Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
|X| Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
OR
|_| Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: 0-16728
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1533559
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10400 Fernwood Road
Bethesda, Maryland 20817
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 301-380-2070
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [__] (Not Applicable)
Documents Incorporated by Reference
None
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Courtyard by Marriott II Limited Partnership
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TABLE OF CONTENTS
PAGE NO.
PART I
Item 1. Business........................................................1
Item 2. Properties......................................................9
Item 3. Legal Proceedings..............................................15
Item 4. Submission of Matters to a Vote of Security Holders.............16
PART II
Item 5. Market For The Partnership's Limited Partnership Units
and Related Security Holder Matters...........................17
Item 6. Selected Financial Data.........................................18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk......24
Item 8. Financial Statements and Supplementary Data.....................25
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure......................................53
PART III
Item 10. Directors and Executive Officers................................53
Item 11. Management Remuneration and Transactions........................54
Item 12. Security Ownership of Certain Beneficial Owners and Management..54
Item 13. Certain Relationships and Related Transactions..................55
PART IV
Item 14. Exhibits, Supplemental Financial Statement Schedules
and Reports on Form 8-K.......................................59
PART I
ITEM 1. BUSINESS
Description of the Partnership
Courtyard by Marriott II Limited Partnership, a Delaware limited partnership
(the "Partnership"), was formed on August 31, 1987 to acquire and own 70
Courtyard by Marriott hotels (the "Hotels") and the respective fee or leasehold
interests in the land on which the Hotels are located. The Hotels are located in
29 states and contain a total of 10,331 guest rooms as of December 31, 1999. The
Partnership commenced operations on October 30, 1987 and will terminate on
December 31, 2087, unless earlier dissolved.
The Partnership is engaged solely in the business of owning and operating hotels
and therefore is engaged in one industry segment. The principal offices of the
Partnership are located at 10400 Fernwood Road, Bethesda, Maryland 20817.
The Hotels are operated as part of the Courtyard by Marriott system, and are
managed by Courtyard Management Corporation (the "Manager"), a wholly owned
subsidiary of Marriott International, Inc. ("MII"), under a long-term management
agreement (the "Management Agreement"). The Management Agreement, as restated on
December 30, 1995, expires in 2013 with renewals at the option of the Manager
for one or more of the Hotels for up to 35 years thereafter. 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 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. The Hotels have the
right to use the Courtyard by Marriott name pursuant to the Management Agreement
and, if the Management Agreement is terminated or not renewed, the Partnership
would lose that right for all purposes (except as part of the Partnership's
name). See Item 13, "Certain Relationships and Related Transactions."
The objective of the Courtyard by Marriott system, including the Hotels, is to
provide consistently superior lodging at a fair price with an appealing,
friendly and contemporary residential character. Courtyard by Marriott hotels
generally have fewer guest rooms than traditional, full-service hotels, in most
cases containing approximately 150 guest rooms, including approximately 12
suites, as compared to full-service Marriott hotels which typically contain 350
or more guest rooms.
Each Courtyard by Marriott hotel is designed around a courtyard area containing
a swimming pool (indoor pool in northern climates), walkways, landscaped areas
and a gazebo. Each Hotel generally contains a small lobby, a restaurant with
seating for approximately 50 guests, a lounge, a hydrotherapy pool, a guest
laundry, an exercise room and two small meeting rooms. The hotels do not contain
as much public space and related facilities as full-service hotels.
Courtyard by Marriott hotels are designed for business and vacation travelers
who desire high quality accommodations at moderate prices. Most of the Hotels
are located in suburban areas near office parks or other commercial activities.
See Item 2, "Properties." Courtyard by Marriott hotels provide large, high
quality guest rooms which contain furnishings comparable in quality to those in
full-service Marriott hotels. Each guest room contains a large, efficient work
desk, remote control television, a television entertainment package, in-room
coffee and tea services and other amenities. Approximately 70% of the guest
rooms contain king-size beds.
Organization of the Partnership
On October 30, 1987, the Partnership began operations and executed a purchase
agreement with Host Marriott Corporation ("Host Marriott") to acquire the
Hotels, all related personal property, and the fee or leasehold interests in the
land on which the Hotels are located for $643.1 million. On that date, CBM Two
Corporation ("CBM Two"), a wholly owned subsidiary of Host Marriott, made a
capital contribution of equipment valued at $11,306,000 for its 5% general
partner interest. On January 18, 1988 (the "Final Closing Date"), 1,470 units of
limited partnership interests (the "Units") in the Partnership, representing a
95% interest in the Partnership, had been sold in a private placement offering.
The offering price per Unit was $100,000. Of the total $643.1 million purchase
price, $507.9 million was paid in cash from the proceeds of mortgage financing
and sale of the Units, $40.2 million from assumption of debt and $95.0 million
from a deferred purchase note.
In accordance with the partnership agreement, in 1990 and 1991 CBM Two purchased
20.5 Units from defaulting investors. Additionally, on July 15, 1995, a limited
partner assigned one Unit to CBM Two.
In connection with the 1996 refinancing of the Partnership's then existing debt,
the limited partners approved certain amendments to the partnership agreement
and the Management Agreement. The partnership agreement amendment, among other
things, allowed 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 $127.4
million of senior secured notes.
Additionally, the Partnership formed a wholly-owned subsidiary, Courtyard II
Associates Management Corporation (the "Managing General Partner"). The 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. The formation of
Associates resulted in the Partnership's primary assets being its direct and
indirect interest in Associates. Additionally, substantially all of Associates'
net equity is restricted to dividends, loans or advances to the Partnership.
Associates holds a 99% membership interest in CBM Associates II LLC ("Associates
II") and the 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 who simultaneously contributed the Hotel and its
related assets to Associates II.
Each of the Managing General Partner, Associates and Associates II were formed
as a single purpose bankruptcy-remote entity to facilitate the refinancing in
January 1996.
CBM Funding Corporation, ("CBM Funding"), a wholly-owned subsidiary of
Associates, was also formed to fund a mortgage loan (the "Mortgage Loan") to
Associates from the proceeds of the sale of the multi-class commercial mortgage
pass-through certificates.
On April 17, 1998, Host Marriott, the parent of CBM Two, announced that its
Board of Directors authorized the company to reorganize its business operations
to qualify as a real estate investment trust ("REIT") to become effective as of
January 1, 1999 (the "REIT Conversion"). On December 29, 1998, Host Marriott
announced that it had completed substantially all the steps necessary to
complete the REIT Conversion and expected to qualify as a REIT under the
applicable Federal income tax laws beginning January 1, 1999. Subsequent to the
REIT Conversion, Host Marriott is referred to as Host REIT. In connection with
the REIT Conversion, Host REIT contributed substantially all of its hotel assets
to a newly-formed partnership, Host Marriott L.P. ("Host LP") which is owned 78%
by Host Marriott and 22% by outside partners.
In connection with Host Marriott's REIT Conversion, the following steps
occurred. Host Marriott formed CBM Two LLC, a Delaware single member limited
liability company, having two classes of member interests (Class A - 1% economic
interest, managing; Class B - 99% economic interest, non-managing). CBM Two
merged into CBM Two LLC on December 22, 1998 and CBM Two ceased to exist. On
December 28, 1998, Host Marriott contributed its entire interest in CBM Two LLC
to Host LP. Finally on December 30, 1998, Host LP contributed its 99% Class B
interest in CBM Two LLC to Rockledge Hotel Properties, Inc. ("Rockledge"), a
Delaware corporation which is owned 95% by Host LP (economic non-voting
interest) and 5% by Host Marriott Statutory/Charitable Employee Trust, a
Delaware statutory business trust (100% of the voting interests). As a result,
the sole general partner of the Partnership is CBM Two LLC (the "General
Partner"), with a Class A 1% managing economic interest owned by Host LP and a
Class B 99% non-managing economic interest owned by Rockledge. With the merger
of CBM Two into the General Partner, the General Partner became the holder of
the Units previously acquired by CBM Two. Therefore, as of December 31, 1999,
the General Partner owns a total of 21.5 Units representing a 1.39% limited
partnership interest in the Partnership.
Pursuant to the terms of the operating agreement of CBM Two LLC, Rockledge, 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 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.
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").
Debt - Senior Notes
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.
The terms of the Senior Notes require the Partnership to establish and fund a
debt service reserve account in an amount equal to one six-month interest
payment on the Senior Notes ($6,848,000) 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 are not redeemable prior to February 1, 2001. Thereafter, the
Senior Notes may be redeemed, at the option of the Partnership, at a premium
declining to par in 2004. The Senior Notes are non-recourse to the Partnership
and its partners.
In connection with Host Marriott's conversion to a REIT, a change of control
occurred when Host Marriott 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 REIT continues to own, indirectly, a
substantial majority of the economic interest in the General Partner of the
Partnership and, through Host LP, has certain voting rights with respect to the
General Partner.
The change 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 LP 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 to February 18, 1999. The tender offer was
commenced on January 14, 1999 and expired on February 12, 1999. No Senior Notes
were tendered to Host LP in connection with the tender offer.
Debt - 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 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 66 2/3% 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 receive payments of interest only based on a
notional balance equal to the Class A-3P & I Certificate balance.
The balance of the Certificates was $355.8 million at December 31, 1999.
Principal payments of $15.4 million on the Certificates were made during 1999.
The Certificates/Mortgage Loan maturities as of December 31, 1999 are as follows
(in thousands):
2000 $ 16,642
2001 17,934
2002 19,326
2003 20,827
2004 22,444
Thereafter 258,608
$ 355,781
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 the 69 Hotels, 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. 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. 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, see Item 13, "Certain Relationships and
Related Transactions" and (v) for distributions to the partners of the
Partnership.
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.
Material Contracts
Management Agreement
The primary provisions are discussed in Item 13, "Certain Relationships and
Related Transactions."
Ground 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 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. For 1999, the Partnership paid a total of $13,368,000 in ground rent.
See Item 2, "Properties" for a listing of Hotels that have ground leases.
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.
Competition
The United States lodging industry generally is comprised of two broad segments:
full-service hotels and limited-service hotels. Full-service hotels generally
offer restaurant and lounge facilities and meeting spaces, as well as a wide
range of services, typically including bell service and room service.
Limited-service hotels generally offer accommodations with limited or no
services and amenities. As moderately-priced hotels, the Hotels compete
effectively with both full-service and limited-service hotels in their
respective markets by providing streamlined services and amenities exceeding
those provided by typical limited-service hotels at prices that are
significantly lower than those available at full-service hotels.
Significant competitors in the moderately-priced lodging segment include Holiday
Inn, Ramada Inn, Four Points by Sheraton, Hampton Inn and Hilton Garden Inns.
The lodging industry in general, and the moderately-priced segment in
particular, is highly competitive, but the degree of competition varies from
location to location. An increase in supply growth began in 1996 with the
introduction of a number of new national brands. It is expected that Courtyard
will continue outperforming both national and local competitors. The brand is
continuing to carefully monitor the introduction of new mid-priced brands
including Wingate Hotels, Hilton Garden Inns, Four Points by Sheraton,
AmeriSuites, Hampton Inn and Hampton Inn and Suites.
The Manager believes that by emphasizing management and personnel development
and maintaining a competitive price structure, the Partnership's share of the
market will be maintained or increased. The inclusion of the Hotels within the
nationwide Courtyard by Marriott system provides the benefits of name
recognition, centralized reservations and advertising, system-wide marketing and
promotion, centralized purchasing and training and support services.
Conflicts of Interest
Because Host LP, the managing member of the General Partner, MII and their
affiliates own and/or operate hotels other than the Partnership's Hotels and MII
and its affiliates license others to operate hotels under the various brand
names owned by Marriott International and its affiliates, potential conflicts of
interest exist. With respect to these potential conflicts of interest, Host LP,
MII and their affiliates retain a free right to compete with the Partnership's
Hotels, including the right to develop, own, and operate competing hotels now
and in the future in markets in which the Hotels are located, in addition to
those existing hotels which may currently compete directly or indirectly with
the Hotels.
Under Delaware law, the General Partner has a fiduciary duty to the Partnership
and is required to exercise good faith and loyalty in all its dealings with
respect to Partnership affairs.
Policies with Respect to Conflicts of Interest
It is the policy of the General Partner that the Partnership's relationship with
the General Partner, any affiliate of the General Partner, or persons employed
by the General Partner or its affiliates be conducted on terms that are fair to
the Partnership and that are commercially reasonable. Agreements and
relationships involving the General Partner or its affiliates and the
Partnership are on terms consistent with the terms on which the General Partner
or its affiliates have dealt with unrelated parties.
The Amended and Restated Agreement of Limited Partnership, as amended, (the
"Partnership Agreement"), provides that any agreements, contracts or
arrangements between the Partnership and the General Partner or any of its
affiliates, except for rendering legal, tax, accounting, financial, engineering,
and procurement services to the Partnership by employees of the General Partner
or its affiliates, will be on commercially reasonable terms and will be subject
to the following additional conditions:
(i) the General Partner or any such affiliate must have the ability to render
such services or to sell or lease such goods;
(ii) such agreements, contracts or arrangements must be fair to the Partnership
and reflect commercially reasonable terms and must be embodied in a written
contract which precisely describes the subject matter thereof and all
compensation to be paid therefor;
(iii) no rebates or give-ups may be received by the General Partner or any such
affiliate, nor may the General Partner or any such affiliate participate in any
reciprocal business arrangements which would have the effect of circumventing
any of the provisions of the Partnership Agreement; and
(iv) no such agreement, contract or arrangement as to which the limited partners
had previously given approval may be amended in such a manner as to increase the
fees or other compensation payable by the Partnership to the General Partner or
any of its affiliates or to decrease the responsibilities or duties of the
General Partner or any such affiliate in the absence of the consent of the
holders of a majority in interest of the limited partners.
Employees
Neither the General Partner nor the Partnership has any employees. Host LP
provides the services of certain employees (including the General Partner's
executive officers) of Host LP to the Partnership and the General Partner. The
Partnership and the General Partner anticipate that each of the executive
officers of the General Partner will generally devote a sufficient portion of
his or her time to the business of the Partnership. However, each of such
executive officers also will devote a significant portion of his or her time to
the business of Host LP and its other affiliates. No officer or director of the
General Partner or employee of Host LP devotes a significant percentage of time
to Partnership matters. To the extent that any officer, director or employee
does devote time to the Partnership, the General Partner or Host LP, as
applicable, is entitled to reimbursement for the cost of providing such
services. See Item 11, "Management Remuneration and Transactions" for
information regarding payments made to Host Marriott, Host LP, or its
subsidiaries for the cost of providing administrative services to the
Partnership.
ITEM 2. PROPERTIES
Introduction
The properties consisted of 70 Courtyard by Marriott hotels as of December 31,
1999. The Hotels have been in operation for at least ten years. The Hotels range
in age between 10 and 14 years. The Hotels are geographically diversified among
29 states, and no state has more than nine Hotels.
The lodging industry in general, and the moderately-priced segment in
particular, is highly competitive, but the degree of competition varies from
location to location. See Item 1, "Business--Competition."
The following table summarizes certain attributes of each of the Hotels.
* Essex House Condominium Corporation is a subsidiary of Marriott International,
Inc.
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
SUMMARY OF PROPERTIES
(70 COURTYARD HOTELS)
PROPERTY TITLE TO LAND # OF ROOMS OPENING DATE
1 Birmingham/Homewood, AL Owned in fee 140 12/21/85
500 Shades Creek Parkway
Homewood, AL 35209
2 Birmingham/Hoover, AL Leased from Essex House 153 08/08/87
1824 Montgomery Highway South Condominium Corp.*
Hoover, AL 35244
3 Huntsville, AL Leased from Essex House 149 08/15/87
4808 University Drive Condominium Corp.*
Huntsville, AL 35816
4 Phoenix/Mesa, AZ Leased from Essex House 148 03/19/88
1221 S. Westward Avenue Condominium Corp.*
Mesa, AZ 85210
5 Phoenix/Metrocenter, AZ Leased from Essex House 146 11/29/87
9631 N. Black Canyon Condominium Corp.*
Phoenix, AZ 85021
6 Tucson Airport, AZ Leased from Essex House 149 10/01/88
2505 E. Executive Drive Condominium Corp.*
Tucson, AZ 85706
7 Little Rock, AR Leased from Essex House 149 05/28/88
10900 Financial Centre Parkway Condominium Corp.*
Little Rock, AR 72211
8 Bakersfield, CA Leased from Essex House 146 02/13/88
3601 Marriott Drive Condominium Corp.*
Bakersfield, CA 93308
9 Cupertino, CA Leased from Vallco 149 05/14/88
10605 N. Wolfe Road Park, Ltd.
Cupertino, CA 95014
10 Foster City, CA Leased from Essex House 147 09/26/87
550 Shell Blvd. Condominium Corp.*
Foster City, CA 94404
11 Fresno, CA Leased from Richard, 146 09/13/86
140 E. Shaw Avenue Miche, Aram & Aznive
Fresno, CA 93710 Erganian
12 Hacienda Heights, CA Leased from Essex House 150 03/28/90
1905 Azusa Avenue Condominium Corp.*
Hacienda Heights, CA 91745
13 Marin/Larkspur Landing, CA Leased from Essex House 146 07/25/87
2500 Larkspur Landing Circle Condominium Corp.*
Larkspur, CA 94939
14 Palm Springs, CA Leased from Essex House 149 10/08/88
300 Tahquitz Canyon Way Condominium Corp.*
Palm Springs, CA 92262
15 Torrance, CA Leased from Essex House 149 10/15/88
2633 West Sepulveda Boulevard Condominium Corp.*
Torrance, CA 90505
16 Boulder, CO Leased from Essex House 148 08/06/88
4710 Pearl East Circle Condominium Corp.*
Boulder, CO 80301
17 Denver, CO Owned in fee 146 08/15/87
7415 East 41st Avenue
Denver, CO 80301
18 Denver/Southeast, CO Leased from Essex House 152 05/30/87
6565 S. Boston Street Condominium Corp.*
Englewood, CO 80111
19 Norwalk, CT Leased from Mary Fabrizio 145 07/30/88
474 Main Avenue
Norwalk, CT 06851
20 Wallingford, CT Leased from Essex House 149 04/21/90
600 Northrop Road Condominium Corp.*
Wallingford, CT 06492
21 Ft. Myers, FL Leased from Essex House 149 08/27/88
4455 Metro Parkway Condominium Corp.*
Ft. Myers, FL 33901
22 Ft. Lauderdale/Plantation, FL Leased from Essex House 149 09/21/88
7780 S.W. 6th Street Condominium Corp.*
Plantation, FL 33324
23 St. Petersburg, FL Leased from Essex House 149 10/14/89
3131 Executive Drive Condominium Corp.*
Clearwater, FL 34622
24 Tampa/Westshore, FL Leased from 145 10/27/86
3805 West Cypress Hotsinger, Inc. and
Tampa, FL 33607 Owned in fee
25 West Palm Beach, FL Leased from Essex House 149 01/14/89
600 Northpoint Parkway Condominium Corp.*
West Palm Beach, FL 33407
26 Atlanta Airport South, GA Owned in fee 144 06/15/86
2050 Sullivan Road
College Park, GA 30337
27 Atlanta/Gwinnett Mall, GA Leased from Essex House 146 03/19/87
3550 Venture Parkway Condominium Corp.*
Duluth, GA 30136
28 Atlanta/Perimeter Ctr., GA Leased from Essex House 145 12/12/87
6250 Peachtree-Dunwoody Road Condominium Corp.*
Atlanta, GA 30328
29 Atlanta/Roswell, GA Leased from Roswell 154 06/11/88
1500 Market Boulevard Landing Associates
Roswell, GA 30076
30 Arlington Heights-South, IL Owned in fee 147 12/20/85
100 W. Algonquin Road
Arlington Heights, Il 60005
31 Chicago/Deerfield, IL Owned in fee 131 01/02/86
800 Lake Cook Road
Deerfield, IL 60015
32 Chicago/Glenview, IL Leased from Essex House 149 07/08/89
180l Milwaukee Avenue Condominium Corp.*
Glenview, IL 60025
33 Chicago/Highland Park, IL Leased from Essex House 149 06/10/88
1505 Lake Cook Road Condominium Corp.*
Highland Park, IL 60035
34 Chicago/Lincolnshire, IL Owned in fee 146 07/20/87
505 Milwaukee Avenue
Lincolnshire, IL 60069
35 Chicago/Oakbrook Terrace, IL Owned in fee 147 05/09/86
6 TransAm Plaza Drive
Oakbrook Terrace, IL 60181
36 Chicago/Waukegan, IL Leased from Essex House 149 05/28/88
800 Lakehurst Road Condominium Corp.*
Waukegan, Il 60085
37 Chicago/Wood Dale, IL Leased from Essex House 149 07/02/88
900 N. Wood Dale Road Condominium Corp.*
Wood Dale, IL 60191
38 Rockford, IL Owned in fee 147 04/12/86
7676 East State Road
Rockford, IL 61108
39 Indianapolis/Castleton, IN Leased from Essex House 146 06/06/87
8670 Allisonville Road Condominium Corp.*
Indianapolis, IN 46250
40 Kansas City/Overland Park, KS Leased from Essex House 149 01/14/89
11301 Metcalf Avenue Condominium Corp.*
Overland Park, KS 66212
41 Lexington/North, KY Leased from Essex House 146 06/04/88
775 Newtown Court Condominium Corp.*
Lexington, KY 40511
42 Annapolis, MD Leased from Essex House 149 03/04/89
2559 Riva Road Condominium Corp.*
Annapolis, MD 21401
43 Silver Spring, MD Leased from Essex House 146 08/06/88
12521 Prosperity Drive Condominium Corp.*
Silver Spring, MD 20904
44 Boston/Andover, MA Leased from Essex House 146 12/03/88
10 Campanelli Drive Condominium Corp.*
Andover, MA 01810
45 Detroit Airport, MI Leased from Essex House 146 12/12/87
30653 Flynn Drive Condominium Corp.*
Romulus, MA 48174
46 Detroit/Livonia, MI Leased from Essex House 148 03/12/88
17200 N. Laurel Park Drive Condominium Corp.*
Livonia, MI 48152
47 Minneapolis Airport, MN Leased from Essex House 146 06/13/87
1352 Northland Drive Condominium Corp.*
Mendota Heights, MN 55120
48 St. Louis/Creve Coeur, MO Leased from Essex House 154 07/22/87
828 N. New Ballas Road Condominium Corp.*
Creve Coeur, MO 63146
49 St. Louis/Westport, MO Leased from Essex House 149 08/20/88
11888 Westline Industrial Drive Condominium Corp.*
St. Louis, MO 63146
50 Lincroft/Red Bank, NJ Leased from Essex House 146 05/28/88
245 Half Mile Road Condominium Corp.*
Red Bank, NJ 07701
51 Poughkeepsie, NY Leased from Pizzgalli 149 06/04/88
408 South Road Investment Company
Poughkeepsie, NY
52 Rye, NY Leased from Essex House 145 03/19/88
631 Midland Avenue Condominium Corp. *
Rye, NY 10580
53 Charlotte/South Park, NC Leased from Queens 149 03/25/89
6023 Park South Drive Properties, Inc.
Charlotte, NC 28210
54 Raleigh/Cary, NC Leased from Essex House 149 06/25/88
102 Edinburgh Drive South Condominium Corp.*
Cary, NC 27511
55 Dayton Mall, OH Leased from Essex House 146 09/19/87
100 Prestige Place Condominium Corp.*
Miamisburg, OH 45342
56 Toledo, OH Leased from Essex House 149 04/30/88
1435 East Mall Drive Condominium Corp.*
Holland, OH 43528
57 Oklahoma City Airport, OK Leased from Essex House 149 07/23/88
4301 Highline Boulevard Condominium Corp.*
Oklahoma City, OK 73108
58 Portland-Beaverton, OR Leased from Essex House 149 02/11/89
8500 S.W. Nimbus Drive Condominium Corp.*
Beaverton, OR 97005
59 Philadelphia/Devon, PA Leased from Three Devon 149 11/19/88
762 W. Lancaster Ave. Square Associates
Wayne, PA 19087
60 Columbia, SC Leased from Essex House 149 01/28/89
347 Zimalcrest Drive Condominium Corp.*
Columbia, SC 29210
61 Greenville, SC Leased from Essex House 146 03/05/88
70 Orchard Park Drive Condominium Corp.*
Greenville, SC 29615
62 Memphis Airport, TN Leased from Essex House 145 07/15/87
1780 Nonconnah Boulevard Condominium Corp.*
Memphis, TN 38132
63 Nashville Airport, TN Leased from Essex House 145 01/23/88
2508 Elm Hill Pike Condominium Corp.*
Nashville, TN 37214
64 Dallas/Northeast, TX Leased from Essex House 149 01/16/88
1000 South Sherman Condominium Corp.*
Richardson, TX 75081
65 Dallas/Plano, TX Owned in fee 149 05/07/88
4901 W. Plano Parkway
Plano, TX 75093
66 Dallas/Stemmons, TX Leased from Essex House 146 09/12/87
2383 Stemmons Trail Condominium Corp.*
Dallas, TX 75220
67 San Antonio/Downtown, TX Leased from Essex House 149 02/03/90
600 Santa Rosa South Condominium Corp.*
San Antonio, TX 78204
68 Charlottesville, VA Leased from Essex House 150 01/21/89
638 Hillsdale Drive Condominium Corp.*
Charlottesville, VA 22901
69 Manassas, VA Leased from Essex House 149 03/04/89
10701 Battleview Parkway Condominium Corp.*
Manassas, VA 22110
70 Seattle/Southcenter, WA Leased from Essex House 149 03/11/89
400 Andover Park West Condominium Corp.*
Tukwila, WA 98188
Grand Total: 10,331 Rooms
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.
Certain Limited Partners of the Partnership filed a lawsuit, styled Whitey Ford,
et al. v. Host Marriott Corporation, et al., Case No. 96-CI-08327, in the 285th
Judicial District Court of Bexar County, Texas on June 7, 1996, against Host
Marriott Corporation ("Host Marriott"), Marriott International, various related
entities, and others (collectively, the "Defendants"). On January 29, 1998, two
other Limited Partners, A.R. Milkes and D.R. Burklew, filed a petition to expand
this lawsuit into a class action. On June 23, 1998, the Court entered an order
certifying a class of limited partners under Texas law. The plaintiffs allege,
among other things, that the Defendants committed fraud, breached fiduciary
duties, and violated the provisions of various contracts.
On March 16, 1998, limited partners in several partnerships sponsored by Host
Marriott, filed a lawsuit, styled Robert M. Haas, Sr. and Irwin Randolph Joint
Tenants, et al. v. Marriott International, Inc., et al., Case No. 98-CI-04092,
in the 57th Judicial District Court of Bexar County, Texas against Marriott
International, Inc. ("Marriott International"), Host Marriott, various of their
subsidiaries, J.W. Marriott, Jr., Stephen Rushmore, and Hospitality Valuation
Services, Inc. (collectively, the "Defendants"). The lawsuit now relates to the
following limited partnerships: Courtyard by Marriott Limited Partnership,
Marriott Residence Inn Limited Partnership, Marriott Residence Inn II Limited
Partnership, Fairfield Inn by Marriott Limited Partnership, Host DSM Limited
Partnership (formerly known as Desert Springs Marriott Limited Partnership) and
Atlanta II Limited Partnership (formerly known as Atlanta Marriott Marquis
Limited Partnership), collectively, the "Six Partnerships". The plaintiffs
allege that the Defendants conspired to sell hotels to the Six Partnerships for
inflated prices and that they charged the Six Partnerships excessive management
fees to operate the Six Partnerships' hotels. The plaintiffs further allege that
the Defendants committed fraud, breached fiduciary duties, and violated the
provisions of various contracts. A related case concerning the Partnership was
filed by the plaintiffs' lawyers in the same court, involves similar allegations
against the Defendants, and has been certified as a class action (see above). As
a result of this development, the Partnership is no longer involved in the
above-referenced Haas lawsuit, Case No. 98-CI-04092.
On March 9, 2000, the Defendants entered into a settlement agreement with
counsel to the plaintiffs to resolve the Haas and the Whitey Ford litigation.
The settlement is subject to numerous conditions, including partnership
agreement amendments, participation thresholds, court approval and various
consents. Under the terms of the settlement, the limited partners of the
Partnership who elect to participate would be paid $147,959 per Unit
($217,499,730 in the aggregate, if the holders of all Units participate) in
exchange for the conveyance of all limited partner Units to a joint venture to
be formed between affiliates of Host Marriott and MII, dismissal of the
litigation and a complete release of all claims. This amount would be reduced by
the amount of attorneys' fees awarded by the court. Limited partners who opt out
of the settlement would have their interests in the Partnership converted into
the right to receive the value of their interests in cash (excluding any amount
related to their claims against the Defendants and retain their individual
claims against the Defendants). The Defendants may terminate the settlement if
the holders of more than 10% of the Partnership's 1,470 limited partner Units
choose not to participate, if the holders of more than 10% of the limited
partner units in any one of the other partnerships involved in the litigation
choose not to participate or if certain other conditions are not satisfied. The
Manager will continue to manage the Partnership's Hotels under long-term
agreements. The details of the settlement will be contained in a court-approved
notice and purchase offer/consent solicitation to the Partnership's limited
partners.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
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 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 and may be made
only to accredited investors. All transfers are subject to approval by the
General Partner. As of December 31, 1999, there were 1,481 holders (including
holders of half-units) of record of the Partnership's 1,470 Units.
In accordance with Sections 4.07 and 4.10 of the Partnership Agreement, 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.
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, 1999, the Partnership has distributed a total of $100,467,000
to the limited partners ($68,345 per limited partner unit) since inception.
During 1999, $8,820,000 ($4,500 and $1,500 per limited partner unit from 1999
and 1998 operations, respectively) was distributed to the limited partners and
an additional $3,675,000 ($2,500 per limited partner unit) was distributed to
the limited partners in February 2000 bringing the total distribution from 1999
operations to $10,290,000 ($7,000 per limited partner unit). The Partnership
distributed $9,555,000 to the limited partners ($6,500 per limited partner unit)
from 1998 operations. The Partnership distributed $13,230,000 to the limited
partners ($9,000 per limited partner unit) from 1997 operations. No
distributions of Capital Receipts have been made since inception.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents historical operating information
for the Partnership for each of the five years in the period ended December 31,
1999 presented in accordance with accounting principles generally accepted in
the United States.
1999 1998 1997 1996 1995
(in thousands, except per unit amounts)
Income Statement Data:
Revenues...........................................$ 292,982 $ 284,251 $ 275,021 $ 263,707 $ 245,825
Operating profit................................... 59,671 58,960 58,771 54,012 46,296
Net income......................................... 17,838 16,950 15,691 10,541 11,215
Net income per limited
partner unit (1,470 Units)...................... 11,528 10,954 10,140 6,812 7,248
Balance Sheet Data:
Total assets.......................................$ 522,943 $ 528,340 $ 536,715 $ 547,099 $ 567,530
Total liabilities.................................. 537,815 552,230 567,412 579,040 603,030
Cash distributions per limited
partner unit (1,470 Units)...................... 6,000 6,900 9,850 4,750 1,846
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
Certain matters discussed in this Form 10-K include forward-looking statements
and as such may involve known and unknown risks, uncertainties and other factors
which may cause the actual transactions, results, performance or achievements to
be materially different from any future transactions, results, performance or
achievements expressed or implied by such forward-looking statements. The
cautionary statements set forth in reports filed under the Securities Act of
1934 contained important factors with respect to such forward-looking
statements, including: (i) national and local economic and business conditions
that will affect, among other things, demand for products and services of the
hotels and other properties, the level of room rates and occupancy that can be
achieved by such properties and the availability and terms of financing; (ii)
the ability to compete effectively in areas such as access, location, quality of
accommodations and room rate structures; (iii) changes in travel patterns, taxes
and government regulations which influence or determine wages, prices,
construction costs and procedures; (iv) governmental approvals, actions and
initiatives including the need for compliance with environmental and safety
requirements, and changes in laws and regulations or the interpretation thereof;
and (v) the effects of tax legislative action. Although the Partnership believes
the expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
attained or that any deviations will not be material. The Partnership undertakes
no obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances.
GENERAL
The following discussion and analysis addresses results of operations for the
fiscal years ended December 31, 1999, 1998 and 1997. During the period from 1997
through 1999, Partnership total hotel revenues grew from $275.0 million to
$293.0 million. Growth in room revenues, and thus hotel revenues, is driven
primarily by growth in revenue per available room ("REVPAR"). REVPAR is a
commonly used indicator of market performance for hotels which represents the
combination of daily room rate charged and the average daily occupancy achieved.
REVPAR does not include food and beverage and other ancillary revenues generated
by the property. REVPAR increased 6% during the period from 1997 through 1999 to
$70 from $66. During the period from 1997 through 1999, the Hotels' combined
average room rate increased by $7.00 from $82.09 to $89.09, while the combined
average occupancy decreased from 80.3% to 79.0%.
RESULTS OF OPERATIONS
The following table shows selected combined operating and financial statistics
for the Hotels (in thousands, except combined average occupancy, combined
average daily room rate, REVPAR and number of rooms):
Year Ended December 31,
1999 1998 1997
Combined average occupancy............................................... 79.0% 79.0% 80.3%
Combined average daily room rate.........................................$ 89.09 $ 86.99 $ 82.09
REVPAR...................................................................$ 70.38 $ 68.72 $ 65.92
Number of rooms.......................................................... 10,331 10,331 10,331
Room revenues............................................................$ 265,137 $ 258,099 $ 248,012
Food and beverage revenues............................................... 17,686 17,219 17,436
Other revenues........................................................... 10,159 8,933 9,573
Total hotel revenues.................................................. 292,982 284,251 275,021
Direct hotel operating costs and expenses................................ 147,129 141,398 133,791
House profit.............................................................$ 145,853 $ 142,853 $ 141,230
The following table shows selected components of the Partnership's
operating income as a percentage of total hotel revenues.
Year Ended December 31,
1999 1998 1997
Hotel revenues:
Room revenues......................................................... 90.5% 90.8% 90.2%
Food and beverage revenues............................................ 6.0 6.1 6.3
Other................................................................. 3.5 3.1 3.5
Total hotel revenues................................................ 100.0 100.0 100.0
Direct operating costs and expenses...................................... 50.2 49.7 48.6
House profit............................................................. 49.8 50.3 51.4
Indirect hotel operating costs and expenses:
Depreciation.......................................................... 9.4 9.8 10.2
Base and Courtyard management fees.................................... 6.0 6.0 6.0
Incentive management fees............................................. 4.5 4.5 4.7
Ground rent........................................................... 4.5 4.5 4.5
Property taxes........................................................ 3.8 3.8 3.6
Insurance and other................................................... 1.2 1.0 1.0
Total indirect hotel operating costs and expenses..................... 29.4 29.6 30.0
Operating profit.................................................... 20.4% 20.7% 21.4%
1999 Compared to 1998
Hotel Revenues. In 1999 hotel revenues increased $8.7 million, or 3.1%, to
$293 million when compared to 1998 due to the increase in rooms revenue
discussed below and telephone revenues.
Rooms Revenues. Rooms revenues increased $7.0 million in 1999 to $265.1
million, a 2.7% increase when compared to 1998. The increase in revenues
was achieved through an increase in the combined average room rate from
$86.99 in 1998 to $89.09 in 1999. The combined average occupancy remained
consistent with 1998.
Total Hotel Property-Level Costs and Expenses. The 1999 total hotel
property-level costs and expenses increased $5.7 million, or 4.1%. The
increase is primarily due to increases in both rooms and food and beverage
costs.
Rooms Costs. In 1999 rooms costs increased $3.9 million, or 7.0%, when
compared to 1998. The overall increase in rooms costs and expenses is due
to an increase in salary and benefits as the hotel's endeavor to maintain
competitive wage scales.
Base and Courtyard Management Fees. Base and Courtyard management fees
increased by 3%, or $524,000, in 1999 when compared to 1998. 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.
Insurance and Other. Insurance and other increased by 57.8%, or $1.3
million in 1999 when compared to 1998. The increase is attributable to
increases in legal expenses related to the litigation discussed in Note 9.
Interest Expense. Interest expense decreased by 2% to $43.6 million in 1999
from $44.7 million in 1998. This decrease is due to principal amortization
of $15.4 million on the Certificates/Mortgage Loan.
1998 Compared to 1997
Hotel Revenues. In 1998, hotel revenues increased $9.2 million, or 3.4%, to
$284.3 million when compared to 1997 due to the increase in rooms revenues
described below partially offset by slight decreases in food and beverage
and other revenues.
Rooms Revenues. Rooms revenues increased $10.1 million in 1998 to $258.1
million, a 4.1% increase when compared to 1997. The increase in revenues
was achieved through an increase in the combined average room rate from
$82.09 in 1997 to $86.99 in 1998. Combined average occupancy decreased 1.3
percentage points from 80.3% in 1997 to 79.0% in 1998 primarily due to
increased competition and aggressive rate increases in some markets.
Total Hotel Property-Level Costs and Expenses. The 1998 total hotel
property-level costs and expenses increased $7.6 million, or 5.7%. The
increase is due to increases in both rooms costs and selling,
administrative and other expenses.
Rooms Costs. In 1998, rooms costs increased $3.6 million, or 6.8%, when
compared to 1997. The increase costs is due to an increase in certain
variable costs related to the increase in rooms revenues.
Selling, Administrative and Other. Selling, administrative and other
expenses increased by $4.2 million in 1998 to $67.5 million, a 6.7%
increase when compared to 1997. The increase in expenses was primarily due
to a $2.5 million increase in general and administrative expenses and a
$1.4 million increase in chain services.
Base and Courtyard Management Fees. Base and Courtyard management fees
increased by 3.4%, or $554,000, in 1998 when compared to 1997. 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.
Property Taxes. Property taxes increased by 9.8% during 1998 to $10.9
million when compared to 1997. The increase is primarily due to real estate
tax increases at 62 of the Partnership's 70 Hotels.
Insurance and Other. Insurance and other decreased by 12.6% to $2.2 million
when compared to 1997. The decrease is primarily due to decreases in
equipment rent and Partnership administrative expenses.
Interest Expense. Interest expense decreased by 2.4% to $44.7 million in
1998 from $45.8 million in 1997. This decrease is due to principal
amortization of $14.3 million on the Certificates/Mortgage Loan.
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have been historically funded through
loan agreements with independent financial institutions. The General
Partner believes that cash from Hotel operations will be sufficient to make
the required debt service payments, to fund the current capital
expenditures needs of the Hotels as well as to make cash distributions to
the limited partners.
Principal Sources and Uses of Cash
The Partnership's principal source of cash is from operations. Its
principal uses of cash are to make debt service payments, fund the property
improvement fund and to make distributions to limited partners. Cash
provided by operations was $47.1 million, $44.5 million and $44.8 million
for the years ended 1999, 1998 and 1997, respectively.
Cash used in investing activities was $17.4 million, $15.8 million and
$17.6 million for 1999, 1998 and 1997, respectively. Contributions to the
property improvement fund which represents 5% of total hotel revenues, were
$14.6 million, $14.2 million and $13.8 million for the years ended December
31, 1999, 1998 and 1997, respectively. Cash used in investing activities
for 1999, 1998 and 1997 includes capital expenditures of $18.4 million,
$36.1 million and $24.9 million, respectively. The Management Agreement
requires annual contributions to a property improvement fund to ensure that
the physical condition and product quality of the Hotels are maintained.
Contributions to this fund are based on a percentage of annual total hotel
revenues, currently equal to 5%. The Partnership believes that the 5%
contribution requirement is consistent with industry standards and provides
a sufficient reserve for the current capital repair and replacement needs
of the Hotels. In accordance with the Management Agreement, the annual
required contribution percentage may increase up to 6% in 2001 at the
option of the Manager. The balance in the fund totaled $5.4 million and
$6.5 million as of December 31, 1999 and 1998, respectively. The capital
expenditures for 1999 and 1998 included room renovations at 14 and 23 of
the Partnership Hotels, respectively. All such capital expenditures were
funded from the property improvement fund. Rooms renovations totaling $2.6
million are scheduled to be completed at three of the Partnership Hotels in
2000. The Partnership will have sufficient funds to complete the
renovations.
Cash used in financing activities was $24.3 million, $24.5 million and
$27.8 million for the years ended December 31, 1999, 1998 and 1997,
respectively. These totals include $8.8 million, $10.1 million and $14.5
million of cash distributions to limited partners in 1999, 1998 and 1997,
respectively.
During 1999, 1998 and 1997, the Partnership repaid $15.4 million, $14.3
million and $13.3 million, respectively, of principal on the commercial
mortgage backed securities. The Partnership also paid $42.0 million, $43.1
million and $44.2 million of interest on its debts in 1999, 1998 and 1997,
respectively. The Partnership expects to make principal repayments of $16.6
million in 2000.
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. The assumption of additional debt associated with MII's
acquisition of the Renaissance Hotel Group N.V., resulted in a single
downgrade of MII's long-term senior unsecured debt, 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 sheet.
Debt
See Item 1, "Business" for discussion of debt financing.
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 has been established
initially at 5% for all Hotels and may be increased, at the option of the
Manager, to 6% of gross Hotel revenues in 2001.
Deferred 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.
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, was reduced from 10% of
invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning
to 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%, 9% and 8% of
invested capital for 1999, 1998 and 1997, respectively, (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 after payment of (i)
through (viii) to repay deferred management fees to the Manager and the
other fifty percent is paid to the Partnership.
During 1999 and 1998, $609,000 and $415,000, respectively, of deferred
incentive management fees were paid. Deferred incentive management fees
were $3,560,000 and $4,169,000 as of December 31, 1999 and 1998,
respectively. Deferred Courtyard management fees totaled $22,341,000 as of
December 31, 1999 and 1998. Deferred base management fees totaled
$7,904,000 as of December 31, 1999 and 1998.
Competition
The moderately priced lodging segment continues to be highly competitive.
An increase in supply growth continued through 1999 with the introduction
of a number of new national brands. The Partnership is continually making
improvements at the Hotels intended to enhance the overall value and
competitiveness of the Hotels. It is expected that Courtyard will continue
outperforming both national and local competitors. The brand is continuing
to carefully monitor the introduction of new mid-priced brands including
Wingate Hotels, Hilton Garden Inns, Four Points by Sheraton, AmeriSuites,
Hampton Inn and Hampton Inn and Suites.
Inflation
The rate of inflation has been relatively low in the past four years. The
Manager is generally able to pass through increased costs to customers
through higher room rates and prices. In 1999, the growth in average room
rates of Courtyard Hotels kept pace with inflationary costs.
Seasonality
Demand, and thus room occupancy, is affected by normally recurring seasonal
patterns. For most of the Hotels, demand is higher in the spring and summer
months (March through October) than during the remainder of the year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Partnership does not have a significant market risk with respect to
interest rates, foreign currency exchanges or other market rate or price
risks, and the Partnership does not hold any financial instruments for
trading purposes. As of December 31, 1999, all of the Partnership's debt
has a fixed interest rate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index Page
Courtyard by Marriott II Limited Partnership Consolidated Financial Statements:
Report of Independent Public Accountants............................................................. 26
Consolidated Statement of Operations................................................................. 27
Consolidated Balance Sheet........................................................................... 28
Consolidated Statement of Changes in Partners' Capital (Deficit)..................................... 29
Consolidated Statement of Cash Flows................................................................. 30
Notes to Consolidated Financial Statements........................................................... 31
Courtyard II Associates, L.P. and Subsidiaries Consolidated Financial Statements:
Report of Independent Public Accountants............................................................. 41
Consolidated Statement of Operations................................................................. 42
Consolidated Balance Sheet........................................................................... 43
Consolidated Statement of Changes in Partners' Capital............................................... 44
Consolidated Statement of Cash Flows................................................................. 45
Notes to Consolidated Financial Statements........................................................... 46
Report of Independent Public Accountants
TO THE PARTNERS OF COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheet of Courtyard by
Marriott II Limited Partnership (a Delaware limited partnership) and
Subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, changes in partners' capital (deficit) and cash
flows for the three years ended December 31, 1999. 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, 1999 and 1998, and the results of its operations and its cash
flows for the three years ended December 31, 1999, 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 rules of the
Securities and Exchange Commission 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 17, 2000
Consolidated Statement of Operations
Courtyard by Marriott II Limited Partnership and Subsidiaries
For the Years Ended December 31, 1999, 1998 and 1997 (in
thousands, except Unit and per Unit amounts)
1999 1998 1997
REVENUES
Hotel revenues
Rooms.................................................................$ 265,137 $ 258,099 $ 248,012
Food and beverage..................................................... 17,686 17,219 17,436
Other................................................................. 10,159 8,933 9,573
Total hotel revenues................................................ 292,982 284,251 275,021
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms................................................................. 59,873 55,962 52,405
Food and beverage..................................................... 15,594 14,991 15,145
Other department costs and expenses................................... 2,492 2,928 2,943
Selling, administrative and other..................................... 69,170 67,517 63,298
Total hotel property-level costs and expenses....................... 147,129 141,398 133,791
Depreciation............................................................ 27,397 27,895 28,131
Base and Courtyard management fees...................................... 17,579 17,055 16,501
Incentive management fee................................................ 13,322 12,895 12,878
Ground rent............................................................. 13,249 12,921 12,480
Property taxes.......................................................... 11,143 10,914 9,938
Insurance and other..................................................... 3,492 2,213 2,531
Total operating costs and expenses.................................. 233,311 225,291 216,250
OPERATING PROFIT........................................................... 59,671 58,960 58,771
Interest expense........................................................ (43,577) (44,686) (45,778)
Interest income......................................................... 1,744 2,676 2,698
NET INCOME.................................................................$ 17,838 $ 16,950 $ 15,691
ALLOCATION OF NET INCOME
General Partner.........................................................$ 892 $ 847 $ 785
Limited Partners........................................................ 16,946 16,103 14,906
$ 17,838 $ 16,950 $ 15,691
NET INCOME PER LIMITED PARTNER UNIT (1,470 Units)..........................$ 11,528 $ 10,954 $ 10,140
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Balance Sheet
Courtyard by Marriott II Limited Partnership and Subsidiaries
December 31, 1999 and 1998
(in thousands)
1999 1998
ASSETS
Property and equipment, net...............................................................$ 454,412 $ 463,650
Deferred financing costs, net of accumulated amortization................................. 12,690 14,262
Due from Courtyard Management Corporation................................................. 8,795 8,739
Other assets.............................................................................. 11 66
Property improvement fund................................................................. 5,395 6,466
Restricted cash........................................................................... 18,299 17,254
Cash and cash equivalents................................................................. 23,341 17,903
$ 522,943 $ 528,340
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt......................................................................................$ 483,181 $ 498,624
Management fees due to Courtyard Management Corporation................................... 33,805 34,414
Due to Marriott International, Inc. and affiliates........................................ 8,812 8,931
Accounts payable and accrued liabilities.................................................. 12,017 10,261
Total Liabilities................................................................... 537,815 552,230
PARTNERS' CAPITAL (DEFICIT)
General Partner
Capital contribution.................................................................... 11,306 11,306
Cumulative net losses................................................................... (2,717) (3,609)
Capital distributions................................................................... (278) (278)
8,311 7,419
Limited Partners
Capital contributions, net of offering costs of $17,189................................. 129,064 129,064
Cumulative net losses................................................................... (51,627) (68,573)
Capital distributions................................................................... (100,467) (91,647)
Investor notes receivable............................................................... (153) (153)
(23,183) (31,309)
Total Partners' Deficit............................................................. (14,872) (23,890)
$ 522,943 $ 528,340
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statement of Changes in
Partners' Capital (Deficit)
Courtyard by Marriott II Limited Partnership and Subsidiaries
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
General Limited
Partner Partners Total
Balance, December 31, 1996.................................................$ 5,787 $ (37,728) $ (31,941)
Capital distributions................................................... -- (14,479) (14,479)
Payments received on investor notes receivable.......................... -- 32 32
Net income.............................................................. 785 14,906 15,691
Balance, December 31, 1997................................................. 6,572 (37,269) (30,697)
Capital distributions................................................... -- (10,143) (10,143)
Net income.............................................................. 847 16,103 16,950
Balance, December 31, 1998................................................. 7,419 (31,309) (23,890)
Capital distributions................................................... -- (8,820) (8,820)
Net income.............................................................. 892 16,946 17,838
Balance, December 31, 1999.................................................$ 8,311 $ (23,183) $ (14,872)
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statement of Cash Flows
Courtyard by Marriott II Limited Partnership and Subsidiaries
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
OPERATING ACTIVITIES
Net income.....................................................................$ 17,838 $ 16,950 $ 15,691
Noncash items:
Depreciation................................................................. 27,397 27,895 28,131
Amortization of deferred financing costs as interest......................... 1,572 1,571 1,572
Loss on disposition of fixed assets.......................................... 291 -- --
Amortization of prepaid expenses............................................. 9 8 1
Changes in operating accounts:
Accounts payable and accrued liabilities..................................... 634 (196) (860)
Management fees due to Courtyard Management Corporation...................... (609) (415) (1,613)
Due to Host Marriott Corporation............................................. 374 (63) 32
Change in real estate tax and insurance, net................................. (237) (1,341) (129)
Change in debt service reserve............................................... (80) -- --
Due from Courtyard Management Corporation.................................... (56) 79 1,997
Cash provided by operations.............................................. 47,133 44,488 44,822
INVESTING ACTIVITIES
Additions to property and equipment, net....................................... (18,450) (36,110) (24,879)
Change in property improvement fund............................................ 1,071 20,734 9,382
Change in working capital reserve.............................................. (53) (2,925) (2,075)
Working capital returned by Courtyard Management Corporation................... -- 2,500 --
Cash used in investing activities........................................ (17,432) (15,801) (17,572)
FINANCING ACTIVITIES
Repayment of principal......................................................... (15,443) (14,331) (13,298)
Capital distributions.......................................................... (8,820) (10,143) (14,479)
Payment of financing costs..................................................... -- -- (12)
Collections of investor notes receivable....................................... -- -- 32
Cash used in financing activities........................................ (24,263) (24,474) (27,757)
INCREASE /(DECREASE) IN CASH AND CASH EQUIVALENTS.................................$ 5,438 $ 4,213 $ (507)
CASH AND CASH EQUIVALENTS at beginning of year.................................... 17,903 13,690 14,197
CASH AND CASH EQUIVALENTS at end of year..........................................$ 23,341 $ 17,903 $ 13,690
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest......................................$ 42,006 $ 43,114 $ 44,207
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, 1999 and 1998
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: nine in
Illinois; eight in California; five in Florida; four in Georgia; four in
Texas and three or less in each of the other 24 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 January 18, 1988 (the "Final Closing Date"), 1,470 limited partnership
interests (the "Units"), representing a 95% interest in the Partnership,
were sold in a private placement offering. The offering price per Unit was
$100,000, $21,200 payable at subscription with the balance due in four
annual installments through February 28, 1991, or, as an alternative,
$94,357 in cash at closing as full payment of the subscription price. The
limited partners paid $39,938,000 as of the Final Closing Date,
representing 1,350 Units purchased on the installment basis and 120 Units
paid in full. The limited partners' obligations to make the installment
payments were evidenced by promissory notes (the "Investor Notes") payable
to the Partnership and secured by the Units. On October 30, 1987 (the
"Initial Closing Date"), CBM Two Corporation ("CBM Two"), a wholly-owned
subsidiary of Host Marriott Corporation ("Host Marriott") made a capital
contribution of equipment valued at $11,306,000 for its 5% general partner
interest.
On the Initial Closing Date, the Partnership began operations and executed
a purchase agreement (the "Purchase Agreement") with Host Marriott to
acquire the Hotels and the land on which certain of the Hotels are located
for a total price of $643.1 million. Of the total purchase price, $507.9
million was paid in cash from the proceeds of the mortgage financing and
sale of the Units, $40.2 million from assumption of industrial development
revenue bond financing (the "IRB Debt") from Host Marriott and $95 million
from a note (the "Deferred Purchase Note") payable to Host Marriott. Twenty
of the Hotels were conveyed to the Partnership in 1987, thirty-four Hotels
in 1988, twelve Hotels in 1989 and the final four Hotels during the first
half of 1990.
Under the Purchase Agreement, Host Marriott agreed to reduce the purchase
price of the Hotels by up to $9.3 million if the Hotels did not provide
cash flow in excess of debt service, as defined, equivalent to $9.3 million
in 1989, (the "Price Adjustment"). The required Price Adjustment for 1989
was $8,843,000. The Price Adjustment was allocated as a reduction to the
Partnership's property and equipment in the accompanying consolidated
financial statements.
In accordance with the partnership agreement, in 1990 and 1991 CBM Two
purchased 20.5 Units from defaulting investors. Additionally, on July 15,
1995, a limited partner assigned one Unit to CBM Two.
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").
In connection with the 1996 refinancing, the limited partners approved
certain amendments to the partnership agreement and the Management
Agreement. The partnership agreement amendment, among other things, allowed
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. The formation of Associates resulted in the Partnership's
primary assets being its direct and indirect interest in Associates.
Additionally, substantially all of Associates' net equity will be
restricted to dividends, loans or advances to the Partnership.
Associates holds a 99% membership interest in CBM Associates II LLC
("Associates II") and the 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 who simultaneously
contributed the Hotel and its related assets to Associates II.
The Managing General Partner, Associates and Associates II were each formed
as single purpose bankruptcy-remote entity to facilitate the refinancing.
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.
On April 17, 1998, Host Marriott Corporation ("Host Marriott"), the parent
of CBM Two, announced that its Board of Directors authorized the company to
reorganize its business operations to qualify as a real estate investment
trust ("REIT") to become effective as of January 1, 1999 (the "REIT
Conversion"). On December 29, 1998, Host Marriott announced that it had
completed substantially all the steps necessary to complete the REIT
Conversion and expected to qualify as a REIT under the applicable Federal
income tax laws beginning January 1, 1999. Subsequent to the REIT
Conversion, Host Marriott is referred to as Host REIT. In connection with
the REIT Conversion, Host REIT contributed substantially all of its hotel
assets to a newly-formed partnership Host Marriott L.P. ("Host LP") which
is owned 78% by Host Marriott and 22% by outside partners.
In connection with Host Marriott's REIT Conversion, the following steps
occurred. Host Marriott formed CBM Two LLC, a Delaware single member
limited liability company, having two classes of member interests (Class A
- 1% economic interest, managing; Class B - 99% economic interest,
non-managing). CBM Two merged into CBM Two LLC on December 22, 1998 and CBM
Two ceased to exist. On December 28, 1998, Host Marriott contributed its
entire interest in CBM Two LLC to Host LP. Finally on December 30, 1998,
Host LP contributed its 99% Class B interest in CBM Two LLC to Rockledge
Hotel Properties, Inc. ("Rockledge"), a Delaware corporation which is owned
95% by Host LP (economic non-voting interest) and 5% by Host Marriott
Statutory/Charitable Employee Trust, a Delaware statutory business trust
(100% of the voting interests). As a result, the sole general partner of
the Partnership is CBM Two LLC (the "General Partner"), with a Class A 1%
managing economic interest owned by Host LP and a Class B 99% non-managing,
economic interest owned by Rockledge. With the merger of CBM Two into the
General Partner, the General Partner became the holder of the Units
previously acquired by CBM Two. Therefore, as of December 31, 1999, the
General Partner owns a total of 21.5 Units representing a 1.39% limited
partnership interest in the Partnership.
Pursuant to the terms of the operating agreement of CBM Two LLC, Rockledge,
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 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.
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.
Use of Estimates
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 and Supplies
Pursuant to the terms of the Partnership's management agreement discussed
in Note 7, the Partnership is required to provide the Manager with working
capital and supplies 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 and supplies into cash and return it to
the Partnership. As a result of these conditions, the individual components
of working capital and supplies 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 described in 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 less selling costs. There was no such adjustment required
at December 31, 1999 or 1998.
Deferred Financing Costs
From 1995 to 1997, the Partnership paid a total of $18,858,000 in financing
costs related to the Senior Notes and the Certificates discussed in Note 5.
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, 1999 and 1998, accumulated amortization of
financing costs totaled $6,168,000 and $4,596,000, respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Restricted Cash
The Partnership was required to establish certain reserves pursuant to the terms
of the Senior Notes and the Certificates/Mortgage Debt as described in Note 5.
The balances in those reserves as of December 31 are as follows (in thousands):
1999 1998
Debt service reserve.................................$ 6,928 $ 6,848
Real estate tax and insurance reserve................ 6,318 5,406
Working capital reserve.............................. 5,053 5,000
$ 18,299 $ 17,254
Ground Rent
The land leases with MII or affiliates of MII and third parties (see Note 6)
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 1999, 1998 and 1997 totaled $119,000 per year. The
related liability is included in Due to MII and affiliates on the accompanying
consolidated balance sheet.
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 tax basis in the net
Partnership liabilities was $2,695,000 and $5,128,000, respectively as of
December 31, 1999 and 1998.
Reclassifications
Certain reclassifications were made to the prior year financial statements to
conform to the 1999 presentation.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
1999 1998
Land..............................................$ 25,541 $ 25,541
Leasehold improvements............................ 298,855 287,174
Building and improvements......................... 253,108 252,375
Furniture and equipment.......................... 157,444 181,434
734,948 746,524
Less accumulated depreciation..................... (280,536) (282,874)
$ 454,412 $ 463,650
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):
As of December 31, 1999 As of December 31, 1998
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
Certificates/Mortgage Loan......................................$ 355,781 $ 347,538 $ 371,224 $ 386,430
Senior Notes....................................................$ 127,400 $ 123,777 $ 127,400 $ 131,859
Management fees due to Courtyard
Management Corporation.......................................$ 33,805 $ 14,185 $ 34,414 $ 18,735
The estimated fair values of debt obligations are based on the quoted market
prices at December 31, 1999 and 1998, 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. 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").
Debt - Senior Notes
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.
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 sheet 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 are not redeemable prior to February 1, 2001. Thereafter, 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's conversion to a REIT, a change of control
occurred when Host Marriott 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 REIT continues to own, indirectly, a
substantial majority of the economic interest in the General Partner of the
Partnership and, through Host LP, has certain voting rights with respect to the
General Partner.
The change 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 LP 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 to February 18, 1999. The tender offer was
commenced on January 14, 1999 and expired on February 12, 1999. No Senior Notes
were tendered to Host LP in connection with the tender offer.
Debt - 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 $355.8 million and $371.2 million at
December 31, 1999 and 1998, respectively. Principal payments of $15.4 million
and $14.3 million on the Certificates were made during 1999 and 1998,
respectively. The weighted average interest rate on the Certificates was 7.8%
for 1999 and 1998.
The Certificates/Mortgage Loan maturities as of December 31, 1999 are as follows
(in thousands):
2000 $ 16,642
2001 17,934
2002 19,326
2003 20,827
2004 22,444
Thereafter 258,608
$ 355,781
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. 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 $101.7 million and $87.3 million as of
December 31, 1999 and 1998, 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. The
assumption of additional debt associated with MII's acquisition of Renaissance
Hotel Group N.V. resulted in a single downgrade of MII's long-term senior
unsecured debt, 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 sheet. The balance in the real estate tax and insurance reserve as of
December 31, 1999 and 1998, was $6.3 million and $5.4 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, 1999 are as follows (in thousands):
Telephone
Lease Land Equipment and Other
Year Leases Leases
2000 $ 9,573 $ 361
2001 9,590 187
2002 9,880 132
2003 10,074 96
2004 10,106 --
Thereafter 1,810,901 --
$ 1,860,124 $ 776
Total rent expense on land leases was $13,249,000 for 1999, $12,921,000 for 1998
and $12,480,000 for 1997.
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
Due to the mortgage debt 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, was reduced from 10% of
invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 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%, 9% and 8% of invested capital for 1999, 1998 and 1997,
respectively, (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 1999 and 1998, $609,000 and $415,000, respectively, of deferred incentive
management fees were paid. Deferred incentive management fees were $3,560,000
and $4,169,000 as of December 31, 1999 and 1998, respectively. Deferred
Courtyard management fees totaled $22,341,000 as of December 31, 1999 and 1998.
Deferred base management fees as of December 31, 1999 and 1998 were $7,904,000.
Chain Services and Marriott's Rewards Program
The Manager is required to furnish certain services ("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
began participating in MII's Marriott Reward Program ("MRP") in 1997. 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 $14,550,000 in 1999, $13,755,000
in 1998 and $11,247,000 in 1997.
Working Capital
The Partnership is required to provide the Manager with working capital and
fixed asset supplies 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 the Partnership advanced $2,500,000 to the Manager as additional
working capital for the operation of the Hotels. In 1998, this $2,500,000 was
returned to the Partnership. Upon termination of the Management Agreement, the
working capital and supplies will be returned to the Partnership. As of December
31, 1999 and 1998, the working capital balance was $6,261,000. At December 31,
1999 and 1998, accumulated depreciation related to the supplies totaled
$2,060,000.
In addition, the Working Capital Agreement required that the Partnership reserve
$2 million by February 1, 1997 and an additional $3 million by February 1, 1998
(the "Working Capital Reserve"). The $3 million and $2 million were reserved on
February 2, 1998 and January 31, 1997, respectively. The Working Capital Reserve
will be 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 Funds
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 has been established at 5% for all Hotels and
may be increased, at the option of the Manager, to 6% of gross Hotel revenues in
2001.
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 and not caused by
the Partnership. The property represents less than 2% of the Partnership's total
assets and revenues as of December 31, 1999 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
Certain limited partners of the Partnership filed a lawsuit, styled Whitey Ford,
et al. v. Host Marriott Corporation, et al., Case No. 96-CI-08327, in the 285th
Judicial District Court of Bexar County, Texas on June 7, 1996, against Host
Marriott Corporation ("Host Marriott"), Marriott International, various related
entities, and others (collectively, the "Defendants"). On January 29, 1998, two
other limited partners, A.R. Milkes and D.R. Burklew, filed a petition to expand
this lawsuit into a class action. On June 23, 1998, the Court entered an order
certifying a class of limited partners under Texas law. The plaintiffs allege,
among other things, that the Defendants committed fraud, breached fiduciary
duties, and violated the provisions of various contracts.
On March 16, 1998, limited partners in several partnerships sponsored by Host
Marriott, filed a lawsuit, styled Robert M. Haas, Sr. and Irwin Randolph Joint
Tenants, et al. v. Marriott International, Inc., et al., Case No. 98-CI-04092,
in the 57th Judicial District Court of Bexar County, Texas against Marriott
International, Inc. ("Marriott International"), Host Marriott, various of their
subsidiaries, J.W. Marriott, Jr., Stephen Rushmore, and Hospitality Valuation
Services, Inc. (collectively, the "Defendants"). The lawsuit now relates to the
following limited partnerships: Courtyard by Marriott Limited Partnership,
Marriott Residence Inn Limited Partnership, Marriott Residence Inn II Limited
Partnership, Fairfield Inn by Marriott Limited Partnership, Host DSM Limited
Partnership (formerly known as Desert Springs Marriott Limited Partnership) and
Atlanta II Limited Partnership (formerly known as Atlanta Marriott Marquis
Limited Partnership), collectively, the "Six Partnerships". The plaintiffs
allege that the Defendants conspired to sell hotels to the Six Partnerships for
inflated prices and that they charged the Six Partnerships excessive management
fees to operate the Six Partnerships' hotels. The plaintiffs further allege that
the Defendants committed fraud, breached fiduciary duties, and violated the
provisions of various contracts. A related case concerning the Partnership was
filed by the plaintiffs' lawyers in the same court, involves similar allegations
against the Defendants, and has been certified as a class action (see above). As
a result of this development, the Partnership is no longer involved in the
above-referenced Haas lawsuit, Case No. 98-CI-04092.
On March 9, 2000, the Defendants entered into a settlement agreement with
counsel to the plaintiffs to resolve the Haas and the Whitey Ford litigation.
The settlement is subject to numerous conditions, including partnership
agreement amendments, participation thresholds, court approval and various
consents. Under the terms of the settlement, the limited partners of the
Partnership who elect to participate would be paid $147,959 per Unit
($217,499,730 in the aggregate, if the holders of all Units participate) in
exchange for the conveyance of all limited partner Units to a joint venture to
be formed between affiliates of Host Marriott and MII, dismissal of the
litigation and a complete release of all claims. This amount would be reduced by
the amount of attorneys' fees awarded by the court. Limited partners who opt out
of the settlement would have their interests in the Partnership converted into
the right to receive the value of their interests in cash (excluding any amount
related to their claims against the Defendants and retain their individual
claims against the Defendants). The Defendants may terminate the settlement if
the holders of more than 10% of the Partnership's 1,470 limited partner Units
choose not to participate, if the holders of more than 10% of the limited
partner units in any one of the other partnerships involved in the litigation
choose not to participate or if certain other conditions are not satisfied. The
Manager will continue to manage the Partnership's Hotels under long-term
agreements.
Report of Independent Public Accountants
TO THE PARTNERS OF COURTYARD II ASSOCIATES, L.P. AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheet of Courtyard II
Associates, L.P. (a Delaware limited partnership) and Subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, changes in partner's capital and cash flows for the three years
ended December 31, 1999. 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, 1999 and 1998, and the
results of its operations and its cash flows for the three years ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States.
ARTHUR ANDERSEN LLP
Vienna, Virginia
March 17, 2000
Consolidated Statement of Operations
Courtyard II Associates, L.P. and Subsidiaries
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
HOTEL REVENUES
Rooms.................................................................$ 265,137 $ 258,099 $ 248,012
Food and beverage..................................................... 17,686 17,219 17,436
Other................................................................. 10,159 8,933 9,573
Total hotel revenues................................................ 292,982 284,251 275,021
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms................................................................. 59,873 55,962 52,404
Food and beverage..................................................... 15,594 14,991 15,145
Other department costs and expenses................................... 2,492 2,928 2,943
Selling, administrative and other..................................... 69,170 67,517 63,299
Total hotel property-level costs and expenses....................... 147,129 141,398 133,791
Depreciation............................................................ 27,397 27,895 28,131
Base and Courtyard management fees...................................... 17,579 17,055 16,501
Incentive management fee................................................ 13,322 12,895 12,878
Ground rent............................................................. 13,249 12,921 12,480
Property taxes.......................................................... 11,143 10,914 9,938
Insurance and other..................................................... 2,193 1,785 1,961
Total operating costs and expenses.................................. 232,012 224,863 215,680
OPERATING PROFIT........................................................... 60,970 59,388 59,341
Interest expense........................................................ (29,407) (30,517) (31,575)
Interest income......................................................... 1,156 1,981 2,008
NET INCOME BEFORE MINORITY INTEREST........................................ 32,719 30,852 29,774
MINORITY INTEREST.......................................................... 13 11 12
NET INCOME.................................................................$ 32,706 $ 30,841 $ 29,762
ALLOCATION OF NET INCOME
General Partners........................................................$ 654 $ 617 $ 595
Limited Partner......................................................... 32,052 30,224 29,167
$ 32,706 $ 30,841 $ 29,762
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Balance Sheet
Courtyard II Associates, L.P. and Subsidiaries
December 31, 1999 and 1998
(in thousands)
1999 1998
ASSETS
Property and equipment, net...............................................................$ 454,412 $ 463,650
Deferred financing costs, net of accumulated amortization................................. 8,928 10,033
Due from Courtyard Management Corporation................................................. 8,795 8,739
Other assets.............................................................................. 11 66
Property improvement fund................................................................. 5,395 6,466
Restricted cash........................................................................... 6,318 5,407
Cash and cash equivalents................................................................. 21,527 11,933
$ 505,386 $ 506,294
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt.............................................................................$ 355,781 $ 371,224
Management fees due to Courtyard Management Corporation................................... 33,805 34,414
Due to Marriott International, Inc. and affiliates........................................ 8,812 8,931
Accounts payable and accrued liabilities.................................................. 5,248 4,347
Total Liabilities................................................................... 403,646 418,916
MINORITY INTEREST............................................................................ 44 31
403,690 418,947
PARTNERS' CAPITAL (See discussion of distribution restrictions in Note 2)
General Partners.......................................................................... 2,048 1,760
Limited Partner........................................................................... 99,648 85,587
Total Partners' Capital............................................................. 101,696 87,347
$ 505,386 $ 506,294
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statement of
Changes in Partners' Capital
Courtyard II Associates, L.P. and Subsidiaries
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
General Limited
Partners Partner Total
Balance, December 31, 1996...................................................$ 1,622 $ 79,488 $ 81,110
Capital distributions..................................................... (596) (29,294) (29,890)
Net income................................................................ 595 29,167 29,762
Balance, December 31, 1997................................................... 1,621 79,361 80,982
Capital distributions..................................................... (478) (23,998) (24,476)
Net income................................................................ 617 30,224 30,841
Balance, December 31, 1998................................................... 1,760 85,587 87,347
Capital distributions..................................................... (366) (17,991) (18,357)
Net income................................................................ 654 32,052 32,706
Balance, December 31, 1999...................................................$ 2,048 $ 99,648 $ 101,696
The accompanying notes are an integral part of these consolidated
financial statements.
Consolidated Statement of Cash Flows
Courtyard II Associates, L.P. and Subsidiaries
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
OPERATING ACTIVITIES
Net income.....................................................................$ 32,706 $ 30,841 $ 29,762
Noncash items:
Depreciation................................................................. 27,397 27,895 28,131
Amortization of deferred financing costs as interest......................... 1,105 1,106 1,105
Loss on disposition of fixed assets.......................................... 291 -- --
Minority Interest............................................................ 13 11 12
Amortization of prepaid expenses............................................. 9 8 1
Changes in operating accounts:
Due from Courtyard Management Corporation.................................... (56) 79 1,997
Management fees due to Courtyard Management Corporation...................... (609) (415) (1,613)
Accounts payable and accrued liabilities..................................... (83) (1,565) (1,030)
Due to Host Marriott Corporation............................................. -- (32) 15
Cash provided by operations.............................................. 60,773 57,928 58,380
INVESTING ACTIVITIES
Additions to property and equipment, net....................................... (18,450) (36,110) (24,879)
Change in property improvement fund............................................ 1,071 20,734 9,382
Working capital returned by Courtyard Management Corporation................... -- 2,500 --
Cash used in investing activities........................................ (17,379) (12,876) (15,497)
FINANCING ACTIVITIES
Capital distributions.......................................................... (18,357) (24,476) (29,890)
Repayment of principal......................................................... (15,443) (14,331) (13,298)
Payment of financing costs..................................................... -- -- (9)
Cash used in financing activities........................................ (33,800) (38,807) (43,197)
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS..................................$ 9,594 $ 6,245 $ (314)
CASH AND CASH EQUIVALENTS at beginning of year.................................... 11,933 5,688 6,002
CASH AND CASH EQUIVALENTS at end of year..........................................$ 21,527 $ 11,933 $ 5,688
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest......................................$ 28,301 $ 29,412 $ 30,469
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, 1999 and 1998
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 and the
Partnership owns 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. The 70 hotel
properties (the "Hotels") are located in 29 states in the United States: nine in
Illinois; eight in California; five in Florida; four in Georgia; four in Texas;
and three or less in each of the other 24 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 carryover basis financial
statements. Intercompany transactions and balances between Associates and its
subsidiaries have been eliminated.
On January 24, 1996, Associates consummated the offering of $410,200,000 of
multi-class mortgage pass-through certificates (the "Certificates"), the net
proceeds of which were used to repay certain obligations of the Partnership. The
accompanying consolidated financial statements present the pushed-down effects
of the debt which was repaid with the proceeds of the offering as discussed in
Note 5.
A concurrent offering of $127,400,000 of senior notes (the "Senior Notes") by
the Partnership was also completed on January 24, 1996. The Senior Notes are
secured by a first priority pledge of the Partnership's 99% partnership interest
in Associates and the Partnership's 100% equity interest in Courtyard II
Associates Management Corporation. As a result, the Partnership owns directly or
indirectly 100% of Associates. The Senior Notes are not reflected in the
accompanying consolidated financial statements of Associates because Associates
does not guarantee the Senior Notes nor do the assets of Associates secure the
Senior Notes. Payments on the Senior Notes are made from distributions of the
excess cash of Associates to the Partnership; such distributions are restricted
only upon a monetary event of default under the Mortgage Loan, as defined in
Note 5. The Partnership has no other source of cash flow other than
distributions from Associates.
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
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 and Supplies
Pursuant to the terms of Associates management agreement discussed in Note 7,
Associates is required to provide the Manager with working capital and supplies
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 and supplies into cash and return
it to Associates. As a result of these conditions, the individual components of
working capital and supplies 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 described in 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, 1999 or 1998.
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, 1999 and 1998, accumulated amortization related
to the Certificates, as defined in Note 5, were $4,339,000 and $3,234,000,
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
Restricted cash represents the real estate tax and insurance reserve established
pursuant to the terms of the Certificates/Mortgage Loan as described in Note 5.
Ground Rent
The land leases with MII or affiliates of MII and third parties (see Note 6)
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 1999, 1998 and 1997 totaled $119,000 per year. The
related liability is included in Due to MII and affiliates on the accompanying
consolidated balance sheet.
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, 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 tax basis in the net
Partnership liabilities was $2,044,000 and $5,600,000, respectively as of
December 31, 1999 and 1998.
Reclassifications
Certain reclassifications were made to the prior year financial statements to
conform to the 1999 presentation.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
1999 1998
Land.............................................$ 25,541 $ 25,541
Leasehold improvements........................... 298,855 287,174
Building and improvements........................ 253,108 252,375
Furniture and equipment.......................... 157,444 181,434
734,948 746,524
Less accumulated depreciation.................... (280,536) (282,874)
$ 454,412 $ 463,650
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):
As of December 31, 1999 As of December 31, 1998
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
Mortgage debt.................................................$ 355,781 $ 347,538 $ 371,224 $ 386,430
Management fees due to Courtyard
Management Corporation.....................................$ 33,805 $ 14,185 $ 34,414 $ 18,735
The estimated fair values of debt obligations are based on the quoted market
prices at December 31, 1999 and 1998, 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, 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 $355.8 million and $371.2 million at
December 31, 1999 and 1998, respectively. Principal payments of $15.4 million
and $14.3 million of the Certificates were made during 1999 and 1998,
respectively. The weighted average interest rate for the Certificates was 7.8%
for 1999 and 1998.
The Certificates/Mortgage Loan maturities as of December 31, 1999 are as follows
(in thousands):
2000 $ 16,642
2001 17,934
2002 19,326
2003 20,827
2004 22,444
Thereafter 258,608
$ 355,781
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. The
assumption of additional debt associated with MII's acquisition of the
Renaissance Hotel Group N.V.resulted in a single downgrade of MII's long- term
senior unsecured debt, 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 balance sheet. The
balance in the real estate tax and insurance reserve as of December 31, 1999 and
1998, was $6.3 million and $5.4 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
2000 $ 9,573 $ 361
2001 9,590 187
2002 9,880 132
2003 10,074 96
2004 10,106 --
Thereafter 1,810,901 --
$ 1,860,124 $ 776
Total rent expense on land leases was $13,249,000 for 1999, $12,921,000 for 1998
and $12,480,000 for 1997.
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, was reduced from 10% of
invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 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%, 9% and 8% of invested capital for 1999, 1998 and 1997,
respectively, (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 1999 and 1998, $609,000 and $415,000, respectively, of deferred incentive
management fees were paid. Deferred incentive management fees were $3,560,000
and $4,169,000 as of December 31, 1999 and 1998, respectively. Deferred
Courtyard management fees totaled $22,341,000 as of December 31, 1999 and 1998.
Deferred base management fees as of December 31, 1999 and 1998 were $7,904,000.
Chain Services and Marriott's Reward Program
The Manager is required to furnish certain services ("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 $14,550,000 in 1999, $13,755,000 in 1998 and
$11,247,000 in 1997.
Working Capital
Associates is required to provide the Manager with working capital and fixed
asset supplies 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
and supplies will be returned to Associates. As of December 31, 1999 and 1998,
the working capital balance was $6,261,000. At December 31, 1999 and 1998,
accumulated depreciation related to the supplies totaled $2,060,000.
In addition, the Working Capital Agreement required the Partnership to reserve
$2 million by February 1, 1997 and an additional $3 million by February 1, 1998
(the "Working Capital Reserve"). The $3 million and $2 million were reserved by
the Partnership on February 2, 1998 and January 31, 1997, respectively. The
Working Capital Reserve will be 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 has been established at 5% for all Hotels and
may be increased, at the option of the Manager, to 6% of gross Hotel revenues in
2001.
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, 1999 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
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:
Age at
Name Current Position December 31, 1999
Robert E. Parsons, Jr. President and Manager 44
Christopher G. Townsend Executive Vice President, Secretary and Manager 52
W. Edward Walter Treasurer 44
Earla L. Stowe Vice President 38
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.
Christopher G. Townsend joined Host Marriott's Law Department in 1982 as a
Senior Attorney. In 1984 he was made Assistant Secretary of Host Marriott. In
1986 he was made an Assistant General Counsel. He was made Senior Vice
President, Corporate Secretary and Deputy General Counsel of Host Marriott in
1993. In January 1997, he was made General Counsel of Host Marriott. He is also
a Senior Vice President, Corporate Secretary and General Counsel of Host LP and
serves as a director, manager and an officer of numerous Host Marriott
subsidiaries.
W. Edward Walter joined Host Marriott in 1996 as Senior Vice
President-Acquisitions and in 1998 was made Treasurer of Host Marriott. He is
also a Senior Vice President and Treasurer of Host LP and 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.
Earla L. Stowe joined Host Marriott in 1982 and held various positions in the
tax department until 1988. She joined the Partnership Services department as an
accountant in 1988 and in 1989 she became an Assistant Manager-Partnership
Services. She was promoted to Manager-Partnership Services in 1991, to
Director-Asset Management in 1996. Ms. Stowe was promoted to Senior
Director-Corporate Accounting in 1998.
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, 1999, 1998 and 1997, the Partnership
reimbursed CBM Two or CBM Two LLC in the amount of $179,000, $274,000 and
$260,000, 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. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of December 31, 1999, Equity Resource Group owned 6.91% of the 1,470 limited
partnership Units. No other person owned of record, or to the Partnership's
knowledge owned beneficially, more than 5% of the total number of limited
partnership Units. The General Partner 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, 1999.
On March 9, 2000, Host Marriott and MII entered into a settlement agreement to
resolve pending litigation filed by limited partners against Host Marriott and
MII. The settlement is subject to numerous conditions, including partnership
agreement amendments, participation thresholds, court approval and various
consents. Under the terms of the settlement, the limited partners of the
Partnership who elect to participate would be paid $147,959 per Unit
($217,499,730 in the aggregate, if the holders of all Units participate) in
exchange for the conveyance of all limited partner Units to a joint venture to
be formed between affiliates of Host Marriott and MII, dismissal of the
litigation and a complete release of all claims. The details of the settlement
will be contained in a court-approved notice and purchase offer/consent
solicitation to the Partnership's limited partners. See Item 3, "Legal
Proceedings."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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
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, was reduced from 10% of
invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 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%, 9% and 8% of invested capital for 1999, 1998 and 1997,
respectively, (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 after payment of (i)
through (viii) to repay deferred management fees to the Manager and the other
fifty percent is paid to the Partnership.
During 1999 and 1998, $609,000 and $415,000, respectively, of deferred incentive
management fees were paid. Deferred incentive management fees were $3,560,000
and $4,169,000 as of December 31, 1999 and 1998, respectively. Deferred
Courtyard management fees totaled $22,341,000 as of December 31, 1999 and 1998.
Deferred base management fees totaled $7,904,000 as of December 31, 1999 and
1998.
Chain Services and Marriott's Rewards Program
The Manager is required to furnish certain services ("Chain Services") which are
furnished generally on a central or regional basis to all hotels managed, owned
or leased in the Courtyard by Marriott hotel system. In addition, the Hotels
began participating in MII's Marriott Reward Program ("MRP") in 1997. 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 $14,550,000 in 1999, $13,755,000
in 1998 and $11,247,000 in 1997.
Working Capital
The Partnership is required to provide the Manager with working capital and
fixed asset supplies 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 the Partnership advanced $2,500,000 to the Manager as additional
working capital for the operation of the Hotels. In 1998, this $2,500,000 was
returned to the Partnership. Upon termination of the Management Agreement, the
working capital and supplies will be returned to the Partnership. As of December
31, 1999 and 1998, the working capital balance was $6,261,000. The 1999 balance
includes the $8,846,000 originally advanced less the $2,585,000 of excess
working capital returned to the Partnership in 1991. At December 31, 1999 and
1998, accumulated depreciation related to the supplies totaled $2,060,000.
In addition, the Working Capital Agreement required the Partnership to reserve
$2 million by February 1, 1997 and an additional $3 million by February 1, 1998
(the "Working Capital Reserve"). The $3 million and $2 million were reserved on
February 2, 1998 and January 31, 1997, respectively. The Working Capital Reserve
will be 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.
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 land leases with affiliates of MII 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 it
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.
Total rent expense on land leases was $13,249,000 for 1999, $12,921,000 for 1998
and $12,480,000 for 1997.
Property Improvement Fund
The Management Agreement provides for the establishment of a repairs and
equipment reserve (property improvement fund) for the Hotels. The funding of
this reserve is based on a percentage of gross Hotel revenues. The contribution
to the property improvement fund has been established initially at 5% for all
Hotels and may be increased, at the option of the Manager, to 6% of gross Hotel
revenues in 2001.
Payments to MII and Subsidiaries
The following table sets forth the amounts paid to MII and affiliates under both
the Management Agreement and the ground lease agreements for the years ended
December 31, 1999, 1998 and 1997 (in thousands):
1999 1998 1997
Incentive management fee..........................................................$ 13,322 $ 12,895 $ 12,878
Ground rent....................................................................... 11,282 10,991 10,628
Chain services and MRP allocations................................................ 14,550 13,755 11,247
Base management fee............................................................... 10,254 9,949 9,626
Courtyard management fee.......................................................... 7,325 7,106 6,875
Deferred incentive management fees................................................ 609 415 1,613
$ 57,342 $ 55,111 $ 52,867
Payments to Host Marriott and Subsidiaries
The following sets forth amounts paid by the Partnership to Host Marriott and
its subsidiaries for the years ended December 31, 1999, 1998 and 1997 (in
thousands):
1999 1998 1997
Administrative expenses reimbursed................................................$ 179 $ 274 $ 260
Cash distributions (as a limited partner)......................................... 129 148 212
$ 308 $ 422 $ 472
PART IV
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 Page
- -------------- -------------------------------------------------- --------
*3.1 Amended and Restated Partnership Agreement of Limited
Partnership of Courtyard by Marriott II Limited
Partnership (the "Partnership") dated October 30, 1987 N/A
*3.2 Amendment No. 1 to the Amended and Restated Agreement
of Limited Partnership of the Partnership N/A
*3.3 Certificate of Limited Partnership of the Partnership N/A
*3.4 Amended and Restated Certificate of Incorporation of
the Courtyard II Finance Company ("Finance") N/A
*3.5 By-laws of Finance N/A
3.6 Agreement of Limited Partnership of Courtyard II
Associates, L.P. ("Associates") (Incorporated by N/A
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 N/A
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 N/A
Commission on March 14, 1996.)
3.10 Second Amendment to the Amended and Restated Agreement
of Limited Partnership of the Partnership dated 76
December 28, 1998
*4.1 Indenture dated as of January 24, 1996 among the
Partnership and Finance and IBJ Schroder Bank & N/A
Trust Company (the "Indenture")
*4.3 Exchange and Registration Rights Agreement dated as
of January 24, 1996 among the Partnership and Finance N/A
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 N/A
*4.5 Trust and Servicing Agreement dated as of January 1,
1996 among Funding, Bankers Trust Company and the N/A
CMBS Trustee
*4.6 Exchange and Registration Rights Agreement dated as
of January 24, 1996 among the Partnership, N/A
Associates, Funding and Lehman Brothers Inc.
*10.1 Amended and Restated Management Agreement dated as of
December 30, 1995, between the Partnership and N/A
Courtyard Management Corporation (the "Manager")
*10.2 Management Agreement dated as of December 30, 1995
between the Partnership and the Manager N/A
**10.3 Assignment of Lease and Warranty and Assumption of
Obligations between Marriott Corporation and the N/A
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 N/A
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 N/A
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 N/A
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 N/A
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 N/A
Pizzagalli Investment Company dated September 22,
1986.
**10.9 Assignment of Lease and Warranty and Assumption of
Obligations between Marriott Corporation and the N/A
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 N/A
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 N/A
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 Original Landlord
Foster City CA 10/30/87 Essex House Condominium
Corporation ("Essex")
Marin/Larkspur Landing CA 10/30/87 Essex
Denver/Southeast CO 10/30/87 Essex
Atlanta/Perimeter Center GA 02/24/88 Essex
Indianapolis/Castleton IN 10/30/87 Essex
Lexington/North KY 10/07/88 Essex
Annapolis MD 05/19/89 Essex
Minneapolis Airport MN 10/30/87 Essex
St. Louis/Creve Couer MO 10/30/87 Essex
Rye NY 03/29/88 Essex
Greenville SC 03/29/88 Essex
Memphis Airport TN 10/30/87 Essex
Nashville Airport TN 02/24/88 Essex
Dallas/Stemmon TX 10/30/87 Essex
San Antonio/Downtown TX 03/23/90 Essex
**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. N/A
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 N/A
10.14 Bill of Sale and Assignment and Assumption Agreement dated as of January
24, 1996 by the Partnership to Associates N/A
10.15 Assignment and Assumption of Management Agreement dated as of
January 24,1996 by the Partnership to Associates N/A
10.16 Contribution Agreement dated as of January 24, 1996 among the Partnership,
the Managing General Partner and Courtyard II Associates LLC ("Deerfield
LLC") N/A
10.17 Bill of Sale and Assignment and Assumption Agreement dated as of January
24, 1996 by the Partnership to Deerfield LLC N/A
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 N/A
10.19 Assignment and Assumption of Management Agreement dated as of January 24,
1996 by the Partnership to Deerfield LLC N/A
10.20 Loan Agreement dated as of January 24, 1996 by and between Associates and
Funding N/A
10.21 Mortgage Note, dated as of January 24, 1996, in the principal amount of
$410,200,000 by Associates to Funding N/A
10.22 Security Agreement dated as of January 24, 1996 by and between Associates
and Funding N/A
10.23 Pledge Agreement dated as of January 24, 1996 by and between Associates
and Funding N/A
10.24 Collateral Assignment of Management Agreement and Subordination Agreement
dated as of January 24, 1996, by and among Associates, the Manager and
Funding N/A
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") N/A
10.26 Environmental Indemnity Agreement dated as of January 24, 1996 by
Associates and the Managing General Partner for the benefit of Funding N/A
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. N/A
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. N/A
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 N/A
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.) N/A
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.) N/A
21.1 Subsidiaries of the Partnership N/A
* 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
A Form 8-K was filed with the SEC on December 17, 1999. This
filing, Item 5-Other Events, discloses that on December 6, 1999,
the General Partner sent to the limited partners of the
Partnership a letter that accompanied the Partnership's Quarterly
Report on Form 10-Q for the quarter ended September 10, 1999. The
letter disclosed the quarterly activities of the Partnership. A
copy of the letter was included as an Item 7-Exhibit in this Form
8-K filing.
SCHEDULE I
Page 1 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 1999 and 1998
(in thousands)
1999 1998
ASSETS
Investments in restricted subsidiaries ..........................................................$ 101,696 $ 87,347
Other assets..................................................................................... 3,806 4,260
Restricted cash.................................................................................. 11,981 11,847
Cash and cash equivalents........................................................................ 1,814 5,970
Total Assets..............................................................................$ 119,297 $ 109,424
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt......................................................................................... $127,400 $ 127,400
Accounts payable and accrued expenses......................................................... 6,769 5,914
Total liabilities......................................................................... 134,169 133,314
PARTNERS' CAPITAL (DEFICIT)
General Partner
Capital contribution........................................................................ 11,306 11,306
Cumulative net losses....................................................................... (2,717) (3,609)
Capital distributions....................................................................... (278) (278)
8,311 7,419
Limited Partners
Capital contributions, net of offering costs of $17,189..................................... 129,064 129,064
Cumulative net losses....................................................................... (51,627) (68,573)
Capital distributions....................................................................... (100,467) (91,647)
Investor notes receivable................................................................... (153) (153)
(23,183) (31,309)
Total Partners' Deficit................................................................... (14,872) (23,890)
$ 119,297 $ 109,424
The Notes to Consolidated Financial Statements of Courtyard by Marriott II
Limited Partnership are an integral part of these statements.
See Accompanying Notes to Condensed Consolidated Financial Information.
SCHEDULE I
Page 2 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
Revenues..................................................................................$ -- $ -- $ --
Operating costs and expenses.............................................................. -- -- --
Operating profit before Partnership expenses and interest................................. -- -- --
Interest income........................................................................... 588 695 690
Interest expense.......................................................................... (14,170) (14,169) (14,203)
Partnership expense....................................................................... (1,299) (428) (570)
Loss before equity in earnings of restricted subsidiaries................................. (14,881) (13,902) (14,083)
Equity in earnings of restricted subsidiaries............................................. 32,719 30,852 29,774
Net income...........................................................................$ 17,838 $ 16,950 $ 15,691
The Notes to Consolidated Financial Statements of Courtyard by Marriott II
Limited Partnership are an integral part of these statements.
See Accompanying Notes to Condensed Consolidated Financial Information.
SCHEDULE I
Page 3 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED CONSOLIDATED STATEMENT OF
CASH FLOWS For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
Cash used in operations...................................................................$ (13,640) $ (13,440) $ (13,557)
INVESTING ACTIVITIES
Dividends from restricted subsidiaries, net............................................ 18,357 24,476 29,890
Change in working capital reserve...................................................... (53) (2,925) (2,075)
Cash provided by investing activities.............................................. 18,304 21,551 27,815
FINANCING ACTIVITIES
Capital distributions.................................................................. (8,820) (10,143) (14,479)
Collections of investor notes receivable............................................... -- -- 32
Payment of financing costs............................................................. -- -- (3)
Cash used in financing activities.................................................. (8,820) (10,143) (14,450)
DECREASE IN CASH AND CASH EQUIVALENTS..................................................... (4,156) (2,032) (192)
CASH AND CASH EQUIVALENTS at beginning of year............................................ 5,970 8,002 8,194
CASH AND CASH EQUIVALENTS at end of year..................................................$ 1,814 $ 5,970 $ 8,002
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on debt.....................................................$ 13,705 $ 13,702 $ 13,738
The Notes to Consolidated Financial Statements of Courtyard by Marriott II
Limited Partnership are an integral part of these statements.
See Accompanying Notes to Condensed Consolidated Financial Information.
SCHEDULE I
Page 4 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED CONSOLIDATED 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 on 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 the Host Marriott's conversion to a REIT, a change
of control occurred when Host Marriott 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 REIT 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 LP, has certain voting
rights with respect to CBM Two LLC.
The change 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 LP 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 to February 18, 1999. The tender offer was commenced on January
14, 1999 and expired on February 12, 1999. No Senior Notes were
tendered to Host LP in connection with the tender offer.
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, 1999
(in thousands)
Initial Costs Gross Amount at December 31, 1999
Subsequent Leasehold,
Buildings & Costs Buildings & Accumulated
Description Encumbrances Land Improvements Capitalized Land Improvements Total Depreciation
70 Courtyard by
Marriott Hotels $ 355,781 $25,392 $ 493,565 $ 58,547 $25,541 $ 551,963 $ 577,504 $ 161,980
Date of
Completion of Date Depreciation
Construction Acquired Life
70 Courtyard by 1987-1990 1987-1990 40 years
Marriott Hotels
Notes:
1997 1998 1999
(a) Reconciliation of Real Estate:
Balance at beginning of year....................................$ 542,872 $ 555,164 $ 567,776
Capital Expenditures............................................ 12,292 14,710 9,740
Dispositions/reclassifications.................................. - (2,098) (12)
Balance at end of year..........................................$ 555,164 $ 567,776 $ 577,504
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of year....................................$ 112,473 $ 128,448 $ 145,070
Depreciation.................................................... 15,975 16,622 16,910
Balance at end of year..........................................$ 128,448 $ 145,070 $ 161,980
(c) The aggregate cost of land, buildings and improvements for Federal income
tax purposes is approximately $567.6 million at December 31, 1999.
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 27th of March
2000.
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
By: CBM TWO LLC
. General Partner
/s/ Earla L. Stowe
Earla L. Stowe
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/ Christopher G. Townsend Executive Vice President, Secretary and Manager
Christopher G. Townsend
/s/ W. Edward Walter Treasurer
W. Edward Walter
/s/ Earla L. Stowe Vice President
Earla L. Stowe