=============================================================================== 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. 0-15736 COURTYARD BY MARRIOTT LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) Delaware 52-1468081 - ------------------------ --------------------------------------- (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 Limited Partnership =============================================================================== TABLE OF CONTENTS PAGE NO. PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Balance Sheets June 16, 2000 (Unaudited) and December 31, 1999.................1 Condensed Statements of Operations Twelve and Twenty-Four Weeks Ended June 16, 2000 and June 18, 1999 (Unaudited).................................2 Condensed Statements of Cash Flows Twenty-Four Weeks ended June 16, 2000 and June 18, 1999 (Unaudited).................................3 Note to Condensed 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 Limited Partnership Condensed Balance Sheets (in thousands) June 16, December 31, 2000 1999 ---------- ------------ (Unaudited) ASSETS Property and equipment, net............................................................$ 284,634 $ 285,915 Due from Courtyard Management Corporation.............................................. 5,589 2,868 Deferred financing costs, net of accumulated amortization.............................. 5,207 5,411 Property improvement fund.............................................................. 10,685 7,857 Restricted cash........................................................................ 7,584 11,889 Cash and cash equivalents.............................................................. 15,634 14,920 ---------- ---------- $ 329,333 $ 328,860 ========== ========== LIABILITIES AND PARTNERS' CAPITAL (DEFICIT) LIABILITIES Mortgage debt..........................................................................$ 300,841 $ 305,086 Straight-line ground rent due to affiliates of Marriott International, Inc............. 19,045 19,152 Debt service guaranty and accrued interest payable to affiliate........................ 15,096 14,794 Incentive management fees due to Courtyard Management Corporation...................... 3,855 4,777 Accounts payable and accrued liabilities............................................... 2,960 3,512 --------- --------- Total Liabilities................................................................ 341,797 347,321 --------- --------- PARTNERS' CAPITAL (DEFICIT) General Partner........................................................................ 698 399 Limited Partners....................................................................... (13,162) (18,860) --------- --------- Total Partners' Deficit.......................................................... (12,464) (18,461) --------- --------- $ 329,333 $ 328,860 ========= ========= See Note to Condensed Financial Statements. Courtyard by Marriott Limited Partnership Condensed 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.............................................$ 47,026 $ 45,354 $ 90,349 $ 88,964 Food and beverage................................. 3,109 3,113 6,073 6,188 Other............................................. 1,571 1,568 3,297 3,113 -------- ------- ------- ------- Total hotel revenues............................ 51,706 50,035 99,719 98,265 -------- ------- ------- ------- OPERATING COSTS AND EXPENSES Hotel property-level costs and expenses Rooms............................................. 10,657 10,150 20,459 19,761 Food and beverage................................. 2,795 2,764 5,441 5,498 Other department costs and expenses............... 914 510 1,571 965 Selling, administrative and other................. 11,648 11,091 22,760 22,301 ------- ------- ------- ------- Total hotel property-level costs and expense.... 26,014 24,515 50,231 48,525 Depreciation........................................ 4,779 4,469 9,324 8,818 Base and Courtyard management fees.................. 3,102 3,002 5,983 5,896 Incentive management fee............................ 2,386 2,366 4,560 4,532 Ground rent, taxes and other........................ 4,431 4,004 8,553 8,085 ------- ------- ------- ------- Total operating costs and expenses.............. 40,712 38,356 78,651 75,856 ------- ------- ------- ------- OPERATING PROFIT....................................... 10,994 11,679 21,068 22,409 Interest expense.................................... (5,800) (5,929) (11,627) (11,958) Interest income..................................... 470 313 774 477 ------- ------- ------- ------- NET INCOME.............................................$ 5,664 $ 6,063 $ 10,215 $ 10,928 ======= ======= ======= ======= ALLOCATION OF NET INCOME General Partner.....................................$ 283 $ 303 $ 511 $ 546 Limited Partners.................................... 5,381 5,760 9,704 10,382 ------- ------- ------- ------- $ 5,664 $ 6,063 $ 10,215 $ 10,928 ======= ======= ======= ======= NET INCOME PER LIMITED PARTNER UNIT (1,150 Units).......................................$ 4,679 $ 5,009 $ 8,438 $ 9,028 ======= ======= ======== ======= See Note to Condensed Financial Statements. Courtyard by Marriott Limited Partnership Condensed Statements of Cash Flows (Unaudited) (in thousands) Twenty-Four Weeks Ended June 16, June 18, 2000 1999 OPERATING ACTIVITIES --------- --------- Net income................................................................................$ 10,215 $ 10,928 Noncash items............................................................................. 9,860 9,289 Changes in operating accounts............................................................. 3 (1,650) ------- --------- Cash provided by operating activities............................................... 20,078 18,567 ------- --------- INVESTING ACTIVITIES Additions to property and equipment, net.................................................. (8,073) (1,848) Change in property improvement fund....................................................... (2,828) (2,696) -------- --------- Cash used in investing activities................................................... (10,901) (4,544) -------- --------- FINANCING ACTIVITIES Repayments of mortgage debt............................................................... (4,245) (3,899) Capital distributions..................................................................... (4,237) (3,455) Payments received on investor notes receivable............................................ 19 -- ------- --------- Cash used in financing activities................................................... (8,463) (7,354) ------- --------- INCREASE IN CASH AND CASH EQUIVALENTS....................................................... 714 6,669 CASH AND CASH EQUIVALENTS at beginning of period............................................. 14,920 9,203 ------- --------- CASH AND CASH EQUIVALENTS at end of period...................................................$ 15,634 $ 15,872 ======= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for mortgage interest...........................................................$ 12,128 $ 12,383 ======= ========= See Note to Condensed Financial Statements. Courtyard by Marriott Limited Partnership Note to Condensed Financial Statements (Unaudited) 1. Summary of Significant Accounting Policies The accompanying unaudited, condensed financial statements have been prepared by Courtyard by Marriott 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 financial statements should be read in conjunction with the Partnership's 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 financial statements reflect all adjustments necessary to present fairly the financial position of the Partnership as of June 16, 2000 and December 31, 1999, 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 One 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, difference in the timing of recognition of certain fees and straight-line rent adjustments. Certain reclassifications were made to the prior year unaudited, condensed 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 Revenues. Revenues increased $1.7 million and $1.5 million to $51.7 million and $99.7 million for the second quarter of 2000 and through the second quarter of 2000, respectively, when compared to the same periods in 1999. The increase in revenues was achieved primarily through an increase in the combined average room rate. The combined average room rate increased 4.2% to $94 for the second quarter of 2000 and 3.9% to $94 through the second quarter of 2000 as compared to the same periods in 1999. Combined average occupancy for the second quarter of 2000 and through the second quarter of 2000 decreased slightly to 82% and 79%, respectively, when compared to the same periods in 1999. REVPAR, or revenue per available room, represents the combination of the average daily room rate charged and the average daily occupancy achieved. REVPAR for the second quarter of 2000 and through the second quarter of 2000 was $77 and $74, respectively, representing a 3.7% and 1.9% increase, respectively, when compared to the same periods in 1999. Operating Costs and Expenses. For the second quarter of 2000, the Partnership's operating costs and expenses increased $2.4 million to $40.7 million when compared to the same period in 1999. In addition, through the second quarter of 2000, operating costs and expenses increased $2.8 million to $78.7 million when compared to the same period in 1999. As a percentage of revenues, operating costs and expenses increased from 77% of revenues for both the second quarter of 1999 and through the second quarter of 1999 to 79% of revenues for the second quarter of 2000 and through the second quarter of 2000. The increase in operating costs and expenses was primarily due to an increase in property-level costs and expenses at the Hotels, depreciation expense, and ground rent, taxes and other expenses discussed below. The Partnership's Hotel property-level costs and expenses increased $1.5 million to $26.0 million and $1.7 million to $50.2 million for the second quarter of 2000 and through the second quarter of 2000, respectively, when compared to the same periods in 1999. Hotel property-level costs and expenses increased due to higher salary and benefit expenses as the Hotels endeavor to maintain competitive wage scales. In addition, marketing expenses increased in 2000 as compared to 1999. Additionally, other department costs and expenses increased $404,000 and $606,000 for the second quarter of 2000 and through the second quarter of 2000, respectively, as expenditures for items that fall below the minimum dollar threshold for capitalization increased relative to the prior year. As a percentage of total hotel revenues, property-level costs and expenses represented 50% of revenues for the second quarter of 2000 and through the second quarter of 2000 as compared to 49% of revenues for the same periods in 1999. Depreciation expense increased $310,000 and $506,000 to $4.8 million and $9.3 million for the second quarter of 2000 and through the second quarter of 2000, respectively, due to the increase in property, plant, and equipment additions in 2000 as compared to 1999. Ground rent, taxes and other expenses increased $427,000 and $468,000 to $4.4 million and $8.6 million for the second quarter of 2000 and through the second quarter of 2000, respectively, when 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. As a result of the changes in revenues and operating costs and expenses discussed above, operating profit decreased $685,000, or 6%, to $11.0 million, or 21% of revenues, for the second quarter of 2000 from $11.7 million, or 23% of revenues, for the second quarter of 1999. In addition, operating profit decreased $1.3 million, or 6%, to $21.1 million, or 21% of revenues, through the second quarter of 2000 from $22.4 million, or 23% of revenues, for the same period in 1999. Interest Expense. Interest expense decreased 2% to $5.8 million for the second quarter of 2000 when compared to the same period in 1999 and decreased $331,000 to $11.6 million through the second quarter of 2000 when compared to the same period in 1999 as a result of principal amortization of the Partnership's mortgage debt. Net Income. As a result of the items discussed above, net income decreased $399,000 to $5.7 million, or 11% of revenues for the second quarter of 2000 when compared to $6.1 million, or 12% of revenues for the second quarter of 1999. Net income through the second quarter of 2000 decreased $713,000 to $10.2 million, or 10% of revenues, when compared to $10.9 million, or 11% of revenues, through the second quarter of 1999. LIQUIDITY AND CAPITAL RESOURCES The Partnership's financing needs have historically been funded through loan agreements with independent financial institutions and Host Marriott Corporation ("Host Marriott"). The General Partner believes that cash from Hotel operations will be sufficient to make required debt service payments, to fund current capital expenditure 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 the partners. Cash provided by operating activities through the second quarter of 2000 and 1999, was $20.1 million and $18.6 million, respectively. The increase in cash provided by operating activities was primarily due to the decrease in the restricted cash balance, partially offset by the increase in the receivable balance due from the Manager at June 16, 2000 when compared to the change in the restricted cash and receivable balances at June 18, 1999. Cash used in investing activities was $10.9 million and $4.5 million through the second quarter of 2000 and 1999, respectively. The increase in investing activities was primarily due to the Partnership funding $5.6 million for capital expenditures related to roofing, facade and other improvements at certain Hotels through the second quarter of 2000. Cash used in financing activities was $8.5 million and $7.4 million through the second quarter of 2000 and 1999, respectively. Through the second quarter of 2000 and 1999, the Partnership repaid $4.2 million and $3.9 million, respectively, of principal on the mortgage debt. The Partnership also paid $4.2 million and $3.5 million of cash distributions to limited partners through the second quarter of 2000 and 1999, respectively. 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 mortgage debt has a fixed interest rate. As of June 16, 2000 and December 31, 1999, the Partnership's mortgage debt totaled $300.8 million and $305.1 million, respectively. The Partnership has a debt service guaranty advance that is sensitive to changes in interest rates. The interest recognized on the debt obligation is based on the prime rate, which was 9.5% at June 16, 2000 and 8.5% at December 31, 1999. The interest rate, fair value, and future maturity associated with this debt obligation has not changed materially from the amount reported in the Partnership's annual report on Form 10-K for the year ended December 31, 1999. As of June 16, 2000 and December 31, 1999, the Partnership's debt service guaranty plus accrued interest totaled $15.1 million and $14.8 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. Marvin Schick and Jack Hirsch, the plaintiffs in a class action lawsuit styled Marvin Schick, et al. v. Host Marriott Corporation, et al., Civil Action No. 15991, filed their complaint on October 16, 1997 in Delaware Chancery Court against the General Partner, Courtyard Management Corporation (the "Manager") and certain of their respective affiliates, officers and directors. The plaintiffs claim that the General Partner agreed to decrease the owner's priority under the Management Agreement for the benefit of the Manager without obtaining the consent of the limited partners. The lawsuit includes claims against Host Marriott and the General Partner for breach of contract and breach of fiduciary duty, and against Marriott International, Inc. ("MII") and the Manager for interference with contract and aiding and abetting in the breach of fiduciary duties. The General Partner believes that the change in the Management Agreement did not require limited partner approval, because, among other things, it did not result in an increase in compensation to the Manager. 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 Courtyard by Marriott II Limited Partnership ("Courtyard II") filed by the plaintiffs' lawyers in the same court, involves similar allegations against the Defendants, and has been certified as a class action. As a result of this development, Courtyard II 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 Courtyard II litigation. The settlement would also resolve the Schick case referred to above. 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 $134,130 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 $18,000 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 $116,000 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 1,150 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. The letter disclosed the annual activities of the Partnership. 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 LIMITED PARTNERSHIP By: CBM ONE LLC General Partner July 27, 2000 By: /s/ Matt Whelan ---------------- Matt Whelan Vice President and Chief Accounting Officer