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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 10, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 033-20022
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1558094
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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
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No ____.
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Marriott Residence Inn Limited Partnership
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TABLE OF CONTENTS
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PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statement of Operations
Twelve and Thirty-Six Weeks Ended
September 10, 1999 and September 11, 1998 (Unaudited)............................................1
Condensed Balance Sheet
September 10, 1999 (Unaudited) and December 31, 1998...............................................2
Condensed Statement of Cash Flows
Thirty-Six Weeks ended September 10, 1999
and September 11, 1998 (Unaudited)...............................................................3
Notes to Condensed Financial Statements (Unaudited)..................................................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................................5
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................................10
Item 6. Exhibits and Reports on Form 8-K......................................................................11
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per Unit amounts)
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Twelve Weeks Ended Thirty-Six Weeks Ended
September 10, September 11, September 10, September 11,
1999 1998 1999 1998
---------------- --------------- ---------------- ---------------
REVENUES
Inn revenues
Suites..........................................$ 16,086 $ 16,095 $ 45,273 $ 44,965
Other........................................... 765 715 2,169 2,103
---------------- --------------- ---------------- ---------------
Total Inn revenues............................. 16,851 16,810 47,442 47,068
---------------- --------------- ---------------- ---------------
OPERATING COSTS AND EXPENSES
Inn property-level costs and expenses
Suites.......................................... 3,360 3,333 9,721 9,300
Other department costs and expenses............. 391 343 1,140 985
Selling, administrative and other............... 3,742 4,062 11,216 11,728
---------------- --------------- ---------------- ---------------
Total Inn property-level costs and expenses.... 7,493 7,738 22,077 22,013
Depreciation...................................... 1,580 1,173 4,247 3,607
Incentive management fee.......................... 456 987 2,678 2,680
Residence Inn system fee.......................... 644 644 1,811 1,799
Property taxes.................................... 438 534 1,510 1,550
Base management fee............................... 337 336 949 941
Equipment rent and other.......................... 231 220 590 786
---------------- --------------- ---------------- ---------------
11,179 11,632 33,862 33,376
---------------- --------------- ---------------- ---------------
OPERATING PROFIT..................................... 5,672 5,178 13,580 13,692
Interest expense.................................. (2,581) (2,807) (7,935) (8,641)
Interest income................................... 68 80 152 191
---------------- --------------- ---------------- ---------------
NET INCOME...........................................$ 3,159 $ 2,451 $ 5,797 $ 5,242
================ =============== ================ ===============
ALLOCATION OF NET INCOME
General Partner...................................$ 32 $ 24 $ 58 $ 52
Limited Partners.................................. 3,127 2,427 5,739 5,190
---------------- --------------- ---------------- ---------------
$ 3,159 $ 2,451 $ 5,797 $ 5,242
================ =============== ================ ===============
NET INCOME PER LIMITED PARTNER
UNIT (65,600 Units)...............................$ 47 $ 37 $ 87 $ 79
================ =============== ================ ===============
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See Notes to Condensed Financial Statements.
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MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(in thousands)
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September 10, December 31,
1999 1998
(Unaudited)
ASSETS ---------------- ---------------
Property and equipment, net.............................................................$ 138,674 $ 140,283
Due from Residence Inn by Marriott, Inc................................................. 2,722 2,041
Deferred financing costs, net of accumulated amortization............................... 1,452 1,779
Property improvement fund............................................................... 2,694 223
Cash and cash equivalents............................................................... 6,073 4,027
---------------- ---------------
$ 151,615 $ 148,353
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LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt........................................................................$ 106,846 $ 110,084
Incentive management fees due to Residence Inn by Marriott, Inc...................... 28,377 27,029
Accounts payable and accrued expenses................................................ 461 1,106
---------------- ---------------
Total Liabilities................................................................ 135,684 138,219
---------------- ---------------
PARTNERS' CAPITAL
General Partner...................................................................... 236 178
Limited Partners..................................................................... 15,695 9,956
---------------- ---------------
Total Partners' Capital.......................................................... 15,931 10,134
---------------- ---------------
$ 151,615 $ 148,353
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See Notes to Condensed Financial Statements.
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MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
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Thirty-Six Weeks Ended
September 10, September 11,
1999 1998
OPERATING ACTIVITIES ----------------- -----------------
Net income.......................................................................$ 5,797 $ 5,242
Noncash items.................................................................... 5,922 5,706
Change in operating accounts..................................................... (1,326) (1,932)
----------------- -----------------
Cash provided by operating activities........................................ 10,393 9,016
----------------- -----------------
INVESTING ACTIVITIES
Additions to property and equipment.............................................. (2,638) (2,053)
Change in property improvement fund.............................................. (2,471) (890)
----------------- -----------------
Cash used in investing activities............................................ (5,109) (2,943)
----------------- -----------------
FINANCING ACTIVITIES
Repayment on mortgage debt....................................................... (3,238) (2,515)
Capital distributions to partners................................................ - (3,313)
----------------- -----------------
Cash used in financing activities............................................ (3,238) (5,828)
----------------- -----------------
INCREASE IN CASH AND CASH EQUIVALENTS............................................... 2,046 245
CASH AND CASH EQUIVALENTS at beginning of period.................................... 4,027 5,650
----------------- -----------------
CASH AND CASH EQUIVALENTS at end of period..........................................$ 6,073 $ 5,895
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest..................................................$ 8,235 $ 8,958
================= =================
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See Notes to Condensed Financial Statements.
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MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
The accompanying unaudited, condensed, interim financial statements have
been prepared by Marriott Residence Inn Limited Partnership (the "Partnership").
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. The Partnership believes the disclosures made
are adequate to make the information presented not misleading. However, the
unaudited, condensed, interim 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, 1998.
In the opinion of the Partnership, the accompanying unaudited, condensed,
interim financial statements reflect all adjustments necessary to present fairly
the financial position of the Partnership as of September 10, 1999, the results
of operations for the twelve and thirty-six weeks ended September 10, 1999 and
September 11, 1998 and the cash flows for the thirty-six weeks ended September
10, 1999 and September 11, 1998. Interim results are not necessarily indicative
of fiscal year performance because of seasonal and short-term variations.
For financial reporting purposes, the net income of the Partnership is
allocated 99% to the limited partners and 1% to RIBM One LLC (the "General
Partner"). Significant differences exist between the net income for financial
reporting purposes and the net income for Federal income tax purposes. These
differences are due primarily to the use, for Federal income tax purposes, of
accelerated depreciation methods and shorter depreciable lives of the assets and
differences in the timing of the recognition of incentive management fee
expense.
2. Revenues
Revenues primarily represent the gross sales generated by the Partnership's
Inns. 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 considered the impact of EITF 97-2 on its condensed
financial statements and determined that EITF 97-2 requires the Partnership to
include property-level sales and operating expenses of its Inns in its condensed
statement of operations. The Partnership has given retroactive effect to the
adoption of EITF 97-2 in the accompanying condensed statement of operations.
Application of EITF 97-2 to the condensed financial statements for the twelve
and thirty-six weeks ended September 10, 1999 and September 11, 1998 increased
both revenues and operating expenses by approximately $7.5 million and $22.1
million and $7.7 million and $22.0 million, respectively, and had no impact on
operating profit or net income.
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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. Certain,
but not necessarily all, of such forward-looking statements can be identified by
the use of forward-looking terminology, such as "believes," "expects," "may,"
"will," "should," "estimates," or "anticipates," or the negative thereof or
other variations thereof or comparable terminology. All forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause our 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. Although
the Partnership believes the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, the Partnership 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
Revenues. Revenues for the twelve weeks ended September 10, 1999 were flat
compared to the same period in 1998. Suite revenues remained steady at $16.1
million for the period due to the fact that Inn revenue per available room
("REVPAR") remained steady at $90. REVPAR represents the combination of the
combined average daily suite rate charged and the combined average daily
occupancy achieved. The combined average daily suite rate for the third quarter
1999 was $103, compared to $100 for the same period in 1998, representing a 3%
increase. Combined average daily occupancy was 87% during the third quarter
1999, compared to 90% during the third quarter 1998, a three percentage point
decrease.
Partnership revenues increased $374,000, or 0.8%, to $47.4 million for the
thirty-six weeks ended September 10, 1999. This slight increase was achieved
primarily through a 1.7% increase in the combined average daily suite rate from
$97 for year-to-date 1998 to $99 for the same period in 1999. However, REVPAR
remained stable at $84 because the combined average daily occupancy decreased
one percentage point to 85% during the same time period.
Operating Costs and Expenses. Operating costs and expenses decreased
$453,000, or 4%, to $11.2 million for the twelve weeks ended September 10, 1999.
The decrease was due primarily to the $531,000, or 54%, decrease in the
incentive management fee ("IMF") and the $320,000, or 8%, decrease in
property-level selling, administrative, and other expenses, partially offset by
the $407,000, or 35%, increase in depreciation expense. The IMF earned by
Residence Inn by Marriott, Inc. (the "Manager") is calculated as 15% of
Operating Profit, as defined in the Management Agreement, in any year in which
Operating Profit is less than $23.5 million and as 20% of Operating Profit
whenever Operating Profit equals or exceeds $23.5 million. During interim
reporting periods, the percentage used to calculate IMF, 15% or 20%, is
determined based on whether or not full year Operating Profit is expected to
fall short of, or exceed, $23.5 million. The IMF was calculated as 15% of
Operating Profit for the first three quarters of 1998. IMF was calculated as 20%
of Operating Profit for the first two quarters of 1999 based upon the
expectation at June 18, 1999, that full-year Operating Profit would exceed $23.5
million. However, as of September 10, 1999, the expectation is that full year
1999 Operating Profit will fall below $23.5 million. Therefore, the IMF
calculation has been adjusted back to 15% of Operating Profit for the
year-to-date, resulting in a third quarter adjustment of $555,000 to IMF
expensed for the first two quarters of 1999. Property-level selling,
administrative and other costs for the third quarter
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decreased primarily because of a 6% decrease in property-level general and
administrative expenses. The increase in depreciation expense was due to the
$6.3 million growth in the average depreciable fixed assets balance between the
first three quarters of 1998 and 1999. As a percentage of Inn revenues, Inn
operating costs and expenses were 66% and 69% of revenues for the third quarter
1999 and 1998, respectively.
Operating costs and expenses for the thirty-six weeks ended September 10,
1999 increased $486,000, or 1.5%, to $33.9 million. The increase was due
primarily to the $640,000, or 17.7%, increase in depreciation expense as a
result of the higher average depreciable fixed assets balance in 1999 compared
to 1998. Property-level costs and expenses remained relatively stable. Suites
expense increased $421,000, or 5%, primarily as a result of a 4% increase in
wage and benefits costs. This increase was offset by the $512,000, or 4%,
decrease in property-level selling, administrative and other costs as a result
of a 6% decrease in property-level general and administrative expenses. As a
percentage of Inn revenues, Inn operating costs and expenses were 71% of
revenues for the first three quarters of 1999 and 1998.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, operating profit increased $494,000, or 10%,
to $5.7 million, or 34% of revenues for the twelve weeks ended September 10,
1999 compared to $5.2 million, or 31% of revenues for the same period in 1998.
In addition, operating profit for the year-to-date decreased $112,000, or 0.8%,
to $13.6 million from $13.7 million. Operating profit was 29% of revenues for
the first three quarters of 1999 and 1998.
Interest Expense. For the quarter and year-to-date, interest expense
decreased $226,000 and $706,000 respectively, both 8% declines, due to principal
amortization on the Partnership's mortgage debt.
Net Income. As a result of the items discussed above, net income for the
quarter increased $708,000, or 29%, to $3.2 million, or 19% of revenues.
Year-to-date net income increased $555,000, or 11%, to $5.8 million, or 12% of
revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's financing needs have been historically funded through
loan agreements with independent financial institutions. Beginning in 1998, the
Partnership's property improvement fund was insufficient to meet current needs.
The shortfall is primarily due to the need to complete total suite
refurbishments at a majority of the Partnership's Inns. To address the
shortfall, the Partnership provided a $1.5 million loan to the property
improvement fund in first quarter 1999 and increased the contribution rate in
1999 from 5% of gross Inn revenues to 5.5%. The Partnership expects to fund an
additional $1.2 million before the end of the fiscal year. The General Partner
believes that cash from Inn operations and Partnership reserves will be adequate
in the short term and is working with the Manager to address long term
operational and capital needs of the Partnership.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is cash from operations. Its
principal uses of cash are to make debt service payments, fund the property
improvement fund and to make distributions to the partners.
Cash provided by operating activities was $10.4 million for the first three
quarters 1999 compared to $9.0 million for the first three quarters 1998. The
$1.4 million increase was due to the $872,000 payment in full of the deferred
base management fees due to the Manager during the first three quarters of 1998
that did not recur in 1999, and a $555,000 increase in net income, as a result
of the items discussed in Results of Operations.
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The Partnership's cash used in investing activities primarily consists of
contributions to the property improvement fund and capital expenditures for
improvements to the Inns. Cash used in investing activities was $5.1 million and
$2.9 million for the first three quarters of 1999 and 1998, respectively.
Contributions to the property improvement fund were $4.2 million and $2.4
million for the first three quarters 1999 and 1998, respectively, while capital
expenditures were $2.6 million and $2.1 million, respectively, during these same
periods. The $1.8 million increase in contributions is due to the $1.5 million
loan funded by the Partnership to the property improvement fund and an increase
in the contribution rate from 5% of gross Inn revenues to 5.5% in order to
complete suite refurbishments at some of the Partnership's Inns. Capital
expenditures year-to-date in 1999 and 1998 include $904,000 and $536,000,
respectively, paid from the Partnership's operating cash account for owner
funded projects.
The Partnership's cash used in financing activities primarily consists of
the repayment of mortgage debt and capital distributions to partners. Cash used
in financing activities was $3.2 million and $5.8 million for the first three
quarters 1999 and 1998, respectively. Year to date 1999, the principal portion
of fixed payments on the mortgage debt increased $723,000 compared to the same
period in 1998 due to decreased interest costs as a result of the $9.2 million
reduction in the average debt principal balance. In the first quarter 1998, the
Partnership distributed $3.3 million to the partners from 1997 operations. There
were no distributions to the partners in the first three quarters of 1999.
Strategy for Liquidity
During 1999, the General Partner has worked with a major investment banking
firm to explore alternatives to provide liquidity for the partners in the
Partnership while securing the highest possible value for the limited partners.
More than 70 prospective purchasers were contacted and Partnership financial
information was made available to a number of them for their review and analysis
on a confidential basis. It is the General Partner's opinion that the offers
received do not reflect the full value of the Inns. The inability to obtain an
acceptable offer at this time is a result of slow revenue growth this year and
an expectation of moderate or low profit growth in the near future, as well as a
general over-supply in the Partnership's lodging markets and a shift of equity
and debt capital out of the lodging sector. Some industry analysts indicate that
new construction starts in the limited service segment have peaked. If this is
the case, the market should see a trend toward supply and demand growth
equilibrium. The rate of general economic growth as well as changes in specific
market conditions will be additional variables affecting this trend. The General
Partner continues to evaluate alternatives for liquidity. However, the General
Partner can make no assurances as to the outcome of these efforts.
YEAR 2000 ISSUES
Year 2000 issues have 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.
Host Marriott Corporation ("Host Marriott"), general partner of Host
Marriott L.P., which owns directly and indirectly, more than 95% of the economic
interest of the General Partner, including the 1% managing member interest, has
adopted the 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 Host Marriott has a material relationship or whose
systems are material to the operations of its hotel properties. Host Marriott's
efforts to
<PAGE>
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 it and 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 engaged a
third party to review its Year 2000 in-house readiness and found no problems
with any mission critical systems. Host Marriott believes that future costs
associated with Year 2000 issues for its in-house systems will be insignificant
and, 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. Host Marriott does, however, have the normal
disaster recovery procedures in place should it have a systems failure.
Third-Party Systems. The Partnership relies upon operational and accounting
systems provided by third parties, primarily the Manager of its Inns, 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 the
Partnership's Inns, 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. Host Marriott continues to receive verbal and
written assurances that these third parties are, or will be, Year 2000 compliant
on time. To the extent these changes impact property-level systems, the
Partnership may be required to fund capital expenditures for upgraded equipment
and software. The Partnership 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 properties. Host Marriott expects that the Manager
will incur Year 2000 costs in lieu of costs for its centralized systems related
to system projects that otherwise would have been pursued and therefore, the
overall level of centralized systems charges allocated to the Inns will not
materially increase as a result of the Year 2000 compliance effort. The
Partnership 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 Inns. 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,
the Partnership will have the right to seek recourse against the Manager under
its management agreement. The management agreement, however, 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
problem with Marriott International, Inc. ("MII"), the parent of the Manager of
the Partnership's Inns. Due to the significance of MII to the Partnership's
business, a detailed description of MII's state of readiness follows.
MII 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
<PAGE>
the scope of Year 2000 issues; (iv) Planning: defining the technical solutions
and labor and work plans necessary for each affected 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 an
internal audit team to review significant projects for adherence to quality
standards and program methodology.
MII 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 MII'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 MII'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. MII 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").
MII measures the completion of each phase based on documentation and
quantified results, weighted for System Criticality. As of September 10, 1999,
the Awareness, Inventory, Assessment and Planning phases were complete for IT
Applications, BIS, and Building Systems. For IT Applications, the
Remediation/Replacement and Testing phases were 95 percent complete. Compliance
Validation had been completed for over 90 percent of key systems, with most of
the remaining work in its final stage. For BIS and Building Systems,
Remediation/Replacement is over 95 percent complete. For BIS, Testing is
approximately 80 percent complete and Compliance Validation is in progress.
Testing is over 95% complete for Building Systems and Compliance Validation is
in progress. Implementation is approximately 85 percent complete and Quality
Assurance is 80 percent complete for IT Applications. For BIS, Implementation is
approximately 85 percent complete while Quality Assurance is in progress.
Implementation is over 95 percent complete and Quality Assurance is in progress
for Building Systems.
Year 2000 compliance communications with MII's significant third party
suppliers, vendors and business partners, including its franchisees are ongoing.
MII's efforts are focused on the connections most critical to customer service,
core business processes 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 services, and
financial institutions providing the most critical payment processing functions.
Responses have been received from a majority of the firms in this group. A
majority of these respondents have either given assurances of timely Year 2000
compliance or have identified the necessary actions to be taken by them or MII
to achieve timely Year 2000 compliance for their products. Where MII has not
received satisfactory responses it is addressing the potential risks of failure
through its contingency planning process.
MII has established a common approach for testing and addressing Year 2000
compliance issues for its managed and franchised properties. This includes
guidance for operated properties, and a Year 2000 "Toolkit" for franchisees
containing relevant Year 2000 compliance information. MII is also utilizing a
Year 2000 best-practices sharing system. MII is monitoring the progress of the
managed and franchised properties towards Year 2000 compliance.
Risks. There can be no assurances that Year 2000 remediation by Host
Marriott 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 problem, which depends on numerous uncertainties such as:
<PAGE>
whether significant third parties properly and timely address the Year 2000
issue and whether broad-based or systemic economic failures may occur. The
Partnership 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 disruption of hotel and Inn reservations made on
centralized reservations systems 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 problem 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 problem and
Host Marriott believes that the possibility of significant interruptions of
normal operations should be reduced.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership does not have significant market risk with respect to
interest rates, foreign currency exchanges or other market rate or price risks,
and the Partnership does not hold any financial instruments for trading
purposes. As of September 10, 1999, all of the Partnership's debt has a fixed
interest rate.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Partnership and the Inns 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 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., Host Marriott, various of their subsidiaries, J.W.
Marriott, Jr., Stephen Rushmore, and Hospitality Valuation Services, Inc.
(collectively, the "Defendants"). The lawsuit now relates to the following
limited partnerships: Courtyard by Marriott Limited Partnership, Marriott
Residence Inn Limited Partnership, Marriott Residence Inn II Limited
Partnership, Fairfield Inn by Marriott Limited Partnership, Host DSM Limited
Partnership (formerly known as Desert Springs Marriott Limited Partnership) and
Atlanta II Limited Partnership (formerly known as Atlanta Marriott Marquis
Limited Partnership), collectively, the "Six Partnerships". The plaintiffs
allege that the Defendants conspired to sell hotels to the Six Partnerships for
inflated prices and that they charged the Six Partnerships excessive management
fees to operate the Six 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 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 answers to the plaintiffs' petition and asserted a
number of defenses. A related case concerning Courtyard by Marriott II Limited
Partnership ("Courtyard II") filed by the plaintiffs' lawyers in the same court
involves similar allegations against the Defendants, and has been certified as a
class action. As a result of this development, Courtyard II is no longer
<PAGE>
involved in the above-referenced Haas lawsuit, Case No. 98-CI-04092. The
Courtyard II class action case is presently scheduled for trial on January 3,
2000. In March of this year, Palm Investors and Equity Resources, assignees of a
number of limited partnership units acquired through various tender offers,
filed petitions to intervene in the Haas case with respect to their units of
Courtyard by Marriott Limited Partnership ("Courtyard I"). In response to these
efforts, two of the limited partners of Courtyard I filed a class action
petition in intervention seeking to convert that portion of the Haas lawsuit
relating to Courtyard I into a class action. The court denied this motion on
April 29, 1999. Although only four of the Six Partnerships have been named as
nominal defendants in the lawsuit, the partnership agreements relating to all
Six Partnerships include an indemnity provision which requires the Six
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: A form 8-K was filed with the
Securities and Exchange Commission on September 21, 1999.
This filing, Item 5 - Other Events, discloses that on
September 15, 1999 the General Partner sent to the limited
partners of the Partnership a letter that accompanied the
Partnership's Quarterly Report on Form 10-Q. The letter
disclosed the quarterly activities of the Partnership and
informed the limited partners that Partnership financial
information was made available to prospective purchasers for
their review and analysis. 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 to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARRIOTT RESIDENCE INN
LIMITED PARTNERSHIP
By: RIBM ONE LLC
General Partner
October 25, 1999 By: /s/ Earla L. Stowe
Earla L. Stowe
Vice President
<TABLE> <S> <C>
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<LEGEND>
(Replace this text with the legend)
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<CIK> 0000829092
<NAME> MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-10-1999
<EXCHANGE-RATE> 1.00
<CASH> 6,073
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<CURRENT-ASSETS> 4,146
<PP&E> 208,599
<DEPRECIATION> (69,925)
<TOTAL-ASSETS> 151,615
<CURRENT-LIABILITIES> 28,838
<BONDS> 106,846
0
0
<COMMON> 0
<OTHER-SE> 15,931
<TOTAL-LIABILITY-AND-EQUITY> 151,615
<SALES> 0
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<CGS> 0
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<OTHER-EXPENSES> 33,710
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