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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. 033-24935
MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1605434
(State of Organization) (I.R.S. Employer Identification Number)
10400 Fernwood Road, Bethesda, MD 20817-1109
(Address of principal executive 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)
Indicated 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. On August
25, 1992, the Registrant filed an application for relief from the reporting
requirements of the Securities Exchange Act of 1934 pursuant to Section 12(h)
thereof. Because of the pendency of such application, the Registrant was not
required to, and did not make, any filings pursuant to the Securities Exchange
Act of 1934 from October 23, 1989 until the application was voluntarily
withdrawn on January 16, 1998.)
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MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP
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TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Operations
Twelve and Twenty-Four Weeks Ended June 19, 1998
and June 20, 1997................................................1
Condensed Consolidated Balance Sheet
June 19, 1998 and December 31, 1997..............................2
Condensed Consolidated Statement of Cash Flows
Twenty-Four Weeks ended June 19, 1998 and June 20, 1997..........3
Notes to Condensed Consolidated Financial Statements................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................9
Item 6. Exhibits and Reports on Form 8-K...................................10
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Marriott Residence Inn II Limited Partnership
Condensed Consolidated Statement of Operations
(Unaudited)
(in thousands, except per Unit amounts)
Twelve Weeks Ended Twenty-Four Weeks Ended
June 19, June 20, June 19, June 20
1998 1997 1998 1997
---------- ----------- ------------ -----------
REVENUES........................$ 8,091 $ 8,699 $ 16,118 $ 17,047
---------- ----------- ------------ -----------
OPERATING COSTS AND EXPENSES
Depreciation................. 1,681 1,921 3,343 3,554
Incentive management fee..... 814 906 1,655 1,793
Residence Inn system fee..... 648 640 1,285 1,271
Property taxes............... 514 515 1,030 1,031
Base management fee.......... 340 337 674 669
Equipment rent and other..... 511 532 647 743
----------- ----------- ------------ -----------
4,508 4,851 8,634 9,061
----------- ----------- ------------ -----------
OPERATING PROFIT................ 3,583 3,848 7,484 7,986
Interest expense............. (2,955) (3,019) (5,987) (6,074)
Interest income.............. 176 139 369 277
----------- ----------- ------------ -----------
NET INCOME......................$ 804 $ 968 $ 1,866 $ 2,189
=========== =========== ============ ===========
ALLOCATION OF NET INCOME
General Partner..............$ 8 $ 10 $ 19 $ 22
Limited Partners............. 796 958 1,847 2,167
----------- ----------- ------------ -----------
$ 804 $ 968 $ 1,866 $ 2,189
=========== =========== ============ ===========
NET INCOME PER LIMITED
PARTNER UNIT (70,000 Units).....$ 11 $ 14 $ 26 $ 31
=========== =========== ============ ===========
See notes to condensed consolidated financial
statements.
Marriott Residence Inn II Limited Partnership
Condensed Consolidated Balance Sheet
(in thousands)
June 19, December 31,
1998 1997
(Unaudited)
ASSETS
Property and equipment, net.........................$ 141,396 $ 143,125
Due from Residence Inn by Marriott, Inc............. 4,290 4,057
Deferred financing costs, net....................... 3,195 3,385
Property improvement fund........................... 1,621 1,543
Restricted reserves................................. 6,391 5,647
Cash and cash equivalents........................... 9,680 10,126
----------- ------------
$ 166,573 $ 167,883
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt.......................................$ 138,336 $ 139,090
Incentive management fee due to Residence Inn
by Marriott, Inc.................................. 17,670 16,545
Accounts payable and accrued expenses............... 1,672 1,684
----------- ------------
Total Liabilities................................ 157,678 157,319
----------- ------------
PARTNERS' CAPITAL
General Partner..................................... 168 185
Limited Partners.................................... 8,727 10,379
----------- ------------
Total Partners' Capital.......................... 8,895 10,564
----------- ------------
$ 166,573 $ 167,883
=========== ============
See notes to condensed consolidated financial
statements.
Marriott Residence Inn II Limited Partnership
Condensed Consolidated Statement of Cash Flows
(Unaudited)
(in thousands)
Twenty-Four Weeks Ended
June 19, June 20,
1998 1997
------------ ------------
OPERATING ACTIVITIES
Net income.....................................$ 1,866 $ 2,189
Noncash items.................................. 4,658 4,340
Changes in operating accounts.................. (739) (1,686)
------------- ------------
Cash provided by operating activities....... 5,785 4,843
------------- ------------
INVESTING ACTIVITIES
Additions to property and equipment............ (1,614) (3,201)
Change in property improvement fund............ (78) 1,324
------------- ------------
Cash used in investing activities........... (1,692) (1,877)
------------- ------------
FINANCING ACTIVITIES
Capital distributions to partners.............. (3,535) (3,536)
Repayment of mortgage debt..................... (754) (223)
Change in restricted reserves.................. (250) (1,603)
------------- ------------
Cash used in financing activities........... (4,539) (5,362)
------------- ------------
DECREASE IN CASH AND CASH EQUIVALENTS............... (446) (2,396)
CASH AND CASH EQUIVALENTS at beginning of period.... 10,126 8,008
------------- ------------
CASH AND CASH EQUIVALENTS at end of period..........$ 9,680 $ 5,612
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest................$ 6,209 $ 6,263
============= ============
See notes to condensed consolidated financial
statements.
Marriott Residence Inn II Limited Partnership
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. The accompanying condensed consolidated financial statements have been
prepared by Marriott Residence Inn II Limited Partnership (the
"Partnership") without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
generally accepted accounting principles have been condensed or omitted
from the accompanying statements. The Partnership believes the disclosures
made are adequate to make the information presented not misleading.
However, the condensed consolidated financial statements should be read in
conjunction with the Partnership's consolidated financial statements and
notes thereto included in the Partnership's Form 10-K for the fiscal year
ended December 31, 1997.
In the opinion of the Partnership, the accompanying condensed unaudited
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position
of the Partnership as of June 19, 1998, the results of operations for the
twelve and twenty-four weeks ended June 19, 1998 and June 20, 1997 and the
results of 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 Marriott RIBM Two
Corporation (the "General Partner"). Significant differences exist between
the net income for financial reporting purposes and the net income for
Federal income tax purposes. These differences are due primarily to the
use, for income tax purposes, of accelerated depreciation methods and
shorter depreciable lives of the assets and differences in the timing of
the recognition of incentive management fee expense.
2. Certain reclassifications were made to prior year financial statements
to conform to the 1998 presentation.
3. Revenues represent house profit of the Partnership Inns since the
Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Inns to Residence Inn by
Marriott, Inc. (the "Manager"). House profit reflects the net revenues
flowing to the Partnership as property owner and represents Inn operating
results less property-level expenses, excluding depreciation, Residence Inn
system, base and incentive management fees, property taxes, equipment rent
and certain other costs, which are disclosed separately in the condensed
consolidated statement of operations.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity
in its financial statements.
The Partnership is assessing the impact of EITF 97-2 on its policy of
excluding property-level revenues and operating expenses of the Inns from
its statements of operations. If the Partnership concludes that EITF 97-2
should be applied to the Inns, it would include operating results of this
managed operation in its fiancial 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 $8,907,000 and $17,597,000, respectively, and would have had
no impact on net income.
Revenues consist of the following Inn operating results for 1998 and 1997
(in thousands):
Twelve Weeks Ended Twenty-Four Weeks Ended
June 19, June 20, June 19, June 20,
1998 1997 1998 1997
---------- --------- ----------- --------
INN SALES
Suites........................$ 16,199 $ 16,004 $ 32,123 $ 31,782
Other operating departments... 799 878 1,592 1,746
---------- --------- ---------- ---------
16,998 16,882 33,715 33,528
---------- --------- ---------- ---------
INN EXPENSES
Departmental direct costs
Suites...................... 3,796 3,444 7,244 6,800
Other operating departments. 284 348 818 701
Other Inn operating expenses.. 4,827 4,391 9,535 8,980
---------- -------- ---------- --------
8,907 8,183 17,597 16,481
---------- -------- ---------- --------
REVENUES........................$ 8,091 $ 8,699 $ 16,118 $ 17,047
========== ======== ========== =========
4. As previously reported Host Marriott Corporation on behalf of the
General Partner, Marriott RIBM Two Corporation, filed a preliminary
Prospectus/Consent Solicitation Statement with the Securities and Exchange
Commission in December 1997 which proposed the consolidation of this
Partnership and five other limited partnerships into a publicly traded real
estate investment trust ("REIT").
In addition, there are existing REIT's which are active in the moderate
price and extended stay hotel segment that have expressed an interest in
acquiring the hotels owned by the six limited partnerships. The General
Partner has had preliminary discussions with some of these companies and
continues to pursue the possibility of a potential transaction involving
the Partnership's assets or a merger of the Partnership with an existing
publicly traded company.
The General Partner has retained Merrill Lynch to advise the Partnership
with respect to the Partnership's strategic alternatives. The General
Partner intends to continue to explore these alternatives and determine
which path to pursue, obviously subject to appropriate partner approval.
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. These risks are detailed from time to time in the Partnership's
filings with the Securities and Exchange Commission. The Partnership undertakes
no obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances.
RESULTS OF OPERATIONS
First Two Quarters of 1998 Compared To First Two Quarters of 1997
Revenues. REVPAR, or revenue per available room, is a commonly used
indicator of market performance for hotels (although it is not a GAAP, or
generally accepted accounting principles, measure of revenue) which represents
the combination of the average daily room rate charged and the average daily
occupancy achieved. REVPAR does not include food and beverage or other ancillary
revenues generated by the property. Inn sales increased $200,000, or 1%, to
$33.7 million in the first two quarters of 1998 reflecting the improvements in
REVPAR for the period. REVPAR increased 1% for the first two quarters of 1998
primarily due to an increase in the combined average room rate of 4%, while the
combined average occupancy decreased by three percentage points. Partnership
revenues for the first two quarters of 1998 decreased $900,000 or 5% to $16.1
million. This decrease is primarily due to stable Inn sales and REVPAR results
combined with higher Inn hourly wage rates, increased utility costs and higher
repairs and maintenance expense.
Operating Costs and Expenses. Operating costs and expenses decreased to $8.6
million for the first two quarters of 1998 from $9.1 million for the first two
quarters of 1997. As a percentage of Inn revenues, Inn operating costs and
expenses were 54% and 53% of revenues for the first two quarters of 1998 and the
first two quarters of 1997, respectively.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit decreased by $500,000 to $7.5
million, or 46% of revenues, for the first two quarters of 1998 from $8.0
million, or 47% of revenues, for the first two quarters of 1997.
Interest Expense. Interest expense decreased by 1% or $100,000 to $6.0 million
for the first two quarters of 1998 compared to $6.1 million for the first two
quarters of 1997 as a result of principal amortization on the Partnership's
mortgage debt.
Net Income. Net income for the first two quarters of 1998 decreased
$300,000 to $1.9 million, or 12% of revenues, compared to net income of $2.2
million, or 13% of revenues, for the first two quarters of 1997 primarily due to
the results of the items discussed above.
Second Quarter 1998 Compared To Second Quarter 1997
Revenues. Inn sales increased $100,000, or 1%, to $17.0 million in the
second quarter 1998 reflecting the improvements in REVPAR for the period. REVPAR
increased 1% for the second quarter 1998 primarily due to an increase in the
combined average room rate of 4%, while the combined average occupancy decreased
three percentage points. Revenues for the second quarter 1998 decreased
$600,000, or 7%, to $8.1 million. The decrease is primarily due to increased
hourly wage rates at the Partnership's Inns and higher repairs and maintenance
expense.
Operating Costs and Expenses. Operating costs and expenses decreased to $4.5
million for the second quarter 1998 from $4.9 million for the second quarter
1997. As a percentage of Inn revenues, Inn operating costs and expenses were 56%
of revenues for both the second quarter 1998 and the second quarter 1997.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit decreased by $200,000 to $3.6
million, or 44% of revenues, for the second quarter 1998 from $3.8 million, or
44% of revenues, for the second quarter 1997.
Interest Expense. Interest expense remained unchanged at $3.0 million for the
second quarter 1998 and 1997.
Net Income. Net income for the second quarter 1998 decreased $200,000 to
$800,000, or 10% of revenues, compared to net income of $1.0 million, or 11% of
revenues, for the second quarter 1997 primarily due to the results of the items
discussed above.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have been historically funded through loan
agreements with independent financial institutions. The General Partner believes
that the Partnership will have sufficient capital resources to conduct its
operations in the ordinary course of business although there can be no assurance
of the Partnership's ability to do so.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is cash from operations. Its
principal uses of cash are to make debt service payments, fund the property
improvement fund and to make distributions to the partners.
Cash provided by operating activities was $5.8 million for the first two
quarters of 1998 compared to $4.8 million for the first two quarters of 1997.
The increase is a result of $900,000 of working capital advanced to the Manager
in 1997 slightly offset by a $200,000 decrease in net income in 1998.
Cash used in investing activities for the first two quarters of 1998 and the
first two quarters of 1997 was $1.9 million and $3.5 million, respectively. The
Partnership's cash used in investing activities consists primarily of
contributions to the property improvement fund, capital expenditures for
improvements to the Inns and contributions to restricted cash reserves required
under the new terms of the mortgage debt. Contributions to the property
improvement fund were $1.7 million for the first two quarters of 1998 and 1997,
while expenditures from the property improvement fund were $1.6 million and $3.2
million for the first two quarters of 1998 and 1997, respectively.
Cash used in financing activities for the first two quarters 1998 and the
first two quarters 1997 was $4.3 million and $3.8 million, respectively. The
Partnership's cash used in financing activities consist of capital distributions
to partners and repayment of mortgage debt. The Partnership distributed $3.5
million to the partners, which equaled $50 per limited partnership unit, in the
first quarter of 1998 from 1997 operations. In the first quarter of 1997, the
Partnership distributed $3.5 million to the partners, which equaled $50 per
limited partnership unit, from 1996 operations. Repayment of mortgage debt was
$800,000 for the first two quarters of 1998 compared to $200,000 for the first
two quarters of 1997. The Partnership's mortgage debt required payments of
interest only through March 1997. Thereafter, it requires principal amortization
based on a 25-year amortization schedule.
The General Partner believes that cash from Inn operations and Partnership
reserves will be adequate in the short term and long term for the operational
and capital needs of the Partnership.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 11, 1998, four individual limited partners in partnerships sponsored
by Host Marriott Corporation ("Host Marriott") filed a class action lawsuit,
styled Ruben, et al. v. Host Marriott Corporation, et al., Civil Action No.
16186, in Delaware State Chancery Court against Host Marriott and the general
partners of Courtyard by Marriott Limited Partnership, Courtyard by Marriott II
Limited Partnership, Marriott Residence Inn Limited Partnership, Marriott
Residence Inn II Limited Partnership, and Fairfield Inn by Marriott Limited
Partnership (collectively, the "Five Partnerships"). The plaintiffs allege that
the merger of the Five Partnerships (the "Merger") into an umbrella partnership
real estate investment trust proposed by CRF Lodging Company, L.P. in a
preliminary registration statement filed with the Securities and Exchange
Commission, dated December 22, 1997, constitutes a breach of the fiduciary
duties owed to the limited partners of the Five Partnerships by Host Marriott
and the general partners of the Five Partnerships. In addition, the plaintiffs
allege that the Merger breaches various agreements relating to the Five
Partnerships. The plaintiffs are seeking, among other things, the following:
certification of a class; injunctive relief to block consummation of the Merger
or, in the alternative, rescission of the Merger; and damages. Host Marriott and
the general partners of the Five Partnerships believe that these allegations are
totally devoid of merit and they intend to vigorously defend against them. The
defendants also maintain that this lawsuit is premature because the Merger has
not been, and may not be, consummated as proposed in the SEC filings.
Accordingly, they have filed a motion to dismiss the lawsuit.
On March 16, 1998, limited partners in several partnerships sponsored by
Host Marriott Corporation ("Host Marriott"), filed a lawsuit, styled Robert M.
Haas, Sr. and Irwin Randolf Joint Tenants, et al., v. Marriott International
Inc., et al., Case No. 98-CI-04092, in the 57th District Court of Bexar County,
Texas against Marriott International, Inc. ("Marriott International"), Host
Marriott, various of their subsidiaries, J.W. Marriott, Jr., Stephen Rushmore,
and Hospitality Valuation Services, Inc. (collectively, the "Defendants"). The
lawsuit relates to the following limited partnerships: Courtyard by Marriott
Limited Partnership, Courtyard by Marriott II Limited Partnership, Marriott
Residence Inn Limited Partnership, Marriott Residence Inn II Limited
Partnership, Fairfield Inn by Marriott Limited Partnership, Desert Springs
Marriott Limited Partnership, and Atlanta Marriott Marquis Limited Partnership
(collectively, the "Seven Partnerships"). The plaintiffs allege, among other
things, that the Defendants conspired to sell hotels to the Seven Partnerships
for inflated prices and that they charged the Seven Partnerships excessive
management fees to operate the Seven Partnerships' hotels. The plaintiffs
further allege that the Defendants committed fraud, breached fiduciary duties,
and violated the provisions of various contracts. The plaintiffs are seeking
unspecified damages. The Defendants, which do not include the Seven
Partnerships, believe that there is no truth to the plaintiffs' allegations and
that the lawsuit is totally devoid of merit. The Defendants intend to vigorously
defend against the claims asserted in the lawsuit. They have filed an answer to
the plaintiffs' petition and asserted a number of defenses. Although the Seven
Partnerships have not been named as Defendants in the lawsuit, the partnership
agreements relating to the Seven Partnerships include an indemnity provision
which requires the Seven Partnerships, under certain circumstances, to indemnify
the general partners against losses, judgments, expenses and fees.
The Partnership and the Inns are involved in routine litigation and
administrative proceedings arising in the ordinary course of business, some of
which are expected to be covered by liability insurance and which collectively
are not expected to have a material adverse effect on the business, financial
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:
May 6, 1998 -- Letter from the general partner to limited
partners regarding status of proposed consolidation.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARRIOTT RESIDENCE INN II
LIMITED PARTNERSHIP
By: MARRIOTT RIBM TWO CORPORATION
General Partner
July 31, 1998 By: /s/ Earla L. Stowe
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Earla L. Stowe
Vice President and Chief Accounting Officer