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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K/A
Annual Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
OR
Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
10400 Fernwood Road
Bethesda, Maryland 20817
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 301-380-2070
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days: Yes |X| No The Partnership became subject to Section 13
reporting August 29, 1997.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ] (Not Applicable)
Documents Incorporated by Reference
None
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Desert Springs Marriott Limited Partnership
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<TABLE>
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TABLE OF CONTENTS
PAGE NO.
PART I
<S> <C>
Item 1. Business 2
Item 2. Property 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market For Registrant's Common Equity and
Related Security Holder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 33
PART III
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Management Renumeration and Transactions 34
Item 12. Security Ownership of Certain Beneficial Owners and Management 34
Item 13. Certain Relationships and Related Transactions 35
PART IV
Item 14. Exhibits, Supplemental Financial Statement Schedules
and Reports on Form 8-K 39
</TABLE>
<PAGE>
PART 1
ITEM 1. BUSINESS
Description of the Partnership
Desert Springs Marriott Limited Partnership (the "Partnership"), a Delaware
limited partnership was formed on February 26, 1987 to own the Marriott's Desert
Springs Resort and Spa and approximately 185 acres of land on which the Hotel
and a golf course are located (the "Hotel"). Additionally, until April 24, 1996,
the Partnership owned certain Trans World Airline, Inc. ("TWA") equipment (the
"Equipment"). See Item 8, "Financial Statements and Supplementary Data."
On September 26, 1997, the General Partner received consents of limited partners
of the Partnership (the "Limited Partners") holding a majority of limited
partnership interests in the Partnership ("Units") approving certain amendments
to the Partnership's Amended and Restated Agreement of Limited Partnership (the
"Partnership Agreement"). The amendments, among other things, allowed the
formation of certain subsidiaries of the Partnership including DS Hotel LLC and
Marriott DSM 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
owns 100% of the membership interest in DS Hotel LLC. The Partnership owns 100%
of the membership interest in Marriott DSM LLC.
The sole general partner of the Partnership, with a 1% interest in the
Partnership, is Marriott Desert Springs Corporation (the "General Partner"), a
Delaware corporation and a wholly-owned subsidiary of Host Marriott Corporation
("Host Marriott"). The Partnership is currently engaged solely in the business
of owning the Hotel through its subsidiaries and, therefore, is engaged in one
industry segment. The principal offices of the Partnership are located at 10400
Fernwood Road, Bethesda, Maryland 20817.
The Hotel was leased to Marriott Hotel Services, Inc.("MHSI" or the "Tenant"), a
wholly-owned direct subsidiary of Marriott International, Inc. ("MII"), under a
long-term lease agreement (the "Operating Lease"). A second golf course (the
"Second Golf Course") is leased by the Partnership from Marriott's Desert
Springs Development Corporation, a wholly-owned indirect subsidiary of MII. The
Hotel had the right to use the Marriott name pursuant to the lease agreements.
See Item 13, "Certain Relationships and Related Transactions."
On November 25, 1997, in connection with the refinancing of the Partnership's
mortgage debt, the General Partner also negotiated with the Tenant to convert
the Operating Lease to a management agreement (the "Management Agreement"). The
Tenant became manager of the Hotel (the "Manager"). The initial term of the
Management Agreement continues through 2022 with four successive renewal options
of ten years each. Pursuant to the terms of the
<PAGE>
Management Agreement, the Hotel owner has the right to use the Marriott name. If
the Management Agreement is terminated, the Hotel owner will lose that right for
all purposes (except as part of the Hotel owner's name). See Item 13, "Certain
Relationships and Related Transactions".
The Hotel is among the premier resorts in the MII full service hotel system and
caters primarily to meetings/conventions, leisure and commercial travel. Since
the Hotel is located in the southern California desert, operating results are
higher during the period from November to April each year. The Partnership has
no plans to acquire any new properties. See Item 2, "Property."
The Equipment was leased to TWA pursuant to the terms of an operating lease
which expired April 20, 1995. On April 20, 1995, the Partnership and TWA entered
into a new sales-type lease agreement which was to have expired on July 24,
1996. However, on April 24, 1996, TWA exercised its early termination option
under the equipment lease and paid the rent due on that date along with the
equipment lease termination value plus the $1 purchase option.
Organization of the Partnership
The Partnership was formed to acquire and own the Hotel and the Equipment. The
Partnership purchased the Hotel from Desert Springs Hotel Services, a California
joint venture. The Equipment was purchased from TWA. Between March 20, 1987 and
April 24, 1987, 900 limited partnership interests (the "Units"), representing a
99% interest in the Partnership were subscribed pursuant to a private placement
offering. The offering price per Unit was $100,000; $25,000 payable at
subscription with the balance due in three annual installments through June 15,
1990; or, as an alternative, $87,715 in cash at closing as full payment of the
subscription price. Of the total 900 Units, 740.5 Units were purchased on the
installment basis and 159.5 Units were paid in full at closing. The General
Partner contributed $909,100 in cash for its 1% general partnership interest.
Amendments to the Partnership Agreement
The following amendments to the Partnership Agreement were approved by a
majority of the Limited Partners pursuant to the Consent Solicitation Statement
which was initiated on August 29, 1997: (i) an amendment to the Partnership
Agreement to authorize the General Partner to form or organize one or more
subsidiaries of the Partnership, to contribute assets of the Partnership to any
such subsidiary in exchange for the equity interests in such subsidiary, and to
delegate its authority to manage any such subsidiary to a governing entity or
other body in order to effect a structured refinancing such as the proposed
refinancing structures, (ii) an amendment to the Partnership Agreement to amend
the definition of "Affiliate" to make clear that a publicly-traded entity will
not be deemed an affiliate of the General Partner or any of its Affiliates
unless a person or group of persons directly or indirectly owns twenty percent
or more of the outstanding common stock of both the General Partner and such
other entity, (iii) an amendment to the Partnership Agreement to revise the
provisions relating to the authority of the General Partner to permit the
General Partner, without obtaining the consent of the Limited Partners, to sell
or otherwise transfer the Hotel to an independent third party, (iv) an amendment
to the Partnership
<PAGE>
Agreement that would allow the General Partner to incur indebtedness in order to
capitalize the Junior Lender (which will make the HM Junior Loan to the
Partnership), (v) amendments to the Partnership Agreement to revise the
provisions limiting the voting rights of the General Partner and its Affiliates
to permit the General Partner and its Affiliates to have full voting rights with
respect to all Units acquired by the General Partner and its Affiliates except
on matters where the General Partner and its Affiliates have an actual economic
interest other than as a Unitholder or general partner, (vi) amendments to the
Partnership Agreement to amend certain terms and sections of the Partnership
Agreement in order to reflect the fact that after the division of Marriott
Corporation's operations into two separate public companies in 1993, Host
Marriott (formerly known as Marriott Corporation) no longer owns the management
business conducted by MII, delete certain obsolete references to entities and
agreements that are no longer in existence and update the Partnership Agreement
to reflect the passage of time since the formation of the Partnership, and (vii)
an amendment to the Partnership Agreement to permit the General Partner, without
the consent of the Limited Partners, to make any amendment to the Partnership
Agreement as is necessary to clarify or update the provisions thereof so long as
such amendment does not adversely affect the rights of Unitholders under the
Partnership Agreement in any material respect.
Competition
The lodging industry as a whole, and the upscale and luxury full-service
segments in particular, is benefiting from a cyclical recovery as well as a
shift in the supply/demand relationship with supply relatively flat and demand
strengthening. The lodging industry posted strong gains in revenues and profits
in 1997, as demand growth continued to outpace additions to supply. The General
Partner expects full-service hotel room supply growth to remain limited through
1998 and for the foreseeable future. This supply/demand imbalance will result in
improving occupancy and room rates which should result in improved operating
profit.
Current trends in the hotel industry indicate that, through at least 1998, the
outlook for the lodging industry remains positive. Demand increases are expected
to continue to outpace supply additions in the upscale and luxury market in
which the Hotel competes. Rooms supply growth, especially for the luxury and
upscale segment, is forecasted to be limited as compared to growth in budget and
mid-priced hotels. Acquisition prices for first class and luxury price
properties are still at a discount to construction, or replacement cost. The
favorable gap between demand increases and supply additions should continue to
drive room rate increases, with occupancy rates leveling as targeted room rates
are achieved.
The primary competition for the Hotel comes from the following first-class
resort lodging-oriented hotels: (i) Marriott's Rancho Las Palmas Resort and
Country Club with 450 guest rooms, (ii) Hyatt Grand Champions Resort with 336
guest rooms, (iii) La Quinta Hotel and Resort with 640 guest rooms, (iv) Ritz-
Carlton Rancho Mirage with 238 guest rooms, (v) Westin Mission Hills Resort with
512 guest rooms and (vi) Stouffers Renaissance Hotels International with 560
rooms. The La Quinta Resort added an additional 18,000 square foot ballroom and
a complete European health spa which opened in 1997. The Miramonte Resort, a 220
room upscale resort, opened in January 1998.
<PAGE>
The inclusion of the Hotel within the nationwide MII full-service hotel system
provides advantages of name recognition, centralized reservations and
advertising, system-wide marketing and promotion, centralized purchasing and
training and support services.
Conflicts of Interest
Because Host Marriott and its affiliates own and/or operate hotels other than
the Hotel owned by the Partnership, potential conflicts of interest exist. With
respect to these potential conflicts of interest, Host Marriott and its
affiliates retain a free right to compete with the Partnership's Hotel,
including the right to develop competing hotels now and in the future, in
addition to those existing hotels which may compete directly or indirectly.
Policies with Respect to Conflicts of Interest
It is the policy of the General Partner that the Partnership's relationship with
the General Partner, any of its
affiliates or persons employed by the General Partner are conducted on terms
which are fair to the Partnership and which are commercially reasonable.
The Partnership Agreement and the Second Amended and Restated Agreement of
Limited Partnership (the "Amended Partnership Agreement") provides that
agreements, contracts or arrangements between the Partnership and the General
Partner, other than arrangements for rendering legal, tax, accounting,
financial, engineering, and procurement services to the Partnership by the
General Partner or its affiliates, which agreements will be on commercially
reasonable terms, will be subject to the following conditions:
(a) the General Partner or any affiliate must be actively engaged in the
business of rendering such services or selling or leasing such goods,
independently of its dealings with the Partnership and as an ordinary
ongoing business or must enter into and engage in such business with
MII system hotels or hotel owners generally and not exclusively with
the Partnership;
(b) any such agreement, contract or arrangement must be fair to the
Partnership, and reflect commercially reasonable terms and shall be
embodied in a written contract which precisely describes the subject
matter thereof and all compensation to be paid therefor;
(c) no rebates or give-ups may be received by the General Partner or any
affiliate, nor may the General Partner or any affiliate participate in
any reciprocal business arrangements which would have the effect of
circumventing any of the provisions of the Partnership Agreement;
(d) no such agreement, contract or arrangement as to which the limited
partners had previously given approval may be amended in such manner as
to increase the fees or other compensation payable to the General
Partner or any affiliate or to decrease the responsibilities or duties
of the General Partner or any affiliate in the absence of the consent
of the limited partners holding a majority of the Units (excluding
those Units held by the General Partner or certain of its affiliates);
and
<PAGE>
(e) any such agreement, contract or arrangement which relates to or secures
any funds advanced or loaned to any of the Partnership by the General
Partner or any affiliate must reflect commercially reasonable terms.
Employees
The Partnership has no employees; however, employees of Host Marriott are
available to perform administrative services for the Partnership. The
Partnership reimburses Host Marriott for the cost of providing such services.
See Item 11, "Executive Compensation," for information regarding payments to
Host Marriott for the cost of providing administrative services to the
Partnership.
The Hotel is staffed by employees of the Manager.
ITEM 2. PROPERTY
The Hotel
Location
Marriott's Desert Springs Resort and Spa is a full-service Marriott hotel and,
with the Second Golf Course, is located on approximately 185 acres of land. It
is located approximately 11 miles from the Palm Springs Airport and two hours
east of Los Angeles via Interstate 10. The Hotel is surrounded by the San
Jacinto Mountains to the west, the Santa Rosa Mountains to the east and south,
and the San Gorgonio Mountains to the north.
Description
The Hotel opened on February 2, 1987. The Hotel consists of 884 large guest
rooms including 65 luxury suites. Each room has a private balcony, mini-bar and
other deluxe accommodations. The Hotel has an 18-hole championship golf course
owned by the Partnership, with an additional 18-hole course which is leased by
the Partnership. Twenty-three acres of man made lakes are interspersed
throughout the resort grounds and lower level of the Hotel's main lobby. Boats
depart from inside the main lobby and carry guests to the various resort
functions. There are a total of five outdoor pools divided between three guest
areas. The main guest pool area, the Oasis, was expanded during 1995 and now has
three pools and two spas, and the Spring Pool and Health Spa areas each have one
pool and one spa. The tennis complex includes a separate tennis pro shop
building, 20 tennis courts of various surfaces, and badminton and volleyball
courts. The health spa is housed in a separate one-story building. Within the
health spa are separate men's and women's facilities, lap pool, hot and cold
plunge pools, saunas, steam rooms, aerobics and exercise rooms, lounge, and
locker rooms. Food and beverage services within the resort include four fine
dining restaurants that range from casual American to Japanese sushi and
overlook the water. Additionally, there are two grille/snack bars at the outdoor
pools, two golf club snack bars, lobby lounge, coffee bar, and entertainment
lounge. The 40,000 square foot lobby has an eight-story high view of the nearby
mountains. The Hotel has a three-story garage with parking for approximately
1,500 vehicles. The meeting and exhibit spaces total 51,300 square feet of
flexible space with 33 meeting rooms, including the 25,000 square foot "Desert"
ballroom and the 21,000 square foot "Springs" ballroom.
<PAGE>
The TWA Airline Equipment
The Equipment consisted of a cross section of TWA's ground service equipment and
equipment used in the operation and maintenance of aircraft, including various
trucks, lifts, cargo loaders, cargo containers, general heavy maintenance
equipment, flight simulators, jetways, office equipment, testing materials,
vehicles and power units. The Equipment was located at various locations in the
United States with the majority of the Equipment located at John F. Kennedy
International Airport on Long Island, New York; Los Angeles (California)
International Airport; Lambert-St. Louis (Missouri) International Airport; and
two TWA facilities at or near an airport in Kansas City, Missouri. On April 24,
1996, TWA exercised its early termination option under the airline equipment
lease and paid the rent due on that date along with the termination value plus
the $1 purchase option.
ITEM 3. LEGAL PROCEEDINGS
Neither the Partnership nor the Hotel is presently subject to any material
litigation nor, to the General Partner's knowledge, is any material litigation
threatened against the Partnership or the Hotel, other than routine litigation
and administrative proceedings arising in the ordinary course of business, some
of which are expected to be covered by liability insurance and which
collectively are not expected to have a material adverse effect on the business,
financial condition or results of operations of the Partnership.
ITEM 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 initiated a Consent Solicitation Statement on August 29,
1997. Pursuant to the Consent Solicitation Statement, the General Partner asked
Limited Partners to consider and vote upon (i) incurrence of the HM Junior Loan,
(ii) an amendment to the Partnership Agreement to authorize the General Partner
to form or organize one or more subsidiaries of the Partnership, to contribute
assets of the Partnership to any such subsidiary in exchange for the equity
interests in such subsidiary, and to delegate its authority to manage any such
subsidiary to a governing entity or other body in order to effect a structured
refinancing such as the proposed refinancing structures, (iii) an amendment to
the Partnership Agreement to amend the definition of "Affiliate" to make clear
that a publicly-traded entity will not be deemed an affiliate of the General
Partner or any of its Affiliates unless a person or group of persons directly or
indirectly owns twenty percent or more of the outstanding common stock of both
the General Partner and such other entity, (iv) an amendment to the Partnership
Agreement to revise the provisions relating to the authority of the General
Partner to permit the General Partner, without obtaining the consent of the
Limited Partners, to sell or otherwise transfer the Hotel to an independent
third party, (v) an amendment to the Partnership Agreement that would allow the
General Partner to incur indebtedness in order to capitalize the Junior Lender
(which will make the HM Junior Loan to the Partnership), (vi) amendments to the
Partnership Agreement to revise the provisions limiting the voting rights of the
General Partner and its Affiliates to permit the General Partner and its
Affiliates to have full voting rights with respect to all Units acquired by the
General Partner and its Affiliates except on matters where the General Partner
and its Affiliates have an actual economic interest other than as a unitholder
or general partner, (vii) amendments to the Partnership Agreement to amend
certain terms and sections of the Partnership Agreement in order to reflect the
fact that after the division of Marriott Corporation's operations into two
separate public companies in 1993, Host Marriott (formerly known as Marriott
Corporation) no longer owns the management business conducted by Marriott
International, Inc., delete certain obsolete references to entities and
agreements that are no longer in existence and update the Partnership Agreement
to reflect the passage of time since the formation of the Partnership, and
(viii) an amendment to the Partnership Agreement to permit the General Partner,
without the consent of the Limited Partners, to make any amendment to the
Partnership Agreement as is necessary to clarify or update the provisions
thereof so long as such amendment does not adversely affect the rights of
Unitholders under the Partnership Agreement in any material respect.
A majority of the Limited Partner approved the incurrence of the HM Junior Loan
and all of the amendments to the Partnership Agreement.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SECURITY HOLDER MATTERS
There is currently no public market for the Units and it is not anticipated that
a public market for the Units will develop. Transfers of Units are limited to
the first day of each accounting period, and are subject to approval by the
General Partner in its sole and absolute discretion and certain other
restrictions. As of December 31, 1997 there were 1,110 holders of record of the
900 Units.
In accordance with Sections 4.06 and 4.09 of the Amended Partnership Agreement,
cash available for distribution for any fiscal year will be distributed at least
annually, as follows:
(i) first, through and including the end of the Accounting Period, as defined,
during which the General Partner and the Limited Partners shall have
received cumulative distributions of refinancing and/or sales proceeds
("Capital Receipts") equal to 50% of their capital contributions 1% to the
General Partner and 99% to the Limited Partners (this threshold has not
been met as of December 31, 1997).
(ii) thereafter, 10% to the General Partner and 90% to the Limited Partners.
Cash available for distribution means, with respect to any fiscal period, the
revenues of the Partnership from all sources during such fiscal period less (i)
all cash expenditures of the Partnership during such fiscal period, including,
without limitation, debt service and any fees for management services and
administrative expenses; and (ii) such reserves as may be determined by the
General Partner, in its sole discretion, to be necessary to provide for the
foreseeable needs of the Partnership, but shall not include Capital Receipts.
On December 1, 1997, the Partnership made a distribution of capital from the
proceeds of the refinancing in the amount of $22,727,000 as follows: $227,000 to
the General Partner and $22,500,000 to the Limited Partners ($25,000 per Unit).
On October 31, 1995, the Partnership made an interim cash distribution solely
from the TWA equipment lease in the amount of $3,900,000 as follows: $39,000 to
the General Partner and $3,861,000 to the Limited Partners ($4,290 per Unit). On
April 15, 1996, the Partnership made a cash distribution in the amount of
$1,547,270, $15,470 to the General Partner and $1,531,800 to the Limited
Partners ($1,702 per Unit) representing a final cash distribution from the 1995
TWA equipment lease payments.
In accordance with Sections 4.07, 4.08 and 4.09 of the Amended Partnership
Agreement, Capital Receipts not retained by the Partnership will be distributed
to the owners of record on the last day of each Accounting Period in which the
transaction is completed, as follows:
(i) first, 1% to the General Partner and 99% to the Limited Partners until the
partners have received cumulative distributions of Capital Receipts equal
to $90,909,100, and
(ii) thereafter, 10% to the General Partner and 90% to the Limited Partners.
As of December 31, 1997, cumulative distributions of Capital Receipts equaled
$40,773,400 ($407,500 to the General Partner and $40,365,900 to the Limited
Partners ($44,851 per Unit)).
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents historical operating information
for the Partnership for each of the five years ended December 31, 1997:
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1997 1996 1995 1994 1993
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(in thousands, except per Unit amounts)
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Revenues(1)..............................................$ 33,369 $ 24,681 $ 22,688 $ 21,407 $ 21,289
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Operating Profit.........................................$ 16,381 $ 14,510 $ 13,293 $ 9,873 $ 9,990
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Net income (loss) before extraordinary income............$ 2,161 $ 109 $ 1,585 $ (2,264) $ (3,099)
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Extraordinary gain due to orgiveness of additional rental$ 27,538 $ -- $ -- $ -- $ --
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Net income (loss)........................................$ 29,699 $ 109 $ 1,585 $ (2,264) $ (3,099)
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Net income (loss) per limited partner unit (900 Units)...$ 32,669 $ 120 $ 1,743 $ (2,490) $ (3,409)
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Total Assets.............................................$ 172,156 $ 164,882 $ 173,742 $ 172,238 $ 175,451
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Total Obligations........................................$ 186,821 $ 186,519 $ 193,941 $ 188,951 $ 185,941
========== ========= ========= ========== ==========
Cash Distributions per limited partner Unit (900 Units)..$ 25,000 $ 1,702 $ 5,577 $ 4,404 $ 5,498
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</TABLE>
(1) Subsequent to November 25, 1997, revenues reflect gross hotel sales. Prior
to that date, revenues reflected hotel rental income.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The following discussion and analysis addresses the results of operations of the
Partnership for the fiscal years ended December 31, 1997, 1996 and 1995.
Growth in the Partnership's total Hotel room sales, and thus rental income and
revenue, is primarily a function of average occupancy and average room rates, as
well as control of hotel operating costs. In addition, due to the amount of
meeting/convention business at the Hotel, food and beverage and golf and spa
operations have a direct effect on the Partnership's rental income and 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 measure
of revenue). REVPAR does not include food and beverage or other ancillary
revenues generated by the Hotel. REVPAR for the years ended December 31, 1997,
1996 and 1995 was $124, $113 and $104, respectively. Food and beverage sales
increased to $40.4 million in 1997 from $38.4 million in 1996 from $33.5 million
in 1995 due to increased group sales.
Revenue for the period of November 25 through December 31, 1997, net rental
income from the Hotel for 1995 through November 24, 1997 and Equipment rental
for 1995 through April 24, 1996 are applied to debt service, property
taxes, partnership administrative costs, Partnership funded capital expenditures
and cash distributions to the partners.
Results of Operations
1997 Compared to 1996
Hotel Rental Income. On November 25, 1997, in connection with the
refinancing, the General Partner and the Tenant/Manager converted the Operating
Lease to a management agreement (the "Management Agreement"). As a result of
this conversion, full year 1997 hotel rental income is not comparable to full
year 1996 hotel rental income. Hotel rental income for the period January 1
through November 25, 1997 was $24 million. For the year, total Hotel sales
increased 6% due primarily to a 7.6% increase in rooms revenue. REVPAR
improved 10% to $124 due to a 7% increase in average room rate to approximately
$170 and a 2.0 percentage point increase in average daily occupancy to
approximately 73%.
Hotel Revenues. Effective November 25, 1997, the Partnership records
hotel operations as revenues. As a result of the conversion from an Operating
Lease to a Management Agreement, Partnership hotel revenues were $9.4 million.
This consists of the Hotel's operating results for the period of November 25
through December 31, 1997.
<PAGE>
Airline Equipment Rental Income. Airline equipment rental income was
$1.2 million in 1996. The airline equipment lease was terminated in April 1996.
On April 24, 1996, TWA, the lessee, terminated the lease and purchased the
equipment, as permitted under the lease agreement.
Depreciation. Depreciation and amortization decreased by $550,000 due
to the retirement of $7 million of equipment in 1997.
Property Taxes. Property taxes were unchanged at $2.0 million for both
1997 and 1996.
Partnership Administration and Other. Partnership administration and
other decreased from $474,000 in 1996 to $445,000 in 1997 due to a slight
decrease in administrative costs related to the refinancing.
Base Management Fee. As a result of the conversion to a management
agreement, the Partnership recorded base management fees from November 26
through December 31, 1997. Base management fees are calculated as 3% of sales or
$281,000 for 1997.
Insurance and Other. As a result of the conversion to a management
agreement, insurance and other expense was $256,000. This expense includes a
loss of $163,000 on the retirement of fixed assets, $65,000 of insurance expense
and $28,000 in equipment rental and permits and licenses.
Incentive Management Fee. As a result of the conversion to a management
agreement, the Partnership's incentive management fee expense from November 26
through December 31, 1997 was $123,000. As further explained in Note 7 to the
financial statements, MII is entitled to a total of $2 million in fees for 1997,
$123,000 of which is incentive management fee expense.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, operating profit increased $1.9 million or
13% to $16.4 million for 1997 when compared to 1996.
Interest Expense. Interest expense decreased 5% from $15.5 million in
1996 to $14.8 million in 1997 due to a decrease in the Partnership's weighted
average interest rate from 9.0% to 8.4%. The Partnership's $160 million Bridge
Loan accrued interest at LIBOR plus 2.75 percentage points from January 1
through November 25, 1997, the closing date of the Bridge Loan refinancing. The
weighted average interest rate for the Bridge Loan for this period was 8.4%
compared to 9.0% in 1996. The refinancing of the Bridge Loan consists of three
tiers of debt: a senior loan which bears interest at a fixed rate of 7.8%; a
mezzanine loan, which bears interest at a fixed rate of 10.365%; and a Host
Marriott junior loan which bears interest at a fixed rate of 13%.
Interest Income and Other. Interest income and other decreased 45% from
$1.1 million in 1996 to $607,000 in 1997. The decrease is primarily due to the
Partnership utilizing $8.2 million of cash and cash equivalents to reduce the
balance of its outstanding mortgage debt combined with paying $2.7 million in
refinancing costs which decreased the cash balance on which interest income is
earned.
<PAGE>
Extraordinary Items. The Partnership recognized an extraordinary gain
in 1997 of $27.5 million representing the forgiveness of additional rental by
the Tenant/Manager.
1996 Compared to 1995
Hotel Rental Income. Hotel rental income for 1996 increased 18% from
$19.9 million in 1995 to $23.4 million in 1996. For the year, total Hotel
revenues increased 15% due to increases in all areas of the Hotel including
rooms, food and beverage, golf and spa and other ancillary revenues. REVPAR
improved 9% to $113 due to a 5% increase in average room rate to approximately
$158 and a 2.5 percentage point increase in average daily occupancy to
approximately 71%. Food and beverage revenues increased 15% from $33.5 million
in 1995 to $38.4 million in 1996.
Airline Equipment Rental Income. Airline equipment rental income
decreased 56% from $2.8 million in 1995 to $1.2 million in 1996 due to the
termination of the airline equipment lease in April 1996. On April 24, 1996,
TWA, the lessee, terminated the lease and purchased the equipment, as permitted
under the lease agreement.
Depreciation. Depreciation and amortization decreased by $100,000 due
to the write-off in 1995 of the airline equipment partially offset by an
increase in building and equipment depreciation due to the $9.1 million rooms
renovation.
Property Taxes. Property tax expense increased 61% to $2.0 million in
1996 from $1.2 million in 1995 primarily due to a nonrecurring $600,000 refund
received in 1995 related to property taxes paid in prior years.
Partnership administration and other. Partnership administration and
other increased 34% primarily due to an increase in administrative costs due to
the refinancing of the mortgage debt.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, operating profit increased $1.2 million or
9.2% to $14.5 million for 1996 when compared to 1995.
Interest Expense. Interest expense increased 16% from $13.4 million in
1995 to $15.5 million in 1996 due to an increase in the weighted average
interest rate. The mortgage debt matured on July 27, 1996 and went into default
on the maturity date. Pursuant to the loan documents, the mortgage debt accrued
interest at the default rate of 10.75% until the refinancing on December 23,
1996. The weighted average interest rate on the first mortgage debt was 9.0% in
1996 and 7.8% in 1995.
<PAGE>
Interest Income and Other. Interest income and other decreased 34% from
$1.6 million in 1995 to $1.1 million in 1996. The decrease is primarily due to
$692,000 of income recognized in 1995 on the funding of the pool expansion by
Marriott Vacation Club International ("MVCI") offset by a $108,000 increase in
interest income earned in 1996 on the Partnership's cash held for refinancing.
Capital Resources and Liquidity
The Partnership's financing needs have been historically funded through loan
agreements with independent financial institutions. As a result of the
successful refinancing of the Partnership's mortgage debt, the General Partner
believes that the Partnership will have sufficient capital resources and
liquidity to conduct its operations in the ordinary course of business.
Principal Sources and Uses of Cash
The Partnership's principal source of cash was from the Hotel Operating Lease up
until November 25, 1997, at which time the Operating Lease was converted to the
Management Agreement. Upon conversion, the Partnership's principal source of
cash is from Hotel operations. Prior to the Equipment Lease termination, the
Partnership's principal sources of cash included rents received under the
Equipment Lease and proceeds from Equipment sales. Its principal uses of cash
are to fund the property improvement fund, pay debt service and cash
distributions to the partners. Additionally, during 1996 and 1997, the
Partnership utilized cash to pay financing costs incurred in connection with the
refinancing of the mortgage debt.
The Hotel Operating Lease provided for the payment of the greater of Basic
Rental or Owner's Priority. Basic Rental equaled 80% of Operating Profit, as
defined in the Hotel Operating Lease. Owner's Priority equaled the greater of
(i) $20 million plus debt service on certain additional debt to expand the Hotel
or (ii) Debt Service, as defined.
Pursuant to an agreement reached with MII, for fiscal year 1997, the $20 million
Owner's Priority was increased to $20.5 million. MII was entitled only to the
next $2 million of Operating Profit. Any additional Operating Profit in excess
of $22.5 million was remitted entirely to the Partnership. For 1997, Operating
Profit was $23.7 million, MII earned $2.0 million and the remaining $1.2 million
was remitted to the Partnership. In connection with the long-term financing, MII
agreed to waive any and all claims to Additional Rental that accrued prior to
the consummation of the loan ($27.5 million).
On November 25, 1997, in connection with the refinancing, the General Partner
also negotiated with the Tenant to convert the Operating Lease to a management
agreement (the "Management Agreement"). The Tenant would become manager of the
Hotel (the "Manager"). The initial term of the Management Agreement continues
through 2022 with four successive renewal options of ten years each.
Beginning with fiscal year 1998 forward, the Management Agreement provides that
no incentive fee will be paid to the Manager with respect to the first $21.5
million of Operating Profit (the "Owner's Priority"). Thereafter the Manager
will receive the next $1.8 million of Operating Profit as an incentive
management fee and any Operating Profit in excess of the $23.3 million will be
divided 75% to the Partnership and 25% to the Manager. Any such payments will be
made annually after completion of the audit of the Partnership's books.
<PAGE>
Total cash provided by operations of the Hotel was $12.4 million, $7.0 million
and $6.7 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Proceeds from the sale of airline equipment were $0 for the year
ended December 31, 1997, $2.5 million for the year ended December 31, 1996, and
$4.0 million for the year ended December 31, 1995 due to the sale of the
equipment in 1996. Cash contributed to the property improvement fund of the
Hotel was $4.6 million, $4.4 million and $3.8 million for the years ended
December 31, 1997, 1996 and 1995, respectively. Cash distributed to the partners
was $22.7 million, $1.5 million and $5.0 million during the years ended December
31, 1997, 1996 and 1995, respectively. Financing costs related to refinancing
the mortgage debt were $1.2 million in 1997 and $2.7 million in 1996. There were
no refinancing costs in 1995.
The General Partner expects that contributions to the property improvement fund
will be a sufficient reserve for the future capital repair and replacement needs
of the Hotel's property and equipment.
Pursuant to the terms of the Hotel Operating Lease and Management Agreement, the
Partnership is obligated to fund major improvements for the Hotel's mechanical
and heating systems. During 1998, the Partnership expects to fund approximately
$2.0 million for improvements to the Hotel's HVAC system (heating, ventilating
and air conditioning). Also, during 1998, the Partnership expects to fund
approximately $350,000 on roof repair projects. The Partnership has established
a reserve to pay for these improvements which is expected to be sufficient. This
reserve is being held by the mortgage loan lender. There are currently no
additional Partnership funded capital expenditure items expected for 1998.
Debt Financing
On December 23, 1996, pursuant to an agreement with the Partnership, GMAC
Commercial Mortgage Corporation ("GMAC") purchased the existing mortgage debt of
the Partnership and amended and restated certain terms thereof (as amended and
restated, the "Bridge Loan"). The Bridge Loan consisted of a $160 million
nonrecourse mortgage loan. The Partnership utilized $8.2 million from its
refinancing reserve to reduce the outstanding principal balance of the existing
mortgage debt to the $160 million outstanding under the Bridge Loan. In
addition, the Partnership utilized $2.6 million from the refinancing reserve to
pay costs associated with the financing including lender's fees, property
appraisals, environmental studies and legal fees. Approximately half of the $2.6
million was for fees related to the long-term financing. The Bridge Loan was
originated by Goldman Sachs Mortgage Company ("GSMC"), matured on October 31,
1997 and bore interest at the London Interbank Offered Rate ("LIBOR") plus 2.75
percentage points and required that all excess cash from Hotel operations, if
any, be held in a debt service reserve for future debt service or to reduce the
outstanding principal balance of the Bridge Loan upon maturity. For the year
ended December 31, 1996, the weighted-average interest rate on the Partnership's
mortgage debt was 9.0%. For the period of January 1 through November 25, 1997
the weighted average interest rate was 8.4%.
The Bridge Loan was secured by the Partnership's fee interest in the Hotel, a
security interest in certain personal property associated with the Hotel
including furniture and equipment, contracts and other general intangibles
and a security interest in the Partnership's rights under the Hotel operating
lease, the Hotel purchase agreement and other related agreements.
<PAGE>
Pursuant to the terms of the debt refinancing, there are no continuing
requirements for a debt service guarantee. Host Marriott and the General Partner
were released from their obligations to the Partnership under their original
debt service guarantee with the refinancing of the Partnership's mortgage debt.
In conjunction with the refinancing of the mortgage debt, the General Partner
reaffirmed a foreclosure guarantee to the lender in the amount of $50 million.
Pursuant to the terms of the foreclosure guarantee, amounts would be payable
only upon a foreclosure of the Hotel and only to the extent that the gross
proceeds from a foreclosure sale were less than $50 million. The foreclosure
guarantee was not reaffirmed with the refinancing of the Bridge Loan.
On September 26, 1997, the General Partner received unrevoked consents approving
a new loan structure and certain amendments to the Partnership Agreement which
were necessary to refinancing negotiations of the Bridge Loan. An extension
agreement was signed with the current lender on October 30, 1997, extending the
maturity date and loan terms of the Bridge Loan from October 31, 1997 until
December 31, 1997, without penalty.
On November 25, 1997, the Partnership secured long-term refinancing for its $160
million Bridge Loan. The new financing consists of three tranches: 1) a $103
million senior loan, 2) a $20 million loan and 3) a $59.7 million junior loan.
The $103 million senior loan (the "Senior Loan") is from GMAC Commercial
Mortgage Company ("GMAC") to a newly formed bankruptcy remote subsidiary of the
Partnership, DS Hotel LLC, which owns the Hotel and related assets. The Senior
Loan matures in December, 2022 and is secured by a first mortgage lien on the
Hotel. The loan bears interest at a fixed rate of 7.8% and requires monthly
payments of interest and principal with amortization over its twenty-five year
term. On June 11, 2010 the interest rate increases to 200 basis points over the
then current yield on 12 year U.S. treasuries and also additional principal
payments will be required as defined in the loan agreement.
The second tranche of debt consists of a $20 million loan (the "Mezzanine Loan")
from Goldman Sachs Mortgage Company ("GSMC") to a newly formed bankruptcy remote
subsidiary of the Partnership, Marriott DSM LLC, which secures the loan.
Marriott DSM LLC owns a 100% interest in DS Hotel LLC. The Mezzanine Loan
consists of a fully amortizing $20 million loan maturing in December, 2010. The
loan bears interest at a fixed rate of 10.365% and requires monthly payments of
interest and principal with amortization over a twelve and one-half year term.
The third tranche of debt consists of a junior loan, (the "HM Junior Loan") to
the Partnership from MDSM Finance LLC ("MDSM"), a wholly owned subsidiary of the
General Partner. The HM Junior Loan has a term of thirty years and requires no
principal amortization for the first twelve and one-half years with a seventeen
and one-half year amortization schedule thereafter. Security for the HM Junior
Loan is the Partnership's 100% interest in Marriott DSM LLC. If remaining cash
flow is insufficient to pay interest on the HM Junior Loan, interest is deferred
and will accrue and compound and be payable from future cash flow. The HM Junior
Loan also entitles MDSM to receive 30% of any excess cash flow, as defined,
available annually, plus 30% of any net capital/residual proceeds after full
repayment of the Senior Loan, the Mezzanine Loan and the HM Junior Loan.
<PAGE>
In conjunction with the refinancing of the mortgage debt, the Partnership was
required to establish cash reserves which are held by an agent of the lender
including:
o $6.2 million debt service reserve
o $1.5 million reserve for capital expenditures
o $2.0 million reserve for payment of fees to the Tenant/Manager
The reserves were established from the Partnership's restricted cash related to
the Bridge Loan in addition to Partnership operating cash.
In addition, the Partnership is required to establish with the lender a separate
escrow account for payments of insurance premiums and real estate taxes for the
Hotel if the credit rating of MII is downgraded by Standard and Poor's Rating
Services. The Manager is a wholly-owned subsidiary of MII. In March 1997, MII
acquired the Renaissance Hotel Group N.V., adding greater geographic diversity
and growth potential to its lodging portfolio. The assumption of additional debt
associated with this transaction resulted in a single downgrade of MII's
long-term senior unsecured debt effective April, 1997. Therefore, the
Partnership was required to establish a reserve account for insurance and real
estate tax. As of December 31, 1997, $581,000 remains available to pay insurance
and real estate taxes. The escrow reserve is included in restricted cash and the
resulting tax and insurance liability is included in accounts payable and
accrued liabilities in the accompanying balance sheet.
The Partnership utilized $1.2 million from the refinancing reserve to pay costs
associated with the financing including lender or subsidiary fees, property
appraisals, environmental studies and legal fees.
Debt to MII
On April 30, 1996, the Partnership entered into a short-term loan with MII in
the amount of $1,700,000 to fund a portion of the Hotel's rooms refurbishment
project. The loan's stated maturity was June 13, 1997, bore interest at 8.5% and
was to be repaid from the property improvement fund as contributions were made
during the year. At December 31, 1996, the loan balance was $900,000. The loan
was fully repaid on March 28, 1997.
Property Improvement Fund
The Partnership is required to maintain the Hotel in good repair and condition.
The Hotel Operating Lease agreement and Management Agreement require the
Tenant/Manager to make annual contributions to the property improvement fund for
the Hotel on behalf of the Partnership. Contributions to the fund are equal to
4.5% of Hotel gross revenues through 1997 increasing to 5.5% thereafter. Total
contributions to the fund were $3.8 million in 1995, $4.4 million in 1996 and
$4.6 million in 1997. The balance of the Hotel's property improvement fund was
$1.6 million as of December 31, 1997.
<PAGE>
During the summer of 1996, a $9.1 million rooms refurbishment was completed at
the Hotel. The property improvement fund was not sufficient to fund the
refurbishment. The Partnership arranged a short-term loan from MII of up to $1.7
million at a fixed rate of 8.5% to finance the anticipated shortfall. The loan
was repaid from the property improvement fund prior to its maturity on June 13,
1997. The General Partner believes that funds available from the property
improvement fund will be adequate for anticipated renewal and replacement
expenditures.
During 1995, the Hotel's main swimming pool was expanded. This $2.1 million
expansion was funded partially with $692,000 in proceeds received from Marriott
Vacation Club International ("MVCI") pursuant to an agreement between the
Partnership and MVCI for the development of additional time share units on land
adjacent to the Hotel. The Partnership funded the remaining $1.4 million from
cash reserves.
Equipment Lease
The Partnership leased airline equipment to TWA under an operating lease which
expired in April 1995. On April 20, 1995, the Partnership reached an agreement
with TWA whereby TWA was obligated to pay quarterly payments of $780,000 plus
interest in arrears at 17%. At the end of the lease in July 1996 (or earlier if
a termination option was exercised), TWA had the option to purchase the
equipment for one dollar ($1). The lease generated $5.4 million in cash flow
during the 1995 fiscal year. As a result of the lease renewal terms, the
Partnership recorded a receivable for the future lease payments due from TWA and
deferred the gain on the transaction. The deferred gain was recognized as income
as lease payments were received. Total rental income recognized in 1995 and 1996
on the lease was $2.8 million and $1.2 million, respectively. The original cost
of the airline equipment was depreciated over the life of the operating lease.
Depreciation expense on the airline equipment was $526,000 for the year ended
December 31, 1995.
On April 24, 1996, TWA exercised its early termination option under the airline
equipment lease and paid the rent due on that date of $847,000 along with the
termination value of $780,000 plus the $1 purchase option. Rental income of
$1,248,000 was generated by the lease in 1996.
Inflation
For the three fiscal years ended December 31, 1997, the rate of inflation has
been relatively low and, accordingly, has not had a significant impact on the
Partnership's gross income and net income. The Operating Tenant/Manager is
generally able to pass through increased costs to customers through higher room
rates. In 1997, the increase in average room rates at the Hotel exceeded those
of direct competitors as well as the general level of inflation.
<PAGE>
Seasonality
Demand, and thus occupancy and room rates, is affected by normally recurring
seasonal patterns. Demand tends to be higher during the months of November
through April than during the remainder of the year. This seasonality tends to
affect the results of operations, increasing the revenue and rental income
during these months. In addition, this seasonality may also increase the
liquidity of the Partnership during these months.
New Statement of Financial Accounting Standards
During 1996, the Partnership adopted Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Adoption of SFAS No. 121 did not have an
effect on its financial statements.
Forward Looking Statements
Certain matters discussed in this Management's Discussion and Analysis section
are forward-looking statements within the meaning of the Private Litigation
Reform Act of 1995 and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Partnership to be different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Although the Partnership believes the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be attained. 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.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Index Page
<S> <C>
Report of Independent Public Accountants.... ............................ 20
Statement of Operations................................................... 21
Balance Sheet............................................................. 22
Statement of Changes in Partners' (Deficit) Capital ...................... 23
Statement of Cash Flows................................................... 24
Notes to Financial Statements............................................. 25
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Desert Springs Marriott
Limited Partnership and subsidiaries (a Delaware limited partnership) as of
December 31, 1997 and 1996, and the related statements of operations, changes in
partners' (deficit) capital and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements and the schedules
referred to below are the responsibility of the General Partner's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Desert Springs Marriott Limited
Partnership and subsidiaries as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedules listed in the index at Item 14(a)(2)
are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 18, 1998
<PAGE>
STATEMENT OF OPERATIONS
Desert Springs Marriott Limited Partnership and Subsidiaries
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands, except per Unit amounts)
<TABLE>
<CAPTION>
<S> 1997 1996 1995
------- ------- -------
REVENUES <C> <C> <C>
Rentals
Hotel....................................... $24,016 $23,433 $19,851
Airline equipment (Note 6)................... -- 1,248 2,837
Hotel revenues
Rooms.................................... 3,620 -- --
Food and beverage............................ 3,330 -- --
Other....................................... 2,403 -- --
------ ------- -------
Total hotel revenues.................... 9,353 -- --
------ ------- -------
33,369 24,681 22,688
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms......................................... 801 -- --
Food and beverage..............................2,646 -- --
Other departmental costs and deductions...... 3,296 -- --
----- ------ -----
Total property-level costs and expenses 6,743 -- --
Depreciation .................................. 7,182 7,732 7,823
Property taxes.............................. 1,958 1,965 1,219
Partnership administration and other......... 445 474 353
Base management fee...................... 281 -- --
Insurance and other......................... 256 -- --
Incentive management fee................... 123 -- --
------ ------ -----
16,988 10,171 9,395
------ ------ -----
OPERATING PROFIT............................ 16,381 14,510 13,293
Interest expense.......................... (14,827) (15,501)(13,371)
Interest income and other............... 607 1,100 1,663
------- ------ -----
NET INCOME BEFORE EXTRAORDINARY ITEM....... 2,161 109 1,585
------- ------ -----
EXTRAORDINARY ITEM
Gain on forgiveness of additional rental.. 27,538 -- --
------- ----- -----
NET INCOME................................... $29,699 $109 $1,585
------- ----- -----
ALLOCATION OF NET INCOME
General Partner.............................. $297 $1 $16
Limited Partners......................... 29,402 108 1,569
------- ---- -----
$29,699 $109 $1,585
======= ===== ======
NET INCOME PER LIMITED PARTNER UNIT (900 Units)...$32,669 $120 $1,743
======= ==== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
BALANCE SHEET
Desert Springs Marriott Limited Partnership and Subsidiaries
As of December 31, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
ASSETS
<S> <C> <C>
Property and equipment, net...............................................................$ 151,401 $ 155,441
Due from Marriott International, Inc...................................................... 1,368 8
Property improvement fund................................................................. 1,598 1,041
Deferred financing, net of accumulated amortization....................................... 3,000 2,637
Restricted cash........................................................................... 10,236 --
Cash and cash equivalents................................................................. 4,553 5,755
------------- -------------
$ 172,156 $ 164,882
============= =============
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt..........................................................................$ 103,000 $ 160,000
Note payable .......................................................................... 20,000 --
Due to Host Marriott and affiliates.................................................... 59,727 --
Additional rental paid by hotel lessee................................................. -- 25,013
Due to Marriott International, Inc..................................................... 2,122 1,022
Accounts payable and accrued expenses.................................................. 1,972 484
------------- -------------
Total Liabilities.................................................................... 186,821 186,519
------------- -------------
PARTNERS' DEFICIT
General Partner
Capital contribution................................................................. 909 909
Capital distributions................................................................ (829) (602)
Cumulative net losses................................................................ (101) (398)
------------- --------------
(21) (91)
------------- --------------
Limited Partners
Capital contributions, net of offering costs of $10,576.............................. 77,444 77,444
Investor notes receivable............................................................ (22) (22)
Capital distributions................................................................ (82,084) (59,584)
Cumulative net losses................................................................ (9,982) (39,384)
------------ --------------
(14,644) (21,546)
------------ --------------
Total Partners' Deficit.............................................................. (14,665) (21,637)
------------ --------------
$ 172,156 $ 164,882
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF CHANGES IN
PARTNERS' (DEFICIT) CAPITAL
Desert Springs Marriott Limited Partnership and Subsidiaries
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
-------------- ------------- ------------
<S> <C> <C> <C>
Balance, December 31, 1994..................................................$ (42) $ (16,671) $ (16,713)
Net income............................................................... 16 1,569 1,585
Capital distributions.................................................... (51) (5,020) (5,071)
-------------- -------------- ------------
Balance, December 31, 1995.................................................. (77) (20,122) (20,199)
Net income............................................................... 1 108 109
Capital distributions.................................................... (15) (1,532) (1,547)
-------------- -------------- -----------
Balance, December 31, 1996.................................................. (91) (21,546) (21,637)
Net income............................................................... 297 29,402 29,699
Capital distributions.................................................... (227) (22,500) (22,727)
-------------- -------------- -----------
Balance, December 31, 1997..................................................$ (21) $ (14,644) $ (14,665)
============== ============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF CASH FLOWS
Desert Springs Marriott Limited Partnership and Subsidiaries
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income..............................................................$ 29,699 $ 109 $ 1,585
Extraordinary item...................................................... (27,538) -- --
-------------- ------------- --------------
Income before extraordinary item........................................ 2,161 109 1,585
Noncash items:
Depreciation ........................................................ 7,182 7,732 7,823
Amortization of deferred financing costs as interest expense......... 807 104 135
Loss (gain) on dispositions of property and equipment................ 163 (1,248) (1,972)
Changes in operating accounts:
Due to/from Marriott International, Inc. and affiliates.............. 640 2,287 (2,241)
Due from airline equipment lessee.................................... -- -- 1,357
Accounts payable and accrued interest................................ 1,488 (1,967) 37
-------------- -------------- --------------
Cash provided by operations....................................... 12,441 7,017 6,724
-------------- -------------- --------------
INVESTING ACTIVITIES
Additions to property and equipment..................................... (3,318) (9,989) (3,979)
Change in property improvement fund, net................................ (544) 4,384 (2,035)
Proceeds from sales of airline equipment................................ -- 2,509 3,964
------------- -------------- --------------
Cash used in investing activities................................. (3,862) (3,096) (2,050)
------------- -------------- --------------
FINANCING ACTIVITIES
Proceeds from mortgage loan............................................. 182,727 160,000 --
Repayment of mortgage debt.............................................. (160,000) (168,239) --
Capital distributions to partners....................................... (22,727) (1,547) (5,071)
Change in restricted cash............................................... (10,236) -- --
Additional rental paid by hotel lessee.................................. 2,525 3,165 3,672
Payment of refinancing costs............................................ (1,170) (2,658) --
Repayment of note payable to Marriott International, Inc................ (900) (800) --
Advances from Marriott International, Inc............................... -- 1,700 --
Cash used in financing activities................................. (9,781) (8,379) (1,399)
------------ -------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... (1,202) (4,458) 3,275
CASH AND CASH EQUIVALENTS at beginning of year............................. 5,755 10,213 6,938
------------ -------------- -------------
CASH AND CASH EQUIVALENTS at end of year...................................$ 4,553 $ 5,755 $ 10,213
============ ============== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest and other...............................$ 12,959 $ 17,372 $ 13,237
============ ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Desert Springs Marriott Limited Partnership and Subsidiaries
December 31, 1997 and 1996
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Desert Springs Marriott Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed to acquire and own Marriott's Desert Springs
Resort and Spa and the land on which the 884-room hotel and a golf course are
located (the "Hotel") and airline equipment. The sole general partner of the
Partnership, with a 1% interest, is Marriott Desert Springs Corporation (the
"General Partner"), a wholly-owned subsidiary of Host Marriott Corporation
("Host Marriott"). The Hotel was leased to Marriott Hotel Services, Inc. (the
"Tenant"), a wholly-owned subsidiary of Marriott International, Inc. ("MII"),
along with a second golf course leased by the Partnership from Marriott Desert
Springs Development Corporation, also a wholly-owned subsidiary of MII. The
airline equipment was leased to Trans World Airlines, Inc. ("TWA") pursuant to
the terms of an operating lease through April 20, 1995. On April 20, 1995, the
Partnership entered into a new sales-type lease agreement which was due to
expire on June 24, 1996. On April 24, 1996, TWA exercised its early termination
option under the airline equipment lease and paid the rent due on that date of
$847,000 along with the termination value of $780,000 plus the $1 purchase
option (see Note 6).
The Partnership was formed on February 26, 1987, and operations commenced on
April 24, 1987 (the "Unit Offering Closing Date"). Between March 20, 1987, and
the Unit Offering Closing Date, 900 limited partnership interests (the "Units")
were subscribed pursuant to a private placement offering. The offering price per
Unit was $100,000; $25,000 payable at subscription with the balance due in three
annual installments through June 15, 1990, or, as an alternative, $87,715 in
cash at closing as full payment of the subscription price. Of the total 900
Units, 740.5 were purchased on the installment basis and 159.5 Units were paid
in full. The General Partner contributed $909,100 in cash for its 1% general
partnership interest.
In connection with the mortgage debt refinancing in 1997 (see Note 5), 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 DS Hotel LLC and Marriott DSM 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. In addition, effective
November 25, 1997, the Hotel is managed by the Tenant (the "Manager").
Partnership Allocations and Distributions
Under the partnership agreement, Partnership allocations, for Federal income tax
purposes, and distributions are generally made as follows:
a. Cash available for distribution will generally be distributed (i) first, 1%
to the General Partner and 99% to the limited partners until the General
Partner and the limited partners (collectively, the "Partners") have
received cumulative distributions of sale or refinancing proceeds ("Capital
Receipts") equal to $45,454,545; and (ii) thereafter, 10% to the General
Partner and 90% to the limited partners.
b. Refinancing proceeds and proceeds from the sale or other disposition of
less than substantially all of the assets of the Partnership, not retained
by the Partnership, will be distributed (i) first, 1% to the General
Partner and 99% to the limited partners, until the Partners have received
cumulative distributions of Capital Receipts equal to $90,909,100; and (ii)
thereafter, 10% to the General Partner and 90% to the limited partners.
Proceeds from the sale or other disposition of all or substantially all of
the assets of the Partnership or from the sale or other disposition of all
or substantially all of the Hotel will be distributed to the Partners pro
rata in accordance with their capital account balances as defined in the
partnership agreement.
<PAGE>
c. Net profits will be allocated as follows: (i) first, through and including
the year ended December 31, 1990, 99% to the General Partner and 1% to the
limited partners; (ii) next, through and including the year ending December
31, 1992, 70% to the General Partner and 30% to the limited partners; and
(iii) thereafter, 10% to the General Partner and 90% to the limited
partners.
d. Net losses will be allocated 100% to the General Partner through December
31, 1990, and thereafter, 70% to the General Partner and 30% to the limited
partners, subject to certain limitations, as specified in the partnership
agreement, regarding allocations to the limited partners.
e. The deduction for interest on the Purchase Note, as defined, which
cumulatively will not exceed $12,285 per Unit will be allocated to those
limited partners owning the Units purchased on the installment basis.
f. In general, gain recognized by the Partnership will be allocated as
follows: (i) first, to all Partners whose capital accounts have negative
balances until such negative balances are brought to zero; (ii) next, to
all Partners up to the amount necessary to bring their respective capital
account balances to an amount equal to their respective invested capital,
as defined; (iii) third, in the case of gain arising from the sale or other
disposition (or from a related series of sales or dispositions) of all or
substantially all of the assets of the Partnership, (a) to the limited
partners in an amount equal to the excess, if any, of (1) the sum of the
product of 12% times the weighted-average of the limited partners' invested
capital, as defined, each year, minus (2) the sum of cumulative
distributions to the limited partners of cash available for distribution,
and (b) next, to the General Partner until it has been allocated an amount
equal to 10/90 times the amount allocated to the limited partners in (a);
and (iv) thereafter, 12% to the General Partner and 88% to the limited
partners.
For financial reporting purposes, profits and losses are allocated among the
Partners based upon their stated interests in cash available for distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership records are maintained on the accrual basis of accounting and
its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Restatement of Revenues 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 as presented in the 1997 Annual
Report on Form 10-K did not reflect gross hotel sales and property-level
operating expenses for the period November 25, 1997 to year end but rather
reflected house profit for the period November 25, 1997 (the date the management
agreement was entered into) through December 31, 1997. House profit represents
gross hotel revenues less property-level operating expenses, excluding
depreciation, 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 1997 statement of
operations has been restated to reflect an increase in hotel revenues and
property-level expenses of $6.7 million for the period November 25, 1997 through
December 31, 1997. The restatement had no impact on operating profit or
net income.
<PAGE>
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the
straight-line method over the following estimated useful lives of the assets
less an estimated residual value of 10% on the original building cost and 20% on
the airline equipment cost:
Building and improvements 50 years
Furniture and equipment 4 to 10 years
Airline equipment 8 years
All Hotel property and equipment is pledged as security for the Senior Loan
described in Note 5.
The Partnership assesses impairment of its real estate property based on whether
estimated undiscounted future cash flow from the hotel will be less than its net
book value. If the property is impaired, its basis is adjusted to fair market
value.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining debt financing and are amortized over the term thereof. The original
Mortgage Debt (see Note 5) matured on July 27, 1996. Deferred financing costs
associated with that debt, totaling $943,000, were fully amortized at maturity
and removed from the Partnership's books. Costs associated with the Bridge Loan
totaled $2,658,000 at December 31, 1996. Total financing costs associated with
the Bridge Loan and long-term financing completed on November 25, 1997 totaled
$3,828,000. At December 31, 1997 and 1996, accumulated amortization of deferred
financing costs totaled $828,000 and $21,000, respectively.
Restricted Cash Reserves
In conjunction with the refinancing of the mortgage debt, the Partnership was
required to establish cash reserves which are held by an agent of the lender
including:
o $6.2 million debt service reserve
o $1.5 million reserve for capital expenditures
o $2.0 million reserve for payment of fees to the Tenant/Manager
In addition, the Partnership is required to establish with the lender a separate
escrow account for payments of insurance premiums and real estate taxes for the
Hotel if the credit rating of MII is downgraded by Standard and Poor's Rating
Services. The Manager is a wholly-owned subsidiary of MII. In March 1997, MII
acquired the Renaissance Hotel Group N.V., adding greater geographic diversity
and growth potential to its lodging portfolio. The assumption of additional debt
associated with this transaction resulted in a single downgrade of MII's
long-term senior unsecured debt effective April, 1997. Therefore, the
Partnership was required to establish a reserve account for insurance and real
estate tax. As of December 31, 1997, $581,000 remains available to pay insurance
and real estate taxes. The escrow reserve is included in restricted cash and the
resulting tax and insurance liability is included in accounts payable and
accrued liabilities in the accompanying balance sheet.
The reserves were established from the Partnership's restricted cash related to
the Bridge Loan in addition to Partnership operating cash.
Additional Rental
Under the terms of the Hotel operating lease (see Note 7), the Tenant paid
Additional Rental to the Partnership which was subject to possible repayment
under defined conditions; therefore, Additional Rental had been recorded as a
liability in the financial statements. At the termination of the Operating
Lease, all Additional Rental was forgiven and is recorded as an Extraordinary
Gain in the financial statements.
<PAGE>
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of less
than three months at date of purchase to be cash equivalents.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes, but rather, allocates its profits and losses to the individual partners.
Significant differences exist between the net loss/net income for financial
reporting purposes and the net loss/net income reported in the Partnership's tax
return. These differences are due primarily to the use for income tax purposes
of accelerated depreciation methods, shorter depreciable lives for the assets
and differences in the timing of recognition of rental income. As a result of
these differences, the excess of the tax basis in net Partnership liabilities
and the net liabilities reported in the accompanying financial statements at
December 31, 1997 and 1996 was $55.7 million and $26.0 million, respectively.
New Statements of Financial Accounting Standards
The Partnership adopted SFAS No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" during 1996. Adoption
of SFAS No. 121 did not have any effect on the Partnership's financial
statements.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Land and land improvements...................... $ 13,690 $ 13,690
Building and improvements........................ 155,497 155,570
Furniture and equipment.......................... 44,090 47,800
------- -------
213,277 217,060
Less accumulated depreciation.................... (61,876) (61,619)
-------- --------
$ 151,401 $ 155,441
============ ============
</TABLE>
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments are shown below. Fair values
of financial instruments not included in this table are estimated to be equal to
their carrying amounts (in thousands):
<TABLE>
<CAPTION>
As of December 31, 1997 As of December 31, 1996
----------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ----------
<S> <C> <C> <C> <C>
Mortgage debt $103,000 $103,000 $160,000 $160,000
Note payable 20,000 20,000 -- --
Due to Host Marriott and affiliates 59,727 59,727 -- --
Note Payable to MII -- -- 900 900
Additional rental paid by Hotel lessee -- -- 25,013 --
</TABLE>
The estimated fair value of mortgage debt and other long term obligations is
based on the expected future debt service payments discounted at estimated
market rates. Additional rental paid by the Hotel lessee was valued based on the
expected future payments from operating cash flow discounted at a risk-adjusted
rate. As further explained in Note 7, upon closing of the permanent financing,
MII agreed to waive all claims to Additional Rental that had accrued prior to
the consummation of the loan. Consequently, the estimated fair value of
Additional Rental paid by the Hotel lessee is zero.
<PAGE>
NOTE 5. DEBT
In 1996, Partnership debt consisted of a $168.2 million nonrecourse mortgage
loan (the "Mortgage Debt") which matured on July 27, 1996. The Mortgage Debt
bore interest at a fixed rate of 7.76% and required no amortization of principal
prior to maturity. Upon maturity, the Mortgage Debt went into default as the
Partnership was unable to secure replacement financing or negotiate a
forbearance agreement with the lender. Pursuant to the loan documents, the
Mortgage Debt began to accrue interest at the Default Rate, as defined, of
10.75% which was 2.5 percentage points above the Lender's Corporate Base Rate,
as defined, from the maturity date through December 23, 1996. The Mortgage Debt
was refinanced on December 23, 1996.
As of December 31, 1996, Partnership debt consisted of a $160 million
nonrecourse mortgage loan (the "Bridge Loan"). The Bridge Loan was originated by
Goldman, Sachs & Co. ("Goldman Sachs") and the lender was GMAC Commercial
Mortgage Corporation providing an interim $160 million mortgage loan bearing
interest at LIBOR plus 2.75 percentage points which matured on October 31, 1997.
Pursuant to the terms of the Bridge Loan, all excess cash from Hotel operations,
if any, was held in a debt service reserve for future debt service or to reduce
the outstanding principal balance upon maturity. Through November 25, 1997, the
weighted average interest rate on the Bridge Loan was 8.4%.
On September 26,1997, the General Partner received unrevoked consents approving
a new loan structure and certain amendments to the Partnership Agreement which
were necessary to refinancing negotiations of the Bridge Loan. An extension
agreement was signed with the current lender on October 30,1997, extending the
maturity date of the Bridge Loan from October 31, 1997 to December 31, 1997,
without penalty.
On November 25, 1997, the Partnership secured long-term financing for its $160
million Bridge Loan. The new financing consists of three tranches: 1) a $103
million senior loan, 2) a $20 million loan and 3) a $59.7 million junior loan.
The $103 million senior loan (the "Senior Loan") is from GMAC Commercial
Mortgage Company ("GMAC") to a newly formed bankruptcy remote subsidiary of the
Partnership, DS Hotel LLC, which owns the Hotel and related assets. The Senior
Loan matures in December, 2022 and is secured by a first mortgage lien on the
Hotel. The loan bears interest at a fixed rate of 7.8% and requires monthly
payments of interest and principal with amortization over its twenty-five year
term.
The second tranche of debt consists of a $20 million loan (the "Mezzanine Loan")
from Goldman Sachs Mortgage Company ("GSMC") to a newly formed bankruptcy remote
subsidiary of the Partnership, Marriott DSM LLC, which secures the loan. The
Mezzanine Loan consists of a fully amortizing $20 million loan bearing interest
at 10.365% for a twelve and one-half year term maturing in December, 2010.
The third tranche of debt consists of a junior loan, (the "HM Junior Loan") to
the Partnership from MDSM Finance LLC ("MDSM"), a wholly owned subsidiary of the
General Partner. The HM Junior Loan has a term of thirty years and requires no
principal amortization for the first twelve and one-half years with a seventeen
and one-half year amortization schedule thereafter. If remaining cash flow is
insufficient to pay interest on the HM Junior Loan, interest is deferred and
will accrue and compound and be payable from future cash flow. The HM Junior
Loan also entitles MDSM to receive 30% of any excess cash flow, as defined,
available annually, plus 30% of any net capital/residual proceeds after full
repayment of the Senior Loan, the Mezzanine Loan and the HM Junior Loan.
On the Closing Date, the Partnership was required to establish certain reserves
which are discussed in Note 2.
The Partnership utilized $1.2 million in 1997 from the refinancing reserve to
pay costs associated with the financing including lender or subsidiary fees,
property appraisals, environmental studies and legal fees.
<PAGE>
The required principal payments of the Senior Loan, Mezzanine Loan and the HM
Junior Loan at December 31, 1997 are as follows (in thousands):
1998 $ 2,186
1999 2,389
2000 2,581
2001 2,850
2002 3,116
Thereafter 169,605
-------------
$ 182,727
=============
Debt to MII
On April 30, 1996, the Partnership entered into a short-term loan with MII in
the amount of $1,700,000 to fund a portion of the Hotel's rooms refurbishment
project. The loan matured on June 13, 1997, bearing interest at 8.5% and was
repaid from the property improvement fund as contributions were made during the
year. The loan was fully repaid on March 28, 1997.
NOTE 6. AIRLINE EQUIPMENT LEASE
The Partnership leased airline equipment to TWA under the terms of an operating
lease which expired in April 1995. Pursuant to the terms of the airline
equipment lease, TWA was obligated to make semi-annual payments, in arrears,
based upon specified percentages of the Partnership's cost of the airline
equipment. Rental income under the operating lease is included in "Airline
equipment income" in the statement of operations and was $852,000 in 1995.
On April 20, 1995, the Partnership reached an agreement with TWA whereby TWA was
obligated to pay renewal rents under a 15-month lease agreement. The renewal
rents consisted of quarterly payments of $780,000 plus 17% interest paid in
arrears, all of which totaled $6.5 million. At the end of the lease term, TWA
had the option to purchase the equipment for one dollar ($1). The Partnership
classified the new lease as a sales-type lease and recorded a receivable for the
future lease payments due from TWA, along with a deferred gain on the
transaction. The deferred gain was recognized as income as lease payments were
received on the installment method as a component of the line item "Airline
Equipment Income" in the statement of operations. Deferred gain amortization was
$1,248,000 in 1996 and $1,985,000 in 1995. On April 24, 1996, TWA exercised its
early termination option under the airline equipment lease and paid the rent due
on that date of $847,000 along with the termination value of $780,000 plus the
$1 purchase option.
NOTE 7. OPERATING LEASE
The Partnership leased the Hotel to the Tenant pursuant to an agreement which
commenced on April 24, 1987, with an initial term of 25 years (the "Operating
Lease") with renewal options for five successive periods of 10 years each.
Annual Rental was equal to the greater of Basic Rental or Owner's Priority, as
described below:
1. Basic Rental equals 85% of Operating Profit, as defined, until December
31, 1993, and 80% thereafter.
2. Owner's Priority equals the greater of (i) $20 million plus debt service
on certain additional debt to expand the Hotel ("Expansion Debt
Service") or (ii) Debt Service, as defined. If there is a new mortgage
(in an amount which exceeds the outstanding balance of the existing
mortgage by at least $45,455,000), Owner's Priority will equal the
greater of (i) $20 million plus Expansion Debt Service, (ii) Debt
Service or (iii) the lesser of Debt Service on the new mortgage or $24
million plus Expansion Debt Service. In no event will Owner's Priority
for any year exceed Operating Profit.
3. Additional Rental equals the cumulative amount by which Owner's Priority
exceeds Basic Rental plus $268,000 and is recorded as a liability in the
accompanying financial statements. If in any year Basic Rental exceeds
Owner's Priority, Annual Rental will be reduced to equal Basic Rental
minus the lower of (i) Additional Rental then outstanding or (ii) 25% of
the amount by which Basic Rental exceeds Owner's Priority.
<PAGE>
Pursuant to an agreement reached with MII, for fiscal year 1997 the $20 million
Owner's Priority was increased to $20.5 million. MII was entitled only to the
next $2 million of Operating Profit. Any additional Operating Profit in excess
of $22.5 million was remitted entirely to the Partnership. In connection with
the long-term financing, MII agreed to waive any and all claims to Additional
Rental that accrued prior to the consummation of the loan. The Partnership
recorded an extraordinary gain of $27.5 million in 1997 to recognize the gain
which resulted from the forgiveness of these fees.
Rental income for 1997 included Basic Rental of $17,608,000 and Additional
Rental of $4,402,000. Operating Profit in 1997 totaled $23,698,000. In
accordance with an agreement reached with MII, the Partnership was entitled to
receive Owner's Priority of $20,500,000 and MII was entitled to the next
$2,000,000 with the remaining $1,198,000 to the Partnership.
In addition to the Annual Rental, the Tenant was required to pay property taxes,
make annual contributions equal to a percentage of Hotel sales to a property
improvement fund (4.5% through 1997 and 5.5% thereafter) and pay rental on the
second golf course.
Pursuant to the terms of the Hotel purchase agreement, the Tenant and its
affiliates may utilize a portion of the land adjacent to the Hotel for
development of residences and timeshare condominiums. Purchasers of the
residences have the opportunity to use certain Hotel facilities and services for
a fee. Purchasers of the timeshare condominiums also have the ability to use the
Hotel's facilities but such use is subject to the same fees charged to Hotel
guests.
During 1995, the Hotel's main swimming pool was expanded at a cost of
approximately $2.1 million. The project was funded partially by proceeds
received from Marriott Vacation Club International ("MVCI"), a wholly-owned
indirect subsidiary of MII, pursuant to an agreement between the Partnership and
MVCI for the development of additional timeshare units on land adjacent to the
Hotel. As part of this agreement, the Hotel's spa was also expanded during 1994.
Pursuant to the terms of the agreement, MVCI contributed a total of $1.3 million
towards the pool expansion and the spa expansion projects; the remaining costs
were funded by Partnership cash reserves. Funding by MVCI in 1995 was $692,000,
and was included in "Other Income" in the statement of operations.
NOTE 8. MANAGEMENT AGREEMENT
On November 25, 1997, in connection with the refinancing, the General Partner
also negotiated with the Tenant to convert the Operating Lease to a management
agreement (the "Management Agreement"). The Tenant would become manager of the
Hotel (the "Manager"). The initial term of the Management Agreement continues
through 2022 with four successive renewal options of ten years each. The Manager
is paid a base management fee equal to 3% of gross hotel sales.
Beginning in fiscal year 1998, the Management Agreement provides that no
incentive fee will be paid to the Manager with respect to the first $21.5
million of Operating Profit (the "Owner's Priority"). Thereafter the Manager
will receive the next $1.8 million of Operating Profit as incentive management
fee and any operating profit in excess of $23.3 million will be divided 75% to
the Partnership and 25% to the Manager. Any such payments will be made annually
after completion of the audit of the Partnership's books.
The Management Agreement provides that the owner may terminate the Management
Agreement if, in any two of three consecutive fiscal years, Operating Profit is
less than $15 million. The Manager may, however, prevent termination by paying
the owner such amounts as are necessary to achieve the performance standards.
Pursuant to the Management Agreement, the Manager is required to furnish the
Hotel with certain services ("Chain Services") which are generally provided on a
central or regional basis to all hotels in the Manager's full-service hotel
system. Chain Services include central training, advertising and promotion, a
national reservations system, computerized payroll and accounting services and
such additional services as needed which may be more efficiently performed on a
centralized basis. Costs and expenses incurred in providing such services are
allocated among all domestic full-service hotels managed, owned or leased by the
Manager or its subsidiaries. In addition, the Hotels also participate in the
Manager's Marriott Rewards Program. The cost of this program is charged to all
hotels in the Manager's full-service hotel system based upon the Marriott
Rewards sales at each hotel. The total amount of Chain Services and Marriott
Rewards costs charged to the Partnership from November 25 through December 31,
1997 were $169,000.
<PAGE>
The Management Agreements provide for the establishment of a property
improvement fund for the Hotel to cover the cost of certain non-routine repairs
and maintenance to the Hotel which are normally capitalized and the cost of
replacements and renewals to the Hotel's property and improvements.
Contributions to the property improvement fund are based on a percentage of
gross sales. Contributions to the property improvement fund are 4.5% in 1997 and
5.5% thereafter. Contributions to the property improvement fund from November 25
through December 31, 1997 were $421,000.
NOTE 9. HOTEL OPERATING RESULTS
The following is a summary of Hotel Operating Profit, as defined in the Hotel
lease agreement, for the three years ended December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
REVENUES
Rooms..................................................................... $ 39,825 $ 37,031 $ 33,495
Food and beverage......................................................... 40,366 38,431 33,453
Other..................................................................... 23,130 22,437 18,450
-------- -------- --------
103,321 97,899 85,398
-------- -------- --------
EXPENSES
Departmental direct costs
Rooms.................................................................. 8,933 8,545 7,715
Food and beverage...................................................... 27,642 26,623 23,335
Other operating expenses.................................................. 43,048 41,686 35,987
-------- ------- -------
79,623 76,854 67,037
-------- ------- -------
HOTEL OPERATING PROFIT...................................................... $ 23,698 $ 21,045 $ 18,361
======== ======== =========
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or officers. The business policy making
functions of the Partnership are carried out through the directors and executive
officers of Marriott Desert Springs Corporation, the General Partner, who are
listed below:
Current Position in Age at
Name Marriott Desert Springs Corp. December 31, 1997
- ------------------ ----------------------------- -----------------
Bruce F. Stemerman President and Director 42
Robert E. Parsons, Jr Vice President and Director 42
Christopher G. Townsend Vice President, Director, and Secret 50
Earla L. Stowe Vice President and Chief Accounting
Officer 37
Business Experience
Bruce F. Stemerman was elected President of the General Partner in November
1995. He has been a Director of the General Partner since October 1993. Mr.
Stemerman joined Host Marriott in 1989 as Director--Partnership Services. He
was promoted to Vice President--Lodging Partnerships in 1994 and to Senior Vice
President--Asset Management in 1996. Prior to joining Host Marriott, Mr.
Stemerman spent ten years with Price Waterhouse. He also serves as a director
and an officer of numerous Host Marriott subsidiaries.
Robert E. Parsons, Jr. has been a Vice President of the General Partner since
November 1995 and a Director of the General Partner since September 1988. From
1988 to October 1995, Mr. Parsons was President of the General Partner. Mr.
Parsons joined Host Marriott's Corporate Financial Planning staff in 1981,
was made Director-Project Finance of Host Marriott's Treasury Department in
1984, and in 1986 he was made Vice President-Project Finance of Host
Marriott's Treasury Department. He was made Assistant Treasurer of Host
Marriott in 1988. Mr. Parsons was named Senior Vice President and Treasurer of
Host Marriott in 1993. He was named Executive Vice President and Chief Financial
Officer of Host Marriott in October 1995. He also serves as a director and an
officer of numerous Host Marriott subsidiaries.
<PAGE>
Christopher G.Townsend has been Vice President, Director and Secretary of the
General Partner since September 1988. Mr.Townsend joined Host Marriott's Law
Department in 1982 as a Senior Attorney. In 1984, Mr.Townsend was made
Assistant Secretary of Host Marriott and in 1986 was made Assistant General
Counsel. In 1993, he was made Senior Vice President, Corporate Secretary and
Deputy General Counsel of Host Marriott. In November 1996, Mr.Townsend was
named General Counsel of Host Marriott. He also serves as a director and an
officer of numerous Host Marriott subsidiaries.
Earla L. Stowe joined Host Marriott in 1982 and held various positions in the
tax department until 1988. She joined the Partnership Services department as an
accountant in 1988 and in 1989 she became Assistant Manager, Partnership
Services. She was promoted to Manager, Partnership Services in 1991 and to
Director, Asset Management in 1996. She was promoted to Senior Director, Asset
Management in 1998. she also serves as an officer of numerous Host Marriott
subsidiaries.
ITEM 11. MANAGEMENT RENUMERATION AND TRANSACTIONS
As noted in Item 10 above, the Partnership has no directors or officers nor does
it have any employees. Under the Partnership Agreement, however, the General
Partner has the exclusive right to conduct the business and affairs of the
Partnership subject only to the Operating Lease and Management Agreement
described in Items 1 and 13. The General Partner is required to devote to the
Partnership such time as may be necessary for the proper performance of its
duties, but the officers and the directors of the General Partner are not
required to devote their full time to the performance of such duties. No officer
or director of the General Partner devotes a significant percentage of time to
Partnership matters. To the extent that any officer or director of the
Partnership or employee of Host Marriott does devote time to the Partnership,
the General Partner is entitled to reimbursement for the cost of providing such
services. Any such costs may include a charge for overhead, but without a profit
to the General Partner. For the fiscal years ending December 31, 1997, 1996 and
1995, administrative expenses reimbursed to the General Partner totaled
$273,000, $250,000 and $67,000, respectively. For information regarding all
payments made by the Partnership to Host Marriott and subsidiaries, see Item 13
"Certain Relationships and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of December 31, 1997, no person owned of record, or to the Partnership's
knowledge owned beneficially, more than 5% of the total number of Units. The
General Partner does not own any Units.
There are no Units owned by the executive officers and directors of the General
Partner, as a group.
<PAGE>
The officers and directors of MII, as a group, own the following units:
Amount and Nature of Percent
Title of Class Beneficial Ownership of Class
Limited Partnership Units 1 Unit 0.1%
There are no Units owned by individuals who are directors of both the General
Partner and MII.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As described below, the Partnership is party to important ongoing agreements
with MII pursuant to which the Hotel was leased and is now managed by MHSI.
Prior to October 8, 1993, MII was a wholly-owned subsidiary of Host Marriott,
which was then known as Marriott Corporation. On October 8, 1993, Marriott
Corporation's operations were divided into two separate companies, Host Marriott
and MII. MII now conducts its management business as a separate, publicly-traded
company and is not a parent or subsidiary of Host Marriott, although the two
corporations have various business and other relationships. In accordance with
the terms of the Partnership Agreement, each of the agreements discussed below
were entered into based upon the General Partner's belief that such agreements
were fair to the Partnership and reflect commercially reasonable terms. However,
as a result of the fact that the Hotel Operating Lease, Golf Course Lease and
Homeowners Agreement described below were entered into at a time when the
counter-party to each of these agreements was a subsidiary of Host Marriott
(then known as Marriott Corporation), the General Partner has made no further
investigation toward forming a belief as to whether these agreements were on
terms at least as favorable as the Partnership would have been able to obtain
from an independent third party. The General Partner believes that the terms of
the Office Space Rental Agreement and Transaction with MCVI for Pool Facilities
described below were on terms at least as favorable as the Partnership would
have been able to obtain from an independent third party.
The Hotel Operating Lease
The Partnership entered into the Operating Lease with MHSI, a subsidiary of MII,
on April 23, 1987, to operate the Hotel. The Operating Lease was for a term of
25 years from the opening of the hotel (through 2012) with renewal terms, at the
option of MHSI, of up to five additional 10-year periods.
The Hotel Operating Lease provided for the payment of the greater of Basic
Rental or Owner's Priority. Basic Rental equals 80% of Operating Profit, as
defined. Owner's Priority equaled the greater of (i) $20 million plus debt
service on certain additional debt to expand the Hotel or (ii) debt service, as
defined. (In no event would Owner's Priority for any year exceed Operating
Profit, as defined.)
<PAGE>
Pursuant to an agreement reached with MII on December 23, 1996, for fiscal year
1997, the $20 million Owner's Priority was increased to $20.5 million. MII was
entitled only to the next $2 million of Operating Profit, as defined. Any
additional Operating Profit in excess of $22.5 million was remitted entirely to
the Partnership. In connection with the long-term financing, MII agreed to waive
any and all claims to Additional Rental, as defined, that had accrued prior to
the consummation of such loan. Therefore, $27.4 million was forgiven in 1997 and
recorded as an extraordinary gain in the accompanying financials.
For the operating lease period ended November 25, 1997 and the lease years ended
December 31, 1996 and 1995 Basic Rental was $17.6 million, $16.8 million and
$14.7 million, respectively.
The Operating Lease provided that the Partnership could terminate the Operating
Lease and remove the Operating Tenant if the payments of Annual Rental in any
two of three consecutive fiscal years beginning with fiscal year 1991 are less
than $15 million. The Operating Tenant could, however, prevent termination by
paying to the Partnership such amounts as are necessary to achieve the above
performance standards. Annual Rental for the fiscal years ended December 31,
1994 was $16.1 million, December 31, 1995 was $18.4 million, December 31, 1996
was $20 million and December 31, 1997 was $20 million.
Golf Course Lease
The Second Golf Course is located near the Hotel on approximately 100 acres of
land and is leased to the Partnership by a subsidiary of MII. The Second Golf
Course and related facilities were subleased by the Partnership to the Tenant
pursuant to an operating lease with annual rental equal to $100,000. The term of
the lease for the Second Golf Course expires on December 31, 2011, with five
10-year renewal periods at the option of the Partnership. Under the terms of the
lease for the Second Golf Course, the Partnership pays annual rent equal to
$100,000 and is responsible for all costs of operating and maintaining the
Second Golf Course. Upon termination of the lease for the Second Golf Course,
the Second Golf Course and all facilities and improvements thereon will become
the property of Marriott's Desert Springs Development Corporation. All costs of
operating and maintaining the course are deductions from gross revenues and all
revenues from operation of the course are items of gross revenues of the Hotel.
In conjunction with the refinancing of the mortgage debt, the golf course is no
longer subleased to the Operating Tenant. The Manager manages the golf course
for the Partnership pursuant to the terms of the Golf Course Lease.
Homeowners Agreement
A subsidiary of MII, MVCI has been developing a portion of land adjacent to the
golf courses for time shares. The Partnership, MII, Marriott's Desert Springs
Development Corporation and MVCI entered into an Agreement (the "Homeowners
Agreement") whereby it was agreed that each purchaser of a time share unit will
receive certain golf course and other privileges (including preferred tee times
at the golf courses equal to one tee time per week per time share unit) at the
<PAGE>
Hotel. Time share purchasers will not pay membership fees, but rather will pay
regular green fees for use of the golf courses, and do not receive preferred
tennis court times or free access to the health spa. Time share purchasers will
have use of the latter facilities and other Hotel facilities, if they are
available, on the same basis as regular Hotel guests and will pay the same fees
as regular Hotel guests.
Office Space Rental Agreement
On January 27, 1995, the Partnership entered into an agreement with MVCI whereby
MVCI occupies the space of eleven guest rooms and built a vacation gallery. The
initial term of the agreement is April 1, 1995 to March 31, 1999, with initial
annual rental of $150,000. The annual rental may be increased in the second,
third and fourth year of the lease by the local area Consumer Price Index plus
1% subject to a maximum of 10%. The annual rental for 1997 was $154,350.
Transaction With MVCI for Pool Facilities
During 1994 and 1995, the Hotel's spa and main swimming pool facilities were
expanded. The total $580,000 for the spa expansion was funded entirely with
proceeds from MVCI pursuant to an agreement between the Partnership and MVCI for
the development of time share units on the land adjacent to the Hotel. As part
of this agreement, MVCI also paid $692,000 toward the $2.1 million pool
expansion. The remainder of the pool expansion was funded by the Partnership's
cash reserves.
Management Agreement
On November 25, 1997, General Partner negotiated with the Tenant to convert the
Operating Lease to a management agreement (the "Management Agreement"). The
Tenant became manager of the Hotel (the "Manager"). The initial term of the
Management Agreement continues through 2022 at the option of the Manager, with
four successive renewal options of ten years each.
For the term following 1997, the Management Agreement provides that no incentive
fee will be paid to the Manager with respect to the first $21.5 million of
Operating Profit (the "Owner's Priority"). Thereafter the Manager will receive
the next $1.8 million of Operating Profit as incentive management fee and any
operating profit in excess of $23.3 million will be divided 75% to the
Partnership and 25% to the Manager. Any such payments will be made annually
after completion of the audit of the Partnership's books.
The Management Agreement provides that the owner may terminate the Management
Agreement if, in any two of three consecutive fiscal years, Operating Profit is
less than $15 million. The Manager may, however prevent termination by paying
the owner such amounts as are necessary to achieve the performance standards.
<PAGE>
Pursuant to the Management Agreement, the Manager is required to furnish the
Hotel with certain services ("Chain Services") which are generally provided on a
central or regional basis to all hotels in the Manager's full-service hotel
system. Chain Services include central training, advertising and promotion, a
national reservations system, computerized payroll and accounting services and
such additional services as needed which may be more efficiently performed on a
centralized basis. Costs and expenses incurred in providing such services are
allocated among all domestic full-service hotels managed, owned or leased by the
Manager or its subsidiaries. In addition, the Hotels also participate in the
Manager's Marriott Rewards Program. The cost of this program is charged to all
hotels in the Manager's full-service hotel system based upon the Marriott
Rewards sales at each hotel. The total amount of Chain Services and Marriott
Rewards costs charged to the Partnership from November 25 through December 31,
1997 were $169,000.
The Management Agreements provide for the establishment of a property
improvement fund for the Hotel to cover the cost of certain non-routine repairs
and maintenance to the Hotel which are normally capitalized and the cost of
replacements and renewals to the Hotel's property and improvements.
Contributions to the property improvement fund are based on a percentage of
gross sales. Contributions to the property improvement fund are 4.5% in 1997 and
5.5% thereafter. Contributions to the property improvement fund from November 25
through December 31, 1997 were $421,000.
Payments to Host Marriott, MII and their Affiliates
The following table sets forth amounts paid by the Partnership to Host Marriott,
MII and their subsidiaries for the years ended December 31, 1997, 1996 and 1995
(in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Payments to Host Marriott and affiliates:
Administrative expenses................................................... $ 273 $ 250 $ 67
Capital distributions..................................................... 227 15 51
----- ----- ----
$ 500 $ 265 $118
Payments to MII and affiliates: ===== ===== ====
Base management fees...................................................... $ 281 $ -- $ --
Chain services............................................................ 169 -- --
Golf course rent.......................................................... 100 100 100
Incentive management fees................................................. 60 -- --
Interest on note payable to MII........................................... 11 48 --
------ ------ ------
$ 621 $ 148 $100
====== ====== ======
</TABLE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of This Report
(1) Financial Statements
All financial statements of the registrant as set forth under Item 8
of this Report on Form 10-K.
(2) Financial Statement Schedules
The following financial information is filed herewith on the pages
indicated.
III. Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements
or notes thereto.
(3) Exhibits
Exhibit # Description
3.1 Amended and Restated Agreement of Limited Partnership
of Desert Springs Marriott Limited Partnership dated April 24,
1987. Incorporated by reference from Exhibit 3 to Form 10 dated
April 27, 1988.
3.2 Second Amendment and Restated Agreement of Limited
Partnership of Desert Springs Marriott Limited
Partnership dated as of September 26, 1997, by and
among Marriott Desert Springs Corporation, a
Delaware corporation, as General Partner, and those
Persons who have been admitted as limited partners
of the Partnership in accordance with the provisions
of the Amended and Restated Agreement of Limited
Partnership of Desert Springs Marriott Limited
Partnership (the "Partnership") dated as of April
24, 1997 (the "Original Agreement") or this
Agreement and are identified in the books and
records of the Partnership as the Limited Partners.
10.1 Lease Agreement between Desert Springs Marriott Limited
Partnership and Desert Springs Hotel Services dated April 23,
1987. Incorporated by reference from Exhibit 10a to Form 10
dated April 27, 1988.
10.2 Golf Course Lease Agreement between Marriott's
Desert Springs Development Corporation and Desert
Springs Marriott Limited Partnership dated April 24,
1987. Incorporated by reference from Exhibit 10b to
Form 10 dated April 27, 1988.
*10.21 First Amendment to Golf Course Lease between
Marriott's Desert Springs Development Corporation
and Desert Springs Marriott Limited Partnership
dated March 31, 1994.
*10.22 Second Amendment to Golf Course Lease between
Marriott's Desert Springs Development Corporation
and Desert Springs Marriott Limited Partnership
dated November 25, 1996.
<PAGE>
Exhibit # Description
10.3 Lease Agreement between Desert Springs Marriott Limited
Partnership and Trans World Airlines, Inc. dated March 3, 1987;
accepted April 24, 1987. Incorporated by reference from Exhibit
10c to Form 10 dated April 27, 1988.
*10.4 Home Owners Agreement among Marriott Corporation, Marriott's
Desert Springs Development Corporation, Desert Springs Hotel
Services and Desert Springs Marriott Limited Partnership;
accepted April 24, 1987.
*10.5 Loan Agreement between The First National Bank of
Chicago; Credit Lyonnais, New York Branch and Credit
Lyonnais, Cayman Island Branch; Societe Generale,
Chicago Branch; Sumitomo Trust & Banking Co., Ltd.,
Los Angeles Agency; and Desert Springs Marriott
Limited Partnership dated July 26, 1989.
*10.6 Modification of Loan Agreement and Other Loan
Documents between GMAC Commercial Mortgage
Corporation and Desert Springs Marriott Limited
Partnership dated as of December 23, 1996.
*10.7 Agreement for Use of Resort Facilities among Desert
Springs Hotel Services, Marriott Ownership Resorts,
Inc., and Marriott Desert Springs Limited
Partnership dated January 1, 1994.
*10.8 Amended and Restated Recreational License among Desert Springs
Hotel Services, Marriott Ownership Resorts, Inc., Desert Springs
Villas Timeshare Association and Marriott Desert Springs Limited
Partnership dated January 1, 1994.
*10.9 Office Space Rental Agreement between Marriott Ownership
Resorts, Inc., and Desert Springs Marriott Limited Partnership
dated January 27, 1995.
10.10 Loan Agreement between DS Hotel, as Borrower and GMAC Commercial
Mortgage Corporation, as Lender dated November 25, 1997.
10.11 Promissory Note from DS Hotel LLC payable to the
order of GMAC Commercial Mortgage Corporation in the
principal amount of $103,000,000 dated November 25,
1997.
10.12 Fee and Leasehold Deed of Trust, Security Agreement
and Assignment of Leases and Rents made by DS Hotel
LLC, as Trustor/Borrower to Commonwealth Land Title
Company as Trustee for the benefit of GMAC
Commercial Mortgage Corporation as
Beneficiary/Lender dated November 25, 1997.
10.13 Credit Agreement (Mezzanine Loan) between Marriott DSM LLC and
Goldman Sachs Mortgage Company dated November 25, 1997.
10.14 Promissory Note from Marriott DSM LLC payable to the order of
Goldman Sachs Mortgage Company in the principal amount of
$20,000,000 dated November 25, 1997.
10.15 Loan Agreement between Desert Springs Marriott Limited
Partnership and MDSM Finance LLC dated November 25, 1997.
<PAGE>
Exhibit # Description
10.16 Promissory Note made by Desert Springs Marriott Limited
Partnership payable to the order of MDSM Finance LLC in
the principal amount of $59,727,272 dated November 25, 1997.
10.17 Management Agreement between DS Hotel LLC and Marriott
Hotel Services, Inc. dated November 25, 1997
27 Financial Data Schedule
* Incorporated by reference to the same numbered exhibit in the Partnership's
December 31, 1996 10-K previously filed with the Commission.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during 1997.
<PAGE>
SCHEDULE I
Page 1 of 4
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Investments in restricted subsidiaries........................................ $ 44,947 $ 9,967
Other assets................................................................... 694 610
Cash and cash equivalents...................................................... 197 5,755
-------- -------
Total Assets.......................................................... $ 45,838 $ 16,332
========= ========
LIABILITIES
Debt$......................................................................... $ 59,727 $ 37,000
Due to Marriott International, Inc. and affiliates............................. -- 900
Accounts payable and accrued expenses.......................................... 776 69
-------- --------
Total Liabilities...................................................... 60,503 37,969
-------- --------
PARTNERS' DEFICIT
General Partner
Capital contribution......................................................... 909 909
Cumulative net losses........................................................ (829) (602)
Capital distributions........................................................ (101) (398)
---------- ---------
(21) (91)
---------- ---------
Limited Partners
Capital contributions, net of offering costs of $10,576...................... 77,444 77,444
Investor notes receivable.................................................... (22) (22)
Capital distributions........................................................ (82,084) (59,584)
Cumulative net losses........................................................ (9,982) (39,384)
---------- ---------
(14,644) (21,546)
---------- ---------
Total Partners' Deficit................................................ $(14,665) $(21,637)
---------- ---------
$ 45,838 $ 16,332
========== =========
</TABLE>
The notes to consolidated financial statements of Desert Springs Marriott
Limited Partnership are an integral part of these statements.
<PAGE>
SCHEDULE I
Page 2 of 4
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Fiscal Year Ended December 31,
1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Interest income..........................................................$ 579 $ 1,100 $ 1,663
Airline equipment........................................................ -- 1,248 2,837
Interest expense......................................................... (3,802) (3,621) (3,092)
Partnership expense and other............................................ (345) (374) (238)
----------- ----------- -----------
Income before equity in earnings of restricted subsidiaries.............. (3,568) (1,647) 1,170
----------- ----------- -----------
Equity in earnings of restricted subsidiaries............................ 33,267 1,756 415
----------- ----------- -----------
Net income..........................................................$ 29,699 $ 109 $ 1,585
=========== =========== ===========
</TABLE>
The notes to consolidated financial statements of Desert Springs Marriott
Limited Partnership are an integral part of these statements.
<PAGE>
SCHEDULE I
Page 3 of 4
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED CONSOLIDATED STATEMENT OF CASH
FLOWS Fiscal Year Ended December 31, 1997,
1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Cash (used in) from operations...........................................$ (3,381) $ 227 $ 1,718
INVESTING ACTIVITIES
(Investment in) dividends from restricted subsidiaries................ (1,277) 4,201 6,628
------------ ------------ ------------
Cash provided by (used in) investing activities..................... (1,277) 4,201 6,628
------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of debt........................................ 59,727 -- --
Repayment of debt..................................................... (37,000) (8,239) --
Capital distributions................................................. (22,727) (1,547) (5,071)
Advances from MII..................................................... -- 1,700 --
Repayment of note payable............................................. (900) (800) --
----------- ------------ ------------
Cash used in financing activities................................... (900) (8,886) (5,071)
----------- ------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS....................................$ (5,558) $ (4,458) $ 3,275
CASH AND CASH EQUIVALENTS at beginning of year........................... 5,755 10,213 6,938
----------- ------------ ------------
CASH AND CASH EQUIVALENTS at end of year.................................$ 197 $ 5,755 $ 10,213
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on debt......................................$ 2,986 $ 3,559 $ 3,559
=========== ============ ============
</TABLE>
The notes to consolidated financial statements of Desert Springs Marriott
Limited Partnership are an integral part of these statements.
<PAGE>
SCHEDULE I
Page 4 of 4
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A) 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. These condensed financial
statements should be read in conjunction with the Partnership's
consolidated financial statements.
On November 25, 1997, the Partnership secured long-term financing for its
$160 million Bridge Loan. The new financing consists of three tranches:
1) a $103 million Senior Loan, 2) a $20 million Mezzanine Loan and 3)
a $59.7 million Junior Loan.
In connection with the mortgage debt refinancing in 1997, 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 DS Hotel LLC, a bankruptcy remote subsidiary. Marriott DSM LLC, a
bankruptcy remote subsidiary owns 100% interest in DS Hotel LLC. The
Partnership owns 100% interest in Marriott DSM LLC ("MDSM LLC").
The accompanying financial statements reflect the $103 million senior loan
and $20 million Mezzanine loan as a component of net investment in
restricted subsidiaries. Prior to the November 1997 issuance of this senior
loan and Mezzanine debt, the financial statements include the pushed down
effect of $123 million in mortgage debt, as the November 1997 proceeds of
the senior loan and Mezzanine debt were used to repay the Partnership's
mortgage debt.
DS Hotel LLC and MDSM LLC are restricted in their ability to dividend cash
to the parent and are accounted for under the equity method of accounting
on the accompanying condensed financial information of the Partnership.
B) The $103 million senior loan is from GMAC Commercial Mortgage Company
("GMAC") to a DS Hotel LLC which owns the Hotel and its related assets. The
senior loan bears interest at a fixed rate of 7.8%, requires monthly
payments of interest and principal with amortization over its twenty-five
year term, matures in 2022 and is secured by a first mortgage lien on the
Hotel. The $20 million Mezzanine Loan to MDSM LLC is secured by its 100%
interest in DS Hotel LLC. The loan bears interest at 10.365% with
amortization over a twelve and one-half year term maturing in December
2010.
<PAGE>
SCHEDULE III
Page 1 of 2
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
PALM DESERT, CALIFORNIA
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
<TABLE>
Gross Amount at December 31, 1997
Subsequent Date of
Encumbrances Land Buildings & Costs Buildings & Accumulated Completion Date Depreciation
Improvements Capitalized Improvements Depreciation Acquired Life
<S>
Marriott Desert Springs
Resort & Spa <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Palm Desert, CA $103,000 $11,459 $146,687 $11,041 $11,459 $157,728 $169,187 $33,030 1987 1987 50 years
</TABLE>
<PAGE>
SCHEDULE III
Page 2 of 2
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(in thousands)
<TABLE>
1995 1996 1997
----------- ---------- -----------
Notes:
(a) The changes in the total cost of land, buildings and improvements for the
three years ended December 31, 1996 were as follows:
<S> <C> <C> <C>
Balance at beginning of year..........................................$ 164,527 $ 166,939 $ 169,260
Capital expenditures................................................ 2,412 2,321 --
Dispositions........................................................ -- -- (92)
----------- ------------ ------------
Balance at end of year................................................$ 166,939 $ 169,260 $ 169,168
=========== ============ ============
(b) The changes in accumulated depreciation and amortization for the three
years ended December 31, 1996 were as follows:
<C> <C> <C>
Balance at beginning of year..........................................$ 22,096 $ 25,597 $ 29,230
Depreciation and amortization....................................... 3,501 3,633 3,849
Dispositions and other ............................................. -- -- (49)
----------- ----------- ------------
Balance at end of year................................................$ 25,597 $ 29,230 $ 33,030
=========== =========== ============
</TABLE>
(c) The aggregate cost of land, buildings and improvements for Federal income
tax purposes was approximately $170,175,000 at December 31, 1997.
<PAGE>
49
SIGNATURE
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Form 10-K/A to be signed on its
behalf by the undersigned, thereunto duly authorized, on September 29, 1998.
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
By: MARRIOTT DESERT SPRINGS CORPORATION
General Partner
By: /s/ Earla L. Stowe
------------------
Earla L. Stowe
Vice President and Chief Accounting Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on September 29, 1998.
Signature Title
(Marriott Desert Springs Corporation)
/s/ Bruce F. Stemerman President and Director
Bruce F. Stemerman (Principal Executive Officer)
/s/ Robert E. Parsons, Jr. Vice President and Director
Robert E. Parsons, Jr.
/s/ Christopher G. Townsend Vice President, Director and Secretary
Christopher G. Townsend
<PAGE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINACIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT 10-K/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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.00
<CASH> 14,789
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,966
<PP&E> 213,277
<DEPRECIATION> (61,876)
<TOTAL-ASSETS> 172,156
<CURRENT-LIABILITIES> 4,094
<BONDS> 182,727
0
0
<COMMON> 0
<OTHER-SE> (14,665)
<TOTAL-LIABILITY-AND-EQUITY> 172,156
<SALES> 0
<TOTAL-REVENUES> 33,369
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 16,381
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,827
<INCOME-PRETAX> 2,161
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 27,538
<CHANGES> 0
<NET-INCOME> 29,699
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>