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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 MARCH 28, 1997
OR
[_] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: 0 - 16777
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
DELAWARE 52-1508601
- ------------------------------ ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation organization)
10400 FERNWOOD ROAD
BETHESDA, MARYLAND
20817-1109
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(Address of principal executive offices)
Registrant's telephone number, including area code: 301-380-2070
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes ______ No ____ (Not Applicable).
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DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
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TABLE OF CONTENTS
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PAGE NO.
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Statement of Operations
Twelve Weeks Ended March 28, 1997 and March 22, 1996............... 1
Condensed Balance Sheet
March 28, 1997 and December 31, 1996............................... 2
Condensed Statement of Cash Flows
Twelve Weeks Ended March 28, 1997 and March 22, 1996............... 3
Notes to Condensed Financial Statements.............................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 6
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PART II - OTHER INFORMATION
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Item 1. Legal Proceedings.................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders.................. 9
Item 5. Other Information.................................................... 9
Item 6. Exhibits and Reports on Form 8-K..................................... 9
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
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Twelve Weeks Ended
March 28, March 22,
1997 1996
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INCOME
Rentals
Hotel......................................... $6,264 $5,422
Airline equipment............................. -- 476
Other........................................... 53 231
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6,317 6,129
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EXPENSES
Interest........................................ 3,440 3,005
Depreciation and amortization................... 1,941 1,828
Property taxes.................................. 488 438
Partnership administration and other............ 72 57
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5,941 5,328
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NET INCOME....................................... $ 376 $ 801
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ALLOCATION OF NET INCOME
General Partner................................. $ 4 $ 8
Limited Partners................................ 372 793
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$ 376 $ 801
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NET INCOME PER LIMITED PARTNER UNIT (900 Units).. $ 413 $ 881
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See Notes to Condensed Consolidated Financial Statements.
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DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(IN THOUSANDS)
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March 28, December 31,
1997 1996
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(Unaudited)
ASSETS
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Property and equipment, net.......................... $154,119 $155,441
Rent receivable from hotel lessee.................... 4,826 8
Other assets......................................... 3,411 3,678
Restricted cash...................................... 4,271 --
Cash and cash equivalents............................ 5,402 5,755
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$172,029 $164,882
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LIABILITIES AND PARTNERS' DEFICIT
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LIABILITIES
Mortgage debt....................................... $160,000 $160,000
Additional rental paid by hotel lessee.............. 26,362 25,013
Due to Marriott International, Inc. and affiliates.. 1,076 1,022
Deferred hotel rental income........................ 5,014 --
Accounts payable and accrued expenses............... 838 484
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Total Liabilities.................................. 193,290 186,519
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PARTNERS' DEFICIT
General Partner..................................... (87) (91)
Limited Partners.................................... (21,174) (21,546)
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Total Partners' Deficit............................ (21,261) (21,637)
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$172,029 $164,882
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See Notes to Condensed Consolidated Financial Statements.
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DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(in thousands)
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Twelve Weeks Ended
March 28, March 22,
1997 1996
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(Unaudited)
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OPERATING ACTIVITIES
Net income................................................. $ 376 $ 801
Noncash items.............................................. 2,188 1,383
Change in operating accounts............................... 1,504 1,918
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Cash provided by operations.............................. 4,068 4,102
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INVESTING ACTIVITIES
Additions to property and equipment, net................... (619) (1,568)
Changes in property improvement fund....................... 46 8
Proceeds from the airline equipment lease.................. -- 881
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Cash used in investing activities........................ (573) (679)
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FINANCING ACTIVITIES
Additional rental paid by hotel lessee..................... 1,349 1,959
Payment of refinancing costs............................... (26) --
Change in restricted cash.................................. (4,271) --
Repayment of note payable to Marriott International, Inc... (900) --
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Cash (used in) provided by financing activities.......... (3,848) 1,959
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(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (353) 5,382
CASH AND CASH EQUIVALENTS at beginning of period............ 5,755 10,213
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CASH AND CASH EQUIVALENTS at end of period.................. $ 5,402 $15,595
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest..................................... $ 2,788 $ 3,336
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
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DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying condensed financial statements have been prepared by Desert
Springs 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-K filed
on August 28, 1997 for the fiscal year ended December 31, 1996.
In the opinion of the Partnership, the accompanying condensed financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of the
Partnership as of March 28, 1997 and December 31, 1996, and the results of
operations for the twelve weeks ended March 28, 1997 and March 22, 1996.
Interim results are not necessarily indicative of fiscal year performance
because of seasonal and short-term variations.
2. For financial reporting purposes, net income (loss) of the Partnership is
allocated 99% to the Limited Partners and 1% to Marriott Desert Springs
Corporation (the "General Partner"), a wholly-owned subsidiary of Host
Marriott Corporation. Significant differences exist between the net loss for
financial reporting purposes and the net 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.
3. The following is a summary of Hotel Operating Profit, as defined in the Hotel
lease agreement for the twelve weeks ended (in thousands):
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March 28, March 22,
1997 1996
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REVENUES
Rooms...................... $12,712 $11,430
Food and beverage.......... 12,060 10,887
Other...................... 8,013 6,885
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32,785 29,202
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DEDUCTIONS
Departmental direct costs
Rooms.................... 2,259 2,039
Food and beverage........ 7,457 6,941
Other operating expenses... 8,414 7,564
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18,130 16,544
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OPERATING PROFIT............. $14,655 $12,658
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The profits from Marriott's Desert Springs Resort & Spa (the "Hotel") are
seasonal and first and second quarter results are generally higher than the
last two quarters of the year. The Partnership recognizes estimated annual
hotel rental income on a straight-line basis throughout the year. Lease
payments from the Hotel lessee in excess of the income recognized by the
Partnership are deferred and, to the extent not subject to possible future
repayment to the Hotel lessee, are recognized as income during the remainder
of the year.
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4. Pursuant to an agreement reached with Marriott International, Inc. ("MII")
for fiscal year 1997, the Owner's Priority, as defined in the Hotel Operating
Lease, has been increased to $20.5 million. MII will be entitled only to the
next $2 million of Operating Profit, as defined. Any Additional Operating
Profit in excess of $22.5 million, will be remitted entirely to the
Partnership as Additional Rent. As of March 28, 1997, a $1.0 million
liability to MII is included in Due to MII and Affiliates in the
accompanying Condensed Balance Sheet. This liability represents MII's
portion of Operating Profit remitted to the Partnership. In connection with
and concurrently with the consummation of the long-term financing in 1997,
MII agreed to waive any and all claims to Additional Rental that have accrued
prior to the consummation of such loan.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Principal Sources and Uses of Cash
The Partnership's principal source of cash is from Hotel income. Its principal
uses of cash are to make debt service payments, fund the property improvement
fund of the Hotel and to make cash distributions to the partners.
Cash provided by operations for the twelve weeks ended March 28, 1997 and March
22, 1996, was $4.1 million for both years.
Financing
As previously reported, the Partnership secured interim financing for its $168
million mortgage debt on December 23, 1996 (the "Bridge Loan"). The Partnership
utilized $8.2 million of its refinancing reserve to reduce the mortgage loan
balance to $160 million. The interim mortgage loan bears interest at LIBOR plus
2.75 percentage points. The weighted average interest rate for the twelve weeks
ended March 28, 1997 was 8.2% compared to 7.76% for the twelve weeks ended March
22, 1996 resulting in a 14% increase in interest expense of $435,000. The
interest rate at March 28, 1997 was 8.2%. There will be no cash distributions
from operations during the term of the interim loan as all excess cash from
Hotel operations, if any, are held in a debt service reserve for future debt
service or to reduce the outstanding principal balance upon maturity on October
31, 1997.
The General Partner is currently pursuing two alternatives to refinance the
Bridge Loan. Each alternative would require that certain amendments (the
"Amendments") be made to the Partnership's Amended and Restated Agreement of
Limited Partnership (the "Partnership Agreement").
Loan Alternative A. One of the two alternatives to refinance the Bridge Loan
would involve a loan from Goldman Sachs Mortgage Company ("GSMC") consisting of
two tranches of debt: (i) a senior loan to a newly formed 100% owned subsidiary
of the Partnership that would own the Hotel ("New Sub"), which senior loan would
be secured by a first mortgage lien on the Hotel in an amount up to $103 million
(with the final amount to be determined based upon the net cash flow at the
Hotel and prevailing interest rates) and (ii) a junior loan to the Partnership,
which junior loan would be secured by the Partnership's 100% direct and indirect
ownership interests in the Partnership's newly formed subsidiary, in an amount
equal to $57 million or such greater amount that, when combined with the
principal amount of the senior loan, would total $160 million ("Alternative A").
Alternative A would enable the Partnership to refinance the Bridge Loan. In
connection with the closing of the Bridge Loan on December 23, 1996, the General
Partner entered into a commitment letter with GSMC setting forth the terms of
Alternative A.
Loan Alternative B. The other alternative ("Alternative B") would involve a
refinancing consisting of the senior loan from GSMC as described in Alternative
A, a subordinate tranche of debt from GSMC to the Partnership in the amount of
$20 million (the "Mezzanine Loan") secured by the Partnership's 100% direct and
indirect ownership interests in the Partnership's newly formed subsidiary, and a
subordinate junior tranche to the Partnership (the "HM Junior Loan") from DSM
Finance LLC (the "Junior Lender"), a single member Maryland limited liability
company of which the General Partner is the sole member. The HM Junior Loan
would be in the amount of $59.7 million, and, if consented by the lender of the
Mezzanine Loan would be secured by a subordinate pledge of the Partnership's
100% direct and indirect ownership interests in the New Sub. Alternative B is
expected to result in $22.7 million of proceeds in excess of that needed to
refinance the Bridge Loan, which would be distributed by the Partnership to its
partners resulting in a distribution to holders (the "Unitholders") of units of
limited partnership interest in the Partnership ("Units") of $25,000 per Unit.
6
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The terms of the Senior Loan contemplate that, consistent with applicable rating
agency requirements, the Hotel would be contributed to the New Sub in exchange
for 100% of the direct and indirect interests in the New Sub. This structure
would create a bankruptcy remote entity (the New Sub) which would be the
borrower under the Senior Loan. The Partnership Agreement does not currently
permit this contribution and, accordingly, each of Alternative A and Alternative
B is contingent on the approval by the Limited Partners of an amendment that
would permit such a contribution. On August 29, 1997, the General Partner
initiated the solicitation of consents of the limited partners of the
Partnership, pursuant to which the General Partner has sought approval of
amendments to refinance the interim loan under either Alternative A or
Alternative B and proposed Alternative B to fund the DSM Junior Loan together
with other amendments to the Partnership Agreement.
The proposed Amendments also would allow the Partnership to reorganize the
ownership structure of the Hotel to provide additional tiers of structured
financing. GSMC has indicated that it might prefer a structured financing under
Alternative B whereby (i) the New Sub would own the Hotel and whould be the
Debtor on the Senior Loan, (ii) a new bankruptcy remote subsidiary of the
Partnership (the "Tier 2 Sub") would be formed to own the New Sub and be the
debtor on the Mezzanine Loan, and (iii) the Partnership would own the Tier 2 Sub
(and indirectly own the New Sub and the Hotel) and would be the debtor on the HM
Junior Loan. As of the date of the consent solicitation statement, no
determination has been made as to whether a tiered subsidiary structure would be
utilized under Alternative B. However, under the proposed terms of the
Mezzanine Loan, would be increased by one percentage point if a tiered
subsidiary structure has not been implemented on or before March 31, 1998. The
effect of the refinancing to the Limited Partners would be the same under either
structure. If these proposed Amendments are approved, the General Partner would
be able to create a new wholly owned subsidiary such as the Tier 2 Sub to
provide for the current or future restructuring of the Partnership's mortgage
debt.
In conjunction with the refinancing completed December 23, 1996, MII agreed to
certain amendments to the operating lease under which an MII subsidiary leases
the Hotel. Pursuant to the agreement reached with MII, for fiscal year 1997,
the $20 million Owner's Priority, as defined, will be increased to $20.5
million. MII will be entitled only to the next $2.0 million of Operating
Profit, as defined. Any additional Operating Profit in excess of $22.5 million
will be remitted entirely to the Partnership. In connection with and
concurrently with the consummation of the long-term financing in 1997, MII
agreed to waive any and all claims to Additional Rental that have accrued prior
to the consummation of such loan. Negotiations with MII continue as additional
changes to the operating lease will be needed to consummate the long term debt
refinancing.
The Hotel's $9.1 million rooms refurbishment project was completed in September,
1996. The refurbishment was financed by the Hotel's property improvement fund
and a $1.7 million short-term loan from MII. The loan was fully repaid from the
property improvement fund in the first quarter of 1997.
OPERATIONS
The operating results of Marriott's Desert Springs Resort and Spa are seasonal
and the first and second quarter results are generally higher than the third and
fourth quarter results. For quarterly reporting purposes, the Partnership
recognizes estimated annual Hotel rental income on a straight-line basis
throughout the year. Each quarter, the estimated annual Hotel rental income is
revised to more accurately forecast full-year results. Based on current
forecasts, 1997 full-year Hotel operations are expected to improve over 1996
results as a result of focusing on the transient leisure market while
maintaining solid group bookings. As a result, Hotel rental income for 1997
first quarter improved 16% over prior year's results.
Operating results (hotel revenue net of hotel operating expenses) increased 16%
when compared to the same period in 1996 due to a significant increase in sales
in all departments of the Hotel. 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 measure of revenue). REVPAR does not
include food and beverage or other ancillary revenues generated by the hotel.
7
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For the first quarter of 1997, REVPAR, or revenue per available room, increased
11% over the same period in 1996 to $171 due to a 5.9 percentage point increase
in average occupancy to approximately 81% and a 3% increase in the average room
rate to approximately $211. Room sales increased 11% primarily due to strong
demand in the leisure transient segment which increased by 2,000 roomnights from
15,900 to 17,900 or 13% over prior year results combined with strong group
business which increased by 3,100 roomnights from 39,400 to 42,500 or 8% over
prior year results. Food and beverage sales increased from $10,887,000 to
$12,060,000 or 11% over the same period in 1996 due primarily to a 14% increase
from $5,737,000 to $6,586,000 in catering sales resulting from the increase in
group roomnights. The resort also benefitted from large increases in ancillary
sales particularly in golf which increased 13% from $3,108,000 to $3,520,000 and
spa sales which increased 3% from $1,093,000 to $1,126,000.
On April 24, 1996, TWA, the lessee on the airline equipment lease terminated the
lease and purchased the equipment, as permitted under the lease agreement.
Accordingly, there were no airline equipment rental revenues in the twelve weeks
ended March 28, 1997, compared to $476,000 for the twelve weeks ended March 22,
1996.
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 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.
8
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Partnership and the Partnership Hotel are involved in routine litigation and
administrative proceedings arising in the ordinary course of business, some of
which are expected to be covered by liability insurance and which collectively
are not expected to have a material adverse effect on the business, financial
conditions or results of operations of the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the limited partners in 1996 or in prior
years. The Partnership instituted a consent solicitation on August 29, 1997,
to obtain the consent of the limited partners to certain matters and amend
certain provisions of the Partnership Agreement.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits - None.
b. Reports on Form 8-K - None.
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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.
DESERT SPRINGS MARRIOTT
LIMITED PARTNERSHIP
By: MARRIOTT DESERT SPRINGS CORPORATION
General Partner
August 28, 1996 By: /s/ Patricia K. Brady
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Patricia K. Brady
Vice President and Chief Accounting Officer
(Authorized Signatory)
10
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<ARTICLE> 5
<CIK> 0000832345
<NAME> DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-28-1997
<CASH> 9,673
<SECURITIES> 3,411<F1>
<RECEIVABLES> 4,826
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<PP&E> 217,679
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0
0
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