<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 March 31, 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)
4001 Main Street, Vancouver, Washington 98663
_________________________________________________________________
(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 MARCH 31, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets 3
Consolidated Statements of Operations 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 12
PART II - OTHER INFORMATION
Item 5 Other Information 16
Item 6 Exhibit and Report on Form 8-K 16
SIGNATURES 17
</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>
MARCH 31, DECEMBER 31,
1997 1996
---------- ------------
<S> <C> <C>
ASSETS
------
Cash $ 547 $ 763
Property and Equipment:
Land 17,705 17,705
Buildings and improvements 167,502 167,502
Furnishings and equipment 60,694 60,694
Construction in progress 675 184
-------- --------
246,576 246,085
Less--accumulated depreciation (83,927) (81,356)
-------- --------
162,649 164,729
Other Assets 875 984
-------- --------
$164,071 $166,476
======== ========
LIABILITIES AND PARTNERS' CAPITAL
- ----------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 9 $ 14
Current portion payable to affiliate 22,698 20,964
Accrued distributions to partners 2,329 2,329
Interest payable 152 41
Property taxes payable 507 358
Current portion long-term debt 2,500 2,375
-------- --------
Total current liabilities 28,195 26,081
Long-Term Payable to Affiliate,
net of current portion 4,345 4,345
Long-Term Debt, net of current portion 119,410 121,043
Deferred Income Taxes 2,050 2,050
-------- --------
Total liabilities 154,000 153,519
-------- --------
Commitments and Contingencies (Note 6)
Partners' Capital:
Limited Partners, 4,940,000 units issued 22,930 25,750
Less -- 806,500 treasury units, at cost (11,202) (11,202)
-------- --------
Limited Partners, net 11,728 14,548
General Partner (1,657) (1,591)
-------- --------
Total partners' capital 10,071 12,957
-------- --------
$164,071 $166,476
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except unit amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1997 1996
-------------- ------------
<S> <C> <C>
Revenues $ 8,064 $ 7,900
Operating Costs and Expenses:
Property taxes 711 682
Base management fee 750 746
Incentive management fee 1,097 --
Depreciation and amortization 2,571 2,418
Other 453 463
---------- ----------
Operating income 2,482 3,591
Interest Expense 3,039 2,847
---------- ----------
Income (loss) before income taxes (557) 744
Income Tax Expense -- 98
---------- ----------
Net income (loss) $ (557) $ 646
========== ==========
Allocation of Net Income (Loss):
General Partner $ (11) $ 13
========== ==========
Limited Partners $ (546) $ 633
========== ==========
Net Income (Loss) per Limited Partner
Unit $(0.13) $0.15
========== ==========
Average Limited Partner Units
Outstanding 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, 1996 4,940,000 $25,750 (806,500) $(11,202) $(1,591) $12,957
Distributions to partners -- (2,274) -- -- (55) (2,329)
Net loss -- (546) -- -- (11) (557)
--------- ------- -------- -------- ------- -------
Balance at March 31, 1997 4,940,000 $22,930 (806,500) $(11,202) $(1,657) $10,071
========= ======= ======== ======== ======= =======
</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>
THREE MONTHS ENDED MARCH 31,
------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (557) $ 646
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,571 2,418
Amortization of deferred loan costs 109 206
Deferred income taxes -- 98
Increase in payables and accrued expenses 255 150
------- -------
Net cash provided by operating activities 2,378 3,518
------- -------
Cash Flows from Investing Activities:
Purchases of property and equipment, net (491) (3,957)
Cash reserved for capital improvements (750) (746)
Cash withdrawn from capital improvements reserve 750 746
------- -------
Net cash used in investing activities (491) (3,957)
------- -------
Cash Flows from Financing Activities:
Distribution of cash to partners (2,329) (2,329)
Advances from affiliate, net 1,734 3,626
Payments on term loan (500) --
Payments on mortgage note -- (397)
Net repayments under revolving credit facility (1,000) (678)
Net decrease in other long-term obligations (8) (12)
------- -------
Net cash provided by (used in) financing activities (2,103) 210
------- -------
Decrease in Cash (216) (229)
Cash at Beginning of Period 763 229
------- -------
Cash at End of Period $ 547 $ --
======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 2,928 $ 2,866
======= =======
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Red
Lion Inns Limited Partnership, a Delaware limited partnership and its subsidiary
limited partnership, Red Lion Inns Operating L.P., a Delaware limited
partnership (the "Partnership" and the "Operating Partnership", respectively;
collectively, the "Partnership"). The Partnership was organized for the purpose
of acquiring and owning, through the Operating Partnership, ten Red Lion hotels
(the "Hotels" or individually, a "Hotel"). On April 14, 1987 (the date of the
Partnership's inception), the Operating Partnership acquired the Hotels from Red
Lion, a California Limited Partnership ("Historical Red Lion"), which continued
to manage the Hotels under a long-term management agreement (the "Management
Agreement"). All significant intercompany transactions and accounts have been
eliminated.
Red Lion Hotels, Inc. ("Red Lion") was incorporated in Delaware in March 1994
and commenced operations in March 1995. On August 1, 1995, Historical Red Lion
contributed substantially all of its assets (excluding 17 hotels and certain
related obligations, certain minority joint venture interests and certain
current assets) and certain liabilities to Red Lion. In connection with this
transaction, Historical Red Lion assigned the Management Agreement to Red Lion.
The Management Agreement expires in 2012 and can be extended for an additional
ten five-year periods. The general partner of the Partnership is Red Lion
Properties, Inc. (the "General Partner"), a wholly-owned subsidiary of Red Lion
(see discussion of Doubletree merger below).
On November 8, 1996, Red Lion became a wholly-owned subsidiary of Doubletree
Corporation ("Doubletree") pursuant to a merger transaction in which all
outstanding shares of Red Lion common stock were converted into cash and shares
of Doubletree common stock. Red Lion, as a wholly-owned subsidiary of
Doubletree, continues to operate and manage the Hotels under the Management
Agreement. Doubletree files reports and other information with the Securities
and Exchange Commission in accordance with the Securities Exchange Act of 1934.
The preparation of financial statements in accordance with generally accepted
accounting principles requires the General Partner to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities. While the
General Partner endeavors to make accurate estimates, actual results could
differ from estimates.
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 March
31, 1997 and the results of operations and cash flows for the three month
periods ended March 31, 1997 and 1996. 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.
Operating Revenues and Expenses and Current Assets and Current Liabilities
Revenues reported in the accompanying statements of income represent the gross
operating profit of the Hotels. Operating revenues and expenses and the current
assets and current liabilities of the Hotels are excluded from the accompanying
consolidated financial statements of the Partnership because Red Lion, and not
the Partnership, has operating responsibility for the Hotels.
7
<PAGE>
Income Taxes
No current provision for federal or state income taxes has been provided by the
Partnership in the accompanying consolidated financial statements. The
Partnership is not currently a taxable entity and any income taxes are the
responsibility of the partners. Beginning January 1, 1998, federal tax law
mandates that the Partnership become subject to corporate taxes on its income.
Therefore, deferred income taxes have been provided for the projected
differences between the financial accounting and tax bases of property and
equipment at January 1, 1998 (see Note 2).
2. INCOME TAXES
DURING 1987, CONGRESS PASSED THE OMNIBUS BUDGET RECONCILIATION ACT WHICH
MANDATES THAT THE PARTNERSHIP BECOME SUBJECT TO CORPORATE TAXES ON ITS INCOME
BEGINNING JANUARY 1, 1998. THE PARTNERSHIP IS NOT CURRENTLY A TAXABLE ENTITY.
THE PAYMENT OF INCOME TAXES BY THE PARTNERSHIP WILL NOT REDUCE CASH AVAILABLE
FOR PAYMENT OF ANY FEES, INCLUDING THE INCENTIVE MANAGEMENT FEE, DUE TO RED LION
UNDER THE MANAGEMENT AGREEMENT (SEE NOTE 5). THE PAYMENT OF INCOME TAXES BY THE
PARTNERSHIP WILL DIRECTLY REDUCE CASH AVAILABLE FOR PARTNER DISTRIBUTION.
DISTRIBUTIONS TO PARTNERS AFTER DECEMBER 31, 1997 WILL BE CONSIDERED TAXABLE
DIVIDENDS.
THE GENERAL PARTNER HAS FORMED A SPECIAL COMMITTEE OF INDEPENDENT DIRECTORS TO
EVALUATE ALTERNATIVES AVAILABLE TO THE PARTNERSHIP IN CONNECTION WITH THE
SCHEDULED 1998 CHANGE IN THE PARTNERSHIP'S TAX STATUS FROM A PARTNERSHIP TO A
CORPORATION. THESE ALTERNATIVES INCLUDE, AMONG OTHERS, INCORPORATING THE
PARTNERSHIP OR CONVERTING OR MERGING THE PARTNERSHIP INTO A REAL ESTATE
INVESTMENT TRUST. THE PARTNERSHIP EXPECTS TO HAVE A RECOMMENDATION FROM THE
SPECIAL COMMITTEE BY LATE SUMMER, AND, SUBJECT TO ANY POSSIBLE LEGISLATIVE
RELIEF DEFERRING OR ALTERING THE CHANGE IN TAX STATUS, TO CONCLUDE ANY PROPOSED
ACTION PRIOR TO YEAR END.
3. LONG-TERM DEBT
During April 1996, the Partnership entered into a three-year $125 million credit
facility. The credit facility includes a $120 million term loan and a $5 million
revolving credit line. The proceeds of the term loan were used to repay all
amounts owed under the prior mortgage note and revolving credit facility, a
portion of the payable to affiliate related to deferred incentive management
fees and loan fees. Borrowings under the facility bear interest at the London
Interbank Offering Rate ("LIBOR") plus 2.25% (8.8% at March 31, 1997 and
December 31, 1996) and are secured by all of the assets of the Hotels. At March
31, 1997, remaining principal payments due on the three-year term loan total
$1.8 million and $3.2 million for 1997 and 1998, respectively, with a lump-sum
payment of $112.9 million due on March 31, 1999.
Interest Rate Swap Agreements
At March 31, 1997, the Partnership had four interest rate swap agreements
outstanding which have substantially converted $100 million of debt from
floating LIBOR based rates to fixed rates ranging from 6.17% to 6.23%. The
agreements expire from December 1998 to March 1999. Interest expense incurred by
the Partnership relating to interest rate swap agreements for the three months
ended March 31, 1997, was approximately $150,000 and is included in interest
expense.
4. CASH DISTRIBUTIONS TO PARTNERS
In accordance with the Management Agreement, the Partnership pays base and
incentive management fees to Red Lion. Base management fees payable are equal to
3% of the annual gross revenues of the Hotels. Incentive management fees
payable are equal to the sum of 15% of annual adjusted gross operating profit
up to $36 million (operating profit target) and 25% of annual adjusted gross
operating profit in excess of the operating profit target. Adjusted gross
operating profit is gross operating profit (the revenues reported in the
accompanying consolidated financial statements) less base management fees.
8
<PAGE>
Incentive management fees are only payable to the extent that cash flow
available for distribution and incentive management fees ("Cash Flow"), on an
annual basis, exceeds $2.20 per unit (the "Priority Return"). Cash Flow is
defined as pre-tax income (or loss) before noncash charges (primarily
depreciation and amortization) and incentive management fees, but after the
reserve for capital improvements and principal payments on certain debt.
Currently, the incentive management fee is accrued at 15% of the quarter's
adjusted operating profit to the extent that adequate cash flow available for
payment of the incentive management fee is anticipated, on an annual basis.
The incentive management fee that is earned but not paid on an annual basis,
because of the Cash Flow limitation, is deferred without interest up to a
maximum of $6 million. The 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.
Following is a calculation of Cash Flow and related cash flow available for
payment of incentive management fees (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Net income (loss) $ (557) $ 646
Add (deduct):
Depreciation and amortization 2,571 2,418
Incentive management fee 1,097 --
Amortization of deferred loan costs 109 206
Cash reserved for capital improvements (750) (746)
Repayments on term loan (500) (397)
Deferred income tax provision -- 98
------- -------
Cash flow available for distribution and
incentive management fees (Cash Flow) 1,970 2,225
Priority Return (2,329) (2,329)
------- -------
Cash flow (shortfall) available for
payment of incentive management fees $ (359) (104)
Current incentive management fee (1,097) --
------- -------
Excess (negative) cash flow $(1,456) $ (104)
======= =======
Cash Flow per unit $ 0.47 $ 0.53
======= =======
</TABLE>
Beginning January 1, 1998, federal tax law mandates that the Partnership become
subject to corporate taxes on its income. The Partnership is not currently a
taxable entity. The payment of income taxes by the Partnership will not reduce
cash available for payment of any fees, including the incentive management fee,
due to Red Lion under the Management Agreement. The payment of income taxes by
the Partnership will directly reduce cash available for partner distribution.
Distributions to partners after December 31, 1997 will be considered taxable
dividends. Although the Partnership has historically distributed the Priority
Return to limited partners, there is no assurance this will continue after
December 31, 1997. In addition, the Priority Return can be used to repay certain
indebtedness owed to Red Lion or to fund capital improvements, also reducing
cash flow available for distribution to limited partners.
9
<PAGE>
5. RELATED PARTY TRANSACTIONS
The General Partner is responsible for the management and administration of the
Partnership. In accordance with the Partnership's Amended and Restated
Agreement of Limited Partnership, 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 (see Note 4).
The Hotels, in accordance with the Management Agreement, are also charged by Red
Lion for their pro rata share of support services such as computer, advertising,
public relations, promotional and sales and central reservation services.
All Partnership personnel are employees of Red Lion and its affiliates. All
costs for services of such employees are reimbursed to Red Lion by the Operating
Partnership. These costs include salaries, wages, payroll taxes and other
employee benefits. Additionally, auxiliary enterprises owned by Red Lion or its
affiliates sell operating supplies, furnishings and equipment to the
Partnership.
Amounts payable to affiliate consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Amounts payable to affiliate $ 29,939 $ 28,499
Current assets and current liabilities of Hotels (2,896) (3,190)
-------- --------
Amounts payable to affiliate, net of current assets
and current liabilities 27,043 25,309
Less current payable to affiliate (22,698) (20,964)
-------- --------
Long-term payable to affiliate, net of current portion $ 4,345 $ 4,345
======== ========
</TABLE>
Included in the amounts payable to affiliate are $25.5 million and $24.1 million
at March 31, 1997 and December 31, 1996, 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. Of such amounts advanced, $21.3 million
and $20.1 million at March 31, 1997 and December 31, 1996, respectively, incur
interest at the rate of prime plus 0.5% (9% and 8.75% at March 31, 1997 and
December 31, 1996, respectively). The balance of the amounts advanced are non-
interest bearing.
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 was approximately $700,000 at March
31, 1997 and December 31, 1996. Of such amount at March 31, 1997 and December
31, 1996, approximately $620,000 is classified as a long-term payable and
$80,000 is classified as a current payable to affiliate as such amount
represents 25% of the Partnership's excess cash flow in 1996 and was paid to Red
Lion in April 1997 as required by the Management Agreement.
The amount drawn against the non-interest bearing General Partner credit
facility was $3.7 million at March 31, 1997 and December 31, 1996 and is
classified as a long-term payable. During the first 36 months of operation,
which ended April 30, 1990, the General Partner advanced amounts to fund
distributions of the Priority Return to limited partners in excess of Cash Flow.
The Partnership anticipates this amount will be repaid out of either (i) cash
flow after payment of the Priority Return and incentive management fees, or (ii)
sale or refinancing proceeds prior to any distribution to limited partners.
10
<PAGE>
Amounts payable to affiliate are recorded net of an amount for the current
assets and current liabilities of the Hotels of $2.9 million and $3.2 million at
March 31, 1997 and December 31, 1996, respectively. The current assets and
current liabilities of the Hotels consist of cash held in hotel accounts,
accounts receivable, inventories, prepaid expenses, hotel accounts payable and
certain taxes other than property, income and payroll taxes. Since Red Lion has
operating responsibilities associated with the Hotels, these current asset and
current liability items are excluded from the accompanying consolidated
financial statements.
The following schedule reflects the operating revenues and expenses of the
Hotels not reflected in the accompanying financial statements (in thousands):
GROSS OPERATING REVENUES AND EXPENSES OF THE HOTELS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
------------- ------------
<S> <C> <C>
Revenues:
Rooms $14,608 $13,953
Food and beverage 7,668 8,175
Other 2,709 2,740
------- -------
Total revenues 24,985 24,868
------- -------
Operating Costs and Expenses:
Departmental direct expenses:
Rooms 4,089 3,908
Food and beverage 6,410 6,508
Other 955 1,031
Administration and general 2,252 2,275
Sales, promotion and advertising 1,382 1,367
Utilities 816 830
Repairs and maintenance 1,017 1,049
------- -------
Total operating costs and expenses 16,921 16,968
------- -------
Gross operating profit of Hotels $ 8,064 $ 7,900
======= =======
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
At March 31, 1997, the Partnership had commitments relating to capital
improvement projects of approximately $1.3 million.
The Partnership is subject to litigation arising in the ordinary course of
business. In the opinion of the General Partner, these actions will not have a
material adverse effect, if any, on the financial position or results of
operations or liquidity of the Partnership or its subsidiary.
11
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------ -----------------------------------------------------------------------
OF OPERATIONS
-------------
BEGINNING JANUARY 1, 1998, FEDERAL TAX LAW MANDATES THAT THE PARTNERSHIP BECOME
SUBJECT TO CORPORATE TAXES ON ITS INCOME. THE PARTNERSHIP IS NOT CURRENTLY A
TAXABLE ENTITY. THE PAYMENT OF INCOME TAXES BY THE PARTNERSHIP WILL NOT REDUCE
CASH AVAILABLE FOR PAYMENT OF ANY FEES, INCLUDING THE INCENTIVE MANAGEMENT FEE,
DUE TO RED LION UNDER THE MANAGEMENT AGREEMENT. THE PAYMENT OF INCOME TAXES BY
THE PARTNERSHIP WILL DIRECTLY REDUCE CASH AVAILABLE FOR PARTNER DISTRIBUTION.
DISTRIBUTIONS TO PARTNERS AFTER DECEMBER 31, 1997 WILL BE CONSIDERED TAXABLE
DIVIDENDS.
THE GENERAL PARTNER HAS FORMED A SPECIAL COMMITTEE OF INDEPENDENT DIRECTORS TO
EVALUATE ALTERNATIVES AVAILABLE TO THE PARTNERSHIP IN CONNECTION WITH THE
SCHEDULED 1998 CHANGE IN THE PARTNERSHIP'S TAX STATUS FROM A PARTNERSHIP TO A
CORPORATION. THESE ALTERNATIVES INCLUDE, AMONG OTHERS, INCORPORATING THE
PARTNERSHIP OR CONVERTING OR MERGING THE PARTNERSHIP INTO A REAL ESTATE
INVESTMENT TRUST. THE PARTNERSHIP EXPECTS TO HAVE A RECOMMENDATION FROM THE
SPECIAL COMMITTEE BY LATE SUMMER, AND, SUBJECT TO ANY POSSIBLE LEGISLATIVE
RELIEF DEFERRING OR ALTERING THE CHANGE IN TAX STATUS, TO CONCLUDE ANY PROPOSED
ACTION PRIOR TO YEAR END.
RESULTS OF OPERATIONS
The revenues of the Partnership represent the gross operating profit of the
Hotels. The gross operating revenues and expenses of the Hotels are excluded
from the financial statements of the Partnership, because Red Lion, and not the
Partnership, has operating responsibility for the Hotels. The schedule displayed
in Note 5 to the consolidated financial statements sets forth the Hotels' gross
operating revenues and expenses. A summary of occupancy and room rates for the
Hotels follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Occupancy percentage 64.9% 65.7%
Average room rate $81.67 $76.22
</TABLE>
Operating results are affected by seasonality. The results of the current
quarter reflect the winter and early spring seasons in which revenues are
typically lower than in the second and third quarters. There can be no
assurance, however, that such trends will continue. Operating results for the
current quarter do not necessarily indicate the results expected for the full
year.
Comparison of Three Months Ended March 31, 1997 and 1996
Gross Revenues of the Hotels. For the three months ended March 31, 1997, gross
- -----------------------------
revenues rose to $25 million from $24.9 million in the comparable three months
ended March 31, 1996, an increase of approximately $100,000. The slight rise in
gross revenues is primarily a result of increased room revenues offset by a
decline in food and beverage revenues.
During the three months ended March 31, 1997, room revenues rose to $14.6
million from $14 million in the comparable three months ended March 31, 1996, an
increase of 4%. The increase in room revenues is due principally to higher
average room rates offset by a slight decline in occupancy.
12
<PAGE>
During the three months ended March 31, 1997, food and beverage revenues fell to
$7.7 million from $8.2 million in the comparable three months ended March 31,
1996, a decrease of 6%. The decrease in food and beverage revenues is due
principally to additional group banquet revenue realized by certain Hotels
during the three months ended March 31, 1996 and the slight decline in occupancy
during the three months ended March 31, 1997 from the comparable three-month
period. During the three months ended March 31, 1996, various hotels located in
northwestern Oregon and southwestern Washington were evacuated due to flooding
in the Pacific Northwest. The two Partnership Hotels located in northwestern
Oregon benefited from additional catering and group banquet revenues as a
result of their displacement from the other hotels.
Gross Operating Costs and Expenses of the Hotels. Gross operating costs and
- -------------------------------------------------
expenses of the Hotels for the three months ended March 31, 1997 decreased
slightly to $16.9 million from $17 million in the comparable three months ended
March 31, 1996, a decrease of less than 1%. Gross operating costs and expenses
as a percentage of gross revenues of the Hotels remained constant at 68% for the
three months ended March 31, 1997 and 1996.
Partnership Revenues. During the three months ended March 31, 1997, revenues
- ---------------------
(which represent the gross operating profits of the Hotels) increased to $8.1
million from $7.9 million in the comparable three months ended March 31, 1996,
an increase of 3%. Partnership revenues as a percentage of Hotel revenues were
32% for both the three months ended March 31, 1997 and 1996. The effect of 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 March 31, 1997 increased by 30% from the comparable three
months ended March 31, 1996. The increase is primarily due to the accrual of the
incentive management fee which was calculated based on the first quarter of 1997
results (see discussion below under Incentive Management Fee). In addition,
depreciation and amortization was higher as a result of significant renovations
at four Hotels during 1996.
Incentive Management Fee. Pursuant to the terms of the Management Agreement,
- -------------------------
Red Lion earns an incentive management fee equal to the sum of 15% of annual
adjusted gross operating profit up to $36 million and 25% of annual adjusted
gross operating profit in excess of $36 million. Adjusted gross operating
profit is gross operating profit (Partnership revenues) less base management fee
(3% of gross revenues of the Hotels). The incentive management fee is only
payable to the extent that cash flow available for distribution 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 the incentive management fee, but after the reserve for
capital improvements and principal payments on certain debt.
During the three months ended March 31, 1997 and 1996, the Partnership
recognized $1.1 million and $0, respectively, of incentive management fees to be
paid to Red Lion. Beginning January 1, 1997, the incentive management fee is
accrued at 15% of the current quarter's adjusted operating profit. Previously,
the Partnership recognized the incentive management fee only to the extent that
actual year-to-date cash flow was available for its payment. Accordingly, during
the three months ended March 31, 1996, no incentive management fee was
recorded. The Partnership believes the current method of accounting for the
incentive management fee produces a better matching of the expenses to revenues
within interim periods and will not impact the accounting for such fee on an
annual basis. The incentive management fee continues to be payable only to the
extent there is cash flow available for its payment.
Partnership Operating Income. Operating income declined to $2.5 million for the
- -----------------------------
three months ended March 31, 1997 from $3.6 million in the comparable three
months ended March 31, 1996, a decrease of 31%. As a percentage of Partnership
revenues, operating income declined to 31% for the three months ended March 31,
1997 as compared to 45% for the three months ended March 31, 1996. The decline
in operating income is primarily a result of the recognition of the incentive
management fee during the three months ended March 31, 1997 as compared to 1996,
discussed above.
13
<PAGE>
Interest Expense. Interest expense increased approximately $190,000 to $3
- -----------------
million for the three months ended March 31, 1997 as compared to $2.8 million
for the three months ended March 31, 1996. The increase is primarily due to
additional expense as a result of higher average outstanding debt balances and
interest rate swap adjustments.
Income Tax Expense. During the three months ended March 31, 1996, the
- -------------------
Partnership provided for deferred income tax of approximately $98,000. During
the three months ended March 31, 1997, no deferred income tax provision was
necessary. The Partnership is not currently a taxable entity. Beginning January
1, 1998, federal tax law mandates that the Partnership become subject to
corporate taxes on its income. Deferred income tax arises primarily from
differences in depreciation for financial accounting and tax purposes which are
expected to exist at January 1, 1998.
Net Income (loss). During the three months ended March 31, 1997, net loss was
- ------------------
approximately $560,000 ($0.13 net loss per limited partner unit) compared to net
income of $650,000 ($0.15 net income per limited partner unit) for the
comparable three months ended March 31, 1996. The decrease in net income is due
primarily to the change in accounting for the incentive management fee and
increased interest expense.
Cash Flow Available for Distribution and Incentive Management Fees. Cash Flow
- -------------------------------------------------------------------
decreased for the three months ended March 31, 1997 to $2 million ($0.47 per
limited partner unit) from the comparable three months ended March 31, 1996 of
$2.2 million ($0.53 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.
Once the Partnership becomes subject to corporate taxes beginning January 1,
1998, the payment of income taxes by the Partnership will directly reduce cash
available for partner distribution. Distributions to partners after December 31,
1997 will be considered taxable dividends. The payment of income taxes by the
Partnership will not reduce cash available for payment of any fees, including
the incentive management fee, due to Red Lion under the Management Agreement.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's principal source of cash is hotel operations. During the three
months ended March 31, 1997, the Hotels generated sufficient cash from
operations to cover operating needs. It is expected that, for 1997, cash
provided by operations and borrowings, if any, from available credit facilities,
discussed below, or from Red Lion will be sufficient to meet anticipated cash
requirements.
During 1996, the Partnership entered into a three-year $125 million credit
facility. The credit facility includes a $120 million term loan and a $5 million
revolving credit line. The proceeds of the term loan were used to repay all
amounts owed under the prior mortgage note and revolving credit facility, a
portion of the payable to affiliate related to deferred incentive management
fees and loan fees. Borrowings under the facility bear interest at the London
Interbank Offering Rate ("LIBOR") plus 2.25% and are secured by all of the
assets of the Hotels. Principal payments on the three-year term loan 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 on March 31, 1999.
Borrowings under the revolving credit line averaged $2.9 million during the
three months ended March 31, 1997. At March 31, 1997, the interest rate was 8.8%
and the balance outstanding was $3.5 million on the revolving credit line. (See
Note 3 to the consolidated financial statements).
During the three months ended March 31, 1997, the Partnership made capital
improvements amounting to approximately $490,000. These capital expenditures
were funded from the current quarter's reserve of approximately $750,000.
Pursuant to provisions of the Management Agreement, 3% of gross revenues is
required to be set aside annually for capital improvements. The General Partner
expects capital expenditures not to exceed the 3% reserve during 1997.
14
<PAGE>
On April 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 May 15, 1997 to unitholders of record on April 30, 1997. This
distribution has been accrued in the accompanying consolidated financial
statements.
INCOME TAXES. BEGINNING JANUARY 1, 1998, FEDERAL TAX LAW MANDATES THAT THE
- ------------
PARTNERSHIP BECOME SUBJECT TO CORPORATE TAXES ON ITS INCOME. THE PARTNERSHIP IS
NOT CURRENTLY A TAXABLE ENTITY. THE PAYMENT OF INCOME TAXES BY THE PARTNERSHIP
WILL NOT REDUCE CASH AVAILABLE FOR PAYMENT OF ANY FEES, INCLUDING THE INCENTIVE
MANAGEMENT FEE, DUE TO RED LION UNDER THE MANAGEMENT AGREEMENT. THE PAYMENT OF
INCOME TAXES BY THE PARTNERSHIP WILL DIRECTLY REDUCE CASH AVAILABLE FOR PARTNER
DISTRIBUTION. DISTRIBUTIONS TO PARTNERS AFTER DECEMBER 31, 1997 WILL BE
CONSIDERED TAXABLE DIVIDENDS.
THE GENERAL PARTNER HAS FORMED A SPECIAL COMMITTEE OF INDEPENDENT DIRECTORS TO
EVALUATE ALTERNATIVES AVAILABLE TO THE PARTNERSHIP IN CONNECTION WITH THE
SCHEDULED 1998 CHANGE IN THE PARTNERSHIP'S TAX STATUS FROM A PARTNERSHIP TO A
CORPORATION. THESE ALTERNATIVES INCLUDE, AMONG OTHERS, INCORPORATING THE
PARTNERSHIP OR CONVERTING OR MERGING THE PARTNERSHIP INTO A REAL ESTATE
INVESTMENT TRUST. THE PARTNERSHIP EXPECTS TO HAVE A RECOMMENDATION FROM THE
SPECIAL COMMITTEE BY LATE SUMMER, AND, SUBJECT TO ANY POSSIBLE LEGISLATIVE
RELIEF DEFERRING OR ALTERING THE CHANGE IN TAX STATUS, TO CONCLUDE ANY PROPOSED
ACTION PRIOR TO YEAR END.
**************
The statements contained in this report that are not statements of historical
fact may include forward-looking statements that involve a number of risks and
uncertainties. Moreover, from time to time the Partnership may issue other
forward-looking statements. The following factors are among those that could
cause actual results to differ materially from the forward-looking statements:
national or local economic conditions affecting the supply and demand for hotel
space, competition in hotel operations, including additional or improved
services or facilities of competitors, price pressures, continuing availability
of capital to fund growth and improvements and the impact of legislation (i.e.
certain provisions of the Omnibus Budget Reconciliation Act of 1987). The
forward-looking statements should be considered in light of these factors.
15
<PAGE>
PART II
ITEM 5 OTHER INFORMATION
- --------------------------------
On May 1, 1997, the Board of Directors of the General Partner expanded the size
of the board from four to six members and appointed two independent directors to
fill the newly-created vacancies. The two new directors are Mr. Robert M. Melzer
and Mr. Joseph E. Maroun. Messrs. Melzer and Maroun comprise the special
committee formed to evaluate alternatives available to the Partnership in
connection with the scheduled 1998 change in the Partnership's tax status from a
partnership to a corporation.
ITEM 6 EXHIBIT AND REPORT ON FORM 8-K
- ---------------------------------------------
(A) EXHIBIT: The following document is filed herewith and made a part of this
report:
Exhibit 27 Article 5 Financial Data Schedule for First Quarter
10-Q.
(B) REPORT ON FORM 8-K:
One report on Form 8-K was filed during the quarter ended March 31, 1997. A
Form 8-K dated February 14, 1997 reported under Item 4 a change in the
Partnership's public accountants.
16
<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.,
a Delaware corporation,
General Partner
Date: May 15, 1997 By: /s/ Richard M. Kelleher
---------------------------
Richard M. Kelleher
President
Date: May 15, 1997 By: /s/William L. Perocchi
---------------------------
William L. Perocchi
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
17
<PAGE>
INDEX OF EXHIBITS
-----------------
EXHIBIT
NUMBER
- ------
27 Article 5 Financial Data Schedule for First Quarter 10-Q.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 547
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 547
<PP&E> 246,576
<DEPRECIATION> (83,927)
<TOTAL-ASSETS> 164,071
<CURRENT-LIABILITIES> 28,195
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 10,071
<TOTAL-LIABILITY-AND-EQUITY> 164,071
<SALES> 8,064
<TOTAL-REVENUES> 8,064
<CGS> 0
<TOTAL-COSTS> 5,582
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,039
<INCOME-PRETAX> (557)
<INCOME-TAX> 0
<INCOME-CONTINUING> (557)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (557)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
