-----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, EcbgRsUajWRgcu6Prp34HehB2m1POf+FzKzlY8eaoiQe/F2wmGgsYL5jhDnOoRtn aO1mAggeTbYBAuvEsxW73A== 0000832179-99-000007.txt : 19990412 0000832179-99-000007.hdr.sgml : 19990412 ACCESSION NUMBER: 0000832179-99-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990408 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP /DE/ CENTRAL INDEX KEY: 0000832179 STANDARD INDUSTRIAL CLASSIFICATION: 7011 IRS NUMBER: 521533559 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16728 FILM NUMBER: 99585659 BUSINESS ADDRESS: STREET 1: 10400 FERNWOOD RD DEPT 908 STREET 2: HOST MARRIOT CORP ASSET MANAGEMENT CITY: BETHESDA STATE: MD ZIP: 20817 BUSINESS PHONE: 3013802070 MAIL ADDRESS: STREET 1: 10400 FERNWOOD RD DEPT 908 STREET 2: HOST MARRIOT CORP ASSET MANAGEMENT CITY: BETHESDA STATE: MD ZIP: 20817 10-K 1 FORM 10-K Securities and Exchange Commission Washington, D.C. 20549 Form 10-K o Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 OR |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 0-16728 COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) Delaware 52-1533559 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 10400 Fernwood Road Bethesda, Maryland 20817 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 301-380-2070 Securities registered pursuant to Section 12(b) of the Act: Not Applicable Securities registered pursuant to Section 12(g) of the Act: Units of Limited Partnership Interest Title of Class Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [__] (Not Applicable) Documents Incorporated by Reference None 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...........................................................................15 Item 4. Submission of Matters to a Vote of Security Holders.........................................16 PART II Item 5. Market For The Partnership's Limited Partnership Units and Related Security Holder Matters.......................................................17 Item 6. Selected Financial Data.....................................................................18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................18 Item 8. Financial Statements and Supplementary Data.................................................28 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure..................................................................57 PART III Item 10. Directors and Executive Officers..........................................................57 Item 11. Management Remuneration and Transactions..................................................58 Item 12. Security Ownership of Certain Beneficial Owners and Management............................58 Item 13. Certain Relationships and Related Transactions............................................58 PART IV Item 14. Exhibits, Supplemental Financial Statement Schedules and Reports on Form 8-K...................................................................62
PART I ITEM 1. BUSINESS Description of the Partnership Courtyard by Marriott II Limited Partnership, a Delaware limited partnership (the "Partnership"), was formed on August 31, 1987 to acquire and own 70 Courtyard by Marriott hotels (the "Hotels") and the respective fee or leasehold interests in the land on which the Hotels are located. The Hotels are located in 29 states and contain a total of 10,331 guest rooms as of December 31, 1998. The Partnership commenced operations on October 30, 1987 and will terminate on December 31, 2087, unless earlier dissolved. The Partnership is engaged solely in the business of owning and operating hotels and therefore is engaged in one industry segment. The principal offices of the Partnership are located at 10400 Fernwood Road, Bethesda, Maryland 20817. The Hotels are operated as part of the Courtyard by Marriott system, which includes over 343 hotels worldwide in the moderately-priced segment of the U.S. lodging industry. The Hotels are managed by Courtyard Management Corporation (the "Manager"), a wholly owned subsidiary of Marriott International, Inc. ("MII"), under a long-term management agreement (the "Management Agreement"). The Management Agreement, as restated on December 30, 1995, expires in 2013 with renewals at the option of the Manager for one or more of the Hotels for up to 35 years thereafter. The Hotels have the right to use the Courtyard by Marriott name pursuant to the Management Agreement and, if the Management Agreement is terminated or not renewed, the Partnership would lose that right for all purposes (except as part of the Partnership's name). See Item 13, "Certain Relationships and Related Transactions." The objective of the Courtyard by Marriott system, including the Hotels, is to provide consistently superior lodging at a fair price with an appealing, friendly and contemporary residential character. Courtyard by Marriott hotels generally have fewer guest rooms than traditional, full-service hotels, in most cases containing approximately 150 guest rooms, including approximately 12 suites, as compared to full-service Marriott hotels which typically contain 350 or more guest rooms. Each Courtyard by Marriott hotel is designed around a courtyard area containing a swimming pool (indoor pool in northern climates), walkways, landscaped areas and a gazebo. Each Hotel generally contains a small lobby, a restaurant with seating for approximately 50 guests, a lounge, a hydrotherapy pool, a guest laundry, an exercise room and two small meeting rooms. The hotels do not contain as much public space and related facilities as full-service hotels. Courtyard by Marriott hotels are designed for business and vacation travelers who desire high quality accommodations at moderate prices. Most of the Hotels are located in suburban areas near office parks or other commercial activities. See Item 2, "Properties." Courtyard by Marriott hotels provide large, high quality guest rooms which contain furnishings comparable in quality to those in full-service Marriott hotels. Each guest room contains a large, efficient work desk, remote control television, a television entertainment package, in-room coffee and tea services and other amenities. Approximately 70% of the guest rooms contain king-size beds. Organization of the Partnership On October 30, 1987, the Partnership began operations and executed a purchase agreement with Host Marriott Corporation ("Host Marriott") to acquire the Hotels, all related personal property, and the fee or leasehold interests in the land on which the Hotels are located for $643.1 million. On that date, CBM Two Corporation ("CBM Two"), a wholly owned subsidiary of Host Marriott, made a capital contribution of equipment valued at $11,306,000 for its 5% general partner interest. On January 18, 1988 (the "Final Closing Date"), 1,470 units of limited partnership interests (the "Units") in the Partnership, representing a 95% interest in the Partnership, had been sold in a private placement offering. The offering price per Unit was $100,000. Of the total $643.1 million purchase price, $507.9 million was paid in cash from the proceeds of mortgage financing and sale of the Units, $40.2 million from assumption of debt and $95.0 million from a deferred purchase note. In accordance with the partnership agreement, in 1990 and 1991 CBM Two purchased 20.5 Units from defaulting investors. Additionally, on July 15, 1995, a limited partner assigned one Unit to CBM Two. In connection with the 1996 refinancing of the Partnership's then existing debt, the limited partners approved certain amendments to the partnership agreement and the Management Agreement. The partnership agreement amendment, among other things, allowed the formation of certain subsidiaries of the Partnership, including Courtyard II Finance Company ("Finance"), a wholly-owned subsidiary of the Partnership, who along with the Partnership is the co-issuer of $127.4 million of senior secured notes. Additionally, the Partnership formed a wholly-owned subsidiary, Courtyard II Associates Management Corporation (the "Managing General Partner"). The Managing General Partner was formed to be the managing general partner with a 1% general partner interest in Courtyard II Associates, L.P. ("Associates"), a Delaware limited partnership. The Partnership owns a 1% general partner interest and a 98% limited partner interest in Associates. On January 24, 1996, the Partnership contributed 69 Hotels and their related assets to Associates. Formation of Associates resulted in the Partnership's primary assets being its direct and indirect interest in Associates. Additionally, substantially all of Associates' net equity is restricted to dividends, loans or advances to the Partnership. Associates holds a 99% membership interest in CBM Associates II LLC ("Associates II") and the Managing General Partner holds the remaining 1% membership interest. On January 24, 1996, the Partnership contributed the Hotel located in Deerfield, IL (the "Deerfield Hotel") and its related assets to Associates and the Managing General Partner who simultaneously contributed the Hotel and its related assets to Associates II. Each of the Managing General Partner, Associates and Associates II were formed as a single purpose bankruptcy-remote entity to facilitate the refinancing in January 1996. CBM Funding Corporation, ("CBM Funding"), a wholly-owned subsidiary of Associates, was also formed to make a mortgage loan (the "Mortgage Loan") to Associates from the proceeds of the sale of the multi-class commercial mortgage pass-through certificates. On April 17, 1998, Host Marriott Corporation ("Host Marriott"), the parent of CBM Two, announced that its Board of Directors authorized the company to reorganize its business operations to qualify as a real estate investment trust ("REIT") to become effective as of January 1, 1999 (the "REIT Conversion"). On December 29, 1998, Host Marriott announced that it had completed substantially all the steps necessary to complete the REIT Conversion and expected to qualify as a REIT under the applicable Federal income tax laws beginning January 1, 1999. Subsequent to the REIT Conversion, Host Marriott is referred to as Host REIT. In connection with the REIT Conversion, Host REIT contributed substantially all of its hotel assets to a newly-formed partnership, Host Marriott L.P. ("Host LP"). In connection with Host Marriott's conversion to a REIT, the following steps occurred. Host Marriott formed CBM Two LLC, a Delaware single member limited liability company, having two classes of member interests (Class A - 1% economic interest, managing; Class B - 99% economic interest, non- managing). CBM Two merged into CBM Two LLC on December 22, 1998 and CBM Two ceased to exist. On December 28, 1998, Host Marriott contributed its entire interest in CBM Two LLC to Host Marriott, L.P. ("Host LP"), which is owned 78% by Host Marriott and 22% by outside partners. Finally on December 30, 1998, Host LP contributed its 99% Class B interest in CBM Two LLC to Rockledge Hotel Properties, Inc. ("Rockledge"), a Delaware corporation which is owned 95% by Host LP (economic non-voting interest) and 5% by Host Marriott Statutory/Charitable Employee Trust, a Delaware statutory business trust (100% of the voting interests). As a result, the sole general partner of the Partnership is CBM Two LLC (the "General Partner"), with a Class A 1% managing economic interest owned by Host LP and a Class B 99% non-managing economic interest owned by Rockledge. With the merger of CBM Two into the General Partner, the General Partner became the holder of the Units previously acquired by CBM Two. Therefore, as of December 31, 1998, the General Partner owns a total of 21.5 Units representing a 1.39% limited partnership interest in the Partnership. Pursuant to the terms of the operating agreement of CBM Two LLC, Rockledge, as the holder of the 99% non-voting member interest in CBM Two LLC, has been granted the sole power to direct the exercise by CBM Two LLC of all voting rights and other rights as owner with respect to all capital stock of any corporation that is owned, directly or indirectly, by the Partnership. The Partnership owns the Hotels through Associates, in which the Partnership is a 98% limited partner and a 1% general partner, and through Courtyard II Associates Management Corporation, the 1% managing general partner of Associates. As a result of the provisions of the operating agreement of CBM Two LLC, Host LP has no right to direct the exercise by CBM Two LLC of voting or other rights with respect to the shares of Courtyard II Associates Management Corporation (and thus has no right to direct or control the affairs of Associates). Debt Financing On January 24, 1996, the Partnership completed a refinancing of the Partnership's existing debt through the private placements of $127.4 million of senior secured notes (the "Senior Notes") and $410.2 million of multi-class commercial mortgage pass-through certificates (the "Certificates"). Debt - Senior Notes The Senior Notes of $127.4 million were issued by the Partnership and Finance. The Senior Notes bear interest at 10 3/4%, require semi-annual payments of interest and require no payments of principal until maturity on February 1, 2008. The Senior Notes are secured by a first priority pledge by the Partnership of (i) its 99% partnership interest (consisting of a 98% limited partner interest and a 1% general partner interest) in Associates and (ii) its 100% equity interest in the Managing General Partner. Finance has nominal assets, does not conduct any operations and does not provide any additional security for the Senior Notes. The terms of the Senior Notes require the Partnership to establish and fund a debt service reserve account in an amount equal to one six-month interest payment on the Senior Notes ($6,848,000) and to maintain certain levels of excess cash flow, as defined. In the event the Partnership fails to maintain the required level of excess cash flow, the Partnership will be required to (i) suspend distributions to its partners and other restricted payments, as defined, (ii) to fund a separate supplemental debt service reserve account (the "Supplemental Debt Service Reserve") in an amount up to two six-month interest payments on the Senior Notes and (iii) if such failure were to continue, to offer to purchase a portion of the Senior Notes at par. The Senior Notes are not redeemable prior to February 1, 2001. Thereafter, the Senior Notes may be redeemed, at the option of the Partnership, at a premium declining to par in 2004. The Senior Notes are non-recourse to the Partnership and its partners. In connection with the Host Marriott's conversion to a REIT, a change of control occurred when Host Marriott ceased to own, directly or indirectly, all of the outstanding equity interest of the sole general partner of the Partnership. Although such a change of control has occurred, Host REIT through Host LP continues to own, indirectly, a substantial majority of the economic interest in CBM Two LLC, the current General Partner of the Partnership and, through Host LP, has certain voting rights with respect to CBM Two LLC. The change in control described above resulted in a "Change in Control" under the indenture governing the Senior Notes. As a result, in accordance with the terms of the indenture, Host LP commenced a tender offer for the Senior Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon to February 18, 1999. The tender offer was commenced on January 14, 1999 and expired on February 12, 1999. No Senior Notes were tendered to Host LP in connection with the tender offer. Debt - Certificates The Certificates, in an initial principal amount of $410.2 million, were issued by CBM Funding. Proceeds from the sale of the Certificates were utilized by CBM Funding to provide the Mortgage Loan to Associates. The Certificates/Mortgage Loan require monthly payments of principal and interest based on a 17-year amortization schedule. The Mortgage Loan matures on January 28, 2008. However, the maturity date of the Certificates/Mortgage Loan may be extended until January 28, 2013 with the consent of 66 2/3% of the holders of the outstanding Certificates affected thereby. The Certificates were issued in the following classes and pass-through rates of interest. Initial Certificate Pass-Through Class Balance Rate -------------------- -------------------- ----------- Class A-1 $ 45,500,000 7.550% Class A-2 $ 50,000,000 6.880% Class A-3P & I $ 129,500,000 7.080% Class A-3IO Not Applicable 0.933% Class B $ 75,000,000 7.480% Class C $ 100,000,000 7.860% Class D $ 10,200,000 8.645% The Class A-3IO Certificates receive payments of interest only based on a notional balance equal to the Class A-3P & I Certificate balance. The balance of the Certificates was $371.2 million at December 31, 1998. Principal amortization of $14.3 million of the Class A-1 Certificates was made during 1998. The Certificates/Mortgage Loan maturities are as follows (in thousands): 1999 $ 15,443 2000 16,642 2001 17,934 2002 19,326 2003 20,827 Thereafter 281,052 $ 371,224 The Mortgage Loan is secured primarily by 69 cross-defaulted and cross-collateralized mortgages representing first priority mortgage liens on (i) the fee or leasehold interest in the 69 Hotels, related furniture, fixtures and equipment and the property improvement fund, (ii) the fee interest in the land leased from MII or their affiliates on which 53 Hotels are located, (iii) a pledge of Associates membership interest in and the related right to receive distributions from Associates II which owns the Deerfield Hotel and (iv) an assignment of the Management Agreement. The Mortgage Loan is non-recourse to Associates, the Partnership and its partners. Operating profit from the Hotels in excess of debt service on the Mortgage Loan is available to be distributed to the Partnership. Amounts distributed to the Partnership are used for the following, in order of priority: (i) for debt service on the Senior Notes, (ii) to fund the Supplemental Debt Service Reserve, if necessary, (iii) to offer to purchase a portion of the Senior Notes at par, if necessary, (iv) for working capital, see Item 13, "Certain Relationships and Related Transactions" and (v) for distributions to the partners of the Partnership. Prepayments of the Mortgage Loan are permitted with the payment of a premium (the "Prepayment Premium"). The Prepayment Premium is equal to the greater of (i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance amount based on a spread of .25% or .55% over the U.S. treasury rate, as defined. Material Contracts Management Agreement The primary provisions are discussed in Item 13, "Certain Relationships and Related Transactions." Ground Leases The land on which 53 of the Hotels are located is leased from MII or affiliates of MII. In addition, eight of the Hotels are located on land leased from third parties. The land leases have remaining terms (including renewal options) expiring between the years 2024 and 2068. The MII land leases and the third party land leases provide for rent based on specific percentages (from 2% to 15%) of gross revenue in certain categories, subject to minimum amounts. The minimum rentals are adjusted at various anniversary dates throughout the lease terms, as defined in the agreements. For 1998, the Partnership paid a total of $13,040,000 in ground rent. See Item 2 "Properties" for a listing of Hotels that have ground leases. In connection with the refinancing, the Partnership, as lessee, transferred its rights and obligations pursuant to the 53 ground leases with MII and affiliates to Associates. Additionally, MII and affiliates agreed to subordinate their right to receive rental payments under the MII ground leases to the payment of debt service on the Senior Notes and the Mortgage Loan. Competition The United States lodging industry generally is comprised of two broad segments: full-service hotels and limited-service hotels. Full-service hotels generally offer restaurant and lounge facilities and meeting spaces, as well as a wide range of services, typically including bell service and room service. Limited-service hotels generally offer accommodations with limited or no services and amenities. As moderately-priced hotels, the Hotels compete effectively with both full-service and limited-service hotels in their respective markets by providing streamlined services and amenities exceeding those provided by typical limited-service hotels at prices that are significantly lower than those available at full-service hotels. Significant competitors in the moderately-priced lodging segment include Holiday Inn, Ramada Inn, Four Points by Sheraton, Hampton Inn and Hilton Garden Inns. The lodging industry in general, and the moderately-priced segment in particular, is highly competitive reflecting the growth of other shares, but the degree of competition varies from location to location and over time. An increase in supply growth began in 1996 with the introduction of a number of new national brands. However, through 1998 Courtyards continue to command a premium share of the market in which they are located in spite of the growth of new chains. For 1999, it is expected that Courtyard will continue outperforming both national and local competitors. The brand is continuing to carefully monitor the introduction of new mid-priced brands including Wingate Hotels, Hilton Garden Inns, Four Points by Sheraton, Mainstay, Candlewood, Club Hotels and Clarion. The Manager believes that by emphasizing management and personnel development and maintaining a competitive price structure, the Partnership's share of the market will be maintained or increased. The inclusion of the Hotels within the nationwide Courtyard by Marriott system provides the benefits of name recognition, centralized reservations and advertising, system-wide marketing and promotion, centralized purchasing and training and support services. Conflicts of Interest Because Host LP, the managing member of the General Partner, MII and their affiliates own and/or operate hotels other than the Partnership's Hotels and MII and its affiliates license others to operate hotels under the various brand names owned by Marriott International and its affiliates, potential conflicts of interest exist. With respect to these potential conflicts of interest, Host LP, MII and their affiliates retain a free right to compete with the Partnership's Hotels, including the right to develop, own, and operate competing hotels now and in the future in markets in which the Hotels are located, in addition to those existing hotels which may currently compete directly or indirectly with the Hotels. Under Delaware law, the General Partner has a fiduciary duty to the Partnership and is required to exercise good faith and loyalty in all its dealings with respect to Partnership affairs. Policies with Respect to Conflicts of Interest It is the policy of the General Partner that the Partnership's relationship with the General Partner, any affiliate of the General Partner, or persons employed by the General Partner or its affiliates be conducted on terms that are fair to the Partnership and that are commercially reasonable. Agreements and relationships involving the General Partner or its affiliates and the Partnership are on terms consistent with the terms on which the General Partner or its affiliates have dealt with unrelated parties. The Amended and Restated Agreement of Limited Partnership, as amended, (the "Partnership Agreement"), provides that any agreements, contracts or arrangements between the Partnership and the General Partner or any of its affiliates, except for rendering legal, tax, accounting, financial, engineering, and procurement services to the Partnership by employees of the General Partner or its affiliates, will be on commercially reasonable terms and will be subject to the following additional conditions: (i) the General Partner or any such affiliate must have the ability to render such services or to sell or lease such goods; (ii) such agreements, contracts or arrangements must be fair to the Partnership and reflect commercially reasonable terms and must be embodied in a written contract which precisely describes the subject matter thereof and all compensation to be paid therefor; (iii) no rebates or give-ups may be received by the General Partner or any such affiliate, nor may the General Partner or any such affiliate participate in any reciprocal business arrangements which would have the effect of circumventing any of the provisions of the Partnership Agreement; and (iv) no such agreement, contract or arrangement as to which the limited partners had previously given approval may be amended in such a manner as to increase the fees or other compensation payable by the Partnership to the General Partner or any of its affiliates or to decrease the responsibilities or duties of the General Partner or any such affiliate in the absence of the consent of the holders of a majority in interest of the limited partners. Employees Neither the General Partner nor the Partnership has any employees. Host LP provides the services of certain employees (including the General Partner's executive officers) of Host LP to the Partnership and the General Partner. The Partnership and the General Partner anticipate that each of the executive officers of the General Partner will generally devote a sufficient portion of his or her time to the business of the Partnership. However, each of such executive officers also will devote a significant portion of his or her time to the business of Host LP and its other affiliates. No officer or director of the General Partner or employee of Host LP devotes a significant percentage of time to Partnership matters. To the extent that any officer, director or employee does devote time to the Partnership, the General Partner or Host LP, as applicable, is entitled to reimbursement for the cost of providing such services. See Item 11, "Management Remuneration and Transactions" for information regarding payments made to Host Marriott, Host LP, or its subsidiaries for the cost of providing administrative services to the Partnership. Potential Transaction The General Partner has retained Merrill Lynch to explore alternatives to provide liquidity for the Partnership and maximize the value of the limited partners' investment. However, there can be no assurance that a transaction will result from these activities. ITEM 2. PROPERTIES Introduction The properties consisted of 70 Courtyard by Marriott hotels as of December 31, 1998. The Hotels have been in operation for at least eight years. The Hotels range in age between 9 and 13 years. The Hotels are geographically diversified among 29 states, and no state has more than nine Hotels. The lodging industry in general, and the moderately-priced segment in particular, is highly competitive, but the degree of competition varies from location to location and over time. On a combined basis, competitive forces affecting the Hotels are not, in the opinion of the General Partner, more adverse than the overall competitive forces affecting the lodging industry generally. See Item 1, "Business--Competition." The following table summarizes certain attributes of each of the Hotels.
COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP SUMMARY OF PROPERTIES (70 COURTYARD HOTELS) PROPERTY TITLE TO LAND # OF ROOMS OPENING DATE 1 Birmingham/Homewood, AL 500 Shades Creek Parkway Homewood, AL 35209 Owned in fee 140 12/21/85 2 Birmingham/Hoover, AL 1824 Montgomery Highway South Hoover, AL 35244 Leased from Essex House Condominium Corp.* 153 08/08/87 3 Huntsville, AL 4808 University Drive Huntsville, AL 35816 Leased from Essex House Condominium Corp.* 149 08/15/87 4 Phoenix/Mesa, AZ 1221 S. Westward Avenue Mesa, AZ 85210 Leased from Essex House Condominium Corp.* 148 03/19/88 5 Phoenix/Metrocenter, AZ 9631 N. Black Canyon Phoenix, AZ 85021 Leased from Essex House Condominium Corp.* 146 11/29/87 6 Tucson Airport, AZ 2505 E. Executive Drive Tucson, AZ 85706 Leased from Essex House Condominium Corp.* 149 10/01/88 7 Little Rock, AR 10900 Financial Centre Parkway Little Rock, AR 72211 Leased from Essex House Condominium Corp.* 149 05/28/88 8 Bakersfield, CA 3601 Marriott Drive Bakersfield, CA 93308 Leased from Essex House Condominium Corp.* 146 02/13/88 9 Cupertino, CA 10605 N. Wolfe Road Cupertino, CA 95014 Leased from Vallco Park, Ltd. 149 05/14/88 10 Foster City, CA 550 Shell Blvd. Foster City, CA 94404 Leased from Essex House Condominium Corp.* 147 09/26/87 11 Fresno, CA 140 E. Shaw Avenue Fresno, CA 93710 Leased from Richard, Miche, Aram & Aznive Erganian 146 09/13/86 12 Hacienda Heights, CA 1905 Azusa Avenue Hacienda Heights, CA 91745 Leased from Essex House Condominium Corp.* 150 03/28/90 13 Marin/Larkspur Landing, CA 2500 Larkspur Landing Circle Larkspur, CA 94939 Leased from Essex House Condominium Corp.* 146 07/25/87 14 Palm Springs, CA 300 Tahquitz Canyon Way Palm Springs, CA 92262 Leased from Essex House Condominium Corp.* 149 10/08/88 15 Torrance, CA 2633 West Sepulveda Boulevard Torrance, CA 90505 Leased from Essex House Condominium Corp.* 149 10/15/88 16 Boulder, CO 4710 Pearl East Circle Boulder, CO 80301 Leased from Essex House Condominium Corp.* 148 08/06/88 17 Denver, CO 7415 East 41st Avenue Denver, CO 80301 Owned in fee 146 08/15/87 18 Denver/Southeast, CO 6565 S. Boston Street Englewood, CO 80111 Leased from Essex House Condominium Corp.* 152 05/30/87 19 Norwalk, CT 474 Main Avenue Norwalk, CT 06851 Leased from Mary Fabrizio 145 07/30/88 20 Wallingford, CT 600 Northrop Road Wallingford, CT 06492 Leased from Essex House Condominium Corp.* 149 04/21/90 21 Ft. Myers, FL 4455 Metro Parkway Ft. Myers, FL 33901 Leased from Essex House Condominium Corp.* 149 08/27/88 22 Ft. Lauderdale/Plantation, FL 7780 S.W. 6th Street Plantation, FL 33324 Leased from Essex House Condominium Corp.* 149 09/21/88 23 St. Petersburg, FL 3131 Executive Drive Clearwater, FL 34622 Leased from Essex House Condominium Corp.* 149 10/14/89 24 Tampa/Westshore, FL 3805 West Cypress Tampa, FL 33607 Leased from Hotsinger, Inc. and Owned in fee 145 10/27/86 25 West Palm Beach, FL 600 Northpoint Parkway West Palm Beach, FL 33407 Leased from Essex House Condominium Corp.* 149 01/14/89 26 Atlanta Airport South, GA 2050 Sullivan Road College Park, GA 30337 Owned in fee 144 06/15/86 27 Atlanta/Gwinnett Mall, GA 3550 Venture Parkway Duluth, GA 30136 Leased from Essex House Condominium Corp.* 146 03/19/87 28 Atlanta/Perimeter Ctr., GA 6250 Peachtree-Dunwoody Road Atlanta, GA 30328 Leased from Essex House Condominium Corp.* 145 12/12/87 29 Atlanta/Roswell, GA 1500 Market Boulevard Roswell, GA 30076 Leased from Roswell Landing Associates 154 06/11/88 30 Arlington Heights-South, IL 100 W. Algonquin Road Arlington Heights, Il 60005 Owned in fee 147 12/20/85 31 Chicago/Deerfield, IL 800 Lake Cook Road Deerfield, IL 60015 Owned in fee 131 01/02/86 32 Chicago/Glenview, IL 180l Milwaukee Avenue Glenview, IL 60025 Leased from Essex House Condominium Corp.* 149 07/08/89 33 Chicago/Highland Park, IL 1505 Lake Cook Road Highland Park, IL 60035 Leased from Essex House Condominium Corp.* 149 06/10/88 34 Chicago/Lincolnshire, IL 505 Milwaukee Avenue Lincolnshire, IL 60069 Owned in fee 146 07/20/87 35 Chicago/Oakbrook Terrace, IL 6 TransAm Plaza Drive Oakbrook Terrace, IL 60181 Owned in fee 147 05/09/86 36 Chicago/Waukegan, IL 800 Lakehurst Road Waukegan, Il 60085 Leased from Essex House Condominium Corp.* 149 05/28/88 37 Chicago/Wood Dale, IL 900 N. Wood Dale Road Wood Dale, IL 60191 Leased from Essex House Condominium Corp.* 149 07/02/88 38 Rockford, IL 7676 East State Road Rockford, IL 61108 Owned in fee 147 04/12/86 39 Indianapolis/Castleton, IN 8670 Allisonville Road Indianapolis, IN 46250 Leased from Essex House Condominium Corp.* 146 06/06/87 40 Kansas City/Overland Park, KS 11301 Metcalf Avenue Overland Park, KS 66212 Leased from Essex House Condominium Corp.* 149 01/14/89 41 Lexington/North, KY 775 Newtown Court Lexington, KY 40511 Leased from Essex House Condominium Corp.* 146 06/04/88 42 Annapolis, MD 2559 Riva Road Annapolis, MD 21401 Leased from Essex House Condominium Corp.* 149 03/04/89 43 Silver Spring, MD 12521 Prosperity Drive Silver Spring, MD 20904 Leased from Essex House Condominium Corp.* 146 08/06/88 44 Boston/Andover, MA 10 Campanelli Drive Andover, MA 01810 Leased from Essex House Condominium Corp.* 146 12/03/88 45 Detroit Airport, MI 30653 Flynn Drive Romulus, MA 48174 Leased from Essex House Condominium Corp.* 146 12/12/87 46 Detroit/Livonia, MI 17200 N. Laurel Park Drive Livonia, MI 48152 Leased from Essex House Condominium Corp.* 148 03/12/88 47 Minneapolis Airport, MN 1352 Northland Drive Mendota Heights, MN 55120 Leased from Essex House Condominium Corp.* 146 06/13/87 48 St. Louis/Creve Coeur, MO 828 N. New Ballas Road Creve Coeur, MO 63146 Leased from Essex House Condominium Corp.* 154 07/22/87 49 St. Louis/Westport, MO 11888 Westline Industrial Drive St. Louis, MO 63146 Leased from Essex House Condominium Corp.* 149 08/20/88 50 Lincroft/Red Bank, NJ 245 Half Mile Road Red Bank, NJ 07701 Leased from Essex House Condominium Corp.* 146 05/28/88 51 Poughkeepsie, NY 408 South Road Poughkeepsie, NY Leased from Pizzgalli Investment Company 149 06/04/88 52 Rye, NY 631 Midland Avenue Rye, NY 10580 Leased from Essex House Condominium Corp. * 145 03/19/88 53 Charlotte/South Park, NC 6023 Park South Drive Charlotte, NC 28210 Leased from Queens Properties, Inc. 149 03/25/89 54 Raleigh/Cary, NC 102 Edinburgh Drive South Cary, NC 27511 Leased from Essex House Condominium Corp.* 149 06/25/88 55 Dayton Mall, OH 100 Prestige Place Miamisburg, OH 45342 Leased from Essex House Condominium Corp.* 146 09/19/87 56 Toledo, OH 1435 East Mall Drive Holland, OH 43528 Leased from Essex House Condominium Corp.* 149 04/30/88 57 Oklahoma City Airport, OK 4301 Highline Boulevard Oklahoma City, OK 73108 Leased from Essex House Condominium Corp.* 149 07/23/88 58 Portland-Beaverton, OR 8500 S.W. Nimbus Drive Beaverton, OR 97005 Leased from Essex House Condominium Corp.* 149 02/11/89 59 Philadelphia/Devon, PA 762 W. Lancaster Ave. Wayne, PA 19087 Leased from Three Devon Square Associates 149 11/19/88 60 Columbia, SC 347 Zimalcrest Drive Columbia, SC 29210 Leased from Essex House Condominium Corp.* 149 01/28/89 61 Greenville, SC 70 Orchard Park Drive Greenville, SC 29615 Leased from Essex House Condominium Corp.* 146 03/05/88 62 Memphis Airport, TN 1780 Nonconnah Boulevard Memphis, TN 38132 Leased from Essex House Condominium Corp.* 145 07/15/87 63 Nashville Airport, TN 2508 Elm Hill Pike Nashville, TN 37214 Leased from Essex House Condominium Corp.* 145 01/23/88 64 Dallas/Northeast, TX 1000 South Sherman Richardson, TX 75081 Leased from Essex House Condominium Corp.* 149 01/16/88 65 Dallas/Plano, TX 4901 W. Plano Parkway Plano, TX 75093 Owned in fee 149 05/07/88 66 Dallas/Stemmons, TX 2383 Stemmons Trail Dallas, TX 75220 Leased from Essex House Condominium Corp.* 146 09/12/87 67 San Antonio/Downtown, TX 600 Santa Rosa South San Antonio, TX 78204 Leased from Essex House Condominium Corp.* 149 02/03/90 68 Charlottesville, VA 638 Hillsdale Drive Charlottesville, VA 22901 Leased from Essex House Condominium Corp.* 150 01/21/89 69 Manassas, VA 10701 Battleview Parkway Manassas, VA 22110 Leased from Essex House Condominium Corp.* 149 03/04/89 70 Seattle/Southcenter, WA 400 Andover Park West Tukwila, WA 98188 Leased from Essex House Condominium Corp.* 149 03/11/89 Grand Total: 10,331 * Essex House Condominium Corporation is a subsidiary of Marriott International, Inc.
ITEM 3. LEGAL PROCEEDINGS Certain limited partners of the Partnership have filed a lawsuit, styled Whitey Ford, et al. v. Host Marriott Corporation, et al., Case No. 96-CI-08327, in the 285th Judicial District Court of Bexar County, Texas against CBM Two, the Manager, various of their subsidiaries, J.W. Marriott, Jr., Stephen Rushmore and Hospitality Valuation Services, Inc. (collectively, the "Defendants"). On January 29, 1998, two other Limited Partners filed a petition to expand this lawsuit to include a class action. On June 23, 1998, the Court entered an order certifying a class of limited partners under Texas law, appointing A.R. Milkes and D.R. Burklew as representative plaintiffs on behalf of the class, and later, appointing the law firm of Berg & Androphy as lead class counsel. The plaintiffs allege, among other things, that the Defendants committed fraud, breached fiduciary duties, and violated the provisions of various contracts. The Defendants have filed an answer and discovery is underway. Trial is scheduled for May 1999. On February 11, 1998, four individual limited partners in partnerships sponsored by Host Marriott Corporation ("Host Marriott") filed a class action lawsuit, styled Ruben, et al. v. Host Marriott Corporation, et al., Civil Action No. 16186, in Delaware State Chancery Court against Host Marriott and the general partners of Courtyard by Marriott Limited Partnership, Courtyard by Marriott II Limited Partnership, Marriott Residence Inn Limited Partnership, Marriott Residence Inn II Limited Partnership, and Fairfield Inn by Marriott Limited Partnership (collectively, the "Five Partnerships"). The plaintiffs alleged that the proposed merger of the Five Partnerships (the "Merger") into an umbrella partnership real estate investment trust proposed by CRF Lodging Company, L.P. in a preliminary registration statement filed with the Securities and Exchange Commission, dated December 22, 1997, constituted a breach of the fiduciary duties owed to the limited partners of the Five Partnerships by Host Marriott and the general partners of the Five Partnerships. In addition, the plaintiffs alleged that the Merger breached various agreements relating to the Five Partnerships. The plaintiffs sought, among other things, the following: certification of a class; injunctive relief to block consummation of the Merger or, in the alternative, rescission of the Merger; and damages. The defendants, in light of market conditions, decided to abandon their efforts to complete the Merger. As a result of this decision, the plaintiffs voluntarily dismissed the lawsuit. On March 16, 1998, limited partners in several partnerships sponsored by Host Marriott filed a lawsuit, styled Robert M. Haas, Sr. and Irwin Randolf Joint Tenants, et al., v. Marriott International Inc., et. al., Case No. 98-CI-04092 (the "Haas Case"), in the 57th Judicial District Court of Bexar County, Texas against MII, Host Marriott, various of their subsidiaries, J.W. Marriott, Jr., Stephen Rushmore, and Hospitality Valuation Services, Inc. (collectively, the "Defendants"). The lawsuit relates to the following limited partnerships: Courtyard by Marriott Limited Partnership, Courtyard by Marriott II Limited Partnership, Marriott Residence Inn Limited Partnership, Marriott Residence Inn II Limited Partnership, Fairfield Inn by Marriott Limited Partnership, Desert Springs Marriott Limited Partnership, and Atlanta Marriott Marquis Limited Partnership (collectively, the "Seven Partnerships"). The plaintiffs allege that the Defendants conspired to sell hotels to the Seven Partnerships for inflated prices and that they charged the Seven Partnerships excessive management fees to operate the Seven Partnerships' hotels. The plaintiffs further allege, among other things, that the Defendants committed fraud, breached fiduciary duties, and violated the provisions of various contracts. The plaintiffs are seeking unspecified damages. The Defendants, which do not include the Seven Partnerships, believe that there is no truth to the plaintiffs' allegations and that the lawsuit is totally devoid of merit. The Defendants intend to vigorously defend against the claims asserted in the lawsuit. They have filed an answer to the plaintiffs' petition and asserted a number of defenses. A related case concerning the Partnership was filed by the plaintiffs' lawyers in the same court, involves similar allegations against the Defendants, and has been certified as a class action. Trial in this related case is presently scheduled for May 1999. Due to the prosecution of the related case, there has been no meaningful activity in the Haas case. Although the Seven Partnerships have not been named as defendants in the lawsuit, the partnership agreements relating to the Seven Partnerships include an indemnity provision which requires the Seven Partnerships, under certain circumstances, to indemnify the general partners against losses, expenses and fees. The Partnership and the Hotels are involved in routine litigation and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and which collectively are not expected to have a material adverse effect on the business, financial condition or results of operations of the Partnership. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS There is currently no established public trading market for the Units and it is not anticipated that a public market for the Units will develop. Transfers of Units are limited to the first date of each accounting period and may be made only to accredited investors. All transfers are subject to approval by the General Partner. As of December 31, 1998, there were 1,480 holders (including holders of half-units) of record of the 1,470 Units. In accordance with Sections 4.07 and 4.10 of the Partnership Agreement, cash available for distribution for any year will be distributed at least annually to the Partners of record at the end of each accounting period during such year as follows: (i) first, through and including the end of the accounting period during which the Partners shall have received cumulative distributions of sales or refinancing proceeds ("Capital Receipts") equal to $77,368,421, 5% to the General Partner and 95% to the limited partners; (ii) next, through and including the end of the accounting period during which the Partners shall have received cumulative distributions of Capital Receipts equal to $158,306,000, 10% to the General Partner and 90% to the limited partners; and (iii) thereafter, 25% to the General Partner and 75% to the limited partners. Distributions to the General Partner under clauses (i), (ii) and (iii) above shall be subordinate to an annual, non-cumulative 10% preferred return to the limited partners on their invested capital, as defined. Cash available for distribution means, with respect to any fiscal period, the cash revenues of the Partnership from all sources during the fiscal period, other than Capital Receipts, plus amounts received by the Partnership pursuant to the Price Adjustment amount, less (i) all cash expenditures of the Partnership during such fiscal period, including, without limitation, repayment of all Partnership indebtedness to the extent required to be paid, but not including expenditures of Capital Receipts, plus fees for management services and administrative expenses and (ii) such reserves as may be determined by the General Partner, in its sole discretion (other than funds received under the Price Adjustment amount) to be necessary to provide for the foreseeable needs of the Partnership. As of December 31, 1998, the Partnership has distributed a total of $91,647,150 to the limited partners ($62,345 per limited partner unit) since inception. During 1998, $7,350,000 ($5,000 per limited partner unit) was distributed to the limited partners and an additional $2,205,000 ($1,500 per limited partner unit) will be distributed to the limited partners in April 1999 bringing the total distribution from 1998 operations to $9,555,000 ($6,500 per limited partner unit). The Partnership distributed $13,230,000 to the limited partners ($9,000 per limited partner unit) from 1997 operations. The Partnership distributed $11,025,000 to the limited partners ($7,500 per limited partner unit) from 1996 operations. No distributions of Capital Receipts have been made since inception. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data presents historical operating information for the Partnership for each of the five years in the period ended December 31, 1998 presented in accordance with generally accepted accounting principles.
1998 1997 1996 1995 1994 (in thousands, except per unit amounts) Income Statement Data: Revenues...........................................$ 284,251 $ 275,021 $ 263,707 $ 245,825 $ 232,082 Operating profit................................... 58,960 58,771 54,012 46,296 37,798 Net income (loss).................................. 16,950 15,691 10,541 11,215 (3,564) Net income (loss) per limited partner unit (1,470 Units)...................... 10,954 10,140 6,812 7,248 (2,303) Balance Sheet Data: Total assets.......................................$ 528,340 $ 536,715 $ 547,099 $ 567,530 $ 549,895 Total liabilities.................................. 552,230 567,412 579,040 603,030 593,947 Cash distributions per limited partner unit (1,470 Units)...................... 6,500 9,000 7,500 -- 6,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Certain matters discussed in this Form 10-K include forward-looking statements and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual transactions, results, performance or achievements to be materially different from any future transactions, results, performance or achievements expressed or implied by such forward-looking statements. The cautionary statements set forth in reports filed under the Securities Act of 1934 contained important factors with respect to such forward-looking statements, including: (i) national and local economic and business conditions that will, among other things, affect demand for hotels and other properties, the level or rates and occupancy that can be achieved by such properties and the availability and terms of financing; (ii) the ability to compete effectively; (iii) changes in travel patterns, taxes and government regulations; (iv) governmental approvals, actions and initiatives; and (v) the effects of tax legislative action. Although the Partnership believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be attained or that any deviations will not be material. The Partnership undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. GENERAL The following discussion and analysis addresses results of operations for the fiscal years ended December 31, 1998, 1997 and 1996. During the period from 1996 through 1998, Partnership total hotel revenues grew from $263.7 million to $284.3 million. Growth in room revenues, and thus hotel revenues, is driven primarily by growth in revenue per available room ("REVPAR"). REVPAR is a commonly used indicator of market performance for hotels which represents the combination of daily room rate charged and the average daily occupancy achieved. REVPAR does not include food and beverage and other ancillary revenues generated by the property. During the period from 1996 through 1998, the Hotels' combined average room rate increased by $10.51 from $76.48 to $86.99, while the combined average occupancy decreased from 80.4% to 79.0%. RESULTS OF OPERATIONS Revenues primarily represent the gross revenues generated by the Partnership's Hotels. On November 20, 1997, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus on EITF 97-2, "Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management Entities and Certain Other Entities with Contractual Management Arrangements." EITF 97-2 addresses the circumstances in which a management entity may include the revenues and expenses of a managed entity in its financial statements. The Partnership considered the impact of EITF 97-2 on its financial statements and determined that EITF 97-2 requires the Partnership to include property-level revenues and operating expenses of its Hotels in its consolidated statement of operations. The Partnership has given retroactive effect to the adoption of EITF 97-2 in the accompanying consolidated statement of operations. Application of EITF 97-2 to the consolidated financial statements for the fiscal years ended December 31, 1998, 1997 and 1996 increased both revenues and operating expenses by approximately $141.4 million, $133.8 million and $130.6 million, respectively, and had no impact on operating profit or net income. The following table shows selected combined operating and financial statistics for the Hotels (in thousands, except combined average occupancy, combined average daily room rate, REVPAR and number of rooms):
Year Ended December 31, 1998 1997 1996 Combined average occupancy............................................... 79.0% 80.3% 80.4% Combined average daily room rate.........................................$ 86.99 $ 82.09 $ 76.48 REVPAR...................................................................$ 68.72 $ 65.92 $ 61.49 Number of rooms.......................................................... 10,331 10,331 10,331 Room revenues............................................................$ 258,099 $ 248,012 $ 235,861 Food and beverage revenues............................................... 17,219 17,436 18,227 Other hotel revenues..................................................... 8,933 9,573 9,619 ----------- ----------- ----------- Total hotel revenues.................................................. 284,251 275,021 263,707 Direct hotel operating costs and expenses................................ 141,398 133,791 130,525 ----------- ----------- ----------- House profit.............................................................$ 142,853 $ 141,230 $ 133,182 =========== =========== =========== The following table shows selected components of the Partnership's operating income as a percentage of total hotel revenues. Year Ended December 31, 1998 1997 1996 Hotel revenues: Room revenues......................................................... 90.8% 90.2% 89.4% Food and beverage revenues............................................ 6.1 6.3 6.9 Other ................................................................ 3.1 3.5 3.7 ----------- ----------- ----------- Total hotel revenues................................................ 100.0 100.0 100.0 Direct operating costs and expenses...................................... 49.7 48.6 49.5 ----------- ----------- ----------- House profit............................................................. 50.3 51.4 50.5 Indirect hotel operating costs and expenses: Depreciation and amortization......................................... 9.8 10.2 10.2 Base and Courtyard management fees.................................... 6.0 6.0 6.0 Ground rent........................................................... 4.5 4.5 4.5 Incentive management fees............................................. 4.5 4.7 4.6 Property taxes........................................................ 3.8 3.6 3.6 Insurance and other................................................... 1.0 1.0 1.1 ----------- ----------- ----------- Total indirect hotel operating costs and expenses 29.6 30.0 30.0 --------- ------------ ------------- Operating profit.................................................... 20.7% 21.4% 20.5% =========== =========== ===========
1998 Compared to 1997 Hotel Revenues. In 1998 hotel revenues increased $9.2 million, or 3.4%, to $284.3 million when compared to 1997 due to the increase in rooms revenues described below partially offset by slight decreases in food and beverage and other revenues. Rooms Revenues. Rooms revenues increased $10.1 million in 1998 to $258.1 million, a 4.1% increase when compared to 1997. The increase in revenues was achieved through an increase in the combined average room rate from $82.09 in 1997 to $86.99 in 1998. Combined average occupancy decreased 1.3 percentage points from 80.3% in 1997 to 79.0% in 1998 primarily due to increased competition and aggressive rate increases in some markets. Total Hotel Property-Level Costs and Expenses. The 1998 total hotel property-level costs and expenses increased $7.6 million, or 5.7%. The increase is due to increases in both rooms costs and selling, administrative and other expenses. Rooms Costs. In 1998 rooms costs increased $3.6 million, or 6.8%, when compared to 1997. The increase costs is due to an increase in certain variable costs related to the increase in rooms revenues. Selling, Administrative and Other. Selling, administrative and other expenses increased by $4.2 million in 1998 to $67.5 million, a 6.7% increase when compared to 1997. The increase in expenses was primarily due to a $2.5 million increase in general and administrative expenses and a $1.4 million increase in chain services. Base and Courtyard Management Fees. Base and Courtyard management fees increased by 3.4%, or $554,000, in 1998 when compared to 1997. Base and Courtyard management fees are calculated as a percentage of total hotel revenues. Accordingly, with the increase in total hotel revenues described above, these fees also increased. Property Taxes. Property taxes increased by 9.8% during 1998 to $10.9 million when compared to 1997. The increase is primarily due to real estate tax increases at 62 of the Partnership's 70 Hotels. Insurance and Other. Insurance and other decreased by 12.6% to $2.2 million when compared to 1997. The decrease is primarily due to decreases in equipment rent and Partnership administrative expenses. Interest Expense. Interest expense decreased by 2.4% to $44.7 million in 1998 from $45.8 million in 1997. This decrease is due to principal amortization of $14.3 million on the Certificates/Mortgage Loan. The weighted average interest rate was 8.5% for 1998 and 1997. 1997 Compared to 1996 Hotel Revenues. Total 1997 hotel revenues of $275.0 million represented an $11.3 million, or 4.3%, increase over 1996. The increase in revenues was achieved through the increase in rooms revenues described below partially offset by a $791,000 decrease in food and beverage revenues. Rooms Revenues. Rooms revenues increased $12.2 million in 1997 to $248.0 million, a 5.2% increase when compared to 1996. The increase in revenues was achieved through an increase in the combined average room rate from $76.48 in 1996 to $82.09 in 1997. Combined average occupancy decreased slightly from 80.4% in 1996 to 80.3% in 1997. Food and Beverage Revenues. In 1997 food and beverage revenues decreased 4.3% to $17.4 million when compared to 1996 primarily due to the elimination of meeting room and dinner business over the course of 1997. Rooms Costs. Rooms costs increased $1.8 million, or 3.5%, when compared to 1996. The increased costs are due to an increase in certain variable costs related to the increase in rooms revenues. However, as a percentage of total hotel revenues, rooms costs decreased slightly to 19.1% in 1997 as compared to 19.2% in 1996. This resulted in a 5.6% increase in rooms profit margin for 1997 as compared to 1996. Food and Beverage Costs. In 1997 food and beverage costs decreased $928,000, or 5.8%, when compared to 1996 due to the decrease in food and beverage revenues discussed above. Selling, Administrative and Other. Selling, administrative and other expenses increased by $2.1 million in 1997 to $63.3 million, a 3.4% increase when compared to 1996. The increase in expenses was primarily due to a $1.4 million increase in general and administrative expenses and a $783,000 increase in chain services. Depreciation. Depreciation increased by $1.1 million, or 4% to $28.1 million in 1997 as compared to 1996 due to new assets being purchased and depreciated as a result of renovations and replacements at the Partnership's hotels. Base and Courtyard Management Fees. Base and Courtyard management fees are calculated as a percentage of hotel revenues. The increase in these fees of 4.3% from $15.8 million in 1996 to $16.5 million in 1997 is due to the improved combined hotel revenues for the 70 Hotels for 1997 when compared to 1996. As a percentage of hotel revenues, these fees remained at 6%. Ground rent. Ground rent increased by 4.9% to $12.5 million during 1997 as compared to 1996 due to improved hotel operations which resulted in Hotels paying more rent as a percent of revenues rather than the minimum rent. However, ground rent as a percentage of total hotel revenues remained stable at 4.5% between 1997 and 1996. Incentive Management Fees. Incentive management fees earned increased by 7.0% from $12.0 million in 1996 to $12.9 million in 1997. The increase in incentive management fees earned was the result of improved combined hotel operating results. Insurance and Other. Insurance and other decreased by 9.9% during 1997 to $2.5 million when compared to 1996. The decrease is primarily due to decreases in equipment rent, and permits and licenses. Operating Profit. Operating profit increased by $4.8 million to $58.8 million in 1997 from $54.0 million in 1996, primarily due to higher revenues. Interest Expense. Interest expense decreased slightly by 1.3% to $45.8 million in 1997 from $46.4 million in 1996. This decrease was primarily due to principal amortization of $13.3 million on the Certificates/Mortgage Loan. The weighted average interest rate for 1997 was 8.5% as compared to 8.4% in 1996. Net Income. In 1997, the Partnership had net income of $15.7 million, an increase of $5.2 million, from net income of $10.5 million for 1996. This increase was primarily due to higher revenues as discussed above, offset by increases in management fees. CAPITAL RESOURCES AND LIQUIDITY Principal Sources and Uses of Cash The Partnership's principal source of cash is from operations. Its principal uses of cash are to make debt service payments, fund the property improvement fund and to make distributions to limited partners. Cash provided by operations was $44.5 million, $44.8 million and $38.1 million for the years ended 1998, 1997 and 1996, respectively. The increase in 1997 when compared to 1996 was primarily due to improved operations. Cash used in investing activities was $15.8 million, $17.6 million and $17.3 million for 1998, 1997 and 1996, respectively. Contributions to the property improvement fund which represents 5% of total hotel revenues, were $14.2 million, $13.8 million and $13.2 million for the years ended December 31, 1998, 1997 and 1996, respectively. Cash used in investing activities for 1998, 1997 and 1996 includes capital expenditures of $36.1 million, $24.9 million and $11.3 million, respectively. The Management Agreement requires annual contributions to a property improvement fund to ensure that the physical condition and product quality of the Hotels are maintained. Contributions to this fund are based on a percentage of annual total hotel revenues, currently equal to 5%. The Partnership believes that the 5% contribution requirement is consistent with industry standards and provides a sufficient reserve for the future capital repair and replacement needs of the Hotels. In accordance with the Management Agreement, the annual required contribution percentage may increase up to 6% after December 31, 2000 at the option of the Manager. The balance in the fund totaled $6.5 million and $27.2 million as of December 31, 1998 and 1997, respectively. The capital expenditures for 1998 and 1997 included renovations at 23 and 16 of the Partnership Hotels, respectively. All such capital expenditures were funded from the property improvement fund. Rooms renovations totaling $13.2 million are scheduled to be completed at 15 of the Partnership hotels in 1999. The Partnership will have sufficient funds to complete the renovations. Cash used in financing activities was $24.5 million, $27.8 million and $34.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. These totals include $10.1 million, $14.5 million and $7.0 million of cash distributions to limited partners in 1998, 1997 and 1996, respectively. During 1998, 1997 and 1996, the Partnership repaid $14.3 million, $13.3 million and $11.3 million, respectively, of principal on the commercial mortgage backed securities. The Partnership also paid $43.1 million, $44.2 million and $42.6 million of interest on its debts in 1998, 1997 and 1996, respectively. The Partnership expects to make principal repayments of $15.4 million in 1999. Pursuant to the terms of the Certificate/Mortgage Loan, the Partnership is required to establish with the lender a separate escrow account for payments of insurance premiums and real estate taxes for each mortgaged property if the credit rating of MII is downgraded by Standard and Poor's Rating Services. The Manager, Courtyard Management Corporation, is a wholly-owned subsidiary of MII. In March 1997, MII acquired the Renaissance Hotel Group N.V., adding greater geographic diversity and growth potential to its lodging portfolio. The assumption of additional debt associated with this transaction resulted in a single downgrade of MII's long term - senior unsecured debt, effective April 1, 1997. As a result, the Partnership transferred $10.3 million into the required reserve accounts prior to December 31, 1997. The escrow reserve is included in restricted cash and the resulting tax and insurance liability is included in accounts payable and accrued liabilities in the accompanying balance sheet. Changes in the real estate tax and insurance, net in 1998 include the $5.4 million remaining in the real estate tax and insurance escrow account reduced by $3.9 million of accrued real estate tax liabilities. Debt See Item 1, "Business" for discussion of debt financing. Property Improvement Fund The General Partner believes that cash from Hotel operations combined with the ability to defer certain management fees to the Manager and ground rent payments to affiliates of MII will provide adequate funds in the short term and long term for the operational needs of the Partnership. Competition The moderately priced lodging segment continues to be highly competitive. An increase in supply growth continued through 1998 with the introduction of a number of new national brands. However, through 1998 Courtyards continue to command a premium share of the market in which they are located in spite of the growth of new chains. For 1999, it is expected that Courtyard will continue outperforming both national and local competitors. The brand is continuing to carefully monitor the introduction of new mid-priced brands including Wingate Hotels, Hilton Garden Inns, Four Points by Sheraton, Mainstay, Candlewood, Club Hotels and Clarion. Inflation The rate of inflation has been relatively low in the past four years. The Manager is generally able to pass through increased costs to customers through higher room rates and prices. In 1998, the growth in average rates of Courtyard hotels exceeded inflationary costs. Seasonality Demand, and thus room occupancy, is affected by normally recurring seasonal patterns. For most of the Hotels, demand is higher in the spring and summer months (March through October) than during the remainder of the year. Year 2000 Issues Year 2000 issues have arisen because many existing computer programs and chip-based embedded technology systems use only the last two digits to refer to a year, and therefore do not properly recognize a year that begins with "20" instead of the familiar "19." If not corrected, many computer applications could fail or create erroneous results. The following disclosure provides information regarding the current status of the Partnership's Year 2000 compliance program. Host Marriott has adopted the compliance program because it recognizes the importance of minimizing the number and seriousness of any disruptions that may occur as a result of the Year 2000 issue. Host Marriott's compliance program includes an assessment of Host Marriott's hardware and software computer systems and embedded systems, as well as an assessment of the Year 2000 issues relating to third parties with which Host Marriott has a material relationship or whose systems are material to the operations of the Partnership's Hotels. Host Marriott's efforts to ensure that its computer systems are Year 2000 compliant have been segregated into two separate phases: in-house systems and third-party systems. In-House Systems. Host Marriott has invested in the implementation and maintenance of accounting and reporting systems and equipment that are intended to enable the Partnership to provide adequately for its information and reporting needs and which are also Year 2000 compliant. Substantially all of Host Marriott's in-house systems have already been certified as Year 2000 compliant through testing and other mechanisms, and Host Marriott has not delayed any systems projects due to the Year 2000 issue. Host Marriott is in the process of engaging a third party to review its Year 2000 in-house compliance. Host Marriott believes that future costs associated with Year 2000 issues for its in-house systems will be insignificant and, therefore, not impact the Partnership's business, financial condition and results of operations. Host Marriott has not developed, and does not plan to develop, a separate contingency plan for its in-house systems due to their current Year 2000 compliance. Third-Party Systems. The Partnership relies upon operational and accounting systems provided by third parties, primarily the Manager of its Hotels, to provide the appropriate property-specific operating systems (including reservation, phone, elevator, security, HVAC and other systems) and to provide it with financial information. Based on discussions with the third parties that are critical to the Partnership's business, including the Manager of its Hotels, Host Marriott believes that these parties are in the process of studying their systems and the systems of their respective vendors and service providers and, in many cases, have begun to implement changes, to ensure that they are Year 2000 compliant. However, Host Marriott has not received any oral or written assurances that these third parties will be Year 2000 compliant on time. To the extent these changes impact property-level systems, the Partnership may be required to fund capital expenditures for upgraded equipment and software. The Partnership does not expect these charges to be material, but is committed to making these investments as required. To the extent that these changes relate to the Manager's centralized systems (including reservations, accounting, purchasing, inventory, personnel and other systems), the Partnership's Management Agreement generally provides for these costs to be charged to the Partnership's properties. Host Marriott expects that the Manager will incur Year 2000 costs for its centralized systems in lieu of costs related to system projects that otherwise would have been pursued and therefore, its overall level of centralized systems charges allocated to the Hotels will not materially increase as a result of the Year 2000 compliance effort. Host Marriott believes that this deferral of certain system projects will not have a material impact on its future results of operations, although it may delay certain productivity enhancements at the Partnership's Hotels. Host Marriott will continue to monitor the efforts of these third parties to become Year 2000 compliant and will take appropriate steps to address any non-compliance issues. The Partnership believes that in the event of material Year 2000 non-compliance caused by a breach of the Manager's duties, the Partnership will have the right to seek recourse against the Manager under its Management Agreement. The Management Agreement, however, generally does not specifically address the Year 2000 compliance issue. Therefore, the amount of any recovery in the event of Year 2000 non-compliance at a property, if any, is not determinable at this time. Host Marriott will work with the third parties to ensure that appropriate contingency plans will be developed to address the most reasonably likely worst case Year 2000 scenarios, which may not have been identified fully. In particular, Host Marriott has had extensive discussions regarding the Year 2000 problem with MII, the parent of the Manager of the Partnership's Hotels. Due to the significance of MII to the Partnership's business, a detailed description of MII's state of readiness follows. MII has adopted an eight-step process toward Year 2000 readiness, consisting of the following: (i) Awareness: fostering understanding of, and commitment to, the problem and its potential risks; (ii) Inventory: identifying and locating systems and technology components that may be affected; (iii) Assessment: reviewing these components for Year 2000 compliance, and assessing the scope of Year 2000 issues; (iv) Planning: defining the technical solutions and labor and work plans necessary for each affected system; (v) Remediation/Replacement: completing the programming to renovate or replace the problem software or hardware; (vi) Testing and Compliance Validation: conducting testing, followed by independent validation by a separate internal verification team; (vii) Implementation: placing the corrected systems and technology back into the business environment; and (viii) Quality Assurance: utilizing an internal audit team to review significant projects for adherence to quality standards and program methodology. MII has grouped its systems and technology into three categories for purposes of Year 2000 compliance: (i) information resource applications and technology (IT Applications) -- enterprise-wide systems supported by MII's centralized information technology organization ("IR"); (ii) Business- initiated Systems ("BIS") - systems that have been initiated by an individual business unit, and that are not supported by MII's IR organization; and (iii) Building Systems - non-IT equipment at properties that use embedded computer chips, such as elevators, automated room key systems and HVAC equipment. MII is prioritizing its efforts based on how severe an effect noncompliance would have on customer service, core business processes or revenues, and whether there are viable, non-automated fallback procedures (System Criticality). MII measures the completion of each phase based on documented and quantified results, weighted for System Criticality. As of January 1, 1999, the Awareness and Inventory phases were complete for IT Applications and substantially complete for BIS and Building Systems. For IT Applications, the Assessment, Planning, Remediation/Replacement and Testing phases were each over 95 percent complete, and Compliance Validation had been completed for nearly half of key systems, with most of the remaining work in its final stage. BIS and Building Systems, Assessment and Planning are nearly complete. Remediation/Replacement and Testing are 20% complete for BIS, and MII is on track for completion of initial Testing of Building Systems by the end of the first quarter of 1999. Compliance Validation is in progress of both BIS and Building Systems. MII remains on target for substantial completion of Remediation/Replacement and Testing for System Critical BIS and Building Systems by June 1999 and September 1999, respectively. Quality Assurance is in progress for IT Applications, BIS and Building Systems. Year 2000 compliance communications with MII's significant third party suppliers, vendors and business partners, including its franchisees are ongoing. MII's efforts are focused on the connections most critical to customer service, core business processes and revenues, including those third parties that support the most critical enterprise-wide IT Applications, franchisees generating the most revenues, suppliers of the most widely used Building Systems and BIS, the top 100 suppliers, by dollar volume, of non-IT products, and financial institutions providing the most critical payment processing functions. Responses have been received from a majority of the firms in this group. A majority of these respondents have either given assurances of timely Year 2000 compliance or have identified the necessary actions to be taken by them or MII to achieve timely Year 2000 compliance for their products. MII is also establishing a common approach for testing and addressing Year 2000 compliance issues for its managed and franchised properties. This includes a guidance protocol for operated properties, and a Year 2000 "Toolkit" for franchisees containing relevant Year 2000 compliance information. MII is also utilizing a Year 2000 best-practices sharing system. Risks. There can be no assurances that Year 2000 remediation by the Partnership or third parties will be properly and timely completed, and failure to do so could have a material adverse effect on the Partnership, its business and its financial condition. The Partnership cannot predict the actual effects to it of the Year 2000 issue, which depends on numerous uncertainties such as: (i) whether significant third parties, properly and timely address the Year 2000 issue; and (ii) whether broad-based or systemic economic failures may occur. Host Marriott is also unable to predict the severity and duration of any such failures, which could include disruptions in passenger transportation or transportation systems generally, loss of utility and/or telecommunications services, the loss or distortion of hotel reservations made on centralized reservations systems and errors or failures in financial transactions or payment processing systems such as credit cards. Due to the general uncertainty inherent in the Year 2000 issue and the Partnership's dependence on third parties, the Partnership is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Partnership. Host Marriott's Year 2000 compliance program is expected to significantly reduce the level of uncertainty about the Year 2000 issue and Host Marriott believes that the possibility of significant interruptions of normal operations should be reduced.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index Page Courtyard by Marriott II Limited Partnership Consolidated Financial Statements: Report of Independent Public Accountants.............................................................29 Consolidated Statement of Operations.................................................................30 Consolidated Balance Sheet...........................................................................31 Consolidated Statement of Changes in Partners' Capital (Deficit).....................................32 Consolidated Statement of Cash Flows.................................................................33 Notes to Consolidated Financial Statements...........................................................34 Courtyard II Associates, L.P. and Subsidiary Consolidated Financial Statements: Report of Independent Public Accountants.............................................................44 Consolidated Statement of Operations.................................................................45 Consolidated Balance Sheet...........................................................................46 Consolidated Statement of Changes in Partners' Capital...............................................47 Consolidated Statement of Cash Flows.................................................................48 Notes to Consolidated Financial Statements...........................................................49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE PARTNERS OF COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP: We have audited the accompanying consolidated balance sheet of Courtyard by Marriott II Limited Partnership (a Delaware limited partnership) as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in partners' capital (deficit) and cash flows for each of the three years in the period ended December 31, 1998. These financial statements and the schedules referred to below are the responsibility of the General Partner's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Courtyard by Marriott II Limited Partnership as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index at Item 14(a)(2) are presented for purposes of complying with the rules of the Securities and Exchange Commission and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. As discussed in Note 2 to the consolidated financial statements, the Partnership has given retroactive effect to the change to include property-level revenues and operating expenses of its hotels in the consolidated statement of operations. ARTHUR ANDERSEN LLP Washington, D.C. March 15, 1999 16
CONSOLIDATED STATEMENT OF OPERATIONS Courtyard by Marriott II Limited Partnership For the Years Ended December 31, 1998, 1997 and 1996 (in thousands, except Unit and per Unit amounts) 1998 1997 1996 ------------- ------------- --------- REVENUES Hotel revenues Rooms.................................................................$ 258,099 $ 248,012 $ 235,861 Food and beverage..................................................... 17,219 17,436 18,227 Other................................................................. 8,933 9,573 9,619 ------------- ------------- ------------- Total hotel revenues................................................ 284,251 275,021 263,707 ------------- ------------- ------------- OPERATING COSTS AND EXPENSES Hotel property-level costs and expenses Rooms................................................................. 55,962 52,405 50,653 Food and beverage..................................................... 14,991 15,145 16,073 Other department costs and expenses................................... 2,928 2,943 2,583 Selling, administrative and other..................................... 67,517 63,298 61,216 ------------- ------------- ------------- Total hotel property-level costs and expenses 141,398 133,791 130,525 Depreciation ........................................................... 27,895 28,131 27,062 Base and Courtyard management fees ..................................... 17,055 16,501 15,822 Ground rent............................................................. 12,921 12,480 11,899 Incentive management fee................................................ 12,895 12,878 12,040 Property taxes.......................................................... 10,914 9,938 9,537 Insurance and other..................................................... 2,213 2,531 2,810 ------------- ------------- ------------- Total operating costs and expenses.................................. 225,291 216,250 209,695 ------------- ------------- ------------- OPERATING PROFIT........................................................... 58,960 58,771 54,012 Interest expense........................................................ (44,686) (45,778) (46,366) Interest income and other............................................... 2,676 2,698 2,895 ------------- ------------- ------------- NET INCOME.................................................................$ 16,950 $ 15,691 $ 10,541 ============= ============= ============= ALLOCATION OF NET INCOME General Partner.........................................................$ 847 $ 785 $ 527 Limited Partners........................................................ 16,103 14,906 10,014 ------------- ------------- ------------- $ 16,950 $ 15,691 $ 10,541 ============= ============= ============= NET INCOME PER LIMITED PARTNER UNIT (1,470 Units) $ 10,954 $ 10,140 $ 6,812 ============ ============= =========== The accompanying notes are an integral part of these financial statements.
17
CONSOLIDATED BALANCE SHEET Courtyard by Marriott II Limited Partnership December 31, 1998 and 1997 (in thousands) 1998 1997 ------------- --------- ASSETS Property and equipment, net...............................................................$ 463,650 $ 455,435 Deferred financing costs, net of accumulated amortization................................. 14,262 15,833 Due from Courtyard Management Corporation................................................. 8,739 11,318 Other assets.............................................................................. 66 27 Property improvement fund................................................................. 6,466 27,200 Restricted cash........................................................................... 17,254 13,212 Cash and cash equivalents................................................................. 17,903 13,690 ------------- ------------- $ 528,340 $ 536,715 ============= ============= LIABILITIES AND PARTNERS' CAPITAL (DEFICIT) LIABILITIES Debt......................................................................................$ 498,624 $ 512,955 Management fees due to Courtyard Management Corporation................................... 34,414 34,829 Due to Marriott International, Inc. and affiliates........................................ 8,931 9,050 Accounts payable and accrued liabilities.................................................. 10,261 10,578 ------------- ------------- Total Liabilities................................................................... 552,230 567,412 ------------- ------------- PARTNERS' CAPITAL (DEFICIT) General Partner Capital contribution.................................................................... 11,306 11,306 Cumulative net losses................................................................... (3,609) (4,456) Capital distributions................................................................... (278) (278) ------------- ------------ 7,419 6,572 ------------- ------------- Limited Partners Capital contributions, net of offering costs of $17,189................................ 129,064 129,064 Cumulative net losses................................................................... (68,573) (84,676) Capital distributions................................................................... (91,647) (81,504) Investor notes receivable............................................................... (153) (153) ------------- ------------ (31,309) (37,269) Total Partners' Deficit............................................................. (23,890) (30,697) ------------- ------------ $ 528,340 $ 536,715 ============= ============= The accompanying notes are an integral part of these financial statements. 18
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) Courtyard by Marriott II Limited Partnership For the Years Ended December 31, 1998, 1997 and 1996 (in thousands) General Limited Partner Partners Total Balance, December 31, 1995.................................................$ 5,260 $ (40,760) $ (35,500) Capital distributions................................................... -- (6,982) (6,982) Net income.............................................................. 527 10,014 10,541 ------------- ------------- ------------- Balance, December 31, 1996................................................. 5,787 (37,728) (31,941) Capital distributions................................................... -- (14,479) (14,479) Payments received on investor notes receivable......................... -- 32 32 Net income.............................................................. 785 14,906 15,691 ------------- ------------- ------------- Balance, December 31, 1997................................................. 6,572 (37,269) (30,697) Capital distributions................................................... -- (10,143) (10,143) Net income.............................................................. 847 16,103 16,950 ------------- ------------- ------------- Balance, December 31, 1998.................................................$ 7,419 $ (31,309) $ (23,890) ============= ============= ============= The accompanying notes are an integral part of these financial statements. 19
CONSOLIDATED STATEMENT OF CASH FLOWS Courtyard by Marriott II Limited Partnership For the Years Ended December 31, 1998, 1997 and 1996 (in thousands) 1998 1997 1996 ----------- ----------- -------- OPERATING ACTIVITIES Net income.....................................................................$ 16,950 $ 15,691 $ 10,541 Noncash items: Depreciation................................................................. 27,895 28,131 27,062 Amortization of deferred financing costs as interest......................... 1,571 1,572 1,679 Deferred management fees..................................................... -- -- 633 Changes in operating accounts: Real estate tax and insurance, net........................................... (1,341) (129) -- Due from Courtyard Management Corporation.................................... 79 1,997 (3,737) Management fees due to Courtyard Management Corporation...................... (415) (1,613) -- Accounts payable and accrued liabilities..................................... (196) (860) 2,924 Due to Host Marriott Corporation............................................. (63) 32 (1,015) Prepaid expenses............................................................. 8 1 (28) ----------- ----------- ----------- Cash provided by operations.............................................. 44,488 44,822 38,059 ----------- ----------- ----------- INVESTING ACTIVITIES Additions to property and equipment, net....................................... (36,110) (24,879) (11,269) Change in property improvement fund............................................ 20,734 9,382 (3,484) Change in working capital reserve.............................................. (2,925) (2,075) -- Working capital returned by/(provided to) Courtyard Management Corporation.... 2,500 -- (2,500) Cash used in investing activities........................................ (15,801) (17,572) (17,253) ------------ ----------- ---------- FINANCING ACTIVITIES Repayment of principal......................................................... (14,331) (13,298) (11,347) Capital distributions.......................................................... (10,143) (14,479) (6,982) Payment of financing costs..................................................... -- (12) (15,835) Collections of investor notes receivable....................................... -- 32 -- Proceeds from issuance of debt................................................. -- -- 537,600 Repayments of debt............................................................. -- -- (531,100) Deposit into the debt service reserve.......................................... -- -- (6,848) Use of refinancing reserve accounts............................................ -- -- 6,684 Repayment of advances from Host Marriott Corporation........................... -- -- (6,489) ----------- ----------- ---------- Cash used in financing activities........................................ (24,474) (27,757) (34,317) ------------ ----------- ---------- INCREASE /(DECREASE) IN CASH AND CASH EQUIVALENTS $ 4,213 $ (507) $(13,511) CASH AND CASH EQUIVALENTS at beginning of year.................................... 13,690 14,197 27,708 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS at end of year..........................................$ 17,903 $ 13,690 $ 14,197 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for mortgage and other interest......................................$ 43,114 $ 44,207 $ 42,532 =========== =========== =========== The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Courtyard by Marriott II Limited Partnership December 31, 1998 and 1997 NOTE 1. THE PARTNERSHIP Description of the Partnership Courtyard by Marriott II Limited Partnership (the "Partnership"), a Delaware limited partnership, was formed on August 31, 1987 to acquire and own 70 Courtyard by Marriott hotels (the "Hotels") and the land on which certain of the Hotels are located. The Partnership's 70 hotel properties are located in 29 states in the United States: nine in Illinois; eight in California; five in Florida; four in Georgia; four in Texas and three or less in each of the other 24 states. The Hotels are managed as part of the Courtyard by Marriott hotel system by Courtyard Management Corporation (the "Manager"), a wholly-owned subsidiary of Marriott International, Inc. ("MII"). On January 18, 1988 (the "Final Closing Date"), 1,470 limited partnership interests (the "Units"), representing a 95% interest in the Partnership, were sold in a private placement offering. The offering price per Unit was $100,000, $21,200 payable at subscription with the balance due in four annual installments through February 28, 1991, or, as an alternative, $94,357 in cash at closing as full payment of the subscription price. The limited partners paid $39,938,000 as of the Final Closing Date, representing 1,350 Units purchased on the installment basis and 120 Units paid in full. The limited partners' obligations to make the installment payments were evidenced by promissory notes (the "Investor Notes") payable to the Partnership and secured by the Units. On October 30, 1987 (the "Initial Closing Date"), CBM Two made a capital contribution of equipment valued at $11,306,000 for its 5% general partner interest. On the Initial Closing Date, the Partnership began operations and executed a purchase agreement (the "Purchase Agreement") with Host Marriott to acquire the Hotels and the land on which certain of the Hotels are located for a total price of $643.1 million. Of the total purchase price, $507.9 million was paid in cash from the proceeds of the mortgage financing and sale of the Units, $40.2 million from assumption of industrial development revenue bond financing (the "IRB Debt") from Host Marriott and $95 million from a note (the "Deferred Purchase Note") payable to Host Marriott. Twenty of the Hotels were conveyed to the Partnership in 1987, thirty-four Hotels in 1988, twelve Hotels in 1989 and the final four Hotels during the first half of 1990. Under the Purchase Agreement, Host Marriott agreed to reduce the purchase price of the Hotels by up to $9.3 million if the Hotels did not provide cash flow in excess of debt service, as defined, equivalent to $9.3 million in 1989, (the "Price Adjustment"). The required Price Adjustment for 1989 was $8,843,000. The Price Adjustment was allocated as a reduction to the Partnership's property and equipment in the accompanying consolidated financial statements. In accordance with the partnership agreement, in 1990 and 1991 CBM Two purchased 20.5 Units from defaulting investors. Additionally, on July 15, 1995, a limited partner assigned one Unit to CBM Two. On January 24, 1996, the Partnership completed a refinancing of the Partnership's existing debt through the private placements of $127.4 million of senior secured notes (the "Senior Notes") and $410.2 million of multi-class commercial mortgage pass-through certificates (the "Certificates"). In connection with the 1996 refinancing, the limited partners approved certain amendments to the partnership agreement and the Management Agreement. The partnership agreement amendment, among other things, allowed the formation of certain subsidiaries of the Partnership, including Courtyard II Finance Company ("Finance"), a wholly-owned subsidiary of the Partnership, who, along with the Partnership, is the co-issuer of the Senior Notes. Additionally, the Partnership formed a wholly-owned subsidiary, Courtyard II Associates Management Corporation ("Managing General Partner"). Managing General Partner was formed to be the managing general partner with a 1% general partner interest in Courtyard II Associates, L.P. ("Associates"), a Delaware limited partnership. The Partnership owns a 1% general partner interest and a 98% limited partner interest in Associates. On January 24, 1996, the Partnership contributed 69 Hotels and their related assets to Associates. Formation of Associates resulted in the Partnership's primary assets being its direct and indirect interest in Associates. Additionally, substantially all of Associates' net equity will be restricted to dividends, loans or advances to the Partnership. Associates holds a 99% membership interest in CBM Associates II LLC ("Associates II") and the Managing General Partner holds the remaining 1% membership interest. On January 24, 1996, the Partnership contributed the Hotel located in Deerfield, IL (the "Deerfield Hotel") and its related assets to Associates and the Managing General Partner who simultaneously contributed the Hotel and its related assets to Associates II. Each of the Managing General Partner, Associates and Associates II were formed as a single purpose bankruptcy-remote entity to facilitate the refinancing. CBM Funding Corporation ("CBM Funding"), a wholly-owned subsidiary of Associates, was also formed to make a mortgage loan (the "Mortgage Loan") to Associates from the proceeds of the sale of the Certificates. On April 17, 1998, Host Marriott Corporation ("Host Marriott"), the parent of CBM Two, announced that its Board of Directors authorized the company to reorganize its business operations to qualify as a real estate investment trust ("REIT") to become effective as of January 1, 1999 (the "REIT Conversion"). On December 29, 1998, Host Marriott announced that it had completed substantially all the steps necessary to complete the REIT Conversion and expected to qualify as a REIT under the applicable Federal income tax laws beginning January 1, 1999. Subsequent to the REIT Conversion, Host Marriott is referred to as Host REIT. In connection with the REIT Conversion, Host REIT contributed substantially all of its hotel assets to a newly-formed partnership Host Marriott L.P. ("Host LP"). In connection with Host Marriott's conversion to a REIT, the following steps occurred. Host Marriott formed CBM Two LLC, a Delaware single member limited liability company, having two classes of member interests (Class A - 1% economic interest, managing; Class B - 99% economic interest, non- managing). CBM Two merged into CBM Two LLC on December 22, 1998 and CBM Two ceased to exist. On December 28, 1998, Host Marriott contributed its entire interest in CBM Two LLC to Host Marriott, L.P. ("Host LP"), which is owned 78% by Host Marriott and 22% by outside partners. Finally on December 30, 1998, Host LP contributed its 99% Class B interest in CBM Two LLC to Rockledge Hotel Properties, Inc. ("Rockledge"), a Delaware corporation which is owned 95% by Host LP (economic non-voting interest) and 5% by Host Marriott Statutory/Charitable Employee Trust, a Delaware statutory business trust (100% of the voting interests). As a result, the sole general partner of the Partnership is CBM Two LLC (the "General Partner"), with a Class A 1% managing economic interest owned by Host LP and a Class B 99% non-managing, economic interest owned by Rockledge. With the merger of CBM Two into the General Partner, the General Partner became the holder of the Units previously acquired by CBM Two. Therefore, as of December 31, 1998, the General Partner owns a total of 21.5 Units representing a 1.39% limited partnership interest in the Partnership. Pursuant to the terms of the operating agreement of CBM Two LLC, Rockledge, as the holder of the 99% non-voting member interest in CBM Two LLC, has been granted the sole power to direct the exercise by CBM Two LLC of all voting rights and other rights as owner with respect to all capital stock of any corporation that is owned, directly or indirectly, by the Partnership. The Partnership owns the Hotels through Associates, in which the Partnership is a 98% limited partner and a 1% general partner, and through Courtyard II Associates Management Corporation, the 1% managing general partner of Associates. As a result of the provisions of the operating agreement of CBM Two LLC, Host LP has no right to direct the exercise by CBM Two LLC of voting or other rights with respect to the shares of Courtyard II Associates Management Corporation (and thus has no right to direct or control the affairs of Associates). Partnership Allocations and Distributions Partnership allocations and distributions are generally made as follows: a. Cash available for distribution is distributed (i) first, 5% to the General Partner and 95% to the limited partners until the General Partner and the limited partners (collectively, the "Partners") have received cumulative distributions of sale proceeds and/or refinancing proceeds ("Capital Receipts") equal to $77,368,421; (ii) next, 10% to the General Partner and 90% to the limited partners until the Partners have received cumulative distributions of Capital Receipts equal to $158,306,000; and (iii) thereafter, 25% to the General Partner and 75% to the limited partners. Distributions to the General Partner are subordinate to an annual 10% non-cumulative preferred return to the limited partners on their invested capital, as defined. b. Refinancing proceeds not retained by the Partnership will be distributed (i) first, 5% to the General Partner and 95% to the limited partners until the Partners have received cumulative distributions of refinancing proceeds equal to $158,306,000 minus adjusted sale proceeds, as defined; and (ii) thereafter, 25% to the General Partner and 75% to the limited partners. c. Proceeds not retained by the Partnership from the sale or other disposition of less than substantially all of the assets of the Partnership will be distributed (i) first, 5% to the General Partner and 95% to the limited partners until the Partners have received cumulative distributions of Capital Receipts equal to $158,306,000; and (ii) thereafter, 25% to the General Partner and 75% to the limited partners. Proceeds from the sale of substantially all of the assets of the Partnership or from a related series of Hotel sales leading to the sale of substantially all of the assets of the Partnership will be distributed to the Partners pro-rata in accordance with their capital account balances. d. Net profits are generally allocated in the same ratio in which cash available for distribution is distributed. e. All items of gain, deduction or loss attributable to the contributed equipment will be allocated to the General Partner. f. In general, gain recognized by the Partnership will be allocated, with respect to any year, in the following order of priority: (i) to all Partners whose capital accounts have negative balances until such negative balances are brought to zero; (ii) to all Partners up to the amount necessary to bring their respective capital account balances to an amount equal to their invested capital, as defined; and (iii) thereafter 25% to the General Partner and 75% to the limited partners. Gain arising from the sale or other disposition (or from a related series of sales or dispositions) of substantially all the assets of the Partnership will be allocated (i) to the limited partners in an amount equal to the excess, if any, of (1) the sum of 15% times the weighted average of the limited partners' invested capital each year, over (2) the sum of distributions to the limited partners of Capital Receipts in excess of the limited partners' cumulative capital and distributions to limited partners of cash available for distribution; and (ii) next, to the General Partner until it has been allocated an amount equal to 33.33% of the amount allocated to the limited partners under clause (i); and (iii) thereafter, 25% to the General Partner and 75% to the limited partners. g. For financial reporting purposes, profits and losses are generally allocated among the Partners based on their stated interests in cash available for distribution. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The Partnership records are maintained on the accrual basis of accounting and its fiscal year coincides with the calendar year. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Working Capital and Supplies Pursuant to the terms of the Partnership's management agreement discussed in Note 7, the Partnership is required to provide the Manager with working capital and supplies to meet the operating needs of the Hotels. The Manager converts cash advanced by the Partnership into other forms of working capital consisting primarily of operating cash, inventories, and trade receivables and payables which are maintained and controlled by the Manager. Upon the termination of the management agreement, the Manager is required to convert working capital and supplies into cash and return it to the Partnership. As a result of these conditions, the individual components of working capital and supplies controlled by the Manager are not reflected in the accompanying consolidated balance sheet. Revenues and Expenses Revenues primarily represent the gross revenues generated by the Partnership's Hotels. On November 20, 1997, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus on EITF 97-2, "Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management Entities and Certain Other Entities with Contractual Management Arrangements." EITF 97-2 addresses the circumstances in which a management entity may include the revenues and expenses of a managed entity in its financial statements. The Partnership considered the impact of EITF 97-2 on its consolidated financial statements and determined that EITF 97-2 requires the Partnership to include property-level revenues and operating expenses of its Hotels in its consolidated statement of operations. The Partnership has given retroactive effect to the adoption of EITF 97-2 in the accompanying consolidated statement of operations. Application of EITF 97-2 to the consolidated financial statements for the fiscal years ended December 31, 1998, 1997 and 1996 increased both revenues and operating expenses by approximately $141.4 million, $133.8 million and $130.5 million, respectively, and had no impact on operating profit or net income. Property and Equipment Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: Buildings and improvements 40 years Leasehold improvements 40 years Furniture and equipment 4-10 years Certain property and equipment is pledged to secure the Certificates/Mortgage Loan described in Note 5. The Partnership assesses impairment of its real estate properties based on whether estimated undiscounted future cash flows from such properties will be less than their net book value. If a property is impaired, its basis is adjusted to fair market value less selling costs. There was no such adjustment required at December 31, 1998 or 1997. Deferred Financing Costs From 1995 to 1997, the Partnership paid a total of $18,858,000 in financing costs related to the Senior Notes and the Certificates discussed in Note 5. Financing costs are amortized using the straight-line method, which approximates the effective interest rate method, over the remaining life of the respective mortgage debt. At December 31, 1998 and 1997, accumulated amortization of financing costs totaled $4,596,000 and $3,025,000, respectively. Cash and Cash Equivalents The Partnership considers all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents. Restricted Cash Reserves The Partnership was required to establish certain reserves pursuant to the terms of the mortgage debt as described in Note 5. The balances in those reserves as of December 31 are as follows (in thousands): 1998 1997 ----------- -------- Debt service reserve.................................$ 6,848 $ 6,848 Real estate tax and insurance reserve................ 5,406 4,289 Working capital reserve.............................. 5,000 2,075 ----------- ----------- $ 17,254 $ 13,212 =========== =========== Ground Rent The land leases with MII or affiliates of MII (see Note 6) include scheduled increases in minimum rents per property. These scheduled rent increases, which are included in minimum lease payments, are being recognized by the Partnership on a straight-line basis over the lease terms of approximately 80 years. The adjustment included in ground rent expense and Due to Marriott International, Inc. and affiliates to reflect minimum lease payments on a straight-line basis for 1998, 1997 and 1996 totaled $119,000 per year. Income Taxes Provision for Federal taxes has not been made in the accompanying consolidated financial statements since the Partnership does not pay income taxes, but rather, allocates its profits and losses to the individual Partners. Significant differences exist between the net income for financial reporting purposes and the net income reported in the Partnership's tax return. These differences are due primarily to the use for income tax purposes of accelerated depreciation methods, shorter depreciable lives for the assets, difference in the timing of recognition of certain fees and straight-line rent adjustments. As a result of these differences, the excess of the net Partnership liabilities reported in the accompanying consolidated financial statements over the tax basis in the net Partnership liabilities was $5,128,000 and $7,196,000, respectively as of December 31, 1998 and 1997. Reclassifications Certain reclassifications were made to the prior year financial statements to conform to the 1998 presentation. NOTE 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following as of December 31 (in thousands): 1998 1997 ------------- --------- Land...............................................$ 25,392 $ 25,392 Leasehold improvements............................. 456,936 442,226 Building and improvements.......................... 85,448 87,546 Furniture and equipment............................ 178,748 155,250 ------------- --------- 746,524 710,414 Less accumulated depreciation...................... (282,874 (254,979) ------------- --------- $ 463,650 $ 455,435 ============= ========== NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS 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, 1998 As of December 31, 1997 -------------------------- ------------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value (in thousands) (in thousands) Debt............................................................$ 498,624 $ 518,289 $ 512,955 $ 544,000 Management fees due to Courtyard Management Corporation.......................................$ 34,414 $ 18,735 $ 34,829 $ 22,000 The 1998 and 1997 estimated fair value of debt obligations were based on the quoted market prices at December 31, 1998 and 1997, respectively. Management fees due to the Manager are valued based on the expected future payments from operating cash flow discounted at risk adjusted rates.
NOTE 5. MORTGAGE DEBT On January 24, 1996, the Partnership completed a refinancing of the Partnership's existing debt through the private placements of $127.4 million of senior secured notes (the "Senior Notes") and $410.2 million of multi-class commercial mortgage pass-through certificates (the "Certificates"). Debt - Senior Notes The Senior Notes of $127.4 million were issued by the Partnership and Finance. The Senior Notes bear interest at 10 3/4%, require semi-annual payments of interest and require no payments of principal until maturity on February 1, 2008. The Senior Notes are secured by a first priority pledge by the Partnership of (i) its 99% partnership interest (consisting of a 98% limited partner interest and a 1% general partner interest) in Associates and (ii) its 100% equity interest in the Managing General Partner. Finance has nominal assets, does not conduct any operations and does not provide any additional security for the Senior Notes. The terms of the Senior Notes include requirements of the Partnership to establish and fund a debt service reserve account in an amount equal to one six-month interest payment on the Senior Notes ($6,848,000 which is included as restricted cash on the accompanying consolidated balance sheets at December 31, 1998 and 1997) and to maintain certain levels of excess cash flow, as defined. In the event the Partnership fails to maintain the required level of excess cash flow, the Partnership will be required to (i) suspend distributions to its partners and other restricted payments, as defined, (ii) to fund a separate supplemental debt service reserve account (the "Supplemental Debt Service Reserve") in an amount up to two six-month interest payments on the Senior Notes and (iii) if such failure were to continue, to offer to purchase a portion of the Senior Notes at par. The Senior Notes are not redeemable prior to February 1, 2001. Thereafter, the Senior Notes may be redeemed, at the option of the Partnership, at a premium declining to par in 2004. The premium is 5.375% for 2001, 3.583% for 2002 and 1.792% for 2003. The Senior Notes are non-recourse to the Partnership and its partners. In connection with the Host Marriott's conversion to a REIT, a change of control occurred when Host Marriott through Host LP ceased to own, directly or indirectly, all of the outstanding equity interest of the sole general partner of the Partnership. Although such a change of control has occurred, Host REIT continues to own, indirectly, a substantial majority of the economic interest in CBM Two LLC, the current General Partner of the Partnership and, through Host LP, has certain voting rights with respect to CBM Two LLC. The change in control described above resulted in a "Change in Control" under the indenture governing the Senior Notes. As a result, in accordance with the terms of the Indenture, Host LP commenced a tender offer for the Senior Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon to February 18, 1999. The tender offer was commenced on January 14, 1999 and expired on February 12, 1999. No Senior Notes were tendered to Host LP in connection with the tender offer. Debt - Certificates The Certificates were issued by CBM funding for an initial principal amount of $410.2 million. Proceeds from the sale of the Certificates were utilized by CBM Funding to provide a Mortgage Loan to Associates. The Certificates/Mortgage Loan require monthly payments of principal and interest based on a 17-year amortization schedule. The Mortgage Loan matures on January 28, 2008. However, the maturity date of the Certificates/Mortgage Loan may be extended until January 28, 2013 with the consent of 662/3% of the holders of the outstanding Certificates affected thereby. The Certificates were issued in the following classes and pass-through rates of interest. Initial Certificate Pass-Through Class Balance Rate ------------------- -------------------- ----------- Class A-1 $ 45,500,000 7.550% Class A-2 $ 50,000,000 6.880% Class A-3P & I $ 129,500,000 7.080% Class A-3IO Not Applicable 0.933% Class B $ 75,000,000 7.480% Class C $ 100,000,000 7.860% Class D $ 10,200,000 8.645% The Class A-3IO Certificates receive payments of interest only based on a notional balance equal to the Class A-3P & I Certificate balance. The balances of the Certificates were $371.2 million and $385.5 million at December 31, 1998 and 1997, respectively. Principal amortization of $14.3 million and $13.3 million of the Class A-1 Certificates were made during 1998 and 1997, respectively. The weighted average interest rate on the Certificates was 7.8% for 1998 and 1997, and the average interest rates were 7.8% at December 31, 1998 and 1997. The Certificates/Mortgage Loan maturities are as follows (in thousands): 1999 $ 15,443 2000 16,642 2001 17,934 2002 19,326 2003 20,827 Thereafter 281,052 $ 371,224 The Mortgage Loan is secured primarily by 69 cross-defaulted and cross-collateralized mortgages representing first priority mortgage liens on (i) the fee or leasehold interest in the 69 Hotels, related furniture, fixtures and equipment and the property improvement fund, (ii) the fee interest in the land leased from MII or their affiliates on which 53 Hotels are located, (iii) a pledge of Associates membership interest in and the related right to receive distributions from Associates II which owns the Deerfield Hotel and (iv) an assignment of the Management Agreement, as defined below. The Mortgage Loan is non-recourse to Associates, the Partnership and its partners. Operating profit from the Hotels in excess of debt service on the Mortgage Loan is available to be distributed to the Partnership. Amounts distributed to the Partnership are used for the following, in order of priority: (i) for debt service on the Senior Notes, (ii) to fund the Supplemental Debt Service Reserve, if necessary, (iii) to offer to purchase a portion of the Senior Notes at par, if necessary, (iv) for working capital as discussed in Note 7 and (v) for distributions to the partners of the Partnership. The net assets (all of which are restricted) of Associates was $87.3 million and $81.0 million as of December 31, 1998 and 1997, respectively. Prepayments of the Mortgage Loan are permitted with the payment of a premium (the "Prepayment Premium"). The Prepayment Premium is equal to the greater of (i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance amount based on a spread of .25% or .55% over the U.S. treasury rate, as defined. Pursuant to the terms of the Certificate/Mortgage Loan, the Partnership is required to establish with the lender a separate escrow account for payments of insurance premiums and real estate taxes for each mortgaged property if the credit rating of MII is downgraded by Standard and Poor's Rating Services. The Manager, Courtyard Management Corporation, is a wholly-owned subsidiary of MII. In March 1997, MII acquired the Renaissance Hotel Group N.V.. The assumption of additional debt associated with this transaction resulted in a single downgrade of MII's long term - Senior unsecured debt, effective April 1, 1997. As a result, the Partnership transferred $10.3 million into the required reserve accounts prior to December 31, 1997. The escrow reserve is included in restricted cash and the resulting tax and insurance liability is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheet. NOTE 6. LEASES The land on which 53 of the Hotels are located is leased from affiliates of MII. In addition, eight of the Hotels are located on land leased from third parties. The land leases have remaining terms (including all renewal options) expiring between the years 2024 and 2068. The MII land leases and the third party land leases provide for rent based on specific percentages (from 2% to 15%) of certain revenue categories subject to minimum amounts. The minimum rentals are adjusted at various anniversary dates throughout the lease terms, as defined in the agreements. The Partnerships also rents certain equipment for use in the Hotels. In connection with the refinancing, the Partnership, as lessee, transferred it rights and obligations pursuant to the 53 ground leases with affiliates of MII and affiliates to Associates. Additionally, affiliates of MII agreed to defer receipt of their ground lease payments to the extent that the Partnership or Associates has insufficient funds for debt service payments on the Senior Notes and the Mortgage Loan. Minimum future rental payments during the term of these operating leases are as follows (in thousands): Telephone Lease Land Equipment and Other Year Leases Leases ----------- ----------- -------------- 1999 $ 9,230 $ 490 2000 9,230 361 2001 9,230 187 2002 9,230 132 2003 9,230 96 Thereafter 523,753 -- ----------- ------------- $ 569,903 $ 1,266 =========== ============= Total rent expense on land leases was $12,921,000 for 1998, $12,480,000 for 1997 and $11,899,000 for 1996. NOTE 7. MANAGEMENT AGREEMENT To facilitate the refinancing, effective December 30, 1995, the original management agreement was restated into two separate management agreements. Associates entered into a management agreement with the Manager for the 69 Hotels which Associates directly owns and Associates II entered into a management agreement for the Deerfield Hotel which Associates II owns, collectively, (the "Management Agreement"). Term The Management Agreement has an initial term expiring in 2013. The Manager may renew the term, as to one or more of the Hotels, at its option, for up to three successive terms of 10-years each and one final term of five years. The Partnership may terminate the Management Agreement if, during any three consecutive years after 1992, specified minimum operating results are not achieved. However, the Manager may prevent termination by paying to the Partnership the amount by which the minimum operating results were not achieved. Management Fees The Management Agreement provides for annual payments of (i) the base management fee equal to 3.5% of gross revenues from the Hotels, (ii) the Courtyard management fee equal to 2.5% of gross revenues from the Hotels, and (iii) the incentive management fee equal to 15% of operating profit, as defined (20% of operating profit after the Partners have received refinancing proceeds equal to 50% of the excess of (a) $154,736,842 over (b) cumulative distributions of adjusted sale proceeds (the "First Equity Refinancing")). Deferral Provisions Due to the refinancing, beginning in 1996, one percent of the Courtyard management fee is deferred through maturity of the Senior Notes and the Mortgage Loan to the extent that the Partnership or Associates has insufficient funds for debt service payments on the Senior Notes and the Mortgage Loan. Previously, the entire Courtyard management fee was subordinate to debt service. To the extent any Courtyard management fee, base management fee or incentive management fee is deferred, it will be added to deferred management fees. Deferred management fees accrue without interest, and will be payable out of 50% of available cash flow after payment of certain priorities as discussed below. The priority return to the Partnership, as defined, was reduced from 10% of invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 10% for 1999 and thereafter. Operating profit from the Hotels (which reflects the deduction of the base and Courtyard management fees and MII ground rent) will be used to pay the following, in order of priority: (i) debt service on the Senior Notes and Mortgage Loan, (ii) to repay working capital loans to the Manager, (iii) to repay deferred ground rent to MII and their affiliates, (iv) to repay ground lease advances to MII and their affiliates, (v) the priority return to the Partnership which was 9%, 8% and 7% of invested capital for 1998, 1997 and 1996, respectively, (vi) eighty percent of the remaining operating profit is applied to the payment of current incentive management fees, (vii) to repay advances to the Partnership, (viii) to repay foreclosure avoidance advances to the Manager and (ix) fifty percent of the remaining operating profit to repay deferred management fees to the Manager and fifty percent of remaining operating profit is paid to the Partnership. During 1998 and 1997, $415,000 and $1,613,000, respectively, of deferred incentive management fees were paid. Deferred incentive management fees were $4,169,000 and $4,584,000 as of December 31, 1998 and 1997, respectively. Deferred Courtyard management fees totaled $22,341,000 as of December 31, 1998 and 1997. Deferred base management fees as of December 31, 1998 and 1997 were $7,904,000. Chain Services The Manager is required to furnish certain services ("Chain Services") which are furnished generally on a central or regional basis to all hotels managed, owned or leased in the Courtyard by Marriott hotel system. In addition, the Hotels participate in MII's Marriott Reward Program ("MRP"). The costs of this program are charged to all hotels in the full-service, Residence Inn by Marriott, Courtyard by Marriott and Fairfield Inn by Marriott systems based upon the MRP revenues at each Hotel. Chain Services and MRP costs charged to the partnership under the Management Agreement were $11,673,000 in 1998 and $10,257,000 in 1997. The total amount of Chain Services was $9,474,000 in 1996. Working Capital The Partnership is required to provide the Manager with working capital and fixed asset supplies to meet the operating needs of the Hotels. The refinancing required certain enhancements to the cash management system of the Manager such that additional working capital may be required for the operation of the Hotels. Therefore, on January 24, 1996, the Partnership, Associates and the Manager entered into a Working Capital Maintenance Agreement (the "Working Capital Agreement") and the Partnership advanced $2,500,000 to the Manager as additional working capital for the operation of the Hotels. In 1998, this $2,500,000 was returned to the Partnership. Upon termination of the Management Agreement, the working capital and supplies will be returned to the Partnership. As of December 31, 1998 and 1997, the working capital balance was $6,261,000 and $8,761,000, respectively. The 1998 balance includes the $8,846,000 originally advanced and $2,500,000 advanced on January 24, 1996 less the $2,585,000 of excess working capital returned to the Partnership in 1991 and the $2,500,000 returned to the Partnership in 1998. At December 31, 1998 and 1997, accumulated depreciation related to the supplies totaled $2,060,000. In addition, the Working Capital Agreement required that the Partnership reserve $2 million by February 1, 1997 and an additional $3 million by February 1, 1998 (the "Working Capital Reserve"). The $3 million and $2 million were reserved on February 2, 1998 and January 31, 1997, respectively. The Working Capital Reserve will be available for payment of hotel operating expenses in the event that there is a further downgrade in the long-term senior unsecurred debt of MII to a level below the rating which was effective April 1, 1997. The obligation to fund the amounts required by the Working Capital Agreement is subordinate to debt service on the Senior Notes and the Mortgage Loan. Property Improvement Funds The Management Agreement provides for the establishment of a repairs and equipment reserve (property improvement fund) for the Hotels. The funding of this reserve is based on a percentage of gross Hotel revenues. The contribution to the property improvement fund has been established at 5% for all Hotels and may be increased, at the option of the Manager, to 6% of gross Hotel revenues in 2001. NOTE 8. ENVIRONMENTAL CONTINGENCY Based upon a study completed in December 1995, the Partnership has become aware of environmental contamination at one of its fee-owned properties, the Deerfield Hotel, caused by the previous use of the site as a landfill and not caused by the Partnership. The property represents less than 2% of the Partnership's total assets and revenues as of December 31, 1998 and for the year ended, respectively. The Partnership is unable to determine the need for remediation, its potential responsibility, if any, for remediation and the extent of the Partnership's possible liability for any remediation costs. There can be no assurance that the Partnership will not have liability with respect to remediation of contamination at that site. The Partnership does not believe that any of the environmental matters are likely to have a material adverse effect on the business and operations of the Partnership. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE PARTNERS OF COURTYARD II ASSOCIATES, L.P. AND SUBSIDIARIES: We have audited the accompanying consolidated balance sheet of Courtyard II Associates, L.P. (a Delaware limited partnership) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations and cash flows for each of the three years in the period ended December 31, 1998 and the statement of changes in partners' capital for the years ended December 31, 1998 and 1997 and for the period from January 24, 1996 to December 31, 1996. These financial statements are the responsibility of the General Partner's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Courtyard II Associates, L.P. and subsidiaries as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, Courtyard II Associates, L.P. has given retroactive effect to the change to include property-level revenues and operating expenses of its hotels in the consolidated statement of operations. ARTHUR ANDERSEN LLP Washington, D.C. March 15, 1999
CONSOLIDATED STATEMENT OF OPERATIONS Courtyard II Associates, L.P. and Subsidiaries For the Years Ended December 31, 1998, 1997 and 1996 (in thousands) 1998 1997 1996 ------------- ------------- --------- HOTEL REVENUES Rooms.................................................................$ 258,099 $ 248,012 $ 235,861 Food and beverage..................................................... 17,219 17,436 18,227 Other................................................................. 8,933 9,573 9,619 ------------- ------------- ------------- Total hotel revenues................................................ 284,251 275,021 263,707 ------------- ------------- ------------- OPERATING COSTS AND EXPENSES Hotel property-level costs and expenses Rooms................................................................. 55,962 52,404 50,653 Food and beverage..................................................... 14,991 15,145 16,073 Other department costs and expenses................................... 2,928 2,943 2,583 Selling, administrative and other..................................... 67,517 63,299 61,216 ------------- ------------- ------------- Total hotel property-level costs and expenses....................... 141,398 133,791 130,525 Depreciation ........................................................... 27,895 28,131 27,062 Base and Courtyard management fees...................................... 17,055 16,501 15,822 Ground rent............................................................. 12,921 12,480 11,899 Incentive management fee................................................ 12,895 12,878 12,040 Property taxes.......................................................... 10,914 9,938 9,537 Insurance and other..................................................... 1,785 1,961 2,468 ------------- ------------- ------------- 224,863 215,680 209,353 ------------- ------------- ------------- OPERATING PROFIT........................................................... 59,388 59,341 54,354 Interest expense........................................................ (30,517) (31,575) (32,463) Interest income......................................................... 1,981 2,008 2,178 ------------- ------------- ------------- NET INCOME BEFORE MINORITY INTEREST........................................ 30,852 29,774 24,069 MINORITY INTEREST.......................................................... 11 12 8 ------------- ------------- ------------- NET INCOME.................................................................$ 30,841 $ 29,762 $ 24,061 ============= ============= ============= ALLOCATION OF NET INCOME General Partners........................................................$ 617 $ 595 $ 481 Limited Partner......................................................... 30,224 29,167 23,580 ------------- ------------- ------------- $ 30,841 $ 29,762 $ 24,061 ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED BALANCE SHEET Courtyard II Associates, L.P. and Subsidiaries December 31, 1998 and 1997 (in thousands) 1998 1997 ------------- --------- ASSETS Property and equipment, net...............................................................$ 463,650 $ 455,435 Deferred financing costs, net of accumulated amortization................................. 10,033 11,139 Due from Courtyard Management Corporation................................................. 8,739 11,318 Other assets.............................................................................. 66 27 Property improvement fund................................................................. 6,466 27,200 Restricted cash........................................................................... 5,407 4,289 Cash and cash equivalents................................................................. 11,933 5,688 ------------ ------------- $ 506,294 $ 515,096 ============ ============= LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Mortgage debt.............................................................................$ 371,224 $ 385,555 Management fees due to Courtyard Management Corporation................................... 34,414 34,829 Due to Marriott International, Inc. and affiliates........................................ 8,931 9,050 Accounts payable and accrued liabilities.................................................. 4,347 4,660 ------------ ------------- Total Liabilities................................................................... 418,916 434,094 MINORITY INTEREST............................................................................ 31 20 ------------ ------------- 418,947 434,114 ------------ ------------- PARTNERS' CAPITAL (See discussion of distribution restrictions in Note 2) General Partners.......................................................................... 1,760 1,621 Limited Partner........................................................................... 85,587 79,361 ------------ ------------- Total Partners' Capital............................................................. 87,347 80,982 ------------ ------------- $ 506,294 $ 515,096 ============ =============
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL Courtyard II Associates, L.P. and Subsidiaries For the Years Ended December 31, 1998 and 1997 and the Period from January 24, 1996 through December 31, 1996 (in thousands) General Limited Partners Partner Total Initial capitalization as of January 24, 1996 $ 1,489 $ 72,938 $ 74,427 Capital distributions..................................................... (348) (17,030) (17,378) Net income................................................................ 481 23,580 24,061 ----------- ----------- ----------- Balance, December 31, 1996................................................... 1,622 79,488 81,110 Capital distributions..................................................... (596) (29,294) (29,890) Net income................................................................ 595 29,167 29,762 ----------- ----------- ----------- Balance, December 31, 1997................................................... 1,621 79,361 80,982 Capital distributions..................................................... (478) (23,998) (24,476) Net income................................................................ 617 30,224 30,841 ----------- ----------- ----------- Balance, December 31, 1998...................................................$ 1,760 $ 85,587 $ 87,347 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS Courtyard II Associates, L.P. and Subsidiaries For the Years Ended December 31, 1998, 1997 and 1996 (in thousands) 1998 1997 1996 ----------- ----------- -------- OPERATING ACTIVITIES Net income.....................................................................$ 30,841 $ 29,762 $ 24,061 Noncash items: Depreciation................................................................. 27,895 28,131 27,062 Amortization of deferred financing costs as interest......................... 1,106 1,105 1,195 Deferred management fees..................................................... -- -- 633 Minority Interest............................................................ 11 12 8 Changes in operating accounts: Due from Courtyard Management Corporation.................................... 79 1,997 (3,737) Management fees due to Courtyard Management Corporation...................... (415) (1,613) -- Accounts payable and accrued liabilities..................................... (1,565) (1,030) (2,309) Due to Host Marriott Corporation............................................. (32) 15 (798) Prepaid expenses............................................................. 8 1 (28) ----------- ----------- ---------- Cash provided by operations.............................................. 57,928 58,380 46,087 ----------- ----------- ----------- INVESTING ACTIVITIES Additions to property and equipment, net....................................... (36,110) (24,879) (11,269) Change in property improvement fund............................................ 20,734 9,382 (3,484) Working capital returned by/(advanced to) Courtyard Management Corporation..... 2,500 -- (2,500) ------------ ---------- --------- Cash used in investing activities........................................ (12,876) (15,497) (17,253) ----------- ----------- ---------- FINANCING ACTIVITIES Capital distributions.......................................................... (24,476) (29,890) (17,378) Repayment of principal......................................................... (14,331) (13,298) (11,347) Payment of financing costs..................................................... -- (9) (10,627) Repayments of debt............................................................. -- -- (410,200) Proceeds from issuance of debt................................................. -- -- 410,200 Investment in and net advances to (from) Associates............................ -- -- 16,520 ----- ----- ------ Cash used in financing activities........................................ (38,807) (43,197) (22,832) ----------- ----------- ---------- INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS $ 6,245 $ (314) $6,002 CASH AND CASH EQUIVALENTS at beginning of year.................................... 5,688 6,002 -- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS at end of year..........................................$ 11,933 $ 5,688 $ 6,002 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for mortgage and other interest......................................$ 29,412 $ 30,469 $ 33,978 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Courtyard II Associates, L.P. and Subsidiaries December 31, 1998 and 1997 NOTE 1. THE PARTNERSHIP Description Courtyard II Associates, L.P. and Subsidiaries ("Associates"), a Delaware limited partnership, was formed December 22, 1995. Substantially all of the assets of Associates were contributed to Associates by Courtyard by Marriott II Limited Partnership (the "Partnership") on January 24, 1996, in connection with the Partnership's refinancing (see Note 5). The managing general partner of Associates is Courtyard II Associates Management Corporation (a wholly-owned subsidiary of the Partnership) with a 1% interest and the Partnership owns a 1% general partner interest and a 98% limited partner interest. CBM Funding Corporation ("CBM Funding") a wholly-owned subsidiary of Associates, was formed on December 29, 1995, to make a mortgage loan to Associates in connection with the refinancing (see Note 5). Associates directly owns 69 Courtyard hotels and the land on which certain of the Hotels, as defined below, are located. One hotel located in Deerfield, Illinois (the "Deerfield Hotel"), is owned by CBM Associates II LLC ("Associates II"). Associates hold a 99% membership interest in Associates II and Courtyard II Associates Management Corporation holds the remaining 1% interest in Associates II. The 70 hotel properties (the "Hotels") are located in 29 states in the United States: nine in Illinois; eight in California; five in Florida; four in Georgia; four in Texas; and three or less in each of the other 24 states. The Hotels are managed as part of the Courtyard by Marriott hotel system by Courtyard Management Corporation (the "Manager"), a wholly-owned subsidiary of Marriott International, Inc. ("MII"). Partnership Allocations and Distributions Allocations and distributions for Associates are generally made in accordance with the respective ownership interests as follows: (i) 98% to the limited partner, the Partnership and (ii) 1% to each general partner, the Partnership and Courtyard II Associates Management Corporation. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements of Associates present the financial position, results of operations and cash flows of Associates as if it were a separate subsidiary of the Partnership for all periods presented. The Partnership's historical basis in the assets and liabilities contributed to Associates have been recorded on Associates carryover basis Financial Statements. Intercompany transactions and balances between Associates and its subsidiaries have been eliminated. On January 24, 1996, the Partnership contributed substantially all of its assets to Associates for a 1% general partner interest and a 98% limited partner interest. Courtyard II Associates Management Corporation owns the remaining 1% general partner interest. On January 24, 1996, Associates consummated the offering of $410,200,000 of multi-class mortgage pass-through certificates (the "Certificates"), the net proceeds of which were used to repay certain obligations of the Partnership. The accompanying consolidated financial statements present the pushed- down effects of the debt which was repaid with the proceeds of the offering as discussed in Note 5. A concurrent offering of $127,400,000 of senior notes (the "Senior Notes") by the Partnership was also completed on January 24, 1996. The Senior Notes are secured by a first priority pledge of the Partnership's 99% partnership interest in Associates and the Partnership's 100% equity interest in Courtyard II Associates Management Corporation. As a result, the Partnership owns directly or indirectly 100% of Associates. The Senior Notes are not reflected in the accompanying consolidated financial statements of Associates because Associates does not guarantee the Senior Notes nor do the assets of Associates secure the Senior Notes. Payments on the Senior Notes are made from distributions of the excess cash of Associates to the Partnership; such distributions are restricted only upon a monetary event of default under the Mortgage Loan, as defined in Note 5. The Partnership has no other source of cash flow other than distributions from Associates. Basis of Accounting The records of Associates are maintained on the accrual basis of accounting and its fiscal year coincides with the calendar year. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Working Capital and Supplies Pursuant to the terms of Associates management agreement discussed in Note 7, Associates is required to provide the Manager with working capital and supplies to meet the operating needs of the Hotels. The Manager converts cash advanced by Associates into other forms of working capital consisting primarily of operating cash, inventories, and trade receivables and payables which are maintained and controlled by the Manager. Upon the termination of the management agreement, the Manager is required to convert working capital and supplies into cash and return it to Associates. As a result of these conditions, the individual components of working capital and supplies controlled by the Manager are not reflected in the accompanying consolidated balance sheet. Revenues and Expenses Revenues primarily represent the gross revenues generated by Associates' Hotels. On November 20, 1997, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus on EITF 97-2, "Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management Entities and Certain Other Entities with Contractual Management Arrangements." EITF 97-2 addresses the circumstances in which a management entity may include the revenues and expenses of a managed entity in its financial statements. Associates considered the impact of EITF 97-2 on its consolidated financial statements and determined that EITF 97-2 requires Associates to include property-level revenues and operating expenses of its Hotels in its consolidated statement of operations. Associates has given retroactive effect to the adoption of EITF 97-2 in the accompanying consolidated statement of operations. Application of EITF 97-2 to the financial statements for the fiscal years ended December 31, 1998, 1997 and 1996 increased both revenues and operating expenses by approximately $141.4 million, $133.8 million and $130.5 million, respectively, and had no impact on operating profit or net income. Property and Equipment Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows: Buildings and improvements 40 years Leasehold improvements 40 years Furniture and equipment 4-10 years Certain property and equipment is pledged to secure the Certificates/Mortgage Loan described in Note 5. Associates assesses impairment of its real estate properties based on whether estimated undiscounted future cash flows from such properties on an individual hotel basis will be less than their net book value. If a property is impaired, its basis is adjusted to fair market value. There was no such adjustment required at December 31, 1998 or 1997. Deferred Financing Costs Financing costs are amortized using the straight-line method, which approximates the effective interest rate method, over the remaining life of the respective mortgage debt At December 31, 1998 and 1997, accumulated amortization related to the Certificates, as defined in Note 5, were $3,234,000 and $2,128,000, respectively. Cash and Cash Equivalents Associates considers all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents. Restricted Cash Restricted cash represents the real estate tax and insurance reserve established pursuant to the terms of the Certificates/Mortgage Loan as described in Note 5. Ground Rent The land leases with MII or affiliates of MII (see Note 6) include scheduled increases in minimum rents per property. These scheduled rent increases, which are included in minimum lease payments, are being recognized by Associates on a straight-line basis over the lease terms of approximately 80 years. The adjustment included in ground rent expense and Due to Marriott International, Inc. and affiliates to reflect minimum lease payments on a straight-line basis for 1998, 1997 and 1996 totaled $119,000 per year. Income Taxes Provision for Federal taxes has not been made in the accompanying consolidated financial statements since Associates does not pay income taxes, but rather, allocates its profits and losses to the individual partners. Significant differences exist between the net income for financial reporting purposes and the net income reported in the Partnership's tax return. These differences are due primarily to the use for income tax purposes of accelerated depreciation methods, shorter depreciable lives for the assets, difference in the timing of recognition of certain fees and straight-line rent adjustments. As a result of these differences, the excess of the net Partnership liabilities reported in the accompanying consolidated financial statements over the tax basis in the net Partnership liabilities was $5,600,000 and $7,505,000, respectively as of December 31, 1998 and 1997. Reclassifications Certain reclassifications were made to the prior year financial statements to conform to the 1998 presentation. NOTE 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following as of December 31 (in thousands): 1998 1997 ------------- --------- Land.............................................$ 25,392 $ 25,392 Leasehold improvements........................... 456,936 442,226 Building and improvements........................ 85,448 87,546 Furniture and equipment.......................... 178,748 155,250 ------------- ------------- 746,524 710,414 Less accumulated depreciation.................... (282,874) (254,979) ------------- ------------ $ 463,650 $ 455,435 ============= =============
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments are shown below. The fair values of financial instruments not included in this table are estimated to be equal to their carrying amounts (in thousands): As of December 31, 1998 As of December 31, 1997 ---------------------------- -------------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value Mortgage debt.................................................$ 371,224 $ 386,430 $ 385,555 $ 402,358 Management fees due to Courtyard Management Corporation.....................................$ 34,414 $ 18,735 $ 34,829 $ 22,000 The 1998 and 1997 estimated fair value of debt obligations were based on the quoted market prices at December 31, 1998 and 1997, respectively. Management fees due to the Manager are valued based on the expected future payments from operating cash flow discounted at risk adjusted rates.
NOTE 5. MORTGAGE DEBT On January 24, 1996, the Partnership and Associates completed two refinancings of the existing debt through the private placements of $127.4 million of Senior Notes and $410.2 million of multiclass commercial mortgage pass-through certificates, respectively. The Certificates were issued by CBM Funding for an initial principal amount of $410.2 million. Proceeds from the sale of the Certificates were utilized by CBM Funding to provide a mortgage loan (the "Mortgage Loan") to Associates. The Certificates/Mortgage Loan require monthly payments of principal and interest based on a 17-year amortization schedule. The Mortgage Loan matures on January 28, 2008. However, the maturity date of the Certificates/Mortgage Loan may be extended until January 28, 2013 with the consent of 662/3% of the holders of the outstanding Certificates affected thereby. The Certificates were issued in the following classes and pass-through rates of interest. Initial Certificate Pass-Through Class Balance Rate ------------------ ------------------ ----------- Class A-1 $ 45,500,000 7.550% Class A-2 $ 50,000,000 6.880% Class A-3P & I $ 129,500,000 7.080% Class A-3IO Not Applicable 0.933% Class B $ 75,000,000 7.480% Class C $ 100,000,000 7.860% Class D $ 10,200,000 8.645% The Class A-3IO Certificates receive payments of interest only based on a notional balance equal to the Class A-3P & I Certificate balance. The balances of the Certificates were $371.2 million and $385.5 million at December 31, 1998 and 1997, respectively. Principal amortizations of $14.3 million and $13.3 million of the Class A-1 Certificates were made during 1998 and 1997, respectively. The weighted average interest rate for the Certificates was 7.8% for 1998 and 1997 and the average interest rates were 7.8% at December 31, 1998 and 1997. The Certificates maturities are as follows (in thousands): 1999 $ 15,443 2000 16,642 2001 17,934 2002 19,326 2003 20,827 Thereafter 281,052 $ 371,224 The Mortgage Loan is secured primarily by 69 cross-defaulted and cross-collateralized mortgages representing first priority mortgage liens on (i) the fee or leasehold interest in the 69 Hotels, related furniture, fixtures and equipment and the property improvement fund, (ii) the fee interest in the land leased from MII or their affiliates on which 53 Hotels are located, (iii) a pledge of Associates membership interest in and the related right to receive distributions from Associates II which owns the Deerfield Hotel and (iv) an assignment of the Management Agreement, as defined below. The Mortgage Loan is non-recourse to Associates, the Partnership and its partners. Operating profit from the Hotels in excess of debt service on the Mortgage Loan is available to be distributed to the Partnership and Courtyard II Associates Management Corporation. Prepayments of the Mortgage Loan are permitted with the payment of a premium (the "Prepayment Premium"). The Prepayment Premium is equal to the greater of (i) one percent of the Mortgage Loan being prepaid or (ii) a yield maintenance amount based on a spread of .25% or .55% over the U.S. treasury rate, as defined. Pursuant to the terms of the Certificate/Mortgage Loan, the Partnership is required to establish with the lender a separate escrow account for payments of insurance premiums and real estate taxes for each mortgaged property if the credit rating of MII is downgraded by Standard and Poor's Rating Services. The Manager, Courtyard Management Corporation, is a wholly-owned subsidiary of MII. In March 1997, MII acquired the Renaissance Hotel Group N.V. The assumption of additional debt associated with this transaction resulted in a single downgrade of MII's long term - senior unsecured debt, effective April 1, 1997. As a result, the Partnership transferred $10.3 million into the required reserve accounts prior to December 31, 1997. The escrow reserve is included in restricted cash and the resulting tax and insurance liability is included in accounts payable and accrued liabilities in the accompanying balance sheet. NOTE 6. LEASES The land on which 53 of the Hotels are located is leased from MII or affiliates of MII. In addition, eight of the Hotels are located on land leased from third parties. The land leases have remaining terms (including all renewal options) expiring between the years 2024 and 2068. The MII land leases and the third party land leases provide for rent based on specific percentages (from 2% to 15%) of certain revenue categories subject to minimum amounts. The minimum rentals are adjusted at various anniversary dates throughout the lease terms, as defined in the agreements. The Partnership also rents certain equipment for use in the Hotels. In connection with the refinancing, the Partnership, as lessee, transferred its rights and obligations pursuant to the 53 ground leases with MII and affiliates to Associates. Additionally, MII and affiliates agreed to defer receipt of their ground lease payments to the extent that the Partnership or Associates has insufficient funds for debt service payments on the Senior Notes and the Mortgage Loan. Minimum future rental payments during the term of these operating leases are as follows (in thousands): Telephone Lease Land Equipment and Other Year Leases Leases ------------- ----------- -------------- 1999 9,230 $ 490 2000 9,230 361 2001 9,230 187 2002 9,230 132 2003 9,230 96 Thereafter 523,753 -- $ 569,903 $ 1,266 =========== ============= Total rent expense on land leases was $12,921,000 for 1998, $12,480,000 for 1997 and $11,899,000 for 1996. NOTE 7. MANAGEMENT AGREEMENT To facilitate the refinancing, effective December 30, 1995, the original management agreement was restated into two separate management agreements. Associates entered into a management agreement with the Manager for the 69 Hotels which Associates directly owns and Associates II entered into a management agreement for the Deerfield Hotel which Associates II owns, collectively, (the "Management Agreement"). Term The Management Agreement has an initial term expiring in 2013. The Manager may renew the term, as to one or more of the Hotels, at its option, for up to three successive terms of 10-years each and one final term of five years. The Partnership may terminate the Management Agreement if, during any three consecutive years after 1992, specified minimum operating results are not achieved. However, the Manager may prevent termination by paying to the Partnership the amount by which the minimum operating results were not achieved. Management Fees The Management Agreement provides for annual payments of (i) the base management fee equal to 3.5% of gross revenues from the Hotels, (ii) the Courtyard management fee equal to 2.5% of gross revenues from the Hotels, and (iii) the incentive management fee equal to 15% of operating profit, as defined (20% of operating profit after the partners have received refinancing proceeds equal to 50% of the excess of (a) $154,736,842 over (b) cumulative distributions of adjusted sale proceeds (the "First Equity Refinancing")). Deferral Provisions Due to the refinancing, beginning in 1996, one percent of the Courtyard management fee is deferred through maturity of the Senior Notes and the Mortgage Loan to the extent that the Partnership or Associates has insufficient funds for debt service payments on the Senior Notes and the Mortgage Loan. Previously, the entire Courtyard management fee was subordinate to debt service. To the extent any Courtyard management fee, base management fee or incentive management fee is deferred, it will be added to deferred management fees. Deferred management fees accrue without interest, and will be payable out of 50% of available cash flow after payment of certain priorities as discussed below. The priority return to the Partnership, as defined, was reduced from 10% of invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 10% for 1999 and thereafter. Operating profit from the Hotels (which reflects the deduction of the base and Courtyard management fees and MII ground rent) will be used to pay the following, in order of priority: (i) debt service on the Senior Notes and Mortgage Loan, (ii) to repay working capital loans to the Manager, (iii) to repay deferred ground rent to MII and their affiliates, (iv) to repay ground lease advances to MII and their affiliates, (v) the priority return to the Partnership which was 9%, 8% and 7% of invested capital for 1998, 1997 and 1996, respectively, (vi) eighty percent of the remaining operating profit is applied to the payment of current incentive management fees, (vii) to repay advances to the Partnership, (viii) to repay foreclosure avoidance advances to the Manager and (ix) fifty percent of the remaining operating profit to repay deferred management fees to the Manager and fifty percent of remaining operating profit is paid to the Partnership. During 1998 and 1997, $415,000 and $1,613,000, respectively, of deferred incentive management fees were paid. Deferred incentive management fees were $4,169,000 and $4,584,000 as of December 31, 1998 and 1997, respectively. Deferred Courtyard management fees totaled $22,341,000 as of December 31, 1998 and 1997. Deferred base management fees as of December 31, 1998 and 1997 were $7,904,000. Chain Services The Manager is required to furnish certain services ("Chain Services") which are furnished generally on a central or regional basis to all hotels managed, owned or leased in the Courtyard by Marriott hotel system. In addition, the Hotels participate in MII's Marriott Reward Program ("MRP"). The costs of this program are charged to all hotels in the full-service, Residence Inn by Marriott, Courtyard by Marriott and Fairfield Inn by Marriott systems based upon the MRP revenues at each Hotel. Chain Services and MRP costs charged to the partnership under the Management Agreement were $11,673,000 in 1998 and $10,257,000 in 1997. The total amount of Chain Services was $9,474,000 in 1996. Working Capital Associates is required to provide the Manager with working capital and fixed asset supplies to meet the operating needs of the Hotels. The refinancing required certain enhancements to the cash management system of the Manager such that additional working capital may be required for the operation of the Hotels. Therefore, on January 24, 1996, the Partnership, Associates and the Manager entered into a working capital maintenance agreement (the "Working Capital Agreement") and advanced $2.5 million to the Manager as additional working capital for the operation of the Hotels. In 1998, this $2.5 million was returned to Associates. Upon termination of the Management Agreement, the working capital and supplies will be returned to Associates. As of December 31, 1998 and 1997, the working capital balance was $6,261,000 and $8,761,000, respectively. The 1998 balance includes the $8,846,000 originally advanced and the $2.5 million advanced on January 24, 1996 less the $2,585,000 of excess working capital returned to the Partnership in 1991 and the $2,500,000 returned to the Partnership in 1998. At December 31, 1998 and 1997, accumulated depreciation related to the supplies totaled $2,060,000. In addition, the Working Capital Agreement required the Partnership to reserve $2 million by February 1, 1997 and an additional $3 million by February 1, 1998 (the "Working Capital Reserve"). The $3 million and $2 million were reserved by the Partnership on February 2, 1998 and January 31, 1997, respectively. The Working Capital Reserve will be available for payment of hotel operating expenses in the event that ther is a further downgrade in the long-term senior unsecured debt of MII to a level below the rating which was effective April 1, 1997. The obligation to fund the amounts required by the Working Capital Agreement is subordinate to debt service on the Senior Notes and the Mortgage Loan. Property Improvement Fund The Management Agreement provides for the establishment of a repairs and equipment reserve (property improvement fund) for the Hotels. The funding of this reserve is based on a percentage of gross Hotel revenues. The contribution to the property improvement fund has been established at 5% for all Hotels and may be increased, at the option of the Manager, to 6% of gross Hotel revenues in 2001. NOTE 8. ENVIRONMENTAL CONTINGENCY Based upon a study completed in December 1995, Associates has become aware of environmental contamination at one of the fee-owned properties owned by Associates II, the Deerfield Hotel, caused by the previous use of the site as a landfill and not caused by Associates. The property represents less than 2% of Associates' total assets and revenues as of December 31, 1998 and for the year ended, respectively. Associates is unable to determine the need for remediation, its potential responsibility, if any, for remediation and the extent of Associates' possible liability for any remediation costs. There can be no assurance that Associates will not have liability with respect to remediation of contamination at that site. Associates does not believe that any of the environmental matters are likely to have a material adverse effect on its business and operations. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The Partnership has no directors or officers. The business and policy making functions of the Partnership are carried out through the managers and executive officers of CBM Two LLC, the General Partner, who are listed below: Age at Name Current Position December 31, 1998 Robert E. Parsons, Jr. President and Manager 43 Christopher G. Townsend Executive Vice President, Secretary and Manager 51 W. Edward Walter Treasurer 43 Earla L. Stowe Vice President 37 Business Experience Robert E. Parsons, Jr. joined Host Marriott's Corporate Financial Planning staff in 1981 and was made Assistant Treasurer in 1988. In 1993, Mr. Parsons was elected Senior Vice President and Treasurer of Host Marriott, and in 1995, he was elected Executive Vice President and Chief Financial Officer of Host Marriott. He also serves as a director, manager and officer of numerous Host Marriott subsidiaries. Christopher G. Townsend joined Host Marriott's Law Department in 1982 as a Senior Attorney. In 1984 he was made Assistant Secretary of Host Marriott. In 1986 he was made an Assistant General Counsel. He was made Senior Vice President, Corporate Secretary and Deputy General Counsel of Host Marriott in 1993. In January 1997, he was made General Counsel of Host Marriott. He also serves as a director, manager and an officer of numerous Host Marriott subsidiaries. W. Edward Walter joined Host Marriott in 1996 as Senior Vice President - - -Acquisitions and in 1998 was made Treasurer of Host Marriott. He also serves as a director, manager and officer of numerous Host Marriott subsidiaries. Prior to joining Host Marriott, Mr. Walter was a partner at Trammell Crow Residential Company and President of Bailey Capital Corporation, a real estate firm focusing on tax exempt real estate investments. Earla L. Stowe joined Host Marriott in 1982 and held various positions in the tax department until 1988. She joined the Partnership Services department as an accountant in 1988 and in 1989 she became an Assistant Manager--Partnership Services. She was promoted to Manager--Partnership Services in 1991, to Director--Asset Management in 1996. Ms. Stowe was promoted to Senior Director - Corporate Accounting in 1998. ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS As noted in Item 10 above, the Partnership has no directors or officers nor does it have any employees. Under the Partnership Agreement, however, the General Partner has the exclusive right to conduct the business and affairs of the Partnership subject only to the Management Agreement described in Items 1 and 13. The General Partner is required to devote to the Partnership such time as may be necessary for the proper performance of its duties, but the officers and managers of the General Partner are not required to devote their full time to the performance of such duties. No officer or manager of the General Partner devotes a significant percentage of time to Partnership matters. To the extent that any officer or manager does devote time to the Partnership, the General Partner is entitled to reimbursement for the cost of providing such services. For the fiscal years ending December 31, 1998, 1997 and 1996, the Partnership reimbursed CBM Two or CBM Two LLC in the amount of $274,000, $260,000 and $221,000, respectively, for the cost of providing all administrative and other services as general partner. For information regarding all payments made by the Partnership to Host Marriott and subsidiaries, see Item 13 "Certain Relationships and Related Transactions." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of December 31, 1998, Equity Resource Group owned 6.91% of the 1,470 limited partnership Units. No other person owned of record, or to the Partnership's knowledge owned beneficially, more than 5% of the total number of limited partnership Units. The General Partner owns a total of 21.5 Units representing a 1.39% limited partnership interest in the Partnership. The executive officers and managers of the General Partner, Host Marriott, MII and their respective affiliates do not own any units as of December 31, 1998. The Partnership is not aware of any arrangements which may, at a subsequent date, result in a change in control of the Partnership. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Management Agreement To facilitate the refinancing, effective December 30, 1995, the original Management Agreement was restated into two separate management agreements. Associates entered into a management agreement with the Manager for the 69 Hotels which Associates directly owns and Associates II entered into a management agreement for the Deerfield Hotel which Associates II owns, collectively, (the "Management Agreement"). Term The Management Agreement has an initial term expiring in 2013. The Manager may renew the term, as to one or more of the Hotels, at its option, for up to three successive terms of 10-years each and one final term of five years. The Partnership may terminate the Management Agreement if, during any three consecutive years after 1992, specified minimum operating results are not achieved. However, the Manager may prevent termination by paying to the Partnership the amount by which the minimum operating results were not achieved. Management Fees The Management Agreement provides for annual payments of (i) the base management fee equal to 3.5% of gross revenues from the Hotels, (ii) the Courtyard management fee equal to 2.5% of gross revenues from the Hotels, and (iii) the incentive management fee equal to 15% of operating profit, as defined (20% of operating profit after the Partners have received refinancing proceeds equal to 50% of the excess of (a) $154,736,842 over (b) cumulative distributions of adjusted sale proceeds (the "First Equity Refinancing"). Deferral Provisions Due to the refinancing, beginning in 1996, one percent of the Courtyard management fee is deferred through maturity of the Senior Notes and the Mortgage Loan to the extent that the Partnership or Associates has insufficient funds for debt service payments on the Senior Notes and the Mortgage Loan. Previously, the entire Courtyard management fee was subordinate to debt service. To the extent any Courtyard management fee, base management fee or incentive management fee is deferred, it will be added to deferred management fees. Deferred management fees accrue without interest, and will be payable out of 50% of available cash flow after payment of certain priorities as discussed below. The priority return to the Partnership, as defined, was reduced from 10% of invested capital to 7% in 1996, 8% in 1997, 9% in 1998 and then returning to 10% for 1999 and thereafter. Operating profit from the Hotels (which reflects the deduction of the base and Courtyard management fees and MII ground rent) will be used to pay the following, in order of priority: (i) debt service on the Senior Notes and Mortgage Loan, (ii) to repay working capital loans to the Manager, (iii) to repay deferred ground rent to MII and their affiliates, (iv) to repay ground lease advances to MII and their affiliates, (v) the priority return to the Partnership which was 9%, 8% and 7% of invested capital for 1998, 1997 and 1996, respectively, (vi) eighty percent of the remaining operating profit is applied to the payment of current incentive management fees, (vii) to repay advances to the Partnership, (viii) to repay foreclosure avoidance advances to the Manager and (ix) fifty percent of the remaining operating profit after payment of (i) through (viii) to repay deferred management fees to the Manager and the other fifty percent is paid to the Partnership. During 1998 and 1997, $415,000 and $1,613,000, respectively, of deferred incentive management fees were paid. Deferred incentive management fees were $4,169,000 and $4,584,000 as of December 31, 1998 and 1997, respectively. Deferred Courtyard management fees totaled $22,341,000 as of December 31, 1998 and 1997. Deferred base management fees totaled $7,904,000 as of December 31, 1998 and 1997. Chain Services The Manager is required to furnish certain services ("Chain Services") which are furnished generally on a central or regional basis to all hotels managed, owned or leased in the Courtyard by Marriott hotel system. In addition, the Hotels participate in MII's Marriott Reward Program ("MRP"). The costs of this program are charged to all hotels in the full-service, Residence Inn by Marriott, Courtyard by Marriott and Fairfield Inn by Marriott systems based upon the MRP revenues at each Hotel. Chain Services and MRP costs charged to the partnership under the Management Agreement were $11,673,000 in 1998 and $10,257,000 in 1997. The total amount of Chain Services was $9,474,000 in 1996. Working Capital The Partnership is required to provide the Manager with working capital and fixed asset supplies to meet the operating needs of the Hotels. The refinancing required certain enhancements to the cash management system of the Manager such that additional working capital may be required for the operation of the Hotels. Therefore, on January 24, 1996, the Partnership, Associates and the Manager entered into a working capital maintenance agreement (the "Working Capital Agreement") and the Partnership advanced $2,500,000 to the Manager as additional working capital for the operation of the Hotels. In 1998, this $2,500,000 was returned to the Partnership. Upon termination of the Management Agreement, the working capital and supplies will be returned to the Partnership. As of December 31, 1998 and 1997, the working capital balance was $6,261,000 and $8,761,000, respectively. The 1998 balance includes the $8,846,000 originally advanced and the $2,500,000 advanced on January 24, 1996 less the $2,585,000 of excess working capital returned to the Partnership in 1991 and the $2,500,000 returned to the Partnership in 1998. At December 31, 1998 and 1997, accumulated depreciation related to the supplies totaled $2,060,000. In addition, the Working Capital Agreement required the Partnership to reserve $2 million by February 1, 1997 and an additional $3 million by February 1, 1998 (the "Working Capital Reserve"). The $3 million and $2 million were reserved on February 2, 1998 and January 31, 1997, respectively. The Working Capital Reserve will be available for payment of hotel operating expenses in the event that there is a further downgrade in the long-term senior unsecured debt of MII to a level below the rating which was effective April 1, 1997. The obligation to fund the amounts required by the Working Capital Agreement is subordinate to debt service on the Senior Notes and the Mortgage Loan. Leases The land on which 53 of the Hotels are located is leased from affiliates of MII. In addition, eight of the Hotels are located on land leased from third parties. The land leases have remaining terms (including all renewal options) expiring between the years 2024 and 2068. The land leases with affiliates of MII and the third party land leases provide for rent based on specific percentages (from 2% to 15%) of certain revenue categories subject to minimum amounts. The minimum rentals are adjusted at various anniversary dates throughout the lease terms, as defined in the agreements. The Partnership also rents certain equipment for use in the Hotels. In connection with the refinancing, the Partnership, as lessee, transferred it rights and obligations pursuant to the 53 ground leases with affiliates of MII and affiliates to Associates. Additionally, affiliates of MII agreed to defer receipt of their ground lease payments to the extent that the Partnership or Associates has insufficient funds for debt service payments on the Senior Notes and the Mortgage Loan. Total rent expense on land leases was $12,921,000 for 1998, $12,480,000 for 1997 and $11,899,000 for 1996. Property Improvement Fund The Management Agreement provides for the establishment of a repairs and equipment reserve (property improvement fund) for the Hotels. The funding of this reserve is based on a percentage of gross Hotel revenues. The contribution to the property improvement fund has been established initially at 5% for all Hotels and may be increased, at the option of the Manager, to 6% of gross Hotel revenues in 2001. Payments to MII and Subsidiaries The following table sets forth the amount paid to MII and affiliates under both the Management Agreement and the ground lease agreements for the years ended December 31, 1998, 1997 and 1996 (in thousands). The table also sets forth accrued but unpaid incentive management fees: 1998 1997 1996 ----------- ----------- -------- Incentive management fee.............$ 12,895 $ 12,878 $ 11,407 Ground rent.......................... 10,991 10,628 10,172 Chain services allocation............ 11,673 10,257 9,474 Base management fee.................. 9,949 9,626 9,230 Courtyard management fee............. 7,106 6,875 6,592 Deferred incentive management fees... 415 1,613 -- ----------- ----------- ----------- $ 53,029 $ 51,877 $ 46,875 =========== =========== ======== Accrued but unpaid fees: Incentive management fee.............$ -- $ -- $ 633 =========== =========== =========== Payments to Host Marriott and Subsidiaries The following sets forth amounts paid by the Partnership to Host Marriott and its subsidiaries for the years ended December 31, 1998, 1997 and 1996 (in thousands): 1998 1997 1996 ----------- ----------- -------- Administrative expenses reimbursed.......$ 274 $ 260 $ 221 Cash distributions (as a limited partner). 148 212 102 Principal and interest on General Partner loan.................................... -- -- 7,508 -------- ----------- ----------- $ 422 $ 472 $ 7,831 =========== =========== =========== 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 Marriott II Limited Partnership (the "Partnership") dated October 30, 1987 N/A *3.2 Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership of the Partnership N/A *3.3 Certificate of Limited Partnership of the Partnership N/A *3.4 Amended and Restated Certificate of Incorporation of the Courtyard II Finance Company ("Finance") N/A *3.5 By-laws of Finance N/A 3.6 Agreement of Limited Partnership of Courtyard II Associates, L.P. ("Associates") (Incorporated by reference herein to Exhibit 3.1 to Associates Form S-4 filed with the Commission on March 14, 1996.) N/A 3.7 Certificate of Limited Partnership of Associates (Incorporated by reference herein to Exhibit 3.2 to Associates Form S-4 filed with the Commission on March 14, 1996.) N/A 3.9 By-laws of Funding (Incorporated by reference herein to Exhibit 3.4 to Associates Form S-4 filed with the Commission on March 14, 1996.) N/A 3.10 Second Amendment to the Amended and Restated Agreement of Limited Partnership of the Partnership dated December 28, 1998 76 *4.1 Indenture dated as of January 24, 1996 among the Partnership and Finance and IBJ Schroder Bank & Trust Company (the "Indenture") N/A *4.3 Exchange and Registration Rights Agreement dated as of January 24, 1996 among the Partnership and Finance and Lehman Brothers Inc. N/A *4.4 Intercreditor Agreement dated as of January 24, 1996 among IBJ Schroder Bank & Trust Company, Bankers Trust Company, Marine Midland Bank (the "CMBS Trustee"), the Partnership and Finance, Associates, Courtyard II Associates Management Corporation (the "Managing General Partner") and Funding N/A *4.5 Trust and Servicing Agreement dated as of January 1, 1996 among Funding, Bankers Trust Company and the CMBS Trustee N/A *4.6 Exchange and Registration Rights Agreement dated as of January 24, 1996 among the Partnership, Associates, Funding and Lehman Brothers Inc. N/A *10.1 Amended and Restated Management Agreement dated as of December 30, 1995, between the Partnership and Courtyard Management Corporation (the "Manager") N/A *10.2 Management Agreement dated as of December 30, 1995 between the Partnership and the Manager N/A **10.3 Assignment of Lease and Warranty and Assumption of Obligations between Marriott Corporation and the Partnership dated October 30, 1987 for the Tampa, FL property. Marriott Hotel Land Leases between Holtsinger, Inc. and Bert Chase, Trustee dated June 13, 1968. N/A **10.4 Assignment of Lease and Warranty and Assumption of Obligations between Marriott Corporation and the Partnership dated August 12, 1988 for the Atlanta-Roswell, GA property. Marriott Hotel Land Lease between Marriott Corporation and Roswell Landing Associates dated June 10, 1986. N/A **10.5 Assignment of Lease and Warranty and Assumption of Obligations between Marriott Corporation and the Partnership dated July 15, 1988 for the Norwalk, CT property. Marriott Hotel Land Lease between Marriott Corporation and Mary E. Fabrizio dated January 6, 1986. N/A **10.6 Assignment of Lease and Warranty and Assumption of Obligations between Marriott Corporation and the Partnership dated February 24, 1988 for the Fresno, CA property. Marriott Hotel Land Lease between Marriott Corporation and Richard Erganian, Miche Erganian, Aram Erganian and Aznive Erganian dated June 6, 1984. N/A **10.7 Assignment of Lease and Warranty and Assumption of Obligations between Marriott Corporation and the Partnership dated August 12, 1988 for the Cupertino, CA property. Marriott Hotel Land Lease between Marriott Corporation and Vallco Park, Ltd. dated March 31, 1987. N/A **10.8 Marriott Hotel Land Lease between Marriott Corporation and Pizzagalli Investment Company dated September 22, 1986. N/A **10.9 Assignment of Lease and Warranty and Assumption of Obligations between Marriott Corporation and the Partnership dated May 19, 1989 for the Charlotte South Park, NC property. Marriott Hotel Land Lease between Marriott Corporation and Queens Properties, Inc. dated January 19, 1987. N/A **10.10 Assignment of Lease and Warranty and Assumption of Obligations between Marriott Corporation and the Partnership dated January 27, 1989 for the Philadelphia/Devon, PA property. Marriott Hotel Land Lease between Marriott Corporation and Three Philadelphia/Devon Square Associates dated July 15, 1986. N/A **10.11 Associates received an assignment from the Partnership, which had received an assignment from Host Marriott, of 15 ground leases for land that Host Marriott had previously leased from various affiliates (the "Original Landlords"). The ground leases are identical in all material respects except as to their assignment dates to the Partnership and the rents due (Exhibit A of each ground lease). The schedule below sets forth the terms of each ground lease not filed which differ from the copy of the example ground lease (Hoover, AL) which was previously filed with the Commission. In addition, a copy of Exhibit A was filed for each excluded ground lease. N/A Property State Assignment Date Original Landlord Foster City CA 10/30/87 Essex House Condominium Corporation ("Essex") Marin/Larkspur Landing CA 10/30/87 Essex Denver/Southeast CO 10/30/87 Essex Atlanta/Perimeter Center GA 02/24/88 Essex Indianapolis/Castleton IN 10/30/87 Essex Lexington/North KY 10/07/88 Essex Annapolis MD 05/19/89 Essex Minneapolis Airport MN 10/30/87 Essex St. Louis/Creve Couer MO 10/30/87 Essex Rye NY 03/29/88 Essex Greenville SC 03/29/88 Essex Memphis Airport TN 10/30/87 Essex Nashville Airport TN 02/24/88 Essex Dallas/Stemmon TX 10/30/87 Essex San Antonio/Downtown TX 03/23/90 Essex **10.12 Associates received an assignment from the Partnership of 38 ground leases which the Partnership had entered into with Marriott International, Inc., ("MII"). The 38 ground leases are identical in all material respects except as to their effective lease dates and the rents due (Exhibit A of each ground lease). The schedule below sets forth the terms of each ground lease not filed which differ from the copy of the example ground lease (Huntsville, AL) which was previously filed with the Commission. In addition, a copy of Exhibit A was filed for each excluded ground lease. N/A Property State Effective Lease Date Birmingham/Hoover AL 10/30/87 Huntsville AL 10/30/87 Phoenix/Mesa AZ 04/22/88 Phoenix/Metrocenter AZ 10/01/87 Tucson Airport AZ 12/30/88 Little Rock AR 09/09/88 Bakersfield CA 05/30/88 Hacienda Heights CA 03/30/90 Palm Springs CA 12/20/88 Torrance CA 12/30/88 Boulder CO 11/04/88 Wallingford CT 04/24/90 Ft. Myers FL 11/04/88 Ft. Lauderdale/Plantation FL 12/02/88 St. Petersburg FL 01/26/90 West Palm Beach FL 02/24/89 Atlanta/Gwinnett Mall GA 10/30/87 Chicago/Glenview IL 10/06/89 Chicago/Highland Park IL 07/15/88 Chicago/Waukegan IL 08/12/88 Chicago/Wood Dale Park IL 09/09/88 Kansas City/Overland Park KS 04/21/89 Silver Spring MD 10/07/88 Boston/Andover MA 02/24/89 Detroit Airport MI 02/24/88 Detroit/Livonia MI 03/29/88 St. Louis/Westport MO 10/07/88 Lincroft/Red Bank NJ 07/15/88 Raleigh/Cary NC 08/12/88 Dayton Mall OH 10/30/87 Toledo OH 07/15/88 Oklahoma City Airport OK 10/07/88 Portland/Beaverton OR 05/19/89 Columbia SC 04/21/89 Dallas/Northeast TX 04/22/88 Charlottesville VA 04/21/89 Manassas VA 05/19/89 Seattle/Southcenter WA 05/19/89 ***10.13 Contribution Agreement dated as of January 24, 1996 among the Partnership, the Managing General Partner and Associates N/A ***10.14 Bill of Sale and Assignment and Assumption Agreement dated as of January 24, 1996 by the Partnership to Associates N/A *10.15 Assignment and Assumption of Management Agreement dated as of January 24, 1996 by the Partnership to Associates N/A ***10.16 Contribution Agreement dated as of January 24, 1996 among the Partnership, the Managing General Partner and Courtyard II Associates LLC ("Deerfield LLC") N/A ***10.17 Bill of Sale and Assignment and Assumption Agreement dated as of January 24, 1996 by the Partnership to Deerfield LLC N/A *10.18 Deed to the Courtyard by Marriott Hotel in Chicago/Deerfield, Illinois dated as of January 24, 1996 by the Partnership to Deerfield LLC N/A *10.19 Assignment and Assumption of Management Agreement dated as of January 24, 1996 by the Partnership to Deerfield LLC N/A *10.20 Loan Agreement dated as of January 24, 1996 by and between Associates and Funding N/A *10.21 Mortgage Note, dated as of January 24, 1996, in the principal amount of $410,200,000 by Associates to Funding N/A *10.22 Security Agreement dated as of January 24, 1996 by and between Associates and Funding N/A *10.23 Pledge Agreement dated as of January 24, 1996 by and between Associates and Funding N/A *10.24 Collateral Assignment of Management Agreement and Subordination Agreement dated as of January 24, 1996, by and among Associates, the Manager and Funding N/A *10.25 Amendment of Ground Leases dated as of January 24, 1996 by and among Associates, Marriott International, Inc. and Essex House Condominium Corporation ("Essex") N/A *10.26 Environmental Indemnity Agreement dated as of January 24, 1996 by Associates and the Managing General Partner for the benefit of Funding N/A *10.27 Associates, as mortgagor, and Funding, as mortgagee, entered into 53 fee and leasehold mortgages, each dated as of January 24, 1996. The 53 mortgages are identical in all material respects except as to the underlying property to which they relate and, in certain instances, additional parties thereto. The schedule below sets forth the terms of each mortgage not filed which differ from the copy of the example mortgage (Birmingham/Hoover, AL) which is filed herewith. N/A Property State Additional Party Birmingham/Hoover AL Essex Huntsville AL MII Phoenix/Mesa AZ MII Phoenix/Metrocenter AZ MII Tucson Airport AZ MII Little Rock AR MII Bakersfield CA MII Foster City CA MII Hacienda Heights CA MII Marin/Larkspur Landing CA MII Palm Springs CA MII Torrance CA MII Boulder CO MII Denver/Southeast CO Essex Wallingford CT MII Ft. Myers FL MII Ft. Lauderdale/Plantation FL MII St. Petersburg FL MII West Palm Beach FL MII Atlanta/Gwinnett Mall GA MII Atlanta/Perimeter Center GA Essex Chicago/Glenview IL MII Chicago/Highland Park IL MII Chicago/Waukegan IL MII Chicago/Wood Dale IL MII Indianapolis/Castleton IN Essex Kansas City/Overland Park KS MII Lexington/North KY Essex Annapolis MD Essex and the Partnership Silver Spring MD MII and the Partnership Boston/Andover MA MII Detroit Airport MI MII Detroit/Livonia MI MII Minneapolis Airport MN Essex St. Louis/Creve Couer MN Essex St. Louis/Westport MO MII Lincroft/Red Bank NJ MII Rye NY Essex Raleigh/Cary NC MII Dayton Mall OH MII Toledo OH MII Oklahoma City Airport OK MII Portland/Beaverton OR MII Columbia SC MII Greenville SC Essex Memphis Airport TN Essex Nashville Airport TN Essex Dallas/Northeast TX MII Dallas/Stemmons TX Essex San Antonio/Downtown TX Essex Charlottesville VA MII Manassas VA MII Seattle/Southcenter WA MII *10.28 Associates, as mortgagor, and Funding, as mortgagee, entered into 16 fee leasehold mortgages, each dated as of January 24, 1996. The 16 mortgages are identical in all material respects except as to the underlying property to which they relate. The schedule below sets forth the terms of each mortgage not filed which differ from the copy of the example mortgage (Birmingham/Homewood, AL) which is filed herewith. N/A Property State Birmingham/Homewood AL Cupertino CA Fresno CA Denver Airport CO Norwalk CT Tampa/Westshore FL Atlanta Airport South GA Atlanta/Roswell GA Arlington Heights South IL Chicago/Lincolnshire IL Chicago/Oakbrook Terrace IL Rockford IL Poughkeepsie NY Charlotte/South Park NC Philadelphia/Devon PA Dallas/Plano TX *10.29 Assignment of Loan Documents dated as of January 24, 1996 by Funding to the CMBS Trustee N/A 10.30 Assignment and Assumption of Management Agreement dated as of January 24, 1996 by the Partnership to Associates with attached Management Agreement (Incorporated by reference herein to Exhibit 10.1 to Associates Form S-4 filed with the Commission on March 14, 1996.) N/A 0 10.31 Working Capital Maintenance Agreement dated as of January 24, 1996, by and among the Partnership, Associates, and the Manager. (Incorporated by reference to the exhibit previously filed as exhibit number 10.23 in Amendment No. 1 to Form S-4 Exchange Offer filed by CBM Funding and Associates with the Commission in May 10, 1996.) N/A *21.1Subsidiaries of the Partnership N/A
* Incorporated herein by reference to the same numbered exhibit in the Partnership's and Finance's Registration Statement on Form S-4 for 10 3/4% Series B Senior Secured Notes due 2008, previously filed with the Commission on March 7, 1996. ** Incorporated by reference to the same numbered exhibit in the Partnership's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. *** Incorporated by reference to the same numbered exhibit to Amendment No. 1 to the Form S-4 Registration Statement previously filed with the Commission by the Partnership on April 25, 1996. (b) Reports on 8-K A Form 8-K was filed with the Securities and Exchange Commission on October 16, 1998. In this filing, Item 5--Other Events discloses that the General Partner sent a letter dated October 1, 1998 to inform the limited partners that the proposed Consolidation to form a new REIT focused on limited service hotels is no longer being pursued. In addition, the letter informs the limited partners that, to date, there have been no acceptable offers from third parties to purchase the Partnership's hotels. A copy of the letter was included as an Item 7--Exhibit in this Form 8-K filing. A Form 8-K was filed with the Securities and Exchange Commission on December 11, 1998. In this filing, Item 5 - Other Events discloses that on June 11, 1998, September 16, 1998 and December 10, 1998 the General Partner sent to the Limited Partners of the Partnership a letter that accompanied the Partnership's Quarterly Reports on Form 10-Q. Each letter disclosed the quarterly activities of the Partnership. Copies of these letters were included as Item 7 - Exhibits in this Form 8-K filing. . A Form 8-K was filed with the Securities and Exchange Commission on January 14, 1999. In this filing, Item 1 - Changes in Control of Registrant discloses the merger of CBM Two into the General Partner with the General Partner assuming all of the obligations of CBM Two under the Partnership Agreement. It also details the transfers of the General Partner's ownership interest which ultimately resulted in a General Partner with a Class A 1% managing economic interest owned by Host LP and a Class B 99% non-managing economic interest owned by Rockledge. A Form 8-K was filed with the Securities and Exchange Commission on February 19, 1999. In this filing, Item 5-Other Events discloses that the events described in the Partnership's Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 14, 1999 resulted in a "Change of Control" under the terms of the Senior Notes. As a result, pursuant to the terms of the indenture, Host LP and Finance commenced a tender offer for the Senior Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon to February 18, 1999. The tender offer was commenced on January 14, 1999 and expired on February 12, 1999. No Senior Notes were tendered to Host LP in connection with the tender offer.
SCHEDULE I Page 1 of 4 COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT CONDENSED CONSOLIDATED BALANCE SHEET (in thousands) December 31, December 31, 1998 1997 --------------- ---------- ASSETS Investments in restricted subsidiaries ..........................................................$ 87,347 $ 80,982 Other assets..................................................................................... 4,260 4,714 Restricted cash.................................................................................. 11,847 8,923 Cash and cash equivalents........................................................................ 5,970 8,002 --------------- --------------- Total Assets..............................................................................$ 109,424 $ 102,621 =============== =============== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES Debt..........................................................................................$ 127,400 $ 127,400 Accounts payable and accrued expenses......................................................... 5,914 5,918 --------------- --------------- Total liabilities......................................................................... 133,314 133,318 --------------- --------------- PARTNERS' CAPITAL (DEFICIT) General Partner Capital contribution........................................................................ 11,306 11,306 Cumulative net losses....................................................................... (3,609) (4,456) Capital distributions....................................................................... (278) (278) --------------- --------------- 7,419 6,572 --------------- --------------- Limited Partners Capital contributions, net of offering costs of $17,189..................................... 129,064 129,064 Cumulative net losses....................................................................... (68,573) (84,676) Capital distributions....................................................................... (91,647) (81,504) Investor notes receivable................................................................... (153) (153) --------------- --------------- (31,309) (37,269) --------------- -------------- Total Partners' Deficit................................................................... (23,890) (30,697) --------------- -------------- $ 109,424 $ 102,621 =============== =============== The Notes to the Consolidated Financial Statements of Courtyard by Marriott II Limited Partnership are an integral part of these statements. See Accompanying Notes to Condensed Consolidated Financial Information. 40 SCHEDULE I Page 2 of 4 COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS Fiscal Years Ended December 31, 1998, 1997, and 1996 (in thousand) 1998 1997 1996 ------------- ------------- --------- Revenues......................................................................$ -- $ -- $ 15,520 Operating costs and expenses.................................................. -- -- (13,637) ------------ ------------- ------------ Opearting profit before Partnership expenses and interest..................... -- -- 1,883 Interest income............................................................... 695 690 735 Interest expense.............................................................. (14,169) (14,203) (15,804) Partnership expense........................................................... (428) (570) (344) ------------- ------------- ------------ Loss before equity in earnings of restricted subsidiaries..................... (13,902) (14,083) (13,530) Equity in earnings of restricted subsidiaries................................. 30,852 29,774 24,071 ------------- ------------- ------------ Net income...............................................................$ 16,950 $ 15,691 $ 10,541 ============= ============= ============ The Notes to the Consolidated Financial Statements of Courtyard by Marriott II Limited Partnership are an integral part of these statements. See Accompanying Notes to Condensed Consolidated Financial Information. 41 SCHEDULE I Page 3 of 4 COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Fiscal Years Ended December 31, 1998, 1997, and 1996 (in thousand) 1998 1997 1996 ------------- ------------- ----------- Cash used in operations.........................................$ (13,440) $ (13,557) (6,659) INVESTING ACTIVITIES Dividends from restricted subsidiaries, net.................. 24,476 29,890 17,203 Change in working capital reserve............................ (2,925) (2,075) -- Contribution to Associates................................... -- -- (10,627) ------------- ------------- ---------- Cash provided by investing activities...... ............. 21,551 27,815 6,576 ------------- ------------- ---------- FINANCING ACTIVITIES Capital distributions......................................... (10,143) (14,479) (6,983) Collections of investor notes receivable...................... -- 32 -- Payment of financing costs.................................... -- (3) (5,600) Proceeds from issuance of debt................................ -- -- 127,400 Repayment of debt............................................. -- -- (127,400) Deposit into the debt service reserve......................... -- -- (6,848) ------------- ------------- ---------- Cash used in financing activities................................ (10,143) (14,450) (19,431) ------------- ------------- --------- DECREASE IN CASH AND CASH EQUIVALENTS............................ (2,032) (192) (19,514) CASH AND CASH EQUIVALENTS at beginning of year................... 8,002 8,194 27,708 ------------- ------------- --------- CASH AND CASH EQUIVALENTS at end of year.........................$ 5,970 $ 8,002 $ 8,194 ============= ============= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest on debt............................$ 13,702 $ 13,738 $ 8,312 ============= ============= =========
The Notes to the Consolidated Financial Statements of Courtyard by Marriott II Limited Partnership are an integral part of these statements. See Accompanying Notes to Condensed Consolidated Financial Information. SCHEDULE I Page 4 of 4 COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS A) The accompanying condensed financial information of Courtyard by Marriott II Limited Partnership (the "Partnership") presents the financial position, results of operations and cash flows of the Partnership with the investment in, and operations of, consolidated subsidiaries with restricted net assets accounted for on the equity method of accounting. On January 24, 1996, the Partnership completed a refinancing of the Partnership's existing debt through the private placement of $127.4 million of senior secured notes (the "Senior Notes") and $410.2 million of multi-class commercial mortgage pass-through certificates (the "Certificates"). In connection with the refinancing, the limited partners approved certain amendments to the partnership agreement and the management agreement. The partnership agreement amendment, among other things, allowed for the formation of certain subsidiaries of the Partnership, including Courtyard II Finance Company ("Finance"), a wholly-owned subsidiary of the Partnership, who along with the Partnership is the co-issuer of the Senior Notes. Additionally, the Partnership formed a wholly-owned subsidiary, Courtyard II Associates Management Corporation ("Managing General Partner"). Managing General Partner was formed to be the managing general partner with a 1% general partner interest in Courtyard II Associates, L.P. ("Associates"), a Delaware limited partnership. The Partnership owns a 1% general partner interest and a 98% limited partner interest in Associates. On January 24, 1996, the Partnership contributed 69 Hotels and their related assets to Associates. Formation of Associates resulted in the Partnership's primary assets being its direct and indirect interest in Associates. Substantially all of Associates' net equity is restricted to distributions, loans or advances to the Partnership. Associates holds a 99% membership interest in CBM Associates II LLC ("Associates II") and Managing General Partner holds the remaining 1% membership interest. On January 24, 1996, the Partnership contributed the Hotel located in Deerfield, IL (the "Deerfield Hotel") and its related assets to Associates and the Managing General Partner simultaneously contributed the Hotel and its related assets to Associates II. CBM Funding Corporation ("CBM Funding"), a wholly-owned subsidiary of Associates, was also formed to make a mortgage loan (the "Mortgage Loan") to Associates from the proceeds of the sale of the Certificates. Associates is a restricted subsidiary of the Partnership and is accounted for under the equity method of accounting on the accompanying condensed financial information of the Partnership. B) As discussed above, on January 24, 1996, the Senior Notes of $127.4 million were issued by the Partnership and Finance. The Senior Notes bear interest at 10 3/4%, require semi-annual payments of interest and require no payments of principal until maturity on February 1, 2008. The Senior Notes are secured by a first priority pledge by the Partnership of (i) its 99% partnership interest (consisting of a 98% limited partner interest and a 1% general partner interest) in Associates and (ii) its 100% equity interest in the Managing General Partner. Finance has nominal assets, does not conduct any operations and does not provide any additional security for the Senior Notes. In connection with the Host Marriott's conversion to a REIT, a change of control occurred when Host Marriott ceased to own, directly or indirectly, all of the outstanding equity interest of the sole general partner of the Partnership. Although such a change of control has occurred, Host REIT continues to own, indirectly, a substantial majority of the economic interest in CBM Two LLC, the current General Partner of the Partnership and, through Host LP, has certain voting rights with respect to CBM Two LLC. The change in control described above resulted in a "Change in Control" under the indenture governing the Senior Notes. As a result, in accordance with the terms of the indenture, Host LP commenced a tender offer for the Senior Notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon to February 18, 1999. The tender offer was commenced on January 14, 1999 and expired on February 12, 1999. No Senior Notes were tendered to Host LP in connection with the tender offer. C) The accompanying statement of operations reflect the equity in earnings of restricted subsidiaries after elimination of interest expense (see Note B). 42
SCHEDULE III COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands) Initial Costs Gross Amount at December 31, 1998 ----------------------- ----------------------------------------- Subsequent Leasehold, Buildings & Costs Buildings & Accumulated Description Encumbrances Land Improvements Capitalized Land Improvements Total Depreciation - - ----------- ------------ ------- ---------------- ------------- ------ ------------- -------- ------------ 70 Courtyard by Marriott Hotels $ 385,555 $25,392 $ 493,565 $ 48,819 $25,392 $ 542,384 $ 567,776 $ 145,070 =============== ======= ============ ======== ======= ============ ========== ========= Date of Completion of Date Depreciation Construction Acquired Life 70 Courtyard by 1987-1990 1987-1990 40 years Marriott Hotels
Notes: 1996 1997 1998 ------------- ------------- -------- (a) Reconciliation of Real Estate: Balance at beginning of year....................................$ 538,358 $ 542,872 $ 555,164 Capital Expenditures............................................ 4,514 12,292 14,710 Dispositions/reclassifications.................................. -- -- (2,098) ------------- ------------- ------------- Balance at end of year..........................................$ 542,872 $ 555,164 $ 567,776 ============= ============= ============= (b) Reconciliation of Accumulated Depreciation: Balance at beginning of year....................................$ 97,726 $ 112,473 $ 128,448 Depreciation.................................................... 14,747 15,975 16,622 Balance at end of year..........................................$ 112,473 $ 128,448 $ 145,070 (c) The aggregate cost of land, buildings and improvements for Federal income tax purposes is approximately $561.3 million at December 31, 1998.
43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on this 31st of March, 1999. COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP By: CBM TWO LLC General Partner /s/ Earla L. Stowe Earla L. Stowe Vice President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and the capacities and on the date indicated above. Signature Title (CBM TWO LLC) /s/ Robert E. Parsons, Jr. President and Manager Robert E. Parsons, Jr. /s/ Christopher G. Townsend Executive Vice President, Secretary and Manager Christopher G. Townsend /s/ W. Edward Walter Treasurer W. Edward Walter /s/ Earla L. Stowe Vice President Earla L. Stowe 44 Exhibit 3.10 SECOND AMENDMENT TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP THIS SECOND AMENDMENT TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF COURTYARD BY MARRIOTT II LIMITED PARTNERSHIP (this "Second Amendment"), dated as of December 28, 1998, is entered into by CBM Two LLC, a Delaware limited liability company, as general partner (the "General Partner"), of Courtyard By Marriott II Limited Partnership (the "Partnership"), for itself and on behalf of the limited partners of the Partnership. WHEREAS, the Partnership was formed pursuant to a Certificate of Limited Partnership filed with the Office of the Secretary of State of the State of Delaware on August 31, 1987; WHEREAS, in connection with certain restructuring transactions involving its parent company, CBM Two Corporation merged with and into the General Partner, a newly formed Delaware limited liability company; and WHEREAS, in accordance with Section 11.02 of the Partnership Agreement, the General Partner wishes to amend the Partnership Agreement to reflect its successor name by merger and to make certain clean up changes. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the General Partner hereby amends the Partnership Agreement as follows: 1. The introductory paragraph of the Partnership Agreement is hereby amended to replace the phrase "CBM Two Corporation, a Delaware corporation" with the phrase "CBM Two LLC, a Delaware limited liability company." 2. The definitions of "General Partner" and "Host" in Section 1.01 of the Partnership Agreement are hereby amended and restated in their entirety as follows: "General Partner" means CBM Two LLC, a Delaware limited liability company, in its capacity as general partner of the Partnership, and its successors and assigns. "Host" means Host Marriott Corporation, a Delaware corporation, and its successors and assigns. 3. Section 3.01 of the Partnership Agreement is hereby amended and restated in its entirety as follows: Section 3.01. General Partner. The General Partner of the Partnership is and shall be CBM Two LLC, a Delaware limited liability company, in its capacity as general partner of the Partnership, and its successors and assigns, having its principal executive offices at 10400 Fernwood Road, Bethesda, Maryland 20817. 4. All defined terms contained in this Second Amendment, unless otherwise defined herein, shall have the meaning contained in the Partnership Agreement. Except as modified herein, all terms and conditions of the Partnership Agreement shall remain in full force and effect, which terms and conditions the General Partner hereby ratifies and affirms. [Page Break Intentionally Inserted] 45 IN WITNESS WHEREOF, the undersigned has executed this Second Amendment as of the date first set forth above. CBM TWO LLC, as the successor General Partner of Courtyard By Marriott II Limited Partnership and on behalf of existing Limited Partners By: /s/ Christopher G. Townsend Name: Christopher G. Townsend Title: Executive Vice President 46 EX-27 2 FDS --
5 (Replace this text with the legend) 0000832179 Courtyard by Marriott II Limited Partnership 1000 US $ 12-Mos Dec-31-1998 Jan-01-1998 Dec-31-1998 1.000 17,903 38,048 8,739 0 0 64,690 746,524 (282,874) 528,340 53,606 498,624 0 0 0 (23,890) 528,340 284,251 286,927 (141,398) (141,398) (83,893) 0 (44,686) 16,950 0 16,950 0 0 0 16,950 0 0
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