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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
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 15, 2001 Commission File No. 0-16728
FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP
10400 Fernwood Road
Bethesda, MD 20817-1109
(301) 380-9000
Delaware 52-1638296
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(State of Organization) (I.R.S. Employer
Identification Number)
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
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(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 ___ No X (Not Applicable).
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Fairfield Inn by Marriott Limited Partnership
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TABLE OF CONTENTS
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PAGE NO.
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PART I - FINANCIAL INFORMATION (unaudited):
Condensed Balance Sheets
June 15, 2001 and December 31, 2000....................................... 1
Condensed Statements of Operations
Twelve and Twenty-Four Weeks Ended June 15, 2001 and June 16, 2000........ 2
Condensed Statements of Cash Flows
Twenty-Four Weeks Ended June 15, 2001 and June 16, 2000................... 3
Notes to Condensed Financial Statements.................................... 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 5
Submission of Matters to a Vote of Limited Partners........................ 8
Quantitative and Qualitative Disclosures about Market Risk................. 9
PART II - OTHER INFORMATION AND SIGNATURE
Legal Proceedings.......................................................... 9
Fairfield Inn by Marriott Limited Partnership
Condensed Balance Sheets
(IN THOUSANDS)
June 15, December 31,
2001 2000
------------ ------------
(unaudited)
ASSETS
Property and equipment, net...................................... $ 122,045 $ 122,013
Due from Marriott International, Inc. and affiliates............. 3,162 1,215
Deferred financing costs, net of accumulated amortization........ 2,712 2,937
Property improvement fund........................................ 4,013 5,489
Restricted cash.................................................. 6,035 7,726
Cash and cash equivalents........................................ 5,001 7,702
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$ 142,968 $ 147,082
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LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt.................................................... $ 151,252 $ 153,569
Due to Marriott International, Inc. and affiliates.. 5,573 3,931
Accounts payable and accrued liabilities......................... 3,282 2,911
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Total Liabilities............................................ 160,107 160,411
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PARTNERS' DEFICIT (121) (83)
General Partner.................................................. (17,018) (13,246)
Limited Partners................................................. ---------- ----------
Total Partners' Deficit...................................... (17,139) (13,329)
$ 142,968 $ 147,082
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See Notes to Condensed Financial Statements.
1
Fairfield Inn by Marriott Limited Partnership
Condensed Statements of Operations
(Unaudited, in Thousands)
Twelve Weeks Ended Twenty-Four Weeks Ended
June 15, June 16, June 15, June 16,
2001 2000 2001 2000
------------- ------------- ------------- --------------
REVENUES
Rooms.......................................... $ 20,525 $ 22,120 $ 38,292 $ 40,898
Other inn revenues............................. 401 507 763 1,142
Other revenues................................. -- -- 656 --
------------- ------------- ------------- --------------
20,926 22,627 39,711 42,040
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OPERATING EXPENSES
Rooms.......................................... 6,324 6,876 12,041 12,902
Other department costs and expenses............ 675 436 962 864
Selling, administrative and other.............. 6,219 6,766 12,301 12,885
Depreciation................................... 2,757 3,410 5,423 6,807
Ground rent, taxes and other................... 1,955 1,896 4,297 3,731
Incentive management fee....................... 660 727 1,076 1,256
Fairfield Inn system fee....................... 628 679 1,172 1,261
Base management fee............................ 418 453 781 841
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19,636 21,243 38,053 40,547
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OPERATING PROFIT.................................. 1,290 1,384 1,658 1,493
Interest expense............................... (2,970) (3,050) (5,889) (6,154)
Interest income................................ 264 298 421 565
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NET LOSS.......................................... $ (1,416) $ (1,368) $ (3,810) $ (4,096)
============= ============= ============= ==============
ALLOCATION OF NET LOSS
General Partner................................ $ (14) $ (14) $ (38) $ (41)
Limited Partners............................... (1,402) (1,354) (3,772) (4,055)
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$ (1,416) $ (1,368) $ (3,810) $ (4,096)
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NET LOSS PER LIMITED PARTNER UNIT
(83,337 Units)................................. $ (17) $ (16) $ (45) $ (49)
============= ============= ============= ==============
See Notes to Condensed Financial Statements.
2
Fairfield Inn by Marriott Limited Partnership
Condensed Statements of Cash Flows
(Unaudited, in Thousands)
Twenty-Four Weeks Ended
June 15, June 16,
2001 2000
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OPERATING ACTIVITIES
Net loss...................................................................... $ (3,810) $ (4,096)
Depreciation.................................................................. 5,423 6,807
(Gain)/loss on disposition of fixed assets.................................... (10) 10
Amortization of deferred financing costs...................................... 225 225
Amortization of mortgage debt premium......................................... (161) (161)
Deferral of incentive management fee.......................................... 1,076 1,256
Changes in operating accounts................................................. 83 (2,380)
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Cash provided by operating activities................................... 2,826 1,661
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INVESTING ACTIVITIES
Additions to property and equipment........................................... (5,445) (2,085)
Change in property improvement fund........................................... 1,476 (2,910)
Change in restricted cash..................................................... -- 879
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Cash used in investing activities....................................... (3,969) (4,116)
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FINANCING ACTIVITIES
Repayment of mortgage debt.................................................... (2,156) (1,947)
Change in restricted cash..................................................... 598 --
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Cash used in financing activities....................................... (1,558) (1,947)
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DECREASE IN CASH AND CASH EQUIVALENTS............................................ (2,701) (4,402)
CASH AND CASH EQUIVALENTS at beginning of period................................. 7,702 10,061
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CASH AND CASH EQUIVALENTS at end of period....................................... $ 5,001 $ 5,659
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest............................................... $ 6,232 $ 6,603
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See Notes to Condensed Financial Statements.
3
Fairfield Inn By Marriott Limited Partnership
Notes to Financial Statements
(Unaudited)
1. Organization
Fairfield Inn by Marriott Limited Partnership (the "Partnership"), a Delaware
limited partnership, owns 50 Fairfield Inn by Marriott properties (the "Inns")
located in sixteen states within the contiguous United States. The Partnership
leases 32 of the inns from Marriott International, Inc. ("MII") and certain of
its affiliates. The Inns are operated under a management agreement by Fairfield
FMC Corporation (the "Manager"), a wholly-owned subsidiary of MII.
On July 13, 2001, the general partner requested consent from the limited
partners to permit the implementation of a restructuring plan intended to
address the Partnership's continued decline in operating results and provide up
to $23 million of additional capital. Consent of more than half of the limited
partners is required to implement the restructuring plan.
2. Summary of Significant Accounting Policies
The accompanying unaudited condensed financial statements have been prepared by
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 for the year ended December 31, 2000 effective on June 11,
2001.
In the opinion of the Partnership, the accompanying unaudited, condensed
financial statements reflect all normal and recurring adjustments necessary to
present fairly the financial position of the Partnership as of June 15, 2001,
the results of its operations for the twelve and twenty-four weeks ended June
15, 2001 and June 16, 2000, and cash flows for the twenty-four weeks ended June
15, 2001 and June 16, 2000. Interim 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
99% to the limited partners and 1% to FIBM One LLC (the "General Partner").
Significant differences exist between the net income for financial reporting
purposes and the net income for Federal income tax purposes. These differences
are due primarily to the use, for Federal income tax purposes, of accelerated
depreciation methods and shorter depreciable lives for certain assets and
differences in the timing of the recognition of certain fees and straight-line
rent adjustments.
3. Amounts Paid to Marriott International, Inc.
The following table provides the significant expenses payable to Marriott
International and its affiliates year-to-date as of June 15, 2001 and June 16,
2000 (in thousands):
Year-to-Date as of
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June 15, June 16,
2001 2000
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Fairfield Inn system fee........................ $ 1,172 $ 1,261
Ground rent..................................... 1,342 1,364
Reservation costs............................... 1,212 1,366
Marketing fund contribution..................... 957 1,022
Incentive management fee........................ 1,076 1,256
Base management fee............................. 781 841
Chain services allocation....................... 683 736
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Total.................................. $ 7,223 $ 7,846
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4
FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. Certain, but not necessarily all, of such forward-looking
statements can be identified by the use of forward-looking terminology, such as
"believes," "expects," "may," "will," "should," "estimates," or "anticipates,"
or the negative thereof or other variations thereof or comparable terminology.
All forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause our actual transactions, results, performance
or achievements to be materially different from any future transactions,
results, performance or achievements expressed or implied by such forward-
looking statements. Although we believe the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, we can give no
assurance that our expectations will be attained or that any deviations will not
be material. We disclaim any obligations or undertaking to publicly release any
updates or revisions to any forward-looking statement contained in this
quarterly report on Form 10-Q to reflect any change in our expectations with
regard thereto or any change in events, conditions or circumstances on which any
such statement is based.
GENERAL
Consistent with the terms of the Partnership agreement and the original
investment objectives contemplated at the formation of the Partnership, the
General Partner is currently attempting to sell the general partner interest.
There can be no assurance, however, that such a transaction will occur or, if it
were to occur, of the timing or value of any such transaction. Please see
"Submission of Matters to a Vote of Limited Partners" for further detail on
potential transaction proposed by the General Partner.
RESULTS OF OPERATIONS
Rooms Revenues. Rooms revenues decreased $1.6 million, or approximately 7% to
$20.5 million for the second quarter of 2001 from $22.1 million for the same
period in 2000. Year-to-date, rooms revenue decreased $2.6 million, or
approximately 6%, to $38.3 million in 2001 from $40.9 million in 2000 reflecting
a 6.6 percentage point decrease in occupancy to 63%, partially offset by the
$1.83 increase in average room rate to $54.47. These changes in occupancy and
room rates caused a decrease in revenue per available room of 6.4% to $34.15.
The decrease in average occupancy was primarily the result of increased
competition in the economy segment, the deferral of capital improvements needed
to make our inns more competitive in their marketplaces because of the lack of
funds, and the slowdown in the economy resulting in a softness in the lodging
industry as a whole.
Total Revenues. Total revenues decreased $2.3 million, or 6%, to $39.7 million
for second quarter year-to-date 2001 from $42.0 million in second quarter
year-to-date 2000. The decrease is due to the decline in rooms revenues
described above. This is offset by other revenues of $656,000 that was
recognized in the first quarter 2001. The other revenues represent a
reimbursement of funds previously paid by the Partnership to On Command Video to
reserve for television equipment upgrades. The television program provider
determined that the equipment upgrades were no longer necessary and the funds
were subsequently reimbursed to the Partnership during the first quarter of
2001.
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FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Operating Expenses. Operating expenses declined during the second quarter of
2001 by $1.6 million or 8% to $19.7 million when compared to second quarter
2000. Year-to-date, operating expenses decreased $2.5 million, or 6%, to $38.1
million as of June 15, 2001 from $40.5 million as of June 16, 2000. The decline
is due to a decline in property-level expenses associated with the decline in
occupancy, and a decrease in depreciation expense of $1.4 million due to the
decrease in the basis of certain inns due to impairment changes recorded during
2000.
Operating Profit. Operating profit for the second quarter of 2001 decreased by
$94,000 to $1.3 million when compared to second quarter 2000. Year-to-date,
operating profit increased by $165,000 to $1.7 million from $1.5 million for the
same period in 2000. The increase is due primarily to the non-recurring
reimbursement and the decrease in depreciation expense discussed above. Without
these two items, year-to-date operating profit would have decreased by
approximately $1.9 million as compared to the same period in 2000. We expect to
see continuing declines in revenues and operating profit during the remainder of
the year.
Interest Expense. Interest expense decreased $80,000 to $3.0 million in second
quarter 2001 when compared to second quarter 2000 and decreased $265,000 to $5.9
million year-to-date. This decrease is due to the payment of principal on the
mortgage debt.
Net loss. Our net loss increased $48,000 to $1.4 million in second quarter 2001
as compared to the net loss in second quarter of 2000. Year-to-date, our net
loss decreased $286,000 to $3.8 million compared to 2000. This decrease is due
primarily to the decrease in operations discussed above partially offset by the
increase in other revenues.
LIQUIDITY AND CAPITAL SHORTFALLS
Adequate liquidity and capital are critical to our ability to continue as a
going concern. We have experienced declining operations since 1996. As a result,
cash flow from operations has declined from $19.4 million in 1997 to $10.5
million in 2000. This trend continued during the first and second quarter of
2001. During this period, we have faced increasing needs to make capital
improvements to our inns to enable them to compete more effectively in their
markets and to satisfy standards for the Fairfield Inn brand, as required by the
management agreement. The General Partner is attempting to address the decline
in operating cash flow and need for additional capital through various avenues,
as described below. We believe that there is sufficient liquidity, including the
availability of cash reserves, to fund operations and meet debt service for the
current year. There can be no assurance that we will be able to reverse the
decline in operations or obtain additional financing that may be required to
meet operating needs in the future.
Principal Sources and Uses of Cash. Our principal source of cash is cash from
operations. Our principal uses of cash are to make debt service payments, fund
the property improvement fund and maintain reserves required pursuant to the
terms of the mortgage debt.
Cash provided by operations was $2.8 million and $1.7 million through the second
quarters of 2001 and 2000, respectively. The increase is primarily attributable
to a decrease in the amount of cash used to provide working capital for the
Partnership.
Cash used in investing activities was $4.0 million and $4.1 million through the
second quarters of 2001 and 2000, respectively. Our cash investing activities
primarily consisted of contributions to the property
6
FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
improvement fund and capital expenditures for improvements to our inns.
Cash used in financing activities was $1.6 million and $1.9 million through the
second quarters of 2001 and 2000, respectively. Our financing activities
consisted of repayment of the mortgage debt and changes to the restricted cash
reserves as required under the terms of the mortgage debt.
Operating Income in 2001 May be Inadequate to Fund Debt Service. Forecasts
provided by our manager indicate that our operating cash flow is likely to be
insufficient to cover debt service during 2001. The current estimated shortfall
before any ground rent deferrals is approximately $3 to $4 million for 2001, but
due to seasonality, it may fluctuate by quarter. We expect to fund this
shortfall from partnership cash (which totals approximately $11.0 million,
including approximately $6.0 million held in lender reserve accounts, at June
15, 2001) and, as permitted under the ground lease documents, from deferral of a
portion of ground rent expense. Based upon current estimates, the ground rent
deferral could provide approximately $1.2 million of additional cash flow in
2001. Ground Rent of $1.1 million was deferred during 2000 and $566,000 was
deferred through the second quarter of 2001. Through reserves held by our
lender, partnership cash, deferral of ground rent and property cash flow, we
expect to meet our debt service requirements during 2001.
Shortfall in Funds Available for Capital Expenditures. In light of the age of
our inns, which range from 11 to 14 years, major capital expenditures will be
required over the next several years in an effort to remain competitive in the
markets where we operate and to satisfy brand standards required by our
management agreement. These capital expenditures include room refurbishments
planned for 22 of our Inns over the next several years and the replacement of
roofs, facades, carpets, wall vinyl and furniture. The capital expenditure needs
for our inns for 2001 and 2002 are estimated to total approximately $36 million.
The cost of future capital expenditures for our inns is estimated to exceed our
available funds. Our property improvement fund became insufficient to meet
anticipated capital expenditures in 1999 and continued to be insufficient
through the second quarter 2001. To address this shortfall, we deposited an
additional $2.4 million into the property improvement fund during 1999 from our
partnership cash beyond the required contributions. In addition, the
contribution rate to the property improvement fund was increased to 7% of gross
sales for 1997 and thereafter. We contributed $2.7 million and $2.9 million
through the second quarters of 2001 and 2000, respectively, to the property
improvement fund.
We expect to continue to have inadequate funds in our property improvement fund
for the capital expenditures that the manager believes are necessary for our
inns to satisfy the standards of quality under the management agreement for inns
in the Fairfield Inn system. Based upon information provided by the Manager, the
estimated capital expenditure shortfall is expected to be $15 to $20 million in
2000. Until we reach a resolution concerning funding of the capital expenditure
shortfall, any proposed capital expenditures exceeding the amount available in
the property improvement fund will be deferred.
Under the management agreement, if the Manager determines that our inns are not
satisfactorily maintained as Fairfield Inn by Marriott properties due to
insufficient capital improvements, the Manager may terminate its management of
those inns which fail to meet brand standards. If this occurs, we would attempt,
with lender approval, to retain another manager and operate some or all of our
inns as non-Fairfield Inn by Marriott properties. There can be no assurance that
we will have sufficient capital to meet brand standards. The loss of the
Fairfield Inn by Marriott brand name and of the Marriott affiliation and
reservation system could negatively impact our inn operating results and our
cash flows.
7
FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Manager has notified us that it believes our failure to fund the capital
shortfall constitutes a default under the management agreement, although the
Manager has not declared the Partnership in default, giving it the right to
terminate the management agreement if we do not provide it with additional funds
to cure the shortfall. We have notified the Manager that we disagree with the
Manager's determination that there is a default situation under the management
agreement. The General Partner has developed a plan to address the capital
expenditure needs of our inns, but we cannot assure you the plan will be
implemented or, if implemented, that it will satisfy our needs for additional
capital. If these issues are not resolved, the Manager may have termination
rights under the management agreement in the future. If the Manager were to
terminate the management agreement, the loss of brand affiliation could
significantly impair our revenues, our cash flow, and the value of our inns, and
there can be no assurance that we would be able to retain another manager on
satisfactory terms, if at all. Moreover, termination of the management agreement
by the Manager could lead to a default under our loan agreement if the
Partnership were unable to retain another manager satisfactory to the lender.
Submission of Matters to a Vote of Limited Partners
On July 13, 2001, the General Partner sent a letter to the limited partners of
the Partnership seeking consent to permit the implementation of a restructuring
plan that is intended to address the Partnership's continued decline in
operating results and provide up to $23 million of additional capital. The
restructuring plan contemplates the following:
. A new management group, which will include (1) a new general partner
for the Partnership, the principals of which have extensive experience
in partnership, asset and property management, and (2) a new hotel
manager for the inns with extensive experience in managing limited
service hotels similar to those owned by the Partnership;
. The opportunity for all limited partners to participate in a new
unsecured loan of up to $23 million to the Partnership and the
commitment of an affiliate of the new general partner to provide any
funds not supplied by limited partners;
. A new franchise agreement with Marriott International for each inn on
terms which include the ability to sell up to five inns without payment
by the Partnership of termination fees estimated at $2.5 million;
. A guarantee by the new general partner's affiliate of up to $25 million
of the Partnership's obligations under certain circumstances to
Marriott International under the new franchise agreements; and
. The Partnership is currently negotiating a ground lease amendment
providing for the reduction of the ground rent payable by the
Partnership, substantially more favorable terms with respect to the
Partnership's right to purchase the land underlying 32 inns and
cancellation of the Partnership's obligation to pay all unpaid deferred
ground rent, which could be as much as $2.3 million by the end of 2001.
In order to implement the restructuring plan, the General Partner must have the
consent of more than half of the limited partners.
8
FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Quantitative and Qualitative Disclosures about Market Risk
We do not have market risk with respect to interest rates, foreign currency
exchanges or other market rate or price risk, and we do not hold any financial
instruments for trading purposes. As of June 15, 2001, all of our debt has a
fixed interest rate.
PART II. OTHER INFORMATION
LEGAL PROCEEDINGS
The Partnership is 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.
9
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.
FAIRFIELD INN BY MARRIOTT
LIMITED PARTNERSHIP
By: FIBM ONE LLC
General Partner
July 27, 2001 By: /s/ Mathew Whelan
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Mathew Whelan
Vice President
10