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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
OR
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: 033-24935
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Delaware 52-1605434
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10400 Fernwood Road
Bethesda, Maryland 20817
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 301-380-2070
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
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(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 ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ] (Not Applicable)
Documents Incorporated by Reference
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None
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Marriott Residence Inn II Limited Partnership
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PAGE NO.
PART I
Item 1. Business.....................................................................................1
Item 2. Properties...................................................................................5
Item 3. Legal Proceedings............................................................................7
Item 4. Submission of Matters to a Vote of Security Holders..........................................7
PART II
Item 5. Market For The Partnership's Limited Partnership Units
and Related Security Holder Matters..........................................................8
Item 6. Selected Financial Data......................................................................9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................................9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................14
Item 8. Financial Statements and Supplementary Data.................................................15
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure....................................................................28
PART III
Item 10. Directors and Executive Officers............................................................29
Item 11. Management Remuneration and Transactions....................................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management..............................30
Item 13. Certain Relationships and Related Transactions..............................................30
PART IV
Item 14. Exhibits, Supplemental Financial Statement Schedules, and Reports on Form 8-K...............33
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
Description of the Partnership
Marriott Residence Inn II Limited Partnership, a Delaware limited partnership
(the "Partnership"), was formed on November 23, 1988 to acquire and own 23
Marriott Residence Inn properties (the "Inns") and the land on which the Inns
are located. The Inns are located in 16 states and contain a total of 2,487
suites as of December 31, 1999. The Partnership commenced operations on December
28, 1988.
The Partnership is engaged solely in the business of owning and operating the
Inns and therefore is engaged in one industry segment. The principal offices of
the Partnership are located at 10400 Fernwood Road, Bethesda, Maryland 20817.
The Inns are operated as part of the Residence Inn by Marriott system and are
managed by Residence Inn by Marriott, Inc. (the "Manager"), a wholly-owned
subsidiary of Marriott International, Inc. ("MII"). Effective March 22, 1996,
the original management agreement was restated into two separate management
agreements. The Partnership entered into a management agreement with the Manager
for 22 of the Inns and Bossier RIBM Two LLC ("Bossier LLC") entered into a
management agreement for the Bossier City Residence Inn (collectively, the
"Restated Management Agreements"). Additionally, the Partnership, Bossier LLC,
and the Manager entered into a coordination agreement to ensure that certain
calculations for items such as fees, payments of operating profit and escrow
contributions are made on a consolidated basis for all 23 Inns. The primary
provisions are discussed in Item 13, "Certain Relationships and Related
Transactions." The Restated Management Agreements expire in 2012 with renewals
at the option of the Manager for one or more of the Inns for up to 45 years
thereafter. See Item 13 "Certain Relationships and Related Transactions."
The objective of the Residence Inn by Marriott system, including the Inns, is to
provide consistently superior lodging at a fair price with an appealing,
friendly and contemporary residential character. Residence Inn by Marriott Inns
generally have fewer guest rooms than traditional full-service hotels, in most
cases containing approximately 120 guest suites, as compared to full-service
Marriott hotels which typically contain 350 or more guest rooms.
The Inns are extended-stay hotels which cater primarily to business and family
travelers who stay more than five consecutive nights. The Inns typically have 88
to 144 studio, one bedroom, two bedroom and two-story penthouse suites. The Inns
generally are located in suburban settings throughout the United States and
feature a series of residential style buildings with landscaped walkways,
courtyards and recreational areas. Residence Inns do not have restaurants, but
offer a complimentary continental breakfast. In addition, most Residence Inns
provide a complimentary hospitality hour. Each suite contains a fully-equipped
kitchen and many suites have woodburning fireplaces.
The Partnership's financing needs have been funded through loan agreements with
independent financial institutions. See the "Debt" section below.
Organization of the Partnership
On December 28, 1988 (the "Closing Date"), 70,000 units of limited partnership
interests (the "Units") in the Partnership, representing a 99% interest in the
Partnership, were sold in a public offering. The offering price per Unit was
$1,000. The general partner contributed $707,100 for its 1% general partner
interest. The Partnership acquired 17 of the Inns on the Closing Date. The
remaining six Inns were acquired during 1989.
To facilitate the refinancing of the Partnership's mortgage debt, on March 22,
1996, as permitted by the Partnership Agreement, the Partnership transferred
ownership of the Bossier City Residence Inn to a newly formed subsidiary,
Bossier LLC, a Delaware limited liability company. The general partner of
Bossier LLC with a 1% interest is Bossier RIBM Two, Inc., a wholly owned
subsidiary of the Partnership. The remaining 99% interest in Bossier LLC is
owned by the Partnership.
On April 17, 1998, Host Marriott Corporation ("Host Marriott"), the parent of
the general partner, announced that its Board of Directors authorized the
company to reorganize its business operations to qualify as a real estate
investment trust ("REIT") to become effective as of January 1, 1999 (the "REIT
Conversion"). On December 29, 1998, Host Marriott announced that it had
completed substantially all the steps necessary to complete the REIT Conversion
and expected to qualify as a REIT under the applicable federal income tax laws
beginning January 1, 1999. Subsequent to the REIT Conversion, Host Marriott is
referred to as Host REIT. In connection with the REIT Conversion, Host REIT
contributed substantially all of its hotel assets to a newly formed partnership,
Host Marriott LP ("Host LP").
In connection with the REIT Conversion, the following steps occurred. Host
Marriott formed RIBM Two LLC, a Delaware single member limited liability
company, having three classes of member interests (Class A - 1% economic
interest, managing; Class B - 98% economic interest, non-managing; Class C - 1%
economic interest, non-managing). Prior to December 24, 1998, the sole general
partner of the Partnership was Marriott RIBM Two Corporation, a Delaware
corporation ("RIBM Two"), a wholly-owned subsidiary of Host Marriott. RIBM Two
merged into RIBM Two LLC on December 24, 1998 and RIBM Two ceased to exist. On
December 28, 1998, Host Marriott contributed its entire interest in RIBM Two LLC
to Host LP, which is owned 78% by Host REIT and 22% by outside partners. Finally
on December 30, 1998, Host LP contributed its 98% Class B interest and its 1%
Class C interest in RIBM Two LLC to Rockledge Hotel Properties, Inc.
("Rockledge"), a Delaware corporation, which is owned 95% by Host LP (economic
non-voting interest) and 5% by Host Marriott Statutory/Charitable Employee
Trust, a Delaware statutory business trust (100% of the voting interest). As a
result, the sole general partner of the Partnership is RIBM Two LLC (the
"General Partner"), with a Class A 1% managing economic interest owned by Host
LP and Class B 98% and Class C 1% non-managing economic interests owned by
Rockledge.
Debt
On March 22, 1996 (the "Refinancing Closing Date"), the General Partner was
successful in refinancing the Term Loan and the Revolving Loan with a new third
party lender. In conjunction with the refinancing, the principal amount of the
Partnership's mortgage debt was increased from $137.1 million to $140 million to
provide funds for the establishment of required reserves and to pay transaction
costs. The refinanced mortgage debt (the "Mortgage Debt") continues to be
nonrecourse to the Partnership, bears interest at a fixed rate of 8.85% based
upon actual number of days over a 360-day year for a 10-year term expiring March
10, 2006 and required payments of interest only during the first loan year
(April 1996 through March 1997) and principal amortization based upon a 25-year
amortization schedule beginning with the second loan year.
The Mortgage Debt is secured by first mortgages on 22 of the Partnership's 23
Inns, the land on which they are located, a security interest in all personal
property associated with those Inns including furniture and equipment,
inventory, contracts, and other intangibles and the Partnership's rights under
the management agreement. Although the Partnership continues to own 23 Residence
Inns, during the course of performing environmental studies at the properties,
the lender determined that the Bossier City Residence Inn did not pass certain
required thresholds to enable the property to collateralize the Mortgage Debt.
Additionally, as part of the refinancing, the Partnership was required to
deposit $500,000 into a reserve account and fund $250,000 annually through 2006
into the account to provide for any claim, investigation or litigation that may
arise from any environmental condition at the Bossier City Residence Inn. The
initial $500,000 deposit was funded by the lender. The Partnership is required
to repay the initial reserve as promptly as possible if the Partnership draws on
the deposit or by the end of the 10-year term in March 2006. Any draws upon the
account will accrue interest at the 30-day LIBOR plus 4.5 percentage points. If
the Partnership does not need to draw on the reserve account, the lender will
hold the reserve until such time as the Mortgage Debt is either repaid, or a
governmental authority determines that the statute of limitations on filing any
claims has expired or that no further remedial activities are required at the
property. Based upon the results of the environmental studies performed, the
Partnership does not expect that it will be necessary to draw on the reserve.
The balance of this reserve as of December 31, 1999 is $792,000 and is included
in the capital expenditure reserve balance of $2,041,000.
Pursuant to the terms of the Mortgage Debt, the Partnership is required to
establish with the lender a separate escrow account for payments of insurance
premiums and real estate taxes (the "Real Estate Tax and Insurance Escrow
Reserves") for each mortgaged property if the credit rating of MII is downgraded
by Standard and Poors Rating Services. The assumption of additional debt
associated with MII's acquisition of the Renaissance Hotel Group N.V. resulted
in a single downgrade of MII's long-term senior unsecured debt effective April
1, 1997. As a result, the Partnership was required to transfer $834,000 into the
Real Estate Tax and Insurance Escrow Reserves from the Manager's existing tax
and insurance reserve account. In addition, the Mortgage Debt required the
Partnership to fund an additional month's debt service of $1.2 million into the
debt service reserve account over a six-month period as a result of this
downgrade. This funding was completed in November 1997. The tax and insurance
escrow reserves and the debt service reserve are shown as restricted reserves
and the related tax and insurance liability is included with accounts payable
and accrued expenses in the accompanying consolidated balance sheet.
Additionally, the terms of the Mortgage Debt require the Partnership to
establish certain reserves including:
o $3,482,000 Debt Service Reserve - This reserve was fully funded by November
1997 and is equal to three months of debt service.
o $2,357,000 Capital Expenditure Reserve - This reserve was fully funded on
the Refinancing Closing Date. The funds will be expended for various
renewals and replacements, site improvements, Americans with Disabilities
Act of 1990 modifications and environmental remediation projects identified
during the course of the appraisals and environmental studies undertaken in
conjunction with the refinancing. As of December 31, 1999, the balance of
this reserve is $2,041,000.
Furthermore, due to the April 1, 1997 MII credit rating downgrade, as described
above, the Manager required additional working capital as follows:
o $900,000 Working Capital Reserve - This reserve was provided for from
1996 cash flow from operations. As of December 31, 1999, the balance of
this reserve was $1,131,000.
Material Contracts
Management Agreement
The primary provisions are discussed in Item 13, "Certain Relationships and
Related Transactions."
Competition
The United States lodging industry generally is comprised of two broad segments:
full service hotels and limited service hotels. Full service hotels generally
offer restaurant and lounge facilities and meeting spaces, as well as a wide
range of services, typically including bell service and room service. Limited
service hotels generally offer accommodations with limited or no services and
amenities. As extended-stay hotels, the Inns compete effectively with both full
service and limited service hotels in their respective markets by providing
streamlined services and amenities exceeding those provided by typical limited
service hotels at prices that are significantly lower than those available at
full service hotels.
The lodging industry in general, and the extended-stay segment in particular, is
highly competitive, but the degree of competition varies from location to
location. The Inns compete with several other major lodging brands. Competition
in the industry is based primarily on the level of service, quality of
accommodations, convenience of locations and room rates. The following are key
participants in the extended stay segment of the lodging industry: Residence
Inn, Homewood Suites by Hilton, Hawthorne Suites, Summerfield Suites, Extended
Stay America and AmeriSuites.
Conflicts of Interest
Because Host LP, the managing member of the General Partner, MII and their
affiliates own and/or operate hotels other than the Partnership's Inns and MII
and its affiliates license others to operate hotels under the various brand
names owned by MII and its affiliates, potential conflicts of interest exist.
With respect to these potential conflicts of interest, Host LP, MII and their
affiliates retain a free right to compete with the Partnership's Inns, including
the right to develop, own, and operate competing hotels now and in the future in
markets in which the Inns are located, in addition to those existing hotels
which may currently compete directly or indirectly with the Inns.
Under Delaware law, the General Partner has a fiduciary duty to the Partnership
and is required to exercise good faith and loyalty in all its dealings with
respect to Partnership affairs.
Policies with Respect to Conflicts of Interest
It is the policy of the General Partner that the Partnership's relationship with
the General Partner, any affiliate of the General Partner, or persons employed
by the General Partner or its affiliates be conducted on terms that are fair to
the Partnership and that are commercially reasonable. Agreements and
relationships involving the General Partner or its affiliates and the
Partnership are on terms consistent with the terms on which the General Partner
or its affiliates have dealt with unrelated parties.
The Amended and Restated Agreement of Limited Partnership, as amended (the
"Partnership Agreement"), provides that any agreements, contracts or
arrangements between the Partnership and the General Partner or any of its
affiliates, except for rendering legal, tax, accounting, financial, engineering,
and procurement services to the Partnership by employees of the General Partner
or its affiliates, will be on commercially reasonable terms and will be subject
to the following additional conditions:
(i) the General Partner or any such affiliate must have the ability to render
such services or to sell or lease such goods;
(ii) such agreements, contracts or arrangements must be fair to the
Partnership and reflect commercially reasonable terms and must be
embodied in a written contract which precisely describes the subject
matter thereof and all compensation to be paid therefor;
(iii) no rebates or give-ups may be received by the General Partner or any such
affiliate, nor may the General Partner or any such affiliate participate
in any reciprocal business arrangements which would have the effect of
circumventing any of the provisions of the Partnership Agreement; and
(iv) no such agreement, contract or arrangement as to which the limited
partners had previously given approval may be amended in such a manner as
to increase the fees or other compensation payable by the Partnership to
the General Partner or any of its affiliates or to decrease the
responsibilities or duties of the General Partner or any such affiliate
in the absence of the consent of the holders of a majority in interest of
the limited partners.
Employees
Neither the General Partner nor the Partnership has any employees. Host LP
provides the services of certain employees (including the General Partner's
executive officers) of Host LP to the Partnership and the General Partner. The
Partnership and the General Partner anticipate that each of the executive
officers of the General Partner will generally devote a sufficient portion of
his or her time to the business of the Partnership. However, each of such
executive officers also will devote a significant portion of his or her time to
the business of Host LP and its other affiliates. No officer or director of the
General Partner or employee of Host LP devotes a significant percentage of time
to Partnership matters. To the extent that any officer, director or employee
does devote time to the Partnership, the General Partner or Host LP, as
applicable, is entitled to reimbursement for the cost of providing such
services. See Item 11, "Management Remuneration and Transactions" for
information regarding payments made to Host LP or its subsidiaries for the cost
of providing administrative services to the Partnership.
ITEM 2. PROPERTIES
Introduction
The properties consist of 23 Residence Inn by Marriott Inns as of December 31,
1999. The Inns range in age between 10 and 16 years. The Inns are geographically
diversified among 16 states, and no state has more than four Inns.
The extended-stay segment of the lodging industry continued to experience
increased competition throughout 1999 as new extended-stay competitors entered
the market. This trend is expected to continue in 2000. In response to this
increased competition, Residence Inn by Marriott's strategy is to differentiate
the brand on the basis of superior service offerings and delivery. See Item 1,
"Business--Competition."
<PAGE>
Name and Location of Partnership Inns
<TABLE>
<S> <C> <C>
Inn Number of Suites Date Opened
- ------------------------------------ ------------------------- -------------------
Alabama
Birmingham 128 1986
California
Arcadia 120 1989
Irvine 112 1989
Placentia 112 1988
Florida
Boca Raton 120 1988
Jacksonville 112 1986
Pensacola 64 1985
St. Petersburg 88 1986
Illinois
Chicago-Deerfield 128 1989
Louisiana
Shreveport-Bossier City 72 1983
Massachusetts
Boston-Danvers 96 1989
Michigan
Kalamazoo 83 1989
Missouri
Jackson 120 1986
Nevada
Las Vegas 192 1989
New Mexico
Santa Fe 120 1986
North Carolina
Charlotte North 91 1988
Greensboro 128 1987
Ohio
Akron 112 1987
Pennsylvania
Valley Forge 88 1988
South Carolina
Columbia 128 1988
Spartanburg 88 1985
Tennessee
Memphis 105 1986
Texas
Lubbock 80 1986
-------------------------
TOTAL SUITES 2,487
=========================
</TABLE>
<PAGE>
ITEM 3. 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. ("MII"), 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. 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.
On March 9, 2000, the Defendants entered into a settlement agreement with
counsel to the plaintiffs to resolve the Haas and Courtyard II litigation. The
settlement is subject to numerous conditions, including participation
thresholds, court approval and various consents. Under the terms of the
settlement, the limited partners of the Partnership who elect to participate
would be paid $228.38 per Unit ($15,986,600 in the aggregate, if the holders of
all Units participate) in exchange for dismissal of the litigation and a
complete release of all claims. This amount would be reduced by the amount of
attorneys' fees awarded by the court. In addition to this cash payment, the
Manager would waive $22,693,000 of deferred incentive management fees. Limited
partners who opt out of the settlement would receive no payment but would retain
their individual claims against the Defendants. The Defendants may terminate the
settlement if the holders of more than 10% of the Partnership's 70,000 limited
partner Units choose not to participate, if the holders of more than 10% of the
limited partner units in any one of the other partnerships involved in the
litigation choose not to participate or if certain other conditions are not
satisfied. The Manager will continue to manage the Partnership's Inns under
long-term agreements. The details of the settlement will be contained in a
court-approved notice to the Partnership's limited partners.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP UNITS AND
RELATED SECURITY HOLDER MATTERS
There is currently no established public trading market for the Units and it is
not anticipated that a public market for the Units will develop. Transfers of
Units are limited to the first date of each accounting quarter. All transfers
are subject to approval by the General Partner. As of December 31, 1999, there
were 3,586 holders of record of the Partnership's 70,000 Units.
The Partnership generally distributes cash available for distribution as
follows: (i) first, 99% to the limited partners and 1% to the General Partner,
until the partners have received, with respect to such year, an amount equal to
10% of their Net Capital Investment, defined as the excess of original capital
contributions over cumulative distributions of net refinancing and sales
proceeds ("Capital Receipts"); and (ii) second, remaining cash available for
distribution will be distributed as follows, depending on the amount of Capital
Receipts previously distributed:
(a) 99% to the limited partners and 1% to the General Partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts of less than 50% of their original capital contributions; or
(b) 90% to the limited partners and 10% to the General Partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to or greater than 50% but less than 100% of their
original capital contributions; or
(c) 75% to the limited partners and 25% to the General Partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to 100% or more of their original capital contributions.
Cash available for distribution means, with respect to any fiscal period, the
cash revenues of the Partnership from all sources during the fiscal period,
other than Capital Receipts, less (i) all cash expenditures of the Partnership
during such fiscal period, including, without limitation, debt service,
repayment of advances made by the General Partner, any fees for management
services and administrative expenses, but excluding expenditures incurred by the
Partnership in connection with a transaction resulting in Capital Receipts, and
(ii) such reserves as may be determined by the General Partner, in its
reasonable discretion to be necessary to provide for the foreseeable cash needs
of the Partnership or for the maintenance, repair, or restoration of the Inns.
As of December 31, 1999, the Partnership has distributed a total of $46,101,000
to the partners ($652 per limited partner unit) since inception. There was no
distribution made in 1999, and in 1998, $3,536,000 ($50 per limited partner
unit) was distributed from 1997 cash flow from operations. No distributions of
Capital Receipts have been made since inception.
For future cash distributions, see "Capital Resources and Liquidity" under Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents historical operating information
for the Partnership for each of the five years in the period ended December 31,
1999 presented in accordance with accounting principles generally accepted in
the United States:
<TABLE>
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -------
(in thousands, except per unit amounts)
Income Statement Data:
Revenues...........................................$ 71,957 $ 71,658 $ 71,039 $ 69,644 $ 66,865
Operating Profit................................... 13,476 14,679 17,147 15,419 15,141
Net income......................................... 1,946 2,822 4,894 2,663 1,603
Net income
per limited partner unit (70,000 Units)......... 28 40 69 38 23
Balance Sheet Data:
Total assets.......................................$ 172,669 $ 168,866 $ 167,883 $ 165,510 $ 165,362
Total liabilities.................................. 160,873 159,016 157,319 156,305 158,820
Cash distributions
per limited partner unit (70,000 Units)......... -- 50 50 -- 70
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-K 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 affect, among other things, demand for products and services at the
Inns and other properties, the level of suite and room rates and occupancy that
can be achieved by such properties and the availability and terms of financing;
(ii) the ability to compete effectively in areas such as access, location,
quality of accommodations and suite and room rate structures; (iii) changes in
travel patterns, taxes and government regulations which influence or determine
wages, prices, construction procedures and costs; (iv) governmental approvals,
actions and initiatives, including the need for compliance with environmental
and safety requirements, and changes in laws and regulations or the
interpretation thereof; 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.
GENERAL
During the period from 1997 through 1999, Partnership revenues grew from $71.0
million to $72.0 million. Growth in suite sales, and thus revenues, is primarily
a function of combined average daily occupancy and combined average daily suite
rates. During the period from 1997 through 1999, the Inns' combined average
daily suite rate increased approximately $2 from $89 to $91, while the combined
average daily occupancy decreased from 83.6% to 82.5%.
With the exception of variable payments due to the Manager, the partnership's
operating costs and expenses are, to a great extent, fixed. Therefore, the
Partnership derives substantial operating leverage from increases in revenue.
The variable expenses, include (i) base and Residence Inn system management fees
under the Restated Management Agreements, which are 2% of gross Inn revenues,
and 4% of suite revenues, respectively, and (ii) incentive management fees under
the Restated Management Agreements equal to 15% of operating profit, as defined,
payable out of 50% of available cash flow, as defined.
RESULTS OF OPERATIONS
The following table shows selected combined operating and financial statistics
for the Inns. Revenue per available room ("REVPAR") is a commonly used indicator
of market performance for hotels which represents the combination of average
daily suite rate charged and the average daily occupancy achieved.
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
---------------------------------
1999 1998 1997
----------- ----------- -------
Combined average daily occupancy......................................... 82.5% 83.1% 83.6%
Combined average daily suite rate........................................$ 91.37 $ 90.93 $ 89.08
REVPAR...................................................................$ 75.38 $ 75.56 $ 74.47
</TABLE>
1999 Compared to 1998:
Revenues. Total 1999 Inn revenues of $72.0 million represented a $299,000, or
0.4%, increase over 1998 results. The flat results were primarily due to a
stable Inn REVPAR. REVPAR does not include other ancillary revenues generated by
the Inns. The slight increase in the average daily suite rate in 1999 from 1998
was offset by the 1% decrease in the average daily occupancy of 83.1% in 1998 to
82.5% in 1999. As a result, REVPAR approximated $75 for both 1999 and 1998.
Combined average suite sales remained virtually unchanged at $68 million in both
1999 and 1998.
Operating Costs and Expenses. Operating costs and expenses increased $1.5
million, or 2.6%, to $58.5 million in 1999 from $57.0 million in 1998 primarily
due to a $1.1 million, or 6.7%, increase in suite property-level costs and
expenses and a $329,000, or 1.6%, decrease in selling, administrative and other
expenses. The overall increase in Inn property-level costs and expenses is due
to an increase in salary and benefits as the Inns endeavor to maintain
competitive wage scales. As a percentage of Inn revenues, operating costs and
expenses represented 81% of revenues for 1999 and 80% in 1998.
Operating Profit. The small increase in revenues offset by the increase in
operating costs and expenses discussed above, resulted in a decrease in
operating profit. Operating profit decreased $1.2 million, or 8.2%, to $13.5
million, or 19% of revenues, in 1999 from $14.7 million, or 20% of revenues in
1998.
Interest Expense. Interest expense decreased $142,000, or 1.1%, to $12.7
million primarily due to principal payments of $1.6 million on the Mortgage
Debt.
Net Income. Net income decreased $875,000, or 31.0%, to $1.9 million, or 3% of
revenues, in 1999 from $2.8 million, or 4% of revenues, in 1998 due primarily to
increased hotel operating costs.
1998 Compared to 1997:
Revenues. Total 1998 Inn revenues of $71.7 million represented a $700,000, or
1%, increase over 1997 results. This increase was achieved primarily through an
increase in Inn REVPAR. REVPAR increased $1 in 1998 as a result of a $2 increase
in the average daily suite rate from $89 in 1997 to $91 in 1998 offset by a
one-half percentage point decrease in the combined average occupancy to
approximately 83.1%. As a result, 1998 combined average suite sales increased by
$800,000, or 1.2%, to $68.2 million from $67.4 million in 1997.
Operating Costs and Expenses. Operating costs and expenses increased $3.1
million, or 5.8%, to $57.0 million in 1998 from $53.9 million in 1997 primarily
due to a $1.8 million, or 9.4%, increase in selling, administrative and other
property-level costs and expenses and a $1.0 million, or 6.8%, increase in suite
property-level costs and expenses. As a percentage of Inn revenues, operating
costs and expenses represented 80% of revenues for 1998 and 76% in 1997.
Operating Profit. The increase in revenues offset by the increase in operating
costs and expenses discussed above, resulted in a decrease in operating profit.
Operating profit decreased $2.4 million, or 14.0%, to $14.7 million, or 20% of
revenues, in 1998 from $17.1 million, or 24% of revenues in 1997.
Interest Expense. Interest expense decreased $100,000, or 1%, to $12.8
million primarily due to principal payments of $1.5 million on the Mortgage
Debt.
Net Income. Net income decreased $2.1 million, or 42.3%, to $2.8 million, or 4%
of revenues, in 1998 from $4.9 million, or 7% of total revenues, in 1997 due
primarily to increased hotel operating costs as a result of increased revenues.
CAPITAL RESOURCES AND LIQUIDITY
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. These refurbishments are
part of the routine capital expenditure cycle for maintaining Inns that are 10
to 16 years old. 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.
In light of the increased competition in the extended-stay market described
above, the Manager has also proposed additional improvements that are intended
to enhance the overall value and competitiveness of the Inns. These proposed
improvements include design, structural and technological improvements to
modernize and enhance the functionality and appeal of the Inns. Based upon
information provided by the Manager, approximately $56 million may be required
over the next five years for the routine renovations and all of the proposed
additional improvements. Based on the anticipated capital expenditure needs of
the Inns over the next few years, it appears unlikely that cash distributions
will be possible for 2000 and 2001.
Pursuant to the modification to the Restated Management Agreements, the Manager
decreased the contribution rate to 5% of gross Inn revenues commencing January
1, 2000. However, the Partnership will fund an additional $1.6 million loan to
the property improvement fund in first quarter 2000 to aid in the current
shortfall estimate for 1999.
The General Partner believes that cash from Inn operations and Partnership
reserves will be sufficient to make the required debt service payments and to
fund a portion of the capital expenditures at the Inns. The General Partner is
reviewing the Manager's proposed Inn renovations and improvements to identify
those projects that have the greatest value to 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 limited partners.
Cash provided by operating activities was $14.4 million, $14.1 million and $12.5
million in 1999, 1998 and 1997, respectively. The $300,000 increase in cash from
operations in 1999 from 1998 was primarily due to a decrease in the amount paid
for administrative charges during 1999 as a result of the deferral of some
administrative payments until 2000. The $1.6 million increase in cash from
operations in 1998 from 1997 was primarily due to the deferral of approximately
$3.1 million of incentive management fees.
Cash used in investing activities was $8.2 million, $4.6 million and $4.4
million in 1999, 1998 and 1997, 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 $7.5 million, $4.3 million
and $3.5 million for the years ended December 31, 1999, 1998 and 1997,
respectively, while expenditures were $7.5 million, $5.9 million and $5.8
million, respectively, during the same time period. The $3.2 million increase in
contributions in 1999 from 1998 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 in 1999 from 1998 by $1.6 million in order to remain competitive
with new hotel properties. Capital expenditures in 1999, 1998 and 1997 include
$534,000, $279,000 and $534,000, respectively, paid from the Partnership's
operating cash account for owner funded projects.
Cash used in financing activities was $1.6 million, $5.0 million and $6.0
million in 1999, 1998 and 1997, respectively. The Partnership's financing
activities are intended to consist primarily of capital distributions to
partners and repayment of mortgage debt. There were no cash distributions made
in 1999. In first quarter 1998 and in 1997, the Partnership distributed a total
of $3.5 million to the partners, which equaled $50 per limited partnership unit,
from 1997 and 1996 operations, respectively. Repayment of mortgage debt was $1.6
million, $1.5 million and $910,000 for 1999, 1998 and 1997, respectively.
Debt
On March 22, 1996, the General Partner was successful in refinancing the Term
Loan and the Revolving Loan with a new third party lender.
To facilitate the refinancing of the Partnership's mortgage debt, on March 22,
1996, as permitted by the Partnership Agreement, the Partnership transferred
ownership of the Bossier City Residence Inn to Bossier LLC. The general partner
of Bossier LLC with a 1% interest is Bossier RIBM Two, Inc., a wholly owned
subsidiary of the Partnership. The remaining 99% interest in Bossier LLC is
owned by the Partnership.
In conjunction with the refinancing, the principal amount of the Partnership's
Mortgage Debt was increased from $137.1 million to $140 million, bears interest
at a fixed rate of 8.85% and matures on March 10, 2006.
The Mortgage Debt is secured by first mortgages on 22 of the Partnership's 23
Inns, the land on which they are located, a security interest in all personal
property associated with those Inns including furniture and equipment,
inventory, contracts and other intangibles and the Partnership's rights under
the management agreement. Although the Partnership continues to own 23 Residence
Inns, during the course of performing environmental studies at the properties,
the lender determined that the Bossier City Residence Inn did not pass certain
required thresholds to enable the property to collateralize the Mortgage Debt.
Additionally, as part of the refinancing, the Partnership was required to
deposit $500,000 into a reserve account and fund $250,000 annually through 2006
into the account to provide for any claim, investigation, or litigation that may
arise from any environmental condition at the Bossier City Residence Inn. The
balance of this reserve was $792,000 as of December 31, 1999. The initial
$500,000 deposit was funded by the lender. The Partnership is required to repay
the initial reserve as promptly as possible if the Partnership draws on the
deposit or by the end of the 10-year term in March 2006. Any draws upon the
account will accrue interest at the 30-day LIBOR plus 4.5 percentage points. If
the Partnership does not need to draw on the reserve account, the lender will
hold the reserve until such time as the Mortgage Debt is either repaid, or a
governmental authority determines that the statute of limitations on filing any
claims has expired or that no further remedial activities are required at the
property. Based upon the results of the environmental studies performed, the
Partnership does not expect that it will be necessary to draw on the reserve.
Property Improvement Fund
The Restated Management Agreements and the prior Management Agreement provide
for the establishment of a property improvement fund for the Inns. During 1997,
contributions to the property improvement fund were 5% of gross Inn revenues. On
October 9, 1998, the Restated Management Agreements were modified to increase
the contribution rate to the property improvement fund to 6% and 7% of gross Inn
revenues in 1998 and 1999, respectively, to aid in the furniture, fixtures and
equipment reserve shortfall discussed below. Pursuant to the modification to the
Restated Management Agreements, the Manager decreased the contribution rate to
5% of gross Inn revenues commencing January 1, 2000. Total contributions to the
property improvement fund for the years ended December 31, 1999, 1998 and 1997
were $7,535,000, $4,282,000 and $3,547,000, respectively. The 1999 contribution
includes a $2.5 million loan to the property improvement fund as described
below.
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 the majority of the Partnership's Inns. To address
the 1998 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. To aid in the current shortfall estimate for
1999, a $1.6 million loan was funded from the Partnership to the property
improvement fund in first quarter 2000.
Deferred Management Fees
To facilitate the refinancing, effective March 22, 1996, the original management
agreement was restated into two separate management agreements. The Partnership
entered into a management agreement with the Manager for 22 of the Inns which
the Partnership directly owns and Bossier LLC entered into a management
agreement for the Bossier City Residence Inn, which Bossier LLC owns
(collectively, the "Restated Management Agreements"). Additionally, the
Partnership, Bossier LLC and the Manager entered into a Coordination Agreement
to ensure certain calculations for items such as fees, payments of operating
profit and escrow contributions are made on a consolidated basis for all 23
Inns.
The Manager earns a base management fee equal to 2% of the Inns' gross revenues.
Through 1991, payment of the base management fee was subordinate to qualifying
debt service payments, a provision for Partnership administrative expenses and
retention by the Partnership of annual cash flow from operations of $7,071,000.
Deferred base management fees are payable in the future from operating cash
flow, as defined. Beginning in 1992 and thereafter, base management fees are
paid currently.
In addition, the Manager is entitled to an incentive management fee equal to 15%
of operating profit, as defined (23.5% in any year in which operating profit is
equal to or greater than $25.3 million; however, cumulative incentive management
fees cannot exceed 20% of cumulative operating profit). The incentive management
fee is payable out of 50% of cash flow from operations remaining after payment
of debt service, provision for Partnership administrative expenses, payment of
the base management fee, payment of deferred base management fees and retention
by the Partnership of annual cash flow from operations of $7,071,000. After the
Partnership has retained an additional 5% return, the incentive management fee
is payable out of 75% of the remaining cash flow from operations. Through 1991,
the Manager was not entitled to accrue any unpaid incentive management fees.
Incentive management fees earned after 1991 are payable in the future from
operating cash flow, as defined. Incentive management fees of $3,090,000,
$3,257,000 and $3,641,000 were earned during 1999, 1998 and 1997, respectively.
Incentive management fees of $14,000, $185,000 and $1,706,000 were paid during
1999, 1998 and 1997, respectively. Accrued deferred incentive management fees
were $22,693,000 and $19,617,000, as of December 31, 1999 and 1998,
respectively. If the litigation settlement agreement referred to in Item 3,
"Legal Proceedings," is consummated, $22,693,000 of these fees will be waived by
the Manager.
Competition
Residence Inn by Marriott continues to be highly competitive and report stable
system-wide operating results when compared to the prior year due to successful
marketing efforts and a continued guest commitment. 1999 has been a challenge as
extended-stay hotel competitors continue to increase their presence in the
market. In response, during 1999 the Manager continued to heighten its efforts
to become the pre-eminent leader in this hospitality category, focusing on
customers that prefer a quality residential experience. The Manager is
continuing to monitor the introduction and growth of new extended-stay brands
including Homewood Suites by Hilton, Hawthorne Suites, Summerfield Suites,
Extended Stay America and AmeriSuites. In addition, a renewed focus will be
placed on strengthening each Inn's sales efforts in order to solidify the
existing relationships with current clients and to establish new ones.
Inflation
The rate of inflation has been relatively low in the past four years. The
Manager is generally able to pass through increased costs to customers through
higher suite rates and prices. In 1999, the average suite rates of Residence
Inns kept pace with inflationary costs.
Seasonality
Demand, and thus room occupancy, is affected by normally recurring seasonal
patterns. For most of the Inns, demand is higher in the spring and summer months
(March through October) than during the remainder of the year.
ITEM 7A. 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
December 31, 1999, all of the Partnership's debt has a fixed interest rate.
<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<S> <C>
Index Page
Residence Inn by Marriott II Limited Partnership Consolidated Financial Statements:
Report of Independent Public Accountants............................................................. 16
Consolidated Statement of Operations................................................................. 17
Consolidated Balance Sheet........................................................................... 18
Consolidated Statement of Changes in Partners' Capital............................................... 19
Consolidated Statement of Cash Flows................................................................. 20
Notes to Consolidated Financial Statements........................................................... 21
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheet of Marriott
Residence Inn II Limited Partnership (a Delaware limited partnership) and
subsidiary, as of December 31, 1999 and 1998, and the related consolidated
statements of operations, changes in partners' capital and cash flows for the
three years ended December 31, 1999. These financial statements and the schedule
referred to below are the responsibility of the General Partner's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Marriott Residence
Inn II Limited Partnership and subsidiary as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for the three years ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at Item
14(a)(2) is presented for purposes of complying with The Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Vienna, Virginia
March 17, 2000
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
Marriott Residence Inn II Limited Partnership and Subsidiary
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands, except per Unit amounts)
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
---------- ----------- --------
REVENUES
Inn revenues
Suites.....................................................................$ 68,360 $ 68,216 $ 67,397
Other...................................................................... 3,597 3,442 3,642
---------- ----------- -----------
Total Inn revenues....................................................... 71,957 71,658 71,039
---------- ----------- -----------
OPERATING COSTS AND EXPENSES
Inn property-level costs and expenses
Suites..................................................................... 17,213 16,135 15,102
Other department costs and expenses........................................ 1,910 1,725 1,517
Selling, administrative and other.......................................... 20,380 20,709 18,938
---------- ----------- -----------
Total Inn property-level costs and expenses.............................. 39,503 38,569 35,557
Depreciation................................................................. 8,120 7,650 7,493
Incentive management fee..................................................... 3,090 3,257 3,641
Residence Inn system fee..................................................... 2,734 2,729 2,696
Property taxes............................................................... 2,270 2,243 2,111
Base management fee.......................................................... 1,439 1,433 1,419
Equipment rent and other..................................................... 1,325 1,098 975
---------- ----------- -----------
58,481 56,979 53,892
---------- ----------- -----------
OPERATING PROFIT................................................................ 13,476 14,679 17,147
Interest expense............................................................. (12,681) (12,823) (12,945)
Interest income.............................................................. 1,151 966 692
---------- ----------- -----------
NET INCOME......................................................................$ 1,946 $ 2,822 $ 4,894
========== =========== ===========
ALLOCATION OF NET INCOME
General Partner..............................................................$ 19 $ 28 $ 49
Limited Partners............................................................. 1,927 2,794 4,845
---------- ----------- -----------
$ 1,946 $ 2,822 $ 4,894
========== =========== ===========
NET INCOME PER LIMITED PARTNER UNIT
(70,000 Units)...............................................................$ 28 $ 40 $ 69
========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEET
Marriott Residence Inn II Limited Partnership and Subsidiary
December 31, 1999 and 1998
(in thousands)
<TABLE>
<S> <C> <C>
1999 1998
------------- ---------
ASSETS
Property and equipment, net...............................................................$ 140,524 $ 141,382
Due from Residence Inn by Marriott, Inc................................................... 3,424 3,805
Deferred financing costs, net of accumulated amortization................................. 2,562 2,973
Property improvement fund................................................................. 466 --
Restricted cash reserves.................................................................. 6,654 6,153
Cash and cash equivalents................................................................. 19,039 14,553
------------- -------------
$ 172,669 $ 168,866
============= =============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt...........................................................................$ 135,933 $ 137,582
Incentive management fee due to Residence Inn by Marriott, Inc.......................... 22,693 19,617
Accounts payable and accrued expenses................................................... 2,247 1,817
------------- -------------
Total Liabilities................................................................. 160,873 159,016
------------- -------------
PARTNERS' CAPITAL
General Partner
Capital contribution.................................................................. 707 707
Capital distributions................................................................. (461) (461)
Cumulative net losses................................................................. (50) (69)
------------- -------------
196 177
------------- -------------
Limited Partners
Capital contributions, net of offering costs of $7,845................................ 62,155 62,155
Capital distributions................................................................. (45,640) (45,640)
Cumulative net losses................................................................. (4,915) (6,842)
------------- -------------
11,600 9,673
------------- -------------
Total Partners' Capital........................................................... 11,796 9,850
------------- -------------
$ 172,669 $ 168,866
============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
Marriott Residence Inn II Limited Partnership and Subsidiary
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<S> <C> <C> <C>
General Limited
Partner Partners Total
------------- ------------- -------------
Balance, December 31, 1996.................................................$ 171 $ 9,034 $ 9,205
Capital distribution.................................................. (35) (3,500) (3,535)
Net income............................................................ 49 4,845 4,894
------------- ------------- -------------
Balance, December 31, 1997................................................. 185 10,379 10,564
Capital distribution.................................................. (36) (3,500) (3,536)
Net income............................................................ 28 2,794 2,822
------------- ------------- -------------
Balance, December 31, 1998................................................. 177 9,673 9,850
Net income............................................................ 19 1,927 1,946
------------- ------------- -------------
Balance, December 31, 1999.................................................$ 196 $ 11,600 $ 11,796
============= ============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Marriott Residence Inn II Limited Partnership and Subsidiary
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
----------- ----------- -----------
OPERATING ACTIVITIES
Net income.....................................................................$ 1,946 $ 2,822 $ 4,894
Noncash items:
Depreciation................................................................. 8,120 7,650 7,493
Deferred incentive management fee............................................ 3,076 3,072 1,935
Amortization of deferred financing costs as interest......................... 411 412 412
Loss on dispositions of property and equipment............................... 125 -- --
Change in operating accounts:
Due from Residence Inn by Marriott, Inc...................................... 522 252 (1,585)
Accounts payable and accrued expenses........................................ 179 (123) (635)
----------- ----------- -----------
Cash provided by operations.............................................. 14,379 14,085 12,514
----------- ----------- -----------
INVESTING ACTIVITIES
Additions to property and equipment, net....................................... (7,387) (5,907) (5,826)
Change in property improvement fund............................................ (607) 1,543 607
Change in restricted cash reserves............................................. (250) (250) 816
----------- ----------- -----------
Cash used in investing activities........................................ (8,244) (4,614) (4,403)
----------- ----------- -----------
FINANCING ACTIVITIES
Repayment of mortgage debt..................................................... (1,649) (1,508) (910)
Capital distributions to partners.............................................. -- (3,536) (3,535)
Additions to debt service reserve.............................................. -- -- (1,548)
----------- ----------- -----------
Cash used in financing activities........................................ (1,649) (5,044) (5,993)
----------- ----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS............................................. 4,486 4,427 2,118
CASH AND CASH EQUIVALENTS at beginning of year.................................... 14,553 10,126 8,008
----------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of year..........................................$ 19,039 $ 14,553 $ 10,126
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest................................................$ 12,278 $ 12,419 $ 12,538
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marriott Residence Inn II Limited Partnership and Subsidiary
December 31, 1999 and 1998
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Marriott Residence Inn II Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed on November 23, 1988, to acquire, own and
operate 23 Residence Inn by Marriott hotels (the "Inns") and the land on which
the Inns are located. The Inns are located in 16 states in the United States:
four in Florida, three in California, two in both North Carolina and South
Carolina and one in each of Alabama, Illinois, Louisiana, Massachusetts,
Michigan, Mississippi, Nevada, New Mexico, Ohio, Pennsylvania, Tennessee and
Texas. As of December 31, 1999, the Inns have a total of 2,487 suites. The Inns
are managed by Residence Inn by Marriott, Inc. (the "Manager"), a wholly-owned
subsidiary of Marriott International, Inc. ("MII"), as part of the Residence Inn
by Marriott hotel system.
To facilitate the refinancing of the Partnership's mortgage debt, on March 22,
1996, as permitted by the Partnership Agreement, the Partnership transferred
ownership of the Bossier City Residence Inn to a newly formed subsidiary,
Bossier RIBM Two LLC ("Bossier LLC"), a Delaware limited liability company. The
general partner of Bossier LLC with a 1% interest is Bossier RIBM Two, Inc., a
wholly-owned subsidiary of the Partnership. The remaining 99% interest in
Bossier LLC is owned by the Partnership.
Between November 23, 1988 and December 29, 1988, 70,000 limited partnership
interests (the "Units") were sold in a public offering. The offering price per
unit was $1,000. The general partner contributed $707,100 for its 1% general
partnership interest. The Partnership acquired 17 of the Inns on December 28,
1988. The remaining six Inns were acquired during 1989.
On April 17, 1998, Host Marriott Corporation ("Host Marriott"), the parent of
the general partner of the Partnership, announced that its Board of Directors
authorized the company to reorganize its business operations to qualify as a
real estate investment trust ("REIT") to become effective as of January 1, 1999
(the "REIT Conversion"). On December 29, 1998, Host Marriott announced that it
had completed substantially all the steps necessary to complete the REIT
Conversion and expected to qualify as a REIT under the applicable Federal income
tax laws beginning January 1, 1999. Subsequent to the REIT Conversion, Host
Marriott is referred to as Host REIT. In connection with the REIT Conversion,
Host Marriott contributed substantially all of its hotel assets to a
newly-formed partnership, Host Marriott L.P. ("Host LP").
In connection with the REIT Conversion, the following steps occurred. Host
Marriott formed RIBM Two LLC, a Delaware single member limited liability
company, having three classes of member interests (Class A - 1% economic
interest, managing; Class B - 98% economic interest, non-managing; Class C - 1%
economic interest, non-managing). Prior to December 24, 1998, the sole general
partner of the Partnership was Marriott RIBM Two Corporation, a Delaware
corporation ("RIBM Two"), a wholly-owned subsidiary of Host Marriott. RIBM Two
merged into RIBM Two LLC on December 24, 1998 and RIBM Two ceased to exist. On
December 28, 1998, Host Marriott contributed its entire interest in RIBM Two LLC
to Host LP, which is owned 78% by Host Marriott and 22% by outside partners.
Finally on December 30, 1998, Host LP contributed its 98% Class B interest and
1% Class C interests in RIBM Two LLC to Rockledge Hotel Properties, Inc.
("Rockledge"), a Delaware corporation, which is owned 95% by Host LP (economic
non-voting interest) and 5% by Host Marriott Statutory/Charitable Employee
Trust, a Delaware statutory business trust (100% of voting interest). As a
result, the sole general partner of the Partnership is RIBM Two LLC (the
"General Partner"), with a Class A 1% managing economic interest owned by Host
LP and Class B 98% and Class C 1% non-managing economic interests owned by
Rockledge.
Partnership Allocations and Distributions
Net profits for Federal income tax purposes are generally allocated to the
partners in proportion to the distributions of cash available for distribution.
The Partnership generally distributes cash available for distribution as
follows: (i) first, 99% to the limited partners and 1% to the General Partner,
until the partners have received, with respect to such year, an amount equal to
10% of their Net Capital Investment, defined as the excess of original capital
contributions over cumulative distributions of net refinancing and sales
proceeds ("Capital Receipts"); and (ii) second, remaining cash available for
distribution will be distributed as follows, depending on the amount of Capital
Receipts previously distributed:
(a) 99% to the limited partners and 1% to the General Partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts of less than 50% of their original capital contributions; or
(b) 90% to the limited partners and 10% to the General Partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to or greater than 50% but less than 100% of their
original capital contributions; or
(c) 75% to the limited partners and 25% to the General Partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to 100% or more of their original capital contributions.
For Federal income tax purposes, losses and net losses are allocated 99% to the
limited partners and 1% to the General Partner.
Capital Receipts not retained by the Partnership will generally be distributed
(i) first, 99% to the limited partners and 1% to the General Partner until the
partners have received cumulative distributions from all sources equal to a
cumulative simple return of 12% per annum on their Net Capital Investment and an
amount equal to their contributed capital, payable only from Capital Receipts;
(ii) next, if the Capital Receipts are from a sale, 100% to the General Partner
until it has received 2% of the gross proceeds from the sale; and (iii)
thereafter, 75% to the limited partners and 25% to the General Partner.
Gains will generally be allocated (i) first, to those partners whose capital
accounts have negative balances until such negative balances are brought to
zero; (ii) second, to all partners in amounts necessary to bring their
respective capital account balances equal to their invested capital, as defined,
plus a 12% return on such invested capital; (iii) next, to the General Partner
in an amount necessary to bring the General Partner's capital account balance to
an amount which is equal to 2% of the gross proceeds from the sale, and (iv)
thereafter, 75% to the limited partners and 25% to the General Partner.
Proceeds from a sale of substantially all of the assets of the Partnership will
be distributed to the partners in accordance with their capital account balances
as adjusted to take into account gain or loss resulting from such sale.
For financial reporting purposes, profits and losses are allocated among the
partners based upon their stated interests in cash available for distribution.
<PAGE>
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership's records are maintained on the accrual basis of accounting and
its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, as follows:
Land improvements 40 years
Building and improvements 40 years
Furniture and equipment 3 to 10 years
All property and equipment at 22 of the Partnership's 23 Inns (Bossier City
excluded) is pledged as security for the mortgage debt described in Note 5.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties on an
individual hotel basis will be less than their net book value. If a property is
impaired, its basis is adjusted to fair market value. No adjustment was
necessary for the years ended December 31, 1999 and 1998.
Income Taxes
Provision for Federal and state income taxes has not been made in the
consolidated financial statements since the Partnership does not pay income
taxes but rather allocates profits and losses to the individual partners.
Significant differences exist between the net income for financial reporting
purposes and the net income (loss) as reported in the Partnership's tax return.
These differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods and shorter depreciable lives of the assets and
the timing of the recognition of base and incentive management fee expense. As a
result of these differences, the excess of the Partnership's net assets reported
in the accompanying consolidated financial statements and the tax basis of such
net assets was $9,719,000 as of December 31, 1999 and $5,193,000 as of December
31, 1998.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the debt financing and are amortized over the term of the debt. The
Partnership incurred $4,119,000 of financing costs in connection with the
refinanced mortgage debt described in Note 5 which are being amortized using the
straight-line method, which approximates the effective interest method, over the
ten year term of the mortgage debt. As of December 31, 1999 and 1998,
accumulated amortization of deferred financing costs totaled $1,557,000 and
$1,146,000, respectively.
Restricted Cash Reserves
On March 22, 1996, the Partnership was required to establish certain reserves in
conjunction with the refinancing of the Mortgage Debt as described in Note 5.
The balances in those reserves as of December 31 are as follows (in thousands):
<TABLE>
<S> <C> <C>
1999 1998
------------- ---------
Capital Expenditure Reserve..........................$ 2,041 $ 1,791
Debt Service Reserve................................. 3,482 3,482
Real Estate Tax and Insurance Reserve................ 1,131 880
------------- -------------
$ 6,654 $ 6,153
============= =============
</TABLE>
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Reclassifications
Certain reclassifications were made to the prior year financial statements to
conform to the 1999 presentation.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<S> <C> <C>
1999 1998
----------- -------
Land...............................................................................$ 38,009 $ 38,009
Building and improvements.......................................................... 130,081 126,011
Furniture and equipment............................................................ 47,218 55,890
----------- -----------
215,308 219,910
Accumulated depreciation........................................................... (74,784) (78,528)
----------- -----------
$ 140,524 $ 141,382
=========== ===========
</TABLE>
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts (in thousands):
<TABLE>
<S> <C> <C> <C> <C>
As of December 31, 1999 As of December 31, 1998
------------------------------ ------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
Mortgage debt..................................$ 135,933 $ 132,578 $ 137,582 $ 147,400
Incentive management fee due to
Residence Inn by Marriott, Inc..............$ 22,693 $ -- $ 19,617 $ 254
</TABLE>
The estimated fair value of the mortgage debt obligation is based on expected
future debt service payments discounted at estimated risk adjusted rates.
Incentive management fees payable are valued based on the expected future
payments from operating cash flow discounted at estimated risk adjusted rates.
As discussed in Note 7, if the March 9, 2000 litigation settlement agreement is
consummated, the Manager would waive $22,693,000 of deferred incentive
management fees payable as of December 31, 1999. Accordingly, the estimated fair
value of the incentive management fees payable at December 31, 1999 is $0.
NOTE 5. MORTGAGE DEBT
On March 22, 1996 (the "Closing Date") the Partnership mortgage debt was
refinanced with a new third party lender. In conjunction with the refinancing,
the principal amount of the Partnership's mortgage debt was increased from
$137.1 million to $140 million. The refinanced mortgage debt (the "Mortgage
Debt") is nonrecourse to the Partnership, bears interest at a fixed rate of
8.85% based upon actual number of days over a 360 day year for a 10-year term
expiring March 10, 2006 and requires payments of interest only during the first
loan year (April 1996 through March 1997) and principal amortization based upon
a 25-year amortization schedule beginning with the second loan year.
Principal amortization of the Mortgage Debt at December 31, 1999 is as follows
(in thousands):
<TABLE>
<S> <C>
2000..................................$ 1,767
2001.................................. 1,968
2002.................................. 2,152
2003.................................. 2,353
2004.................................. 2,540
Thereafter............................ 125,153
---------------
$ 135,933
===============
</TABLE>
The Mortgage Debt is secured by first mortgages on 22 of the Partnership's 23
Inns, the land on which they are located, a security interest in all personal
property associated with those Inns including furniture and equipment,
inventory, contracts, and other intangibles and the Partnership's rights under
the management agreement. Although the Partnership continues to own 23 Residence
Inns, during the course of performing environmental studies at the properties,
the lender determined that the Bossier City Residence Inn did not pass certain
required thresholds to enable the property to collateralize the Mortgage Debt.
Additionally, as part of the refinancing, the Partnership was required to
deposit $500,000 into a reserve account and fund $250,000 annually into the
account to provide for any claim, investigation, or litigation that may arise
from any environmental condition at the Bossier City Residence Inn. The initial
$500,000 deposit was funded by the lender. The Partnership is required to repay
the initial reserve as promptly as possible if the Partnership draws on the
deposit or by the end of the 10-year term in March 2006. Any draws upon the
account will accrue interest at the 30-day London Interbank Offered Rate
("LIBOR") plus 4.5 percentage points. If the Partnership does not need to draw
on the reserve account, the lender will hold the reserve until such time as the
Mortgage Debt is either repaid, or a governmental authority determines that the
statute of limitations on filing any claims has expired or that no further
remedial activities are required at the property. Based upon the results of the
environmental studies performed, the Partnership believes that it is remote that
it will be necessary to draw on the reserve. The balance of this reserve, as of
December 31, 1999, is $792,000 and is included in the capital expenditure
reserve balance of $2,041,000.
Pursuant to the terms of the Mortgage Debt, the Partnership is required to
establish with the lender a separate escrow account for payments of insurance
premiums and real estate taxes (the "Real Estate Tax and Insurance Escrow
Reserves") for each mortgaged property if the credit rating of MII is downgraded
by Standard and Poor Rating Services. The assumption of additional debt
associated with MII's acquisition of the Renaissance Hotel Group N.V resulted in
a single downgrade of MII's long-term senior unsecured debt effective April 1,
1997. As a result, the Partnership subsequently transferred $834,000 into the
Real Estate Tax and Insurance Escrow Reserves from the Manager's existing real
estate tax and insurance reserve account. In addition, the Mortgage Debt
required the Partnership to fund an additional month's debt service into the
debt service reserve account over a six month period as a result of this
downgrade. The Real Estate Tax and Insurance Escrow Reserves and the debt
service reserve are shown as restricted cash reserves and the related real
estate tax and insurance liability is included with accounts payable and accrued
expenses in the accompanying consolidated balance sheet.
Additionally, the terms of the Mortgage Debt require the Partnership to
establish certain reserves including:
o $3,482,000 Debt Service Reserve - This reserve was fully funded by mid-1997
and is to equal three months of debt service.
o $2,357,000 Capital Expenditure Reserve - This reserve was fully funded on
the Closing Date. The funds will be expended for various renewals and
replacements, site improvements, Americans with Disabilities Act of 1990
modifications and environmental remediation projects identified during the
course of the appraisals and environmental studies undertaken in
conjunction with the refinancing. As of December 31, 1999, the balance of
this reserve is $2,041,000.
Furthermore, as a result of the MII credit rating downgrade, as described above,
the Manager required additional working capital as follows:
o $900,000 Working Capital Reserve - This reserve was funded from 1996 cash
from operations. As of December 31, 1999, the balance of this reserve is
$1,131,000.
NOTE 6. MANAGEMENT AGREEMENT
To facilitate the Mortgage Debt refinancing, (see Note 5), effective March 22,
1996, the original management agreement was restated into two separate
management agreements. The Partnership entered into a management agreement with
the Manager for the 22 Inns securing the Mortgage Debt and Bossier LLC entered
into a management agreement with the Manager for the Bossier City Residence Inn
(collectively, the "Restated Management Agreements"). The terms of the Restated
Management Agreements do not differ from the original management agreement with
the exception of the term. Pursuant to the Restated Management Agreements, the
initial term expires December 31, 2012, with the Manager having the option to
extend the agreement on one or more of the Inns for up to four 10-year terms.
The Manager earns a base management fee equal to 2% of the Inns' gross revenues.
Through 1991, payment of the base management fee was subordinate to qualifying
debt service payments, a provision for Partnership administrative expenses and
retention by the Partnership of annual cash flow from operations of $7,071,000.
Deferred base management fees were payable in the future from operating cash
flow, as defined. Beginning in 1992 and thereafter, base management fees are
paid currently.
In addition, the Manager is entitled to an incentive management fee equal to 15%
of Operating Profit, as defined (23.5% in any year in which operating profit is
equal to or greater than $25.3 million; however, cumulative incentive management
fees cannot exceed 20% of cumulative Operating Profit). The incentive management
fee is payable out of 50% of cash flow from operations remaining after payment
of debt service, provision for Partnership administrative expenses, payment of
the base management fee, payment of deferred base management fees and retention
by the Partnership of annual cash flow from operations of $7,071,000. After the
Partnership has retained an additional 5% return, the incentive management fee
is payable out of 75% of the remaining cash flow from operations. Unpaid
incentive management fees are deferred without interest and are payable from
future operating cash flow, as defined. Incentive management fees of $3,090,000,
$3,257,000 and $3,641,000 were earned during 1999, 1998 and 1997, respectively.
Incentive management fees of $14,000, $185,000 and $1,706,000 were paid during
1999, 1998 and 1997, respectively. Accrued deferred incentive management fees
were $22,693,000 and $19,617,000 as of December 31, 1999 and 1998, respectively.
If the litigation settlement agreement referred to in Note 7 is consummated,
$22,693,000 of these fees will be waived by the Manager.
The Restated Management Agreements provide for a Residence Inn system fee equal
to 4% of suite revenues. In addition, the Manager is reimbursed for each Inn's
pro rata share of the actual costs and expenses incurred in providing certain
services ("Chain Services") on a central or regional basis to all hotels
operated by the Manager. As franchiser of the Residence Inn by Marriott system,
the Manager maintains a marketing fund to pay the costs associated with certain
system-wide advertising, promotional, and public relations materials and
programs and the operation of a toll-free reservation system. Each Inn
contributes 2.5% of suite revenues to the marketing fund. Beginning in 1998, the
Inns began participating in the Marriott Rewards Program ("MRP"). The cost of
this program is charged to all hotels in the Marriott hotel system. For the
years ended December 31, 1999, 1998 and 1997, the Partnership paid a Residence
Inn system fee of $2,734,000, $2,729,000 and $2,696,000, reimbursed the Manager
for $1,975,000, $2,005,000 and $1,590,000 of Chain Services and contributed
$1,705,000, $1,705,000 and $1,685,000 to the marketing fund, respectively. For
the years ended December 31, 1999 and 1998, MRP costs totaled $249,000 and
$143,000, respectively. Chain Services, contributions to the marketing fund and
MRP costs are included in other operating expenses in the consolidated statement
of operations.
The Partnership is required to provide the Manager with working capital to meet
the operating needs of the Inns. The Manager converts cash advanced by the
Partnership into other forms of working capital consisting primarily of
operating cash, inventories, and trade receivables and payables which are
maintained and controlled by the Manager. Upon termination of the Restated
Management Agreements, the working capital will be returned to the Partnership.
The individual components of working capital controlled by the Manager are not
reflected in the Partnership's consolidated balance sheet. For both December 31,
1999 and 1998, $2,050,000, has been advanced to the Manager for working capital
which is included in Due from Residence Inn by Marriott, Inc. in the
accompanying consolidated balance sheet.
The Restated Management Agreements provide for the establishment of a property
improvement fund for the Inns to cover the cost of certain non-routine repairs
and maintenance to the Inns which are normally capitalized and the cost of
replacements and renewals to the Inns' property and improvements. During 1997,
contributions to the property improvement fund were 5% of gross Inn revenues. On
October 9, 1998, the Restated Management Agreements were modified to increase
the contribution rate to the property improvement fund to 6% and 7% of gross Inn
revenues in 1998 and 1999, respectively, to aid in the furniture, fixtures and
equipment reserve short fall discussed below. Pursuant to the modification to
the Restated Management Agreements, the Manager decreased the contribution rate
to 5% of gross Inn revenues commencing January 1, 2000. Total contributions to
the property improvement fund for the years ended December 31, 1999, 1998 and
1997 were $7,535,000, $4,282,000 and $3,547,000, respectively. The 1999
contribution includes a $2.5 million loan to the property improvement fund, as
described below.
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 the majority of the Partnership's Inns. To address
the 1998 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. To aid in the current shortfall estimate for
1999, a $1.6 million loan was funded from the Partnership to the property
improvement fund in first quarter 2000.
NOTE 7. LITIGATION
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. ("MII"), 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. 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.
On March 9, 2000, the Defendants entered into a settlement agreement with
counsel to the plaintiffs to resolve the litigation. The settlement is subject
to numerous conditions, including participation thresholds, court approval and
various consents. Under the terms of the settlement, the limited partners of the
Partnership who elect to participate would be paid $228.38 per Unit ($15,986,600
in the aggregate, if the holders of all Units participate) in exchange for
dismissal of the litigation and a complete release of all claims. This amount
would be reduced by the amount of attorneys' fees awarded by the court. In
addition to this cash payment, the Manager would waive $22,693,000 of deferred
incentive management fees. Limited partners who opt out of the settlement would
receive no payment but would retain their individual claims against the
Defendants. The Defendants may terminate the settlement if the holders of more
than 10% of the Partnership's 70,000 limited partner Units choose not to
participate, if the holders of more than 10% of the limited partner units in any
one of the other partnerships involved in the litigation choose not to
participate or if certain other conditions are not satisfied. The Manager will
continue to manage the Partnership's Inns under long-term agreements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Partnership has no directors or officers. The business and policy making
functions of the Partnership are carried out through the directors and executive
officers of RIBM Two LLC, the General Partner, who are listed below:
<TABLE>
<S> <C> <C>
Age at
Name Current Position December 31, 1999
------------------------------- ------------------------------------------------ --------------------
Robert E. Parsons, Jr. President and Manager 44
Christopher G. Townsend Executive Vice President, Secretary and Manager 52
W. Edward Walter Treasurer 44
Earla L. Stowe Vice President 38
</TABLE>
Business Experience
Robert E. Parsons, Jr. joined Host Marriott's Corporate Financial Planning staff
in 1981 and was made Assistant Treasurer in 1988. In 1993, Mr. Parsons was
elected Senior Vice President and Treasurer of Host Marriott, and in 1995, he
was elected Executive Vice President and Chief Financial Officer of Host
Marriott. He is also an Executive Vice President and Chief Financial Officer of
Host LP and serves as a director, manager and officer of numerous Host Marriott
subsidiaries.
Christopher G. Townsend joined Host Marriott's Law Department in 1982 as a
Senior Attorney. In 1984, he was made Assistant Secretary of Host Marriott. In
1986, he was made an Assistant General Counsel. He was made Senior Vice
President, Corporate Secretary and Deputy General Counsel of Host Marriott in
1993. In January 1997, he was made General Counsel of Host Marriott. He is also
a Senior Vice President, Corporate Secretary and General Counsel of Host LP and
serves as a director, manager and an officer of numerous Host Marriott
subsidiaries.
W. Edward Walter joined Host Marriott in 1996 as Senior Vice
President-Acquisitions and in 1998 was made Treasurer of Host Marriott. He is
also a Senior Vice President and Treasurer of Host LP and serves as a director,
manager and officer of numerous Host Marriott subsidiaries. Prior to joining
Host Marriott, Mr. Walter was a partner at Trammell Crow Residential Company and
President of Bailey Capital Corporation, a real estate firm focusing on tax
exempt real estate investments.
Earla L. Stowe joined Host Marriott in 1982 and held various positions in the
tax department until 1988. She joined the Partnership Services department as an
accountant in 1988 and in 1989 she became an Assistant Manager-Partnership
Services. She was promoted to Manager-Partnership Services in 1991 and to
Director-Asset Management in 1996. Ms. Stowe was promoted to Senior
Director-Corporate Accounting in 1998.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
As noted in Item 10 above, the Partnership has no directors or officers nor does
it have any employees. Under the Partnership Agreement, however, the General
Partner has the exclusive right to conduct the business and affairs of the
Partnership subject only to the management agreements described in Items 1 and
13. The General Partner is required to devote to the Partnership such time as
may be necessary for the proper performance of its duties, but the officers and
directors of the General Partner are not required to devote their full time to
the performance of such duties. No officer or director of the General Partner
devotes a significant percentage of time to Partnership matters. To the extent
that any officer or director does devote time to the Partnership, the General
Partner is entitled to reimbursement for the cost of providing such services.
For the fiscal years ending December 31, 1999, 1998 and 1997, the Partnership
reimbursed Host Marriott or its subsidiaries in the amount of $105,000, $278,000
and $143,000, respectively, for the cost of providing all administrative and
other services as General Partner. For information regarding all payments made
by the Partnership to Host Marriott and subsidiaries, see Item 13 "Certain
Relationships and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 1999, Prescott Associates, LLC, an unrelated third party,
owned 6.5% of the total number of limited partnership Units. No other person
owned of record, or to the Partnership's knowledge owned beneficially, more than
5% of the total number of limited partnership Units. The General Partner does
not own any limited partnership interest in the Partnership.
The executive officers and managers of the General Partner, Host Marriott, MII
and their respective affiliates do not own any Units as of December 31, 1999.
The Partnership is not aware of any arrangements which may, at a subsequent
date, result in a change in control of the Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Agreement
To facilitate the refinancing, effective March 22, 1996, the original Management
Agreement was restated into two separate management agreements. The Partnership
entered into a management agreement with the Manager for 22 of the Inns which
the Partnership directly owns and Bossier LLC entered into a management
agreement for the Bossier City Residence Inn, (collectively, the "Restated
Management Agreements").
Term
During 1995, the Manager operated the Inns pursuant to a long-term management
agreement (the "Original Management Agreement") with an initial term expiring on
December 28, 2007. The Manager had the option to extend the Original Management
Agreement on one or more of the Inns for up to five 10-year terms. To facilitate
the refinancing, effective March 22, 1996, the Original Management Agreement was
restated into two separate management agreements. The Partnership entered into a
management agreement with the Manager for the 22 Inns the Mortgage Debt is
secured by, and Bossier LLC also entered into a management agreement with the
Manager for the Bossier City Residence Inn (collectively, the "Restated
Management Agreements"). The terms of the Restated Management Agreements do not
differ from the Original Management Agreement with the exception of the term.
Pursuant to the Restated Management Agreements, the initial term expires
December 31, 2012, with the Manager having the option to extend the agreement on
one or more of the Inns for up to four 10-year terms.
Management Fees
The Restated Management Agreements provide for annual payments of (i) the base
management fee equal to 2% of gross revenues from the Inns, (ii) the Residence
Inn system fee equal to 4% of gross suite revenues from the Inns, and (iii) the
incentive management fee equal to 15% of operating profit, as defined (23.5% of
operating profit, as defined, in any year in which operating profit exceeds
$25.3 million; however, cumulative incentive management fee can not exceed 20%
of cumulative operating profit). During 1999, 1998 and 1997, respectively, the
Partnership paid a system fee of $2,734,000, $2,729,000 and $2,696,000. See
"Deferral Provisions" for a discussion of the payment of base and incentive
management fees.
Deferral Provisions
Through 1991, payment of the base management fee was subordinate to qualifying
debt service payments, a provision for Partnership administrative expenses and
retention by the Partnership of annual cash flow from operations of $7,071,000.
Deferred base management fees are payable in the future from operating cash
flow, as defined. Beginning in 1992 and thereafter, base management fees are
paid currently. For the years ended December 31, 1999, 1998 and 1997, the
Partnership paid current base management fees of $1,439,000, $1,433,000 and
$1,419,000, respectively.
The incentive management fee is payable out of 50% of cash flow from operations
remaining after payment of debt service, provision for Partnership
administrative expenses, payment of the base management fee, payment of deferred
base management fees and retention by the Partnership of annual cash flow from
operations of $7,071,000. After the Partnership has retained an additional 5%
return, the incentive management fee is payable out of 75% of the remaining cash
flow from operations. Through 1991, the Manager was not entitled to accrue any
unpaid incentive management fees. Incentive management fees earned after 1991
will be payable in the future from operating cash flow, as defined. Incentive
management fees of $3,090,000, $3,257,000 and $3,641,000 were earned during
1999, 1998 and 1997, respectively. Incentive management fees of $14,000,
$185,000 and $1,706,000 were paid during 1999, 1998 and 1997, respectively.
Deferred incentive management fees were $22,693,000 and $19,617,000 as of
December 31, 1999 and 1998, respectively. If the litigation settlement agreement
referred to in Item 3, "Legal Proceedings," is consummated, $22,693,000 of these
fees will be waived by the Manager.
Chain Services, Marketing Fund and Marriott Rewards Program
The Manager is reimbursed for each Inn's pro rata share of the actual costs and
expenses incurred in providing certain services ("Chain Services") on a central
or regional basis to all hotels operated by the Manager. Such reimbursements
were limited through 1991 to 2% of gross revenues from Inn operations. As
franchiser of the Residence Inn by Marriott system, the Manager maintains a
marketing fund to pay the costs associated with certain system-wide advertising,
promotional and public relations materials and programs and the operation of a
toll-free reservation system. Each Inn contributes 2.5% of suite revenues to the
marketing fund. For the years ended December 31, 1999, 1998 and 1997, the
Partnership reimbursed the Manager for $1,975,000, $2,005,000 and $1,590,000 of
Chain Services and contributed $1,705,000, $1,705,000 and $1,685,000 to the
marketing fund, respectively. In addition, the Inns participate in MII's
Marriott's Rewards Program ("MRP"). Residence Inn began participating in the MRP
in 1998. The costs of this program are charged to all hotels in the
full-service, Residence Inn by Marriott, Courtyard by Marriott and Fairfield Inn
by Marriott systems based upon the MRP sales at each hotel. MRP costs charged to
the Partnership under the Restated Management Agreements were $249,000 and
$143,000 in 1999 and 1998, respectively. Chain Services, contributions to the
marketing fund and MRP costs are included in selling, administrative and other
expenses detailed in the consolidated statement of operations (see Item 8).
Working Capital
The Partnership is required to provide the Manager with working capital to meet
the operating needs of the Inns. The Manager converts cash advanced by the
Partnership into other forms of working capital consisting primarily of
operating cash, inventories and trade receivables and payables which are
maintained and controlled by the Manager. Upon termination of the Restated
Management Agreements, the working capital will be returned to the Partnership.
The individual components of working capital controlled by the Manager are not
reflected in the Partnership's balance sheet. As of December 31, 1999 and 1998,
$2,050,000 has been advanced to the Manager for working capital which is
included in Due from Residence Inn by Marriott, Inc. in the accompanying
consolidated balance sheet (see Item 8).
Property Improvement Funds
The Restated Management Agreements provide for the establishment of a property
improvement fund for the Inns to cover the cost of certain non-routine repairs
and maintenance to the Inns which are normally capitalized and the cost of
replacements and renewals to the Inns' property and improvements. During 1997,
contributions to the property improvement fund were 5% of gross Inn revenues. On
October 9, 1998, the Restated Management Agreements were modified to increase
the contribution rate to the property improvement fund to 6% and 7% of gross Inn
revenues in 1998 and 1999, respectively, to aid in the furniture, fixtures and
equipment reserve short fall discussed below. Pursuant to the modification to
the Restated Management Agreements, the Manager decreased the contribution rate
to 5% of gross Inn revenues commencing January 1, 2000. Total contributions to
the property improvement fund for the years ended December 31, 1999, 1998 and
1997 were $7,535,000, $4,282,000 and $3,547,000, respectively. The 1999
contribution includes a $2.5 million loan to the property improvement fund as
described below.
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 the majority of the Partnership's Inns. To address
the 1998 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. To aid in the current shortfall estimate for
1999, a $1.6 million loan was funded from the Partnership to the property
improvement fund in first quarter 2000.
Payments to MII and Subsidiaries
The following table sets forth the amount paid to MII and affiliates under the
Restated Management Agreements for the years ended December 31, 1999, 1998 and
1997 (in thousands):
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
----------- ----------- -----------
Residence Inn system fee...................................................$ 2,734 $ 2,729 $ 2,696
Chain services............................................................. 1,975 2,005 1,590
Marketing fund contribution................................................ 1,705 1,705 1,685
Base management fee........................................................ 1,439 1,433 1,419
MRP costs.................................................................. 249 143 --
Incentive management fee................................................... 14 185 1,706
----------- ----------- -----------
$ 8,116 $ 8,200 $ 9,096
=========== =========== ===========
</TABLE>
Payments to Host Marriott and Subsidiaries
The following sets forth amounts paid by the Partnership to Host Marriott and
its subsidiaries for the years ended December 31, 1999, 1998 and 1997 (in
thousands):
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
----------- ----------- -----------
Administrative expenses reimbursed.........................................$ 105 $ 278 $ 143
Cash distributions......................................................... -- 36 35
----------- ----------- -----------
$ 105 $ 314 $ 178
=========== =========== ===========
</TABLE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of This Report
(1) Financial Statements
All financial statements of the registrant as set forth
under Item 8 of this Report on Form 10-K.
(2) Financial Statement Schedules
The following financial information is filed herewith on
the pages indicated.
Schedule III - Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable or the required
information is included in the financial statements or notes thereto.
(3) Exhibits
<TABLE>
<S> <C> <C>
Exhibit Number Description Page
------------------------- ----------------------------------------------------------------------- -------------
* 3.1 Amended and Restated Agreement of Limited Partnership of Marriott N/A
Residence Inn II Limited Partnership dated November 23, 1988.
*3.2 First Amendment to Amended and Restated Agreement of Limited N/A
Partnership dated April 1, 1989.
*3.3 First Amendment to Amended and Restated Agreement of Limited N/A
Partnership of Marriott Residence Inn II Limited Partnership dated
December 28, 1998.
*10.1 Amended and Restated Management Agreement by and between Residence N/A
Inn by Marriott, Inc. and Marriott Residence Inn II Limited
Partnership dated as of March 22, 1996.
*10.2 Loan Agreement by and between Marriott
Residence Inn II Limited N/A Partnership
and the Sanwa Bank Limited dated December
27, 1988.
*10.3 Loan Agreement between Marriott Residence Inn II Limited Partnership N/A
and Nomura Asset Capital Corporation dated as of March 22, 1996.
---------------------
</TABLE>
* Incorporated by reference to the Partnership's previously filed
documents.
<PAGE>
(b) Reports on Form 8-K:
A Form 8-K was filed with the SEC on December 10, 1999.
This filing, Item 5-Other Events, discloses that on
December 8, 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 for the quarter ended September 10, 1999. The
letter disclosed the quarterly activities of the
Partnership. A copy of the letter was included as an
Item 7-Exhibit in this Form 8-K filing.
<PAGE>
SCHEDULE III
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Costs Gross Amount at December 31, 1999
------------------------ -------------------------------------------
Subsequent
Land and Building and Costs Land and Buildings and Accumulated
Description Debt Improvements Improvements Capitalized Improvements Improvements Total Depreciation
- -------------------- --------- ------------ ------------ ----------- ------------ ------------ --------- -----------
Las Vegas, NV $ 16,241 $ 4,967 $ 8,284 $ 1,103 $ 3,310 $ 11,044 $ 14,354 $ 3,083
Irvine, CA 7,048 3,503 5,843 221 2,334 7,233 9,567 1,924
Arcadia, CA 8,897 3,426 5,714 1,294 2,283 8,151 9,435 1,998
Greensboro, NC 8,268 2,937 4,926 713 1,965 6,611 8,576 1,883
Birmingham, AL 7,154 2,886 4,840 751 1,924 6,553 8,477 2,003
Memphis East, TN 3,611 2,629 4,409 1,528 1,753 6,813 8,566 2,087
Other properties,
each less than 5% of total 84,714 36,476 60,628 11,012 24,440 83,676 109,115 25,350
--------- ----------- ----------- --------- ----------- ----------- --------- ----------
$ 135,933 $ 56,824 $ 94,644 $ 16,622 $ 38,009 $ 130,081 $ 168,090 $ 38,328
========= =========== =========== ========= =========== =========== ========= ==========
Date of
Completion of Date Depreciation
Construction Acquired Life
----------- ------------ --------------
Las Vegas, NV 1989 1989 40 years
Irvine, CA 1989 1989 40 years
Arcadia, CA 1989 1989 40 years
Greensboro, NC 1987 1988 40 years
Birmingham, AL 1986 1988 40 years
Memphis East, TN 1986 1988 40 years
Other properties,
each less than 5% of total 1983-1989 1988-1989 40 years
</TABLE>
<TABLE>
Notes:
- -----
<S> <C> <C> <C>
1997 1998 1999
----------- ----------- -----------
(a) Reconciliation of Real Estate:
Balance at beginning of year....................$ 159,416 $ 162,480 $ 164,009
Capital Expenditures............................ 3,064 1,529 4,092
Dispositions.................................... -- -- (11)
----------- ----------- -----------
Balance at end of year..........................$ 162,480 $ 164,009 $ 168,090
=========== =========== ===========
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of year....................$ 25,540 $ 29,593 $ 33,834
Depreciation.................................... 4,053 4,241 4,494
----------- ----------- -----------
Balance at end of year..........................$ 29,593 $ 33,834 $ 38,328
=========== =========== ===========
</TABLE>
(c) The aggregate cost of land, buildings and improvements for Federal income
tax purposes is approximately $161.7 million at December 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized on this 27th of March,
2000.
MARRIOTT RESIDENCE INN II
LIMITED PARTNERSHIP
By: RIBM TWO LLC
General Partner
/s/ Earla L. Stowe
------------------
Earla L. Stowe
Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
the capacities and on the date indicated above.
<TABLE>
<S> <C>
Signature Title
(RIBM TWO LLC)
/s/ Robert S. Parsons, Jr. President and Manager
- --------------------------------------------
Robert S. Parsons, Jr.
/s/ Christopher G. Townsend Executive Vice President, Secretary and Manager
- --------------------------------------------
Christopher G. Townsend
/s/W. Edward Walter Treasurer
- --------------------------------------------
W. Edward Walter
/s/ Earla L. Stowe Vice President
- --------------------------------------------
Earla L. Stowe
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Annual
Report 10-K 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1.00
<CASH> 25,693
<SECURITIES> 0
<RECEIVABLES> 3,424
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,028
<PP&E> 215,308
<DEPRECIATION> (74,784)
<TOTAL-ASSETS> 172,669
<CURRENT-LIABILITIES> 24,940
<BONDS> 135,933
0
0
<COMMON> 0
<OTHER-SE> 11,796
<TOTAL-LIABILITY-AND-EQUITY> 172,669
<SALES> 0
<TOTAL-REVENUES> 71,957
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 57,330
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,681
<INCOME-PRETAX> 1,946
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,946
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,946
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
