SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 11, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-24467
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Rhode Island 05-0440218
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation organization)
10400 Fernwood Road, Bethesda, MD 20817-1109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 301-380-2070
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes No ____ Not applicable |X| The
Partnership became subject to Section 13 reporting on August 11, 1998.
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Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
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TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statement of Operations
Twelve and Thirty-Six Weeks Ended September 11, 1998 (Unaudited)
and September 12, 1997 (Unaudited)..................... 1
Condensed Balance Sheet
September 11, 1998 (Unaudited) and December 31, 1997....... 2
Condensed Statement of Cash Flows
Thirty-Six Weeks Ended September 11, 1998 (Unaudited)
and September 12, 1997 (Unaudited)...................... 3
Notes to Condensed Financial Statements (Unaudited)..............4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................11
Item 6. Exhibits and Reports on Form 8-K................................11
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED STATEMENT OF OPERATIONS
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
(Unaudited)
(in thousands, except per Unit amounts)
<TABLE>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
-------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
REVENUES (Note 2)....................................$ 1,762 $ 1,588 $ 5,120 $ 4,540
- ---------------- --------------- ---------------- ---------------
OPERATING COSTS AND EXPENSES
Real estate taxes and other....................... 295 282 889 861
Depreciation...................................... 241 193 708 578
Incentive management fee.......................... 244 215 703 604
Base management fee............................... 110 104 323 299
Ground rent and administrative.................... 117 83 330 251
---------------- --------------- ---------------- ---------------
1,007 877 2,953 2,593
---------------- --------------- ---------------- ---------------
OPERATING PROFIT..................................... 755 711 2,167 1,947
Interest expense.................................. (474) (497) (1,480) (1,496)
Interest income................................... 14 9 45 38
---------------- --------------- ---------------- ---------------
NET INCOME...........................................$ 295 $ 223 $ 732 $ 489
================ =============== ================ ===============
ALLOCATION OF NET INCOME
General Partner...................................$ 3 $ 2 $ 7 $ 5
MBIP Limited Partner Interest..................... 3 2 7 5
Limited Partner Unit Holders...................... 289 219 718 479
---------------- --------------- ---------------- ---------------
$ 295 $ 223 $ 732 $ 489
================ =============== ================ ===============
NET INCOME
PER LIMITED PARTNER UNIT (335 Units)..............$ 863 $ 654 $ 2,143 $ 1,430
================ =============== ================ ===============
</TABLE>
See Notes to Condensed Financial Statements (Unaudited).
<PAGE>
CONDENSED BALANCE SHEET
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
(in thousands)
<TABLE>
September 11, December 31,
1998 1997
(unaudited)
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ASSETS
<S> <C> <C>
Property and equipment, net..........................................................$ 23,621 $ 23,784
Due from Marriott International, Inc................................................. 649 507
Other assets......................................................................... 343 428
Property improvement fund............................................................ 296 402
Cash and cash equivalents............................................................ 1,061 841
---------------- --------------
$ 25,970 $ 25,962
================ ==============
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt........................................................................$ 23,400 $ 24,475
Deferred incentive management fee due to Marriott International, Inc................. 3,582 3,587
Accounts payable and accrued expenses................................................ 544 193
Note payable to Marriott International, Inc.......................................... 533 528
---------------- --------------
Total Liabilities.................................................................. 28,059 28,783
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PARTNERS' DEFICIT
General Partner...................................................................... (3) (10)
MBIP Limited Partner Interest........................................................ (3) (10)
Limited Partner Unit Holders......................................................... (2,083) (2,801)
---------------- --------------
Total Partners' Deficit............................................................ (2,089) (2,821)
---------------- --------------
$ 25,970 $ 25,962
================ ===============
</TABLE>
See Notes to Condensed Financial Statements (Unaudited).
<PAGE>
CONDENSED STATEMENT OF CASH FLOWS
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
(Unaudited)
(in thousands)
<TABLE>
Thirty-Six Weeks Ended
September 11, September 12,
1998 1997
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.......................................................................$ 732 $ 489
Noncash items.................................................................... 831 862
Change in operating accounts..................................................... 166 219
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Cash provided by operating activities........................................ 1,729 1,570
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INVESTING ACTIVITIES
Additions to property and equipment.............................................. (545) (868)
Changes in property improvement fund............................................. 106 45
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Cash used in investing activities............................................ (439) (823)
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FINANCING ACTIVITIES
Principal repayments of mortgage debt............................................ (1,075) (590)
Proceeds from note payable to Marriott International, Inc........................ 35 451
Repayments on note payable to Marriott International, Inc........................ (30) -
Payment of refinancing costs..................................................... - (347)
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Cash used in financing activities............................................ (1,070) (486)
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INCREASE IN CASH AND CASH EQUIVALENTS............................................... 220 261
CASH AND CASH EQUIVALENTS at beginning of period.................................... 841 733
----------------- -----------------
CASH AND CASH EQUIVALENTS at end of period..........................................$ 1,061 $ 994
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest...........................................................$ 1,009 $ 974
================= =================
</TABLE>
See Notes to Condensed Financial Statements (Unaudited).
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL PARTNERS, L.P.
(Unaudited)
1. The accompanying condensed financial statements have been prepared by
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P. (the "Partnership")
without audit. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted from the accompanying statements. The
Partnership believes the disclosures made are adequate to make the information
presented not misleading. However, the condensed financial statements should be
read in conjunction with the Partnership's financial statements and notes
thereto for the fiscal year ended December 31, 1997 included in the
Partnership's Form 10-A.
In the opinion of the Partnership, the accompanying unaudited condensed
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of the
Partnership as of September 11, 1998, the results of operations for the twelve
and thirty-six weeks ended September 11, 1998 and September 12, 1997 and cash
flows for the thirty-six weeks ended September 11, 1998 and September 12, 1997.
Interim results are not necessarily indicative of fiscal year performance
because of seasonal and short-term variations.
For financial reporting purposes, net profits and net losses of the
Partnership are allocated 1% to MOHS Corporation (the "General Partner"), a
wholly owned subsidiary of Host Marriott Corporation ("Host Marriott"), 1% to
Mutual Benefit Investment Properties ("MBIP"), a limited partner, and 98% to the
remaining limited partners. Significant differences exist between the net
profits and net losses for financial reporting purposes and the net profits and
net losses reported for Federal income tax purposes. These differences are due
primarily to the use, for income tax purposes, of accelerated depreciation
methods, shorter depreciable lives of the assets, differences in the timing of
the recognition of management fee expense and the deduction of certain costs
incurred during construction which have been capitalized in the accompanying
condensed financial statements.
2. Hotel revenues represent house profit from the Hotel since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Hotel to Marriott International, Inc.
(the "Manager"). House profit reflects hotel operating results which flow to the
Partnership as property owner and represents gross hotel sales less
property-level expenses, excluding depreciation and amortization, base and
incentive management fees, property taxes and certain other costs, which are
disclosed separately in the condensed statement of operations.
On November 20, 1997 the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that
it should be applied to its hotel. Accordingly, upon adoption, hotel sales and
property-level expenses will be reflected on the statement of operations. This
change in accounting principle will be adopted in the financial statements
during the fourth quarter of 1998 as of and for the year ended December 31, 1998
with retroactive effect in prior periods to conform to the new presentation.
Application of EITF 97-2 will increase both revenues and operating expenses by
approximately $1.9 million for the twelve weeks ended September 11, 1998 and
September 12, 1997 and $5.7 million and $5.4 million for the thirty-six weeks
ended September 11, 1998 and September 12, 1997, respectively, and will have no
impact on operating profit or net income.
<PAGE>
Revenues consist of the following Hotel operating results for the twelve
and thirty-six weeks ended September 11, 1998 and September 12, 1997 (in
thousands):
<TABLE>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September 12, September 11, September 12
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
HOTEL SALES
Rooms.........................................$ 2,937 $ 2,729 $ 8,579 $ 7,835
Food and beverage............................. 617 606 1,839 1,777
Other......................................... 121 125 363 357
--------------- --------------- --------------- ---------------
3,675 3,460 10,781 9,969
--------------- --------------- --------------- ---------------
HOTEL EXPENSES
Departmental direct costs
Rooms....................................... 622 601 1,820 1,746
Food and beverage........................... 512 489 1,513 1,435
Other operating expenses...................... 779 782 2,328 2,248
--------------- --------------- --------------- ---------------
1,913 1,872 5,661 5,429
--------------- --------------- --------------- ---------------
REVENUES........................................$ 1,762 $ 1,588 $ 5,120 $ 4,540
================ =============== ================ ===============
</TABLE>
3. Host Marriott Corporation ("Host Marriott"), the parent company of the
General Partner of the Partnership, has adopted a plan to restructure its
business operations so that it will qualify as a real estate investment trust
("REIT"). As part of this restructuring (the "REIT Conversion"), Host Marriott
and its consolidated subsidiaries will contribute their full-service hotel
properties and certain other businesses and assets to Host Marriott, L.P., a
Delaware limited partnership (the "Operating Partnership"), in exchange for
units of limited partnership interest in the Operating Partnership ("OP Units")
and the assumption of liabilities. As part of the REIT Conversion, Host Marriott
proposes to merge into HMC Merger Corporation (to be renamed "Host Marriott
Corporation"), a Maryland corporation ("Host REIT"), and thereafter continue and
expand its full-service hotel ownership business. Host REIT expects to qualify
as a REIT beginning with its first full taxable year commencing after the REIT
Conversion is completed, which Host Marriott currently expects to be the year
beginning January 1, 1999 (but which might not be until the year beginning
January 1, 2000). Host REIT will be the sole general partner of the Operating
Partnership.
The Operating Partnership is proposing to acquire by merger (the "Merger")
the Partnership. The Limited Partners in the Partnership have been given an
opportunity to receive, on a tax-deferred basis, OP Units in the Operating
Partnership in exchange for their current limited partnership interests. At any
time prior to 5:00 p.m. on the fifteenth trading day following the effective
date of the Merger, the Limited Partners can elect to exchange the OP Units
received in connection with the Merger for either common stock of Host REIT or a
6.56% callable note due December 15, 2005 of the Operating Partnership. Exercise
of either the election to receive common stock or a note would be a taxable
transaction.
Beginning one year after the Merger, Limited Partners who retain OP Units
may exchange such OP Units for Host REIT common stock on a one-for-one basis (or
their cash equivalent, as determined by Host REIT).
On June 2, 1998, the Operating Partnership filed a Registration Statement
on Form S-4 with the Securities and Exchange Commission. In October 1998, the
Prospectus/Consent Solicitation Statement, which formed a part of such
Registration Statement, was mailed to the Limited Partners who have until
December 12, 1998 to vote on this Merger, unless extended.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q include forward-looking
statements including, without limitation, statements related to the proposed
REIT conversion, the terms, structure and timing thereof, and the expected
effects of the proposed REIT conversion and business and operating strategies in
the future. All forward-looking statements 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 achievement expressed or implied by such
forward-looking statements. Certain of the transactions described herein are
subject to certain consents of shareholders, lenders, debtholders and partners
of Host Marriott and its affiliates and of other third parties and various other
conditions and contingencies, and future results, performance and achievements
will be affected by general economic, business and financing conditions,
competition and government actions. The cautionary statements set forth in
reports filed under the Securities Act of 1934 contain important factors with
respect to such forward-looking statements, including: (i) national and local
economic and business conditions that will, among other things, affect demand
for hotels and other properties, the level of rates and occupancy that can be
achieved by such properties and the availability and terms of financing; (ii)
the ability to maintain the properties in a first-class manner; (iii) the
ability to compete effectively; (iv) the ability to obtain required consents of
shareholders, lenders, debtholders, partners and ground lessors in connection
with Host Marriott's proposed conversion to a REIT and to consummate all of the
transactions constituting the REIT conversion; (v) changes in travel patterns,
taxes and government regulations; (vi) governmental approvals, actions and
initiatives; (vii) the effects of tax legislative action; and (viii) the timing
of Host Marriott's election to be taxed as a REIT and the ability to satisfy
complex rules in order to qualify for taxation as a REIT for federal income tax
purposes and to operate effectively within the limitations imposed by these
rules. Although the Partnership believes the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be attained or that any deviations will not
be material. The Partnership undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements that may be made to
reflect any future events or circumstances.
RESULTS OF OPERATIONS
Revenues. Year-to-date revenues increased 13%, or $580,000, over 1997 from
$4.5 million to $5.1 million. For the third quarter of 1998, revenues increased
11% or $174,000 over the same period in 1997 from $1.6 million to $1.8 million.
Revenues were impacted primarily by growth in revenue per available room
("REVPAR"). REVPAR represents the combination of the average daily room rate
charged and the average daily occupancy achieved and is a commonly used
indicator of hotel performance (although it is not a GAAP, or generally accepted
accounting principles, measure of revenue). REVPAR does not include food and
beverage or other ancillary revenues generated by the property. For the
thirty-six weeks ended September 11, 1998, the increase in REVPAR to $133 from
$122 during the same period in 1997 was the result of a 10% increase in average
room rate from $144 to $159, slightly offset by a one percentage point decrease
in average occupancy to 84%. For the third quarter of 1998, REVPAR increased 7%
to $136 as a result of an 8% increase in the average room rate to $158 while
occupancy remained stable at 86%. The increase in the average room rate was
primarily due to the Hotel limiting the sale of discounted rooms, creating a
breakfast-included rate which raised the non-corporate premium rate, and
increasing its corporate room rates.
<PAGE>
Operating Costs and Expenses. Operating costs and expenses increased 15% to
$1.0 million for the third quarter and 14% to $3.0 million for the thirty-six
weeks ended September 11, 1998 when compared to the same periods in 1997. The
increase in operating costs and expenses for the quarter was primarily due to
the 25% or $48,000 increase in depreciation expense, the 13% or $29,000 increase
in incentive management fee, and the 28% or $19,000 increase in ground rent
expense. The increase in year-to-date operating costs and expenses was primarily
due to the 22% or $130,000 increase in depreciation expense, a 24% or $49,000
increase in ground rent expense, and a 16% or $99,000 increase in the incentive
management fee. The increase in depreciation expense was due to the completion
of the rooms' renovation in 1997. Ground rent is the greater of 3% of gross room
sales or $300,000 on an annual basis. Incentive management fee is calculated as
20% of hotel net house profit, which represents gross hotel sales less
property-level expenses, base management fee, the escrow reserve contribution
and certain other costs. The increase in the ground rent expense and the
incentive management fee was the result of the improvement in revenues discussed
above. As a percentage of revenues, operating costs and expenses increased two
percentage points to 57% for the third quarter and one percentage point to 58%
for the first thirty-six weeks of 1998 when compared to the same periods in
1997.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, operating profit increased $44,000 to
$755,000 for the third quarter and $220,000 to $2.2 million year-to-date in 1998
from $1.9 million for the same period in 1997. As a percentage of revenues,
operating profit decreased two percentage points to 43% for the third quarter
and decreased one percentage point to 42% for the first thirty-six weeks of
1998. These slight decreases can be attributed to the increases in operating
costs and expenses discussed above.
Interest expense. Interest expense decreased 5% for the third quarter and
1% for the thirty-six weeks ended September 11, 1998 when compared to the same
periods in 1997 due primarily to principal payments and a lower interest rate on
the mortgage loan. The weighted average principal balance during the third
quarter of 1998 was $23.4 million compared to $24.8 million during the
comparable period in 1997. The weighted average interest rate on the mortgage
loan for the third quarter of 1998 was 7.69% compared to 7.78% for the same
period in 1997. For the thirty-six weeks ended September 11, 1998, the weighted
average principal balance was $24.1 million compared to $25.1 million during the
same period in 1997. The weighted average interest rate increased to 7.76%
year-to-date in 1998 from 7.67% in 1997.
Net income. Net income increased 32%, or $72,000, to $295,000 for the third
quarter of 1998 and 50%, or $243,000, to $732,000, when compared to the first
thirty-six weeks of 1997. These increases were primarily due to an increase in
hotel revenues, offset by the changes in expenses discussed above.
CAPITAL RESOURCES AND LIQUIDITY
General
The General Partner believes that cash from operations will provide
adequate funds for the operational needs of the Partnership for the foreseeable
future.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is from operating activities.
Its principal uses of cash are to fund the Hotel's property improvement fund and
to pay required principal amortization of the mortgage debt. Additionally, the
Partnership is required to use its excess annual cash flow to pay additional
principal on the mortgage debt.
<PAGE>
Total cash provided by operating activities for the thirty-six weeks ended
September 11, 1998 and September 12, 1997, was $1.7 million and $1.6 million,
respectively. The increase was primarily due to an increase in hotel revenues
when compared to 1997.
For the thirty-six weeks ended September 11, 1998 and September 12, 1997,
cash used in investing activities was $439,000 and $823,000, respectively, and
consisted of contributions to and expenditures from the property improvement
fund. Contributions to the property improvement fund were $431,000 and $399,000
for the thirty-six weeks ended September 11, 1998 and September 12, 1997,
respectively. Contributions are equal to 4% of gross hotel sales and increased
$32,000 in 1998 over 1997 due to the $812,000 increase in sales. Net
expenditures from the fund year to date in 1998 totaled $545,000, and included
$35,000 for the roof and facade repair work. Expenditures for the comparable
period in 1997 were $868,000, and included $473,000 for the roof and facade
work. Roof and facade expenditures were funded by the Partnership through
borrowing on the roof and facade loan with MII. The General Partner believes
that the property improvement fund will provide adequate funds in the short and
long term to meet the Hotel's capital needs.
For the thirty-six weeks ended September 11, 1998 and September 12, 1997,
cash used in financing activities was $1.1 million and $486,000, respectively,
and consisted primarily of repayments on the mortgage debt. The mortgage loan
requires minimum quarterly amortization payments based on a 20-year schedule.
Additionally, all excess cash flow after payment of ground rent, required
principal and interest payments, incentive management fee, partnership
administrative expenses and refinancing costs is to be applied toward principal
amortization. On June 24, 1998, the Partnership made a $766,000 principal
payment from excess cash flow generated during 1997. In June of 1997, the
Partnership made a principal payment of $305,000 from excess cash generated
during 1996. As of September 11, 1998, the principal balance on the mortgage
loan is $23.4 million. Additionally, during the third quarter of 1998, the
Partnership began making monthly principal and interest payments on the roof and
facade loan from MII.
YEAR 2000 ISSUE
The "Year 2000 Issue" has arisen because many existing computer programs
and chip-based embedded technology systems use only the last two digits to refer
to a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous results. The following disclosure provides information
regarding the current status of the Partnership's Year 2000 compliance program.
The Partnership processes its records on computer hardware and software
systems maintained by Host Marriott Corporation ("Host Marriott"), the parent
company of the General Partner of the Partnership. Host Marriott has adopted a
compliance program because it recognizes the importance of minimizing the number
and seriousness of any disruptions that may occur as a result of the Year 2000
Issue. Host Marriott's compliance program includes an assessment of Host
Marriott's hardware and software computer systems and embedded systems, as well
as an assessment of the Year 2000 issues relating to third parties with which
the Partnership has a material relationship or whose systems are material to the
operations of the Partnership's Hotel. Host Marriott's efforts to ensure that
its computer systems are Year 2000 compliant have been segregated into two
separate phases: in-house systems and third-party systems.
In-House Systems.Host Marriott has invested in the implementation and
maintenance of accounting and reporting systems and equipment that are intended
to enable the Partnership to provide adequately for its information and
reporting needs and which are also Year 2000 compliant. Substantially all of
Host Marriott's in-house systems have already been certified as Year 2000
compliant through testing and other mechanisms and Host Marriott has not delayed
any systems projects due to the Year 2000 Issue. Host Marriott is in the process
of engaging a third party to review its Year 2000 in-house compliance. Host
<PAGE>
Marriott believes that future costs associated with Year 2000 Issues for its
in-house systems will be insignificant and will therefore not impact the
Partnership's business, financial condition and results of operations. Host
Marriott has not developed, and does not plan to develop, a separate contingency
plan for its in-house systems due to their current Year 2000 compliance.
However, Host Marriott does have detailed contingency plans for its in-house
systems covering a variety of possible events, including natural disasters,
interruption of utility service and similar events.
Third-Party Systems. The Partnership relies upon operational and accounting
systems provided by third parties, primarily the Manager of its Hotel, to
provide the appropriate property-specific operating systems (including
reservation, phone, elevator, security, HVAC and other systems) and to provide
it with financial information. Based on discussions with the third parties that
are critical to the Partnership's business, including the Manager of its Hotel,
Host Marriott believes that these parties are in the process of studying their
systems and the systems of their respective vendors and service providers and,
in many cases, have begun to implement changes, to ensure that they are Year
2000 compliant. To the extent these changes impact property-level systems, the
Partnership may be required to fund capital expenditures for upgraded equipment
and software. Host Marriott does not expect these charges to be material, but is
committed to making these investments as required. To the extent that these
changes relate to the Manager's centralized systems (including reservations,
accounting, purchasing, inventory, personnel and other systems), the
Partnership's management agreement generally provides for these costs to be
charged to the Partnership's Hotel. Host Marriott expects that the Manager will
incur Year 2000 costs for its centralized systems in lieu of costs related to
system projects that otherwise would have been pursued and therefore, its
overall level of centralized charges allocated to the Hotel will not materially
increase as a result of the Year 2000 compliance effort. Host Marriott believes
that this deferral of certain system projects will not have a material impact on
its future results of operations, although it may delay certain productivity
enhancements at the Partnership's Hotel. Host Marriott will continue to monitor
the efforts of these third parties to become Year 2000 compliant and will take
appropriate steps to address any non-compliance issues. The Partnership believes
that in the event of material Year 2000 non-compliance caused by a breach of the
Manager's duties, the Partnership will have the right to seek recourse against
the Manager under its third party management agreement. The management agreement
generally does not specifically address the Year 2000 compliance issue.
Therefore the amount of any recovery in the event of Year 2000 non-compliance at
a property, if any, is not determinable at this time.
Host Marriott will work with the third parties to ensure that appropriate
contingency plans will be developed to address the most reasonably likely worst
case Year 2000 scenarios, which may not have been identified fully. In
particular, Host Marriott has had extensive discussions regarding the Year 2000
Issue with Marriott International, the Manager of the Hotel. Due to the
significance of Marriott International to the Partnership's business, a detailed
description of Marriott International's state of readiness follows.
Marriott International has adopted an eight-step process toward Year 2000
readiness, consisting of the following: (i) Awareness: fostering understanding
of, and commitment to, the problem and its potential risks; (ii) Inventory:
identifying and locating systems and technology components that may be affected;
(iii) Assessment: reviewing these components for Year 2000 compliance, and
assessing the scope of Year 2000 issues; (iv) Planning: defining the technical
solutions and labor and work plans necessary for each particular system; (v)
Remediation/Replacement: completing the programming to renovate or replace the
problem software or hardware; (vi) Testing and Compliance Validation: conducting
testing, followed by independent validation by a separate internal verification
team; (vii) Implementation: placing the corrected systems and technology back
into the business environment; and (viii) Quality Assurance: utilizing a
dedicated audit team to review and test significant projects for adherence to
quality standards and program methodology.
Marriott International has grouped its systems and technology into three
categories for purposes of Year 2000 compliance: (i) information resource
applications and technology (IT Applications) -- enterprise-wide systems
supported by Marriott International's centralized information technology
<PAGE>
organization ("IR"); (ii) Business-initiated Systems ("BIS") - systems that have
been initiated by an individual business unit, and that are not supported by
Marriott International's IR organization; and (iii) Building Systems - non-IT
equipment at properties that use embedded computer chips, such as elevators,
automated room key systems and HVAC equipment. Marriott International is
prioritizing its efforts based on how severe an effect noncompliance would have
on customer service, core business processes or revenues, and whether there are
viable, non-automated fallback procedures (System Criticality).
Marriott International measures the completion of each phase based on
documented and quantified results, weighted for System Criticality. As of the
end of the 1998 third quarter, the awareness and inventory phases were complete
for IT Applications and nearly complete for BIS and Building Systems. For IT
Applications, the Assessment, Planning and Remediation/Replacement phases were
each over 80 percent complete, and Testing and Compliance Validation had been
completed for a number of key systems, with most of the remaining work in its
final stage. For BIS and Building Systems, Assessment and Planning were in the
mid- to upper-range of completion, with a substantial amount of work in process,
while the progress level for Remediation/Replacement and Testing and Compliance
Validation had not yet been documented and quantified. Quality Assurance is also
in progress for IT Applications and is scheduled to begin for BIS and Business
Systems in the near future. Marriott International's goal is to substantially
complete the Remediation/Replacement and Testing phases for its System Critical
IT Applications by the end of 1998, with 1999 reserved for unplanned
contingencies and for Compliance Validation and Quality Assurance. For System
Critical BIS and Building Systems, the same level of completion is targeted for
June 1999 and September 1999, respectively.
Marriott International has initiated Year 2000 compliance communications
with its significant third party suppliers, vendors and business partners,
including its franchisees. Marriott International is focusing its efforts on the
business interfaces most critical to its customer service and revenues,
including those third parties that support the most critical enterprise-wide IT
Applications, franchisees generating the most revenues, suppliers of the most
widely used Building Systems and BIS, the top 100 suppliers, by dollar volume,
of non-IT products, and financial institutions providing the most critical
payment processing functions. Responses have been received from a majority of
the firms in this group.
Marriott International is also establishing a common approach for testing
and addressing Year 2000 compliance issues for its managed and franchised
properties. This includes a guidance protocol for operated properties, and a
Year 2000 "Toolkit" for franchisees containing relevant Year 2000 compliance
information. Marriott International is also utilizing a Year 2000 best-practices
sharing system.
Risks. There can be no assurance that Year 2000 remediation by the
Partnership or third parties will be properly and timely completed, and failure
to do so could have a material adverse effect on the Partnership, its business
and its financial condition. The Partnership cannot predict the actual effects
to it of the Year 2000 Issue, which depends on numerous uncertainties such as:
(i) whether significant third parties properly and timely address the Year 2000
Issue; and (ii) whether broad-based or systemic economic failures may occur.
Host Marriott is also unable to predict the severity and duration of any such
failures, which could include disruptions in passenger transportation or
transportation systems generally, loss of utility and/or telecommunications
services, the loss or distortion of hotel reservations made on a centralized
reservation system and errors or failures in financial transactions or payment
processing systems such as credit cards. Due to the general uncertainty inherent
in the Year 2000 Issue and the Partnership's dependence on third parties, the
Partnership is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Partnership. Host Marriott's
Year 2000 compliance program is expected to significantly reduce the level of
uncertainty about the Year 2000 Issue and Host Marriott believes that the
possibility of significant interruptions of normal operations should be reduced.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Partnership nor the Hotel are presently subject to any material
litigation nor, to the General Partner's knowledge, is any material litigation
threatened against the Partnership or the Hotel, other than 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K:
September 16, 1998 -- In this filing, Item 5 -- Other Events discloses that
the General Partner sent the limited partners of the Partnership a letter to
inform them that September 18, 1998 will be the record date for voting in the
forthcoming consent solicitation. Those limited partners whose ownership is
reflected on the records of the General Partner as of September 18, 1998 will be
eligible to vote on the merger and proposed amendments to the partnership
agreement. A copy of the letter was included as an Item 7 -- Exhibit in this
Form 8-K filing.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
MUTUAL BENEFIT CHICAGO MARRIOTT SUITE HOTEL
PARTNERS, L.P.
By: MOHS CORPORATION
General Partner
October 27, 1998 By: /s/ Earla L. Stowe
Earla L. Stowe
Vice President and Chief Accounting
Officer
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
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FINANCIAL STATEMENTS
</LEGEND>
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