Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 18, 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
- ------------------------- -------------------------------------------
(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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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 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
<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 Twenty-Four Weeks Ended
June 18, June 19, June 18, June 19,
1999 1998 1999 1998
-------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
REVENUES
Hotel revenues
Rooms.............................................$ 45,354 $ 44,681 $ 88,964 $ 86,475
Food and beverage................................. 3,113 3,166 6,188 6,153
Other............................................. 1,568 1,562 3,113 3,053
-------------- ------------- ------------- -------------
Total hotel revenues............................ 50,035 49,409 98,265 95,681
-------------- ------------- ------------- -------------
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms............................................. 10,150 9,220 19,761 18,049
Food and beverage................................. 2,764 2,569 5,498 5,125
Other department costs and expenses............... 510 459 965 874
Selling, administrative and other................. 11,091 10,890 22,301 21,585
-------------- ------------- ------------- -------------
Total hotel property-level costs and expense.... 24,515 23,138 48,525 45,633
Depreciation ....................................... 4,469 4,119 8,818 8,087
Base and Courtyard management fees.................. 3,002 2,965 5,896 5,741
Incentive management fee............................ 2,366 2,565 4,532 4,800
Ground rent, taxes and other........................ 4,004 3,766 8,085 7,630
-------------- ------------- ------------- -------------
Total operating costs and expenses............ 38,356 36,553 75,856 71,891
-------------- ------------- ------------- -------------
OPERATING PROFIT....................................... 11,679 12,856 22,409 23,790
Interest expense.................................... (5,929) (6,075) (11,958) (12,328)
Interest income..................................... 313 246 477 370
-------------- ------------- ------------- -------------
NET INCOME.............................................$ 6,063 $ 7,027 $ 10,928 $ 11,832
============== ============= ============= =============
ALLOCATION OF NET INCOME
General Partner.....................................$ 303 $ 351 $ 546 $ 591
Limited Partners.................................... 5,760 6,676 10,382 11,241
-------------- ------------- ------------- -------------
$ 6,063 $ 7,027 $ 10,928 $ 11,832
============== ============= ============= =============
NET INCOME PER LIMITED PARTNER UNIT
(1,150 Units).......................................$ 5,009 $ 5,805 $ 9,028 $ 9,774
============== ============= ============= =============
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(in thousands)
<TABLE>
June 18, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
ASSETS
Property and equipment, net..........................................................$ 290,218 $ 297,189
Deferred financing costs, net of accumulated amortization............................ 5,650 5,854
Due from Courtyard Management Corporation............................................ 5,086 4,210
Property improvement fund............................................................ 8,171 5,475
Restricted cash...................................................................... 7,784 9,315
Cash and cash equivalents............................................................ 15,872 9,203
---------------- ---------------
$ 332,781 $ 331,246
================ ===============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Mortgage debt........................................................................$ 309,152 $ 313,051
Straight-line ground rent due to affiliates of Marriott International, Inc........... 19,277 19,384
Debt service guaranty and accrued interest payable to
Host Marriott Corporation.......................................................... 14,474 14,208
Incentive management fees due to Courtyard Management Corporation.................... 4,302 5,653
Accounts payable and accrued liabilities............................................. 2,903 3,750
---------------- ---------------
Total Liabilities.............................................................. 350,108 356,046
---------------- ---------------
PARTNERS' CAPITAL (DEFICIT)
General Partner...................................................................... 631 85
Limited Partners..................................................................... (17,958) (24,885)
---------------- ---------------
Total Partners' Deficit........................................................ (17,327) (24,800)
---------------- ---------------
$ 332,781 $ 331,246
================ ===============
See Notes to Condensed Financial Statements.
</TABLE>
<PAGE>
COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
Twenty-Four Weeks Ended
June 18, June 19,
1999 1998
---------------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income...........................................................................$ 10,928 $ 11,832
Noncash items........................................................................ 9,289 8,582
Changes in operating accounts........................................................ (1,594) (229)
---------------- ---------------
Cash provided by operating activities.......................................... 18,623 20,185
---------------- ---------------
INVESTING ACTIVITIES
Change in property improvement fund.................................................. (2,696) (3,026)
Additions to property and equipment, net............................................. (1,848) (8,382)
---------------- ---------------
Cash used in investing activities.............................................. (4,544) (11,408)
---------------- ---------------
FINANCING ACTIVITIES
Repayments of mortgage debt.......................................................... (3,899) (3,606)
Capital distributions................................................................ (3,455) (2,420)
Change in debt reserve............................................................... (56) 90
Payment of financing costs........................................................... -- (2)
---------------- ---------------
Cash used in financing activities.............................................. (7,410) (5,938)
---------------- ---------------
INCREASE IN CASH AND CASH EQUIVALENTS................................................... 6,669 2,839
CASH AND CASH EQUIVALENTS at beginning of period........................................ 9,203 5,450
---------------- ---------------
CASH AND CASH EQUIVALENTS at end of period..............................................$ 15,872 $ 8,289
================ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest......................................................$ 12,383 $ 12,681
================ ===============
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 June 18, 1999, and the
results of operations for the twelve and twenty-four weeks ended June 18,
1999 and June 19, 1998 and 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 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 financial statements
to conform to the 1999 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 twenty-four weeks ended June 18, 1999 and
June 19, 1998 increased both revenues and operating expenses by
approximately $24.5 million and $48.5 million and $23.1 million and $45.6
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 $626,000 and $2.6 million to $50.0 million and
$98.3 million for the twelve and twenty-four weeks ended June 18, 1999,
respectively. The increase in revenues was achieved primarily through an
increase in the combined average room rate. The combined average room rate
increased 1.6% to $90 for second quarter 1999 and 2.2% to $90 for year-to-date
second 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 for the twelve and twenty-four weeks ended June 18,
1999 remained stable at 81% and 83%, respectively, when compared to the same
periods in 1998. Occupancy remained steady 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 for the twelve and twenty-four weeks
ended June 18, 1999 was $73 and $75 respectively, representing a slight increase
when compared to the same periods in 1998.
Operating Costs and Expenses. For the twelve weeks ended June 18, 1999, the
Partnership's operating costs and expenses increased $1.8 million to $38.4
million as compared to the same period in 1998. In addition, for the twenty-four
weeks ended June 18, 1999, operating costs and expenses increased $4.0 million
to $75.9 million. As a percentage of revenues, operating costs and expenses
increased from 74% of revenues for the second quarter 1998 to 77% of revenues
for second quarter 1999. For year-to-date second quarter 1999, operating costs
and expenses as a percentage of revenues increased from 75% of revenues for
year-to-date second quarter 1998 to 77% of revenues for year-to-date second
quarter 1999. The increase in operating costs and expenses was primarily due to
an increase in property-level costs and expenses at the Hotels.
The Partnership's Hotel property-level costs and expenses increased $1.4 million
to $24.5 million and $2.9 million to $48.5 million for the twelve and
twenty-four weeks ended June 18, 1999 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 and beverage 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 49% of revenues for both second
quarter 1999 and year-to-date second quarter 1999 as compared to 47% of revenues
for second quarter 1998 and 48% of revenues for year-to-date second quarter
1998.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit decreased $1.2 million, or 9%, to
$11.7 million, or 23% of revenues, for the twelve weeks ended June 18, 1999 from
$12.9 million, or 26% of revenues for the twelve weeks ended June 19, 1998. In
addition, operating profit decreased $1.4 million, or 6%, to $22.4 million, or
23% of revenues, for the twenty-four weeks ended June 18, 1999 from $23.8
million, or 25% of revenues, for the twenty-four weeks ended June 19, 1998.
Interest Expense. Interest expense decreased slightly to $5.9 million for the
twelve weeks ended June 18, 1999 when compared to the same period in 1998 and
decreased $370,000 to $12.0 million for the twenty-four weeks ended June 18,
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 decreased
$964,000 to $6.1 million, or 12% of revenues for the twelve weeks ended June 18,
1999 when compared to $7.0 million, or 14% of revenues for the twelve weeks
ended June 19, 1998. Net income for the twenty-four weeks ended June 18, 1999
decreased $904,000 to $10.9 million, or 11% of revenues when compared $11.8
million or 12% of revenues for the twenty-four weeks ended June 19, 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 limited partners.
Cash provided by operations for the twenty-four weeks ended June 18, 1999 and
June 19, 1998, was $18.6 million and $20.2 million, respectively. The decrease
in cash provided by operations was due to an increase in the receivable balance
due from the Manager at June 18, 1999 when compared to the balance at June 19,
1998 and the required payment of $1.4 million to the Manager for deferred
incentive management fees.
Cash used in investing activities was $4.5 million for the first two quarters of
1999 and $11.4 million for the first two 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'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.
<PAGE>
Cash used in financing activities was $7.4 million and $5.9 million for the
first two quarters of 1999 and 1998, respectively. During the twenty-four weeks
ended June 18, 1999 and June 19, 1998, the Partnership repaid $3.9 million and
$3.6 million, respectively, of principal on the mortgage debt. Cash used in
financing activities also included $3.5 million and $2.4 million of cash
distributions to limited partners during the twenty-four weeks ended June 18,
1999 and June 19, 1998, respectively.
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.
<PAGE>
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.
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 at June 18,
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 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 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, 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 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") 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 involved in the above-mentioned lawsuit, Case No. 98-CI-04092. In March
of this year, Palm Investors and Equity Resources filed petitions to intervene
in the Haas case with respect to units of Courtyard by Marriott Limited
Partnership ("CBMI"). In response to these efforts, two other CBMI partners Jack
L. Walker and Murray F. Weiss, ("Walker & Weiss") filed a petition to intervene
and certify the CBMI partners as a class. On April 29, 1999, the court denied
this petition and refused to certify the CBMI case as a class action, because of
a prior filed class action case involving CBMI in Delaware. 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, 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
Corporation, 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 is styled Equity Resource Fund X,
et al. v. CBM One Corporation, et al., Case No. 99-CI-04765. The plaintiffs
allege 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 allege,
among other things, that the defendants committed fraud, breaches of fiduciary
duties and violated provisions of the various agreements. The plaintiffs are
seeking 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. The defendants believe that there is no
truth to the plaintiffs' allegations and that the lawsuit is totally devoid of
merit. The defendants have filed an answer to the complaint, asserted a number
of defenses, and intend to vigorously defend against the claims asserted in the
derivative lawsuit. The derivative lawsuit is presently scheduled for trial on
January 10, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
None.
<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
July 30, 1999 By: /s/ Earla L. Stowe
------------------
Earla L. Stowe
Vice President and
Chief Accounting
Officer
<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
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-18-1999
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<CASH> 15,872
<SECURITIES> 0
<RECEIVABLES> 5,086
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<CURRENT-ASSETS> 21,605
<PP&E> 544,431
<DEPRECIATION> (254,213)
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<CURRENT-LIABILITIES> 40,956
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0
0
<COMMON> 0
<OTHER-SE> (17,327)
<TOTAL-LIABILITY-AND-EQUITY> 332,781
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<TOTAL-REVENUES> 98,265
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