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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 11, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 033-24935
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1605434
- --------------------------------- --------------------------------------
(State of Organization) (I.R.S. Employer Identification Number)
10400 Fernwood Road, Bethesda, MD 20817-1109
- --------------------------------- -------------------------------------
(Address of principal executive (Zip Code)
offices)
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 (I) 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. On August 25,
1992, the Registrant filed an application for relief from the reporting
requirements of the Securities Exchange Act of 1934 pursuant to Section 12(h)
thereof. Because of the pendency of such application, the Registrant was not
required to, and did not make, any filings pursuant to the Securities Exchange
Act of 1934 from October 23, 1989 until the application was voluntarily
withdrawn on January 16, 1998.)
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<PAGE>
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Marriott Residence Inn II Limited Partnership
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TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Operations
Twelve and Thirty-Six Weeks Ended September 11, 1998 (Unaudited)
and September 12, 1997 (Unaudited)..........................1
Condensed Consolidated Balance Sheet
September 11, 1998 (Unaudited) and December 31, 1997..........2
Condensed Consolidated Statement of Cash Flows
Twelve and Thirty-Six Weeks ended September 11, 1998
(Unaudited) and September 12, 1997 (Unaudited)................3
Notes to Condensed Consolidated Financial Statements
(Unaudited)...................................................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................11
Item 6. Exhibits and Reports on Form 8-K..................................12
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per Unit amounts)
<TABLE>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September12, September 11, September 12,
1998 1997 1998 1997
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
REVENUES (Note 3).........$ 8,035 $ 8,113 $24,153 $25,160
------------- ------------ ------------ -------------
OPERATING COSTS AND EXPENSES
Depreciation........... 1,677 1,266 5,020 4,820
Incentive management fee. 830 852 2,485 2,645
Residence Inn system fee. 653 639 1,938 1,910
Property taxes........... 512 512 1,542 1,543
Base management fee...... 344 336 1,018 1,005
Equipment rent and other. 190 193 837 936
------------ ------------ ------------ -------------
4,206 3,798 12,840 12,859
------------ ------------ ------------ -------------
OPERATING PROFIT........... 3,829 4,315 11,313 12,301
Interest expense........(2,949) (2,978) (8,936) (9,052)
Interest income......... 279 171 648 448
------------ ------------ ------------ -------------
NET INCOME...............$ 1,159 $ 1,508 $ 3,025 $ 3,697
============ ============ ============ =============
ALLOCATION OF NET INCOME
General Partner.......$ 11 $ 15 $ 30 $ 37
Limited Partners...... 1,148 1,493 2,995 3,660
------------ ------------ ------------ -------------
$ 1,159 $ 1,508 $ 3,025 $ 3,697
============ ============ ============ =============
NET INCOME PER LIMITED
PARTNER UNIT
(70,000 Units).......$ 17 $ 21 $ 43 $ 52
============ ============ ============ =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
September 11, December 31,
1998 1997
(unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net.................$ 140,752 $ 143,125
Due from Residence Inn by Marriott, Inc..... 4,271 4,057
Deferred financing costs, net............... 3,100 3,385
Property improvement fund................... 1,729 1,543
Restricted reserves......................... 6,331 5,647
Cash and cash equivalents................... 11,341 10,126
------------- --------------
$ 167,524 $ 167,883
============= ==============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt...............................$ 137,980 $ 139,090
Incentive management fee due to Residence
Inn by Marriott, Inc...................... 18,184 16,545
Accounts payable and accrued expenses....... 1,306 1,684
-------------- ---------------
Total Liabilities......................... 157,470 157,319
-------------- ---------------
PARTNERS' CAPITAL
General Partner............................. 180 185
Limited Partners............................ 9,874 10,379
-------------- ---------------
Total Partners' Capital................... 10,054 10,564
-------------- ---------------
$ 167,524 $ 167,883
============== ===============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
Thirty-Six Weeks Ended
September 11, September 12,
1998 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income..........................$ 3,025 $ 3,697
Noncash items....................... 6,944 6,143
Change in operating accounts........ (1,026) (466)
-------------- ----------------
Cash provided by operating
activities...................... 8,943 9,374
-------------- ----------------
INVESTING ACTIVITIES
Additions to property and equipment. (2,647) (4,239)
Change in restricted capital
expenditure reserves.............. (250) 460
Change in property improvement fund. (186) 797
Additional working capital advanced
to Residence Inn by Marriott, Inc. -- (900)
-------------- ----------------
Cash used in investing
activities...................... (3,083) (3,882)
-------------- -----------------
FINANCING ACTIVITIES
Capital distributions to partners... (3,535) (3,536)
Repayment of mortgage debt.......... (1,110) (546)
Change in restricted debt service
reserves.......................... -- (1,935)
-------------- ---------------
Cash used in financing
activities...................... (4,645) (6,017)
-------------- ---------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS....................... 1,215 (525)
CASH AND CASH EQUIVALENTS at beginning
of period.............................. 10,126 8,008
-------------- ---------------
CASH AND CASH EQUIVALENTS at end of
period.................................$ 11,341 $ 7,483
============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest.....$ 9,335 $ 9,421
============== ===============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed consolidated financial statements have been
prepared by Marriott Residence Inn 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 fiscal year
ended December 31, 1997.
In the opinion of the Partnership, the accompanying condensed unaudited
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position
of the Partnership as of September 11, 1998, the results of operations for
the twelve and thirty-six weeks ended September 11, 1998 and September 12,
1997 and the cash flows for the thirty-six weeks ended September 11, 1998
and September 12, 1997. Interim results are not necessarily indicative of
fiscal year performance because of seasonal and short-term variations.
For financial reporting purposes, net income of the Partnership is
allocated 99% to the limited partners and 1% to Marriott RIBM Two
Corporation (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 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. Certain reclassifications were made to prior year condensed consolidated
financial statements to conform to the 1998 presentation.
3. Revenues represent house profit of the Partnership's Inns since the
Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Inns to Residence Inn by
Marriott, Inc. (the "Manager"). House profit reflects Inn operating results
which flow to the Partnership as property owner and represents total Inn
sales less property-level expenses, excluding depreciation, Residence Inn
system, base and incentive management fees, property taxes, equipment rent
and certain other costs, which are disclosed separately in the accompanying
condensed consolidated statement of operations.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity
in its financial statements.
<PAGE>
The Partnership has considered the impact of EITF 97-2 and concluded that
it should be applied to its Inns. Accordingly, upon adoption, Inn sales and
property-level expenses will be reflected on the statement of operations.
This change in accounting principle will be adopted in the financial
statements during the fourth quarter of 1998 as of and for the year ended
December 31, 1998 with retroactive effect in prior periods to conform to
the new presentation. Application of EITF 97-2 will increase both revenues
and operating expenses by approximately $9.1 million and $8.7 million for
the twelve weeks ended September 11, 1998 and September 12, 1997,
respectively, and $26.7 million and $25.2 million for the thirty-six weeks
ended September 11, 1998, and September 12, 1997, respectively, and will
have no impact on operating profit or net income.
Revenues consist of the following Inn operating results (in thousands):
<TABLE>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September12, September 11, September 12,
1998 1997 1998 1997
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
INN SALES
Suites..............$ 16,319 $ 15,973 $ 48,442 $ 47,755
Other operating
departments....... 852 848 2,444 2,594
------------- ------------ ------------- ------------
17,171 16,821 50,886 50,349
------------- ------------ ------------- ------------
INN EXPENSES
Departmental direct costs
Suites............ 3,892 3,565 11,136 10,365
Other operating
departments..... 397 361 1,215 1,062
Other Inn operating
expenses.......... 4,847 4,782 14,382 13,762
------------- ------------ ------------- ------------
9,136 8,708 26,733 25,189
------------- ------------ ------------- ------------
REVENUES..............$ 8,035 $ 8,113 $ 24,153 $ 25,160
============= ============ ============= ============
</TABLE>
4. Host Marriott Corporation, on behalf of the General Partner, Marriott RIBM
Two Corporation, filed a preliminary Prospectus/Consent Solicitation
Statement with the Securities and Exchange Commission in December 1997,
which proposed the consolidation ("Consolidation") of this Partnership and
five other limited partnerships into a publicly traded real estate
investment trust ("REIT"). Subsequently, the General Partner reported that
existing REIT's active in the moderate price and extended-stay hotel
segment had expressed an interest in acquiring some of the hotels owned by
the six partnerships. The General Partner retained Merrill Lynch to advise
the partnerships with respect to these alternatives.
The original Consolidation plan included an initial public offering of the
REIT's common shares. The General Partner has been advised that it would be
difficult to raise the appropriate level of outside equity and that the
perceived benefits of the Consolidation are not achievable at this time.
Therefore, the General Partner is not pursuing the plan to form a new REIT.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q include forward-looking
statements and as such may involve known and unknown risks, uncertainties and
other factors which may cause the actual transactions, results, performance or
achievements to be materially different from any future transactions, results,
performance or achievements expressed or implied by such forward-looking
statements. The cautionary statements set forth in reports filed under the
Securities Act of 1934 contained important factors with respect to such
forward-looking statements, including: (i) national and local economic and
business conditions that will, among other things, affect demand for hotels and
other properties, the level of rates and occupancy that can be achieved by such
properties and the availability and terms of financing; (ii) the ability to
compete effectively; (iii) changes in travel patterns, taxes and government
regulations; (iv) governmental approvals, actions and initiatives; and (v) the
effects of tax legislative action. Although the Partnership believes the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
attained or that any deviations will not be material. The Partnership undertakes
no obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances.
RESULTS OF OPERATIONS
First Three Quarters of 1998 Compared To First Three Quarters of 1997
Revenues. REVPAR, or revenue per available room, is a commonly used indicator of
market performance for hotels (although it is not a GAAP, or generally accepted
accounting principles, measure of revenue) which represents the combination of
average daily room rate charged and the average daily occupancy achieved. REVPAR
does not include food and beverage or other ancillary revenues generated by the
properties. Inn sales increased $537,000, or 1%, to $50.9 million in the first
three quarters of 1998 when compared to the first three quarters of 1997
reflecting the improvements in REVPAR for the period. The 1% increase in REVPAR
for the first three quarters of 1998 was primarily due to an increase in
combined average room rates of 4%, while combined average occupancy decreased by
two percentage points. Partnership revenues for the first three quarters of 1998
decreased $1 million, or 4%, to $24.2 million. The decrease is primarily due to
an increase in Inn sales and REVPAR results offset by higher Inn hourly rates,
increased training costs and higher guest relations expense.
Operating Costs and Expenses. Operating costs and expenses remained stable at
$12.8 million when compared to the same period in 1997. As a percentage of
revenues, operating costs and expenses were 53% and 51% of revenues for the
first three quarters of 1998 and 1997, respectively.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit decreased by $1 million to $11.3
million, or 47% of revenues, for the first three quarters of 1998 from $12.3
million, or 49% of revenues, for the first three quarters of 1997.
Interest Expense. Interest expense decreased by 1%, or $116,000 to $8.9
million for the first three quarters of 1998 due to principal amortization on
the Partnership's debt.
<PAGE>
Net Income. Net income for the first three quarters of 1998 decreased $672,000
to $3.0 million, or 13% of revenues, compared to net income of $3.7 million, or
15% of revenues, for the first three quarters of 1997 primarily as a result of
the items discussed above.
Third Quarter 1998 Compared To Third Quarter 1997
Revenues. Inn sales increased $350,000, or 2%, to $17.2 million in the third
quarter 1998 reflecting the improvements in REVPAR for the period. REVPAR
increased 2% for the third quarter 1998 primarily due to an increase in the
combined average room rate of 3%, while average occupancy remained stable.
Partnership revenues for the third quarter 1998 decreased $78,000, or 1%, to
$8.0 million. The decrease is primarily due to increased hourly wage rates at
the Partnership's Inns and higher guest relations expense.
Operating Costs and Expenses. Operating costs and expenses increased to $4.2
million for the third quarter 1998 from $3.8 million for the third quarter 1997.
As a percentage of revenues, operating costs and expenses were 52% and 47% of
revenues for the third quarter 1998 and the third quarter 1997, respectively.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit decreased by $486,000 to $3.8
million, or 48% of revenues, for the third quarter 1998 from $4.3 million, or
53% or revenues, for the third quarter 1997.
Interest Expense. Interest expense remained stable at $2.9 million for the
third quarter 1998 as compared to the third
quarter 1997.
Net Income. Net income for the third quarter 1998 decreased $349,000 to $1.2
million, or 14% of revenues, compared to net income of $1.5 million, or 19% of
revenues, for the third quarter 1997 primarily due to the results of the items
discussed above.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have been historically funded through loan
agreements with independent financial institutions. The General Partner believes
that the Partnership will have sufficient capital resources to conduct its
operations in the ordinary course of business.
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 $8.9 million and $9.4 million for the
first three quarters of 1998 and 1997, respectively. The decrease is primarily
the result of the decrease in net income in 1998.
Cash used in investing activities for the first three quarters of 1998 and 1997
was $3.1 million and $3.9 million, respectively. The Partnership's cash
investing activities consists primarily of contributions to the property
improvement fund, capital expenditures for improvements to existing Inns and
contributions to restricted cash reserves required under the terms of the
mortgage debt. Contributions to the property improvement fund were $2.5 million
for the first three quarters of 1998 and 1997, while capital expenditures were
$2.6 million and $4.2 million for the first three quarters of 1998 and 1997,
respectively. The General Partner believes that the property improvement fund
will provide adequate funds in the short and long term to meet the Inns capital
needs.
<PAGE>
Cash used in financing activities for the first three quarters of 1998 and 1997
was $4.6 million and $6.0 million, respectively. The Partnership's cash
financing activities primarily consist of capital distributions to partners and
repayment of debt. The Partnership distributed $3.5 million to the partners,
which equaled $50 per limited partnership unit, in the first quarter of 1998
from 1997 operations. In the first quarter of 1997, the Partnership distributed
$3.5 million to the partners, which equaled $50 per limited partnership unit,
from 1996 operations. Repayment of mortgage debt was $1.1 million for the first
three quarters of 1998 compared to $546,000 for the first three quarters of
1997. The Partnership's mortgage debt required payments of interest only through
March 1997. Thereafter, it requires principal amortization based on a 25-year
amortization schedule.
The General Partner believes that cash from Inn operations and Partnership
reserves will be adequate in the short term and long term for the operational
and capital needs of the Partnership.
YEAR 2000 ISSUES
The "Year 2000 Issue" has arisen because many existing computer programs
and chip-based embedded technology systems use only the last two digits to refer
to a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous results. The following disclosure provides information
regarding the current status of the Partnership's Year 2000 compliance program.
The Partnership processes its records on computer hardware and software systems
maintained by Host Marriott Corporation ("Host Marriott"), the parent company of
the General Partner of the Partnership. Host Marriott has adopted a compliance
program because it recognizes the importance of minimizing the number and
seriousness of any disruptions that may occur as a result of the Year 2000
Issue. Host Marriott's compliance program includes an assessment of Host
Marriott's hardware and software computer systems and embedded systems, as well
as an assessment of the Year 2000 issues relating to third parties with which
the Partnership has a material relationship or whose systems are material to the
operations of the Partnership's Hotels. Host Marriott's efforts to ensure that
its computer systems are Year 2000 compliant have been segregated into two
separate phases: in-house systems and third-party systems.
In-House Systems. Host Marriott has invested in the implementation and
maintenance of accounting and reporting systems and equipment that are intended
to enable the Partnership to provide adequately for its information and
reporting needs and which are also Year 2000 compliant. Substantially all of
Host Marriott's in-house systems have already been certified as Year 2000
compliant through testing and other mechanisms and Host Marriott has not delayed
any systems projects due to the Year 2000 Issue. Host Marriott is in the process
of engaging a third party to review its Year 2000 in-house compliance. Host
Marriott believes that future costs associated with Year 2000 Issues for its
in-house systems will be insignificant and will therefore not impact the
Partnership's business, financial condition and results of operations. Host
Marriott has not developed, and does not plan to develop, a separate contingency
plan for its in-house systems due to their current Year 2000 compliance.
However, Host Marriott does have detailed contingency plans for its in-house
systems covering a variety of possible events, including natural disasters,
interruption of utility service and similar events.
Third-Party Systems. The Partnership relies upon operational and accounting
systems provided by third parties, primarily the Manager of its Hotels, to
provide the appropriate property-specific operating systems (including
reservation, phone, elevator, security, HVAC and other systems) and to provide
it with financial information. Based on discussions with the third parties that
are critical to the Partnership's business, including the Manager of its Hotels,
Host Marriott believes that these parties are in the process of studying their
systems and the systems of their respective vendors and service providers and,
in many cases, have begun to implement changes, to ensure that they are Year
2000 compliant. To the extent these changes impact property-level systems, the
Partnership may be required to fund capital expenditures for upgraded equipment
and software. Host Marriott does not expect these charges to be material, but is
committed to making these investments as required. To the extent that these
changes relate to the Manager's centralized systems (including reservations,
accounting, purchasing, inventory, personnel and other systems), the
Partnership's management agreement generally provides for these costs to be
charged to the Partnership's Hotels. Host Marriott expects that the Manager will
incur Year 2000 costs for its centralized systems in lieu of costs related to
system projects that otherwise would have been pursued and therefore, its
overall level of centralized charges allocated to the Hotels will not materially
increase as a result of the Year 2000 compliance effort. Host Marriott believes
that this deferral of certain system projects will not have a material impact on
its future results of operations, although it may delay certain productivity
enhancements at the Partnership's Hotels. Host Marriott will continue to monitor
the efforts of these third parties to become Year 2000 compliant and will take
appropriate steps to address any non-compliance issues. The Partnership believes
that in the event of material Year 2000 non-compliance caused by a breach of the
Manager's duties, the Partnership will have the right to seek recourse against
the Manager under its third party management agreement. The management agreement
generally does not specifically address the Year 2000 compliance issue.
Therefore the amount of any recovery in the event of Year 2000 non-compliance at
a property, if any, is not determinable at this time.
Host Marriott will work with the third parties to ensure that appropriate
contingency plans will be developed to address the most reasonably likely worst
case Year 2000 scenarios, which may not have been identified fully. In
particular, Host Marriott has had extensive discussions regarding the Year 2000
Issue with Marriott International, the Manager of the Hotels. Due to the
significance of Marriott International to the Partnership's business, a detailed
description of Marriott International's state of readiness follows.
Marriott International has adopted an eight-step process toward Year 2000
readiness, consisting of the following: (i) Awareness: fostering understanding
of, and commitment to, the problem and its potential risks; (ii) Inventory:
identifying and locating systems and technology components that may be affected;
(iii) Assessment: reviewing these components for Year 2000 compliance, and
assessing the scope of Year 2000 issues; (iv) Planning: defining the technical
solutions and labor and work plans necessary for each particular system; (v)
Remediation/Replacement: completing the programming to renovate or replace the
problem software or hardware; (vi) Testing and Compliance Validation: conducting
testing, followed by independent validation by a separate internal verification
team; (vii) Implementation: placing the corrected systems and technology back
into the business environment; and (viii) Quality Assurance: utilizing a
dedicated audit team to review and test significant projects for adherence to
quality standards and program methodology.
Marriott International has grouped its systems and technology into three
categories for purposes of Year 2000 compliance: (i) information resource
applications and technology (IT Applications) -- enterprise-wide systems
supported by Marriott International's centralized information technology
organization ("IR"); (ii) Business-initiated Systems ("BIS") - systems that have
been initiated by an individual business unit, and that are not supported by
Marriott International's IR organization; and (iii) Building Systems - non-IT
equipment at properties that use embedded computer chips, such as elevators,
automated room key systems and HVAC equipment. Marriott International is
prioritizing its efforts based on how severe an effect noncompliance would have
on customer service, core business processes or revenues, and whether there are
viable, non-automated fallback procedures (System Criticality).
Marriott International measures the completion of each phase based on
documented and quantified results, weighted for System Criticality. As of the
end of the 1998 third quarter, the awareness and inventory phases were complete
for IT Applications and nearly complete for BIS and Building Systems. For IT
Applications, the Assessment, Planning and Remediation/Replacement phases were
each over 80 percent complete, and Testing and Compliance Validation had been
completed for a number of key systems, with most of the remaining work in its
final stage. For BIS and Building Systems, Assessment and Planning were in the
mid- to upper-range of completion, with a substantial amount of work in process,
while the progress level for Remediation/Replacement and Testing and Compliance
Validation had not yet been documented and quantified. Quality Assurance is also
in progress for IT Applications and is scheduled to begin for BIS and Business
Systems in the near future. Marriott International's goal is to substantially
complete the Remediation/Replacement and Testing phases for its System Critical
IT Applications by the end of 1998, with 1999 reserved for unplanned
contingencies and for Compliance Validation and Quality Assurance. For System
Critical BIS and Building Systems, the same level of completion is targeted for
June 1999 and September 1999, respectively.
Marriott International has initiated Year 2000 compliance communications
with its significant third party suppliers, vendors and business partners,
including its franchisees. Marriott International is focusing its efforts on the
business interfaces most critical to its customer service and revenues,
including those third parties that support the most critical enterprise-wide IT
Applications, franchisees generating the most revenues, suppliers of the most
widely used Building Systems and BIS, the top 100 suppliers, by dollar volume,
of non-IT products, and financial institutions providing the most critical
payment processing functions. Responses have been received from a majority of
the firms in this group.
Marriott International is also establishing a common approach for testing
and addressing Year 2000 compliance issues for its managed and franchised
properties. This includes a guidance protocol for operated properties, and a
Year 2000 "Toolkit" for franchisees containing relevant Year 2000 compliance
information. Marriott International is also utilizing a Year 2000 best-practices
sharing system.
Risks. There can be no assurance that Year 2000 remediation by the Partnership
or third parties will be properly and timely completed, and failure to do so
could have a material adverse effect on the Partnership, its business and its
financial condition. The Partnership cannot predict the actual effects to it of
the Year 2000 Issue, which depends on numerous uncertainties such as: (i)
whether significant third parties properly and timely address the Year 2000
Issue; and (ii) whether broad-based or systemic economic failures may occur.
Host Marriott is also unable to predict the severity and duration of any such
failures, which could include disruptions in passenger transportation or
transportation systems generally, loss of utility and/or telecommunications
services, the loss or distortion of hotel reservations made on a centralized
reservation system and errors or failures in financial transactions or payment
processing systems such as credit cards. Due to the general uncertainty inherent
in the Year 2000 Issue and the Partnership's dependence on third parties, the
Partnership is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Partnership. Host Marriott's
Year 2000 compliance program is expected to significantly reduce the level of
uncertainty about the Year 2000 Issue and Host Marriott believes that the
possibility of significant interruptions of normal operations should be reduced.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 11, 1998, four individual limited partners in partnerships
sponsored by Host Marriott Corporation ("Host Marriott") filed a class action
lawsuit, styled Ruben, et al. v. Host Marriott Corporation, et al., Civil Action
No. 16186, in Delaware State Chancery Court against Host Marriott and the
general partners of Courtyard by Marriott Limited Partnership, Courtyard by
Marriott II Limited Partnership, Marriott Residence Inn Limited Partnership,
Marriott Residence Inn II Limited Partnership, and Fairfield Inn by Marriott
Limited Partnership (collectively, the "Five Partnerships"). The plaintiffs
allege that the proposed merger of the Five Partnerships (the "Merger") into an
umbrella partnership real estate investment trust proposed by CRF Lodging
Company, L.P. in a preliminary registration statement filed with the Securities
and Exchange Commission, dated December 22, 1997, constitutes a breach of the
fiduciary duties owed to the limited partners of the Five Partnerships by Host
Marriott and the general partners of the Five Partnerships. In addition, the
plaintiffs allege that the Merger breaches various agreements relating to the
Five Partnerships. The plaintiffs are seeking, among other things, the
following: certification of a class; injunctive relief to block consummation of
the Merger or, in the alternative, rescission of the Merger; and damages. Host
Marriott and the general partners of the Five Partnerships believe that these
allegations are totally devoid of merit and they intend to vigorously defend
against them. The defendants, in light of current conditions, have decided to
abandon their efforts to complete the initial merger at this time. Accordingly,
they intend to continue their efforts to dismiss the lawsuit.
On March 16, 1998, limited partners in several partnerships sponsored by
Host Marriott filed a lawsuit, styled Robert M. Haas, Sr. and Irwin Randolf
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
"Seven Partnerships"). The plaintiffs allege that the Defendants conspired to
sell hotels to the Seven Partnerships for inflated prices and that they charged
the Seven Partnerships excessive management fees to operate the Seven
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 Seven 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 Seven Partnerships have not been
named as Defendants in the lawsuit, the partnership agreements relating to the
Seven Partnerships include an indemnity provision which requires the Seven
Partnerships, under certain circumstances, to indemnify the general partners
against losses, expenses and fees.
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
conditions or results of operations of the Partnership.
<PAGE>
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 October 9, 1998. This filing, Item 5--Other
Events, discloses that the General Partner sent a letter
dated October 1, 1998 to inform the limited partners that
the proposed Consolidation to form a new REIT focused on
limited service hotels is no longer being pursued. In
addition, the letter informs the limited partners that, to
date, there have been no acceptable offers from third
parties to purchase the Partnership's hotels. 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 II
LIMITED PARTNERSHIP
By: MARRIOTT RIBM TWO CORPORATION
General Partner
October 26, 1998 By: /s/ Earla L. Stowe
------------------
Earla L. Stowe
Vice President and Chief
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
SCHEDULE 1
This schedule contains summary financial information extracted from the
Quarterly Report 10-Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000841283
<NAME> Marriott Residence Inn II Limited Partnership
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 9-MoS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-12-1998
<EXCHANGE-RATE> 1.00
<CASH> 11,341
<SECURITIES> 0
<RECEIVABLES> 4,271
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,160
<PP&E> 216,650
<DEPRECIATION> (75,898)
<TOTAL-ASSETS> 167,524
<CURRENT-LIABILITIES> 157,470
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 10,054
<TOTAL-LIABILITY-AND-EQUITY> 167,524
<SALES> 0
<TOTAL-REVENUES> 24,153
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,192
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,936
<INCOME-PRETAX> 3,025
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,025
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
