-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EkiryCQy08478AhVuv78nzmF1DLlysshIJKh3QXRvSkXvNF6rEZ0yYJbYmBpfm8o l8t7ldGSTdgFuE1vLPw0ag== 0000950152-98-000525.txt : 19980129 0000950152-98-000525.hdr.sgml : 19980129 ACCESSION NUMBER: 0000950152-98-000525 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980128 ITEM INFORMATION: FILED AS OF DATE: 19980128 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOYKIN LODGING CO CENTRAL INDEX KEY: 0001015859 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 341824586 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-11975 FILM NUMBER: 98515596 BUSINESS ADDRESS: STREET 1: 1500 TERMINAL TOWER STREET 2: 50 PUBLIC SQUARE CITY: CLEVELAND STATE: OH ZIP: 44113 BUSINESS PHONE: 2162416375 MAIL ADDRESS: STREET 1: 1500 TERMINAL TOWER STREET 2: 50 PUBLIC SQUARE CITY: CLEVELAND STATE: OH ZIP: 44113 FORMER COMPANY: FORMER CONFORMED NAME: BOYKIN LODGING TRUST INC DATE OF NAME CHANGE: 19960604 8-K 1 BOYKIN LODGING COMPANY FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report: January 28, 1998 ------------------- BOYKIN LODGING COMPANY ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) Ohio 001-11975 34-1824586 - ----------------------------- ----------------------- --------------- (State or Other Jurisdiction (Commission File Number) (IRS Employer of Incorporation) Identification Number) Terminal Tower, Suite 1500, 50 Public Square, - --------------------------------------------- Cleveland, Ohio 44113 --------------- ------- (Address of Principal Executive Offices) (Zip Code) (216) 241-6375 ------------------------------------------------------ (Registrant's Telephone Number, Including Area Code) 2 ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. A. On December 30, 1997, Boykin Lodging Company, an Ohio corporation (the "Company"), entered into an Agreement and Plan of Merger with Red Lion Inns Limited Partnership, a Delaware limited partnership (the "Partnership"), Red Lion Properties, Inc., a Delaware corporation, Red Lion Inns Operating L.P., a Delaware limited partnership, Boykin Hotel Properties, L.P., an Ohio limited partnership, Boykin Acquisition Corporation I, Inc., an Ohio corporation and a wholly owned subsidiary of the Company, Boykin Acquisition Corporation II, Inc., an Ohio corporation and a wholly owned subsidiary of the Company, and Boykin Acquisition Partnership, L.P., a Delaware limited partnership ("Merger Sub"), pursuant to which the Merger Sub will be merged with and into the Partnership (the "Merger"). Attached are the following for the Partnership: 1. EXHIBIT 1 - The Partnership Form 10-K, without exhibits, for the year ended December 31, 1996 including Consolidated Balance Sheets as of December 31, 1996 and 1995 and Consolidated Statements of Income, Partner's Capital and Cash Flows for each of the three years in the period ended December 31, 1996, together with related Reports of Independent Public Accountants. 2. EXHIBIT 2 - The Partnership Form 10-Q for the nine months ended September 30, 1997, including an unaudited Consolidated Balance Sheet as of September 30, 1997, the unaudited Consolidated Statements of Operations for the three and nine month periods ended September 30, 1997 and 1996, the unaudited Consolidated Statements of Cash Flows for the nine month periods ended September 30, 1997 and 1996 and the unaudited Consolidated Statement of Partners' Capital for the nine month period ended September 30, 1997. B. During 1997 the Company acquired several hotels that individually were insignificant, but when considered on an aggregate basis, exceed 50% of one of the Rule 3-05 tests of significance. The following financial statements are for two individually insignificant hotels acquired in 1997 that when combined represent the mathematical majority of the test deemed most significant: 1. EXHIBIT 3 - Marriott's Hunt Valley Inn audited financial statements as of and for the year ended December 31, 1996, together with Report of Independent Public Accountants and unaudited financial statements as of June 30, 1997 and for the six month periods ended June 30, 1997 and 1996. 2. EXHIBIT 4 - Holiday Inn Minneapolis West audited financial statements as of and for the year ended December 31, 1996, together with Report of Independent Public Accountants and unaudited financial statements as of June 30, 1997 and for the six month periods ended June 30, 1997 and 1996. -1- 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: January 27, 1998 BOYKIN LODGING COMPANY By: /s/ Raymond P. Heitland ---------------------------------- Raymond P. Heitland Chief Financial Officer -2- 4 EXHIBIT INDEX Exhibit Number Description - -------------- ----------- 1. Red Lion Inns Limited Partnership Form 10-K, without exhibits, for the year ended December 31, 1996 including Consolidated Balance Sheets as of December 31, 1996 and 1995 and Consolidated Statements of Income, Partner's Capital and Cash Flows for each of the three years in the period ended December 31, 1996, together with related Reports of Independent Public Accountants. 2. Red Lion Inns Limited Partnership Form 10-Q for the nine months ended September 30, 1997, including an unaudited Consolidated Balance Sheet as of September 30, 1997, the unaudited Consolidated Statements of Operations for the three and nine month periods ended September 30, 1997 and 1996, the unaudited Consolidated Statements of Cash Flows for the nine month periods ended September 30, 1997 and 1996 and the unaudited Consolidated Statement of Partners' Capital for the nine month period ended September 30, 1997. 3. Marriott's Hunt Valley Inn audited financial statements as of and for the year ended December 31, 1996, together with Report of Independent Public Accountants and unaudited financial statements as of June 30, 1997 and for the six month periods ended June 30, 1997 and 1996. 4. Holiday Inn Minneapolis West audited financial statements as of and for the year ended December 31, 1996, together with Report of Independent Public Accountants and unaudited financial statements as of June 30, 1997 and for the six month periods ended June 30, 1997 and 1996. EX-1 2 EXHIBIT 1 1 Exhibit 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 ----------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to Commission file number 1-9443 ------ RED LION INNS LIMITED PARTNERSHIP --------------------------------- (Exact name of registrant as specified in its charter) Delaware 94-3029959 --------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4001 Main Street, Vancouver, Washington 98663 --------------------------------------- ----- (Address of principal executive offices) (Zip Code) (360) 696-0001 -------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered Units representing limited partnership interests American Stock Exchange - -------------------------------------------------- -----------------------
Securities registered pursuant to Section 12(g) of the Act: None ---- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), 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. [ ] The aggregate market value of units of non-voting limited partnership interests held by non-affiliates was $99,721,000 at March 21, 1997, and is based on a closing price of $24.125 and 4,133,500 units outstanding and held by non- affiliates. 2 RED LION INNS LIMITED PARTNERSHIP REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 INDEX
PAGE PART I Item 1 Business 3 Item 2 Properties 5 Item 3 Legal Proceedings 5 Item 4 Submission of Matters to a Vote of Security Holders 5 PART II Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters 6 Item 6 Selected Financial Data 7 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 8 Financial Statements and Supplementary Data 13 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 30 PART III Item 10 Directors and Executive Officers of the Registrant 30 Item 11 Executive Compensation 31 Item 12 Security Ownership of Certain Beneficial Owners and Management 31 Item 13 Certain Relationships and Related Transactions 31 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 33 SIGNATURES 35
2 3 PART I ITEM 1 BUSINESS - - ------------------ GENERAL DEVELOPMENT OF BUSINESS Red Lion Inns Limited Partnership and its subsidiary limited partnership, Red Lion Inns Operating L.P. (the "Partnership" and the "Operating Partnership", respectively; collectively, the "Partnership"), were formed in 1987 under the Delaware Revised Uniform Limited Partnership Act for the purpose of owning, through the Operating Partnership, ten Red Lion hotels (the "Hotels" or individually, a "Hotel"). The Hotels had been previously owned by Red Lion, a California Limited Partnership ("Historical Red Lion"). On April 14, 1987, the Partnership completed an initial public offering of units representing limited partnership interests ("Unit" or "Units"), the proceeds from which were $98.8 million. These proceeds, accompanied by a $105.9 million mortgage loan, were used to acquire the Hotels, through the Operating Partnership, from Historical Red Lion for $195 million. Since the completion of this acquisition, the Partnership's limited partners have had an effective 98.01% ownership interest in the Hotels, with the general partner retaining the remaining 1.99 % ownership interest. Since April 14, 1987, the day-to-day management of the Hotels has been conducted pursuant to the management agreement (the "Management Agreement") between the Operating Partnership and Historical Red Lion or its successor. Red Lion Hotels, Inc. ("Red Lion") was incorporated in Delaware in March 1994. On August 1, 1995 (the "Formation Date"), Historical Red Lion contributed substantially all of its assets (excluding 17 hotels, certain minority joint venture interests and certain current assets) and certain liabilities to Red Lion. In connection with this transaction, Historical Red Lion assigned the Management Agreement to Red Lion, which continues to operate and manage the Hotels thereunder. The general partner of the Partnership and Operating Partnership is Red Lion Properties, Inc. (the "General Partner"), a wholly owned subsidiary of Red Lion. On November 8, 1996, Red Lion became a wholly owned subsidiary of Doubletree Corporation ("Doubletree") pursuant to a merger transaction in which all outstanding shares of Red Lion common stock were converted into cash and shares of Doubletree common stock. Doubletree files reports and other information with the Securities and Exchange Commission in accordance with the Securities Exchange Act of 1934. Red Lion, as a subsidiary of Doubletree, provides the same management services to the Hotels that it renders to the other Red Lion lodging facilities, including a centralized reservation system, purchasing, training, marketing, sales, advertising, administration, maintenance, accounting and planning programs. DESCRIPTION OF BUSINESS Since the merger with Doubletree, Red Lion manages the Hotels as part of Doubletree's hotel chain which operates and franchises hotels throughout the United States, Mexico and the Caribbean. The combined operations include over 240 hotels with more than 56,000 rooms. The chain includes leased, managed, franchised and owned hotels. The lodging facilities are designed to provide guests with a full range of high-quality hotel accommodations in convenient locations at competitive prices. In conjunction with its acquisition of Red Lion in November 1996, Doubletree stated its intention to convert most of the Red Lion hotels to one of the Doubletree brands. Doubletree currently intends to convert most or all of the Partnership's Hotels to the Doubletree brand. Upon conversion, these hotels will participate in and take advantage of the marketing and sales programs provided to the Doubletree branded hotels. The Hotels are located in western and mid-western states and compete primarily in the upscale sector of the hospitality market. The Hotels are located near airports or major traffic arteries and are convenient to commercial centers or tourist destinations. The Hotels vary in size, ranging from 208 rooms to 476 rooms. 3 4 Currently, the marketing and sales programs for the Hotels are coordinated through a centralized national marketing team operating through sales offices in Sacramento, Los Angeles, San Francisco, Portland, Seattle, Chicago and Washington, D.C. and trained sales and catering managers located at individual properties. Property sales personnel participate in local and regional trade shows, design local promotional and advertising campaigns and use direct solicitation to increase room and catering sales to national and local groups and associations. All of the Hotels offer full-service accommodations. In addition to restaurants, lounges, banquet and meeting space, most of the Hotels offer oversized rooms with oversized beds, premium television channel and movie availability, complimentary airport shuttle service, free parking, swimming pools, room service and valet services. Their guest amenities may include health and fitness facilities, gift shops, concierge services and business centers. Advertising, public relations, market research and training programs are provided by Doubletree (through Red Lion) for the benefit of the Hotels. Technical training and assistance is also provided to each Hotel for other areas such as front office operations, reservations, housekeeping, property maintenance, energy management, laundry, valet services, telephone systems and guest services. Other services provided include accounting and cash management, risk management, credit and collection, tax compliance, legal, computer and point of sale systems support and internal audit. The food and beverage division establishes quality levels and monitors performance, provides culinary training, assists in menu design, pricing, accounting and cost controls. A centralized reservation system is available to customers throughout the United States and Canada. Doubletree, as part of the Red Lion acquisition, is in the process of upgrading and improving Red Lion's central reservation system, which may be accessed on a toll free basis. The project is expected to be completed in 1997. The improved system will provide, among other features, a real time inventory of all of Red Lion's rooms, which will enhance the ability to manage occupancy yields and room rates. Doubletree also participates in major national and international airline reservations systems which allow travel agents to book reservations at Red Lion Hotels. The Partnership has no employees. Hotel and administrative personnel are employed by Red Lion and its affiliates. The Partnership is not responsible for the payment of executive compensation to the officers of the General Partner. The Partnership reimburses Red Lion for the cost of providing such services at the Hotel level and reimburses the General Partner for Partnership administrative costs. For further discussion of reimbursements to the General Partner and executive compensation, see Items 11 and 13 of this report. The table below presents comparative information on certain characteristics of the Hotels:
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 1994 ---- ---- ---- Average number of rooms per Hotel(1) 306 306 306 Occupancy percentage(2) 73.1% 73.5% 72.8% Average room rate(3) $ 80.21 $ 74.79 $ 70.22 Average gross revenue per room(2) $36,195 $34,551 $32,813 Average gross operating profit per room(2) $13,358 $12,779 $11,618 Average food and beverage revenues per room(2) $10,929 $11,095 $11,021 Average food and beverage operating profit per room(2) $ 2,244 $ 2,411 $ 2,302
(1) At December 31st. (2) Calculated on a per available room per year basis. (3) Based on rooms occupied. 4 5 ITEM 2 PROPERTIES - ---------------------- Each of the Hotels offers full-service accommodations, with meeting space and at least two food outlets. The following table presents certain information concerning the Hotels:
NUMBER OF PROPERTY LOCATION GUEST ROOMS - ---------- -------- ------------ Red Lion Hotel/Sacramento Sacramento, CA 448 Red Lion Hotel/Colorado Springs Colorado Springs, CO 299 Red Lion Hotel/Riverside Boise, ID 304 Red Lion Hotel/Omaha(1) Omaha, NE 413 Red Lion Inn/Springfield(1) Springfield, OR 234 Red Lion Hotel/Lloyd Center Portland, OR 476 Red Lion Hotel/Downtown Portland, OR 235 Red Lion Inn/Bellevue Center Bellevue, WA 208 Red Lion Inn/Spokane Valley Spokane, WA 237 Red Lion Inn/Yakima Valley Yakima, WA 208 ----- 3,062 =====
/(1)/Property subject to full or partial ground lease. ITEM 3 LEGAL PROCEEDINGS - ----------------------------- The Partnership is subject to litigation arising in the ordinary course of business. In the opinion of the General Partner, these actions will not have a material adverse effect, if any, on the financial position or results of operations or liquidity of the Partnership or its subsidiary. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - --------------------------------------------------------------- There were no matters submitted to a vote of Unitholders during the year ended December 31, 1996. 5 6 PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------------------------------------------------------------------------------- Red Lion Inns Limited Partnership Units are listed on the American Stock Exchange under the symbol RED. Per Unit market prices were:
QUARTER ENDED ---------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- --------- ------------- -------------- 1996 - ---- High $24 1/4 $26 $25 3/4 $26 5/8 Low 22 1/4 22 5/8 23 1/8 21 1/2 1995 - ---- High 23 5/8 22 1/2 24 3/8 24 1/4 Low 20 7/8 20 1/2 21 7/8 22 1/2
Cash distributions to Unitholders were:
PER UNIT RECORD DATE PAYMENT DATE CASH DISTRIBUTION ----------- ------------ ----------------- 1996 - --------- First quarter April 30, 1996 May 15, 1996 $ .55 Second quarter July 31, 1996 August 15, 1996 .55 Third quarter October 31, 1996 November 15, 1996 .55 Fourth quarter January 31, 1997 February 14, 1997 .55 ----- $2.20 ===== 1995 - -------- First quarter April 30, 1995 May 15, 1995 $ .55 Second quarter July 31, 1995 August 15, 1995 .55 Third quarter October 31, 1995 November 15, 1995 .55 Fourth quarter January 31, 1996 February 15, 1996 .55 ----- $2.20 =====
At December 31, 1996, the Partnership had 841 Unitholders of record. Beginning January 1, 1998, federal tax law mandates that the Partnership become subject to corporate taxes on its income. The payment of income taxes by the Partnership will directly reduce cash available for partner distribution. Distributions to partners after December 31, 1997 will be considered taxable dividends. 6 7 ITEM 6 SELECTED FINANCIAL DATA - - --------------------------------- (in thousands, except operating statistics and per Unit amounts)
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- FINANCIAL DATA: Partnership revenues (a) $ 40,903 $ 39,142 $ 35,620 $ 32,510 $ 31,659 Income before cumulative effect of change in accounting principle 4,037 4,517 2,929 3,206 3,038 Per limited partner Unit 0.96 1.07 0.69 0.76 0.72 Cumulative effect of change in accounting principle -- -- -- (1,351) -- Per limited partner Unit -- -- -- (0.32) -- Net income 4,037 4,517 2,929 1,855 3,038 Per limited partner Unit 0.96 1.07 0.69 0.44 0.72 Cash Flow available for distribution and incentive management fees 15,434 16,122 13,752 10,456 10,211 Per limited partner Unit 3.65 3.81 3.25 2.47 2.41 Cash distribution per limited partner Unit 2.20 2.20 2.20 2.20 2.20 HOTEL OPERATING DATA: Gross revenues of the Hotels $110,827 $105,829 $100,603 $ 96,237 $ 95,745 Hotel gross operating profit as a percentage of gross revenues 37% 37% 35% 34% 33% Number of rooms at end of period 3,062 3,063 3,063 3,069 3,071 Occupancy percentage (b) 73.1% 73.5% 72.8% 73.3% 72.7% Average room rate (c) $ 80.21 $ 74.79 $ 70.22 $ 66.67 $ 64.56 DECEMBER 31, -------------------------------------------------------- 1996 1995 1994 1993 1992 -------- --------- --------- --------- --------- BALANCE SHEET DATA: Total assets $166,476 $166,267 $165,205 $168,043 $171,873 Long-term obligations 127,438 118,939 124,831 125,374 125,514 Partners' capital 12,957 18,234 23,031 29,416 36,875
(a) Partnership revenues represent the gross operating profit of the Hotels. (b) Calculated on a per available room per year basis. (c) Based on rooms occupied. 7 8 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- BEGINNING JANUARY 1, 1998, FEDERAL TAX LAW MANDATES THAT THE PARTNERSHIP BECOME SUBJECT TO CORPORATE TAXES ON ITS INCOME. THE PARTNERSHIP IS NOT CURRENTLY A TAXABLE ENTITY. THE PAYMENT OF INCOME TAXES BY THE PARTNERSHIP WILL NOT REDUCE CASH AVAILABLE FOR PAYMENT OF ANY FEES, INCLUDING THE INCENTIVE MANAGEMENT FEE, DUE TO RED LION UNDER THE MANAGEMENT AGREEMENT. THE PAYMENT OF INCOME TAXES BY THE PARTNERSHIP WILL DIRECTLY REDUCE CASH AVAILABLE FOR PARTNER DISTRIBUTION. DISTRIBUTIONS TO PARTNERS AFTER DECEMBER 31, 1997 WILL BE CONSIDERED TAXABLE DIVIDENDS. THE GENERAL PARTNER IS CURRENTLY ASSESSING ALTERNATIVES RELATING TO THIS CHANGE IN TAX STATUS, BUT NO ASSURANCE CAN BE PROVIDED THAT ANY ACTION WILL BE TAKEN TO LESSEN THE IMPACT OF SUCH TAXES. RESULTS OF OPERATIONS The revenues of the Partnership represent the gross operating profit of the Hotels. The gross operating revenues and expenses of the Hotels are excluded from the financial statements of the Partnership, because Red Lion, and not the Partnership, has operating responsibility for the Hotels. The schedule displayed in Note 8 to the consolidated financial statements sets forth the Hotels' gross operating revenues and expenses. A summary of occupancy and room rates for the Hotels follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 ---- ---- ---- Occupancy percentage 73.1% 73.5% 72.8% Average room rate $80.21 $74.79 $70.22
Comparison of Years Ended December 31, 1996 and 1995 GROSS REVENUES OF THE HOTELS. For the year ended December 31, 1996, gross revenues rose to $110.8 million from $105.8 million in the year ended December 31, 1995, an increase of approximately $5 million or 5%. The rise in gross revenues is primarily a result of increased room and other revenues. During the year ended December 31, 1996, room revenues rose to $65.7 million from $61.5 million in the year ended December 31, 1995, an increase of 7%. The increase in room revenues is due principally to higher average room rates. The average occupancy rate was slightly lower for the current year due in part to the effects of renovation work at various Hotels. During the year ended December 31, 1996, other revenues rose to $11.6 million from $10.4 million in the year ended December 31, 1995, an increase of 12%. The increase in other revenues is due principally to increased banquet room rentals and ancillary banquet services. GROSS OPERATING COSTS AND EXPENSES OF THE HOTELS. Gross operating costs and expenses of the Hotels for the year ended December 31, 1996 rose to $69.9 million from $66.7 million in the year ended December 31, 1995, an increase of $3.2 million or 5%. Gross operating costs and expenses as a percentage of gross revenues of the Hotels remained constant at 63% for the years ended December 31, 1996 and 1995. PARTNERSHIP REVENUES. During the year ended December 31, 1996, revenues (which represent the gross operating profits of the Hotels) increased to $40.9 million from $39.1 million in the year ended December 31, 1995, an increase of 5%. Partnership revenues as a percentage of Hotel revenues were 37% for both the years ended December 31, 1996 and 1995. The effect of the changes in gross revenues and expenses of the Hotels that affect the amounts credited from Red Lion are discussed above. 8 9 PARTNERSHIP OPERATING COSTS AND EXPENSES. Operating costs and expenses for the year ended December 31, 1996 increased by 6% from the year ended December 31, 1995. The increase is primarily due to higher base and incentive management fees as a result of increased Partnership revenues and higher property taxes and insurance costs. INCENTIVE MANAGEMENT FEE. Pursuant to the terms of the Management Agreement, Red Lion earns an incentive management fee equal to the sum of 15% of annual adjusted gross operating profit up to $36 million and 25% of annual adjusted gross operating profit in excess of $36 million. Adjusted gross operating profit is gross operating profit (Partnership revenues) less base management fee (3% of gross revenues of the Hotels). The incentive management fee is only payable to the extent that cash flow available for distribution and incentive management fee ("Cash Flow"), on an annual basis, as defined in the Management Agreement, exceeds $2.20 per Unit ("Priority Return"). Cash Flow is defined as pre-tax income (or loss) before noncash charges (primarily depreciation and amortization) and the incentive management fee, but after the reserve for capital improvements and principal payments on certain debt. During the year ended December 31, 1996, the Partnership recognized $5.8 million (15.4% of adjusted gross operating profit) of incentive management fee to be paid to Red Lion. During the year ended December 31, 1995, the incentive management fee was $5.4 million, representing 15% of adjusted gross operating profit. PARTNERSHIP OPERATING INCOME. Operating income rose slightly to $16.5 million for the year ended December 31, 1996 from $16.1 million in the year ended December 31, 1995, an increase of 2%. As a percentage of revenues, operating income is relatively constant at 40% and 41% for the years ended December 31, 1996 and 1995, respectively. INTEREST EXPENSE. Interest expense increased approximately $740,000 to $12 million for the year ended December 31, 1996 as compared to $11.3 million for the year ended December 31, 1995. The increase is primarily due to a higher average outstanding principal balance and interest rate swap agreement adjustments. INCOME TAX EXPENSE. During the years ended December 31, 1996 and 1995, the Partnership provided for deferred income tax of approximately $380,000 and $270,000, respectively. The Partnership is not currently a taxable entity. Beginning January 1, 1998, federal tax law mandates that the Partnership become subject to corporate taxes on its income. Deferred income tax arises primarily from differences in depreciation for financial accounting and tax purposes which are expected to exist at January 1, 1998. NET INCOME. During the year ended December 31, 1996, net income was $4 million ($0.96 per limited partner Unit) compared to $4.5 million ($1.07 per limited partner Unit) for the year ended December 31, 1995. The decrease in net income is due primarily to increased interest expense which was partially offset by improved operating income. CASH FLOW AVAILABLE FOR DISTRIBUTION AND INCENTIVE MANAGEMENT FEE. Cash Flow decreased for the year ended December 31, 1996 to $15.4 million ($3.65 per limited partner Unit) from the year ended December 31, 1995 of $16.1 million ($3.81 per limited partner Unit). The decrease in Cash Flow is due to the factors impacting net income, discussed above, and higher principal repayments of certain debt. Cash flow available for payment of incentive management fees for the year ended December 31, 1996 was $6.1 million, which exceeded the current incentive management fee of $5.8 million, by approximately $330,000. Under the Management Agreement, on an annual basis, 25% of any cash flow available for payment of incentive management fees in excess of the current year's recognized incentive management fee will be paid to Red Lion to pay down the non-interest bearing deferred incentive management fees currently outstanding. In accordance with the terms of the Management Agreement, approximately $80,000 of the excess cash flow available for payment of incentive management fees will be used to pay down the outstanding deferred incentive management fees balance of approximately $700,000. The additional excess cash flow of approximately $250,000 will be applied against the balance of interest-bearing payables to Red Lion. (See Notes 6 and 8 to the consolidated financial statements). 9 10 Once the Partnership becomes subject to corporate taxes beginning January 1, 1998, the payment of income taxes by the Partnership will directly reduce cash available for partner distribution. Distributions to partners after December 31, 1997 will be considered taxable dividends. The payment of income taxes by the Partnership will not reduce cash available for payment of any fees, including the incentive management fee, due to Red Lion under the Management Agreement. Comparison of Years Ended December 31, 1995 and 1994 GROSS REVENUES OF THE HOTELS. For the year ended December 31, 1995, gross revenues rose to $105.8 million from $100.6 million in the year ended December 31, 1994, an increase of approximately $5.2 million or 5%. The rise in gross revenues is primarily a result of increased room revenues. During the year ended December 31, 1995, room revenues rose to $61.5 million from $57.2 million in the year ended December 31, 1994, an increase of 8%. The increase in room revenues is due principally to higher average room rates and an improvement in occupancy. During the year ended December 31, 1995, other revenues rose to $10.4 million from $9.6 million in the year ended December 31, 1994, an increase of 8%. The increase in other revenues is due principally to increased banquet room and equipment rentals. GROSS OPERATING COSTS AND EXPENSES OF THE HOTELS. Gross operating costs and expenses of the Hotels for the year ended December 31, 1995 rose to $66.7 million from $65 million in the year ended December 31, 1994, an increase of $1.7 million or 3%. The increase is largely due to higher rooms expense and administrative and general costs. Based on management of costs, gross operating costs and expenses as a percentage of gross revenues of the Hotels decreased to 63% for the year ended December 31, 1995 from 65% in the year ended December 31, 1994. PARTNERSHIP REVENUES. During the year ended December 31, 1995, revenues (which represent the gross operating profits of the Hotels) increased to $39.1 million from $35.6 million in the year ended December 31, 1994, an increase of 10%. Partnership revenues as a percentage of Hotel revenues increased to 37% for the year ended December 31, 1995 from 35% in the year ended December 31, 1994. The increase is due to improved Hotel gross revenues and management of operating costs. The effect of the changes in gross revenues and expenses of the Hotels are discussed above. PARTNERSHIP OPERATING COSTS AND EXPENSES. Operating costs and expenses for the year ended December 31, 1995 increased by 4% from the year ended December 31, 1994. The increase is primarily due to higher base and incentive management fees as a result of increased Partnership revenues and higher property taxes, which was offset by lower depreciation and amortization as a result of assets becoming fully depreciated in early 1995. INCENTIVE MANAGEMENT FEE. During the year ended December 31, 1995, the Partnership recognized $5.4 million (15% of adjusted gross operating profit) of incentive management fee to be paid to Red Lion. During the year ended December 31, 1994, the incentive management fee was $4.4 million representing 13.6% of adjusted gross operating profit, because Cash Flow was insufficient to pay the full 15% during 1994. PARTNERSHIP OPERATING INCOME. Operating income rose to $16.1 million for the year ended December 31, 1996 from $13.5 million in the year ended December 31, 1994, an increase of 19%. As a percentage of revenues, operating income increased to 41% for the year ended December 31, 1995 from 38% for the year ended December 31, 1994. The increase is predominantly due to the increased Partnership revenues discussed above. INTEREST EXPENSE. Interest expense increased approximately $800,000 to $11.3 million for the year ended December 31, 1995 as compared to $10.5 million for the year ended December 31, 1994. The increase is primarily due to higher interest rates and amortization of deferred loan costs. 10 11 INCOME TAX EXPENSE. During the years ended December 31, 1995 and 1994, the Partnership provided for deferred income taxes of approximately $270,000 and $50,000, respectively. The Partnership is not currently a taxable entity. Beginning January 1, 1998, federal tax law mandates that the Partnership become subject to corporate taxes on its income. Deferred income tax arises primarily from differences in depreciation for financial accounting and tax purposes which are expected to exist at January 1, 1998. NET INCOME. During the year ended December 31, 1995, net income was $4.5 million ($1.07 per limited partner Unit) compared to $2.9 million ($0.69 per limited partner Unit) for the year ended December 31, 1994. The increase in net income is due primarily to increased Partnership revenues and lower depreciation and amortization expense. CASH FLOW AVAILABLE FOR DISTRIBUTION AND INCENTIVE MANAGEMENT FEES. Cash Flow increased for the year ended December 31, 1995 to $16.1 million ($3.81 per limited partner Unit) from the year ended December 31, 1994 of $13.8 million ($3.25 per limited partner Unit). The increase in Cash Flow is due to the factors impacting net income, discussed above. Cash flow available for payment of incentive management fees for the year ended December 31, 1995 was $6.8 million, which exceeded the current incentive management fee of $5.4 million by approximately $1.4 million. Under the Management Agreement, on an annual basis, 25% of any cash flow available for payment of incentive management fees in excess of the current year's recognized incentive management fee will be paid to Red Lion to pay down the non-interest bearing deferred incentive management fees currently outstanding. In accordance with the terms of the Management Agreement, approximately $350,000 of the excess cash flow available for payment of incentive management fees was used to pay down the outstanding deferred incentive management fees balance. The additional $1.1 million of excess cash flow was applied against the balance of interest- bearing payables due to Red Lion. (See Notes 6 and 8 to the consolidated financial statements). Once the Partnership becomes subject to corporate taxes beginning January 1, 1998, the payment of income taxes by the Partnership will directly reduce cash available for partner distribution. Distributions to partners after December 31, 1997 will be considered taxable dividends. The payment of income taxes by the Partnership will not reduce cash available for payment of any fees, including the incentive management fee, due to Red Lion under the Management Agreement. 11 12 LIQUIDITY AND CAPITAL RESOURCES The Partnership's principal source of cash is hotel operations. During the three years ended December 31, 1996, the Hotels generated sufficient cash from operations to cover operating needs. It is expected that, for 1997, cash provided by operations and borrowings, if any, from available credit facilities, discussed below, or from Red Lion will be sufficient to meet anticipated cash requirements. During 1996, the Partnership entered into a three-year $125 million credit facility. The credit facility includes a $120 million term loan and a $5 million revolving credit line. The proceeds of the term loan were used to repay all amounts owed under the prior mortgage note and revolving credit facility, a portion of the payable to affiliate related to deferred incentive management fees (see Note 8 to the consolidated financial statements) and loan fees. Borrowings under the facility bear interest at the London Interbank Offering Rate ("LIBOR") plus 2.25% and are secured by all of the assets of the Hotels. Principal payments on the three-year term loan amount to $1.5 million, $2.4 million and $3.2 million for 1996, 1997 and 1998, respectively, with a lump-sum payment of $112.9 million due at the end of the term (March 31, 1999). Borrowings under the current and prior revolving credit lines averaged $4.8 million during the year ended December 31, 1996. At December 31, 1996, the interest rate was 8.8% and the balance outstanding was $4.5 million on the revolving credit line. (See Note 5 to the consolidated financial statements). During the year ended December 31, 1996, the Partnership made capital improvements amounting to approximately $8.9 million. Major improvements included guest room renovations and common area refurbishments at four hotels. These capital expenditures were funded from the current year's reserve of approximately $3.3 million and the balance was funded by advances from Red Lion. Pursuant to provisions of the Management Agreement, 3% of gross revenues is required to be set aside annually for capital improvements. INCOME TAXES. BEGINNING JANUARY 1, 1998, FEDERAL TAX LAW MANDATES THAT THE PARTNERSHIP BECOME SUBJECT TO CORPORATE TAXES ON ITS INCOME. THE PARTNERSHIP IS NOT CURRENTLY A TAXABLE ENTITY. THE PAYMENT OF INCOME TAXES BY THE PARTNERSHIP WILL NOT REDUCE CASH AVAILABLE FOR PAYMENT OF ANY FEES, INCLUDING THE INCENTIVE MANAGEMENT FEE, DUE TO RED LION UNDER THE MANAGEMENT AGREEMENT. THE PAYMENT OF INCOME TAXES BY THE PARTNERSHIP WILL DIRECTLY REDUCE CASH AVAILABLE FOR PARTNER DISTRIBUTION. DISTRIBUTIONS TO PARTNERS AFTER DECEMBER 31, 1997 WILL BE CONSIDERED TAXABLE DIVIDENDS. SEASONALITY. Operations of the Hotels are affected by seasonality. Revenues are typically higher in summer periods than in winter periods. INFLATION. The effects of inflation, as measured by fluctuations in the Consumer Price Index, have not had a material impact on the Partnership's revenues or net income during the last three years. ************** The statements contained in this report that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Moreover, from time to time the Partnership may issue other forward-looking statements. The following factors are among those that could cause actual results to differ materially from the forward-looking statements: national or local economic conditions affecting the supply and demand for hotel space, competition in hotel operations, including additional or improved services or facilities of competitors, price pressures, continuing availability of capital to fund growth and improvements and the impact of legislation (i.e. certain provisions of the Omnibus Budget Reconciliation Act of 1987). The forward-looking statements should be considered in light of these factors. 12 13 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------------------------------------------------------- INDEPENDENT AUDITORS' REPORT To the Partners of Red Lion Inns Limited Partnership and its Subsidiary Limited Partnership: We have audited the accompanying consolidated balance sheet of Red Lion Inns Limited Partnership (a Delaware limited partnership) and its subsidiary limited partnership (the "Partnership") as of December 31, 1996 and the related consolidated statements of income, partners' capital and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Red Lion Inns Limited Partnership (a Delaware limited partnership) and its subsidiary limited partnership as of December 31, 1996 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP - - ------------------------- Orange County, California February 26, 1997 13 14 INDEPENDENT AUDITORS' REPORT To the Partners of Red Lion Inns Limited Partnership and its Subsidiary Limited Partnership: We have audited the accompanying consolidated balance sheet of Red Lion Inns Limited Partnership (a Delaware limited partnership) and its subsidiary limited partnership (the "Partnership") as of December 31, 1995, and the related consolidated statements of income, partners' capital, and cash flows for the year then ended. 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 generally accepted auditing standards. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Red Lion Inns Limited Partnership and its subsidiary limited partnership as of December 31, 1995, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/Deloitte & Touche LLP - - ------------------------ Portland, Oregon February 24, 1996 (March 14, 1996 as to Note 5) 14 15 INDEPENDENT AUDITORS' REPORT To the Partners of Red Lion Inns Limited Partnership and its Subsidiary Limited Partnership: We have audited the accompanying consolidated statements of income, partners' capital and cash flows of Red Lion Inns Limited Partnership (a Delaware limited partnership) and its subsidiary limited partnership for the year ended December 31, 1994. These financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 consolidated financial statements of Red Lion Inns Limited Partnership and its subsidiary limited partnership referred to above present fairly, in all material respects, the results of their operations and their cash flows for the year ended December 31, 1994 in conformity with generally accepted accounting principles. /s/Arthur Andersen LLP - - ---------------------- Portland, Oregon February 7, 1995 15 16 RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS (in thousands, except unit amounts)
DECEMBER 31, ------------------------- 1996 1995 ---- ----- ASSETS - - ------ Cash $ 763 $ 229 Property and Equipment: Land 17,705 17,705 Buildings and improvements 167,502 164,605 Furnishings and equipment 60,694 55,596 Construction in progress 184 2,229 -------- -------- 246,085 240,135 Less -- accumulated depreciation (81,356) (74,306) -------- -------- 164,729 165,829 Other Assets 984 209 -------- -------- $166,476 $166,267 ======== ======== LIABILITIES AND PARTNERS' CAPITAL - ----------------------------------- Current Liabilities: Accounts payable and accrued expenses $ 14 $ 19 Current portion payable to affiliate 20,964 24,231 Accrued distributions to partners 2,329 2,329 Interest payable 41 334 Property taxes payable 358 284 Current portion long-term debt 2,375 1,897 -------- -------- Total current liabilities 26,081 29,094 Long-Term Payable to Affiliate, net of current portion 4,345 4,573 Long-Term Debt, net of current portion 121,043 112,693 Deferred Income Taxes 2,050 1,673 -------- -------- Total liabilities 153,519 148,033 -------- -------- Commitments and Contingencies (Note 9) Partners' Capital: Limited Partners, 4,940,000 units issued 25,750 30,887 Less -- 806,500 treasury units, at cost (11,202) (11,202) -------- -------- Limited Partners, net 14,548 19,685 General Partner (1,591) (1,451) -------- -------- Total partners' capital 12,957 18,234 -------- -------- $166,476 $166,267 ======== ========
See Notes to Consolidated Financial Statements. 16 17 RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF INCOME (in thousands, except unit amounts)
YEAR ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 ---- ---- ---- Revenues $ 40,903 $ 39,142 $ 35,620 Operating Costs and Expenses: Property taxes 3,096 2,770 2,573 Base management fee 3,325 3,175 3,018 Incentive management fee 5,794 5,395 4,438 Depreciation and amortization 10,046 9,955 10,611 Other 2,182 1,748 1,491 ---------- ---------- ---------- Operating Income 16,460 16,099 13,489 Interest Expense 12,046 11,310 10,510 ---------- ---------- ---------- Income Before Income Taxes 4,414 4,789 2,979 Income Tax Expense 377 272 50 ---------- ---------- ---------- Net Income $ 4,037 $ 4,517 $ 2,929 ========== ========== ========== Allocation of Net Income: General Partner $ 80 $ 90 $ 58 ========== ========== ========== Limited Partners $ 3,957 $ 4,427 $ 2,871 ========== ========== ========== Net Income Per Limited Partner Unit $ 0.96 $ 1.07 $ 0.69 ========== ========== ========== Average Limited Partner Units Outstanding 4,133,500 4,133,500 4,133,500 ========== ========== ==========
See Notes to Consolidated Financial Statements. 17 18 RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (in thousands, except unit amounts)
LIMITED PARTNERS ------------------------------------------------ ISSUED UNITS TREASURY UNITS ----------------------- ------------------- GENERAL UNITS AMOUNT UNITS AMOUNT PARTNER TOTAL --------- --------- -------- -------- -------- ------ Balance at December 31, 1993 4,940,000 $41,777 (806,500) $(11,202) $(1,159) $29,416 Distributions to partners -- (9,094) -- -- (220) (9,314) Net income -- 2,871 -- -- 58 2,929 --------- ------- -------- -------- ------- ------- Balance at December 31, 1994 4,940,000 35,554 (806,500) (11,202) (1,321) 23,031 Distributions to partners -- (9,094) -- -- (220) (9,314) Net income -- 4,427 -- -- 90 4,517 --------- ------- -------- -------- ------- ------- Balance at December 31, 1995 4,940,000 30,887 (806,500) (11,202) (1,451) 18,234 Distributions to partners -- (9,094) -- -- (220) (9,314) Net income -- 3,957 -- -- 80 4,037 --------- ------- -------- -------- ------- ------- Balance at December 31, 1996 4,940,000 $25,750 (806,500) $(11,202) $(1,591) $12,957 ========= ======= ======== ======== ======= =======
See Notes to Consolidated Financial Statements. 18 19 RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEAR ENDED DECEMBER 31, -------------------------------------- 1996 1995 1994 ---------- ------------ ---------- Cash Flows from Operating Activities: Net income $ 4,037 $ 4,517 $ 2,929 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,046 9,955 10,611 Amortization of deferred loan costs 536 658 114 Deferred income taxes 377 272 50 Decrease in payables and accrued expenses (224) (411) (6) --------- -------- ------- Net cash provided by operating activities 14,772 14,991 13,698 --------- -------- ------- Cash Flows from Investing Activities: Purchases of property and equipment, net (8,946) (10,307) (8,100) Cash reserved for capital improvements (3,325) (3,175) (3,018) Cash withdrawn from reserve for capital improvements 3,325 3,175 3,018 --------- -------- ------- Net cash used in investing activities (8,946) (10,307) (8,100) --------- -------- ------- Cash Flows from Financing Activities: Distribution of cash to partners (9,314) (9,314) (9,314) Advances from (payments to) affiliate, net (3,495) 6,614 3,967 Proceeds from term loan 120,000 -- -- Payments on term loan (1,500) -- -- Payments on mortgage note (100,969) (1,500) (1,372) Net (repayments) borrowings under revolving credit facility (8,802) 566 908 Additions to deferred loan costs (1,311) (835) -- Net increase in other long-term obligations 99 14 -- --------- -------- ------- Net cash used in financing activities (5,292) (4,455) (5,811) --------- -------- ------- Increase (Decrease) in Cash 534 229 (213) Cash at Beginning of Year 229 -- 213 --------- -------- ------- Cash at End of Year $ 763 $ 229 -- ========= ======== ======= Supplemental Disclosure of Cash Flow Information: Cash paid for interest $ 11,803 $ 11,118 $10,389 ========= ======== =======
See Notes to Consolidated Financial Statements. 19 20 RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements include the accounts of Red Lion Inns Limited Partnership, a Delaware limited partnership and its subsidiary limited partnership, Red Lion Inns Operating L.P., a Delaware limited partnership (the "Partnership" and the "Operating Partnership", respectively; collectively, the "Partnership"). The Partnership was organized for the purpose of acquiring and owning, through the Operating Partnership, ten Red Lion hotels (the "Hotels" or individually, a "Hotel"). On April 14, 1987 (the date of the Partnership's inception), the Operating Partnership acquired the Hotels from Red Lion, a California Limited Partnership ("Historical Red Lion"), which continued to manage the Hotels under a long-term management agreement (the "Management Agreement"). All significant intercompany transactions and accounts have been eliminated. Red Lion Hotels, Inc. ("Red Lion") was incorporated in Delaware in March 1994 and commenced operations in March 1995. On August 1, 1995, Historical Red Lion contributed substantially all of its assets (excluding 17 hotels and certain related obligations, certain minority joint venture interests and certain current assets) and certain liabilities to Red Lion. In connection with this transaction, Historical Red Lion assigned the Management Agreement to Red Lion. The Management Agreement expires in 2012 and can be extended for an additional ten five-year periods. The general partner of the Partnership is Red Lion Properties, Inc. (the "General Partner"), a wholly owned subsidiary of Red Lion. On November 8, 1996, Red Lion became a wholly owned subsidiary of Doubletree Corporation ("Doubletree") pursuant to a merger transaction in which all outstanding shares of Red Lion common stock were converted into cash and shares of Doubletree common stock. Red Lion, as a wholly owned subsidiary of Doubletree, continues to operate and manage the Hotels under the Management Agreement. Doubletree files reports and other information with the Securities and Exchange Commission in accordance with the Securities Exchange Act of 1934. The preparation of financial statements in accordance with generally accepted accounting principles requires the General Partner to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. While the General Partner endeavors to make accurate estimates, actual results could differ from estimates. Certain prior year amounts have been reclassified to conform to the current year presentation. Operating Revenues and Expenses and Current Assets and Current Liabilities Revenues reported in the accompanying statements of income represent the gross operating profit of the Hotels. Operating revenues and expenses and the current assets and current liabilities of the Hotels are excluded from the accompanying consolidated financial statements of the Partnership because Red Lion, and not the Partnership, has operating responsibility for the Hotels. 20 21 Property and Equipment The Partnership recorded the April 14, 1987 acquisition of property and equipment on the basis of an allocation of the purchase price to the assets acquired. Subsequent additions and improvements have been capitalized at their cost. Normal repairs and maintenance are charged to Hotel operating costs and expenses as incurred. Upon sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the respective accounts and the resulting gain or loss, if any, is included in income. Base stock (linens, china, silverware and glassware) for the Hotels has been depreciated to 50 percent of its initial cost on a straight-line basis over a three-year period and subsequent replacements are expensed when purchased in accordance with industry practice. The carrying value of base stock is included in furnishings and equipment in the accompanying consolidated balance sheets. Depreciation is computed on a straight-line basis using the following estimated useful lives: Buildings and improvements............................. 5 to 35 years Furnishings and equipment.............................. 3 to 15 years The Partnership adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on the Partnership's financial position, results of operations or liquidity. Deferred Loan Costs Deferred loan costs, included in other assets, consist of financing fees paid in connection with obtaining the Partnership's credit facility and are amortized over the three-year term of the credit facility. Income Taxes No current provision for federal or state income taxes has been provided by the Partnership in the accompanying consolidated financial statements. The Partnership is not currently a taxable entity and any income taxes are the responsibility of the partners. Beginning January 1, 1998, federal tax law mandates that the Partnership become subject to corporate taxes on its income. Therefore, deferred income taxes have been provided for the projected differences between the financial accounting and tax bases of property and equipment at January 1, 1998 (see Note 3). Cash Distributions The Partnership declares each quarterly distribution in the month following the end of the quarter to which it applies. Fourth quarter distributions are accrued in the accompanying consolidated balance sheets for both of the years presented. 21 22 2. ORGANIZATION The Partnership was formed on January 16, 1987, under the Delaware Revised Uniform Limited Partnership Act and will continue until December 31, 2062, unless sooner terminated under the provisions of the Partnership's Amended and Restated Agreement of Limited Partnership (the "Partnership Agreement"). The Partnership was formed to acquire, own and operate the Hotels through its interest in the Operating Partnership. Red Lion Properties, Inc., the General Partner of the Partnership, is a wholly- owned subsidiary of Red Lion. On April 14, 1987, the Partnership completed an initial public offering of units representing limited partnership interests ("Unit" or "Units") totaling $98.8 million. These proceeds, accompanied by a $105.9 million mortgage loan, were used to acquire, through the Operating Partnership, the Hotels from Historical Red Lion for approximately $195 million. After completion of this acquisition, the Partnership's limited partners have an effective 98.01% ownership interest in the Hotels with the General Partner retaining the remaining 1.99% ownership interest. On November 8, 1996, Red Lion became a wholly owned subsidiary of Doubletree pursuant to a merger transaction in which a wholly owned subsidiary of Doubletree was merged with and into Red Lion and all outstanding shares of Red Lion stock were converted into cash and shares of Doubletree stock. The allocation of the Partnership's profits and losses is based on the relative ownership interests in accordance with the terms of the Partnership Agreement. Cash flow available for distribution, as defined in the Partnership Agreement, will generally be distributed to the partners in proportion to their respective ownership interests. Such distributions occur until certain preferential distributions are achieved and then cash flow is allocated to both the general and limited partners depending on factors related to the source of the net cash flow and cash distributions as specified in the Partnership Agreement (see Note 6). 3. INCOME TAXES DURING 1987, CONGRESS PASSED THE OMNIBUS BUDGET RECONCILIATION ACT WHICH MANDATES THAT THE PARTNERSHIP BECOME SUBJECT TO CORPORATE TAXES ON ITS INCOME BEGINNING JANUARY 1, 1998. THE PARTNERSHIP IS NOT CURRENTLY A TAXABLE ENTITY. THE PAYMENT OF INCOME TAXES BY THE PARTNERSHIP WILL NOT REDUCE CASH AVAILABLE FOR PAYMENT OF ANY FEES, INCLUDING THE INCENTIVE MANAGEMENT FEE, DUE TO RED LION UNDER THE MANAGEMENT AGREEMENT (SEE NOTE 8). THE PAYMENT OF INCOME TAXES BY THE PARTNERSHIP WILL DIRECTLY REDUCE CASH AVAILABLE FOR PARTNER DISTRIBUTION. DISTRIBUTIONS TO PARTNERS AFTER DECEMBER 31, 1997 WILL BE CONSIDERED TAXABLE DIVIDENDS. THE GENERAL PARTNER IS CURRENTLY ASSESSING ALTERNATIVES RELATING TO THIS CHANGE IN TAX STATUS, BUT NO ASSURANCE CAN BE PROVIDED THAT ANY ACTION WILL BE TAKEN TO LESSEN THE IMPACT OF SUCH TAXES. In accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," deferred income taxes have been provided for the book and tax depreciation differences on property and equipment which are expected to reverse subsequent to 1997 as follows (in thousands):
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 1994 ------ ------ ----- Deferred Federal $ 320 $ 231 $ 45 Deferred State 57 41 5 ----- ----- ----- Tax expense $ 377 $ 272 $ 50 ===== ===== =====
The effective tax rate of 40% utilized in the calculation of the deferred tax provision differs from the federal statutory rate of 34% primarily due to the impact of state taxes, net of federal benefit. 22 23 4. CAPITAL IMPROVEMENTS A cash reserve for capital improvements has been established in accordance with the provisions of the Management Agreement. Funding of 3% of gross revenues is to be used for renovations, refurbishments and other capital expenditures. During the years ended December 31, 1996, 1995 and 1994, $3.3 million, $3.2 million and $3 million, respectively, were accumulated in this reserve and then withdrawn to fund capital improvements. Capital improvements which include the above amounts totaled $8.9 million, $10.3 million and $8.1 million for the years ended December 31, 1996, 1995 and 1994, respectively. Those capital improvements in excess of the 3% reserve were funded primarily by Red Lion (see Note 8). 5. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
DECEMBER 31, ------------------------ 1996 1995 --------- -------- Term loan, payable in varying installments through March 31, 1999 $118,500 $ -- Revolving credit facility, due March 31, 1999 4,500 -- Mortgage note, repaid in April 1996 -- 100,969 Revolving credit facility, repaid in April 1996 -- 13,302 Other long-term obligations 418 319 -------- -------- Total long-term debt 123,418 114,590 Less current portion (2,375) (1,897) -------- -------- $121,043 $112,693 ======== ========
During 1996, the Partnership entered into a three-year $125 million credit facility. The credit facility includes a $120 million term loan and a $5 million revolving credit line. The proceeds of the term loan were used to repay all amounts owed under the prior mortgage note and revolving credit facility, a portion of the payable to affiliate related to deferred incentive management fees (see Note 8) and loan fees. Borrowings under the facility bear interest at the London Interbank Offering Rate ("LIBOR") plus 2.25% (8.8% at December 31, 1996) and are secured by all of the assets of the Hotels. At December 31, 1996, remaining principal payments due on the three-year term loan total $2.4 million and $3.2 million for 1997 and 1998, respectively, with a lump-sum payment of $112.9 million due at the end of the term (March 31, 1999). Interest Rate Swap Agreements The Partnership enters into interest rate swap agreements in order to reduce its exposure to interest rate fluctuations. The agreements have effectively converted floating rate debt, which is tied to LIBOR, to fixed rates. Accordingly, the net interest received or paid on the interest rate swap is recorded as an adjustment to interest expense. At December 31, 1996, the Partnership had four interest rate swap agreements outstanding which have substantially converted $100 million of debt from floating LIBOR based rates to fixed rates ranging from 6.17% to 6.23%. The agreements expire from December 1998 to March 1999. Interest expense incurred by the Partnership relating to interest rate swap agreements for the year ended December 31, 1996, was approximately $470,000 and is included as an adjustment to interest expense. 23 24 6. CASH DISTRIBUTIONS TO PARTNERS The Partnership declared cash distributions of $9.3 million in the years ended December 31, 1996, 1995 and 1994. On a per Unit basis, cash distributions declared were $2.20 in the years ended December 31, 1996, 1995 and 1994. In accordance with the Management Agreement, incentive management fees are only payable to the extent that cash flow available for distribution and incentive management fee ("Cash Flow"), on an annual basis, exceeds $2.20 per Unit (the "Priority Return"). Cash Flow is defined as pre-tax income (or loss) before noncash charges (primarily depreciation and amortization) and incentive management fees, but after the reserve for capital improvements and principal payments on certain debt. During the years ended December 31, 1996, 1995 and 1994, the Partnership's Cash Flow covered 100% of the Priority Return and also allowed payment of the current incentive management fee to Red Lion of approximately $5.8 million, $5.4 million and $4.4 million, respectively (see Note 8). Beginning January 1, 1998, federal tax law mandates that the Partnership become subject to corporate taxes on its income. The Partnership is not currently a taxable entity. The payment of income taxes by the Partnership will not reduce cash available for payment of any fees, including the incentive management fee, due to Red Lion under the Management Agreement. The payment of income taxes by the Partnership will directly reduce cash available for partner distribution. Distributions to partners after December 31, 1997 will be considered taxable dividends. Although the Partnership has historically distributed the Priority Return to limited partners, there is no assurance this will continue after December 31, 1997. In addition, the Priority Return can be used to repay certain indebtedness owed to Red Lion or to fund capital improvements, also reducing cash flow available for distribution to limited partners. For the first 36 months of operations, which ended April 30, 1990, the General Partner agreed to make available to the Partnership a $4 million non-interest bearing revolving credit facility which was to be used in the event that Cash Flow was insufficient to distribute the Priority Return to limited partners. During the 36 month period, the General Partner funded approximately $3.7 million from the facility. This amount will be repaid out of either (i) cash flow after payment of the Priority Return and incentive management fees, or (ii) sale or refinancing proceeds prior to any distribution to limited partners. Incentive management fees that are earned, but not paid, in any year because of the Cash Flow limitation, are deferred without interest up to a maximum of $6 million. In 1988, the Partnership reached the maximum deferred amount of $6 million of such fees in accordance with the Management Agreement. The deferred amount is to be paid out of either (i) 25% of Cash Flow in excess of the Priority Return and the current incentive management fee or (ii) sale or refinancing proceeds prior to any distribution to the limited partners. At December 31, 1996, the deferred incentive management fee outstanding amounted to approximately $700,000. 24 25 Following is a calculation of Cash Flow and related cash flow available for payment of incentive management fees (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 -------- ----------- ----------- Net income $ 4,037 $ 4,517 $ 2,929 Add (deduct): Depreciation and amortization 10,046 9,955 10,611 Incentive management fee 5,794 5,395 4,438 Amortization of other assets 536 658 114 Cash reserved for capital improvements (3,325) (3,175) (3,018) Repayments on term loan (2,031) (1,500) (1,372) Income tax provision 377 272 50 ------- ------- ------- Cash flow available for distribution and incentive management fees 15,434 16,122 13,752 Distributions to partners (9,314) (9,314) (9,314) ------- ------- ------- Cash flow available for payment of incentive management fees 6,120 6,808 4,438 Current incentive management fee (5,794) (5,395) (4,438) ------- ------- ------- Excess cash flow $ 326 $ 1,413 $ 0 ======= ======= ======= Cash Flow per Unit $ 3.65 $ 3.81 $ 3.25 ======= ======= =======
7. LEASES Two of the Hotels hold leases on all or a portion of their land. The leases contain rental provisions which are based on increases in the Consumer Price Index. The terms of the leases expire through July 2067. The Partnership leases certain equipment under operating leases. Total land and equipment rent expense for the years ended December 31, 1996, 1995 and 1994 was approximately $277,000, $132,000 and $94,000, respectively. Future minimum rental payments at December 31, 1996, substantially all of which relate to land leases are as follows (in thousands): 1997 $ 277 1998 277 1999 277 2000 277 2001 277 Thereafter 17,446 ------- $18,831 =======
8. RELATED PARTY TRANSACTIONS The General Partner is responsible for the management and administration of the Partnership. In accordance with the Partnership Agreement, the Partnership reimburses the General Partner for related administrative costs. Under the Management Agreement, the Partnership pays base and incentive management fees to Red Lion. Base management fees payable are equal to 3% of the annual gross revenues of the Hotels. Incentive management fees payable are equal to the sum of 15% of annual adjusted gross operating profit up to $36 million (operating profit target) and 25% of annual adjusted gross operating profit in excess of the operating profit target. Adjusted gross operating profit is gross operating profit (the revenues reported in the accompanying consolidated financial statements) less base management fees. 25 26 Incentive management fees are only payable to the extent that Cash Flow, on an annual basis, as defined in the Management Agreement, exceeds the Priority Return. The incentive management fee that is earned but not paid on an annual basis, because of the Cash Flow limitation, is deferred without interest up to a maximum of $6 million. The Hotels, in accordance with the Management Agreement, are also charged by Red Lion for their pro rata share of support services such as computer, advertising, public relations, promotional and sales and central reservation services. All Partnership personnel are employees of Red Lion and its affiliates. All costs for services of such employees are reimbursed to Red Lion by the Operating Partnership. These costs include salaries, wages, payroll taxes and other employee benefits. Additionally, auxiliary enterprises owned by Red Lion or its affiliates sell operating supplies, furnishings and equipment to the Partnership. The aggregate amounts, excluding personnel related expenses, charged by Red Lion to the Partnership under the arrangements described above are as follows (in thousands):
YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 -------- ------------ --------- Management fees $9,119 $ 8,570 $7,456 Support services 6,957 4,141 3,778 Purchases from auxiliary enterprises 9,915 11,248 9,513 General Partner administrative expenses 545 473 434
Amounts payable to affiliate consists of the following (in thousands):
DECEMBER 31, ------------------ 1996 1995 ---- ---- Amounts payable to affiliate $ 28,499 $ 30,998 Current assets and current liabilities of Hotels (3,190) (2,194) -------- -------- Amounts payable to affiliate, net of current assets and current liabilities 25,309 28,804 Less current payable to affiliate (20,964) (24,231) --------- -------- Long-term payable to affiliate, net of current portion $ 4,345 $ 4,573 ========= ========
Included in the amounts payable to affiliate are $24.1 million and $21.3 million at December 31, 1996 and 1995, respectively, representing amounts payable to Red Lion primarily for advances made by Red Lion for capital improvements which exceeded the 3% reserve established in accordance with the provisions of the Management Agreement. The amounts advanced for capital improvements of $20.1 million and $17.3 million at December 31, 1996 and 1995, respectively, incur interest at the rate of prime plus 0.5% (8.75% and 9.0% at December 31, 1996 and 1995, respectively). At December 31, 1996 and 1995, the non-interest bearing amounts of the advance totaled $4 million. 26 27 Long-term payables to affiliate are non-interest bearing amounts comprised of deferred incentive management fees and a General Partner credit facility (see Note 6). Deferred incentive management fees payable were approximately $700,000 and $6 million at December 31, 1996 and 1995, respectively. Of such amount at December 31, 1996, approximately $620,000 is classified as a long-term payable and $80,000 is classified as a current payable to affiliate as such amount represents 25% of the Partnership's excess cash flow in 1996 and will be paid to Red Lion in 1997 as required by the Management Agreement. The amount drawn against the General Partner credit facility was $3.7 million at December 31, 1996 and 1995 and is classified as a long-term payable. Amounts payable to affiliate are recorded net of an amount for the current assets and current liabilities of the Hotels of $3.2 million and $2.2 million at December 31, 1996 and 1995, respectively. The current assets and current liabilities of the Hotels consist of cash held in hotel accounts, accounts receivable, inventories, prepaid expenses, hotel accounts payable and certain taxes other than property, income and payroll taxes. Since Red Lion has operating responsibilities associated with the Hotels, these current asset and current liability items are excluded from the accompanying consolidated financial statements. The following schedules reflect the operating revenues and expenses and current assets and current liabilities of the Hotels not reflected in the accompanying financial statements (in thousands): GROSS OPERATING REVENUES AND EXPENSES OF THE HOTELS
YEAR ENDED DECEMBER 31, ------------------------------ 1996 1995 1994 -------- -------- -------- Revenues: Rooms $ 65,734 $ 61,496 $ 57,247 Food and beverage 33,464 33,983 33,791 Other 11,629 10,350 9,565 -------- -------- -------- Total revenues 110,827 105,829 100,603 -------- -------- -------- Operating Costs and Expenses: Departmental direct expenses: Rooms 16,841 15,202 14,290 Food and beverage 26,592 26,599 26,742 Other 4,208 3,824 3,680 Administration and general 9,092 8,904 8,391 Sales, promotion and advertising 5,671 5,005 4,637 Utilities 3,416 3,167 3,316 Repairs and maintenance 4,104 3,986 3,927 -------- -------- -------- Total operating costs and expenses 69,924 66,687 64,983 -------- -------- -------- Gross operating profit of Hotels $ 40,903 $ 39,142 $ 35,620 ======== ======== ========
27 28 CURRENT ASSETS AND CURRENT LIABILITIES OF THE HOTELS
DECEMBER 31, --------------- 1996 1995 ------ ------ Current Assets: Cash $ 255 $ 277 Accounts receivable 3,951 3,352 Inventories 1,201 1,152 Prepaid expenses 1,124 1,079 ------ ------ 6,531 5,860 ------ ------ Current Liabilities: Accounts payable 2,506 2,868 Taxes payable (other than property, income and payroll taxes) 835 798 ------ ------ 3,341 3,666 ------ ------ Net Hotel current assets and current liabilities $3,190 $2,194 ====== ======
9. COMMITMENTS AND CONTINGENCIES At December 31, 1996, the Partnership had commitments relating to capital improvement projects of approximately $610,000. The Partnership is subject to litigation arising in the ordinary course of business. In the opinion of the General Partner, these actions will not have a material adverse effect, if any, on the financial position or results of operations or liquidity of the Partnership or its subsidiary. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Partnership's financial instruments, and the methods and assumptions used to estimate such fair values are as follows (in thousands):
DECEMBER 31, ---------------------------------------------- 1996 1995 --------------------- -------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ----------- -------- ---------- Long-term payable to affiliate (Note 8) $ 4,345 $ 3,571 $ 4,573 $ 3,714 Long-term debt (Note 5) 123,418 123,418 114,590 114,590 Interest rate swaps (Note 5) -- (586) -- --
The fair values of the Partnership's financial instruments, except for long-term payable to affiliate and long term debt, approximate their carrying values due to the short-term nature of such financial instruments. The fair values of long-term payable to affiliate and long-term debt are determined using estimated rates for similar notes, based on anticipated repayment dates. The fair value of interest rate swaps is the estimated amount that the Partnership would pay to terminate the swap agreements at December 31, 1996, taking into account current interest rates and the current credit worthiness of the swap counterparties. 28 29 11. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data are as follows (in thousands, except per Unit amounts, room and occupancy statistics):
1996 QUARTER ENDED - - ---- ------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------- Partnership revenues $ 7,900 $11,777 $12,088 $ 9,138 Operating income 3,591 4,285 5,615 2,969 Net income (loss) 646 1,076 2,424 (109) Net income (loss) per Unit 0.15 0.26 0.57 (0.02) Gross revenues of the Hotels 24,868 29,405 29,696 26,858 Cash flow available for distribution and incentive management fees 2,225 4,996 5,481 2,732 Cash flow available for distribution and incentive management fees per Unit 0.53 1.18 1.29 0.65 Average Units outstanding 4,134 4,134 4,134 4,134 Occupancy percentage 65.7% 77.9% 81.9% 67.0% Average room rate $ 76.22 $ 82.71 $ 82.78 $ 78.09
1995 QUARTER ENDED - ------ -------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------- Partnership revenues $ 7,730 $11,222 $11,486 $ 8,704 Operating income 3,006 4,417 5,560 3,116 Net income (loss) 230 1,555 2,741 (9) Net income (loss) per Unit 0.05 0.37 0.65 -- Gross revenues of the Hotels 23,638 28,430 28,234 25,527 Cash flow available for distribution and incentive management fees 1,921 5,289 5,610 3,302 Cash flow available for distribution and incentive management fees per Unit 0.45 1.25 1.33 0.78 Average Units outstanding 4,134 4,134 4,134 4,134 Occupancy percentage 66.9% 80.9% 81.7% 64.7% Average room rate $ 72.50 $ 75.87 $ 77.13 $ 72.83
29 30 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- Not applicable. PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ The Partnership has no directors or officers. Management functions of the Partnership are performed by the General Partner. The following information is provided regarding the executive officers and directors of the General Partner:
NAME AGE PRESENT POSITION WITH THE GENERAL PARTNER - ---- --- ----------------------------------------- Richard M. Kelleher 47 President, Chief Executive Officer and Director William L. Perocchi 39 Executive Vice President, Chief Financial Officer and Director Anupam Narayan 43 Vice President, Treasurer and Secretary Dale F. Frey(1) 64 Director Norman B. Leventhal(1) 79 Director
(1) Effective March 10, 1997, Messrs. Frey and Leventhal replaced Mr. Edward Gilhuly and Mr. Michael Michelson as Directors. Mr. Kelleher has served as President and Director of the General Partner and President of Red Lion Hotels, Inc. since November 1996. Mr. Kelleher has served as President and Chief Executive Officer of Doubletree Hotels Corporation ("DHC") since December 1993; as President and Chief Executive Officer of Doubletree Corporation ("Doubletree") since November 1996 and as a director of Doubletree since July 1995. From April 1993 to December 1993, Mr. Kelleher served as Chief Executive Officer and President of Guest Quarters Hotel Partnership ("GQHP"). From December 1989 to April 1993, Mr. Kelleher was President of Guest Quarters Suite Hotels. In 1983, Mr. Kelleher co-founded Beacon Hotel Corporation, which merged with GQHP in 1986. Mr. Perocchi was appointed Executive Vice President, Chief Financial Officer of the General Partner in March 1997 and has served as Vice President and Director since November 1996. Mr. Perocchi has served as Executive Vice President, Chief Financial Officer and Treasurer of Doubletree since its formation and DHC since December 1993 and as a Director of Doubletree since November 1996. From August 1992 to December 1993, Mr. Perocchi served as Executive Vice President and Chief Financial Officer of GQHP. From June 1989 to July 1992, Mr. Perocchi served as the Vice President, Finance for AMETEK Aerospace Products, Inc. From June 1979 to June 1989, Mr. Perocchi held various positions with The General Electric Company. Mr. Narayan has served as Vice President, Treasurer of the General Partner since May 1992 and was appointed to his present position in November 1996. He was appointed Senior Vice President, Treasurer of DHC in December 1996. Mr. Narayan joined Red Lion Hotels, Inc. ("Red Lion") in 1985 and has served as Vice President, Treasurer of Red Lion since May 1992. Prior to 1985 Mr. Narayan held various positions with Promus Companies. Mr. Frey was elected as a Director of the General Partner effective March 10, 1997. Mr. Frey has served as a Director of Doubletree and Doubletree Partners since December 1993. From July 1992 to December 1993, Mr. Frey served as a director of GQHP. Prior to his retirement in early 1997, Mr. Frey was Chairman of the Board, President and Chief Executive Officer of General Electric Investment Corporation, a position he had held since 1984, and a Vice President of General Electric Company since 1980. Mr. Frey is a member of the Board of Directors of Rhone-Poulenic Rorer; USF&G Corporation; Proxair, Inc.; The Beacon Companies; First American Financial Corporation and The Cancer Research Fund of the Damon Runyon-Walter Winchell Foundation and is a Trustee of Franklin and Marshall College. 30 31 Mr. Leventhal was elected a Director of the General Partner effective March 10, 1997. Mr. Leventhal has served as a Director of Doubletree and Doubletree Partners since December 1993. From September 1992 to December 1993, Mr. Leventhal served as a Director of GQHP. Mr. Leventhal is Chairman of The Beacon Companies, a position he has held for more than ten years. Mr. Leventhal co- founded The Beacon Companies, a major real estate developer, in 1946. Mr. Leventhal serves as a Director of Beacon Properties Corporation. Mr. Leventhal is a Life Member Emeritus of The Corporation of The Massachusetts Institute of Technology and a Director of The Picower Institute for Medical Research. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires certain Partnership insiders to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Richard M. Kelleher and William L. Perocchi each filed a late Form 3 Initial Statement of Beneficial Ownership in February 1997. Each of the late Form 3 reports indicated beneficial ownership of zero Units. ITEM 11 EXECUTIVE COMPENSATION - -------------------------------- The Partnership has no directors, officers or employees. Under the Partnership Agreement, the General Partner is responsible for the management and administration of the Partnership. As discussed in Item 13 below, the General Partner is reimbursed for certain management and administrative costs but receives no fees for providing these services to the Partnership and the Partnership is not responsible for the payment of compensation to the officers of the General Partner. The Hotels are operated by Red Lion in accordance with the Management Agreement (see Item 13). ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------- At December 31, 1996, the following owner beneficially owned more than five percent of the total number of outstanding Units.
NAME AND ADDRESS AMOUNT AND NATURE PERCENT OF OF OF TITLE OF CLASS BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(1) CLASS(1) - --------------- ------------------- ----------------------- -------- Units representing FMR Corporation 399,000 Units 9.65% limited partnership 82 Devonshire St. interests Boston, MA 02109
(1) The information relating to FMR Corporation ("FMR") is based solely on a Schedule 13G filed by FMR with the Securities and Exchange Commission and the Partnership accepts no responsibility for its accuracy. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- All of the directors and principal officers of the General Partner are directors or officers of Doubletree. The General Partner is responsible for the management and administration of the Partnership. In accordance with the Partnership Agreement, the Partnership reimburses the General Partner for administrative costs. Under the Management Agreement, the Partnership pays base and incentive management fees to Red Lion. Base management fees payable are equal to 3% of the annual gross revenues of the Hotels. The incentive management fee payable is equal to the sum of 15% of annual adjusted gross operating profit up to $36 million (operating profit target) and 25% of annual adjusted gross operating profit in excess of the operating profit target. Adjusted gross operating profit is gross operating profit (the revenues reported in the accompanying consolidated financial statements) less base management fees (3% of gross revenues of the Hotels). 31 32 The incentive management fee is only payable to the extent that cash flow available for distribution and incentive management fee ("Cash Flow"), on an annual basis, exceeds $2.20 per Unit (the "Priority Return"). Cash Flow is defined as pre-tax income (or loss) before noncash charges (primarily depreciation and amortization) and the incentive management fee, but after the reserve for capital improvements and principal payments on certain debt. Incentive management fees earned but not paid, on an annual basis, because of the Cash Flow limitation are deferred without interest up to a maximum amount of $6 million and are repaid out of either (i) 25% of Cash Flow in excess of the Priority Return and the current incentive management fee, or (ii) sale or refinancing proceeds prior to any distribution to limited partners. The $6 million maximum deferred incentive management fee amount was reached in November 1988. The Partnership generated sufficient Cash Flow to cover 100% of the Priority Return to partners and also allowed payment of the current incentive management fee of $5.8 million, $5.4 million and $4.4 million for the years ended December 31, 1996, 1995 and 1994, respectively. As a result of $1.4 million in excess cash flow in 1995, approximately $350,000 was paid to Red Lion to reduce the $6 million in deferred incentive management fees. An additional $4.9 million was paid in April 1996 out of the refinancing of the Partnership's credit facilities. As a result of approximately $330,000 in excess cash flow in 1996, approximately $80,000 will be paid to further reduce the outstanding deferred incentive management fees balance of approximately $700,000 at December 31, 1996. The Partnership, in accordance with the Management Agreement, is also charged by Red Lion for its pro rata share of support services such as computer, advertising, public relations, promotional and sales and central reservation services. All Partnership personnel are employees of Red Lion and its affiliates. All costs of services of such employees are reimbursed to Red Lion by the Operating Partnership. These costs include salaries, wages, payroll taxes and other employee benefits. Additionally, auxiliary enterprises owned by Red Lion sell operating supplies and furnishings and equipment to the Partnership. For the first 36 full months of operations which ended April 30, 1990, the General Partner agreed to make available to the Partnership a $4 million non- interest bearing revolving credit facility which was to be used in the event that Cash Flow was insufficient to distribute the Priority Return to limited partners. During the 36 month period, the General Partner was required to fund $3.7 million from the facility. This amount will be repaid out of either (i) cash flow after payment of the Priority Return and incentive management fees, or (ii) sale or refinancing proceeds prior to any distribution to limited partners. Amounts payable of $24.1 million and $21.3 million at December 31, 1996 and 1995, respectively, consist of amounts payable to Red Lion primarily for advances made by Red Lion for capital improvements which exceeded the 3% reserve established in accordance with the provisions of the Management Agreement (see Notes 4 and 8 to the consolidated financial statements). At December 31, 1996, the amount payable is comprised of $20.1 million which bears interest at prime plus 0.5% (8.75% at December 31, 1996) and $4 million which is non-interest bearing. For further discussion of related party transactions, see Notes 6 and 8 to the consolidated financial statements. 32 33 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------- (A) EXHIBITS AND FINANCIAL STATEMENT SCHEDULES: The following documents are filed herewith and made a part of this report: 1. The consolidated financial statements and supplementary information set forth in Item 8 of Part II beginning on page 13 of this report. 2. Financial statement schedules: None. 3. Exhibits: 2.1 Amended and Restated Agreement of Limited Partnership of Red Lion Inns Limited Partnership. Previously filed and incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1, Registration No. 33- 11954. 2.2 Amended and Restated Agreement of Limited Partnership of Red Lion Inns Operating L.P. Previously filed and incorporated by reference to Exhibit 2.2 to the Company's Registration Statement on Form S-1, Registration No. 33-11954. 3.1 Amended and Restated Certificate of Limited Partnership of Red Lion Inns Limited Partnership. Previously filed and incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1, Registration No. 33- 11954. 3.2 Certificate of Limited Partnership of Red Lion Inns Operating L.P. Previously filed and incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1, Registration No. 33-11954. 4. Form of Unit Certificate. Previously filed and incorporated by reference to Exhibit 5 to the Company's Registration Statement on Form 10. 10.1 (a) Management Agreement between Red Lion Inns Operating L.P. and RL Acquisition Company. Previously filed and incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1, Registration No. 33- 11954. 10.1 (b) Assignment and Assumption Agreement, dated August 1, 1995, between Red Lion, a California Limited Partnership and Red Lion Hotels, Inc. relating to the assignment of the Management Agreement. Previously filed and incorporated by reference to the Exhibits to the Partnership's Report on Form 10-K for the year ended December 31, 1995. 10.2 (a) Purchase and Sale Agreement between RL Acquisition Company and Red Lion Inns Operating L.P. Previously filed and incorporated by reference to Exhibit 10.2(a) to the Company's Registration Statement on Form S-1, Registration No. 33-11954. 10.2 (b) Supplemental Purchase and Sale Agreement between RL Acquisition Company and Red Lion Inns Operating L.P. Previously filed and incorporated by reference to Exhibit 10.2(b) to the Company's Registration Statement on Form S-1, Registration No. 33-11954. 10.3 Lease dated as of June 23, 1980, by and between Lloyd Corporation, Ltd., as Lessor, and Red Lion Inn/Lloyd Center, Inc., as Lessee. Previously filed and incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1, Registration No. 33-11954. 33 34 10.4 Lease dated as of October 23, 1968, by and between First National Bank of Omaha, as Lessor, and Downtown Development Co., Ltd., as Lessee. Previously filed and incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1, Registration No. 33-11954. 10.5 Assignment of Lease dated April 8, 1985, from Omaha Red Lion, Inc., to RL Acquisition Company. Previously filed and incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1, Registration No. 33- 11954. 10.6 Lease dated June 1, 1973, between Charles F. Larson, as Lessor and James A. McClory, as Lessee. Previously filed and incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1, Registration No. 33- 11954. 10.7 Purchase and Sale Agreement and Escrow Instructions dated as of April 3, 1987, by and between Lloyd Properties and Red Lion Inn/Lloyd Center, Inc. Previously filed and incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1, Registration No. 33- 11954. 10.8 Second Amended and Restated Credit Agreement, dated April 2, 1996, between Various Lenders (as defined), Canadian Imperial Bank of Commerce (as agent) and Red Lion Inns Operating, L.P. Previously filed and incorporated by reference to Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996. 24.1 Power of Attorney for Dale F. Frey. 24.2 Power of Attorney for Norman B. Leventhal. 27 Article 5 Financial Data Schedule for 10-K. (b) REPORTS ON FORM 8-K: One report on Form 8-K was filed by the Partnership during the last quarter of the fiscal year ended December 31, 1996. A Report on Form 8-K dated November 13, 1996, reported under Item 5 the acquisition of Red Lion by Doubletree Corporation and a change in the composition of the Board of Directors of the General Partner. 34 35 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. RED LION INNS LIMITED PARTNERSHIP By: RED LION PROPERTIES, INC. Its sole General Partner Date: March 28, 1997 By: /s/Richard M. Kelleher ------------------------------- Richard M. Kelleher President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Date: March 28, 1997 By: /s/Richard M. Kelleher ----------------------------------- Richard M. Kelleher President Director Date: March 28, 1997 By: /s/William L. Perocchi ---------------------------------- William L. Perocchi Executive Vice President and Chief Financial Officer (Principal Accounting Officer) Director Date: March 28, 1997 By: (1) ------------------------------ Dale F. Frey Director Date: March 28, 1997 By: (1) ------------------------------- Norman B. Leventhal Director Date: March 28, 1997 (1) By: /s/William L. Perocchi ----------------------------------- William L. Perocchi Attorney-in-Fact 35 EX-2 3 EXHIBIT 2 1 Exhibit 2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to _____ Commission file number 1-9443 RED LION INNS LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) Delaware 94-3029959 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 410 North 44th Street, Suite 700, Phoenix, Arizona 85008 (Address of principal executive offices) (Zip Code) (602) 220-6666 (Registrant's telephone number, including area code) None (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- 2 RED LION INNS LIMITED PARTNERSHIP REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 INDEX
PAGE PART I - FINANCIAL INFORMATION Item 1 Consolidated Financial Statements: Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996 3 Consolidated Statements of Operations for the three and nine months ended September 30, 1997 and 1996 4 Consolidated Statements of Partners' Capital for the nine months ended September 30, 1997 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 6 Notes to Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II - OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 19 SIGNATURES 20
2 3 PART I. FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEETS (in thousands, except unit amounts)
(UNAUDITED) SEPTEMBER 30, DECEMBER 31, 1997 1996 ---- ---- ASSETS Cash and cash equivalents $ 686 $ 763 Property and Equipment: Land 17,705 17,705 Buildings and improvements 168,011 167,502 Furnishings and equipment 61,193 60,694 Construction in progress 891 184 --------- --------- 247,800 246,085 Less--accumulated depreciation (89,023) (81,356) --------- --------- 158,777 164,729 Other Assets 959 984 --------- --------- Total Assets $ 160,422 $ 166,476 ========= ========= LIABILITIES AND PARTNERS' CAPITAL Current Liabilities: Accounts payable and accrued expenses $ 7 $ 14 Current portion of long-term payable to affiliate 18,607 20,964 Accrued distributions to partners 2,320 2,329 Interest payable -- 41 Property taxes payable 1,392 358 Current portion long-term debt 3,018 2,375 --------- --------- Total current liabilities 25,344 26,081 Long-Term Payable to Affiliate, net of current portion 4,345 4,345 Long-Term Debt, net of current portion 118,631 121,043 Deferred Income Taxes 2,050 2,050 --------- --------- Total Liabilities 150,370 153,519 --------- --------- Commitments and Contingencies (Note 7) Partners' Capital: Limited Partners, 4,940,000 units issued 22,912 25,750 Less -- 806,500 treasury units, at cost (11,202) (11,202) --------- --------- Limited Partners, net 11,710 14,548 General Partner (1,658) (1,591) --------- --------- Total Partners' Capital 10,052 12,957 --------- --------- Total Liabilities and Partners' Capital $ 160,422 $ 166,476 ========= =========
See notes to consolidated financial statements. 3 4 RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per unit and unit amounts) (unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------ ------------------------------ 1997 1996 1997 1996 ---- ---- ---- ---- Gross Operating Profit of Hotels $ 11,866 $ 12,088 $ 31,703 $ 31,765 Expenses: Property taxes 788 692 2,415 2,276 Base management fee 887 891 2,530 2,519 Incentive management fee 1,647 1,680 4,376 4,387 Depreciation 2,527 2,568 7,667 7,455 Other 439 642 1,410 1,637 ----------- ----------- ----------- ----------- Operating income 5,578 5,615 13,305 13,491 Interest Expense (3,134) (3,100) (9,242) (9,008) ----------- ----------- ----------- ----------- Income before income taxes 2,444 2,515 4,063 4,483 Income Tax Expense -- (91) -- (337) ----------- ----------- ----------- ----------- Net income $ 2,444 $ 2,424 $ 4,063 $ 4,146 =========== =========== =========== =========== Allocation of Net Income: General Partner $ 49 $ 48 $ 81 $ 83 =========== =========== =========== =========== Limited Partners $ 2,395 $ 2,376 $ 3,982 $ 4,063 =========== =========== =========== =========== Net Income per Limited Partner Unit $ .58 $ .57 $ .96 $ .98 =========== =========== =========== =========== Average Limited Partner Units Outstanding 4,133,500 4,133,500 4,133,500 4,133,500 =========== =========== =========== ===========
See notes to consolidated financial statements. 4 5 RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (in thousands, except unit amounts) (unaudited)
LIMITED PARTNERS -------------------------------------------------------- ISSUED UNITS TREASURY UNITS ------------ -------------- GENERAL UNITS AMOUNT UNITS AMOUNT PARTNER TOTAL ----- ------ ----- ------ ------- ----- Balances at December 31, 1996 4,940,000 $ 25,750 (806,500) $(11,202) $ (1,591) $12,957 Distributions to partners --- (6,820) --- --- (148) (6,968) Net income --- 3,982 --- --- 81 4,063 ---------- ------------ ---------- ---------- ----------- --------- Balances at September 30, 1997 4,940,000 $ 22,912 (806,500) $(11,202) $ (1,658) $ 10,052 ========= ============ ========== ========= =========== =========
See notes to consolidated financial statements. 5 6 RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ------------- 1997 1996 ---- ---- Cash Flows from Operating Activities: Net income $ 4,063 $ 4,146 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 7,667 7,455 Amortization of deferred loan costs 327 428 Deferred income taxes -- 337 Increase in other assets (302) -- Increase in payables and accrued expenses 986 26 --------- --------- Net cash provided by operating activities 12,741 12,392 --------- --------- Cash Flows from Investing Activities: Purchases of property and equipment, net (1,715) (8,050) --------- --------- Cash Flows from Financing Activities: Cash distributions to partners (6,977) (6,986) Repayments of advances from affiliate, net (2,357) (4,702) Payments on long-term debt (1,769) (101,969) Proceeds from long-term debt -- 120,000 Net repayments under revolving credit facility -- (8,302) Additions to deferred loan costs -- (1,311) Net increase in other long-term obligations -- 104 --------- --------- Net cash used in financing activities (11,103) (3,166) --------- --------- Net increase (decrease) in cash (77) 1,176 Cash and Cash Equivalents at Beginning of Period 763 229 --------- --------- Cash and Cash Equivalents at End of Period $ 686 $ 1,405 ========= ========= Supplemental Disclosure of Cash Flow Information: Cash paid for interest $ 8,956 $ 9,309 ========= =========
See notes to consolidated financial statements. 6 7 RED LION INNS LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements include the accounts of Red Lion Inns Limited Partnership, a Delaware limited partnership (the "Partnership") and its subsidiary limited partnership, Red Lion Inns Operating L.P., a Delaware limited partnership (the "Operating Partnership;" collectively, the "MLP"). The MLP was organized on April 14, 1987 for the purpose of acquiring and owning, through the Operating Partnership, ten Red Lion hotels (the "Hotels" or individually, a "Hotel), which continue to be managed under a long-term management agreement (the "Management Agreement") with Red Lion Hotels, Inc. ("Red Lion"), a wholly-owned subsidiary of Doubletree Corporation pursuant to the November 8, 1996 merger in which Doubletree Corporation acquired 100% of Red Lion (collectively, "Doubletree"). The Management Agreement expires in 2012 and can be extended for an additional ten five-year periods. The general partner of the MLP is Red Lion Properties, Inc. (the "General Partner"), an indirect, wholly owned subsidiary of Doubletree. As of September 30, 1997 all of the hotels have been rebranded "Doubletree." All significant intercompany transactions and accounts have been eliminated. The preparation of financial statements in accordance with generally accepted accounting principles requires the General Partner to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. While the General Partner endeavors to make accurate estimates, actual results could differ from estimates. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments, primarily eliminations of all significant intercompany transactions and accounts) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the related disclosures contained in the MLP's annual report on Form 10-K for the year ended December 31, 1996, as filed with Securities and Exchange Commission. The results of operations for the nine months ended September 30, 1997 are not necessarily indicative of results to be expected for the full year. Cash Equivalents All short-term, highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents for purposes of the statements of cash flows. Gross Operating Profit of Hotels The gross operating profit of the Hotels reported in the accompanying statements of operations represents the revenues net of the operating expenses of the Hotels. Operating revenues and expenses and the current assets and current liabilities of the Hotels are excluded from the accompanying consolidated financial statements of the MLP because Doubletree, as manager, not the MLP, has operating responsibility for the Hotels. 2. INCOME TAXES THE MLP IS NOT CURRENTLY A TAXABLE ENTITY AND ANY INCOME TAXES ARE THE RESPONSIBILITY OF THE PARTNERS. ACCORDINGLY, NO CURRENT PROVISION FOR FEDERAL OR STATE INCOME TAXES HAS BEEN PROVIDED BY THE MLP IN THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS. DURING 1987, CONGRESS PASSED THE OMNIBUS BUDGET RECONCILIATION ACT WHICH MANDATES THAT THE MLP BECOME SUBJECT TO CORPORATE TAXES ON ITS INCOME BEGINNING JANUARY 1, 1998. IN ADDITION, DISTRIBUTIONS TO PARTNERS WILL BE CONSIDERED TAXABLE DIVIDENDS TO EACH UNITHOLDER. DEFERRED INCOME TAXES HAVE BEEN PROVIDED FOR THE 7 8 PROJECTED DIFFERENCES BETWEEN THE FINANCIAL ACCOUNTING AND TAX BASES OF PROPERTY AND EQUIPMENT AT JANUARY 1, 1998. IN MAY, 1997, THE GENERAL PARTNER FORMED A SPECIAL COMMITTEE OF TWO INDEPENDENT DIRECTORS TO EVALUATE ALTERNATIVES AVAILABLE TO THE MLP IN CONNECTION WITH THE SCHEDULED 1998 CHANGE IN THE MLP'S TAX STATUS. THESE ALTERNATIVES INCLUDE, AMONG OTHERS, THE SALE OF THE MLP ASSETS EITHER INDIVIDUALLY OR IN TOTAL, INCORPORATING THE MLP OR CONVERTING OR MERGING THE MLP INTO A REAL ESTATE INVESTMENT TRUST. AT A BOARD MEETING IN JUNE, 1997, THE SPECIAL COMMITTEE RECOMMENDED THAT THE ASSETS OR BUSINESS OF THE MLP BE SOLD IN A VALUE MAXIMIZING TRANSACTION. AT THE SAME MEETING, THE BOARD OF DIRECTORS AUTHORIZED THE SPECIAL COMMITTEE TO PURSUE SUCH A SALE. THE SPECIAL COMMITTEE ENGAGED ITS OWN INDEPENDENT LEGAL COUNSEL AND FINANCIAL ADVISORS TO ASSIST IN THIS PROCESS. IN AUGUST 1997, CONGRESS PASSED THE TAXPAYER RELIEF ACT OF 1997. THE TAXPAYER RELIEF ACT OF 1997 PROVIDES AN EXCEPTION TO THE RULE DESCRIBED ABOVE IN THAT THE MLP MAY ELECT TO CONTINUE TO BE TREATED AS A PARTNERSHIP FOR FEDERAL INCOME TAX PURPOSES AND NOT BE SUBJECT TO FEDERAL OR STATE CORPORATE INCOME TAXES. HOWEVER, IF THIS ELECTION IS MADE THE MLP WILL BE SUBJECT TO A FEDERAL TAX EQUAL TO 3.5% OF ITS GROSS INCOME AND STATE TAXES TO THE EXTENT STATES HAVE ENACTED A PARTNERSHIP GROSS INCOME TAX. UNDER THIS ELECTION, DISTRIBUTIONS PAID TO THE PARTNERS SHOULD CONTINUE TO BE NON-TAXABLE DISTRIBUTIONS. THE ELECTION APPLIES TO TAXABLE YEARS AFTER 1997 AND CAN LATER BE REVOKED. ONCE REVOKED IT CANNOT BE REINSTATED. THE GENERAL PARTNER AND THE SPECIAL COMMITTEE CONTINUE TO EVALUATE AND PURSUE THE SALE OF THE ASSETS OR BUSINESS OF THE MLP. THERE ARE ONGOING NEGOTIATIONS WITH A NUMBER OF INTERESTED PARTIES. IF NEGOTIATIONS WITH ANY PARTY ARE SUCCESSFUL, THE CLOSING OF THE SALE IS EXPECTED TO OCCUR IN TWO TO SIX MONTHS. CONSUMMATION OF A SALES TRANSACTION WILL BE SUBJECT TO A NUMBER OF CONDITIONS INCLUDING THE APPROVAL OF THE BOARD OF DIRECTORS AND, IN MOST INSTANCES, THE UNITHOLDERS OF THE MLP. THERE CAN BE NO ASSURANCE THAT A SALE OF THE ASSETS OR BUSINESS OF THE MLP WILL OCCUR OR THAT ANY OTHER TRANSACTION CAN BE COMPLETED THAT WILL LESSEN THE ADVERSE TAX IMPACT AFTER DECEMBER 31, 1997. IN THE EVENT SUCH A SALE DOES NOT OCCUR BEFORE JANUARY 1, 1998, THE PAYMENT OF TAXES BY THE MLP ON EITHER PARTNERSHIP INCOME OR GROSS INCOME WILL DIRECTLY REDUCE CASH AVAILABLE FOR PARTNER DISTRIBUTIONS. 3. LONG-TERM DEBT During April 1996, the MLP entered into a three-year $125 million credit facility. The credit facility includes a $120 million term loan and a $5 million revolving credit line. The proceeds of the term loan were used to repay all amounts owed under the prior mortgage note and revolving credit facility, a portion of the payable to affiliate (related to deferred incentive management fees) and loan fees incurred to consummate the financing. The facility is secured by all of the assets of the Hotels. Borrowings under the term loan bear interest at the London Interbank Offering Rate ("LIBOR") plus 2.25% (8.00% at September 30, 1997). Borrowings under the revolving credit line bear interest, at the MLP's election, at either LIBOR plus 2.25% or the prime rate plus 1.25%. At September 30, 1997, all outstanding borrowings bear interest at LIBOR plus 2.25% (8.00%), total $4.5 million, and are due and payable on March 31, 1999. Accordingly, this balance is classified as long-term in the accompanying balance sheets. The remaining principal payments due on the three-year term loan totaled $0.7 million and $3.2 million for 1997 and 1998, respectively, with a lump-sum payment of $112.9 million due on March 31, 1999. Long-term debt also includes approximately $0.4 million in other long-term obligations related to special tax assessments that the MLP has elected to pay out over a 20-year period. These long-term obligations have varying maturity dates ranging from August 2009 to June 2016. Interest Rate Swap Agreements At September 30, 1997, the MLP had four interest rate swap agreements outstanding which have substantially converted $100 million of debt from floating LIBOR based rates to fixed rates ranging from 6.17% to 6.23% (prior 8 9 to the applicable margin). The agreements expire from December 1998 to March 1999. Interest expense incurred by the MLP relating to interest rate swap agreements for the three and nine month periods ended September 30, 1997, was approximately $110,000 and $363,000, respectively, and is included in interest expense. 9 10 4. MANAGEMENT FEES In accordance with the Management Agreement, the MLP pays base and incentive management fees to Doubletree. Base management fees payable are equal to 3% of the annual gross revenues of the Hotels. Incentive management fees payable are equal to the sum of 15% of annual adjusted gross operating profit up to $36 million (operating profit target) and 25% of annual adjusted gross operating profit in excess of the operating profit target. Adjusted gross operating profit is calculated by subtracting the base management fee expense from the gross operating profit of Hotels as shown in the accompanying consolidated financial statements. The MLP may defer payment of the incentive fees to Doubletree to the extent that the calculation of Cash Flow for Incentive Fees, as defined in the Management Agreement, on an annual basis, does not exceed $2.20 per unit ("Priority Return"). Currently, the incentive management fee is accrued at 15% of the quarter's adjusted gross operating profit regardless of whether cash flow is adequate to pay the incentive management fee on an interim basis, if cash flow is expected to be available for payment of the incentive management fee on an annual basis. 5. CASH DISTRIBUTIONS TO PARTNERS In accordance with the Partnership's Amended and Restated Agreement of Limited Partnership, cash distributions to partners may be made from Cash Flow Available for Distribution, as defined. As discussed in Note 4, the incentive management fee is payable only to the extent that cash flow available after payment of the cash distributions to partners exceeds the Priority Return. The following table calculates Cash Flow Available for Distribution and Incentive Management Fees ("Cash Flow") for the three and nine-month periods ended September 30, 1996 and 1997. Cash Flow is defined as pre-tax income (or loss) before noncash charges (primarily depreciation and amortization) and incentive management fees, but after the reserve for capital improvements and principal payments on certain debt.
(In thousands except per unit amounts) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- --------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Net income $ 2,444 $ 2,424 $ 4,063 $ 4,146 Add (deduct): Depreciation 2,527 2,568 7,667 7,455 Incentive management fee 1,647 1,680 4,376 4,387 Amortization of deferred loan costs 109 109 327 428 Cash reserved for capital improvements (887) (891) (2,530) (2,519) Repayments on term loan (625) (500) (1,750) (1,532) Deferred income tax provision -- 91 -- 337 ----------- ----------- ----------- ----------- Cash Flow 5,215 5,481 12,153 12,702 Less: Priority Return (2,320) (2,329) (6,968) (6,986) ----------- ----------- ----------- ----------- Cash Flow available for payment of incentive management fees 2,895 3,152 5,185 5,716 Less: Current incentive management fee (1,647) (1,680) (4,376) (4,387) ----------- ----------- ----------- ----------- Excess cash flow $ 1,248 $ 1,472 $ 809 $ 1,329 =========== =========== =========== =========== Cash Flow per unit $ 1.24 $ 1.29 $ 2.88 $ 3.00 =========== =========== =========== =========== Average Limited Partner Units Outstanding 4,133,500 4,133,500 4,133,500 4,133,500 =========== =========== =========== ===========
10 11 The incentive management fee that is earned but not paid on an annual basis due to insufficient Cash Flow, is deferred without interest up to a maximum of $6 million. The deferred amount is to be paid out of either (i) 25% of cash flow in excess of the Priority Return and the current incentive management fee or (ii) sale or refinancing proceeds prior to any distribution to the limited partners. Beginning January 1, 1998, federal tax law mandates that the MLP become subject to corporate taxes on its income or, at its election remain a partnership for tax purposes and pay a gross income tax. The MLP is not currently a taxable entity. The payment of such taxes by the MLP will directly reduce cash available for partner distributions. If the MLP elects to pay corporate income taxes, distributions to partners after December 31, 1997 will be considered taxable dividends. Although the MLP has historically distributed the Priority Return to limited partners, there is no assurance this will continue after December 31, 1997. In addition, the Priority Return can be used to repay certain indebtedness owed to Doubletree or to fund capital improvements, also reducing cash flow available for distribution to limited partners. 6. RELATED PARTY TRANSACTIONS The General Partner is responsible for the management and administration of the MLP. In accordance with the MLP's Amended and Restated Agreements of Limited Partnership, the MLP reimburses the General Partner for related administrative costs. Under the Management Agreement, the MLP pays base and incentive management fees to Doubletree. The Hotels, in accordance with the Management Agreement, are also charged by Doubletree for their pro rata share of support services such as computer, advertising, public relations, promotional and sales and central reservation services. All MLP personnel are employees of Doubletree and its affiliates. All costs for services of such employees are reimbursed to Doubletree by the Operating Partnership. These costs include salaries, wages, payroll taxes and other employee benefits. Additionally, auxiliary enterprises owned by Doubletree or its affiliates sell operating supplies, furnishings and equipment to the MLP. Amounts payable to affiliate consists of the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 1997 1996 ---- ---- Advances from Doubletree $ 19,930 $ 20,060 General Partner Credit Facility 3,726 3,726 Deferred Incentive Management Fees 619 700 -------- -------- Total due to Doubletree 24,275 24,486 Plus: Hotel working capital (surplus) deficit (1,323) 823 -------- -------- Payable to affiliate net of hotel working capital 22,952 25,309 Less: Current portion (18,607) (20,964) -------- -------- Long-term portion $ 4,345 $ 4,345 ======== ========
Advances from Doubletree consist primarily of funds advanced for capital improvements in excess of the reserve (equal to 3% of revenues required by the provisions of the Management Agreement) and incentive management fees earned but unpaid in the current year. Amounts advanced bear interest at the prime rate plus 0.5% (9.0% at September 30, 1997). The Hotel working capital consists of the current assets and current liabilities of the Hotels, including cash held in hotel accounts, accounts receivable, inventories, prepaid expenses, hotel accounts payable and certain taxes other than property, income and payroll taxes. Since Doubletree has operating responsibilities associated with the Hotels, these current asset and current liability items are excluded from the accompanying consolidated financial statements and are assumed to be liquidated into cash and used to pay down the payable to affiliate from $24.3 million to $23.0 million at September 30, 1997. 11 12 During the first 36 months of operation, which ended April 30, 1990, the General Partner advanced, on a non-interest basis, amounts under the General Partner Credit Facility to fund distributions of the Priority Return. The MLP anticipates this amount will be repaid out of either (i) cash flow after payment of the Priority Return and incentive management fees, or (ii) sale or refinancing proceeds prior to any distribution to limited partners. Accordingly, the credit facility is classified as long-term. Deferred incentive management fees are non-interest bearing and are payable from either (i) 25% of cash flow in excess of the Priority Return and the current incentive management fee or (ii) sale or refinancing proceeds. At September 30, 1997 all of this balance is classified as long-term. The following schedule reflects the operating revenues and expenses of the Hotels not reflected in the accompanying consolidated financial statements (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- --------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Revenues: Rooms $19,249 $19,094 $52,161 $51,004 Food and beverage 7,378 7,706 23,401 24,237 Other 2,939 2,896 8,779 8,728 ------- ------- ------- ------- Total revenues 29,566 29,696 84,341 83,969 ------- ------- ------- ------- Departmental direct expenses: Rooms 4,439 4,529 12,993 12,659 Food and beverage 6,197 6,313 19,248 19,563 Other 1,011 1,028 2,999 3,176 ------- ------- ------- ------- Total departmental direct expenses 11,647 11,870 35,240 35,398 ------- ------- ------- ------- Hotel indirect expenses: Administrative and general 2,217 2,307 6,851 6,887 Sales, promotion and advertising 1,883 1,508 4,886 4,283 Utilities 923 928 2,518 2,587 Repairs and maintenance 1,030 995 3,143 3,049 ------- ------- ------- ------- Total hotel indirect expenses 6,053 5,738 17,398 16,806 ------- ------- ------- ------- Gross operating profit of hotels $11,866 $12,088 $31,703 $31,765 ======= ======= ======= =======
7. COMMITMENTS AND CONTINGENCIES At September 30, 1997, the MLP had commitments relating to capital improvement projects of approximately $1.2 million. The MLP is subject to litigation arising in the ordinary course of business. In the opinion of the General Partner, these actions will not have a material adverse effect, if any, on the financial position or results of operations or liquidity of the MLP or its subsidiary. 12 13 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE MLP IS NOT CURRENTLY A TAXABLE ENTITY AND ANY INCOME TAXES ARE THE RESPONSIBILITY OF THE PARTNERS. ACCORDINGLY, NO CURRENT PROVISION FOR FEDERAL OR STATE INCOME TAXES HAS BEEN PROVIDED BY THE MLP IN THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS. DURING 1987, CONGRESS PASSED THE OMNIBUS BUDGET RECONCILIATION ACT WHICH MANDATES THAT THE MLP BECOME SUBJECT TO CORPORATE TAXES ON ITS INCOME BEGINNING JANUARY 1, 1998. IN ADDITION, DISTRIBUTIONS TO PARTNERS WILL BE CONSIDERED TAXABLE DIVIDENDS TO EACH UNITHOLDER. DEFERRED INCOME TAXES HAVE BEEN PROVIDED FOR THE PROJECTED DIFFERENCES BETWEEN THE FINANCIAL ACCOUNTING AND TAX BASES OF PROPERTY AND EQUIPMENT AT JANUARY 1, 1998. IN MAY 1997, THE GENERAL PARTNER FORMED A SPECIAL COMMITTEE OF TWO INDEPENDENT DIRECTORS TO EVALUATE ALTERNATIVES AVAILABLE TO THE MLP IN CONNECTION WITH THE SCHEDULED 1998 CHANGE IN THE MLP'S TAX STATUS. THESE ALTERNATIVES INCLUDE, AMONG OTHERS, THE SALE OF THE MLP ASSETS EITHER INDIVIDUALLY OR IN TOTAL, INCORPORATING THE MLP OR CONVERTING OR MERGING THE MLP INTO A REAL ESTATE INVESTMENT TRUST. AT A BOARD MEETING IN JUNE 1997, THE SPECIAL COMMITTEE RECOMMENDED THAT THE ASSETS OR BUSINESS OF THE MLP BE SOLD IN A VALUE MAXIMIZING TRANSACTION. AT THE SAME MEETING, THE BOARD OF DIRECTORS AUTHORIZED THE SPECIAL COMMITTEE TO PURSUE SUCH A SALE. THE SPECIAL COMMITTEE ENGAGED ITS OWN INDEPENDENT LEGAL COUNSEL AND FINANCIAL ADVISORS TO ASSIST IN THIS PROCESS. IN AUGUST 1997, CONGRESS PASSED THE TAXPAYER RELIEF ACT OF 1997. THE TAXPAYER RELIEF ACT OF 1997 PROVIDES AN EXCEPTION TO THE RULE DESCRIBED ABOVE IN THAT THE MLP MAY ELECT TO CONTINUE TO BE TREATED AS A PARTNERSHIP FOR FEDERAL INCOME TAX PURPOSES AND NOT BE SUBJECT TO FEDERAL OR STATE CORPORATE INCOME TAXES. HOWEVER, IF THIS ELECTION IS MADE THE MLP WILL BE SUBJECT TO A FEDERAL TAX EQUAL TO 3.5% OF ITS GROSS INCOME AND STATE TAXES TO THE EXTENT STATES HAVE ENACTED A PARTNERSHIP GROSS INCOME TAX. UNDER THIS ELECTION, DISTRIBUTIONS PAID TO THE PARTNERS SHOULD CONTINUE TO BE NON-TAXABLE DISTRIBUTIONS. THE ELECTION APPLIES TO TAXABLE YEARS AFTER 1997 AND CAN LATER BE REVOKED. ONCE REVOKED IT CANNOT BE REINSTATED. THE GENERAL PARTNER AND THE SPECIAL COMMITTEE CONTINUE TO EVALUATE AND PURSUE THE SALE OF THE ASSETS OR BUSINESS OF THE MLP. THERE ARE ONGOING NEGOTIATIONS WITH A NUMBER OF INTERESTED PARTIES. IF NEGOTIATIONS WITH ANY PARTY ARE SUCCESSFUL, THE CLOSING OF THE SALE IS EXPECTED TO OCCUR IN TWO TO SIX MONTHS. CONSUMMATION OF A SALES TRANSACTION WILL BE SUBJECT TO A NUMBER OF CONDITIONS INCLUDING THE APPROVAL OF THE BOARD OF DIRECTORS AND, IN MOST INSTANCES, THE UNITHOLDERS OF THE MLP. THERE CAN BE NO ASSURANCE THAT A SALE OF THE ASSETS OR BUSINESS OF THE MLP WILL OCCUR OR THAT ANY OTHER TRANSACTION CAN BE COMPLETED THAT WILL LESSEN THE ADVERSE TAX IMPACT AFTER DECEMBER 31, 1997. IN THE EVENT SUCH A SALE DOES NOT OCCUR BEFORE JANUARY 1, 1998, THE PAYMENT OF TAXES BY THE MLP ON EITHER PARTNERSHIP INCOME OR GROSS INCOME WILL DIRECTLY REDUCE CASH AVAILABLE FOR PARTNER DISTRIBUTIONS. 13 14 RESULTS OF OPERATIONS Gross Operating Profit of the Hotels consists of the following (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- --------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Rooms profit $14,810 $14,565 $39,168 $38,345 Food and beverage profit 1,181 1,393 4,153 4,674 Other profit 1,928 1,868 5,780 5,552 ------- ------- ------- ------- Departmental profit 17,919 17,826 49,101 48,571 ------- ------- ------- ------- Hotel indirect expenses: Administrative and general 2,217 2,307 6,851 6,887 Sales, promotion and advertising 1,883 1,508 4,886 4,283 Utilities 923 928 2,518 2,587 Repairs and maintenance 1,030 995 3,143 3,049 ------- ------- ------- ------- Total Hotel indirect expenses 6,053 5,738 17,398 16,806 ------- ------- ------- ------- Gross Operating Profit of Hotels $11,866 $12,088 $31,703 $31,765 ======= ======= ======= =======
A summary of occupancy and room rates for the Hotels follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- --------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Occupancy percentage 78.1% 80.7% 72.9% 74.1% Average room rate $ 86.81 $ 83.47 $ 84.97 $ 81.49 REVPAR $ 67.77 $ 67.35 $ 61.94 $ 60.37
Three Months Ended September 30, 1997 Compared with Three Months Ended September 30, 1996 Rooms profit increased by approximately $300,000 or 2% to $14.8 million for the three months ended September 30, 1997 compared to $14.6 million for the three months ended September 30, 1996. This increase is the result of an increase in the average room rate offset by a decrease in occupancy, which is reflected in the decrease in rooms expense of approximately $100,000. Food and beverage profit decreased approximately $200,000 to $1.2 million for the three months ended September 30, 1997 compared to the same period in 1996. The profit margin also declined from 18.1% of 1996 third quarter food and beverage revenues to 16.0% of 1997 third quarter food and beverage revenues. This decrease is the result of lower revenues (a decrease of $300,000) generated by two of the larger hotels without a corresponding decrease in food and beverage costs. Hotel indirect expenses increased approximately $300,000 or 6% in the three months ended September 30, 1997 compared to the three months ended September 30, 1996. This increase is due primarily to an increase in sales, promotion and advertising expense attributable to the conversion from the "Red Lion" brand to the "Doubletree" brand on June 9, 1997, offset by a slight decrease in administrative and general expense. The Hotels incurred approximately $300,000 in conversion costs including one-time charges for advertising, public relations, in-house promotions and miscellaneous conversion costs incurred by the Hotels. Excluding these one-time charges, sales, promotion and advertising expense increased by less than 5%. 14 15 Operating income remained flat at $5.6 million for the three months ended September 30, 1997 compared to the three months ended September 30, 1996. As a percentage of gross operating profit of Hotels, operating income increased to 47% for the three months ended September 30, 1997 as compared to 46% for the three months ended September 30, 1996, despite the decline in gross operating profit of Hotels. This slight increase is due primarily to lower depreciation and other expenses in the quarter ending September 30, 1997 as compared to the same quarter of 1996. Interest expense was constant at $3.1 million for the three months ended September 30, 1997 and September 30, 1996, respectively. During the three months ended September 30, 1996, the MLP provided for deferred income tax of approximately $91,000. During the three months ended September 30, 1997, no deferred income tax provision was necessary. The MLP is not currently a taxable entity. Beginning January 1, 1998, federal tax law mandates that the MLP become subject to corporate taxes on its income or at the MLP's election, pay federal tax equal to 3.5% of its gross income and state taxes to the extent states have enacted a partnership gross income tax. Deferred income tax arises primarily from differences in depreciation for financial accounting and tax purposes that are expected to exist at January 1, 1998. During the three months ended September 30, 1997, net income was $2.4 million ($.58 per limited partner unit) compared to net income of $2.4 million ($0.57 per limited partner unit) for the comparable three months ended September 30, 1996. Cash Flow Available for Distribution and Incentive Management Fees ("Cash Flow") for the three months ended September 30, 1997 was approximately $5.2 million ($1.24 per limited partner unit) compared to the three months ended September 30, 1996 of approximately $5.5 million ($1.29 per limited partner unit). The decline in Cash Flow is due primarily to the higher principal payments and interest expense under the term loan and lower depreciation expense and incentive management fees recorded in the third quarter of 1997 as compared to the third quarter of 1996. Once the MLP becomes subject to income taxes beginning January 1, 1998, the payment of taxes on either partnership income or gross income will directly reduce cash available for partner distributions. If the MLP elects to pay corporate income taxes, distributions to partners after December 31, 1997 will be considered taxable dividends. Nine Months Ended September 30, 1997 Compared with Nine Months Ended September 30, 1996 Rooms profit increased approximately $800,000 or 2% to $39.2 million for the nine months ended September 30, 1997 compared to $38.3 million for the nine months ended September 30, 1996. This increase is the result of an increase in the average room rate, offset by a decrease in occupancy. Food and beverage profit decreased approximately $500,000 or 11% to $4.2 million for the nine months ended September 30, 1997 compared to the same period in 1996. The year to date profit margin also declined from 19.3% of 1996 food and beverage revenues to 17.7% of 1997 food and beverage revenues. This decrease is due principally to higher margin group banquet revenue realized in the first half of 1996 by two Hotels located in Northwestern Oregon which benefited from additional catering and group banquet business as a result of the flooding in the Pacific Northwest during 1996. Hotel indirect expenses increased by approximately $600,000 or 4% in the nine months ended September 30, 1997 compared to the nine months ended September 30, 1996. This increase is due primarily to an increase in sales, promotion and advertising expense attributable to the conversion from the "Red Lion" brand to the "Doubletree" brand on June 9, 1997, as well as an increase in repairs and maintenance expense, offset by reductions in utilities and administrative and general expenses. The Hotels incurred approximately $500,000 in conversion costs including one-time charges for advertising, public relations, in-house promotions and miscellaneous conversion costs incurred by the Hotels. Excluding these one-time charges, sales, promotion and advertising expense increased 15 16 approximately $100,000 or 2%. Operating income decreased from $13.5 million for the nine months ended September 30, 1996 to $13.3 million for the nine months ended September 30, 1997, a decrease of 1%. As a percentage of gross operating profit of Hotels, operating income remained at 42% for the nine months ended September 30, 1997 and 1996, respectively. The slight decrease in operating income is primarily the result of higher property taxes and depreciation expense due to assets placed in service in late 1996 and early 1997, after significant renovations at four hotels, offset by a reduction in other expenses resulting from lower administrative fees charged by the General Partner. The MLP recognized $4.4 million in each of the nine month periods ended September 30, 1997 and 1996, respectively, of incentive management fees payable to Doubletree. The current incentive management fee is payable only to the extent there is cash flow available for its payment. Interest expense increased $200,000 to $9.2 million in the nine months ended September 30, 1997 as compared to $9.0 million for the nine months ended September 30, 1996. The additional expense is due primarily to higher average debt levels and interest rate swap adjustments. During the nine months ended September 30, 1996, the MLP provided for deferred income taxes of approximately $337,000. During the nine months ended September 30, 1997, no deferred income tax provision was necessary. The MLP is not currently a taxable entity. Beginning January 1, 1998, federal tax law mandates that the MLP become subject to corporate taxes on its income or at the MLP's election, pay federal taxes equal to 3.5% of its gross income and state taxes to the extent that states have enacted a partnership gross income tax. Deferred income tax arises primarily from differences in depreciation for financial accounting and tax purposes that are expected to exist at January 1, 1998. During the nine months ended September 30, 1997, net income was $4.1 million ($.96 per limited partner unit) compared to $4.1 million ($0.98 per limited partner unit) for the comparable nine months ended September 30, 1996. Cash Flow for the nine months ended September 30, 1997 was approximately $12.2 million ($2.88 per limited partner unit) compared to $12.7 million ($3.00 per limited partner unit) during the comparable prior period. The decrease in Cash Flow is due to higher principal payments and interest expense under the term loan and reductions in amortization of deferred loan costs and the deferred income tax provision. Once the MLP becomes subject to income taxes beginning January 1, 1998, the payment of taxes on either partnership income or gross income will directly reduce cash available taxes for partner distributions. If the MLP elects to pay corporate income taxes, distributions to partners after December 31, 1997 will be considered taxable dividends. LIQUIDITY AND CAPITAL RESOURCES The MLP's principal source of cash is from Hotel operations. During the nine months ended September 30, 1997, the Hotels generated sufficient cash from operations to cover operating needs. The MLP generated $12.7 million from operating activities for the nine months ended September 30, 1997, compared to $12.4 million generated in the same period in 1996. It is expected that for 1997, cash provided by operations and borrowings, if any, from available credit facilities or from Doubletree will be sufficient to meet anticipated cash requirements. During 1996, the MLP entered into a three-year $125 million credit facility. The credit facility includes a $120 million term loan and a $5 million revolving credit line. The proceeds of the term loan were used to repay all amounts owed under the prior mortgage note and revolving credit facility, a portion of the payable to affiliate related to deferred incentive management fees and loan fees. The facility is secured by all of the assets of the hotels. Borrowings under the term loan bear interest at the London Interbank Offering Rate ("LIBOR") plus 2.25%. Borrowings under the revolving credit line bear interest, at the MLP's election, at either LIBOR plus 2.25% or the prime rate plus 1.25%. Remaining principal payments on the three-year term loan amount to $0.7 million and $3.2 million for 1997 and 1998, 16 17 respectively, with a lump-sum payment of $112.9 million due on March 31, 1999. Borrowings under the revolving credit line total $4.5 million at September 30, 1997 and are due and payable in March 1999. During the nine months ended September 30, 1997, the MLP made capital improvements amounting to approximately $1.7 million. These capital improvements were funded from the current year's reserve of approximately $2.5 million. Pursuant to provisions of the Management Agreement, 3% of gross revenues is required to be set aside annually for capital improvements. The General Partner does not expect capital expenditures to exceed the 3% reserve during 1997. The MLP has repaid $2.4 million, net of advances and changes in working capital of the Hotels, to Doubletree during the nine months ended September 30, 1997. On October 21, 1997, the General Partner declared a quarterly cash distribution of $0.55 per limited partner unit ($2.20 annualized) for the current quarter, payable on November 14, 1997 to unitholders of record on October 31, 1997. This distribution has been accrued in the accompanying consolidated financial statements. THE MLP IS NOT CURRENTLY A TAXABLE ENTITY AND ANY INCOME TAXES ARE THE RESPONSIBILITY OF THE PARTNERS. ACCORDINGLY, NO CURRENT PROVISION FOR FEDERAL OR STATE INCOME TAXES HAS BEEN PROVIDED BY THE MLP IN THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS. DURING 1987, CONGRESS PASSED THE OMNIBUS BUDGET RECONCILIATION ACT WHICH MANDATES THAT THE MLP BECOME SUBJECT TO CORPORATE TAXES ON ITS INCOME BEGINNING JANUARY 1, 1998. IN ADDITION, DISTRIBUTIONS TO PARTNERS WILL BE CONSIDERED TAXABLE DIVIDENDS TO EACH UNITHOLDER. DEFERRED INCOME TAXES HAVE BEEN PROVIDED FOR THE PROJECTED DIFFERENCES BETWEEN THE FINANCIAL ACCOUNTING AND TAX BASES OF PROPERTY AND EQUIPMENT AT JANUARY 1, 1998. IN MAY 1997, THE GENERAL PARTNER FORMED A SPECIAL COMMITTEE OF TWO INDEPENDENT DIRECTORS TO EVALUATE ALTERNATIVES AVAILABLE TO THE MLP IN CONNECTION WITH THE SCHEDULED 1998 CHANGE IN THE MLP'S TAX STATUS. THESE ALTERNATIVES INCLUDE, AMONG OTHERS, THE SALE OF THE MLP ASSETS EITHER INDIVIDUALLY OR IN TOTAL, INCORPORATING THE MLP OR CONVERTING OR MERGING THE MLP INTO A REAL ESTATE INVESTMENT TRUST. AT A BOARD MEETING IN JUNE 1997, THE SPECIAL COMMITTEE RECOMMENDED THAT THE ASSETS OR BUSINESS OF THE MLP BE SOLD IN A VALUE MAXIMIZING TRANSACTION. AT THE SAME MEETING, THE BOARD OF DIRECTORS AUTHORIZED THE SPECIAL COMMITTEE TO PURSUE SUCH A SALE. THE SPECIAL COMMITTEE ENGAGED ITS OWN INDEPENDENT LEGAL COUNSEL AND FINANCIAL ADVISORS TO ASSIST IN THIS PROCESS. IN AUGUST 1997, CONGRESS PASSED THE TAXPAYER RELIEF ACT OF 1997. THE TAXPAYER RELIEF ACT OF 1997 PROVIDES AN EXCEPTION TO THE RULE DESCRIBED ABOVE IN THAT THE MLP MAY ELECT TO CONTINUE TO BE TREATED AS A PARTNERSHIP FOR FEDERAL INCOME TAX PURPOSES AND NOT BE SUBJECT TO FEDERAL OR STATE CORPORATE INCOME TAXES. HOWEVER, IF THIS ELECTION IS MADE THE MLP WILL BE SUBJECT TO A FEDERAL TAX EQUAL TO 3.5% OF ITS GROSS INCOME AND STATE TAXES TO THE EXTENT STATES HAVE ENACTED A PARTNERSHIP GROSS INCOME TAX. UNDER THIS ELECTION, DISTRIBUTIONS PAID TO THE PARTNERS SHOULD CONTINUE TO BE NON-TAXABLE DISTRIBUTIONS. THE ELECTION APPLIES TO TAXABLE YEARS AFTER 1997 AND CAN LATER BE REVOKED. ONCE REVOKED IT CANNOT BE REINSTATED. THE GENERAL PARTNER AND THE SPECIAL COMMITTEE CONTINUE TO EVALUATE AND PURSUE THE SALE OF THE ASSETS OR BUSINESS OF THE MLP. THERE ARE ONGOING NEGOTIATIONS WITH A NUMBER OF INTERESTED PARTIES. IF NEGOTIATIONS WITH ANY PARTY ARE SUCCESSFUL, THE CLOSING OF THE SALE IS EXPECTED TO OCCUR IN TWO TO SIX MONTHS. CONSUMMATION OF A SALES TRANSACTION WILL BE SUBJECT TO A NUMBER OF CONDITIONS INCLUDING THE APPROVAL OF THE BOARD OF DIRECTORS AND, IN MOST INSTANCES, THE UNITHOLDERS OF THE MLP. THERE CAN BE NO ASSURANCE THAT A SALE OF THE ASSETS OR BUSINESS OF THE MLP WILL OCCUR OR THAT ANY OTHER TRANSACTION CAN BE COMPLETED THAT WILL LESSEN THE ADVERSE TAX IMPACT AFTER DECEMBER 31, 1997. IN THE EVENT SUCH A SALE DOES NOT OCCUR BEFORE JANUARY 1, 1998, THE PAYMENT OF TAXES BY THE MLP ON EITHER PARTNERSHIP INCOME OR GROSS INCOME WILL DIRECTLY REDUCE CASH AVAILABLE FOR PARTNER DISTRIBUTIONS. 17 18 ************** The statements contained in this report that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Moreover, from time to time the MLP may issue other forward-looking statements. The following factors are among those that could cause actual results to differ materially from the forward-looking statements: national or local economic conditions affecting the supply and demand for hotel space, competition in hotel operations, including additional or improved services or facilities of competitors, price pressures, continuing availability of capital to fund growth and improvements and the impact of tax legislation, the inability to complete a sales transaction by year end as well as other factors detailed by management's discussion and analysis. The forward-looking statements should be considered in light of these factors. 18 19 PART II ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBIT: The following document is filed herewith and made a part of this report: Exhibit 27 Financial Data Schedule (b) REPORTS ON FORM 8-K: None 19 20 SIGNATURES Pursuant to the requirements 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. RED LION INNS LIMITED PARTNERSHIP By: RED LION PROPERTIES, INC., a Delaware corporation, General Partner Date: November 14, 1997 By: /s/ William L. Perocchi --------------------------- William L. Perocchi Executive Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) 20 EX-3 4 EXHIBIT 3 1 Exhibit 3 MARRIOTT'S HUNT VALLEY INN FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND JUNE 30, 1997 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Boykin Lodging Company: We have audited the accompanying balance sheet of Marriott's Hunt Valley Inn as of December 31, 1996, and the related statements of income (loss), owner's equity and cash flows for the year then ended. 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 generally accepted auditing standards. 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 financial statements referred to above present fairly, in all material respects, the financial position of the Marriott's Hunt Valley Inn as of December 31, 1996 and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. Rhea & Ivy, P.L.C. Memphis, Tennessee March 6, 1997, except for Note 3 as to which the date is July 23, 1997 3 MARRIOTT'S HUNT VALLEY INN -------------------------- BALANCE SHEETS --------------
ASSETS December 31, 1996 June 30, 1997 ------ ----------------- ------------- (Unaudited) INVESTMENT IN HOTEL PROPERTY, at cost: Land $ 2,123,484 $ 2,123,484 Building and improvements 8,913,465 8,913,465 Furniture and equipment 2,723,351 2,909,796 ------------ ------------ 13,760,300 13,946,745 Less - Accumulated depreciation (1,210,253) (1,703,852) ------------ ------------ Net investment in hotel property 12,550,047 12,242,893 CASH AND CASH EQUIVALENTS 446,659 417,236 ACCOUNTS RECEIVABLE 496,753 890,293 INVENTORIES 75,379 55,203 PREPAIDS AND OTHER ASSETS 18,581 20,223 DEFERRED MAINTENANCE 154,543 243,043 DEFERRED EXPENSES, net 184,661 158,280 ------------ ------------ $ 13,926,623 $ 14,027,171 ============ ============ LIABILITIES AND OWNER'S EQUITY ------------------------------ MORTGAGE NOTE PAYABLE $ 10,395,226 $ 10,265,649 CAPITAL LEASE 33,636 1,996 ACCOUNTS PAYABLE, trade 260,210 305,823 ACCRUED EXPENSES AND OTHER LIABILITIES 535,720 466,444 ------------ ------------ 11,224,792 11,039,912 OWNER'S EQUITY 2,701,831 2,987,259 ------------ ------------ $ 13,926,623 $ 14,027,171 ============ ============
The accompanying notes to financial statements are an integral part of these statements. 4 MARRIOTT'S HUNT VALLEY INN -------------------------- STATEMENTS OF INCOME (LOSS) ---------------------------
For the Six Months Ended June 30, For the Year Ended --------------------------------- December 31, 1996 1996 1997 ------------------ ------------ ------------ (Unaudited) HOTEL REVENUES: Room $ 7,230,001 $ 3,493,224 $ 3,873,755 Food and beverage 6,305,046 3,129,174 3,264,948 Other 578,893 294,651 280,448 ------------ ------------ ------------ Total revenues 14,113,940 6,917,049 7,419,151 ------------ ------------ ------------ EXPENSES: Departmental expenses: Rooms 2,118,045 961,981 1,061,539 Food and beverage 4,118,284 1,970,905 2,004,976 Other 386,605 186,201 191,406 General and administrative 1,324,572 683,050 698,975 Advertising and promotion 835,664 403,425 418,488 Utilities 725,592 330,512 310,201 Management fees to related party 423,414 207,577 222,593 Franchisor royalties and other charges 597,653 291,381 314,062 Repairs and maintenance 802,522 400,353 393,775 Taxes and insurance 325,179 180,607 185,210 Interest 1,097,167 533,465 537,500 Depreciation and amortization 1,032,408 467,230 519,980 Other (32,144) 1,538 4,878 Renovations 386,045 384,235 -- ------------ ------------ ------------ Total expenses 14,141,006 7,002,460 6,863,583 ------------ ------------ ------------ NET INCOME (LOSS) $ (27,066) $ (85,411) $ 555,568 ============ ============ ============
The accompanying notes to financial statements are an integral part of these statements. 5 MARRIOTT'S HUNT VALLEY INN -------------------------- STATEMENTS OF OWNER'S EQUITY ----------------------------
BALANCE, DECEMBER 31, 1995 $ 3,155,770 Net loss (27,066) Distributions (426,873) ----------- BALANCE, DECEMBER 31, 1996 2,701,831 Net income (unaudited) 555,568 Distributions (unaudited) (270,140) ----------- BALANCE, JUNE 30, 1997, (unaudited) $ 2,987,259 ===========
The accompanying notes to financial statements are an integral part of these statements. 6 MARRIOTT'S HUNT VALLEY INN -------------------------- STATEMENTS OF CASH FLOWS ------------------------
For the Six Months Ended June 30, For the Year Ended ------------------------------- December 31, 1996 1996 1997 ----------------- ----------- ----------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (27,066) $ (85,411) $ 555,568 Adjustments to reconcile net income (loss) to net cash provided by operating activities - Depreciation and amortization 1,032,408 467,230 519,980 Changes in assets and liabilities: Accounts receivable 538,260 260,108 (393,540) Inventories (15,675) 6,990 20,176 Prepaids and other assets 90,161 69,656 (1,642) Accounts payable, accrued expenses and other liabilities (400,431) (169,647) (23,663) ----------- ----------- ----------- Net cash provided by operating activities 1,217,657 548,926 676,879 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Improvements and additions to hotel properties, net (1,111,162) (662,473) (186,445) Renovation escrow funds released 173,866 -- -- Deposits to deferred maintenance escrow account (154,543) -- (88,500) ----------- ----------- ----------- Net cash used for investing activities (1,091,839) (662,473) (274,945) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under mortgage note payable 1,152,822 973,788 -- Principal payments on mortgage note payable (479,774) (250,000) (129,577) Principal payment on capital lease (46,275) (22,916) (31,640) Distributions to partners (426,873) (193,685) (270,140) Proceeds from promissory note 150,000 150,000 -- Repayment of promissory note (150,000) -- -- ----------- ----------- ----------- Net cash provided by (used for) financing activities 199,900 657,187 (431,357) ----------- ----------- ----------- NET CHANGE IN CASH 325,718 543,640 (29,423) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 120,941 120,941 446,659 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 446,659 $ 664,581 $ 417,236 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 1,076,475 $ 533,997 $ 630,096
The accompanying notes to financial statements are an integral part of these statements. 7 MARRIOTT'S HUNT VALLEY INN -------------------------- Notes to Financial Statements ----------------------------- (Amounts and disclosures as of June 30, 1997 and for the six months ended June 30, 1997 and 1996 are unaudited) ================================================================================ 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION ------------------------------------------------- Organization and Nature of Business - ----------------------------------- Marriott's Hunt Valley Inn (Hotel) in Hunt Valley, Maryland is owned by Shawan Road Hotel Limited Partnership (Shawan), a Maryland limited partnership. The partnership was organized on June 29, 1995 to acquire and operate the 392 room Hotel. The Hotel was acquired and began operations on June 29, 1995. Basis of Presentation - --------------------- The accompanying financial statements are prepared on the accrual basis of accounting and include the accounts of the Hotel using historical cost basis. The accompanying balance sheet as of June 30, 1997, and the statements of income (loss), owner's equity and cash flows for the six month periods ended June 30, 1996 and 1997 are unaudited. In the opinion of management, such financial statements include all adjustments consisting solely of normal recurring adjustments, necessary for a fair presentation of results of these interim periods. The results of the six month period ended June 30, 1997 are not necessarily indicative of results to be expected for the entire year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Estimates - --------- The process of preparing financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents include cash, money market funds and other highly liquid investments with maturities of three months or less. Shawan had bank deposits in excess of regulatory insurance limits. Inventories - ----------- Inventories consist primarily of food and alcoholic beverages and are stated at the lower of cost, determined by the first-in, first-out method, or market. 8 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ------------------------------------------ Investment in Hotel - ------------------- The Hotel property is stated at cost and depreciated over the estimated useful lives of the assets using straight-line and accelerated methods. Repairs and maintenance, which are not considered betterments and do not extend the useful life of the property are charged to expense as incurred. The major assets classifications and their estimated useful lives are as follows: Buildings 39 years Furniture and equipment 5 - 7 years Deferred Expenses - ----------------- The Partnership incurred certain costs associated with obtaining financing and a restaurant franchise. The costs are being amortized as follows:
Amortization Original Amortization Accumulated Period Charge Expense Amortization ------------ -------- ------------ ------------ Financing costs 5 years $ 257,800 $ 51,560 $ 77,339 Franchise fees 5 years 6,000 1,200 1,800 ----------- ---------- $ 52,760 $ 79,139 =========== ==========
Revenue Recognition - ------------------- Revenue is recognized as earned. Ongoing credit evaluations are performed and an allowance for potential credit loss is provided against the portion of accounts receivable which is estimated to be uncollectible. 3. ACQUISITION BY BOYKIN HUNT VALLEY, L.L.C. ----------------------------------------- In July 1997, Boykin Hotel Properties, L.P. formed Boykin Hunt Valley, L.L.C. which made a cash contribution of $27,300,000 to Shawan. Shawan retired the outstanding mortgage note payable and redeemed the one percent (1%) ownership interest of the general partner, Shawan Road Hotel, Inc., and ninety percent (90%) of the Hunt Valley Associates, L.L.C. limited partnership interest. Shawan leased the Hotel to Hunt Valley Associates, L.L.C. 4. MORTGAGE NOTE PAYABLE --------------------- The mortgage note payable is collateralized by substantially all of the assets of the Partnership. The note bears interest at variable rates based on the London Inter-Bank Offer Rate (LIBOR) plus 4.75% (10.34% at December 31, 1996). Quarterly principal payments of $125,000 are due through July 1, 1996 at which time monthly installments of principal and interest shall be due through the maturity date, June 29, 2000. The note agreement also provides for the establishment of a replacement reserve to be funded monthly beginning August 1, 1996, based on 4% of gross revenues. As indicated in Note 3, in connection with the capital contribution and admission of Boykin Hunt Valley, L.L.C. as a partner, the outstanding balance of the mortgage was retired. 9 5. COMMITMENTS ----------- Franchise Agreement Shawan has entered into a franchise agreement with Marriott International, Inc. Under the terms of the agreement, which expires in 2010, Shawan has agreed to pay a monthly percentage fee of 6% of gross room revenues and 3% of gross food and beverage revenues. In addition, Shawan agreed to pay an advertising fee of 1% of gross room revenues. Shawan also entered into a franchise agreement with Pizza Hut, Inc. Under the terms of the agreement which expires in 2000, Shawan has agreed to a monthly percentage fee of 8% of applicable gross food sales. In addition, Shawan has agreed to expend each month an amount no less than 1% of the prior month's applicable gross sales on marketing efforts. 6. RELATED PARTY TRANSACTIONS -------------------------- Shawan entered into a fifteen (15) year management agreement with Davidson Hotel Company (Davidson) to provide management and accounting services. Wilton D. Hill, the sole stockholder of Shawan Road Hotel, Inc. (the general partner), a limited partner, and a member of Hunt Valley Associates, L.L.C. (also a limited partner) is the sole stockholder of Davidson Holdings, Inc., the parent company of Davidson. Davidson manages the property for a basic management fee of 2% of gross revenues, an additional fee of 1% of gross revenues which becomes a subordinated management fee on January 1, 1997 plus an incentive management fee of 2% of gross revenues provided the partners have received a specified yield on their capital. The accounting services are provided at a monthly charge of $3,500. The management and accounting fees amounted to $423,414 and $42,000, respectively, for the year ended December 31, 1996, $222,593 and $21,000 for the six months ended June 30, 1997, and $207,577 and $21,000 for the six months ended June 30, 1996. On January 15, 1996, the Partnership borrowed $150,000 from Davidson Hotel Company. Pursuant to the terms of the promissory note, interest was payable monthly at a rate of 10%. The entire note balance was paid as of December 31, 1996. Shawan Road Hotel, Inc., the general partner, and Wilton D. Hill, a limited partner, borrowed from a lender $4,651,000. The funds were contributed to Shawan. This loan is collateralized by the partnership interests of each of the respective parties. Hunt Valley Associates, L.L.C. subsequently entered into a guarantee and pledge of partnership interest with Shawan Road Hotel, Inc. and Wilton D. Hill for their pro-rata ownership percentage (23.4%) of the borrowed funds. As a result of the acquisition as discussed in Note 3, the loan was retired and the collateral and guarantee were released. Davidson provides certain health care benefits to their employees. The expenses incurred by Shawan represent allocations from the Davidson Hotel Company Employees' Health Care Trust (the Trust) which includes other properties managed by Davidson. Premiums paid to the Trust are determined by management of Davidson and a third party administrator and based on historical claims. Expenses paid by Shawan, net of refunds, amounted to $356,974 for the year ended December 31, 1996, and $183,814 and $185,564 for the periods ended June 30, 1997 and 1996. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS ----------------------------------- Mortgage Payable - ---------------- Management estimates that the fair value of the mortgage note payable approximates carrying value based on the variable rate terms. EX-4 5 EXHIBIT 4 1 Exhibit 4 HOLIDAY INN MINNEAPOLIS WEST FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND JUNE 30, 1997 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Boykin Lodging Company: We have audited the accompanying balance sheet of Holiday Inn Minneapolis West as of December 31, 1996 and the related statements of income, owner's equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 financial statements referred to above present fairly, in all material respects, the financial position of the Holiday Inn Minneapolis West as of December 31, 1996 and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio, August 14, 1997. 3 HOLIDAY INN MINNEAPOLIS WEST ---------------------------- BALANCE SHEETS --------------
December 31, 1996 June 30, 1997 ----------------- ------------- (Unaudited) ASSETS - ------ INVESTMENT IN HOTEL PROPERTY, at cost: Land $ 2,056,510 $ 2,056,510 Buildings and improvements 3,796,293 3,796,293 Furniture and equipment 1,454,951 1,543,734 ----------- ----------- 7,307,754 7,396,537 Less -- Accumulated depreciation (1,519,302) (1,693,976) ----------- ----------- Net investment in hotel property 5,788,452 5,702,561 CASH AND CASH EQUIVALENTS 220,360 361,281 ACCOUNTS RECEIVABLE, net of allowance for doubtful accounts of approximately $6,000 148,467 118,197 INVENTORIES 22,052 19,006 PREPAIDS AND OTHER ASSETS 31,474 15,133 CASH HELD IN ESCROW 185,402 348,425 DEFERRED EXPENSES, net 12,664 7,913 ----------- ----------- $ 6,408,871 $ 6,572,516 =========== =========== LIABILITIES AND OWNER'S EQUITY - ------------------------------ MORTGAGE NOTE PAYABLE $ 5,351,041 $ 5,331,859 ACCOUNTS PAYABLE, trade 135,580 155,476 ACCRUED EXPENSES AND OTHER LIABILITIES 197,818 349,879 ----------- ----------- 5,684,439 5,837,214 OWNER'S EQUITY 724,432 735,302 ----------- ----------- $ 6,408,871 $ 6,572,516 =========== ===========
The accompanying notes to financial statements are an integral part of these balance sheets. 4 HOLIDAY INN MINNEAPOLIS WEST ---------------------------- STATEMENTS OF INCOME --------------------
For the Six Months Ended June 30, For the Year Ended ----------------------------- December 31, 1996 1996 1997 ------------------ ---------- ---------- (Unaudited) HOTEL REVENUES: Room revenue $3,299,501 $1,558,656 $1,575,979 Food and beverage revenue 1,971,990 926,502 935,234 Other revenue 173,583 73,387 71,631 ---------- ---------- ---------- Total revenues 5,445,074 2,558,545 2,582,844 ---------- ---------- ---------- EXPENSES: Departmental expenses -- Rooms 676,320 312,374 323,455 Food and beverage 1,318,623 633,691 628,854 Other 68,868 39,543 37,299 General and administrative 415,818 182,888 195,783 Advertising and promotion 125,299 65,813 63,730 Utilities 219,027 105,911 113,934 Management fees to related party 185,953 89,988 84,027 Franchisor royalties and other charges 305,052 137,404 145,455 Repairs and maintenance 233,154 114,584 138,202 Taxes, insurance and rent 422,733 210,080 188,693 Interest expense 517,554 262,668 262,590 Depreciation and amortization 428,821 215,966 181,978 Other 5,938 3,699 7,974 ---------- ---------- ---------- Total expenses 4,923,160 2,374,609 2,371,974 ---------- ---------- ---------- NET INCOME $ 521,914 $ 183,936 $ 210,870 ========== ========== ==========
The accompanying notes to financial statements are an integral part of these statements. 5 HOLIDAY INN MINNEAPOLIS WEST ---------------------------- STATEMENTS OF OWNER'S EQUITY ---------------------------- BALANCE, DECEMBER 31, 1995 $ 1,002,518 Net income 521,914 Distributions (800,000) BALANCE, DECEMBER 31, 1996 724,432 ----------- Net income (unaudited) 210,870 Distributions (unaudited) (200,000) ----------- BALANCE, JUNE 30, 1997, (unaudited) $ 735,302 ===========
The accompanying notes to financial statements are an integral part of these statements. 6 HOLIDAY INN MINNEAPOLIS WEST ---------------------------- STATEMENTS OF CASH FLOWS ------------------------
For the Six Months Ended June 30, For the Year Ended ---------------------------- December 31, 1996 1996 1997 ------------------ --------- --------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 521,914 $ 183,936 $ 210,870 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization expense 428,818 215,966 181,978 Changes in assets and liabilities -- Accounts receivable trade, net (46,921) (63,957) 30,270 Inventories (4,505) 1,403 3,046 Prepaids and other assets 6,178 24,823 16,341 Escrow cash (33,238) (169,795) (163,023) Accounts payable, accrued expenses and other liabilities (35,398) 126,279 171,957 --------- --------- --------- Net cash provided by operating activities 836,848 318,655 451,439 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Improvements and additions to hotel properties, net (28,528) (19,935) (91,336) --------- --------- --------- Net cash used for investing activities (28,528) (19,935) (91,336) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on mortgage note payable (46,068) (19,182) (19,182) Distributions (800,000) (250,000) (200,000) --------- --------- --------- Net cash used for financing activities (846,068) (269,182) (219,182) --------- --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS (37,748) 29,538 140,921 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 258,108 258,108 220,360 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 220,360 $ 287,646 $ 361,281 ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 518,000 $ 263,000 $ 263,000
The accompanying notes to financial statements are an integral part of these statements. 7 HOLIDAY INN MINNEAPOLIS WEST ---------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- (Amounts and disclosures as of June 30, 1996 and 1997 and for the periods then ended are unaudited.) 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION: -------------------------------------------------- DESCRIPTION OF BUSINESS The Holiday Inn Minneapolis West (the Hotel) is owned and operated by Crowne West Limited Partnership (the Partnership). The Partnership was organized on March 18, 1992, to acquire and operate the 196-room Hotel in Minneapolis, Minnesota. The Hotel was acquired July 1, 1992, the date the Partnership began operation. The Partnership is controlled by Minnesota Hotel Corporation (MHC), the Managing General Partner. The Partnership has entered into a management agreement with MHC for day to day operation of the hotel. BASIS OF PRESENTATION The accompanying financial statements are prepared on the accrual basis of accounting and include the accounts of the Hotel using historical cost basis. The accompanying balance sheet as of June 30, 1997, and the statements of income, owner's equity and cash flows for the six month periods ended June 30, 1996 and 1997 are unaudited. In the opinion of management, such financial statements include all adjustments consisting solely of normal recurring adjustments, necessary for a fair presentation of results of these interim periods. The results of the six month period ended June 30, 1997 are not necessarily indicative of results to be expected for the entire year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ------------------------------------------- CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash, certificates of deposit, money market funds, and other highly liquid investments with maturities of three months or less. INVENTORIES Inventories consist primarily of food and beverages and are stated at the lower of cost or market, determined by the first-in, first-out method. INVESTMENT IN HOTEL PROPERTY The hotel property is stated at cost. Depreciation is computed using the straight-line method based upon the following estimated useful lives: Buildings and improvements 10-30 years Furniture and equipment 3-10 years 8 -2- The management of the Hotel reviews the hotel property for impairment when events or changes in circumstances indicate the carrying amount of the hotel property may not be recoverable. When such conditions exist, management estimates the future cash flows from operations and disposition of the hotel property. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to the related estimated fair market value would be recorded and an impairment loss would be recognized. No such impairment losses have been recognized. Maintenance and repairs are charged to operations as incurred; major renewals and betterments are capitalized. Upon the sale or disposition of a fixed asset, the asset and related accumulated depreciation are removed from the accounts, and the gain or loss is included in the determination of net income. DEFERRED EXPENSES Organizational costs have been capitalized and are being amortized on a straight-line basis over five years. Costs incurred in connection with obtaining the mortgage financing discussed in Note 4 are capitalized and amortized over the seven-year term of the mortgage note. Accumulated amortization of organization costs and deferred financing costs was $23,000 and $21,000, respectively, at December 31, 1996, and $24,000 and $23,000 at June 30, 1997, respectively. REVENUE RECOGNITION Revenue is recognized as earned. Ongoing credit evaluations are performed and an allowance for potential credit losses is provided against the portion of accounts receivable which is estimated to be uncollectable. Such losses have been within management's expectations. INCOME TAXES Under the U.S. Internal Revenue Code, the Partnership owes no federal income tax. The Partners will owe tax on their allocable share of Partnership taxable income. MANAGEMENT'S USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. ACQUISITION BY BOYSTAR VENTURES, L.P.: -------------------------------------- In July 1997, Boykin Hotel Properties, L.P. and CapStar Hotel Company (CapStar) formed a joint venture, BoyStar Ventures, L.P., (BoyStar). BoyStar acquired the Holiday Inn Minneapolis West in July 1997 from the Partnership in exchange for aggregate cash consideration of $12,300,000 and leased it to CapStar. In connection with the sale transaction, the mortgage debt of the Partnership was retired. 9 -3- 4. MORTGAGE NOTE PAYABLE: ---------------------- The mortgage note payable is collateralized by a first mortgage on the Hotel's land, building and furnishings and an assignment of revenue. In addition, certain partners in the Partnership have guaranteed a portion of the principal of the note (up to $525,500). The note is non-recourse to the other partners and for amounts in excess of the amount guaranteed. The note agreement also provides for the establishment of a replacement reserve of up to $300,000 to be funded monthly based on 3% of gross revenue, and taxes and insurance are required to be escrowed with the lender. The note agreement restricts future borrowing except with the consent of the lender. As indicated in Note 3, in connection with the sale of the Hotel to BoyStar, the outstanding balance of the mortgage note was retired. 5. EMPLOYEE BENEFIT PLAN: ---------------------- The Hotel contributes specified percentages of qualifying wages of eligible employees to a defined contribution plan. Contributions provided pursuant to the Plan were $30,000 for the year ended December 31, 1996 and $21,000 and $22,000 for the six month periods ended June 30, 1996 and 1997, respectively. 6. COMMITMENTS: ------------ FRANCHISE AGREEMENTS The Hotel is operated as a Holiday Inn pursuant to the terms of a hotel franchise agreement expiring in 2002. The franchise agreement requires payments for franchisor royalties, reservation fees and marketing contributions that are computed at 7.5% of gross room revenue. The franchise agreements contain provisions whereby the franchisor would be entitled to additional payments in the event the franchisee would terminate the franchise agreement prior to maturity. 7. RELATED PARTY TRANSACTIONS: --------------------------- MHC receives a fee of 3.5% of revenues for managing the Hotel pursuant to the terms of a management agreement. The initial term of the management agreement expires in 2002. MHC received management fees of approximately $186,000, $90,000 and $84,000 in the year ended December 31, 1996 and the six month periods ended June 30, 1996 and 1997, respectively. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS: ------------------------------------ Statement of Financial Accounting Standards No. 107 requires disclosure about fair value for all financial instruments, whether or not recognized for financial statement purposes. Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 1996 and June 30, 1997. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts which could be realized on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. 10 -4- MORTGAGE NOTE PAYABLE Management estimates that the fair value of the mortgage note payable approximates carrying value based upon the Hotel's effective borrowing rate for issuance of debt with similar terms and remaining maturities. -----END PRIVACY-ENHANCED MESSAGE-----