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 June 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 1-9563
AIRCOA HOTEL PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 84-1042607
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
5775 DTC Boulevard
Suite 300
Englewood, Colorado 80111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 220-2000
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 twelve 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_____
-----
There were 5,340,214 Units outstanding of the Registrant's Class A Units, as of
August 1, 1997.
AIRCOA HOTEL PARTNERS, L.P.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)
June 30, 1997 and December 31, 1996 2 - 3
Consolidated Statements of Operations (Unaudited)
Three Months and Six Months Ended June 30, 1997 and 1996 4
Consolidated Statement of Partners' Capital (Unaudited)
Six Months Ended June 30, 1997 5
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1997 and 1996 6
Notes to Consolidated Financial
Statements (Unaudited) 7 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 14
PART II. OTHER INFORMATION AND SIGNATURES 14
1
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
- ------- ---------------------
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
Assets June 30, 1997 December 31, 1996
- ------ ------------- -----------------
Current assets:
Cash and cash equivalents $ 489 $ 2,350
Accounts receivable:
Trade 3,331 3,305
Affiliates 343 ---
Inventory 397 373
Prepaid expenses 422 516
-------- ---------
Total current assets 4,982 6,544
-------- --------
Property and equipment, at cost:
Land and leasehold improvements 9,461 9,427
Buildings and leasehold improvements 68,872 68,499
Furniture, fixtures and equipment 22,925 20,251
-------- --------
101,258 98,177
Less accumulated depreciation and amortization (37,610) (35,501)
-------- --------
Net property and equipment 63,648 62,676
-------- --------
Other assets, including debt issue costs, net of
accumulated amortization of $311 in 1997 and
$337 in 1996 934 911
------- ------
$69,564 $70,131
======= =======
(continued)
2
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In Thousands)
Liabilities and Partners' Capital June 30, 1997 December 31, 1996
--------------------------------- ------------- -----------------
Current liabilities:
Current installments of long-term debt $ 1,126 $ 1,122
Trade accounts payable 832 1,284
Payables to affiliates 421 444
Accrued liabilities:
Payroll 795 832
Taxes, other than income taxes 1,114 513
Other 1,726 2,223
Deferred revenue and advance deposits 1,135 1,842
------- -------
Total current liabilities 7,149 8,260
Long-term debt, excluding current installments 42,091 42,504
Notes payable to affiliates 8,100 8,100
Accrued administration, management fees and
interest payable to affiliate 632 506
------- -------
Total liabilities 57,972 59,370
------- -------
Partners' capital:
General Partner 256 245
Limited Partners:
Class A Unitholders 13,778 13,517
Class B Unitholders (deficit) (2,442) (3,001)
------- -------
Total Partners' capital 11,592 10,761
------- -------
$69,564 $70,131
======= =======
See accompanying notes to consolidated financial statements.
3
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
(In Thousands, Except Unit Data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ---------------------
1997 1996 1997 1996
----------- ----------- ------- --------
Revenue:
Rooms $ 7,861 $ 7,739 $ 15,294 $ 15,056
Food and beverage 3,223 3,436 6,100 6,453
Other property operations 1,732 1,878 3,691 3,912
-------- ---------- --------- --------
12,816 13,053 25,085 25,421
-------- ----------- ---------- --------
Costs and operating expenses:
Rooms 2,143 2,056 4,089 3,942
Food and beverage 2,277 2,373 4,296 4,560
Other property operations 716 760 1,636 1,721
Administrative and general 1,235 1,343 2,754 2,558
Marketing 1,066 1,050 2,113 2,184
Energy 571 599 1,169 1,216
Property maintenance 665 633 1,273 1,206
Rent, taxes and insurance 803 654 1,497 1,337
Management fees 511 518 999 1,010
Depreciation and amortization 1,021 1,053 2,109 2,106
-------- ---------- --------- ---------
11,008 11,039 21,935 21,840
-------- ----------- ---------- -----------
Operating income 1,808 2,014 3,150 3,581
Interest expense, including
amortization of debt costs 1,165 1,164 2,319 2,359
-------- ---------- --------- ----------
Net income $ 643 $ 850 $ 831 $ 1,222
========= ========== ========= ==========
Class A Unitholders:
Income per limited partnership unit -primary $ .07 $ .10 $ .05 $ .12
======== =========== ========== ===========
Income per limited partnership unit -fully diluted $ --- $ .07 $ --- $ .10
======== =========== ========== ==========
Weighted average number of units outstanding -
primary 5,340,214 5,340,214 5,340,214 5,340,214
Weighted average number of units outstanding -
fully diluted ---- 15,775,810 --- 16,043,220
Class B Unitholders:
Income per limited partnership unit $ .31 $ .32 $ .59 $ .61
======== ============ ========= ===========
Weighted average number of units outstanding 950,000 950,000 950,000 950,000
See accompanying notes to consolidated financial statements.
4
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
SIX MONTHS ENDED JUNE 30, 1997
(Unaudited)
(In Thousands, Except Unit Data)
Limited Partners' Capital (Deficit)
-----------------------------------
Class A Unitholders Class B Unitholders Total
General ------------------- ------------------- Partners'
Partner Units Capital Units Deficit Capital
-------- ------- --------- ------- --------- -------
Balances at
December 31, 1996 $245 5,340,214 $13,517 950,000 $(3,001) $10,761
Net income 11 ---- 261 --- 559 831
------ --------- -------- -------- -------- -------
Balances at
June 30, 1997 $256 5,340,214 $13,778 950,000 $(2,442) $11,592
====== ========= ======= ======= ========= =======
See accompanying notes to consolidated financial statements.
5
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
(In Thousands)
1997 1996
-------- --------
Cash flows from operating activities:
Cash received from customers $ 23,184 $ 23,948
Cash paid to suppliers and vendors (13,418) (13,626)
Cash paid to employees (6,831) (6,513)
Interest paid (2,014) (1,441)
Other cash receipts, net 927 863
---------- --------
Net cash provided by operating activities 1,848 3,231
---------- --------
Cash flows from investing activities -
capital expenditures (3,081) (878)
---------- --------
Cash flows from financing activities:
Principal payments on long-term debt, net (409) (540)
Payment for debt issue costs (219) ---
---------- --------
Net cash used in financing activities (628) (540)
---------- --------
(Decrease) increase in cash and cash equivalents (1,861) 1,813
Cash and cash equivalents at beginning of period 2,350 2,116
---------- --------
Cash and cash equivalents at end of period $ 489 $ 3,929
========== ========
See accompanying notes to consolidated financial statements.
6
AIRCOA PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)
(1) BASIS OF PRESENTATION
AIRCOA Hotel Partners, L.P., a Delaware limited partnership (the
"Partnership") was organized in December 1986 to acquire, own and operate
hotel and resort properties. The Partnership owns and operates six hotel
and resort properties (the "Properties") through operating partnerships
(the "Operating Partnerships") which were acquired in 1986.
The Partnership holds a 99% limited partner interest in each of the six
Operating Partnerships which hold title to the Properties and through which
the Partnership conducts all of its operations. AHS, a wholly owned
subsidiary of Richfield Hospitality Services, Inc. ("Richfield"), is also
the 1% General Partner of each of the Operating Partnerships. Richfield
operates the Properties for the Partnership under certain management
agreements.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore,
do not include all information and disclosures necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. In the opinion of
management, these financial statements reflect all adjustments (which
include only normal recurring adjustments) necessary for a fair
presentation of the results of operations and financial position for the
interim periods presented. These interim financial statements should be
read in conjunction with the Annual Report on Form 10-K for the period
ended December 31, 1996. Operating results for the six months ended June
30, 1997 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1997.
(2) MERGER WITH AFFILIATE
The Partnership received in December 1996, a written proposal from an
affiliate, Regal Hotel Management, Inc. ("RHM"), to commence discussions
with respect to the possible purchase of all of the Class A and Class B
units not currently owned by RHM or its affiliates (the "Public Units") for
$2.35 per Class A Unit and $16.80 per Class B Unit. The General Partner of
the Partnership referred consideration of RHM's proposal to a Special
Committee (the "Special Committee") comprised of the independent members of
the Partnership's Advisory Committee. After negotiations with the Special
Committee, RHM agreed to increase the merger consideration to $3.10 per
Class A Unit and $20.00 per Class B Unit. The Special Committee determined
that such increased merger consideration was fair to, and in the best
interests of, unaffiliated unitholders of the Partnership and recommended
approval of the merger transaction by the Board of Directors of the
Partnership's General Partner. The General Partner's Board of Directors
approved RHM's revised proposal on May 2, 1997.
RHM's proposed acquisition of the Public Units would be made by means of a
merger of a subsidiary limited partnership owned by RHM into the
Partnership. The completion of the merger and the resulting acquisition of
the Public Units is subject to the approval of the merger by unitholders
owning a majority interest of the Partnership's units at a special meeting.
Presently, RHM and its affiliates own 71% of the Class A Units and 93.6% of
the Class B Units. RHM and its affiliates have agreed to vote in favor of
the merger thus assuring its approval. Although no date has been set for
the special meeting, it is presently expected that the meeting will be
held, and the merger will be consummated, during the third quarter of 1997.
In conjunction with approval of the merger transaction, the General Partner
has amended the Partnership Agreement in order to defer the mandatory
conversion of Class B Units into Class A Units.
7
AIRCOA PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)
The amendment provides that the 250,000 Class B Units scheduled to convert
into additional Class A Units during 1997 will convert on the earliest to
occur of (i) any termination of the definitive merger agreement; (ii) the
record date for any vote of the Class A Unitholders, (other than the vote
on merger), (iii) the record date for any distribution by the Partnership
to holders of Class A Units or (iv) September 30, 1997. In 1997, in
accordance with the Partnership Agreement, the number of Class A Units to
be received upon conversion of a Class B Unit will be determined by
dividing $20.00 by the average of the closing prices of Class A Units for
the five trading days ending on May 30, 1997, or $2.75. In light of the
likelihood of completion of the merger, the General Partner adopted this
amendment in order to avoid administrative and other issues arising from
the issuance of additional Class A Units pursuant to the conversion.
(3) LONG-TERM DEBT
The Partnership has a first mortgage loan and a $1,000,000 revolving credit
line. The first mortgage loan bears interest at the Eurodollar rate plus 2%
(7.85% at June 30, 1997). Re-payment of the first mortgage loan is based on
a twenty-year amortization with a maturity date in June 2000. Payments
under this loan consist of monthly installments of $90,000 plus interest on
the unpaid balance. The revolving credit line is renewable annually at the
option of the lender. No amounts have been drawn on the line at June 30,
1997.
Long-term debt is summarized as follows (in thousands):
June 30, December 31,
1997 1996
--------- -------------
Mortgage loan $42,840 $43,380
Capital lease obligation 377 246
------- -------
43,217 43,626
Less current installments (1,126) (1,122)
------- -------
Long-term debt, excluding current installments $42,091 $42,504
======= =======
The first mortgage loan and revolving credit line contain various covenants
including: minimum debt service ratios, restrictions on additional
indebtedness, limitations on annual cash distributions to Class A
Unitholders, limitations on the payment of principal on the affiliate notes
payable, prepayment premium during the first two years, deferral of
management fees payable to Richfield if minimum debt service ratios are not
achieved, maintenance of a capital expenditure reserve account equal to 5%
of gross revenue and a maximum loan-to-value ratio of 65% based on the
aggregate appraised values of the Properties. The first mortgage loan and
revolving credit line are subject to certain limited guarantees of an
affiliate of the General Partner. The first mortgage loan also requires the
Bank's approval of any dilution in the present ownership interests of
affiliates of the General Partner in the Partnership. The Partnership pays
an annual guarantee fee calculated at .5% of the outstanding loan balance
at June 8th of each year to an affiliate of the General Partner for the
limited guarantee of the first mortgage loan and the revolving credit line.
(4) NOTES PAYABLE TO AFFILIATES
The Partnership has notes payable of $8,100,000 to AHS that are subordinate
to the first mortgage
8
AIRCOA HOTEL PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)
loan. Notes payable to AHS consist of notes payable of $6,000,000 and a
note payable of $2,100,000. The notes payable totaling $6,000,000 accrue
interest at 12% per annum, payable monthly, and mature on June 8, 2000. The
note payable for $2,100,000 accrues interest at 12% per annum, with
interest and principal due on June 8, 2000. The notes payable to AHS are
convertible into Class A Units of the Partnership at $16.60 per unit. In
addition, these notes stipulate that 25% of any excess cash flow, as
defined in the first mortgage loan, will be applied against the principal
of the notes outstanding.
(5) PARTNERSHIP UNITS AND ALLOCATIONS
LIMITED PARTNERSHIP UNITS
The Class A Units entitle each Unitholder to a limited partnership interest
in a percentage of the profits and losses, tax allocations and
distributions of the Partnership.
The Class B Units entitle each Unitholder to a limited partnership interest
which is subordinate to the Class A Units, in certain circumstances. The
Class B Units are redeemable by the Partnership or convertible into Class A
Units, in certain circumstances. The Class B Units do not receive
distributions until the Class A Unitholders receive defined Minimum Annual
Distributions. Beginning in 1997, in accordance with the terms of the
Partnership Agreement, and each year thereafter through 2001, a minimum of
250,000 Class B Units are required to be converted into Class A Units
annually through 2001 at a redemption value of $20.00 per Class B Unit, by
issuing Class A Units valued at the then current market price of the Class
A Units. As discussed above in Note 2, the Partnership Agreement was
amended to defer the 1997 conversion of Class B Units.
CASH DISTRIBUTIONS
The Partnership Agreement provides for periodic distribution of
distributable cash flow, as defined, to the partners at the discretion of
the General Partner. Distributable cash flow is generally defined as cash
flow from operations of the hotel properties. Such cash is allocated and
distributed (net of AHS' 1% general partnership interest in the Operating
Partnerships) 99% to the Class A Unitholders and 1% to the General Partner
until the Class A Unitholders have received defined Minimum Annual
Distributions. At June 30, 1997, the cumulative unpaid Minimum Annual
Distribution per Class A Unit significantly exceeds the Partnerships' net
asset value per unit based on the December 31, 1996 appraised values of the
hotel properties.
According to the first mortgage loan, the maximum annual amount that the
Partnership may distribute to the Class A Unitholders is equal to 50% of
excess cash flow as defined in the mortgage loan agreement. However, if the
debt service coverage ratio, as defined in the mortgage loan agreement, is
greater than 1.50, then the Partnership may distribute up to 75% of such
excess cash flow.
In addition, the Partnership may not make any distributions to the Class A
Unitholders if there are any amounts which are due and payable under the
mortgage loan agreement which are unpaid.
9
AIRCOA HOTEL PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)
(6) RELATED PARTY TRANSACTIONS
The following amounts resulting from transactions with affiliates are
included in the accompanying consolidated statements of operations (in
thousands):
For the six
months ended June 30,
---------------------
1997 1996
---- ----
Partnership administration fees $ 120 $ 95
===== ======
Management fees $ 999 $1,010
===== ======
Allocated data processing cost $ 23 $ 44
===== ======
Allocated insurance expenses $ 671 $ 692
===== ======
Interest expense $ 486 $ 486
===== ======
Lease income $ 149 $ 115
===== ======
License fees $ 261 $ 149
===== ======
Guarantee and financing fee
(included in interest expense) $ 112 $ 112
===== ======
The properties are obligated to reimburse an affiliate for payroll,
professional fees, and certain out-of-pocket expenses incurred by the
affiliate on their behalf. Affiliates are also paid purchasing and design
fees in connection with renovations of the hotels and purchases of
furnishings, equipment and supplies.
(7) INCOME TAXES
No current provision or benefit for income taxes is included in the
accompanying consolidated financial statements since the taxable income or
loss of the Partnership is included in the tax returns of the individual
partners of the Partnership.
The Partnership's only significant temporary difference is an excess of the
tax basis over the book basis of the Partnership's hotels of approximately
$5,000,000 which gives rise to a net deferred tax asset of approximately
$2,000,000. The Partnership has established a 100% valuation allowance on
these net deferred tax assets. Current federal income tax regulations will
subject the Partnership to corporate taxation beginning in 1998. Following
the enactment of the Revenue Provisions of the Taxpayer Relief Act of 1997
(HR2014) issued August 1, 1997, Title IX, Miscellaneous Provisions, the
Partnership may make an election to be subject to an excise tax of 3.5% on
its gross receipts in lieu of being taxed as a corporation. Further, upon
the consummation of the merger discussed above in Note 2, the Partnership
would no longer be a publicly traded partnership and would continue to be
taxed as a partnership.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS
Partnership revenue for the three months ended June 30, 1997 decreased $237,000
or 1.8% compared to the three months ended June 30, 1996. Revenue for the first
six months of 1997 decreased $336,000 or 1.3% compared to the first six months
of 1996. Average occupancy and daily room rates for the portfolio of 1,586
rooms are summarized as follows:
Three months Six months
ended June 30, ended June 30,
---------------- ----------------
1997 1996 1997 1996
------- ------- ------- -------
Average occupancy 82.0% 83.7% 77.4% 79.9%
Average daily room rates $66.51 $63.90 $69.08 $65.11
The decrease in revenue at the Partnership's properties for the three months
ended June 30, 1997 when compared to the three months ended June 30, 1996 was
primarily a result of a decrease in food and beverage revenue of $213,000
offset, in part, by an increase in rooms revenue of $122,000. The decrease in
revenue for the six months ended June 30, 1997 when compared to the six months
ended June 30, 1996 was primarily a result of a decrease in food and beverage
revenue of $353,000 offset, in part by an increase in rooms revenue of $238,000.
Food and beverage revenue is influenced, in part, by occupancy levels at each of
the properties. For the three months and six months ended June 30, 1997,
occupancy levels at the Partnership's properties decreased by 2.0% and 3.1%,
respectively, as compared to the same periods in 1996. These decreases in
occupancy levels contributed, in part, to decreases in food and beverage revenue
of 6.2% and 5.5% for the three months and six months ended June 30, 1997,
respectively, when compared with the same periods in 1996. Rooms revenue is a
function of occupancy levels as well as average daily room rates. For both the
three months and six months ended June 30, 1997, rooms revenue increased by 1.6%
over the same periods in 1996, as a result of increases in average daily rates
that more than offset decreases in occupancy levels for these periods.
Increased average daily rates and decreased occupancy levels during these
periods resulted from efforts by the Partnership to increase revenue per
available room at certain of its properties through increased average daily
rates. This resulted in an overall small decrease in occupancy levels.
Net rooms margin (rooms revenue less rooms expenses) increased $35,000 or 0.6%
for the three months ended June 30, 1997 as compared to the three months ended
June 30, 1996, as rooms revenue increased by $122,000 or 1.6%, while rooms
expenses increased by $87,000 or 4.2%. Net rooms margin increased $91,000 or
0.8% for the six months ended June 30, 1997 as compared to the six months ended
June 30, 1996, as revenue increased by $238,000 or 1.6%, while expenses
increased by $147,000 or 3.7%. The increases in net rooms margins for the three
months and six months ended June 30, 1997 as compared to the same periods in
1996 were primarily due to increases at Lakeside offset, in part, by decreases
at Fourwinds. The increases in net rooms margins at Lakeside were the result of
increased average daily room rates, primarily in the wholesale market segment.
The decreases at Fourwinds are primarily due to decreased occupancy levels,
resulting from rooms taken out of service for renovation during March, April,
and May of 1997.
Net food and beverage margin (food and beverage revenue less food and beverage
expenses) decreased $117,000 or 11.0% for the three months ended June 30, 1997
as compared to the three months ended June 30, 1996, as revenue decreased
$213,000 or 6.2%, while expenses decreased $96,000 or 4.0%. Net food and
beverage margin decreased $89,000 or 4.7% for the first six months of 1997 as
compared to the same period in 1996, as revenue decreased $353,000 or 5.5% while
expenses decreased $264,000 or 5.8%. The decreases in net food and beverage
margins during these periods were primarily due to decreases at Buffalo and
University that were offset, in part, by increases at McCormick. The decreases
in net food and beverage margins at Buffalo were primarily due to changes in the
segment mix of the hotel's guests to include more contract business, which
typically does not use the hotel's food and beverage outlets as much as other
segments. Additionally, Buffalo experienced increased payroll costs.
University experienced a
11
drop in occupancy levels, which contributed to decreased net food and beverage
margins. The increases in net food and beverage margins at McCormick were
primarily due to the addition of a catering pavilion at the property during
1996, which increased banquet revenue; reductions in payroll cost also occurred.
Revenue from other property operations decreased $146,000 or 7.8% and $221,000
or 5.6% for the three months and six months ended June 30, 1997, respectively,
as compared to the three months and six months ended June 30, 1996. These
decreases are primarily a result of lower revenue generated by Fourwinds' marina
operations during the second quarter of 1997 due to poor weather in Bloomington,
Indiana.
Operating income for the three months ended June 30, 1997 decreased $206,000 or
10.2% as compared to the three months ended June 30, 1996 as revenue decreased
$237,000 or 1.8% and operating costs decreased $31,000 or 0.3%. Operating
income decreased $431,000 or 12.0% for the six months ended June 30, 1997 as
compared to the first six months of 1996, as revenue decreased $336,000 or 1.3%
and operating costs increased $95,000 or .4%. Operating costs include a
provision of approximately $200,000 for an occupancy tax assessment at McCormick
recorded during the second quarter of 1997.
Interest expense during the three months and six months ended June 30, 1997 was
comparable to the same periods in 1996. The average interest rate (inclusive of
amortization of debt issue costs) was 9.00% for the first six months of 1997 as
compared to 9.04% for the first six months of 1996.
Cash flow from operations differs from net income of the Partnership due to the
effects of depreciation, amortization and accruals as reflected in the
consolidated statements of cash flows. Net income/(loss) per Class A Unit and
the net income per Class B Unit reflect allocations of the net income as
required by the Partnership Agreement.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the first six months of 1997 was
$1,848,000, a decrease of $1,383,000 as compared with the same period in 1996.
The decrease is primarily attributable to the decrease in cash received from
customers of $573,000 and an increase in interest paid of $792,000. Cash used
in investing activities increased $2,203,000 in the first six months of 1997
compared to the first six months of 1996. The increase primarily reflects
capital expenditures at McCormick for rooms renovation and at Fourwinds for dock
and rooms renovation. Cash used in financing activities in the first six months
of 1997 increased $88,000 as compared to the first six months of 1996.
The Partnership had indebtedness at June 30, 1997 of $51,317,000 as compared to
$51,726,000 at December 31, 1996. At June 30, 1997, the Partnership had a
working capital deficit of $2,167,000 compared to a working capital deficit of
$1,716,000 at December 31, 1996. The Partnership's 1997 working capital
requirements, debt service obligations and capital expenditures are expected to
be satisfied through a combination of operating cash flows and draws on its
revolving line of credit. The Partnership has capital improvements of
approximately $4,600,000 planned in 1997 (approximately two-thirds of which is
for the renovation of guest rooms at certain of the Properties and improvements
at Fourwinds' marina dock and the remainder one-third is for other renovations
and improvements at the Properties). Approximately $3,100,000 of improvements
were made through June 30, 1997. These improvements have been and are expected
to be funded from hotel operations. In the longer term, in order to remain
competitive, the Partnership may need to make significant capital expenditures
in excess of the industry norm, 5% of annual revenue, for renovation and
improvements. Such capital expenditures would require the Partnership to obtain
financing from external sources.
The market value of the Partnership's properties differs significantly from the
historical cost of the properties of $63,648,000, as reflected in the
Partnership's balance sheet at June 30, 1997. As indicated under Item 2 in the
Partnership's 1996 Form 10-K, the aggregate appraised value of the hotel
properties at December 31, 1996 was $87,300,000. The appraised value of the
hotel properties at December 31, 1996 was revised to $86,760,000 subsequent to
the filing of the Partnership's 1996 Form 10-K. The December 1996 appraised
value may not be representative of the appraised value which will be obtained as
of December 31, 1997 and is not necessarily indicative of the ability of the
Partnership to consummate a sale of the properties or the actual sale price to
be realized from the sale of the properties. However, the appraised value does
represent the appraiser's opinion of the most probable price for which the hotel
properties should sell in a competitive market.
12
PARTNERSHIP DISTRIBUTIONS AND UNIT CONVERSIONS
The Partnership Agreement provides for periodic distribution of distributable
cash flow, as defined, to the partners subject to any applicable restrictions
and the discretion of the General Partner. The Partnership has not made any
distributions since 1990. Prior to making future distributions, the Partnership
will comply will its capital expenditure requirements as specified in its
mortgage loan agreement and maintain sufficient working capital balances. The
Partnership currently has a Minimum Annual Distribution requirement of $2.16 per
Class A Unit. At June 30, 1997, the cumulative unpaid Minimum Annual
Distribution per Class A Unit significantly exceeds the Partnership's net asset
value per unit based on the December 31, 1996 appraised values of the hotel
properties. At this time, it is unlikely that there will be any funds available
for distribution to the Class A Unitholders in 1997.
Beginning in 1997, in accordance with the terms of the Partnership Agreement,
and each year thereafter through 2001, a minimum of 250,000 Class B Units are
required to be converted at a redemption value of $20.00 per Class B Unit, by
issuing Class A Units valued at the current market price of a Class A Unit. As
discussed below in the "Other Matters" section, the Partnership Agreement was
amended to defer the 1997 conversion of Class B Units.
For purposes of calculating the conversion of 250,000 Class B Units during 1997,
the Class A Unit conversion price is $2.75, which was the average closing price
for the five trading days ending on May 30, 1997. The conversion of these Class
B Units would result in the issuance of approximately 1,818,000 Class A Units
and in an approximate 25% dilution to the Class A Unitholders.
Pursuant to the Partnership Agreement, the Class A Units to be issued upon
conversion of the Class B Units must be identical to the Class A Units existing
prior to the conversion date. The General Partner has, on the advice of
counsel, determined that Class B Units convert into identical Class A Units
because there are elective procedures, which are standard practice for publicly-
traded partnerships, that make Class A Units received upon conversion fungible
for tax purposes with all pre-existing Class A Units.
OTHER MATTERS
The Partnership received in December 1996, a written proposal from an affiliate,
Regal Hotel Management, Inc. ("RHM"), to commence discussions with respect to
the possible purchase of all of the Class A and Class B units not currently
owned by RHM or its affiliates (the "Public Units") for $2.35 per Class A Unit
and $16.80 per Class B Unit. The General Partner of the Partnership referred
consideration of RHM's proposal to a Special Committee (the "Special Committee")
comprised of the independent members of the Partnership's Advisory Committee.
After negotiations with the Special Committee, RHM agreed to increase the merger
consideration to $3.10 per Class A Unit and $20.00 per Class B Unit. The
Special Committee determined that such increased merger consideration was fair
to, and in the best interests of, unaffiliated unitholders of the Partnership
and recommended approval of the merger transaction by the Board of Directors of
the Partnership's General Partner. The General Partner's Board of Directors
approved RHM's revised proposal on May 2, 1997.
RHM's proposed acquisition of the Public Units would be made by means of a
merger of a subsidiary limited partnership owned by RHM into the Partnership.
The completion of the merger and the resulting acquisition of interests of
unaffiliated unitholders is subject to the approval of the merger by unitholders
owning a majority interest of the Partnership's units at a special meeting. RHM
and its affiliates own 71% of the Class A Units and 93.6% of the Class B Units.
RHM and its affiliates have agreed to vote in favor of the merger thus assuring
its approval. Although no date has been set for the special meeting, it is
presently expected that the meeting will be held, and the merger will be
consummated, during the third quarter of 1997.
In conjunction with approval of the merger transaction, the General Partner has
amended the Partnership Agreement in order to defer the mandatory conversion of
Class B Units into Class A Units. The amendment provides that the 250,000 Class
B Units scheduled to convert into additional Class A Units during 1997 will
convert on the earliest to occur of (i) any termination of the definitive merger
agreement; (ii) the record date for any vote of the Class A Unitholders, (other
than the vote on merger), (iii) the record date for any distribution by the
Partnership to holders of Class A Units or (iv) September 30, 1997. In 1997, in
accordance with the Partnership Agreement, the number of Class A Units to be
received upon conversion of a Class B Unit will be determined by dividing $20.00
by the average of the closing prices of Class A Units
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for the five trading days ending on May 30, 1997, or $2.75. In light of the
likelihood of completion of the merger, the General Partner adopted this
amendment in order to avoid administrative and other issues arising from the
issuance of additional Class A Units pursuant to the conversion.
RHM has agreed to reimburse the Partnership for costs associated with merger,
upon its consummation. In light of the likely completion of the merger, the
Partnership has recorded a receivable of $343,000 for costs incurred through
June 30, 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share (SFAS No. 128). SFAS
No. 128 establishes standards for computing and presenting earnings per share.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997 and earlier application is not permitted. Had the
Partnership implemented the requirements of SFAS No. 128, basic EPS for the
three months and six months ended June 30, 1997 would have been $0.07 and $0.05,
respectively and diluted EPS for both the three months and six months ended June
30, 1997 would have been $0.05.
PART II. OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
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a) Exhibits
(2.1) Agreement and Plan of Merger dated May 2, 1997 between and
among the Registrant, AIRCOA Hospitality Services, Inc., and Regal
Merger Limited Partnership.
b) Reports on Form 8-K
Form 8-K dated May 8, 1997 - Item 5. Other Events.
SIGNATURES
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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.
AIRCOA HOTEL PARTNERS, L.P.
By: AIRCOA Hospitality Services, Inc.,
General Partner
Date: August 14, 1997 By: /s/ Douglas M. Pasquale
-------------------- -------------------------------
Douglas M. Pasquale
President and Director
(Principal Executive and Financial Officer)
By: /s/ David C. Ridgley
-------------------------------
David C. Ridgley
Senior Vice President
and Chief Accounting Officer (Duly
Authorized Officer)
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