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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
o
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
OR
|_| Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: 333-2336-01
COURTYARD II ASSOCIATES LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Delaware 52-1955662
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10400 Fernwood Road 20817
Bethesda, Maryland
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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 II ASSOCIATES LIMITED PARTNERSHIP
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TABLE OF CONTENTS
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PAGE NO.
PART I
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Item 1. Business...............................................................................1
Item 2. Properties.............................................................................7
Item 3. Legal Proceedings......................................................................15
Item 4. Submission of Matters to a Vote of Security Holders....................................15
PART II
Item 5. Market For The Partnership's Limited Partnership Units
and Related Security Holder Matters..............................................................15
Item 6. Selected Financial Data..........................................................................15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................................16
Item 8. Financial Statements and Supplementary Data......................................................26
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.........................................................................46
PART III
Item 10. Directors and Executive Officers.................................................................46
Item 11. Management Remuneration and Transactions.........................................................47
Item 12. Security Ownership of Certain Beneficial Owners and Management...................................47
Item 13. Certain Relationships and Related Transactions...................................................47
PART IV
Item 14. Exhibits, Supplemental Financial Statement Schedules
and Reports on Form 8-K..........................................................................52
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PART I
ITEM 1. BUSINESS
Description of the Partnership
Courtyard II Associates, L.P. ("Associates"), a Delaware limited partnership,
was formed December 22, 1995. Substantially all of the assets of Associates, as
defined below, 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 6). The managing general partner of
Associates is Courtyard II Associates Management Corporation (a wholly-owned
subsidiary of the Partnership) with a 1% interest. The Partnership owns a 1%
general partner interest and a 98% limited partner interest in Associates. 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 6). Associates directly owns 69 Courtyard hotels
and the land on which certain of the Hotels 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 and contain a total of 10,335 guest rooms as of December 31, 1996.
Associates is engaged solely in the business of owning and operating hotels and
therefore is engaged in one industry segment. The principal offices of the
Associates are located at 10400 Fernwood Road, Bethesda, Maryland 20817.
The Hotels are operated as part of the Courtyard by Marriott system, which
includes over 286 hotels worldwide in the moderately-priced segment of the U.S.
lodging industry. The Hotels are managed by Courtyard Management Corporation
(the "Manager"), a wholly-owned subsidiary of Marriott International, Inc.
("MII"), under a long-term management agreement (the "Management Agreement").
The Management Agreement as restated on December 30, 1995 expires in 2013 with
renewals at the option of the Manager for one or more of the Hotels for up to 35
years thereafter. The Hotels have the right to use the Courtyard by Marriott
name pursuant to the Management Agreement and, if the Management Agreement is
terminated or not renewed, the Partnership would lose that right for all
purposes (except as part of the Partnership's name). See Item 13 "Certain
Relationships and Related Transactions."
The objective of the Courtyard by Marriott system, including the Hotels, is to
provide consistently superior lodging at a fair price with an appealing,
friendly and contemporary residential character. Courtyard by Marriott hotels
have fewer guest rooms than traditional, full-service hotels, containing
approximately 150 guest rooms, including approximately 12 suites, as compared to
full-service Marriott hotels which typically contain 350 or more guest rooms.
Each Courtyard by Marriott hotel is designed around a courtyard area containing
a swimming pool (indoor pool in northern climates), walkways, landscaped areas
and a gazebo. Each Hotel generally contains a small lobby, a restaurant with
seating for approximately 50 guests, a lounge, a hydrotherapy pool, a guest
laundry, an exercise room and two small meeting rooms. The hotels do not contain
as much public space and related facilities as full-service hotels.
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Courtyard by Marriott hotels are designed for business and vacation travelers
who desire high quality accommodations at moderate prices. Most of the Hotels
are located in suburban areas near office parks or other commercial activities.
See Item 2 "Properties." Courtyard by Marriott hotels provide large, high
quality guest rooms which contain furnishings comparable in quality to those in
full-service Marriott hotels. Each guest room contains a large, efficient work
desk, remote control television, a television entertainment package, in-room
coffee and tea services and other amenities. Approximately 70% of the guest
rooms contain king-size beds.
Organization of Associates
In connection with the refinancing discussed below, the limited partners of the
Partnership approved certain amendments to the partnership agreement and the
Management Agreement. The partnership agreement amendment, among other things,
allowed the formation of certain subsidiaries of the Partnership, including 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. Additionally, substantially all of Associates' net equity will be
restricted to dividends, loans or advances to the Partnership.
Associates holds a 99% membership interest in CBM Associates II LLC ("Associates
II") and Managing General Partner holds the remaining 1% membership interest. On
January 24, 1996, the Partnership contributed the Hotel located in Deerfield, IL
(the "Deerfield Hotel") and its related assets to Associates and the Managing
General Partner who simultaneously contributed the Hotel and its related assets
to Associates II.
Each of the Managing General Partner, Associates and Associates II were formed
as a single purpose bankruptcy-remote entity to facilitate the refinancing in
January, 1996.
CBM Funding Corporation, ("CBM Funding"), a wholly-owned subsidiary of
Associates, was also formed to make a mortgage loan (the "Mortgage Loan") to
Associates from the proceeds of the sale of the multi-class commercial mortgage
pass through certificates.
Debt Financing
As of December 31, 1995, the Partnership had outstanding bank mortgage
indebtedness of $275 million related to 36 Hotels and $230.5 million related to
29 Hotels. As of December 31, 1995, the Partnership also had approximately $25.6
million of industrial revenue bond financing (the "IRB Debt") on the remaining
five Hotels and owed approximately $6.5 million to Host Marriott in connection
with such IRB Debt with respect to those five Hotels ("Host Marriott's IRB
Liability"). The bank mortgage indebtedness, the IRB Debt and advances from Host
Marriott's IRB Liability were repaid with the net proceeds of the Senior Notes,
as defined below, and Certificates, as defined in the overview below, on January
24, 1996.
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Refinancing
Debt Refinancing - Overview
On January 24, 1996, the Partnership completed a refinancing of the existing
debt through the private placement of $410.2 million of multi-class commercial
mortgage pass-through certificates (the "Certificates").
A concurrent offering of $127,400,000 of senior notes (the "Senior Notes") by
the Partnership was also completed on January 24, 1996. The Senior Notes are
secured by a first priority pledge of the Partnership's 99% partnership interest
in Associates and the Partnership's 100% equity interest in Managing General
Partner. The Senior Notes are not reflected in the accompanying financial
statements of Associates because Associates does not guarantee the Senior Notes
nor do the assets of Associates secure the Senior Notes. Payments on the Senior
Notes are made from distributions of the excess cash of Associates to the
Partnership; such distributions are restricted only upon a monetary event of
default under the Mortgage Loan, as defined in Note 6 of Associates financial
statements. The Partnership has no other source of cash flow other than
distributions from Associates.
The net proceeds from the placement of the Certificates and cash contributed by
the Partnership were used as follows: (i) to repay the existing bank
indebtedness of $385.6 million, (ii) to repay the IRB Debt of $19.7 million,
(iii) to repay the advances from Host Marriott related to certain IRB Hotels of
$4.9 million and (iv) to pay certain costs of structuring and issuing the
Certificates.
Upon repayment of the bank indebtedness, Host Marriott was released from its
obligations under (i) the bank indebtedness debt service guarantees, (ii) the
foreclosure guarantee and (iii) the Ground Rent Facility as defined.
Debt Refinancing - Certificates
The Certificates in an initial principal amount of $410.2 million were issued by
CBM Funding. Proceeds from the sale of the Certificates were utilized by CBM
Funding to provide a Mortgage Loan to Associates. The Certificates/Mortgage Loan
require monthly payments of principal and interest based on a 17-year
amortization schedule. The Mortgage Loan matures on January 28, 2008. However,
the maturity date of the Certificates/Mortgage Loan may be extended until
January 28, 2013 with the consent of 66 2/3% of the holders of the outstanding
Certificates affected thereby. The Certificates were issued in the following
classes and pass-through rates of interest.
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Initial Certificate Pass-Through
Class Balance Rate
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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%
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The Class A-3IO Certificates receive payments of interest only based on a
notional balance equal to the Class A-3P & I Certificate Balance.
The balance of the Certificates was $398.9 million at December 31, 1996.
Principal amortization of $11.3 million of the Class A-1 Certificates was made
during 1996.
The Certificates/Mortgage Loan maturities are as follows (in thousands):
1997 $ 13,298
1998 14,331
1999 15,443
2000 16,642
2001 17,934
Thereafter 321,205
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$ 398,853
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The Mortgage Loan is secured primarily by 69 cross-defaulted and
cross-collateralized mortgages representing first priority mortgage liens on (i)
the fee or leasehold interest in the 69 Hotels, related furniture, fixtures and
equipment and the property improvement fund, (ii) the fee interest in the land
leased from MII or their affiliates on which 53 Hotels are located, (iii) a
pledge of Associates membership interest in and the related right to receive
distributions from Associates II which owns the Deerfield Hotel and (iv) an
assignment of the Management Agreement, 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, see Item 13 "Certain Relationships and
Related Transactions," and (v) for distributions to the partners of the
Partnership.
Prepayments of the Mortgage Loan are permitted with the payment of a premium
(the "Prepayment Premium"). The Prepayment Premium is equal to the greater of
(i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance
amount based on a spread of .25% or .55% over the U.S. treasury rate, as
defined.
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On June 30, 1996, CBM Funding completed an exchange offer of its Multiclass
Mortgage Pass- Through Certificates, Series 1006-1A with a principal balance of
$406.2 million at that time ("Old Certificates"), for an equal amount of
Multiclass Mortgage Pass-Through Certificates, Series 1996-1B ("New
Certificates"). The form and terms of the New Certificates are substantially
identical to the form and terms of the Old Certificates, except that the New
Certificates are registered under the Securities Act of 1933, as amended and
their transfers are not restricted.
Ground Rent Facility
Fifty-three of the Hotels are situated on land leased from MII or affiliates of
MII, eight of the Hotels are situated on land leased from third parties. MFS had
agreed to lend the Partnership up to $25 million (the "Ground Rent Facility") to
the extent that the Partnership has insufficient funds to pay ground rent under
any ground lease, including third party ground leases, after payment of (i)
hotel operating expenses (except for ground rent) and (ii) debt service. No
amounts were ever advanced under the Ground Rent Facility. Upon refinancing of
the Partnership Debt in January 24, 1996, MFS was released from the Ground Rent
Facility.
Material Contracts
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"). The primary provisions are discussed
in Item 13, "Certain Relationships and Related Transactions."
Ground Leases
The land on which 53 of the Hotels are located is leased from MII or affiliates
of MII. In addition, eight of the Hotels are located on land leased from third
parties. The land leases have remaining terms (including renewal options)
expiring between the years 2024 and 2068. The MII land leases and the third
party land leases provide for rent based on specific percentages (from 2% to
15%) of gross sales in certain categories, subject to minimum amounts. The
minimum rentals are adjusted at various anniversary dates throughout the lease
terms, as defined in the agreements. For 1996, Associates paid a total of
$12,018,000 in ground rent. See Item 2 "Properties" for a listing of Hotels that
have ground leases.
In connection with the refinancing, the Partnership, as lessee, transferred its
rights and obligations pursuant to the 53 ground leases with MII and affiliates
to Associates. Additionally, MII and affiliates agreed to subordinate their
right to receive rental payments under the MII ground leases to the payment of
debt service on the Senior Notes and the Mortgage Loan.
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Competition
The United States lodging industry generally is comprised of two broad segments:
full-service hotels and limited-service hotels. Full-service hotels generally
offer restaurant and lounge facilities and meeting spaces, as well as a wide
range of services, typically including bell service and room service.
Limited-service hotels generally offer accommodations with limited or no
services and amenities. As moderately-priced hotels, the Hotels compete
effectively with both full-service and limited-service hotels in their
respective markets by providing streamlined services and amenities exceeding
those provided by typical limited-service hotels at prices that are
significantly lower than those available at full-service hotels.
Significant competitors in the moderately-priced lodging segment include Holiday
Inn, Ramada Inn, Sheraton Inn, Hampton Inn and Hilton Inn. The lodging industry
in general, and the moderately-priced segment in particular, is highly
competitive, but the degree of competition varies from location to location and
over time. An increase in supply growth began in 1996 with the introduction of a
number of new national brands. For 1997, the outlook continues to be positive.
Courtyards continue to command a premium share of the markets in which they are
located in spite of the growth of new chains. It is expected that Courtyard will
continue outperforming both national and local competitors. The brand is
continuing to carefully monitor the introduction of new mid-priced brands
including Wingate Hotels, Hilton Garden Inns, Four Points by Sheraton, Mainstay,
Candlewood, Club Hotels and Clarion.
The Manager believes that by emphasizing management and personnel development
and maintaining a competitive price structure, the Partnership's share of the
market will be maintained or increased. The inclusion of the Hotels within the
nationwide Courtyard by Marriott system provides the benefits of name
recognition, centralized reservations and advertising, system-wide marketing and
promotion, centralized purchasing and training and support services.
Conflicts of Interest
Because Host Marriott, the parent of the general partner of the Partnership, MII
and their affiliates own and/or operate hotels other than Associates Hotels' and
Marriott International, Inc. and its affiliates license others to operate hotels
under the various brand names owned by Marriott International, Inc. and its
affiliates, potential conflicts of interest exist. With respect to these
potential conflicts of interest, Host Marriott, MII and their affiliates retain
a free right to compete with Associates' 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.
Policies with Respect to Conflicts of Interest
It is the policy of the Managing Partner and the Partnership (the "General
Partners") that Associates' relationship with the General Partners, any
affiliate of the General Partners, or persons employed by the General Partners
or its affiliates be conducted on terms that are fair to Associates and that are
commercially reasonable. Agreements and relationships involving the General
Partners or its affiliates and Associates are on terms consistent with the terms
on which the General Partners or its affiliates have dealt with unrelated
parties.
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Employees
Neither the General Partners nor Associates have any employees. Host Marriott
provides the services of certain employees of Host Marriott to Associates and
the General Partners. Associates and the General Partners anticipate that each
of the executive officers of the General Partners will generally devote a
sufficient portion of his or her time to the business of Associates. However,
each of such executive officers also will devote a significant portion of his or
her time to the business of Host Marriott and its other affiliates. No officer
or director of the General Partners or employee of Host Marriott devotes a
significant percentage of time to Associates matters. To the extent that any
officer, director or employee does devote time to Associates, the General
Partners or Host Marriott, as applicable, is entitled to reimbursement for the
cost of providing such services. See Item 11 "Management Remuneration and
Transactions" for information regarding payments made to Host Marriott or its
subsidiaries for the cost of providing administrative services to Associates.
ITEM 2. PROPERTIES
Introduction
The properties consisted of 70 Courtyard by Marriott hotels as of December 31,
1996. After the refinancing on January 24, 1996, sixty nine of the Hotels are
directly owned by Associates whereas one Hotel is owned by Associates II. The
Hotels have been in operation for at least seven years. The Hotels range in age
between 7 and 11 years. The Hotels are geographically diversified among 29
states, and no state has more than nine Hotels.
The lodging industry in general, and the moderately-priced segment in
particular, is highly competitive, but the degree of competition varies from
location to location and over time. On a combined basis, competitive forces
affecting the Hotels are not, in the opinion of the General Partners, more
adverse than the overall competitive forces affecting the lodging industry
generally. See Item 1 "Business--Competition."
The following table summarizes certain attributes of each of the Hotels.
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COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
SUMMARY OF ATTRIBUTES
(70 COURTYARD HOTELS)
PROPERTY TITLE TO LAND # OF OPENING LOCATION
ROOMS DATE
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1 Birmingham/Homewood, AL Owned in fee 140 12/21/85 Five miles southeast of downtown
500 Shades Creek Parkway Birmingham and two miles north of I-459
Homewood, AL 35209 on Shades Creek Parkway across from
Brookwood Village Mall in the Homewood
commercial and residential area.
2 Birmingham/Hoover, AL Leased from Essex House 153 08/08/87 In the Riverchase Galleria area in greater
1824 Montgomery Highway South Condominium Corp. * southwest Birmingham 1/2 mile from I-
Hoover, AL 35244 459 and Route 31 (Montgomery
Highway), Riverchase Galleria Mall and
Riverchase office developments.
3 Huntsville, AL Leased from Marriott 149 08/15/87 On University Drive, one mile from the
4808 University Drive International, Inc. NASA Space Center, five miles from
Huntsville, AL 35816 Redstone Arsenal and across from
Cummings Research Park entrance.
4 Phoenix/Mesa, AZ Leased from Marriott 148 03/19/88 On corner of Southern Avenue at
1221 S. Westward Avenue International, Inc. Westwood Street, approximately 1/2 mile
Mesa, AZ 85210 north of Superstition Freeway and 1/2 mile
east of Fiesta Mall.
5 Phoenix/Metrocenter, AZ Leased from Marriott 146 11/29/87 In northwest Phoenix, 11 miles from
9631 N. Black Canyon International, Inc. downtown. Hotel is across from Metro
Phoenix, AZ 85021 Center regional mall and adjacent to
YWCA Leadership Development Center.
6 Tucson Airport, AZ Leased from Marriott 149 10/01/88 One-half mile north of Tucson
2505 E. Executive Drive International, Inc. International Airport at the intersection of
Tucson, AZ 85706 Tucson Boulevard and Valencia Road.
The Hotel is part of Bay Colony Business
Park and near IBM, Hughes Aircraft, and
Gates Learjet facilities.
7 Little Rock, AR Leased from Marriott 149 05/28/88 In West Little Rock on Financial Centre
10900 Financial Centre Parkway International, Inc. Parkway, just west of the intersection of
Little Rock, AR 72211 Shackleford Road and I-630/I-430.
8 Bakersfield, CA Leased from Marriott 146 02/13/88 Off Highway 99 at Rosedale Highway in
3601 Marriott Drive International, Inc. north Bakersfield. Close to Shell
Bakersfield, CA 93308 California, Occidental and Contel offices.
9 Cupertino, CA Leased from Vallco 149 05/14/88 In Silicon Valley near Santa Clara, at
10605 N. Wolfe Road Park, Ltd. intersection of I-280 and Wolfe Road in
Cupertino, CA 95014 the center of commercial and retail
development. Near major corporate computer
firms in area and 1/2 mile from Valco Park
regional mall.
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10 Foster City, CA Leased from Essex House 147 09/26/87 Eight miles south of San Francisco
550 Shell Blvd. Condominium Corp. * International Airport just off Highway 92
Foster City, CA 94404 at Foster City Boulevard. Within Foster
City commercial and residential development.
11 Fresno, CA Leased from Richard, 146 09/13/86 In north Fresno just off Highway 41 at
140 E. Shaw Avenue Miche, Aram & Aznive Shaw Avenue. Located two miles west of
Fresno, CA 93710 Erganian Fresno State University and near Fashion
Fair Shopping Mall.
12 Hacienda Heights, CA Leased from Marriott 150 03/28/90 East of Los Angeles at intersection of
1905 Azusa Avenue International, Inc. Azusa Avenue and Colima Road, 1/2 mile
Hacienda Heights, CA 91745 from State Highway 60. Near over
45 million square feet of industrial and
office development in the City of Industry.
13 Marin/Larkspur Landing, CA Leased from Essex House 146 07/25/87 Twelve miles north of San Francisco in
2500 Larkspur Landing Circle Condominium Corp. * Marin County of Highway 101 at
Larkspur, CA 94939 Richmond San Rafael Bridge exit. Hotel
is in Larkspur Landing commercial and
residential development.
14 Palm Springs, CA Leased from Marriott 149 10/08/88 On northeast corner of Hermosa Drive and
300 Tahquitz Canyon Way International, Inc. Tahquitz McCallum Way 1/2 mile from
Palm Springs, CA 92262 downtown Palm Springs Airport.
15 Torrance, CA Leased from Marriott 149 10/15/88 On Sepulveda Boulevard, west of
2633 West Sepulveda Boulevard International, Inc. Crenshaw Boulevard, in Park Del Amo
Torrance, CA 90505 business park. Approximately one mile
from Del Amo Fashion Center Mall.
16 Boulder, CO Leased from Marriott 148 08/06/88 At the intersection of 28th and Pearl
4710 Pearl East Circle International, Inc. Streets, in the north central area of
Boulder, CO 80301 Boulder. One mile from downtown
Boulder and the University of Colorado.
17 Denver, CO Owned in fee 146 08/15/87 Near the intersection of I-70 and Quebec
7415 East 41st Avenue Avenue, approximately one-half mile from
Denver, CO 80301 the Denver Airport.
18 Denver/Southeast, CO Leased from Essex House 152 05/30/87 In southeast Denver off I-25 and
6565 S. Boston Street Condominium Corp.* Arapachoe Road near Tech Center office
Englewood, CO 80111 and commercial developments.
19 Norwalk, CT Leased from Mary 145 07/30/88 Fronting U.S. Route y, 1/2 mile north of
474 Main Avenue Fabrizio Merritt Parkway, next to the Merritt Office
Norwalk, CT 06851 Park and near Perkin Elmer, Pitney
Bowes, Emery, and Richardson Vicks
Corporate Headquarters.
20 Wallinford, CT Leased from Marriott 149 04/21/90 At the Route 68 and I-91 interchange.
600 Northrop Road International, Inc. The site is near the Bristol-Myers World
Wallingford, CT 06492 Research Headquarters, Mid-Way
Industrial Park and Barnes Industrial Park.
21 Ft. Myers, FL Leased from Marriott 149 08/27/88 At the intersection of Colonial Boulevard
4455 Metro Parkway International, Inc. and Metro Parkway in Metro Park office
Ft. Myers, FL 33901 development, five miles from Ft. Myers
Regional Airport and close to General
Electric offices and Metro Mall.
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22 Ft. Lauderdale/Plantation, FL Leased from Marriott 149 09/21/88 In Broward County eight miles west of
7780 S.W. 6th Street International, Inc. central Ft. Lauderdale at the intersection
Plantation, FL 33324 of Mall Avenue and University Drive. The
site is located in the heart of the retail
and office developments near Broward Mall and
major American Express, Motorola, Southern
Bell, and Racal-Milgo facilities.
23 St. Petersburg, FL Leased from Marriott 149 10/14/89 On Ulmerton Road near Roosevelt
3131 Executive Drive International, Inc. Boulevard and two miles from St.
Clearwater, FL 34622 Petersburg Airport. Near Honeywell, and
Paradyne offices and Carillon and Feather
Sound office parks.
24 Tampa/Westshore, FL Leased from 145 10/27/86 Three miles southeast of Tampa
3805 West Cypress Hotsinger, Inc. and International Airport at the intersection of
Tampa, FL 33607 Owned in fee I-275 and Dale Mabry in the greater
Tampa Westshore office and commercial
development area.
25 West Palm Beach, FL Leased from Marriott 149 01/14/89 At intersection of I-95 and 45th Street in
600 Northpoint Parkway International, Inc. the Northpoint Corporate Park. Near Palm
West Palm Beach, FL 33407 Beach Lakes Boulevard, Barnett Bank
Operations Center, Palm Beach Mall, and
the Forum III office complex.
26 Atlanta Airport South, GA Owned in fee 144 06/15/86 One mile from Hartsfield International
2050 Sullivan Road Airport, off I-85 and Riverdale Road.
College Park, GA 30337
27 Atlanta/Gwinnett Mall, GA Leased from Marriott 146 03/19/87 In northeast Atlanta at the intersection of
3550 Venture Parkway International, Inc. I-85 and Pleasant Hill Road adjacent to
Duluth, GA 30136 Gwinnett Regional Mall.
28 Atlanta/Perimeter Ctr., GA Leased from Essex House 145 12/12/87 In north Atlanta, one mile north of I-285
6250 Peachtree-Dunwoody Road Condominium Corp. * and Peachtree-Dunwoody Road near
Atlanta, GA 30328 office, commercial and residential
developments.
29 Atlanta/Roswell, GA Leased from Roswell 154 06/11/88 Fifteen miles north of Atlanta at the
1500 Market Boulevard Landing Associates intersection of Highway 400 and Holcomb
Roswell, GA 30076 Bridge Road in the Holcomb Woods office
complex and across from Kimberly-
Clark's Southern Headquarters.
30 Arlington Heights-South, IL Owned in fee 147 12/20/85 In the western Chicago area just off I-90
100 W. Algonquin Road at Arlington Heights Road 10 miles west
Arlington Heights, Il 60005 of Chicago O'Hare Airport in office,
commercial and residential developments.
31 Chicago/Deerfield, IL Owned in fee 131 01/02/86 In the north Chicago area, 15 miles north
800 Lake Cook Road of Chicago O'Hare Airport on Lake Cook
Deerfield, IL 60015 Road, one mile from Northbrook Court
Mall and several office and residential
developments.
32 Chicago/Glenview, IL Leased from Marriott 149 07/08/89 In the northwest Chicago area at 1-294
180l Milwaukee Avenue International, Inc. and West Lake Avenue intersection, just
Glenview, IL 60025 off Milwaukee Avenue and West Lake
Avenue. Close to Allstate Insurance, A.C.
Nielson, Zenith, Dart, and Culligan
Headquarters office.
10
<PAGE>
33 Chicago/Highland Park, IL Leased from Marriott 149 06/10/88 In the north Chicago area at the
1505 Lake Cook Road International, Inc. intersection of Edens Expressway and
Highland Park, IL 60035 Lake Cook Road. Crosswoods Mall and
Northbrook Court Shopping Center are
located within one mile.
34 Chicago/Lincolnshire, IL Owned in fee 146 07/20/87 In the northwest Chicago area, 20 miles
505 Milwaukee Avenue north of Chicago O'Hare Airport, across
Lincolnshire, IL 60069 from Lincolnshire Corporate Center on
Milwaukee Avenue.
35 Chicago/Oakbrook Terrace, IL Owned in fee 147 05/09/86 Eighteen miles west of downtown Chicago
6 TransAm Plaza Drive in TransAm Plaza office development just
Oakbrook Terrace, IL 60181 off I-294 and Butterfield Road. Near
office, commercial and residential
developments in Oakbrook and Oakbrook
Terrace.
36 Chicago/Waukegan, IL Leased from Marriott 149 05/28/88 Thirty miles north of Chicago at the
800 Lakehurst Road International, Inc. intersection of Route 43 and Route 120 by
Waukegan, Il 60085 the Lakehurst Mall. The Hotel is close to
Abbott Labs, American Hospital Supply,
Johnson Outboard Marine, and Johns
Manville offices and Ft. Sheridan Great
Lakes Naval Training Center.
37 Chicago/Wood Dale, IL Leased from Marriott 149 07/02/88 In the west Chicago area at Thorndale
900 N. Wood Dale Road International Inc. Avenue and Mittel Road near Hamilton
Wood Dale, IL 60191 Lakes Office Park and Centex Industrial
Park.
38 Rockford, IL Owned in fee 147 04/12/86 Ninety miles west of Chicago just off I-90
7676 East State Road at State Street exit. Near Sundstand
Rockford, IL 61108 Headquarters, and Chrysler and Barber
Coleman offices.
39 Indianapolis/Castleton, IN Leased from Essex House 146 06/06/87 In northeast Indianapolis just off I-465 at
8670 Allisonville Road Condominium Corp. * Allisonville Road, near Castleton Mall and
Indianapolis, IN 46250 Castle Creek office development.
40 Kansas City/Overland Park, KS Leased from Marriott 149 01/14/89 South of downtown Kansas City on 112th
11301 Metcalf Avenue International, Inc. Street and Metcalf Avenue just off I-435.
Overland Park, KS 66212 Site is adjacent to Kansas City Trade
Mart/Convention Center and several complexes.
41 Lexington/North, KY Leased from Essex House 146 06/04/88 At the intersection of Newtown Pike and
775 Newtown Court Condominium Corp.* New Circle Road in the northwest section
Lexington, KY 40511 of Lexington. Close to I-75, IBM,
University of Kentucky and Kentucky horse
farms.
42 Annapolis, MD Leased from Essex House 149 03/04/89 On southwest corner of Riva Road and
2559 Riva Road Admiral Cochran Drive, just west of the
Annapolis, MD 21401 U.S. 50 interchange. Site is 1/2 mile from
Riva Office Park, one mile from
Annapolis Mall and near the U.S. Naval
Academy and downtown Annapolis.
11
<PAGE>
43 Silver Spring, MD Leased from Marriott 146 08/06/88 At the intersection of U.S. 29 and
12521 Prosperity Drive International, Inc. Randolph/Cherry Hill Road, approximately
Silver Spring, MD 20904 four miles north of I-495 and two miles
west of I-95. The site is near the
Chesapeake & Potomac Telephone Company
complex, Montgomery Industrial Park,
Westfield Office Park and Seventh Day
Adventist Headquarters.
44 Boston/Andorver, MA Leased from Marriott 146 12/03/88 Sixteen miles northwest of Boston at I-93
10 Campanelli Drive International, Inc. and River Road. Site is part of Riverfront
Andover, MA 01810 Industrial Park and near offices of Digital,
Raytheon, Hewlett-Packard, and
Honeywell.
45 Detroit Airport, MI Leased from Marriott 146 12/12/87 On Merriman Road just off I-94 less than
30653 Flynn Drive International, Inc. one mile north of the entrance to Detroit
Romulus, MA 48174 Metropolitan Airport.
46 Detroit/Livonia, MI Leased from Marriott 148 03/12/88 In west Detroit at I-275 and Six Mile
17200 N. Laurel Park Drive International, Inc. Road. The site is part of the Laurel Park
Livonia, MI 48152 office and retail development and near the
Plymouth Road industrial and office
developments.
47 Minneapolis Airport, MN Leased from Essex House 146 06/13/87 Two miles southeast of Minneapolis/St.
1352 Northland Drive Condominium Corp. * Paul Airport just off I-494 and Pilot Knob
Mendota Heights, MN 55120 Road in Mendota Heights near Northwest
Airlines headquarters and major office
developments.
48 St. Louis/Creve Coeur, MO Leased from Essex House 154 07/22/87 Eighteen miles east of downtown St. Louis
828 N. New Ballas Road Condominium Corp. * and nine miles southwest of Lambert-
Creve Coeur, MO 63146 St. Louis International Airport just off I-
270 at Olive Road. Near Monsanto
Headquarters and Creve Coeur Executive
Park.
49 St. Louis/Westport, MO Leased from Marriott 149 08/20/88 In northwest St. Louis, just off I-270 at
11888 Westline Industrial Drive International, Inc. the corner of Page Avenue and Westport
St. Louis, MO 63146 Plaza Drive. The site is near Westport
Plaza and close to several commercial and
light industrial offices, including offices
for Monsanto, DuPont, General Motors, and
Wausau Insurance.
50 Lincroft/Red Bank, NJ Leased from Marriott 146 05/28/88 Fifty-five miles south of New York City at
245 Half Mile Road International, Inc. Exit 109 of the Garden State Parkway
Red Bank, NJ 07701 (The Newman Road interchange). Near
Bell Laboratories and American Bell
offices and Fort Monmouth, the Garden
State Arts Center and Red Bank.
51 Poughkeepsie, NY Leased from Pizzgalli 149 06/04/88 Just west of Rt. 9, approximately three
408 South Road Investment Company miles south of downtown Poughkeepsie.
Poughkeepsie, NY It is one mile north of IBM's main office
and manufacturing center.
52 Rye, NY Leased from Essex House 145 03/19/88 In Westchester County, New York at the
631 Midland Avenue Condominium Corp. * intersection of I-95 and I-287. Near
Rye, NY 10580 corporate, commercial and residential
developments in Rye and White Plains.
12
<PAGE>
53 Charlotte/South Park, NC Leased from Queens 149 03/25/89 Four miles south of downtown Charlotte
6023 Park South Drive Properties, Inc. and east of I-77 near intersection of
Charlotte, NC 28210 Fairview Road and Park Road. The hotel
is located one mile from the headquarters
of Celanese Corporation and J.A. Jones
and near offices of IBM and Burroughs.
54 Raleigh/Cary, NC Leased from Marriott 149 06/25/88 Approximately 10 miles southwest of
102 Edinburgh Drive South International, Inc. Raleigh at the intersection of U.S. 64 and
Cary, NC 27511 Edinburgh Drive in the MacGregor office
and shopping park. Near IBM, Hewlett-
Packard, Borg-Warner, and Union Carbide
office.
55 Dayton Mall, OH Leased from Marriott 146 09/19/87 Seven miles south of downtown Dayton,
100 Prestige Place International, Inc. just off I-75 at Route 725. The site is 1/4
Miamisburg, OH 45342 mile from Dayton Mall and four miles
from NCR Headquarters in the premier
suburban office, commercial, retail and
residential area.
56 Toledo, OH Leased from Marriott 149 04/30/88 At intersection of Airport Road and I-475,
1435 East Mall Drive International, Inc. two miles from Toledo Airport. Close to
Holland, OH 43528 NCR, Dana Corporation and Commerce
Executive Park.
57 Oklahoma City Airport, OK Leased from Marriott 149 07/23/88 Just off I-40 at Meridian Interchange on
4301 Highline Boulevard International, Inc. Highland Blvd., four miles north of Will
Oklahoma City, OK 73108 Rogers World Airport and five miles from
downtown.
58 Portland-Beaverton, OR Leased from Marriott 149 02/11/89 On Hall Boulevard, 1/4 mile from
8500 S.W. Nimbus Drive International, Inc. Highway 217 in Koll Business Center, and
Beaverton, OR 97005 1/2 mile from Washington Square Mall in
southwest Portland.
59 Philadelphia/Devon, PA Leased from Three Devon 149 11/19/88 At Route 30 (Lancaster Avenue) and Old
762 W. Lancaster Ave. Square Associates Eagle School Road. Near Wyeth
Wayne, PA 19087 International, Chilton, and Fidelity Mutual
Corporate Headquarters and Villanova
University and Immaculata College.
60 Columbia, SC Leased from Marriott 149 01/28/89 On Zimalcrest Drive on southwest corner
347 Zimalcrest Drive International, Inc. of I-20 and I-126 in northwest Columbia.
Columbia, SC 29210 The site is within 10 minutes of the
Columbia Metropolitan Airport,
downtown, and the University of South
Carolina.
61 Greenville, SC Leased from Essex House 146 03/05/88 In suburban Greenville at intersection of I-
70 Orchard Park Drive Condominium Corp. * 385 and Haywood Road, four miles from
Greenville, SC 29615 downtown Greenville, 1/2 mile from
Haywood Mall, and eight miles from
Greenville/Spartanburg Jetport.
62 Memphis Airport, TN Leased from Essex House 145 07/15/87 One mile from Memphis International
1780 Nonconnah Boulevard Condominium Corp. * Airport just off I-240 and Mill Branch
Memphis, TN 38132 Road. Site is near Federal Express
headquarters and in Nonconnah Corporate
Center, which contains the office of
Nationwide Insurance.
13
<PAGE>
63 Nashville Airport, TN Leased from Essex House 145 01/23/88 On the northeast corner of Elm Hill Pike
2508 Elm Hill Pike Condominium Corp. * and McGavock Street, two miles from
Nashville, TN 37214 Nashville Metro Airport, six miles south
of Opryland USA and eight miles from
downtown Nashville.
64 Dallas/Northeast, TX Leased from Marriott 149 01/16/88 Off central expressway (Route 75) and
1000 South Sherman International, Inc. Spring Valley Road in Spring Valley
Richardson, TX 75081 Business Park, near Texas Instruments and
EDS.
65 Dallas/Plano, TX Owned in fee 149 05/07/88 In north Dallas at the intersection of
4901 W. Plano Parkway Preston Road and Plano Parkway. The
Plano, TX 75093 site is near EDS, Frito-Lay, and J.C.
Penney Headquarters.
66 Dallas/Stemmons, TX Leased from Essex House 146 09/12/87 At I-35 and Northwest Highway within
2383 Stemmons Trail Condominium Corp. * five miles of the high concentration of
Dallas, TX 75220 offices in the Dallas Market Center area.
67 San Antonio/Downtown, TX Leased from Essex House 149 02/30/90 On the southeast corner of Santa Rosa and
600 Santa Rosa South Condominium Corp. * Durango Boulevard 1/2 mile from I-35
San Antonio, TX 78204 and Durango interchange in downtown
San Antonio, 1/2 mile from Market Square and
one mile from Riverwalk and Hemisfair
Plaza.
68 Charlottesville, VA Leased from Marriott 150 01/21/89 On Highway 29 next to Fashion Square
638 Hillsdale Drive International, Inc. Mall, approximately five miles north of
Charlottesville, VA 22901 the University of Virginia.
69 Manassas, VA Leased from Marriott 149 03/04/89 West of Washington, D.C. at I-66 and
10701 Battleview Parkway International, Inc. Route 234 (Sudley Road), near Atlantic
Manassas, VA 22110 Research, IBM, and Manassas Battlefield
Park.
70 Seattle/Southcenter, WA Leased from Marriott 149 03/11/89 Near Sea/Tac Airport at the intersection of
400 Andover Park West International, Inc. Stander Boulevard and Andover Park West
Tukwila, WA 98188 within 1/4 mile of Southcenter Mall and
Boeing Computer Services Headquarters.
Close to Tukwila's office and industrial
parks.
* Essex House Condominium Corporation is a subsidiary of Marriott International, Inc.
14
</TABLE>
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Associates 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 Associates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP UNITS
AND RELATED SECURITY HOLDER MATTERS
None.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents historical operating information
for Associates for each of the five years in the period ended December 31, 1996
as if it were a separate subsidiary of the Partnership for all periods
presented. The Partnership's historical basis in the assets and liabilities have
been carried over. For periods prior to January 24, 1996, the accompanying
financial statements reflect the pushed-down effects of an equivalent principal
amount of the Partnership's then outstanding indebtedness.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues..................................$ 133,182 $ 121,737 $ 112,392 $ 102,916 $ 93,434
============ ============ ============ ============ ============
Net income (loss).........................$ 24,061 $ 18,977 $ 6,160 $ 5,085 $ (4,972)
============ ============ ============ ============ ============
Total assets..............................$ 526,887 $ 526,783 $ 531,362 $ 546,427 $ 563,313
============ ============ ============ ============ ============
Total liabilities.........................$ 445,777 $ 468,876 $ 464,583 $ 461,391 $ 460,184
============ ============ ============ ============ ============
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis addresses results of operations for the
fiscal years ended December 31, 1996, 1995 and 1994. The consolidated financial
statements of Associates present the financial position, results of operations
and cash flows of Associates and its subsidiaries (CBM Funding and Associates
II) as if Associates were a separate subsidiary of Courtyard by Marriott II
Limited Partnership (the "Partnership") for all periods presented. The
Partnership's historical basis in the assets and liabilities contributed to
Associates and such subsidiaries has been carried over. The consolidated
financial information has been restated, under "pushdown" accounting for all
fiscal periods presented to reflect the transfer of substantially all the assets
of the Partnership to Associates and Associates II in connection with the
refinancing and the allocation to Associates of $410,200,000 of the
Partnership's mortgage debt repaid with the proceeds of the Certificates.
Changes in Investment in and Net Advances to Associates for all periods
presented represent the net income of Associates and subsidiaries net of cash
transferred to the Partnership. There are no terms of settlement or interest
charges associated with the Investment in and Net Advances to Associates
balance.
On December 22, 1995, substantially all of the assets of Associates were
contributed to Associates by the Partnership. During the period from 1994
through 1996, Associates revenues grew from $112.4 million to $133.2 million,
while Associates' total hotel sales grew from $232.1 million to $263.7 million.
Growth in room sales, and thus hotel sales, is primarily a function of combined
average occupancy and room rates. The Hotels' combined average room rate
increased by $9.53 from $66.95 to $76.48, while the combined average occupancy
decreased slightly from 81% to 80%.
Associates' operating costs and expenses are, to a great extent, fixed.
Therefore, Associates derives substantial operating leverage from increases in
revenue. This operating leverage is offset in part by variable expenses,
including (i) base and Courtyard management fees under the management agreement,
which are 3 1/2% and 2 1/2% of gross hotel sales, respectively and (ii) variable
ground lease payments.
16
<PAGE>
RESULTS OF OPERATIONS
The following table shows selected combined operating and financial statistics
for the Hotels (in thousands, except combined average occupancy, combined
average daily room rate, REVPAR and number of rooms):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996 1995 1994
-------------- ------------ --------------
<S> <C> <C> <C>
Combined average occupancy............................................. 80.4% 81.4% 81.1%
Combined average daily room rate.......................................$ 76.48 $ 71.49 $ 66.95
REVPAR.................................................................$ 61.49 $ 58.19 $ 54.30
Number of rooms........................................................ 10,355 10,335 10,335
Room sales.............................................................$ 235,861 $ 218,955 $ 204,203
Food and beverage sales................................................ 18,227 17,628 18,483
Other hotel sales...................................................... 9,619 9,242 9,396
------------ ------------ ------------
Total hotel sales.................................................... 263,707 245,825 232,082
Direct hotel operating costs and expenses.............................. 130,525 124,088 119,690
------------ ------------ ------------
Revenues...............................................................$ 133,182 $ 121,737 $ 112,392
============ ============ ============
</TABLE>
The following table shows selected components of Associates' operating income as
a percentage of total hotel sales.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1995 1994
------------ ------------- ----------
<S> <C> <C> <C>
Hotel sales:
Room sales............................................................. 89.4% 89.1% 88.0%
Food and beverage sales................................................ 6.9 7.2 8.0
Other ................................................................. 3.7 3.7 4.0
------------ ------------ -----------
Total hotel sales.................................................. 100.0 100.0 100.0
Direct operating costs and expenses.................................... 49.5 50.5 51.6
------------ ------------ -----------
Revenues............................................................... 50.5 49.5 48.4
Indirect hotel operating costs and expenses:
Depreciation......................................................... 10.2 11.3 12.1
Base and Courtyard management fees................................... 6.0 6.0 6.0
Ground rent.......................................................... 4.5 4.7 4.6
Property taxes....................................................... 3.6 3.8 4.1
Incentive management fees............................................ 4.6 4.3 4.1
Insurance and other.................................................. .1 (0.1) 0.8
------------ ------------ -----------
Total indirect hotel operating costs and expenses.................... 29.0 30.0 31.7
------------ ------------ -----------
Operating income................................................... 21.5% 19.5% 16.7%
============ ============ ===========
</TABLE>
1996 Compared to 1995:
Revenues. Revenues (hotel sales less direct hotel operating costs and expenses)
increased by $11.4 million in 1996, to $133.2 million, a 9.4% increase when
compared to 1995. This increase in revenues was achieved primarily through an
increase in hotel sales offset by an increase in hotel operating costs and
expenses, as discussed below.
17
<PAGE>
Hotel sales. Total 1996 hotel sales of $263.7 million represented a $17.9
million, or 7.3%, increase over 1995 results. This increase was achieved
primarily through increases in the combined average room rate from $71.49 in
1995 to $76.48 in 1996. As a result, 1996 room sales increased by $16.9 million,
or 7.7%, to $235.9 million from $219.0 million in 1995 despite a one percent
decrease in occupancy to 80.4% during 1996. Forty of the Partnership's 70 Hotels
posted occupancy rates exceeding 80% for 1996.
Direct hotel operating costs and expenses. Direct hotel operating costs and
expenses in 1996 increased $6.4 million, or 5.2%. The increase in direct hotel
operating costs and expenses is primarily due to an increase in certain variable
costs related to the increase in room sales. However, as a percentage of total
hotel sales, these costs and expenses decreased to 49.5% in 1996 as compared to
50.5% in 1995.
Indirect hotel operating costs and expenses. Indirect hotel operating costs and
expenses increased by $3.9 million, or 5.3%, from $72.4 million in 1995 to $76.3
million in 1996. As a percentage of total hotel sales these costs and expenses
decreased to 29.0% of total hotel sales in 1996 from 30.0% in 1995. The
components of this category are discussed below:
Depreciation. Depreciation decreased slightly in 1996 as compared to 1995
due to a portion of the Hotels' furniture and equipment becoming fully
depreciated in 1995.
Base and Courtyard management fees. The increase in base and Courtyard
management fees of 7.4%, from $14.7 million in 1995 to $15.8 million in 1996 is
due to the improved combined hotel sales for the 70 Hotels for 1996 when
compared to 1995.
Ground rent. The 1996 ground rent expense of $11.9 million represents a 3.0%
increase over 1995 levels as improved hotel operations resulted in Hotels paying
more ground rent as a percent of sales rather than the minimum rent. As a
percentage of total hotel sales, ground rent expense was 4.5% and 4.7% in 1996
and 1995, respectively.
Incentive management fees. In 1996 $12.0 million of incentive management fees
were earned as compared to $10.5 million earned in 1995. The increase in
incentive management fees earned was the result of improved combined hotel
operating results.
Operating income. Operating income (hotel revenues less all costs and expenses
other than interest expense) increased by $8.4 million to $56.5 million in 1996,
from $48.1 million in 1995, primarily due to revenues.
Interest expense. Interest expense increased 11.6% to $32.5 million in 1996 from
$29.1 million in 1995. This increase in interest expense was due to the
refinancing of debt at fixed rates which are higher than the prior year's
variable interest rates. The weighted average interest rate in 1996 was 6.6% as
compared to 6.5% in 1995.
Net income. In 1996, Associates had net income of $24.1 million, an increase of
$5.1 million from 1995's net income of $19.0 million. This increase was
primarily due to higher revenues.
18
<PAGE>
1995 Compared to 1994:
Revenues. Revenues (hotel sales less direct hotel operating costs and expenses)
increased by $9.3 million in 1995, to $121.7 million, a 8.3% increase when
compared to 1994. This increase in revenues was achieved primarily through an
increase in hotel sales offset by an increase in operating costs and expenses,
as discussed below.
Hotel sales. Total 1995 hotel sales of $245.8 million represented a $13.7
million, or 5.9%, increase over 1994 results. This increase was achieved
primarily through increases in the combined average room rate from $66.95 in
1994 to $71.49 in 1995. As a result, 1995 room sales increased by $14.8 million,
or 7.2%, to $219.0 million from $204.2 million in 1994 despite stable occupancy
of approximately 81% during these periods. Forty-five of the Partnership's 70
Hotels posted occupancy rates exceeding 80% for 1995. Food and beverage sales
decreased by 4.6% from $18.5 million in 1994 to $17.6 million in 1995 as a
result of the Manager's continued efforts to match restaurant service to
customer demands by eliminating under-utilized services at low volume
restaurants.
Direct hotel operating costs and expenses. Direct hotel operating costs and
expenses in 1995 increased $4.4 million, or 3.7%. The increase in direct hotel
operating costs and expenses is primarily due to an increase in certain variable
costs related to the increase in room sales. However, as a percentage of total
hotel sales, these costs and expenses decreased to 50.5% in 1995 as compared to
51.6% in 1994.
Indirect hotel operating costs and expenses. Indirect hotel operating costs and
expenses decreased by $.4 million, or .5%, from $72.8 million in 1994 to $72.4
million in 1995. As a percentage of total hotel sales these costs and expenses
decreased to 30.0% of total hotel sales in 1995 from 31.4% in 1994. The
components of this category are discussed below:
Depreciation. Depreciation decreased slightly in 1995 as compared to 1994
due to a portion of the Hotels' furniture and equipment becoming fully
depreciated in 1994.
Base and Courtyard management fees. The increase in base and Courtyard
management fees of 5.9%, from $13.9 million in 1994 to $14.7 million in 1995 is
due to the improved combined hotel sales for the 70 Hotels for 1995 when
compared to 1994.
Ground rent. The 1995 ground rent expense of $11.5 million represents a 7.1%
increase over 1994 levels as improved hotel operations resulted in more Hotels
paying ground rent as a percent of sales rather than the minimum rent. As a
percentage of total hotel sales, ground rent expense remained the same at 4.7%
in 1994 and 1995.
Incentive management fees. In 1995 $10.5 million of incentive management fees
were earned as compared to $9.4 million earned in 1994. The increase in
incentive management fees earned was the result of improved combined hotel
operating results.
Operating income. Operating income (hotel revenues less all costs and expenses
other than interest expense) increased by $9.0 million to $48.1 million in 1995,
from $39.1 million in 1994, primarily due to higher hotel sales.
19
<PAGE>
Interest expense. Interest expense decreased 11.6% to $29.1 million in 1995 from
$32.9 million in 1994. This decrease in interest expense was due to the
expiration of the interest rate swaps on Mortgage Debt A and Mortgage Debt B on
August 4, 1994 and October 18, 1994, respectively. Incremental interest expense,
as a result of the interest rate swaps, was $15.0 million for 1994.
Net income. In 1995, Associates had net income of $19.0 million, an increase of
$12.8 million, over 1994's net income of $6.2 million. This increase was
primarily due to higher revenues and lower interest expense due to the
expiration of the interest rate swap agreements.
CAPITAL RESOURCES AND LIQUIDITY
Principal Sources and Uses of Cash
Associates' principal source of cash is cash from operations. Its principal uses
of cash are to make debt service payments, fund the property improvement fund,
and to make distributions to the partners. Cash provided from operations was
$46.1 million, $42.6 million and $39.4 million for the years ended December 31,
1996, 1995 and 1994, respectively. During 1996, Associates repaid $11.3 million
of principal on the Certificates, as defined below, and paid $33.9 million of
interest. Associates paid $32.1 million and $36.1 million in interest in 1995
and 1994, respectively. No principal payments were made on the mortgage debt in
1995 or 1994. Contributions to the property improvement fund were $13.2 million,
$12.3 million and $11.8 million for the years ended December 31, 1996, 1995, and
1994, respectively. Distributions to partners were $17.4 million in 1996.
Refinancing
Associates Structure
On January 24, 1996, the Partnership completed a refinancing of the
Partnership's existing debt through the private placements of $127.4 million of
senior secured notes (the "Senior Notes") and $410.2 million of multi-class
commercial mortgage pass-through certificates (the "Certificates").
In connection with the refinancing, the limited partners of the Partnership
approved certain amendments to the partnership agreement and the management
agreement. The partnership agreement amendment, among other things, allowed the
formation of certain subsidiaries of the Partnership, including Courtyard II
Finance Company ("Finance"), a wholly-owned subsidiary of the Partnership, who
along with the Partnership is the co-issuer of the Senior Notes.
Additionally, the Partnership formed a wholly-owned subsidiary, Courtyard II
Associates Management Corporation ("Managing General Partner"). Managing General
Partner was formed to be the managing general partner with a 1% general partner
interest in Courtyard II Associates, L.P. ("Associates"), a Delaware limited
partnership. The Partnership owns a 1% general partner interest and a 98%
limited partner interest in Associates. On January 24, 1996, the Partnership
contributed 69 Hotels and their related assets to Associates. Substantially all
of Associates' net equity will be restricted to dividends, loans or advances to
the Partnership.
20
<PAGE>
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 who simultaneously contributed the Hotel and its related assets
to Associates II.
Each of the Managing General Partner, Associates and Associates II were formed
as a single purpose bankruptcy-remote entity to facilitate the refinancing.
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.
Debt Refinancing - Overview
On January 24, 1996, net proceeds from the placement of the Senior Notes and the
Certificates and existing Partnership cash were used as follows: (i) to repay
the Partnership's existing bank indebtedness of $505.5 million (ii) to repay the
IRB Debt of $25.6 million, (iii) to repay the Host Marriott IRB Liability loans
of $6.5 million and (iv) to pay certain costs of structuring and issuing the
Senior Notes and the Certificates.
Prior to the completion of the refinancing on January 24, 1996, Host Marriott or
its wholly owned subsidiary, CBM Two Corporation, (the "General Partner" of the
Partnership) provided additional credit support to the Partnership through the
following: (i) debt service guarantees on the bank indebtedness, (ii)
foreclosure guarantees on the bank indebtedness, (iii) obligations to advance
funds related to the IRB Debt and (iv) a facility for the Partnership to borrow
funds to pay ground rent (the "Ground Rent Facility"). Upon repayment of the
bank indebtedness, and the IRB Debt, Host Marriott was released from these
obligations.
Debt Refinancing - Certificates
The Certificates in an initial principal payment of $410.2 million were issued
by CBM Funding. Proceeds from the sale of the Certificates were utilized by CBM
Funding to provide a Mortgage Loan to Associates. The Certificates/Mortgage Loan
require monthly payments of principal and interest based on a 17-year
amortization schedule. The Mortgage Loan matures on January 28, 2008. However,
the maturity date of the Certificates/Mortgage Loan may be extended until
January 28, 2013 with the consent of 66 2/3% of the holders of the outstanding
Certificates affected thereby. The Certificates were issued in the following
classes and pass-through rates of interest.
Initial Certificate Pass-Through
Class Balance Rate
- ------------------- ------------------------ --------------
Class A-1 $ 45,500,000 7.550%
Class A-2 $ 50,000,000 6.880%
Class A-3P & I $ 129,500,000 7.080%
Class A-3IO Not Applicable 0.933%
Class B $ 75,000,000 7.480%
Class C $ 100,000,000 7.860%
Class D $ 10,200,000 8.645%
21
<PAGE>
The Class A-3IO Certificates receive payments of interest only based on a
notional balance equal to the Class A-3P & I Certificate Balance.
The balance of the Certificates was $398,853,000 at December 31, 1996. Principal
amortization of $11.3 million of the Class A-1 Certificates was made during
1996.
The Certificates maturities are as follows (in thousands):
1997 $ 13,298
1998 14,331
1999 15,443
2000 16,642
2001 17,934
Thereafter 321,205
$ 398,853
The Mortgage Loan is secured primarily by 69 cross-defaulted and
cross-collateralized mortgages representing first priority mortgage liens on (i)
the fee or leasehold interest in the 69 Hotels, related furniture, fixtures and
equipment and the property improvement fund, (ii) the fee interest in the land
leased from MII or their affiliates on which 53 Hotels are located, (iii) a
pledge of Associates membership interest in and the related right to receive
distributions from Associates II which owns the Deerfield Hotel and (iv) an
assignment of the Management Agreement, 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, see Item 13 "Certain Relationships and
Related Transactions," and (v) for distributions to the partners of the
Partnership.
Prepayments of the Mortgage Loan are permitted with the payment of a premium
(the "Prepayment Premium"). The Prepayment Premium is equal to the greater of
(i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance
amount based on a spread of .25% or .55% over the U.S. treasury rate, as
defined.
On June 30, 1996, CBM Funding completed an exchange offer of its Multiclass
Mortgage Pass- Through Certificates, Series 1006-1A with a principal balance of
$406.2 million at that time ("Old Certificates"), for an equal amount of
Multiclass Mortgage Pass-Through Certificates, Series 1996-1B ("New
Certificates"). The form and terms of the New Certificates are substantially
identical to the form and terms of the Old Certificates, except that the New
Certificates are registered under the Securities Act of 1933, as amended and
their transfers are not restricted.
22
<PAGE>
Deferred Management Fees and Ground Lease Payments
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").
Under the Management Agreement that became effective on December 30, 1995, the
Manager agreed to subordinate a portion of the Courtyard management fees and all
incentive management fees, and under an amendment to the ground leases with
Marriott International, Inc. and its affiliates (the "Marriott Ground Lessors")
that became effective on January 24, 1996, the Marriott Ground Lessors agreed to
subordinate their ground rent payments, to the payment of interest, principal
and premiums on the Mortgage Loan and the Senior Notes and debt incurred to
refinance the Mortgage Loan or the Senior Notes that meets specified criteria.
In addition, the Manager agreed to subordinate existing deferred base, Courtyard
and incentive management fees to the payment of debt service.
Deferred base, Courtyard and incentive management fees do not accrue interest
and will be repaid from a portion of operating cash flow but only after payment
of (i) debt service, (ii) a priority return to the Partnership and (iii) certain
other priorities as defined in the Management Agreement. Deferred ground rent
owed to the Marriott Ground Lessors does not accrue interest and will be repaid
from a portion of operating cash flow, but only after payment of debt service.
Payment of such deferred fees and deferred ground rent are restricted payments
under the covenants of the Senior Notes.
Historically, under the management agreement, the Manager subordinated receipt
of the Courtyard management fee to the payment of debt service (through the debt
refinancing date of January 24, 1996) and a 6% return to the limited partners
(through 1993). The Manager also agreed to defer payment of the base management
fee to the extent cash was not otherwise available to provide a 6% return to the
limited partners (through 1993). As of December 31, 1996, cumulative deferred
base and Courtyard management fees totaled $30.2 million.
Prior to 1994 no incentive management fees were earned by the Manager. For the
year ended December 31, 1995, $10.5 million in incentive management fees were
earned and paid to the Manager. For the year ended December 31, 1996, $12.0
million in incentive management fees were earned and $11.4 million were paid.
Therefore, $.6 million was deferred in 1996. In the future, additional incentive
management fees may be earned, but payment will be limited by the terms of the
Management Agreement to 80% of the amount by which operating profit less debt
service exceeds the priority return to the Partnership.
The priority return to the Partnership, as defined, was reduced from 10% of
invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 10%
for 1999 and thereafter. Operating profit from the Hotels (which reflects the
deduction of the base and Courtyard management fees and MII ground rent) will be
used to pay the following, in order of priority: (i) debt service on the Senior
Notes and Mortgage Loan, (ii) to repay working capital loans to the Manager,
(iii) to repay deferred ground rent to MII and their affiliates, (iv) to repay
ground lease advances to MII and their affiliates, (v) the priority return to
the Partnership which is 7% of invested capital for 1996, (vi) eighty percent of
the remaining operating profit is applied to
23
<PAGE>
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. In 1996, the Partnership had $2.5 million of
remaining operating profit after the payment of i) through viii) above. Fifty
percent of this remaining operating profit was used to repay a portion of 1996
deferred incentive management fees to the Manager and the remainder was paid to
the Partnership.
Property Improvement Fund
The Management Agreement requires annual contributions to a property improvement
fund to ensure that the physical condition and product quality of the Hotels are
maintained. Contributions to this fund are based on a percentage of annual total
hotel sales, currently equal to 5%. The Partnership believes that the 5%
contribution requirement is consistent with industry standards and provides a
sufficient reserve for the future capital repair and replacement needs of the
Hotels. In accordance with the Management Agreement, the annual required
contribution percentage may increase to up to 6% after December 31, 2000. The
balance in the fund totaled $36.6 million as of December 31, 1996. During the
period from 1992 through 1995, room renovation projects were completed at all of
the Hotels at an aggregate cost of approximately $30.7 million. Total capital
expenditures for 1996, 1995 and 1994 were $11.2 million, $8.8 million and $13.4
million, respectively. All such capital expenditures were funded from the
property improvement fund.
General
The General Partners believe that cash from hotel operations combined with the
ability to defer certain management fees to the Manager and ground rent payments
to MII and affiliates will provide adequate funds in the short term and long
term for the operational and capital needs of Associates.
Competition
The moderately priced lodging segment continues to be highly competitive. An
increase in supply growth began in 1996 with the introduction of a number of new
national brands. For 1997, the outlook continues to be positive. Courtyards
continue to command a premium share of the markets in which they are located in
spite of the growth of new chains. It is expected that Courtyard will continue
outperforming both national and local competitors. The brand is continuing to
carefully monitor the introduction of new mid-priced brands including Wingate
Hotels, Hilton Garden Inns, Four Points by Sheraton, Mainstay, Candlewood, Club
Hotels and Clarion.
24
<PAGE>
Inflation
The rate of inflation has been relatively low in the past four years. The
Manager is generally able to pass through increased costs to customers through
higher room rates and prices. In 1996, average rates of Courtyard hotels
exceeded inflationary costs, but lagged the increases of direct competitors who
have been able to realize higher rates due to climbing occupancies. On January
24, 1996, the Company refinanced its mortgage debt and fixed its interest costs
thereby eliminating the Company's exposure to the impact of inflation on future
interest costs.
Seasonality
Demand, and thus room occupancy, is affected by normally recurring seasonal
patterns. For most of the Hotels, demand is higher in the spring and summer
months (March through October) than during the remainder of the year.
Forward-Looking Statements
Certain matters discussed herein are forward-looking statements within the
meaning of the Private Litigation Reform Act of 1995 and as such may involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance or achievements of Associates to be different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Although Associates believes the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, it can give no assurance that its expectations will be attained.
These risks are detailed from time to time in Associates' filings with the
Securities and Exchange Commission. Associates undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
that may be made to reflect any future events or circumstances.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Index Page
<S> <C>
Report of Independent Public Accountants........................................................ 27
Consolidated Statement of Operations............................................................ 28
Consolidated Balance Sheet...................................................................... 29
Consolidated Statement of Changes in Partners' Capital.......................................... 30
Consolidated Statement of Cash Flows............................................................ 31
Notes to Consolidated Financial Statements...................................................... 33
</TABLE>
26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO COURTYARD II ASSOCIATES LIMITED PARTNERSHIP 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, 1996 and 1995, and the related consolidated statements of
operations and cash flows for each of the three years in the period ended
December 31, 1996 and the statement of changes in partners' capital for the
period from January 24, 1996 to December 31, 1996. These financial statements
and the schedule referred to below are the responsibility of the General Partner
of Courtyard by Marriott II Limited Partnership. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an 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, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at Item
14(a)(2) is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 13, 1997
27
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
Courtyard II Associates, L.P. and Subsidiaries
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
------------ ------------- --------
<S> <C> <C> <C>
REVENUES (Note 3).............................................................$ 133,182 $ 121,737 $ 112,392
------------ ------------- ------------
OPERATING COSTS AND EXPENSES
Interest ................................................................... 32,463 29,080 32,897
Depreciation ............................................................... 27,062 27,720 27,980
Base and Courtyard management fees ......................................... 15,822 14,749 13,925
Incentive management fee.................................................... 12,040 10,480 9,403
Ground rent................................................................. 11,899 11,550 10,787
Property taxes.............................................................. 9,537 9,324 9,453
Insurance and other......................................................... 290 (143) 1,787
------------ ------------- ------------
......................................................................... 109,113 102,760 106,232
- -- ------------ ------------- ------------
NET INCOME BEFORE MINORITY INTEREST........................................... 24,069 18,977 6,160
MINORITY INTEREST............................................................. 8 -- --
------------ ------------- ------------
NET INCOME....................................................................$ 24,061 $ 18,977 $ 6,160
============ ============= ============
ALLOCATION OF NET INCOME
General Partners............................................................$ 481 $ 380 $ 123
Limited Partner............................................................. 23,580 18,597 6,037
------------ ------------- ------------
.........................................................................$ 24,061 $ 18,977 $ 6,160
============ ============= ============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
Courtyard II Associates, L.P. and Subsidiaries
December 31, 1996 and 1995
(in thousands)
1996 1995
------------ --------
<S> <C> <C>
ASSETS
Property and equipment, net................................................................$ 458,687 $ 474,480
Deferred financing costs, net of accumulated amortization.................................. 12,273 12,127
Due from Courtyard Management Corporation.................................................. 13,315 7,078
Prepaid expenses........................................................................... 28 --
Property improvement fund.................................................................. 36,582 33,098
Cash and cash equivalents.................................................................. 6,002 --
------------ ------------
.....................................................................................$ 526,887 $ 526,783
- -- ============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt..............................................................................$ 398,853 $ 410,200
Management fees due to Courtyard Management Corporation.................................... 36,442 35,809
Due to Marriott International, Inc. and affiliates......................................... 9,169 9,402
Accounts payable and accrued liabilities................................................... 1,305 12,718
Due to Host Marriott Corporation........................................................... -- 747
------------ ------------
Total Liabilities.................................................................... 445,769 468,876
------------ ------------
MINORITY INTEREST............................................................................ 8 --
------------ ------------
.................................................................................... 445,777 468,876
------------ ------------
PARTNERS' CAPITAL (See discussion of distribution restrictions in Note 2)
General Partners........................................................................... 1,622 --
Limited Partner............................................................................ 79,488 --
Investment in and net advances to Associates............................................... -- 57,907
------------ ------------
Total Partners' Capital.............................................................. 81,110 57,907
------------ ------------
.....................................................................................$ 526,887 $ 526,783
- ---------------------------------------------------------------------------------------------============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN
PARTNERS' CAPITAL
Courtyard II Associates, L.P. and Subsidiaries
For the Period from January 24, 1996 through December 31, 1996
(in thousands)
General Limited
Partners Partner Total
<S> <C> <C> <C>
Initial capitalization as of January 24, 1996................................ 1,489 72,938 74,427
Capital distributions.................................................... (348) (17,030) (17,378)
Net income................................................................ 481 23,580 24,061
---------- ------------ -----------
Balance, December 31, 1996...................................................$ 1,622 $ 79,488 $ 81,110
========== ============ ===========
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Courtyard II Associates, L.P. and Subsidiaries
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
----------- ---------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.......................................................................$ 24,061 $ 18,977 $ 6,160
Noncash items:
Depreciation.................................................................. 27,062 27,720 27,980
Amortization of deferred financing costs as interest.......................... 1,195 493 454
Deferred management fees...................................................... 633 -- 5,564
Minority Interest............................................................. 8 -- --
Deferred interest on IRB advances from Host Marriott Corporation.............. -- 147 260
(Gain) loss on sale of equipment.............................................. -- (12) 1,185
Changes in operating accounts:
Due from Courtyard Management Corporation..................................... (3,737) 1,311 (2,260)
Accounts payable and accrued liabilities...................................... (2,309) (5,911) (2,710)
Due to Host Marriott Corporation.............................................. (798) -- --
Prepaid expenses and other.................................................... (28) 137 (138)
Management fees due to Courtyard Management Corporation....................... -- (162) --
Due to Marriott International, Inc. .......................................... -- (106) (64)
----------- ---------- -----------
Cash provided by operations................................................ 46,087 42,594 36,431
----------- ---------- -----------
INVESTING ACTIVITIES
Additions to property and equipment, net...................................... (11,269) (8,786) (13,361)
Change in property improvement fund........................................... (3,484) (5,427) 1,229
Working capital advanced to Courtyard Management Corporation.................. (2,500) -- --
----------- ---------- -----------
Cash used in investing activities.......................................... (17,253) (14,213) (12,132)
----------- ---------- -----------
FINANCING ACTIVITIES
Repayments of debt............................................................ (410,200) -- --
Proceeds from issuance of debt................................................ 410,200 -- --
Capital distributions......................................................... (17,378) -- --
Investment in and net advances to (from) Associates........................... 16,520 (28,381) (24,299)
Payment of principal.......................................................... (11,347) -- --
Payment of financing costs.................................................... (10,627) -- --
----------- ---------- -----------
Cash used in financing activities.......................................... (22,832) (28,381) (24,299)
----------- ---------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
Courtyard II Associates, L.P. and Subsidiaries
For the Years Ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
----------- ---------- --------
<S> <C> <C> <C>
INCREASE IN CASH AND CASH EQUIVALENTS..............................................$ 6,002 $ -- $ --
CASH AND CASH EQUIVALENTS at beginning of year..................................... -- -- --
----------- ---------- -----------
CASH AND CASH EQUIVALENTS at end of year...........................................$ 6,002 $ -- $ --
=========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for mortgage and other interest.....................................$ 33,978 $ 32,116 $ 36,153
=========== ========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Courtyard II Associates, L.P. and Subsidiaries
December 31, 1996 and 1995
NOTE 1. COURTYARD II ASSOCIATES, L.P. AND SUBSIDIARIES
Description
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 6). The managing general partner of
Associates is Courtyard II Associates Management Corporation (a wholly-owned
subsidiary of the Partnership) with a 1% 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 6). Associates directly owns 69 Courtyard hotels and
the land on which certain of the Hotels, as defined below, are located. One
hotel located in Deerfield, Illinois (the "Deerfield Hotel"), is owned by CBM
Associates II LLC ("Associates II"). Associates hold a 99% membership interest
in Associates II and Courtyard II Associates Management Corporation holds the
remaining 1% interest in Associates II. The 70 hotel properties (the "Hotels")
are located in 29 states in the United States: nine in Illinois; eight in
California; five in Florida; four in Georgia; four in Texas; and three or less
in each of the other 24 states. The Hotels are managed as part of the Courtyard
by Marriott hotel system by Courtyard Management Corporation (the "Manager"), a
wholly-owned subsidiary of Marriott International, Inc. ("MII").
Partnership Allocations and Distributions
Allocations and distributions for Associates are generally made in accordance
with the respective ownership interests as follows: (i) 98% to the limited
partner, the Partnership and (ii) 1% to each general partner, the Partnership
and Courtyard II Associates Management Corporation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of Associates present the financial
position, results of operations and cash flows of Associates as if it were a
separate subsidiary of the Partnership for all periods presented. The
Partnership's historical basis in the assets and liabilities contributed to
Associates have been carried over. Intercompany transactions and balances
between Associates and its subsidiaries have been eliminated. Changes in
Investment in and Net Advances to Associates for all periods presented prior to
January 24, 1996, represent the net income of Associates net of cash transferred
to the Partnership. There were no terms of settlement or interest charges
associated with the Investment in and Net Advances to Associates balance.
33
<PAGE>
An analysis of the activity in Investment in and Net Advances to Associates for
the two years ended December 31, 1995 and the period from January 1, 1996
through January 24, 1996, is as follows (in millions):
Balance, December 31, 1994....................................$ 67
Cash transfers to (from) Associates, net.................. (28)
Net income................................................ 19
Balance, December 31, 1995.................................... 58
Cash transfers to Associates, net......................... 16
Amount reclassified as Partners' Capital.................. (74)
-----
Balance, January 24, 1996.....................................$ --
The average balance for Investment in and Net Advances to Associates for each of
the years 1994 and 1995 was $76 million and $62.5 million, respectively. On
January 24, 1996, the Partnership contributed substantially all of its assets to
Associates for a 1% general partner interest and a 98% limited partner interest.
Courtyard II Associates Management Corporation owns the remaining 1% general
partner interest.
On January 24, 1996, Associates consummated the offering of $410,200,000 of
multi-class mortgage pass-through certificates (the "Certificates"), the net
proceeds of which were used to repay certain obligations of the Partnership as
discussed in Note 6. The accompanying consolidated financial statements present
the pushed-down effects of the debt which was repaid with the proceeds of the
offering as discussed in Note 6.
A concurrent offering of $127,400,000 of senior notes (the "Senior Notes") by
the Partnership was also completed on January 24, 1996. The Senior Notes are
secured by a first priority pledge of the Partnership's 99% partnership interest
in Associates and the Partnership's 100% equity interest in Courtyard II
Associates Management Corporation. As a result, the Partnership owns directly or
indirectly 100% of Associates. The Senior Notes are not reflected in the
accompanying consolidated financial statements of Associates because Associates
does not guarantee the Senior Notes nor do the assets of Associates secure the
Senior Notes. Payments on the Senior Notes are made from distributions of the
excess cash of Associates to the Partnership; such distributions are restricted
only upon a monetary event of default under the Mortgage Loan, as defined in
Note 6. The Partnership has no other source of cash flow other than
distributions from Associates.
Basis of Accounting
The records of Associates are maintained on the accrual basis of accounting and
its fiscal year coincides with the calendar year.
34
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Working Capital and Supplies
Pursuant to the terms of Associates management agreement discussed in Note 8,
Associates is required to provide the Manager with working capital and supplies
to meet the operating needs of the Hotels. The Manager converts cash advanced by
Associates into other forms of working capital consisting primarily of operating
cash, inventories, and trade receivables and payables which are maintained and
controlled by the Manager. Upon the termination of the management agreement, the
Manager is required to convert working capital and supplies into cash and return
it to Associates. As a result of these conditions, the individual components of
working capital and supplies controlled by the Manager are not reflected in the
accompanying consolidated balance sheet.
Revenues and Expenses
Revenues represent house profit from Associates' Hotels since Associates
delegated substantially all of the operating decisions related to the generation
of house profit of the Hotels to the Manager. House profit reflects hotel
operating results which flow to Associates as property owner and represents
hotel sales less property-level expenses, excluding depreciation, base,
Courtyard and incentive management fees, real and personal property taxes,
ground rent and equipment rent, insurance and certain other costs, which are
disclosed separately in the consolidated statement of operations.
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 was pledged to secure the mortgage debt described
in Note 6.
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.
35
<PAGE>
Deferred Financing Costs
Prior to 1996, deferred financing costs consist of costs incurred in connection
with obtaining Mortgage Debt A and B, as defined in Note 6. 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, 1996 accumulated amortization related to Mortgage Debt A and B,
as defined in Note 6, was $2,904,000. At December 31, 1996, costs related to
Mortgage Debt A and B were fully amortized. On January 24, 1996, the Partnership
contributed substantially all of its assets to Associates including $2,630,000
the Partnership had paid in 1995 in financing costs related to the debt
refinancing discussed in Note 6. During 1996, Associates paid $10,627,000 in
financing costs. At December 31, 1996, accumulated amortization related to the
Certificates, as defined in Note 6, was $1,023,000.
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.
Ground Rent
The land leases with MII or affiliates of MII (see Note 7) 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 which approximate 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 1996, 1995 and 1994 totalled $119,000 per year.
Income Taxes
Provision for Federal taxes has not been made in the accompanying consolidated
financial statements since Associates does not pay income taxes, but rather,
allocates its profits and losses to the individual partners.
Interest Rate Swap Agreements
Associates was a party to two interest rate swap agreements (prior to their
expiration in 1994) to reduce Associates' exposure to floating interest rates.
Associates accounted for the swap arrangements as a hedge of obligations to pay
floating rates of interest and accordingly, recorded interest expense based upon
its payment obligations at fixed interest rates. Interest expense on the
consolidated statement of operations reflects the "pushed down" effect of a
proportionate amount of total swap interest.
New Statement of Financial Accounting Standards
In the first quarter of 1996, Associates adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS
No. 121 did not have an effect on its consolidated financial statements.
36
<PAGE>
NOTE 3. REVENUES
Revenues for Associates consist of Hotel operating results for the three years
ended December 31 (in thousands):
<TABLE>
1996 1995 1994
------------ ------------- ---------
<CAPTION>
<S> <C> <C> <C>
HOTEL SALES
Rooms.....................................................................$ 235,861 $ 218,955 $ 204,203
Food and beverage......................................................... 18,227 17,628 18,483
Other..................................................................... 9,619 9,242 9,396
------------ ------------- -------------
........................................................................ 263,707 245,825 232,082
------------ -------------- -------------
HOTEL EXPENSES
Departmental Direct Costs
Rooms................................................................... 50,653 48,091 45,088
Food and beverage....................................................... 16,073 15,006 15,162
Other hotel operating expenses............................................ 63,799 60,991 59,440
------------ ------------- -------------
........................................................................ 130,525 124,088 119,690
------------ ------------- -------------
REVENUES....................................................................$ 133,182 $ 121,737 $ 112,392
============ ============= =============
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
1996 1995
------------- ---------
<S> <C> <C>
Land.........................................................................................$ 25,392 $ 25,392
Leasehold improvements....................................................................... 438,921 435,913
Building and improvements.................................................................... 78,559 77,053
Furniture and equipment...................................................................... 142,663 135,908
------------- -------------
685,535 674,266
Less accumulated depreciation................................................................ (226,848) (199,786)
------------- -------------
$ 458,687 $ 474,480
============= =============
</TABLE>
37
<PAGE>
NOTE 5. 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):
<TABLE>
<CAPTION>
As of December 31, 1996 As of December 31, 1995
------------------------------ --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial liabilities
Mortgage debt...............................................$ 398,853 $ 405,695 $ 410,200 $ 410,200
Management fees due to Courtyard
Management Corporation....................................$ 36,442 $ 16,681 $ 35,809 $ 9,995
Due to Host Marriott Corporation............................$ -- $ -- $ 747 $ 747
</TABLE>
The 1996 estimated fair value of mortgage debt obligations was based on the
quoted market prices at December 31, 1996.
The 1995 estimated fair values of mortgage debt obligations and amounts due to
Host Marriott Corporation are based on their carrying amounts as these items
were repaid on January 24, 1996. Consistent with the prior year, the 1996
management fees due to the Courtyard Management Corporation are valued based on
the expected future payments from operating cash flow discounted at risk
adjusted rates.
NOTE 6. MORTGAGE DEBT
Overview
For 1995, the accompanying consolidated financial statements reflect the
pushed-down effects of an equivalent principal amount of the Partnership's debt
which was repaid with the proceeds of the offering as discussed below.
Therefore, debt consisted of the following at December 31, 1995 (in thousands):
Partnership Associates
Mortgage Debt A.......................$ 275,000 $ 209,612
Mortgage Debt B....................... 230,500 175,976
IRB Debt.............................. 25,600 19,690
Host Marriott IRB Liability loans..... 6,489 4,922
------------- -------------
$ 537,589 $ 410,200
============= =============
The following discussion of bank mortgage debt, swaps, debt service guarantees,
foreclosure guarantees, Host Marriott IRB Liability advances and repayments and
the ground rent facility reflect actual amounts in relation to the Partnership.
Therefore, amounts discussed herein are not reflective of "push down" amounts to
Associates.
38
<PAGE>
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 net proceeds from the placement of the Senior Notes and the Certificates and
existing Partnership cash were used as follows: (i) to repay the Partnership's
existing Mortgage Debt A of $275 million and Mortgage Debt B of $230.5 million,
(ii) to repay the IRB Debt of $25.6 million, (iii) to repay advances from the
Host Marriott related to certain IRB Hotels loans of $6.5 million and (iv) to
pay certain costs of structuring and issuing the Senior Notes and the
Certificates.
Upon repayment of Mortgage Debt A and Mortgage Debt B, Host Marriott was
released from its obligations under (i) the Mortgage Debt A and Mortgage Debt B
debt service guarantees, (ii) the foreclosure guarantee and (iii) the Ground
Rent Facility as defined.
Bank Mortgage Debt
Mortgage Debt A and B were non-recourse and bore interest at a floating rate
equal to (i) the adjusted CD Rate or LIBOR, as defined, plus (ii) .75 percentage
points. Mortgage Debt A and B required no principal amortization prior to
maturity on December 15, 1995 and September 5, 1996, respectively.
During the period from 1989 through 1994, to reduce the Partnership's exposure
to floating interest rates, the Partnership entered into two swap agreements
effectively fixing the interest rates on Mortgage Note A and a large portion of
Mortgage Note B.
The combined effective interest rate for Mortgage Debt A and B was 6.67% from
January 1, 1996 through January 23, 1996, 7% for 1995, and 8.08% for 1994. The
combined average interest rate at January 23, 1996 for Mortgage Debt A and B was
6.58%.
As security for the Mortgage Debt A (36 Hotels) and Mortgage Debt B (29 Hotels)
the banks held mortgages on the Partnership's fee or leasehold interest on the
respective Hotels. The banks also had security interests under their respective
mortgages in the personal property associated with those Hotels and obtained an
assignment of the Partnership's rights under the management agreement and the
Purchase Agreement.
On December 15, 1995, the Partnership and the Mortgage Debt A lenders amended
the loan agreement to extend the maturity date of Mortgage Debt A from December
15, 1995 to February 15, 1996 (the "Extension Period"). This amendment provided
for interest during the Extension Period equal to the following:
December 16, 1995 through January 15, 1996.....Adjusted CD Rate or LIBOR plus 1
percentage point
January 16, 1996 through February 15, 1996.....Adjusted CD Rate or LIBOR plus
1.25 percentage points
In connection with the Mortgage Debt A extension, the Partnership paid an
extension fee to the Banks of $1,085,000 which was amortized as interest expense
during the Extension Period.
39
<PAGE>
Bank Mortgage Debt Guarantees
Prior to the initial refinancing, in 1987 Host Marriott had guaranteed payment
of up to $60 million of debt service on the $500 million of non-recourse
mortgage debt (the "MFS Mortgage Debt") from Marriott Financial Services, Inc.
("MFS"), a wholly-owned subsidiary of Host Marriott. As a result of the initial
refinancing, this guarantee was allocated $32.6 million to Mortgage Debt A and
$27.4 million to Mortgage Debt B. Any payments by Host Marriott under the
Mortgage Debt guarantees were treated as loans to the Partnership and bore
interest at one percentage point in excess of the prime rate of interest
announced by Bankers Trust Company of New York (the "Prime Rate").
During 1995, Host Marriott was released from its remaining original Mortgage
Debt A guarantee obligation of $32.6 million as certain debt service coverage
requirements were met. Host Marriott was released from the remaining original
guarantees on January 24, 1996, the date when Mortgage Debt A and Mortgage Debt
B were repaid in full.
During 1994, the Partnership, Manager and Mortgage Debt A and B lenders agreed
that the Partnership would establish reserve accounts for Mortgage Debt A and B
and contribute 1% of Hotel sales on the respective Mortgage Debt A and B
properties to these reserves for 1993 through the respective loan maturities.
The initial contribution, made in 1994, included the required contribution for
1993. On January 24, 1996, these reserves were used to pay costs associated with
the refinancing of these loans and to repay a portion of these loans upon
maturity.
In addition, the General Partner had provided a guarantee to MFS that, in the
event of a foreclosure, proceeds under the MFS Mortgage Debt would be at least
$75 million. This foreclosure guarantee was allocated $40.8 million to Mortgage
Debt A and $34.2 million to Mortgage Debt B. Upon completion of the debt
refinancing on January 24, 1996, Host Marriott was released from its obligations
pursuant to the foreclosure guarantee.
IRB Debt
The IRB Debt was refinanced on January 24, 1996 and the IRB Debt was repaid in
full. The $25.6 million of IRB Debt outstanding at December 31, 1995 was backed
by direct-pay letters of credit from commercial banks that would have expired in
February, November and December 1996. These issues were subject to mandatory
prepayment upon expiration of the letters of credit unless replacement letters
of credit were secured. The IRB Debt bore interest at daily, weekly or fixed
rates at the option of the Partnership, and was limited to a maximum interest
rate of 15%. During the period from January 1, 1996 through January 23, 1996,
the interest rates on the IRB Debt ranged from 2.65% to 6.1%. In 1995 and 1994,
the interest rates on the IRB Debt ranged from 1.9% to 6.1% and 1.15% to 6.05%,
respectively. The interest rate on the IRB Debt was 3.2% at January 23, 1996.
The bondholders had the right to demand purchase of any of the bonds at the
expiration of specified interest rate periods. Had the Partnership failed to
make the required payments of principal and interest on the IRB Debt, Host
Marriott would have been required to make such payments ("Host Marriott's IRB
Liability"). Through January 24, 1996, the Partnership purchased a total of
$15.4 million of bonds/IRB Debt with proceeds advanced by Host Marriott (see
below) when presented by certain bondholders. These loans bore interest at one
percentage point in excess of the Prime Rate (8.5% at January 23, 1996). The
weighted average interest rate was 9.5% for the period from January 1, 1996
through January 23, 1996, 9.83% for 1995 and 8.14% for 1994. As of December 31,
1995, $6.5 million of Host Marriott IRB Liability loans were outstanding. As
discussed above, the $6.5 million of Host Marriott IRB Liability loans were
repaid on January 24, 1996, from proceeds of the debt refinancing.
40
<PAGE>
Ground Rent Facility
Fifty-three of the Hotels are situated on land leased from MII or affiliates of
MII, eight of the Hotels are situated on land leased from third parties. MFS had
agreed to lend the Partnership up to $25 million (the "Ground Rent Facility") to
the extent that the Partnership has insufficient funds to pay ground rent under
any ground lease under certain circumstances. No amounts were ever advanced
under the Ground Rent Facility. Upon refinancing of the Partnership Debt on
January 24, 1996, MFS was released from the Ground Rent Facility.
Debt Refinancing - Certificates
The Certificates in an initial principal amount of $410.2 million were issued by
CBM Funding. Proceeds from the sale of the Certificates were utilized by CBM
Funding to provide a mortgage loan (the "Mortgage Loan") to Associates. The
Certificates/Mortgage Loan require monthly payments of principal and interest
based on a 17-year amortization schedule. The Mortgage Loan matures on January
28, 2008. However, the maturity date of the Certificates/Mortgage Loan may be
extended until January 28, 2013 with the consent of 662/3% of the holders of the
outstanding Certificates affected thereby. The Certificates were issued in the
following classes and pass-through rates of interest.
Initial Certificate Pass-Through
Class Balance Rate
------------------- ------------------- ------------
Class A-1 $ 45,500,000 7.550%
Class A-2 $ 50,000,000 6.880%
Class A-3P & I $ 129,500,000 7.080%
Class A-3IO Not Applicable 0.933%
Class B $ 75,000,000 7.480%
Class C $ 100,000,000 7.860%
Class D $ 10,200,000 8.645%
The Class A-3IO Certificates receive payments of interest only based on a
notional balance equal to the Class A-3P & I Certificate Balance.
The balance of the Certificates was $398.9 million at December 31, 1996.
Principal amortization of $11.3 million of the Class A-1 Certificates was made
during 1996. The weighted average interest rate for January 24, 1996, through
December 31, 1996, was 7.7%. The average interest rate at December 31, 1996 was
7.6%.
The Certificates maturities are as follows (in thousands):
1997 $ 13,298
1998 14,331
1999 15,443
2000 16,642
2001 17,934
Thereafter 321,205
-------------------
$ 398,853
===================
41
<PAGE>
The Mortgage Loan is secured primarily by 69 cross-defaulted and
cross-collateralized mortgages representing first priority mortgage liens on (i)
the fee or leasehold interest in the 69 Hotels, related furniture, fixtures and
equipment and the property improvement fund, (ii) the fee interest in the land
leased from MII or their affiliates on which 53 Hotels are located, (iii) a
pledge of Associates membership interest in and the related right to receive
distributions from Associates II which owns the Deerfield Hotel and (iv) an
assignment of the Management Agreement, as defined below. The Mortgage Loan is
non-recourse to Associates, the Partnership and its partners.
Operating profit from the Hotels in excess of debt service on the Mortgage Loan
is available to be distributed to the Partnership and Courtyard II Associates
Management Corporation.
Prepayments of the Mortgage Loan are permitted with the payment of a premium
(the "Prepayment Premium"). The Prepayment Premium is equal to the greater of
(i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance
amount based on a spread of .25% or .55% over the U.S. treasury rate, as
defined.
On June 30, 1996, CBM Funding completed an exchange offer of its Multiclass
Mortgage Pass-Through Certificates, Series 1006-1A with a principal balance of
$406.2 million at that time ("Old Certificates"), for an equal amount of
Multiclass Mortgage Pass-Through Certificates, Series 1996-1B ("New
Certificates"). The form and terms of the New Certificates are substantially
identical to the form and terms of the Old Certificates, except that the New
Certificates are registered under the Securities Act of 1933, as amended and
their transfers are not restricted.
NOTE 7. LEASES
The land on which 53 of the Hotels are located is leased from MII or 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 sales categories subject to minimum amounts. The minimum rentals
are adjusted at various anniversary dates throughout the lease terms, as defined
in the agreements. The Partnership also rents certain equipment for use in the
Hotels.
In connection with the refinancing, the Partnership, as lessee, transferred its
rights and obligations pursuant to the 53 ground leases with MII and affiliates
to Associates. Additionally, MII and affiliates 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.
42
<PAGE>
Minimum future rental payments during the term of these operating leases are as
follows (in thousands):
Telephone
Lease Land Equipment Other
Year Leases Leases Leases
-------------- ---------- -------------- ---------
1997 $ 9,230 $ 1,125 $ 966
1998 9,230 1,106 561
1999 9,230 787 101
2000 9,230 589 --
2001 9,230 -- --
Thereafter 542,213 -- --
---------- -------------- -----------
$ 588,363 $ 3,607 $ 1,628
========== ============== ===========
Total rent expense on land leases was $11,899,000 for 1996, $11,550,000 for 1995
and $10,787,000 for 1994.
NOTE 8. 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.
Management Fees
The Management Agreement provides for annual payments of (i) the base management
fee equal to 3 1/2% of gross sales from the Hotels, (ii) the Courtyard
management fee equal to 2 1/2% of gross sales from the Hotels, and (iii) the
incentive management fee equal to 15% of operating profit, as defined (20% of
operating profit after the partners have received refinancing proceeds equal to
50% of the excess of (a) $154,736,842 over (b) cumulative distributions of
adjusted sale proceeds (the "First Equity Refinancing").
Deferral Provisions
Due to the refinancing, beginning in 1996, one percent of the Courtyard
management fee is deferred through maturity of the Senior Notes and the Mortgage
Loan to the extent that the Partnership or Associates has insufficient funds for
debt service payments on the Senior Notes and the Mortgage Loan. This change
eliminated the previous deferral of the total Courtyard management fee to debt
service through December 31, 1997.
43
<PAGE>
To the extent any Courtyard management fee, base management fee or incentive
management fee is deferred, it will be added to deferred management fees.
Deferred management fees accrue without interest, and will be payable out of 50%
of available cash flow after payment of certain priorities as discussed below.
The priority return to the Partnership, as defined, was reduced from 10% of
invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 10%
for 1999 and thereafter. Operating profit from the Hotels (which reflects the
deduction of the base and Courtyard management fees and MII ground rent) will be
used to pay the following, in order of priority: (i) debt service on the Senior
Notes and Mortgage Loan, (ii) to repay working capital loans to the Manager,
(iii) to repay deferred ground rent to MII and their affiliates, (iv) to repay
ground lease advances to MII and their affiliates, (v) the priority return to
the Partnership which is 7% of invested capital for 1996, (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. In 1996,
the Partnership had $2.5 million of remaining operating profit after the payment
of i) through viii) above. Fifty percent of this remaining operating profit was
used to repay a portion of 1996 deferred incentive management fees to the
Manager and the remainder was paid to the Partnership.
During 1996, $633,000 of incentive management fees were deferred while during
1995, $162,000 were repaid. Deferred incentive management fees were $6,197,000
and $5,564,000 as of December 31, 1996 and 1995, respectively. Deferred
Courtyard management fees totalled $22,341,000 as of December 31, 1996 and 1995.
Deferred base management fees as of December 31, 1996 and 1995 were $7,904,000.
Chain Services
The Manager is required to furnish certain services ("Chain Services") which are
furnished generally on a central or regional basis to all hotels managed, owned
or leased in the Courtyard by Marriott hotel system. The total amount of Chain
Services allocated to the Partnership was $9,474,000 in 1996, $9,224,000 in 1995
and $8,981,000 in 1994.
Working Capital
Associates is required to provide the Manager with working capital and fixed
asset supplies to meet the operating needs of the Hotels. The refinancing
required certain enhancements to the cash management system of the Manager such
that additional working capital may be required for the operation of the Hotels.
Therefore, on January 24, 1996, the Partnership, Associates and the Manager
entered into a working capital maintenance agreement (the "Working Capital
Agreement") and deposited $2.5 million as additional working capital for the
operation of the Hotels. Upon termination of the Management Agreement, the
working capital and supplies will be returned to Associates. As of December 31,
1996, the working capital balance was $8,761,000. This includes the $8,846,000
originally advanced less the $2,585,000 of excess working capital returned to
the Partnership in 1991 and the $2,500,000 advanced during 1996. At December 31,
1996 and 1995, accumulated depreciation related to the supplies totalled
$2,060,000.
44
<PAGE>
In addition, the Working Capital Agreement provides that the Partnership and
Associates, collectively, reserve $2 million by February 1, 1997, and additional
amounts such that the total balance is $5 million by February 1, 1998 (the
"Working Capital Reserve"). The $2 million was reserved by Associates on January
31, 1997. The Working Capital Reserve will be available for payment of hotel
operating expenses in the event that there is a downgrade in the long-term
senior unsecured debt of MII to below a certain level, as described in the
Mortgage Loan.
The obligation to fund the amounts required by the Working Capital Agreement is
subordinate to debt service on the Senior Notes and the Mortgage Loan.
Property Improvement Fund
The Management Agreement provides for the establishment of a repairs and
equipment reserve (property improvement fund) for the Hotels. The funding of
this reserve is based on a percentage of gross Hotel sales. During 1994, the
Partnership, Manager and the Mortgage Debt A and B lenders agreed that the
Partnership would establish refinancing reserve accounts and contribute 1% of
Hotel sales on the respective Mortgage Debt A and B properties to these
reserves. Correspondingly, the Management Agreement was amended in order to
reduce the contribution to the property improvement fund from 6% to 5% of gross
Hotel sales for the Mortgage Debt A and B properties for 1993 through the
respective loan maturities. The contribution for the five IRB Hotels remained at
6%. Upon completion of the refinancing on January 24, 1996, the contribution to
the property improvement fund was established initially at 5% for all Hotels and
may be increased, at the option of the Manager, to 6% of gross Hotel sales in
2001.
NOTE 9. ENVIRONMENTAL CONTINGENCY
Based upon a study completed in December 1995, Associates has become aware of
environmental contamination at one of the fee-owned properties owned by
Associates II, the Deerfield Hotel, caused by the previous use of the site as a
landfill and not caused by Associates. The property represents less than 5% of
Associates' total assets and revenues as of December 31, 1996 and for the year
ended, respectively. Associates is unable to determine the need for remediation,
its potential responsibility, if any, for remediation and the extent of
Associates' possible liability for any remediation costs. There can be no
assurance that Associates will not have liability with respect to remediation of
contamination at that site. Associates does not believe that any of the
environmental matters are likely to have a material adverse effect on its
business and operations.
45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Associates has no directors or officers. The business and policy making
functions of Associates are carried out through the directors and executive
officers of Courtyard II Associates Management Corporation, the managing general
partner who are listed below:
Age at
Name Current Position December 31, 1996
Bruce F. Stemerman President and Director 41
Earla L. Stowe Vice President and 35
Chief Accounting Officer
Anna Mary Coburn Secretary 41
Bruce Wardinski Treasurer 36
Mark A. Ferrucci Director 43
Business Experience
Bruce F. Stemerman was elected President and Director in 1995. Mr.
Stemerman joined Host Marriott Corporation in 1989 as Director -- Partnership
Services. He became Vice President - Lodging Partnerships in 1994 and became
Senior Vice President--Asset Management in 1996. Prior to joining Host Marriott
Corporation, Mr. Stemerman spent ten years with Price Waterhouse. He also serves
as a director and an officer of numerous Host Marriott subsidiaries.
Earla L. Stowe was appointed to Vice President and Chief Accounting Officer of
CBM Two Corporation in October, 1996. Ms. Stowe joined Host Marriott Corporation
in 1982 and held various positions in the tax department until 1988. She joined
the Partnership Services department as an accountant in 1988 and in 1989 she
became an Assistant Manager--Partnership Services. She was promoted to
Manager--Partnership Services in 1991 and to Director--Asset Management in 1996.
Anna Mary Coburn joined Host Marriott as Attorney in 1988, was made Assistant
General Counsel in 1993 and elected Corporate Secretary and Associate General
Counsel in 1997. Prior to joining Host Marriott, she was an attorney for the law
firm of Rosenthal and a law clerk for the United States Court of Appeals for the
Fourth Circuit.
Bruce Wardinski joined Host Marriott in 1987 as a Senior Financial Analyst of
Financial Planning & Analysis and was named Manager in June 1988. He was
appointed Director, Financial Planning & Analysis in 1989, Director of Project
Finance in January 1990, Senior Director of Project Finance in June 1993, Vice
President--Project Finance in June 1994, and Senior Vice President of
International Development in October 1995. In June 1996, Mr. Wardinski was named
Senior Vice President and Treasurer of Host Marriott. Prior to joining Host
Marriott, Mr. Wardinski was with the public accounting firm Price Waterhouse.
46
<PAGE>
Mark A. Ferrucci joined CT Corporation System in 1977 as an Account
Representative. In 1990, he became an Assistant Secretary of CT Corporation
System and in 1992 he became Assistant Vice President.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
As noted in Item 10 above, Associates has no directors or officers nor does it
have any employees. Under the Partnership Agreement, however, the Managing
General Partner has the exclusive right to conduct the business and affairs of
Associates subject only to the management agreements described in Items 1 and
13. The Managing General Partner is required to devote to Associates such time
as may be necessary for the proper performance of its duties, but the officers
and directors of the Managing General Partner are not required to devote their
full time to the performance of such duties. No officer or director of the
Managing General Partner devotes a significant percentage of time to Associate
matters. To the extent that any officer or director does devote time to
Associates, the Managing General Partner is entitled to reimbursement for the
cost of providing such services. For the fiscal years ending December 31, 1996,
1995 and 1994, Associates reimbursed the General Partner in the amount of
$108,000, $233,000 and $167,000, respectively, for the cost of providing all
administrative and other services as Managing General Partners. For information
regarding all payments made by Associates 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, 1996, 99% of Associates is owned by Courtyard by Marriott II
Limited Partnership and 1% is owned by Courtyard II Associates Management
Corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Agreement
To facilitate the refinancing, effective December 30, 1995, the original
management agreement was restated into two separate management agreements.
Associates entered into a management agreement with the Manager for the 69
Hotels which Associates directly owns and Associates II entered into a
management agreement for the Deerfield Hotel which Associates II owns,
collectively, (the "Management Agreement").
Term
The Management Agreement has an initial term expiring in 2013. The Manager may
renew the term, as to one or more of the Hotels, at its option, for up to three
successive terms of 10-years each and one final term of five years. Associates
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.
47
<PAGE>
Management Fees
The Management Agreement provides for annual payments of (i) the base management
fee equal to 3 1/2% of gross sales from the Hotels, (ii) the Courtyard
management fee equal to 2 1/2% of gross sales from the Hotels, and (iii) the
incentive management fee equal to 15% of operating profit, as defined (20% of
operating profit after the Partners have received refinancing proceeds equal to
50% of the excess of (a) $154,736,842 over (b) cumulative distributions of
adjusted sale proceeds (the "First Equity Refinancing").
Deferral Provisions
Until 1998, the Courtyard management fee will be deferred to the extent the
Partnership does not have sufficient funds for debt service. Prior to 1994, the
incentive management fee earned and paid was limited to a maximum of 55% of the
remainder of (i) available cash flow, as defined, less (ii) the priority return.
Thereafter, payment of any earned incentive management fee is limited to 80% of
the amount by which available cash flow exceeds the priority return.
Beginning in 1996, one percent of the Courtyard management fee is deferred
through maturity of the Senior Notes and the Mortgage Loan to the extent that
the Partnership or Associates has insufficient funds for debt service payments
on the Senior Notes and the Mortgage Loan.
To the extent any Courtyard management fee, base management fee or incentive
management fee is deferred, it will be added to deferred management fees.
Deferred management fees accrue without interest, and will be payable out of 50%
of available cash flow after payment of certain priorities as discussed below.
The priority return to the Partnership, as defined, was reduced from 10% of
invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 10%
for 1999 and thereafter. Operating profit from the Hotels (which reflects the
deduction of the base and Courtyard management fees and MII ground rent) will be
used to pay the following, in order of priority: (i) debt service on the Senior
Notes and Mortgage Loan, (ii) to repay working capital loans to the Manager,
(iii) to repay deferred ground rent to MII and their affiliates, (iv) to repay
ground lease advances to MII and their affiliates, (v) the priority return to
the Partnership which is 7% of invested capital for 1996, (vi) eighty percent of
the remaining operating profit is applied to the payment of current incentive
management fees, (vii) to repay advances to the Partnership, (viii) to repay
foreclosure avoidance advances to the Manager and (ix) fifty percent of the
remaining operating profit after payment of (i) through (viii) to repay deferred
management fees to the Manager and the other fifty percent is paid to the
Partnership. In 1996, the Partnership had $2.5 million of remaining operating
profit after the payment of i) through viii) above. Fifty percent of this
remaining operating profit was used to repay a portion of 1996 deferred
incentive management fees to the Manager and the remainder was paid to the
Partnership.
During 1996, $633,000 of incentive management fees were deferred while during
1995, $162,000 were repaid. Deferred incentive management fees were $6,197,000
and $5,564,000 as of December 31, 1996 and 1995, respectively. Deferred
Courtyard management fees totalled $22,341,000 as of December 31, 1996 and 1995.
Deferred base management fees as of December 31, 1996 and 1995 were $7,904,000.
48
<PAGE>
Chain Services
The Manager is required to furnish certain services ("Chain Services") which are
furnished generally on a central or regional basis to all hotels managed, owned
or leased in the Courtyard by Marriott hotel system. The cost of certain Chain
Services that were allocated to the Partnership prior to December 31, 1993 was
limited to 4% of gross Hotel sales. The total amount of Chain Services allocated
to the Partnership was $9,474,000 in 1996, $9,224,000 in 1995 and $8,981,000 in
1994.
Working Capital
The Partnership is required to provide the Manager with working capital and
fixed asset supplies to meet the operating needs of the Hotels. The refinancing
required certain enhancements to the cash management system of the Manager such
that additional working capital may be required for the operation of the Hotels.
Therefore, on January 24, 1996, the Partnership, Associates and the Manager
entered into a working capital maintenance agreement (the "Working Capital
Agreement") and deposited $2.5 million as additional working capital for the
operation of the Hotels. Upon termination of the Management Agreement, the
working capital and supplies will be returned to the Partnership. As of December
31, 1996, the working capital balance was $8,761,000. This includes the
$8,846,000 originally advanced less the $2,585,000 of excess working capital
returned to the Partnership in 1991 and the $2,500,000 advanced during 1996. At
December 31, 1996 and 1995, accumulated depreciation related to the supplies
totalled $2,060,000.
In addition, the Working Capital Agreement provides that the Partnership and
Associates, collectively, reserve $2 million by February 1, 1997 and additional
amounts such that the total balance is $5 million by February 1, 1998 (the
"Working Capital Reserve"). The $2 million was reserved by Associates on January
31, 1997. The Working Capital Reserve will be available for payment of hotel
operating expenses in the event that there is a downgrade in the long-term
senior unsecured debt of MII to below a certain level, as described in the
Mortgage Loan.
The obligation to fund the amounts required by the Working Capital Agreement is
subordinate to debt service on the Senior Notes and the Mortgage Loan.
Property Improvement Fund
The Management Agreement provides for the establishment of a repairs and
equipment reserve (property improvement fund) for the Hotels. The funding of
this reserve is based on a percentage of gross Hotel sales. During 1994, the
Partnership, Manager and the Mortgage Debt A and B lenders agreed that the
Partnership would establish refinancing reserve accounts and contribute 1% of
Hotel sales on the respective Mortgage Debt A and B properties to these
reserves. Correspondingly, the Management Agreement was amended in order to
reduce the contribution to the property improvement fund from 6% to 5% of gross
Hotel sales for the Mortgage Debt A and B properties for 1993 through the
respective loan maturities. The contribution for the five IRB Hotels remained at
6%. Upon completion of the refinancing on January 24, 1996, the contribution to
the property improvement fund was established initially at 5% for all Hotels and
may be increased, at the option of the Manager, to 6% of gross Hotel sales in
2001. Additionally, the Partnership is no longer required to contribute 1% of
gross Hotel sales from the Mortgage Debt A and Mortgage Debt B Hotels to the
refinancing reserves.
49
<PAGE>
Payments to MII and Subsidiaries
The following table sets forth the amount paid to MII and affiliates under both
the Management Agreement and the ground lease agreements for the years ended
December 31, 1996, 1995 and 1994 (in thousands). The table also sets forth
accrued but unpaid base, Courtyard and incentive management fees:
<TABLE>
1996 1995 1994
------------ ------------- --------
<CAPTION>
<S> <C> <C> <C>
Incentive management fee......................................................$ 11,407 $ 10,480 $ 3,839
Ground rent................................................................... 10,172 9,856 9,284
Chain services allocation..................................................... 9,474 9,224 8,981
Base management fee........................................................... 9,230 8,604 8,123
Courtyard management fee...................................................... 6,592 6,145 5,802
Deferred incentive management fees............................................ -- 162 --
------------ ------------- ------------
$...........................................................................$ 46,875 $ 44,471 $ 36,029
============ ============ ===========
Accrued but unpaid fees:
Incentive management fee......................................................$ 633 $ -- $ 5,564
============ ============= ============
</TABLE>
IRB Advances and General Partner Loans
The IRB Debt was refinanced on January 24, 1996 and the IRB Debt was repaid in
full. The $25.6 million of IRB Debt outstanding at December 31, 1995 was backed
by direct-pay letters of credit from commercial banks that expired in February,
November and December 1996. These issues were subject to mandatory prepayment
upon expiration of the letters of credit unless replacement letters of credit
were secured. The IRB Debt bore interest at daily, weekly or fixed rates at the
option of the Partnership, and was limited to a maximum interest rate of 15%.
During the period from January 1, 1996 through January 23, 1996, the interest
rates on the IRB Debt ranged from 2.65% to 6.1%. In 1995 and 1994, the interest
rates on the IRB Debt range from 1.9% to 6.1% and 1.15% to 6.05%, respectively.
The interest rate on the IRB Debt was 3.2% at January 24, 1996.
The bondholders had the right to demand purchase of any of the bonds at the
expiration of specified interest rate periods. Had the Partnership failed to
make the required payments of principal and interest on the IRB Debt, Host
Marriott would have been required to make such payments ("Host Marriott's IRB
Liability"). Through January 24, 1996, the Partnership purchased a total of
$15.4 million of bonds/IRB Debt with proceeds advanced by Host Marriott (see
below) when presented by certain bondholders. These loans bore interest at one
percentage point in excess of the Prime Rate (8.5% at January 23, 1996). The
weighted average interest rate was 9.5% for the period from January 1, 1996,
through January 23, 1996, 9.83% for 1995 and 8.14% for 1994. The two General
Partner loans would have matured on the earlier of (i) December 1997 and June
1998, respectively, or (ii) the date upon which the bonds were remarketed.
During 1993 and 1994, the Partnership repaid $8.2 million in General Partner
loans. As of December 31, 1995, $6.5 million of Host Marriott IRB Liability
loans were outstanding. As discussed above, the $6.5 million of Host Marriott
IRB Liability loans were repaid on January 24, 1996, from proceeds of the debt
refinancing.
50
<PAGE>
Payments to Host Marriott and Subsidiaries
The following sets forth amounts paid by Associates to Host Marriott and its
subsidiaries for the years ended December 31, 1996, 1995 and 1994 (in
thousands):
<TABLE>
1996 1995 1994
------------ ------------- --------
<CAPTION>
<S> <C> <C> <C>
Principal and interest on General Partner loan................................$ 5,669 $ 340 $ 3,175
Administrative expenses reimbursed............................................ 108 233 167
------------ ------------- ------------
$...........................................................................$ 5,777 $ 573 $ 3,342
============ ============= ============
</TABLE>
Mortgage Debt Guarantees
Prior to the initial refinancing, in 1987 Host Marriott had guaranteed payment
of up to $60 million of debt service on the MFS Mortgage Debt. As a result of
the initial refinancing, this guarantee was allocated $32.6 million to Mortgage
Debt A and $27.4 million to Mortgage Debt B. Any payments by Host Marriott under
the Mortgage Debt guarantees were treated as loans to the Partnership and bore
interest at one percentage point in excess of the prime rate of interest
announced by Bankers Trust Company of New York (the "Prime Rate").
During 1995, Host Marriott was released from its original Mortgage Debt A
guarantee obligation of $32.6 million as certain debt service coverage
requirements were met. As a result, as of December 31, 1995, $5.4 million and
$27.4 million, respectively, was available under Mortgage Debt A and B
guarantees. Host Marriott was released from the original guarantees on January
24, 1996, the date when Mortgage Debt A and Mortgage Debt B were repaid in full.
During 1994, the Partnership, Manager and Mortgage Debt A and B lenders agreed
that the Partnership would establish reserve accounts for Mortgage Debt A and B
and contribute 1% of Hotel sales on the respective Mortgage Debt A and B
properties to these reserves for 1993 through the respective loan maturities.
The initial contribution, made in 1994, included the required contribution for
1993. On January 24, 1996, these reserves were used to pay costs associated with
the refinancing of these loans and to repay a portion of these loans upon
maturity.
In addition, the General Partner CBM TWO Corporation had provided a guarantee to
MFS that, in the event of a foreclosure, proceeds under the MFS Mortgage Debt
would be at least $75 million. This foreclosure guarantee was allocated $40.8
million to Mortgage Debt A and $34.2 million to Mortgage Debt B. Upon completion
of the debt refinancing on January 24, 1996, Host Marriott was released from the
Mortgage Debt A and Mortgage Debt B debt service guarantee obligations and from
its obligations pursuant to the foreclosure guarantee.
51
<PAGE>
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 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.
<TABLE>
(3) EXHIBITS
Exhibit
Number Description Page
- ---------------------------------------------------------------------------------------------------- ------------
<CAPTION>
<S> <C> <C>
3.6 Agreement of Limited Partnership of Courtyard II Associates, L.P. ("Associates") N/A
(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 N/A Exhibit 3.2
to Associates Form S-4 filed with the Commission on
March 14, 1996.)
3.8 Amended and Restated Certificate of Incorporation of CBM Funding Corporation N/A
("Funding") (Incorporated by reference herein to Exhibit 3.3 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 N/A
S-4 filed with the Commission on March 14, 1996.)
*4.4 Intercreditor Agreement dated as of January 24, 1996 among IBJ Schroder Bank & N/A
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 N/A
Trust Company and the CMBS Trustee
*4.6 Exchange and Registration Rights
Agreement dated as of January 24, 1996
among the N/A Partnership, Associates,
Funding and Lehman Brothers Inc.
*10.1 Amended and Restated Management Agreement dated as of December 30, 1995, N/A
between the Partnership and Courtyard Management Corporation (the "Manager")
*10.2 Management Agreement dated as of December 30, 1995 between the Partnership and the N/A
Manager
52
<PAGE>
**10.3 Assignment of Lease and Warranty and Assumption of Obligations between Marriott N/A
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 N/A 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 N/A
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 N/A
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 N/A
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 N/A
Company dated September 22, 1986.
**10.9 Assignment of Lease and Warranty and Assumption of Obligations between Marriott N/A
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 N/A
Corporation and the Partnership dated January 27, 1989 for the
Philadelphia/Devon, PA property. Marriott Hotel Land Lease between
Marriott Corporation and Three Philadelphia/Devon Square Associates dated
July 15, 1986.
**10.11 Associates received an assignment from the Partnership, which had received an N/A
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.
</TABLE>
<TABLE>
Property State Assignment Date Original Landlord
---------------------- ----- ---------------- ----------------------
<CAPTION>
<S> <C> <C> <C>
Foster City CA 10/30/87 Essex House Condominium
Corporation ("Essex")
Marin/Larkspur Landing CA 10/30/87 Essex
Denver/Southeast CO 10/30/87 Essex
Atlanta/Perimeter Center GA 02/24/88 Essex
Indianapolis/Castleton IN 10/30/87 Essex
53
<PAGE>
Lexington/North KY 10/07/88 Essex
Annapolis MD 05/19/89 Essex
Minneapolis Airport MN 10/30/87 Essex
St. Louis/Creve Couer MO 10/30/87 Essex
Rye NY 03/29/88 Essex
Greenville SC 03/29/88 Essex
Memphis Airport TN 10/30/87 Essex
Nashville Airport TN 02/24/88 Essex
Dallas/Stemmon TX 10/30/87 Essex
San Antonio/Downtown TX 03/23/90 Essex
</TABLE>
<TABLE>
<S> <C> <C>
**10.12 Associates received an assignment from the Partnership of 38 ground leases which N/A
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.
</TABLE>
<TABLE>
Property State Effective Lease Date
-------- ----- --------------------
<CAPTION>
<S> <C> <C>
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 KS 04/21/89
Park
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
54
<PAGE>
Dallas/Northeast TX 04/22/88
Charlottesville VA 04/21/89
Manassas VA 05/19/89
Seattle/Southcenter WA 05/19/89
</TABLE>
<TABLE>
<S> <C> <C>
***10.13 Contribution Agreement dated as of January 24, 1996 among the N/A
Partnership, the Managing General Partner and Associates
***10.14 Bill of Sale and Assignment and Assumption Agreement dated as of N/A
January 24, 1996 by the Partnership to Associates
*10.15 Assignment and Assumption of Management Agreement dated as of N/A
January 24, 1996 by the Partnership to Associates
***10.16 Contribution Agreement dated as of January 24, 1996 among the N/A
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 N/A
January 24, 1996 by the Partnership to Deerfield LLC
*10.18 Deed to the Courtyard by Marriott Hotel in Chicago/Deerfield, N/A
Illinois dated as of January 24, 1996 by the Partnership to
Deerfield LLC
*10.19 Assignment and Assumption of Management Agreement dated as of N/A
January 24, 1996 by the Partnership to Deerfield LLC
*10.20 Loan Agreement dated as of January 24, 1996 by and between N/A
Associates and Funding
*10.21 Mortgage Note, dated as of January 24, 1996, in the principal N/A
amount of $410,200,000 by Associates to Funding
*10.22 Security Agreement dated as of January 24, 1996 by and between N/A
Associates and Funding
*10.23 Pledge Agreement dated as of January 24, 1996 by and between N/A
Associates and Funding
*10.24 Collateral Assignment of Management Agreement and Subordination N/A
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 N/A
among Associates, Marriott International, Inc. and Essex
House Condominium Corporation ("Essex")
*10.26 Environmental Indemnity Agreement dated as of January 24, 1996 N/A
by Associates and the Managing General Partner for the
benefit of Funding
55
<PAGE>
*10.27 Associates, as mortgagor, and Funding, as mortgagee, entered into N/A
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.
</TABLE>
<TABLE>
Property State Additional Party
-------- ----- ----------------
<CAPTION>
<S> <C> <C>
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
56
<PAGE>
Dallas/Stemmons TX Essex
San Antonio/Downtown TX Essex
Charlottesville VA MII
Manassas VA MII
Seattle/Southcenter WA MII
</TABLE>
<TABLE>
<S> <C> <C>
*10.28 Associates, as mortgager, and Funding, as mortgagee, entered into 16 N/A
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.
</TABLE>
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
<TABLE>
<S> <C> <C>
*10.29 Assignment of Loan Documents dated as of January N/A
24, 1996 by Funding to the CMBS Trustee
10.30 Assignment and Assumption of Management Agreement dated as of N/A
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, N/A
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 N/A
</TABLE>
57
<PAGE>
* 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 FORM 8-K
None.
58
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE III
COURTYARD II ASSOCIATES, L.P. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(in thousands)
Initial Costs Gross Amount at December 31, 1996
----------------------- ---------------------------------------
Subsequent
Buildings & Costs Buildings & Accumulated
Description Encumbrances Land Improvements Capitalized Land Improvements Total Depreciation
- ----------- ------------ ----- ------------- ------------ ------ ------------ ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
70 Courtyard by
Marriott Hotels $398,853 $25,392 $493,565 $23,915 $25,392 $517,480 $542,872 $112,473
======== ======= ======== ======= ======= ======== ======== ========
</TABLE>
Date of
Completion of Date Depreciation
Construction Acquired Life
70 Courtyard by 1987-1990 1987-1990 40 years
Marriott Hotels
Notes:
<TABLE>
<CAPTION>
1994 1995 1996
------------------ ------------------ -----------
<S> <C> <C> <C> <C>
(a) Reconciliation of Real Estate:
Balance at beginning of year....................$ 531,750 $ 535,546 $ 538,358
Capital Expenditures............................ 3,796 2,812 4,514
Dispositions.................................... -- -- --
------------------ ------------------ -----------------
Balance at end of year..........................$ 535,546 $ 538,358 $ 542,872
================== ================== =================
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of year....................$ 69,346 $ 83,321 $ 97,726
Depreciation.................................... 13,975 14,405 14,747
------------------ ------------------ -----------------
Balance at end of year..........................$ 83,321 $ 97,726 $ 112,473
================== ================== =================
</TABLE>
(c) The aggregate cost of land, buildings and improvements for Federal income
tax purposes is approximately $538.2 million at December 31, 1996.
(d) The Debt balance as of December 31, 1996 reflects the $398.9 million of
Multi-class Mortgage Pass-Through Certificates.
59
<PAGE>
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 28th of March,
1997.
COURTYARD II ASSOCIATES, L.P.
By: COURTYARD II ASSOCIATES MANAGEMENT CORPORATION
Managing General Partner
/s/ Bruce F. Stemerman
------------------------------------------------------------------
Bruce F. Stemerman
President and Director
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
(COURTYARD II ASSOCIATES
MANAGEMENT CORPORATION)
/s/ Bruce F. Stemerman
- --------------------------------------------
President and Director
Bruce F. Stemerman (Principal Executive Officer)
/s/ Earla Stowe
- --------------------------------------------
Vice President and Chief Accounting Officer
Earla Stowe (Principal Accounting Officer)
/s/ Anna Mary Coburn
- --------------------------------------------
Secretary
Anna Mary Coburn
/s/ Bruce Wardinski
- --------------------------------------------
Treasurer
Bruce Wardinski (Principal Financial Officer)
/s/ Mark A. Ferrucci
- --------------------------------------------
Director
Mark A. Ferrucci
60
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1996 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENT
</LEGEND>
<CIK> 0001010684
<NAME> COURTYARD II ASSOCIATES LIMITED PARTNERSHIP
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1.000
<CASH> 6,002
<SECURITIES> 48,883
<RECEIVABLES> 13,315
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 68,200
<PP&E> 685,535
<DEPRECIATION> (226,848)
<TOTAL-ASSETS> 526,887
<CURRENT-LIABILITIES> 1,313
<BONDS> 444,464
0
0
<COMMON> 0
<OTHER-SE> 81,110
<TOTAL-LIABILITY-AND-EQUITY> 526,887
<SALES> 0
<TOTAL-REVENUES> 133,182
<CGS> 0
<TOTAL-COSTS> 76,658
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,463
<INCOME-PRETAX> 24,061
<INCOME-TAX> 0
<INCOME-CONTINUING> 24,061
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,061
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
