10-Q 1 0001.txt FORM 10-Q ================================================================================ 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 -------------------------------------------- (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 X No . ================================================================================ ================================================================================ COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP ================================================================================ TABLE OF CONTENTS 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
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) June 16, December 31, 2000 1999 ----------- ------------ (Unaudited) ASSETS 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 ================ =============== 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 ---------------- --------------- Total Liabilities.............................................................. 529,701 537,815 ---------------- --------------- PARTNERS' CAPITAL (DEFICIT) General Partner...................................................................... 8,737 8,311 Limited Partners..................................................................... (18,767) (23,183) ---------------- --------------- Total Partners' Deficit........................................................ (10,030) (14,872) ---------------- --------------- $ 519,671 $ 522,943 ================ =============== See Note to Condensed Consolidated Financial Statements.
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except Unit and per Unit amounts) 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.
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Twenty-Four Weeks Ended June 16, June 18, 2000 1999 ---------------- ---------- OPERATING ACTIVITIES Net income...........................................................................$ 8,517 $ 10,909 Noncash items........................................................................ 15,405 13,043 Changes in operating accounts........................................................ 170 1,854 ---------------- --------------- Cash provided by operating activities.......................................... 24,092 25,806 ---------------- --------------- INVESTING ACTIVITIES Additions to property and equipment, net............................................. (5,655) (11,039) Change in property improvement funds................................................. (10,689) 249 ---------------- --------------- Cash used in investing activities.............................................. (16,344) (10,790) ---------------- --------------- FINANCING ACTIVITIES Repayments of debt................................................................... (6,783) (6,295) Capital distributions................................................................ (3,675) (2,205) ---------------- --------------- Cash used in financing activities.............................................. (10,458) (8,500) ---------------- --------------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........................................ (2,710) 6,516 CASH AND CASH EQUIVALENTS at beginning of period........................................ 23,341 17,903 ---------------- --------------- CASH AND CASH EQUIVALENTS at end of period..............................................$ 20,631 $ 24,419 ================ =============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for mortgage and other interest............................................$ 18,303 $ 18,777 ================ =============== See Note to Condensed Consolidated Financial Statements.
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. 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. 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. 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. 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. 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. 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 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