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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
For the Quarter ended June 14, 1996
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
OR
[_] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: 2-75711
POTOMAC HOTEL LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Delaware 52-1240223
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation organization)
10400 Fernwood Road
Bethesda, Maryland 20817
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 301-380-2070
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Potomac Hotel Limited Partnership
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TABLE OF CONTENTS
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PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statement of Operations
Twelve and Twenty-Four Weeks Ended June 14, 1996 and June 16, 1995...... 1
Condensed Balance Sheet
June 14, 1996 and December 31, 1995..................................... 2
Condensed Statement of Cash Flows
Twenty-Four Weeks ended June 14, 1996 and June 16, 1995................. 3
Notes to Condensed Financial Statements................................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................................... 9
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per unit amounts)
Twelve Weeks Ended Twenty-Four Weeks
June 14, June 16, June 14, June 16,
1996 1995 1996 1995
-------- -------- -------- --------
REVENUES (Note 2).................. $11,643 $13,021 $25,340 $28,985
------- ------- ------- -------
OPERATING COSTS AND EXPENSES
Interest.......................... 5,589 9,485 11,114 18,998
Incentive management fee.......... 1,951 2,338 4,652 5,447
Depreciation and amortization..... 1,292 1,368 2,546 2,751
Base management fee............... 1,023 1,132 2,119 2,382
Property taxes.................... 879 1,113 1,752 2,222
Ground rent, insurance and other.. 719 345 1,238 1,026
------- ------- ------- -------
11,453 15,781 23,421 32,826
------- ------- ------- -------
NET INCOME (LOSS)................. $ 190 $(2,760) $ 1,919 $(3,841)
======= ======= ======= =======
ALLOCATION OF NET INCOME (LOSS)
General Partner................... $ 2 $ (28) $ 19 $ (38)
Limited Partners.................. 188 (2,732) 1,900 (3,803)
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$ 190 $(2,760) $ 1,919 $(3,841)
======= ======= ======= =======
NET INCOME (LOSS) PER LIMITED
PARTNER UNIT (1,800 Units)........ $ 105 $(1,518) $ 1,056 $(2,113)
======= ======= ======= =======
See Notes to Condensed Financial Statements.
1
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(in thousands)
June 14, December 31,
1996 1995
------------ ------------
(unaudited)
ASSETS
Property and equipment, net........................... $ 151,290 $ 151,097
Due from Marriott International, Inc. and affiliates.. 13,796 12,017
Other assets.......................................... 6,128 4,320
Restricted cash....................................... 12,743 2,948
Cash and cash equivalents............................. 2,028 6,139
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$ 185,985 $ 176,521
========= =========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt......................................... $ 184,837 $ 186,000
Due to Host Marriott Corporation and affiliates....... 120,368 122,243
Incentive and base management fees due to Marriott
International, Inc.
and affiliates........................................ 13,914 9,435
Due to Marriott International, Inc. and affiliates.... 463 477
Accrued interest and other liabilities................ 6,940 822
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Total Liabilities................................... 326,522 318,977
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PARTNERS' DEFICIT
General Partner....................................... (34,777) (34,796)
Limited Partners...................................... (105,760) (107,660)
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Total Partners' Deficit............................. (140,537) (142,456)
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$ 185,985 $ 176,521
========= =========
See Notes to Condensed Financial Statements.
2
POTOMAC HOTEL LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
Twenty-Four Weeks Ended
June 14, June 16,
1996 1995
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(in thousands)
OPERATING ACTIVITIES
Net income (loss)............................... $ 1,919 $ (3,841)
Noncash items................................... 9,761 11,323
Changes in operating accounts................... 4,846 2,332
-------- --------
Cash provided by operating activities......... 16,526 9,814
-------- --------
INVESTING ACTIVITIES
Additions to property and equipment............. (2,739) (986)
Change in property improvement funds............ (2,210) (2,927)
Working capital funded to Marriott
International, Inc............................. (262) --
-------- --------
Cash used in investing activities............. (5,211) (3,913)
-------- --------
FINANCING ACTIVITIES
Change in collateral accounts................... (9,795) (4,388)
Repayments to Host Marriott Corporation......... (3,848) --
Principal repayments on mortgage debt........... (1,783) (780)
Advances from Host Marriott Corporation and
affiliates, net................................ -- 778
Increase in amounts due from Marriott
International, Inc............................. -- (631)
Advances from affiliates of Marriott
International, Inc............................. -- 350
Payment of financing costs...................... -- (189)
Change in escrow fund cash...................... -- 20
-------- --------
Cash used in financing activities............. (15,426) (4,840)
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.. (4,111) 1,061
CASH AND CASH EQUIVALENTS at beginning of period.. 6,139 7,883
-------- --------
CASH AND CASH EQUIVALENTS at end of period........ $ 2,028 $ 8,944
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for mortgage and other interest $2,253 $10,035
====== =======
See Notes to Condensed Financial Statements.
3
POTOMAC HOTEL LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed financial statements have been prepared by
Potomac Hotel Limited Partnership (the "Partnership") without audit.
Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted from the
accompanying statements. The Partnership believes the disclosures made
are adequate to make the information presented not misleading. However,
the condensed financial statements should be read in conjunction with
the Partnership's financial statements and notes thereto included in the
Partnership's Form 10-K for the fiscal year ended December 31, 1995. In
the opinion of the Partnership, the accompanying unaudited condensed
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial
position of the Partnership as of June 14, 1996 and December 31, 1995,
the results of operations for the twelve and twenty-four weeks ended
June 14, 1996 and June 16, 1995. 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 (loss) is
allocated 99% to the limited partners and 1% to Host Marriott (the
"General Partner"). Significant differences exist between the net income
(loss) for financial reporting purposes and the net income (loss)
reported 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 differences in the timing of the recognition of management
fee expense.
4
2. Revenues represents house profit of the Partnership's Hotels since the
Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Hotels to the manager.
House profit reflects hotel operating results which flow to the
Partnership as property owner and represents gross hotel sales less
property-level expenses, excluding depreciation and amortization, base
and incentive management fees, real and personal property taxes, ground
and equipment rent, insurance and certain other costs, which are
disclosed separately in the condensed statement of operations. Revenues
consists of the following for the twelve and twenty-four weeks ended
June 14, 1996 and June 16, 1995 (in thousands); however, due to the sale
of the Dallas Hotel in August 1995, 1996 and 1995 Hotel operating
results are not comparable:
Twelve Weeks Ended Twenty-Four Weeks Ended
June 14, June 16, June 14, June 16,
1996 1995 1996 1995
-------- -------- -------- ---------
HOTEL SALES
Rooms............. $ 21,098 $ 23,445 $ 44,025 $ 49,233
Food and beverage. 10,181 11,654 20,856 23,979
Other............. 2,834 2,954 5,751 6,191
-------- -------- -------- --------
34,113 38,053 70,632 79,403
-------- -------- -------- --------
HOTEL EXPENSES
Departmental
Direct Costs
Rooms............ 5,177 5,667 10,300 11,396
Food and beverage 7,621 8,751 15,497 17,585
Other hotel
operating
expenses......... 9,672 10,614 19,495 21,437
-------- -------- -------- --------
22,470 25,032 45,292 50,418
-------- -------- -------- --------
REVENUES $ 11,643 $ 13,021 $ 25,340 $ 28,985
======== ======== ======== ========
3. In the first quarter of 1996, the Partnership adopted Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Adoption of SFAS No. 121 did not have an effect on its financial
statements.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded through
loan agreements with independent financial institutions or with Host
Marriott Corporation ("Host Marriott" and "General Partner") 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.
Total Partnership interest expense decreased 41% for both the twelve and
twenty-four weeks ended June 14, 1996 when compared to the same periods in
1995 primarily due to reduced interest expense on the mortgage loan ( the
"Bank Loan") for six of the Partnership's hotels (the "Bank Hotels"). As a
result of the August 22, 1995 Bank Loan restructuring and related sale of
the Dallas Hotel, the principal balance of the Bank Loan was reduced from
$245.0 million as of June 16, 1995 to $184.8 million as of June 14, 1996.
In addition, the interest rate on the Bank Loan decreased from 12.4%, which
was the default rate at which interest accrued during the restructuring
period, to 7.2% for the twenty-four weeks ended June 16, 1995 and June 14,
1996, respectively.
Pursuant to the terms of the restructured Bank Loan, operating profit from
the Bank Hotels in excess of debt service must be held in a collateral
account with The Mitsui Trust and Banking Company (the "Bank Lender").
Also, payment of a portion of the Marriott International, Inc. ("MII") base
management fee equal to 1% of gross Bank Hotel sales is subordinate to debt
service on the Bank Loan and is set aside in the collateral account. After
the end of each fiscal year, excess cash remaining in the collateral
account after payment of annual debt service is applied to repay Bank Loan
principal, advances under the $26 million debt service guaranty (the "Bank
Guaranty") provided by Host Marriott and, depending upon the unadvanced
balance of the Bank Guaranty, deferred base management fees to MII. As a
result, on February 22, 1996, the Partnership repaid $1.2 million in
principal on the Bank Loan and $1.2 million to Host Marriott on the Bank
Guaranty from 1995 excess operating cash flow and subordinated base
management fees related to the Bank Hotels. As of June 14, 1996, $17.2
million was available under the Bank Guaranty.
In connection with the restructuring of the Bank Loan, Host Marriott
executed an additional guaranty (the "Interest Guaranty") for $12 million
to cover any shortfalls in the payment of interest after application of all
cash flow being made under the Bank Guaranty or an equivalent "back-up"
guaranty provided by MII (the "MII Back-up Guaranty"). Pursuant to the
terms of the Interest Guaranty, Host Marriott's liability was reduced by $4
million on December 31, 1995. Therefore, as of June 14, 1996, Host
Marriott's liability under the Interest Guaranty was $8 million.
On March 27, 1996, the Partnership repaid $2.8 million from excess working
capital to Host Marriott which was previously advanced to the Partnership
to fund temporary working capital shortfalls. As of June 14, 1996, the
amount due to Host Marriott for working capital advances was approximately
$4.7 million.
6
On June 24, 1996, the Partnership repaid $2.5 million of principal on the
Bank Loan, along with approximately $6.8 million in interest from cash
reserved in the collateral account. The repayment reduced the balance of
the Bank Loan to approximately $182.3 million. The balance in the
collateral account after the repayment was approximately $2.9 million.
In the first quarter of 1996, the Partnership adopted Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Adoption of SFAS No. 121 did not have an effect on its financial
statements.
Capital Sources and Uses of Cash
For the twenty-four weeks ended June 14, 1996 and June 16, 1995, cash
provided by operations was $16.5 million and $9.8 million, respectively.
The increase was primarily due to a decrease in interest expense on the
Bank Loan and management fees, offset by a decrease in hotel revenues due
to the Dallas Hotel being owned by the Partnership during the twenty-four
weeks ended June 16, 1995 while this Hotel was not owned during 1996.
For the twenty-four weeks ended June 14, 1996 and June 16, 1995, cash
utilized in investing activities was $5.2 million and $3.9 million,
respectively. The variance was primarily the result of an increase in
capital expenditures at the hotels and working capital advances totalling
$262,000 to the Miami, Albuquerque, Mountain Shadows and Houston hotels.
For the twenty-four weeks ended June 14, 1996 and June 16, 1995, cash
utilized in financing activities was $15.4 million and $4.8 million,
respectively. The variance was due to an increase in the amount of net
operating cash flow from the Bank Hotels deposited into the collateral
account with the Bank Lender; principal repayments of approximately $1.2
million on the Bank Loan and approximately $1.2 million on the Host
Marriott Bank Guaranty; and repayment of $2.8 million in working capital
advances to Host Marriott.
The General Partner believes that cash from hotel operations, the ability
to defer the payment of certain management fees to the manager and the
ability to standaside a portion of the FF&E reserve contribution will
provide adequate funds to meet debt service requirements of the
Partnership. As a result, no further advances are expected to be required
under the Bank Guaranty, the Interest Guaranty or the MII Back-up Guaranty.
However, no cash will be available for distribution to the partners.
RESULTS OF OPERATIONS
Hotel revenues decreased $3.6 million, or 13%, and $1.4 million, or 11%, to
$25.3 million year-to-date and $11.6 million in the second quarter,
respectively, when compared to the same period in 1995. The decrease in
revenues was primarily due to the Partnership owning the Dallas Hotel
during the first quarter 1995 while this Hotel was not owned in 1996.
For the eight hotels owned continuously during 1995 and 1996, revenues for
the year-to-date and second quarter increased $1.1 million, or 4%, and $1.0
million, or 9%, respectively, when
7
compared to 1995. Combined REVPAR, or revenue per available room, for
these eight hotels increased 6% to $83 for the year-to-date and 7% to $79
for the second quarter due to increase in combined average room rate and
combined average occupancy. For the eight hotels owned continuously,
combined average room rate increased 3% to $101 and 4% to $95 for the 1996
year-to-date and second quarter; combined average occupancy increased 1.6
percentage points to 82% for the year-to-date and 2.6 percentage points to
83% for the second quarter. Demand in the transient segment remains
strong, which has allowed the hotels to restrict discounted rates, thereby
increasing average room rates.
Incentive management fee, base management fee, property taxes and
depreciation and amortization expenses for the second quarter and year-to-
date 1996 decreased primarily due to expenses being recorded for the Dallas
Hotel in 1995 but not in 1996.
8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Partnership and the Partnership Hotels are involved in routine
litigation and administrative proceedings arising in the ordinary course of
business, some of which are expected to be covered by liability insurance
and which collectively are not expected to have a material adverse effect
on the business, financial conditions or results of operations of the
Partnership.
9
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
July 26, 1996 By: /s/ Donald D. Olinger
---------------------------------
Donald D. Olinger
Vice President and
Corporate Controller
(Principal Accounting Officer)