<PAGE>
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 1-9563
AIRCOA HOTEL PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 84-1042607
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
5775 DTC Boulevard
Suite 300
Englewood, Colorado 80111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 220-2000
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 twelve 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
----- -----
There were 5,340,214 Units outstanding of the Registrant's Class A Units as of
November 1, 1996.
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
<C> <S> <C>
Consolidated Balance Sheets
September 30, 1996 (Unaudited)
and December 31, 1995 2 - 3
Consolidated Statements of Operations
Three Months and Nine Months ended September 30, 1996
and 1995 (Unaudited) 4
Consolidated Statement of Partners' Capital
Nine Months Ended September 30, 1996
(Unaudited) 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995
(Unaudited) 6
Notes to Consolidated Financial
Statements (Unaudited) 7 - 10
Item 2. Management's Discussion and Analysis of 11 - 14
Financial Condition and Results of Operations
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
- ------- ---------------------
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Assets September 30, 1996 December 31, 1995
- ------ ------------------- ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,032 $ 2,116
Accounts receivable:
Trade 2,883 2,479
Affiliates 107 143
Inventory 376 339
Prepaid expenses 391 482
-------- --------
Total current assets 6,789 5,559
-------- --------
Property and equipment, at cost:
Land and leasehold improvements 8,927 8,914
Buildings and leasehold improvements 67,430 66,838
Furniture, fixtures and equipment 19,667 18,332
-------- --------
96,024 94,084
Less accumulated depreciation and amortization (34,489) (31,329)
-------- --------
Net property and equipment 61,535 62,755
-------- --------
Other assets, including debt issue costs, net of
accumulated amortization of $301 in 1996 and
$237 in 1995 1,011 1,092
----- -----
$69,335 $69,406
======= =======
</TABLE>
(continued)
2
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Liabilities and Partners' Capital September 30, 1996 December 31, 1995
- --------------------------------- ------------------- ------------------
<S> <C> <C>
Current liabilities:
Current installments of long-term debt $ 1,080 $ 1,080
Accounts payable:
Trade 1,322 1,683
Affiliates 659 715
Accrued liabilities:
Payroll 179 217
Taxes, other than income taxes 1,013 473
Other 1,938 1,848
Deferred revenue and advance deposits 827 1,995
------- -------
Total current liabilities 7,018 8,011
Long-term debt, excluding current installments 42,480 43,290
Notes payable to affiliate 8,100 8,100
Accrued administration fees, management fees and interest
payable to affiliate 442 253
------- -------
Total liabilities 58,040 59,654
------- -------
Partners' capital:
General Partner 259 236
Limited partners:
Class A Unitholders 14,270 13,603
Class B Unitholders (deficit) (3,234) (4,087)
------- -------
Total partners' capital 11,295 9,752
------- -------
$69,335 $69,406
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
(In Thousands, Except Unit Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Rooms $ 7,467 $ 7,345 $ 22,523 $ 21,037
Food and beverage 2,687 2,857 9,140 8,742
Other property operations 1,743 1,743 5,655 5,402
---------- ---------- ---------- ----------
11,897 11,945 37,318 35,181
---------- ---------- ---------- ----------
Costs and operating expenses:
Rooms 1,954 1,967 5,896 5,638
Food and beverage 2,055 2,115 6,615 6,454
Other property operations 625 629 2,346 2,415
Administrative and general 1,272 1,306 3,830 3,657
Marketing 978 970 3,162 3,039
Energy 621 651 1,837 1,802
Property maintenance 615 529 1,821 1,718
Rent, taxes and insurance 713 706 2,050 2,059
Management fees 471 473 1,481 1,398
Depreciation and amortization 1,054 1,006 3,160 3,022
---------- ---------- ---------- ----------
10,358 10,352 32,198 31,202
---------- ---------- ---------- ----------
Operating income 1,539 1,593 5,120 3,979
Interest expense, including
amortization of debt costs (1,218) (1,238) (3,577) (3,640)
---------- ---------- ---------- ----------
Net income $ 321 $ 355 $ 1,543 $ 339
========== ========== ========== ==========
Net income (loss) per limited
partnership unit:
Class A Unitholders:
Net income (loss) $.01 $(.01) $.13 $(.10)
========== ========== ========== ==========
Class B Unitholders:
Net income $.29 $.32 $.90 $.92
========== ========== ========== ==========
Weighted average number of units outstanding:
Class A 5,340,214 5,340,214 5,340,214 5,340,214
Class B 950,000 950,000 950,000 950,000
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
NINE MONTHS ENDED SEPTEMBER 30, 1996
(Unaudited)
(In Thousands, Except Unit Data)
<TABLE>
<CAPTION>
Limited Partners' Capital (Deficit) Total
----------------------------------------
General Class A Unitholders Class B Unitholders Partners'
------------------- -------------------
Partner Units Capital Units Deficit Capital
------- --------- ----------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1995 $236 5,340,214 $13,603 950,000 $(4,087) $ 9,752
Net income 23 -- 667 -- 853 1,543
---- --------- ------- ------- ------- -------
Balances at
September 30, 1996 $259 5,340,214 $14,270 950,000 $(3,234) $11,295
==== ========= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 34,375 $ 32,342
Cash paid to suppliers and vendors (19,242) (19,466)
Cash paid to employees (10,146) (9,808)
Interest paid (2,508) (2,035)
Other cash receipts, net 1,411 1,661
-------- --------
Net cash provided by operating activities 3,890 2,694
-------- --------
Cash flows from investing activities -
capital expenditures (1,940) (1,592)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt (810) (42,725)
Proceeds from refinancing -- 45,000
Payments for debt issuance cost (224) (977)
-------- --------
Net cash provided (used) by financing activity (1,034) 1,298
-------- --------
Increase in cash and cash equivalents 916 2,400
Cash and cash equivalents at beginning of period 2,116 1,261
-------- --------
Cash and cash equivalents at end of period $ 3,032 $ 3,661
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
(1) BASIS OF PRESENTATION
AIRCOA Hotel Partners, L.P., a Delaware limited partnership (the
"Partnership" ) was organized in December 1986 to acquire, own and operate
hotel and resort properties. The Partnership owns and operates six hotel
and resort properties (the " Properties" ) through operating partnerships
(the "Operating Partnerships" ) which were acquired in 1986.
The Partnership holds a 99% limited partner interest in each of the six
Operating Partnerships, which hold title to the Properties and through
which the Partnership conducts all of its operations. AIRCOA Hospitality
Services, Inc. (" AHS "), a wholly owned subsidiary of Richfield
Hospitality Services, Inc. (" Richfield "), is the 1% General Partner of
each of the Operating Partnerships. Richfield operates the Properties for
the Partnership under certain management agreements.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore,
do not include all information and disclosures necessary for a fair
presentation of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. In the opinion of
management, these financial statements reflect all adjustments (which
include only normal recurring adjustments) necessary for a fair
presentation of the results of operations and financial position for the
interim periods presented. These interim financial statements should be
read in conjunction with the Annual Report on Form 10-K for the period
ended December 31, 1995. Operating results for the nine months ended
September 30, 1996 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1996.
Certain amounts reported in the 1995 financial statements have been
reclassified to conform to the 1996 presentation.
(2) LONG-TERM DEBT
On June 8, 1995, the Partnership signed a credit agreement with a new
lender which provided a $45,000,000 first mortgage loan and a $1,000,000
revolving credit line. The proceeds of the $45,000,000 first mortgage loan
were used principally to refinance, on a long-term basis, the Partnership's
existing mortgage loan in the amount of $38,950,000 and the note payable to
bank of $1,790,000 which were due July 31, 1995 and October 31, 1995,
respectively, and to provide approximately $3,000,000 to fund hotel
property renovations. The balance of the funds was used for the payment of
a facility fee and closing costs.
The first mortgage loan interest rate at September 30, 1996 of 7.6875% was
based on the current Eurodollar rate plus 2%, and has been fixed through
November 1, 1996. Repayment of the first mortgage loan is based on a
twenty-year amortization with a final maturity date in June 2000. Payments
under this loan consist of monthly installments of $90,000 plus interest
on the unpaid balance. The revolving credit line is renewable annually at
the option of the lender. No amounts have been drawn on the line at
September 30, 1996.
Long term debt is summarized as follows (in thousands):
September 30, 1996 December 31, 1995
------------------- ------------------
Mortgage loan $43,560 $44,370
Less current installments (1,080) (1,080)
------- -------
Long-term debt, excluding
current installments $42,480 $43,290
======== ========
7
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
The first mortgage loan and revolving credit line contain various covenants
including: minimum debt service ratios, restrictions on additional
indebtedness, limitations on annual cash distributions to Class A
Unitholders, limitations on the payment of principal on the affiliate notes
payable, prepayment premium during the first three years, deferral of
management fees payable to Richfield if minimum debt service ratios are not
achieved, maintenance of a capital expenditure reserve account equal to 5%
of gross revenue and a maximum loan-to-value ratio of 65% based on the
aggregate appraised values of the Properties. The first mortgage loan and
revolving credit line are subject to certain limited guarantees of an
affiliate of the General Partner. The first mortgage loan also requires the
lender's approval of any dilution in the present ownership interests of
affiliates of the General Partner in the Partnership.
In accordance with the Partnership Agreement, the General Partner received
a 1% financing fee, reduced by the amount of the financing fee paid to the
lender, for arranging the refinancing of the Partnership's indebtedness. In
addition, the Partnership pays an annual guarantee fee to an affiliate of
the General Partner for the limited guarantee of the first mortgage loan
and the revolving credit line. The guarantee fee is calculated at .5% of
the total of the outstanding mortgage loan balance at June 8th of each year
plus the revolving credit line amount.
(3) NOTES PAYABLE TO AFFILIATE
A condition of the credit agreement signed by the Partnership for the first
mortgage loan and revolving credit line required the subordination of
$6,000,000 in notes payable to AHS (the "Notes" ). AHS agreed to this
subordination, and as a result, on September 26, 1995 the Board of
Directors of AHS, in its capacity as General Partner, and the Advisory
Committee of AHP authorized the extension of the term and deferral of
certain past-due interest on the Notes.
Pursuant to this extension, the Notes, which originally matured in January
1995 are due on June 8, 2000 which is coterminous with the new mortgage
loan. The unpaid interest on the Notes accrued prior to January 1, 1995 in
the amount of $2,100,000 was converted into a new promissory note ( "New
Note" ), which also matures on June 8, 2000. The New Note accrues interest
at the rate of 12% per annum and is payable at maturity. Interest accrued
on the Notes after December 31, 1994 was paid at closing. Interest incurred
on the Notes subsequent to closing continues to be accrued at 12% per annum
and is paid monthly. These notes are convertible into Class A Units of the
Partnership at $16.60 per unit. In addition, the Notes and New Note
stipulate that 25% of any excess cash flow, as defined in the new mortgage
loan, will be applied against the principal of the notes outstanding.
(4) PARTNERSHIP UNITS AND ALLOCATIONS
LIMITED PARTNERSHIP UNITS
The Class A Units entitle each Unitholder to a limited partnership interest
in a percentage of the profits and losses, tax allocations and
distributions of the Partnership, as described below.
The Class B Units entitle each Unitholder to a limited partnership interest
which is subordinate to the Class A Units, in certain circumstances. The
Class B Units are redeemable by the Partnership or convertible into Class A
Units, in certain circumstances. The Class B Units do not receive
distributions until the Class A Unitholders receive defined Minimum Annual
Distributions. Through 1996, the Class B Units are convertible into Class A
Units to the extent that distributable cash flow of the Partnership in the
previous year would have been sufficient to pay Minimum Annual
Distributions for the Class A Units, including the Class B Units to be
converted. Beginning in 1997,
8
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
during the 30-day period following the release of the Partnership's annual
audited financial statements, and each year thereafter through 2001, a
minimum of 250,000 Class B Units are required to be converted into Class A
Units annually at a redemption value of $20.00 per Class B Unit, by issuing
Class A Units valued at the then current market price of the Class A Units.
Therefore, the number of Class A Units to be issued upon conversion of a
Class B Unit will be determined at the time of conversion by dividing
$20.00 by the then current market price of a Class A Unit.
CASH DISTRIBUTIONS
The Partnership Agreement provides for periodic distribution of
distributable cash flow, as defined, to the partners at the discretion of
the General Partner. Distributable cash flow is generally defined as cash
flow from operations of the hotel properties. Such cash is allocated and
distributed (net of AHS' 1% general partnership interest in the Operating
Partnerships) 99% to the Class A Unitholders and 1% to the General Partner
until the Class A Unitholders have received defined Minimum Annual
Distributions. At September 30, 1996, the cumulative unpaid Minimum Annual
Distribution per Class A Unit significantly exceeds the Partnerships' net
asset value per unit based on the December 31, 1995 appraised values of the
hotel properties.
According to the first mortgage loan, the maximum annual amount that the
Partnership may distribute to the Class A Unitholders is equal to 50% of
the excess cash flow, as defined. However, if the debt service coverage
ratio, as defined, is greater than 1.50, then the Partnership may
distribute up to 75% of the excess cash flow.
In addition, the Partnership may not make any distributions to the Class A
Unitholders if there are any amounts which are due and payable under the
mortgage loan agreement which are unpaid.
(5) RELATED PARTY TRANSACTIONS
The following amounts resulting from transactions with affiliates are
included in the accompanying consolidated statements of operations (in
thousands):
For the nine
months ended September 30,
--------------------------
1996 1995
---- ----
Partnership administration fees $ 146 $ 155
========= =========
Management fees $1,481 $1,398
========= =========
Allocated insurance expenses $1,021 $1,085
========= =========
Allocated data processing cost $ 55 $ 34
========= =========
Interest expense $ 729 $ 540
========= =========
Lease income $ 215 $ 187
========= =========
License fees $ 198 $ 129
========= =========
Guarantee and financing fees
(included in interest expense) $ 171 $ 66
========= =========
The Properties are obligated to reimburse an affiliate for payroll,
professional fees, and certain out-of-pocket expenses incurred by the
affiliate on their behalf. Affiliates are also paid purchasing and design
fees in connection with renovations of the hotels and purchases of
furnishings, equipment and supplies.
9
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
Effective August 1, 1996, Sheraton University Center was converted to Regal
University Hotel. Accordingly, Regal University Hotel has a license
agreement with an affiliate to operate as a Regal hotel.
(6) INCOME TAXES
No current provision or benefit for income taxes is included in the
accompanying consolidated financial statements since the taxable income or
loss of the Partnership is included in the tax returns of the individual
partners of the Partnership.
The Partnership's only significant temporary difference is an excess of the
tax basis over the book basis of the Partnership's hotels of approximately
$6,500,000 which gives rise to a net deferred tax asset of approximately
$2,600,000. The Partnership has established a 100% valuation allowance on
these net deferred tax assets. Current federal income tax regulations will
subject the Partnership to corporate taxation beginning in 1998.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS
Partnership revenue for the three months ended September 30, 1996 decreased
$48,000 or .4% compared to the three months ended September 30, 1995.
Revenue for the first nine months of 1996 increased $2,137,000 or 6.1%
compared to the first nine months of 1995. Average occupancy and daily room
rates for the portfolio of 1,586 rooms are summarized as follows:
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Average occupancy 82.6% 83.8% 80.8% 80.9%
Average daily room rates $62.06 $60.09 $64.19 $60.07
</TABLE>
The decrease in revenue for the three months ended September 30, 1996 when
compared to the three months ended September 30, 1995 resulted from increased
rooms revenue offset by decreased food and beverage revenue. Rooms revenue
is primarily a function of the Properties' average daily room rates and
occupancy levels. For the three months ended September 30, 1996 compared to
the three months ended September 30, 1995, rooms revenue increased as a
result of increased average daily room rates offset by a decrease in
occupancy levels. Food and beverage revenue for the three months ended
September 30, 1996 decreased primarily due to decreased occupancy levels.
The increase in revenue for the nine months ended September 30, 1996 when
compared to the nine months ended September 30, 1995 was a result of
increased rooms revenue and food and beverage revenue. Increased rooms
revenue was primarily a result of increased average daily room rates, while
increased food and beverage revenue was primarily a result of increased
banquet services, primarily in the first half of 1996.
Net rooms margin (rooms revenue less rooms expenses) increased $135,000 or
2.5% for the three months ended September 30, 1996 as compared to the three
months ended September 30, 1995, as revenue increased by $122,000 or 1.7%
while expenses decreased $13,000 or .7%. This improvement was primarily a
result of increased average daily room rates at Sheraton Lakeside and Regal
University Hotel offset by decreased occupancy at Regal McCormick Ranch.
Average daily room rates increased at Sheraton Lakeside in the wholesale
segment and at Regal University Hotel in the leisure and group segments.
Decreased occupancy at Regal McCormick Ranch occurred in the group and
leisure segments.
Net rooms margin increased $1,228,000 or 8.0% for the first nine months of
1996 as compared to the first nine months of 1995, as revenue increased by
$1,486,000 or 7.1%, while expenses only increased by $258,000 or 4.6%. The
largest increases in net rooms margin occurred at Sheraton Lakeside, Regal
University Hotel and Sheraton Buffalo. The increase at Sheraton Lakeside was
generated through increased room rates, primarily in the leisure market
segment, and increased occupancy, primarily in the wholesale segment. The
increase at Regal University Hotel was generated through increased room
rates, primarily in the leisure and commercial market segments, offset with
slight decreased occupancy, primarily in the commercial market segment. The
increase at Sheraton Buffalo was achieved through slight improvements in room
rates and occupancy, in addition to improved control over rooms expenses.
Net food and beverage margin (food and beverage revenue less food and
beverage expenses) decreased $110,000 or 14.8% for the three months ended
September 30, 1996 as compared to the three months ended September 30, 1995,
as revenue decreased $170,000 or 6.0% while expenses decreased $60,000 or
2.8%. This was primarily the result of decreased food and beverage margins
at Regal University Hotel and Sheraton Lakeside.
11
<PAGE>
For the nine months ended September 30, 1996, net food and beverage margin
increased $237,000 or 10.4%, as revenue increased $398,000 or 4.6% while
expenses increased $161,000 or 2.5%. This increase was a result of increased
margins at Regal McCormick Ranch and Sheraton Buffalo, offset by a decrease
at Sheraton Lakeside. These changes resulted from fluctuations in food and
beverage margins.
Revenue from other property operations was unchanged for the three months
ended September 30, 1996 as compared to the three months ended September 30,
1995 and increased $253,000 or 4.7% for the nine months ended September 30,
1996 as compared to the same period in the prior year. This is primarily due
to increased activities at Regal McCormick Ranch during the first quarter of
1996 in the Scottsdale region, which benefited from Phoenix, Arizona hosting
the Super Bowl and Fiesta Bowl at the beginning of the year.
Operating income for the three months ended September 30, 1996 decreased
$54,000 or 3.4% as compared to the three months ended September 30, 1995, as
revenue decreased .4% while operating costs increased slightly. Operating
income increased $1,141,000 or 28.7% for the nine months ended September 30,
1996 as compared to the first nine months of 1995, as revenue increased 6.1%
while operating costs only increased 3.2%.
Interest expense decreased slightly for the three months ended September 30,
1996 as compared to the three months ended September 30, 1995. For the nine
months ended September 30, 1996, interest expense decreased $63,000 or 1.7%
as compared to the nine months ended September 30, 1995, as the result of a
decrease in the average interest rate (inclusive of amortization of debt
issue cost) from 9.60% to 9.16%, offset in part by higher average debt
levels.
Cash flow from operations differs from net income of the Partnership due to
the effects of depreciation, amortization and accruals as reflected in the
consolidated statements of cash flows. Net income/(loss) per Class A Unit and
the net income per Class B Unit reflect allocations of the net income as
required by the Partnership Agreement.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the first nine months of 1996
was $3,890,000, an increase of $1,196,000 as compared with the same period in
1995. The increase is primarily attributable to increased cash received from
customers of $2,033,000, offset by increased interest paid of $473,000 and
increased cash paid to employees of $338,000. Cash used in investing
activities increased $348,000 in the first nine months of 1996 compared to
the first nine months of 1995 due to increased capital expenditures. Cash
used in financing activities decreased $2,332,000 in the first nine months of
1996 as compared to the first nine months of 1995. The decrease is
attributable to the Partnership refinancing its long term debt in June 1995.
This refinancing resulted in a new $45,000,000 first mortgage loan and a
$1,000,000 revolving line of credit.
The Partnership had indebtedness at September 30, 1996 of $51,660,000 as
compared to $52,470,000 at December 31, 1995. At September 30, 1996, the
Partnership had a working capital deficit of $229,000 compared to a working
capital deficit of $2,452,000 at December 31, 1995. The Partnership's working
capital requirements, debt service obligations and capital expenditures are
expected to be satisfied through a combination of operating cash flows and
draws on its revolving line of credit. During the first nine months of 1996
the Partnership spent $1,940,000 on capital improvements and has
approximately $1,975,000 planned for the remainder of 1996. These
improvements will be primarily funded from hotel operations. In accordance
with the provisions of the mortgage loan agreement, which requires certain
minimum levels of capital expenditures, any required amounts not expended
will be placed in a capital reserve account at December 31, 1996.
In 1997, the Partnership has significant capital refurbishments and repairs
planned at Fourwinds, one of the Partnership's properties, as well as routine
capital improvements at other properties. The Partnership anticipates that
expenditures required for these refurbishments and repairs will be
12
<PAGE>
primarily funded from 1997 hotel operating cash flows. The Partnership
presently believes that the expenditure of funds necessary to complete the
repair and refurbishment of Fourwinds and the routine capital improvements at
other properties may preclude the Partnership from making cash distributions
to unitholders in the first half of 1997.
The market value of the Partnership's properties differs significantly from
the historical cost of the properties as reflected in the Partnership's
balance sheet at September 30, 1996. As indicated under Item 2 in the
Partnership's 1995 Form 10-K, the aggregate appraised value of the hotel
properties at December 31, 1995 was $82,875,000. This does not reflect an
interim appraised value for Regal University Hotel of $15,780,000 obtained in
September 1996. At December 31, 1995 Regal University was appraised at
$12,000,000. The December 1995 appraised value may not be representative of
the appraised value which will be obtained as of December 31, 1996 and is not
necessarily indicative of the ability of the Partnership to consummate a sale
of the Properties or the actual sale price to be realized from the sale of
the Properties. However, the appraised value does represent the appraiser's
opinion of the most probable price as of the appraisal date for which the
hotel properties should sell in a competitive market.
PARTNERSHIP DISTRIBUTIONS AND UNIT CONVERSIONS
The Partnership Agreement provides for periodic distribution of distributable
cash flow, as defined, to the partners subject to any applicable restrictions
and the discretion of the General Partner. The Partnership has not made any
distributions since 1990. Prior to making future distributions, the
Partnership will comply with its capital expenditure and debt service reserve
requirements as specified in its mortgage loan agreement and maintain
sufficient working capital balances. The Partnership currently has a Minimum
Annual Distribution requirement of $2.16 per Class A Unit. At September 30,
1996, the cumulative unpaid Minimum Annual Distribution per Class A Unit
significantly exceeds the Partnership's net asset value per unit based on the
December 31, 1995 appraised values of the hotel properties. The Partnership
does not believe that there will be funds available for distribution to the
Class A Unitholders in 1996.
Beginning in 1997, during the 30-day period following the release of the
Partnership's annual audited financial statements, and each year thereafter
through 2001, a minimum of 250,000 Class B Units are required to be converted
at a redemption value of $20.00 per Class B Unit, by issuing Class A Units
valued at the then current market price of a Class A Unit. Therefore, the
number of Class A Units to be issued upon the conversion of a Class B Unit
will be determined at the time of conversion by dividing $20.00 by the then
current market price of a Class A Unit. Current market price for this
calculation is the average market price for a Class A Unit during the last
five days prior to conversion. Pursuant to the Partnership Agreement, the
Class A Units to be issued upon conversion of the Class B Units will be
identical to the Class A Units existing prior to the conversion date. The
General Partner has, on the advice of counsel, determined that the Class B
Units convert into identical Class A Units because there are elective
procedures, which are standard practice for publicly-traded partnerships,
that make the Class A Units received upon conversion fungible for tax
purposes with all pre-existing Class A Units.
Based on current market prices of the Class A Units, such required conversion
is expected to result in substantial dilution to the preconversion Class A
Unitholders. For example, based on the average monthly market price of Class
A Units during the first nine months of 1996 of approximately $1.83, the
conversion of 250,000 Class B Units in the first year of the required
conversion period would result in an approximate 34% dilution to the Class A
Unitholders upon conversion. This conversion will result in the issuance of
approximately 2,730,000 new Class A Units in 1997. The conversion of all
950,000 Class B Units would result in an approximate 66% dilution to the
preconversion Class A Unitholders at the $1.83 per unit market price. In
addition, using the same per unit market price for a Class A Unit of $1.83,
affiliate ownership of Class A Units would increase to approximately 81% and
90% upon conversion of the first 250,000 Class B Units and conversion of all
950,000 Class B Units, respectively. Changes in the market price of Class A
Units will not result in proportional changes in dilution. The market price
of the Partnership's Class A Units is subject to fluctuations and there is no
assurance that the prices upon
13
<PAGE>
which the conversions will be determined will approximate the average per
unit market price for the first nine months of 1996.
OTHER MATTERS
Management of the Partnership, the Board of Directors of the General Partner
and the Advisory Committee are seeking to increase the value of the
Partnership for all of its Unitholders. Management has been evaluating and
will continue to evaluate different strategies for maximizing Unitholder
value including; (i) continued ownership and operation of the properties
(ii) sale of one or more of the Partnership's properties in response to
exceptional offers, (iii) liquidation, sale or other similar transactions,
and (iv) combining the Partnership or its assets with other hotel-owning
entities.
Unless and until such time as management identifies one or more preferable
strategic alternatives, the Partnership intends to pursue its current
strategy of owning and operating its existing portfolio of properties.
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
a) Exhibits
(10.36) Indemnification Agreement
b) Reports on Form 8-K
None
14
<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.
AIRCOA HOTEL PARTNERS, L.P.
By: AIRCOA Hospitality Services, Inc.,
General Partner
Date: November 12, 1996 By: /s/ Douglas M. Pasquale
--------------------- -----------------------
Douglas M. Pasquale
President and Director
(Principal Executive and
Financial Officer)
of AIRCOA Hospitality Services, Inc.
By: /s/ David C. Ridgley
--------------------
David C. Ridgley
Vice President
and Chief Accounting Officer
(Duly Authorized Officer)
15
<PAGE>
EXHIBIT 10.36
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (the "Agreement") is made this 12 day of
September 1996, by and among AIRCOA Hotel Partners, L.P., a Delaware limited
partnership (the "Partnership"), AIRCOA Hospitality Services, Inc., a Delaware
corporation (the "General Partner") and William R. Arthur and Frank A. Hughes
(the "Indemnities").
RECITALS
WHEREAS, the agreement of limited partnership of the Partnership, as
amended to date (the "Partnership Agreement") provides for an advisory committee
("Advisory Committee") to perform the duties set out in Section 1.8 of the
Partnership Agreement;
WHEREAS, Section 1.8 of the Partnership Agreement provides that a majority
of the Members of the Advisory Committee should, to the extent practicable,
consist of persons not affiliated with the General Partner.
WHEREAS, the General Partner believes it is in the best interest of the
Partnership, in order to assure that competent, professional, and independent
persons continue to serve on the Advisory Committee that the General Partner and
the Partnership limit the liability and provide indemnification from liability
for those members of the Advisory Committee not otherwise indemnified pursuant
to the terms of the Partnership Agreement in connection with their service on
the Advisory Committee including, without limitation, their service on any
special committee thereof that may be established after the date of this
Agreement;
WHEREAS, the Partnership intends the Indemnities' benefits under this
Agreement to include, without limitation, the supplementation of benefits under
any existing liability insurance policy;
WHEREAS, the Indemnities are willing to continue to serve on the Advisory
Committee provided the General Partner and the Partnership are and will continue
to be obligated to indemnify them, their successors, assigns, heirs, personal
representatives, and administrators in accordance with the provisions of the
Agreement.
NOW THEREFORE, the parties agree as follows:
Section 1. LIMITATIONS ON LIABILITY OF MEMBERS OF AN ADVISORY COMMITTEE.
(a) The Indemnities shall not be liable to the Partnership or to the
General Partner, or to any Affiliate of the Partnership (including, without
limitation, the Operating Partnerships, as defined in the Partnership Agreement)
or to any director, officer employee, or agent of the Partnership, General
Partner or their Affiliates, or to the Limited Partners (any "Covered Person")
1
<PAGE>
for losses and liabilities, obligations, damages, penalties, taxes, claims,
actions, suits, amounts paid in settlement, or out-or-pocket expenses or costs
of any kind and nature whatsoever incurred in connection with any act or
omission or by reason of such service on an Advisory committee, (collectively,
"Committee Claims"), unless it shall be determined by final judicial decision on
the merits from which there is no further right to appeal that such Committee
Claims are due to the negligence or willful misconduct of the Indemnitees in
their capacity as such.
(b) Notwithstanding Section 1 (a) hereof, the Indemnitees shall not be
indemnified for losses, liabilities or expenses arising from or out of an
alleged violation of federal or state securities laws unless (1) there has been
a successful adjudication on the merits of each count involving alleged
securities law violations as to the particular Indemnitee, or (2) such claims
have been dismissed with prejudice on the merits by a court of competent
jurisdiction as the particular Indemnitee, or (3) a court of competent
jurisdiction approves a settlement of the claim against the particular
Indemnitee.
(c) To the extent that, at law or in equity, the Indemnitees have duties
(including fiduciary duties) and liabilities relating to service on the Advisory
Committee, the Indemnitees acting under the Partnership Agreement shall not be
liable to any Covered Person for the Indemnitees' good-faith reliance on the
provisions of the Partnership Agreement or on the records of the Partnership or
on such information, opinions, reports or statements presented to the Advisory
Committee by any person that the Indemnitees reasonably believe are within such
person's professional or expert competence, including, without limitation,
advise of counsel and financial advisors.
Section 2. INDEMNIFICATION AND ADVANCEMENT OF LEGAL FEES FOR MEMBERS OF
ADVISORY COMMITTEE.
(a) To the fullest extent permitted by law, the Partnership and the
General Partner jointly and severally agree to indemnify and hold harmless the
Indemnitees and their heirs, successors, assigns, administrators and personal
representatives for any and all losses and liabilities, obligations, damages,
penalties, taxes, claims, actions, suits, amounts paid in settlement, or out-of-
pocket expenses or costs of any kind and nature whatsoever incurred or arising
out of or in connection with service on the Advisory Committee including the
reasonable out-of-pocket costs and expenses, including attorney fees, of
defending himself against any claim of liability (collectively, "Indemnified
Expenses"), except that the indemnitees shall not be entitled to be indemnified
for any Indemnified Expenses to the extent incurred by the Indemnitees by reason
of his own negligence or willful misconduct determined after final judicial
decision on the merits from which there is no further right of appeal. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere, or its equivalent, shall not, of
itself, create a presumption that an Indemnitee has acted in a manner contrary
to this Agreement.
(b) To the fullest extent permitted by applicable law, Indemnified
Expenses (including legal fees) incurred by an Indemnitee in defending any
claim, demand, action, suit or proceeding shall, from time to time, be advanced
by, or on behalf of, the Partnership or the General Partner
2
<PAGE>
prior to the final disposition of such claim, demand, action, suit or proceeding
upon receipt by the Partnership or the General Partner, as the case may be, by
or on behalf of the indemnitees and reasonably satisfactory to the General
Partner, an undertaking by or on behalf of the Indemnitees to repay such amount
if it shall be determined by a court of competent jurisdiction after final
judicial decision on the merits from which there is no further right of appeal
that the Indemnitees are not entitled to be indemnified. The advances to be made
hereunder shall be paid to an Indemnitee within sixty (60) days following
delivery of a written request therefor by the Indemnitee to the Partnership and
the General Partner, supported by appropriate invoices, receipts and/or
vouchers.
(c) The indemnification provided by this Section shall be in addition to
any other rights to which each Indemnitee may be entitled under any agreement,
vote of the Partners, as a matter of law or otherwise.
(d) The obligation of the Partnership and the General Partner to
indemnify, hold harmless and advance expenses to an Indemnitee, and the right of
any Indemnitee to be compensated and to be reimbursed for its reasonable out-of-
pocket expenses, disbursements and advances shall constitute indebtedness of the
Partnership and shall survive the termination of this Agreement.
(e) For purposes of determining the rights of the Indemnitees under this
Agreement, the provisions of Sections 8.10 (a) and (b) of the Partnership
Agreement (or any successor provision thereto) applicable to the General Partner
of any of its Affiliates shall apply mutatis mutandis to the Indemnitees.
Section 3. RIGHT OF INDEMNITEES TO BRING SUIT. If the General Partner or the
Partnership does not pay in full a claim under Section 1 or 2 of this Agreement
within seventy-five days after a written claim therefor has been received by
either the General Partner or the Partnership, the Indemnitees may at any time
thereafter bring suit against the General Partner and/or the Partnership to
recover the unpaid amount of the claim. If successful in whole or in part in
any such suit, or in a suit brought by the General Partner or the Partnership to
recover any advancement of expenses, the Indemnitees shall be entitled to be
paid also the expense of prosecuting or defending such suit or part thereof as
to which the Indemnitees have been successful.
Section 4. NOTICE AND OTHER INDEMNIFICATION PROCEDURES.
(a) Promptly after receipt by an Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that indemnification with respect thereto
properly may be sought from the Partnership and the General Partner in writing
at their principal executive offices (attention General Counsel) of the
commencement or threat of commencement thereof. The failure to notify or
promptly notify the Partnership or the General Partner shall not relieve the
Partnership or the General Partner from any liability which either of them may
have to Indemnitee otherwise than under this Agreement, and shall relieve the
Partnership or the General Partner from liability hereunder only to the extent
3
<PAGE>
the Partnership or the General Partner has been prejudiced by the failure of the
Indemnitee to adhere to this notice provision.
(b) In the event the Partnership or the General Partner shall be
obligated to pay the expenses of the Indemnitee in connection with any
proceeding, the Partnership or the General Partner shall be entitled to assume
the defense of such proceeding, with counsel selected by the Partnership or
General Partner (subject to the approval of the Indemnitee, such approval not to
be unreasonably withheld), upon the delivery to the indemnitee of written notice
of an election to assume the defense. After delivery of such notice, approval of
such counsel by the Indemnitee and the retention of such counsel by the
Partnership or the General Partner, the Partnership or the General Partner, the
Partnership or the General Partner will not be liable to the Indemnitee under
this Agreement for any fees of counsel or other expenses subsequently incurred
by the Indemnitee with respect to the same proceeding, provided that (i) the
Indemnitee shall have the right to employ his own counsel in any such proceeding
at the Indemnitee's expense; and (ii) if (A) the employment of counsel by the
Indemnitee has been previously authorized by the Partnership or the General
Partner, or (B) the Indemnitee shall have reasonably concluded, in good faith,
that there is a conflict of interest between the Partnership or the General
Partner and the Indemnitee in the conduct of any such defense, or (C) the
Partnership or the General Partner shall not, in fact, have employed counsel to
assume the defense of such proceeding, then the fees and expenses of
Indemnitee's counsel shall be paid by the Partnership or the General Partner;
and provided further that the Partnership or the General Partner shall not be
required to pay the expenses of more than one such separate counsel for persons
it is indemnifying in any one proceeding.
Section 5. SETTLEMENT. Neither the Partnership nor the General Partner shall
be liable to indemnify an Indemnitee under this Agreement for any amounts paid
in settlement of any proceeding without their written consent, which consent
shall not be unreasonably withheld. Neither the Partnership nor the General
Partner shall settle any proceeding which would impose any penalty or limitation
on an indemnitee without that Indemnitee's written consent, which consent shall
not be unreasonably withheld.
Section 6. SUBROGATION RIGHTS. In the event of any payment under this
Agreement to (or for the benefit of) and Indemnitee by either the Partnership or
the General Partner, the Partnership or the General Partner, as the case may be,
shall be subrogated to the extent of such payment to all of the rights of
recovery of the Indemnitee against any person or organization and such
indemnitee shall execute all papers required and shall do everything that may be
reasonably necessary to secure such rights for the Partnership or the General
Partner.
Section 7. NO DUPLICATION OF PAYMENTS. Neither the Partnership nor the General
Partner shall be liable under this Agreement to make any payment under the terms
of this Agreement to the extent an Indemnitee has otherwise actually received
payment (under any insurance policy or otherwise) of the amounts otherwise
indemnifiable hereunder.
Section 8. SEVERABILITY. If this Agreement or any portion hereof shall be
invalidated on any ground by a court of competent jurisdiction, then the General
Partner or the Partnership shall nevertheless indemnify the Indemnitees as to
costs, charges, and expenses (including attorneys'
4
<PAGE>
fees), judgments fines, and amounts paid in settlement with respect to any
action, suit, or proceeding, including an action by or in the right of the
Partnership, to the full extent permitted by any applicable portion of this
Agreement that shall not have been invalidated and to the full extent permitted
by applicable law.
Section 9. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon all
successors and assigns of the General Partner and the Partnership and shall be
binding on and inure to the benefit of the Indemnitee's heirs, executors and
administrators.
Section 10. AMENDMENT. No amendment, modification, termination or cancellation
of this Agreement shall be effective against the indemnitees unless made in
writing and signed by the Indemnitees.
Section 11. CHOICE OF LAW. This Agreement shall be governed and its provisions
construed in accordance with the laws of the State of Delaware, as applied to
contracts between Delaware residents entered into and to be performed entirely
within Delaware.
Adopted this 13th day of September 1996
AIRCOA HOSPITALITY SERVICES, INC.
By: /s/ Douglas M. Pasquale
---------------------------
Name: Douglas M. Pasquale
Title: President/CEO
By: /s/ David C. Ridgley
----------------------------
Name: David C. Ridgley
Title: Vice President and Chief
Accounting Officer
5
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
By: AIRCOA HOSPITALITY SERVICES, INC.
---------------------------------
Sole General Partner
By: /s/ Douglas M. Pasquale
---------------------------------
Name: Douglas M. Pasquale
Title: President/CEO
By: /s/ Michael Sheh
---------------------------------
Name: Michael Sheh
Title: Senior Vice President and
Treasurer
INDEMNITEES:
By: /s/ William R. Arthur
--------------------------------
William R. Arthur
By: /s/ Frank A. Hughes
--------------------------------
Frank A. Hughes
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-START> JUL-01-1996 JUL-01-1995
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> SEP-30-1996 SEP-30-1995
<CASH> 3,032 2,116
<SECURITIES> 0 0
<RECEIVABLES> 2,990 2,622
<ALLOWANCES> 0 0
<INVENTORY> 376 339
<CURRENT-ASSETS> 6,789 5,559
<PP&E> 96,024 94,084
<DEPRECIATION> (34,489) (31,329)
<TOTAL-ASSETS> 69,335 69,406
<CURRENT-LIABILITIES> 7,018 8,011
<BONDS> 50,580 51,390
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 11,295 9,752
<TOTAL-LIABILITY-AND-EQUITY> 69,335 69,406
<SALES> 11,897 11,945
<TOTAL-REVENUES> 11,897 11,945
<CGS> 0 0
<TOTAL-COSTS> (10,358) (10,352)
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (1,218) (1,238)
<INCOME-PRETAX> 321 355
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 321 355
<EPS-PRIMARY> 0<F1> 0<F2>
<EPS-DILUTED> 0 0
<FN>
<F1> Class A Unitholders........$ .01
Class B Unitholders........$ .29
<F2> Class A Unitholders........$(.01)
Class B Unitholders........$ .32
</FN>
</TABLE>
