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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. 0-16728
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)
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 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 Twenty-Four Weeks Ended June 18, 1999
and June 19, 1998 (Unaudited)....................................1
Condensed Consolidated Balance Sheet
June 18, 1999 (Unaudited) and December 31, 1998..................2
Condensed Consolidated Statement of Cash Flows
Twenty-Four Weeks ended June 18, 1999
and June 19, 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..........9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................10
Item 6. Exhibits and Reports on Form 8-K...................................11
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED 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.............................................$ 63,532 $ 62,679 $ 124,923 $ 122,959
Food and beverage................................. 4,217 4,172 8,345 8,201
Other............................................. 2,340 2,218 4,620 4,341
-------------- ------------- ------------- -------------
Total hotel revenues............................$ 70,089 $ 69,069 $ 137,888 $ 135,501
-------------- ------------- ------------- -------------
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms............................................. 14,086 13,153 27,685 25,811
Food and beverage................................. 3,662 3,457 7,249 6,916
Other department costs and expenses............... 741 700 1,435 1,359
Selling, administrative and other................. 15,780 15,611 31,643 30,641
-------------- ------------- ------------- -------------
Total hotel property-level costs and expenses... 34,269 32,921 68,012 64,727
Depreciation ....................................... 6,199 6,255 12,317 12,521
Ground rent, taxes and other........................ 6,174 6,154 12,173 12,154
Base and Courtyard management fees.................. 4,205 4,144 8,273 8,130
Incentive management fee............................ 3,313 3,388 6,408 6,600
-------------- ------------- ------------- -------------
Total operating costs and expenses.............. 54,160 52,862 107,183 104,132
-------------- ------------- ------------- -------------
OPERATING PROFIT....................................... 15,929 16,207 30,705 31,369
Interest expense.................................... (10,110) (10,048) (20,503) (21,137)
Interest income..................................... 399 631 707 1,303
-------------- ------------- ------------- -------------
NET INCOME.............................................$ 6,218 $ 6,790 $ 10,909 $ 11,535
============== ============= ============= =============
ALLOCATION OF NET INCOME
General Partner.....................................$ 310 $ 340 $ 545 $ 577
Limited Partners.................................... 5,908 6,450 10,364 10,958
-------------- ------------- ------------- -------------
$ 6,218 $ 6,790 $ 10,909 $ 11,535
============== ============= ============= =============
NET INCOME PER LIMITED PARTNER UNIT
(1,470 Units).......................................$ 4,019 $ 4,388 $ 7,050 $ 7,454
============== ============= ============= =============
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
June 18, December 31,
1999 1998
(Unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net..........................................................$ 462,372 $ 463,650
Deferred financing costs, net of accumulated amortization............................ 13,536 14,262
Due from Courtyard Management Corporation............................................ 7,343 8,739
Other assets......................................................................... 34 66
Property improvement fund............................................................ 6,217 6,466
Restricted cash...................................................................... 17,346 17,254
Cash and cash equivalents............................................................ 24,419 17,903
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$ 531,267 $ 528,340
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LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt.................................................................................$ 492,329 $ 498,624
Management fees due to Courtyard Management Corporation.............................. 33,246 34,414
Straight-line ground rent due to Marriott International, Inc. and affiliates......... 8,876 8,931
Accounts payable and accrued liabilities............................................. 12,002 10,261
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Total Liabilities.............................................................. 546,453 552,230
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PARTNERS' CAPITAL (DEFICIT)
General Partner...................................................................... 7,964 7,419
Limited Partners..................................................................... (23,150) (31,309)
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Total Partners' Deficit........................................................ (15,186) (23,890)
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$ 531,267 $ 528,340
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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>
Twenty-Four Weeks Ended
June 18, June 19,
1999 1998
---------------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income...........................................................................$ 10,909 $ 11,535
Noncash items........................................................................ 13,043 13,247
Changes in operating accounts........................................................ 1,864 575
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Cash provided by operating activities.......................................... 25,816 25,357
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INVESTING ACTIVITIES
Additions to property and equipment, net............................................. (11,039) (16,140)
Change in property improvement funds................................................. 249 9,089
Change in working capital reserve.................................................... (10) (2,987)
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Cash used in investing activities.............................................. (10,800) (10,038)
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FINANCING ACTIVITIES
Repayments of debt................................................................... (6,295) (5,841)
Capital distributions................................................................ (2,205) (2,793)
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Cash used in financing activities.............................................. (8,500) (8,634)
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INCREASE IN CASH AND CASH EQUIVALENTS................................................... 6,516 6,685
CASH AND CASH EQUIVALENTS at beginning of period........................................ 17,903 13,690
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CASH AND CASH EQUIVALENTS at end of period..............................................$ 24,419 $ 20,375
================ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest............................................$ 18,777 $ 19,238
================ ===============
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<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") 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 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 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 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.
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
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 twenty-four weeks ended June 18, 1999 and June 19, 1998
increased both revenues and operating expenses by approximately $34.3
million and $68 million and $32.9 million and $64.7 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 by $1.0 million and $2.4 million to $70.1 million
and $137.9 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 to $90 for both second quarter 1999 and year-to-date 1999 as
compared to the same periods in 1998. The modest 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 twenty-four weeks ended June 18, 1999, of 81% and 80%, respectively.
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 $72 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 $1.3 million to $54.2
million as compared to the comparable period in 1998. In addition, for the
twenty-four weeks ended June 18, 1999, operating costs and expenses increased by
$3.1 million to $107.2 million. As a percentage of hotel revenues, operating
costs and expenses increased to 77.3% of revenues for the second quarter 1999 as
compared to 76.5% for second quarter 1998. For year-to-date second quarter 1999,
operating costs and expenses as a percentage of sales increased to 77.7% as
compared to 76.8% for year-to-date second quarter 1998. The increase in
operating costs and expenses was primarily due to an increase in hotel
property-level costs and expenses at the Hotels as discussed below.
Total Hotel Property-Level Costs and Expenses. The Partnership's Hotel
property-level costs and expenses increased by 4% to $34.3 million and by 5% to
$68.0 million for the twelve and twenty-four weeks ended June 18, 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.
<PAGE>
Operating Profit. Operating profit for the second quarter 1999 and for second
quarter 1999 year-to-date declined 2% to $15.9 million and $30.7 million,
respectively, as compared to the comparable period in 1998. The decrease in
operating profit was primarily due to the increase in Hotel property-level costs
and expenses offset by the increase in revenues.
Interest Expense. Interest expense decreased by 3% to $20.5 million for the
twenty-four weeks ended June 18, 1999 from $21.1 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
twenty-four weeks ended June 19, 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, for the twenty-four weeks
ended June 18, 1999, the Partnership had net income of $10.9 million, a decrease
of $626,000, from the comparable period in 1998. For the second quarter 1999,
net income decreased $572,000 to $6.2 million as compared to second quarter
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 $25.8 million and $25.4 million, respectively. The increase
in cash provided by operations is primarily due to a decrease of $1.1 million in
deferred incentive management fees paid to the Manager during the twenty-four
weeks ended June 18, 1999, as compared to the comparable period in 1998 due to
lower operating results at the Hotels.
Cash used in investing activities was $10.8 million for the first two quarters
of 1999 and $10 million for the first two quarters of 1998. Cash used in
investing activities for 1999 includes capital expenditures of $11 million,
primarily related to renovations and replacements of furniture, fixtures and
equipment at the Partnership's Hotels as compared to $16.1 million of capital
expenditures in 1998. The change in the property improvement funds was $249,000
for the twenty-four weeks ended June 18, 1999 as compared to $9.1 million for
the comparable period in 1998. This decrease reflects a higher level of capital
expenditures in 1998 whereby a larger amount of the property improvement fund
balance was utilized for capital expenditures in 1998 as compared to 1999.
During the twenty-four weeks ended June 19, 1998, the Partnership transferred a
net $2.9 million to reserve accounts.
Cash used in financing activities was $8.5 million and $8.6 million for the
first two quarters of 1999 and 1998, respectively. During these periods, the
Partnership repaid $6.3 million and $5.8 million, respectively, of principal on
the commercial mortgage backed securities.
Cash used in financing activities included $2.2 million and $2.8 million of cash
distributions to limited partners during the twenty-four weeks ended June 18,
1999 and June 19, 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.
<PAGE>
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.
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.
<PAGE>
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 against Host Marriott, Marriott
International, various related entities, and others (collectively, the
"Defendants"). On January 29, 1998, two other Limited Partners 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 have filed an answer denying all of the plaintiffs' allegations and
discovery is continuing. This case is presently scheduled for trial on January
3, 2000.
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 the
remaining units owned. 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. The
original class action plaintiffs have filed a third amended class action
complaint on May 24, 1999.
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 the Partnership 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 (see above). As a result of
this development, the Partnership 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 CBMI, filed a derivative lawsuit on behalf of the Partnership
and CBMI, against Marriott International, 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 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, breached fiduciary duties, and violated provisions
of 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 II
LIMITED PARTNERSHIP
By: CBM TWO LLC
General Partner
July 30, 1999 By: /s/ Earla L. Stowe
------------------
Earla L. Stowe
Vice President and
Chief Accounting Officer
<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> JUN-18-1999
<EXCHANGE-RATE> 1.00
<CASH> 24,419
<SECURITIES> 0
<RECEIVABLES> 7,343
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 37,133
<PP&E> 757,563
<DEPRECIATION> (295,191)
<TOTAL-ASSETS> 531,267
<CURRENT-LIABILITIES> 54,124
<BONDS> 492,329
0
0
<COMMON> 0
<OTHER-SE> (15,186)
<TOTAL-LIABILITY-AND-EQUITY> 531,267
<SALES> 0
<TOTAL-REVENUES> 137,888
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (106,476)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (20,503)
<INCOME-PRETAX> 10,909
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,909
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,909
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
