Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
|X| Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
OR
|_| Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: 0-15736
COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1468081
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10400 Fernwood Road
Bethesda, Maryland 20817
- -------------------------------------------------------------------------------
(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 ____ (Not Applicable).
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
================================================================================
<PAGE>
================================================================================
COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
================================================================================
TABLE OF CONTENTS
PAGE NO.
PART I
Item 1. Business........................................................1
Item 2. Properties......................................................5
Item 3. Legal Proceedings...............................................7
Item 4. Submission of Matters to a Vote of Security Holders.............8
PART II
Item 5. Market For The Partnership's Limited Partnership Units
and Related Security Holder Matters...........................8
Item 6. Selected Financial Data .....................................10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................10
Item 8. Financial Statements and Supplementary Data....................20
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.....................................34
PART III
Item 10. Directors and Executive Officers...............................34
Item 11. Management Remuneration and Transactions.......................35
Item 12. Security Ownership of Certain Beneficial Owners and Management.35
Item 13. Certain Relationships and Related Transactions.................35
PART IV
Item 14. Exhibits, Supplemental Financial Statement Schedules
and Reports on Form 8-K......................................39
<PAGE>
6
PART I
ITEM 1. BUSINESS
Description of the Partnership
Courtyard by Marriott Limited Partnership, a Delaware limited partnership (the
"Partnership"), was formed on July 15, 1986 to acquire and own 50 Courtyard by
Marriott hotels (the "Hotels") and the respective fee or leasehold interests in
the land on which the Hotels are located. The Hotels are located in 16 states
and contain a total of 7,223 guest rooms as of December 31, 1998. The
Partnership commenced operations on August 20, 1986 and will terminate on
December 31, 2086, unless earlier dissolved. Prior to December 24, 1998 the sole
general partner of the Partnership, with a 5% interest was CBM One Corporation
("CBM One"), a wholly owned subsidiary of Host Marriott Corporation ("Host
Marriott").
The Partnership is engaged solely in the business of owning and operating hotels
and therefore is engaged in one industry segment. The principal offices of the
Partnership are located at 10400 Fernwood Road, Bethesda, Maryland 20817.
The Hotels are operated as part of the Courtyard by Marriott system, which
includes over 343 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"). As part of the refinancing in March 1997, the two Operating Agreements
were converted into a single management agreement (the "Management Agreement")
effective January 4, 1997. The initial term of the Management Agreement expires
at the end of 2017. The Manager can extend the Management Agreement for up to
four successive periods of ten years. The Hotels have the right to use the
Courtyard by Marriott name pursuant to the Management Agreement and, if the
Management Agreement is terminated or not renewed, the Partnership would lose
that right for all purposes (except as part of the Partnership's name). See Item
13 "Certain Relationships and Related Transactions."
The objective of the Courtyard by Marriott system, including the Hotels, is to
provide consistently superior lodging at a fair price with an appealing,
friendly and contemporary residential character. Courtyard by Marriott hotels
generally have fewer guest rooms than traditional, full-service hotels, in most
cases containing approximately 150 guest rooms, including approximately 12
suites, as compared to full-service Marriott hotels which typically contain 350
or more guest rooms.
Each Courtyard by Marriott hotel is designed around a courtyard area containing
a swimming pool (indoor pool in northern climates), walkways, landscaped areas
and a gazebo. Each Hotel generally contains a small lobby, a restaurant with
seating for approximately 50 guests, a lounge, a hydrotherapy pool, a guest
laundry, an exercise room and two small meeting rooms. The hotels do not contain
as much public space and related facilities as full-service hotels.
Courtyard by Marriott hotels are designed for business and vacation travelers
who desire high quality accommodations at moderate prices. Most of the Hotels
are located in suburban areas near office parks or other commercial activities.
See Item 2 "Properties." Courtyard by Marriott hotels provide large, high
quality guest rooms which contain furnishings comparable in quality to those in
full-service Marriott hotels. Each guest room contains a large, efficient work
desk, remote control television, a television entertainment package, in-room
coffee and tea services and other amenities.
Approximately 70% of the guest rooms contain king-size beds.
Organization of the Partnership
On August 20, 1986 (the "Closing Date"), 1,150 units of limited partnership
interests (the "Units") in the Partnership, representing a 95% interest in the
Partnership, had been sold in a private placement offering. The offering price
per Unit was $100,000. On August 20, 1986, the General Partner made capital
contributions consisting of $1,211,000 in cash and land on which certain of the
Hotels are located valued at $4,842,000 for its 5% general partner interest.
Twenty-eight of the Hotels were conveyed to the Partnership in 1986, twenty-one
Hotels in 1987 and the final Hotel in January 1988.
On April 17, 1998, Host Marriott, the parent of the Old General Partner of the
Partnership, announced that its Board of Directors authorized the company to
reorganize its business operations so as to qualify as a real estate investment
trust ("REIT") to become effective as of January 1, 1999 (the "REIT
Conversion"). On December 29, 1998, Host Marriott announced that it had
completed substantially all the steps necessary to complete the REIT Conversion
and expected to qualify as a REIT under the applicable Federal income tax laws
beginning January 1, 1999. In connection with the REIT Conversion, Host Marriott
contributed substantially all of its hotel assets to a newly-formed partnership,
Host Marriott, L.P. ("Host LP").
In connection with Host Marriott's conversion to a REIT, the following occurred.
Host Marriott formed CBM One LLC, a Delaware single member limited liability
company, having three classes of member interests (Class A - 1% economic
interest, managing; Class B - 98% economic interest, non-managing; Class C - 1%
economic interest, non-managing). The Class B interests are entitled to exercise
all voting/other rights with respect to the corporate stock owned directly or
indirectly by the Partnership. CBM One merged into CBM One LLC on December 24,
1998 and CBM One ceased to exist. On December 28, 1998, Host Marriott
contributed its entire interest in CBM One LLC to Host LP, which is owned 78% by
Host Marriott Corporation and 22% by outside partners. Finally, on December 30,
1998, Host LP (non-voting interest) contributed its 98% Class B and 1% Class C
interest in CBM One LLC to Rockledge Hotel Properties, Inc. ("Rockledge"), a
Delaware corporation which is owned 95% by Host LP (economic non-voting
interest) and 5%, by Host Marriott Statutory/Charitable Employee Trust (100%
voting interest), a Delaware statutory business trust. As a result, the sole
general partner of the Partnership is CBM One LLC (the "General Partner"), with
a Class A 1% managing economic interest owned by Host LP, a Class B 98% and
Class C 1% non-managing economic interest owned by Rockledge.
Debt Financing
On March 21, 1997 (the "Refinancing Date") both the 49 Hotels Loan and the
Windsor Loan were refinanced. The total amount of the debt was increased from
$280.8 million to $325.0 million. The $44.2 million of excess refinancing
proceeds were used to: (i) make a $7 million contribution to the property
improvement fund to cover anticipated shortfalls; (ii) pay approximately $7
million of refinancing costs; and (iii) make a $30.2 million partial return of
capital distribution to the partners. The new loan continues to be non-recourse
and requires monthly payments of interest at a fixed rate of 7.865% and
principal based on a 20-year amortization schedule. The loan has a scheduled
maturity on April 10, 2012; however, the loan maturity can be extended for an
additional five years. During the extended loan term, the loan bears interest at
an Adjusted Rate, as defined, and all cash flow, from Partnership operations
will be used to amortize the principal balance of the loan. As of December 31,
1998, the principal balance of the loan was $313.1 million.
The refinanced mortgage loan is secured by first mortgages on all 50 of the
Partnership's Hotels, related personal property, and the land on which the
Hotels are located or an assignment of the Partnership's interest under the land
leases. No guaranties have been provided by Host Marriott or MII. As additional
security, affiliates of MII, as the land lessors, agreed to continue to subject
their ownership interest as well as receipt of ground rent to debt service on
the mortgage loan.
Material Contracts
The primary provisions of the Management Agreement are discussed in Item 13,
"Certain Relationship and Related transactions."
Ground Leases
The land on which 31 of the Hotels are located is leased from affiliates of MII.
In addition, two of the Hotels are located on land leased from third parties.
The land leases have remaining terms (including renewal options) expiring
between the years 2058 and 2081. The MII land leases and the third party land
leases provide for rent based on specific percentages (from 2% to 9.75%) 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 1998, the Partnership paid a total of $8.3
million in ground rent. See Item 2 "Properties" for a listing of Hotels that
have ground leases.
In connection with refinancing, MII and affiliates agreed to subordiante their
right to receive rental payments under the MII ground leases to the payment of
debt service on the 50 Hotels Loan.
Competition
The United States lodging industry generally is comprised of two broad segments:
full-service hotels and limited-service hotels. Full-service hotels generally
offer restaurant and lounge facilities and meeting spaces, as well as a wide
range of services, typically including bell service and room service.
Limited-service hotels generally offer accommodations with limited or no
services and amenities. As moderately priced hotels, the Hotels compete
effectively with both full-service and limited-service hotels in their
respective markets by providing streamlined services and amenities exceeding
those provided by typical limited-service hotels at prices that are
significantly lower than those available at full-service hotels.
Significant competitors in the moderately priced lodging segment include Holiday
Inn, Ramada Inn, Four Points by Sheraton, Hampton Inn and Hilton Garden Inns.
The lodging industry in general, and the moderately priced segment in
particular, is highly competitive, but the degree of competition varies from
location to location and over time. An increase in supply growth began in 1996
with the introduction of a number of new national brands. It is expected that
Courtyard will continue outperforming both national and local competitors. The
brand is continuing to carefully monitor the introduction of new mid-priced
brands including Wingate Hotels, Hilton Garden Inns, Four Points by Sheraton,
Main Stay, Candlewood Hotels and Club Hotels.
The Manager believes that by emphasizing management and personnel development
and maintaining a competitive price structure, the Partnership's share of the
market will be maintained or increased. The inclusion of the Hotels within the
nationwide Courtyard by Marriott system provides the benefits of name
recognition, centralized reservations and advertising, system-wide marketing and
promotion, centralized purchasing and training and support services.
Conflicts of Interest
Because Host LP, the managing member of the General Partner, MII and their
affiliates own and/or operate hotels other than the Partnership Hotels and MII
and its affiliates license others to operate hotels under the various brand
names owned by MII and its affiliates, potential conflicts of interest exist.
With respect to these potential conflicts of interest, Host LP, MII and their
affiliates retain a free right to compete with the Partnership's Hotels,
including the right to develop, own, and operate competing hotels now and in the
future in markets in which the Hotels are located, in addition to those existing
hotels which may currently compete directly or indirectly with the Hotels.
Under Delaware law, the General Partner has a fiduciary duty to the Partnership
and is required to exercise good faith and loyalty in all its dealings with
respect to Partnership affairs.
Policies with Respect to Conflicts of Interest
It is the policy of the General Partner that the Partnership's relationship with
the General Partner, any affiliate of the General Partner, or persons employed
by the General Partner or its affiliates be conducted on terms that are fair to
the Partnership and that are commercially reasonable. Agreements and
relationships involving the General Partner or its affiliates and the
Partnership are on terms consistent with the terms on which the General Partner
or its affiliates have dealt with unrelated parties.
The Amended and Restated Agreement of Limited Partnership as amended (the
"Partnership Agreement"), provides that any agreements, contracts or
arrangements between the Partnership and the General Partner or any of its
affiliates, except for rendering legal, tax, accounting, financial, engineering
and procurement services to the Partnership by employees of the General Partner
or its affiliates, will be on commercially reasonable terms and will be subject
to the following additional conditions:
(i) the General Partner or any such affiliate must have the ability to
render such services or to sell or lease such goods;
(ii) such agreements, contracts or arrangements must be fair to the
Partnership and reflect commercially reasonable terms and must be
embodied in a written contract which precisely describes the subject
matter thereof and all compensation to be paid therefor;
(iii) no rebates or give-ups may be received by the General Partner or any
such affiliate, nor may the General Partner or any such affiliate
participate in any reciprocal business arrangements which would have
the effect of circumventing any of the provisions of the Partnership
Agreement; and
(iv) no such agreement, contract or arrangement as to which the limited
partners had previously given approval may be amended in such a manner
as to increase the fees or other compensation payable by the
Partnership to the General Partner or any of its affiliates or to
decrease the responsibilities or duties of the General Partner or any
such affiliate in the absence of the consent of the holders of a
majority in interest of the limited partners.
Employees
Neither the General Partner nor the Partnership has any employees. Host LP
provides the services of certain employees (including the General Partner's
executive officers) of Host LP to the Partnership and the General Partner. The
Partnership and the General Partner anticipate that each of the executive
officers of the General Partner will generally devote a sufficient portion of
his or her time to the business of the Partnership. However, each of such
executive officers also will devote a significant portion of his or her time to
the business of Host LP and its other affiliates. No officer or director of the
General Partner or employee of Host LP devotes a significant percentage of time
to Partnership matters. To the extent that any officer, director or employee
does devote time to the Partnership, the General Partner or Host LP, as
applicable, is entitled to reimbursement for the cost of providing such
services. See Item 11 "Management Remuneration and Transactions" for information
regarding payments made to Host LP or its subsidiaries for the cost of providing
administrative services to the Partnership.
Potential Transaction
The General Partner has retained Merrill Lynch to explore and evaluate
alternatives to provide liquidity for the Partnership and maximize the value of
limited partners investment. However, there can be no assurance that a
transaction will result from these activities.
ITEM 2. PROPERTIES
Introduction
The properties consisted of 50 Courtyard by Marriott hotels as of December 31,
1998. The Hotels have been in operation for at least ten years. The Hotels range
in age between 11 and 16 years. The Hotels are geographically diversified among
16 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 Partner, more
adverse than the overall competitive forces affecting the lodging industry
generally. See Item 1 "Business--Competition."
<PAGE>
The following table sets forth certain information related to the Hotels.
COURTYARD BY MARRIOTT
LIMITED PARTNERSHIP HOTELS
(50 Courtyard Hotels)
<PAGE>
Location Rooms
Alabama
Montgomery (1) 146
Arizona
Phoenix Airport (1) 145
California
Buena Park (1) 145
Fremont (1) 146
Pleasanton 145
Sacramento-Rancho Cordova 144
San Francisco Airport (2) 147
Santa Ana (1) 145
Connecticut
Windsor (1) 149
Florida
Melbourne (1) 146
Miami Airport-West (1) 145
Tallahassee (1) 154
Georgia
Atlanta-Delk Road (1) 146
Atlanta-Executive Park (1) 145
Atlanta-Northlake (2) 128
Atlanta-Peachtree Corners 131
Atlanta-Peachtree Dunwoody 128
Atlanta-Windy Hill 127
Augusta 130
Columbus 139
Savannah 144
Illinois
Naperville (1) 147
Maryland
Hunt Valley (1) 146
Landover 152
Rockville (1) 147
(1) Land is leased from an affiliate of MII. (2) Land is leased from a third
party.
Location Rooms
Michigan
Dearborn (1) 147
Southfield 147
Troy 147
Warren 147
North Carolina
Charlotte-Arrowood Road (1) 146
Raleigh-Wake Forest Road 153
New York
Tarrytown 139
Ohio
Cincinnati-Blue Ash (1) 149
Columbus-Dublin (1) 147
Columbus-Worthington (1) 145
Pennsylvania
Valley Forge (1) 150
Tennessee
Brentwood (1) 145
Memphis-Park Avenue East (1) 146
Texas
Arlington 147
Bedford (1) 145
Dallas-Addison (1) 145
Dallas-Las Colinas 147
Dallas-LBJ Northwest (1) 146
San Antonio Airport (1) 145
San Antonio-Medical Center (1) 146
Virginia
Fair Oaks 144
Herndon (1) 146
Hampton (1) 146
Richmond (1) 145
Virginia Beach (1) 146
---------
Total: 7,223
<PAGE>
20
ITEM 3. LEGAL PROCEEDINGS
Marvin Schick and Jack Hirsch, the plaintiffs in a class action lawsuit styled
Marvin Schick, et al. v. Host Marriott Corporation, et al., Civil Action No.
15991, filed their complaint on October 16, 1997 in Delaware Chancery Court
against the General Partner, the Manager and certain of their respective
affiliates, officers and directors. The plaintiffs' claim that the General
Partner agreed to decrease the owner's priority under the terms of the
Management Agreement for the benefit of the Manager without obtaining the
consent of the limited partners. The lawsuit includes claims against Host
Marriott and the General Partner for breach of contract and breach of fiduciary
duty, and against Marriott International, Inc. and the Manager for interference
with contract and aiding and abetting in the breach of fiduciary duties. The
General Partner believes that the change in the Management Agreement did not
require limited partner approval, because, among other things, it did not result
in an increase in compensation to the Manager. The defendants filed an answer to
the plaintiffs' complaint and asserted a number of defenses. The parties to this
lawsuit have reached a tentative agreement to settle the matter and are in the
process of negotiating the details of the settlement.
On February 11, 1998, four individual limited partners in partnerships sponsored
by Host Marriott, filed a class action lawsuit, styled Ruben, et al. v. Host
Marriott Corporation, et al., Civil Action No. 16186, in Delaware State Chancery
Court against Host Marriott and the general partners of Courtyard by Marriott
Limited Partnership, Courtyard by Marriott II Limited Partnership, Marriott
Residence Inn Limited Partnership, Marriott Residence Inn II Limited
Partnership, and Fairfield Inn by Marriott Limited Partnership (collectively,
the "Five Partnerships"). The plaintiffs alleged that the proposed merger of the
Five Partnerships (the "Merger") into an umbrella partnership real estate
investment trust proposed by CRF Lodging Company, L.P. in a preliminary
registration statement filed with the Securities and Exchange Commission, dated
December 22, 1997, constituted a breach of the fiduciary duties owed to the
limited partners of the Five Partnerships by Host Marriott and the general
partners of the Five Partnerships. In addition, the plaintiffs alleged that the
Merger breached various agreements relating to the Five Partnerships. The
plaintiffs sought, among other things, the following: certification of a class;
injunctive relief to block consummation of the Merger or, in the alternative,
rescission of the Merger; and damages. The defendants, in light of market
conditions, decided to abandon their efforts to complete the initial Merger. As
a result of this decision, the plaintiffs voluntarily dismissed the lawsuits.
On March 16, 1998, limited partners in several partnerships sponsored by Host
Marriott, filed a lawsuit, styled Robert M. Haas, Sr. and Irwin Randolph Joint
Tenants, et al. v. Marriott International, Inc., et al., Case No. 98-CI-04092,
in the 57th Judicial District Court of Bexar County, Texas against Marriott
International, Inc., Host Marriott, various of their subsidiaries, J.W.
Marriott, Jr., Stephen Rushmore, and Hospitality Valuation Services, Inc.
(collectively, the "Defendants"). The lawsuit relates to the following limited
partnerships: Courtyard by Marriott Limited Partnership, Courtyard by Marriott
II Limited Partnership, Marriott Residence Inn Limited Partnership, Marriott
Residence Inn II Limited Partnership, Fairfield Inn by Marriott Limited
Partnership, Desert Springs Marriott Limited Partnership and Atlanta Marriott
Marquis Limited Partnership (collectively, the "Seven Partnerships"). The
plaintiffs allege that the Defendants conspired to sell hotels to the Seven
Partnerships for inflated prices and that they charged the Seven Partnerships
excessive management fees to operate the Seven Partnerships' hotels. The
plaintiffs further allege, among other things, that the Defendants committed
fraud, breached fiduciary duties, and violated the provisions of various
contracts. The plaintiffs are seeking unspecified damages. The Defendants, which
do not include the Seven Partnerships, believe that there is no truth to the
plaintiffs' allegations and that the lawsuit is totally devoid of merit. The
Defendants intend to vigorously defend against the claims asserted in the
lawsuit. They have filed an answer to the plaintiffs' petition and asserted a
number of defenses. A related case concerning Courtyard by Marriott II Limited
Partnership filed by the plaintiff's lawyers in the same court involves similar
allegations against the defendants, and has been certified as a class action.
Trial in this related case is presently scheduled for May 1999. Due to the
prosecution of the related case, there has been no meaningful activity in the
Haas case. Although the Seven Partnerships have not been named as Defendants in
the lawsuit, the partnership agreements relating to the Seven Partnerships
include an indemnity provision which requires the Seven Partnerships, under
certain circumstances, to indemnify the general partners against losses,
expenses and fees.
The Partnership and the Hotels are involved in routine litigation and
administrative proceedings arising in the ordinary course of business, some of
which are expected to be covered by liability insurance and which collectively
are not expected to have a material adverse effect on the business, financial
condition or results of operations of the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP UNITS AND
RELATED SECURITY HOLDER MATTERS
There is currently no established public trading market for the units and it is
not anticipated that a public market for the Units will develop. Transfers of
Units are limited to the first date of each accounting period and may be made
only to accredited investors. All transfers are subject to approval by the
General Partner. As of December 31, 1998, there were 1,084 holders (including
holders of half-units) of record of the 1,150 Units.
In accordance with Sections 4.07 and 4.10 of the Partnership Agreement, cash
available for distribution for any year will be distributed at least annually to
the general and limited partners (the "Partners") of record at the end of each
accounting period during such year as follows:
(i) first, through and including the end of the accounting period during
which the Partners shall have received cumulative distributions of
sales or refinancing proceeds ("Capital Receipts") equal to
$60,526,500, 5% to the General Partner and 95% to the limited partners;
<PAGE>
(ii) next, through and including the end of the accounting period during
which the Partners shall have received cumulative distributions of
Capital Receipts equal to $121,053,000, 15% to the General Partner and
85% to the limited partners; and
(iii) thereafter, 30% to the General Partner and 70% to the limited partners.
Cash available for distribution means, with respect to any fiscal period, the
cash revenues of the Partnership from all sources during the fiscal period,
other than Capital Receipts, less (i) all cash expenditures of the Partnership
during such fiscal period, including, without limitation, repayment of all
Partnership indebtedness to the extent required to be paid, but not including
expenditures of Capital Receipts, plus fees for management services and
administrative expenses and (ii) such reserves as may be determined by the
General Partner, in its sole discretion to be necessary to provide for the
foreseeable needs of the Partnership.
As of December 31, 1998, the Partnership has distributed a total of $4,187,271
to the General Partner and $79,553,152 to the limited partners ($69,177 per
limited partner unit) since inception. Included in the $69,177 of distributions
per limited partner unit was $4,000 per limited partner unit distribution from
excess refinancing proceeds that was distributed to the partners in 1988 and the
$25,000 per limited partner unit from 1997 excess refinancing proceeds. During
1998, the Partnership distributed $605,000 to the General Partners and
$11,495,000 ($2,000 and $8,000 per limited partner unit from 1998 and 1997
operations, respectively) to the limited partners. An additional $2,000 per
limited partner unit from 1998 operations will be distributed in April 1999.
In 1997, the Partnership made a partial return of capital distribution of
$1,513,158 to the General Partner and $28,750,000 to the limited partners
($25,000 per limited partner unit) from excess refinancing proceeds. In
addition, during 1997, the Partnership distributed $484,211 to the General
Partner and $9,200,000 to the limited partners ($8,000 per limited partner unit)
from 1997 operations. An additional $2,000 per limited partner unit was
distributed in 1998.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents historical operating information
for the Partnership for each of the five years in the period ended December 31,
1998 presented in accordance with generally accepted accounting principles (in
thousands, except per unit amounts):
<TABLE>
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Income Statement Data:
Revenues.................................................$ 201,250 $ 189,552 $ 181,639 $ 170,799 $ 161,840
Operating Profit......................................... 44,276 40,683 35,985 30,752 23,501
Net income............................................... 18,885 27,813 13,454 4,988 53,409
Net income per limited partner unit (1,150 Units)........ 15,601 22,976 11,114 4,120 44,120
Balance Sheet Data:
Total assets............................................. 331,246 331,406 330,509 338,740 349,641
Total liabilities........................................ 356,046 362,991 349,839 369,224 385,113
Cash distributions per limited partner unit (1,150 Units) 10,000 35,000 2,000 -- --
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-K include forward-looking statements
and as such may involve known and unknown risks, uncertainties and other factors
which may cause the actual transactions, results, performance or achievements to
be materially different from any future transactions, results, performance or
achievements expressed or implied by such forward-looking statements. The
cautionary statements set forth in reports filed under the Securities Act of
1934 contained important factors with respect to such forward-looking
statements, including: (i) national and local economic and business conditions
that will, among other things, affect demand for hotels and other properties,
the level or rates and occupancy that can be achieved by such properties and the
availability and terms of financing; (ii) the ability to compete effectively;
(iii) changes in travel patterns, taxes and government regulations; (iv)
governmental approvals, actions and initiatives; and (v) the effects of tax
legislative action. Although the Partnership believes the expectations reflected
in such forward-looking statements are based upon reasonable assumptions, it can
give no assurance that its expectations will be attained or that any deviations
will not be material. The Partnership undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that may
be made to reflect any future events or circumstances.
<PAGE>
GENERAL
The following discussion and analysis addresses results of operations for the
fiscal years ended December 31, 1998, 1997 and 1996. During the period from 1996
through 1998, the Partnership's total revenues grew from $181.6 million to
$201.3 million. Growth in room sales, and thus hotel sales, was driven primarily
by growth in room revenue per available room ("REVPAR"). REVPAR is a commonly
used indicator of market performance for hotels which represents the combination
of daily room rate charged and the average daily occupancy achieved. REVPAR does
not include food and beverage or other ancillary revenues generated by the
property. During the period from 1997 through 1998, the Hotels' combined average
room rate increased by $6 to $87, while the combined average occupancy remained
stable at approximately 80%.
The Partnership's operating costs and expenses are, to a great extent, fixed.
Therefore, the Partnership derives substantial operating leverage from increases
in revenue offset in part by (i) base and Courtyard management fees under the
Management Agreement, which are each 3% of gross hotel sales, (ii) incentive
management fees equal to 15% of operating profit, and (iii) variable ground
lease payments.
RESULTS OF OPERATIONS
Revenues primarily represent the gross sales generated by the Partnership's
Hotels. Total hotel sales less hotel property-level costs and expenses equals
house profit which reflects the net amounts flowing to the Partnership as the
property owner. As discussed below, the Partnership previously recorded only the
house profit generated by the Partnership's Hotels as revenue.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus on EITF 97-2, "Application of
FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements."
EITF 97-2 addresses the circumstances in which a management entity may include
the revenues and expenses of a managed entity in its financial statements.
The Partnership considered the impact of EITF 97-2 on its financial statements
and determined that EITF 97-2 requires the Partnership to include property-level
sales and operating expenses of its Hotel in its statements of revenues and
expenses for the period during which the Partnership operated the Hotel through
a management agreement. The Partnership has given retroactive effect to the
adoption of EITF 97-2 in the accompanying statement of revenues and expenses.
Application of EITF 97-2 to the financial statements for the fiscal years ended
December 31, 1998, 1997 and 1996 increased both revenues and operating expenses
by approximately $100.1 million, $94.2 million, and $91.3 million respectively,
and had no impact on operating profit or net income.
<PAGE>
The following table shows selected combined operating and financial statistics
for the Hotels (in thousands, except combined average occupancy, combined
average daily room rate, REVPAR and number of rooms.
<TABLE>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Combined average occupancy............................................... 79.7% 80.0% 79.2%
Combined average daily room rate.........................................$ 87.09 $ 81.10 $ 76.39
REVPAR ..................................................................$ 69.41 $ 64.88 $ 60.50
</TABLE>
1998 Compared to 1997:
Revenues. Revenues increased $11.8 million, or 6%, to $201.3 million in 1998
from $189.6 million in 1997 as a result of strong growth in REVPAR of 7%. The
increase in REVPAR was primarily a result of a 7% increase in combined average
daily room rates. Additionally, food and beverage revenues increased $524,000.
Operating Costs and Expenses. Operating costs and expenses increased $8.1
million, or 5%, to $157.0 million in 1998 from $148.9 million in 1997, primarily
reflecting an increase in base, Courtyard and incentive management fees
associated with increased revenues and operating profit as well as an increase
in property-level costs and expenses. As a percentage of hotel revenues,
operating costs and expenses represented 78% of revenues for 1998 and 79% in
1997.
Total Hotel Property-Level Costs and Expenses. The 1998 total hotel
property-level costs and expenses increased $5.8 million, or 6%. The increase is
due to increases in both rooms costs and selling, administrative and other
expenses.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit increased $3.6 million to $44.3
million, or 22% of total revenues, in 1998 from $40.7 million, or 21% of
revenues, in 1997.
Interest Expense. Interest expense increased $0.3 million to $26.3 million in
1998 from $26.0 million in 1997 from the increase in principal as a result of
the 1997 refinancing.
Income Before Extraordinary Items. Income before extraordinary items
increased $3.5 million to $18.9 million, or 9% of revenues, in 1998, from $15.3
million, or 8% of revenues, in 1997.
Extraordinary Items. The Partnership recognized an extraordinary gain in 1997 of
$14.9 million representing the forgiveness of deferred management fees by the
Manager. This extraordinary gain was combined with a loss on extinguishment of
debt of $2.4 million resulting in a net extraordinary gain of $12.5 million. No
extraordinary gain was recognized in 1998.
Net Income. Net income decreased $8.9 million to $18.9 million, or 9% of total
revenues, in 1998 from $27.8 million, or 15% of total revenues, in 1997 due to
the impact of the net extraordinary gain in the prior year, discussed above.
1997 Compared to 1996:
Revenues. Revenues increased $8.0 million, or 4%, to $189.6 million in 1997 from
$181.6 million in 1996 as a result of strong growth in REVPAR of 7%. The
increase in REVPAR was primarily a result of a 6% increase in combined average
daily room rates and a one percentage point increase in combined average
occupancy.
Operating Costs and Expenses. Operating costs and expenses increased $3.2
million, or 2%, to $148.9 million in 1997 from $145.7 million in 1996, primarily
reflecting an increase in base and Courtyard management fees associated with
increased revenues and operating profit. As a percentage of hotel revenues,
operating costs and expenses represented 79% of revenues for 1997 and 80% in
1996.
Total Hotel Property-Level Costs and Expenses. The 1998 total hotel
property-level costs and expenses increased $2.9 million, or 3%. The increase is
due to increases in both rooms costs and selling, administrative and other
expenses.
Property Taxes. Property taxes decreased by 12% during 1997 to $5.3 million
when compared to 1996.
Insurance and Other. Insurance and other increased by 29% to $2.0 million when
compared to 1996. The increase is primarily due to an increase in equipment rent
and Partnership administrative expenses.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, operating profit increased $4.7 million to $40.7
million, or 21% of total revenues, in 1997 from $36.0 million, or 20% of
revenues, in 1996.
Interest Expense. Interest expense increased $2.5 million to $26.0 million due
to the increased level of debt from $280.8 million to $325.0 million as a result
of the refinancing in 1997.
Income before Extraordinary Items. Income before extraordinary items
increased $1.9 million to $15.3 million, or 8% of revenues, in 1997, from $13.5
million, or 7% of revenues, in 1996.
Extraordinary Items. The Partnership recognized an extraordinary gain in 1997 of
$14.9 million representing the forgiveness of deferred management fees by the
Manager. This extraordinary gain was combined with a loss on extinguishment of
debt of $2.4 million resulting in a net extraordinary gain of $12.5 million. No
extraordinary gain was recognized in 1996.
Net Income. Net income increased $14.4 million to $27.8 million, or 15% of total
revenues, in 1997 from $13.5 million, or 7% of total revenues, in 1996 due to
improved lodging results and the impact of the net extraordinary gain discussed
above.
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Principal Sources and Uses of Cash
The Partnership's principal source of cash is cash from operations. Cash
provided by operations was $38.2 million, $31.7 million and $42.7 million for
the years ended 1998, 1997 and 1996, respectively. The decrease from 1996 to
1997 was primarily due to $4.2 million of deferred incentive management fees
paid in 1997 and no deferral of current incentive management fees in 1997. In
accordance with to the new management agreement, unpaid incentive management
fees will no longer accrue. The increase in cash from operations from 1997 to
1998 was primarily due to a 6% increase in revenues.
The Partnership's cash investing activities consist primarily of contributions
to the property improvement fund and capital expenditures for improvements to
existing hotels. Cash used in investing activities was $14.9 million, $16.8
million and $9.6 million for 1998, 1997 and 1996, respectively. As part of the
debt refinancing, contributions to the property improvement fund will remain at
5% of gross Hotel sales through 1998 and may be increased by the Manager to 6%
in 1999 and 2000 and 7% thereafter if the current contribution of 5% of gross
Hotel sales is insufficient to make the replacements, renewals and repairs
necessary to maintain the Hotels in accordance with the Manager's standards for
Courtyard by Marriott hotels. Capital expenditures for hotel improvements were
$11.1 million, $23.6 million and $19.1 million for the years ended December 31,
1998, 1997 and 1996, respectively. During 1996 and 1997 a majority of the
Partnership's Hotels underwent room renovations and replacements.
The Partnership's financing activities primarily consist of capital
distributions to its partners, repayments of debt and payment of financing
costs, as well as the refinancing of the Partnership's mortgage debt. Cash used
in financing activities was $19.5 million, $22.2 million and $31.4 million for
1998, 1997 and 1996, respectively. During 1998 and 1997 and 1996 the Partnership
paid cash distributions of $12.1 million, $40.1 million and $2.3 million,
respectively. Cash distributions in 1998 included $11.5 million to the limited
partners ($10,000 per limited partner unit) and $0.6 million to the General
Partner as a return on invested capital paid from refinancing proceeds. 1997
cash distributions included a $25,000 per unit return of investment from
refinancing proceeds.
In February 1997, the Partnership repaid $8.2 million in principal on the 49
Hotels Loan with cash flow from 1996 operations. On March 21, 1997, the
Partnership repaid $280.8 million in principal on the 49 Hotels Loan and the
Windsor Loan from the proceeds of the debt refinancing. In addition, from March
22, 1997 through December 31, 1997, the Partnership repaid $4.6 million in
principal on the refinanced debt. During 1996, the Partnership repaid $28.8
million in principal on the 49 Hotels Loan and the Windsor Loan. During 1998,
the Partnership repaid $7.4 million in principal on the refinanced debt. The
Partnership also paid $25.3 million, $24.8 million and $22.1 million of interest
on its mortgage debt in 1998, 1997 and 1996, respectively.
Pursuant to the terms of the 50 Hotels Loan, the Partnership is required to
establish with the lender a separate escrow account for payments of insurance
premiums and real estate taxes for each Hotel if the credit rating of Marriott
International, Inc. is downgraded by Standard and Poor's Rating Services. The
Manager, Courtyard Management Corporation, is a wholly-owned subsidiary of
Marriott International, Inc. In March 1997, MII acquired the Renaissance Hotel
Group N.V., adding greater geographic diversity and growth potential to its
lodging portfolio. The assumption of additional debt associated with this
transaction resulted in a single downgrade of MII's long-term senior unsecured
debt effective April 1997. The Partnership transferred $7.9 million into the
reserve account during 1998. Out of the balance, approximately $6.9 million of
real estate taxes were paid. The escrow reserve is included in restricted cash
and the resulting tax and insurance liability is included in accounts payable
and accrued liabilities in the accompanying balance sheet, as of December 31,
1998.
In addition, in connection with the 50 Hotels Loan, the Partnership was also
required to reserve one month's debt service in a separate escrow account. In
1997, the Partnership transferred $2.8 million into the debt reserve account in
order to meet this requirement. The debt service reserve is also included in
restricted cash in the accompanying balance sheet.
Refinancing
In March 1997, the General Partner refinanced all of its outstanding mortgage
debt. The total amount of debt increased from $280.8 million to $325 million.
The $44.2 million of excess financing proceeds were used to make a $7 million
contribution to the property improvement fund, a $30.2 million partial return of
capital distribution to the partners and to pay $7 million of refinancing costs.
The new non-recourse loan matures on April 10, 2012, requires principal
amortization on a 20-year term and carries a fixed interest rate of 7.865%.
The land on which 31 of the Hotels are located is leased from affiliates of MII.
The ground leases have remaining terms (including all renewal options) expiring
between the years 2058 and 2081. The MII ground leases provide for rent based on
specific percentages (from 2% to 9.75%) 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 affiliates of MII,
as land lessors, agreed to continue to subordinate their ownership interest as
well as receipt of ground rent to debt service on the 50 Hotels Loan obtained
March 21, 1997.
In connection with the refinancing, 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 50 Hotels Loan.
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. However, in
accordance with the Management Agreement, contributions to the property
improvement fund may be increased by the Manager to 6% in 1999 and 2000 and 7%
thereafter if the current contribution of 5% of gross Hotel sales is
insufficient to make the replacements, renewals and necessary repairs to
maintain the Hotels in accordance with the Manager's standards for Courtyard by
Marriott hotels. The balance in the fund totaled $5.5 million as of December 31,
1998 and $1.6 million in 1997. Total capital expenditures for 1998, 1997 and
1996 were $11.1 million, $23.6 million and $19.1 million, respectively.
General
The General Partner believes that cash from hotel operations combined with the
ability to defer 1% of the Courtyard management fee to the Manager and ground
rent payments to affiliates of MII will provide adequate funds in the short term
and long term for the operational needs of the Partnership.
Competition
The moderately priced lodging segment continues to be highly competitive. An
increase in supply growth continued through 1998 with the introduction of a
number of new national brands. It is expected that Courtyard will continue
outperforming both national and local competitors. The brand is continuing to
carefully monitor the introduction of new mid-priced brands including Wingate
Hotels, Hilton Garden Inns, Four Points by Sheraton, Main Stay, Candlewood
Hotels and Club Hotels.
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 1998, the growth in average rates of Courtyard
hotels exceeded inflationary costs.
Seasonality
Demand, and thus room occupancy, is affected by normally recurring seasonal
patterns. For most of the Hotels, demand is higher in the spring and summer
months (March through October) than during the remainder of the year.
Year 2000 Issues
Year 2000 issues have arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous results. The following disclosure provides information
regarding the current status of the Partnership's Year 2000 compliance program.
Host Marriott has adopted the compliance program because it recognizes the
importance of minimizing the number and seriousness of any disruptions that may
occur as a result of the Year 2000 issue. Host Marriott's compliance program
includes an assessment of Host Marriott's hardware and software computer systems
and embedded systems, as well as an assessment of the Year 2000 issues relating
to third parties with which Host Marriott has a material relationship or whose
systems are material to the operations of the Partnership's Hotels. Host
Marriott's efforts to ensure that its computer systems are Year 2000 compliant
have been segregated into two separate phases: in-house systems and third-party
systems.
In-House Systems. Host Marriott has invested in the implementation and
maintenance of accounting and reporting systems and equipment that are intended
to enable the Partnership to provide adequately for its information and
reporting needs and which are also Year 2000 compliant. Substantially all of
Host Marriott's in-house systems have already been certified as Year 2000
compliant through testing and other mechanisms, and Host Marriott has not
delayed any systems projects due to the Year 2000 issue. Host Marriott is in the
process of engaging a third party to review its Year 2000 in-house compliance.
Host Marriott believes that future costs associated with Year 2000 issues for
its in-house systems will be insignificant and, therefore, not impact the
Partnership's business, financial condition and results of operations. Host
Marriott has not developed, and does not plan to develop, a separate contingency
plan for its in-house systems due to their current Year 2000 compliance.
Third-Party Systems. The Partnership relies upon operational and accounting
systems provided by third parties, primarily the Manager of its Hotels, to
provide the appropriate property-specific operating systems (including
reservation, phone, elevator, security, HVAC and other systems) and to provide
it with financial information. Based on discussions with the third parties that
are critical to the Partnership's business, including the Manager of its Hotels,
Host Marriott believes that these parties are in the process of studying their
systems and the systems of their respective vendors and service providers and,
in many cases, have begun to implement changes, to ensure that they are Year
2000 compliant. However, Host Marriott has not received any oral or written
assurances that these third parties will be Year 2000 compliant on time. To the
extent these changes impact property-level systems, the Partnership may be
required to fund capital expenditures for upgraded equipment and software. The
Partnership does not expect these charges to be material, but is committed to
making these investments as required. To the extent that these changes relate to
the Manager's centralized systems (including reservations, accounting,
purchasing, inventory, personnel and other systems), the Partnership's
Management Agreement generally provides for these costs to be charged to the
Partnership's Hotels. Host Marriott expects that the Manager will incur Year
2000 costs for its centralized systems in lieu of costs related to system
projects that otherwise would have been pursued and therefore, its overall level
of centralized systems charges allocated to the Hotels will not materially
increase as a result of the Year 2000 compliance effort. Host Marriott believes
that this deferral of certain system projects will not have a material impact on
its future results of operations, although it may delay certain productivity
enhancements at the Partnership's Hotels. Host Marriott will continue to monitor
the efforts of these third parties to become Year 2000 compliant and will take
appropriate steps to address any non-compliance issues. The Partnership believes
that in the event of material Year 2000 non-compliance caused by a breach of the
Manager's duties, the Partnership will have the right to seek recourse against
the Manager under its Management Agreement. The Management Agreement generally
does not specifically address the Year 2000 compliance issue. Therefore, the
amount of any recovery in the event of Year 2000 non-compliance at a property,
if any, is not determinable at this time.
Host Marriott will work with the third parties to ensure that appropriate
contingency plans will be developed to address the most reasonably likely worst
case Year 2000 scenarios, which may not have been identified fully. In
particular, Host Marriott has had extensive discussions regarding the Year 2000
problem with MII, the parent of the Manager of the Partnership's Hotels. Due to
the significance of MII to the Partnership's business, a detailed description of
MII state of readiness follows.
MII has adopted an eight-step process toward Year 2000 readiness, consisting of
the following: (i) Awareness: fostering understanding of, and commitment to, the
problem and its potential risks; (ii) Inventory: identifying and locating
systems and technology components that may be affected; (iii) Assessment:
reviewing these components for Year 2000 compliance, and assessing the scope of
Year 2000 issues; (iv) Planning: defining the technical solutions and labor and
work plans necessary for each particular system; (v) Remediation/Replacement:
completing the programming to renovate or replace the problem software or
hardware; (vi) Testing and Compliance Validation: conducting testing, followed
by independent validation by a separate internal verification team; (vii)
Implementation: placing the corrected systems and technology back into the
business environment; and (viii) Quality Assurance: utilizing a dedicated audit
team to review and test significant projects for adherence to quality standards
and program methodology.
MII has grouped its systems and technology into three categories for purposes of
Year 2000 compliance: (i) information resource applications and technology (IT
Applications) -- enterprise-wide systems supported by MII's centralized
information technology organization ("IR"); (ii) Business-initiated Systems
("BIS") - systems that have been initiated by an individual business unit, and
that are not supported by MII's IR organization; and (iii) Building Systems -
non-IT equipment at properties that use embedded computer chips, such as
elevators, automated room key systems and HVAC equipment. MII is prioritizing
its efforts based on how severe an effect noncompliance would have on customer
service, core business processes or revenues, and whether there are viable,
non-automated fallback procedures (System Criticality).
MII measures the completion of each phase based on documented and quantified
results, weighted for System Criticality. As of December 31, 1998, the Awareness
and Inventory phases were complete for IT Applications and nearly complete for
BIS and Building Systems. For IT Applications, the Assessment, Planning and
Remediation/Replacement and Testing phases were each over 95 percent complete,
and Compliance Validation had been completed for nearly half of key systems,
with most of the remaining work in its final stage. BIS and Building Systems,
Assessment and Planning are nearly complete. Remediation/Replacement and Testing
are 20% complete for BIS, and Marriott International is on track for completion
of initial Testing of Building Systems by the end of first quarter 1999.
Compliance Validation is in progress for both BIS and Building Systems. Marriott
International remains on target for substantial completion of
Remediation/Replacement and Testing for System Critical BIS and Building Systems
by June 1999 and September 1999, respectively. Quality Assurance is in progress
for IT Applications, BIS and Building Systems.
MII has initiated Year 2000 compliance communications with its significant third
party suppliers, vendors and business partners, including its franchisees. MII
is focusing its efforts on the business interfaces most critical to its customer
service and revenues, including those third parties that support the most
critical enterprise-wide IT Applications, franchisees generating the most
revenues, suppliers of the most widely used Building Systems and BIS, the top
100 suppliers, by dollar volume, of non-IT products, and financial institutions
providing the most critical payment processing functions. Responses have been
received from a majority of the firms in this group. A majority of the
respondents have either given assurances of timely Year 2000 compliance or have
identified the necessary actions to be taken to achieve timely Year 2000
compliance.
MII is also establishing a common approach for testing and addressing Year 2000
compliance issues for its managed and franchised properties. This includes a
guidance protocol for operated properties, and a Year 2000 "Toolkit" for
franchisees containing relevant Year 2000 compliance information. MII is also
utilizing a Year 2000 best-practices sharing system.
Risks. There can be no assurance that Year 2000 remediation by the Partnership
or third parties will be properly and timely completed, and failure to do so
could have a material adverse effect on the Partnership, its business and its
financial condition. The Partnership cannot predict the actual effects to it of
the Year 2000 issue, which depends on numerous uncertainties such as: (i)
whether significant third parties properly and timely address the Year 2000
issue; and (ii) whether broad-based or systemic economic failures may occur.
Host Marriott is also unable to predict the severity and duration of any such
failures, which could include disruptions in passenger transportation or
transportation systems generally, loss of utility and/or telecommunications
services, the loss or distortion of hotel reservations made on a centralized
reservation system and errors or failures in financial transactions or payment
processing systems such as credit cards. Due to the general uncertainty inherent
in the Year 2000 issue and the Partnership's dependence on third parties, the
Partnership is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Partnership. Host Marriott's
Year 2000 compliance program is expected to significantly reduce the level of
uncertainty about the Year 2000 issue and Host Marriott believes that the
possibility of significant interruptions of normal operations should be reduced.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Index
Courtyard by Marriott Limited Partnership Financial Statements:
Report of Independent Public Accountants............................... 21
Statement of Operations................................................ 22
Balance Sheet.......................................................... 23
Statement of Changes in Partners' Capital (Deficit).................... 24
Statement of Cash Flows................................................ 25
Notes to Financial Statements.......................................... 26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF COURTYARD BY MARRIOTT LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Courtyard by Marriott Limited
Partnership (a Delaware limited partnership) as of December 31, 1998 and 1997,
and the related statements of operations, changes in partners' capital (deficit)
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements and the schedule referred to below are the
responsibility of the General Partner's management. Our responsibility is to
express an opinion on these financial statements and the 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 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 financial statements referred to above present fairly, in
all material respects, the financial position of Courtyard by Marriott Limited
Partnership as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Partnership has given
retroactive effect to the change to include property-level sales and operating
expenses of its hotels in the statement of operations.
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 the purpose of complying with the Securities and
Exchange Commission's rules and is not part 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 22, 1999
<PAGE>
STATEMENT OF OPERATIONS
Courtyard by Marriott Limited Partnership
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands, except per Unit amounts)
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
REVENUES
Hotel revenues
Rooms........................................................................$ 182,097 $ 170,583 $ 162,126
Food and beverage............................................................ 12,994 12,470 12,975
Other........................................................................ 6,159 6,499 6,538
----------- ----------- -----------
Total hotel revenues....................................................... 201,250 189,552 181,639
----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms........................................................................ 39,481 36,539 36,059
Food and beverage............................................................ 11,247 10,966 11,165
Other department costs and expenses.......................................... 2,024 2,116 1,968
Selling, administrative and other............................................ 47,330 44,627 42,147
----------- ----------- -----------
Total hotel property-level costs and expenses.............................. 100,082 94,248 91,339
Depreciation................................................................... 19,031 19,387 19,258
Base and Courtyard management fees............................................. 12,074 11,373 10,898
Incentive management fee....................................................... 9,426 8,906 9,365
Ground rent.................................................................... 8,021 7,648 7,246
Property taxes................................................................. 6,761 5,278 5,977
Insurance and other............................................................ 1,579 2,029 1,571
----------- ----------- -----------
Total Operating Costs and Expenses....................................... 156,974 148,869 145,654
----------- ----------- -----------
OPERATING PROFIT.................................................................. 44,276 40,683 35,985
Interest expense............................................................... (26,305) (25,990) (23,529)
Interest income................................................................ 914 647 998
----------- ----------- -----------
NET INCOME BEFORE EXTRAORDINARY ITEMS............................................. 18,885 15,340 13,454
EXTRAORDINARY ITEMS
Gain on forgiveness of deferred management fees................................ -- 14,896 --
Loss on extinguishment of debt................................................. -- (2,423) --
----------- ----------- -----------
NET INCOME........................................................................$ 18,885 $ 27,813 $ 13,454
=========== =========== ===========
ALLOCATION OF NET INCOME
General Partner................................................................$ 944 $ 1,391 $ 673
Limited Partners............................................................... 17,941 26,422 12,781
----------- ----------- -----------
$ 18,885 $ 27,813 $ 13,454
=========== =========== ===========
NET INCOME BEFORE EXTRAORDINARY ITEMS PER
LIMITED PARTNER UNIT (1,150 Units).............................................$ 15,601 $ 12,672 $ 11,114
=========== =========== ===========
NET INCOME PER LIMITED PARTNER UNIT (1,150 Units).................................$ 15,601 $ 22,976 $ 11,114
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
BALANCE SHEET
Courtyard by Marriott Limited Partnership
December 31, 1998 and 1997
(in thousands)
<TABLE>
1998 1997
<S> <C> <C>
ASSETS
Property and equipment, net...................................................................$ 297,189 $ 305,156
Deferred financing costs, net of accumulated amortization..................................... 5,854 6,295
Due from Courtyard Management Corporation..................................................... 4,210 4,913
Property improvement fund..................................................................... 5,475 1,628
Restricted cash............................................................................... 9,315 7,964
Cash and cash equivalents..................................................................... 9,203 5,450
----------- -----------
</TABLE>
<TABLE>
<S> <C> <C>
$ 331,246 $ 331,406
============ ===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES
Mortgage debt.................................................................................$ 313,051 $ 320,407
Straight-line ground rent due to affiliates of Marriott International, Inc.................... 19,384 19,616
Debt service guaranty and accrued interest payable to Host Marriott Corporation............... 14,208 13,594
Incentive management fees due to Courtyard Management Corporation............................. 5,653 6,476
Accounts payable and accrued liabilities...................................................... 3,750 2,898
----------- -----------
Total Liabilities....................................................................... 356,046 362,991
</TABLE>
<TABLE>
----------- -----------
<S> <C> <C>
PARTNERS' CAPITAL (DEFICIT)
General Partner
Capital contributions....................................................................... 28,218 28,218
Capital distributions....................................................................... (4,187) (3,582)
Cumulative net losses....................................................................... (23,946) (24,890)
----------- -----------
85 (254)
--- --------
Limited Partners
Capital contributions, net of offering costs of $12,912..................................... 100,845 100,845
Investor notes receivable................................................................... (98) (98)
Capital distributions....................................................................... (79,553) (68,058)
Cumulative net losses....................................................................... (46,079) (64,020)
----------- -----------
(24,885) (31,331)
Total Partners' Deficit................................................................. (24,800) (31,585)
----------- -----------
$ 331,246 $ 331,406
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
STATEMENT OF CHANGES IN
PARTNERS' CAPITAL (DEFICIT)
Courtyard by Marriott Limited Partnership
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
General Limited
Partner Partners Total
<S> <C> <C> <C>
Balance, December 31, 1995........................................................$ (199) $ (30,285) $ (30,484)
Capital distributions........................................................ -- (2,300) (2,300)
Net income................................................................... 673 12,781 13,454
----------- ----------- -----------
Balance, December 31, 1996........................................................ 474 (19,804) (19,330)
Capital distributions........................................................ (2,118) (37,950) (40,068)
Net income................................................................... 1,390 26,423 27,813
----------- ----------- -----------
Balance, December 31, 1997........................................................ (254) (31,331) (31,585)
Capital distributions........................................................ (605) (11,495) (12,100)
Net income................................................................... 944 17,941 18,885
----------- ----------- -----------
Balance, December 31, 1998........................................................$ 85 $ (24,885) $ (24,800)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
STATEMENT OF CASH FLOWS
Courtyard by Marriott Limited Partnership
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.....................................................................$ 18,885 $ 27,813 $ 13,454
Net extraordinary items........................................................ -- (12,473) --
----------- ----------- -----------
Income before extraordinary items.............................................. 18,885 15,340 13,454
Noncash items:
Depreciation................................................................. 19,031 19,387 19,258
Deferred interest on guaranty advances....................................... 614 619 609
Amortization of deferred financing costs as interest expense................. 443 696 1,126
Deferred incentive management fees........................................... -- -- 9,365
Changes in operating accounts:
Payment of deferred incentive management fees................................ (823) (4,224) --
Due from Courtyard Management Corporation.................................... 420 412 (553)
Straight-line ground rent due to affiliates of Marriott International, Inc... (232) (232) (268)
Accounts payable and accrued liabilities..................................... (146) (313) (303)
----------- ----------- -----------
Cash provided by operations.............................................. 38,192 31,685 42,688
----------- ----------- -----------
INVESTING ACTIVITIES
Additions to property and equipment, net....................................... (11,064) (23,604) (19,080)
Change in property improvement fund............................................ (3,847) 6,821 9,491
----------- ----------- -----------
Cash used in investing activities........................................ (14,911) (16,783) (9,589)
----------- ----------- -----------
FINANCING ACTIVITIES
Capital distributions.......................................................... (12,100) (40,068) (2,300)
Payment of mortgage debt....................................................... (7,356) (293,568) (28,788)
Change in debt reserve......................................................... (70) (7,198) --
Payment of financing costs..................................................... (2) (6,327) (315)
Proceeds from mortgage debt.................................................... -- 325,000 --
----------- ----------- -----------
Cash used in financing activities........................................ (19,528) (22,161) (31,403)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. 3,753 (7,259) 1,696
CASH AND CASH EQUIVALENTS at beginning of year.................................... 5,450 12,709 11,013
----------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of year..........................................$ 9,203 $ 5,450 $ 12,709
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest................................................$ 25,285 $ 24,844 $ 22,122
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Courtyard by Marriott Limited Partnership
December 31, 1998 and 1997
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Courtyard by Marriott Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed to acquire and own 50 Courtyard by Marriott
hotels (the "Hotels") and the land on which certain of the Hotels are located.
The Partnership's 50 hotels are located in 16 states in the United States: nine
in Georgia; seven in Texas; six in California; five in Virginia; four in
Michigan and three or fewer in each of the other 11 states. The Hotels are
operated as part of the Courtyard by Marriott hotel system by Courtyard
Management Corporation (the "Manager"), a wholly owned subsidiary of Marriott
International, Inc. ("MII").
On August 20, 1986 (the "Closing Date"), 1,150 limited partnership interests
(the "Units"), representing a 95% interest in the Partnership, were sold
pursuant to a private placement offering at $100,000 per Unit. CBM One
Corporation, (the "Old General Partner") made capital contributions consisting
of $1,211,000 in cash and land on which certain of the Hotels are located
valued at $4,842,000 for its 5% general partner interest.
On the Closing Date, the Partnership executed a purchase agreement (the
"Purchase Agreement") with Host Marriott to acquire the Hotels and the land on
which certain of the Hotels are located for a total fixed price of $448,184,000.
Of the total purchase price, $374,656,000 was paid in cash from the proceeds of
the mortgage financing and the initial installment on the sale of the Units with
the remaining $73,528,000 evidenced by a note payable to Host Marriott.
Twenty-eight of the Hotels were conveyed to the Partnership in 1986, twenty-one
Hotels in 1987 and the final Hotel in January 1988.
On April 17, 1998, Host Marriott, the parent of the Old General Partner of the
Partnership, announced that its Board of Directors authorized the company to
reorganize its business operations so as to qualify as a real estate investment
trust ("REIT") to become effective as of January 1, 1999 (the "REIT
Conversion"). On December 29, 1998, Host Marriott announced that it had
completed substantially all the steps necessary to complete the REIT Conversion
and expected to qualify as a REIT under the applicable Federal income tax laws
beginning January 1, 1999. Subsequent to the REIT Conversion, Host Marriott is
referred to as Host REIT. In connection with the REIT Conversion, Host Marriott
contributed substantially all of its hotel assets to a newly-formed partnership,
Host Marriott L.P. ("Host LP").
Prior to December 24, 1998, the sole general partner of the Partnership, with a
5% interest, was CBM One Corporation ("CBM One"), a wholly owned subsidiary of
Host Marriott Corporation. In connection with Host Marriott Corporation's
conversion to a real estate investment trust, the following steps occurred. Host
Marriott formed CBM One LLC, a Delaware single member limited liability company,
having three classes of member interests (Class A - 1% economic interest,
managing; Class B - 98% economic interest, non-managing; Class C - 1% economic
interest, non-managing). CBM One merged into CBM One LLC on December 24, 1998
and CBM One ceased to exist. On December 28, 1998, Host Marriott
contributed its entire interest in CBM One LLC to Host Marriott, L.P. ("Host
LP"), which is owned 78% by Host Marriott and 22% by outside limited partners.
Finally on December 30, 1998, Host LP contributed its 98% Class B and 1%
Class C interest in CBM One LLC to Rockledge Hotel Properties, Inc.
("Rockledge"), a Delaware corporation which is owned 95% by Host LP
(economic non-voting interest) and 5% by Host Marriott Statutory/Charitable
Employee Trust, a Delaware statutory business trust (100% of voting
interest). As a result, the sole general partner of the Partnership is CBM One
LLC (the "General Partner")which has three classes of member interests;
a Class A 1% managing economic interest owned by Host LP and a Class B 98%
and Class C 1% non-managing economic interest owned by Rockledge.
<PAGE>
Partnership Allocations and Distributions
Partnership allocations and distributions are generally made as follows:
a. Cash available for distribution will be distributed (i) first, 5% to the
General Partner and 95% to the limited partners until the General Partner
and the limited partners (collectively, the "Partners") have received
cumulative distributions of sale or refinancing proceeds ("Capital
Receipts") equal to $60,526,500; (ii) next, 15% to the General Partner and
85% to the limited partners until the Partners have received cumulative
distributions of Capital Receipts equal to $121,053,000; and (iii)
thereafter, 30% to the General Partner and 70% to the limited partners.
b. Capital Receipts, other than from the sale or other disposition of
substantially all of the assets of the Partnership, not retained by the
Partnership will be distributed (i) first, 5% to the General Partner and
95% to the limited partners until the Partners have received cumulative
distributions of Capital Receipts equal to $121,053,000 and (ii)
thereafter, 30% to the General Partner and 70% to the limited partners.
c. Proceeds from the sale of substantially all of the assets of the
Partnership or from a related series of Hotel sales leading to the sale of
substantially all of the assets of the Partnership will be distributed to
the Partners pro-rata in accordance with their capital account balances.
d. Net profits are generally allocated in the same ratio in which cash
available for distribution is distributed. Net losses are generally
allocated to the General Partner. To the extent the General Partner makes
debt service advances to the Partnership and other loans are outlined in
the partnership agreement, the General Partner will be allocated net losses
equal to the amounts advanced.
e. In general, gain recognized by the Partnership will be allocated, with
respect to any year, in the following order of priority: (i) to all
Partners whose capital accounts have negative balances until such negative
balances are brought to zero; (ii) to all Partners up to the amount
necessary to bring their respective capital account balances to an amount
equal to their invested capital, as defined; and (iii) thereafter, 30% to
the General Partner and 70% to the limited partners.
Gain arising from the sale or other disposition (or from a related series
of sales or dispositions) of substantially all of the assets of the
Partnership will be allocated (i) to the limited partners in an amount
equal to the excess, if any, of (1) the sum of 15% times the weighted
average of the limited partners' invested capital each year, over (2) the
sum of distributions to the limited partners of Capital Receipts and cash
available for distribution each year; (ii) next, to the General Partner
until it has been allocated an amount equal to 30/70 times the amount
allocated to the limited partners under clause (i); and (iii) thereafter,
30% to the General Partner and 70% to the limited partners.
f. For financial reporting purposes, profits and losses are allocated among
the Partners based on their stated interests in cash available for
distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership records are maintained on the accrual basis of accounting, and
its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with 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.
<PAGE>
Working Capital and Supplies
Pursuant to the terms of the Partnership's management agreement discussed in
Note 7, the Partnership is required to provide the Manager with working capital
and supplies to meet the operating needs of the Hotels. The Manager converts
cash advanced by the Partnership into other forms of working capital consisting
primarily of operating cash, inventories, and trade receivables and payables
which are maintained and controlled by the Manager. Upon the termination of the
management agreement, the Manager is required to convert working capital and
supplies into cash and return it to the Partnership. As a result of these
conditions, the individual components of working capital and supplies controlled
by the Manager are not reflected in the accompanying consolidated balance sheet.
Revenues and Expenses
Revenues primarily represent the gross revenues generated by the Partnership's
Hotels.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus on EITF 97-2, "Application of
FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements."
EITF 97-2 addresses the circumstances in which a management entity may include
the revenues and expenses of a managed entity in its financial statements.
The Partnership has considered the impact of EITF 97-2 on its financial
statements and determined that EITF 97-2 requires the Partnership to include
property-level sales and operating expenses of its Hotels in its statement of
operations. The Partnership has given retroactive effect to the adoption of EITF
97-2 in the accompanying statement of operations. Application of EITF 97-2 to
the financial statements for the fiscal years ended December 31, 1998, 1997 and
1996 increased both revenues and operating expenses by approximately $100.1
million, $94.2 million and $91.3 million, respectively, and had no impact on
operating profit or net income.
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:
Building and improvements 40 years
Leasehold improvements 40 years
Furniture and equipment 4-10 years
All property and equipment is pledged to secure the mortgage debt described in
Note 5.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties will be
less than their net book value. If a property is impaired, its basis is adjusted
to fair market value less selling costs. There was no such adjustment required
at December 31, 1998 or 1997.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the mortgage debt (see Note 5) and are amortized, using the
straight-line method which approximates the effective interest rate method, over
the term of the loan. In connection with the refinancing, $2,423,000 of
unamortized deferred financing fees related to the 49 Hotels and Windsor Loans
were written off in 1997 and recorded in the financial statements as an
extraordinary loss. Financing costs as of December 31, 1998 and 1997 were
$6,644,000 and $6,642,000, respectively. Accumulated amortization of financing
costs as of December 31, 1998 and 1997 totaled $790,000 and $347,000,
respectively.
Ground Rent
The land leases with affiliates of MII (see Note 6) include scheduled
increases in minimum rents per property. These scheduled rent increases,
which are included in minimum lease payments, are being recognized by the
Partnership on a straight-line basis over the 95 year term of the leases.
The adjustment included in ground rent expense to reflect minimum lease
payments on a straight-line basis was $(232,000) for 1998, 1997 and ($268,000)
for 1996.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes, but rather, allocates its profits and losses to the individual Partners.
Significant differences exist between the net income for financial reporting
purposes and the net income as reported in the Partnership's tax return. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods, shorter depreciable lives for the assets,
differences in the timing of recognition of certain fees and straight-line rent
adjustments. As a result of these differences, the excess of the tax basis in
net Partnership liabilities over the net Partnership liabilities reported in the
accompanying financial statements is $52,845,000 and $45,080,000 as of December
31, 1998 and 1997, respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Reclassifications
Certain reclassifications were made to the 1996 and 1997 financial statements
to conform to the 1998 presentation.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
1998 1997
----------- --------
<S> <C> <C>
Land.............................................................................................$ 30,797 $ 30,797
Leasehold improvements........................................................................... 208,758 201,413
Building and improvements........................................................................ 136,872 142,447
Furniture and equipment.......................................................................... 167,230 157,936
----------- -----------
543,657 532,593
Less accumulated depreciation.................................................................... (246,468) (227,437)
----------- -----------
$ 297,189 $ 305,156
=========== ===========
</TABLE>
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value 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>
As of December 31, 1998 As of December 31, 1997
---------------------------- ---------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Mortgage debt.............................................$ 313,051 $ 298,274 $ 320,407 $ 320,000
Incentive management fees due to Courtyard
Management Corporation.................................$ 5,653 $ 3,447 $ 6,476 $ 4,300
Debt service guaranty and accrued interest payable
Host Marriott Corporation..............................$ 14,208 $ 1,389 $ 13,594 $ 1,200
</TABLE>
The estimated fair value of mortgage debt obligations is based on the expected
future debt service payments discounted at estimated market rates. Management
fees due to Courtyard Management Corporation and debt service guaranty payable
to Host Marriott Corporation including accrued interest are valued based on the
expected future payments from operating cash flow discounted at risk adjusted
rates.
<PAGE>
NOTE 5. DEBT
The 49 Hotels Loan and the Windsor Loan, as discussed below, were
refinanced on March 21, 1997 and the lenders were repaid in full.
49 Hotels Loan
On April 18, 1994, the Partnership entered into a restated loan agreement (the
"49 Hotels Loan") with a group of banks (the "Lenders") for the 49 Hotels. For
the period June 16, 1996 through June 15, 1997 the 49 Hotels Loan bore interest
at floating rates at the Partnership's option equal to LIBOR plus 1.75
percentage points or the higher of .75 percentage points plus (a) prime, or (b)
.5 percentage points plus (i) the three week average 3-month CD rate or (ii) the
federal funds rate.
The 49 Hotels Loan required minimum annual principal payments of $7,000,000.
Additionally, while the loan balance was above $300,000,000, 100% of Available
Cash Flow (equal to operating profit, as defined, less the sum of (1) interest
expense, (2) the $7,000,000 annual principal payment, (3) partnership
administrative expenses of up to $250,000, as adjusted annually for the consumer
price index, and (4) ground rent payments to MII) was used to pay additional
principal on the 49 Hotels Loan. While the loan balance was between $250,000,000
and $299,999,999, 80% of Available Cash Flow was used to pay additional
principal on the 49 Hotels Loan and once the loan balance was less than
$250,000,000, 75% of Available Cash Flow would have been used to pay additional
principal on the loan.
For the period January 1, 1997 to March 21, 1997, the weighted average interest
rate on the 49 Hotels Loan was 7.2% and was 7.08% in 1996. The 49 Hotels Loan
would have matured on June 15, 1997; however, the term could have been extended
for two one-year periods if certain operating profit levels, as defined, were
met.
As security for the 49 Hotels Loan, the Lenders had a mortgage on the
Partnership's fee or leasehold interest in each of the Hotels, except the
Windsor, Connecticut Hotel (the "Windsor Hotel"). In addition, all of the
Lenders had a security interest in certain personal property associated with
each Hotel and granted a security interest in the Partnership's rights under the
operating agreement (see Note 7) and Purchase Agreement. Thirty of the 49 hotels
covered by the 49 Hotels Loan lease land (see Note 6) from affiliates of MII.
These affiliates agreed to subject their ownership interests as well as
subordinate their receipt of ground rent to the payment of debt service on the
49 Hotels Loan.
Windsor Hotel Loan
On February 9, 1988, the Partnership entered into a loan agreement to provide
non-recourse mortgage debt of $8,274,000 (the "Windsor Loan") to pay
approximately 80% of the purchase price of the Windsor Hotel. The Windsor Loan
bore interest at a floating rate equal to the adjusted CD rate or LIBOR plus 2.0
percentage points. The Windsor Loan matured on August 15, 1996 with the
remaining principal balance of $6,289,000 plus accrued interest due at that
time. In exchange for Host Marriott providing a guaranty of repayment of the
loan at maturity, the lender agreed to extend the Windsor Loan maturity to March
31, 1997. The Partnership agreed to continue to pay interest on the Windsor Loan
at LIBOR plus 200 basis points until the earlier of repayment or March 31, 1997.
No principal amortization on the Windsor Loan was required until maturity. For
the period January 1, 1997 to March 21, 1997, the weighted average interest rate
on the Windsor Loan was 7.65% and was 7.46% for 1996.
As security for the Windsor Loan, the bank had a mortgage on the Partnership's
leasehold interest in the Windsor Hotel. Additionally, the bank had a security
interest in the Partnership's interest in the personal property associated with
the Windsor Hotel and a security interest in the Partnership's rights under the
operating agreement and Purchase Agreement.
The Windsor Hotel land is also leased from an affiliate of MII, which agreed to
subject their ownership interest as well as their receipt of ground rent to the
payment of debt service on the Windsor Loan.
49 Hotels Loan Guaranties
Host Marriott provided additional security to the Lenders in the form of a debt
guaranty (the "Debt Service Guaranty") of aggregate interest and principal of up
to $40 million. Host Marriott's performance under the Debt Service Guaranty was
backed by a $40 million guaranty of aggregate principal and interest from MII
(the "Backup Guaranty"). Payments by Host Marriott under the Debt Service
Guaranty or MII under the Backup Guaranty would have been treated as advances to
the Partnership and bore interest at the base rate announced by The First
National Bank of Chicago. The Debt Service Guaranty replaced the original
guaranty of $37.3 million under the Original 49 Hotels Loan. No amounts were
advanced under the Debt Service Guaranty or the Backup Guaranty covering the 49
Hotels Loan. As of December 31, 1998, $7,341,000 had been advanced by the
General Partner under the Original 49 Hotels Debt Service Guaranty. The weighted
average interest rate on the Original 49 Hotel Loan guaranty advances was 8.4%
for 1998 and 1997. The interest rate was 7.75% at December 31, 1998. Accrued
interest on the guaranty advance as of December 31, 1998 and 1997, was
$6,867,000 and $6,253,000, respectively.
MII provided two additional guaranties to the Lenders: the debt and tenant
change guaranty (the "Debt and Tenant Change Guaranty") and the Marriott
International Guaranty (the "MII Guaranty").
The Debt and Tenant Change Guaranty provided that in the event of nonpayment of
principal and interest when due or upon loan maturity, MII would have advanced
amounts, as defined, in addition to amounts advanced under the Backup Guaranty
for principal and interest. No amounts were advanced pursuant to the Debt and
Tenant Change Guaranty.
Upon the refinancing of the Partnership's debt, Host Marriott and MII were
released from these guaranties.
Windsor Loan Guaranty
Host Marriott directly or through the General Partner provided additional
security to the Windsor Loan lenders in the form of a debt service guaranty of
aggregate interest and principal on the Windsor Loan of up to $706,000. Payments
by Host Marriott or the General Partner under the debt service guaranty were
treated as advances to the Partnership and bore interest at the base rate
announced by The First National Bank of Chicago. No amounts were advanced under
the Windsor Loan guaranty. However, in exchange for Host Marriott providing a
guaranty of repayment of the loan at maturity, the lender agreed to extend the
Windsor Loan maturity to March 31, 1997.
Upon the refinancing of the Partnership's debt, Host Marriott and MII were
released from this guaranty.
50 Hotels Loan
On March 21, 1997 (the "Refinancing Date") both the 49 Hotels Loan and the
Windsor Loan were refinanced with a new loan covering all 50 Hotels (the "50
Hotels Loan"). The total amount of the debt was increased from $280.8 million to
$325.0 million. The $44.2 million of excess refinancing proceeds were used to:
(i) make a $7 million contribution to the property improvement fund to cover
anticipated shortfalls; (ii) pay approximately $7 million of refinancing costs;
and (iii) make a $30.2 million partial return of capital distribution to the
partners. The new loan continues to be non-recourse and requires monthly
payments of interest at a fixed rate of 7.865% and principal based on a 20 year
amortization schedule. The loan has a scheduled maturity on April 10, 2012;
however, the loan maturity can be extended for an additional five years. During
the extended loan term, the loan bears interest at an adjusted rate, as defined,
and all cash flow from Partnership operations is used to amortize the principal
balance of the loan.
Debt maturities as of December 31, 1998 under the refinanced loan are as follows
(in thousands):
1999 $ 7,955
2000 8,604
2001 9,306
2002 10,065
2003 10,886
Thereafter 266,235
--------------
$ 313,051
The refinanced mortgage loan is secured by first mortgages on all of the Hotels,
related personal property, and the land on which they are located or an
assignment of the Partnership's interest under the land leases. No new debt
guaranties have been provided by Host Marriott or MII.
Pursuant to the terms of the 50 Hotels Loan, the Partnership is required to
establish with the lender a separate escrow account for payments of insurance
premiums and real estate taxes for each Hotel if the credit rating of Marriott
International, Inc. is downgraded by Standard and Poor's Rating Services. The
Manager, Courtyard Management Corporation, is a wholly-owned subsidiary of MII.
In March 1997, MII acquired the Renaissance Hotel Group N.V., adding greater
geographic diversity and growth potential to its lodging portfolio. The
assumption of additional debt associated with this transaction resulted in a
single downgrade of MII's long-term senior unsecured debt effective April 1997.
The escrow reserve is included in restricted cash and the resulting tax and
insurance liability is included in accounts payable and accrued liabilities in
the accompanying balance sheet.
In addition, in connection with the 50 Hotels Loan, the Partnership was also
required to reserve one month's debt service in a separate account. The balance
of the debt service reserve as of December 31, 1998 and 1997 was $2.8 million
and $2.7 million, respectively. The debt reserve is also included in restricted
cash in the accompanying balance sheet.
Restricted cash consists of the following:
1998 1997
Debt Service Reserve $ 2,788 $ 2,718
Real Estate and Insurance Escrow 1,764 766
Restricted Cash Collateral 4,763 4,480
----------- ---------
$ 9,315 $ 7,964
NOTE 6. LAND LEASES
The land on which 31 of the Hotels are located is leased from affiliates of MII.
In addition, two of the Hotels are located on land leased from third parties.
The ground leases have remaining terms (including all renewal options) expiring
between the years 2058 and 2081. The MII ground leases and one of the third
party ground leases provide for rent based on specific percentages (from 2% to
9.75%) 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 affiliates of MII, as land lessors, agreed to
continue to subordinate their ownership interest as well as receipt of ground
rent to debt service on the 50 Hotels Loan obtained March 21, 1997 (see Note 5).
Minimum future rental payments during the term of the ground leases as of
December 31, 1998 are as follows (in thousands):
Lease Ground
Year Leases
----------- --------
1999 $ 7,068
2000 7,140
2001 7,140
2002 7,140
2003 7,140
Thereafter 532,423
$ 568,051
Total ground rent expense was $8,021,000 in 1998, $7,648,000 in 1997 and
$7,246,000 in 1996.
NOTE 7. MANAGEMENT AGREEMENT
Prior to the refinancing of the mortgage debt, the two operating agreements were
converted into a single management agreement effective January 4, 1997. The
initial term of the management agreement (the "Management Agreement") expires at
the end of 2017. The Manager can extend the Management Agreement for up to
four successive periods of ten years.
Under the Management Agreement, the Manager has agreed to subordinate a portion
of the Courtyard management fee equal to 1% of gross Hotel sales to debt service
on the 50 Hotels Loan. In addition, the Partnership paid $4.2 million of
deferred incentive management fees at closing, and the Manager agreed to forgive
approximately $14.9 million of deferred fees. The $14.9 million of forgiven fees
is recognized as an extraordinary gain in the 1997 financial statements.
Deferred and current year incentive management fees are payable from 50% of
available cash after the payment of: (i) debt service; (ii) deferred Courtyard
management fees, if any; (iii) deferred MII ground rent, if any; and (iv) a
priority return to the Partnership equal to 10% of cumulative capital less sale
and refinancing proceeds. In addition, incentive management fees paid are capped
at 15% of operating profit and no longer increase to 25% of operating profit
once cumulative distributions of refinancing proceeds equal $60.5 million.
Deferred management fees are not payable to the Manager from sale or refinancing
proceeds. Unpaid incentive management fees will not accrue. For the years ended
December 31, 1998, 1997 and 1996 incentive management fees of $9,426,000,
$8,906,000 and $9,365,000 were paid to the Manager. Deferred incentive
management fees of $823,000 and $4.2 million were paid to the Manager
during the years ended December 31, 1998 and 1997, respectively. No deferred
incentive management fees were paid during 1996.
The Management Agreement provides for annual payments to the Manager of (i) the
base management fee equal to 3% of gross sales from the Hotels, (ii) the
Courtyard management fee equal to 3% of gross sales from the Hotels, and (iii)
the incentive management fee equal to 15% of operating profit, as defined.
The Manager is required to furnish Chain Services which are furnished generally
on a central or regional basis to all managed, owned or leased hotels in the
Courtyard by Marriott hotel system. Under the Management Agreement, charges for
certain Chain Services cannot exceed 5% of gross Hotel sales. The Manager will
be responsible for any Chain Services in excess of the 5% of gross Hotel sales
limit from its own funds. In addition, the Hotels participate in MII's
Marriott's Rewards Program ("MRP"). The costs of this program are charged to all
hotels in the full-service, Residence Inn by Marriott, Courtyard by Marriott and
Fairfield Inn by Marriott systems based upon the MRP sales at each hotel. Chain
Services and MRP costs charged to the Partnership under the Management Agreement
were $8,244,000 and $7,084,000 in 1998 and 1997, respectively. The total amount
of Chain Services was $6,540,000 in 1996.
The Partnership is required to provide the Manager with working capital
and fixed asset supplies to meet the operating needs of the Hotels. Upon
termination of the Management Agreement, the working capital and supplies will
be returned to the Partnership. The working capital balance was $1,213,000 as of
December 31, 1998 and 1997, respectively.
The Management Agreement provides for a property improvement fund to be
maintained to ensure that the physical condition and product quality of the
Hotels are maintained. Contributions to the property improvement fund are equal
to 5% of gross Hotel sales through 1998 and may be increased, at the option of
the Manager, to 6% of gross Hotel sales in 1999 and 2000 and 7% thereafter. For
the years ended December 31, 1998 and 1997, the Partnership contributed
$10,540,000 and $9,478,000, excluding the $7 million contribution paid in 1997
from refinancing proceeds (Note 5), respectively, to the property improvement
fund.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Partnership has no directors or officers. The business and policy making
functions of the Partnership are carried out through the directors and executive
officers of CBM One LLC, the General Partner, who are listed below:
Age at
Name Current Position December 31, 1998
- --------------------------------------------------------------------------------
Robert E. Parsons, Jr. President and Manager 43
Christopher G. Townsend Executive Vice President,
Secretary and Manager 51
W. Edward Walter Treasurer 43
Earla L. Stowe Vice President and Chief
Accounting Officer 37
Business Experience
Robert E. Parsons, Jr. joined Host Marriott Corporation's Corporate
Financial Planning staff in 1981 and was made Assistant Treasurer in 1988.
In 1993, Mr. Parsons was elected Senior Vice President and Treasurer of
Host Marriott Corporation, and in 1995, he was elected Executive Vice
President and Chief Financial Officer of Host Marriott Corporation. He
also serves as a director, manager and officer of numerous Host Marriott
Corporation subsidiaries.
Christopher G. Townsend joined Host Marriott's Law Department in 1982 as a
Senior Attorney. In 1984 he was made Assistant Secretary of Host Marriott. In
1986 he was made an Assistant General Counsel. He was made Senior Vice
President, Corporate Secretary and Deputy General Counsel of Host Marriott in
1993. In January 1997, he was made General Counsel of Host Marriott. He also
serves as a director, manager and an officer of numerous Host Marriott
subsidiaries.
W. Edward Walter joined Host Marriott Corporation in 1996 as Senior Vice
President -Acquisitions and in 1998 was made Treasurer of Host Marriott. He also
serves as a director, manager and officer of numerous Host Marriott Corporation
subsidiaries. Prior to joining Host Marriott Corporation, Mr. Walter was a
partner at Trammell Crow Residential Company and President of Bailey Capital
Corporation, a real estate firm focusing on tax exempt real estate investments.
Earla L. Stowe joined Host Marriott 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. Ms. Stowe was promoted to
Senior Director-Corporate Accounting in 1998.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
As noted in Item 10 above, the Partnership has no directors or officers nor does
it have any employees. Under the Partnership Agreement, however, the General
Partner has the exclusive right to conduct the business and affairs of the
Partnership subject only to the management agreements described in Items 1 and
13. The General Partner is required to devote to the Partnership such time as
may be necessary for the proper performance of its duties, but the officers and
directors of the General Partner are not required to devote their full time to
the performance of such duties. No officer or manager of the General Partner
devotes a significant percentage of time to Partnership matters. To the extent
that any officer or manager does devote time to the Partnership, the General
Partner is entitled to reimbursement for the cost of providing such services.
For the fiscal years ending December 31, 1998, 1997 and 1996, the Partnership
reimbursed the General Partner in the amount of $523,000, $260,000 and $154,000,
respectively, for the cost of providing all administrative and other services as
General Partner. For information regarding all payments made by the Partnership
to Host Marriott and subsidiaries, see Item 13 "Certain Relationships and
Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of December 31, 1998, Palm Investors, LLC, an unrelated third party, owns
approximately 5.5% of the total number of limited partnership Units. The General
Partner owns a total of 15 Units representing a 1.24% limited partnership
interest in the Partnership.
As of December 31, 1998, an officer and manager of the General Partner and Host
Marriott and their respective affiliates owned a quarter unit; an officer of
Host Marriott owned a quarter unit; and two officers of MII owned one unit each.
The Partnership is not aware of any arrangements which may, at a subsequent
date, result in a change in control of the Partnership other than the
consolidation described in Item 1.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Agreement
In connection with the debt refinancing, the 49 Hotels Operating Agreement and
the Windsor Hotel Operating Agreement in effect from January 1, 1994 to January
3, 1997 were terminated. A new Management Agreement was executed as of January
4, 1997 for the management of the 50 Partnership Hotels.
<PAGE>
Term
The Management Agreement has an initial term expiring December 31, 2017 and can
be renewed for four successive ten year periods as to one or more of the Hotels.
The Partnership may terminate the Management Agreement if, during any three
consecutive years, the average operating profit, as defined, does not exceed
$40,198,000 plus 8% of the sum of owner funded capital expenditures. Management
Fees
The Management Agreement provides for annual payments of (i) the base management
fee equal to 3% of gross Hotel sales, (ii) the Courtyard management fee equal to
3% of gross Hotel sales, and (iii) the incentive management fee equal to 15% of
operating profit, as defined. A portion of the Courtyard management fee equal to
1% of gross Hotel sales is subordinate to debt service on the mortgage loan.
Deferral Provisions
As part of the debt refinancing, the Partnership agreed to pay $4.2 million of
deferred incentive management fees and the Manager agreed to approximately $14.9
million of these fees at the new mortgage debt closing on March 21, 1997. This
left a remaining balance of $6.5 million of accrued incentive management fees as
of March 21, 1997 and December 31, 1997. The Partnership paid $823,000 of
deferred, incentive management fees during 1998 leaving a balance of $5.7
million of deferred incentive management fees as of December 31, 1998.
Under the new Management Agreement, base and Courtyard management fees no longer
accrue if not paid. Deferred and current year incentive management fees are
payable from 50% of available cash after the payment of: (i) debt service; (ii)
deferred Courtyard management fees; if any; (iii) deferred MII ground rent, if
any; and (iv) a priority return to the Partnership equal to 10% of cumulative
capital less sale and refinancing proceeds. Deferred management fees are not
payable to the Manager from sale or refinancing proceeds. Unpaid incentive
management fees will not accrue.
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. Under the Management
Agreement, charges for certain Chain Services cannot exceed 5% of gross Hotel
sales. In addition, the Hotels participate in MII's Marriott's Rewards Program
("MRP"). The total amount of Chain Services and MRP costs allocated to the
Partnership was $8,244,000 in 1998, $7,084,000 in 1997 and $6,540,000 in 1996.
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. Upon termination
of the Management Agreement, the working capital and supplies will be returned
to the Partnership. As of December 31, 1998, the Partnership has advanced the
Manager $1,213,000 in working capital.
<PAGE>
Property Improvement Fund
The Management Agreement provides for the establishment of a repairs and
equipment reserve (property improvement fund) for the Hotels. The funding of
this reserve is based on a percentage of gross Hotel sales. The contribution to
the property improvement fund is at 5% of gross Hotel sales through 1998 and may
be increased, at the option of the Manager, to 6% of gross Hotel sales in 1999
and 2000 and 7% thereafter if the current contribution of 5% of gross Hotel
sales is insufficient to make the replacements, renewals and repairs to maintain
the Hotels in accordance with the Manager's standards for Courtyard by Marriott
hotels.
Leases
The land on which 31 of the Hotels are located is leased from affiliates of MII.
In addition, two of the Hotels are located on land leased from third parties.
The ground leases have remaining terms (including all renewal options) expiring
between the years 2058 and 2081. The MII ground leases and one of the third
party ground leases provide for rent based on specific percentages (from 2% to
9.75%) of certain sales categories, subject to minimum amounts. The minimum
rentals are adjusted at various anniversary dates throughout the lease terms, as
defined in the agreements. The affiliates of MII, as land lessors, agreed to
continue to subordinate their ownership interest as well as receipt of ground
rent to debt service on the 50 Hotels Loan obtained March 21, 1997 (see Note 6).
Payments to MII and Subsidiaries
The following table sets forth the amount paid to MII and affiliates under both
the Operating and Management Agreements and the ground lease agreements for the
years ended December 31, 1998, 1997 and 1996 (in thousands). The table also sets
forth accrued but unpaid incentive management fees:
<TABLE>
1998 1997 1996
----------- ----------- --------
<S> <C> <C> <C>
Incentive management fee..........................................................$ 9,426 $ 8,906 $ --
Ground rent....................................................................... 8,021 7,302 6,966
Chain services and MRP allocation................................................. 8,244 7,084 6,540
Base management fee............................................................... 6,037 5,687 5,449
Courtyard management fee.......................................................... 6,037 5,687 5,449
Deferred incentive management fee................................................. 823 4,224 --
----------- ----------- -----------
$ 38,588 $ 38,890 $ 24,404
=========== =========== ===========
Accrued but unpaid fees:
Incentive management fee..........................................................$ -- $ -- $ 9,365
=========== =========== ===========
</TABLE>
<PAGE>
Payments to Host Marriott and Subsidiaries
The following sets forth amounts paid by the Partnership to Host Marriott and
its subsidiaries for the years ended December 31, 1998, 1997 and 1996 (in
thousands):
<TABLE>
1998 1997 1996
----------- ----------- --------
<S> <C> <C> <C>
Cash distributions................................................................$ 755 $ 2,613 $ 30
Administrative expenses reimbursed................................................ 523 260 154
----------- ----------- -----------
$ 1,278 $ 2,873 $ 184
=========== =========== ===========
</TABLE>
Mortgage Debt Guarantees
Upon the refinancing of the Partnership debt on March 21, 1997, Host Marriott
and MII were released from the following guaranties.
49 Hotels Loan Guaranties
Host Marriott provided additional security to the 49 Hotels Loan lenders in the
form of a debt guaranty (the "Debt Service Guaranty") of aggregate interest and
principal of up to $40 million. Host Marriott's performance under the Debt
Service Guaranty was backed by a $40 million guaranty of aggregate principal and
interest from MII (the "Backup Guaranty"). Payments by Host Marriott under the
Debt Service Guaranty or MII under the Backup Guaranty would have been treated
as advances to the Partnership and bore interest at the base rate announced by
The First National Bank of Chicago. The Debt Service Guaranty replaced the
original guarantee of $37.3 million under the Original 49 Hotels Loan. No
amounts were advanced under the Debt Service Guaranty or the Backup Guaranty
covering the 49 Hotels Loan. As of December 31, 1998 and 1997, $7,341,000 had
been advanced by the General Partner under the Original 49 Hotels Loan guaranty.
The weighted average interest rate on the Original 49 Hotel Loan guaranty
advances was 8.4% for 1998 and 1997. The interest rate was 7.75% at December 31,
1998. Accrued interest on the guaranty advance as of December 31, 1998 and 1997,
was $6,867,000 and $6,253,000, respectively.
MII provided two additional guaranties to the 49 Hotels Loan lenders: the debt
and tenant change guaranty (the "Debt and Tenant Change Guaranty") and the
Marriott International Guaranty (the "MII Guaranty").
The Debt and Tenant Change Guaranty provided that in the event of nonpayment of
principal and interest when due or upon loan maturity, MII would have advanced
amounts, as defined, in addition to amounts advanced under the Backup Guaranty
for principal and interest. No amounts were advanced pursuant to the MII
Guaranty and Debt and Tenant Change Guaranty.
Windsor Loan Guaranty
Host Marriott directly or through the General Partner provided additional
security to the Windsor Loan lenders in the form of a debt service guaranty of
aggregate interest and principal on the Windsor Loan of up to $706,000. Payments
by Host Marriott or the General Partner under the debt service guaranty were
treated as advances to the Partnership and bore interest at the base rate
announced by The First National Bank of Chicago. No amounts were advanced under
the Windsor Loan guaranty.
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.
(3) Exhibits
<TABLE>
<S> <C> <C>
Exhibit
Number Description Page
- ------------- ------------------------------------------------------------------------------------------ -------
*2. Purchase Agreement between Marriott Corporation and Courtyard by Marriott Limited N/A
Partnership dated August 4, 1986.
*3.a Amended and Restated Certificate and Amended and Restated Agreement of Limited N/A
Partnership of Courtyard by Marriott Limited Partnership dated August 20, 1986.
3.b First Amendment to Amended and Restated Agreement of Limited Partnership of Courtyard by N/A
Marriott Limited Partnership dated December 28, 1998.
*10.a Management Agreement between Courtyard by Marriott Limited Partnership and Courtyard N/A
Management Corporation dated August 14, 1986.
*10.b Assignment of sublease and Warranty and Assumption of Obligations between Marriott N/A
Corporation and the Courtyard by Marriott Limited Partnership dated August 19, 1986 for
the Northlake, Georgia property. Sublease Agreement between Crow-Atlanta Retail, Ltd.
and Marriott Corporation dated April 5, 1983.
*10.c Assignment of Lease and Warranty and Assumption of Obligations between Marriott N/A
Corporation and the Courtyard by Marriott Limited Partnership dated August 19, 1986 for
the Windy Hill, Georgia property. Marriott Hotel Land Lease between Kan Am Properties
Limited and Marriott Corporation dated September 1, 1982.
*10.d Assignment of Lease and Warranty and Assumption of Obligations between Marriott N/A
Corporation and the Courtyard by Marriott Limited Partnership dated December 9, 1986 for
the San Francisco Airport, California property. Marriott Hotel Land Lease between AE
Properties, Inc. and Marriott Corporation dated May 6, 1985.
*10.e The Courtyard by Marriott Limited Partnership received an assignment from Marriott N/A
Corporation of 12 Ground Leases for land that Marriott Corporation had previously leased
from various affiliates (the "Original Landlords") on April 13, 1986. The 12 Ground
Leases are identical in all material respects except as to their assignment date to the
Partnership, rents due (Exhibit A of each Ground Lease) and the affiliates of Marriott
Corporation who are the Original Landlords. The schedule below sets forth the terms of
each Ground Lease not filed which differ from the copy of the example Ground Lease
(Atlanta-Delk Road) which is filed herewith. In addition, a copy of Exhibit A is being
filed for each excluded Ground Lease.
Property State Assignment Date Original Landlord
Atlanta-Delk Road GA 12/09/86 Host Restaurants, Inc.
Buena Park CA 12/09/86 Essex House Condominium
Corporation
Cincinnati-Blue Ash OH 10/15/86 Host Restaurants, Inc.
Columbus-Dublin OH 11/12/86 Host Restaurants, Inc.
Dearborn MI 11/12/86 Host Restaurants, Inc.
Hunt Valley MD 10/15/86 Essex House Condominium
Corporation
Memphis-Park Ave-East TN 10/15/86 Host Restaurants, Inc.
Montgomery AL 12/09/86 Host Restaurants, Inc.
Naperville IL 12/09/86 Casa Maria of Maryland, Inc.
Brentwood (Nashville) TN 09/17/86 Host Restaurants, Inc.
Norfolk-VA Beach VA 12/09/86 Host Restaurants, Inc.
Brookfield (Richmond) VA 12/09/86 Newark Properties, Inc.
**10.f Loan Agreement between Citibank, N.A., The First National Bank of Chicago and Courtyard N/A
by Marriott Limited Partnership dated February 9, 1988.
**10.g Promissory Note for $4,136,995 between Courtyard by
Marriott Limited Partnership and The N/A First National
Bank of Chicago dated February 10, 1988 and Promissory Note
for $4,136,995 between Courtyard by Marriott Limited
Partnership and Citibank, N.A. dated February 10, 1988.
**10.h Debt Service Guaranty between Marriott Corporation, as Guarantor, and Citibank, N.A. and N/A
the First National Bank of Chicago, as Lender, dated February 10, 1988.
**10.i Lease Agreement between Courtyard Management Corporation and Courtyard by Marriott N/A
Limited Partnership with LaSalle National Trust, N.A. and Alexander Title Agency, Inc.
as Trustees dated January 1, 1994.
**10.j Lease Agreement between Courtyard Management Corporation and Courtyard by Marriott N/A
Limited Partnership dated January 1, 1994.
**10.k Second Amendment and Restated Loan Agreement for
$304,788,924.58 between the Banks as N/A named within the
Agreement and Citibank, N.A., as Agent, and Courtyard by
Marriott Limited Partnership dated April 7, 1994.
**10.l Amended and Restated Debt Service Guaranty dated April 7,
1994 between Host Marriott N/A Corporation, as Guarantor,
and the Lenders as named within the Second Amended and
Restated Loan Agreement dated April 7, 1994 and Citibank,
N.A., as Agent.
**10.m Management Agreement by and between Courtyard Management Corporation (Manager) dated N/A
January 4, 1997 and Courtyard by Marriott Limited Partnership (Owner).
**10.n Loan Agreement by and between Courtyard by Marriott Limited Partnership (Borrower) and N/A
Lehman Brothers Holdings, Inc. (Lender) dated March 21, 1997.
**10.o First Amendment to Loan Agreement by and between Courtyard by Marriott Limited N/A
Partnership (Borrower) and Lehman Brothers Holdings, Inc. (Lender) dated March 21, 1997.
**10.p Mortgage Note by Courtyard by Marriott Limited Partnership Payable to The Order of N/A
Lehman Brothers Holdings, Inc. d/b/a Lehman Capital in the amount of $325,000,000.00
dated March 21, 1997.
**10.q Courtyard by Marriott Limited Partnership Promissory Note in favor of Host Marriott N/A
Corporation in the amount of $7,340,744.00 together with Endorsement by CBM One
Holdings, Inc. dated March 21, 1997.
**10.r Intercreditor Agreement by and between Lehman Brothers Holdings, Inc., d/b/a Lehman N/A
Brothers Holdings, Inc. (Senior Lender) and CBM One Holdings, Inc. (Junior Lender) dated
March 21, 1997.
**10.s Second Amendment of Ground Leases by and among Courtyard by Marriott Limited N/A
Partnership, Host Restaurants, Inc. (HRI), Newark Properties, Inc. (Newark), Casa Maria
of Maryland, Inc. (Casa Maria) and Essex House Condominium Corporation (Essex House)
(Landlord and Collectively Landlords) dated March 21, 1997.
27. Financial Data Schedule. N/A
* 28. Pages 28 through 36 and pages 40 through 44 of Courtyard by Marriott Limited Partnership N/A
Private Placement Memorandum.
</TABLE>
* Incorporated by reference to the same numbered exhibit in the
Partnership's General Form for Registration of Securities on Form 10
previously filed with the Commission.
** Incorporated by reference to the same numbered exhibit in the
Partnership's December 31, 1996 10-K previously filed with the
Commission.
(b) Reports on Form 8-K
A Form 8-K was filed with the Securities and Exchange
Commission ("SEC") on October 9, 1998. This filing, Item
5--Other Events, discloses that the General Partner sent a
letter dated October 1, 1998 to inform the limited partners
that the proposed Consolidation to form a new REIT focused
on limited service hotels is no longer being pursued. In
addition, the letter informs the limited partners that, to
date, there have been no acceptable offers from third
parties to purchase the Partnership's hotels. A copy of the
letter was included as an Item 7--Exhibit in this Form 8-K
filing.
A Form 8-K was filed with the SEC on December 4, 1998. This
filing, Item 5--Other Events, discloses that the General
Partner sent letters to the limited partners that
accompanied the quarterly reports on Form 10-Q dated June
24, 1998, September 17, 1998 and November 25, 1998.
<PAGE>
SCHEDULE III
COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
<TABLE>
Initial Costs Gross Amount at December 31, 1998
----------------------- ----------------------------------------
Subsequent
Buildings & Costs Buildings & Accumulated
Description Encumbrances Land Improvements Capitalized Land Improvements Total Depreciation
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
50 Courtyard by
Marriott Hotels
(each less than
5% of total) $ 320,407 $30,797 $ 310,705 $ 34,925 $ 30,797 $ 345,630 $ 376,427 $ 110,047
============ ======= ============ ========== ======== ============ ========= ==============
</TABLE>
Date of
Completion of Date Depreciation
Construction Acquired Life
50 Courtyard by 1983 - 1988 1986 - 1988 40 years
Marriott Hotels
<TABLE>
Notes:
1996 1997 1998
------------- ------------- --------
<S> <C> <C> <C>
(a) Reconciliation of Real Estate:
Balance at beginning of year....................................$ 356,598 $ 364,120 $ 374,657
Capital Expenditures............................................ 7,522 10,537 1,770
Dispositions.................................................... -- -- --
------------- ------------- -------------
Balance at end of year..........................................$ 364,120 $ 374,657 $ 376,427
============= ============= =============
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of year....................................$ 78,524 $ 88,768 $ 100,921
Depreciation.................................................... 10,244 12,153 9,126
------------- ------------- -------------
Balance at end of year..........................................$ 88,768 $ 100,921 $ 110,047
============= ============= =============
(c) The aggregate cost of land, buildings and improvements for Federal income
tax purposes is approximately $382.7 million at December 31, 1998.
</TABLE>
<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 31st day of March,
1999.
COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
By: CBM ONE LLC
General Partner
/s/ Earla L. Stowe
------------------
Earla L. Stowe
Vice President and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
the capacities and on the date indicated above.
Signature Title
(CBM ONE LLC)
/s/ Robert E. Parsons, Jr. President and Manager
Robert E. Parsons, Jr.
/s/ Christopher G. Townsend Executive Vice President,
Christopher G. Townsend Secretary and Manager
/s/ W. Edward Walter Treasurer
W. Edward Walter
/s/ Earla L. Stowe Vice President and Chief
Earla L. Stowe Accounting Officer
<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 31st day of March,
1999.
COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
By: CBM ONE LLC
General Partner
Earla L. Stowe
Vice President and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
the capacities and on the date indicated above.
Signature Title
(CBM ONE LLC)
President and Manager
Robert E. Parsons, Jr.
Executive Vice President,
Christopher G. Townsend Secretary and Manager
Treasurer
W. Edward Walter
Vice President and Chief
Earla L. Stowe Accounting Officer
<PAGE>
Exhibit 3.b
FIRST AMENDMENT TO AMENDED AND
RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF
COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
THIS FIRST AMENDMENT TO AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF COURTYARD BY MARRIOTT LIMITED PARTNERSHIP (this "First
Amendment"), dated as of December 28, 1998, is entered into by CBM One LLC, a
Delaware limited liability company, as general partner (the "General Partner"),
of Courtyard By Marriott Limited Partnership (the "Partnership"), for itself and
on behalf of the limited partners of the Partnership.
WHEREAS, the Partnership was formed pursuant to a Certificate of
Limited Partnership filed with the Office of the Secretary of State of the State
of Delaware on July 15, 1986;
WHEREAS, in connection with certain restructuring transactions
involving its parent company, CBM One Corporation merged with and into the
General Partner, a newly formed Delaware limited liability company; and
WHEREAS, in accordance with Section 11.02 of the Partnership Agreement,
the General Partner wishes to amend the Partnership Agreement to reflect its
successor name by merger and to make certain clean up changes.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the General Partner hereby amends the Partnership Agreement as
follows:
1. The introductory paragraph of the Partnership Agreement is hereby
amended to replace the phrase "CBM One Corporation, a Delaware corporation" with
the phrase "CBM One LLC, a Delaware limited liability company."
2. The definitions of "General Partner" and "Host" in Section 1.01 of
the Partnership Agreement are hereby amended and restated in their entirety as
follows:
"General Partner" means CBM One LLC, a Delaware limited
liability company, in its capacity as general partner of the
Partnership, and its successors and assigns.
"Host" means Host Marriott Corporation, a Delaware
corporation, and its successors and assigns.
3. Section 3.01 of the Partnership Agreement is hereby amended
and restated in its entirety as follows:
Section 3.01. General Partner. The General Partner of the
Partnership is and shall be CBM One LLC, a Delaware limited
liability company, in its capacity as general partner of the
Partnership, and its successors and assigns.
4. All defined terms contained in this First Amendment, unless
otherwise defined herein, shall have the meaning contained in the Partnership
Agreement. Except as modified herein, all terms and conditions of the
Partnership Agreement shall remain in full force and effect, which terms and
conditions the General Partner hereby ratifies and affirms.
[Page Break Intentionally Inserted]
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this First Amendment
as of the date first set forth above.
CBM ONE LLC,
as the successor General Partner of Courtyard
By Marriott Limited Partnership and on behalf
of existing Limited Partners
By:______________________________
Name: Christopher G. Townsend
Title: Executive Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REPORT 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000813807
<NAME> COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.00
<CASH> 9,203
<SECURITIES> 0
<RECEIVABLES> 4,210
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,644
<PP&E> 543,657
<DEPRECIATION> (246,468)
<TOTAL-ASSETS> 331,246
<CURRENT-LIABILITIES> 28,787
<BONDS> 327,259
0
0
<COMMON> 0
<OTHER-SE> (24,800)
<TOTAL-LIABILITY-AND-EQUITY> 331,246
<SALES> 0
<TOTAL-REVENUES> 201,250
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 156,060
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,305
<INCOME-PRETAX> 18,885
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,885
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
