<PAGE>
FORM 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
Commission file number 33-11096
--------------
CRI HOTEL INCOME PARTNERS, L.P.
- -------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 52-1500621
- ---------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- ---------------------------
(Address of principal executive offices) (Zip Code)
(301) 468-9200
- -------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Not applicable Not applicable
- -------------------------- ---------------------------------------
(Class) (Outstanding at September 30, 1998)
<PAGE>
CRI HOTEL INCOME PARTNERS, L.P.
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets - September 30, 1998
and December 31, 1997 . . . . . . . . . . . . . . . . 1
Statements of Income - for the three and nine months
ended September 30, 1998 and 1997 . . . . . . . . . . 2
Statement of Changes in Partners' Capital (Deficit)
- for the nine months ended September 30, 1998 . . . 3
Statements of Cash Flows - for the nine months
ended September 30, 1998 and 1997 . . . . . . . . . . 4
Notes to Financial Statements - September 30, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 10
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 17
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CRI HOTEL INCOME PARTNERS, L.P.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Property and equipment - at cost:
Land $ 1,574,490 $ 1,574,490
Buildings and site improvements 13,112,968 13,112,968
Furniture, fixtures and equipment 6,381,483 5,665,358
Leasehold improvements 1,382,000 1,382,000
------------ ------------
22,450,941 21,734,816
Less: accumulated depreciation and amortization (10,172,538) (9,453,974)
------------ ------------
12,278,403 12,280,842
Cash and cash equivalents 100,991 380,294
Working capital reserve 760,150 925,000
Receivables, capital improvements reserve and other assets 1,197,308 1,139,454
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $363,435 and $337,933, respectively 656,669 682,171
Property purchase costs, net of accumulated amortization
of $64,588 and $60,031, respectively 117,679 122,236
------------ ------------
Total assets $ 15,111,200 $ 15,529,997
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-1-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CRI HOTEL INCOME PARTNERS, L.P.
BALANCE SHEETS - Continued
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Distributions payable $ 274,781 $ 195,006
Accounts payable and accrued expenses 575,651 616,989
Hotel trade payables 246,850 454,945
Short-term portion of notes payable 128,991 121,757
------------ ------------
Total current liabilities 1,226,273 1,388,697
------------ ------------
Long term debt:
Notes payable 8,680,575 8,778,243
------------ ------------
Total liabilities 9,906,848 10,166,940
------------ ------------
Commitments and contingencies
Partners' capital (deficit):
General Partner (284,695) (281,520)
Beneficial Assignee Certificates (BACs) Series A;
868,662 BACs issued and outstanding 5,489,047 5,644,577
------------ ------------
Total partners' capital 5,204,352 5,363,057
------------ ------------
Total liabilities and partners' capital $ 15,111,200 $ 15,529,997
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CRI HOTEL INCOME PARTNERS, L.P.
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION> For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rooms $ 2,288,928 $ 2,293,727 $ 7,326,436 $ 7,176,772
Telephone 78,259 70,262 234,894 219,016
Rental and other 96,806 91,349 272,670 295,423
Food and beverage 31,037 27,870 76,972 84,710
------------ ------------ ------------ ------------
2,495,030 2,483,208 7,910,972 7,775,921
------------ ------------ ------------ ------------
Departmental expenses:
Rooms (695,877) (708,722) (2,051,457) (2,051,425)
Telephone (39,401) (25,562) (99,431) (78,019)
Rental and other (42,932) (37,667) (121,596) (116,547)
Food and beverage (25,867) (22,161) (62,434) (66,016)
------------ ------------ ------------ ------------
(804,077) (794,112) (2,334,918) (2,312,007)
------------ ------------ ------------ ------------
Gross operating income 1,690,953 1,689,096 5,576,054 5,463,914
------------ ------------ ------------ ------------
Unallocated operating income (expenses):
Interest and other income 24,036 18,561 79,012 55,729
General and administrative (258,169) (252,511) (847,714) (833,142)
Building lease (124,454) (126,132) (547,702) (563,784)
Marketing (214,182) (230,517) (666,939) (677,923)
Depreciation and amortization (259,569) (246,743) (760,841) (725,011)
Energy (142,627) (143,265) (377,829) (407,490)
Property taxes (145,053) (136,358) (470,233) (408,666)
Property operations and maintenance (146,850) (141,556) (423,163) (422,671)
Management fees (87,308) (85,889) (276,783) (272,067)
Base asset management fee, paid to related parties (23,437) (23,437) (70,312) (70,312)
Professional fees (12,224) (9,932) (34,904) (35,919)
------------ ------------ ------------ ------------
(1,389,837) (1,377,779) (4,397,408) (4,361,256)
------------ ------------ ------------ ------------
Operating income 301,116 311,317 1,178,646 1,102,658
Other expenses:
Interest expense (170,421) (171,284) (513,008) (502,547)
------------ ------------ ------------ ------------
Net income $ 130,695 $ 140,033 $ 665,638 $ 600,111
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-3-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CRI HOTEL INCOME PARTNERS, L.P.
STATEMENTS OF INCOME - Continued
(Unaudited)
<TABLE>
<CAPTION> For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income allocated to General Partner (2%) $ 2,614 $ 2,801 $ 13,313 $ 12,002
============ ============ ============ ============
Net income allocated to BAC Holders (98%) $ 128,081 $ 137,232 $ 652,325 $ 588,109
============ ============ ============ ============
Net income per BAC based on 868,662 BACs outstanding $ 0.15 $ 0.16 $ 0.75 $ 0.68
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-4-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CRI HOTEL INCOME PARTNERS, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
<TABLE>
<CAPTION>
Beneficial
Assignee
General Certificate
Partner Holders Total
--------- ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1997 $(281,520) $ 5,644,577 $ 5,363,057
Distributions paid or accrued of $0.93 per BAC
(including return of capital of $0.18 per BAC) (16,488) (807,855) (824,343)
Net income 13,313 652,325 665,638
--------- ------------ ------------
Balance, September 30, 1998 $(284,695) $ 5,489,047 $ 5,204,352
========= ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-5-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CRI HOTEL INCOME PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 665,638 $ 600,111
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 760,841 725,011
Accrued interest on notes payable -- 502,547
Changes in assets and liabilities:
Decrease (increase) in receivables and other assets, net 89,210 (188,974)
(Decrease) increase in accounts payable and accrued expenses (41,338) 165,308
(Decrease) increase in hotel trade payables (208,095) 2,901
------------ ------------
Net cash provided by operating activities 1,266,256 1,806,904
------------ ------------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment (716,125) (588,668)
Net withdrawals from (deposits to) working capital reserve 164,850 (6,804)
Net (deposits to) withdrawals from capital improvements reserve (159,282) 52,576
------------ ------------
Net cash used in investing activities (710,557) (542,896)
------------ ------------
Cash flows from financing activities:
Distributions paid to BAC Holders and General Partner (744,568) (1,178,899)
Payment of principal on note payable (90,434) --
------------ ------------
Net cash used in financing activities (835,002) (1,178,899)
------------ ------------
Net (decrease) increase in cash and cash equivalents (279,303) 85,109
Cash and cash equivalents, beginning of period 380,294 504,423
------------ ------------
Cash and cash equivalents, end of period $ 100,991 $ 589,532
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 513,007 $ --
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-6-
<PAGE>
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of CRICO Hotel Associates I, L.P. (the General Partner), the
accompanying unaudited financial statements of CRI Hotel Income Partners, L. P.
(the Partnership) reflect all adjustments of a normal recurring nature necessary
to present fairly the Partnership's financial position as of September 30, 1998,
and the results of its operations for the three and nine months ended September
30, 1998 and 1997 and its cash flows for the nine months ended September 30,
1998 and 1997. The results of operations for the interim period ended September
30, 1998, are not necessarily indicative of the results to be expected for the
full year.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and with the
instructions to Form 10-QSB. Certain information and accounting policies and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the instructions. These financial statements should be read
in conjunction with the financial statements and notes thereto included in the
Partnership's Annual Report filed on Form 10-K at December 31, 1997.
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
2. NOTES PAYABLE
On December 19, 1997, the Partnership refinanced with Citicorp Real Estate,
Inc. (Citicorp) the Zero Coupon Notes (Former Notes) which were originally
issued in connection with the Partnership's acquisition of the hotels. The
amounts due on the former Notes as of December 19, 1997, were as follows:
<TABLE>
<CAPTION>
Balance Due
at
12/19/97
-----------
<S> <C>
Minneapolis Days Inn $ 2,296,070
Plymouth Days Inn 1,890,216
Roseville Days Inn 1,955,287
Clearwater Days Inn 1,732,796
-----------
$ 7,874,369
===========
</TABLE>
The new loan proceeds of $8.9 million were in excess of the amount needed
to pay the Former Notes of $7,874,369 due as of December 19, 1997. Such excess
was used to pay the costs of refinancing and to fund needed capital improvements
at the hotels. The new loan bears interest at the rate of 7.72% per annum and
matures January 1, 2008. On that date, a balloon payment in the amount of
$7,136,233 will be due. In accordance with the terms of the new loan, the
-7-
<PAGE>
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. NOTES PAYABLE - Continued
Partnership began paying monthly installments of principal and interest in the
amount of $67,049 on the first day of each month beginning February 1998. If
any such monthly installment is not paid when due, the entire principal amount
outstanding and accrued interest thereon shall at once become due and payable,
at the option of the holder. Subject to prepayment terms, as discussed below,
the refinancing of the Former Notes does not preclude the future sale of the
hotels, either individually or as a portfolio.
Under the terms of the new loan, such loan may be prepaid, subject to terms
and prepayment penalties as set forth in the note. The new loan has been
securitized in a "no lock" program, which permits the prepayment of the new loan
with a 3% premium during the first three years, a 2% premium during the next
three years, a 1% premium during the next three years, and no penalty during the
final year. Additionally, see Note 7 for further information pertaining to the
acquisition and servicing of the Citicorp note.
The Partnership made installments of principal and interest aggregating
$603,441 during the nine months ended September 30, 1998. The Partnership's
balance on this loan was $8,809,566 and $8,900,000 as of September 30, 1998 and
December 31, 1997, respectively.
3. REAL ESTATE TAX AND CAPITAL IMPROVEMENTS RESERVE ESCROWS
In addition to the monthly loan installments, as discussed above, the
Partnership also makes monthly payments which are escrowed for estimated annual
real estate taxes and capital improvements reserves (CIR). The monthly real
estate tax payments equal one-twelfth of the estimated yearly taxes and
assessments to be levied on the hotels, currently estimated as $37,761 per
month. The servicer of the loan pays such taxes and assessments when due from
these escrows. The monthly CIR payment totalling $19,365 is held in escrow and
may be drawn on by the Partnership for deferred maintenance and/or ongoing
capital improvement expenditures and for the replacement of furniture, fixtures
and equipment at the hotels. Both the real estate tax and CIR payments are due
on the same day as the monthly principal and interest installments, commencing
February 1, 1998 until the new loan is paid in full.
As of September 30, 1998 and December 31, 1997, Citicorp held $64,883 and
$75,522, respectively, for real estate taxes and $461,006 and $286,725,
respectively, for capital improvement reserves. These amounts are included in
Receivables, capital improvements reserve and other assets in the accompanying
financial statements.
-8-
<PAGE>
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. WORKING CAPITAL RESERVE
As of September 30, 1998 and December 31, 1997, the working capital reserve
of $760,150 and $925,000, respectively, consisted of $428,274 and $800,000,
respectively, set aside for Phase II of renovations to be performed at the
hotels, and $331,876 and $125,000, respectively, set aside for contingencies.
The working capital reserve may be increased or reduced by the General Partner
as deemed appropriate.
-9-
<PAGE>
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
5. DISTRIBUTIONS TO BAC HOLDERS
The following distributions were paid or accrued to BAC holders of record
during the first three quarters of 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
Distributions to Distributions to
BAC Holders BAC Holders
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Quarter Ended Total Per BAC Total Per BAC
------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
March 31 $ 269,285 $ 0.31 $ 382,211 $ 0.44
June 30 269,285 0.31 382,211 0.44
September 30 269,285 0.31 382,211 0.44
---------- ------- ---------- -------
$ 807,855 $ 0.93 $1,146,633 $ 1.32
========== ======= ========== =======
</TABLE>
6. COMMITMENTS
a. Hotel operations management agreements
--------------------------------------
The Partnership entered into management agreements with Buckhead Hotel
Management Company, Inc. (Buckhead) for operation of the hotels. Each
agreement was for an initial term of ten years, with a five-year renewal
option. The agreements called for a base management fee of 2.5% of gross
revenues from operations, a marketing fee of 1.5% of net room revenues, and
a reservation fee of 2.3% of gross revenues from rental of hotel guest
rooms. The agreements also called for incentive management fees generally
equal to 25% of net cash flow available after payment of a preferred cash
flow return to the Partnership equal to 11% of the aggregate purchase price
for Series A hotels owned by the Partnership.
On January 1, 1993, the management agreements between the Partnership
and Buckhead were amended to extend the existing term of each agreement for
an additional two to five years and increase the base management fee from
2.5% to 3.5% of gross revenues. As amended, the management agreements
expire between November 2002 and July 2003. The amendments for the
Clearwater Days Inn and the Scottsdale Days Inn included modifications to
the method of calculating the incentive management fee. No incentive
management fees were earned for the first three quarters of 1998 or 1997.
b. Operating lease agreements
--------------------------
The Partnership assumed an existing lease agreement from Days Inns in
connection with the acquisition of the leasehold interest in the Scottsdale
Days Inn. The assumption transfers the rights to operate the property on
the lease's existing terms over the remaining life of the lease. The lease
has been extended to expire on January 31, 2004. The lease may be renewed
-10-
<PAGE>
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
6. COMMITMENTS - Continued
at the option of the lessee for an additional five year period. Annual
lease payments are equal to the greater of $140,450 or 22% of total room
revenue and 2.5% of food and beverage revenue. Minimum lease payments of
$11,704 are payable monthly with a quarterly analysis of the actual amount
due. For the three and nine months ended September 30, 1998, lease
payments were $124,454, and $547,702, respectively, and $126,132 and
$563,784 for the three and nine months ended September 30, 1997,
respectively.
c. Ground lease agreement
----------------------
The Partnership entered into a ground lease with Vicorp Restaurants,
Inc. (Vicorp) effective January 1991, pursuant to which the Partnership is
leasing a portion of the Minneapolis Days Inn property to Vicorp, which is
operating a restaurant (Baker's Square) on the property. Gross rental
income pursuant to the lease agreement, which is included in Interest and
other income on the accompanying statements of income, was $13,518 and
$40,554 for the three and nine months ended September 30, 1998,
respectively, and $13,061 and $39,182 for the three and nine months ended
September 30, 1997, respectively.
7. RELATED-PARTY TRANSACTIONS
The Partnership, in accordance with the terms of the Partnership Agreement,
is obligated to reimburse the General Partner or its affiliates for their direct
expenses in connection with managing the Partnership. The Partnership paid or
accrued $18,710 and $42,118 for the three and nine months ended September 30,
1998, respectively, and $8,607 and $38,367 for the three and nine months ended
September 30, 1997, respectively, to the General Partner or its affiliates as
direct reimbursement of expenses incurred on behalf of the Partnership. Such
reimbursements are included in General and administrative expense on the
statements of income.
The amount of the base asset management fee earned by the General Partner
or its affiliates is equal to 0.50% of the weighted average balance of the
adjusted partnership investment during the period, as defined in the Partnership
Agreement. The Partnership paid or accrued a base asset management fee of
$23,437 and $70,312 for the three and nine months ended September 30, 1998,
respectively, and like amounts for the three and nine months ended September 30,
1997.
The $8.9 million loan originated and underwritten by Citicorp (see Note 2)
was acquired by CRIIMI MAE Inc., and was included in a securitization by them in
June 1998. As master and special servicer for the loan pool, CRIIMI MAE
Services Limited Partnership, a CRIIMI MAE affiliate, will retain a portion of
the cash flow, as well as any prepayment penalties. The Chairman and President
of CRIIMI MAE Inc. are the Chairman and President, respectively, of, and holders
of a 100% equity interest in, C.R.I., Inc. which is the general partner of CRICO
Hotel Associates I, L.P., which, in turn, is the General Partner of the
Partnership.
-11-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
CRI Hotel Income Partners, L.P.'s (the Partnership) Management's Discussion
and Analysis of Financial Condition and Results of Operations section contains
information that may be considered forward looking, including statements
regarding the effect of governmental regulations. Actual results may differ
materially from those described in the forward looking statements and will be
affected by a variety of factors including seasonality with respect to the hotel
industry, national and local economic conditions, the general level of interest
rates, terms of governmental regulations that affect the Partnership and
interpretations of those regulations, the competitive environment in which the
Partnership operates, and the availability of working capital.
A number of investors have sold their Beneficial Assignee Certificates
(BACs) in the Partnership to other investors. From January 1 through May 22,
1998, approximately 4.9% of outstanding BACs were sold. If more than 5% of the
total outstanding BACs in the Partnership are transferred in any one calendar
year (not counting certain exempt transfers), the Partnership could be taxed as
a "publicly traded partnership," with potentially severe implications for the
Partnership and its investors. Specifically, the Partnership would be taxed as
a corporation and the income and losses from the Partnership would no longer be
considered a passive activity. Accordingly, to remain within the 5% safe
harbor, effective June 1, 1998, the General Partner of the Partnership halted
recognition of any transfers that exceed the safe harbor limit. As a result,
current BAC holders may not sell their interests until after January 1, 1999.
Financial Condition/Liquidity
------------------------------
The Partnership expects that the hotels in the aggregate will generate
sufficient cash flow to achieve a positive cash flow after operating expenses.
In addition to periodic replacement of fixed assets, which are funded from the
capital improvements reserve, the Partnership has determined that significant
capital improvements are needed to enhance the marketability of the hotels.
During the nine months ended September 30, 1998 and 1997, the Partnership funded
$371,726 and $361,584 from the working capital reserve to the hotels for such
capital improvements. The General Partner intends to fund additional
Partnership monies to the hotels for further needed capital improvements. See
further discussion in the working capital reserve section, below.
The Partnership's liquidity and future results of operations are primarily
dependent upon the performance of the underlying hotels. Hotel operations may
be materially affected by changing market conditions and by seasonality caused
by variables such as vacations, holidays and climate. The Partnership closely
monitors its cash flow and liquidity position in an effort to ensure that
sufficient cash is available for operating requirements and distributions to BAC
holders. The Partnership's net cash provided by operating activities for the
nine months ended September 30, 1998 and 1997, along with existing cash
resources, were adequate to support operating, investing and financing
requirements, and to make distributions to BAC holders and the General Partner.
Cash and cash equivalents decreased during the nine months ended September 30,
1998 primarily due to the purchase of furniture, fixture and equipment at the
hotels. The General Partner estimates that existing cash and cash equivalents
along with future cash flows from the hotels' operations, in the aggregate, will
be sufficient to pay operating expenses and short term commitments, and to fund
the working capital and capital improvements reserves. Current liabilities as
of September 30, 1998 totalled $1,226,273, which represents a $162,424 decrease
from the balance as of December 31, 1997. This decrease primarily resulted from
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
a decrease in trade payables at four of the hotels, partially offset by an
increase in distributions payable.
Citicorp Financing
- ------------------
On December 19, 1997, the Partnership refinanced with Citicorp Real Estate,
Inc. ("Citicorp") the Zero Coupon Notes ("Former Notes") which were originally
issued in connection with the Partnership's acquisition of the hotels. The
amounts due on the former Notes as of December 19, 1997, were as follows:
<TABLE>
<CAPTION>
Balance Due
at
12/19/97
-----------
<S> <C>
Minneapolis Days Inn $ 2,296,070
Plymouth Days Inn 1,890,216
Roseville Days Inn 1,955,287
Clearwater Days Inn 1,732,796
-----------
$ 7,874,369
===========
</TABLE>
The new loan proceeds of $8.9 million were in excess of the amount needed
to pay the Former Notes of $7,874,369 due as of December 19, 1997. Such excess
was used to pay the costs of refinancing and to fund needed capital improvements
at the hotels. The new loan bears interest at the rate of 7.72% per annum and
matures January 1, 2008. On that date, a balloon payment in the amount of
$7,136,233 will be due. In accordance with the terms of the new loan, the
Partnership began paying monthly installments of principal and interest in the
amount of $67,049 on the first day of each month beginning February 1998. If
any such monthly installment is not paid when due, the entire principal amount
outstanding and accrued interest thereon shall at once become due and payable,
at the option of the holder. Subject to prepayment terms, as discussed below,
the refinancing of the Former Notes does not preclude the future sale of the
hotels, either individually or as a portfolio.
Under the terms of the new loan, such loan may be prepaid, subject to terms
and prepayment penalties as set forth in the note. The new loan has been
securitized in a "no lock" program, which permits the prepayment of the new loan
with a 3% premium during the first three years, a 2% premium during the next
three years, a 1% premium during the next three years, and no penalty during the
final year.
-13-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
The Partnership made installments of principal and interest aggregating
$603,441 during the nine months ended September 30, 1998. The Partnership's
balance on this loan was $8,809,566 and $8,900,000 as of September 30, 1998 and
December 31, 1997, respectively.
Real Estate Tax And Capital Improvements Reserve Escrows
- --------------------------------------------------------
In addition to the monthly loan installments, as discussed above, the
Partnership also makes monthly payments which are escrowed for estimated annual
real estate taxes and capital improvements reserves (CIR). The monthly real
estate tax payments equal one-twelfth of the estimated yearly taxes and
assessments to be levied on the hotels, currently estimated as $37,761 per
month. The servicer of the loan pays such taxes and assessments when due from
these escrows. The monthly CIR payment totalling $19,365 is held in escrow and
may be drawn on by the Partnership for deferred maintenance and/or ongoing
capital improvement expenditures and for the replacement of furniture, fixtures
and equipment at the hotels. Both the real estate tax and CIR payments are due
on the same day as the monthly principal and interest installments, commencing
February 1, 1998 until the new loan is paid in full.
As of September 30, 1998 and December 31, 1997, Citicorp held $64,883 and
$75,522, respectively, for real estate taxes and $461,006 and $286,725,
respectively, for capital improvement reserves. These amounts are included in
receivables, capital improvements reserve and other assets in the accompanying
financial statements.
Working Capital Reserve
- -----------------------
As of September 30, 1998 and December 31, 1997, the working capital reserve
of $760,150 and $925,000, respectively, consisted of $428,274 and $800,000,
respectively, set aside for Phase II of renovations to be performed at the
hotels, and $331,876 and $125,000, respectively, set aside for contingencies.
The working capital reserve may be increased or reduced by the General Partner
as deemed appropriate.
Distributions to BAC Holders
- ----------------------------
The following distributions were paid or accrued to BAC holders of record
during the first three quarters of 1998 and 1997:
-14-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
1998 1997
Distributions to Distributions to
BAC Holders BAC Holders
------------------- ----------------------
<S> <C> <C> <C> <C>
Quarter Ended Total Per BAC Total Per BAC
------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
March 31 $ 269,285 $ 0.31 $ 382,211 $ 0.44
June 30 269,285 0.31 382,211 0.44
September 30 269,285 0.31 382,211 0.44
---------- ------- ---------- -------
$ 807,855 $ 0.93 $1,146,633 $ 1.32
========== ======= ========== =======
</TABLE>
Results of Operations -- Partnership
------------------------------------
The Partnership's net income, which consists principally of revenues from
hotel operations, decreased approximately $9,000 during the three months ended
September 30, 1998 from the comparable period in 1997 primarily due to increased
telephone expense due to incorrect billing from the hotels' long distance
carrier during the third quarter 1998 (which will be credited to the hotels
during the fourth quarter 1998), increased depreciation expense due to capital
improvements made at the hotels, and increased property taxes due to timing
differences. Partially offsetting the decrease in the Partnership's net income
was a decrease in marketing expense due to the consolidation of sales positions
at the University and Roseville hotels, and a decrease in rooms expense due to
the overall decrease in occupancy at the hotels.
The Partnership's net income increased approximately $66,000 during the
nine months ended September 30, 1998 from the comparable period in 1997
primarily due to an increase in rooms revenue resulting from increases in room
rates at all of the hotels, a decrease in energy expense due to decreased
occupancy at four of the hotels, an increase in interest and other income due to
higher working capital balances during 1998, a decrease in building lease
expense due to decreased revenues at the Scottsdale hotel (the building lease
expense is based on a percentage of rental revenues), and increased telephone
revenue due to the implementation of a new policy allowing collection of $1 per
day per room for unlimited local calls. Partially offsetting the increase in
the Partnership's net income was an increase in property tax expense and an
increase in depreciation expense, both of which are discussed above, and
decreased rental and other revenue due to lost rents during the time lag between
the closing of the Happy Chef restaurant and its replacement by a new tenant
during the second quarter at the Roseville hotel. Also partially offsetting the
increase in the Partnership's net income was an increase in telephone expense,
as discussed above, and increased general and administrative expenses primarily
due to higher payroll costs.
-15-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Results of Operations -- Hotels
-------------------------------
The hotels' results of operations are affected by changing market
conditions and by seasonality caused by variables such as vacations, holidays
and climate. Based on the hotels' operating budgets, the following months
should provide the highest gross operating income and net cash flow:
<TABLE>
<CAPTION>
Hotel Location Peak Months
-------------- ---------------------
<C> <C>
Clearwater, FL October through April
Minneapolis, MN May through October
Plymouth, MN June through October
Roseville, MN May through October
Scottsdale, AZ January through May
</TABLE>
The Partnership's Statements of Income include operating results for each
of the hotels as summarized below. Gross Operating Income represents total
revenue from rooms, telephone, food and beverage, and rental and other, less the
related departmental expenses. Operating Income represents Gross Operating
Income less unallocated operating income (expenses). The operating results and
average occupancy for the hotels for the three and nine months, each ended
September 30, 1998 and 1997, were as follows:
-16-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
Gross Operating Income Gross Operating Income
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
Hotel Location 1998 1997 1998 1997
- -------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Clearwater, FL $ 189,830 $ 206,120 $ 856,867 $ 907,663
Minneapolis, MN 489,610 455,425 1,254,928 1,169,843
Plymouth, MN 286,263 273,048 643,978 613,414
Roseville, MN 296,327 316,333 775,906 769,162
Scottsdale, AZ 428,923 438,170 2,044,375 2,003,832
------------ ------------ ------------ ------------
Total $ 1,690,953 $ 1,689,096 $ 5,576,054 $ 5,463,914
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Operating Income Operating Income
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
Hotel Location 1998 1997 1998 1997
- -------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Clearwater, FL $ 30,122 $ 58,753 $ 363,089 $ 406,008
Minneapolis, MN 278,514 250,403 628,403 563,936
Plymouth, MN 141,193 114,477 214,900 153,666
Roseville, MN 140,107 147,674 308,221 284,754
Scottsdale, AZ 8,536 23,375 585,382 556,285
Depreciation and Partnership operating expenses (297,356) (283,365) (921,349) (861,991)
------------ ------------ ------------ ------------
Total $ 301,116 $ 311,317 $ 1,178,646 $ 1,102,658
============ ============ ============ ============
</TABLE>
-17-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
Weighted Weighted
Average Occupancy Average Occupancy
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
Hotel Location 1998 1997 1998 1997
- -------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Clearwater, FL 55% 59% 64% 70%
Minneapolis, MN 92% 86% 85% 84%
Plymouth, MN 80% 76% 70% 72%
Roseville, MN 87% 100% 89% 93%
Scottsdale, AZ 84% 90% 89% 92%
------ ------ ------ ------
Total (1) 80% 83% 80% 83%
====== ====== ====== ======
</TABLE>
(1) Weighted average occupancy is computed by taking into consideration the
number of rooms at each location.
Gross operating income and operating income for the Clearwater hotel for
the three and nine months ended September 30, 1998 decreased from the same
periods in 1997 primarily due to increased competition from new hotels in the
market. Gross operating income and operating income for the Minneapolis hotel
for the three and nine months ended September 30, 1998 increased from the same
periods in 1997 primarily due to higher room rates. Gross operating income and
operating income for the Plymouth hotel for the three and nine months ended
September 30, 1998 increased from the same periods in 1997 primarily due to the
positive effect of rooms renovation in 1997, which attracted higher-rate
business. Gross operating income and operating income for the Roseville hotel
for the three months ended September 30, 1998 decreased from the same period in
1997 primarily due to declines in rental revenue and in guaranteed no-show
income. Gross operating income and operating income for the Roseville hotel for
the nine months ended September 30, 1998 increased from the same period in 1997,
despite decreased occupancy, due to increased rental rates. Gross operating
income and operating income for the Scottsdale hotel for the three months ended
September 30, 1998 decreased from the same period in 1997 primarily due to
decreased occupancy as well as wage increases due to turnover and kitchen
repairs for a new caterer. Gross operating income and operating income for the
Scottsdale hotel for the nine months ended September 30, 1998 increased from the
same periods in 1997 primarily due to increased rental rates and the
implementation of a new policy allowing collection of $1 per day per room for
unlimited local calls.
Year 2000 Computer Issue
------------------------
The Year 2000 ("Y2K") computer issue refers to the inability of many
computer systems in use today to recognize "00" in the date field as the year
2000 and to recognize the year 2000 as a leap year. The Y2K problem arose
because, for many years, computer software programs, including programs embedded
-18-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
in hardware, utilized only the last two digits to specify the year with the
assumption that the first two digits were "19." As a result, such programs may
not be able to recognize and process dates beyond 1999; rather they may
recognize and process "00," "01," "02,", etc., incorrectly as 1900, 1901, 1902,
instead of as 2000, 2001, 2002. In the opinion of computer experts, this could
cause such programs to create erroneous results, malfunction, or fail completely
unless corrective measures are taken.
The Partnership utilizes software and related computer technologies
essential to its operations that will be affected by the Y2K issue. To address
the issue, the Managing General Partner has developed and is currently
implementing a plan (the "Y2K Project") designed to ensure that the Y2K date
change will not have an adverse impact on the Partnership's operations. The Y2K
Project is on schedule and the Managing General Partner expects completion by
the end of 1999.
The Y2K Project consists of four phases -- Planning, Assessment,
Implementation and Testing. The Planning Phase began early in 1998 and is
substantially complete. Under the Planning Phase, the Managing General Partner
conducted an inventory of all internal hardware and software systems, data
interfaces, business operations and non-information technology functions which
may be susceptible to the Y2K issue. The Managing General Partner expects final
completion of this phase by November 30, 1998. The Assessment Phase is
currently underway. Under the Assessment Phase, all applications and functions
identified in the Planning Phase are being analyzed to determine Y2K compliance
and the materiality of each identified risk is being determined. In the event
of noncompliance, for a material risk, timetables for corrective action, as well
as estimated costs to achieve compliance, are being determined. Completion of
this phase is expected by December 31, 1998. The Implementation Phase is also
underway. Renovation and replacement of existing internal hardware and software
systems has begun and completion is expected by June 1999. Additionally, the
Managing General Partner is currently working with third party vendors and
service providers to verify their Y2K compliance. Final completion of this
phase is expected by June 1999. The Testing Phase, which will include testing
of internal applications as well as third party
-19-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
systems, is expected to begin during January 1999 and continue throughout 1999.
Contingency planning is scheduled to commence during the fourth quarter 1998 and
be completed by year-end 1999. Although the expense associated with the Y2K
Project cannot presently be determined, the Managing General Partner does not
expect it to be material.
PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. None.
b. No reports on Form 8-K were filed with the Commission during the
quarter ended September 30, 1998.
All other items are not applicable.
-20-
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CRI HOTEL INCOME PARTNERS, L.P.
-----------------------------------------------
(Registrant)
by: CRICO Hotel Associates I, L.P.
-------------------------------------------
General Partner
by: C.R.I., Inc.
---------------------------------------
its General Partner
November 13, 1998 by: /s/ Michael J. Tuszka
- ----------------- -----------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
-21-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-22-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
THIRD QUARTER 10-QSB AND IS QUALIFED IN ITS ENTIRETY BY REFERENCE TO
SUCH 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 100,991
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 22,450,941
<DEPRECIATION> 10,172,538
<TOTAL-ASSETS> 15,111,200
<CURRENT-LIABILITIES> 1,226,273
<BONDS> 8,680,575
0
0
<COMMON> 0
<OTHER-SE> 5,204,352
<TOTAL-LIABILITY-AND-EQUITY> 15,111,200
<SALES> 0
<TOTAL-REVENUES> 7,989,984
<CGS> 0
<TOTAL-COSTS> 6,811,338
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 513,008
<INCOME-PRETAX> 665,638
<INCOME-TAX> 0
<INCOME-CONTINUING> 665,638
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 665,638
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.75
</TABLE>
