<PAGE>
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, 1996
------------------
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
incorporation or organization) Identification No.)
4001 Main Street, Vancouver, Washington 98663
--------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(360) 696-0001
--------------
(Registrant's telephone number, including area code)
__________________________________________________________________
(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 .
--- ---
<PAGE>
RED LION INNS LIMITED PARTNERSHIP
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
Item 1 Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statement of Partners' Capital 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 16
</TABLE>
2
<PAGE>
PART I
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
- ------ ---------------------------------
RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit amounts)
(unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
------
Cash $ 1,405 $ 229
Property and Equipment:
Land 17,705 17,705
Buildings and improvements 166,992 164,605
Furnishings and equipment 59,749 55,596
Construction in progress 743 2,229
-------- --------
245,189 240,135
Less -- accumulated depreciation (78,765) (74,306)
-------- --------
166,424 165,829
Other Assets 1,092 209
-------- --------
$168,921 $166,267
======== ========
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 19 $ 19
Payable to affiliate 19,675 24,231
Accrued distributions to partners 2,329 2,329
Interest payable 33 334
Property taxes payable 611 284
Current portion long-term debt 2,250 1,897
-------- --------
Total current liabilities 24,917 29,094
Long-Term Payable to Affiliate,
net of current portion 4,427 4,573
Long-Term Debt, net of current portion 122,173 112,693
Deferred Income Taxes 2,010 1,673
-------- --------
Total liabilities 153,527 148,033
-------- --------
Commitments and Contingencies (Note 5)
Partners' Capital:
Limited Partners, 4,940,000 units issued 28,129 30,887
Less -- 806,500 treasury units, at cost (11,202) (11,202)
-------- --------
Limited Partners, net 16,927 19,685
General Partner (1,533) (1,451)
-------- --------
Total partners' capital 15,394 18,234
-------- --------
$168,921 $166,267
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except unit amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues $ 12,088 $ 11,486 $ 31,765 $ 30,438
Operating Costs and Expenses:
Property taxes 692 771 2,276 2,153
Base management fee 891 847 2,519 2,409
Incentive management fee 1,680 1,651 4,387 4,204
Depreciation and amortization 2,568 2,229 7,455 7,162
Other 642 428 1,637 1,527
---------- ---------- ---------- ----------
Operating Income 5,615 5,560 13,491 12,983
Interest Expense (3,100) (2,819) (9,008) (8,457)
---------- ---------- ---------- ----------
Income Before Income Taxes 2,515 2,741 4,483 4,526
Income Tax Expense (91) -- (337) --
---------- ---------- ---------- ----------
Net Income $ 2,424 $ 2,741 $ 4,146 $ 4,526
========== ========== ========== ==========
Allocation of Net Income:
General Partner $ 48 $ 55 $ 83 $ 90
========== ========== ========== ==========
Limited Partners $ 2,376 $ 2,686 $ 4,063 $ 4,436
========== ========== ========== ==========
Net Income Per Limited Partner
Unit $0.57 $0.65 $0.98 $1.07
========== ========== ========== ==========
Average Limited Partner Units
Outstanding 4,133,500 4,133,500 4,133,500 4,133,500
========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(in thousands, except unit amounts)
(unaudited)
<TABLE>
<CAPTION>
LIMITED PARTNERS
--------------------------------------------
ISSUED UNITS TREASURY UNITS
------------------- -------------------- GENERAL
UNITS AMOUNT UNITS AMOUNT PARTNER TOTAL
--------- -------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 4,940,000 $30,887 (806,500) $(11,202) $(1,451) $18,234
Distributions to partners -- (6,821) -- -- (165) (6,986)
Net income -- 4,063 -- -- 83 4,146
--------- ------- -------- -------- ------- -------
Balance at September 30, 1996 4,940,000 $28,129 (806,500) $(11,202) $(1,533) $15,394
========= ======= ======== ======== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 4,146 $ 4,526
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 7,455 7,162
Amortization of other assets 428 449
Deferred income taxes 337 --
Increase (decrease) in payables
and accrued expenses 26 (344)
--------- --------
Net cash provided by operating activities 12,392 11,793
--------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment, net (8,050) (6,754)
Cash reserved for capital improvements (2,519) (2,409)
Cash withdrawn from reserve
for capital improvements 2,519 2,409
--------- --------
Net cash used in investing activities (8,050) (6,754)
--------- --------
Cash Flows from Financing Activities:
Distribution of cash to partners (6,986) (6,986)
Advances from affiliate 32,369 30,595
Payments to affiliate (37,071) (27,581)
Proceeds from term loan 120,000 --
Payments on term loan (1,000) --
Payments on mortgage note (100,969) (1,112)
Net (repayments) borrowings
under revolving credit facility (8,302) 878
Additions to deferred loan costs (1,311) (833)
Net increase in other
long-term obligations 104 --
--------- --------
Net cash used in financing activities (3,166) (5,039)
--------- --------
Increase in Cash 1,176 --
Cash at Beginning of Period 229 --
--------- --------
Cash at End of Period $ 1,405 $
========= ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 9,309 $ 8,461
========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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"). The
Partnership was organized for the purpose of acquiring and owning, through the
Operating Partnership, ten Red Lion hotels (the "Hotels" or individually, a
"Hotel"). On April 14, 1987 (the date of the Partnership's inception), the
Operating Partnership acquired the Hotels from Red Lion, a California Limited
Partnership ("Historical Red Lion"), which continued to manage the Hotels under
a long-term management agreement (the "Management Agreement"). All significant
intercompany transactions and accounts have been eliminated.
Red Lion Hotels, Inc. ("Red Lion") was incorporated in Delaware in March 1994
and commenced operations in March 1995. On August 1, 1995, Historical Red Lion
contributed substantially all of its assets (excluding 17 hotels and certain
related obligations, certain minority joint venture interests and certain
current assets) and certain liabilities to Red Lion. In connection with this
transaction, Historical Red Lion assigned the Management Agreement to Red Lion,
which continues to operate and manage the Hotels thereunder. The Management
Agreement expires in 2012 and can be extended by Red Lion for an additional ten
five-year periods.
The general partner of the Partnership and Operating Partnership is Red Lion
Properties, Inc. (the "General Partner"), a wholly owned subsidiary of Red Lion.
Red Lion became a publicly held company in July 1995. Red Lion files reports and
other information with the Securities and Exchange Commission in accordance with
the Securities Exchange Act of 1934. On September 12, 1996, Red Lion entered
into an Agreement and Plan of Merger ("Merger Agreement") with Doubletree
Corporation ("Doubletree"), pursuant to which Red Lion would be acquired by
Doubletree through the merger of a wholly owned subsidiary with and into Red
Lion. Consummation of the transaction is subject to certain conditions and is
expected to be completed during the fourth quarter of 1996.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management 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 management endeavors
to make accurate estimates, actual results could differ from estimates.
The unaudited consolidated financial statements reflect, in the opinion of
management, all adjustments, all of which are of a normal recurring nature,
necessary to present fairly the financial position of the Partnership at
September 30, 1996 and the results of operations and cash flows for the nine
month periods ended September 30, 1996 and 1995. Interim results are not
necessarily indicative of results to be expected for a full fiscal year.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
The unaudited consolidated financial statements should be read in conjunction
with the Partnership's annual consolidated financial statements and notes
thereto.
7
<PAGE>
Operating Revenues and Expenses and Current Assets and Current Liabilities
Revenues reported in the accompanying statements of income represent the gross
operating profit of the Hotels which is credited to the Partnership from Red
Lion under the terms of the Management Agreement. Operating revenues and
expenses and the current assets and current liabilities of the Hotels are
included in the consolidated financial statements of Red Lion and are excluded
from the accompanying consolidated financial statements of the Partnership
because Red Lion, and not the Partnership, has operating responsibility for the
Hotels and such operating responsibility is substantially the same as that for
owned hotels.
Income Taxes
No current provision for federal or state income taxes has been provided by the
Partnership in the accompanying consolidated financial statements since such
taxes are the responsibility of the individual partners. However, as discussed
in Note 2, deferred income taxes have been provided for the projected
differences between the financial accounting and tax bases of property and
equipment on January 1, 1998, when the Partnership will cease to be a nontaxable
entity and income will be taxed at the Partnership level with distributions to
individual partners taxed as dividends.
2. INCOME TAXES
DURING 1987, CONGRESS PASSED THE OMNIBUS BUDGET RECONCILIATION ACT WHICH, AMONG
OTHER THINGS, TREATS THEN EXISTING PUBLICLY-TRADED PARTNERSHIPS AS CORPORATIONS
FOR TAX PURPOSES FOR YEARS BEGINNING AFTER DECEMBER 31, 1997. THE PARTNERSHIP
IS NOT CURRENTLY A TAXABLE ENTITY. THE EFFECT OF TREATING PUBLICLY-TRADED
PARTNERSHIPS AS CORPORATIONS WILL BE TO TAX THE INCOME OF THE PARTNERSHIP AT THE
ENTITY LEVEL AND CHANGE THE NATURE OF DISTRIBUTIONS TO LIMITED PARTNERS, MAKING
FUTURE DISTRIBUTIONS TAXABLE DIVIDENDS. THE PAYMENT OF INCOME TAXES BY THE
PARTNERSHIP WILL NOT REDUCE CASH AVAILABLE FOR PAYMENT OF THE INCENTIVE
MANAGEMENT FEES TO RED LION DESCRIBED IN NOTE 3. INSTEAD, THE PAYMENT OF INCOME
TAXES BY THE PARTNERSHIP WILL DIRECTLY REDUCE PARTNER DISTRIBUTIONS.
3. RELATED PARTY TRANSACTIONS
The General Partner is responsible for the management and administration of the
Partnership. In accordance with the limited partnership agreement, the
Partnership reimburses the General Partner for related administrative costs.
Under the Management Agreement, the Partnership pays base and incentive
management fees to Red Lion. Base management fees payable to Red Lion are equal
to 3% of the annual gross revenues of the Hotels. Incentive management fees
payable to Red Lion are equal to the sum of 15% of annual adjusted gross
operating profit up to $36 million (operating profit target) and 25% of adjusted
gross operating profit in excess of the operating profit target. Adjusted gross
operating profit is gross operating profit (the revenues reported in the
accompanying financial statements) less base management fees.
Incentive management fees are only payable to the extent that cash flow
available for distributions and incentive management fees ("Cash Flow") on an
annual basis, as defined in the Management Agreement, exceeds $2.20 per unit
("Priority Return"). Cash Flow is defined as pre-tax income (or loss) before
noncash charges (primarily depreciation and amortization) and incentive
management fees, but after the reserve for capital improvements and principal
payments on certain debt. Incentive management fees that are earned but not
paid on an annual basis because of the Cash Flow limitation are deferred without
interest up to a maximum of $6 million.
Once the Partnership becomes a taxable entity in 1998, a portion of the Priority
Return will be used to pay any income taxes payable by the Partnership, thereby
reducing the quarterly distributions to limited partners. In addition, the
Priority Return can be used to repay certain indebtedness owed to Red Lion or to
fund capital improvements.
8
<PAGE>
The Hotels, in accordance with the Management Agreement, are also charged by Red
Lion for their pro rata share of support services such as computer, advertising,
public relations, promotional and sales and central reservation services.
All Partnership personnel are employees of Red Lion and its affiliates. All
costs for services of such employees are reimbursed to Red Lion by the Operating
Partnership. These costs include salaries, wages, payroll taxes and other
employee benefits. Additionally, auxiliary enterprises owned by Red Lion sell
operating supplies, furnishings and equipment to the Partnership.
Amounts payable to affiliate consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------- ------------
<S> <C> <C>
Amounts payable to affiliate $ 26,592 $ 30,998
Current assets and current liabilities
of Hotels (2,490) (2,194)
-------- --------
Amounts payable to affiliate, net of
current assets and current liabilities 24,102 28,804
Less current payable to affiliate (19,675) (24,231)
-------- --------
Long-term payable to affiliate, net of
current portion $ 4,427 $ 4,573
======== ========
</TABLE>
Included in the amounts payable to affiliate are $19,675,000 and $19,078,000 at
September 30, 1996 and December 31, 1995, respectively, representing amounts
payable to Red Lion primarily for advances made by Red Lion for capital
improvements which exceeded the 3% reserve established in accordance with the
provisions of the Management Agreement. The amounts advanced for capital
improvements incur interest at the rate of prime plus 0.5% (8.75% and 9.0% at
September 30, 1996 and December 31, 1995, respectively).
Long-term payables to affiliate are non-interest bearing amounts comprised of
deferred incentive management fees and a General Partner credit facility.
Deferred incentive management fees payable were $701,000 and $6,000,000 at
September 30, 1996 and December 31, 1995, respectively. The amount drawn
against the General Partner credit facility was $3,726,000 at September 30, 1996
and December 31, 1995 and is classified as a long-term payable.
Amounts payable to affiliate are recorded net of an amount for the current
assets and current liabilities of the Hotels of $2,490,000 and $2,194,000 at
September 30, 1996 and December 31, 1995, respectively. The current assets and
current liabilities of the Hotels consist of cash held in hotel accounts,
accounts receivable, inventories, prepaid expenses, hotel accounts payable and
certain taxes other than property, income and payroll taxes. Since Red Lion has
operating responsibilities associated with the Hotels, these current asset and
current liability items are excluded from the accompanying consolidated
financial statements.
9
<PAGE>
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Term loan, payable in varying
installments through March 31, 1999 $119,000 $ --
Revolving credit facility, due
March 31, 1999 5,000 --
Mortgage note, payable in varying
installments through April 14, 1996 -- 100,969
Revolving credit facility, due
April 14, 1996 -- 13,302
Other long-term obligations 423 319
-------- --------
Total long-term debt 124,423 114,590
Less current portion (2,250) (1,897)
-------- --------
$122,173 $112,693
======== ========
</TABLE>
On April 2, 1996, the Partnership entered into a three-year $125 million credit
facility. The credit facility includes a $120 million term loan and a $5
million revolving credit line. The proceeds of the new term loan were used to
pay in full all amounts owed under the prior mortgage note and revolving credit
facility, to pay a portion of the payable to affiliate related to deferred
incentive management fees, as discussed in Note 3, and to pay loan fees.
Borrowings under the facility bear interest at the London Interbank Offering
Rate ("LIBOR") plus 2.25% (8.9% at September 30, 1996) and are secured by the
Hotels. At September 30, 1996, remaining principal payments due on the three-
year term loan total $500,000, $2.4 million and $3.2 million for 1996, 1997 and
1998, respectively, with a lump-sum payment of $112.9 million due at the end of
the term (March 31, 1999).
Interest Rate Swap Agreements
The Partnership enters into interest rate swap agreements in order to reduce its
exposure to interest rate fluctuations. The agreements have effectively
converted floating rate debt, which is tied to LIBOR, to fixed rates.
Accordingly, the net interest received or paid on the interest rate swap is
recorded as an adjustment to interest expense.
At September 30, 1996, the Partnership had four interest rate swap agreements
outstanding which have substantially converted $100 million of debt from
floating LIBOR based rates to fixed rates ranging from 6.17% to 6.23%. The
agreements expire from December 1998 to March 1999. Interest expense incurred
by the Partnership relating to interest rate swap agreements for the three and
nine months ended September 30, 1996, was approximately $170,000 and $300,000,
respectively, and is included as an adjustment to interest expense.
5. COMMITMENTS AND CONTINGENCIES
At September 30, 1996, the Partnership had commitments relating to capital
improvement projects of $2.3 million.
The Partnership is subject to litigation arising in the ordinary course of
business. In the opinion of management, these actions will not have a material
adverse effect, if any, on the financial position or results of operations or
liquidity of the Partnership or its subsidiary.
10
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------ -----------------------------------------------------------------------
OF OPERATIONS
-------------
RESULTS OF OPERATIONS
BEGINNING JANUARY 1, 1998, THE PARTNERSHIP WILL BE SUBJECT TO TAXES ON ITS
INCOME. THE EFFECT OF THIS WILL BE TO REDUCE CURRENT DISTRIBUTIONS TO LIMITED
PARTNERS BY THE AMOUNT OF THESE INCOME TAXES. INCOME TAXES WILL NOT REDUCE
AMOUNTS AVAILABLE FOR PAYMENT TO RED LION OF ANY FEES DUE UNDER THE MANAGEMENT
AGREEMENT. DISTRIBUTIONS TO PARTNERS WILL BE CONSIDERED TAXABLE DIVIDENDS.
The revenues of the Partnership represent the gross operating profit of the
Hotels which is credited to the Partnership from Red Lion under the terms of the
Management Agreement. The gross operating revenues and expenses of the Hotels
are included in the consolidated financial statements of Red Lion, and are
excluded from the financial statements of the Partnership, because Red Lion, and
not the Partnership, has operating responsibility for the Hotels. The following
table sets forth Red Lion's operating revenues and expenses associated with the
Hotels (in thousands):
GROSS OPERATING REVENUES AND EXPENSES OF THE HOTELS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1996 1995 1996 1995
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues:
Rooms $19,094 $17,756 $51,004 $48,224
Food and beverage 7,706 7,879 24,237 24,503
Other 2,896 2,599 8,728 7,575
------- ------- ------- -------
Total revenues 29,696 28,234 83,969 80,302
------- ------- ------- -------
Operating Costs and Expenses:
Departmental direct expenses:
Rooms 4,529 4,111 12,659 11,593
Food and beverage 6,313 6,294 19,563 19,608
Other 1,028 958 3,176 2,853
Administration and general 2,307 2,236 6,887 6,665
Sales, promotion and advertising 1,508 1,262 4,283 3,737
Utilities 928 910 2,587 2,410
Repairs and maintenance 995 977 3,049 2,998
------- ------- ------- -------
Total operating costs and expenses 17,608 16,748 52,204 49,864
------- ------- ------- -------
Gross Operating Profit of Hotels
Managed by Red Lion $12,088 $11,486 $31,765 $30,438
======= ======= ======= =======
</TABLE>
If the acquisition of Red Lion by Doubletree is consummated according to the
terms of the Merger Agreement, Red Lion will become a wholly owned subsidiary of
Doubletree. This transaction is expected to be completed during the fourth
quarter of 1996.
Comparison of Three Months Ended September 30, 1996 and 1995
Gross Revenues of the Hotels. For the three months ended September 30, 1996,
- -----------------------------
gross revenues rose to $29.7 million from $28.2 million in the comparable
quarter ended September 30, 1995, an increase of approximately $1.5 million or
5%. The rise in gross revenues is primarily a result of increased room
revenues.
11
<PAGE>
During the three months ended September 30, 1996, room revenues rose to $19.1
million from $17.8 million in the comparable three months ended September 30,
1995, an increase of 7%. The increase in room revenues is due principally to
higher average room rates. The average occupancy rate was slightly higher for
the current quarter.
A summary of occupancy and room rates for the Hotels for the three months ended
September 30 is as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Occupancy Percentage 81.9% 81.7%
Average Room Rate $82.78 $77.13
</TABLE>
Operating results are affected by seasonality. The current quarter results
reflect late summer and early fall seasons in which revenues are typically
higher than in the second and fourth quarters. There can be no assurance,
however, that such trends will continue.
Gross Operating Costs and Expenses of the Hotels. Gross operating costs and
- -------------------------------------------------
expenses of the Hotels for the three months ended September 30, 1996 rose
slightly to $17.6 million from $16.7 million in the comparable three months
ended September 30, 1995, an increase of $900,000 or 5%. Gross operating costs
and expenses as a percentage of gross revenues of the Hotels remained relatively
constant at 59% for the three months ended September 30, 1996 and 1995.
Gross Operating Profit of the Hotels. Gross operating profit as a percentage of
- -------------------------------------
revenues was 41% for both the three months ended September 30, 1996 and 1995.
Partnership Revenues. During the three months ended September 30, 1996, revenues
- ---------------------
(which represent the gross operating profits of the Hotels credited from Red
Lion) increased to $12.1 million from $11.5 million in the comparable three
months ended September 30, 1995, an increase of 5%. The changes in gross
revenues and expenses of the Hotels that affect the amounts credited from Red
Lion are discussed above.
Partnership Operating Costs and Expenses. Operating costs and expenses for the
- -----------------------------------------
three months ended September 30, 1996 increased by 9% from the three months
ended September 30, 1995. The increase is due to higher depreciation and
amortization as a result of capital expenditures made in 1996 to renovate
certain hotels and higher other expenses as a result of a 10 year consumer price
index adjustment to a lease at one hotel.
Incentive Management Fee. Incentive management fees payable to Red Lion are
- -------------------------
equal to the sum of 15% of annual adjusted gross operating profit up to $36
million and 25% of adjusted gross operating profit in excess of $36 million.
Adjusted gross operating profit is gross operating profit (Partnership revenues)
less base management fees (3% of gross revenues of the Hotels). Incentive
management fees are only payable to the extent that cash flow available for
distributions and incentive management fees ("Cash Flow") on an annual basis, as
defined in the Management Agreement, exceeds $2.20 per unit ("Priority Return").
Cash Flow is defined as pre-tax income (or loss) before noncash charges
(primarily depreciation and amortization) and incentive management fees, but
after the reserve for capital improvements and principal payments on certain
debt.
Once the Partnership becomes a taxable entity in 1998, a portion of the Priority
Return will be used to pay any income taxes payable by the Partnership, thereby
reducing the quarterly distributions to limited partners. In addition, the
Priority Return can be used to repay certain indebtedness owed to Red Lion or to
fund capital improvements.
During the three months ended September 30, 1996, the Partnership accrued $1.7
million (15% of the current quarter's adjusted gross operating profit) of
incentive management fees to be paid to Red Lion.
Operating Income. Operating income before incentive management fee and
- -----------------
depreciation and amortization for the three months ended September 30, 1996 rose
to $9.9 million from $9.4 million in the comparable three months ended September
30, 1995, an increase of 5%. The increase is predominantly due to the increased
partnership revenues discussed above. After incentive management fee and
depreciation and amortization expense, operating income remained constant at
$5.6 million for the three months ended September 30, 1996 and 1995.
12
<PAGE>
Interest Expense. Interest expense increased approximately $300,000 to $3.1
- -----------------
million for the three months ended September 30, 1996 as compared to $2.8
million for the three months ended September 30, 1995. The increase is
primarily due to a higher average outstanding principal balance and interest
rate swap agreement adjustments.
Income Tax Expense. During the three months ended September 30, 1996, the
- -------------------
Partnership provided for deferred income tax of approximately $90,000. Deferred
income tax arises primarily from differences in depreciation for financial
accounting and tax purposes. The Partnership is not currently a taxable entity.
However, for years beginning after December 31, 1997, income will be taxed at
the partnership level.
Net Income. During the three months ended September 30, 1996, net income was
- -----------
$2.4 million ($.57 per limited partner unit) compared to $2.7 million ($.65 per
limited partner unit) for the three months ended September 30, 1995. The
decrease in net income is due primarily to increases in Partnership operating
costs and expenses and interest expense and recognition of deferred income taxes
at the partnership level.
Cash Flow Available for Distribution and Incentive Management Fees. Following
- -------------------------------------------------------------------
is a calculation of Cash Flow (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
-------- -------- --------- -------
<S> <C> <C> <C> <C>
Net income $ 2,424 $ 2,741 $ 4,146 $ 4,526
Add (deduct):
Depreciation and amortization 2,568 2,229 7,455 7,162
Amortization of other assets 109 215 427 449
Incentive management fee 1,680 1,651 4,387 4,204
Cash reserved for capital improvements (891) (847) (2,519) (2,409)
Repayments on term loan (500) (379) (1,531) (1,112)
Deferred income tax provision 91 -- 337 --
------- ------- ------- -------
Cash flow available for distribution and
incentive management fees 5,481 5,610 12,702 12,820
Priority distributions to partners (2,329) (2,329) (6,986) (6,986)
------- ------- ------- -------
Cash flow available for payment of
incentive management fee $ 3,152 $ 3,281 $ 5,716 $ 5,834
======= ======= ======= =======
</TABLE>
Cash Flow decreased slightly for the three months ended September 30, 1996 to
$5.5 million ($1.29 per limited partner unit) from the three months ended
September 30, 1995 of $5.6 million ($1.33 per limited partner unit). The
decrease in Cash Flow is due to the factors impacting net income, discussed
above, and higher principal repayments of certain debt.
Comparison of Nine Months Ended September 30, 1996 and 1995
Gross Revenues of the Hotels. For the nine months ended September 30, 1996,
- -----------------------------
gross revenues rose to $84 million from $80.3 million in the comparable nine
months ended September 30, 1995, an increase of approximately $3.7 million or
5%. The rise in gross revenues is primarily a result of increased room and
other revenues.
During the nine months ended September 30, 1996, room revenues rose to $51
million from $48.2 million in the comparable nine months ended September 30,
1995, an increase of 6%. The increase in room revenues is due principally to
higher average room rates. The average occupancy rate declined during the
current nine month period due in part to the effects of renovation work at
various hotels.
13
<PAGE>
A summary of occupancy and room rates for the Hotels for the nine months ended
September 30 is as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Occupancy Percentage 75.2% 76.5%
Average Room Rate $80.85 $75.35
</TABLE>
During the nine months ended September 30, 1996, other revenues rose to $8.7
million from $7.6 million in the comparable nine months ended September 30,
1995, an increase of 14%. The increase in other revenues is due principally to
increased banquet room rentals and ancillary banquet services.
Gross Operating Costs and Expenses of the Hotels. Gross operating costs and
- -------------------------------------------------
expenses of the Hotels for the nine months ended September 30, 1996 rose to
$52.2 million from $49.9 million in the comparable nine months ended September
30, 1995, an increase of $2.3 million or 5%. Gross operating costs and expenses
as a percentage of gross revenues of the Hotels remained constant at 62% for the
nine months ended September 30, 1996 and 1995.
Gross Operating Profit of the Hotels. Gross operating profit as a percentage of
- -------------------------------------
revenues was 38% for both the nine months ended September 30, 1996 and 1995.
Partnership Revenues. During the nine months ended September 30, 1996, revenues
- ---------------------
(which represent the gross operating profits of the Hotels credited from Red
Lion) increased to $31.8 million from $30.4 million in the comparable nine
months ended September 30, 1995, an increase of 5%. The changes in gross
revenues and expenses of the Hotels that affect the amounts credited from Red
Lion are discussed above.
Partnership Operating Costs and Expenses. Operating costs and expenses for the
- -----------------------------------------
nine months ended September 30, 1996 increased by 5% from the nine months ended
September 30, 1995. The increase is primarily due to higher depreciation and
amortization as a result or capital expenditures made in 1996 to renovate
certain hotels and higher base and incentive management fees as a result of
increased partnership revenues.
Incentive Management Fee. During the nine months ended September 30, 1996, the
- -------------------------
Partnership recognized $4.4 million (15% of year-to-date adjusted gross
operating profit) of incentive management fees to be paid to Red Lion.
Operating Income. Operating income before incentive management fee and
- -----------------
depreciation and amortization for the nine months ended September 30, 1996 rose
to $25.3 million from $24.3 million in the comparable nine months ended
September 30, 1995, an increase of 4%. The increase is predominantly due to the
increased partnership revenues discussed above. After incentive management fee
and depreciation and amortization expense, operating income in the nine months
ended September 30, 1996 rose to $13.5 million from $13 million in the nine
months ended September 30, 1995, an increase of 4%. As a percentage of revenues,
operating income is relatively constant at 42% and 43% for the nine months ended
September 30, 1996 and 1995, respectively.
Interest Expense. Interest expense increased approximately $500,000 to $9
- -----------------
million for the nine months ended September 30, 1996 as compared to $8.5 million
for the nine months ended September 30, 1995. The increase is primarily due to a
higher average outstanding principal balance and interest rate swap agreement
adjustments.
Income Tax Expense. During the nine months ended September 30, 1996, the
- -------------------
Partnership provided for deferred income taxes of approximately $340,000.
Deferred income tax arises primarily from differences in depreciation for
financial accounting and tax purposes. The Partnership is not currently a
taxable entity. However, for years beginning after December 31, 1997, income
will be taxed at the partnership level.
Net Income. During the nine months ended September 30, 1996, net income was
- -----------
$4.1 million ($.98 per limited partner unit) compared to $4.5 million ($1.07 per
limited partner unit) for the nine months ended September 30, 1995. The
decrease in net income is due primarily to increased interest expense and the
recognition of deferred income taxes at the partnership level which was offset
by improved operating income.
14
<PAGE>
Cash Flow Available for Distribution and Incentive Management Fees. Cash Flow
- -------------------------------------------------------------------
decreased slightly for the nine months ended September 30, 1996 to $12.7 million
($3.00 per limited partner unit) from the nine months ended September 30, 1995
of $12.8 million ($3.03 per limited partner unit). The decrease in Cash Flow is
due to the factors impacting net income, discussed above, and higher principal
repayments of certain debt.
Cash flow available for payment of incentive management fees for the nine months
ended September 30, 1996 was $5.7 million, which exceeded the incentive
management fee of $4.4 million. Under the Management Agreement, on an annual
basis, 25% of any cash flow available for payment of incentive management fees
in excess of the current year's incentive management fee will be paid to Red
Lion to pay down the non-interest bearing deferred incentive management fees
currently outstanding ($701,000 at September 30, 1996). In accordance with the
terms of the Management Agreement, none of the excess cash flow available for
payment of incentive management fees was applied against the deferred incentive
management fee balance during the third quarter of 1996. As noted in the
discussion of operations above, operating results are affected by seasonality
with second and third quarter revenues typically higher than fourth quarter
revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's principal source of cash is hotel operations. During the nine
months ended September 30, 1996, the Hotels generated sufficient cash from
operations to cover operating needs. It is expected that, for the remainder of
1996, cash provided by both operations and the credit facilities, discussed
below, or by Red Lion will be sufficient to meet anticipated cash requirements.
On April 2, 1996 the Partnership entered into a three-year $125 million credit
facility. The credit facility includes a $120 million term loan and a $5
million revolving credit line. The proceeds of the new term loan were used to
pay in full all amounts owed under the prior mortgage note and revolving credit
facility, to pay a portion of the payable to affiliate related to deferred
incentive management fees (discussed in Note 3 to the Partnership's consolidated
financial statements) and to pay loan fees. Borrowings under the facility bear
interest at the London Interbank Offering Rate ("LIBOR") plus 2.25% and are
secured by the Hotels. Principal payments on the three-year term loan will
amount to $1.5 million, $2.4 million and $3.2 million for 1996, 1997 and 1998,
respectively, with a lump-sum payment of $112.9 million due at the end of the
term (March 31, 1999).
Borrowings under the current and prior revolving credit line averaged $5.5
million during the nine months ended September 30, 1996. At September 30, 1996,
the interest rate was 8.9% and the balance outstanding was $5 million on the
revolving credit line. For further discussion of the Partnership's credit
facilities, see Note 4 to the Partnership's consolidated financial statements.
During the nine months ended September 30, 1996, the Partnership made total
capital improvements amounting to approximately $8.2 million. Major
improvements included guest room renovations and common area refurbishments at 5
hotels. These capital expenditures were reserved and funded from Hotel
operations in the amount of approximately $2.5 million pursuant to provisions of
the Management Agreement requiring 3% of gross revenues to be set aside for
capital improvements. Capital expended above the reserved amounts has been
funded principally from advances made by Red Lion.
INCOME TAXES: IN ACCORDANCE WITH CERTAIN PROVISIONS OF THE OMNIBUS BUDGET
RECONCILIATION ACT OF 1987, THE PARTNERSHIP WILL BE TREATED AS A CORPORATION FOR
INCOME TAX PURPOSES BEGINNING JANUARY 1, 1998. INCOME TAXES WILL NOT AFFECT
AMOUNTS AVAILABLE FOR PAYMENT OF INCENTIVE MANAGEMENT FEES TO RED LION UNDER THE
MANAGEMENT AGREEMENT DESCRIBED ABOVE. DISTRIBUTIONS TO PARTNERS AFTER THAT TIME
WILL BE CONSIDERED TAXABLE DIVIDENDS. THE PAYMENT OF INCOME TAXES BY THE
PARTNERSHIP WILL DIRECTLY REDUCE THE DISTRIBUTIONS TO PARTNERS.
On October 15, 1996, the General Partner declared a quarterly cash distribution
of $.55 per limited partner unit ($2.20 annualized) for the current quarter,
payable on November 15, 1996, to unitholders of record on October 31, 1996.
This distribution has been accrued in the accompanying financial statements.
**************
15
<PAGE>
The statements contained in this report that are not statements of historical
fact may include forward-looking statements that involve a number of risks and
uncertainties. Moreover, from time to time the Partnership may issue other
forward-looking statements. The following factors are among those that could
cause actual results to differ materially from the forward-looking statements:
national or local economic conditions affecting the supply and demand for hotel
space, competition in hotel operations, including additional or improved
services or facilities of competitors, price pressures, continuing availability
of capital to fund growth and improvements and the consummation of the Merger
Agreement between Red Lion and Doubletree. The forward-looking statements
should be considered in light of these factors.
16
<PAGE>
PART II
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(a) EXHIBITS: The following documents are filed herewith and made a part of
this report:
Exhibit 27 - Article 5 Financial Data Schedule for 3rd Quarter
10-Q.
(b) REPORTS ON FORM 8-K : None
17
<PAGE>
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.
Its sole General Partner
Date: October 21, 1996 By: /s/David J. Johnson
-------------------------------------
David J. Johnson
President and Chief Executive Officer
Date: October 21, 1996 By: /s/Michael Vernon
-------------------------------------
Michael Vernon
Chief Financial Officer
(Principal Financial and Accounting Officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,405
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,405
<PP&E> 245,189
<DEPRECIATION> (78,765)
<TOTAL-ASSETS> 168,921
<CURRENT-LIABILITIES> 24,917
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 15,394
<TOTAL-LIABILITY-AND-EQUITY> 168,921
<SALES> 31,765
<TOTAL-REVENUES> 31,765
<CGS> 0
<TOTAL-COSTS> 18,274
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,008
<INCOME-PRETAX> 4,483
<INCOME-TAX> 337
<INCOME-CONTINUING> 4,146
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,146
<EPS-PRIMARY> 0.98
<EPS-DILUTED> 0.98
</TABLE>
