Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
For the Quarter ended September 12, 1997
X 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
(Exact name of registrant as specified in its charter)
Delaware 52-1240223
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation organization)
10400 Fernwood Road
Bethesda, Maryland 20817
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(Address of principal (Zip Code)
executive 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 Thirty-Six Weeks Ended September 12, 1997
and September 6, 1996................................................1
Condensed Balance Sheet
September 12, 1997 and December 31, 1996.............................2
Condensed Statement of Cash Flows
Thirty-Six Weeks ended September 12, 1997 and September 6, 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.....................................................9
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 Thirty-Six Weeks Ended
September 12, September 6, September 12, September 6,
1997 1996 1997 1996
-------------- ------------- -------------- -------------
REVENUES
Hotel....................................................$ 7,834 $ 6,927 $ 35,882 $ 32,267
Other.................................................... 146 253 474 619
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7,980 7,180 36,356 32,886
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OPERATING COSTS AND EXPENSES
Interest................................................. 5,645 5,738 17,135 16,852
Incentive management fee................................. 849 876 6,044 5,528
Depreciation and amortization............................ 1,263 1,273 3,789 3,819
Base management fee...................................... 889 833 3,146 2,952
Property taxes........................................... 777 847 2,379 2,599
Ground rent, insurance and other......................... 979 782 3,097 2,386
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10,402 10,349 35,590 34,136
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NET INCOME (LOSS)............................................$ (2,422) $ (3,169) $ 766 $ (1,250)
============== ============= ============== =============
ALLOCATION OF NET INCOME (LOSS)
General Partner..........................................$ (24) $ (31) $ 8 $ (12)
Limited Partners......................................... (2,398) (3,138) 758 (1,238)
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$(2,422) $ (3,169) $ 766 $ (1,250)
============== ============= ============== =============
NET INCOME (LOSS) PER LIMITED
PARTNER UNIT (1,800 Units)...............................$ (1,332) $ (1,744) $ 421 $ (688)
============== ============= ============== =============
See Notes to Condensed Financial Statements.
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(in thousands)
September 12, December 31,
1997 1996
(unaudited)
ASSETS
Property and equipment, net..............................................................$ 157,154 $ 155,412
Due from Marriott International, Inc. and affiliates..................................... 10,283 10,870
Other assets............................................................................. 3,733 3,850
Restricted cash.......................................................................... 9,567 4,507
Cash and cash equivalents................................................................ 1,749 5,228
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$ 182,486 $ 179,867
============== ===============
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt............................................................................$ 175,167 $ 179,837
Due to Host Marriott Corporation and affiliates.......................................... 123,565 124,370
Incentive and base management fees due to Marriott International, Inc. and affiliates.... 23,360 17,172
Due to Marriott International, Inc. and affiliates....................................... 488 1,956
Accrued interest and other liabilities................................................... 3,437 829
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Total Liabilities..................................................................... 326,017 324,164
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PARTNERS' DEFICIT
General Partner.......................................................................... (34,806) (34,814)
Limited Partners......................................................................... (108,725) (109,483)
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Total Partners' Deficit............................................................... (143,531) (144,297)
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$ 182,486 $ 179,867
============== ==============
See Notes to Condensed Financial Statements.
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
Thirty-Six Weeks Ended
September 12, September 6,
1997 1996
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OPERATING ACTIVITIES
Net income (loss)........................................................................$ 766 $ (1,250)
Noncash items............................................................................ 15,009 13,456
Changes in operating accounts............................................................ 1,580 2,887
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Cash provided by operating activities................................................ 17,355 15,093
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INVESTING ACTIVITIES
Additions to property and equipment...................................................... (5,531) (5,080)
Working capital received from (funded to) Marriott International, Inc. and affiliates, net 168 (262)
Change in property improvement funds..................................................... (46) (1,349)
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Cash used in investing activities.................................................... (5,409) (6,691)
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FINANCING ACTIVITIES
Repayments to Host Marriott Corporation and affiliates, net.............................. (5,663) (4,575)
Change in restricted cash................................................................ (5,060) (3,923)
Principal repayments on mortgage debt.................................................... (4,670) (3,663)
Repayments to affiliates of Marriott International, Inc.................................. (32) --
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Cash used in financing activities.................................................... (15,425) (12,161)
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DECREASE IN CASH AND CASH EQUIVALENTS........................................................ (3,479) (3,759)
CASH AND CASH EQUIVALENTS at beginning of period............................................. 5,228 6,139
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CASH AND CASH EQUIVALENTS at end of period...................................................$ 1,749 $ 2,380
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest................................................$ 9,442 $ 9,605
============== =============
See Notes to Condensed Financial Statements.
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 September 12, 1997; the results of
operations for the twelve and thirty-six weeks ended September 12,
1997, and September 6, 1996; and the statement of cash flows for the
thirty-six weeks ended September 12, 1997, and September 6, 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.
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 consisted of the following Hotel operating results (in
thousands):
Twelve Weeks Ended Thirty-Six Weeks Ended
September 12, September 6, September 12, September 6,
1997 1996 1997 1996
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HOTEL SALES
Rooms......................................$ 19,377 $ 18,135 $ 67,716 $ 62,160
Food and beverage.......................... 8,051 7,456 29,241 28,312
Other...................................... 2,192 2,165 7,896 7,916
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29,620 27,756 104,853 98,388
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HOTEL EXPENSES
Departmental Direct Costs
Rooms.................................... 5,330 5,084 16,428 15,384
Food and beverage........................ 6,773 6,583 22,613 22,080
Other hotel operating expenses............. 9,683 9,162 29,930 28,657
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21,786 20,829 68,971 66,121
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HOTEL REVENUES................................$ 7,834 $ 6,927 $ 35,882 $ 32,267
============== ============== ============== ==============
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 $3.5 million
during the thirty-six weeks ended September 12, 1997. This decrease was due to
the use of cash for investing and financing actvities partially offset by cash
provided by operating activities.
The Partnership's principal source of cash is cash from operations. Total cash
provided by operations increased $2.3 million, to $17.4 million, for the
thirty-six weeks ended September 12, 1997, due to improved Hotel operating
results.
The Partnership's principal uses of cash are (i) to pay for capital expenditures
and to fund the property improvement funds, (ii) to make deposits to restricted
cash accounts, (iii) to pay debt service on the Partnership's mortgage debt, and
(iv) to pay amounts owed to Host Marriott Corporation and Marriott
International, Inc. ("MII").
Cash used in investing activities was $5.4 million for the thirty-six weeks
ended September 12, 1997, and $6.7 million for the thirty-six weeks ended
September 6, 1996. Cash used in investing activities for the thirty-six weeks
ended September 12, 1997, included capital expenditures of $5.5 million,
primarily related to furniture, fixtures, and equipment renewals and
replacements at the Hotels.
Cash used in financing activities was $15.4 million and $12.2 million for the
thirty-six weeks ended September 12, 1997, and September 6, 1996, respectively.
Cash used in financing activities for the thirty-six weeks ended September 12,
1997, included repayments to Host Marriott Corporation and affiliates of $5.7
million, net deposits to restricted cash accounts of $5.1 million for the
payment of mortgage debt, and repayments on the Partnership's mortgage debt of
$4.7 million.
No cash was distributed to the Partners for the thirty-six weeks ended September
12, 1997, or September 6, 1996.
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. The General Partner is currently working with the Manager and the
lender 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 and its affiliates, and (iii) MII and its affiliates.
Total Partnership interest expense increased 2% to $17.1 million for the
thirty-six weeks ended September 12, 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
thirty-six weeks ended September 12, 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, the Bank Loan principal balance was $175.2 million as of
September 12, 1997.
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 11% to $35.9 million for the year-to-date 1997 and 13%
to $7.8 million for the third quarter of 1997, when compared to the same periods
in 1996. The increases in revenues were primarily due to the increases in
REVPAR, or revenues per available room, at each of the eight Hotels for the
thirty-six weeks ended September 12, 1997.
For the thirty-six weeks ended September 12, 1997, the combined average room
rate increased 9% to $105, while combined average occupancy decreased slightly
to 80%, when compared to the same period in 1996. For the twelve weeks ended
September 12, 1997, the combined average room rate increased 9% to $95, and
combined average occupancy decreased two percentage points to 76%, when compared
to the same period in 1996. The increase in average room rate was due to the
strong transient demand in many of the Hotel's markets that allowed the Hotels
to increase their corporate room rates and sell more rooms at the higher-rated
corporate room rates over the lower-rated group room rates.
Incentive management fees, base management fees, and ground rent generally are
calculated as a percentage of Hotel sales or Hotel revenues. The increases in
these expenses for the thirty-six and twelve weeks ended September 12, 1997,
when compared to the same periods in 1996, were directly related to the
increases in Hotel sales and Hotel revenues for these periods.
The Partnership generated net income of $766,000 for the thirty-six weeks ended
September 12, 1997 as compared to a net loss of $1.3 million for the same period
in 1996. The increase was due to the increase in Hotel revenues discussed above.
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.
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
Donald D. Olinger
Senior Vice President and
Corporate Controller
(Principal Accounting Officer)
October 24, 1997