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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 QUARTER ENDED JUNE 16, 2000
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
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(Exact name of registrant as specified in its charter)
Delaware 52-1533559
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(State of Organization) (I.R.S. Employer Identification Number)
10400 Fernwood Road, Bethesda, MD 20817-1109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 380-2070
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No .
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COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
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<TABLE>
TABLE OF CONTENTS
<S> <C>
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 16, 2000 (Unaudited) and December 31, 1999...............................................1
Condensed Consolidated Statements of Operations
Twelve and Twenty-Four Weeks Ended June 16, 2000 and June 18, 1999 (Unaudited)................2
Condensed Consolidated Statements of Cash Flows
Twenty-Four Weeks ended June 16, 2000 and June 18, 1999 (Unaudited)...........................3
Note 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.......................................7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................8
Item 6. Exhibits and Reports on Form 8-K...............................................................9
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
June 16, December 31,
2000 1999
----------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net..........................................................$ 445,377 $ 454,412
Deferred financing costs, net of accumulated amortization............................ 11,965 12,690
Due from Courtyard Management Corporation............................................ 7,497 8,795
Other assets......................................................................... 20 11
Property improvement funds........................................................... 16,084 5,395
Restricted cash...................................................................... 18,097 18,299
Cash and cash equivalents............................................................ 20,631 23,341
---------------- ---------------
$ 519,671 $ 522,943
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LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt.................................................................................$ 476,398 $ 483,181
Management fees due to Courtyard Management Corporation.............................. 31,873 33,805
Due to Marriott International, Inc. and affiliates................................... 8,757 8,812
Accounts payable and accrued liabilities............................................. 12,673 12,017
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Total Liabilities.............................................................. 529,701 537,815
---------------- ---------------
PARTNERS' CAPITAL (DEFICIT)
General Partner...................................................................... 8,737 8,311
Limited Partners..................................................................... (18,767) (23,183)
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Total Partners' Deficit........................................................ (10,030) (14,872)
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$ 519,671 $ 522,943
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See Note to Condensed Consolidated Financial Statements.
</TABLE>
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COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except Unit and per Unit amounts)
<TABLE>
<S> <C> <C> <C> <C>
Twelve Weeks Ended Twenty-Four Weeks Ended
June 16, June 18, June 16, June 18,
2000 1999 2000 1999
-------------- ------------- ------------- ---------
REVENUES
Hotel revenues
Rooms.............................................$ 66,408 $ 63,532 $ 127,861 $ 124,923
Food and beverage................................. 4,421 4,217 8,513 8,345
Other............................................. 2,327 2,340 4,799 4,620
-------------- ------------- ------------- -------------
Total hotel revenues............................ 73,156 70,089 141,173 137,888
-------------- ------------- ------------- -------------
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms............................................. 14,623 14,086 28,419 27,685
Food and beverage................................. 3,762 3,662 7,321 7,249
Other department costs and expenses............... 1,008 741 1,968 1,435
Selling, administrative and other................. 16,177 15,780 31,913 31,643
-------------- ------------- ------------- -------------
Total hotel property-level costs and expenses... 35,570 34,269 69,621 68,012
Depreciation ....................................... 6,566 6,199 14,690 12,317
Ground rent, taxes and other........................ 7,500 6,174 14,167 12,173
Base and Courtyard management fees.................. 4,389 4,205 8,470 8,273
Incentive management fee............................ 3,558 3,313 6,691 6,408
-------------- ------------- ------------- -------------
Total operating costs and expenses.............. 57,583 54,160 113,639 107,183
-------------- ------------- ------------- -------------
OPERATING PROFIT....................................... 15,573 15,929 27,534 30,705
Interest expense.................................... (9,792) (10,110) (19,797) (20,503)
Interest income..................................... 459 399 780 707
-------------- ------------- ------------- -------------
NET INCOME.............................................$ 6,240 $ 6,218 $ 8,517 $ 10,909
============== ============= ============= =============
ALLOCATION OF NET INCOME
General Partner.....................................$ 312 $ 310 $ 426 $ 545
Limited Partners.................................... 5,928 5,908 8,091 10,364
-------------- ------------- ------------- -------------
$ 6,240 $ 6,218 $ 8,517 $ 10,909
============== ============= ============= =============
NET INCOME PER LIMITED PARTNER UNIT
(1,470 Units).......................................$ 4,033 $ 4,019 $ 5,504 $ 7,050
============== ============= ============= =============
See Note to Condensed Consolidated Financial Statements.
</TABLE>
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COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
Twenty-Four Weeks Ended
June 16, June 18,
2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES
Net income...........................................................................$ 8,517 $ 10,909
Noncash items........................................................................ 15,405 13,043
Changes in operating accounts........................................................ 170 1,854
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Cash provided by operating activities.......................................... 24,092 25,806
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INVESTING ACTIVITIES
Additions to property and equipment, net............................................. (5,655) (11,039)
Change in property improvement funds................................................. (10,689) 249
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Cash used in investing activities.............................................. (16,344) (10,790)
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FINANCING ACTIVITIES
Repayments of debt................................................................... (6,783) (6,295)
Capital distributions................................................................ (3,675) (2,205)
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Cash used in financing activities.............................................. (10,458) (8,500)
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(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........................................ (2,710) 6,516
CASH AND CASH EQUIVALENTS at beginning of period........................................ 23,341 17,903
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CASH AND CASH EQUIVALENTS at end of period..............................................$ 20,631 $ 24,419
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest............................................$ 18,303 $ 18,777
================ ===============
See Note to Condensed Consolidated Financial Statements.
</TABLE>
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COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies
The accompanying unaudited, condensed, consolidated financial statements
have been prepared by Courtyard by Marriott II Limited Partnership (the
"Partnership"). Certain information and footnote disclosures normally
included in financial statements presented in accordance with accounting
principles generally accepted in the United States 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 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 year ended December 31, 1999.
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 16,
2000 and December 31, 1999, and the results of operations for the twelve
and twenty-four weeks ended June 16, 2000 and June 18, 1999 and cash flows
for the twenty-four weeks ended June 16, 2000 and June 18, 1999. Results
are not necessarily indicative of full 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.
Certain reclassifications were made to the prior year unaudited, condensed,
consolidated financial statements to conform to the 2000 presentation.
<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 are forward-looking statements
within the meaning of federal securities regulations. All forward-looking
statements 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. Future
transactions, results, performance and achievements will be affected by general
economic, business and financing conditions, competition and governmental
actions. The cautionary statements set forth in reports filed with the
Securities and Exchange Commission contain 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 and the availability and terms of financing; (ii) the ability
to maintain the properties in a first-class manner (including meeting capital
expenditure requirements); (iii) the ability to compete effectively in areas
such as access, location, quality of accommodations and room rate structure;
(iv) changes in travel patterns, taxes and government regulations; (v)
governmental approvals, actions and initiatives; and (vi) 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 increased approximately $3 million to $73.2
million and $141.2 million for the twelve and twenty-four weeks ended June 16,
2000, respectively. The increase in hotel revenues was achieved primarily
through a $2.9 million increase in rooms revenue for both the second quarter of
2000 and year-to-date 2000 as compared to the same periods in 1999.
Rooms revenue. The increase in rooms revenue of $537,000 for the quarter and
$734,000 for the year-to-date when compared to the same period last year was due
to an increase in revenue per available room ("REVPAR"). REVPAR for the twelve
and twenty-four weeks ended June 16, 2000 increased 4% to $76 and 3% to $74
respectively, when compared to the same periods in 1999. The increase in REVPAR
was driven by an increase in the average room rate of 4% for both the quarter
and year-to-date to $94 and $93 for the same periods, respectively.
Operating Costs and Expenses. For the twelve weeks ended June 16, 2000, the
Partnership's operating costs and expenses increased $3.4 million, or 6%, to
$57.6 million as compared to the same period in 1999. For the twenty-four weeks
ended June 16, 2000, the Partnership's operating costs and expenses increased
$6.5 million, or 6%, to $113.6 million. As a percentage of hotel revenues,
operating costs and expenses increased to 79% of revenues for the second quarter
of 2000 as compared to 77% for the second quarter of 1999. Through the second
quarter of 2000, operating costs and expenses as a percentage of sales increased
to 80% as compared to 78% for the same period in 1999. The increase in operating
costs and expenses for the second quarter and year-to-date in 2000 relative to
the same periods in 1999 was primarily due to the increase in hotel
property-level costs and expenses, depreciation and ground rent, taxes and other
expenses discussed below.
<PAGE>
Hotel property-level costs and expenses. The Partnership's hotel property-level
costs and expenses increased 4% to $35.6 million and 2% to $69.6 million for the
twelve and twenty-four weeks ended June 16, 2000, respectively, as compared to
the same periods in 1999. Hotel property-level costs and expenses increased
primarily due to higher salary and benefit expenses as the Hotels endeavor to
maintain competitive wage scales. Additionally, property-level costs and
expenses increased $432,000 and $1.0 million for the twelve and twenty-four
weeks ended June 16, 2000, respectively, as expenditures for items that fall
below the minimum dollar threshold for capitalization increased relative to the
prior year. The increases were offset by decreases in the cost of telephone
operations of $164,000 and $468,000 for the second quarter and year-to-date in
2000, respectively.
Depreciation. Depreciation expense increased $367,000 to $6.6 million and $2.4
million to $14.7 million for the twelve and twenty-four weeks ended June 16,
2000, respectively, as compared to the same periods in 1999. The increase was
due primarily to a loss of $1.5 million, recognized during the year-to-date
period in 2000, associated with property and equipment retirements and to
property, plant, and equipment additions between the end of the second quarter
of 1999 and 2000, respectively, primarily as a result of the completion of rooms
renovations during 1999.
Ground rent, taxes and other. Ground rent, taxes and other expenses increased
$1.3 million to $7.5 million and $2 million to $14.2 million for the twelve and
twenty-four weeks ended June 16, 2000, respectively, as compared to the same
periods in 1999 due to increases in administrative costs, primarily as a result
of fees incurred in connection with the litigation discussed in Part II, Item 1,
Legal Proceedings.
Operating Profit. Operating profit decreased $356,000 to $15.6 million and $3.2
million to $27.5 million for the twelve and twenty-four weeks ended June 16,
2000, respectively, as compared to the same periods in 1999. The decrease was
due to the increases in depreciation, ground rent, taxes and other expenses and
the loss on retirement of property and equipment discussed above. As a
percentage of hotel revenues, operating profit represented 21% of revenues for
the second quarter of 2000 as compared to 22% for the second quarter of 1999.
Through the year-to-date in 2000, operating profit represented 19% of revenues
as compared to 22% for the same period in 1999.
Interest Expense. Interest expense decreased to $19.8 million for the
twenty-four weeks ended June 16, 2000 from $20.5 million for the comparable
period in 1999. The decrease was primarily due to principal amortization on the
commercial mortgage backed securities which results in lower principal debt
balances in 2000 as compared to 1999.
Net Income. As a result of the items discussed above, for the twenty-four weeks
ended June 16, 2000, net income decreased $2.4 million from the comparable
period in 1999 to $8.5 million. For the second quarter of 2000, net income
remained steady at $6.2 million when compared to second quarter 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's financing needs have historically been funded through loan
agreements with independent financial institutions. The General Partner believes
that cash from Hotel operations will be sufficient to make the required debt
service payments, to fund the current capital expenditures needs of the Hotels
as well as to make cash distributions to the limited partners.
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.
<PAGE>
Cash provided by operations for the twenty-four weeks ended June 16, 2000 and
June 18, 1999, was $24.1 million and $25.8 million, respectively. The decrease
in cash provided by operations was primarily due to increased payments towards
the deferred incentive management fees in 2000 when compared to 1999. The cash
flow provided by improved hotel operations enabled the Partnership to increase
the payment of deferred incentive management fees.
Cash used in investing activities was $16.3 million for the first two quarters
of 2000 and $10.8 million for the first two quarters of 1999. Cash used in
investing activities for 2000 includes capital expenditures of $5.7 million,
primarily related to renovations and replacements of furniture, fixtures and
equipment at the Partnership's Hotels as compared to $11 million of capital
expenditures in 1999. The property improvement fund increased $10.7 million for
the first two quarters of 2000 as compared to a decrease of $249,000 for the
comparable period in 1999. During the first two quarters of 2000, the
Partnership funded $10 million to the property fund to reimburse certain capital
expenditures.
Cash used in financing activities was $10.5 million and $8.5 million for the
first two quarters of 2000 and 1999, respectively. During these periods, the
Partnership repaid $6.8 million and $6.3 million, respectively, of principal on
the commercial mortgage backed securities. Cash used in financing activities
included $3.7 million and $2.2 million of cash distributions to limited partners
during the twenty-four weeks ended June 16, 2000 and June 18, 1999,
respectively. On February 16, 2000, the Partnership utilized 1999 cash flow
after debt service to make a final 1999 cash distribution of $2,500 per limited
partner unit, or $3,675,000.
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 16, 2000, all of the Partnership's debt has a fixed interest rate. As of
June 16, 2000 and December 31, 1999, the Partnership's mortgage debt totaled
$476.4 million and $483.2 million, respectively.
<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 on June 7, 1996, against Host
Marriott Corporation ("Host Marriott"), Marriott International, Inc. ("MII"),
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.
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 MII, 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, among other things, that the Defendants committed
fraud, breached fiduciary duties and violated the provisions of various
contracts. 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.
On March 9, 2000, the Defendants entered into a settlement agreement with
counsel for the plaintiffs to resolve the Haas and the Whitey Ford litigation.
The settlement is subject to numerous conditions, including partnership
agreement amendments, participation thresholds, court approval and various
consents.
Under the terms of the settlement, the limited partners of the Partnership who
elect to participate would receive $147,959 per Unit, or a pro rata portion
thereof, in cash in exchange for the transfer, directly or through a merger, of
all limited partner Units to a joint venture between subsidiaries of Host
Marriott and MII, dismissal of the litigation, and a complete release of all
claims. If the Texas court approves legal fees and expenses of approximately
$29,000 per Unit to counsel to the class action plaintiffs, the net amount that
each class member who transfers his Unit and releases all of his litigation
claims will receive is approximately $119,000 per Unit, or a pro rata portion
thereof for fractional Units.
<PAGE>
Limited partners who opt out of the settlement would have their interests in the
Partnership converted into the right to receive the appraised value of the Units
in cash (excluding any amount related to the claims asserted in the class action
litigation) and will retain their individual claims against the Defendants.
The settlement will not be consummated unless the Texas court approves the
fairness of the settlement. The Defendants may terminate the settlement if the
holders of more than 10% of the Partnership's 1,470 Units choose not to
participate, if the holders of more than 10% of the limited partner units in any
one of the other partnerships involved in the settlement choose not to
participate or if certain other conditions are not satisfied. The Manager will
continue to manage the Partnership's Hotels under long-term agreements.
The details of the settlement will be contained in a court-approved notice and
purchase offer/consent solicitation to be sent to the Partnership's limited
partners and the discussion of the settlement herein is qualified in its
entirety by the terms of the actual court-approved notice and purchase
offer/consent solicitation sent to the Partnership's limited partners.
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 April 28, 2000. This filing, Item
5--Other Events, discloses that on April 28, 2000,
the General Partner sent to the Limited Partners of
the Partnership a letter that accompanied the
Partnership's Annual Report on Form 10-K for the year
ended December 31, 1999. 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
July 27, 2000 By: /s/ Matt Whelan
---------------
Matt Whelan
Vice President and Chief Accounting Officer
<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 27, 2000 By: -----------------------------
Matt Whelan
Vice President and Chief Accounting Officer
