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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
For the Quarter ended June 20, 1997
o Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
OR
|_| Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: 2-75711
POTOMAC HOTEL LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Delaware 52-1240223
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation organization)
10400 Fernwood Road
Bethesda, Maryland 20817
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(Address of principal executive (Zip Code)
offices
Registrant's telephone number, including area code: 301-380-2070
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
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POTOMAC HOTEL LIMITED PARTNERSHIP
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE NO.
Item 1. Financial Statements
Condensed Statement of Operations
Twelve and Twenty-Four Weeks Ended June 20, 1997 and June 14, 1996....1
Condensed Balance Sheet
June 20, 1997 and December 31, 1996...................................2
Condensed Statement of Cash Flows
Twenty-Four Weeks ended June 20, 1997 and June 14, 1996...............3
Notes to Condensed 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.....................................................8
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per unit amounts)
Twelve Weeks Ended Twenty-Four Weeks Ended
June 20, June 14, June 20, June 14,
1997 1996 1997 1996
----------- ----------- ----------- -------
REVENUES
Hotel...........................................................$ 12,134 $ 11,643 $ 28,048 $ 25,340
Other........................................................... 151 207 328 366
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12,285 11,850 28,376 25,706
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OPERATING COSTS AND EXPENSES
Interest........................................................ 5,645 5,589 11,490 11,114
Incentive management fee........................................ 2,135 1,951 5,195 4,652
Depreciation and amortization................................... 1,263 1,292 2,526 2,546
Base management fee............................................. 1,060 1,023 2,257 2,119
Property taxes.................................................. 795 879 1,602 1,752
Ground rent, insurance and other................................ 1,239 926 2,118 1,604
----------- ----------- ----------- ----------
12,137 11,660 25,188 23,787
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NET INCOME.........................................................$ 148 $ 190 $ 3,188 $ 1,919
=========== =========== =========== ==========
ALLOCATION OF NET INCOME
General Partner.................................................$ 1 $ 2 $ 32 $ 19
Limited Partners................................................ 147 188 3,156 1,900
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$ 148 $ 190 $ 3,188 $ 1,919
=========== =========== =========== ==========
NET INCOME PER LIMITED
PARTNER UNIT (1,800 Units)......................................$ 82 $ 105 $ 1,753 $ 1,056
=========== =========== =========== ==========
See Notes to Condensed Financial Statements.
1
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(in thousands)
June 20, December 31,
1997 1996
(unaudited)
ASSETS
Property and equipment, net.................................................................$ 156,244 $ 155,412
Due from Marriott International, Inc. and affiliates........................................ 11,647 10,870
Other assets................................................................................ 4,746 3,850
Restricted cash............................................................................. 14,997 4,507
Cash and cash equivalents................................................................... 974 5,228
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$ 188,608 $ 179,867
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LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt...............................................................................$ 177,666 $ 179,837
Due to Host Marriott Corporation and affiliates............................................. 121,952 124,370
Incentive and base management fees due to Marriott International, Inc.
and affiliates. ........................................................................... 22,294 17,172
Due to Marriott International, Inc. and affiliates.......................................... 752 1,956
Accrued interest and other liabilities...................................................... 7,053 829
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Total Liabilities........................................................................ 329,717 324,164
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PARTNERS' DEFICIT
General Partner............................................................................. (34,782) (34,814)
Limited Partners............................................................................ (106,327) (109,483)
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Total Partners' Deficit.................................................................. (141,109) (144,297)
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$ 188,608 $ 179,867
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See Notes to Condensed Financial Statements.
2
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
Twenty-Four Weeks Ended
June 20, June 14,
1997 1996
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OPERATING ACTIVITIES
Net income................................................................................$ 3,188 $ 1,919
Noncash items............................................................................. 9,457 9,761
Changes in operating accounts............................................................. 5,398 4,846
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Cash provided by operating activities.............................................. 18,043 16,526
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INVESTING ACTIVITIES
Additions to property and equipment....................................................... (3,358) (2,739)
Change in property improvement funds...................................................... (1,005) (2,210)
Working capital received from (funded to)
Marriott International, Inc. and affiliates, net...................................... 168 (262)
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Cash used in investing activities.................................................. (4,195) (5,211)
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FINANCING ACTIVITIES
Change in collateral accounts............................................................. (10,490) (9,795)
Repayments to Host Marriott Corporation and affiliates, net............................... (5,419) (4,468)
Principal repayments on mortgage debt..................................................... (2,171) (1,163)
Repayments to affiliates of Marriott International, Inc................................... (22) --
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Cash used in financing activities.................................................. (18,102) (15,426)
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DECREASE IN CASH AND CASH EQUIVALENTS......................................................... (4,254) (4,111)
CASH AND CASH EQUIVALENTS at beginning of period.............................................. 5,228 6,139
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CASH AND CASH EQUIVALENTS at end of period....................................................$ 974 $ 2,028
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for mortgage and other interest.................................................$ 2,080 $ 2,253
See Notes to Condensed Financial Statements.
3
POTOMAC HOTEL LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed financial statements have been prepared by
Potomac 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 financial statements and notes thereto
included in the Partnership's Form 10-K for the fiscal year ended December 31,
1996.
In the opinion of the Partnership, the accompanying unaudited condensed
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of the
Partnership as of June 20, 1997, the results of operations for the twelve and
twenty-four weeks ended June 20, 1997, and June 14, 1996. Interim results are
not necessarily indicative of fiscal year performance because of seasonal and
short-term variations.
For financial reporting purposes, the Partnership's net income is allocated 99%
to the limited partners and 1% to Host Marriott Corporation (the "General
Partner"). Significant differences exist between the net income for financial
reporting purposes and the net income for Federal income tax reporting purposes.
These differences are due primarily to the use for tax purposes of differing
useful lives and accelerated depreciation methods, differing tax bases in
contributed capital, and differing timings in the recognition of management fee
expense.
Certain reclassifications were made to the prior year condensed financial
statements to conform to the 1997 presentation.
4
2. Hotel revenues represent house profit of the Partnership's 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, real and
personal property taxes, ground and equipment rent, insurance, and certain other
costs, which are disclosed separately in the condensed statement of operations.
Hotel revenues consist of the following Hotel operating results (in thousands):
Twelve Weeks Ended Twenty-Four Weeks Ended
June 20, June 14, June 20, June 14,
1997 1996 1997 1996
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HOTEL SALES
Rooms.........................................$ 22,404 $ 21,098 $ 48,339 $ 44,025
Food and beverage............................. 10,263 10,181 21,190 20,856
Other......................................... 2,657 2,834 5,704 5,751
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35,324 34,113 75,233 70,632
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HOTEL EXPENSES
Departmental Direct Costs
Rooms....................................... 5,518 5,177 11,098 10,300
Food and beverage........................... 7,711 7,621 15,840 15,497
Other hotel operating expenses................ 9,961 9,672 20,247 19,495
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23,190 22,470 47,185 45,292
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HOTEL REVENUES...................................$ 12,134 $ 11,643 $ 28,048 $ 25,340
============ ============ ============ =============
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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
Principal Sources and Uses of Cash
The Partnership reported a decrease in cash and cash equivalents of $4.3 million
during the twenty-four weeks ended June 20, 1997. This decrease is primarily due
to the deposits made to the cash collateral account.
The Partnership's principal source of cash is cash from operations. Total cash
provided by operations increased $1.5 million, to $18.0 million, for the
twenty-four weeks ended June 20, 1997, due to improved Hotel operating results.
The Partnership's principal uses of cash are (i) to pay for capital expenditures
and fund the property improvement funds, (ii) to make deposits to cash
collateral accounts, (iii) to pay amounts owed to Host Marriott Corporation and
Marriott International, Inc. ("MII"), and (iv) to pay debt service on the
Partnership's mortgage debt.
Cash used in investing activities was $4.2 million for the twenty-four weeks
ended June 20, 1997 and $5.2 million for the twenty-four weeks ended June 14,
1996. Cash used in investing activities for the twenty-four weeks ended June 20,
1997, included capital expenditures of $3.4 million, primarily related to the
renewals and replacements at the Hotels. In addition, cash used in investing
activities included a net deposit of $1 million to the property improvement
funds.
Cash used in financing activities was $18.1 million and $15.4 million for the
twenty-four weeks ended June 20, 1997, and June 14, 1996, respectively. Cash
used in financing activities for the twenty-four weeks ended June 20, 1997,
included deposits into the cash collateral accounts of $10.5 million, repayments
to Host Marriott Corporation and affiliates of $5.4 million, and repayments on
the Partnership's mortgage debt of $2.2 million.
No cash was distributed to the Partners for the twenty-four weeks ended June 20,
1997, and June 14, 1996.
6
Capital Expenditures
It is anticipated that shortfalls in the property improvement fund for the six
hotels financed with the Bank Loan, as defined below will occur over the next
few years. However, the General Partner has started discussions with the Manager
and the lender and is working to resolve the expected shortfalls.
Debt
The Partnership's financing needs are funded through loan agreements with (i)
The Mitsui Trust and Banking Company (the "Bank Lender"), (ii) Host Marriott
Corporation or its affiliates, and (iii) MII or its affiliates.
Total Partnership interest expense increased 3% to $11.5 million for the
twenty-four weeks ended June 20, 1997, when compared to the same period in 1996
primarily due to increased interest expense on the mortgage loan (the "Bank
Loan"). The weighted average interest rate on the Bank Loan was 7.4% for the
twenty-four weeks ended June 20, 1997, as compared to 7.2% for the comparable
period in 1996.
On June 23, 1997, the Partnership made the required Bank Loan principal payment
of $2.5 million. Thus, as of June 23, 1997, the Bank Loan principal balance is
$175.2 million.
The Bank Loan was scheduled to mature on December 22, 1997; however, two
one-year extensions were available. As required under the Bank Loan, on June 19,
1997, the Partnership provided notice to the lender of its intent to extend the
loan along with a debt service coverage ratio calculation with a ratio greater
than 1.2 and has successfully extended the Bank Loan maturity to December 22,
1998.
RESULTS OF OPERATIONS
Hotel revenues increased 4% to $12.1 million for the second quarter of 1997 and
11% to $28.0 million for the year-to-date 1997, when compared to the same
periods in 1996. The increases in revenues are primarily due to the increases in
REVPAR, or revenues per available room, at each of the eight Hotels for the
twenty-four weeks ended June 20, 1997.
For the twenty-four weeks ended June 20, 1997, the combined average room rate
increased 9% to $110, while combined average occupancy remained stable at 82%,
when compared to the same period in 1996. For the twelve weeks ended June 20,
1997, the combined average room rate increased 9% to $104 as a result of
increases in the corporate room rate, while combined average occupancy decreased
three percentage points to 80% resulting from unexpected cancellations and
reduction of group contracts, when compared to the same period in 1996.
Incentive management fees, base management fees, and ground rent are calculated
generally as a percentage of Hotel sales or Hotel revenues. The increases in
these expenses for the twenty-four and twelve weeks ended June 20, 1997, when
compared to the same periods in 1996, are directly related to the increases in
Hotel sales and Hotel revenues for these periods.
Net income increased 66% to $3.2 million for the twenty-four weeks ended June
20, 1997, when compared to the same period in 1996 due to the increase in Hotel
revenues discussed above.
7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Partnership and the Partnership Hotels 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.
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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.
POTOMAC HOTEL LIMITED PARTNERSHIP
By: HOST MARRIOTT CORPORATION
General Partner
By:
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Donald D. Olinger
Senior Vice President
and Corporate Controller
(Principal Accounting Officer)
August 1, 1997
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.
POTOMAC HOTEL LIMITED PARTNERSHIP
By: HOST MARRIOTT CORPORATION
General Partner
By: /s/ Donald D. Olinger
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Donald D. Olinger
Senior Vice President
and Corporate Controller
(Principal Accounting Officer)
August 1, 1997