BY ELECTRONIC FILING
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-16777
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1508601
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10400 Fernwood Road, Bethesda, MD 20817-1109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 301-380-2070
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section
12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No ____. The Partnership became subject to Section 13
reporting August 29, 1997.
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DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
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TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Operations
Twelve Weeks Ended March 27, 1998 and March 28, 1997 1
Condensed Consolidated Balance Sheet
March 27, 1998 and December 31, 1997................ 2
Condensed Consolidated Statement of Cash Flows
Twelve Weeks Ended March 27, 1998 and March 28, 1997 3
Notes to Condensed Consolidated Financial Statements .. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................... 9
Item 6. Exhibits and Reports on Form 8-K........................ 9
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per unit amounts)
<TABLE>
Twelve Weeks Ended
March 27, March 28,
1998 1997
----------------- -----------
<S> <C> <C>
REVENUES (Note 3)
Hotel rentals............................................................$ -- $ 6,264
Hotel revenues........................................................... 16,153 --
----------------- -----------------
16,153 6,264
----------------- -----------------
OPERATING COSTS AND EXPENSES
Incentive management fees................................................ 1,010 --
Depreciation............................................................. 1,657 1,941
Base management fees..................................................... 1,081 --
Property taxes and other................................................. 789 560
----------------- -----------------
4,537 2,501
----------------- -----------------
OPERATING PROFIT............................................................ 11,616 3,763
Interest expense (including amounts related to
Host Marriott debt of $1,855)........................................ (4,470) (3,440)
Interest income and other................................................ 184 53
----------------- -----------------
NET INCOME..................................................................$ 7,330 $ 376
================= =================
ALLOCATION OF NET INCOME
General Partner..........................................................$ 73 $ 4
Limited Partners......................................................... 7,257 372
----------------- -----------------
$ 7,330 $ 376
================= =================
NET INCOME PER LIMITED PARTNER UNIT (900 Units).............................$ 8,063 $ 413
================= =================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
March 27, December 31,
1998 1997
(unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net..............................................$ 151,284 $ 151,401
Due from Marriott Hotel Services, Inc.................................... 5,420 1,368
Property improvement fund................................................ 2,124 1,598
Deferred financing, net of accumulated amortization...................... 3,027 3,000
Restricted cash reserves................................................. 11,780 10,236
Cash and cash equivalents................................................ 8,805 4,553
---------------- ----------------
$ 182,440 $ 172,156
================ ================
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt............................................................$ 102,640 $ 103,000
Note payable............................................................. 19,797 20,000
Note payable to Host Marriott and affiliates............................. 59,727 59,727
Due to Marriott Hotel Services, Inc...................................... 3,133 2,122
Accounts payable and accrued expenses.................................... 4,478 1,972
---------------- ----------------
Total Liabilities.................................................. 189,775 186,821
---------------- ----------------
PARTNERS' DEFICIT
General Partner.......................................................... 52 (21)
Limited Partners......................................................... (7,387) (14,644)
---------------- ----------------
Total Partners' Deficit............................................ (7,335) (14,665)
---------------- ----------------
$ 182,440 $ 172,156
================ ================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
Twelve Weeks Ended
March 27, March 28,
1998 1997
<S> <C> <C>
ACTIVITIES
Net income.......................................................................$ 7,330 $ 376
Noncash items.................................................................... 1,715 2,188
Change in operating accounts..................................................... (535) 2,853
------------ ------------
Cash provided by operating activities...................................... 8,510 5,417
------------ ------------
INVESTING ACTIVITIES
Additions to property and equipment, net......................................... (1,540) (619)
Changes in property improvement fund............................................. (526) 46
------------ ------------
Cash used in investing activities.......................................... (2,066) (573)
------------ ------------
FINANCING ACTIVITIES
Change in restricted cash........................................................ (1,544) (4,271)
Repayment of mortgage debt....................................................... (360) --
Repayment of note payable........................................................ (203) --
Payment of refinancing costs..................................................... (85) (26)
Repayment of note payable to Marriott International, Inc......................... -- (900)
------------ ------------
Cash used in financing activities.......................................... (2,192) (5,197)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... 4,252 (353)
CASH AND CASH EQUIVALENTS at beginning of period..................................... 4,553 5,755
------------ ------------
CASH AND CASH EQUIVALENTS at end of period...........................................$ 8,805 $ 5,402
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest...........................................................$ 2,523 $ 2,788
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed consolidated financial statements have been
prepared by Desert Springs Marriott Limited Partnership and subsidiaries (the
"Partnership") without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted from the
accompanying statements. The Partnership believes the disclosures made are
adequate to make the information presented not misleading. However, the
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Partnership's Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
In the opinion of the Partnership, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
financial position of the Partnership as of March 27, 1998 and December
31, 1997, and the results of operations for the twelve weeks ended March
27, 1998 and March 28, 1997. Interim results are not necessarily
indicative of fiscal year performance because of seasonal and short-term
variations (see Note 3).
For financial reporting purposes, net income of the Partnership is
allocated 99% to the Limited Partners and 1% to Marriott Desert Springs
Corporation (the "General Partner"). Significant differences exist
between the net income for financial reporting purposes and the net
income for Federal income tax purposes. These differences are due
primarily to the use, for income tax purposes, of accelerated
depreciation methods, shorter depreciable lives, no estimated salvage
values for the assets and differences in the timing of the recognition of
rental income.
2. In connection with the mortgage debt refinancing in November 1997, 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.
3. On November 25, 1997, the Partnership completed a refinancing of its
mortgage debt. In connection with the refinancing, the Partnership converted its
operating lease with Marriott Hotel Services, Inc. ("MHS") to a management
agreement (the "Conversion"). Prior to the Conversion, the Partnership
recognized estimated annual hotel rental income on a straight-line basis
throughout the year. The profits from the Hotel are seasonal and first and
second quarter results are generally higher than the last two quarters of the
year. Lease payments in excess of the income recognized by the Partnership were
deferred and, to the extent not subject to possible future repayment to the
Hotel tenant, were recognized as income during the remainder of the year.
Pursuant to the terms of the Operating Lease, Annual Rental, as defined, was
equal to the greater of Basic Rental (80% of Operating Profit, as defined) and
Owner's Priority, as defined. Additionally, the Hotel tenant was required to pay
property taxes, make contributions equal to a percentage of Hotel sales to a
property improvement fund (4.5% in 1997 and 5.5% thereafter) and pay rental on
the second golf course. Subsequent to the Conversion, the Partnership records
revenue based on house profit generated by the Hotel. House profit reflects
Hotel operating results, and represents gross hotel sales less property-level
expenses, excluding depreciation, base and incentive management fees, property
taxes, and certain other costs, which are disclosed separately in the statement
of operations. Revenues are recorded based on house profit because the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit to MHS.
The following is a summary of Hotel Revenues, for the twelve weeks ended March
27, 1998 and March 28, 1997(in thousands):
March 27, March 28,
1998 1997
HOTEL SALES
Rooms................$ 14,433 $ 12,712
Food and beverage.... 13,471 12,060
Other..................... 8,115 8,013
----------- ------------------
36,019 32,785
------- -------------
HOTEL EXPENSES
Departmental direct costs
Rooms....................... 2,673 2,259
Food and beverage............ 8,389 7,457
Other operating expenses...........8,804 8,414
------ ------------------
19,866 18,130
-------- ------------------
HOTEL REVENUES... ......$ 16,153 $ 14,655
================= ==================
4. Pursuant to the terms of the management agreement, MHS earns an
incentive management fee based on Operating Profit as defined. For fiscal year
1998, the Partnership is entitled to the first $21.5 million of Operating Profit
(the "Owners Priority"). Thereafter, MHS will receive the next $1.8 million of
Operating Profit as an incentive management fee and any operating profit in
excess of $23.3 million will be divided 75% to the Partnership and 25% to MHS.
Any such payments will be made annually after completion of the audit of the
Partnership's books. Pursuant to the terms of the management agreement,
contributions to the property improvement fund in 1998 are 5.5% of gross Hotel
sales, a one percentage point increase over the prior year level.
5. On April 17, 1998, Host Marriott Corporation ("Host Marriott"), the
parent of the General Partner of the Partnership, announced that its Board of
Directors has authorized the company to reorganize its business operations to
qualify as a real estate investment trust ("REIT") to become effective as of
January 1, 1999. As part of the REIT conversion, Host Marriott expects to form a
new operating partnership (the "Operating Partnership") and limited partners in
certain Host Marriott full-service hotel partnerships and joint ventures,
including the Partnership, are expected to be given an opportunity to receive,
on a tax-deferred basis, Operating Partnership units in the new Operating
Partnership in exchange for their current partnership interest.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements 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. These risks are detailed from time to time in the Partnership's
filings with the Securities and Exchange Commission. The Partnership undertakes
no obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded primarily
through loan agreements with independent financial institutions. The General
Partner believes that the Partnership will have sufficient capital resources and
liquidity to continue to conduct its operations in the ordinary course of
business.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is from Hotel operations. Its
principal uses of cash are to make debt service payments, fund the Hotel's
property improvement fund and establish reserves required by the lender.
Cash provided by operations for the twelve weeks ended March 27, 1998 and March
28, 1997 was $8.5 million and $5.4 million, respectively. Cash provided by
operations increased $3.1 million primarily due to the Conversion combined with
improved Hotel operations. Prior to the Conversion, the Partnership recognized
estimated annual hotel rental income on a straight-line basis throughout the
year. This change combined with an overall improvement in hotel operations
(discussed below under Revenues) and an increase in accounts payable of $2.1
million due to increased accrued interest liability, resulted in the increase in
cash from operations.
Cash used in investing activities for the twelve weeks ended March 27, 1998 and
March 28, 1997 was $2.1 million and $573,000, respectively. The Partnership's
cash investing activities consist primarily of contributions to the property
improvement fund and capital expenditures for improvements at the Hotel.
Contributions to the property improvement fund were $2 million for first quarter
1998 and $1.5 million for first quarter 1997. Capital expenditures were $1.5
million and $619,000 in first quarter 1998 and first quarter 1997, respectively.
Cash used in financing activities for the twelve weeks ended March 27, 1998 and
March 28, 1997 was $2.2 million and $5.2 million respectively. The Partnership's
cash financing activities consist primarily of payments of the mortgage debt and
contributions to the restricted cash reserves. Additionally, in first quarter
1997, the Partnership made $900,000 of loan repayments from the property
improvement fund on the $1.7 million rooms refurbishment loan from Marriott
International, Inc. The General Partner believes that cash contributions to the
property improvement fund will provide adequate funds in the short-term and
long-term to meet the Hotel's capital needs.
RESULTS OF OPERATIONS
Revenues. As discussed in Note 3 to the Condensed Consolidated Financial
Statements, the Partnership changed its method of reporting revenues in
connection with the Conversion. As a result, Partnership Revenues reported for
the twelve weeks ended March 27, 1998 are not comparable to the Partnership
Revenues reported for the twelve weeks ended March 28, 1997. Prior to the
Conversion, the Partnership recognized estimated annual hotel rental income on a
straight-line basis throughout the year. The profits from the Hotel are seasonal
and first and second quarter results are generally higher than the last two
quarters of the year. Lease payments in excess of the income recognized by the
Partnership were deferred and, to the extent not subject to possible future
repayment to the Hotel lessee, were recognized as income during the remainder of
the year. Pursuant to the terms of the Operating Lease, Annual Rental, as
defined, was equal to the greater of Basic Rental (80% of Operating Profit, as
defined) and Owner's Priority, as defined. Additionally, the Hotel tenant was
required to pay property taxes, make contributions equal to a percentage of
Hotel sales to a property improvement fund (4.5% in 1997 and 5.5% thereafter)
and pay rental on the second golf course.
Subsequent to the Conversion, the Partnership records revenue based on house
profit generated by the Hotel. House profit reflects Hotel operating results,
and represents gross hotel sales less property-level expenses, excluding
depreciation, base and incentive management fees, property taxes, and certain
other costs, which are disclosed separately in the statement of operations.
Revenues are recorded based on house profit because the Partnership has
delegated substantially all of the operating decisions related to the generation
of house profit to MHS.
On a comparative basis, house profit increased $1.5 million, or 10%, for the
first quarter 1998 when compared to the same period in 1997 due to significant
increases in rooms and food and beverage 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 measure under generally
accepted accounting principles). For the first quarter 1998, REVPAR increased
14% to $194 due to a 12% increase in average room rate to approximately $236
while average occupancy remained stable when compared to first quarter 1997.
Average room rates increased by 15% for group business and 9% for transient
business. Additionally, group roomnights sold increased by over 3,000 roomnights
or 8% over 1997 while transient roomnights declined by 2,600 roomnights or 14%
from first quarter 1997. The increase in the higher rated group roomnights sold
more than offset the decline in transient room revenue. As a result of the
increase in REVPAR combined with the increase in group roomnights and group
average rate, hotel room sales increased 14% or $1.7 million for the first
quarter 1998 when compared to the first quarter 1997. Food and beverage sales
increased 12% or $1.4 million in first quarter 1998 when compared to the first
quarter in 1997 due primarily to the increase in group business and related
increases in banquet sales and audio visual rental revenue.
Operating Costs and Expenses. Operating costs and expenses increased $2 million
from $2.5 million in first quarter 1997 to $4.5 million in first quarter 1998
due primarily to the impact of the Conversion. Prior to the Conversion, the
Partnership did not record incentive management fee expense. Additionally, base
management fees, though a component in the calculation of Operating Profit prior
to the Conversion, was not a component of the Partnership's operating costs. On
a comparative basis, base management fees for the first quarter 1998 increased
$96,000, or 10% from $984,000 in first quarter 1997 to $1.1 million in first
quarter 1998 with the increase in hotel operations discussed above.
Depreciation. Depreciation decreased $284,000, or 14.6%, for the first quarter
1998 when compared to the first quarter 1997 as the Partnership's original
10-year equipment was fully depreciated during 1997.
Interest Expense. On November 25, 1997 the Partnership refinanced its $160
million mortgage debt with $182.7 million of debt. The increase in debt along
with an increase in the weighted average interest rate from 8.2% in the first
twelve weeks of 1997 to 9.8% in the first twelve weeks of 1998 resulted in an
increase in interest expense of $1.1 million, or 30%, from $3.4 million to $4.5
million.
Interest Income and Other. Interest income and other includes $73,000 in first
quarter 1998 which represents payments made to the Partnership by Marriott
Vacation Club International ("MVCI") for the rental of a gallery and marketing
desk in the Hotel's lobby. In first quarter 1997, MVCI rental of $77,000 was
recognized and included in the $6.3 million of Hotel rental income.
Net Income. Net income increased $7 million to $7.3 million in first quarter
1998 as a result of the changes discussed above, primarily the Conversion, and
improved property operating results.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Partnership and the Partnership Hotel are involved in routine litigation and
administrative proceedings arising in the ordinary course of business, some of
which are expected to be covered by liability insurance and which collectively
are not expected to have a material adverse effect on the business, financial
conditions or results of operations of the Partnership.
On March 16, 1998, limited partners in several partnerships sponsored by Host
Marriott Corporation ("Host Marriott") filed a lawsuit, styled Robert M. Haas,
Sr. and Irwin Randolph Joint Tenants, et al. v. Marriott International, Inc., et
al., Case No. CI-04092, in the 57th Judicial District Court of Bexar County,
Texas against Marriott International, Inc. ("Marriott International"), Host
Marriott, various of their subsidiaries, J.W. Marriott, Jr., Stephen Rushmore,
and Hospitality Valuation Services, Inc. (collectively, the "Defendants"). The
lawsuit relates to the following limited partnerships: Courtyard by Marriott
Limited Partnership, Courtyard by Marriott II Limited Partnership, Marriott
Residence Inn Limited Partnership, Marriott Residence Inn II Limited
Partnership, Fairfield Inn by Marriott Limited Partnership, Desert Springs
Marriott Limited Partnership, and Atlanta Marriott Marquis Limited Partnership
(collectively, the "Partnerships"). The plaintiffs allege that the Defendants
conspired to sell hotels to the Partnerships for inflated prices and that they
charged the Partnerships excessive management fees to operate the Partnerships'
hotels. The plaintiffs further allege that the Defendants committed fraud,
breached fiduciary duties, and violated the provisions of various contracts. The
plaintiffs are seeking unspecified damages. The Defendants, which do not include
the Partnerships, believe that there is no truth to the plaintiffs' allegations
and that the lawsuit is totally devoid of merit. The Defendants intend to
vigorously defend against the claims asserted in the lawsuit. Although the
Partnerships have not been named as Defendants in the lawsuit, the partnership
agreements relating to the Partnerships include an indemnity provision which
requires the Partnerships, under certain circumstances, to indemnify the general
partners against losses, judgments, expenses, and fees.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits - None.
b. Reports on Form 8-K
A Form 8-K was filed with the Securities and Exchange Commission on May 8,
1998. In this filing, Item 5 Other Events discloses the announcement by
Host Marriott Corporation ("Host Marriott"), parent company of the General
Partner of the Partnership, that Host Marriott's Board of Directors has
authorized Host Marriott to reorganize its business operations to qualify
as a real estate investment trust, effective as of January 1, 1999. A copy
of the press release was included as an Item 7 - Exhibit in this Form 8-K
filing.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
DESERT SPRINGS MARRIOTT
LIMITED PARTNERSHIP
By: MARRIOTT DESERT SPRINGS CORPORATION
General Partner
May 11, 1998 By: /s/ Patricia K. Brady
---------------------
Patricia K. Brady
Vice President and Chief Accounting Officer
<PAGE>
SIGNATURE
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.</LEGEND>
<CIK> 0000832345
<NAME> DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-27-1998
<EXCHANGE-RATE> 1.00
<CASH> 20,585
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<CURRENT-ASSETS> 10,571
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<DEPRECIATION> (63,533)
<TOTAL-ASSETS> 182,440
<CURRENT-LIABILITIES> 7,611
<BONDS> 182,164
0
0
<COMMON> 0
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<TOTAL-LIABILITY-AND-EQUITY> 182,440
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