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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, 2001
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
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(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: 301-380-9000
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
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PAGE NO.
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PART I
Items 1 & 2. Business and Properties..........................................1
Item 3. Legal Proceedings................................................5
Item 4. Submission of Matters to a Vote of Security Holders..............6
PART II
Item 5. Market For The Partnership's Limited Partnership Units
and Related Security Holder Matters............................7
Item 6. Selected Financial Data..........................................8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................8
Item 7A. Quantitative and Qualitative Disclosures about Market Risk......12
Item 8. Financial Statements and Supplementary Data.....................13
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure......................................40
PART III
Item 10. Directors and Executive Officers................................40
Item 11. Management Remuneration and Transactions........................40
Item 12. Security Ownership of Certain Beneficial Owners and Management..41
Item 13. Certain Relationships and Related Transactions..................41
PART IV
Item 14. Exhibits, Supplemental Financial Statement Schedules
and Reports on Form 8-K.......................................42
PART I
FORWARD LOOKING STATEMENTS
This annual report on Form 10-K and the information incorporated by reference
herein include forward-looking statements. We have based these forward-looking
statements on our current expectations and projections about future events. We
identify forward-looking statements in this annual report and the information
incorporated by reference herein by using words or phrases such as "anticipate",
"believe", "estimate", "expect", "intend", "may be", "objective", "plan",
"predict", "project" and "will be" and similar words or phrases, or the negative
thereof.
These forward-looking statements are subject to numerous assumptions, risks and
uncertainties. Factors which may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by us in those statements include, among
others, the following:
. national and local economic and business conditions, including the
effect of the terrorist attacks of September 11, 2001 on travel,
that will affect, among other things, demand for products and
services at our properties and other properties, the level of room
rates and occupancy that can be achieved by such properties and the
availability and terms of financing and our liquidity;
. our ability to maintain the properties in a first-class manner,
including meeting capital expenditure requirements;
. our ability to compete effectively in areas such as access,
location, quality of accommodations and room rate structures;
. our degree of leverage which may affect our ability to obtain
financing in the future or compliance with current debt covenants;
. changes in travel patterns, taxes and government regulations which
influence or determine wages, prices, construction procedures and
costs;
. government approvals, actions and initiatives including the need for
compliance with environmental and safety requirements, and change in
laws and regulations or the interpretation thereof; and
. other factors discussed in other filings with the Securities and
Exchange Commission.
Although we believe the expectations reflected in our forward-looking statements
are based upon reasonable assumptions, we can give no assurance that we will
attain these expectations or that any deviations will not be material. Except as
otherwise required by the federal securities laws, we disclaim any obligations
or undertaking to publicly release any updates or revisions to any
forward-looking statement contained in this annual report on Form 10-K and the
information incorporated by reference herein to reflect any change in our
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
1
ITEMS 1 & 2. BUSINESS AND PROPERTIES
Description of the Partnership
Courtyard by Marriott II Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed on August 31, 1987 to acquire and own 70
Courtyard by Marriott 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 10,337 guest rooms as of December 31, 2001. We commenced
operations on October 30, 1987 and will terminate on December 31, 2087, unless
dissolved earlier.
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.
Our objective 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.
The Hotels are 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.
Our 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. Our Hotels
provide large, high quality guest rooms which generally contain 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.
Hotel Lodging Industry
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. Limited-service hotels generally offer accommodations with
limited services and amenities. As moderately-priced hotels, our properties
compete effectively with both full-service and limited-service hotels in their
respective markets by providing streamlined services and amenities at prices
that are significantly lower than those available at full-service hotels.
The lodging industry in general, and the moderately-priced segment in
particular, is highly competitive with several major lodging brands including
Holiday Inn, Ramada Inn, Four Points by Sheraton, Hampton Inn, Hampton Inn and
Suites, AmeriSuites and Hilton Garden Inns. We are continually making
improvements at the Hotels intended to enhance the overall value and
competitiveness of the
2
Hotels. We are continuing to carefully monitor the introduction of new
mid-priced brands including Wingate Hotels.
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.
While room supply in the moderately-priced lodging segment has continued to
grow, demand declined during 2001 as a result of the sluggish economy that was
intensified by the September 11th terrorist attacks. We believe that during
2002, supply growth will begin to decrease as the lack of availability of
development financing slows new construction. However, we believe that demand
will remain below historical levels at least during the first half of 2002, but
will begin to grow toward the end of 2002 and continue in 2003 if the economy
strengthens.
The economic trends affecting the lodging industry and the overall economy will
be a major factor in generating growth in Hotel revenues, and the ability of the
Manager will also have a material impact on future Hotel level sales and
operating profit growth. The Hotels may be impacted by increasing costs such as
increases in insurance. Unlike other real estate, hotels have the ability to
change room rates on a daily basis, so the impact of higher costs often can be
passed on to customers, particularly in the transient segment. However, an
economic downturn may affect the Managers' ability to increase room rates. As a
result of the current economic recession, the fourth quarter 2001 results of
operations were significantly below the prior year results. In order to maintain
operating margins at levels comparable to prior year, the partnership, in
conjunction with the Manager, has implemented a number of cost saving
initiatives at the Hotels. Despite the Manager's efforts to increase demand at
the Hotels, there has been increased pressure on room rates.
Lodging Properties
The following table shows selected combined operating statistics for the Hotels.
RevPAR represents the combination of average daily room rate charged and the
average daily occupancy achieved, and is a commonly used indicator of hotel
performance. RevPAR does not include food and beverage or other ancillary
revenues such as telephone or other guest services generated by the property.
Year Ended December 31,
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2001 2000 1999
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Combined average occupancy......................... 71.5% 78.3% 79.0%
Combined average daily room rate................... $ 94.80 $ 93.60 $ 89.09
RevPAR............................................. $ 67.74 $ 73.32 $ 70.38
The properties consist of 70 Courtyard by Marriott hotels as of December 31,
2001 containing approximately 10,330 rooms. The properties are geographically
diversified among 29 states averaging 147 rooms and are approximately 13 years
old.
To maintain the overall quality of our lodging properties, each property
undergoes refurbishments and capital improvements on a regularly scheduled
basis. Typically, refurbishing has been provided at intervals of five years,
based on an annual review of the condition of each property. For fiscal years
2001, 2000 and 1999 we spent $7.7 million, $13.3 million and $18.5 million,
respectively, on capital improvements to existing properties. As a result of
these expenditures, we expect to maintain high quality rooms and restaurants at
our properties.
3
The following table sets forth as of March 1, 2002, the location and number of
rooms for each of our properties:
Location Rooms
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Alabama
Birmingham/Homewood (1) .................................... 140
Birmingham/Hoover .......................................... 153
Huntsville ................................................. 149
Arizona
Phoenix/Mesa ............................................... 149
Phoenix/Metrocenter ........................................ 146
Tucson Airport ............................................. 149
Arkansas
Little Rock ................................................ 149
California
Bakersfield ................................................ 146
Cupertino .................................................. 149
Foster City ................................................ 147
Fresno ..................................................... 146
Hacienda Heights ........................................... 150
Marin/Larkspur Landing ..................................... 146
Palm Springs ............................................... 149
Torrance ................................................... 149
Colorado
Boulder .................................................... 149
Denver (1) ................................................. 146
Denver/Southeast ........................................... 155
Connecticut
Norwalk .................................................... 145
Wallingford ................................................ 149
Florida
Ft. Myers .................................................. 149
Ft. Lauderdale/Plantation .................................. 149
St. Petersburg ............................................. 149
Tampa/Westshore ............................................ 145
West Palm Beach ............................................ 149
Georgia
Atlanta Airport South (1) .................................. 144
Atlanta/Gwinnett Mall ...................................... 146
Atlanta/Perimeter Ctr ...................................... 145
Atlanta/Roswell ............................................ 154
Illinois
Arlington Heights-South (1) ................................ 147
Chicago/Deerfield (1) ...................................... 131
Chicago/Glenview ........................................... 149
Chicago/Highland Park ...................................... 149
Chicago/Lincolnshire (1) ................................... 146
Chicago/Oakbrook Terrace (1) ............................... 147
Chicago/Waukegan ........................................... 149
Chicago/Wood Dale .......................................... 149
Rockford (1) ............................................... 147
Indiana
Indianapolis/Castleton ..................................... 146
Kansas
Kansas City/Overland Park .................................. 149
Kentucky
Lexington/North ............................................ 146
Maryland
Annapolis .................................................. 149
Silver Spring .............................................. 146
Massachusetts
Boston/Andover ............................................. 146
Michigan
Detroit Airport ............................................ 146
Detroit/Livonia ............................................ 149
Minnesota
Minneapolis Airport ........................................ 146
Missouri
St. Louis/Creve Coeur ...................................... 154
St. Louis/Westport ......................................... 149
New Jersey
Lincroft/Red Bank .......................................... 146
New York
Poughkeepsie ............................................... 149
Rye ........................................................ 145
North Carolina
Charlotte/South Park ....................................... 149
Raleigh/Cary ............................................... 149
Ohio
Dayton Mall ................................................ 146
Toledo ..................................................... 149
Oklahoma
Oklahoma City Airport ...................................... 149
Oregon
Portland-Beaverton ......................................... 149
Pennsylvania
Philadelphia/Devon ......................................... 149
South Carolina
Columbia ................................................... 149
Greenville ................................................. 146
Tennessee
Memphis Airport ............................................ 145
Nashville Airport .......................................... 145
Texas
Dallas/Northeast ........................................... 149
Dallas/Plano (1) ........................................... 149
Dallas/Stemmons ............................................ 146
San Antonio/Downtown ....................................... 149
Virginia
Charlottesville ............................................ 150
Manassas ................................................... 149
Washington
Seattle/Southcenter ........................................ 149
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Total: ............................ 10,337
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(1) Hotel and land is owned fee simple
4
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. As a
result of the economic slowdown and events of September 11, fourth quarter 2001
operations were much lower than the same period in 2000.
Material Contracts
Management Agreement
The Hotels are subject to a long-term Management Agreement for the operation of
the properties, the primary provisions of which are discussed in Note 7 to the
financial statements.
The land on which 61 of the Hotels are located are subject to ground leases, 53
of which are with affiliates of MII, the primary provisions of which are
discussed in Note 6 to the financial statements.
Conflicts of Interest
Host LP, the managing member of the General Partner, MII and their affiliates
own and/or operate hotels other than our Hotels. Additionally, MII and its
affiliates license others to operate hotels under the various brand names owned
by MII and its affiliates, and therefore 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 our 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.
Employees
We have no employees. Host LP provides the services of certain employees
(including the General Partner's executive officers) to us and the General
Partner. We 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 our business. However, each of such executive officers also
will devote a significant portion of his or her time to Host LP's business and
its other affiliates. No officer of the General Partner or employee of Host LP
devotes a significant percentage of time to our business. 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.
ITEM 3. LEGAL PROCEEDINGS
The Partnership and the Hotels are involved in routine litigation and
administrative proceedings arising in the ordinary course of business, some of
which are expected to be covered by liability insurance and which collectively
are not expected to have a material adverse effect on the business, financial
condition or results of operations of the Partnership.
Litigation Settlement
In November 2000, the general partner and MII settled a lawsuit filed by limited
partners from seven limited partnerships, including our limited partners (the
"Settlement"). In accordance with the terms of the Settlement, our limited
partners involved in the settlement received a cash payment of $148,000 per
unit, in exchange for dismissal of the litigation, a complete release of all
claims and the sale of their
5
Partnership units to a joint venture formed by Host Marriott, L.P. (Host LP) (an
affiliate of the general partner), Rockledge Hotel Properties, Inc. (an
affiliate of the general partner) and MII (the "Joint Venture"). As a result,
subsequent to the completion of the settlement, all of the outstanding limited
partner units are owned by the Joint Venture.
The Joint Venture acquired the partnership interests in Courtyard by Marriott
Limited Partnership (CBM I") and the Partnership, together owning 120 hotels,
for an aggregate payment of approximately $372 million plus interest and legal
fees, of which Host Marriott and its affiliates paid approximately $90 million.
The Joint Venture acquired the partnerships by acquiring partnership units
pursuant to a tender offer for such units followed by a merger of each of CBM I
and the Partnership with subsidiaries of the Joint Venture. The Joint Venture
financed the acquisition with mezzanine indebtedness borrowed from MII, cash and
other assets contributed by Host Marriott and its affiliates, including the
existing general partner and limited partner interests in the partnerships, and
cash contributed by MII. Host Marriott owns a 50% interest in the Joint Venture.
For purposes of the purchaser's investment analysis, they estimated the value of
the planned investment in the Joint Venture based upon: (1) estimated
post-acquisition cash flows, including anticipated changes in the related hotel
management agreements to be made contemporaneously with the investment; (2) the
Joint Venture's new capital structure; and (3) estimates of prevailing discount
rates and capitalization rates reflected in the market at that time. The amount
of post-settlement equity of the Joint Venture was considerably lower than the
pre-acquisition equity due to additional indebtedness post-acquisition offset by
the impact of changes to the Management Agreements made contemporaneously with
the transaction. The purchase by the Joint Venture was consummated late in the
fourth quarter of 2000. The Joint Venture has recorded its investment in the
partnership units at $363 million, which reflected estimated fair value based
on: (1) pre-acquisition cash flows; (2) the pre-acquisition capital structure;
and (3) prevailing discount rates and capitalization rates in December 2000.
Due to a number of factors, the equity values used in the purchase accounting
for the Joint Venture's investment were different from limited partner unit
estimates included in the CBM I and the Partnership Purchase Offer and Consent
Solicitations prepared in early 2000. The solicitations reported that the value
of limited partner units based on an assumed 20 percent discount rate would be
$254 million. The difference between this and the purchase accounting entry by
the Joint Venture is primarily attributed to: (1) the purchase being consummated
almost one year subsequent to the time the original estimates were prepared ($30
million); and (2) a lower discount rate (17 percent) and capitalization rate
reflecting changes in market conditions and capital structure versus the date at
which the estimates in the solicitations were prepared ($79 million).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
6
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 limited partner
units of the Partnership (the "Units") and it is not anticipated that a public
market for the Units will develop. Transfers of Units are limited to the first
date of each accounting period except for the transfer of Units to CBM II
Holdings LLC (a subsidiary of the Joint Venture) and any subsequent assignment
of Units by CBM II Holdings LLC. All transfers are subject to approval by the
general partner. As of December 31, 2001, the Joint Venture between Host LP and
MII were the holders of record of all of the Partnership's 1,470 Units.
Cash available for distribution for any year will be distributed at least
annually to the Partners of record at the end of each accounting period during
such year as follows:
(i) first, through and including the end of the accounting period during which
the Partners shall have received cumulative distributions of sales or
refinancing proceeds ("Capital Receipts") equal to $77,368,421, 5% to the
general partner and 95% to the limited partners;
(ii) next, through and including the end of the accounting period during which
the Partners shall have received cumulative distributions of Capital
Receipts equal to $158,306,000, 10% to the general partner and 90% to the
limited partners; and
(iii) thereafter, 25% to the general partner and 75% to the limited partners.
Distributions to the General Partner under clauses (i), (ii) and (iii) above
shall be subordinate to an annual, non-cumulative 10% preferred return to the
limited partners on their invested capital, as defined.
In order to allow for the cash distributions made in accordance with the terms
of the Settlement Agreement, the Partnership Agreement was modified so that the
holders of Partnership units ("Unitholders") prior to the Settlement would (1)
receive allocations of profit or loss on their Units up through the effective
date of the Settlement Agreement rather than through the end of the preceding
accounting period, (2) would receive a distribution from cash available for
distribution for the period ending on the day prior to the date of entry of the
judgment order (November 27, 2000) and (3) would not receive any additional cash
distributions.
Cash available for distribution means, with respect to any fiscal period, the
cash revenues of the Partnership from all sources during the fiscal period,
other than Capital Receipts, plus amounts received by the Partnership pursuant
to the price adjustment amount, less (i) all cash expenditures of the
Partnership during such fiscal period, including, without limitation, repayment
of all Partnership indebtedness to the extent required to be paid, but not
including expenditures of Capital Receipts, plus fees for management services
and administrative expenses and (ii) such reserves as may be determined by the
general partner, in its sole discretion (other than funds received under the
price adjustment amount) to be necessary to provide for the foreseeable needs of
the Partnership.
7
As of December 31, 2001, the Partnership has distributed a total of $133.8
million to the limited partners ($90,993 per limited partner unit) since
inception. During 2001, $17.0 million ($6,430 and $5,104 per limited partner
unit from 2001 and 2000 operations, respectively) was distributed to the limited
partners. During 2000, $16.3 million ($8,614 and $2,496 per limited partner unit
from 2000 and 1999 operations, respectively) was distributed to the limited
partners prior to the transfer of the limited partner units to the Joint
Venture. However, due to the $7.5 million paid in 2001 but pertaining to 2000
operations, as discussed above, 2000 total distributions from operations was
$20.2 million ($13,718 per limited partner unit). The 2001 cash was distributed
after the transfer of limited partner units to the Joint Venture. During 1999,
the Partnership distributed $8.8 million to the limited partners ($4,500 and
$1,500 per limited partner unit from 1999 and 1998 operations, respectively). No
distributions of Capital Receipts have been made since inception.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents historical operating information
for the Partnership for each of the five years in the period ended December 31,
2001 presented in accordance with accounting principles generally accepted in
the United States.
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(in thousands, except per unit amounts)
Income Statement Data:
Revenues....................................... $ 278,481 $ 303,534 $ 292,982 $ 284,251 $ 275,021
Operating profit............................... 55,016 61,312 59,671 58,960 58,771
Net income..................................... 15,297 20,965 17,838 16,950 15,691
Net income per limited
partner unit (1,470 Units).................. 9,886 13,549 11,528 10,954 10,140
Balance Sheet Data:
Total assets................................... $ 501,086 $ 509,510 $ 522,943 $ 528,340 $ 536,715
Total liabilities.............................. 512,856 518,755 537,815 552,230 567,412
Cash distributions per limited
partner unit (1,470 Units).................. 11,534 11,110 6,000 6,900 9,850
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Courtyard by Marriott II Limited Partnership is the owner of 70
moderately-priced hotels which are operated as part of the Courtyard by Marriott
system, and managed by Courtyard Management Corporation.
RECENT EVENTS
As a result of the decline in the economy, combined with the effects of the
September 11, 2001 terrorist attacks, the hospitality and travel industry
experienced a significant decrease in operations during the second half of 2001.
Revenues decreased $25.0 million, or 8%, to $278.5 million in 2001 from $303.5
million in 2000, primarily as a result of decreases in occupancy and room rates,
which were flat or decreasing throughout the year. During the fourth quarter of
2001, revenues decreased $18.6 million, or 21%, compared to the same period in
2000. The Partnership also anticipates that some costs, such as insurance and
energy, will likely increase faster than the rate of inflation in 2002, which
will further
8
affect operating margins. The Partnership, in conjunction with the Manager, has
implemented a number of cost saving initiatives to reflect the reduced volume at
the Hotels, including reducing labor costs. If demand in the hospitality and
travel industry returns to more historic levels of operations, the Partnership
should experience increased occupancy and room rates, which should improve
operating margins in the future.
RESULTS OF OPERATIONS
2001 Compared to 2000
Hotel Revenues. Hotel revenues decreased $25.0 million, or 8%, to $278.5 million
in 2001 from $303.5 million in 2000 as a result of the September 11, 2001
terrorist attacks and the continued overall weakness in the economy. RevPAR
decreased primarily as the result of a 6.8 percentage point decrease in the
combined average occupancy to 71.5%, which was offset by a 1% increase in the
combined average daily room rate to $94.80. RevPAR does not include food and
beverage and other ancillary revenues generated by the Hotels.
Base and Courtyard Management Fees. Base and Courtyard management fees decreased
by 8%, or $1.5 million, in 2001 when compared to 2000. The decrease in
management fees, which are calculated as a percentage of total hotel revenues is
consistent with the decline in hotel revenues.
Incentive Management Fees. Incentive management fees declined $1.9 million, or
14%, to $11.9 million in 2001 when compared to 2000. These fees are calculated
as a percentage of operating profit, as defined in the Management Agreement. The
decrease in these fees for 2001 is consistent with the decline in operating
profit.
Operating Costs and Expenses. Total operating costs and expenses decreased $18.7
million, or 8%, to $223.5 million in 2001 from $242.2 million in 2000. The
decrease is primarily due to a $5.0 million, or 8%, decrease in rooms costs and
expenses as well as a $5.4 million, or 7%, decrease in selling, administrative
and other costs. These decreases are primarily the result of a decrease in
controllable expenses such as wages, reservation costs and supplies as a result
of the Manager's cost cutting efforts and decreased occupancy at the Hotels.
Interest Expense. Interest expense decreased by 3% to $41.3 million in 2001 from
$42.5 million in 2000. This decrease is due to payments on the mortgage
principal of $17.9 million in 2001.
Net Income. Net income decreased by $5.7 million in 2001 to $15.3 million from
$21.0 million in 2000 primarily due to the changes in revenues and expenses
discussed above.
2000 Compared to 1999
Hotel Revenues. In 2000, hotel revenues increased $10.5 million, or 3.6%, to
$303.5 million when compared to 1999 as a result of the growth in RevPAR of
4.2%. The increase in RevPAR was primarily the result of a 5.1% increase in the
combined average daily room rate to $93.60, offset by a .7 percentage point
decrease in combined average occupancy to 78.3%.
Operating Costs and Expenses. The 2000 total operating costs and expenses
increased $8.9 million, or 3.8%. The increase is primarily due to increases in
both rooms and selling, administrative and other costs as discussed below.
9
Rooms costs and expenses increased $2.1 million, or 3.6%, during 2000 as
compared to 1999. The overall increase is primarily due to an increase in salary
and benefits as the hotels endeavor to maintain competitive wage scales.
Selling, administrative and other costs increased $3.2 million or 4.6% when
compared to 1999 due to increased administrative costs, particularly
administrative wages, combined with an increase in energy costs. Also, more of
the Partnership hotels took part in MII marketing programs in 2000, increasing
marketing costs.
Base and Courtyard Management Fees. Base and Courtyard management fees increased
by 3.6%, or $633,000, in 2000 when compared to 1999. Base and Courtyard
management fees are calculated as a percentage of total hotel revenues.
Accordingly, with the increase in total hotel revenues described above, these
fees also increased.
Interest Expense. Interest expense decreased by 2.6% to $42.5 million in 2000
from $43.6 million in 1999. This decrease is due to payments on the mortgage
principal of $16.6 million in 2000.
Property Taxes. Property taxes increased by $704,000, or 6.3% in 2000 due to an
increase in the tax basis of the properties.
Net Income. Net income increased by $3.1 million in 2000 to $21.0 million from
$17.8 million in 1999 primarily due to the changes in revenues and expenses
discussed above.
Capital Resources and Liquidity
Our principal source of cash is from operation of the Hotels. Our principal uses
of cash are debt service payments, funding capital expenditure needs and
distributions to the limited partners.
Principal Sources and Uses of Cash
Our principal source of cash is from operations. Cash provided by operations was
$56.0 million, $49.0 million and $47.2 million for the years ended 2001, 2000
and 1999, respectively. We paid $39.7 million, $40.9 million and $42.0 million
of interest on our debt in 2001, 2000 and 1999, respectively. The increase in
cash provided by operations during 2001 is primarily due to the deferral of
$11.9 million of incentive management fees.
Cash used in investing activities was $19.3 million, $26.8 million and $17.4
million for 2001, 2000 and 1999, respectively. Investing activities consist
primarily of contributions to the property improvement fund and capital
expenditures for improvements to the Hotels. Contributions to the property
improvement fund, which represents 6.5% of total hotel revenues as of October
24, 2000 and 5% of total hotel revenues prior to October 24, 2000, were $18.1
million, $15.9 million and $14.6 million for the years ended December 31, 2001,
2000 and 1999, respectively. Property improvement fund expenditures and other
activity includes expenditures for the replacement of furniture, fixtures and
equipment offset by interest income earned by the fund. During 2000 and 1999,
activity in the property improvement fund also included reimbursements for prior
year capital expenditures of $12.5 million and $3.1 million, respectively. Total
capital expenditures during 2001, 2000 and 1999 were $7.7 million, $13.3 million
and $18.5 million, respectively.
Cash used in financing activities was $39.6 million, $32.1 million and $24.3
million for the years ended December 31, 2001, 2000 and 1999, respectively. We
repaid $17.9 million, $16.6 million and $15.4 million of principal on our
Certificate/Mortgage Loan in 2001, 2000 and 1999, respectively.
10
We also made cash distributions to general and limited partners of $17.8
million, $16.3 million and $8.8 million in 2001, 2000 and 1999, respectively.
2001 distributions include $0.5 million that was owed to the former partners who
held partnership units prior to the acquisition of the partnership by the Joint
Venture. Cash used in financing also includes funding of the debt service
reserves required under our debt agreements.
Pursuant to the terms of the Certificate/Mortgage Loan, the Partnership is
required to establish with the lender a separate escrow account for payments of
insurance premiums and real estate taxes for each mortgaged property if the
credit rating of MII is downgraded by Standard and Poor's Rating Services which
occurred effective April 1, 1997. The escrow reserve is included in restricted
cash and the resulting tax and insurance liability is included in accounts
payable and accrued liabilities in the accompanying consolidated balance sheets.
Inflation
Our hotel lodging properties have been impacted by inflation through its effect
on increasing costs and on the Managers' ability to increase room rates. Unlike
other real estate, hotels have the ability to change room rates on a daily
basis, so the impact of higher inflation often can be passed on to customers.
However, the current weak economic environment has resulted in a decline in
demand and has restricted our managers' ability to raise room rates to offset
rising costs.
Critical Accounting Policies
Our consolidated financial statements include accounts of the Partnership and
all majority owned subsidiaries. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities at the date of our financial statements, and
the reported amounts of revenues and expenses during the reporting period. While
we do not believe the reported amounts would be materially different,
application of these policies involves the exercise of judgment and the use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates. All of our significant accounting policies are
disclosed in Note 2 to the audited financial statements. The following critical
accounting policy requires the use of business judgment or significant estimates
to be made.
Long-lived assets. We are required to make subjective assessments as to
whether there are impairments in the value of our real estate properties.
These assessments have a direct impact on our net income, because an
impairment results in an immediate negative adjustment to net income. On a
periodic basis, management assesses whether there are any indicators that
the value of the real estate properties may be impaired. A property's
value is impaired only if management's estimate of the aggregate future
cash flows (undiscounted and without interest charges) to be generated by
the property are less than the carrying value of the property. Such cash
flows consider factors such as expected future operating income, trends
and prospects, as well as the effects of demand, competition and other
factors. To the extent impairment has occurred, the loss will be measured
as the excess of the carrying amount of the property over the fair value
of the property.
11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have a significant market risk with respect to interest rates, foreign
currency exchanges or other market rate or price risks, and we do not hold any
financial instruments for trading purposes. As of December 31, 2001, all of our
debt has a fixed interest rate. See Note 5 to the financial statements for a
further description.
12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index Page
- ----- ----
Courtyard by Marriott II Limited Partnership Consolidated Financial
Statements:
Report of Independent Public Accountants.............................. 14
Consolidated Balance Sheets of December 31, 2001 and 2000............. 15
Consolidated Statements of Operations for the Fiscal Years Ended
December 31, 2001, 2000 and 1999.................................... 16
Consolidated Statements of Changes in Partners' Capital (Deficit)
for the Fiscal Years Ended December 31, 2001, 2000 and 1999......... 17
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 31, 2001, 2000 and 1999.................................... 18
Notes to Consolidated Financial Statements............................ 19
Courtyard II Associates, L.P. and Subsidiaries Consolidated Financial
Statements:
Report of Independent Public Accountants.............................. 28
Consolidated Balance Sheets of December 31, 2001 and 2000............. 29
Consolidated Statements of Operations for the Fiscal Years Ended
December 31, 2001, 2000 and 1999.................................... 30
Consolidated Statements of Changes in Partners' Capital
for the Fiscal Years Ended December 31, 2001, 2000 and 1999......... 31
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 31, 2001, 2000 and 1999.................................... 32
Notes to Consolidated Financial Statements............................ 33
13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheets of Courtyard by
Marriott II Limited Partnership (a Delaware limited partnership) and
Subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, changes in partners' capital (deficit) and cash flows
for the three years ended December 31, 2001. These financial statements and the
schedules referred to below are the responsibility of the General Partner's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Courtyard by
Marriott II Limited Partnership and Subsidiaries as of December 31, 2001 and
2000, and the results of their operations and their cash flows for the three
years ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index at Item
14(a)(2) are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in our
audits of the basic financial statements and, in our opinion, fairly state in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Vienna, Virginia
March 18, 2002
14
CONSOLIDATED BALANCE SHEETS
Courtyard by Marriott II Limited Partnership and Subsidiaries
December 31, 2001 and 2000
(in thousands)
2001 2000
--------- ---------
ASSETS
Property and equipment, net ............................... $ 418,885 $ 439,098
Deferred financing costs, net of accumulated amortization . 9,547 11,119
Due from Courtyard Management Corporation ................. 9,117 8,453
Other assets .............................................. -- 2
Property improvement fund ................................. 30,513 18,912
Restricted cash ........................................... 22,535 18,415
Cash and cash equivalents ................................. 10,489 13,511
--------- ---------
$ 501,086 $ 509,510
========= =========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt ...................................................... $ 448,605 $ 466,539
Management fees due to Courtyard Management Corporation ... 43,288 31,417
Due to Marriott International, Inc. and affiliates ........ 8,574 8,693
Accounts payable and accrued liabilities .................. 12,389 12,106
--------- ---------
Total liabilities ................................... 512,856 518,755
--------- ---------
PARTNERS' CAPITAL (DEFICIT)
General Partner
Capital contribution .................................... 11,356 11,356
Cumulative net losses ................................... (904) (1,669)
Capital distributions ................................... (1,145) (278)
--------- ---------
9,307 9,409
--------- ---------
Limited Partners
Capital contributions ................................... 130,014 130,014
Cumulative net losses ................................... (17,178) (31,710)
Capital distributions ................................... (133,760) (116,805)
Investor notes receivable ............................... (153) (153)
--------- ---------
(21,077) (18,654)
--------- ---------
Total Partners' Deficit ............................. (11,770) (9,245)
--------- ---------
$ 501,086 $ 509,510
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
15
CONSOLIDATED STATEMENTS OF OPERATIONS
Courtyard by Marriott II Limited Partnership and Subsidiaries
For the Years Ended December 31, 2001, 2000 and 1999
(in thousands, except Unit and per Unit amounts)
2001 2000 1999
--------- --------- ---------
REVENUES
Rooms ...................................... $ 254,880 $ 275,877 $ 265,137
Food and beverage .......................... 15,858 18,057 17,686
Other ...................................... 7,743 9,600 10,159
--------- --------- ---------
Total revenues ........................... 278,481 303,534 292,982
--------- --------- ---------
OPERATING COSTS AND EXPENSES
Rooms ...................................... 56,967 62,008 59,873
Food and beverage .......................... 14,166 15,989 15,594
Other department costs and expenses ........ 1,723 2,017 2,492
Selling, administrative and other .......... 66,875 72,344 69,170
Depreciation ............................... 27,956 28,583 27,397
Base and Courtyard management fees ......... 16,709 18,212 17,579
Incentive management fee ................... 11,871 13,778 13,322
Ground rent ................................ 13,020 13,741 13,249
Property taxes ............................. 12,074 11,734 11,143
Insurance and other ........................ 2,104 3,816 3,492
--------- --------- ---------
Total operating costs and expenses ....... 223,465 242,222 233,311
--------- --------- ---------
OPERATING PROFIT ................................ 55,016 61,312 59,671
Interest expense ............................. (41,260) (42,461) (43,577)
Interest income .............................. 1,541 2,114 1,744
--------- --------- ---------
NET INCOME ...................................... $ 15,297 $ 20,965 $ 17,838
========= ========= =========
ALLOCATION OF NET INCOME
General Partner .............................. $ 765 $ 1,048 $ 892
Limited Partners ............................. 14,532 19,917 16,946
--------- --------- ---------
$ 15,297 $ 20,965 $ 17,838
========= ========= =========
NET INCOME PER LIMITED PARTNER UNIT (1,470 Units) $ 9,886 $ 13,549 $ 11,528
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
16
CONSOLIDATED STATEMENTS OF CHANGES IN
Partners' Capital (Deficit)
Courtyard by Marriott II Limited Partnership and Subsidiaries
For the Years Ended December 31, 2001, 2000 and 1999
(in thousands)
General Limited
Partner Partners Total
------- -------- --------
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)
Capital contributions ........ 50 950 1,000
Capital distributions ........ -- (16,338) (16,338)
Net income ................... 1,048 19,917 20,965
------- -------- --------
Balance, December 31, 2000 ...... 9,409 (18,654) (9,245)
Capital distributions ........ (867) (16,955) (17,822)
Net income ................... 765 14,532 15,297
------- -------- --------
Balance, December 31, 2001 ...... $ 9,307 $(21,077) $(11,770)
======= ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
Courtyard by Marriott II Limited Partnership and Subsidiaries
For the Years Ended December 31, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
-------- -------- --------
OPERATING ACTIVITIES
Net income .............................................. $ 15,297 $ 20,965 $ 17,838
Depreciation ............................................ 27,956 28,583 27,397
Amortization of deferred financing costs as interest .... 1,572 1,571 1,572
(Gain)/loss on disposition of fixed assets .............. (4) 17 291
Amortization of prepaid expenses ........................ 2 9 9
Changes in operating accounts:
Accounts payable and accrued liabilities .............. 283 89 1,802
Management fees due to Courtyard Management Corporation 11,871 (2,388) (609)
Straight-line rent adjustment ......................... (119) (119) (119)
Change in real estate tax and insurance reserve ....... (322) 9 (912)
Change in working capital reserve ..................... 88 (53) (53)
Due from Courtyard Management Corporation ............. (664) 342 (56)
-------- -------- --------
Cash provided by operating activities ............. 55,960 49,025 47,213
-------- -------- --------
INVESTING ACTIVITIES
Additions to property and equipment, net ................ (7,739) (13,286) (18,450)
Contributions to the property improvement fund .......... (18,101) (15,910) (14,623)
Property improvement fund expenditures and other activity 6,500 2,393 15,694
-------- -------- --------
Cash used in investing activities ................. (19,340) (26,803) (17,379)
-------- -------- --------
FINANCING ACTIVITIES
Repayment of principal .................................. (17,934) (16,642) (15,443)
Change in debt service reserve .......................... (3,886) (72) (80)
Capital distributions ................................... (17,822) (16,338) (8,820)
Capital contributions ................................... -- 1,000 --
-------- -------- --------
Cash used in financing activities ................. (39,642) (32,052) (24,343)
-------- -------- --------
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS .......... $ (3,022) $ (9,830) $ 5,438
CASH AND CASH EQUIVALENTS at beginning of year ............. 13,511 23,341 17,903
-------- -------- --------
CASH AND CASH EQUIVALENTS at end of year ................... $ 10,489 $ 13,511 $ 23,341
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest ......................... $ 39,688 $ 40,855 $ 42,006
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Courtyard by Marriott II Limited Partnership and Subsidiaries
December 31, 2001 and 2000
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Courtyard by Marriott II Limited Partnership and Subsidiaries (the
"Partnership"), a Delaware limited partnership, was formed on August 31, 1987 to
acquire and own 70 Courtyard by Marriott hotels (the "Hotels") and the land on
which certain of the Hotels are located. The Partnership's 70 hotel properties
are located in 29 states in the United States. The Hotels are managed as part of
the Courtyard by Marriott hotel system by Courtyard Management Corporation (the
"Manager"), a wholly-owned subsidiary of Marriott International, Inc. ("MII").
On March 9, 2000, Host Marriott, L.P. and MII entered into a settlement
agreement (the "Settlement Agreement") to resolve pending litigation. In
accordance with the terms of the Settlement Agreement, on November 28, 2000, the
following steps occurred. CBM Joint Venture LLC (the "Joint Venture"), which is
a joint venture among Host Marriott, L.P., Rockledge Hotel Properties, Inc. (an
affiliate of Host Marriott, L.P.) and MII or their wholly-owned subsidiaries,
acquired the Class B 99% non-managing economic interest in the general partner,
and, through CBM Two GP Corp., a Delaware corporation and an indirect
wholly-owned subsidiary of the Joint Venture, acquired the Class A 1% managing
economic interest in the general partner. As a result, the Joint Venture owns
100% of the general partner. In addition, CBM II Holdings LLC, a Delaware
limited liability company and an indirect wholly-owned subsidiary of the Joint
Venture, purchased all of the outstanding units in the Partnership (other than
units held by the general partner). As a result, the Joint Venture became the
holder indirectly of all of the units in the Partnership.
Pursuant to the terms of the operating agreement of CBM Two LLC, the Joint
Venture, as the holder of the 99% non-voting member interest in CBM Two LLC, has
been granted the sole power to direct the exercise by CBM Two LLC of all voting
rights and other rights as owner with respect to all capital stock of any
corporation that is owned, directly or indirectly, by the Partnership. The
Partnership owns the Hotels through Courtyard II Associates, L.P. and
Subsidiaries ("Associates"), in which the Partnership is a 98% limited partner
and a 1% general partner, and through Courtyard II Associates Management
Corporation, the 1% managing general partner of Associates.
Partnership Allocations and Distributions
Partnership allocations and distributions are generally made as follows:
a. Cash available for distribution is distributed (i) first, 5% to the
general partner and 95% to the limited partners until the general partner
and the limited partners (collectively, the "Partners") have received
cumulative distributions of sale proceeds and/or refinancing proceeds
("Capital Receipts") equal to $77,368,421; (ii) next, 10% to the general
partner and 90% to the limited partners until the Partners have received
cumulative distributions of Capital Receipts equal to $158,306,000; and
(iii) thereafter, 25% to the general partner and 75% to the limited
partners. Distributions to the general partner are subordinate to an
annual 10% non-cumulative preferred return to the limited partners on
their invested capital, as defined.
b. Refinancing proceeds not retained by the Partnership will be distributed
(i) first, 5% to the general partner and 95% to the limited partners until
the Partners have received cumulative distributions of refinancing
proceeds equal to $158,306,000 minus adjusted sale proceeds, as defined;
and (ii) thereafter, 25% to the general partner and 75% to the limited
partners.
c. Proceeds not retained by the Partnership from the sale or other
disposition of less than substantially all of the assets of the
Partnership will be distributed (i) first, 5% to the general partner and
95% to the limited partners until the partners have received cumulative
distributions of Capital Receipts equal to $158,306,000; and (ii)
thereafter, 25% to the general partner and 75% to the limited partners.
19
Proceeds from the sale of substantially all of the assets of the
Partnership or from a related series of Hotel sales leading to the sale of
substantially all of the assets of the Partnership will be distributed to
the Partners pro-rata in accordance with their capital account balances.
d. Net profits are generally allocated in the same ratio in which cash
available for distribution is distributed.
e. All items of gain, deduction or loss attributable to the contributed
equipment will be allocated to the general partner.
f. In general, gain recognized by the Partnership will be allocated, with
respect to any year, in the following order of priority: (i) to all
Partners whose capital accounts have negative balances until such negative
balances are brought to zero; (ii) to all Partners up to the amount
necessary to bring their respective capital account balances to an amount
equal to their invested capital, as defined; and (iii) thereafter 25% to
the general partner and 75% to the limited partners.
Gain arising from the sale or other disposition (or from a related series
of sales or dispositions) of substantially all the assets of the
Partnership will be allocated (i) to the limited partners in an amount
equal to the excess, if any, of (1) the sum of 15% times the weighted
average of the limited partners' invested capital each year, over (2) the
sum of distributions to the limited partners of Capital Receipts in excess
of the limited partners' cumulative capital and distributions to limited
partners of cash available for distribution; and (ii) next, to the general
partner until it has been allocated an amount equal to 33.33% of the
amount allocated to the limited partners under clause (i); and (iii)
thereafter, 25% to the general partner and 75% to the limited partners.
g. For financial reporting purposes, profits and losses are generally
allocated among the Partners based on their stated interests in cash
available for distribution.
In order to allow for the cash distributions made in accordance with the terms
of the Settlement Agreement, the partnership agreement was modified so that the
unitholders would (1) receive allocations of profit or loss on their units up
through the effective date of the Settlement Agreement rather than through the
end of the preceding accounting period, (2) would receive a distribution from
cash available for distribution for the period ending on the day prior to the
date of entry of the judgment order and (3) would not receive any additional
cash distributions. Following the settlement, the cash allocations to the
general partner and the limited partner will remain consistent with the policies
described above.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership records are maintained on the accrual basis of accounting and
its fiscal year coincides with the calendar year.
Basis of Presentation
As discussed in Note 1, on November 28, 2000 the Joint Venture acquired all of
the outstanding limited partner and general partner interests in the
Partnership. The accompanying consolidated financial statements do not reflect
the debt incurred by the Joint Venture to consummate the acquisition described
above since the Partnership has not assumed the obligation for such debt and the
proceeds from such debt were not used to repay existing Partnership obligations.
To provide a consistent presentation, the Partnership also does not reflect the
Joint Venture's basis in the assets and liabilities of the Partnership in these
consolidated financial statements.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
20
Working Capital
Pursuant to the terms of the management agreement, the Partnership is required
to provide the Manager with working capital to meet the operating needs of the
Hotels. The Manager converts cash advanced by the Partnership into other forms
of working capital consisting primarily of operating cash, inventories, and
trade receivables and payables which are maintained and controlled by the
Manager. Upon termination of the management agreement, the Manager is required
to convert working capital into cash and return it to the Partnership. As a
result of these conditions, the individual components of working capital
controlled by the Manager are not reflected in the accompanying consolidated
balance sheets but rather are included in Due from Courtyard Management
Corporation.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets as follows:
Buildings and improvements 40 years
Leasehold improvements 40 years
Furniture and equipment 4-10 years
Certain property and equipment is pledged to secure the Certificates/Mortgage
Loan (see Note 5).
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties will be
less than their net book value. If a property is impaired, its basis is adjusted
to fair market value. There was no such adjustment required at December 31, 2001
or 2000.
Deferred Financing Costs
From 1995 to 1997, the Partnership paid a total of $18,858,000 in financing
costs related to the Senior Notes, as defined in Note 7, and the Certificates.
Financing costs are amortized using the straight-line method, which approximates
the effective interest rate method, over the remaining life of the respective
mortgage debt. At December 31, 2001 and 2000, accumulated amortization of
financing costs totaled $9,311,000 and $7,739,000, respectively.
Ground Rent
The land leases include scheduled increases in minimum rents per property. These
scheduled rent increases, which are included in minimum lease payments, are
being recognized by the Partnership on a straight-line basis over the lease
terms of approximately 80 years. The reduction in ground rent expense and Due to
Marriott International, Inc. and affiliates to reflect minimum lease payments on
a straight-line basis for 2001, 2000 and 1999 totaled $119,000 per year.
Income Taxes
Provision for Federal taxes has not been made in the accompanying consolidated
financial statements since the Partnership does not pay income taxes, but
rather, allocates its profits and losses to the individual Partners. Significant
differences exist between the net income for financial reporting purposes and
the net income reported in the Partnership's tax return. These differences are
due primarily to the use for income tax purposes of accelerated depreciation
methods, shorter depreciable lives for the assets, difference in the timing of
recognition of certain fees and straight-line rent adjustments. As a result of
these differences, the excess of the net Partnership liabilities reported in the
accompanying consolidated financial statements over the net Partnership
liabilities for tax purposes was approximately $13,667,000 and $658,000,
respectively as of December 31, 2001 and 2000.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
21
Restricted Cash
The Partnership was required to establish certain reserves pursuant to the terms
of the Senior Notes and the Certificates/Mortgage Debt as described in Note 5.
The balances in those reserves as of December 31 are as follows (in thousands):
2001 2000
------- -------
Debt service reserve ........................... $ 6,857 $ 6,985
Real estate tax and insurance reserve .......... 6,632 6,310
Deposit reserve ................................ 4,028 14
Working capital reserve ........................ 5,018 5,106
------- -------
$22,535 $18,415
======= =======
Reclassifications
Certain reclassifications were made to the prior year financial statements to
conform to the 2001 presentation.
Application of New Accounting Standards
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" which replaces
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets SFAS No. 121"
to determine when a long-lived asset should be classified as held for sale,
among other things. Those criteria specify that the asset must be available for
immediate sale in its present condition, subject only to terms that are usual
and customary for sales of such assets, and the sale of the asset must be
probable, and its transfer expected to qualify for recognition as a completed
sale, within one year. This Statement is effective for fiscal years beginning
after December 15, 2001. The Partnership does not believe implementation of the
standard will have a material effect on the Partnership.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
2001 2000
--------- ---------
Land ................................... $ 25,541 $ 25,541
Leasehold improvements ................. 311,190 307,741
Building and improvements .............. 255,971 256,885
Furniture and equipment ................ 130,766 127,275
Construction in progress ............... 1,631 --
--------- ---------
725,099 717,442
Less accumulated depreciation .......... (306,214) (278,344)
--------- ---------
$ 418,885 $ 439,098
========= =========
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts (in thousands):
As of December 31, 2001 As of December 31, 2000
-------------------------- --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- ----------- -----------
Certificates/Mortgage Loan.................. $ 321,205 $ 335,483 $ 339,139 $ 349,230
Senior Notes................................ $ 127,400 $ 132,735 $ 127,400 $ 128,356
Management fees due to Courtyard
Management Corporation................... $ 43,288 $ 17,480 $ 31,417 $ 12,367
22
The estimated fair values of debt obligations are based on the quoted market
prices at December 31, 2001 and 2000, respectively. Management fees due to the
Manager are valued based on the expected future payments from operating cash
flow discounted at estimated risk adjusted rates.
NOTE 5. DEBT
On January 24, 1996, the Partnership completed a refinancing of the
Partnership's existing debt through the private placements of $127.4 million of
senior secured notes (the "Senior Notes") and $410.2 million of multi-class
commercial mortgage pass-through certificates (the "Certificates" or "Mortgage
Loan").
Senior Notes
The Senior Notes of $127.4 million were issued by the Partnership, bear interest
at 10 3/4%, require semi-annual payments of interest and require no payments of
principal until maturity on February 1, 2008. The Senior Notes are secured by a
first priority pledge by the Partnership of (i) its 99% partnership interest
(consisting of a 98% limited partner interest and a 1% general partner interest)
in Associates and (ii) its 100% equity interest in the managing general partner.
The terms of the Senior Notes include requirements of the Partnership to
establish and fund a debt service reserve account in an amount equal to at least
one six-month interest payment on the Senior Notes ($6,848,000) which is
included as restricted cash on the accompanying consolidated balance sheets and
to maintain certain levels of excess cash flow, as defined. In the event the
Partnership fails to maintain the required level of excess cash flow, the
Partnership will be required to (i) suspend distributions to its Partners and
other restricted payments, as defined, (ii) to fund a separate supplemental debt
service reserve account (the "Supplemental Debt Service Reserve") in an amount
up to two six-month interest payments on the Senior Notes and (iii) if such
failure were to continue, to offer to purchase a portion of the Senior Notes at
par.
The Senior Notes may be redeemed, at the option of the Partnership, at a premium
declining to par in 2004. The premium is 5.375% for 2001, 3.583% for 2002 and
1.792% for 2003. The Senior Notes are non-recourse to the Partnership and its
partners.
In connection with Host Marriott Corporation's conversion to a REIT on January
1, 1999, a change of control occurred when Host Marriott Corporation ceased to
own, directly or indirectly, all of the outstanding equity interest of the
general partner of the Partnership. Although such a change of control has
occurred, Host Marriott Corporation continued to own, indirectly, a substantial
majority of the economic interest in the general partner of the Partnership,
through Host Marriott, L.P. A change of control occurred again in 2000 in
conjunction with the Settlement Agreement and subsequent purchase by the Joint
Venture of all the partnership units.
The changes in control described above resulted in a "Change in Control" under
the indenture governing the Senior Notes. As a result, in accordance with the
terms of the indenture, a tender offer commenced for the Senior Notes at a
purchase price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest thereon. The first tender offer expired on February
12, 1999 with no Senior Notes tendered. The second tender offer was completed on
January 26, 2001 and approximately $11.6 million Senior Notes were purchased,
representing approximately 9% of the outstanding notes. The notes, which were
purchased by the Joint Venture, were resold on March 27, 2001.
Certificates
The Certificates were issued by CBM Funding for an initial principal amount of
$410.2 million. Proceeds from the sale of the Certificates were utilized by CBM
Funding to provide a Mortgage Loan to Associates. The Certificates/Mortgage Loan
requires monthly payments of principal and interest based on a 17-year
amortization schedule. The Mortgage Loan matures on January 28, 2008. However,
the maturity date of the Certificates/Mortgage Loan may be extended until
January 28, 2013 with the consent of 662/3% of the holders of the outstanding
Certificates affected thereby. The Certificates were issued in the following
classes and pass-through rates of interest.
23
Initial Certificate Pass-Through
Class Balance Rate
- ------------------- -------------------- ------------------
Class A-1 $ 45,500,000 7.550%
Class A-2 $ 50,000,000 6.880%
Class A-3P & I $ 129,500,000 7.080%
Class A-3IO Not Applicable 0.933%
Class B $ 75,000,000 7.480%
Class C $ 100,000,000 7.860%
Class D $ 10,200,000 8.645%
The Class A-3IO Certificates require payments of interest only based on a
notional balance equal to the Class A-3P & I Certificate balance.
The balances of the Certificates were $321.2 million and $339.1 million at
December 31, 2001 and 2000, respectively. Principal payments of $17.9 million
and $16.6 million on the Certificates were made during 2001 and 2000,
respectively. The weighted average interest rate on the Certificates was 7.9%
for 2001 and 7.8% for 2000.
The Certificates/Mortgage Loan maturities as of December 31, 2001 are as follows
(in thousands):
2002............ $ 19,326
2003............ 20,827
2004............ 22,444
2005............ 24,186
2006............ 26,064
Thereafter......... 208,358
-------------
$ 321,205
==============
The Mortgage Loan is secured primarily by 69 cross-defaulted and
cross-collateralized mortgages representing first priority mortgage liens on (i)
the fee or leasehold interest in 69 of the Hotels (excluding the Deerfield
Hotel), related furniture, fixtures and equipment and the property improvement
fund, (ii) the fee interest in the land leased from MII or their affiliates on
which 53 Hotels are located, (iii) a pledge of Associates membership interest in
and the related right to receive distributions from CBM Associates II
("Associates II") which owns the Deerfield Hotel and (iv) an assignment of the
Management Agreement, as defined below. The Mortgage Loan is non-recourse to
Associates, the Partnership and its Partners.
Operating profit, as defined, from the Hotels in excess of debt service on the
Mortgage Loan is available to be distributed to the Partnership. Amounts
distributed to the Partnership are used for the following, in order of priority:
(i) for debt service on the Senior Notes, (ii) to fund the Supplemental Debt
Service Reserve, if necessary, (iii) to offer to purchase a portion of the
Senior Notes at par, if necessary, (iv) for working capital as discussed in Note
7 and (v) for distributions to the Partners of the Partnership. The net assets
(all of which are restricted) of Associates was $106.4 million and $107.1
million as of December 31, 2001 and 2000, respectively.
Prepayments of the Mortgage Loan are permitted with the payment of a premium
(the "Prepayment Premium"). The Prepayment Premium is equal to the greater of
(i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance
amount based on a spread of .25% or .55% over the U.S. treasury rate, as
defined.
Pursuant to the terms of the Certificate/Mortgage Loan, the Partnership is
required to establish with the lender a separate escrow account for payments of
insurance premiums and real estate taxes for each mortgaged property if the
credit rating of MII is downgraded by Standard and Poor's Rating Services which
occurred effective April 1, 1997. The real estate tax and insurance reserve is
included in restricted cash and the resulting tax and insurance liability is
included in accounts payable and accrued liabilities in the accompanying
consolidated balance sheets. The balance in the real estate tax and insurance
reserve as of December 31, 2001 and 2000 was $6.6 million and $6.3 million,
respectively.
24
NOTE 6. LEASES
The land on which 53 of the Hotels are located is leased from affiliates of MII.
In addition, eight of the Hotels are located on land leased from third parties.
The land leases have remaining terms (including all renewal options) expiring
between the years 2024 and 2068. The MII land leases and the third party land
leases provide for rent based on specific percentages (from 2% to 15%) of
certain revenue categories subject to minimum amounts. The minimum rentals are
adjusted at various anniversary dates throughout the lease terms, as defined in
the agreements. The Partnership also rents certain equipment for use in the
Hotels.
In connection with the mortgage debt refinancing, the Partnership, as lessee,
transferred it rights and obligations pursuant to the 53 Hotel ground leases
with affiliates of MII to Associates. Additionally, affiliates of MII agreed to
defer receipt of their ground lease payments to the extent that the Partnership
or Associates has insufficient funds for debt service payments on the Senior
Notes and the Mortgage Loan.
Minimum future rental payments during the term of these operating leases as of
December 31, 2001 are as follows (in thousands):
Telephone
Lease Land Equipment and Other
Year Leases Leases
- ----------- ----------- ----------------------
2002 $ 10,054 $ 132
2003 10,348 96
2004 10,381 --
2005 10,889 --
2006 11,207 --
Thereafter 1,839,949 --
----------- -------------
$ 1,892,828 $ 228
=========== =============
Total rent expense on land leases was approximately $13,020,000 for 2001,
$13,741,000 for 2000 and $13,249,000 for 1999.
NOTE 7. MANAGEMENT AGREEMENT
To facilitate the refinancing, effective December 30, 1995, the original
management agreement was restated into two separate management agreements.
Associates entered into a management agreement with the Manager for the 69
Hotels which Associates directly owns and Associates II entered into a
management agreement for the Deerfield Hotel which Associates II owns,
collectively, (the "Management Agreement").
Term
The Management Agreement has an initial term expiring in 2013. The Manager may
renew the term, as to one or more of the Hotels, at its option, for up to three
successive terms of 10-years each and one final term of five years. The
Partnership may terminate the Management Agreement if, during any three
consecutive years after 1992, specified minimum operating results are not
achieved. However, the Manager may prevent termination by paying to the
Partnership the amount by which the minimum operating results were not achieved.
Upon the sale of a hotel, the Management Agreement may be terminated with
respect to that hotel with payment of a termination fee. Prior to December 31,
2007, a maximum of 20 hotels may be sold free and clear of the Management
Agreement with payment of the termination fee. The termination fee is calculated
by the Manager as the net present value of reasonably anticipated future
incentive management fees.
Management Fees
The Management Agreement provides for annual payments of (i) the base management
fee equal to 3.5% of gross revenues from the Hotels, (ii) the Courtyard
management fee equal to 2.5% of gross revenues from the Hotels, and (iii) the
incentive management fee equal to 15% of operating profit, as defined (20% of
operating profit after the Partners have received refinancing proceeds equal to
50% of the excess of (a) $154,736,842 over (b) cumulative distributions of
adjusted sale proceeds).
25
Deferral Provisions
One percent of the Courtyard management fee is deferred through maturity of the
Senior Notes and the Mortgage Loan to the extent that the Partnership or
Associates has insufficient funds for debt service payments on the Senior Notes
and the Mortgage Loan.
To the extent any Courtyard management fee, base management fee or incentive
management fee is deferred, it will be added to deferred management fees.
Deferred management fees accrue without interest, and will be payable out of 50%
of available cash flow after payment of certain priorities as discussed below.
The priority return to the Partnership, as defined, is 10% for 1999 and
thereafter. Operating profit from the Hotels (which reflects the deduction of
the base and Courtyard management fees and MII ground rent) will be used to pay
the following, in order of priority: (i) debt service on the Senior Notes and
Mortgage Loan, (ii) to repay working capital loans to the Manager, (iii) to
repay deferred ground rent to affiliates of MII, (iv) to repay ground lease
advances to affiliates of MII, (v) the priority return to the Partnership which
was 10% of invested capital for 2001, 2000 and 1999, (vi) eighty percent of the
remaining operating profit is applied to the payment of current incentive
management fees, (vii) to repay advances to the Partnership, (viii) to repay
foreclosure avoidance advances to the Manager and (ix) fifty percent of the
remaining operating profit to repay deferred management fees to the Manager and
fifty percent of remaining operating profit is paid to the Partnership.
During 2001, no deferred incentive management fees were paid. During 2000,
$1,878,000 of deferred incentive management fees were paid. Deferred incentive
management fees were $13,553,000 and $1,682,000 as of December 31, 2001 and
2000, respectively. The Partnership did not pay down any deferred base
management fees during 2001 but paid down $510,000 during 2000. The Partnership
did not pay down any deferred Courtyard management fees during 2001 and 2000.
Deferred base management fees totaled $7,394,000 as of December 31, 2001 and
2000 and deferred Courtyard management fees totaled $22,341,000 as of December
31, 2001 and 2000.
Chain Services and Marriott's Rewards Program
The Manager is required to furnish certain chain services which are generally
furnished on a central or regional basis to all hotels managed, owned or leased
in the Courtyard by Marriott hotel system. In addition, the Hotels participate
in MII's Marriott Reward Program ("MRP"). The MRP is a program that provides
benefits to frequent travelers who stay at Marriott branded properties. Chain
services and MRP costs charged to the partnership under the Management Agreement
were approximately $13,470,000 in 2001, $14,470,000 in 2000 and $14,550,000 in
1999.
Working Capital
The Partnership is required to provide the Manager with working capital to meet
the operating needs of the Hotels. The refinancing required certain enhancements
to the cash management system of the Manager such that additional working
capital may be required for the operation of the Hotels. Therefore, on January
24, 1996, the Partnership, Associates and the Manager entered into a working
capital maintenance agreement (the "Working Capital Agreement") and advanced
$2.5 million to the Manager as additional working capital for the operation of
the Hotels. In 1998, this $2.5 million was returned to Associates. Upon
termination of the Management Agreement, the working capital will be returned to
the Partnership. As of December 31, 2001 and 2000, the working capital balance
was $4,202,000.
The working capital reserve is available for payment of hotel operating expenses
in the event that there is a further downgrade in the long-term senior unsecured
debt of MII to a level below the rating which was effective April 1, 1997. The
obligation to fund the amounts required by the Working Capital Agreement is
subordinate to debt service on the Senior Notes and the Mortgage Loan.
Property Improvement Fund
The Management Agreement provides for the establishment of a repairs and
equipment reserve (property improvement fund) for the Hotels. The funding of
this reserve is based on a percentage of gross Hotel revenues. The contribution
to the property improvement fund was originally established at 5% for all
Hotels. In connection with the purchase of the limited partnership units by the
Joint Venture, the contribution percentage was increased to 6.5% as of October
24, 2000.
26
NOTE 8. ENVIRONMENTAL CONTINGENCY
Based upon a study completed in December 1995, the Partnership has become aware
of environmental contamination at one of its fee-owned properties, the Deerfield
Hotel, caused by the previous use of the site as a landfill. The property
represents less than 2% of the Partnership's total assets and revenues as of
December 31, 2001 and for the year ended, respectively. The Partnership is
unable to determine the need for remediation, its potential responsibility, if
any, for remediation and the extent of the Partnership's possible liability for
any remediation costs. The Partnership has obtained environmental insurance.
There can be no assurance that the Partnership will not have liability with
respect to remediation of contamination at that site. The Partnership does not
believe that any of the environmental matters are likely to have a material
adverse effect on the business and operations of the Partnership.
NOTE 9. LITIGATION
The Partnership and the Hotels are involved in routine litigation and
administrative proceedings arising in the ordinary course of business, some of
which are expected to be covered by liability insurance and which collectively
are not expected to have a material adverse effect on the business, financial
condition of results of operations of the Partnership.
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF COURTYARD II ASSOCIATES, L.P. AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of Courtyard II
Associates, L.P. (a Delaware limited partnership) and Subsidiaries as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, changes in partners' capital and cash flows for the three years
ended December 31, 2001. These financial statements are the responsibility of
the General Partner's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Courtyard II
Associates, L.P. and Subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for the three years ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Vienna, Virginia
March 18, 2002
28
CONSOLIDATED BALANCE SHEETS
Courtyard II Associates, L.P. and Subsidiaries
December 31, 2001 and 2000
(in thousands)
2001 2000
-------- --------
ASSETS
Property and equipment, net ............................. $418,885 $439,098
Deferred financing costs, net of accumulated amortization 6,716 7,822
Due from Courtyard Management Corporation ............... 9,117 8,453
Other assets ............................................ -- 2
Property improvement fund ............................... 30,513 18,912
Restricted cash ......................................... 10,660 6,324
Cash and cash equivalents ............................... 9,891 11,755
-------- --------
$485,782 $492,366
======== ========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt ........................................... $321,205 $339,139
Management fees due to Courtyard Management Corporation . 43,288 31,417
Due to Marriott International, Inc. and affiliates ...... 8,574 8,693
Accounts payable and accrued liabilities ................ 6,222 5,945
-------- --------
Total Liabilities ................................. 379,289 385,194
MINORITY INTEREST .......................................... 69 58
-------- --------
379,358 385,252
-------- --------
PARTNERS' CAPITAL
General Partners ........................................ 2,141 2,155
Limited Partner ......................................... 104,283 104,959
-------- --------
Total Partners' Capital ........................... 106,424 107,114
-------- --------
$485,782 $492,366
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
29
CONSOLIDATED STATEMENTS OF OPERATIONS
Courtyard II Associates, L.P. and Subsidiaries
For the Years Ended December 31, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
------------- ------------- -------------
REVENUES
Rooms................................................................... $ 254,880 $ 275,877 $ 265,137
Food and beverage....................................................... 15,858 18,057 17,686
Other................................................................... 7,743 9,600 10,159
------------- ------------- -------------
Total revenues...................................................... 278,481 303,534 292,982
------------- ------------- -------------
OPERATING COSTS AND EXPENSES
Rooms................................................................... 56,967 62,008 59,873
Food and beverage....................................................... 14,166 15,989 15,594
Other department costs and expenses..................................... 1,723 2,017 2,492
Selling, administrative and other....................................... 66,875 72,344 69,170
Depreciation............................................................ 27,956 28,583 27,397
Base and Courtyard management fees...................................... 16,709 18,212 17,579
Incentive management fee................................................ 11,871 13,778 13,322
Ground rent............................................................. 13,020 13,741 13,249
Property taxes.......................................................... 12,074 11,734 11,143
Insurance and other..................................................... 1,480 2,084 2,193
------------- ------------- -------------
Total operating costs and expenses.................................. 222,841 240,490 232,012
------------- ------------- -------------
OPERATING PROFIT........................................................... 55,640 63,044 60,970
Interest expense........................................................ (27,098) (28,289) (29,407)
Interest income......................................................... 1,124 1,405 1,156
------------- ------------- -------------
NET INCOME BEFORE MINORITY INTEREST........................................ 29,666 36,160 32,719
MINORITY INTEREST.......................................................... 11 14 13
------------- ------------- -------------
NET INCOME................................................................. $ 29,655 $ 36,146 $ 32,706
============= ============= =============
ALLOCATION OF NET INCOME
General Partners........................................................ $ 593 $ 723 $ 654
Limited Partner......................................................... 29,062 35,423 32,052
------------- ------------- -------------
$ 29,655 $ 36,146 $ 32,706
============= ============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
CONSOLIDATED STATEMENTS OF
CHANGES IN PARTNERS' CAPITAL
Courtyard II Associates, L.P. and Subsidiaries
For the Years Ended December 31, 2001, 2000 and 1999
(in thousands)
General Limited
Partners Partner Total
----------- ----------- -----------
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
Capital distributions............................................ (616) (30,112) (30,728)
Net income....................................................... 723 35,423 36,146
----------- ----------- -----------
Balance, December 31, 2000.......................................... 2,155 104,959 107,114
Capital distributions............................................ (607) (29,738) (30,345)
Net income....................................................... 593 29,062 29,655
----------- ----------- -----------
Balance, December 31, 2001.......................................... $ 2,141 $ 104,283 $ 106,424
=========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
31
CONSOLIDATED STATEMENTS OF CASH FLOWS
Courtyard II Associates, L.P. and Subsidiaries
For the Years Ended December 31, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
----------- ----------- -----------
OPERATING ACTIVITIES
Net income..................................................................... $ 29,655 $ 36,146 $ 32,706
Depreciation................................................................... 27,956 28,583 27,397
Amortization of deferred financing costs as interest........................... 1,106 1,106 1,105
Gain/(loss) on disposition of fixed assets..................................... (4) 17 291
Minority interest.............................................................. 11 14 13
Amortization of prepaid expenses............................................... 2 9 9
Changes in operating accounts:
Due from Courtyard Management Corporation.................................... (664) 342 (56)
Management fees due to Courtyard Management Corporation...................... 11,871 (2,388) (609)
Accounts payable and accrued liabilities..................................... 277 697 948
Straight-line rent adjustment................................................ (119) (119) (119)
Real estate tax and insurance reserve........................................ (322) 8 (912)
----------- ----------- -----------
Cash provided by operations.............................................. 69,769 64,415 60,773
----------- ----------- -----------
INVESTING ACTIVITIES
Additions to property and equipment, net....................................... (7,739) (13,286) (18,450)
Contributions to the property improvement fund................................. (18,101) (15,910) (14,623)
Property improvement fund expenditures and other activity...................... 6,500 2,393 15,694
----------- ----------- -----------
Cash used in investing activities........................................ (19,340) (26,803) (17,379)
----------- ----------- -----------
FINANCING ACTIVITIES
Capital distributions.......................................................... (30,345) (30,728) (18,357)
Change in debt service reserve................................................. (4,014) (14) --
Repayment of principal......................................................... (17,934) (16,642) (15,443)
----------- ----------- -----------
Cash used in financing activities........................................ (52,293) (47,384) (33,800)
----------- ----------- -----------
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS.................................. $ (1,864) $ (9,772) $ 9,594
CASH AND CASH EQUIVALENTS at beginning of year.................................... 11,755 21,527 11,933
----------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of year.......................................... $ 9,891 $ 11,755 $ 21,527
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest......................................................... $ 25,993 $ 27,159 $ 28,301
=========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Courtyard II Associates, L.P. and Subsidiaries
December 31, 2001 and 2000
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Courtyard II Associates, L.P. and Subsidiaries ("Associates"), a Delaware
limited partnership, was formed December 22, 1995. Substantially all of the
assets of Associates were contributed to Associates by Courtyard by Marriott II
Limited Partnership (the "Partnership") on January 24, 1996, in connection with
the Partnership's refinancing (see Note 5). The managing general partner of
Associates is Courtyard II Associates Management Corporation (a wholly-owned
subsidiary of the Partnership) with a 1% general partner interest. The remaining
partner interests are owned by the Partnership with a 1% general partner
interest and a 98% limited partner interest.
CBM Funding Corporation ("CBM Funding") a wholly-owned subsidiary of Associates,
was formed on December 29, 1995, to make a mortgage loan to Associates in
connection with the refinancing (see Note 5). Associates directly owns 69
Courtyard hotels and the land on which certain of the Hotels, as defined below,
are located. One hotel located in Deerfield, Illinois (the "Deerfield Hotel"),
is owned by CBM Associates II LLC ("Associates II"). Associates hold a 99%
membership interest in Associates II and Courtyard II Associates Management
Corporation holds the remaining 1% interest in Associates II, which is reflected
as minority interest in the financial statements.
The 70 hotel properties (the "Hotels") are located in 29 states in the United
States. The Hotels are managed as part of the Courtyard by Marriott hotel system
by Courtyard Management Corporation (the "Manager"), a wholly-owned subsidiary
of Marriott International, Inc. ("MII").
Partnership Allocations and Distributions
Allocations and distributions for Associates are generally made in accordance
with the respective ownership interests as follows: (i) 98% to the limited
partner, the Partnership and (ii) 1% to each general partner, the Partnership
and Courtyard II Associates Management Corporation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of Associates present the financial
position, results of operations and cash flows of Associates as if it were a
separate subsidiary of the Partnership for all periods presented. The
Partnership's historical basis in the assets and liabilities contributed to
Associates have been recorded on Associates at their carryover basis.
Intercompany transactions and balances between Associates and its subsidiaries
have been eliminated.
Basis of Accounting
The records of Associates are maintained on the accrual basis of accounting and
its fiscal year coincides with the calendar year.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
33
Working Capital
Pursuant to the terms of the management agreement, Associates is required to
provide the Manager with working capital to meet the operating needs of the
Hotels. The Manager converts cash advanced by Associates into other forms of
working capital consisting primarily of operating cash, inventories, and trade
receivables and payables which are maintained and controlled by the Manager.
Upon termination of the management agreement, the Manager is required to convert
working capital into cash and return it to Associates. As a result of these
conditions, the individual components of working capital controlled by the
Manager are not reflected in the accompanying consolidated balance sheet, but
rather are included in Due from Courtyard Management Corporation.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets as follows:
Buildings and improvements 40 years
Leasehold improvements 40 years
Furniture and equipment 4-10 years
Certain property and equipment is pledged to secure the Certificates/Mortgage
Loan (see Note 5).
Associates assesses impairment of its real estate properties based on whether
estimated undiscounted future cash flows from such properties on an individual
hotel basis will be less than their net book value. If a property is impaired,
its basis is adjusted to fair market value. There was no such adjustment
required at December 31, 2001 or 2000.
Deferred Financing Costs
Financing costs are amortized using the straight-line method, which approximates
the effective interest rate method, over the remaining life of the respective
mortgage debt. At December 31, 2001 and 2000, accumulated amortization related
to the Certificates, as defined in Note 5, were $6,551,000 and $5,445,000,
respectively.
Cash and Cash Equivalents
Associates considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Restricted Cash
The Partnership was required to establish certain reserves pursuant to the terms
of the Certificates/Mortgage Debt as described in Note 5. The balances in those
reserves as of December 31 are as follows (in thousands):
2001 2000
----------- -----------
Real estate tax and insurance reserve............ $ 6,632 $ 6,310
Deposit reserve.................................. 4,028 14
----------- -----------
$ 10,660 $ 6,324
=========== ===========
Ground Rent
The land leases include scheduled increases in minimum rents per property. These
scheduled rent increases, which are included in minimum lease payments, are
being recognized by Associates on a straight-line basis over the lease terms of
approximately 80 years. The adjustment included in ground rent expense and Due
to Marriott International, Inc. and affiliates to reflect minimum lease payments
on a straight-line basis for 2001, 2000 and 1999 totaled $119,000 per year. The
related liability is included in Due to MII and affiliates on the accompanying
consolidated balance sheets.
34
Income Taxes
Provision for Federal taxes has not been made in the accompanying consolidated
financial statements since Associates does not pay income taxes, but rather,
allocates its profits and losses to the individual partners. Significant
differences exist between the net income for financial reporting purposes and
the net income reported in the Partnership's tax return. These differences are
due primarily to the use for income tax purposes of accelerated depreciation
methods, shorter depreciable lives for the assets, differences in the timing of
recognition of certain fees and straight-line rent adjustments. As a result of
these differences, the excess of the net Partnership liabilities reported in the
accompanying consolidated financial statements over the tax basis in the net
Partnership liabilities was approximately $12,854,000 and $507,000, respectively
as of December 31, 2001 and 2000.
Reclassifications
Certain reclassifications were made to the prior year financial statements to
conform to the 2001 presentation.
Application of New Accounting Standards
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" which replaces
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets SFAS No. 121"
to determine when a long-lived asset should be classified as held for sale,
among other things. Those criteria specify that the asset must be available for
immediate sale in its present condition, subject only to terms that are usual
and customary for sales of such assets, and the sale of the asset must be
probable, and its transfer expected to qualify for recognition as a completed
sale, within one year. This Statement is effective for fiscal years beginning
after December 15, 2001. The Partnership does not believe implementation of the
standard will have a material effect on the Partnership.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
2001 2000
--------- ---------
Land ................................... $ 25,541 $ 25,541
Leasehold improvements ................. 311,190 307,741
Building and improvements .............. 255,971 256,885
Furniture and equipment ................ 130,766 127,275
Construction in progress ............... 1,631 --
--------- ---------
725,099 717,442
Less accumulated depreciation .......... (306,214) (278,344)
--------- ---------
$ 418,885 $ 439,098
========= =========
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts (in thousands):
As of December 31, 2001 As of December 31, 2000
---------------------------- ----------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
Mortgage debt................................................. $ 321,205 $ 335,483 $ 339,139 $ 349,230
Management fees due to Courtyard Management Corporation....... $ 43,288 $ 17,480 $ 31,417 $ 12,367
The estimated fair value of the mortgage debt is based on the quoted market
price at December 31, 2001 and 2000, respectively. Management fees due to the
Manager are valued based on the expected future payments from operating cash
flow discounted at risk adjusted rates.
35
NOTE 5. MORTGAGE DEBT
On January 24, 1996, the Partnership and Associates completed two refinancings
of the existing debt through the private placements of $127.4 million of Senior
Notes and $410.2 million of multiclass commercial mortgage pass-through
certificates (the "Certificates"), respectively.
The Certificates were issued by CBM Funding for an initial principal amount of
$410.2 million. Proceeds from the sale of the Certificates were utilized by CBM
Funding to provide a mortgage loan (the "Mortgage Loan") to Associates. The
Certificates/Mortgage Loan require monthly payments of principal and interest
based on a 17-year amortization schedule. The Mortgage Loan matures on January
28, 2008. However, the maturity date of the Certificates/Mortgage Loan may be
extended until January 28, 2013 with the consent of 662/3% of the holders of the
outstanding Certificates affected thereby. The Certificates were issued in the
following classes and pass-through rates of interest.
Initial Certificate Pass-Through
Class Balance Rate
- ------------------ ------------------ ------------------
Class A-1 $ 45,500,000 7.550%
Class A-2 $ 50,000,000 6.880%
Class A-3P & I $ 129,500,000 7.080%
Class A-3IO Not Applicable 0.933%
Class B $ 75,000,000 7.480%
Class C $ 100,000,000 7.860%
Class D $ 10,200,000 8.645%
The Class A-3IO Certificates require payments of interest only based on a
notional balance equal to the Class A-3P & I Certificate balance.
The balances of the Certificates were $321.2 million and $339.1 million at
December 31, 2001 and 2000, respectively. Principal payments of $17.9 million
and $16.6 million of the Certificates were made during 2001 and 2000,
respectively. The weighted average interest rate for the Certificates was 7.9%
for 2001 and 7.8% for 2000.
The Certificates/Mortgage Loan maturities as of December 31, 2001 are as follows
(in thousands):
2002.................. $ 19,326
2003.................. 20,827
2004.................. 22,444
2005.................. 24,186
2006.................. 26,064
Thereafter............... 208,358
--------------
$ 321,205
==============
The Mortgage Loan is secured primarily by 69 cross-defaulted and
cross-collateralized mortgages representing first priority mortgage liens on (i)
the fee or leasehold interest in 69 of the Hotels (excluding the Deerfield
Hotel), related furniture, fixtures and equipment and the property improvement
fund, (ii) the fee interest in the land leased from MII or their affiliates on
which 53 Hotels are located, (iii) a pledge of Associates membership interest in
and the related right to receive distributions from Associates II which owns the
Deerfield Hotel and (iv) an assignment of the Management Agreement, as defined
below. The Mortgage Loan is non-recourse to Associates, the Partnership and its
partners.
Operating profit from the Hotels in excess of debt service on the Mortgage Loan
is available to be distributed to the Partnership and Courtyard II Associates
Management Corporation.
Prepayments of the Mortgage Loan are permitted with the payment of a premium
(the "Prepayment Premium"). The Prepayment Premium is equal to the greater of
(i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance
amount based on a spread of .25% or .55% over the U.S. treasury rate, as
defined.
36
Pursuant to the terms of the Certificate/Mortgage Loan, the Partnership is
required to establish with the lender a separate escrow account for payments of
insurance premiums and real estate taxes for each mortgaged property if the
credit rating of MII is downgraded by Standard and Poor's Rating Services which
occurred effective April 1, 1997. The real estate tax and insurance reserve is
included in restricted cash and the resulting tax and insurance liability is
included in accounts payable and accrued liabilities in the accompanying balance
sheets. The balance in the real estate tax and insurance reserve as of December
31, 2001 and 2000 was $6.6 million and $6.3 million, respectively.
NOTE 6. LEASES
The land on which 53 of the Hotels are located is leased from affiliates of MII.
In addition, eight of the Hotels are located on land leased from third parties.
The land leases have remaining terms (including all renewal options) expiring
between the years 2024 and 2068. The MII land leases and the third party land
leases provide for rent based on specific percentages (from 2% to 15%) of
certain revenue categories subject to minimum amounts. The minimum rentals are
adjusted at various anniversary dates throughout the lease terms, as defined in
the agreements. The Partnership also rents certain equipment for use in the
Hotels.
In connection with the refinancing, the Partnership, as lessee, transferred its
rights and obligations pursuant to the 53 ground leases with affiliates of MII
to Associates. Additionally, affiliates of MII agreed to defer receipt of their
ground lease payments to the extent that the Partnership or Associates has
insufficient funds for debt service payments on the Senior Notes and the
Mortgage Loan.
Minimum future rental payments during the term of these operating leases are as
follows (in thousands):
Telephone
Lease Land Equipment and Other
Year Leases Leases
- ----------- ----------- ----------------------
2002 $ 10,054 $ 132
2003 10,348 96
2004 10,381 --
2005 10,889 --
2006 11,207 --
Thereafter 1,839,949 --
----------- -------------
$ 1,892,828 $ 228
=========== =============
Total rent expense on land leases was approximately $13,020,000 for 2001,
$13,741,000 for 2000 and $13,249,000 for 1999.
NOTE 7. MANAGEMENT AGREEMENT
To facilitate the refinancing, effective December 30, 1995, the original
management agreement was restated into two separate management agreements.
Associates entered into a management agreement with the Manager for the 69
Hotels which Associates directly owns and Associates II entered into a
management agreement for the Deerfield Hotel which Associates II owns,
collectively, (the "Management Agreement").
Term
The Management Agreement has an initial term expiring in 2013. The Manager may
renew the term, as to one or more of the Hotels, at its option, for up to three
successive terms of 10-years each and one final term of five years. The
Partnership may terminate the Management Agreement if, during any three
consecutive years after 1992, specified minimum operating results are not
achieved. However, the Manager may prevent termination by paying to the
Partnership the amount by which the minimum operating results were not achieved.
Upon the sale of a Hotel, the Management Agreement may be terminated with
respect to that Hotel with payment of a termination fee. Prior to December 31,
2007, a maximum of 20 Hotels may be sold free and clear of the Management
Agreement with payment of the termination fee. The termination fee is calculated
by the Manager as the net present value of reasonably anticipated future
incentive management fees.
37
Management Fees
The Management Agreement provides for annual payments of (i) the base management
fee equal to 3.5% of gross revenues from the Hotels, (ii) the Courtyard
management fee equal to 2.5% of gross revenues from the Hotels, and (iii) the
incentive management fee equal to 15% of operating profit, as defined (20% of
operating profit after the partners have received refinancing proceeds equal to
50% of the excess of (a) $154,736,842 over (b) cumulative distributions of
adjusted sale proceeds (the "First Equity Refinancing")).
Deferral Provisions
Due to the refinancing, beginning in 1996, one percent of the Courtyard
management fee is deferred through maturity of the Senior Notes and the Mortgage
Loan to the extent that the Partnership or Associates has insufficient funds for
debt service payments on the Senior Notes and the Mortgage Loan. Previously, the
entire Courtyard management fee was subordinate to debt service.
To the extent any Courtyard management fee, base management fee or incentive
management fee is deferred, it will be added to deferred management fees.
Deferred management fees accrue without interest, and will be payable out of 50%
of available cash flow after payment of certain priorities as discussed below.
The priority return to the Partnership, as defined, is 10% for 1999 and
thereafter. Operating profit from the Hotels (which reflects the deduction of
the base and Courtyard management fees and MII ground rent) will be used to pay
the following, in order of priority: (i) debt service on the Senior Notes and
Mortgage Loan, (ii) to repay working capital loans to the Manager, (iii) to
repay deferred ground rent to affiliates of MII, (iv) to repay ground lease
advances to affiliates of MII, (v) the priority return to the Partnership which
was 10% of invested capital for 2001, 2000 and 1999, (vi) eighty percent of the
remaining operating profit is applied to the payment of current incentive
management fees, (vii) to repay advances to the Partnership, (viii) to repay
foreclosure avoidance advances to the Manager and (ix) fifty percent of the
remaining operating profit to repay deferred management fees to the Manager and
fifty percent of remaining operating profit is paid to the Partnership.
During 2001, no deferred incentive management fees were paid. During 2000,
$1,878,000 of deferred incentive management fees were paid. Deferred incentive
management fees were $13,553,000 and $1,682,000 as of December 31, 2001 and
2000, respectively. The Partnership did not pay down any deferred base
management fees during 2001 but paid down $510,000 during 2000. The Partnership
did not pay down any deferred Courtyard management fees during 2001 and 2000.
Deferred base management fees totaled $7,394,000 as of December 31, 2001 and
2000 and deferred Courtyard management fees totaled $22,341,000 as of December
31, 2001 and 2000.
Chain Services and Marriott's Reward Program
The Manager is required to furnish certain chain services which are generally
furnished on a central or regional basis to all hotels managed, owned or leased
in the Courtyard by Marriott hotel system. In addition, the Hotels participate
in MII's Marriott Reward Program ("MRP"). The costs of this program are charged
to all hotels in the full-service, Residence Inn by Marriott, Courtyard by
Marriott and Fairfield Inn by Marriott systems based upon the MRP revenues at
each Hotel. Chain services and MRP costs charged to the partnership under the
Management Agreement were $13,470,000 in 2001, $14,470,000 in 2000 and
$14,550,000 in 1999.
Working Capital
Associates is required to provide the Manager with working capital to meet the
operating needs of the Hotels. The refinancing required certain enhancements to
the cash management system of the Manager such that additional working capital
may be required for the operation of the Hotels. Therefore, on January 24, 1996,
the partnership, Associates and the Manager entered into a working capital
maintenance agreement (the "Working Capital Agreement") and advanced $2.5
million to the Manager as additional working capital for the operation of the
Hotels. In 1998, this $2.5 million was returned to Associates. Upon termination
of the Management Agreement, the working capital will be returned to Associates.
As of December 31, 2001 and 2000, the working capital balance was $4,202,000.
38
The working capital reserve is available for payment of hotel operating expenses
in the event that there is a further downgrade in the long-term senior unsecured
debt of MII to a level below the rating which was effective April 1, 1997. The
obligation to fund the amounts required by the Working Capital Agreement is
subordinate to debt service on the Senior Notes and the Mortgage Loan.
Property Improvement Fund
The Management Agreement provides for the establishment of a repairs and
equipment reserve (property improvement fund) for the Hotels. The funding of
this reserve is based on a percentage of gross Hotel revenues. The contribution
to the property improvement fund was originally established at 5% for all
Hotels. In connection with the purchase of the limited partnership units by CBM
Joint Venture LLC, the contribution percentage was increased to 6.5% as of
October 24, 2000.
NOTE 8. ENVIRONMENTAL CONTINGENCY
Based upon a study completed in December 1995, Associates has become aware of
environmental contamination at one of the fee-owned properties owned by
Associates II, the Deerfield Hotel, caused by the previous use of the site as a
landfill and not caused by Associates. The property represents less than 2% of
Associates' total assets and revenues as of December 31, 2001 and for the year
ended, respectively. Associates is unable to determine the need for remediation,
its potential responsibility, if any, for remediation and the extent of
Associates' possible liability for any remediation costs. Associates has
obtained environmental insurance. There can be no assurance that Associates will
not have liability with respect to remediation of contamination at that site.
Associates does not believe that any of the environmental matters are likely to
have a material adverse effect on its business and operations.
NOTE 9. LITIGATION
The Partnership and the Hotels are involved in routine litigation and
administrative proceedings arising in the ordinary course of business, some of
which are expected to be covered by liability insurance and which collectively
are not expected to have a material adverse effect on the business, financial
condition of results of operations of the Partnership.
39
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, 2001
- ----------------------- -------------------------------------- -----------------
Robert E. Parsons, Jr. President and Manager 46
W. Edward Walter Executive Vice President and Treasurer 46
Business Experience
Robert E. Parsons, Jr. joined Host Marriott's Corporate Financial Planning staff
in 1981 and was made Assistant Treasurer in 1988. In 1993, Mr. Parsons was
elected Senior Vice President and Treasurer of Host Marriott, and in 1995, he
was elected Executive Vice President and Chief Financial Officer of Host
Marriott. He is also an Executive Vice President and Chief Financial Officer of
Host LP and serves as a director, manager and officer of numerous Host Marriott
subsidiaries.
W. Edward Walter joined Host Marriott in 1996 as Senior Vice President for
Acquisitions, and was elected Treasurer in 1998, Executive Vice President in May
2000, and Chief Operating Officer in 2001. He also serves as a director, manager
and officer of numerous Host Marriott subsidiaries. Prior to joining Host
Marriott, Mr. Walter was a partner at Trammell Crow Residential Company and
President of Bailey Capital Corporation, a real estate firm focusing on tax
exempt real estate investments.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
As noted in Item 10 above, the Partnership has no directors or officers nor does
it have any employees. Under the Partnership Agreement, however, the General
Partner has the exclusive right to conduct the business and affairs of the
Partnership subject only to the Management Agreement described in Items 1 and
13. The General Partner is required to devote to the Partnership such time as
may be necessary for the proper performance of its duties, but the officers and
managers of the General Partner are not required to devote their full time to
the performance of such duties. No officer or manager of the General Partner
devotes a significant percentage of time to Partnership matters. To the extent
that any officer or manager does devote time to the Partnership, the General
Partner is entitled to reimbursement for the cost of providing such services.
For the fiscal years ending December 31, 2001, 2000 and 1999, the Partnership
40
reimbursed CBM Two or CBM Two LLC in the amount of $102,000, $90,000 and
$179,000, respectively, for the cost of providing all administrative and other
services as general partner. For information regarding all payments made by the
Partnership to Host Marriott and subsidiaries, see Item 13, "Certain
Relationships and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 2001, CBM Joint Venture LLC, which is a joint venture among
Host Marriott, L.P., Rockledge, and Marriott International, Inc. through their
wholly owned subsidiaries owned 100% of the 1,470 limited partnership Units. The
Joint Venture acquired the Units as part of the Settlement Agreement entered
into to resolve litigation filed by limited partners against Host Marriott, MII
and several of their subsidiaries. The General Partner, a wholly owned
subsidiary of the Joint Venture described above, owns a total of 21.5 Units
representing a 1.39% limited partnership interest in the Partnership.
The executive officers and managers of the General Partner, Host Marriott, MII
and their respective affiliates do not own any units as of December 31, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the description of the management agreement in Note
7 to the financial statements set forth in Part I.
41
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
- -------------- --------------------------------------------------------
*3.1 Amended and Restated Partnership Agreement of Limited
Partnership of Courtyard by Marriott II Limited
Partnership (the "Partnership") dated October 30, 1987
*3.2 Amendment No. 1 to the Amended and Restated Agreement of
Limited Partnership of the Partnership
*3.3 Certificate of Limited Partnership of the Partnership
*3.4 Amended and Restated Certificate of Incorporation of the
Courtyard II Finance Company ("Finance")
*3.5 By-laws of Finance
3.6 Agreement of Limited Partnership of Courtyard II
Associates, L.P. ("Associates") (Incorporated by
reference herein to Exhibit 3.1 to Associates Form S-4
filed with the Commission on March 14, 1996.)
3.7 Certificate of Limited Partnership of Associates
(Incorporated by reference herein to Exhibit 3.2 to
Associates Form S-4 filed with the Commission on March
14, 1996.)
3.9 By-laws of Funding (Incorporated by reference herein to
Exhibit 3.4 to Associates Form S-4 filed with the
Commission on March 14, 1996.)
3.10 Second Amendment to the Amended and Restated Agreement
of Limited Partnership of the Partnership dated December
28, 1998 (Filed with Partnership's Form 10-K for the
year ended December 31, 2000.)
42
*4.1 Indenture dated as of January 24, 1996 among the
Partnership and Finance and IBJ Schroder Bank & Trust
Company (the "Indenture")
*4.3 Exchange and Registration Rights Agreement dated as of
January 24, 1996 among the Partnership and Finance and
Lehman Brothers Inc.
*4.4 Intercreditor Agreement dated as of January 24, 1996
among IBJ Schroder Bank & Trust Company, Bankers Trust
Company, Marine Midland Bank (the "CMBS Trustee"), the
Partnership and Finance, Associates, Courtyard II
Associates Management Corporation (the "Managing General
Partner") and Funding
*4.5 Trust and Servicing Agreement dated as of January 1,
1996 among Funding, Bankers Trust Company and the CMBS
Trustee
*4.6 Exchange and Registration Rights Agreement dated as of
January 24, 1996 among the Partnership, Associates,
Funding and Lehman Brothers Inc.
*10.1 Amended and Restated Management Agreement dated as of
December 30, 1995, between the Partnership and Courtyard
Management Corporation (the "Manager")
*10.2 Management Agreement dated as of December 30, 1995
between the Partnership and the Manager
**10.3 Assignment of Lease and Warranty and Assumption of
Obligations between Marriott Corporation and the
Partnership dated October 30, 1987 for the Tampa, FL
property. Marriott Hotel Land Leases between Holtsinger,
Inc. and Bert Chase, Trustee dated June 13, 1968.
**10.4 Assignment of Lease and Warranty and Assumption of
Obligations between Marriott Corporation and the
Partnership dated August 12, 1988 for the
Atlanta-Roswell, GA property. Marriott Hotel Land Lease
between Marriott Corporation and Roswell Landing
Associates dated June 10, 1986.
**10.5 Assignment of Lease and Warranty and Assumption of
Obligations between Marriott Corporation and the
Partnership dated July 15, 1988 for the Norwalk, CT
property. Marriott Hotel Land Lease between Marriott
Corporation and Mary E. Fabrizio dated January 6, 1986.
**10.6 Assignment of Lease and Warranty and Assumption of
Obligations between Marriott Corporation and the
Partnership dated February 24, 1988 for the Fresno, CA
property. Marriott Hotel Land Lease between Marriott
Corporation and Richard Erganian, Miche Erganian, Aram
Erganian and Aznive Erganian dated June 6, 1984.
**10.7 Assignment of Lease and Warranty and Assumption of
Obligations between Marriott Corporation and the
Partnership dated August 12, 1988 for the Cupertino, CA
property. Marriott Hotel Land Lease between Marriott
Corporation and Vallco Park, Ltd. dated March 31, 1987.
**10.8 Marriott Hotel Land Lease between Marriott Corporation
and Pizzagalli Investment Company dated September 22,
1986.
**10.9 Assignment of Lease and Warranty and Assumption of
Obligations between Marriott Corporation and the
Partnership dated May 19, 1989 for the Charlotte South
Park, NC property. Marriott Hotel Land Lease between
Marriott Corporation and Queens Properties, Inc. dated
January 19, 1987.
**10.10 Assignment of Lease and Warranty and Assumption of
Obligations between Marriott Corporation and the
Partnership dated January 27, 1989 for the
Philadelphia/Devon, PA property. Marriott Hotel Land
Lease between Marriott Corporation and Three
Philadelphia/Devon Square Associates dated July 15,
1986.
43
**10.11 Associates received an assignment from the Partnership,
which had received an assignment from Host Marriott, of
15 ground leases for land that Host Marriott had
previously leased from various affiliates (the "Original
Landlords"). The ground leases are identical in all
material respects except as to their assignment dates to
the Partnership and the rents due (Exhibit A of each
ground lease). The schedule below sets forth the terms
of each ground lease not filed which differ from the
copy of the example ground lease (Hoover, AL) which was
previously filed with the Commission. In addition, a
copy of Exhibit A was filed for each excluded ground
lease.
Property State Assignment Date
- -------- ----- ---------------
Foster City CA 10/30/87
Marin/Larkspur Landing CA 10/30/87
Denver/Southeast CO 10/30/87
Atlanta/Perimeter Center GA 02/24/88
Indianapolis/Castleton IN 10/30/87
Lexington/North KY 10/07/88
Annapolis MD 05/19/89
Minneapolis Airport MN 10/30/87
St. Louis/Creve Couer MO 10/30/87
Rye NY 03/29/88
Greenville SC 03/29/88
Memphis Airport TN 10/30/87
Nashville Airport TN 02/24/88
Dallas/Stemmon TX 10/30/87
San Antonio/Downtown TX 03/23/90
**10.12 Associates received an assignment from the Partnership
of 38 ground leases which the Partnership had entered
into with Marriott International, Inc., ("MII"). The 38
ground leases are identical in all material respects
except as to their effective lease dates and the rents
due (Exhibit A of each ground lease). The schedule below
sets forth the terms of each ground lease not filed
which differ from the copy of the example ground lease
(Huntsville, AL) which was previously filed with the
Commission. In addition, a copy of Exhibit A was filed
for each excluded ground lease.
Property State Effective Lease Date
- -------- ----- --------------------
Birmingham/Hoover AL 10/30/87
Huntsville AL 10/30/87
Phoenix/Mesa AZ 04/22/88
Phoenix/Metrocenter AZ 10/01/87
Tucson Airport AZ 12/30/88
Little Rock AR 09/09/88
Bakersfield CA 05/30/88
Hacienda Heights CA 03/30/90
Palm Springs CA 12/20/88
Torrance CA 12/30/88
Boulder CO 11/04/88
Wallingford CT 04/24/90
Ft. Myers FL 11/04/88
Ft. Lauderdale/Plantation FL 12/02/88
St. Petersburg FL 01/26/90
West Palm Beach FL 02/24/89
Atlanta/Gwinnett Mall GA 10/30/87
Chicago/Glenview IL 10/06/89
Chicago/Highland Park IL 07/15/88
Chicago/Waukegan IL 08/12/88
Chicago/Wood Dale Park IL 09/09/88
Kansas City/Overland Park KS 04/21/89
Silver Spring MD 10/07/88
Boston/Andover MA 02/24/89
44
Detroit Airport MI 02/24/88
Detroit/Livonia MI 03/29/88
St. Louis/Westport MO 10/07/88
Lincroft/Red Bank NJ 07/15/88
Raleigh/Cary NC 08/12/88
Dayton Mall OH 10/30/87
Toledo OH 07/15/88
Oklahoma City Airport OK 10/07/88
Portland/Beaverton OR 05/19/89
Columbia SC 04/21/89
Dallas/Northeast TX 04/22/88
Charlottesville VA 04/21/89
Manassas VA 05/19/89
Seattle/Southcenter WA 05/19/89
***10.13 Contribution Agreement dated as of January 24, 1996
among the Partnership, the Managing General Partner and
Associates
***10.14 Bill of Sale and Assignment and Assumption Agreement
dated as of January 24, 1996 by the Partnership to
Associates
*10.15 Assignment and Assumption of Management Agreement dated
as of January 24, 1996 by the Partnership to Associates
***10.16 Contribution Agreement dated as of January 24, 1996
among the Partnership, the Managing General Partner and
Courtyard II Associates LLC ("Deerfield LLC")
***10.17 Bill of Sale and Assignment and Assumption Agreement
dated as of January 24, 1996 by the Partnership to
Deerfield LLC
*10.18 Deed to the Courtyard by Marriott Hotel in
Chicago/Deerfield, Illinois dated as of January 24, 1996
by the Partnership to Deerfield LLC
*10.19 Assignment and Assumption of Management Agreement dated
as of January 24, 1996 by the Partnership to Deerfield
LLC
*10.20 Loan Agreement dated as of January 24, 1996 by and
between Associates and Funding
*10.21 Mortgage Note, dated as of January 24, 1996, in the
principal amount of $410,200,000 by Associates to
Funding
*10.22 Security Agreement dated as of January 24, 1996 by and
between Associates and Funding
*10.23 Pledge Agreement dated as of January 24, 1996 by and
between Associates and Funding
*10.24 Collateral Assignment of Management Agreement and
Subordination Agreement dated as of January 24, 1996, by
and among Associates, the Manager and Funding
*10.25 Amendment of Ground Leases dated as of January 24, 1996
by and among Associates, Marriott International, Inc.
and Essex House Condominium Corporation ("Essex")
*10.26 Environmental Indemnity Agreement dated as of January
24, 1996 by Associates and the Managing General Partner
for the benefit of Funding
45
*10.27 Associates, as mortgagor, and Funding, as mortgagee,
entered into 53 fee and leasehold mortgages, each dated
as of January 24, 1996. The 53 mortgages are identical
in all material respects except as to the underlying
property to which they relate and, in certain instances,
additional parties thereto. The schedule below sets
forth the terms of each mortgage not filed which differ
from the copy of the example mortgage
(Birmingham/Hoover, AL) which is filed herewith.
Property State Additional Party
- -------- ----- ----------------
Birmingham/Hoover AL Essex
Huntsville AL MII
Phoenix/Mesa AZ MII
Phoenix/Metrocenter AZ MII
Tucson Airport AZ MII
Little Rock AR MII
Bakersfield CA MII
Foster City CA MII
Hacienda Heights CA MII
Marin/Larkspur Landing CA MII
Palm Springs CA MII
Torrance CA MII
Boulder CO MII
Denver/Southeast CO Essex
Wallingford CT MII
Ft. Myers FL MII
Ft. Lauderdale/Plantation FL MII
St. Petersburg FL MII
West Palm Beach FL MII
Atlanta/Gwinnett Mall GA MII
Atlanta/Perimeter Center GA Essex
Chicago/Glenview IL MII
Chicago/Highland Park IL MII
Chicago/Waukegan IL MII
Chicago/Wood Dale IL MII
Indianapolis/Castleton IN Essex
Kansas City/Overland Park KS MII
Lexington/North KY Essex
Annapolis MD Essex and the Partnership
Silver Spring MD MII and the Partnership
Boston/Andover MA MII
Detroit Airport MI MII
Detroit/Livonia MI MII
Minneapolis Airport MN Essex
St. Louis/Creve Couer MN Essex
St. Louis/Westport MO MII
Lincroft/Red Bank NJ MII
Rye NY Essex
Raleigh/Cary NC MII
Dayton Mall OH MII
Toledo OH MII
Oklahoma City Airport OK MII
Portland/Beaverton OR MII
Columbia SC MII
Greenville SC Essex
Memphis Airport TN Essex
Nashville Airport TN Essex
Dallas/Northeast TX MII
Dallas/Stemmons TX Essex
San Antonio/Downtown TX Essex
46
Charlottesville VA MII
Manassas VA MII
Seattle/Southcenter WA MII
*10.28 Associates, as mortgagor, and Funding, as mortgagee,
entered into 16 fee leasehold mortgages, each dated as
of January 24, 1996. The 16 mortgages are identical in
all material respects except as to the underlying
property to which they relate. The schedule below sets
forth the terms of each mortgage not filed which differ
from the copy of the example mortgage
(Birmingham/Homewood, AL) which is filed herewith.
Property State
- -------- -----
Birmingham/Homewood AL
Cupertino CA
Fresno CA
Denver Airport CO
Norwalk CT
Tampa/Westshore FL
Atlanta Airport South GA
Atlanta/Roswell GA
Arlington Heights South IL
Chicago/Lincolnshire IL
Chicago/Oakbrook Terrace IL
Rockford IL
Poughkeepsie NY
Charlotte/South Park NC
Philadelphia/Devon PA
Dallas/Plano TX
*10.29 Assignment of Loan Documents dated as of January 24,
1996 by Funding to the CMBS Trustee.
10.30 Assignment and Assumption of Management Agreement dated
as of January 24, 1996 by the Partnership to Associates
with attached Management Agreement (Incorporated by
reference herein to Exhibit 10.1 to Associates Form S-4
filed with the Commission on March 14, 1996.)
10.31 Working Capital Maintenance Agreement dated as of
January 24, 1996, by and among the Partnership,
Associates, and the Manager. (Incorporated by reference
to the exhibit previously filed as exhibit number 10.23
in Amendment No. 1 to Form S-4 Exchange Offer filed by
CBM Funding and Associates with the Commission in May
10, 1996.)
12.1 Ratio of Earnings of Fixed Changes
*21.1 Subsidiaries of the Partnership
99 Confirmation on Receipt of Assurances from Arthur
Andersen LLP
- ----------
* Incorporated herein by reference to the same numbered exhibit in the
Partnership's and Finance's Registration Statement on Form S-4 for 10 3/4%
Series B Senior Secured Notes due 2008, previously filed with the
Commission on March 7, 1996.
** Incorporated by reference to the same numbered exhibit in the
Partnership's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
*** Incorporated by reference to the same numbered exhibit to Amendment No. 1
to the Form S-4 Registration Statement previously filed with the
Commission by the Partnership on April 25, 1996.
(b) Reports on 8-K
None.
47
SCHEDULE I
Page 1 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
December 31, 2001 and 2000
(in thousands)
2001 2000
--------- ---------
ASSETS
Investments in restricted subsidiaries ....................... $ 106,424 $ 107,114
Other assets ................................................. 2,900 3,355
Restricted cash .............................................. 11,875 12,091
Cash and cash equivalents .................................... 598 1,756
--------- ---------
Total Assets .......................................... $ 121,797 $ 124,316
========= =========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt ...................................................... $ 127,400 $ 127,400
Accounts payable and accrued expenses ..................... 6,167 6,161
--------- ---------
Total liabilities ..................................... 133,567 133,561
--------- ---------
PARTNERS' CAPITAL (DEFICIT)
General Partner
Capital contribution .................................... 11,356 11,356
Cumulative net losses ................................... (904) (1,669)
Capital distributions ................................... (1,145) (278)
--------- ---------
9,307 9,409
--------- ---------
Limited Partners
Capital contributions, net of offering costs of $17,189 . 130,014 130,014
Cumulative net losses ................................... (17,178) (31,710)
Capital distributions ................................... (133,760) (116,805)
Investor notes receivable ............................... (153) (153)
--------- ---------
(21,077) (18,654)
--------- ---------
Total Partners' Deficit ............................... (11,770) (9,245)
--------- ---------
$ 121,797 $ 124,316
========= =========
The Notes to Consolidated Financial Statements of Courtyard by Marriott II
Limited Partnership are an integral part of these statements.
48
SCHEDULE I
Page 2 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
----------- ----------- -----------
Revenues......................................................... $ -- $ -- $ --
Operating costs and expenses..................................... -- -- --
----------- ----------- -----------
Operating profit before Partnership expenses and interest........ -- -- --
Interest income.................................................. 417 709 588
Interest expense................................................. (14,162) (14,172) (14,170)
Partnership expense.............................................. (624) (1,732) (1,299)
------------ ------------ ------------
Loss before equity in earnings of restricted subsidiaries........ (14,369) (15,195) (14,881)
Equity in earnings of restricted subsidiaries.................... 29,666 36,160 32,719
----------- ----------- -----------
Net income.................................................. $ 15,297 $ 20,965 $ 17,838
=========== =========== ===========
The Notes to Consolidated Financial Statements of Courtyard by Marriott II
Limited Partnership are an integral part of these statements.
49
SCHEDULE I
Page 3 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
----------- ----------- -----------
Cash used in operations............................................... $ (13,681) $ (15,448) $ (13,640)
INVESTING ACTIVITIES
Dividends from restricted subsidiaries, net........................ 30,345 30,728 18,357
Change in working capital reserve.................................. -- -- (53)
----------- ----------- -----------
Cash provided by investing activities.......................... 30,345 30,728 18,304
----------- ----------- -----------
FINANCING ACTIVITIES
Capital distributions.............................................. (17,822) (16,338) (8,820)
Capital contributions.............................................. -- 1,000 --
----------- ----------- -----------
Cash used in financing activities.............................. (17,822) (15,338) (8,820)
----------- ----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS................................. (1,158) (58) (4,156)
CASH AND CASH EQUIVALENTS at beginning of year........................ 1,756 1,814 5,970
----------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of year.............................. $ 598 $ 1,756 $ 1,814
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on debt................................. $ 13,695 $ 13,696 $ 13,705
=========== =========== ===========
The Notes to Consolidated Financial Statements of Courtyard by Marriott II
Limited Partnership are an integral part of these statements.
50
SCHEDULE I
Page 4 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
A) The accompanying condensed financial information of Courtyard by Marriott
II Limited Partnership (the "Partnership") presents the financial
position, results of operations and cash flows of the Partnership with the
investment in, and operations of, consolidated subsidiaries with
restricted net assets accounted for using the equity method of accounting.
On January 24, 1996, the Partnership completed a refinancing of the
Partnership's existing debt through the private placement of $127.4
million of senior secured notes (the "Senior Notes") and $410.2 million of
multi-class commercial mortgage pass-through certificates (the
"Certificates").
In connection with the refinancing, the limited partners approved certain
amendments to the partnership agreement and the management agreement. The
partnership agreement amendment, among other things, allowed for the
formation of certain subsidiaries of the Partnership, including Courtyard
II Finance Company ("Finance"), a wholly-owned subsidiary of the
Partnership, who along with the Partnership is the co-issuer of the Senior
Notes.
Additionally, the Partnership formed a wholly-owned subsidiary, Courtyard
II Associates Management Corporation ("Managing General Partner").
Managing General Partner was formed to be the managing general partner
with a 1% general partner interest in Courtyard II Associates, L.P.
("Associates"), a Delaware limited partnership. The Partnership owns a 1%
general partner interest and a 98% limited partner interest in Associates.
On January 24, 1996, the Partnership contributed 69 Hotels and their
related assets to Associates. Formation of Associates resulted in the
Partnership's primary assets being its direct and indirect interest in
Associates. Substantially all of Associates' net equity is restricted to
distributions, loans or advances to the Partnership.
Associates holds a 99% membership interest in CBM Associates II LLC
("Associates II") and Managing General Partner holds the remaining 1%
membership interest. On January 24, 1996, the Partnership contributed the
Hotel located in Deerfield, IL (the "Deerfield Hotel") and its related
assets to Associates and the Managing General Partner simultaneously
contributed the Hotel and its related assets to Associates II.
CBM Funding Corporation ("CBM Funding"), a wholly-owned subsidiary of
Associates, was also formed to make a mortgage loan (the "Mortgage Loan")
to Associates from the proceeds of the sale of the Certificates.
Associates is a restricted subsidiary of the Partnership and is accounted
for under the equity method of accounting on the accompanying condensed
financial information of the Partnership.
B) As discussed above, on January 24, 1996, the Senior Notes of $127.4
million were issued by the Partnership and Finance. The Senior Notes bear
interest at 10 3/4%, require semi-annual payments of interest and require
no payments of principal until maturity on February 1, 2008. The Senior
Notes are secured by a first priority pledge by the Partnership of (i) its
99% partnership interest (consisting of a 98% limited partner interest and
a 1% general partner interest) in Associates and (ii) its 100% equity
interest in the Managing General Partner. Finance has nominal assets, does
not conduct any operations and does not provide any additional security
for the Senior Notes.
In connection with Host Marriott Corporation's conversion to a REIT, a
change of control occurred when Host Marriott Corporation ceased to own,
directly or indirectly, all of the outstanding equity interest of the sole
general partner of the Partnership. Although such a change of control has
occurred, Host Marriott Corporation continues to own, indirectly, a
substantial majority of the economic interest in CBM Two LLC, the current
General Partner of the Partnership and, through Host Marriot, L.P., has
certain voting rights with respect to CBM Two LLC. A change of control
occurred again in 2000 in conjunction with the settlement agreement and
subsequent purchase by CBM Joint Venture LLC of all the partnership units.
51
The changes in control described above resulted in a "Change in Control"
under the indenture governing the Senior Notes. As a result, in accordance
with the terms of the indenture, Host Marriott, L.P. commenced a tender
offer for the Senior Notes at a purchase price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest
thereon. The first tender offer expired on February 12, 1999 with no
Senior Notes tendered. The second tender offer was completed on January
26, 2001 and approximately $11.6 million Senior Notes were purchased,
representing approximately 9% of the outstanding notes. The notes, which
were purchased by the Joint Venture, were resold on March 27, 2001.
C) The accompanying statement of operations reflect the equity in earnings of
restricted subsidiaries after elimination of interest expense (see Note
B).
52
SCHEDULE III
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(in thousands)
Initial Costs Gross Amount at December 31, 2001
---------------------- ------------------------------------------------
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 $73,745 $25,541 $567,161 $592,702 $198,763
======== ======= ======== ======= ======= ======== ======== ========
Date of
Completion of Date Depreciation
Construction Acquired Life
------------ -------- ----
70 Courtyard by 1987-1990 1987-1990 40 years
Marriott Hotels
Notes:
- -----
1999 2000 2001
------------- ------------- -------------
(a) Reconciliation of Real Estate:
Balance at beginning of year.................................... $ 567,776 $ 577,504 $ 588,218
Capital Expenditures............................................ 9,740 10,751 4,489
Dispositions/reclassifications.................................. (12) (37) (5)
------------- ------------- -------------
Balance at end of year.......................................... $ 577,504 $ 588,218 $ 592,702
============= ============= =============
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of year.................................... $ 145,070 161,980 180,451
Depreciation.................................................... 16,910 18,471 18,312
------------- ------------- -------------
Balance at end of year.......................................... $ 161,980 $ 180,451 $ 198,763
============= ============= =============
(c) The aggregate cost of land, buildings and improvements for Federal income
tax purposes is approximately $577.4 million at December 31, 2001.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 18th day of March
2002.
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
By: CBM TWO LLC
General Partner
/s/ Mathew J. Whelan
------------------------------------
Mathew J. Whelan
Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
the capacities and on the date indicated above.
Signature Title
- --------- -----
(CBM TWO LLC)
/s/ Robert E. Parsons, Jr. President and Manager
- ------------------------------
Robert E. Parsons, Jr.
/s/ W. Edward Walter Executive Vice President
- ------------------------------
W. Edward Walter
/s/ John A. Carnella Treasurer
- ------------------------------
John A. Carnella
/s/ Mathew J. Whelan Vice President (Chief Accounting Officer)
- ------------------------------
Mathew J. Whelan
54