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 QUARTER ENDED SEPTEMBER 11, 1998
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 of (I.R.S.Employer Identification No.)
incorporation organization)
10400 Fernwood Road, Bethesda, MD 20817-1109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 301-380-2070
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No ____.
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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 11, 1998 (Unaudited)
and September 12, 1997 (Unaudited)...............................1
Condensed Balance Sheet
September 11, 1998 (Unaudited) and December 31, 1997.............2
Condensed Statement of Cash Flows
Thirty-Six Weeks ended September 11, 1998 (Unaudited)
and September 12, 1997 (Unaudited)...............................3
Notes to Condensed Financial Statements (Unaudited).................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................14
Item 6. Exhibits and Reports on Form 8-K...................................14
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 11, September 12, September 11, September 12,
1998 1997 1998 1997
--------------- --------------- --------------- -------------
REVENUES (Note 3)....................................$ 7,758 $ 7,834 $ 37,238 $ 35,882
- ---------------- --------------- ---------------- ---------------
OPERATING COSTS AND EXPENSES
Incentive management fees......................... 742 849 6,290 6,044
Depreciation...................................... 1,945 1,263 5,836 3,789
Base management fees.............................. 932 889 3,302 3,146
Property taxes.................................... 1,052 777 2,677 2,379
Ground rent, insurance and other.................. 1,004 979 2,973 3,097
---------------- ---------------- ---------------- ----------------
5,675 4,757 21,078 18,455
---------------- ---------------- ---------------- ----------------
OPERATING PROFIT..................................... 2,083 3,077 16,160 17,427
Interest expense.................................. (5,568) (5,645) (17,473) (17,135)
Other revenues.................................... 116 146 373 474
---------------- ---------------- ---------------- ----------------
NET (LOSS) INCOME....................................$ (3,369) $ (2,422) $ (940) $ 766
================ =============== ================ ===============
ALLOCATION OF NET (LOSS) INCOME
General Partner...................................$ (34) $ (24) $ (9) $ 8
Limited Partners.................................. (3,335) (2,398) (931) 758
---------------- --------------- ---------------- ---------------
$ (3,369) $ (2,422) $ (940) $ 766
================ =============== ================ ===============
NET (LOSS) INCOME PER LIMITED
PARTNER UNIT (1,800 Units)........................$ (1,853) $ (1,332) $ (517) $ 421
================ =============== ================ ===============
See Notes to Condensed Financial Statements.
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(in thousands)
September 11, December 31,
1998 1997
(unaudited)
--------------- ------------------
ASSETS
Property and equipment, net..........................................................$ 154,877 $ 154,253
Due from Marriott International, Inc. and affiliates................................. 7,794 10,173
Other assets......................................................................... 4,424 4,265
Restricted cash...................................................................... 9,708 6,351
Cash and cash equivalents............................................................ 869 3,182
---------------- ---------------
$ 177,672 $ 178,224
================ ===============
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt........................................................................$ 165,909 $ 172,667
Due to Host Marriott Corporation and affiliates...................................... 125,313 125,549
Incentive and base management fees due to Marriott International, Inc................ 30,818 25,868
Due to Marriott International, Inc. and affiliates................................... 356 398
Accrued interest and other liabilities............................................... 3,338 864
---------------- -----------
Total Liabilities................................................................ 325,734 325,346
--------------- ------------
PARTNERS' DEFICIT
General Partner...................................................................... (34,851) (34,842)
Limited Partners..................................................................... (113,211) (112,280)
---------------- ----------------
Total Partners' Deficit.......................................................... (148,062) (147,122)
---------------- ----------------
$ 177,672 $ 178,224
================ ===============
See Notes to Condensed Financial Statements.
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
Thirty-Six Weeks Ended
September 11, September 12,
1998 1997
--------------- ---------------
OPERATING ACTIVITIES
Net (loss) income..................................................................$ (940) $ 766
Noncash items...................................................................... 15,999 15,009
Changes in operating accounts...................................................... 3,023 1,580
--------------- --------------
Cash provided by operating activities.......................................... 18,082 17,355
--------------- --------------
INVESTING ACTIVITIES
Additions to property and equipment................................................ (6,478) (5,531)
Change in property improvement funds............................................... (323) (46)
Working capital received from Marriott International, Inc. and affiliates, net..... 100 168
-------------- --------------
Cash used in investing activities.............................................. (6,701) (5,409)
--------------- ---------------
FINANCING ACTIVITIES
Principal repayments on mortgage debt.............................................. (6,758) (4,670)
Repayments to Host Marriott Corporation and affiliates, net........................ (5,043) (5,663)
Change in restricted cash.......................................................... (3,357) (5,060)
Collection of amounts due from Marriott International, Inc......................... 1,504 -
Repayments to affiliates of Marriott International, Inc............................ (40) (32)
--------------- ---------------
Cash used in financing activities.............................................. (13,694) (15,425)
--------------- ---------------
DECREASE IN CASH AND CASH EQUIVALENTS................................................... (2,313) (3,479)
CASH AND CASH EQUIVALENTS at beginning of period........................................ 3,182 5,228
--------------- ---------------
CASH AND CASH EQUIVALENTS at end of period..............................................$ 869 $ 1,749
================ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest..........................................$ 9,928 $ 9,442
================ ===============
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,
1997.
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 11, 1998, the results of operations for the twelve
and thirty-six weeks ended September 11, 1998 and September 12, 1997, and the
cash flows for the thirty-six weeks ended September 11, 1998 and September 12,
1997. 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 ("Host Marriott"
or "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
differing useful lives and accelerated depreciation methods, differing tax bases
in contributed capital, and differing timings in the recognition of management
fee expense.
2. Certain reclassifications were made to the prior quarter condensed
financial statements to conform to the current quarter presentation.
3. 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, base and incentive management fees, property taxes, ground rent,
insurance, and certain other costs, which are disclosed separately in the
condensed statement of operations.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that
it should be applied to its hotels. Accordingly, upon adoption hotel sales and
property-level expenses will be reflected on the statement of operations. This
change in accounting principle will be adopted in the financial statements
during the fourth quarter of 1998 as of and for the year ended December 31, 1998
with retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $23.3 million and $21.7 million for the twelve weeks ended
September 11, 1998 and September 12, 1997, respectively, by approximately $72.8
million and $69.0 million for the thirty-six weeks ended September 11, 1998 and
September 12, 1997, respectively, and will have no impact on operating profit or
net income.
Revenues consist of the following hotel operating results (in thousands):
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
HOTEL SALES
Rooms.........................................$ 20,272 $ 19,377 $ 71,287 $ 67,716
Food and beverage............................. 8,560 8,051 30,697 29,241
Other......................................... 2,226 2,192 8,067 7,896
---------------- ---------------- ---------------- ----------------
31,058 29,620 110,051 104,853
---------------- ---------------- ---------------- ----------------
HOTEL EXPENSES
Departmental Direct Costs
Rooms....................................... 5,754 5,330 17,534 16,428
Food and beverage........................... 7,377 6,773 23,669 22,613
Other hotel operating expenses.............. 10,169 9,683 31,610 29,930
---------------- ---------------- ---------------- ----------------
23,300 21,786 72,813 68,971
---------------- ---------------- ---------------- ----------------
REVENUES........................................$ 7,758 $ 7,834 $ 37,238 $ 35,882
================ =============== ================ ===============
4. Host Marriott Corporation ("Host Marriott"), the General Partner of the
Partnership, has adopted a plan to restructure its business operations so that
it will qualify as a real estate investment trust ("REIT"). As part of this
restructuring (the "REIT Conversion"), Host Marriott and its consolidated
subsidiaries will contribute their full-service hotel properties and certain
other businesses and assets to Host Marriott, L.P., a Delaware limited
partnership (the "Operating Partnership"), in exchange for units of limited
partnership interest in the Operating Partnership ("OP Units") and the
assumption of liabilities. As part of the REIT Conversion, Host Marriott
proposes to merge into HMC Merger Corporation (to be renamed "Host Marriott
Corporation"), a Maryland corporation ("Host REIT"), and thereafter continue and
expand its full-service hotel ownership business. Host REIT expects to qualify
as a REIT beginning with its first full taxable year commencing after the REIT
Conversion is completed, which Host Marriott currently expects to be the year
beginning January 1, 1999 (but which might not be until the year beginning
January 1, 2000). Host REIT will be the sole general partner of the Operating
Partnership.
The Operating Partnership is proposing to acquire by merger (the "Merger")
the Partnership. The Limited Partners in the Partnership have been given an
opportunity to receive, on a tax-deferred basis, OP Units in the Operating
Partnership in exchange for their current limited partnership interests. At any
time prior to 5:00 p.m. on the fifteenth trading day following the effective
date of the Merger, the Limited Partners can elect to exchange the OP Units
received in connection with the Merger for either common stock of Host REIT or a
6.56% callable note due December 15, 2005 of the Operating Partnership. Exercise
of either the election to receive common stock or a note would be a taxable
transaction.
Beginning one year after the Merger, Limited Partners who retain OP Units
may exchange such OP Units for Host REIT common stock on a one-for-one basis (or
their cash equivalent, as determined by Host REIT).
On June 2, 1998, the Operating Partnership filed a Registration Statement
on Form S-4 with the Securities and Exchange Commission. In October 1998, the
Prospectus/Consent Solicitation Statement, which formed a part of such
Registration Statement, was mailed to the Limited Partners who have until
December 12, 1998 to vote on this Merger, unless extended.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q include forward-looking
statements including, without limitation, statements related to the proposed
REIT conversion, the terms, structure and timing thereof, and the expected
effects of the proposed REIT conversion and business and operating strategies in
the future. All forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual transactions,
results, performance or achievements to be materially different from any future
transactions, results, performance or achievements expressed or implied by such
forward-looking statements. Certain of the transactions described herein are
subject to certain consents of shareholders, lenders, debtholders and partners
of Host Marriott and its affiliates and of other third parties and various other
conditions and contingencies, and future results, performance and achievements
will be affected by general economic, business and financing conditions,
competition and government actions. The cautionary statements set forth in
reports filed under the Securities Act of 1934 contain important factors with
respect to such forward-looking statements, including: (i) national and local
economic and business conditions that will, among other things, affect demand
for hotels and other properties, the level of rates and occupancy that can be
achieved by such properties and the availability and terms of financing; (ii)
the ability to maintain the properties in a first-class manner; (iii) the
ability to compete effectively; (iv) the ability to obtain required consents of
shareholders, lenders, debtholders, partners and ground lessors in connection
with Host Marriott's proposed conversion to a REIT and to consummate all of the
transactions constituting the REIT conversion; (v) changes in travel patterns,
taxes and government regulations; (vi) governmental approvals, actions and
initiatives; (vii) the effects of tax legislative action; and (viii) the timing
of Host Marriott's election to be taxed as a REIT and the ability to satisfy
complex rules in order to qualify for taxation as a REIT for federal income tax
purposes and to operate effectively within the limitations imposed by these
rules. 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 or that any deviations will not
be material. 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.
RESULTS OF OPERATIONS
The following chart summarizes REVPAR and the percentage change in REVPAR
for each Partnership hotel:
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September 12, % September 11, September 12, %
1998 1997 Change 1998 1997 Change
-------------- -------------- ---- -------------- -------------- ----
Mountain Shadows $ 46 $ 47 (2%) $ 109 $ 106 3%
Seattle 111 111 0% 102 95 7%
Tampa Westshore 79 74 7% 98 89 10%
Greensboro 84 76 11% 87 82 6%
Miami Biscayne Bay 63 58 9% 87 81 7%
Houston Medical Center 74 71 4% 83 78 6%
Raleigh Crabtree 80 75 7% 82 78 5%
Albuquerque 71 67 6% 69 71 (3%)
Combined Average $ 76 $ 72 6% $ 88 $ 84 5%
Revenues: Revenues increased 4% to $37.2 million for year-to-date 1998 and
remained at $7.8 million for the third quarter of 1998, when compared to the
same periods in 1997. The increase in year-to-date revenues is primarily due to
increases in REVPAR at seven of the eight hotels for the thirty-six weeks ended
September 11, 1998. REVPAR, or revenue per available room, represents the
combination of the average daily room rate charged and the average daily
occupancy achieved and is a commonly used indicator of hotel performance
(although it is not a GAAP, or generally accepted accounting principles, measure
of revenue). For the thirty-six weeks ended September 11, 1998, the combined
average room rate increased 7% to $112, while the combined average occupancy
decreased one percentage point to 79%, when compared to the same period in 1997.
For the twelve weeks ended September 11, 1998, the combined average room rate
increased 5% to $100, and the combined average occupancy remained steady at 76%,
when compared to the same period in 1997.
Operating Costs and Expenses: Operating costs and expenses increased 19% to
$5.7 million for the third quarter of 1998 and 14% to $21 million for
year-to-date 1998, when compared to the same periods of 1997. The principal
components of this category are:
Management Fees: Incentive management fees and base management fees are
calculated generally as a percentage of hotel sales or hotel revenues. The
increases in these expenses for year-to-date 1998 were directly related to the
increases in hotel sales and hotel revenues for year-to-date 1998.
Depreciation: Depreciation expense increased for year-to-date 1998 due to
property and equipment additions as well as a change in the estimated useful
lives of certain assets.
Operating Profit: Operating profit decreased 32% to $2.1 million for the
third quarter of 1998 and decreased 7% to $16.2 million for the thirty-six weeks
ended September 11, 1998, when compared to the same periods in 1997. The
decreases in operating profit were attributable to the increases in operating
costs and expenses for these periods in 1998.
Interest Expense: Interest expense remained stable at $5.6 million for the
third quarter of 1998 and increased 2% to $17.5 million for the thirty-six weeks
ended September 11, 1998, when compared to the same periods in 1997. The
weighted average interest rate on the Bank Loan was 8.1% for the thirty-six
weeks ended September 11, 1998, as compared to 7.4% for the same period in 1997.
The increase in interest expense is due to the increase in the weighted average
interest rate which was partially offset by a decrease in the average Bank Loan
principal balance for the first three quarters of 1998 as compared to the first
three quarters of 1997.
Net Loss: The Partnership reported a 39% increase in net loss to $3.4
million for the third quarter of 1998, when compared to the third quarter of
1997. The Partnership reported a net loss of $940,000 for the thirty-six weeks
ended September 11, 1998, as compared to net income of $766,000 for the
thirty-six weeks ended September 12, 1997. These increases in net loss were due
to the increases in operating costs and expenses and interest expense discussed
above.
Individual hotel operating results are discussed below:
On a year-to-date basis, revenues at the Mountain Shadows Resort decreased
4% to $4.7 million when compared to the same period of 1997 primarily due an
increase in labor costs. REVPAR for year-to-date 1998 increased 3% to $109 due
to a 5% increase in the average room rate to $143 offset by a two percentage
point decrease in occupancy to 76%. The resort reported a net loss of $600,000
for the third quarter of 1998, which represented a 20% greater loss than the
loss for the third quarter of 1997. The third quarter of the year is
historically the resort's weakest quarter due to the extremely hot temperatures
in the region. For the third quarter of 1998, REVPAR decreased 2% to $46
primarily due to a five percentage point decrease in average occupancy to 60%
offset by a 6% increase in the average room rate to $76. The decrease in
occupancy was the result of a decrease in group business during the quarter as
well as the addition of approximately 4,000 new rooms in the Scottsdale region
in the past year. In the upcoming months, the resort plans to expand its
marketing efforts by distributing a newsletter and by circulating mailers for
the holiday season.
Year-to-date revenues at the Seattle Sea-Tac Hotel increased 12% to $7.7
million primarily due to a 7% increase in REVPAR to $102 and a 16% increase in
food and beverage revenues to $1.9 million. The increase in REVPAR was caused by
a 6% increase in the average room rate to $126 and a one percentage point
increase in average occupancy to 81%. Hotel revenues during the third quarter of
1998 increased 7% to $2.9 million when compared to the third quarter of 1997.
REVPAR for the third quarter of 1998 remained steady at $111 due to a 7%
increase in the average room rate to $137 offset by a six percentage point
decrease in average occupancy to 81%. Due to strong demand in the Seattle
convention market, the hotel was able to increase its group room rate and group
business in 1998. The increase in group business also led to additional catering
revenues during the year. Additionally, in early 1998, the hotel completed
renovations of its Yukon Landing Restaurant and Snoqualmie Ballroom.
Revenues for the Tampa Westshore Hotel remained steady at $3.4 million for
the thirty-six weeks ended September 11, 1998, when compared to the same period
of 1997. Although REVPAR increased 10% to $98 when compared to the first
thirty-six weeks of 1997, revenues were impacted by increased management costs
and repairs and maintenance expenses. REVPAR increased due to a 15% increase in
the average room rate to $125 offset by a four percentage point decrease in
average occupancy to 78%. Third quarter 1998 revenues decreased 17% to $500,000
when compared to the third quarter of 1997. REVPAR for third quarter 1998
improved 7% to $79 due to an 18% increase in the average room rate to $116
offset by an eight percentage point decrease in average occupancy to 68%. The
decrease in average occupancy is related to customer's sensitivity to room rate
increases as well as a loss of tourism during the summer season in the Tampa
area. Attendance at local amusement parks was down as much as 30% per day during
the summer, and attendance at major sporting events during the quarter was weak.
The hotel recently completed a renovation of its front entrance and will begin a
rooms renovation to replace the guest room carpeting, draperies, and bedspreads
in November 1998.
On a year-to-date basis, 1998 revenues at the Greensboro Hotel increased 6%
to $3.4 million when compared to the same period of 1997 due to a 6% increase in
REVPAR to $87 and a 28% increase in food and beverage revenues to $648,000.
While average occupancy for 1998 remained flat at 80%, the average room rate
increased 7% to $109 due to an increase in sales of the higher-rated concierge
rooms. Food and beverage revenues improved due to significant increases in the
hotel's catering business. Third quarter 1998 revenues at the hotel remained
steady at $1.0 million when compared to the same period of 1997. Although REVPAR
for the quarter increased 11% to $84, revenues remained unchanged due to
increased labor costs. The hotel used contract labor during the third quarter of
1998 due to low unemployment rates throughout the region. For the remainder of
1998, the hotel plans to increase its promotional efforts by expanding its sales
force and utilizing an event booking center which cross sells Marriott products
in the Greensboro-High Point region. Additionally, in late 1998, the hotel will
begin a renovation of its guest bathrooms.
For the thirty-six weeks ended September 11, 1998, revenues at the Miami
Biscayne Bay Hotel increased 8% to $7.1 million primarily due to a 7% increase
in REVPAR to $87 and a 26% increase in food and beverage revenues to $1.1
million. The average room rate increased 8% to $106, while average occupancy
decreased one percentage point to 82%. The hotel's third quarter 1998 revenues
remained steady at $1.0 million. REVPAR for third quarter 1998 increased 9% to
$63 due a four percentage point increase in occupancy to 79% and a 4% increase
in the average room rate to $80, when compared to the same period in 1997. The
hotel increased its contract room rate which contributed to the increase in the
overall average room rate. Additionally, growing demand for the hotel's catering
services led to the increase in food and beverage revenues. The hotel plans to
complete a lobby, restaurant, and bar renovation during the fourth quarter of
1998.
On a year-to-date basis, 1998 revenues at the Houston Medical Center Hotel
increased 13% to $4.3 million when compared to the same period in 1997 primarily
due to a 10% increase in rooms revenues. REVPAR for 1998 increased 6% to $83
primarily due to a 12% increase in the average room rate to $108 offset by a
four percentage point decrease in average occupancy to 77%. For the third
quarter of 1998, revenues remained steady at $1.0 million when compared to the
third quarter of 1997. The average room rate for the third quarter increased 11%
to $105, and average occupancy decreased five percentage points to 70%. During
1998, the hotel increased its corporate and medical room rates, leading to the
increase in the average room rate. Average occupancy declined due to rooms being
out of service for a rooms renovation, during which the hotel replaced the
bedspreads, drapery, upholstery, carpeting, and furniture in its guest rooms.
The hotel expects to complete this rooms renovation in October 1998. The hotel's
outlook for the remainder of 1998 is positive due to expected strong transient
demand in the region generated by the major league baseball playoffs and Grand
Prix racing events.
For the first thirty-six weeks of 1998, the revenues at the Raleigh
Crabtree Valley Hotel remained stable at $3.7 million, when compared to the same
period of 1997. Year-to-date REVPAR increased 5% to $82 due to a 7% increase in
the average room rate to $101 offset by a two percentage point decrease in
average occupancy to 81%. Third quarter 1998 revenues at the hotel decreased 9%
to $1.0 million when compared to the third quarter of 1997. In the third quarter
of 1998, the average room rate increased 8% to $99 while average occupancy
decreased one percentage point to 81%. The hotel increased its average room rate
primarily by increasing its group room rates. The hotel plans to increase its
occupancy rate by participating in advertising promotions for discounted weekend
rooms rates and by utilizing additional sales executives to acquire new
business.
Year-to-date 1998 revenues for the Albuquerque Hotel decreased 15% to $2.9
million when compared to the same period of 1997. Year-to-date REVPAR decreased
3% to $69 and year-to-date food and beverage revenues declined 35% to $407,000.
REVPAR decreased due to a 6% decrease in the average room rate to $90 offset by
a three percentage point increase in average occupancy to 77%. Third quarter
1998 revenues remained steady at $900,000 when compared to the third quarter of
1997. Third quarter 1998 REVPAR increased 6% to $71 due to an eleven percentage
point increase in the average occupancy to 81% offset by a 8% decrease in the
average room rate to $88. In 1998, the hotel has employed a strategy to increase
average occupancy by lowering rates during low demand periods and actively
seeking group business. For the remainder of the year, the hotel plans to
continue offering discounted weekend room rates and increasing group business in
an effort to keep its market share.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded through
loan agreements with independent financial institutions, Host Marriott
Corporation ("Host Marriott" or "General Partner") and its affiliates, or
Marriott International, Inc. ("MII") and its affiliates. The General Partner
believes that the Partnership will have sufficient capital resources and
liquidity to continue to conduct its business in the ordinary course.
Principal Sources and Uses of Cash
The Partnership reported a decrease in cash and cash equivalents of $2.3
million during the thirty-six weeks ended September 11, 1998. This decrease was
due to the use of cash for investing and financing activities 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 4% to $18.1 million, for the thirty-six
weeks ended September 11, 1998, when compared to the thirty-six weeks ended
September 12, 1997.
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 and MII.
Cash used in investing activities was $6.7 million for the thirty-six weeks
ended September 11, 1998, and $5.4 million for the thirty-six weeks ended
September 12, 1997. Cash used in investing activities for the thirty-six weeks
ended September 11, 1998, included capital expenditures of $6.5 million
primarily related to furniture, fixtures, and equipment renewals and
replacements at the Hotels. Contributions to the property improvement funds for
the thirty-six weeks ended September 11, 1998 were $5.5 million.
Cash used in financing activities was $13.7 million and $15.4 million for
the thirty-six weeks ended September 11, 1998, and September 12, 1997,
respectively. Cash used in financing activities for the thirty-six weeks ended
September 11, 1998, included repayments to Host Marriott and affiliates of $5.0
million and repayments on the Partnership's mortgage debt of $6.8 million.
No cash was distributed to the partners during the thirty-six weeks ended
September 11, 1998, or September 12, 1997.
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 in 1999.
The General Partner is currently working to resolve the expected shortfalls.
Debt
Total Partnership interest expense increased 2% to $17.5 million for the
thirty-six weeks ended September 11, 1998, when compared to the same period in
1997 primarily due to increased interest expense on the mortgage loan (the "Bank
Loan"). The weighted average interest rate on the Bank Loan was 8.1% for the
thirty-six weeks ended September 11, 1998, as compared to 7.4% for the same
period in 1997.
On June 22, 1998, the Partnership made the required Bank Loan principal
payment of $3.0 million. Thus, as of September 11, 1998, the Bank Loan principal
balance was $165.9 million.
The Bank Loan was scheduled to mature on December 22, 1998; however, an
additional one-year extension was available. As required under the Bank Loan,
the Partnership provided notice of its intent to extend the loan along with
adequate debt service coverage tests to extend the Bank Loan maturity to
December 22, 1999.
YEAR 2000 ISSUES
The "Year 2000 Issue" has arisen because many existing computer programs
and chip-based embedded technology systems use only the last two digits to refer
to a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous results. The following disclosure provides information
regarding the current status of the Partnership's Year 2000 compliance program.
The Partnership processes its records on computer hardware and software
systems maintained by Host Marriott Corporation ("Host Marriott"), the General
Partner of the Partnership. Host Marriott has adopted a compliance program
because it recognizes the importance of minimizing the number and seriousness of
any disruptions that may occur as a result of the Year 2000 Issue. Host
Marriott's compliance program includes an assessment of Host Marriott's hardware
and software computer systems and embedded systems, as well as an assessment of
the Year 2000 issues relating to third parties with which the Partnership has a
material relationship or whose systems are material to the operations of the
Partnership's Hotels. Host Marriott's efforts to ensure that its computer
systems are Year 2000 compliant have been segregated into two separate phases:
in-house systems and third-party systems.
In-House Systems. Host Marriott has invested in the implementation and
maintenance of accounting and reporting systems and equipment that are intended
to enable the Partnership to provide adequately for its information and
reporting needs and which are also Year 2000 compliant. Substantially all of
Host Marriott's in-house systems have already been certified as Year 2000
compliant through testing and other mechanisms and Host Marriott has not delayed
any systems projects due to the Year 2000 Issue. Host Marriott is in the process
of engaging a third party to review its Year 2000 in-house compliance. Host
Marriott believes that future costs associated with Year 2000 Issues for its
in-house systems will be insignificant and will therefore not impact the
Partnership's business, financial condition and results of operations. Host
Marriott has not developed, and does not plan to develop, a separate contingency
plan for its in-house systems due to their current Year 2000 compliance.
However, Host Marriott does have detailed contingency plans for its in-house
systems covering a variety of possible events, including natural disasters,
interruption of utility service and similar events.
Third-Party Systems. The Partnership relies upon operational and accounting
systems provided by third parties, primarily the Manager of its Hotels, to
provide the appropriate property-specific operating systems (including
reservation, phone, elevator, security, HVAC and other systems) and to provide
it with financial information. Based on discussions with the third parties that
are critical to the Partnership's business, including the Manager of its Hotels,
Host Marriott believes that these parties are in the process of studying their
systems and the systems of their respective vendors and service providers and,
in many cases, have begun to implement changes, to ensure that they are Year
2000 compliant. To the extent these changes impact property-level systems, the
Partnership may be required to fund capital expenditures for upgraded equipment
and software. Host Marriott does not expect these charges to be material, but is
committed to making these investments as required. To the extent that these
changes relate to the Manager/s centralized systems (including reservations,
accounting, purchasing, inventory, personnel and other systems), the
Partnership's management agreements generally provide for these costs to be
charged to the Partnership's Hotels. Host Marriott expects that the Manager will
incur Year 2000 costs for its centralized systems in lieu of costs related to
system projects that otherwise would have been pursued and therefore, its
overall level of centralized charges allocated to the Hotels will not materially
increase as a result of the Year 2000 compliance effort. Host Marriott believes
that this deferral of certain system projects will not have a material impact on
its future results of operations, although it may delay certain productivity
enhancements at the Partnership's Hotels. Host Marriott will continue to monitor
the efforts of these third parties to become Year 2000 compliant and will take
appropriate steps to address any non-compliance issues. The Partnership believes
that in the event of material Year 2000 non-compliance caused by a breach of the
Manager's duties, the Partnership will have the right to seek recourse against
the Manager under its third party management agreements. The management
agreements generally do not specifically address the Year 2000 compliance issue.
Therefore the amount of any recovery in the event of Year 2000 non-compliance at
a property, if any, is not determinable at this time.
Host Marriott will work with the third parties to ensure that appropriate
contingency plans will be developed to address the most reasonably likely worst
case Year 2000 scenarios, which may not have been identified fully. In
particular, Host Marriott has had extensive discussions regarding the Year 2000
Issue with Marriott International, the Manager of the Hotels. Due to the
significance of Marriott International to the Partnership's business, a detailed
description of Marriott International's state of readiness follows.
Marriott International has adopted an eight-step process toward Year 2000
readiness, consisting of the following: (i) Awareness: fostering understanding
of, and commitment to, the problem and its potential risks; (ii) Inventory:
identifying and locating systems and technology components that may be affected;
(iii) Assessment: reviewing these components for Year 2000 compliance, and
assessing the scope of Year 2000 issues; (iv) Planning: defining the technical
solutions and labor and work plans necessary for each particular system; (v)
Remediation/Replacement: completing the programming to renovate or replace the
problem software or hardware; (vi) Testing and Compliance Validation: conducting
testing, followed by independent validation by a separate internal verification
team; (vii) Implementation: placing the corrected systems and technology back
into the business environment; and (viii) Quality Assurance: utilizing a
dedicated audit team to review and test significant projects for adherence to
quality standards and program methodology.
Marriott International has grouped its systems and technology into three
categories for purposes of Year 2000 compliance: (i) information resource
applications and technology (IT Applications) -- enterprise-wide systems
supported by Marriott International's centralized information technology
organization ("IR"); (ii) Business-initiated Systems ("BIS") - systems that have
been initiated by an individual business unit, and that are not supported by
Marriott International's IR organization; and (iii) Building Systems - non-IT
equipment at properties that use embedded computer chips, such as elevators,
automated room key systems and HVAC equipment. Marriott International is
prioritizing its efforts based on how severe an effect noncompliance would have
on customer service, core business processes or revenues, and whether there are
viable, non-automated fallback procedures (System Criticality).
Marriott International measures the completion of each phase based on
documented and quantified results, weighted for System Criticality. As of the
end of the 1998 third quarter, the awareness and inventory phases were complete
for IT Applications and nearly complete for BIS and Building Systems. For IT
Applications, the Assessment, Planning and Remediation/Replacement phases were
each over 80 percent complete, and Testing and Compliance Validation had been
completed for a number of key systems, with most of the remaining work in its
final stage. For BIS and Building Systems, Assessment and Planning were in the
mid- to upper-range of completion, with a substantial amount of work in process,
while the progress level for Remediation/Replacement and Testing and Compliance
Validation had not yet been documented and quantified. Quality Assurance is also
in progress for IT Applications and is scheduled to begin for BIS and Business
Systems in the near future. Marriott International's goal is to substantially
complete the Remediation/Replacement and Testing phases for its System Critical
IT Applications by the end of 1998, with 1999 reserved for unplanned
contingencies and for Compliance Validation and Quality Assurance. For System
Critical BIS and Building Systems, the same level of completion is targeted for
June 1999 and September 1999, respectively.
Marriott International has initiated Year 2000 compliance communications
with its significant third party suppliers, vendors and business partners,
including its franchisees. Marriott International is focusing its efforts on the
business interfaces most critical to its customer service and revenues,
including those third parties that support the most critical enterprise-wide IT
Applications, franchisees generating the most revenues, suppliers of the most
widely used Building Systems and BIS, the top 100 suppliers, by dollar volume,
of non-IT products, and financial institutions providing the most critical
payment processing functions. Responses have been received from a majority of
the firms in this group.
Marriott International is also establishing a common approach for testing
and addressing Year 2000 compliance issues for its managed and franchised
properties. This includes a guidance protocol for operated properties, and a
Year 2000 "Toolkit" for franchisees containing relevant Year 2000 compliance
information. Marriott International is also utilizing a Year 2000 best-practices
sharing system.
Risks. There can be no assurance that Year 2000 remediation by the
Partnership or third parties will be properly and timely completed, and failure
to do so could have a material adverse effect on the Partnership, its business
and its financial condition. The Partnership cannot predict the actual effects
to it of the Year 2000 Issue, which depends on numerous uncertainties such as:
(i) whether significant third parties properly and timely address the Year 2000
Issue; and (ii) whether broad-based or systemic economic failures may occur.
Host Marriott is also unable to predict the severity and duration of any such
failures, which could include disruptions in passenger transportation or
transportation systems generally, loss of utility and/or telecommunications
services, the loss or distortion of hotel reservations made on a centralized
reservation system and errors or failures in financial transactions or payment
processing systems such as credit cards. Due to the general uncertainty inherent
in the Year 2000 Issue and the Partnership's dependence on third parties, the
Partnership is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Partnership. Host Marriott's
Year 2000 compliance program is expected to significantly reduce the level of
uncertainty about the Year 2000 Issue and Host Marriott believes that the
possibility of significant interruptions of normal operations should be reduced.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Partnership and the 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
condition, or results of operations of the Partnership.
On July 15, 1998, one limited partner of the Partnership filed a
class-action lawsuit styled Michael C. deBerardinis v. Host Marriott
Corporation, Civil Action No. WMN 98-2263, in the United States District Court
for the District of Maryland, against Host Marriott Corporation ("Host
Marriott"). The plaintiff alleges that Host Marriott misled the limited partners
in order to induce them into approving the sale of one of the Partnership's
hotels, violated the securities regulations by issuing a false and misleading
consent solicitation, and breached fiduciary duties and the partnership
agreement. The complaint seeks unspecified damages. Host Marriott intends to
vigorously defend against the claims asserted in the lawsuit, and has filed a
motion to dismiss the plaintiff's complaints.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None.
(b) Reports on Form 8-K
September 16, 1998 -- This filing, Item 5 -- Other Events, discloses that
the General Partner sent the limited partners of the Partnership a letter to
inform them that September 18, 1998 will be the record date for voting in the
forthcoming consent solicitation. Those limited partners whose ownership is
reflected on the records of the General Partner as of September 18, 1998 will be
eligible to vote on the merger and proposed amendments. A copy of the letter was
included as an Item 7 -- Exhibit in this Form 8-K filing.
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
October 26, 1998 By: /s/ Donald D. Olinger
Donald D. Olinger
Senior Vice President and Corporate
Controller
(Principal Accounting Officer)