SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 19, 1998
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
(Exact name of registrant as specified in its charter)
Delaware 52-1508601
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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 |X| No ____. The Partnership became subject to Section 13
reporting August 29, 1997.
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<PAGE>
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DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Statement of Operations
Twelve and Twenty-Four Weeks Ended June 19, 1998 and June 20, 1997........1
Condensed Consolidated Balance Sheet
June 19, 1998 and December 31, 1997...................................... 2
Condensed Consolidated Statement of Cash Flows
Twenty-Four Weeks Ended June 19, 1998 and June 20, 1997.................. 3
Notes to Condensed Consolidated Financial Statements.......................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................11
Item 6. Exhibits and Reports on Form 8-K................................11
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per Unit amounts)
<TABLE>
Twelve Weeks Ended Twenty-Four Weeks Ended
June 19, June 20, June 19, June 20,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
REVENUES (Note 3)
Hotel revenues
Rooms.............................................$ 10,961 $ -- $ 25,394 $ --
Food and beverage................................. 11,266 -- 24,737 --
Other............................................. 6,805 -- 14,920 --
----------- ----------- ----------- -----------
Total hotel revenues 29,032 -- 65,051 --
Hotel rentals....................................... -- 6,224 -- 12,488
----------- ----------- ----------- -----------
29,032 6,224 65,051 12,488
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OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms............................................. 2,454 -- 5,127 --
Food and beverage................................. 7,235 -- 15,624 --
Other hotel operating expenses.................... 8,205 -- 17,009 --
----------- ----------- ----------- -----------
Total hotel property-level costs and expenses... 17,894 -- 37,760 --
Depreciation........................................ 1,657 1,627 3,314 3,568
Base management fees................................ 871 -- 1,952 --
Incentive management fees........................... 831 -- 1,841 --
Property taxes and other............................ 850 604 1,639 1,164
----------- ----------- ----------- -----------
22,103 2,231 46,506 4,732
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OPERATING PROFIT....................................... 6,929 3,993 18,545 7,756
Interest expense (including second quarter and
year-to-date 1998 amounts related to
Host Marriott debt of $1,933 and $3,937).......... (4,333) (3,330) (8,803) (6,770)
Interest income and other........................... 270 160 454 213
----------- ----------- ----------- -----------
NET INCOME ............................................$ 2,866 $ 823 $ 10,196 $ 1,199
=========== =========== =========== ===========
ALLOCATION OF NET INCOME
General Partner.....................................$ 29 $ 8 $ 102 $ 12
Limited Partners.................................... 2,837 815 10,094 1,187
----------- ----------- ----------- -----------
$ 2,866 $ 823 $ 10,196 $ 1,199
=========== =========== =========== ===========
NET INCOME PER LIMITED
PARTNER UNIT (900 Units)............................$ 3,152 $ 906 $ 11,216 $ 1,319
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
June 19, December 31,
1998 1997
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(unaudited)
<S> <C> <C>
ASSETS
Property and equipment, net..............................................$ 150,679 $ 151,401
Due from Marriott Hotel Services, Inc.................................... 2,185 1,368
Property improvement fund................................................ 2,954 1,598
Deferred financing, net of accumulated amortization...................... 2,971 3,000
Restricted cash reserves................................................. 9,191 10,236
Cash and cash equivalents................................................ 13,644 4,553
---------------- ----------------
$ 181,624 $ 172,156
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LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Mortgage debt............................................................$ 102,318 $ 103,000
Note payable............................................................. 19,599 20,000
Note payable to Host Marriott Corporation and affiliates................. 59,727 59,727
Due to Marriott Hotel Services, Inc...................................... 1,963 2,122
Accounts payable and accrued expenses.................................... 4,757 1,972
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Total Liabilities.................................................. 188,364 186,821
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PARTNERS' CAPITAL (DEFICIT)
General Partner.......................................................... 58 (21)
Limited Partners......................................................... (6,798) (14,644)
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Total Partners' Deficit............................................ (6,740) (14,665)
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$ 181,624 $ 172,156
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See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
Twenty-Four Weeks Ended
June 19, June 20,
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net income......................................................................$ 10,196 $ 1,199
Noncash items................................................................... 3,429 4,006
Change in operating accounts.................................................... 1,256 9,657
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Cash provided by operating activities..................................... 14,881 14,862
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INVESTING ACTIVITIES
Additions to property and equipment, net........................................ (2,592) (1,318)
Changes in property improvement fund............................................ (1,356) (469)
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Cash used in investing activities......................................... (3,948) (1,787)
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FINANCING ACTIVITIES
Capital distribution to partners................................................ (2,271) --
Change in restricted cash reserves.............................................. 1,598 (10,931)
Repayment of mortgage debt...................................................... (682) --
Repayment of note payable....................................................... (401) (900)
Payment of refinancing costs.................................................... (86) (90)
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Cash used in financing activities......................................... (1,842) (11,921)
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INCREASE IN CASH AND CASH EQUIVALENTS............................................... 9,091 1,154
CASH AND CASH EQUIVALENTS at beginning of period.................................... 4,553 5,755
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CASH AND CASH EQUIVALENTS at end of period..........................................$ 13,644 $ 6,909
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest.......................................$ 5,866 $ 6,169
============= =============
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed consolidated financial statements have been
prepared by Desert Springs Marriott Limited Partnership and subsidiaries (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 consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Partnership's Annual Report on Form 10-K for the year ended December 31, 1997.
In the opinion of the Partnership, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial position
of the Partnership as of June 19, 1998, the results of operations for the twelve
and twenty-four weeks ended June 19, 1998 and June 20, 1997 and cash flows for
the twenty-four weeks ended June 19, 1998 and June 20, 1997. Interim results are
not necessarily indicative of fiscal year performance because of seasonal and
short-term variations (see Note 3).
For financial reporting purposes, net income of the Partnership is allocated 99%
to the limited partners and 1% to Marriott Desert Springs Corporation (the
"General Partner"). Significant differences exist between the net income for
financial reporting purposes and the net income 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. In connection with the mortgage debt refinancing in November 1997 (see Note
3), the General Partner received unrevoked consents of limited partners
approving certain amendments to the partnership agreement. The amendments, among
other things, allowed the formation of certain subsidiaries of the Partnership
including Marriott DSM LLC and DS Hotel LLC. The Partnership contributed the
Hotel and its related assets to Marriott DSM LLC, which in turn contributed them
to DS Hotel LLC, a bankruptcy remote subsidiary. Marriott DSM LLC, a bankruptcy
remote subsidiary of the Partnership, owns 100% interest in DS Hotel LLC. The
Partnership owns 100% interest in Marriott DSM LLC.
3. On November 25, 1997, the Partnership completed a refinancing of its mortgage
debt. In connection with the refinancing, the Partnership converted its
operating lease with Marriott Hotel Services, Inc. ("MHS") to a management
agreement (the "Conversion"). Prior to the Conversion, the Partnership
recognized estimated annual hotel rental income on a straight-line basis
throughout the year. The profits from the Marriott's Desert Springs Resort and
Spa (the "Hotel") are seasonal and first and second quarter results are
generally higher than the last two quarters of the year. Lease payments in
excess of the income recognized by the Partnership were deferred and, to the
extent not subject to possible future repayment to the Hotel tenant, were
recognized as income during the remainder of the year. Pursuant to the terms of
the Operating Lease, Annual Rental, as defined, was equal to the greater of
Basic Rental (80% of Operating Profit, as defined) and Owner's Priority, as
defined. Additionally, the Hotel tenant was required to pay property taxes, make
contributions equal to a percentage of Hotel sales to a property improvement
fund (4.5% in 1997 and 5.5% thereafter) and pay rental on the second golf
course.
Subsequent to the Conversion, the Partnership records revenues which represent
gross sales generated by the Hotel. Hotel property-level costs and expenses
reflect all property-level costs and expenses. Prior to the Conversion, hotel
property-level costs and expenses and incentive management fee expense were not
components of operating expense. Rather, hotel property-level costs and expenses
was a deduction to arrive at hotel rental and accrued incentive management fee
expense was deducted from the additional lease payments in excess of rental
income that were deferred by the Partnership. Additionally, base management
fees, though a component in the calculation of Operating Profit prior to the
Conversion, were not a component of the Partnership's operating costs.
Subsequent to the Conversion, the Partnership records base management fees and
incentive management fees as components of Partnership operating costs and
expenses.
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 statement of operations of the Partnership presented in the Form 10-Q for
the twelve and twenty-four weeks ended June 19, 1998 did not reflect gross hotel
sales and property-level operating expenses but rather reflected house profit
which represents gross hotel revenues less property-level operating expenses,
excluding base and incentive management fees, property taxes, insurance and
certain other costs, which were disclosed separately in the statement of
operations. The Partnership has concluded that EITF 97-2 should be applied to
the Partnership beginning November 25, 1997, the date the Partnership entered
into a new management agreement, and accordingly the second quarter and
year-to-date 1998 statements of operations have been restated to reflect an
increase in hotel revenues and property-level expenses of $17.9 million for the
quarter and $37.8 million year-to-date. The restatement had no impact on
operating profit or net income.
The following are summaries of hotel revenues and Partnership operating costs
and expenses on a comparative basis, for the twelve and twenty-four weeks ended
June 19, 1998 and June 20, 1997 (in thousands). To enhance comparability, hotel
revenues and Partnership operating costs and expenses for the twelve and
twenty-four weeks ended June 20, 1997 are presented on a "pro forma" basis which
assumes the Conversion occurred at the beginning of these periods.
<TABLE>
Twelve Weeks Ended Twenty-Four Weeks Ended
June 19, June 20, June 19, June 20,
1998 1997 1998 1997
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
Hotel Revenues
Rooms..................................................$ 10,961 $ 10,353 $ 25,394 $ 23,065
Food and beverage...................................... 11,266 10,927 24,737 22,987
Other.................................................. 6,805 5,310 14,920 13,323
----------- ----------- ---------- ---------
Total hotel revenues...................................$ 29,032 $ 26,590 $ 65,061 $ 59,375
=========== =========== ========== =========
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms..................................................$ 2,454 $ 2,275 $ 5,127 $ 4,534
Food and beverage...................................... 7,235 6,909 15,624 14,366
Other hotel operating expenses......................... 8,205 7,351 17,009 15,765
----------- ------------ --------- --------
Total hotel property-level costs and expenses..... 17,894 16,535 37,760 34,665
Depreciation................................................ 1,657 1,627 3,314 3,568
Base management fees........................................ 871 798 1,952 1,781
Incentive management fees................................... 831 708 1,841 1,662
Property taxes and other.................................... 850 604 1,639 1,164
----------- ----------- --------- --------
Total operating costs and expenses................$ 22,103 $ 20,272 $ 46,506 $ 42,840
=========== =========== ========= ========
</TABLE>
4. Pursuant to the terms of the management agreement, MHS earns an incentive
management fee based on Operating Profit as defined. For fiscal year 1998, the
Partnership is entitled to the first $21.5 million of Operating Profit (the
"Owner's Priority"). Thereafter, MHS will receive the next $1.8 million of
Operating Profit as an incentive management fee and any operating profit in
excess of $23.3 million will be divided 75% to the Partnership and 25% to MHS.
Any such payments will be made annually after completion of the audit of the
Partnership's financial statements. Pursuant to the terms of the management
agreement, contributions to the property improvement fund in 1998 are 5.5% of
gross Hotel sales, a one percentage point increase over the prior year level.
5. Host Marriott Corporation ("Host Marriott"), the parent of the General
Partner of the Partnership, announced on April 17, 1998, that its Board of
Directors has authorized the company to reorganize its business operations to
qualify as a real estate investment trust ("REIT") to become effective as of
January 1, 1999. As part of the REIT conversion, Host Marriott formed a new
operating partnership (the "Operating Partnership") and limited partners in
certain Host Marriott full-service hotel partnerships and joint ventures,
including the Partnership, are expected to be given an opportunity to receive,
on a tax-deferred basis, Operating Partnership units in the new Operating
Partnership in exchange for their current partnership interests. The Operating
Partnership units would be redeemable by the limited partner for freely traded
Host Marriott shares (or the cash equivalent thereof) at any time after one year
from the closing of the merger. In connection with the REIT conversion, the
Operating Partnership filed a Registration Statement on Form S-4 with the
Securities and Exchange Commission on June 2, 1998. Limited partners will be
able to vote on the Partnership's participation in the merger later this year
through a consent solicitation.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements 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.
RESULTS OF OPERATIONS
Revenues. As discussed in Note 3 to the Condensed Consolidated Financial
Statements, the Partnership converted its operating lease to a management
agreement in connection with its debt refinancing. Revenues reflect hotel sales
in 1998. Revenues reported for the twelve and twenty-four weeks ended June 19,
1998 are not comparable to the Hotel Rentals reported for the twelve and
twenty-four weeks ended June 20, 1997. Prior to the Conversion, the Partnership
recognized estimated annual hotel rental income on a straight-line basis
throughout the year. The profits from the Hotel are seasonal and first and
second quarter results are generally higher than the last two quarters of the
year. Lease payments in excess of the income recognized by the Partnership were
deferred and, to the extent not subject to possible future repayment to the
Hotel lessee, were recognized as income during the remainder of the year.
Pursuant to the terms of the Operating Lease, Annual Rental, as defined, was
equal to the greater of Basic Rental (80% of Operating Profit, as defined) and
Owner's Priority, as defined. Additionally, the Hotel tenant was required to pay
taxes, make contributions equal to a percentage of Hotel sales to a property
improvement fund (4.5% in 1997 and 5.5% thereafter) and pay rental on the second
golf course.
Subsequent to the Conversion, the Partnership records revenues which represent
gross sales generated by the Hotel. Hotel property-level costs and expenses
reflect all property-level costs and expenses. To enhance comparability,
revenues for the twelve and twenty-four weeks ended June 20, 1997 are discussed
on a "pro forma" basis which assumes the Conversion occurred at the beginning of
these periods.
Compared to pro forma results, hotel sales increased $2.4 million or 9.2%, from
$26.6 million in second quarter 1997 to $29.0 million in second quarter 1998 due
to increases in rooms revenues. 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). For the second quarter 1998, REVPAR increased
6% to approximately $148 due to a 4% increase in the average room rate to
approximately $191 coupled with a slight increase in average occupancy over the
same quarter in 1997. Average room rates increased by 6% for group business and
3% for transient business. Additionally, transient roomnights sold increased by
over 3,000 roomnights or 20% over the same quarter in 1997 while group
roomnights declined by 2,300 or 6% from second quarter 1997. These increases
were the result of increased marketing efforts to the transient customers, as
well as better than normal weather in the desert for this season. As a result of
the increase in REVPAR, hotel room sales increased 5.9% or $608,000 in second
quarter 1998 when compared to the same quarter in 1997.
<PAGE>
For the first two quarters of 1998, compared to pro forma results, hotel sales
increased $5.7 million or 9.6% from $59.4 million in the first two quarters of
1997 to $65.1 million in the first two quarters of 1998 due primarily to
increases in rooms revenues. For the year, REVPAR increased 10% over the same
period of the prior year to approximately $171 due primarily to a 9% increase in
the average room rate to approximately $214 coupled with a 1.1 percentage point
increase in average occupancy to approximately 80%. Room sales and profit
increased 10% and 9% respectively, due to strong demand in the leisure transient
segment and improvements in the Hotel's rooms amenity package and guest
services. With the increase in transient demand, the hotel increased its group
average room rate by approximately 12% on a year-to-date basis compared to the
prior year.
Operating Costs and Expenses. Operating costs and expenses for the twelve and
twenty-four weeks ended June 20, 1997 are discussed on a "pro forma" basis which
assumes the Conversion occurred at the beginning of these periods. Compared to
pro forma results, operating costs and expenses increased $1.8 million from
$20.3 million in second quarter 1997 to $22.1 million in second quarter 1998. On
a year-to-date basis, operating costs and expenses increased $3.7 million from
$42.8 million in 1997 to $46.5 million in 1998. The quarter and year-to-date
increases are due primarily to increases in hotel property-level costs and
expenses. Prior to the Conversion, hotel property-level costs and expenses and
incentive management fee expense were not components of operating expense.
Rather, hotel property-level costs and expenses was a deduction to arrive at
hotel rental and accrued incentive management fee expense was deducted from the
additional lease payments in excess of rental income that were deferred by the
Partnership. Additionally, base management fees, though a component in the
calculation of Operating Profit prior to the Conversion, were not a component of
the Partnership's operating costs.
Compared to pro forma results, incentive management fees for second quarter 1998
increased $123,000, or 17.4% from $708,000 in second quarter 1997 to $831,000 in
second quarter 1998 due to the increase in hotel operations discussed above. On
a second quarter year-to-date basis, incentive management fees increased
$179,000, or 10.8% from $1.7 million in 1997 to $1.8 million in 1998.
Compared to pro forma results, base management fees for the second quarter 1998
increased $73,000, or 9.1% from $798,000 in second quarter 1997 to $871,000 in
second quarter 1998 due to the increase in hotel operations discussed above. On
a second quarter year-to-date basis, base management fees increased $171,000, or
9.6% from $1.8 million in 1997 to almost $2.0 million in 1998.
Depreciation. Depreciation increased $30,000, or 1.8%, for second quarter 1998
when compared to the same quarter in 1997 due to capital improvements completed
in the third and fourth quarters of 1997, including the ballroom and lobby
renovations. On a year-to-date basis, depreciation decreased $254,000, or 7%,
when compared to the same quarter in 1997 as the Partnership's original 10-year
equipment became fully depreciated during 1997.
Interest Expense. On November 25, 1997 the Partnership refinanced its $160
million mortgage debt with $182.7 million of debt. The increase in debt along
with an increase in the weighted average interest rate from 8.4% in the second
quarter of 1997 to 9.8% in the second quarter of 1998 resulted in an increase in
interest expense of approximately $1.0 million, or 30.1%, from $3.3 million to
$4.3 million. On a year-to-date basis, interest expense increased approximately
$2.0 million, or 30%, from $6.8 million to $8.8 million. On a year-to-date
basis, the weighted average interest rate increased from 8.3% in 1997 to 9.8% in
1998.
Interest Income and Other. Interest income and other includes $59,000 in second
quarter 1998 which represents payments made to the Partnership by Marriott
Vacation Club International ("MVCI") for the rental of a gallery and marketing
desk in the Hotel's lobby. In second quarter 1997, MVCI rental of $63,000 was
recognized and included in the $6.2 million of Hotel rental income. On a
year-to-date basis, $132,000 of MVCI rental income is included in interest
income and other, compared to $140,000 in the same period in the prior year.
Net Income. Net income increased $2.0 million to $2.9 million in the second
quarter of 1998 when compared to the second quarter of 1997. On a year-to-date
basis, net income increased $9.0 million to $10.2 million from prior year as a
result of the changes discussed above, primarily the Conversion, and improved
hotel operating results.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded primarily
through loan agreements with independent financial institutions. The General
Partner believes that the Partnership will have sufficient capital resources and
liquidity to continue to conduct its operations in the ordinary course of
business.
On November 25, 1997, the Partnership completed a refinancing of its mortgage
debt. The financing consists of a $103 million senior loan, a $20 million
mezzanine loan and a $59.7 million junior loan. In connection with the
refinancing, the Partnership converted its operating lease with Marriott Hotel
Services, Inc. ("MHS") to a management agreement (the "Conversion"). Prior to
the Conversion, the Partnership recognized estimated annual hotel rental income
on a straight-line basis throughout the year. The profits from the Marriott's
Desert Springs Resort and Spa (the "Hotel") are seasonal and first and second
quarter results are generally higher than the last two quarters of the year.
Lease payments in excess of the income recognized by the Partnership were
deferred and, to the extent not subject to possible future repayment to the
Hotel tenant, were recognized as income during the remainder of the year.
Pursuant to the terms of the Operating Lease, Annual Rental, as defined, was
equal to the greater of Basic Rental (80% of Operating Profit, as defined) and
Owner's Priority, as defined. Additionally, the Hotel tenant was required to pay
property taxes, make contributions equal to a percentage of Hotel sales to a
property improvement fund (4.5% in 1997 and 5.5% thereafter) and pay rental on
the second golf course. Subsequent to the Conversion, the Partnership records
revenues which represent gross sales generated by the Hotel.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is from hotel operations. Its
principal uses of cash are to make debt service payments, fund the hotel's
property improvement fund and establish reserves required by the lender.
Cash provided by operating activities for the twenty-four weeks ended June 19,
1998 and June 20, 1997 was $14.9 million. Cash provided by operating activities
increased $19,000 primarily due to the Conversion, as discussed in Note 3,
combined with improved hotel operations. Prior to the Conversion, the
Partnership recognized estimated annual hotel rental income on a straight-line
basis throughout the year. This change combined with an overall improvement in
hotel operations, an increase in accounts payable of $2.8 million due to
increased accrued interest liability, offset by the payment of $2.0 million of
accrued incentive management fees to MHS in second quarter 1998 resulted in the
increase in cash from operations. Additionally, through June 19, 1998, an
additional $1.5 million was transferred into the tax and insurance reserve
account and $984,000 was disbursed to pay accrued real estate taxes. The tax and
insurance reserve is included in restricted cash reserves and the resulting tax
and insurance liability is included in accounts payable and accrued expenses in
the accompanying balance sheet.
<PAGE>
Cash used in investing activities for the twenty-four weeks ended June 19, 1998
and June 20, 1997 was $3.9 million and $1.8 million, respectively. The
Partnership's cash used in investing activities consists primarily of
contributions to the property improvement fund and capital expenditures for
improvements at the hotel. Contributions to the property improvement fund for
the twenty-four weeks ended June 19, 1998 were $3.6 million and $2.7 million for
the twenty-four weeks ended June 20, 1997. Contributions in 1998 increased due
to a $5.7 million increase in gross hotel sales and an increase in the
contribution rate from 4.5% in 1997 to 5.5% in 1998. Capital expenditures from
the property improvement fund were $2.3 million and $1.3 million for the
twenty-four weeks ended June 19, 1998 and June 20, 1997, respectively.
Cash used in financing activities for the twenty-four weeks ended June 19, 1998
and June 20, 1997 was $1.8 million and $11.9 million, respectively. The
Partnership's cash used in financing activities consists primarily of payments
of the mortgage debt, contributions to the restricted cash reserves and cash
distributions. Year-to-date 1998 contributions to the restricted cash reserves
consist of $500,000 for the replacement of the Hotel's air conditioning system
and interest income earned year-to-date of $153,000. Disbursements from the
reserves include $270,000 for the air conditioning work and $2.0 million for
accrued incentive management fees payable to MHS. Year-to-date contributions to
the restricted cash reserves in 1997 consisted of $10.9 million of excess cash
from Hotel operations held for future debt service. During the second quarter of
1998, the Partnership distributed $2.3 million to the partners ($2,500 per
limited partner unit) from 1997 operations. Additionally, for the twenty-four
weeks ended June 20, 1997, the Partnership made $900,000 of loan repayments from
the property improvement fund on the rooms refurbishment loan from Marriott
International, Inc.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Partnership and the 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.
On March 16, 1998, limited partners in several partnerships sponsored by Host
Marriott Corporation ("Host Marriott") filed a lawsuit, styled Robert M. Haas,
Sr. and Irwin Randolph Joint Tenants, et al. v. Marriott International, Inc., et
al., Case No. 98-CI-04092, in the 57th Judicial District Court of Bexar County,
Texas against Marriott International, Inc. ("Marriott International"), Host
Marriott, various of their subsidiaries, J.W. Marriott, Jr., Stephen Rushmore,
and Hospitality Valuation Services, Inc. (collectively, the "Defendants"). The
lawsuit relates to the following limited partnerships: Courtyard by Marriott
Limited Partnership, Courtyard by Marriott II Limited Partnership, Marriott
Residence Inn Limited Partnership, Marriott Residence Inn II Limited
Partnership, Fairfield Inn by Marriott Limited Partnership, Desert Springs
Marriott Limited Partnership, and Atlanta Marriott Marquis Limited Partnership
(collectively, the "Partnerships"). The plaintiffs allege that the Defendants
conspired to sell hotels to the Partnerships for inflated prices and that they
charged the Partnerships excessive management fees to operate the Partnerships'
hotels. The plaintiffs further allege, among other things, that the Defendants
committed fraud, breached fiduciary duties, and violated the provisions of
various contracts. The plaintiffs are seeking unspecified damages. The
Defendants, which do not include the Partnerships, believe that there is no
truth to the plaintiffs' allegations and that the lawsuit is totally devoid of
merit. The Defendants intend to vigorously defend against the claims asserted in
the lawsuit. They have filed an answer to the plaintiffs' petition and asserted
a number of defenses. Although the Partnerships have not been named as
Defendants in the lawsuit, the partnership agreements relating to the
Partnerships include an indemnity provision which requires the Partnerships,
under certain circumstances, to indemnify the general partners against losses,
judgments, expenses and fees.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits - None.
b. Reports on Form 8-K
May 8, 1998 -- In this filing, Item 5 - Other Events discloses the
announcement by Host Marriott Corporation ("Host Marriott"), parent company
of the General Partner of the Partnership, that Host Marriott's Board of
Directors has authorized Host Marriott to reorganize its business
operations to qualify as a real estate investment trust, effective as of
January 1, 1999. A copy of the press release was included as an Item 7 -
Exhibit in this Form 8-K filing.
June 19, 1998 -- In this filing, Item 5 - Other Events discloses that the
General Partner sent the limited partners of the Partnership a letter to
inform them of the proposed reorganization of Host Marriott's business
operations to qualify as a real estate investment trust and provide them
with the estimated exchange value per Partnership unit. 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/A to be signed on its behalf by the
undersigned, thereunto duly authorized.
DESERT SPRINGS MARRIOTT
LIMITED PARTNERSHIP
By: MARRIOTT DESERT SPRINGS CORPORATION
General Partner
September 29, 1998 By: /s/ Earla L. Stowe
------------------
Earla L. Stowe
Vice President and Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT 10-Q/A AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.</LEGEND>
<CIK> 0000832345
<NAME> DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-19-1998
<EXCHANGE-RATE> 1.00
<CASH> 22,835
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,110
<PP&E> 215,869
<DEPRECIATION> (65,190)
<TOTAL-ASSETS> 181,624
<CURRENT-LIABILITIES> 6,720
<BONDS> 181,644
0
0
<COMMON> 0
<OTHER-SE> (6,740)
<TOTAL-LIABILITY-AND-EQUITY> 181,624
<SALES> 0
<TOTAL-REVENUES> 65,051
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 46,052
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,803
<INCOME-PRETAX> 10,196
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,196
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
