1
Exhibit 1
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
2
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)
3
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
4
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.
5
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.
6
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.
7
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.
8
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.
9
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.
10
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.
11
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.
12
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.
13
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.
14
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.
15
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
======== ======== ========
16
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.
17
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