-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IuheICMTt4d47/dA8zx6Z9ERFKDWfLuNlhwRmGB7gPuQoJuIOpVPYjcf0F/GxCYI IVjpw6AjykFByVlUe4bCdQ== 0000832179-97-000004.txt : 19970329 0000832179-97-000004.hdr.sgml : 19970329 ACCESSION NUMBER: 0000832179-97-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP /DE/ CENTRAL INDEX KEY: 0000832179 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 521533559 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16728 FILM NUMBER: 97566831 BUSINESS ADDRESS: STREET 1: 10400 FERNWOOD RD CITY: BETHESDA STATE: MD ZIP: 20058 BUSINESS PHONE: 3013807666 10-K 1 ANNUAL REPORT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Securities and Exchange Commission Washington, D.C. 20549 Form 10-K X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 OR |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 0-16728 COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 52-1533559 - --------------------------------- ----------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10400 Fernwood Road Bethesda, Maryland 20817 - -------------------------------------- ------------------------------------ Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 301-380-2070 Securities registered pursuant to Section 12(b) of the Act: Not Applicable Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interest -------------------------------------------- Title of Class Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x/ No 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP - -------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE NO. PART I
Item 1. Business.........................................................................................1 Item 2. Properties.......................................................................................9 Item 3. Legal Proceedings................................................................................17 Item 4. Submission of Matters to a Vote of Security Holders..............................................17 PART II Item 5. Market For The Partnership's Limited Partnership Units and Related Security Holder Matters..............................................................17 Item 6. Selected Financial Data..........................................................................18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................19 Item 8. Financial Statements and Supplementary Data......................................................29 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.........................................................................69 PART III Item 10. Directors and Executive Officers.................................................................69 Item 11. Management Remuneration and Transactions.........................................................70 Item 12. Security Ownership of Certain Beneficial Owners and Management...................................70 Item 13. Certain Relationships and Related Transactions...................................................71 PART IV Item 14. Exhibits, Supplemental Financial Statement Schedules and Reports on Form 8-K..........................................................................75
PART I ITEM 1. BUSINESS Description of the Partnership Courtyard by Marriott II Limited Partnership, a Delaware limited partnership (the "Partnership"), was formed on August 31, 1987 to acquire and own 70 Courtyard by Marriott hotels (the "Hotels") and the respective fee or leasehold interests in the land on which the Hotels are located. The Hotels are located in 29 states and contain a total of 10,335 guest rooms as of December 31, 1996. The Partnership commenced operations on October 30, 1987 and will terminate on December 31, 2087, unless earlier dissolved. The sole general partner of the Partnership is CBM Two Corporation, a Delaware corporation (the "General Partner"), a wholly-owned subsidiary of Host Marriott Corporation. On December 29, 1995, Host Marriott Corporation's operations were divided into two separate companies: Host Marriott Corporation, which continued the business of owning lodging properties and Host Marriott Services Corporation which continued the business of concession operations at airports and toll roads. The Partnership is engaged solely in the business of owning and operating hotels and therefore is engaged in one industry segment. The principal offices of the Partnership are located at 10400 Fernwood Road, Bethesda, Maryland 20817. The Hotels are operated as part of the Courtyard by Marriott system, which includes over 286 hotels worldwide in the moderately-priced segment of the U.S. lodging industry. The Hotels are managed by Courtyard Management Corporation (the "Manager"), a wholly owned subsidiary of MII, under a long-term management agreement (the "Management Agreement"). The Management Agreement as restated on December 30, 1995 expires in 2013 with renewals at the option of the Manager for one or more of the Hotels for up to 35 years thereafter. The Hotels have the right to use the Courtyard by Marriott name pursuant to the Management Agreement and, if the Management Agreement is terminated or not renewed, the Partnership would lose that right for all purposes (except as part of the Partnership's name). See Item 13 "Certain Relationships and Related Transactions." The objective of the Courtyard by Marriott system, including the Hotels, is to provide consistently superior lodging at a fair price with an appealing, friendly and contemporary residential character. Courtyard by Marriott hotels have fewer guest rooms than traditional, full-service hotels, containing approximately 150 guest rooms, including approximately 12 suites, as compared to full-service Marriott hotels which typically contain 350 or more guest rooms. Each Courtyard by Marriott hotel is designed around a courtyard area containing a swimming pool (indoor pool in northern climates), walkways, landscaped areas and a gazebo. Each Hotel generally contains a small lobby, a restaurant with seating for approximately 50 guests, a lounge, a hydrotherapy pool, a guest laundry, an exercise room and two small meeting rooms. The hotels do not contain as much public space and related facilities as full-service hotels. 1 Courtyard by Marriott hotels are designed for business and vacation travelers who desire high quality accommodations at moderate prices. Most of the Hotels are located in suburban areas near office parks or other commercial activities. See Item 2 "Properties." Courtyard by Marriott hotels provide large, high quality guest rooms which contain furnishings comparable in quality to those in full-service Marriott hotels. Each guest room contains a large, efficient work desk, remote control television, a television entertainment package, in-room coffee and tea services and other amenities. Approximately 70% of the guest rooms contain king-size beds. Historically, the Partnership's financing needs have been funded through loan agreements with independent financial institutions and through loans and advances made by Host Marriott and its affiliates. See "Debt Financing" below. From 1987 through 1989, the Partnership borrowed $469.7 million (the "MFS Mortgage Debt") from Marriott Financial Services, Inc. ("MFS"), an indirect wholly owned subsidiary of Host Marriott, to finance the acquisition of 65 Hotels (the "non-IRB Hotels"). In connection with the Partnership's acquisition from Host Marriott of the remaining 5 Hotels (the "IRB Hotels"), the Partnership assumed an additional $40.2 million of industrial revenue bond financing (the "IRB Debt") originally borrowed by Host Marriott to finance the construction of these 5 Hotels. In 1988 and 1989, the Partnership replaced the initial financing from MFS through two loans. In 1988, the Partnership borrowed $275 million ("Mortgage Debt A") from two banks (the "Banks"), to repay the MFS debt related to 36 of the non-IRB Hotels plus transaction costs. In 1989, the Partnership borrowed an additional $230.5 million ("Mortgage Debt B") from the Banks to repay the MFS debt related to the remaining 29 non-IRB Hotels plus transaction costs. On December 15, 1995, the Partnership and the Mortgage Debt A lenders amended the loan agreement to extend the maturity date of Mortgage Debt A from December 15, 1995 to February 15, 1996. Mortgage Debt B was scheduled to mature on September 5, 1996. On January 24, 1996, the Partnership completed a refinancing of the Partnership's debt. See "Refinancing" below. Organization of the Partnership On October 30, 1987, the Partnership began operations and executed a purchase agreement (the "Purchase Agreement") with Host Marriott to acquire the Hotels, all related personal property, and the fee or leasehold interests in the land on which the Hotels are located. On January 18, 1988 (the "Final Closing Date"), 1,470 units of limited partnership interests (the "Units") in the Partnership, representing a 95% interest in the Partnership, had been sold in a private placement offering. The offering price per Unit was $100,000, $21,200 payable at subscription with the balance due in four annual installments through February 28, 1991, or, as an alternative, $94,357 in cash at closing as full payment of the subscription price. The limited partners paid $39,938,000 as of the Final Closing Date, representing 1,350 Units purchased on the installment basis and 120 Units paid in full. The limited partners' obligations to make the installment payments were evidenced by promissory notes (the "Investor Notes") payable to the Partnership and secured by the Units. On October 30, 1987, the General Partner made a capital contribution of equipment valued at $11,306,000 for its 5% general partner interest. The total purchase price under the Purchase Agreement was $643.1 million. Of this total, $507.9 million was paid in cash from the proceeds of the MFS Mortgage Debt and the sale of the Units, $40.2 million was paid through the Partnership's assumption of the IRB Debt and 2 $95 million was paid in the form of a note payable to Host Marriott (which has since been repaid). Twenty of the Hotels were conveyed to the Partnership in 1987, thirty-four Hotels in 1988, twelve Hotels in 1989 and the final four Hotels during the first half of 1990. Under the Purchase Agreement, Host Marriott agreed to reduce the purchase price of the Hotels by up to $5.4 million in 1988 and $9.3 million in 1989 if the Hotels did not provide cash flow in excess of debt service, as defined, of at least $5.4 million and $9.3 million, respectively, in those years (the "Price Adjustment"). No Price Adjustment was required in 1988. The required Price Adjustment for 1989 was $8,843,000. The Price Adjustment was allocated as a reduction to the Partnership's property and equipment. In accordance with the partnership agreement, in 1990 and 1991 the General Partner purchased 20.5 Units from defaulting investors. Additionally, on July 15, 1995, a limited partner assigned one Unit to the General Partner. Therefore, as of December 31, 1996, the General Partner owns a total of 21.5 Units representing a 1.39% limited partnership interest in the Partnership. In connection with the refinancing discussed below, the limited partners approved certain amendments to the partnership agreement and the Management Agreement. The partnership agreement amendment, among other things, allowed the formation of certain subsidiaries of the Partnership, including Courtyard II Finance Company ("Finance"), a wholly-owned subsidiary of the Partnership, who along with the Partnership is the co-issuer of the $127.4 million of senior secured notes. Additionally, the Partnership formed a wholly-owned subsidiary, Courtyard II Associates Management Corporation ("Managing General Partner"). Managing General Partner was formed to be the managing general partner with a 1% general partner interest in Courtyard II Associates, L.P. ("Associates"), a Delaware limited partnership. The Partnership owns a 1% general partner interest and a 98% limited partner interest in Associates. On January 24, 1996, the Partnership contributed 69 Hotels and their related assets to Associates. Formation of Associates resulted in the Partnership's primary assets being its direct and indirect interest in Associates. Additionally, substantially all of Associates' net equity will be restricted to dividends, loans or advances to the Partnership. Associates holds a 99% membership interest in CBM Associates II LLC ("Associates II") and Managing General Partner holds the remaining 1% membership interest. On January 24, 1996, the Partnership contributed the Hotel located in Deerfield, IL (the "Deerfield Hotel") and its related assets to Associates and the Managing General Partner who simultaneously contributed the Hotel and its related assets to Associates II. Each of the Managing General Partner, Associates and Associates II were formed as a single purpose bankruptcy-remote entity to facilitate the refinancing in January 1996. CBM Funding Corporation, ("CBM Funding"), a wholly-owned subsidiary of Associates, was also formed to make a mortgage loan (the "Mortgage Loan") to Associates from the proceeds of the sale of the multi-class commercial mortgage pass-through certificates. 3 Debt Financing As of December 31, 1995, the Partnership had outstanding bank mortgage indebtedness of $275 million related to 36 Hotels and $230.5 million related to 29 Hotels. As of December 31, 1995, the Partnership also had approximately $25.6 million of industrial revenue bond financing (the "IRB Debt") on the remaining five Hotels and owed approximately $6.5 million to Host Marriott in connection with such IRB Debt with respect to those five Hotels ("Host Marriott's IRB Liability"). The bank mortgage indebtedness, the IRB Debt and advances from Host Marriott related to certain IRB Hotels were repaid with the net proceeds of the Senior Notes, as defined below, and Certificates, as defined below, on January 24, 1996. Refinancing Debt Refinancing - Overview On January 24, 1996, the Partnership completed a refinancing of the Partnership's existing debt through the private placements of $127.4 million of senior secured notes (the "Senior Notes") and $410.2 million of multi-class commercial mortgage pass-through certificates (the "Certificates"). The net proceeds from the placement of the Senior Notes and the Certificates and existing Partnership cash were used as follows: (i) to repay the Partnership's existing Mortgage Debt A of $275 million and Mortgage Debt B of $230.5 million, (ii) to repay the IRB Debt of $25.6 million, (iii) to repay the advances from Host Marriott related to certain IRB Hotels of $6.5 million and (iv) to pay certain costs of structuring and issuing the Senior Notes and the Certificates. Upon repayment of Mortgage Debt A and Mortgage Debt B, Host Marriott was released from its obligations under (i) the Mortgage Debt A and Mortgage Debt B debt service guarantees, (ii) the foreclosure guarantee and (iii) the Ground Rent Facility, as defined. Debt Refinancing - Senior Notes The Senior Notes of $127.4 million were issued by the Partnership and Finance. The Senior Notes bear interest at 10 3/4%, require semi-annual payments of interest and require no payments of principal until maturity on February 1, 2008. The Senior Notes are secured by a first priority pledge by the Partnership of (i) its 99% partnership interest (consisting of a 98% limited partner interest and a 1% general partner interest) in Associates and (ii) its 100% equity interest in the Managing General Partner. Finance has nominal assets, does not conduct any operations and does not provide any additional security for the Senior Notes. The terms of the Senior Notes include requirements of the Partnership to establish and fund a debt service reserve account in an amount equal to one six-month interest payment on the Senior Notes ($6,848,000) and to maintain certain levels of excess cash flow, as defined. In the event the Partnership fails to maintain the required level of excess cash flow, the Partnership will be required to (i) suspend distributions to its partners and other restricted payments, as defined, (ii) to fund a separate supplemental debt service reserve account (the "Supplemental Debt Service Reserve") in an amount up to two six-month interest payments on the Senior Notes and (iii) if 4 such failure were to continue, to offer to purchase a portion of the Senior Notes at par. The Senior Notes are not redeemable prior to February 1, 2001. Thereafter, the Senior Notes may be redeemed, at the option of the Partnership, at a premium declining to par in 2004. The Senior Notes are non-recourse to the Partnership and its partners. On June 4, 1996, the Partnership and Finance completed an exchange offer of its unregistered 10 3/4% Series B Senior Secured Notes with an aggregate principal amount of $127.4 million ("Old Notes") due 2008 for an equal amount of registered notes ("New Notes"). The form and terms of the New Notes are substantially identical to the form and terms of the Old Notes, except that the New Notes have been registered under the Securities Act of 1933, as amended and will not have any restrictions for transfer. Debt Refinancing - Certificates The Certificates in an initial principal amount of $410.2 million were issued by CBM Funding. Proceeds from the sale of the Certificates were utilized by CBM Funding to provide a Mortgage Loan to Associates. The Certificates/Mortgage Loan require monthly payments of principal and interest based on a 17-year amortization schedule. The Mortgage Loan matures on January 28, 2008. However, the maturity date of the Certificates/Mortgage Loan may be extended until January 28, 2013 with the consent of 66 2/3% of the holders of the outstanding Certificates affected thereby. The Certificates were issued in the following classes and pass-through rates of interest.
Initial Certificate Pass-Through Class Balance Rate Class A-1 $ 45,500,000 7.550% Class A-2 $ 50,000,000 6.880% Class A-3P & I $ 129,500,000 7.080% Class A-3IO Not Applicable 0.933% Class B $ 75,000,000 7.480% Class C $ 100,000,000 7.860% Class D $ 10,200,000 8.645%
The Class A-3IO Certificates receive payments of interest only based on a notional balance equal to the Class A-3P & I Certificate balance. The balance of the Certificates was $398.9 million at December 31, 1996. Principal amortization of $11.3 million of the Class A-1 Certificates was made during 1996. The Certificates/Mortgage Loan maturities are as follows (in thousands): 1997 $ 13,298 1998 14,331 1999 15,443 2000 16,642 2001 17,934 Thereafter 321,205 ------------ $ 398,853 ============ 5 The Mortgage Loan is secured primarily by 69 cross-defaulted and cross-collateralized mortgages representing first priority mortgage liens on (i) the fee or leasehold interest in the 69 Hotels, related furniture, fixtures and equipment and the property improvement fund, (ii) the fee interest in the land leased from MII or their affiliates on which 53 Hotels are located, (iii) a pledge of Associates membership interest in and the related right to receive distributions from Associates II which owns the Deerfield Hotel and (iv) an assignment of the Management Agreement, as defined below. The Mortgage Loan is non-recourse to Associates, the Partnership and its partners. Operating profit from the Hotels in excess of debt service on the Mortgage Loan is available to be distributed to the Partnership. Amounts distributed to the Partnership are used for the following, in order of priority: (i) for debt service on the Senior Notes, (ii) to fund the Supplemental Debt Service Reserve, if necessary, (iii) to offer to purchase a portion of the Senior Notes at par, if necessary, (iv) for working capital, see Item 13, "Certain Relationships and Related Transactions" and (v) for distributions to the partners of the Partnership. Prepayments of the Mortgage Loan are permitted with the payment of a premium (the "Prepayment Premium"). The Prepayment Premium is equal to the greater of (i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance amount based on a spread of .25% or .55% over the U.S. treasury rate, as defined. On June 30, 1996, CBM Funding completed an exchange offer of its Multiclass Mortgage Pass-Through Certificates, Series 1996-1A with a principal balance of $406.2 million at that time, ("Old Certificates") for an equal amount of Multiclass Mortgage Pass-Through Certificates, Series 1996-1B ("New Certificates"). The form and terms of the New Certificates are substantially identical to the form and terms of the Old Certificates, except that the New Certificates are registered under the Securities Act of 1933, as amended and their transfers are not restricted. Ground Rent Facility Fifty-three of the Hotels are situated on land leased from MII or affiliates of MII, eight of the Hotels are situated on land leased from third parties. MFS had agreed to lend the Partnership up to $25 million (the "Ground Rent Facility") to the extent that the Partnership has insufficient funds to pay ground rent under any ground lease, including third party ground leases, after payment of (i) hotel operating expenses (except for ground rent) and (ii) debt service. No amounts were ever advanced under the Ground Rent Facility. Upon refinancing of the Partnership debt on January 24, 1996, MFS was released from the Ground Rent Facility. Material Contracts Management Agreement To facilitate the refinancing, effective December 30, 1995, the original management agreement was restated into two separate management agreements. Associates entered into a management agreement with the Manager for the 69 Hotels which Associates directly owns and Associates 6 II entered into a management agreement for the Deerfield Hotel which Associates II owns, collectively, (the "Management Agreement"). The primary provisions are discussed in Item 13, "Certain Relationships and Related Transactions." Ground Leases The land on which 53 of the Hotels are located is leased from MII or affiliates of MII. In addition, eight of the Hotels are located on land leased from third parties. The land leases have remaining terms (including renewal options) expiring between the years 2024 and 2068. The MII land leases and the third party land leases provide for rent based on specific percentages (from 2% to 15%) of gross sales in certain categories, subject to minimum amounts. The minimum rentals are adjusted at various anniversary dates throughout the lease terms, as defined in the agreements. For 1996, the Partnership paid a total of $12,018,000 in ground rent. See Item 2 "Properties" for a listing of Hotels that have ground leases. In connection with the refinancing, the Partnership, as lessee, transferred it rights and obligations pursuant to the 53 ground leases with MII and affiliates to Associates. Additionally, MII and affiliates agreed to subordinate their right to receive rental payments under the MII ground leases to the payment of debt service on the Senior Notes and the Mortgage Loan. Competition The United States lodging industry generally is comprised of two broad segments: full-service hotels and limited-service hotels. Full-service hotels generally offer restaurant and lounge facilities and meeting spaces, as well as a wide range of services, typically including bell service and room service. Limited-service hotels generally offer accommodations with limited or no services and amenities. As moderately-priced hotels, the Hotels compete effectively with both full-service and limited-service hotels in their respective markets by providing streamlined services and amenities exceeding those provided by typical limited-service hotels at prices that are significantly lower than those available at full-service hotels. Significant competitors in the moderately-priced lodging segment include Holiday Inn, Ramada Inn, Sheraton Inn, Hampton Inn and Hilton Inn. The lodging industry in general, and the moderately-priced segment in particular, is highly competitive, but the degree of competition varies from location to location and over time. An increase in supply growth began in 1996 with the introduction of a number of new national brands. For 1997, the outlook continues to be positive. Courtyards continue to command a premium share of the market in which they are located in spite of the growth of new chains. It is expected that Courtyard will continue outperforming both national and local competitors. The brand is continuing to carefully monitor the introduction of new mid-priced brands including Wingate Hotels, Hilton Garden Inns, Four Points by Sheraton, Mainstay, Candlewood, Club Hotels and Clarion. The Manager believes that by emphasizing management and personnel development and maintaining a competitive price structure, the Partnership's share of the market will be maintained or increased. The inclusion of the Hotels within the nationwide Courtyard by Marriott system provides the benefits of name recognition, centralized reservations and advertising, system-wide marketing and promotion, centralized purchasing and training and support services. 7 Conflicts of Interest Because Host Marriott, the parent of the General Partner, MII and their affiliates own and/or operate hotels other than the Partnership Hotels and Marriott International and its affiliates license others to operate hotels under the various brand names owned by Marriott International and its affiliates, potential conflicts of interest exist. With respect to these potential conflicts of interest, Host Marriott, MII and their affiliates retain a free right to compete with the Partnership's Hotels, including the right to develop, own, and operate competing hotels now and in the future in markets in which the Hotels are located, in addition to those existing hotels which may currently compete directly or indirectly with the Hotels. Under Delaware law, the General Partner has unlimited liability for the obligations of the Partnership, unless those obligations are, by contract, without recourse to the partners of the Partnership. Since the General Partner is entitled to manage and control the business and operations of the Partnership, and because certain actions taken by the General Partner or the Partnership could expose the General Partner or its parent, Host Marriott, to liability that is not shared by the limited partners (for example, tort liability and environmental liability), this control could lead to conflicts of interest. Policies with Respect to Conflicts of Interest It is the policy of the General Partner that the Partnership's relationship with the General Partner, any affiliate of the General Partner, or persons employed by the General Partner or its affiliates be conducted on terms that are fair to the Partnership and that are commercially reasonable. Agreements and relationships involving the General Partner or its affiliates and the Partnership are on terms consistent with the terms on which the General Partner or its affiliates have dealt with unrelated parties. The Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement") provides that any agreements, contracts or arrangements between the Partnership and the General Partner or any of its affiliates, except for rendering legal, tax, accounting, financial, engineering, and procurement services to the Partnership by employees of the General Partner or its affiliates, will be on commercially reasonable terms and will be subject to the following additional conditions: (i) the General Partner or any such affiliate must have the ability to render such services or to sell or lease such goods; (ii) such agreements, contracts or arrangements must be fair to the Partnership and reflect commercially reasonable terms and must be embodied in a written contract which precisely describes the subject matter thereof and all compensation to be paid therefor; (iii) no rebates or give-ups may be received by the General Partner or any such affiliate, nor may the General Partner or any such affiliate participate in any reciprocal business arrangements which would have the effect of circumventing any of the provisions of the Partnership Agreement; and 8 (iv) no such agreement, contract or arrangement as to which the limited partners had previously given approval may be amended in such a manner as to increase the fees or other compensation payable by the Partnership to the General Partner or any of its affiliates or to decrease the responsibilities or duties of the General Partner or any such affiliate in the absence of the consent of the holders of a majority in interest of the limited partners. Employees Neither the General Partner nor the Partnership has any employees. Host Marriott provides the services of certain employees (including the General Partner's executive officers) of Host Marriott to the Partnership and the General Partner. The Partnership and the General Partner anticipate that each of the executive officers of the General Partner will generally devote a sufficient portion of his or her time to the business of the Partnership. However, each of such executive officers also will devote a significant portion of his or her time to the business of Host Marriott and its other affiliates. No officer or director of the General Partner or employee of Host Marriott devotes a significant percentage of time to Partnership matters. To the extent that any officer, director or employee does devote time to the Partnership, the General Partner or Host Marriott, as applicable, is entitled to reimbursement for the cost of providing such services. See Item 11 "Management Remuneration and Transactions" for information regarding payments made to Host Marriott or its subsidiaries for the cost of providing administrative services to the Partnership. ITEM 2. PROPERTIES Introduction The properties consisted of 70 Courtyard by Marriott hotels as of December 31, 1996. The Hotels have been in operation for at least seven years. The Hotels range in age between 7 and 11 years. The Hotels are geographically diversified among 29 states, and no state has more than nine Hotels. The lodging industry in general, and the moderately-priced segment in particular, is highly competitive, but the degree of competition varies from location to location and over time. On a combined basis, competitive forces affecting the Hotels are not, in the opinion of the General Partner, more adverse than the overall competitive forces affecting the lodging industry generally. See Item 1 "Business--Competition." The following table summarizes certain attributes of each of the Hotels. 9
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP SUMMARY OF ATTRIBUTES (70 COURTYARD HOTELS) PROPERTY TITLE TO LAND # OF OPENING LOCATION ROOMS DATE 1 Birmingham/Homewood, AL Owned in fee 140 12/21/85 Five miles southeast of downtown 500 Shades Creek Parkway Birmingham and two miles north of I-459 Homewood, AL 35209 on Shades Creek Parkway across from commercial and residential areas. 2 Birmingham/Hoover, AL Leased from Essex House 153 08/08/87 In the Riverchase Galleria area in greater 1824 Montgomery Highway South Condominium Corp. * southwest Birmingham 1/2 mile from I- Hoover, AL 35244 459 and Route 31 (Montgomery Highway), Riverchase Galleria Mall and Riverchase office developments. 3 Huntsville, AL Leased from Marriott 149 08/15/87 On University Drive, one mile from the 4808 University Drive International, Inc. NASA Space Center, five miles from Huntsville, AL 35816 Redstone Arsenal and across from Cummings Research Park entrance. 4 Phoenix/Mesa, AZ Leased from Marriott 148 03/19/88 On corner of Southern Avenue at 1221 S. Westward Avenue International, Inc. Westwood Street, approximately 1/2 mile Mesa, AZ 85210 north of Superstition Freeway and 1/2 mile east of Fiesta Mall. 5 Phoenix/Metrocenter, AZ Leased from Marriott 146 11/29/87 In northwest Phoenix, 11 miles from 9631 N. Black Canyon International, Inc. downtown. Hotel is across from Metro Phoenix, AZ 85021 Center regional mall and adjacent to YWCA Leadership Development Center. 6 Tucson Airport, AZ Leased from Marriott 149 10/01/88 One-half mile north of Tucson 2505 E. Executive Drive International, Inc. International Airport at the intersection Tucson, AZ 85706 of Tucson Boulevard and Valencia Road. The Hotel is part of Bay Colony Business Park and near IBM, Hughes Aircraft, and Gates Learjet facilities. 7 Little Rock, AR Leased from Marriott 149 05/28/88 In West Little Rock on Financial Centre 10900 Financial Centre Parkway International, Inc. Parkway, just west of the intersection of Little Rock, AR 72211 Shackleford Road and I-630/I-430. 8 Bakersfield, CA Leased from Marriott 146 02/13/88 Off Highway 99 at Rosedale Highway in 3601 Marriott Drive International, Inc. north Bakersfield. Close to Shell Bakersfield, CA 93308 California, Occidental and Contel offices. 9 Cupertino, CA Leased from Vallco 149 05/14/88 In Silicon Valley near Santa Clara, at 10605 N. Wolfe Road Park, Ltd. intersection of I-280 and Wolfe Road in Cupertino, CA 95014 the center of commercial and retail development. Near major corporate computer firms in the area and 1/2 mile from Vallco Park regional mall. 10 Foster City, CA Leased from Essex House 147 09/26/87 Eight miles south of San Francisco 550 Shell Blvd. Condominium Corp. * International Airport just off Highway 92 Foster City, CA 94404 at Foster City Boulevard. Within Foster City commercial and residential development. Essex House Condominium Corporation is a subsidiary of Marriott International, Inc. 10 11 Fresno, CA Leased from Richard, 146 09/13/86 In north Fresno just off Highway 41 at 140 E. Shaw Avenue Miche, Aram & Aznive Shaw Avenue. Located two miles west of Fresno, CA 93710 Erganian Fresno State University and near Fashion Fair Shopping Mall. 12 Hacienda Heights, CA Leased from Marriott 150 03/28/90 East of Los Angeles at intersection of 1905 Azusa Avenue International, Inc. Azusa Avenue and Colima Road, 1/2 mile Hacienda Heights, CA 91745 from State Highway 60. Near over 45 million square feet of industrial and office development in the City of Industry. 13 Marin/Larkspur Landing, CA Leased from Essex House 146 07/25/87 Twelve miles north of San Francisco in 2500 Larkspur Landing Circle Condominium Corp. * Marin County of Highway 101 at Larkspur, CA 94939 Richmond San Rafael Bridge exit. Hotel is in Larkspur Landing commercial and residential development. 14 Palm Springs, CA Leased from Marriott 149 10/08/88 On northeast corner of Hermosa Drive and 300 Tahquitz Canyon Way International, Inc. Tahquitz McCallum Way 1/2 mile from Palm Springs, CA 92262 downtown Palm Springs Airport. 15 Torrance, CA Leased from Marriott 149 10/15/88 On Sepulveda Boulevard, west of 2633 West Sepulveda Boulevard International, Inc. Crenshaw Boulevard, in Park Del Amo Torrance, CA 90505 business park. Approximately one mile from Del Amo Fashion Center Mall. 16 Boulder, CO Leased from Marriott 148 08/06/88 At the intersection of 28th and Pearl 4710 Pearl East Circle International, Inc. Streets, in the north central area of Boulder, CO 80301 Boulder. One mile from downtown Boulder and the University of Colorado. 17 Denver, CO Owned in fee 146 08/15/87 Near the intersection of I-70 and Quebec 7415 East 41st Avenue Avenue, approximately one-half mile from Denver, CO 80301 the Denver Airport. 18 Denver/Southeast, CO Leased from Essex House 152 05/30/87 In southeast Denver off I-25 and 6565 S. Boston Street Condominium Corp.* Arapachoe Road near Tech Center office Englewood, CO 80111 and commercial developments. 19 Norwalk, CT Leased from Mary 145 07/30/88 Fronting U.S. Route y, 1/2 mile north of 474 Main Avenue Fabrizio Merritt Parkway, next to the Merritt Office Norwalk, CT 06851 Park and near Perkin Elmer, Pitney Bowes, Emery, and Richardson Vicks Corporate Headquarters. 20 Wallinford, CT Leased from Marriott 149 04/21/90 At the Route 68 and I-91 interchange. 600 Northrop Road International, Inc. The site is near the Bristol-Myers World Wallingford, CT 06492 Research Headquarters, Mid-Way Industrial Park and Barnes Industrial Park. 21 Ft. Myers, FL Leased from Marriott 149 08/27/88 At the intersection of Colonial Boulevard 4455 Metro Parkway International, Inc. and Metro Parkway in Metro Park office Ft. Myers, FL 33901 development, five miles from Ft. Myers Regional Airport and close to General Electric offices and Metro Mall. 22 Ft. Lauderdale/Plantation, FL Leased from Marriott 149 09/21/88 In Broward County eight miles west of 7780 S.W. 6th Street International, Inc. central Ft. Lauderdale at the intersection Plantation, FL 33324 of Mall Avenue and University Drive. The site is located in the heart of the retail and office developments near Broward Mall and American Express, Motorola, Southern Bell, and Racal-Milgo facilities. *Essex House Condominium Corporation is a subsidiary of Marriott International, Inc. 11 23 St. Petersburg, FL Leased from Marriott 149 10/14/89 On Ulmerton Road near Roosevelt 3131 Executive Drive International, Inc. Boulevard and two miles from St. Clearwater, FL 34622 Petersburg Airport. Near Honeywell, and Paradyne offices, and Carillon and Feather Sound office parks. 24 Tampa/Westshore, FL Leased from 145 10/27/86 Three miles southeast of Tampa 3805 West Cypress Hotsinger, Inc. and International Airport at the intersection Tampa, FL 33607 Owned in fee of I-275 and Dale Mabry in the greater Tampa Westshore office and commercial development area. 25 West Palm Beach, FL Leased from Marriott 149 01/14/89 At intersection of I-95 and 45th Street in 600 Northpoint Parkway International, Inc. the Northpoint Corporate Park. Near Palm West Palm Beach, FL 33407 Beach Lakes Boulevard, Barnett Bank Operations Center, Palm Beach Mall, and the Forum III office complex. 26 Atlanta Airport South, GA Owned in fee 144 06/15/86 One mile from Hartsfield International 2050 Sullivan Road Airport, off I-85 and Riverdale Road. College Park, GA 30337 27 Atlanta/Gwinnett Mall, GA Leased from Marriott 146 03/19/87 In northeast Atlanta at the intersection 3550 Venture Parkway International, Inc. of I-85 and Pleasant Hill Road adjacent to Duluth, GA 30136 Gwinnett Regional Mall. 28 Atlanta/Perimeter Ctr., GA Leased from Essex House 145 12/12/87 In north Atlanta, one mile north of I-285 6250 Peachtree-Dunwoody Road Condominium Corp. * and Peachtree-Dunwoody Road near Atlanta, GA 30328 office, commercial and residential developments. 29 Atlanta/Roswell, GA Leased from Roswell 154 06/11/88 Fifteen miles north of Atlanta at the 1500 Market Boulevard Landing Associates intersection of Highway 400 and Holcomb Roswell, GA 30076 Bridge Road in the Holcomb Woods office complex and across from Kimberly- Clark's Southern Headquarters. 30 Arlington Heights-South, IL Owned in fee 147 12/20/85 In the western Chicago area just off I-90 100 W. Algonquin Road at Arlington Heights Road 10 miles west Arlington Heights, Il 60005 of Chicago O'Hare Airport in office, commercial and residential developments. 31 Chicago/Deerfield, IL Owned in fee 131 01/02/86 In the north Chicago area, 15 miles north 800 Lake Cook Road of Chicago O'Hare Airport on Lake Cook Deerfield, IL 60015 Road, one mile from Northbrook Court Mall and several office and residential developments. 32 Chicago/Glenview, IL Leased from Marriott 149 07/08/89 In the northwest Chicago area at 1-294 180l Milwaukee Avenue International, Inc. and West Lake Avenue intersection, just Glenview, IL 60025 off Milwaukee Avenue and West Lake Avenue. Close to Allstate Insurance, A.C. Nielson, Zenith, Dart, and Culligan Headquarters office. 33 Chicago/Highland Park, IL Leased from Marriott 149 06/10/88 In the north Chicago area at the 1505 Lake Cook Road International, Inc. intersection of Edens Expressway and Highland Park, IL 60035 Lake Cook Road. Crosswoods Mall and Northbrook Court shopping center are located within one mile. * Essex House Condominium Corporation is a subsidiary of Marriott International, Inc. 12 34 Chicago/Lincolnshire, IL Owned in fee 146 07/20/87 In the northwest Chicago area, 20 miles 505 Milwaukee Avenue north of Chicago O'Hare Airport, across Lincolnshire, IL 60069 from Lincolnshire Corporate Center on Milwaukee Avenue. 35 Chicago/Oakbrook Terrace, IL Owned in fee 147 05/09/86 Eighteen miles west of downtown Chicago 6 TransAm Plaza Drive in TransAm Plaza office development just Oakbrook Terrace, IL 60181 off I-294 and Butterfield Road. Near office, commercial and residential developments in Oakbrook and Oakbrook Terrace. 36 Chicago/Waukegan, IL Leased from Marriott 149 05/28/88 Thirty miles north of Chicago at the 800 Lakehurst Road International, Inc. intersection of Route 43 and Route 120 by Waukegan, Il 60085 the Lakehurst Mall. The Hotel is close to Abbott Labs, American Hospital Supply, Johnson Outboard Marine, and Johns Manville offices and Ft. Sheridan Great Lakes Naval Training Center. 37 Chicago/Wood Dale, IL Leased from Marriott 149 07/02/88 In the west Chicago area at Thorndale 900 N. Wood Dale Road International Inc. Avenue and Mittel Road near Hamilton Wood Dale, IL 60191 Lakes Office Park and Centex Industrial Park. 38 Rockford, IL Owned in fee 147 04/12/86 Ninety miles west of Chicago just off I-90 7676 East State Road at State Street exit. Near Sundstand Rockford, IL 61108 Headquarters, and Chrysler and Barber Coleman offices. 39 Indianapolis/Castleton, IN Leased from Essex House 146 06/06/87 In northeast Indianapolis just off I-465 at 8670 Allisonville Road Condominium Corp. * Allisonville Road, near Castleton Mall and Indianapolis, IN 46250 Castle Creek office development. 40 Kansas City/Overland Park, KS Leased from Marriott 149 01/14/89 South of downtown Kansas City on 112th 11301 Metcalf Avenue International, Inc. Street and Metcalf Avenue just off I-435. Overland Park, KS 66212 Site is adjacent to Kansas City Trade/Mart Convention Center and several complexes. 41 Lexington/North, KY Leased from Essex House 146 06/04/88 At the intersection of Newtown Pike and 775 Newtown Court Condominium Corp.* New Circle Road in the northwest section Lexington, KY 40511 of Lexington. Close to I-75, IBM, University of Kentucky and Kentucky horse farms. 42 Annapolis, MD Leased from Essex House 149 03/04/89 On southwest corner of Riva Road and 2559 Riva Road Admiral Cochran Drive, just west of the Annapolis, MD 21401 U.S. 50 interchange. Site is 1/2 mile from Riva Office Park, one mile from Annapolis Mall and near the U.S. Naval Academy and downtown Annapolis. 43 Silver Spring, MD Leased from Marriott 146 08/06/88 At the intersection of U.S. 29 and 12521 Prosperity Drive International, Inc. Randolph/Cherry Hill Road, approximately Silver Spring, MD 20904 four miles north of I-495 and two miles west of I-95. The site is near the Chesapeake and Potomac Telephone Company complex, Montgomery Industrial Park, Westfield Office Park and Seventh Day Adventist Headquarters. * Essex House Condominium Corporation is a subsidiary of Marriott International, Inc. 13 44 Boston/Andorver, MA Leased from Marriott 146 12/03/88 Sixteen miles northwest of Boston at I-93 10 Campanelli Drive International, Inc. and River Road. Site is part of Riverfront Andover, MA 01810 Industrial Park and near offices of Digital, Raytheon, Hewlett-Packard, and Honeywell. 45 Detroit Airport, MI Leased from Marriott 146 12/12/87 On Merriman Road just off I-94 less than 30653 Flynn Drive International, Inc. one mile north of the entrance to Detroit Romulus, MA 48174 Metropolitan Airport. 46 Detroit/Livonia, MI Leased from Marriott 148 03/12/88 In west Detroit at I-275 and Six Mile 17200 N. Laurel Park Drive International, Inc. Road. The site is part of the Laurel Park Livonia, MI 48152 office and retail development and near the Plymouth Road industrial and office developments. 47 Minneapolis Airport, MN Leased from Essex House 146 06/13/87 Two miles southeast of Minneapolis/St. 1352 Northland Drive Condominium Corp. * Paul Airport just off I-494 and Pilot Knob Mendota Heights, MN 55120 Road in Mendota Heights near Northwest Airlines headquarters and major office developments. 48 St. Louis/Creve Coeur, MO Leased from Essex House 154 07/22/87 Eighteen miles east of downtown St. Louis 828 N. New Ballas Road Condominium Corp. * and nine miles southwest of Lambert- Creve Coeur, MO 63146 St. Louis International Airport just off I-270 at Olive Road. Near Monsanto Headquarters and Creve Coeur Executive Park. 49 St. Louis/Westport, MO Leased from Marriott 149 08/20/88 In northwest St. Louis, just off I-270 at 11888 Westline Industrial Drive International, Inc. the corner of Page Avenue and Westport St. Louis, MO 63146 Plaza Drive. The site is near Westport Plaza and close to several commercial and light industrial offices, including offices for Monsanto, DuPont, General Motors, and Wausau Insurance. 50 Lincroft/Red Bank, NJ Leased from Marriott 146 05/28/88 Fifty-five miles south of New York City at 245 Half Mile Road International, Inc. Exit 109 of the Garden State Parkway Red Bank, NJ 07701 (The Newman Road interchange). Near Bell Laboratories and American Bell offices and Fort Monmouth, the Garden State Arts Center and Red Bank. 51 Poughkeepsie, NY Leased from Pizzgalli 149 06/04/88 Just west of Rt. 9, approximately three 408 South Road Investment Company miles south of downtown Poughkeepsie. Poughkeepsie, NY It is one mile north of IBM's main office and manufacturing center. 52 Rye, NY Leased from Essex House 145 03/19/88 In Westchester County, New York at the 631 Midland Avenue Condominium Corp. * intersection of I-95 and I-287. Near Rye, NY 10580 corporate, commercial and residential developments in Rye and White Plains. 53 Charlotte/South Park, NC Leased from Queens 149 03/25/89 Four miles south of downtown Charlotte 6023 Park South Drive Properties, Inc. and east of I-77 near intersection of Charlotte, NC 28210 Fairview Road and Park Road. The hotel is located one mile from the headquarters of Celanese Corporation and J.A. Jones and near offices of IBM and Burroughs. * Essex House Condominium Corporation is a subsidiary of Marriott International, Inc. 14 54 Raleigh/Cary, NC Leased from Marriott 149 06/25/88 Approximately 10 miles southwest of 102 Edinburgh Drive South International, Inc. Raleigh at the intersection of U.S. 64 and Cary, NC 27511 Edinburgh Drive in the MacGregor office and shopping park. Near IBM, Hewlett- Packard, Borg-Warner, and Union Carbide office. 55 Dayton Mall, OH Leased from Marriott 146 09/19/87 Seven miles south of downtown Dayton, 100 Prestige Place International, Inc. just off I-75 at Route 725. The site is 1/4 Miamisburg, OH 45342 mile from Dayton Mall and four miles from NCR Headquarters in the premier suburban office, commercial, retail and residential area. 56 Toledo, OH Leased from Marriott 149 04/30/88 At intersection of Airport Road and I-475, 1435 East Mall Drive International, Inc. two miles from Toledo Airport. Close to Holland, OH 43528 NCR, Dana Corporation and Commerce Executive Park. 57 Oklahoma City Airport, OK Leased from Marriott 149 07/23/88 Just off I-40 at Meridian Interchange on 4301 Highline Boulevard International, Inc. Highland Blvd., four miles north of Will Oklahoma City, OK 73108 Rogers World Airport and five miles from downtown. 58 Portland-Beaverton, OR Leased from Marriott 149 02/11/89 On Hall Boulevard, 1/4 mile from 8500 S.W. Nimbus Drive International, Inc. Highway 217 in Koll Business Center, and Beaverton, OR 97005 1/2 mile from Washington Square Mall in southwest Portland. 59 Philadelphia/Devon, PA Leased from Three Devon 149 11/19/88 At Route 30 (Lancaster Avenue) and Old 762 W. Lancaster Ave. Square Associates Eagle School Road. Near Wyeth Wayne, PA 19087 International, Chilton, and Fidelity Mutual Corporate Headquarters and Villanova University and Immaculata College. 60 Columbia, SC Leased from Marriott 149 01/28/89 On Zimalcrest Drive on southwest corner 347 Zimalcrest Drive International, Inc. of I-20 and I-126 in northwest Columbia. Columbia, SC 29210 The site is within 10 minutes of the Columbia Metropolitan Airport, downtown, and the University of South Carolina. 61 Greenville, SC Leased from Essex House 146 03/05/88 In suburban Greenville at intersection of I- 70 Orchard Park Drive Condominium Corp. * 385 and Haywood Road, four miles from Greenville, SC 29615 downtown Greenville, 1/2 mile from Haywood Mall, and eight miles from Greenville/Spartanburg Jetport. 62 Memphis Airport, TN Leased from Essex House 145 07/15/87 One mile from Memphis International 1780 Nonconnah Boulevard Condominium Corp. * Airport just off I-240 and Mill Branch Memphis, TN 38132 Road. Site is near Federal Express headquarters and in Nonconnah Corporate Center, which contains the office of Nationwide Insurance. 63 Nashville Airport, TN Leased from Essex House 145 01/23/88 On the northeast corner of Elm Hill Pike 2508 Elm Hill Pike Condominium Corp. * and McGavock Street, two miles from Nashville, TN 37214 Nashville Metro Airport, six miles south of Opryland USA and eight miles from downtown Nashville. 64 Dallas/Northeast, TX Leased from Marriott 149 01/16/88 Off central expressway (Route 75) and 1000 South Sherman International, Inc. Spring Valley Road in Spring Valley Richardson, TX 75081 Business Park, near Texas Instruments and EDS. * Essex House Condominium Corporation is a subsidiary of Marriott International, Inc. 15 65 Dallas/Plano, TX Owned in fee 149 05/07/88 In north Dallas at the intersection of 4901 W. Plano Parkway Preston Road and Plano Parkway. The Plano, TX 75093 site is near EDS, Frito-Lay, and J.C. Penney Headquarters. 66 Dallas/Stemmons, TX Leased from Essex House 146 09/12/87 At I-35 and Northwest Highway within 2383 Stemmons Trail Condominium Corp. * five miles of the high concentration of Dallas, TX 75220 offices in the Dallas Market Center area. 67 San Antonio/Downtown, TX Leased from Essex House 149 02/30/90 On the southeast corner of Santa Rosa and 600 Santa Rosa South Condominium Corp. * Durango Boulevard 1/2 mile from I-35 San Antonio, TX 78204 and Durango interchange in downtown San Antonio, 1/2 mile from Market Square and one mile from Riverwalk and Hemisfair Plaza. 68 Charlottesville, VA Leased from Marriott 150 01/21/89 On Highway 29 next to Fashion Square 638 Hillsdale Drive International, Inc. Mall, approximately five miles north of Charlottesville, VA 22901 the University of Virginia. 69 Manassas, VA Leased from Marriott 149 03/04/89 West of Washington, D.C. at I-66 and 10701 Battleview Parkway International, Inc. Route 234 (Sudley Road), near Atlantic Manassas, VA 22110 Research, IBM, and Manassas Battlefield Park. 70 Seattle/Southcenter, WA Leased from Marriott 149 03/11/89 Near Sea/Tac Airport at the intersection of 400 Andover Park West International, Inc. Stander Boulevard and Andover Park West Tukwila, WA 98188 within 1/4 mile of Southcenter Mall and Boeing Computer Services Headquarters. Close to Tukwila's office and industrial parks. * Essex House Condominium Corporation is a subsidiary of Marriott International, Inc.
16 ITEM 3. LEGAL PROCEEDINGS Certain Limited Partners of the Partnership have filed a lawsuit in Texas state court against the General Partner, the Manager and certain of their respective affiliates, officers and directors. These partners have alleged that the General Partner and the Manager have improperly operated the business affairs of the Partnership and its hotels. The General Partner believes that all of these claims are without foundation and intends to vigorously defend against them. The Partnership and the Hotels are involved in routine litigation and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and which collectively are not expected to have a material adverse effect on the business, financial condition or results of operations of the Partnership. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS There is currently no established public trading market for the Units and it is not anticipated that a public market for the Units will develop. Transfers of Units are limited to the first date of each accounting period and may be made only to accredited investors. All transfers are subject to approval by the General Partner. As of December 31, 1996, there were 1,633 holders (including holders of half-units) of record of the 1,470 Units. In accordance with Sections 4.07 and 4.10 of the Partnership Agreement, cash available for distribution for any year will be distributed at least annually to the Partners of record at the end of each accounting period during such year as follows: (i) first, through and including the end of the accounting period during which the Partners shall have received cumulative distributions of sales or refinancing proceeds ("Capital Receipts") equal to $77,368,421, 5% to the General Partner and 95% to the limited partners; (ii) next, through and including the end of the accounting period during which the Partners shall have received cumulative distributions of Capital Receipts equal to $158,306,000, 10% to the General Partner and 90% to the limited partners; and (iii) thereafter, 25% to the General Partner and 75% to the limited partners. Distributions to the General Partner under clauses (i), (ii) and (iii) above shall be subordinate to an annual, non-cumulative 10% preferred return to the limited partners on their invested capital, as defined. 17 Cash available for distribution means, with respect to any fiscal period, the cash revenues of the Partnership from all sources during the fiscal period, other than Capital Receipts, plus amounts received by the Partnership pursuant to the Price Adjustment amount, less (i) all cash expenditures of the Partnership during such fiscal period, including, without limitation, repayment of all Partnership indebtedness to the extent required to be paid, but not including expenditures of Capital Receipts, plus fees for management services and administrative expenses and (ii) such reserves as may be determined by the General Partner, in its sole discretion (other than funds received under the Price Adjustment amount) to be necessary to provide for the foreseeable needs of the Partnership. As of December 31, 1996, the Partnership has distributed a total of $67,024,650 ($45,595 per limited partner unit) since inception. In 1996, $6,982,500 ($4,750 per limited partner unit) was distributed and an additional $4,042,500 ($2,750 per limited partner unit) will be distributed in April 1997 bringing the total distribution from 1996 operations to $11,025,000 ($7,500 per limited partner unit). In 1995, no distributions were made to the Partners in order to retain funds to pay the costs associated with refinancing the Partnership's debt. The Partnership distributed $8,820,000 ($6,000 per limited partner unit) for 1994. No distributions of Capital Receipts have been made since inception. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data presents historical operating information for the Partnership for each of the five years in the period ended December 31, 1996 presented in accordance with generally accepted accounting principles.
1996 1995 1994 1993 1992 ---------- ----------- ----------- ---------- ---------- (in thousands, except per unit amounts) Revenues..........................................$ 136,077 $ 124,769 $ 114,145 $ 102,916 $ 93,434 ========== =========== =========== ========== =========== Net income (loss).................................$ 10,541 $ 11,215 $ (3,564) $ (6,019) $ (16,307) ========== =========== =========== ========== =========== Net income (loss) per limited partner unit (1,470 Units)......................$ 6,812 $ 7,248 $ (2,303) $ (3,890) $ (10,538) ========== =========== =========== ========== =========== Total assets......................................$ 547,099 $ 567,530 $ 549,895 $ 564,225 $ 581,975 ========== =========== =========== ========== =========== Total liabilities.................................$ 579,040 $ 603,030 $ 593,947 $ 595,893 $ 598,804 ========== =========== =========== ========== =========== Cash distributions per limited partner unit (1,470 Units)......................$ 7,500 $ -- $ 6,000 $ 6,000 $ 6,000 ========== =========== =========== ========== ===========
18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion and analysis addresses results of operations for the fiscal years ended December 31, 1996, 1995 and 1994. Since 1990, Courtyard by Marriott II Limited Partnership ("the Partnership") has owned the 70 hotels (the "Hotels") which, as of December 31, 1996, contain a total of 10,335 guest rooms. During the period from 1994 through 1996, Partnership revenues grew from $112.4 million to $133.2 million, while the Partnership's total hotel sales grew from $232.1 million to $263.7 million. Growth in room sales, and thus hotel sales, is primarily a function of combined average occupancy and room rates. During the period from 1994 through 1996, the Hotels' combined average room rate increased by $9.53 from $66.95 to $76.48, while the combined average occupancy decreased slightly from 81% to 80%. The Partnership's operating costs and expenses are, to a great extent, fixed. Therefore, the Partnership derives substantial operating leverage from increases in revenue. This operating leverage is offset in part by variable expenses, including (i) base and Courtyard management fees under the management agreement, which are 3 1/2% and 2 1/2% of gross hotel sales, respectively and (ii) variable ground lease payments. RESULTS OF OPERATIONS The following table shows selected combined operating and financial statistics for the Hotels (in thousands, except combined average occupancy, combined average daily room rate, REVPAR and number of rooms):
Year Ended December 31, 1996 1995 1994 Combined average occupancy................................................. 80.4% 81.4% 81.1% Combined average daily room rate...........................................$ 76.48 $ 71.49 $ 66.95 REVPAR $...................................................................$ 61.49 $ 58.19 $ 54.30 Number of rooms............................................................ 10,355 10,335 10,335 Room sales.................................................................$ 235,861 $ 218,955 $ 204,203 Food and beverage sales.................................................... 18,227 17,628 18,483 Other hotel sales.......................................................... 9,619 9,242 9,396 ---------- ----------- ----------- Total hotel sales....................................................... 263,707 245,825 232,082 Direct hotel operating costs and expenses.................................. 130,525 124,088 119,690 ---------- ----------- ----------- Hotel Revenues.............................................................$ 133,182 $ 121,737 $ 112,392 ========== =========== ===========
19 The following table shows selected components of the Partnership's operating income as a percentage of total hotel sales.
Year Ended December 31, 1996 1995 1994 Hotel sales: Room sales.............................................................. 89.4% 89.1% 88.0% Food and beverage sales................................................. 6.9 7.2 8.0 Other ................................................................. 3.7 3.7 4.0 ----- ------ ------ Total hotel sales.................................................... 100.0 100.0 100.0 Direct operating costs and expenses........................................ 49.5 50.5 51.6 ----- ------ ------ Hotel Revenues............................................................. 50.5 49.5 48.4 Indirect hotel operating costs and expenses: Depreciation and amortization........................................... 10.2 11.3 12.1 Base and Courtyard management fees...................................... 6.0 6.0 6.0 Ground rent............................................................. 4.5 4.7 4.6 Property taxes.......................................................... 3.6 3.8 4.1 Incentive management fees............................................... 4.6 4.3 4.1 Insurance and other..................................................... 2.1 1.3 2.7 ---------- ----------- ----------- Total indirect hotel operating costs and expenses....................... 31.0 31.4 33.6 ---------- ----------- ----------- Operating income..................................................... 19.5% 18.1% 14.8% ========== =========== ===========
1996 Compared to 1995: Hotel Revenues. Hotel revenues (hotel sales less direct hotel operating costs and expenses) increased by $11.4 million in 1996, to $133.2 million, a 9.4% increase when compared to 1995. This increase in revenues was achieved primarily through an increase in hotel sales offset by an increase in hotel operating costs and expenses, as discussed below. Hotel sales. Total 1996 hotel sales of $263.7 million represented a $17.9 million, or 7.3%, increase over 1995 results. This increase was achieved primarily through increases in the combined average room rate from $71.49 in 1995 to $76.48 in 1996. As a result, 1996 room sales increased by $16.9 million, or 7.7%, to $235.9 million from $219.0 million in 1995 despite a one percent decrease in occupancy to 80.4% during 1996. Forty of the Partnership's 70 Hotels posted occupancy rates exceeding 80% for 1996. Direct hotel operating costs and expenses. Direct hotel operating costs and expenses in 1996 increased $6.4 million, or 5.2%. The increase in direct hotel operating costs and expenses is primarily due to an increase in certain variable costs related to the increase in room sales. However, as a percentage of total hotel sales, these costs and expenses decreased to 49.5% in 1996 as compared to 50.5% in 1995. Indirect hotel operating costs and expenses. Indirect hotel operating costs and expenses increased by $3.9 million, or 5.3%, from $72.4 million in 1995 to $76.3 million in 1996. As a percentage of total hotel sales these costs and expenses decreased to 28.9% of total hotel sales in 1996 from 29.5% in 1995. The components of this category are discussed below: Depreciation. Depreciation decreased slightly in 1996 as compared to 1995 due to a portion of the Hotels' furniture and equipment becoming fully depreciated in 1995. 20 Base and Courtyard management fees. The increase in base and Courtyard management fees of 7.4%, from $14.7 million in 1995 to $15.8 million in 1996 is due to the improved combined hotel sales for the 70 Hotels for 1996 when compared to 1995. Ground rent. The 1996 ground rent expense of $11.9 million represents a 3.0% increase over 1995 levels as improved hotel operations resulted in Hotels paying more ground rent as a percent of sales rather than the minimum rent. As a percentage of total hotel sales, ground rent expense was 4.5% and 4.7% in 1996 and 1995, respectively. Incentive management fees. In 1996, $12.0 million of incentive management fees were earned as compared to $10.5 million earned in 1995. The increase in incentive management fees earned was the result of improved combined hotel operating results. Insurance and other. The 1996 insurance and other expenses increased by $1.2 million to $2.8 million when compared to 1995. The increase is primarily due to an increase in equipment rent, insurance expenses and prior year adjustments. Operating income. Operating income (hotel revenues less all costs and expenses other than interest expense) increased by $7.6 million to $56.9 million in 1996, from $49.3 million in 1995, primarily due to higher revenues. Interest expense. Interest expense increased 21.7% to $46.4 million in 1996 from $38.1 million in 1995. This increase in interest expense was due to the refinancing of the Partnership's debt at fixed rates which are higher than the prior year's variable interest rates. The weighted average interest rate in 1996 was 8.4% as compared to 7% in 1995. Net income/(loss). In 1996, the Partnership had net income of $10.5 million, a decrease of $.7 million from 1995's net income of $11.2 million. This decrease was primarily due to higher interest expense. 1995 Compared to 1994: Hotel Revenues. Hotel revenues (hotel sales less direct hotel operating costs and expenses) increased by $9.3 million in 1995, to $121.7 million, a 8.3% increase when compared to 1994. This increase in revenues was achieved primarily through an increase in hotel sales offset by an increase in operating costs and expenses, as discussed below. Hotel sales. Total 1995 hotel sales of $245.8 million represented a $13.7 million, or 5.9%, increase over 1994 results. This increase was achieved primarily through increases in the combined average room rate from $66.95 in 1994 to $71.49 in 1995. As a result, 1995 room sales increased by $14.8 million, or 7.2%, to $219.0 million from $204.2 million in 1994 despite stable occupancy of approximately 81% during these periods. Forty-five of the Partnership's 70 Hotels posted occupancy rates exceeding 80% for 1995. Food and beverage sales decreased by 4.6% from $18.5 million in 1994 to $17.6 million in 1995 as a result of the Manager's continued efforts to match restaurant service to customer demands by eliminating under-utilized services at low volume restaurants. Direct hotel operating costs and expenses. Direct hotel operating costs and expenses in 1995 increased $4.4 million, or 3.7%. The increase in direct hotel operating costs and expenses is 21 primarily due to an increase in certain variable costs related to the increase in room sales. However, as a percentage of total hotel sales, these costs and expenses decreased to 50.5% in 1995 as compared to 51.6% in 1994. Indirect hotel operating costs and expenses. Indirect hotel operating costs and expenses decreased by $.4 million, or .5%, from $72.8 million in 1994 to $72.4 million in 1995. As a percentage of total hotel sales these costs and expenses decreased to 29.5% of total hotel sales in 1995 from 31.4% in 1994. The components of this category are discussed below: Depreciation. Depreciation decreased slightly in 1995 as compared to 1994 due to a portion of the Hotels' furniture and equipment becoming fully depreciated in 1994. Base and Courtyard management fees. The increase in base and Courtyard management fees of 5.9%, from $13.9 million in 1994 to $14.7 million in 1995 is due to the improved combined hotel sales for the 70 Hotels for 1995 when compared to 1994. Ground rent. The 1995 ground rent expense of $11.5 million represents a 7.1% increase over 1994 levels as improved hotel operations resulted in Hotels paying more ground rent as a percent of sales rather than the minimum rent. As a percentage of total hotel sales, ground rent expense remained the same at 4.7% in 1994 and 1995. Incentive management fees. In 1995, $10.5 million of incentive management fees were earned as compared to $9.4 million earned in 1994. The increase in incentive management fees earned was the result of improved combined hotel operating results. Insurance and other. The 1995 insurance and other expenses decreased $1.4 million to $1.6 million when compared to 1994 due to a $1.2 million loss on fixed asset dispositions in 1994. Operating income. Operating income (hotel expenses less all costs and expenses other than interest expense) increased by $9.7 million to $49.3 million in 1995, from $39.6 million in 1994, primarily due to higher hotel sales. Interest expense. Interest expense decreased 11.6% to $38.1 million in 1995 from $43.1 million in 1994. This decrease in interest expense was due to the expiration of the interest rate swaps on Mortgage Debt A and Mortgage Debt B on August 4, 1994 and October 18, 1994, respectively. Incremental interest expense, as a result of the interest rate swaps, was $15.0 million for 1994. Net income/(loss). In 1995, the Partnership had net income of $11.2 million, an increase of $14.8 million, over 1994's net loss of $3.6 million. This increase was primarily due to higher revenues and lower interest expense due to the expiration of the Partnership's interest rate swap agreements. 22 CAPITAL RESOURCES AND LIQUIDITY Principal Sources and Uses of Cash The Partnership's principal source of cash is cash from operations. Its principal uses of cash are to make debt service payments, fund the property improvement fund, and to make distributions to the limited partners. Cash provided from operations was $35.6 million, $36.0 million and $25.7 million for the years ended December 31, 1996, 1995 and 1994, respectively. During 1996, the Partnership repaid $11.3 million of principal on the Certificates, as defined below, and paid $42.5 million of interest on the Partnership's debt. The Partnership paid $42.1 million and $47.4 million in interest in 1995 and 1994, respectively. No principal payments were made on the Partnership's Mortgage Debt in 1995 or 1994. Contributions to the property improvement fund were $13.2 million, $12.3 million and $11.8 million for the years ended December 31, 1996, 1995, and 1994, respectively. Distributions to limited partners were $7.0 million in 1996, $2.7 million during 1995 from 1994 operations and $8.8 million in 1994. Refinancing Partnership Structure On January 24, 1996, the Partnership completed a refinancing of the Partnership's existing debt through the private placements of $127.4 million of senior secured notes (the "Senior Notes") and $410.2 million of multi-class commercial mortgage pass-through certificates (the "Certificates"). In connection with the refinancing, the limited partners approved certain amendments to the partnership agreement and the management agreement. The partnership agreement amendment, among other things, allowed the formation of certain subsidiaries of the Partnership, including Courtyard II Finance Company ("Finance"), a wholly-owned subsidiary of the Partnership, who along with the Partnership is the co-issuer of the Senior Notes. Additionally, the Partnership formed a wholly-owned subsidiary, Courtyard II Associates Management Corporation ("Managing General Partner"). Managing General Partner was formed to be the managing general partner with a 1% general partner interest in Courtyard II Associates, L.P. ("Associates"), a Delaware limited partnership. The Partnership owns a 1% general partner interest and a 98% limited partner interest in Associates. On January 24, 1996, the Partnership contributed 69 Hotels and their related assets to Associates. Formation of Associates resulted in the Partnership's primary assets being its direct and indirect interest in Associates. Additionally, substantially all of Associates' net equity will be restricted to dividends, loans or advances to the Partnership. Associates holds a 99% membership interest in CBM Associates II LLC ("Associates II") and Managing General Partner holds the remaining 1% membership interest. On January 24, 1996, the Partnership contributed the Hotel located in Deerfield, IL (the "Deerfield Hotel") and its related assets to Associates and the Managing General Partner who simultaneously contributed the Hotel and its related assets to Associates II. Each of the Managing General Partner, Associates and Associates II were formed as a single purpose bankruptcy-remote entity to facilitate the refinancing. 23 CBM Funding Corporation ("CBM Funding"), a wholly-owned subsidiary of Associates, was also formed to make a mortgage loan (the "Mortgage Loan") to Associates from the proceeds of the sale of the Certificates. Debt Refinancing - Overview On January 24, 1996, net proceeds from the placement of the Senior Notes and the Certificates and existing Partnership cash were used as follows: (i) to repay the Partnership's existing Mortgage Debt A of $275 million and Mortgage Debt B of $230.5 million, (ii) to repay the industrial revenue bond financing on certain Hotels (the "IRB Debt") of $25.6 million, (iii) to repay advances from Host Marriott related to certain Hotels of $6.5 million and (iv) to pay certain costs of structuring and issuing the Senior Notes and the Certificates. Prior to the completion of the refinancing on January 24, 1996, Host Marriott or its wholly-owned subsidiary, CBM Two Corporation, (the "General Partner") provided additional credit support to the Partnership through the following: (i) debt service guarantees on Mortgage Debt A and B, (ii) foreclosure guarantees on the Mortgage Debt A and B, (iii) obligations to advance funds related to the IRB Debt and (iv) a facility for the Partnership to borrow funds to pay ground rent (the "Ground Rent Facility"). Upon repayment of Mortgage Debt A, Mortgage Debt B, and the IRB Debt, Host Marriott was released from these obligations. Debt Refinancing - Senior Notes The Senior Notes of $127.4 million were issued by the Partnership and Finance. The Senior Notes bear interest at 10 3/4%, require semi-annual payments of interest and require no payments of principal until maturity on February 1, 2008. The Senior Notes are secured by a first priority pledge by the Partnership of (i) its 99% partnership interest (consisting of a 98% limited partner interest and a 1% general partner interest) in Associates and (ii) its 100% equity interest in the Managing General Partner. Finance has nominal assets, does not conduct any operations and does not provide any additional security for the Senior Notes. The terms of the Senior Notes include requirements of the Partnership to establish and fund a debt service reserve account in an amount equal to one six-month interest payment on the Senior Notes ($6,848,000) and to maintain certain levels of excess cash flow, as defined. In the event the Partnership fails to maintain the required level of excess cash flow, the Partnership will be required to (i) suspend distributions to its partners and other restricted payments, as defined, (ii) to fund a separate supplemental debt service reserve account (the "Supplemental Debt Service Reserve") in an amount up to two six-month interest payments on the Senior Notes and (iii) if such failure were to continue, to offer to purchase a portion of the Senior Notes at par. The Senior Notes are not redeemable prior to February 1, 2001. Thereafter, the Senior Notes may be redeemed, at the option of the Partnership, at a premium declining to par in 2004. The Senior Notes are non-recourse to the Partnership and its partners. On June 4, 1996, the Partnership and Finance completed an exchange offer of its unregistered 10 3/4% Series B Senior Secured Notes with an aggregate principal amount of $127.4 million ("Old Notes") due 2008 for an equal amount of registered notes ("New Notes"). The form and 24 terms of the New Notes are substantially identical to the form and terms of the Old Notes, except that the New Notes have been registered under the Securities Act of 1933, as amended and will not have any restrictions for transfer. Debt Refinancing - Certificates The Certificates in an initial principal payment of $410.2 million were issued by CBM Funding. Proceeds from the sale of the Certificates were utilized by CBM Funding to provide a Mortgage Loan to Associates. The Certificates/Mortgage Loan require monthly payments of principal and interest based on a 17-year amortization schedule. The Mortgage Loan matures on January 28, 2008. However, the maturity date of the Certificates/Mortgage Loan may be extended until January 28, 2013 with the consent of 66 2/3% of the holders of the outstanding Certificates affected thereby. The Certificates were issued in the following classes and pass-through rates of interest. Initial Certificate Pass-Through Class Balance Rate Class A-1 $ 45,500,000 7.550% Class A-2 $ 50,000,000 6.880% Class A-3P & I $ 129,500,000 7.080% Class A-3IO Not Applicable 0.933% Class B $ 75,000,000 7.480% Class C $ 100,000,000 7.860% Class D $ 10,200,000 8.645% The Class A-3IO Certificates receive payments of interest only based on a notional balance equal to the Class A-3P & I Certificate balance. The balance of the Certificates was $398.9 million at December 31, 1996. Principal amortization of $11.3 million of the Class A-1 Certificates was made during 1996. The Certificates/Mortgage Loan maturities are as follows (in thousands): 1997 $ 13,298 1998 14,331 1999 15,443 2000 16,642 2001 17,934 Thereafter 321,205 ------------ $ 398,853 ============ The Mortgage Loan is secured primarily by 69 cross-defaulted and cross-collateralized mortgages representing first priority mortgage liens on (i) the fee or leasehold interest in the 69 Hotels, related furniture, fixtures and equipment and the property improvement fund, (ii) the fee interest in the land leased from MII or their affiliates on which 53 Hotels are located, (iii) a pledge of Associates membership interest in and the related right to receive distributions from Associates II which owns the Deerfield Hotel and (iv) an assignment of the Management Agreement, as defined below. The Mortgage Loan is non-recourse to Associates, the Partnership and its partners. 25 Operating profit from the Hotels in excess of debt service on the Mortgage Loan is available to be distributed to the Partnership. Amounts distributed to the Partnership are used for the following, in order of priority: (i) for debt service on the Senior Notes, (ii) to fund the Supplemental Debt Service Reserve, if necessary, (iii) to offer to purchase a portion of the Senior Notes at par, if necessary, (iv) for working capital, see Item 13 "Certain Relationship and Related Transaction," and (v) for distributions to the partners of the Partnership. Prepayments of the Mortgage Loan are permitted with the payment of a premium (the "Prepayment Premium"). The Prepayment Premium is equal to the greater of (i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance amount based on a spread of .25% or .55% over the U.S. treasury rate, as defined. On June 30, 1996, CBM Funding completed an exchange offer of its Multiclass Mortgage Pass-Through Certificates, Series 1996-1A with a principal balance of $406.2 million at that time, ("Old Certificates") for an equal amount of Multiclass Mortgage Pass-Through Certificates, Series 1996-1B ("New Certificates"). The form and terms of the New Certificates are substantially identical to the form and terms of the Old Certificates, except that the New Certificates are registered under the Securities Act of 1933, as amended and their transfers are not restricted. Deferred Management Fees and Ground Lease Payments To facilitate the refinancing, effective December 30, 1995, the original management agreement was restated into two separate management agreements. Associates entered into a management agreement with the Manager for the 69 Hotels which Associates directly owns and Associates II entered into a management agreement for the Deerfield Hotel which Associates II owns, collectively, (the "Management Agreement"). Under the Management Agreement that became effective on December 30, 1995, the Manager agreed to subordinate a portion of the Courtyard management fees and all incentive management fees, and under an amendment to the ground leases with Marriott International, Inc. and its affiliates (the "Marriott Ground Lessors") that became effective on January 24, 1996, the Marriott Ground Lessors agreed to subordinate their ground rent payments, to the payment of interest, principal and premiums on the Mortgage Loan and the Senior Notes and debt incurred to refinance the Mortgage Loan or the Senior Notes that meets specified criteria. In addition, the Manager agreed to subordinate existing deferred base, Courtyard and incentive management fees to the payment of debt service. Deferred base, Courtyard and incentive management fees do not accrue interest and will be repaid from a portion of operating cash flow but only after payment of (i) debt service, (ii) a priority return to the Partnership and (iii) certain other priorities as defined in the Management Agreement. Deferred ground rent owed to the Marriott Ground Lessors does not accrue interest and will be repaid from a portion of operating cash flow, but only after payment of debt service. Payment of such deferred fees and deferred ground rent are restricted payments under the covenants of the Senior Notes. Historically, under the management agreement, the Manager subordinated receipt of the Courtyard management fee to the payment of debt service (through the debt refinancing date of January 24, 1996) and a 6% return to the limited partners (through 1993). As of December 31, 26 1996, cumulative deferred base and Courtyard management fees totaled $30.2 million. Prior to 1994 no incentive management fees were earned by the Manager. For the year ended December 31, 1995, $10.5 million in incentive management fees were earned and paid to the Manager. For the year ended December 31, 1996, $12.0 million in incentive management fees were earned and $11.4 million were paid. Therefore, $.6 million was deferred in 1996. In the future, additional incentive management fees may be earned, but payment will be limited by the terms of the Management Agreement to 80% of the amount by which operating profit less debt service exceeds the priority return to the Partnership. The priority return to the Partnership, as defined, was reduced from 10% of invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 10% for 1999 and thereafter. Operating profit from the Hotels (which reflects the deduction of the base and Courtyard management fees and MII ground rent) will be used to pay the following, in order of priority: (i) debt service on the Senior Notes and Mortgage Loan, (ii) to repay working capital loans to the Manager, (iii) to repay deferred ground rent to MII and their affiliates, (iv) to repay ground lease advances to MII and their affiliates, (v) the priority return to the Partnership which is 7% of invested capital for 1996, (vi) eighty percent of the remaining operating profit is applied to the payment of current incentive management fees, (vii) to repay advances to the Partnership, (viii) to repay foreclosure avoidance advances to the Manager and (ix) fifty percent of the remaining operating profit to repay deferred management fees to the Manager and fifty percent of remaining operating profit is paid to the Partnership. In 1996, the Partnership had $2.5 million of remaining operating profit after the payment of i) through viii) above. Fifty percent of this remaining operating profit was used to repay a portion of 1996 deferred incentive management fees to the Manager and the remainder was paid to the Partnership. Property Improvement Fund The Management Agreement requires annual contributions to a property improvement fund to ensure that the physical condition and product quality of the Hotels are maintained. Contributions to this fund are based on a percentage of annual total hotel sales, currently equal to 5%. The Partnership believes that the 5% contribution requirement is consistent with industry standards and provides a sufficient reserve for the future capital repair and replacement needs of the Hotels. In accordance with the Management Agreement, the annual required contribution percentage may increase to up to 6% after December 31, 2000. The balance in the fund totaled $36.6 million as of December 31, 1996. During the period from 1992 through 1995, room renovation projects were completed at all of the Hotels at an aggregate cost of approximately $30.7 million. Total capital expenditures for 1996, 1995 and 1994 were $11.2 million, $8.8 million and $13.4 million, respectively. All such capital expenditures were funded from the property improvement fund. General As previously discussed, the Partnership's debt was refinanced on January 24, 1996. The General Partner believes that cash from hotel operations combined with the ability to defer certain management fees to the Manager and ground rent payments to MII and affiliates will provide adequate funds in the short term and long term for the operational and capital needs of the Partnership. 27 Competition The moderately priced lodging segment continues to be highly competitive. An increase in supply growth began in 1996 with the introduction of a number of new national brands. For 1997, the outlook continues to be positive. Courtyards continue to command a premium share of the market in which they are located in spite of the growth of new chains. It is expected that Courtyard will continue outperforming both national and local competitors. The brand is continuing to carefully monitor the introduction of new mid-priced brands including Wingate Hotels, Hilton Garden Inns, Four Points by Sheraton, Mainstay, Candlewood, Club Hotels and Clarion. Inflation The rate of inflation has been relatively low in the past four years. The Manager is generally able to pass through increased costs to customers through higher room rates and prices. In 1996, average rates of Courtyard hotels exceeded inflationary costs, but lagged the increases of direct competitors who have been able to realize higher rates due to climbing occupancies. In January 24, 1996, the Partnership refinanced its mortgage debt and fixed its interest costs thereby eliminating the Partnership's exposure to the impact of inflation on future interest costs. Seasonality Demand, and thus room occupancy, is affected by normally recurring seasonal patterns. For most of the Hotels, demand is higher in the spring and summer months (March through October) than during the remainder of the year. Forward-Looking Statements Certain matters discussed herein are forward-looking statements within the meaning of the Private Litigation Reform Act of 1995 and as such may involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Partnership to be different from any future results, performance or achievements expressed or implied by such forward-looking statements. Although the Partnership believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be attained. These risks are detailed from time to time in the Partnership's filings with the Securities and Exchange Commission. The Partnership undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index Page Courtyard by Marriott II Limited Partnership Consolidated Financial Statements: Report of Independent Public Accountants.......................................................30 Consolidated Statement of Operations...........................................................31 Consolidated Balance Sheet.....................................................................32 Consolidated Statement of Changes in Partners' Capital (Deficit)...............................33 Consolidated Statement of Cash Flows...........................................................34 Notes to Consolidated Financial Statements.....................................................36 Courtyard II Associates, L.P. and Subsidiary Consolidated Financial Statements: Report of Independent Public Accountants.......................................................50 Consolidated Statement of Operations...........................................................51 Consolidated Balance Sheet.....................................................................52 Consolidated Statement of Changes in Partners' Capital.........................................53 Consolidated Statement of Cash Flows...........................................................54 Notes to Consolidated Financial Statements.....................................................56
29 - ---------------------------------------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP: We have audited the accompanying consolidated balance sheet of Courtyard by Marriott II Limited Partnership (a Delaware limited partnership) as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in partners' capital (deficit) and cash flows for each of the three years in the period ended December 31, 1996. 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Courtyard by Marriott II Limited Partnership as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index at Item 14(a)(2) are presented for purposes of complying with the Securities and Exchange Commission's rules and are not a required part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Washington, D.C. March 13, 1997 30 - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENT OF OPERATIONS Courtyard by Marriott II Limited Partnership For the Years Ended December 31, 1996, 1995 and 1994 (in thousands, except per Unit amounts)
1996 1995 1994 ------------ ------------- --------- REVENUES Hotel revenues (Note 3).....................................................$ 133,182 $ 121,737 $ 112,392 Interest income and other................................................... 2,895 3,032 1,753 ------------ ------------- ------------- ......................................................................... 136,077 124,769 114,145 ------------ ------------- ------------- OPERATING COSTS AND EXPENSES Interest ................................................................... 46,366 38,113 43,115 Depreciation ............................................................... 27,062 27,720 27,980 Base and Courtyard management fees ......................................... 15,822 14,749 13,925 Incentive management fee.................................................... 12,040 10,480 9,403 Ground rent................................................................. 11,899 11,550 10,787 Property taxes.............................................................. 9,537 9,324 9,453 Insurance and other......................................................... 2,810 1,618 3,046 ------------ ------------- ------------- ......................................................................... 125,536 113,554 117,709 - -- ------------ ------------- ------------- NET INCOME (LOSS).............................................................$ 10,541 $ 11,215 $ (3,564) ============ ============= ============= ALLOCATION OF NET INCOME (LOSS) General Partner.............................................................$ 527 $ 560 $ (178) Limited Partners............................................................ 10,014 10,655 (3,386) ------------ ------------- ------------- .........................................................................$ 10,541 $ 11,215 $ (3,564) ============ ============= ============= NET INCOME (LOSS) PER LIMITED PARTNER UNIT (1,470 units)...............................................................$ 6,812 $ 7,248 $ (2,303) ============ ============= ============= The accompanying notes are an integral part of these consolidated financial statements.
31 - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET Courtyard by Marriott II Limited Partnership December 31, 1996 and 1995 (in thousands)
1996 1995 ------------- ------------- ASSETS Property and equipment, net.................................................................$ 458,687 $ 474,480 Deferred financing costs, net of accumulated amortization................................... 17,442 18,482 Due from Courtyard Management Corporation................................................... 13,315 7,078 Prepaid expenses............................................................................ 28 -- Property improvement fund................................................................... 36,582 33,098 Restricted cash............................................................................. 6,848 6,684 Cash and cash equivalents................................................................... 14,197 27,708 ------------- ------------- $ 547,099 $ 567,530 ============= ============= LIABILITIES AND PARTNERS' CAPITAL (DEFICIT) LIABILITIES Debt .....................................................................................$ 526,253 $ 531,100 Management fees due to Courtyard Management Corporation..................................... 36,442 35,809 Due to Marriott International, Inc. and affiliates.......................................... 9,169 9,402 Accounts payable and accrued liabilities.................................................... 7,176 19,250 Due to Host Marriott Corporation............................................................ -- 7,469 ------------- ------------- Total Liabilities..................................................................... 579,040 603,030 ------------- ------------- PARTNERS' CAPITAL (DEFICIT) General Partner Capital contribution..................................................................... 11,306 11,306 Cumulative net losses.................................................................... (5,241) (5,768) Capital distributions.................................................................... (278) (278) ------------- ------------- 5,787 5,260 ------------- ------------- Limited Partners Capital contributions, net of offering costs of $17,189.................................. 129,064 129,064 Cumulative net losses.................................................................... (99,582) (109,596) Capital distributions.................................................................... (67,025) (60,043) Investor notes receivable................................................................ (185) (185) -------------- ------------- (37,728) (40,760) -------------- ------------- Total Partners' Deficit............................................................... (31,941) (35,500) ------------- ------------- $ 547,099 $ 567,530 ============= ============= The accompanying notes are an integral part of these consolidated financial statements.
32 - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) Courtyard by Marriott II Limited Partnership For the Years Ended December 31, 1996, 1995 and 1994 (in thousands)
General Limited Partner Partners Total Balance, December 31, 1993..................................................$ 4,878 $ (36,546) $ (31,668) Capital distributions..................................................... -- (8,820) (8,820) Net loss.................................................................. (178) (3,386) (3,564) ------------ --------------- ------------ Balance, December 31, 1994.................................................. 4,700 (48,752) (44,052) Payments received on investor notes receivable............................ -- 51 51 Capital distributions..................................................... -- (2,714) (2,714) Net income................................................................ 560 10,655 11,215 ------------ --------------- ------------ Balance, December 31, 1995.................................................. 5,260 (40,760) (35,500) Capital distributions..................................................... -- (6,982) (6,982) Net income................................................................ 527 10,014 10,541 ------------ --------------- ------------ Balance, December 31, 1996..................................................$ 5,787 $ (37,728) $ (31,941) ============ =============== ============ The accompanying notes are an integral part of these consolidated financial statements.
33 - ----------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS Courtyard by Marriott II Limited Partnership For the Years Ended December 31, 1996, 1995 and 1994 (in thousands)
1996 1995 1994 ----------- ---------- ----------- OPERATING ACTIVITIES Net income/(loss)................................................................$ 10,541 $ 11,215 $ (3,564) Noncash items: Depreciation.................................................................. 27,062 27,720 27,980 Amortization of deferred financing costs as interest.......................... 1,679 625 595 Deferred management fees...................................................... 633 -- 5,564 (Gain) loss on sale of equipment.............................................. -- (12) 1,185 Deferred interest on IRB advances from Host Marriott Corporation.................................................. -- 638 341 Changes in operating accounts: Due from Courtyard Management Corporation..................................... (3,737) 1,311 (2,260) Accounts payable and accrued liabilities...................................... 2,924 (5,114) (3,876) Due to Host Marriott Corporation.............................................. (1,015) (427) -- Prepaid expenses ............................................................. (28) 180 (181) Management fees due to Courtyard Management Corporation....................... -- (162) -- Due to Marriott International, Inc. .......................................... -- -- (64) ----------- ---------- ----------- Cash provided by operations................................................ 38,059 35,974 25,720 ----------- ---------- ----------- INVESTING ACTIVITIES Additions to property and equipment, net......................................... (11,269) (8,786) (13,361) Change in property improvement fund.............................................. (3,484) (5,427) 1,229 Working capital provided to Courtyard Management Corporation..................... (2,500) -- -- ----------- ---------- ----------- Cash used in investing activities.......................................... (17,253) (14,213) (12,132) ----------- ---------- ----------- FINANCING ACTIVITIES Proceeds from issuance of debt................................................... 537,600 -- -- Repayments of debt............................................................... (531,100) -- -- Payment of financing costs....................................................... (15,835) (2,990) (20) Repayment of principal........................................................... (11,347) -- -- Capital distributions............................................................ (6,982) (2,714) (8,820) Deposit into the debt service reserve ........................................... (6,848) -- -- Use of (Deposit in) refinancing reserve accounts................................. 6,684 (2,560) (4,124) Repayment of advances from Host Marriott Corporation............................. (6,489) -- (3,911) Collections of investor notes receivable......................................... -- 51 -- ----------- ---------- ----------- Cash used in financing activities.......................................... (34,317) (8,213) (16,875) ----------- ---------- ----------- The accompanying notes are an integral part of these consolidated financial statements.
34 - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) Courtyard by Marriott II Limited Partnership For the Years Ended December 31, 1996, 1995 and 1994 (in thousands)
1996 1995 1994 ----------- ---------- ----------- (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS.............................................................$ (13,511) $ 13,548 $ (3,287) CASH AND CASH EQUIVALENTS at beginning of year..................................... 27,708 14,160 17,447 ----------- ---------- ----------- CASH AND CASH EQUIVALENTS at end of year...........................................$ 14,197 $ 27,708 $ 14,160 =========== ========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for mortgage and other interest.....................................$ 42,532 $ 42,092 $ 47,382 =========== ========== =========== The accompanying notes are an integral part of these consolidated financial statements.
35 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Courtyard by Marriott II Limited Partnership December 31, 1996 and 1995 NOTE 1. THE PARTNERSHIP Description of the Partnership Courtyard by Marriott II Limited Partnership (the "Partnership"), a Delaware limited partnership, was formed August 31, 1987 to acquire and own 70 Courtyard by Marriott hotels (the "Hotels") and the land on which certain of the Hotels are located. The Partnership's 70 hotel properties are located in 29 states in the United States: nine in Illinois; eight in California; five in Florida; four in Georgia; four in Texas and three or less in each of the other 24 states. On December 29, 1995, Host Marriott Corporation's operations were divided into two separate companies: Host Marriott Corporation ("Host Marriott") and Host Marriott Services Corporation. The Hotels are managed as part of the Courtyard by Marriott hotel system by Courtyard Management Corporation (the "Manager"), a wholly-owned subsidiary of Marriott International, Inc. ("MII"). The sole general partner of the Partnership, with a 5% interest, is CBM Two Corporation (the "General Partner"), a wholly-owned subsidiary of Host Marriott. On January 18, 1988 (the "Final Closing Date"), 1,470 limited partnership interests (the "Units"), representing a 95% interest in the Partnership, had been sold in a private placement offering. The offering price per Unit was $100,000, $21,200 payable at subscription with the balance due in four annual installments through February 28, 1991, or, as an alternative, $94,357 in cash at closing as full payment of the subscription price. The limited partners paid $39,938,000 as of the Final Closing Date, representing 1,350 Units purchased on the installment basis and 120 Units paid in full. The limited partners' obligations to make the installment payments were evidenced by promissory notes (the "Investor Notes") payable to the Partnership and secured by the Units. On October 30, 1987 (the "Initial Closing Date"), the General Partner made a capital contribution of equipment valued at $11,306,000 for its 5% general partner interest. On the Initial Closing Date, the Partnership began operations and executed a purchase agreement (the "Purchase Agreement") with Host Marriott to acquire the Hotels and the land on which certain of the Hotels are located for a total price of $643.1 million. Of the total purchase price, $507.9 million was paid in cash from the proceeds of the mortgage financing and sale of the Units, $40.2 million from assumption of industrial development revenue bond financing (the "IRB Debt") from Host Marriott and $95 million from a note (the "Deferred Purchase Note") payable to Host Marriott. Twenty of the Hotels were conveyed to the Partnership in 1987, thirty-four Hotels in 1988, twelve Hotels in 1989 and the final four Hotels during the first half of 1990. Under the Purchase Agreement, Host Marriott agreed to reduce the purchase price of the Hotels by up to $9.3 million if the Hotels did not provide cash flow in excess of debt service, as defined, equivalent to $9.3 million in 1989, (the "Price Adjustment"). The required Price Adjustment for 1989 was $8,843,000. The Price Adjustment was allocated as a reduction to the Partnership's property and equipment in the accompanying consolidated financial statements. In accordance with the partnership agreement, in 1990 and 1991 the General Partner purchased 20.5 Units from defaulting investors. Additionally, on July 15, 1995, a limited partner assigned one Unit to the General Partner. Therefore, as of December 31, 1996, the General Partner owns a total of 21.5 Units representing a 1.39% limited partnership interest in the Partnership. 36 - ----------------------------------------------------------------------------- On January 24, 1996, the Partnership completed a refinancing of the Partnership's existing debt through the private placements of $127.4 million of senior secured notes (the "Senior Notes") and $410.2 million of multi-class commercial mortgage pass-through certificates (the "Certificates"). In connection with the refinancing, the limited partners approved certain amendments to the partnership agreement and the Management Agreement. The partnership agreement amendment, among other things, allowed the formation of certain subsidiaries of the Partnership, including Courtyard II Finance Company ("Finance"), a wholly-owned subsidiary of the Partnership, who along with the Partnership is the co-issuer of the Senior Notes. Additionally, the Partnership formed a wholly-owned subsidiary, Courtyard II Associates Management Corporation ("Managing General Partner"). Managing General Partner was formed to be the managing general partner with a 1% general partner interest in Courtyard II Associates, L.P. ("Associates"), a Delaware limited partnership. The Partnership owns a 1% general partner interest and a 98% limited partner interest in Associates. On January 24, 1996, the Partnership contributed 69 Hotels and their related assets to Associates. Formation of Associates resulted in the Partnership's primary assets being its direct and indirect interest in Associates. Additionally, substantially all of Associates' net equity will be restricted to dividends, loans or advances to the Partnership. Associates holds a 99% membership interest in CBM Associates II LLC ("Associates II") and Managing General Partner holds the remaining 1% membership interest. On January 24, 1996, the Partnership contributed the Hotel located in Deerfield, IL (the "Deerfield Hotel") and its related assets to Associates and the Managing General Partner who simultaneously contributed the Hotel and its related assets to Associates II. Each of the Managing General Partner, Associates and Associates II were formed as a single purpose bankruptcy-remote entity to facilitate the refinancing. CBM Funding Corporation ("CBM Funding"), a wholly-owned subsidiary of Associates, was also formed to make a mortgage loan (the "Mortgage Loan") to Associates from the proceeds of the sale of the Certificates. Partnership Allocations and Distributions Partnership allocations and distributions are generally made as follows: a. Cash available for distribution is distributed (i) first, 5% to the General Partner and 95% to the limited partners until the General Partner and the limited partners (collectively, the "Partners") have received cumulative distributions of sale proceeds and/or refinancing proceeds ("Capital Receipts") equal to $77,368,421; (ii) next, 10% to the General Partner and 90% to the limited partners until the Partners have received cumulative distributions of Capital Receipts equal to $158,306,000; and (iii) thereafter, 25% to the General Partner and 75% to the limited partners. Distributions to the General Partner are subordinate to an annual 10% non-cumulative preferred return to the limited partners on their invested capital, as defined. b. Refinancing proceeds not retained by the Partnership will be distributed (i) first, 5% to the General Partner and 95% to the limited partners until the Partners have received cumulative distributions of refinancing proceeds equal to $158,306,000 minus adjusted sale proceeds, as defined; and (ii) thereafter, 25% to the General Partner and 75% to the limited partners. 37 - ------------------------------------------------------------------------------ c. Proceeds not retained by the Partnership from the sale or other disposition of less than substantially all of the assets of the Partnership will be distributed (i) first, 5% to the General Partner and 95% to the limited partners until the Partners have received cumulative distributions of Capital Receipts equal to $158,306,000; and (ii) thereafter, 25% to the General Partner and 75% to the limited partners. Proceeds from the sale of substantially all of the assets of the Partnership or from a related series of Hotel sales leading to the sale of substantially all of the assets of the Partnership will be distributed to the Partners pro-rata in accordance with their capital account balances. d. Net profits are generally allocated in the same ratio in which cash available for distribution is distributed. e. All items of gain, deduction or loss attributable to the contributed equipment will be allocated to the General Partner. f. In general, gain recognized by the Partnership will be allocated, with respect to any year, in the following order of priority: (i) to all Partners whose capital accounts have negative balances until such negative balances are brought to zero; (ii) to all Partners up to the amount necessary to bring their respective capital account balances to an amount equal to their invested capital, as defined; and (iii) thereafter 25% to the General Partner and 75% to the limited partners. Gain arising from the sale or other disposition (or from a related series of sales or dispositions) of substantially all the assets of the Partnership will be allocated (i) to the limited partners in an amount equal to the excess, if any, of (1) the sum of 15% times the weighted average of the limited partners' invested capital each year, over (2) the sum of distributions to the limited partners of Capital Receipts in excess of the limited partners' cumulative capital and distributions to limited partners of cash available for distribution; and (ii) next, to the General Partner until it has been allocated an amount equal to 33.33% of the amount allocated to the limited partners under clause (i); and (iii) thereafter, 25% to the General Partner and 75% to the limited partners. g. For financial reporting purposes, profits and losses are generally allocated among the Partners based on their stated interests in cash available for distribution. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The Partnership records are maintained on the accrual basis of accounting and its fiscal year coincides with the calendar year. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 38 - ------------------------------------------------------------------------------ Working Capital and Supplies Pursuant to the terms of the Partnership's management agreement discussed in Note 8, the Partnership is required to provide the Manager with working capital and supplies to meet the operating needs of the Hotels. The Manager converts cash advanced by the Partnership into other forms of working capital consisting primarily of operating cash, inventories, and trade receivables and payables which are maintained and controlled by the Manager. Upon the termination of the management agreement, the Manager is required to convert working capital and supplies into cash and return it to the Partnership. As a result of these conditions, the individual components of working capital and supplies controlled by the Manager are not reflected in the accompanying consolidated balance sheet. Revenues and Expenses Revenues represent house profit from the Partnership's Hotels since the Partnership has delegated substantially all of the operating decisions related to the generation of house profit of the Hotels to the Manager. House profit reflects hotel operating results which flow to the Partnership as property owner and represents hotel sales less property-level expenses, excluding depreciation and amortization, base, Courtyard and incentive management fees, real and personal property taxes, ground rent and equipment rent, insurance and certain other costs, which are disclosed separately in the consolidated statement of operations. Property and Equipment Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: Buildings and improvements 40 years Leasehold improvements 40 years Furniture and equipment 4-10 years Certain property and equipment was pledged to secure the mortgage debt described in Note 6. The Partnership assesses impairment of its real estate properties based on whether estimated undiscounted future cash flows from such properties will be less than their net book value. If a property is impaired, its basis is adjusted to fair market value. Deferred Financing Costs Prior to 1996, deferred financing costs consist of costs incurred in connection with obtaining Partnership financing for Mortgage Debt A and B, as defined in Note 6. During 1996 and 1995, the Partnership paid $15,835,000 and $2,990,000, respectively, in financing costs related to the debt refinancing discussed in Note 6. Financing costs are amortized using the straight-line method, which approximates the effective interest rate method, over the remaining life of the respective mortgage debt. At December 31, 1996 and 1995, accumulated amortization of financing costs totalled $1,453,000 and $3,806,000, respectively. 39 - -------------------------------------------------------------------------------- Cash and Cash Equivalents The Partnership considers all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents. Ground Rent The land leases with MII or affiliates of MII (see Note 7) include scheduled increases in minimum rents per property. These scheduled rent increases, which are included in minimum lease payments, are being recognized by the Partnership on a straight-line basis over the lease terms which approximate 80 years. The adjustment included in ground rent expense and Due to Marriott International, Inc. and affiliates to reflect minimum lease payments on a straight-line basis for 1996, 1995 and 1994 totalled $119,000 per year. Income Taxes Provision for Federal taxes has not been made in the accompanying consolidated financial statements since 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/loss for financial reporting purposes and the net income/loss reported in the Partnership's tax return. These differences are due primarily to the use for income tax purposes of accelerated depreciation methods, shorter depreciable lives for the assets, difference in the timing of recognition of certain fees and straight-line rent adjustments. As a result of these differences, the excess of the net Partnership liabilities reported in the accompanying consolidated financial statements over the tax basis in the net Partnership liabilities was $7,819,000 and $3,381,000, respectively as of December 31, 1996 and 1995. Interest Rate Swap Agreements The Partnership was a party to two interest rate swap agreements (prior to their expiration in 1994) to reduce the Partnership's exposure to floating interest rates. The Partnership accounted for the swap arrangements as a hedge of obligations to pay floating rates of interest and accordingly, recorded interest expense based upon its payment obligations at fixed interest rates. Statement of Financial Accounting Standards In the first quarter of 1996, the Partnership adopted Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS No. 121 did not have an effect on its consolidated financial statements. Reclassifications Certain reclassifications were made to the prior year financial statements to conform to the 1996 presentation. 40 - -------------------------------------------------------------------------------- NOTE 3. HOTEL REVENUES Partnership Hotel revenues consist of Hotel operating results for the three years ended December 31 (in thousands):
1996 1995 1994 HOTEL SALES Rooms................................................................$ 235,861 $ 218,955 $ 204,203 Food and beverage.................................................... 18,227 17,628 18,483 Other ............................................................... 9,619 9,242 9,396 ----------- ---------- ------------- 263,707 245,825 232,082 ----------- ----------- ------------- HOTEL EXPENSES Departmental Direct Costs Rooms.............................................................. 50,653 48,091 45,088 Food and beverage.................................................. 16,073 15,006 15,162 Other hotel operating expenses....................................... 63,799 60,991 59,440 ------------- -------------- --------------- 130,525 124,088 119,690 ------------- -------------- --------------- HOTEL REVENUES.........................................................$ 133,182 $ 121,737 $ 112,392 ============== ============== ===============
NOTE 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following as of December 31 (in thousands): 1996 1995 -------------- --------------- Land......................................................................................$ 25,392 $ 25,392 Leasehold improvements.................................................................... 438,921 435,913 Building and improvements................................................................. 78,559 77,053 Furniture and equipment................................................................... 142,663 135,908 -------------- --------------- 685,535 674,266 Less accumulated depreciation............................................................. (226,848) (199,786) -------------- --------------- $ 458,687 $ 474,480 ============== ===============
41 - ------------------------------------------------------------------------------ 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.
As of December 31, 1996 As of December 31, 1995 ------------------------------ -------------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value (in thousands) (in thousands) Financial liabilities Debt........................................................$ 526,253 $ 540,420 $ 531,100 $ 531,100 Management fees due to Courtyard Management Corporation...................................$ 36,442 $ 16,681 $ 35,809 $ 9,995 Due to Host Marriott Corporation............................$ -- $ -- $ 7,469 $ 7,469
The 1996 estimated fair value of debt obligations was based on the quoted market prices at December 31, 1996. The 1995 estimated fair values of debt obligations and amounts due to Host Marriott Corporation are based on their carrying amounts as these items were repaid on January 24, 1996. Consistent with the prior year, the 1996 management fees due to the Courtyard Management Corporation are valued based on the expected future payments from operating cash flow discounted at risk adjusted rates. NOTE 6. MORTGAGE DEBT Overview The Partnership's initial financing consisted of up to $500 million of non-recourse mortgage debt (the "MFS Mortgage Debt") from Marriott Financial Services, Inc. ("MFS"), a wholly-owned subsidiary of Host Marriott, to provide financing for the purchase of 65 of the Hotels (the "non-IRB Hotels"). The Partnership assumed the $40.2 million of IRB Debt to provide financing for the purchase of the remaining 5 Hotels (the "IRB Hotels"). In 1988 and 1989, the Partnership borrowed $275 million (the "Mortgage Debt A") and $230.5 million (the "Mortgage Debt B") from two banks (the "Banks") to repay the MFS Mortgage Debt and to pay financing costs. On January 24, 1996, the Partnership completed a refinancing of the Partnership's existing debt through the private placements of $127.4 million of senior secured notes (the "Senior Notes") and $410.2 million of multi-class commercial mortgage pass-through certificates (the "Certificates"). The net proceeds from the placement of the Senior Notes and the Certificates and existing Partnership cash were used as follows: (i) to repay the Partnership's existing Mortgage Debt A of $275 million and Mortgage Debt B of $230.5 million, (ii) to repay the IRB Debt of $25.6 million, (iii) to repay the advances from Host Marriott related to certain IRB Hotels of $6.5 million and (iv) to pay certain costs of structuring and issuing the Senior Notes and the Certificates. Upon repayment of Mortgage Debt A and Mortgage Debt B, Host Marriott was released from its obligations under (i) the Mortgage Debt A and Mortgage Debt B debt service guarantees, (ii) the foreclosure guarantee and (iii) the Ground Rent Facility, as defined. 42 - -------------------------------------------------------------------------------- Bank Mortgage Debt Mortgage Debt A and B were non-recourse and bore interest at a floating rate equal to (i) the adjusted CD Rate or LIBOR, as defined, plus (ii) .75 percentage points. Mortgage Debt A and B required no principal amortization prior to maturity on December 15, 1995 and September 5, 1996, respectively. During the period from 1989 through 1994, to reduce the Partnership's exposure to floating interest rates, the Partnership entered into two swap agreements effectively fixing the interest rates on Mortgage Note A and a large portion of Mortgage Note B. The combined effective interest rate for Mortgage Debt A and B was 6.67% from January 1, 1996 through January 23, 1996, 7% for 1995, and 8.08% for 1994. The combined average interest rate at January 23, 1996 for Mortgage Debt A and B was 6.58%. As security for the Mortgage Debt A (36 Hotels) and Mortgage Debt B (29 Hotels) the Banks held mortgages on the Partnership's fee or leasehold interest on the respective Hotels. The Banks also had security interests under their respective mortgages in the personal property associated with those Hotels and obtained an assignment of the Partnership's rights under the management agreement and the Purchase Agreement. On December 15, 1995, the Partnership and the Mortgage Debt A lenders amended the loan agreement to extend the maturity date of Mortgage Debt A from December 15, 1995 to February 15, 1996 (the "Extension Period"). This amendment provided for interest during the Extension Period equal to the following: December 16, 1995 through January 15, 1996....................Adjusted CD Rate or LIBOR plus 1 percentage point January 16, 1996 through February 15, 1996....................Adjusted CD Rate or LIBOR plus 1.25 percentage points In connection with the Mortgage Debt A extension, the Partnership paid an extension fee to the Banks of $1,085,000 of which the 1995 portion is included in interest expense on the consolidated statement of operations. Bank Mortgage Debt Guarantees Prior to the initial refinancing, in 1987 Host Marriott had guaranteed payment of up to $60 million of debt service on the MFS Mortgage Debt. As a result of the initial refinancing, this guarantee was allocated $32.6 million to Mortgage Debt A and $27.4 million to Mortgage Debt B. Any payments by Host Marriott under the Mortgage Debt guarantees were treated as loans to the Partnership and bore interest at one percentage point in excess of the prime rate of interest announced by Bankers Trust Company of New York (the "Prime Rate"). During 1995, Host Marriott was released from its original Mortgage Debt A guarantee obligation of $32.6 million as certain debt service coverage requirements were met. As a result, as of December 31, 1995, $5.4 million and $27.4 million, respectively, was available under Mortgage Debt A and B guarantees. Host Marriott was released from the original guarantees on January 24, 1996, the date when Mortgage Debt A and Mortgage Debt B were repaid in full. During 1994, the Partnership, Manager and Mortgage Debt A and B lenders agreed that the Partnership would establish reserve accounts for Mortgage Debt A and B and contribute 1% of Hotel sales on the respective Mortgage Debt A and B 43 - ------------------------------------------------------------------------------ properties to these reserves from 1993 through the respective loan maturities. The initial contribution, made in 1994, included the required contribution for 1993. On January 24, 1996, these reserves were used to pay costs associated with the refinancing of these loans and to repay a portion of these loans upon maturity. In addition, the General Partner had provided a guarantee to MFS that, in the event of a foreclosure, proceeds under the MFS Mortgage Debt would be at least $75 million. This foreclosure guarantee was allocated $40.8 million to Mortgage Debt A and $34.2 million to Mortgage Debt B. Upon completion of the debt refinancing on January 24, 1996, Host Marriott was released from its obligations pursuant to the foreclosure guarantee. IRB Debt The IRB Debt was refinanced on January 24, 1996 and the IRB Debt was repaid in full. The $25.6 million of IRB Debt outstanding at December 31, 1995 was backed by direct-pay letters of credit from commercial banks that would have expired in 1996. These issues were subject to mandatory prepayment upon expiration of the letters of credit unless replacement letters of credit were secured. The IRB Debt bore interest at daily, weekly or fixed rates at the option of the Partnership, and was limited to a maximum interest rate of 15%. From January 1, 1996 through January 23, 1996, the interest rates on the IRB Debt ranged from 2.65% to 6.1%. In 1995 and 1994, the interest rates on the IRB Debt ranged from 1.9% to 6.1% and 1.15% to 6.05%, respectively. The interest rate on the IRB Debt was 3.2% at January 23, 1996. The bondholders had the right to demand purchase of any of the bonds at the expiration of specified interest rate periods. Had the Partnership failed to make the required payments of principal and interest on the IRB Debt, Host Marriott would have been required to make such payments ("Host Marriott's IRB Liability"). Through January 24, 1996, the Partnership purchased a total of $15.4 million of bonds/IRB Debt with proceeds advanced by Host Marriott (see below) when presented by certain bondholders. These loans bore interest at one percentage point in excess of the Prime Rate (8.5% at January 23, 1996). The weighted average interest rate was 9.5% for the period from January 1, 1996 through January 23, 1996, 9.83% for 1995 and 8.14% for 1994. In 1993 and 1994, the Partnership was able to repay the General Partner $8.9 million. As of December 31, 1995, $6.5 million of Host Marriott IRB Liability loans were outstanding. As discussed above, the $6.5 million of Host Marriott IRB Liability loans were repaid on January 24, 1996 from proceeds of the debt refinancing. Ground Rent Facility Fifty-three of the Hotels are situated on land leased from MII or affiliates of MII, eight of the Hotels are situated on land leased from third parties. MFS had agreed to lend the Partnership up to $25 million (the "Ground Rent Facility") to the extent that the Partnership has insufficient funds to pay ground rent under any ground lease, including third party ground leases, after payment of (i) hotel operating expenses (except for ground rent) and (ii) debt service. No amounts were ever advanced under the Ground Rent Facility. Upon refinancing of the Partnership debt on January 24, 1996, MFS was released from the Ground Rent Facility. Debt Refinancing - Senior Notes The Senior Notes of $127.4 million were issued by the Partnership and Finance. The Senior Notes bear interest at 10 3/4%, require semi-annual payments of interest and require no payments of principal until maturity on February 1, 2008. The Senior Notes are secured by a first priority pledge by the Partnership of (i) its 99% partnership interest (consisting of a 98% 44 - ------------------------------------------------------------------------------- limited partner interest and a 1% general partner interest) in Associates and (ii) its 100% equity interest in the Managing General Partner. Finance has nominal assets, does not conduct any operations and does not provide any additional security for the Senior Notes. The terms of the Senior Notes include requirements of the Partnership to establish and fund a debt service reserve account in an amount equal to one six-month interest payment on the Senior Notes ($6,848,000 which is included as restricted cash on the accompanying consolidated balance sheet at December 31, 1996) and to maintain certain levels of excess cash flow, as defined. In the event the Partnership fails to maintain the required level of excess cash flow, the Partnership will be required to (i) suspend distributions to its partners and other restricted payments, as defined, (ii) to fund a separate supplemental debt service reserve account (the "Supplemental Debt Service Reserve") in an amount up to two six-month interest payments on the Senior Notes and (iii) if such failure were to continue, to offer to purchase a portion of the Senior Notes at par. The Senior Notes are not redeemable prior to February 1, 2001. Thereafter, the Senior Notes may be redeemed, at the option of the Partnership, at a premium declining to par in 2004. The Senior Notes are non-recourse to the Partnership and its partners. On June 4, 1996, the Partnership and Finance completed an exchange offer of its unregistered 10 3/4% Series B Senior Secured Notes with an aggregate principal amount of $127.4 million ("Old Notes") due 2008 for an equal amount of registered notes ("New Notes"). The form and terms of the New Notes are substantially identical to the form and terms of the Old Notes, except that the New Notes have been registered under the Securities Act of 1933, as amended and will not have any restrictions for transfer. Debt Refinancing - Certificates The Certificates in an initial principal payment of $410.2 million were issued by CBM Funding. Proceeds from the sale of the Certificates were utilized by CBM Funding to provide a Mortgage Loan to Associates. The Certificates/Mortgage Loan require monthly payments of principal and interest based on a 17-year amortization schedule. The Mortgage Loan matures on January 28, 2008. However, the maturity date of the Certificates/Mortgage Loan may be extended until January 28, 2013 with the consent of 662/3% of the holders of the outstanding Certificates affected thereby. The Certificates were issued in the following classes and pass-through rates of interest. Initial Certificate Pass-Through Class Balance Rate ------------------- ------------------- ------------ Class A-1 $ 45,500,000 7.550% Class A-2 $ 50,000,000 6.880% Class A-3P & I $ 129,500,000 7.080% Class A-3IO Not Applicable 0.933% Class B $ 75,000,000 7.480% Class C $ 100,000,000 7.860% Class D $ 10,200,000 8.645% The Class A-3IO Certificates receive payments of interest only based on a notional balance equal to the Class A-3P & I Certificate balance. 45 - ------------------------------------------------------------------------------- The balance of the Certificates was $398.9 million at December 31, 1996. Principal amortization of $11.3 million of the Class A-1 Certificates was made during 1996. The weighted average interest rate on the Certificates was 7.7% from January 24, 1996 through December 31, 1996, and the average interest rate was 7.6% at December 31, 1996. The Certificates/Mortgage Loan maturities are as follows (in thousands): 1997 $ 13,298 1998 14,331 1999 15,443 2000 16,642 2001 17,934 Thereafter 321,205 ------------------- $ 398,853 =================== The Mortgage Loan is secured primarily by 69 cross-defaulted and cross-collateralized mortgages representing first priority mortgage liens on (i) the fee or leasehold interest in the 69 Hotels, related furniture, fixtures and equipment and the property improvement fund, (ii) the fee interest in the land leased from MII or their affiliates on which 53 Hotels are located, (iii) a pledge of Associates membership interest in and the related right to receive distributions from Associates II which owns the Deerfield Hotel and (iv) an assignment of the Restated Management Agreement, as defined below. The Mortgage Loan is non-recourse to Associates, the Partnership and its partners. Operating profit from the Hotels in excess of debt service on the Mortgage Loan is available to be distributed to the Partnership. Amounts distributed to the Partnership are used for the following, in order of priority: (i) for debt service on the Senior Notes, (ii) to fund the Supplemental Debt Service Reserve, if necessary, (iii) to offer to purchase a portion of the Senior Notes at par, if necessary, (iv) for working capital as discussed in Note 8 and (v) for distributions to the partners of the Partnership. The restricted net assets of Associates is $81.1 million as of December 31, 1996. Prepayments of the Mortgage Loan are permitted with the payment of a premium (the "Prepayment Premium"). The Prepayment Premium is equal to the greater of (i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance amount based on a spread of .25% or .55% over the U.S. treasury rate, as defined. On June 30, 1996, CBM Funding completed an exchange offer of its Multiclass Mortgage Pass-Through Certificates, Series 1996-1A with a principal balance of $406.2 million at that time, ("Old Certificates") for an equal amount of Multiclass Mortgage Pass-Through Certificates, Series 1996-1B ("New Certificates"). The form and terms of the New Certificates are substantially identical to the form and terms of the Old Certificates, except that the New Certificates are registered under the Securities Act of 1933, as amended and their transfers are not restricted. NOTE 7. LEASES The land on which 53 of the Hotels are located is leased from MII or affiliates of MII. In addition, eight of the Hotels are located on land leased from third parties. The land leases have remaining terms (including all renewal options) expiring between the years 2024 and 2068. The MII land leases and the third party land leases provide for rent based on specific percentages (from 2% to 15%) of certain sales categories subject to minimum amounts. The minimum rentals are adjusted at various anniversary dates throughout the lease terms, as defined in the agreements. The Partnership also rents certain equipment for use in the Hotels. 46 - ------------------------------------------------------------------------------- In connection with the refinancing, the Partnership, as lessee, transferred it rights and obligations pursuant to the 53 ground leases with MII and affiliates to Associates. Additionally, MII and affiliates agreed to defer receipt of their ground lease payments to the extent that the Partnership or Associates has insufficient funds for debt service payments on the Senior Notes and the Mortgage Loan. Minimum future rental payments during the term of these operating leases are as follows (in thousands): Telephone Lease Land Equipment Other Year Leases Leases Leases 1997 $ 9,230 $ 1,125 $ 966 1998 9,230 1,106 561 1999 9,230 787 101 2000 9,230 589 -- 2001 9,230 -- -- Thereafter 542,213 -- -- ---------- -------------- ----------- $ 588,363 $ 3,607 $ 1,628 ========== ============== =========== Total rent expense on land leases was $11,899,000 for 1996, $11,550,000 for 1995 and $10,787,000 for 1994. NOTE 8. MANAGEMENT AGREEMENT To facilitate the refinancing, effective December 30, 1995, the original management agreement was restated into two separate management agreements. Associates entered into a management agreement with the Manager for the 69 Hotels which Associates directly owns and Associates II entered into a management agreement for the Deerfield Hotel which Associates II owns, collectively, (the "Management Agreement"). Term The Management Agreement has an initial term expiring in 2013. The Manager may renew the term, as to one or more of the Hotels, at its option, for up to three successive terms of 10-years each and one final term of five years. The Partnership may terminate the Management Agreement if, during any three consecutive years after 1992, specified minimum operating results are not achieved. However, the Manager may prevent termination by paying to the Partnership the amount by which the minimum operating results were not achieved. Management Fees The Management Agreement provides for annual payments of (i) the base management fee equal to 3 1/2% of gross sales from the Hotels, (ii) the Courtyard management fee equal to 2 1/2% of gross sales from the Hotels, and (iii) the incentive management fee equal to 15% of operating profit, as defined (20% of operating profit after the Partners have received refinancing proceeds equal to 50% of the excess of (a) $154,736,842 over (b) cumulative distributions of adjusted sale proceeds (the "First Equity Refinancing"). 47 - ------------------------------------------------------------------------------ Deferral Provisions Due to the refinancing, beginning in 1996, one percent of the Courtyard management fee is deferred through maturity of the Senior Notes and the Mortgage Loan to the extent that the Partnership or Associates has insufficient funds for debt service payments on the Senior Notes and the Mortgage Loan. This change eliminated the previous deferral of the total Courtyard management fee to debt service through December 31, 1997. To the extent any Courtyard management fee, base management fee or incentive management fee is deferred, it will be added to deferred management fees. Deferred management fees accrue without interest, and will be payable out of 50% of available cash flow after payment of certain priorities as discussed below. The priority return to the Partnership, as defined, was reduced from 10% of invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 10% for 1999 and thereafter. Operating profit from the Hotels (which reflects the deduction of the base and Courtyard management fees and MII ground rent) will be used to pay the following, in order of priority: (i) debt service on the Senior Notes and Mortgage Loan, (ii) to repay working capital loans to the Manager, (iii) to repay deferred ground rent to MII and their affiliates, (iv) to repay ground lease advances to MII and their affiliates, (v) the priority return to the Partnership which is 7% of invested capital for 1996, (vi) eighty percent of the remaining operating profit is applied to the payment of current incentive management fees, (vii) to repay advances to the Partnership, (viii) to repay foreclosure avoidance advances to the Manager and (ix) fifty percent of the remaining operating profit to repay deferred management fees to the Manager and fifty percent of remaining operating profit is paid to the Partnership. In 1996, the Partnership had $2.5 million of remaining operating profit after the payment of i) through viii) above. Fifty percent of this remaining operating profit was used to repay a portion of 1996 deferred incentive management fees to the Manager and the remainder was paid to the Partnership. During 1996, $633,000 of incentive management fees were deferred while during 1995, $162,000 were repaid. Deferred incentive management fees were $6,197,000 and $5,564,000 as of December 31, 1996 and 1995, respectively. Deferred Courtyard management fees totalled $22,341,000 as of December 31, 1996 and 1995. Deferred base management fees as of December 31, 1996 and 1995 were $7,904,000 and $8,066,000, respectively. Chain Services The Manager is required to furnish certain services ("Chain Services") which are furnished generally on a central or regional basis to all hotels managed, owned or leased in the Courtyard by Marriott hotel system. The total amount of Chain Services allocated to the Partnership was $9,474,000 in 1996, $9,224,000 in 1995 and $8,981,000 in 1994. Working Capital The Partnership is required to provide the Manager with working capital and fixed asset supplies to meet the operating needs of the Hotels. The refinancing required certain enhancements to the cash management system of the Manager such that additional working capital may be required for the operation of the Hotels. Therefore, on January 24, 1996, the Partnership, Associates and the Manager entered into a working capital maintenance agreement (the "Working Capital Agreement") and deposited $2.5 million as additional working capital for the operation of the Hotels. Upon termination of the Management Agreement, the working capital and supplies will be returned to the Partnership. As of December 31, 1996, the working 48 - -------------------------------------------------------------------------------- capital balance was $8,761,000. This includes the $8,846,000 originally advanced less the $2,585,000 of excess working capital returned to the Partnership in 1991 and the $2,500,000 advanced on January 24, 1996. At December 31, 1996 and 1995, accumulated depreciation related to the supplies totalled $2,060,000. In addition, the Working Capital Agreement provides that the Partnership and Associates, collectively, reserve $2 million by February 1, 1997 and additional amounts such that the total balance is $5 million by February 1, 1998 (the "Working Capital Reserve"). The $2 million was reserved on January 31, 1997. The Working Capital Reserve will be available for payment of hotel operating expenses in the event that there is a downgrade in the long-term senior unsecured debt of MII to below a certain level, as described in the Mortgage Loan. The obligation to fund the amounts required by the Working Capital Agreement is subordinate to debt service on the Senior Notes and the Mortgage Loan. Property Improvement Funds The Management Agreement provides for the establishment of a repairs and equipment reserve (property improvement fund) for the Hotels. The funding of this reserve is based on a percentage of gross Hotel sales. During 1994, the Partnership, Manager and the Mortgage Debt A and B lenders agreed that the Partnership would establish refinancing reserve accounts and contribute 1% of Hotel sales on the respective Mortgage Debt A and B properties to these reserves. Correspondingly, the Management Agreement was amended in order to reduce the contribution to the property improvement fund from 6% to 5% of gross Hotel sales for the Mortgage Debt A and B properties for 1993 through the respective loan maturities. The contribution for the five IRB Hotels remained at 6%. Upon completion of the refinancing on January 24, 1996, the contribution to the property improvement fund was established initially at 5% for all Hotels and may be increased, at the option of the Manager, to 6% of gross Hotel sales in 2001. Additionally, the Partnership is no longer required to contribute 1% of gross Hotel sales from the Mortgage Debt A and Mortgage Debt B Hotels to the refinancing reserves. NOTE 9. ENVIRONMENTAL CONTINGENCY Based upon a study completed in December 1995, the Partnership has become aware of environmental contamination at one of its fee-owned properties, the Deerfield Hotel, caused by the previous use of the site as a landfill and not caused by the Partnership. The property represents less than 5% of the Partnership's total assets and revenues as of December 31, 1996 and for the year ended, respectively. The Partnership is unable to determine the need for remediation, its potential responsibility, if any, for remediation and the extent of the Partnership's possible liability for any remediation costs. There can be no assurance that the Partnership will not have liability with respect to remediation of contamination at that site. The Partnership does not believe that any of the environmental matters are likely to have a material adverse effect on the business and operations of the Partnership. 49 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO COURTYARD II ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES: We have audited the accompanying consolidated balance sheet of Courtyard II Associates, L.P. (a Delaware limited partnership) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 1996 and the statement of changes in partners' capital for the period from January 24, 1996 to December 31, 1996. These financial statements and the schedule referred to below are the responsibility of the General Partner of Courtyard by Marriott II Limited Partnership. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Courtyard II Associates, L.P. and subsidiaries as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index at Item 14(a)(2) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Washington, D.C. March 13, 1997 50 - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENT OF OPERATIONS Courtyard II Associates, L.P. and Subsidiaries For the Years Ended December 31, 1996, 1995 and 1994 (in thousands)
1996 1995 1994 ------------ ------------- ----------- REVENUES (Note 3).............................................................$ 133,182 $ 121,737 $ 112,392 ------------ ------------- ------------ OPERATING COSTS AND EXPENSES Interest ................................................................... 32,463 29,080 32,897 Depreciation ............................................................... 27,062 27,720 27,980 Base and Courtyard management fees ......................................... 15,822 14,749 13,925 Incentive management fee.................................................... 12,040 10,480 9,403 Ground rent................................................................. 11,899 11,550 10,787 Property taxes.............................................................. 9,537 9,324 9,453 Insurance and other......................................................... 290 (143) 1,787 ------------ ------------- ------------ 109,113 102,760 106,232 ------------ ------------- ------------ NET INCOME BEFORE MINORITY INTEREST........................................... 24,069 18,977 6,160 MINORITY INTEREST............................................................. 8 -- -- ------------ ------------- ------------ NET INCOME....................................................................$ 24,061 $ 18,977 $ 6,160 ============ ============= ============ ALLOCATION OF NET INCOME General Partners............................................................$ 481 $ 380 $ 123 Limited Partner............................................................. 23,580 18,597 6,037 ------------ ------------- ------------ $ 24,061 $ 18,977 $ 6,160 ============ ============= ============ The accompanying notes are an integral part of these consolidated financial statements.
51 - ----------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET Courtyard II Associates, L.P. and Subsidiaries December 31, 1996 and 1995 (in thousands)
1996 1995 ------------ -------- ASSETS Property and equipment, net................................................................$ 458,687 $ 474,480 Deferred financing costs, net of accumulated amortization.................................. 12,273 12,127 Due from Courtyard Management Corporation.................................................. 13,315 7,078 Prepaid expenses........................................................................... 28 -- Property improvement fund.................................................................. 36,582 33,098 Cash and cash equivalents.................................................................. 6,002 -- ------------ ------------ $ 526,887 $ 526,783 ============ ============ LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Mortgage debt..............................................................................$ 398,853 $ 410,200 Management fees due to Courtyard Management Corporation.................................... 36,442 35,809 Due to Marriott International, Inc. and affiliates......................................... 9,169 9,402 Accounts payable and accrued liabilities................................................... 1,305 12,718 Due to Host Marriott Corporation........................................................... -- 747 ------------ ------------ Total Liabilities.................................................................... 445,769 468,876 ------------ ------------ MINORITY INTEREST............................................................................ 8 -- ------------ ------------ 445,777 468,876 ------------ ------------ PARTNERS' CAPITAL (See discussion of distribution restrictions in Note 2) General Partners........................................................................... 1,622 -- Limited Partner............................................................................ 79,488 -- Investment in and net advances to Associates............................................... -- 57,907 ------------ ------------ Total Partners' Capital.............................................................. 81,110 57,907 ------------ ------------ $ 526,887 $ 526,783 ============ ============ The accompanying notes are an integral part of these consolidated financial statements.
52 - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL Courtyard II Associates, L.P. and Subsidiaries For the Period from January 24, 1996 through December 31, 1996 (in thousands)
General Limited Partners Partner Total Initial capitalization as of January 24, 1996................................$ 1,489 $ 72,938 $ 74,427 Capital distributions.................................................... (348) (17,030) (17,378) Net income................................................................ 481 23,580 24,061 ---------- ------------ ----------- Balance, December 31, 1996...................................................$ 1,622 $ 79,488 $ 81,110 ========== ============ =========== The accompanying notes are an integral part of these consolidated financial statements.
53 - ------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS Courtyard II Associates, L.P. and Subsidiaries For the Years Ended December 31, 1996, 1995 and 1994 (in thousands)
1996 1995 1994 ----------- ---------- ----------- OPERATING ACTIVITIES Net income.......................................................................$ 24,061 $ 18,977 $ 6,160 Noncash items: Depreciation.................................................................. 27,062 27,720 27,980 Amortization of deferred financing costs as interest.......................... 1,195 493 454 Deferred management fees...................................................... 633 -- 5,564 Minority Interest............................................................. 8 -- -- Deferred interest on IRB advances from Host Marriott Corporation.............. -- 147 260 (Gain) loss on sale of equipment.............................................. -- (12) 1,185 Changes in operating accounts: Due from Courtyard Management Corporation..................................... (3,737) 1,311 (2,260) Accounts payable and accrued liabilities...................................... (2,309) (5,911) (2,710) Due to Host Marriott Corporation.............................................. (798) -- -- Prepaid expenses and other.................................................... (28) 137 (138) Management fees due to Courtyard Management Corporation....................... -- (162) -- Due to Marriott International, Inc. .......................................... -- (106) (64) ----------- ---------- ----------- Cash provided by operations................................................ 46,087 42,594 36,431 ----------- ---------- ----------- INVESTING ACTIVITIES Additions to property and equipment, net...................................... (11,269) (8,786) (13,361) Change in property improvement fund........................................... (3,484) (5,427) 1,229 Working capital advanced to Courtyard Management Corporation.................. (2,500) -- -- ----------- ---------- ----------- Cash used in investing activities.......................................... (17,253) (14,213) (12,132) ----------- ---------- ----------- FINANCING ACTIVITIES Repayments of debt............................................................ (410,200) -- -- Proceeds from issuance of debt................................................ 410,200 -- -- Capital distributions......................................................... (17,378) -- -- Investment in and net advances to (from) Associates........................... 16,520 (28,381) (24,299) Payment of principal.......................................................... (11,347) -- -- Payment of financing costs.................................................... (10,627) -- -- ----------- ---------- ----------- Cash used in financing activities.......................................... (22,832) (28,381) (24,299) ----------- ---------- ----------- The accompanying notes are an integral part of these consolidated financial statements.
54 - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) Courtyard II Associates, L.P. and Subsidiaries For the Years Ended December 31, 1996, 1995 and 1994 (in thousands)
1996 1995 1994 ----------- ---------- -------- INCREASE IN CASH AND CASH EQUIVALENTS..............................................$ 6,002 $ -- $ -- CASH AND CASH EQUIVALENTS at beginning of year..................................... -- -- -- ----------- ---------- ----------- CASH AND CASH EQUIVALENTS at end of year...........................................$ 6,002 $ -- $ -- =========== ========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for mortgage and other interest.....................................$ 33,978 $ 32,116 $ 36,153 =========== ========== =========== The accompanying notes are an integral part of these consolidated financial statements.
55 - ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Courtyard II Associates, L.P. and Subsidiaries December 31, 1996 and 1995 NOTE 1. COURTYARD II ASSOCIATES, L.P. AND SUBSIDIARIES Description Courtyard II Associates, L.P. and subsidiaries ("Associates"), a Delaware limited partnership, was formed December 22, 1995. Substantially all of the assets of Associates were contributed to Associates by Courtyard by Marriott II Limited Partnership (the "Partnership") on January 24, 1996, in connection with the Partnership's refinancing (see Note 6). The managing general partner of Associates is Courtyard II Associates Management Corporation (a wholly-owned subsidiary of the Partnership) with a 1% interest and the Partnership owns a 1% general partner interest and a 98% limited partner interest. CBM Funding Corporation ("CBM Funding") a wholly-owned subsidiary of Associates, was formed on December 29, 1995, to make a mortgage loan to Associates in connection with the refinancing (see Note 6). Associates directly owns 69 Courtyard hotels and the land on which certain of the Hotels, as defined below, are located. One hotel located in Deerfield, Illinois (the "Deerfield Hotel"), is owned by CBM Associates II LLC ("Associates II"). Associates hold a 99% membership interest in Associates II and Courtyard II Associates Management Corporation holds the remaining 1% interest in Associates II. The 70 hotel properties (the "Hotels") are located in 29 states in the United States: nine in Illinois; eight in California; five in Florida; four in Georgia; four in Texas; and three or less in each of the other 24 states. The Hotels are managed as part of the Courtyard by Marriott hotel system by Courtyard Management Corporation (the "Manager"), a wholly-owned subsidiary of Marriott International, Inc. ("MII"). Partnership Allocations and Distributions Allocations and distributions for Associates are generally made in accordance with the respective ownership interests as follows: (i) 98% to the limited partner, the Partnership and (ii) 1% to each general partner, the Partnership and Courtyard II Associates Management Corporation. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements of Associates present the financial position, results of operations and cash flows of Associates as if it were a separate subsidiary of the Partnership for all periods presented. The Partnership's historical basis in the assets and liabilities contributed to Associates have been carried over. Intercompany transactions and balances between Associates and its subsidiaries have been eliminated. Changes in Investment in and Net Advances to Associates for all periods presented prior to January 24, 1996, represent the net income of Associates net of cash transferred to the Partnership. There were no terms of settlement or interest charges associated with the Investment in and Net Advances to Associates balance. 56 - -------------------------------------------------------------------------------- An analysis of the activity in Investment in and Net Advances to Associates for the two years ended December 31, 1995 and the period from January 1, 1996 through January 24, 1996, is as follows (in millions): Balance, December 31, 1994....................................$ 67 Cash transfers to (from) Associates, net.................. (28) Net income................................................ 19 Balance, December 31, 1995.................................... 58 Cash transfers to Associates, net......................... 16 Amount reclassified as Partners' Capital.................. (74) --- Balance, January 24, 1996........................................$ -- === The average balance for Investment in and Net Advances to Associates for each of the years 1994 and 1995 was $76 million and $62.5 million, respectively. On January 24, 1996, the Partnership contributed substantially all of its assets to Associates for a 1% general partner interest and a 98% limited partner interest. Courtyard II Associates Management Corporation owns the remaining 1% general partner interest. On January 24, 1996, Associates consummated the offering of $410,200,000 of multi-class mortgage pass-through certificates (the "Certificates"), the net proceeds of which were used to repay certain obligations of the Partnership as discussed in Note 6. The accompanying consolidated financial statements present the pushed-down effects of the debt which was repaid with the proceeds of the offering as discussed in Note 6. A concurrent offering of $127,400,000 of senior notes (the "Senior Notes") by the Partnership was also completed on January 24, 1996. The Senior Notes are secured by a first priority pledge of the Partnership's 99% partnership interest in Associates and the Partnership's 100% equity interest in Courtyard II Associates Management Corporation. As a result, the Partnership owns directly or indirectly 100% of Associates. The Senior Notes are not reflected in the accompanying consolidated financial statements of Associates because Associates does not guarantee the Senior Notes nor do the assets of Associates secure the Senior Notes. Payments on the Senior Notes are made from distributions of the excess cash of Associates to the Partnership; such distributions are restricted only upon a monetary event of default under the Mortgage Loan, as defined in Note 6. The Partnership has no other source of cash flow other than distributions from Associates. Basis of Accounting The records of Associates are maintained on the accrual basis of accounting and its fiscal year coincides with the calendar year. 57 - -------------------------------------------------------------------------------- Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Working Capital and Supplies Pursuant to the terms of Associates management agreement discussed in Note 8, Associates is required to provide the Manager with working capital and supplies to meet the operating needs of the Hotels. The Manager converts cash advanced by Associates into other forms of working capital consisting primarily of operating cash, inventories, and trade receivables and payables which are maintained and controlled by the Manager. Upon the termination of the management agreement, the Manager is required to convert working capital and supplies into cash and return it to Associates. As a result of these conditions, the individual components of working capital and supplies controlled by the Manager are not reflected in the accompanying consolidated balance sheet. Revenues and Expenses Revenues represent house profit from Associates' Hotels since Associates delegated substantially all of the operating decisions related to the generation of house profit of the Hotels to the Manager. House profit reflects hotel operating results which flow to Associates as property owner and represents hotel sales less property-level expenses, excluding depreciation, base, Courtyard and incentive management fees, real and personal property taxes, ground rent and equipment rent, insurance and certain other costs, which are disclosed separately in the consolidated statement of operations. Property and Equipment Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: Buildings and improvements 40 years Leasehold improvements 40 years Furniture and equipment 4-10 years Certain property and equipment was pledged to secure the mortgage debt described in Note 6. Associates assesses impairment of its real estate properties based on whether estimated undiscounted future cash flows from such properties on an individual hotel basis will be less than their net book value. If a property is impaired, its basis is adjusted to fair market value. 58 - -------------------------------------------------------------------------------- Deferred Financing Costs Prior to 1996, deferred financing costs consist of costs incurred in connection with obtaining Mortgage Debt A and B, as defined in Note 6. Financing costs are amortized using the straight-line method, which approximates the effective interest rate method, over the remaining life of the respective mortgage debt. At December 31, 1996 accumulated amortization related to Mortgage Debt A and B, as defined in Note 6, was $2,904,000. At December 31, 1996, costs related to Mortgage Debt A and B were fully amortized. On January 24, 1996, the Partnership contributed substantially all of its assets to Associates including $2,630,000 the Partnership had paid in 1995 in financing costs related to the debt refinancing discussed in Note 6. During 1996, Associates paid $10,627,000 in financing costs. At December 31, 1996, accumulated amortization related to the Certificates, as defined in Note 6, was $1,023,000. Cash and Cash Equivalents Associates considers all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents. Ground Rent The land leases with MII or affiliates of MII (see Note 7) include scheduled increases in minimum rents per property. These scheduled rent increases, which are included in minimum lease payments, are being recognized by Associates on a straight-line basis over the lease terms which approximate 80 years. The adjustment included in ground rent expense and Due to Marriott International, Inc. and affiliates to reflect minimum lease payments on a straight-line basis for 1996, 1995 and 1994 totalled $119,000 per year. Income Taxes Provision for Federal taxes has not been made in the accompanying consolidated financial statements since Associates does not pay income taxes, but rather, allocates its profits and losses to the individual partners. Interest Rate Swap Agreements Associates was a party to two interest rate swap agreements (prior to their expiration in 1994) to reduce Associates' exposure to floating interest rates. Associates accounted for the swap arrangements as a hedge of obligations to pay floating rates of interest and accordingly, recorded interest expense based upon its payment obligations at fixed interest rates. Interest expense on the consolidated statement of operations reflects the "pushed down" effect of a proportionate amount of total swap interest. New Statement of Financial Accounting Standards In the first quarter of 1996, Associates adopted Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS No. 121 did not have an effect on its consolidated financial statements. 59 - -------------------------------------------------------------------------------- NOTE 3. REVENUES Revenues for Associates consist of Hotel operating results for the three years ended December 31 (in thousands):
1996 1995 1994 ------------ ------------- ------------- HOTEL SALES Rooms.....................................................................$ 235,861 $ 218,955 $ 204,203 Food and beverage......................................................... 18,227 17,628 18,483 Other .................................................................... 9,619 9,242 9,396 ----------- ----------- --------- 263,707 245,825 232,082 ----------- ----------- --------- HOTEL EXPENSES Departmental Direct Costs Rooms................................................................... 50,653 48,091 45,088 Food and beverage....................................................... 16,073 15,006 15,162 Other hotel operating expenses............................................ 63,799 60,991 59,440 ------------ ------------- ------------- 130,525 124,088 119,690 ------------ ------------- ------------- REVENUES....................................................................$ 133,182 $ 121,737 $ 112,392 ============ ============= =============
NOTE 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following as of December 31 (in thousands): 1996 1995 ----------- ------------- Land...............................$ 25,392 $ 25,392 Leasehold improvements............. 438,921 435,913 Building and improvements.......... 78,559 77,053 Furniture and equipment............ 142,663 135,908 ------------- ------------- 685,535 674,266 Less accumulated depreciation...... (226,848) (199,786) ------------- ------------- $ 458,687 $ 474,480 ============= ============= 60 - ------------------------------------------------------------------------------- NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments are shown below. The fair values of financial instruments not included in this table are estimated to be equal to their carrying amounts (in thousands):
As of December 31, 1996 As of December 31, 1995 ------------------------------ ----------------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value Financial liabilities Mortgage debt........................$ 398,853 $ 405,695 $ 410,200 $ 410,200 Management fees due to Courtyard Management Corporation.............$ 36,442 $ 16,681 $ 35,809 $ 9,995 Due to Host Marriott Corporation.....$ -- $ -- $ 747 $ 747
The 1996 estimated fair value of mortgage debt obligations was based on the quoted market prices at December 31, 1996. The 1995 estimated fair values of mortgage debt obligations and amounts due to Host Marriott Corporation are based on their carrying amounts as these items were repaid on January 24, 1996. Consistent with the prior year, the 1996 management fees due to the Courtyard Management Corporation are valued based on the expected future payments from operating cash flow discounted at risk adjusted rates. NOTE 6. MORTGAGE DEBT Overview For 1995, the accompanying consolidated financial statements reflect the pushed-down effects of an equivalent principal amount of the Partnership's debt which was repaid with the proceeds of the offering as discussed below. Therefore, debt consisted of the following at December 31, 1995 (in thousands): Partnership Associates Mortgage Debt A.......................$ 275,000 $ 209,612 Mortgage Debt B....................... 230,500 175,976 IRB Debt.............................. 25,600 19,690 Host Marriott IRB Liability loans..... 6,489 4,922 --------- ---------- $ 537,589 $ 410,200 ========= ========== The following discussion of bank mortgage debt, swaps, debt service guarantees, foreclosure guarantees, Host Marriott IRB Liability advances and repayments and the ground rent facility reflect actual amounts in relation to the Partnership. Therefore, amounts discussed herein are not reflective of "push down" amounts to Associates. 61 - -------------------------------------------------------------------------------- On January 24, 1996, the Partnership and Associates completed two refinancings of the existing debt through the private placements of $127.4 million of Senior Notes and $410.2 million of multiclass commercial mortgage pass-through certificates, respectively. The net proceeds from the placement of the Senior Notes and the Certificates and existing Partnership cash were used as follows: (i) to repay the Partnership's existing Mortgage Debt A of $275 million and Mortgage Debt B of $230.5 million, (ii) to repay the IRB Debt of $25.6 million, (iii) to repay advances from the Host Marriott related to certain IRB Hotels loans of $6.5 million and (iv) to pay certain costs of structuring and issuing the Senior Notes and the Certificates. Upon repayment of Mortgage Debt A and Mortgage Debt B, Host Marriott was released from its obligations under (i) the Mortgage Debt A and Mortgage Debt B debt service guarantees, (ii) the foreclosure guarantee and (iii) the Ground Rent Facility as defined. Bank Mortgage Debt Mortgage Debt A and B were non-recourse and bore interest at a floating rate equal to (i) the adjusted CD Rate or LIBOR, as defined, plus (ii) .75 percentage points. Mortgage Debt A and B required no principal amortization prior to maturity on December 15, 1995 and September 5, 1996, respectively. During the period from 1989 through 1994, to reduce the Partnership's exposure to floating interest rates, the Partnership entered into two swap agreements effectively fixing the interest rates on Mortgage Note A and a large portion of Mortgage Note B. The combined effective interest rate for Mortgage Debt A and B was 6.67% from January 1, 1996 through January 23, 1996, 7% for 1995, and 8.08% for 1994. The combined average interest rate at January 23, 1996 for Mortgage Debt A and B was 6.58%. As security for the Mortgage Debt A (36 Hotels) and Mortgage Debt B (29 Hotels) the banks held mortgages on the Partnership's fee or leasehold interest on the respective Hotels. The banks also had security interests under their respective mortgages in the personal property associated with those Hotels and obtained an assignment of the Partnership's rights under the management agreement and the Purchase Agreement. On December 15, 1995, the Partnership and the Mortgage Debt A lenders amended the loan agreement to extend the maturity date of Mortgage Debt A from December 15, 1995 to February 15, 1996 (the "Extension Period"). This amendment provided for interest during the Extension Period equal to the following: December 16, 1995 through January 15, 1996........Adjusted CD Rate or LIBOR plus 1 percentage point January 16, 1996 through February 15, 1996........Adjusted CD Rate or LIBOR plus 1.25 percentage points In connection with the Mortgage Debt A extension, the Partnership paid an extension fee to the Banks of $1,085,000 which was amortized as interest expense during the Extension Period. 62 - -------------------------------------------------------------------------------- Bank Mortgage Debt Guarantees Prior to the initial refinancing, in 1987 Host Marriott had guaranteed payment of up to $60 million of debt service on the $500 million of non-recourse mortgage debt (the "MFS Mortgage Debt") from Marriott Financial Services, Inc. ("MFS"), a wholly-owned subsidiary of Host Marriott. As a result of the initial refinancing, this guarantee was allocated $32.6 million to Mortgage Debt A and $27.4 million to Mortgage Debt B. Any payments by Host Marriott under the Mortgage Debt guarantees were treated as loans to the Partnership and bore interest at one percentage point in excess of the prime rate of interest announced by Bankers Trust Company of New York (the "Prime Rate"). During 1995, Host Marriott was released from its remaining original Mortgage Debt A guarantee obligation of $32.6 million as certain debt service coverage requirements were met. Host Marriott was released from the remaining original guarantees on January 24, 1996, the date when Mortgage Debt A and Mortgage Debt B were repaid in full. During 1994, the Partnership, Manager and Mortgage Debt A and B lenders agreed that the Partnership would establish reserve accounts for Mortgage Debt A and B and contribute 1% of Hotel sales on the respective Mortgage Debt A and B properties to these reserves for 1993 through the respective loan maturities. The initial contribution, made in 1994, included the required contribution for 1993. On January 24, 1996, these reserves were used to pay costs associated with the refinancing of these loans and to repay a portion of these loans upon maturity. In addition, the General Partner had provided a guarantee to MFS that, in the event of a foreclosure, proceeds under the MFS Mortgage Debt would be at least $75 million. This foreclosure guarantee was allocated $40.8 million to Mortgage Debt A and $34.2 million to Mortgage Debt B. Upon completion of the debt refinancing on January 24, 1996, Host Marriott was released from its obligations pursuant to the foreclosure guarantee. IRB Debt The IRB Debt was refinanced on January 24, 1996 and the IRB Debt was repaid in full. The $25.6 million of IRB Debt outstanding at December 31, 1995 was backed by direct-pay letters of credit from commercial banks that would have expired in February, November and December 1996. These issues were subject to mandatory prepayment upon expiration of the letters of credit unless replacement letters of credit were secured. The IRB Debt bore interest at daily, weekly or fixed rates at the option of the Partnership, and was limited to a maximum interest rate of 15%. During the period from January 1, 1996 through January 23, 1996, the interest rates on the IRB Debt ranged from 2.65% to 6.1%. In 1995 and 1994, the interest rates on the IRB Debt ranged from 1.9% to 6.1% and 1.15% to 6.05%, respectively. The interest rate on the IRB Debt was 3.2% at January 23, 1996. The bondholders had the right to demand purchase of any of the bonds at the expiration of specified interest rate periods. Had the Partnership failed to make the required payments of principal and interest on the IRB Debt, Host Marriott would have been required to make such payments ("Host Marriott's IRB Liability"). Through January 24, 1996, the Partnership purchased a total of $15.4 million of bonds/IRB Debt with proceeds advanced by Host Marriott (see below) when presented by certain bondholders. These loans bore interest at one percentage point in excess of the Prime Rate (8.5% at January 23, 1996). The weighted average interest rate was 9.5% for the period from January 1, 1996 through January 23, 1996, 9.83% for 1995 and 8.14% for 1994. As of December 31, 1995, $6.5 million of Host Marriott IRB Liability loans were outstanding. As discussed above, the $6.5 million of Host Marriott IRB Liability loans were repaid on January 24, 1996, from proceeds of the debt refinancing. 63 - ------------------------------------------------------------------------------- Ground Rent Facility Fifty-three of the Hotels are situated on land leased from MII or affiliates of MII, eight of the Hotels are situated on land leased from third parties. MFS had agreed to lend the Partnership up to $25 million (the "Ground Rent Facility") to the extent that the Partnership has insufficient funds to pay ground rent under any ground lease under certain circumstances. No amounts were ever advanced under the Ground Rent Facility. Upon refinancing of the Partnership Debt on January 24, 1996, MFS was released from the Ground Rent Facility. Debt Refinancing - Certificates The Certificates in an initial principal amount of $410.2 million were issued by CBM Funding. Proceeds from the sale of the Certificates were utilized by CBM Funding to provide a mortgage loan (the "Mortgage Loan") to Associates. The Certificates/Mortgage Loan require monthly payments of principal and interest based on a 17-year amortization schedule. The Mortgage Loan matures on January 28, 2008. However, the maturity date of the Certificates/Mortgage Loan may be extended until January 28, 2013 with the consent of 662/3% of the holders of the outstanding Certificates affected thereby. The Certificates were issued in the following classes and pass-through rates of interest. Initial Certificate Pass-Through Class Balance Rate ------------------- ------------------- ------------ Class A-1 $ 45,500,000 7.550% Class A-2 $ 50,000,000 6.880% Class A-3P & I $ 129,500,000 7.080% Class A-3IO Not Applicable 0.933% Class B $ 75,000,000 7.480% Class C $ 100,000,000 7.860% Class D $ 10,200,000 8.645% The Class A-3IO Certificates receive payments of interest only based on a notional balance equal to the Class A-3P & I Certificate Balance. The balance of the Certificates was $398.9 million at December 31, 1996. Principal amortization of $11.3 million of the Class A-1 Certificates was made during 1996. The weighted average interest rate for January 24, 1996, through December 31, 1996, was 7.7%. The average interest rate at December 31, 1996 was 7.6%. The Certificates maturities are as follows (in thousands): 1997 $ 13,298 1998 14,331 1999 15,443 2000 16,642 2001 17,934 Thereafter 321,205 --------- $ 398,853 ========= 64 - ------------------------------------------------------------------------------ The Mortgage Loan is secured primarily by 69 cross-defaulted and cross-collateralized mortgages representing first priority mortgage liens on (i) the fee or leasehold interest in the 69 Hotels, related furniture, fixtures and equipment and the property improvement fund, (ii) the fee interest in the land leased from MII or their affiliates on which 53 Hotels are located, (iii) a pledge of Associates membership interest in and the related right to receive distributions from Associates II which owns the Deerfield Hotel and (iv) an assignment of the Management Agreement, as defined below. The Mortgage Loan is non-recourse to Associates, the Partnership and its partners. Operating profit from the Hotels in excess of debt service on the Mortgage Loan is available to be distributed to the Partnership and Courtyard II Associates Management Corporation. Prepayments of the Mortgage Loan are permitted with the payment of a premium (the "Prepayment Premium"). The Prepayment Premium is equal to the greater of (i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance amount based on a spread of .25% or .55% over the U.S. treasury rate, as defined. On June 30, 1996, CBM Funding completed an exchange offer of its Multiclass Mortgage Pass-Through Certificates, Series 1006-1A with a principal balance of $406.2 million at that time ("Old Certificates"), for an equal amount of Multiclass Mortgage Pass-Through Certificates, Series 1996-1B ("New Certificates"). The form and terms of the New Certificates are substantially identical to the form and terms of the Old Certificates, except that the New Certificates are registered under the Securities Act of 1933, as amended and their transfers are not restricted. NOTE 7. LEASES The land on which 53 of the Hotels are located is leased from MII or affiliates of MII. In addition, eight of the Hotels are located on land leased from third parties. The land leases have remaining terms (including all renewal options) expiring between the years 2024 and 2068. The MII land leases and the third party land leases provide for rent based on specific percentages (from 2% to 15%) of certain sales categories subject to minimum amounts. The minimum rentals are adjusted at various anniversary dates throughout the lease terms, as defined in the agreements. The Partnership also rents certain equipment for use in the Hotels. In connection with the refinancing, the Partnership, as lessee, transferred its rights and obligations pursuant to the 53 ground leases with MII and affiliates to Associates. Additionally, MII and affiliates agreed to defer receipt of their ground lease payments to the extent that the Partnership or Associates has insufficient funds for debt service payments on the Senior Notes and the Mortgage Loan. 65 - -------------------------------------------------------------------------------- Minimum future rental payments during the term of these operating leases are as follows (in thousands): Telephone Lease Land Equipment Other Year Leases Leases Leases -------------- ---------- -------------- --------- 1997 $ 9,230 $ 1,125 $ 966 1998 9,230 1,106 561 1999 9,230 787 101 2000 9,230 589 -- 2001 9,230 -- -- Thereafter 542,213 -- -- ---------- -------------- ----------- $ 588,363 $ 3,607 $ 1,628 ========== ============== =========== Total rent expense on land leases was $11,899,000 for 1996, $11,550,000 for 1995 and $10,787,000 for 1994. NOTE 8. MANAGEMENT AGREEMENT To facilitate the refinancing, effective December 30, 1995, the original management agreement was restated into two separate management agreements. Associates entered into a management agreement with the Manager for the 69 Hotels which Associates directly owns and Associates II entered into a management agreement for the Deerfield Hotel which Associates II owns, collectively, (the "Management Agreement"). Term The Management Agreement has an initial term expiring in 2013. The Manager may renew the term, as to one or more of the Hotels, at its option, for up to three successive terms of 10-years each and one final term of five years. The Partnership may terminate the Management Agreement if, during any three consecutive years after 1992, specified minimum operating results are not achieved. However, the Manager may prevent termination by paying to the Partnership the amount by which the minimum operating results were not achieved. Management Fees The Management Agreement provides for annual payments of (i) the base management fee equal to 3 1/2% of gross sales from the Hotels, (ii) the Courtyard management fee equal to 2 1/2% of gross sales from the Hotels, and (iii) the incentive management fee equal to 15% of operating profit, as defined (20% of operating profit after the partners have received refinancing proceeds equal to 50% of the excess of (a) $154,736,842 over (b) cumulative distributions of adjusted sale proceeds (the "First Equity Refinancing"). Deferral Provisions Due to the refinancing, beginning in 1996, one percent of the Courtyard management fee is deferred through maturity of the Senior Notes and the Mortgage Loan to the extent that the Partnership or Associates has insufficient funds for debt service payments on the Senior Notes and the Mortgage Loan. This change eliminated the previous deferral of the total Courtyard management fee to debt service through December 31, 1997. 66 - ------------------------------------------------------------------------------- To the extent any Courtyard management fee, base management fee or incentive management fee is deferred, it will be added to deferred management fees. Deferred management fees accrue without interest, and will be payable out of 50% of available cash flow after payment of certain priorities as discussed below. The priority return to the Partnership, as defined, was reduced from 10% of invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 10% for 1999 and thereafter. Operating profit from the Hotels (which reflects the deduction of the base and Courtyard management fees and MII ground rent) will be used to pay the following, in order of priority: (i) debt service on the Senior Notes and Mortgage Loan, (ii) to repay working capital loans to the Manager, (iii) to repay deferred ground rent to MII and their affiliates, (iv) to repay ground lease advances to MII and their affiliates, (v) the priority return to the Partnership which is 7% of invested capital for 1996, (vi) eighty percent of the remaining operating profit is applied to the payment of current incentive management fees, (vii) to repay advances to the Partnership, (viii) to repay foreclosure avoidance advances to the Manager and (ix) fifty percent of the remaining operating profit to repay deferred management fees to the Manager and fifty percent of remaining operating profit is paid to the Partnership. In 1996, the Partnership had $2.5 million of remaining operating profit after the payment of i) through viii) above. Fifty percent of this remaining operating profit was used to repay a portion of 1996 deferred incentive management fees to the Manager and the remainder was paid to the Partnership. During 1996, $633,000 of incentive management fees were deferred while during 1995, $162,000 were repaid. Deferred incentive management fees were $6,197,000 and $5,564,000 as of December 31, 1996 and 1995, respectively. Deferred Courtyard management fees totalled $22,341,000 as of December 31, 1996 and 1995. Deferred base management fees as of December 31, 1996 and 1995 were $7,904,000. Chain Services The Manager is required to furnish certain services ("Chain Services") which are furnished generally on a central or regional basis to all hotels managed, owned or leased in the Courtyard by Marriott hotel system. The total amount of Chain Services allocated to the Partnership was $9,474,000 in 1996, $9,224,000 in 1995 and $8,981,000 in 1994. Working Capital Associates is required to provide the Manager with working capital and fixed asset supplies to meet the operating needs of the Hotels. The refinancing required certain enhancements to the cash management system of the Manager such that additional working capital may be required for the operation of the Hotels. Therefore, on January 24, 1996, the Partnership, Associates and the Manager entered into a working capital maintenance agreement (the "Working Capital Agreement") and deposited $2.5 million as additional working capital for the operation of the Hotels. Upon termination of the Management Agreement, the working capital and supplies will be returned to Associates. As of December 31, 1996, the working capital balance was $8,761,000. This includes the $8,846,000 originally advanced less the $2,585,000 of excess working capital returned to the Partnership in 1991 and the $2,500,000 advanced during 1996. At December 31, 1996 and 1995, accumulated depreciation related to the supplies totalled $2,060,000. 67 - -------------------------------------------------------------------------------- In addition, the Working Capital Agreement provides that the Partnership and Associates, collectively, reserve $2 million by February 1, 1997, and additional amounts such that the total balance is $5 million by February 1, 1998 (the "Working Capital Reserve"). The $2 million was reserved by Associates on January 31, 1997. The Working Capital Reserve will be available for payment of hotel operating expenses in the event that there is a downgrade in the long-term senior unsecured debt of MII to below a certain level, as described in the Mortgage Loan. The obligation to fund the amounts required by the Working Capital Agreement is subordinate to debt service on the Senior Notes and the Mortgage Loan. Property Improvement Fund The Management Agreement provides for the establishment of a repairs and equipment reserve (property improvement fund) for the Hotels. The funding of this reserve is based on a percentage of gross Hotel sales. During 1994, the Partnership, Manager and the Mortgage Debt A and B lenders agreed that the Partnership would establish refinancing reserve accounts and contribute 1% of Hotel sales on the respective Mortgage Debt A and B properties to these reserves. Correspondingly, the Management Agreement was amended in order to reduce the contribution to the property improvement fund from 6% to 5% of gross Hotel sales for the Mortgage Debt A and B properties for 1993 through the respective loan maturities. The contribution for the five IRB Hotels remained at 6%. Upon completion of the refinancing on January 24, 1996, the contribution to the property improvement fund was established initially at 5% for all Hotels and may be increased, at the option of the Manager, to 6% of gross Hotel sales in 2001. NOTE 9. ENVIRONMENTAL CONTINGENCY Based upon a study completed in December 1995, Associates has become aware of environmental contamination at one of the fee-owned properties owned by Associates II, the Deerfield Hotel, caused by the previous use of the site as a landfill and not caused by Associates. The property represents less than 5% of Associates' total assets and revenues as of December 31, 1996 and for the year ended, respectively. Associates is unable to determine the need for remediation, its potential responsibility, if any, for remediation and the extent of Associates' possible liability for any remediation costs. There can be no assurance that Associates will not have liability with respect to remediation of contamination at that site. Associates does not believe that any of the environmental matters are likely to have a material adverse effect on its business and operations. 68 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The Partnership has no directors or officers. The business and policy making functions of the Partnership are carried out through the directors and executive officers of CBM Two Corporation, the General Partner, who are listed below: Age at Name Current Position December 31, 1996 Robert E. Parsons President and Director 41 Christopher G. Townsend Vice President and Director 49 Bruce F. Stemerman Vice President and Director 41 Earla L. Stowe Vice President and 35 Chief Accounting Officer Anna Mary Coburn Secretary 41 Bruce Wardinski Treasurer 36 Business Experience Robert E. Parsons joined Host Marriott's Corporate Finance Planning staff in 1981. In 1984, Mr. Parsons was made Director, Project Finance of Host Marriott's Treasury Department and in 1986 he was made Vice President, Project Finance of Host Marriott's Treasury Department. He was made Assistant Treasurer of Host Marriott in 1988 and was made Senior Vice President and Treasurer of Host Marriott in 1993. In October 1995, he was made Executive Vice President and Chief Financial Officer of Host Marriott. He also serves as a director and an officer of numerous Host Marriott subsidiaries. Christopher G. Townsend joined Host Marriott's Law Department in 1982 as a Senior Attorney. In 1984 he was made Assistant Secretary of Host Marriott. In 1986 he was made an Assistant General Counsel. He was made Senior Vice President, Corporate Secretary and Deputy General Counsel of Host Marriott in 1993. In January 1997, he was made General Counsel of Host Marriott. He also serves as a director and an officer of numerous Host Marriott subsidiaries. Bruce F. Stemerman joined Host Marriott in 1989 as Director--Partnership Services. He became Vice President--Lodging Partnerships in 1994 and became Senior Vice President--Asset Management in 1996. Prior to joining Host Marriott, Mr. Stemerman spent ten years with Price Waterhouse and became Senior Vice President--Asset Management in 1996. He also serves as a director and an officer of numerous Host Marriott subsidiaries. Earla L. Stowe was appointed to Vice President and Chief Accounting Officer of CBM Two Corporation on October 8, 1996. Ms. Stowe joined Host Marriott Corporation in 1982 and held various positions in the tax department until 1988. She joined the Partnership Services department as an accountant in 1988 and in 1989 she became an Assistant Manager--Partnership Services. She was promoted to Manager--Partnership Services in 1991 and to Director--Asset Management in 1996. 69 Anna Mary Coburn joined Host Marriott as an Attorney in 1988, became Assistant General Counsel in 1993, and was elected Corporate Secretary and Associate General Counsel in 1997. Prior to joining Host Marriott, Ms. Coburn was an Attorney for the law firm of Shawe & Rosenthal and was a law clerk for the United States Court of Appeals for the Fourth Circuit. Bruce Wardinski joined Host Marriott in 1987 as a Senior Financial Analyst of Financial Planning & Analysis and was named Manager in June 1988. He was appointed Director, Financial Planning & Analysis in 1989, Director of Project Finance in January 1990, Senior Director of Project Finance in June 1993, Vice President--Project Finance in June 1994, and Senior Vice President of International Development in October 1995. In June 1996, Mr. Wardinski was named Senior Vice President and Treasurer of Host Marriott. Prior to joining Host Marriott, Mr. Wardinski was with the public accounting firm Price Waterhouse. ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS As noted in Item 10 above, the Partnership has no directors or officers nor does it have any employees. Under the Partnership Agreement, however, the General Partner has the exclusive right to conduct the business and affairs of the Partnership subject only to the management agreements described in Items 1 and 13. The General Partner is required to devote to the Partnership such time as may be necessary for the proper performance of its duties, but the officers and directors of the General Partner are not required to devote their full time to the performance of such duties. No officer or director of the General Partner devotes a significant percentage of time to Partnership matters. To the extent that any officer or director does devote time to the Partnership, the General Partner is entitled to reimbursement for the cost of providing such services. For the fiscal years ending December 31, 1996, 1995 and 1994, the Partnership reimbursed the General Partner in the amount of $221,000, $306,000 and $219,000, respectively, for the cost of providing all administrative and other services as General Partner. For information regarding all payments made by the Partnership to Host Marriott and subsidiaries, see Item 13 "Certain Relationships and Related Transactions." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of December 31, 1996, no person owned of record, or to the Partnership's knowledge owned beneficially, more than 5% of the total number of limited partnership Units. The General Partner owns a total of 21.5 Units representing a 1.39% limited partnership interest in the Partnership. The executive officers and directors of the General Partner, Host Marriott, MII and their respective affiliates do not own any units as of December 31, 1996. The Partnership is not aware of any arrangements which may, at a subsequent date, result in a change in control of the Partnership. 70 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Management Agreement To facilitate the refinancing, effective December 30, 1995, the original Management Agreement was restated into two separate management agreements. Associates entered into a management agreement with the Manager for the 69 Hotels which Associates directly owns and Associates II entered into a management agreement for the Deerfield Hotel which Associates II owns, collectively, (the "Management Agreement"). Term The Management Agreement has an initial term expiring in 2013. The Manager may renew the term, as to one or more of the Hotels, at its option, for up to three successive terms of 10-years each and one final term of five years. The Partnership may terminate the Management Agreement if, during any three consecutive years after 1992, specified minimum operating results are not achieved. However, the Manager may prevent termination by paying to the Partnership the amount by which the minimum operating results were not achieved. Management Fees The Management Agreement provides for annual payments of (i) the base management fee equal to 3 1/2% of gross sales from the Hotels, (ii) the Courtyard management fee equal to 2 1/2% of gross sales from the Hotels, and (iii) the incentive management fee equal to 15% of operating profit, as defined (20% of operating profit after the Partners have received refinancing proceeds equal to 50% of the excess of (a) $154,736,842 over (b) cumulative distributions of adjusted sale proceeds (the "First Equity Refinancing"). Deferral Provisions Until 1998, the Courtyard management fee will be deferred to the extent the Partnership does not have sufficient funds for debt service. Prior to 1994, the incentive management fee earned and paid was limited to a maximum of 55% of the remainder of (i) available cash flow, as defined, less (ii) the priority return. Thereafter, payment of any earned incentive management fee is limited to 80% of the amount by which available cash flow exceeds the priority return. Beginning in 1996, one percent of the Courtyard management fee is deferred through maturity of the Senior Notes and the Mortgage Loan to the extent that the Partnership or Associates has insufficient funds for debt service payments on the Senior Notes and the Mortgage Loan. To the extent any Courtyard management fee, base management fee or incentive management fee is deferred, it will be added to deferred management fees. Deferred management fees accrue without interest, and will be payable out of 50% of available cash flow after payment of certain priorities as discussed below. The priority return to the Partnership, as defined, was reduced from 10% of invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 10% for 1999 and thereafter. Operating profit from the Hotels (which reflects the deduction of the base and Courtyard management fees and MII ground rent) will be used to pay the following, in order of priority: (i) debt service on the Senior Notes 71 and Mortgage Loan, (ii) to repay working capital loans to the Manager, (iii) to repay deferred ground rent to MII and their affiliates, (iv) to repay ground lease advances to MII and their affiliates, (v) the priority return to the Partnership which is 7% of invested capital for 1996, (vi) eighty percent of the remaining operating profit is applied to the payment of current incentive management fees, (vii) to repay advances to the Partnership, (viii) to repay foreclosure avoidance advances to the Manager and (ix) fifty percent of the remaining operating profit after payment of (i) through (viii) to repay deferred management fees to the Manager and the other fifty percent is paid to the Partnership. In 1996, the Partnership had $2.5 million of remaining operating profit after the payment of i) through viii) above. Fifty percent of this remaining operating profit was used to repay a portion of 1996 deferred incentive management fees to the Manager and the remainder was paid to the Partnership. During 1996, $633,000 of incentive management fees were deferred while during 1995, $162,000 were repaid. Deferred incentive management fees were $6,197,000 and $5,564,000 as of December 31, 1996 and 1995, respectively. Deferred Courtyard management fees totalled $22,341,000 as of December 31, 1996 and 1995. Deferred base management fees as of December 31, 1996 and 1995 were $7,904,000. Chain Services The Manager is required to furnish certain services ("Chain Services") which are furnished generally on a central or regional basis to all hotels managed, owned or leased in the Courtyard by Marriott hotel system. The total amount of Chain Services allocated to the Partnership was $9,474,000 in 1996, $9,224,000 in 1995 and $8,981,000 in 1994. Working Capital The Partnership is required to provide the Manager with working capital and fixed asset supplies to meet the operating needs of the Hotels. The refinancing required certain enhancements to the cash management system of the Manager such that additional working capital may be required for the operation of the Hotels. Therefore, on January 24, 1996, the Partnership, Associates and the Manager entered into a working capital maintenance agreement (the "Working Capital Agreement") and deposited $2.5 million as additional working capital for the operation of the Hotels. Upon termination of the Management Agreement, the working capital and supplies will be returned to the Partnership. As of December 31, 1996, the working capital balance was $8,761,000. This includes the $8,846,000 originally advanced less the $2,585,000 of excess working capital returned to the Partnership in 1991 and the $2,500,000 advanced on January 24, 1996. At December 31, 1996 and 1995, accumulated depreciation related to the supplies totalled $2,060,000. In addition, the Working Capital Agreement provides that the Partnership and Associates, collectively, reserve $2 million by February 1, 1997 and additional amounts such that the total balance is $5 million by February 1, 1998 (the "Working Capital Reserve"). The $2 million was reserved on January 31, 1997. The Working Capital Reserve will be available for payment of hotel operating expenses in the event that there is a downgrade in the long-term senior unsecured debt of MII to below a certain level, as described in the Mortgage Loan. The obligation to fund the amounts required by the Working Capital Agreement is subordinate to debt service on the Senior Notes and the Mortgage Loan. 72 Property Improvement Funds The Management Agreement provides for the establishment of a repairs and equipment reserve (property improvement fund) for the Hotels. The funding of this reserve is based on a percentage of gross Hotel sales. During 1994, the Partnership, Manager and the Mortgage Debt A and B lenders agreed that the Partnership would establish refinancing reserve accounts and contribute 1% of Hotel sales on the respective Mortgage Debt A and B properties to these reserves. Correspondingly, the Management Agreement was amended in order to reduce the contribution to the property improvement fund from 6% to 5% of gross Hotel sales for the Mortgage Debt A and B properties for 1993 through the respective loan maturities. The contribution for the five IRB Hotels remained at 6%. Upon completion of the refinancing on January 24, 1996, the contribution to the property improvement fund was established initially at 5% for all Hotels and may be increased, at the option of the Manager, to 6% of gross Hotel sales in 2001. Additionally, the Partnership is no longer required to contribute 1% of gross Hotel sales from the Mortgage Debt A and Mortgage Debt B Hotels to the refinancing reserves. Payments to MII and Subsidiaries The following table sets forth the amount paid to MII and affiliates under both the Management Agreement and the ground lease agreements for the years ended December 31, 1996, 1995 and 1994 (in thousands). The table also sets forth accrued but unpaid base, Courtyard and incentive management fees: 1996 1995 1994 ----------- ---------- ------- Incentive management fee...............$ 11,407 $ 10,480 $ 3,839 Ground rent............................ 10,172 9,856 9,284 Chain services allocation.............. 9,474 9,224 8,981 Base management fee.................... 9,230 8,604 8,123 Courtyard management fee............... 6,592 6,145 5,802 Deferred incentive management fees..... -- 162 -- ----------- ---------- ----------- $ 46,875 $ 44,471 $ 36,029 =========== =========== =========== Accrued but unpaid fees: Incentive management fee...............$ 633 $ -- $ 5,564 =========== ========== =========== IRB Advances and General Partner Loans The IRB Debt was refinanced on January 24, 1996 and the IRB Debt was repaid in full. The $25.6 million of IRB Debt outstanding at December 31, 1995 was backed by direct-pay letters of credit from commercial banks that would have expired in February, November and December 1996. These issues were subject to mandatory prepayment upon expiration of the letters of credit unless replacement letters of credit were secured. The IRB Debt bore interest at daily, weekly or fixed rates at the option of the Partnership, and was limited to a maximum interest rate of 15%. From January 1, 1996, through January 23, 1996, the interest rates on the IRB Debt ranged from 2.65% to 6.1%. In 1995 and 1994, the interest rates on the IRB Debt ranged from 1.9% to 6.1% and 1.15% to 6.05%, respectively. The interest rate on the IRB Debt was 3.2% at January 23, 1996. The bondholders had the right to demand purchase of any of the bonds at the expiration of specified interest rate periods. Had the Partnership fail to make the required payments of principal and interest on the IRB Debt, Host Marriott would have been required to make such payments ("Host Marriott's IRB Liability"). Through January 24, 1996, the Partnership purchased a total of $15.4 million of 73 bonds/IRB Debt with proceeds advanced by Host Marriott when presented by certain bondholders. These loans bore interest at one percentage point in excess of the Prime Rate (8.5% at January 23, 1996). The weighted average interest rate was 9.5% for the period from January 1, 1996 through January 23, 1996, 9.83% for 1995 and 8.14% for 1994. In 1993 and 1994, the Partnership was able to repay the General Partner $8.9 million. As of December 31, 1995, $6.5 million of Host Marriott IRB Liability loans were outstanding. As discussed above, the $6.5 million of Host Marriott IRB Liability loans were repaid on January 24, 1996 from proceeds of the debt refinancing. Payments to Host Marriott and Subsidiaries The following sets forth amounts paid by the Partnership to Host Marriott and its subsidiaries for the years ended December 31, 1996, 1995 and 1994 (in thousands):
1996 1995 1994 --------- ---------- ---------- Principal and interest on General Partner loan.....$ 7,508 $ 445 $ 4,161 Administrative expenses reimbursed................. 221 306 219 Cash distributions (as a limited partner).......... 102 76 123 ----------- ---------- ----------- $ 7,831 $ 827 $ 4,503 =========== ========= ===========
Mortgage Debt Guarantees Prior to the initial refinancing, in 1987 Host Marriott had guaranteed payment of up to $60 million of debt service on the MFS Mortgage Debt. As a result of the initial refinancing, this guarantee was allocated $32.6 million to Mortgage Debt A and $27.4 million to Mortgage Debt B. Any payments by Host Marriott under the Mortgage Debt guarantees were treated as loans to the Partnership and bore interest at one percentage point in excess of the prime rate of interest announced by Bankers Trust Company of New York (the "Prime Rate"). During 1995, Host Marriott was released from its original Mortgage Debt A guarantee obligation of $32.6 million as certain debt service coverage requirements were met. As a result, as of December 31, 1995, $5.4 million and $27.4 million, respectively, was available under Mortgage Debt A and B guarantees. Host Marriott was released from the original guarantees on January 24, 1996, the date when Mortgage Debt A and Mortgage Debt B were repaid in full. During 1994, the Partnership, Manager and Mortgage Debt A and B lenders agreed that the Partnership would establish reserve accounts for Mortgage Debt A and B and contribute 1% of Hotel sales on the respective Mortgage Debt A and B properties to these reserves for 1993 through the respective loan maturities. The initial contribution, made in 1994, included the required contribution for 1993. On January 24, 1996, these reserves were used to pay costs associated with the refinancing of these loans and to repay a portion of these loans upon maturity. In addition, the General Partner had provided a guarantee to MFS that, in the event of a foreclosure, proceeds under the MFS Mortgage Debt would be at least $75 million. This foreclosure guarantee was allocated $40.8 million to Mortgage Debt A and $34.2 million to Mortgage Debt B. Upon completion of the debt refinancing on January 24, 1996, Host Marriott was released from its obligations pursuant to the foreclosure guarantee. 74 PART IV ITEM 14. EXHIBITS, SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) List of Documents Filed as Part of This Report (1) Financial Statements All financial statements of the registrant as set forth under Item 8 of this Report on Form 10-K. (2) Financial Statement Schedules The following financial information is filed herewith on the pages indicated. Schedule I - Condensed Consolidated Financial Information of Registrant Schedule III - Real Estate and Accumulated Depreciation All other schedules are omitted because they are not applicable or the required information is included in the financial statements or notes thereto.
(3) EXHIBITS Exhibit Number Description Page - ---------- ----------------------------------------------------------------------------------------------------------- *3.1 Amended and Restated Partnership Agreement of Limited Partnership of Courtyard by N/A Marriott II Limited Partnership (the "Partnership") dated October 30, 1987 *3.2 Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of the N/A Partnership *3.3 Certificate of Limited Partnership of the Partnership N/A *3.4 Amended and Restated Certificate of Incorporation of the Courtyard II Finance Company N/A ("Finance") *3.5 By-laws of Finance N/A 3.6 Agreement of Limited Partnership of Courtyard II Associates, L.P. ("Associates") N/A (Incorporated by reference herein to Exhibit 3.1 to Associates Form S-4 filed with the Commission on March 14, 1996.) 3.7 Certificate of Limited Partnership of Associates (Incorporated by reference herein to Exhibit N/A 3.2 to Associates Form S-4 filed with the Commission on March 14, 1996.) 3.8 Amended and Restated Certificate of Incorporation of CBM Funding Corporation N/A ("Funding") (Incorporated by reference herein to Exhibit 3.3 to Associates Form S-4 filed with the Commission on March 14, 1996.) 3.9 By-laws of Funding (Incorporated by reference herein to Exhibit 3.4 to Associates Form S-4 N/A filed with the Commission on March 14, 1996.) 75 *4.1 Indenture dated as of January 24, 1996 among the Partnership and Finance and IBJ Schroder N/A Bank & Trust Company (the"Indenture") *4.3 Exchange and Registration Rights Agreement dated as of January 24, 1996 among the N/A Partnership and Finance and Lehman Brothers Inc. *4.4 Intercreditor Agreement dated as of January 24, 1996 among IBJ Schroder Bank & Trust N/A Company, Bankers Trust Company, Marine Midland Bank (the "CMBS Trustee"), the Partnership and Finance, Associates, Courtyard II Associates Management Corporation (the "Managing General Partner") and Funding *4.5 Trust and Servicing Agreement dated as of January 1, 1996 among Funding, Bankers Trust N/A Company and the CMBS Trustee *4.6 Exchange and Registration Rights Agreement dated as of January 24, 1996 among the N/A Partnership, Associates, Funding and Lehman Brothers Inc. *10.1 Amended and Restated Management Agreement dated as of December 30, 1995, between N/A the Partnership and Courtyard Management Corporation (the "Manager") *10.2 Management Agreement dated as of December 30, 1995 between the Partnership and the N/A Manager **10.3 Assignment of Lease and Warranty and Assumption of Obligations between Marriott N/A Corporation and the Partnership dated October 30, 1987 for the Tampa, FL property. Marriott Hotel Land Leases between Holtsinger, Inc. and Bert Chase, Trustee dated June 13, 1968. **10.4 Assignment of Lease and Warranty and Assumption of Obligations between Marriott N/A Corporation and the Partnership dated August 12, 1988 for the Atlanta-Roswell, GA property. Marriott Hotel Land Lease between Marriott Corporation and Roswell Landing Associates dated June 10, 1986. **10.5 Assignment of Lease and Warranty and Assumption of Obligations between Marriott N/A Corporation and the Partnership dated July 15, 1988 for the Norwalk, CT property. Marriott Hotel Land Lease between Marriott Corporation and Mary E. Fabrizio dated January 6, 1986. **10.6 Assignment of Lease and Warranty and Assumption of Obligations between Marriott N/A Corporation and the Partnership dated February 24, 1988 for the Fresno, CA property. Marriott Hotel Land Lease between Marriott Corporation and Richard Erganian, Miche Erganian, Aram Erganian and Aznive Erganian dated June 6, 1984. **10.7 Assignment of Lease and Warranty and Assumption of Obligations between Marriott N/A Corporation and the Partnership dated August 12, 1988 for the Cupertino, CA property. Marriott Hotel Land Lease between Marriott Corporation and Vallco Park, Ltd. dated March 31, 1987. **10.8 Marriott Hotel Land Lease between Marriott Corporation and Pizzagalli Investment N/A Company dated September 22, 1986. **10.9 Assignment of Lease and Warranty and Assumption of Obligations between Marriott N/A Corporation and the Partnership dated May 19, 1989 for the Charlotte South Park, NC property. Marriott Hotel Land Lease between Marriott Corporation and Queens Properties, Inc. dated January 19, 1987. 76 **10.10 Assignment of Lease and Warranty and Assumption of Obligations between Marriott N/A Corporation and the Partnership dated January 27, 1989 for the Philadelphia/Devon, PA property. Marriott Hotel Land Lease between Marriott Corporation and Three Philadelphia/Devon Square Associates dated July 15, 1986. **10.11 Associates received an assignment from the Partnership, which had received an assignment N/A from Host Marriott, of 15 ground leases for land that Host Marriott had previously leased from various affiliates (the "Original Landlords"). The ground leases are identical in all material respects except as to their assignment dates to the Partnership and the rents due (Exhibit A of each ground lease). The schedule below sets forth the terms of each ground lease not filed which differ from the copy of the example ground lease (Hoover, AL) which was previously filed with the Commission. In addition, a copy of Exhibit A was filed for each excluded ground lease. Property State Assignment Date Original Landlord Foster City CA 10/30/87 Essex House Condominium Corporation ("Essex") Marin/Larkspur Landing CA 10/30/87 Essex Denver/Southeast CO 10/30/87 Essex Atlanta/Perimeter Center GA 02/24/88 Essex Indianapolis/Castleton IN 10/30/87 Essex Lexington/North KY 10/07/88 Essex Annapolis MD 05/19/89 Essex Minneapolis Airport MN 10/30/87 Essex St. Louis/Creve Couer MO 10/30/87 Essex Rye NY 03/29/88 Essex Greenville SC 03/29/88 Essex Memphis Airport TN 10/30/87 Essex Nashville Airport TN 02/24/88 Essex Dallas/Stemmon TX 10/30/87 Essex San Antonio/Downtown TX 03/23/90 Essex **10.12 Associates received an assignment from the Partnership of 38 ground leases which N/A the Partnership had entered into with Marriott International, Inc., ("MII"). The 38 ground leases are identical in all material respects except as to their effective lease dates and the rents due (Exhibit A of each ground lease). The schedule below sets forth the terms of each ground lease not filed which differ from the copy of the example ground lease (Huntsville, AL) which was previously filed with the Commission. In addition, a copy of Exhibit A was filed for each excluded ground lease. Property State Effective Lease Date -------- ----- -------------------- Birmingham/Hoover AL 10/30/87 Huntsville AL 10/30/87 Phoenix/Mesa AZ 04/22/88 Phoenix/Metrocenter AZ 10/01/87 Tucson Airport AZ 12/30/88 Little Rock AR 09/09/88 Bakersfield CA 05/30/88 Hacienda Heights CA 03/30/90 Palm Springs CA 12/20/88 Torrance CA 12/30/88 Boulder CO 11/04/88 Wallingford CT 04/24/90 Ft. Myers FL 11/04/88 Ft. Lauderdale/Plantation FL 12/02/88 St. Petersburg FL 01/26/90 West Palm Beach FL 02/24/89 Atlanta/Gwinnett Mall GA 10/30/87 Chicago/Glenview IL 10/06/89 77 Chicago/Highland Park IL 07/15/88 Chicago/Waukegan IL 08/12/88 Chicago/Wood Dale Park IL 09/09/88 Kansas City/Overland Park KS 04/21/89 Silver Spring MD 10/07/88 Boston/Andover MA 02/24/89 Detroit Airport MI 02/24/88 Detroit/Livonia MI 03/29/88 St. Louis/Westport MO 10/07/88 Lincroft/Red Bank NJ 07/15/88 Raleigh/Cary NC 08/12/88 Dayton Mall OH 10/30/87 Toledo OH 07/15/88 Oklahoma City Airport OK 10/07/88 Portland/Beaverton OR 05/19/89 Columbia SC 04/21/89 Dallas/Northeast TX 04/22/88 Charlottesville VA 04/21/89 Manassas VA 05/19/89 Seattle/Southcenter WA 05/19/89 ***10.13 Contribution Agreement dated as of January 24, 1996 among the N/A Partnership, the Managing General Partner and Associates ***10.14 Bill of Sale and Assignment and Assumption Agreement dated as of N/A January 24, 1996 by the Partnership to Associates *10.15 Assignment and Assumption of Management Agreement dated as of N/A January 24, 1996 by the Partnership to Associates ***10.16 Contribution Agreement dated as of January 24, 1996 among the N/A Partnership, the Managing General Partner and Courtyard II Associates LLC ("Deerfield LLC") ***10.17 Bill of Sale and Assignment and Assumption Agreement dated as of N/A January 24, 1996 by the Partnership to Deerfield LLC *10.18 Deed to the Courtyard by Marriott Hotel in Chicago/Deerfield, N/A Illinois dated as of January 24, 1996 by the Partnership to Deerfield LLC *10.19 Assignment and Assumption of Management Agreement dated as of N/A January 24, 1996 by the Partnership to Deerfield LLC *10.20 Loan Agreement dated as of January 24, 1996 by and between N/A Associates and Funding *10.21 Mortgage Note, dated as of January 24, 1996, in the principal N/A amount of $410,200,000 by Associates to Funding *10.22 Security Agreement dated as of January 24, 1996 by and between N/A Associates and Funding *10.23 Pledge Agreement dated as of January 24, 1996 by and between N/A Associates and Funding *10.24 Collateral Assignment of Management Agreement and Subordination N/A Agreement dated as of January 24, 1996, by and among Associates, the Manager and Funding 78 *10.25 Amendment of Ground Leases dated as of January 24, 1996 by and N/A among Associates, Marriott International, Inc. and Essex House Condominium Corporation ("Essex") *10.26 Environmental Indemnity Agreement dated as of January 24, 1996 N/A by Associates and the Managing General Partner for the benefit of Funding *10.27 Associates, as mortgagor, and Funding, as mortgagee, entered into N/A 53 fee and leasehold mortgages, each dated as of January 24, 1996. The 53 mortgages are identical in all material respects except as to the underlying property to which they relate and, in certain instances, additional parties thereto. The schedule below sets forth the terms of each mortgage not filed which differ from the copy of the example mortgage (Birmingham/Hoover, AL) which is filed herewith. Property State Additional Party -------- ----- ---------------- Birmingham/Hoover AL Essex Huntsville AL MII Phoenix/Mesa AZ MII Phoenix/Metrocenter AZ MII Tucson Airport AZ MII Little Rock AR MII Bakersfield CA MII Foster City CA MII Hacienda Heights CA MII Marin/Larkspur Landing CA MII Palm Springs CA MII Torrance CA MII Boulder CO MII Denver/Southeast CO Essex Wallingford CT MII Ft. Myers FL MII Ft. Lauderdale/Plantation FL MII St. Petersburg FL MII West Palm Beach FL MII Atlanta/Gwinnett Mall GA MII Atlanta/Perimeter Center GA Essex Chicago/Glenview IL MII Chicago/Highland Park IL MII Chicago/Waukegan IL MII Chicago/Wood Dale IL MII Indianapolis/Castleton IN Essex Kansas City/Overland Park KS MII Lexington/North KY Essex Annapolis MD Essex and the Partnership Silver Spring MD MII and the Partnership Boston/Andover MA MII Detroit Airport MI MII Detroit/Livonia MI MII Minneapolis Airport MN Essex St. Louis/Creve Couer MN Essex St. Louis/Westport MO MII Lincroft/Red Bank NJ MII Rye NY Essex Raleigh/Cary NC MII Dayton Mall OH MII Toledo OH MII Oklahoma City Airport OK MII Portland/Beaverton OR MII Columbia SC MII Greenville SC Essex 79 Memphis Airport TN Essex Nashville Airport TN Essex Dallas/Northeast TX MII Dallas/Stemmons TX Essex San Antonio/Downtown TX Essex Charlottesville VA MII Manassas VA MII Seattle/Southcenter WA MII *10.28 Associates, as mortgager, and Funding, as mortgagee, entered into 16 N/A fee leasehold mortgages, each dated as of January 24, 1996. The 16 mortgages are identical in all material respects except as to the underlying property to which they relate. The schedule below sets forth the terms of each mortgage not filed which differ from the copy of the example mortgage (Birmingham/Homewood, AL) which is filed herewith. Property State -------- ----- Birmingham/Homewood AL Cupertino CA Fresno CA Denver Airport CO Norwalk CT Tampa/Westshore FL Atlanta Airport South GA Atlanta/Roswell GA Arlington Heights South IL Chicago/Lincolnshire IL Chicago/Oakbrook Terrace IL Rockford IL Poughkeepsie NY Charlotte/South Park NC Philadelphia/Devon PA Dallas/Plano TX *10.29 Assignment of Loan Documents dated as of January N/A 24, 1996 by Funding to the CMBS Trustee 10.30 Assignment and Assumption of Management Agreement dated as of N/A January 24, 1996 by the Partnership to Associates with attached Management Agreement (Incorporated by reference herein to Exhibit 10.1 to Associates Form S-4 filed with the Commission on March 14, 1996.) 10.31 Working Capital Maintenance Agreement dated as of January 24, 1996, N/A by and among the Partnership, Associates, and the Manager. (Incorporated by reference to the exhibit previously filed as exhibit number 10.23 in Amendment No. 1 to Form S-4 Exchange Offer filed by CBM Funding and Associates with the Commission in May 10, 1996.) *21.1 Subsidiaries of the Partnership N/A 80 * Incorporated herein by reference to the same numbered exhibit in the Partnership's and Finance's Registration Statement on Form S-4 for 10 3/4% Series B Senior Secured Notes due 2008, previously filed with the Commission on March 7, 1996. ** Incorporated by reference to the same numbered exhibit in the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. *** Incorporated by reference to the same numbered exhibit to Amendment No. 1 to the Form S-4 Registration Statement previously filed with the Commission by the Partnership on April 25, 1996. (b) REPORTS ON FORM 8-K Form 8-K dated January 24, 1996, was filed on March 11, 1996. 81
SCHEDULE I Page 1 of 4 COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT CONDENSED CONSOLIDATED BALANCE SHEET December 31, 1996 (in thousands) ASSETS Investments in restricted subsidiaries ......................$ 81,109 Other assets................................................. 5,177 Restricted cash.............................................. 6,848 Cash and cash equivalents.................................... 8,194 --------------- Total Assets..........................................$ 101,328 =============== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Debt .................................................... $ 127,400 Accounts payable and accrued expenses..................... 5,869 --------------- Total liabilities..................................... 133,269 --------------- PARTNERS' CAPITAL (DEFICIT) General Partner Capital contribution................................... 11,306 Cumulative net losses.................................. (5,241) Capital distributions.................................. (278) --------------- 5,787 --------------- Limited Partners Capital contributions, net of offering costs of $17,189.. 129,064 Cumulative net losses.................................... (99,582) Capital distributions.................................... (67,025) Investor notes receivable................................ (185) ------------- (37,728) ------------- Total Partners' Deficit................................ (31,941) ------------- $ 101,328 ============= The Notes to Consolidated Financial Statements of Courtyard by Marriott II Limited Partnership are an integral part of these statements. See Accompanying Notes to Condensed Consolidated Financial Information. 82 SCHEDULE I Page 2 of 4 COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Fiscal year ended December 31, 1996 1996 (in thousands) -------------- Revenues.....................................................$ 15,520 Operating costs and expenses................................. 13,637 -------------- Operating profit before Partnership expenses and interest.... 1,883 Interest income.............................................. 735 Interest expense............................................. (15,804) Partnership expense.......................................... (344) -------------- Loss before equity in earnings of restricted subsidiaries.... (13,530) Equity in earnings of restricted subsidiaries................ 24,071 -------------- Net income..............................................$ 10,541 ============== Notes to Consolidated Financial Statements of Courtyard by Marriott II Limited Partnership are an integral part of these statements. See Accompanying Notes to Condensed Consolidated Financial Information. 83 SCHEDULE I Page 3 of 4 COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Fiscal year ended December 31, 1996 1996 (in thousands) -------------- Cash used in operations.................................... (6,659) -------------- INVESTING ACTIVITIES Dividends from restricted subsidiaries.................. 17,203 Contribution to Associates.............................. (10,627) -------------- Cash provided by investing activities............... 6,576 -------------- FINANCING ACTIVITIES Proceeds from issuance of debt.......................... 127,400 Repayment of debt....................................... (127,400) Capital distributions................................... (6,983) Deposit into the debt service reserve account........... (6,848) Payment of financing costs.............................. (5,600) -------------- Cash used in financing activities................... (19,431) -------------- DECREASE IN CASH AND CASH EQUIVALENTS......................$ (19,514) CASH AND CASH EQUIVALENTS at beginning of year............. 27,708 -------------- CASH AND CASH EQUIVALENTS at end of year...................$ 8,194 ============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest on debt......................$ 8,312 ============== The Notes to Consolidated Financial Statements of Courtyard by Marriott II Limited Partnership are an integral part of these statements. See Accompanying Notes to Condensed Consolidated Financial Information. 84 SCHEDULE I Page 4 of 4 COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS A) The accompanying condensed financial information of Courtyard by Marriott II Limited Partnership (the "Partnership") present the financial position, results of operations and cash flows of the Partnership with the investment in, and operations of, consolidated subsidiaries with restricted net assets on the equity method of accounting. On January 24, 1996, the Partnership completed a refinancing of the Partnership's existing debt through the private placements of $127.4 million of senior secured notes (the "Senior Notes") and $410.2 million of multi-class commercial mortgage pass-through certificates (the "Certificates"). In connection with the refinancing, the limited partners approved certain amendments to the partnership agreement and the management agreement. The partnership agreement amendment, among other things, allowed the formation of certain subsidiaries of the Partnership, including Courtyard II Finance Company ("Finance"), a wholly-owned subsidiary of the Partnership, who along with the Partnership is the co-issuer of the Senior Notes. Additionally, the Partnership formed a wholly-owned subsidiary, Courtyard II Associates Management Corporation ("Managing General Partner"). Managing General Partner was formed to be the managing general partner with a 1% general partner interest in Courtyard II Associates, L.P. ("Associates"), a Delaware limited partnership. The Partnership owns a 1% general partner interest and a 98% limited partner interest in Associates. On January 24, 1996, the Partnership contributed 69 Hotels and their related assets to Associates. Formation of Associates resulted in the Partnership's primary assets being its direct and indirect interest in Associates. Substantially all of Associates' net equity is restricted to distributions, loans or advances to the Partnership. Associates holds a 99% membership interest in CBM Associates II LLC ("Associates II") and Managing General Partner holds the remaining 1% membership interest. On January 24, 1996, the Partnership contributed the Hotel located in Deerfield, IL (the "Deerfield Hotel") and its related assets to Associates and the Managing General Partner simultaneously contributed the Hotel and its related assets to Associates II. CBM Funding Corporation ("CBM Funding"), a wholly-owned subsidiary of Associates, was also formed to make a mortgage loan (the "Mortgage Loan") to Associates from the proceeds of the sale of the Certificates. Associates is a restricted subsidiary of the Partnership and is accounted for under the equity method of accounting on the accompanying condensed financial information of the Partnership. B) As mentioned above, on January 24, 1996, the Senior Notes of $127.4 million were issued by the Partnership and Finance. The Senior Notes bear interest at 10 3/4%, require semi-annual payments of interest and require no payments of principal until maturity on February 1, 2008. The Senior Notes are secured by a first priority pledge by the Partnership of (i) its 99% partnership interest (consisting of a 98% limited partner interest and a 1% general partner interest) in Associates and (ii) its 100% equity interest in the Managing General Partner. Finance has nominal assets, does not conduct any operations and does not provide any additional security for the Senior Notes. C) The accompanying statement of operations reflect the equity in earnings of restricted subsidiaries after elimination of interest expense (see Note B). 85
SCHEDULE III COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1996 (in thousands) Initial Costs Gross Amount at December 31, 1996 ----------------------- --------------------------------------- Subsequent Buildings & Costs Buildings & Accumulated Description Encumbrances Land Improvements Capitalized Land Improvements Total Depreciation - ----------- ------------ ---- ----------- ----------- ---- ------------ ----- ------------ 70 Courtyard by Marriott Hotels $526,253 $25,392 $493,565 $23,915 $25,392 $517,480 $542,872 $112,473 ======== ======= ======== ======= ======= ======== ======== ========
Date of Completion of Date Depreciation Construction Acquired Life 70 Courtyard by 1987-1990 1987-1990 40 years Marriott Hotels
Notes: 1994 1995 1996 ------------- ------------- ------------ (a) Reconciliation of Real Estate: Balance at beginning of year.....................................$ 531,750 $ 535,546 $ 538,358 Capital Expenditures............................................. 3,796 2,812 4,514 Dispositions..................................................... -- -- -- ------------- ------------- ------------ Balance at end of year...........................................$ 535,546 $ 538,358 $ 542,872 ============= ============= ============ (b) Reconciliation of Accumulated Depreciation: Balance at beginning of year.....................................$ 69,346 $ 83,321 $ 97,726 Depreciation..................................................... 13,975 14,405 14,747 ------------- ------------- ------------ Balance at end of year...........................................$ 83,321 $ 97,726 $ 112,473 ============= ============= ============
(c) The aggregate cost of land, buildings and improvements for Federal income tax purposes is approximately $538.2 million at December 31, 1996. (d) The Debt balance is $526.3 million as of December 31, 1996 and includes $127.4 million of Senior Notes and $398.9 million of Multiclass Mortgage Pass-through Certificates. 86 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on this 28th day of March, 1997. COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP By: CBM TWO CORPORATION General Partner /s/Robert E. Parsons ------------------------- Robert E. Parsons President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and the capacities and on the date indicated above. Signature Title (CBM TWO CORPORATION) /s/ Robert E. Parsons - -------------------------------------------- President and Director Robert E. Parsons Principal Executive Officer) /s/ Bruce F. Stemerman - -------------------------------------------- Vice President and Director Bruce F. Stemerman /s/ Christopher G. Townsend - -------------------------------------------- Vice President and Director Christopher G. Townsend /s/ Earla L. Stowe - -------------------------------------------- Vice President and Earla L. Stowe Chief Accounting Officer /s/ Anna Mary Coburn - -------------------------------------------- Secretary Anna Mary Coburn /s/ Bruce Wardinski - -------------------------------------------- Treasurer Bruce Wardinski 87 EX-27 2 FDS --
5 (Replace this text with the legend) 0000832179 COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP 1,000 US Dollars 12-mos dec-31-1996 jan-01-1996 dec-31-1996 1.000 21,045 54,052 13,315 0 0 88,412 685,535 (226,848) 547,099 7,176 571,864 0 0 0 (31,941) 547,099 0 136,077 0 79,170 0 0 46,366 10,541 0 10,541 0 0 0 10,541 0 0 This represents other assets. This represents partners deficit.
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