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 September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the transition period from ______ to _____
Commission file number 1-9443
RED LION INNS LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Delaware 94-3029959
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
410 North 44th Street, Suite 700, Phoenix, Arizona 85008
(Address of principal executive offices) (Zip Code)
(602) 220-6666
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
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RED LION INNS LIMITED PARTNERSHIP
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 1997 and 1996 4
Consolidated Statements of Partners' Capital for the nine months
ended September 30, 1997 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 13
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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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)
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
ASSETS
Cash and cash equivalents $ 686 $ 763
Property and Equipment:
Land 17,705 17,705
Buildings and improvements 168,011 167,502
Furnishings and equipment 61,193 60,694
Construction in progress 891 184
--------- ---------
247,800 246,085
Less--accumulated depreciation (89,023) (81,356)
--------- ---------
158,777 164,729
Other Assets 959 984
--------- ---------
Total Assets $ 160,422 $ 166,476
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Accounts payable and accrued expenses $ 7 $ 14
Current portion of long-term payable to affiliate 18,607 20,964
Accrued distributions to partners 2,320 2,329
Interest payable -- 41
Property taxes payable 1,392 358
Current portion long-term debt 3,018 2,375
--------- ---------
Total current liabilities 25,344 26,081
Long-Term Payable to Affiliate,
net of current portion 4,345 4,345
Long-Term Debt, net of current portion 118,631 121,043
Deferred Income Taxes 2,050 2,050
--------- ---------
Total Liabilities 150,370 153,519
--------- ---------
Commitments and Contingencies (Note 7)
Partners' Capital:
Limited Partners, 4,940,000 units issued 22,912 25,750
Less -- 806,500 treasury units, at cost (11,202) (11,202)
--------- ---------
Limited Partners, net 11,710 14,548
General Partner (1,658) (1,591)
--------- ---------
Total Partners' Capital 10,052 12,957
--------- ---------
Total Liabilities and Partners' Capital $ 160,422 $ 166,476
========= =========
See notes to consolidated financial statements.
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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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1997 1996 1997 1996
---- ---- ---- ----
Gross Operating Profit of Hotels $ 11,866 $ 12,088 $ 31,703 $ 31,765
Expenses:
Property taxes 788 692 2,415 2,276
Base management fee 887 891 2,530 2,519
Incentive management fee 1,647 1,680 4,376 4,387
Depreciation 2,527 2,568 7,667 7,455
Other 439 642 1,410 1,637
----------- ----------- ----------- -----------
Operating income 5,578 5,615 13,305 13,491
Interest Expense (3,134) (3,100) (9,242) (9,008)
----------- ----------- ----------- -----------
Income before income taxes 2,444 2,515 4,063 4,483
Income Tax Expense -- (91) -- (337)
----------- ----------- ----------- -----------
Net income $ 2,444 $ 2,424 $ 4,063 $ 4,146
=========== =========== =========== ===========
Allocation of Net Income:
General Partner $ 49 $ 48 $ 81 $ 83
=========== =========== =========== ===========
Limited Partners $ 2,395 $ 2,376 $ 3,982 $ 4,063
=========== =========== =========== ===========
Net Income per Limited Partner Unit $ .58 $ .57 $ .96 $ .98
=========== =========== =========== ===========
Average Limited Partner Units Outstanding 4,133,500 4,133,500 4,133,500 4,133,500
=========== =========== =========== ===========
See notes to consolidated financial statements.
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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 --- (6,820) --- --- (148) (6,968)
Net income --- 3,982 --- --- 81 4,063
---------- ------------ ---------- ---------- ----------- ---------
Balances at September 30, 1997 4,940,000 $ 22,912 (806,500) $(11,202) $ (1,658) $ 10,052
========= ============ ========== ========= =========== =========
See notes to consolidated financial statements.
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RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1997 1996
---- ----
Cash Flows from Operating Activities:
Net income $ 4,063 $ 4,146
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,667 7,455
Amortization of deferred loan costs 327 428
Deferred income taxes -- 337
Increase in other assets (302) --
Increase in payables and accrued expenses 986 26
--------- ---------
Net cash provided by operating activities 12,741 12,392
--------- ---------
Cash Flows from Investing Activities:
Purchases of property and equipment, net (1,715) (8,050)
--------- ---------
Cash Flows from Financing Activities:
Cash distributions to partners (6,977) (6,986)
Repayments of advances from affiliate, net (2,357) (4,702)
Payments on long-term debt (1,769) (101,969)
Proceeds from long-term debt -- 120,000
Net repayments under revolving credit facility -- (8,302)
Additions to deferred loan costs -- (1,311)
Net increase in other long-term obligations -- 104
--------- ---------
Net cash used in financing activities (11,103) (3,166)
--------- ---------
Net increase (decrease) in cash (77) 1,176
Cash and Cash Equivalents at Beginning of Period 763 229
--------- ---------
Cash and Cash Equivalents at End of Period $ 686 $ 1,405
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 8,956 $ 9,309
========= =========
See notes to consolidated financial statements.
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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 September 30, 1997 all of the
hotels have been rebranded "Doubletree." All significant intercompany
transactions and accounts have been eliminated.
The preparation of financial statements in accordance with generally accepted
accounting principles requires the General Partner to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities. While the
General Partner endeavors to make accurate estimates, actual results could
differ from estimates.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments, primarily eliminations of all significant intercompany transactions
and accounts) necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the related disclosures contained in the MLP's annual
report on Form 10-K for the year ended December 31, 1996, as filed with
Securities and Exchange Commission. The results of operations for the nine
months ended September 30, 1997 are not necessarily indicative of results to be
expected for the full year.
Cash Equivalents
All short-term, highly liquid investments purchased with an original maturity of
three months or less are considered to be cash equivalents for purposes of the
statements of cash flows.
Gross Operating Profit of Hotels
The gross operating profit of the Hotels reported in the accompanying statements
of operations represents the revenues net of the operating expenses of the
Hotels. Operating revenues and expenses and the current assets and current
liabilities of the Hotels are excluded from the accompanying consolidated
financial statements of the MLP because Doubletree, as manager, not the MLP, has
operating responsibility for the Hotels.
2. INCOME TAXES
THE MLP IS NOT CURRENTLY A TAXABLE ENTITY AND ANY INCOME TAXES ARE THE
RESPONSIBILITY OF THE PARTNERS. ACCORDINGLY, NO CURRENT PROVISION FOR FEDERAL OR
STATE INCOME TAXES HAS BEEN PROVIDED BY THE MLP IN THE ACCOMPANYING CONSOLIDATED
FINANCIAL STATEMENTS.
DURING 1987, CONGRESS PASSED THE OMNIBUS BUDGET RECONCILIATION ACT WHICH
MANDATES THAT THE MLP BECOME SUBJECT TO CORPORATE TAXES ON ITS INCOME BEGINNING
JANUARY 1, 1998. IN ADDITION, DISTRIBUTIONS TO PARTNERS WILL BE CONSIDERED
TAXABLE DIVIDENDS TO EACH UNITHOLDER. DEFERRED INCOME TAXES HAVE BEEN PROVIDED
FOR THE
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PROJECTED DIFFERENCES BETWEEN THE FINANCIAL ACCOUNTING AND TAX BASES OF
PROPERTY AND EQUIPMENT AT JANUARY 1, 1998.
IN MAY, 1997, THE GENERAL PARTNER FORMED A SPECIAL COMMITTEE OF TWO INDEPENDENT
DIRECTORS TO EVALUATE ALTERNATIVES AVAILABLE TO THE MLP IN CONNECTION WITH THE
SCHEDULED 1998 CHANGE IN THE MLP'S TAX STATUS. THESE ALTERNATIVES INCLUDE, AMONG
OTHERS, THE SALE OF THE MLP ASSETS EITHER INDIVIDUALLY OR IN TOTAL,
INCORPORATING THE MLP OR CONVERTING OR MERGING THE MLP INTO A REAL ESTATE
INVESTMENT TRUST. AT A BOARD MEETING IN JUNE, 1997, THE SPECIAL COMMITTEE
RECOMMENDED THAT THE ASSETS OR BUSINESS OF THE MLP BE SOLD IN A VALUE MAXIMIZING
TRANSACTION. AT THE SAME MEETING, THE BOARD OF DIRECTORS AUTHORIZED THE SPECIAL
COMMITTEE TO PURSUE SUCH A SALE. THE SPECIAL COMMITTEE ENGAGED ITS OWN
INDEPENDENT LEGAL COUNSEL AND FINANCIAL ADVISORS TO ASSIST IN THIS PROCESS.
IN AUGUST 1997, CONGRESS PASSED THE TAXPAYER RELIEF ACT OF 1997. THE TAXPAYER
RELIEF ACT OF 1997 PROVIDES AN EXCEPTION TO THE RULE DESCRIBED ABOVE IN THAT THE
MLP MAY ELECT TO CONTINUE TO BE TREATED AS A PARTNERSHIP FOR FEDERAL INCOME TAX
PURPOSES AND NOT BE SUBJECT TO FEDERAL OR STATE CORPORATE INCOME TAXES. HOWEVER,
IF THIS ELECTION IS MADE THE MLP WILL BE SUBJECT TO A FEDERAL TAX EQUAL TO 3.5%
OF ITS GROSS INCOME AND STATE TAXES TO THE EXTENT STATES HAVE ENACTED A
PARTNERSHIP GROSS INCOME TAX. UNDER THIS ELECTION, DISTRIBUTIONS PAID TO THE
PARTNERS SHOULD CONTINUE TO BE NON-TAXABLE DISTRIBUTIONS. THE ELECTION APPLIES
TO TAXABLE YEARS AFTER 1997 AND CAN LATER BE REVOKED. ONCE REVOKED IT CANNOT BE
REINSTATED.
THE GENERAL PARTNER AND THE SPECIAL COMMITTEE CONTINUE TO EVALUATE AND PURSUE
THE SALE OF THE ASSETS OR BUSINESS OF THE MLP. THERE ARE ONGOING NEGOTIATIONS
WITH A NUMBER OF INTERESTED PARTIES. IF NEGOTIATIONS WITH ANY PARTY ARE
SUCCESSFUL, THE CLOSING OF THE SALE IS EXPECTED TO OCCUR IN TWO TO SIX MONTHS.
CONSUMMATION OF A SALES TRANSACTION WILL BE SUBJECT TO A NUMBER OF CONDITIONS
INCLUDING THE APPROVAL OF THE BOARD OF DIRECTORS AND, IN MOST INSTANCES, THE
UNITHOLDERS OF THE MLP.
THERE CAN BE NO ASSURANCE THAT A SALE OF THE ASSETS OR BUSINESS OF THE MLP WILL
OCCUR OR THAT ANY OTHER TRANSACTION CAN BE COMPLETED THAT WILL LESSEN THE
ADVERSE TAX IMPACT AFTER DECEMBER 31, 1997. IN THE EVENT SUCH A SALE DOES NOT
OCCUR BEFORE JANUARY 1, 1998, THE PAYMENT OF TAXES BY THE MLP ON EITHER
PARTNERSHIP INCOME OR GROSS INCOME WILL DIRECTLY REDUCE CASH AVAILABLE FOR
PARTNER DISTRIBUTIONS.
3. LONG-TERM DEBT
During April 1996, the MLP entered into a three-year $125 million credit
facility. The credit facility includes a $120 million term loan and a $5 million
revolving credit line. The proceeds of the term loan were used to repay all
amounts owed under the prior mortgage note and revolving credit facility, a
portion of the payable to affiliate (related to deferred incentive management
fees) and loan fees incurred to consummate the financing. The facility is
secured by all of the assets of the Hotels. Borrowings under the term loan bear
interest at the London Interbank Offering Rate ("LIBOR") plus 2.25% (8.00% at
September 30, 1997). Borrowings under the revolving credit line bear interest,
at the MLP's election, at either LIBOR plus 2.25% or the prime rate plus 1.25%.
At September 30, 1997, all outstanding borrowings bear interest at LIBOR plus
2.25% (8.00%), total $4.5 million, and are due and payable on March 31, 1999.
Accordingly, this balance is classified as long-term in the accompanying balance
sheets. The remaining principal payments due on the three-year term loan totaled
$0.7 million and $3.2 million for 1997 and 1998, respectively, with a lump-sum
payment of $112.9 million due on March 31, 1999. Long-term debt also includes
approximately $0.4 million in other long-term obligations related to special tax
assessments that the MLP has elected to pay out over a 20-year period. These
long-term obligations have varying maturity dates ranging from August 2009 to
June 2016.
Interest Rate Swap Agreements
At September 30, 1997, the MLP had four interest rate swap agreements
outstanding which have substantially converted $100 million of debt from
floating LIBOR based rates to fixed rates ranging from 6.17% to 6.23% (prior
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to the applicable margin). The agreements expire from December 1998 to March
1999. Interest expense incurred by the MLP relating to interest rate swap
agreements for the three and nine month periods ended September 30, 1997, was
approximately $110,000 and $363,000, respectively, and is included in interest
expense.
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4. MANAGEMENT FEES
In accordance with the Management Agreement, the MLP pays base and incentive
management fees to Doubletree. Base management fees payable are equal to 3% of
the annual gross revenues of the Hotels. Incentive management fees payable are
equal to the sum of 15% of annual adjusted gross operating profit up to $36
million (operating profit target) and 25% of annual adjusted gross operating
profit in excess of the operating profit target. Adjusted gross operating profit
is calculated by subtracting the base management fee expense from the gross
operating profit of Hotels as shown in the accompanying consolidated financial
statements. The MLP may defer payment of the incentive fees to Doubletree to the
extent that the calculation of Cash Flow for Incentive Fees, as defined in the
Management Agreement, on an annual basis, does not exceed $2.20 per unit
("Priority Return"). Currently, the incentive management fee is accrued at 15%
of the quarter's adjusted gross operating profit regardless of whether cash flow
is adequate to pay the incentive management fee on an interim basis, if cash
flow is expected to be available for payment of the incentive management fee on
an annual basis.
5. CASH DISTRIBUTIONS TO PARTNERS
In accordance with the Partnership's Amended and Restated Agreement of Limited
Partnership, cash distributions to partners may be made from Cash Flow Available
for Distribution, as defined. As discussed in Note 4, the incentive management
fee is payable only to the extent that cash flow available after payment of the
cash distributions to partners exceeds the Priority Return.
The following table calculates Cash Flow Available for Distribution and
Incentive Management Fees ("Cash Flow") for the three and nine-month periods
ended September 30, 1996 and 1997. Cash Flow is defined as pre-tax income (or
loss) before noncash charges (primarily depreciation and amortization) and
incentive management fees, but after the reserve for capital improvements and
principal payments on certain debt.
(In thousands except per unit amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
1997 1996 1997 1996
---- ---- ---- ----
Net income $ 2,444 $ 2,424 $ 4,063 $ 4,146
Add (deduct):
Depreciation 2,527 2,568 7,667 7,455
Incentive management fee 1,647 1,680 4,376 4,387
Amortization of deferred loan costs 109 109 327 428
Cash reserved for capital improvements (887) (891) (2,530) (2,519)
Repayments on term loan (625) (500) (1,750) (1,532)
Deferred income tax provision -- 91 -- 337
----------- ----------- ----------- -----------
Cash Flow 5,215 5,481 12,153 12,702
Less: Priority Return (2,320) (2,329) (6,968) (6,986)
----------- ----------- ----------- -----------
Cash Flow available for payment of
incentive management fees 2,895 3,152 5,185 5,716
Less: Current incentive management fee (1,647) (1,680) (4,376) (4,387)
----------- ----------- ----------- -----------
Excess cash flow $ 1,248 $ 1,472 $ 809 $ 1,329
=========== =========== =========== ===========
Cash Flow per unit $ 1.24 $ 1.29 $ 2.88 $ 3.00
=========== =========== =========== ===========
Average Limited Partner Units Outstanding 4,133,500 4,133,500 4,133,500 4,133,500
=========== =========== =========== ===========
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The incentive management fee that is earned but not paid on an annual basis due
to insufficient Cash Flow, is deferred without interest up to a maximum of $6
million. The deferred amount is to be paid out of either (i) 25% of cash flow in
excess of the Priority Return and the current incentive management fee or (ii)
sale or refinancing proceeds prior to any distribution to the limited partners.
Beginning January 1, 1998, federal tax law mandates that the MLP become subject
to corporate taxes on its income or, at its election remain a partnership for
tax purposes and pay a gross income tax. The MLP is not currently a taxable
entity. The payment of such taxes by the MLP will directly reduce cash available
for partner distributions. If the MLP elects to pay corporate income taxes,
distributions to partners after December 31, 1997 will be considered taxable
dividends. Although the MLP has historically distributed the Priority Return to
limited partners, there is no assurance this will continue after December 31,
1997. In addition, the Priority Return can be used to repay certain indebtedness
owed to Doubletree or to fund capital improvements, also reducing cash flow
available for distribution to limited partners.
6. RELATED PARTY TRANSACTIONS
The General Partner is responsible for the management and administration of the
MLP. In accordance with the MLP's Amended and Restated Agreements of Limited
Partnership, the MLP reimburses the General Partner for related administrative
costs. Under the Management Agreement, the MLP pays base and incentive
management fees to Doubletree.
The Hotels, in accordance with the Management Agreement, are also charged by
Doubletree for their pro rata share of support services such as computer,
advertising, public relations, promotional and sales and central reservation
services.
All MLP personnel are employees of Doubletree and its affiliates. All costs for
services of such employees are reimbursed to Doubletree by the Operating
Partnership. These costs include salaries, wages, payroll taxes and other
employee benefits. Additionally, auxiliary enterprises owned by Doubletree or
its affiliates sell operating supplies, furnishings and equipment to the MLP.
Amounts payable to affiliate consists of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
Advances from Doubletree $ 19,930 $ 20,060
General Partner Credit Facility 3,726 3,726
Deferred Incentive Management Fees 619 700
-------- --------
Total due to Doubletree 24,275 24,486
Plus: Hotel working capital (surplus) deficit (1,323) 823
-------- --------
Payable to affiliate net of hotel working capital 22,952 25,309
Less: Current portion (18,607) (20,964)
-------- --------
Long-term portion $ 4,345 $ 4,345
======== ========
Advances from Doubletree consist primarily of funds advanced for capital
improvements in excess of the reserve (equal to 3% of revenues required by the
provisions of the Management Agreement) and incentive management fees earned but
unpaid in the current year. Amounts advanced bear interest at the prime rate
plus 0.5% (9.0% at September 30, 1997). The Hotel working capital consists of
the current assets and current liabilities of the Hotels, including cash held in
hotel accounts, accounts receivable, inventories, prepaid expenses, hotel
accounts payable and certain taxes other than property, income and payroll
taxes. Since Doubletree has operating responsibilities associated with the
Hotels, these current asset and current liability items are excluded from the
accompanying consolidated financial statements and are assumed to be liquidated
into cash and used to pay down the payable to affiliate from $24.3 million to
$23.0 million at September 30, 1997.
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During the first 36 months of operation, which ended April 30, 1990, the General
Partner advanced, on a non-interest basis, amounts under the General Partner
Credit Facility to fund distributions of the Priority Return. The MLP
anticipates this amount will be repaid out of either (i) cash flow after payment
of the Priority Return and incentive management fees, or (ii) sale or
refinancing proceeds prior to any distribution to limited partners. Accordingly,
the credit facility is classified as long-term.
Deferred incentive management fees are non-interest bearing and are payable from
either (i) 25% of cash flow in excess of the Priority Return and the current
incentive management fee or (ii) sale or refinancing proceeds. At September 30,
1997 all of this balance is classified as long-term.
The following schedule reflects the operating revenues and expenses of the
Hotels not reflected in the accompanying consolidated financial statements (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Rooms $19,249 $19,094 $52,161 $51,004
Food and beverage 7,378 7,706 23,401 24,237
Other 2,939 2,896 8,779 8,728
------- ------- ------- -------
Total revenues 29,566 29,696 84,341 83,969
------- ------- ------- -------
Departmental direct expenses:
Rooms 4,439 4,529 12,993 12,659
Food and beverage 6,197 6,313 19,248 19,563
Other 1,011 1,028 2,999 3,176
------- ------- ------- -------
Total departmental direct expenses 11,647 11,870 35,240 35,398
------- ------- ------- -------
Hotel indirect expenses:
Administrative and general 2,217 2,307 6,851 6,887
Sales, promotion and advertising 1,883 1,508 4,886 4,283
Utilities 923 928 2,518 2,587
Repairs and maintenance 1,030 995 3,143 3,049
------- ------- ------- -------
Total hotel indirect expenses 6,053 5,738 17,398 16,806
------- ------- ------- -------
Gross operating profit of hotels $11,866 $12,088 $31,703 $31,765
======= ======= ======= =======
7. COMMITMENTS AND CONTINGENCIES
At September 30, 1997, the MLP had commitments relating to capital improvement
projects of approximately $1.2 million.
The MLP is subject to litigation arising in the ordinary course of business. In
the opinion of the General Partner, these actions will not have a material
adverse effect, if any, on the financial position or results of operations or
liquidity of the MLP or its subsidiary.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE MLP IS NOT CURRENTLY A TAXABLE ENTITY AND ANY INCOME TAXES ARE THE
RESPONSIBILITY OF THE PARTNERS. ACCORDINGLY, NO CURRENT PROVISION FOR FEDERAL OR
STATE INCOME TAXES HAS BEEN PROVIDED BY THE MLP IN THE ACCOMPANYING CONSOLIDATED
FINANCIAL STATEMENTS.
DURING 1987, CONGRESS PASSED THE OMNIBUS BUDGET RECONCILIATION ACT WHICH
MANDATES THAT THE MLP BECOME SUBJECT TO CORPORATE TAXES ON ITS INCOME BEGINNING
JANUARY 1, 1998. IN ADDITION, DISTRIBUTIONS TO PARTNERS WILL BE CONSIDERED
TAXABLE DIVIDENDS TO EACH UNITHOLDER. DEFERRED INCOME TAXES HAVE BEEN PROVIDED
FOR THE PROJECTED DIFFERENCES BETWEEN THE FINANCIAL ACCOUNTING AND TAX BASES OF
PROPERTY AND EQUIPMENT AT JANUARY 1, 1998.
IN MAY 1997, THE GENERAL PARTNER FORMED A SPECIAL COMMITTEE OF TWO INDEPENDENT
DIRECTORS TO EVALUATE ALTERNATIVES AVAILABLE TO THE MLP IN CONNECTION WITH THE
SCHEDULED 1998 CHANGE IN THE MLP'S TAX STATUS. THESE ALTERNATIVES INCLUDE, AMONG
OTHERS, THE SALE OF THE MLP ASSETS EITHER INDIVIDUALLY OR IN TOTAL,
INCORPORATING THE MLP OR CONVERTING OR MERGING THE MLP INTO A REAL ESTATE
INVESTMENT TRUST. AT A BOARD MEETING IN JUNE 1997, THE SPECIAL COMMITTEE
RECOMMENDED THAT THE ASSETS OR BUSINESS OF THE MLP BE SOLD IN A VALUE MAXIMIZING
TRANSACTION. AT THE SAME MEETING, THE BOARD OF DIRECTORS AUTHORIZED THE SPECIAL
COMMITTEE TO PURSUE SUCH A SALE. THE SPECIAL COMMITTEE ENGAGED ITS OWN
INDEPENDENT LEGAL COUNSEL AND FINANCIAL ADVISORS TO ASSIST IN THIS PROCESS.
IN AUGUST 1997, CONGRESS PASSED THE TAXPAYER RELIEF ACT OF 1997. THE TAXPAYER
RELIEF ACT OF 1997 PROVIDES AN EXCEPTION TO THE RULE DESCRIBED ABOVE IN THAT THE
MLP MAY ELECT TO CONTINUE TO BE TREATED AS A PARTNERSHIP FOR FEDERAL INCOME TAX
PURPOSES AND NOT BE SUBJECT TO FEDERAL OR STATE CORPORATE INCOME TAXES. HOWEVER,
IF THIS ELECTION IS MADE THE MLP WILL BE SUBJECT TO A FEDERAL TAX EQUAL TO 3.5%
OF ITS GROSS INCOME AND STATE TAXES TO THE EXTENT STATES HAVE ENACTED A
PARTNERSHIP GROSS INCOME TAX. UNDER THIS ELECTION, DISTRIBUTIONS PAID TO THE
PARTNERS SHOULD CONTINUE TO BE NON-TAXABLE DISTRIBUTIONS. THE ELECTION APPLIES
TO TAXABLE YEARS AFTER 1997 AND CAN LATER BE REVOKED. ONCE REVOKED IT CANNOT BE
REINSTATED.
THE GENERAL PARTNER AND THE SPECIAL COMMITTEE CONTINUE TO EVALUATE AND PURSUE
THE SALE OF THE ASSETS OR BUSINESS OF THE MLP. THERE ARE ONGOING NEGOTIATIONS
WITH A NUMBER OF INTERESTED PARTIES. IF NEGOTIATIONS WITH ANY PARTY ARE
SUCCESSFUL, THE CLOSING OF THE SALE IS EXPECTED TO OCCUR IN TWO TO SIX MONTHS.
CONSUMMATION OF A SALES TRANSACTION WILL BE SUBJECT TO A NUMBER OF CONDITIONS
INCLUDING THE APPROVAL OF THE BOARD OF DIRECTORS AND, IN MOST INSTANCES, THE
UNITHOLDERS OF THE MLP.
THERE CAN BE NO ASSURANCE THAT A SALE OF THE ASSETS OR BUSINESS OF THE MLP WILL
OCCUR OR THAT ANY OTHER TRANSACTION CAN BE COMPLETED THAT WILL LESSEN THE
ADVERSE TAX IMPACT AFTER DECEMBER 31, 1997. IN THE EVENT SUCH A SALE DOES NOT
OCCUR BEFORE JANUARY 1, 1998, THE PAYMENT OF TAXES BY THE MLP ON EITHER
PARTNERSHIP INCOME OR GROSS INCOME WILL DIRECTLY REDUCE CASH AVAILABLE FOR
PARTNER DISTRIBUTIONS.
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RESULTS OF OPERATIONS
Gross Operating Profit of the Hotels consists of the following (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
Rooms profit $14,810 $14,565 $39,168 $38,345
Food and beverage profit 1,181 1,393 4,153 4,674
Other profit 1,928 1,868 5,780 5,552
------- ------- ------- -------
Departmental profit 17,919 17,826 49,101 48,571
------- ------- ------- -------
Hotel indirect expenses:
Administrative and general 2,217 2,307 6,851 6,887
Sales, promotion and advertising 1,883 1,508 4,886 4,283
Utilities 923 928 2,518 2,587
Repairs and maintenance 1,030 995 3,143 3,049
------- ------- ------- -------
Total Hotel indirect expenses 6,053 5,738 17,398 16,806
------- ------- ------- -------
Gross Operating Profit of Hotels $11,866 $12,088 $31,703 $31,765
======= ======= ======= =======
A summary of occupancy and room rates for the Hotels follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1997 1996 1997 1996
---- ---- ---- ----
Occupancy percentage 78.1% 80.7% 72.9% 74.1%
Average room rate $ 86.81 $ 83.47 $ 84.97 $ 81.49
REVPAR $ 67.77 $ 67.35 $ 61.94 $ 60.37
Three Months Ended September 30, 1997 Compared with Three Months Ended September
30, 1996
Rooms profit increased by approximately $300,000 or 2% to $14.8 million for the
three months ended September 30, 1997 compared to $14.6 million for the three
months ended September 30, 1996. This increase is the result of an increase in
the average room rate offset by a decrease in occupancy, which is reflected in
the decrease in rooms expense of approximately $100,000.
Food and beverage profit decreased approximately $200,000 to $1.2 million for
the three months ended September 30, 1997 compared to the same period in 1996.
The profit margin also declined from 18.1% of 1996 third quarter food and
beverage revenues to 16.0% of 1997 third quarter food and beverage revenues.
This decrease is the result of lower revenues (a decrease of $300,000) generated
by two of the larger hotels without a corresponding decrease in food and
beverage costs.
Hotel indirect expenses increased approximately $300,000 or 6% in the three
months ended September 30, 1997 compared to the three months ended September 30,
1996. This increase is due primarily to an increase in sales, promotion and
advertising expense attributable to the conversion from the "Red Lion" brand to
the "Doubletree" brand on June 9, 1997, offset by a slight decrease in
administrative and general expense. The Hotels incurred approximately $300,000
in conversion costs including one-time charges for advertising, public
relations, in-house promotions and miscellaneous conversion costs incurred by
the Hotels. Excluding these one-time charges, sales, promotion and advertising
expense increased by less than 5%.
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Operating income remained flat at $5.6 million for the three months ended
September 30, 1997 compared to the three months ended September 30, 1996. As a
percentage of gross operating profit of Hotels, operating income increased to
47% for the three months ended September 30, 1997 as compared to 46% for the
three months ended September 30, 1996, despite the decline in gross operating
profit of Hotels. This slight increase is due primarily to lower depreciation
and other expenses in the quarter ending September 30, 1997 as compared to the
same quarter of 1996.
Interest expense was constant at $3.1 million for the three months ended
September 30, 1997 and September 30, 1996, respectively.
During the three months ended September 30, 1996, the MLP provided for deferred
income tax of approximately $91,000. During the three months ended September 30,
1997, no deferred income tax provision was necessary. The MLP is not currently a
taxable entity. Beginning January 1, 1998, federal tax law mandates that the MLP
become subject to corporate taxes on its income or at the MLP's election, pay
federal tax equal to 3.5% of its gross income and state taxes to the extent
states have enacted a partnership gross income tax. Deferred income tax arises
primarily from differences in depreciation for financial accounting and tax
purposes that are expected to exist at January 1, 1998.
During the three months ended September 30, 1997, net income was $2.4 million
($.58 per limited partner unit) compared to net income of $2.4 million ($0.57
per limited partner unit) for the comparable three months ended September 30,
1996.
Cash Flow Available for Distribution and Incentive Management Fees ("Cash Flow")
for the three months ended September 30, 1997 was approximately $5.2 million
($1.24 per limited partner unit) compared to the three months ended September
30, 1996 of approximately $5.5 million ($1.29 per limited partner unit). The
decline in Cash Flow is due primarily to the higher principal payments and
interest expense under the term loan and lower depreciation expense and
incentive management fees recorded in the third quarter of 1997 as compared to
the third quarter of 1996.
Once the MLP becomes subject to income taxes beginning January 1, 1998, the
payment of taxes on either partnership income or gross income will directly
reduce cash available for partner distributions. If the MLP elects to pay
corporate income taxes, distributions to partners after December 31, 1997 will
be considered taxable dividends.
Nine Months Ended September 30, 1997 Compared with Nine Months Ended September
30, 1996
Rooms profit increased approximately $800,000 or 2% to $39.2 million for the
nine months ended September 30, 1997 compared to $38.3 million for the nine
months ended September 30, 1996. This increase is the result of an increase in
the average room rate, offset by a decrease in occupancy.
Food and beverage profit decreased approximately $500,000 or 11% to $4.2 million
for the nine months ended September 30, 1997 compared to the same period in
1996. The year to date profit margin also declined from 19.3% of 1996 food and
beverage revenues to 17.7% of 1997 food and beverage revenues. This decrease is
due principally to higher margin group banquet revenue realized in the first
half of 1996 by two Hotels located in Northwestern Oregon which benefited from
additional catering and group banquet business as a result of the flooding in
the Pacific Northwest during 1996.
Hotel indirect expenses increased by approximately $600,000 or 4% in the nine
months ended September 30, 1997 compared to the nine months ended September 30,
1996. This increase is due primarily to an increase in sales, promotion and
advertising expense attributable to the conversion from the "Red Lion" brand to
the "Doubletree" brand on June 9, 1997, as well as an increase in repairs and
maintenance expense, offset by reductions in utilities and administrative and
general expenses. The Hotels incurred approximately $500,000 in conversion costs
including one-time charges for advertising, public relations, in-house
promotions and miscellaneous conversion costs incurred by the Hotels. Excluding
these one-time charges, sales, promotion and advertising expense increased
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approximately $100,000 or 2%.
Operating income decreased from $13.5 million for the nine months ended
September 30, 1996 to $13.3 million for the nine months ended September 30,
1997, a decrease of 1%. As a percentage of gross operating profit of Hotels,
operating income remained at 42% for the nine months ended September 30, 1997
and 1996, respectively. The slight decrease in operating income is primarily the
result of higher property taxes and depreciation expense due to assets placed in
service in late 1996 and early 1997, after significant renovations at four
hotels, offset by a reduction in other expenses resulting from lower
administrative fees charged by the General Partner.
The MLP recognized $4.4 million in each of the nine month periods ended
September 30, 1997 and 1996, respectively, of incentive management fees payable
to Doubletree. The current incentive management fee is payable only to the
extent there is cash flow available for its payment.
Interest expense increased $200,000 to $9.2 million in the nine months ended
September 30, 1997 as compared to $9.0 million for the nine months ended
September 30, 1996. The additional expense is due primarily to higher average
debt levels and interest rate swap adjustments.
During the nine months ended September 30, 1996, the MLP provided for deferred
income taxes of approximately $337,000. During the nine months ended September
30, 1997, no deferred income tax provision was necessary. The MLP is not
currently a taxable entity. Beginning January 1, 1998, federal tax law mandates
that the MLP become subject to corporate taxes on its income or at the MLP's
election, pay federal taxes equal to 3.5% of its gross income and state taxes to
the extent that states have enacted a partnership gross income tax. Deferred
income tax arises primarily from differences in depreciation for financial
accounting and tax purposes that are expected to exist at January 1, 1998.
During the nine months ended September 30, 1997, net income was $4.1 million
($.96 per limited partner unit) compared to $4.1 million ($0.98 per limited
partner unit) for the comparable nine months ended September 30, 1996.
Cash Flow for the nine months ended September 30, 1997 was approximately $12.2
million ($2.88 per limited partner unit) compared to $12.7 million ($3.00 per
limited partner unit) during the comparable prior period. The decrease in Cash
Flow is due to higher principal payments and interest expense under the term
loan and reductions in amortization of deferred loan costs and the deferred
income tax provision.
Once the MLP becomes subject to income taxes beginning January 1, 1998, the
payment of taxes on either partnership income or gross income will directly
reduce cash available taxes for partner distributions. If the MLP elects to pay
corporate income taxes, distributions to partners after December 31, 1997 will
be considered taxable dividends.
LIQUIDITY AND CAPITAL RESOURCES
The MLP's principal source of cash is from Hotel operations. During the nine
months ended September 30, 1997, the Hotels generated sufficient cash from
operations to cover operating needs. The MLP generated $12.7 million from
operating activities for the nine months ended September 30, 1997, compared to
$12.4 million generated in the same period in 1996. It is expected that for
1997, cash provided by operations and borrowings, if any, from available credit
facilities or from Doubletree will be sufficient to meet anticipated cash
requirements.
During 1996, the MLP entered into a three-year $125 million credit facility. The
credit facility includes a $120 million term loan and a $5 million revolving
credit line. The proceeds of the term loan were used to repay all amounts owed
under the prior mortgage note and revolving credit facility, a portion of the
payable to affiliate related to deferred incentive management fees and loan
fees. The facility is secured by all of the assets of the hotels. Borrowings
under the term loan bear interest at the London Interbank Offering Rate
("LIBOR") plus 2.25%. Borrowings under the revolving credit line bear interest,
at the MLP's election, at either LIBOR plus 2.25% or the prime rate plus 1.25%.
Remaining principal payments on the three-year term loan amount to $0.7 million
and $3.2 million for 1997 and 1998,
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respectively, with a lump-sum payment of $112.9 million due on March 31, 1999.
Borrowings under the revolving credit line total $4.5 million at September 30,
1997 and are due and payable in March 1999.
During the nine months ended September 30, 1997, the MLP made capital
improvements amounting to approximately $1.7 million. These capital improvements
were funded from the current year's reserve of approximately $2.5 million.
Pursuant to provisions of the Management Agreement, 3% of gross revenues is
required to be set aside annually for capital improvements. The General Partner
does not expect capital expenditures to exceed the 3% reserve during 1997.
The MLP has repaid $2.4 million, net of advances and changes in working capital
of the Hotels, to Doubletree during the nine months ended September 30, 1997.
On October 21, 1997, the General Partner declared a quarterly cash distribution
of $0.55 per limited partner unit ($2.20 annualized) for the current quarter,
payable on November 14, 1997 to unitholders of record on October 31, 1997. This
distribution has been accrued in the accompanying consolidated financial
statements.
THE MLP IS NOT CURRENTLY A TAXABLE ENTITY AND ANY INCOME TAXES ARE THE
RESPONSIBILITY OF THE PARTNERS. ACCORDINGLY, NO CURRENT PROVISION FOR FEDERAL OR
STATE INCOME TAXES HAS BEEN PROVIDED BY THE MLP IN THE ACCOMPANYING CONSOLIDATED
FINANCIAL STATEMENTS.
DURING 1987, CONGRESS PASSED THE OMNIBUS BUDGET RECONCILIATION ACT WHICH
MANDATES THAT THE MLP BECOME SUBJECT TO CORPORATE TAXES ON ITS INCOME BEGINNING
JANUARY 1, 1998. IN ADDITION, DISTRIBUTIONS TO PARTNERS WILL BE CONSIDERED
TAXABLE DIVIDENDS TO EACH UNITHOLDER. DEFERRED INCOME TAXES HAVE BEEN PROVIDED
FOR THE PROJECTED DIFFERENCES BETWEEN THE FINANCIAL ACCOUNTING AND TAX BASES OF
PROPERTY AND EQUIPMENT AT JANUARY 1, 1998.
IN MAY 1997, THE GENERAL PARTNER FORMED A SPECIAL COMMITTEE OF TWO INDEPENDENT
DIRECTORS TO EVALUATE ALTERNATIVES AVAILABLE TO THE MLP IN CONNECTION WITH THE
SCHEDULED 1998 CHANGE IN THE MLP'S TAX STATUS. THESE ALTERNATIVES INCLUDE, AMONG
OTHERS, THE SALE OF THE MLP ASSETS EITHER INDIVIDUALLY OR IN TOTAL,
INCORPORATING THE MLP OR CONVERTING OR MERGING THE MLP INTO A REAL ESTATE
INVESTMENT TRUST. AT A BOARD MEETING IN JUNE 1997, THE SPECIAL COMMITTEE
RECOMMENDED THAT THE ASSETS OR BUSINESS OF THE MLP BE SOLD IN A VALUE MAXIMIZING
TRANSACTION. AT THE SAME MEETING, THE BOARD OF DIRECTORS AUTHORIZED THE SPECIAL
COMMITTEE TO PURSUE SUCH A SALE. THE SPECIAL COMMITTEE ENGAGED ITS OWN
INDEPENDENT LEGAL COUNSEL AND FINANCIAL ADVISORS TO ASSIST IN THIS PROCESS.
IN AUGUST 1997, CONGRESS PASSED THE TAXPAYER RELIEF ACT OF 1997. THE TAXPAYER
RELIEF ACT OF 1997 PROVIDES AN EXCEPTION TO THE RULE DESCRIBED ABOVE IN THAT THE
MLP MAY ELECT TO CONTINUE TO BE TREATED AS A PARTNERSHIP FOR FEDERAL INCOME TAX
PURPOSES AND NOT BE SUBJECT TO FEDERAL OR STATE CORPORATE INCOME TAXES. HOWEVER,
IF THIS ELECTION IS MADE THE MLP WILL BE SUBJECT TO A FEDERAL TAX EQUAL TO 3.5%
OF ITS GROSS INCOME AND STATE TAXES TO THE EXTENT STATES HAVE ENACTED A
PARTNERSHIP GROSS INCOME TAX. UNDER THIS ELECTION, DISTRIBUTIONS PAID TO THE
PARTNERS SHOULD CONTINUE TO BE NON-TAXABLE DISTRIBUTIONS. THE ELECTION APPLIES
TO TAXABLE YEARS AFTER 1997 AND CAN LATER BE REVOKED. ONCE REVOKED IT CANNOT BE
REINSTATED.
THE GENERAL PARTNER AND THE SPECIAL COMMITTEE CONTINUE TO EVALUATE AND PURSUE
THE SALE OF THE ASSETS OR BUSINESS OF THE MLP. THERE ARE ONGOING NEGOTIATIONS
WITH A NUMBER OF INTERESTED PARTIES. IF NEGOTIATIONS WITH ANY PARTY ARE
SUCCESSFUL, THE CLOSING OF THE SALE IS EXPECTED TO OCCUR IN TWO TO SIX MONTHS.
CONSUMMATION OF A SALES TRANSACTION WILL BE SUBJECT TO A NUMBER OF CONDITIONS
INCLUDING THE APPROVAL OF THE BOARD OF DIRECTORS AND, IN MOST INSTANCES, THE
UNITHOLDERS OF THE MLP.
THERE CAN BE NO ASSURANCE THAT A SALE OF THE ASSETS OR BUSINESS OF THE MLP WILL
OCCUR OR THAT ANY OTHER TRANSACTION CAN BE COMPLETED THAT WILL LESSEN THE
ADVERSE TAX IMPACT AFTER DECEMBER 31, 1997. IN THE EVENT SUCH A SALE DOES NOT
OCCUR BEFORE JANUARY 1, 1998, THE PAYMENT OF TAXES BY THE MLP ON EITHER
PARTNERSHIP INCOME OR GROSS INCOME WILL DIRECTLY REDUCE CASH AVAILABLE FOR
PARTNER DISTRIBUTIONS.
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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 MLP may issue other
forward-looking statements. The following factors are among those that could
cause actual results to differ materially from the forward-looking statements:
national or local economic conditions affecting the supply and demand for hotel
space, competition in hotel operations, including additional or improved
services or facilities of competitors, price pressures, continuing availability
of capital to fund growth and improvements and the impact of tax legislation,
the inability to complete a sales transaction by year end as well as other
factors detailed by management's discussion and analysis. The forward-looking
statements should be considered in light of these factors.
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PART II
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT: The following document is filed herewith and made a part of this
report:
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K: None
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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: November 14, 1997 By: /s/ William L. Perocchi
---------------------------
William L. Perocchi
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
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INDEX OF EXHIBITS
EXHIBIT
NUMBER
27 Financial Data Schedule
21