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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, 2000
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: 301-380-2070
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [__] (Not Applicable)
Documents Incorporated by Reference
None
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Courtyard by Marriott II Limited Partnership
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TABLE OF CONTENTS
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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................... 5
PART II
Item 5. Market For The Partnership's Limited Partnership Units
and Related Security Holder Matters................................. 6
Item 6. Selected Financial Data............................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 7
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............ 10
Item 8. Financial Statements and Supplementary Data........................... 11
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure............................................ 38
PART III
Item 10. Directors and Executive Officers...................................... 38
Item 11. Management Remuneration and Transactions.............................. 38
Item 12. Security Ownership of Certain Beneficial Owners and Management........ 39
Item 13. Certain Relationships and Related Transactions........................ 39
PART IV
Item 14. Exhibits, Supplemental Financial Statement Schedules
and Reports on Form 8-K............................................. 40
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 that will affect,
among other things, demand for products and services at our hotels and
other properties, the level of room rates and occupancy that can be
achieved by such properties and the availability and terms of financing;
. 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;
. other factors 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.
ITEMS 1 & 2. BUSINESS AND PROPERTIES
Description of the Partnership
Courtyard by Marriott II Limited Partnership, a Delaware limited partnership
(the "Partnership"), was formed on August 31, 1987 to acquire and own 70
Courtyard by Marriott hotels (the "Hotels") and the respective fee or leasehold
interests in the land on which the Hotels are located. The Hotels are located in
29 states and contain a total of 10,336 guest rooms as of December 31, 2000. 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.
1
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 contain furnishings comparable in
quality to those in full-service Marriott hotels. Each guest room contains a
large, efficient work desk, remote control television, a television
entertainment package, in-room coffee and tea services and other amenities.
Approximately 70% of the guest rooms contain king-size beds.
Litigation Settlement
In November 2000, the general partner and MII, Inc. settled a lawsuit filed by
limited partners from seven limited partnerships, including our limited partners
(the "Settlement"). In accordance with the terms of the Settlement, our limited
partners involved in the settlement received a cash payment of $148,000 per
unit, in exchange for dismissal of the litigation, a complete release of all
claims and the sale of their partnership units to a joint venture formed by Host
Marriott, L.P. (Host LP) (an affiliate of the general partner), Rockledge Hotel
Properties, Inc. (an affiliate of the general partner) and MII (the "Joint
Venture"). As a result, subsequent to the completion of the settlement all of
the outstanding limited partner units are owned by this Joint Venture. For a
discussion of the Settlement, see Note 1 to the financial statements.
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 of the
financial statements.
The land on which 61 of the Hotels are located are subject to ground leases, the
primary provisions of which are discussed in Note 6 to the financial statements.
Competition
The United States lodging industry generally is comprised of two broad segments:
full-service hotels and limited-service hotels. Full-service hotels generally
offer restaurant and lounge facilities and meeting spaces, as well as a wide
range of services, typically including bell service and room service.
Limited-service hotels generally offer accommodations with limited or no
services and amenities. As moderately-priced hotels, our properties compete
effectively with both full-service and limited-service hotels in their
respective markets by providing streamlined services and amenities exceeding
those provided by typical limited-service hotels at prices that are
significantly lower than those available at full-service hotels.
Significant competitors in the moderately-priced lodging segment include Holiday
Inn, Ramada Inn, Four Points by Sheraton, Hampton Inn and Hilton Garden Inns.
The lodging industry in general, and the moderately-priced segment in
particular, is highly competitive, but the degree of competition varies
2
from location to location. We are continually making improvements at the Hotels
intended to enhance the overall value and competitiveness of the Hotels. We are
continuing to carefully monitor the introduction of new mid-priced brands
including Wingate Hotels, Hilton Garden Inns, Four Points by Sheraton,
AmeriSuites, Hampton Inn and Hampton Inn and Suites.
The 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.
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.
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.
Lodging Properties
The properties consisted of 70 Courtyard by Marriott hotels as of December 31,
2000. The properties range in age between 10 and 14 years. The properties are
geographically diversified among 29 states.
The following table sets forth the location and number of rooms for each of our
properties:
3
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)......................................... 146
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: 10,336
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(1) Hotel and land is owned fee simple
4
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
5
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, 2000, the Joint Venture between Host LP
(through non-controlled subsidiaries) 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.
6
As of December 31, 2000, the Partnership has distributed a total of $116.8
million to the limited partners ($79,456 per limited partner unit) since
inception. During 2000, $16.4 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. An additional $7,502,000 ($5,104 per limited partner unit) was
distributed to the limited partners in January of 2001 bringing the total
distribution from 2000 operations to $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. The Partnership distributed $10.3 million to the limited
partners ($7,000 per limited partner unit) from 1999 operations. The Partnership
distributed $9,555,000 to the limited partners ($6,500 per limited partner unit)
from 1998 operations. No distributions of Capital Receipts have been made since
inception.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents historical operating information
for the Partnership for each of the five years in the period ended December 31,
2000 presented in accordance with accounting principles generally accepted in
the United States.
2000 1999 1998 1997 1996
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(in thousands, except per unit amounts)
Income Statement Data:
Revenues............................... $ 303,534 $ 292,982 $ 284,251 $ 275,021 $ 263,707
Operating profit....................... 61,312 59,671 58,960 58,771 54,012
Net income............................. 20,965 17,838 16,950 15,691 10,541
Net income per limited
partner unit (1,470 Units).......... 13,549 11,528 10,954 10,140 6,812
Balance Sheet Data:
Total assets........................... $ 509,510 $ 522,943 $ 528,340 $ 536,715 $ 547,099
Total liabilities...................... 518,755 537,815 552,230 567,412 579,040
Cash distributions per limited
partner unit (1,470 Units).......... 11,110 6,000 6,900 9,850 4,750
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
During the period from 1998 through 2000, our total hotel revenues grew from
$284.3 million to $303.5 million. Growth in room revenues, and thus hotel
revenues, is driven primarily by growth in revenue per available room
("REVPAR"). REVPAR is a commonly used indicator of market performance for hotels
which represents the combination of daily room rate charged and the average
daily occupancy achieved. REVPAR does not include food and beverage and other
ancillary revenues generated by the property. REVPAR increased 7% during the
period from 1998 through 2000 to $73.32 from $68.72. During the period from 1998
through 2000, the Hotels' combined average room rate increased by $6.61 from
$86.99 to $93.60, while the combined average occupancy decreased from 79.0% to
78.3%.
7
Results of Operations
The following table shows selected combined operating and financial statistics
for the Hotels.
Year Ended December 31,
------------------------------------------
2000 1999 1998
----------- ----------- -----------
Combined average occupancy....................... 78.3% 79.0% 79.0%
Combined average daily room rate................. $ 93.60 $ 89.09 $ 86.99
REVPAR........................................... $ 73.32 $ 70.38 $ 68.72
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 due to the increase in rooms revenue
discussed above.
Hotel Property-Level Costs and Expenses. The 2000 total hotel property-level
costs and expenses increased $5.2 million, or 3.6%. The increase is primarily
due to increases in both rooms and selling administrative and other costs.
Rooms Costs. In 2000 rooms costs increased $2.1 million, or 3.6%, when compared
to 1999. The overall increase in rooms costs and expenses is primarily due to an
increase in salary and benefits as the hotels endeavor to maintain competitive
wage scales.
Selling, Administrative and Other Costs. 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
Marriott International 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.
1999 Compared to 1998
Hotel Revenues. In 1999 hotel revenues increased $8.7 million, or 3.1%, to $293
million when compared to 1998 due to the increase in rooms revenue discussed
below and telephone revenues.
Rooms Revenues. Rooms revenues increased $7.0 million in 1999 to $265.1 million,
a 2.7% increase when compared to 1998. The increase in revenues was achieved
through an increase in the combined average room rate from $86.99 in 1998 to
$89.09 in 1999. The combined average occupancy remained consistent with 1998.
8
Hotel Property-Level Costs and Expenses. The 1999 total hotel property-level
costs and expenses increased $5.7 million, or 4.1%. The increase is primarily
due to increases in both rooms and food and beverage costs.
Rooms Costs. In 1999 rooms costs increased $3.9 million, or 7.0%, when compared
to 1998. The overall increase in rooms costs and expenses is due to an increase
in salary and benefits as the hotel's endeavor to maintain competitive wage
scales.
Base and Courtyard Management Fees. Base and Courtyard management fees increased
by 3%, or $524,000, in 1999 when compared to 1998. Base and Courtyard management
fees are calculated as a percentage of total hotel revenues. Accordingly, with
the increase in total hotel revenues described above, these fees also increased.
Insurance and Other. Insurance and other increased by 57.8%, or $1.3 million in
1999 when compared to 1998. The increase is attributable to increases in legal
expenses related to the litigation discussed in Note 9.
Interest Expense. Interest expense decreased by 2% to $43.6 million in 1999 from
$44.7 million in 1998. This decrease is due to principal amortization of $15.4
million on the Certificates/Mortgage Loan.
Capital Resources and Liquidity
Our principal source of cash is from operation of the properties. Our principal
use 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
$49.0 million, $47.1 million and $44.5 million for the years ended 2000, 1999
and 1998, respectively. We paid $40.9 million, $42.0 million and $43.1 million
of interest on our debt in 2000, 1999 and 1998, respectively. The increases in
cash provided by operations is due increases in our property-level results
offset by changes in operating accounts.
Cash used in investing activities was $26.8 million, $17.4 million and $15.8
million for 2000, 1999 and 1998, respectively. Contributions to the property
improvement fund which represents 5% of total hotel revenues, were $15.9
million, $14.6 million and $14.2 million for the years ended December 31, 2000,
1999 and 1998, respectively. Cash used in investing activities for 2000, 1999
and 1998 includes capital expenditures of $13.3 million, $18.5 million and $36.1
million, respectively. The increase in the property improvement fund balance is
due to reimbursements made to the fund in 2000 for prior year capital
expenditures in the amount of $12.5 million, compared to $3.1 million in 1999,
in addition to a decrease of $5.2 million in additions to the property and
equipment in 2000 as compared to 1999.
Cash used in financing activities was $32.0 million, $24.3 million and $24.5
million for the years ended December 31, 2000, 1999 and 1998, respectively. We
repaid $16.6 million, $15.4 million and $14.3 million of principal on our
commercial mortgage backed securities in 2000, 1999 and 1998, respectively. We
also made cash distributions to limited partners of $16.3 million, $8.8 million
and $10.1 million in 2000, 1999 and 1998, respectively.
9
Pursuant to the terms of the Certificate/Mortgage Loan, the Partnership is
required to establish with the lender a separate escrow account for payments of
insurance premiums and real estate taxes for each mortgaged property if the
credit rating of MII is downgraded by Standard and Poor's Rating Services. The
assumption of additional debt associated with MII's acquisition of the
Renaissance Hotel Group N.V., resulted in a single downgrade of MII's long-term
senior unsecured debt, effective April 1, 1997. The escrow reserve is included
in restricted cash and the resulting tax and insurance liability is included in
accounts payable and accrued liabilities in the accompanying consolidated
balance sheet.
Inflation
The rate of inflation has been relatively low in the past three years. The
Manager is generally able to pass through increased costs to customers through
higher room rates and prices. In 2000, the growth in average room rates of our
Hotels kept pace with inflationary costs.
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, 2000, all of our
debt has a fixed interest rate. See Note 4 for a further discussion.
10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index Page
- ----- ----
Courtyard by Marriott II Limited Partnership Consolidated Financial Statements:
Report of Independent Public Accountants................................................ 12
Consolidated Balance Sheet of December 31, 2000 and 1999................................ 13
Consolidated Statement of Operations for the Fiscal Years Ended
December 31, 2000, 1999 and 1998...................................................... 14
Consolidated Statement of Changes in Partners' Capital (Deficit)
for the Fiscal Years Ended December 31, 2000, 1999 and 1998........................... 15
Consolidated Statement of Cash Flows for the Fiscal Years Ended
December 31, 2000, 1999 and 1998...................................................... 16
Notes to Consolidated Financial Statements.............................................. 17
Courtyard II Associates, L.P. and Subsidiaries Consolidated Financial Statements:
Report of Independent Public Accountants................................................ 26
Consolidated Balance Sheet of December 31, 2000 and 1999................................ 27
Consolidated Statement of Operations for the Fiscal Years Ended
December 31, 2000, 1999 and 1998...................................................... 28
Consolidated Statement of Changes in Partners' Capital
for the Fiscal Years Ended December 31, 2000, 1999 and 1998........................... 29
Consolidated Statement of Cash Flows for the Fiscal Years Ended
December 31, 2000, 1999 and 1998...................................................... 30
Notes to Consolidated Financial Statements.............................................. 31
11
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheet of Courtyard by
Marriott II Limited Partnership (a Delaware limited partnership) and
Subsidiaries as of December 31, 2000 and 1999, and the related consolidated
statements of operations, changes in partners' capital (deficit) and cash flows
for the three years ended December 31, 2000. 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, 2000 and
1999, and the results of its operations and its cash flows for the three years
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index at Item
14(a)(2) are presented for purposes of complying with the rules of the
Securities and Exchange Commission and are not part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in our audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Vienna, Virginia
March 23, 2001
12
Consolidated Balance Sheet
Courtyard by Marriott II Limited Partnership and Subsidiaries
December 31, 2000 and 1999
(in thousands)
2000 1999
------------- -------------
ASSETS
Property and equipment, net............................................................ $ 439,098 $ 454,412
Deferred financing costs, net of accumulated amortization.............................. 11,119 12,690
Due from Courtyard Management Corporation.............................................. 8,453 8,795
Other assets........................................................................... 2 11
Property improvement fund.............................................................. 18,912 5,395
Restricted cash........................................................................ 18,415 18,299
Cash and cash equivalents.............................................................. 13,511 23,341
------------- -------------
$ 509,510 $ 522,943
============= =============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt................................................................................... $ 466,539 $ 483,181
Management fees due to Courtyard Management Corporation................................ 31,417 33,805
Due to Marriott International, Inc. and affiliates..................................... 8,693 8,812
Accounts payable and accrued liabilities............................................... 12,106 12,017
------------- -------------
Total liabilities................................................................ 518,755 537,815
------------- -------------
PARTNERS' CAPITAL (DEFICIT)
General Partner
Capital contribution................................................................. 11,356 11,306
Cumulative net losses................................................................ (1,669) (2,717)
Capital distributions.................................................................. (278) (278)
------------- -------------
9,409 8,311
------------- -------------
Limited Partners
Capital contributions................................................................ 130,014 129,064
Cumulative net losses................................................................ (31,710) (51,627)
Capital distributions................................................................ (116,805) (100,467)
Investor notes receivable............................................................ (153) (153)
------------- -------------
(18,654) (23,183)
------------- -------------
Total Partners' Deficit.......................................................... (9,245) (14,872)
------------- -------------
$ 509,510 $ 522,943
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
13
Consolidated Statement of Operations
Courtyard by Marriott II Limited Partnership and Subsidiaries
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands, except Unit and per Unit amounts)
2000 1999 1998
------------- ------------- -------------
REVENUES
Hotel revenues
Rooms................................................ $ 275,877 $ 265,137 $ 258,099
Food and beverage.................................... 18,057 17,686 17,219
Other................................................ 9,600 10,159 8,933
------------- ------------- -------------
Total hotel revenues............................... 303,534 292,982 284,251
------------- ------------- -------------
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms................................................ 62,008 59,873 55,962
Food and beverage.................................... 15,989 15,594 14,991
Other department costs and expenses.................. 2,017 2,492 2,928
Selling, administrative and other.................... 72,344 69,170 67,517
------------- ------------- -------------
Hotel property-level costs and expenses............ 152,358 147,129 141,398
Depreciation........................................... 28,583 27,397 27,895
Base and Courtyard management fees..................... 18,212 17,579 17,055
Incentive management fee............................... 13,778 13,322 12,895
Ground rent............................................ 13,741 13,249 12,921
Property taxes......................................... 11,847 11,143 10,914
Insurance and other.................................... 3,703 3,492 2,213
------------- ------------- -------------
Total operating costs and expenses................. 242,222 233,311 225,291
------------- ------------- -------------
OPERATING PROFIT.......................................... 61,312 59,671 58,960
Interest expense....................................... (42,461) (43,577) (44,686)
Interest income........................................ 2,114 1,744 2,676
------------- ------------- -------------
NET INCOME................................................ $ 20,965 $ 17,838 $ 16,950
============= ============= =============
ALLOCATION OF NET INCOME
General Partner........................................ $ 1,048 $ 892 $ 847
Limited Partners....................................... 19,917 16,946 16,103
------------- ------------- -------------
$ 20,965 $ 17,838 $ 16,950
============= ============= =============
NET INCOME PER LIMITED PARTNER UNIT (1,470 Units)......... $ 13,549 $ 11,528 $ 10,954
============= ============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
14
Consolidated Statement of Changes in
Partners' Capital (Deficit)
Courtyard by Marriott II Limited Partnership and Subsidiaries
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands)
General Limited
Partner Partners Total
------------- ------------- -------------
Balance, December 31, 1997.................................. $ 6,572 $ (37,269) $ (30,697)
Capital distributions.................................... -- (10,143) (10,143)
Net income............................................... 847 16,103 16,950
------------- ------------- -------------
Balance, December 31, 1998.................................. 7,419 (31,309) (23,890)
Capital distributions.................................... -- (8,820) (8,820)
Net income............................................... 892 16,946 17,838
------------- ------------- -------------
Balance, December 31, 1999.................................. 8,311 (23,183) (14,872)
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)
============= ============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
15
Consolidated Statement of Cash Flows
Courtyard by Marriott II Limited Partnership and Subsidiaries
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands)
2000 1999 1998
----------- ----------- -----------
OPERATING ACTIVITIES
Net income........................................................... $ 20,965 $ 17,838 $ 16,950
Depreciation......................................................... 28,583 27,397 27,895
Amortization of deferred financing costs as interest................. 1,571 1,572 1,571
Loss on disposition of fixed assets.................................. 17 291 --
Amortization of prepaid expenses..................................... 9 9 8
Changes in operating accounts:
Accounts payable and accrued liabilities........................... (647) 634 (196)
Management fees due to Courtyard Management Corporation............ (2,388) (609) (415)
Due to Host Marriott Corporation................................... (235) 374 (63)
Change in real estate tax and insurance, net....................... 808 (237) (1,341)
Change in debt service reserve..................................... (72) (80) --
Due from Courtyard Management Corporation.......................... 342 (56) 79
----------- ----------- -----------
Cash provided by operations.................................... 48,953 47,133 44,488
----------- ----------- -----------
INVESTING ACTIVITIES
Additions to property and equipment, net............................. (13,286) (18,450) (36,110)
Change in property improvement fund.................................. (13,517) 1,071 20,734
Change in working capital reserve.................................... -- (53) (2,925)
Working capital returned by Courtyard Management Corporation......... -- -- 2,500
----------- ----------- -----------
Cash used in investing activities.............................. (26,803) (17,432) (15,801)
----------- ----------- -----------
FINANCING ACTIVITIES
Repayment of principal............................................... (16,642) (15,443) (14,331)
Capital distributions................................................ (16,338) (8,820) (10,143)
Capital contributions................................................ 1,000 -- --
----------- ----------- -----------
Cash used in financing activities.............................. (31,980) (24,263) (24,474)
----------- ----------- -----------
INCREASE /(DECREASE) IN CASH AND CASH EQUIVALENTS....................... $ (9,830) $ 5,438 $ 4,213
CASH AND CASH EQUIVALENTS at beginning of year.......................... 23,341 17,903 13,690
----------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of year................................ $ 13,511 $ 23,341 $ 17,903
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest............................ $ 40,855 $ 42,006 $ 43,114
=========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Courtyard by Marriott II Limited Partnership and Subsidiaries
December 31, 2000 and 1999
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 and Marriott International, Inc. 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.
and Marriott International, Inc. 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 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.
17
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 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
financial statements.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Working Capital
Pursuant to the terms of the management agreement, the Partnership is required
to provide the Manager with working capital to meet the operating needs of the
Hotels. The Manager converts cash advanced by the Partnership into other forms
of working capital consisting primarily of operating cash, inventories, and
trade receivables and payables which are maintained and controlled by the
Manager. Upon termination of the management agreement, the Manager is required
to convert working capital into cash and return it to the Partnership. As a
result of these conditions, the individual components of working capital
controlled by the Manager are not reflected in the accompanying consolidated
balance sheet but rather are included in Due from Courtyard Management
Corporation.
18
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.
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, 2000
or 1999.
Deferred Financing Costs
From 1995 to 1997, the Partnership paid a total of $18,858,000 in financing
costs related to the Senior Notes and the Certificates. 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, 2000 and 1999, accumulated amortization of financing costs
totaled $7,739,000 and $6,168,000, 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 2000, 1999 and 1998 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 $658,000 and $2,695,000, respectively as of
December 31, 2000 and 1999.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Restricted Cash
The Partnership was required to establish certain reserves pursuant to the terms
of the Senior Notes and the Certificates/Mortgage Debt as described in Note 5.
The balances in those reserves as of December 31 are as follows (in thousands):
2000 1999
--------- ---------
Debt service reserve.......................... $ 6,986 $ 6,928
Real estate tax and insurance reserve......... 6,309 6,318
Working capital reserve....................... 5,120 5,053
--------- ---------
$ 18,415 $ 18,299
========= =========
19
Reclassifications
Certain reclassifications were made to the prior year financial statements to
conform to the 2000 presentation.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
2000 1999
---------- -----------
Land................................... $ 25,541 $ 25,541
Leasehold improvements................. 307,741 298,855
Building and improvements.............. 256,885 253,108
Furniture and equipment................ 127,275 157,444
---------- -----------
717,442 734,948
Less accumulated depreciation.......... (278,344) (280,536)
---------- -----------
$ 439,098 $ 454,412
========== ===========
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, 2000 As of December 31, 1999
-------------------------- --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- ----------- -----------
Certificates/Mortgage Loan.................. $ 339,139 $ 349,230 $ 355,781 $ 347,538
Senior Notes................................ $ 127,400 $ 128,356 $ 127,400 $ 123,777
Management fees due to Courtyard
Management Corporation................... $ 31,417 $ 12,367 $ 33,805 $ 14,185
The estimated fair values of debt obligations are based on the quoted market
prices at December 31, 2000 and 1999, 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 and Finance.
The Senior Notes bear interest at 10 3/4%, require semi-annual payments of
interest and require no payments of principal until maturity on February 1,
2008. The Senior Notes are secured by a first priority pledge by the Partnership
of (i) its 99% partnership interest (consisting of a 98% limited partner
interest and a 1% general partner interest) in Associates and (ii) its 100%
equity interest in the Managing General Partner. Finance has nominal assets,
does not conduct any operations and does not provide any additional security for
the Senior Notes.
The terms of the Senior Notes include requirements of the Partnership to
establish and fund a debt service reserve account in an amount equal to at least
one six-month interest payment on the Senior Notes ($6,848,000) which is
included as restricted cash on the accompanying consolidated balance sheet and
to maintain certain levels of excess cash flow, as defined. In the event the
Partnership fails to maintain the required level of excess cash flow, the
Partnership will be required to (i) suspend distributions to
20
its partners and other restricted payments, as defined, (ii) to fund a separate
supplemental debt service reserve account (the "Supplemental Debt Service
Reserve") in an amount up to two six-month interest payments on the Senior Notes
and (iii) if such failure were to continue, to offer to purchase a portion of
the Senior Notes at par.
The Senior Notes are not redeemable prior to February 1, 2001. Thereafter, the
Senior Notes may be redeemed, at the option of the Partnership, at a premium
declining to par in 2004. The premium is 5.375% for 2001, 3.583% for 2002 and
1.792% for 2003. The Senior Notes are non-recourse to the Partnership and its
partners.
In connection with Host Marriott's conversion to a REIT on January 1, 1999, a
change of control occurred when Host Marriott ceased to own, directly or
indirectly, all of the outstanding equity interest of the General Partner of the
Partnership. Although such a change of control has occurred, Host REIT continued
to own, indirectly, a substantial majority of the economic interest in the
General Partner of the Partnership, through Host LP. 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 has 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 remain outstanding.
Certificates
The Certificates were issued by CBM funding for an initial principal amount of
$410.2 million. Proceeds from the sale of the Certificates were utilized by CBM
Funding to provide a Mortgage Loan to Associates. The Certificates/Mortgage Loan
requires monthly payments of principal and interest based on a 17-year
amortization schedule. The Mortgage Loan matures on January 28, 2008. However,
the maturity date of the Certificates/Mortgage Loan may be extended until
January 28, 2013 with the consent of 662/3% of the holders of the outstanding
Certificates affected thereby. The Certificates were issued in the following
classes and pass-through rates of interest.
Initial Certificate Pass-Through
Class Balance Rate
------------------- -------------------- ------------------
Class A-1 $ 45,500,000 7.550%
Class A-2 $ 50,000,000 6.880%
Class A-3P & I $ 129,500,000 7.080%
Class A-3IO Not Applicable 0.933%
Class B $ 75,000,000 7.480%
Class C $ 100,000,000 7.860%
Class D $ 10,200,000 8.645%
The Class A-3IO Certificates require payments of interest only based on a
notional balance equal to the Class A-3P & I Certificate balance.
The balances of the Certificates were $339.1 million and $355.8 million at
December 31, 2000 and 1999, respectively. Principal payments of $16.6 million
and $15.4 million on the Certificates were made during 2000 and 1999,
respectively. The weighted average interest rate on the Certificates was 7.8%
for 2000 and 1999.
21
The Certificates/Mortgage Loan maturities as of December 31, 2000 are as follows
(in thousands):
2001............ $ 17,934
2002............ 19,326
2003............ 20,827
2004............ 22,444
2005............ 24,186
Thereafter......... 234,422
-------------
$ 339,139
=============
The Mortgage Loan is secured primarily by 69 cross-defaulted and
cross-collateralized mortgages representing first priority mortgage liens on (i)
the fee or leasehold interest in 69 of the Hotels (excluding the Deerfield
Hotel), related furniture, fixtures and equipment and the property improvement
fund, (ii) the fee interest in the land leased from MII or their affiliates on
which 53 Hotels are located, (iii) a pledge of Associates membership interest in
and the related right to receive distributions from Associates II which owns the
Deerfield Hotel and (iv) an assignment of the Management Agreement, as defined
below. The Mortgage Loan is non-recourse to Associates, the Partnership and its
partners.
Operating profit from the Hotels in excess of debt service on the Mortgage Loan
is available to be distributed to the Partnership. Amounts distributed to the
Partnership are used for the following, in order of priority: (i) for debt
service on the Senior Notes, (ii) to fund the Supplemental Debt Service Reserve,
if necessary, (iii) to offer to purchase a portion of the Senior Notes at par,
if necessary, (iv) for working capital as discussed in Note 7 and (v) for
distributions to the partners of the Partnership. The net assets (all of which
are restricted) of Associates was $107.1 million and $101.7 million as of
December 31, 2000 and 1999, respectively.
Prepayments of the Mortgage Loan are permitted with the payment of a premium
(the "Prepayment Premium"). The Prepayment Premium is equal to the greater of
(i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance
amount based on a spread of .25% or .55% over the U.S. treasury rate, as
defined.
Pursuant to the terms of the Certificate/Mortgage Loan, the Partnership is
required to establish with the lender a separate escrow account for payments of
insurance premiums and real estate taxes for each mortgaged property if the
credit rating of MII is downgraded by Standard and Poor's Rating Services. The
assumption of additional debt associated with MII's acquisition of Renaissance
Hotel Group N.V. resulted in a single downgrade of MII's long-term senior
unsecured debt, effective April 1, 1997. The escrow reserve is included in
restricted cash and the resulting tax and insurance liability is included in
accounts payable and accrued liabilities in the accompanying consolidated
balance sheet. The balance in the real estate tax and insurance reserve as of
December 31, 2000 and 1999 was $6.3 million.
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.
22
Minimum future rental payments during the term of these operating leases as of
December 31, 2000 are as follows (in thousands):
Telephone
Lease Land Equipment and Other
Year Leases Leases
----------- ----------- ----------------------
2001 $ 9,616 $ 187
2002 10,054 132
2003 10,348 96
2004 10,381 --
2005 10,889 --
Thereafter 1,851,156 --
----------- -------------
$ 1,902,444 $ 415
=========== =============
Total rent expense on land leases was $13,741,000 for 2000, $13,249,000 for 1999
and $12,921,000 for 1998.
NOTE 7. MANAGEMENT AGREEMENT
To facilitate the refinancing, effective December 30, 1995, the original
management agreement was restated into two separate management agreements.
Associates entered into a management agreement with the Manager for the 69
Hotels which Associates directly owns and Associates II entered into a
management agreement for the Deerfield Hotel which Associates II owns,
collectively, (the "Management Agreement").
Term
The Management Agreement has an initial term expiring in 2013. The Manager may
renew the term, as to one or more of the Hotels, at its option, for up to three
successive terms of 10-years each and one final term of five years. The
Partnership may terminate the Management Agreement if, during any three
consecutive years after 1992, specified minimum operating results are not
achieved. However, the Manager may prevent termination by paying to the
Partnership the amount by which the minimum operating results were not achieved.
Upon the sale of a Hotel, the Management Agreement may be terminated with
respect to that Hotel with payment of a termination fee. Prior to December 31,
2007, a maximum of 20 Hotels may be sold free and clear of the Management
Agreement with payment of the termination fee. The termination fee is calculated
by the Manager as the net present value of reasonably anticipated future
incentive management fees.
Management Fees
The Management Agreement provides for annual payments of (i) the base management
fee equal to 3.5% of gross revenues from the Hotels, (ii) the Courtyard
management fee equal to 2.5% of gross revenues from the Hotels, and (iii) the
incentive management fee equal to 15% of operating profit, as defined (20% of
operating profit after the Partners have received refinancing proceeds equal to
50% of the excess of (a) $154,736,842 over (b) cumulative distributions of
adjusted sale proceeds).
Deferral Provisions
One percent of the Courtyard management fee is deferred through maturity of the
Senior Notes and the Mortgage Loan to the extent that the Partnership or
Associates has insufficient funds for debt service payments on the Senior Notes
and the Mortgage Loan.
To the extent any Courtyard management fee, base management fee or incentive
management fee is deferred, it will be added to deferred management fees.
Deferred management fees accrue without interest, and will be payable out of 50%
of available cash flow after payment of certain priorities as discussed below.
The priority return to the Partnership, as defined, was 9% in 1998 and then 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
23
priority return to the Partnership which was 10%, 10% and 9% of invested capital
for 2000, 1999 and 1998, respectively, (vi) eighty percent of the remaining
operating profit is applied to the payment of current incentive management fees,
(vii) to repay advances to the Partnership, (viii) to repay foreclosure
avoidance advances to the Manager and (ix) fifty percent of the remaining
operating profit to repay deferred management fees to the Manager and fifty
percent of remaining operating profit is paid to the Partnership.
During 2000 and 1999, $1,878,000 and $609,000, respectively, of deferred
incentive management fees were paid. Deferred incentive management fees were
$1,682,000 and $3,560,000 as of December 31, 2000 and 1999, respectively. Also,
the Partnership paid $510,000 of deferred base management fees during 2000.
Therefore, deferred base management fees decreased to $7,394,000 in 2000 from
$7,904,000 in 1999 . Deferred Courtyard management fees totaled $22,341,000 as
of December 31, 2000 and 1999.
Chain Services and Marriott's Rewards Program
The Manager is required to furnish certain services ("Chain Services") which are
generally furnished on a central or regional basis to all hotels managed, owned
or leased in the Courtyard by Marriott hotel system. In addition, the Hotels
participate in MII's Marriott Reward Program ("MRP"). Chain Services and MRP
costs charged to the partnership under the Management Agreement were $14,470,000
in 2000, $14,550,000 in 1999 and $13,755,000 in 1998.
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. Upon termination of the
Management Agreement, the working capital will be returned to the Partnership.
As of December 31, 2000 and 1999, 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 Funds
The Management Agreement provides for the establishment of a repairs and
equipment reserve (property improvement fund) for the Hotels. The funding of
this reserve is based on a percentage of gross Hotel revenues. The contribution
to the property improvement fund was originally established at 5% for all
Hotels. In connection with the purchase of the Limited Partnership Units by the
Joint Venture, the contribution percentage was increased to 6.5% as of October
24, 2000.
NOTE 8. ENVIRONMENTAL CONTINGENCY
Based upon a study completed in December 1995, the Partnership has become aware
of environmental contamination at one of its fee-owned properties, the Deerfield
Hotel, caused by the previous use of the site as a landfill. The property
represents less than 2% of the Partnership's total assets and revenues as of
December 31, 2000 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.
24
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 or results of operations of the Partnership.
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF COURTYARD II ASSOCIATES, L.P. AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheet of Courtyard II
Associates, L.P. (a Delaware limited partnership) and Subsidiaries as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, changes in partner's capital and cash flows for the three years
ended December 31, 2000. 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, 2000 and 1999, and the
results of its operations and its cash flows for the three years ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States.
ARTHUR ANDERSEN LLP
Vienna, Virginia
March 23, 2001
26
CONSOLIDATED BALANCE SHEET
Courtyard II Associates, L.P. and Subsidiaries
December 31, 2000 and 1999
(in thousands)
2000 1999
------------- -------------
ASSETS
Property and equipment, net..................................................... $ 439,098 $ 454,412
Deferred financing costs, net of accumulated amortization....................... 7,822 8,928
Due from Courtyard Management Corporation....................................... 8,453 8,795
Other assets.................................................................... 2 11
Property improvement fund....................................................... 18,912 5,395
Restricted cash................................................................. 6,324 6,318
Cash and cash equivalents....................................................... 11,755 21,527
------------ -------------
$ 492,366 $ 505,386
============ =============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt................................................................... $ 339,139 $ 355,781
Management fees due to Courtyard Management Corporation......................... 31,417 33,805
Due to Marriott International, Inc. and affiliates.............................. 8,693 8,812
Accounts payable and accrued liabilities........................................ 5,945 5,248
------------ -------------
Total Liabilities......................................................... 385,194 403,646
MINORITY INTEREST.................................................................. 58 44
------------ -------------
385,252 403,690
------------ -------------
PARTNERS' CAPITAL
General Partners................................................................ 2,155 2,048
Limited Partner................................................................. 104,959 99,648
------------ -------------
Total Partners' Capital................................................... 107,114 101,696
------------ -------------
$ 492,366 $ 505,386
============ =============
The accompanying notes are an integral part of these consolidated
financial statements.
27
CONSOLIDATED STATEMENT OF OPERATIONS
Courtyard II Associates, L.P. and Subsidiaries
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands)
2000 1999 1998
------------- ------------- -------------
HOTEL REVENUES
Rooms.............................................................. $ 275,877 $ 265,137 $ 258,099
Food and beverage.................................................. 18,057 17,686 17,219
Other.............................................................. 9,600 10,159 8,933
------------- ------------- -------------
Total hotel revenues............................................. 303,534 292,982 284,251
------------- ------------- -------------
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms.............................................................. 62,008 59,873 55,962
Food and beverage.................................................. 15,989 15,594 14,991
Other department costs and expenses................................ 2,017 2,492 2,928
Selling, administrative and other.................................. 72,344 69,170 67,517
------------- ------------- -------------
Total hotel property-level costs and expenses.................... 152,358 147,129 141,398
Depreciation......................................................... 28,583 27,397 27,895
Base and Courtyard management fees................................... 18,212 17,579 17,055
Incentive management fee............................................. 13,778 13,322 12,895
Ground rent.......................................................... 13,741 13,249 12,921
Property taxes....................................................... 11,734 11,143 10,914
Insurance and other.................................................. 2,084 2,193 1,785
------------- ------------- -------------
Total operating costs and expenses............................... 240,490 232,012 224,863
------------- ------------- -------------
OPERATING PROFIT........................................................ 63,044 60,970 59,388
Interest expense..................................................... (28,289) (29,407) (30,517)
Interest income...................................................... 1,405 1,156 1,981
------------- ------------- -------------
NET INCOME BEFORE MINORITY INTEREST..................................... 36,160 32,719 30,852
MINORITY INTEREST....................................................... 14 13 11
------------- ------------- -------------
NET INCOME.............................................................. $ 36,146 $ 32,706 $ 30,841
============= ============= =============
ALLOCATION OF NET INCOME
General Partners..................................................... $ 723 $ 654 $ 617
Limited Partner...................................................... 35,423 32,052 30,224
------------- ------------- -------------
$ 36,146 $ 32,706 $ 30,841
============= ============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
28
CONSOLIDATED STATEMENT OF
CHANGES IN PARTNERS' CAPITAL
Courtyard II Associates, L.P. and Subsidiaries
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands)
General Limited
Partners Partner Total
------------ ----------- ----------
Balance, December 31, 1997................................................. $ 1,621 $ 79,361 $ 80,982
Capital distributions................................................... (478) (23,998) (24,476)
Net Income.............................................................. 617 30,224 30,841
----------- ----------- -----------
Balance, December 31, 1998................................................. 1,760 85,587 87,347
Capital distributions................................................... (366) (17,991) (18,357)
Net income.............................................................. 654 32,052 32,706
----------- ----------- -----------
Balance, December 31, 1999................................................. 2,048 99,648 101,696
Capital distributions................................................... (616) (30,112) (30,728)
Net income.............................................................. 723 35,423 36,146
----------- ----------- -----------
Balance, December 31, 2000................................................. $ 2,155 $ 104,959 $ 107,114
=========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
29
CONSOLIDATED STATEMENT OF CASH FLOWS
COURTYARD II ASSOCIATES, L.P. AND SUBSIDIARIES
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands)
2000 1999 1998
----------- ----------- -----------
OPERATING ACTIVITIES
Net income............................................................. $ 36,146 $ 32,706 $ 30,841
Depreciation........................................................... 28,583 27,397 27,895
Amortization of deferred financing costs as interest................... 1,106 1,105 1,106
Loss on disposition of fixed assets.................................... 17 291 --
Minority Interest...................................................... 14 13 11
Amortization of prepaid expenses....................................... 9 9 8
Changes in operating accounts:
Due from Courtyard Management Corporation............................ 342 (56) 79
Management fees due to Courtyard Management Corporation.............. (2,357) (609) (415)
Accounts payable and accrued liabilities............................. (171) (83) (1,565)
Due to Host Marriott Corporation..................................... 729 -- (32)
----------- ----------- -----------
Cash provided by operations...................................... 64,401 60,773 57,928
=========== =========== ===========
INVESTING ACTIVITIES
Additions to property and equipment, net............................... (13,286) (18,450) (36,110)
Change in property improvement fund.................................... (13,517) 1,071 20,734
Working capital returned by Courtyard Management Corporation........... -- -- 2,500
----------- ----------- -----------
Cash used in investing activities................................ (26,803) (17,379) (12,876)
----------- ----------- -----------
FINANCING ACTIVITIES
Capital distributions.................................................. (30,728) (18,357) (24,476)
Repayment of principal................................................. (16,642) (15,443) (14,331)
----------- ------------ -----------
Cash used in financing activities................................ (47,370) (33,800) (38,807)
----------- ----------- -----------
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS.......................... $ (9,772) $ 9,594 $ 6,245
CASH AND CASH EQUIVALENTS at beginning of year............................ 21,527 11,933 5,688
----------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of year.................................. $ 11,755 $ 21,527 $ 11,933
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................................. $ 27,159 $ 28,301 $ 29,412
=========== =========== ===========
The accompanying notes are an integral part of these consolidated
financial statements.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Courtyard II Associates, L.P. and Subsidiaries
December 31, 2000 and 1999
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Courtyard II Associates, L.P. and Subsidiaries ("Associates"), a Delaware
limited partnership, was formed December 22, 1995. Substantially all of the
assets of Associates were contributed to Associates by Courtyard by Marriott II
Limited Partnership (the "Partnership") on January 24, 1996, in connection with
the Partnership's refinancing (see Note 5). The managing general partner of
Associates is Courtyard II Associates Management Corporation (a wholly-owned
subsidiary of the Partnership) with a 1% general partner interest and the
Partnership owns a 1% general partner interest and a 98% limited partner
interest. CBM Funding Corporation ("CBM Funding") a wholly-owned subsidiary of
Associates, was formed on December 29, 1995, to make a mortgage loan to
Associates in connection with the refinancing (see Note 5). Associates directly
owns 69 Courtyard hotels and the land on which certain of the Hotels, as defined
below, are located. One hotel located in Deerfield, Illinois (the "Deerfield
Hotel"), is owned by CBM Associates II LLC ("Associates II"). Associates hold a
99% membership interest in Associates II and Courtyard II Associates Management
Corporation holds the remaining 1% interest in Associates II. The 70 hotel
properties (the "Hotels") are located in 29 states in the United States. The
Hotels are managed as part of the Courtyard by Marriott hotel system by
Courtyard Management Corporation (the "Manager"), a wholly-owned subsidiary of
Marriott International, Inc. ("MII").
Partnership Allocations and Distributions
Allocations and distributions for Associates are generally made in accordance
with the respective ownership interests as follows: (i) 98% to the limited
partner, the Partnership and (ii) 1% to each general partner, the Partnership
and Courtyard II Associates Management Corporation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of Associates present the financial
position, results of operations and cash flows of Associates as if it were a
separate subsidiary of the Partnership for all periods presented. The
Partnership's historical basis in the assets and liabilities contributed to
Associates have been recorded on Associates at their carryover basis.
Intercompany transactions and balances between Associates and its subsidiaries
have been eliminated.
Basis of Accounting
The records of Associates are maintained on the accrual basis of accounting and
its fiscal year coincides with the calendar year.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Working Capital
Pursuant to the terms of the management agreement, Associates is required to
provide the Manager with working capital to meet the operating needs of the
Hotels. The Manager converts cash advanced by Associates into other forms of
31
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.
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, 2000 or 1999.
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, 2000 and 1999, accumulated amortization related
to the Certificates, as defined in Note 5, were $5,445,000 and $4,339,000,
respectively.
Cash and Cash Equivalents
Associates considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Restricted Cash
Restricted cash represents the real estate tax and insurance reserve established
pursuant to the terms of the Certificates/Mortgage Loan as described in Note 5.
Ground Rent
The land leases 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 2000, 1999 and 1998 totaled $119,000 per year. The
related liability is included in Due to MII and affiliates on the accompanying
consolidated balance sheet.
Income Taxes
Provision for Federal taxes has not been made in the accompanying consolidated
financial statements since Associates does not pay income taxes, but rather,
allocates its profits and losses to the individual partners. Significant
differences exist between the net income for financial reporting purposes and
the net income reported in the Partnership's tax return. These differences are
due primarily to the use for income tax purposes of accelerated depreciation
methods, shorter depreciable lives for the assets, 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 $507,000 and $2,044,000, respectively as of December
31, 2000 and 1999.
32
Reclassifications
Certain reclassifications were made to the prior year financial statements to
conform to the 2000 presentation.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
2000 1999
------------- -------------
Land.............................................. $ 25,541 $ 25,541
Leasehold improvements............................ 307,741 298,855
Building and improvements......................... 256,885 253,108
Furniture and equipment........................... 127,275 157,444
------------- -------------
717,442 734,948
Less accumulated depreciation..................... (278,344) (280,536)
------------- -------------
$ 439,098 $ 454,412
============= =============
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, 2000 As of December 31, 1999
---------------------------- ----------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
Mortgage debt............................................. $ 339,139 $ 349,230 $ 355,781 $ 347,538
Management fees due to Courtyard
Management Corporation................................. $ 31,417 $ 12,367 $ 33,805 $ 14,185
The estimated fair values of debt obligations are based on the quoted market
prices at December 31, 2000 and 1999, respectively. Management fees due to the
Manager are valued based on the expected future payments from operating cash
flow discounted at risk adjusted rates.
NOTE 5. MORTGAGE DEBT
On January 24, 1996, the Partnership and Associates completed two refinancings
of the existing debt through the private placements of $127.4 million of Senior
Notes and $410.2 million of multiclass commercial mortgage pass-through
certificates, respectively.
The Certificates were issued by CBM Funding for an initial principal amount of
$410.2 million. Proceeds from the sale of the Certificates were utilized by CBM
Funding to provide a mortgage loan (the "Mortgage Loan") to Associates. The
Certificates/Mortgage Loan require monthly payments of principal and interest
based on a 17-year amortization schedule. The Mortgage Loan matures on January
28, 2008. However, the maturity date of the Certificates/Mortgage Loan may be
extended until January 28, 2013 with the consent of 662/3% of the holders of the
outstanding Certificates affected thereby. The Certificates were issued in the
following classes and pass-through rates of interest.
33
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 $339.1 million and $355.8 million at
December 31, 2000 and 1999, respectively. Principal payments of $16.6 million
and $15.4 million on the Certificates were made during 2000 and 1999,
respectively. The weighted average interest rate on the Certificates was 7.8%
for 2000 and 1999.
The Certificates/Mortgage Loan maturities as of December 31, 2000 are as follows
(in thousands):
2001............ $ 17,934
2002............ 19,326
2003............ 20,827
2004............ 22,444
2005............ 24,186
Thereafter......... 234,422
-----------
$ 339,139
===========
The Mortgage Loan is secured primarily by 69 cross-defaulted and cross-
collateralized mortgages representing first priority mortgage liens on (i) the
fee or leasehold interest in 69 of the Hotels (excluding the Deerfield Hotel),
related furniture, fixtures and equipment and the property improvement fund,
(ii) the fee interest in the land leased from MII or their affiliates on which
53 Hotels are located, (iii) a pledge of Associates membership interest in and
the related right to receive distributions from Associates II which owns the
Deerfield Hotel and (iv) an assignment of the Management Agreement, as defined
below. The Mortgage Loan is non-recourse to Associates, the Partnership and its
partners.
Operating profit from the Hotels in excess of debt service on the Mortgage Loan
is available to be distributed to the Partnership. Amounts distributed to the
Partnership are used for the following, in order of priority: (i) for debt
service on the Senior Notes, (ii) to fund the Supplemental Debt Service Reserve,
if necessary, (iii) to offer to purchase a portion of the Senior Notes at par,
if necessary, (iv) for working capital as discussed in Note 7 and (v) for
distributions to the partners of the Partnership. The net assets (all of which
are restricted) of Associates was $107.3 million and $101.7 million as of
December 31, 2000 and 1999, respectively.
Prepayments of the Mortgage Loan are permitted with the payment of a premium
(the "Prepayment Premium"). The Prepayment Premium is equal to the greater of
(i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance
amount based on a spread of .25% or .55% over the U.S. treasury rate, as
defined.
Pursuant to the terms of the Certificate/Mortgage Loan, the Partnership is
required to establish with the lender a separate escrow account for payments of
insurance premiums and real estate taxes for each mortgaged property if the
credit rating of MII is downgraded by Standard and Poor's Rating Services. The
assumption of additional debt associated with MII's acquisition of Renaissance
Hotel Group N.V. resulted in a single downgrade of MII's long-term senior
unsecured debt, effective April 1, 1997. The escrow reserve is included in
restricted cash and the resulting tax and insurance liability is included in
accounts payable and accrued liabilities in the accompanying consolidated
balance sheet. The balance in the real estate tax and insurance reserve as of
December 31, 2000 and 1999 was $6.3 million.
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
34
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, 2000 are as follows (in thousands):
Telephone
Lease Land Equipment and Other
Year Leases Leases
----------- ----------- ----------------------
2001 $ 9,616 $ 187
2002 10,054 132
2003 10,348 96
2004 10,381 --
2005 10,889 --
Thereafter 1,851,156 --
----------- -------------
$ 1,902,444 $ 415
=========== =============
Total rent expense on land leases was $13,741,000 for 2000, $13,249,000 for 1999
and $12,921,000 for 1998.
NOTE 7. MANAGEMENT AGREEMENT
To facilitate the refinancing, effective December 30, 1995, the original
management agreement was restated into two separate management agreements.
Associates entered into a management agreement with the Manager for the 69
Hotels which Associates directly owns and Associates II entered into a
management agreement for the Deerfield Hotel which Associates II owns,
collectively, (the "Management Agreement").
Term
The Management Agreement has an initial term expiring in 2013. The Manager may
renew the term, as to one or more of the Hotels, at its option, for up to three
successive terms of 10-years each and one final term of five years. The
Partnership may terminate the Management Agreement if, during any three
consecutive years after 1992, specified minimum operating results are not
achieved. However, the Manager may prevent termination by paying to the
Partnership the amount by which the minimum operating results were not achieved.
Upon the sale of a Hotel, the Management Agreement may be terminated with
respect to that Hotel with payment of a termination fee. Prior to December 31,
2007, a maximum of 20 Hotels may be sold free and clear of the Management
Agreement with payment of the termination fee. The termination fee is calculated
by the Manager as the net present value of reasonably anticipated future
incentive management fees.
Management Fees
The Management Agreement provides for annual payments of (i) the base management
fee equal to 3.5% of gross revenues from the Hotels, (ii) the Courtyard
management fee equal to 2.5% of gross revenues from the Hotels, and (iii) the
incentive management fee equal to 15% of operating profit, as defined (20% of
operating profit after the Partners have received refinancing proceeds equal to
50% of the excess of (a) $154,736,842 over (b) cumulative distributions of
adjusted sale proceeds).
Deferral Provisions
One percent of the Courtyard management fee is deferred through maturity of the
Senior Notes and the Mortgage Loan to the extent that the Partnership or
Associates has insufficient funds for debt service
35
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, was 9% in 1998 and then 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%, 10% and 9% of invested capital for 2000, 1999 and 1998,
respectively, (vi) eighty percent of the remaining operating profit is applied
to the payment of current incentive management fees, (vii) to repay advances to
the Partnership, (viii) to repay foreclosure avoidance advances to the Manager
and (ix) fifty percent of the remaining operating profit to repay deferred
management fees to the Manager and fifty percent of remaining operating profit
is paid to the Partnership.
During 2000 and 1999, $1,878,000 and $609,000, respectively, of deferred
incentive management fees were paid. Deferred incentive management fees were
$1,682,000 and $3,560,000 as of December 31, 2000 and 1999, respectively. Also,
the Partnership paid $510,000 of deferred base management fees during 2000.
Therefore, deferred base management fees decreased from $7,904,000 in 1999 to
$7,394,000 in 2000. Deferred Courtyard management fees totaled $22,341,000 as of
December 31, 2000 and 1999.
Chain Services and Marriott's Rewards Program
The Manager is required to furnish certain services ("Chain Services") which are
generally furnished on a central or regional basis to all hotels managed, owned
or leased in the Courtyard by Marriott hotel system. In addition, the Hotels
participate in MII's Marriott Reward Program ("MRP"). Chain Services and MRP
costs charged to the partnership under the Management Agreement were $14,470,000
in 2000, $14,550,000 in 1999 and $13,755,000 in 1998.
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. Upon termination of the
Management Agreement, the working capital will be returned to the Partnership.
As of December 31, 2000 and 1999, 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 Funds
The Management Agreement provides for the establishment of a repairs and
equipment reserve (property improvement fund) for the Hotels. The funding of
this reserve is based on a percentage of gross Hotel revenues. The contribution
to the property improvement fund 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.
36
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, 2000 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 or results of operations of the Partnership.
37
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, 2000
--------------------------------- --------------------------------------------------- ----------------------
Robert E. Parsons, Jr. President and Manager 45
W. Edward Walter Executive Vice President and Treasurer 45
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-
Acquisitions and in 1998 was made Treasurer of Host Marriott. He is also an
Executive Vice President and Treasurer of Host LP and serves as a director,
manager and officer of numerous Host Marriott subsidiaries. Prior to joining
Host Marriott, Mr. Walter was a partner at Trammell Crow Residential Company and
President of Bailey Capital Corporation, a real estate firm focusing on tax
exempt real estate investments.
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
38
providing such services. For the fiscal years ending December 31, 2000, 1999 and
1998, the Partnership reimbursed CBM Two or CBM Two LLC in the amount of
$90,000, $179,000 and $274,000, 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, 2000, 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, 2000.
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.
39
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
40
*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.
41
**10.11 Associates received an assignment from the Partnership, which had
received an assignment from Host Marriott, of 15 ground leases for land
that Host Marriott had previously leased from various affiliates (the
"Original Landlords"). The ground leases are identical in all material
respects except as to their assignment dates to the Partnership and the
rents due (Exhibit A of each ground lease). The schedule below sets
forth the terms of each ground lease not filed which differ from the
copy of the example ground lease (Hoover, AL) which was previously
filed with the Commission. In addition, a copy of Exhibit A was filed
for each excluded ground lease.
Property State Assignment Date
-------- ----- ---------------
Foster City CA 10/30/87
Marin/Larkspur Landing CA 10/30/87
Denver/Southeast CO 10/30/87
Atlanta/Perimeter Center GA 02/24/88
Indianapolis/Castleton IN 10/30/87
Lexington/North KY 10/07/88
Annapolis MD 05/19/89
Minneapolis Airport MN 10/30/87
St. Louis/Creve Couer MO 10/30/87
Rye NY 03/29/88
Greenville SC 03/29/88
Memphis Airport TN 10/30/87
Nashville Airport TN 02/24/88
Dallas/Stemmon TX 10/30/87
San Antonio/Downtown TX 03/23/90
**10.12 Associates received an assignment from the Partnership of 38 ground
leases which the Partnership had entered into with Marriott
International, Inc., ("MII"). The 38 ground leases are identical in all
material respects except as to their effective lease dates and the
rents due (Exhibit A of each ground lease). The schedule below sets
forth the terms of each ground lease not filed which differ from the
copy of the example ground lease (Huntsville, AL) which was previously
filed with the Commission. In addition, a copy of Exhibit A was filed
for each excluded ground lease.
Property State Effective Lease Date
-------- ----- --------------------
Birmingham/Hoover AL 10/30/87
Huntsville AL 10/30/87
Phoenix/Mesa AZ 04/22/88
Phoenix/Metrocenter AZ 10/01/87
Tucson Airport AZ 12/30/88
Little Rock AR 09/09/88
Bakersfield CA 05/30/88
Hacienda Heights CA 03/30/90
Palm Springs CA 12/20/88
Torrance CA 12/30/88
Boulder CO 11/04/88
Wallingford CT 04/24/90
Ft. Myers FL 11/04/88
Ft. Lauderdale/Plantation FL 12/02/88
St. Petersburg FL 01/26/90
West Palm Beach FL 02/24/89
Atlanta/Gwinnett Mall GA 10/30/87
Chicago/Glenview IL 10/06/89
Chicago/Highland Park IL 07/15/88
Chicago/Waukegan IL 08/12/88
Chicago/Wood Dale Park IL 09/09/88
Kansas City/Overland Park KS 04/21/89
Silver Spring MD 10/07/88
Boston/Andover MA 02/24/89
Detroit Airport MI 02/24/88
Detroit/Livonia MI 03/29/88
St. Louis/Westport MO 10/07/88
Lincroft/Red Bank NJ 07/15/88
Raleigh/Cary NC 08/12/88
Dayton Mall OH 10/30/87
Toledo OH 07/15/88
Oklahoma City Airport OK 10/07/88
Portland/Beaverton OR 05/19/89
Columbia SC 04/21/89
Dallas/Northeast TX 04/22/88
Charlottesville VA 04/21/89
Manassas VA 05/19/89
Seattle/Southcenter WA 05/19/89
42
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
43
*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
44
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.)
* 21.1 Subsidiaries of the Partnership
_______________________
* 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.
45
SCHEDULE I
Page 1 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 2000 and 1999
(in thousands)
2000 1999
--------------- ---------------
ASSETS
Investments in restricted subsidiaries........................................................ $ 107,114 $ 101,696
Other assets.................................................................................. 3,355 3,806
Restricted cash............................................................................... 12,091 11,981
Cash and cash equivalents..................................................................... 1,756 1,814
--------------- --------------
Total Assets............................................................................ 124,316 $ 119,297
============== ===============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt........................................................................................ 127,400 $ 127,400
Accounts payable and accrued expenses....................................................... 6,161 6,769
--------------- ---------------
Total liabilities....................................................................... 133,561 134,169
--------------- ---------------
PARTNERS' CAPITAL (DEFICIT)
General Partner
Capital contribution....................................................................... 11,356 11,306
Cumulative net losses...................................................................... (1,669) (2,717)
Capital distributions...................................................................... (278) (278)
--------------- ---------------
9,409 8,311
--------------- ---------------
Limited Partners
Capital contributions, net of offering costs of $17,189.................................. 130,014 129,064
Cumulative net losses.................................................................... (31,710) (51,627)
Capital distributions.................................................................... (116,805) (100,467)
Investor notes receivable................................................................ (153) (153)
--------------- ---------------
(18,654) (23,183)
--------------- ---------------
Total Partners' Deficit................................................................ (9,245) (14,872)
--------------- ---------------
$ 124,316 $ 119,297
=============== ===============
The Notes to Consolidated Financial Statements of Courtyard by Marriott II
Limited Partnership are an integral part of these statements.
See Accompanying Notes to Condensed Consolidated Financial Information.
46
SCHEDULE I
Page 2 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands)
2000 1999 1998
----------- ----------- -----------
Revenues.......................................................... $ -- $ -- $ --
Operating costs and expenses...................................... -- -- --
----------- ----------- -----------
Operating profit before Partnership expenses and interest......... -- -- --
Interest income................................................... 709 588 695
Interest expense.................................................. (14,172) (14,170) (14,169)
Partnership expense............................................... (1,619) (1,299) (428)
Property taxes.................................................... (113) -- --
----------- ----------- -----------
Loss before equity in earnings of restricted subsidiaries......... (15,195) (14,881) (13,902)
Equity in earnings of restricted subsidiaries..................... 36,160 32,719 30,852
----------- ----------- -----------
Net income................................................... $ 20,965 $ 17,838 $ 16,950
=========== =========== ===========
The Notes to Consolidated Financial Statements of Courtyard by Marriott II
Limited Partnership are an integral part of these statements.
See Accompanying Notes to Condensed Consolidated Financial Information.
47
SCHEDULE I
Page 3 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands)
2000 1999 1998
---------- ----------- -----------
Cash used in operations.................................... $ (15,448) $ (13,640) $ (13,440)
INVESTING ACTIVITIES
Dividends from restricted subsidiaries, net.............. 30,728 18,357 24,476
Change in working capital reserve........................ -- (53) (2,925)
----------- ----------- -----------
Cash provided by investing activities................ 30,728 18,304 21,551
----------- ----------- -----------
FINANCING ACTIVITIES
Capital distributions.................................... (16,338) (8,820) (10,143)
Capital contributions.................................... 1,000 -- --
----------- ----------- -----------
Cash used in financing activities.................... (15,338) (8,820) (10,143)
----------- ----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS...................... (58) (4,156) (2,032)
CASH AND CASH EQUIVALENTS at beginning of year............. 1,814 5,970 8,002
----------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of year................... $ 1,756 $ 1,814 $ 5,970
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on debt....................... $ 13,696 $ 13,705 $ 13,702
=========== =========== ===========
The Notes to Consolidated Financial Statements of Courtyard by Marriott II
Limited Partnership are an integral part of these statements.
See Accompanying Notes to Condensed Consolidated Financial Information.
48
SCHEDULE I
Page 4 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A) The accompanying condensed financial information of Courtyard by Marriott
II Limited Partnership (the "Partnership") presents the financial position,
results of operations and cash flows of the Partnership with the investment
in, and operations of, consolidated subsidiaries with restricted net assets
accounted for on the equity method of accounting.
On January 24, 1996, the Partnership completed a refinancing of the
Partnership's existing debt through the private placement of $127.4 million
of senior secured notes (the "Senior Notes") and $410.2 million of multi-
class commercial mortgage pass-through certificates (the "Certificates").
In connection with the refinancing, the limited partners approved certain
amendments to the partnership agreement and the management agreement. The
partnership agreement amendment, among other things, allowed for the
formation of certain subsidiaries of the Partnership, including Courtyard
II Finance Company ("Finance"), a wholly-owned subsidiary of the
Partnership, who along with the Partnership is the co-issuer of the Senior
Notes.
Additionally, the Partnership formed a wholly-owned subsidiary, Courtyard
II Associates Management Corporation ("Managing General Partner"). Managing
General Partner was formed to be the managing general partner with a 1%
general partner interest in Courtyard II Associates, L.P. ("Associates"), a
Delaware limited partnership. The Partnership owns a 1% general partner
interest and a 98% limited partner interest in Associates. On January 24,
1996, the Partnership contributed 69 Hotels and their related assets to
Associates. Formation of Associates resulted in the Partnership's primary
assets being its direct and indirect interest in Associates. Substantially
all of Associates' net equity is restricted to distributions, loans or
advances to the Partnership.
Associates holds a 99% membership interest in CBM Associates II LLC
("Associates II") and Managing General Partner holds the remaining 1%
membership interest. On January 24, 1996, the Partnership contributed the
Hotel located in Deerfield, IL (the "Deerfield Hotel") and its related
assets to Associates and the Managing General Partner simultaneously
contributed the Hotel and its related assets to Associates II.
CBM Funding Corporation ("CBM Funding"), a wholly-owned subsidiary of
Associates, was also formed to make a mortgage loan (the "Mortgage Loan")
to Associates from the proceeds of the sale of the Certificates.
Associates is a restricted subsidiary of the Partnership and is accounted
for under the equity method of accounting on the accompanying condensed
financial information of the Partnership.
B) As discussed above, on January 24, 1996, the Senior Notes of $127.4 million
were issued by the Partnership and Finance. The Senior Notes bear interest
at 10 3/4%, require semi-annual payments of interest and require no
payments of principal until maturity on February 1, 2008. The Senior Notes
are secured by a first priority pledge by the Partnership of (i) its 99%
partnership interest (consisting of a 98% limited partner interest and a 1%
general partner interest) in Associates and (ii) its 100% equity interest
in the Managing General Partner. Finance has nominal assets, does not
conduct any operations and does not provide any additional security for the
Senior Notes.
In connection with Host Marriott's conversion to a REIT, a change of
control occurred when Host Marriott ceased to own, directly or indirectly,
all of the outstanding equity interest of the sole general partner of the
Partnership. Although such a change of control has occurred, Host REIT
continues to own, indirectly, a substantial majority of the economic
interest in CBM Two LLC, the current General Partner of the Partnership
and, through Host LP, has certain voting rights with respect to CBM Two
LLC.
49
The change in control described above resulted in a "Change in Control"
under the indenture governing the Senior Notes. As a result, in accordance
with the terms of the indenture, Host LP commenced a tender offer for the
Senior Notes at a purchase price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest thereon to February 18,
1999. The tender offer was commenced on January 14, 1999 and expired on
February 12, 1999. No Senior Notes were tendered to Host LP in connection
with the tender offer.
C) The accompanying statement of operations reflect the equity in earnings of
restricted subsidiaries after elimination of interest expense (see Note B).
50
SCHEDULE III
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2000
(in thousands)
Initial Costs Gross Amount at December 31, 2000
---------------------- ----------------------------------------------------
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 $ 69,261 $25,541 $ 562,676 $ 588,218 $ 180,451
============ ======= ============ ============= ======= ============ ========= =============
Date of
Completion of Date Depreciation
Construction Acquired Life
-------------- ---------- ---------------
70 Courtyard by 1987-1990 1987-1990 40 years
Marriott Hotels
Notes: 1998 1999 2000
- ----- ------------- ------------- -------------
(a) Reconciliation of Real Estate:
Balance at beginning of year.................................. $ 555,164 $ 567,776 $ 577,504
Capital Expenditures.......................................... 14,710 9,740 10,751
Dispositions/reclassifications................................ (2,098) (12) (37)
------------- ------------- -------------
Balance at end of year........................................ $ 567,776 $ 577,504 $ 588,218
============= ============= =============
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of year.................................. $ 128,448 $ 145,070 161,980
Depreciation.................................................. 16,622 16,910 18,471
------------- ------------- -------------
Balance at end of year........................................ $ 145,070 $ 161,980 $ 180,451
============= ============= =============
(c) The aggregate cost of land, buildings and
improvements for Federal income tax purposes
is approximately $582.4 million at December 31, 2000.
51
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 28/th/ day of
March, 2000.
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 and Treasurer
W. Edward Walter
52