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 10, 1999
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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 380-2070
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No .
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Courtyard By Marriott 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 Thirty-Six Weeks Ended September 10, 1999
and September 11, 1998 (Unaudited)......................1
Condensed Balance Sheet
September 10, 1999 (Unaudited) and December 31, 1998......2
Condensed Statement of Cash Flows
Thirty-Six Weeks ended September 10, 1999
and September 11, 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..9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..........................................10
Item 6. Exhibits and Reports on Form 8-K...........................11
<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 10, September 11, September 10, September 11,
1999 1998 1999 1998
---------------- --------------- ---------------- ----------
<S> <C> <C> <C> <C>
REVENUES
Hotel revenues
Rooms...........................................$ 44,145 $ 43,486 $ 133,109 $ 129,961
Food and beverage............................... 2,957 2,982 9,145 9,135
Other........................................... 1,542 1,293 4,655 4,346
---------------- --------------- ---------------- ---------------
Total hotel revenues.......................... 48,644 47,761 146,909 143,442
---------------- --------------- ---------------- ---------------
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms........................................... 10,003 9,507 29,764 27,556
Food and beverage............................... 2,702 2,688 8,200 7,813
Other department costs and expenses............. 514 486 1,479 1,360
Selling, administrative and other............... 11,093 11,063 33,394 32,648
---------------- --------------- ---------------- ---------------
Total hotel property-level costs and expense.. 24,312 23,744 72,837 69,377
Depreciation...................................... 4,425 4,058 13,243 12,145
Base and Courtyard management fees................ 2,918 2,865 8,814 8,606
Incentive management fees......................... 2,233 2,278 6,765 7,078
Ground rent, taxes and other...................... 3,730 3,656 11,815 11,286
---------------- --------------- ---------------- ---------------
Total operating costs and expenses............ 37,618 36,601 113,474 108,492
---------------- --------------- ---------------- ---------------
OPERATING PROFIT..................................... 11,026 11,160 33,435 34,950
Interest expense.................................. (5,894) (6,046) (17,852) (18,374)
Interest income................................... 363 215 840 585
---------------- --------------- ---------------- ---------------
NET INCOME...........................................$ 5,495 $ 5,329 $ 16,423 $ 17,161
================ =============== ================ ===============
ALLOCATION OF NET INCOME
General Partner...................................$ 275 $ 267 $ 821 $ 858
Limited Partners.................................. 5,220 5,062 15,602 16,303
---------------- --------------- ---------------- ---------------
$ 5,495 $ 5,329 $ 16,423 $ 17,161
================ =============== ================ ===============
NET INCOME PER LIMITED PARTNER UNIT
(1,150 Units).....................................$ 4,539 $ 4,403 $ 13,567 $ 14,177
================ =============== ================ ===============
See Notes to Condensed Financial Statements.
</TABLE>
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COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(in thousands)
<TABLE>
September 10, December 31,
1999 1998
(unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net..........................................................$ 288,525 $ 297,189
Due from Courtyard Management Corporation............................................ 7,006 4,210
Deferred financing costs, net of accumulated amortization............................ 5,547 5,854
Property improvement fund............................................................ 8,408 5,475
Restricted cash...................................................................... 5,696 9,315
Cash and cash equivalents............................................................ 13,808 9,203
---------------- ---------------
$ 328,990 $ 331,246
================ ===============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Mortgage debt........................................................................$ 307,134 $ 313,051
Due to Marriott International, Inc. and affiliates................................... 19,223 19,384
Debt service guaranty and accrued interest payable to
Host Marriott Corporation.......................................................... 14,606 14,208
Incentive management fees due to Courtyard Management Corporation.................... 3,928 5,653
Accounts payable and accrued liabilities............................................. 3,376 3,750
---------------- ---------------
Total Liabilities.............................................................. 348,267 356,046
---------------- ---------------
PARTNERS' CAPITAL (DEFICIT)
General Partner...................................................................... 361 85
Limited Partners..................................................................... (19,638) (24,885)
---------------- ---------------
Total Partners' Deficit........................................................ (19,277) (24,800)
---------------- ---------------
$ 328,990 $ 331,246
================ ===============
See Notes to Condensed Financial Statements.
</TABLE>
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COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
Thirty-Six Weeks Ended
September 10, September 11,
1999 1998
---------------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income...........................................................................$ 16,423 $ 17,161
Noncash items........................................................................ 13,948 12,886
Changes in operating accounts........................................................ (1,437) (880)
----------------- ---------------
Cash provided by operating activities.......................................... 28,934 29,167
---------------- ---------------
INVESTING ACTIVITIES
Additions to property and equipment, net............................................. (4,579) (7,987)
Change in property improvement fund.................................................. (2,933) (4,252)
---------------- ---------------
Cash used in investing activities.............................................. (7,512) (12,239)
---------------- ---------------
FINANCING ACTIVITIES
Capital distributions................................................................ (10,900) (9,680)
Repayments of mortgage debt.......................................................... (5,917) (5,462)
Payment of financing costs........................................................... -- (2)
---------------- ---------------
Cash used in financing activities.............................................. (16,817) (15,144)
---------------- ---------------
INCREASE IN CASH AND CASH EQUIVALENTS................................................... 4,605 1,784
CASH AND CASH EQUIVALENTS at beginning of period........................................ 9,203 5,450
---------------- ---------------
CASH AND CASH EQUIVALENTS at end of period..............................................$ 13,808 $ 7,234
================ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest......................................................$ 18,584 $ 19,036
================ ===============
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
COURTYARD BY MARRIOTT 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 the Courtyard By Marriott 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 from the
accompanying statements. 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
financial statements reflect all adjustments necessary to present fairly
the financial position of the Partnership as of September 10, 1999, and the
results of operations for the twelve and thirty-six weeks ended September
10, 1999 and September 11, 1998 and cash flows for the thirty-six weeks
ended September 10, 1999 and September 11, 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 95% to the Limited Partners and 5% to CBM One LLC (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, differences in the timing of the recognition of certain fees
and straight-line rent adjustments.
Certain reclassifications were made to the prior year condensed financial
statements to conform to current year presentation.
2. Revenues
Revenues primarily represent the gross sales generated by the Partnership's
Hotels. 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 Hotels 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 thirty-six weeks ended September 10, 1999 and
September 11, 1998 increased both revenues and operating expenses by
approximately $24.3 million and $72.8 million and $23.7 million and $69.4
million, respectively, and had no impact on operating profit or net income.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements. 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
Revenues. Revenues increased $883,000 and $3.5 million to $48.6 million and
$146.9 million for the twelve and thirty-six weeks ended September 10, 1999,
respectively. The increase in revenues was achieved primarily through an
increase in the combined average room rate. The combined average room rate
increased 3.3% to $90 for third quarter 1999 and 2.5% to $90 for year-to-date
third quarter 1999 as compared to the same periods in 1998. The increase in
average room rate is primarily due to continued efforts to increase weekday
pricing.
Combined average occupancy decreased slightly to 81% for the twelve and
thirty-six weeks ended September 10, 1999, when compared to the same periods in
1998. Occupancy decreased slightly due to increased competition and aggressive
rate increases in some markets. REVPAR, or revenue per available room,
represents the combination of the average daily room rate charged and the
average daily occupancy achieved. REVPAR was $73 for the twelve and thirty-six
weeks ended September 10, 1999, representing a slight increase when compared to
the same periods in 1998.
Operating Costs and Expenses. For the twelve weeks ended September 10, 1999, the
Partnership's operating costs and expenses increased $1.0 million to $37.6
million as compared to the same period in 1998. In addition, for the thirty-six
weeks ended September 10, 1999, operating costs and expenses increased $5.0
million to $113.5 million. As a percentage of revenues, operating costs and
expenses remained stable at 77% of revenues for the third quarter 1999 when
compared to third quarter 1998. For year-to-date third quarter 1999, operating
costs and expenses as a percentage of revenues increased from 76% of revenues
for year-to-date third quarter 1998 to 77% of revenues for year-to-date third
quarter 1999. The increase in operating costs and expenses was primarily due to
an increase in depreciation expense and in hotel property-level costs and
expenses as discussed below.
Depreciation expense increased $367,000 to $4.4 million and $1.1 million to
$13.2 million for third quarter 1999 and for year-to-date third quarter 1999,
respectively, when compared to the same periods in 1998. The increase in
depreciation expense is due to the completion of more projects in the current
year.
<PAGE>
The Partnership's Hotel property-level costs and expenses increased $568,000 to
$24.3 million and $3.5 million to $72.8 million for the twelve and thirty-six
weeks ended September 10, 1999, respectively, when compared to the same periods
in 1998. Hotel property-level costs and expenses are higher as salary and
benefit expenses have increased as the Hotels endeavor to maintain competitive
wage scales. In addition, food costs as well as marketing expenses increased in
1999 as compared to 1998. As a percentage of hotel revenues, property-level
costs and expenses represented 50% of revenues for both third quarter 1999 and
year-to-date third quarter 1999 as compared to 50% of revenues for third quarter
1998 and 48% of revenues for year-to-date third quarter 1998.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit decreased $134,000, or 1.2%, to $11.0
million, or 23% of revenues, for the twelve weeks ended September 10, 1999 from
$11.2 million, or 23% of revenues for the twelve weeks ended September 11, 1998.
In addition, operating profit decreased $1.5 million, or 4.3%, to $33.4 million,
or 23% of revenues, for the thirty-six weeks ended September 10, 1999 from $34.9
million, or 24% of revenues, for the thirty-six weeks ended September 11, 1998.
Interest Expense. Interest expense decreased slightly to $5.9 million for the
twelve weeks ended September 10, 1999 when compared to the same period in 1998
and decreased $522,000 to $17.9 million for the thirty-six weeks ended September
10, 1999 when compared to the same period in 1998 as a result of principal
amortization on the Partnership's mortgage debt.
Net Income. As a result of the items discussed above, net income increased
$166,000 to $5.5 million, or 11% of revenues for the twelve weeks ended
September 10, 1999 when compared to $5.3 million, or 11% of revenues for the
twelve weeks ended September 11, 1998. Net income for the thirty-six weeks ended
September 10, 1999 decreased $738,000 to $16.4 million, or 11% of revenues when
compared $17.2 million or 12% of revenues for the thirty-six weeks ended
September 11, 1998.
LIQUIDITY AND CAPITAL RESOURCES
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
The Partnership's principal source of cash is 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 for the thirty-six weeks ended September
10, 1999 and September 11, 1998, was $28.9 million and $29.2 million,
respectively.
Cash used in investing activities was $7.5 million for the first three quarters
of 1999 and $12.2 million for the first three quarters of 1998. The decrease in
investing activities was due to the decrease in capital expenditures related to
the completion of 10-year rooms renovations at a majority of the Hotels prior to
and during 1998. The Partnership used $4.6 million for capital expenditures
during the first three quarters of 1999 compared to $8.0 million for the first
three quarters of 1998.
The Partnership's investing activities also involve making contributions to the
property improvement fund for the Hotels. Contributions to the property
improvement fund increased to 6% of Hotel sales in 1999 from 5% in 1998.
Contributions to the property improvement fund will remain at 6% through the end
of the fiscal year 2000 and may be increased thereafter to 7% at the option of
the Manager.
Cash used in financing activities was $16.8 million and $15.1
million for the first three quarters of 1999 and 1998, respectively. During the
thirty-six weeks ended September 10, 1999 and September 11, 1998, the
Partnership repaid $5.9 million and $5.5 million, respectively, of principal on
the mortgage debt. Cash used in financing activities also included $10.9 million
and $9.7 million of cash distributions to the partners during the thirty-six
weeks ended September 10, 1999 and September 11, 1998, respectively.
Strategy for Liquidity
During 1999, the General Partner has been working with a major investment
banking firm to explore alternatives to provide liquidity for the partners in
the Partnership while securing the highest possible value for the limited
partners. More than 70 prospective purchasers were contacted and Partnership
financial information was made available to a number of them for their review
and analysis on a confidential basis. Due to the large number of Hotels in the
Partnership, many prospective purchasers did not have the ability to consummate
a transaction of this size. At this time, the General Partner and the investment
banking firm continue in their efforts to develop a transaction that would be
acceptable to a majority of the limited partners. Many factors, the most
important being the operating performance trends of the Hotels over the next few
months, will impact these efforts. 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, 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 Hotels. 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 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. 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 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 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, 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 Hotels. 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 September 10, 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 over 90% of key systems, with most of the
remaining work in its final stage. For BIS and Building Systems,
Remediation/Replacement is over 95% complete. For BIS, Testing is approximately
80% complete and Compliance Validation is in progress. Testing is over 95%
complete for Building Systems and Compliance Validation is in progress.
Implementation is approximately 85% complete and Quality Assurance is 80%
complete for IT Applications. For BIS, Implementation is over 95% complete and
Quality Assurance is in progress. Implementation is over 95% complete and
Quality Assurance is 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
guidance 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 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
September 10, 1999, all of the Partnership's debt has a fixed interest rate.
However, the Partnership has a debt service guaranty advance that is sensitive
to changes in interest rates. The interest recognized on the debt obligation is
based on the prime rate, which was 7.75% at December 31, 1998 and 8.25% at
September 10, 1999. The interest rate, fair value, and future maturity
associated with this debt obligation has not changed materially from the amount
reported in the Partnership's annual report on Form 10-K.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
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 Management Agreement
for the benefit of the Manager without obtaining the consent of the limited
partners. The lawsuit includes claims against Host Marriott Corporation ("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
answers 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 finalizing the settlement.
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 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, Host DSM Limited
Partnership (formerly known as Desert Springs Marriott Limited Partnership) and
Atlanta II Limited Partnership (formerly known as 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 that
the Defendants committed fraud, breached fiduciary duties, and violated the
provisions of various contracts. The plaintiffs are seeking unspecified damages.
The Defendants 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 answers to
the plaintiffs' petition and asserted a number of defenses. A related case
concerning Courtyard by Marriott II Limited Partnership ("Courtyard II") was
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 included in the above-referenced
Haas lawsuit, Case No. 98-CI-04092. The Courtyard II case is presently scheduled
for trial on January 3, 2000. In March of this year, Palm Investors and Equity
Resources, assignees of a number of limited partnership units acquired through
various tender offers, filed petitions to intervene in the Haas case with
respect to their units of the Partnership. In response to these efforts, two
other of the Partnership's partners, Jack L. Walker and Murray F. Weiss ("Walker
& Weiss"), filed a petition to intervene and certify a class comprised of the
Partnership's partners. On April 29, 1999, the court denied this motion and
refused to certify the class, because of the prior-filed Schick case in
Delaware, Civil Action No. 15991. Although only four of the Six Partnerships
have been named as nominal defendants in the lawsuit, the partnership agreements
relating to all Six Partnerships include an indemnity provision which requires
the Six Partnerships, under certain circumstances, to indemnify the general
partners against losses, judgments, expenses, and fees.
On April 1, 1999, Equity Resource Fund X, Equity Resource Fund XII, Palm
Investors, L.L.C., and Repp Properties, L.P., limited partners in the
Partnership and in Courtyard II, filed a derivative lawsuit on behalf of the
Partnership and Courtyard II against Marriott International, Inc., Host
Marriott, various of their subsidiaries, and several of their current and former
executives. The plaintiffs filed this lawsuit in the 150th Judicial District of
Bexar County, Texas and the case was styled Equity Resource Fund X, et al. v.
CBM One Corporation, et al., Case No. 99-CI-04765. The plaintiffs alleged that
the defendants conspired to profit at the partnerships' expense by entering into
agreements, including management agreements and ground leases, that were unfair
and not commercially reasonable. The plaintiffs further alleged, among other
things, that the defendants committed fraud, breached fiduciary duties, and
violated provisions of the various agreements. The plaintiffs sought
disgorgement of all fees and rents paid under the management agreements and
leases, cancellation or reformation of these agreements, damages, and
replacement of the general partners. Because the General Partner believed that
there was no truth to the plaintiffs' allegations and that the lawsuit was
totally devoid of merit, it appointed a special litigation committee (the "SLC")
under Delaware law on August 17, 1999, consisting of The Honorable William
Webster and The Honorable Charles Renfrew, to (i) analyze the facts and
circumstances surrounding the plaintiffs' claims; (ii) determine whether or not
prosecution of such claims are in the best interests of the Partnership; and
(iii) decide what action the Partnership should take with respect to such
claims. The law firm of Milbank, Tweed, Hadley & McCoy is representing the SLC
and assisting the SLC in its investigation. As a result of this development, the
defendants filed a motion to stay this proceeding pending the completion of the
SLC's investigation. In response to this motion, the plaintiffs took a non-suit,
effectively dismissing the case, on August 25, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
A Form 8-K was filed with the Securities and Exchange Commission on
September 14, 1999. This filing, Item 5--Other Events, discloses that
on September 9, 1999 the General Partner sent to the limited partners
of the Partnership a letter that accompanied the Partnership's
Quarterly Report on Form 10-Q. The letter disclosed the quarterly
activities of the Partnership and informed the limited partners that
Partnership financial information was made available to prospective
purchasers for their review and analysis. 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 LLC
General Partner
October 25, 1999 By: /s/ Earla L. Stowe
------------------
Earla L. Stowe
Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<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>
<CIK> 0000813807
<NAME> COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-10-1999
<EXCHANGE-RATE> 1.00
<CASH> 13,808
<SECURITIES> 0
<RECEIVABLES> 7,006
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,651
<PP&E> 547,162
<DEPRECIATION> (258,637)
<TOTAL-ASSETS> 328,990
<CURRENT-LIABILITIES> 41,133
<BONDS> 307,134
0
0
<COMMON> 0
<OTHER-SE> (19,277)
<TOTAL-LIABILITY-AND-EQUITY> 328,990
<SALES> 0
<TOTAL-REVENUES> 146,909
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<OTHER-EXPENSES> 112,634
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<EXTRAORDINARY> 0
<CHANGES> 0
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