10-K 1 file001.txt FORM 10-K FORM 10K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended Commission File Number December 31, 2003 0-16728 FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) Delaware 52-1638296 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 9507, 7 Bulfinch Place - Suite 500, Boston, MA 02114 -------------------------------------------------------------- (Address of principal executive offices) (617) 570-4600 -------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: UNITS OF LIMITED PARTNERSHIP INTEREST Indicate by check mark whether 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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined by Exchange Act Rule 12b-2). Yes [ ] No [X] There is no public market for the Limited Registrant Units. Accordingly, information with respect to the aggregate market value of Limited Registrant Units held by non-affiliates of Registrant has not been supplied. Documents incorporated by reference ----------------------------------- None FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP CROSS REFERENCE SHEET PURSUANT TO ITEM G, GENERAL INSTRUCTIONS TO FORM 10-K

~~Location~~ITEM ofOF ~~Inn~~FORM ~~Gross~~10-K ~~Carrying~~Page ~~Value~~PART ~~Accumulated~~I ~~Depreciation~~1. ~~Federal~~Business ~~Tax~~3 ~~Basis~~2. ~~---------------~~Properties ~~--------------------~~7 ~~------------------------~~3. ~~-----------------~~Legal ~~Alabama~~Proceedings ~~Birmingham--Homewood~~13 ~~$6,097,000~~4. ~~$3,634,000~~Submission ~~$2,609,000~~of ~~Montgomery~~Matters ~~$3,474,000~~to ~~$2,669,000~~a ~~$3,078,000~~Vote ~~California~~of ~~Los~~Security ~~Angeles--Buena~~Holders ~~Park~~13 ~~$3,500,000~~PART ~~$2,918,000~~II ~~$2,445,000~~5. ~~Los~~Market ~~Angeles--Placentia~~for ~~$7,572,000~~Corporation's ~~$3,272,000~~Common ~~$4,281,000~~Equity ~~Florida~~and ~~Gainesville~~Related ~~$4,870,000~~Stockholder ~~$2,817,000~~Matters ~~$2,138,000~~14 ~~Miami--West~~6. ~~$5,909,000~~Selected ~~$3,010,000~~Financial ~~$2,758,000~~Data ~~Orlando--International~~15 ~~Drive~~7. ~~$5,501,000~~Management's ~~$2,946,000~~Discussion ~~$2,578,000~~and ~~Orlando--South~~Analysis ~~$3,990,000~~of ~~$3,326,000~~Financial ~~$2,800,000~~Condition ~~Georgia~~and ~~Atlanta--Airport~~Results ~~$3,707,000~~of ~~$3,115,000~~Operations ~~$2,563,000~~16 ~~Atlanta--Gwinnett~~7A. ~~Mall~~Quantitative ~~$6,321,000~~and ~~$2,861,000~~Qualitative ~~$3,492,000~~Disclosures ~~Atlanta--Northlake~~Regarding ~~$5,795,000~~Market ~~$3,282,000~~Risk ~~$2,580,000~~23 ~~Atlanta--Northwest~~8. ~~$6,023,000~~Financial ~~$3,654,000~~Statements ~~$2,598,000~~24 ~~Atlanta--Peachtree~~8A. ~~Corners~~Controls ~~$4,691,000~~and ~~$2,666,000~~Procedures ~~$3,286,000~~48 ~~Atlanta--Southlake~~9 ~~$5,283,000~~Changes ~~$2,651,000~~in ~~$2,949,000~~and ~~Savannah~~Disagreements ~~$5,030,000~~with ~~$2,559,000~~Accounts ~~$2,486,000~~on ~~Iowa~~Accounting ~~Des~~and ~~Moines--West~~Financial ~~$5,390,000~~Disclosure ~~$3,207,000~~49 ~~$2,203,000~~PART ~~Illinois~~III ~~Bloomington--Normal~~10. ~~$6,213,000~~Directors ~~$3,517,000~~and ~~$2,813,000~~Executive ~~Chicago--Lansing~~Officers ~~$3,842,000~~of ~~$3,091,000~~the ~~$2,309,000~~Corporation ~~Peoria~~50 ~~$6,587,000~~11. ~~$3,155,000~~Executive ~~$3,662,000~~Compensation ~~Rockford~~51 ~~$5,965,000~~12. ~~$3,167,000~~Security ~~$2,900,000~~Ownership ~~Indiana~~of ~~Indianapolis--Castleton~~Certain ~~$5,622,000~~Beneficial ~~$3,223,000~~Owners ~~$2,554,000~~and ~~Indianapolis--College~~Management ~~Park~~51 ~~$6,292,000 $3,284,000 $3,126~~13.~~000~~ ~~Kansas~~Certain ~~Kansas~~Relationships ~~City--Merriam~~and ~~$5,769,000~~Related ~~$2,834,000~~Transactions ~~$2,924,000~~51 ~~Kansas~~14. ~~City--Overland~~Principal ~~Park~~Accountant ~~$6,547,000~~Fees ~~$3,056,000~~and ~~$3,523,000~~Services ~~Michigan~~52 ~~Detroit--Airport~~PART ~~$5,896,000~~IV ~~$3,163,000~~15. $2Exhibits,~~793,000~~ ~~Detroit--Auburn~~Financial ~~Hills~~Statement $6Schedules,~~592,000~~ ~~$3,297,000~~and ~~$3,450,000~~Reports ~~Detroit--Madison~~on ~~Heights~~Form ~~$6,363,000~~8-K ~~$3,300,000~~53 ~~$3,119,000~~(a) ~~Detroit--Warren~~Financial ~~$5,722,000~~Statements ~~$3,335,000~~and ~~$2,500,000~~Financial ~~Detroit--West~~Statement Schedules (~~Canton~~b) ~~$5,808,000~~Exhibits ~~$3,386,000~~(c) ~~$2,588,000~~Reports ~~Kalamazoo~~on ~~$5,594,000~~Form ~~$2,810,000~~8-K ~~$2,658,000~~Signatures ~~Missouri~~54 ~~St.~~Exhibit ~~Louis--Hazelwood~~Index ~~$6,366,000 $3,001,000 $3,382,000~~55

2 PART I Certain matters discussed herein are forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as "believes," "expects," "may," "will," "should," "estimates," or "anticipates," or the negative thereof or other variations thereof or comparable terminology. All forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our 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. Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained or that any deviations will not be material. We disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this annual report on Form 10-K to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. ITEM 1. BUSINESS General Fairfield Inn by Marriott Limited Partnership (the "Partnership"), a Delaware limited partnership, was formed on August 23, 1989 to acquire, own and operate 50 Fairfield Inn by Marriott properties (the "Inns"), which compete in the economy segment of the lodging industry. Effective August 16, 2001, AP-Fairfield GP LLC, a Delaware limited liability company, became the general partner of the Partnership. See "Restructuring Plan" below. During the year ended December 31, 2002, the Partnership sold four of its Inns, two of which leased their underlying land from Marriott International, Inc. ("MII"), and retains an interest in 46 Inns as of December 31, 2003, all of which are being marketed for sale. See "Property Sales." As of December 31, 2003, the Partnership leases the land underlying 30 of its Inns from MII and certain of its affiliates. The Partnership's 46 Inns are located in sixteen states. See "Item 2. Properties" below. Effective November 30, 2001, Sage Management Resources III, LLC ("Sage" or "Manager"), an affiliate of Sage Hospitality Resources, LLC, began providing management at the Inns. See "Restructuring Plan" below. Prior to such date, the Inns were managed by Fairfield FMC Corporation, a wholly owned subsidiary of MII, as part of the Fairfield Inn by Marriott system under a long-term management agreement. Under Sage the Inns continue to be operated under the Fairfield Inn by Marriott system. Sage is a leading hotel management company that, including the Partnership's properties, owns, manages and/or operates 79 hotels located in 24 states. Of these hotels, 68 carry a Marriott flag including 56 Fairfield Inns. Between November 17, 1989 and July 31, 1990, the Partnership sold 83,337 units of limited partnership interests in a registered public offering for $1,000 per unit. The original general partner, Marriott FIBM One Corporation, contributed $0.8 million for a 1% general partner interest and $1.1 million to assist in establishing our initial working capital reserve at $1.5 million, as required in the partnership agreement. In addition, the general partner purchased units equal to a 10% limited partner interest at the closing of the offering. The remaining 90% limited partnership interest was acquired by unrelated parties. Restructuring Plan and Plan of Liquidation Restructuring Plan As a result of the Partnership's continued decline in operating results, the prior general partner, FIBM One LLC, developed a restructuring plan for the Partnership. In connection with this plan, the consent of limited partners of the Partnership was sought for the transfer by FIBM One LLC of its general partner interest in the Partnership to the current general partner. Effective August 16, 2001, following the receipt of the necessary consent to the transfer of the general partner interest, FIBM One LLC transferred its general partner interest in the Partnership to AP-Fairfield GP LLC, which is affiliated with Apollo Real Estate Advisors, L.P. and Winthrop Financial Associates, a Boston based real estate 3 investment company with extensive experience in partnership, asset and property management as well as investor servicing. On November 30, 2001, the Restructuring Plan was implemented as the Partnership (i) replaced MII as the property manager at the Partnership's properties with Sage Management, (ii) entered into new Franchise Agreements with MII, (iii) entered into Ground Lease modifications which provided for substantially reduced rent for the year 2002, and an extension of the term to November 30, 2098, (iv) agreed to complete the property improvement plans ("PIPs") required by MII at the properties by no later than November 30, 2003 and (v) MII waived its right to receive the deferred fees then owing to it. Also, as part of the Restructuring Plan, the Partnership filed a Form S-1 Registration Statement, in which the Partnership sought to offer its limited partners the right to purchase $23 million in subordinated notes due in 2007 (the "Offering"). The proceeds of the Offering were to have been used for capital improvements at the Inns. However, due to the Partnership's ongoing financial difficulties, and in light of the continued decline in operations, it was determined not to make the Offering and the Registration Statement was withdrawn on January 6, 2003. Pursuant to the terms of the management agreement with Sage, which agreement has a term of five years subject to early termination, the Partnership is required to pay Sage a management fee equal to 3% of adjusted gross revenues at the Partnership's properties. In addition, Sage is entitled to an annual incentive management fee equal to 10% of the excess earnings before interest, taxes, depreciation and amortization of the Partnership in excess of $25 million during the first three years. If the Partnership's earnings before interest, taxes, depreciation and amortization is not at least $25 million for the 2004 calendar year (subject to certain exceptions), the Partnership has the right to terminate Sage. See "The Fairfield Inn by Marriott System" below. The new Franchise Agreements were substantially similar to the prior agreements with MII as they relate to the use of the "Fairfield Inn by Marriott" flag except that it was an event of default under the Ground Lease if the PIPs were not completed by November 30, 2003. The PIPs were not completed by November 30, 2003. The Partnership's default under the Franchise Agreement also constituted a default under the Ground Lease and the loan encumbering the Partnership's properties. The Franchise Agreements permit the Inns to be operated as "Fairfield Inns by Marriott." See "The Fairfield Inn by Marriott System" below. In addition, as a result of the Partnership's declining operations, the Partnership has failed to meet its debt service payments on its loan encumbering its properties since November 11, 2002. On March 26, 2003, the Partnership received notice from MII as the ground lessor with respect to 30 of the Inns, that it was in default under the ground lease agreements, due to its failure to pay the full amount due of minimum rentals owed under the Ground leases beginning in January 2003. On May 9, 2003, the lender exercised its right to cure the default and paid the non-subordinated ground rent owed under the ground lease agreements through March 2003. On behalf of the Partnership, the lender has continued to pay the non-subordinated ground rent under the Ground leases through December 2003. Plan of Liquidation As a result of these defaults, the Partnership engaged in discussions with its lender as well as MII to seek a further restructuring of the Partnership's debt and ground lease. Effective December 5, 2003, the Partnership entered into an agreement with its lender and MII which provides that the lender and MII will forbear in the exercise of their remedies under the relevant documents due to the then existing defaults, including the non-payment of debt service and ground rent and the failure to complete required MII PIPs on a timely basis, all due to a lack of operating revenues, and to implement a liquidation of the Partnership's Inns. In exchange for the agreement to liquidate, the lender has agreed to pay the Partnership: (i) $65,217 per Inn sold, payable upon the sale of each Inn, and (ii) an additional amount equal to 10% of the aggregate net sale proceeds from the sale of all Inns in excess of a graduated incentive fee base, plus any additional amounts the lender advances in connection with the liquidation process. Based upon estimates by management, the Inns will not generate gross sales proceeds in excess of the threshold amount. It is anticipated that the lender will advance funds to: (a) permit capital improvements to be conducted at the Inns, which is required by MII, and will also increase the marketability of the Inns for sale, and (b) fund operating expenses, including payment of real estate taxes, as a result of insufficient operating revenue. In the event all the Inns are not sold by April 1, 2005, the Partnership has agreed to allow the lender to exercise its rights under the loan documents, which may include foreclosure, without interference from the 4 Partnership. Accordingly, if all of the Inns are not sold by April 1, 2005, it is likely that the remaining Inns will be lost to the lender through foreclosure. In connection with the agreement, an affiliate of MII, as ground lessor, agreed to waive up to $1.2 million of ground rent for a period of up to one year, and any additional ground rent due in excess of $1.2 million will be deferred until the earlier of: (i) the sale of an Inn, or (ii) April 1, 2005; provided, however that in the event a default arises under the agreements reached with MII at any time, all ground rent shall become immediately due and payable. MII, as franchisor, has agreed that for those Inns that will remain in the Fairfield Inn by Marriott system, the property improvement plans are not required to be completed until April 1, 2005, however the work must be commenced by September 1, 2004, and has also agreed to waive any liquidated damages that otherwise may be due to MII arising from the early termination of a franchise agreement due to the sale of an Inn through September 1, 2004, and thereafter reduced the amount to $25,000 per property for Inns sold between September 1, 2004 and November 30, 2004. In exchange for these ground rent and franchise termination fee concessions, the Partnership has agreed to remove 12 of the Inns, as identified by MII, from the Fairfield Inn by Marriott system no later than September 1, 2004 and keep six of the Inns, as identified by MII, in the Fairfield Inn by Marriott system. The remaining Inns can be sold either as a Fairfield Inn by Marriott or without the franchise agreement. In the event PIPs are not completed by April 1, 2005 for any Inn not sold, it will result in a default under the MII agreements, and permit MII to terminate the franchise agreements. Further, upon the termination of any franchise agreement, the Partnership must purchase MII's interest under all ground leases. On November 20, 2003, the Partnership engaged a nationally recognized broker to begin marketing the Inns for sale. It is expected that the Partnership will, in all likelihood, be dissolved in 2005, either upon the sale of all Inns or as a result of the foreclosure by the lender of any remaining Inns not otherwise sold. The Partnership sold 3 of its Inns during the first quarter of 2004 and has entered into contracts to sell an additional 11 of its Inns. See "Property Sales" below. It is expected that these properties will be sold, if at all, during the second quarter of 2004. Competition The United States lodging industry is segmented into full service and limited service properties. The Inns are included within the limited service segment and directly compete in the sub-segment of mid-scale properties without food and beverage facilities. This segment is highly competitive and includes many name brands including Comfort Inn and Suites, Holiday Inn Express, Hampton Inn and Suites, La Quinta Inn and Suites, Sleep Inn, Country Inn and Suites, Candlewood Hotels and Wingate Inns. Competition is based primarily on the level of service, quality of accommodations, convenience of locations and room rates. Full service hotels generally offer restaurant and lounge facilities and meeting space, as well as a wide range of services and amenities. Hotels within our competitive set generally offer basic guest room accommodations with limited or no services and amenities. Based on data by Smith Travel Research, supply in this sub-segment increased significantly in the late 1990's, growing at rates in excess of 11% annually, which exceeded demand growth for each year during the period from 1995 through 1999. Additionally, the supply growth rate is projected to continue to grow for the next three years, which will increase the competitive pressure on the Inns. These new products frequently reflect updated designs and features, which increases the need to make capital expenditures at the Inns in order for them to compete effectively. In addition to competing brands, customers compare the Inns to other Fairfield Inn by Marriott properties. The Partnership's Inns, which are 14 to 17 years old, struggle to compete with newer Fairfield Inn properties, which benefit from design enhancements and a more contemporary feel, as well as other limited service properties in the marketplaces where the Partnership operates. The inclusion of the Inns within the nationwide Fairfield Inn by Marriott hotel system provides advantages of name, recognition, and centralized reservations and advertising, system-wide marketing and promotion, centralized purchasing and training and support services. As economy hotels, the Inns compete with limited service hotels in their respective markets by providing streamlined services and amenities at prices that are significantly lower than those available at full service hotels. 5 The Fairfield Inn by Marriott System As part of the "Fairfield Inn by Marriott" system, the Manager is required to furnish specific chain services to the Inns, which services are furnished generally on a central or regional basis to all Inns in the Fairfield Inn by Marriott hotel system that are owned, leased, or managed by MII and its subsidiaries. Costs and expenses incurred in providing such services are allocated among all domestic Fairfield Inn by Marriott hotels managed, owned or leased by MII or its subsidiaries. The costs and expenses are allocated among all Inns based on the gross revenues of each Inn. Beginning in 1997, the Partnership's Inns began participating in MII's Marriott Rewards Program ("MRP"). The cost of this program is 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 or Inn. The total amounts of chain services and MRP costs allocated to the Partnership for the nine months ended September 30, 2003 and for the years ended December 31, 2002 and 2001 were $3.6 million, $5.0 million and $1.8 million, respectively. These expenses increased in 2002 due to the terms of the new franchise agreement entered with MII effective November 30, 2001. This increase was offset by a decline in administrative expenses, such as central office services charged by MII. In addition, MII maintains a marketing fund to pay the costs associated with specified system-wide advertising, marketing, sales, promotional and public relations materials and programs. Each Inn within the system contributes approximately 2.5% (for 2003and 2002) and 2.4% (for 2001 and prior) of gross Inn revenues to the marketing fund. For the nine months ended September 30, 2003 and the years ended December 31, 2002 and 2001, the Partnership contributed $1.4 million, $1.9 million and $1.9 million, respectively, to the marketing fund. Ground As indicated above, the land on which 30 of our Inns are located is leased from MII or its affiliates. Under the leases, the Partnership is required to pay all costs, expenses, taxes and assessments relating to the leased Inns and the underlying land, including real estate taxes. Each ground lease provides that the Partnership has a first right of refusal in the event the applicable ground lessor decides to sell the leased premises. Upon expiration or termination of a ground lease, title to the applicable Inn and all improvements reverts to the ground lessor. Under the terms of the December 5, 2003 agreement, the Partnership must purchase the land underlying an Inn from the ground lessor upon the sale of the Inn or removal of the Inn from the "Fairfield Inn by Marriott" system. Mortgage Debt As of December 31, 2003, the outstanding balance of principal and accrued interest on the mortgage debt was $135.3 million, which bears interest at a fixed rate of 8.40%. The non-recourse mortgage debt was scheduled to mature on January 11, 2017. The mortgage debt is secured by first mortgages on all of the Inns, the land on which they are located, or an assignment of the Partnership's interest under the ground leases, including ownership interest in all improvements thereon, fixtures and personal property related thereto. As described above, under the terms of the December 5, 2003 agreement to liquidate, the lender has agreed to pay the Partnership: (i) $65,217 per Inn sold, payable upon the sale of each Inn, and (ii) an additional amount equal to 10% of the aggregate net sale proceeds from the sale of all Inns in excess of a graduated incentive fee base, plus any additional amounts the lender advances in connection with the liquidation process. At present, based upon management's estimates, the sale of the Inns will not generate gross sales proceeds in excess of the threshold amount. It is anticipated that the lender will advance funds to: (a) permit capital improvements to be conducted at the Inns, which is required by MII, and will also increase the marketability of the Inns for sale, and (b) fund operating expenses, including payment of real estate taxes, as a result of insufficient operating revenue. In the event all the Inns are not sold by April 1, 2005, the Partnership has agreed to allow the lender to exercise its rights under the loan documents, which may include foreclosure, without interference from the Partnership. Accordingly, if all of the Inns are not sold by April 1, 2005, it is likely that the remaining Inns will be lost to the lender through foreclosure. Property Sales On July 29, 2002, the Partnership sold one of its inns located in Montgomery, Alabama for $3.1 million. The net proceeds from the sale of approximately $2.9 million were applied toward the Partnership's mortgage debt, in 6 accordance with the terms of the loan agreement. The Partnership recognized a gain on the sale of approximately $2.1 million. On August 12, 2002, the Partnership sold its inn located in Charlotte (Airport), North Carolina for $2.5 million. The net proceeds from the sale of approximately $0.3 million, which is net of approximately $1.9 million attributed to the ground lease buyout, were applied toward the Partnership's mortgage debt, in accordance with the terms of the loan agreement. The Partnership recognized a gain on the sale of approximately $0.2 million. On August 14, 2002, the Partnership sold its inn located in Atlanta (Southlake), Georgia for approximately $3.0 million. The net proceeds from the sale of approximately $2.8 million were applied toward the Partnership's mortgage debt, in accordance with the terms of the loan agreement. The Partnership recognized a gain on the sale of approximately $0.2 million. On October 9, 2002, the Partnership sold its inn located in Chicago (Lansing), Illinois for $2.3 million. The net proceeds from the sale of approximately $1.4 million, which is net of approximately $0.7 million attributed to the ground lease buyout, will be applied toward the Partnership's mortgage debt, in accordance with the terms of the loan agreement. The Partnership recognized a gain on the sale of approximately $1.1 million. On March 24, 2004, the Partnership sold its inn located in Norcross, Georgia for $1.5 million. After closing costs and the payment to the Partnership of the $65,217 as agreed to under the liquidation plan, the net proceeds from the sale of approximately $1.3 million were applied toward the Partnership's mortgage debt. The Partnership recognized a loss of the sale of $3,000. On March 25, 2004, the Partnership sold its inns located in Buena Park and Placentia, California for an aggregate price of $8.75 million. After payment for the purchase of the ground for $3.6 million, closing costs and the payment to the Partnership of $130,434, as agreed to under the liquidation plan, the net proceeds from the sale of approximately $4.5 million were applied toward the Partnership's mortgage debt. The Partnership recognized a loss of the sale of $7,000. Employees The Partnership has no employees. Services are performed for the Partnership by the general partner and agents retained by the Partnership including Sage. Seasonality Demand at the Inns is affected by normally recurring seasonal patterns. For most of the Inns, demand is higher in the spring and summer months (March through October) than during the remainder of the year. ITEM 2. PROPERTIES The Partnership's portfolio consists of 43 Fairfield Inn by Marriott properties as of March 29, 2004. The Inns, which range in age between 14 and 17 years, are geographically diversified among 16 states. The following table presents the location and number of rooms for each of the Inns owned as of March 29, 2004. All of the Inns are managed by Sage. See Item 1. Business. The land on which the Inns are located is either owned by us or leased under a long-term agreement. Location of Inn Number of Rooms --------------- --------------- Alabama Birmingham--Homewood(1) 132 California Los Angeles--Buena Park(1)(2) 135 Los Angeles--Placentia(2) 135 7 Florida Gainesville(1) 135 Miami--West(1) 135 Orlando--International Drive(1) 135 Orlando--South(1)(3) 132 Georgia Atlanta--Airport(1)(3) 132 Atlanta--Gwinnett Mall(3) 135 Atlanta--Northlake(1) 133 Atlanta--Northwest(1) 130 Atlanta--Peachtree Corners(2) 135 Savannah(1) 135 Illinois Bloomington--Normal(1) 128 Peoria 135 Rockford 135 Indiana Indianapolis--Castleton(1)(3) 132 Indianapolis--College Park 132 Iowa Des Moines--West(1) 135 Kansas Kansas City--Merriam 135 Kansas City--Overland Park 134 Michigan Detroit--Airport(1) 133 Detroit--Auburn Hills(1) 134 Detroit--Madison Heights(1)(3) 134 Detroit--Warren(1)(3) 132 Detroit--West (Canton)(1)(3) 133 Kalamazoo(1)(3) 133 Missouri St. Louis--Hazelwood(3) 135 North Carolina Charlotte--Northeast(1) 133 Durham(1) 135 Fayetteville(1) 135 Greensboro(1) 135 Raleigh--Northeast(1) 132 Wilmington 134 Ohio Cleveland--Airport 135 Columbus--North(1) 135 Dayton--North(1) 135 Toledo--Holland 134 South Carolina Florence 134 Greenville 132 Hilton Head(1) 119 Tennessee Johnson City(1) 132 Virginia Hampton(3) 134 Virginia Beach(1) 134 8 Wisconsin Madison(1)(3) 135 Milwaukee--Brookfield 135 TOTAL 6,137 (1) The land on which the Inn is located is leased by the Partnership from Marriott International under a long-term lease agreement. See "Item 1. Business-Ground Lease." (2) Property was sold during the first quarter of 2004. (3) Property is under contract for sale. Occupancy The following table sets forth the average occupancy rates at the Inns for the years ended December 31, 2003, 2002 and 2001

Location of Inn ~~2001~~2003 ~~2000~~2002 ~~1999~~2001 --------------- ---- ---- ---- Alabama Birmingham--Homewood 61.1% 60.0% 60.8% 65California Los Angeles--Buena Park(1) 75.9% 60.2% 68.3% Los Angeles--Placentia(1) 72.8% 67.4% 74.9% Florida Gainesville 71.5% 64.4% 61.6% Miami--West 66.3% 68.9% 72.7% Orlando--International Drive 55.3% 56.0% 63.2% Orlando--South(2) 55.3% 48.9% 55.6% ~~Montgomery~~Georgia 62Atlanta--Airport(2) 57.82% 60.6% 70.40% 78Atlanta--Gwinnett Mall(2) 50.7% ~~California~~48.5% ~~Los~~59.1% ~~Angeles~~Atlanta--~~Buena~~Northlake ~~Park~~52.5% 6848.0% 59.5% Atlanta--Northwest 49.6% 54.0% 58.3% 73Atlanta--Peachtree Corners(1) 41.43% 46.1% 59.6% Savannah 72.9% 66.5% 67.6% Illinois Bloomington--Normal 58.0% 60.1% 68.3% Peoria 54.7% ~~Los~~61.3% ~~Angeles~~64.5% Rockford 49.9% 51.3% 57.4% Indiana Indianapolis--~~Placentia~~Castleton(2) 7453.0% 54.3% 61.1% Indianapolis--College Park 47.2% 50.2% 58.0% Iowa Des Moines--West 63.8% 65.6% 63.1% Kansas Kansas City--Merriam 54.4% 60.9% 64.5% Kansas City--Overland Park 49.8% 55.2% 58.3% Michigan Detroit--Airport 76.8% 75.2% 79.5% 73Detroit--Auburn Hills 59.1% 61.4% 65.2% Detroit--Madison Heights(2) 65.8% 64.0% 69.6% ~~Florida~~Detroit--Warren(2) ~~Gainesville~~51.5% 50.1% 60.1% Detroit--West (Canton)(2) 67.3% 61.64% 6568.1% 70Kalamazoo(2) 58.3% 62.8% 63.0% 9 Missouri St. Louis--Hazelwood(2) 59.2% 57.6% ~~Miami~~63.6% North Carolina Charlotte--~~West~~Northeast 7248.73% 8038.5% 38.3% Durham 65.0% 8266.2% 67.1% Fayetteville 90.4% 84.4% 64.4% Greensboro 61.9% ~~Orlando~~63.6% 59.8% Raleigh--~~International~~Northeast ~~Drive~~60.1% 6356.2% 8252.65% 79Wilmington 53.7% 56.8% ~~Orlando~~53.3% Ohio Cleveland--~~South~~Airport 61.2% 54.8% 61.0% Columbus--North 55.7% 59.1% 67.1% Dayton--North 76.2% 66.4% 65.7% Toledo--Holland 54.0% 59.5% 65.2% South Carolina Florence 70.1% 74.4% 71.1% Greenville 53.3% 53.5% 57.4% Hilton Head 64.8% 58.5% 52.5% Tennessee Johnson City 53.2% 53.3% 51.6% Virginia Hampton(2) 70.2% 57.5% 55.4% Virginia Beach 72.2% 68.4% 66.8% Wisconsin Madison(2) 57.1% 59.1% 60.0% Milwaukee--Brookfield 53.9% 7553.9% 62.2% Total Average Occupancy 60.3% 59.2% 62.0%

(1) Property was sold during the first quarter of 2004. (2) Property is under contract for sale. Room Rates The following table sets forth the average daily room rates at the Inns for the years ended December 31, 2003, 2002 and 2001. Average daily room rate is the annual room revenue divided by the number of paid occupied rooms for the year.

Location of Inn ~~2001~~2003 ~~2000~~2002 ~~1999~~2001 --------------- ---- ---- ---- Alabama Birmingham--Homewood $5048.1172 $49.1552 $4850.~~65 Montgomery $49.~~11 ~~$47.43 $44.94~~ California Los Angeles--Buena Park(1) $5546.1938 $4951.2898 $4955.2419 Los Angeles--Placentia(1) $5652.1375 $5257.1814 $5056.1713 Florida Gainesville $4950.4711 $4751.7849 $4649.6247 Miami--West $6355.0444 $6457.9416 $63.8504 Orlando--International Drive $5957.1042 $5961.9474 $5559.1410 Orlando--South(2) $4542.9637 $4746.4494 $4445.6196 Georgia Atlanta--Airport(2) $4847.9959 $4852.1782 $4648.6999 Atlanta--Gwinnett Mall(2) $5445.5141 $4753.9151 $4754.8651 10 Atlanta--Northlake $4944.4657 $4752.3005 $4349.1646 Atlanta--Northwest $5249.8205 $5354.6432 $5052.7582 Atlanta--Peachtree Corners(1) $41.61 $46.3109 $46.1431 Savannah $4352.39 $56.31 $54.18 ~~Atlanta~~Illinois Bloomington--~~Southlake~~Normal $4655.39 $59.87 $58.71 Peoria $4656.5269 $4356.19 $52.62 Rockford $51.26 ~~Savannah~~$49.80 $5447.1828 Indiana Indianapolis--Castleton(2) $54.8544 $53.84 $52.99 Indianapolis--College Park $49.54 $51.4298 $48.27 Iowa Des Moines--West $5449.8158 $5452.5103 $5754.5881 ~~Illinois~~Kansas ~~Bloomington~~Kansas City--~~Normal~~Merriam $5847.71 $5949.0840 $5748.5156 ~~Chicago~~Kansas City--~~Lansing~~Overland Park $5053.3024 $56.3406 $5655.9332 ~~Peoria~~Michigan Detroit--Airport $5257.6283 $4961.9968 $5070.8006 ~~Rockford~~Detroit--Auburn Hills $4757.2825 $5059.76 $5064.9886 ~~Indiana Indianapolis~~Detroit--~~Castleton~~Madison Heights(2) $5258.9951 $6064.0957 $5762.9031 ~~Indianapolis~~Detroit--~~College~~Warren(2) ~~Park~~$46.11 $4853.2757 $55.62 Detroit--West (Canton)(2) $52.3605 $5157.3062 ~~Kansas~~$60.96 ~~Kansas~~Kalamazoo(2) ~~City~~$55.14 $54.90 $54.22 Missouri St. Louis--~~Merriam~~Hazelwood(2) $48.5691 $5350.7938 $5350.7101 ~~Kansas~~North ~~City~~Carolina Charlotte--~~Overland~~Northeast ~~Park~~$40.11 $45.86 $47.68 Durham $47.43 $51.87 $51.57 Fayetteville $63.03 $59.80 $53.55 Greensboro $58.3203 $57.2926 $57.1764 ~~Michigan Detroit~~Raleigh--~~Airport~~Northeast $44.70 $48.0668 $7151.20 Wilmington $54.14 $54.11 $56.26 Ohio Cleveland--Airport $48.24 $6155.3003 ~~Detroit~~$56.20 Columbus--~~Auburn~~North ~~Hills~~$51.95 $6453.77 $49.86 Dayton--North $7351.08 $5952.1025 ~~Detroit~~$52.04 Toledo--~~Madison~~Holland ~~Heights~~ $6249.3157 $6151.5469 $5652.9952 ~~Detroit--Warren~~South Carolina Florence $55.6200 $5853.6345 $51.53 Greenville $43.9507 ~~Detroit--West~~$44.75 $45.37 Hilton Head $59.85 $65.22 $64.28 Tennessee Johnson City $53.10 $50.88 $46.00 Virginia Hampton(~~Canton~~2) $6057.9687 $6357.3394 $6151.6850 ~~Kalamazoo~~Virginia Beach $5464.2208 $59.67 $54.1289 Wisconsin Madison(2) $51.9305 $52.13 $48.45 Milwaukee--Brookfield $56.57 $56.46 $52.95 Total Average Room Rate $51.66 $54.31 $53.48

(1) Property was sold during the first quarter of 2004. (2) Property is under contract for sale. 11 Real Estate Taxes Real estate taxes billed and rates in 2003 for each of the Inns were:

~~2001~~Location ~~2000~~of ~~1999~~Inn ~~1998~~Billing ~~1997~~Rate(1) ---- ---- ------- ------- ------- ~~Income~~Alabama ~~Statement~~Birmingham--Homewood ~~Data:~~$48,116 ~~Revenues~~1.50% $California ~~83,865~~Los $Angeles--Buena ~~91,478~~Park(2) $ 9354,~~084~~246 $1.14% 94Los Angeles--Placentia(2) $58,~~370~~554 1.11% Florida Gainesville $59,578 952.49% Miami--West $73,~~721~~943 ~~Operating~~2.25% ~~profit~~Orlando--International ~~(loss)~~Drive ~~496~~$83,543 (2~~,848)~~.05% Orlando--South(3) $48,~~885~~635 1.98% Georgia Atlanta--Airport(~~522~~3) 11$62,~~963~~082 ~~Net~~2.19% Atlanta--Gwinnett Mall(~~loss~~3) ~~income~~$46,894 ~~(11~~1.28% Atlanta--Northlake. $88,~~472)~~420 81.55% Atlanta--Northwest $47,~~709~~540 1.20% Atlanta--Peachtree Corners(~~8,552~~2) ~~(12~~$44,~~999)~~870 (1.54% Savannah $82,~~411)~~052 ~~Net~~1.79% ~~(loss)~~Illinois ~~income~~Bloomington--Normal ~~per~~$48,116 ~~limited~~2.40% ~~partner~~Peoria ~~unit~~$96,410 ~~(83~~2.69% Rockford $116,~~337~~392 ~~Units)~~3.63% Indiana Indianapolis--Castleton(~~136~~3) ~~103~~$38,343 ~~(102)~~2.13% ~~(154)~~Indianapolis--College ~~(17)~~Park ~~Balance~~$47,944 ~~Sheet~~2.17% ~~Data:~~Iowa ~~Total~~Des ~~assets~~Moines--West $~~130~~100,~~212~~035 3.34% Kansas Kansas City--Merriam $~~147~~66,~~082~~475 2.45% Kansas City--Overland Park $~~163~~56,~~574~~654 2.13% Michigan Detroit--Airport $~~173~~79,~~064~~611 2.51% Detroit--Auburn Hills $~~185~~82,~~503~~670 ~~Total~~1.19% ~~liabilities~~Detroit--Madison ~~155,013~~Heights(3) ~~160~~$119,~~411~~527 ~~185,612~~2.28% ~~186,550~~Detroit--Warren(3) ~~185~~$69,~~990~~956 ~~Other~~1.91% ~~Data~~Detroit--West (~~unaudited~~Canton): ~~Cash~~(3) ~~distributions~~$60,291 ~~per~~1.57% ~~limited~~Kalamazoo(3) --$92,896 --3.23% Missouri St. Louis--Hazelwood(3) $74,431 3.04% North Carolina Charlotte--Northeast 10$32,502 ~~partner~~1.16% ~~unit~~Durham ~~(83~~$39,~~337~~145 ~~Units)~~1.31% ~~Ratio~~Fayetteville of$75,956 ~~earnings~~1.42% toGreensboro ~~fixed~~$32,870 ~~charges~~1.33% Raleigh--Northeast $28,926 0.99% Wilmington $35,521 1.15% 12 Ohio Cleveland--Airport $103,536 2.06% Columbus--North $47,101 1.85% Dayton--North $69,750 1.99% Toledo--Holland ~~Deficiency~~$53,300 of1.97% ~~earnings~~South toCarolina ~~fixed~~Florence $1137,~~472~~074 1.38% Greenville $1432,~~774~~310 1.58% Hilton Head $57,292 81.50% Tennessee Johnson City $39,~~552~~850 1.59% Virginia Hampton(3) $1248,~~999~~370 1.51% Virginia Beach $50,752 1.33% Wisconsin Madison(3) $58,~~411~~065 ~~charges~~2.27% Milwaukee--Brookfield $60,637 1.58%

(1) The real estate tax rates calculated by dividing the 2003 tax liability by the 2003 assessed value of the property. (2) Property was sold during the first quarter of 2004. (3) Property is under contract for sale. ITEM 3. LEGAL PROCEEDINGS None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report through the solicitation of proxies or otherwise. 13 PART II ITEM 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED SECURITY HOLDER MATTERS Units of the Partnership are not publicly traded. There are certain restrictions set forth in the Partnership's amended limited partnership agreement (the "Limited Partnership Agreement") that may limit the ability of a limited partner to transfer Units. Such restrictions could impair the ability of a limited partner to liquidate its investment in the event of an emergency or for any other reason. As of March 1, 2004, there were 2,470 holders of Units of the Partnership, owning an aggregate of 83,337 Units. The Partnership did not make a distribution during the year ended December 31, 2003 but made a distribution of $2.4 million during the year ended December 31, 2002. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", for a discussion of additional factors which may affect the Partnership's ability to pay distributions. Over the past few years, many companies have begun making "mini-tenders" (offers to purchase an aggregate of less than 5% of the total outstanding Units) for Units. Pursuant to the rules of the Securities and Exchange Commission, when a tender offer is commenced for Units, the Partnership is required to provide limited partners with a statement setting forth whether it believes limited partners should tender or whether it is remaining neutral with respect to the offer. Unfortunately, the rules of the Securities and Exchange Commission do not require that the bidders in certain tender offers provide the Partnership with a copy of their offer. As a result, the general partner often does not become aware of such offers until shortly before they are scheduled to expire or even after they have expired. Accordingly, the general partner does not have sufficient time to advise limited partners of its position on the tender. In this regard, please be advised that pursuant to the discretionary right granted to the general partner of the Partnership in the Limited Partnership Agreement to reject any transfers of Units, the general partner will not permit the transfer of any Unit in connection with a tender offer unless: (i) the Partnership is provided with a copy of the bidder's offering materials, including amendments thereto, simultaneously with their distribution to the limited partners; (ii) the offer provides for withdrawal rights at any time prior to the expiration date of the offer and, if payment is not made by the bidder within 60 days of the date of the offer, after such 60 day period; and (iii) the offer must be open for at least 20 business days and, if a material change is made to the offer, for at least 10 business days following such change. 14 ITEM 6. SELECTED FINANCIAL DATA The following table presents selected historical financial data which data has been derived from our audited financial statements for those years presented. You should read the following selected financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited financial statements included herein. Selected Financial Data (in thousands, except per unit amounts and ratio data)

~~2001~~January ~~2000~~1 ~~----~~through ~~----~~September ~~ASSETS Property and equipment~~30, ~~net~~2003 $2002 ~~110,039~~2001 $2000 ~~122,013~~1999 ~~Properties held for sale 5,709~~ -- ~~Deferred financing costs, net of accumulated amortization 2,451 2,937 Due from manager 1,069~~ -- ~~Inventory 1,000~~ -- ~~Due from Marriott International, Inc. and affiliates~~ -- ~~1,215 Property improvement fund 5,220 5,489 Restricted cash 3,127 7,726 Cash and cash equivalents 1,597 7,702~~ ---- ----- ----~~-----~~ ~~Total~~Income ~~assets~~Statement Data: Revenues $55,904 ~~130~~$78,~~212~~797 $ ~~147~~83,~~082~~865 ~~========= ========= LIABILITIES AND PARTNERS' DEFICIT LIABILITIES Mortgage debt~~ $ ~~148~~91,~~850~~478 $ ~~153~~93,~~569~~084 ~~Due~~Operating to(loss) ~~Marriott~~profit ~~International~~(15,351) ~~Inc.,~~(3) ~~affiliates~~496 ~~and other~~ (2,~~503~~848) 3,~~931~~885 ~~Accounts~~Net ~~payable~~(loss) ~~and~~income ~~accrued~~(24,161) ~~liabilities 3~~(8,~~660~~548) 2(11,~~911~~472) ~~--------- --------- Total liabilities 155~~8,~~013~~709 ~~160~~(8,~~411~~552) ~~---------~~Net ~~---------~~(loss) ~~PARTNERS'~~income ~~DEFICIT~~per ~~General~~limited ~~Partner~~partner ~~813~~unit ~~813~~(83,337 ~~Capital~~Units) ~~contribution~~ (~~517~~287) (~~517~~102) ~~Capital distributions~~ (~~494~~136) 103 (~~379~~102) ~~---------~~Balance Sheet Data: Total assets --~~-------~~ ~~Cumulative~~114,901 ~~net~~136,967 ~~losses~~147,082 ~~(198)~~163,574 ~~(83)~~Total ~~---------~~liabilities --~~-------~~ ~~Limited~~150,650 ~~Partners~~161,768 75160,~~479~~411 75185,~~479~~612 ~~Capital~~Other ~~contributions~~Data (~~51,270~~unaudited): ~~(51,270)~~Cash ~~Capital~~ distributions ~~(48,812)~~per ~~(37,455)~~limited -- $28.51 -- --~~---~~ --~~-------~~ ~~Cumulative~~partner ~~net~~unit ~~losses~~ (2483,~~603)~~337 ~~(13,246~~Units) ~~---------~~Deficiency ~~---------~~of ~~Total~~earnings ~~partners'~~to ~~deficit~~fixed ($24,~~801)~~161 ~~(13~~$8,~~329)~~548 ~~--------- ---------~~ $11,472 ~~130~~$14,~~212~~774 $ ~~147~~8,~~082~~552 ~~========= =========~~charges

STATEMENT OF CHANGES IN NET LIABILITIES IN LIQUIDATION (1) (in thousands) Period from September 30, 2003 through December 31, 2003 ------------------ Net Liabilities in Liquidation as of September 30, 2003 $41,495 Operating Loss 3,165 Changes in net assets in liquidation: Decrease in fair value of real estate 25,554 Decrease in inventory value 920 ------- Net Liabilities in Liquidation as of December 31, 2003 $71,134 ======= (1) On December 5, 2003, in accordance with the agreement reached between the Partnership, its lender and MII, the Partnership adopted the liquidation basis of accounting, and financial statement presentation has been adopted beginning September 30, 2003. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain matters discussed herein are forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as "believes," "expects," "may," "will," "should," "estimates," or "anticipates," or the negative thereof or other variations thereof or comparable terminology. All forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our 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. Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained or that any deviations will not be material. We disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this report on Form 10-K to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. GENERAL At December 31, 2002, the Partnership was the owner of 46 limited service Inns, which are operated as part of the Fairfield Inn by Marriott system, and until November 30, 2001, managed by Fairfield FMC Corporation. Beginning November 30, 2001, Sage began providing management at the properties. Under Sage the Inns continue to be operated under the Fairfield Inn by Marriott system. During the first quarter of 2004, the Partnership sold three of its Inns. Effective December 5, 2003, the Partnership entered into an agreement with its lender and Marriott International, Inc. ("MII") which provides that the lender and MII will forbear in the exercise of their remedies under the relevant documents due to the then existing defaults, including the non-payment of debt service and ground rent and the failure to complete required MII PIPs on a timely basis, all due to a lack of operating revenues, and to implement a liquidation of the Partnership's Inns. In exchange for the agreement to liquidate, the lender has agreed to pay the Partnership: (i) $65,217 per Inn sold, payable upon the sale of each Inn, and (ii) an additional amount equal to 10% of the aggregate net sale proceeds from the sale of all Inns in excess of a graduated incentive fee base, plus any additional amounts the lender advances in connection with the liquidation process. At present, based upon management's estimates, the sales of the Inns will not generate gross sales proceeds in excess of the threshold amount. It is anticipated that the lender will advance funds to: (a) permit capital improvements to be conducted at the Inns, which is required by MII, and will also increase the marketability of the Inns for sale, and (b) fund operating expenses, including payment of real estate taxes, as a result of insufficient operating revenue. In the event all the Inns are not sold by April 1, 2005, the Partnership has agreed to allow the lender to exercise its rights under the loan documents, which may include foreclosure, without interference from the Partnership. Accordingly, if all of the Inns are not sold by April 1, 2005, it is likely that the remaining Inns will be lost to the lender through foreclosure. In connection with the agreement, an affiliate of MII, as ground lessor, agreed to waive up to $1.2 million of ground rent for a period of up to one year, and any additional ground rent due in excess of $1.2 million will be deferred until the earlier of: (i) the sale of an Inn, or (ii) April 1, 2005; provided, however that in the event a default arises under the agreements reached with MII at any time, all ground rent shall become immediately due and payable. MII, as franchisor, has agreed that for those Inns that will remain in the Fairfield Inn by Marriott system, the property improvement plans are not required to be completed until April 1, 2005, however the work must be commenced by September 1, 2004, and has also agreed to waive any liquidated damages that otherwise may be due to MII arising from the early termination of a franchise agreement due to the sale of an Inn through September 1, 2004, and thereafter reduced the amount to $25,000 per property for Inns sold between September 1, 2004 and November 30, 2004. In exchange for these ground rent and franchise termination fee concessions, the Partnership has agreed to remove 12 of the Inns, as identified by MII, from the Fairfield Inn by Marriott system no later than September 1, 2004 and keep six of the Inns, as identified by MII, in the Fairfield Inn by Marriott system. The remaining Inns can be sold either as a Fairfield Inn by Marriott or without the franchise agreement. In the event PIPs are not completed by April 1, 2005 for any Inn not sold, it will result in a default under the MII agreements, and permit MII to terminate the franchise agreements. Further, upon the termination of any franchise agreement, the Partnership must purchase MII's interest under all ground leases. 16 On November 20, 2003, the Partnership engaged a nationally recognized broker to begin marketing the Inns for sale. It is expected that the Partnership will, in all likelihood, be dissolved in 2005, either upon the sale of all Inns or as a result of the foreclosure by the lender of any remaining Inns not otherwise sold. As a result, the Partnership has adopted the liquidation basis of accounting for the period beginning after September 30, 2003. Accordingly, the Partnership has adjusted its assets to their estimated net realizable value and liabilities were adjusted to estimated settlement amounts, including estimated costs associated with carrying out the liquidation. In addition, pursuant to the liquidation basis of accounting, the Partnership ceased to record revenues and expenses after that date, and reports only changes in net assets in liquidation for the periods thereafter. The Partnership sold 3 of its Inns during the first quarter of 2004 and has entered into contracts to sell an additional 11 of its Inns. It is expected that these properties will be sold, if at all, during the second quarter of 2004. LIQUIDITY AND CAPITAL RESOURCES GOING CONCERN: The Partnership did not have sufficient cash flow from current operations to make its required debt service payments beginning in November 2002, nor did it have sufficient cash flow to make its property improvement fund contributions beginning in September 2002. Further, on March 26, 2003, the Partnership received notice from MII that it was in default under the ground lease agreements due to its failure to pay the full amount due of minimum rentals owed under the ground leases beginning in January 2003. A default under the ground lease agreements also constituted a default under the loan agreement. On May 7, 2003, the Partnership received notice from MII that the ground leases would be terminated effective June 15, 2003 for nonpayment. On May 9, 2003, the lender exercised its right to cure the default and paid the non-subordinated ground rent owed under the ground leases through March 2003. On behalf of the Partnership, the lender has continued to pay the non-subordinated ground rent under the ground leases through December 2003. The Partnership has recognized the obligation to repay the lender for these advances. Effective December 5, 2003, the Partnership reached an agreement with its lender and MII for those parties to forbear in the exercise of their remedies under the relevant documents due to certain existing defaults, including the non-payment of debt service and ground rent and the failure to complete required MII product improvement plans on a timely basis, all due to a lack of operating revenues, and to implement a liquidation of the Partnership's Inns. In exchange for the agreement to liquidate, the lender has agreed to pay the Partnership: (i) $65,217 per Inn sold, payable upon the sale of each Inn, and (ii) an additional amount equal to 10% of the aggregate net sale proceeds from the sale of all Inns in excess of a graduated incentive fee base, plus any additional amounts the lender advances in connection with the liquidation process. At present, based upon management's estimates, the sale of the Inns will not generate gross sales proceeds in excess of the threshold amount. It is anticipated that the lender will advance funds to: (a) permit capital improvements to be conducted at the Inns, which is required by MII, and will also increase the marketability of the Inns for sale, and (b) fund operating expenses, including payment of real estate taxes, as a result of insufficient operating revenue. In the event all the Inns are not sold by April 1, 2005, the Partnership has agreed to allow the lender to exercise its rights under the loan documents, which may include foreclosure, without interference from the Partnership. An affiliate of MII, as ground lessor, has agreed to waive up to $1.2 million of ground rent for a period of up to one year, and any additional ground rent due in excess of $1.2 million will be deferred until the earlier of: (i) the sale of an Inn, or (ii) April 1, 2005; provided, however that in the event a default arises under the agreements reached with MII at any time, all ground rent shall become immediately due and payable. MII, as franchisor, has agreed that for those Inns that will remain in the Fairfield Inn by Marriott system, the property improvement plans are not required to be completed until April 1, 2005, however the work must be commenced by September 1, 2004, and has also agreed to waive any liquidated damages that otherwise may be due to MII arising from the early termination of a franchise agreement due to the sale of an Inn through September 1, 2004, and thereafter reduced the amount to $25,000 per property for Inns sold between September 1, 2004 and November 30, 2004. In exchange for these ground rent and franchise termination fee concessions, the Partnership has agreed to remove 12 of the Inns, as identified by MII, from the Fairfield Inn by Marriott system no later than September 1, 2004 and keep six of the Inns, as identified by MII, in the Fairfield Inn by Marriott system. The remaining Inns can be sold either as a Fairfield Inn by Marriott or without the franchise agreement. In the event product improvement plans are not completed by April 1, 2005 for any Inn not sold, it will result in a default under 17 the MII agreements, and permit MII to terminate the franchise agreements. Further, upon the termination of any franchise agreement, the Partnership must purchase MII's interest under all ground leases. On November 20, 2003, the Partnership engaged a nationally recognized broker to begin marketing the Inns for sale. It is expected that the Partnership will, in all likelihood, be dissolved in 2005, either upon the sale of all Inns or as a result of the foreclosure by the lender of any remaining Inns not otherwise sold. PRINCIPAL SOURCES AND USES OF CASH: The Partnership's principal source of cash has been cash from operations. The Partnership's principal uses of cash are to make debt service payments, ground lease payments and fund the property improvement fund. During the period of liquidation, the Partnership's principal source of cash will be the $65,217 received upon the sale of each Inn. In 2003 during the period in which the Partnership operated as a going concern, January 1 through September 30, 2003, the Partnership's cash and cash equivalents, excluding funds held in lender reserves, decreased by $923,000 to $4.9 million at September 30, 2003 compared to $5.9 million at December 31, 2002. The decrease from the prior year is due to $3.5 million of cash used in investing activities and $1.8 million of cash used in financing activities, which were partially offset by $4.4 million of cash provided by operating activities. Cash used in investing activities consisted of capital improvements and equipment purchases. Cash used in financing activities consisted of changes to the restricted cash reserves as required under the terms of the mortgage debt. SALES OF PROPERTIES. On July 29, 2002, the Partnership sold its Inn located in Montgomery, Alabama for $3.1 million. The net proceeds from the sale of approximately $2.9 million were applied toward the Partnership's mortgage debt, in accordance with the terms of the loan agreement. The Partnership recognized a gain on the sale of approximately $2.1 million. On August 12, 2002, the Partnership sold its Inn located in Charlotte (Airport), North Carolina for $2.5 million. The net proceeds from the sale of approximately $300,000, which is net of approximately $1.9 million attributed to the ground lease buyout, were applied toward the Partnership's mortgage debt, in accordance with the terms of the loan agreement. The Partnership recognized a gain on the sale of approximately $200,000. On August 14, 2002, the Partnership sold its Inn located in Atlanta (Southlake), Georgia for $3.0 million. The net proceeds from the sale of approximately $2.8 million were applied toward the Partnership's mortgage debt, in accordance with the terms of the loan agreement. The Partnership recognized a gain on the sale of approximately $200,000. On October 9, 2002, the Partnership sold its Inn located in Chicago (Lansing), Illinois for $2.3 million. The net proceeds from the sale of approximately $1.4 million, which is net of approximately $700,000 attributed to the ground lease buyout, were applied toward the Partnership's mortgage debt, in accordance with the terms of the loan agreement. The Partnership recognized a gain on the sale of approximately $1.1 million. On March 24, 2004, the Partnership sold its inn located in Norcross, Georgia for $1.5 million. After closing costs and the payment to the Partnership of the $65,217 as agreed to under the liquidation plan, the net proceeds from the sale of approximately $1.3 million were applied toward the Partnership's mortgage debt. The Partnership recognized a loss of the sale of $3,000. On March 25, 2004, the Partnership sold its inns located in Buena Park and Placentia, California for an aggregate price of $8.75 million. After payment for the purchase of the ground for $3.6 million, closing costs and the payment to the Partnership of $130,434, as agreed to under the liquidation plan, the net proceeds from the sale of approximately $4.5 million were applied toward the Partnership's mortgage debt. The Partnership recognized a loss of the sale of $7,000. 18 RESULTS OF OPERATIONS The following discussion and analysis addresses results of operations and should be read together with the "Selected Financial Data" and historical financial statements and related notes included elsewhere herein. Changes in Net Liabilities in Liquidation September 30, 2003 to December 31, 2003 Net liabilities in liquidation decreased by $29.6 million from September 30, 2003 to December 31, 2003. Operating loss, which includes property related income and expenses, and interest expense, was $3.1 million for the period. The fair value of real estate decreased $25.6 million due to changes in anticipated proceeds from future property sales based upon current trends in the real estate markets. The Company realized a loss on the decrease in the fair value of inventory of $0.9 million. The Period January 1 through September 30, 2003 compared to the Year Ended December 31,2002 The following discussion of results of operations from January 1 through September 30, 2003 compared to the year ended December 31, 2002 do not contain comparable periods; however such comparison is provided to present a discussion of general trends in the operating results of the Partnership. Rooms Revenues: Rooms revenues decreased $21.4 million, or approximately 28% to $55.3 million in 2003 from $76.7 million in 2002. Revenues declined primarily as the result of the adoption of liquidation accounting for the period subsequent to September 30, 2003, pursuant to which the Partnership ceased the recognition of revenue during the fourth quarter. Also contributing to the decline was the sale of four of the Partnership's hotels during 2002, offset partially by increased revenues due to slightly improved occupancy levels from a general improvement in the economy. Operating Expenses: Operating expenses decreased $7.5 million, or 9.5%, to $71.3 million when compared to 2002. The principal individual components are discussed below. Room Costs: In 2003, rooms costs decreased $6.4 million or 25.3%, to $18.9 million when compared to 2002. This decline is the result of the adoption of liquidation accounting for the period subsequent to September 30, 2003, pursuant to which the Partnership ceased the recognition of expense during the fourth quarter. Also contributing to the decline was the sale of four of the Partnership's hotels during 2002. Selling, Administrative and other: Selling, administrative and other expenses decreased by $6.7 million in 2003 to $19.1 million, or a 25.8% decrease when compared to 2002. The decrease in these expenses was also due to the adoption of liquidation accounting for the period subsequent to September 30, 2003, pursuant to which the Partnership ceased the recognition of expense during the fourth quarter. Depreciation: Depreciation expense decreased by $1.4 million or 15% to $8.0 million for the period January 1 through September 30, 2003 compared to the year ended December 31, 2002. This was due to the cessation of depreciation in connection with the adoption of liquidation basis accounting, offset slightly by additional depreciation on improvements put in place during the period January 1 through September 30, 2003. Ground Rent: Ground rent decreased by $95,000 in 2003 to $2.5 million, or a 3.6% decrease when compared to 2002. The decrease in expenses was also due to the adoption of liquidation accounting for the period subsequent to September 30, 2003, pursuant to which the Partnership ceased the recognition of expense during the fourth quarter. That decline was largely offset by the expiration in 2003 of ground rent waivers granted for 2002. Base Management Fee: Base management fee decreased $708,000 or approximately 29.5% to $1.7 million in 2003 from $2.4 million in 2002. The base management fee declined primarily as the result of the adoption of liquidation accounting for the period subsequent to September 30, 2003, pursuant to which the Partnership ceased the recognition of expense during the fourth quarter. Also contributing to the decline was the sale of four of the Partnership's hotels during 2002. 19 Insurance and other: Insurance and other expenses decreased by $685,000 in 2003 to $2.3 million, or a 22.8% decrease when compared to 2002. The decrease in expenses was also due to the adoption of liquidation accounting for the period subsequent to September 30, 2003, pursuant to which the Partnership ceased the recognition of expense during the fourth quarter. Loss on impairment of long-lived assets: In 2003, the Partnership recorded impairment of long lived assets of million related to 23 of its Inns. In 2002, the Partnership recorded impairment of long-lived assets of $5.3 million related to its Inns located in Atlanta (Northlake), Georgia; Birmingham, Alabama; Detroit (Warren), Michigan; St. Louis (Hazelwood), Missouri; Greenville, South Carolina; and Orlando (South), Florida. Operating Loss: As a result of the changes in revenues and operating expenses discussed above, operating loss increased by $15.3 million resulting in an operating loss of $15.4 million in 2003 compared to operating loss of $3,000 in 2002. Interest Expense: Interest expense decreased by $3.5 million to $8.9 million in 2003 when compared to 2002. The decrease in expense was also due to the adoption of liquidation accounting for the period subsequent to September 30, 2003, pursuant to which the Partnership ceased the recognition of expense during the fourth quarter. Net Loss: Net loss for 2003 was $24.1 million compared to net loss of $8.5 million for 2002. The increase is primarily due to the $15.1 million impairment charge in 2003. 2002 compared to 2001 Rooms Revenues: Rooms revenues decreased $4.8 million or approximately 5.9% to $76.7 million in 2002 from $81.5 million in 2001, reflecting a 2.8 percentage point decrease in average occupancy to 59.2%. The decrease in average occupancy was primarily the result of the increased competition in the economy segment which was exacerbated by the general downturn in the economy experienced during 2002, which hurt the hospitality industry in general. Revenues also declined due to the sale of four of the Partnership's hotels during 2002. Excluding the effect on revenues of the sale of these four hotels, rooms revenues for the remaining 46 inns decreased $3.0 million, or approximately 3.9% to $73.0 million in 2002 from $76.0 million in 2001. In 2002, total Inn revenues decreased $5.1 million, or 6.0%, to $78.8 million when compared to $83.9 million in 2001. Operating Expenses: Operating expenses decreased $4.6 million, or 5.5%, to $78.8 million when compared to 2001. The individual components are discussed below. Room Costs: In 2002, rooms costs decreased $1.1 million, or 4.2%, to $25.3 million when compared to 2001. The overall decrease in controllable room costs is a result of the occupancy decreases at the Inns. Room costs in 2002 were also lower due to the sale of four of the hotels during 2002. Selling, Administrative and other: Selling, administrative and other expenses decreased by $1.3 million in 2002 to $25.8 million, or a 4.8% decrease when compared to 2001. The decrease in expenses was due to a decrease in repairs and maintenance expenses. Fairfield Inn system fee: In connection with the Partnership's termination of the management agreement with Fairfield FMC Corporation on November 30, 2001, the Partnership's obligation to pay system fees is now included in its franchise fees paid to MII. In 2001, the Partnership recognized $2.4 million in Fairfield Inn system fee expenses. Insurance and other: Insurance and other expenses decreased by $1.1 million in 2002 to $3.0 million, or a 26% decrease when compared to 2001. The decrease in expense is primarily due the following expenses incurred in 2001: the payment of a franchise application fee of $500,000 to MII in connection with the new franchise agreement, legal expenses incurred in connection with the restructuring, and expenses associated with the transition of the management of the Inns from MII to Sage. 20 Termination of management agreement: In connection with the termination of the Management Agreement with Fairfield FMC Corporation, the Partnership paid MII $500,000 and wrote off deferred incentive fees of $2.8 million as the fees were no longer due. Loss on impairment of long-lived assets: In 2002, the Partnership recorded impairment of long-lived assets of $5.3 million related to its Inns located in Atlanta (Northlake), Georgia; Birmingham, Alabama; Detroit (Warren), Michigan; St. Louis (Hazelwood), Missouri; Greenville, South Carolina; and Orlando (South), Florida. The Partnership recorded an impairment charge of $3.8 million in 2001 related to the Inns located in Greenville, South Carolina; Charlotte (Northeast), North Carolina; Charlotte (Airport), North Carolina; Chicago (Lansing), Illinois; Atlanta (Southlake), Georgia; and Atlanta (Peachtree Corners), Georgia. Operating (Loss) Profit: As a result of the changes in revenues and operating expenses discussed above, operating loss increased by $499,000, resulting in an operating loss of $3,000 in 2002 compared to operating profit of $496,000 in 2001. Interest Expense: Interest expense decreased by $530,000 to $12.3 million in 2002 when compared to 2001. This decrease is due to the payment of $11.4 million of principal on the mortgage debt. Gain on Disposition of Properties: During 2002, the Partnership recorded gain on disposition of properties of $3.5 million related to the sale of its Inns located in Montgomery, Alabama; Charlotte-Airport, North Carolina; Atlanta-Southlake, Georgia; and Chicago-Lansing, Illinois. Net Loss: Net loss for 2002 was $8.5 million compared to net loss of $11.5 million for 2001. The decrease is primarily due to the $3.5 million gain on disposition of four of the Partnership's properties and decreases in operating expenses, offset by the decrease in revenues. RECENTLY ISSUED ACCOUNTING STANDARDS Financial Accounting Standards Board ("FASB") SFAS No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets" supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The standard provides guidance beyond that previously specified in Statement 121 to determine when a long-lived asset should be classified as held for sale, among other things. This Statement was adopted by the Partnership effective January 1, 2002. Implementation of the statement did not have a material effect on the Partnership. SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of SFAS No. 13 and Technical Corrections," updates, clarifies and simplifies existing accounting pronouncements. In part, this statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt." SFAS No. 145 will be effective for fiscal years beginning after May 15, 2002. Upon adoption, enterprises must reclassify prior period items that do not meet the extraordinary item classification criteria in APB Opinion No. 30. This statement had no effect on the Partnership's financial statements. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. SFAS No. 146 is effective prospectively for exit and disposal activities initiated after December 31, 2002, with earlier adoption encouraged. This statement had no effect on the Partnership's financial statements. FASB Interpretation No. 45, "Guarantors' Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This Interpretation does not prescribe a specific approach for subsequently measuring the guarantor's 21 recognized liability over the term of the related guarantee. The disclosure provisions of this Interpretation are effective for the Partnership's December 31, 2002 financial statements. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. This Interpretation had no effect on the Partnership's financial statements. FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities". This interpretation clarifies the application of existing accounting pronouncements to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, FASB issued a revision to Interpretation No. 46 ("46R") to clarify some of the provisions of Interpretation No. 46, and exempt to certain entities from its requirements. The provisions of the interpretation need to be applied no later than December 31, 2004, except for entities that are considered to be special-purpose entities which need to be applied as of December 31, 2003. This interpretation had no effect on the Partnership's financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial reporting and accounting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The changes in the statement improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this statement (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in SFAS No. 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an Underlying to conform it to language used in FASB Interpretation No. 45 and (4) amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts either as derivatives or hybrid instruments. This statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The provisions of this statement that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as contracts entered into after June 30, 2003. This statement has no effect on the Partnership's financial statements. In May 2003, the issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The statement improves the accounting for certain financial instruments that under pervious guidance, issuers could account for as equity. The new statement requires that those instruments be classified as liabilities in statements of financial position. SFAS No. 150 affects the issuer's accounting for three types of freestanding financial instruments. One type is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash and other assets. A second type, which includes put options and forward purchase contracts, involves instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instruments that are liabilities under this statement is obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such a market index, or varies inversely with the value of the issuers' shares. SFAS No. 150 does not apply to features embedded in a financial instrument that is not a derivative of the entirety. In addition to its requirements for the classification and measurement of financial instruments in its scope, SFAS No. 150 also requires disclosures about alternative ways of settling the instruments and the capital structures of all entities, all of whose shares are mandatorily redeemable. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. This statement has no effect on the Partnership's financial statements. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Partnership does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting 22 policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. The Partnership adopted the liquidation basis of accounting for all periods beginning after September 30, 2003. On September 30, 2003, in accordance with the liquidation basis of accounting, assets were adjusted to estimated net realizable value and liabilities were adjusted to estimated settlement amounts, including estimated costs associated with carrying out the liquidation. The valuation of real estate held for sale is based on current estimates and other indications of sales value net of estimated selling costs. Actual values realized for assets and settlement of liabilities may differ materially from the amounts estimated. Due to the uncertainty in timing of anticipated sales of property, no provision has been made for estimated future cash flows from property operations. Under the liquidation basis of accounting, the Partnership is required to estimate and accrue the non-operating costs associated with executing the plan of liquidation. These amounts can vary significantly due to, among other things, the timing and realized proceeds from property sales, the costs of retaining agents and trustees to oversee the liquidation, including the costs of insurance, the timing and amounts associated with discharging known and contingent liabilities and the non-operating costs associated with cessation of the Partnership's operations. These non-operating costs are estimates and are expected to be paid out over the liquidation period. However, in accordance with FASB No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities", the non-recourse mortgage debt and related mortgage premium were not adjusted to its estimated settlement amount as the Partnership has not been legally released from being the primary obligor under the mortgage debt. Accordingly, the outstanding mortgage balance and accrued and unpaid interest will continue to be presented at its historical basis. Prior to the adoption of the liquidation basis of accounting and during the nine months ended September 30, 2003 and the years ended December 31, 2002 and 2001, the Partnership recognized $15.3 million, $5.2 million, and $3.8 million, respectively, of impairment losses related to its property and equipment. An impairment loss was recorded for an Inn if estimated undiscounted future cash flows were less than the book value of the Inn. Impairment losses were measured based on the estimated fair value of the Inn. The Partnership based its estimates of fair values primarily upon tax assessments and sales comparisons. In assessing the recoverability of the Partnership's property and equipment the Partnership considered the forecasted financial performance of its properties. Useful lives of long-lived assets: Property and equipment, and certain other long-lived assets, are amortized over their useful lives. Useful lives are based on management's estimates of the period that the assets will generate revenue. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The Partnership is not subject to market risk with respect to interest rates, foreign currency exchanges or other market rate or price risk, and we do not hold any financial instruments for trading purposes. As of December 31, 2003, all of the Partnership's debt has a fixed interest rate. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS

~~2001~~Page ~~2000 1999~~ ---- ~~----~~Independent ~~----~~Auditors' ~~REVENUES~~Report..................................................................... ~~Rooms~~25 ~~$81,540~~Report ~~$89,308~~of ~~$90,653~~Independent ~~Other~~Auditors................................................................... ~~2,325~~26 ~~2,170~~Report ~~2,431~~of ~~---------~~Independent ~~--------~~Public ~~--------~~Accountants......................................................... ~~Total~~28 ~~revenues~~Statement ~~83,865~~of ~~91,478~~Net ~~93,084~~Liabilities ~~---------~~in ~~--------~~Liquidation ~~--------~~as ~~OPERATING~~of ~~EXPENSES~~December ~~Rooms 26~~31,~~373~~ ~~27,894~~2003 ~~28,481~~(Liquidation ~~Other~~Basis) ~~department~~and ~~costs~~Balance ~~and~~Sheet ~~expenses~~as ~~1,844~~of ~~1,670~~December 131,~~597~~ ~~Selling,~~2002 ~~administrative~~(Going ~~and~~Concern ~~other~~Basis).................................. ~~27,135~~29 ~~27,701~~Statement ~~26,907~~of ~~---------~~Changes ~~--------~~in ~~--------~~Net ~~Total~~Liabilities ~~property-level~~in ~~costs~~Liquidation ~~and~~(Liquidation ~~expenses~~Basis) ~~55,352~~for ~~57,265~~the ~~56,985~~period ~~Depreciation~~from ~~11,647~~September 1330,~~463~~ ~~14,413~~2003 ~~Property~~through ~~taxes~~December 431,~~048~~ ~~3,886~~2003................................. ~~3,749~~30 ~~Fairfield~~Statements ~~Inn~~of ~~system~~Operations ~~fee~~for ~~2,409~~the ~~2,744~~period ~~2,792~~from ~~Incentive~~January ~~management fee -- 2~~1,~~849~~ ~~2,775~~2003 ~~Ground~~through ~~rent~~September 230,~~665~~ ~~2,964~~2003 ~~2,742~~and ~~Base~~for ~~management~~the ~~fee~~years ~~1,712~~ended ~~1,830~~December 131,~~862~~ ~~Insurance~~2002 and ~~other~~2001 ~~4,077 1,198 1,038 Termination of management agreement~~ (~~Note~~Going 7)Concern ~~(2,349~~Basis)......................... --31 --Statements ~~Loss on impairment~~ of ~~long-lived~~Changes ~~assets~~in ~~(Note~~Partners' 2)Deficit ~~3,808~~for ~~8,127~~the ~~2,843~~period ~~---------~~from ~~--------~~January ~~-------- Total operating expenses 83~~1,~~369~~ ~~94,326~~2003 ~~89,199~~through ~~---------~~September ~~-------- -------- OPERATING PROFIT (LOSS) 496 (2~~30,~~848)~~ ~~3,885~~2003 ~~Interest~~and ~~expense~~for ~~(12,845)~~the ~~(13,238)~~years ~~(13,528)~~ended ~~Interest~~December ~~income 727 1~~31,~~312~~ ~~1,091~~2002 ~~Other~~and ~~income~~2001 ~~150 -- -- --------- -------- -------- LOSS BEFORE EXTRAORDINARY ITEM~~ (~~11,472)~~Going ~~(14,774)~~Concern ~~(8,552~~Basis)...... ~~EXTRAORDINARY~~32 ~~ITEM~~Statements ~~Gain on the forgiveness~~ of ~~incentive~~Cash ~~management~~Flows ~~fees~~from --January 231,~~483~~ --2003 ~~---------~~through ~~--------~~September ~~-------- NET (LOSS) INCOME $(11~~30,~~472)~~ ~~$8,709~~2003 ~~$(8,552)~~and ~~=========~~for ~~========~~the ~~========~~years ~~ALLOCATION~~ended OFDecember ~~NET (LOSS) INCOME General Partner $(115) $87 $(86) Limited Partners (11~~31,~~357)~~ ~~8,622~~2002 ~~(8,466)~~and ~~---------~~2001 ~~-------- -------- $~~(~~11,472)~~Going ~~$8,709~~Concern ~~$(8,552~~Basis)......................... ~~=========~~33 ~~========~~Notes ~~========~~to ~~NET~~Financial ~~(LOSS)~~Statements.................................................................... ~~INCOME PER LIMITED PARTNER UNIT (83,337 UNITS) $ (136) $ 103 $ (102) ========= ======== ========~~34

24 Independent Auditors' Report To the Partners Fairfield Inn by Marriott Limited Partnership We have audited the accompanying statement of net liabilities in liquidation of Fairfield Inn by Marriott Limited Partnership (the "Partnership") as of December 31, 2003, and the statements of operations, changes in partners' deficit and cash flows for the period from January 1, 2003 through September 30, 2003 (Going Concern basis). In addition, we have audited the related statement of changes in net liabilities in liquidation for the period from September 30, 2003 through December 31, 2003. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 audit provides a reasonable basis for our opinion. As discussed in Note 1 to the financial statements, the Partnership has reached an agreement with its lender and Marriott International, Inc. and its affiliates to implement a liquidation of all the Partnership's remaining properties, and as a result, the Partnership has changed its basis of accounting to the liquidation basis effective September 30, 2003. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Fairfield Inn by Marriott Limited Partnership for the period from January 1, 2003 through September 30, 2003, in conformity with accounting principles generally accepted in the United States of America and its statement of net liabilities in liquidation as of December 31, 2003 and the changes in net liabilities in liquidation for the period from September 30, 2003 through December 31, 2003, applied on the basis described in the preceding paragraph. /s/ Imowitz Koenig & Co., LLP New York, New York March 25, 2004 25 Report of Independent Auditors To the Partners Fairfield Inn by Marriott Limited Partnership We have audited the accompanying balance sheet of Fairfield Inn by Marriott Limited Partnership as of December 31, 2002, and the related statements of operations, changes in partners' capital (deficit), and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item l5(a). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. The financial statements and schedule of Fairfield Inn by Marriott Limited Partnership for the years ended December 31, 2001 and 2000, were audited by other auditors who have ceased operations and whose report dated March 18, 2002, included an explanatory paragraph that raised substantial doubt about the Partnership's ability to continue as a going concern. The financial statements on which they reported were before giving effect to the reclassification adjustments and disclosures described in Note 9. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the financial position of Fairfield Inn by Marriott Limited Partnership at December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule as of and for the year ended December 31, 2002, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying financial statements have been prepared assuming that Fairfield Inn by Marriott Limited Partnership will continue as a going concern. As more fully described in Note 1, the Partnership has incurred recurring operating losses, has a partners' deficit and is in default on its mortgage loan, and its ground leases and franchise agreements with Marriott International, Inc. These conditions raise substantial doubt about the Partnership's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. As discussed above, the financial statements of Fairfield Inn by Marriott Limited Partnership as of December 31, 2001, and for the year then ended, were audited by other auditors who have ceased operations. As described in Note 9, these financial statements have been revised to reflect the components of working capital on the balance sheet. We audited the adjustments in Note 9 that were applied to revise the balance sheet as of December 31, 2001 and the statement of cash flows for the year ended December 31, 2001. Our procedures included (a) agreeing the adjusted amounts for cash, accounts receivable, prepaid expenses and other current assets, and accounts payable to the Partnership's underlying trial 26 balances obtained from Management and (b) testing the mathematical accuracy of the financial statements. In our opinion, such adjustments and disclosures are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 financial statements of the Partnership other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 financial statements taken as a whole. Ernst & Young LLP March 14, 2003, except for Notes 1 and 7 as to which the date is March 26, 2003 27 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE PARTNERS OF FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP: We have audited the accompanying balance sheets of Fairfield Inn by Marriott Limited Partnership (a Delaware limited partnership) as of December 31, 2001 and 2000, and the related statements of operations, changes in partners' capital (deficit) and cash flows for the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fairfield Inn by Marriott Limited Partnership as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the partnership will continue as a going concern. As discussed in Note 1 to the financial statements, the partnership has suffered recurring operating losses, has a net capital deficiency, and the partnership may not be able to meet its 2002 debt obligations. These factors raise substantial doubt about the partnership's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments relating to recoverability of asset carrying amounts or the amount of liabilities that might result should the partnership be unable to continue as a going concern. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index at Item 14(a)(2) is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Vienna, Virginia March 18, 2002 Note: This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Fairfield Inn by Marriott Limited Partnership's Annual Report on Form 10-K for the year ended December 31, 2001. This report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K. 28 FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP STATEMENT OF NET LIABILITIES IN LIQUIDATION (LIQUIDATION BASIS) AS OF DECEMBER 31,2003 AND BALANCE SHEET (GOING CONCERN BASIS) AS OF DECEMBER 31,2002 (in thousands)

~~General~~Liquidation ~~Limited~~Basis ~~Partner~~Going ~~Partners~~Concern ~~Total~~Basis ~~Balance,~~2003 ~~December~~2002 31-------- -------- ASSETS Property and equipment, ~~1998~~net $ ~~(84)~~-- $~~(13,402)~~ ~~$(13~~99,~~486)~~626 ~~Net~~Properties ~~loss~~held ~~(86)~~for (8sale 124,~~466)~~972 (81,~~552)~~122 Deferred financing costs, net of accumulated amortization -- 1,875 Accounts receivable 1,162 1,008 Prepaid insurance and other current assets 1,325 1,270 Inventory -- 920 Due from Marriott International, Inc. --~~--------~~ 387 Property improvement fund 2,156 2,785 Restricted cash 1,770 8 Cash and cash equivalents 3,510 5,900 --------~~------~~ --------~~------~~ ~~Balance~~Total assets $134,895 ~~December~~$114,901 31======== ======== LIABILITIES AND PARTNERS' DEFICIT Mortgage debt $135,311 ~~1999~~$137,070 ~~(170)~~Land ~~(21~~Purchase obligation due to Marriott International,~~868)~~ ~~(22~~Inc 50,~~038)~~471 ~~Net~~-- ~~income~~Accounts 87payable 8and accrued liabilities 16,~~622~~480 8,~~709~~546 Due to Marriott International, Inc., its affiliates and other 2,267 5,034 Reserved for estimated costs during the period of liquidation 1,500 -- -------- ---- ---- Total liabilities 206,029 150,650 ---------- --------~~------~~ ~~Balance,~~Net ~~December~~Liabilities ~~31,~~in ~~2000~~Liquidation ~~(83)~~$ ~~(13~~71,~~246)~~134 ~~(13,329)~~======== ~~Net~~PARTNERS' ~~loss~~DEFICIT ~~(115)~~General Partner (~~11,357~~307) Limited Partners (1135,~~472~~442) --------~~------~~ ~~--------------~~Total partners' deficit (35,749) --------~~------~~ ~~Balance,~~Total ~~December~~liabilities ~~31,~~and ~~2001~~partners' ~~$(198)~~deficit $~~(24~~114,~~603)~~901 ~~$(24,801)~~ ========~~====== ============== ==============~~

The accompanying notes are an integral part of these financial statements. 29 FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP STATEMENT OF CHANGES IN NET LIABILITIES IN LIQUIDATION (LIQUIDATION BASIS) (IN THOUSANDS) Period from September 30, 2003 through December 31, 2003 ------------------ Net Liabilities in Liquidation as of September 30, 2003 $41,495 Operating Loss 3,165 Changes in net assets in liquidation: Decrease in fair value of real estate 25,554 Decrease in inventory value 920 ------- Net Liabilities in Liquidation as of December 31, 2003 $71,134 ======= The accompanying notes are an integral part of these financial statements. 30 FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS (GOING CONCERN BASIS) (in thousands, except Unit and per Unit amounts)

~~2001~~Period ~~2000~~January ~~1999~~1 through September 30, Years Ended December 31, ---- ------------ ------------------------ ~~OPERATING~~2003 ~~ACTIVITIES~~2002 ~~Net~~2001 ~~(loss)~~-------- ~~income~~-------- -------- REVENUES Rooms $~~(11~~ 55,~~472)~~288 $8 76,~~709~~727 $(8 81,~~552)~~540 ~~Extraordinary~~Other ~~gain~~616 on2,070 ~~the~~2,325 ~~forgiveness~~-------- ~~of incentive~~ -------- ~~(23,483)~~ -------- ~~management~~Total ~~fees~~revenues ~~Depreciation 11~~55,~~647~~904 1378,~~463~~797 1483,~~413~~865 ~~Deferral~~-------- of-------- ~~incentive~~-------- ~~management~~OPERATING ~~fee~~EXPENSES --Rooms 218,~~849~~879 225,~~775~~277 ~~Amortization~~26,373 ofOther ~~deferred~~department ~~financing~~ costs asand ~~interest~~expenses ~~expense~~877 ~~486~~1,481 ~~487~~1,844 ~~486~~Selling, ~~Amortization~~administrative ofand ~~mortgage~~other ~~debt~~19,126 ~~premium~~25,799 ~~(350)~~27,135 ~~(350)~~-------- ~~(350)~~-------- ~~Loss~~-------- onTotal ~~disposition of equipment~~ property--level 16costs 28and ~~Loss~~expenses on38,882 ~~impairment~~52,557 of55,352 ~~long-lived~~Depreciation ~~assets~~8,041 39,~~808~~465 811,~~127~~647 Property taxes 2,~~843~~474 ~~Termination~~3,480 of4,048 ~~management~~Fairfield ~~agreement~~Inn ~~(2,849)~~system fee -- -- ~~Changes~~2,409 inGround ~~operating~~rent ~~accounts:~~2,512 ~~Due~~2,607 ~~to/from Marriott International~~2,665 ~~Inc.~~Base ~~and~~management ~~affiliates~~fee 1,696 2,~~636~~404 ~~106~~1,712 ~~823~~Insurance ~~Receivables~~ and other ~~current assets (~~2,~~069)~~324 --3,009 --4,077 ~~Accounts~~Termination ~~payable~~of ~~and~~management ~~accrued~~agreement ~~liabilities 749~~ (~~335~~Note 8) ~~776 Change in restricted reserves 1,518 913 3,119~~ --~~-----------~~ --~~----------~~ ~~----------- Cash provided by operations 4~~(2,~~104~~349) ~~10,502~~Loss ~~16,361~~on ~~INVESTING~~impairment ~~ACTIVITIES~~of ~~Additions~~long-lived toassets ~~property and equipment~~ (~~9,190)~~Note ~~(6,682~~2) (815,~~973)~~326 ~~Change in property improvement fund 269 (1~~5,~~603)~~278 (3,~~678)~~808 --------~~-----~~ --------~~----~~ --------~~---~~ ~~Cash~~Total ~~used~~operating inexpenses ~~investing activities (8~~71,~~921)~~255 (878,~~285)~~800 ~~(12~~83,~~651)~~369 --------~~-----~~ --------~~----~~ --------~~---~~ ~~FINANCING~~OPERATING ~~ACTIVITIES Repayment of mortgage debt~~ (~~4,369~~LOSS) PROFIT (315,~~978~~351) (3~~,689~~) ~~Change~~496 inInterest ~~restricted~~expense ~~cash 3~~(8,~~081~~856) (~~598~~12,315) 1(12,~~386~~845) ~~-------------~~Interest ~~------------~~income ~~-----------~~46 ~~Cash~~223 ~~used~~727 inGain ~~financing~~on ~~activities~~disposition ~~(1,288)~~of properties (Note 4~~,576~~) (2-- 3,~~303)~~547 -- Other income -- -- 150 -------- --------~~----~~ --------~~---~~ NET LOSS $(~~DECREASE~~24,161) ~~INCREASE~~$ ~~IN CASH AND~~ (68,~~105~~548) $(211,~~359~~472) ~~1,407~~======== ~~CASH~~======== ~~EQUIVALENTS~~======== ~~CASH~~ALLOCATION ~~AND~~OF ~~CASH~~NET ~~EQUIVALENTS~~LOSS atGeneral ~~beginning~~Partner of$ ~~year~~(241) ~~7,702~~$ 10(85) $ (115) Limited Partners (23,~~061~~920) (8,~~654~~463) (11,357) --------~~-----~~ --------~~----~~ --------~~---~~ ~~CASH AND CASH EQUIVALENTS at end of year~~ $ 1(24,~~597~~161) $ 7(8,~~702~~548) $ 10(11,~~061~~472) ========~~=====~~ ========~~====~~ ========~~===~~ ~~SUPPLEMENTAL~~NET ~~DISCLOSURE~~LOSS OFPER ~~CASH~~LIMITED ~~FLOW~~PARTNER ~~INFORMATION:~~UNIT ~~Cash~~(83,337 ~~paid~~UNITS) ~~for mortgage interest~~ $ ~~12,730~~(287) $ ~~13,121~~(102) $ ~~13,409~~(136) ========~~=====~~ ========~~====~~ ========~~===~~

The accompanying notes are an integral part of these financial statements. 31 FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' DEFICIT (GOING CONCERN BASIS) For the period January 1, 2003 to September 30, 2003 and For the years ended December 31, 2002 and 2001 (in thousands)

AsGeneral ofLimited ~~December~~Partner ~~31,~~Partners ~~2001~~Total As-------- of-------- -------- Balance, December 31, 2000 ~~Estimated~~$ ~~Estimated~~(83) ~~Carrying~~$(13,246) ~~Fair~~$(13,329) ~~Carrying~~Net ~~Fair~~loss ~~Amount~~(115) ~~Value~~(11,357) ~~Amount~~(11,472) ~~Value~~-------- -------- -------- Balance, December 31, 2001 (198) (24,603) (24,801) Distribution to partners (24) (2,376) (2,400) Net loss (85) (8,463) (8,548) -------- -------- ~~Mortgage~~-------- ~~debt $148~~Balance,~~850~~ ~~$123~~December 31,~~511~~ ~~$153~~2002 (307) (35,~~569~~442) ~~$135~~(35,~~033~~749) ~~Incentive~~Net ~~management~~loss ~~fee~~(241) ~~due~~(23,920) to(24,161) $-------- -------- $ -------- $Balance, 2September 30,~~849~~ 2003 $ ~~194~~(548) ~~Fairfield~~$(59,362) ~~FMC~~$(59,910) ~~Corporation~~======== ======== ========

The accompanying notes are an integral part of these financial statements. 32 FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS (GOING CONCERN BASIS) (in thousands)

~~Initial~~Period ~~Costs~~from January 1 through September 30, Years Ended December 31, ------------- ----------------------------- 2003 2002 2001 ---- ---- ---- OPERATING ACTIVITIES Net loss $(24,161) $(8,548) $(11,472) Gain on disposition of properties -- (3,547) -- ~~Leasehold~~Depreciation 8,041 ~~Buildings~~9,465 11,647 Amortization of deferred ground rent -- (23) -- Amortization of deferred financing costs as interest expense 351 576 486 Amortization of mortgage debt premium (137) (350) (350) Loss on impairment of long-lived assets 15,326 5,278 3,808 Termination of management agreement -- -- (2,849) Changes in operating accounts: Due to/from Marriott International, Inc. and ~~Subsequent~~affiliates ~~Properties~~1,175 ~~Held~~2,554 ~~Buildings~~2,636 Receivables and ~~Accumulated~~other ~~Description~~current ~~Encumbrances~~assets ~~Land~~266 ~~Improvements~~1,365 ~~Costs~~(2,069) ~~Capitalized~~Accounts ~~For~~payable ~~Sale~~and ~~Land~~accrued ~~Improvements~~liabilities ~~Total~~4,030 ~~Depreciation~~(1,619) 50749 ~~Fairfield~~Change ~~Inns~~in ~~$148~~restricted reserves (486) 1,~~850~~327 $1,518 ------------ ----------- -------------- Cash provided by operations 4,405 6,478 4,104 ------------ ----------- -------------- INVESTING ACTIVITIES Additions to property and equipment (4,288) (4,155) (9,190) Proceeds from sale of properties -- 10,395 -- Change in property improvement fund 739 2,435 269 ------------ ----------- -------------- Cash (used in) provided by investing activities (3,549) 8,675 (8,921) ------------ ----------- -------------- FINANCING ACTIVITIES Repayment of mortgage debt -- (11,430) (4,369) Distribution to partners -- (2,400) -- Payment of ground lease buy-out -- (2,606) -- Change in restricted cash (1,779) 1,792 3,081 ------------ ----------- -------------- Cash used in financing activities (1,779) (14,~~873~~644) ~~$159~~(1,~~615~~288) ------------ ----------- -------------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (923) 509 (6,105) CASH AND CASH EQUIVALENTS at beginning of period 5,900 5,391 7,702 CASH OF THE INNS (Note 9), as restated -- -- 3,794 ------------ ----------- -------------- CASH AND CASH EQUIVALENTS at end of period $13 4,~~046~~977 $~~(16~~ 5,~~178)~~900 $13 5,~~425~~391 ============ =========== ============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for mortgage interest $~~157~~4,~~931~~666 $~~171~~11,~~356~~185 $70 12,~~065~~730 ============ =========== ==============

The accompanying notes are an integral part of these financial statements. 33 NOTE 1. THE PARTNERSHIP Description of the Partnership Fairfield Inn by Marriott Limited Partnership (the "Partnership"), a Delaware limited partnership, was formed on August 23, 1989, to acquire, own and operate 50 Fairfield Inn by Marriott properties (the "Inns"), which compete in the economy segment of the lodging industry. Effective August 16, 2001, AP-Fairfield GP LLC, a Delaware limited liability company, became the general partner of the Partnership. During the year ended December 31, 2002, the Partnership sold four of its Inns, two of which leased underlying land from Marriott International, Inc. ("MII"). On December 5, 2003 as a result of the agreement reached between the Partnership, its lender and MII, the Partnership adopted the liquidation basis of accounting for all periods beginning after September 30, 2003 and accordingly adjusted the assets to estimated net realizable value and liabilities were adjusted to estimated settlement amounts, including estimated costs associated with carrying out the liquidation (see below). As of December 31, 2003, the Partnership leased the land underlying 30 of the Inns from MII and certain of its affiliates (the "Ground Leases"). Of the Partnership's 46 Inns, six are located in each of Georgia, North Carolina and Michigan; four in each of Florida and Ohio; and three or less in each of Alabama, California, Illinois, Indiana, Iowa, Kansas, Missouri, South Carolina, Tennessee, Virginia and Wisconsin (see Note 14). Effective November 30, 2001, Sage Management Resources III, LLC ("Sage" or "New Manager"), an affiliate of Sage Hospitality Resources, LLC, began providing management at the properties. See "Restructuring Plan" below. Prior to such date the Inns were managed by Fairfield FMC Corporation (the "Former Manager"), a wholly-owned subsidiary of MII, as part of the Fairfield Inn by Marriott hotel system under a long-term management agreement. Under Sage, the Inns continue to be operated under the Fairfield Inn by Marriott system. Inn operations commenced on July 31, 1990 after 83,337 limited partnership interests (the "Units") were sold in a public offering for $1,000 per Unit. Marriott FIBM One Corporation ("FIBM One") contributed $841,788 for a 1% general partnership interest and $1.1 million to establish the initial working capital reserve of the Partnership at $1.5 million. In addition, FIBM One had a 10% limited partnership interest in the Partnership while the remaining 90% of the limited partnership interest is owned by outside parties. Restructuring Plan and Plan of Liquidation Restructuring Plan As a result of the Partnership's continued decline in operating results, the prior general partner, FIBM One, developed a restructuring plan for the Partnership. In connection with this plan, the consent of limited partners of the Partnership was sought for the transfer by FIBM One of its general partner interest in the Partnership to the current general partner. Effective August 16, 2001, following the receipt of the necessary consent to the transfer of the general partner interest, FIBM One transferred its general partner interest in the Partnership to AP-Fairfield GP LLC, which is affiliated with Apollo Real Estate Advisors, L.P. and Winthrop Financial Associates. On November 30, 2001, the Restructuring Plan was implemented as the Partnership (i) replaced MII as the property manager at the Partnership's properties with Sage Management, (ii) entered into new Franchise Agreements with MII, (iii) entered into modifications of the Ground Leases which provided for substantially reduced rent for the year 2002, and an extension of the term to November 30, 2098, (iv) agreed to complete the property improvement plans ("PIPs") required by MII at the properties by no later than November 30, 2003 and (v) MII waived its right to receive the deferred fees then owing to it. Also, as part of the Restructuring Plan, the Partnership filed a Form S-1 Registration Statement, in which the Partnership sought to offer its limited partners the right to purchase $23 million in subordinated notes due in 2007 (the "Offering"). The proceeds of the Offering were to have been used for capital improvements at the Inns. However, due to the Partnership's ongoing financial difficulties, and in light of the continued decline in operations, it was determined not to make the Offering and the Registration Statement was withdrawn on January 6, 2003. 34 Pursuant to the terms of the management agreement with Sage, which agreement has a term of five years subject to early termination, the Partnership is required to pay Sage a management fee equal to 3% of adjusted gross revenues at the Partnership's properties. In addition, Sage is entitled to an annual incentive management fee equal to 10% of the excess earnings before interest, taxes, depreciation and amortization of the Partnership in excess of $25 million during the first three years. If the Partnership's earnings before interest, taxes, depreciation and amortization is not at least $25 million for the 2004 calendar year (subject to certain exceptions), the Partnership has the right to terminate Sage. See "The Fairfield Inn by Marriott System" below. The new Franchise Agreements were substantially similar to the prior agreements with MII as they relate to the use of the "Fairfield Inn by Marriott" flag except that it was an event of default under the ground lease if the PIPs were not completed by November 30, 2003. The PIPs were not completed by November 30, 2003. The Partnership's default under the Franchise Agreement also constituted a default under the ground lease and the loan encumbering the Partnership's properties. The Franchise Agreements permit the Inns to be operated as "Fairfield Inns by Marriott." See "The Fairfield Inn by Marriott System" below. In addition, as a result of the Partnership's declining operations, the Partnership has failed to meet its debt service payments on its loan encumbering its properties since November 11, 2002. On March 26, 2003, the Partnership received notice from MII as the ground lessor with respect to 30 of the Inns that it was in default under the Ground Leases, due to its failure to pay the full amount due of minimum rentals owed under the Ground Leases beginning in January 2003. On May 9, 2003, the lender exercised its right to cure the default and paid the non-subordinated ground rent owed under the Ground Leases through March 2003. On behalf of the Partnership, the lender has continued to pay the non-subordinated ground rent under the Ground Leases through December 2003. Plan of Liquidation As a result of these defaults, the Partnership engaged in discussions with its lender as well as MII to seek a further restructuring of the Partnership's debt and ground lease. Effective December 5, 2003, the Partnership entered into an agreement with its lender and MII which provides that the lender and MII will forbear in the exercise of their remedies under the relevant documents due to the then existing defaults, including the non-payment of debt service and ground rent and the failure to complete required MII PIPs on a timely basis, all due to a lack of operating revenues, and to implement a liquidation of the Partnership's Inns. In exchange for the agreement to liquidate, the lender has agreed to pay the Partnership: (i) $65,217 per Inn sold, payable upon the sale of each Inn, and (ii) an additional amount equal to 10% of the aggregate net sale proceeds from the sale of all Inns in excess of a graduated incentive fee base, plus any additional amounts the lender advances in connection with the liquidation process. At present, it is not expected that the Inns will generate gross sales proceeds in excess of the threshold amount. It is anticipated that the lender will advance funds to: (a) permit capital improvements to be conducted at the Inns, which is required by MII, and will also increase the marketability of the Inns for sale, and (b) fund operating expenses, including payment of real estate taxes, as a result of insufficient operating revenue. In the event all the Inns are not sold by April 1, 2005, the Partnership has agreed to allow the lender to exercise its rights under the loan documents, which may include foreclosure, without interference from the Partnership. Accordingly, if all of the Inns are not sold by April 1, 2005, it is likely that the remaining Inns will be lost to the lender through foreclosure. In connection with the agreement, an affiliate of MII, as ground lessor, agreed to waive up to $1.2 million of ground rent for a period of up to one year, and any additional ground rent due in excess of $1.2 million will be deferred until the earlier of: (i) the sale of an Inn, or (ii) April 1, 2005; provided, however that in the event a default arises under the agreements reached with MII at any time, all ground rent shall become immediately due and payable. MII, as franchisor, has agreed that for those Inns that will remain in the Fairfield Inn by Marriott system, the property improvement plans are not required to be completed until April 1, 2005, however the work must be commenced by September 1, 2004, and has also agreed to waive any liquidated damages that otherwise may be due to MII arising from the early termination of a franchise agreement due to the sale of an Inn through September 1, 2004, and thereafter reduced the amount to $25,000 per property for Inns sold between September 1, 2004 and November 30, 2004. In exchange for these ground rent and franchise termination fee concessions, the Partnership has agreed to remove 12 of the Inns, as identified by MII, from the Fairfield Inn by Marriott system no later than September 1, 2004 and keep six of the Inns, as identified by MII, in the Fairfield Inn by Marriott system. The remaining Inns can be sold either as a Fairfield Inn by Marriott or without the 35 franchise agreement. In the event PIPs are not completed by April 1, 2005 for any Inn not sold, it will result in a default under the MII agreements and permit MII to terminate the franchise agreements. Further, upon the termination of any franchise agreement, the Partnership must purchase MII's interest under all Ground Leases. On November 20, 2003, the Partnership engaged a nationally recognized broker to begin marketing the Inns for sale. It is expected that the Partnership will, in all likelihood, be dissolved in 2005, either upon the sale of all Inns or as a result of the foreclosure by the lender of any remaining Inns not otherwise sold. Partnership Allocations and Distributions Partnership allocations and distributions are generally made as follows: a. Cash available for distribution for each fiscal year will be distributed quarterly as follows: (i) 99% to the limited partners and 1% to the General Partner (collectively, the "Partners") until the Partners have received, with respect to such fiscal year, an amount equal to the Partners' Preferred Distribution (10% of the excess of original cash contributions over cumulative distributions of net refinancing and sales proceeds ("Capital Receipts") on an annualized basis); and (ii) remaining cash available for distribution will be distributed as follows, depending on the amount of Capital Receipts previously distributed: (1) 99% to the limited partners and 1% to the General Partner, if the Partners have received aggregate cumulative distributions of Capital Receipts of less than 50% of their original capital contributions; or (2) 90% to the limited partners and 10% to the General Partner, if the Partners have received aggregate cumulative distributions of Capital Receipts equal to or greater than 50% but less than 100% of their original capital contributions; or (3) 80% to the limited partners and 20% to the General Partner, if the Partners have received aggregate cumulative distributions of Capital Receipts equal to 100% or more of their original capital contributions. b. Refinancing proceeds and sale proceeds from the sale or other disposition of less than substantially all of the assets of the Partnership will be distributed (i) 99% to the limited partners and 1% to the General Partner until the Partners have received the then outstanding Partners' 12% Preferred Distribution, as defined, and cumulative distributions of Capital Receipts equal to 100% of their original capital contributions; and (ii) thereafter, 80% to the limited partners and 20% to the General Partner. c. Sale proceeds from 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 as adjusted to take into account gain or loss resulting from such sale. d. Net profits for each fiscal year generally will be allocated in the same manner in which cash available for distribution is distributed. Net losses for each fiscal year generally will be allocated 99% to the limited partners and 1% to the General Partner. e. Gains recognized by the Partnership generally will be allocated in the following order of priority: (i) to those 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 the Partners' capital account balances to an amount equal to their pro-rata share of the Partners' 12% Preferred Distribution, as defined, plus their Net Invested Capital, as defined; and (iii) thereafter, 80% to the limited partners and 20% to the General Partner. f. For financial reporting purposes, profits and losses are allocated among the Partners based on their stated interests in cash available for distribution. 36 NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting Due to the agreement reached between the Partnership, its lender and MII on December 5, 2003, the Partnership adopted the liquidation basis of accounting for all periods beginning after September 30, 2003. In accordance with the liquidation basis of accounting, the Partnership adjusted its assets to their estimated net realizable value and liabilities were adjusted to estimated settlement amounts, including estimated costs associated with carrying out the liquidation. The valuation of real estate held for sale is based on current contracts, estimates and other indication of sales value net of estimated selling costs (including brokerage commissions, transfer taxes, legal costs). Actual values realized for assets and settlements of liabilities may differ materially from the amounts estimated. However, in accordance with FASB No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities", the non-recourse mortgage debt and related mortgage premium were not adjusted to its estimated settlement amount as the Partnership has not been legally released from being the primary obligor under the mortgage debt. Accordingly, the outstanding mortgage balance and accrued and unpaid interest will continue to be presented at its historical basis. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Revenue Recognition Prior to the adoption of the liquidation basis of accounting, revenue was generally recognized as services were performed. Property and Equipment Prior to the adoption of the liquidation basis of accounting, property and equipment was recorded at cost. Depreciation was computed using the straight-line method over the estimated useful lives of the assets, which is generally 30 years for building, leasehold and land improvements, and 4 to 10 years for furniture and equipment. All property and equipment is pledged as security for the mortgage debt. The Partnership assessed impairment of its real estate properties based on whether estimated undiscounted future cash flows from such properties was expected to be less than their net book value. If a property was impaired, its basis was adjusted to its estimated fair value. The Partnership recorded an impairment charge of $15.3 million, $5.3 million, and $3.8 million for the nine months ended September 30, 2003 and for the years ended December 31, 2002 and 2001, respectively. Deferred Financing Costs Upon the adoption of the liquidation basis of accounting, deferred financing costs of $1.5 million were written off to reflect the balances at their net realizable value. Restricted Cash The Partnership was required to establish certain reserves pursuant to the terms of the mortgage debt (see Note 6). 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. 37 Real Estate Held for Sale and Adjustment to Liquidation Basis of Accounting As a result of the agreement reached between the Partnership, its lender and MII, the Partnership adopted the liquidation basis of accounting and accordingly adjusted the assets to estimated net realizable value, and liabilities were adjusted to estimated settlement amounts, including estimated costs associated with carrying out the liquidation. The valuation of real estate held for sale is based on current contracts, estimates and other indications of sales value net of estimated selling costs (including brokerage commissions, transfer taxes, legal costs). Additionally, the Partnership suspended recording any further depreciation expense. The actual values realized for assets and settlement of liabilities may differ materially from amounts estimated. Significant differences may occur based upon local economic market conditions which have resulted in weaker 2004 operating results at some of the hotels. Reserve for Estimated Costs during the Period of Liquidation Under the liquidation basis of accounting, the Partnership is required to estimate and accrue the non-operating costs associated with executing the plan of liquidation. These amounts can vary significantly due to, among other things, the timing and realized proceeds from property sales, the costs of retaining agents and trustees to oversee the liquidation, including the costs of insurance, the timing and amounts associated with discharging known and contingent liabilities and the non-operating costs associated with cessation of the Partnership's operations. These non-operating costs are estimates and are expected to be paid out over the liquidation period. Such costs do not include costs incurred in connection with ordinary operations. Ground Rent Certain Inns are subject to Ground Leases with MII that provide for annual minimum rents. Initially, the Ground Leases included scheduled increases in minimum rents per property. These scheduled rent increases, which were included in minimum lease payments, were recognized by the Partnership on a straight-line basis over the first ten years of the leases. As of year end 2000, all deferred straight-line ground rent had been recognized. For the remaining life of the leases, the minimum rentals were to be adjusted every five years based on changes in the Consumer Price Index, and prior to the adoption of liquidation basis accounting, were expensed as incurred. Upon modification of the ground lease with MII effective November 30, 2001, ground rent of $2.2 million was forgiven and minimum rentals for 2002 were reduced to $100,000. The excess of ground rent expense recognized over the 2002 rental payments of $100,000 required by the lease agreement of $2.5 million was deferred at December 31, 2002. Prior to the adoption to the liquidation basis of accounting, these amounts were amortized on a straight line basis over the terms of the ground lease. Upon the adoption of the liquidation basis of accounting, subordinated unpaid ground rent of $2.7 million was written off to reflect the balance at its net realizable value. On March 26, 2003, the Partnership received notice from MII that it was in default under the ground lease agreements due to its failure to pay the full amount due of minimum rentals owed under the Ground Leases beginning in January 2003. On May 7, 2003, the Partnership received notice from MII that the Ground Leases would be terminated effective June 15, 2003 for nonpayment. On May 9, 2003, the lender exercised its right to cure the default and paid the non-subordinated ground rent owed under the Ground Leases through March 2003. On behalf of the Partnership, the lender has continued to pay the non-subordinated ground rent under the Ground Leases through December 2003. The Partnership has recognized the obligation to repay the lender for these advances. Income Taxes Provision for Federal and state income taxes has not been made in the accompanying financial statements since the Partnership does not pay income taxes, but rather, allocates profits and losses to the individual Partners. Significant 38 differences exist between the net loss for financial reporting purposes and the net loss as reported in the Partnership's tax return. Recently Issued Accounting Standards Financial Accounting Standards Board ("FASB") SFAS No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets" supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The standard provides guidance beyond that previously specified in Statement 121 to determine when a long-lived asset should be classified as held for sale, among other things. This Statement was adopted by the Partnership effective January 1, 2002. Implementation of the statement did not have a material effect on the Partnership. SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of SFAS No. 13 and Technical Corrections," updates, clarifies and simplifies existing accounting pronouncements. In part, this statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt." SFAS No. 145 will be effective for fiscal years beginning after May 15, 2002. Upon adoption, enterprises must reclassify prior period items that do not meet the extraordinary item classification criteria in APB Opinion No. 30. This statement had no effect on the Partnership's financial statements. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. SFAS No. 146 is effective prospectively for exit and disposal activities initiated after December 31, 2002, with earlier adoption encouraged. This statement had no effect on the Partnership's financial statements. FASB Interpretation No. 45, "Guarantors' Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This Interpretation does not prescribe a specific approach for subsequently measuring the guarantor's recognized liability over the term of the related guarantee. The disclosure provisions of this Interpretation are effective for the Partnership's December 31, 2002 financial statements. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. This Interpretation had no effect on the Partnership's financial statements. FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities". This interpretation clarifies the application of existing accounting pronouncements to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, FASB issued a revision to Interpretation No. 46 ("46R") to clarify some of the provisions of Interpretation No. 46, and exempt to certain entities from its requirements. The provisions of the interpretation need to be applied no later than December 31, 2004, except for entities that are considered to be special-purpose entities which need to be applied as of December 31, 2003. This interpretation had no effect on the Partnership's financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial reporting and accounting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The changes in the statement improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. In particular, this statement (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in SFAS No. 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an Underlying to conform it to language used in FASB Interpretation No. 45 and (4) amends certain other existing pronouncements. Those changes will result in more consistent reporting of contracts either as derivatives or hybrid instruments. This statement is effective for contracts entered into or modified after June 39 30, 2003, and for hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The provisions of this statement that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as contracts entered into after June 30, 2003. This statement has no effect on the Partnership's financial statements. In May 2003, the issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The statement improves the accounting for certain financial instruments that under pervious guidance, issuers could account for as equity. The new statement requires that those instruments be classified as liabilities in statements of financial position. SFAS No. 150 affects the issuer's accounting for three types of freestanding financial instruments. One type is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash and other assets. A second type, which includes put options and forward purchase contracts, involves instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instruments that are liabilities under this statement is obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such a market index, or varies inversely with the value of the issuers' shares. SFAS No. 150 does not apply to features embedded in a financial instrument that is not a derivative of the entirety. In addition to its requirements for the classification and measurement of financial instruments in its scope, SFAS No. 150 also requires disclosures about alternative ways of settling the instruments and the capital structures of all entities, all of whose shares are mandatorily redeemable. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. This statement has no effect on the Partnership's financial statements. NOTE 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following as of December 31, 2002 (in thousands): Land and improvements $ 13,425 Building and leasehold improvements 154,198 Furniture and equipment 66,466 Construction in progress 3,002 237,091 Less accumulated depreciation and amortization (137,465) -------- $ 99,626 ======== NOTE 4. REAL ESTATE HELD FOR SALE The following table is a summary of the Partnership's real estate held for sale (in thousands): December 31, ------------ 2003 2002 ---- ---- Real Estate Held for Sale $124,972 $1,122 ======== ====== As of December 31, 2003 the Partnership owned 46 Inns located in 16 states (see Note 14). No properties were sold during 2003. 40 On July 29, 2002, the Partnership sold one of its Inns located in Montgomery, Alabama (previously classified as property held for sale on the accompanying balance sheet) for $3.1 million. The net proceeds from the sale of approximately $2.9 million were applied toward the Partnership's mortgage debt, in accordance with the terms of the loan agreement. The Partnership recognized a gain on the sale of approximately $2.1 million. On August 12, 2002, the Partnership sold its Inn located in Charlotte, North Carolina (classified as property held for sale on the accompanying balance sheet) for $2.5 million. The net proceeds from the sale of approximately $300,000, which is net of approximately $1.9 million attributed to the ground lease buyout, were applied toward the Partnership's mortgage debt, in accordance with the terms of the loan agreement. The Partnership recognized a gain on the sale of approximately $200,000. On August 14, 2002, the Partnership sold its Inn located in Atlanta, Georgia (classified as property held for sale on the accompanying balance sheet) for $3.0 million. The net proceeds from the sale of approximately $2.8 million were applied toward the Partnership's mortgage debt, in accordance with the terms of the loan agreement. The Partnership recognized a gain on the sale of approximately $200,000. On October 9, 2002, the Partnership sold its Inn located in Chicago, Illinois (classified as property held for sale on the accompanying balance sheet) for $2.3 million. The net proceeds from the sale of approximately $1.4 million, which is net of approximately $700,000 attributed to the ground lease buyout, were applied toward the Partnership's mortgage debt, in accordance with the terms of the loan agreement. The Partnership recognized a gain on the sale of approximately $1.1 million. On November 20, 2003, the Partnership engaged a nationally recognized broker to begin marketing the Inns for sale. It is expected that the Partnership will, in all likelihood, be dissolved in 2005, either upon the sale of all Inns or as a result of the foreclosure by the lender of any remaining Inns not otherwise sold. NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The Partnership is currently in default under its mortgage loan agreement. Therefore, the fair value of the Partnership's mortgage debt cannot be reasonably estimated due to uncertainties related to ongoing operations. The fair value of the Partnership's cash and cash equivalents, restricted cash, property improvement fund, accounts receivable, and accounts payable equals carrying value as presented in the accompanying balance sheets. NOTE 6. DEBT As of November 11, 2002, the Partnership is in default under the mortgage loan agreement due to its failure to pay the regularly scheduled debt service payment due on that date. In 1997, the Partnership's mortgage debt was refinanced and increased to $165.4 million. The mortgage debt is non-recourse, bears interest at a fixed rate of 8.40% and required monthly payments of $1.4 million of principal and interest based upon a 20-year amortization schedule for a 10-year term which was scheduled to expire January 11, 2007. Thereafter, until the final scheduled maturity date of January 11, 2017, interest was to be payable at an adjusted rate, and all excess cash flow was to be applied toward principal amortization. The lender securitized the loan through the issuance and sale of commercial mortgage backed securities. In connection with the December 5, 2003 agreement described above, the Partnership adopted the liquidation basis of accounting for all periods beginning after September 30, 2003. In accordance with the liquidation basis of accounting, assets were adjusted to estimated net realizable value and liabilities were adjusted to estimated settlement amounts, including estimated costs associated with carrying out the liquidation. However, in accordance with FASB No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities", the non-recourse mortgage debt and related mortgage premium were not adjusted to its estimated settlement amount as the Partnership has not been legally released from being the primary obligor under the mortgage debt. Accordingly, the outstanding mortgage balance and accrued and unpaid interest will continue to be presented at its historical basis. In exchange for the agreement to liquidate, the lender has agreed to pay the Partnership: (i) $65,217 per Inn sold, payable 41 upon the sale of each Inn, and (ii) an additional amount equal to 10% of the aggregate net sale proceeds from the sale of all Inns in excess of a graduated incentive fee base, plus any additional amounts the lender advances in connection with the liquidation process. At present, based upon management's estimates, the sale of the Inns will not generate gross sales proceeds in excess of the threshold amount. It is anticipated that the lender will advance funds to: (a) permit capital improvements to be conducted at the Inns, which is required by MII, and will also increase the marketability of the Inns for sale, and (b) fund operating expenses, including payment of real estate taxes, as a result of insufficient operating revenue. In the event all the Inns are not sold by April 1, 2005, the Partnership has agreed to allow the lender to exercise its rights under the loan documents, which may include foreclosure, without interference from the Partnership. The mortgage premium of $3.5 million is being amortized based on a 20-year amortization schedule for a 10-year term, subject to adjustments for Inn sales, expiring January 11, 2007. Accumulated amortization of the mortgage premium at December 31, 2003 and 2002 was $2.3 million and $2.1 million, respectively, resulting in an unamortized balance of $1.2 million and $1.4 million, respectively. The mortgage debt is secured by first mortgages on all of the Inns, the land on which they are located, or an assignment of the Partnership's interest under the Ground Leases, including ownership interest in all improvements thereon, fixtures and personal property related thereto. Reserves The Partnership was required by the lender to establish various reserves for capital expenditures, working capital, debt service and insurance needs. The balances in those reserves as of December 31 are as follows (in thousands): 2003 2002 ---- ---- Taxes and insurance reserve $1,517 $- Ground rent reserve 253 8 ------ --- Total restricted cash $1,770 $ 8 ====== === 42 NOTE 7. GROUND LEASES The land on which 30 of the Inns are located is leased from MII or its affiliates. The Ground Leases, prior to the amendment discussed below, expired on November 30, 2088 and provided that, other than in 2002, the Partnership would pay annual rents equal to the greater of a specified minimum rent for each property or a percentage rent based on gross revenues of the Inn operated thereon. The minimum rentals were adjusted at various anniversary dates through 2000, as defined in the agreements. The minimum rentals were adjusted every five years for the remaining life of the leases based on changes in the Consumer Price Index. The percentage rent, which also varied from property to property, was fixed at predetermined percentages of gross revenues that increase over time. On March 26, 2003, the Partnership received notice from MII that it was in default under the Ground Leases due to its failure to pay the full amount due of minimum rentals owed under the Ground Leases beginning in January 2003. On May 7, 2003, the Partnership received notice from MII that the Ground Leases would be terminated effective June 15, 2003 for nonpayment. On May 9, 2003, the lender exercised its right to cure the default and paid the non-subordinated ground rent owed under the Ground Leases through March 2003. On behalf of the Partnership, the lender has continued to pay the non-subordinated ground rent under the Ground Leases through December 2003. The Partnership has recognized the obligation to repay the lender for these advances. In connection with the December 5, 2003 agreement described above, an affiliate of MII, as ground lessor, agreed to waive up to $1.2 million of ground rent for a period of up to one year, and any additional ground rent due in excess of $1.2 million will be deferred until the earlier of: (i) the sale of an Inn, or (ii) April 1, 2005; provided, however that in the event a default arises under the agreements reached with MII at any time, all ground rent shall become immediately due and payable. Total rental expense on the Ground Leases was $2.5 million, $2.6 million, and $2.7 million for the period January 1 through September 30, 2003 and the years ended December 31, 2002 and 2001, respectively. Under the Ground Leases, the Partnership pays all costs, expenses, taxes and assessments relating to the Inns and the underlying land, including real estate taxes. The Ground Leases provide that the Partnership has a first right of refusal in the event the applicable ground lessor decides to sell the leased premises. Upon expiration or termination of the Ground Leases, title to the applicable Inn and all improvements reverts to the ground lessor. NOTE 8. FORMER MANAGEMENT AGREEMENT Through November 30, 2001, the Partnership was a party to a long-term management agreement (the "Management Agreement") with the Former Manager. This agreement was terminated and Sage Management Resources III, LLC ("Sage"), an affiliate of Sage Hospitality Resources, LLC, was retained as the New Manager effective November 30, 2001. See discussion of new management agreement below. The Former Manager was required to furnish certain services ("Chain Services") which are furnished generally on a central or regional basis to all managed or owned Inns in the Fairfield Inn by Marriott hotel system. Costs and expenses incurred in providing such services were allocated among all domestic Fairfield Inn by Marriott hotels managed, owned or leased by MII or its subsidiaries, based upon one or a combination of the following: (i) percent of revenues, (ii) total number of hotel rooms, (iii) total number of reservations booked, and (iv) total number of management employees. The Inns also participated in MII's Marriott Rewards Program ("MRP"). The cost of this program was 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. The total amount of chain services and MRP costs allocated to the Partnership for the period January 1 through September 30, 2003 and the year ended December 31, 2002 was $3.6million and $5.0 million, respectively. In addition, MII maintains a marketing fund to pay the costs associated with certain system-wide advertising, marketing, sales, promotional and public relations materials and programs. Each Inn within the system contributes approximately 2.5% (for 2003and 2002) and 2.4% (for 2001 and prior) of gross Inn revenues to the marketing fund. For the nine months ended September 30, 2003 and the years ended December 31, 2002 and 2001, the Partnership contributed $1.4 million, $1.9 million and $1.9 million, respectively, to the marketing fund. 43 Pursuant to the terms of the Management Agreement, the Partnership was required to provide the Former Manager with working capital and supplies to meet the operating needs of the Inns. The Former Manager converted cash advanced by the Partnership into other forms of working capital consisting primarily of operating cash, inventories, and trade receivables and payables which were maintained and controlled by the Former Manager. This advance earned no interest and remained the property of the Partnership throughout the term of the Management Agreement. The Partnership was required to advance upon request of the Former Manager any additional funds necessary to satisfy the needs of the Inns as their operations required from time to time. Upon termination of the Management Agreement, the Former Manager returned to the Partnership all unused working capital and supplies. At the inception of the Partnership, $1 million was advanced to the Former Manager for working capital and supplies which was included in Due from Marriott International, Inc. and affiliates. Effective with the termination of the Management Agreement, the working capital was turned over to the new manager and represents inventory. NOTE 9. NEW MANAGEMENT AGREEMENT Effective November 30, 2001, the Partnership retained Sage, an independent hotel management company, to manage its Inns under separate management agreements for each Inn. The management agreements have a term of five years and provide that the Inns will be operated as part of the Fairfield Inn by Marriott franchise system, and that Sage will be responsible for the day-to-day operation of the Inns. The Partnership has the right to terminate a management agreement under certain circumstances, including a change in control of Sage, the sale of all the Inns (in which event a termination fee may be payable) or Sage's failure to achieve certain performance levels during the third year of the agreement, unless such failure is due to circumstances beyond Sage's control. Sage may terminate a management agreement under certain circumstances, including the Partnership's failure to provide sufficient working capital for the operation of an Inn. Sage receives a base management fee under the management agreements in the aggregate equal to 3% of adjusted gross revenue, and an incentive management fee equal to 10% of the excess of earnings before interest, taxes, depreciation and amortization of all the Inns during the applicable fiscal year ("EBITDA") over (i) $25 million, to be adjusted if an Inn is no longer managed by Sage (during the first three years of the management agreements) and (ii) 107.5% of the greater of (x) $25,000,000 and (y) the prior year's EBITDA (during the last two years of the management agreements). The right to continue to manage and operate the Inns shall be subordinate to the mortgage. The incentive management fee shall be subordinate in payment to the mortgage debt. The total fees and expenses payable by the Partnership under the new franchise agreements and the new management agreements, exclusive of the incentive management fee payable to Sage, will not exceed the amount that was paid to the Former Manager under the previous management agreement. During 2001, the Partnership advanced to Sage amounts totaling $868,000 in order to fund expenses incurred related to Sage's transition as the new manager. The Partnership and Sage entered into a Promissory Note Agreement ("Note") whereby these advances would be repaid by Sage on a monthly basis beginning February 1, 2002 in an amount equal to 50% of the previous months management fees until the Note is paid in full. The advances accrued interest at a rate of 12%. Interest income on these advances was $49,000 and $23,000 for the years ending December 31, 2002 and 2001, respectively. This Note was paid in full during the year ended December 31, 2002. The Partnership is required to establish a reserve account to cover expenditures for capital improvements and replacement of furniture, fixtures and equipment for the Inns. Contributions to the account will be made on a monthly basis in an amount equal to 7% of gross monthly revenues for the Inns. If funds are insufficient to meet required monthly contributions to the reserve account, the Partnership is required to provide additional funds. The Partnership is also required to provide Sage with working capital sufficient to meet all disbursements and operating expenses necessary to permit the uninterrupted and efficient operation of the Inns. Sage may request additional contributions to working capital if any additional funds are necessary to satisfy the needs of the Inns as their operations may require from time to time. If the Partnership's earnings before interest, taxes, depreciation, and amortization is not at least $25 million for the calendar year 2004 (subject to certain exceptions), the Partnership has the right to terminate Sage. 44 The Partnership has historically presented the working capital advanced to the Former Manager in a single line item on the balance sheet. In 2001, the Partnership presented the working capital advanced to Sage in a single line item on the balance sheet to be consistent with prior year presentation. In 2002, the Partnership concluded that the components of the working capital managed by Sage should be consolidated with the working capital of the Partnership. Previously reported financial statements have been revised to reflect this accounting presentation. This revision did not impact the statement of operations, partners' deficit or the net operating, investing and financing cash flows, but did affect the comparability of the components of the operating cash flows for 2002 to 2001 and 2000. Following is a summary of the working capital components affected by the revision at December 31, 2001 (in thousands): Balance Sheet as previously Balance Sheet reported Adjustments Revised -------------- ----------- ------------- Accounts receivable $ -- $ 598 $ 598 Due from Manager 1,069 400 1,469 Cash 1,597 3,794 5,391 Due from Marriott International, Inc. -- 387 387 Prepaid insurance and other current assets -- 1,576 1,576 Accounts payable (3,660) (6,755) (10,415) -------- -------- -------- $ (994) $ -- $ (994) ======== ======== ======== NOTE 10. FRANCHISE AGREEMENTS Effective November 30, 2001, the Partnership entered into Franchise Agreements with MII for each Inn, which permitted the Partnership to continue to use the Fairfield Inn by Marriott brand. Under the new Franchise Agreements, the Partnership was required to pay the following fees for each Inn: o a $10,000 non-refundable application fee per inn to cover MII's application processing expenses; o a royalty fee of 4% of gross room revenue; o a marketing fund contribution of 2.5% of gross room revenue; o a reservation system fee equal to 1% of gross room revenue, plus $3.50 for each reservation confirmed and a communications support fee of $379 per month for each inn; o a property management system fee of $323 per month for each inn plus an additional $30 per month for each inn to access the Marriott intranet site; and o training and software charges. In addition, the Partnership was required to deposit 7% of each Inn's gross monthly revenues into an escrow account to be applied towards capital improvements. Prior to the agreements entered into effective December 5, 2003, between the Partnership, its lender and MII, the Partnership was in default under the franchise agreements with MII due to its failure to make its property improvement fund contributions beginning in September 2002, which also resulted in technical default under the mortgage loan agreement. 45 Each new franchise agreement included a termination fee to MII if the franchise for a particular Inn is terminated. To facilitate a potential sale, the Partnership was not required to pay the termination fee on five of eight specified inns if the Inns had been sold within 18 months of the date of the franchise agreements. Each franchise agreement had a 10-year term. The Partnership had the option to renew each agreement for two additional five-year periods subject to its successful maintenance of brand standards and compliance with all of the material terms of the agreement. As a condition to entering into the franchise agreements, an affiliate of the Partnership's general partner had guaranteed the Partnership's obligations to pay the termination fees under certain circumstances that may come due under the agreements up to a maximum of $25 million and up to a maximum of $10 million on the Partnership's other obligations under the agreements. As described above, in connection with the agreements entered into effective December 5, 2003, MII, as franchisor, has agreed to the plan of liquidation and has agreed that for those Inns that will remain in the Fairfield Inn by Marriott system, the property improvement plans are not required to be completed until April 1, 2005, however the work must be commenced by September 1, 2004, and has also agreed to waive any liquidated damages that otherwise may be due to MII arising from the early termination of a franchise agreement due to the sale of an Inn through September 1, 2004, and thereafter reduced the amount to $25,000 per property for Inns sold between September 1, 2004 and November 30, 2004. In exchange for these ground rent and franchise termination fee concessions, the Partnership has agreed to remove 12 of the Inns, as identified by MII, from the Fairfield Inn by Marriott system no later than September 1, 2004 and keep six of the Inns, as identified by MII, in the Fairfield Inn by Marriott system. The remaining Inns can be sold either as a Fairfield Inn by Marriott or without the franchise agreement. In the event PIPs are not completed by April 1, 2005 for any Inn not sold, it will result in a default under the MII agreements, and permit MII to terminate the franchise agreements. Further, upon the termination of any franchise agreement, the Partnership must purchase MII's interest under all Ground Leases. NOTE 11. TAXABLE LOSS The Partnership's taxable loss differs from the net loss for financial reporting purposes for the years ended December 31, 2002 and 2001, as follows (in thousands): 2002 2001 -------- -------- Net loss income for financial reporting purposes $ (8,548) $(11,472) Gain from property and equipment sales (6,226) -- Depreciation and amortization 3 1,266 Impairment charges 5,278 3,808 Incentive fees -- (2,849) Ground rent 2,532 -- Difference in capitalized items 342 1,058 Other (29) 151 -------- -------- Taxable loss $ (6,648) $ (8,038) ======== ======== The Partnership's taxable loss was $12,552,000 for the year ended December 31, 2003. NOTE 12. RELATED PARTY TRANSACTIONS The Partnership pays Winthrop Financial Associates ("WFA"), an affiliate of the general partner, a monthly fee of $30,000 to cover various administrative services provided on the Partnership's behalf. For the nine months ended September 30, 2003 and for the years ended December 31, 2002 and 2001, $270,000, $360,000 and $12,000 were expensed for these services, respectively. For the year ended December 31, 2003, WFA was paid $360,000. 46 NOTE 13. SUMMARY OF QUARTERLY RESULTS (UNAUDITED) The following summary represents the results of operations for each quarter in 2003 and 2002: (In thousands, except units amounts) QUARTERS ENDED

~~(a)~~March ~~Reconciliation~~31 ofJune ~~Real~~30 ~~Estate:~~September ~~1999~~30 ~~2000~~December ~~2001~~31 ----------- ---------- ----------- ------------ ~~Balance~~2003 at---- ~~beginning~~Revenues of$ ~~year~~15,806 $ ~~191~~19,~~024~~644 $ ~~188~~20,~~578~~454 $ ~~184,327~~0 ~~Capital~~=========== ~~Expenditures~~========== ~~6,153~~=========== ~~3,876~~============ ~~7,015~~Net ~~Dispositions/Reclassifications~~loss $ (56,~~756~~644)(4) -$ ~~- Impairment Loss~~ (2,~~843~~671) (~~8,127~~5) $ (314,~~808~~846)(6) ~~Properties~~$ ~~Held~~0 ~~for~~=========== ~~Sale~~========== -=========== -============ ~~(16,178)~~Net ~~--------------------------------------------~~loss ~~Balance~~per atlimited ~~end~~partner ofunit ~~year~~$ (79) $ ~~188,578~~(32) $ ~~184,327~~(176) $ ~~171,356~~0 =========== ========== =========== ============ ~~(b)~~2002 ~~Reconciliation~~---- ofRevenues ~~Accumulated Deprciation Balance at beginning of year~~ $ 5618,~~029~~024 $ 6423,~~740~~932 $ 7321,~~375~~432 ~~Depreciation~~$ 815,~~711~~409 ~~8,635~~=========== ~~8,665~~========== ~~Properties~~=========== ~~Held~~=========== ~~for~~Net ~~Sale~~income -(loss) -$ (112,~~975~~607) ~~-------------------------------------------- Balance at end of year~~ $ 641,~~740~~252 $ 73(4,~~375~~192)(1,3) $ 70(3,~~065~~001)(2) =========== ========== ============ =========== cNet ~~The~~income ~~aggregate~~(loss) ~~cost~~per oflimited ~~land,~~partner ~~buildings,~~unit ~~improvements~~$ ~~and~~(31) ~~properties~~$ ~~held~~15 ~~for~~$ ~~sale~~(50) ~~for Federal income tax purposes is approximately~~ $~~212.9~~ ~~million~~(36) at=========== ~~December~~========== ~~31,~~=========== ~~2001.~~===========

(1) Includes gain of disposal of real estate of $2.5 million. (2) Includes gain of disposal of real estate of $1.0 million. (3) Includes loss on impairment of long-lived assets of $5.3 million. (4) Includes loss on impairment of long-lived assets of $2.0 million. (5) Includes loss on impairment of long-lived assets of $892,000. (6) Includes loss on impairment of long-lived assets of $12.5 million. NOTE 14. SUBSEQUENT EVENTS On March 24, 2004, the Partnership sold its inn located in Norcross, Georgia for $1.5 million. After closing costs and the payment to the Partnership of the $65,217 as agreed to under the liquidation plan, the net proceeds from the sale of approximately $1.3 million were applied toward the Partnership's mortgage debt. The Partnership recognized a loss of the sale of $3,000. On March 25, 2004, the Partnership sold its inns located in Buena Park and Placentia, California for an aggregate price of $8.75 million. After payment for the purchase of the ground for $3.6 million, closing costs and the payment to the Partnership of $130,434, as agreed to under the liquidation plan, the net proceeds from the sale of approximately $4.5 million were applied toward the Partnership's mortgage debt. The Partnership recognized a loss of the sale of $7,000. 47 ITEM 8A. CONTROLS AND PROCEDURES As of the end of the period covered by this annual report on Form 10-K, an evaluation was carried out under the supervision and with the participation of the General Partner's management, including the General Partner's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Partnership's disclosure controls and procedures (as such term is defined in Rule 13a-15 (e) under the Securities Exchange Act of 1934). Based on that evaluation, the General Partner's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Partnership's disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in our internal control over financial reporting (as defined in Rule 13a- 15 (f) under the Securities Exchange Act of 1934) occurred during the fourth quarter of our fiscal year ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 48 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Effective January 21, 2004, the Registrant dismissed Ernst & Young, LLP as independent auditor. Ernst & Young LLP's report on the Registrant's financial statements for the fiscal year ended December 31, 2002 did not contain an adverse opinion or a disclaimer of opinion, but was modified due to uncertainty about the Registrant's ability to continue as a going concern. During the Registrant's 2002 year and through January 21, 2004, there were: (i) no disagreements with the Ernst & Young LLP on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which disagreements if not resolved to the Ernst & Young LLP's satisfaction, would have caused them to make reference to the subject matter in connection with their report on our financial statements for such year; and (ii) there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. Effective January 21, 2004, the board of directors of the manager of the Registrant's general partner approved the engagement of Imowitz Koenig & Co., LLP as the Registrant's independent auditors for the fiscal year ending December 31, 2003. The Registrant did not consult Imowitz Koenig & Co., LLP regarding any of the matters or events set forth in Item 304(a)(2) of Regulation S-K prior to January 21, 2004. 49 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP The Partnership has no directors or executive officers. The general partner of the Partnership is AP-Fairfield GP LLC, a Delaware limited liability company. The general partner manages and controls substantially all of the Partnership's affairs and has general responsibility and ultimate authority in all matters affecting its business. As of March 1, 2004, the names of the executive officers of manager of the general partner and the position held by each of them are as follows:

~~No.~~Position ~~Exhibit~~Held ~~Page~~with the Has Served as a Director Name General Partner or Officer Since ---- --------------- ---------------- ~~2.1~~Michael ~~Amended and Restated Agreement of Limited Partnership of Fairfield Inn by Marriott Limited (1) Partnership by and among Marriott FIBM One Corporation (General Partner), Christopher, G~~L. ~~Townsend~~Ashner ~~(Organizational~~Chief ~~Limited~~Executive ~~Partner),~~Officer and ~~those~~Director ~~persons~~8-01 ~~who~~Thomas ~~become Limited Partners (Limited Partners) dated July 31, 1990~~C. ~~2.2~~Staples ~~First~~Chief ~~Amendment~~Financial toOfficer ~~Amended~~8-01 ~~and~~Peter ~~Restated~~Braverman ~~Agreement~~Executive ofVice ~~Limited~~President ~~Partnership~~8-01 ~~dated~~Carolyn asTiffany ofChief ~~December~~Operating ~~(2)~~Officer 28, 1998. 10.1 Loan Agreement between Fairfield Inn by Marriott Limited Partnership and Nomura Asset Capital (1) Corporation dated January 13, 1997. 10.2 Secured Promissory Note made by Fairfield Inn by Marriott Limited Partnership (the "Maker") (1) to Nomura Asset Capital Corporation (the "Payee") dated January 13, 1997. 10.3 Form of Ground Lease (1) 12. Statements re: Computation of Ratio of Earnings to Fixed Charges 51 99. Confirmation of Receipt of Assurances from Arthur Anderson LLP 528-01

Mr. Ashner, age 51, has been the Chief Executive Officer of Winthrop Financial Associates, A Limited Partnership and its affiliates ("WFA"), since January 1996. Mr. Ashner is also the Chief Executive Officer of Newkirk MLP Corp., the manager of the general partner of The Newkirk Master Limited Partnership ("Newkirk") as well as the Chief Executive Officer of each of Shelbourne Properties I, Inc., Shelbourne Properties II, Inc. and Shelbourne Properties III, Inc., three separate publicly traded real estate investment trusts listed on the American Stock Exchange and that are currently liquidating, and First Union Real Estate Equity and Mortgage Investments ("First Union"), a real estate investment trust listed on the New York Stock Exchange. Mr. Ashner also currently serves on the Boards of Directors of the following publicly traded companies: Greate Bay Hotel and Casino Inc., a hotel and casino operator, Shelbourne Properties I, Inc., Shelbourne Properties II, Inc. and NBTY Inc., a manufacturer, marketer and retailer of nutritional supplements. Mr. Braverman, age 52, has been the Executive Vice President of WFA since January 1996. Mr. Braverman is also the Executive Vice President of Newkirk as well as each of Shelbourne I, II and III and First Union. Mr. Braverman also currently serves on the Board of Director of each of Shelbourne Properties I, II and III. Ms. Tiffany, age 37, has been the Chief Operating Officer of WFA since December 1997. Ms. Tiffany is also the Vice President, Treasurer, Secretary and Chief Financial Officer of Shelbourne Properties I, II and III, and the Chief Operating Officer and Secretary of Newkirk and First Union Mr. Staples, age 48, has been has been with WFA since 1995 and has served as its Chief Financial Officer since January 1999. Mr. Staples also serves as the Chief Financial Officer of First Union and Newkirk and is the Assistant Treasurer of Shelbourne Properties I, II and III. Mr. Staples is a certified public accountant. One or more of the above persons are also directors or officers of a general partner (or general partner of a general partner) of a number of limited partnerships which either have a class of securities registered pursuant to Section 12(g) of the Securities and Exchange Act of 1934, or are subject to the reporting requirements of Section 15(d) of such Act. Except as indicated above, neither the Partnership nor the general partner has any significant employees within the meaning of Item 401(c) of Regulation S-K. There are no family relationships among the officers and directors of the general partner. Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Partnership under Rule 16a-3(e) during the Partnership's most recent fiscal year and Forms 5 and amendments thereto furnished to the 50 Partnership with respect to its most recent fiscal year, the Partnership is not aware of any director, officer, beneficial owner of more than ten percent of the units of limited partnership interest in the Registrant that failed to file on a timely basis, as disclosed in the above Forms, reports required by section 16(a) of the Exchange Act during the most recent fiscal year or prior fiscal years. ITEM 11. EXECUTIVE COMPENSATION The Partnership is not required to and did not pay remuneration to the officers and directors of its general partner. Certain officers and directors of the general partner receive compensation from the general partner and/or its affiliates (but not from the Partnership) for services performed for various affiliated entities, which may include services performed for the Partnership; however, the general partner believes that any compensation attributable to services performed for the Partnership are immaterial. See also "Item 13. Certain Relationships and Related Transactions." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners. Except as set forth below, no person or group is known by the Partnership to be the beneficial owner of more than 5% of the outstanding Units at March 1, 2004: Name of Beneficial Owner Number of Units owned % of Class ------------------------ --------------------- ---------- AP-Fairfield LP, LLC(1) 18,554 22.26% (1) The principal business address of the listed entity, which is an affiliate of the general partner, is 7 Bulfinch Place, Suite 500, Boston, Massachusetts 02114. (b) Security Ownership of Management. At March 1, 2004, AP-Fairfield LP, LLC, an affiliate of the general partner, owned 18,554 Units representing approximately 22.26% of the total number of Units outstanding. Neither the general partner, nor any officer, director, manager or member thereof, or any of their affiliates owned any Units. (c) Changes in Control. There exists no arrangement known to the Partnership the operation of which may at a subsequent date result in a change in control of the Partnership. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Partnership pays Winthrop Financial Associates, an affiliate of the general partner, a monthly fee of $30,000 to cover various administrative services provided on the Partnership's behalf. For the year ended December 31, 2003, $360,000 was paid for these services. 51 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The Managing General Partner has reappointed Imowitz, Koenig & Co., LLP as independent auditors to audit the financial statements of the Partnership for 2004. Audit Fees. The Partnership was billed by Imowitz Koenig & Co., LLP audit fees of approximately $67,000 for the year ended December 31, 2003. The Partnership was billed by Ernst & Young, LLP audit fees of approximately $108,500 for the year ended December 31, 2002. Audit Related Fees. The Partnership was billed by Imowitz Koenig & Co., LLP audit related fees of $0 for the year ended December 31, 2003. The Partnership was billed by Ernst & Young, LLP audit related fees of approximately $13,577 for the year ended December 31, 2002 Tax Fees. The Partnership was billed by Imowitz Koenig & Co., LLP tax fees of approximately $33,000 for the year ended December 31, 2003. The Partnership was billed by Ernst & Young, LLP tax fees of approximately $28,500 for the year ended December 31, 2002. Other Fees. The Partnership did not pay any other fees to Imowitz Koenig & Co., LLP for the year ended December 31, 2003 nor did it pay any other fees to Ernst & Young, LLP for the year ended December 31, 2002. 52 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements: see Index to Financial Statements in Item 8. (a)(2) Financial Statement Schedule: All Schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (a)(3) Exhibits: See Exhibit Index (b) Reports on Form 8-K: The Partnership filed the following reports on Form 8-K during the last quarter of the fiscal year: No Current Reports on Form 8-K were filed by the Partnership during the three month period ended December 31, 2003. 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP By: AP-Fairfield GP LLC General Partner By: AP-Fairfield Manager Corp. Manager Dated: March 30, 2004 By: /s/ Michael L. Ashner ---------------------- Michael L. Ashner President and Director (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in their capacities on the dates indicated. Dated: March 30, 2004 By: /s/ Michael L. Ashner ---------------------- Michael L. Ashner President and Director (Principal Executive Officer) Dated: March 30, 2004 By: /s/ Thomas Staples ------------------- Thomas Staples Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 54 EXHIBIT INDEX

(1) Incorporated by reference to the Registrant's Form 10 filed on January 29, 1998. (2) Incorporated by reference to the Registrant's Form 10/A filed on April 11, 2001. (3) Incorporated by reference to the Registrant's Annual Report on Form 10K filed for the year ended December 31, 2001. (4) Incorporated by reference to the Registrant's Current Report on Form 8K filed May 20, 2002. (5) Incorporated by reference to the Registrant's Quarterly Report on Form 10Q filed for the three month period ended September 30, 2003. (6) Incorporated by reference to the Registrant's Current Report on Form 8K filed January 22, 2004. 55

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