management fees equal to a percentage of hotel operating profit, 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
<PAGE>
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 guaranty 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 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
(the "FF&E 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, 1997 and 1996, MII was obligated to pay $2.9 million and $5.2
million,respectively, to the Partnership under these agreements.
Bank Hotels Management Agreement
Effective December 31, 1994, in connection with the Bank Loan restructuring, the
Partnership entered into a new management agreement (the "Bank Hotels Management
Agreement") with MII. This agreement provides for an initial term of 25 years
from the opening date, as specified in the agreement, of each Bank 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 Hotel sales. In accordance with the restructured Bank Loan, a portion
of the base management fee equal to 1% of gross Bank Hotel 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
collateral account to be made available for the payment of (i) debt service on
the Bank Loan, (ii) debt service on the Bank Guaranty, and (iii) depending upon
the balance of the Bank Guaranty, deferred base management fees. Any unpaid base
management fees are deferred without interest and are payable in future years.
As of December 31, 1997 and 1996, deferred base management fees were $3.6
million and $2.4 million, respectively. On February 23, 1998, the Partnership
repaid $1.5 million to MII for deferred base management fees. Therefore, as of
February 23, 1998, deferred base management fees were $2.1 million.
The Manager will continue to earn incentive management fees equal to 20% of
hotel operating profit, as defined, and additional incentive management fees,
after certain returns to the Partnership, ranging from 10% to 70% of hotel
operating profit depending upon 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, 1997 and 1996, deferred incentive management fees
were $22.2 million and $14.8 million, respectively.
The Bank Hotels Management Agreement also requires the Partnership to maintain a
property improvement fund (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 Hotel 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 Hotel sales is to be deposited into an escrow account for the FF&E
needs of the Bank Hotels. This escrow balance as of December 31, 1997 and 1996,
was $2.8 million and $2.4 million, respectively. The remaining portion of the
Bank Hotels Property Improvement Fund contribution equal to 1% of gross Bank
Hotel 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 remaining 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, 1997 and 1996, the balance in the restricted cash account was $1.1 million.
The balance in the fund was not required for 1997 or 1996 debt service and was
transferred to the Bank Hotels Property Improvement Fund in early 1998 and 1997,
respectively.
<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, 1997, the Raleigh and Tampa owner's investment was
$19.6 million and $16.8 million, 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 management fees will accrue and are payable from any excess
operating profit; however, any deferred base management fees remaining on June
18, 1999, will be waived. As of December 31, 1997 and 1996, 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 the Raleigh and Tampa Hotels
are waived annually. In 1997, incentive management fees paid for the Raleigh and
Tampa Hotels were $567,000 and $350,000, respectively. In 1996, incentive
management fees paid for the Raleigh and Tampa Hotels were $574,000 and
$315,000, respectively.
Each MHSI Agreement provides for the establishment of a property improvement
fund ("Property Improvement Fund") for each Hotel. Contributions to the Property
Improvement Fund equal 5% of gross Hotel sales from each Hotel. However,
effective August 1996, MHSI and the Partnership agreed to increase the
contribution from 5% to 7% for the Raleigh Hotel until an additional $300,000
was deposited to cover the cost of certain renovations. This increase was in
effect until the fourth quarter of 1997. In addition, a portion of the
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, 1997, the balances of the Raleigh and
Tampa Property Improvement Funds were $727,000 and $232,000, respectively. As of
December 31, 1996, the balances of the Raleigh and Tampa Property Improvement
Funds were $678,000 and $67,000, respectively.
General
Pursuant to the terms of the management agreements, the Managers are required to
furnish the Hotels with certain services ("Chain Services") which generally are
provided on a central or regional basis to all hotels in the Marriott 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 hotels managed, owned, or leased by MII or its
subsidiaries. In addition, the Hotels also participate in MII's Marriott Rewards
Program ("MRP"). This program was formerly called the Honored Guest Awards
Program. The cost of this program is charged to all hotels in the Marriott hotel
system based on the MRP sales at each hotel. The total amount of Chain Services
and MRP costs charged to the Partnership was $7.3 million in 1997, $7.1 million
in 1996, and $7.6 million in 1995.
Pursuant to the terms of the management agreements, the Partnership is required
to provide the Managers with working capital and supplies to meet the operating
needs of the Hotels. 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. During 1997, $168,000 in working capital was returned to the
Partnership. Therefore, as of December 31, 1997 and 1996, $5.1 million and $5.3
million, respectively, has been advanced to the Managers for working capital and
supplies for the Hotels.
<PAGE>
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 Raleigh 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 8.44% for 1997, 8.27% for 1996, and 8.85% for
1995. The balance of the Addition Deferral including accrued interest at
December 31, 1997 and 1996, was $1.6 and $1.5 million, respectively. Except for
the balance of $1.6 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.
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.
<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, 1997
<S> <C> <C>
- ------------------------------ ------------------------------------------------------------- ---------------------
Terence C. Golden President, Chief Executive Officer and Director 53
Richard E. Marriott* Chairman of the Board of Directors 59
R. Theodore Ammon Director 48
Robert M. Baylis Director 59
J. W. Marriott, Jr.* Director 66
Ann Dore McLaughlin Director 56
Harry L. Vincent, Jr. Director 78
Robert E. Parsons, Jr. Executive Vice President and Chief Financial Officer 42
Christopher J. Nassetta Executive Vice President 35
Christopher G. Townsend Senior Vice President and General Counsel 50
Donald D. Olinger Senior Vice President and Corporate Controller 39
</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 2000 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
<PAGE>
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.
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 as
Director 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 2000 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 2000 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
<PAGE>
1995, he was elected Executive Vice President and ChiefFinancial 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.
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.
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, 1997, 1996 and 1995,
the Partnership reimbursed the General Partner in the amount of $259,000,
$218,000 and $88,000, 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 47 of this document.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of December 31, 1997, no person of record owned, or to the Partnership's
knowledge beneficially owned, more than 5% of the total number of Units.
<PAGE>
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 material 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 new management agreement (the "Bank Hotels Management
Agreement") with MII. This agreement provides for an initial term of 25 years
from the opening date, as specified in the agreement, of each Bank 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 Hotel sales. In accordance with the restructured Bank Loan, a portion
of the base management fee equal to 1% of gross Bank Hotel 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
collateral account to be made available for the payment of (i) debt service on
the Bank Loan, (ii) debt service on the Bank Guaranty, and (iii) depending upon
the balance of the Bank Guaranty, of deferred base management fees. Any unpaid
base management fees are deferred without interest and are payable in future
years. As of December 31, 1997 and 1996, deferred base management fees were $3.6
million and $2.4 million, respectively. On February 23, 1998, the Partnership
repaid $1.5 million to MII for deferred base management fees. Therefore, as of
February 23, 1998, deferred base management fees were $2.1 million.
<PAGE>
The Manager will continue to earn incentive management fees equal to 20% of
hotel operating profit, as defined, and additional incentive management fees,
after certain returns to the Partnership, ranging from 10% to 70% of hotel
operating profit depending upon 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, 1997 and 1996, deferred incentive management fees
were $22.2 million and $14.8 million, respectively.
The Bank Hotels Management Agreement also requires the Partnership to maintain a
property improvement fund (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 Hotel 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 Hotel sales is to be deposited into an escrow account for the FF&E
needs of the Bank Hotels. This escrow balance as of December 31, 1997 and 1996,
was $2.8 million and $2.4 million, respectively. The remaining portion of the
Bank Hotels Property Improvement Fund contribution equal to 1% of gross Bank
Hotel 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 remaining 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, 1997 and 1996, the balance in the restricted cash account was $1.1 million.
The balance in the fund was not required for 1997 or 1996 debt service and was
transferred to the Bank Hotels Property Improvement Fund in early 1998 and 1997,
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, 1997, the Raleigh and Tampa owner's investment was
$19.6 million and $16.8 million, 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 management fees will accrue and are payable from any excess
operating profit; however, any deferred base management fees remaining on June
<PAGE>
18, 1999, will be waived. As of December 31, 1997 and 1996, 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 the Raleigh and Tampa Hotels
are waived annually. In 1997, incentive management fees paid for the Raleigh and
Tampa Hotels were $567,000 and $350,000, respectively. In 1996, incentive
management fees paid for the Raleigh and Tampa Hotels were $574,000 and
$315,000, respectively.
Each MHSI Agreement provides for the establishment of a property improvement
fund ("Property Improvement Fund") for each Hotel. Contributions to the Property
Improvement Fund equal 5% of gross Hotel sales from each Hotel. However,
effective August 1996, MHSI and the Partnership agreed to increase the
contribution from 5% to 7% for the Raleigh Hotel until an additional $300,000
was deposited to cover the cost of certain renovations. This increase was in
effect until the fourth quarter of 1997. In addition, a portion of the
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, 1997, the balances of the Raleigh and
Tampa Property Improvement Funds were $727,000 and $232,000, respectively. As of
December 31, 1996, the balances of the Raleigh and Tampa Property Improvement
Funds were $678,000 and $67,000, respectively.
General
Pursuant to the terms of the management agreements, the Managers are required to
furnish the Hotels with certain services ("Chain Services") which generally are
provided on a central or regional basis to all hotels in the Marriott 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 hotels managed, owned, or leased by MII or its
subsidiaries. In addition, the Hotels also participate in MII's Marriott Rewards
Program ("MRP"). This program was formerly called the Honored Guest Awards
Program. The cost of this program is charged to all hotels in the Marriott hotel
system based on the MRP sales at each hotel. The total amount of Chain Services
and MRP costs charged to the Partnership was $7.3 million in 1997, $7.1 million
in 1996, and $7.6 million in 1995.
Pursuant to the terms of the management agreements, the Partnership is required
to provide the Managers with working capital and supplies to meet the operating
needs of the Hotels. 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. During 1997, $168,000 in working capital was returned to the
Partnership. Therefore, as of December 31, 1997 and 1996, $5.1 million and $5.3
million, respectively, has been advanced to the Managers for working capital and
supplies for the Hotels.
<PAGE>
The following table sets forth the amount paid to the Managers under both the
Bank Hotels Management Agreement and the MHSI Agreements for the years ended
December 31, 1997, 1996, and 1995 (in thousands). The table also includes
accrued but unpaid base and incentive management fees:
<TABLE>
1997 1996 1995
------------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
Chain Services and MRP costs reimbursed.........................................$ 7,320 $ 7,076 $ 7,575
Base management fees paid....................................................... 3,310 3,152 3,324
Incentive management fees paid.................................................. 917 889 489
Interest and principal paid on Raleigh FF&E loan................................ 70 67 --
------------- ------------- -------------
$ 11,617 $ 11,184 $ 11,388
============= ============= =============
Accrued but unpaid fees:
Incentive management fees.......................................................$ 7,491 $ 6,589 $ 8,162
Base management fees............................................................ 1,205 1,148 1,273
------------- ------------- -------------
$ 8,696 $ 7,737 $ 9,435
============= ============= =============
</TABLE>
Raleigh and Tampa Loans
The Partnership 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,
$14.0 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. The 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, 1997 and 1996, the Raleigh Note A principal balance was $13.5
million, and the Raleigh Note B principal balance was $3.8 million and $4.8
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,
$10.0 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. 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. The 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, 1997 and 1996, the Tampa Note A principal balance was $9.7 million, and the
Tampa Note B principal balance was $5.4 million and $6.1 million, respectively.
<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.
Other Loans
As of December 31, 1997, the Partnership also owed Host Marriott $88.8 million
including accrued interest, as follows: (i) $64.4 million related to the
original Host Marriott Guaranty and the S&L Guaranty; (ii) $8.5 million related
to the Bank Guaranty; (iii) $5.4 million related to working capital advances;
(iv) $8.9 million for capital improvements at the Point Clear, Alabama Hotel;
and (v) $1.6 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 8.44% for 1997, 8.27% for 1996, and 8.85% for 1995. At December
31, 1997, the interest rate was 8.50%.
As of December 31, 1997 and 1996, the Partnership owed Host Marriott $874,000
and $1.0 million, respectively, including accrued interest related to the
Raleigh $350,000 FF&E Loan and the Raleigh $700,000 FF&E Loan.
As of December 31, 1997 and 1996, the Partnership owed MHSI $300,000 including
accrued interest related to the Raleigh $350,000 FF&E Loan.
All Partnership indebtedness, including the Bank Loan, guaranty advances, other
General Partner loans, and deferred base and incentive management fees which are
outstanding upon dissolution of the Partnership must be repaid before any cash
distributions can be made to the partners.
Payments to Host Marriott and Subsidiaries
The following table sets forth amounts paid by the Partnership to Host Marriott
and its subsidiaries for the years ended December 31, 1997, 1996 and 1995 (in
thousands):
<TABLE>
(unaudited)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest and principal paid on FF&E loans.............................................$ 2,768 $ 304 $ 6,428
Interest and principal paid on Raleigh acquisition loan............................... 2,754 2,852 2,495
Interest and principal paid on Bank Guaranty loan..................................... 2,170 1,163 0
Interest and principal paid on Tampa acquisition loan................................. 2,153 2,239 1,951
Administrative expenses reimbursed.................................................... 259 218 88
Interest and principal paid on the working capital advances........................... -- 2,800 946
----------- ----------- -----------
$ 10,104 $ 9,576 $ 11,908
=========== =========== ===========
</TABLE>
<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.
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.
<PAGE>
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
*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
<PAGE>
*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
*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
<PAGE>
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
**10gg. Waiver of Deferred Management Fees dated as of July 13, 1995,
between Marriott International, Inc. and the Partnership. N/A
<PAGE>
***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
***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
<PAGE>
***10tt. First Amendment to Security Agreement and Assignment of
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) N/A
****10eee.Promissory Note dated January 24, 1995, by the Partnership
to Marriott Financial Services, Inc. (Raleigh) N/A
****10fff. Promissory Note dated June 1, 1996, by the Partnership
to Marriott Financial Services, Inc. (Raleigh) N/A
<PAGE>
****10ggg.Loan Agreement dated September 13, 1996, between the
Partnership and Marriott Hotel Services, Inc. (Raleigh) N/A
****10hhh.Loan Agreement dated September 13, 1996, between the
Partnership and Marriott Financial Services, Inc. (Raleigh) N/A
****10iii. Loan Agreement dated September 13, 1996, between the
Partnership and Marriott Financial Services, Inc. (Raleigh) N/A
****10jjj. Amendment to Management Agreement dated August 15, 1996,
between the Partnership and Marriott Hotel Services, Inc. (Raleigh) N/A
10kkk Allonge to Promissory Note dated June 22, 1997, between the Partnership
and The Mitsui Trust and Banking Company, Limited, New York Branch 59
10lll First Amendment to Interest Guaranty Agreement dated June 22, 1997,
between Host Marriott Corporation and The Mitsui Trust and Banking
Company, Limited, New York Branch 61
* 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.
**** Incorporated herein by reference to the same numbered exhibit in the
Partnership's Form 10-K for the fiscal year ended December 31, 1996,
previously filed with the Commission on March 28, 1996.
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
</TABLE>
<PAGE>
Exhibit 10kkk
ALLONGE TO PROMISSORY NOTE
THIS ALLONGE TO PROMISSORY NOTE dated as of June 22, 1997 (the
"Allonge") by and between POTOMAC HOTEL LIMITED PARTNERSHIP, a Delaware limited
partnership (the "Borrower") and THE MITSUI TRUST AND BANKING COMPANY, LIMITED,
NEW YORK BRANCH (the "Lender"), sets forth the binding agreement of the parties.
WHEREAS, the Borrower and Lender are parties to (i) that certain
Amended and Restated Loan Agreement dated as of August 22, 1995 (the "Loan
Agreement") and (ii) that certain Note Modification Agreement dated as of August
22, 1995, which amended and restated in its entirety the Promissory Note
evidencing the loan of $191,000,000 from the Lender to the Borrower (the
"Note"); and
WHEREAS, Section 2.4(i) of the Loan Agreement requires the parties, in
connection with any extension of the Maturity Date (as defined in the Loan
Agreement) under the terms of the Loan Agreement, to execute this Allonge to the
Note to reflect the extension of the Maturity Date;
NOW, THEREFORE, in consideration of the premises, the parties hereto
agree as follows:
1. The definition of "Maturity Date" in Section 1 of the Note shall be
amended to read in its entirety as follows:
Maturity Date:December 22, 1998.
2. All other terms and conditions of the Note shall remain unmodified
and in full force and effect.
IN WITNESS WHEREOF, the Borrower and the Lender have caused this
Allonge to be duly executed and delivered as of the date first above written.
POTOMAC HOTEL LIMITED PARTNERSHIP
By: Host Marriott Corporation, its general partner
By: /s/ Bruce D. Wardinski
Name: Bruce D. Wardinski
Title: Vice President
<PAGE>
THE MITSUI TRUST AND BANKING COMPANY,
LIMITED, NEW YORK BRANCH
By: /s/ Hideharu Nozawa Dec 22 1997
Name: Hideharu Nozawa
Title: VP and Manager
<PAGE>
Exhibit 10lll
FIRST AMENDMENT TO INTEREST GUARANTY AGREEMENT
THIS FIRST AMENDMENT TO INTEREST GUARANTY AGREEMENT dated as of June
22, 1997 (the "Agreement") by and between HOST MARRIOTT CORPORATION, a Delaware
corporation (the "Guarantor") and THE MITSUI TRUST AND BANKING COMPANY, LIMITED,
NEW YORK BRANCH (the "Lender"), sets forth the binding agreement of the parties.
PRELIMINARY STATEMENT
A. The Lender has made a loan in the original principal amount of
$245,000,000 (the "Loan") to Potomac Hotel Limited Partnership, a Delaware
limited partnership (the "Borrower") pursuant to that certain Loan Agreement
dated as of December 22, 1987 (the "Original Loan Agreement").
B. The term of the Loan was extended on the terms described in the
Amended and Restated Loan Agreement dated as of August 22, 1995 (the "Restated
Loan Agreement") which amended and restated the Original Loan Agreement.
C. As a condition to the Lender's willingness to execute and deliver
the Restated Loan Agreement, the Guarantor and the Lender entered into that
certain Interest Guaranty Agreement dated as of August 22, 1995 (the
"Guaranty"), pursuant to the Lender's request that the Guarantor guarantee
certain of the obligations of the Borrower and to indemnify the Lender for
certain related matters.
D. Pursuant to Section 2.4(a) of the Restated Loan Agreement, the
Borrower has elected to exercise the option to extend the Maturity Date for a
period of one year (the "First Extension Option").
E. Pursuant to Section 2.4(b) of the Restated Loan Agreement, one of
the conditions to the extension of the Maturity Date is the amendment of the
Guaranty on the terms and to the extent described in this Agreement.
Agreement
1. All capitalized terms used herein and not otherwise defined herein
shall have the meanings ascribed to such terms in the Guaranty.
2. As of the Maturity Date (as in effect prior to the exercise of the
First Extension Option), the definition of "Adjusted Maximum Interest Liability"
in section 2.3(a) of the Guaranty, is hereby amended to be $8,000,000.
3. The Guaranty, as amended hereby, is hereby ratified and confirmed,
and shall remain in full force and effect, and, except as expressly amended
hereby, all provisions of the Guaranty remain unmodified.
<PAGE>
IN WITNESS WHEREOF, the Guarantor and the Lender have caused this
Agreement to be duly executed and delivered as of the date first above written.
THE MITSUI TRUST AND BANKING COMPANY,
LIMITED, NEW YORK BRANCH
By: /s/ Hideharu Nozawa Dec 22 1997
Name: Hideharu Nozawa
Title: VP and Manager
HOST MARRIOTT CORPORATION
By: /s/ Bruce D. Wardinski
Name: Bruce D. Wardinski
Title: Senior Vice President
<PAGE>
<TABLE>
SCHEDULE III
Page 1 of 3
POTOMAC HOTEL LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
Initial Costs Gross Amount at December 31, 1997
---------------------- ------------------------------------
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 $21,755 $0 $19,128 $714 $0 $19,842 $19,842 $(7,532)
Albuquerque, New Mexico
Greensboro-High Point 31,307 0 10,514 848 0 11,362 11,362 (3,998)
Marriott Hotel
Greensboro, North Carolina
Houston Marriott Medical Center 16,503 0 28,798 600 0 29,398 29,398 (9,778)
Houston, Texas
Biscayne Bay Marriott Hotel 44,723 0 48,531 1,106 0 49,637 49,637 (17,308)
Miami, Florida
Marriott's Mountain Shadows 27,076 6,994 25,625 3,126 6,994 28,751 35,745 (12,583)
Resort and Golf Club
Scottsdale, Arizona
Raleigh Marriott Crabtree Valley (e) 17,318 1,838 16,097 1,279 1,838 17,376 19,214 (1,789)
Raleigh, North Carolina
Seattle Marriott Sea-Tac Airport 31,303 1,612 22,241 1,161 1,612 23,402 25,014 (8,686)
Seattle, Washington
Tampa Marriott Westshore (e) 15,024 0 14,347 546 0 14,893 14,893 (1,381)
Tampa, Florida ------ ----- ------ --- ----- ------ ------ ------
$205,009 $10,444 $185,281 $9380 $10,444 $194,661 $205,105 ($63,055)
======== ======= ======== ====== ======= ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
SCHEDULE III
Page 2 of 3
POTOMAC HOTEL LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
Date of
Completion of Date Depreciation
Description Construction Acquired Life
<S> <C> <C> <C>
Albuquerque Marriott Hotel 1982 1982 40 years
Albuquerque, New Mexico
Greensboro-High Point 1983 1982 40 years
Marriott Hotel
Greensboro, North Carolina
Houston Marriott Medical Center 1984 1982 40 years
Houston, Texas
Biscayne Bay Marriott Hotel 1983 1982 40 years
Miami, Florida
Marriott's Mountain Shadows 1959 1982 40 years
Resort and Golf Club
Scottsdale, Arizona
Raleigh Marriott Crabtree Valley (e) 1982 1982 & 40 years
Raleigh, North Carolina 1994
Seattle Marriott Sea-Tac Airport 1981 1982 40 years
Seattle, Washington
Tampa Marriott Westshore (e) 1981 1982 & 40 years
Tampa, Florida 1994
</TABLE>
<PAGE>
<TABLE>
Schedule III
Page 3 of 3
Potomac Hotel Limited Partnership
Real Estate and Accumulated Depreciation
December 31, 1997
(in thousands)
<S> <C> <C> <C>
Notes: 1997 1996 1995
- ------ ----------- ------------ ------------
(a) Reconciliation of Real Estate:
Balance at beginning of year.......................................$ 201,893 $ 199,009 $ 224,253
Capital expenditures............................................... 3,212 2,920 1,908
Dispositions and other............................................. -- (36) (27,152)
----------- ------------ ------------
Balance at end of year.............................................$ 205,105 $ 201,893 $ 199,009
=========== ============ ============
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of year.......................................$ 57,025 $ 52,568 $ 55,542
Depreciation....................................................... 6,030 4,461 5,300
Dispositions and other............................................. -- (4) (8,274)
----------- ------------ ------------
Balance at end of year.............................................$ 63,055 $ 57,025 $ 52,568
=========== ============ ============
</TABLE>
(c) The aggregate cost of land, buildings and improvements for Federal income
tax purposes was approximately $187 million at December 31, 1997.
(d) The Debt balance is as of December 31, 1997.
(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.
<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,
1998.
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
<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/Donald D. Olinger Vice President and Corporate Controller
Donald D. Olinger (Principal Accounting Officer)
<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> 1000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.00
<CASH> 9,533
<SECURITIES> 4,265<F1>
<RECEIVABLES> 10,173
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,971
<PP&E> 231,863
<DEPRECIATION> (77,610)
<TOTAL-ASSETS> 178,224
<CURRENT-LIABILITIES> 864
<BONDS> 324,482
0
0
<COMMON> 0
<OTHER-SE> (147,122)
<TOTAL-LIABILITY-AND-EQUITY> 178,224
<SALES> 0
<TOTAL-REVENUES> 51,038
<CGS> 0
<TOTAL-COSTS> 29,267
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,596
<INCOME-PRETAX> (2,825)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,825)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,825)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> THIS IS OTHER ASSETS.
</FN>
</TABLE>