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 MARCH 26, 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(State of Organization)
(I.R.S. Employer Identification Number)10400 Fernwood Road, Bethesda, MD
20817-1109(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (301) 380-2070
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of
the Act:
Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes a No o o o o o
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COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statement of Operations
Twelve Weeks Ended March 26, 1999 and March 27, 1998 (Unaudited)..1
Condensed Consolidated Balance Sheet
March 26, 1999 (Unaudited) and December 31, 1998..................2
Condensed Consolidated Statement of Cash Flows
Twelve Weeks ended March 26, 1999 and March 27, 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
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ..............................................9
Item 6. Exhibits and Reports on Form 8-K...............................11
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<TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except unit and per unit amounts)
Twelve Weeks Ended
March 26, March 27,
1999 1998
------------- ---------
<S> <C> <C>
REVENUES
Hotel revenues
Rooms...................................................................................$ 61,391 $ 60,280
Food and beverage....................................................................... 4,128 4,029
Other................................................................................... 2,280 2,123
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Total hotel revenues.................................................................. 67,799 66,432
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OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms................................................................................... 13,599 12,658
Food and beverage....................................................................... 3,587 3,459
Other department costs and expenses..................................................... 694 659
Selling, administrative and other....................................................... 15,863 15,030
------------- -------------
Total hotel property-level costs and expenses......................................... 33,743 31,806
Depreciation.............................................................................. 6,118 6,266
Ground rent, taxes and other.............................................................. 5,999 6,000
Base and Courtyard management fees........................................................ 4,068 3,986
Incentive management fee.................................................................. 3,095 3,212
------------- -------------
Total operating costs and expenses.................................................... 53,023 51,270
------------- -------------
OPERATING PROFIT............................................................................. 14,776 15,162
Interest expense.......................................................................... (10,393) (11,089)
Interest income........................................................................... 308 672
------------- -------------
NET INCOME...................................................................................$ 4,691 $ 4,745
============= =============
ALLOCATION OF NET INCOME
General Partner...........................................................................$ 235 $ 237
Limited Partners.......................................................................... 4,456 4,508
------------- -------------
$ 4,691 $ 4,745
============= =============
NET INCOME PER LIMITED PARTNER UNIT (1,470 Units)............................................$ 3,031 $ 3,067
============= =============
See Notes to Condensed Consolidated Financial Statements.
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<TABLE>
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COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
March 26, December 31,
1999 1998
(Unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net............................................................$ 463,920 $ 463,650
Due from Courtyard Management Corporation.............................................. 7,913 8,739
Other assets........................................................................... 18,172 20,794
Restricted cash........................................................................ 16,389 17,254
Cash and cash equivalents.............................................................. 22,210 17,903
-------------- ---------------
$ 528,604 $ 528,340
============== ===============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt...................................................................................$ 496,130 $ 498,624
Management fees due to Courtyard Management Corporation. . 34,258 34,414
Due to Marriott International, Inc. and affiliates 8,904 8,931
Accounts payable and accrued liabilities............................................... 8,511 10,261
-------------- ---------------
Total Liabilities................................................................ 547,803 552,230
-------------- ---------------
PARTNERS' CAPITAL (DEFICIT)
General Partner........................................................................ 7,654 7,419
Limited Partners....................................................................... (26,851) (31,309)
-------------- --------------
Total Partners' Deficit.......................................................... (19,199) (23,890)
-------------- --------------
$ 528,604 $ 528,340
============== ===============
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
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<TABLE>
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COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
Twelve Weeks Ended
March 26, March 27,
1999 1998
------------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ...............................................................................$ 4,691 $ 4,745
Noncash items............................................................................. 6,482 6,629
Changes in operating accounts............................................................. (189) (7,169)
------------- ------------
Cash provided by operating activities............................................... 10,984 4,205
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INVESTING ACTIVITIES
Additions to property and equipment....................................................... (6,388) (7,456)
Change in property improvement funds...................................................... 2,228 4,228
Change in working capital reserve......................................................... (23) (2,940)
------------- ------------
Cash used in investing activities................................................... (4,183) (6,168)
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FINANCING ACTIVITIES
Repayments of debt ....................................................................... (2,494) (3,483)
------------- ------------
Cash used in financing activities................................................... (2,494) (3,483)
------------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................................. 4,307 (5,446)
CASH AND CASH EQUIVALENTS at beginning of period............................................. 17,903 13,690
------------- -------------
CASH AND CASH EQUIVALENTS at end of period...................................................$ 22,210 $ 8,244
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest.................................................$ 11,644 $ 14,303
============= =============
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
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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, 1998.
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 March 26, 1999, and the results of operations and cash
flows for the twelve weeks ended March 26, 1999 and March 27, 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 Federal 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 financial statements to
conform to the 1999 presentation.
3. Revenues primarily represent the gross revenues 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 revenues 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 weeks ended March 26, 1999 and March 27, 1998 increased both
revenues and operating expenses by approximately $33.7 million and $31.8
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 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 Exchange
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 or 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
Hotel Revenues. Total hotel revenues for first quarter 1999 increased by $1.4
million to $67.8 million, a 2.1% increase when compared to the same period in
1998. The increase in revenues was achieved primarily through the increase in
rooms revenues described below.
Rooms Revenues. Rooms revenues for first quarter 1999 increased $1.1 million, or
1.8%, to $61.4 million when compared to the same period in 1998. The increase in
revenues was achieved through a 1.2% increase in the combined average room rate
from $88.52 for the first quarter of 1998 to $89.61 for the first quarter of
1999. Combined average occupancy decreased slightly from 78.4% for the first
quarter of 1998 to 78.3% for the first quarter of 1999.
Operating costs and expenses. Operating costs and expenses increased $1.8
million, or 3.4%, to $53.0 million for first quarter 1999 when compared to first
quarter 1998, primarily due to the increase in property-level costs and expenses
discussed below. As a percentage of hotel revenues, operating costs and expenses
represented 78% of revenues for first quarter 1999 and 77% for first quarter
1998.
Total Hotel Property-Level Costs and Expenses. Total hotel property-level costs
and expenses increased $1.9 million, or 6.1%, to $33.7 million for first quarter
1999 when compared to the same period in 1998. The increase is due to increases
in both rooms costs and selling, administrative and other expenses described
below. As a percentage of hotel revenues, total hotel property-level costs and
expenses represented 49.8% of revenues for first quarter 1999 and 47.9% for
first quarter 1998
Rooms Costs. For the first quarter of 1999, rooms costs increased $941,000, or
7.4%, to $13.6 million when compared to the first quarter of 1998. The increase
in rooms costs is primarily due to increases in wage expense.
Selling, Administrative and Other. For the first quarter of 1999 selling,
administrative and other expenses increased $833,000, or 5.5%, to $15.9 million
when compared to the same period in 1998. The increase is due to the increases
in wage expenses and repairs and maintenance costs.
Operating Profit. Operating profit decreased $386,000 for first quarter 1999 to
$14.8 million when compared to the same period in 1998. The decrease was due to
the increases in rooms costs and selling, administrative and other expenses
described above. As a percentage of hotel revenues, operating profit represented
21.8% of revenues for first quarter 1999 and 22.8% for first quarter 1998
Interest Expense. Interest expense decreased $696,000, or 6.3%, for first
quarter 1999 when compared to the same period in 1998. This decrease was due to
amortization of principal on the Certificates/Mortgage Loan. The weighted
average interest rate for first quarter 1999 was 8.7% as compared to 8.9% for
the comparable period in 1998.
Interest Income. Interest income decreased $364,000 or 54.2%, for first quarter
1999 when compared to same period in 1998. The decrease is due to the decrease
in the property improvement fund. The balance in the property improvement fund
decreased $18.7 million from $22.9 million as of March 27, 1998 to $4.2 million
as of March 26, 1999.
Net Income. Net income for first quarter 1999 increased by $54,000 to $4.7
million when compared to the same period in 1998 as a result of the items
discussed above.
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 first quarter 1999 and 1998, were $11.0 million
and $4.2 million, respectively. The increase in cash provided by operations
during the first quarter of 1999 when compared to the same period in 1998
resulted from the following changes in operating accounts: (1) a lower
receivable balance due from the Manager at March 26, 1999 when compared to the
receivable balance at March 27, 1998; (2) a higher interest payable balance at
March 26, 1999 when compared to the payable balance at March 27, 1998 due to the
timing of the April debt service payment on the Certificates/Mortgage Loan; and
(3) during first quarter 1999, the Partnership repaid only $156,000 of deferred
incentive management fees while during first quarter 1998, $864,000 was repaid.
Cash used in investing activities was $4.2 million and $6.2 million for first
quarter 1999 and 1998, respectively. The decrease in cash used in investing
activities resulted from a decrease in capital expenditures during the first
quarter of 1999 when compared to the first quarter of 1998. In addition, during
first quarter 1998, the Partnership made a $2.9 million deposit to the working
capital reserve. This reserve was fully funded after that deposit, therefore no
such deposit was made during first quarter 1999.
Cash used in financing activities was $2.5 million and $3.5 million for first
quarter 1999 and 1998, respectively. During first quarter 1999 and 1998, the
Partnership repaid $2.5 million and $3.5 million, respectively, of principal on
the commercial mortgage backed securities. The decrease in the amount paid
during first quarter 1999 was due to the timing of the payments on the loan.
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.
While the General Partner can make no assurances as to the outcome of their
efforts, the General Partner continues to work with Merrill Lynch who is acting
as an advisor in this regard.
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 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 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, 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.
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. However, Host Marriott has not received any oral or written
assurances that these third parties 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 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 March 26, 1999, the Awareness
and Inventory phases were complete for IT Applications, BIS, and Building
Systems. For IT Applications, the Assessment and Planning phases were complete
and Remediation/Replacement and Testing phases were 95 percent complete.
Compliance Validation has been completed for approximately 75% of key systems,
with most of the remaining work in its final stage. For BIS and Building
Systems, Assessment and Planning are substantially complete. For BIS,
Remediation/Replacement is substantially complete and Testing is in progress.
MII is on track for completion of Remediation/Replacement and Testing of
Building Systems for September of 1999. Compliance Validation is in progress for
both BIS and Building Systems. Implementation and Quality Assurance is in
progress for IT Applications, BIS and 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.
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.
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 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 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 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.
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
March 26, 1999, all of the Partnership's debt is fixed 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 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.
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 then filed a second amended class action
complaint on March 19, 1999. Trial is expected to be set for the end of this
year.
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. 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 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. 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). 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 declined to
certify the CBMI partners as a class, because of a prior filed class action case
involving CBMI in Delaware. 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.
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. Although the
defendants have not yet been required to file a pleading responsive to the
complaint, they intend to vigorously defend against the claims asserted in the
derivative lawsuit.
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 January 14, 1999. In this filing, Item
1 - Changes in Control of Registrant discloses the
merger of CBM Two Corporation into the General
Partner with the General Partner assuming all of the
obligations of CBM Two Corporation under the
Partnership Agreement. It also details the transfers
of the General Partner's ownership interest which
ultimately resulted in the General Partner holding a
Class A 1% managing economic interest owned by Host
Marriott L.P. and a Class B 99% non-managing economic
interest owned by Rockledge Hotel Properties, Inc.
A Form 8-K was filed with the Securities and Exchange
Commission on February 19, 1999. In this filing, Item
5-Other Events discloses that the events described in
the Partnership's Current Report on Form 8-K, filed
with the Securities and Exchange Commission on
January 14, 1999 resulted in a "Change of Control"
under the terms of the Senior Notes. As a result,
pursuant to the terms of the indenture, Host Marriott
L.P. and Courtyard II Finance Company commenced a
tender offer for the Senior Notes at a purchase price
equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest thereon to
February 18, 1999. The tender offer was commenced on
January 14, 1999 and expired on February 12, 1999. No
Senior Notes were tendered to Host Marriott L.P. in
connection with the tender offer.
<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
May 6, 1999 By: /s/ Earla L. Stowe
------------------
Earla L. Stowe
Vice President
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