UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): August 28, 2002
APPLE HOSPITALITY TWO, INC.
(Exact name of registrant as specified in its charter)
Virginia 333-53984 54-2010305
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification Number)
10 South Third Street, Richmond, VA 23219
(Address of principal executive offices) (Zip Code)
(804) 344-8121
(Registrant's telephone number, including area code)
Item 2. Acquisition or Disposition of Assets
Apple Hospitality Two, Inc. (which is referred to below as the
"Company" or as "we," "us" or "our") is filing this report pursuant to Item 2 of
Form 8-K. This report describes certain acquisitions involving a "significant
amount" of assets within the meaning of the General Instructions to Form 8-K.
Certain related matters also are reported below.
OVERVIEW
Acquisition of Hotels
On August 28, 2002, we acquired, through our subsidiaries, Marriott
Residence Inn II Limited Partnership, which has direct or indirect ownership of
23 extended-stay hotels. For simplicity, this entity will be referred to as the
"Partnership." Although the acquisition was conducted through a merger in which
our subsidiaries acquired the Partnership, the purpose and result was our
acquisition of the hotels. Each hotel operates as part of the Residence Inn(R)
by Marriott(R) franchise system (such trademarks are the property of Marriott
International, Inc. or
one of its affiliates). The hotels are described in another section below. As a
result of the acquisition, we now own a total of 48 hotels, which contain 5,767
suites.
The total purchase price for the acquisition was approximately $160
million. The purchase price, as subject to certain adjustments at closing, was
satisfied by a combination of actions. They included the assumption of existing
debt in the approximate amount of $132 million (representing outstanding
principal and interest as of August 31, 2002), which is secured by the hotels
owned directly by the Partnership, together with a cash payment for the net
balance of the purchase price (after credit for our deposit of $3 million, with
interest, and certain other cash balances). Our source for the cash payment was
our ongoing and registered public offering of units, plus funds raised in our
prior offering, which ended as of May 29, 2002.
We also used the proceeds of our ongoing offering to pay 2% of the
total purchase price for these 23 hotels, in the amount of $3,200,000, as a
commission to Apple Suites Realty Group, Inc. This entity is owned by Glade M.
Knight, who is one of our directors and our Chief Executive Officer.
ACQUISITIONS AND RELATED MATTERS
New Subsidiaries
We formed new subsidiaries to acquire the Partnership and its 23
hotels. Specifically, we formed two direct wholly-owned subsidiaries. One of
these subsidiaries, AHT Res II GP, Inc., acquired the entire general partnership
interest in the Partnership and now holds a 1% interest as its sole general
partner. The other newly-formed and directly-owned subsidiary, AHT Res II LP,
Inc., acquired the entire limited partnership interest in the Partnership and
now holds a 99% interest as its sole limited partner. The Partnership directly
owns all of the hotels, except for the hotel in Bossier City, Louisiana. For
simplicity, this hotel will be referred to as the "Bossier Hotel." The Bossier
hotel has been and continues to be owned by a wholly-owned subsidiary of the
Partnership, Bossier RIBM Two LLC.
We also formed new subsidiaries in connection with the leasing of the
hotels under master hotel lease agreements, which are among the material
contracts summarized in another section below. Specifically, we formed AHM Res
II GP, Inc. and AHM Res II LP, Inc., to serve as the sole general partner and
sole limited partner, respectively, of AHM Res II Limited Partnership. This
limited partnership was formed as one of our indirect, wholly-owned subsidiaries
to lease the 22 hotels owned directly by the Partnership. In a similar fashion,
we formed another limited partnership, Bossier Res II Limited Partnership, and
its general and limited partners, Bossier Res II GP, Inc. and Bossier Res II LP,
Inc., to lease the Bossier Hotel from its direct owner, Bossier RIBM Two LLC.
For simplicity, these two newly-formed limited partnerships will be referred to
as the "Lessees" or individually as a "Lessee."
Loans Secured By Hotels
The Partnership received a loan in the original principal amount of
$140 million prior to our recent acquisition of the Partnership. The current
lender, by assignment of the original loans, is LaSalle Bank National
Association, as Trustee for Nomura Asset Securities Corporation
2
Commercial Mortgage Pass-Through Certificates Series 1996-MD V. Our recent
acquisition of the Partnership occurred with the consent of the lender and did
not result in any material change to the terms or conditions of the loans.
The loan is secured by a first mortgage on the 22 hotels owned directly
by the Partnership and by a related first priority security interest in the
rents, revenues and other personal property of such hotels. For simplicity,
these 22 hotels will be referred to as the "Secured Hotels." On August 31, 2002,
the aggregate unpaid balance of the loan was approximately $132 million
(representing principal and interest). Interest accrues at an annual rate of
8.85%. The monthly payment under the loans is approximately $1.16 million. An
aggregate balloon payment in the amount of approximately $123 million is
scheduled to be due on the maturity date, which is March 10, 2006.
We expect that revenues from the Secured Hotels will be sufficient to
make monthly payments under the loan. If such revenues are not sufficient and
other sources of funds are not available, we could lose the Secured Hotels
through foreclosure. While the secured loan remains outstanding, certain
covenants apply to the Partnership, as the borrower, and its general partner, as
well as to AHM Res II Limited Partnership, as the lessee for the Secured Hotels,
and its general partner. Among other things, these covenants (a) prohibit such
entities from engaging in any business that is not related to the Secured Hotels
or the secured loans, (b) require such entities to each maintain a separate
legal identity and an arms-length relationship with affiliates, (c) restrict the
transfer of ownership interests in such entities, and (d) limit the extent to
which modifications may be made to the organizational documents of such
entities, or to the master hotel lease agreement or the amended and restated
management agreement for the Secured Hotels.
Other Actions
All 23 hotels have been and will continue to be managed by Residence
Inn By Marriott, Inc., which will be referred to, for simplicity, as the
"Manager." Such management is occurring in accordance with amended and restated
management agreements, which are among the material contracts described in the
next section.
SUMMARY OF MATERIAL CONTRACTS
Agreement and Plan of Merger
Our acquisition of the Partnership and its direct and indirect hotels
occurred in accordance with an agreement and plan of merger dated as of April
30, 2002. The closing occurred on August 28, 2002, after a number of required
conditions to closing were satisfied.
Master Hotel Lease Agreements
The Secured Hotels are leased by the Partnership to AHM Res II Limited
Partnership under a master hotel lease agreement dated as of August 28, 2002.
For simplicity, this master hotel lease agreement will be referred to as the
"Secured Hotel Lease." The Secured Hotel Lease provides for an initial term of
15 years. The applicable Lessee has the option to extend the term
3
for two additional five-year periods, provided it is not in default at the end
of the prior term or at the time the option is exercised.
The Secured Hotel Lease provides that the applicable Lessee will pay an
annual base rent, a quarterly percentage rent and a quarterly sundry rent.
Annual base rent is payable in advance in equal monthly installments. The amount
of annual base rent for the Secured Hotels ranges from $100,509 to $817,099 (as
prorated for 2002). The base rent will be adjusted each year in proportion to
the Consumer Price Index (based on the U.S. City Average). The lease
commencement date for each of the Secured Hotels for rent pro-ration and other
purposes is August 10, 2002. Percentage rent is payable quarterly. Percentage
rent depends on a formula that compares fixed "suite revenue breakpoints" with a
portion of "suite revenue," which is equal to gross revenue from suite rentals
less sales and room taxes, credit card fees and sundry rent (as described
below). The suite revenue breakpoints will be adjusted each year in proportion
to the Consumer Price Index (based on the U.S. City Average). Specifically, the
percentage rent is equal to the sum of (a) 17% of all year-to-date suite
revenue, up to the applicable suite revenue breakpoint, plus (b) 55% of the
year-to-date suite revenue in excess of the applicable suite revenue breakpoint,
as reduced by base rent and the percentage rent paid year to date. The sundry
rent is payable quarterly and equals 55% of all sundry revenue, which consists
of revenue other than suite revenue, less the amount of sundry rent paid
year-to-date.
In addition, the Partnership and the applicable Lessee have
entered into a tenant security agreement dated as of August 28, 2002 in which
the Lessee grants the Partnership a security interest in certain collateral to
secure, among other things, the Lessee's obligations under the Secured Hotel
Lease. The Bossier Hotel is leased under a master hotel lease agreement also
dated as of August 28, 2002, which is substantially similar to the Secured
Hotel Lease.
Amended and Restated Management Agreements
The Manager will continue to manage the Secured Hotels under an amended
and restated management agreement dated as of August 28, 2002, with the consent
of the secured lender and the applicable Lessee. For simplicity, this agreement
will be referred to as the "Management Agreement." Management services under the
Management Agreement include supervising the operation of the Secured Hotels and
collecting revenues from their operation for the benefit of the Lessee.
The initial term of the Management Agreement will continue until
December 28, 2012. The Manager may renew the term of the Management Agreement
for one period of 5 years, followed by four periods of 10 years each, provided
that an event of default by the Manager has not occurred and provided that the
Manager exercises its renewal option with respect to at least 80% of the Secured
Hotels that either meet the then-current brand standards for Residence Inn(R) by
Marriott(R) or are subject to property improvement programs reasonably required
by the Manager. The Manager may elect to renew for an additional term by giving
notice to the Lessee at least 18 months before the expiration of the then
current term. Such renewal may apply to all or only some of the Secured Hotels.
The Lessee may terminate the Management Agreement with respect to the Secured
Hotels if the total operating profit for certain specified periods does not
reach a specified minimum amount. The Manager has the option to avoid such
termination by advancing the amount of the deficiency in operating profit to the
Lessee.
The Manager will receive a management fee for its services. The total
management fee consists of a base management fee based on gross revenues, a
Residence Inn(R) system fee based on suite revenues and an incentive management
fee and a contingent management fee, both
4
based on operating profit. The formulas for these fees are complex and were the
result of prior negotiations between the Partnership and the Manager, but were
not materially changed in connection with our acquisition of the Partnership.
The Manager also may exercise a right of first refusal if the Lessee
receives a bona fide written offer from a third party that, if accepted and
consummated, would cause the Secured Hotels to have more than five separate
owners. In such an event, the applicable Lessee must cause the Partnership to
give prior notice to the Manager, which will then have 30 days in which to
exercise its right of first refusal. Any such purchase, lease or other
acquisition of the Secured Hotels by the Manager is required to comply with the
terms and conditions set forth in the bona fide offer. The Management Agreement
would remain in effect as to any Secured Hotels not involved in such sale, lease
or other disposition.
A substantially similar amended and restated management agreement was
executed with the Manager with respect to the Bossier Hotel.
Owner Agreement
In owner agreements dated as of August 28, 2002, the Manager granted
its consent to our acquisition of the Partnership and to the execution of the
Secured Hotel Lease and the lease for the Bossier Hotel. In return, the
Partnership, as the direct or indirect owner of the hotels, agreed to guarantee
the performance of the obligations, including monetary obligations, of each
Lessee under the management agreements described above.
Agreements with Secured Lender
The secured lender granted its consent to our acquisition of the
Partnership and to the leasing of the Secured Hotels to the applicable Lessee by
an acknowledgement, waiver, consent and amendment dated as of August 28, 2002.
The secured lender has security interests in the personal property at
the Secured Hotels, and in the rents and revenues from their operation, pursuant
to separate deeds of trust, assignments of leases and security agreements that
were executed by the Partnership prior to our acquisition.
The Partnership executed a facility mortgagee agreement, a supplemental
assignment of leases and rents and a supplemental security agreement, each dated
as of August 28, 2002. These agreements contain a number of provisions designed
to preserve and protect the secured lender's interest in the Secured Hotels.
These protections include subordinating the Secured Hotel Lease to the secured
lender's interest in its collateral, granting the secured lender a security
interest in the Partnership's interests under the Secured Hotel Lease and
granting the secured lender a security interest in any new furniture, fixtures
and equipment acquired by the Partnership or the applicable Lessee for the
Secured Hotels.
5
OUR PROPERTIES
We currently own a total of 48 extended-stay hotels, which contain
5,767 suites and are part of the Residence Inn(R) by Marriott(R) franchise
system. The hotels first began their operations during the period from 1984
through 1990. Each hotel was in business when acquired by us. Each hotel offers
one and two room suites with the amenities generally offered by upscale
extended-stay hotels. The hotels are located in developed areas in competitive
markets. We believe the hotels are well-positioned to compete in these markets
based on their location, amenities, rate structure and franchise affiliation. In
the opinion of management, all of the hotels are adequately covered by
insurance. All of our hotels are listed in the table below (with the recently
acquired 23 hotels indicated by an asterisk):
HOTEL SUMMARY
- -------------------------------------------------------------------------------------------------------------------------
State Hotel Suites State Hotel Suites
- -------------------------------------------------------------------------------------------------------------------------
Alabama Birmingham* .................. 128 Michigan Kalamazoo* ................ 83
Montgomery ................... 94 Southfield ................ 144
California Arcadia* ..................... 120 Mississippi Jackson* .................. 120
Bakersfield .................. 114
Concord-Pleasant Hill ........ 126 Missouri St. Louis-Chesterfield .... 104
Costa Mesa ................... 144 St. Louis-Galleria ........ 152
Irvine* ...................... 112
La Jolla ..................... 288 Nevada Las Vegas* ................ 192
Long Beach ................... 216
Placentia* ................... 112 New Mexico Santa Fe* ................. 120
San Ramon .................... 106
North Carolina Charlotte* ................ 91
Colorado Boulder ...................... 128 Greensboro* ............... 128
Connecticut Meriden ...................... 106 Ohio Akron* .................... 112
Cincinnati-Blue Ash ....... 118
Florida Boca Raton* .................. 120 Cincinnati-Sharonville .... 144
Clearwater-St. Petersburg* ... 88 Columbus .................. 96
Jacksonville* ................ 112 Dayton North .............. 64
Pensacola* ................... 64 Dayton South .............. 96
Georgia Atlanta Airport-Hapeville .... 126 Pennsylvania Philadelphia-Berwyn* ...... 88
Atlanta-Buckhead ............. 136
Atlanta-Cumberland ........... 130 South Carolina Columbia* ................. 128
Atlanta-Dunwoody ............. 144 Spartanburg* .............. 88
Illinois Chicago-Deerfield* ........... 128 Tennessee Memphis* .................. 105
Chicago-Lombard .............. 144
Texas Dallas-Irving ............. 120
Louisiana Shreveport-Bossier City* ..... 72 Houston-Clear Lake ........ 110
Lubbock* .................. 80
Massachusetts Boston-Danvers* .............. 96
Boston-Tewksbury ............. 130
- ---------------------
* Acquired on August 28, 2002.
6
Eight of our hotels are located in the same markets as extended-stay
hotels owned by Apple Suites, Inc. (These hotels are the ones located in
Atlanta-Buckhead, Atlanta-Cumberland, Boulder, Clearwater, Dallas-Irving,
Jackson, Philadelphia and St. Louis-Chesterfield). As discussed above, the
day-to-day operations of our hotels has been contracted to Residence Inn by
Marriott, Inc. and our hotels operate under the Residence Inn(R) by Marriott(R)
brand. The hotels owned by Apple Suites are operated on a day-to-day basis by a
separate management company and operate under the Homewood Suites(R) by Hilton
brand. We may in the future acquire additional hotels located in the same
markets as hotels owned by Apple Suites. Our Chairman and President, Glade M.
Knight, is also Chairman and President of Apple Suites.
The site of the Bossier Hotel is a portion of a larger property that
was previously used as an oil refinery. This refinery property has been a focus
of federal and state environmental agencies for a number of years and has
undergone environmental clean-up procedures. To deal with remaining subsurface
contamination on the refinery property, the U.S. Environmental Protection Agency
has developed a clean-up plan, which may result in the installation of
monitoring wells or extraction wells on the Bossier Hotel site. We have received
a letter from the U.S. Environmental Protection Agency informing us that the EPA
is in negotiations with certain other companies with regard to the performance
of the EPA-approved remedial design and remedial action plan and also telling us
that EPA has no intention of pursuing any party other than those other companies
for cleanup costs associated with the refinery property.
As part of the previous refinancing of the loan secured by the Secured
Hotels, the owner of the Bossier Hotel, a wholly-owned subsidiary of the
Partnership, was required to establish and fund a reserve account to be held by
the lender and to provide for any claim, investigation or litigation that may
arise from the environmental condition of the Bossier Hotel. The owner of the
Bossier Hotel is required to add $250,000 to the fund each year until 2006. The
current balance of this reserve account is $1,542,000. If funds are not
disbursed from the reserve account, the lender will hold the reserve until the
loan is repaid, or the relevant governmental authority determines that the
statute of limitations on filing any claims has expired and no further remedial
activities are required at the refinery site.
7
Item 7. Financial Statements and Exhibits
a. Financial Statements of Businesses Acquired
Marriott Residence Inn II Limited Partnership
(Audited)
Report of Independent Public Accountants ....................................... 9
Consolidated Balance Sheets as of December 31, 2001 and 2000 ................... 10
Consolidated Statements of Operations for the Fiscal Years Ended
December 31, 2001, 2000 and 1999 .......................................... 11
Consolidated Statements of Changes in Partners' Capital
for the Fiscal Years Ended December 31, 2001, 2000 and 1999 ............... 12
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 31, 2001, 2000 and 1999 .......................................... 13
Notes to Consolidated Financial Statements ..................................... 14
(Unaudited)
Condensed Consolidated Balance Sheets
June 14, 2002 and December 31, 2001 ....................................... 21
Condensed Consolidated Statements of Operations
Twelve and Twenty-Four Weeks Ended June 14, 2002 and June 15, 2001 ........ 22
Condensed Consolidated Statements of Cash Flows
Twenty-Four Weeks Ended June 14, 2002 and June 15, 2001 ................... 23
Notes to Condensed Consolidated Financial Statements ........................... 24
8
Report of Independent Public Accountants
TO THE PARTNERS OF MARRIOTT RESIDENCE INN II LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheets of Marriott
Residence Inn II Limited Partnership (a Delaware limited partnership) and
subsidiary, as of December 31, 2001 and 2000, and the related consolidated
statements of operations, changes in partners' capital and cash flows for each
of the three fiscal years in the period ended December 31, 2001. These financial
statements and the schedule referred to below are the responsibility of the
general partner's management. Our responsibility is to express an opinion on
these financial statements and schedule 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 Marriott Residence
Inn II Limited Partnership and subsidiary as of December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at Item
14(a)(2) is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Vienna, Virginia
March 18, 2002
*** This is a copy of the audit report previously issued by Arthur Andersen in
connection with the Partnership's filing on Form 10-K for the year ended
December 31, 2001. This audit report has not been reissued by Arthur
Andersen in connection with this filing on Form 8-K.
9
Consolidated Balance Sheets
Marriott Residence Inn II Limited Partnership and Subsidiary
December 31, 2001 and 2000
(in thousands)
2001 2000
------------- -------------
ASSETS
Property and equipment, net ........................................... $ 132,137 $ 133,126
Due from Residence Inn by Marriott, Inc. .............................. 3,005 2,814
Deferred financing costs, net of accumulated amortization ............. 1,738 2,150
Property improvement fund ............................................. 3,923 3,998
Restricted cash reserves .............................................. 7,762 7,693
Cash and cash equivalents ............................................. 25,149 22,291
------------- -------------
$ 173,714 $ 172,072
============= =============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt ....................................................... $ 132,198 $ 134,166
Incentive management fee due to Residence Inn by Marriott, Inc. ..... 5,440 2,895
Accounts payable and accrued expenses ............................... 2,037 1,998
------------- -------------
Total Liabilities ............................................. 139,675 139,059
------------- -------------
PARTNERS' CAPITAL
General Partner
Capital contribution .............................................. 707 707
Capital distributions ............................................. (461) (461)
Cumulative net income ............................................. 172 162
------------- -------------
418 408
------------- -------------
Limited Partners
Capital contributions ............................................. 62,155 62,155
Capital distributions ............................................. (45,640) (45,640)
Cumulative net income ............................................. 17,106 16,090
------------- -------------
33,621 32,605
------------- -------------
Total Partners' Capital ....................................... 34,039 33,013
------------- -------------
$ 173,714 $ 172,072
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
10
Consolidated Statements of Operations
Marriott Residence Inn II Limited Partnership and Subsidiary
For the Years Ended December 31, 2001, 2000 and 1999
(in thousands, except per Unit amounts)
2001 2000 1999
----------- ----------- -----------
REVENUES
Suites ......................................................... $ 63,727 $ 69,721 $ 68,360
Other .......................................................... 2,804 3,367 3,597
----------- ----------- -----------
Total revenues ............................................... 66,531 73,088 71,957
----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Suites ......................................................... 16,107 17,752 17,213
Other department costs and expenses ............................ 1,475 1,806 1,910
Selling, administrative and other .............................. 19,877 21,254 20,380
Depreciation ................................................... 7,295 7,163 8,120
Incentive management fee ....................................... 2,545 2,895 3,090
Residence Inn system fee ....................................... 2,549 2,789 2,734
Property taxes ................................................. 2,262 2,307 2,270
Base management fee ............................................ 1,331 1,462 1,439
Equipment rent and other ....................................... 1,165 1,202 1,325
Loss on impairment of long-lived assets ........................ -- 5,170 --
----------- ----------- -----------
54,606 63,800 58,481
----------- ----------- -----------
OPERATING PROFIT .................................................. 11,925 9,288 13,476
Interest expense ............................................... (12,362) (12,562) (12,681)
Interest income ................................................ 1,463 1,798 1,151
----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS .......................... 1,026 (1,476) 1,946
Extraordinary gain on the forgiveness of deferred incentive
management fees .............................................. -- 22,693 --
----------- ----------- -----------
NET INCOME ........................................................ $ 1,026 $ 21,217 $ 1,946
=========== =========== ===========
ALLOCATION OF NET INCOME
General Partner ................................................ $ 10 $ 212 $ 19
Limited Partners ............................................... 1,016 21,005 1,927
----------- ----------- -----------
$ 1,026 $ 21,217 $ 1,946
=========== =========== ===========
NET INCOME PER LIMITED PARTNER UNIT (70,000 Units) ................ $ 15 $ 300 $ 28
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
11
Consolidated Statements of Changes in Partners' Capital
Marriott Residence Inn II Limited Partnership and Subsidiary
For the Years Ended December 31, 2001, 2000 and 1999
(in thousands)
General Limited
Partner Partners Total
--------- ---------- -------
Balance, December 31, 1998 ..................... $ 177 $ 9,673 $ 9,850
Net income ................................ 19 1,927 1,946
--------- ---------- -------
Balance, December 31, 1999 ..................... 196 11,600 11,796
Net income ................................ 212 21,005 21,217
--------- ---------- -------
Balance, December 31, 2000 ..................... 408 32,605 33,013
Net income ................................ 10 1,016 1,026
--------- ---------- -------
Balance, December 31, 2001 ..................... $ 418 $ 33,621 34,039
========= ========== =======
The accompanying notes are an integral part of these consolidated financial
statements.
12
Consolidated Statements of Cash Flows
Marriott Residence Inn II Limited Partnership and Subsidiary
For the Years Ended December 31, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
---------- ---------- --------
OPERATING ACTIVITIES
Net income ............................................................... $ 1,026 $ 21,217 $ 1,946
Extraordinary gain on the forgiveness of deferred incentive
management fees ....................................................... -- (22,693) --
Depreciation ............................................................. 7,295 7,163 8,120
Deferred incentive management fee ........................................ 2,545 2,895 3,076
Amortization of deferred financing costs as interest ..................... 412 412 411
Loss on dispositions of property and equipment ........................... 2 73 125
Loss on impairment of long-lived assets .................................. -- 5,170 --
Change in operating accounts:
(Increase)/Decrease in due from Residence Inn by Marriott, Inc. ....... (191) 610 522
Increase/(Decrease) in accounts payable and accrued expenses .......... 39 (249) 430
Decrease/(Increase) in restricted cash reserves ....................... (91) 155 (251)
--------- --------- --------
Cash provided by operating activities .............................. 11,037 14,753 14,379
--------- --------- --------
INVESTING ACTIVITIES
Additions to property and equipment, net ................................. (6,308) (5,008) (7,387)
Change in property improvement fund ...................................... 75 (3,532) (607)
Change in restricted cash reserves ....................................... 768 (250) (250)
--------- --------- --------
Cash used in investing activities .................................. (5,465) (8,790) (8,244)
--------- --------- --------
FINANCING ACTIVITIES
Repayment of mortgage debt ............................................... (1,968) (1,767) (1,649)
Change in restricted cash reserves ....................................... (746) 216 452
--------- --------- --------
Cash used in financing activities .................................. (2,714) (1,551) (1,197)
--------- --------- --------
INCREASE IN CASH AND CASH EQUIVALENTS ....................................... 2,858 4,412 4,938
CASH AND CASH EQUIVALENTS at beginning of year .............................. 22,291 17,879 12,941
--------- --------- --------
CASH AND CASH EQUIVALENTS at end of year .................................... $ 25,149 $ 22,291 $ 17,879
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest .......................................... $ 11,960 $ 12,159 $ 12,278
========= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
13
Notes to Consolidated Financial Statements
Marriott Residence Inn II Limited Partnership and Subsidiary
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Marriott Residence Inn II Limited Partnership, a Delaware limited partnership,
was formed on September 20, 1988, to acquire, own and operate 23 Residence Inn
by Marriott hotels (the "Inns") and the land on which the Inns are located.
The Inns are located in 16 states in the United States: four in Florida, three
in California, two in both North Carolina and South Carolina and one in each
of Alabama, Illinois, Louisiana, Massachusetts, Michigan, Mississippi, Nevada,
New Mexico, Ohio, Pennsylvania, Tennessee and Texas. As of December 31, 2001,
the Inns have a total of 2,487 suites. The Inns are managed by Residence Inn
by Marriott, Inc. (the "Manager"), a wholly-owned subsidiary of Marriott
International, Inc. ("MII"), as part of the Residence Inn by Marriott hotel
system.
The partnership was formed through a public offering of 70,000 limited
partnership interests (the "Units") in 1998. The sole general partner, with a
1% interest, is RIBM Two LLC, a Delaware single member limited liability
company, which is owned directly and indirectly by Host Marriott, L.P. (`Host
LP"), as of December 31, 2001.
To facilitate the refinancing of the partnership's mortgage debt, on March 22,
1996, as permitted by the partnership agreement, the partnership transferred
ownership of the Bossier City Residence Inn to a newly formed subsidiary,
Bossier RIBM Two LLC ("Bossier LLC"), a Delaware limited liability company.
Partnership Allocations and Distributions
Net profits for Federal income tax purposes are generally allocated to the
partners in proportion to the distributions of cash available for
distribution. The partnership generally distributes cash available for
distribution as follows: (i) first, 99% to the limited partners and 1% to the
general partner, until the partners have received, with respect to such year,
an amount equal to 10% of their Net Capital Investment, defined as the excess
of original capital contributions over cumulative distributions of net
refinancing and sales proceeds ("Capital Receipts"); and (ii) second,
remaining cash available for distribution will be distributed as follows,
depending on the amount of Capital Receipts previously distributed:
(a) 99% to the limited partners and 1% to the general partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts of less than 50% of their original capital contributions; or
(b) 90% to the limited partners and 10% to the general partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to or greater than 50% but less than 100% of their
original capital contributions; or
(c) 75% to the limited partners and 25% to the general partner, if the
partners have received aggregate cumulative distributions of Capital
Receipts equal to 100% or more of their original capital contributions.
For Federal income tax purposes, losses and net losses are allocated 99% to
the limited partners and 1% to the general partner.
14
Notes to Consolidated Financial Statements
Marriott Residence Inn II Limited Partnership and Subsidiary
Capital Receipts not retained by the partnership will generally be distributed
(i) first, 99% to the limited partners and 1% to the general partner until the
partners have received cumulative distributions from all sources equal to a
cumulative simple return of 12% per annum on their Net Capital Investment and
an amount equal to their contributed capital, payable only from Capital
Receipts; (ii) next, if the Capital Receipts are from a sale, 100% to the
general partner until it has received 2% of the gross proceeds from the sale;
and (iii) thereafter, 75% to the limited partners and 25% to the general
partner.
Gains will generally be allocated (i) first, to those partners whose capital
accounts have negative balances until such negative balances are brought to
zero; (ii) second, to all partners in amounts necessary to bring their
respective capital account balances equal to their invested capital, as
defined, plus a 12% return on such invested capital; (iii) next, to the
general partner in an amount necessary to bring the general partner's capital
account balance to an amount which is equal to 2% of the gross proceeds from
the sale, and (iv) thereafter, 75% to the limited partners and 25% to the
general partner.
Proceeds from a sale of substantially all of the assets of the partnership
will be distributed to the partners in accordance with their capital account
balances as adjusted to take into account gain or loss resulting from such
sale.
For financial reporting purposes, profits and losses are allocated among the
partners based upon their stated interests in cash available for distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The partnership's records are maintained on the accrual basis of accounting
and its fiscal year coincides with the calendar year.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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:
Land improvements 40 years
Building and improvements 40 years
Furniture and equipment 3 to 10 years
All property and equipment at 22 of the partnership's 23 Inns (Bossier City
excluded) is pledged as security for the mortgage debt described in Note 6.
15
Notes to Consolidated Financial Statements
Marriott Residence Inn II Limited Partnership and Subsidiary
The partnership 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. During 2000, the Inn
located in Memphis, Tennessee experienced declining cash flows, primarily due
to additional competition in its local market. As a result, the partnership
concluded that the Inn was impaired, adjusted its basis to the estimated fair
market value, and recorded an impairment charge of $5,170,000 during the
fourth quarter of 2000. There was no such adjustment required at December 31,
2001.
Income Taxes
Provision for Federal and state income taxes has not been made in the
consolidated financial statements since the partnership does not pay income
taxes but rather allocates profits and losses to the individual partners.
Significant differences exist between the net income for financial reporting
purposes and the net income (loss) as reported in the partnership's tax
return. These differences are due primarily to the use, for income tax
purposes, of accelerated depreciation methods and shorter depreciable lives of
the assets and the timing of the recognition of base and incentive management
fee expense. As a result of these differences, the partnership's net assets
reported in the accompanying consolidated financial statements exceed the tax
basis of such net assets by $6,819,000 and $8,721,000 as of December 31, 2001
and 2000, respectively.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the debt financing and are amortized over the term of the debt. As
of December 31, 2001 and 2000, deferred financing costs, net of accumulated
amortization, totaled $1,738,000 and $2,150,000, respectively. Amortization of
deferred financing costs totaled $412,000, $412,000 and $411,000 in 2001,
2000, and 1999, respectively.
Restricted Cash Reserves
On March 22, 1996, the partnership was required to establish certain reserves
in conjunction with the refinancing of the Mortgage Debt as described in Note
6. The balances in those reserves, along with other reserves, as of December
31 are as follows (in thousands):
2001 2000
---------- ----------
Capital Expenditure Reserve ....................... $ 1,523 $ 2,291
Debt Service Reserve .............................. 5,172 4,426
Real Estate Tax and Insurance Reserve ............. 1,067 976
---------- ----------
$ 7,762 $ 7,693
========== ==========
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.
Reclassifications
Certain reclassifications were made to the prior year financial statements to
conform to the 2001 presentation.
16
Notes to Consolidated Financial Statements
Marriott Residence Inn II Limited Partnership and Subsidiary
Application of New Accounting Standards
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" which replaces
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets SFAS No. 121"
to determine when a long-lived asset should be classified as held for sale,
among other things. Those criteria specify that the asset must be available for
immediate sale in its present condition, subject only to terms that are usual
and customary for sales of such assets, and the sale of the asset must be
probable, and its transfer expected to qualify for recognition as a completed
sale, within one year. This Statement is effective for fiscal years beginning
after December 15, 2001. The Partnership does not believe implementation of the
standard will have a material effect on the Partnership.
NOTE 3. LITIGATION SETTLEMENT
In September 2000, the general partner, Marriott International, Inc., and
related defendants closed on the settlement of a lawsuit filed by limited
partners from seven limited partnerships, including the partnership's limited
partners ("Litigation Settlement"). In accordance with the terms of the
settlement, the defendants made cash payments of approximately $152 per Unit to
the limited partners, in exchange for dismissal of the litigation and a complete
release of all claims. In addition to these cash payments, the Manager agreed to
forgive $22.7 million of deferred incentive management fees payable by the
partnership, which is reflected as an extraordinary gain in the statements of
operations for the year ended December 31, 2000.
The partnership and the Inns 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.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
2001 2000
----------- ------------
Land .............................................. $ 36,613 $ 36,613
Building and improvements ......................... 132,841 128,145
Furniture and equipment ........................... 34,093 32,497
----------- ------------
203,547 197,255
Accumulated depreciation .......................... (71,410) (64,129)
----------- ------------
$ 132,137 $ 133,126
=========== ============
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments are shown below (in
thousands). The fair values of financial instruments not included in this table
are estimated to be equal to their carrying amounts.
17
Notes to Consolidated Financial Statements
Marriott Residence Inn II Limited Partnership and Subsidiary
As of December 31, 2001 As of December 31, 2000
-------------------------- ---------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ---------- ---------- -----------
Mortgage debt ........................... $ 132,198 $ 132,628 $ 134,166 $ 137,427
The estimated fair value of the mortgage debt obligation is based on expected
future debt service payments discounted at estimated risk adjusted rates.
NOTE 6. MORTGAGE DEBT
The partnership's mortgage debt (the "Mortgage Debt") is comprised of a $140
million note. The Mortgage Debt is nonrecourse to the partnership, bears
interest at a fixed rate of 8.85% based upon actual number of days over a 360
day year for a 10-year term expiring March 10, 2006 and required payments of
interest only during the first loan year and principal amortization based upon a
25-year amortization schedule beginning with the second loan year.
Principal amortization of the Mortgage Debt at December 31, 2001 is as follows
(in thousands):
2002 ................... $ 2,152
2003 ................... 2,353
2004 ................... 2,540
2005 ................... 2,811
2006 ................... 122,342
Thereafter ............. --
---------
$ 132,198
=========
The Mortgage Debt is secured by first mortgages on 22 of the partnership's 23
Inns, the land on which they are located, a security interest in all personal
property associated with those Inns including furniture and equipment,
inventory, contracts, and other intangibles and the partnership's rights under
the management agreements. The Bossier City Residence Inn did not pass certain
required thresholds to enable the property to collateralize the Mortgage Debt.
The partnership was required to deposit $500,000 into a reserve account and fund
$250,000 annually into the account to provide for any claim, investigation, or
litigation that may arise from any environmental condition at the Bossier City
Residence Inn. The initial $500,000 deposit was funded by the lender. The
partnership is required to repay the initial reserve as promptly as possible if
the partnership draws on the deposit or by the end of the 10-year term in March
2006. Any draws upon the account will accrue interest at the 30-day London
Interbank Offered Rate ("LIBOR") plus 4.5 percentage points. If the partnership
does not need to draw on the reserve account, the lender will hold the reserve
until such time as the Mortgage Debt is either repaid, or a governmental
authority determines that the statute of limitations on filing any claims has
expired or that no further remedial activities are required at the property. The
balance of this reserve, as of December 31, 2001, is $1,292,000 and is included
in capital expenditure reserves, a component of restricted cash on the
accompanying consolidated balance sheets.
Pursuant to the terms of the Mortgage Debt, the partnership was required to
establish with the lender a separate escrow account for payments of insurance
premiums and real estate taxes (the "Real Estate Tax and Insurance Escrow
Reserves") for each mortgaged property due to a downgrade of the credit rating
of MII by Standard and Poor Rating Services in 1997. The partnership funded the
Real Estate Tax and Insurance Escrow Reserve for $834,000 in 1997. As a result
of this downgrade, the Mortgage Debt also required the partnership to fund an
18
Notes to Consolidated Financial Statements
Marriott Residence Inn II Limited Partnership and Subsidiary
additional month's debt service into the debt service reserve account over a six
month period and the Manager required the partnership to fund an additional
working capital reserve. Additionally, the terms of the Mortgage Debt require
the partnership to maintain a debt service reserve equal to three months of debt
service and a reserve for environmental remediation projects identified during
the course of the environmental studies undertaken in conjunction with the
refinancing.
NOTE 7. MANAGEMENT AGREEMENTS
The Manager operates the Inns pursuant to two long-term management agreements
("Management Agreements") with initial terms expiring December 31, 2012. The
Management Agreements expire in 2012 with renewal at the option of the Manager
for one or more of the Inns for up to 45 years thereafter. The Manager earns a
base management fee equal to 2% of the Inns' gross revenues. Base management
fees are paid currently.
In addition, the Manager is entitled to an incentive management fee equal to 15%
of Operating Profit, as defined (23.5% in any year in which operating profit is
equal to or greater than $25.3 million; however, cumulative incentive management
fees cannot exceed 20% of cumulative Operating Profit). The incentive management
fee is payable out of 50% of cash flow from operations remaining after payment
of debt service, provision for partnership administrative expenses, payment of
the base management fee, payment of deferred base management fees and retention
by the partnership of annual cash flow from operations of $7,071,000. After the
partnership has retained an additional 5% return, the incentive management fee
is payable out of 75% of the remaining cash flow from operations. Unpaid
incentive management fees are deferred without interest and are payable from
future operating cash flow, as defined. Incentive management fees of $2,545,000,
$2,895,000 and $3,090,000 were earned during 2001, 2000 and 1999, respectively.
The partnership did not pay incentive management fees in 2001 or 2000. During
1999, the partnership paid incentive management fees of $14,000. Deferred
incentive management fees were $5,440,000 and $2,895,000 as of December 31, 2001
and 2000, respectively. In connection with the Litigation Settlement, the
Manager waived $22,693,000 of deferred incentive management fees, which was
recognized as an extraordinary gain during 2000.
The Management Agreements also provide for annual payments of the Residence Inn
system fee equal to 4% of suite revenues. In addition, the Manager is reimbursed
for each Inn's pro rata share of the actual costs and expenses incurred in
providing certain chain services on a central or regional basis to all hotels
operated by the Manager. As franchiser of the Residence Inn by Marriott system,
the Manager maintains a marketing fund to pay the costs associated with certain
system-wide advertising, promotional, and public relations materials and
programs, and operating a toll-free reservation system. Each Inn contributes
2.5% of suite revenues to the marketing fund. The Inns also participate in the
Marriott Rewards Program ("MRP"). The cost of this program is charged to all
hotels in the Marriott hotel system. For the years ended December 31, 2001, 2000
and 1999, respectively, the partnership paid a Residence Inn system fee of
$2,549,000, $2,789,000 and $2,734,000, reimbursed the Manager for $1,803,000,
$1,941,000 and $1,975,000 of chain services, contributed $1,593,000, $1,743,000
and $1,705,000 to the marketing fund, and paid MRP costs of $191,000, $277,000
and $249,000. Chain services, contributions to the marketing fund and MRP costs
are included in other operating expenses in the accompanying consolidated
statements of operations.
The partnership is required to provide the Manager with working capital to meet
the operating needs of the Inns. 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
Agreements, the working capital will be returned to the partnership. The
individual components of working capital controlled by the Manager are not
reflected in the partnership's
19
Notes to Consolidated Financial Statements
Marriott Residence Inn II Limited Partnership and Subsidiary
consolidated balance sheets. For December 31, 2001 and 2000, $2,050,000 has been
advanced to the Manager for working capital which is included in Due from
Residence Inn by Marriott, Inc. in the accompanying consolidated balance sheets.
The Management Agreements provide for the establishment of a property
improvement fund for the Inns to cover the cost of replacements and renewals to
the Inns' property and improvements. Total contributions to the property
improvement fund for the years ended December 31, 2001, 2000 and 1999 were
$4,657,000, $6,716,000 and $7,535,000, respectively. Based on capital budgets,
it was determined that the property improvement fund was insufficient to meet
current needs beginning in 1998. The shortfall is primarily due to the need to
complete total suite refurbishments at the majority of the partnership's Inns.
To reduce this shortfall, the partnership provided additional cash contributions
of $1.6 million and $2.5 million to the property improvement fund in the first
quarters of 2000 and 1999, respectively, and increased the contribution rate
beginning in 1999 to 7% of gross Inn revenues. In addition, the Partnership has
agreed to fund $9.7 million of capital expenditures. Actual funding of these
improvements is not expected to occur until the end of the year.
20
Marriott Residence Inn II Limited Partnership
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
June 14, December 31,
2002 2001
------------- ----------------
(Unaudited)
ASSETS
Property and equipment, net ............................................. $ 129,888 $ 132,137
Due from Residence Inn by Marriott, Inc. ................................ 4,308 3,005
Deferred financing costs, net of accumulated amortization ............... 1,548 1,738
Property improvement fund ............................................... 5,188 3,923
Restricted cash reserves. ............................................... 6,316 7,762
Cash and cash equivalents ............................................... 25,854 25,149
------------- ----------------
$ 173,102 $ 173,714
============= ================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt ........................................................... $ 131,130 $ 132,198
Incentive management fee due to Residence Inn by Marriott, Inc. ......... 6,625 5,440
Accounts payable and accrued expenses ................................... 1,503 2,037
------------- ----------------
Total Liabilities ................................................. 139,258 139,675
------------- ----------------
PARTNERS' CAPITAL
General partner ......................................................... 417 418
Limited Partners......................................................... 33,427 33,621
------------- ----------------
Total Partners' Capital ........................................... 33,844 34,039
------------- ----------------
$ 173,102 $ 173,714
============= ================
See Notes to Condensed Consolidated Financial Statements.
21
Marriott Residence Inn II Limited Partnership
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except Unit and per Unit amounts)
Twelve Weeks Ended Twenty-Four Weeks Ended
June 14, June 15, June 14, June 15,
2002 2001 2002 2001
------------- -------------- ------------- --------------
REVENUES
Suites .................................... $ 14,783 $ 15,468 $ 28,805 $ 31,429
Other ..................................... 526 717 1,100 1,405
------------- -------------- ------------- --------------
Total revenues ...................... 15,309 16,185 29,905 32,834
------------- -------------- ------------- --------------
OPERATING COSTS AND EXPENSES
Suites .................................... 3,576 3,961 7,004 8,018
Department costs and expenses ............. 450 507 897 927
Selling, administrative and other ......... 4,359 4,495 8,645 9,425
Depreciation .............................. 1,651 1,712 3,319 3,384
Incentive management fee .................. 606 645 1,185 1,286
Residence Inn system fee .................. 591 619 1,073 1,257
Property taxes ............................ 567 542 1,102 1,037
Equipment rent and other .................. 861 417 1,040 642
Base management fee ....................... 306 324 598 657
------------- -------------- ------------- --------------
OPERATING PROFIT ............................. 2,342 2,963 5,042 6,201
Interest expense .......................... (2,809) (2,851) (5,531) (5,646)
Interest income ........................... 164 419 294 733
------------- -------------- ------------- --------------
NET INCOME (LOSS) ............................ $ (303) $ 531 $ (195) $ 1,288
============= ============== ============= ==============
ALLOCATION OF NET INCOME (LOSS)
General partner ........................... $ (3) $ 5 $ (2) $ 13
Limited Partners .......................... (300) 526 (193) 1,275
------------- -------------- ------------- --------------
$ (303) $ 531 $ (195) $ 1,288
============= ============== ============= ==============
NET INCOME (LOSS) PER LIMITED PARTNER UNIT
(70,000 Units) ............................ $ (4) $ 7 $ (3) $ 18
============= ============== ============= ==============
See Notes to Condensed Consolidated Financial Statements.
22
Marriott Residence Inn II Limited Partnership
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
Twenty-Four Weeks Ended
June 14, June 15,
2002 2001
------------- --------------
OPERATING ACTIVITIES
Net income (loss) ................................................... $ (195) $ 1,288
Depreciation ........................................................ 3,319 3,384
Amortization of deferred financing costs ............................ 190 191
Deferred incentive management fees .................................. 1,185 1,286
Loss on dispositions of fixed assets ................................ -- 2
Changes in operating accounts ....................................... (1,835) (2,583)
------------- --------------
Cash provided by operating activities ......................... 2,664 3,568
------------- --------------
INVESTING ACTIVITIES
Additions to property and equipment, net ............................ (1,070) (1,401)
Change in property improvement fund ................................. (1,265) (1,541)
------------- --------------
Cash used in investing activities ............................. (2,335) (2,942)
------------- --------------
FINANCING ACTIVITIES
Repayment of mortgage debt .......................................... (1,068) (964)
Change in debt service reserves ..................................... 1,444 944
------------- --------------
Cash provided by (used in) financing activities ............... 376 (20)
------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS .................................. 705 606
CASH AND CASH EQUIVALENTS at beginning of period ....................... 25,149 22,291
------------- --------------
CASH AND CASH EQUIVALENTS at end of period ............................. $ 25,854 $ 22,897
============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest ..................................... $ 5,894 $ 5,999
============= ==============
See Notes to Condensed Consolidated Financial Statements.
23
Marriott Residence Inn II Limited Partnership
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization
Marriott Residence Inn II Limited Partnership (the "Partnership"), a Delaware
limited partnership, owns 23 Marriott Residence Inn properties (the "Inns") and
the land on which the Inns are located. The Inns are located in 16 states and
contain a total of 2,487 suites. The Inns are managed by Residence Inn by
Marriott, Inc. (the "Manager"), a wholly owned subsidiary of Marriott
International, Inc. See Note 4 Subsequent Events for a discussion of a proposed
merger with Apple Hospitality Two, Inc.
2. Summary of Significant Accounting Policies
The accompanying condensed consolidated financial statements of the Partnership
have been prepared without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted. The Partnership believes the disclosures made are adequate
to make the information presented not misleading. However, the unaudited,
condensed consolidated financial statements should be read in conjunction with
the Partnership's consolidated financial statements and notes thereto included
in the Partnership's annual report on Form 10-K for the year ended December 31,
2001.
In the opinion of the Partnership, the accompanying unaudited, condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the financial position of the Partnership as of June 14, 2002, and the
results of its operations for the twelve and twenty-four weeks ended June 14,
2002 and June 15, 2001 and cash flows for the twenty-four weeks ended June 14,
2002 and June 15, 2001. Interim results are not necessarily indicative of full
year performance because of the impact of seasonal and short-term variations.
For financial reporting purposes, net income of the Partnership is allocated 99%
to the limited partners and 1% to RIBM Two LLC, the general partner. Significant
differences exist between the net income for financial reporting purposes and
the net income for federal income tax purposes. These differences are due
primarily to the use, for federal income tax purposes, of accelerated
depreciation methods and shorter depreciable lives of the assets, and
differences in the timing of the recognition of incentive management fee
expense.
3. Amounts Paid to the General Partner and Marriott International, Inc.
The chart below summarizes cash amounts paid to the general partner and Marriott
International, Inc. for the twenty-four weeks ended June 14, 2002 and June 15,
2001 (in thousands):
2002 2001
----------- -----------
Marriott International, Inc.:
Residence Inn system fee ............................ $ 1,073 $ 1,257
Chain services and Marriott Rewards Program ......... 739 938
Marketing fund contribution ......................... 720 786
Base management fee ................................. 598 657
----------- -----------
$ 3,130 $ 3,638
=========== ===========
General partner:
Administrative expenses reimbursed .................. $ 139 $ 70
=========== ===========
24
4. Subsequent Events
As disclosed in a letter to the limited partners on April 30, 2002, and in a
consent solicitation distributed to the limited partners on or about July 8,
2002, the Partnership has entered into a definitive merger agreement with Apple
Hospitality Two, Inc. ("Apple") and AHT RES II Acquisition, L.P., a wholly owned
indirect subsidiary of Apple, pursuant to which Apple will acquire all of the
outstanding partnership interests in the Partnership and will assume
approximately $131 million of the Partnership's indebtedness and the
Partnership's obligation to fund the $9.7 million capital expenditure plan for
the current fiscal year.
The aggregate purchase price for all of the outstanding units and the one
percent general partner interest is $29,250,000. If the merger is completed, the
limited partners will receive $415 in cash for each unit of limited partnership
interest owned immediately prior to the closing of the merger. In addition, the
limited partners will receive a beneficial interest in a liquidating trust to be
created by the Partnership to hold several contingent assets of the Partnership
and to facilitate certain cashflow adjustments and other transactions to be made
by the parties after the closing of the merger. Prior to the closing of the
merger, the Partnership will contribute $300,000 ($4.28 per unit) and assign
certain contingent assets to this trust, which will be managed without profit by
the general partner. Approximately two years after the completion of the merger,
the trust will be liquidated and its remaining assets distributed to the limited
partners. The general partner will receive $200,000 in cash for its 1% general
partner interest, which will be retained by Apple for a period of time after
completion of the merger to satisfy certain indemnification obligations that the
general partner agreed to fund under the merger agreement.
Consummation of the merger is subject to certain conditions, including approval
of the merger by the limited partners holding a majority of the issued and
outstanding units, consent of the Partnership's lender and consent of the
Manager. On July 8, 2002, the Partnership commenced a consent solicitation
seeking the consent of a majority of the holders to the proposed merger. The
Partnership mailed a copy of the consent solicitation to each limited partner
who is listed on the records of the Partnership on July 3, 2002. The consent
period ends at 2:00 p.m. on August 8, 2002.
25
b. Pro Forma Financial Information
Apple Hospitality Two, Inc.
(Unaudited)
Pro Forma Condensed Consolidated Balance Sheet As of June 30, 2002.............................. 27
Notes to Pro Forma Condensed Consolidated Balance Sheet......................................... 28
Pro Forma Condensed Consolidated Statements of Operations For the
Year Ended December 31, 2001 and the Six Months Ended June 30, 2002....................... 29
Notes to Pro Forma Condensed Consolidated Statements of Operations.............................. 30
26
Apple Hospitality Two, Inc.
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2002 (unaudited)
The following unaudited Pro Forma Condensed Consolidated Balance Sheet of Apple
Hospitality Two, Inc. (the "Company") is presented as if the purchase of
Marriott Residence Inn Limited Partnership (the "Partnership"), containing 23
Residence Inn(R) by Marriott(R) hotels, for approximately $160 million in gross
purchase price had occurred on June 30, 2002.
This pro forma Balance Sheet also assumes all of the hotels had been leased to
our wholly owned subsidiary pursuant to master hotel lease agreements. Residence
Inn By Marriott, Inc. will continue to manage the hotels under agreements not
materially different from historical contractual arrangements.
Such pro forma information is based in part upon the historical Consolidated
Balance Sheet of the Company, and the historical Balance Sheet of the Marriott
Residence Inn Limited Partnership and Residence Inn III LLC. In management's
opinion, all adjustments necessary to reflect the effects of these transactions
have been made.
The following unaudited Pro Forma Condensed Consolidated Balance Sheet of the
Company is not necessarily indicative of what actual financial condition of the
Company would have been assuming such transactions had been completed on
June 30, 2002, nor does it purport to represent the financial position for
future periods. These unaudited pro forma condensed financial statements should
be read in conjunction with the Company's historical consolidated financial
statements.
Company (A)
Historical Historical Pro
Consolidated Marriott Forma Total
Balance Sheet Residence Inn II LP Adjustments (B) Proforma
-------------------------------------------------------------------------
ASSETS
Investment in hotel properties $ 249,532,341 $ 129,888,000 $ 1,646,703 (C) $ 381,067,044
Cash and cash equivalents 68,794,802 25,854,000 (30,942,703) (B) 63,706,099
Restricted cash reserves 6,316,000 6,316,000
Deposit for potential acquisition 3,000,000 - (3,000,000) (B) -
Due from Residence Inn by Marriott, Inc. 2,535,282 4,308,000 6,843,282
Furniture, fixtures & equipment reserve 7,132,744 5,188,000 - 12,320,744
Deferred financing costs, net of accumulated amortizaton 1,548,000 (1,548,000) (D) -
Deposit for refinancing 2,000,105 - - 2,000,105
Other assets 3,685,176 - - 3,685,176
- - - -
-------------------------------------------------------------------------
Total Assets $ 336,680,450 $ 173,102,000 $ (33,844,000) $ 475,938,450
=========================================================================
LIABILITIES and SHAREHOLDERS' EQUITY
Liabilities
Mortgage notes payable $ 142,912,276 $ 131,130,000 $ 274,042,276
Accounts payable - affiliate 123,610 - 123,610
Accounts payable and accrued expenses 2,476,954 1,503,000 3,979,954
Capital lease obligations 153,066 - 153,066
Interest payable 367,888 - 367,888
Deferred incentive management fees payable 818,580 6,625,000 7,443,580
---------------------------------------------------- -------------
Total Liabilities 146,852,374 139,258,000 - 286,110,374
Shareholders' equity
Total partmers' capital 33,844,000 (33,844,000) (E) -
Preferred stock, no par value, authorized
15,000,000 shares; none issued or outstanding - -
Common stock, no par value, authorized 200,000,000
shares; issued and outstanding 21,344,510 shares 190,484,388 190,484,388
Class B convertible stock, no par value, authorized
240,000 shares; issued and outstanding 240,000 shares 24,000 24,000
Distributions greater than net income (680,312) (680,312)
-------------------------------------------------------------------------
Total Shareholders' Equity 189,828,076 33,844,000 (33,844,000) 189,828,076
-------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 336,680,450 $ 173,102,000 $ (33,844,000) $ 475,938,450
=========================================================================
27
Notes to Pro Forma Condensed Consolidated Balance Sheet (unaudited)
(A) Represents the historical June 30, 2002 balance sheet of the partnership.
(B) Total purchase price consists of the following:
Purchase price per contract, net of cash acquired $ 135,756,718
Fair value of deferred incentive management fee liability
assumed 6,625,000
Fair value of other liabilities assumed 1,503,000
-------------
Sub-total 143,884,718
Acquisition fee payable to ASRG 3,199,732
Additional closing costs 262,253
-------------
Total purchase price $ 147,346,703
=============
The purchase price was satisfied by the following:
Cash:
-on hand $ 5,088,703
-deposit previously made to seller 3,000,000
Assumption of mortgage loan at fair value 131,130,000
Assumption of other liabilities 8,128,000
-------------
$ 147,346,703
=============
(C) Allocation of purchase price (see Note B above) to assets acquired at
fair value are as follows:
Purchase price (See Note B) $ 147,346,703
Less:
Restricted cash - FF&E reserves (11,504,000)
Other assets and prepaids (4,308,000)
-------------
Amount allocated to investment in hotel properties 131,534,703
Net book value of investment in hotel properties 129,888,000
-------------
Net increase in book value of investment in hotels $ 1,646,703
=============
(D) Represents elimination of deferred financing costs.
(E) Represents the elimination of Partners' capital account from prior owner.
28
Apple Hospitality Two, Inc.
Pro Forma Condensed Consolidated Statements of Operations (unaudited)
For the twelve months ended December 31, 2001 (audited) and the six months ended
June 30, 2002 (unaudited)
The following unaudited Pro Forma Condensed Consolidated Statement of Operations
of Apple Hospitality Two, Inc. (the "Company") are presented as if the purchase
of Marriott Residence Inn II Limited Partnership (the "Partnership"), containing
23 Residence Inn(R) by Marriott(R) hotels, for approximately $160 million in
gross purchase price had occurred on January 1, 2001 for the twelve month and
January 1, 2002, for the six month statement of operations.
In addition, the unaudited Pro Forma Condensed Statement of Operations includes
the purchase of 15 Residence Inn(R) by Marriott(R) hotels in March 2002 for an
aggregate purchase price of $133 million; as well as, 10 Residence Inn(R)
by Marriott(R) hotels from Crestline Capital Corporation in September 2001,
for an aggregate purchase price of $123.5 million. The results of operations
subsequent to our purchase are included in the historical statement of
operations of the Company.
This pro forma Statement of Operations also assumes all of the hotels had been
leased to our wholly owned subsidiary pursuant to master hotel lease agreements.
Residence Inn by Marriott, Inc. will continue to manage the hotels under
agreements not materially different from historical contractual arrangements.
Such pro forma information is based in part upon the historical Consolidated
Statements of Operations of the Company, and the historical Statements of
Operations of the Marriott Residence Inn I and II Limited Partnerships and
Residence Inn III LLC. In management's opinion, all adjustments necessary to
reflect the effects of these transactions have been made.
The following unaudited Pro Forma Condensed Consolidated Statement of Operations
of the Company are not necessarily indicative of what actual results of
operations of the Company would have been assuming such transactions had been
completed on January 1, 2001 for the twelve month and January 1, 2002 for the
six month statement of operations, nor does it purport to represent the results
of operations for future periods.
For the twelve months ended December 31, 2001
Company
Historical
Statement of Historical
Operations Residence Inn Pro forma Pro forma before
(May 1- Dec. 31) III LLC (A) Adjustments 2002 acquisitions
-------------------------------------------------------- -------------------
Revenue:
Suite revenue $ 10,022,272 27,564,918 - $ 37,587,190
Other operating revenue 414,493 - - 414,493
Interest income 2,005,006 - (1,827,669) (B) 177,337
--------------------------------------------------- ----------------
Total revenue 12,441,771 27,564,918 (1,827,669) 38,179,020
Expenses:
Operating expenses 4,516,264 12,288,306 - 16,804,570
General and administrative 491,009 - 372,897 (C) 863,906
Franchise fees (Residence Inn System Fee) 400,888 1,055,127 - 1,456,015
Management fees 474,041 551,298 - 1,025,339
Permits, Licenses & Lease Payments - 128,688 - 128,688
Chain Services 233,643 552,449 - 786,092
Incentive management fees - 841,983 - 841,983
Taxes, insurance and other 552,734 1,322,418 - 1,875,152
Depreciation of real estate owned 1,084,933 - 2,019,336 (D) 3,104,269
-
Interest 1,371,540 - 2,868,745 (E) 4,240,285
-
--------------------------------------------------- ----------------
Total expenses 9,125,052 16,740,269 5,260,978 31,126,299
Income tax expense - - - -
--------------------------------------------------- ----------------
Net income $ 3,316,719 10,824,649 (7,088,647) 7,052,721
=================================================== ================
Earnings per common share:
Basic and Diluted $ 0.52 0.75
============== ================
Basic and diluted weighted average
common shares outstanding 6,334,649 3,038,590 9,373,239
Pro forma before Historical
Historical acquisition of Marriott
Marriott Residence Pro forma Marriott Residence Residence
Inn LP (A) Adjustments Inn II LP Inn II LP (A)
---------------------------------------------------------------------------------
Revenue:
Suite revenue $ 61,423,000 - $ 99,010,190 $ 63,727,000
Other operating revenue 2,621,000 - 3,035,493 2,804,000
Interest income 664,000 (664,000) (B) 177,337 1,463,000
---------------------------------------------------------------------------------
Total revenue 64,708,000 (664,000) 102,223,020 67,994,000
Expenses:
Operating expenses 28,116,000 - 44,920,570 37,459,000
General and administrative 1,636,000 (1,636,000) (C) 863,906 -
Franchise fees (Residence Inn System Fee) 2,457,000 440,837 (D) 4,353,852 2,549,000
Management fees 1,281,000 - 2,306,339 1,331,000
Permits, Licenses & Lease Payments - - 128,688 1,165,000
Chain Services - - 786,092 -
Incentive management fees 3,375,000 - 4,216,983 2,545,000
Taxes, insurance and other 5,807,000 - 7,682,152 2,262,000
Depreciation of real estate owned 6,479,000 (6,479,000) (E) - 7,295,000
- 3,006,965 (F) 6,111,234
Interest 10,152,000 (10,152,000) (G) - 12,362,000
9,370,685 (H) 13,610,970
---------------------------------------------------------------------------------
Total expenses 59,303,000 (5,448,514) 84,980,786 66,968,000
Income tax expense - - - -
---------------------------------------------------------------------------------
Net income 5,405,000 4,784,514 (I) 17,242,234 $ 1,026,000
=================================================================================
Earnings per common share:
Basic and Diluted 1.15
==============
Basic and diluted weighted average
common shares outstanding 5,603,630 (J) 14,976,869
Pro Forma Total
Adjustments Pro Forma
-----------------------------------
Revenue:
Suite revenue $ - $ 162,737,190
Other operating revenue - 5,839,493
Interest income (1,463,000) (B) -
(100,000) (C) 77,337
------------ --------------
Total revenue (1,563,000) 168,576,683
Expenses:
Operating expenses - 82,379,570
General and administrative 325,000 (D) 1,188,906
Franchise fees (Residence Inn System Fee) - 6,902,852
Management fees - 3,637,339
Permits, Licenses & Lease Payments - 1,293,688
Chain Services 786,092
Incentive management fees - 6,761,983
Taxes, insurance and other - 9,944,152
Depreciation of real estate owned (7,295,000) (E)
3,885,419 (F) 9,996,653
Interest -
25,972,970
------------ -------------
Total expenses (3,084,581) 148,864,205
Income tax expense - -
------------ -------------
Net income $ 1,521,581 $ 19,712,478
=================================
Earnings per common share:
Basic and Diluted $ 1.32
=============
Basic and diluted weighted average
common shares outstanding 14,976,869
For the six months ended June 30, 2002 (unaudited)
Company Historical Pro forma before
Historical Marriot Residence acquisition of
Statement of Inn LP for Periods Pro forma Marriott Residence
Operations 1 & 2 2002 Adjustments Inn II LP
------------------------------------------------ ------------------
Revenue:
Suite revenue $ 33,381,932 $ 7,516,099 - 40,898,031
Other operating revenue 1,188,221 296,191 - 1,484,412
Interest income 336,387 - - 336,387
------------------------------------------------ ------------------
Total revenue 34,906,540 7,812,290 - 42,718,830
Expenses:
Operating expenses 15,513,207 3,931,579 - 19,444,786
General and administrative 683,325 - 215,348 (D) 898,673
Franchise fees (Residence Inn System Fee) 1,335,276 300,644 - 1,635,920
Management fees 1,515,880 156,246 - 1,672,126
Permits, Licenses & Lease Payments - 46,747 - 46,747
Chain Services 538,334 143,542 - 681,876
Incentive management fees - - - -
Taxes, insurance and other 2,212,034 434,737 - 2,646,771
Depreciation of real estate owned 2,639,286 - 443,527 (F) 3,082,813
- -
Imputed interest expense on Res I 450,000 - - 450,000
Interest 4,502,602 - 1,365,355 (H) 5,867,957
------------------------------------------------ ------------------
Total expenses 29,389,944 5,013,495 2,024,230 36,427,669
Income tax expense - - - -
------------------------------------------------ ------------------
Net income $ 5,516,596 $ 2,798,795 $ (2,024,230) $ 6,291,161
================================================ ==================
Earnings per common share:
Basic and Diluted $ 0.33 0.37
============= ==================
Basic and diluted weighted average
common shares outstanding 16,810,654 - 16,810,654
============= ==================
Historical
Marriott
Residence Pro Forma Total
Inn II LP (A) Adjustments Pro Forma
------------------------------------------------------------
Revenue:
Suite revenue $ 28,805,000 $ - 69,703,031
Other operating revenue 1,100,000 - 2,584,412
Interest income 294,000 (294,000) (B) -
(50,000) (C) 286,387
------------------------------- -----------------
Total revenue 30,199,000 (344,000) 72,573,830
Expenses:
Operating expenses 16,546,000 35,990,786
General and administrative - 365,232 (D) 1,263,905
Franchise fees (Residence Inn System Fee) 1,073,000 - 2,708,920
Management fees 598,000 - 2,270,126
Permits, Licenses & Lease Payments 1,040,000 - 1,086,747
Chain Services - 681,876
Incentive management fees 1,185,000 - 1,185,000
Taxes, insurance and other 1,102,000 - 3,748,771
Depreciation of real estate owned 3,319,000 (3,319,000) (E) -
1,942,710 (F) 5,025,523
Imputed interest expense on Res I 450,000
Interest 5,531,000 11,398,957
------------------------------- -----------------
Total expenses 30,394,000 (1,011,059) 65,810,610
Income tax expense - - -
------------------------------- -----------------
Net income $ (195,000) $ 667,290 6,763,451
============================================================
Earnings per common share:
Basic and Diluted 0.40
=================
Basic and diluted weighted average
common shares outstanding 16,810,654
=================
29
Notes to Pro Forma Condensed Consolidated Statements of Operations (unaudited)
for Residence Inn III LLC:
(A) Represents results of operations for the hotels acquired on a pro forma
basis as if the hotels were owned by the Company at January 1, 2001 for
the respecitve periods prior to acquisition by the Company in September
2001.
(B) Represents the elimination of the interst income recorded on the $47
million promissory note with Cresline, as the note receivable was used to
purchase the Partnership.
(C) Represents the advisory fee of .25% of accumulated capital
contributions under the "best efforts" offering for the period of time
not owned by the company plus anticipated legal and accounting fees,
employee costs, salaries and other costs of operating as a public company
of $814, 377 and $372, 896 for the year ended December 31, 2000, and the
period ended December 31, 2001, respectively.
(D) Represents the depreciation on the hotels acquired based on the purchase
price allocation of $98 million to depreciable property. The weighted
average lives of the depreciable assets are 39 years for building and 7
years for FF&E. The estimated useful lives are based on management's
knowledge of the properties and the hotel industry in general.
(E) Represents the interst expense for the hotel acquisitions for the period
in which the hotels were not owned. Interest was computed using the
interest rate of 8.08% on the mortgage debt of $53 million.
(F) Represents the combined state and federal income tax expense of our
wholly owned taxable REIT subsidiary estimated based on the contractual
agreements put in place between the Company and our lessee based on a
combined rate of 40%. Based on the terms of the lease agreements our
taxable subsidiary would have incurred a loss. No operating loss benefit
has been recorded as a realization is not certain.
(G) Represents the number of shares assumin Residence Inn III LLC was
acquired at the beginning of the period presented.
Notes to Pro Forma Condensed Consolidated Statements of Operations (unaudited)
for Marriott Residence Inn LP:
(A) Represents results of operations for the hotels acquired on a pro forma
basis as if the Partnership was owned by the Company on January 1, 2001.
(B) Represents the elimination of historical interest income recorded by the
prior owner.
(C) Represents the elimination of the historical general and administrative
expense allocated ot the hotels by the prior owner, which will not be
incurred by the Company. The amount indicated for general and
administrative expense was extracted from the Partnership's historical
statement based on an estimate.
(D) Represents the advisory fee of .25% of accumulated capital contributions
under the "best efforts" offering for the period of time not owned by the
Company plus anticipated legal and accounting fees, employee costs,
salaries and other costs of operating as a public company of $330,628 for
the year ended December 31, 2001 and $215,348 for the two months not
owned in 2001.
(E) Represents the elimination of the historical depreciation expense
recorded by the prior owner.
(F) Represents the depreciation on the hotels acquired based on the purchase
price allocation. The weighted average lives of the depreciable assets
are 39 years for building and 7 years for FF&E. The estimated useful
lives are based on management's knowledge of the properties and hotel
industry in general.
(G) Represents the elimination of the histornical interest expense recorded
by the prior owner.
(H) Represents the interest expense for the hotel acquisitions for the period
in which the hotels were not owned. Interest was computed using the
interest rates of 8.6% on the mortgage debt of $70.9 million and 15.6% on
the mortgage debt of $20.7 million.
(I) Represents the combined state and federal income tax expense of our
wholly owned taxable REIT subsidiary estimated based on the contractual
agreements put in place between the Company and our lessee based on a
combined rate of 40%. Based on the terms of the lease agreements our
taxable subsidiary would have incurred a loss. No operating loss benefit
has been recorded as realization is not certain.
(J) Represents additional common shares assuming the Partnership was acquired
at the beginning of the period presented.
Notes to Pro Forma Condensed Consolidated Statements of Operations (unaudited)
for Marriott Residence Inn II LP:
(A) Represents results of operations for the hotels acquired on a pro forma
basis as if the Partnership was owned by the Company on January 1, 2002.
(B) Represents the elimination of historical interest income recorded by the
prior owner.
(C) Represents the elimination of interest income on Company cash of
approximately $5 million used to fund acquisition at interest rates in
effect during periods presented.
(D) Represents the advisory fee of .25% of accumulated capital contributions
under the "best efforts" offering for the period of time not owned by the
Company plus anticipated legal and accounting fees, employee costs,
salaries and other costs of operating as a public company.
(E) Represents the elimination of the historical depreciation expense
recorded by the prior owner.
(F) Represents the depreciation on the hotels acquired based on the purchase
price allocation. The weighted average lives of the depreciable assets
are 39 years (fair value allocation of approximately $116.67 million) for
building and 7 years for FF&E (fair value allocation of $6.25 million).
The estimated useful lives are based on management's knowledge of the
properties and hotel industry in general.
(G) Represents the combined state and federal income tax expense of our
wholly owned taxable REIT subsidiary estimated based on the contractual
agreements put in place between the Company and our lessee based on a
combined rate of 40%. Based on the terms of the lease agreements our
taxable subsidiary would have incurred a loss. No operating loss benefit
has been recorded as realization is not certain.
30
c. Exhibits
Exhibit Description
- ------- -----------
2.1 Agreement and Plan of Merger dated as of April 30, 2002 by and among
Apple Hospitality Two, Inc., AHT Res II Acquisition, L.P., RIBM Two LLC
and Marriott Residence Inn II Limited Partnership.
2.2 Certificate of Merger dated August 28, 2002 for merger of AHT Res II
Acquisition, L.P. with and into Marriott Residence Inn II Limited
Partnership (as surviving entity).
4.1 Acknowledgment, Waiver, Consent and Amendment dated as of August 28,
2002 by and between Marriott Residence Inn II Limited Partnership
(Borrower), LaSalle Bank National Association (f/k/a LaSalle National
Bank), as Trustee for Nomura Asset Securities Corporation Commercial
Mortgage Pass-Through Certificates, Series 1996-MD V (Lender).
4.2 Facility Mortgagee Agreement dated as of August 28, 2002 by and between
Marriott Residence Inn II Limited Partnership (Borrower), AHM Res II
Limited Partnership (Tenant), Apple Hospitality Two, Inc. and LaSalle
Bank National Association (f/k/a LaSalle National Bank), as Trustee for
Nomura Asset Securities Corporation Commercial Mortgage Pass-Through
Certificates, Series 1996-MD V (Lender).
4.3 Supplemental Assignment of Leases and Rents dated as of August 28, 2002
by and between Marriott Residence Inn II Limited Partnership (Borrower)
and LaSalle Bank National Association (f/k/a LaSalle National Bank), as
Trustee for Nomura Asset Securities Corporation Commercial Mortgage
Pass-Through Certificates, Series 1996-MD V (Lender).
4.4 Supplemental Security Agreement dated as of August 28, 2002 by and
between Marriott Residence Inn II Limited Partnership (Debtor) and
LaSalle Bank National Association (f/k/a LaSalle National Bank), as
Trustee for Nomura Asset Securities Corporation Commercial Mortgage
Pass-Through Certificates, Series 1996-MD V (Secured Party).
4.5 Tenant Security Agreement dated as of August 28, 2002 by and between
Marriott Residence Inn II Limited Partnership (Secured Party) and AHM
Res II Limited Partnership (Debtor).
10.1 Amended and Restated Management Agreement dated as of August 28, 2002
by AHM Res II Limited Partnership and Residence Inn By Marriott, Inc.
10.2 Master Hotel Lease Agreement dated as of August 28, 2002 by and between
Marriott Residence Inn II Limited Partnership and AHM Res II Limited
Partnership (regarding 22 hotels).
10.3 Schedule setting forth information on a substantially identical Master
Hotel Lease Agreement (regarding one hotel).
10.4 Amended and Restated Certificate of Limited Partnership of Marriott
Residence Inn II Limited Partnership (a subsidiary of registrant owning
real property).
10.5 Amended and Restated Limited Partnership Agreement of Marriott
Residence Inn II Limited Partnership (a subsidiary of registrant owning
real property).
10.6 Amended and Restated Certificate of Limited Partnership of AHM Res II
Limited Partnership (a subsidiary of registrant Leasing real property).
10.7 Amended and Restated Limited Partnership Agreement of AHM Res II
Limited Partnership (a subsidiary of registrant leasing real property).
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Apple Hospitality Two, Inc.
By: /s/ Glade M. Knight
-------------------------------
Glade M. Knight, President
September 12, 2002
32