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
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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
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RED LION INNS LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
Delaware 94-3029959
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4001 Main Street, Vancouver, Washington 98663
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(Address of principal executive offices) (Zip Code)
(360) 696-0001
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(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
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Securities registered pursuant to Section 12(g) of the Act:
None
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(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.
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
PART I
ITEM 1 BUSINESS
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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
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
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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
ITEM 2 PROPERTIES
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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
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3,062
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/(1)/Property subject to full or partial ground lease.
ITEM 3 LEGAL PROCEEDINGS
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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
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There were no matters submitted to a vote of Unitholders during the year ended
December 31, 1996.
5
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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MATTERS
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Red Lion Inns Limited Partnership Units are listed on the American Stock
Exchange under the symbol RED. Per Unit market prices were:
QUARTER ENDED
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MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- --------- ------------- --------------
1996
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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
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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
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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
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$2.20
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1995
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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
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$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
ITEM 6 SELECTED FINANCIAL DATA
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(in thousands, except operating statistics and per Unit amounts)
YEAR ENDED DECEMBER 31,
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1996 1995 1994 1993 1992
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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 2.20 2.20 2.20 2.20 2.20
Unit
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,
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1996 1995 1994 1993 1992
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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
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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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
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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
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,
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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
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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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
INDEX OF EXHIBITS
EXHIBIT
NUMBER
- ------
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.
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.
36
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.
37