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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. 033-24935
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1605434
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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 (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 |X| No ____.
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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 10, 1999
and September 11, 1998 (Unaudited)...............................................................1
Condensed Consolidated Balance Sheet
September 10, 1999 (Unaudited) and December 31, 1998...............................................2
Condensed Consolidated Statement of Cash Flows
Thirty-Six Weeks ended September 10, 1999
and September 11, 1998 (Unaudited)...............................................................3
Notes to Condensed Consolidated 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.............................................7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................................10
Item 6. Exhibits and Reports on Form 8-K......................................................................10
</TABLE>
<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)
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Twelve Weeks Ended Thirty-Six Weeks Ended
September 10, September11, September 10, September 11,
1999 1998 1999 1998
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---------------- --------------- ---------------- ----------
REVENUES
Inn revenues
Suites..........................................$ 15,957 $ 16,319 $ 48,430 $ 48,442
Other........................................... 831 852 2,544 2,444
---------------- --------------- ---------------- ---------------
Total Inn revenues............................ 16,788 17,171 50,974 50,886
---------------- --------------- ---------------- ---------------
OPERATING COSTS AND EXPENSES
Inn property-level costs and expenses
Suites.......................................... 4,081 3,892 11,892 11,136
Other department costs and expenses............. 466 397 1,369 1,215
Selling, administrative and other............... 4,532 4,847 13,635 14,382
---------------- --------------- ---------------- ---------------
Total Inn property-level costs and expenses.... 9,079 9,136 26,896 26,733
Depreciation...................................... 1,623 1,677 4,939 5,020
Incentive management fee.......................... 790 830 2,365 2,485
Residence Inn system fee.......................... 638 653 1,937 1,938
Property taxes.................................... 498 512 1,609 1,542
Base management fee............................... 335 344 1,019 1,018
Equipment rent and other.......................... 241 190 869 837
---------------- --------------- ---------------- ---------------
13,204 13,342 39,634 39,573
---------------- --------------- ---------------- ---------------
OPERATING PROFIT..................................... 3,584 3,829 11,340 11,313
Interest expense.................................. (2,916) (2,949) (8,805) (8,936)
Interest income................................... 321 279 729 648
---------------- --------------- ---------------- ---------------
NET INCOME...........................................$ 989 $ 1,159 $ 3,264 $ 3,025
================ =============== ================ ===============
ALLOCATION OF NET INCOME
General Partner...................................$ 10 $ 11 $ 33 $ 30
Limited Partners.................................. 979 1,148 3,231 2,995
---------------- --------------- ---------------- ---------------
$ 989 $ 1,159 $ 3,264 $ 3,025
================ =============== ================ ===============
NET INCOME PER LIMITED
PARTNER UNIT (70,000 Units).......................$ 14 $ 17 $ 46 $ 43
================ =============== ================ ===============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
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September 10, December 31,
1999 1998
(unaudited)
ASSETS
Property and equipment, net..........................................................$ 140,462 $ 141,382
Due from Residence Inn by Marriott, Inc.............................................. 5,455 3,805
Deferred financing costs, net of accumulated amortization............................ 2,688 2,973
Property improvement funds........................................................... 2,414 --
Restricted cash...................................................................... 6,712 6,153
Cash and cash equivalents............................................................ 16,197 14,553
---------------- ---------------
$ 173,928 $ 168,866
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LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt........................................................................$ 136,488 $ 137,582
Incentive management fees due to Residence Inn by Marriott, Inc...................... 21,873 19,617
Accounts payable and accrued expenses................................................ 2,453 1,817
---------------- ---------------
Total Liabilities................................................................ 160,814 159,016
---------------- ---------------
PARTNERS' CAPITAL
General Partner...................................................................... 210 177
Limited Partners..................................................................... 12,904 9,673
---------------- ---------------
Total Partners' Capital.......................................................... 13,114 9,850
---------------- ---------------
$ 173,928 $ 168,866
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
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Thirty-Six Weeks Ended
September 10, September 11,
1999 1998
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OPERATING ACTIVITIES
Net income.......................................................................$ 3,264 $ 3,025
Noncash items.................................................................... 7,480 6,944
Change in operating accounts..................................................... (1,323) (1,026)
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Cash provided by operating activities...................................... 9,421 8,943
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INVESTING ACTIVITIES
Additions to property and equipment, net......................................... (4,019) (2,647)
Change in property improvement funds............................................. (2,414) (186)
Change in restricted cash........................................................ (250) (250)
----------------- -----------------
Cash used in investing activities.......................................... (6,683) (3,083)
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FINANCING ACTIVITIES
Repayment of mortgage debt....................................................... (1,094) (1,110)
Capital distributions to partners................................................ -- (3,535)
----------------- -----------------
Cash used in financing activities.......................................... (1,094) (4,645)
----------------- -----------------
INCREASE IN CASH AND CASH EQUIVALENTS............................................... 1,644 1,215
CASH AND CASH EQUIVALENTS at beginning of period.................................... 14,553 10,126
----------------- -----------------
CASH AND CASH EQUIVALENTS at end of period..........................................$ 16,197 $ 11,341
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest............................................$ 8,190 $ 9,335
================= =================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
The accompanying unaudited, condensed, consolidated, interim financial
statements have been prepared by Marriott Residence Inn II 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 from the accompanying statements. The Partnership
believes the disclosures made are adequate to make the information
presented not misleading. However, the unaudited, condensed, consolidated,
interim 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, 1998.
In the opinion of the Partnership, the accompanying unaudited, condensed,
consolidated, 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 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, net income of the Partnership is
allocated 99% to the limited partners and 1% to RIBM Two 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
consolidated 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 consolidated statement of operations. The
Partnership has given retroactive effect to the adoption of EITF 97-2 in
the accompanying condensed consolidated statement of operations.
Application of EITF 97-2 to the condensed consolidated 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
$9.1 million and $26.9 million and $9.1 million and $26.7 million,
respectively, and had no impact on operating profit or net income.
<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. 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. Inn revenues decreased $383,000, or 2%, to $16.8 million for the third
quarter 1999 and increased slightly by $88,000 to $51.0 million for the first
three quarters 1999 when compared to the same periods in 1998 due to the changes
in REVPAR for the periods. REVPAR, or revenue per available room, represents the
combination of the combined average suite rate charged and the combined average
occupancy achieved. REVPAR decreased 2% to $76 for the third quarter 1999 when
compared to the third quarter 1998 due to a decrease in the combined average
occupancy of two percentage points to 84% while the combined average suite rate
remained steady at $91. For the first three quarters 1999, REVPAR remained
stable at $77 when compared to the first three quarters 1998 due to a decrease
in the combined average suite rate of 1% to $91, while the combined average
occupancy increased by one percentage point to 84%.
Operating Costs and Expenses. Operating costs and expenses decreased $138,000,
or 1%, for the third quarter 1999 when compared to the same period in 1998. For
the first three quarters 1999, operating costs and expenses remained flat at
$39.6 million when compared to the same period in 1998. As a percentage of Inn
revenues, Inn operating costs and expenses were 79% and 78% for the third
quarters 1999 and 1998, respectively, and were 78% of revenues for the first
three quarters 1999 and 1998.
For the third quarter and first three quarters 1999, Inn property-level costs
and expenses decreased $57,000 and increased $163,000, respectively, when
compared to the same periods in 1998. When compared to third quarter 1998,
property-level selling, administrative and other costs for the third quarter
1999 decreased primarily because of an 8% decrease in property-level general and
administrative expenses. The overall increase for year-to-date 1999 is due to an
increase in salary and benefits as the Inns endeavor to maintain competitive
wage scales.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit decreased by $245,000, or 6%, to $3.6
million, or 21% of revenues, for the third quarter 1999 from $3.8 million, or
22% of revenues, for the third quarter 1998. Operating profit remained flat at
$11.3 million, or 22% of revenues, for the first three quarters 1999 when
compared to the first three quarters 1998.
Interest Expense. For the third quarter and first three quarters 1999, interest
expense decreased $33,000, or 1%, to $2.9 million and $131,000, or 1%, to $8.8
million when compared to the same periods in 1998 as a result of principal
amortization of the Partnership's mortgage debt.
Net Income. As a result of the items discussed above, net income decreased
$170,000, or 15%, to $1.0 million, or 6% of revenues, for the third quarter 1999
compared to net income of $1.2 million, or 7% of revenues, for the third quarter
1998. For the first three quarters 1999, net income increased $239,000, or 8%,
to $3.3 million, or 6% of revenues, compared to net income of $3.0 million, or
6% of revenues, for the first three quarters 1998, primarily due to the items
discussed above.
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 $2.5 million loan to the property
improvement fund in first quarter 1999 and increased the contribution rate in
1999 to 7% of gross Inn revenues. Based upon these actions, 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 $9.4 million for the first three
quarters 1999 compared to $8.9 million for the first three quarters 1998. The
$500,000 increase was primarily due to a decrease in incentive management fee
payments for the first three quarters 1999 when compared to the same period in
1998. During the first three quarters 1999, the Partnership funded $2.5 million
to the property improvement fund and increased the property improvement fund's
contribution rate to 7% in 1999 as discussed above. During 1999, loan repayments
on the $2.5 million loan and the additional funds contributed to the property
improvement fund as a result of the increase in the contribution rate, are
deducted from operating profit in calculating the incentive management fee
payment.
Cash used in investing activities for the first three quarters 1999 and the
first three quarters 1998 was $6.7 million and $3.1 million, respectively. The
Partnership's investing activities consist primarily of contributions to the
property improvement fund, capital expenditures for improvements to the Inns and
contributions to restricted cash reserves required under the terms of the
mortgage debt. Contributions to the property improvement fund were $6.1 million
and $2.5 million for the first three quarters 1999 and 1998, respectively, while
expenditures were $4.0 million and $2.6 million for the first three quarters
1999 and 1998, respectively. The $3.6 million increase in contributions is due
primarily to a $2.5 million loan funded by the Partnership to the property
improvement fund and an increase in the contribution rate to 7% in 1999 in order
to complete suite refurbishments at some of the Partnership's Inns. In addition,
the Partnership increased capital expenditures by $1.4 million in order to
remain competitive with new hotel properties. Capital expenditures in 1999 and
1998 include $534,000 and $279,000 paid from the Partnership's operating cash
account for owner funded projects.
Cash used in financing activities for the first three quarters 1999 and 1998 was
$1.1 million and $4.6 million, respectively. The Partnership's financing
activities consist primarily of capital distributions to partners and repayment
of mortgage debt. In the first quarter 1998, the Partnership distributed $3.5
million to the partners, which equaled $50 per limited partnership unit, from
1997 operations. No other distributions of cash were made in the first three
quarters of 1999 and 1998. Repayment of mortgage debt was $1.1 million during
the first three quarters of both 1999 and 1998.
<PAGE>
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 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 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 percent 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: 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.
<PAGE>
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
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 II
LIMITED PARTNERSHIP
By: RIBM TWO LLC
General Partner
October 25, 1999 By: /s/ Earla L. Stowe
------------------
Earla L. Stowe
Vice President
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</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-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-10-1999
<EXCHANGE-RATE> 1.00
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<DEPRECIATION> (83,449)
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<BONDS> 136,488
0
0
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