SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 11, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-15736
COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1468081
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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 ____ 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October 23, 1989 until the application was voluntarily withdrawn on January 27,
1998.
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Courtyard By Marriott Limited Partnership
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statement of Operations
Twelve and Thirty-Six Weeks Ended September 11, 1998 (Unaudited)
and September 12, 1997 (Unaudited).............................................1
Condensed Balance Sheet
September 11, 1998 (Unaudited) and December 31, 1997...........................2
Condensed Statement of Cash Flows
Thirty-Six Weeks ended September 11, 1998 (Unaudited)
and September 12, 1997 (Unaudited).............................................3
Notes to Condensed Financial Statements (Unaudited)............................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................9
Item 6. Exhibits and Reports on Form 8-K...................................10
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands except per Unit amounts)
<TABLE>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
REVENUES (Note 3)....................................$ 24,017 $ 22,771 $ 74,065 $ 68,961
---------------- --------------- ---------------- ---------------
OPERATING COSTS AND EXPENSES
Depreciation...................................... 4,058 5,292 12,145 13,332
Base and Courtyard management fees................ 2,865 2,713 8,606 8,105
Incentive management fees......................... 2,278 2,083 7,078 6,595
Ground rent, taxes and other...................... 3,656 3,914 11,286 10,167
---------------- --------------- ---------------- ---------------
Total Operating Costs and Expenses.......... 12,857 14,002 39,115 38,199
---------------- --------------- ---------------- ---------------
OPERATING PROFIT..................................... 11,160 8,769 34,950 30,762
Interest expense.................................. (6,046) (6,121) (18,374) (17,814)
Interest income................................... 215 112 585 472
---------------- --------------- ---------------- ---------------
NET INCOME BEFORE
EXTRAORDINARY ITEMS............................... 5,329 2,760 17,161 13,420
EXTRAORDINARY ITEMS
Gain on forgiveness of deferred fees.............. -- -- -- 14,896
Loss on extinguishment of debt.................... -- -- -- (2,423)
---------------- --------------- ---------------- ---------------
-- -- -- 12,473
---------------- --------------- ---------------- ---------------
NET INCOME...........................................$ 5,329 $ 2,760 $ 17,161 $ 25,893
================ =============== ================ ===============
ALLOCATION OF NET INCOME
General Partner...................................$ 267 $ 138 $ 858 $ 1,295
Limited Partner................................... 5,062 2,622 16,303 24,598
---------------- --------------- ---------------- ---------------
$ 5,329 $ 2,760 $ 17,161 $ 25,893
================ =============== ================ ===============
NET INCOME BEFORE EXTRAORDINARY ITEMS
PER LIMITED PARTNER UNIT
(1,150 Units).....................................$ 4,403 $ 2,280 $ 14,177 $ 11,086
================ =============== ================ ===============
NET INCOME PER LIMITED PARTNER UNIT
(1,150 Units).....................................$ 4,403 $ 2,280 $ 14,177 $ 21,390
================ =============== ================ ===============
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(in thousands)
<TABLE>
September 11, December 31,
1998 1997
(unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net..........................................................$ 303,420 $ 305,156
Deferred financing costs, net........................................................ 5,990 6,295
Property improvement fund............................................................ 5,880 1,628
Restricted cash...................................................................... 5,279 7,964
Due from Courtyard Management Corporation............................................ 4,314 4,913
Cash and cash equivalents............................................................ 7,234 5,450
---------------- ---------------
$ 332,117 $ 331,406
================ ===============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Mortgage debt........................................................................$ 314,945 $ 320,407
Due to Marriott International, Inc. and affiliates................................... 19,455 19,616
Due to Host Marriott Corporation..................................................... 14,028 13,594
Incentive management fees due to Courtyard Management Corporation.................... 4,659 6,476
Accounts payable and accrued liabilities............................................. 3,134 2,898
---------------- ---------------
Total Liabilities................................................................ 356,221 362,991
---------------- ---------------
PARTNERS' CAPITAL (DEFICIT)
General Partner....................................................................... 120 (254)
Limited Partners...................................................................... (24,224) (31,331)
---------------- ---------------
Total Partners' Capital (Deficit)................................................ (24,104) (31,585)
---------------- ---------------
$ 332,117 $ 331,406
================ ===============
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
Thirty-Six Weeks Ended
September 11, September 12,
1998 1997
---------------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.........................................................................$ 17,161 $ 25,893
Extraordinary items................................................................ -- (12,473)
---------------- ---------------
Net income before extraordinary items.............................................. 17,161 13,420
Noncash items...................................................................... 12,886 14,264
Changes in operating accounts...................................................... 1,565 (7,253)
---------------- ---------------
Cash provided by operating activities.......................................... 31,612 20,431
---------------- ---------------
INVESTING ACTIVITIES
Additions to property and equipment, net........................................... (10,409) (14,978)
Change in property improvement fund................................................ (4,252) 1,160
---------------- ---------------
Cash used in investing activities.............................................. (14,661) (13,818)
---------------- ---------------
FINANCING ACTIVITIES
Capital distributions.............................................................. (9,680) (37,647)
Repayments of mortgage debt ....................................................... (5,462) (291,817)
Change in restricted debt service reserve.......................................... (23) --
Payment of financing costs......................................................... (2) (5,980)
Proceeds from mortgage debt ....................................................... -- 325,000
---------------- ---------------
Cash used in financing activities.............................................. (15,167) (10,444)
---------------- ---------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................ 1,784 (3,831)
CASH AND CASH EQUIVALENTS at beginning of period........................................ 5,450 12,709
---------------- ---------------
CASH AND CASH EQUIVALENTS at end of period..............................................$ 7,234 $ 8,878
================ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest....................................................$ 19,036 $ 18,450
================ ===============
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed financial statements have been prepared by the
Courtyard By Marriott 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 10-K
for the fiscal year ended December 31, 1997.
In the opinion of the Partnership, the accompanying unaudited condensed
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position
of the Partnership as of September 11, 1998, the results of operations for
the twelve and thirty-six weeks ended September 11, 1998 and September 12,
1997 and the cash flows for the thirty-six weeks ended September 11, 1998
and September 12, 1997. Interim results are not necessarily indicative of
fiscal year performance because of seasonal and short-term variations.
For financial reporting purposes, the net income of the Partnership is
allocated 95% to the Limited Partners and 5% 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, shorter depreciable lives
for the assets, difference in the timing of recognition of certain fees and
straight-line rent adjustments.
2. Certain reclassifications were made to the prior year financial
statements to conform to the 1998 presentation.
3. Revenues represent house profit of the Partnership hotels since the
Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the hotels to Courtyard
Management Corporation (the "Manager"). House profit reflects hotel
operating results which flow to the Partnership as property owner and
represents total combined hotel sales less property-level expenses,
excluding depreciation, base, Courtyard and incentive management fees,
property taxes, equipment rent and certain other costs, which are disclosed
separately in the accompanying condensed statement of operations.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity
in its financial statements.
The Partnership has considered the impact of EITF 97-2 and concluded that
it should be applied to its hotels. Accordingly, upon adoption, hotel sales
and property-level expenses will be reflected on the statement of
operations. This change in accounting principle will be adopted in the
financial statements during the fourth quarter of 1998 as of and for the
year ended December 31, 1998 with retroactive effect in prior periods to
conform to the new presentation. Application of EITF 97-2 will increase
both revenues and operating expenses by approximately $23.7 million and
$22.4 million for the twelve weeks ended September 11, 1998 and September
12, 1997, respectively, and $69.4 million and $66.1 million for the
thirty-six weeks ended September 11, 1998 and September 12, 1997,
respectively, and will have no impact on operating profit or net income.
<PAGE>
Revenues consist of the following hotel operating results (in thousands):
<TABLE>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
HOTEL SALES
Rooms..............................$ 43,486 $ 40,878 $ 129,961 $ 121,572
Food and beverage.................. 2,982 2,808 9,135 8,886
Other.............................. 1,293 1,524 4,346 4,624
---------------- --------------- --------------- ---------------
47,761 45,210 143,442 135,082
---------------- --------------- --------------- ---------------
HOTEL EXPENSES
Departmental direct costs
Rooms............................ 9,507 8,875 27,556 25,833
Food and beverage................ 2,688 2,542 7,813 7,656
Other............................ 11,549 11,022 34,008 32,632
---------------- --------------- --------------- ---------------
23,744 22,439 69,377 66,121
---------------- --------------- --------------- ---------------
REVENUES.............................$ 24,017 $ 22,771 $ 74,065 $ 68,961
================ =============== =============== ===============
</TABLE>
4. Host Marriott Corporation, on behalf of the General Partner, CBM One
Corporation, filed a preliminary Prospectus/Consent Solicitation Statement
with the Securities and Exchange Commission in December 1997, which
proposed the consolidation ("Consolidation") of this Partnership and five
other limited partnerships into a publicly traded real estate investment
trust ("REIT"). Subsequently, the General Partner reported that existing
REIT's active in the moderate price and extended-stay hotel segment had
expressed an interest in acquiring some of the hotels owned by the six
partnerships. The General Partner retained Merrill Lynch to advise the
partnerships with respect to these alternatives.
The original Consolidation plan included an initial public offering of the
REIT's common shares. The General Partner has been advised that it would be
difficult to raise the appropriate level of outside equity and that the
perceived benefits of the Consolidation are not achievable at this time.
Therefore, the General Partner is not pursuing the plan to form a new REIT.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-Q include forward-looking
statements and as such may involve known and unknown risks, uncertainties, and
other factors which may cause the actual transactions, results, performance or
achievements to be materially different from any future transactions, results,
performance or achievements expressed or implied by such forward-looking
statements. The cautionary statements set forth in reports filed under the
Securities Act of 1934 contain important factors with respect to such
forward-looking statements, including: (i) national and local economic and
business conditions that will, among other things, affect demand for hotels and
other properties, the level of rates and occupancy that can be achieved by such
properties and the availability and terms of financing; (ii) the ability to
compete effectively; (iii) changes in travel patterns, taxes and government
regulations; (iv) governmental approvals, actions and initiatives; and (v) the
effects of tax legislative action. Although the Partnership believes the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that it's 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 Three Quarters of 1998 Compared to the First Three Quarters of 1997
Revenues. Revenues (hotel sales less direct hotel operating costs and expenses)
for the first three quarters of 1998 increased $5.1 million to $74.1 million, a
7% increase when compared to the first three quarters of 1997. The Partnership's
revenues and operating profit were impacted by improved lodging results. The
increase was driven primarily by growth in revenue per available room
("REVPAR"). REVPAR is a commonly used indicator of market performance for hotels
which represents the combination of average daily room rate charged and the
average daily occupancy achieved (although it is not a GAAP, or generally
accepted accounting principles, measure of revenue). REVPAR does not include
food and beverage or other ancillary revenues generated by the property.
REVPAR increased 8% to $71 for the first three quarters of 1998 when compared to
the first three quarters of 1997, primarily due to the increase in combined
average room rate of $7, or 8%, to $88 offset by a one percentage point decrease
in average occupancy to approximately 81%. As a result, room sales for the first
three quarters of 1998 increased $8.4 million to $130 million, a 7% increase
compared to the first three quarters of 1997.
Operating Costs and Expenses. The Partnership's operating costs and
expenses increased $916,000, or 2%, from $38.2 million for the first three
quarters of 1997 to $39.1 million for the first three quarters of 1998 primarily
due to an increase in base, Courtyard and incentive management fees, as well as
ground rent, taxes and other expenses.
Operating Profit. As a result of changes in revenues and operating costs
and expenses discussed above, operating profit increased $4.2 million, or 14%,
from $30.8 million for the first three quarters of 1997 to $35 million for the
first three quarters of 1998. As a percentage of revenues, operating profit
increased from 45% of revenues for the first three quarters of 1997 to 47% of
revenues for the first three quarters of 1998.
Interest Expense. Interest expense increased 3% to $18.4 million for the first
three quarters of 1998 due to the 1997 refinancing of the mortgage debt at a
higher fixed rate as compared to the variable rates charged on the prior debt
and an increase in the loan balance from $280.8 million to $325 million.
<PAGE>
Net Income before Extraordinary Items. Net income before extraordinary
items increased by $3.7 million, or 28%, to $17.2 million for the first three
quarters of 1998 when compared to the first three quarters of 1997, primarily
due to the $4.2 million increase in operating profit offset by the increase in
interest expense discussed above.
Extraordinary Items. The Partnership recognized a net extraordinary gain in the
first three quarters of 1997 of $12.5 million representing the forgiveness of
deferred management fees by Courtyard Management Corporation partially offset by
an extraordinary loss on the early extinguishment of debt.
Net Income. Net income for the first three quarters of 1998 decreased $8.7
million to $17.2 million, or 23% of revenues, when compared to the first three
quarters of 1997 as a result of the items discussed above.
Third Quarter 1998 Compared to Third Quarter 1997
Revenues. Revenues increased $1.2 million to $24 million for third quarter 1998,
a 5% increase when compared to third quarter 1997, due to the increase in REVPAR
as described below.
REVPAR for third quarter 1998 increased 7% to $72 when compared to third quarter
1997 primarily due to the increase in combined average room rate of $6 to $87
for third quarter 1998. The combined average occupancy remained stable at
approximately 83%.
Operating Costs and Expenses. The Partnership's operating costs and expenses
decreased 8% to $12.9 million for third quarter 1998 when compared to the same
period in 1997 primarily due to a decrease in depreciation expense and ground
rent, taxes and other.
Operating Profit. As a result of changes in revenues and operating costs and
expenses discussed above, operating profit increased for third quarter 1998 by
$2.4 million, or 27%, to $11.2 million, when compared to the same period in
1997.
Net Income. Net income increased $2.6 million in third quarter 1998 when
compared to the same period in 1997. This results primarily from an increase in
operating profit as discussed above, partially offset by an increase in interest
expense.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded through loan
agreements with various lenders and Host Marriott Corporation ("Host Marriott").
The General Partner believes that the Partnership will have sufficient capital
resources and liquidity to continue to conduct its business in the ordinary
course.
Principal Sources and Uses of Cash
Cash provided by operating activities was $31.6 million and $20.4 million for
the first three quarters 1998 and the first three quarters 1997, respectively.
Cash provided by operations was higher in third quarter 1998 primarily due to
improved lodging results combined with the payment of $4.2 million of deferred
management fees in connection with the refinancing in 1997, as discussed above.
Cash used in investing activities was $14.7 million and $13.8 million for the
first three quarters 1998 and the first three quarters 1997, respectively. The
Partnership's investing activities consist primarily of contributions to the
property improvement fund and capital expenditures for improvements to hotels.
Contributions to the property improvement fund were $7.6 million and $6.6
million for the first three quarters of 1998 and 1997, respectively, while
capital expenditures from the property improvement fund and owner funds were
$10.4 million and $15.0 million for the same period in 1998 and 1997,
respectively. The General Partner believes that the property improvement fund
will provide adequate funds in the short and long term to meet the Hotel's
capital needs.
As part of the debt refinancing, contributions to the property improvement fund
will remain at 5% of gross hotel sales through 1998 and may be increased by
Courtyard Management Corporation to 6% in 1999 and 2000 and 7% thereafter if the
current contribution of 5% of gross hotel sales is insufficient to make the
replacements, renewals and repairs to maintain the hotels in accordance with the
Manager's standards for Courtyard by Marriott hotels.
Cash used in financing activities was $15.2 million and $10.4 million for the
first three quarters 1998 and the first three quarters 1997, respectively. The
Partnership's financing activities consist primarily of capital distributions to
its partners and repayment of debt. During the first three quarters of 1998, the
Partnership distributed $7.3 million or $6,000 per limited partnership unit from
first and second quarter 1998 operations and $2.4 million or $2,000 per limited
partnership unit from 1997 operations. In the first quarter 1997, the
Partnership received refinancing proceeds in excess of repayments of the
mortgage debt. This provided cash to the Partnership which was used to pay
refinancing costs and provided funds for a partial return of capital
distribution to the partners. This distribution was paid in second quarter 1997.
The Partnership plans to distribute $2.4 million or $2,000 per limited
partnership unit from third quarter 1998 operating results in November 1998
bringing total 1998 distributions to $8,000 per limited partner unit. We
anticipate total cash distributions for 1998 of approximately $10,000 per
limited partner unit. However, actual distributions may be higher or lower
depending on actual Hotel operating results for the remainder of the year. We
expect to make a final distribution for 1998 operations in April 1999.
YEAR 2000 ISSUES
The "Year 2000 Issue" has arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous results. The following disclosure provides information
regarding the current status of the Partnership's Year 2000 compliance program.
The Partnership processes its records on computer hardware and software systems
maintained by Host Marriott Corporation ("Host Marriott"), the parent company of
the General Partner of the Partnership. Host Marriott has adopted a compliance
program because it recognizes the importance of minimizing the number and
seriousness of any disruptions that may occur as a result of the Year 2000
Issue. Host Marriott's compliance program includes an assessment of Host
Marriott's hardware and software computer systems and embedded systems, as well
as an assessment of the Year 2000 issues relating to third parties with which
the Partnership has a material relationship or whose systems are material to the
operations of the Partnership's Hotel. Host Marriott's efforts to ensure that
its computer systems are Year 2000 compliant have been segregated into two
separate phases: in-house systems and third-party systems.
In-House Systems. Host Marriott has invested in the implementation and
maintenance of accounting and reporting systems and equipment that are intended
to enable the Partnership to provide adequately for its information and
reporting needs and which are also Year 2000 compliant. Substantially all of
Host Marriott's in-house systems have already been certified as Year 2000
compliant through testing and other mechanisms and Host Marriott has not delayed
any systems projects due to the Year 2000 Issue. Host Marriott is in the process
of engaging a third party to review its Year 2000 in-house compliance. Host
Marriott believes that future costs associated with Year 2000 Issues for its
in-house systems will be insignificant and will therefore not impact the
Partnership's business, financial condition and results of operations. Host
Marriott has not developed, and does not plan to develop, a separate contingency
plan for its in-house systems due to their current Year 2000 compliance.
However, Host Marriott does have detailed contingency plans for its in-house
systems covering a variety of possible events, including natural disasters,
interruption of utility service and similar events.
Third-Party Systems. The Partnership relies upon operational and accounting
systems provided by third parties, primarily the Manager of its Hotels 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 Hotels,
Host Marriott believes that these parties are in the process of studying their
systems and the systems of their respective vendors and service providers and,
in many cases, have begun to implement changes, to ensure that they are Year
2000 compliant. To the extent these changes impact property-level systems, the
Partnership may be required to fund capital expenditures for upgraded equipment
and software. Host Marriott does not expect these charges to be material, but is
committed to making these investments as required. To the extent that these
changes relate to the Manager's centralized systems (including reservations,
accounting, purchasing, inventory, personnel and other systems), the
Partnership's management agreement generally provides for these costs to be
charged to the Partnership's Hotels. Host Marriott expects that the Manager will
incur Year 2000 costs for its centralized systems in lieu of costs related to
system projects that otherwise would have been pursued and therefore, its
overall level of centralized charges allocated to the Hotels 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 Hotels. Host Marriott will continue to monitor
the efforts of these third parties to become Year 2000 compliant and will take
appropriate steps to address any non-compliance issues. The Partnership believes
that in the event of material Year 2000 non-compliance caused by a breach of the
Manager's duties, the Partnership will have the right to seek recourse against
the Manager under its third party management agreement. The management agreement
generally does not specifically address the Year 2000 compliance issue.
Therefore the amount of any recovery in the event of Year 2000 non-compliance at
a property, if any, is not determinable at this time.
Host Marriott will work with the third parties to ensure that appropriate
contingency plans will be developed to address the most reasonably likely worst
case Year 2000 scenarios, which may not have been identified fully. In
particular, Host Marriott has had extensive discussions regarding the Year 2000
Issue with Marriott International, the Manager of the Hotels. Due to the
significance of Marriott International to the Partnership's business, a detailed
description of Marriott International's state of readiness follows.
Marriott International has adopted an eight-step process toward Year 2000
readiness, consisting of the following: (i) Awareness: fostering understanding
of, and commitment to, the problem and its potential risks; (ii) Inventory:
identifying and locating systems and technology components that may be affected;
(iii) Assessment: reviewing these components for Year 2000 compliance, and
assessing the scope of Year 2000 issues; (iv) Planning: defining the technical
solutions and labor and work plans necessary for each particular system; (v)
Remediation/Replacement: completing the programming to renovate or replace the
problem software or hardware; (vi) Testing and Compliance Validation: conducting
testing, followed by independent validation by a separate internal verification
team; (vii) Implementation: placing the corrected systems and technology back
into the business environment; and (viii) Quality Assurance: utilizing a
dedicated audit team to review and test significant projects for adherence to
quality standards and program methodology.
Marriott International has grouped its systems and technology into three
categories for purposes of Year 2000 compliance: (i) information resource
applications and technology (IT Applications) -- enterprise-wide systems
supported by Marriott International's centralized information technology
organization ("IR"); (ii) Business-initiated Systems ("BIS") - systems that have
been initiated by an individual business unit, and that are not supported by
Marriott International's IR organization; and (iii) Building Systems - non-IT
equipment at properties that use embedded computer chips, such as elevators,
automated room key systems and HVAC equipment. Marriott International is
prioritizing its efforts based on how severe an effect noncompliance would have
on customer service, core business processes or revenues, and whether there are
viable, non-automated fallback procedures (System Criticality).
Marriott International measures the completion of each phase based on documented
and quantified results, weighted for System Criticality. As of the end of the
1998 third quarter, the awareness and inventory phases were complete for IT
Applications and nearly complete for BIS and Building Systems. For IT
Applications, the Assessment, Planning and Remediation/Replacement phases were
each over 80 percent complete, and Testing and Compliance Validation had been
completed for a number of key systems, with most of the remaining work in its
final stage. For BIS and Building Systems, Assessment and Planning were in the
mid- to upper-range of completion, with a substantial amount of work in process,
while the progress level for Remediation/Replacement and Testing and Compliance
Validation had not yet been documented and quantified. Quality Assurance is also
in progress for IT Applications and is scheduled to begin for BIS and Business
Systems in the near future. Marriott International's goal is to substantially
complete the Remediation/Replacement and Testing phases for its System Critical
IT Applications by the end of 1998, with 1999 reserved for unplanned
contingencies and for Compliance Validation and Quality Assurance. For System
Critical BIS and Building Systems, the same level of completion is targeted for
June 1999 and September 1999, respectively.
Marriott International has initiated Year 2000 compliance communications with
its significant third party suppliers, vendors and business partners, including
its franchisees. Marriott International is focusing its efforts on the business
interfaces most critical to its customer service and revenues, including those
third parties that support the most critical enterprise-wide IT Applications,
franchisees generating the most revenues, suppliers of the most widely used
Building Systems and BIS, the top 100 suppliers, by dollar volume, of non-IT
products, and financial institutions providing the most critical payment
processing functions. Responses have been received from a majority of the firms
in this group.
Marriott International is also establishing a common approach for testing and
addressing Year 2000 compliance issues for its managed and franchised
properties. This includes a guidance protocol for operated properties, and a
Year 2000 "Toolkit" for franchisees containing relevant Year 2000 compliance
information. Marriott International is also utilizing a Year 2000 best-practices
sharing system.
Risks. There can be no assurance that Year 2000 remediation by the Partnership
or third parties will be properly and timely completed, and failure to do so
could have a material adverse effect on the Partnership, its business and its
financial condition. The Partnership cannot predict the actual effects to it of
the Year 2000 Issue, which depends on numerous uncertainties such as: (i)
whether significant third parties properly and timely address the Year 2000
Issue; and (ii) whether broad-based or systemic economic failures may occur.
Host Marriott is also unable to predict the severity and duration of any such
failures, which could include disruptions in passenger transportation or
transportation systems generally, loss of utility and/or telecommunications
services, the loss or distortion of hotel reservations made on a centralized
reservation system and errors or failures in financial transactions or payment
processing systems such as credit cards. Due to the general uncertainty inherent
in the Year 2000 Issue and the Partnership's dependence on third parties, the
Partnership is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Partnership. Host Marriott's
Year 2000 compliance program is expected to significantly reduce the level of
uncertainty about the Year 2000 Issue and Host Marriott believes that the
possibility of significant interruptions of normal operations should be reduced.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Marvin Schick and Jack Hirsch, the plaintiffs in a class action lawsuit styled
Marvin Schick, et al. v. Host Marriott Corporation, et al., Civil Action No.
15991, filed their complaint on October 16, 1997 in Delaware Chancery Court
against the General Partner, the Manager and certain of their respective
affiliates, officers and directors. The plaintiffs' claim that the General
Partner agreed to decrease the owner's priority under the terms of the
Management Agreement for the benefit of the Manager without obtaining the
consent of the limited partners. The lawsuit includes claims against Host
Marriott and the General Partner for breach of contract and breach of fiduciary
duty, and against Marriott International, Inc. and the Manager for interference
with contract and aiding and abetting in the breach of fiduciary duties. The
General Partner believes that the change in the Management Agreement did not
require limited partner approval, because, among other things, it did not result
in an increase in compensation to the Manager. The defendants filed an answer to
the plaintiffs' complaint and asserted a number of defenses. The parties to
this lawsuit have reached a tentative agreement to settle the matter and are in
the process of negotiating the details of the settlement.
On February 11, 1998, four individual limited partners in partnerships sponsored
by 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 proposed 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, in light of current market conditions, have decided to abandon their
efforts to complete the initial Merger at this time. Accordingly, they intend to
continue their efforts to dismiss the lawsuit.
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. ("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 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, 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 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, expenses and fees.
The Partnership and the 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.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
1. A Form 8-K was filed with the Securities and Exchange Commission
on October 9, 1998. This filing, Item 5--Other Events
discloses that the General Partner sent a letter dated October 1,
1998 to inform the limited partners that the proposed
Consolidation to form a new REIT focused on limited service
hotels is no longer being pursued. In addition, the letter
informs the limited partners that, to date, there have been no
acceptable offers from third parties to purchase the
Partnership's hotels. A copy of the letter was included as an
Item 7--Exhibit in this Form 8-K filing.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
COURTYARD BY MARRIOTT
LIMITED PARTNERSHIP
By: CBM ONE CORPORATION
General Partner
October 27, 1998 By: /s/ Earla L. Stowe
------------------
Earla L. Stowe
Vice President and Chief Accounting Officer
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
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