Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
OR
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number: 0-28222
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 52-1604506
- ------------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10400 Fernwood Road
Bethesda, Maryland 20817
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(Address of principal (Zip Code)
executive offices)
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
<PAGE>
TABLE OF CONTENTS
PAGE NO.
PART I
Item 1. Business.....................................................3
Item 2. Properties..................................................10
Item 3. Legal Proceedings...........................................14
Item 4. Submissions of Matters to a Vote of Security Holders........15
PART II
Item 5. Market For The Partnership's Limited Partnership Units and
Related Security Holder Matters.............................15
Item 6. Selected Financial Data.....................................17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................17
Item 8. Financial Statements and Supplementary Data.................22
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure....................................38
PART III
Item 10. Directors and Executive Officers............................38
Item 11. Management Remuneration and Transactions....................39
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................39
Item 13. Certain Relationships and Related Transactions..............39
PART IV
Item 14. Exhibits, Supplemental Financial Statement Schedules
and Reports on Form 8-K.....................................43
<PAGE>
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
Certain matters discussed herein are forward-looking statements within the
meaning of the Private Litigation Reform Act of 1995 and as such may involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance or achievements of the Partnership to be different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Although the Partnership, believes the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
attained. 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.
Description of the Partnership
Marriott Hotel Properties II Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed in 1989 to acquire and own (i) the 1,290-room
New Orleans Marriott Hotel and underlying land in New Orleans, Louisiana (the
"New Orleans Hotel"); (ii) the 999-room Marriott Rivercenter Hotel in San
Antonio, Texas (the "San Antonio Hotel"); (iii) the 368-room Bishop Ranch
Marriott Hotel in San Ramon, California (the "San Ramon Hotel") (collectively,
the "Hotels") and to acquire a 50% limited partnership interest in the Santa
Clara Marriott Hotel Limited Partnership (the "Santa Clara Partnership"), a
Delaware limited partnership, which owns the 754-room Santa Clara Marriott Hotel
in Santa Clara, California (the "Santa Clara Hotel"). The remaining 50% interest
in the Santa Clara Partnership is owned by Marriott MHP Two Corporation, the
General Partner, with a 1% interest, and an affiliate of the General Partner,
HMH Properties, Inc., a wholly-owned indirect subsidiary of Host Marriott
Corporation ("Host Marriott"), with a 49% limited partner interest
(collectively, the "Other Santa Clara Partners"). The sole general partner of
the Partnership is Marriott MHP Two Corporation (the "General Partner"), a
Delaware corporation and a wholly-owned indirect subsidiary of Host Marriott.
The San Antonio Hotel, the San Ramon Hotel and the Santa Clara Hotel are located
on sites that are leased from unrelated third parties. See Item 2, "Properties"
below.
Host Marriott, when used herein in reference to a period or date prior to
October 8, 1993, means Marriott Corporation as it existed prior to its division.
The Partnership is engaged solely in the business of owning 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 and the Santa Clara Hotel are operated as part of the Marriott
International, Inc. ("MII") full-service hotel system and are managed by
Marriott Hotel Services, Inc. (the "Manager"), a wholly-owned subsidiary of MII,
under long-term management agreements. The Hotels and the Santa Clara Hotel have
the right to use the Marriott name pursuant to the Management Agreements and the
Santa Clara Management Agreement and, if these management agreements are
terminated, the Partnership and the Santa Clara Partnership will lose the right
for all purposes. See Item 13, "Certain Relationships and Related Transactions."
<PAGE>
The Hotels and the Santa Clara Hotel are among the premier properties in their
markets and are geographically diverse which may balance the Partnership's
exposure to local and regional economic risk. The Partnership also benefits from
the four hotels' diversity of principal market segments served, with an overall
balance between the group/convention, business traveler and leisure traveler
segments. The Partnership has no plans to acquire any new properties or sell any
of the existing properties. See "Competition" below and Item 2, "Properties."
Historically, the Partnership's financing needs have been funded through loan
agreements with independent financial institutions. See "Debt Financing" below.
Organization of the Partnership
On March 20, 1989 (the "Partnership Closing Date"), 745 limited partner
interests (the "Units"), representing a 99% interest in the Partnership, were
sold in a private placement. The offering price per Unit was $100,000, payable
in three annual installments through June 1, 1991 (the "Investor Notes"), or as
an alternative, $89,247 in cash on the Partnership Closing Date as full payment
of the subscription price. A total of 621 Units were purchased on an installment
basis and 124 Units were paid in full. Half Units were offered on similar terms
at proportionate prices, and consequently, there were 420 limited partners as of
December 31, 1997. On the Closing Date, the Partnership executed purchase
agreements (the "Purchase Agreements") with Host Marriott to acquire the Hotels
and the 50% limited partner interest in the Santa Clara Partnership for $319.5
million. Of the total purchase price, $222.5 million was paid from proceeds of
the mortgage loan (see "Debt Financing" below), $43.4 million was evidenced by a
promissory note payable to Host Marriott (the "Deferred Purchase Note"), $43.5
million was paid from a cash distribution by the Santa Clara Partnership and the
remainder from the initial payment on the sale of the Units. The principal
outstanding on the Deferred Purchase Note was fully repaid in 1991, with the
proceeds of the Investor Notes. The General Partner made a capital contribution
of $752,525 for its 1% general partner interest.
The New Orleans Hotel, the San Antonio Hotel and the limited partnership
interest in the Santa Clara Partnership were conveyed to the Partnership on the
Partnership Closing Date. The San Ramon Hotel was conveyed upon completion of
its construction on May 31, 1989.
On June 13, 1996, MHPII Acquisition Corp. (the "Company"), a wholly-owned
subsidiary of Host Marriott, completed a tender offer for the Units in the
Partnership. The Company purchased 377 Units for an aggregate consideration of
$56,550,000 or $150,000 per Unit. Subsequent to the tender offer, the Company
purchased an additional eleven Units in the Partnership. As a result of these
transactions, the Company became the majority limited partner in the
Partnership, owning 387 Units. In 1997, the Company acquired an additional Unit
bringing its total ownership to 388 Units, or approximately 52% of the total
Units outstanding. The General Partner owned five Units which it had acquired
from limited partners who were in default on their Investor Notes.
Additionally, in a Partnership vote held in conjunction with the tender offer,
the limited partners approved certain amendments to the Partnership's
partnership agreement (the "Partnership Agreement") that were conditions to the
tender offer. The amendments: (i) revised the provisions limiting the voting
rights of the General Partner and its affiliates to permit the General Partner
and its affiliates (including the Company) to have full voting rights with
respect to all Units currently held by the General Partner or acquired by its
affiliates except on matters where the General Partner or its affiliates have an
actual economic interest other than as a limited partner or General Partner (an
"Interested Transaction") and (ii) modified the voting provisions with respect
to Interested Transactions to permit action to be taken if approved by limited
partners holding a majority of the outstanding Units, with all Units held by the
General Partner and its affiliates being voted in the same manner as a majority
of the Units actually voted by limited partners other than the General Partner
and its affiliates. As a result of the approval of this and the other minor
amendments, the Partnership Agreement was amended and restated effective June
14, 1996.
<PAGE>
Debt Financing
Partnership Mortgage Debt
On the Partnership Closing Date, the Partnership borrowed $222.5 million from
commercial banks (the "Original Lenders") pursuant to the terms of a variable
rate mortgage loan (the "Original Mortgage Debt") to finance the acquisition of
the Hotels. The Original Mortgage Debt agreement provided for interest rate
fixed through an interest rate swap at 7.8%. The weighted average interest rate
on the Original Mortgage Debt for the year ended December 31, 1995 was 7.8%.
On March 21, 1996, the Original Mortgage Debt and the Original Santa Clara
Mortgage Debt matured at which time the Original Lenders granted the Partnership
and the Santa Clara Partnership an extension of the two loans for an additional
six months until replacement financing could be finalized with another lender.
Under the terms of the extension, interest accrued at the London interbank
offered rate ("LIBOR") plus 1.875 percentage points for the first three months
and accrued at LIBOR plus 2.25 percentage points for the second three months. No
principal amortization was required during the extension period. However, under
the terms of the extension, the Partnership applied $9.2 million accumulated in
the primary lender reserve account to pay down the principal balance of the
Original Mortgage Debt to $213.3 million and deposited $19.1 million into the
primary lender reserve account. The primary lender reserve account was
established in 1994 to provide funds for a principal paydown on the Original
Mortgage Debt at maturity. The $19.1 million deposit represented the balance
($16.8 million) from the unrestricted reserve account as of December 31, 1995,
established by the General Partner in 1992 (the "General Partner Reserve") and
cash flow from the Partnership for the first two accounting periods of 1996
($2.3 million). During the extension period, the Partnership also was required
to deposit into the primary lender reserve account all cash flow from the
Partnership's Hotels plus all of the Partnership's cash flow from the Santa
Clara Partnership, net of (i) $500,000 per accounting period, (ii) debt service
and (iii) current incentive management fees paid. The $500,000 per accounting
period was deposited into a separate expense reserve account which was used by
the Partnership to fund administrative expenses and refinancing costs, any
owner-funded capital expenditures, as well as the Partnership's share of any
such costs incurred by the Santa Clara Partnership during the six month
extension period.
Mortgage Debt Refinancing
On September 23, 1996 (the "Closing Date"), the General Partner refinanced the
Partnership's Original Mortgage Debt, as well as the $43.5 million mortgage debt
of the Santa Clara Partnership. A total of $266.0 million was borrowed from a
new third party lender, $222.5 million of which is recorded on the Partnership's
financial statements (the "Mortgage Debt"). The Partnership's Mortgage Debt is
nonrecourse to the Partnership and is secured by first mortgages on the Hotels,
as well as a pledge of its limited partner interest in the Santa Clara
Partnership. The debt bears interest at a fixed rate of 8.22% for an 11-year
term expiring October 11, 2007, required payments of interest only during the
first loan year (October 1996 through September 1997) and then principal
amortization based upon a 20-year amortization schedule beginning with the
second loan year. The mortgage debt balance was $221.8 million as of December
31, 1997. The weighted average interest rate on the Mortgage Debt for the years
ended December 31, 1997 and 1996 was 8.2% and 7.7%, respectively. Annual debt
service on the Mortgage Debt was $19.2 million for 1998 and will be $22.7
million annually until the end of the 11-year term.
<PAGE>
On the Closing Date, the Partnership was required to establish certain reserves
which are held by an agent of the lender including:
$7.0 million Owner Funded Capital Expenditure Reserve--The funds will be
expended for various renewals, replacements and site improvements that are
the Partnership's obligation pursuant to the management agreement. A
majority of these projects were completed in 1997 utilizing escrow funds
and the General Partner will be seeking reimbursement of these funds during
1998.
$1.1 million Capital Expenditure Reserve--The funds will be expended for
Americans with Disabilities Act of 1990 modifications and environmental
remediation projects identified during the course of the appraisals and
environmental studies undertaken in conjunction with the refinancing. A
majority of these projects were completed in 1997 utilizing escrow funds
and the General Partner will be seeking reimbursement of these funds during
1998.
$4.5 million Debt Service Reserve--Based upon current forecasts, it is
expected that cash from operations will be sufficient for the required
payment terms of the Mortgage Debt. However due to seasonality of the four
hotels' operations, the timing of debt service payments and the lender's
desire for additional security, the Partnership was required to establish a
debt service reserve for both the Partnership Mortgage Debt and the Santa
Clara Partnership mortgage debt totaling two months of debt service.
$155,000 Ground Rent Reserve--This reserve is equal to one month of ground
rent.
These reserves were funded by using $12.2 million from the General Partner
Reserve and $634,000 from the Partnership and the Santa Clara Partnership
property improvement funds.
The loan agreement also requires that the Partnership deposit into the Capital
Expenditure Reserve $1.0 million in December of each calendar year commencing in
December 1997 until a total of $5.0 million has been deposited to be used for
air conditioning system maintenance at the New Orleans Hotel.
In addition, the loan agreement requires that should the long-term senior
unsecured debt of MII be downgraded by Standard and Poors Rating Services from
an A- to a BBB+, additional reserves would need to be established by the
Partnership. 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. Accordingly, at that time, the Partnership transferred
$1.3 million from MII's existing tax and insurance reserve account and $465,000
from Partnership cash to the lender to establish a separate escrow account for
the payment of the next succeeding insurance premiums and real estate taxes for
the Hotels and the Santa Clara Hotel. In the future, the Partnership will make
deposits to the reserve account each period and the insurance premiums and real
estate taxes will continue to paid by the lender until such time as MII's debt
is upgraded to A-. In addition, the Partnership was required to deposit an
additional month's debt service for both the Partnership and the Santa Clara
Partnership into the Debt Service Reserve account totaling $2.3 million. The
money to fund these reserves had been set aside prior to the distribution of the
excess of the General Partner reserve made to the partners in April 1997.
<PAGE>
Santa Clara Partnership Mortgage Debt
On the Partnership Closing Date, the Santa Clara Partnership borrowed $43.5
million from commercial banks pursuant to the terms of a variable rate mortgage
loan (the "Original Santa Clara Mortgage Debt") which matured on March 21, 1996
and was extended until September 21, 1996. The proceeds of the loan were
immediately distributed to the Partnership for its use in purchasing its 50%
limited partner interest in the Santa Clara Partnership. The Original Santa
Clara Mortgage Debt was nonrecourse to the Santa Clara Partnership and was
secured by a first mortgage on the Hotel and an assignment of the Santa Clara
Partnership's rights under the Santa Clara Management and Purchase Agreements.
The Original Santa Clara Mortgage Debt provide for interest rate options which
were tied to a Eurodollar rate, an adjusted CD rate or the fluctuating corporate
base rate, with interest payable on the last day of the elected interest period.
For Eurodollar or CD elections, the Partnership paid the applicable rate plus an
increment equal to 0.85 percentage points. No amortization of principal was
required prior to maturity. The Original Mortgage Debt's weighted average
interest rate for the year ended December 31, 1995 was 7.0% .
On the Closing Date, the General Partner refinanced the Original Santa Clara
Mortgage Debt under substantially identical terms as the Partnership Mortgage
Debt. The $43.5 million mortgage debt (the "Santa Clara Mortgage Debt") is
nonrecourse to the Santa Clara Partnership and is secured by first mortgages on
the Santa Clara Hotel, the Hotels and the Partnership's limited partner interest
in the Santa Clara Partnership. The Santa Clara Mortgage Debt bears interest at
a fixed rate of 8.22% for an 11-year term expiring October 11, 2007, required
payments of interest only during the first loan year (October 1996 through
September 1997) and the principal amortization based upon a 20-year amortization
schedule beginning with the second loan year. It matures on October 11, 2017.
The weighted average interest rate on the Santa Clara Mortgage Debt for the
years ended December 31, 1997 and 1996 was 8.2% and 7.6%, respectively. Annual
debt service on the Santa Clara Mortgage Debt was $3.8 million for 1997 and will
be $4.2 million annually until the end of the 11-year term.
Pursuant to the terms of the Santa Clara partnership agreement, the Partnership
has an obligation to make capital contributions to fund certain debt service
shortfalls to the extent debt service is greater than 50% of cash flow available
before debt service (the "Debt Service Advances"). No contributions were made in
1997 and 1996. Any outstanding Debt Service Advances, together with accrued
interest, would have been repayable prior to certain distributions and would
have been due, in any event, ten years after the date of each advance. There
have been no Debt Service Advances since inception of the Santa Clara
Partnership.
Pursuant to the terms of the Santa Clara partnership agreement, if sale proceeds
otherwise distributable to the Partnership in connection with a sale of the
Santa Clara Hotel were not sufficient to repay the Santa Clara Mortgage Debt,
then the Partnership in effect would be required to contribute to the Santa
Clara Partnership an amount equal to the amount, if any, of the proceeds
otherwise distributable to the Other Santa Clara Partners that were applied in
satisfaction of the Santa Clara Mortgage Debt.
<PAGE>
Material Contracts
Management Agreements
The Partnership and the Santa Clara Partnership entered into long-term hotel
management agreements (collectively, the "Management Agreements") with the
Manager to manage the Hotels and the Santa Clara Hotel as part of the MII
full-service hotel system. The Management Agreements for each Hotel had an
initial term expiring on December 31, 2008. To facilitate the refinancing of the
Partnership's Mortgage Debt and the Santa Clara Mortgage Debt, the Manager
exercised its option to renew the Management Agreements for each Hotel for an
additional 10-year term. Therefore, the current terms of the Management
Agreements for each Hotel expire on December 31, 2018. This, as well as the
assignment of the Management Agreements described in "Description of the
Partnership" above, and other minor changes were documented in an amendment to
each of the Management Agreements. The Manager has the option to renew the
Management Agreements for up to three additional 10-year terms. The Management
Agreements provide the Manager with a base management fee equal to 3% of gross
hotel sales. In addition, the Manager is entitled to an incentive management fee
equal to 20% of such hotel's operating profit after retention by the Partnership
of a 10% priority return, as defined. For additional information, see Item 13,
"Certain Relationships and Related Transactions."
Ground Leases
The Partnership and the Santa Clara Partnership lease land on which the San
Antonio, San Ramon and Santa Clara Hotels are located from unrelated third
parties. For a description of the terms of the ground leases, see Item 2,
"Properties."
Competition
The upscale and luxury full-service segments of the lodging industry continues
to benefit from a favorable cyclical imbalance in the supply/demand relationship
in which room demand growth has exceeded supply growth, which has remained
fairly limited. The lodging industry posted strong gains in revenues and profits
in 1997 as demand growth continued to outpace additions to supply. The General
Partner believes that full-service hotel room supply growth will remain limited
through at least 1998. Accordingly, the General Partner believes this
supply/demand imbalance will result in improved room rates which should result
in improved REVPAR and operating profit.
Following a period of significant overbuilding in the mid to late 1980s, the
lodging industry experienced a severe downturn. Since 1991, new hotel
construction has been modest. Due to an increase in travel and an improving
economy, hotel occupancy has grown steadily over the past several years, and
room rates have improved. The General Partner believes that room demand for
upscale and luxury full-service properties will remain stable over the next few
years.
The Hotels and the Santa Clara Hotel compete with other major lodging brands in
the regions in which they operate. Competition in the regions is based primarily
on the level of service, quality of accommodations, convenience of locations,
and room rates of each hotel. The inclusion of the Hotels and the Santa Clara
Hotel within the Marriott full service hotel system provides advantages of name
recognition, centralized reservations and advertising, system-wide marketing and
promotion, centralized purchasing and training and support services. Additional
competitive information is set forth in Item 2, "Properties" with respect to
each Hotel and the Santa Clara Hotel.
Conflicts of Interest
Because Host Marriott and its affiliates own and/or operate hotels other than
those owned by the Partnership and the Santa Clara Partnership, potential
conflicts of interest exist. With respect to these potential conflicts of
interest, Host Marriott and its affiliates retain a free right to compete with
the Partnership's and the Santa Clara Partnership's Hotels, including the right
to develop competing hotels now and in the future, in addition to those existing
hotels which may compete directly or indirectly.
<PAGE>
Under Delaware law, the General Partner has unlimited liability for obligations
of the Partnership and the Santa Clara Partnership, unless those obligations
are, by contract, without recourse to the partners thereof. Since the General
Partner is entitled to manage and control the business and operations of the
Partnership and the Santa Clara Partnership, and because certain actions taken
by the General Partner, the Partnership or the Santa Clara Partnership could
expose the General Partner or its parent, Host Marriott, to liability that is
not shared by the limited partners (for example, tort liability or environmental
liability), this control could lead to a conflict of interest.
Under the Second Amended and Restated Partnership Agreement (the "Partnership
Agreement"), the General Partner generally is allocated 75% of all losses and
net losses whereas the limited partners are distributed a majority of the cash
available for distribution or sale proceeds. To the extent a course of action
would generate losses or net losses, and thus possible tax benefits for the
General Partner, rather than cash available for distribution or sale proceeds,
the General Partner would face a conflict of interest.
Policies with Respect to Conflicts of Interest
It is the policy of the General Partner that the Partnership's relationship with
the General Partner or any affiliate or persons employed by the General Partner
are conducted on terms which are fair to the Partnership and which 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
partners.
The Partnership Agreement provides that 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 conditions:
the General Partner or any such affiliate must have the ability to render
such services or to sell or lease such goods;
such agreements, contracts or arrangements must be fair to the Partnership
and reflect commercially reasonable terms and shall be embodied in a written
contract which precisely describes the subject matter thereof and all
compensation to be paid thereof;
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;
no such agreement, contract or arrangement as to which the limited partners
had previously given approval may be amended in such 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 limited partners holding a majority of the Units (excluding
those Units held by the General Partner or certain of its affiliates); and
any such agreement, contract or arrangement which relates to or secures any
funds advanced or loaned to the Partnership by the General Partner or any
such affiliate must reflect commercially reasonable terms.
The Santa Clara Partnership Agreement contains similar provisions with respect
to the Santa Clara Partnership.
<PAGE>
Employees
Neither the General Partner nor the Partnership has any employees. Host Marriott
provides the services of certain employees (including the General Partner's
executive officers) of Host Marriott to the Partnership and the General Partner.
The Partnership and the General Partner anticipate that each of the executive
officers of the General Partner will generally devote a sufficient portion of
his or her time to the business of the Partnership. However, each of such
executive officers also will devote a significant portion of his or her time to
the business of Host Marriott and its other affiliates. No officer or director
of the General Partner or employee of Host Marriott devotes a significant
percentage of time to Partnership matters. To the extent that any officer,
director or employee does devote time to the Partnership, the General Partner or
Host Marriott, as applicable, is entitled to reimbursement for the cost of
providing such services. See Item 11, "Management Remuneration and
Transactions," for information regarding payments made to Host Marriott or its
subsidiaries for the cost of providing administrative services to the
Partnership. The Hotels and the Santa Clara Hotel are staffed by employees of
the Manager.
ITEM 2. PROPERTIES
As of December 31, 1997 the Partnership and the Santa Clara Partnership
properties consist of four hotels, all of which are in full operation and
described below.
New Orleans Marriott Hotel - New Orleans, Louisiana
Location
The New Orleans Hotel is a full-service Marriott hotel located on approximately
1.88 acres of fee-owned land in the central business district in downtown New
Orleans on the western boundary of the famous French Quarter. The Hotel is
situated on Canal Street, the primary commercial route through the downtown
area. It is located approximately 12 miles from the New Orleans International
Airport.
Description
The Hotel, which opened in July 1972, currently contains 1,290 guest rooms,
including 54 suites and 48 concierge-level guest rooms. The Hotel is comprised
of the original 42-story River Tower and the 20-story Quarter Tower. Designed as
part of the MII network of convention hotels, it has extensive meeting and
convention facilities, totaling 80,000 square feet, including (i) a 27,100
square foot grand ballroom, which is the largest hotel ballroom in New Orleans,
(ii) a 10,400 square foot junior ballroom and (iii) 25 meeting rooms. Hotel
facilities also include three restaurants, three lounges, a health club, an
outdoor pool, a business center, a gift shop and a 475-space parking garage.
Capital Improvements
The Hotel had 924 guest rooms when it originally opened in 1972. A 400-room
expansion was completed in 1979. The Hotel underwent an $11.4 million renovation
in 1988 which included reconfiguring certain guest rooms, including 54 suites
and 48 concierge-level guest rooms. The completion of these two projects has
resulted in the 1,290 guest room count that the Hotel currently contains. The
Hotel is currently undergoing a complete refurbishment of all of its guest rooms
at an estimated cost of $13.0 million, which will include the replacement of the
carpeting, bedspreads, upholstery, drapes and other similar items ("Softgoods")
and also the dressers, chairs, beds and other furniture ("Casegoods"). This
renovation is expected to be completed in July 1998. In addition, the Hotel
recently completed a lobby and restaurant renovation at a cost of $2.1 million.
<PAGE>
Competition
The primary competition for the New Orleans Hotel comes from the following three
first-class convention oriented hotels in the central business district of New
Orleans: (i) the Sheraton New Orleans Hotel, (ii) the Hyatt Regency New Orleans
Hotel and (iii) the New Orleans Hilton Riverside and Towers Hotel. These three
competitors contain an aggregate of approximately 3,900 rooms and 254,000 square
feet of meeting space. In addition, other hotels in the New Orleans area also
compete with the New Orleans Hotel; however, these differ from the New Orleans
Hotel in terms of size, room rates, facilities, amenities and services offered,
market orientation and/or location. None of these other hotels are operated as
part of the MII full-service hotel system. As a major convention facility, the
New Orleans Hotel also competes with similar facilities throughout the country.
A number of smaller hotel products entered the market in 1997 adding a total of
1,225 rooms and an additional 724 rooms are expected to be completed in 1998.
None of these products are direct competitors and no new direct competitors are
expected to open in New Orleans in the near-term. However, the overall increase
in room supply will effect the Hotel in periods of weak demand.
Marriott Rivercenter Hotel - San Antonio, Texas
Location
The San Antonio Hotel is a full-service Marriott hotel located in downtown San
Antonio on a leased parcel of land of approximately 2.7 acres. The Hotel is
situated on the San Antonio Riverwalk and is located one block from the San
Antonio Convention Center and the Alamo. It is located approximately seven miles
from the San Antonio International Airport.
Description
The Hotel opened in October 1988. The Hotel contains 999 guest rooms, including
86 suites and 40 concierge-level guest rooms, in a 38-story building. Designed
as part of the MII network of convention hotels, it has extensive meeting and
convention facilities, totaling 58,300 square feet, including (i) a 40,000
square foot grand ballroom and (ii) 36 meeting rooms. Hotel facilities also
include two restaurants, two lounges, a health club, an indoor/outdoor pool, a
gift shop and a 650-space underground parking garage.
Capital Improvements
The Hotel is scheduled to complete a combined Softgoods and Casegoods renovation
of all of its guest rooms at an estimated cost of $12.5 million in 2000 and
2001.
<PAGE>
Competition
The primary competition for the Hotel comes from the following two first-class
hotels in downtown San Antonio: (i) the Hyatt Regency and (ii) the Hilton
Palacio del Rio Hotel. These two competitors contain an aggregate of
approximately 1,100 rooms and 50,300 square feet of meeting space. The San
Antonio Marriott Riverwalk Hotel, which opened in 1980 and is managed by MII, is
located across the street from the San Antonio Hotel. Currently, the marketing
and sales groups work together and the two management teams are currently
exploring the possibility of working more closely together to maximize
efficiencies. The San Antonio Marriott Riverwalk Hotel and another area hotel,
the Plaza San Antonio Hotel are both owned by Host Marriott. In addition, other
hotels in the San Antonio area also compete with the San Antonio Hotel; however,
these differ from the San Antonio Hotel in terms of size, room rates,
facilities, amenities and services offered, market orientation and/or location.
None of these other hotels are operated as part of the MII full-service hotel
system.
In February 1997 the Residence Inn Alamo Plaza opened with 220 rooms. In August
of 1997, the Adams Mark Hotel opened on the Riverwalk with 410 rooms and 25,000
square feet of meeting space. Both hotels are in the San Antonio Hotel's
immediate market area and it is expected that the San Antonio Hotel will compete
directly with the Adams Mark Hotel for transient business. The downtown San
Antonio market has experienced a total room increase of 780 rooms in 1997, of
which the only full-service property is the Adams Mark Hotel. In addition, the
demand in this market is at a level that has created interest by a number of
parties in expanding existing properties and/or developing new full-service
hotels. Construction is underway on the expansion of the San Antonio Convention
Center which will bring its size to 500,000 square feet, thus ranking it as the
12th largest convention center in the country. It is likely that the expansion
to the Convention Center will create demand for additional hotel rooms in the
San Antonio market. While it is difficult to predict the ultimate outcome of
this proposal, it is likely that hotel rooms will be added to the market and,
therefore, increase the San Antonio Hotel's competition.
Ground Lease
The San Antonio Hotel is located on a site that is leased from an unrelated
third party for an initial term expiring December 31, 2013. To facilitate the
refinancing, the Partnership exercised its option to extend the land lease for
an additional 20-year period. Therefore, the term of the San Antonio land lease
expires on December 31, 2033. The Partnership has the option to extend the term
for up to three successive terms of ten years each. The lease provides for
annual rental during the term of the lease equal to the greater of $700,000 or
3.5% of annual gross room sales.
San Ramon Marriott Hotel - San Ramon, California
Location
The San Ramon Hotel is a full-service Marriott hotel located within the Bishop
Ranch Business Park in San Ramon, California approximately 40 miles east of San
Francisco and approximately 20 miles east of Oakland. The Hotel is located on a
leased parcel of land of approximately 11.8 acres. It is located approximately
18 miles from the Oakland International Airport and 35 miles from the San
Francisco International Airport.
Description
The Hotel opened in June 1989. The Hotel contains 368 guest rooms, including six
suites and 72 concierge-level guest rooms, in a six-story building. The Hotel
has approximately 16,300 square feet of meeting and banquet space, including (i)
a 10,000 square foot main ballroom, (ii) a 5,000 square foot junior ballroom and
(iii) six meeting rooms. Hotel facilities also include a restaurant, a lounge, a
heated outdoor pool, an exercise room, a sundry shop and outdoor parking for
over 560 cars.
<PAGE>
Capital Improvements
In January 1997, the Hotel completed a $1.2 million Softgoods renovation
project. In addition, during 1997, the Hotel completed a combined Softgoods and
Casegoods refurbishment of its six suites.
Competition
The primary competition for the San Ramon Hotel comes from the following three
hotels: (i) the Hilton Inn Pleasanton, (ii) the Sheraton Pleasanton and (iii)
the Marriott Residence Inn San Ramon. These three competitors contain an
aggregate of approximately 600 rooms and 21,000 square feet of meeting space. In
addition, other hotels in the San Ramon area also compete with the San Ramon
Hotel; however, these differ from the San Ramon Hotel in terms of size, room
rates, facilities, amenities and services offered, market orientation and/or
location. None of these other hotels are operated as part of the MII
full-service hotel system. In 1997, 225 limited service rooms were added to the
market and another 640 are expected by June 1998. No new full-service
competition is expected to open in the San Ramon area in the near-term.
Ground Lease
The San Ramon Hotel is located on a site that is leased from an unrelated third
party for an initial term expiring May 2014. To facilitate the refinancing, the
Partnership exercised its option to extend the land lease for an additional
20-year period. Therefore, the current term of the San Ramon land lease expires
in May 2034. The Partnership has the option to extend the term for up to three
successive terms of ten years each. The lease provides for annual rental during
the term of the lease equal to the greater of $350,000 or 3% of annual gross
sales. The minimum rent of $350,000 may be adjusted upward beginning in June
1995, and every fifth year thereafter, to an amount equal to 75% of the average
rent paid during the three years immediately preceding the applicable five-year
period. No such adjustment was necessary in June 1995.
Santa Clara Marriott Hotel - Santa Clara, California
Location
The Santa Clara Hotel is a full-service Marriott hotel located in Santa Clara,
California on two leased parcels of land, totaling approximately 21.9 acres. The
Hotel is situated in the center of "Silicon Valley," approximately one mile from
the Santa Clara Convention Center. It is located approximately four miles from
the San Jose International Airport and 36 miles from the San Francisco
International Airport.
Description
The Hotel opened in June 1976. The Hotel contains 754 guest rooms, including 25
suites and 76 concierge-level guest rooms. The Hotel consists of two towers (one
13 stories and one 10 stories) and a series of two-and three-story buildings,
all of which are interconnected. The Hotel has approximately 24,000 square feet
of meeting and banquet space, which includes three separate ballrooms, with a
total of 20,200 square feet, and six meeting rooms. Hotel facilities also
include two restaurants, two lounges, an indoor/outdoor pool, an exercise room,
a game room, a gift shop and outdoor parking for over 1,200 cars.
<PAGE>
Capital Improvements
In 1998, the Hotel is scheduled to complete a Softgoods renovation of 202 rooms
at an approximate cost of $1.8 million and a combined Softgoods and Casegoods
refurbishment of 264 rooms at an approximate cost of $2.2 million.
Competition
The primary competition for the Santa Clara Hotel comes from the following three
hotels: (i) the Westin Santa Clara Hotel, (ii) the Doubletree San Jose and (iii)
the Embassy Suites Santa Clara Hotel. These three competitors contain an
aggregate of approximately 1,300 rooms and 46,000 square feet of meeting space.
In addition, other hotels in the Santa Clara area also compete with the Santa
Clara Hotel; however, these differ from the Santa Clara Hotel in terms of size,
room rates, facilities, amenities and services offered, market orientation
and/or location. None of these other hotels are operated as part of the MII
full-service hotel system. No new competition is expected to open in the Santa
Clara area in the near-term.
Ground Lease
The Santa Clara Hotel is located on a site that is leased from two third parties
for an initial term expiring November 30, 2028. The Santa Clara Partnership has
the option to extend the term of each ground lease for up to three successive
terms of ten years each. The leases provide for aggregate annual rentals during
the term of the leases ranging from $63,700, increasing incrementally over the
term of the leases, to $100,000. The aggregate annual rent due under the leases
during the three renewal terms ranges from $116,900, increasing incrementally
over the renewal terms, to $148,800.
ITEM 3. LEGAL PROCEEDINGS
The Partnership and the Partnership 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 conditions or results of operations of the Partnership.
On April 23, 1996, MacKenzie Patterson Special Fund 2, L.P. ("MacKenzie
Patterson"), a limited partner of the Partnership, filed a class-action lawsuit
in the Circuit Court for Montgomery County, Maryland, against the Partnership,
as a nominal defendant, MHPII Acquisition Corp. ("MHPII Acquisition"), a
wholly-owned subsidiary of Host Marriott, Host Marriott, the General Partner and
the directors of the General Partner, alleging, among other things, that the
defendants had violated their fiduciary duties in connection with MHPII
Acquisition's tender offer. The complaint sought certification as a
class-action, to enjoin the tender offer and its associated consent
solicitation, and damages. Subsequently, MacKenzie Patterson dismissed the
Montgomery County action and refiled in Delaware State Chancery Court. In
separate lawsuits, filed on April 24, 1996, in Delaware State Chancery Court and
on May 10, 1996, in the Circuit Court for Palm Beach County, Florida, two other
limited partners of the Partnership sought similar relief. The Chancery Court
consolidated the two Delaware lawsuits and on June 12, 1996, entered an order
denying the Delaware plaintiffs' motion to enjoin the tender offer and consent
solicitation. The defendants moved to dismiss this consolidated action and to
stay discovery. While the defendant's motion to dismiss was pending, MacKenzie
Patterson filed its own motion to dismiss the consolidated Delaware cases so
that it could join in the Florida action. The Chancery Court entered an order
granting MacKenzie Patterson's motion to dismiss on September 17, 1997. The
defendants removed the Florida action to federal court and filed motions to
dismiss, or in the alternative, to stay the action pending resolution of the
Delaware action. Although the District Court denied these motions, it required
the plaintiffs to file a second amended complaint. Subsequently, the plaintiffs
filed yet a third amended complaint. The defendants believe that this latest
complaint is equally without merit and intend to continue vigorously defending
this action. As previously stated, the Partnership is named only as a nominal
defendant in this lawsuit. Accordingly, final resolution of this matter will not
have any adverse effect on the business, financial condition or results of
operations of the Partnership.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP UNITS AND RELATED
SECURITY HOLDER MATTERS
There is currently no established public trading market for the Units and it is
not anticipated that a public market for the Units will develop. Transfers of
Units are limited to the first day of a fiscal quarter (other than any transfer
of Units by the limited partners to the Company), and are subject to approval by
the General Partner and certain other restrictions. As of December 31, 1997,
there were 420 holders of record of the 745 Units.
In accordance with Sections 4.06, 4.07 and 4.08 of the Partnership Agreement,
cash available for distribution will be distributed for each fiscal year to the
partners as follows:
(i) first, 100% to the limited partners until the limited partners have
received with respect to such fiscal year a non-cumulative 10%
preferred distribution on their invested capital of $74,500,000;
(ii) next, 100% to the General Partner until the General Partner has
received an amount equal to 1/99th of the amount distributed to the
limited partners;
(iii) 1% to the General Partner and 99% to the limited partners until such
time as the limited partners have received their 15% preferred
distribution, plus $50,000 per Unit, payable only from sales and/or
refinancing proceeds ("Capital Receipts"), to the extent available
after the payment of such 15% preferred distribution;
(iv) thereafter, 20% to the General Partner and 80% to the limited
partners.
Cash available for distribution means, with respect to any fiscal period, the
cash revenues of the Partnership from all sources, other than Capital Receipts,
during such fiscal period plus such reserves as may be determined by the General
Partner in its reasonable discretion, as no longer necessary to provide for the
foreseeable needs of the Partnership, less (i) all cash expenditures of the
Partnership during such fiscal period, including, without limitation, debt
service, repayment of advances made by the General Partner as and when such
repayments are required, any fees for management services, and administrative
expenses but excluding expenditures incurred by the Partnership in connection
with a capital transaction, and (ii) such reserves as may be determined by the
General Partner, in its reasonable discretion to be necessary to provide for the
foreseeable needs of the Partnership, including, without limitation, for the
maintenance, repair or restoration of the Hotels.
<PAGE>
For 1997, the Partnership made interim cash distributions from 1997 operations
in the amount of $12,609,470 as follows: $126,105 to the General Partner and
$12,483,965 to the limited partners ($16,757 per Unit). In addition, in April
1998, an additional $7,861,000 will be distributed as follows: $78,610 to the
General Partner and $7,782,390 to the limited partners ($10,446 per Unit)
representing the final cash distribution from 1997 operations. Including the
final 1997 distribution made in April 1998, the Partnership distributed $27,204
per limited partner Unit from operating cash flow which represents a 27.2%
annual return on invested capital.
For 1996, on October 31, 1996, the Partnership made an interim cash distribution
from 1996 operations in the amount of $15,050,505 as follows: $150,505 to the
General Partner and $14,900,000 to the limited partners ($20,000 per Unit). In
addition, on April 15, 1997, the final cash distribution from 1996 operations in
the amount of $6,208,333 was distributed as follows: $62,083 to the General
Partner and $6,146,250 to the limited partners ($8,250 per Unit). Concurrent
with this distribution, the General Partner distributed another $3,667,000 as
follows: $36,670 to the General Partner and $3,630,330 to the limited partners
($4,873 per Unit). This distribution represented the excess of the General
Partner Reserve after payment of all transaction costs related to the Mortgage
Debt refinancing, as well as the establishment of an additional month's debt
service reserve and an insurance and real estate tax reserve pursuant to the
loan agreement. This was a one time distribution.
For 1995, on October 31, 1995, the Partnership made an interim cash distribution
from 1995 operations in the amount of $7,814,975 as follows: $78,150 to the
General Partner and $7,736,825 to the limited partners ($10,385 per Unit). In
addition, on April 15, 1996, the final cash distribution from 1995 operations in
the amount of $3,472,904 was distributed as follows: $34,729 to the General
Partner and $3,438,175 to the limited partners ($4,615 per Unit).
During 1997, the Partnership increased its distribution frequency to quarterly
from its historic bi-annual distributions. The Partnership expects to continue
to make cash distributions not less than bi-annually. No distributions of
Capital Receipts have been made since inception.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents historical operating information
for the Partnership for each of the five years ended December 31, 1997 (in
thousands, except per Unit amounts):
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.................................................$ 69,014 $ 66,292 $ 64,002 $ 58,703 $ 57,003
========== ========== =========== ========== ==========
Net income...............................................$ 17,014 $ 14,811 $ 13,045 $ 8,428 $ 6,869
========== ========== =========== ========== ==========
Net income per limited partner
Unit (745 Units).......................................$ 22,609 $ 19,682 $ 17,336 $ 11,200 $ 9,128
========== ========== =========== ========== ==========
Total assets.............................................$ 249,418 $ 251,740 $ 254,113 $ 250,461 $ 254,184
========== ========== =========== ========== ==========
Total liabilities........................................$ 238,281 $ 235,132 $ 233,792 $ 231,897 $ 232,703
========== ========== =========== ========== ==========
Cash distributions per limited partner *
Unit (745 Units).......................................$ 27,204 $ 33,123 $ 15,000 $ 15,000 $ 15,000
========== ========== =========== ========== ==========
</TABLE>
* 1996 figure includes the distribution of $4,873 per Unit which represented
the excess of the General Partner Reserve after payment of all transaction
costs related to the Mortgage Debt refinancing, as well as the establishment
of an additional month's debt service reserve and an insurance and real
estate tax reserve pursuant to the loan agreement.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
The Partnership's financing needs have historically been funded through loan
agreements with independent financial institutions. The General Partner believes
that the Partnership will have sufficient capital resources and liquidity to
continue to conduct its operations in the ordinary course of business.
Mortgage Debt
The Partnership is financed with mortgage debt of $222.5 million which is
nonrecourse to the Partnership and is secured by first mortgages on the Hotels,
as well as a pledge of its limited partner interest in the Santa Clara
Partnership. The mortgage debt bears interest at a fixed rate of 8.22% for an
11-year term expiring October 11, 2007. During the first loan year (October 1996
through September 1997), the mortgage debt required payments of interest only.
Subsequently, principal amortization based upon a 20-year amortization schedule
began. As a result of the required principal amortization, at the end of the
11-year term, the mortgage debt's principal balance outstanding will have been
reduced $64.4 million. Partnership debt service was $19.2 million for 1997 and
will be $22.6 million annually thereafter until the end of the 11-year term.
See Item 1, "Business" for further discussion of the Partnership's mortgage
debt.
The General Partner expects cash flow from the Partnership's Hotels and the
Santa Clara Hotel will be sufficient to provide for the Partnership's and the
Santa Clara Partnership's debt service.
<PAGE>
Capital Resources and Uses of Cash
The Partnership's principal source of cash is from operations and distributions
from the Santa Clara Partnership. Its principal uses of cash are to pay debt
service on the Partnership's Mortgage Debt, to fund the property improvement
funds of the Hotels, to establish reserves required by the lender and to make
cash distributions to the partners. Additionally, in 1996, the Partnership
received cash from the General Partner Reserve and, in 1996 and 1997, utilized
cash to pay financing costs incurred in connection with the refinancing of the
Partnership's Mortgage Debt and the Santa Clara Mortgage Debt.
Total cash provided from operations was $30.0 million, $28.7 million and $27.0
million for the years ended December 31, 1997, 1996 and 1995, respectively. The
General Partner Reserve provided total cash of $25.7 million for the year ended
December 31, 1996. Debt service paid on the Partnership's Mortgage Debt was
$19.2 million, $17.2 million and $17.3 million for the years ended December 31,
1997, 1996 and 1995, respectively.
Cash used in investing activities increased to $8.0 million in 1997 from $5.7
million in 1996 primarily due to an increase property and equipment expenditures
at the New Orleans Hotel associated with the rooms refurbishment. Investing
activities for the three years ended December 31, 1997, included the following
activities. Distributions from the Santa Clara Partnership were $2.4 million,
$781,000 and $1.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Contributions to the property improvement funds of the Hotels were
$8.2 million, $6.6 million and $6.3 million for the years ended December 31,
1997, 1996 and 1995, respectively. Contributions to the Santa Clara Partnership
property improvement fund were $2.4 million, $2.0 million and $1.8 million for
1997, 1996 and 1995, respectively.
Cash used in financing activities decreased slightly to $28.0 million in 1997
from $28.2 million in 1996. Financing activities for the three years ended
December 31, 1997, included the following activities. The various reserves
required by the lender pursuant to the terms of the Partnership's Mortgage Debt
and the Santa Clara Mortgage Debt totaled $6.9 million and $12.8 million for the
years ended December 31, 1997 and 1996, respectively. The change in the reserve
accounts includes the $6.9 million deposited into the reserve accounts for the
payment of insurance premiums and real estate taxes as well as $854,000 of
interest earned on the lender reserves reduced by $2.7 million of accrued real
estates tax liabilities and $239,000 of capital expenditure reimbursements. Cash
distributed to the partners was $22.5 million, $18.5 million and $11.3 million
for the years ended December 31, 1997, 1996 and 1995, respectively. Financing
costs related to the refinancing of the Partnership's Mortgage Debt and the
Santa Clara Mortgage Debt totaled $34,000 and $6.0 million for the years ended
December 31, 1997 and 1996, respectively. There were no financing costs paid in
1995.
The Partnership is required to maintain the Hotels and the Santa Clara Hotel in
good condition. Under the Management Agreements, the Partnership is required to
make annual contributions to the property improvement funds which provide
funding for replacement of furniture, fixtures and equipment. Contributions to
the property improvement fund are based on a percentage of gross sales.
Contributions to the fund by property are as follows: San Antonio, 4% in
1994-1998 and 5% thereafter; San Ramon, 4% in 1994-1998 and 5% thereafter; New
Orleans and Santa Clara 5%. The contribution percentage for the New Orleans
Hotel was increased to 7% for 1997 and 1998 to allow for adequate funding of the
combined Softgoods and Casegoods refurbishment of all rooms scheduled for 1998.
This project is expected to cost approximately $13.0 million and is estimated to
be completed in July 1998.
<PAGE>
The General Partner believes that cash from Hotel operations and the reserves
established in conjunction with the refinancing will continue to meet the short
and long-term operational needs of the Partnership. In addition, the General
Partner believes the property improvement funds, as adjusted in the case of the
New Orleans Hotel, and the capital reserves established in conjunction with the
refinancing will be adequate for the future capital repairs and replacement
needs of the Hotels.
RESULTS OF OPERATIONS
Revenues in the accompanying financial statements represent house profit of the
Partnership's Hotels since the Partnership has delegated substantially all of
the operating decisions related to the generation of house profit of the Hotels
and the Santa Clara Hotel to the Manager. House profit reflects hotel operating
results which flow to the Partnership as property owner and represents gross
hotel sales less property-level expenses, excluding depreciation and
amortization, base and incentive management fees, property taxes, and ground
rent, insurance and other costs, which are disclosed separately in the statement
of operations.
1997 compared to 1996: For 1997, Partnership revenues increased to $69.0 million
in 1997 from $66.3 million in 1996 due to significant increases in revenues at
the San Antonio and San Ramon Hotels. REVPAR increased 8% as a result of an 8%
increase in the combined average room rate to $132 while the combined average
occupancy remained stable at 81%. Net income for 1997 increased 15% to $17.0
million from $14.8 million in 1996. The Partnership's equity in income of the
Santa Clara Partnership increased $1.4 million in 1997 when compared to 1996 due
to improved operations at the Santa Clara Hotel.
The Marriott Rivercenter in San Antonio reported an 8%, or $2.4 million,
increase in revenues during 1997. This increase in revenues was primarily due to
an 8% increase in REVPAR to approximately $120 coupled with a 12%, or $789,000,
increase in food and beverage revenues. REVPAR increased due to a 7% increase in
the average room rate to approximately $140 combined with a 1.2 percentage point
increase in average occupancy to the mid-80's. The increase in the average room
rate was due to an increase in the transient average rate. Because demand has
remained strong in the group business segment, Hotel management has been able to
hold out for premium rates in the transient business segment. Group roomnights
increased 6%, or 12,600 roomnights, when compared to the prior year primarily
due to the major conventions rotating back into San Antonio this year. Food and
beverage revenues increased primarily due to an increase in banquet sales as a
result of a shift in customer mix to corporate business. Although faced with the
challenge of increased competition with the openings of the Adams Mark Hotel and
the Residence Inn Alamo Plaza, Hotel management is optimistic that 1998 will be
another strong year for the Hotel.
The Partnership's Northern California Hotels both reported significant increases
in revenues during 1997. The Santa Clara Marriott Hotel reported a 25%, or $4.4
million, increase in revenues during 1997 when compared to 1996 results. The
increase in revenues is primarily due to a 23% increase in REVPAR to $118 as the
average room rate increased 24% to approximately $147 with average occupancy
remaining stable in the low-80's. The increase in the average room rate is the
result of strong transient demand throughout the market which has allowed the
Hotel to maximize room rates in both the transient and group business segments.
Transient roomnights increased by approximately 9,000 roomnights, a 6% increase
when compared to the prior year. Hotel management is optimistic that demand in
the Silicon Valley region will remain high throughout 1998. With no new
full-service competition expected in the coming year, Hotel management will
continue its strategies of maximizing rates and effectively managing their
customer mix.
<PAGE>
The San Ramon Marriott reported a 12% increase in revenues, or $706,000, for
1997 when compared to 1996. This increase was due to a 14% increase in REVPAR to
$92 as the average room rate increased 15% to approximately $111 partially
offset by a slight decrease in average occupancy to the low-80's. The increase
in the average room rate was achieved primarily as a result of an increase the
corporate rate. In 1997, 225 limited service rooms were added to the market and
another 640 are expected to be added by June 1998. However, a number of
companies are filling the existing office space in the area and the space
currently under construction is already substantially committed. Hotel
management is optimistic that 1998 will be another successful year.
The New Orleans Marriott Hotel reported a slight decrease in revenues in 1997
when compared to 1996 results due to a 2%, or $904,000, decrease in room
revenues which was significantly offset by a 20%, or $783,000, increase in food
and beverage revenues. REVPAR remained stable at $97 due to a 2% increase in the
average room rate to approximately $127 partially offset by a 1.3 percentage
point decrease in average occupancy to the mid-70's. The increase in the average
room rate is due to growth in the group business segment. While group roomnights
were down 8,300 roomnights in 1997 when compared to 1996, the group mix shifted
to higher-rated association business. The decrease in average occupancy is due
to the lack of city-wide groups over the summer months. This cycle generally
repeats itself every three years as it is effected by the tradition of the
conventions, which meet in different cities on an alternating basis. Food and
beverage revenues increased when compared to the prior year primarily as a
result of Super Bowl XXXI taking place in New Orleans in January 1997. This
event generated significant catering and audio visual revenues. In addition,
food and beverage revenues increased due to the shift in customer mix to
association business which more heavily utilized the catering facilities. The
Hotel is currently undergoing a complete rooms refurbishment at an approximate
cost of $13.0 million which is scheduled to be completed in July 1998.
Ground rent, insurance and other: In 1997, ground rent, insurance and other
increased to $1.8 million in 1997 from $893,000 in 1996 primarily due to a loss
on the retirement of assets as a significant number of assets were retired at
the New Orleans Hotel in conjunction with the refurbishment of the guest rooms,
an increase in general and administrative expenses and an increase in ground
rent expense associated with improved hotel operations.
Equity in Income of Santa Clara Partnership: In 1997, equity in income of the
Santa Clara Partnership increased to $2.0 million in 1997 from $665,000 in 1996
primarily due to improved hotel operations at the Santa Clara Hotel, while
interest expense increased only slightly from year to year on the Santa Clara
Mortgage Debt.
Net Income: In 1997, net income increased to $17.0 million in 1997 from $14.8
million in 1996 primarily due to improved Hotel revenues and an increase in
equity in income of the Santa Clara Partnership.
1996 compared to 1995: For 1996, Partnership revenues increased from $64.0
million in 1995 to $66.3 million in 1996 due to a 4% increase in REVPAR. REVPAR
increased primarily due to a 5% increase in the combined average room rate to
$123 while the combined average occupancy remained stable at 81%. Net income for
1996 increased 14% to $14.8 million from $13.0 million in 1995. Interest expense
increased slightly due to refinancing expenses incurred with the extension of
the Original Mortgage Debt which are reflected as interest expense in the
accompanying statement of operations. The Partnership's equity in income of the
Santa Clara Partnership increased $546,000 in 1996 when compared to 1995 due to
improved operations at the Santa Clara Hotel.
<PAGE>
The New Orleans Marriott reported a 4% increase in revenues during 1996. The
increase was due to a 3% increase in REVPAR partially offset by a 3% decrease in
food and beverage revenues. REVPAR increased due to a 4% increase in average
room rate to approximately $125 while average occupancy remained stable in the
high-70's. The decline in food and beverage revenues was primarily due to
decreases in banquet sales.
The Marriott Rivercenter in San Antonio reported a slight increase in revenues
during 1996 due to a 2% increase in REVPAR. REVPAR increased due to a 2%
increase in average room rate to approximately $130 partially offset by a 1.0
percentage point decrease in average occupancy to the mid-80's.
Revenues at the Northern California Hotels increased significantly in 1996 when
compared to 1995 results. The San Ramon Marriott Hotel reported a 15% increase
in revenues primarily due to an 11% increase in REVPAR. REVPAR increased
primarily due to an 8% increase in average room rate to approximately $95
combined with a 1.8 percentage point increase in average occupancy to the
mid-80s.
The Santa Clara Marriott Hotel reported a 19% increase in revenues in 1996. This
increase in revenues was primarily due to an 18% increase in REVPAR as average
room rate increased 14% to approximately $120 combined with a 2.8 percentage
point increase in average occupancy to the low-80's.
Interest Expense: In 1996, interest expense increased to $18.3 million from
$17.8 million in 1995, primarily due the inclusion financing costs incurred in
obtaining the extension of Original Mortgage Debt in March 1996 which were
included as interest expense in 1996.
Equity in Income of Santa Clara Partnership: In 1996, equity in income of Santa
Clara Partnership increased to $665,000 from $119,000 in 1995, primarily due to
improved hotel operations at the Santa Clara Hotel while interest expense
increased only slightly from year to year on the Santa Clara Mortgage Debt.
Net Income: In 1996, net income increased to $14.8 million from $13.0 million in
1995, primarily due to improved Hotel revenues and an increase in equity in
income of the Santa Clara Partnership.
Inflation
The rate of inflation has been relatively low since the inception of the
Partnership and accordingly, has not had a significant impact on operating
results. However, the Hotels' and the Santa Clara's room rates and occupancy are
inflation sensitive. The Manager is generally able to pass through increased
costs to customers through higher room rates. In 1997, the increase in average
room rates at the San Antonio, San Ramon and Santa Clara Hotels exceeded those
of direct competitors as well as the general level of inflation. As stated
above, the Mortgage Debt bears a fixed interest rate, thereby eliminating
exposure to the impact of future increases in interest rates.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index Page
Report of Independent Public Accountants............................ 23
Statement of Operations............................................. 24
Balance Sheet....................................................... 25
Statement of Changes in Partners' Capital........................... 26
Statement of Cash Flows............................................. 27
Notes to Financial Statements....................................... 28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Marriott Hotel Properties II
Limited Partnership (a Delaware limited partnership) as of December 31, 1997 and
1996, and the related statements of operations, changes in partners' capital and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements and the schedule referred to below are the
responsibility of the General Partner's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Marriott Hotel Properties II
Limited Partnership as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at Item
14(a)(2) is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 18, 1998
<PAGE>
STATEMENT OF OPERATIONS
Marriott Hotel Properties II Limited Partnership
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands, except per Unit amounts)
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
REVENUES (Note 3).............................................................$ 69,014 $ 66,292 $ 64,002
------------- ------------ ------------
OPERATING COSTS AND EXPENSES
Interest.................................................................. 18,841 18,305 17,803
Depreciation and amortization............................................. 13,087 13,456 13,364
Incentive management fees................................................. 9,925 9,813 9,412
Property taxes............................................................ 5,712 5,208 5,526
Base management fees...................................................... 4,649 4,471 4,281
Ground rent, insurance and other.......................................... 1,812 893 690
------------- ------------ ------------
54,026 52,146 51,076
------------- ------------ ------------
INCOME BEFORE EQUITY IN INCOME
OF SANTA CLARA PARTNERSHIP................................................ 14,988 14,146 12,926
EQUITY IN INCOME OF SANTA CLARA PARTNERSHIP................................... 2,026 665 119
------------- ------------ ------------
NET INCOME....................................................................$ 17,014 $ 14,811 $ 13,045
============= ============ ============
ALLOCATION OF NET INCOME
General Partner...........................................................$ 170 $ 148 $ 130
Limited Partners.......................................................... 16,844 14,663 12,915
------------- ------------ ------------
$ 17,014 $ 14,811 $ 13,045
============= ============ ============
NET INCOME PER LIMITED PARTNER UNIT (745 Units)...............................$ 22,609 $ 19,682 $ 17,336
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
BALANCE SHEET
Marriott Hotel Properties II Limited Partnership
December 31, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Property and equipment, net...............................................................$ 197,512 $ 198,826
Due from Marriott Hotel Services, Inc..................................................... 7,063 7,447
Deferred financing and organization costs, net............................................ 5,663 5,932
Other assets.............................................................................. 8,510 10,348
Restricted cash reserves.................................................................. 20,307 12,815
Cash and cash equivalents................................................................. 10,363 16,372
------------- ------------
$ 249,418 $ 251,740
============= ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt .........................................................................$ 221,814 $ 222,500
Investment in Santa Clara Partnership.................................................. 8,737 8,360
Due to Marriott Hotel Services, Inc.................................................... 3,567 2,882
Accounts payable and accrued expenses.................................................. 4,163 1,390
------------- ------------
Total Liabilities.................................................................. 238,281 235,132
------------- ------------
PARTNERS' CAPITAL
General Partner
Capital contribution, net of offering costs of $22................................. 731 731
Capital distributions.............................................................. (1,036) (811)
Cumulative net income ............................................................. 561 391
------------- ------------
256 311
------------- ------------
Limited Partners
Capital contribution, net of offering costs of $8,426.............................. 64,689 64,689
Capital distributions.............................................................. (109,378) (87,118)
Cumulative net income ............................................................. 55,570 38,726
------------- ------------
10,881 16,297
------------- ------------
Total Partners' Capital............................................................ 11,137 16,608
------------- ------------
$ 249,418 $ 251,740
============= ============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
Marriott Hotel Properties II Limited Partnership
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
----------- ------------ ----------
<S> <C> <C> <C>
Balance, December 31, 1994........................................................$ 331 $ 18,233 $ 18,564
Capital distributions......................................................... (113) (11,175) (11,288)
Net income.................................................................... 130 12,915 13,045
----------- ------------ ----------
Balance, December 31, 1995........................................................ 348 19,973 20,321
Capital distributions......................................................... (185) (18,339) (18,524)
Net income.................................................................... 148 14,663 14,811
----------- ------------ ----------
Balance, December 31, 1996........................................................ 311 16,297 16,608
Capital distributions......................................................... (225) (22,260) (22,485)
Net income.................................................................... 170 16,844 17,014
----------- ------------ ----------
Balance, December 31, 1997........................................................$ 256 $ 10,881 $ 11,137
=========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
STATEMENT OF CASH FLOWS
Marriott Hotel Properties II Limited Partnership
For the Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ......................................................................$ 17,014 $ 14,811 $ 13,045
Noncash items:
Depreciation and amortization................................................. 13,087 13,456 13,364
Deferred incentive management fees............................................ 161 414 461
Equity in income of Santa Clara Partnership................................... (2,026) (665) (119)
Amortization of deferred financing costs as interest.......................... 303 206 489
Loss on retirement of assets.................................................. 473 27 10
Changes in operating accounts:
Due from Marriott Hotel Services, Inc......................................... 384 (172) (426)
Accounts payable and accrued expenses......................................... 30 957 61
Other assets.................................................................. 29 (223) --
Due to Marriott Hotel Services, Inc........................................... 524 (147) 123
----------- ----------- ----------
Cash provided by operating activities ...................................... 29,979 28,664 27,008
----------- ---------- ----------
INVESTING ACTIVITIES
Additions to property and equipment, net......................................... (12,250) (8,300) (5,566)
Distributions from Santa Clara Partnership....................................... 2,403 781 1,370
Change in property improvement funds............................................. 1,813 1,797 (1,341)
Additions to restricted cash reserve............................................. -- -- (6,346)
----------- ---------- -----------
Cash used in investing activities........................................... (8,034) (5,722) (11,883)
----------- ----------- ----------
FINANCING ACTIVITIES
Capital distributions............................................................ (22,485) (18,524) (11,288)
Additions to restricted lender reserves, net..................................... (4,749) (12,815) --
Principal payments on mortgage debt.............................................. (686) -- --
Payment of financing costs....................................................... (34) (6,025) --
Proceeds from mortgage loan...................................................... -- 222,500 --
Repayment of mortgage debt....................................................... -- (213,307) --
----------- ----------- ----------
Cash used in financing activities........................................... (27,954) (28,171) (11,288)
----------- ---------- ----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................................... (6,009) (5,229) 3,837
CASH AND CASH EQUIVALENTS at beginning of year...................................... 16,372 21,601 17,764
----------- ---------- ----------
CASH AND CASH EQUIVALENTS at end of year............................................$ 10,363 $ 16,372 $ 21,601
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest..................................................$ 18,541 $ 17,173 $ 17,267
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Marriott Hotel Properties II Limited Partnership
December 31, 1997 and 1996
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Marriott Hotel Properties II Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed to acquire and operate (i) the 1,290-room New
Orleans Marriott Hotel and underlying land in New Orleans, Louisiana (the "New
Orleans Hotel"); (ii) the 999-room Marriott Rivercenter Hotel in San Antonio,
Texas (the "San Antonio Hotel"); (iii) the 368-room Bishop Ranch Marriott Hotel
in San Ramon, California (the "San Ramon Hotel"); (collectively, the "Hotels")
and (iv) a 50% limited partner interest in the Santa Clara Marriott Hotel
Limited Partnership (the "Santa Clara Partnership"), a Delaware limited
partnership, which owns the 754-room Santa Clara Marriott Hotel in Santa Clara,
California (the "Santa Clara Hotel"). The remaining 50% interest in the Santa
Clara Partnership is owned by Marriott MHP Two Corporation (the "General
Partner") with a 1% interest, and HMH Properties, Inc., a wholly-owned indirect
subsidiary of Host Marriott Corporation ("Host Marriott") with a 49% limited
partner interest.
The sole general partner of the Partnership, with a 1% interest, is MHP Two
Corporation, a wholly-owned subsidiary of Host Marriott. The General Partner
made a capital contribution of $752,525 for its 1% general partner interest. On
March 20, 1989 (the "Partnership Closing Date"), 745 limited partner interests
(the "Units"), representing a 99% interest in the Partnership, were sold in a
private placement. The offering price per Unit was $100,000, payable in three
annual installments through June 1, 1991 (the "Investor Notes"), or as an
alternative, $89,247 in cash on the Partnership Closing Date as full payment of
the subscription price. On the Partnership Closing Date, the Partnership
executed purchase agreements (the "Purchase Agreements") with Host Marriott to
acquire the Hotels and the 50% limited partner interest in the Santa Clara
Partnership for $319.5 million. Of the total purchase price, $222.5 million was
paid from proceeds of the mortgage loan (the "Original Mortgage Debt"), $43.4
million was evidenced by a promissory note payable to Host Marriott (the
"Deferred Purchase Note"), $43.5 million was paid from a cash distribution by
the Santa Clara Partnership and the remainder from the initial payment on the
sale of the Units. The principal outstanding on the Deferred Purchase Note was
fully repaid in 1991 with the proceeds of the Investor Notes.
The New Orleans and San Antonio Hotels and the limited partner interest in the
Santa Clara Partnership were conveyed to the Partnership on the Partnership
Closing Date and the San Ramon Hotel was conveyed to the Partnership upon
completion of its construction on May 31, 1989. The Hotels and the Santa Clara
Hotel are managed by Marriott International, Inc. under long-term management
agreements. In conjunction with the refinancing of the Partnership's Mortgage
Debt described in Note 7, Marriott International, Inc. assigned all of its
interests in the management agreements to Marriott Hotel Services, Inc. (the
"Manager"), a wholly-owned subsidiary of Marriott International, Inc. ("MII").
On June 13, 1996, MHPII Acquisition Corp. (the "Company"), a wholly-owned
subsidiary of Host Marriott, completed a tender offer for the limited
partnership Units in the Partnership. The Company purchased 377 Units for an
aggregate consideration of $56,550,000 or $150,000 per Unit. Subsequent to the
tender offer, the Company purchased an additional ten Units in the Partnership.
As a result of these transactions, the Company became the majority limited
partner in the Partnership, owning 387 Units. In 1997, the Company acquired an
additional Unit bringing its total ownership to 388 Units, or approximately 52%
of the total Units outstanding. Additionally, in a Partnership vote held in
conjunction with the tender offer, the limited partners approved certain
amendments to the Partnership Agreement that were conditions to the tender
offer. The amendments: (i) revised the provisions limiting the voting rights of
the General Partner and its affiliates to permit the General Partner and its
affiliates (including the Company) to have full voting rights with respect to
all Units currently held by the General Partner or acquired by its affiliates
except on matters where the General Partner or its affiliates have an actual
economic interest other than as a Limited Partner or General Partner (an
"Interested Transaction") and (ii) modified the voting provisions with respect
to Interested Transactions to permit action to be taken if approved by limited
partners holding a majority of the outstanding Units, with all Units held by the
General Partner and its affiliates being voted in the same manner as a majority
of the Units actually voted by limited partners other than the General Partner
and its affiliates. As a result of the approval of this and the other minor
amendments, the Partnership Agreement was amended and restated effective June
14, 1996.
<PAGE>
Partnership Allocations and Distributions
Pursuant to the terms of the Partnership Agreement, Partnership allocations, for
Federal income tax purposes, and distributions are generally made as follows:
a. Cash available for distribution is distributed for each fiscal year
semi-annually as follows: (i) 100% to the limited partners until the
limited partners have received with respect to such fiscal year a
non-cumulative 10% preferred distribution on their Invested Capital, as
defined; (ii) 100% to the General Partner until the General Partner has
received an amount equal to 1/99th of the amount distributed to the limited
partners; (iii) 1% to the General Partner and 99% to the limited partners
until such time as the limited partners have received the 15% Preferred
Distribution, as defined, plus $50,000 per Unit, payable only from Capital
Receipts, as defined, to the extent available after the payment of the 15%
Preferred Distribution; and (iv) thereafter, 20% to the General Partner and
80% to the limited partners.
b. Refinancing and sales proceeds ("Capital Receipts") available for
distribution to the partners will be distributed as follows: (i) 1% to the
General Partner and 99% to the limited partners until the limited partners
have received cumulative distributions from Capital Receipts equal to the
15% Preferred Distribution plus $100,000 per Unit; and (ii) 20% to the
General Partner and 80% to the limited partners.
c. Net profits generally will be allocated to the partners in proportion to
the distributions of cash available for distribution.
d. Net losses generally will be allocated 75% to the General Partner and 25%
to the limited partners.
e. Gains recognized by the Partnership will be allocated in the following
order of priority: (i) to all partners up to the amount necessary to bring
the limited partners' capital account balances to an amount equal to the
limited partners' 15% Preferred Distribution plus the limited partners'
Invested Capital and to bring the General Partner's capital account balance
to an amount equal to 1/99th of the capital account balance of the limited
partners; and (ii) 20% to the General Partner and 80% to the limited
partners.
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, disclosure of contingent
assets and liabilities and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenues and Expenses
Hotel revenues represent house profit of the Partnership's Hotels since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Hotels to the Manager. House profit
reflects hotel operating results which flow to the Partnership as property owner
and represents gross hotel sales less property-level expenses, excluding
depreciation and amortization, base and incentive management fees, property
taxes, ground rent, insurance and other costs, which are disclosed separately in
the statement of operations.
<PAGE>
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus on EITF 97-2 "Application of FASB
Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements."
EITF 97-2 addresses the circumstances in which a management entity may include
the revenues and expenses of a managed entity in its financial statements.
The Partnership is assessing the impact of EITF 97-2 on its policy of excluding
the property-level revenues and operating expenses of its Hotels from its
statement of operations (see Note 3). If the Partnership concludes that EITF
97-2 should be applied to its Hotels, it would include operating results of
those managed operations in its financial statements. Application of EITF 97-2
to financial statements as of and for the year ended December 31, 1997 would
have increased both revenues and operating expenses by approximately $85,949,000
and would have had no impact on 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 as follows:
Land improvements 40 years
Building and improvements 30 to 40 years
Leasehold improvements 40 years
Furniture and equipment 3 to 10 years
All property and equipment is pledged as security against the Mortgage Debt
described in Note 7.
The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties on an
individual hotel basis will be less than their net book value. If a property is
impaired, its basis is adjusted to fair market value.
Deferred Financing and Organization Costs
Deferred financing and organization costs consist of loan fees and legal and
accounting costs incurred in connection with obtaining Partnership financing and
the formation of the Partnership. Deferred financing costs totaling $3,280,000
were fully amortized at March 21, 1996. Additional financing costs of $34,000
and $6,025,000 were incurred in 1997 and 1996, respectively, in connection with
the refinancing of the Partnership's mortgage loan. Financing costs are
amortized using the straight-line method, which approximates the effective
interest method, over the 20 year loan term. At December 31, 1997 and 1996,
accumulated amortization of deferred financing and organization costs totaled
$396,000 and $92,000, respectively.
Restricted Cash Reserve
In 1994, a restricted cash reserve consisting of funds generated in excess of an
annual 17.5% return on partners invested capital, as defined, was established in
an escrow account maintained by the lender. Through October of 1995, deposits
were made in conjunction with the bi-annual distributions to the limited
partners. At the time the mortgage debt matured on March 21, 1996, the
Partnership applied the balance in the reserve as of December 31, 1995,
$9,193,000, to the principal balance of the mortgage loan as a condition to the
extension of the loan agreement.
On September 23, 1996, the General Partner refinanced the Partnership's mortgage
debt. On this date, the Partnership was required to establish certain reserves
which are held by an agent of the lender including:
$7.0 million Owner Funded Capital Expenditure Reserve--The funds will be
expended for various renewals, replacements and site improvements that are
the Partnership's obligation pursuant to the management agreement. A
majority of these projects were completed in 1997 utilizing escrow funds
and the General Partner will be seeking reimbursement of these funds during
1998.
<PAGE>
$1.1 million Capital Expenditure Reserve--The funds will be expended for
Americans with Disabilities Act of 1990 modifications and environmental
remediation projects identified during the course of the appraisals and
environmental studies undertaken in conjunction with the refinancing. A
majority of these projects were completed in 1997 utilizing escrow funds
and the General Partner will be seeking reimbursement of these funds during
1998.
$4.5 million Debt Service Reserve--Based upon current forecasts, it is
expected that cash from operations will be sufficient for the required
payment terms of the Mortgage Debt. However due to seasonality of the four
hotels' operations, the timing of debt service payments and the lender's
desire for additional security, the Partnership was required to establish a
debt service reserve for both the Partnership Mortgage Debt and the Santa
Clara Partnership mortgage debt totaling two months of debt service.
$155,000 Ground Rent Reserve--This reserve is equal to one month of ground
rent.
These reserves were funded by using $12.2 million from the General Partner
Reserve and $634,000 from the Partnership and the Santa Clara Partnership
property improvement funds.
The loan agreement also requires that the Partnership deposit into the Capital
Expenditure Reserve $1.0 million in December of each calendar year commencing in
December 1997 until a total of $5.0 million has been deposited to be used for
air conditioning system maintenance at the New Orleans Hotel.
In addition, the loan agreement requires that should the long-term senior
unsecured debt of MII be downgraded by Standard and Poors Rating Services from
an A- to a BBB+, additional reserves would need to be established by the
Partnership. 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. Accordingly, at that time, the Partnership transferred
$1.3 million from the Manager's existing tax and insurance reserve account and
$465,000 from Partnership cash to the lender to establish a separate escrow
account for the payment of the next succeeding insurance premiums and real
estate taxes for the Hotels and the Santa Clara Hotel. In the future, the
Partnership will make deposits to the reserve account each period and the
insurance premiums and real estate taxes will continue to be paid by the lender
until such time as MII's debt is upgraded to A-. In addition, the Partnership
was required to deposit an additional month's debt service for both the
Partnership and the Santa Clara Partnership into the Debt Service Reserve
account totaling $2.3 million. The money to fund these reserves had been set
aside by the General Partner prior to the distribution of the excess of the
General Partner reserve made to the partners in April 1997. The tax and
insurance reserves and the Debt Service Reserve are included in restricted cash
reserves and the resulting tax and insurance liability is included in accounts
payable and accrued expenses in the accompanying balance sheet.
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.
Investment in Santa Clara Partnership
The Partnership's earnings from the Santa Clara Partnership are recorded based
on the equity method of accounting. Equity in earnings from the Santa Clara
Partnership includes 100% of the interest expense related to the debt incurred
by the Santa Clara Partnership, the proceeds of which were distributed to the
Partnership. The $28.4 million excess of the purchase price of the Santa Clara
Partnership interest over the Partnership's proportionate share of the net book
value of the assets acquired is being amortized over the related remaining lives
of those assets. Amortization is included in Equity in Income of Santa Clara
Partnership in the accompanying statement of operations. At December 31, 1997
and 1996, accumulated amortization of the excess purchase price of the Santa
Clara Partnership investment was $11,917,000 and $11,006,000, respectively.
<PAGE>
Pursuant to the terms of the Santa Clara partnership agreement, the Partnership
has an obligation to make capital contributions to fund certain debt service
shortfalls to the extent debt service is greater than 50% of cash flow available
before debt service (the "Debt Service Advances"). No contributions were made in
1997 and 1996. Any outstanding Debt Service Advances, together with accrued
interest, would have been repayable prior to certain distributions and would
have been due, in any event, ten years after the date of each advance. There
have been no Debt Service Advances since inception of the Santa Clara
Partnership.
Interest Rate Swap Agreements
As of December 31, 1995, the Partnership was a party to an interest rate swap
agreement to reduce the Partnership's exposure to floating interest rates. The
Partnership accounted for the swap arrangement as a hedge of an obligation to
pay floating rates of interest and accordingly, recorded interest expense based
upon its payment obligation at a fixed rate. This agreement terminated at the
initial maturity of the Partnership's mortgage loan on March 21, 1996.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes but rather allocates its profits and losses to the individual partners.
Significant differences exist between the net income for financial reporting
purposes and the net income as reported in the Partnership's tax return. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods and shorter depreciable lives of the assets and
differences in the timing of recognition of incentive management fee expense. As
a result of these differences, the deficit of the net assets reported in the
accompanying financial statements over the tax basis in net Partnership assets
is $85.9 million and $87.9 million as of December 31, 1997 and 1996,
respectively. Following the Company's acquisition of limited partner interests
in the Partnership in 1996, the Partnership underwent a termination and
constructive liquidation for tax purposes. All partners were then deemed to
recontribute their assets to a newly reconstituted partnership. Upon
recontribution the Partnership recorded the fixed assets at their fair market
value for tax reporting purposes, as represented by the Company's purchase price
for limited partner units resulting in a significant change in the 1996 tax
basis when compared to the prior year.
Statement of Financial Accounting Standards
In the first quarter of 1996, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS
No.
121 did not have an effect on its financial statements.
Reclassifications
Certain reclassifications were made to the prior year financial statements to
conform to the 1997 presentation.
<PAGE>
NOTE 3. REVENUES
Partnership revenues consist of the Hotels' operating results for the three
years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
HOTEL SALES
Rooms...........................................................................$ 101,603 $ 98,436 $ 93,292
Food and beverage............................................................... 44,877 42,427 42,198
Other........................................................................... 8,483 8,171 7,215
----------- ---------- ----------
154,963 149,034 142,705
----------- ---------- ----------
HOTEL EXPENSES
Departmental direct costs
Rooms........................................................................ 19,676 18,878 18,416
Food and beverage............................................................ 31,439 30,496 28,975
Other hotel operating expenses.................................................. 34,834 33,368 31,312
----------- ---------- ----------
85,949 82,742 78,703
----------- ---------- ----------
REVENUES............................................................................$ 69,014 $ 66,292 $ 64,002
=========== ========== ==========
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Land and improvements...........................................................$ 17,091 $ 17,091
Building and improvements....................................................... 107,826 105,382
Leasehold improvements.......................................................... 118,978 111,197
Furniture and equipment......................................................... 51,848 61,206
----------- ----------
295,743 294,876
Less accumulated depreciation................................................... (98,231) (96,050)
----------- ----------
$ 197,512 $ 198,826
=========== ==========
</TABLE>
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts.
<TABLE>
<CAPTION>
As of December 31, 1997 As of December 31, 1996
------------------------- --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Mortgage debt $ 221,814 $ 230,700 $ 222,500 $ 222,500
Incentive management fees due to Marriott Hotel Services, Inc. $ 2,739 $ 800 $ 2,578 $ 170
</TABLE>
The 1996 and 1997 estimated fair value of the mortgage debt obligation is based
on the expected future debt service payments discounted at risk adjusted rates.
Incentive management fees due are valued based on the expected future payments
from operating cash flow discounted at risk adjusted rates.
<PAGE>
NOTE 6. SANTA CLARA PARTNERSHIP
Summarized financial information for the Santa Clara Partnership consists of the
following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Balance Sheet
Property and equipment.............................................................................$ 28,688 $ 30,144
Due from Marriott International, Inc............................................................... 2,059 2,170
Property improvement fund.......................................................................... 2,619 1,230
Cash and cash equivalents.......................................................................... 3,177 1,933
---------- ----------
Total Assets................................................................................$ 36,543 $ 35,477
========== ==========
Mortgage debt .....................................................................................$ 43,366 $ 43,500
Due to Marriott International, Inc................................................................. 970 749
Accounts payable and accrued expenses.............................................................. 482 522
Partners' Deficit.................................................................................. (8,275) (9,294)
---------- ----------
Total Liabilities and Partners' Deficit.....................................................$ 36,543 $ 35,477
========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Statement of Operations
REVENUES..........................................................................$ 21,709 $ 17,347 $ 14,516
----------- ----------- ------------
OPERATING COSTS AND EXPENSES
Depreciation and amortization.................................................. 3,013 2,927 2,765
Interest....................................................................... 3,625 3,318 3,063
Incentive management fees...................................................... 3,401 2,652 2,175
Base management fees........................................................... 1,420 1,224 1,079
Property taxes................................................................. 470 499 508
Ground rent, insurance and other............................................... 281 264 201
----------- ----------- ----------
12,210 10,884 9,791
----------- ----------- ----------
NET INCOME........................................................................$ 9,499 $ 6,463 $ 4,725
=========== =========== ==========
</TABLE>
NOTE 7. MORTGAGE DEBT
As of December 31, 1995, the Partnership's debt consisted of a $222.5 million
mortgage loan (the "Original Mortgage Debt"). The Original Mortgage Debt was
nonrecourse to the Partnership and was secured by a first mortgage on each of
the Hotels including the grant of a security interest in the Partnership's
furniture, fixtures and equipment, contracts and other intangibles and an
assignment of the Partnership's rights under the Management and Purchase
Agreements.
At the option of the Partnership, the Original Mortgage Debt loan agreement
provided for interest rate options which were tied to a Eurodollar rate, an
adjusted CD rate or the fluctuating corporate base rate. For Eurodollar or CD
elections, the Partnership paid the applicable rate plus an increment equal to
0.9 percentage points. In April 1992, the Partnership entered into an interest
rate swap agreement for the entire loan amount with the primary lender to
effectively fix the interest rate on the Original Mortgage Debt at 7.8% per
annum from May 1992 through loan maturity. The Partnership's obligations under
the swap agreement were secured by a pledge of collateral by the General
Partner. The weighted average interest rate on the Original Mortgage Debt for
the year ended December 31, 1995 was 7.8%. The interest rate swap agreement
expired on March 21, 1996.
<PAGE>
On March 21, 1996, the Original Mortgage Debt and the Santa Clara mortgage debt
matured at which time the lender granted the Partnership an extension of the two
loans for an additional six months until replacement financing could be
finalized with another lender. Under the terms of the extension, interest
accrued at the London interbank offered rate ("LIBOR") plus 1.875 percentage
points for the first three months and accrued at LIBOR plus 2.25 percentage
points for the second three months. No principal amortization was required
during the extension period. However, under the terms of the extension, the
Partnership applied the $9.2 million accumulated in the primary lender reserve
account to pay down the principal balance of the Original Mortgage Debt to
$213.3 million and deposited $19.1 million into the primary lender reserve
account. The primary lender reserve account was established in 1994 to provide
funds for a principal paydown on the Original Mortgage Debt at maturity. The
$19.1 million deposit represented the balance ($16.8 million) from the
unrestricted reserve account included in cash in the accompanying balance sheet
as of December 31, 1995, previously established by the General Partner in 1992
(the "General Partner Reserve") and cash flow from the Partnership for the first
two accounting periods of 1996 ($2.3 million). During the extension period, the
Partnership also was required to deposit into the primary lender reserve account
all cash flow from the Hotels plus all of the Partnership's cash flow from the
Santa Clara Partnership, net of (i) $500,000 per accounting period, (ii) debt
service and (iii) current incentive management fees paid. The $500,000 per
accounting period was deposited into a separate expense reserve account which
was used by the Partnership to fund administrative expenses and refinancing
costs, any owner funded capital expenditures, as well as the Partnership's share
of any such costs incurred by the Santa Clara Partnership during the six month
extension period.
On September 23, 1996 (the "Closing Date"), the General Partner refinanced the
Partnership's Original Mortgage Debt, as well as the $43.5 million mortgage debt
of the Santa Clara Partnership. A total of $266.0 million was borrowed from a
new third party lender, $222.5 million of which is recorded on the Partnership's
financial statements (the "Mortgage Debt"). The Partnership's Mortgage Debt is
nonrecourse to the Partnership and is secured by first mortgages on the Hotels,
as well as a pledge of its limited partner interest in the Santa Clara
Partnership. The two loans are cross-defaulted. The debt bears interest at a
fixed rate of 8.22% for an 11-year term expiring October 11, 2007, requires
payments of interest only during the first loan year (October 1996 through
September 1997). Subsequently, principal amortization based upon a 20-year
amortization schedule beginning with the second loan year. The mortgage debt
balance was $221.8 million as of December 31, 1997. The weighted average
interest rate on the Mortgage Debt for the years ended December 31, 1997 and
1996 was 8.2% and 7.7%, respectively. On the Closing Date, the Partnership was
required to establish certain reserves. In addition, a new reserve was
established in 1997 and additional amounts were deposited into the existing
reserves. All reserves are discussed in Note 2.
The required principal payments of the Mortgage Debt at December 31, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
1998.................................$ 4,379
1999................................. 4,759
2000................................. 5,119
2001................................. 5,614
2002................................. 6,100
Thereafter........................... 195,843
-----------------
$ 221,814
=================
</TABLE>
<PAGE>
NOTE 8. LAND LEASES
The San Antonio and San Ramon Hotels are located on sites with ground leases
from unrelated third parties. The initial lease terms expire in 2013 and 2014,
respectively. To facilitate the refinancing, the Partnership exercised its
option to extend the land leases of both properties for an additional
twenty-year period. Therefore, the current terms of the San Antonio and San
Ramon land leases expire in 2033 and 2034, respectively. The Partnership is
obligated to pay annual rent equal to the greater of a minimum rent or a
percentage rent and has the option to extend the terms for up to three
successive ten-year terms each. Ground rent on the San Antonio Hotel is equal to
the greater of $700,000 or 3.5% of annual gross room sales. Ground rent on the
San Ramon Hotel is equal to the greater of $350,000 or 3% of annual gross sales
for the first five years, after which minimum rent was adjusted upward every
five years, beginning in 1989, to an amount equal to 75% of the average rent
paid during the three years immediately preceding the applicable five-year
period. No such adjustment was necessary at that time. Ground rent expense for
the San Antonio and San Ramon Hotels totaled $2,122,000, $1,982,000 and
$1,879,000, for the years ended December 31, 1997, 1996 and 1995, respectively.
Future minimum annual rental commitments for all land leases entered into by the
Partnership, as described above, are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal Year Land Leases
1998.................$ 1,050
1999................. 1,050
2000................. 1,050
2001................. 1,050
2002................. 1,050
Thereafter.............. 32,900
-------------
Total Minimum Lease Payments $ 38,150
=============
</TABLE>
NOTE 9. MANAGEMENT AGREEMENTS
The Partnership entered into long-term hotel management agreements (the
"Management Agreements") with the Manager to manage the Hotels as part of the
Marriott International, Inc. full service hotel system. The Management Agreement
for each Hotel has an initial term expiring on December 31, 2008. To facilitate
the refinancing, the Manager exercised its option to renew the Management
Agreements for each Hotel for an additional 10-year term. Therefore, the current
terms of the Management Agreements for each Hotel expire on December 31, 2018.
This, as well as the assignment of the Management Agreements described in Note
1, and other minor changes were documented in an amendment to each of the
Management Agreements. The Manager has the option to renew the Management
Agreements for up to three additional 10-year terms. The Manager also manages
the Santa Clara Hotel on behalf of the Santa Clara Partnership. The Manager is
paid a base management fee equal to 3% of gross hotel sales. Base management
fees paid in 1997, 1996 and 1995 were $4,649,000, $4,471,000 and $4,281,000,
respectively.
In addition, the Manager is entitled to an incentive management fee equal to 20%
of each Hotel's Operating Profit, as defined. The incentive management fee with
respect to each Hotel is payable only out of 55% of each Hotel's Operating
Profit after the Partnership's payment or retention for such fiscal year of the
following: (i) the Ground Rent, if any, with respect to such Hotel; (ii) the
Qualifying Debt Service, as defined, with respect to such Hotel; (iii) such
Hotel's Pro-Rata Share of Total Mortgage Debt Service Shortfall, as defined, if
any, with respect to all Hotels; and (iv) the Partnership's non-cumulative 10%
Priority Return on the Adjusted Contributed Capital, as defined, with respect to
such Hotel.
Unpaid incentive management fees are accrued without interest and are paid from
cash flow available for incentive management fees following payment of any then
current incentive management fees. Incentive management fees earned for the
years ended December 31, 1997, 1996 and 1995 were $9,925,000, $9,813,000 and
$9,412,000, respectively. Deferred incentive management fees for the years ended
December 31, 1997 and 1996 were $2,739,000 and $2,578,000, respectively, and are
included in Due to Marriott Hotel Services, Inc. in the accompanying balance
sheet.
<PAGE>
Pursuant to the Management Agreements, the Manager is required to furnish the
Hotels with certain services ("Chain Services") which are generally provided on
a central or regional basis to all hotels in the Manager's full-service hotel
system. Chain Services include central training, advertising and promotion, a
national reservations system, computerized payroll and accounting services and
such additional services as needed which may be more efficiently performed on a
centralized basis. Costs and expenses incurred in providing such services are
allocated among all domestic full-service hotels managed, owned or leased by the
Manager or its subsidiaries. In addition, the Hotels also participate in the
Manager's Marriott Rewards Program ("MRP"). This program succeeded the Manager's
Honored Guest Awards Program. The cost of this program is charged to all hotels
in the Manager's hotel system based upon the MRP sales at each hotel. The total
amount of Chain Services and MRP costs charged to the Partnership for the years
ended December 31, 1997, 1996 and 1995 were $5,593,000, $5,433,000 and
$5,151,000, respectively, and are included in Revenues (as defined in Note 3) in
the accompanying statement of operations.
The Management Agreements provide for the establishment of a property
improvement fund for each Hotel to cover the cost of certain non-routine repairs
and maintenance to the Hotels which are normally capitalized and the cost of
replacements and renewals to the Hotels' property and improvements.
Contributions to the property improvement fund are based on a percentage of
gross sales. Contributions to the property improvement fund for the San Antonio
Hotel are 4% in 1991 through 1998 and 5% thereafter. Contributions to the
property improvement fund for the San Ramon Hotel are 4% in 1994 through 1998
and 5% thereafter. Contributions to the property improvement fund for the New
Orleans Hotel are 5% each year; however, the contribution percentage was
increased to 7% for 1997 and 1998. Commencing with fiscal year 2003, the Manager
shall have the right, but not the obligation, to increase the amount it
transfers into the fund to any amount greater than 5% but not exceeding 6% of
gross sales. Total contributions to the property improvement fund for the years
ended December 31, 1997, 1996 and 1995 were $8,193,000, $6,622,000 and
$6,342,000, respectively.
Pursuant to the terms of the Management Agreements, 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 termination of any of the Management Agreements,
the working capital and supplies of the related Hotel will be returned to the
Partnership. The individual components of working capital and supplies
controlled by the Manager are not reflected in the Partnership's balance sheet.
As of December 31, 1997 and 1996, $6,633,000 has been advanced to the Manager
for working capital and supplies which is included in Due from Marriott Hotel
Services, Inc. in the accompanying balance sheet. The supplies advanced to the
Manager are recorded at their estimated net realizable value.
Each of the Management Agreements also provides that the Partnership may
terminate any of the Management Agreements and remove the Manager if, during any
three consecutive fiscal years after fiscal year 1992, with respect to any
Hotel, the sum of the operating profit before real and personal property taxes,
fails to equal or exceed 8% of the sum of the original cost of the Hotel plus
certain additional hotel investments by the Partnership. The Manager may,
however, prevent termination by paying to the Partnership such amounts as are
necessary to achieve the above performance standards.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or officers. The business policy making
functions of the Partnership are carried out through the directors and executive
officers of Marriott MHP Two Corporation, the General Partner, who are listed
below:
<TABLE>
<CAPTION>
Age at
Name Current Position December 31,1997
-------------------------------- ----------------------------------------------------- ----------------
<S> <C> <C>
Bruce F. Stemerman President and Director 42
Patricia K. Brady Vice President and Chief Accounting Officer 36
Christopher G. Townsend Vice President, Director and Secretary 50
Bruce D. Wardinski Treasurer 37
</TABLE>
Business Experience
Bruce F. Stemerman joined Host Marriott in 1989 as Director--Partnership
Services. He was promoted to Vice President--Lodging Partnerships in 1994 and
became Senior Vice President--Asset Management in 1996. Prior to joining Host
Marriott, Mr. Stemerman spent ten years with Price Waterhouse. He also serves as
a director and an officer of numerous Host Marriott subsidiaries.
Patricia K. Brady joined Host Marriott in 1989 as Assistant Manager--Partnership
Services. She was promoted to Manager in 1990 and to Director--Partnership
Services in June 1996. Ms. Brady also serves as an officer of numerous Host
Marriott subsidiaries.
Christopher G. Townsend joined Host Marriott's Law Department in 1982 as a
Senior Attorney. In 1984, Mr. Townsend was made Assistant Secretary of Host
Marriott and in 1986 was made Assistant General Counsel. In 1993, he was made
Senior Vice President, Corporate Secretary and Deputy General Counsel of Host
Marriott. In January 1997, he was made General Counsel of Host Marriott. He also
serves as a director and an officer of numerous Host Marriott subsidiaries.
Bruce D. Wardinski joined Host Marriott in 1987 as a Senior Financial Analyst of
Financial Planning & Analysis, and was named Manager in June 1988. He was
appointed Director, Financial Planning & Analysis in 1989, Director of Project
Finance in January 1990. Senior Director of Project Finance in June 1993 Vice
President, Project Finance in June 1994, and Senior Vice President of
International Development in October 1995. In June 1996, Mr. Wardinski was named
Senior Vice President and Treasurer of Host Marriott. He also serves as an
officer of numerous other Host Marriott subsidiaries.
<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. Host Marriott provides the services of certain employees (including the
General Partner's executive officers) of Host Marriott to the Partnership and
the General Partner. The Partnership and the General Partner anticipate that
each of the executive officers of the General Partner will generally devote a
sufficient portion of his or her time to the business of the Partnership.
However, each of such executive officers also will devote a significant portion
of his or her time to the business of Host Marriott and its other affiliates. No
officer or director of the General Partner or employee of Host Marriott devotes
a significant percentage of time to Partnership matters. To the extent that any
officer, director or employee does devote time to the Partnership, the General
Partner or Host Marriott, as applicable, is entitled to reimbursement for the
cost of providing such services. Any such costs may include a charge for
overhead, but without a profit to the General Partner. For the fiscal years
ending December 31, 1997, 1996 and 1995, administrative expenses reimbursed to
the General Partner totaled $351,000, $225,000 and $89,000, 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
The General Partner owns a total of 5.0 Units representing a 0.67% limited
partnership interest in the Partnership. MHPII Acquisition Corp., a wholly-owned
subsidiary of Host Marriott, owns a total of 388 Units representing a 52.1%
limited partnership interest.
There are no Units owned by the executive officers and directors of the General
Partner, as a group.
There are no Units owned by the executive officers and directors of MII, as a
group.
There are no Units owned by individuals who are directors of both the General
Partner and MII.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Agreements
The Partnership entered into long-term hotel management agreements (the
"Management Agreements") with the Manager to manage the Hotels as part of the
MII full service hotel system. The Management Agreement for each Hotel had an
initial term expiring on December 31, 2008. To facilitate the refinancing, the
Manager exercised its option to renew the Management Agreements for each Hotel
for an additional 10-year term. Therefore, the current terms of the Management
Agreements for each Hotel expire on December 31, 2018. This, as well as the
assignment of the Management Agreements described in Item 1, "Description of the
Partnership", and other minor changes were documented in an amendment to each of
the Management Agreements. The Manager has the option to renew the Management
Agreements for up to three additional 10-year terms. The Manager also manages
the Santa Clara Hotel on behalf of the Santa Clara Partnership. The Manager is
paid a base management fee equal to 3% of gross hotel sales. Base management
fees paid in 1997, 1996 and 1995 were $4,649,000, $4,471,000 and $4,281,000,
respectively.
<PAGE>
In addition, the Manager is entitled to an incentive management fee equal to 20%
of each Hotel's Operating Profit, as defined. The incentive management fee with
respect to each Hotel is payable only out of 55% of each Hotel's Operating
Profit after the Partnership's payment or retention for such fiscal year of the
following: (i) the Ground Rent, if any, with respect to such Hotel; (ii) the
Qualifying Debt Service, as defined, with respect to such Hotel; (iii) such
Hotel's Pro-Rata Share of Total Mortgage Debt Service Shortfall, as defined, if
any, with respect to all Hotels; and (iv) the Partnership's non-cumulative 10%
Priority Return on the Adjusted Contributed Capital, as defined, with respect to
such Hotel.
Unpaid incentive management fees ("Deferred Incentive Management Fees") accrue
without interest and are paid from cash flow available for incentive management
fees following payment of any then current incentive management fees. In the
event that any Deferred Incentive Management Fees with respect to a Hotel
remains unpaid at the time of sale of such Hotel (or interest therein), then
such Deferred Incentive Management Fee is paid, pro rata with the placement
agents' disposition fee, with respect to such Hotel, out of 55% of sale
proceeds, remaining after the Partnership's repayment or retention of the
following: (i) all qualifying debt, with respect to such Hotel, (ii) any
outstanding advances and accrued interest thereon under the Santa Clara debt
service advances, (iii) the Partnership's cumulate annual 15% priority return,
with respect to such Hotel, and (iv) the adjusted contributed capital, with
respect to such Hotel. As of December 31, 1997 and 1996, Deferred Incentive
Management Fees were $2,739,000 and $2,578,000, respectively.
The following table sets forth the amounts paid to the Manager for the three
years ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Base management fees.........................................................$ 4,649 $ 4,471 $ 4,281
Chain services and MRP costs................................................. 5,593 5,433 5,151
Incentive management fees.................................................... 9,925 9,415 8,827
----------- ---------- ----------
Total paid.................................................................$ 20,167 $ 19,319 $ 18,259
============ ========== ==========
</TABLE>
The Management Agreements provide for the establishment of a property
improvement fund for each Hotel to cover the cost of certain non-routine repairs
and maintenance to the Hotels which are normally capitalized and the cost of
replacements and renewals to the Hotels' property and improvements.
Contributions to the property improvement fund are based on a percentage of
gross sales. Contributions to the property improvement fund by property are as
follows: San Antonio Hotel, 4% for the period 1994 through 1998, and 5%
thereafter; San Ramon Hotel, 4% for the period 1994 through 1998 and 5%
thereafter; New Orleans, 7% for the period 1997 through 1998, and 5% thereafter.
Commencing with fiscal year 2003, the Manager shall have the right, but not the
obligation, to increase the amount it transfers into the fund to any amount
greater than 5% but not exceeding 6% of gross sales.
<PAGE>
Pursuant to the Management Agreements, the Partnership provided the Manager with
working capital and supplies to meet the operating needs of the Hotels. This
advance bears no interest and remains the property of the Partnership throughout
the term of the Management Agreements. The Partnership is required to advance
upon the request of the Manager any additional funds necessary to maintain
working capital and supplies at levels determined by the Manager to be necessary
to satisfy the needs of the Hotels as their operations may require from time to
time. Upon termination of the Management Agreements, the Manager will return to
the Partnership any unused working capital and supplies. At the inception of the
Partnership, $6.9 million was advanced to the Manager for working capital and
supplies, of with $250,000 was returned to the Partnership in 1991.
Each of the Management Agreements also provides that the Partnership may
terminate any of the Management Agreements and remove the Manager if, during any
three consecutive fiscal years after fiscal year 1992, with respect to any
Hotel, the sum of the operating profit before real and personal property taxes,
fails to equal or exceed 8% of the sum of the original cost of the Hotel plus
certain additional hotel investments by the Partnership. The Manager may,
however, prevent termination by paying to the Partnership such amounts as are
necessary to achieve the above performance standards.
Santa Clara Hotel Management Agreement
The Santa Clara Hotel Management Agreement provides for an initial 20-year term
expiring on December 31, 2008. To facilitate the refinancing of the Santa Clara
Mortgage Debt, the Manager exercised its option to renew the Management
Agreement for an additional 10-year term. Therefore, the current term of the
Management Agreement expires on December 31, 2018. This, as well as the
assignment of the Management Agreements described in Item 1, "Description of the
Partnership", and other minor changes were documented in an amendment to the
Santa Clara Management Agreement. The Manager has the option to renew the Santa
Clara Hotel Management Agreement for up to three additional 10-year terms. The
Manager is paid a base management fee equal to 3% of gross hotel sales.
In addition, the Manager is entitled to an incentive management fee equal to 20%
of Hotel operating profit. The incentive management fee is payable only out of
55% of Hotel operating profit after payments of ground rent and 200% of each of
the following: (i) qualifying debt service; (ii) the pro-rata share of total
debt service shortfall; and (iii) the Santa Clara Partnership's 10% priority
return. Unpaid incentive management fees ("Deferred Incentive Management Fees")
accrue without interest and are paid from cash flow available for incentive
management fees following payment of any then current incentive management fees.
Deferred Incentive Management Fees would be payable upon the sale of the Santa
Clara Hotel in a manner similar to the Partnership's payment of Deferred
Incentive Management Fees upon sale of the Hotels. Deferred Incentive Management
Fees at December 31, 1997 and 1996 were $577,000.
The Manager is required to furnish the Santa Clara Hotel with Chain Services.
Costs and expenses incurred in providing the Chain Services are allocated as
described above with the Hotels.
The following table sets forth the amounts paid to the Manager for the
three years ended December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Base management fees.........................................................$ 1,420 $ 1,755 $ 1,079
Chain services and MRP costs................................................. 2,072 1,224 1,537
Incentive management fees.................................................... 3,401 2,951 1,556
----------- ---------- ----------
Total paid.................................................................$ 6,893 $ 5,930 $ 4,172
=========== ========== ==========
</TABLE>
<PAGE>
The Santa Clara Hotel Management Agreement also provides for the establishment
of a property improvement fund for the Santa Clara Hotel to cover the cost of
certain non-routine repairs and maintenance to the Santa Clara Hotel which are
normally capitalized and the cost of replacements and renewals to the Santa
Clara Hotel's property and improvements. Contributions to the property
improvement fund are equal to 5% of gross Hotel sales. Commencing with fiscal
year 2003, the Manager shall have the right, but not the obligation, to increase
the amount it transfers into the fund to any amount greater than 5% but not
exceeding 6% of gross Hotel sales.
Pursuant to the terms of the Santa Clara Hotel Management Agreement, the Santa
Clara Partnership is provided the Manager with working capital to meet the
operating needs of the Hotel. This advance bears no interest and remains the
property of the Santa Clara Partnership throughout the term of the Santa Clara
Management Agreement. The Santa Clara Partnership is required to advance upon
request of the Manager any additional funds necessary to maintain working
capital and supplies at levels determined by the Manager to be necessary to
satisfy the needs of the Santa Clara Hotel as its operations may require from
time to time. Upon termination of the Santa Clara Management Agreement, the
Manager will return to the Santa Clara Partnership any unused working capital
and supplies. At its inception, the Santa Clara Partnership advanced $1.4
million the Manager for working capital and supplies.
The Santa Clara Hotel Management Agreement provides that the Santa Clara
Partnership may terminate the Santa Clara Management Agreement and remove the
Manager if, during any three consecutive fiscal years after fiscal year 1992,
the sum of the operating profit before real and personal property taxes, fails
to equal or exceed 8% of the sum of $96 million plus certain additional Hotel
Investments by the Santa Clara Partnership. The Manager may, however, prevent
termination by paying to the Santa Clara Partnership such amounts as are
necessary to achieve the performance standards.
<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.
III. Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable or the required
information is included in the consolidated financial statements or notes
thereto.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description Page
<S> <C>
*3.1 Second Amended and Restated Agreement of Limited Partnership of
Marriott Hotel Properties II Limited Partnership dated June 14, 1996 N/A
*10.1 Loan Agreement between Marriott Hotel Properties II Limited
Partnership and Nomura Asset Capital Corporation dated as of
September 23, 1996 N/A
*10.2 Loan Agreement between Santa Clara Marriott Hotel Limited
Partnership and Nomura Asset Capital Corporation dated as of
September 23, 1996 N/A
*10.3 Secured Promissory Note made by Marriott Hotel Properties II
Limited Partnership to Nomura Asset Capital Corporation dated
September 23, 1996 N/A
*10.4 Secured Promissory Note made by Marriott Hotel Properties II
Limited Partnership to Nomura Asset Capital Corporation dated
September 23, 1996 N/A
*10.5 Secured Promissory Note made by Marriott Hotel Properties II
Limited Partnership and Santa Clara Marriott Hotel Limited
Partnership to Nomura Asset Capital Corporation dated
September 23, 1996 N/A
*10.6 Modification, Subordination and Non-Disturbance Agreement,
Estoppel, Assignment and Consent (Marriott Rivercenter
Hotel, San Antonio, Texas) between Marriott Hotel Services, Inc.,
Nomura Asset Capital Corporation and Marriott Hotel Properties
II Limited Partnership dated as of September 23, 1996 N/A
*10.7 First Amendment to Management Agreement (San Antonio Marriott
Hotel) by Marriott Hotel Properties II Limited Partnership
and Marriott Hotel Services, Inc. dated September 23, 1996 N/A
*10.8 Deed of Trust, Assignment of Leases, Security Agreement and
Fixture Filing (San Ramon First Deed of Trust) by Marriott
Hotel Properties II Limited Partnership in favor of
Commonwealth Land Title Insurance Company of California for
the benefit of Nomura Asset Capital Corporation dated as of
September 23, 1996 in the amount of $222,500,000 N/A
*10.9 Deed of Trust, Assignment of Leases, Security Agreement and
Fixture Filing (San Ramon Second Deed of Trust) by Marriott
Hotel Properties II Limited Partnership in favor of
Commonwealth Land Title Insurance Company of California for
the benefit of Nomura Asset Capital Corporation dated as of
September 23, 1996 in the amount of $43,500,000 N/A
*10.10 Deed of Trust, Assignment of Leases, Security Agreement and
Fixture Filing (Santa Clara Deed of Trust) by Santa Clara
Marriott Hotel Limited Partnership in favor of Commonwealth
Land Title Insurance Company of California for the benefit
of Nomura Asset Capital Corporation dated as of
September 23, 1996 in the amount of $43,500,000 N/A
*10.11 Schedule Identifying Documents Omitted N/A
27 Financial Data Schedule
</TABLE>
* 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, 1996.
(b) REPORTS ON FORM 8-K
None.
<PAGE>
SCHEDULE III
MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Initial Costs Gross Amount at December 31, 1997
------------------------ --------------------------------------
Subsequent
Building and Costs Building and
Debt Land Improvements Capitalized Land Improvements Total
-------- ----------- ------------ ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
San Antonio $ -- $ 1,393 $ 83,010 $ 8,174 $ 2,486 $ 90,091 $ 92,577
New Orleans -- 13,574 103,326 8,678 12,560 113,018 125,578
San Ramon -- 1,991 21,174 2,575 2,045 23,695 25,740
-------- ----------- ----------- ----------- ---------- ------------ ---------
Total $221,814 $ 16,958 $ 207,510 $ 19,427 $ 17,091 $ 226,804 $ 243,895
======== =========== =========== =========== ========== ============ =========
</TABLE>
<TABLE>
<CAPTION>
Date of
Accumulated Completion of Date Depreciation
Depreciation Construction Acquired Life
------------ ------------- -------- --------------
<S> <C> <C> <C> <C>
San Antonio $ 20,088 1988 1989 30 to 50 years
New Orleans 34,743 1972 1989 30 to 50 years
San Ramon 5,307 1989 1989 30 to 50 years
------------
Total $ 60,138
============
</TABLE>
<TABLE>
<CAPTION>
1995 1996 1997
----------- ---------- -----------
<S> <C> <C> <C>
Notes:
(a) Reconciliation of Real Estate:
Balance at beginning of year..........................................$ 229,754 $ 231,313 $ 233,670
Capital Expenditures............................................... 1,559 2,357 10,225
Dispositions....................................................... -- -- --
----------- ---------- -----------
Balance at end of year................................................$ 231,313 $ 233,670 $ 243,895
=========== ========== ===========
(b) Reconciliation of Accumulated Depreciation:
Balance at beginning of year..........................................$ 37,712 $ 44,971 $ 52,516
Depreciation....................................................... 7,259 7,545 7,622
Dispositions ...................................................... -- -- --
----------- ---------- -----------
Balance at end of year................................................$ 44,971 $ 52,516 $ 60,138
=========== ========== ===========
</TABLE>
(c) The aggregate cost of land, building and leasehold improvements for
Federal income tax purposes is approximately $215.5 million at December
31, 1997.
(d) All of the Hotels are pledged as collateral for the Partnership's
mortgage debt for $221.8 million as of December 31, 1997.
<PAGE>
SIGNATURE
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 March 31, 1998.
MARRIOTT HOTEL PROPERTIES II
LIMITED PARTNERSHIP
By: MARRIOTT MHP TWO CORPORATION
General Partner
By: /s/ Patricia K. Brady
---------------------
Patricia K. Brady
Vice President and Chief
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on March 31, 1998.
Signature Title
- --------- -----
MARRIOTT MHP TWO CORPORATION
/s/ Bruce F. Stemerman
- ----------------------
Bruce F. Stemerman President and Director
/s/ Patricia K. Brady
- ---------------------
Patricia K. Brady Vice President and Chief Accounting Officer
/s/ Christopher G. Townsend
- ---------------------------
Christopher G. Townsend Vice President, Director and Assistant Secretary
/s/ Bruce D. Wardinski
- ----------------------
Bruce D. Wardinski Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS. </LEGEND>
<CIK> 0000845240
<NAME> MARRIOTT HOTEL PROPERTIES II L.P.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.00
<CASH> 30,670
<SECURITIES> 14,173<F1>
<RECEIVABLES> 7,063
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 51,906
<PP&E> 295,743
<DEPRECIATION> (98,231)
<TOTAL-ASSETS> 249,418
<CURRENT-LIABILITIES> 16,467
<BONDS> 221,814
0
0
<COMMON> 0
<OTHER-SE> 11,137
<TOTAL-LIABILITY-AND-EQUITY> 249,418
<SALES> 0
<TOTAL-REVENUES> 71,040<F2>
<CGS> 0
<TOTAL-COSTS> 35,185
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,841
<INCOME-PRETAX> 17,014
<INCOME-TAX> 0
<INCOME-CONTINUING> 17,014
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,014
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>THIS IS OTHER ASSETS AND DEFERRED FINANCING COSTS, NET
<F2>THIS INCLUDES EQUITY IN INCOMOE OF SANTA CLARA PARTNERSHIP
</FN>
</TABLE>
