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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 19, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-14374
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1427553
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(State of Organization) (I.R.S. Employer Identification Number)
10400 Fernwood Road, Bethesda, MD 20817-1109
- ------------------------------------ ----------------------------------------
(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 No (Not Applicable. The Partnership became subject to
Section 13 reporting on November 10, 1997.)
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ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP
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TABLE OF CONTENTS
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PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Operations
Twelve and Twenty-Four Weeks ended June 19, 1998 and June 20, 1997.............................1
Condensed Consolidated Balance Sheet
June 19, 1998 and December 31, 1997............................................................2
Condensed Consolidated Statement of Cash Flows
Twenty-Four Weeks ended June 19, 1998 and June 20, 1997........................................3
Notes to Condensed Consolidated Financial Statements..............................................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................................11
Item 6. Exhibits and Reports on Form 8-K.................................................................12
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per Unit amounts)
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Twelve Weeks Ended Twenty-Four Weeks Ended
June 19, June 20, June 19, June 20,
1998 1997 1998 1997
-------------- ------------- ------------- ---------
HOTEL REVENUES
Rooms...............................................$ 13,239 $ 14,250 $ 26,909 $ 27,710
Food and beverage................................... 5,244 6,404 12,269 13,254
Other............................................... 1,424 1,387 2,779 2,800
-------------- ------------- ------------- -------------
19,907 22,041 41,957 43,764
-------------- ------------- ------------- -------------
OPERATING COSTS AND EXPENSES
Property-level costs and expenses
Rooms............................................. 2,841 3,024 5,536 5,752
Food and beverage................................. 3,868 4,236 8,186 8,370
Other............................................. 4,548 4,650 9,175 9,469
-------------- ------------- ------------- -------------
Total hotel property-level costs and expenses... 11,257 11,910 22,897 23,591
Depreciation ....................................... 1,492 1,175 2,891 2,349
Property taxes and other............................ 1,057 853 1,923 1,707
Base management fee................................. 597 659 1,259 1,311
Incentive management fee............................ (117) 1,000 90 1,998
-------------- ------------- ------------- -------------
14,286 15,597 29,060 30,956
-------------- ------------- ------------- -------------
OPERATING PROFIT....................................... 5,621 6,444 12,897 12,808
Interest expense.................................... (3,288) (5,267) (7,964) (10,862)
Interest income..................................... 40 232 154 379
-------------- ------------- ------------- -------------
NET INCOME BEFORE
EXTRAORDINARY ITEMS................................. 2,373 1,409 5,087 2,325
EXTRAORDINARY ITEMS
Gain on extinguishment of debt...................... -- -- 19 --
Gain on forgiveness of incentive management fees.... -- -- 4,155 --
-------------- ------------- ------------- -------------
NET INCOME.............................................$ 2,373 $ 1,409 $ 9,261 $ 2,325
============== ============= ============= =============
ALLOCATION OF NET INCOME
General Partner.....................................$ -- $ 14 $ -- $ 23
Class A Limited Partners............................ -- 1,395 -- 2,302
Class B Limited Partner............................. 2,373 -- 9,261 --
-------------- ------------- ------------- -------------
$ 2,373 $ 1,409 $ 9,261 $ 2,325
============== ============= ============= =============
NET INCOME PER CLASS A
LIMITED PARTNER UNIT (530 Units)....................$ -- $ 2,632 $ -- $ 4,343
============== ============= ============= =============
</TABLE>
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ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
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June 19, December 31,
1998 1997
(unaudited)
ASSETS
Property and equipment, net...........................................................$ 164,005 $ 165,372
Due from Marriott International, Inc.................................................. 7,434 4,425
Property improvement fund............................................................. 3,357 2,756
Deferred financing costs, net of accumulated amortization............................. 3,174 321
Restricted cash reserves.............................................................. 25,031 --
Cash and cash equivalents............................................................. 6,191 21,502
-------------- ---------------
$ 209,192 $ 194,376
============== ===============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Mortgage debt.........................................................................$ 163,232 $ 199,019
Due to Host Marriott Corporation under Original Debt Service
Guarantee and Commitment and Interest Guarantee..................................... -- 30,524
Term loan payable to Host Marriott Corporation........................................ 20,134 --
Due to Marriott International, Inc.................................................... 133 4,198
Accounts payable and accrued expenses................................................. 2,190 12,743
-------------- ---------------
Total Liabilities................................................................ 185,689 246,484
-------------- ---------------
PARTNERS' CAPITAL (DEFICIT)
General Partner....................................................................... (520) (520)
Class A Limited Partners.............................................................. (60,238) (57,588)
Class B Limited Partner............................................................... 84,261 6,000
-------------- ---------------
Total Partners' Capital (Deficit)................................................ 23,503 (52,108)
-------------- ---------------
$ 209,192 $ 194,376
============== ===============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
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Twenty-Four Weeks Ended
June 19, June 20,
1998 1997
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OPERATING ACTIVITIES
Net income .............................................................................$ 9,261 $ 2,325
Net extraordinary items................................................................. (4,174) --
------------- -------------
Income before extraordinary items....................................................... 5,087 2,325
Noncash items......................................................................... 2,994 3,567
Changes in operating accounts......................................................... (12,990) 9,176
------------- -------------
Cash (used in) provided by operating activities................................... (4,909) 15,068
------------- -------------
INVESTING ACTIVITIES
Working capital provided to Marriott International, Inc................................. (2,639) --
Additions to property and equipment, net................................................ (1,524) (1,109)
Change in property improvement fund..................................................... (601) (1,201)
------------- -------------
Cash used in investing activities................................................. (4,764) (2,310)
------------- -------------
FINANCING ACTIVITIES
Proceeds from mortgage debt............................................................. 164,000 --
Repayment of mortgage debt.............................................................. (199,768) --
Capital contributions from General Partner for Class B
Limited Partnership Interest.......................................................... 69,000 --
Changes in restricted lender reserves................................................... (22,873) --
Repayments under Original Debt Service Guarantee and Commitment
and Interest Guarantee to Host Marriott Corporation................................... (10,390) --
Payment of financing costs.............................................................. (2,957) --
Capital distributions................................................................... (2,650) --
------------- -------------
Cash used in financing activities................................................. (5,638) --
------------- -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................................. (15,311) 12,758
CASH AND CASH EQUIVALENTS at beginning of period............................................. 21,502 5,601
------------- -------------
CASH AND CASH EQUIVALENTS at end of period...................................................$ 6,191 $ 18,359
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest...............................................$ 19,127 $ 662
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed consolidated financial statements have been
prepared by the Atlanta Marriott Marquis II 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 consolidated financial statements should be read in
conjunction with the Partnership's consolidated financial statements and
notes thereto included in the Partnership's Form 10-K for the 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 June 19, 1998 and December 31, 1997, the results
of operations for the twelve and twenty-four weeks ended June 19, 1998 and
June 20, 1997 and cash flows for the twenty-four weeks ended June 19, 1998
and June 20, 1997. Interim results are not necessarily indicative of fiscal
year performance because of seasonal and short-term variations.
Through December 31, 1997, for financial reporting purposes the net
income/(loss) of the Partnership was allocated 99% to the limited partners
and 1% to Marriott Marquis Corporation (the "General Partner"), a
wholly-owned subsidiary of Host Marriott Corporation ("Host Marriott"). As
reported in the Partnership's Form 10-K for the fiscal year ended December
31, 1997, Atlanta Marriott Marquis Limited Partnership's ("AMMLP")
partnership agreement was amended as a result of the Merger to incorporate
a revision of AMMLP's allocations and distributions such that Partnership
net income is generally allocated (i) to the General Partner, until the
General Partner has received a 13.5% cumulative compounded annual return on
its Class B invested capital, (ii) to the General Partner and Class A
limited partners, until the General Partner and the Class A limited
partners have received a non-cumulative, non-compounded annual return of 5%
on their initial investment in the Partnership, and (iii) thereafter, in
proportion to total invested capital through completion of the merger
transactions of approximately 41% to limited partners and 59% to the
General Partner. Net losses are generally allocated in proportion to the
partners' capital accounts. 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 accelerated depreciation
methods, shorter depreciable lives for the assets, and differences in the
timing of the recognition of 1997 incentive management fee expense.
Through December 31, 1997, AMMLP owned an 80% general partnership interest
in Ivy Street Hotel Limited Partnership ("Ivy") which owned the Atlanta
Marriott Marquis Hotel (the "Hotel"). The Partnership also owned the land
(the "Land") on which the Hotel is located. On December 31, 1997 AMMLP
merged (the "Merger") with and into the Partnership. The Merger of AMMLP
and the Partnership was treated as a reorganization of affiliated entities
and AMMLP's basis in its assets and liabilities were carried over. On
January 29, 1998, the Hotel and the Land were conveyed to a special
purpose, bankruptcy remote entity, HMA Realty Limited Partnership ("HMA").
The sole general partner of HMA with a 1% interest, is HMA-GP, Inc., a
wholly-owned subsidiary of Ivy. The sole limited partner, with a 99%
interest, is Ivy. The Partnership consolidates Ivy and HMA, and all
significant intercompany transactions and balances between the Partnership,
Ivy and HMA have been eliminated. In 1990, the Partnership determined that
the probability of collecting the receivable from the minority partner in
Ivy was remote. Thus, the Partnership wrote off this receivable and is now
recording 100% of the income/(loss) of Ivy until excess income allocated to
the Partnership equals the excess losses previously recorded by the
Partnership.
2. Certain reclassifications were made to the prior year financial statements
to conform to the 1998 presentation.
3. The Partnership's revenues represent gross sales generated by the
Partnership's hotel. Total hotel sales less property-level costs and
expenses equals house profit which reflects the net revenues flowing to the
Partnership as property owner. As discussed below, the Partnership
previously recorded only the house profit generated by the Partnership's
hotel as revenues. The Partnership recorded house profit as revenue in its
second quarter Form 10-Q and is amending that presentation, as discussed
below, in this Form 10-Q/A.
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 on its financial
statements and has determined that EITF 97-2 requires that the Partnership
include property-level revenues and operating costs and expenses of its
hotel in its statement of operations. The Partnership was required to apply
EITF 97-2 on January 3, 1998 to the modified management agreement with
Marriott International, Inc. The Partnership has given retroactive effect
to the adoption of EITF 97-2 in the accompanying consolidated statement of
operations. The adoption of EITF 97-2 increased both revenues and operating
costs and expenses by $11.3 million and $11.9 million and $22.9 million and
$23.6 million for second quarters 1998 and 1997 and the twenty-four weeks
ended June 19, 1998 and June 20, 1997, respectively, and had no impact on
operating profit or net income.
4. On February 2, 1998, HMA obtained new 12-year first mortgage financing of
$164 million which, together with $35 million from the additional $69
million capital contributed by the General Partner, was used to pay the
maturing mortgage debt. The Mortgage Debt is nonrecourse to HMA, bears
interest at a fixed rate of 7.4% and requires monthly payments of principal
and interest calculated to fully amortize the loan over 25 years. Annual
debt service on the new mortgage debt is $14.1 million for 1998 and $14.4
million annually until the end of the 12-year term.
5. To facilitate the refinancing, effective January 3, 1998, a new management
agreement was entered into by HMA and the Manager. The new management
agreement expires on July 1, 2010 and is renewable at the Manager's option
for five additional 10-year terms. Pursuant to the terms of the new
management agreement, no incentive management fees are payable to the
Manager with respect to the first $29.7 million of operating profit (the
"Owner's Priority"). Thereafter, the Manager will receive 20% of the profit
in excess of such Owner's Priority. As part of the new management
agreement, all accrued incentive management fees totaling $4.2 million were
forgiven by the Manager. The Partnership recorded an extraordinary gain in
conjunction with the forgiveness in the accompanying condensed consolidated
financial statements.
6. Pursuant to the terms of the Mortgage Debt, HMA was required to establish
with the lender a separate reserve account for payments of insurance
premiums and real estate taxes for the mortgaged property as a result of
the credit rating of Marriott International, Inc. Thus, the Partnership has
transferred $2.2 million into the reserve through June 19, 1998. The
reserve is included in restricted cash reserves and the resulting tax and
insurance liability is included in accounts payable and accrued expenses in
the accompanying balance sheet.
Additionally, HMA was required to establish the following reserves which
are classified as restricted cash reserves in the accompanying condensed
consolidated balance sheet and are held by the agent of the lender
including:
o $3.6 million debt service reserve--This reserve is equal to three
months of debt service.
o $10.1 million deferred maintenance and capital expenditure
reserve--This reserve will be expended for capital expenditures for
repairs to the facade of the Hotel as well as various renewals and
replacements and site improvements.
o $7.5 million rooms refurbishment reserve--This reserve will be expended
to refurbish the remaining 711 rooms and 16 suites at the Hotel which
have not already been refurbished.
7. On April 17, 1998, Host Marriott, parent company of the General Partner of
the Partnership, announced that its Board of Directors authorized Host
Marriott to reorganize its business operations to qualify as a real estate
investment trust ("REIT") to become effective as of January 1, 1999. As
part of the REIT conversion, Host Marriott formed a new operating
Partnership (the "Operating Partnership") and limited partners in certain
Host Marriott full-service hotel partnerships and joint ventures, including
the Atlanta Marriott Marquis II Limited Partnership, are expected to be
given an opportunity to receive, on a tax-deferred basis, Operating
Partnership units in the Operating Partnership in exchange for their
current Partnership interests. The Operating Partnership units would be
redeemable by the limited partner for freely traded Host Marriott shares
(or the cash equivalent thereof) at any time after one year from the
closing of the merger. In connection with the REIT conversion, the
Operating Partnership filed a Registration Statement on Form S-4 with the
Securities and Exchange Commission (the "SEC") on June 2, 1998. Limited
Partners will be able to vote on this Partnership's participation in the
merger later this year through a consent solicitation.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements and as such may
involve known and unknown risks, uncertainties, and other factors which may
cause the actual results, performance or achievements of the Partnership to be
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Although the Partnership believes
the expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
attained. 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
Revenues represent sales generated by the Partnership's hotel. Total hotel sales
less property-level costs and expenses equals house profit which reflects the
net revenues flowing to the Partnership as property owner. As discussed below,
the Partnership previously recorded only the house profit generated by the
Partnership's hotel as revenues.
The Partnership adopted EITF 97-2 which requires that the Partnership include
property-level revenues and operating costs and expenses in the statement of
operations. The Partnership has given retroactive effect to the adoption of EITF
97-2 in the accompanying statement of operations.
Revenues. Partnership revenues for second quarter 1998 and the twenty-four weeks
ended June 19, 1998 decreased 10%, or $2.1 million, to $19.9 million and 4%, or
$1.8 million, to $42.0 million, respectively, when compared to the same periods
in 1997 due to decreases in room and food and beverage sales. Room sales
decreased 7%, or $1.0 million, to $13.2 million and 3%, or $801,000, to $27.0
million for second quarter 1998 and the twenty-four weeks ended June 19, 1998,
respectively, when compared to the same periods in 1997. Food and beverage sales
decreased 18%, or $1.2 million, to $5.2 million and 7%, or $1.0 million, to
$12.3 million for second quarter 1998 and the twenty-four weeks ended June 19,
1998, respectively, when compared to the same periods in 1997. The decrease in
food and beverage sales is primarily due to lower occupancy levels at the Hotel
in 1998 as compared to 1997. Room sales decreased due to a 7% decrease in REVPAR
for the second quarter 1998 and a 3% decrease in REVPAR for the twenty-four
weeks ended June 19, 1998 when compared to the same periods in 1997. 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). REVPAR decreased for the second
quarter 1998 and twenty-four weeks ended June 19, 1998 due to a 7.4 percentage
point decrease in average occupancy to 66% and a 5.4 percentage point decrease
in average occupancy to 69%, respectively, when compared to the same periods in
1997. The decrease in occupancy was partially offset by a 3%, or $5, increase in
average room rate to approximately $142 for second quarter 1998 and a 5%, or $6,
increase in average room rate to $139 for the twenty-four weeks ended June 19,
1998 when compared to the same periods in 1997. The increase in average room
rate is due to a shift in group mix to higher-rated group business. The decrease
in average occupancy is primarily due to a decrease in the number of city-wide
conventions in the first half of 1998 when compared to the same period in 1997.
Additional supply added to the Atlanta suburbs has also impacted 1998 occupancy
levels.
<PAGE>
Operating Costs and Expenses. For the second quarter of 1998 and the twenty-four
weeks ended June 19, 1998, operating costs and expenses decreased 8%, or $1.3
million, to $14.3 million and 6%, or $1.9 million, to $29.1 million,
respectively, when compared to the same periods in 1997, primarily due to
decreases in hotel property-level costs and expenses and incentive management
fees. For second quarter 1998 and the twenty-four weeks ended June 19, 1998
hotel property-level costs and expenses decreased 5%, or $653,000, to $11.3
million and 3%, or $694,000, to $22.9 million when compared to the same periods
in 1997 primarily because of lower occupancy levels and lower sales at the
hotel. For the twenty-four weeks ended June 19, 1998, $90,000 of incentive
management fees were earned as compared to $2.0 million for the twenty-four
weeks ended June 20, 1997. Incentive management fees decreased due to an
increase in Owner's Priority. Pursuant to the new management agreement,
effective January 3, 1998, no incentive management fees are payable to the
Manager with respect to the first $29.7 million of operating profit. Thereafter,
the Manager will receive 20% of the profit in excess of such figure. As a
percentage of revenues, operating costs and expenses represented 72% and 71% of
revenues for the second quarters of 1998 and 1997, respectively, and 69% and 71%
of revenues for the twenty-four weeks ended June 19, 1998 and June 20, 1997,
respectively.
Operating Profit. As a result of the changes in revenues and expenses discussed
above, operating profit decreased 13%, or $823,000, to $5.6 million for the
second quarter 1998 and increased 1%, or $89,000, to $12.9 million for the
twenty-four weeks ended June 19, 1998 when compared to the same periods in 1997.
Interest Expense. Interest expense decreased 38%, or $2.0 million, to $3.3
million and 27%, or $2.9 million, to $8.0 million for second quarter 1998 and
the twenty-four weeks ended June 19, 1998, respectively, when compared to the
same periods in 1997. The decrease is primarily due to the refinancing of the
mortgage debt on February 2, 1998. On that date, HMA obtained new 12-year first
mortgage financing of $164 million (the "Mortgage Debt") which, together with
$35 million from the additional $69 million capital contributed by the General
Partner, was used to pay the $199 million maturing mortgage debt. The Mortgage
Debt bears interest at a fixed rate of 7.4% and requires monthly principal and
interest payments based on a 25-year amortization schedule. The prior mortgage
debt bore interest at a fixed rate of 10.3%.
Net Income Before Extraordinary Items. Net income before extraordinary items
increased 68%, or $1.0 million, to $2.4 million and 119%, or $2.8 million, to
$5.1 million for second quarter 1998 and the twenty-four weeks ended June 19,
1998, respectively, when compared to the same periods in 1997. The increase is
primarily due to decreases in incentive management fees and interest expense.
Extraordinary Items. Pursuant to the terms of the new management agreement, all
unpaid incentive management fees accrued through December 31, 1997 amounting to
$4.2 million were forgiven by the Manager. During the twenty-four weeks ended
June 19, 1998, the Partnership recorded an extraordinary gain in conjunction
with the write off. In addition, the Partnership recorded a $19,000
extraordinary gain on extinguishment of debt during the twenty-four weeks ended
June 19, 1998.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have been historically funded through loan
agreements with independent financial institutions. As a result of the
transactions associated with the Merger and the successful refinancing of the
Partnership's mortgage debt, the General Partner believes that the Partnership
will have sufficient capital resources to conduct its operations in the ordinary
course of business.
<PAGE>
Mortgage Debt
On February 2, 1998, the mortgage debt was successfully refinanced with a third
party lender. The Partnership's debt now consists of a $164 million mortgage
loan (the "Mortgage Debt"), which is nonrecourse to HMA, which bears interest at
a fixed rate of 7.4% for a 12-year term. The mortgage loan requires payments of
principal and interest based upon a 25-year amortization schedule. As part of
the refinancing, HMA was required to establish certain reserves which are
classified as restricted cash reserves in the accompanying condensed
consolidated balance sheet and are held by an agent of the lender including:
$3.6 million debt service reserve--This reserve is equal to three months
of debt service.
$10.1 million deferred maintenance and capital expenditure reserve--This
reserve will be expended for capital expenditures for repairs to the facade
of the Hotel as well as various renewals and replacements and site
improvements.
$7.5 million rooms refurbishment reserve--This reserve will be expended to
refurbish the remaining 711 rooms and 16 suites at the Hotel which have not
already been refurbished.
$1.3 million tax and insurance reserve--This reserve will be used to pay
real estate tax and insurance premiums for the Hotel.
In addition, during the twenty-four weeks ended June 19, 1998, HMA advanced an
additional $2.6 million to the Manager for working capital needs and used the
remaining cash to pay transaction costs associated with the refinancing.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is cash from Hotel operations. Its
principal uses of cash are to pay debt service payments on the Partnership's
mortgage debt, to make guarantee repayments, to fund the property improvement
fund and to make cash distributions to the partners. Additionally, in 1998 the
Partnership received cash through an equity infusion by the General Partner and
utilized cash to pay financing costs incurred in connection with the refinancing
of the Partnership's mortgage debt and to establish reserves required by the
lender.
Total cash used in operating activities was $4.9 million for the twenty-four
weeks ended June 19, 1998 as compared to total cash provided by operations of
$15.1 million for the twenty-four weeks ended June 20, 1997. In 1998, cash was
used to pay accrued interest on the Partnership's debt. In addition, pursuant to
the terms of the Mortgage Debt, the Partnership was required to establish with
the lender a separate reserve account for payments of insurance premiums and
real estate taxes for the mortgaged property as a result of the credit rating of
Marriott International, Inc. Thus, the Partnership has transferred $2.2 million
into the reserve through June 19, 1998. The reserve is included in restricted
cash reserves and the resulting tax and insurance liability is included in
accounts payable and accrued expenses in the accompanying balance sheet.
Cash used in investing activities was $4.8 million for the twenty-four weeks
ended June 19, 1998 as compared to $2.3 million for the twenty-four weeks ended
June 20, 1997. The increase in cash used in investing activities is primarily
due to an advance of $2.6 million to the Manager for working capital needs.
Cash used in financing activities was $5.6 million for the twenty-four weeks
ended June 19, 1998. For the twenty-four weeks ended June 20, 1997, no cash was
provided by or used in financing activities. The increase in cash used in
financing activities is primarily the result of the restructuring and
refinancing transactions. During 1998, the Partnership acquired new mortgage
debt financing of $164 million and received the remaining $69 million of the $75
million equity infusion from the General Partner. These proceeds were used as
follows: to repay the $199.8 million of mortgage debt; to repay $10.4 million of
the debt service guarantee and related interest outstanding under the Host
Marriott interest guarantee; to establish $22.5 million of reserves required by
the lender; and, to pay financing costs of $3.0 million. The Partnership made a
cash distribution in February 1998 to the Class A limited partners of $2.7
million, or $5,000 per limited partner unit, from 1997 operations.
The General Partner believes that cash from Hotel operations and the reserves
established in conjunction with the refinancing will continue to meet the short
and long-term operational needs of the Partnership.
Capital Expenditures
The Partnership is required to maintain the Hotel in good repair and condition.
The new management agreement provides for the establishment of a property
improvement fund to cover the cost of non-routine repairs and maintenance and
renewals and replacements to the Hotel's property and equipment. Contributions
to the fund are 5% of Hotel gross sales.
In 1997, the Hotel completed a $7.0 million refurbishment of approximately half
its guest rooms which included the replacement of the carpeting, bedspreads,
upholstery, drapes and other similar items and also the dressers, chairs, beds
and other furniture. The refurbishment of the remaining 711 rooms and 16 suites
began in mid-1998. This portion of the refurbishment will be funded from a
reserve which was established by the Partnership with the lender on February 2,
1998. The facade repair project which entails a repair of the entire facade of
the building is underway. The project is expected to cost $9.0 million and will
be funded by the Partnership from a reserve which was also established with the
lender in conjunction with the refinancing on the Maturity Date. The project is
expected to be completed by mid-1999.
The General Partner believes the property improvement fund and the capital
reserves established in conjunction with the refinancing will be adequate for
the future capital repairs and replacement needs of the Hotel.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Partnership and the Partnership Hotel 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 December 12, 1997, Hiram and Ruth Sturm, limited partners in Atlanta Marriott
Marquis Limited Partnership ("AMMLP"), filed a class-action lawsuit, styled
Hiram and Ruth Sturm v. Marriott Marquis Corporation, et al., Case No.
97-CV-3706, in the U.S. District Court for the Northern District of Georgia
against Marriott Marquis Corporation ("MMC"), its directors, and Host Marriott,
regarding the merger of AMMLP into a new partnership (the "Merger"), Atlanta
Marriott Marquis Limited Partnership II ("AMMLP-II"). MMC, formerly the general
partner of AMMLP, is the sole general partner of AMMLP-II. AMMLP-II owns an 80%
interest in Ivy Street Hotel Limited Partnership ("Ivy"), a Georgia limited
partnership. The other general and limited partners of Ivy are not affiliated
with Host Marriott. A wholly-owned bankruptcy remote subsidiary of Ivy owns the
Atlanta Marriott Marquis Hotel.
The Sturms allege, among other things, that the defendants misled the limited
partners in order to induce them to approve the Merger, violated securities
regulations by filing a prospectus with the SEC that contained false statements,
violated Federal roll-up regulations and Sections 14 and 20 of the Exchange Act,
breached their fiduciary duties, and breached the partnership agreement. The
plaintiffs sought to enjoin, or in the alternative rescind, the Merger and
damages. Howard H. Poorvu, another limited partner of AMMLP, filed a similar and
separate lawsuit, styled Howard H. Poorvu, v. Marriott Marquis Corporation, et
al., Civil Action No. 16095-NC, on December 19, 1997, in Delaware State Chancery
Court. The Merger took place on December 31, 1997, and the refinancing of the
first mortgage debt closed on January 10, 1998. The defendants filed answers to
the Delaware complaint on January 16, 1998, and moved to dismiss the Georgia
complaint on March 6, 1998. Although AMMLP and AMMLP-II have not been named as
defendants in the lawsuits, their partnership agreements include an indemnity
provision which requires them, under certain circumstances, to indemnify the
general partners against losses, judgments, expenses, and fees.
On March 16, 1998, limited partners in several partnerships sponsored by Host
Marriott, filed a lawsuit, styled Robert M. Haas, Sr. and Irwin Randolph Joint
Tenants, et al. v. Marriott International, Inc., et al., Case No. 98-CI-04092,
in the 57th Judicial District Court of Bexar County, Texas against Marriott
International, Inc. ("Marriott International"), Host Marriott, various of their
subsidiaries, J.W. Marriott, Jr., Stephen Rushmore, and Hospitality Valuation
Services, Inc. (collectively, the "Defendants"). The lawsuit relates to the
following limited partnerships: Courtyard by Marriott Limited Partnership,
Courtyard by Marriott II Limited Partnership, Marriott Residence Inn Limited
Partnership, Marriott Residence Inn II Limited Partnership, Fairfield Inn by
Marriott Limited Partnership, Desert Springs Marriott Limited Partnership, and
Atlanta Marriott Marquis Limited Partnership (collectively, the "Partnerships").
The plaintiffs allege that the Defendants conspired to sell hotels to the
Partnerships for inflated prices and that they charged the Partnerships
excessive management fees to operate the Partnerships' hotels. The plaintiffs
further allege, among other things, that the Defendants committed fraud,
breached fiduciary duties, and violated the provisions of various contracts. The
plaintiffs are seeking unspecified damages. The Defendants, which do not include
the Partnerships, believe that there is no truth to the plaintiffs' allegations
and that the lawsuit is totally devoid of merit. The Defendants intend to
vigorously defend against the claims asserted in the lawsuit. They have filed an
answer to the plaintiffs' petition and asserted a number of defenses. Although
the Partnerships have not been named as Defendants in the lawsuit, the
partnership agreements relating to the Partnerships include an indemnity
provision which requires the Partnerships, under certain circumstances, to
indemnify the general partners against losses, judgments, expenses, and fees.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits - None.
b. Reports on Form 8-K
May 8, 1998 -- In this filing, Item 5 - Other Events discloses the
announcement by Host Marriott that Host Marriott's Board of Directors has
authorized Host Marriott to reorganize its business operations to qualify
as a real estate investment trust, effective as of January 1, 1999. A
copy of the press release was included as an Item 7 - Exhibit in this
Form 8-K filing.
June 19, 1998 -- In this filing, Item 5 - Other Events discloses that the
General Partner sent the limited partners of the Partnership a letter to
inform them of the proposed reorganization of Host Marriott's business
operations to qualify as a real estate investment trust and provide them
with the estimated exchange value per Partnership unit. A copy of the
letter was included as an Item 7 - Exhibit in this Form 8-K filing.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q/A to be signed on its behalf by the
undersigned, thereunto duly authorized.
ATLANTA MARRIOTT MARQUIS II
LIMITED PARTNERSHIP
By: MARRIOTT MARQUIS CORPORATION
General Partner
October 2, 1998 By: /s/ Earla L. Stowe
------------------
Earla L. Stowe
Vice President and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS DOCUMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT 10-Q/A AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001048447
<NAME> ATLANTA MARRIOTT MARQUIS II LIMITED PARTNERSHIP
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