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, 1998
OR
|_| Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: 0-16728
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1533559
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer
Identification No.)
10400 Fernwood Road
Bethesda, Maryland 20817
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 301-380-2070
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [__] (Not Applicable)
Documents Incorporated by Reference
None
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COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
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TABLE OF CONTENTS
PAGE NO.
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PART I
Item 1. Business.....................................................................................1
Item 2. Properties...................................................................................9
Item 3. Legal Proceedings...........................................................................15
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.................................................28
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure..................................................................57
PART III
Item 10. Directors and Executive Officers..........................................................57
Item 11. Management Remuneration and Transactions..................................................58
Item 12. Security Ownership of Certain Beneficial Owners and Management............................58
Item 13. Certain Relationships and Related Transactions............................................58
PART IV
Item 14. Exhibits, Supplemental Financial Statement Schedules
and Reports on Form 8-K...................................................................62
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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 10,331 guest rooms as of December 31, 1998. The
Partnership commenced operations on October 30, 1987 and will terminate on
December 31, 2087, unless earlier dissolved.
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
generally have fewer guest rooms than traditional, full-service hotels, in most
cases containing approximately 150 guest rooms, including approximately 12
suites, as compared to full-service Marriott hotels which typically contain 350
or more guest rooms.
Each Courtyard by Marriott hotel is designed around a courtyard area
containing a swimming pool (indoor pool in northern climates), walkways,
landscaped areas and a gazebo. Each Hotel generally contains a small lobby, a
restaurant with seating for approximately 50 guests, a lounge, a hydrotherapy
pool, a guest laundry, an exercise room and two small meeting rooms. The hotels
do not contain as much public space and related facilities as full-service
hotels.
Courtyard by Marriott hotels are designed for business and vacation travelers
who desire high quality accommodations at moderate prices. Most of the Hotels
are located in suburban areas near office parks or other commercial activities.
See Item 2, "Properties." Courtyard by Marriott hotels
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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 with Host Marriott Corporation ("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 for $643.1 million. On that date, CBM Two
Corporation ("CBM Two"), a wholly owned subsidiary of Host Marriott, made a
capital contribution of equipment valued at $11,306,000 for its 5% general
partner interest. 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. Of the total $643.1 million purchase
price, $507.9 million was paid in cash from the proceeds of mortgage financing
and sale of the Units, $40.2 million from assumption of debt and $95.0 million
from a deferred purchase note.
In accordance with the partnership agreement, in 1990 and 1991 CBM Two purchased
20.5 Units from defaulting investors. Additionally, on July 15, 1995, a limited
partner assigned one Unit to CBM Two.
In connection with the 1996 refinancing of the Partnership's then existing debt,
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 $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
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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.
On April 17, 1998, Host Marriott Corporation ("Host Marriott"), the parent of
CBM Two, announced that its Board of Directors authorized the company to
reorganize its business operations to qualify as a real estate investment trust
("REIT") to become effective as of January 1, 1999 (the "REIT Conversion"). On
December 29, 1998, Host Marriott announced that it had completed substantially
all the steps necessary to complete the REIT Conversion and expected to qualify
as a REIT under the applicable Federal income tax laws beginning January 1,
1999. Subsequent to the REIT Conversion, Host Marriott is referred to as Host
REIT. In connection with the REIT Conversion, Host REIT contributed
substantially all of its hotel assets to a newly-formed partnership, Host
Marriott L.P. ("Host LP").
In connection with Host Marriott's conversion to a REIT, the following steps
occurred. Host Marriott formed CBM Two LLC, a Delaware single member limited
liability company, having two classes of member interests (Class A - 1% economic
interest, managing; Class B - 99% economic interest, non- managing). CBM Two
merged into CBM Two LLC on December 22, 1998 and CBM Two ceased to exist. On
December 28, 1998, Host Marriott contributed its entire interest in CBM Two LLC
to Host Marriott, L.P. ("Host LP"), which is owned 78% by Host Marriott and 22%
by outside partners. Finally on December 30, 1998, Host LP contributed its 99%
Class B interest in CBM Two LLC to Rockledge Hotel Properties, Inc.
("Rockledge"), a Delaware corporation which is owned 95% by Host LP (economic
non-voting interest) and 5% by Host Marriott Statutory/Charitable Employee
Trust, a Delaware statutory business trust (100% of the voting interests). As a
result, the sole general partner of the Partnership is CBM Two LLC (the "General
Partner"), with a Class A 1% managing economic interest owned by Host LP and a
Class B 99% non-managing economic interest owned by Rockledge. With the merger
of CBM Two into the General Partner, the General Partner became the holder of
the Units previously acquired by CBM Two. Therefore, as of December 31, 1998,
the General Partner owns a total of 21.5 Units representing a 1.39% limited
partnership interest in the Partnership.
Pursuant to the terms of the operating agreement of CBM Two LLC, Rockledge, as
the holder of the 99% non-voting member interest in CBM Two LLC, has been
granted the sole power to direct the exercise by CBM Two LLC of all voting
rights and other rights as owner with respect to all capital stock of any
corporation that is owned, directly or indirectly, by the Partnership. The
Partnership owns the Hotels through Associates, in which the Partnership is a
98% limited partner and a 1% general partner, and through Courtyard II
Associates Management Corporation, the 1% managing general partner of
Associates. As a result of the provisions of the operating agreement of CBM Two
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LLC, Host LP has no right to direct the exercise by CBM Two LLC of voting or
other rights with respect to the shares of Courtyard II Associates Management
Corporation (and thus has no right to direct or control the affairs of
Associates).
Debt Financing
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").
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.
In connection with the Host Marriott's conversion to a REIT, a change of control
occurred when Host Marriott ceased to own, directly or indirectly, all of the
outstanding equity interest of the sole general partner of the Partnership.
Although such a change of control has occurred, Host REIT through Host LP
continues to own, indirectly, a substantial majority of the economic interest in
CBM Two LLC, the current General Partner of the Partnership and, through Host
LP, has certain voting rights with respect to CBM Two LLC.
The change in control described above resulted in a "Change in Control" under
the indenture governing the Senior Notes. As a result, in accordance with the
terms of the indenture, Host LP commenced a tender offer for the Senior Notes at
a purchase price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest thereon to February 18, 1999. The
<PAGE>
tender offer was commenced on January 14, 1999 and expired on February 12, 1999.
No Senior Notes were tendered to Host LP in connection with the tender offer.
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 $371.2 million at December 31, 1998.
Principal amortization of $14.3 million of the Class A-1 Certificates was made
during 1998.
The Certificates/Mortgage Loan maturities are as follows (in thousands):
1999 $ 15,443
2000 16,642
2001 17,934
2002 19,326
2003 20,827
Thereafter 281,052
$ 371,224
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
<PAGE>
the Deerfield Hotel and (iv) an assignment of the Management Agreement. 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.
Material Contracts
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 revenue in certain categories, subject to minimum amounts. The
minimum rentals are adjusted at various anniversary dates throughout the lease
terms, as defined in the agreements. For 1998, the Partnership paid a total of
$13,040,000 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
<PAGE>
limited-service hotels in their respective markets by providing streamlined
services and amenities exceeding those provided by typical limited-service
hotels at prices that are significantly lower than those available at
full-service hotels.
Significant competitors in the moderately-priced lodging segment include Holiday
Inn, Ramada Inn, Four Points by Sheraton, Hampton Inn and Hilton Garden Inns.
The lodging industry in general, and the moderately-priced segment in
particular, is highly competitive 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 1998 Courtyards continue to command a premium
share of the market in which they are located in spite of the growth of new
chains. For 1999, 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 LP, the managing member of the General Partner, MII and their
affiliates own and/or operate hotels other than the Partnership's Hotels and MII
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 LP,
MII and their affiliates retain a free right to compete with the Partnership's
Hotels, including the right to develop, own, and operate competing hotels now
and in the future in markets in which the Hotels are located, in addition to
those existing hotels which may currently compete directly or indirectly with
the Hotels.
Under Delaware law, the General Partner has a fiduciary duty to the Partnership
and is required to exercise good faith and loyalty in all its dealings with
respect to Partnership affairs.
Policies with Respect to Conflicts of Interest
It is the policy of the General Partner that the Partnership's relationship with
the General Partner, any affiliate of the General Partner, or persons employed
by the General Partner or its affiliates be conducted on terms that are fair to
the Partnership and that are commercially reasonable. Agreements and
relationships involving the General Partner or its affiliates and the
Partnership are on terms consistent with the terms on which the General Partner
or its affiliates have dealt with unrelated parties.
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The Amended and Restated Agreement of Limited Partnership, as amended, (the
"Partnership Agreement"), provides that any agreements, contracts or
arrangements between the Partnership and the General Partner or any of its
affiliates, except for rendering legal, tax, accounting, financial, engineering,
and procurement services to the Partnership by employees of the General Partner
or its affiliates, will be on commercially reasonable terms and will be subject
to the following additional conditions:
(i) the General Partner or any such affiliate must have the ability to render
such services or to sell or lease such goods;
(ii) such agreements, contracts or arrangements must be fair to the Partnership
and reflect commercially reasonable terms and must be embodied in a written
contract which precisely describes the subject matter thereof and all
compensation to be paid therefor;
(iii) no rebates or give-ups may be received by the General Partner or any such
affiliate, nor may the General Partner or any such affiliate participate in any
reciprocal business arrangements which would have the effect of circumventing
any of the provisions of the Partnership Agreement; and
(iv) no such agreement, contract or arrangement as to which the limited partners
had previously given approval may be amended in such a manner as to increase the
fees or other compensation payable by the Partnership to the General Partner or
any of its affiliates or to decrease the responsibilities or duties of the
General Partner or any such affiliate in the absence of the consent of the
holders of a majority in interest of the limited partners.
Employees
Neither the General Partner nor the Partnership has any employees. Host LP
provides the services of certain employees (including the General Partner's
executive officers) of Host LP to the Partnership and the General Partner. The
Partnership and the General Partner anticipate that each of the executive
officers of the General Partner will generally devote a sufficient portion of
his or her time to the business of the Partnership. However, each of such
executive officers also will devote a significant portion of his or her time to
the business of Host LP and its other affiliates. No officer or director of the
General Partner or employee of Host LP devotes a significant percentage of time
to Partnership matters. To the extent that any officer, director or employee
does devote time to the Partnership, the General Partner or Host LP, as
applicable, is entitled to reimbursement for the cost of providing such
services. See Item 11, "Management Remuneration and Transactions" for
information regarding payments made to Host Marriott, Host LP, or its
subsidiaries for the cost of providing administrative services to the
Partnership.
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Potential Transaction
The General Partner has retained Merrill Lynch to explore alternatives to
provide liquidity for the Partnership and maximize the value of the limited
partners' investment. However, there can be no assurance that a transaction will
result from these activities.
ITEM 2. PROPERTIES
Introduction
The properties consisted of 70 Courtyard by Marriott hotels as of December 31,
1998. The Hotels have been in operation for at least eight years. The Hotels
range in age between 9 and 13 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.
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COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
SUMMARY OF PROPERTIES
(70 COURTYARD HOTELS)
PROPERTY
TITLE TO LAND
# OF ROOMS
OPENING DATE
1
Birmingham/Homewood, AL
500 Shades Creek Parkway
Homewood, AL 35209
Owned in fee
140
12/21/85
2
Birmingham/Hoover, AL
1824 Montgomery Highway South Hoover, AL 35244
Leased from Essex House Condominium Corp.*
153
08/08/87
3
Huntsville, AL
4808 University Drive
Huntsville, AL 35816
Leased from Essex House Condominium Corp.*
149
08/15/87
4
Phoenix/Mesa, AZ
1221 S. Westward Avenue
Mesa, AZ 85210
Leased from Essex House Condominium Corp.*
148
03/19/88
5
Phoenix/Metrocenter, AZ
9631 N. Black Canyon
Phoenix, AZ 85021
Leased from Essex House Condominium Corp.*
146
11/29/87
6
Tucson Airport, AZ
2505 E. Executive Drive
Tucson, AZ 85706
Leased from Essex House Condominium Corp.*
149
10/01/88
7
Little Rock, AR
10900 Financial Centre Parkway
Little Rock, AR 72211
Leased from Essex House Condominium Corp.*
149
05/28/88
8
Bakersfield, CA
3601 Marriott Drive
Bakersfield, CA 93308
Leased from Essex House Condominium Corp.*
146
02/13/88
9
Cupertino, CA
10605 N. Wolfe Road
Cupertino, CA 95014
Leased from Vallco
Park, Ltd.
149
05/14/88
10
Foster City, CA
550 Shell Blvd.
Foster City, CA 94404
Leased from Essex House Condominium Corp.*
147
09/26/87
11
Fresno, CA
140 E. Shaw Avenue
Fresno, CA 93710
Leased from Richard, Miche, Aram & Aznive Erganian
146
09/13/86
12
Hacienda Heights, CA
1905 Azusa Avenue
Hacienda Heights, CA 91745
Leased from Essex House Condominium Corp.*
150
03/28/90
13
Marin/Larkspur Landing, CA
2500 Larkspur Landing Circle
Larkspur, CA 94939
Leased from Essex House
Condominium Corp.*
146
07/25/87
14
Palm Springs, CA
300 Tahquitz Canyon Way
Palm Springs, CA 92262
Leased from Essex House Condominium Corp.*
149
10/08/88
15
Torrance, CA
2633 West Sepulveda Boulevard
Torrance, CA 90505
Leased from Essex House Condominium Corp.*
149
10/15/88
16
Boulder, CO
4710 Pearl East Circle
Boulder, CO 80301
Leased from Essex House Condominium Corp.*
148
08/06/88
17
Denver, CO
7415 East 41st Avenue
Denver, CO 80301
Owned in fee
146
08/15/87
18
Denver/Southeast, CO
6565 S. Boston Street
Englewood, CO 80111
Leased from Essex House
Condominium Corp.*
152
05/30/87
19
Norwalk, CT
474 Main Avenue
Norwalk, CT 06851
Leased from Mary Fabrizio
145
07/30/88
20
Wallingford, CT
600 Northrop Road
Wallingford, CT 06492
Leased from Essex House Condominium Corp.*
149
04/21/90
21
Ft. Myers, FL
4455 Metro Parkway
Ft. Myers, FL 33901
Leased from Essex House Condominium Corp.*
149
08/27/88
22
Ft. Lauderdale/Plantation, FL
7780 S.W. 6th Street
Plantation, FL 33324
Leased from Essex House Condominium Corp.*
149
09/21/88
23
St. Petersburg, FL
3131 Executive Drive
Clearwater, FL 34622
Leased from Essex House Condominium Corp.*
149
10/14/89
24
Tampa/Westshore, FL
3805 West Cypress
Tampa, FL 33607
Leased from
Hotsinger, Inc. and Owned in fee
145
10/27/86
25
West Palm Beach, FL
600 Northpoint Parkway
West Palm Beach, FL 33407
Leased from Essex House Condominium Corp.*
149
01/14/89
26
Atlanta Airport South, GA
2050 Sullivan Road
College Park, GA 30337
Owned in fee
144
06/15/86
27
Atlanta/Gwinnett Mall, GA
3550 Venture Parkway
Duluth, GA 30136
Leased from Essex House Condominium Corp.*
146
03/19/87
28
Atlanta/Perimeter Ctr., GA
6250 Peachtree-Dunwoody Road
Atlanta, GA 30328
Leased from Essex House Condominium Corp.*
145
12/12/87
29
Atlanta/Roswell, GA
1500 Market Boulevard
Roswell, GA 30076
Leased from Roswell Landing Associates
154
06/11/88
30
Arlington Heights-South, IL
100 W. Algonquin Road
Arlington Heights, Il 60005
Owned in fee
147
12/20/85
31
Chicago/Deerfield, IL
800 Lake Cook Road
Deerfield, IL 60015
Owned in fee
131
01/02/86
32
Chicago/Glenview, IL
180l Milwaukee Avenue
Glenview, IL 60025
Leased from Essex House Condominium Corp.*
149
07/08/89
33
Chicago/Highland Park, IL
1505 Lake Cook Road
Highland Park, IL 60035
Leased from Essex House Condominium Corp.*
149
06/10/88
34
Chicago/Lincolnshire, IL
505 Milwaukee Avenue
Lincolnshire, IL 60069
Owned in fee
146
07/20/87
35
Chicago/Oakbrook Terrace, IL
6 TransAm Plaza Drive
Oakbrook Terrace, IL 60181
Owned in fee
147
05/09/86
36
Chicago/Waukegan, IL
800 Lakehurst Road
Waukegan, Il 60085
Leased from Essex House Condominium Corp.*
149
05/28/88
37
Chicago/Wood Dale, IL
900 N. Wood Dale Road
Wood Dale, IL 60191
Leased from Essex House Condominium Corp.*
149
07/02/88
38
Rockford, IL
7676 East State Road
Rockford, IL 61108
Owned in fee
147
04/12/86
39
Indianapolis/Castleton, IN
8670 Allisonville Road
Indianapolis, IN 46250
Leased from Essex House
Condominium Corp.*
146
06/06/87
40
Kansas City/Overland Park, KS
11301 Metcalf Avenue
Overland Park, KS 66212
Leased from Essex House Condominium Corp.*
149
01/14/89
41
Lexington/North, KY
775 Newtown Court
Lexington, KY 40511
Leased from Essex House
Condominium Corp.*
146
06/04/88
42
Annapolis, MD
2559 Riva Road
Annapolis, MD 21401
Leased from Essex House Condominium Corp.*
149
03/04/89
43
Silver Spring, MD
12521 Prosperity Drive
Silver Spring, MD 20904
Leased from Essex House Condominium Corp.*
146
08/06/88
44
Boston/Andover, MA
10 Campanelli Drive
Andover, MA 01810
Leased from Essex House Condominium Corp.*
146
12/03/88
45
Detroit Airport, MI
30653 Flynn Drive
Romulus, MA 48174
Leased from Essex House Condominium Corp.*
146
12/12/87
46
Detroit/Livonia, MI
17200 N. Laurel Park Drive
Livonia, MI 48152
Leased from Essex House Condominium Corp.*
148
03/12/88
47
Minneapolis Airport, MN
1352 Northland Drive
Mendota Heights, MN 55120
Leased from Essex House Condominium Corp.*
146
06/13/87
48
St. Louis/Creve Coeur, MO
828 N. New Ballas Road
Creve Coeur, MO 63146
Leased from Essex House Condominium Corp.*
154
07/22/87
49
St. Louis/Westport, MO
11888 Westline Industrial Drive
St. Louis, MO 63146
Leased from Essex House Condominium Corp.*
149
08/20/88
50
Lincroft/Red Bank, NJ
245 Half Mile Road
Red Bank, NJ 07701
Leased from Essex House Condominium Corp.*
146
05/28/88
51
Poughkeepsie, NY
408 South Road
Poughkeepsie, NY
Leased from Pizzgalli Investment Company
149
06/04/88
52
Rye, NY
631 Midland Avenue
Rye, NY 10580
Leased from Essex House Condominium Corp. *
145
03/19/88
53
Charlotte/South Park, NC
6023 Park South Drive
Charlotte, NC 28210
Leased from Queens Properties, Inc.
149
03/25/89
54
Raleigh/Cary, NC
102 Edinburgh Drive South
Cary, NC 27511
Leased from Essex House Condominium Corp.*
149
06/25/88
55
Dayton Mall, OH
100 Prestige Place
Miamisburg, OH 45342
Leased from Essex House Condominium Corp.*
146
09/19/87
56
Toledo, OH
1435 East Mall Drive
Holland, OH 43528
Leased from Essex House Condominium Corp.*
149
04/30/88
57
Oklahoma City Airport, OK
4301 Highline Boulevard
Oklahoma City, OK 73108
Leased from Essex House Condominium Corp.*
149
07/23/88
58
Portland-Beaverton, OR
8500 S.W. Nimbus Drive
Beaverton, OR 97005
Leased from Essex House Condominium Corp.*
149
02/11/89
59
Philadelphia/Devon, PA
762 W. Lancaster Ave.
Wayne, PA 19087
Leased from Three Devon Square Associates
149
11/19/88
60
Columbia, SC
347 Zimalcrest Drive
Columbia, SC 29210
Leased from Essex House Condominium Corp.*
149
01/28/89
61
Greenville, SC
70 Orchard Park Drive
Greenville, SC 29615
Leased from Essex House Condominium Corp.*
146
03/05/88
62
Memphis Airport, TN
1780 Nonconnah Boulevard
Memphis, TN 38132
Leased from Essex House Condominium Corp.*
145
07/15/87
63
Nashville Airport, TN
2508 Elm Hill Pike
Nashville, TN 37214
Leased from Essex House Condominium Corp.*
145
01/23/88
64
Dallas/Northeast, TX
1000 South Sherman
Richardson, TX 75081
Leased from Essex House Condominium Corp.*
149
01/16/88
65
Dallas/Plano, TX
4901 W. Plano Parkway
Plano, TX 75093
Owned in fee
149
05/07/88
66
Dallas/Stemmons, TX
2383 Stemmons Trail
Dallas, TX 75220
Leased from Essex House Condominium Corp.*
146
09/12/87
67
San Antonio/Downtown, TX
600 Santa Rosa South
San Antonio, TX 78204
Leased from Essex House Condominium Corp.*
149
02/03/90
68
Charlottesville, VA
638 Hillsdale Drive
Charlottesville, VA 22901
Leased from Essex House Condominium Corp.*
150
01/21/89
69
Manassas, VA
10701 Battleview Parkway
Manassas, VA 22110
Leased from Essex House Condominium Corp.*
149
03/04/89
70
Seattle/Southcenter, WA
400 Andover Park West
Tukwila, WA 98188
Leased from Essex House Condominium Corp.*
149
03/11/89
Grand Total: 10,331
* Essex House Condominium Corporation is a subsidiary of Marriott
International, Inc.
</TABLE>
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Certain limited partners of the Partnership have filed a lawsuit, styled Whitey
Ford, et al. v. Host Marriott Corporation, et al., Case No. 96-CI-08327, in the
285th Judicial District Court of Bexar County, Texas against CBM Two, the
Manager, various of their subsidiaries, J.W. Marriott, Jr., Stephen Rushmore and
Hospitality Valuation Services, Inc. (collectively, the "Defendants"). On
January 29, 1998, two other Limited Partners filed a petition to expand this
lawsuit to include a class action. On June 23, 1998, the Court entered an order
certifying a class of limited partners under Texas law, appointing A.R. Milkes
and D.R. Burklew as representative plaintiffs on behalf of the class, and later,
appointing the law firm of Berg & Androphy as lead class counsel. The plaintiffs
allege, among other things, that the Defendants committed fraud, breached
fiduciary duties, and violated the provisions of various contracts. The
Defendants have filed an answer and discovery is underway. Trial is scheduled
for May 1999.
On February 11, 1998, four individual limited partners in partnerships sponsored
by Host Marriott Corporation ("Host Marriott") filed a class action lawsuit,
styled Ruben, et al. v. Host Marriott Corporation, et al., Civil Action No.
16186, in Delaware State Chancery Court against Host Marriott and the general
partners of Courtyard by Marriott Limited Partnership, Courtyard by Marriott II
Limited Partnership, Marriott Residence Inn Limited Partnership, Marriott
Residence Inn II Limited Partnership, and Fairfield Inn by Marriott Limited
Partnership (collectively, the "Five Partnerships"). The plaintiffs alleged that
the proposed merger of the Five Partnerships (the "Merger") into an umbrella
partnership real estate investment trust proposed by CRF Lodging Company, L.P.
in a preliminary registration statement filed with the Securities and Exchange
Commission, dated December 22, 1997, constituted a breach of the fiduciary
duties owed to the limited partners of the Five Partnerships by Host Marriott
and the general partners of the Five Partnerships. In addition, the plaintiffs
alleged that the Merger breached various agreements relating to the Five
Partnerships. The plaintiffs sought, among other things, the following:
certification of a class; injunctive relief to block consummation of the Merger
or, in the alternative, rescission of the Merger; and damages. The defendants,
in light of market conditions, decided to abandon their efforts to complete the
Merger. As a result of this decision, the plaintiffs voluntarily dismissed the
lawsuit.
On March 16, 1998, limited partners in several partnerships sponsored by Host
Marriott filed a lawsuit, styled Robert M. Haas, Sr. and Irwin Randolf Joint
Tenants, et al., v. Marriott International Inc., et. al., Case No. 98-CI-04092
(the "Haas Case"), in the 57th Judicial District Court of Bexar County, Texas
against MII, Host Marriott, various of their subsidiaries, J.W. Marriott, Jr.,
Stephen Rushmore, and Hospitality Valuation Services, Inc. (collectively, the
"Defendants"). The lawsuit relates to the following limited partnerships:
Courtyard by Marriott Limited Partnership, Courtyard by Marriott II Limited
Partnership, Marriott Residence Inn Limited Partnership, Marriott Residence Inn
II Limited Partnership, Fairfield Inn by Marriott Limited Partnership, Desert
Springs Marriott Limited Partnership, and Atlanta Marriott Marquis Limited
Partnership (collectively, the "Seven Partnerships"). The plaintiffs allege that
the Defendants conspired to sell hotels to the Seven Partnerships for inflated
prices and that they charged the Seven Partnerships excessive management fees to
operate the Seven Partnerships' hotels. The plaintiffs further allege, among
other things, that the Defendants committed fraud, breached fiduciary duties,
and violated the provisions of various contracts. The plaintiffs are
<PAGE>
seeking unspecified damages. The Defendants, which do not include the Seven
Partnerships, believe that there is no truth to the plaintiffs' allegations and
that the lawsuit is totally devoid of merit. The Defendants intend to vigorously
defend against the claims asserted in the lawsuit. They have filed an answer to
the plaintiffs' petition and asserted a number of defenses. A related case
concerning the Partnership was filed by the plaintiffs' lawyers in the same
court, involves similar allegations against the Defendants, and has been
certified as a class action. Trial in this related case is presently scheduled
for May 1999. Due to the prosecution of the related case, there has been no
meaningful activity in the Haas case. Although the Seven Partnerships have not
been named as defendants in the lawsuit, the partnership agreements relating to
the Seven Partnerships include an indemnity provision which requires the Seven
Partnerships, under certain circumstances, to indemnify the general partners
against losses, expenses and fees.
The Partnership and the Hotels are involved in routine litigation and
administrative proceedings arising in the ordinary course of business, some of
which are expected to be covered by liability insurance and which collectively
are not expected to have a material adverse effect on the business, financial
condition or results of operations of the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<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, 1998, there were 1,480 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, 1998, the Partnership has distributed a total of $91,647,150
to the limited partners ($62,345 per limited partner unit) since inception.
During 1998, $7,350,000 ($5,000 per limited partner unit) was distributed to the
limited partners and an additional $2,205,000 ($1,500 per limited partner unit)
will be distributed to the limited partners in April 1999 bringing the total
distribution from 1998 operations to $9,555,000 ($6,500 per limited partner
unit). The Partnership distributed $13,230,000 to the limited partners ($9,000
per limited partner unit) from 1997
<PAGE>
operations. The Partnership distributed $11,025,000 to the limited partners
($7,500 per limited partner unit) from 1996 operations. No distributions of
Capital Receipts have been made since inception.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents historical operating information
for the Partnership for each of the five years in the period ended December 31,
1998 presented in accordance with generally accepted accounting principles.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
(in thousands, except per unit amounts)
Income Statement Data:
Revenues...........................................$ 284,251 $ 275,021 $ 263,707 $ 245,825 $ 232,082
Operating profit................................... 58,960 58,771 54,012 46,296 37,798
Net income (loss).................................. 16,950 15,691 10,541 11,215 (3,564)
Net income (loss) per limited
partner unit (1,470 Units)...................... 10,954 10,140 6,812 7,248 (2,303)
Balance Sheet Data:
Total assets.......................................$ 528,340 $ 536,715 $ 547,099 $ 567,530 $ 549,895
Total liabilities.................................. 552,230 567,412 579,040 603,030 593,947
Cash distributions per limited
partner unit (1,470 Units)...................... 6,500 9,000 7,500 -- 6,000
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-K include forward-looking statements
and as such may involve known and unknown risks, uncertainties and other factors
which may cause the actual transactions, results, performance or achievements to
be materially different from any future transactions, results, performance or
achievements expressed or implied by such forward-looking statements. The
cautionary statements set forth in reports filed under the Securities Act of
1934 contained important factors with respect to such forward-looking
statements, including: (i) national and local economic and business conditions
that will, among other things, affect demand for hotels and other properties,
the level or rates and occupancy that can be achieved by such properties and the
<PAGE>
availability and terms of financing; (ii) the ability to compete effectively;
(iii) changes in travel patterns, taxes and government regulations; (iv)
governmental approvals, actions and initiatives; and (v) the effects of tax
legislative action. Although the Partnership believes the expectations reflected
in such forward-looking statements are based upon reasonable assumptions, it can
give no assurance that its expectations will be attained or that any deviations
will not be material. The Partnership undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that may
be made to reflect any future events or circumstances.
GENERAL
The following discussion and analysis addresses results of operations for the
fiscal years ended December 31, 1998, 1997 and 1996. During the period from 1996
through 1998, Partnership total hotel revenues grew from $263.7 million to
$284.3 million. Growth in room revenues, and thus hotel revenues, is driven
primarily by growth in revenue per available room ("REVPAR"). REVPAR is a
commonly used indicator of market performance for hotels which represents the
combination of daily room rate charged and the average daily occupancy achieved.
REVPAR does not include food and beverage and other ancillary revenues generated
by the property. During the period from 1996 through 1998, the Hotels' combined
average room rate increased by $10.51 from $76.48 to $86.99, while the combined
average occupancy decreased from 80.4% to 79.0%.
RESULTS OF OPERATIONS
Revenues primarily represent the gross revenues generated by the Partnership's
Hotels.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus on EITF 97-2, "Application of
FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements."
EITF 97-2 addresses the circumstances in which a management entity may include
the revenues and expenses of a managed entity in its financial statements.
The Partnership considered the impact of EITF 97-2 on its financial statements
and determined that EITF 97-2 requires the Partnership to include property-level
revenues and operating expenses of its Hotels in its consolidated statement of
operations. The Partnership has given retroactive effect to the adoption of EITF
97-2 in the accompanying consolidated statement of operations. Application of
EITF 97-2 to the consolidated financial statements for the fiscal years ended
December 31, 1998, 1997 and 1996 increased both revenues and operating expenses
by approximately $141.4 million, $133.8 million and $130.6 million,
respectively, and had no impact on operating profit or net income.
The following table shows selected combined operating and financial statistics
for the Hotels (in thousands, except combined average occupancy, combined
average daily room rate, REVPAR and number of rooms):
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Combined average occupancy............................................... 79.0% 80.3% 80.4%
Combined average daily room rate.........................................$ 86.99 $ 82.09 $ 76.48
REVPAR...................................................................$ 68.72 $ 65.92 $ 61.49
Number of rooms.......................................................... 10,331 10,331 10,331
Room revenues............................................................$ 258,099 $ 248,012 $ 235,861
Food and beverage revenues............................................... 17,219 17,436 18,227
Other hotel revenues..................................................... 8,933 9,573 9,619
----------- ----------- -----------
Total hotel revenues.................................................. 284,251 275,021 263,707
Direct hotel operating costs and expenses................................ 141,398 133,791 130,525
----------- ----------- -----------
House profit.............................................................$ 142,853 $ 141,230 $ 133,182
=========== =========== ===========
The following table shows selected components of the Partnership's operating
income as a percentage of total hotel revenues.
Year Ended December 31,
1998 1997 1996
Hotel revenues:
Room revenues......................................................... 90.8% 90.2% 89.4%
Food and beverage revenues............................................ 6.1 6.3 6.9
Other ................................................................ 3.1 3.5 3.7
----------- ----------- -----------
Total hotel revenues................................................ 100.0 100.0 100.0
Direct operating costs and expenses...................................... 49.7 48.6 49.5
----------- ----------- -----------
House profit............................................................. 50.3 51.4 50.5
Indirect hotel operating costs and expenses:
Depreciation and amortization......................................... 9.8 10.2 10.2
Base and Courtyard management fees.................................... 6.0 6.0 6.0
Ground rent........................................................... 4.5 4.5 4.5
Incentive management fees............................................. 4.5 4.7 4.6
Property taxes........................................................ 3.8 3.6 3.6
Insurance and other................................................... 1.0 1.0 1.1
----------- ----------- -----------
Total indirect hotel operating costs and expenses 29.6 30.0 30.0
--------- ------------ -------------
Operating profit.................................................... 20.7% 21.4% 20.5%
=========== =========== ===========
</TABLE>
1998 Compared to 1997
Hotel Revenues. In 1998 hotel revenues increased $9.2 million, or 3.4%, to
$284.3 million when compared to 1997 due to the increase in rooms revenues
described below partially offset by slight decreases in food and beverage and
other revenues.
Rooms Revenues. Rooms revenues increased $10.1 million in 1998 to $258.1
million, a 4.1% increase when compared to 1997. The increase in revenues was
achieved through an increase in the combined average room rate from $82.09 in
1997 to $86.99 in 1998. Combined average occupancy decreased 1.3 percentage
points from 80.3% in 1997 to 79.0% in 1998 primarily due to increased
competition and aggressive rate increases in some markets.
<PAGE>
Total Hotel Property-Level Costs and Expenses. The 1998 total hotel
property-level costs and expenses increased $7.6 million, or 5.7%. The increase
is due to increases in both rooms costs and selling, administrative and other
expenses.
Rooms Costs. In 1998 rooms costs increased $3.6 million, or 6.8%, when compared
to 1997. The increase costs is due to an increase in certain variable costs
related to the increase in rooms revenues.
Selling, Administrative and Other. Selling, administrative and other expenses
increased by $4.2 million in 1998 to $67.5 million, a 6.7% increase when
compared to 1997. The increase in expenses was primarily due to a $2.5 million
increase in general and administrative expenses and a $1.4 million increase in
chain services.
Base and Courtyard Management Fees. Base and Courtyard management fees increased
by 3.4%, or $554,000, in 1998 when compared to 1997. Base and Courtyard
management fees are calculated as a percentage of total hotel revenues.
Accordingly, with the increase in total hotel revenues described above, these
fees also increased.
Property Taxes. Property taxes increased by 9.8% during 1998 to $10.9 million
when compared to 1997. The increase is primarily due to real estate tax
increases at 62 of the Partnership's 70 Hotels.
Insurance and Other. Insurance and other decreased by 12.6% to $2.2 million when
compared to 1997. The decrease is primarily due to decreases in equipment rent
and Partnership administrative expenses.
Interest Expense. Interest expense decreased by 2.4% to $44.7 million in 1998
from $45.8 million in 1997. This decrease is due to principal amortization of
$14.3 million on the Certificates/Mortgage Loan. The weighted average interest
rate was 8.5% for 1998 and 1997.
1997 Compared to 1996
Hotel Revenues. Total 1997 hotel revenues of $275.0 million represented an $11.3
million, or 4.3%, increase over 1996. The increase in revenues was achieved
through the increase in rooms revenues described below partially offset by a
$791,000 decrease in food and beverage revenues.
Rooms Revenues. Rooms revenues increased $12.2 million in 1997 to $248.0
million, a 5.2% increase when compared to 1996. The increase in revenues was
achieved through an increase in the combined average room rate from $76.48 in
1996 to $82.09 in 1997. Combined average occupancy decreased slightly from 80.4%
in 1996 to 80.3% in 1997.
Food and Beverage Revenues. In 1997 food and beverage revenues decreased 4.3% to
$17.4 million when compared to 1996 primarily due to the elimination of meeting
room and dinner business over the course of 1997.
<PAGE>
Rooms Costs. Rooms costs increased $1.8 million, or 3.5%, when compared to 1996.
The increased costs are due to an increase in certain variable costs related to
the increase in rooms revenues. However, as a percentage of total hotel
revenues, rooms costs decreased slightly to 19.1% in 1997 as compared to 19.2%
in 1996. This resulted in a 5.6% increase in rooms profit margin for 1997 as
compared to 1996.
Food and Beverage Costs. In 1997 food and beverage costs decreased $928,000, or
5.8%, when compared to 1996 due to the decrease in food and beverage revenues
discussed above.
Selling, Administrative and Other. Selling, administrative and other expenses
increased by $2.1 million in 1997 to $63.3 million, a 3.4% increase when
compared to 1996. The increase in expenses was primarily due to a $1.4 million
increase in general and administrative expenses and a $783,000 increase in chain
services.
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 revenues. 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 revenues for the 70 Hotels for 1997 when compared to 1996. As a
percentage of hotel revenues, 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 revenues rather than the minimum rent. However,
ground rent as a percentage of total hotel revenues remained stable at 4.5%
between 1997 and 1996.
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.
Insurance and Other. Insurance and other decreased by 9.9% during 1997 to $2.5
million when compared to 1996. The decrease is primarily due to decreases in
equipment rent, and permits and licenses.
Operating Profit. Operating profit increased by $4.8 million to $58.8 million in
1997 from $54.0 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.
<PAGE>
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.
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 $44.5 million, $44.8 million and $38.1 million for the years ended 1998,
1997 and 1996, respectively. The increase in 1997 when compared to 1996 was
primarily due to improved operations.
Cash used in investing activities was $15.8 million, $17.6 million and $17.3
million for 1998, 1997 and 1996, respectively. Contributions to the property
improvement fund which represents 5% of total hotel revenues, were $14.2
million, $13.8 million and $13.2 million for the years ended December 31, 1998,
1997 and 1996, respectively. Cash used in investing activities for 1998, 1997
and 1996 includes capital expenditures of $36.1 million, $24.9 million and $11.3
million, respectively. 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 revenues, 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 up to 6%
after December 31, 2000 at the option of the Manager. The balance in the fund
totaled $6.5 million and $27.2 million as of December 31, 1998 and 1997,
respectively. The capital expenditures for 1998 and 1997 included renovations at
23 and 16 of the Partnership Hotels, respectively. All such capital expenditures
were funded from the property improvement fund. Rooms renovations totaling $13.2
million are scheduled to be completed at 15 of the Partnership hotels in 1999.
The Partnership will have sufficient funds to complete the renovations.
Cash used in financing activities was $24.5 million, $27.8 million and $34.3
million for the years ended December 31, 1998, 1997 and 1996, respectively.
These totals include $10.1 million, $14.5 million and $7.0 million of cash
distributions to limited partners in 1998, 1997 and 1996, respectively.
During 1998, 1997 and 1996, the Partnership repaid $14.3 million, $13.3 million
and $11.3 million, respectively, of principal on the commercial mortgage backed
securities. The Partnership also paid $43.1 million, $44.2 million and $42.6
million of interest on its debts in 1998, 1997 and 1996, respectively. The
Partnership expects to make principal repayments of $15.4 million in 1999.
<PAGE>
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. 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.
Changes in the real estate tax and insurance, net in 1998 include the $5.4
million remaining in the real estate tax and insurance escrow account reduced by
$3.9 million of accrued real estate tax liabilities.
Debt
See Item 1, "Business" for discussion of debt financing.
Property Improvement Fund
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 affiliates of MII will provide adequate funds in the short term and long term
for the operational needs of the Partnership.
Competition
The moderately priced lodging segment continues to be highly competitive. An
increase in supply growth continued through 1998 with the introduction of a
number of new national brands. However, through 1998 Courtyards continue to
command a premium share of the market in which they are located in spite of the
growth of new chains. For 1999, 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.
Inflation
The rate of inflation has been relatively low in the past four years. The
Manager is generally able to pass through increased costs to customers through
higher room rates and prices. In 1998, the growth in average rates of Courtyard
hotels exceeded inflationary costs.
<PAGE>
Seasonality
Demand, and thus room occupancy, is affected by normally recurring seasonal
patterns. For most of the Hotels, demand is higher in the spring and summer
months (March through October) than during the remainder of the year.
Year 2000 Issues
Year 2000 issues have arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications could
fail or create erroneous results. The following disclosure provides information
regarding the current status of the Partnership's Year 2000 compliance program.
Host Marriott has adopted the compliance program because it recognizes the
importance of minimizing the number and seriousness of any disruptions that may
occur as a result of the Year 2000 issue. Host Marriott's compliance program
includes an assessment of Host Marriott's hardware and software computer systems
and embedded systems, as well as an assessment of the Year 2000 issues relating
to third parties with which Host Marriott has a material relationship or whose
systems are material to the operations of the Partnership's Hotels. Host
Marriott's efforts to ensure that its computer systems are Year 2000 compliant
have been segregated into two separate phases: in-house systems and third-party
systems.
In-House Systems. Host Marriott has invested in the implementation and
maintenance of accounting and reporting systems and equipment that are intended
to enable the Partnership to provide adequately for its information and
reporting needs and which are also Year 2000 compliant. Substantially all of
Host Marriott's in-house systems have already been certified as Year 2000
compliant through testing and other mechanisms, and Host Marriott has not
delayed any systems projects due to the Year 2000 issue. Host Marriott is in the
process of engaging a third party to review its Year 2000 in-house compliance.
Host Marriott believes that future costs associated with Year 2000 issues for
its in-house systems will be insignificant and, therefore, not impact the
Partnership's business, financial condition and results of operations. Host
Marriott has not developed, and does not plan to develop, a separate contingency
plan for its in-house systems due to their current Year 2000 compliance.
Third-Party Systems. The Partnership relies upon operational and accounting
systems provided by third parties, primarily the Manager of its Hotels, to
provide the appropriate property-specific operating systems (including
reservation, phone, elevator, security, HVAC and other systems) and to provide
it with financial information. Based on discussions with the third parties that
are critical to the Partnership's business, including the Manager of its Hotels,
Host Marriott believes that these parties are in the process of studying their
systems and the systems of their respective vendors and service providers and,
in many cases, have begun to implement changes, to ensure that they are Year
2000 compliant. However, Host Marriott has not received any oral or written
assurances that these third parties will be Year 2000 compliant on time. To the
extent these changes impact property-level systems, the Partnership may be
required to fund capital expenditures for upgraded equipment and software. The
Partnership does not expect these charges
<PAGE>
to be material, but is committed to making these investments as required. To the
extent that these changes relate to the Manager's centralized systems (including
reservations, accounting, purchasing, inventory, personnel and other systems),
the Partnership's Management Agreement generally provides for these costs to be
charged to the Partnership's properties. Host Marriott expects that the Manager
will incur Year 2000 costs for its centralized systems in lieu of costs related
to system projects that otherwise would have been pursued and therefore, its
overall level of centralized systems charges allocated to the Hotels will not
materially increase as a result of the Year 2000 compliance effort. Host
Marriott believes that this deferral of certain system projects will not have a
material impact on its future results of operations, although it may delay
certain productivity enhancements at the Partnership's Hotels. Host Marriott
will continue to monitor the efforts of these third parties to become Year 2000
compliant and will take appropriate steps to address any non-compliance issues.
The Partnership believes that in the event of material Year 2000 non-compliance
caused by a breach of the Manager's duties, the Partnership will have the right
to seek recourse against the Manager under its Management Agreement. The
Management Agreement, however, generally does not specifically address the Year
2000 compliance issue. Therefore, the amount of any recovery in the event of
Year 2000 non-compliance at a property, if any, is not determinable at this
time.
Host Marriott will work with the third parties to ensure that appropriate
contingency plans will be developed to address the most reasonably likely worst
case Year 2000 scenarios, which may not have been identified fully. In
particular, Host Marriott has had extensive discussions regarding the Year 2000
problem with MII, the parent of the Manager of the Partnership's Hotels. Due to
the significance of MII to the Partnership's business, a detailed description of
MII's state of readiness follows.
MII has adopted an eight-step process toward Year 2000 readiness, consisting of
the following: (i) Awareness: fostering understanding of, and commitment to, the
problem and its potential risks; (ii) Inventory: identifying and locating
systems and technology components that may be affected; (iii) Assessment:
reviewing these components for Year 2000 compliance, and assessing the scope of
Year 2000 issues; (iv) Planning: defining the technical solutions and labor and
work plans necessary for each affected system; (v) Remediation/Replacement:
completing the programming to renovate or replace the problem software or
hardware; (vi) Testing and Compliance Validation: conducting testing, followed
by independent validation by a separate internal verification team; (vii)
Implementation: placing the corrected systems and technology back into the
business environment; and (viii) Quality Assurance: utilizing an internal audit
team to review significant projects for adherence to quality standards and
program methodology.
MII has grouped its systems and technology into three categories for purposes of
Year 2000 compliance: (i) information resource applications and technology (IT
Applications) -- enterprise-wide systems supported by MII's centralized
information technology organization ("IR"); (ii) Business- initiated Systems
("BIS") - systems that have been initiated by an individual business unit, and
that are not supported by MII's IR organization; and (iii) Building Systems -
non-IT equipment at properties that use embedded computer chips, such as
elevators, automated room key systems and HVAC equipment. MII is prioritizing
its efforts based on how severe an effect noncompliance would have on customer
service, core business processes or revenues, and whether there are viable,
non-automated fallback procedures (System Criticality).
<PAGE>
MII measures the completion of each phase based on documented and quantified
results, weighted for System Criticality. As of January 1, 1999, the Awareness
and Inventory phases were complete for IT Applications and substantially
complete for BIS and Building Systems. For IT Applications, the Assessment,
Planning, Remediation/Replacement and Testing phases were each over 95 percent
complete, and Compliance Validation had been completed for nearly half of key
systems, with most of the remaining work in its final stage. BIS and Building
Systems, Assessment and Planning are nearly complete. Remediation/Replacement
and Testing are 20% complete for BIS, and MII is on track for completion of
initial Testing of Building Systems by the end of the first quarter of 1999.
Compliance Validation is in progress of both BIS and Building Systems. MII
remains on target for substantial completion of Remediation/Replacement and
Testing for System Critical BIS and Building Systems by June 1999 and September
1999, respectively. Quality Assurance is in progress for IT Applications, BIS
and Building Systems.
Year 2000 compliance communications with MII's significant third party
suppliers, vendors and business partners, including its franchisees are ongoing.
MII's efforts are focused on the connections most critical to customer service,
core business processes and revenues, including those third parties that support
the most critical enterprise-wide IT Applications, franchisees generating the
most revenues, suppliers of the most widely used Building Systems and BIS, the
top 100 suppliers, by dollar volume, of non-IT products, and financial
institutions providing the most critical payment processing functions. Responses
have been received from a majority of the firms in this group. A majority of
these respondents have either given assurances of timely Year 2000 compliance or
have identified the necessary actions to be taken by them or MII to achieve
timely Year 2000 compliance for their products.
MII is also establishing a common approach for testing and addressing Year 2000
compliance issues for its managed and franchised properties. This includes a
guidance protocol for operated properties, and a Year 2000 "Toolkit" for
franchisees containing relevant Year 2000 compliance information. MII is also
utilizing a Year 2000 best-practices sharing system.
Risks. There can be no assurances that Year 2000 remediation by the Partnership
or third parties will be properly and timely completed, and failure to do so
could have a material adverse effect on the Partnership, its business and its
financial condition. The Partnership cannot predict the actual effects to it of
the Year 2000 issue, which depends on numerous uncertainties such as: (i)
whether significant third parties, properly and timely address the Year 2000
issue; and (ii) whether broad-based or systemic economic failures may occur.
Host Marriott is also unable to predict the severity and duration of any such
failures, which could include disruptions in passenger transportation or
transportation systems generally, loss of utility and/or telecommunications
services, the loss or distortion of hotel reservations made on centralized
reservations systems and errors or failures in financial transactions or payment
processing systems such as credit cards. Due to the general uncertainty inherent
in the Year 2000 issue and the Partnership's dependence on third parties, the
Partnership is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Partnership. Host Marriott's
Year 2000 compliance program is expected to significantly reduce the level of
uncertainty about the Year 2000 issue and Host Marriott believes that the
possibility of significant interruptions of normal operations should be reduced.
<PAGE>
<TABLE>
<CAPTION>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index Page
<S> <C>
Courtyard by Marriott II Limited Partnership Consolidated Financial Statements:
Report of Independent Public Accountants.............................................................29
Consolidated Statement of Operations.................................................................30
Consolidated Balance Sheet...........................................................................31
Consolidated Statement of Changes in Partners' Capital (Deficit).....................................32
Consolidated Statement of Cash Flows.................................................................33
Notes to Consolidated Financial Statements...........................................................34
Courtyard II Associates, L.P. and Subsidiary Consolidated Financial Statements:
Report of Independent Public Accountants.............................................................44
Consolidated Statement of Operations.................................................................45
Consolidated Balance Sheet...........................................................................46
Consolidated Statement of Changes in Partners' Capital...............................................47
Consolidated Statement of Cash Flows.................................................................48
Notes to Consolidated Financial Statements...........................................................49
</TABLE>
<PAGE>
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
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.
As discussed in Note 2 to the consolidated financial statements, the Partnership
has given retroactive effect to the change to include property-level revenues
and operating expenses of its hotels in the consolidated statement of
operations.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 15, 1999
16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
Courtyard by Marriott II Limited Partnership
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands, except Unit and per Unit amounts)
1998 1997 1996
------------- ------------- ---------
<S> <C> <C> <C>
REVENUES
Hotel revenues
Rooms.................................................................$ 258,099 $ 248,012 $ 235,861
Food and beverage..................................................... 17,219 17,436 18,227
Other................................................................. 8,933 9,573 9,619
------------- ------------- -------------
Total hotel revenues................................................ 284,251 275,021 263,707
------------- ------------- -------------
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms................................................................. 55,962 52,405 50,653
Food and beverage..................................................... 14,991 15,145 16,073
Other department costs and expenses................................... 2,928 2,943 2,583
Selling, administrative and other..................................... 67,517 63,298 61,216
------------- ------------- -------------
Total hotel property-level costs and expenses 141,398 133,791 130,525
Depreciation ........................................................... 27,895 28,131 27,062
Base and Courtyard management fees ..................................... 17,055 16,501 15,822
Ground rent............................................................. 12,921 12,480 11,899
Incentive management fee................................................ 12,895 12,878 12,040
Property taxes.......................................................... 10,914 9,938 9,537
Insurance and other..................................................... 2,213 2,531 2,810
------------- ------------- -------------
Total operating costs and expenses.................................. 225,291 216,250 209,695
------------- ------------- -------------
OPERATING PROFIT........................................................... 58,960 58,771 54,012
Interest expense........................................................ (44,686) (45,778) (46,366)
Interest income and other............................................... 2,676 2,698 2,895
------------- ------------- -------------
NET INCOME.................................................................$ 16,950 $ 15,691 $ 10,541
============= ============= =============
ALLOCATION OF NET INCOME
General Partner.........................................................$ 847 $ 785 $ 527
Limited Partners........................................................ 16,103 14,906 10,014
------------- ------------- -------------
$ 16,950 $ 15,691 $ 10,541
============= ============= =============
NET INCOME PER LIMITED PARTNER UNIT (1,470 Units) $ 10,954 $ 10,140 $ 6,812
============ ============= ===========
The accompanying notes are an integral part of these
financial statements.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
Courtyard by Marriott II Limited Partnership
December 31, 1998 and 1997
(in thousands)
1998 1997
------------- ---------
<S> <C> <C>
ASSETS
Property and equipment, net...............................................................$ 463,650 $ 455,435
Deferred financing costs, net of accumulated amortization................................. 14,262 15,833
Due from Courtyard Management Corporation................................................. 8,739 11,318
Other assets.............................................................................. 66 27
Property improvement fund................................................................. 6,466 27,200
Restricted cash........................................................................... 17,254 13,212
Cash and cash equivalents................................................................. 17,903 13,690
------------- -------------
$ 528,340 $ 536,715
============= =============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Debt......................................................................................$ 498,624 $ 512,955
Management fees due to Courtyard Management Corporation................................... 34,414 34,829
Due to Marriott International, Inc. and affiliates........................................ 8,931 9,050
Accounts payable and accrued liabilities.................................................. 10,261 10,578
------------- -------------
Total Liabilities................................................................... 552,230 567,412
------------- -------------
PARTNERS' CAPITAL (DEFICIT)
General Partner
Capital contribution.................................................................... 11,306 11,306
Cumulative net losses................................................................... (3,609) (4,456)
Capital distributions................................................................... (278) (278)
------------- ------------
7,419 6,572
------------- -------------
Limited Partners
Capital contributions, net of offering costs of $17,189................................ 129,064 129,064
Cumulative net losses................................................................... (68,573) (84,676)
Capital distributions................................................................... (91,647) (81,504)
Investor notes receivable............................................................... (153) (153)
------------- ------------
(31,309) (37,269)
Total Partners' Deficit............................................................. (23,890) (30,697)
------------- ------------
$ 528,340 $ 536,715
============= =============
The accompanying notes are an integral part of these
financial statements.
18
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN
PARTNERS' CAPITAL (DEFICIT)
Courtyard by Marriott II Limited Partnership
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
General Limited
Partner Partners Total
<S> <C> <C> <C>
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)
Capital distributions................................................... -- (10,143) (10,143)
Net income.............................................................. 847 16,103 16,950
------------- ------------- -------------
Balance, December 31, 1998.................................................$ 7,419 $ (31,309) $ (23,890)
============= ============= =============
The accompanying notes are an integral part of these
financial statements.
19
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Courtyard by Marriott II Limited Partnership
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
----------- ----------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.....................................................................$ 16,950 $ 15,691 $ 10,541
Noncash items:
Depreciation................................................................. 27,895 28,131 27,062
Amortization of deferred financing costs as interest......................... 1,571 1,572 1,679
Deferred management fees..................................................... -- -- 633
Changes in operating accounts:
Real estate tax and insurance, net........................................... (1,341) (129) --
Due from Courtyard Management Corporation.................................... 79 1,997 (3,737)
Management fees due to Courtyard Management Corporation...................... (415) (1,613) --
Accounts payable and accrued liabilities..................................... (196) (860) 2,924
Due to Host Marriott Corporation............................................. (63) 32 (1,015)
Prepaid expenses............................................................. 8 1 (28)
----------- ----------- -----------
Cash provided by operations.............................................. 44,488 44,822 38,059
----------- ----------- -----------
INVESTING ACTIVITIES
Additions to property and equipment, net....................................... (36,110) (24,879) (11,269)
Change in property improvement fund............................................ 20,734 9,382 (3,484)
Change in working capital reserve.............................................. (2,925) (2,075) --
Working capital returned by/(provided to) Courtyard Management Corporation.... 2,500 -- (2,500)
Cash used in investing activities........................................ (15,801) (17,572) (17,253)
------------ ----------- ----------
FINANCING ACTIVITIES
Repayment of principal......................................................... (14,331) (13,298) (11,347)
Capital distributions.......................................................... (10,143) (14,479) (6,982)
Payment of financing costs..................................................... -- (12) (15,835)
Collections of investor notes receivable....................................... -- 32 --
Proceeds from issuance of debt................................................. -- -- 537,600
Repayments of debt............................................................. -- -- (531,100)
Deposit into the debt service reserve.......................................... -- -- (6,848)
Use of refinancing reserve accounts............................................ -- -- 6,684
Repayment of advances from Host Marriott Corporation........................... -- -- (6,489)
----------- ----------- ----------
Cash used in financing activities........................................ (24,474) (27,757) (34,317)
------------ ----------- ----------
INCREASE /(DECREASE) IN CASH AND CASH EQUIVALENTS $ 4,213 $ (507) $(13,511)
CASH AND CASH EQUIVALENTS at beginning of year.................................... 13,690 14,197 27,708
----------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of year..........................................$ 17,903 $ 13,690 $ 14,197
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest......................................$ 43,114 $ 44,207 $ 42,532
=========== =========== ===========
The accompanying notes are an integral part of these
financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Courtyard by Marriott II Limited Partnership
December 31, 1998 and 1997
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").
On January 18, 1988 (the "Final Closing Date"), 1,470 limited partnership
interests (the "Units"), representing a 95% interest in the Partnership, were
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"), CBM Two 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 CBM Two purchased
20.5 Units from defaulting investors. Additionally, on July 15, 1995, a limited
partner assigned one Unit to CBM Two.
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 1996 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
<PAGE>
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.
On April 17, 1998, Host Marriott Corporation ("Host Marriott"), the parent of
CBM Two, announced that its Board of Directors authorized the company to
reorganize its business operations to qualify as a real estate investment trust
("REIT") to become effective as of January 1, 1999 (the "REIT Conversion"). On
December 29, 1998, Host Marriott announced that it had completed substantially
all the steps necessary to complete the REIT Conversion and expected to qualify
as a REIT under the applicable Federal income tax laws beginning January 1,
1999. Subsequent to the REIT Conversion, Host Marriott is referred to as Host
REIT. In connection with the REIT Conversion, Host REIT contributed
substantially all of its hotel assets to a newly-formed partnership Host
Marriott L.P. ("Host LP").
In connection with Host Marriott's conversion to a REIT, the following steps
occurred. Host Marriott formed CBM Two LLC, a Delaware single member limited
liability company, having two classes of member interests (Class A - 1% economic
interest, managing; Class B - 99% economic interest, non- managing). CBM Two
merged into CBM Two LLC on December 22, 1998 and CBM Two ceased to exist. On
December 28, 1998, Host Marriott contributed its entire interest in CBM Two LLC
to Host Marriott, L.P. ("Host LP"), which is owned 78% by Host Marriott and 22%
by outside partners. Finally on December 30, 1998, Host LP contributed its 99%
Class B interest in CBM Two LLC to Rockledge Hotel Properties, Inc.
("Rockledge"), a Delaware corporation which is owned 95% by Host LP (economic
non-voting interest) and 5% by Host Marriott Statutory/Charitable Employee
Trust, a Delaware statutory business trust (100% of the voting interests). As a
result, the sole general partner of the Partnership is CBM Two LLC (the "General
Partner"), with a Class A 1% managing economic interest owned by Host LP and a
Class B 99% non-managing, economic interest owned by Rockledge. With the merger
of CBM Two into the General Partner, the General Partner became the holder of
the Units previously acquired by CBM Two. Therefore, as of December 31, 1998,
the General Partner owns a total of 21.5 Units representing a 1.39% limited
partnership interest in the Partnership.
Pursuant to the terms of the operating agreement of CBM Two LLC, Rockledge, as
the holder of the 99% non-voting member interest in CBM Two LLC, has been
granted the sole power to direct the exercise by CBM Two LLC of all voting
rights and other rights as owner with respect to all capital stock of any
corporation that is owned, directly or indirectly, by the Partnership. The
Partnership owns the Hotels through Associates, in which the Partnership is a
98% limited partner and a 1% general partner, and through Courtyard II
Associates Management Corporation, the 1% managing general partner of
Associates. As a result of the provisions of the operating agreement of CBM Two
LLC, Host LP has no right to direct the exercise by CBM Two LLC of voting or
other rights with respect to the shares of Courtyard II Associates Management
Corporation (and thus has no right to direct or control the affairs of
Associates).
Partnership Allocations and Distributions
Partnership allocations and distributions are generally made as follows:
a. Cash available for distribution is distributed (i) first, 5% to the General
Partner and 95% to the limited partners until the General Partner and the
limited partners (collectively, the "Partners") have received cumulative
distributions of sale proceeds and/or refinancing proceeds ("Capital Receipts")
equal to $77,368,421; (ii) next, 10% to the General Partner and 90% to the
limited partners until the Partners have received cumulative distributions of
Capital Receipts equal to $158,306,000; and (iii) thereafter, 25% to the General
Partner and 75% to the limited partners. Distributions to the General Partner
are subordinate to an annual 10% non-cumulative preferred return to the limited
partners on their invested capital, as defined.
<PAGE>
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 7, the Partnership is required to provide the Manager with working capital
and supplies to meet the operating needs of the Hotels. The Manager converts
cash advanced by the Partnership into other forms of working capital consisting
primarily of operating cash, inventories, and trade receivables and payables
which are maintained and controlled by the Manager. Upon the termination of the
management agreement, the Manager is required to convert working capital and
supplies into cash and return it to the Partnership. As a
<PAGE>
result of these conditions, the individual components of working capital and
supplies controlled by the Manager are not reflected in the accompanying
consolidated balance sheet.
Revenues and Expenses
Revenues primarily represent the gross revenues generated by the Partnership's
Hotels.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus on EITF 97-2, "Application of
FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements."
EITF 97-2 addresses the circumstances in which a management entity may include
the revenues and expenses of a managed entity in its financial statements.
The Partnership considered the impact of EITF 97-2 on its consolidated financial
statements and determined that EITF 97-2 requires the Partnership to include
property-level revenues and operating expenses of its Hotels in its consolidated
statement of operations. The Partnership has given retroactive effect to the
adoption of EITF 97-2 in the accompanying consolidated statement of operations.
Application of EITF 97-2 to the consolidated financial statements for the fiscal
years ended December 31, 1998, 1997 and 1996 increased both revenues and
operating expenses by approximately $141.4 million, $133.8 million and $130.5
million, respectively, and had no impact on operating profit or net income.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets as follows:
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 5.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties will be
less than their net book value. If a property is impaired, its basis is adjusted
to fair market value less selling costs. There was no such adjustment required
at December 31, 1998 or 1997.
Deferred Financing Costs
From 1995 to 1997, the Partnership paid a total of $18,858,000 in
financing costs related to the Senior Notes and the Certificates discussed in
Note 5. 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, 1998 and 1997, accumulated
amortization of financing costs totaled $4,596,000 and $3,025,000, respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Restricted Cash Reserves
The Partnership was required to establish certain reserves pursuant to the terms
of the mortgage debt as described in Note 5. The balances in those reserves as
of December 31 are as follows (in thousands):
<PAGE>
1998 1997
----------- --------
Debt service reserve.................................$ 6,848 $ 6,848
Real estate tax and insurance reserve................ 5,406 4,289
Working capital reserve.............................. 5,000 2,075
----------- -----------
$ 17,254 $ 13,212
=========== ===========
Ground Rent
The land leases with MII or affiliates of MII (see Note 6) include scheduled
increases in minimum rents per property. These scheduled rent increases, which
are included in minimum lease payments, are being recognized by the Partnership
on a straight-line basis over the 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 1998, 1997 and 1996 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 $5,128,000 and $7,196,000, respectively as of
December 31, 1998 and 1997.
Reclassifications
Certain reclassifications were made to the prior year financial statements to
conform to the 1998 presentation.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
1998 1997
------------- ---------
Land...............................................$ 25,392 $ 25,392
Leasehold improvements............................. 456,936 442,226
Building and improvements.......................... 85,448 87,546
Furniture and equipment............................ 178,748 155,250
------------- ---------
746,524 710,414
Less accumulated depreciation...................... (282,874 (254,979)
------------- ---------
$ 463,650 $ 455,435
============= ==========
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
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.
<CAPTION>
As of December 31, 1998 As of December 31, 1997
-------------------------- -------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Debt............................................................$ 498,624 $ 518,289 $ 512,955 $ 544,000
Management fees due to Courtyard
Management Corporation.......................................$ 34,414 $ 18,735 $ 34,829 $ 22,000
<PAGE>
The 1998 and 1997 estimated fair value of debt obligations were based on the
quoted market prices at December 31, 1998 and 1997, respectively. Management
fees due to the Manager are valued based on the expected future payments from
operating cash flow discounted at risk adjusted rates.
</TABLE>
NOTE 5. MORTGAGE DEBT
On January 24, 1996, the Partnership completed a refinancing of the
Partnership's existing debt through the private placements of $127.4 million of
senior secured notes (the "Senior Notes") and $410.2 million of multi-class
commercial mortgage pass-through certificates (the "Certificates").
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,
1998 and 1997) 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.
In connection with the Host Marriott's conversion to a REIT, a change of control
occurred when Host Marriott through Host LP ceased to own, directly or
indirectly, all of the outstanding equity interest of the sole general partner
of the Partnership. Although such a change of control has occurred, Host REIT
continues to own, indirectly, a substantial majority of the economic interest in
CBM Two LLC, the current General Partner of the Partnership and, through Host
LP, has certain voting rights with respect to CBM Two LLC.
The change in control described above resulted in a "Change in Control" under
the indenture governing the Senior Notes. As a result, in accordance with the
terms of the Indenture, Host LP commenced a tender offer for the Senior Notes at
a purchase price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest thereon to February 18, 1999. The tender offer was
commenced on January 14, 1999 and expired on February 12, 1999. No Senior Notes
were tendered to Host LP in connection with the tender offer.
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 662/3% of the holders of the outstanding
Certificates affected thereby. The Certificates were issued in the following
classes and pass-through rates of interest.
<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 $371.2 million and $385.5 million at
December 31, 1998 and 1997, respectively. Principal amortization of $14.3
million and $13.3 million of the Class A-1 Certificates were made during 1998
and 1997, respectively. The weighted average interest rate on the Certificates
was 7.8% for 1998 and 1997, and the average interest rates were 7.8% at December
31, 1998 and 1997.
The Certificates/Mortgage Loan maturities are as follows (in thousands):
1999 $ 15,443
2000 16,642
2001 17,934
2002 19,326
2003 20,827
Thereafter 281,052
$ 371,224
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 as discussed in Note 7 and (v) for
distributions to the partners of the Partnership. The net assets (all of which
are restricted) of Associates was $87.3 million and $81.0 million as of December
31, 1998 and 1997, respectively.
Prepayments of the Mortgage Loan are permitted with the payment of a premium
(the "Prepayment Premium"). The Prepayment Premium is equal to the greater of
(i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance
amount based on a spread of .25% or .55% over the U.S. treasury rate, as
defined.
Pursuant to the terms of the Certificate/Mortgage Loan, the Partnership is
required to establish with the lender a separate escrow account for payments of
insurance premiums and real estate taxes for each mortgaged property if the
credit rating of MII is downgraded by Standard and Poor's Rating Services. The
Manager, Courtyard Management Corporation, is a wholly-owned subsidiary of MII.
In March 1997, MII acquired the Renaissance Hotel Group N.V.. 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. 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.
<PAGE>
NOTE 6. LEASES
The land on which 53 of the Hotels are located is leased from affiliates of MII.
In addition, eight of the Hotels are located on land leased from third parties.
The land leases have remaining terms (including all renewal options) expiring
between the years 2024 and 2068. The MII land leases and the third party land
leases provide for rent based on specific percentages (from 2% to 15%) of
certain revenue categories subject to minimum amounts. The minimum rentals are
adjusted at various anniversary dates throughout the lease terms, as defined in
the agreements. The Partnerships 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 affiliates of MII
and affiliates to Associates. Additionally, affiliates of MII agreed to defer
receipt of their ground lease payments to the extent that the Partnership or
Associates has insufficient funds for debt service payments on the Senior Notes
and the Mortgage Loan.
Minimum future rental payments during the term of these operating leases are as
follows (in thousands):
Telephone
Lease Land Equipment and Other
Year Leases Leases
----------- ----------- --------------
1999 $ 9,230 $ 490
2000 9,230 361
2001 9,230 187
2002 9,230 132
2003 9,230 96
Thereafter 523,753 --
----------- -------------
$ 569,903 $ 1,266
=========== =============
Total rent expense on land leases was $12,921,000 for 1998, $12,480,000 for 1997
and $11,899,000 for 1996.
NOTE 7. MANAGEMENT AGREEMENT
To facilitate the refinancing, effective December 30, 1995, the original
management agreement was restated into two separate management agreements.
Associates entered into a management agreement with the Manager for the 69
Hotels which Associates directly owns and Associates II entered into a
management agreement for the Deerfield Hotel which Associates II owns,
collectively, (the "Management Agreement").
Term
The Management Agreement has an initial term expiring in 2013. The Manager may
renew the term, as to one or more of the Hotels, at its option, for up to three
successive terms of 10-years each and one final term of five years. The
Partnership may terminate the Management Agreement if, during any three
consecutive years after 1992, specified minimum operating results are not
achieved. However, the Manager may prevent termination by paying to the
Partnership the amount by which the minimum operating results were not achieved.
Management Fees
The Management Agreement provides for annual payments of (i) the base management
fee equal to 3.5% of gross revenues from the Hotels, (ii) the Courtyard
management fee equal to 2.5% of gross revenues from the Hotels, and (iii) the
incentive management fee equal to 15% of operating profit, as defined (20% of
operating profit after the Partners have received refinancing proceeds equal to
50% of the excess of (a) $154,736,842 over (b) cumulative distributions of
adjusted sale proceeds (the "First Equity Refinancing")).
Deferral Provisions
Due to the refinancing, beginning in 1996, one percent of the Courtyard
management fee is deferred through maturity of the Senior Notes and the Mortgage
Loan to the extent that the Partnership or Associates has insufficient funds for
debt service
<PAGE>
payments on the Senior Notes and the Mortgage Loan. Previously, the entire
Courtyard management fee was subordinate to debt service.
To the extent any Courtyard management fee, base management fee or incentive
management fee is deferred, it will be added to deferred management fees.
Deferred management fees accrue without interest, and will be payable out of 50%
of available cash flow after payment of certain priorities as discussed below.
The priority return to the Partnership, as defined, 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 9%, 8% and 7% of invested capital for 1998, 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.
During 1998 and 1997, $415,000 and $1,613,000, respectively, of deferred
incentive management fees were paid. Deferred incentive management fees were
$4,169,000 and $4,584,000 as of December 31, 1998 and 1997, respectively.
Deferred Courtyard management fees totaled $22,341,000 as of December 31, 1998
and 1997. Deferred base management fees as of December 31, 1998 and 1997 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. In addition, the Hotels
participate in MII's Marriott Reward Program ("MRP"). The costs of this program
are charged to all hotels in the full-service, Residence Inn by Marriott,
Courtyard by Marriott and Fairfield Inn by Marriott systems based upon the MRP
revenues at each Hotel. Chain Services and MRP costs charged to the partnership
under the Management Agreement were $11,673,000 in 1998 and $10,257,000 in 1997.
The total amount of Chain Services was $9,474,000 in 1996.
Working Capital
The Partnership is required to provide the Manager with working capital and
fixed asset supplies to meet the operating needs of the Hotels. 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. In 1998, this $2,500,000 was
returned to the Partnership. Upon termination of the Management Agreement, the
working capital and supplies will be returned to the Partnership. As of December
31, 1998 and 1997, the working capital balance was $6,261,000 and $8,761,000,
respectively. The 1998 balance includes the $8,846,000 originally advanced and
$2,500,000 advanced on January 24, 1996 less the $2,585,000 of excess working
capital returned to the Partnership in 1991 and the $2,500,000 returned to the
Partnership in 1998. At December 31, 1998 and 1997, 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 further downgrade in the long-term senior unsecurred 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.
<PAGE>
Property Improvement Funds
The Management Agreement provides for the establishment of a repairs and
equipment reserve (property improvement fund) for the Hotels. The funding of
this reserve is based on a percentage of gross Hotel revenues. The contribution
to the property improvement fund has been established at 5% for all Hotels and
may be increased, at the option of the Manager, to 6% of gross Hotel revenues in
2001.
NOTE 8. ENVIRONMENTAL CONTINGENCY
Based upon a study completed in December 1995, the Partnership has become aware
of environmental contamination at one of its fee-owned properties, the Deerfield
Hotel, caused by the previous use of the site as a landfill and not caused by
the Partnership. The property represents less than 2% of the Partnership's total
assets and revenues as of December 31, 1998 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
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, 1998 and 1997, and the related consolidated statements of
operations and cash flows for each of the three years in the period ended
December 31, 1998 and the statement of changes in partners' capital for the
years ended December 31, 1998 and 1997 and for the period from January 24, 1996
to December 31, 1996. 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, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the financial statements, Courtyard II Associates,
L.P. has given retroactive effect to the change to include property-level
revenues and operating expenses of its hotels in the consolidated statement of
operations.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 15, 1999
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
Courtyard II Associates, L.P. and Subsidiaries
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
------------- ------------- ---------
<S> <C> <C> <C>
HOTEL REVENUES
Rooms.................................................................$ 258,099 $ 248,012 $ 235,861
Food and beverage..................................................... 17,219 17,436 18,227
Other................................................................. 8,933 9,573 9,619
------------- ------------- -------------
Total hotel revenues................................................ 284,251 275,021 263,707
------------- ------------- -------------
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms................................................................. 55,962 52,404 50,653
Food and beverage..................................................... 14,991 15,145 16,073
Other department costs and expenses................................... 2,928 2,943 2,583
Selling, administrative and other..................................... 67,517 63,299 61,216
------------- ------------- -------------
Total hotel property-level costs and expenses....................... 141,398 133,791 130,525
Depreciation ........................................................... 27,895 28,131 27,062
Base and Courtyard management fees...................................... 17,055 16,501 15,822
Ground rent............................................................. 12,921 12,480 11,899
Incentive management fee................................................ 12,895 12,878 12,040
Property taxes.......................................................... 10,914 9,938 9,537
Insurance and other..................................................... 1,785 1,961 2,468
------------- ------------- -------------
224,863 215,680 209,353
------------- ------------- -------------
OPERATING PROFIT........................................................... 59,388 59,341 54,354
Interest expense........................................................ (30,517) (31,575) (32,463)
Interest income......................................................... 1,981 2,008 2,178
------------- ------------- -------------
NET INCOME BEFORE MINORITY INTEREST........................................ 30,852 29,774 24,069
MINORITY INTEREST.......................................................... 11 12 8
------------- ------------- -------------
NET INCOME.................................................................$ 30,841 $ 29,762 $ 24,061
============= ============= =============
ALLOCATION OF NET INCOME
General Partners........................................................$ 617 $ 595 $ 481
Limited Partner......................................................... 30,224 29,167 23,580
------------- ------------- -------------
$ 30,841 $ 29,762 $ 24,061
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
Courtyard II Associates, L.P. and Subsidiaries
December 31, 1998 and 1997
(in thousands)
1998 1997
------------- ---------
<S> <C> <C>
ASSETS
Property and equipment, net...............................................................$ 463,650 $ 455,435
Deferred financing costs, net of accumulated amortization................................. 10,033 11,139
Due from Courtyard Management Corporation................................................. 8,739 11,318
Other assets.............................................................................. 66 27
Property improvement fund................................................................. 6,466 27,200
Restricted cash........................................................................... 5,407 4,289
Cash and cash equivalents................................................................. 11,933 5,688
------------ -------------
$ 506,294 $ 515,096
============ =============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt.............................................................................$ 371,224 $ 385,555
Management fees due to Courtyard Management Corporation................................... 34,414 34,829
Due to Marriott International, Inc. and affiliates........................................ 8,931 9,050
Accounts payable and accrued liabilities.................................................. 4,347 4,660
------------ -------------
Total Liabilities................................................................... 418,916 434,094
MINORITY INTEREST............................................................................ 31 20
------------ -------------
418,947 434,114
------------ -------------
PARTNERS' CAPITAL (See discussion of distribution restrictions in Note 2)
General Partners.......................................................................... 1,760 1,621
Limited Partner........................................................................... 85,587 79,361
------------ -------------
Total Partners' Capital............................................................. 87,347 80,982
------------ -------------
$ 506,294 $ 515,096
============ =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF
CHANGES IN PARTNERS' CAPITAL
Courtyard II Associates, L.P. and Subsidiaries
For the Years Ended December 31, 1998 and 1997
and the Period from January 24, 1996 through December 31, 1996
(in thousands)
General Limited
Partners Partner Total
<S> <C> <C> <C>
Initial capitalization as of January 24, 1996 $ 1,489 $ 72,938 $ 74,427
Capital distributions..................................................... (348) (17,030) (17,378)
Net income................................................................ 481 23,580 24,061
----------- ----------- -----------
Balance, December 31, 1996................................................... 1,622 79,488 81,110
Capital distributions..................................................... (596) (29,294) (29,890)
Net income................................................................ 595 29,167 29,762
----------- ----------- -----------
Balance, December 31, 1997................................................... 1,621 79,361 80,982
Capital distributions..................................................... (478) (23,998) (24,476)
Net income................................................................ 617 30,224 30,841
----------- ----------- -----------
Balance, December 31, 1998...................................................$ 1,760 $ 85,587 $ 87,347
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Courtyard II Associates, L.P. and Subsidiaries
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
----------- ----------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.....................................................................$ 30,841 $ 29,762 $ 24,061
Noncash items:
Depreciation................................................................. 27,895 28,131 27,062
Amortization of deferred financing costs as interest......................... 1,106 1,105 1,195
Deferred management fees..................................................... -- -- 633
Minority Interest............................................................ 11 12 8
Changes in operating accounts:
Due from Courtyard Management Corporation.................................... 79 1,997 (3,737)
Management fees due to Courtyard Management Corporation...................... (415) (1,613) --
Accounts payable and accrued liabilities..................................... (1,565) (1,030) (2,309)
Due to Host Marriott Corporation............................................. (32) 15 (798)
Prepaid expenses............................................................. 8 1 (28)
----------- ----------- ----------
Cash provided by operations.............................................. 57,928 58,380 46,087
----------- ----------- -----------
INVESTING ACTIVITIES
Additions to property and equipment, net....................................... (36,110) (24,879) (11,269)
Change in property improvement fund............................................ 20,734 9,382 (3,484)
Working capital returned by/(advanced to) Courtyard Management Corporation..... 2,500 -- (2,500)
------------ ---------- ---------
Cash used in investing activities........................................ (12,876) (15,497) (17,253)
----------- ----------- ----------
FINANCING ACTIVITIES
Capital distributions.......................................................... (24,476) (29,890) (17,378)
Repayment of principal......................................................... (14,331) (13,298) (11,347)
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
----- ----- ------
Cash used in financing activities........................................ (38,807) (43,197) (22,832)
----------- ----------- ----------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS $ 6,245 $ (314) $6,002
CASH AND CASH EQUIVALENTS at beginning of year.................................... 5,688 6,002 --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of year..........................................$ 11,933 $ 5,688 $ 6,002
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage and other interest......................................$ 29,412 $ 30,469 $ 33,978
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Courtyard II Associates, L.P. and Subsidiaries
December 31, 1998 and 1997
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 5). 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 5). Associates directly owns 69 Courtyard hotels and
the land on which certain of the Hotels, as defined below, are located. One
hotel located in Deerfield, Illinois (the "Deerfield Hotel"), is owned by CBM
Associates II LLC ("Associates II"). Associates hold a 99% membership interest
in Associates II and Courtyard II Associates Management Corporation holds the
remaining 1% interest in Associates II. The 70 hotel properties (the "Hotels")
are located in 29 states in the United States: 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.
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. 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 5.
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;
<PAGE>
such distributions are restricted only upon a monetary event of default under
the Mortgage Loan, as defined in Note 5. 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 7,
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 primarily represent the gross revenues generated by Associates' Hotels.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus on EITF 97-2, "Application of
FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements."
EITF 97-2 addresses the circumstances in which a management entity may include
the revenues and expenses of a managed entity in its financial statements.
Associates considered the impact of EITF 97-2 on its consolidated financial
statements and determined that EITF 97-2 requires Associates to include
property-level revenues and operating expenses of its Hotels in its consolidated
statement of operations. Associates has given retroactive effect to the adoption
of EITF 97-2 in the accompanying consolidated statement of operations.
Application of EITF 97-2 to the financial statements for the fiscal years ended
December 31, 1998, 1997 and 1996 increased both revenues and operating expenses
by approximately $141.4 million, $133.8 million and $130.5 million,
respectively, and had no impact on operating profit or net income.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets as follows:
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 5.
<PAGE>
Associates assesses impairment of its real estate properties based on whether
estimated undiscounted future cash flows from such properties on an individual
hotel basis will be less than their net book value. If a property is impaired,
its basis is adjusted to fair market value. There was no such adjustment
required at December 31, 1998 or 1997.
Deferred Financing Costs
Financing costs are amortized using the straight-line method, which approximates
the effective interest rate method, over the remaining life of the respective
mortgage debt At December 31, 1998 and 1997, accumulated amortization related to
the Certificates, as defined in Note 5, were $3,234,000 and $2,128,000,
respectively.
Cash and Cash Equivalents
Associates considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Restricted Cash
Restricted cash represents the real estate tax and insurance reserve established
pursuant to the terms of the Certificates/Mortgage Loan as described in Note 5.
Ground Rent
The land leases with MII or affiliates of MII (see Note 6) include scheduled
increases in minimum rents per property. These scheduled rent increases, which
are included in minimum lease payments, are being recognized by 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 1998, 1997 and 1996 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. 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 $5,600,000 and $7,505,000, respectively as of
December 31, 1998 and 1997.
Reclassifications
Certain reclassifications were made to the prior year financial statements to
conform to the 1998 presentation.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
1998 1997
------------- ---------
Land.............................................$ 25,392 $ 25,392
Leasehold improvements........................... 456,936 442,226
Building and improvements........................ 85,448 87,546
Furniture and equipment.......................... 178,748 155,250
------------- -------------
746,524 710,414
Less accumulated depreciation.................... (282,874) (254,979)
------------- ------------
$ 463,650 $ 455,435
============= =============
<PAGE>
<TABLE>
<CAPTION>
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The
fair values of financial instruments not included in this table are
estimated to be equal to their carrying amounts (in thousands):
As of December 31, 1998 As of December 31, 1997
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
Mortgage debt.................................................$ 371,224 $ 386,430 $ 385,555 $ 402,358
Management fees due to Courtyard
Management Corporation.....................................$ 34,414 $ 18,735 $ 34,829 $ 22,000
The 1998 and 1997 estimated fair value of debt obligations were based on
the quoted market prices at December 31, 1998 and 1997, respectively.
Management fees due to the Manager are valued based on the expected future
payments from operating cash flow discounted at risk adjusted rates.
</TABLE>
NOTE 5. MORTGAGE DEBT
On January 24, 1996, the Partnership and Associates completed two refinancings
of the existing debt through the private placements of $127.4 million of Senior
Notes and $410.2 million of multiclass commercial mortgage pass-through
certificates, respectively.
The Certificates were issued by CBM Funding for an initial principal amount of
$410.2 million. Proceeds from the sale of the Certificates were utilized by CBM
Funding to provide a mortgage loan (the "Mortgage Loan") to Associates. The
Certificates/Mortgage Loan require monthly payments of principal and interest
based on a 17-year amortization schedule. The Mortgage Loan matures on January
28, 2008. However, the maturity date of the Certificates/Mortgage Loan may be
extended until January 28, 2013 with the consent of 662/3% of the holders of the
outstanding Certificates affected thereby. The Certificates were issued in the
following classes and pass-through rates of interest.
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 $371.2 million and $385.5 million at
December 31, 1998 and 1997, respectively. Principal amortizations of $14.3
million and $13.3 million of the Class A-1 Certificates were made during 1998
and 1997, respectively. The weighted average interest rate for the Certificates
was 7.8% for 1998 and 1997 and the average interest rates were 7.8% at December
31, 1998 and 1997.
<PAGE>
The Certificates maturities are as follows (in thousands):
1999 $ 15,443
2000 16,642
2001 17,934
2002 19,326
2003 20,827
Thereafter 281,052
$ 371,224
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.
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. 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. 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 6. 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 revenue categories subject to minimum amounts. The minimum
rentals are adjusted at various anniversary dates throughout the lease terms, as
defined in the agreements. The Partnership also rents certain equipment for use
in the Hotels.
In connection with the refinancing, the Partnership, as lessee, transferred its
rights and obligations pursuant to the 53 ground leases with 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.
<PAGE>
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
------------- ----------- --------------
1999 9,230 $ 490
2000 9,230 361
2001 9,230 187
2002 9,230 132
2003 9,230 96
Thereafter 523,753 --
$ 569,903 $ 1,266
=========== =============
Total rent expense on land leases was $12,921,000 for 1998, $12,480,000 for 1997
and $11,899,000 for 1996.
NOTE 7. MANAGEMENT AGREEMENT
To facilitate the refinancing, effective December 30, 1995, the original
management agreement was restated into two separate management agreements.
Associates entered into a management agreement with the Manager for the 69
Hotels which Associates directly owns and Associates II entered into a
management agreement for the Deerfield Hotel which Associates II owns,
collectively, (the "Management Agreement").
Term
The Management Agreement has an initial term expiring in 2013. The Manager may
renew the term, as to one or more of the Hotels, at its option, for up to three
successive terms of 10-years each and one final term of five years. The
Partnership may terminate the Management Agreement if, during any three
consecutive years after 1992, specified minimum operating results are not
achieved. However, the Manager may prevent termination by paying to the
Partnership the amount by which the minimum operating results were not achieved.
Management Fees
The Management Agreement provides for annual payments of (i) the base management
fee equal to 3.5% of gross revenues from the Hotels, (ii) the Courtyard
management fee equal to 2.5% of gross revenues from the Hotels, and (iii) the
incentive management fee equal to 15% of operating profit, as defined (20% of
operating profit after the partners have received refinancing proceeds equal to
50% of the excess of (a) $154,736,842 over (b) cumulative distributions of
adjusted sale proceeds (the "First Equity Refinancing")).
Deferral Provisions
Due to the refinancing, beginning in 1996, one percent of the Courtyard
management fee is deferred through maturity of the Senior Notes and the Mortgage
Loan to the extent that the Partnership or Associates has insufficient funds for
debt service payments on the Senior Notes and the Mortgage Loan. Previously, the
entire Courtyard management fee was subordinate to debt service.
To the extent any Courtyard management fee, base management fee or incentive
management fee is deferred, it will be added to deferred management fees.
Deferred management fees accrue without interest, and will be payable out of 50%
of available cash flow after payment of certain priorities as discussed below.
The priority return to the Partnership, as defined, 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
<PAGE>
the Partnership which was 9%, 8% and 7% of invested capital for 1998, 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.
During 1998 and 1997, $415,000 and $1,613,000, respectively, of deferred
incentive management fees were paid. Deferred incentive management fees were
$4,169,000 and $4,584,000 as of December 31, 1998 and 1997, respectively.
Deferred Courtyard management fees totaled $22,341,000 as of December 31, 1998
and 1997. Deferred base management fees as of December 31, 1998 and 1997 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. In addition, the Hotels
participate in MII's Marriott Reward Program ("MRP"). The costs of this program
are charged to all hotels in the full-service, Residence Inn by Marriott,
Courtyard by Marriott and Fairfield Inn by Marriott systems based upon the MRP
revenues at each Hotel. Chain Services and MRP costs charged to the partnership
under the Management Agreement were $11,673,000 in 1998 and $10,257,000 in 1997.
The total amount of Chain Services was $9,474,000 in 1996.
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. In 1998, this $2.5 million was returned
to Associates. Upon termination of the Management Agreement, the working capital
and supplies will be returned to Associates. As of December 31, 1998 and 1997,
the working capital balance was $6,261,000 and $8,761,000, respectively. The
1998 balance includes the $8,846,000 originally advanced and the $2.5 million
advanced on January 24, 1996 less the $2,585,000 of excess working capital
returned to the Partnership in 1991 and the $2,500,000 returned to the
Partnership in 1998. At December 31, 1998 and 1997, 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 ther is a further downgrade in the long-term senior
unsecured debt of MII to a level below the rating which was effective April 1,
1997.
The obligation to fund the amounts required by the Working Capital Agreement is
subordinate to debt service on the Senior Notes and the Mortgage Loan.
Property Improvement Fund
The Management Agreement provides for the establishment of a repairs and
equipment reserve (property improvement fund) for the Hotels. The funding of
this reserve is based on a percentage of gross Hotel revenues. The contribution
to the property improvement fund has been established at 5% for all Hotels and
may be increased, at the option of the Manager, to 6% of gross Hotel revenues in
2001.
<PAGE>
NOTE 8. ENVIRONMENTAL CONTINGENCY
Based upon a study completed in December 1995, Associates has become aware of
environmental contamination at one of the fee-owned properties owned by
Associates II, the Deerfield Hotel, caused by the previous use of the site as a
landfill and not caused by Associates. The property represents less than 2% of
Associates' total assets and revenues as of December 31, 1998 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>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Partnership has no directors or officers. The business and policy making
functions of the Partnership are carried out through the managers and executive
officers of CBM Two LLC, the General Partner, who are listed below: Age at Name
Current Position December 31, 1998
Robert E. Parsons, Jr. President and Manager 43
Christopher G. Townsend Executive Vice President,
Secretary and Manager 51
W. Edward Walter Treasurer 43
Earla L. Stowe Vice President 37
Business Experience
Robert E. Parsons, Jr. joined Host Marriott's Corporate Financial Planning staff
in 1981 and was made Assistant Treasurer in 1988. In 1993, Mr. Parsons was
elected Senior Vice President and Treasurer of Host Marriott, and in 1995, he
was elected Executive Vice President and Chief Financial Officer of Host
Marriott. He also serves as a director, manager and 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, manager and an officer of numerous Host Marriott
subsidiaries.
W. Edward Walter joined Host Marriott in 1996 as Senior Vice President
- - -Acquisitions and in 1998 was made Treasurer of Host Marriott. He also serves as
a director, manager and officer of numerous Host Marriott subsidiaries. Prior to
joining Host Marriott, Mr. Walter was a partner at Trammell Crow Residential
Company and President of Bailey Capital Corporation, a real estate firm focusing
on tax exempt real estate investments.
Earla L. Stowe joined Host Marriott 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, to
Director--Asset Management in 1996. Ms. Stowe was promoted to Senior Director -
Corporate Accounting in 1998.
<PAGE>
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
As noted in Item 10 above, the Partnership has no directors or officers nor does
it have any employees. Under the Partnership Agreement, however, the General
Partner has the exclusive right to conduct the business and affairs of the
Partnership subject only to the Management Agreement described in Items 1 and
13. The General Partner is required to devote to the Partnership such time as
may be necessary for the proper performance of its duties, but the officers and
managers of the General Partner are not required to devote their full time to
the performance of such duties. No officer or manager of the General Partner
devotes a significant percentage of time to Partnership matters. To the extent
that any officer or manager does devote time to the Partnership, the General
Partner is entitled to reimbursement for the cost of providing such services.
For the fiscal years ending December 31, 1998, 1997 and 1996, the Partnership
reimbursed CBM Two or CBM Two LLC in the amount of $274,000, $260,000 and
$221,000, respectively, for the cost of providing all administrative and other
services as general partner. For information regarding all payments made by the
Partnership to Host Marriott and subsidiaries, see Item 13 "Certain
Relationships and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of December 31, 1998, Equity Resource Group owned 6.91% 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 managers of the General Partner, Host Marriott, MII
and their respective affiliates do not own any units as of December 31, 1998.
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
<PAGE>
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 3.5% of gross revenues from the Hotels, (ii) the Courtyard
management fee equal to 2.5% of gross revenues from the Hotels, and (iii) the
incentive management fee equal to 15% of operating profit, as defined (20% of
operating profit after the Partners have received refinancing proceeds equal to
50% of the excess of (a) $154,736,842 over (b) cumulative distributions of
adjusted sale proceeds (the "First Equity Refinancing").
Deferral Provisions
Due to the refinancing, beginning in 1996, one percent of the Courtyard
management fee is deferred through maturity of the Senior Notes and the Mortgage
Loan to the extent that the Partnership or Associates has insufficient funds for
debt service payments on the Senior Notes and the Mortgage Loan. Previously, the
entire Courtyard management fee was subordinate to debt service.
To the extent any Courtyard management fee, base management fee or incentive
management fee is deferred, it will be added to deferred management fees.
Deferred management fees accrue without interest, and will be payable out of 50%
of available cash flow after payment of certain priorities as discussed below.
The priority return to the Partnership, as defined, 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 9%, 8% and 7% of invested capital for 1998, 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 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 1998 and 1997, $415,000 and $1,613,000, respectively, of deferred
incentive management fees were paid. Deferred incentive management fees were
$4,169,000 and $4,584,000 as of December 31, 1998 and 1997, respectively.
Deferred Courtyard management fees totaled $22,341,000 as of December 31, 1998
and 1997. Deferred base management fees totaled $7,904,000 as of December 31,
1998 and 1997.
<PAGE>
Chain Services
The Manager is required to furnish certain services ("Chain Services") which are
furnished generally on a central or regional basis to all hotels managed, owned
or leased in the Courtyard by Marriott hotel system. In addition, the Hotels
participate in MII's Marriott Reward Program ("MRP"). The costs of this program
are charged to all hotels in the full-service, Residence Inn by Marriott,
Courtyard by Marriott and Fairfield Inn by Marriott systems based upon the MRP
revenues at each Hotel. Chain Services and MRP costs charged to the partnership
under the Management Agreement were $11,673,000 in 1998 and $10,257,000 in 1997.
The total amount of Chain Services was $9,474,000 in 1996.
Working Capital
The Partnership is required to provide the Manager with working capital and
fixed asset supplies to meet the operating needs of the Hotels. 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. In 1998, this $2,500,000 was
returned to the Partnership. Upon termination of the Management Agreement, the
working capital and supplies will be returned to the Partnership. As of December
31, 1998 and 1997, the working capital balance was $6,261,000 and $8,761,000,
respectively. The 1998 balance includes the $8,846,000 originally advanced and
the $2,500,000 advanced on January 24, 1996 less the $2,585,000 of excess
working capital returned to the Partnership in 1991 and the $2,500,000 returned
to the Partnership in 1998. At December 31, 1998 and 1997, 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 further downgrade in the long-term senior unsecured debt of MII to a
level below the rating which was effective April 1, 1997.
The obligation to fund the amounts required by the Working Capital Agreement is
subordinate to debt service on the Senior Notes and the Mortgage Loan.
Leases
The land on which 53 of the Hotels are located is leased from affiliates of MII.
In addition, eight of the Hotels are located on land leased from third parties.
The land leases have remaining terms (including all renewal options) expiring
between the years 2024 and 2068. The land leases with affiliates of MII and the
third party land leases provide for rent based on specific percentages (from 2%
to 15%) of certain revenue categories subject to minimum amounts. The minimum
rentals are adjusted at various anniversary dates throughout the lease terms, as
defined in the agreements. The Partnership also rents certain equipment for use
in the Hotels.
<PAGE>
In connection with the refinancing, the Partnership, as lessee, transferred it
rights and obligations pursuant to the 53 ground leases with affiliates of MII
and affiliates to Associates. Additionally, affiliates of MII agreed to defer
receipt of their ground lease payments to the extent that the Partnership or
Associates has insufficient funds for debt service payments on the Senior Notes
and the Mortgage Loan.
Total rent expense on land leases was $12,921,000 for 1998, $12,480,000 for 1997
and $11,899,000 for 1996.
Property Improvement Fund
The Management Agreement provides for the establishment of a repairs and
equipment reserve (property improvement fund) for the Hotels. The funding of
this reserve is based on a percentage of gross Hotel revenues. The contribution
to the property improvement fund has been established initially at 5% for all
Hotels and may be increased, at the option of the Manager, to 6% of gross Hotel
revenues in 2001.
Payments to MII and Subsidiaries
The following table sets forth the amount paid to MII and affiliates under both
the Management Agreement and the ground lease agreements for the years ended
December 31, 1998, 1997 and 1996 (in thousands). The table also sets forth
accrued but unpaid incentive management fees:
1998 1997 1996
----------- ----------- --------
Incentive management fee.............$ 12,895 $ 12,878 $ 11,407
Ground rent.......................... 10,991 10,628 10,172
Chain services allocation............ 11,673 10,257 9,474
Base management fee.................. 9,949 9,626 9,230
Courtyard management fee............. 7,106 6,875 6,592
Deferred incentive management fees... 415 1,613 --
----------- ----------- -----------
$ 53,029 $ 51,877 $ 46,875
=========== =========== ========
Accrued but unpaid fees:
Incentive management fee.............$ -- $ -- $ 633
=========== =========== ===========
Payments to Host Marriott and Subsidiaries
The following sets forth amounts paid by the Partnership to Host Marriott and
its subsidiaries for the years ended December 31, 1998, 1997 and 1996 (in
thousands):
1998 1997 1996
----------- ----------- --------
Administrative expenses reimbursed.......$ 274 $ 260 $ 221
Cash distributions (as a limited partner). 148 212 102
Principal and interest on General Partner
loan.................................... -- -- 7,508
-------- ----------- -----------
$ 422 $ 472 $ 7,831
=========== =========== ===========
<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>
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(3) Exhibits
<S> <C>
Exhibit
Number Description Page
*3.1 Amended and Restated Partnership Agreement of Limited Partnership of
Courtyard by Marriott II Limited Partnership (the "Partnership") dated
October 30, 1987 N/A
*3.2 Amendment No. 1 to the Amended and Restated Agreement of Limited
Partnership of the Partnership N/A
*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 ("Finance") N/A
*3.5 By-laws of Finance N/A
3.6 Agreement of Limited Partnership of Courtyard II Associates, L.P.
("Associates") (Incorporated by reference herein to Exhibit 3.1 to
Associates Form S-4 filed with the Commission on March 14, 1996.) N/A
3.7 Certificate of Limited Partnership of Associates (Incorporated by reference
herein to Exhibit 3.2 to Associates Form S-4 filed with the Commission on
March 14, 1996.) N/A
3.9 By-laws of Funding (Incorporated by reference herein to Exhibit 3.4 to
Associates Form S-4 filed with the Commission on March 14, 1996.) N/A
3.10 Second Amendment to the Amended and Restated Agreement of Limited
Partnership of the Partnership dated December 28, 1998 76
<PAGE>
*4.1 Indenture dated as of January 24, 1996 among the Partnership and Finance
and IBJ Schroder Bank & Trust Company (the "Indenture") N/A
*4.3 Exchange and Registration Rights Agreement dated as of January 24, 1996
among the Partnership and Finance and Lehman Brothers Inc. N/A
*4.4 Intercreditor Agreement dated as of January 24, 1996 among IBJ Schroder Bank
& Trust Company, Bankers Trust Company, Marine Midland Bank (the "CMBS
Trustee"), the Partnership and Finance, Associates, Courtyard II Associates
Management Corporation (the "Managing General Partner") and Funding N/A
*4.5 Trust and Servicing Agreement dated as of January 1, 1996 among Funding,
Bankers Trust Company and the CMBS Trustee N/A
*4.6 Exchange and Registration Rights Agreement dated as of January 24, 1996
among the Partnership, Associates, Funding and Lehman Brothers Inc. N/A
*10.1 Amended and Restated Management Agreement dated as of December 30, 1995,
between the Partnership and Courtyard Management Corporation (the
"Manager") N/A
*10.2 Management Agreement dated as of December 30, 1995 between the Partnership
and the Manager N/A
**10.3 Assignment of Lease and Warranty and Assumption of Obligations between
Marriott Corporation and the Partnership dated October 30, 1987 for the
Tampa, FL property. Marriott Hotel Land Leases between Holtsinger, Inc. and
Bert Chase, Trustee dated June 13, 1968. N/A
**10.4 Assignment of Lease and Warranty and Assumption of Obligations between
Marriott Corporation and the Partnership dated August 12, 1988 for the
Atlanta-Roswell, GA property. Marriott Hotel Land Lease between Marriott
Corporation and Roswell Landing Associates dated June 10, 1986. N/A
**10.5 Assignment of Lease and Warranty and Assumption of Obligations between
Marriott Corporation and the Partnership dated July 15, 1988 for the
Norwalk, CT property. Marriott Hotel Land Lease between Marriott
Corporation and Mary E. Fabrizio dated January 6, 1986. N/A
**10.6 Assignment of Lease and Warranty and Assumption of Obligations between
Marriott Corporation and the Partnership dated February 24, 1988 for the
Fresno, CA property. Marriott Hotel Land Lease between Marriott Corporation
and Richard Erganian, Miche Erganian, Aram Erganian and Aznive Erganian
dated June 6, 1984. N/A
**10.7 Assignment of Lease and Warranty and Assumption of Obligations between
Marriott Corporation and the Partnership dated August 12, 1988 for the
Cupertino, CA property. Marriott Hotel Land Lease between Marriott
Corporation and Vallco Park, Ltd. dated March 31, 1987. N/A
**10.8 Marriott Hotel Land Lease between Marriott Corporation and Pizzagalli
Investment Company dated September 22, 1986. N/A
**10.9 Assignment of Lease and Warranty and Assumption of Obligations between
Marriott Corporation and the Partnership dated May 19, 1989 for the
Charlotte South Park, NC property. Marriott Hotel Land Lease between
Marriott Corporation and Queens Properties, Inc. dated January 19, 1987. N/A
**10.10 Assignment of Lease and Warranty and Assumption of Obligations between
Marriott Corporation and the Partnership dated January 27, 1989 for the
Philadelphia/Devon, PA property. Marriott Hotel Land Lease between Marriott
Corporation and Three Philadelphia/Devon Square Associates dated July 15,
1986. N/A
<PAGE>
**10.11 Associates received an assignment from the Partnership, which had
received an assignment from Host Marriott, of 15 ground leases for land that
Host Marriott had previously leased from various affiliates (the "Original
Landlords"). The ground leases are identical in all material respects except as
to their assignment dates to the Partnership and the rents due (Exhibit A of
each ground lease). The schedule below sets forth the terms of each ground lease
not filed which differ from the copy of the example ground lease (Hoover, AL)
which was previously filed with the Commission. In addition, a copy of Exhibit A
was filed for each excluded ground lease. N/A
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 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. N/A
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
<PAGE>
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, the Managing General Partner and Associates N/A
***10.14 Bill of Sale and Assignment and Assumption Agreement dated as of
January 24, 1996 by the Partnership to Associates N/A
*10.15 Assignment and Assumption of Management Agreement dated as of January 24,
1996 by the Partnership to Associates N/A
***10.16 Contribution Agreement dated as of January 24, 1996 among the
Partnership, the Managing General Partner and Courtyard II Associates LLC
("Deerfield LLC") N/A
***10.17 Bill of Sale and Assignment and Assumption Agreement dated as of
January 24, 1996 by the Partnership to Deerfield LLC N/A
*10.18 Deed to the Courtyard by Marriott Hotel in Chicago/Deerfield, Illinois
dated as of January 24, 1996 by the Partnership to Deerfield LLC N/A
*10.19 Assignment and Assumption of Management Agreement dated as of January 24,
1996 by the Partnership to Deerfield LLC N/A
*10.20 Loan Agreement dated as of January 24, 1996 by and between Associates and
Funding N/A
*10.21 Mortgage Note, dated as of January 24, 1996, in the principal amount of
$410,200,000 by Associates to Funding N/A
*10.22 Security Agreement dated as of January 24, 1996 by and between Associates
and Funding N/A
*10.23 Pledge Agreement dated as of January 24, 1996 by and between Associates
and Funding N/A
*10.24 Collateral Assignment of Management Agreement and Subordination Agreement
dated as of January 24, 1996, by and among Associates, the Manager and
Funding N/A
*10.25 Amendment of Ground Leases dated as of January 24, 1996 by and among
Associates, Marriott International, Inc. and Essex House Condominium
Corporation ("Essex") N/A
*10.26 Environmental Indemnity Agreement dated as of January 24, 1996 by
Associates and the Managing General Partner for the benefit of Funding N/A
<PAGE>
*10.27 Associates, as mortgagor, and Funding, as mortgagee, entered into 53 fee
and leasehold mortgages, each dated as of January 24, 1996. The 53
mortgages are identical in all material respects except as to the
underlying property to which they relate and, in certain instances,
additional parties thereto. The schedule below sets forth the terms of each
mortgage not filed which differ from the copy of the example mortgage
(Birmingham/Hoover, AL) which is filed herewith. N/A
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
<PAGE>
Charlottesville VA MII
Manassas VA MII
Seattle/Southcenter WA MII
*10.28 Associates, as mortgagor, and Funding, as mortgagee, entered into 16 fee
leasehold mortgages, each dated as of January 24, 1996. The 16 mortgages
are identical in all material respects except as to the underlying property
to which they relate. The schedule below sets forth the terms of each
mortgage not filed which differ from the copy of the example mortgage
(Birmingham/Homewood, AL) which is filed herewith. N/A
Property State
Birmingham/Homewood AL
Cupertino CA
Fresno CA
Denver Airport CO
Norwalk CT
Tampa/Westshore FL
Atlanta Airport South GA
Atlanta/Roswell GA
Arlington Heights South IL
Chicago/Lincolnshire IL
Chicago/Oakbrook Terrace IL
Rockford IL
Poughkeepsie NY
Charlotte/South Park NC
Philadelphia/Devon PA
Dallas/Plano TX
*10.29 Assignment of Loan Documents dated as of January 24, 1996 by Funding to
the CMBS Trustee N/A
10.30 Assignment and Assumption of Management Agreement dated as of January 24,
1996 by the Partnership to Associates with attached Management Agreement
(Incorporated by reference herein to Exhibit 10.1 to Associates Form S-4
filed with the Commission on March 14, 1996.) N/A
0
10.31 Working Capital Maintenance Agreement dated as of January 24, 1996, by and
among the Partnership, Associates, and the Manager. (Incorporated by
reference to the exhibit previously filed as exhibit number 10.23 in
Amendment No. 1 to Form S-4 Exchange Offer filed by CBM Funding and
Associates with the Commission in May 10, 1996.) N/A
*21.1Subsidiaries of the Partnership N/A
</TABLE>
<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
A Form 8-K was filed with the Securities and Exchange Commission
on October 16, 1998. In this filing, Item 5--Other Events
discloses that the General Partner sent a letter dated October 1,
1998 to inform the limited partners that the proposed
Consolidation to form a new REIT focused on limited service
hotels is no longer being pursued. In addition, the letter
informs the limited partners that, to date, there have been no
acceptable offers from third parties to purchase the
Partnership's hotels. A copy of the letter was included as an
Item 7--Exhibit in this Form 8-K filing.
A Form 8-K was filed with the Securities and Exchange Commission
on December 11, 1998. In this filing, Item 5 - Other Events
discloses that on June 11, 1998, September 16, 1998 and December
10, 1998 the General Partner sent to the Limited Partners of the
Partnership a letter that accompanied the Partnership's Quarterly
Reports on Form 10-Q. Each letter disclosed the quarterly
activities of the Partnership. Copies of these letters were
included as Item 7 - Exhibits in this Form 8-K filing.
.
A Form 8-K was filed with the Securities and Exchange Commission
on January 14, 1999. In this filing, Item 1 - Changes in Control
of Registrant discloses the merger of CBM Two into the General
Partner with the General Partner assuming all of the obligations
of CBM Two under the Partnership Agreement. It also details the
transfers of the General Partner's ownership interest which
ultimately resulted in a General Partner with a Class A 1%
managing economic interest owned by Host LP and a Class B 99%
non-managing economic interest owned by Rockledge.
A Form 8-K was filed with the Securities and Exchange Commission
on February 19, 1999. In this filing, Item 5-Other Events
discloses that the events described in the Partnership's Current
Report on Form 8-K, filed with the Securities and Exchange
Commission on January 14, 1999 resulted in a "Change of Control"
under the terms of the Senior Notes. As a result, pursuant to the
terms of the indenture, Host LP and Finance commenced a tender
offer for the Senior Notes at a purchase price equal to 101% of
the aggregate principal amount thereof, plus accrued and unpaid
interest thereon to February 18, 1999. The tender offer was
commenced on January 14, 1999 and expired on February 12, 1999. No
Senior Notes were tendered to Host LP in connection with the
tender offer.
<PAGE>
<TABLE>
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SCHEDULE I
Page 1 of 4
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
December 31, December 31,
1998 1997
--------------- ----------
ASSETS
<S> <C> <C>
Investments in restricted subsidiaries ..........................................................$ 87,347 $ 80,982
Other assets..................................................................................... 4,260 4,714
Restricted cash.................................................................................. 11,847 8,923
Cash and cash equivalents........................................................................ 5,970 8,002
--------------- ---------------
Total Assets..............................................................................$ 109,424 $ 102,621
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Debt..........................................................................................$ 127,400 $ 127,400
Accounts payable and accrued expenses......................................................... 5,914 5,918
--------------- ---------------
Total liabilities......................................................................... 133,314 133,318
--------------- ---------------
PARTNERS' CAPITAL (DEFICIT)
General Partner
Capital contribution........................................................................ 11,306 11,306
Cumulative net losses....................................................................... (3,609) (4,456)
Capital distributions....................................................................... (278) (278)
--------------- ---------------
7,419 6,572
--------------- ---------------
Limited Partners
Capital contributions, net of offering costs of $17,189..................................... 129,064 129,064
Cumulative net losses....................................................................... (68,573) (84,676)
Capital distributions....................................................................... (91,647) (81,504)
Investor notes receivable................................................................... (153) (153)
--------------- ---------------
(31,309) (37,269)
--------------- --------------
Total Partners' Deficit................................................................... (23,890) (30,697)
--------------- --------------
$ 109,424 $ 102,621
=============== ===============
The Notes to the 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.
40
<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, 1998, 1997, and 1996
(in thousand)
1998 1997 1996
------------- ------------- ---------
Revenues......................................................................$ -- $ -- $ 15,520
Operating costs and expenses.................................................. -- -- (13,637)
------------ ------------- ------------
Opearting profit before Partnership expenses and interest..................... -- -- 1,883
Interest income............................................................... 695 690 735
Interest expense.............................................................. (14,169) (14,203) (15,804)
Partnership expense........................................................... (428) (570) (344)
------------- ------------- ------------
Loss before equity in earnings of restricted subsidiaries..................... (13,902) (14,083) (13,530)
Equity in earnings of restricted subsidiaries................................. 30,852 29,774 24,071
------------- ------------- ------------
Net income...............................................................$ 16,950 $ 15,691 $ 10,541
============= ============= ============
The Notes to the 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.
41
<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, 1998, 1997, and 1996
(in thousand)
1998 1997 1996
------------- ------------- -----------
Cash used in operations.........................................$ (13,440) $ (13,557) (6,659)
INVESTING ACTIVITIES
Dividends from restricted subsidiaries, net.................. 24,476 29,890 17,203
Change in working capital reserve............................ (2,925) (2,075) --
Contribution to Associates................................... -- -- (10,627)
------------- ------------- ----------
Cash provided by investing activities...... ............. 21,551 27,815 6,576
------------- ------------- ----------
FINANCING ACTIVITIES
Capital distributions......................................... (10,143) (14,479) (6,983)
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................................ (10,143) (14,450) (19,431)
------------- ------------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS............................ (2,032) (192) (19,514)
CASH AND CASH EQUIVALENTS at beginning of year................... 8,002 8,194 27,708
------------- ------------- ---------
CASH AND CASH EQUIVALENTS at end of year.........................$ 5,970 $ 8,002 $ 8,194
============= ============= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest on debt............................$ 13,702 $ 13,738 $ 8,312
============= ============= =========
</TABLE>
The Notes to the 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.
<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") presents the financial position,
results of operations and cash flows of the Partnership with the investment
in, and operations of, consolidated subsidiaries with restricted net assets
accounted for on the equity method of accounting.
On January 24, 1996, the Partnership completed a refinancing of the
Partnership's existing debt through the private placement of $127.4 million
of senior secured notes (the "Senior Notes") and $410.2 million of
multi-class commercial mortgage pass-through certificates (the
"Certificates").
In connection with the refinancing, the limited partners approved certain
amendments to the partnership agreement and the management agreement. The
partnership agreement amendment, among other things, allowed for the
formation of certain subsidiaries of the Partnership, including Courtyard
II Finance Company ("Finance"), a wholly-owned subsidiary of the
Partnership, who along with the Partnership is the co-issuer of the Senior
Notes.
Additionally, the Partnership formed a wholly-owned subsidiary, Courtyard
II Associates Management Corporation ("Managing General Partner"). Managing
General Partner was formed to be the managing general partner with a 1%
general partner interest in Courtyard II Associates, L.P. ("Associates"), a
Delaware limited partnership. The Partnership owns a 1% general partner
interest and a 98% limited partner interest in Associates. On January 24,
1996, the Partnership contributed 69 Hotels and their related assets to
Associates. Formation of Associates resulted in the Partnership's primary
assets being its direct and indirect interest in Associates. Substantially
all of Associates' net equity is restricted to distributions, loans or
advances to the Partnership.
Associates holds a 99% membership interest in CBM Associates II LLC
("Associates II") and Managing General Partner holds the remaining 1%
membership interest. On January 24, 1996, the Partnership contributed the
Hotel located in Deerfield, IL (the "Deerfield Hotel") and its related
assets to Associates and the Managing General Partner simultaneously
contributed the Hotel and its related assets to Associates II.
CBM Funding Corporation ("CBM Funding"), a wholly-owned subsidiary of
Associates, was also formed to make a mortgage loan (the "Mortgage Loan")
to Associates from the proceeds of the sale of the Certificates.
Associates is a restricted subsidiary of the Partnership and is accounted
for under the equity method of accounting on the accompanying condensed
financial information of the Partnership.
B) As discussed above, on January 24, 1996, the Senior Notes of $127.4 million
were issued by the Partnership and Finance. The Senior Notes bear interest
at 10 3/4%, require semi-annual payments of interest and require no
payments of principal until maturity on February 1, 2008. The Senior Notes
are secured by a first priority pledge by the Partnership of (i) its 99%
partnership interest (consisting of a 98% limited partner interest and a 1%
general partner interest) in Associates and (ii) its 100% equity interest
in the Managing General Partner. Finance has nominal assets, does not
conduct any operations and does not provide any additional security for the
Senior Notes.
In connection with the Host Marriott's conversion to a REIT, a change of
control occurred when Host Marriott ceased to own, directly or indirectly,
all of the outstanding equity interest of the sole general partner of the
Partnership. Although such a change of control has occurred, Host REIT
continues to own, indirectly, a substantial majority of the economic
interest in CBM Two LLC, the current General Partner of the Partnership
and, through Host LP, has certain voting rights with respect to CBM Two
LLC.
<PAGE>
The change in control described above resulted in a "Change in Control"
under the indenture governing the Senior Notes. As a result, in accordance
with the terms of the indenture, Host LP commenced a tender offer for the
Senior Notes at a purchase price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest thereon to February 18,
1999. The tender offer was commenced on January 14, 1999 and expired on
February 12, 1999. No Senior Notes were tendered to Host LP in connection
with the tender offer.
C) The accompanying statement of operations reflect the equity in earnings of
restricted subsidiaries after elimination of interest expense (see Note B).
42
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE III
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(in thousands)
Initial Costs Gross Amount at December 31, 1998
----------------------- -----------------------------------------
Subsequent Leasehold,
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 $ 48,819 $25,392 $ 542,384 $ 567,776 $ 145,070
=============== ======= ============ ======== ======= ============ ========== =========
Date of
Completion of Date Depreciation
Construction Acquired Life
70 Courtyard by 1987-1990 1987-1990 40 years
Marriott Hotels
</TABLE>
<TABLE>
<CAPTION>
Notes:
1996 1997 1998
------------- ------------- --------
<S> <C> <C> <C>
(a) Reconciliation of Real Estate:
Balance at beginning of year....................................$ 538,358 $ 542,872 $ 555,164
Capital Expenditures............................................ 4,514 12,292 14,710
Dispositions/reclassifications.................................. -- -- (2,098)
------------- ------------- -------------
Balance at end of year..........................................$ 542,872 $ 555,164 $ 567,776
============= ============= =============
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of year....................................$ 97,726 $ 112,473 $ 128,448
Depreciation.................................................... 14,747 15,975 16,622
Balance at end of year..........................................$ 112,473 $ 128,448 $ 145,070
(c) The aggregate cost of land, buildings and
improvements for Federal income tax purposes
is approximately $561.3 million at December 31, 1998.
</TABLE>
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 31st of March,
1999.
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
By: CBM TWO LLC
General Partner
/s/ Earla L. Stowe
Earla L. Stowe
Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
the capacities and on the date indicated above.
Signature Title
(CBM TWO LLC)
/s/ Robert E. Parsons, Jr. President and Manager
Robert E. Parsons, Jr.
/s/ Christopher G. Townsend Executive Vice President, Secretary and Manager
Christopher G. Townsend
/s/ W. Edward Walter Treasurer
W. Edward Walter
/s/ Earla L. Stowe Vice President
Earla L. Stowe
44
<PAGE>
Exhibit 3.10
SECOND AMENDMENT TO AMENDED AND
RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP
THIS SECOND AMENDMENT TO AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP (this "Second
Amendment"), dated as of December 28, 1998, is entered into by CBM Two LLC, a
Delaware limited liability company, as general partner (the "General Partner"),
of Courtyard By Marriott II Limited Partnership (the "Partnership"), for itself
and on behalf of the limited partners of the Partnership.
WHEREAS, the Partnership was formed pursuant to a Certificate of
Limited Partnership filed with the Office of the Secretary of State of the State
of Delaware on August 31, 1987;
WHEREAS, in connection with certain restructuring transactions
involving its parent company, CBM Two Corporation merged with and into the
General Partner, a newly formed Delaware limited liability company; and
WHEREAS, in accordance with Section 11.02 of the Partnership Agreement,
the General Partner wishes to amend the Partnership Agreement to reflect its
successor name by merger and to make certain clean up changes.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the General Partner hereby amends the Partnership Agreement as
follows:
1. The introductory paragraph of the Partnership Agreement is hereby
amended to replace the phrase "CBM Two Corporation, a Delaware corporation"
with the phrase "CBM Two LLC, a Delaware limited liability company."
2. The definitions of "General Partner" and "Host" in Section 1.01 of the
Partnership Agreement are hereby amended and restated in their entirety as
follows:
"General Partner" means CBM Two LLC, a Delaware limited liability company,
in its capacity as general partner of the Partnership, and its successors
and assigns.
"Host" means Host Marriott Corporation, a Delaware corporation, and its
successors and assigns.
<PAGE>
3. Section 3.01 of the Partnership Agreement is hereby amended and restated
in its entirety as follows:
Section 3.01. General Partner. The General Partner of the Partnership is
and shall be CBM Two LLC, a Delaware limited liability company, in its
capacity as general partner of the Partnership, and its successors and
assigns, having its principal executive offices at 10400 Fernwood Road,
Bethesda, Maryland 20817.
4. All defined terms contained in this Second Amendment, unless otherwise
defined herein, shall have the meaning contained in the Partnership
Agreement. Except as modified herein, all terms and conditions of the
Partnership Agreement shall remain in full force and effect, which terms
and conditions the General Partner hereby ratifies and affirms.
[Page Break Intentionally Inserted]
45
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Second Amendment as
of the date first set forth above.
CBM TWO LLC, as the successor General Partner of Courtyard By Marriott II
Limited Partnership and on behalf of existing Limited Partners
By: /s/ Christopher G. Townsend
Name: Christopher G. Townsend
Title: Executive Vice President
46
<PAGE>
<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 $
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 17,903
<SECURITIES> 38,048
<RECEIVABLES> 8,739
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 64,690
<PP&E> 746,524
<DEPRECIATION> (282,874)
<TOTAL-ASSETS> 528,340
<CURRENT-LIABILITIES> 53,606
<BONDS> 498,624
0
0
<COMMON> 0
<OTHER-SE> (23,890)
<TOTAL-LIABILITY-AND-EQUITY> 528,340
<SALES> 284,251
<TOTAL-REVENUES> 286,927
<CGS> (141,398)
<TOTAL-COSTS> (141,398)
<OTHER-EXPENSES> (83,893)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (44,686)
<INCOME-PRETAX> 16,950
<INCOME-TAX> 0
<INCOME-CONTINUING> 16,950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,950
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
