1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the transition period from ______ to ______
Commission file number 1-9443
RED LION INNS LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 94-3029959
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
410 North 44th Street, Suite 700, Phoenix, Arizona 85008
(Address of principal executive offices) (Zip Code)
(602) 220-6666
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
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RED LION INNS LIMITED PARTNERSHIP
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Partners' Capital 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
PART II - OTHER INFORMATION
Item 5 Other Information 17
Item 6 Exhibits and Report on Form 8-K 17
SIGNATURES 18
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PART I. FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit amounts)
(UNAUDITED)
JUNE 30, DECEMBER 31,
1997 1996
---- ----
ASSETS
Cash $ 1,229 $ 763
Property and Equipment:
Land 17,705 17,705
Buildings and improvements 167,502 167,502
Furnishings and equipment 60,694 60,694
Construction in progress 1,285 184
--------- ---------
247,186 246,085
Less--accumulated depreciation (86,496) (81,356)
--------- ---------
160,690 164,729
Other Assets 886 984
--------- ---------
Total Assets $ 162,805 $ 166,476
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Accounts payable and accrued expenses $ 8 $ 14
Current portion of long-term payable to affiliate 23,770 20,964
Accrued distributions to partners 2,320 2,329
Interest payable 15 41
Property taxes payable 598 358
Current portion long-term debt 2,750 2,375
--------- ---------
Total current liabilities 29,461 26,081
Long-Term Payable to Affiliate,
net of current portion 4,345 4,345
Long-Term Debt, net of current portion 117,022 121,043
Deferred Income Taxes 2,050 2,050
--------- ---------
Total Liabilities 152,878 153,519
--------- ---------
Commitments and Contingencies (Note 7)
Partners' Capital:
Limited Partners, 4,940,000 units issued 22,789 25,750
Less -- 806,500 treasury units, at cost (11,202) (11,202)
--------- ---------
Limited Partners, net 11,587 14,548
General Partner (1,660) (1,591)
--------- ---------
Total Partners' Capital 9,927 12,957
--------- ---------
Total Liabilities and Partners' Capital $ 162,805 $ 166,476
========= =========
See notes to consolidated financial statements.
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RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit and unit amounts)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
Gross Operating Profit of Hotels $ 11,773 $ 11,777 $ 19,837 $ 19,677
Expenses:
Property taxes 916 902 1,627 1,584
Base management fee 894 882 1,644 1,628
Incentive management fee 1,632 2,707 2,729 2,707
Depreciation 2,569 2,469 5,140 4,887
Other 518 532 971 995
----------- ----------- ----------- -----------
Operating income 5,244 4,285 7,726 7,876
----------- ----------- ----------- -----------
Interest Expense (3,069) (3,061) (6,108) (5,908)
----------- ----------- ----------- -----------
Income before income taxes 2,175 1,224 1,618 1,968
Income Tax Expense -- (148) -- (246)
----------- ----------- ----------- -----------
Net income $ 2,175 $ 1,076 $ 1,618 $ 1,722
=========== =========== =========== ===========
Allocation of Net Income:
General Partner $ 43 $ 21 $ 32 $ 34
=========== =========== =========== ===========
Limited Partners $ 2,132 $ 1,055 $ 1,586 $ 1,688
=========== =========== =========== ===========
Net Income per Limited Partner Unit $ .52 $ .26 $ .38 $ .41
=========== =========== =========== ===========
Average Limited Partner Units Outstanding 4,133,500 4,133,500 4,133,500 4,133,500
=========== =========== =========== ===========
See notes to consolidated financial statements.
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RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(in thousands, except unit amounts)
(unaudited)
LIMITED PARTNERS
--------------------------------------------------
ISSUED UNITS TREASURY UNITS GENERAL
UNITS AMOUNT UNITS AMOUNT PARTNER TOTAL
----- ------ ----- ------ ------- -----
Balances at December 31, 1996 4,940,000 $25,750 (806,500) $(11,202) $(1,591) $12,957
Distributions to partners --- (4,547) --- --- (101) (4,648)
Net income --- 1,586 --- --- 32 1,618
---------- ------- ---------- ---------- ------- -------
Balances at June 30, 1997 4,940,000 $22,789 (806,500) $(11,202) $(1,660) $ 9,927
========= ======= ========== ========== ======== =======
See notes to consolidated financial statements.
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RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
SIX MONTHS ENDED JUNE 30,
1997 1996
---- ----
Cash Flows from Operating Activities:
Net income $ 1,618 $ 1,722
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 5,140 4,887
Amortization of deferred loan costs 217 318
Deferred income taxes -- 246
Increase in other assets (119) --
Increase in payables and accrued expenses 208 558
------- ---------
Net cash provided by operating activities 7,064 7,731
------- ---------
Cash Flows from Investing Activities:
Purchases of property and equipment, net (1,101) (6,964)
------- ---------
Cash Flows from Financing Activities:
Cash distributions to partners (4,657) (4,657)
Advances from (repayments to) affiliate, net 2,806 (1,922)
Payments on long-term debt (1,146) (100,969)
Proceeds from long-term debt -- 119,500
Net repayments under revolving credit facility (2,500) (11,302)
Additions to deferred loan costs -- (1,315)
Net increase in other long-term obligations -- 117
------- ---------
Net cash used in financing activities (5,497) (548)
------- ---------
Net Increase in Cash 466 219
Cash at Beginning of Period 763 229
------- ---------
Cash at End of Period $ 1,229 $ 448
======= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 5,917 $ 5,838
======= =========
See notes to consolidated financial statements.
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RED LION INNS LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Red
Lion Inns Limited Partnership, a Delaware limited partnership (the
"Partnership") and its subsidiary limited partnership, Red Lion Inns Operating
L.P., a Delaware limited partnership (the "Operating Partnership;" collectively,
the "MLP"). The MLP was organized on April 14, 1987 for the purpose of acquiring
and owning, through the Operating Partnership, ten Red Lion hotels (the "Hotels"
or individually, a "Hotel), which continue to be managed under a long-term
management agreement (the "Management Agreement") with Red Lion Hotels, Inc.
(Red Lion), a wholly-owned subsidiary of Doubletree Corporation pursuant to the
November 8, 1996 merger in which Doubletree Corporation acquired 100% of Red
Lion (collectively, "Doubletree"). The Management Agreement expires in 2012 and
can be extended for an additional ten five-year periods. The general partner of
the MLP is Red Lion Properties, Inc. (the "General Partner"), an indirect,
wholly owned subsidiary of Doubletree. As of June 30, 1997 all of the hotels
have been rebranded "Doubletree." All significant intercompany transactions and
accounts have been eliminated.
The preparation of financial statements in accordance with generally accepted
accounting principles requires the General Partner to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities. While the
General Partner endeavors to make accurate estimates, actual results could
differ from estimates.
The unaudited consolidated financial statements reflect, in the opinion of
management, all adjustments, all of which are of a normal recurring nature,
necessary to present fairly the financial position and results of operations and
cash flows for the periods presented. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
related disclosures contained in the MLP's annual report on Form 10-K for the
year ended December 31, 1996, as filed with Securities and Exchange Commission.
The results of operations for the three and six month periods ended June 30,
1997 are not necessarily indicative of results to be expected for a full year.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Gross Operating Profit of Hotels
The gross operating profit of the Hotels reported in the accompanying statements
of operations represents the revenues net of the operating expenses of the
Hotels. Operating revenues and expenses and the current assets and current
liabilities of the Hotels are excluded from the accompanying consolidated
financial statements of the MLP because Doubletree, as manager, not the MLP, has
operating responsibility for the Hotels.
2. INCOME TAXES
THE MLP IS NOT CURRENTLY A TAXABLE ENTITY AND ANY INCOME TAXES ARE THE
RESPONSIBILITY OF THE PARTNERS. ACCORDINGLY, NO CURRENT PROVISION FOR FEDERAL OR
STATE INCOME TAXES HAS BEEN PROVIDED BY THE MLP IN THE ACCOMPANYING CONSOLIDATED
FINANCIAL STATEMENTS.
DURING 1987, CONGRESS PASSED THE OMNIBUS BUDGET RECONCILIATION ACT WHICH
MANDATES THAT THE MLP BECOME SUBJECT TO CORPORATE TAXES ON ITS INCOME BEGINNING
JANUARY 1, 1998. IN ADDITION, DISTRIBUTIONS TO PARTNERS WILL BE CONSIDERED
TAXABLE DIVIDENDS TO EACH UNITHOLDER. DEFERRED INCOME TAXES HAVE BEEN PROVIDED
FOR THE PROJECTED DIFFERENCES BETWEEN THE FINANCIAL ACCOUNTING AND TAX BASES OF
PROPERTY AND EQUIPMENT AT JANUARY 1, 1998.
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IN MAY, 1997, THE GENERAL PARTNER FORMED A SPECIAL COMMITTEE OF TWO INDEPENDENT
DIRECTORS TO EVALUATE ALTERNATIVES AVAILABLE TO THE PARTNERSHIP IN CONNECTION
WITH THE SCHEDULED 1998 CHANGE IN THE MLP'S TAX STATUS. THESE ALTERNATIVES
INCLUDE, AMONG OTHERS, THE SALE OF THE MLP ASSETS EITHER INDIVIDUALLY OR IN
TOTAL, INCORPORATING THE MLP OR CONVERTING OR MERGING THE MLP INTO A REAL ESTATE
INVESTMENT TRUST. AT A BOARD MEETING IN JUNE, 1997, THE SPECIAL COMMITTEE
RECOMMENDED THAT THE ASSETS OR BUSINESS OF THE MLP BE SOLD IN A VALUE MAXIMIZING
TRANSACTION. AT THE SAME MEETING, THE BOARD OF DIRECTORS AUTHORIZED THE SPECIAL
COMMITTEE TO PURSUE SUCH A SALE. THE SPECIAL COMMITTEE HAS ENGAGED ITS OWN
INDEPENDENT LEGAL COUNSEL AND FINANCIAL ADVISORS TO ASSIST IN THIS PROCESS.
CONSUMMATION OF A SALES TRANSACTION WILL BE SUBJECT TO A NUMBER OF CONDITIONS
INCLUDING THE APPROVAL OF THE BOARD OF DIRECTORS AND, IN MOST INSTANCES, THE
UNITHOLDERS OF THE MLP.
IN AUGUST, 1997, CONGRESS PASSED THE TAXPAYER RELIEF ACT OF 1997. THE TAXPAYER
RELIEF ACT OF 1997 PROVIDES AN EXCEPTION TO THE RULE DESCRIBED ABOVE IN THAT THE
PARTNERSHIP MAY ELECT TO CONTINUE TO BE TREATED AS A PARTNERSHIP FOR FEDERAL
INCOME TAX PURPOSES AND NOT BE SUBJECT TO CORPORATE INCOME TAXES. HOWEVER, IF
THIS ELECTION IS MADE THE PARTNERSHIP WILL BE SUBJECT TO A FEDERAL TAX EQUAL TO
3.5% OF ITS GROSS INCOME. UNDER THIS ELECTION, DISTRIBUTIONS PAID TO THE
PARTNERS SHOULD CONTINUE TO BE NON-TAXABLE DISTRIBUTIONS. THE ELECTION APPLIES
TO TAXABLE YEARS AFTER 1997 AND CAN LATER BE REVOKED. ONCE REVOKED IT CANNOT BE
REINSTATED. THE SPECIAL COMMITTEE IS EVALUATING THE IMPACT OF THE TAXPAYER
RELIEF ACT OF 1997 AND THE ELECTION MADE AVAILABLE BY THE ACT.
THERE CAN BE NO ASSURANCE THAT A SALE OF THE ASSETS OR BUSINESS OF THE MLP WILL
OCCUR. IN THE EVENT SUCH A SALE DOES NOT OCCUR BEFORE JANUARY 1, 1998, THE
PAYMENT OF FEDERAL TAXES BY THE MLP ON EITHER PARTNERSHIP INCOME OR GROSS INCOME
WILL DIRECTLY REDUCE CASH AVAILABLE FOR PARTNER DISTRIBUTIONS.
3. LONG-TERM DEBT
During April 1996, the Operating 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) and loan fees incurred to consummate the financing. Borrowings
under the facility bear interest at the London Interbank Offering Rate ("LIBOR")
plus 2.25% (8.0% at June 30, 1997) and are secured by all of the assets of the
Hotels. At June 30, 1997, the balance outstanding under the revolving credit
line was $2.0 million which is due and payable on March 31, 1999. The remaining
principal payments due on the three-year term loan totaled $1.3 million and $3.2
million for 1997 and 1998, respectively, with a lump-sum payment of $112.9
million due on March 31, 1999. Long-term debt also includes approximately
$400,000 in other long-term obligations related to special tax assessments that
the Partnership has elected to pay out over a 20-year period. These long-term
obligations have varying maturity dates ranging from August 2009 to June 2016.
Interest Rate Swap Agreements
At June 30, 1997, 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 three and six
month periods ended June 30, 1997, was approximately $111,000 and $261,000
respectively, and is included in interest expense.
4. MANAGEMENT FEES
In accordance with the Management Agreement, the Partnership pays base and
incentive management fees to Doubletree. Base management fees payable are equal
to 3% of the annual gross revenues of the Hotels. Incentive management fees
payable are equal to the sum of 15% of annual adjusted gross operating profit up
to $36 million (operating profit target) and 25% of annual adjusted gross
operating profit in excess of the operating profit target. Adjusted gross
operating profit is calculated by subtracting the base management fee expense
from the gross operating profit of Hotels as shown in the accompanying
consolidated financial statements. The Partnership may defer payment of the
incentive fees to Doubletree to the extent that the calculation of Cash Flow for
Incentive Fees, as defined in the Management Agreement, on an annual basis, does
not exceed $2.20 per unit ("Priority Return"). Currently, the incentive
management fee is accrued at 15% of the quarter's adjusted gross operating
profit regardless
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of whether cash flow is adequate to pay the incentive management fee on an
interim basis, if cash flow is expected to be available for payment of the
incentive management fee on an annual basis.
5. CASH DISTRIBUTIONS TO PARTNERS
In accordance with the Partnership's Amended and Restated Agreement of Limited
Partnership, cash distributions to partners may be made from Cash Flow Available
for Distribution, as defined. As discussed in Note 4, the incentive management
fee is payable only to the extent that Cash Flow for Incentive Fees exceeds the
Priority Return.
The following table calculates Cash Flow available for distribution and
incentive management fees ("Cash Flow") for the three and six-month periods
ended June 30 1996 and 1997. Cash Flow is defined as pre-tax income (or loss)
before noncash charges (primarily depreciation and amortization) and incentive
management fees, but after the reserve for capital improvements and principal
payments on certain debt.
(In thousands except per unit amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
Net income $ 2,175 $ 1,076 $ 1,618 $ 1,722
Add (deduct):
Depreciation and amortization 2,569 2,469 5,140 4,887
Incentive management fee 1,632 2,707 2,729 2,707
Amortization of deferred loan costs 108 112 217 318
Cash reserved for capital improvements (894) (882) (1,644) (1,628)
Repayments on term loan (625) (634) (1,125) (1,031)
Deferred income tax provision -- 148 -- 246
----------- ----------- ----------- -----------
Cash Flow available for payment of Priority
Return and current incentive management
fees 4,965 4,996 6,935 7,221
Less: Priority Return (2,320) (2,328) (4,648) (4,657)
----------- ----------- ----------- -----------
Cash Flow available for payment of
incentive management fees 2,645 2,668 2,287 2,564
Less: Current incentive management fee (1,632) (2,707) (2,729) (2,707)
----------- ----------- ----------- -----------
Excess (negative) cash flow $ 1,013 $ (39) $ (442) $ (143)
=========== =========== =========== ===========
Cash Flow per unit $ 1.17 $ 1.18 $ 1.64 $ 1.71
=========== =========== =========== ===========
Average Limited Partner Units Outstanding 4,133,500 4,133,500 4,133,500 4,133,500
=========== =========== =========== ===========
The incentive management fee that is earned but not paid on an annual basis due
to insufficient Cash Flow, is deferred without interest up to a maximum of $6
million. The deferred amount is to be paid out of either (i) 25% of cash flow in
excess of the Priority Return and the current incentive management fee or (ii)
sale or refinancing proceeds prior to any distribution to the limited partners.
Beginning January 1, 1998, federal tax law mandates that the MLP become subject
to Corporate taxes on its income or, at its election, remain a Partners
hip for tax purposes and pay a gross income tax. The MLP is not currently a
taxable entity. The payment of such federal taxes by the MLP will directly
reduce cash available for partner distributions. If the Partnership elects to
pay Corporate income taxes, distributions to partners after December 31, 1997
will be considered taxable dividends. Although the MLP has historically
distributed the Priority Return to limited partners, there is no assurance
this will continue after December 31, 1997. In addition, the Priority Return
can be used to repay certain indebtedness owed to Doubletree or to fund
capital improvements, also reducing cash flow available for distribution to
limited partners.
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6. RELATED PARTY TRANSACTIONS
The General Partner is responsible for the management and administration of the
MLP. In accordance with the MLP's Amended and Restated Agreements of Limited
Partnership, the MLP reimburses the General Partner for related administrative
costs. Under the Management Agreement, the MLP pays base and incentive
management fees to Doubletree.
The Hotels, in accordance with the Management Agreement, are also charged by
Doubletree for their pro rata share of support services such as computer,
advertising, public relations, promotional and sales and central reservation
services.
All MLP personnel are employees of Doubletree and its affiliates. All costs for
services of such employees are reimbursed to Doubletree by the Operating
Partnership. These costs include salaries, wages, payroll taxes and other
employee benefits. Additionally, auxiliary enterprises owned by Doubletree or
its affiliates sell operating supplies, furnishings and equipment to the
Partnership.
Amounts payable to affiliate consists of the following (in thousands):
JUNE 30, DECEMBER 31,
1997 1996
---- ----
Advances from Doubletree $23,770 $20,883
General Partner Credit Facility 3,726 3,726
Deferred Incentive Management Fees 619 700
------- -------
28,115 25,309
Less: current portion (23,770) (20,964)
------- -------
Long-term portion $4,345 $4,345
====== ======
Advances from Doubletree consist primarily of funds advanced for capital
improvements in excess of the reserve equal to 3% of revenues required by the
provisions of the Management Agreement and incentive management fees earned but
unpaid in the current year, net of the working capital of the Hotels ($4.2
million and $3.2 million at June 30, 1997 and December 31,1996, respectively).
Amounts advanced bear interest at the prime rate plus 0.5% (9.0% at June 30,
1997). The working capital of the Hotels consists of the current assets and
current liabilities of the Hotels, including cash held in hotel accounts,
accounts receivable, inventories, prepaid expenses, hotel accounts payable and
certain taxes other than property, income and payroll taxes. Since Doubletree
has operating responsibilities associated with the Hotels, these current asset
and current liability items are excluded from the accompanying consolidated
financial statements and are assumed to be liquidated into cash and used to pay
down the payable to affiliate from $32.3 million to $28.1 million at June 30,
1997.
During the first 36 months of operation, which ended April 30, 1990, the General
Partner advanced on a non-interest basis amounts under the General Partner
Credit Facility to fund distributions of the Priority Return. The Partnership
anticipates this amount will be repaid out of either (i) cash flow after payment
of the Priority Return and incentive management fees, or (ii) sale or
refinancing proceeds prior to any distribution to limited partners. Accordingly,
the credit facility is classified as long-term.
Deferred incentive management fees payable are non-interest bearing and are
payable from either (i) 25% of cash flow in excess of the Priority Return and
the current incentive management fee or (ii) sale or refinancing proceeds. At
June 30, 1997 all of this balance is classified as long-term.
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The following schedule reflects the operating revenues and expenses of the
Hotels not reflected in the accompanying consolidated financial statements (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -----------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rooms $18,304 $17,957 $32,912 $31,910
Food and beverage 8,355 8,356 16,023 16,531
Other 3,131 3,092 5,840 5,832
------- ------- ------- -------
Total revenues 29,790 29,405 54,775 54,273
------- ------- ------- -------
Departmental direct expenses:
Rooms 4,465 4,222 8,554 8,130
Food and beverage 6,641 6,742 13,051 13,250
Other 1,033 1,117 1,988 2,148
------- ------- ------- -------
Total departmental direct expenses 12,139 12,081 23,593 23,528
------- ------- ------- -------
Hotel indirect expenses:
Administration and general 2,382 2,305 4,634 4,580
Sales, promotion and advertising 1,621 1,408 3,003 2,775
Utilities 779 829 1,595 1,659
Repairs and maintenance 1,096 1,005 2,113 2,054
------- ------- ------- -------
Total hotel indirect expenses 5,878 5,547 11,345 11,068
------- ------- ------- -------
Gross operating profit of hotels $11,773 $11,777 $19,837 $19,677
======= ======= ======= =======
7. COMMITMENTS AND CONTINGENCIES
At June 30, 1997, the Partnership had commitments relating to capital
improvement projects of approximately $4.1 million.
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 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE MLP IS NOT CURRENTLY A TAXABLE ENTITY AND ANY INCOME TAXES ARE
THE RESPONSIBILITY OF THE PARTNERS. ACCORDINGLY, NO CURRENT PROVISION FOR
FEDERAL OR STATE INCOME TAXES HAS BEEN PROVIDED BY THE MLP IN THE ACCOMPANYING
CONSOLIDATED FINANCIAL STATEMENTS.
DURING 1987, CONGRESS PASSED THE OMNIBUS BUDGET RECONCILIATION ACT WHICH
MANDATES THAT THE MLP BECOME SUBJECT TO CORPORATE TAXES ON ITS INCOME BEGINNING
JANUARY 1, 1998. IN ADDITION, DISTRIBUTIONS TO PARTNERS WILL BE CONSIDERED
TAXABLE DIVIDENDS TO EACH UNITHOLDER. DEFERRED INCOME TAXES HAVE BEEN PROVIDED
FOR THE PROJECTED DIFFERENCES BETWEEN THE FINANCIAL ACCOUNTING AND TAX BASES OF
PROPERTY AND EQUIPMENT AT JANUARY 1, 1998.
IN MAY, 1997, THE GENERAL PARTNER FORMED A SPECIAL COMMITTEE OF TWO INDEPENDENT
DIRECTORS TO EVALUATE ALTERNATIVES AVAILABLE TO THE PARTNERSHIP IN CONNECTION
WITH THE SCHEDULED 1998 CHANGE IN THE MLP'S TAX STATUS. THESE ALTERNATIVES
INCLUDE, AMONG OTHERS, THE SALE OF THE MLP ASSETS EITHER INDIVIDUALLY OR IN
TOTAL, INCORPORATING THE MLP OR CONVERTING OR MERGING THE MLP INTO A REAL ESTATE
INVESTMENT TRUST. AT A BOARD MEETING IN JUNE, 1997, THE SPECIAL COMMITTEE
RECOMMENDED THAT THE ASSETS OR BUSINESS OF THE MLP BE SOLD IN A VALUE MAXIMIZING
TRANSACTION. AT THE SAME MEETING, THE BOARD OF DIRECTORS AUTHORIZED THE SPECIAL
COMMITTEE TO PURSUE SUCH A SALE. THE SPECIAL COMMITTEE HAS ENGAGED ITS OWN
INDEPENDENT LEGAL COUNSEL AND FINANCIAL ADVISORS TO ASSIST IN THIS PROCESS.
CONSUMMATION OF A SALES TRANSACTION WILL BE SUBJECT TO A NUMBER OF CONDITIONS
INCLUDING THE APPROVAL OF THE BOARD OF DIRECTORS AND, IN MOST INSTANCES, THE
UNITHOLDERS OF THE MLP.
IN AUGUST, 1997, CONGRESS PASSED THE TAXPAYER RELIEF ACT OF 1997. THE TAXPAYER
RELIEF ACT OF 1997 PROVIDES AN EXCEPTION TO THE RULE DESCRIBED ABOVE IN THAT THE
PARTNERSHIP MAY ELECT TO CONTINUE TO BE TREATED AS A PARTNERSHIP FOR FEDERAL
INCOME TAX PURPOSES AND NOT BE SUBJECT TO CORPORATE INCOME TAXES. HOWEVER, IF
THIS ELECTION IS MADE THE PARTNERSHIP WILL BE SUBJECT TO A FEDERAL TAX EQUAL TO
3.5% OF ITS GROSS INCOME. UNDER THIS ELECTION, DISTRIBUTIONS PAID TO THE
PARTNERS SHOULD CONTINUE TO BE NON-TAXABLE DISTRIBUTIONS. THE ELECTION APPLIES
TO TAXABLE YEARS AFTER 1997 AND CAN LATER BE REVOKED. ONCE REVOKED IT CANNOT BE
REINSTATED. THE SPECIAL COMMITTEE IS EVALUATING THE IMPACT OF THE TAXPAYER
RELIEF ACT OF 1997 AND THE ELECTION MADE AVAILABLE BY THE ACT.
THERE CAN BE NO ASSURANCE THAT A SALE OF THE ASSETS OR BUSINESS OF THE MLP WILL
OCCUR. IN THE EVENT SUCH A SALE DOES NOT OCCUR BEFORE JANUARY 1, 1998, THE
PAYMENT OF FEDERAL TAXES BY THE MLP ON EITHER PARTNERSHIP INCOME OR GROSS INCOME
WILL DIRECTLY REDUCE CASH AVAILABLE FOR PARTNER DISTRIBUTIONS.
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RESULTS OF OPERATIONS
Gross Operating Profit of the Hotels consists of the following (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
Rooms profit $13,839 $13,735 $24,358 $23,780
Food and beverage profit 1,714 1,614 2,972 3,281
Other profit 2,098 1,975 3,852 3,684
------- ------- ------- -------
Departmental profit 17,651 17,324 31,182 30,745
------- ------- ------- -------
Hotel indirect expenses:
Administrative and general 2,382 2,305 4,634 4,580
Sales, promotion and advertising 1,621 1,408 3,003 2,775
Utilities 779 829 1,595 1,659
Repairs and maintenance 1,096 1,005 2,113 2,054
------- ------- ------- -------
Total Hotel indirect expenses 5,878 5,547 11,345 11,068
------- ------- ------- -------
Gross Operating Profit of Hotels $11,773 $11,777 $19,837 $19,677
======= ======= ======= =======
A summary of occupancy and room rates for the Hotels follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
Occupancy percentage 76.8% 77.9% 71.3% 71.8%
Average room rate $85.53 $82.71 $83.28 $79.74
REVPAR $65.69 $64.44 $59.38 $57.26
Three Months Ended June 30, 1997 Compared with Three Months Ended June 30, 1996
Rooms profit increased by approximately $100,000 or 1% to $13.8 million for the
three months ended June 30, 1997 compared to $13.7 million for the three months
ended June 30, 1996. This increase is the result of an increase in rooms revenue
of approximately $300,000, offset by an increase in rooms expense of
approximately $200,000. The revenue increase generated a $1.25 (1.9%) REVPAR
increase.
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Food and beverage profit increased approximately $100,000 to $1.7 million for
the three months ended June 30, 1997 compared to the same period in 1996. The
increase in the food and beverage profit resulted from tighter controls over
costs, as revenues remained flat ($8.4 million for the three months ended June
30, 1997 and 1996, respectively).
Hotel indirect expenses increased approximately $300,000 or 6% in the three
months ended June 30, 1997 compared to the three months ended June 30, 1996.
This increase is due primarily to an increase in sales, promotion and
advertising expense of $200,000 (15%). The Hotels were converted from the "Red
Lion" brand to the "Doubletree" brand on June 9, 1997. The Hotels incurred
approximately $150,000 in conversion costs including one-time charges for
corporate advertising, public relations, in-house promotions and miscellaneous
conversion costs incurred by the Hotels. The classification of central
reservations and marketing charges by Doubletree differs from the Red Lion
classification, in that a greater portion of these charges is included in sales,
promotion and advertising expense, and a smaller portion of these charges is
reflected in rooms expense. In total, these charges are comparable between
periods. The remaining increase in sales, promotion and advertising expense
relates to this reclassification. The balance of the increase in Hotel indirect
expenses relates to increases in both administrative and general and repairs and
maintenance expense, offset by a slight decrease in utilities expense.
Operating income increased to $5.2 million for the three months ended June 30,
1997 from $4.3 million in the comparable three months ended June 30, 1996, an
increase of 22%. As a percentage of gross operating profit of Hotels, operating
income increased to 45% for the three months ended June 30, 1997 as compared to
36% for the three months ended June 30, 1996. The increase in operating income
is primarily a result of the lower incentive management fee recorded in the
second quarter of 1997 versus the corresponding quarter in 1996. Depreciation
expense increased approximately $100,000 due to assets placed in service in late
1996 and early 1997, after significant renovations at four hotels.
During the three months ended June 30, 1997 and 1996, the Partnership recognized
$1.6 million and $2.7 million, respectively, of incentive management fees to be
paid to Doubletree. Beginning in the second quarter of 1996 the incentive
management fee is accrued at 15% of the current quarter's adjusted gross
operating profit. Previously, the Partnership recognized the incentive
management fee only to the extent that actual year-to-date cash flow was
available for its payment. Accordingly, the incentive management fee recorded in
the second quarter of 1996 equaled 15% of the year to date adjusted gross
operating profit, while the incentive management fee recorded during the second
quarter of 1997 is only the fee due for the second quarter. The Partnership
believes the current method of accounting for the incentive management fee
produces a better matching of the expenses to revenues within interim periods
and will not impact the accounting for such fee on an annual basis. The current
incentive management fee is payable only to the extent there is cash flow
available for its payment.
Interest expense was constant at $3.1 million for the three months ended June
30, 1997 and June 30, 1996, respectively.
During the three months ended June 30, 1996, the Partnership provided for
deferred income tax of approximately $150,000. During the three months ended
June 30, 1997, no deferred income tax provision was necessary. 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 or
at the Partnership's election, pay federal tax equal to 3.5% of its gross
income. Deferred income tax arises primarily from differences in depreciation
for financial accounting and tax purposes that are expected to exist at January
1, 1998.
During the three months ended June 30, 1997, net income was $2.2 million ($.52
per limited partner unit) compared to net income of $1.1 million ($0.26 per
limited partner unit) for the comparable three months ended June 30, 1996. The
increase in net income is due primarily to the lower incentive management fee
recorded in the second quarter of 1997 versus the second quarter of 1996.
Cash Flow Available for Distribution and Incentive Management Fees for the three
months ended June 30, 1997 was approximately $4.9 million ($1.17 per limited
partner unit) compared to the three months ended June 30, 1996 of approximately
$5.0 million ($1.18 per limited partner unit).
Once the Partnership becomes subject to federal taxes beginning January 1, 1998,
the payment of federal taxes on
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either Partnership income or gross income will directly reduce cash available
for partner distribution. If the Partnership elects to pay corporate federal
taxes, distributions to partners after December 31, 1997 will be considered
taxable dividends.
Six Months Ended June 30, 1997 Compared with Six Months Ended June 30, 1996
Rooms profit increased approximately $600,000 or 2% to $24.4 million for the
six months ended June 30, 1997 compared to $23.8 million for the six months
ended June 30, 1996. This increase is the result of an increase in rooms revenue
of approximately $1 million, offset by an increase in rooms expense of
approximately $400,000. The revenue increase was generated by a $2.12 (3.7%)
REVPAR increase.
Food and beverage profit decreased approximately $300,000 or 9% to $3.0 million
for the six months ended June 30, 1997 compared to the same period in 1996. Food
and beverage revenues decreased $500,000 or 3% from $16.5 million in the six
months ended June 30, 1996 to $16.0 million in the six months ended June 30,
1997. Food and beverage expenses also decreased, to a lesser extent, by
approximately $200,000 (2%). The decrease in food and beverage revenues is due
principally to additional group banquet revenue realized by two Hotels during
the first half of 1996. Two Hotels located in northwestern Oregon benefited from
additional catering and group banquet business as a result of the flooding in
the Pacific Northwest during 1996. These Hotels received the displaced business
from hotels located in the flood areas.
Hotel indirect expenses increased by approximately $300,000 or 3% in the six
months ended June 30, 1997 compared to the six months ended June 30, 1996. This
increase is due primarily to an increase in sales, promotion and advertising
expense of $200,000 (8%). The Hotels were converted from the "Red Lion" brand to
the "Doubletree" brand on June 9, 1997. The Hotels incurred approximately
$150,000 in conversion costs including one-time charges for corporate
advertising, public relations, in-house promotions and miscellaneous conversion
costs incurred by the Hotels. The classification of central reservations and
marketing charges by Doubletree differs from the Red Lion classification, in
that a greater portion of these charges is included in sales, promotion and
advertising expense, and a smaller portion of these charges is reflected in
rooms expense. In total, these charges are comparable between periods. The
remaining increase in sales, promotion and advertising expense relates to this
reclassification. The balance of the increase in Hotel indirect expenses relates
to increases in both administrative and general and repairs and maintenance
expense, offset by a slight decrease in utilities expense.
Operating income decreased from $7.9 million for the six months ended June 30,
1996 to $7.7 million for the six months ended June 30, 1997, a decrease of 2%.
As a percentage of Partnership revenues, operating income declined to 39% for
the six months ended June 30, 1997 from 40% for the six months ended June 30,
1996. The decrease in operating income is primarily the result of higher
depreciation expense due to assets placed in service in late 1996 and early
1997, after significant renovations at four hotels.
The Partnership recognized $2.7 million in each of the six month periods ended
June 30, 1997 and 1996, respectively, of incentive management fees payable to
Red Lion. The current incentive management fee is payable only to the extent
there is cash flow available for its payment.
Interest expense increased $200,000 to $6.1 million in the six months ended June
30, 1997 as compared to $5.9 million for the six months ended June 30, 1997. The
additional expense is due primarily to higher average debt levels and interest
rate swap adjustments.
During the six months ended June 30, 1996, the Partnership provided for deferred
income taxes of approximately $250,000. During the six months ended June 30,
1997, no deferred income tax provision was necessary. 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 or at the
Partnership's election, pay federal taxes equal to 3.5% of its gross income.
Deferred income tax arises primarily from differences in depreciation for
financial accounting and tax purposes that are expected to exist at January 1,
1998.
During the six months ended June 30, 1997, net income was $1.6 million ($.38 per
limited partner unit) compared to $1.7 million ($0.41 per limited partner unit)
for the comparable six months ended June 30, 1996. The decrease in net income is
due primarily to higher Partnership operating costs and expenses and interest
expense recorded in the six months ended June 30, 1997 versus the comparable
period in 1996.
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Cash Flow Available for Distribution and Incentive Management Fees (Cash Flow)
for the six months ended June 30, 1997 was approximately $6.9 million ($1.64 per
limited partner unit) compared to $7.2 million ($1.71 per limited partner unit)
during the comparable prior period. The decrease in Cash Flow is due to the
decline in net income and higher depreciation and amortization expense discussed
above.
Once the Partnership become subject to federal taxes beginning January 1, 1998,
the payment of federal taxes on either Partnership income or gross income will
directly reduce cash available for partner distribution. If the Partnership
elects to pay corporate federal taxes, distributions to partners after December
31, 1997 will be considered taxable dividends.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's principal source of cash is from Hotel operations. During the
three months ended June 30, 1997, 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
or from Doubletree 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 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. Remaining principal payments on the three-year term loan
amount to $1.3 million and $3.2 million for 1997 and 1998, respectively, with a
lump-sum payment of $112.9 million due on March 31, 1999.
Borrowings under the revolving credit line, after repayments of $2.5 million in
the first half of 1997, were reduced to $2.0 million at June 30, 1997.
Outstanding borrowings are due and payable in March, 1999.
During the six months ended June 30, 1997, the Partnership made capital
improvements amounting to approximately $1.1 million. These capital improvements
were funded from the current year's reserve of approximately $1.6 million.
Pursuant to provisions of the Management Agreement, 3% of gross revenues is
required to be set aside annually for capital improvements. The General Partner
does not expect capital expenditures to exceed the 3% reserve during 1997.
The Partnership borrowed an additional $2.8 million, net of changes in working
capital of the Hotels, from Doubletree during the six months ended June 30,
1997.
On July 21, 1997, the General Partner declared a quarterly cash distribution of
$0.55 per limited partner unit ($2.20 annualized) for the current quarter,
payable on August 14, 1997 to unitholders of record on July 30, 1997. This
distribution has been accrued in the accompanying consolidated financial
statements.
THE MLP IS NOT CURRENTLY A TAXABLE ENTITY AND ANY INCOME TAXES ARE THE
RESPONSIBILITY OF THE PARTNERS. ACCORDINGLY, NO CURRENT PROVISION FOR FEDERAL OR
STATE INCOME TAXES HAS BEEN PROVIDED BY THE MLP IN THE ACCOMPANYING CONSOLIDATED
FINANCIAL STATEMENTS.
DURING 1987, CONGRESS PASSED THE OMNIBUS BUDGET RECONCILIATION ACT WHICH
MANDATES THAT THE MLP BECOME SUBJECT TO CORPORATE TAXES ON ITS INCOME BEGINNING
JANUARY 1, 1998. IN ADDITION, DISTRIBUTIONS TO PARTNERS WILL BE CONSIDERED
TAXABLE DIVIDENDS TO EACH UNITHOLDER. DEFERRED INCOME TAXES HAVE BEEN PROVIDED
FOR THE PROJECTED DIFFERENCES BETWEEN THE FINANCIAL ACCOUNTING AND TAX BASES OF
PROPERTY AND EQUIPMENT AT JANUARY 1, 1998.
IN MAY, 1997, THE GENERAL PARTNER FORMED A SPECIAL COMMITTEE OF TWO INDEPENDENT
DIRECTORS TO EVALUATE ALTERNATIVES AVAILABLE TO THE PARTNERSHIP IN CONNECTION
WITH THE SCHEDULED 1998 CHANGE IN THE MLP'S TAX STATUS. THESE ALTERNATIVES
INCLUDE, AMONG OTHERS, THE SALE OF THE MLP ASSETS EITHER INDIVIDUALLY OR IN
TOTAL, INCORPORATING THE MLP OR CONVERTING OR MERGING THE MLP INTO A REAL ESTATE
INVESTMENT TRUST. AT A BOARD MEETING IN JUNE, 1997, THE SPECIAL COMMITTEE
RECOMMENDED THAT THE ASSETS OR BUSINESS OF THE MLP BE SOLD IN A VALUE MAXIMIZING
TRANSACTION. AT THE SAME MEETING, THE BOARD OF DIRECTORS AUTHORIZED THE SPECIAL
COMMITTEE TO PURSUE SUCH A SALE. THE SPECIAL COMMITTEE HAS ENGAGED ITS OWN
INDEPENDENT LEGAL COUNSEL AND FINANCIAL ADVISORS TO ASSIST IN THIS PROCESS.
CONSUMMATION OF A SALES TRANSACTION WILL BE SUBJECT TO A NUMBER OF CONDITIONS
INCLUDING THE APPROVAL OF THE BOARD OF DIRECTORS AND, IN MOST INSTANCES, THE
UNITHOLDERS OF THE MLP.
IN AUGUST, 1997, CONGRESS PASSED THE TAXPAYER RELIEF ACT OF 1997. THE TAXPAYER
RELIEF ACT OF 1997 PROVIDES AN EXCEPTION TO THE RULE DESCRIBED ABOVE IN THAT THE
PARTNERSHIP MAY ELECT TO CONTINUE TO BE TREATED AS A PARTNERSHIP FOR FEDERAL
INCOME TAX PURPOSES AND NOT BE SUBJECT TO CORPORATE INCOME TAXES. HOWEVER, IF
THIS ELECTION IS MADE THE PARTNERSHIP WILL BE SUBJECT TO A FEDERAL TAX EQUAL TO
3.5% OF ITS GROSS INCOME. UNDER THIS ELECTION, DISTRIBUTIONS PAID TO THE
PARTNERS SHOULD CONTINUE TO BE NON-TAXABLE DISTRIBUTIONS. THE ELECTION APPLIES
TO TAXABLE YEARS AFTER 1997 AND CAN LATER BE REVOKED. ONCE REVOKED IT CANNOT BE
REINSTATED. THE SPECIAL COMMITTEE IS EVALUATING THE IMPACT OF THE TAXPAYER
RELIEF ACT OF 1997 AND THE ELECTION MADE AVAILABLE BY THE ACT.
THERE CAN BE NO ASSURANCE THAT A SALE OF THE ASSETS OR BUSINESS OF THE MLP WILL
OCCUR. IN THE EVENT SUCH A SALE DOES NOT OCCUR BEFORE JANUARY 1, 1998, THE
PAYMENT OF FEDERAL TAXES BY THE MLP ON EITHER PARTNERSHIP INCOME OR GROSS INCOME
WILL DIRECTLY REDUCE CASH AVAILABLE FOR PARTNER DISTRIBUTIONS.
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**************
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.
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PART II
ITEM 5 OTHER INFORMATION
On May 1, 1997, the Board of Directors of the General Partner expanded the size
of the board from four to six members and appointed two independent directors to
fill the newly-created vacancies. The two new directors are Mr. Robert M. Melzer
and Mr. Joseph E. Maroun. Messrs. Melzer and Maroun comprise the special
committee formed to evaluate alternatives available to the Partnership in
connection with the scheduled 1998 change in the Partnership's tax status.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBIT: The following document is filed herewith and made a part of this
report:
Exhibit 27 Financial Data Schedule
(B) REPORT ON FORM 8-K: None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RED LION INNS LIMITED PARTNERSHIP
By: RED LION PROPERTIES, INC.,
a Delaware corporation,
General Partner
Date: August 14, 1997 By: /s/William L. Perocchi
----------------------
William L. Perocchi
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
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INDEX OF EXHIBITS
EXHIBIT
NUMBER
- ------
27 Financial Data Schedule
19