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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 19, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-28222
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1990352
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(State of Organization) (I.R.S. Employer Identification Number)
10400 Fernwood Road, Bethesda, MD 20817-1109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 380-2070
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of
the Act:
Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes x No ____.
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<PAGE>
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Marriott Hotel Properties II Limited Partnership
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE NO.
Item 1. Financial Statements
Condensed Statement of Operations
Twelve and Twenty-Four Weeks Ended
June 19, 1998 and June 20, 1997.....................3
Condensed Balance Sheet
June 19, 1998 and December 31, 1997......................4
Condensed Statement of Cash Flows
Twenty-Four Weeks Ended June 19, 1998 and June 20, 1997..5
Notes to Condensed Financial Statements......................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.....................................................14
Item 6. Exhibits and Reports on Form 8-K......................................15
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Marriott Hotel Properties II Limited Partnership
Condensed Statement of Operations
(Unaudited)
(in thousands, except per Unit amounts)
<TABLE>
Twelve Weeks Ended Twenty-Four Weeks Ended
June 19, June 20, June 19, June 20,
1998 1997 1998 1997
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUES $.......................................$ 18,598 $ 17,046 $ 37,946 $ 36,584
----------- ----------- ----------- --------------
OPERATING COSTS AND EXPENSES
Depreciation.................................. 3,316 2,936 6,285 6,042
Incentive management fees..................... 2,708 2,509 5,550 5,410
Property taxes................................ 1,594 1,366 3,178 2,760
Base management fees.......................... 1,179 1,113 2,390 2,303
Ground rent .................................. 537 490 1,090 993
Insurance and other........................... 284 239 559 467
------------- -------------- ------------- --------------
9,618 8,653 19,052 17,975
------------- -------------- ------------- --------------
OPERATING PROFIT................................. 8,980 8,393 18,894 18,609
Interest expense.............................. (4,293) (4,337) (8,708) (8,827)
Interest income............................... 432 606 714 957
------------- -------------- ------------- --------------
INCOME BEFORE EQUITY IN INCOME OF
SANTA CLARA PARTNERSHIP....................... 5,119 4,662 10,900 10,739
EQUITY IN INCOME OF
SANTA CLARA PARTNERSHIP....................... 796 684 1,856 1,112
------------- -------------- ------------- --------------
NET INCOME.......................................$ 5,915 $ 5,346 $ 12,756 $ 11,851
============= ============== ============= ==============
ALLOCATION OF NET INCOME
General Partner...............................$ 59 $ 53 $ 127 $ 119
Limited Partners.............................. 5,856 5,293 12,629 11,732
------------- -------------- ------------- --------------
$ 5,915 $ 5,346 $ 12,756 $ 11,851
============= ============== ========== ===========
NET INCOME PER LIMITED PARTNER UNIT
(745 Units)...................................$ 7,860 $ 7,105 $ 16,952 $ 15,748
============= ============== ============= ==============
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
Marriott Hotel Properties II Limited Partnership
Condensed Balance Sheet
(in thousands)
<TABLE>
June 19, December 31,
1998 1997
(unaudited)
<S> <C> <C>
ASSETS
Property and equipment, net....................................................$ 194,173 $ 197,512
Due from Marriott Hotel Services, Inc.......................................... 10,208 7,063
Other assets................................................................... 11,031 8,510
Deferred financing costs, net.................................................. 5,523 5,663
Restricted cash reserves....................................................... 17,122 20,307
Cash and cash equivalents...................................................... 7,900 10,363
------------- ---------------
$ 245,957 $ 249,418
============= ===============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt................................................................$ 219,644 $ 221,814
Investment in Santa Clara Partnership........................................ 7,726 8,737
Due to Marriott International, Inc. ........................................ 4,203 3,567
Accounts payable and accrued expenses........................................ 1,677 4,163
------------- ---------------
Total Liabilities........................................................ 233,250 238,281
------------- ---------------
PARTNERS' CAPITAL
General Partner.............................................................. 272 256
Limited Partners............................................................. 12,435 10,881
------------- ---------------
Total Partners' Capital.................................................. 12,707 11,137
------------- ---------------
$ 245,957 $ 249,418
============= ===============
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
Marriott Hotel Properties II Limited Partnership
Condensed Statement of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
Twenty-Four Weeks Ended
June 19, June 20,
1998 1997
------------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ......................................................................$ 12,756 $ 11,851
Noncash items.................................................................... 4,647 5,087
Change in operating accounts..................................................... (3,273) 546
------------- --------------
Cash provided by operating activities...................................... 14,130 17,484
------------- --------------
INVESTING ACTIVITIES
Additions to property and equipment, net......................................... (2,946) (2,764)
Change in property improvement fund.............................................. (2,521) (1,922)
Distributions from Santa Clara Partnership....................................... 845 982
------------- --------------
Cash used in investing activities.......................................... (4,622) (3,704)
------------- --------------
FINANCING ACTIVITIES
Capital distributions to partners................................................ (11,186) (9,875)
Repayment of mortgage debt....................................................... (2,170) --
Change in restricted lender reserves, net........................................ 1,385 (2,139)
Payment of financing costs....................................................... -- (34)
------------- --------------
Cash used in financing activities.......................................... (11,971) (12,048)
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(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................................... (2,463) 1,732
CASH AND CASH EQUIVALENTS at beginning of period.................................... 10,363 16,372
------------- --------------
CASH AND CASH EQUIVALENTS at end of period..........................................$ 7,900 $ 18,104
============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest..................................................$ 9,181 $ 9,246
============= ==============
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
Marriott Hotel Properties II Limited Partnership
Notes to Condensed Financial Statements
(Unaudited)
1. The accompanying condensed financial statements have been prepared by
Marriott Hotel Properties II Limited Partnership (the "Partnership")
without audit. Certain information and footnote disclosures normally
included in financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted from the
accompanying statements. The Partnership believes the disclosures made are
adequate to make the information presented not misleading. However, the
condensed financial statements should be read in conjunction with the
Partnership's financial statements and notes thereto included in the
Partnership's Form 10-K for the fiscal year ended December 31, 1997.
In the opinion of the Partnership, the accompanying condensed unaudited
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position
of the Partnership as of June 19, 1998; the results of operations for the
twelve and twenty-four weeks ended June 19, 1998, and June 20, 1997; and
cash flows for the twenty-four weeks ended June 19, 1998, and June 20,
1997. Interim results are not necessarily indicative of fiscal year
performance because of seasonal and short-term variations.
For financial reporting purposes, net income of the Partnership is
allocated 99% to the limited partners and 1% to the General Partner.
Significant differences exist between the net income for financial
reporting purposes and the net income reported for Federal income tax
purposes. These differences are due primarily to the use for income tax
purposes of accelerated depreciation methods and shorter depreciable lives
of assets and differences in the timing of recognition of incentive
management fee expense.
2. The Partnership owns the New Orleans, San Antonio Rivercenter and San Ramon
Marriott Hotels (the "Hotels"). In addition, the Partnership owns a 50% limited
partnership interest in the Santa Clara Marriott Hotel Limited Partnership (the
"Santa Clara Partnership") which owns the Santa Clara Marriott Hotel (the "Santa
Clara Hotel"). The sole general partner of the Partnership and the Santa Clara
Partnership, with a 1% interest in each, is Marriott MHP Two Corporation (the
"General Partner"), a wholly-owned subsidiary of Host Marriott Corporation
("Host Marriott"). The remaining 49% interest in the Santa Clara Partnership is
owned by HMH Properties, Inc., a wholly-owned subsidiary of Host Marriott. The
Partnership's income from the Santa Clara Partnership is reported as Equity in
Income of the Santa Clara Partnership. In arriving at Equity in Income from the
Santa Clara Partnership, the Partnership is allocated 100% of the interest
expense related to the debt incurred to purchase the Santa Clara Partnership
interest. Summarized financial information for the Santa Clara Partnership is
presented in Note 5.
3. Certain reclassifications were made to the prior year condensed financial
statements to conform to the current year presentation.
4. Hotel revenues represent house profit of the Partnership's Hotels since
the Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Hotels to Marriott Hotel
Services, 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, ground
rent, insurance 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 is assessing the impact of EITF 97-2 on its policy of
excluding property-level revenues and operating expenses of the Hotels
from its statements of operations. If the Partnership concludes that EITF
97-2 should be applied to the Hotels, it would include operating results
of this managed operation in its financial statements. Application of EITF
97-2 to financial statements as of and for the twelve and twenty-four
weeks ended June 19, 1998, would have increased both revenues and
operating expenses by approximately $20.7 million and $41.7 million,
respectively, and would have had no impact on net income.
<PAGE>
Partnership revenues generated by the Hotels for 1998 and 1997, consist of
(in thousands):
<TABLE>
Twelve Weeks Ended Twenty-Four Weeks Ended
June 19, June 20, June 19, June 20,
1998 1997 1998 1997
-------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
HOTEL SALES
Rooms..............................$ 26,482 $ 24,479 $ 52,920 $ 50,384
Food and beverage.................. 10,630 10,469 22,223 22,072
Other.............................. 2,161 2,159 4,514 4,320
-------------- ------------- ------------- --------------
39,273 37,107 79,657 76,776
-------------- ------------- ------------- --------------
HOTEL EXPENSES
Departmental direct costs
Rooms............................ 4,851 4,656 9,499 9,151
Food and beverage................ 7,386 7,235 15,315 14,952
Other hotel operating expenses..... 8,438 8,170 16,897 16,089
-------------- ------------- ------------- --------------
20,675 20,061 41,711 40,192
-------------- ------------- ------------- --------------
HOTEL REVENUES........................$ 18,598 $ 17,046 $ 37,946 $ 36,584
============== ============= ============= ==============
</TABLE>
<PAGE>
5. Summarized financial information for the Santa Clara Partnership for 1998
and 1997, is as follows (in thousands):
<TABLE>
Twelve Weeks Ended Twenty-Four Weeks Ended
June 19, June 20, June 19, June 20,
1998 1997 1998 1997
-------------- ------------- ------------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Condensed Statement of Operations
REVENUES..............................$ 5,876 $ 5,260 $ 12,490 $ 10,247
OPERATING COSTS AND EXPENSES
Incentive management fees.......... 937 826 2,008 1,610
Depreciation and amortization...... 708 464 1,424 1,134
Base management fees............... 367 342 760 668
Property taxes..................... 122 122 245 244
Ground rent, insurance and other... 136 149 257 230
-------------- ------------- ------------- --------------
2,270 1,903 4,694 3,886
-------------- ------------- ------------- --------------
OPERATING PROFIT...................... 3,606 3,357 7,796 6,361
Interest expense................... (826) (835) (1,675) (1,699)
Interest income.................... 58 102 107 102
-------------- ------------- ------------- --------------
NET INCOME............................$ 2,838 $ 2,624 $ 6,228 $ 4,764
============== ============= ============= ==============
</TABLE>
<TABLE>
June 19, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
Condensed Balance Sheet
Property and equipment, net..............................................$ 27,623 $ 28,688
Property Improvement Fund................................................ 3,554 2,619
Due from Marriott Hotel Services, Inc.................................... 2,649 2,059
Cash and cash equivalents................................................ 4,949 3,177
------------- ----------------
Total Assets.........................................................$ 38,775 $ 36,543
============= ================
Mortgage debt............................................................$ 42,942 $ 43,366
Due to Marriott Hotel Services, Inc...................................... 475 970
Accounts payable and accrued expenses.................................... 322 482
Partners' deficit........................................................ (4,964) (8,275)
------------- ----------------
Total Liabilities and Partners' Deficit..............................$ 38,775 $ 36,543
============= ================
</TABLE>
6. As previously reported, Host Marriott, parent company of the General Partner
of the Partnership, announced on April 17, 1998, that its Board of Directors
authorized Host Marriott to reorganize its business operations to qualify as a
real estate investment trust ("REIT") to become effective as of January 1, 1999.
As part of the REIT conversion, Host Marriott formed a new operating partnership
(the "Operating Partnership"), and limited partners in certain Host Marriott
full-service hotel partnerships and joint ventures, including the Marriott Hotel
Properties II Limited Partnership, are expected to be given an opportunity to
receive, on a tax-deferred basis, Operating Partnership units in the Operating
Partnership in exchange for their current limited partnership interests. The
Operating Partnership units would be redeemable by the limited partner for
freely traded Host Marriott shares (or the cash equivalent thereof) at any time
after one year from the closing of the merger. In connection with the REIT
conversion, the Operating Partnership filed a Registration Statement on Form S-4
with the Securities and Exchange Commission on June 2, 1998. Limited partners
will be able to vote on this Partnership's participation in the merger later
this year through a consent solicitation.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements and as such may
involve known and unknown risks, uncertainties, and other factors which may
cause the actual results, performance or achievements of the Partnership to be
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Although the Partnership believes
the expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
attained. 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
REVPAR, or revenue per available room, 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). The following
charts summarize REVPAR and the percentage change from the prior year for each
Partnership Hotel for the twelve and twenty-four weeks ended June 19, 1998, and
June 20, 1997:
<TABLE>
Twelve Weeks Ended Twenty-Four Weeks Ended
-------------------------------------------- ---------------------------------------
June 19, 1998 June 20, 1997 June 19, 1998 June 20, 1997
-------------------- -------------------- -------------------- -----------------
<S> <C> <C> <C> <C>
REVPAR % Change REVPAR % Change REVPAR % Change REVPAR % Change
San Antonio $ 135 7% $ 126 4% $ 136 8% $ 126 5%
New Orleans $ 111 10% $ 101 (5%) $ 109 -- $ 109 5%
San Ramon $ 103 7% $ 96 15% $ 105 15% $ 91 12%
Santa Clara $ 134 8% $ 124 22% $ 138 14% $ 121 24%
Combined Average $ 122 10% $ 111 3% $ 123 8% $ 114 8%
</TABLE>
Revenues. Partnership revenues for the twelve and twenty-four week periods in
1998 increased by 9% and 4%, respectively when compared to 1997 results. The
increase in overall revenues is primarily due to a 5% increase in total room
sales. For the twelve weeks ended June 19, 1998, REVPAR increased 10% due to a
13% increase in the combined average room rate, elevating it to approximately
$151 from $134, that was partially offset by a three percentage point decrease
in combined average occupancy as compared to the same twelve week period in
1997. In comparison, for the twenty-four weeks ended June 19, 1998, REVPAR
increased 8% as a result of a 11% increase in the combined average room rate
over the same period last year to approximately $153 from $137 partially offset
by a two percentage point decline in combined average occupancy.
The Marriott Rivercenter in San Antonio reported a 10%, or $1.7 million,
increase in year to date second quarter 1998 revenues compared to the same
period in 1997. This increase primarily is due to a 9% increase in room revenues
to $22.8 million. Room revenues increased due to an 8% increase in REVPAR to
$136, resulting from a 7% increase in the average room rate to approximately
$154 combined with a slight increase in average occupancy. The increase in the
average room rate is primarily due to more emphasis being placed on higher-rated
transient business versus group business. Second quarter 1998 revenues at the
Hotel increased to $9.2 million from $8.4 million in second quarter 1997, or 9%.
Contributing to the increase in hotel revenues for the second quarter 1998 were
room sales and food and beverage sales, up 7% and 5%, respectively, over the
same quarter of last year. Hotel management has accomplished the increase in
revenues by monitoring the number of special corporate accounts and by replacing
this business with higher-rated transient business. The Hotel has begun a major
renovation of its ballroom which will position it to compete more effectively
for banquet business in the future.
Year to date revenues at the New Orleans Marriott Hotel decreased 6%, or
$990,000, for 1998 when compared to the same period in 1997. The decrease is
primarily due to a 9% decrease in food and beverage revenues and an increase in
other Hotel operating costs. The year to date average room rate increased by 6%
as compared to year to date 1997 due to rate increases in both group and
transient room rates. Year to date average occupancy declined by five percentage
points to 75% primarily due to city wide convention group traffic being down
significantly during 1998. Additionally, the rooms renovation project
contributed to the shortfall by creating a lack of room availability. Second
quarter 1998 as compared to second quarter 1997 reflects a 9% increase in
revenues. The increase in revenues is driven by a 9% increase in room sales. The
lobby and restaurant renovations have now been completed, and the rooms
renovation was completed over the July 4th weekend. In a continuing effort to
replace lost roomnights due to the major conventions rotating to other cities in
1998, Hotel management is targeting small groups which will also enable them to
increase the average room rate.
Year to date revenues at the San Ramon Marriott Hotel increased 21%, or $637,000
when compared to 1997. The increase is due to a 19%, or $820,000, increase in
room revenues. Room revenues increased due to a significant increase in REVPAR.
REVPAR increased 15% when compared to 1997 which was attributable to a 21%
increase in the average room rate to approximately $131, while average occupancy
fell by four percentage points to the low-80's. Second quarter 1998 produced a
10% increase in revenues over second quarter 1997. Factors contributing to the
increase were a 7% increase in room sales over last year's second quarter due to
a 4% increase in average room rate from approximately $109 to $113, which
resulted in a 2% improvement in REVPAR. The increase in the average room rate is
due to Hotel management's continued success in increasing the corporate rate.
Room margins continue to maintain a 2% premium over 1997 due to an increase in
room rates and cost efficiencies. In addition, sales promotion efforts
instituted an Events Booking Center to capture more of the group business
market.
The Santa Clara Marriott Hotel reported a 22%, or $2.2 million, increase for
year to date 1998 revenues when compared to the same period in 1997. The
increase is primarily due to a 14% increase in room revenues and a 14% increase
in food and beverage revenues. Room revenues increased due to a 19% increase in
the average room rate to approximately $172, deriving a 14% increase in REVPAR,
while average occupancy decreased four percentage points to the low-80's. In
comparison to year to date figures, second quarter 1998 results reflect an 11%
increase in revenues as compared to second quarter 1997. Factors contributing to
the increase are room sales and food and beverage sales, improving 8% and 5%,
respectively. Second quarter 1998 average occupancy fell by seven percentage
points while the average room rate improved 17% in comparison to second quarter
1997. The overall increase in the average room rate is supported by an increase
in regular corporate rates. Hotel management is striving to improve occupancy by
offering special corporate rates and pursuing room contracts with local
technology companies. Food and beverage revenues increased primarily due to
heavier utilization of the catering facilities by existing groups, the
implementation of a new service charge for meeting room rental, and effective
menu pricing in the Hotel's restaurant. A major rooms renovation is planned for
the Hotel this year with work scheduled to commence in November and
conclude in early 1999.
Operating Costs and Expenses. For the twenty-four weeks
ended June 19, 1998, operating costs and expenses increased by $1.1 million to
$19.1 million over last year at June 20, 1997. For the twelve weeks ended June
19, 1998, operating costs and expenses increased by $965,000 to $9.6 million
over second quarter 1997. Operating costs and expenses increased primarily due
to increases in depreciation expense and property taxes expense.
Operating Profit. For the twenty-four weeks ended June 19, 1998, operating
profit increased $285,000 to $18.9 million primarily due to an increase in
revenues which was partially offset by the increase in operating costs and
expenses discussed above. For the twelve weeks ending June 19, 1998, operating
profit increased $587,000, or 7%, to $9.0 million.
Interest Expense. Interest expense decreased slightly when comparing both year
to date and second quarter 1998 results to the same periods in 1997 due to a
lower principal balance on the Partnership's Mortgage Debt as a result of the
principal amortization that began in the fourth quarter of 1997.
Equity in Income of Santa Clara Partnership. For year to date second quarter
1998, equity in income of the Santa Clara Partnership increased by $744,000 to
$1.9 million primarily due to improved hotel operations at the Santa Clara Hotel
combined with a slight decrease in interest expense on the Santa Clara Mortgage
Debt. For second quarter 1998, equity in income of the Santa Clara Partnership
increased by $112,000, or 16%, as compared to second quarter last year.
Net Income. For year to date second quarter 1998, net income increased by
$905,000 to $12.8 million. For second quarter 1998, net income increased by
$569,000 to $5.9 million. These increases primarily resulted from an increase in
operating profit and in equity in income of the Santa Clara Partnership.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded through loan
agreements with independent financial institutions. The General Partner believes
that the Partnership will have sufficient capital resources and liquidity to
continue to conduct its operations in the ordinary course of business.
Mortgage Debt
The Partnership's mortgage debt consists of a $222.5 million nonrecourse
mortgage loan (the "Mortgage Debt") which accrues interest at a fixed rate of
8.22%. Payments of interest only were required during the first loan year
(October 1996 through September 1997) and then principal payments based on a
20-year amortization schedule began in October 1997. This principal
amortization is expected to improve the financial condition of the Partnership
by reducing the Partnership's long-term indebtedness. The General Partner
expects that cash flows from the Partnership Hotels and the Santa Clara Hotel
will be sufficient to provide for the Partnership's debt service.
<PAGE>
Principal Sources and Uses of Cash
The Partnership's principal sources of cash are cash from operations and cash
distributions from the Santa Clara Partnership. Its principal uses of cash are
to pay debt service on the Partnership's Mortgage Debt, to fund the property
improvement funds of the Hotels, and to make capital distributions to the
partners. Additionally, in 1997 the Partnership utilized cash to establish
capital reserves required by the lender and to pay financing costs incurred in
connection with the refinancing of the Partnership's Mortgage Debt and the Santa
Clara Partnership's Mortgage Debt.
Total cash provided by operating activities was $14.1 million and $17.5 million
for the twenty-four weeks ended June 19, 1998 and June 20, 1997, respectively.
This decrease was due to a change in operating accounts partially offset by an
increase in net income.
Cash used in investing activities increased to $4.6 million for the twenty-four
weeks ended June 19, 1998 from $3.7 million for the twenty-four weeks ended June
20, 1997. Property and equipment expenditures have increased to $2.9 million as
compared to $2.8 million over the same period last year, and the year to date
net change in the property improvement funds of the Hotels was $2.5 million and
$1.9 million for the twenty-four weeks ended June 19, 1998 and June 20, 1997,
respectively. Contributions to the property improvement funds of the Hotels were
$4.2 million and $4.1 million for the twenty-four weeks ended June 19, 1998 and
June 20, 1997, respectively.
Cash used in financing activities produced comparable results of $12.0 million
for the twenty-four weeks ended June 19, 1998 and June 20, 1997. A net increase
in restricted lender reserves was partially offset by cash utilized to make
principal payments of $2.2 million on the Partnership's Mortgage Debt.
Additionally, capital distributions increased to $11.2 million from $9.9 million
for the twenty-four weeks ended June 19, 1998 and June 20, 1997, respectively.
The General Partner believes that cash from Hotel operations and the reserves
established in conjunction with the refinancing will continue to meet the short
and long-term operational and capital needs of the Partnership. In August 1998,
the Partnership will make a cash distribution of $6,700 per limited partner unit
from second quarter 1998 operating cash flow bringing total distributions year
to date from 1998 operating cash flow to $11,700 per limited partner unit.
The Partnership is required to maintain the Hotels and the Santa Clara Hotel in
good condition. Under each of the Partnership Hotels and the Santa Clara Hotel
management agreements, the Partnership is required to make annual contributions
to the property improvement funds which provide funding for replacement of
furniture, fixtures and equipment. The General Partner believes the property
improvement funds, as adjusted in the case of the New Orleans Hotel, and the
capital reserves established in conjunction with the refinancing will be
adequate for the future capital repairs and replacement needs of the Hotels and
the Santa Clara Hotel. As previously reported, the escrow contribution
percentage for the New Orleans Marriott Hotel increased from 5% to 7% in late
1997 and will continue at 7% through 1998 to allow for adequate funding of the
total rooms refurbishment of its guest rooms. This project was completed in July
1998, and during the refurbishment, the Hotel replaced the carpeting,
bedspreads, upholstery, drapes and other similar items as well as the dressers,
chairs, beds and other furniture in the guest rooms.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Partnership and the Partnership Hotels 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 April 23, 1996, MacKenzie Patterson Special Fund 2, L.P. ("MacKenzie
Patterson"), a limited partner of the Partnership, filed a class-action lawsuit
in the Circuit Court for Montgomery County, Maryland, against the Partnership,
as a nominal defendant, MHPII Acquisition Corp. ("MHPII Acquisition"), a
wholly-owned subsidiary of Host Marriott Corporation, Host Marriott Corporation,
the General Partner and the directors of the General Partner, alleging, among
other things, that the defendants had violated their fiduciary duties in
connection with MHPII Acquisition's tender offer. The complaint sought
certification as a class-action, to enjoin the tender offer and its associated
consent solicitation, and damages. Subsequently, MacKenzie Patterson dismissed
the Montgomery County action and refiled in Delaware State Chancery Court. In
separate lawsuits, filed on April 24, 1996, in Delaware State Chancery Court and
on May 10, 1996, in the Circuit Court for Palm Beach County, Florida, two other
limited partners of the Partnership sought similar relief. The Chancery Court
consolidated the two Delaware lawsuits and on June 12, 1996, entered an order
denying the Delaware plaintiff's motion to enjoin the tender offer and consent
solicitation. The defendants moved to dismiss this consolidated action and to
stay discovery. While the defendants' motion to dismiss was pending, MacKenzie
Patterson filed its own motion to dismiss the consolidated Delaware cases so
that it could join in the Florida action. The Chancery Court entered an order
granting MacKenzie Patterson's motion to dismiss on September 17, 1997.
The defendants removed the Florida action to federal court and filed motions to
dismiss the case. This case is styled Leonard Rosenblum, as Trustee of the
Sylvia Bernice Rosenblum Trust, et al. v. Marriott MHP Two Corporation, et al.,
Case No. 96-8377-CIV-HURLEY. Although the District Court denied these motions,
it required Rosenblum to file a second amended complaint. Subsequently,
Rosenblum filed yet a third amended complaint. The defendants subsequently filed
motions to dismiss the third amended complaint. In addition, the defendants
sought to deny class certification in this case, because, among other things,
Rosenblum failed to seek certification for nearly two years. MacKenzie Patterson
filed its Florida complaint on December 18, 1997, styled MacKenzie Patterson
Special Fund 2, L.P., et al. v. Marriott MHP Two Corporation, et al., Case No.
97-8989-CIV-HURLEY, and the defendants are seeking dismissal of this latest
effort on jurisdictional grounds and because MacKenzie Patterson failed to plead
its fraud and derivative claims properly. On May 28, 1998, the District Court
granted the defendants' motions and dismissed MacKenzie Patterson's Florida
complaint and Rosenblum's third amended complaint, but allowed both sets of
plaintiffs to amend their complaints. On June 19, 1998, the District Court
dismissed MacKenzie Patterson's amended Florida complaint, again allowing
MacKenzie Patterson to replead, but the court also entered an order to show
cause why the case should not be dismissed and closed. Four days later the
District Court dismissed Rosenblum's fourth amended complaint, again allowing
Rosenblum to replead, and Rosenblum filed a fifth amended complaint on July 3,
1998. The defendants believe that the latest Florida complaints are equally
without merit and intend to continue vigorously defending these actions. As
previously stated, the Partnership is named only as a nominal defendant in both
lawsuits. Accordingly, final resolution of these matters will not have any
adverse effect on 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
A Form 8-K was filed with the Securities and Exchange
Commission on May 8, 1998. In this filing, Item 5 - Other
Events discloses the announcement by Host Marriott, parent
company of the General Partner of the Partnership, that Host
Marriott's Board of Directors has authorized Host Marriott
to reorganize its business operations to qualify as a real
estate investment trust, effective as of January 1, 1999. A
copy of the press release was included as an Item 7 -
Exhibit in this Form 8-K filing.
A Form 8-K was filed with the Securities and Exchange
Commission on June 19, 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 of the
proposed reorganization of Host Marriott's business
operations to qualify as a real estate investment trust and
to provide them with the estimated exchange value per
Partnership unit. 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 report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
By: MARRIOTT MHP TWO CORPORATION
General Partner
By: /s/Earla L. Stowe
Earla L. Stowe
Vice President and Chief Accounting Officer
July 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the second
quarter Form 10-Q and is qualified in its entirety by reference to such
financial statements.</LEGEND>
<CIK> 0000845240
<NAME> Marriott Hotel Properties II Limited Partnership
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> Jun-19-1998
<EXCHANGE-RATE> 1.00
<CASH> 25,022
<SECURITIES> 16,554 <F1>
<RECEIVABLES> 10,208
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 51,784
<PP&E> 298,689
<DEPRECIATION> (104,516)
<TOTAL-ASSETS> 245,957
<CURRENT-LIABILITIES> 13,606
<BONDS> 219,644
0
0
<COMMON> 0
<OTHER-SE> 12,707
<TOTAL-LIABILITY-AND-EQUITY> 245,957
<SALES> 0
<TOTAL-REVENUES> 40,516 <F2>
<CGS> 0
<TOTAL-COSTS> 19,052
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,708
<INCOME-PRETAX> 12,756
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,756
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,756
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> This is other assets.
<F2> This includes equity in income of Santa Clara Partnership and interest
income.
</FN>
</TABLE>
