SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 11, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-24465
HANOVER MARRIOTT LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1482649
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(State of Organization) I.R.S. Employer Identification Number)
10400 Fernwood Road, Bethesda, MD 20817-1109
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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 No (Not Applicable. The Partnership became subject to
Section 13 reporting on August 11, 1998.)
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HANOVER MARRIOTT LIMITED PARTNERSHIP
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TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statement of Operations
Twelve and Thirty-Six Weeks ended September 11, 1998 (Unaudited)
and September 12, 1997 (Unaudited)............................1
Condensed Balance Sheet
September 11, 1998 (Unaudited) and December 31, 1997............2
Condensed Statement of Cash Flows
Thirty-Six Weeks ended September 11, 1998 (Unaudited)
and September 12, 1997 (Unaudited)............................3
Notes to Condensed Financial Statements (Unaudited)................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................13
Item 6. Exhibits and Reports on Form 8-K..................................13
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER MARRIOTT LIMITED PARTNERSHIP
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per Unit amounts)
<TABLE>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
REVENUES
Hotel revenues (Note 2)...........................$ 1,847 $ -- $ 5,238 $ --
Hotel rental...................................... -- 1,378 -- 4,393
Other............................................. 27 27 82 82
---------------- --------------- ---------------- ---------------
1,874 1,405 5,320 4,475
---------------- --------------- ---------------- ---------------
OPERATING COSTS AND EXPENSES
Depreciation...................................... 289 282 861 843
Incentive management fee.......................... 187 -- 358 --
Base management fee............................... 156 43 452 43
Property taxes and other.......................... 203 181 566 386
---------------- --------------- ---------------- ---------------
835 506 2,237 1,272
---------------- --------------- ---------------- ---------------
OPERATING PROFIT..................................... 1,039 899 3,083 3,203
Interest expense.................................. (901) (999) (2,764) (2,716)
Interest income................................... 7 47 25 125
---------------- --------------- ---------------- ---------------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM................................ 145 (53) 344 612
EXTRAORDINARY ITEM
Gain on forgiveness of additional rental.......... -- 5,094 -- 5,094
---------------- --------------- ---------------- ---------------
NET INCOME...........................................$ 145 $ 5,041 $ 344 $ 5,706
================ =============== ================ ===============
ALLOCATION OF NET INCOME
General Partner...................................$ 7 $ 252 $ 17 $ 285
Limited Partners.................................. 138 4,789 327 5,421
---------------- --------------- ---------------- ---------------
$ 145 $ 5,041 $ 344 $ 5,706
================ =============== ================ ===============
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM PER LIMITED
PARTNER UNIT (84 Units)...........................$ 1,643 $ (599) $ 3,893 $ 6,921
================ =============== ================ ===============
NET INCOME PER LIMITED
PARTNER UNIT (84 Units)...........................$ 1,643 $ 57,012 $ 3,893 $ 64,536
================ =============== ================ ===============
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(in thousands)
<TABLE>
September 11, December 31,
1998 1997
-------------- ---------------
(unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net.........................................................$ 31,537 $ 29,984
Due from Marriott Hotel Services, Inc............................................... 359 204
Other assets........................................................................ 746 743
Cash and cash equivalents........................................................... 451 1,952
---------------- ---------------
$ 33,093 $ 32,883
================ ===============
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt.......................................................................$ 29,519 $ 29,760
Subordinated loan from Host Marriott Corporation.................................... 6,975 7,077
Notes payable and related interest due to the General Partner....................... 4,550 4,317
Accounts payable and accrued expenses............................................... 138 80
Deferred revenue.................................................................... 87 169
---------------- ---------------
Total Liabilities.............................................................. 41,269 41,403
---------------- ---------------
PARTNERS' DEFICIT
General Partner..................................................................... (335) (352)
Limited Partners.................................................................... (7,841) (8,168)
---------------- ---------------
Total Partners' Deficit........................................................ (8,176) (8,520)
---------------- ---------------
$ 33,093 $ 32,883
================ ===============
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
Thirty-Six Weeks Ended
September 11, September 12,
1998 1997
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.........................................................................$ 344 $ 5,706
Extraordinary item................................................................. -- (5,094)
---------------- ---------------
Net income before extraordinary item............................................... 344 612
Noncash items...................................................................... 1,059 1,226
Changes in operating accounts...................................................... (97) 51
---------------- ---------------
Cash provided by operating activities........................................ 1,306 1,889
---------------- ---------------
INVESTING ACTIVITIES
Additions to property and equipment, net........................................... (2,414) (322)
Change in property improvement fund................................................ (50) (451)
---------------- ---------------
Cash used in investing activities............................................ (2,464) (773)
---------------- ---------------
FINANCING ACTIVITIES
Principal repayments on mortgage debt.............................................. (241) --
Repayment of subordinated loan from Host Marriott Corporation...................... (102) (2,875)
Repayment of first mortgage loan................................................... -- (37,000)
Proceeds from first mortgage loan.................................................. -- 29,875
Proceeds from subordinated loan from Host Marriott Corporation..................... -- 10,000
Payment of financing costs......................................................... -- (500)
---------------- ---------------
Cash used in financing activities............................................ (343) (500)
---------------- ---------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........................................ (1,501) 616
CASH AND CASH EQUIVALENTS at beginning of period........................................ 1,952 2,557
---------------- ---------------
CASH AND CASH EQUIVALENTS at end of period..............................................$ 451 $ 3,173
================ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest....................................................$ 2,376 $ 2,148
================ ===============
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
HANOVER MARRIOTT LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed financial statements have been prepared by
Hanover Marriott Limited Partnership (the "Partnership") without audit.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles have been condensed or omitted from the accompanying statements.
The Partnership believes the disclosures made are adequate to make the
information presented not misleading. However, the condensed financial
statements should be read in conjunction with the Partnership's financial
statements and notes thereto included in the Partnership's Form 10-A for
the fiscal year ended December 31, 1997.
In the opinion of the Partnership, the accompanying unaudited condensed
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position
of the Partnership as of September 11, 1998, the results of operations for
the twelve and thirty-six weeks ended September 11, 1998 and September 12,
1997, and cash flows for the thirty-six weeks ended September 11, 1998 and
September 12, 1997. Interim results are not necessarily indicative of
fiscal year performance because of seasonal and short-term variations.
For financial reporting purposes, net income of the Partnership is
allocated 95% to the limited partners and 5% to Marriott Hanover Hotel
Corporation (the "General Partner"). Net losses are allocated 100% to the
General Partner. Significant differences exist between the net income for
financial reporting purposes and the net income (loss) for Federal income
tax purposes. These differences are due primarily to the use, for income
tax purposes, of accelerated depreciation methods, shorter depreciable
lives, no estimated salvage values for the assets and differences in the
timing of the recognition of rental income.
2. On August 18, 1997, the Partnership completed a refinancing of its mortgage
debt. In addition to the refinancing, the Partnership converted its
operating lease (the "Operating Lease") with Marriott Hotel Services, Inc.
("MHS") to a management agreement the ("Management Agreement"),
(collectively referred to as the "Conversion"). Prior to the Conversion,
the Partnership recorded revenue based on the rental income to be received
from MHS.
Annual rental (the "Annual Rental") during the term of the Operating Lease
was equal to the greater of: (i) minimum rental of $100,000; or (ii) basic
rental (the "Basic Rental") equal to 80% of Operating Profit, as defined in
the Operating Lease, reduced to 75% of Operating Profit after the
Partnership received $4,421,000 of cumulative capital receipts, or (iii)
adjusted rental (the "Adjusted Rental") equal to debt service on the
mortgage debt plus Partnership administration costs (collectively referred
to as "Debt Service") plus the greater of: (a) a preferred return equal to
$840,000 or (b) 50% of the amount by which Operating Profit exceeded Debt
Service. In no event was Adjusted Rental to exceed Operating Profit.
The amount by which Adjusted Rental exceeded Basic Rental in any fiscal
year was defined as Additional Rental. Cumulative Additional Rental was
recoverable by MHS in any fiscal year when Basic Rental exceeded Adjusted
Rental, provided no loans from the General Partner or Host Marriott
Corporation ("Host Marriott") were then outstanding. Annual Rental was
reduced by 50% of such excess to the extent cumulative Additional Rental
existed. In addition to the Annual Rental, MHS was required to pay real
estate taxes.
<PAGE>
Subsequent to the Conversion, the Partnership records revenue based on
house profit generated by the hotel. House profit reflects hotel operating
results, which flow to the Partnership as property owner and represents
gross hotel sales less property-level expenses, excluding depreciation and
amortization, base and incentive management fees, real estate taxes,
insurance and certain other costs, which are disclosed separately in the
accompanying statement of operations. Revenues are recorded based on house
profit of the hotel because the Partnership has delegated substantially all
of the operating decisions related to the generation of house profit from
the hotel to MHS.
Pursuant to the terms of the Management Agreement, MHS receives a base
management fee equal to 3% of gross revenues. The Partnership is entitled
to the first $4,650,000 of operating profit generated by the hotel each
fiscal year ("Owner's Priority"). Owner's Priority is increased by 10% of
any additional invested capital. In addition to a base management fee, MHS
will be paid an incentive management fee of the next $400,000 from
operating profit. Any cash remaining after the payment of the Owner's
Priority and the incentive management fee will be allocated 75% to the
Partnership and 25% to MHS.
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 has considered the impact of EITF 97-2 and concluded that
it should be applied to its hotel. Accordingly, upon adoption, hotel sales
and property-level expenses will be reflected on the statement of
operations. This change in accounting principle will be adopted in the
financial statements during the fourth quarter of 1998 as of and for the
year ended December 31, 1998 with retroactive effect in prior periods to
conform to the new presentation. Application of EITF 97-2 will increase
both revenues and operating expenses by approximately $3.4 million and $3.2
million for the twelve weeks ended September 11, 1998 and September 12,
1997, respectively, and $9.8 million for the thirty-six weeks ended
September 11, 1998, and September 12, 1997, and will have no impact on
operating profit or net income.
The following is a summary of hotel revenues, as defined in the Management
Agreement (in thousands):
<TABLE>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
HOTEL SALES
Rooms................................$ 3,277 $ 2,943 $ 9,324 $ 8,990
Food and beverage.................... 1,741 1,773 5,261 5,954
Other................................ 181 156 491 511
---------------- --------------- --------------- ----------------
5,199 4,872 15,076 15,455
---------------- --------------- --------------- ----------------
HOTEL EXPENSES
Departmental direct costs
Rooms.............................. 777 698 2,190 2,006
Food and beverage.................. 1,346 1,320 3,987 4,127
Other.............................. 1,229 1,183 3,661 3,674
---------------- --------------- --------------- ----------------
3,352 3,201 9,838 9,807
---------------- --------------- --------------- ----------------
HOTEL REVENUES.........................$ 1,847 $ 1,671 $ 5,238 $ 5,648
================ =============== =============== ================
</TABLE>
<PAGE>
3. Host Marriott Corporation ("Host Marriott"), the parent company of the
General Partner of the Partnership, has adopted a plan to restructure its
business operations so that it will qualify as a real estate investment
trust ("REIT"). As part of this restructuring (the "REIT Conversion"), Host
Marriott and its consolidated subsidiaries will contribute their
full-service hotel properties and certain other businesses and assets to
Host Marriott, L.P., a Delaware limited partnership (the "Operating
Partnership"), in exchange for units of limited partnership interest in the
Operating Partnership ("OP Units") and the assumption of liabilities. As
part of the REIT Conversion, Host Marriott proposes to merge into HMC
Merger Corporation (to be renamed "Host Marriott Corporation"), a Maryland
corporation ("Host REIT"), and thereafter continue and expand its
full-service hotel ownership business. Host REIT expects to qualify as a
REIT beginning with its first full taxable year commencing after the REIT
Conversion is completed, which Host Marriott currently expects to be the
year beginning January 1, 1999 (but which might not be until the year
beginning January 1, 2000). Host REIT will be the sole general partner of
the Operating Partnership.
The Operating Partnership is proposing to acquire by merger (the "Merger")
the Partnership. The Limited Partners in the Partnership have been given an
opportunity to receive, on a tax-deferred basis, OP Units in the Operating
Partnership in exchange for their current limited partnership interests. At
any time prior to 5:00 p.m. on the fifteenth trading day following the
effective date of the Merger, the Limited Partners can elect to exchange
the OP Units received in connection with the Merger for either common stock
of Host REIT or a 6.56% callable note due December 15, 2005 of the
Operating Partnership. Exercise of either the election to receive common
stock or a note would be a taxable transaction.
Beginning one year after the Merger, Limited Partners who retain OP Units
may exchange such OP Units for Host REIT common stock on a one-for-one
basis (or their cash equivalent, as determined by Host REIT).
On June 2, 1998, the Operating Partnership filed a Registration Statement
on Form S-4 with the Securities and Exchange Commission. In October 1998,
the Prospectus/Consent Solicitation Statement, which formed a part of such
Registration Statement, was mailed to the Limited Partners who have until
December 12, 1998 to vote on this Merger, unless extended.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q include forward-looking statements
including, without limitation, statements related to the proposed REIT
conversion, the terms, structure and timing thereof, and the expected effects of
the proposed REIT conversion and business and operating strategies in the
future. All forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual transactions,
results, performance or achievements to be materially different from any future
transactions, results, performance or achievements expressed or implied by such
forward-looking statements. Certain of the transactions described herein are
subject to certain consents of shareholders, lenders, debtholders and partners
of Host Marriott and its affiliates and of other third parties and various other
conditions and contingencies, and future results, performance and achievements
will be affected by general economic, business and financing conditions,
competition and government actions. The cautionary statements set forth in
reports filed under the Securities Act of 1934 contained important factors with
respect to such forward-looking statements, including: (i) national and local
economic and business conditions that will, among other things, affect demand
for hotels and other properties, the level of rates and occupancy that can be
achieved by such properties and the availability and terms of financing; (ii)
the ability to maintain the properties in a first-class manner; (iii) the
ability to compete effectively; (iv) the ability to obtain required consents of
shareholders, lenders, debtholders, partners and ground lessors in connection
with Host Marriott's proposed conversion to a REIT and to consummate all of the
transactions constituting the REIT conversion; (v) changes in travel patterns,
taxes and government regulations; (vi) governmental approvals, actions and
initiatives; (vii) the effects of tax legislative action; and (viii) the timing
of Host Marriott's election to be taxed as a REIT and the ability to satisfy
complex rules in order to qualify for taxation as a REIT for federal income tax
purposes and to operate effectively within the limitations imposed by these
rules. 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 or that any deviations will not
be material. 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.
RESULTS OF OPERATIONS
On August 18, 1997, the Partnership completed a refinancing of its mortgage
debt. In addition, the Partnership converted the Operating Lease with MHS to the
Management Agreement (the "Conversion") on August 18, 1997. Prior to the
Conversion, the Partnership recorded revenue based on the rental income to be
received from MHS. Annual rental during the term of the Operating Lease was
equal to the greater of: (i) Minimum Rental of $100,000; or (ii) Basic Rental
equal to 80% of Operating Profit reduced to 75% of Operating Profit after the
Partnership received $4,421,000 of cumulative capital receipts; or (iii)
Adjusted Rental equal to Debt Service plus the greater of: (a) a preferred
return equal to $840,000 or (b) 50% of the amount by which Operating Profit
exceeded Debt Service. In no event was Adjusted Rental to exceed Operating
Profit.
The amount by which Adjusted Rental exceeded Basic Rental in any fiscal year was
defined as Additional Rentals. Cumulative Additional Rentals were recoverable by
MHS in any fiscal year when Basic Rental exceeded Adjusted Rentals, provided no
loans from the General Partner or Host Marriott were then outstanding. Annual
Rental was reduced by 50% of such excess to the extent cumulative Additional
Rentals existed. In addition to the Annual Rental, MHS was required to pay real
estate taxes.
Subsequent to the Conversion, the Partnership records revenue based on house
profit generated by the hotel. House profit reflects hotel operating results,
and represents gross hotel sales less property-level expenses, excluding
depreciation and amortization, base and incentive management fees, real estate
taxes, insurance and certain other costs, which are disclosed separately in the
statement of operations. Revenues are recorded based on house profit of the
hotel because the Partnership has delegated substantially all of the operating
decisions related to the generation of house profit from the hotel to MHS. As a
result of the Conversion, hotel revenues as reported under the Management
Agreement for the twelve and thirty-six weeks ended September 11, 1998 are not
comparable with hotel rental as reported under the Operating Lease for the
twelve and thirty-six weeks ended September 12, 1997.
Revenues. Total revenues increased 33%, or $469,000, to $1.9 million and 19%, or
$845,000, to $5.3 million for the twelve and thirty-six weeks ended September
11, 1998 when compared to the same periods in 1997. As discussed above, the
Partnership converted the Operating Lease to a Management Agreement. As a result
of the Conversion, hotel revenues as reported under the Management Agreement for
the twelve and thirty-six weeks ended September 11, 1998 are not comparable with
hotel rental as reported under the Operating Lease for the twelve and thirty-six
weeks ended September 12, 1997. On a comparative basis, hotel revenues for the
twelve and the thirty-six weeks ended September 11, 1998 increased 11%, or
$176,000, to $1.8 million and decreased 7%, or $410,000, to $5.2 million,
respectively, when compared to the same periods in 1997. The decrease in hotel
revenues for the thirty-six weeks ended September 11, 1998 is primarily due to
decreases in food and beverage sales. Food and beverage sales decreased 2%, or
$32,000, to $1.7 million and 12%, or $693,000, to $5.3 million for the twelve
and the thirty-six weeks ended September 11, 1998, respectively, when compared
to the same periods in 1997. Room sales increased 11%, or $334,000, to $3.3
million, and 4%, or $334,000, to $9.3 million for the twelve and thirty-six
weeks ended September 11, 1998, respectively, when compared to the same periods
in 1997 due to increases in REVPAR.
REVPAR, or revenue per available room, represents the combination of the average
daily room rate charged and the average daily occupancy achieved and is a
commonly used indicator of hotel performance (although it is not a GAAP, or
generally accepted accounting principles, measure of revenue). REVPAR increased
11% for the twelve weeks ended September 11, 1998 when compared to the twelve
weeks ended September 12, 1997 due to a two percentage point increase in average
occupancy to 84%. The increase in average occupancy was complemented by an 8%,
or $10, increase in average room rate to approximately $131 for the twelve weeks
ended September 11, 1998 when compared to the same period in 1997. REVPAR
increased 4% for the thirty-six weeks ended September 11, 1998 when compared to
the thirty-six weeks ended September 12, 1997 due to a 12%, or $15, increase in
average room rate to approximately $138 offset by a six percentage point
decrease in average occupancy to 76%. The decrease in average occupancy for the
thirty-six weeks ended September 11, 1998 is a result of an overall decline in
the market and rooms being temporarily out of inventory during the rooms
refurbishment that occurred during January through March 1998.
Operating Costs and Expenses. For the twelve and the thirty-six weeks ended
September 11, 1998, operating costs and expenses increased 65%, or $329,000, to
$835,000 and 76%, or $965,000, to $2.2 million, respectively, when compared to
the same periods in 1997, primarily due to the Conversion. For the twelve and
thirty-six weeks ended September 11, 1998 and September 12, 1997, $300,000 and
$767,000 of the increase is related to base and incentive management fees,
respectively. The Partnership is responsible for these fees and costs under the
Management Agreement, but was not under the Operating Lease. On a comparative
basis, base management fees for the twelve and the thirty-six weeks ended
September 11, 1998 increased $10,000, or 7%, to $156,000 and decreased $12,000,
or 3%, to $452,000, respectively, when compared to the same periods in 1997.
Subsequent to the Conversion, MHS receives an incentive management fee once
Owner's Priority has been met. For the twelve and the thirty-six weeks ended
September 11, 1998, MHS received $187,000 and $358,000, respectively, in
incentive management fees. In addition, real estate taxes increased $29,000, or
24%, to $149,000 and $79,000, or 26%, to $385,000 for the twelve and the
thirty-six weeks ended September 11, 1998, when compared to the same periods in
1997 due to a re-assessment of the property in 1997.
Operating Profit. As a result of the changes in revenues and expenses discussed
above, operating profit increased 16%, or $140,000, to $1.0 million and
decreased 4%, or $120,000, to $3.1 million for the twelve and the thirty-six
weeks ended September 11, 1998 when compared to the same periods in 1997.
Interest Expense. Interest expense decreased 10%, or $98,000, to $901,000 and
increased 2%, or $48,000, to $2.8 million for the twelve and the thirty-six
weeks ended September 11, 1998, respectively, when compared to the same periods
in 1997. The weighted average interest rate on the Partnership's debt, which
includes the Subordinated Loan, for the thirty-six weeks ended September 11,
1998 and September 12, 1997, was 9.6% and 8.8%, respectively.
Income (Loss) Before Extraordinary Item. For the twelve weeks ended September
11, 1998 and September 12, 1997, the Partnership's loss before extraordinary
item decreased $198,000 to income before extraordinary item of $145,000, as a
result of the items discussed above. For the thirty-six weeks ended September
11, 1998 and September 12, 1997, income before extraordinary item decreased
$268,000 to $344,000, as a result of the items discussed above.
Extraordinary Item. The Partnership recognized an extraordinary gain during the
twelve weeks ended September 12, 1997 of $5.1 million representing the
forgiveness of Additional Rental by MHS in connection with the conversion from
the Operating Lease to the Management Agreement.
Net Income. Net income for the twelve weeks ended September 11, 1998 and
September 12, 1997 was $145,000 and $344,000, respectively, and $5.0 million and
$5.7 million for the thirty-six weeks ended September 11, 1998 and September 12,
1997, respectively, as a result of the items discussed above.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have been historically funded through loan
agreements with independent financial institutions and Host Marriott. As a
result of the successful refinancing of the Partnership's mortgage debt, the
General Partner believes that the Partnership will have sufficient capital
resources and liquidity to conduct its operations in the ordinary course of
business.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is cash from hotel operations. Cash
provided by operating activities for the thirty-six weeks ended September 11,
1998 and September 12, 1997 was $1.3 million and $1.9 million, respectively.
Cash provided by operations was lower for the thirty-six weeks ended September
11, 1998 primarily due to a decrease in the Hotel's food and beverage sales due
to a decrease in occupancy as a result of the rooms refurbishment discussed
previously.
The Partnership's cash investing activities consist primarily of contributions
to the property improvement fund and capital expenditures for improvements to
the hotel. Cash used in investing activities was $2.5 million and $773,000 for
the thirty-six weeks ended September 11, 1998 and September 12, 1997,
respectively. The increase in cash used in investing activities is due to
payments for the rooms refurbishment completed in 1998. Contributions, including
interest income, to the property improvement fund were $754,000 and $773,000 for
the thirty-six weeks ended September 11, 1998 and September 12, 1997,
respectively. Capital expenditures were $2.4 million and $322,000 for the same
periods, respectively.
Under the Management Agreement, the Partnership is required to make annual
contributions to the property improvement fund which provides funding for
capital expenditures and replacement of furniture, fixtures and equipment.
Contributions to the fund equal 5% of gross hotel sales, net of interest income.
The General Partner believes that the property improvement fund will provide
adequate funds in the short and long term to meet the Hotel's capital needs.
The Partnership's financing activities consist of repayments of debt and payment
of financing costs. Cash used in financing activities was $343,000 and $500,000
for the thirty-six weeks ended September 11, 1998 and September 12, 1997,
respectively.
In 1997, the Partnership refinanced its mortgage debt (the "Mortgage Debt") with
new mortgage debt (the "New Mortgage Debt") of $29.9 million with another
independent financial institution. In addition, Host Marriott funded a $10
million subordinated loan to the Partnership which was used to make a $10
million principal payment on the Mortgage Debt.
Year 2000
The "Year 2000 Issue" has arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous results. The following disclosure provides information
regarding the current status of the Partnership's Year 2000 compliance program.
The Partnership processes its records on computer hardware and software systems
maintained by Host Marriott, the parent company of
the General Partner of the Partnership. Host Marriott has adopted a compliance
program because it recognizes the importance of minimizing the number and
seriousness of any disruptions that may occur as a result of the Year 2000
Issue. Host Marriott's compliance program includes an assessment of Host
Marriott's hardware and software computer systems and embedded systems, as well
as an assessment of the Year 2000 issues relating to third parties with which
the Partnership has a material relationship or whose systems are material to the
operations of the Partnership's Hotel. Host Marriott's efforts to ensure that
its computer systems are Year 2000 compliant have been segregated into two
separate phases: in-house systems and third-party systems.
In-House Systems. Host Marriott has invested in the implementation and
maintenance of accounting and reporting systems and equipment that are intended
to enable the Partnership to provide adequately for its information and
reporting needs and which are also Year 2000 compliant. Substantially all of
Host Marriott's in-house systems have already been certified as Year 2000
compliant through testing and other mechanisms and Host Marriott has not delayed
any systems projects due to the Year 2000 Issue. Host Marriott is in the process
of engaging a third party to review its Year 2000 in-house compliance. Host
Marriott believes that future costs associated with Year 2000 Issues for its
in-house systems will be insignificant and will therefore not impact the
Partnership's business, financial condition and results of operations. Host
Marriott has not developed, and does not plan to develop, a separate contingency
plan for its in-house systems due to their current Year 2000 compliance.
However, Host Marriott does have detailed contingency plans for its in-house
systems covering a variety of possible events, including natural disasters,
interruption of utility service and similar events.
Third-Party Systems. The Partnership relies upon operational and accounting
systems provided by third parties, primarily the Manager of its Hotel, to
provide the appropriate property-specific operating systems (including
reservation, phone, elevator, security, HVAC and other systems) and to provide
it with financial information. Based on discussions with the third parties that
are critical to the Partnership's business, including the Manager of its Hotel,
Host Marriott believes that these parties are in the process of studying their
systems and the systems of their respective vendors and service providers and,
in many cases, have begun to implement changes, to ensure that they are Year
2000 compliant. To the extent these changes impact property-level systems, the
Partnership may be required to fund capital expenditures for upgraded equipment
and software. Host Marriott does not expect these charges to be material, but is
committed to making these investments as required. To the extent that these
changes relate to the Manager's centralized systems (including reservations,
accounting, purchasing, inventory, personnel and other systems), the
Partnership's management agreement generally provides for these costs to be
charged to the Partnership's Hotel. Host Marriott expects that the Manager will
incur Year 2000 costs for its centralized systems in lieu of costs related to
system projects that otherwise would have been pursued and therefore, its
overall level of centralized charges allocated to the Hotel will not materially
increase as a result of the Year 2000 compliance effort. Host Marriott believes
that this deferral of certain system projects will not have a material impact on
its future results of operations, although it may delay certain productivity
enhancements at the Partnership's Hotel. Host Marriott will continue to monitor
the efforts of these third parties to become Year 2000 compliant and will take
appropriate steps to address any non-compliance issues. The Partnership believes
that in the event of material Year 2000 non-compliance caused by a breach of the
Manager's duties, the Partnership will have the right to seek recourse against
the Manager under its third party management agreement. The management agreement
generally does not specifically address the Year 2000 compliance issue.
Therefore the amount of any recovery in the event of Year 2000 non-compliance at
a property, if any, is not determinable at this time.
Host Marriott will work with the third parties to ensure that appropriate
contingency plans will be developed to address the most reasonably likely worst
case Year 2000 scenarios, which may not have been identified fully. In
particular, Host Marriott has had extensive discussions regarding the Year 2000
Issue with Marriott International, the Manager of the Hotel. Due to the
significance of Marriott International to the Partnership's business, a detailed
description of Marriott International's state of readiness follows.
Marriott International has adopted an eight-step process toward Year 2000
readiness, consisting of the following: (i) Awareness: fostering understanding
of, and commitment to, the problem and its potential risks; (ii) Inventory:
identifying and locating systems and technology components that may be affected;
(iii) Assessment: reviewing these components for Year 2000 compliance, and
assessing the scope of Year 2000 issues; (iv) Planning: defining the technical
solutions and labor and work plans necessary for each particular system; (v)
Remediation/Replacement: completing the programming to renovate or replace the
problem software or hardware; (vi) Testing and Compliance Validation: conducting
testing, followed by independent validation by a separate internal verification
team; (vii) Implementation: placing the corrected systems and technology back
into the business environment; and (viii) Quality Assurance: utilizing a
dedicated audit team to review and test significant projects for adherence to
quality standards and program methodology.
Marriott International has grouped its systems and technology into three
categories for purposes of Year 2000 compliance: (i) information resource
applications and technology (IT Applications) -- enterprise-wide systems
supported by Marriott International's centralized information technology
organization ("IR"); (ii) Business-initiated Systems ("BIS") - systems that have
been initiated by an individual business unit, and that are not supported by
Marriott International's IR organization; and (iii) Building Systems - non-IT
equipment at properties that use embedded computer chips, such as elevators,
automated room key systems and HVAC equipment. Marriott International is
prioritizing its efforts based on how severe an effect noncompliance would have
on customer service, core business processes or revenues, and whether there are
viable, non-automated fallback procedures (System Criticality).
Marriott International measures the completion of each phase based on documented
and quantified results, weighted for System Criticality. As of the end of the
1998 third quarter, the awareness and inventory phases were complete for IT
Applications and nearly complete for BIS and Building Systems. For IT
Applications, the Assessment, Planning and Remediation/Replacement phases were
each over 80 percent complete, and Testing and Compliance Validation had been
completed for a number of key systems, with most of the remaining work in its
final stage. For BIS and Building Systems, Assessment and Planning were in the
mid- to upper-range of completion, with a substantial amount of work in process,
while the progress level for Remediation/Replacement and Testing and Compliance
Validation had not yet been documented and quantified. Quality Assurance is also
in progress for IT Applications and is scheduled to begin for BIS and Business
Systems in the near future. Marriott International's goal is to substantially
complete the Remediation/Replacement and Testing phases for its System Critical
IT Applications by the end of 1998, with 1999 reserved for unplanned
contingencies and for Compliance Validation and Quality Assurance. For System
Critical BIS and Building Systems, the same level of completion is targeted for
June 1999 and September 1999, respectively.
Marriott International has initiated Year 2000 compliance communications with
its significant third party suppliers, vendors and business partners, including
its franchisees. Marriott International is focusing its efforts on the business
interfaces most critical to its customer service and revenues, including those
third parties that support the most critical enterprise-wide IT Applications,
franchisees generating the most revenues, suppliers of the most widely used
Building Systems and BIS, the top 100 suppliers, by dollar volume, of non-IT
products, and financial institutions providing the most critical payment
processing functions. Responses have been received from a majority of the firms
in this group.
Marriott International is also establishing a common approach for testing and
addressing Year 2000 compliance issues for its managed and franchised
properties. This includes a guidance protocol for operated properties, and a
Year 2000 "Toolkit" for franchisees containing relevant Year 2000 compliance
information. Marriott International is also utilizing a Year 2000 best-practices
sharing system.
Risks. There can be no assurance that Year 2000 remediation by the Partnership
or third parties will be properly and timely completed, and failure to do so
could have a material adverse effect on the Partnership, its business and its
financial condition. The Partnership cannot predict the actual effects to it of
the Year 2000 Issue, which depends on numerous uncertainties such as: (i)
whether significant third parties properly and timely address the Year 2000
Issue; and (ii) whether broad-based or systemic economic failures may occur.
Host Marriott is also unable to predict the severity and duration of any such
failures, which could include disruptions in passenger transportation or
transportation systems generally, loss of utility and/or telecommunications
services, the loss or distortion of hotel reservations made on a centralized
reservation system and errors or failures in financial transactions or payment
processing systems such as credit cards. Due to the general uncertainty inherent
in the Year 2000 Issue and the Partnership's dependence on third parties, the
Partnership is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Partnership. Host Marriott's
Year 2000 compliance program is expected to significantly reduce the level of
uncertainty about the Year 2000 Issue and Host Marriott believes that the
possibility of significant interruptions of normal operations should be reduced.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Partnership nor the hotel is presently subject to any material
litigation nor, to the General Partner's knowledge, is any material litigation
threatened against the Partnership or the Hotel, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits - None.
b. Reports on Form 8-K
1. A Form 8-K was filed with the Securities and Exchange Commission on
September 16, 1998. This filing, Item 5-Other Events,
discloses that the General Partner sent the limited partners of the
Partnership a letter to inform them that September 18, 1998 will be
the record date for voting in the forthcoming consent solicitation.
Those limited partners whose ownership is reflected on the records of
the General Partner as of September 18, 1998 will be eligible to vote
on the merger and proposed amendments. A copy of the letter was
included as an Item 7-Exhibit in this Form 8-K filing.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
HANOVER MARRIOTT LIMITED PARTNERSHIP
By: MARRIOTT HANOVER HOTEL CORPORATION
General Partner
October 26, 1998 By: /s/ Earla L. Stowe
------------------
Earla L. Stowe
Vice President and Chief Accounting Officer
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