ITEM 3. 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.
Litigation Settlement
In November 2000, the general partner and MII settled a lawsuit filed by limited partners from seven limited partnerships, including our limited partners (the "Settlement"). In accordance with the terms of the Settlement, our limited partners involved in the settlement received a cash payment of $148,000 per unit, in exchange for dismissal of the litigation, a complete release of all claims and the sale of their
Partnership units to a joint venture formed by Host Marriott, L.P. (Host LP) (an affiliate of the general partner), Rockledge Hotel Properties, Inc. (an affiliate of the general partner) and MII (the "Joint Venture"). As a result, subsequent to the completion of the settlement, all of the outstanding limited partner units are owned by the Joint Venture.
The Joint Venture acquired the partnership interests in Courtyard by Marriott Limited Partnership (CBM I") and the Partnership, together owning 120 hotels, for an aggregate payment of approximately $372 million plus interest and legal fees, of which Host Marriott and its affiliates paid approximately $90 million. The Joint Venture acquired the partnerships by acquiring partnership units pursuant to a tender offer for such units followed by a merger of each of CBM I and the Partnership with subsidiaries of the Joint Venture. The Joint Venture financed the acquisition with mezzanine indebtedness borrowed from MII, cash and other assets contributed by Host Marriott and its affiliates, including the existing general partner and limited partner interests in the partnerships, and cash contributed by MII. Host Marriott owns a 50% interest in the Joint Venture.
For purposes of the purchaser's investment analysis, they estimated the value of the planned investment in the Joint Venture based upon: (1) estimated post-acquisition cash flows, including anticipated changes in the related hotel management agreements to be made contemporaneously with the investment; (2) the Joint Venture's new capital structure; and (3) estimates of prevailing discount rates and capitalization rates reflected in the market at that time. The amount of post-settlement equity of the Joint Venture was considerably lower than the pre-acquisition equity due to additional indebtedness post-acquisition offset by the impact of changes to the Management Agreements made contemporaneously with the transaction. The purchase by the Joint Venture was consummated late in the fourth quarter of 2000. The Joint Venture has recorded its investment in the partnership units at $363 million, which reflected estimated fair value based on: (1) pre-acquisition cash flows; (2) the pre-acquisition capital structure; and (3) prevailing discount rates and capitalization rates in December 2000.
Due to a number of factors, the equity values used in the purchase accounting for the Joint Venture's investment were different from limited partner unit estimates included in the CBM I and the Partnership Purchase Offer and Consent Solicitations prepared in early 2000. The solicitations reported that the value of limited partner units based on an assumed 20 percent discount rate would be $254 million. The difference between this and the purchase accounting entry by the Joint Venture is primarily attributed to: (1) the purchase being consummated almost one year subsequent to the time the original estimates were prepared ($30 million); and (2) a lower discount rate (17 percent) and capitalization rate reflecting changes in market conditions and capital structure versus the date at which the estimates in the solicitations were prepared ($79 million).
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS
There is currently no established public trading market for the limited partner units of the Partnership (the "Units") and it is not anticipated that a public market for the Units will develop. Transfers of Units are limited to the first date of each accounting period except for the transfer of Units to CBM II Holdings LLC (a subsidiary of the Joint Venture) and any subsequent assignment of Units by CBM II Holdings LLC. All transfers are subject to approval by the general partner. As of December 31, 2001, the Joint Venture between Host LP and MII were the holders of record of all of the Partnership's 1,470 Units.
Cash available for distribution for any year will be distributed at least annually to the Partners of record at the end of each accounting period during such year as follows:
(i) first, through and including the end of the accounting period during which the Partners shall have received cumulative distributions of sales or refinancing proceeds ("Capital Receipts") equal to $77,368,421, 5% to the general partner and 95% to the limited partners;
(ii) next, through and including the end of the accounting period during which the Partners shall have received cumulative distributions of Capital Receipts equal to $158,306,000, 10% to the general partner and 90% to the limited partners; and
(iii) thereafter, 25% to the general partner and 75% to the limited partners.
Distributions to the General Partner under clauses (i), (ii) and (iii) above shall be subordinate to an annual, non-cumulative 10% preferred return to the limited partners on their invested capital, as defined.
In order to allow for the cash distributions made in accordance with the terms of the Settlement Agreement, the Partnership Agreement was modified so that the holders of Partnership units ("Unitholders") prior to the Settlement would (1) receive allocations of profit or loss on their Units up through the effective date of the Settlement Agreement rather than through the end of the preceding accounting period, (2) would receive a distribution from cash available for distribution for the period ending on the day prior to the date of entry of the judgment order (November 27, 2000) and (3) would not receive any additional cash distributions.
Cash available for distribution means, with respect to any fiscal period, the cash revenues of the Partnership from all sources during the fiscal period, other than Capital Receipts, plus amounts received by the Partnership pursuant to the price adjustment amount, less (i) all cash expenditures of the Partnership during such fiscal period, including, without limitation, repayment of all Partnership indebtedness to the extent required to be paid, but not including expenditures of Capital Receipts, plus fees for management services and administrative expenses and (ii) such reserves as may be determined by the general partner, in its sole discretion (other than funds received under the price adjustment amount) to be necessary to provide for the foreseeable needs of the Partnership.
As of December 31, 2001, the Partnership has distributed a total of $133.8 million to the limited partners ($90,993 per limited partner unit) since inception. During 2001, $17.0 million ($6,430 and $5,104 per limited partner unit from 2001 and 2000 operations, respectively) was distributed to the limited partners. During 2000, $16.3 million ($8,614 and $2,496 per limited partner unit from 2000 and 1999 operations, respectively) was distributed to the limited partners prior to the transfer of the limited partner units to the Joint Venture. However, due to the $7.5 million paid in 2001 but pertaining to 2000 operations, as discussed above, 2000 total distributions from operations was $20.2 million ($13,718 per limited partner unit). The 2001 cash was distributed after the transfer of limited partner units to the Joint Venture. During 1999, the Partnership distributed $8.8 million to the limited partners ($4,500 and $1,500 per limited partner unit from 1999 and 1998 operations, respectively). No distributions of Capital Receipts have been made since inception.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents historical operating information for the Partnership for each of the five years in the period ended December 31, 2001 presented in accordance with accounting principles generally accepted in the United States.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Courtyard by Marriott II Limited Partnership is the owner of 70 moderately-priced hotels which are operated as part of the Courtyard by Marriott system, and managed by Courtyard Management Corporation.
RECENT EVENTS
As a result of the decline in the economy, combined with the effects of the September 11, 2001 terrorist attacks, the hospitality and travel industry experienced a significant decrease in operations during the second half of 2001. Revenues decreased $25.0 million, or 8%, to $278.5 million in 2001 from $303.5 million in 2000, primarily as a result of decreases in occupancy and room rates, which were flat or decreasing throughout the year. During the fourth quarter of 2001, revenues decreased $18.6 million, or 21%, compared to the same period in 2000. The Partnership also anticipates that some costs, such as insurance and energy, will likely increase faster than the rate of inflation in 2002, which will further
affect operating margins. The Partnership, in conjunction with the Manager, has implemented a number of cost saving initiatives to reflect the reduced volume at the Hotels, including reducing labor costs. If demand in the hospitality and travel industry returns to more historic levels of operations, the Partnership should experience increased occupancy and room rates, which should improve operating margins in the future.
RESULTS OF OPERATIONS
2001 Compared to 2000
Hotel Revenues. Hotel revenues decreased $25.0 million, or 8%, to $278.5 million in 2001 from $303.5 million in 2000 as a result of the September 11, 2001 terrorist attacks and the continued overall weakness in the economy. RevPAR decreased primarily as the result of a 6.8 percentage point decrease in the combined average occupancy to 71.5%, which was offset by a 1% increase in the combined average daily room rate to $94.80. RevPAR does not include food and beverage and other ancillary revenues generated by the Hotels.
Base and Courtyard Management Fees. Base and Courtyard management fees decreased by 8%, or $1.5 million, in 2001 when compared to 2000. 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 declined $1.9 million, or 14%, to $11.9 million in 2001 when compared to 2000. These fees are calculated as a percentage of operating profit, as defined in the Management Agreement. The decrease in these fees for 2001 is consistent with the decline in operating profit.
Operating Costs and Expenses. Total operating costs and expenses decreased $18.7 million, or 8%, to $223.5 million in 2001 from $242.2 million in 2000. The decrease is primarily due to a $5.0 million, or 8%, decrease in rooms costs and expenses as well as a $5.4 million, or 7%, decrease in selling, administrative and other costs. These decreases are primarily the result of a decrease in controllable expenses such as wages, reservation costs and supplies as a result of the Manager's cost cutting efforts and decreased occupancy at the Hotels.
Interest Expense. Interest expense decreased by 3% to $41.3 million in 2001 from $42.5 million in 2000. This decrease is due to payments on the mortgage principal of $17.9 million in 2001.
Net Income. Net income decreased by $5.7 million in 2001 to $15.3 million from $21.0 million in 2000 primarily due to the changes in revenues and expenses discussed above.
2000 Compared to 1999
Hotel Revenues. In 2000, hotel revenues increased $10.5 million, or 3.6%, to $303.5 million when compared to 1999 as a result of the growth in RevPAR of 4.2%. The increase in RevPAR was primarily the result of a 5.1% increase in the combined average daily room rate to $93.60, offset by a .7 percentage point decrease in combined average occupancy to 78.3%.
Operating Costs and Expenses. The 2000 total operating costs and expenses increased $8.9 million, or 3.8%. The increase is primarily due to increases in both rooms and selling, administrative and other costs as discussed below.
Rooms costs and expenses increased $2.1 million, or 3.6%, during 2000 as compared to 1999. The overall increase is primarily due to an increase in salary and benefits as the hotels endeavor to maintain competitive wage scales.
Selling, administrative and other costs increased $3.2 million or 4.6% when compared to 1999 due to increased administrative costs, particularly administrative wages, combined with an increase in energy costs. Also, more of the Partnership hotels took part in MII marketing programs in 2000, increasing marketing costs.
Base and Courtyard Management Fees. Base and Courtyard management fees increased by 3.6%, or $633,000, in 2000 when compared to 1999. Base and Courtyard management fees are calculated as a percentage of total hotel revenues. Accordingly, with the increase in total hotel revenues described above, these fees also increased.
Interest Expense. Interest expense decreased by 2.6% to $42.5 million in 2000 from $43.6 million in 1999. This decrease is due to payments on the mortgage principal of $16.6 million in 2000.
Property Taxes. Property taxes increased by $704,000, or 6.3% in 2000 due to an increase in the tax basis of the properties.
Net Income. Net income increased by $3.1 million in 2000 to $21.0 million from $17.8 million in 1999 primarily due to the changes in revenues and expenses discussed above.
Capital Resources and Liquidity
Our principal source of cash is from operation of the Hotels. Our principal uses of cash are debt service payments, funding capital expenditure needs and distributions to the limited partners.
Principal Sources and Uses of Cash
Our principal source of cash is from operations. Cash provided by operations was $56.0 million, $49.0 million and $47.2 million for the years ended 2001, 2000 and 1999, respectively. We paid $39.7 million, $40.9 million and $42.0 million of interest on our debt in 2001, 2000 and 1999, respectively. The increase in cash provided by operations during 2001 is primarily due to the deferral of $11.9 million of incentive management fees.
Cash used in investing activities was $19.3 million, $26.8 million and $17.4 million for 2001, 2000 and 1999, respectively. Investing activities consist primarily of contributions to the property improvement fund and capital expenditures for improvements to the Hotels. Contributions to the property improvement fund, which represents 6.5% of total hotel revenues as of October 24, 2000 and 5% of total hotel revenues prior to October 24, 2000, were $18.1 million, $15.9 million and $14.6 million for the years ended December 31, 2001, 2000 and 1999, respectively. Property improvement fund expenditures and other activity includes expenditures for the replacement of furniture, fixtures and equipment offset by interest income earned by the fund. During 2000 and 1999, activity in the property improvement fund also included reimbursements for prior year capital expenditures of $12.5 million and $3.1 million, respectively. Total capital expenditures during 2001, 2000 and 1999 were $7.7 million, $13.3 million and $18.5 million, respectively.
Cash used in financing activities was $39.6 million, $32.1 million and $24.3 million for the years ended December 31, 2001, 2000 and 1999, respectively. We repaid $17.9 million, $16.6 million and $15.4 million of principal on our Certificate/Mortgage Loan in 2001, 2000 and 1999, respectively.
We also made cash distributions to general and limited partners of $17.8 million, $16.3 million and $8.8 million in 2001, 2000 and 1999, respectively. 2001 distributions include $0.5 million that was owed to the former partners who held partnership units prior to the acquisition of the partnership by the Joint Venture. Cash used in financing also includes funding of the debt service reserves required under our debt agreements.
Pursuant to the terms of the Certificate/Mortgage Loan, the Partnership is required to establish with the lender a separate escrow account for payments of insurance premiums and real estate taxes for each mortgaged property if the credit rating of MII is downgraded by Standard and Poor's Rating Services which occurred effective April 1, 1997. The escrow reserve is included in restricted cash and the resulting tax and insurance liability is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets.
Inflation
Our hotel lodging properties have been impacted by inflation through its effect on increasing costs and on the Managers' ability to increase room rates. Unlike other real estate, hotels have the ability to change room rates on a daily basis, so the impact of higher inflation often can be passed on to customers. However, the current weak economic environment has resulted in a decline in demand and has restricted our managers' ability to raise room rates to offset rising costs.
Critical Accounting Policies
Our consolidated financial statements include accounts of the Partnership and all majority owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements, and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. All of our significant accounting policies are disclosed in Note 2 to the audited financial statements. The following critical accounting policy requires the use of business judgment or significant estimates to be made.
Long-lived assets. We are required to make subjective assessments as to whether there are impairments in the value of our real estate properties. These assessments have a direct impact on our net income, because an impairment results in an immediate negative adjustment to net income. On a periodic basis, management assesses whether there are any indicators that the value of the real estate properties may be impaired. A property's value is impaired only if management's estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property are less than the carrying value of the property. Such cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the property over the fair value of the property.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have a significant market risk with respect to interest rates, foreign currency exchanges or other market rate or price risks, and we do not hold any financial instruments for trading purposes. As of December 31, 2001, all of our debt has a fixed interest rate. See Note 5 to the financial statements for a further description.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index Page - ----- ----
Courtyard by Marriott II Limited Partnership Consolidated Financial Statements:
Report of Independent Public Accountants.............................. 14
Consolidated Balance Sheets of December 31, 2001 and 2000............. 15
Consolidated Statements of Operations for the Fiscal Years Ended December 31, 2001, 2000 and 1999.................................... 16
Consolidated Statements of Changes in Partners' Capital (Deficit) for the Fiscal Years Ended December 31, 2001, 2000 and 1999......... 17
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 2001, 2000 and 1999.................................... 18
Notes to Consolidated Financial Statements............................ 19
Courtyard II Associates, L.P. and Subsidiaries Consolidated Financial Statements:
Report of Independent Public Accountants.............................. 28
Consolidated Balance Sheets of December 31, 2001 and 2000............. 29
Consolidated Statements of Operations for the Fiscal Years Ended December 31, 2001, 2000 and 1999.................................... 30
Consolidated Statements of Changes in Partners' Capital for the Fiscal Years Ended December 31, 2001, 2000 and 1999......... 31
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 2001, 2000 and 1999.................................... 32
Notes to Consolidated Financial Statements............................ 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheets of Courtyard by Marriott II Limited Partnership (a Delaware limited partnership) and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in partners' capital (deficit) and cash flows for the three years ended December 31, 2001. These financial statements and the schedules referred to below are the responsibility of the General Partner's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Courtyard by Marriott II Limited Partnership and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the three years ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index at Item 14(a)(2) are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Vienna, Virginia March 18, 2002
CONSOLIDATED BALANCE SHEETS Courtyard by Marriott II Limited Partnership and Subsidiaries December 31, 2001 and 2000 (in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS Courtyard by Marriott II Limited Partnership and Subsidiaries For the Years Ended December 31, 2001, 2000 and 1999 (in thousands, except Unit and per Unit amounts)
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN Partners' Capital (Deficit) Courtyard by Marriott II Limited Partnership and Subsidiaries For the Years Ended December 31, 2001, 2000 and 1999 (in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS Courtyard by Marriott II Limited Partnership and Subsidiaries For the Years Ended December 31, 2001, 2000 and 1999 (in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Courtyard by Marriott II Limited Partnership and Subsidiaries December 31, 2001 and 2000
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Courtyard by Marriott II Limited Partnership and Subsidiaries (the "Partnership"), a Delaware limited partnership, was formed on August 31, 1987 to acquire and own 70 Courtyard by Marriott hotels (the "Hotels") and the land on which certain of the Hotels are located. The Partnership's 70 hotel properties are located in 29 states in the United States. The Hotels are managed as part of the Courtyard by Marriott hotel system by Courtyard Management Corporation (the "Manager"), a wholly-owned subsidiary of Marriott International, Inc. ("MII").
On March 9, 2000, Host Marriott, L.P. and MII entered into a settlement agreement (the "Settlement Agreement") to resolve pending litigation. In accordance with the terms of the Settlement Agreement, on November 28, 2000, the following steps occurred. CBM Joint Venture LLC (the "Joint Venture"), which is a joint venture among Host Marriott, L.P., Rockledge Hotel Properties, Inc. (an affiliate of Host Marriott, L.P.) and MII or their wholly-owned subsidiaries, acquired the Class B 99% non-managing economic interest in the general partner, and, through CBM Two GP Corp., a Delaware corporation and an indirect wholly-owned subsidiary of the Joint Venture, acquired the Class A 1% managing economic interest in the general partner. As a result, the Joint Venture owns 100% of the general partner. In addition, CBM II Holdings LLC, a Delaware limited liability company and an indirect wholly-owned subsidiary of the Joint Venture, purchased all of the outstanding units in the Partnership (other than units held by the general partner). As a result, the Joint Venture became the holder indirectly of all of the units in the Partnership.
Pursuant to the terms of the operating agreement of CBM Two LLC, the Joint Venture, as the holder of the 99% non-voting member interest in CBM Two LLC, has been granted the sole power to direct the exercise by CBM Two LLC of all voting rights and other rights as owner with respect to all capital stock of any corporation that is owned, directly or indirectly, by the Partnership. The Partnership owns the Hotels through Courtyard II Associates, L.P. and Subsidiaries ("Associates"), in which the Partnership is a 98% limited partner and a 1% general partner, and through Courtyard II Associates Management Corporation, the 1% managing general partner of Associates.
Partnership Allocations and Distributions
Partnership allocations and distributions are generally made as follows:
a. Cash available for distribution is distributed (i) first, 5% to the general partner and 95% to the limited partners until the general partner and the limited partners (collectively, the "Partners") have received cumulative distributions of sale proceeds and/or refinancing proceeds ("Capital Receipts") equal to $77,368,421; (ii) next, 10% to the general partner and 90% to the limited partners until the Partners have received cumulative distributions of Capital Receipts equal to $158,306,000; and (iii) thereafter, 25% to the general partner and 75% to the limited partners. Distributions to the general partner are subordinate to an annual 10% non-cumulative preferred return to the limited partners on their invested capital, as defined.
b. Refinancing proceeds not retained by the Partnership will be distributed (i) first, 5% to the general partner and 95% to the limited partners until the Partners have received cumulative distributions of refinancing proceeds equal to $158,306,000 minus adjusted sale proceeds, as defined; and (ii) thereafter, 25% to the general partner and 75% to the limited partners.
c. Proceeds not retained by the Partnership from the sale or other disposition of less than substantially all of the assets of the Partnership will be distributed (i) first, 5% to the general partner and 95% to the limited partners until the partners have received cumulative distributions of Capital Receipts equal to $158,306,000; and (ii) thereafter, 25% to the general partner and 75% to the limited partners.
Proceeds from the sale of substantially all of the assets of the Partnership or from a related series of Hotel sales leading to the sale of substantially all of the assets of the Partnership will be distributed to the Partners pro-rata in accordance with their capital account balances.
d. Net profits are generally allocated in the same ratio in which cash available for distribution is distributed.
e. All items of gain, deduction or loss attributable to the contributed equipment will be allocated to the general partner.
f. In general, gain recognized by the Partnership will be allocated, with respect to any year, in the following order of priority: (i) to all Partners whose capital accounts have negative balances until such negative balances are brought to zero; (ii) to all Partners up to the amount necessary to bring their respective capital account balances to an amount equal to their invested capital, as defined; and (iii) thereafter 25% to the general partner and 75% to the limited partners.
Gain arising from the sale or other disposition (or from a related series of sales or dispositions) of substantially all the assets of the Partnership will be allocated (i) to the limited partners in an amount equal to the excess, if any, of (1) the sum of 15% times the weighted average of the limited partners' invested capital each year, over (2) the sum of distributions to the limited partners of Capital Receipts in excess of the limited partners' cumulative capital and distributions to limited partners of cash available for distribution; and (ii) next, to the general partner until it has been allocated an amount equal to 33.33% of the amount allocated to the limited partners under clause (i); and (iii) thereafter, 25% to the general partner and 75% to the limited partners.
g. For financial reporting purposes, profits and losses are generally allocated among the Partners based on their stated interests in cash available for distribution.
In order to allow for the cash distributions made in accordance with the terms of the Settlement Agreement, the partnership agreement was modified so that the unitholders would (1) receive allocations of profit or loss on their units up through the effective date of the Settlement Agreement rather than through the end of the preceding accounting period, (2) would receive a distribution from cash available for distribution for the period ending on the day prior to the date of entry of the judgment order and (3) would not receive any additional cash distributions. Following the settlement, the cash allocations to the general partner and the limited partner will remain consistent with the policies described above.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership records are maintained on the accrual basis of accounting and its fiscal year coincides with the calendar year.
Basis of Presentation
As discussed in Note 1, on November 28, 2000 the Joint Venture acquired all of the outstanding limited partner and general partner interests in the Partnership. The accompanying consolidated financial statements do not reflect the debt incurred by the Joint Venture to consummate the acquisition described above since the Partnership has not assumed the obligation for such debt and the proceeds from such debt were not used to repay existing Partnership obligations. To provide a consistent presentation, the Partnership also does not reflect the Joint Venture's basis in the assets and liabilities of the Partnership in these consolidated financial statements.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Working Capital
Pursuant to the terms of the management agreement, the Partnership is required to provide the Manager with working capital to meet the operating needs of the Hotels. The Manager converts cash advanced by the Partnership into other forms of working capital consisting primarily of operating cash, inventories, and trade receivables and payables which are maintained and controlled by the Manager. Upon termination of the management agreement, the Manager is required to convert working capital into cash and return it to the Partnership. As a result of these conditions, the individual components of working capital controlled by the Manager are not reflected in the accompanying consolidated balance sheets but rather are included in Due from Courtyard Management Corporation.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
Buildings and improvements 40 years Leasehold improvements 40 years Furniture and equipment 4-10 years
Certain property and equipment is pledged to secure the Certificates/Mortgage Loan (see Note 5).
The Partnership assesses impairment of its real estate properties based on whether estimated undiscounted future cash flows from such properties will be less than their net book value. If a property is impaired, its basis is adjusted to fair market value. There was no such adjustment required at December 31, 2001 or 2000.
Deferred Financing Costs
From 1995 to 1997, the Partnership paid a total of $18,858,000 in financing costs related to the Senior Notes, as defined in Note 7, and the Certificates. Financing costs are amortized using the straight-line method, which approximates the effective interest rate method, over the remaining life of the respective mortgage debt. At December 31, 2001 and 2000, accumulated amortization of financing costs totaled $9,311,000 and $7,739,000, respectively.
Ground Rent
The land leases include scheduled increases in minimum rents per property. These scheduled rent increases, which are included in minimum lease payments, are being recognized by the Partnership on a straight-line basis over the lease terms of approximately 80 years. The reduction in ground rent expense and Due to Marriott International, Inc. and affiliates to reflect minimum lease payments on a straight-line basis for 2001, 2000 and 1999 totaled $119,000 per year.
Income Taxes
Provision for Federal taxes has not been made in the accompanying consolidated financial statements since the Partnership does not pay income taxes, but rather, allocates its profits and losses to the individual Partners. Significant differences exist between the net income for financial reporting purposes and the net income reported in the Partnership's tax return. These differences are due primarily to the use for 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. As a result of these differences, the excess of the net Partnership liabilities reported in the accompanying consolidated financial statements over the net Partnership liabilities for tax purposes was approximately $13,667,000 and $658,000, respectively as of December 31, 2001 and 2000.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents.
Restricted Cash
The Partnership was required to establish certain reserves pursuant to the terms of the Senior Notes and the Certificates/Mortgage Debt as described in Note 5. The balances in those reserves as of December 31 are as follows (in thousands):
2001 2000 ------- ------- Debt service reserve ........................... $ 6,857 $ 6,985 Real estate tax and insurance reserve .......... 6,632 6,310 Deposit reserve ................................ 4,028 14 Working capital reserve ........................ 5,018 5,106 ------- ------- $22,535 $18,415 ======= =======
Reclassifications
Certain reclassifications were made to the prior year financial statements to conform to the 2001 presentation.
Application of New Accounting Standards
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets SFAS No. 121" to determine when a long-lived asset should be classified as held for sale, among other things. Those criteria specify that the asset must be available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such assets, and the sale of the asset must be probable, and its transfer expected to qualify for recognition as a completed sale, within one year. This Statement is effective for fiscal years beginning after December 15, 2001. The Partnership does not believe implementation of the standard will have a material effect on the Partnership.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in thousands):
2001 2000 --------- --------- Land ................................... $ 25,541 $ 25,541 Leasehold improvements ................. 311,190 307,741 Building and improvements .............. 255,971 256,885 Furniture and equipment ................ 130,766 127,275 Construction in progress ............... 1,631 -- --------- --------- 725,099 717,442 Less accumulated depreciation .......... (306,214) (278,344) --------- --------- $ 418,885 $ 439,098 ========= =========
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair values of financial instruments not included in this table are estimated to be equal to their carrying amounts (in thousands):
The estimated fair values of debt obligations are based on the quoted market prices at December 31, 2001 and 2000, respectively. Management fees due to the Manager are valued based on the expected future payments from operating cash flow discounted at estimated risk adjusted rates.
NOTE 5. DEBT
On January 24, 1996, the Partnership completed a refinancing of the Partnership's existing debt through the private placements of $127.4 million of senior secured notes (the "Senior Notes") and $410.2 million of multi-class commercial mortgage pass-through certificates (the "Certificates" or "Mortgage Loan").
Senior Notes
The Senior Notes of $127.4 million were issued by the Partnership, bear interest at 10 3/4%, require semi-annual payments of interest and require no payments of principal until maturity on February 1, 2008. The Senior Notes are secured by a first priority pledge by the Partnership of (i) its 99% partnership interest (consisting of a 98% limited partner interest and a 1% general partner interest) in Associates and (ii) its 100% equity interest in the managing general partner.
The terms of the Senior Notes include requirements of the Partnership to establish and fund a debt service reserve account in an amount equal to at least one six-month interest payment on the Senior Notes ($6,848,000) which is included as restricted cash on the accompanying consolidated balance sheets and to maintain certain levels of excess cash flow, as defined. In the event the Partnership fails to maintain the required level of excess cash flow, the Partnership will be required to (i) suspend distributions to its Partners and other restricted payments, as defined, (ii) to fund a separate supplemental debt service reserve account (the "Supplemental Debt Service Reserve") in an amount up to two six-month interest payments on the Senior Notes and (iii) if such failure were to continue, to offer to purchase a portion of the Senior Notes at par.
The Senior Notes may be redeemed, at the option of the Partnership, at a premium declining to par in 2004. The premium is 5.375% for 2001, 3.583% for 2002 and 1.792% for 2003. The Senior Notes are non-recourse to the Partnership and its partners.
In connection with Host Marriott Corporation's conversion to a REIT on January 1, 1999, a change of control occurred when Host Marriott Corporation ceased to own, directly or indirectly, all of the outstanding equity interest of the general partner of the Partnership. Although such a change of control has occurred, Host Marriott Corporation continued to own, indirectly, a substantial majority of the economic interest in the general partner of the Partnership, through Host Marriott, L.P. A change of control occurred again in 2000 in conjunction with the Settlement Agreement and subsequent purchase by the Joint Venture of all the partnership units.
The changes in control described above resulted in a "Change in Control" under the indenture governing the Senior Notes. As a result, in accordance with the terms of the indenture, a tender offer commenced for the Senior Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon. The first tender offer expired on February 12, 1999 with no Senior Notes tendered. The second tender offer was completed on January 26, 2001 and approximately $11.6 million Senior Notes were purchased, representing approximately 9% of the outstanding notes. The notes, which were purchased by the Joint Venture, were resold on March 27, 2001.
Certificates
The Certificates were issued by CBM Funding for an initial principal amount of $410.2 million. Proceeds from the sale of the Certificates were utilized by CBM Funding to provide a Mortgage Loan to Associates. The Certificates/Mortgage Loan requires monthly payments of principal and interest based on a 17-year amortization schedule. The Mortgage Loan matures on January 28, 2008. However, the maturity date of the Certificates/Mortgage Loan may be extended until January 28, 2013 with the consent of 662/3% of the holders of the outstanding Certificates affected thereby. The Certificates were issued in the following classes and pass-through rates of interest.
Initial Certificate Pass-Through Class Balance Rate - ------------------- -------------------- ------------------ Class A-1 $ 45,500,000 7.550% Class A-2 $ 50,000,000 6.880% Class A-3P & I $ 129,500,000 7.080% Class A-3IO Not Applicable 0.933% Class B $ 75,000,000 7.480% Class C $ 100,000,000 7.860% Class D $ 10,200,000 8.645%
The Class A-3IO Certificates require payments of interest only based on a notional balance equal to the Class A-3P & I Certificate balance.
The balances of the Certificates were $321.2 million and $339.1 million at December 31, 2001 and 2000, respectively. Principal payments of $17.9 million and $16.6 million on the Certificates were made during 2001 and 2000, respectively. The weighted average interest rate on the Certificates was 7.9% for 2001 and 7.8% for 2000.
The Certificates/Mortgage Loan maturities as of December 31, 2001 are as follows (in thousands):
2002............ $ 19,326 2003............ 20,827 2004............ 22,444 2005............ 24,186 2006............ 26,064 Thereafter......... 208,358 ------------- $ 321,205 ==============
The Mortgage Loan is secured primarily by 69 cross-defaulted and cross-collateralized mortgages representing first priority mortgage liens on (i) the fee or leasehold interest in 69 of the Hotels (excluding the Deerfield Hotel), related furniture, fixtures and equipment and the property improvement fund, (ii) the fee interest in the land leased from MII or their affiliates on which 53 Hotels are located, (iii) a pledge of Associates membership interest in and the related right to receive distributions from CBM Associates II ("Associates II") which owns the Deerfield Hotel and (iv) an assignment of the Management Agreement, as defined below. The Mortgage Loan is non-recourse to Associates, the Partnership and its Partners.
Operating profit, as defined, from the Hotels in excess of debt service on the Mortgage Loan is available to be distributed to the Partnership. Amounts distributed to the Partnership are used for the following, in order of priority: (i) for debt service on the Senior Notes, (ii) to fund the Supplemental Debt Service Reserve, if necessary, (iii) to offer to purchase a portion of the Senior Notes at par, if necessary, (iv) for working capital as discussed in Note 7 and (v) for distributions to the Partners of the Partnership. The net assets (all of which are restricted) of Associates was $106.4 million and $107.1 million as of December 31, 2001 and 2000, respectively.
Prepayments of the Mortgage Loan are permitted with the payment of a premium (the "Prepayment Premium"). The Prepayment Premium is equal to the greater of (i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance amount based on a spread of .25% or .55% over the U.S. treasury rate, as defined.
Pursuant to the terms of the Certificate/Mortgage Loan, the Partnership is required to establish with the lender a separate escrow account for payments of insurance premiums and real estate taxes for each mortgaged property if the credit rating of MII is downgraded by Standard and Poor's Rating Services which occurred effective April 1, 1997. The real estate tax and insurance reserve is included in restricted cash and the resulting tax and insurance liability is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. The balance in the real estate tax and insurance reserve as of December 31, 2001 and 2000 was $6.6 million and $6.3 million, respectively.
NOTE 6. LEASES
The land on which 53 of the Hotels are located is leased from affiliates of MII. In addition, eight of the Hotels are located on land leased from third parties. The land leases have remaining terms (including all renewal options) expiring between the years 2024 and 2068. The MII land leases and the third party land leases provide for rent based on specific percentages (from 2% to 15%) of certain revenue categories subject to minimum amounts. The minimum rentals are adjusted at various anniversary dates throughout the lease terms, as defined in the agreements. The Partnership also rents certain equipment for use in the Hotels.
In connection with the mortgage debt refinancing, the Partnership, as lessee, transferred it rights and obligations pursuant to the 53 Hotel ground leases with affiliates of MII to Associates. Additionally, affiliates of MII agreed to defer receipt of their ground lease payments to the extent that the Partnership or Associates has insufficient funds for debt service payments on the Senior Notes and the Mortgage Loan.
Minimum future rental payments during the term of these operating leases as of December 31, 2001 are as follows (in thousands):
Telephone Lease Land Equipment and Other Year Leases Leases - ----------- ----------- ---------------------- 2002 $ 10,054 $ 132 2003 10,348 96 2004 10,381 -- 2005 10,889 -- 2006 11,207 -- Thereafter 1,839,949 -- ----------- ------------- $ 1,892,828 $ 228 =========== =============
Total rent expense on land leases was approximately $13,020,000 for 2001, $13,741,000 for 2000 and $13,249,000 for 1999.
NOTE 7. MANAGEMENT AGREEMENT
To facilitate the refinancing, effective December 30, 1995, the original management agreement was restated into two separate management agreements. Associates entered into a management agreement with the Manager for the 69 Hotels which Associates directly owns and Associates II entered into a management agreement for the Deerfield Hotel which Associates II owns, collectively, (the "Management Agreement").
Term
The Management Agreement has an initial term expiring in 2013. The Manager may renew the term, as to one or more of the Hotels, at its option, for up to three successive terms of 10-years each and one final term of five years. The Partnership may terminate the Management Agreement if, during any three consecutive years after 1992, specified minimum operating results are not achieved. However, the Manager may prevent termination by paying to the Partnership the amount by which the minimum operating results were not achieved. Upon the sale of a hotel, the Management Agreement may be terminated with respect to that hotel with payment of a termination fee. Prior to December 31, 2007, a maximum of 20 hotels may be sold free and clear of the Management Agreement with payment of the termination fee. The termination fee is calculated by the Manager as the net present value of reasonably anticipated future incentive management fees.
Management Fees
The Management Agreement provides for annual payments of (i) the base management fee equal to 3.5% of gross revenues from the Hotels, (ii) the Courtyard management fee equal to 2.5% of gross revenues from the Hotels, and (iii) the incentive management fee equal to 15% of operating profit, as defined (20% of operating profit after the Partners have received refinancing proceeds equal to 50% of the excess of (a) $154,736,842 over (b) cumulative distributions of adjusted sale proceeds).
Deferral Provisions
One percent of the Courtyard management fee is deferred through maturity of the Senior Notes and the Mortgage Loan to the extent that the Partnership or Associates has insufficient funds for debt service payments on the Senior Notes and the Mortgage Loan.
To the extent any Courtyard management fee, base management fee or incentive management fee is deferred, it will be added to deferred management fees. Deferred management fees accrue without interest, and will be payable out of 50% of available cash flow after payment of certain priorities as discussed below.
The priority return to the Partnership, as defined, is 10% for 1999 and thereafter. Operating profit from the Hotels (which reflects the deduction of the base and Courtyard management fees and MII ground rent) will be used to pay the following, in order of priority: (i) debt service on the Senior Notes and Mortgage Loan, (ii) to repay working capital loans to the Manager, (iii) to repay deferred ground rent to affiliates of MII, (iv) to repay ground lease advances to affiliates of MII, (v) the priority return to the Partnership which was 10% of invested capital for 2001, 2000 and 1999, (vi) eighty percent of the remaining operating profit is applied to the payment of current incentive management fees, (vii) to repay advances to the Partnership, (viii) to repay foreclosure avoidance advances to the Manager and (ix) fifty percent of the remaining operating profit to repay deferred management fees to the Manager and fifty percent of remaining operating profit is paid to the Partnership.
During 2001, no deferred incentive management fees were paid. During 2000, $1,878,000 of deferred incentive management fees were paid. Deferred incentive management fees were $13,553,000 and $1,682,000 as of December 31, 2001 and 2000, respectively. The Partnership did not pay down any deferred base management fees during 2001 but paid down $510,000 during 2000. The Partnership did not pay down any deferred Courtyard management fees during 2001 and 2000. Deferred base management fees totaled $7,394,000 as of December 31, 2001 and 2000 and deferred Courtyard management fees totaled $22,341,000 as of December 31, 2001 and 2000.
Chain Services and Marriott's Rewards Program
The Manager is required to furnish certain chain services which are generally furnished on a central or regional basis to all hotels managed, owned or leased in the Courtyard by Marriott hotel system. In addition, the Hotels participate in MII's Marriott Reward Program ("MRP"). The MRP is a program that provides benefits to frequent travelers who stay at Marriott branded properties. Chain services and MRP costs charged to the partnership under the Management Agreement were approximately $13,470,000 in 2001, $14,470,000 in 2000 and $14,550,000 in 1999.
Working Capital
The Partnership is required to provide the Manager with working capital to meet the operating needs of the Hotels. The refinancing required certain enhancements to the cash management system of the Manager such that additional working capital may be required for the operation of the Hotels. Therefore, on January 24, 1996, the Partnership, Associates and the Manager entered into a working capital maintenance agreement (the "Working Capital Agreement") and advanced $2.5 million to the Manager as additional working capital for the operation of the Hotels. In 1998, this $2.5 million was returned to Associates. Upon termination of the Management Agreement, the working capital will be returned to the Partnership. As of December 31, 2001 and 2000, the working capital balance was $4,202,000.
The working capital reserve is available for payment of hotel operating expenses in the event that there is a further downgrade in the long-term senior unsecured debt of MII to a level below the rating which was effective April 1, 1997. The obligation to fund the amounts required by the Working Capital Agreement is subordinate to debt service on the Senior Notes and the Mortgage Loan.
Property Improvement Fund
The Management Agreement provides for the establishment of a repairs and equipment reserve (property improvement fund) for the Hotels. The funding of this reserve is based on a percentage of gross Hotel revenues. The contribution to the property improvement fund was originally established at 5% for all Hotels. In connection with the purchase of the limited partnership units by the Joint Venture, the contribution percentage was increased to 6.5% as of October 24, 2000.
NOTE 8. ENVIRONMENTAL CONTINGENCY
Based upon a study completed in December 1995, the Partnership has become aware of environmental contamination at one of its fee-owned properties, the Deerfield Hotel, caused by the previous use of the site as a landfill. The property represents less than 2% of the Partnership's total assets and revenues as of December 31, 2001 and for the year ended, respectively. The Partnership is unable to determine the need for remediation, its potential responsibility, if any, for remediation and the extent of the Partnership's possible liability for any remediation costs. The Partnership has obtained environmental insurance. There can be no assurance that the Partnership will not have liability with respect to remediation of contamination at that site. The Partnership does not believe that any of the environmental matters are likely to have a material adverse effect on the business and operations of the Partnership.
NOTE 9. LITIGATION
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 of results of operations of the Partnership.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF COURTYARD II ASSOCIATES, L.P. AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of Courtyard II Associates, L.P. (a Delaware limited partnership) and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in partners' capital and cash flows for the three years ended December 31, 2001. These financial statements are the responsibility of the General Partner's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Courtyard II Associates, L.P. and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the three years ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Vienna, Virginia March 18, 2002
CONSOLIDATED BALANCE SHEETS Courtyard II Associates, L.P. and Subsidiaries December 31, 2001 and 2000 (in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS Courtyard II Associates, L.P. and Subsidiaries For the Years Ended December 31, 2001, 2000 and 1999 (in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL Courtyard II Associates, L.P. and Subsidiaries For the Years Ended December 31, 2001, 2000 and 1999 (in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS Courtyard II Associates, L.P. and Subsidiaries For the Years Ended December 31, 2001, 2000 and 1999 (in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Courtyard II Associates, L.P. and Subsidiaries December 31, 2001 and 2000
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Courtyard II Associates, L.P. and Subsidiaries ("Associates"), a Delaware limited partnership, was formed December 22, 1995. Substantially all of the assets of Associates were contributed to Associates by Courtyard by Marriott II Limited Partnership (the "Partnership") on January 24, 1996, in connection with the Partnership's refinancing (see Note 5). The managing general partner of Associates is Courtyard II Associates Management Corporation (a wholly-owned subsidiary of the Partnership) with a 1% general partner interest. The remaining partner interests are owned by the Partnership with a 1% general partner interest and a 98% limited partner interest.
CBM Funding Corporation ("CBM Funding") a wholly-owned subsidiary of Associates, was formed on December 29, 1995, to make a mortgage loan to Associates in connection with the refinancing (see Note 5). Associates directly owns 69 Courtyard hotels and the land on which certain of the Hotels, as defined below, are located. One hotel located in Deerfield, Illinois (the "Deerfield Hotel"), is owned by CBM Associates II LLC ("Associates II"). Associates hold a 99% membership interest in Associates II and Courtyard II Associates Management Corporation holds the remaining 1% interest in Associates II, which is reflected as minority interest in the financial statements.
The 70 hotel properties (the "Hotels") are located in 29 states in the United States. The Hotels are managed as part of the Courtyard by Marriott hotel system by Courtyard Management Corporation (the "Manager"), a wholly-owned subsidiary of Marriott International, Inc. ("MII").
Partnership Allocations and Distributions
Allocations and distributions for Associates are generally made in accordance with the respective ownership interests as follows: (i) 98% to the limited partner, the Partnership and (ii) 1% to each general partner, the Partnership and Courtyard II Associates Management Corporation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of Associates present the financial position, results of operations and cash flows of Associates as if it were a separate subsidiary of the Partnership for all periods presented. The Partnership's historical basis in the assets and liabilities contributed to Associates have been recorded on Associates at their carryover basis. Intercompany transactions and balances between Associates and its subsidiaries have been eliminated.
Basis of Accounting
The records of Associates are maintained on the accrual basis of accounting and its fiscal year coincides with the calendar year.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Working Capital
Pursuant to the terms of the management agreement, Associates is required to provide the Manager with working capital to meet the operating needs of the Hotels. The Manager converts cash advanced by Associates into other forms of working capital consisting primarily of operating cash, inventories, and trade receivables and payables which are maintained and controlled by the Manager. Upon termination of the management agreement, the Manager is required to convert working capital into cash and return it to Associates. As a result of these conditions, the individual components of working capital controlled by the Manager are not reflected in the accompanying consolidated balance sheet, but rather are included in Due from Courtyard Management Corporation.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
Buildings and improvements 40 years Leasehold improvements 40 years Furniture and equipment 4-10 years
Certain property and equipment is pledged to secure the Certificates/Mortgage Loan (see Note 5).
Associates assesses impairment of its real estate properties based on whether estimated undiscounted future cash flows from such properties on an individual hotel basis will be less than their net book value. If a property is impaired, its basis is adjusted to fair market value. There was no such adjustment required at December 31, 2001 or 2000.
Deferred Financing Costs
Financing costs are amortized using the straight-line method, which approximates the effective interest rate method, over the remaining life of the respective mortgage debt. At December 31, 2001 and 2000, accumulated amortization related to the Certificates, as defined in Note 5, were $6,551,000 and $5,445,000, respectively.
Cash and Cash Equivalents
Associates considers all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents.
Restricted Cash
The Partnership was required to establish certain reserves pursuant to the terms of the Certificates/Mortgage Debt as described in Note 5. The balances in those reserves as of December 31 are as follows (in thousands):
2001 2000 ----------- ----------- Real estate tax and insurance reserve............ $ 6,632 $ 6,310 Deposit reserve.................................. 4,028 14 ----------- ----------- $ 10,660 $ 6,324 =========== ===========
Ground Rent
The land leases include scheduled increases in minimum rents per property. These scheduled rent increases, which are included in minimum lease payments, are being recognized by Associates on a straight-line basis over the lease terms of approximately 80 years. The adjustment included in ground rent expense and Due to Marriott International, Inc. and affiliates to reflect minimum lease payments on a straight-line basis for 2001, 2000 and 1999 totaled $119,000 per year. The related liability is included in Due to MII and affiliates on the accompanying consolidated balance sheets.
Income Taxes
Provision for Federal taxes has not been made in the accompanying consolidated financial statements since Associates does not pay income taxes, but rather, allocates its profits and losses to the individual partners. Significant differences exist between the net income for financial reporting purposes and the net income reported in the Partnership's tax return. These differences are due primarily to the use for income tax purposes of accelerated depreciation methods, shorter depreciable lives for the assets, differences in the timing of recognition of certain fees and straight-line rent adjustments. As a result of these differences, the excess of the net Partnership liabilities reported in the accompanying consolidated financial statements over the tax basis in the net Partnership liabilities was approximately $12,854,000 and $507,000, respectively as of December 31, 2001 and 2000.
Reclassifications
Certain reclassifications were made to the prior year financial statements to conform to the 2001 presentation.
Application of New Accounting Standards
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets SFAS No. 121" to determine when a long-lived asset should be classified as held for sale, among other things. Those criteria specify that the asset must be available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such assets, and the sale of the asset must be probable, and its transfer expected to qualify for recognition as a completed sale, within one year. This Statement is effective for fiscal years beginning after December 15, 2001. The Partnership does not believe implementation of the standard will have a material effect on the Partnership.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in thousands):
2001 2000 --------- --------- Land ................................... $ 25,541 $ 25,541 Leasehold improvements ................. 311,190 307,741 Building and improvements .............. 255,971 256,885 Furniture and equipment ................ 130,766 127,275 Construction in progress ............... 1,631 -- --------- --------- 725,099 717,442 Less accumulated depreciation .......... (306,214) (278,344) --------- --------- $ 418,885 $ 439,098 ========= =========
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair values of financial instruments not included in this table are estimated to be equal to their carrying amounts (in thousands):
The estimated fair value of the mortgage debt is based on the quoted market price at December 31, 2001 and 2000, respectively. Management fees due to the Manager are valued based on the expected future payments from operating cash flow discounted at risk adjusted rates.
NOTE 5. MORTGAGE DEBT
On January 24, 1996, the Partnership and Associates completed two refinancings of the existing debt through the private placements of $127.4 million of Senior Notes and $410.2 million of multiclass commercial mortgage pass-through certificates (the "Certificates"), respectively.
The Certificates were issued by CBM Funding for an initial principal amount of $410.2 million. Proceeds from the sale of the Certificates were utilized by CBM Funding to provide a mortgage loan (the "Mortgage Loan") to Associates. The Certificates/Mortgage Loan require monthly payments of principal and interest based on a 17-year amortization schedule. The Mortgage Loan matures on January 28, 2008. However, the maturity date of the Certificates/Mortgage Loan may be extended until January 28, 2013 with the consent of 662/3% of the holders of the outstanding Certificates affected thereby. The Certificates were issued in the following classes and pass-through rates of interest.
Initial Certificate Pass-Through Class Balance Rate - ------------------ ------------------ ------------------ Class A-1 $ 45,500,000 7.550% Class A-2 $ 50,000,000 6.880% Class A-3P & I $ 129,500,000 7.080% Class A-3IO Not Applicable 0.933% Class B $ 75,000,000 7.480% Class C $ 100,000,000 7.860% Class D $ 10,200,000 8.645%
The Class A-3IO Certificates require payments of interest only based on a notional balance equal to the Class A-3P & I Certificate balance.
The balances of the Certificates were $321.2 million and $339.1 million at December 31, 2001 and 2000, respectively. Principal payments of $17.9 million and $16.6 million of the Certificates were made during 2001 and 2000, respectively. The weighted average interest rate for the Certificates was 7.9% for 2001 and 7.8% for 2000.
The Certificates/Mortgage Loan maturities as of December 31, 2001 are as follows (in thousands):
2002.................. $ 19,326 2003.................. 20,827 2004.................. 22,444 2005.................. 24,186 2006.................. 26,064 Thereafter............... 208,358 -------------- $ 321,205 ==============
The Mortgage Loan is secured primarily by 69 cross-defaulted and cross-collateralized mortgages representing first priority mortgage liens on (i) the fee or leasehold interest in 69 of the Hotels (excluding the Deerfield Hotel), related furniture, fixtures and equipment and the property improvement fund, (ii) the fee interest in the land leased from MII or their affiliates on which 53 Hotels are located, (iii) a pledge of Associates membership interest in and the related right to receive distributions from Associates II which owns the Deerfield Hotel and (iv) an assignment of the Management Agreement, as defined below. The Mortgage Loan is non-recourse to Associates, the Partnership and its partners.
Operating profit from the Hotels in excess of debt service on the Mortgage Loan is available to be distributed to the Partnership and Courtyard II Associates Management Corporation.
Prepayments of the Mortgage Loan are permitted with the payment of a premium (the "Prepayment Premium"). The Prepayment Premium is equal to the greater of (i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance amount based on a spread of .25% or .55% over the U.S. treasury rate, as defined.
Pursuant to the terms of the Certificate/Mortgage Loan, the Partnership is required to establish with the lender a separate escrow account for payments of insurance premiums and real estate taxes for each mortgaged property if the credit rating of MII is downgraded by Standard and Poor's Rating Services which occurred effective April 1, 1997. The real estate tax and insurance reserve is included in restricted cash and the resulting tax and insurance liability is included in accounts payable and accrued liabilities in the accompanying balance sheets. The balance in the real estate tax and insurance reserve as of December 31, 2001 and 2000 was $6.6 million and $6.3 million, respectively.
NOTE 6. LEASES
The land on which 53 of the Hotels are located is leased from affiliates of MII. In addition, eight of the Hotels are located on land leased from third parties. The land leases have remaining terms (including all renewal options) expiring between the years 2024 and 2068. The MII land leases and the third party land leases provide for rent based on specific percentages (from 2% to 15%) of certain revenue categories subject to minimum amounts. The minimum rentals are adjusted at various anniversary dates throughout the lease terms, as defined in the agreements. The Partnership also rents certain equipment for use in the Hotels.
In connection with the refinancing, the Partnership, as lessee, transferred its rights and obligations pursuant to the 53 ground leases with affiliates of MII to Associates. Additionally, affiliates of MII agreed to defer receipt of their ground lease payments to the extent that the Partnership or Associates has insufficient funds for debt service payments on the Senior Notes and the Mortgage Loan.
Minimum future rental payments during the term of these operating leases are as follows (in thousands):
Telephone Lease Land Equipment and Other Year Leases Leases - ----------- ----------- ---------------------- 2002 $ 10,054 $ 132 2003 10,348 96 2004 10,381 -- 2005 10,889 -- 2006 11,207 -- Thereafter 1,839,949 -- ----------- -------------
$ 1,892,828 $ 228 =========== =============
Total rent expense on land leases was approximately $13,020,000 for 2001, $13,741,000 for 2000 and $13,249,000 for 1999.
NOTE 7. MANAGEMENT AGREEMENT
To facilitate the refinancing, effective December 30, 1995, the original management agreement was restated into two separate management agreements. Associates entered into a management agreement with the Manager for the 69 Hotels which Associates directly owns and Associates II entered into a management agreement for the Deerfield Hotel which Associates II owns, collectively, (the "Management Agreement").
Term
The Management Agreement has an initial term expiring in 2013. The Manager may renew the term, as to one or more of the Hotels, at its option, for up to three successive terms of 10-years each and one final term of five years. The Partnership may terminate the Management Agreement if, during any three consecutive years after 1992, specified minimum operating results are not achieved. However, the Manager may prevent termination by paying to the Partnership the amount by which the minimum operating results were not achieved. Upon the sale of a Hotel, the Management Agreement may be terminated with respect to that Hotel with payment of a termination fee. Prior to December 31, 2007, a maximum of 20 Hotels may be sold free and clear of the Management Agreement with payment of the termination fee. The termination fee is calculated by the Manager as the net present value of reasonably anticipated future incentive management fees.
Management Fees
The Management Agreement provides for annual payments of (i) the base management fee equal to 3.5% of gross revenues from the Hotels, (ii) the Courtyard management fee equal to 2.5% of gross revenues from the Hotels, and (iii) the incentive management fee equal to 15% of operating profit, as defined (20% of operating profit after the partners have received refinancing proceeds equal to 50% of the excess of (a) $154,736,842 over (b) cumulative distributions of adjusted sale proceeds (the "First Equity Refinancing")).
Deferral Provisions
Due to the refinancing, beginning in 1996, one percent of the Courtyard management fee is deferred through maturity of the Senior Notes and the Mortgage Loan to the extent that the Partnership or Associates has insufficient funds for debt service payments on the Senior Notes and the Mortgage Loan. Previously, the entire Courtyard management fee was subordinate to debt service.
To the extent any Courtyard management fee, base management fee or incentive management fee is deferred, it will be added to deferred management fees. Deferred management fees accrue without interest, and will be payable out of 50% of available cash flow after payment of certain priorities as discussed below.
The priority return to the Partnership, as defined, is 10% for 1999 and thereafter. Operating profit from the Hotels (which reflects the deduction of the base and Courtyard management fees and MII ground rent) will be used to pay the following, in order of priority: (i) debt service on the Senior Notes and Mortgage Loan, (ii) to repay working capital loans to the Manager, (iii) to repay deferred ground rent to affiliates of MII, (iv) to repay ground lease advances to affiliates of MII, (v) the priority return to the Partnership which was 10% of invested capital for 2001, 2000 and 1999, (vi) eighty percent of the remaining operating profit is applied to the payment of current incentive management fees, (vii) to repay advances to the Partnership, (viii) to repay foreclosure avoidance advances to the Manager and (ix) fifty percent of the remaining operating profit to repay deferred management fees to the Manager and fifty percent of remaining operating profit is paid to the Partnership.
During 2001, no deferred incentive management fees were paid. During 2000, $1,878,000 of deferred incentive management fees were paid. Deferred incentive management fees were $13,553,000 and $1,682,000 as of December 31, 2001 and 2000, respectively. The Partnership did not pay down any deferred base management fees during 2001 but paid down $510,000 during 2000. The Partnership did not pay down any deferred Courtyard management fees during 2001 and 2000. Deferred base management fees totaled $7,394,000 as of December 31, 2001 and 2000 and deferred Courtyard management fees totaled $22,341,000 as of December 31, 2001 and 2000.
Chain Services and Marriott's Reward Program
The Manager is required to furnish certain chain services which are generally furnished on a central or regional basis to all hotels managed, owned or leased in the Courtyard by Marriott hotel system. In addition, the Hotels participate in MII's Marriott Reward Program ("MRP"). The costs of this program are charged to all hotels in the full-service, Residence Inn by Marriott, Courtyard by Marriott and Fairfield Inn by Marriott systems based upon the MRP revenues at each Hotel. Chain services and MRP costs charged to the partnership under the Management Agreement were $13,470,000 in 2001, $14,470,000 in 2000 and $14,550,000 in 1999.
Working Capital
Associates is required to provide the Manager with working capital to meet the operating needs of the Hotels. The refinancing required certain enhancements to the cash management system of the Manager such that additional working capital may be required for the operation of the Hotels. Therefore, on January 24, 1996, the partnership, Associates and the Manager entered into a working capital maintenance agreement (the "Working Capital Agreement") and advanced $2.5 million to the Manager as additional working capital for the operation of the Hotels. In 1998, this $2.5 million was returned to Associates. Upon termination of the Management Agreement, the working capital will be returned to Associates. As of December 31, 2001 and 2000, the working capital balance was $4,202,000.
The working capital reserve is available for payment of hotel operating expenses in the event that there is a further downgrade in the long-term senior unsecured debt of MII to a level below the rating which was effective April 1, 1997. The obligation to fund the amounts required by the Working Capital Agreement is subordinate to debt service on the Senior Notes and the Mortgage Loan.
Property Improvement Fund
The Management Agreement provides for the establishment of a repairs and equipment reserve (property improvement fund) for the Hotels. The funding of this reserve is based on a percentage of gross Hotel revenues. The contribution to the property improvement fund was originally established at 5% for all Hotels. In connection with the purchase of the limited partnership units by CBM Joint Venture LLC, the contribution percentage was increased to 6.5% as of October 24, 2000.
NOTE 8. ENVIRONMENTAL CONTINGENCY
Based upon a study completed in December 1995, Associates has become aware of environmental contamination at one of the fee-owned properties owned by Associates II, the Deerfield Hotel, caused by the previous use of the site as a landfill and not caused by Associates. The property represents less than 2% of Associates' total assets and revenues as of December 31, 2001 and for the year ended, respectively. Associates is unable to determine the need for remediation, its potential responsibility, if any, for remediation and the extent of Associates' possible liability for any remediation costs. Associates has obtained environmental insurance. There can be no assurance that Associates will not have liability with respect to remediation of contamination at that site. Associates does not believe that any of the environmental matters are likely to have a material adverse effect on its business and operations.
NOTE 9. LITIGATION
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 of results of operations of the Partnership.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Partnership has no directors or officers. The business and policy making functions of the Partnership are carried out through the managers and executive officers of CBM Two LLC, the General Partner, who are listed below:
Business Experience
Robert E. Parsons, Jr. joined Host Marriott's Corporate Financial Planning staff in 1981 and was made Assistant Treasurer in 1988. In 1993, Mr. Parsons was elected Senior Vice President and Treasurer of Host Marriott, and in 1995, he was elected Executive Vice President and Chief Financial Officer of Host Marriott. He is also an Executive Vice President and Chief Financial Officer of Host LP and serves as a director, manager and officer of numerous Host Marriott subsidiaries.
W. Edward Walter joined Host Marriott in 1996 as Senior Vice President for Acquisitions, and was elected Treasurer in 1998, Executive Vice President in May 2000, and Chief Operating Officer in 2001. He also serves as a director, manager and officer of numerous Host Marriott subsidiaries. Prior to joining Host Marriott, Mr. Walter was a partner at Trammell Crow Residential Company and President of Bailey Capital Corporation, a real estate firm focusing on tax exempt real estate investments.
ITEM 11.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
As noted in Item 10 above, the Partnership has no directors or officers nor does it have any employees. Under the Partnership Agreement, however, the General Partner has the exclusive right to conduct the business and affairs of the Partnership subject only to the Management Agreement described in Items 1 and 13. The General Partner is required to devote to the Partnership such time as may be necessary for the proper performance of its duties, but the officers and managers of the General Partner are not required to devote their full time to the performance of such duties. No officer or manager of the General Partner devotes a significant percentage of time to Partnership matters. To the extent that any officer or manager does devote time to the Partnership, the General Partner is entitled to reimbursement for the cost of providing such services. For the fiscal years ending December 31, 2001, 2000 and 1999, the Partnership
reimbursed CBM Two or CBM Two LLC in the amount of $102,000, $90,000 and $179,000, respectively, for the cost of providing all administrative and other services as general partner. For information regarding all payments made by the Partnership to Host Marriott and subsidiaries, see Item 13, "Certain Relationships and Related Transactions."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 2001, CBM Joint Venture LLC, which is a joint venture among Host Marriott, L.P., Rockledge, and Marriott International, Inc. through their wholly owned subsidiaries owned 100% of the 1,470 limited partnership Units. The Joint Venture acquired the Units as part of the Settlement Agreement entered into to resolve litigation filed by limited partners against Host Marriott, MII and several of their subsidiaries. The General Partner, a wholly owned subsidiary of the Joint Venture described above, owns a total of 21.5 Units representing a 1.39% limited partnership interest in the Partnership.
The executive officers and managers of the General Partner, Host Marriott, MII and their respective affiliates do not own any units as of December 31, 2001.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the description of the management agreement in Note 7 to the financial statements set forth in Part I.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of This Report
(1) Financial Statements
All financial statements of the registrant as set forth under Item 8 of this Report on Form 10-K.
(2) Financial Statement Schedules
The following financial information is filed herewith on the pages indicated.
Schedule I - Condensed Consolidated Financial Information of Registrant
Schedule III - Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable or the required information is included in the financial statements or notes thereto.
(3) Exhibits
Exhibit Number Description - -------------- --------------------------------------------------------
*3.1 Amended and Restated Partnership Agreement of Limited Partnership of Courtyard by Marriott II Limited Partnership (the "Partnership") dated October 30, 1987
*3.2 Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of the Partnership
*3.3 Certificate of Limited Partnership of the Partnership
*3.4 Amended and Restated Certificate of Incorporation of the Courtyard II Finance Company ("Finance")
*3.5 By-laws of Finance
3.6 Agreement of Limited Partnership of Courtyard II Associates, L.P. ("Associates") (Incorporated by reference herein to Exhibit 3.1 to Associates Form S-4 filed with the Commission on March 14, 1996.)
3.7 Certificate of Limited Partnership of Associates (Incorporated by reference herein to Exhibit 3.2 to Associates Form S-4 filed with the Commission on March 14, 1996.)
3.9 By-laws of Funding (Incorporated by reference herein to Exhibit 3.4 to Associates Form S-4 filed with the Commission on March 14, 1996.)
3.10 Second Amendment to the Amended and Restated Agreement of Limited Partnership of the Partnership dated December 28, 1998 (Filed with Partnership's Form 10-K for the year ended December 31, 2000.)
*4.1 Indenture dated as of January 24, 1996 among the Partnership and Finance and IBJ Schroder Bank & Trust Company (the "Indenture")
*4.3 Exchange and Registration Rights Agreement dated as of January 24, 1996 among the Partnership and Finance and Lehman Brothers Inc.
*4.4 Intercreditor Agreement dated as of January 24, 1996 among IBJ Schroder Bank & Trust Company, Bankers Trust Company, Marine Midland Bank (the "CMBS Trustee"), the Partnership and Finance, Associates, Courtyard II Associates Management Corporation (the "Managing General Partner") and Funding
*4.5 Trust and Servicing Agreement dated as of January 1, 1996 among Funding, Bankers Trust Company and the CMBS Trustee
*4.6 Exchange and Registration Rights Agreement dated as of January 24, 1996 among the Partnership, Associates, Funding and Lehman Brothers Inc.
*10.1 Amended and Restated Management Agreement dated as of December 30, 1995, between the Partnership and Courtyard Management Corporation (the "Manager")
*10.2 Management Agreement dated as of December 30, 1995 between the Partnership and the Manager
**10.3 Assignment of Lease and Warranty and Assumption of Obligations between Marriott Corporation and the Partnership dated October 30, 1987 for the Tampa, FL property. Marriott Hotel Land Leases between Holtsinger, Inc. and Bert Chase, Trustee dated June 13, 1968.
**10.4 Assignment of Lease and Warranty and Assumption of Obligations between Marriott Corporation and the Partnership dated August 12, 1988 for the Atlanta-Roswell, GA property. Marriott Hotel Land Lease between Marriott Corporation and Roswell Landing Associates dated June 10, 1986.
**10.5 Assignment of Lease and Warranty and Assumption of Obligations between Marriott Corporation and the Partnership dated July 15, 1988 for the Norwalk, CT property. Marriott Hotel Land Lease between Marriott Corporation and Mary E. Fabrizio dated January 6, 1986.
**10.6 Assignment of Lease and Warranty and Assumption of Obligations between Marriott Corporation and the Partnership dated February 24, 1988 for the Fresno, CA property. Marriott Hotel Land Lease between Marriott Corporation and Richard Erganian, Miche Erganian, Aram Erganian and Aznive Erganian dated June 6, 1984.
**10.7 Assignment of Lease and Warranty and Assumption of Obligations between Marriott Corporation and the Partnership dated August 12, 1988 for the Cupertino, CA property. Marriott Hotel Land Lease between Marriott Corporation and Vallco Park, Ltd. dated March 31, 1987.
**10.8 Marriott Hotel Land Lease between Marriott Corporation and Pizzagalli Investment Company dated September 22, 1986.
**10.9 Assignment of Lease and Warranty and Assumption of Obligations between Marriott Corporation and the Partnership dated May 19, 1989 for the Charlotte South Park, NC property. Marriott Hotel Land Lease between Marriott Corporation and Queens Properties, Inc. dated January 19, 1987.
**10.10 Assignment of Lease and Warranty and Assumption of Obligations between Marriott Corporation and the Partnership dated January 27, 1989 for the Philadelphia/Devon, PA property. Marriott Hotel Land Lease between Marriott Corporation and Three Philadelphia/Devon Square Associates dated July 15, 1986.
**10.11 Associates received an assignment from the Partnership, which had received an assignment from Host Marriott, of 15 ground leases for land that Host Marriott had previously leased from various affiliates (the "Original Landlords"). The ground leases are identical in all material respects except as to their assignment dates to the Partnership and the rents due (Exhibit A of each ground lease). The schedule below sets forth the terms of each ground lease not filed which differ from the copy of the example ground lease (Hoover, AL) which was previously filed with the Commission. In addition, a copy of Exhibit A was filed for each excluded ground lease.
Property State Assignment Date - -------- ----- --------------- Foster City CA 10/30/87 Marin/Larkspur Landing CA 10/30/87 Denver/Southeast CO 10/30/87 Atlanta/Perimeter Center GA 02/24/88 Indianapolis/Castleton IN 10/30/87 Lexington/North KY 10/07/88 Annapolis MD 05/19/89 Minneapolis Airport MN 10/30/87 St. Louis/Creve Couer MO 10/30/87 Rye NY 03/29/88 Greenville SC 03/29/88 Memphis Airport TN 10/30/87 Nashville Airport TN 02/24/88 Dallas/Stemmon TX 10/30/87 San Antonio/Downtown TX 03/23/90
**10.12 Associates received an assignment from the Partnership of 38 ground leases which the Partnership had entered into with Marriott International, Inc., ("MII"). The 38 ground leases are identical in all material respects except as to their effective lease dates and the rents due (Exhibit A of each ground lease). The schedule below sets forth the terms of each ground lease not filed which differ from the copy of the example ground lease (Huntsville, AL) which was previously filed with the Commission. In addition, a copy of Exhibit A was filed for each excluded ground lease.
Property State Effective Lease Date - -------- ----- -------------------- Birmingham/Hoover AL 10/30/87 Huntsville AL 10/30/87 Phoenix/Mesa AZ 04/22/88 Phoenix/Metrocenter AZ 10/01/87 Tucson Airport AZ 12/30/88 Little Rock AR 09/09/88 Bakersfield CA 05/30/88 Hacienda Heights CA 03/30/90 Palm Springs CA 12/20/88 Torrance CA 12/30/88 Boulder CO 11/04/88 Wallingford CT 04/24/90 Ft. Myers FL 11/04/88 Ft. Lauderdale/Plantation FL 12/02/88 St. Petersburg FL 01/26/90 West Palm Beach FL 02/24/89 Atlanta/Gwinnett Mall GA 10/30/87 Chicago/Glenview IL 10/06/89 Chicago/Highland Park IL 07/15/88 Chicago/Waukegan IL 08/12/88 Chicago/Wood Dale Park IL 09/09/88 Kansas City/Overland Park KS 04/21/89 Silver Spring MD 10/07/88 Boston/Andover MA 02/24/89
Detroit Airport MI 02/24/88 Detroit/Livonia MI 03/29/88 St. Louis/Westport MO 10/07/88 Lincroft/Red Bank NJ 07/15/88 Raleigh/Cary NC 08/12/88 Dayton Mall OH 10/30/87 Toledo OH 07/15/88 Oklahoma City Airport OK 10/07/88 Portland/Beaverton OR 05/19/89 Columbia SC 04/21/89 Dallas/Northeast TX 04/22/88 Charlottesville VA 04/21/89 Manassas VA 05/19/89 Seattle/Southcenter WA 05/19/89
***10.13 Contribution Agreement dated as of January 24, 1996 among the Partnership, the Managing General Partner and Associates
***10.14 Bill of Sale and Assignment and Assumption Agreement dated as of January 24, 1996 by the Partnership to Associates
*10.15 Assignment and Assumption of Management Agreement dated as of January 24, 1996 by the Partnership to Associates
***10.16 Contribution Agreement dated as of January 24, 1996 among the Partnership, the Managing General Partner and Courtyard II Associates LLC ("Deerfield LLC")
***10.17 Bill of Sale and Assignment and Assumption Agreement dated as of January 24, 1996 by the Partnership to Deerfield LLC
*10.18 Deed to the Courtyard by Marriott Hotel in Chicago/Deerfield, Illinois dated as of January 24, 1996 by the Partnership to Deerfield LLC
*10.19 Assignment and Assumption of Management Agreement dated as of January 24, 1996 by the Partnership to Deerfield LLC
*10.20 Loan Agreement dated as of January 24, 1996 by and between Associates and Funding
*10.21 Mortgage Note, dated as of January 24, 1996, in the principal amount of $410,200,000 by Associates to Funding
*10.22 Security Agreement dated as of January 24, 1996 by and between Associates and Funding
*10.23 Pledge Agreement dated as of January 24, 1996 by and between Associates and Funding
*10.24 Collateral Assignment of Management Agreement and Subordination Agreement dated as of January 24, 1996, by and among Associates, the Manager and Funding
*10.25 Amendment of Ground Leases dated as of January 24, 1996 by and among Associates, Marriott International, Inc. and Essex House Condominium Corporation ("Essex")
*10.26 Environmental Indemnity Agreement dated as of January 24, 1996 by Associates and the Managing General Partner for the benefit of Funding
*10.27 Associates, as mortgagor, and Funding, as mortgagee, entered into 53 fee and leasehold mortgages, each dated as of January 24, 1996. The 53 mortgages are identical in all material respects except as to the underlying property to which they relate and, in certain instances, additional parties thereto. The schedule below sets forth the terms of each mortgage not filed which differ from the copy of the example mortgage (Birmingham/Hoover, AL) which is filed herewith.
Property State Additional Party - -------- ----- ---------------- Birmingham/Hoover AL Essex Huntsville AL MII Phoenix/Mesa AZ MII Phoenix/Metrocenter AZ MII Tucson Airport AZ MII Little Rock AR MII Bakersfield CA MII Foster City CA MII Hacienda Heights CA MII Marin/Larkspur Landing CA MII Palm Springs CA MII Torrance CA MII Boulder CO MII Denver/Southeast CO Essex Wallingford CT MII Ft. Myers FL MII Ft. Lauderdale/Plantation FL MII St. Petersburg FL MII West Palm Beach FL MII Atlanta/Gwinnett Mall GA MII Atlanta/Perimeter Center GA Essex Chicago/Glenview IL MII Chicago/Highland Park IL MII Chicago/Waukegan IL MII Chicago/Wood Dale IL MII Indianapolis/Castleton IN Essex Kansas City/Overland Park KS MII Lexington/North KY Essex Annapolis MD Essex and the Partnership Silver Spring MD MII and the Partnership Boston/Andover MA MII Detroit Airport MI MII Detroit/Livonia MI MII Minneapolis Airport MN Essex St. Louis/Creve Couer MN Essex St. Louis/Westport MO MII Lincroft/Red Bank NJ MII Rye NY Essex Raleigh/Cary NC MII Dayton Mall OH MII Toledo OH MII Oklahoma City Airport OK MII Portland/Beaverton OR MII Columbia SC MII Greenville SC Essex Memphis Airport TN Essex Nashville Airport TN Essex Dallas/Northeast TX MII Dallas/Stemmons TX Essex San Antonio/Downtown TX Essex
Charlottesville VA MII Manassas VA MII Seattle/Southcenter WA MII
*10.28 Associates, as mortgagor, and Funding, as mortgagee, entered into 16 fee leasehold mortgages, each dated as of January 24, 1996. The 16 mortgages are identical in all material respects except as to the underlying property to which they relate. The schedule below sets forth the terms of each mortgage not filed which differ from the copy of the example mortgage (Birmingham/Homewood, AL) which is filed herewith.
Property State - -------- ----- Birmingham/Homewood AL Cupertino CA Fresno CA Denver Airport CO Norwalk CT Tampa/Westshore FL Atlanta Airport South GA Atlanta/Roswell GA Arlington Heights South IL Chicago/Lincolnshire IL Chicago/Oakbrook Terrace IL Rockford IL Poughkeepsie NY Charlotte/South Park NC Philadelphia/Devon PA Dallas/Plano TX
*10.29 Assignment of Loan Documents dated as of January 24, 1996 by Funding to the CMBS Trustee.
10.30 Assignment and Assumption of Management Agreement dated as of January 24, 1996 by the Partnership to Associates with attached Management Agreement (Incorporated by reference herein to Exhibit 10.1 to Associates Form S-4 filed with the Commission on March 14, 1996.)
10.31 Working Capital Maintenance Agreement dated as of January 24, 1996, by and among the Partnership, Associates, and the Manager. (Incorporated by reference to the exhibit previously filed as exhibit number 10.23 in Amendment No. 1 to Form S-4 Exchange Offer filed by CBM Funding and Associates with the Commission in May 10, 1996.)
12.1 Ratio of Earnings of Fixed Changes
*21.1 Subsidiaries of the Partnership
99 Confirmation on Receipt of Assurances from Arthur Andersen LLP - ----------
* Incorporated herein by reference to the same numbered exhibit in the Partnership's and Finance's Registration Statement on Form S-4 for 10 3/4% Series B Senior Secured Notes due 2008, previously filed with the Commission on March 7, 1996.
** Incorporated by reference to the same numbered exhibit in the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.
*** Incorporated by reference to the same numbered exhibit to Amendment No. 1 to the Form S-4 Registration Statement previously filed with the Commission by the Partnership on April 25, 1996.
(b) Reports on 8-K
None.
SCHEDULE I Page 1 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
December 31, 2001 and 2000
(in thousands)
The Notes to Consolidated Financial Statements of Courtyard by Marriott II Limited Partnership are an integral part of these statements.
SCHEDULE I Page 2 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2001, 2000 and 1999
(in thousands)
The Notes to Consolidated Financial Statements of Courtyard by Marriott II Limited Partnership are an integral part of these statements.
SCHEDULE I Page 3 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
(in thousands)
The Notes to Consolidated Financial Statements of Courtyard by Marriott II Limited Partnership are an integral part of these statements.
SCHEDULE I Page 4 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
A) The accompanying condensed financial information of Courtyard by Marriott II Limited Partnership (the "Partnership") presents the financial position, results of operations and cash flows of the Partnership with the investment in, and operations of, consolidated subsidiaries with restricted net assets accounted for using the equity method of accounting.
On January 24, 1996, the Partnership completed a refinancing of the Partnership's existing debt through the private placement of $127.4 million of senior secured notes (the "Senior Notes") and $410.2 million of multi-class commercial mortgage pass-through certificates (the "Certificates").
In connection with the refinancing, the limited partners approved certain amendments to the partnership agreement and the management agreement. The partnership agreement amendment, among other things, allowed for the formation of certain subsidiaries of the Partnership, including Courtyard II Finance Company ("Finance"), a wholly-owned subsidiary of the Partnership, who along with the Partnership is the co-issuer of the Senior Notes.
Additionally, the Partnership formed a wholly-owned subsidiary, Courtyard II Associates Management Corporation ("Managing General Partner"). Managing General Partner was formed to be the managing general partner with a 1% general partner interest in Courtyard II Associates, L.P. ("Associates"), a Delaware limited partnership. The Partnership owns a 1% general partner interest and a 98% limited partner interest in Associates. On January 24, 1996, the Partnership contributed 69 Hotels and their related assets to Associates. Formation of Associates resulted in the Partnership's primary assets being its direct and indirect interest in Associates. Substantially all of Associates' net equity is restricted to distributions, loans or advances to the Partnership.
Associates holds a 99% membership interest in CBM Associates II LLC ("Associates II") and Managing General Partner holds the remaining 1% membership interest. On January 24, 1996, the Partnership contributed the Hotel located in Deerfield, IL (the "Deerfield Hotel") and its related assets to Associates and the Managing General Partner simultaneously contributed the Hotel and its related assets to Associates II.
CBM Funding Corporation ("CBM Funding"), a wholly-owned subsidiary of Associates, was also formed to make a mortgage loan (the "Mortgage Loan") to Associates from the proceeds of the sale of the Certificates.
Associates is a restricted subsidiary of the Partnership and is accounted for under the equity method of accounting on the accompanying condensed financial information of the Partnership.
B) As discussed above, on January 24, 1996, the Senior Notes of $127.4 million were issued by the Partnership and Finance. The Senior Notes bear interest at 10 3/4%, require semi-annual payments of interest and require no payments of principal until maturity on February 1, 2008. The Senior Notes are secured by a first priority pledge by the Partnership of (i) its 99% partnership interest (consisting of a 98% limited partner interest and a 1% general partner interest) in Associates and (ii) its 100% equity interest in the Managing General Partner. Finance has nominal assets, does not conduct any operations and does not provide any additional security for the Senior Notes.
In connection with Host Marriott Corporation's conversion to a REIT, a change of control occurred when Host Marriott Corporation ceased to own, directly or indirectly, all of the outstanding equity interest of the sole general partner of the Partnership. Although such a change of control has occurred, Host Marriott Corporation continues to own, indirectly, a substantial majority of the economic interest in CBM Two LLC, the current General Partner of the Partnership and, through Host Marriot, L.P., has certain voting rights with respect to CBM Two LLC. A change of control occurred again in 2000 in conjunction with the settlement agreement and subsequent purchase by CBM Joint Venture LLC of all the partnership units.
The changes in control described above resulted in a "Change in Control" under the indenture governing the Senior Notes. As a result, in accordance with the terms of the indenture, Host Marriott, L.P. commenced a tender offer for the Senior Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon. The first tender offer expired on February 12, 1999 with no Senior Notes tendered. The second tender offer was completed on January 26, 2001 and approximately $11.6 million Senior Notes were purchased, representing approximately 9% of the outstanding notes. The notes, which were purchased by the Joint Venture, were resold on March 27, 2001.
C) The accompanying statement of operations reflect the equity in earnings of restricted subsidiaries after elimination of interest expense (see Note B).
SCHEDULE III
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2001 (in thousands)
Date of Completion of Date Depreciation Construction Acquired Life ------------ -------- ----
70 Courtyard by 1987-1990 1987-1990 40 years Marriott Hotels
(c) The aggregate cost of land, buildings and improvements for Federal income tax purposes is approximately $577.4 million at December 31, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on this 18th day of March 2002.
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
By: CBM TWO LLC General Partner
/s/ Mathew J. Whelan ------------------------------------ Mathew J. Whelan Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and the capacities and on the date indicated above.
Signature Title - --------- ----- (CBM TWO LLC)
/s/ Robert E. Parsons, Jr. President and Manager - ------------------------------ Robert E. Parsons, Jr.
/s/ W. Edward Walter Executive Vice President - ------------------------------ W. Edward Walter
/s/ John A. Carnella Treasurer - ------------------------------ John A. Carnella
/s/ Mathew J. Whelan Vice President (Chief Accounting Officer) - ------------------------------ Mathew J. Whelan