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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 18, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 033-20022
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1558094
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(State of Organization) (I.R.S. Employer Identification Number)
10400 Fernwood Road, Bethesda, MD 20817-1109
- --------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 380-2070
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of
the Act:
Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark whether the registrant (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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MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
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TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statement of Operations
Twelve and Twenty-Four Weeks Ended June 18, 1999 and June 19, 1998 (Unaudited)................1
Condensed Balance Sheet
June 18, 1999 (Unaudited) and December 31, 1998...............................................2
Condensed Statement of Cash Flows
Twenty-Four Weeks ended June 18, 1999 and June 19, 1998 (Unaudited)...........................3
Notes to Condensed Financial Statements (Unaudited)..............................................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................................5
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................................................10
Item 6. Exhibits and Reports on Form 8-K................................................................11
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per Unit amounts)
Twelve Weeks Ended Twenty-Four Weeks Ended
June 18, June 19, June 18, June 19,
1999 1998 1999 1998
------------- ------------- -------------- --------
REVENUES
Inn revenues
Suites...............................................$ 14,846 $ 14,914 $ 29,187 $ 28,870
Other................................................ 710 692 1,404 1,388
------------- ------------- -------------- -------------
Total Inn revenues................................. 15,556 15,606 30,591 30,258
------------- ------------- -------------- -------------
OPERATING COSTS AND EXPENSES
Inn property-level costs and expenses
Suites............................................... 3,184 3,077 6,361 5,967
Other department costs and expenses.................. 367 307 749 642
Selling, administrative and other.................... 3,641 3,796 7,474 7,666
------------- ------------- -------------- -------------
Total Inn property-level costs and expenses........ 7,192 7,180 14,584 14,275
Depreciation........................................... 1,396 1,244 2,667 2,434
Incentive management fee............................... 1,154 885 2,222 1,693
Residence Inn system fee............................... 593 597 1,167 1,155
Property taxes......................................... 543 517 1,072 1,016
Base management fee.................................... 311 312 612 605
Equipment rent and other............................... 212 398 359 566
------------- ------------- -------------- -------------
11,401 11,133 22,683 21,744
-------- -------- ---------- --------
OPERATING PROFIT.......................................... 4,155 4,473 7,908 8,514
Interest expense....................................... (2,604) (2,825) (5,354) (5,834)
Interest income........................................ 50 55 84 111
------------- ------------- -------------- -------------
NET INCOME................................................$ 1,601 $ 1,703 $ 2,638 $ 2,791
============= ============= ============== =============
ALLOCATION OF NET INCOME
General Partner........................................$ 16 $ 17 $ 26 $ 28
Limited Partners....................................... 1,585 1,686 2,612 2,763
------------- ------------- -------------- -------------
$ 1,601 $ 1,703 $ 2,638 $ 2,791
======= ======== ========== ========
NET INCOME PER LIMITED
PARTNER UNIT (65,600 Units)............................$ 24 $ 26 $ 40 $ 42
============= ============= ============== =============
See Notes to Condensed Financial Statements.
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(in thousands)
June 18, December 31,
1999 1998
(unaudited)
ASSETS
Property and equipment, net........................................................$ 139,993 $ 140,283
Due from Residence Inn by Marriott, Inc............................................ 2,662 2,041
Deferred financing costs, net of accumulated amortization.......................... 1,561 1,779
Property improvement fund.......................................................... 2,025 223
Cash and cash equivalents.......................................................... 3,985 4,027
------------- ---------------
$ 150,226 $ 148,353
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LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt......................................................................$ 107,953 $ 110,084
Incentive management fees due to Residence Inn by Marriott, Inc.................... 28,797 27,029
Accounts payable and accrued expenses.............................................. 704 1,106
------------- ---------------
Total Liabilities............................................................ 137,454 138,219
------------- ---------------
PARTNERS' CAPITAL
General Partner.................................................................... 204 178
Limited Partners................................................................... 12,568 9,956
---------- ----------
Total Partners' Capital...................................................... 12,772 10,134
------------- ---------------
$ 150,226 $ 148,353
=========== =============
See Notes to Condensed Financial Statements.
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
Twenty-Four Weeks Ended
June 18, June 19,
1999 1998
------------- --------
OPERATING ACTIVITIES
Net income...........................................................................$ 2,638 $ 2,791
Noncash items........................................................................ 4,653 3,325
Changes in operating accounts........................................................ (1,023) (533)
------------- -------------
Cash provided by operating activities.......................................... 6,268 5,583
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INVESTING ACTIVITIES
Additions to property and equipment.................................................. (2,377) (865)
Change in property improvement fund.................................................. (1,802) (684)
------------- -------------
Cash used in investing activities.............................................. (4,179) (1,549)
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FINANCING ACTIVITIES
Repayment of mortgage debt........................................................... (2,131) (1,656)
Capital distributions to partners.................................................... -- (3,313)
------------- -------------
Cash used in financing activities.............................................. (2,131) (4,969)
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS................................................... (42) (935)
CASH AND CASH EQUIVALENTS at beginning of period........................................ 4,027 5,650
------------- -------------
CASH AND CASH EQUIVALENTS at end of period..............................................$ 3,985 $ 4,715
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest......................................................$ 5,518 $ 5,993
============= =============
See Notes to Condensed Financial Statements.
MARRIOTT RESIDENCE INN LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
The accompanying unaudited, condensed, interim financial statements have
been prepared by Marriott Residence Inn Limited Partnership (the
"Partnership"). Certain information and footnote disclosures normally
included in financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted. The
Partnership believes the disclosures made are adequate to make the
information presented not misleading. However, the unaudited, condensed,
interim 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, 1998.
In the opinion of the Partnership, the accompanying unaudited, condensed,
interim financial statements reflect all adjustments necessary to present
fairly the financial position of the Partnership as of June 18, 1999, the
results of operations for the twelve and twenty-four weeks ended June 18,
1999 and June 19, 1998 and the cash flows for the twenty-four weeks ended
June 18, 1999 and June 19, 1998. Interim results are not necessarily
indicative of fiscal year performance because of seasonal and short-term
variations.
For financial reporting purposes, the net income of the Partnership is
allocated 99% to the limited partners and 1% to RIBM One LLC (the "General
Partner"). Significant differences exist between the net income for
financial reporting purposes and the net income for Federal income tax
purposes. These differences are due primarily to the use, for Federal
income tax purposes, of accelerated depreciation methods and shorter
depreciable lives of the assets and differences in the timing of the
recognition of incentive management fee expense.
Certain reclassifications were made to prior year unaudited, condensed,
interim financial statements to conform to the 1999 presentation.
2. Revenues
Revenues primarily represent the gross sales generated by the Partnership's
Inns. On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity
in its financial statements.
The Partnership considered the impact of EITF 97-2 on its condensed
financial statements and determined that EITF 97-2 requires the Partnership
to include property-level sales and operating expenses of its Inns in its
condensed statement of operations. The Partnership has given retroactive
effect to the adoption of EITF 97-2 in the accompanying condensed statement
of operations. Application of EITF 97-2 to the condensed financial
statements for the twelve and twenty-four weeks ended June 18, 1999 and
June 19, 1998 increased both revenues and operating expenses by
approximately $7.2 million and $14.6 million and $7.2 million and $14.3
million, respectively, and had no impact on operating profit or net income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements. Certain, but
not necessarily all, of such forward-looking statements can be identified by the
use of forward-looking terminology, such as "believes," "expects," "may,"
"will," "should," "estimates," or "anticipates," or the negative thereof or
other variations thereof or comparable terminology. All forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause our actual transactions, results, performance or achievements to
be materially different from any future transactions, results, performance or
achievements expressed or implied by such forward-looking statements. Although
the Partnership believes the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, the Partnership can give no
assurance that its expectations will be attained or that any deviations will not
be material. The Partnership undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements that may be made to
reflect any future events or circumstances.
RESULTS OF OPERATIONS
First Two Quarters of 1999 Compared to First Two Quarters of 1998
Revenues. Partnership revenues increased $333,000, or 1%, to $30.6 million. This
increase was achieved primarily through an increase in Inn revenue per available
room ("REVPAR"). REVPAR represents the combination of the combined average daily
suite rate charged and the combined average daily occupancy achieved. REVPAR
increased 1% primarily due to a 1% increase in the combined average suite rate
from $96 for the first two quarters 1998 to $97 for the first two quarters 1999.
The 1% increase in the combined average suite rate was partially offset by a
slight decrease in occupancy.
Operating Costs and Expenses. Operating costs and expenses increased $939,000,
or 4%, to $22.7 million. The increase was due primarily to a $529,000, or 31%,
increase in incentive management fee, a $309,000 increase in property-level
costs and expenses and a $233,000, or 10%, increase in depreciation expense. The
incentive management fee ("IMF") earned by the Manager is calculated as 15% of
Operating Profit, as defined in the Management Agreement, in any year in which
Operating Profit is less than $23.5 million. The Manager earns an IMF equal to
20% of Operating Profit, whenever Operating Profit is equal to or exceeds $23.5
million. The IMF was calculated as 15% of Operating Profit for the first two
quarters 1998 based upon the expectation at June 19, 1998, that full-year 1998
Operating Profit would not meet the $23.5 million threshold. This compares to an
IMF calculated as 20% of Operating Profit for the first two quarters 1999 based
on the expectation at June 18, 1999, that full-year Operating Profit will exceed
$23.5 million. Thus the increase in IMF was due to the expectation that
Operating Profit will exceed the $23.5 million threshold for the full-year 1999,
which resulted in a 20% IMF calculation, as opposed to 15% used during the
comparable period in 1998. If full year 1999 Operating Profit falls below $23.5
million, the IMF calculation will be adjusted back to 15% of Operating Profit.
Property-level costs and expenses increased primarily because of the $394,000
increase in suites expense as a result of a 6% increase in wage and benefits
costs. The increase in depreciation expense was due to an increase in the
average depreciable fixed assets balance of $6.3 million between the first two
quarters of 1998 and 1999. As a percentage of Inn revenues, Inn operating costs
and expenses were 74% and 72% of revenues for the first two quarters of 1999 and
the first two quarters of 1998, respectively.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit decreased $600,000, or 7%, to $7.9
million, or 26% of revenues, from $8.5 million, or 28% of revenues.
Interest Expense. Interest expense decreased $480,000 to $5.4 million as a
result of principal amortization on the Partnership's mortgage debt.
Net Income. As a result of the items discussed above, net income decreased
$153,000 to $2.6 million, or 9% of revenues.
Second Quarter 1999 Compared to Second Quarter 1998
Revenues. Revenues for second quarter 1999 declined slightly to $15.6 million
due to a 2% decrease in REVPAR for the period. This REVPAR decrease was
primarily due to a decline in the combined average occupancy of two percentage
points. The combined average suite rate remained steady at $97.
Operating Costs and Expenses. Operating costs and expenses increased $268,000,
or 2%, to $11.4 million for the second quarter 1999. The increase was due
primarily to a $269,000, or 30%, increase in incentive management fee and a
$152,000, or 12%, increase in depreciation expense. The incentive management fee
was calculated as 15% of Operating Profit for the second quarter of 1998 and 20%
of Operating Profit for the second quarter of 1999, based upon the expectation
that Operating Profit will exceed the $23.5 million threshold for the full-year
1999. The increase in depreciation expense was due to an increase in the average
depreciable fixed assets balance of $6.3 million between the first two quarters
of 1998 and 1999. As a percentage of Inn revenues, Inn operating costs and
expenses were 73% and 71% of revenues for the second quarter 1999 and the second
quarter 1998, respectively.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit decreased $318,000, or 7%, to $4.2
million, or 27% of revenues.
Interest Expense. Interest expense decreased $221,000, or 8%, to $2.6 million
due to principal amortization on the Partnership's mortgage debt.
Net Income. As a result of the items discussed above, net income decreased
$102,000, or 6%, to $1.6 million, or 10% of revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's financing needs have been historically funded through loan
agreements with independent financial institutions. Beginning in 1998, the
Partnership's property improvement fund was insufficient to meet current needs.
The shortfall is primarily due to the need to complete total suite
refurbishments at a majority of the Partnership's Inns. To address the
shortfall, the Partnership provided a $1.5 million loan to the property
improvement fund in first quarter 1999 and increased the contribution rate in
1999 from 5% of gross Inn revenues to 5.5%. The Partnership expects to fund an
additional $1.2 million before the end of the fiscal year. The General Partner
believes that cash from Inn operations and Partnership reserves will be adequate
in the short term and is working with the Manager to address long term
operational and capital needs of the Partnership.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is cash from operations. Its
principal uses of cash are to make debt service payments, fund the property
improvement fund and to make distributions to the limited partners. Cash
provided by operating activities was $6.3 million for the first two quarters
1999 compared to $5.6 million for the first two quarters 1998. This $685,000
increase was due to an $872,000 payment of deferred base management fees in the
first two quarters 1998 that did not recur in 1999.
The Partnership's cash used in investing activities primarily consists of
contributions to the property improvement fund and capital expenditures for
improvements to the Inns. Cash used in investing activities was $4.2 million and
$1.5 million for first two quarters 1999 and 1998, respectively. Contributions
to the property improvement fund were $3.1 million and $1.5 million for the
first two quarters 1999 and first two quarters 1998 respectively, while capital
expenditures were $1.5 million and $865,000, respectively, during these same
periods. The $1.6 million increase in contributions is due to a $1.5 million
loan funded by the Partnership to the property improvement fund and an increase
in the contribution rate from 5% of gross Inn revenues to 5.5% in order to
complete suite refurbishments at some of the Partnership's Inns, which resulted
in the $600,000 increase in capital expenditures.
The Partnership's cash used in financing activities primarily consists of
capital distributions to partners and the repayment of mortgage debt. Cash used
in financing activities was $2.1 million and $5.0 million for the first two
quarters 1999 and 1998, respectively. In the first quarter 1998, the Partnership
distributed $3.3 million to the partners from 1997 operations. There were no
distributions to the partners in the first two quarters of 1999. Year to date
1999, the principal portion of fixed payments on the mortgage debt increased
$475,000 compared to the same period in 1998 due to decreased interest costs as
a result of the $8.7 million reduction in the average debt principal balance.
Strategy for Liquidity
The General Partner is continuing to explore alternatives to provide liquidity
for the Partnership and maximize the value of the limited partners' investment.
During second quarter 1999, an investment banking firm, acting as an advisor to
the Partnership, provided financial information to a number of prospective
purchasers for their review and analysis. The General Partner and the investment
banking firm are working with prospective purchasers in an effort to negotiate a
transaction that will provide liquidity for the Partnership while securing the
highest possible value for the limited partner units; however, the General
Partner can make no assurances as to the outcome of these efforts.
YEAR 2000 ISSUES
Year 2000 issues have arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous results. The following disclosure provides information
regarding the current status of the Partnership's Year 2000 compliance program.
Host Marriott Corporation ("Host Marriott"), general partner of Host Marriott
L.P., which owns directly and indirectly, more than 95% of the economic interest
of the General Partner, including the 1% managing member interest, has adopted
the compliance program because it recognizes the importance of minimizing the
number and seriousness of any disruptions that may occur as a result of the Year
2000 issue. Host Marriott's compliance program includes an assessment of Host
Marriott's hardware and software computer systems and embedded systems, as well
as an assessment of the Year 2000 issues relating to third parties with which
Host Marriott has a material relationship or whose systems are material to the
operations of the Partnership's Inns. 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 engaged a
third party to review its Year 2000 in-house readiness and found no problems
with any mission critical systems. Host Marriott believes that future costs
associated with Year 2000 issues for its in-house systems will be insignificant
and, therefore, not impact the Partnership's business, financial condition and
results of operations. Host Marriott has not developed, and does not plan to
develop, a separate contingency plan for its in-house systems due to their
current Year 2000 compliance. Host Marriott does, however, have the normal
disaster recovery procedures in place should it have a systems failure.
Third-Party Systems. The Partnership relies upon operational and accounting
systems provided by third parties, primarily the Manager of its Inns, to provide
the appropriate property-specific operating systems (including reservation,
phone, elevator, security, HVAC and other systems) and to provide it with
financial information. Based on discussions with the third parties that are
critical to the Partnership's business, including the Manager of its Inns, Host
Marriott believes that these parties are in the process of studying their
systems and the systems of their respective vendors and service providers and,
in many cases, have begun to implement changes, to ensure that they are Year
2000 compliant. Host Marriott continues to receive verbal and written assurances
that these third parties are, or will be, Year 2000 compliant on time. To the
extent these changes impact property-level systems, the Partnership may be
required to fund capital expenditures for upgraded equipment and software. The
Partnership does not expect these charges to be material, but is committed to
making these investments as required. To the extent that these changes relate to
the Manager's centralized systems (including reservations, accounting,
purchasing, inventory, personnel and other systems), the Partnership's
management agreement generally provides for these costs to be charged to the
Partnership's properties. Host Marriott expects that the Manager will incur Year
2000 costs 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 systems charges allocated to the Inns 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 Inns. Host Marriott will continue to monitor
the efforts of these third parties to become Year 2000 compliant and will take
appropriate steps to address any non-compliance issues. The Partnership believes
that in the event of material Year 2000 non-compliance, the Partnership will
have the right to seek recourse against the Manager under its management
agreement. The management agreement, however, generally does not specifically
address the Year 2000 compliance issue. Therefore, the amount of any recovery in
the event of Year 2000 non-compliance at a property, if any, is not determinable
at this time.
Host Marriott will work with the third parties to ensure that appropriate
contingency plans will be developed to address the most reasonably likely worst
case Year 2000 scenarios, which may not have been identified fully. In
particular, Host Marriott has had extensive discussions regarding the Year 2000
problem with Marriott International, Inc. ("MII"), the parent of the Manager of
the Partnership's Inns. Due to the significance of MII to the Partnership's
business, a detailed description of MII's state of readiness follows.
MII has adopted an eight-step process toward Year 2000 readiness, consisting of
the following: (i) Awareness: fostering understanding of, and commitment to, the
problem and its potential risks; (ii) Inventory: identifying and locating
systems and technology components that may be affected; (iii) Assessment:
reviewing these components for Year 2000 compliance, and assessing the scope of
Year 2000 issues; (iv) Planning: defining the technical solutions and labor and
work plans necessary for each affected system; (v) Remediation/Replacement:
completing the programming to renovate or replace the problem software or
hardware; (vi) Testing and Compliance Validation: conducting testing, followed
by independent validation by a separate internal verification team; (vii)
Implementation: placing the corrected systems and technology back into the
business environment; and (viii) Quality Assurance: utilizing an internal audit
team to review significant projects for adherence to quality standards and
program methodology.
MII has grouped its systems and technology into three categories for purposes of
Year 2000 compliance: (i) information resource applications and technology ("IT
Applications") -- enterprise-wide systems supported by MII's centralized
information technology organization ("IR"); (ii) Business-initiated Systems
("BIS") - systems that have been initiated by an individual business unit, and
that are not supported by MII's IR organization; and (iii) Building Systems -
non-IT equipment at properties that use embedded computer chips, such as
elevators, automated room key systems and HVAC equipment. MII is prioritizing
its efforts based on how severe an effect noncompliance would have on customer
service, core business processes or revenues, and whether there are viable,
non-automated fallback procedures ("System Criticality").
MII measures the completion of each phase based on documented and quantified
results, weighted for System Criticality. As of June 18, 1999, the Awareness,
Inventory, Assessment and Planning phases were complete for IT Applications,
BIS, and Building Systems. For IT Applications, the Remediation/Replacement and
Testing phases were 95% complete. Compliance Validation had been completed for
approximately 85% of key systems, with most of the remaining work in its final
stage. For BIS and Building Systems, Remediation/Replacement is substantially
complete with a target date of September 1999. For BIS, Testing and Compliance
Validation are in progress. Testing is over 95% complete for Building Systems
for which approximately 5% require further remediation/replacement and
re-testing, and Compliance Validation is in progress. Implementation and Quality
Assurance is 80% complete for IT Applications. For BIS, Implementation is
substantially complete while Quality Assurance is in progress. Both
Implementation and Quality Assurance are in progress for Building Systems.
Year 2000 compliance communications with MII's significant third party
suppliers, vendors and business partners, including its franchisees are ongoing.
MII's efforts are focused on the connections most critical to customer service,
core business processes and revenues, including those third parties that support
the most critical enterprise-wide IT Applications, franchisees generating the
most revenues, suppliers of the most widely used Building Systems and BIS, the
top 100 suppliers, by dollar volume, of non-IT products, and financial
institutions providing the most critical payment processing functions. Responses
have been received from a majority of the firms in this group. A majority of
these respondents have either given assurances of timely Year 2000 compliance or
have identified the necessary actions to be taken by them or MII to achieve
timely Year 2000 compliance for their products. Where MII has not received
satisfactory responses it is addressing the potential risks of failure through
its contingency planning process.
MII has established a common approach for testing and addressing Year 2000
compliance issues for its managed and franchised properties. This includes a
guidance protocol for operated properties, and a Year 2000 "Toolkit" for
franchisees containing relevant Year 2000 compliance information. MII is also
utilizing a Year 2000 best-practices sharing system. MII is monitoring the
progress of the managed and franchised properties towards Year 2000 compliance.
Risks. There can be no assurances that Year 2000 remediation by 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 problem, which depends on numerous uncertainties such as: whether
significant third parties properly and timely address the Year 2000 issue and
whether broad-based or systemic economic failures may occur. 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
disruption of hotel and Inn reservations made on centralized reservations
systems and errors or failures in financial transactions or payment processing
systems such as credit cards. Due to the general uncertainty inherent in the
Year 2000 problem and the Partnership's dependence on third parties, the
Partnership is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Partnership. Host Marriott's
Year 2000 compliance program is expected to significantly reduce the level of
uncertainty about the Year 2000 issue and Host Marriott believes that the
possibility of significant interruptions of normal operations should be reduced.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership does not have significant market risk with respect to interest
rates, foreign currency exchanges or other market rate or price risks, and the
Partnership does not hold any financial instruments for trading purposes.
As of June 18, 1999, all of the Partnership's debt has a fixed interest rate.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Partnership and the Inns are involved in routine litigation and
administrative proceedings arising in the ordinary course of business, some of
which are expected to be covered by liability insurance and which collectively
are not expected to have a material adverse effect on the business, financial
condition or results of operations of the Partnership.
On March 16, 1998, limited partners in several partnerships sponsored by Host
Marriott, filed a lawsuit, styled Robert M. Haas, Sr. and Irwin Randolph Joint
Tenants, et al. v. Marriott International, Inc., et al., Case No. 98-CI-04092,
in the 57th Judicial District Court of Bexar County, Texas against Marriott
International, Inc., Host Marriott, various of their subsidiaries, J.W.
Marriott, Jr., Stephen Rushmore, and Hospitality Valuation Services, Inc.
(collectively, the "Defendants"). The lawsuit now relates to the following
limited partnerships: Courtyard by Marriott Limited Partnership, Marriott
Residence Inn Limited Partnership, Marriott Residence Inn II Limited
Partnership, Fairfield Inn by Marriott Limited Partnership, Desert Springs
Marriott Limited Partnership and Atlanta Marriott Marquis Limited Partnership
(collectively, the "Six Partnerships"). The plaintiffs allege that the
Defendants conspired to sell hotels to the Six Partnerships for inflated prices
and that they charged the Six Partnerships excessive management fees to operate
the Six Partnerships' hotels. The plaintiffs further allege, among other things,
that the Defendants committed fraud, breached fiduciary duties and violated the
provisions of various contracts. The plaintiffs are seeking unspecified damages.
The Defendants, which do not include the Six 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. A related case concerning Courtyard by Marriott
II Limited Partnership ("Courtyard II") filed by the plaintiff's lawyers in the
same court involves similar allegations against the defendants, and has been
certified as a class action. As a result of this development, Courtyard II is no
longer involved in the above-mentioned lawsuit, Case No. 98-CI-04092. The
Courtyard II class action case is presently scheduled for trial on January 3,
2000. On March 18, 1999, two of the limited partners of the Courtyard by
Marriott Limited Partnership ("Courtyard I") filed a class action petition in
intervention seeking to convert that portion of the lawsuit relating to the
Courtyard I into a class action. The court denied this petition on April 29,
1999. Although the Six Partnerships have not been named as Defendants in the
lawsuit, the partnership agreements relating to the Six Partnerships include an
indemnity provision which requires the Six Partnerships, under certain
circumstances, to indemnify the general partners against losses, expenses and
fees.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits: None.
b. Reports on Form 8-K: None.
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
LIMITED PARTNERSHIP
By: RIBM ONE LLC
General Partner
July 30, 1999 By: /s/ Earla L. Stowe
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Earla L. Stowe
Vice President