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 10, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-16728
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
(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)
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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 10, 1999
and September 11, 1998 (Unaudited)............................................1
Condensed Consolidated Balance Sheet
September 10, 1999 (Unaudited) and December 31, 1998..........................2
Condensed Consolidated Statement of Cash Flows
Thirty-Six Weeks ended September 10, 1999
and September 11, 1998 (Unaudited)............................................3
Notes to Condensed Consolidated 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 II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED 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
------------- ---------------- ------------- -------------
<C> <C> <C> <C>
<S>
REVENUES
Hotel revenues
Rooms............................................. $ 63,068 $ 61,044 $ 187,991 $ 184,003
Food and beverage............................... 4,059 3,904 12,404 12,105
Other.......................................... 2,284 1,926 6,904 6,267
------------- ---------- ----------- -------------
Total hotel revenues.......................... 69,411 66,874 207,299 202,375
------------- ---------- ----------- -------------
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms............................................ 14,011 13,317 41,696 39,128
Food and beverage............................... 3,570 3,474 10,819 10,390
Other department costs and expenses.......... 702 705 2,137 2,064
Selling, administrative and other................ 15,637 16,229 47,280 46,870
------------- ---------- --------- -----------
Total hotel property-level costs and expenses. 33,920 33,725 101,932 98,452
Depreciation..................................... 6,426 6,073 18,743 18,594
Ground rent, taxes and other..................... 5,598 5,712 17,771 17,866
Base and Courtyard management fees............... 4,165 4,012 12,438 12,142
Incentive management fee........................ 3,344 3,026 9,752 9,626
---------- ---------- ---------- -----------
Total operating costs and expenses............... 53,453 52,548 160,636 156,680
---------- ---------- ---------- -----------
OPERATING PROFIT................................... 15,958 14,326 46,663 45,695
Interest expense.................................. (9,962) (10,239) (30,465) (31,376)
Interest income............................... 376 596 1,083 1,899
---------- ------------ ---------- -------------
NET INCOME......................................... $ 6,372 $ 4,683 $ 17,281 $ 16,218
========== ============= ========== =============
ALLOCATION OF NET INCOME
General Partner................................ $ 319 $ 234 $ 864 $ 811
Limited Partners............................... 6,053 4,449 16,417 15,407
---------- ------------- ------------ ------------
$ 6,372 $ 4,683 $ 17,281 $ 16,218
========== ============= ============= ============
NET INCOME PER LIMITED PARTNER
UNIT (1,470 Units)................................ $ 4,118 $ 3,027 $ 11,168 $ 10,481
========== ============= ============== ============
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
September 10, December 31,
1999 1998
(Unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net.......................................................... $ 458,746 $ 463,650
Deferred financing costs, net of accumulated amortization............................ 13,174 14,262
Due from Courtyard Management Corporation............................................ 6,567 8,739
Other assets......................................................................... 24 66
Property improvement fund............................................................ 6,913 6,466
Restricted cash...................................................................... 18,622 17,254
Cash and cash equivalents............................................................ 21,789 17,903
------------- ------------
$ 525,835 $ 528,340
============= =============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt................................................................................. $ 488,457 $ 498,624
Management fees due to Courtyard Management Corporation.............................. 32,182 34,414
Straight-line ground rent due to Marriott International, Inc. and affiliates......... 8,849 8,931
Accounts payable and accrued liabilities............................................. 8,836 10,261
---------- ------------
Total Liabilities.................................................................... 538,324 552,230
---------- ------------
PARTNERS' CAPITAL (DEFICIT)
General Partner...................................................................... 8,283 7,419
Limited Partners..................................................................... (20,772) (31,309)
--------- ------------
Total Partners' Deficit.............................................................. (12,489) (23,890)
----------- ------------
$ 525,835 $ 528,340
=========== ============
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 10, September 11,
1999 1998
------------ ------------
<S>
OPERATING ACTIVITIES <C> <C>
Net income........................................................................... $ 17,281 $ 16,218
Noncash items........................................................................ 19,831 19,683
Changes in operating accounts........................................................ (2,842) (4,413)
--------- ---------
Cash provided by operating activities................................................ 34,270 31,488
--------- ---------
INVESTING ACTIVITIES
Additions to property and equipment, net............................................. (13,839) (22,916)
Change in property improvement funds................................................. (447) 12,228
Change in working capital reserve.................................................... (51) (2,941)
---------- ----------
Cash used in investing activities.................................................... (14,337) (13,629)
---------- ----------
FINANCING ACTIVITIES
Repayments of debt................................................................... (10,167) (9,434)
Capital distributions................................................................ (5,880) (8,673)
---------- ----------
Cash used in financing activities.................................................... (16,047) (18,107)
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... 3,886 (248)
CASH AND CASH EQUIVALENTS at beginning of period...................................... 17,903 13,690
-------- ----------
CASH AND CASH EQUIVALENTS at end of period............................................ $ 21,789 $ 13,442
======== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest............................................ $ 32,686 $ 33,430
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
The accompanying unaudited, condensed, consolidated interim financial
statements have been prepared by the Courtyard by Marriott II 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 consolidated interim 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, 1998.
In the opinion of the Partnership, the accompanying unaudited, condensed,
consolidated 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 Two 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.
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
consolidated 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 consolidated statement of operations. The Partnership
has given retroactive effect to the adoption of EITF 97-2 in the accompanying
condensed consolidated statement of operations. Application of EITF 97-2 to the
condensed consolidated 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 $33.9 million and $101.9 million and $33.7
million and $98.5 million, respectively, and had no impact on operating profit
or net income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements. Certain, but
not necessarily all, of such forward-looking statements can be identified by the
use of forward-looking terminology, such as "believes," "expects," "may,"
"will," "should," "estimates," or "anticipates," or the negative thereof or
other variations thereof or comparable terminology. All forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause our actual transactions, results, performance or achievements to
be materially different from any future transactions, results, performance or
achievements expressed or implied by such forward-looking statements. Although
the Partnership believes the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, the Partnership can give no
assurance that its expectations will be attained or that any deviations will not
be material. The Partnership undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements that may be made to
reflect any future events or circumstances.
RESULTS OF OPERATIONS
Revenues. Revenues increased by $2.5 million and $4.9 million to $69.4 million
and $207.3 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 3.6% and 2.0% to $90 for both the third quarter 1999 and year-to-date
third quarter 1999, respectively, when compared to the same periods in 1998. The
increase in the combined average room rate is due to continued efforts to
increase weekday pricing.
Despite increased competition in the moderate tier hotel segment, the
Partnership's Hotels were able to maintain a combined average occupancy for the
twelve and thirty-six weeks ended September 10, 1999, of 81.4% and 80.4%,
respectively. REVPAR, or revenue per available room, represents the combination
of the average daily room rate charged and the average daily occupancy achieved.
REVPAR increased 4% and 2% for the twelve and thirty-six weeks ended September
10, 1999 to $73 and $72 respectively, 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 $905,000 to $53.5 million
as compared to the comparable period in 1998. In addition, for the thirty-six
weeks ended September 10, 1999, operating costs and expenses increased by $4
million to $160.6 million. As a percentage of revenues, operating costs and
expenses decreased to 77.0% of revenues for the third quarter 1999 as compared
to 78.6% of revenues for third quarter 1998. For year-to-date third quarter
1999, operating costs and expenses as a percentage of revenues remained stable
at 77.5% of revenues as compared to year-to-date third quarter 1998. The
increase in operating costs and expenses for the third quarter 1999 when
compared to 1998 was primarily due to an increase in management fees paid to the
Manager as a result of improved operations. The increase in operating costs and
expenses for the thirty-six weeks of 1999 was primarily due to an increase in
hotel property-level costs and expenses as discussed below.
Total Hotel Property-Level Costs and Expenses. The Partnership's Hotel
property-level costs and expenses increased slightly to $33.9 million and by
$3.5 million to $101.9 million for the twelve and thirty-six weeks ended
September 10, 1999, respectively, as 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 revenues, property-level costs and
expenses represented 49% 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 49% of revenues for year-to-date third quarter 1998.
Operating Profit. Operating profit increased $1.6 million, or 11.4%, to $16.0
million, or 23% of revenues, for the twelve weeks ended September 10, 1999 from
$14.3 million, or 21% of revenues for the twelve weeks ended September 11, 1998.
In addition, operating profit increased $968,000, or 2.1%, to $46.7 million, or
23% of revenues, for the thirty-six weeks ended September 10, 1999 from $45.7
million, or 23% of revenues, for the thirty-six weeks ended September 11, 1998.
The increase in operating profit was primarily due to the increase in revenues
offset by the increase in Hotel property-level costs and expenses and management
fee expenses.
Interest Expense. Interest expense decreased by 2.9% to $30.5 million for the
thirty-six weeks ended September 10, 1999 from $31.4 million for the comparable
period in 1998. The decrease was primarily due to principal amortization on the
commercial mortgage backed securities which results in lower principal debt
balances in 1999 as compared to 1998. The weighted average interest rate for the
thirty-six weeks ended September 10, 1999 was 8.5% as compared to 8.6% for the
comparable period in 1998.
Net Income. As a result of the items discussed above, net income increased $1.7
million to $6.4 million, or 9.2% of revenues for the twelve weeks ended
September 10, 1999 when compared to $4.7 million, or 7% of revenues for the
twelve weeks ended September 11, 1998. Net income for the thirty-six weeks ended
September 10, 1999 increased $1.1 million to $17.3 million, or 8.3% of revenues
when compared to $16.2 million, or 8% 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 limited partners.
Cash provided by operations for the thirty-six weeks ended September 10, 1999
and September 11, 1998, was $34.3 million and $31.5 million, respectively. The
increase in cash provided by operations is primarily due to improved operations,
partially offset by the change in operating accounts during the thirty-six weeks
ended September 10, 1999, as compared to the comparable period in 1998.
Cash used in investing activities was $14.3 million for the first three quarters
of 1999 and $13.6 million for the first three quarters of 1998. Cash used in
investing activities for 1999 includes capital expenditures of $13.8 million,
primarily related to renovations and replacements of furniture, fixtures and
equipment at the Partnership's Hotels as compared to $22.9 million of capital
expenditures in 1998. The property improvement funds increased $447,000 for the
thirty-six weeks ended September 10, 1999 as compared to a decrease of $12.2
million for the comparable period in 1998. The decrease in 1999 reflects a
higher level of capital expenditures for rooms renovations in 1998 whereby a
larger amount of the property improvement fund balance was utilized for these
capital expenditures in 1998 as compared to 1999.
Cash used in financing activities was $16.1 million and $18.1 million for the
first three quarters of 1999 and 1998, respectively. During these periods, the
Partnership repaid $10.2 million and $9.4 million, respectively, of principal on
the commercial mortgage backed securities. Cash used in financing activities
included $5.9 million and $8.7 million of cash distributions to limited partners
during the thirty-six weeks ended September 10, 1999 and September 11, 1998,
respectively. In April of 1999, the Partnership utilized 1998 cash flow after
debt service to make a final 1998 cash distribution of $1,500 per limited
partner unit, bringing the total distribution from 1998 operations to $9.6
million or $6,500 per limited partner unit. In addition, on August 10, 1999, the
Partnership distributed an interim 1999 distribution of $3.7 million or $2,500
per limited partner unit from first and second quarter 1999 partnership
operations.
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 for its centralized systems 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.
<PAGE>
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.
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.
Certain Limited Partners of the Partnership 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 on June 7, 1996, against Host
Marriott Corporation ("Host Marriott"), Marriott International, various related
entities, and others (collectively, the "Defendants"). On January 29, 1998, two
other Limited Partners, A.R. Milkes and D.R. Burklew, filed a petition to expand
this lawsuit into a class action. On June 23, 1998, the Court entered an order
certifying a class of limited partners under Texas law. The plaintiffs allege,
among other things, that the Defendants committed fraud, breached fiduciary
duties, and violated the provisions of various contracts. The Defendants filed
answers denying all of the plaintiffs'allegations and discovery is continuing.
In March of this year, two groups of limited partners ("Palm Investors" and
"Equity Resources") filed petitions to intervene in this lawsuit with respect to
Partnership units that they purchased from Texas partners and some of the
original plaintiffs. They elected to opt-out of the class with respect to
certain units. Palm Investors also sought to raise claims relating to the 1993
split of Marriott Corporation and the Partnership's 1995 refinancing, and to add
the appraiser as a defendant for its role in the refinancing. On September 24,
1999, Palm Investors dismissed that appraiser from this lawsuit. In a third
amended class action complaint filed on May 24, 1999, the original class action
plaintiffs asserted as derivative claims some of the claims previously asserted
as individual claims. This case is presently scheduled for trial on January 3,
2000.
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 the Partnership was filed by the plaintiffs' lawyers in the same
court, involves similar allegations against the Defendants, and has been
certified as a class action (see above). As a result of this development, the
Partnership is no longer involved in the above-referenced Haas 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
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 CBMI, filed a derivative lawsuit on behalf of the Partnership
and CBMI, 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 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. The General Partner also assigned to the SLC the same tasks
with respect to the derivative claims in the Partnership's class action lawsuit,
Case No. 96-CI-08327. As a result of this undertaking, the defendants have asked
the Court to enter an order staying the class action lawsuit until the SLC has
completed its investigation. Similarly, the SLC has asked the Court to postpone
the trial for up to six months so that the SLC can complete its investigation.
The Court has not yet ruled on these requests.
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 II
LIMITED PARTNERSHIP
By: CBM TWO LLC
General Partner
October 25, 1999
By: /s/ Earla L. Stowe
------------------
Earla L. Stowe
Vice President
<PAGE>
<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$
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-10-1999
<EXCHANGE-RATE> 1.00
<CASH> 21,789
<SECURITIES> 0
<RECEIVABLES> 6,567
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,733
<PP&E> 760,364
<DEPRECIATION> (301,618)
<TOTAL-ASSETS> 525,835
<CURRENT-LIABILITIES> 49,867
<BONDS> 488,457
0
0
<COMMON> 0
<OTHER-SE> (12,489)
<TOTAL-LIABILITY-AND-EQUITY> 525,835
<SALES> 0
<TOTAL-REVENUES> 207,299
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (159,553)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (30,465)
<INCOME-PRETAX> 17,281
<INCOME-TAX> 0
<INCOME-CONTINUING> 17,281
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,281
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
