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Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
O Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
OR
G Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange of 1934
Commission File Number: 0-16728
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1533559
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10400 Fernwood Road
Bethesda, Maryland 20817
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 301-380-2070
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes U No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [____] (Not Applicable)
Documents Incorporated by Reference
None
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<PAGE>
ii
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COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
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TABLE OF CONTENTS
PAGE NO.
PART I
Item 1. Business........................................................1
Item 2. Properties.....................................................10
Item 3. Legal Proceedings..............................................16
Item 4. Submission of Matters to a Vote of Security Holders............16
PART II
Item 5. Market For The Partnership's Limited Partnership Units
and Related Security Holder Matters............................17
Item 6. Selected Financial Data........................................18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................18
Item 8. Financial Statements and Supplementary Data....................30
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.......................................65
PART III
Item 10. Directors and Executive Officers...............................65
Item 11. Management Remuneration and Transactions.......................66
Item 12. Security Ownership of Certain Beneficial Owners and Management.66
Item 13. Certain Relationships and Related Transactions.................66
PART IV
Item 14. Exhibits, Supplemental Financial Statement Schedules
and Reports on Form 8-K........................................72
<PAGE>
PART I
ITEM 1. BUSINESS
Description of the Partnership
Courtyard by Marriott II Limited Partnership, a Delaware limited partnership
(the "Partnership"), was formed on August 31, 1987 to acquire and own 70
Courtyard by Marriott hotels (the "Hotels") and the respective fee or leasehold
interests in the land on which the Hotels are located. The Hotels are located in
29 states and contain a total of 10,335 guest rooms as of December 31, 1997. The
Partnership commenced operations on October 30, 1987 and will terminate on
December 31, 2087, unless earlier dissolved.
The sole general partner of the Partnership is CBM Two Corporation, a Delaware
corporation (the "General Partner"), a wholly-owned subsidiary of Host Marriott
Corporation.
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"), under a long-term management agreement (the "Management Agreement").
The Management Agreement, as restated on December 30, 1995, expires in 2013 with
renewals at the option of the Manager for one or more of the Hotels for up to 35
years thereafter. The Hotels have the right to use the Courtyard by Marriott
name pursuant to the Management Agreement and, if the Management Agreement is
terminated or not renewed, the Partnership would lose that right for all
purposes (except as part of the Partnership's name). See Item 13 "Certain
Relationships and Related Transactions."
The objective of the Courtyard by Marriott system, including the Hotels, is to
provide consistently superior lodging at a fair price with an appealing,
friendly and contemporary residential character. Courtyard by Marriott hotels
have fewer guest rooms than traditional, full-service hotels, containing
approximately 150 guest rooms, including approximately 12 suites, as compared to
full-service Marriott hotels which typically contain 350 or more guest rooms.
Each Courtyard by Marriott hotel is designed around a courtyard area containing
a swimming pool (indoor pool in northern climates), walkways, landscaped areas
and a gazebo. Each Hotel generally contains a small lobby, a restaurant with
seating for approximately 50 guests, a lounge, a hydrotherapy pool, a guest
laundry, an exercise room and two small meeting rooms. The hotels do not contain
as much public space and related facilities as full-service hotels.
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 October 30, 1987, the Partnership began operations and executed a purchase
agreement (the "Purchase Agreement") with Host Marriott to acquire the Hotels,
all related personal property, and the fee or leasehold interests in the land on
which the Hotels are located. On January 18, 1988 (the "Final Closing Date"),
1,470 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, $21,200 payable at
subscription with the balance due in four annual installments through February
28, 1991, or, as an alternative, $94,357 in cash at closing as full payment of
the subscription price. The limited partners paid $39,938,000 as of the Final
Closing Date, representing 1,350 Units purchased on the installment basis and
120 Units paid in full. The limited partners' obligations to make the
installment payments were evidenced by promissory notes (the "Investor Notes")
payable to the Partnership and secured by the Units. On October 30, 1987, the
General Partner made a capital contribution of equipment valued at $11,306,000
for its 5% general partner interest.
The total purchase price under the Purchase Agreement was $643.1 million. Of
this total, $507.9 million was paid in cash from the proceeds of the MFS
Mortgage Debt (see "Debt Financing" below) and the sale of the Units, $40.2
million was paid through the Partnership's assumption of the IRB Debt (see "Debt
Financing" below) and $95 million was paid in the form of a note payable to Host
Marriott (which has since been repaid). Twenty of the Hotels were conveyed to
the Partnership in 1987, thirty-four Hotels in 1988, twelve Hotels in 1989 and
the final four Hotels during the first half of 1990.
Under the Purchase Agreement, Host Marriott agreed to reduce the purchase price
of the Hotels by up to $5.4 million in 1988 and $9.3 million in 1989 if the
Hotels did not provide cash flow in excess of debt service, as defined, of at
least $5.4 million and $9.3 million, respectively, in those years (the "Price
Adjustment"). No Price Adjustment was required in 1988. The required Price
Adjustment for 1989 was $8,843,000. The Price Adjustment was allocated as a
reduction to the Partnership's property and equipment.
In accordance with the partnership agreement, in 1990 and 1991 the General
Partner purchased 20.5 Units from defaulting investors. Additionally, on July
15, 1995, a limited partner assigned one Unit to the General Partner. Therefore,
as of December 31, 1997, the General Partner owns a total of 21.5 Units
representing a 1.39% limited partnership interest in the Partnership.
In connection with the refinancing discussed below, the limited partners
approved certain amendments to the partnership agreement and the Management
Agreement. The partnership agreement amendment, among other things, allowed the
formation of certain subsidiaries of the Partnership, including Courtyard II
Finance Company ("Finance"), a wholly-owned subsidiary of the Partnership, who
along with the Partnership is the co-issuer of the $127.4 million of senior
secured notes.
Additionally, the Partnership formed a wholly-owned subsidiary, Courtyard II
Associates Management Corporation (the "Managing General Partner"). The Managing
General Partner was formed to be the managing general partner with a 1% general
partner interest in Courtyard II Associates, L.P. ("Associates"), a Delaware
limited partnership. The Partnership owns a 1% general partner interest and a
98% limited partner interest in Associates. On January 24, 1996, the Partnership
contributed 69 Hotels and their related assets to Associates. Formation of
Associates resulted in the Partnership's primary assets being its direct and
indirect interest in Associates. Additionally, substantially all of Associates'
net equity is restricted to dividends, loans or advances to the Partnership.
Associates holds a 99% membership interest in CBM Associates II LLC ("Associates
II") and the Managing General Partner holds the remaining 1% membership
interest. On January 24, 1996, the Partnership contributed the Hotel located in
Deerfield, IL (the "Deerfield Hotel") and its related assets to Associates and
the Managing General Partner who simultaneously contributed the Hotel and its
related assets to Associates II.
Each of the Managing General Partner, Associates and Associates II were formed
as a single purpose bankruptcy-remote entity to facilitate the refinancing in
January 1996.
CBM Funding Corporation, ("CBM Funding"), a wholly-owned subsidiary of
Associates, was also formed to make a mortgage loan (the "Mortgage Loan") to
Associates from the proceeds of the sale of the multi-class commercial mortgage
pass-through certificates.
Debt Financing
Historically, the Partnership's financing needs have been funded through loan
agreements with independent financial institutions and through loans and
advances made by Host Marriott and its affiliates. From 1987 through 1989, the
Partnership borrowed $469.7 million (the "MFS Mortgage Debt") from Marriott
Financial Services, Inc. ("MFS"), an indirect wholly owned subsidiary of Host
Marriott, to finance the acquisition of 65 Hotels (the "non-IRB Hotels"). In
connection with the Partnership's acquisition from Host Marriott of the
remaining 5 Hotels (the "IRB Hotels"), the Partnership assumed an additional
$40.2 million of industrial revenue bond financing (the "IRB Debt") originally
borrowed by Host Marriott to finance the construction of these 5 Hotels. In 1988
and 1989, the Partnership replaced the initial financing from MFS with two
separate loans. In 1988, the Partnership borrowed $275 million ("Mortgage Debt
A") from two banks (the "Banks"), to repay the MFS debt related to 36 of the
non-IRB Hotels and transaction costs. In 1989, the Partnership borrowed an
additional $230.5 million ("Mortgage Debt B") from the Banks to repay the MFS
debt related to the remaining 29 non-IRB Hotels and transaction costs.
On December 15, 1995, the Partnership and the Banks amended Mortgage Debt A to
extend the maturity date from December 15, 1995 to February 15, 1996. Mortgage
Debt B was scheduled to mature on September 5, 1996.
The bank mortgage indebtedness, the IRB Debt and advances from Host Marriott
related to certain IRB Hotels were repaid with the net proceeds of the Senior
Notes, as defined below, and the Certificates, as defined below, on January 24,
1996.
Debt - Overview
On January 24, 1996, the Partnership completed a refinancing of the
Partnership's existing debt through the private placements of $127.4 million of
senior secured notes (the "Senior Notes") and $410.2 million of multi-class
commercial mortgage pass-through certificates (the "Certificates").
The net proceeds from the placement of the Senior Notes and the Certificates and
existing Partnership cash were used as follows: (i) to repay the Partnership's
existing Mortgage Debt A of $275 million and Mortgage Debt B of $230.5 million,
(ii) to repay the IRB Debt of $25.6 million, (iii) to repay the advances from
Host Marriott related to certain IRB Hotels of $6.5 million and (iv) to pay
certain costs of structuring and issuing the Senior Notes and the Certificates.
Upon repayment of Mortgage Debt A and Mortgage Debt B, Host Marriott was
released from its obligations under (i) the Mortgage Debt A and Mortgage Debt B
debt service guarantees, (ii) the foreclosure guarantee and (iii) the Ground
Rent Facility, as defined.
Debt - Senior Notes
The Senior Notes of $127.4 million were issued by the Partnership and Finance.
The Senior Notes bear interest at 10 3/4%, require semi-annual payments of
interest and require no payments of principal until maturity on February 1,
2008. The Senior Notes are secured by a first priority pledge by the Partnership
of (i) its 99% partnership interest (consisting of a 98% limited partner
interest and a 1% general partner interest) in Associates and (ii) its 100%
equity interest in the Managing General Partner. Finance has nominal assets,
does not conduct any operations and does not provide any additional security for
the Senior Notes.
The terms of the Senior Notes require the Partnership to establish and fund a
debt service reserve account in an amount equal to one six-month interest
payment on the Senior Notes ($6,848,000) and to maintain certain levels of
excess cash flow, as defined. In the event the Partnership fails to maintain the
required level of excess cash flow, the Partnership will be required to (i)
suspend distributions to its partners and other restricted payments, as defined,
(ii) to fund a separate supplemental debt service reserve account (the
"Supplemental Debt Service Reserve") in an amount up to two six-month interest
payments on the Senior Notes and (iii) if such failure were to continue, to
offer to purchase a portion of the Senior Notes at par.
The Senior Notes are not redeemable prior to February 1, 2001. Thereafter, the
Senior Notes may be redeemed, at the option of the Partnership, at a premium
declining to par in 2004. The Senior Notes are non-recourse to the Partnership
and its partners.
On June 4, 1996, the Partnership and Finance completed an exchange offer of its
unregistered 10 3/4% Series B Senior Secured Notes with an aggregate principal
amount of $127.4 million ("Old Notes") due 2008 for an equal amount of
registered notes ("New Notes"). The form and terms of the New Notes are
substantially identical to the form and terms of the Old Notes, except that the
New Notes have been registered under the Securities Act of 1933, as amended and
will not have any restrictions on transferability.
Debt - Certificates
The Certificates, in an initial principal amount of $410.2 million, were issued
by CBM Funding. Proceeds from the sale of the Certificates were utilized by CBM
Funding to provide the Mortgage Loan to Associates. The Certificates/Mortgage
Loan require monthly payments of principal and interest based on a 17-year
amortization schedule. The Mortgage Loan matures on January 28, 2008. However,
the maturity date of the Certificates/Mortgage Loan may be extended until
January 28, 2013 with the consent of 66 2/3% of the holders of the outstanding
Certificates affected thereby. The Certificates were issued in the following
classes and pass-through rates of interest.
Initial Certificate Pass-Through
Class Balance Rate
------------------------ ------------------------ -------------
Class A-1 $ 45,500,000 7.550%
Class A-2 $ 50,000,000 6.880%
Class A-3P & I $ 129,500,000 7.080%
Class A-3IO Not Applicable 0.933%
Class B $ 75,000,000 7.480%
Class C $ 100,000,000 7.860%
Class D $ 10,200,000 8.645%
The Class A-3IO Certificates receive payments of interest only based on a
notional balance equal to the Class A-3P & I Certificate balance.
The balance of the Certificates was $385.6 million at December 31, 1997.
Principal amortization of $13.3 million of the Class A-1 Certificates was made
during 1997.
PAGE>
The Certificates/Mortgage Loan maturities are as follows (in thousands):
1998 $ 14,331
1999 15,443
2000 16,642
2001 17,934
2002 19,326
Thereafter 301,879
------------
$ 385,555
The Mortgage Loan is secured primarily by 69 cross-defaulted and
cross-collateralized mortgages representing first priority mortgage liens on (i)
the fee or leasehold interest in the 69 Hotels, related furniture, fixtures and
equipment and the property improvement fund, (ii) the fee interest in the land
leased from MII or their affiliates on which 53 Hotels are located, (iii) a
pledge of Associates membership interest in and the related right to receive
distributions from Associates II which owns the Deerfield Hotel and (iv) an
assignment of the Management Agreement, as defined below. The Mortgage Loan is
non-recourse to Associates, the Partnership and its partners.
Operating profit from the Hotels in excess of debt service on the Mortgage Loan
is available to be distributed to the Partnership. Amounts distributed to the
Partnership are used for the following, in order of priority: (i) for debt
service on the Senior Notes, (ii) to fund the Supplemental Debt Service Reserve,
if necessary, (iii) to offer to purchase a portion of the Senior Notes at par,
if necessary, (iv) for working capital, see Item 13, "Certain Relationships and
Related Transactions" and (v) for distributions to the partners of the
Partnership.
Prepayments of the Mortgage Loan are permitted with the payment of a premium
(the "Prepayment Premium"). The Prepayment Premium is equal to the greater of
(i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance
amount based on a spread of .25% or .55% over the U.S. treasury rate, as
defined.
On June 30, 1996, CBM Funding completed an exchange offer of its Multiclass
Mortgage Pass-Through Certificates, Series 1996-1A with a principal balance of
$406.2 million at that time, ("Old Certificates") for an equal amount of
Multiclass Mortgage Pass-Through Certificates, Series 1996-1B ("New
Certificates"). The form and terms of the New Certificates are substantially
identical to the form and terms of the Old Certificates, except that the New
Certificates are registered under the Securities Act of 1933, as amended and
their transfers are not restricted.
Ground Rent Facility
Fifty-three of the Hotels are situated on land leased from MII or affiliates of
MII, eight of the Hotels are situated on land leased from third parties. MFS had
agreed to lend the Partnership up to $25 million (the "Ground Rent Facility") to
the extent that the Partnership has insufficient funds to pay ground rent under
any ground lease, including third party ground leases, after payment of (i)
hotel operating expenses (except for ground rent) and (ii) debt service. No
amounts were advanced under the Ground Rent Facility. Upon refinancing of the
Partnership debt on January 24, 1996, MFS was released from the Ground Rent
Facility.
Material Contracts
Management Agreement
To facilitate the refinancing, effective December 30, 1995, the original
management agreement was restated into two separate management agreements.
Associates entered into a management agreement with the Manager for the 69
Hotels which Associates directly owns and Associates II entered into a
management agreement for the Deerfield Hotel which Associates II owns,
collectively, (the "Management Agreement"). The primary provisions are discussed
in Item 13, "Certain Relationships and Related Transactions."
Ground Leases
The land on which 53 of the Hotels are located is leased from MII or affiliates
of MII. In addition, eight of the Hotels are located on land leased from third
parties. The land leases have remaining terms (including renewal options)
expiring between the years 2024 and 2068. The MII land leases and the third
party land leases provide for rent based on specific percentages (from 2% to
15%) of gross sales in certain categories, subject to minimum amounts. The
minimum rentals are adjusted at various anniversary dates throughout the lease
terms, as defined in the agreements. For 1997, the Partnership paid a total of
$12,599,000 in ground rent. See Item 2 "Properties" for a listing of Hotels that
have ground leases.
In connection with the refinancing, the Partnership, as lessee, transferred its
rights and obligations pursuant to the 53 ground leases with MII and affiliates
to Associates. Additionally, MII and affiliates agreed to subordinate their
right to receive rental payments under the MII ground leases to the payment of
debt service on the Senior Notes and the Mortgage Loan.
Competition
The United States lodging industry generally is comprised of two broad segments:
full-service hotels and limited-service hotels. Full-service hotels generally
offer restaurant and lounge facilities and meeting spaces, as well as a wide
range of services, typically including bell service and room service.
Limited-service hotels generally offer accommodations with limited or no
services and amenities. As moderately-priced hotels, the Hotels compete
effectively with both full-service and limited-service hotels in their
respective markets by providing streamlined services and amenities exceeding
those provided by typical limited-service hotels at prices that are
significantly lower than those available at full-service hotels.
Significant competitors in the moderately-priced lodging segment include Holiday
Inn, Ramada Inn, Sheraton Inn, Hampton Inn and Hilton Inn. The lodging industry
in general, and the moderately-priced segment in particular, is highly
competitive reflecting the growth of other shares, 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. However,
through 1997 Courtyards continue to command a premium share of the market in
which they are located in spite of the growth of new chains. For 1998, the
outlook continues to be positive. It is expected that Courtyard will continue
outperforming both national and local competitors. The brand is continuing to
carefully monitor the introduction of new mid-priced brands including Wingate
Hotels, Hilton Garden Inns, Four Points by Sheraton, Mainstay, Candlewood, Club
Hotels and Clarion.
The Manager believes that by emphasizing management and personnel development
and maintaining a competitive price structure, the Partnership's share of the
market will be maintained or increased. The inclusion of the Hotels within the
nationwide Courtyard by Marriott system provides the benefits of name
recognition, centralized reservations and advertising, system-wide marketing and
promotion, centralized purchasing and training and support services.
Conflicts of Interest
Because Host Marriott, the parent of the General Partner, MII and their
affiliates own and/or operate hotels other than the Partnership Hotels and
Marriott International and its affiliates license others to operate hotels under
the various brand names owned by Marriott International and its affiliates,
potential conflicts of interest exist. With respect to these potential conflicts
of interest, Host Marriott, MII and their affiliates retain a free right to
compete with 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 unlimited liability for the
obligations of the Partnership, unless those obligations are, by contract,
without recourse to the partners of the Partnership. Since the General Partner
is entitled to manage and control the business and operations of the
Partnership, and because certain actions taken by the General Partner or the
Partnership could expose the General Partner or its parent, Host Marriott, to
liability that is not shared by the limited partners (for example, tort
liability and environmental liability), this control could lead to conflicts of
interest. 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 (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 Marriott
provides the services of certain employees (including the General Partner's
executive officers) of Host Marriott 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 Marriott and its other affiliates. No officer or director
of the General Partner or employee of Host Marriott 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 Marriott, as applicable, is entitled to reimbursement for the cost of
providing such services. See Item 11 "Management Remuneration and Transactions"
for information regarding payments made to Host Marriott or its subsidiaries for
the cost of providing administrative services to the Partnership.
Potential Transaction
The General Partner has undertaken, on behalf of the Partnership, to pursue,
subject to further approval of the partners, a potential transaction (the
"Consolidation") in which (i) subsidiaries of CRF Lodging Company, L.P. (the
"Company"), a newly formed Delaware limited partnership, would merge with and
into the Partnership and up to five other limited partnerships, with the
Partnership and the other limited partnerships being the surviving entities
(each, a "Merger" and collectively, the "Mergers"), subject to the satisfaction
or waiver of certain conditions; (ii) CRF Lodging Trust ("CRFLT"), a Maryland
real estate investment trust, the sole general partner of the Company, would
offer its common shares of beneficial interest, par value $0.01 per share (the
"Common Shares") to investors in an underwritten public offering and would
invest the proceeds of such offering in the Company in exchange for units of
limited partnership interests in the company ("CRFLT Units"); and (iii) the
Partnership would enter into a lease for the operation of its Hotels pursuant to
which a lessee would pay rent to the Partnership based upon the greater of a
fixed dollar amount of base rent or specified percentages of gross sales, as
specified in the lease. If the partners approve the transaction and other
conditions are satisfied, the partners of the Partnership would receive CRFLT
Units in the Merger in exchange for their interests in the Partnership.
A preliminary prospectus/consent solicitation was filed as part of a
registration statement on Form S-4 with the Securities and Exchange Commission
and which describes the potential transaction in greater detail. Any offer of
CRFLT Units in connection with the consolidation will be made solely by a final
prospectus/consent solicitation.
ITEM 2. PROPERTIES
Introduction
The properties consisted of 70 Courtyard by Marriott hotels as of December 31,
1997. The Hotels have been in operation for at least eight years. The Hotels
range in age between 8 and 12 years. The Hotels are geographically diversified
among 29 states, and no state has more than nine Hotels.
The lodging industry in general, and the moderately-priced segment in
particular, is highly competitive, but the degree of competition varies from
location to location and over time. On a combined basis, competitive forces
affecting the Hotels are not, in the opinion of the General Partner, more
adverse than the overall competitive forces affecting the lodging industry
generally. See Item 1 "Business--Competition.
The following table summarizes certain attributes of each of the Hotels.
<PAGE>
15
* Essex House Condominium Corporation is subsidiary of Marriott
International, Inc.
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
SUMMARY OF PROPERTIES
(70 COURTYARD HOTELS)
PROPERTY TITLE TO LAND # OF ROOMS OPENING DATE
1 Birmingham/Homewood, AL Owned in fee 140 12/21/85
500 Shades Creek Parkway
Homewood, AL 35209
2 Birmingham/Hoover, AL Leased from Essex House 153 08/08/87
1824 Montgomery Highway South Condominium Corp. *
Hoover, AL 35244
3 Huntsville, AL Leased from Marriott 149 08/15/87
4808 University Drive International, Inc.
Huntsville, AL 35816
4 Phoenix/Mesa, AZ Leased from Marriott 148 03/19/88
1221 S. Westward Avenue International, Inc.
Mesa, AZ 85210
5 Phoenix/Metrocenter, AZ Leased from Marriott 146 11/29/87
9631 N. Black Canyon International, Inc.
Phoenix, AZ 85021
6 Tucson Airport, AZ Leased from Marriott 149 10/01/88
2505 E. Executive Drive International, Inc.
Tucson, AZ 85706
7 Little Rock, AR Leased from Marriott 149 05/28/88
10900 Financial Centre Parkway International, Inc.
Little Rock, AR 72211
8 Bakersfield, CA Leased from Marriott 146 02/13/88
3601 Marriott Drive International, Inc.
Bakersfield, CA 93308
9 Cupertino, CA Leased from Vallco 149 05/14/88
10605 N. Wolfe Road Park, Ltd.
Cupertino, CA 95014
10 Foster City, CA Leased from Essex House 147 09/26/87
550 Shell Blvd. Condominium Corp. *
Foster City, CA 94404
11 Fresno, CA Leased from Richard, 146 09/13/86
140 E. Shaw Avenue Miche, Aram & Aznive
Fresno, CA 93710 Erganian
12 Hacienda Heights, CA Leased from Marriott 150 03/28/90
1905 Azusa Avenue International, Inc.
Hacienda Heights, CA 91745
13 Marin/Larkspur Landing, CA Leased from Essex House 146 07/25/87
2500 Larkspur Landing Circle Condominium Corp. *
Larkspur, CA 94939
14 Palm Springs, CA Leased from Marriott 149 10/08/88
300 Tahquitz Canyon Way International, Inc.
Palm Springs, CA 92262
15 Torrance, CA Leased from Marriott 149 10/15/88
2633 West Sepulveda Boulevard International, Inc.
Torrance, CA 90505
16 Boulder, CO Leased from Marriott 148 08/06/88
4710 Pearl East Circle International, Inc.
Boulder, CO 80301
17 Denver, CO Owned in fee 146 08/15/87
7415 East 41st Avenue
Denver, CO 80301
18 Denver/Southeast, CO Leased from Essex House 152 05/30/87
6565 S. Boston Street Condominium Corp.*
Englewood, CO 80111
19 Norwalk, CT Leased from Mary 145 07/30/88
474 Main Avenue Fabrizio
Norwalk, CT 06851
20 Wallinford, CT Leased from Marriott 149 04/21/90
600 Northrop Road International, Inc.
Wallingford, CT 06492
21 Ft. Myers, FL Leased from Marriott 149 08/27/88
4455 Metro Parkway International, Inc.
Ft. Myers, FL 33901
22 Ft. Lauderdale/Plantation, FL Leased from Marriott 149 09/21/88
7780 S.W. 6th Street International, Inc.
Plantation, FL 33324
23 St. Petersburg, FL Leased from Marriott 149 10/14/89
3131 Executive Drive International, Inc.
Clearwater, FL 34622
24 Tampa/Westshore, FL Leased from 145 10/27/86
3805 West Cypress Hotsinger, Inc. and
Tampa, FL 33607 Owned in fee
25 West Palm Beach, FL Leased from Marriott 149 01/14/89
600 Northpoint Parkway International, Inc.
West Palm Beach, FL 33407
26 Atlanta Airport South, GA Owned in fee 144 06/15/86
2050 Sullivan Road
College Park, GA 30337
27 Atlanta/Gwinnett Mall, GA Leased from Marriott 146 03/19/87
3550 Venture Parkway International, Inc.
Duluth, GA 30136
28 Atlanta/Perimeter Ctr., GA Leased from Essex House 145 12/12/87
6250 Peachtree-Dunwoody Road Condominium Corp. *
Atlanta, GA 30328
29 Atlanta/Roswell, GA Leased from Roswell 154 06/11/88
1500 Market Boulevard Landing Associates
Roswell, GA 30076
30 Arlington Heights-South, IL Owned in fee 147 12/20/85
100 W. Algonquin Road
Arlington Heights, Il 60005
31 Chicago/Deerfield, IL Owned in fee 131 01/02/86
800 Lake Cook Road
Deerfield, IL 60015
32 Chicago/Glenview, IL Leased from Marriott 149 07/08/89
180l Milwaukee Avenue International, Inc.
Glenview, IL 60025
33 Chicago/Highland Park, IL Leased from Marriott 149 06/10/88
1505 Lake Cook Road International, Inc.
Highland Park, IL 60035
34 Chicago/Lincolnshire, IL Owned in fee 146 07/20/87
505 Milwaukee Avenue
Lincolnshire, IL 60069
35 Chicago/Oakbrook Terrace, IL Owned in fee 147 05/09/86
6 TransAm Plaza Drive
Oakbrook Terrace, IL 60181
36 Chicago/Waukegan, IL Leased from Marriott 149 05/28/88
800 Lakehurst Road International, Inc.
Waukegan, Il 60085
37 Chicago/Wood Dale, IL Leased from Marriott 149 07/02/88
900 N. Wood Dale Road International Inc.
Wood Dale, IL 60191
38 Rockford, IL Owned in fee 147 04/12/86
7676 East State Road
Rockford, IL 61108
39 Indianapolis/Castleton, IN Leased from Essex House 146 06/06/87
8670 Allisonville Road Condominium Corp. *
Indianapolis, IN 46250
40 Kansas City/Overland Park, KS Leased from Marriott 149 01/14/89
11301 Metcalf Avenue International, Inc.
Overland Park, KS 66212
41 Lexington/North, KY Leased from Essex House 146 06/04/88
775 Newtown Court Condominium Corp.*
Lexington, KY 40511
42 Annapolis, MD Leased from Essex House 149 03/04/89
2559 Riva Road
Annapolis, MD 21401
43 Silver Spring, MD Leased from Marriott 146 08/06/88
12521 Prosperity Drive International, Inc.
Silver Spring, MD 20904
44 Boston/Andover, MA Leased from Marriott 146 12/03/88
10 Campanelli Drive International, Inc.
Andover, MA 01810
45 Detroit Airport, MI Leased from Marriott 146 12/12/87
30653 Flynn Drive International, Inc.
Romulus, MA 48174
46 Detroit/Livonia, MI Leased from Marriott 148 03/12/88
17200 N. Laurel Park Drive International, Inc.
Livonia, MI 48152
47 Minneapolis Airport, MN Leased from Essex House 146 06/13/87
1352 Northland Drive Condominium Corp. *
Mendota Heights, MN 55120
48 St. Louis/Creve Coeur, MO Leased from Essex House 154 07/22/87
828 N. New Ballas Road Condominium Corp. *
Creve Coeur, MO 63146
49 St. Louis/Westport, MO Leased from Marriott 149 08/20/88
11888 Westline Industrial Drive International, Inc.
St. Louis, MO 63146
50 Lincroft/Red Bank, NJ Leased from Marriott 146 05/28/88
245 Half Mile Road International, Inc.
Red Bank, NJ 07701
51 Poughkeepsie, NY Leased from Pizzgalli 149 06/04/88
408 South Road Investment Company
Poughkeepsie, NY
52 Rye, NY Leased from Essex House 145 03/19/88
631 Midland Avenue Condominium Corp. *
Rye, NY 10580
53 Charlotte/South Park, NC Leased from Queens 149 03/25/89
6023 Park South Drive Properties, Inc.
Charlotte, NC 28210
54 Raleigh/Cary, NC Leased from Marriott 149 06/25/88
102 Edinburgh Drive South International, Inc.
Cary, NC 27511
55 Dayton Mall, OH Leased from Marriott 146 09/19/87
100 Prestige Place International, Inc.
Miamisburg, OH 45342
56 Toledo, OH Leased from Marriott 149 04/30/88
1435 East Mall Drive International, Inc.
Holland, OH 43528
57 Oklahoma City Airport, OK Leased from Marriott 149 07/23/88
4301 Highline Boulevard International, Inc.
Oklahoma City, OK 73108
58 Portland-Beaverton, OR Leased from Marriott 149 02/11/89
8500 S.W. Nimbus Drive International, Inc.
Beaverton, OR 97005
59 Philadelphia/Devon, PA Leased from Three Devon 149 11/19/88
762 W. Lancaster Ave. Square Associates
Wayne, PA 19087
60 Columbia, SC Leased from Marriott 149 01/28/89
347 Zimalcrest Drive International, Inc.
Columbia, SC 29210
61 Greenville, SC Leased from Essex House 146 03/05/88
70 Orchard Park Drive Condominium Corp. *
Greenville, SC 29615
62 Memphis Airport, TN Leased from Essex House 145 07/15/87
1780 Nonconnah Boulevard Condominium Corp. *
Memphis, TN 38132
63 Nashville Airport, TN Leased from Essex House 145 01/23/88
2508 Elm Hill Pike Condominium Corp. *
Nashville, TN 37214
64 Dallas/Northeast, TX Leased from Marriott 149 01/16/88
1000 South Sherman International, Inc.
Richardson, TX 75081
65 Dallas/Plano, TX Owned in fee 149 05/07/88
4901 W. Plano Parkway
Plano, TX 75093
66 Dallas/Stemmons, TX Leased from Essex House 146 09/12/87
2383 Stemmons Trail Condominium Corp. *
Dallas, TX 75220
67 San Antonio/Downtown, TX Leased from Essex House 149 02/30/90
600 Santa Rosa South Condominium Corp. *
San Antonio, TX 78204
68 Charlottesville, VA Leased from Marriott 150 01/21/89
638 Hillsdale Drive International, Inc.
Charlottesville, VA 22901
69 Manassas, VA Leased from Marriott 149 03/04/89
10701 Battleview Parkway International, Inc.
Manassas, VA 22110
70 Seattle/Southcenter, WA Leased from Marriott 149 03/11/89
400 Andover Park West International, Inc.
Tukwila, WA 98188
<PAGE>
30
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Certain Limited Partners of the Partnership have filed a lawsuit in Texas state
court against the General Partner, the Manager and certain of their respective
affiliates, officers and directors. These partners have alleged that the General
Partner and the Manager have improperly operated the business affairs of the
Partnership and its hotels. In January of 1998, two other Limited Partners filed
a petition to expand this lawsuit to include a class action. The General Partner
believes that all of the claims are without foundation and intends to vigorously
defend against them.
On February 11, 1998, four individual limited partners in partnerships sponsored
by Host Marriott Corporation ("Host Marriott"), filed a class action lawsuit
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
"Partnerships"). The plaintiffs allege that the merger of the 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, constitutes a
breach of the fiduciary duties owed to the limited partners of the Partnerships
by Host Marriott and the general partners of the Partnerships. In addition, the
plaintiffs allege that the Merger breaches various agreements relating to the
Partnerships. The plaintiffs are seeking, among other things, the following:
certification of a class; injunctive relief to prohibit consummation of the
Merger or, in the alternative, recision of the Merger; and damages. Host
Marriott and the general partners of the Partnerships believe that these
allegations are totally devoid of merit and they intend to vigorously defend
against such claims. The defendants also maintain that this lawsuit is premature
because the Merger has not been and may not be consummated as proposed in the
filings..
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
<PAGE>
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, 1997, there were 1,579 holders (including
holders of half-units) of record of the 1,470 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 Partners of record at the end of each accounting period during such year as
follows:
(i) first, through and including the end of the accounting period during
which the Partners shall have received cumulative distributions of
sales or refinancing proceeds ("Capital Receipts") equal to
$77,368,421, 5% to the General Partner and 95% to the limited partners;
(ii) next, through and including the end of the accounting period during
which the Partners shall have received cumulative distributions of
Capital Receipts equal to $158,306,000, 10% to the General Partner and
90% to the limited partners; and
(iii) thereafter, 25% to the General Partner and 75% to the limited partners.
Distributions to the General Partner under clauses (i), (ii) and (iii) above
shall be subordinate to an annual, non-cumulative 10% preferred return to the
limited partners on their invested capital, as defined.
Cash available for distribution means, with respect to any fiscal period, the
cash revenues of the Partnership from all sources during the fiscal period,
other than Capital Receipts, plus amounts received by the Partnership pursuant
to the Price Adjustment amount, less (i) all cash expenditures of the
Partnership during such fiscal period, including, without limitation, repayment
of all Partnership indebtedness to the extent required to be paid, but not
including expenditures of Capital Receipts, plus fees for management services
and administrative expenses and (ii) such reserves as may be determined by the
General Partner, in its sole discretion (other than funds received under the
Price Adjustment amount) to be necessary to provide for the foreseeable needs of
the Partnership.
As of December 31, 1997, the Partnership has distributed a total of $81,504,150
($55,445 per limited partner unit) since inception. During 1997, $10,437,000
($7,100 per limited partner unit) was distributed and an additional $2,793,000
($1,900 per limited partner unit) will be distributed in April 1998 bringing the
total distribution from 1997 operations to $13,230,000 ($9,000 per limited
partner unit). The Partnership distributed $11,025,000 ($7,500 per limited
partner unit) from 1996 operations. No distributions were made to the Partners
from 1995 operations in order to retain funds to pay the costs associated with
refinancing the Partnership's debt. No distributions of Capital Receipts have
been made since inception.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents historical operating information
for the Partnership for each of the five years in the period ended December 31,
1997 presented in accordance with generally accepted accounting principles.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
(in thousands, except per unit amounts)
Revenues..........................................$ 141,230 $ 133,182 $ 121,737 $ 112,392 $ 102,916
========== =========== =========== ========== ===========
Net income (loss).................................$ 15,691 $ 10,541 $ 11,215 $ (3,564) $ (6,019)
========== =========== =========== ========== ===========
Net income (loss) per limited
partner unit (1,470 Units)......................$ 10,140 $ 6,812 $ 7,248 $ (2,303) $ (3,890)
========== =========== =========== ========== ===========
Total assets......................................$ 536,715 $ 547,099 $ 567,530 $ 549,895 $ 564,225
========== =========== =========== ========== ===========
Total liabilities.................................$ 567,412 $ 579,040 $ 603,030 $ 593,947 $ 595,893
========== =========== =========== ========== ===========
Cash distributions per limited
partner unit (1,470 Units)......................$ 9,000 $ 7,500 $ -- $ 6,000 $ 6,000
========== =========== =========== ========== ===========
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements within the
meaning of the Private Litigation Reform Act of 1995 and as such may involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance or achievements of the Partnership to be different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. 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. These risks are detailed from time to time in the Partnership's
filings with the Securities and Exchange Commission. 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, 1997, 1996 and 1995. Since 1990, Courtyard by
Marriott II Limited Partnership ("the Partnership") has owned the 70 hotels (the
"Hotels") which, as of December 31, 1997, contain a total of 10,336 guest rooms.
During the period from 1995 through 1997, Partnership revenues grew from $121.7
million to $141.2 million, while the Partnership's total hotel sales grew from
$245.8 million to $275.0 million. Growth in room sales, and thus hotel sales, is
a function of combined average occupancy and room rates. During the period from
1995 through 1997, the Hotels' combined average room rate increased by $10.60
from $71.49 to $82.09, while the combined average occupancy decreased from 81.4%
to 80.3%.
With the exception of additional rentals due under certain ground lease
agreements and variable payments due to the Manager, the Partnership's operating
costs and expenses are, to a great extent, fixed. Therefore, the Partnership
derives substantial operating leverage from increases in revenue. The variable
expenses include (i) base and Courtyard management fees under the management
agreement, which are 3 1/2% and 2 1/2% of gross hotel sales, respectively, (ii)
incentive management fee equal, in most cases, to 15% of operating profit, and
(iii) variable ground lease payments.
RESULTS OF OPERATIONS
The following table shows selected combined operating and financial statistics
for the Hotels (in thousands, except combined average occupancy, combined
average daily room rate, REVPAR and number of rooms):
Year Ended December 31,
1997 1996 1995
combined average occupancy.............. 80.3% 80.4% 81.4%
Combined average daily room rate........$ 82.09 $ 76.48 $ 71.49
REVPAR..................................$ 65.92 $ 61.49 $ 58.19
Number of rooms......................... 10,336 10,336 10,335
Room sales..............................$ 248,012 $ 235,861 $ 218,955
Food and beverage sales............ .... 17,436 18,227 17,628
Other hotel sales....................... 9,573 9,619 9,242
---------- ----------- -----------
Total hotel sales.................... 275,021 263,707 245,825
Direct hotel operating costs and expenses 133,791 130,525 124,088
---------- ----------- -----------
Hotel Revenues..........................$ 141,230 $ 133,182 $ 121,737
========== =========== ===========
<PAGE>
The following table shows selected components of the Partnership's operating
income as a percentage of total hotel sales.
Year Ended December 31,
1997 1996 1995
Hotel sales:
Room sales........................ 90.2% 89.4% 89.1%
Food and beverage sales........... 6.3 6.9 7.2
Other ............................ 3.5 3.7 3.7
----------- ----------- -----------
Total hotel sales.............. 100.0 100.0 100.0
Direct operating costs and expenses.. 48.6 49.5 50.5
----------- ----------- -----------
Hotel Revenues..................... 51.4 50.5 49.5
Indirect hotel operating costs and expenses:
Depreciation and amortization..... 10.2 10.2 11.3
Base and Courtyard management fees 6.0 6.0 6.0
Ground rent....................... 4.5 4.5 4.7
Property taxes.................... 3.6 3.6 3.8
Incentive management fees......... 4.7 4.6 4.3
Insurance and other............... 1.0 1.1 0.6
----------- ----------- -----------
Total indirect hotel operating costs
and expenses. 30.0 30.0 30.7
----------- ----------- -----------
Operating profit. ............. 21.4% 20.5% 18.8%
=========== =========== ===========
1997 Compared to 1996
Hotel Revenues. Hotel revenues (hotel sales less direct hotel operating costs
and expenses) increased by $8.0 million in 1997 to $141.2 million, a 6.0%
increase when compared to 1996. The increase in revenues was achieved primarily
through an increase in hotel sales offset by an increase in hotel operating
costs and expenses, as discussed below.
Hotel Sales. Total 1997 hotel sales of $275.0 million represented an $11.3
million, or 4.3%, increase over 1996. The increase in sales was achieved
primarily through an increase in the combined average room rate from $76.48 in
1996 to $82.09 in 1997. As a result, 1997 room sales increased by $12.2 million,
or 5.2%, to $248.0 million from $235.9 million in 1996 despite a slight decrease
in occupancy.
Combined average occupancy for 1997 decreased by 0.1 percentage points to 80.3%.
The slight decrease in occupancy during the year is mainly due to increased
competition and aggressive rate increases in some markets. For 1997, 37 of the
Partnership's 70 Hotels posted occupancy rates exceeding 80%.
Direct Hotel Operating Costs and Expenses. The 1997 direct hotel operating costs
and expenses increased $3.3 million, or 2.5%. The increase is primarily due to
an increase in certain variable costs related to the increase in room sales.
However, as a percentage of total hotel sales, these costs and expenses
decreased to 48.6% in 1997 as compared to 49.5% in 1996. This resulted in higher
room and food and beverage profit margins. Room profit and food and beverage
profit increased by 5.6% and 6.4%, respectively for 1997 as compared to 1996.
Indirect Hotel Operating Costs and Expenses. Indirect hotel operating costs and
expenses increased by $3.3 million, or 4.2% from $79.2 million in 1996 to $82.5
million in 1997. As a percentage of total hotel sales, these costs and expenses
remained at 30% for both 1997 and 1996. The components of this category are
discussed below:
Depreciation. Depreciation increased by $1.1 million, or 4% to $28.1 million in
1997 as compared to 1996 due to new assets being purchased and depreciated as a
result of renovations and replacements at the Partnership's hotels.
Base and Courtyard Management Fees. Base and Courtyard management fees are
calculated as a percentage of hotel sales. The increase in these fees of 4.3%
from $15.8 million in 1996 to $16.5 million in 1997 is due to the improved
combined hotel sales for the 70 Hotels for 1997 when compared to 1996. As a
percentage of hotel sales, these fees remained at 6%.
Ground rent. Ground rent increased by 4.9% to $12.5 million during 1997 as
compared to 1996 due to improved hotel operations which resulted in Hotels
paying more rent as a percent of sales rather than the minimum rent. However,
ground rent as a percentage of total hotel sales remained stable at 4.5% between
1997 and 1996.
Insurance and Other. Insurance and other decreased by 10% during 1997 to $2.5
million when compared to 1996. The decrease is primarily due to decreases in
equipment rent, and permits and licenses.
Incentive Management Fees. Incentive management fees earned increased by 7.0%
from $12.0 million in 1996 to $12.9 million in 1997. The increase in incentive
management fees earned was the result of improved combined hotel operating
results.
Operating Profit. Operating profit (hotel revenues less all costs and expenses
other than interest expense) increased by $4.8 million to $58.8 million in 1997
from $54 million in 1996, primarily due to higher revenues.
Interest Expense. Interest expense decreased slightly by 1.3% to $45.8
million in 1997 from $46.4 million in 1996. This decrease was primarily due
to principal amortization of $13.3 million on the Certificates/Mortgage
Loan. The weighted average interest rate for 1997 was 8.5% as compared to
8.4% in 1996.
Net Income. In 1997, the Partnership had net income of $15.7 million, an
increase of $5.2 million, from net income of $10.5 million for 1996. This
increase was primarily due to higher revenues as discussed above, offset by
increases in management fees.
1996 Compared to 1995:
Hotel Revenues. Hotel revenues (hotel sales less direct hotel operating costs
and expenses) increased by $11.4 million in 1996, to $133.2 million, a 9.4%
increase when compared to 1995. This increase in revenues was achieved primarily
through an increase in hotel sales offset by an increase in hotel operating
costs and expenses, as discussed below.
Hotel Sales. Total 1996 hotel sales of $263.7 million represented a $17.9
million, or 7.3%, increase over 1995 results. This increase was achieved
primarily through increases in the combined average room rate from $71.49 in
1995 to $76.48 in 1996. As a result, 1996 room sales increased by $16.9 million,
or 7.7%, to $235.9 million from $219.0 million in 1995 despite a one percent
decrease in occupancy to 80.4% during 1996. Forty of the Partnership's 70 Hotels
posted occupancy rates exceeding 80% for 1996.
Direct Hotel Operating Costs and Expenses. Direct hotel operating costs and
expenses in 1996 increased $6.4 million, or 5.2%. The increase in direct hotel
operating costs and expenses is primarily due to an increase in certain variable
costs related to the increase in room sales. However, as a percentage of total
hotel sales, these costs and expenses decreased to 49.5% in 1996 as compared to
50.5% in 1995.
Indirect Hotel Operating Costs and Expenses. Indirect hotel operating costs and
expenses increased by $3.7 million, or 4.9%, from $75.4 million in 1995 to $79.1
million in 1996. As a percentage of total hotel sales these costs and expenses
decreased to 30% of total hotel sales in 1996 from 30.7% in 1995. The components
of this category are discussed below:
Depreciation. Depreciation decreased slightly in 1996 as compared to 1995
due to a portion of the Hotels' furniture and equipment becoming fully
depreciated in 1995.
Base and Courtyard Management Fees. Base and Courtyard management fees are
calculated as a percentage of hotel sales. The increase in these fees of 7.4%,
from $14.7 million in 1995 to $15.8 million in 1996 is due to the improved
combined hotel sales for the 70 Hotels for 1996 when compared to 1995. As a
percentage of hotel sales, these fees remained at 6%.
Ground Rent. The 1996 ground rent expense of $11.9 million represents a 3.0%
increase over 1995 levels as improved hotel operations resulted in Hotels paying
more ground rent as a percent of sales rather than the minimum rent. As a
percentage of total hotel sales, ground rent expense was 4.5% and 4.7% in 1996
and 1995, respectively.
Incentive Management Fees. In 1996, $12.0 million of incentive management fees
were earned as compared to $10.5 million earned in 1995. The increase in
incentive management fees earned was the result of improved combined hotel
operating results.
Insurance and Other. The 1996 insurance and other expenses increased by $1.2
million to $2.8 million when compared to 1995. The increase is primarily due to
an increase in equipment rent, insurance expenses and administrative expenses.
Operating Profit. Operating profit (hotel revenues less all costs and expenses
other than interest expense) increased by $7.7 million to $54.0 million in 1996,
from $46.3 million in 1995, primarily due to higher revenues.
Interest Expense. Interest expense increased 21.7% to $46.4 million in 1996 from
$38.1 million in 1995. This increase in interest expense was due to the
refinancing of the Partnership's debt at fixed rates which are higher than the
prior year's variable interest rates. The weighted average interest rate in 1996
was 8.4% as compared to 7% in 1995.
Net Income: In 1996, the Partnership had net income of $10.5 million, a decrease
of $.7 million from 1995's net income of $11.2 million. This decrease was
primarily due to higher interest expense.
CAPITAL RESOURCES AND LIQUIDITY
Principal Sources and Uses of Cash
The Partnership's principal source of cash is from operations. Its principal
uses of cash are to make debt service payments, fund the property improvement
fund and to make distributions to limited partners. Cash provided by operations
was $45.0 million, $38.1 million and $36.0 million for the years ended 1997,
1996 and 1995, respectively.
The increase is primarily due to improved operations.
Cash used in investing activities was $15.5 million, $17.3 million and $14.2
million for 1997, 1996 and 1995, respectively. Contributions to the property
improvement fund were $13.8 million, $13.2 million and $12.3 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Cash used in
investing activities for 1997, 1996 and 1995 includes capital expenditures of
$24.9 million, $11.3 million and $8.8, respectively. The increase in 1997
capital expenditures is primarily related to room renovations and replacements
at the Partnership's hotels.
Cash used in financing activities was $30.0 million, $34.3 million and $8.2
million for the years ended December 31, 1997, 1996 and 1995, respectively. Cash
used in financing activities includes $14.5 million, $7.0 million and $2.7
million of cash distributions to limited partners in 1997, 1996 and 1995,
respectively. The distribution in 1995 was the final distribution from the
operations of 1994 and the cash available from 1995 operations was used to pay
refinancing fees.
During 1997 and 1996, the Partnership repaid $13.3 million and $11.3 million,
respectively, of principal on the commercial mortgage backed securities. No
principal payments were made in 1995 as the mortgage debt in place at that time
did not require principal payments. The Partnership also paid $44.2 million,
$42.5 million and $42.1 million of interest on its debts in 1997, 1996 and 1995,
respectively.
Pursuant to the terms of the Certificate/Mortgage Loan, the Partnership is
required to establish with the lender a separate escrow account for payments of
insurance premiums and real estate taxes for each mortgaged property if the
credit rating of MII is downgraded by Standard and Poor's Rating Services. The
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 1,
1997. As a result, the Partnership transferred $10.3 million into the required
reserve accounts prior to December 31, 1997. Out of this balance, approximately
$6.0 million of real estate taxes have been 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.
The change in reserve accounts includes $2 million transferred to the working
capital reserve and the $4.3 million remaining in the real estate tax and
insurance escrow account reduced by $4.1 million of accrued real estate tax
liabilities.
Debt
Partnership Structure
On January 24, 1996, the Partnership completed a refinancing of the
Partnership's existing debt through the private placements of $127.4 million of
senior secured notes (the "Senior Notes") and $410.2 million of multi-class
commercial mortgage pass-through certificates (the "Certificates").
In connection with the refinancing, the limited partners approved certain
amendments to the partnership agreement and the management agreement. The
partnership agreement amendment, among other things, allowed the formation of
certain subsidiaries of the Partnership, including Courtyard II Finance Company
("Finance"), a wholly-owned subsidiary of the Partnership, who along with the
Partnership is the co-issuer of the Senior Notes.
Additionally, the Partnership formed a wholly-owned subsidiary, Courtyard II
Associates Management Corporation (the "Managing General Partner"). The Managing
General Partner was formed to be the managing general partner with a 1% general
partner interest in Courtyard II Associates, L.P. ("Associates"), a Delaware
limited partnership. The Partnership owns a 1% general partner interest and a
98% limited partner interest in Associates. On January 24, 1996, the Partnership
contributed 69 Hotels and their related assets to Associates. Formation of
Associates resulted in the Partnership's primary assets being its direct and
indirect interest in Associates. Additionally, substantially all of Associates'
net equity will be restricted to dividends, loans or advances to the
Partnership.
Associates holds a 99% membership interest in CBM Associates II LLC ("Associates
II") and Managing General Partner holds the remaining 1% membership interest. On
January 24, 1996, the Partnership contributed the Hotel located in Deerfield, IL
(the "Deerfield Hotel") and its related assets to Associates and the Managing
General Partner who simultaneously contributed the Hotel and its related assets
to Associates II.
Each of the Managing General Partner, Associates and Associates II were formed
as a single purpose bankruptcy-remote entity to facilitate the refinancing.
CBM Funding Corporation ("CBM Funding"), a wholly-owned subsidiary of
Associates, was also formed to make a mortgage loan (the "Mortgage Loan") to
Associates from the proceeds of the sale of the Certificates.
<PAGE>
Debt - Overview
On January 24, 1996, net proceeds from the placement of the Senior Notes and the
Certificates and existing Partnership cash were used as follows: (i) to repay
the Partnership's existing Mortgage Debt A of $275 million and Mortgage Debt B
of $230.5 million, (ii) to repay the industrial revenue bond financing on
certain Hotels (the "IRB Debt") of $25.6 million, (iii) to repay advances from
Host Marriott related to certain Hotels of $6.5 million and (iv) to pay certain
costs of structuring and issuing the Senior Notes and the Certificates.
Prior to the completion of the refinancing on January 24, 1996, Host Marriott or
its wholly-owned subsidiary, CBM Two Corporation, (the "General Partner")
provided additional credit support to the Partnership through the following: (i)
debt service guarantees on Mortgage Debt A and B, (ii) foreclosure guarantees on
the Mortgage Debt A and B, (iii) obligations to advance funds related to the IRB
Debt and (iv) a facility for the Partnership to borrow funds to pay ground rent
(the "Ground Rent Facility"). Upon repayment of Mortgage Debt A, Mortgage Debt
B, and the IRB Debt, Host Marriott was released from these obligations.
Debt - Senior Notes
The Senior Notes of $127.4 million were issued by the Partnership and Finance.
The Senior Notes bear interest at 10 3/4%, require semi-annual payments of
interest and require no payments of principal until maturity on February 1,
2008. The Senior Notes are secured by a first priority pledge by the Partnership
of (i) its 99% partnership interest (consisting of a 98% limited partner
interest and a 1% general partner interest) in Associates and (ii) its 100%
equity interest in the Managing General Partner. Finance has nominal assets,
does not conduct any operations and does not provide any additional security for
the Senior Notes.
The terms of the Senior Notes include requirements of the Partnership to
establish and fund a debt service reserve account in an amount equal to one
six-month interest payment on the Senior Notes ($6,848,000) and to maintain
certain levels of excess cash flow, as defined. In the event the Partnership
fails to maintain the required level of excess cash flow, the Partnership will
be required to (i) suspend distributions to its partners and other restricted
payments, as defined, (ii) to fund a separate supplemental debt service reserve
account (the "Supplemental Debt Service Reserve") in an amount up to two
six-month interest payments on the Senior Notes and (iii) if such failure were
to continue, to offer to purchase a portion of the Senior Notes at par.
The Senior Notes are not redeemable prior to February 1, 2001. Thereafter, the
Senior Notes may be redeemed, at the option of the Partnership, at a premium
declining to par in 2004. The premium is 5.375% for 2001, 3.583% for 2002 and
1.792% for 2003. The Senior Notes are non-recourse to the Partnership and its
partners.
On June 4, 1996, the Partnership and Finance completed an exchange offer of its
unregistered 10 3/4% Series B Senior Secured Notes with an aggregate principal
amount of $127.4 million ("Old Notes") due 2008 for an equal amount of
registered notes ("New Notes"). The form and terms of the New Notes are
substantially identical to the form and terms of the Old Notes, except that the
New Notes have been registered under the Securities Act of 1933, as amended and
will not have any restrictions on transferability.
Debt - Certificates
The Certificates in an initial principal payment of $410.2 million were issued
by CBM Funding. Proceeds from the sale of the Certificates were utilized by CBM
Funding to provide a Mortgage Loan to Associates. The Certificates/Mortgage Loan
require monthly payments of principal and interest based on a 17-year
amortization schedule. The Mortgage Loan matures on January 28, 2008. However,
the maturity date of the Certificates/Mortgage Loan may be extended until
January 28, 2013 with the consent of 66 2/3% of the holders of the outstanding
Certificates affected thereby. The Certificates were issued in the following
classes and pass-through rates of interest.
Initial Certificate Pass-Through
Class Balance Rate
Class A-1 $ 45,500,000 7.550%
Class A-2 $ 50,000,000 6.880%
Class A-3P & I $ 129,500,000 7.080%
Class A-3IO Not Applicable 0.933%
Class B $ 75,000,000 7.480%
Class C $ 100,000,000 7.860%
Class D $ 10,200,000 8.645%
The Class A-3IO Certificates receive payments of interest only based on a
notional balance equal to the Class A-3P & I Certificate balance.
The balance of the Certificates was $385.6 million and $398.9 million at
December 31, 1997 and 1996, respectively. Principal amortization of $13.3
million and $11.3 million of the Class A-1 Certificates were made during 1997
and 1996, respectively.
The Certificates/Mortgage Loan maturities are as follows (in thousands):
1998 $ 14,331
1999 15,443
2000 16,642
2001 17,934
2002 19,326
Thereafter 301,879
------------
$ 385,555
The Mortgage Loan is secured primarily by 69 cross-defaulted and
cross-collateralized mortgages representing first priority mortgage liens on (i)
the fee or leasehold interest in the 69 Hotels, related furniture, fixtures and
equipment and the property improvement fund, (ii) the fee interest in the land
leased from MII or their affiliates on which 53 Hotels are located, (iii) a
pledge of Associates membership interest in and the related right to receive
distributions from Associates II which owns the Deerfield Hotel and (iv) an
assignment of the Management Agreement, as defined below. The Mortgage Loan is
non-recourse to Associates, the Partnership and its partners.
Operating profit from the Hotels in excess of debt service on the Mortgage Loan
is available to be distributed to the Partnership. Amounts distributed to the
Partnership are used for the following, in order of priority: (i) for debt
service on the Senior Notes, (ii) to fund the Supplemental Debt Service Reserve,
if necessary, (iii) to offer to purchase a portion of the Senior Notes at par,
if necessary, (iv) for working capital, see Item 13 "Certain Relationship and
Related Transaction," and (v) for distributions to the partners of the
Partnership.
Prepayments of the Mortgage Loan are permitted with the payment of a premium
(the "Prepayment Premium"). The Prepayment Premium is equal to the greater of
(i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance
amount based on a spread of .25% or .55% over the U.S. treasury rate, as
defined.
On June 30, 1996, CBM Funding completed an exchange offer of its Multiclass
Mortgage Pass-Through Certificates, Series 1996-1A with a principal balance of
$406.2 million at that time, ("Old Certificates") for an equal amount of
Multiclass Mortgage Pass-Through Certificates, Series 1996-1B ("New
Certificates"). The form and terms of the New Certificates are substantially
identical to the form and terms of the Old Certificates, except that the New
Certificates are registered under the Securities Act of 1933, as amended and
their transfers are not restricted.
Deferred Management Fees and Ground Lease Payments
To facilitate the refinancing, effective December 30, 1995, the original
management agreement was restated into two separate management agreements.
Associates entered into a management agreement with the Manager for the 69
Hotels which Associates directly owns and Associates II entered into a
management agreement for the Deerfield Hotel which Associates II owns,
collectively, (the "Management Agreement").
Under the Management Agreement that became effective on December 30, 1995, the
Manager agreed to subordinate a portion of the Courtyard management fees and all
incentive management fees, and under an amendment to the ground leases with
Marriott International, Inc. and its affiliates (the "Marriott Ground Lessors")
that became effective on January 24, 1996, the Marriott Ground Lessors agreed to
subordinate their ground rent payments, to the payment of interest, principal
and premiums on the Mortgage Loan and the Senior Notes and debt incurred to
refinance the Mortgage Loan or the Senior Notes that meets specified criteria.
In addition, the Manager agreed to subordinate existing deferred base, Courtyard
and incentive management fees to the payment of debt service.
Deferred base, Courtyard and incentive management fees do not accrue interest
and will be repaid from a portion of operating cash flow but only after payment
of (i) debt service, (ii) a priority return to the Partnership and (iii) certain
other priorities as defined in the Management Agreement. Deferred ground rent
owed to the Marriott Ground Lessors does not accrue interest and will be repaid
from a portion of operating cash flow, but only after payment of debt service.
Payment of such deferred fees and deferred ground rent are restricted payments
under the covenants of the Senior Notes.
Historically, under the management agreement, the Manager subordinated receipt
of the Courtyard management fee to the payment of debt service (through the debt
refinancing date of January 24, 1996) and a 6% return to the limited partners
(through 1993). As of December 31, 1997 and 1996, cumulative deferred base and
Courtyard management fees totaled $30.2 million.
No incentive management fees were earned by the Manager prior to 1994 whereas
$5.6 million of incentive management fees earned in 1994 were deferred. For the
year ended December 31, 1995, $10.5 million in incentive management fees were
earned and paid to the Manager. For the year ended December 31, 1996, $12.0
million in incentive management fees were earned and $11.4 million were paid
resulting in an additional deferment of $0.6 million. In 1997, the $12.9 million
of incentive management fees earned were fully paid and $1.6 million of deferred
fees were also paid.
The priority return to the Partnership, as defined, was reduced from 10% of
invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 10%
for 1999 and thereafter. Operating profit from the Hotels (which reflects the
deduction of the base and Courtyard management fees and MII ground rent) will be
used to pay the following, in order of priority: (i) debt service on the Senior
Notes and Mortgage Loan, (ii) to repay working capital loans to the Manager,
(iii) to repay deferred ground rent to MII and their affiliates, (iv) to repay
ground lease advances to MII and their affiliates, (v) the priority return to
the Partnership which was 8% and 7% of invested capital for 1997 and 1996,
respectively, (vi) eighty percent of the remaining operating profit is applied
to the payment of current incentive management fees, (vii) to repay advances to
the Partnership, (viii) to repay foreclosure avoidance advances to the Manager
and (ix) fifty percent of the remaining operating profit to repay deferred
management fees to the Manager and fifty percent of remaining operating profit
is paid to the Partnership.
Property Improvement Fund
The Management Agreement requires annual contributions to a property improvement
fund to ensure that the physical condition and product quality of the Hotels are
maintained. Contributions to this fund are based on a percentage of annual total
hotel sales, currently equal to 5%. The Partnership believes that the 5%
contribution requirement is consistent with industry standards and provides a
sufficient reserve for the future capital repair and replacement needs of the
Hotels. In accordance with the Management Agreement, the annual required
contribution percentage may increase to up to 6% after December 31, 2000 at the
option of the Manager. The balance in the fund totaled $27.2 million and $36.6
million as of December 31, 1997 and 1996, respectively. Total capital
expenditures for 1997, 1996 and 1995 were $24.9 million, $11.3 million and $8.8
million, respectively. The capital expenditures for 1997 included renovations at
15 of the Partnership hotels. All such capital expenditures were funded from the
property improvement fund. Rooms renovations totaling $21.5 million are
scheduled to be completed at 28 of the Partnership hotels in 1998. The
Partnership will have sufficient funds to complete the renovations.
<PAGE>
General
As previously discussed, the Partnership's debt was refinanced on January 24,
1996. The General Partner believes that cash from hotel operations combined with
the ability to defer certain management fees to the Manager and ground rent
payments to MII and affiliates will provide adequate funds in the short term and
long term for the operational needs of the Partnership.
Competition
The moderately priced lodging segment continues to be highly competitive. An
increase in supply growth began in 1996 with the introduction of a number of new
national brands. However, through 1997 Courtyards continue to command a premium
share of the market in which they are located in spite of the growth of new
chains. For 1998, the outlook continues to be positive. It is expected that
Courtyard will continue outperforming both national and local competitors. The
brand is continuing to carefully monitor the introduction of new mid-priced
brands including Wingate Hotels, Hilton Garden Inns, Four Points by Sheraton,
Mainstay, Candlewood 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 1997, average rates of Courtyard hotels
exceeded inflationary costs, but lagged the increases of direct competitors who
have been able to realize higher rates due to climbing occupancies. On January
24, 1996, the Partnership refinanced its mortgage debt and fixed its interest
costs thereby eliminating the Partnership's exposure to the impact of inflation
on future interest costs.
Seasonality
Demand, and thus room occupancy, is affected by normally recurring seasonal
patterns. For most of the Hotels, demand is higher in the spring and summer
months (March through October) than during the remainder of the year.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index Page
Courtyard by Marriott II Limited Partnership Consolidated Financial Statements:
Report of Independent Public Accountants....................................................... 31
Consolidated Statement of Operations........................................................... 32
Consolidated Balance Sheet..................................................................... 33
Consolidated Statement of Changes in Partners' Capital (Deficit)............................... 34
Consolidated Statement of Cash Flows........................................................... 35
Notes to Consolidated Financial Statements..................................................... 37
Courtyard II Associates, L.P. and Subsidiary Consolidated Financial Statements:
Report of Independent Public Accountants....................................................... 49
Consolidated Statement of Operations........................................................... 50
Consolidated Balance Sheet..................................................................... 51
Consolidated Statement of Changes in Partners' Capital......................................... 52
Consolidated Statement of Cash Flows........................................................... 53
Notes to Consolidated Financial Statements..................................................... 55
</TABLE>
<PAGE>
49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP:
We have audited the accompanying consolidated balance sheet of Courtyard by
Marriott II Limited Partnership (a Delaware limited partnership) as of December
31, 1997 and 1996, and the related consolidated statements of operations,
changes in partners' capital (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements and the
schedules referred to below are the responsibility of the General Partner's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Courtyard by
Marriott II Limited Partnership as of December 31, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index at Item
14(a)(2) are presented for purposes of complying with the rules of the
Securities and Exchange Commission and are not part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in our audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 23, 1998
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
Courtyard by Marriott II Limited Partnership
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands, except per Unit amounts)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- ---------
<S> <C> <C> <C>
REVENUES
Hotel revenues (Note 3).....................................................$ 141,230 $ 133,182 $ 121,737
------------ ------------- -------------
OPERATING COSTS AND EXPENSES
Depreciation ............................................................... 28,131 27,062 27,720
Base and Courtyard management fees ......................................... 16,501 15,822 14,749
Incentive management fee.................................................... 12,878 12,040 10,480
Ground rent................................................................. 12,480 11,899 11,550
Property taxes.............................................................. 9,938 9,537 9,324
Insurance and other......................................................... 2,531 2,810 1,618
------------ ------------- -------------
82,459 79,170 75,441
------------ ------------- -------------
OPERATING PROFIT.............................................................. 58,771 54,012 46,296
Interest expense.............................................................. (45,778) (46,366) (38,113)
Interest income............................................................... 2,698 2,895 3,032
------------ ------------- -------------
NET INCOME....................................................................$ 15,691 $ 10,541 $ 11,215
============ ============= =============
ALLOCATION OF NET INCOME
General Partner.............................................................$ 785 $ 527 $ 560
Limited Partners............................................................ 14,906 10,014 10,655
------------ ------------- -------------
$ 15,691 $ 10,541 $ 11,215
============ ============= =============
NET INCOME PER LIMITED PARTNER UNIT (1,470 Units).............................$ 10,140 $ 6,812 $ 7,248
============ ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED BALANCE SHEET
Courtyard by Marriott II Limited Partnership
December 31, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1997 1996
------------- ---------
<S> <C> <C>
ASSETS
Property and equipment, net.................................................................$ 455,435 $ 458,687
Deferred financing costs, net of accumulated amortization................................... 15,833 17,442
Due from Courtyard Management Corporation................................................... 11,318 13,315
Prepaid expenses............................................................................ 27 28
Property improvement fund................................................................... 27,200 36,582
Restricted cash............................................................................. 13,212 6,848
Cash and cash equivalents................................................................... 13,690 14,197
------------- -------------
$ 536,715 $ 547,099
============= =============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt ......................................................................................$ 512,955 $ 526,253
Management fees due to Courtyard Management Corporation..................................... 34,829 36,442
Due to Marriott International, Inc. and affiliates.......................................... 9,050 9,169
Accounts payable and accrued liabilities.................................................... 10,578 7,176
------------- -------------
Total Liabilities..................................................................... 567,412 579,040
------------- -------------
PARTNERS' CAPITAL (DEFICIT)
General Partner
Capital contribution..................................................................... 11,306 11,306
Cumulative net losses.................................................................... (4,456) (5,241)
Capital distributions.................................................................... (278) (278)
------------- -------------
6,572 5,787
------------- -------------
Limited Partners
Capital contributions, net of offering costs of $17,189.................................. 129,064 129,064
Cumulative net losses.................................................................... (84,676) (99,582)
Capital distributions.................................................................... (81,504) (67,025)
Investor notes receivable................................................................ (153) (185)
------------- -------------
(37,269) (37,728)
Total Partners' Deficit............................................................... (30,697) (31,941)
------------- -------------
$ 536,715 $ 547,099
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN
PARTNERS' CAPITAL (DEFICIT)
Courtyard by Marriott II Limited Partnership
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
----------- --------------- ------------
<S> <C> <C> <C>
Balance, December 31, 1994..................................................$ 4,700 $ (48,752) $ (44,052)
Payments received on investor notes receivable............................ -- 51 51
Capital distributions..................................................... -- (2,714) (2,714)
Net income................................................................ 560 10,655 11,215
------------ --------------- ------------
Balance, December 31, 1995.................................................. 5,260 (40,760) (35,500)
Capital distributions..................................................... -- (6,982) (6,982)
Net income................................................................ 527 10,014 10,541
------------ --------------- ------------
Balance, December 31, 1996.................................................. 5,787 (37,728) (31,941)
Capital distributions..................................................... -- (14,479) (14,479)
Payments received on investor notes receivable............................ -- 32 32
Net income................................................................ 785 14,906 15,691
------------ --------------- ------------
Balance, December 31, 1997..................................................$ 6,572 $ (37,269) $ (30,697)
============ =============== ============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Courtyard by Marriott II Limited Partnership
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................................................$ 15,691 $ 10,541 $ 11,215
Noncash items:
Depreciation................................................................... 28,131 27,062 27,720
Amortization of deferred financing costs as interest........................... 1,572 1,679 625
Deferred management fees....................................................... -- 633 --
Gain on sale of equipment...................................................... -- -- (12)
Deferred interest on IRB advances from
Host Marriott Corporation................................................... -- -- 638
Changes in operating accounts:
Due from Courtyard Management Corporation...................................... 1,997 (3,737) 1,311
Management fees due to Courtyard Management Corporation........................ (1,613) -- (162)
Accounts payable and accrued liabilities....................................... (860) 2,924 (5,114)
Due to Host Marriott Corporation............................................... 32 (1,015) (427)
Prepaid expenses............................................................... 1 (28) 180
---------- ---------- -----------
Cash provided by operations................................................. 44,951 38,059 35,974
---------- ---------- -----------
INVESTING ACTIVITIES
Additions to property and equipment, net.......................................... (24,879) (11,269) (8,786)
Change in property improvement fund............................................... 9,382 (3,484) (5,427)
Working capital provided to Courtyard Management Corporation...................... -- (2,500) --
---------- ---------- -----------
Cash used in investing activities........................................... (15,497) (17,253) (14,213)
---------- ---------- -----------
FINANCING ACTIVITIES
Capital distributions............................................................. (14,479) (6,982) (2,714)
Repayment of principal............................................................ (13,298) (11,347) --
Change in restricted reserve accounts............................................. (2,204) -- --
Payment of financing costs........................................................ (12) (15,835) (2,990)
Proceeds from issuance of debt.................................................... -- 537,600 --
Repayments of debt................................................................ -- (531,100) --
Deposit into the debt service reserve............................................. -- (6,848) --
Use of (Deposit in) refinancing reserve accounts.................................. -- 6,684 (2,560)
Repayment of advances from Host Marriott Corporation.............................. -- (6,489) --
Collections of investor notes receivable.......................................... 32 -- 51
---------- ---------- -----------
Cash used in financing activities........................................... (29,961) (34,317) (8,213)
---------- ---------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Courtyard by Marriott II Limited Partnership
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -------
<S> <C> <C> <C>
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS....................................$ (507) $ (13,511) $ 13,548
CASH AND CASH EQUIVALENTS at beginning of year...................................... 14,197 27,708 14,160
---------- ---------- -----------
CASH AND CASH EQUIVALENTS at end of year............................................$ 13,690 $ 14,197 $ 27,708
========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest......................................$ 44,207 $ 42,532 $ 42,092
========== ========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Courtyard by Marriott II Limited Partnership
December 31, 1997 and 1996
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Courtyard by Marriott II Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed on August 31, 1987 to acquire and own 70
Courtyard by Marriott hotels (the "Hotels") and the land on which certain of the
Hotels are located. The Partnership's 70 hotel properties are located in 29
states in the United States: nine in Illinois; eight in California; five in
Florida; four in Georgia; four in Texas and three or less in each of the other
24 states. The Hotels are managed as part of the Courtyard by Marriott hotel
system by Courtyard Management Corporation (the "Manager"), a wholly-owned
subsidiary of Marriott International, Inc. ("MII"). The sole general partner of
the Partnership, with a 5% interest, is CBM Two Corporation (the "General
Partner"), a wholly-owned subsidiary of Host Marriott Corporation ("Host
Marriott").
On January 18, 1988 (the "Final Closing Date"), 1,470 limited partnership
interests (the "Units"), representing a 95% interest in the Partnership, had
been sold in a private placement offering. The offering price per Unit was
$100,000, $21,200 payable at subscription with the balance due in four annual
installments through February 28, 1991, or, as an alternative, $94,357 in cash
at closing as full payment of the subscription price. The limited partners paid
$39,938,000 as of the Final Closing Date, representing 1,350 Units purchased on
the installment basis and 120 Units paid in full. The limited partners'
obligations to make the installment payments were evidenced by promissory notes
(the "Investor Notes") payable to the Partnership and secured by the Units. On
October 30, 1987 (the "Initial Closing Date"), the General Partner made a
capital contribution of equipment valued at $11,306,000 for its 5% general
partner interest.
On the Initial Closing Date, the Partnership began operations and 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 price
of $643.1 million. Of the total purchase price, $507.9 million was paid in cash
from the proceeds of the mortgage financing and sale of the Units, $40.2 million
from assumption of industrial development revenue bond financing (the "IRB
Debt") from Host Marriott and $95 million from a note (the "Deferred Purchase
Note") payable to Host Marriott. Twenty of the Hotels were conveyed to the
Partnership in 1987, thirty-four Hotels in 1988, twelve Hotels in 1989 and the
final four Hotels during the first half of 1990.
Under the Purchase Agreement, Host Marriott agreed to reduce the purchase price
of the Hotels by up to $9.3 million if the Hotels did not provide cash flow in
excess of debt service, as defined, equivalent to $9.3 million in 1989, (the
"Price Adjustment"). The required Price Adjustment for 1989 was $8,843,000. The
Price Adjustment was allocated as a reduction to the Partnership's property and
equipment in the accompanying consolidated financial statements.
In accordance with the partnership agreement, in 1990 and 1991 the General
Partner purchased 20.5 Units from defaulting investors. Additionally, on July
15, 1995, a limited partner assigned one Unit to the General Partner. Therefore,
as of December 31, 1997, the General Partner owns a total of 21.5 Units
representing a 1.39% limited partnership interest in the Partnership.
On January 24, 1996, the Partnership completed a refinancing of the
Partnership's existing debt through the private placements of $127.4 million of
senior secured notes (the "Senior Notes") and $410.2 million of multi-class
commercial mortgage pass-through certificates (the "Certificates").
In connection with the refinancing, the limited partners approved certain
amendments to the partnership agreement and the Management Agreement. The
partnership agreement amendment, among other things, allowed the formation of
certain subsidiaries of the Partnership, including Courtyard II Finance Company
("Finance"), a wholly-owned subsidiary of the Partnership, who, along with the
Partnership, is the co-issuer of the Senior Notes.
Additionally, the Partnership formed a wholly-owned subsidiary, Courtyard II
Associates Management Corporation ("Managing General Partner"). Managing General
Partner was formed to be the managing general partner with a 1% general partner
interest in Courtyard II Associates, L.P. ("Associates"), a Delaware limited
partnership. The Partnership owns a 1% general partner interest and a 98%
limited partner interest in Associates. On January 24, 1996, the Partnership
contributed 69 Hotels and their related assets to Associates. Formation of
Associates resulted in the Partnership's primary assets being its direct and
indirect interest in Associates. Additionally, substantially all of Associates'
net equity will be restricted to dividends, loans or advances to the
Partnership.
Associates holds a 99% membership interest in CBM Associates II LLC ("Associates
II") and the Managing General Partner holds the remaining 1% membership
interest. On January 24, 1996, the Partnership contributed the Hotel located in
Deerfield, IL (the "Deerfield Hotel") and its related assets to Associates and
the Managing General Partner who simultaneously contributed the Hotel and its
related assets to Associates II.
Each of the Managing General Partner, Associates and Associates II were formed
as a single purpose bankruptcy-remote entity to facilitate the refinancing.
CBM Funding Corporation ("CBM Funding"), a wholly-owned subsidiary of
Associates, was also formed to make a mortgage loan (the "Mortgage Loan") to
Associates from the proceeds of the sale of the Certificates.
Potential Transaction
The General Partner has undertaken, on behalf of the Partnership, to pursue,
subject to further approval of the partners, a potential transaction (the
"Consolidation") in which (i) subsidiaries of CRF Lodging Company, L.P. (the
"Company"), a newly formed Delaware limited partnership, would merge with and
into the Partnership and up to five other limited partnerships, with the
Partnership and the other limited partnerships being the surviving entities
(each, a "Merger" and collectively, the "Mergers"), subject to the satisfaction
or waiver of certain conditions; (ii) CRF Lodging Trust ("CRFLT"), a Maryland
real estate investment trust, the sole general partner of the Company, would
offer its common shares of beneficial interest, par value $0.01 per share (the
"Common Shares") to investors in an underwritten public offering and would
invest the proceeds of such offering in the Company in exchange for units of
limited partnership interests in the company ("CRFLT Units"); and (iii) the
Partnership would enter into a lease for the operation of its Hotels pursuant to
which a lessee would pay rent to the Partnership based upon the greater of a
fixed dollar amount of base rent or specified percentages of gross sales, as
specified in the lease. If the partners approve the transaction and other
conditions are satisfied, the partners of the Partnership would receive CRFLT
Units in the Merger in exchange for their interests in the Partnership.
A preliminary prospectus/consent solicitation was filed as part of a
registration statement on Form S-4 with the Securities and Exchange Commission
and which describes the potential transaction in greater detail. Any offer of
CRFLT Units in connection with the consolidation will be made solely by a final
prospectus/consent solicitation.
Partnership Allocations and Distributions
Partnership allocations and distributions are generally made as follows:
a. Cash available for distribution is distributed (i) first, 5% to the
General Partner and 95% to the limited partners until the General Partner
and the limited partners (collectively, the "Partners") have received
cumulative distributions of sale proceeds and/or refinancing proceeds
("Capital Receipts") equal to $77,368,421; (ii) next, 10% to the General
Partner and 90% to the limited partners until the Partners have received
cumulative distributions of Capital Receipts equal to $158,306,000; and
(iii) thereafter, 25% to the General Partner and 75% to the limited
partners. Distributions to the General Partner are subordinate to an
annual 10% non-cumulative preferred return to the limited partners on
their invested capital, as defined.
b. Refinancing proceeds not retained by the Partnership will be distributed
(i) first, 5% to the General Partner and 95% to the limited partners
until the Partners have received cumulative distributions of refinancing
proceeds equal to $158,306,000 minus adjusted sale proceeds, as defined;
and (ii) thereafter, 25% to the General Partner and 75% to the limited
partners.
c. Proceeds not retained by the Partnership from the sale or other
disposition of less than substantially all of the assets of the
Partnership will be distributed (i) first, 5% to the General Partner and
95% to the limited partners until the Partners have received cumulative
distributions of Capital Receipts equal to $158,306,000; and (ii)
thereafter, 25% to the General Partner and 75% to the limited partners.
Proceeds from the sale of substantially all of the assets of the
Partnership or from a related series of Hotel sales leading to the sale
of substantially all of the assets of the Partnership will be distributed
to the Partners pro-rata in accordance with their capital account
balances.
d. Net profits are generally allocated in the same ratio in which cash
available for distribution is distributed.
e. All items of gain, deduction or loss attributable to the contributed
equipment will be allocated to the General Partner.
f. In general, gain recognized by the Partnership will be allocated, with
respect to any year, in the following order of priority: (i) to all
Partners whose capital accounts have negative balances until such
negative balances are brought to zero; (ii) to all Partners up to the
amount necessary to bring their respective capital account balances to an
amount equal to their invested capital, as defined; and (iii) thereafter
25% to the General Partner and 75% to the limited partners.
Gain arising from the sale or other disposition (or from a related series
of sales or dispositions) of substantially all the assets of the
Partnership will be allocated (i) to the limited partners in an amount
equal to the excess, if any, of (1) the sum of 15% times the weighted
average of the limited partners' invested capital each year, over (2) the
sum of distributions to the limited partners of Capital Receipts in
excess of the limited partners' cumulative capital and distributions to
limited partners of cash available for distribution; and (ii) next, to
the General Partner until it has been allocated an amount equal to 33.33%
of the amount allocated to the limited partners under clause (i); and
(iii) thereafter, 25% to the General Partner and 75% to the limited
partners.
g. For financial reporting purposes, profits and losses are generally
allocated among the Partners based on their stated interests in cash
available for distribution.
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.
Working Capital and Supplies
Pursuant to the terms of the Partnership's management agreement discussed in
Note 8, 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.
<PAGE>
Revenues and Expenses
Revenues represent house profit from the Partnership's Hotels since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Hotels to the Manager. House profit
reflects hotel operating results which flow to the Partnership as property owner
and represents hotel sales less property-level expenses, excluding depreciation
and amortization, base, Courtyard and incentive management fees, real and
personal property taxes, ground rent and equipment rent, insurance and certain
other costs, which are disclosed separately in the consolidated statement of
operations (see Note 3).
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 is assessing the impact of EITF 97-2 on its policy of excluding
the property-level revenues and operating expenses of the Hotels from its
consolidated statement of operations (see Note 3). If the Partnership concludes
that EITF 97-2 should be applied to the Hotels, it would include operating
results of those managed operations in its consolidated financial statements.
Application of EITF 97-2 to consolidated financial statements as of and for the
year ended December 31, 1997, would have increased both revenues and operating
expenses by approximately $133.8 million and would have 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:
Buildings and improvements 40 years
Leasehold improvements 40 years
Furniture and equipment 4-10 years
Certain property and equipment is pledged to secure the Certificates/Mortgage
Loan described in Note 6.
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.
Deferred Financing Costs
Prior to 1996, deferred financing costs consisted of costs incurred in
connection with obtaining Partnership financing for Mortgage Debt A and B, as
defined in Note 6. During 1997, 1996 and 1995, the Partnership paid $12,000,
$15,835,000 and $2,990,000, respectively, in financing costs related to the
Senior Notes and the Certificates discussed in Note 6. Financing costs are
amortized using the straight-line method, which approximates the effective
interest rate method, over the remaining life of the respective mortgage debt.
At December 31, 1997 and 1996, accumulated amortization of financing costs
totaled $3,025,000 and $1,453,000, 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.
Ground Rent
The land leases with MII or affiliates of MII (see Note 7) include scheduled
increases in minimum rents per property. These scheduled rent increases, which
are included in minimum lease payments, are being recognized by the Partnership
on a straight-line basis over the lease terms of approximately 80 years. The
adjustment included in ground rent expense and Due to Marriott International,
Inc. and affiliates to reflect minimum lease payments on a straight-line basis
for 1997, 1996 and 1995 totaled $119,000 per year.
Income Taxes
Provision for Federal taxes has not been made in the accompanying consolidated
financial statements since the Partnership does not pay income taxes, but
rather, allocates its profits and losses to the individual Partners. Significant
differences exist between the net income for financial reporting purposes and
the net income reported in the Partnership's tax return. These differences are
due primarily to the use for income tax purposes of accelerated depreciation
methods, shorter depreciable lives for the assets, difference in the timing of
recognition of certain fees and straight-line rent adjustments. As a result of
these differences, the excess of the net Partnership liabilities reported in the
accompanying consolidated financial statements over the tax basis in the net
Partnership liabilities was $7,196,000 and $7,819,000, respectively as of
December 31, 1997 and 1996.
Statement of Financial Accounting Standards
In the first quarter of 1996, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS
No. 121 did not have an effect on the Partnership's consolidated financial
statements.
Reclassifications
Certain reclassifications were made to the prior year financial statements to
conform to the 1997 presentation.
NOTE 3. HOTEL REVENUES
Partnership Hotel revenues consist of Hotel operating results for the three
years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ---------
<S> <C> <C> <C>
HOTEL SALES
Rooms...................................................................$ 248,012 $ 235,861 $ 218,955
Food and beverage....................................................... 17,436 18,227 17,628
Other................................................................... 9,573 9,619 9,242
------------- ------------- -------------
275,021 263,707 245,825
------------- ------------- -------------
HOTEL EXPENSES
Departmental Direct Costs
Rooms................................................................. 52,405 50,653 48,091
Food and beverage..................................................... 15,145 16,073 15,006
Other hotel operating expenses.......................................... 66,241 63,799 60,991
------------- ------------- -------------
133,791 130,525 124,088
----------- ------------ -----------
HOTEL REVENUES.............................................................$ 141,230 $ 133,182 $ 121,737
============= ============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
1997 1996
------------- ---------
<S> <C> <C>
Land..................................................................................... $ 25,392 $ 25,392
Leasehold improvements....................................................................... 442,226 438,921
Building and improvements.................................................................... 87,546 78,559
Furniture and equipment...................................................................... 155,250 142,663
------------- -------------
710,414 685,535
Less accumulated depreciation................................................................ (254,979) (226,848)
------------- -------------
$ 455,435 $ 458,687
============= =============
</TABLE>
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts.
<TABLE>
<CAPTION>
As of December 31, 1997 As of December 31, 1996
------------------------------ --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Debt........................................................$ 512,955 $ 544,000 $ 526,253 $ 540,420
Management fees due to Courtyard
Management Corporation...................................$ 34,829 $ 22,000 $ 36,442 $ 16,681
</TABLE>
The 1997 and 1996 estimated fair value of debt obligations were based on the
quoted market prices at December 31, 1997 and 1996, respectively. Management
fees due to Courtyard Management Corporation are valued based on the expected
future payments from operating cash flow discounted at risk adjusted rates.
NOTE 6. MORTGAGE DEBT
Overview
The Partnership's initial financing consisted of up to $500 million of
non-recourse mortgage debt (the "MFS Mortgage Debt") from Marriott Financial
Services, Inc. ("MFS"), a wholly-owned subsidiary of Host Marriott, to provide
financing for the purchase of 65 of the Hotels (the "non-IRB Hotels"). The
Partnership assumed the $40.2 million of IRB Debt to provide financing for the
purchase of the remaining 5 Hotels (the "IRB Hotels"). In 1988 and 1989, the
Partnership borrowed $275 million (the "Mortgage Debt A") and $230.5 million
(the "Mortgage Debt B") from two banks (the "Banks") to repay the MFS Mortgage
Debt and to pay financing costs.
On January 24, 1996, the Partnership completed a refinancing of the
Partnership's existing debt through the private placements of $127.4 million of
senior secured notes (the "Senior Notes") and $410.2 million of multi-class
commercial mortgage pass-through certificates (the "Certificates").
The net proceeds from the placement of the Senior Notes and the Certificates and
existing Partnership cash were used as follows: (i) to repay the Partnership's
existing Mortgage Debt A of $275 million and Mortgage Debt B of $230.5 million,
(ii) to repay the IRB Debt of $25.6 million, (iii) to repay the advances from
Host Marriott related to certain IRB Hotels of $6.5 million and (iv) to pay
certain costs of structuring and issuing the Senior Notes and the Certificates.
Upon repayment of Mortgage Debt A and Mortgage Debt B, Host Marriott was
released from its obligations under (i) the Mortgage Debt A and Mortgage Debt B
debt service guarantees, (ii) the foreclosure guarantee and (iii) the Ground
Rent Facility, as defined.
Bank Mortgage Debt
Mortgage Debt A and B were non-recourse and bore interest at a floating rate
equal to (i) the adjusted CD Rate or LIBOR, as defined, plus (ii) .75 percentage
points. Mortgage Debt A and B required no principal amortization prior to
maturity on December 15, 1995 and September 5, 1996, respectively.
The combined effective interest rate for Mortgage Debt A and B was 6.67% from
January 1, 1996 through January 23, 1996 and 7% for 1995. The combined average
interest rate at January 23, 1996 for Mortgage Debt A and B was 6.58%.
As security for the Mortgage Debt A (36 Hotels) and Mortgage Debt B (29 Hotels)
the Banks held mortgages on the Partnership's fee or leasehold interest on the
respective Hotels. The Banks also had security interests under their respective
mortgages in the personal property associated with those Hotels and obtained an
assignment of the Partnership's rights under the management agreement and the
Purchase Agreement.
On December 15, 1995, the Partnership and the Mortgage Debt A lenders amended
the loan agreement to extend the maturity date of Mortgage Debt A from December
15, 1995 to February 15, 1996 (the "Extension Period"). This amendment provided
for interest during the Extension Period equal to an adjusted CD Rate or LIBOR
plus a premium.
In connection with the Mortgage Debt A extension, the Partnership paid an
extension fee to the Banks of $1,085,000 which was amortized as interest expense
over the Extension Period.
Bank Mortgage Debt Guarantees
Prior to the initial refinancing, in 1987 Host Marriott had guaranteed payment
of up to $60 million of debt service on the MFS Mortgage Debt. As a result of
the initial refinancing, this guarantee was allocated $32.6 million to Mortgage
Debt A and $27.4 million to Mortgage Debt B. Any payments by Host Marriott under
the Mortgage Debt guarantees were treated as loans to the Partnership and bore
interest at one percentage point in excess of the prime rate of interest
announced by Bankers Trust Company of New York (the "Prime Rate"). Host Marriott
was released from the original guarantees on January 24, 1996, the date when
Mortgage Debt A and Mortgage Debt B were repaid in full.
During 1994, the Partnership, Manager and the Banks agreed that the Partnership
would establish reserve accounts for Mortgage Debt A and B and contribute 1% of
Hotel sales on the respective Mortgage Debt A and B properties to these reserves
from 1993 through the respective loan maturities. The initial contribution, made
in 1994, included the required contribution for 1993. On January 24, 1996, these
reserves were used to pay costs associated with the refinancing of these loans
and to repay a portion of these loans upon maturity.
In addition, the General Partner had provided a guarantee to MFS that, in the
event of a foreclosure, proceeds under the MFS Mortgage Debt would be at least
$75 million. Upon completion of the debt refinancing on January 24, 1996, Host
Marriott was released from its obligations pursuant to the foreclosure
guarantee.
IRB Debt
The IRB Debt was refinanced on January 24, 1996 and the IRB Debt was repaid in
full. The $25.6 million of IRB Debt outstanding at December 31, 1995 was backed
by direct-pay letters of credit from commercial banks that would have expired in
1996. The IRB Debt bore interest at daily, weekly or fixed rates at the option
of the Partnership, and was limited to a maximum interest rate of 15%. From
January 1, 1996 through January 23, 1996, the interest rates on the IRB Debt
ranged from 2.65% to 6.1%. In 1995, the interest rates on the IRB Debt ranged
from 1.9% to 6.1%. The interest rate on the IRB Debt was 3.2% at January 23,
1996.
The bondholders had the right to demand purchase of any of the bonds at the
expiration of specified interest rate periods. Had the Partnership failed to
make the required payments of principal and interest on the IRB Debt, Host
Marriott would have been required to make such payments ("Host Marriott's IRB
Liability"). Through January 24, 1996, the Partnership purchased a total of
$15.4 million of bonds/IRB Debt with proceeds advanced by Host Marriott (see
below) when presented by certain bondholders. These loans bore interest at one
percentage point in excess of the Prime Rate (8.5% at January 23, 1996). The
weighted average interest rate was 9.5% for the period from January 1, 1996
through January 23, 1996 and 9.83% for 1995. In 1993 and 1994, the Partnership
was able to repay the General Partner $8.9 million. As of December 31, 1995,
$6.5 million of Host Marriott IRB Liability loans were outstanding. The Host
Marriott IRB Liability loans were repaid on January 24, 1996 from proceeds of
the debt refinancing.
Ground Rent Facility
Fifty-three of the Hotels are situated on land leased from MII or affiliates of
MII, eight of the Hotels are situated on land leased from third parties. MFS had
agreed to lend the Partnership up to $25 million (the "Ground Rent Facility") to
the extent that the Partnership has insufficient funds to pay ground rent under
any ground lease, including third party ground leases, after payment of (i)
hotel operating expenses (except for ground rent) and (ii) debt service. No
amounts were ever advanced under the Ground Rent Facility. Upon refinancing of
the Partnership debt on January 24, 1996, MFS was released from the Ground Rent
Facility.
Debt - Senior Notes
The Senior Notes of $127.4 million were issued by the Partnership and Finance.
The Senior Notes bear interest at 10 3/4%, require semi-annual payments of
interest and require no payments of principal until maturity on February 1,
2008. The Senior Notes are secured by a first priority pledge by the Partnership
of (i) its 99% partnership interest (consisting of a 98% limited partner
interest and a 1% general partner interest) in Associates and (ii) its 100%
equity interest in the Managing General Partner. Finance has nominal assets,
does not conduct any operations and does not provide any additional security for
the Senior Notes.
The terms of the Senior Notes include requirements of the Partnership to
establish and fund a debt service reserve account in an amount equal to one
six-month interest payment on the Senior Notes ($6,848,000 which is included as
restricted cash on the accompanying consolidated balance sheets at December 31,
1997 and 1996) and to maintain certain levels of excess cash flow, as defined.
In the event the Partnership fails to maintain the required level of excess cash
flow, the Partnership will be required to (i) suspend distributions to its
partners and other restricted payments, as defined, (ii) to fund a separate
supplemental debt service reserve account (the "Supplemental Debt Service
Reserve") in an amount up to two six-month interest payments on the Senior Notes
and (iii) if such failure were to continue, to offer to purchase a portion of
the Senior Notes at par.
The Senior Notes are not redeemable prior to February 1, 2001. Thereafter, the
Senior Notes may be redeemed, at the option of the Partnership, at a premium
declining to par in 2004. The premium is 5.375% for 2001, 3.583% for 2002 and
1.792% for 2003. The Senior Notes are non-recourse to the Partnership and its
partners.
On June 4, 1996, the Partnership and Finance completed an exchange offer of its
unregistered 10 3/4% Series B Senior Secured Notes with an aggregate principal
amount of $127.4 million ("Old Notes") due 2008 for an equal amount of
registered notes ("New Notes"). The form and terms of the New Notes are
substantially identical to the form and terms of the Old Notes, except that the
New Notes have been registered under the Securities Act of 1933, as amended,
there are no restrictions on the transferability of the New Notes.
Debt - Certificates
The Certificates were issued by CBM funding for an initial principal amount of
$410.2 million. Proceeds from the sale of the Certificates were utilized by CBM
Funding to provide a Mortgage Loan to Associates. The Certificates/Mortgage Loan
require monthly payments of principal and interest based on a 17-year
amortization schedule. The Mortgage Loan matures on January 28, 2008. However,
the maturity date of the Certificates/Mortgage Loan may be extended until
January 28, 2013 with the consent of 66-2/3% of the holders of the outstanding
Certificates affected thereby. The Certificates were issued in the following
classes and pass-through rates of interest.
<PAGE>
Initial Certificate Pass-Through
Class Balance Rate
------------------- ------------------- ------------
Class A-1 $ 45,500,000 7.550%
Class A-2 $ 50,000,000 6.880%
Class A-3P & I $ 129,500,000 7.080%
Class A-3IO Not Applicable 0.933%
Class B $ 75,000,000 7.480%
Class C $ 100,000,000 7.860%
Class D $ 10,200,000 8.645%
The Class A-3IO Certificates receive payments of interest only based on a
notional balance equal to the Class A-3P & I Certificate balance.
The balances of the Certificates were $385.6 million and $398.9 million at
December 31, 1997 and 1996, respectively. Principal amortization of $13.3
million and $11.3 million of the Class A-1 Certificates were made during 1997
and 1996, respectively. The weighted average interest rate on the Certificates
was 7.8% for 1997 and 7.7% from January 24, 1996 through December 31, 1996, and
the average interest rates were 7.8% and 7.6% at December 31, 1997 and 1996,
respectively.
The Certificates/Mortgage Loan maturities are as follows (in thousands):
1998 $ 14,331
1999 15,443
2000 16,642
2001 17,934
2002 19,326
Thereafter 301,879
-------------
$ 385,555
The Mortgage Loan is secured primarily by 69 cross-defaulted and
cross-collateralized mortgages representing first priority mortgage liens on (i)
the fee or leasehold interest in the 69 Hotels, related furniture, fixtures and
equipment and the property improvement fund, (ii) the fee interest in the land
leased from MII or their affiliates on which 53 Hotels are located, (iii) a
pledge of Associates membership interest in and the related right to receive
distributions from Associates II which owns the Deerfield Hotel and (iv) an
assignment of the Restated Management Agreement, as defined below. The Mortgage
Loan is non-recourse to Associates, the Partnership and its partners.
Operating profit from the Hotels in excess of debt service on the Mortgage Loan
is available to be distributed to the Partnership. Amounts distributed to the
Partnership are used for the following, in order of priority: (i) for debt
service on the Senior Notes, (ii) to fund the Supplemental Debt Service Reserve,
if necessary, (iii) to offer to purchase a portion of the Senior Notes at par,
if necessary, (iv) for working capital as discussed in Note 8 and (v) for
distributions to the partners of the Partnership. The restricted net assets of
Associates was $81.0 million and $81.1 million as of December 31, 1997 and 1996,
respectively.
Prepayments of the Mortgage Loan are permitted with the payment of a premium
(the "Prepayment Premium"). The Prepayment Premium is equal to the greater of
(i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance
amount based on a spread of .25% or .55% over the U.S. treasury rate, as
defined.
On June 30, 1996, CBM Funding completed an exchange offer of its Multiclass
Mortgage Pass-Through Certificates, Series 1996-1A with a principal balance of
$406.2 million at that time, ("Old Certificates") for an equal amount of
Multiclass Mortgage Pass-Through Certificates, Series 1996-1B ("New
Certificates"). The form and terms of the New Certificates are substantially
identical to the form and terms of the Old Certificates, except that the New
Certificates are registered under the Securities Act of 1933, as amended and
their transfers are not restricted.
Pursuant to the terms of the Certificate/Mortgage Loan, the Partnership is
required to establish with the lender a separate escrow account for payments of
insurance premiums and real estate taxes for each mortgaged property if the
credit rating of MII is downgraded by Standard and Poor's Rating Services. The
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 1,
1997. As a result, the Partnership transferred $10.3 million into the required
reserve accounts prior to December 31, 1997. Out of this balance, approximately
$6.0 million of real estate taxes have been 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 consolidated
balance sheet.
NOTE 7. LEASES
The land on which 53 of the Hotels are located is leased from MII or affiliates
of MII. In addition, eight of the Hotels are located on land leased from third
parties. The land leases have remaining terms (including all renewal options)
expiring between the years 2024 and 2068. The MII land leases and the third
party land leases provide for rent based on specific percentages (from 2% to
15%) of certain sales categories subject to minimum amounts. The minimum rentals
are adjusted at various anniversary dates throughout the lease terms, as defined
in the agreements. The Partnership also rents certain equipment for use in the
Hotels.
In connection with the refinancing, the Partnership, as lessee, transferred it
rights and obligations pursuant to the 53 ground leases with MII and affiliates
to Associates. Additionally, MII and affiliates agreed to defer receipt of their
ground lease payments to the extent that the Partnership or Associates has
insufficient funds for debt service payments on the Senior Notes and the
Mortgage Loan.
Minimum future rental payments during the term of these operating leases are as
follows (in thousands):
Telephone
Lease Land Equipment and Other
Year Leases Leases
1998 $ 9,230 $ 1,611
1999 9,230 1,126
2000 9,230 813
2001 9,230 761
2002 9,230 741
Thereafter 532,983 --
---------- ----------------------
$ 579,133 $ 5,052
========== ======================
Total rent expense on land leases was $12,480,000 for 1997, $11,899,000 for 1996
and $11,550,000 for 1995.
NOTE 8. MANAGEMENT AGREEMENT
To facilitate the refinancing, effective December 30, 1995, the original
management agreement was restated into two separate management agreements.
Associates entered into a management agreement with the Manager for the 69
Hotels which Associates directly owns and Associates II entered into a
management agreement for the Deerfield Hotel which Associates II owns,
collectively, (the "Management Agreement").
Term
The Management Agreement has an initial term expiring in 2013. The Manager may
renew the term, as to one or more of the Hotels, at its option, for up to three
successive terms of 10-years each and one final term of five years. The
Partnership may terminate the Management Agreement if, during any three
consecutive years after 1992, specified minimum operating results are not
achieved. However, the Manager may prevent termination by paying to the
Partnership the amount by which the minimum operating results were not achieved.
Management Fees
The Management Agreement provides for annual payments of (i) the base management
fee equal to 3-1/2% of gross sales from the Hotels, (ii) the Courtyard
management fee equal to 2-1/2% of gross sales from the Hotels, and (iii) the
incentive management fee equal to 15% of operating profit, as defined (20% of
operating profit after the Partners have received refinancing proceeds equal to
50% of the excess of (a) $154,736,842 over (b) cumulative distributions of
adjusted sale proceeds (the "First Equity Refinancing")).
Deferral Provisions
Due to the refinancing, beginning in 1996, one percent of the Courtyard
management fee is deferred through maturity of the Senior Notes and the Mortgage
Loan to the extent that the Partnership or Associates has insufficient funds for
debt service payments on the Senior Notes and the Mortgage Loan. Previously, the
entire three percent of the Courtyard management fee was subordinate to debt
service.
To the extent any Courtyard management fee, base management fee or incentive
management fee is deferred, it will be added to deferred management fees.
Deferred management fees accrue without interest, and will be payable out of 50%
of available cash flow after payment of certain priorities as discussed below.
The priority return to the Partnership, as defined, was reduced from 10% of
invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 10%
for 1999 and thereafter. Operating profit from the Hotels (which reflects the
deduction of the base and Courtyard management fees and MII ground rent) will be
used to pay the following, in order of priority: (i) debt service on the Senior
Notes and Mortgage Loan, (ii) to repay working capital loans to the Manager,
(iii) to repay deferred ground rent to MII and their affiliates, (iv) to repay
ground lease advances to MII and their affiliates, (v) the priority return to
the Partnership which is 8% of invested capital for 1997 and was 7% for 1996,
(vi) eighty percent of the remaining operating profit is applied to the payment
of current incentive management fees, (vii) to repay advances to the
Partnership, (viii) to repay foreclosure avoidance advances to the Manager and
(ix) fifty percent of the remaining operating profit to repay deferred
management fees to the Manager and fifty percent of remaining operating profit
is paid to the Partnership.
During 1997, $1,613,000 of deferred incentive management fees were paid while
during 1996, $633,000 were deferred. Deferred incentive management fees were
$4,584,000 and $6,197,000 as of December 31, 1997 and 1996, respectively.
Deferred Courtyard management fees totaled $22,341,000 as of December 31, 1997
and 1996. Deferred base management fees as of December 31, 1997 and 1996 were
$7,904,000.
Chain Services
The Manager is required to furnish certain services ("Chain Services") which are
furnished generally on a central or regional basis to all hotels managed, owned
or leased in the Courtyard by Marriott hotel system. The total amount of Chain
Services allocated to the Partnership was $10,257,000 in 1997, $9,474,000 in
1996 and $9,224,000 in 1995.
Working Capital
The Partnership is required to provide the Manager with working capital and
fixed asset supplies to meet the operating needs of the Hotels. The refinancing
required certain enhancements to the cash management system of the Manager such
that additional working capital may be required for the operation of the Hotels.
Therefore, on January 24, 1996, the Partnership, Associates and the Manager
entered into a Working Capital Maintenance Agreement (the "Working Capital
Agreement") and the Partnership advanced $2.5 million to the Manager as
additional working capital for the operation of the Hotels. Upon termination of
the Management Agreement, the working capital and supplies will be returned to
the Partnership. As of December 31, 1997 and 1996, the working capital balance
was $8,761,000. This includes the $8,846,000 originally advanced less the
$2,585,000 of excess working capital returned to the Partnership in 1991 and the
$2,500,000 advanced on January 24, 1996. At December 31, 1997 and 1996,
accumulated depreciation related to the supplies totaled $2,060,000.
In addition, the Working Capital Agreement required that the Partnership reserve
$2 million by February 1, 1997 and an additional $3 million by February 1, 1998
(the "Working Capital Reserve"). The $3 million and $2 million were reserved on
February 2, 1998 and January 31, 1997, respectively. The Working Capital Reserve
will be available for payment of hotel operating expenses in the event that
there is a downgrade in the long-term senior unsecured debt of MII to a level
below the rating which was effective April 1, 1997.
The obligation to fund the amounts required by the Working Capital Agreement is
subordinate to debt service on the Senior Notes and the Mortgage Loan.
Property Improvement Funds
The Management Agreement provides for the establishment of a repairs and
equipment reserve (property improvement fund) for the Hotels. The funding of
this reserve is based on a percentage of gross Hotel sales. During 1994, the
Partnership, Manager and the Mortgage Debt A and B lenders agreed that the
Partnership would establish refinancing reserve accounts and contribute 1% of
Hotel sales on the respective Mortgage Debt A and B properties to these
reserves. Correspondingly, the Management Agreement was amended in order to
reduce the contribution to the property improvement fund from 6% to 5% of gross
Hotel sales for the Mortgage Debt A and B properties for 1993 through the
respective loan maturities. The contribution for the five IRB Hotels remained at
6%. Upon completion of the refinancing on January 24, 1996, the contribution to
the property improvement fund was established initially at 5% for all Hotels and
may be increased, at the option of the Manager, to 6% of gross Hotel sales in
2001.
NOTE 9. ENVIRONMENTAL CONTINGENCY
Based upon a study completed in December 1995, the Partnership has become aware
of environmental contamination at one of its fee-owned properties, the Deerfield
Hotel, caused by the previous use of the site as a landfill and not caused by
the Partnership. The property represents less than 2% of the Partnership's total
assets and revenues as of December 31, 1997 and for the year ended,
respectively. The Partnership is unable to determine the need for remediation,
its potential responsibility, if any, for remediation and the extent of the
Partnership's possible liability for any remediation costs. There can be no
assurance that the Partnership will not have liability with respect to
remediation of contamination at that site. The Partnership does not believe that
any of the environmental matters are likely to have a material adverse effect on
the business and operations of the Partnership.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
64
TO THE PARTNERS OF COURTYARD II ASSOCIATES, L.P. AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheet of Courtyard II
Associates, L.P. (a Delaware limited partnership) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations and cash flows for each of the three years in the period ended
December 31, 1997 and the statement of changes in partners' capital for the
period from January 24, 1996 to December 31, 1996 and the year ended December
31, 1997. These financial statements are the responsibility of the General
Partner's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Courtyard II
Associates, L.P. and subsidiaries as of December 31, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 23, 1998
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
Courtyard II Associates, L.P. and Subsidiaries
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- --------
<S> <C> <C> <C>
HOTEL REVENUES (Note 3).......................................................$ 141,230 $ 133,182 $ 121,737
------------ ------------- ------------
OPERATING COSTS AND EXPENSES
Depreciation ............................................................... 28,131 27,062 27,720
Base and Courtyard management fees.......................................... 16,501 15,822 14,749
Incentive management fee.................................................... 12,878 12,040 10,480
Ground rent................................................................. 12,480 11,899 11,550
Property taxes.............................................................. 9,938 9,537 9,324
Insurance and other......................................................... 1,961 2,468 1,618
------------ ------------- ------------
81,889 78,828 75,441
------------ ------------- ------------
OPERATING PROFIT.............................................................. 59,341 54,354 46,296
Interest expense.............................................................. (31,575) (32,463) (29,080)
Interest income............................................................... 2,008 2,178 1,761
------------ ------------- ------------
NET INCOME BEFORE MINORITY INTEREST........................................... 29,774 24,069 18,977
MINORITY INTEREST............................................................. 12 8 --
------------ ------------- ------------
NET INCOME....................................................................$ 29,762 $ 24,061 $ 18,977
============ ============= ============
ALLOCATION OF NET INCOME
General Partners............................................................$ 595 $ 481 $ 380
Limited Partner............................................................. 29,167 23,580 18,597
------------ ------------- ------------
$ 29,762 $ 24,061 $ 18,977
============ ============= ============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED BALANCE SHEET
Courtyard II Associates, L.P. and Subsidiaries
December 31, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1997 1996
------------ --------
<S> <C> <C>
ASSETS
Property and equipment, net................................................................$ 455,435 $ 458,687
Deferred financing costs, net of accumulated amortization.................................. 11,139 12,273
Due from Courtyard Management Corporation.................................................. 11,318 13,315
Prepaid expenses........................................................................... 27 28
Property improvement fund.................................................................. 27,200 36,582
Restricted cash............................................................................ 4,289 --
Cash and cash equivalents.................................................................. 5,688 6,002
------------ ------------
$ 515,096 $ 526,887
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt..............................................................................$ 385,555 $ 398,853
Management fees due to Courtyard Management Corporation.................................... 34,829 36,442
Due to Marriott International, Inc. and affiliates......................................... 9,050 9,169
Accounts payable and accrued liabilities................................................... 4,660 1,305
------------ ------------
Total Liabilities.................................................................... 434,094 445,769
MINORITY INTEREST............................................................................ 20 8
------------ ------------
434,114 445,777
------------ ------------
PARTNERS' CAPITAL (See discussion of distribution restrictions in Note 2)
General Partners........................................................................... 1,621 1,622
Limited Partner............................................................................ 79,361 79,488
------------ ------------
Total Partners' Capital.............................................................. 80,982 81,110
------------ ------------
$ 515,096 $ 526,887
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF
CHANGES IN PARTNERS' CAPITAL
Courtyard II Associates, L.P. and Subsidiaries
For the Year Ended December 31, 1997
and the Period from January 24, 1996 through December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
General Limited
Partners Partner Total
---------- ------------ ----------
<S> <C> <C> <C>
Initial capitalization as of January 24, 1996................................$ 1,489 $ 72,938 $ 74,427
Capital distributions.................................................... (348) (17,030) (17,378)
Net income................................................................ 481 23,580 24,061
---------- ------------ -----------
Balance, December 31, 1996................................................... 1,622 79,488 81,110
Capital distributions.................................................... (596) (29,294) (29,890)
Net income................................................................ 595 29,167 29,762
---------- ------------ -----------
Balance, December 31, 1997...................................................$ 1,621 $ 79,361 $ 80,982
========== ============ ===========
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Courtyard II Associates, L.P. and Subsidiaries
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.......................................................................$ 29,762 $ 24,061 $ 18,977
Noncash items:
Depreciation.................................................................. 28,131 27,062 27,720
Amortization of deferred financing costs as interest.......................... 1,105 1,195 493
Deferred management fees...................................................... -- 633 --
Minority Interest............................................................. 12 8 --
Deferred interest on IRB advances from Host Marriott Corporation.............. -- -- 147
Gain on sale of equipment..................................................... -- -- (12)
Changes in operating accounts:
Due from Courtyard Management Corporation..................................... 1,997 (3,737) 1,311
Management fees due to Courtyard Management Corporation....................... (1,613) -- (162)
Accounts payable and accrued liabilities...................................... (901) (2,309) (5,911)
Due to Host Marriott Corporation.............................................. 15 (798) --
Prepaid expenses and other.................................................... 1 (28) 137
Due to Marriott International, Inc. .......................................... -- -- (106)
----------- ---------- -----------
Cash provided by operations................................................ 58,509 46,087 42,594
----------- ---------- -----------
INVESTING ACTIVITIES
Additions to property and equipment, net...................................... (24,879) (11,269) (8,786)
Change in property improvement fund........................................... 9,382 (3,484) (5,427)
Working capital advanced to Courtyard Management Corporation.................. -- (2,500) --
----------- ---------- -----------
Cash used in investing activities.......................................... (15,497) (17,253) (14,213)
----------- ---------- -----------
FINANCING ACTIVITIES
Capital distributions......................................................... (29,890) (17,378) --
Repayment of principal........................................................ (13,298) (11,347) --
Change in restricted reserve accounts......................................... (129) -- --
Payment of financing costs.................................................... (9) (10,627) --
Repayments of debt............................................................ -- (410,200) --
Proceeds from issuance of debt................................................ -- 410,200 --
Investment in and net advances to (from) Associates........................... -- 16,520 (28,381)
----------- ---------- -----------
Cash used in financing activities.......................................... (43,326) (22,832) (28,381)
----------- ---------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Courtyard II Associates, L.P. and Subsidiaries
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- --------
<S> <C> <C> <C>
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS...................................$ (314) $ 6,002 $ --
CASH AND CASH EQUIVALENTS at beginning of year..................................... 6,002 -- --
----------- ---------- -----------
CASH AND CASH EQUIVALENTS at end of year...........................................$ 5,688 $ 6,002 $ --
=========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest.....................................$ 30,469 $ 33,978 $ 32,116
=========== ========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Courtyard II Associates, L.P. and Subsidiaries
December 31, 1997 and 1996
NOTE 1. THE PARTNERSHIP
Description
Courtyard II Associates, L.P. and Subsidiaries ("Associates"), a Delaware
limited partnership, was formed December 22, 1995. Substantially all of the
assets of Associates were contributed to Associates by Courtyard by Marriott II
Limited Partnership (the "Partnership") on January 24, 1996, in connection with
the Partnership's refinancing (see Note 6). The managing general partner of
Associates is Courtyard II Associates Management Corporation (a wholly-owned
subsidiary of the Partnership) with a 1% interest and the Partnership owns a 1%
general partner interest and a 98% limited partner interest. CBM Funding
Corporation ("CBM Funding") a wholly-owned subsidiary of Associates, was formed
on December 29, 1995, to make a mortgage loan to Associates in connection with
the refinancing (see Note 6). Associates directly owns 69 Courtyard hotels and
the land on which certain of the Hotels, as defined below, are located. One
hotel located in Deerfield, Illinois (the "Deerfield Hotel"), is owned by CBM
Associates II LLC ("Associates II"). Associates hold a 99% membership interest
in Associates II and Courtyard II Associates Management Corporation holds the
remaining 1% interest in Associates II. The 70 hotel properties (the "Hotels")
are located in 29 states in the United States: nine in Illinois; eight in
California; five in Florida; four in Georgia; four in Texas; and three or less
in each of the other 24 states. The Hotels are managed as part of the Courtyard
by Marriott hotel system by Courtyard Management Corporation (the "Manager"), a
wholly-owned subsidiary of Marriott International, Inc. ("MII").
Partnership Allocations and Distributions
Allocations and distributions for Associates are generally made in accordance
with the respective ownership interests as follows: (i) 98% to the limited
partner, the Partnership and (ii) 1% to each general partner, the Partnership
and Courtyard II Associates Management Corporation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of Associates present the financial
position, results of operations and cash flows of Associates as if it were a
separate subsidiary of the Partnership for all periods presented. The
Partnership's historical basis in the assets and liabilities contributed to
Associates have been recorded on Associates Carryover Basis Financial
Statements. Intercompany transactions and balances between Associates and its
subsidiaries have been eliminated. Changes in Investment in and Net Advances to
Associates for all periods presented prior to January 24, 1996, represent the
net income of Associates net of cash transferred to the Partnership. There were
no terms of settlement or interest charges associated with the Investment
in and Net Advances to Associates balance.
An analysis of the activity in Investment in and Net Advances to Associates for
the two years ended December 31, 1995 and the period from January 1, 1996
through January 24, 1996, is as follows (in millions):
Balance, December 31, 1994.....................................$ 67
Cash transfers to (from) Associates, net................... (28)
Net income................................................. 19
-------
Balance, December 31, 1995..................................... 58
Cash transfers to Associates, net.......................... 16
Amount reclassified as Partners' Capital................... (74)
-------
Balance, January 24, 1996......................................$ --
The average balance for Investment in and Net Advances to Associates for 1995
was $62.5 million. On January 24, 1996, the Partnership contributed
substantially all of its assets to Associates for a 1% general partner interest
and a 98% limited partner interest. Courtyard II Associates Management
Corporation owns the remaining 1% general partner interest.
On January 24, 1996, Associates consummated the offering of $410,200,000 of
multi-class mortgage pass-through certificates (the "Certificates"), the net
proceeds of which were used to repay certain obligations of the Partnership as
discussed in Note 6. The accompanying consolidated financial statements present
the pushed-down effects of the debt which was repaid with the proceeds of the
offering as discussed in Note 6.
A concurrent offering of $127,400,000 of senior notes (the "Senior Notes") by
the Partnership was also completed on January 24, 1996. The Senior Notes are
secured by a first priority pledge of the Partnership's 99% partnership interest
in Associates and the Partnership's 100% equity interest in Courtyard II
Associates Management Corporation. As a result, the Partnership owns directly or
indirectly 100% of Associates. The Senior Notes are not reflected in the
accompanying consolidated financial statements of Associates because Associates
does not guarantee the Senior Notes nor do the assets of Associates secure the
Senior Notes. Payments on the Senior Notes are made from distributions of the
excess cash of Associates to the Partnership; such distributions are restricted
only upon a monetary event of default under the Mortgage Loan, as defined in
Note 6. The Partnership has no other source of cash flow other than
distributions from Associates.
Basis of Accounting
The records of Associates are maintained on the accrual basis of accounting and
its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Working Capital and Supplies
Pursuant to the terms of Associates management agreement discussed in Note 8,
Associates is required to provide the Manager with working capital and supplies
to meet the operating needs of the Hotels. The Manager converts cash advanced by
Associates into other forms of working capital consisting primarily of operating
cash, inventories, and trade receivables and payables which are maintained and
controlled by the Manager. Upon the termination of the management agreement, the
Manager is required to convert working capital and supplies into cash and return
it to Associates. As a result of these conditions, the individual components of
working capital and supplies controlled by the Manager are not reflected in the
accompanying consolidated balance sheet.
Revenues and Expenses
Revenues represent house profit from Associates' Hotels since Associates
delegated substantially all of the operating decisions related to the generation
of house profit of the Hotels to the Manager. House profit reflects hotel
operating results which flow to Associates as property owner and represents
hotel sales less property-level expenses, excluding depreciation, base,
Courtyard and incentive management fees, real and personal property taxes,
ground rent and equipment rent, insurance and certain other costs, which are
disclosed separately in the consolidated statement of operations (see Note 3).
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.
Associates is assessing the impact of EITF 97-2 on its policy of excluding the
property-level revenues and operating expenses of the Hotels from its
consolidated statement of operations (see Note 3). If Associates concludes that
EITF 97-2 should be applied to the Hotels, it would include operating results of
those managed operations in its consolidated financial statements. Application
of EITF 97-2 to consolidated financial statements as of and for the year ended
December 31, 1997, would have increased both revenues and operating expenses by
approximately $133.8 million and would have 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:
Buildings and improvements 40 years
Leasehold improvements 40 years
Furniture and equipment 4-10 years
Certain property and equipment is pledged to secure the Certificates/Mortgage
Loan described in Note 6.
Associates assesses impairment of its real estate properties based on whether
estimated undiscounted future cash flows from such properties on an individual
hotel basis will be less than their net book value. If a property is impaired,
its basis is adjusted to fair market value.
Deferred Financing Costs
Prior to 1996, deferred financing costs consisted of costs incurred in
connection with obtaining Mortgage Debt A and B, as defined in Note 6. Financing
costs are amortized using the straight-line method, which approximates the
effective interest rate method, over the remaining life of the respective
mortgage debt. At December 31, 1996 accumulated amortization related to Mortgage
Debt A and B, as defined in Note 6, was $2,904,000. At December 31, 1996, costs
related to Mortgage Debt A and B were fully amortized. On January 24, 1996, the
Partnership contributed substantially all of its assets to Associates including
$2,630,000 the Partnership had paid in 1995 in financing costs related to the
debt refinancing discussed in Note 6. During 1997 and 1996, Associates paid
$9,000 and $10,627,000 in financing costs, respectively. At December 31, 1997
and 1996, accumulated amortization related to the Certificates, as defined in
Note 6, were $2,128,000 and $1,023,000, respectively.
Cash and Cash Equivalents
Associates considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Ground Rent
The land leases with MII or affiliates of MII (see Note 7) include scheduled
increases in minimum rents per property. These scheduled rent increases, which
are included in minimum lease payments, are being recognized by Associates on a
straight-line basis over the lease terms of approximately 80 years. The
adjustment included in ground rent expense and Due to Marriott International,
Inc. and affiliates to reflect minimum lease payments on a straight-line basis
for 1997, 1996 and 1995 totaled $119,000 per year.
Income Taxes
Provision for Federal taxes has not been made in the accompanying consolidated
financial statements since Associates does not pay income taxes, but rather,
allocates its profits and losses to the individual partners.
<PAGE>
Statement of Financial Accounting Standards
In the first quarter of 1996, Associates adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS
No. 121 did not have an effect on the Partnership's consolidated financial
statements.
Reclassifications
Certain reclassifications were made to the prior year financial statements to
conform to the 1997 presentation.
NOTE 3. REVENUES
Revenues for Associates consist of Hotel operating results for the three years
ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- --------
<S> <C> <C> <C>
HOTEL SALES
Rooms....................................................................$ 248,012 $ 235,861 $ 218,955
Food and beverage........................................................ 17,436 18,227 17,628
Other.................................................................... 9,573 9,619 9,242
------------- ------------- -------------
275,021 263,707 245,825
------------- ------------- -------------
HOTEL EXPENSES
Departmental Direct Costs
Rooms................................................................. 52,405 50,653 48,091
Food and beverage..................................................... 15,145 16,073 15,006
Other hotel operating expenses.......................................... 66,241 63,799 60,991
------------- ------------- -------------
133,791 130,525 124,088
------------- ------------- -------------
HOTEL REVENUES.............................................................$ 141,230 $ 133,182 $ 121,737
============= ============= =============
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------------- ---------
<S> <C> <C>
Land.........................................................................................$ 25,392 $ 25,392
Leasehold improvements....................................................................... 442,226 438,921
Building and improvements.................................................................... 87,546 78,559
Furniture and equipment...................................................................... 155,250 142,663
------------- -------------
710,414 685,535
Less accumulated depreciation................................................................ (254,979) (226,848)
------------- -------------
$ 455,435 $ 458,687
============= =============
</TABLE>
<PAGE>
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts (in thousands):
<TABLE>
<CAPTION>
As of December 31, 1997 As of December 31, 1996
------------------------------ --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Mortgage debt...............................................$ 385,555 $ 402,358 $ 398,853 $ 405,695
Management fees due to Courtyard
Management Corporation....................................$ 34,829 $ 22,000 $ 36,442 $ 16,681
</TABLE>
The 1997 and 1996 estimated fair value of debt obligations were based on the
quoted market prices at December 31, 1997 and 1996, respectively. Management
fees due to the Courtyard Management Corporation are valued based on the
expected future payments from operating cash flow discounted at risk adjusted
rates.
NOTE 6. MORTGAGE DEBT
Overview
The following discussion of bank mortgage debt, debt service guarantees,
foreclosure guarantees, Host Marriott IRB Liability advances and repayments and
the ground rent facility reflect actual amounts in relation to the Partnership.
Therefore, amounts discussed herein are not reflective of "push down" amounts to
Associates.
On January 24, 1996, the Partnership and Associates completed two refinancings
of the existing debt through the private placements of $127.4 million of Senior
Notes and $410.2 million of multiclass commercial mortgage pass-through
certificates, respectively.
The net proceeds from the placement of the Senior Notes and the Certificates and
existing Partnership cash were used as follows: (i) to repay the Partnership's
existing Mortgage Debt A of $275 million and Mortgage Debt B of $230.5 million,
(ii) to repay the IRB Debt of $25.6 million, (iii) to repay advances from the
Host Marriott related to certain IRB Hotels loans of $6.5 million and (iv) to
pay certain costs of structuring and issuing the Senior Notes and the
Certificates.
Upon repayment of Mortgage Debt A and Mortgage Debt B, Host Marriott was
released from its obligations under (i) the Mortgage Debt A and Mortgage Debt B
debt service guarantees, (ii) the foreclosure guarantee and (iii) the Ground
Rent Facility as defined.
Bank Mortgage Debt
Mortgage Debt A and B were non-recourse and bore interest at a floating rate
equal to (i) the adjusted CD Rate or LIBOR, as defined, plus (ii) .75 percentage
points. Mortgage Debt A and B required no principal amortization prior to
maturity on December 15, 1995 and September 5, 1996, respectively.
The combined effective interest rate for Mortgage Debt A and B was 6.67% from
January 1, 1996 through January 23, 1996 and 7% for 1995. The combined average
interest rate at January 23, 1996 for Mortgage Debt A and B was 6.58%.
As security for the Mortgage Debt A (36 Hotels) and Mortgage Debt B (29 Hotels)
the banks held mortgages on the Partnership's fee or leasehold interest on the
respective Hotels. The banks also had security interests under their respective
mortgages in the personal property associated with those Hotels and obtained an
assignment of the Partnership's rights under the management agreement and the
Purchase Agreement.
On December 15, 1995, the Partnership and the Mortgage Debt A lenders amended
the loan agreement to extend the maturity date of Mortgage Debt A from December
15, 1995 to February 15, 1996 (the "Extension Period"). This amendment provided
for interest during the Extension Period equal to an adjusted CD Rate or LIBOR
plus a premium.
In connection with the Mortgage Debt A extension, the Partnership paid an
extension fee to the Banks of $1,085,000 which was amortized as interest expense
over the Extension Period.
Bank Mortgage Debt Guarantees
Prior to the initial refinancing, in 1987 Host Marriott had guaranteed payment
of up to $60 million of debt service on the $500 million of non-recourse
mortgage debt (the "MFS Mortgage Debt") from Marriott Financial Services, Inc.
("MFS"), a wholly-owned subsidiary of Host Marriott. As a result of the initial
refinancing, this guarantee was allocated $32.6 million to Mortgage Debt A and
$27.4 million to Mortgage Debt B. Any payments by Host Marriott under the
Mortgage Debt guarantees were treated as loans to the Partnership and bore
interest at one percentage point in excess of the prime rate of interest
announced by Bankers Trust Company of New York (the "Prime Rate"). Host Marriott
was released from the original guarantees on January 24, 1996, the date when
Mortgage Debt A and Mortgage Debt B were repaid in full.
During 1994, the Partnership, Manager and the Banks agreed that the Partnership
would establish reserve accounts for Mortgage Debt A and B and contribute 1% of
Hotel sales on the respective Mortgage Debt A and B properties to these reserves
for 1993 through the respective loan maturities. The initial contribution, made
in 1994, included the required contribution for 1993. On January 24, 1996, these
reserves were used to pay costs associated with the refinancing of these loans
and to repay a portion of these loans upon maturity.
In addition, the General Partner had provided a guarantee to MFS that, in the
event of a foreclosure, proceeds under the MFS Mortgage Debt would be at least
$75 million. Upon completion of the debt refinancing on January 24, 1996, Host
Marriott was released from its obligations pursuant to the foreclosure
guarantee.
IRB Debt
The IRB Debt was refinanced on January 24, 1996 and the IRB Debt was repaid in
full. The $25.6 million of IRB Debt outstanding at December 31, 1995 was backed
by direct-pay letters of credit from commercial banks that would have expired in
1996. The IRB Debt bore interest at daily, weekly or fixed rates at the option
of the Partnership, and was limited to a maximum interest rate of 15%. During
the period from January 1, 1996 through January 23, 1996, the interest rates on
the IRB Debt ranged from 2.65% to 6.1%. In 1995, the interest rates on the IRB
Debt ranged from 1.9% to 6.1%. The interest rate on the IRB Debt was 3.2% at
January 23, 1996.
The bondholders had the right to demand purchase of any of the bonds at the
expiration of specified interest rate periods. Had the Partnership failed to
make the required payments of principal and interest on the IRB Debt, Host
Marriott would have been required to make such payments ("Host Marriott's IRB
Liability"). Through January 24, 1996, the Partnership purchased a total of
$15.4 million of bonds/IRB Debt with proceeds advanced by Host Marriott (see
below) when presented by certain bondholders. These loans bore interest at one
percentage point in excess of the Prime Rate (8.5% at January 23, 1996). The
weighted average interest rate was 9.5% for the period from January 1, 1996
through January 23, 1996 and 9.83% for 1995. As of December 31, 1995, $6.5
million of Host Marriott IRB Liability loans were outstanding. The Host Marriott
IRB Liability loans were repaid on January 24, 1996, from proceeds of the debt
refinancing.
Ground Rent Facility
Fifty-three of the Hotels are situated on land leased from MII or affiliates of
MII, eight of the Hotels are situated on land leased from third parties. MFS had
agreed to lend the Partnership up to $25 million (the "Ground Rent Facility") to
the extent that the Partnership has insufficient funds to pay ground rent under
any ground lease under certain circumstances. No amounts were ever advanced
under the Ground Rent Facility. Upon refinancing of the Partnership Debt on
January 24, 1996, MFS was released from the Ground Rent Facility.
<PAGE>
Debt - Certificates
The Certificates were issued by CBM Funding for an initial principal amount of
$410.2 million. Proceeds from the sale of the Certificates were utilized by CBM
Funding to provide a mortgage loan (the "Mortgage Loan") to Associates. The
Certificates/Mortgage Loan require monthly payments of principal and interest
based on a 17-year amortization schedule. The Mortgage Loan matures on January
28, 2008. However, the maturity date of the Certificates/Mortgage Loan may be
extended until January 28, 2013 with the consent of 66-2/3% of the holders of
the outstanding Certificates affected thereby. The Certificates were issued in
the following classes and pass-through rates of interest.
Initial Certificate Pass-Through
Class Balance Rate
------------------- ------------------- ------------
Class A-1 $ 45,500,000 7.550%
Class A-2 $ 50,000,000 6.880%
Class A-3P & I $ 129,500,000 7.080%
Class A-3IO Not Applicable 0.933%
Class B $ 75,000,000 7.480%
Class C $ 100,000,000 7.860%
Class D $ 10,200,000 8.645%
The Class A-3IO Certificates receive payments of interest only based on a
notional balance equal to the Class A-3P & I Certificate balance.
The balances of the Certificates were $385.6 million and $398.9 million at
December 31, 1997 and 1996, respectively. Principal amortizations of $13.3
million and $11.3 million of the Class A-1 Certificates were made during 1997
and 1996, respectively. The weighted average interest rate for the Certificates
was 7.8% for 1997 and 7.7% from January 24, 1996, through December 31, 1996 and
the average interest rates were 7.8% and 7.6% at December 31, 1997 and 1996,
respectively.
The Certificates maturities are as follows (in thousands):
1998 $ 14,331
1999 15,443
2000 16,642
2001 17,934
2002 19,326
Thereafter 301,879
------------
$ 385,555
The Mortgage Loan is secured primarily by 69 cross-defaulted and
cross-collateralized mortgages representing first priority mortgage liens on (i)
the fee or leasehold interest in the 69 Hotels, related furniture, fixtures and
equipment and the property improvement fund, (ii) the fee interest in the land
leased from MII or their affiliates on which 53 Hotels are located, (iii) a
pledge of Associates membership interest in and the related right to receive
distributions from Associates II which owns the Deerfield Hotel and (iv) an
assignment of the Management Agreement, as defined below. The Mortgage Loan is
non-recourse to Associates, the Partnership and its partners.
Operating profit from the Hotels in excess of debt service on the Mortgage Loan
is available to be distributed to the Partnership and Courtyard II Associates
Management Corporation.
Prepayments of the Mortgage Loan are permitted with the payment of a premium
(the "Prepayment Premium"). The Prepayment Premium is equal to the greater of
(i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance
amount based on a spread of .25% or .55% over the U.S. treasury rate, as
defined.
On June 30, 1996, CBM Funding completed an exchange offer of its Multiclass
Mortgage Pass-Through Certificates, Series 1006-1A with a principal balance of
$406.2 million at that time ("Old Certificates"), for an equal amount of
Multiclass Mortgage Pass-Through Certificates, Series 1996-1B ("New
Certificates"). The form and terms of the New Certificates are substantially
identical to the form and terms of the Old Certificates, except that the New
Certificates are registered under the Securities Act of 1933, as amended and
their transfers are not restricted.
Pursuant to the terms of the Certificate/Mortgage Loan, the Partnership is
required to establish with the lender a separate escrow account for payments of
insurance premiums and real estate taxes for each mortgaged property if the
credit rating of MII is downgraded by Standard and Poor's Rating Services. The
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 1,
1997. As a result, the Partnership transferred $10.3 million into the required
reserve accounts prior to December 31, 1997. Out of this balance, approximately
$6.0 million of real estate taxes have been 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.
NOTE 7. LEASES
The land on which 53 of the Hotels are located is leased from MII or affiliates
of MII. In addition, eight of the Hotels are located on land leased from third
parties. The land leases have remaining terms (including all renewal options)
expiring between the years 2024 and 2068. The MII land leases and the third
party land leases provide for rent based on specific percentages (from 2% to
15%) of certain sales categories subject to minimum amounts. The minimum rentals
are adjusted at various anniversary dates throughout the lease terms, as defined
in the agreements. The Partnership also rents certain equipment for use in the
Hotels.
In connection with the refinancing, the Partnership, as lessee, transferred its
rights and obligations pursuant to the 53 ground leases with MII and affiliates
to Associates. Additionally, MII and affiliates agreed to defer receipt of their
ground lease payments to the extent that the Partnership or Associates has
insufficient funds for debt service payments on the Senior Notes and the
Mortgage Loan.
Minimum future rental payments during the term of these operating leases are as
follows (in thousands):
Telephone
Lease Land Equipment and Other
Year Leases Leases
---------- ---------- ---------------------
1998 $ 9,230 $ 1,611
1999 9,230 1,126
2000 9,230 813
2001 9,230 761
2002 9,230 741
Thereafter 532,983 --
---------- ---------------------
$ 579,133 $ 5,052
========== =====================
Total rent expense on land leases was $12,480,000 for 1997, $11,899,000 for 1996
and $11,550,000 for 1995.
NOTE 8. MANAGEMENT AGREEMENT
To facilitate the refinancing, effective December 30, 1995, the original
management agreement was restated into two separate management agreements.
Associates entered into a management agreement with the Manager for the 69
Hotels which Associates directly owns and Associates II entered into a
management agreement for the Deerfield Hotel which Associates II owns,
collectively, (the "Management Agreement").
<PAGE>
Term
The Management Agreement has an initial term expiring in 2013. The Manager may
renew the term, as to one or more of the Hotels, at its option, for up to three
successive terms of 10-years each and one final term of five years. The
Partnership may terminate the Management Agreement if, during any three
consecutive years after 1992, specified minimum operating results are not
achieved. However, the Manager may prevent termination by paying to the
Partnership the amount by which the minimum operating results were not achieved.
Management Fees
The Management Agreement provides for annual payments of (i) the base management
fee equal to 3-1/2% of gross sales from the Hotels, (ii) the Courtyard
management fee equal to 2-1/2% of gross sales from the Hotels, and (iii) the
incentive management fee equal to 15% of operating profit, as defined (20% of
operating profit after the partners have received refinancing proceeds equal to
50% of the excess of (a) $154,736,842 over (b) cumulative distributions of
adjusted sale proceeds (the "First Equity Refinancing")).
Deferral Provisions
Due to the refinancing, beginning in 1996, one percent of the Courtyard
management fee is deferred through maturity of the Senior Notes and the Mortgage
Loan to the extent that the Partnership or Associates has insufficient funds for
debt service payments on the Senior Notes and the Mortgage Loan. Previously, the
entire three percent of the Courtyard management fee was subordinate to debt
service.
To the extent any Courtyard management fee, base management fee or incentive
management fee is deferred, it will be added to deferred management fees.
Deferred management fees accrue without interest, and will be payable out of 50%
of available cash flow after payment of certain priorities as discussed below.
The priority return to the Partnership, as defined, was reduced from 10% of
invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 10%
for 1999 and thereafter. Operating profit from the Hotels (which reflects the
deduction of the base and Courtyard management fees and MII ground rent) will be
used to pay the following, in order of priority: (i) debt service on the Senior
Notes and Mortgage Loan, (ii) to repay working capital loans to the Manager,
(iii) to repay deferred ground rent to MII and their affiliates, (iv) to repay
ground lease advances to MII and their affiliates, (v) the priority return to
the Partnership which is 7% of invested capital for 1996 and 8% of invested
capital for 1997, (vi) eighty percent of the remaining operating profit is
applied to the payment of current incentive management fees, (vii) to repay
advances to the Partnership, (viii) to repay foreclosure avoidance advances to
the Manager and (ix) fifty percent of the remaining operating profit to repay
deferred management fees to the Manager and fifty percent of remaining operating
profit is paid to the Partnership.
During 1997, $1,613,000 of incentive management fees were paid while during
1996, $633,000 were deferred. Deferred incentive management fees were $4,584,000
and $6,197,000 as of December 31, 1997 and 1996, respectively. Deferred
Courtyard management fees totaled $22,341,000 as of December 31, 1997 and 1996.
Deferred base management fees as of December 31, 1997 and 1996 were $7,904,000.
Chain Services
The Manager is required to furnish certain services ("Chain Services") which are
furnished generally on a central or regional basis to all hotels managed, owned
or leased in the Courtyard by Marriott hotel system. The total amount of Chain
Services allocated to the Partnership was $10,257,000 in 1997, $9,474,000 in
1996 and $9,224,000 in 1995.
Working Capital
Associates is required to provide the Manager with working capital and fixed
asset supplies to meet the operating needs of the Hotels. The refinancing
required certain enhancements to the cash management system of the Manager such
that additional working capital may be required for the operation of the Hotels.
Therefore, on January 24, 1996, the Partnership, Associates and the Manager
entered into a working capital maintenance agreement (the "Working Capital
Agreement") and advanced $2.5 million to the Manager as additional working
capital for the operation of the Hotels. Upon termination of the Management
Agreement, the working capital and supplies will be returned to Associates. As
of December 31, 1997 and 1996, the working capital balance was $8,761,000. This
includes the $8,846,000 originally advanced less the $2,585,000 of excess
working capital returned to the Partnership in 1991 and the $2,500,000 advanced
during 1996. At December 31, 1997 and 1996, accumulated depreciation related to
the supplies totaled $2,060,000.
In addition, the Working Capital Agreement required the Partnership to reserve
$2 million by February 1, 1997 and an additional $3 million by February 1, 1998
(the "Working Capital Reserve"). The $3 million and $2 million were reserved by
the Partnership on February 2, 1998 and January 31, 1997, respectively. The
Working Capital Reserve will be available for payment of hotel operating
expenses in the event that there is a downgrade in the long-term senior
unsecured debt of MII to a level below the rating which was effective April 1,
1997.
The obligation to fund the amounts required by the Working Capital Agreement is
subordinate to debt service on the Senior Notes and the Mortgage Loan.
Property Improvement Fund
The Management Agreement provides for the establishment of a repairs and
equipment reserve (property improvement fund) for the Hotels. The funding of
this reserve is based on a percentage of gross Hotel sales. During 1994, the
Partnership, Manager and the Mortgage Debt A and B lenders agreed that the
Partnership would establish refinancing reserve accounts and contribute 1% of
Hotel sales on the respective Mortgage Debt A and B properties to these
reserves. Correspondingly, the Management Agreement was amended in order to
reduce the contribution to the property improvement fund from 6% to 5% of gross
Hotel sales for the Mortgage Debt A and B properties for 1993 through the
respective loan maturities. The contribution for the five IRB Hotels remained at
6%. Upon completion of the refinancing on January 24, 1996, the contribution to
the property improvement fund was established initially at 5% for all Hotels and
may be increased, at the option of the Manager, to 6% of gross Hotel sales in
2001.
NOTE 9. ENVIRONMENTAL CONTINGENCY
Based upon a study completed in December 1995, Associates has become aware of
environmental contamination at one of the fee-owned properties owned by
Associates II, the Deerfield Hotel, caused by the previous use of the site as a
landfill and not caused by Associates. The property represents less than 2% of
Associates' total assets and revenues as of December 31, 1997 and for the year
ended, respectively. Associates is unable to determine the need for remediation,
its potential responsibility, if any, for remediation and the extent of
Associates' possible liability for any remediation costs. There can be no
assurance that Associates will not have liability with respect to remediation of
contamination at that site. Associates does not believe that any of the
environmental matters are likely to have a material adverse effect on its
business and operations.
<PAGE>
84
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 Two Corporation, the General Partner, who are listed below:
Age at
Name Current Position December 31, 1997
Bruce F. Stemerman President and Director 42
Christopher G. Townsend Vice President, Secretary and Director 50
Earla L. Stowe Vice President and Chief Accounting Officer 36
Bruce Wardinski Treasurer 37
Business Experience
Bruce F. Stemerman joined Host Marriott in 1989 as Director--Partnership
Services. He became Vice President--Lodging Partnerships in 1994 and became
Senior Vice President--Asset Management in 1996. Prior to joining Host
Marriott, Mr. Stemerman spent ten years with Price Waterhouse. He also
serves as a director and an officer of numerous Host Marriott 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 and an officer of numerous Host Marriott subsidiaries.
Earla L. Stowe was appointed to Vice President and Chief Accounting Officer of
CBM Two Corporation on October 8, 1996. Ms. Stowe joined Host Marriott
Corporation in 1982 and held various positions in the tax department until 1988.
She joined the Partnership Services department as an accountant in 1988 and in
1989 she became an Assistant Manager--Partnership Services. She was promoted to
Manager--Partnership Services in 1991 and to Director--Asset Management in 1996.
Bruce Wardinski joined Host Marriott in 1987 as a Senior Financial Analyst of
Financial Planning & Analysis and was named Manager in June 1988. He was
appointed Director, Financial Planning & Analysis in 1989, Director of Project
Finance in January 1990, Senior Director of Project Finance in June 1993, Vice
President--Project Finance in June 1994, and Senior Vice President of
International Development in October 1995. In June 1996, Mr. Wardinski was named
Senior Vice President and Treasurer of Host Marriott. Prior to joining Host
Marriott, Mr. Wardinski was with the public accounting firm Price Waterhouse.
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 director of the General Partner
devotes a significant percentage of time to Partnership matters. To the extent
that any officer or director 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, 1997, 1996 and 1995, the Partnership
reimbursed the General Partner in the amount of $260,000, $221,000 and $306,000,
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, 1997, Equity Resource Group owned 6.34% of the 1,470 limited
partnership Units. No other person owned of record, or to the Partnership's
knowledge owned beneficially, more than 5% of the total number of limited
partnership Units. The General Partner owns a total of 21.5 Units representing a
1.39% limited partnership interest in the Partnership.
The executive officers and directors of the General Partner, Host Marriott, MII
and their respective affiliates do not own any units as of December 31, 1997.
The Partnership is not aware of any arrangements which may, at a subsequent
date, result in a change in control of the Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Agreement
To facilitate the refinancing, effective December 30, 1995, the original
Management Agreement was restated into two separate management agreements.
Associates entered into a management agreement with the Manager for the 69
Hotels which Associates directly owns and Associates II entered into a
management agreement for the Deerfield Hotel which Associates II owns,
collectively, (the "Management Agreement"). Term
The Management Agreement has an initial term expiring in 2013. The Manager may
renew the term, as to one or more of the Hotels, at its option, for up to three
successive terms of 10-years each and one final term of five years. The
Partnership may terminate the Management Agreement if, during any three
consecutive years after 1992, specified minimum operating results are not
achieved. However, the Manager may prevent termination by paying to the
Partnership the amount by which the minimum operating results were not achieved.
Management Fees
The Management Agreement provides for annual payments of (i) the base management
fee equal to 32% of gross sales from the Hotels, (ii) the Courtyard management
fee equal to 22% of gross sales from the Hotels, and (iii) the incentive
management fee equal to 15% of operating profit, as defined (20% of operating
profit after the Partners have received refinancing proceeds equal to 50% of the
excess of (a) $154,736,842 over (b) cumulative distributions of adjusted sale
proceeds (the "First Equity Refinancing").
Deferral Provisions
Due to the refinancing, beginning in 1996, one percent of the Courtyard
management fee is deferred through maturity of the Senior Notes and the Mortgage
Loan to the extent that the Partnership or Associates has insufficient funds for
debt service payments on the Senior Notes and the Mortgage Loan. Previously, the
entire three percent of the Courtyard management fee was subordinate to debt
service.
To the extent any Courtyard management fee, base management fee or incentive
management fee is deferred, it will be added to deferred management fees.
Deferred management fees accrue without interest, and will be payable out of 50%
of available cash flow after payment of certain priorities as discussed below.
The priority return to the Partnership, as defined, was reduced from 10% of
invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 10%
for 1999 and thereafter. Operating profit from the Hotels (which reflects the
deduction of the base and Courtyard management fees and MII ground rent) will be
used to pay the following, in order of priority: (i) debt service on the Senior
Notes and Mortgage Loan, (ii) to repay working capital loans to the Manager,
(iii) to repay deferred ground rent to MII and their affiliates, (iv) to repay
ground lease advances to MII and their affiliates, (v) the priority return to
the Partnership which is 8% of invested capital for 1997 and 7% for 1996, (vi)
eighty percent of the remaining operating profit is applied to the payment of
current incentive management fees, (vii) to repay advances to the Partnership,
(viii) to repay foreclosure avoidance advances to the Manager and (ix) fifty
percent of the remaining operating profit after payment of (i) through (viii) to
repay deferred management fees to the Manager and the other fifty percent is
paid to the Partnership.
During 1997, $1,613,000 of deferred incentive management fees were repaid while
in 1996, $633,000 were deferred. Deferred incentive management fees were
$4,584,000 and $6,197,000 as of December 31, 1997 and 1996, respectively.
Deferred Courtyard Management fees totaled $22,341,000 as of December 31, 1997
and 1996. Deferred base management fees totaled $7,904,000 as of December 31,
1997 and 1996.
Chain Services
The Manager is required to furnish certain services ("Chain Services") which are
furnished generally on a central or regional basis to all hotels managed, owned
or leased in the Courtyard by Marriott hotel system. The total amount of Chain
Services allocated to the Partnership was $10,257,000 in 1997, $9,474,000 in
1996 and $9,224,000 in 1995.
Working Capital
The Partnership is required to provide the Manager with working capital and
fixed asset supplies to meet the operating needs of the Hotels. The refinancing
required certain enhancements to the cash management system of the Manager such
that additional working capital may be required for the operation of the Hotels.
Therefore, on January 24, 1996, the Partnership, Associates and the Manager
entered into a working capital maintenance agreement (the "Working Capital
Agreement") and the Partnership advanced $2,500,000 to the Manager as additional
working capital for the operation of the Hotels. Upon termination of the
Management Agreement, the working capital and supplies will be returned to the
Partnership. As of December 31, 1997, the working capital balance was
$8,761,000. This includes the $8,846,000 originally advanced less the $2,585,000
of excess working capital returned to the Partnership in 1991 and the $2,500,000
advanced on January 24, 1996. At December 31, 1996 and 1995, accumulated
depreciation related to the supplies totaled $2,060,000.
In addition, the Working Capital Agreement required the Partnership to reserve
$2 million by February 1, 1997 and an additional $3 million by February 1, 1998
(the "Working Capital Reserve"). The $3 million and $2 million were reserved on
February 2, 1998 and January 31, 1997, respectively. The Working Capital Reserve
will be available for payment of hotel operating expenses in the event that
there is a downgrade in the long-term senior unsecured debt of MII to a level
below the rating which was effective April 1, 1997.
The obligation to fund the amounts required by the Working Capital Agreement is
subordinate to debt service on the Senior Notes and the Mortgage Loan.
Leases
The land on which 53 of the Hotels are located is leased from MII or affiliates
of MII. In addition, eight of the Hotels are located on land leased from third
parties. The land leases have remaining terms (including all renewal options)
expiring between the years 2024 and 2068. The MII land leases and the third
party land leases provide for rent based on specific percentages (from 2% to
15%) of certain sales categories subject to minimum amounts. The minimum rentals
are adjusted at various anniversary dates throughout the lease terms, as defined
in the agreements. The Partnership also rents certain equipment for use in the
Hotels.
In connection with the refinancing, the Partnership, as lessee, transferred it
rights and obligations pursuant to the 53 ground leases with MII and affiliates
to Associates. Additionally, MII and affiliates agreed to defer receipt of their
ground lease payments to the extent that the Partnership or Associates has
insufficient funds for debt service payments on the Senior Notes and the
Mortgage Loan.
Total rent expense on land leases was $12,480,000 for 1997, $11,899,000 for 1996
and $11,550,000 for 1995.
Property Improvement Fund
The Management Agreement provides for the establishment of a repairs and
equipment reserve (property improvement fund) for the Hotels. The funding of
this reserve is based on a percentage of gross Hotel sales. During 1994, the
Partnership, Manager and the Mortgage Debt A and B lenders agreed that the
Partnership would establish refinancing reserve accounts and contribute 1% of
Hotel sales on the respective Mortgage Debt A and B properties to these
reserves. Correspondingly, the Management Agreement was amended in order to
reduce the contribution to the property improvement fund from 6% to 5% of gross
Hotel sales for the Mortgage Debt A and B properties for 1993 through the
respective loan maturities. The contribution for the five IRB Hotels remained at
6%. Upon completion of the refinancing on January 24, 1996, the contribution to
the property improvement fund was established initially at 5% for all Hotels and
may be increased, at the option of the Manager, to 6% of gross Hotel sales in
2001. Subsequent to the refinancing, the Partnership is no longer required to
contribute 1% of gross Hotel sales from the Mortgage Debt A and Mortgage Debt B
Hotels to the refinancing reserves.
Payments to MII and Subsidiaries
The following table sets forth the amount paid to MII and affiliates under both
the Management Agreement and the ground lease agreements for the years ended
December 31, 1997, 1996 and 1995 (in thousands). The table also sets forth
accrued but unpaid incentive management fees:
1997 1996 1995
----------- ----------- --------
Incentive management fee..............$ 12,878 $ 11,407 $ 10,480
Ground rent........................... 10,628 10,172 9,856
Chain services allocation............. 10,257 9,474 9,224
Base management fee................... 9,626 9,230 8,604
Courtyard management fee.............. 6,875 6,592 6,145
Deferred base management fee........ -- -- 162
Deferred incentive management fees.... 1,613 -- --
----------- ----------- -----------
$ 51,877 $ 46,875 $ 44,471
=========== =========== ===========
Accrued but unpaid fees:
Incentive management fee............ .$ -- $ 633 $ --
=========== =========== ===========
<PAGE>
IRB Advances and General Partner Loans
The IRB Debt was refinanced on January 24, 1996 and the IRB Debt was repaid in
full. The $25.6 million of IRB Debt outstanding at December 31, 1995 was backed
by direct-pay letters of credit from commercial banks that would have expired in
February, November and December 1996. These issues were subject to mandatory
prepayment upon expiration of the letters of credit unless replacement letters
of credit were secured. The IRB Debt bore interest at daily, weekly or fixed
rates at the option of the Partnership, and was limited to a maximum interest
rate of 15%. From January 1, 1996, through January 23, 1996, the interest rates
on the IRB Debt ranged from 2.65% to 6.1%. In 1995, the interest rates on the
IRB Debt ranged from 1.9% to 6.1%. The interest rate on the IRB Debt was 3.2% at
January 23, 1996.
The bondholders had the right to demand purchase of any of the bonds at the
expiration of specified interest rate periods. Had the Partnership failed to
make the required payments of principal and interest on the IRB Debt, Host
Marriott would have been required to make such payments ("Host Marriott's IRB
Liability"). Through January 24, 1996, the Partnership purchased a total of
$15.4 million of bonds/IRB Debt with proceeds advanced by Host Marriott when
presented by certain bondholders. These loans bore interest at one percentage
point in excess of the Prime Rate (8.5% at January 23, 1996). The weighted
average interest rate was 9.5% for the period from January 1, 1996 through
January 23, 1996 and 9.83% for 1995. As of December 31, 1995, $6.5 million of
Host Marriott IRB Liability loans were outstanding. As discussed above, the $6.5
million of Host Marriott IRB Liability loans were repaid on January 24, 1996
from proceeds of the debt refinancing.
Payments to Host Marriott and Subsidiaries
The following sets forth amounts paid by the Partnership to Host Marriott and
its subsidiaries for the years ended December 31, 1997, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ----------- --------
<S> <C> <C> <C>
Principal and interest on General Partner loan....................................$ -- $ 7,508 $ 445
Administrative expenses reimbursed................................................ 260 221 306
Cash distributions (as a limited partner)......................................... 212 102 76
----------- ----------- -----------
$ 472 $ 7,831 $ 827
=========== =========== ===========
</TABLE>
Mortgage Debt Guarantees
Prior to the initial refinancing, in 1987 Host Marriott had guaranteed payment
of up to $60 million of debt service on the MFS Mortgage Debt. As a result of
the initial refinancing, this guarantee was allocated $32.6 million to Mortgage
Debt A and $27.4 million to Mortgage Debt B. Any payments by Host Marriott under
the Mortgage Debt guarantees were treated as loans to the Partnership and bore
interest at one percentage point in excess of the prime rate of interest
announced by Bankers Trust Company of New York (the "Prime Rate").
During 1995, Host Marriott was released from its original Mortgage Debt A
guarantee obligation of $32.6 million as certain debt service coverage
requirements were met. As a result, as of December 31, 1995, $5.4 million and
$27.4 million, respectively, was available under Mortgage Debt A and B
guarantees. Host Marriott was released from the original guarantees on January
24, 1996, the date when Mortgage Debt A and Mortgage Debt B were repaid in full.
During 1994, the Partnership, Manager and Mortgage Debt A and B lenders agreed
that the Partnership would establish reserve accounts for Mortgage Debt A and B
and contribute 1% of Hotel sales on the respective Mortgage Debt A and B
properties to these reserves for 1993 through the respective loan maturities.
The initial contribution, made in 1994, included the required contribution for
1993. On January 24, 1996, these reserves were used to pay costs associated with
the refinancing of these loans and to repay a portion of these loans upon
maturity.
In addition, the General Partner had provided a guarantee to MFS that, in the
event of a foreclosure, proceeds under the MFS Mortgage Debt would be at least
$75 million. This foreclosure guarantee was allocated $40.8 million to Mortgage
Debt A and $34.2 million to Mortgage Debt B. Upon completion of the debt
refinancing on January 24, 1996, Host Marriott was released from its obligations
pursuant to the foreclosure guarantee.
<PAGE>
PART IV
ITEM 14. EXHIBITS, SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of This Report
(1) Financial Statements
All financial statements of the registrant as set
forth under Item 8 of this Report on Form 10-K.
(2) Financial Statement Schedules
The following financial information is filed
herewith on the pages indicated.
Schedule I - Condensed Consolidated Financial Information
of Registrant
Schedule III - Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable or the required
information is included in the financial statements or notes thereto.
<TABLE>
<CAPTION>
<S> <C> <C>
(3) EXHIBITS
Exhibit
Number Description Page
- ------------- ------------------------------------------------------------------------------------------ -------
*3.1 Amended and Restated Partnership Agreement of Limited Partnership of Courtyard by N/A
Marriott II Limited Partnership (the "Partnership") dated October 30, 1987
*3.2 Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of the N/A
Partnership
*3.3 Certificate of Limited Partnership of the Partnership N/A
*3.4 Amended and Restated Certificate of Incorporation of the Courtyard II Finance Company N/A
("Finance")
*3.5 By-laws of Finance N/A
3.6 Agreement of Limited Partnership of Courtyard II Associates, L.P. ("Associates") N/A
(Incorporated by reference herein to Exhibit 3.1 to Associates Form S-4 filed with the
Commission on March 14, 1996.)
3.7 Certificate of Limited Partnership of Associates (Incorporated by reference herein to N/A
Exhibit 3.2 to Associates Form S-4 filed with the Commission on March 14,
1996.)
3.8 Amended and Restated Certificate of Incorporation of CBM Funding Corporation ("Funding") N/A
(Incorporated by reference herein to Exhibit 3.3 to Associates Form S-4 filed with the
Commission on March 14, 1996.)
3.9 By-laws of Funding (Incorporated by reference herein to Exhibit 3.4 to Associates Form N/A
S-4 filed with the Commission on March 14, 1996.)
*4.1 Indenture dated as of January 24, 1996 among the Partnership and Finance and IBJ N/A
Schroder Bank & Trust Company (the "Indenture")
*4.3 Exchange and Registration Rights Agreement dated as of January 24, 1996 among the N/A
Partnership and Finance and Lehman Brothers Inc.
*4.4 Intercreditor Agreement dated as of January 24, 1996 among
IBJ Schroder Bank & Trust N/A Company, Bankers Trust
Company, Marine Midland Bank (the "CMBS Trustee"), the
Partnership and Finance, Associates, Courtyard II
Associates Management Corporation (the "Managing General
Partner") and Funding
*4.5 Trust and Servicing Agreement dated as of January 1, 1996 among Funding, Bankers Trust N/A
Company and the CMBS Trustee
*4.6 Exchange and Registration Rights Agreement dated as of January 24, 1996 among the N/A
Partnership, Associates, Funding and Lehman Brothers Inc.
*10.1 Amended and Restated Management Agreement dated as of December 30, 1995, between the N/A
Partnership and Courtyard Management Corporation (the "Manager")
*10.2 Management Agreement dated as of December 30, 1995 between the Partnership and the N/A
Manager
**10.3 Assignment of Lease and Warranty and Assumption of Obligations between Marriott N/A
Corporation and the Partnership dated October 30, 1987 for the Tampa, FL property.
Marriott Hotel Land Leases between Holtsinger, Inc. and Bert Chase, Trustee dated June
13, 1968.
**10.4 Assignment of Lease and Warranty and Assumption of Obligations between Marriott N/A
Corporation and the Partnership dated August 12, 1988 for the Atlanta-Roswell, GA
property. Marriott Hotel Land Lease between Marriott Corporation and Roswell Landing
Associates dated June 10, 1986.
**10.5 Assignment of Lease and Warranty and Assumption of
Obligations between Marriott N/A Corporation and the
Partnership dated July 15, 1988 for the Norwalk, CT
property. Marriott Hotel Land Lease between Marriott
Corporation and Mary E. Fabrizio dated January 6, 1986.
**10.6 Assignment of Lease and Warranty and Assumption of Obligations between Marriott N/A
Corporation and the Partnership dated February 24, 1988 for the Fresno, CA property.
Marriott Hotel Land Lease between Marriott Corporation and Richard Erganian, Miche
Erganian, Aram Erganian and Aznive Erganian dated June 6, 1984.
**10.7 Assignment of Lease and Warranty and Assumption of Obligations between Marriott N/A
Corporation and the Partnership dated August 12, 1988 for the Cupertino, CA property.
Marriott Hotel Land Lease between Marriott Corporation and Vallco Park, Ltd. dated March
31, 1987.
**10.8 Marriott Hotel Land Lease between Marriott Corporation and Pizzagalli Investment Company N/A
dated September 22, 1986.
**10.9 Assignment of Lease and Warranty and Assumption of Obligations between Marriott N/A
Corporation and the Partnership dated May 19, 1989 for the Charlotte South Park, NC
property. Marriott Hotel Land Lease between Marriott Corporation and Queens Properties,
Inc. dated January 19, 1987.
**10.10 Assignment of Lease and Warranty and Assumption of Obligations between Marriott N/A
Corporation and the Partnership dated January 27, 1989 for the Philadelphia/Devon, PA
property. Marriott Hotel Land Lease between Marriott Corporation and Three
Philadelphia/Devon Square Associates dated July 15, 1986.
**10.11 Associates received an assignment from the Partnership, which had received an assignment N/A
from Host Marriott, of 15 ground leases for land that Host Marriott had previously
leased from various affiliates (the "Original Landlords"). The ground leases are
identical in all material respects except as to their assignment dates to the
Partnership and the rents due (Exhibit A of each ground lease). The schedule below
sets forth the terms of each ground lease not filed which differ from the copy of the
example ground lease (Hoover, AL) which was previously filed with the Commission. In
addition, a copy of Exhibit A was filed for each excluded ground lease.
Property State Assignment Date Original Landlord
Foster City CA 10/30/87 Essex House Condominium
Corporation ("Essex")
Marin/Larkspur Landing CA 10/30/87 Essex
Denver/Southeast CO 10/30/87 Essex
Atlanta/Perimeter Center GA 02/24/88 Essex
Indianapolis/Castleton IN 10/30/87 Essex
Lexington/North KY 10/07/88 Essex
Annapolis MD 05/19/89 Essex
Minneapolis Airport MN 10/30/87 Essex
St. Louis/Creve Couer MO 10/30/87 Essex
Rye NY 03/29/88 Essex
Greenville SC 03/29/88 Essex
Memphis Airport TN 10/30/87 Essex
Nashville Airport TN 02/24/88 Essex
Dallas/Stemmon TX 10/30/87 Essex
San Antonio/Downtown TX 03/23/90 Essex
**10.12 Associates received an assignment from the Partnership of 38 ground leases which the N/A
Partnership had entered into with Marriott International, Inc., ("MII"). The 38
ground leases are identical in all material respects except as to their effective
lease dates and the rents due (Exhibit A of each ground lease). The schedule below
sets forth the terms of each ground lease not filed which differ from the copy of the
example ground lease (Huntsville, AL) which was previously filed with the
Commission. In addition, a copy of Exhibit A was filed for each excluded ground
lease.
Property State Effective Lease Date
-------- ----- --------------------
Birmingham/Hoover AL 10/30/87
Huntsville AL 10/30/87
Phoenix/Mesa AZ 04/22/88
Phoenix/Metrocenter AZ 10/01/87
Tucson Airport AZ 12/30/88
Little Rock AR 09/09/88
Bakersfield CA 05/30/88
Hacienda Heights CA 03/30/90
Palm Springs CA 12/20/88
Torrance CA 12/30/88
Boulder CO 11/04/88
Wallingford CT 04/24/90
Ft. Myers FL 11/04/88
Ft. Lauderdale/Plantation FL 12/02/88
St. Petersburg FL 01/26/90
West Palm Beach FL 02/24/89
Atlanta/Gwinnett Mall GA 10/30/87
Chicago/Glenview IL 10/06/89
Chicago/Highland Park IL 07/15/88
Chicago/Waukegan IL 08/12/88
Chicago/Wood Dale Park IL 09/09/88
Kansas City/Overland Park KS 04/21/89
Silver Spring MD 10/07/88
Boston/Andover MA 02/24/89
Detroit Airport MI 02/24/88
Detroit/Livonia MI 03/29/88
St. Louis/Westport MO 10/07/88
Lincroft/Red Bank NJ 07/15/88
Raleigh/Cary NC 08/12/88
Dayton Mall OH 10/30/87
Toledo OH 07/15/88
Oklahoma City Airport OK 10/07/88
Portland/Beaverton OR 05/19/89
Columbia SC 04/21/89
Dallas/Northeast TX 04/22/88
Charlottesville VA 04/21/89
Manassas VA 05/19/89
Seattle/Southcenter WA 05/19/89
***10.13 Contribution Agreement dated as of January 24, 1996 among the Partnership, N/A
the Managing General Partner and Associates
***10.14 Bill of Sale and Assignment and Assumption Agreement dated as of January N/A
24, 1996 by the Partnership to Associates
*10.15 Assignment and Assumption of Management Agreement dated as of January 24, N/A
1996 by the Partnership to Associates
***10.16 Contribution Agreement dated as of January 24, 1996 among the Partnership, N/A
the Managing General Partner and Courtyard II Associates LLC ("Deerfield
LLC")
***10.17 Bill of Sale and Assignment and Assumption Agreement dated as of January N/A
24, 1996 by the Partnership to Deerfield LLC
*10.18 Deed to the Courtyard by Marriott Hotel in Chicago/Deerfield, Illinois N/A
dated as of January 24, 1996 by the Partnership to Deerfield LLC
*10.19 Assignment and Assumption of Management Agreement dated as of January 24, N/A
1996 by the Partnership to Deerfield LLC
*10.20 Loan Agreement dated as of January 24, 1996 by and between Associates and N/A
Funding
*10.21 Mortgage Note, dated as of January 24, 1996, in the principal amount of N/A
$410,200,000 by Associates to Funding
*10.22 Security Agreement dated as of January 24, 1996 by and between Associates N/A
and Funding
*10.23 Pledge Agreement dated as of January 24, 1996 by and between Associates and N/A
Funding
*10.24 Collateral Assignment of Management Agreement and Subordination Agreement N/A
dated as of January 24, 1996, by and among Associates, the Manager and
Funding
*10.25 Amendment of Ground Leases dated as of January 24, 1996 by and among N/A
Associates, Marriott International, Inc. and Essex House Condominium
Corporation ("Essex")
*10.26 Environmental Indemnity Agreement dated as of January 24, 1996 by N/A
Associates and the Managing General Partner for the benefit of Funding
*10.27 Associates, as mortgagor, and Funding, as mortgagee, entered into 53 fee N/A
and leasehold mortgages, each dated as of January 24, 1996. The 53
mortgages are identical in all material respects except as to the
underlying property to which they relate and, in certain instances,
additional parties thereto. The schedule below sets forth the terms of
each mortgage not filed which differ from the copy of the example mortgage
(Birmingham/Hoover, AL) which is filed herewith.
Property State Additional Party
-------- ----- ----------------
Birmingham/Hoover AL Essex
Huntsville AL MII
Phoenix/Mesa AZ MII
Phoenix/Metrocenter AZ MII
Tucson Airport AZ MII
Little Rock AR MII
Bakersfield CA MII
Foster City CA MII
Hacienda Heights CA MII
Marin/Larkspur Landing CA MII
Palm Springs CA MII
Torrance CA MII
Boulder CO MII
Denver/Southeast CO Essex
Wallingford CT MII
Ft. Myers FL MII
Ft. Lauderdale/Plantation FL MII
St. Petersburg FL MII
West Palm Beach FL MII
Atlanta/Gwinnett Mall GA MII
Atlanta/Perimeter Center GA Essex
Chicago/Glenview IL MII
Chicago/Highland Park IL MII
Chicago/Waukegan IL MII
Chicago/Wood Dale IL MII
Indianapolis/Castleton IN Essex
Kansas City/Overland Park KS MII
Lexington/North KY Essex
Annapolis MD Essex and the Partnership
Silver Spring MD MII and the Partnership
Boston/Andover MA MII
Detroit Airport MI MII
Detroit/Livonia MI MII
Minneapolis Airport MN Essex
St. Louis/Creve Couer MN Essex
St. Louis/Westport MO MII
Lincroft/Red Bank NJ MII
Rye NY Essex
Raleigh/Cary NC MII
Dayton Mall OH MII
Toledo OH MII
Oklahoma City Airport OK MII
Portland/Beaverton OR MII
Columbia SC MII
Greenville SC Essex
Memphis Airport TN Essex
Nashville Airport TN Essex
Dallas/Northeast TX MII
Dallas/Stemmons TX Essex
San Antonio/Downtown TX Essex
Charlottesville VA MII
Manassas VA MII
Seattle/Southcenter WA MII
*10.28 Associates, as mortgagor, and Funding, as mortgagee, entered into 16 fee N/A
leasehold mortgages, each dated as of January 24, 1996. The 16 mortgages are
identical in all material respects except as to the underlying property to
which they relate. The schedule below sets forth the terms of each mortgage
not filed which differ from the copy of the example mortgage
(Birmingham/Homewood, AL) which is filed herewith.
Property State
-------- -----
Birmingham/Homewood AL
Cupertino CA
Fresno CA
Denver Airport CO
Norwalk CT
Tampa/Westshore FL
Atlanta Airport South GA
Atlanta/Roswell GA
Arlington Heights South IL
Chicago/Lincolnshire IL
Chicago/Oakbrook Terrace IL
Rockford IL
Poughkeepsie NY
Charlotte/South Park NC
Philadelphia/Devon PA
Dallas/Plano TX
*10.29 Assignment of Loan Documents dated as of January 24, 1996 by Funding to N/A
the CMBS Trustee
10.30 Assignment and Assumption of Management Agreement dated as of January N/A
24, 1996 by the Partnership to Associates with attached Management
Agreement (Incorporated by reference herein to Exhibit 10.1 to
Associates Form S-4 filed with the Commission on March 14, 1996.)
10.31 Working Capital Maintenance Agreement dated as of January 24, 1996, by N/A
and among the Partnership, Associates, and the Manager. (Incorporated
by reference to the exhibit previously filed as exhibit number 10.23 in
Amendment No. 1 to Form S-4 Exchange Offer filed by CBM Funding and
Associates with the Commission in May 10, 1996.)
*21.1 Subsidiaries of the Partnership N/A
<PAGE>
* Incorporated herein by reference to the same numbered exhibit in the
Partnership's and Finance's Registration Statement on Form S-4 for 10
3/4% Series B Senior Secured Notes due 2008, previously filed with the
Commission on March 7, 1996.
** Incorporated by reference to the same numbered exhibit in the
Partnership's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
*** Incorporated by reference to the same numbered exhibit to Amendment No. 1
to the Form S-4 Registration Statement previously filed with the
Commission by the Partnership on April 25, 1996.
(b) Reports on 8-K
None
</TABLE>
<PAGE>
SCHEDULE I
Page 1 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
--------------- ---------
ASSETS
<S> <C> <C>
Investments in restricted subsidiaries .........................................................$ 80,982 $ 81,109
Other assets.................................................................................... 4,714 5,177
Restricted cash................................................................................. 8,923 6,848
Cash and cash equivalents....................................................................... 8,002 8,194
--------------- ---------------
Total Assets.............................................................................$ 102,621 $ 101,328
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Debt.........................................................................................$ 127,400 $ 127,400
Accounts payable and accrued expenses........................................................ 5,918 5,869
--------------- ---------------
Total liabilities........................................................................ 133,318 133,269
--------------- ---------------
PARTNERS' CAPITAL (DEFICIT)
General Partner
Capital contribution....................................................................... 11,306 11,306
Cumulative net losses...................................................................... (4,456) (5,241)
Capital distributions...................................................................... (278) (278)
--------------- ---------------
6,572 5,787
--------------- ---------------
Limited Partners
Capital contributions, net of offering costs of $17,189.................................... 129,064 129,064
Cumulative net losses...................................................................... (84,676) (99,582)
Capital distributions...................................................................... (81,504) (67,025)
Investor notes receivable.................................................................. (153) (185)
--------------- ---------------
(37,269) (37,728)
--------------- ---------------
Total Partners' Deficit.................................................................. (30,697) (31,941)
--------------- ---------------
$ 102,621 $ 101,328
=============== ===============
The Notes to Consolidated Financial Statements of Courtyard by Marriott II
Limited Partnership are an integral part of these statements.
See Accompanying Notes to Condensed Consolidated Financial Information.
</TABLE>
<PAGE>
SCHEDULE I
Page 2 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Fiscal Years Ended December 31, 1997 and 1996
(in thousand)
<TABLE>
<CAPTION>
1997 1996
------------- --------
<S> <C> <C>
Revenues.........................................................................................$ -- $ 15,520
Operating costs and expenses..................................................................... -- 13,637
------------- -------------
Operating profit before Partnership expenses and interest........................................ -- 1,883
Interest income.................................................................................. 690 735
Interest expense................................................................................. (14,203) (15,804)
Partnership expense.............................................................................. (570) (344)
------------- -------------
Loss before equity in earnings of restricted subsidiaries........................................ (14,083) (13,530)
Equity in earnings of restricted subsidiaries.................................................... 29,774 24,071
------------- -------------
Net income..................................................................................$ 15,691 $ 10,541
============= =============
The Notes to Consolidated Financial Statements of Courtyard by Marriott II
Limited Partnership are an integral part of these statements.
See Accompanying Notes to Condensed Consolidated Financial Information.
</TABLE>
<PAGE>
SCHEDULE I
Page 3 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Fiscal Years Ended December 31, 1997 and 1996
(in thousand)
<TABLE>
<CAPTION>
1997 1996
------------- --------
<S> <C> <C>
Cash from (used) in operations...................................................................$ (13,557) $ (6,659)
INVESTING ACTIVITIES
Dividends from restricted subsidiaries, net................................................... 29,890 17,203
Contribution to Associates.................................................................... -- (10,627)
------------- -------------
Cash provided by investing activities..................................................... 29,890 6,576
------------- -------------
FINANCING ACTIVITIES
Capital distributions......................................................................... (14,479) (6,983)
Change in restricted reserve accounts......................................................... (2,075) --
Collections of investor notes receivable...................................................... 32 --
Payment of financing costs.................................................................... (3) (5,600)
Proceeds from issuance of debt................................................................ -- 127,400
Repayment of debt............................................................................. -- (127,400)
Deposit into the debt service reserve......................................................... -- (6,848)
------------- -------------
Cash used in financing activities......................................................... (16,525) (19,431)
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS............................................................ (192) (19,514)
CASH AND CASH EQUIVALENTS at beginning of year................................................... 8,194 27,708
------------- -------------
CASH AND CASH EQUIVALENTS at end of year.........................................................$ 8,002 $ 8,194
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on debt............................................................$ 13,738 $ 8,312
============= =============
The Notes to Consolidated Financial Statements of Courtyard by Marriott II
Limited Partnership are an integral part of these statements.
See Accompanying Notes to Condensed Consolidated Financial Information.
</TABLE>
<PAGE>
SCHEDULE I
Page 4 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A) The accompanying condensed financial information of Courtyard by
Marriott II Limited Partnership (the "Partnership") present the
financial position, results of operations and cash flows of the
Partnership with the investment in, and operations of, consolidated
subsidiaries with restricted net assets accounted for on the equity
method of accounting.
On January 24, 1996, the Partnership completed a refinancing of the
Partnership's existing debt through the private placements of $127.4
million of senior secured notes (the "Senior Notes") and $410.2 million
of multi-class commercial mortgage pass-through certificates (the
"Certificates").
In connection with the refinancing, the limited partners approved
certain amendments to the partnership agreement and the management
agreement. The partnership agreement amendment, among other things,
allowed the formation of certain subsidiaries of the Partnership,
including Courtyard II Finance Company ("Finance"), a wholly-owned
subsidiary of the Partnership, who along with the Partnership is the
co-issuer of the Senior Notes.
Additionally, the Partnership formed a wholly-owned subsidiary,
Courtyard II Associates Management Corporation ("Managing General
Partner"). Managing General Partner was formed to be the managing
general partner with a 1% general partner interest in Courtyard II
Associates, L.P. ("Associates"), a Delaware limited partnership. The
Partnership owns a 1% general partner interest and a 98% limited
partner interest in Associates. On January 24, 1996, the Partnership
contributed 69 Hotels and their related assets to Associates. Formation
of Associates resulted in the Partnership's primary assets being its
direct and indirect interest in Associates. Substantially all of
Associates' net equity is restricted to distributions, loans or
advances to the Partnership.
Associates holds a 99% membership interest in CBM Associates II LLC
("Associates II") and Managing General Partner holds the remaining 1%
membership interest. On January 24, 1996, the Partnership contributed
the Hotel located in Deerfield, IL (the "Deerfield Hotel") and its
related assets to Associates and the Managing General Partner
simultaneously contributed the Hotel and its related assets to
Associates II.
CBM Funding Corporation ("CBM Funding"), a wholly-owned subsidiary of
Associates, was also formed to make a mortgage loan (the "Mortgage
Loan") to Associates from the proceeds of the sale of the Certificates.
Associates is a restricted subsidiary of the Partnership and is
accounted for under the equity method of accounting on the accompanying
condensed financial information of the Partnership.
B) As mentioned above, on January 24, 1996, the Senior Notes of $127.4
million were issued by the Partnership and Finance. The Senior Notes
bear interest at 10-3/4%, require semi-annual payments of interest and
require no payments of principal until maturity on February 1, 2008.
The Senior Notes are secured by a first priority pledge by the
Partnership of (i) its 99% partnership interest (consisting of a 98%
limited partner interest and a 1% general partner interest) in
Associates and (ii) its 100% equity interest in the Managing General
Partner. Finance has nominal assets, does not conduct any operations
and does not provide any additional security for the Senior Notes.
C) The accompanying statement of operations reflect the equity in earnings
of restricted subsidiaries after elimination of interest expense (see
Note B).
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE III
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
Initial Costs Gross Amount at December 31, 1997
----------------------- -------------------------------------------
Subsequent
Buildings & Costs Buildings & Accumulated
Description Encumbrances Land Improvements Capitalized Land Improvements Total Depreciation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
70 Courtyard by
Marriott Hotels $ 385,555 $25,392 $ 493,565 $ 36,207 $25,392 $ 529,772 $ 555,164 $ 128,448
========== ======= =========== ========== ======= ============= ============= ==============
</TABLE>
Date of
Completion of Date Depreciation
Construction Acquired Life
------------- --------- ------------
70 Courtyard by 1987-1990 1987-1990 40 years
Marriott Hotels
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Notes:
1995 1996 1997
------------- ------------- --------
(a) Reconciliation of Real Estate:
Balance at beginning of year.....................................$ 535,546 $ 538,358 $ 542,872
Capital Expenditures............................................. 2,812 4,514 12,292
Dispositions..................................................... -- -- --
------------- ------------- ------------
Balance at end of year...........................................$ 538,358 $ 542,872 $ 555,164
============= ============= ============
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of year.....................................$ 83,321 $ 97,726 $ 112,473
Depreciation..................................................... 14,405 14,747 15,975
------------- ------------- ------------
Balance at end of year...........................................$ 97,726 $ 112,473 $ 128,448
============= ============= ============
</TABLE>
(c) The aggregate cost of land, buildings and improvements for Federal income
tax purposes is approximately $548.2 million at December 31, 1997.
<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 March 30, 1998.
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
By: CBM TWO CORPORATION
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 TWO CORPORATION)
/s/ Bruce F. Stemerman President and Director
Bruce F. Stemerman (Principal Executive Officer)
/s/ Christopher G. Townsend Vice President, Secretary and Director
Christopher G. Townsend
/s/ Bruce Wardinski Treasurer
Bruce Wardinski
<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 March 30, 1998.
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
By: CBM TWO CORPORATION
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 TWO CORPORATION)
/s/ Bruce F. Stemerman Vice President and Director
Bruce F. Stemerman
/s/ Christopher G. Townsend Vice President, Secretary and Director
Christopher G. Townsend
/s/ Bruce Wardinski Treasurer
Bruce Wardinski
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000832179
<NAME> COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1000
<CASH> 26,902
<SECURITIES> 43,060 <F1>
<RECEIVABLES> 11,318
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 81,280
<PP&E> 710,414
<DEPRECIATION> (254,979)
<TOTAL-ASSETS> 536,715
<CURRENT-LIABILITIES> 10,578
<BONDS> 556,834
0
0
<COMMON> 0
<OTHER-SE> (30,697) <F2>
<TOTAL-LIABILITY-AND-EQUITY> 536,715
<SALES> 0
<TOTAL-REVENUES> 141,230
<CGS> 0
<TOTAL-COSTS> 79,761
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,778
<INCOME-PRETAX> 15,691
<INCOME-TAX> 0
<INCOME-CONTINUING> 15,691
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,691
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> This represents other assets.
<F2> This represents partners deficit.
</FN>
</TABLE>
