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 SEPTEMBER 11, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-16728
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COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Delaware 52-1533559
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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 __.
<PAGE>
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Courtyard By Marriott II Limited Partnership
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TABLE OF CONTENTS
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Operations
Twelve and Thirty-Six Weeks Ended September 11, 1998
and September 12, 1997 (Unaudited)....................... 1
Condensed Consolidated Balance Sheet
September 11, 1998 (Unaudited) and December 31, 1997....... 2
Condensed Consolidated Statement of Cash Flows
Thirty-Six Weeks ended September 11, 1998
and September 12, 1997 (Unaudited)....................... 3
Notes to Condensed Consolidated 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..............................................11
Item 6. Exhibits and Reports on Form 8-K...............................12
<PAGE>
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED 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)....................................$ 33,149 $ 33,456 $ 103,923 $ 101,428
---------------- --------------- ---------------- ---------------
OPERATING COSTS AND EXPENSES
Depreciation...................................... 6,073 6,307 18,594 18,901
Ground rent, taxes and other...................... 5,712 5,891 17,866 17,417
Base and Courtyard management fees................ 4,012 3,937 12,142 11,721
Incentive management fee.......................... 3,026 3,062 9,626 9,447
---------------- --------------- ---------------- ---------------
18,823 19,197 58,228 57,486
---------------- --------------- ---------------- ---------------
OPERATING PROFIT..................................... 14,326 14,259 45,695 43,942
Interest expense.................................. (10,239) (10,511) (31,376) (32,259)
Interest income................................... 596 786 1,899 1,942
---------------- --------------- ---------------- ---------------
NET INCOME...........................................$ 4,683 $ 4,534 $ 16,218 $ 13,625
================ =============== ================ ===============
ALLOCATION OF NET INCOME
General Partner...................................$ 234 $ 227 $ 811 $ 681
Limited Partners.................................. 4,449 4,307 15,407 12,944
---------------- --------------- ---------------- ---------------
$ 4,683 $ 4,534 $ 16,218 $ 13,625
================ =============== ================ ===============
NET INCOME PER LIMITED PARTNER
UNIT (1,470 Units)................................$ 3,027 $ 2,930 $ 10,481 $ 8,805
================ =============== ================ ===============
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
September 11, December 31,
1998 1997
-------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Property and equipment, net..........................................................$ 459,757 $ 455,435
Due from Courtyard Management Corporation............................................ 10,548 11,318
Property improvement fund............................................................ 14,972 27,200
Other assets......................................................................... 14,775 15,860
Restricted cash...................................................................... 17,260 13,212
Cash and cash equivalents............................................................ 13,442 13,690
---------------- ---------------
$ 530,754 $ 536,715
================ ===============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt.................................................................................$ 503,521 $ 512,955
Management fees due to Courtyard Management Corporation.............................. 32,259 34,829
Due to Marriott International, Inc. and affiliates................................... 8,968 9,050
Accounts payable and accrued liabilities............................................. 9,158 10,578
---------------- ---------------
Total Liabilities.................................................................. 553,906 567,412
---------------- ---------------
PARTNERS' CAPITAL (DEFICIT)
General Partner...................................................................... 7,383 6,572
Limited Partners..................................................................... (30,535) (37,269)
---------------- ---------------
Total Partners' Deficit............................................................ (23,152) (30,697)
---------------- ---------------
$ 530,754 $ 536,715
================ ===============
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED 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.........................................................................$ 16,218 $ 13,625
Noncash items...................................................................... 19,683 19,988
Changes in operating accounts...................................................... (4,413) (2,749)
---------------- ---------------
Cash provided by operating activities.......................................... 31,488 30,864
---------------- ---------------
INVESTING ACTIVITIES
Additions to property and equipment................................................ (22,916) (18,368)
Change in property improvement funds............................................... 12,228 7,542
Change in working capital reserve account.......................................... (2,941) (2,049)
---------------- ---------------
Cash used in investing activities.............................................. (13,629) (12,875)
---------------- ---------------
FINANCING ACTIVITIES
Repayments of debt................................................................. (9,434) (8,754)
Capital distributions.............................................................. (8,673) (11,539)
---------------- ---------------
Cash used in financing activities.............................................. (18,107) (20,293)
---------------- ---------------
DECREASE IN CASH AND CASH EQUIVALENTS................................................... (248) (2,304)
CASH AND CASH EQUIVALENTS at beginning of period........................................ 13,690 14,197
---------------- ---------------
CASH AND CASH EQUIVALENTS at end of period..............................................$ 13,442 $ 11,893
================ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest..........................................$ 33,430 $ 34,158
================ ===============
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed consolidated financial statements have been
prepared by the Courtyard By Marriott II Limited Partnership (the
"Partnership") without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
generally accepted accounting principles have been condensed or omitted
from the accompanying statements. The Partnership believes the disclosures
made are adequate to make the information presented not misleading.
However, the condensed consolidated financial statements should be read in
conjunction with the Partnership's consolidated financial statements and
notes thereto included in the Partnership's Form 10-K for the fiscal year
ended December 31, 1997.
In the opinion of the Partnership, the accompanying unaudited condensed
consolidated 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 CBM Two Corporation (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.
2. Certain reclassifications were made to the prior year condensed
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 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 consolidated statement of
operations.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity
in its financial statements.
The Partnership 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 $33.7 million and
$32.2 million for the twelve weeks ended September 11, 1998 and September
12, 1997, respectively, and $98.5 million and $93.9 million for the
thirty-six weeks ended September 11, 1998 and September 12, 1997,
respectively, and will have no impact on operating profit or net income.
<PAGE>
Revenues consist of the following hotel operating results (in thousands):
<TABLE>
Twelve Weeks Ended Thirty-Six Weeks Ended
September 11, September 12, September 11, September 12,
1998 1997 1998 1997
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
HOTEL SALES
Rooms...................................$ 61,044 $ 59,503 $ 184,003 $ 176,228
Food and beverage....................... 3,904 3,966 12,105 12,325
Other................................... 1,926 2,147 6,267 6,789
--------------- ---------------- ---------------- ---------------
66,874 65,616 202,375 195,342
--------------- ---------------- ---------------- ---------------
HOTEL EXPENSES
Departmental direct costs
Rooms................................. 13,317 12,777 39,128 36,786
Food and beverage..................... 3,474 3,572 10,390 10,597
Other................................. 16,934 15,811 48,934 46,531
--------------- ---------------- ---------------- ---------------
33,725 32,160 98,452 93,914
--------------- ---------------- ---------------- ---------------
REVENUES..................................$ 33,149 $ 33,456 $ 103,923 $ 101,428
=============== ================ ================ ===============
</TABLE>
4. Host Marriott Corporation, on behalf of the General Partner, CBM Two
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 contained 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 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 decreased by $307,000 to $33.1 million and increased by $2.5
million to $103.9 million for the twelve and thirty-six weeks ended September
11, 1998, respectively. These represent a 0.9% decrease and a 2.5% increase,
respectively, for the quarter and year-to-date when compared to the same periods
in 1997. The decrease in revenues for the quarter is primarily due to a 4.9%
increase in direct hotel operating costs and expenses. The increase in revenues
for the thirty-six weeks ended September 11, 1998 was achieved primarily through
an increase in hotel sales offset by an increase in direct hotel operating costs
and expenses. The increase in expenses has resulted from increased reservation
costs, Marriott rewards program costs and wage increases.
For the twelve and thirty-six weeks ended September 11, 1998, hotel sales
increased by $1.3 million and $7.0 million, or 1.9% and 3.6%, to $66.9 million
and $202.4 million, respectively, over the same periods in 1997. The increase in
sales was achieved primarily through an increase in the combined average room
rate. The combined average room rate increased $4.22 to $86.79 for the third
quarter and $5.59 to $88.03 year-to-date as compared to the same periods in
1997. The increase in average room rate is primarily due to aggressive weekday
pricing combined with a strong advertising campaign which focused on leisure
travelers.
Combined average occupancy for the twelve and thirty-six weeks ended September
11, 1998 decreased by 2.0 and 1.8 percentage points to 81.0% and 80.3%,
respectively, when compared to the same periods in 1997. The decrease in
occupancy is mainly due to increased competition and aggressive rate increases
in some markets. For the thirty-six weeks ended September 11, 1998, 39 of the
Partnership's 70 Hotels posted occupancy rates exceeding 80%. REVPAR, or revenue
per available room, represents the combination of the average daily room rate
charged and the average daily occupancy achieved and is a commonly used
indicator of hotel performance (although it is not a GAAP, or generally accepted
accounting principles, measurement of revenue). REVPAR for the twelve weeks and
thirty-six weeks ended September 11, 1998 was $70.31 and $70.69, representing a
2.6% and 4.4% increase, respectively, when compared to the same periods in 1997.
Direct hotel operating costs and expenses increased from $32.2 million and $93.9
million for the twelve and thirty-six weeks ended September 12, 1997 to $33.7
million and $98.5 million, respectively, for the same periods in 1998. Room
profit increased by 2.1% and 3.9% for the twelve and thirty-six weeks ended
September 11, 1998, respectively, as compared to the same periods in 1997.
Operating Costs and Expenses. The Partnership's operating costs and expenses
decreased by 1.9% to $18.8 million and increased by 1.3% to $58.2 million for
the twelve and thirty-six weeks ended September 11, 1998, respectively, when
compared to the same periods in 1997. As a percentage of total hotel sales,
these costs and expenses decreased slightly from 29.4% in the thirty-six weeks
ended September 12, 1997 to 28.8% in the same period of 1998. As a percentage of
total sales for the third quarter, these costs and expenses decreased slightly
from 29.3% in the twelve weeks ended September 12, 1997 to 28.1% in the same
period of 1998. Some of the components of this category are discussed below:
Base and Courtyard Management Fees. The 3.6% increase in base and Courtyard
management fees from $11.7 million for the thirty-six weeks ended September 12,
1997 to $12.1 million for the comparable period in 1998 is due to the improved
combined hotel sales for the 70 Hotels.
Incentive Management Fees. During the thirty-six weeks ended September 11, 1998,
incentive management fees earned increased by 1.9% to $9.6 million from $9.4
million in the comparable period in 1997. The increase in incentive management
fees earned was the result of improved combined hotel operating results.
Operating Profit. Operating profit increased by $1.8 million to $45.7 million in
the thirty-six weeks ended September 11, 1998 from $43.9 million in the same
period in 1997, primarily due to higher revenues.
Interest Expense. Interest expense decreased by 2.7% to $31.4 million for the
thirty-six weeks ended September 11, 1998 from $32.3 million for the comparable
period in 1997. For the third quarter 1998, interest expense decreased $272,000
as compared to the third quarter 1997. The decrease was primarily due to
principal amortization on the Certificates/Mortgage Loan. The weighted average
interest rate for the thirty-six weeks ended September 11, 1998 was 8.6% as
compared to 8.4% for the comparable period in 1997.
Net Income. For the thirty-six weeks ended September 11, 1998, the Partnership
had net income of $16.2 million, an increase of $2.6 million, or 19%, from net
income of $13.6 million for the comparable period in 1997. This increase was
primarily due to higher revenues as discussed above, offset by increases in
management fees, ground rent, taxes and other expenses.
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
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 thirty-six weeks ended September 11, 1998
and September 12, 1997, was $31.5 million and $30.9 million, respectively. The
increase in cash provided by operations is due to improved operations, partially
offset by the change in operating accounts.
Cash used in investing activities was $13.6 million and $12.9 million for the
thirty-six weeks ended September 11, 1998 and September 12, 1997, respectively.
The Partnership transferred a net amount of $2.9 million and $2.0 million into
a working capital reserve account during the thirty-six weeks ended
September 11, 1998 and September 12, 1997, respectively. Cash used in
investing activities for 1998 includes capital expenditures of $22.9
million, primarily related to renovations and replacements at the Partnership's
hotels. Contributions to the property improvement fund, including interest
earned on the fund, were $10.7 million and $10.9 million for the thirty-six
weeks ended September 11, 1998 and September 12, 1997, respectively.
The General Partner believes the property improvement funds will be adequate
for the future capital repairs and replacement needs of the Hotels.
Cash used in financing activities was $18.1 million and $20.3 million for the
thirty-six weeks ended September 11, 1998 and September 12, 1997, respectively.
During the first thirty-six weeks of 1998 and 1997, the Partnership repaid $9.4
million and $8.8 million, respectively, of principal on the
Certificates/Mortgage Loan.
Cash used in financing activities included $8.7 million and $11.5 million of
cash distributions to limited partners during the thirty-six weeks ended
September 11, 1998 and September 12, 1997, respectively. In April of 1998, the
Partnership utilized 1997 cash flow after debt service to make a final cash
distribution totaling $2.8 million or $1,900 per limited partner unit, bringing
the total distribution from 1997 operations to $13.2 million or $9,000 per
limited partner unit. Additionally, on July 27, 1998, the Partnership utilized
1998 cash flow through June 19, 1998 to make a distribution of $5.9 million or
$4,000 per limited partner unit.
YEAR 2000 ISSUE
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 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 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 agreements generally provide 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 agreements. The management
agreements generally do 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain limited partners of the Partnership have filed a lawsuit, styled Whitey
Ford, et al. v. Host Marriott Corporation, et al., Case No. 96-CI-08327, in the
285th Judicial District Court of Bexar County, Texas against the General
Partner, the Manager, various of their subsidiaries, J.W. Marriott, Jr., Stephen
Rushmore and Hospitality Valuation Services, Inc. (collectively, the
"Defendants"). On January 29, 1998, two other Limited Partners filed a petition
to expand this lawsuit to include a class action. On June 23, 1998, the Court
entered an order certifying a class of limited partners under Texas law,
appointing A.R. Milkes and D.R. Burklew as representative plaintiffs on behalf
of the class, and later, appointing the law firm of Berg & Androphy as lead
class counsel. The plaintiffs allege, among other things, that the Defendants
committed fraud, breached fiduciary duties, and violated the provisions of
various contracts. The Defendants have filed an answer and discovery is
underway. Trial is scheduled for May 1999.
On February 11, 1998, four individual limited partners in partnerships sponsored
by Host Marriott Corporation ("Host Marriott"), filed a class action lawsuit,
styled Ruben, et al. v. Host Marriott Corporation, et al., Civil Action No.
16186, in Delaware State Chancery Court against Host Marriott and the general
partners of Courtyard by Marriott Limited Partnership, Courtyard by Marriott II
Limited Partnership, Marriott Residence Inn Limited Partnership, Marriott
Residence Inn II Limited Partnership, and Fairfield Inn by Marriott Limited
Partnership (collectively, the "Five Partnerships"). The plaintiffs allege that
the 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, recision 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, judgments, 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.
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 October 16, 1998. In 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 II
LIMITED PARTNERSHIP
By: CBM TWO CORPORATION
General Partner
October 26, 1998 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> 0000832179
<NAME> COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-11-1998
<EXCHANGE-RATE> 1000
<CASH> 30,702
<SECURITIES> 29,747 <F1>
<RECEIVABLES> 10,548
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 70,997
<PP&E> 733,330
<DEPRECIATION> (273,573)
<TOTAL-ASSETS> 530,754
<CURRENT-LIABILITIES> 9,158
<BONDS> 544,748
0
0
<COMMON> 0
<OTHER-SE> (23,152) <F2>
<TOTAL-LIABILITY-AND-EQUITY> 530,754
<SALES> 0
<TOTAL-REVENUES> 103,923
<CGS> 0
<TOTAL-COSTS> 56,329
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,376
<INCOME-PRETAX> 16,218
<INCOME-TAX> 0
<INCOME-CONTINUING> 16,218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,218
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> THIS REPRESENTS OTHER ASSETS.
<F2> THIS REPRESENTS PARTNERS' DEFICIT.
</FN>
</TABLE>
