10-Q 1 d10q.txt QUARTERLY REPORT ================================================================================ 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 14, 2002 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 10400 Fernwood Road Bethesda, MD 20817-1109 (301) 380-9000 Delaware 52-1533559 ----------------------------- -------------------------------------------- (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 ------------------------------------- (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 (Unaudited) Condensed Consolidated Balance Sheets ~~September~~June 714, ~~2001~~2002 and December 31, ~~2000~~2001 ....................................~~.............~~ 1 Condensed Consolidated Statements of Operations Twelve and ~~Thirty~~Twenty-~~six~~four Weeks Ended ~~September~~June 714, ~~2001~~2002 and ~~September~~June 815, ~~2000~~2001 .....~~..........~~ 2 Condensed Consolidated Statements of Cash Flows ~~Thirty~~Twenty-~~six~~four Weeks Ended ~~September~~June 714, ~~2001~~2002 and ~~September~~June 815, ~~2000~~2001 ................~~..........~~ 3 Notes to Condensed Consolidated Financial Statements ......................~~...............~~ 4 Management's Discussion and Analysis of Financial Condition and Results of Operations ....................................~~.................~~ 5 Quantitative and Qualitative Disclosures about Market Risk ................~~...............~~ 7 PART II - OTHER INFORMATION Legal Proceedings .........................................................~~...............~~ 7

Courtyard by Marriott II Limited Partnership Condensed Consolidated Balance Sheets (in thousands)

~~September~~June 714, December 31, 2002 2001 ~~2000~~ ---------~~---~~ ---------~~---~~ (Unaudited) ASSETS Property and equipment, net ..................................... $ ~~423~~408,~~152~~916 $ ~~439~~418,~~098~~885 Deferred financing costs, net of accumulated amortization ....... 108,~~031~~822 119,~~119~~547 Due from Courtyard Management Corporation ....................... 68,~~546~~174 89,~~453~~117 ~~Other~~Prepaid ~~assets~~insurance ............................................... 83 2-- Property improvement fund ....................................... 2936,~~424~~645 1830,~~912~~513 Restricted cash ................................................. 2826,~~757~~557 1822,~~415~~535 Cash and cash equivalents ....................................... 5,~~891~~363 1310,~~511~~489 ---------~~---~~ ---------~~---~~ $ ~~503~~494,~~809~~480 $ ~~509~~501,~~510~~086 =========~~===~~ =========~~===~~ LIABILITIES AND PARTNERS' CAPITAL (DEFICIT) LIABILITIES Debt ............................................................ $ ~~454~~440,~~732~~727 $ ~~466~~448,~~539~~605 Management fees due to Courtyard Management Corporation ......... 3848,~~858~~115 3143,~~417~~288 Due to Marriott International, Inc. and affiliates .............. 8,~~611~~519 8,~~693~~574 Accounts payable and accrued liabilities ........................ 712,~~732~~799 12,~~106~~389 ---------~~---~~ ---------~~---~~ Total Liabilities ......................................... ~~509~~510,~~933~~160 ~~518~~512,~~755~~856 ---------~~---~~ ---------~~---~~ PARTNERS' CAPITAL (DEFICIT) General Partner ................................................. 9,~~589~~111 9,~~409~~307 Limited Partners ................................................ (1524,~~713~~791) (1821,~~654~~077) ---------~~---~~ ---------~~---~~ Total Partners' Deficit ................................... (615,~~124~~680) (911,~~245~~770) ---------~~---~~ ---------~~---~~ $ ~~503~~494,~~809~~480 $ ~~509~~501,~~510~~086 =========~~===~~ =========~~===~~

See Notes to Condensed Consolidated Financial Statements. 1 Courtyard by Marriott II Limited Partnership Condensed Consolidated Statements of Operations (Unaudited, in thousands, except Unit and Per Unit Amounts)

Twelve Weeks Ended ~~Thirty~~Twenty-~~six~~four Weeks Ended ~~September~~June 714, ~~September~~June 815, ~~September~~June 714, ~~September~~June 815, 2002 2001 ~~2000~~2002 2001 ~~2000~~ ---------~~---~~ ---------~~---~~ ---------~~---~~ ---------~~---~~ REVENUES ~~Hotel revenues~~ Rooms ...............................~~...................~~ $ 6057,~~547~~527 $ 65,~~704~~040 $ ~~189~~109,~~037~~736 $ ~~193~~128,~~565~~490 Food and beverage ...................~~...................~~ 3,~~632~~656 43,~~100~~958 116,~~550~~991 127,~~613~~918 Other ...............................~~...................~~ 21,~~082~~264 21,~~108~~949 52,~~997~~595 63,~~907~~915 ---------~~---~~ ---------~~---~~ ---------~~---~~ ---------~~---~~ Total ~~hotel~~ revenues ..................~~..............~~ 6662,~~261~~447 7170,~~912~~947 ~~206~~119,~~584~~322 ~~213~~140,~~085~~323 ---------~~---~~ ---------~~---~~ ---------~~---~~ ---------~~---~~ OPERATING COSTS AND EXPENSES ~~Hotel property-level costs and expenses~~ Rooms ...............................~~...................~~ 1312,~~605~~726 14,~~762~~064 4124,~~668~~493 4328,~~181~~063 Food and beverage ...................~~...................~~ 32,~~306~~953 3,~~752~~578 105,~~462~~770 117,~~073~~156 ~~Other~~Department ~~department~~ costs and expenses .......~~.............~~ ~~417~~599 ~~696~~664 1,~~531~~048 1,~~657~~114 Selling, administrative and other~~......................~~ 15,~~752~~051 1716,~~270~~450 4829,~~994~~402 ~~50,190 ------------ ------------ ------------ ------------ Total hotel property-level costs and expenses.......~~ 33,~~080~~242 ~~36,480 102,655 106,101~~ Depreciation ........................~~....................~~ 6,~~443~~003 6,~~543~~530 1912,~~488~~140 1913,~~756~~045 Ground rent, taxes and other ........~~....................~~ 6,~~270~~464 6,~~448~~703 1912,~~559~~822 2013,~~664~~289 Base and Courtyard management ~~fees~~fee ...~~...................~~ 3,~~976~~746 4,~~315~~256 127,~~395~~159 128,~~785~~419 Incentive management fee ............~~....................~~ 2,~~854~~628 3,~~251~~235 94,~~043~~827 96,~~942~~189 ---------~~---~~ ---------~~---~~ ---------~~---~~ ---------~~---~~ ~~Total operating costs and expenses.................. 52,623 57,037 163,140 169,248 ------------ ------------ ------------ ------------~~ OPERATING PROFIT .......................~~..................~~ 1312,~~638~~277 1415,~~875~~467 4321,~~444~~661 4329,~~837~~806 Interest expense ....................~~....................~~ (9,~~458~~284) (9,~~734~~582) (2818,~~566~~422) (2919,~~531~~108) Interest income .....................~~....................~~ ~~416~~127 ~~524~~370 ~~1,117~~233 ~~1,304~~701 ---------~~---~~ ---------~~---~~ ---------~~---~~ ---------~~---~~ NET INCOME .............................~~..................~~ $ 43,~~596~~120 $ 56,~~665~~255 $ 153,~~995~~472 $ 1511,~~610~~399 =========~~===~~ =========~~===~~ =========~~===~~ =========~~===~~ ALLOCATION OF NET INCOME General Partner .....................~~....................~~ $ ~~230~~156 $ ~~283~~313 $ ~~800~~174 $ ~~780~~570 Limited Partners ....................~~....................~~ 42,~~366~~964 5,~~382~~942 153,~~195~~298 1410,~~830~~829 ---------~~---~~ ---------~~---~~ ---------~~---~~ ---------~~---~~ $ 43,~~596~~120 $ 56,~~665~~255 $ 153,~~995~~472 $ 1511,~~610~~399 =========~~===~~ =========~~===~~ =========~~===~~ =========~~===~~ NET INCOME PER LIMITED PARTNER UNIT (1,470 Units) ..................~~.........................~~ $ 2,~~970~~016 $ 34,~~661~~042 $ 102,~~337~~244 $ 107,~~088~~367 =========~~===~~ =========~~===~~ =========~~===~~ =========~~===~~

See Notes to Condensed Consolidated Financial Statements. 2 Courtyard by Marriott II Limited Partnership Condensed Consolidated Statements of Cash Flows (Unaudited, in thousands) Twenty-four Weeks Ended June 14, June 15, 2002 2001 -------- -------- OPERATING ACTIVITIES Net income ...................................... $ 3,472 $ 11,399 Depreciation expense ............................ 12,140 13,045 Gain on disposition of fixed assets ............. -- (4) Amortization of deferred financing fees ......... 725 728 Changes in operating accounts ................... 2,090 (4,684) -------- -------- Cash provided by operating activities ..... 18,427 20,484 -------- -------- INVESTING ACTIVITIES Additions to property and equipment, net ........ (2,171) (1,798) Change in property improvement funds ............ (6,132) (7,929) -------- -------- Cash used in investing activities ......... (8,303) (9,727) -------- -------- FINANCING ACTIVITIES Repayments of debt .............................. (7,878) (7,310) Change in debt service reserve .................. 10 -- Capital distributions ........................... (7,382) (9,936) -------- -------- Cash used in financing activities ......... (15,250) (17,246) -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS .............. (5,126) (6,489) CASH AND CASH EQUIVALENTS at beginning of period ... 10,489 13,511 -------- -------- CASH AND CASH EQUIVALENTS at end of period ......... $ 5,363 $ 7,022 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for mortgage and other interest ....... $ 17,305 $ 18,933 ======== ======== See Notes to Condensed Consolidated Financial Statements. 3 Courtyard by Marriott II Limited Partnership Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Organization Courtyard by Marriott II Limited Partnership, a Delaware limited partnership, owns 70 Courtyard by Marriott hotels located in 29 states within the contiguous United States. The hotels are operated under a management agreement by a subsidiary of Marriott International (the "Manager"). 2. Summary of Significant Accounting Policies The accompanying unaudited, condensed consolidated 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 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, 2001. 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 14, 2002, and the results of its operations for the twelve and twenty-four weeks ended June 14, 2002 and June 15, 2001 and cash flows for the twenty-four weeks ended June 14, 2002 and June 15, 2001. Interim results are not necessarily indicative of full year performance because of seasonal and short-term variations. Certain reclassifications were made to the prior year financial statements to conform to the 2002 presentation. 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 certain assets, differences in the timing of the recognition of certain fees and straight-line rent adjustments. 3. Amounts Paid to the General Partner and Marriott International, Inc. The chart below summarizes amounts paid to the general partner and Marriott International, Inc. for the twenty-four weeks ended June 14, 2002 and June 15, 2001 (in thousands): 2002 2001 ------- ------- Marriott International, Inc.: Incentive management fee ..................... $ -- $ 2,040 Base management fee .......................... 4,176 4,911 Chain services and Marriott Rewards Program .. 3,743 4,238 Courtyard by Marriott system fee ............. 2,983 3,508 Marketing fund contribution .................. 2,488 2,981 ------- ------- $13,390 $17,678 ======= ======= General Partner: Administrative expenses reimbursed ........... $ 349 $ 7 ======= ======= 4 COURTYARD BY MARRIOTT II 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. RESULTS OF OPERATIONS Revenues. Total hotel revenues for the twelve weeks ended June 14, 2002 decreased $8.5 million, or 12%, to $62.4 million compared to the same period in 2001. For the twenty-four weeks ended June 14, 2002, total hotel revenues decreased $21 million, or 15%, to $119.3 million compared to the twenty-four weeks ended June 15, 2001. The decrease in hotel revenues for both the second quarter of 2002 and year-to-date 2002 is due to a decrease in rooms' revenues. The decrease in year-to-date rooms' revenue was driven by a decline in revenue per available room ("RevPAR") of $10.80 or, 14.6%, which reflects a decrease in occupancy of 6.1 percentage points and a decrease in average room rates of $6.98, or 7.1%. The results reflect the continued demand weakness in the lodging industry. Additionally, lower room rates at full service hotels have caused increased competition for the limited service segment. Property level costs and expenses. Property-level costs and expenses which includes rooms, food and beverage, department costs and expenses and selling, administration, and other expenses, declined $3.4 million, or 10%, to $31.3 million for the second quarter of 2002 compared to the second quarter of 2001. For the twenty-four weeks ended June 14, 2002, property-level costs and expenses decreased $8.9 million to $60.7 million from the same period in 2001. The decrease is due to a decline in controllable expenses as a result of cost-cutting efforts implemented at the hotels in response to the decrease in occupancy. These efforts include a reduction in wages at the properties of $3.1 million. However, our ability to achieve significant additional reductions in variable costs is limited and as a result, we believe we will continue to see a decline in margins over the prior year. As a percentage of hotel revenues, property-level costs and expenses represented approximately 50% and 49% of hotel revenues for the second quarter of 2002 and 2001 respectively. Year-to-date, property-level costs and expenses represented 51% and 50% of hotel revenues for 2002 and 2001 respectively. Base and Courtyard management fees. Base and Courtyard management fees declined $510,000, or 12%, for the second quarter of 2002 versus the second quarter of 2001, and decreased $1.3 million, or 15%, year-to-date. The decrease in management fees, which are calculated as a percentage of total hotel revenues, is consistent with the decline in hotel revenues. Incentive Management Fees. Incentive management fees decreased by $607,000, or 19%, for the second quarter of 2002 versus the second quarter of 2001, and decreased $1.4 million, or 22%, year-to-date. This is a result of decreased hotel revenues. 5 COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Profit. Operating profit for second quarter 2002 decreased by $3.2 million compared to second quarter 2001. Year-to-date, operating profit decreased $8.1 million to $21.7 million when compared to the same period in 2001. Operating profit represented 20% of total revenues for the second quarter of 2002 and 22% for the second quarter of 2001. Year-to-date, operating profit represented 18% and 21% of hotel revenues for 2002 and 2001, respectively. Interest Expense. Interest expense decreased $298,000, or 3.1%, for the second quarter of 2002 versus the second quarter of 2001, and decreased $686,000, or 3.6%, year-to-date. The decreases for both periods are the result of principal amortization on the debt. Net Income. Net income for the second quarter 2002 decreased by $3.1 million to $3.1 million when compared to the same period in 2001. Year-to-date, net income decreased $7.9 million to $3.5 million, as a result of the items discussed above. LIQUIDITY AND CAPITAL RESOURCES The partnership's liquidity has been historically funded through loan agreements with independent financial institutions and by cash from our operations. As a result of the events of September 11 and the slowly recovering economy the results of operations from the properties have decreased significantly over prior year levels. Based on the current forecast of full year results, it appears that there will be sufficient cash from operations to make the required debt service, however we may not have sufficient cash from operations to complete all the planned owner funded capital expenditures for the remainder of 2002. The partnership does have $5.4 million of cash as of June 14, 2002, which could be used either to fund capital expenditures or to make distributions to the partners. If the economy experiences further declines, we expect that operations may continue to be adversely affected. Also, we believe that delays in completing the planned capital expenditures could result in greater future costs for the partnership. Although the General Partner believes that the expectations reflected in these forward looking statements are based upon reasonable assumptions, we can give no assurance that actual results will reflect these statements or that the results will not deviate materially. 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, make payments to the property improvement fund and to make distributions to the limited partners. Cash provided by operations for the first two quarters of 2002 was $18.4 million compared to $20.5 million for the first two quarters of 2001. The decrease in cash provided by operations is due to a decrease in net income, partially offset by an increase in deferred incentive management fees. Cash used in investing activities was $8.3 million and $9.7 million for the first two quarters of 2002 and 2001, respectively. Cash used in investing activities for the first two quarters of 2002 includes capital expenditures of $2.2 million, primarily related to renovations and replacements of furniture, fixtures and equipment at the partnership's hotels as compared to $1.8 million in the first two quarters of 2001. The property improvement fund increased by $6.1 million for the twenty-four weeks ended June 14, 2002 compared to $7.9 million for the twenty-four weeks ended June 15, 2001. Cash used in financing activities was $15.3 million and $17.2 million for the first two quarters of 2002 and 2001, respectively. The partnership repaid $7.9 million and $7.3 million, respectively, of principal on the commercial mortgage-backed securities during the first two quarters of 2002 and 2001. Cash used in financing activities 6 COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS included $7.4 million of cash distributions to the limited partners during the first two quarters of 2002 compared to $10 million during the first two quarters of 2001. 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 14, 2002, all of the partnership's debt is fixed 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. 7 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 29, 2002 By: /s/ Mathew J. Whelan ---------------------------------------- Mathew J. Whelan Vice President 8

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