================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported) September 10, 1997
-------------------------
HOST MARRIOTT CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
1-5664 53-0085950
(Commission File Number) (I.R.S. Employer Identification Number)
10400 Fernwood Road, Bethesda, Maryland 20817
(Address of Principal Executive Offices) (Zip Code)
----------------------------
Registrant's Telephone Number, Including Area Code (301) 380-9000
(Former Name or Former Address, if changed since last report.)
================================================================================
FORM 8-K
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On September 10, 1997, Host Marriott Corporation (the "Company") successfully
completed the purchase of a majority of the limited partnership units in the
Chesapeake Hotel Limited Partnership. The Partnership owns six hotels, the Key
Bridge Marriott, the Chicago O'Hare Marriott, the Boston Newton Marriott, the
Denver Southeast Marriott, the Bloomington Minnesota Marriott and the
Saddlebrook New Jersey Marriott. The purchase will result in the Company's
acquisition of 434 units or 98.6% of the limited partnership units for an
aggregate payment of $31.5 million. Combined with its general partner and
existing limited partnership positions, the Company now owns through affiliates
99.9% of this Partnership.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of Chesapeake Hotel Limited Partnership:
Page
Report of Independent Public Accountants 3
Balance Sheets as of December 31, 1996 and 1995 4
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 5
Statements of Changes in Partners' Deficit for
the years ended December 31, 1996, 1995 and 1994 6
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 7
Notes to Financial Statements 8
Condensed Balance Sheets as of June 20, 1997 and 15
December 31, 1996
Condensed Statements of Operations for the twelve and 16
twenty-four weeks ended June 20, 1997 and
June 14, 1996
Condensed Statements of Cash Flows for the twenty-four 17
weeks ended June 20, 1997 and June 14, 1996
Notes to Unaudited Condensed Financial Statements 18
(b) Pro form financial information:
It is impracticable for the Company to provide the required pro forma
financial information at the time of this filing. The Company will
file such pro forma financial information by amendment no later than
60 days after the date this report is filed, as permitted under Item 7
of Form 8-K.
(c) Exhibits:
(99) News Release dated September 12, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HOST MARRIOTT CORPORATION
By: /s/ Donald D. Olinger
--------------------------------
Donald D. Olinger
Senior Vice President and
Corporate Controller
Date: September 25, 1997
-2-
Report of Independent Public Accountants
TO THE PARTNERS OF CHESAPEAKE HOTEL LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Chesapeake Hotel Limited
Partnership (the "Partnership") a Delaware limited partnership, as of December
31, 1996 and 1995, and the related statements of operations, changes in
partners' deficit and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements 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 an 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 Chesapeake Hotel Limited
Partnership as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 1 to the
financial statements, the Partnership has significant debt obligations which are
callable or in default and which, if called or foreclosed, could not be repaid
by the Partnership which raises substantial doubt about its ability to continue
as a going concern. The Partnership's plans in regard to these matters are also
described in Notes 6 and 7. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 28, 1997
-3-
Chesapeake Hotel Limited Partnership
Balance Sheets
December 31, 1996 and 1995
(in thousands)
1996 1995
----------- -----------
ASSETS
Property and equipment, net (Note 4).......................................................$ 123,949 $ 125,999
Due from Marriott International, Inc. and affiliates....................................... 6,209 6,358
Other assets............................................................................... 572 655
Cash and cash equivalents.................................................................. 4,307 4,468
----------- -----------
$ 135,037 $ 137,480
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt..............................................................................$ 2,690 $ 3,379
Mortgage debt payable to Host Marriott Corporation and affiliates.......................... 199,702 201,914
Notes and other payables due to Host Marriott Corporation and affiliates................... 35,914 34,196
Due to Willmar Distributors, Inc........................................................... 7,715 8,411
Notes and other payables due to Marriott International, Inc. and affiliates................ 147,267 127,022
Accounts payable and accrued expenses...................................................... 1,322 1,196
----------- -----------
Total Liabilities...................................................................... 394,610 376,118
----------- -----------
PARTNERS' DEFICIT
General Partner
Capital contribution................................................................ 444 444
Cumulative net losses............................................................... (2,993) (2,784)
----------- -----------
(2,549) (2,340)
----------- -----------
Limited Partners
Capital contribution, net of offering costs of $4,674............................... 39,326 39,326
Cumulative net losses............................................................... (296,350) (275,624)
----------- -----------
(257,024) (236,298)
----------- -----------
Total Partners' Deficit................................................................ (259,573) (238,638)
----------- -----------
$ 135,037 $ 137,480
=========== ===========
The accompanying notes are an integral part of these financial statements.
-4-
Chesapeake Hotel Limited Partnership
Statements of Operations
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands, except per Unit amounts)
1996 1995 1994
---------- ----------- -----------
REVENUES (Note 3).............................................................. $ 44,599 $ 44,827 $ 40,247
---------- ----------- -----------
OPERATING COSTS AND EXPENSES
Interest..................................................................... 30,108 31,316 28,995
Depreciation and amortization................................................ 13,133 13,616 13,707
Incentive management fee..................................................... 8,295 8,458 6,956
Property taxes............................................................... 6,255 5,766 6,280
Base management fee.......................................................... 4,099 4,166 4,014
Ground rent, insurance and other............................................. 3,644 2,365 2,994
Write-down of Tulsa Hotel to estimated fair market value..................... -- 6,868 --
---------- ----------- ----------
65,534 72,555 62,946
---------- ----------- ----------
LOSS BEFORE EXTRAORDINARY ITEM................................................. (20,935) (27,728) (22,699)
EXTRAORDINARY ITEM
Gain on foreclosure of Tulsa Hotel........................................... -- 31,965 --
---------- ----------- ----------
NET (LOSS) INCOME.............................................................. $ (20,935) $ 4,237 $ (22,699)
========== =========== ===========
ALLOCATION OF NET (LOSS) INCOME
General Partner.............................................................. $ (209) $ 42 $ (227)
Limited Partners............................................................. (20,726) 4,195 (22,472)
---------- ----------- -----------
$ (20,935) $ 4,237 $ (22,699)
========== =========== ===========
NET (LOSS) INCOME PER LIMITED PARTNER UNIT (440 UNITS)......................... $ (47,105) $ 9,534 $ (51,073)
========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-5-
Chesapeake Hotel Limited Partnership
Statements of Changes in Partners' Deficit
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands)
General Limited
Partner Partners Total
------------- ------------- --------------
Balance, December 31, 1993.................................................$ (2,155) $ (218,021) $ (220,176)
Net loss............................................................... (227) (22,472) (22,699)
------------ ------------ ------------
Balance, December 31, 1994................................................. (2,382) (240,493) (242,875)
Net income............................................................. 42 4,195 4,237
------------ ------------ ------------
Balance, December 31, 1995................................................. (2,340) (236,298) (238,638)
Net loss............................................................... (209) (20,726) (20,935)
------------ ------------ ------------
Balance, December 31, 1996.................................................$ (2,549) $ (257,024) $ (259,573)
============ ============ ============
The accompanying notes are an integral part of these financial statements.
-6-
Chesapeake Hotel Limited Partnership
Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
------------ ------------ ------------
OPERATING ACTIVITIES
Net (loss) income...........................................................$ (20,935) $ 4,237 $ (22,699)
Extraordinary item.......................................................... -- (31,965) --
----------- ----------- -----------
Loss before extraordinary item.............................................. (20,935) (27,728) (22,699)
Noncash items:
Depreciation and amortization........................................... 13,133 13,616 13,707
Deferred incentive management fee and related interest.................. 18,054 17,233 13,985
Amortization of discount on mortgages as interest expense............... 108 131 202
Interest................................................................ 1,718 1,820 5,810
Loss on retirement of property and equipment............................ 268 -- 30
Write-down of Tulsa Hotel to estimated fair market value................ -- 6,868 --
Changes in operating accounts:
Accounts payable and accrued expenses................................... 100 623 (1,056)
Due to (from) Marriott International, Inc. and affiliates............... 149 58 (1,302)
----------- ----------- -----------
Cash provided by operations............................................. 12,595 12,621 8,677
----------- ----------- -----------
INVESTING ACTIVITIES
Additions to property and equipment, net.................................... (4,797) (3,008) (740)
Proceeds from Tulsa Hotel Foreclosure....................................... -- 750 --
----------- ----------- -----------
Cash used in investing activities....................................... (4,797) (2,258) (740)
----------- ----------- -----------
FINANCING ACTIVITIES
Repayment of mortgage debt payable to
Host Marriott Corporation and affiliates................................ (5,000) (5,000) (4,000)
Repayment of Willmar loan................................................... (4,353) (2,097) --
Repayment of first mortgages payable........................................ (797) (1,191) (4,865)
Advance from Marriott International, Inc. and affiliates.................... 2,400 -- --
Repayment of note payable to Marriott International, Inc.................... (209) -- --
Principal payments on capital lease obligations............................. -- (126) (162)
----------- ----------- -----------
Cash used in financing activities....................................... (7,959) (8,414) (9,027)
----------- ----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................ (161) 1,949 (1,090)
CASH AND CASH EQUIVALENTS at beginning of year.................................. 4,468 2,519 3,609
----------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of year........................................$ 4,307 $ 4,468 $ 2,519
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage and other interest...................................$ 18,522 $ 19,950 $ 16,813
=========== =========== ===========
Non-cash investing activities
Additions to property and equipment through capital lease...............$ 6,445 $ 6,342 $ 8,432
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-7-
Chesapeake Hotel Limited Partnership
Notes to Financial Statements
December 31, 1996 and 1995
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Chesapeake Hotel Limited Partnership (the "Partnership"), a Delaware limited
partnership, was formed August 24, 1984 (the "Closing Date"), to acquire, own
and operate a number of hotels (the "Hotels"). As of December 31, 1996, the
Partnership owned the following seven Hotels totalling 3,322 rooms: (i) the
584-room Key Bridge Hotel in Virginia; (ii) the 221-room Saddle Brook Hotel in
New Jersey; (iii) the 681-room Chicago O'Hare Hotel in Illinois; (iv) the 430-
room Boston/Newton Hotel in Massachusetts; (v) the 590-room Denver Southeast
Hotel in Colorado; (vi) the 478-room Minneapolis/Bloomington Hotel in Minnesota
and (vii) the 338-room Houston Astrodome Hotel in Texas. Marriott International,
Inc. ("MII" and the "Manager") serves as the manager at all of the Partnership's
Hotels with the exception of the Houston Astrodome Hotel. On December 29, 1995,
Host Marriott Corporation's operations were divided into two separate companies:
Host Marriott Corporation ("Host Marriott") and Host Marriott Services
Corporation. The sole general partner of the Partnership, with a 1% interest, is
Marriott PLP Corporation (the "General Partner"), a wholly-owned subsidiary of
Host Marriott.
On the Closing Date, 440 limited partnership interests (the "Units") were sold
in a private placement at $100,000 per Unit. The General Partner contributed
$444,000 for its 1% general partnership interest.
Partnership Liquidity
As discussed in Note 6, the Partnership has a significant obligation which
became callable in 1994. As of March 28, 1997, the lender, Host Marriott, has
not taken action to call the debt. If Host Marriott called the debt, the
Partnership would be unable to satisfy the obligation, which would have a
significant adverse effect on the Partnership's ability to continue operations.
Such adverse effects may include foreclosure on substantially all of the
Partnership's assets, cessation of Partnership operations and liquidation.
Additionally, as discussed in Notes 6 and 7, the Partnership exceeded its
borrowing threshold of $34 million on the promissory note payable to Willmar
Distributors, Inc. ("Willmar"), a wholly-owned subsidiary of Host Marriott, and
was unable to repay the loan upon maturity, resulting in an Event of Default
under the Facilities Service Agreement. However, Willmar continues to fund the
Partnership's periodic facilities service payments.
Partnership Allocations and Distributions
The Partnership's limited partnership agreement provides for the distribution of
available cash and the allocation of operating income, gains and losses, and
deductions and credits for Federal income tax purposes among the partners
generally with 1% allocated to the General Partner and 99% to the limited
partners subject to certain special allocations of net profit or net losses to
the General Partner if required by Federal income tax regulations.
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.
-8-
Revenues and Expenses
Revenues represent house profit of the Hotels since the Partnership has
delegated substantially all of the operating decisions related to the generation
of house profit of the Hotels to the Manager. House profit reflects hotel
operating results which flow to the Partnership, as property owner, and
represents gross hotel sales less property-level expenses, excluding
depreciation and amortization, base and incentive management fees, property
taxes, ground rent, insurance and certain other costs, which are disclosed
separately in the statement of operations.
Property and Equipment
Property and equipment is recorded at the lower of cost or estimated net
realizable value. The cost of property and equipment acquired on the Closing
Date reflects an imputed discount on certain of the related mortgage notes
required to recognize their market value. The cost of furniture and equipment
provided by Willmar under a long-term agreement totalled $81,065,000 and
$78,298,000 at December 31, 1996 and 1995, respectively, and is included in
property and equipment in the accompanying balance sheet. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets as follows:
Buildings and improvements 25 to 40 years
Leasehold improvements 25 to 40 years
Furniture and equipment 4 to 10 years
Property and equipment owned by the Partnership is pledged as security for the
mortgages described in Note 6.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties on an
individual hotel basis will be less than their net book value. If a property is
impaired, its basis is adjusted to fair market value.
On February 16, 1994, the Houston Astrodome Hotel was subleased to a third party
through December 31, 2000 (see Note 7).
On October 3, 1995, ownership of the Tulsa Hotel was transferred to Tulsa
Garnett Hotel Ventures LLC through foreclosure (see Note 6).
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) income for financial
reporting purposes and the net (loss) income reported in the Partnership's tax
return. These differences are due primarily to the use, for tax purposes, of
accelerated depreciation methods and shorter depreciable lives on higher asset
bases and differences in the timing of the recognition of interest and incentive
management fee expenses. As a result of these differences, the excess of the net
partnership liabilities recorded in the accompanying financial statements over
the tax basis in net Partnership liabilities is $121,361,000 and $107,625,000 as
of December 31, 1996 and 1995, respectively.
New Statements of Financial Accounting Standards
In the first quarter of 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.
-9-
NOTE 3. REVENUES
Partnership revenues consist of the Hotels' operating results for the three
years ended December 31 (in thousands):
1996 1995 1994
----------- ----------- -----------
HOTEL SALES
Rooms....................................................................... $ 85,548 $ 84,625 $ 81,530
Food and beverage........................................................... 44,094 46,901 44,896
Other....................................................................... 6,992 7,337 7,370
----------- ----------- -----------
136,634 138,863 133,796
----------- ----------- -----------
HOTEL EXPENSES
Departmental direct costs
Rooms.................................................................... 21,505 21,343 20,907
Food and beverage........................................................ 34,293 36,003 36,012
Other hotel operating expenses.............................................. 36,237 36,690 36,630
----------- ----------- -----------
92,035 94,036 93,549
----------- ----------- -----------
REVENUES....................................................................... $ 44,599 $ 44,827 $ 40,247
=========== =========== ===========
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
1996 1995
------------ ------------
Land.................................................................... $ 12,502 $ 12,502
Buildings and improvements.............................................. 103,799 100,630
Leasehold improvements.................................................. 64,298 64,234
Furniture and equipment................................................. 91,589 87,558
------------ ------------
272,188 264,924
Less accumulated depreciation........................................... (148,239) (138,925)
------------ ------------
$ 123,949 $ 125,999
============ ============
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in the table are estimated to be
equal to their carrying amounts (in thousands):
As of December 31, 1996 As of December 31, 1995
---------------------------- -----------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------- -------------
Debt payable to financial institutions $ 2,690 $ 2,700 $ 3,379 $ 3,379
Note payable due to Marriott International, Inc.
and affiliates $ 2,191 $ 2,100 $ 0 $ 0
Notes and other payables due to Host Marriott
Corporation and affiliates $ 235,615 $ 140,000 $ 236,110 $ 145,000
Due to Willmar Distributors, Inc. $ 7,715 $ 0 $ 8,411 $ 0
Incentive management fee and related interest
due to Marriott International, Inc. $ 144,996 $ 0 $ 126,942 $ 0
-10-
The estimated fair value of debt obligations is based on the expected future
debt service payments discounted at estimated market rates. Notes and other
payables due to Host Marriott and affiliates, due to Willmar and incentive
management fees payable to MII are valued based on the expected future payments
from operating cash flow discounted at risk- adjusted rates.
NOTE 6. DEBT
As of December 31, 1996, Partnership debt consisted of $2,858,000 in
non-recourse third party first mortgages (the "Mortgage Debt"), $140,142,000 in
secured promissory notes (the "Purchase Money Debt") payable to Marriott
Financial Services, Inc. ("MFS"), a wholly-owned indirect subsidiary of Host
Marriott, a $6,779,000 note payable to the General Partner for the Key Bridge
Hotel's expansion (the "Key Bridge Loan"), a $59,560,000 note payable and
related accrued interest to Willmar and $29,135,000 due to Host Marriott for
debt service guarantee advances and related accrued interest. The Mortgage Debt
is secured by the property and equipment of the Denver Southeast Hotel. As of
December 31, 1996, $18,305,000 had been advanced under the Host Marriott
guarantees consisting of $4,075,000 and $8,230,000 for the Tulsa and Charlotte
loans, respectively, and $6,000,000 for the Chicago O'Hare Hotel unsecured loan.
These advances are interest-bearing loans to the Partnership to be repaid from
available cash flow after debt service and management fees. Interest accrues at
1% over prime. No other Host Marriott guarantees on the Mortgage Debt exist.
The Purchase Money Debt is secured by non-recourse first mortgages on the
Chicago O'Hare and the Houston Astrodome Hotels and by non-recourse second
mortgages on the Boston/Newton, Denver Southeast, Key Bridge,
Minneapolis/Bloomington and Saddle Brook Hotels. The Purchase Money Debt bears
interest at 9% per annum until such time as additional borrowings of at least
$44.4 million are obtained by the Partnership for purposes other than meeting
Partnership obligations or for other than operational purposes. Thereafter, the
interest rate is subject to a possible one time only adjustment based upon the
prevailing 10-year Treasury Bill rate. The Purchase Money Debt matures on
December 31, 2003, but has been callable since January 1, 1994 (at 97% of the
principal balance increasing to 98% in 1999). The Purchase Money Debt requires
amortization of approximately 44% of the original principal amount prior to
maturity. For 1996, operating cash flow from the Hotels was sufficient to cover
debt service on the Purchase Money Debt. It is expected that 1997 cash flows
will be sufficient to cover the scheduled 1997 debt service on Purchase Money
Debt. As of March 28, 1997, the lender has not taken action to call such debt;
there can be no assurance that the Purchase Money Debt will not be called. If
the Purchase Money Debt is called, the Partnership would likely default which
could lead to a foreclosure on the Hotels and, ultimately, liquidation of the
Partnership.
The Key Bridge and Boston/Newton first mortgages were fully amortized and were
paid in full on February 1, 1995. The Saddle Brook Hotel first mortgage was
fully amortized and was paid in full on October 1, 1995.
On December 18, 1995, the Partnership entered into a loan agreement with
Marriott Information Services, Inc., an indirect subsidiary of MII, to borrow
$2.4 million for certain renovations and capital improvements to the Saddle
Brook Hotel. In addition, the Partnership funded approximately $600,000 from
operating cash for the renovation. The renovation included a conversion of the
meeting rooms to guest rooms on the second and third floors, as well as a
renovation of all guest bathrooms. The exterior hotel wing and the parking
garage were demolished and replaced with street level parking. The loan is being
paid from 5% of the gross revenues of the Hotel each period. The interest on the
loan is LIBOR plus 1.50 percentage points. The loan matures on December 18,
2002. As of December 31, 1996 and 1995, the outstanding balance on this debt
equalled $2.2 million and $0, respectively.
On October 3, 1995, ownership of the Tulsa Hotel was transferred to Tulsa
Garnett Hotel Ventures LLC ("TGHV") in satisfaction of TGHV's foreclosure
judgment. In connection with this transfer, the Partnership received a total of
$525,000 from TGHV and a release of TGHV's claims to approximately $1.2 million
of Partnership cash. Additionally, the Partnership received a payment of
$225,000 from the landlord for agreeing to a modification in the ground lease.
Accounting for the foreclosure required the write-down of the Hotel assets to
their estimated fair market value at the time of the foreclosure. This resulted
in recording a loss of $6.9 million in 1995. Additionally, the Partnership
recorded an extraordinary gain in 1995 of $32.0 million which represents the
difference between the cash received plus the mortgage debt and accrued interest
of $40.3 million extinguished as a result of the foreclosure and the estimated
fair market value of the foreclosed Hotel.
-11-
The note payable to the General Partner for the Key Bridge Hotel's 1990
expansion bears interest at the prime rate less one percent for the first five
years and the prime rate thereafter. No amortization of principal is required
until maturity on July 13, 2000. For 1996, operating cash flow from the Hotels
was sufficient to cover interest payments on the Key Bridge Loan. It is expected
that 1997 cash flows will be sufficient to cover the scheduled 1997 interest
payment.
In 1996, operating cash flow was not sufficient to cover the Partnership's
obligation to Willmar (see Note 7). Willmar had agreed to accept a promissory
note for up to $34.0 million through December 31, 1994, under the Facilities
Service Agreement for the purpose of funding the necessary renewal and
replacements of furniture, fixtures and equipment. The debt was not repaid at
maturity and, therefore, went into default on December 31, 1994. However,
Willmar continues to fund the Partnership's periodic facilities service
payments. During 1996, the Partnership continued to exceed its borrowing
threshold of $34.0 million. As of December 31, 1996, the Partnership has
borrowed $55.4 million. The loan bears interest at 8% per annum and will be
repaid from available cash flow after payment of debt service and provides that
any unpaid interest be added to principal annually on December 31. Additions of
unpaid interest do not reduce the amount available under this loan. During 1996,
operating cash flow was sufficient to cover interest for the current year on the
Willmar loan and a portion of the accrued interest from 1995. As of December 31,
1996, $4.2 million of unpaid interest has been added to principal.
Mortgage notes bearing interest at below market rates on the Closing Date were
discounted based on an imputed interest rate of 13%. Debt at December 31, 1996
is (in thousands):
Weighted-Average Latest Year
Balance Interest Rates of Maturity
-------------- ---------------- -----------
Financial Institutions
Fixed rate.................................................. $ 2,858 8.8% 1999
Less unamortized discount................................... (168)
--------------
$ 2,690
==============
Host Marriott Corporation and affiliates
Purchase Money Debt......................................... $ 140,142 9.0% 2003
Willmar debt and accrued interest........................... 59,560 8.0% 1996
--------------
$ 199,702
==============
Key Bridge Loan............................................. $ 6,779 8.3% 2000
Debt service guarantee advances and accrued interest........ 29,135 9.3% 1996
--------------
$ 35,914
==============
MII and affiliates
Saddle Brook Hotel renovation loan.......................... $ 2,191 7.0% 2002
==============
Debt maturities, excluding the $140,142,000 Purchase Money Debt which is
callable at any time and the $59,560,000 Willmar debt which is currently due, at
December 31, 1996 are (in thousands):
1997.................................... $ 1,269
1998.................................... 1,381
1999.................................... 1,501
2000.................................... 497
2001.................................... 401
Thereafter.............................. 35,914
----------
40,963
Less unamortized discount............... (168)
----------
$ 40,795
==========
If the Purchase Money Debt is not called, annual principal payments of $6.0
million will be made in 1997, 1998 and 1999, $7.0 million in 2000, 2001 and
2002, increasing to $8.0 million in 2003.
-12-
NOTE 7. MANAGEMENT AGREEMENT
The Partnership entered into a hotel management agreement on the Closing Date
with MII to manage the Hotels for a term of 25 years, renewable on one or more
of the Hotels at MII's option for terms of up to an additional 25 to 40 years.
MII is entitled to compensation for its services in the form of a base
management fee equal to three percent of gross revenues and an incentive
management fee.
The incentive management fee is equal to 25% of the combined annual operating
profit (defined as gross revenues less operating expenses including the base
management fee) of the eight Hotels through February 16, 1994, seven Hotels
through October 3, 1995, and six Hotels thereafter. Payment of this fee is made
from cash flow after debt service, which is defined as cash flow after payment
of certain debt service, ground rent, facilities service fees and owner's
administrative costs. Cash flow after debt service is reduced by the first $5.0
million by which the annualized level of debt service on first and second
mortgages attributable to the Hotels is less than $29.6 million. The payment
will be made from 50% of the first $6.0 million of cash flow after debt service
and from 75% of cash flow after debt service in excess of $6.0 million or in
certain circumstances from the proceeds of any sale, condemnation or insurance
recovery on total destruction of the Hotels. Any amounts earned but not paid
currently accrue interest at 12% per annum. No incentive management fees were
paid during the three years ended December 31, 1996. MII's accrued but unpaid
incentive management fees at December 31, 1996 and 1995, were $144,996,000 and
$126,942,000, respectively, including accrued interest of $58,737,000 and
$48,978,000, respectively.
Pursuant to the terms of the hotel management agreement, MII is required to
furnish the Hotels with certain services ("Chain Services") which are generally
provided on a central or regional basis to all Hotels in the MII full-service
hotel system. Chain Services include central training, advertising and
promotion, a national reservation 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 MII or its subsidiaries. In addition, the Hotels also participate in
MII's Honored Guest Awards Program ("HGA"). The cost of this program is charged
to all Hotels in the MII full-service hotel system based upon the HGA sales at
each Hotel. The total amount of Chain Services and HGA costs was $6,601,000 for
1996, $6,475,000 for 1995 and $5,772,000 for 1994.
Pursuant to the terms of the hotel management agreement, the Partnership is
required to provide MII with working capital and supplies to meet the operating
needs of the Hotels. MII converts cash advanced by the Partnership into other
forms of working capital consisting primarily of operating cash, inventories,
and trade receivables and payables which are maintained and controlled by MII.
Upon termination of the hotel management agreement, the working capital and
supplies will be returned to the Partnership. The individual components of
working capital and supplies controlled by MII are not reflected in the
Partnership's balance sheet. As of December 31, 1996 and 1995, $6,140,000 has
been advanced to MII for working capital and supplies which is reflected in Due
from Marriott International, Inc. and affiliates in the accompanying financial
statement. On October 3, 1995, the Tulsa Hotel was transferred through
foreclosure to TGHV. As a result, during 1995, $571,000 of working capital and
supplies of the Tulsa Hotel were written-off and included in the extraordinary
loss calculation. The supplies advanced to MII are recorded at their estimated
net realizable value. At December 31, 1996 and 1995, accumulated amortization
related to the revaluation of these supplies totalled $1,004,000.
The Partnership also entered into an agreement (the "Facilities Service
Agreement") with Willmar. Pursuant to the Facilities Service Agreement, Willmar
provides the necessary furniture, fixtures and equipment ("FF&E") to maintain
each Hotel in good repair and condition. Willmar-owned FF&E is accounted for as
a capital lease by the Partnership and is included with furniture and equipment
in the balance sheet. Additions to furniture and equipment through this capital
lease were $6,445,000 in 1996, $6,342,000 in 1995 and $8,432,000 in 1994.
Willmar is paid an annual fee over a six-year period equal to a declining
percentage of the cost of the FF&E and any related services provided. Willmar is
not obligated and has not committed to fund the Partnership's future capital
expenditures. For FF&E and related services provided, Willmar was entitled to
receive $7,141,000 in 1996, $7,789,000 in 1995 and $8,044,000 in 1994, with
minimum additional payments to be made in 1997 through 2001 of $4,218,000,
$2,223,000, $904,000, $246,000 and $124,000, respectively. The Partnership
expects that 1997 cash flow will not be sufficient to cover the Partnership's
1997 minimum obligation to Willmar; however, current forecasts indicate there
will be cash available for a partial payment to Willmar for current and prior
year interest accrued on the loan and a portion of principal on the loan in
1997.
-13-
On February 16, 1994, the Houston Astrodome Hotel was subleased to a third party
through December 31, 2000. In conjunction with this sublease, the management
agreement with the Manager for this property was terminated. Pursuant to the
lease agreement, the sublessee agreed to pay the ground rent and real estate and
property taxes related to the Hotel on behalf of the Partnership. The sublease
also names a third party as guarantor (the "Guarantor") of the agreement. The
Guarantor is liable for any unpaid tax and ground rent amounts due to the
Partnership after a 10-day notice of default has been issued to the tenant. The
Partnership was paid $120,000 on February 16, 1994 and the sublessee agreed to
make payments commencing on January 1, 1995 totalling $1,080,000 over the term
of the lease in seventy equal monthly installments of principal and interest. On
August 29, 1996, the lease agreement was modified from the payment of principal
and interest to interest only payments at an interest rate of 7% on the
currently outstanding balance owed of $977,635. Payments of ground rent, real
estate and property taxes and interest were made through August 1, 1996.
Interest not paid when due bears interest at the lesser of 18% or the highest
contract rate permitted by law. On March 25, 1997, the Partnership issued a
demand notice to the tenant requesting payment of amounts owed. If the payment
is not received by the Partnership within the 10-day period, the Partnership
will seek satisfaction of amounts owed from the Guarantor.
NOTE 8. GROUND LEASES
Four of the Partnership's Hotels are located on sites with ground leases having
remaining terms expiring between 2049 and 2064, including all renewal options,
generally for 10- or 20-year periods. Two of these leases provide for rent based
upon the greater of a minimum amount or a specific percentage of revenues.
Ground rent expense, including Tulsa in 1995 and 1994, was $1,761,000,
$1,784,000 and $1,745,000 for 1996, 1995 and 1994, respectively.
Minimum future rentals under non-cancelable ground leases are (in thousands):
1997...........................................$ 773
1998........................................... 773
1999........................................... 773
2000........................................... 663
2001........................................... 663
Thereafter..................................... 5,084
-----------
$ 8,729
===========
Amounts presented above have been reduced by sublease rentals of $137,900
through December 31, 2000, due to the sublease of the Houston Astrodome Hotel
referred to in Note 7.
-14-
Chesapeake Hotel Limited Partnership
Condensed Balance Sheets
(Unaudited)
June 20, December 31,
1997 1996
---------- -----------
(in thousands)
ASSETS
Property and equipment, net........... $ 122,485 $ 123,949
Due from Marriott International, Inc.. 8,905 6,209
Other assets.......................... 496 572
Cash and cash equivalents............. 4,564 4,307
---------- ----------
$ 136,450 $ 135,037
========== ==========
LIABILITIES AND PARTNERS' DEFICIT
Mortgage debt ........................ $ 2,307 $ 2,690
Mortgage debt payable to Host Marriott
Corporation and affiliates......... 196,610 199,702
Notes and other payables due to Host
Marriott Corporation and affiliates 36,725 35,914
Due to Willmar Distributors, Inc...... 8,107 7,715
Due to Marriott International, Inc.... 156,397 147,267
Accounts payable and accrued interest. 4,058 1,322
---------- ----------
Total Liabilities.................. 404,204 394,610
---------- ----------
PARTNERS' DEFICIT
General Partner....................... (2,631) (2,549)
Limited Partners...................... (265,123) (257,024)
---------- ----------
Total Partners' Deficit............ (267,754) (259,573)
---------- ----------
$ 136,450 $ 135,037
========== ==========
The accompanying notes are an integral part of these condensed financial
statements.
-15-
Chesapeake Hotel Limited Partnership
Condensed Statements of Operations
(Unaudited)
Twenty-Four Weeks Ended
-----------------------
June 20, June 14,
1997 1996
--------- ---------
(in thousands)
REVENUES...................................$ 23,218 $ 18,672
--------- ---------
OPERATING COSTS AND EXPENSES
Interest................................. 14,476 13,546
Depreciation and amortization............ 5,930 5,923
Incentive management fee................. 4,450 3,343
Property taxes........................... 2,880 2,872
Base management fee...................... 2,032 1,787
Ground rent, insurance and other......... 1,631 2,078
--------- ---------
31,399 29,549
--------- ---------
NET LOSS...................................$ 8,181 $ 10,877
========= =========
Twelve Weeks Ended
--------------------
June 20, June 14,
1997 1996
--------- ---------
(in thousands)
REVENUES...................................$ 14,606 $ 12,216
--------- ---------
OPERATING COSTS AND EXPENSES
Interest................................. 7,210 6,799
Depreciation and amortization............ 2,708 2,944
Incentive management fee................. 2,950 2,266
Property taxes........................... 1,500 1,439
Base management fee...................... 1,136 1,007
Ground rent, insurance and other......... 925 1,166
--------- ---------
16,429 15,621
--------- ---------
NET LOSS...................................$ 1,823 $ 3,405
========= =========
The accompanying notes are an integral part of these condensed financial
statements.
-16-
Chesapeake Hotel Limited Partnership
Condensed Statements of Cash Flows
(Unaudited)
Twenty-Four Weeks Ended
-----------------------
June 20, June 14,
1997 1996
---------- -----------
(in thousands)
OPERATING ACTIVITIES
Net loss...............................$ (8,181) $ (10,877)
Noncash items.......................... 16,080 14,430
Changes in operating accounts.......... 66 330
---------- ----------
Cash provided by operations.......... 7,965 3,883
---------- ----------
INVESTING ACTIVITIES
Additions to property and equipment.... (616) (1,397)
---------- ----------
FINANCING ACTIVITIES
Repayment of Willmar loan.............. (5,000) --
Repayment of mortgage and other debt... (2,092) (1,574)
Saddle Brook renovation loan........... -- 836
---------- ----------
Cash used in financing activities.... (7,092) (738)
---------- ----------
INCREASE IN CASH AND
CASH EQUIVALENTS....................... 257 1,748
CASH AND CASH EQUIVALENTS
at beginning of period................. 4,307 4,468
---------- ----------
CASH AND CASH EQUIVALENTS
at end of period.......................$ 4,564 $ 6,216
========== ==========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest...............$ 5,971 $ 3,623
========== ==========
NON-CASH INVESTING ACTIVITIES
Additions to property and equipment
through capital lease..............$ 3,800 $ 3,532
========== ==========
The accompanying notes are an integral part of these condensed financial
statements.
-17-
Chesapeake Hotel Limited Partnership
Notes to Condensed Financial Statements
(Unaudited)
The accompanying condensed financial statements have been prepared by Chesapeake
Hotel Limited Partnership (the "Partnership") without audit. Certain information
and footnote disclosures normally included in financial statements presented in
accordance with generally accepted accounting principles have been condensed or
omitted from the accompanying statements. The Partnership believes the
disclosures made are adequate to make the information presented not misleading.
However, the condensed financial statements should be read in conjunction with
the Partnership's 1996 audited financial statements. Interim results are not
necessarily indicative of fiscal year performance because of seasonal and
short-term variations.
For financial reporting purposes, the net loss of the Partnership is allocated
99% to the limited partners and 1% to Marriott PLP Corporation (the "General
Partner"). Significant differences exist between the net loss for financial
reporting purposes and the net loss for Federal income tax purposes. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods and shorter depreciable lives on higher asset
bases, and differences in the timing of the recognition of interest and
incentive management fee expenses.
Revenues represent house profit which is hotel sales less hotel-level expenses,
excluding certain operating costs and expenses such as depreciation, real and
personal property taxes, ground rent, insurance and management fees.
Revenues consist of Hotel operating results for the twenty-four and twelve weeks
ended:
Twenty-Four Weeks Ended
------------------------
June 20, June 14,
1997 1996
------------ ------------
(in thousands)
HOTEL SALES
Rooms........................... $ 42,969 $ 36,658
Food and beverage............... 21,483 19,881
Other........................... 3,290 3,024
------------ ------------
67,742 59,563
------------ ------------
HOTEL EXPENSES
Departmental Direct Costs
Rooms......................... 10,478 9,397
Food and beverage............. 16,562 15,305
Other hotel operating expenses.. 17,484 16,189
------------ ------------
44,524 40,891
------------ ------------
REVENUES.......................... $ 23,218 $ 18,672
============ ============
-18-
Twelve Weeks Ended
------------------------
June 20, June 14,
1997 1996
------------ ------------
(in thousands)
HOTEL SALES
Rooms........................... $ 24,261 $ 20,821
Food and beverage............... 11,794 11,057
Other........................... 1,804 1,666
------------ ------------
37,859 33,544
------------ ------------
HOTEL EXPENSES
Departmental Direct Costs
Rooms......................... 5,517 4,903
Food and beverage............. 8,832 8,006
Other hotel operating expenses.. 8,904 8,419
------------ ------------
23,253 21,328
------------ ------------
REVENUES.......................... $ 14,606 $ 12,216
============ ============
Marriott International, Inc. was not paid any incentive management fees during
the quarter since cash flow did not meet levels specified in the hotel
management agreement. These fees have been deferred in accordance with the
management agreement and accrued as a liability in the financial statements. Any
deferred incentive management fees accrue interest at a rate of 12% per annum.
-19-