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 No. 0-24463
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 52-1646207
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(State of Organization) (I.R.S. Employer Identification Number)
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
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(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 No . (Not Applicable) The Partnership became subject to
Section 13 reporting on August 11, 1998.
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MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
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TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Operations
Twelve and Thirty-Six Weeks Ended September 11, 1998 (Unaudited)
and September 12, 1997 (Unaudited).................... ............ 1
Condensed Consolidated Balance Sheet
September 11, 1998 (Unaudited) and December 31, 1997............... 2
Condensed Consolidated Statement of Cash Flows
Thirty-Six Weeks Ended September 11, 1998 (Unaudited)
and September 12, 1997 (Unaudited).............................. 3
Notes to Condensed Consolidated 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...................................................13
Item 6. Exhibits and Reports on Form 8-K....................................13
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per Unit amounts)
Twelve Weeks Ended Thirty-Six Weeks Ended
September 1l, September 12, September 11, September 12,
1998 1997 1998 1997
---------------- --------------- ---------------- ---------------
REVENUES (Note 4)....................................$ 5,830 $ 5,950 $ 20,351 $ 18,454
---------------- --------------- ---------------- ---------------
OPERATING COSTS AND EXPENSES
Depreciation and amortization................... 1,360 1,919 4,139 4,300
Base management fees............................ 531 514 1,675 1,556
Property taxes and other........................ 610 484 1,983 1,697
---------------- --------------- ---------------- ---------------
2,501 2,917 7,797 7,553
---------------- --------------- ---------------- ---------------
OPERATING PROFIT..................................... 3,329 3,033 12,554 10,901
Interest expense................................ (1,891) (2,066) (6,030) (6,241)
Interest income................................. 147 189 457 280
---------------- --------------- ---------------- ---------------
NET INCOME ......................................$ 1,585 $ 1,156 $ 6,981 $ 4,940
======== ======== ========== ========
ALLOCATION OF NET INCOME
General Partner.................................$ 16 $ 12 $ 70 $ 49
Limited Partners................................ 1,569 1,144 6,911 4,891
---------------- --------------- ---------------- ---------------
$ 1,585 $ 1,156 $ 6,981 $ 4,940
================ =============== ================ ===============
NET INCOME PER LIMITED PARTNER UNIT
(414 Units).....................................$ 3,790 $ 2,763 $ 16,693 $ 11,814
================= =============== ================ ===============
See Notes To Condensed Consolidated Financial Statements.
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
September 11, December 31,
1998 1997
--------------- ---------------
(unaudited)
ASSETS
Property and equipment, net........................................................$ 105,567 $ 108,153
Mortgage escrow.................................................................... 9,167 11,624
Due from Marriott Hotel Services, Inc.............................................. 4,097 3,714
Debt service reserve fund.......................................................... 3,000 3,000
Other assets....................................................................... 2,442 2,203
Cash and cash equivalents.......................................................... 1,414 1,137
---------------- ---------------
$ 125,687 $ 129,831
================ ===============
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt......................................................................$ 109,962 $ 122,014
Debt service guarantee and related interest payable to
Host Marriott Corporation........................................................ 20,577 19,762
Note payable and related interest due to the General Partner....................... 2,936 2,804
Deferred purchase debt and related interest payable to
Host Marriott Corporation........................................................ 720 676
Accounts payable and accrued expenses.............................................. 990 1,054
---------------- ---------------
Total Liabilities.............................................................. 135,185 146,310
---------------- ---------------
PARTNERS' DEFICIT
General Partner.................................................................... (44) (114)
Limited Partners................................................................... (9,454) (16,365)
---------------- ---------------
Total Partners' Deficit........................................................ (9,498) (16,479)
---------------- ---------------
$ 125,687 $ 129,831
================ ===============
See Notes To Condensed Consolidated Financial Statements.
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
Thirty-Six Weeks Ended
September 11, September 12,
1998 1997
---------------- ---------------
OPERATING ACTIVITIES
Net income ..........................................................................$ 6,981 $ 4,940
Noncash items........................................................................ 5,292 5,417
Change in operating accounts......................................................... (897) (114)
---------------- ---------------
Cash provided by operating activities............................................ 11,376 10,243
---------------- ---------------
INVESTING ACTIVITIES
Additions to property and equipment, net............................................. (1,522) (2,675)
Change in property improvement fund.................................................. (432) 546
Return of working capital from Marriott Hotel Services, Inc.......................... 450 --
---------------- ---------------
Cash used in investing activities................................................ (1,504) (2,129)
---------------- ---------------
FINANCING ACTIVITIES
Repayment of mortgage debt........................................................... (12,052) (6,423)
Capital distributions to partners.................................................... -- (1,382)
Change in mortgage escrow............................................................ 2,457 (1,673)
---------------- ---------------
Cash used in financing activities................................................ (9,595) (9,478)
---------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................ 277 (1,364)
CASH AND CASH EQUIVALENTS at beginning of period........................................ 1,137 2,762
---------------- ---------------
CASH AND CASH EQUIVALENTS at end of period..............................................$ 1,414 $ 1,398
================ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest......................................................$ 4,596 $ 5,212
================ ===============
See Notes To Condensed Consolidated Financial Statements.
MARRIOTT DIVERSIFIED AMERICAN HOTELS, L.P.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. The accompanying condensed consolidated financial statements have been
prepared by Marriott Diversified American Hotels, L.P. (the "Partnership")
without audit. Certain information and footnote disclosures normally
included in financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted from the
accompanying statements. The Partnership believes the disclosures made are
adequate to make the information presented not misleading. However, the
condensed consolidated financial statements should be read in conjunction
with the Partnership's financial statements and notes thereto included in
the Partnership's annual report for the fiscal year ended December 31,
1997.
In the opinion of the Partnership, the accompanying condensed consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position
of the Partnership as of 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, net income of the Partnership is
allocated 99% to the Limited Partners and 1% to the General Partner.
Significant differences exist between the net income for financial
reporting purposes and the net income reported 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 of the assets and differences in the timing of recognition of
incentive management fee expense.
2. The Partnership owns and operates the Marriott Research Triangle Park,
Southfield Marriott, Detroit Marriott at Livonia, Fullerton Marriott,
Fairview Park Marriott and Dayton Marriott. The sole general partner of
the Partnership, with a 1% interest, is Marriott MDAH One Corporation (the
"General Partner"), a wholly-owned subsidiary of Host Marriott Corporation
("Host Marriott"). The remaining 99% interest in the Partnership is owned
by the limited partners.
3. Certain reclassifications were made to the prior year condensed
consolidated financial statements to conform to the 1998 presentation.
4. The Partnership's depreciation expense for the third quarter 1997 included
a correction of an error of approximately $500,000 which occurred in the
second quarter 1997. Without the impact of this adjustment, depreciation
expense would have been approximately $1.4 million for the twelve weeks
ended September 12, 1997.
5. 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 Marriott Hotel
Services, Inc. (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 other costs, which are disclosed separately in the
condensed consolidated 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 $11.9 million and
$11.2 million for the twelve weeks ended September 11, 1998 and September
12, 1997, respectively, and $35.5 million and $33.4 million for the
thirty-six weeks ended September 11, 1998, and September 12, 1997,
respectively, and will have no impact on operating profit or net income.
Revenues consist of the following hotel operating results (in thousands):
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
-------------- --------------- ----------------- ---------------
HOTEL SALES
Rooms.......................................$ 12,086 $ 11,465 $ 37,179 $ 34,175
Food and beverage........................... 4,667 4,676 15,721 14,892
Other....................................... 942 988 2,923 2,807
---------------- --------------- ---------------- ---------------
17,695 17,129 55,823 51,874
---------------- --------------- ---------------- ---------------
HOTEL EXPENSES
Departmental direct costs
Rooms..................................... 3,023 2,819 9,018 8,392
Food and beverage......................... 4,007 3,826 12,430 11,764
Other..................................... 4,835 4,534 14,024 13,264
---------------- --------------- ---------------- ---------------
11,865 11,179 35,472 33,420
---------------- --------------- ---------------- ---------------
REVENUES.......................................$ 5,830 $ 5,950 $ 20,351 $ 18,454
================ =============== ================ ===============
6. Host Marriott Corporation ("Host Marriott"), the parent company of 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 real estate
investment trust ("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 contained
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, % Increase September 11, September 12,
1998 1997 (Decrease) 1998 1997 % Increase
-------------- ------------- ----------- ------------- -------------- -----------
Fairview Park $ 94 $ 88 7% $ 97 $ 90 8%
Livonia 94 83 13% 93 83 12%
Research Triangle 86 81 6% 91 83 10%
Southfield 93 80 16% 90 78 15%
Dayton 82 83 (1)% 83 79 5%
Fullerton 58 62 (6)% 66 63 5%
Combined Average $ 85 $ 80 6% $ 87 $ 80 9%
============== ============= =========== ============= ============== =======
Hotel Revenues: Hotel revenues decreased 2% to $5.8 million for the third
quarter of 1998 and increased 10% to $20.4 million for the year-to-date 1998,
when compared to the same periods in 1997. Although total sales increased
$566,000, or 3%, for the quarter, revenues decreased primarily due to an
increase in direct rooms and food and beverage costs. These increased costs
resulted in a slight decrease in rooms profit margins. Food and beverage profit
margins decreased from 18% in the third quarter of 1997 to 14% in the third
quarter of 1998 primarily due to increased food and labor costs. The increase in
year-to-date revenue is primarily due to increases in REVPAR and food and
beverage sales. 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 11% to $114, while the combined average occupancy
decreased one percentage point to 77%, when compared to the same period in 1997.
This resulted in a 9%, or $7 increase in REVPAR to $87. For the thirty-six weeks
ended September 11, 1998, room profit margins increased slightly to 76% and food
and beverage profit margins remained stable at 21%.
Operating Costs and Expenses: Operating costs and expenses decreased 14% to $2.5
million and increased 3% to $7.8 million for the twelve and thirty-six weeks
ended September 11, 1998, respectively, when compared to the same periods of
1997. The principal components of this category are:
Depreciation and Amortization: As discussed in Note 4, the
Partnership's depreciation expense for the third quarter 1997 included
a correction of an error of approximately $500,000 which occurred in
the second quarter 1997. Without the impact of this adjustment,
depreciation expense would have been approximately $1.4 million for the
twelve weeks ended September 12, 1997. Depreciation and amortization
decreased approximately $73,000, or 5%, for the third quarter 1998 as
compared to the same quarter of 1997, after adjusting for the error
discussed in Note 4. On a year-to-date basis, depreciation and
amortization decreased approximately $161,000, or 4%, as compared to
1997. The decrease in depreciation is due to furniture and equipment
that has become fully depreciated.
Management Fees: Base management fees are calculated as a percentage of
Hotel sales. The increase in this expense for the twelve and thirty-six
weeks ended September 11, 1998 was directly related to the increase in
Hotel sales.
Property Taxes and Other: Property tax expense increased by 125% and
21% for the twelve and thirty-six weeks ended September 11, 1998 due to
real estate tax refunds received in the third quarter of 1997, which
reduced that year's expense. These refunds were not received in 1998.
The increase in property taxes was partially offset by decreases in
other expenses.
Operating Profit: Operating profit increased 10% to $3.3 million for the third
quarter of 1998, when compared to the same period in 1997. However, operating
profit decreased approximately $190,000, or 5%, for the third quarter 1998 as
compared to third quarter 1997 after adjusting for the correction of an error
discussed in Note 4 of the condensed consolidated financial statements. On a
year-to-date basis, operating profit increased 15% to $12.6 million as compared
to the same period in 1997. The increase in year-to-date operating profit is
attributable to the increase in revenues which was partially offset by the
increase in operating costs and expenses.
Interest Expense: Interest expense decreased 8% to $1.9 million for the third
quarter 1998 and 3% to $6.0 million for the thirty-six weeks ended September 11,
1998, when compared to the same periods in 1997 due to principal amortization of
the mortgage debt. The weighted average interest rate on the mortgage debt was
6.5% for the thirty-six weeks ended September 11, 1998, as compared to 6.4% for
the comparable period in 1997.
Net Income: Net income increased 37% to $1.6 million for the third quarter 1998
and 41% to $7.0 million for the thirty-six weeks ended September 11, 1998, when
compared to the same periods in 1997 primarily due to improved operations and
the decrease in interest expense, as discussed above.
Individual hotel operating results are discussed below:
Revenues for the Fairview Park Hotel decreased $136,000, to $1.7 million, for
the third quarter 1998, primarily due to lower food and beverage profit margins
and increases in other hotel operating costs when compared to the same quarter
of 1997. Revenues for the year-to-date 1998 increased $356,000, to $6.4 million,
when compared to the prior year, primarily due to an 8% increase in REVPAR to
approximately $97. This increase was primarily due to a 13% increase in average
room rate to approximately $130 which was offset by a 2.9 percentage point
decrease in average occupancy to 75%. The increase in the average room rate for
the third quarter 1998 was primarily due to increases in the corporate rate
while occupancy has decreased because of a softening in transient demand.
REVPAR for the Livonia Hotel increased 13% for the third quarter 1998 and 12%
year-to-date to approximately $94 and $93, respectively, when compared to the
same periods in 1997. The increase in REVPAR was primarily due to an increase in
the average room rate of 7% to approximately $117 for the third quarter 1998 and
9% year-to-date to approximately $116. The increase in room rates was primarily
due to corporate rate increases and improvement in the mix of corporate and
premium rated rooms. In addition, average occupancy was approximately 80% for
the third quarter 1998 and for year-to-date 1998. This represents a 4.1
percentage point increase for the quarter and a 2.2 percentage point increase
year-to-date as compared to the comparable periods in 1997. As a result of the
increases in REVPAR, Hotel revenues increased $48,000 for the third quarter 1998
and $271,000 year-to-date 1998 representing a 7% and 13% increase, respectively,
when compared to the same periods in 1997.
Revenues from the Research Triangle Park Hotel increased 11% to $739,000 for the
third quarter 1998 and 13% to $2.5 million year-to-date when compared to the
same periods in 1997 due to increases in REVPAR. REVPAR increased by 6% for the
third quarter 1998 due primarily to an increase in the average room rate of 6%
to $115. Average occupancy for the third quarter 1998 remained stable at
approximately 75% when compared to the third quarter of 1997. On a year-to-date
basis, REVPAR increased 10% to $91 primarily due to a 9% increase in the average
room rate to $118 while average occupancy remained stable at approximately 77%.
An increase in corporate and premium rates accounted for most of the increases
in revenues.
REVPAR at the Southfield Hotel increased 16% for the third quarter
1998 to approximately $93 when compared to the same period in 1997 due to an 11%
increase in the average room rate to approximately $113 coupled with a 3.6
percentage point increase in average occupancy to 82%. Year-to-date REVPAR
increased 15% to approximately $90 when compared to the same period in 1997 due
to an 11% increase in average room rate to $113, combined with a 3.1 percentage
point increase in average occupancy to 80%. The increase in average room rate
for both the third quarter and year-to-date 1998 is primarily due to increases
in the corporate and premium rates. Additionally, management controlled the
customer mix so that higher rated business was not displaced as weekday demand
is strong. As a result of the increases in REVPAR, Hotel revenues increased
$52,000 for the third quarter 1998 and $363,000 for year-to-date 1998
representing an increase of 8% and 19%, respectively, when compared to the same
periods in 1997.
For the third quarter 1998, revenues from the Dayton Hotel decreased 5% to $1.6
million primarily due to a 1% decrease in REVPAR to approximately $82 combined
with higher direct rooms and food and beverage costs when compared to the third
quarter of 1997. The decrease in REVPAR for the third quarter 1998 is due to a
4.2 percentage point decrease in average occupancy to 81% offset by a 4%
increase in average room rate to $101. 1998 year-to-date Hotel revenues
increased 10% to $5.1 million primarily due to a 5% increase in REVPAR to
approximately $83 combined with improved food and beverage profit margins when
compared to the same period in 1997. The increase in REVPAR for year-to-date
1998 is due to a 9% increase in average room rate to $105 offset by a 3
percentage point decrease in average occupancy to 79%. The increase in room
rates was primarily due to increasing the weekday corporate room rates and a
weekend rate increase. The Dayton market is experiencing a softening in demand
which has impacted average occupancy at the Hotel and management is evaluating
and targeting group business in order to build occupancy.
Revenues for the Fullerton Hotel for the third quarter 1998 decreased 15%, or
$62,000, due to a 6% decrease in REVPAR combined with lower profit margins when
compared to the third quarter of 1997. Although the average room rate increased
13% to $93, average occupancy decreased by 13 percentage points to approximately
62%. Hotel revenues for the year-to-date 1998 increased 12%, or $177,000, due to
a 5% increase in REVPAR combined with a 110% increase in food and beverage
revenues of $107,000 when compared to the same period in 1997. Year-to-date
REVPAR increased when compared to the same period in 1997 primarily due to a 14%
increase in average room rate to $96 offset by a 6.4 percentage point decrease
in average occupancy to 69%. The increase in the average room rate was due to
corporate rate increases. The decrease in occupancy was primarily due to the
lack of citywide conventions because of the Anaheim Convention Center renovation
which is currently underway. The Convention Center renovation is scheduled to be
completed in the year 2000. During the renovation period, hotel management will
be challenged to find ways to increase occupancies while maintaining the rate
structure.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded through loan
agreements with independent financial institutions and Host Marriott Corporation
("Host Marriott"). 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's principal source of cash is from operations. Its principal
uses of cash are to make debt service payments and to fund the property
improvement fund.
Cash provided by operations for the thirty-six weeks ended September 11, 1998
and September 12, 1997, was $11.4 million and $10.2 million, respectively. The
increase in cash provided by operations is mainly due to an increase in net
income partially offset by changes in operating accounts.
Cash used in investing activities was $1.5 million for the thirty-six weeks
ended September 11, 1998, and $2.1 million for the thirty-six weeks ended
September 12, 1997. Cash used in investing activities is mainly comprised of
capital expenditures primarily related to furniture, fixtures, and equipment
renewals and replacements at the Hotels. During the thirty-six weeks ended
September 11, 1998 and September 12, 1997, capital expenditures totaled $1.5
million and $2.7 million, respectively. Contributions to the property
improvement fund, including interest earned, were $1.9 million and $1.7 million
for the thirty-six weeks ended September 11, 1998 and September 12, 1997.
It is anticipated that shortfalls in the property improvement fund will
occur in the future. The General Partner will work to resolve the expected
shortfall.
During the thirty-six weeks ended September 11, 1998, the Manager, Marriott
Hotel Services, Inc. returned $450,000 of working capital to the Partnership.
Cash used in financing activities was $9.6 million and $9.5 million for the
first three quarters of 1998 and 1997, respectively. During the first thirty-six
weeks of 1998 and 1997, the Partnership repaid $12.1 million and $6.4 million,
respectively, of principal on the mortgage debt. During the thirty-six weeks
ended September 11, 1998, the Partnership utilized a net $2.5 million from the
mortgage escrow account while during the thirty-six weeks ended September 12,
1997, a net $1.7 million was placed in the mortgage escrow account. Also, during
the thirty-six weeks ended September 12, 1997, the Partnership made
distributions totaling $1.4 million to the Partners, while for the thirty-six
weeks ended September 11, 1998, no distributions were made.
YEAR 2000 ISSUE
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 parent company of
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 agreement generally provides 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 agreement. The management agreement
generally does 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
Neither the Partnership nor the Hotels are presently subject to any material
litigation nor, to the General Partner's knowledge, is any material litigation
threatened against the Partnership or the Hotels, other than 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None.
(b) Reports on Form 8-K
A Form 8-K was filed with the Securities and Exchange Commission
on 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.
MARRIOTT DIVERSIFIED AMERICAN HOTELS
LIMITED PARTNERSHIP
By: MARRIOTT MDAH CORPORATION
General Partner
October 26, 1998 By: __/s/ Earla L. Stowe_______________
Earla L. Stowe
Vice President and Chief Accounting Officer