BY ELECTRONIC FILING
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 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
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10400 Fernwood Road, Bethesda, MD 20817-1109
-------------------------------- ------------------------------
(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>
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
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
REVENUES (Note 3)
Hotel revenues......................................$ 11,138 $ -- $ 27,291 $ --
Hotel rentals....................................... -- 6,224 -- 12,488
----------- ----------- ----------- -----------
11,138 6,224 27,291 12,488
------ ---------- ---------- ----------
OPERATING COSTS AND EXPENSES
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
----------- ----------- ----------- -----------
4,209 2,231 8,746 4,732
----- ---------- -------- ---------
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
------------- ----------------
(unaudited)
ASSETS
<S> <C> <C>
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
================ ================
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
------------ ----------------
Total Liabilities.................................................. 188,364 186,821
---------- ----------------
PARTNERS' CAPITAL (DEFICIT)
General Partner.......................................................... 58 (21)
Limited Partners......................................................... (6,798) (14,644)
---------------- ----------------
Total Partners' Deficit............................................ (6,740) (14,665)
---------------- ----------------
$ 181,624 $ 172,156
================ ================
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
----------- ----------
<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
----------- ----------
Cash provided by operating activities..... 14,881 14,862
----------- ----------
INVESTING ACTIVITIES
Additions to property and equipment, net.... (2,592) (1,318)
Changes in property improvement fund........ (1,356) (469)
----------- ----------
Cash used in investing activities..... (3,948) (1,787)
----------- ----------
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)
----------- ----------
Cash used in financing activities..... (1,842) (11,921)
----------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS........... 9,091 1,154
CASH AND CASH EQUIVALENTS at beginning of period. 4,553 5,755
---------- ----------
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
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<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 and December
31, 1997, and 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 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, base and incentive management fees,
property taxes, and certain other costs, which are disclosed separately
in the accompanying condensed consolidated statement of operations.
Revenues are recorded based
on house profit because the Partnership has delegated substantially all
of the operating decisions related to the generation of house profit 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 is assessing the impact of EITF 97-2 on its policy of
excluding the property level revenues and operating expenses of its hotel
from its statements of operations. If the Partnership concludes that EITF
97-2 should be applied to its Hotel, it would include operating results
of this managed operation in its financial statements. Application of
EITF 97-2 to financial statements as of and for the twelve and
twenty-four weeks ended June 19, 1998 would have increased both revenues
and operating expenses by approximately $17.9 million and $37.8 million,
respectively, and would have had no impact on operating profit or net
income.
The following is a summary of hotel revenues, for the twelve and
twenty-four weeks ended June 19, 1998 and June 20, 1997 (in thousands):
<TABLE>
Twelve Weeks Ended Twenty-Four Weeks Ended
June 19, June 20, June 19, June 20,
1998 1997 1998 1997
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
HOTEL SALES
Rooms................$ 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
-------------- ------------- ------------- -------------
29,032 26,590 65,051 59,375
-------------- ------------- ------------- -------------
HOTEL EXPENSES
Departmental direct costs
Rooms............. 2,454 2,275 5,127 4,534
Food and beverage. 7,235 6,909 15,624 14,366
Other operating expenses 8,205 7,351 17,009 15,765
-------------- ------------- ------------- -------------
17,894 16,535 37,760 34,665
-------------- ------------- ------------- -------------
HOTEL REVENUES..........$ 11,138 $ 10,055 $ 27,291 $ 24,710
============== ============ ============= =============
</TABLE>
<PAGE>
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 "Owners 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 changed its method of reporting revenues in
connection with the Conversion. As a result, Partnership Revenues reported for
the twelve and twenty-four weeks ended June 19, 1998 are not comparable to the
Partnership Revenues 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 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, base and incentive management fees, property taxes, and certain
other costs, which are disclosed separately in the accompanying statement of
operations. Revenues are recorded based on house profit because the Partnership
has delegated substantially all of the operating decisions related to the
generation of house profit to MHS.
On a comparative basis, house profit increased $1.1 million or 10.8%, for the
second quarter 1998 when compared to the same period in 1997 due to increases in
rooms revenue. 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.
On a year-to-date basis, house profit increased $2.6 million or 10% over the
same period of the prior year 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 increased $2.0
million from $2.2 million in second quarter 1997 to $4.2 million in second
quarter 1998. On a year-to-date basis, operating costs and expenses increased
$4.0 million from $4.7 million in 1997 to $8.7 million in 1998. The quarter and
year-to-date increases are due primarily to the impact of the Conversion. Prior
to the Conversion, incentive management fee expense was not a component of
operating expense. Rather, 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.
On a comparative basis, 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.
On a comparative basis, 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
revenue based on house profit 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 to be signed on its behalf by the
undersigned, thereunto duly authorized.
DESERT SPRINGS MARRIOTT
LIMITED PARTNERSHIP
By: MARRIOTT DESERT SPRINGS CORPORATION
General Partner
July 31, 1998 By: /s/ Earla L. Stowe
------------------
Earla L. Stowe
Vice President and Chief Accounting Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. </LEGEND>
<CIK> 0000832345
<NAME> DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAR-28-1998
<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> 27,291
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,292
<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>
