[Letterhead of AIRCOA Hotel Partners, L.P.]
September 5, 1997
Dear Unitholder:
You are cordially invited to attend a Special Meeting
of holders of units of limited partner interests ("Units") of
AIRCOA Hotel Partners, L.P. ("AHP" and, collectively with its
consolidated subsidiaries, the "Partnership") to be held on
September 29, 1997. At the Special Meeting, the holders of the
Units will vote upon a proposal that will result in the merger
(the "Merger") of Regal Merger Limited Partnership ("Regal"), a
wholly owned subsidiary of Regal Hotel Management, Inc. ("RHM")
formed solely for the purpose of engaging in the Merger, with and
into AHP. As a result of the Merger, AHP will become wholly
owned by RHM and its affiliates, and the Units held by persons other
than RHM or its affiliates (the "Public Unitholders") will be
converted into the right to receive $3.10 per Class A Unit and
$20.00 per Class B Unit, in cash.
The Board of Directors (the "Board") of AIRCOA Hospitality
Services, Inc., the general partner of AHP (the "General
Partner"), and a Special Committee of outside advisors appointed
by the Board to consider the proposal, each have concluded that
the Merger is fair to, and in the best interests of, the Public
Unitholders, and have unanimously approved the Merger. In
arriving at its conclusions, the Special Committee gave due
consideration and significant weight to the fact that its
financial advisor, Houlihan, Lokey, Howard & Zukin, had delivered
to the Special Committee its written opinion that, based upon the
considerations and subject to the assumptions and limitations set
forth therein, the consideration to be received by the Public
Unitholders in the Merger is fair to the Public Unitholders from
a financial point of view. The Board unanimously recommends that
Unitholders vote "FOR" approval of the Merger and the
transactions contemplated thereby.
The Merger must be approved by the holders of a
majority of the aggregate voting power of all Units (where each
Class A Unit represents one vote and each Class B Unit represents
one-half vote), including Units held by RHM and its affiliates.
RHM and its affiliates hold, collectively, approximately 71.0% of
the issued and outstanding Class A Units and approximately 93.6%
(with 100% voting control) of the issued and outstanding Class B
Units and intends to vote such Units "FOR" approval of the
Merger. As a consequence, approval of the Merger is assured,
regardless of how the Public Unitholders vote at the Special
Meeting. As a consequence, approval of the Merger is assured,
regardless of how the Public Unitholders vote at the Special
Meeting. As a consequence, approval of the Merger is assured,
regardless of how the Public Unitholders vote at the Special
Meeting.
The accompanying Proxy Statement describes in detail the
reasons for the Merger, the manner in which the transactions will
take place, certain tax consequences of the Merger and other
matters. The action to be taken at the Special Meeting is of
great importance and I urge you to read the accompanying
materials carefully. WHETHER OR NOT YOU PLAN TO ATTEND THE
SPECIAL MEETING IN PERSON AND REGARDLESS OF THE NUMBER OF UNITS
YOU OWN, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD
AND MAIL IT AS SOON AS POSSIBLE IN THE BUSINESS REPLY ENVELOPE
PROVIDED.
Very truly yours,
/s/ DOUGLAS M. PASQUALE
---------------------------------
DOUGLAS M. PASQUALE
President and Chief Executive Officer
AIRCOA Hospitality Services, Inc.,
General Partner of AIRCOA Hotel Partners, L.P.
<PAGE>
AIRCOA Hotel Partners, L.P.
5775 DTC Boulevard
Englewood, Colorado 80111
(303) 220-2000
NOTICE OF SPECIAL MEETING OF UNITHOLDERS
TO BE HELD ON SEPTEMBER 29, 1997
To the Holders of Class A and Class B Units of Limited Partner
Interests of AIRCOA Hotel Partners, L.P.:
Notice is hereby given that a special meeting of the holders
("Unitholders") of Class A and Class B units of limited partner
interests ("Units") of AIRCOA Hotel Partners, L.P. (the
"Partnership") will be held at 9:00 a.m. (New York City time) on
September 29, 1997 at the offices of Coudert Brothers,
counsel to the Partnership, 1114 Avenue of the Americas, New
York, New York 10036 (the "Special Meeting"), to consider and
approve a proposed merger (the "Merger") of Regal Merger Limited
Partnership ("Regal"), a Delaware limited partnership wholly
owned by Regal Hotel Management, Inc. ("RHM") and formed by RHM
solely for the purpose of engaging in such transaction, with and into
the Partnership.
By order of the Board of Directors (the "Board") of AIRCOA
Hospitality Services, Inc., general partner of the Partnership,
the close of business on September 2, 1997, has been fixed as
the record date for determination of Unitholders entitled to
notice of, and to vote at, the Special Meeting or any
adjournments or postponements thereof.
Information regarding the matters to be acted upon at the Special
Meeting is contained in the accompanying Proxy Statement. The
Agreement and Plan of Merger, dated May 2, 1997, by and among the
Partnership, the General Partner, Regal and RHM contains the full
terms and conditions of the Merger and is set forth as Annex A to
the Proxy Statement. The Board unanimously recommends that
Unitholders vote "FOR" approval of the Merger and the
transactions contemplated thereby.
Whether or not you plan to attend the Special Meeting in person
and regardless of the number of Units you own, you are urged to
sign and date the enclosed proxy card and mail it as soon as
possible in the stamped, addressed return envelope provided, so
that your Units will be represented and voted at the Special
Meeting.
By order of the Board of Directors of
AIRCOA Hospitality Services, Inc.,
General Partner
/s/ Lyle Boll
-----------------------------------
Corporate Secretary
September 5, 1997
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
PROXY STATEMENT
Special Meeting to be held on September 29, 1997
This Proxy Statement and the accompanying Notice of Special
Meeting of Unitholders (collectively, the "Proxy Statement") are
being furnished to the holders ("Unitholders") of Class A and
Class B units of limited partner interests (whether represented
by certificates or depositary receipts, "Units") of AIRCOA Hotel
Partners, L.P., a Delaware limited partnership (together with its
consolidated subsidiaries, the "Partnership"), in connection with
the solicitation of proxies for use at the special meeting to be
held at 9:00 a.m. (New York City time) on September 29,
1997 at the offices of Coudert Brothers, counsel to the
Partnership, 1114 Avenue of the Americas, New York, New York
10036, or at any adjournment or postponement thereof (the
"Special Meeting"). Proxies are being solicited by the
Partnership and AIRCOA Hospitality Services, Inc., the general
partner of the Partnership (the "General Partner"). This Proxy
Statement and the accompanying form of proxy are first being
mailed to Unitholders on or about September 5, 1997. Unitholders are
entitled to one vote for each Class A Unit and one-half vote for
each Class B Unit held of record at the close of business on
September 2, 1997 (the "Record Date"), with respect to the
proposal described in the Proxy Statement.
Action may be taken on the proposal described in the Proxy
Statement on the date specified herein, or on any date or dates
to which, by original or later adjournment, the meeting may be
adjourned.
At the Special Meeting, Unitholders will consider and vote
upon a proposal to merge (the "Merger") the Partnership with
Regal Merger Limited Partnership, a Delaware limited partnership
("Regal") wholly owned by Regal Hotel Management, Inc., a
Delaware corporation ("RHM"), and formed by RHM solely for the
purpose of engaging in such transaction. RHM is a Delaware
corporation which owns and operates hotels and an office complex
and invests in hospitality real estate projects owned or managed
by affiliates. RHM is indirectly wholly owned by Regal Hotels
International Holdings Limited, a Bermuda corporation and hotel
ownership and management company ("Regal Holdings") and an
indirect parent of each of the General Partner, RHM and Regal.
RHM and its affiliates together own 3,794,646, or approximately
71.0%, of the outstanding Class A Units, and 888,746, or
approximately 93.6%, of the outstanding Class B Units (and has
voting control with respect to 100% of the Class B Units). Regal
Holdings is an indirect subsidiary of Century City International
Holdings Limited, a Bermuda corporation ("Century City"). Century
City is a Hong Kong based holding company which, through its
subsidiaries, engages primarily in property investment,
development and management, securities trading and investments,
promotions and communications, and other investments. Unitholders
other than Regal Holdings or its affiliates are herein referred
to as "Public Unitholders." The Merger is being effected pursuant
to an Agreement and Plan of Merger, dated as of May 2, 1997, by
and among Regal, RHM, the General Partner and the Partnership
(the "Merger Agreement"). A COPY OF THE MERGER AGREEMENT IS
ATTACHED HERETO AS ANNEX A. PUBLIC UNITHOLDERS ARE ENCOURAGED TO
READ THE MERGER AGREEMENT CAREFULLY. Consummation of the Merger
is subject to several conditions. See "The Merger Agreement --
Conditions to the Merger."
The Merger Agreement provides that, among other things, as
soon as practicable, Regal will be merged with and into the
Partnership, with the Partnership continuing as the surviving
partnership. At the effective time of the Merger (the "Effective
Time"), (i) each issued and outstanding Class A Unit, other than
those held by Regal Holdings or any direct or indirect subsidiary
of Regal Holdings, shall be cancelled, extinguished and retired
and will be converted into the right to receive $3.10 in cash,
without interest, (ii) each issued and outstanding Class B Unit,
other than those held by Regal Holdings or any direct or indirect
subsidiary of Regal Holdings, shall be cancelled, extinguished
and retired and will be converted into the right to receive
$20.00 in cash, without interest, (iii) each outstanding Unit
which is owned by Regal Holdings or any direct or indirect
subsidiary of Regal Holdings shall be and remain a unit of
limited partner interest in the Partnership; (iv) each
outstanding partnership interest, general or
limited, of Regal shall be cancelled, extinguished and retired,
and no payment shall be made thereon; (v) Regal shall cease to exist;
and (vi) the General Partner's general partnership interest in the
Partnership shall be and remain a general partnership interest in
the Partnership. See "The Merger Agreement" for a
i
<PAGE>
description of the Merger and the Merger Agreement. The
Partnership and RHM currently anticipate that the Effective Time
will occur on September 30, 1997.
-------------
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION NOR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
-------------
RHM has proposed the Merger because it believes that
the expense both in terms of actual costs and time and attention
required of management with respect to maintaining the
Partnership as a public entity, as well as potential conflict of
interest situations between the Partnership and RHM and its
affiliates, can be eliminated through the Merger. Furthermore, if
the Partnership remains a publicly-traded partnership, it will
become taxable as a corporation under the Internal Revenue Code
of 1986, as amended (the "Internal Revenue Code") in the
beginning of 1998. See "Summary Financial Data--Annual Financial
Information." In addition, RHM believes that in order to compete
effectively in the longer term in the markets in which it
operates, the Partnership may need to make significant capital
expenditures for necessary renovations as well as improvements at
the Partnership's properties (the "Properties") and that, in its
current form, the Partnership will neither have, nor be able to
obtain, sufficient resources to fund these expenditures. See
"Special Factors -- Reasons for the Merger."
The General Partner believes that the Merger is fair to,
and in the best interests of, the Partnership and the Public
Unitholders, based in part upon the recommendation of a special
committee (the "Special Committee") consisting of the two
independent members of the General Partner's Advisory Committee
(the "Advisory Committee"). The Advisory Committee is established
pursuant to the Agreement of Limited Partnership of the
Partnership (the "Partnership Agreement"). The Board of Directors
of the General Partner and the Special Committee have concluded
that the transactions contemplated by the Merger Agreement are
fair to, and in the best interests of, the Public Unitholders,
and have unanimously approved the Merger Agreement. In arriving
at its conclusions, the Special Committee gave due consideration
and significant weight to the opinion of Houlihan, Lokey, Howard
& Zukin, an investment banking firm acting as the Special
Committee's financial advisor ("Houlihan Lokey"), that, based
upon the considerations and subject to the assumptions and
limitations set forth therein, the consideration to be received
by the Public Unitholders in the Merger (the "Merger
Consideration") is fair to the Public Unitholders (the "Houlihan
Lokey Opinion"). See "Special Factors -- Opinion of Financial
Advisor." A copy of the Houlihan Lokey Opinion is attached hereto
as Annex B. THE BOARD OF DIRECTORS OF THE GENERAL PARTNER
UNANIMOUSLY RECOMMENDS THAT UNITHOLDERS VOTE "FOR" APPROVAL OF
THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
See "Special Factors -- Fairness of the Merger; Recommendation of
the Special Committee and Position of the Related Persons."
On the Record Date, there were 5,340,214 Class A Units
outstanding. Pursuant to the Delaware Revised Uniform Limited
Partnership Act (the "Delaware Act") and the Partnership
Agreement, approval of the Merger Agreement will require the
affirmative vote of the holders of a majority of the aggregate
voting power of all Units entitled to vote thereon (where each
Class A Unit represents one vote and each Class B Unit represents
one-half vote), including the Units held by Regal Holdings and
its affiliates. Regal Holdings has informed the General Partner
that it intends to vote the Class A Units and Class B Units over
which it has voting control, representing approximately 71.0% of
the outstanding Class A Units and 100% of the outstanding Class B
Units, "FOR" approval of the Merger. As a result, approval of the
Merger by the Unitholders is assured, regardless of how the
Public Unitholders vote at the Special Meeting.
-------------
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON
AND REGARDLESS OF THE NUMBER OF UNITS YOU OWN, PLEASE COMPLETE,
SIGN AND DATE THE ENCLOSED PROXY CARD AND MAIL IT AS SOON AS
POSSIBLE IN THE STAMPED, ADDRESSED RETURN ENVELOPE PROVIDED.
UNITHOLDERS SHOULD NOT SEND IN ANY CERTIFICATES
OR DEPOSITARY RECEIPTS REPRESENTING UNITS AT THIS TIME.
-------------
The date of this Proxy Statement is September 5, 1997.
ii
<PAGE>
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION.............................................v
SUMMARY...........................................................1
Purpose of the Special Meeting..............................1
Date, Time and Place of the Special Meeting.................1
Record Date; Units Entitled to Vote; Quorum.................1
Vote Required...............................................1
Certain Relationships.......................................2
Interests of Certain Persons in the Merger..................2
The Special Committee.......................................3
Fairness of the Transaction; Recommendations................3
Opinion of Financial Advisor................................4
Appraisals..................................................4
PKF Report..................................................4
Reasons for the Merger......................................4
Terms of the Merger.........................................5
Effective Time..............................................5
Sources of Funds; Financing of the Merger...................5
Market Prices of the Class A Units..........................6
No Appraisal Rights.........................................6
Summary of Federal Income Tax Consequences of the Merger....6
Accounting Treatment of the Merger..........................6
SPECIAL FACTORS...................................................7
Background of and Reasons for the Merger....................7
Fairness of the Merger; Recommendation of the Special
Committee and Position of the Related Persons...........12
Opinion of Financial Advisor...............................19
Appraisals.................................................24
PKF Report.................................................26
Certain Projections of the Partnership.....................26
Structure of the Merger....................................29
Interests of Certain Persons in the Merger; Conflicts
of Interest.............................................30
Relationships Between the Parties..........................30
Plans for the Partnership After the Merger.................31
Certain Effects of the Merger..............................31
Income Tax Consequences....................................32
Accounting Treatment of the Merger.........................33
Regulatory Approvals and Filings...........................33
THE PROXY SOLICITATION...........................................34
Voting and Proxy Procedures................................34
Solicitation of Proxies....................................34
No Appraisal Rights........................................35
Conduct of the Special Meeting.............................35
THE MERGER AGREEMENT.............................................35
General....................................................35
iii
<PAGE>
Expenses of the Merger.....................................35
Effective Time.............................................36
Financing of the Merger....................................36
Conditions to the Merger...................................36
Termination................................................37
Payment for Units..........................................37
THE PARTNERSHIP..................................................38
General Development of Business............................38
Financial Information About Industry Segments..............38
Narrative Description of Business..........................39
Properties.................................................40
Legal Proceedings..........................................41
Beneficial Ownership of Class A Units and Transactions
In Class A Units By Certain Persons.....................41
SUMMARY FINANCIAL DATA...........................................45
Annual Financial Information...............................45
Interim Financial Information..............................52
MARKET FOR PARTNERSHIP'S UNITS; DISTRIBUTIONS....................54
TAX, LEGALITY AND LIABILITY......................................56
DOCUMENTS INCORPORATED BY REFERENCE..............................56
SCHEDULE 1......................................................S-1
ANNEX A - THE MERGER AGREEMENT..................................A-1
ANNEX B - OPINION OF HOULIHAN LOKEY.............................B-1
ANNEX C - CONSOLIDATED FINANCIAL STATEMENTS OF AIRCOA HOTEL
PARTNERS, L.P. AND ITS SUBSIDIARY OPERATING
PARTNERSHIPS..........................................C-1
iv
<PAGE>
AVAILABLE INFORMATION
The Partnership is subject to the informational reporting
requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, files
reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected
and copied at the Commission's office at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices
located at 7 World Trade Center, Suite 1300, New York, New York
10048 and at Northwestern Atrium Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661. Copies of this material
may also be obtained by mail, upon payment of the Commission's
customary fees, from the Commission's principal offices at 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission also
maintains a Web site at http://www.sec.gov, which contains
certain reports, proxy statements and other information regarding
the Partnership and other registrants that file electronically
with the Commission. The Partnership's Class A Units are listed
on the American Stock Exchange. Copies of reports, proxy
statements and other information may therefore also be inspected
at the offices of the American Stock Exchange, 80 Trinity Place,
New York, New York 10006-1881.
The Partnership, the General Partner, Century City,
RHM and Regal (collectively, the "Related Persons") have jointly
filed with the Commission a Rule 13e-3 Transaction Statement on
Schedule 13E-3 (the "Schedule 13E-3") pursuant to the Exchange
Act, furnishing certain information with respect to the Merger,
in addition to the information contained in this Proxy Statement,
and they may file further amendments to the Schedule 13E-3. As
permitted by the rules and regulations of the Commission, this
Proxy Statement omits certain information contained in the
Schedule 13E-3. For further information pertaining to the Related
Persons, reference is made to the Schedule 13E-3 and the exhibits
and amendments thereto. Statements contained herein concerning
such documents are not necessarily complete and, in each
instance, reference is made to the copy of such documents filed
as an exhibit to the Schedule 13E-3. Each such statement is
qualified in its entirety by such reference.
The Schedule 13E-3 and any such further amendments,
including exhibits, may be inspected and copies may be obtained
in the same manner as set forth in the preceding paragraph,
except that they will not be available at the regional offices of
the Commission.
None of the Related Persons other than the Partnership is
subject to the informational reporting requirements of the
Exchange Act. Regal was formed by RHM solely for purposes of
engaging in the Merger and has not otherwise conducted any
business operations.
v
<PAGE>
SUMMARY
The following is a summary of certain information
contained elsewhere in this Proxy Statement. This summary is
qualified in its entirety by the more detailed information
contained, or incorporated by reference, in this Proxy Statement
and the Annexes hereto. Public Unitholders are urged to read this
Proxy Statement and the Annexes hereto in their entirety. The
information in this Proxy Statement concerning Century City the
Partnership has been provided by the Partnership, and the
information concerning Century City, Regal Holdings, RHM and
Regal has been provided by RHM.
Purpose of the Special Meeting
This Proxy Statement is being furnished to Unitholders in
connection with the solicitation of proxies for use at a Special
Meeting of Unitholders. At the Special Meeting, Unitholders will
consider the Merger Agreement and the transactions contemplated
thereby, including the Merger. Pursuant to the terms of the
Merger Agreement, in the Merger, the Partnership will be merged
with Regal, with the Partnership being the entity surviving the
Merger. In the Merger, each Class A Unit held by Public
Unitholders will be converted into the right to receive $3.10 in
cash, and each Class B Unit held by Public Unitholders will be
converted into the right to receive $20.00 in cash. Upon
completion of the Merger, the Partnership will be wholly owned by
RHM and its affiliates.
Date, Time and Place of the Special Meeting
The Special Meeting of Unitholders will be held at the
offices of Coudert Brothers, counsel to the Partnership, 1114
Avenue of the Americas, New York, New York 10036, on
September 29, 1997 at 9:00 a.m.
(New York City time).
Record Date; Units Entitled to Vote; Quorum
Only record holders of Units at the close of business on
September 2, 1997, the Record Date, will be entitled to notice of
and to vote at the Special Meeting. At September 2, 1997, there were
5,340,214 Class A Units and 950,000 Class B Units outstanding.
Such Class A Units and Class B Units were held by approximately
1,400 and three holders of record, respectively. The presence in
person, or by properly executed proxy, of the holders of more
than 50 percent of the aggregate voting power of outstanding
Units is necessary to constitute a quorum at the Special Meeting.
Each holder of record of Units on the Record Date is
entitled to cast one vote per Class A Unit and one-half vote per
Class B Unit on each proposal with respect to the Merger properly
submitted for the vote of the Unitholders.
Vote Required
Pursuant to the Delaware Act and the Partnership Agreement,
approval of the Merger Agreement will require the affirmative
vote of a majority of the aggregate voting power of the
outstanding Units entitled to vote thereon (where each Class A
Unit represents one vote and each Class B Unit represents
one-half vote), including Units held by Regal Holdings and its
affiliates (the "Majority Vote Requirement"). Regal Holdings has
informed the General Partner that it intends to vote the Class A
Units and Class B Units over which it has voting control,
representing approximately 71.0% of the outstanding Class A Units
and 100% of the outstanding Class B Units, "FOR" approval of the
Merger. As a result, approval of the Merger by the Unitholders is
assured, regardless of how the Public Unitholders vote at the
Special Meeting.
<PAGE>
Certain Relationships
Each of Richfield Holdings, Inc. ("RHI"), AIRCOA Equity
Interests, Inc. ("AEI"), RHM and Gateway Hotel Holdings, Inc.
("Gateway") share voting and investment power over 3,794,646, or
approximately 71.0% of the Class A Units with Century City. RHI
has direct ownership of 546,740 Class A Units, an indirect
ownership of 650,000 Class A Units through AEI, and indirect
ownership of 3,800 Class A Units through Richfield Hospitality
Services, Inc. ("Richfield"), a wholly owned subsidiary of RHI,
for a total direct and indirect ownership of 1,200,540 Class A
Units, which represent 22.5% of the Class A Units. In addition,
RHI directly owns 200,000 Class B Units. RHM directly owns
1,825,065 Class A Units and 688,746 Class B Units. Buffalo Hotel
Investors, Ltd. ("BHI") directly owns 61,254 Class B Units. AEI
is the managing general partner of BHI. AEI and its affiliates
directly and indirectly own 7.1% of the partnership interests in
BHI.
The General Partner is wholly owned by Richfield, which in
turn is wholly owned by RHI. RHI also owns all the common stock
of AEI. More than 95% of the common stock, and more than 90% of
the preferred stock, of RHI is owned, directly and indirectly
through other subsidiaries, by Regal International (BVI) Holdings
Limited ("Regal International"). Regal International also owns,
directly and indirectly through subsidiaries, by Regal
other than RHI and its subsidiaries, all of the
common and preferred stock of RHM and all of the common stock of
Gateway. Regal International is a wholly owned subsidiary of
Regal Holdings. Accordingly, all or substantially all of the
equity interests in each of RHI, AEI, Richfield, the General
Partner, RHM and Gateway are owned, directly or indirectly, by
Regal Holdings. More than 70% of the common stock of Regal
Holdings is owned by Paliburg Holdings Limited ("Paliburg"), of
which 73.1% of the common stock is owned by Century City. Century
City is a publicly traded company the common stock of which is
traded on the Hong Kong stock exchange. More than 60% of the
voting stock of Century City is beneficially owned by Mr. Lo Yuk
Sui, a citizen of Hong Kong.
The General Partner directly owns notes, with face values
of $8,100,000, which are convertible into Class A Units at a
price of $16.60 per Class A Unit. Assuming that these were
converted, the General Partner would directly own 9.2% of the
Class A Units. Century City would then indirectly own 73.5% of
the Class A Units.
The principal executive offices of the Partnership, the
General Partner, RHM and Regal are located at 5775 DTC Boulevard,
Englewood, Colorado 80111, telephone (303) 220-2000.
Interests of Certain Persons in the Merger
As of September 2, 1997, approximately 3,794,646
(71.0%) of the Class A Units and approximately 888,746 (93.6%) of
the Class B Units were beneficially owned by Regal Holdings and
its affiliates. Of the approximately 71.0% of Class A Units and
93.6% of Class B Units owned directly or indirectly by Regal
Holdings, 34.2% and 72.5%, respectively, is owned by RHM. See
"The Partnership -- Beneficial Ownership of Class A Units and
Transactions in Class A Units By Certain Persons."
In addition, RHM is interested in the outcome of the Merger
in that, following the Merger, RHM and its affiliates
would be the sole owners of the Partnership. As sole owners,
RHM and its affiliates would bear the total risk of
the Partnership's operations but would also receive the entire
benefit, if any, arising from pursuit of the various
opportunities described under "-- Reasons for the Merger." RHM
also would be able to consolidate the Partnership's operations
more fully with those of its other properties owned and managed
by RHM and its affiliates without introducing issues with respect
to potential conflicts of interest, and to realize potential
operating synergies therefrom. If the Partnership were sold to an
unrelated third party, RHM would not have any further
participation in any such opportunities, while, if the current
ownership structure were maintained, it would share any such
benefits with the Public Unitholders. See "Special Factors --
Interests of Certain Persons in the Merger; Conflicts of
Interest."
In proposing and structuring the terms of the Merger, RHM
primarily considered its own interests and not those of the
Public Unitholders, recognizing, however, that the terms and
structure of the Merger transaction would be reviewed by the
Special Committee, and that RHM would not proceed with the Merger
absent a favorable
2
<PAGE>
recommendation by the Special Committee with
respect thereto. Neither RHM nor the Special Committee
approached any unaffiliated persons or entities with respect to
the acquisition of the Partnership or any of its assets.
See "Special Factors -- Background of the Merger."
The General Partner and the senior management of the
Partnership have certain interests that may present them with
actual or potential conflicts of interest. Among these are that
(i) the General Partner is controlled by Regal Holdings, an
affiliate of RHM, (ii) the current General Partner is expected to
remain in its current role subsequent to the Merger, and (iii)
the current senior management of the General Partner is expected
to remain in their positions following the Merger. See "Special
Factors -- Interests of Certain Persons in the Merger; Conflicts
of Interest." Both the Partnership and the Special Committee were
advised by separate legal counsel from that of RHM and Regal in
connection with the Merger.
The Special Committee
The Board of Directors of the General Partner (the
"Board") appointed the Special Committee pursuant to resolutions
adopted on January 14, 1997 to consider the fairness of the
proposed transaction to the Public Unitholders. The Special
Committee consists of Mr. James W. Hire and Mr. Anthony C.
Dimond, each of whom is an independent member of the
Partnership's Advisory Committee and is not (and, at the time of
the approval of the Merger, was not) an employee of the
Partnership or the General Partner or otherwise affiliated with
the Partnership or its affiliates. See "Special Factors --
Background of the Merger."
Fairness of the Transaction; Recommendations
In developing its initial merger proposal of $2.35 per
Class A Unit and $16.80 per Class B Unit, RHM determined that
such initial proposal might reasonably be expected to be found by
a special committee, and its independent financial advisor, to be
fair to the Public Unitholders and, therefore, that such an offer
might reasonably be expected to lead to a successful acquisition
by RHM of the publicly held Units, but did not determine at that
time whether or not such proposal was fair to the Public
Unitholders. Both RHM and the General Partner have interests in
the proposed Merger which conflict with the interests of the
Public Unitholders. See "Special Factors -- Interests of Certain
Persons in the Merger; Conflicts of Interests." Accordingly, the
Special Committee was appointed by the Board to make a
determination with respect to the fairness of the transaction to
the Public Unitholders. See "Special Factors -- Opinion of
Financial Advisor."
The Special Committee concluded that the transactions
contemplated by the Merger Agreement are fair to, and in the best
interests of, the Public Unitholders, and unanimously approved
the Merger Agreement. In arriving at its conclusion, the Special
Committee gave due consideration and significant weight to the
Houlihan Lokey Opinion (confirmed in writing on May 2, 1997)
that, based upon the considerations and subject to the
assumptions and limitations set forth therein, the Merger
Consideration to be received by the Public Unitholders in the
Merger is fair, from a financial point of view, to the Public
Unitholders.
The determinations of the Special Committee, including its
conclusions, recommendations and the material considerations
applicable thereto, were delivered to the Advisory Committee and
the Board at a meeting held on May 2, 1997. The Advisory
Committee and the Board concurred in and adopted both the
material considerations and the conclusions of the Special
Committee. There were no other material considerations applicable
to the deliberations of the Board. Each of the Advisory Committee
and the Board unanimously approved the Merger Agreement on the
basis of the considerations and conclusions of the Special
Committee. See "Special Factors --Fairness of the Merger;
Recommendation of the Special Committee and Position of Century
City and RHM."
THE BOARD OF DIRECTORS OF THE GENERAL PARTNER UNANIMOUSLY
RECOMMENDS THAT UNITHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY.
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Opinion of Financial Advisor
Houlihan Lokey, a nationally recognized investment banking
firm, delivered a written opinion to the Special Committee on May
2, 1997, to the effect that, as of such date, and based upon the
assumptions made, general procedures followed, factors considered
and limitations on the review undertaken as set forth in such
opinion, the Merger Consideration of $3.10 in cash per Class A
Unit and $20.00 in cash per Class B Unit to be received by the
Public Unitholders pursuant to the Merger Agreement is fair to
such Public Unitholders from a financial point of view. The full
text of the Houlihan Lokey Opinion is attached as Annex B to this
Proxy Statement. Public Unitholders are urged to read the
Houlihan Lokey Opinion carefully and in its entirety in
conjunction with this Proxy Statement for the assumptions made,
the matters considered and the limits of the review of Houlihan
Lokey. See "Special Factors -- Opinion of Financial Advisor."
Appraisals
Arthur Andersen LLP ("Arthur Andersen") prepared appraisals
of the Properties (the "Appraisals") on behalf of the
Partnership's bank lenders, and authorized the use of such
Appraisals for use by the Special Committee in connection with
its review of the proposed Merger. The Appraisals were prepared
in order to estimate the market value of the fee simple and/or
leasehold estate in the Properties, as requested by the Special
Committee. Arthur Andersen concluded that the aggregate market
value of the Properties was $86,760,000. See "Special Factors
- --Appraisals."
PKF Report
PKF Consulting ("PKF"), a hotel appraisal firm, was
retained by the Special Committee to determine if there was any
additional value to the Partnership as a result of holding a
portfolio of properties that might be purchased as a whole. In
preparing its report, dated April 29, 1997 (the "PKF Report"),
PKF reviewed the Appraisals and interviewed representatives of
various enterprises involved in the acquisition of portfolios of
properties. The PKF Report concluded that a typical "willing and
knowledgeable investor" would not pay a premium over the sum of
the individual property values for this group of hotels. See
"Special Factors -- PKF Report."
Reasons for the Merger
RHM (rather than the General Partner) is the party
primarily initiating, supporting, structuring and negotiating the
terms of the Merger. RHM has proposed the Merger because it
believes that maintaining the Partnership as a public entity is
expensive both in terms of the actual costs of reporting and
providing information to Unitholders and the time and attention
required of management, whose energies might be better spent on
other matters. Furthermore, if the Partnership remains a
publicly-traded partnership, it will become taxable as a
corporation under the Internal Revenue Code in the beginning of
1998. RHM also believes that potential conflict of interest
situations between the Partnership and RHM can be eliminated
through the Merger. In addition, RHM believes that in order to
compete effectively in the longer term in the markets in which it
operates, the Partnership may need to make significant capital
expenditures for necessary renovations as well as improvements
and that, in its current form, the Partnership will neither have,
nor be able to obtain, sufficient resources to fund these
expenditures. The Related Persons believe that the Merger is fair
to, and in the best interests of, the Partnership and the Public
Unitholders, based in part on the determinations of the Special
Committee and the Houlihan Lokey Opinion. See "Special Factors --
Background of and Reasons for the Merger" and "-- Fairness of the
Merger; Recommendation of the Special Committee and Position of
the Related Persons."
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Terms of the Merger
The Merger will be effected pursuant to the terms of the
Merger Agreement. Public Unitholders are urged to read the text
of the Merger Agreement, a copy of which is attached as Annex A
to this Proxy Statement. Upon consummation of the Merger and by
virtue thereof, (i) each issued and outstanding Class A Unit,
other than those held by Regal Holdings or any direct or indirect
subsidiary of Regal Holdings, shall be cancelled, extinguished
and retired and will be converted into the right to receive $3.10
in cash, without interest, (ii) each issued and outstanding Class
B Unit, other than Class B Units owned by Regal Holdings or any
direct or indirect subsidiary of Regal Holdings, shall be
cancelled, extinguished and retired and will be converted into
the right to receive $20.00 in cash, without interest, (iii) each
outstanding Unit which is owned by Regal Holdings or any direct
or indirect subsidiary of Regal Holdings shall be and remain a
unit of limited partner interest in the Partnership, (iv) each
outstanding partnership interest, general or limited, of Regal
shall be cancelled, extinguished and retired, and no payment
shall be made thereon, (v) Regal shall cease to exist, and (vi)
the General Partner's general partnership interest in the
Partnership shall be and remain a general partnership interest in
the Partnership. As a result of the Merger, the Partnership and
its consolidated subsidiaries will become wholly owned
by RHM and its affiliates and the Public Unitholders will
cease to be limited partners of the Partnership. Because no Class
A Units will be publicly held after the Merger, the Class A Units
will be delisted and will no longer trade on the American Stock
Exchange, and the Partnership will cease to be a separate
reporting company under the Exchange Act.
Closing of the Merger is subject, among other things, to:
(i) the Majority Vote Requirement having been met; (ii) no
withdrawal by Houlihan Lokey of the Houlihan Lokey Opinion or
modification thereof in a manner materially adverse to RHM,
Regal, the Partnership or any Unitholder having occurred; and
(iii) no statute, rule, regulation, executive order, decree or
injunction having been enacted, entered, promulgated or enforced
by any court or governmental authority which prohibits,
restrains, enjoins or restricts the consummation of the Merger.
See "The Merger Agreement."
Effective Time
Under the Merger Agreement, the Merger will become
effective on the date (the "Effective Date") and at the time (the
"Effective Time") that a Certificate of Merger is filed pursuant
to Delaware law. It is anticipated that the Effective Date will
occur on or about September 30, 1997, although there can be no
assurance in this regard. The transfer books for the Class A
Units and Class B Units will be closed as of the close of
business on the Effective Date and no transfer of record can be
made of certificates representing the Class A Units or Class B
Units thereafter other than registrations of transfer reflecting
transfers occurring before the close of business on the Effective
Date. If the Merger cannot be concluded by September 30, 1997
(see "The Merger Agreement -- Termination"), the Special
Committee and the parties to the Merger Agreement may consider
whether or not to extend the time for consummation of the Merger
by amendment or waiver of the applicable condition in the Merger
Agreement for any appropriate reason. See "The Merger Agreement
- -- Effective Time."
Upon consummation of the Merger, RHM and its affiliates
will hold the entire limited partnership interest in the
Partnership. The Public Unitholders will have no ownership
interest in or control over the Partnership. In addition, the
Partnership's registration of the Class A Units under the
Exchange Act will be terminated and the Partnership will not be
required to continue its periodic reporting requirements under
the Exchange Act. See "Special Factors -- Certain Effects of the
Merger" and "Market for Partnership's Units; Distributions."
Sources of Funds; Financing of the Merger
Approximately $7 million will be required to consummate
the Merger and to pay related fees and expenses. The necessary
funds are expected to be provided by RHM from funds on hand of
Regal Holdings and its subsidiaries. See "The Merger Agreement --
Expenses of the Merger" and "--Financing of the Transaction."
5
<PAGE>
Market Prices of the Class A Units
The Class A Units have been traded on the American
Stock Exchange since July 1987. As reported by the American Stock
Exchange, during the first quarter of 1997, the closing prices of
the Class A Units on the American Stock Exchange ranged from
$1.875 to $2.25 per Class A Unit, and the average trading volume
for such period was approximately 2,900 Class A Units per day. On
December 18, 1996, the date of announcement of the Proposal,
daily trading volume in the Class A Units was approximately
29,100 Class A Units and the closing price per Class A Unit on
the American Stock Exchange increased from $1.50 on December 17,
1996 to a closing price of $2.00 on December 18, 1996. On May 2,
1997, immediately preceding the announcement of the execution of the
Merger Agreement, the high and low sales prices of the Class A
Units on the American Stock Exchange were $2.6875 and $2.625,
respectively, and the closing price was $2.6875. On May 5, 1997,
the day the execution of the Merger Agreement was announced,
daily trading volume in the Class A Units was 3,500 Class A Units
and the closing price per Class A Unit on the American Stock
Exchange was $2.875. See "Market for Partnership's Units;
Distributions."
No Appraisal Rights
Under the Delaware Act, the only appraisal rights available
to Unitholders are those accorded by contract. Neither the
Partnership Agreement nor the Merger Agreement provides such
appraisal rights to the Public Unitholders in connection with the
Merger.
Summary of Federal Income Tax Consequences of the Merger
The receipt of cash in exchange for Units pursuant to the
Merger will be a taxable transaction for federal income tax
purposes and may also be a taxable transaction under applicable
state, local and foreign tax laws. Accordingly, a Unitholder will
recognize a gain or loss on the conversion of Units in the Merger
to the extent of the difference between the amount realized and
his or her adjusted tax basis in the Units sold. In addition,
upon the conversion by a Unitholder of all his or her Units in
the Merger, any net losses of the Partnership that were suspended
under the passive loss rules of the Internal Revenue Code may be
used to offset income and gain on such conversion.
The foregoing summary is for general information of
Unitholders only as to their tax consequences and does not
purport to be complete. For a more extensive discussion of the
Federal income tax consequences of the Merger, see "Special
Factors -- Income Tax Consequences" below. The consequences to
any particular Unitholder may differ depending upon that
Unitholder's own circumstances and tax position. Certain types of
Unitholders (including, but not necessarily limited to, financial
institutions, tax-exempt organizations and foreign persons) may
be subject to special rules. This discussion does not consider
the effect of any applicable foreign, state or local tax laws.
Each Unitholder is urged to consult his tax advisor as to the
particular tax consequences of the Merger to such Unitholder,
including the application of state, local and foreign tax laws.
For purposes of this summary, Unitholders are assumed to hold
their Units as capital assets (generally, property held for
investment).
Accounting Treatment of the Merger
The acquisition by RHM of the Units will be accounted for
as an acquisition of minority ownership interests of a subsidiary
in accordance with the purchase method of accounting.
Representatives of KPMG Peat Marwick LLP, the principal
accountants for the Partnership, are expected to be present at
the Special Meeting and will be available to respond to
appropriate questions and to make a statement if they desire to do so.
6
<PAGE>
SPECIAL FACTORS
Background of and Reasons for the Merger
Relationship Between RHM and the Partnership
The Partnership was formed in 1986 by the General Partner
to acquire, own and operate hotel and resort properties. The
Partnership acquired its initial portfolio of seven hotel
properties from affiliates of the General Partner substantially
in consideration for Class B Units. In July 1987, the Partnership
issued 1,700,000 Class A Units in an initial public offering at a
price of $18.50 per Class A Unit. In addition, the Partnership
issued 570,270 Class A Units to the General Partner and its
affiliates for cash at the initial public offering price. Since
the initial public offering and prior to 1993, the General
Partner and certain of its affiliates acquired an additional
3,069,944 Class A Units from the Partnership (i) pursuant to the
terms of certain support arrangements which required the General
Partner and such affiliates to contribute additional cash amounts
to the Partnership as necessary to enable the Partnership to make
certain distributions in respect of the Class A Units, (ii) to
pay maturing debt and (iii) to increase the working capital of
the Partnership.
In 1989, Regal Holdings acquired the General Partner and
certain of its affiliates, and thereby acquired beneficial
ownership of the Class A Units and Class B Units held by those
entities. Only two of the Partnership's six hotel and resort
properties bear the "Regal" name, while three properties are
operated under franchise agreements with third party hotel
chains. From time to time in the past, Regal Holdings has
preliminarily considered the possibility of consolidating the
Properties with certain other U.S. properties owned or managed by
affiliates of Regal Holdings, through acquisition, merger or
otherwise.
Costs of Maintaining the Partnership as a Public Partnership
RHM believes that maintaining the Partnership as a public
entity is expensive both in terms of the actual costs of
reporting and providing information to Unitholders (approximately
$500,000 per year) and the time and attention required of
management, whose energies might be better spent on other
matters. Furthermore, if the Partnership remains a
publicly-traded partnership, it will become taxable as a
corporation pursuant to the Internal Revenue Code in the
beginning of 1998. See "Summary Financial Data -- Annual
Financial Information -- Liquidity and Capital Resources --
Income Taxes." RHM also believes that potential conflict of
interest situations between the Partnership and RHM can be
eliminated through the Merger.
Need for Capital Investment; Availability of Financing
The level of competition among mid-market hospitality
properties such as those owned by the Partnership has increased
substantially in recent years, as new properties have been
constructed and others have been renovated to provide for more
modern amenities and a fresher appearance. The General Partner
believes that, to date, the Properties have performed
competitively when compared to other properties, especially on a
"revenue per available rooms" basis. In order to remain
competitive, the Partnership needs to make capital expenditures
for ongoing maintenance which will be 5% or more of the annual
revenue of the Partnership as a whole(5% is an industry rule of
thumb for certain properties). Also, RHM believes that, in order
to remain competitive in the longer term, the Partnership may
need to make significant capital investments in excess of the
industry norm, for renovation and improvements. The Partnership's
projected cash flow may not be sufficient to fund this amount,
and the terms of the Partnership's current bank facilities will
not permit the incurrence by the Partnership of a substantial
amount of additional indebtedness. In addition, RHM and its
affiliates have advised the Partnership they are not required and
are unwilling to make additional capital contributions or provide
other additional financial support to the Partnership in its
present form. RHM and its affiliates have also advised the
Partnership that they would not support any liquidation or
dissolution of the Partnership.
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Class B Unit Conversion
For years prior to 1997, the Class B Units were
subordinated limited partnership units in respect of which
distributions could not be made until certain minimum annual
distributions were made in respect of the Class A Units. Since
1990, the Partnership has not been able to pay the minimum annual
distributions on the Class A Units which would entitle the
holders of Class B Units to receive any distribution. However,
under the terms of the Partnership Agreement, from 1997 through
2001 a minimum of 250,000 Class B Units are to convert
automatically into Class A Units at a conversion rate of $20.00
in market value of Class A Units per Class B Unit (the "Class B
Unit Conversion"). The Class B Unit Conversion is to occur each
year from 1997 through 2001, within 30 days following the
delivery to holders of Class B Units of the Partnership's annual
financial statements for the immediately preceding year. If the
scheduled 1997 conversion of 250,000 Class B Units to Class A
Units had occurred at the market price for the Class A Units on
December 17, 1996 (the day immediately preceding the date of
RHM's proposal to engage in the Merger) of $1.50 per Class A
Unit, there would be 8,673,547 Class A Units outstanding
(compared with 5,340,214 Class A Units currently outstanding). As
discussed below in the "Market for Partnership's Units;
Distributions" section, the Partnership Agreement was amended to
defer the 1997 conversion of Class B Units pursuant to the Class
B Unit Conversion.
The 13D Group
In February 1995, a group of Unitholders reportedly engaged
in the real estate industry (the "13D Group"), filed a Schedule
13D with the Commission pursuant to Section 13(d) of the Exchange
Act. In the Schedule 13D, the 13D Group stated, among other
things, that it may seek to influence management of the
Partnership to engage in a variety of actions, including the
reorganization of the Partnership, the reconfiguration of the
Partnership as a real estate investment trust, the sale of one or
more of the Properties and the change of the Partnership's
distribution policies.
The 13D Group approached the General Partner on several
occasions since the filing of the group's Schedule 13D, during
which the 13D Group requested, and was provided by the
Partnership with, certain public information concerning the
Partnership's assets and operations. According to the Schedule
13D, the members of the 13D Group currently beneficially own
432,300, or 8.1%, of the Class A Units outstanding. Members of
the 13D Group have also proposed to engage in various
transactions with the Partnership, including the purchase and
sale of the Regal University Hotel, Sheraton Inn Buffalo Airport
and Clarion Fourwinds Resort and Marina properties at a purchase
price substantially less than the appraised value thereof, which
proposal was rejected by the General Partner as inadequate; the
purchase and sale of the Partnership's Regal University Hotel at
a price substantially less than the appraised value thereof,
which proposal was rejected by the General Partner as inadequate;
and the exchange of certain of the Properties for limited
partnership units of a hotel limited partnership managed by a 13D
Group member, which the General Partner also determined not to
pursue. On June 24, 1996, representatives of the 13D Group
proposed that the Partnership repurchase the Class A Units held
by the 13D Group at a price of $7.00 per Class A Unit, which
would have represented a 273% premium over the then prevailing
market price of $1.875 per Class A Unit. In view of the
Partnership's business plan and financial condition, as well as
the amount of the proposed purchase price, this proposal was also
rejected by the General Partner. Other than the approaches made
by members of the 13D Group, the General Partner is not aware of
any third party proposals with respect to an acquisition or
similar transaction involving the Partnership since 1994.
RHM Merger Proposal; Appointment of Special Committee
In view of the foregoing circumstances, RHM and its
affiliates determined that the most practical means of (i)
protecting their investment in the Partnership and furthering the
business objectives and plans of the Partnership without the
attention required by management as a result of having public
Unitholders and (ii) providing Public Unitholders with fair value
for their Class A Units and Class B Units was to engage in a
transaction in which the Public Unitholders would be paid cash
for their Units and the Partnership would become wholly owned by
RHM and its affiliates. On December 16, 1996, the Board of
Directors of RHM authorized its officers to enter into
negotiations with the Partnership regarding the acquisition of
all of the Class A Units and Class B Units not owned by RHM and
its affiliates at a price of $2.35 per Class A Unit and $16.80
per Class B
8
<PAGE>
Unit. On the same date, theBoard of Directors of the
General Partner discussed with the two independent members of the
Advisory Committee whether they would be willing to act as a
special committee to consider RHM's proposal. Pursuant to the
Partnership Agreement, the Partnership is required to maintain an
Advisory Committee consisting of not less than three persons
selected by the General Partner. The Advisory Committee's mandate
includes (i) reviewing the policies and practices of the
Partnership and the General Partner regarding matters as to which
potential conflicts of interest may arise between the Partnership
on the one hand and the General Partner and its affiliates on the
other, (ii) reviewing any matters involving potential conflicts
of interest between holders of different classes of Partnership
Units, (iii) reviewing and approving annual budgets for each
Partnership property where the General Partner or an affiliate
acts as the manager of the property and (iv) approving (or not
approving) certain transactions specified by the Partnership
Agreement, including (a) the acquisition of certain hotels, (b)
the construction or development of new hotel properties, (c) the
sale of any of the Partnership's initial hotel properties to any
person, (d) certain amendments to the terms of a loan made by an
affiliate to the Partnership, and (e) any acquisition of any
Partnership hotel from, or sales of any Partnership hotel
property to, any affiliate of the General Partner. The members of
the Advisory Committee are entitled to receive and review such
financial and other information regarding the Partnership as the
Advisory Committee, in the exercise of its responsibilities, may
request from the General Partner.
The Partnership Agreement also requires, to the extent
reasonably practicable, that a majority of the Advisory Committee
consist of individuals who are not affiliates of the General
Partner (other than those persons who are affiliates of the
General Partner solely as a result of their service as members of
the Board of Directors of the General Partner or any of its
affiliates). The Advisory Committee is required to meet at least
annually under the terms of the Partnership Agreement.
In late December 1996, the two independent members of the
Advisory Committee advised Mr. Douglas Pasquale, President of the
General Partner and RHM, that they would not be willing to serve
as members of a special committee to review the Merger proposal
unless the General Partner agreed to certain conditions,
including that (i) the General Partner authorize the expenditure
of a specified sum to engage independent financial advisors and
legal counsel, (ii) RHM reimburse the Partnership for its
expenses in connection with its acquisition proposal in the event
that a transaction did not result, (iii) the fees payable to each
member for his service on the special committee be increased from
$25,000 to $50,000 and (iv) each special committee member be
entitled to receive his full annual retainer for serving as a
member of the Advisory Committee during 1997, even if the Merger
occurred prior to the end of the year. The General Partner
advised the Advisory Committee members that while it would agree
to cause the Partnership to pay the requested sum for the
retention of financial advisors and legal counsel, it would not
be willing to request RHM to reimburse some portion of the
Partnership's expenses in the event that no transaction were to
occur or to permit the Partnership to pay to the special
committee members the requested fees or excess retainer. The
independent members of the Advisory Committee then resigned from
the Advisory Committee. After consulting with members of the
Board, in accordance with Section 1.8 of the Partnership
Agreement, the sole remaining member of the Advisory Committee,
Anthony Williams, a director of the General Partner and the
Chairman of the Partnership's outside law firm, appointed James
W. Hire and Anthony C. Dimond as members of the Advisory
Committee to fill the vacancies created by the resignations.
Subsequently, the Board of Directors of the General Partner,
pursuant to a unanimous written consent of director dated January
14, 1997, appointed Messrs. Hire and Dimond to serve as the
members of the Special Committee.
Mr. Hire is an experienced consultant to the hospitality
industry, having completed well over 2,000 individual consulting
assignments during his 18 years as an independent consultant.
Prior to his work as an independent consultant, Mr. Hire spent 12
years in hotel operations, including positions as general manager
and developer of new properties. Mr. Dimond has extensive
experience in hotel management. Mr. Dimond has worked for the
last seven years through Miramar Asset Management, Inc. with
financial institutions and individual owners, assisting them with
troubled properties and handling asset management, evaluations
and receivership functions on a variety of hotel projects.
Apart from their membership on the Partnership's
Advisory Committee and their service as members of the Special
Committee, neither Mr. Dimond nor Mr. Hire has been employed in
any capacity with, or has ever otherwise been affiliated with, the
Partnership or its affiliates. As wholly independent members of
the Advisory
9
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Committee, the Board of Directors of the General
Partner selected Messrs. Hire and Dimond to serve on the Special
Committee for the purpose of evaluating RHM's offer from the
perspective of Public Unitholders, negotiating the terms of any
proposed transaction resulting from the offer and making a
recommendation to the Partnership as to whether or not such
transaction should be approved.
Consideration and Negotiation of Terms of the Merger
Between January 17, 1997 and January 30, 1997, the Special
Committee received proposals from six separate investment banking
firms to act as financial advisor to the Special Committee in
considering the Merger Proposal of RHM (the "Proposal"), and
investigated several other potential financial advisors who were
eliminated from consideration for reasons including specific
experience, availability and potential conflicts of interest. The
Special Committee decided that three of these proposals warranted
further interviews and negotiations. Each of these three
potential advisors made presentations to the Special Committee
and the Special Committee interviewed each of the potential
advisors with respect to their capabilities and experience
relating to full service hotels in commercial and resort areas,
as well as with respect to the scope and methodology of their
proposed services. After these presentations on February 19,
1997, both members of the Special Committee unanimously decided
to retain Houlihan Lokey to act as the Special Committee's
financial advisor in considering the Proposal, and an engagement
letter with Houlihan Lokey was executed. The Special Committee
selected Houlihan Lokey for several reasons, including primarily
the reputation of the firm, their experience in transactions
involving the purchase of minority interests, and their
experience with hospitality properties. The Special Committee
also retained Holland & Hart LLP as its legal counsel based on
the firm's reputation and experience in transactions involving
public companies.
The Special Committee reviewed the Appraisals dated January
1, 1997, which Appraisals were prepared at the Partnership's
request by Arthur Andersen, which had appraised the Properties on
behalf of the Partnership's bank lenders. An Appraisal was made
on each of the Partnership's individual Properties (treating Pine
Lake as a separate entity for such purposes). The Appraisals were
determined by the Special Committee to be reasonable for use by
the Special Committee in its deliberations and negotiations. See
"-- Recommendation of the Special Committee -- Arthur Andersen
Appraisals."
The Special Committee then determined that a second hotel
appraisal firm should be retained to perform an analysis of the
Properties as a portfolio, to determine if there was any
additional value to the Partnership as a result of holding a
portfolio of properties that might be purchased as a whole. After
interviewing two such appraisal firms, the Special Committee
determined to retain PKF, in part because of the reputation and
experience of the firm and the principal who would be performing
the analysis, and in part because PKF was already familiar with
the Properties, having had previous experience appraising those
Properties. From time to time, PKF has also performed work on
behalf of the General Partner and its affiliates.
The Special Committee and its legal counsel conducted
certain due diligence on the Partnership and its Properties.
Included in the Special Committee's due diligence efforts were,
without limitation, visits to each of the Properties and
interviews with management at each site, a review of industry
information, the Partnership's filings with the Commission, the
Partnership's significant agreements, historical financial
information, correspondence between the Partnership and the
13D Group, the Appraisals, the minutes of the Board, the
Partnership's most recent budget and forecasts of future operating
results and tax related information.
Houlihan Lokey began its review of the Partnership shortly
after it was retained. Based on its analysis completed through
March 24, 1997, representatives of Houlihan Lokey met with the
Special Committee on March 24, 1997 and March 25, 1997. At the
March 24-25 meeting, Houlihan Lokey described the research it had
performed, and described three different methods that were used
to value the Partnership and the Units. At this and subsequent
meetings, the Special Committee reviewed a number of substantive
and procedural factors relevant to the value of the Units. The
Special Committee then reviewed with Houlihan Lokey and the
Special Committee's legal counsel certain negotiating strategies
that could be used in attempting to increase the price for the
Units held by Public Unitholders set forth in the proposal.
Negotiations between the Special Committee (in consultation
with Houlihan Lokey and the Special Committee's legal counsel)
and RHM commenced at a meeting on March 26, 1997. During these
negotiations,
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which extended over several weeks, the members of
the Special Committee indicated to representatives of RHM that
they believed that the consideration of $2.35 per Class A Unit
and $16.80 per Class B Unit initially proposed by RHM was
inadequate in general, and that the consideration offered for
each Class B Unit fell substantially short of the $20.00 in
market value of Class A Units into which many of the Class B
Units (including all of the Class B Units held by Public
Unitholders) would become convertible in 1997. The RHM
representatives disagreed, noting that the proposal reflected an
appropriate allocation of the anticipated appraised value of the
Properties, net of indebtedness and holding company and similar
expenses, taking into consideration the scheduled conversion of
Class B Units to Class A Units pursuant to the Class B Unit
Conversion. See "Summary Financial Data -- Annual Financial
Information -- Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Liquidity and Capital
Resources -- Partnership Distributions and Unit Conversions." RHM
also argued that the offered consideration would represent a
substantial premium to the recent trading prices of the Class A
Units. However, RHM indicated that it would nevertheless be
willing to increase its proposed consideration to $2.70 per Class
A Unit, and $20.00 per Class B Unit, held by the Public
Unitholders. On April 7, 1997, the members of the Special
Committee advised RHM that, in their view, the proposed
consideration for the Class A Units remained too low, and that a
higher amount per Class A Unit would be more appropriate.
Finally, after reviewing many factors and determining that the
Merger would be in the best interests of the Public Unitholders,
on April 11, 1997, the Special Committee indicated that it would
be prepared to recommend a price of $3.10 for each Class A Unit,
and $20.00 for each Class B Unit, held by the Public Unitholders
(the "Revised Proposal"), subject to satisfactory resolution of a
number of items, including final negotiation of the Merger
Agreement. RHM agreed that it also would be prepared to proceed
with a transaction on the basis of such terms.
The terms and conditions of the Merger Agreement were then
negotiated by RHM, the Special Committee and their respective
counsel. A number of revisions were made to the initial draft
Merger Agreement prepared by RHM's counsel at the request of the
Special Committee and its counsel, including but not limited to
augmenting the representations and warranties made by RHM while
deleting certain warranties made by the Partnership, adding
certain conditions to the Partnership's obligation to consummate
the Merger, and limiting the remedy of any party for the breach
of a warranty or covenant to the termination of the Merger
Agreement.
Concurrently with the negotiation of the terms and
conditions of the Merger Agreement, the Special Committee also
examined certain claims made by the 13D Group involving
allegations of breaches of fiduciary duty by the General Partner,
which were set forth in the correspondence between the 13D Group
and the General Partner or the Special Committee. The allegations
included the following: (1) the alleged denial to the 13D Group
of access to information of the Partnership; (2) the alleged
payment of excessive administrative, management and financing
fees to the General Partner; (3) the alleged payment of an
excessive guarantee fee to an affiliate of RHM; (4) the alleged
improper allocation of insurance fees; (5) the alleged
inappropriate allocation of overhead expenses; (6) the alleged
failure to make distributions to the Class A Unitholders; (7) the
alleged inappropriately low sales price for Class A Units sold to
RHM and its affiliates; (8) the alleged impacts of the Class B
Unit Conversion; (9) the alleged lack of independent members of
the Advisory Committee; (10) the alleged failure to consider
other alternative transactions; and (11) the alleged
inappropriate timing of the Proposal (collectively, the "13D
Group Allegations"). The Special Committee found no evidence
indicating that there was any basis for a successful claim by the
Partnership against the General Partner that might result in any
damages being recovered by the Partnership or the Public
Unitholders. When combined with the business judgment of the
Special Committee that the Merger would be a beneficial
transaction to the Public Unitholders, the Special Committee
concluded the Partnership should proceed with the Merger.
From the first official meeting of the Special Committee on
February 3, 1997 until its meeting on May 1, 1997, the Special
Committee officially met a total of 10 times in person or by
telephone. Discussions were also held on an almost daily basis
from the middle of January 1997 to May 1, 1997 in regard to the
Merger. Both members of the Special Committee were actively
involved in the negotiations with RHM, and conducted the
negotiations in an arms-length manner.
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After reaching agreement on all of the major issues
relating to the Merger Agreement, the Special Committee prepared
a presentation for the Board, which was given on May 2, 1997. The
presentation included a determination by the Special Committee
that the Merger Agreement was fair to and in the best interests
of the Public Unitholders, and a recommendation from the Special
Committee that the Board approve the Merger Agreement, and that
the Board recommend that the Unitholders approve the Merger
Agreement. This determination and recommendation were subject to
the satisfaction of two conditions: (1) receipt by the Special
Committee of the final Houlihan Lokey Opinion; and (2) receipt by
the Special Committee of the final PKF Report. These conditions
were satisfied later in the day. Based on the Special Committee's
determinations and recommendation, the Advisory Committee and the
Board also approved the Merger as being in the best interests of
the Unitholders and the Board recommended that the Unitholders
approve the Merger. The Merger Agreement was executed by RHM and
the Partnership at the end of the day on May 2, 1997.
Subsequent Contact With the 13D Group
Following the public announcement of the execution of
the Merger Agreement, a representative of the 13D Group advised
the General Partner that the 13D Group had decided to support the Merger.
Fairness of the Merger; Recommendation of the Special Committee
and Position of the Related Persons
Recommendation of the Special Committee
As noted above, on May 2, 1997, the Special Committee
conveyed to the Board its determination that the Merger Agreement
was fair to and in the best interests of the Public Unitholders,
and recommended that the Board approve the Merger Agreement, and
that the Board recommend that the Unitholders of the Partnership
approve the Merger Agreement. Among other things, the Special
Committee considered the following factors in making that
determination and recommendation.
Fairness Opinion and Presentations of Houlihan Lokey
The Special Committee placed significant weight on the
Houlihan Lokey Opinion, which concluded that the consideration to
be received by Public Unitholders in connection with the Merger
is fair, from a financial point of view, to such holders. The
Special Committee also placed significant weight on the related
written and oral presentations made by Houlihan Lokey to the
Special Committee in connection with its consideration of the
Proposal and the Revised Proposal. In fact, the consideration to
be received in the Merger by the Public Unitholders holding Class
A Units is above the relevant range of a fair price per Class A
Unit of $l.75 to $2.84, as determined by Houlihan Lokey. The
Houlihan Lokey Opinion was received on May 2, 1997, prior to the
execution of the Merger Agreement. A copy of the Houlihan Lokey
Opinion is attached to this Proxy Statement as Annex B and the
Public Unitholders are urged to read the Houlihan Lokey Opinion
in its entirety. See "-- Opinion of Financial Advisor."
The Special Committee reviewed the methodologies used by
Houlihan Lokey in rendering the Houlihan Lokey Opinion and in
valuing the Partnership, including a discounted cash flow
approach, a net asset value approach, and a market comparison
approach involving public companies that were considered to be
comparable to the Partnership. See "-- Discounted Cash Flow
Value," "-- Net Asset Value," and "-- Market Comparison Value"
below. In addition, the Special Committee reviewed each
substantive factor considered by Houlihan Lokey in rendering its
opinion, including, among others, the prior trading history of
the Partnership's Class A Units, the historical financial
condition and performance of the Partnership, the projected
financial expectations of the Partnership, and the performance and
condition of public companies and securities which are comparable to
the Partnership and its securities.
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Arthur Andersen Appraisals
The Special Committee reviewed the Appraisals of each of
the Partnership's hotel properties. Appraisals of each of the
Properties were an annual requirement in connection with a loan
to the Partnership by Hong Kong and Shanghai Bank and the
Partnership's previous lender, and are also used to calculate the
administration fee of the General Partner as set forth in the
Partnership Agreement. The Special Committee believed that these
uses indicatedthat the Appraisals were not biased to favor any
party. The Appraisals preliminarily showed an aggregate market
value of $87.3 million for the Properties, which value was
finally determined by Arthur Andersen to be $86.8 million. For
purposes of its negotiations, the Special Committee added
$500,000 to the Partnership's Pine Lake Trout Club property in
order to disregard a last-minute reduction in the appraised value
of such property by Arthur Andersen. The Special Committee
members also visited each of the Properties to gain additional
comfort that the Appraisals were reasonable. The Appraisals
were determined by the Special Committee to be recent, prepared
by a reputable real estate appraiser, and prepared in accordance
with procedures deemed by the Special Committee to be reasonable
for purposes of the Special Committee's deliberations.
The Appraisals were used primarily in connection with
Houlihan Lokey's asset value liquidation approach. Both the
Appraisals and that approach were given significant weight by the
Special Committee. It was also believed that the use of the
market value of the Properties resulting from the Appraisals was
an easy reference point from which to commence negotiations with
RHM. As a result, several models of the value of the Units were
prepared by the Special Committee using the Appraisals as the
starting point and then subtracting or adding various items for
negotiation purposes. These models did not represent any
determination by the Special Committee of value, and were used
only for purposes of negotiation in order to achieve the highest
price possible for the Class A Units and Class B Units held by
Public Unitholders.
PKF Report
The Special Committee concluded that while the Appraisals
were conducted appropriately for use by the Special Committee in
its deliberations, they did not take into account any potential
increase in market value of the Properties associated with any
sale of the Properties as a portfolio, rather than individually.
Consequently, the Special Committee retained PKF to perform such
an analysis. The PKF Report concluded that the market value of
the Partnership's resort properties was not any higher assuming
they were to be sold as a portfolio rather than individually. PKF
stated that to warrant such a premium, the portfolio must offer
some type of synergistic cost savings or revenue enhancement, and
PKF concluded that neither of these attributes are identifiable
with the Partnership's portfolio of Properties.
Class B Unit Conversion
The Special Committee reviewed the provisions in the
Partnership Agreement mandating the Class B Unit Conversion and
descriptions of the Class B Unit Conversion in the Partnership's
prospectus for its initial public offering in 1987. The Special
Committee also asked its legal counsel to analyze the likely
effects of the Class B Unit Conversion beginning in 1997. The
Special Committee then considered the significant dilution of
ownership that would be suffered by the Public Unitholders
holding Class A Units due to the Class B Unit Conversion, and the
substantial transfer of capital account balances away from these
Public Unitholders as a result of the Class B Unit Conversion.
The effects of the Class B Unit Conversion were also taken into
account in the Houlihan Lokey Opinion. See "-- Opinion of
Financial Advisor."
Discounted Cash Flow Value
The Special Committee reviewed the discounted cash flow
analysis conducted by Houlihan Lokey. See "Opinion of Financial
Advisor -- Discounted Cash Flow Value Analysis." This review
included a check of the methodology of Houlihan Lokey and the
historical numbers used by Houlihan Lokey. The Special Committee
did not, however, conduct its own discounted cash flow value
analysis. The Special Committee recognized that the discounted
cash flow value represented a value of the Partnership assuming a
continuation of the Partnership's business as presently conducted
and with the existing ownership structure.
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Net Asset Value
The Special Committee also gave consideration to the net
asset value of the Partnership, which is a liquidation analysis.
The Special Committee reviewed the net asset value analysis
conducted by Houlihan Lokey. See "Opinion of Financial Advisor --
Net Asset Value Analysis." This net asset value as based in part
upon the Appraisals, and the methodology and historical numbers
used for this value were reviewed by the Special Committee. The
Special Committee did not calculate its own net asset value
although it did create models based upon the net asset value
analysis performed by Houlihan Lokey solely for use in
negotiations with RHM.
Market Comparison Value
The Special Committee also reviewed and considered Houlihan
Lokey's market comparison analysis. See "Opinion of Financial Advisor
- -- Market Comparison Value Analysis."
Absence of Potential Alternative Transactions
In light of the ownership by RHM and its affiliates of
approximately 71.0% of the outstanding Class A Units, and
approximately 93.6% of the outstanding Class B Units (and voting
control over 100% of the Class B Units), and in light of RHM's
stated position to the Special Committee that it is not
interested in considering alternative transactions such as the
potential sale of part or all of the Partnership's assets or
securities to a third party, the Special Committee concluded that
pursuing such alternative transactions was not justified.
Notwithstanding this conclusion, the Special Committee did review
the history of efforts by the Partnership to sell certain of its
Properties, and the history of offers by third parties to
purchase the Properties, and concluded that none of those offers
indicated that an alternative transaction, such as a sale of part
or all of the Properties to a third party, would result in a
greater valuation of the Partnership and the Units than that
provided by the Merger. As described below in "-- Comparison with
Status Quo," the Special Committee did consider the alternative
of rejecting the Merger, and continuing the Partnership's
business with the current ownership structure, and concluded that
the Merger was significantly more desirable than that
alternative.
Comparison with Status Quo
The Special Committee considered the alternative of
rejecting the Merger, and continuing the Partnership's business
with the current ownership structure. First, the Special
Committee considered the significant dilution of ownership that
would be suffered by the Public Unitholders in the Class B Unit
Conversion, and the substantial shift of capital accounts away
from the Public Unitholders that the Class B Unit Conversion
would likely trigger. The Special Committee then noted the thinly
traded nature of the Class A Units. The Special Committee also
noted that the Partnership is slated under the Internal Revenue
Code to be taxed as a corporation beginning in 1998. Moreover,
the Special Committee reviewed a number of factors related to the
Partnership's business, including: (1) the need for significant
capital expenditures at each of the Properties, as confirmed by
the Special Committee in site visits to each of the Properties;
(2) the projected future financial results of the Partnership;
(3) the risks involved in the hospitality industry generally,
including the risk of a significant downturn in the economy; (4)
the risks involving the Partnership's specific properties and
markets, including the risk of increased competition from new
hotels, including those currently being constructed by Disney in
Orlando, Florida and new resorts being constructed in Scottsdale,
Arizona; and (5) the cost of maintaining the Partnership as a
public partnership.
In summary, the Special Committee concluded that
continuation of the Partnership's business with the current
ownership structure poses significant risks and uncertainties to
the Public Unitholders, and that the price to be received by the
Public Unitholders in the Merger reflects an appropriate premium
to market that makes the Merger an attractive alternative at this
time.
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Recent Market Prices
The Special Committee noted that the $3.10 to be received
for each Class A Unit held by a Public Unitholder in the Merger
represents a 106.7% premium over the $1.43 20-day moving average
closing price for the Class A Units on December 17, 1996 (the
business day immediately preceding the announcement of the
Proposal), and a 40.3% premium over the $2.21 20-day moving
average closing price for the Class A Units on May 2, 1997 (the
business day immediately preceding the announcement of the
Revised Proposal).
Book Value
The Special Committee noted the Partnership's December 31,
1996 book value of $2.53 per Class A Unit, based upon the Class A
Unitholders' capital at that date, but believed that such amount
was not representative of a fair price for the Class A Units because
of the nature of the Partnership's business and the potential dilutive
effect of the Class B Unit Conversion. Hospitality properties, which are
depreciated for tax purposes, will frequently have a fair market value in
excess of book value, especially in a rising market. The value of these
types of properties are usually determined using the approaches
involved in the Appraisals, which does not include an analysis of the
book value of the properties. In addition, the dilutive effect of
the Class B Unit Conversion mandated by the Partnership Agreement,
if it were to occur, would decrease the book value of the Class A
Units by a transfer of capital account balances away from Class A
Units to Class B Units. In the opinion of the Special Committee,
this would make the use of the book value of the Class A Units in
a valuation even more inappropriate. Although a higher price was
obtained for the Class A Units in the Special Committee's
negotiations with RHM, the Special Committee believes that the
relevant range of a fair price per Class A Unit is the one
determined by Houlihan Lokey. See "-- Fairness Opinion and
Presentations of Houlihan Lokey."
Allegations of Breach of Fiduciary Duty
The Special Committee and its legal counsel investigated
the 13D Group Allegations to determine if they had any potential
value to the Partnership that should be taken into account in
connection with the valuation analysis described above. Following
an investigation by the Special Committee and its legal counsel,
the Special Committee found no evidence indicating that there was
any basis for a successful claim against the General Partner that
might result in any damages being recovered by the Partnership or
the Unitholders, and consequently attributed no value to these
potential claims in connection with its valuation analysis.
Arm's Length Negotiations
The terms of the Merger Agreement, including the price to
be paid for the Units held by Public Unitholders, were determined
through arm's length negotiations between RHM and the Special
Committee, with the assistance of Houlihan Lokey and the Special
Committee's legal counsel.
Appraisal Rights
The Special Committee recognized that the Public
Unitholders will not have appraisal rights under the Merger
Agreement. Appraisal rights with respect to the Merger are not
mandated by the Partnership Agreement or by applicable Delaware
law. Nevertheless, the Special Committee initially requested that
RHM agree to provide appraisal rights in connection with the
Merger, which request RHM declined. The Special Committee
concluded that the benefits to the Public Unitholders of the
Merger were sufficiently great to mandate recommendation of the
Merger, notwithstanding the lack of appraisal rights.
Advantages to RHM
The Special Committee recognized that the Merger would be
advantageous to RHM and its affiliates, which would collectively
own all of the Units following the Merger. The Partnership
probably will be able to achieve significant benefits as a result
of the Merger, including elimination of the need to recognize
fiduciary obligations to the Public Unitholders and elimination
of the costs of maintaining the Partnership's status as a
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reporting company under the Exchange Act. The Merger may also
have the effect of preventing, following the effectiveness of the
Merger, any Public Unitholders from having standing to sue the
Partnership for damages based on a derivative claim of a breach
of fiduciary duties. In addition, the Merger avoids the
administrative and accounting costs associated with the Class B
Unit Conversion, as well as recognizing the tax consequences of
the Class B Unit Conversion. The Merger will also simplify the
Partnership's management structure, make it easier to finance and
refranchise hotels in the Partnership's portfolio, make it more
likely that RHM or one of its affiliates will contribute
additional capital to the Partnership to make the necessary
capital improvements at the Properties and increase
the potential benefits of consolidating the Partnership's hotel
properties with other properties of RHM and its affiliates.
Adequacy of Financing
The Special Committee noted that in the Merger Agreement,
RHM represents and warrants with respect to the adequacy of its
financing, and the Special Committee concluded that the Merger
would be adequately financed with little risk that the Merger
would not be consummated by RHM in an expeditious manner.
Merger Agreement
The Special Committee considered the specific terms of the
final Merger Agreement, including changes that had been made in
response to the Special Committee's requests during the
negotiations. In particular, the Special Committee noted that the
Merger Agreement was conditioned on there being no withdrawal by
Houlihan Lokey of its opinion with respect to the Merger, limited
the remedy of any party for the breach of a warranty or covenant
to the termination of the Merger Agreement, included reasonable
representations and warranties from the Partnership and contained
adequate representations and warranties from RHM and Regal. See
"Appraisal Rights" and "Background of and Reasons for the Merger
- -- Consideration and Negotiation of Terms of the Merger."
Unchanged Operations
The Special Committee noted RHM's stated intent that the
Partnership's operations will continue essentially unchanged
after the Merger, with no material adverse impact on employees,
local communities where activities are conducted, or others who
deal with the Partnership and its hotel properties. Applicable
Delaware law permits the directors to consider such other
constituencies in addition to the Unitholders, although the
Special Committee considered the Public Unitholders' interest as
paramount. The Special Committee also was aware that RHM could
reconsider these matters after completion of the Merger.
Other
The Special Committee also reviewed factors including:
economies of scale (see "-- PKF Report" concerning the sale of
the Properties as a portfolio); the structure and tax aspects of
the Merger (see "-- Merger Agreement" above and "-- Income Tax
Consequences" below); an informal review of financial ratios of
the Partnership compared to those of its competitors, which were
obtained from industry sources and from the knowledge and
experience of the members of the Special Committee as to
occupancy, rates and "revenue per available room" (the Special
Committee concluded that these ratios for the Properties were
competitive); the impact of the Merger on the Partnership's loan
documents and other contractual obligations, the history of past
distributions to the Class A Unitholders, which showed no
distributions made beyond the mandated support period during
which the General Partner was obligated to provide additional
cash amounts as necessary to enable minimum distributions; the
likelihood of future distributions to Class A Unitholders which
is affected by various factors, such as the risks of the industry
and the need for capital expenditures; the cost of termination of
management contracts and other liquidation costs, which are
relevant to the net asset or liquidation valuation analysis; the
aging nature of the Properties, which affects competitiveness and
the need for capital expenditures; and the timing and likelihood
of consummating the Merger.
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Procedural Fairness
The Special Committee noted that information was provided
on a continual basis to the Special Committee, and that both
members of the Special Committee played an active role in
negotiations and in the decision-making process. Both members of
the Special Committee are knowledgeable and experienced in the
hospitality industry, and the Special Committee was aware of its
fiduciary responsibilities at all times during the process. The
Special Committee worked closely with its legal counsel and with
Houlihan Lokey in its negotiations.
The Special Committee noted that the Merger has not
been structured so that approval of at least a majority of the
Units held by Public Unitholders is required to approve the
Merger. The Special Committee received advice that it was not
legally necessary to include a majority-of-the-minority voting
requirement, and noted that comparable transactions involving
mergers with controlling equity owners routinely take place
without such voting provisions. The Special Committee recognized
that no unaffiliated representative was retained to act solely on
behalf of the Public Unitholders, although neither the Board of
Directors of the General Partner nor the Special Committee
considered it necessary to retain such a representative in view of
the appointment of the Special Committee, the retention of an
independent financial adviser and special legal counsel and the
fact that neither of the members of the Special Committee was
affiliated with the General Partner or any of its affiliates.
Weighing of Factors
In view of the wide variety of factors considered in its
evaluation of the Merger, the Special Committee did not find it
practicable to, and did not, quantify or otherwise assign precise
relative weights to the individual items described above. Among
the most important factors considered by the Special Committee
were the attractive price negotiated in the Merger, the dilutive
and capital account shifting effects of the impending Class B
Unit Conversion mandated by the Partnership Agreement, the risks
of continuing the Partnership's business with the current
ownership structure, the fact that there were no feasible
alternative transactions, and the Houlihan Lokey Opinion and
presentations.
Position of the Related Persons With Respect to the Merger
The General Partner (on behalf of itself and the
Partnership), RHM, Regal and Century City believe that the Merger
is fair to the Public Unitholders and unanimously recommend that
holders of Class A Units vote "FOR" approval of the Merger
Agreement and the transactions contemplated thereby.
In reaching their determination to engage in the Merger and
in determining that the Merger is fair to the Public Unitholders,
the Related Persons considered a number of factors, including
the following:
(i) the Houlihan Lokey Opinion that, as of May 2, 1997,
subject to the assumptions set forth therein, the Merger
Consideration of $3.10 in cash per Class A Unit and $20.00 in
cash per Class B Unit to be received by the Public Unitholders in
the Merger is fair to the Public Unitholders, and the analysis of
Houlihan Lokey underlying the Houlihan Lokey Opinion, which the
Related Persons have adopted. The full text of the Houlihan Lokey
Opinion is attached as Annex B to this Proxy Statement. Public
Unitholders are urged to, and should, read the Houlihan Lokey
Opinion carefully and in its entirety in conjunction with this
Proxy Statement for the assumptions made, the matters considered
and the limits of the review of Houlihan Lokey. See "-- Opinion
of Financial Advisor;"
(ii) the procedural aspects of the selection of the
Special Committee, the recommendation of the Special Committee
and the factors and determinations underlying such
recommendation, as described above, which were adopted by Related
Persons;
(iii) in the case of holders of Class A Units , the
Premium represented by the Merger Consideration over the trading
price of Class A Units on December 17, 1996 (the business day
immediately preceding the announcement of the Proposal) and May 2,
1997 ( the business day immediately preceding the annoucement of
the Revised Proposal).
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(iv) the elimination of the costs to the Partnership of
being a publicly owned entity, including (A) the
distractions to and time demands on management as a
consequence of operating a public entity, (B) the
Partnership's reporting obligations as a reporting entity
under the Exchange Act and the costs and potential
liabilities associated therewith, which are not justified
by the benefits to the Partnership or its Unitholders, and
(C) the fact that if the Partnership remains a
publicly-traded partnership it will become taxable as a
corporation under the Internal Revenue Code in the
beginning of 1998;
(v) the conflicts of interest that exist between RHM and
its affiliates and the Partnership, and the desire to
achieve greater flexibility in affiliated transactions
without the conflicts of interest inherent therein;
(vi) the historically low level of trading in the Class A
Units and the lack of a trading market for the Class B
Units, the limited liquidity in the Units as a result
thereof, and the opportunity the Merger offers the Public
Unitholders to liquidate their holdings in the Partnership;
(vii) the Partnership's existing equity capital structure;
(viii) the all-cash nature of the Merger Consideration;
(ix) the increasing competition in the industry;
(x) the Partnership's possible long-term need to make
significant capital expenditures to remain competitive and
the likely difficulty to satisfy these requirements under
the Partnership's current structure;
(xi) the possible alternatives to the Merger, including
the prospects of continuing to operate as an independent
entity and the possible values to the Unitholders of such
alternatives;
(xii) the lack of cash distributions to Unitholders since
1990, and the possibility that Unitholders may not receive
any distributions of operating cash flow in the future;
(xiii) the opportunity for Unitholders to sell Units
without the cost and commissions normally associated with a
sale; and
(xiv) the terms and conditions of the Merger Agreement,
taken as a whole, and the fact that such terms had been
established through negotiations with an independent
Special Committee, advised by an independent financial
advisor and legal counsel.
In view of the wide variety of factors considered in
connection with its evaluation of the Merger, the Related Persons
had not found it practicable to, and did not, quantify or
otherwise attempt to assign relative weights to the specific
factors they considered in reaching their determinations,
although the Related Persons did place special emphasis on the
findings and recommendations of the Special Committee and the
Houlihan Lokey Opinion. The Related Persons believe that the
factors described above are favorable to their determination of
fairness.
As of June 30, 1997, the book value of the Partnership
was $11,592,000, which yields a book value for the Class A Units
of approximately $13,778,000 in the aggregate or $2.58 per Class
A Unit and a book value for the Class B Units of $(2,442,000) in
the aggregate or a deficit of $2.57 per Class B Unit. The Related
Persons do not believe that the current net book value per Unit
is an accurate indication of value due to its historical nature.
Furthermore, the Related Persons do not consider liquidation
value to be relevant to their determination of fairness because
the Partnership intends to continue to operate the business
currently conducted by the Partnership as a going concern. Regal
Holdings and its affiliates, which collectively control
approximately 71.0% of the Class A Units and approximately 93.6%
(with 100% voting control) of the Class B Units (and thus have
the ability to
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determine each matter submitted to a vote of
limited partners), have advised the Partnership that they intend
to vote the Class A Units controlled by them against any proposal
to liquidate the assets of the Partnership made in the
foreseeable future. Therefore, the Related Persons evaluated the
Partnership on a going concern basis, although the Related
Persons believe that estimates of future net revenue, information
concerning historical operations, current operations and the
future prospects of the investment properties held by the
Partnership and general economic and market conditions, as
described below under "-- Opinion of Financial Advisor," would
also be taken into account in determining liquidation value. A
liquidation of the Partnership requires the approval of the
affirmative vote of the holders of a majority of the Class A
Units and of the aggregate voting power of all of the outstanding
Units. The Related Persons noted that, depending upon the
assumptions made for purposes of calculation, the liquidation
value attributable to the Class A Units could be more or less
than the $3.10 per Unit consideration payable for the Class A
Units in the Merger. In view of the establishment of the Special
Committee, the retention of Holihan Lokey, the factors considered
by the Special Committee and the analysis of Houlihan Lokey as
described above, the Related Persons did not consider it
necessary to, and did not, undertake a separate valuation
analysis in connection with the Merger.
Opinion of Financial Advisor
Houlihan Lokey delivered a written opinion to the Special
Committee on May 2, 1997, to the effect that, as of such date,
and based upon the assumptions made, general procedures followed,
factors considered and limitations on the review undertaken as
set forth in such opinion, the Merger Consideration of $3.10 in
cash per Class A Unit and $20.00 in cash per Class B Unit to be
received by the Public Unitholders pursuant to the Merger
Agreement is fair to such Public Unitholders from a financial
point of view.
THE FULL TEXT OF THE HOULIHAN LOKEY OPINION IS ATTACHED AS
ANNEX B TO THIS PROXY STATEMENT. PUBLIC UNITHOLDERS ARE URGED TO,
AND SHOULD, READ THE HOULIHAN LOKEY OPINION CAREFULLY AND IN ITS
ENTIRETY IN CONJUNCTION WITH THIS PROXY STATEMENT FOR THE
ASSUMPTIONS MADE, THE MATTERS CONSIDERED AND THE LIMITS OF THE
REVIEW OF HOULIHAN LOKEY.
Pursuant to an engagement letter dated February 19, 1997
between the General Partner and the Partnership, Houlihan Lokey
was engaged to act as financial advisor to the Special Committee
to render an opinion as to the fairness, from a financial point
of view, to the Public Unitholders of the Merger Consideration to
be received by such Unitholders in connection with the Merger.
Houlihan Lokey is a nationally recognized investment banking firm
that is continually engaged in providing financial advisory
services in connection with mergers and acquisitions, leveraged
buyouts, business valuations for a variety of regulatory and
planning purposes, recapitalizations, financial restructurings,
and private placements of debt and equity securities. Houlihan
Lokey has no material prior relationship with the Partnership,
the General Partner or their respective affiliates.
As compensation to Houlihan Lokey for its services, the
Partnership has agreed to pay Houlihan Lokey a fee of $140,000
plus reasonable and accountable out-of-pocket expenses not to
exceed $30,000 in the aggregate without prior approval of the
Special Committee. No portion of Houlihan Lokey's fees is
contingent upon the successful completion of the Merger. The
General Partner has also agreed to indemnify Houlihan Lokey and
related persons against certain liabilities arising out of the
engagement of Houlihan Lokey, including liabilities under Federal
securities laws, and to reimburse Houlihan Lokey for certain
expenses.
The full text of the Houlihan Lokey Opinion, which sets
forth the assumptions made, general procedures followed, factors
considered and limitations on the review undertaken by Houlihan
Lokey in rendering its Opinion, is attached as Appendix B to this
Proxy Statement and is incorporated herein by reference. The
Houlihan Lokey Opinion is directed only to the fairness from a
financial point of view of the Merger Consideration to be
received by the Public Unitholders pursuant to the Merger
Agreement and does not constitute a recommendation to any Public
Unitholder as to how such Public Unitholder should vote with
respect to the Merger Agreement and the transactions contemplated
thereby. The summary of the Houlihan Lokey Opinion set forth in
this Proxy Statement
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is qualified in its entirety by reference to
the full text of the Houlihan Lokey Opinion. The Public
Unitholders are urged to, and should, read the Houlihan Lokey
Opinion in its entirety.
In connection with the Houlihan Lokey Opinion, Houlihan
Lokey made such reviews, analyses and inquiries as it deemed
necessary and appropriate under the circumstances. Among other
things, Houlihan Lokey: (i) reviewed the Partnership's annual
reports to Unitholders on Form 10-K for each of the five fiscal
years ending December 31, 1996, which the General Partner's
management identified as being the most current audited financial
statements available; (ii) reviewed a copy of the Partnerships'
Class A Depository Units Prospectus dated July 23, 1987; (iii)
reviewed a copy of the Partnership's Offer Letter from RHM dated
December 16, 1996; (iv) reviewed a copy of the Merger Agreement;
(v) reviewed a calculation of the Partnership's Cumulative
Minimum Annual Distributions (as defined in the Partnership Agreement)
as of December 31, 1996; (vi) reviewed a March 20, 1997, letter
and the Appraisals upon which Houlihan Lokey relied in its
analysis, which were prepared by Arthur Andersen; (vii) reviewed
the April 29, 1997 PKF Report; (viii) reviewed various industry
reports for the hotel and resort industries; (ix) met with
certain members of the senior management of the General Partner
to discuss the operations, financial condition, future prospects
and projected operations and performance of the Partnership and
met with counsel to the Special Committee to discuss certain
matters; (x) conducted various telephone conversations and
attended Special Committee meetings on February 20, March 24-25,
and March 27, 1997; (xi) reviewed forecasts and projections
prepared by the General Partner's management with respect to the
Partnership for the three years ended December 31, 1997 through
1999; (xii) reviewed the historical market prices and trading
volume for the Partnership's publicly traded securities; (xiii)
reviewed certain other publicly available financial data for
certain companies and securities that was deemed comparable to
the Partnership and its securities, and publicly available prices
and premiums paid in other transactions that were considered
similar to the Merger; and (xiv) conducted such other studies,
analyses and inquiries as Houlihan Lokey deemed appropriate.
Houlihan Lokey used several methodologies to assess the
fairness of the Merger Consideration from a financial point of
view. In connection with the Houlihan Lokey Opinion, Houlihan
Lokey arrived at (i) an estimate as to the enterprise value and
the resulting net equity value of the Partnership and (ii) the
value of the Class A and Class B Units.
The enterprise value and the resulting net equity value of
the Partnership was determined by utilizing a net asset value
approach (the "Net Asset Value Analysis"), a market comparison
value approach (the "Market Comparison Value Analysis"), and a
discounted cash flow value approach (the "Discounted Cash Flow
Value Analysis"). After the enterprise and net equity values of
the Partnership were determined, Houlihan Lokey analyzed the
specific rights and privileges of the Class A and Class B Units
together with the enterprise and net equity values and arrived at
an estimate of value for the Class A and Class B Units. This
valuation analysis, along with a public trading price value
analysis (the "Public Trading Price Value Analysis"), provided a
basis of comparison to the Merger Consideration. The following is
a summary of the financial analyses utilized by Houlihan Lokey,
and does not purport to be a complete description of the analyses
performed by Houlihan Lokey.
Determination of Enterprise and Net Equity Values
Net Asset Value Analysis. One methodology was a Net
Asset Value Analysis, in which Houlihan Lokey performed an
analysis of the value of the Partnership's underlying assets and
liabilities under a sale/liquidation scenario. This approach
allowed Houlihan Lokey to determine the net equity value of the
business by first determining the value of the Partnership's
assets and then subtracting the value of the Partnership's
liabilities.
The Partnership's primary assets include the six hotel and
resort Properties it owns and operates and various current
assets. The Partnership's primary liabilities include its
interest bearing debt and various current liabilities. The value
of the Properties was $86,760,000, as determined by the
Appraisals. PKF also performed an analysis of the six Properties
on a portfolio basis and determined there would be no material
difference in value upon a portfolio basis versus an individual
property basis. Furthermore, the Partnership had current assets
of approximately $6,500,000, interest bearing debt of $52,300,000
and current liabilities of approximately $7,200,000. The net
result of these asset and liabilities values was an equity value
of approximately $33,800,000.
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Since the Net Asset Value Analysis is predicated on a sale
of the Properties or liquidation of the business, various costs
associated with such sale or liquidation must be factored into
determining net equity value. These costs, which are incurred by
the Partnership pursuant to the Partnership Agreement, management
agreements and license/franchise agreements, include a fee
associated with cancellation of management in the amount of
approximately $5,800,000, a disposition fee in the amount of
approximately $900,000 and a license agreement termination fee of
approximately $500,000. Finally, the General Partner is entitled
to a net 1.99% of the equity value available for distribution or
approximately $500,000 under this scenario. The result of these
adjustments produces a net equity value available for limited
partners of approximately $26,200,000.
Market Comparison Value Analysis.
An alternative methodology was a Market Comparison Value
Analysis, which considered the capitalization multiples for
certain income and cash flows of a peer group of companies. The
peer group of companies was based on an analysis of dozens of
publicly traded hotel companies. After a review of such hotel
companies, seven were determined to be the most representative
for comparative purposes. The comparable companies selected were
Amerihost Properties, Inc., CapStar Hotel Co., Equity Inns, Inc.,
ShoLodge, Inc., Supertel Hospitality, Inc., Winston Hotels, Inc.,
and Wyndham Hotel Corp. Houlihan Lokey then applied a selected
capitalization multiple to the Partnership's representative
income and cash flows to determine an indication of the value of
the Partnership. Such selected capitalization multiples were
based on a comparative financial analysis of the Partnership and
the peer group of companies. In this analysis, the operational
results of the Partnership were compared to certain publicly
available financial and operating data of the comparable public
companies. For each of the comparable public companies, Houlihan
Lokey analyzed, among other things, market value,
interest-bearing debt, cash flow, and earnings before interest,
taxes, depreciation and amortization ("EBITDA"). On a latest
twelve month basis, the comparable public companies exhibited
multiples of cash flow in the range of 6.1 to 27.6, with a median
of 12.3, and multiples of EBITDA in the range of 6.6 to 16.0,
with a median of 12.0.
Houlihan Lokey then made a determination of the relative
risks associated with the business of the Partnership versus
those of the comparable public companies, and made a conclusion
regarding the appropriate relative multiples for the operating
results of the Partnership. Because of the lack of truly
comparable companies due to the inherent differences between the
business and size of the Partnership and the business and size of
the comparable public companies, Houlihan Lokey believed it was
inappropriate to, and therefore did not, rely solely on the
quantitative results of the analysis, and accordingly made
professional judgments regarding the differences between the
Partnership and the comparable public companies that would impact
the appropriate multiples and discount rate and thus the value of
the Partnership. Such comparative analyses formed the basis for
Houlihan Lokey's selection of multiples for the Partnership,
which it determined to be 6.0 times representative cash flow and
8.0 times representative EBITDA.
In utilizing this valuation approach, Houlihan Lokey
multiplied the Partnership's latest twelve months cash flow of
approximately $4,800,000 times the selected cash flow multiple of
6.0 to arrive at an equity value of approximately $28,800,000.
Furthermore, Houlihan Lokey multiplied the Partnership's latest
twelve months EBITDA of approximately $10,000,000 times the
selected EBITDA multiple of 8.0 to arrive at an enterprise value
for the business of approximately $80,000,000. Since EBITDA
reflects a cash flow stream prior to debt service, interest
bearing debt must be subtracted from this approach to arrive at
an equity value. Consequently, $52,300,000 of debt is subtracted
from the total enterprise value of approximately $80,000,000 to
arrive at an equity value of approximately $27,700,000.
In contrast to the Net Asset Value Analysis, the Market
Comparison Value Analysis is not predicated upon a sale of the
Properties or liquidation of the business; consequently, the
various costs (e.g. license agreement termination fee, etc.)
discussed in the Net Asset Value Analysis are not subtracted from
the calculated equity value under the Market Comparison Value
Analysis. However, since RHM is proposing a transaction whereby
the Partnership will continue as a going concern but will be
taken private, certain cost savings associated with going private
can accrue to RHM. Based upon a discussion with management
regarding such potential cost savings, Houlihan Lokey determined
that approximately $3,000,000 of incremental value should be
added to the Market Comparison Value Analysis. This provides a range
of equity values of approximately $30,700,000 to $31,800,000.
Houlihan Lokey then subtracted the General Partner's net 1.99% ownership
position, or approximately $600,000,
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which resulted in a net equity value available for
limited partners in the range of approximately $30,100,000 to
$31,200,000.
Discounted Cash Flow Value Analysis.
An additional methodology was a Discounted Cash Flow Value
Analysis, in which Houlihan Lokey analyzed the forecasted and
projected financial information provided by management of the
Partnership for the years 1997 through 1999. These forecasts and
projections were analyzed in light of historical results,
discussions with management and a review of general industry
trends. Houlihan Lokey determined an indicated value of the
Partnership based upon the net present value of the sum of the
discounted stream of projected cash flows and the discounted
projected terminal value of the Partnership based upon a range of
market-based, risk adjusted capitalization multiples. Discount
rates and market capitalization multiples were determined based
upon discount rates and market capitalization multiples for
comparable companies and the risk associated with achieving these
forecasts and projections. The Houlihan Lokey analysis used
discount rates ranging from 9.5% to 11.5% and terminal EBITDA
multiples of 6.0 to 8.0.
The Discounted Cash Flow Analysis resulted in an enterprise
value of the Partnership of approximately $78,000,000. Since the
forecasts and projections utilized represented cash flows prior
to debt service, interest bearing debt was subtracted from this
indication of total value to arrive at an equity value.
Subtracting the Partnership's $52,300,000 of debt resulted in an
equity value of approximately $25,700,000. Similar to the going
concern assumption with the Market Comparison Value Analysis, no
additional costs (e.g. license agreement termination fees) were
deducted in this approach, but the approximately $3,000,000 of
cost savings were added and the $600,000 of general partnership
interests (representing the General Partner's 1.99% interest)
were deducted to arrive at an equity value available for limited
partners in the amount of approximately $28,100,000.
Determination of Class A Unit and Class B Unit Valuations
The Net Asset Value, Market Comparison Value and Discounted
Cash Flow Value Analyses resulted in a range of net equity values
available for limited partners of approximately $26,200,000 to
$31,200,000. Houlihan Lokey then determined the fair market value
of Class A and Class B Units based upon the specific rights and
privileges of each security. This analysis considered the fair
market value of the Class A and Class B Units based upon, among
other things, a sale of the Partnership or its assets during the
Class B Unit Conversion period and thereafter, and a discounted
cash flow of the projected value to be received by the Class B
Units upon conversion.
Pursuant to the Partnership Agreement, the Class B Units
are entitled to convert into Class A Units on a specific schedule
over the next four years based upon a conversion value of $20.00
of Class A Units at the then market price for Class A Units.
Consequently, the 950,000 outstanding Class B Units can be valued
based on a discounted cash flow analysis reflecting the projected
stream of converted Class B Units into $20.00 of Class A Unit
value over the next four years. These projected conversion values
were discounted at a risk adjusted rate, reflecting the
short-term nature of the conversion time period and limited risk
associated with receiving the $20.00 of Class A Unit value. This
analysis resulted in an aggregate value of the Class B Units in
the amount of just over $17,000,000, or $17.93 per Class B Unit
based on 950,000 Class B Units outstanding, and assumes that all
Class B Units would ultimately convert into Class A Units.
Subtracting the aggregate Class B Unit value of
approximately $17,000,000 from the total net equity value of
approximately $26,200,000 to $31,200,000 resulted in a Class A
Unit value of approximately $9,200,000 to $14,200,000, or $1.72
to $2.66 per Class A Unit, based on 5,340,214 Class A Units
outstanding.
Furthermore, the value of the Class B Units was also
analyzed assuming a hypothetical sale of the Partnership (at
various points in time) prior to the Class B Unit Conversion of
all the Class B Units into Class A Units. Under this analysis,
the Class B Units which did not convert into Class A Units prior
to the sale of the Partnership have nominal value due to the
level of the unpaid Cumulative Minimum Annual Distributions,
which upon sale or liquidation must be paid to Class A
Unitholders, including those who previously held Class B Units
and converted into Class A Units. As of December 31, 1996, the
unpaid Cumulative Minimum Annual Distributions owed to the Class
A Unitholders at sale or liquidation of the Partnership was
$68,613,848. Based on
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the unpaid Cumulative Minimum Annual Distributions at
December 31, 1996, this analysis produced a value for the Class A
Units in the range of approximately $1.99 to $2.84 per Class A
Unit.
In determining the relevant range for the Class A Units,
Houlihan Lokey considered a number of factors, including as
mentioned above the full and/or partial conversion of the Class B
Units pursuant to the Class B Unit Conversion as well as the
impact of the accrued Cumulative Minimum Annual Distributions.
The concluded relevant range for the Class A Units was $1.72 to
$2.84 per Class A Unit.
Public Trading Price Value Analysis. Finally, a Public
Trading Price Value Analysis of the Partnership's Class A Units
was considered in Houlihan Lokey's analysis. The Merger
Consideration of $3.10 per Class A Unit and $20.00 per Class B
Unit agreed upon in the Merger Agreement superseded a December
18, 1996 offer of $2.35 per Class A Unit and $16.80 per Class B
Unit. On December 17, 1996, the day prior to such offer, the high
and low sales price of the Class A Units was $1.50. Based upon a
20-day moving average, as of December 17, 1996, the Class A Unit
price of the Partnership was approximately $1.43 per Class A
Unit. The post-announcement Class A Unit price of the Partnership
was approximately $1.93 per Class A Unit, based upon a 20-day
moving average as of January 21, 1997. Prior to the announcement
of the Merger Consideration agreed upon in the Merger Agreement,
the Class A Unit price of the Partnership was approximately $2.21
per Class A Unit, based upon a 20-day moving average as of May 2,
1997. The Partnership is less actively traded than most of the
comparable public companies, as indicated by an average daily
trading volume of only 1,000 Class A Units for the month prior to
the initial announcement of the Merger, compared to a median of
18,210 shares for the comparable public companies.
The aforementioned analyses required studies of the overall
market, economic and industry conditions in which the Partnership
operates, and the Partnership's operating results and
distributions to the Class A and Class B Unitholders. Research
into, and consideration of, these conditions were incorporated
into the analyses.
In preparing the Houlihan Lokey Opinion, Houlihan Lokey
relied and assumed, without independent verification, upon the
accuracy and completeness of all the financial and other
information (including financial forecasts and projections)
supplied or otherwise made available to it by the General Partner
and that such information was reasonably prepared and reflected
the best currently available estimates of the future financial
results and conditions of the Partnership and the Properties and
that there had been no material change in the assets, financial
condition, business or prospects of the Partnership and the
Properties since the date of the most recent financial statements
provided to Houlihan Lokey. Houlihan Lokey did not make an
independent appraisal of any of the Properties. The Houlihan
Lokey Opinion is necessarily based on business, economic, market
and other conditions as they existed and could be evaluated by
them at the date of the Houlihan Lokey Opinion.
Houlihan Lokey did not and was not engaged or requested to
initiate any discussions with third parties or to solicit any
third-party indications with respect to a possible acquisition of
the Partnership or all or a portion of the Class A and Class B
Units. Furthermore, Houlihan Lokey did not and was not requested
to negotiate the terms of the Merger Agreement or to advise the
General Partner or the Partnership with respect to alternatives
with respect to the Merger, and Houlihan Lokey did not make any
recommendations as to the form or amount of consideration to be
paid. The terms of the Merger Agreement, including the form and
amount of consideration, were determined on the basis of
arm's-length negotiations between the Special Committee and RHM.
In the Houlihan Lokey Opinion, Houlihan Lokey made its
determination as to the fairness, from a financial point of view,
of the Merger Consideration on the basis of the analyses
described above. No restrictions or limitations were imposed by
the General Partner upon Houlihan Lokey with respect to the
investigation made or the procedures followed in rendering its
opinion. The Houlihan Lokey Opinion is not intended to be and
does not constitute a recommendation to any Public Unitholder as
to whether to accept the Merger Consideration to be received by
such Public Unitholder in connection with the Merger Agreement.
Houlihan Lokey has advised the General Partner and the
Partnership that it used several methodologies to assess the
fairness, from a financial point of view, of the Merger
Consideration. In each of the analyses, the
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estimated value of an unaffiliated Unit was lower than
the Merger Consideration, leading Houlihan Lokey to conclude that
the Merger Consideration is fair to the Public Unitholders from a
financial point of view.
The summary set forth above describes the material points
of more detailed analyses performed by Houlihan Lokey in arriving
at its fairness opinion. The preparation of a fairness opinion is
a complex analytical process involving various determinations as
to the most appropriate and relevant methods of financial
analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary
description. In arriving at its opinion, Houlihan Lokey has
advised the General Partner and the Partnership that it did not
attribute any particular weight to any analysis or factor
considered by it, but rather made the qualitative judgments as to
the significance and relevance of each analysis and factor.
Accordingly, Houlihan Lokey believes
that its analyses and the summary set forth herein must
be considered as a whole and that selecting portions of its
analyses, without considering all analyses, or portions of this
summary, without considering all factors and analyses, could
create an incomplete view of the processes underlying the
analyses undertaken by it in connection with the Houlihan Lokey
Opinion. Houlihan Lokey has advised the Special Committee, the
General Partner and the Partnership that in its analyses,
Houlihan Lokey made numerous assumptions with respect to the
General Partner, the Partnership, industry performance, general
business, economic, market and financial conditions and other
matters, many of which are beyond the control of the General
Partner and the Partnership. The estimates contained in such
analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be more or less
favorable than suggested by such analyses. Additionally, analyses
relating to the value of businesses or securities are not
appraisals. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty.
Appraisals
Arthur Andersen was engaged by the Partnership to
appraise the real estate portfolio of the Partnership and has
delivered a written summary of its analysis, based upon the
review, analysis, scope and limitations described therein, as to
the fair market value of the Partnership's portfolio as of
January 1, 1997. The Partnership selected Arthur Andersen to
provide the appraisal because of its experience and reputation in
connection with real estate assets, and particularly because of
its experience in appraising the Properties on behalf of the
Partnership's bank lender. The Appraisals, which contain a
description of the assumptions and qualifications made, matters
considered and limitations on the review and analysis, were filed
with the Commission as an exhibit to the Schedule 13E-3 and are
incorporated herein by reference. Certain of the material
assumptions, qualifications and limitations to, and the material
analyses and conclusions of, the Appraisals are described below.
Summary of Methodologies. At the request of the
Partnership, Arthur Andersen evaluated the Partnership's
portfolio of real estate utilizing the income approach and the
sale comparison approach to valuation. Appraisers typically use
up to three approaches in valuing real property: (i) the cost
approach, (ii) the income approach and (iii) the sales comparison
approach. The type and age of a property, market conditions and
the quantity and quality of data affect the applicability of each
approach in a specific appraisal situation. The value estimated
by the cost approach incorporates separate estimates for the
value of the unimproved site and the replacement cost of
improvements, less observed physical wear and tear and functional
or economic obsolescence. The income approach estimates a
property's capacity to produce income through an analysis of the
rental market, operating expenses and net income. Net income or
free cash flow is used to obtain a reference value through either
a direct capitalization or a discounted cash flow analysis, or a
combination of these two methods. The sales comparison approach
involves a comparative analysis of the subject property with
other similar properties that have sold recently or that are
currently offered for sale in the market. Arthur Andersen relied
principally on the income approach because of the adequacy of
available reliable data and the view of Arthur Andersen that this
approach was the prevalent method relied upon by market
participants. The sales comparison approach was also used, but
primarily as a secondary indicator of the reliability of the
results obtained through the income approach. Arthur Andersen did
not rely upon the cost approach at all, based on Arthur
Andersen's view that this method would be less reliable given the
significant depreciation and external obsolescence present at the
subject Properties.
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While the appraisals were prepared for each Partnership's
entire real estate portfolio, Arthur Andersen analyzed the
individual Properties in the real estate portfolio of each
Partnership by, among other things, (i) making an on-site
inspection of each property, (ii) interviewing on-site management
of each property, (iii) evaluating general economic conditions of
the market area in which each property was situated in order to
assess future demand, (iv) identifying, visiting and interviewing
management of competitive hospitality properties for each of the
Properties, (v) interviewing zoning and building officials, local
planners, highway department officials, property assessors and
other persons with respect to each property, (vi) preparing
supply and demand analyses with respect to each property, (vii)
reviewing statistics with respect to sales and transfers of
properties deemed comparable to the Properties and (viii)
evaluating the projected cash flow and income of each property.
In its interviews with management, Arthur Andersen obtained and
evaluated information relating to the condition of each property,
including any deferred maintenance, capital budgets, status of
ongoing or newly planned property additions, reconfigurations,
improvements and other factors affecting the physical condition
of the property improvements.
Income Approach. Arthur Andersen determined a reference
value of the Properties based upon their estimated income,
expenses and free cash flow for a ten year period ending 2006,
and discounting such cash flows and an assumed terminal value of
the Properties at discount rates of 12% to 15%. The discount
rates were based on Arthur Andersen's review and judgment as to
long-term investor return requirements for investments in
hospitality and similar properties. Terminal capitalization rates
of 10% to 12.5% were used by Arthur Andersen based on Arthur
Andersen's review of sales of hospitality properties. Where
appropriate, the capitalization rate used for an individual
property was adjusted to reflect valuation factors unique to the
property, such as age, overall quality and recent improvements.
Sales Comparison Approach. Arthur Andersen compiled
transaction data involving properties similar in type to the
Properties by interviewing sources in local markets to identify
recent sales of hospitality properties, reviewing publicly
available information on acquisitions of self storage properties,
reviewing information provided by management, and contacting
industry sources. Using this data, Arthur Andersen performed a
comparable sales analysis based upon price per room, which was
then adjusted to reflect differences between the Properties and
the comparable properties.
Conclusions. Based on the valuation methodologies described
above, Arthur Andersen assigned a value to the portfolio of real
property assets of each Partnership. The following table sets
forth the final portfolio value conclusion of Arthur Andersen
with respect to each of the Partnerships.
Property Location Rooms Appraised Value
Aurora Inn Aurora, OH 69 $4,560,000
Aurora Inn (Pine Chagrin Falls, OH 8 cabins 2,600,000
Lake Trout Club)
Clarion Fourwinds Bloomington, IN 126 8,030,000
Resort and Marina
Regal McCormick Scottsdale, AZ 125 13,770,000
Ranch
Sheraton Inn Cheektowaga, NY 293 14,000,000
Buffalo Airport
Sheraton Inn Kissimmee, FL 651 28,000,000
Lakeside
Regal University Durham, NC 322 15,800,000
Hotel
==========
Total $86,760,000
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Assumptions, Limitations and Qualifications of Portfolio
Appraisals. The Appraisals reflect Arthur Andersen's valuation of
the Properties of the Partnership as of January 1, 1997, in the
context of the information available on such date as well as the
operating information available as of March 31, 1997. Events
occurring after January 1, 1997, and before the closing of the
Merger could affect the Properties or assumptions used in
preparing the Appraisals. Arthur Andersen has no obligation to
update the Appraisals. In connection with preparing the
Appraisals, Arthur Andersen was not engaged to, and did not,
prepare any written report or compendium of its analysis for
internal or external use beyond the Appraisals.
Compensation and Material Relationships. The Partnership
paid Arthur Andersen a fee of $10,000 in connection with the
preparation of the Appraisals. In addition, Arthur Andersen is
entitled to reimbursement for reasonable travel and out-of-pocket
expenses incurred in making site visits and preparing the
Appraisals, and is entitled to indemnification against certain
liabilities, including certain liabilities under federal
securities laws. Such fees were negotiated between the
Partnership and Arthur Andersen and payment thereof is not
dependent upon completion of the Merger. As noted above, Arthur
Andersen has in the past rendered appraisals of the Properties on
behalf of the Partnership's bank lender.
PKF Report
PKF was retained by the Special Committee to determine if
there was any additional value to the Partnership as a result of
holding a portfolio of properties that might be purchased as a
whole. In preparing the PKF Report, PKF reviewed the Appraisals
and interviewed representatives of various enterprises involved
in the acquisition of portfolios of properties. The PKF Report
concluded that a typical "willing and knowledgeable investor"
would not pay a premium over the sum of the individual property
values for this group of hotels. The PKF Report was filed with
the Commission as an exhibit to the Schedule 13E-3 and is
incorporated herein by reference.
Certain Projections of the Partnership
The Partnership provided RHM, the Special Committee and
Houlihan Lokey with certain projected financial data for the
years 1997 through 1999, inclusive. The projected financial data
were not prepared with a view to public disclosure or compliance
with published guidelines of the Commission or the guidelines
established by the American Institute of Certified Public
Accountants regarding projections and are included in this Proxy
Statement only because they are available to Houlihan Lokey, the
Partnership, the General Partner, RHM and its affiliates. Neither
Houlihan Lokey's, RHM's, Regal's, the General Partner's nor the
Partnership's independent auditors, KPMG Peat Marwick LLP,
examined, compiled or applied any procedures with respect to the
projected financial data and express no opinion or any kind of
assurance thereon. Neither Houlihan Lokey, RHM, the Partnership,
the General Partner, Regal nor any of their respective affiliates
or advisors assumes any responsibility for the reasonableness or
completeness of the projected financial data. While presented
with numerical specificity, the projected financial data are
based on a variety of assumptions relating to the business of the
Partnership (some of which are listed below) that, although
considered appropriate by the Partnership at one time, may not be
realized. Moreover, the projected financial data, and the
assumptions upon which they are based, are subject to significant
uncertainties and contingencies, many of which are beyond the
control of the Partnership. Consequently, the projected financial
data and the underlying assumptions are necessarily speculative
in nature and inherently imprecise, and there can be no assurance
that projected financial results will be realized. It is expected
that there will be differences between actual and projected
results and actual results may vary materially from those shown.
Neither Houlihan Lokey, RHM, the Partnership, the General
Partner, Regal nor any of their respective affiliates or advisors
intends to update or otherwise revise the projected financial
data. The inclusion of the projected financial data herein should
not be regarded as an indication that Houlihan Lokey, RHM, the
Partnership, the General Partner, Regal or any of their
respective affiliates or advisors considers it an accurate
prediction of future results. Class A Unitholders are cautioned
not to place undue reliance on the projections,
26
<PAGE>
which should be read together with the information
relating to the business, assets and financial condition of the
Partnership included herein. See "The Partnership," "Summary
Financial Data" and "Index to Financial Statements."
Set forth below is a summary of the projected financial data
prepared by the Partnership and provided to RHM, the Special
Committee and Houlihan Lokey.
AIRCOA HOTEL PARTNERS, L.P.
PROFIT PROJECTION (dollars shown in $000's)
1997
McCormick Pine Sheraton Regal
Ranch Aurora Lake Buffalo University
----- ------ ---- ------- ----------
Available Rooms 125 69 8 292 313
Annual Available
Rooms 45,625 25,185 2,920 106,580 114,245
# Of Occupied
Rooms 35,360 16,875 2,365 90,697 80,902
Annual Average
Occupancy 78% 67% 81% 85% 71%
Average Daily Rate: 130 96 33 69 74
---------------------------------------------------
Departmental
Sales:
Rooms 4,596 1,613 79 6,252 5,788
Food & Beverage 3,335 1,293 475 2,704 2,314
Telephone 245 46 0 167 213
Other Departments 1,502 135 630 24 0
Other Income 245 21 5 56 69
Total Sales 9,923 3,108 1,189 9,203 8,385
---------------------------------------------------
Direct Operating
Expenses:
Rooms 919 282 12 1,503 1,632
Food & Beverage 2,135 840 367 1,725 1,851
Telephone 116 36 0 78 127
Other Departments 1,225 70 34 45 0
Gross Operating
Income: 5,527 1,880 776 5,852 4,774
---------------------------------------------------
Undistributed
Expenses:
Administrative
& General 863 370 184 811 887
Marketing 921 258 30 867 883
Energy Costs 348 185 51 678 369
Operations &
Maintenance 399 140 91 524 441
Total Undistrib-
butable Exp: 2,531 953 356 2,880 2,580
---------------------------------------------------
Gross Operating
Profit 2,996 927 420 2,972 2,194
---------------------------------------------------
Fixed Charges:
Base Management
Fees 397 124 48 368 335
Rent, Tax,
Insur, Other 657 48 16 765 263
Interest 464 191 187 917 508
Depreciation &
Amortization 429 155 81 803 817
Pre-Tax Net
Income1 ,049 408 88 119 271
===================================================
Clarion Sheraton Home
Fourwindss Lakeside Total Office Total
---------- -------- ----- ------ -----
Available Rooms 126 651 1,584
Annual Available
Rooms 45,990 237,615 578,160
# Of Occupied
Rooms 21,656 203,398 451,253
Annual Average
Occupancy 47% 86% 78%
Average Daily Rate: 79 53 69
-----------------------------------------------------
Departmental
Sales:
Rooms 1,710 10,752 30,790 30,790
Food & Beverage 1,375 2,025 13,521 13,521
Telephone 42 291 1,004 1,004
Other Departments 2,375 765 5,431 5,431
Other Income 40 510 946 946
Total Sales 5,541 14,343 51,692 51,692
-----------------------------------------------------
Direct Operating
Expenses:
Rooms 359 3,268 7,976 7,976
Food & Beverage 954 1,546 9,419 9,419
Telephone 31 167 555 555
Other Departments 631 487 2,492 2,492
Gross Operating
Income: 3,566 8,875 31,250 31,250
-----------------------------------------------------
Undistributed
Expenses:
Administrative
& General 705 1,115 4,935 932 5,867
Marketing 420 1,355 4,734 4,734
Energy Costs 225 753 2,609 2,609
Operations &
Maintenance 325 930 2,850 2,850
Total Undistrib-
butable Exp: 1,675 4,153 15,128 932 16,060
-----------------------------------------------------
Gross Operating
Profit 1,891 4,722 16,122 -932 15,190
-----------------------------------------------------
Fixed Charges:
Base Management
Fees 222 574 2,068 2,068
Rent, Tax,
Insur, Other 415 608 2,772 2,772
Interest 520 1,713 4,500 -120 4,380
Depreciation &
Amortization 507 1,814 4,606 4,606
Pre-Tax Net
Income1 227 13 2,176 -812 1,364
=====================================================
27
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
PROFIT PROJECTION (dollars shown in $000's)
1998
McCormick Pine Sheraton Regal
Ranch Aurora Lake Buffalo University
----- ------ ---- ------- ----------
Available Rooms 125 69 7 292 313
Annual Available
Roo 45,625 25,185 2,555 106,580 114,245
# Of Occupied
Rooms (w/Comps) 35,588 16,875 2,120 88,567 80,551
Annual Average
Occupancy 78% 67% 83% 83% 71%
Average Daily Rate 138 95 34 74 78
-------------------------------------------------
Departmental
Sales:
Rooms 4,893 1,595 72 6,594 6,249
Food & Beverage 3,420 1,350 505 2,784 2,442
Telephone 249 50 0 160 227
Other Departments 1,580 100 665 026 0
Other Income 315 20 6 60 74
Total Sales 10,457 3,115 1,248 9,624 8,990
-------------------------------------------------
Direct Operating
Expenses:
Rooms 985 285 10 1,556 1,687
Food & Beverage 2,295 874 390 1,760 1,880
Telephone 135 39 0 73 136
Other Departments 1,209 60 36 47 0
Gross Operating
Income: 5,833 1,857 812 6,188 5,287
-------------------------------------------------
Undistributed
Expenses:
Administrative &
General 890 380 190 840 917
Marketing 960 250 36 905 944
Energy Costs 378 195 56 694 405
Operations &
Maintence 470 144 100 550 495
Total Undistri-
butable Exp: 2,698 969 382 2,989 2,760
-------------------------------------------------
Gross Operating
Profit: 3,135 888 430 3,199 2,527
-------------------------------------------------
Fixed Charges:
Base Management
Fees: 418 125 50 385 360
Rent, Tax, Insur,
Other 701 50 17 803 260
Interest 464 191 187 917 508
Depreciation &
Amortization 429 155 81 803 817
Pre-Tax Net
Income 1,123 367 95 291 583
=================================================
Clarion Sheraton Home
Fourwinds Lakeside Total Office Total
--------- -------- ----- ------ -----
Available Rooms 126 651 1,593
Annual Available
Roo 45,990 237,615 577,795
# Of Occupied
Rooms (w/Comps) 22,576 205,537 451,814
Annual Average
Occupancy 49% 87% 78%
Average Daily Rate 80 57 73
-----------------------------------------------------
Departmental
Sales:
Rooms 1,806 11,644 32,853 32,853
Food & Beverage 1,444 2,148 14,093 14,093
Telephone 44 302 1,032 1,032
Other Departments 2,493 822 5,686 5,686
Other Income 42 534 1,051 1,051
Total Sales 5,829 15,450 54,714 54,714
-----------------------------------------------------
Direct Operating
Expenses:
Rooms 377 3,419 8,319 8,319
Food & Beverage 993 1,611 9,803 9,803
Telephone 32 172 587 587
Other Departments 664 507 2,523 2,523
Gross Operating
Income: 3,763 9,741 33,482 33,482
----------------------------------------------------
Undistributed
Expenses:
Administrative &
General 715 1,151 5,083 200 5,283
Marketing 426 1,475 4,996 4,996
Energy Costs 234 781 2,743 2,743
Operations &
Maintence 331 942 3,031 3,031
Total Undistri-
butable Exp: 1,705 4,349 15,852 200 16,052
----------------------------------------------------
Gross Operating
Profit: 2,058 5,392 17,629 -200 17,429
----------------------------------------------------
Fixed Charges:
Base Management
Fees: 233 618 2,189 2,189
Rent, Tax, Insur,
Other 436 638 2,905 2,905
Interest 520 1,713 4,500 -110 4,390
Depreciation &
Amortization 507 1,814 4,606 4,606
Pre-Tax Net
Income 362 609 3,430 -90 3,340
====================================================
28
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
PROFIT PROJECTION (dollars shown in $000's)
1999
McCormick Pine Sheraton Regal
Ranch Aurora Lake Buffalo University
----- ------ ---- ------- ----------
Available Rooms 125 69 6 292 313
Annual Available
Rooms 45,625 25,185 2,190 106,580 114,245
Of Occupied Rooms
(w/Comps) 34,675 17,377 1,840 86,863 82,967
Annual Average
Occupancy 75% 69% 84% 82% 73%
Average Daily Rate: 139 97 35 77 81
--------------------------------------------------
Departmental
Sales:
Rooms 4,811 1,685 64 6,688 6,749
Food & Beverage 3,595 1,425 530 2,868 2,564
Telephone 255 53 0 184 238
Other Departments 1,602 103 698 27 0
Other Income 315 25 7 62 78
Total Sales 10,578 3,291 1,299 9,829 9,629
--------------------------------------------------
Direct Operating
Expenses:
Rooms 975 295 8 1,551 1,755
Food & Beverage 2,365 918 407 1,810 1,948
Telephone 147 42 0 84 143
Other Departments 1,250 62 38 48 0
Gross Operating
Income: 5,841 1,974 846 6,336 5,783
--------------------------------------------------
Undistributed
Expenses:
Administrative &
General 915 395 200 860 1,011
Marketing 985 260 40 937 1,059
Energy Costs 417 207 60 720 433
Operations &
Maintence 499 150 110 570 530
Total Undistri-
butable Exp: 2,816 1,012 410 3,087 3,033
--------------------------------------------------
Gross Operating
Profit: 3,025 962 436 3,249 2,750
--------------------------------------------------
Fixed Charges:
Base Management
Fees 423 132 52 393 385
Rent, Tax, Insur,
Other 709 53 18 843 273
Interest 464 191 187 917 508
Depreciation &
Amortization 429 155 81 803 817
Pre-Tax Net
Income 1,000 431 98 292 767
==================================================
Clarion Sheraton Home
Fourwinds Lakeside Total Office Total
--------- -------- ----- ------ -----
Available Rooms 126 651 1,582
Annual Available
Rooms 45,990 237,615 577,430
Of Occupied Rooms
(w/Comps) 23,496 205,537 452,755
Annual Average
Occupancy 51% 87% 78%
Average Daily Rate: 81 60 75
----------------------------------------------------
Departmental
Sales:
Rooms 1,903 12,229 34,129 34,129
Food & Beverage 1,516 2,255 14,753 14,753
Telephone 46 312 1,088 1,088
Other Departments 2,618 874 5,922 5,922
Other Income 44 555 1,087 1,087
Total Sales 6,128 16,225 56,979 56,979
----------------------------------------------------
Direct Operating
Expenses:
Rooms 398 3,519 8,501 8,501
Food & Beverage 1,032 1,664 10,145 10,145
Telephone 34 178 627 627
Other Departments 683 529 2,610 2,610
Gross Operating
Income: 3,981 10,335 35,096 35,096
----------------------------------------------------
Undistributed
Expenses:
Administrative &
General 750 1,185 5,316 210 5,526
Marketing 248 1,539 5,068 5,068
Energy Costs 347 802 2,987 2,987
Operations &
Maintence 443 1,004 3,305 3,305
Total Undistri-
butable Exp: 1,788 4,530 16,677 210 16,887
----------------------------------------------------
Gross Operating
Profit: 2,192 5,805 18,420 -210 18,210
----------------------------------------------------
Fixed Charges:
Base Management
Fees 245 649 2,279 2,279
Rent, Tax, Insur,
Other 457 670 3,023 3,023
Interest 520 1,713 4,500 -100 4,400
Depreciation &
Amortization 507 1,814 4,606 4,606
Pre-Tax Net
Income 463 959 4,011 -110 3,901
====================================================
Structure of the Merger
At the Effective Time, (i) each issued and outstanding
Class A Unit, other than those held by Regal Holdings or any
direct or indirect subsidiary of Regal Holdings, shall be
cancelled, extinguished and retired and will be converted into
the right to receive $3.10 in cash, without interest, (ii) each
issued and outstanding Class B Unit, other than those held by
Regal Holdings or any direct or indirect subsidiary of Regal
Holdings, shall be cancelled, extinguished and retired and will
be converted into the right to receive $20.00 in cash, without
interest, (iii) each outstanding Unit which is owned by Regal
Holdings or any direct or indirect subsidiary of Regal Holdings
shall be and remain a unit of limited partner interest in the
Partnership; (iv) each outstanding partnership interest, general
or limited, of Regal shall be cancelled, extinguished and
retired, and no payment shall be made thereon; (v) Regal shall
cease to exist; and (vi) the General Partner's general
partnership interest in the Partnership shall be and remain a
general partnership interest in the Partnership. The Partnership
has been informed by RHM that, following the
Merger, it intends to retain the Partnership's current management
and continue to manage the Partnership as an ongoing business in
the same general manner as it is now being conducted.
29
<PAGE>
Because RHM and its affiliates, which together own
approximately 71.0% of the Class A Units and approximately 93.6%
(with 100% voting control) of the Class B Units, intend to vote
such Units "FOR" approval of the Merger Agreement at the Special
Meeting, the Partnership expects that the Merger and the Merger
Agreement will be approved. The Partnership expects that the
Merger will be consummated on September 30, 1997, or as
promptly as practicable thereafter, assuming that the conditions
to the Merger set forth in the Merger Agreement have been
satisfied or, if permissible, waived. See "The Merger Agreement
- -- Conditions to the Merger."
Interests of Certain Persons in the Merger; Conflicts of Interest
Class A Unitholders should be aware that management and
certain persons associated with the General Partner have certain
interests which may present them with actual or potential
conflicts of interest in connection with the Merger.
RHM is interested in the outcome of the Merger in that,
following the Merger, it and its affiliates would be the sole
owners of the Partnership. As sole owners, RHM and its affiliates
would bear the total risk of the Partnership's operations but
would also receive the entire benefit, if any, arising from
pursuit of the various opportunities described under "Summary --
Reasons for the Merger." RHM also would be able to consolidate
the Partnership's operations more fully with those of its other
owned and managed properties without introducing issues with
respect to potential conflicts of interest, and to realize
potential operating synergies therefrom. If the Partnership were
sold to an unrelated third party, RHM would not have any further
participation in any such opportunities, while, if the current
ownership structure were maintained, it would share any such
benefits with the Public Unitholders.
The General Partner and the senior management of the
Partnership have certain interests that may present them with
actual or potential conflicts of interest. Among these are that
(i) the General Partner is controlled by Regal Holdings, an
indirect parent of RHM, (ii) the current General Partner is
expected to remain in its current role subsequent to the Merger,
and (iii) the current senior management of the Partnership and
the General Partner are expected to remain in their positions
following the Merger. Each of the Partnership and the Special
Committee was advised by separate legal counsel from that of RHM
and Regal in connection with the Merger.
It is expected that each of the current officers and key
employees of the Partnership will continue as officers and
employees of the Partnership after the Merger. None of the
current officers and key employees of the Partnership
beneficially own any Units. No executive officer or key employee
of the Partnership owns any equity interest in Regal Holdings or
RHM.
Relationships Between the Parties
Except as set forth in this Proxy Statement, there are no
past, present or proposed material contracts, arrangements,
understandings, relationships, negotiations or transactions
between the Partnership, on the one hand, and RHM and its
affiliates, on the other hand, concerning a merger, consolidation
or acquisition, a tender offer or other acquisition of
securities, or sale or other transfer of a material amount of
assets of the Partnership. However, in the future, the
Partnership's management may review additional information about
the Partnership and, upon completion of any such review, may
propose or develop additional or new plans or proposals or may
propose the acquisition, disposition or refinancing of assets or
other changes in the Partnership's business, structure,
capitalization, management or distribution policy which they
consider to be in the best interests of the Partnership and its
partners.
30
<PAGE>
Plans for the Partnership After the Merger
The Partnership has been informed by RHM that, following the
Merger, RHM intends to cause the business and operations of the
Partnership to continue to be conducted by the Partnership
substantially as they are currently being conducted. Regal
Holdings will, however, continue to evaluate the business and
operations of the Partnership after the consummation of the
Merger and will continue to take such actions as are deemed
appropriate by RHM and its affiliates, under the circumstances
then existing, to maximize the profitability of the Partnership.
The Partnership has also been informed by Regal Holdings and its
affiliates, which collectively control approximately 71.0% of the
Class A Units and approximately 93.6% (with 100% voting control)
of the Class B Units (and thus have the ability to determine each
matter submitted to a vote of limited partners), that they intend
to vote the Class A Units controlled by them against any proposal
to liquidate the assets of the Partnership made in the
foreseeable future.
Except for the Merger and as otherwise described in this
Proxy Statement, none of Century City, RHM, the General Partner
or Regal has any present plans or proposals which relate to or
would result in an extraordinary transaction, such as a merger,
reorganization, liquidation, relocation of any operations of the
Partnership or sale or transfer of a material amount of assets
involving the Partnership or any other change in the
Partnership's structure or business or the composition of its
management. However, in the future, RHM, its affiliates and the
Partnership's management will continually review additional
information about the Partnership and, upon completion of any
such review, may propose or develop additional or new plans or
proposals or may propose the acquisition, disposition or
refinancing of assets (including, without limitation, general or
limited partnership interests in one or more partnership
subsidiaries of the Partnership, real estate assets held by one
or more of such partnership subsidiaries and property management
or asset management and related contracts in respect of
properties controlled by the Partnership, one of its partnership
subsidiaries or an affiliate of the Partnership), the
repositioning of certain of the Properties or other changes in
the Partnership's business, structure, capitalization, management
or distribution policy which they consider to be in the best
interests of the Partnership and its surviving partners.
Certain Effects of the Merger
In the Merger, all of the Class A Units outstanding
immediately prior to the Effective Time (other than Class A Units
held by Regal Holdings and its affiliates) will be converted into
the right to receive $3.10 in cash per Class A Unit, all of the
Class B Units outstanding immediately prior to the Effective Time
(other than Class B Units held by Regal Holdings and its
affiliates) will be converted into the right to receive $20.00 in
cash per Class B Unit, and the Public Unitholders will cease to
have any interest in the Partnership and will therefore not share
in future earnings and growth of the Partnership, if any. As a
result of the Merger, RHM and its affiliates will hold the entire
equity interest in the Partnership, including the entire interest
in the Partnership's net earnings and book value.
The Class A Units are currently registered under the
Exchange Act. Registration of the Class A Units under the
Exchange Act may be terminated upon application of the
Partnership to the Commission if the Class A Units are neither
listed on a national securities exchange nor held by more than
300 holders of record. Termination of registration of the Class A
Units under the Exchange Act would substantially reduce the
information required to be furnished by the Partnership to
Unitholders and to the Commission and would make certain
provisions of the Exchange Act, such as the short-swing profit
recovery provisions of Section 16(b), the requirement of
furnishing a proxy statement pursuant to Section 14(a) in
connection with Unitholder meetings and the related requirement
of forwarding an annual report to Class A Unitholders and the
requirements of Rule 13e-3 under the Exchange Act with respect to
"going private" transactions, no longer applicable to the
Partnership. Furthermore, the ability of "affiliates" of the
Partnership and persons holding "restricted securities" of the
Partnership to dispose of such securities pursuant to Rule 144
under the Securities Act may be impaired or eliminated. Regal
Holdings presently intends to cause the Partnership to apply for
termination of registration of the Class A Units under the
Exchange Act as soon as the requirements for such termination are
met and to take all permitted actions to make the Partnership
eligible for such termination.
31
<PAGE>
Income Tax Consequences
The following is a brief summary of the material federal
income tax rules applicable to the Merger. The summary is for
general information only and does not discuss all of the federal
income tax consequences that may be relevant to a particular
Unitholder or to certain Unitholders subject to special treatment
under the federal income tax laws (for example, foreign persons,
tax-exempt entities, life insurance companies or S corporations).
The discussion set forth below is based upon the Internal Revenue
Code, regulations and announcements promulgated thereunder and
published rulings and court decisions, all as in effect on the
date hereof and without giving effect to changes to the federal
tax laws, if any, enacted after the date hereof. DUE TO THE
INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH UNITHOLDER IS URGED
TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE SPECIFIC
FEDERAL INCOME TAX CONSEQUENCES OF SELLING UNITS IN THE MERGER,
AS WELL AS THE EFFECTS OF STATE, LOCAL, FOREIGN AND OTHER TAX
LAWS.
Gain or Loss
A Unitholder will recognize gain or loss on the sale of
Units in the Merger to the extent of the difference between the
amount realized and his or her adjusted tax basis in the Units
sold. The amount realized will equal the amount of cash received
plus the Unitholder's share of the Partnership's liabilities
(including the Partnership's share of the liabilities of
partnerships in which the Partnership is a partner) (determined
under Section 752 of the Internal Revenue Code and the
regulations promulgated thereunder). Generally, the adjusted tax
basis of a Unitholder's Units will be equal to the cost of the
Units to such Unitholder, decreased by the Unitholder's share of
Partnership distributions and losses, and increased by the
Unitholder's share of Partnership income and Partnership
liabilities (including the Partnership's share of the liabilities
of partnerships in which the Partnership is a partner), as
determined under Section 752 of the Internal Revenue Code and the
regulations promulgated thereunder. Set forth below is a summary
of certain information provided to Unitholders by the Partnership
that is relevant to the calculation of a Unitholder's adjusted
tax basis in its Units. THIS SUMMARY IS PROVIDED FOR GENERAL
INFORMATION ONLY, AND IS NOT A SUBSTITUTE FOR INDIVIDUAL TAX
ADVICE. ACCORDINGLY, UNITHOLDERS ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS AS TO THE CORRECT DETERMINATION OF THE ADJUSTED TAX
BASIS OF THEIR UNITS.
Summary of Taxable Income (Loss) and
Per Unit Allocations 1987-1996(1)
Income (Loss)
Allocations Distributions Per
Per Class A Unit Class A Unit
---------------- ------------
1987 (0.98) 1.00
1988 (2.92) 2.40
1989 3.22 4.25(2)
1990 (0.79) 1.26
1991 (0.63) 0
1992 (0.29) 0
1993 (0.02) 0
1994 (0.03) 0
1995 (0.13) 0
1996 0.11 0
- -------------
(1) The amounts set forth in this table assume the Class A Unit is
held for the entire year period shown.
(2) Consists of distributable cash flow of $2.35, and a capital
distribution of $1.90. This was the only capital distribution
ever made.
32
<PAGE>
If a Unitholder's share of the Partnership's liabilities
exceed the adjusted tax basis for his or her Units, such
Unitholder's realized gain will include such excess.
Except as described below, gain or loss realized by a
Unitholder who has held the Units as capital assets will be
capital gain or loss and will be long-term capital gain or loss
if such Units have been held for more than one year. Under
recently enacted tax legislation, Unitholders who have held their
Units for more than 18 months may be entitled to a lower
long-term capital gains tax rate. Capital losses generally are
deductible only to the extent of capital gains plus, in the case
of non-corporate Unitholders, up to $3,000 of ordinary income.
Capital losses realized upon the sale of Units may be utilized to
offset capital gains from other sources and may be carried
forward, subject to applicable limitations.
Effect of Passive Loss Rules
Upon the sale by a Unitholder of all his Units in the
Merger, any net losses of the Partnership that were suspended
under the passive loss rules of Section 469 of the Internal
Revenue Code may be used to offset income and gain on such sale.
If a Unitholder's suspended Partnership losses exceed the gain on
the sale of Units, such loss may be applied against any income or
gain of the Partnership for the current year and thereafter may
be applied against any other passive activity income of such
Unitholder in the current year. Thereafter, any excess suspended
losses from prior years will be available to offset income and
gain from any other sources.
Income Tax Consequences of the Merger on the Partnership and
its Affiliates
Pursuant to Internal Revenue Code Section 731(b), the
cancellation of all Class A Units and Class B Units not currently
held by RHM or its affiliates in exchange for the right to
receive $3.10 per Class A Unit and $20 per Class B Unit,
respectively, will not be a taxable event to the Partnership. In
addition, the Merger and retirement of the Units will not be a
taxable event to the continuing partners of the Partnership, RHM
or its affiliates. Also, pursuant to Internal Revenue Code
Sections 708, 721, 731(a) and 731(b), the Merger of Regal and the
Partnership will not be a taxable event to the Partnership, its
continuing partners, or any of their affiliates.
Accounting Treatment of the Merger
The acquisition by RHM of the Units will be accounted for
as an acquisition of minority ownership interests of a subsidiary
in accordance with the purchase method of accounting.
Regulatory Approvals and Filings
Except for the filings with the State of Delaware necessary
to effectuate the Merger, the Partnership is not aware of any
licenses or regulatory permits that would be material to the
business of the Partnership, taken as a whole, and that might be
adversely affected by the Merger as contemplated herein, or any
filings, approvals or other actions by or with any domestic
(federal or state), foreign governmental, administrative or
regulatory agency that would be required prior to the Merger as
contemplated herein. Should any such approval or other action be
required, it is the Partnership's present intention to seek such
approval or action. The Partnership does not presently intend,
however, to delay the Merger pending the outcome of any such
action or the receipt of such approval (subject to the conditions
in "The Merger Agreement -- Conditions to the Merger"). There can
be no assurance that any such additional approval or action, if
needed, would be obtained without substantial conditions or that
adverse consequences might not result to the Partnership's
business, or that certain parts of the Partnership's business
might not have to be disposed of or held separate or other
substantial conditions complied with in order to obtain such
approval or action or in the event that such approvals were not
obtained or such actions were not taken, any of which would cause
RHM to elect to terminate the Merger, without conversion of the
Units thereunder.
33
<PAGE>
The Related Persons have filed with the Commission a
Schedule 13E-3 pursuant to the Exchange Act, furnishing certain
information with respect to the Merger in addition to the
information contained in this Proxy Statement, and they may file
amendments to the Schedule 13E-3. As permitted by the rules and
regulations of the Commission, this Proxy Statement omits certain
information contained in the Schedule 13E-3. For further
information pertaining to the Partnership, reference is made to
the Schedule 13E-3 and the exhibits and amendments thereto. See
"Available Information."
THE PROXY SOLICITATION
Voting and Proxy Procedures
A proxy enables a Unitholder to be represented at a meeting
at which he would otherwise be unable to participate. The proxy
card accompanying this Proxy Statement is solicited because each
Unitholder is entitled, as a limited partner of the Partnership,
to vote on matters scheduled to come before the Special Meeting.
Units eligible to be voted and for which a proxy card in
the accompanying form is properly signed, dated and returned in
sufficient time to permit the necessary examination and
tabulation of the proxy before a vote is taken will be voted in
accordance with any choice specified. The proxy card permits a
specification of approval, disapproval or abstention as to the
proposal described in this Proxy Statement. Unitholders are urged
to specify their choice by marking an (x) or other mark in the
appropriate box on the proxy card, but where no choice is
specified, eligible Units will be voted as indicated on the proxy
card.
If any matters not specified in this Proxy Statement come
before the Special Meeting, eligible Units will be voted in
accordance with the best judgment of the persons named therein as
proxies. At the time this Proxy Statement was printed, management
of the General Partner was not aware of any other matters to be
voted upon. Only procedural matters may come before the Special
Meeting since the only substantive matters which may be
considered are those with respect to which prior notice is given.
The proxy may be revoked at any time before it is exercised
by submitting a written revocation or a later-dated proxy or
proxy card, attention Corporate Secretary, to AIRCOA Hotel
Partners, L.P., 5775 DTC Boulevard, Englewood, Colorado 80111, or
by attending the Special Meeting in person and so notifying the
meeting inspectors.
The presence in person, or by properly executed proxy, of
the holders of more than 50 percent of the aggregate voting power
of the issued and outstanding Units is necessary to constitute a
quorum at the Special Meeting. Each holder of record of Units on
the Record Date is entitled to cast one vote per Class A Unit and
one-half vote per Class B Unit on each proposal properly
submitted for the vote of the holders of the Units.
Pursuant to the Delaware Act and the Partnership Agreement,
approval of the Merger requires satisfaction of the Majority Vote
Requirement. Abstentions and any unvoted positions in brokerage
accounts will be counted toward the calculation of a quorum, but
are not treated as either a vote for or against the proposal.
Abstentions and unvoted Units will have the same effect as a vote
against the proposal with respect to satisfaction of the Majority
Vote Requirement. Regal Holdings has informed the General Partner
that it intends to vote the Class A Units and Class B Units over
which it has voting control, representing approximately 71.0% of
the outstanding Class A Units and 100% of the outstanding Class B
Units, "FOR" approval of the Merger. As a result, approval of the
Merger by the Unitholders is assured, regardless of how the
Public Unitholders vote at the Special Meeting.
Solicitation of Proxies
Solicitation of proxies from the Unitholders will be made
by the General Partner and will be undertaken principally by use
of
34
<PAGE>
the United States Postal Service. The cost of any such
solicitation, including the cost of preparing and mailing proxy
materials, returning the proxies and reimbursing brokerage houses
and nominees for forwarding proxy materials to beneficial owners,
will be borne by the Partnership.
No Appraisal Rights
Under the Delaware Act, the only appraisal rights available
to Unitholders are those accorded by contract. Neither the
Partnership Agreement nor the Merger Agreement provide such
appraisal rights to the Public
Unitholders in connection with the Merger.
Conduct of the Special Meeting
An agenda will be distributed at the Special Meeting, and
the meeting will be conducted in accordance with the agenda. The
presiding officer's rules will govern the meeting.
THE MERGER AGREEMENT
The following is a summary of the material provisions of the
Merger Agreement, which is attached as Annex A to this Proxy
Statement. Such summary is qualified in its entirety by reference
to the Merger Agreement.
General
The Merger Agreement provides that, at the Effective Time
and subject to the satisfaction of certain other conditions,
Regal will be merged with and into the Partnership. Following the
Merger, the Partnership will continue as the surviving
partnership and the separate existence of Regal shall cease. In
the Merger, (i) each issued and outstanding Class A Unit, other
than those held by Regal Holdings or any direct or indirect
subsidiary of Regal Holdings, shall be cancelled, extinguished
and retired and will be converted into the right to receive $3.10
in cash, without interest, (ii) each issued and outstanding Class
B Unit, other than those held by Regal Holdings or any direct or
indirect subsidiary of Regal Holdings, shall be cancelled,
extinguished and retired and will be converted into the right to
receive $20.00 in cash, without interest, (iii) each outstanding
Unit which is owned by Regal Holdings or any direct or indirect
subsidiary of Regal Holdings shall be and remain a unit of
limited partner interest in the Partnership; (iv) each
outstanding partnership interest, general or limited, of Regal
shall be cancelled, extinguished and retired, and no payment
shall be made thereon; (v) Regal shall cease to exist; and (vi)
the General Partner's general partnership interest in the
Partnership shall be and remain a general partnership interest in
the Partnership.
35
<PAGE>
Expenses of the Merger
It is estimated that the expenses incurred in connection
with the Merger will be approximately as set forth below:
Investment banking fees and expenses (1).... $170,000
Legal fees and expenses (2)................. $700,000
Accounting fees and expenses................ $50,000
Filing fees................................. $ 1,000
Printing and mailing fees................... $25,000
Miscellaneous (3)........................... $42,000
Appraisal fees and expenses................. $12,000
========
Total................................. $1,000,000
- -----------------
(1) Includes the fees and estimated expenses of Houlihan
Lokey (see "Special Factors -- Opinion of Financial
Advisor").
(2) Includes the fees and estimated expenses of counsel to
the Special Committee (see "Special Factors --
Background of the Merger"), counsel to the Partnership
and counsel to RHM and Regal.
(3) Includes paying agent fees for processing transmittals
and payments to holders of Units.
Except as otherwise provided in the Merger Agreement with
respect to indemnification, RHM has agreed to bear the expenses
of each party in connection with the Merger Agreement and the
transactions contemplated thereby, and none of the expenses of
any party to the Merger Agreement is expected to be paid by the
Partnership.
Effective Time
The Merger will become effective at the time of the filing
by the Partnership with the Secretary of State of the State of
Delaware of a certificate of merger in accordance with the
Delaware Act. It is presently anticipated that such filing will
be made on September 30, 1997. Such filing will be made,
however, only upon satisfaction or waiver, where permissible, of
the conditions set forth in the Merger Agreement. See "--
Conditions to the Merger."
Financing of the Merger
Approximately $7 million will be required to consummate the
Merger and to pay related fees and expenses (see "-- Expenses of
the Merger" above). The necessary funds are expected to be
provided by RHM, which will obtain such funds from general funds
of Regal Holdings and its affiliates. Regal Holdings has
sufficient funds on hand to consummate the Merger.
Conditions to the Merger
The respective obligations of the Partnership and RHM to
effect the Merger are subject to the satisfaction at or prior to
the Effective Time of the following conditions: (i) the Majority
Vote Requirement having been met; (ii) neither the execution and
delivery of the Merger Agreement by the Partnership nor the
consummation of the transactions contemplated thereby nor
compliance by the Partnership with any of the provisions thereof
shall (x) violate, conflict with, or result in a breach of any
provision of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default)
under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the
properties or assets of the Partnership or any direct
36
<PAGE>
or indirect subsidiary of the Partnership under any of
the terms, conditions or provisions of (I) the Partnership
Agreement or any other partnership agreement or charter or bylaws
of any direct or indirect subsidiary of the Partnership or (II)
any material note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to
which the Partnership or any direct or indirect subsidiary of the
Partnership is a party, or to which any of them, or any of their
respective properties or assets, may be subject, or (y) violate
any judgment, ruling, order, writ, injunction, decree, statute,
rule or regulation applicable to the Partnership or any direct or
indirect subsidiary of the Partnership or any of their respective
properties or assets, except, in the case of each of clauses (x)
and (y) above, for such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens,
security interests, charges or encumbrances, which would not, in
the aggregate, have a material adverse effect on the transactions
contemplated hereby or on the condition (financial or other),
business or operations of the Partnership and its subsidiaries,
taken as a whole; (iii) no withdrawal by Houlihan Lokey of its
opinion with respect to the Merger or modification thereof in a
manner materially adverse to RHM, Regal, the Partnership or any
Unitholder having occurred; and (iv) no preliminary or permanent
injunction or other order, decree or ruling issued by a court of
competent jurisdiction or by any administrative agency or
commission or other governmental authority or instrumentality (a
"Governmental Entity"), nor any statute, rule, regulation or
executive order promulgated or enacted by any Governmental Entity
shall be in effect, which would make the acquisition or holding
by RHM, its subsidiaries or affiliates of the Units of the
Partnership following the Merger illegal or otherwise prevent the
consummation of the Merger or make the consummation of the Merger
illegal.
Termination
The Merger Agreement may be terminated and the Merger
may be abandoned notwithstanding approval thereof by the General
Partner and holders of a majority in interest of the Class A
Units, at any time prior to the Effective Time, if any court of
competent jurisdiction in the United States or other United
States governmental body shall have issued an order, decree or
ruling or taken any other action restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling
or other action shall have become final and nonappealable. In
addition, the Merger Agreement may be terminated by RHM or the
Partnership (at the direction of the Special Committee) if the
Merger is not consummated on or before September 30, 1997.
Payment for Units
At or prior to the Effective Time, RHM will deposit or
cause to be deposited in trust with American Stock Transfer and
Trust Company (the "Paying Agent"), as agent for each holder of
record of Units, the cash which such holders will be entitled to
receive in the Merger. As soon as practicable after the Effective
Time, the Paying Agent will mail to each such holder of record a
letter of transmittal (which will specify that delivery shall be
effected, and risk of loss and title to the Units shall pass,
only upon receipt by the Paying Agent of confirmation of a
book-entry transfer of Units into the Paying Agent's account at
The Depository Trust Company) to be returned to the Paying Agent
and instructions for effecting the surrender of Units in exchange
for $3.10 in cash per Class A Unit and $20.00 in cash per Class B
Unit (in each case without interest). All Units so surrendered
will be cancelled.
Upon surrender of a duly executed letter of transmittal,
each Public Unitholder will receive $3.10 in cash per Class A
Unit and $20.00 in cash per Class B Unit (in each case without
interest) held by such Public Unitholders. Any cash held by the
Paying Agent that remains unclaimed by Public Unitholders six
months after the Effective Time will be delivered to the
Partnership, after which time persons entitled thereto may look,
subject to applicable escheat and other similar laws, only to the
Partnership for payment thereof.
37
<PAGE>
THE PARTNERSHIP
General Development of Business
The Partnership was organized in December 1986 by the
General Partner to acquire, own, operate and sell hotels and
resort properties. The Partnership owns and operates the
Properties through operating partnerships (the "Operating
Partnerships") which were acquired in 1986.
The Partnership owns 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. The General Partner, a wholly owned subsidiary of
Richfield, is also the 1% general partner of each of the
Operating Partnerships. Richfield operates the Properties for the
Partnership under certain management agreements.
Financial Information About Industry Segments
The Partnership's operations have been in one industry
segment since formation. Revenue has been generated through the
ownership and operation of the Properties. The following table
reflects the sources of revenue and gross operating profit and
total assets for each of the three years ended December 31, 1996,
1995 and 1994.
At and for the Year Ended December 31,
1996 1995 1994
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(In thousands, except percentages)
Rooms $29,038 59.8% $26,810 59.1% $26,863 58.2%
Food and Beverage 12,272 25.3% 11,733 25.8% 12,274 26.6%
Other Property
Operations 7,243 14.9% 6,856 15.1% 7,020 15.2%
------- ------ ------- ------- ------- ------
Total Revenue $48,553 100.0% $45,399 100.0% $46,157 100.0%
======= ====== ======= ======= ======= ======
Gross Operating
Profit $14,625 30.1% $12,799 28.1% $13,566 29.4%
======= ====== ======= ======= ======= ======
Total Assets (as
at December 31 $70,131 $69,406 $73,542
======= ======= =======
Gross operating profit represents operating income of the
Partnership before rent, taxes and insurance, management fees,
depreciation, amortization and impairment of property. Gross
operating profit is indicative of the profitability from
operations of the Properties.
Room revenue is significantly impacted by the rates
obtained for rooms and the level of occupancy of the Properties.
Although not in the same proportion, changes in occupancy also
impact revenue generated from food and beverage and other
property operations. Average daily room rates of the Properties
were $64.26, $59.55 and $59.42 in 1996, 1995 and 1994,
respectively. Average occupancy levels for the Properties were
78.3%, 77.6% and 77.9% in 1996, 1995 and 1994, respectively. For
a discussion of the changes in various operating statistics, see
"Summary Financial Data."
38
<PAGE>
Narrative Description of Business
Business
The principal business of the Partnership is the ownership
and operation of six hotel and resort Properties located in
geographically diverse areas of the continental United States.
The Properties are full service facilities serving the vacation,
leisure, meetings, convention and business segments of the hotel
market. In addition to lodging, various guest services are
offered by the Properties including restaurants, lounges, banquet
rooms, valet, concierge, parking and shuttle services. Other
services available at some of the Properties include a marina,
health and fitness facilities, swimming pools, tennis courts,
spas and retail facilities.
Importance of Franchises and Trademarks
Three of the Properties are affiliated with national
franchises and operate under franchise agreements. The benefits
of these franchise agreements include national brand name
recognition and world wide central reservation systems, as well
as operating quality standards and extensive marketing programs.
Two of the Properties are licensed to use the Regal trademark,
which is sub-licensed to the hotels by an affiliate of the
General Partner. The Partnership considers such affiliations and
licenses to be important to the operations and success of the
Properties in regard to customer recognition and satisfaction.
Other properties may be licensed in the future to use the Regal
trademark.
Seasonality of Business
Because of the Properties' locations, occupancy levels are
generally lower in the first and fourth quarters and higher in
the second and third quarters of the year. These fluctuations are
consistent with the normal recurring seasonal patterns of the
industry.
Industry Practices
The Properties periodically offer discounts to contract and
group customers and room rates generally fluctuate during peak
and non-peak times of the year. Deposits are often obtained in
advance for facility rentals and rooms. In addition, a certain
level of capital expenditures, repair and replacement of hotel
property is required under the Partnership's loan agreement.
The Properties are managed by Richfield in accordance with
certain management contracts. Management services provided under
the contracts include operations supervision, strategic business
planning, yield management, sales and marketing oversight,
personnel management and accounting and technical services.
Market Information and Competitive Conditions
According to Smith Travel Research, all of the U.S. lodging
industry performance measures were higher in 1996 than in 1995.
Average daily room rate for the industry increased by 6.4% to
$71.66 and room occupancy increased .3% to 65.7%. The hospitality
industry in the U.S. experienced a slight increase in occupancy
and notable increases in average room rates during 1996. The
increase in average room rates during 1996 was achieved primarily
due to the increase in rooms demand exceeding the increase in
rooms supply. As a result, 1996 rooms revenue exceeded 1995 rooms
revenue. Room revenue per available room (Revpar) was up 6.7%,
slightly above the 6.3% increase for a year ago. Smith Travel
Research estimates that performance ratios in the lodging
industry in 1997 should improve over 1996.
39
<PAGE>
The Partnership's Revpar has consistently exceeded the
industry averages noted above. This is due to occupancy levels
exceeding industry averages, offset by average room rates below
industry averages. The Partnership's operations in certain
markets are price sensitive. The Partnership considers its
primary points of competition to include, but are not limited to,
room rates, location, guest services and responsiveness, adequacy
and appearance of facilities and overall customer satisfaction.
The demand at a particular hotel of the Partnership may be
adversely affected by many factors, including changes in travel
patterns, local and regional economic conditions and the degree
of competition with other hotels in the area.
Regulation
The Operating Partnerships are subject to regulation in
connection with their business, including liquor licensing,
occupational health and safety regulations, environmental
regulations, food service regulation and labor laws. The
Operating Partnerships have not experienced significant
difficulties with regulation in these areas; however, failure to
comply with those regulations could result in loss of licenses,
permits or other authorizations which could adversely impact the
Partnership's operating revenue.
Employees
All hotel personnel are employed by the respective
Operating Partnerships. Richfield processes the payroll on behalf
of the Operating Partnerships. The number of persons employed by
the Operating Partnerships, as of December 31, 1996, was
approximately 990. Management considers employee relations to be
satisfactory.
Properties
The six hotel and resort Properties including the hotel
buildings and leasehold improvements are owned by the Operating
Partnerships. Three of the hotel properties are located on land
owned by the Operating Partnerships, while the other three hotel
properties are located on land leased by the Operating
Partnerships on a long-term basis. The following table presents
certain information for each of the Properties:
Number
of
Property Primary Markets Served Area Served Rooms
- -------- --------------- ------------------ -----
Aurora Inn and Pine Vacation, Greater Cleveland 69
Lake Trout Club Business /Akron, Ohio
("Aurora")
Fourwinds/A Clarion Destination Bloomington/ 126
Resort Resort and Indianapolis,
("Fourwinds") Marina Indiana
Regal McCormick Vacation, Phoenix/ 125
Ranch Meetings Scottsdale,
("McCormick") Arizona
Sheraton Inn Business, Buffalo/ 293
Buffalo Airport Meetings and Niagara Falls,
("Buffalo") Leisure New York
Sheraton Inn Vacation Orlando/Walt 651
Lakeside Disney World,
("Lakeside") Florida
Regal University Business, Raleigh/Durham/ 322
Hotel Meetings, and Chapel Hill
("University") Conventions North Carolina
-----
TOTAL 1,586
=====
40
<PAGE>
The appraised value of the Properties is summarized below:
Appraised Values
----------------------------------------------
December 1996 December 1995 December 1994
------------- ------------- -------------
Aurora Inn & Pine Lake
Trout Club $7,160,000 $7,200,000 $ 7,520,000
Fourwinds/A Clarion
Resort 8,030,000 8,800,000 10,200,000
Regal McCormick Ranch 13,770,000 9,875,000 9,015,000
Sheraton Inn Buffalo
Airport 14,000,000 15,000,000 17,730,000
Sheraton Inn Lakeside 28,000,000 30,000,000 34,000,000
Regal University Hotel 15,800,000 12,000,000 8,025,000
----------- ----------- ----------
Total appraised value $86,760,000 $82,875,000 $86,490,000
=========== =========== ===========
The appraised value for the Pine Lake Trout Club property at
December 1996 reflects a downward revision of $500,000 from the appraised
value shown in the Partnership's Annual Report on Form 10-K for
the year ended December 31, 1996.
The increase in the aggregate appraised value of the
portfolio from 1995 to 1996 was primarily the result of increases
in the fair value of Regal McCormick Ranch and Regal University
Hotel. These increases were due to increased demand for hotel
rooms in the markets in which these hotels are located.
Additionally, Regal University Hotel's appraised value benefited
from a renovation completed in 1996.
The decline in the aggregate appraised value of the
portfolio from 1994 to 1995 was primarily the result of decreases
in the value of the Sheraton Lakeside Inn and the Sheraton Inn -
Buffalo Airport in 1995, and the decline in the Fourwinds Resort
in 1995. These declines are primarily attributable to these
hotels being located in markets with increases in the supply of
available rooms and static demand for hotel rooms. See "Summary
Financial Data."
Legal Proceedings
There are no material pending legal proceedings to which
the Partnership or any of the Operating Partnerships is a party,
except for ordinary and routine litigation incidental to the
business of the Partnership.
Beneficial Ownership of Class A Units and Transactions In
Class A Units By Certain Persons
The following table sets forth information as of September 2,
1997 with respect to persons who are known to the Partnership
(based on statements filed with the Commission pursuant to
Section 13(d) or 13(g) of the Exchange Act) to be the beneficial
owner of more than five percent of any class of the Partnership's
voting securities.
Name and address of Amount and nature of Percent of
Title of Class beneficial owner beneficial ownership Class
- -------------- ---------------- -------------------- -----
Class A Units Century City 3,794,646s(1) 71.0%
International Holdings
Limited
Paliburg Plaza Indirect Ownership
68 Ye Woo Street
Hong Kong
41
<PAGE>
Class A Units Regal Hotel 1,825,065 (1) 34.2%
Management, Inc.
5775 DTC Boulevard
Suite 300 Direct Ownership
Englewood, Colorado
80111
Class A Units Gateway Hotel 769,041 (1) 14.4%
Holdings, Inc.
5775 DTC Boulevard
Suite 300 Direct Ownership
Englewood, Colorado
80111
Class A Units AIRCOA Equity 650,000 (1) 12.2%
Interests, Inc.
5775 DTC Boulevard
Suite 300 Direct Ownership
Englewood, Colorado
80111
Class A Units Richfield 546,740 (1)(2) 10.2%
Holdings, Inc.
5775 DTC Boulevard Direct Ownership
Suite 300
Englewood, Colorado
80111
Class A Units Investing Group: 432,300 (3) 8.1%
Direct Ownership
Hatfield Family
Trust, UA
RR1, Box 162
Ridgeland,
South Carolina 29936
(108,700 units 2.04%)
J. Mark Grosvenor
3145 Sports Arena
Boulevard
San Diego, California
92110
(110,000 units 2.06%)
Gerald Loehr Trust
c/o Gerald G. Loehr
P.O. Box 675207
Rancho Santa Fe,
California 92067
(43,500 units .81%)
Gardner-Smith Living
Trust, UA
7825 Fay Avenue,
Suite 250
La Jolla, California
92037
(43,200 units .81%)
42
<PAGE>
Narans Investment
Management, Inc.
3440 South Vance Avenue,
Suite 700
Lakewood, Colorado
80227
(32,200 units .60%)
Blacor, Inc.
8235 Douglas Avenue,
Suite 1300
Dallas, Texas
75225
(37,100 units .69%)
Lance T. Shaner 303
Science Park Road
State College,
Pennsylvania
16803
(37,100 units .69%)
Don W. Cockroft
P.O. Box 770577
Memphis, Tennessee
38177
(10,500 units .20%)
Michael McNulty
8235 Douglas Avenue,
Suite 1300
Dallas, Texas 75225
(10,000 units .20%)
Class B Units Century City 950,000 (4)(5) 100.0%
International
Holdings Limited Indirect Ownership
- ----------------
(1) Each of RHI, AEI, RHM and Gateway share voting and investment
power with Century City.
(2) RHI has direct ownership of 546,740 Class A Units, an
indirect ownership of 650,000 Class A Units through AEI, and
indirect ownership of 3,800 Class A Units through Richfield, for
a total direct and indirect ownership of 1,200,540 Class A Units,
which represent 22.5% of the Class A Units.
(3) Individuals or trusts listed have jointly filed a Schedule
13-D indicating that they are acting as a group. Ownership
information is based on Amendment No. 2 to the Schedule 13-D
filed February 3, 1996.
(4) Class B Units are not listed on any securities exchange or
quoted on Nasdaq; however, they are convertible into Class A
Units under certain conditions as set forth in the
Partnership Agreement. No conversion rights have been
exercisable since the Partnership's inception through the
date hereof.
(5) RHI directly owns 200,000 Class B Units. RHM directly owns
688,746 Class B Units of the Partnership. BHI directly owns
61,254 Class B Units. AEI is the managing general partner of
BHI and therefore BHI is considered an affiliate. AEI and its
affiliates directly and indirectly own 7.1% of the
partnership interests of BHI.
The General Partner is wholly owned by Richfield, which in
turn is wholly owned by RHI. RHI also owns all of the common
stock of AEI. More than 95% of the common stock,
43
<PAGE>
and more than 90% of the preferred stock, of RHI is
owned, directly and indirectly through other subsidiaries, by
Regal International. Regal International also owns, directly and
indirectly through subsidiaries other than RHI and its
subsidiaries, all of the common and preferred stock of RHM and
all of the common stock of Gateway. Regal International is a
wholly owned subsidiary of Regal Holdings. Accordingly, all or
substantially all of the equity interests in each of RHI, AEI,
Richfield, the General Partner, RHM and Gateway are owned,
directly or indirectly, by Regal Holdings. More than 70% of the
common stock of Regal Holdings is owned by Paliburg, of which
73.1% of the common stock is owned by Century City. Century City
is a publicly traded company the common stock of which is traded
on the Hong Kong stock exchange. More than 60% of the voting
stock of Century City is beneficially owned by Mr. Lo Yuk Sui, a
citizen of Hong Kong.
The General Partner directly owns notes, with face values
of $8,100,000, which are convertible into Class A Units at a
price of $16.60 per Class A Unit. Assuming that these were
converted, the General Partner would directly own 8.4% of the
Class A Units. Century City would then indirectly own 73.5% of
the Class A Units.
As of September 2, 1997, no officers or directors of the
General Partner or any of its affiliates had beneficial ownership
of any equity securities of the Partnership or the General
Partner.
None of the Related Persons or their respective affiliates
have purchased, transferred or sold any Units within the past 60
days.
For certain information concerning the directors and
executive officers of the Related Persons, see Schedule 1 to this
Proxy Statement.
44
<PAGE>
SUMMARY FINANCIAL DATA
Set forth below is a summary of certain combined financial
information with respect to the Partnership, excerpted from the
information in the Partnership's Annual Reports on Form 10-K for
the years ended December 31, 1995 and December 31, 1996 and the
Partnership's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997. More comprehensive financial information is
included in such reports and other documents filed by the
Partnership with the Commission and the following summary is
qualified in its entirety by reference to such reports and other
documents and all of the financial information (including any
related notes) contained therein. These reports and other
documents should be available for inspection or copying as
discussed above under "Available Information."
Annual Financial Information
Years ended December 31,
--------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per unit amounts)
Consolidated
Operations Data
- ---------------
Revenue $ 48,553 45,399 46,157 45,268 42,998
Operating income
(loss)(1) 5,775 (630) 5,122 5,556 4,331
Net income
(loss) (1) 1,009 (5,421) 627 1,120 113
Income (loss)
per unit:
Class A: Net loss (0.02) (1.50) (.10) (.02) (.22)
Class B: Net income 1.14 2.86 1.25 1.27 1.17
Weighted average
number of units
outstanding
Class A 5,340,214 5,340,214 5,340,214 5,340,214 4,490,214
Class B 950,000 950,000 950,000 950,000 950,000
Ratio of earnings
to fixed charges 7.4% (29.8)%(1) 4.8% 8.9% 9.6%
Consolidated
Balance Sheet Data
- ------------------
Working capital
deficit (2) (1,716) (2,452) (7,178) (48,180) (48,771)
Total assets 70,131 69,406 73,542 77,369 78,589
Long-term debt
and affiliate
notes payable (2) 50,604 51,390 46,180 6,000 8,715
Partners' capital 10,761 9,752 15,173 14,546 13,426
Appraised values
of properties 86,760 82,875 86,490 89,530 90,240
Consolidated
Cash Flow Data
- --------------
Capital expenditures 3,847 3,286 2,049 2,353 2,530
Net cash provided
by operating
activities 5,071 3,143 5,568 5,841 4,080
Net cash used in
investing activities (3,847) (3,306) (1,944) (2,394) (2,433)
Net cash provided
(used) by financing
activities (990) 1,018 (5,279) (3,612) (1,391)
(1) Includes a loss for the impairment of the Partnership's
Lakeside property in the amount of $4,789 for the year ended
December 31, 1995.
(2) Certain of the Partnership's indebtedness to unaffiliated
financial institutions was classified as current at December
31, 1993 and 1992.
45
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Results of Operations
The following table reflects certain historical financial
information and operating statistics for the years ended December
31, 1996, 1995 and 1994.
Historical Financial Information
(in thousands, except operating statistics)
1996 1995 1994
---- ---- ----
Revenue:
Rooms $29,038 $26,810 $26,863
Food and beverage 12,272 11,733 12,274
Other property operations 7,243 6,856 7,020
------ ------ -----
Total revenue 48,553 45,399 46,157
Expenses:
Hotel operations 33,928 32,600 32,591
------ ------ ------
Gross operating profit 14,625 12,799 13,566
Other operating expenses (1)(2) 8,850 13,429 8,444
------ ------ -----
Operating income (loss) 5,775 (630) 5,122
Other expense, net (3) (4,766) (4,791) (4,495)
------ ------ ------
Net income (loss) $ 1,009 $(5,421) $ 627
======= ======= ========
Operating Statistics:
Average room rate $64.26 $59.55 $59.42
Average occupancy percent 78.3% 77.6% 77.9%
Number of available rooms 1,586 1,586 1,586
- --------------
(1) Includes rent, taxes and insurance, management fees,
depreciation and amortization, and impairment of property.
(2) 1995 includes impairment loss on the Lakeside property in the amount
of $4,789. No impairment loss was recorded in 1996 or 1994.
(3) Principally comprised of interest expense.
Revenue. Total revenue increased $3,154,000 or 6.9% in
1996, compared to a decrease of $758,000 or 1.6% in 1995. Of
total revenue in 1996, 1995 and 1994, rooms comprised 59.8%,
59.1% and 58.2%, respectively; food and beverage comprised 25.3%,
25.8% and 26.6%, respectively, and other property operations
comprised 14.9%, 15.1% and 15.2%, respectively.
Rooms revenue is primarily a function of the Properties'
occupancy levels and room rates. Rooms revenue increased
$2,228,000 or 8.3% in 1996 due primarily to an increase in
average daily room rates of $4.71 as well as an increase in
occupancy from 77.6% to 78.3%. Rooms revenue decreased $53,000 in
1995 due to a decrease in occupancy from 77.9% to 77.6% offset in
part by an increase in average daily room rates of $.13. Rooms
revenue increases in 1996 were primarily attributable to
increases at Sheraton Lakeside Inn, Regal University Hotel
(formerly Sheraton University Center) and Sheraton Inn - Buffalo
Airport. The leisure market in Orlando improved during 1996,
which resulted in Sheraton Lakeside generating higher average
room rates and increased wholesale business. Regal University
Hotel benefited from its 1995 renovation as well as strong growth
in average rooms rates in the group business and leisure markets
during 1996. While the leisure market continued to be stagnant at
Sheraton Inn - Buffalo Airport, aggressive rate strategies
resulted in improved occupancy in the leisure market.
Rooms revenue decreases in 1995 were primarily attributable
to decreases at the Sheraton Inn Lakeside and Sheraton Inn
Buffalo Airport. The leisure market at Sheraton Inn Lakeside
continued to be impacted by significant competitive pressures,
resulting from an increase in room supply in the Orlando area.
The reduction in rooms revenue at Sheraton Buffalo was due to a
decrease in Canadian leisure activity resulting from declines in
the
46
<PAGE>
value of the Canadian dollar and loss of a substantial
airline room contract. The decreases in Lakeside and Buffalo were
mitigated by the impact of increases in rooms revenue, due to
increases in average rate, at Regal McCormick Ranch, Regal
University Hotel and Aurora Inn.
Food and beverage revenue increased $539,000 or 4.6% in
1996 and decreased $541,000 or 4.4% in 1995. Food and beverage
revenue is impacted by room occupancy and the mix of room sales
between leisure, group, contract and business customers. The food
and beverage revenue increase in 1996 resulted primarily from an
increase at Regal McCormick Ranch due to the addition of an
outdoor banquet facility. In addition, food and beverage revenue
benefited from increased banquet revenue at Regal University
Hotel and the increased occupancy at Sheraton Inn - Buffalo
Airport. The primary reason for the decrease in 1995 was related
to increased competition from stand-alone restaurants in the area
surrounding the Regal McCormick Ranch, the smaller percentage
contribution from the Canadian leisure market maintained at the
Sheraton Buffalo and a decrease in banquet activity at both
locations.
Other property operations consist of marina sales and
rentals (at Fourwinds), gift shops, food marts, lease income,
phone charges and other miscellaneous guest services. Other
property operations increased $387,000 or 5.6% in 1996 and
decreased $164,000 or 2.3% in 1995. The 1996 increase in other
property operations was attributable to increased activities at
Regal McCormick Ranch during the first quarter of 1996,
benefiting from Phoenix, Arizona hosting the 1996 Super Bowl and
increases at Sheraton Lakeside's food mart outlet. The 1995
decrease in other property operations was primarily due to storm
damage at the Clarion Fourwinds Resort, which impacted the
"marina-related" revenue.
While the hotel industry continues to be very competitive,
the Properties, as a group, have outperformed the industry when
measuring revenue per available room ("Revpar," calculated as
occupancy percent times average room rate). The Properties'
Revpar, as a group, was $50.32, $46.23 and $46.29 in 1996, 1995
and 1994, respectively. Revpar for the United States hotel
industry, accumulated by Smith Travel Research, was $47.08,
$44.11 and $41.49 in 1996, 1995 and 1994, respectively.
Costs and Operating Expenses. Total operating expenses
decreased $3,251,000 or 7.1% in 1996. The decrease is primarily
attributable to the impairment of the Lakeside property of
$4,789,000 in 1995, and an increase in other operating expenses
of $1,538,000. Excluding the impairment of the Lakeside property,
total operating costs increased primarily as a result of
increases in rooms and administrative and general expenses.
Although rooms expense increased over 1995, rooms expense as a
percent of rooms revenue decreased to 26.8% in 1996 from 27.5% in
1995. This resulted from the increase in rooms revenue being
generated through increased average room rates, rather than
increased occupancy. Food and beverage costs as a percent of food
and beverage revenue decreased to 71.6% in 1996 from 73.1% in
1995. As discussed below, in 1995 additional marketing expenses
were incurred in connection with the repositioning of restaurants
at certain of the Partnership's hotels. The increase in
administrative and general expense is primarily due to increased
legal costs.
Total operating expenses increased $4,994,000 or 12.2% in
1995. This increase is primarily attributable to the impairment
of the Lakeside property of $4,789,000, and an increase in other
operating expenses of $196,000. Excluding the impairment of the
Lakeside property, total operating costs increased primarily as a
result of increased food and beverage costs. Food and beverage
costs as a percent of food and beverage revenue increased to
73.1% in 1995 from 71.4% in 1994. The primary reason for the
increase in this percentage is a result of costs incurred for
promotional campaigns and marketing plans to reposition the
restaurants at the Clarion Fourwinds Resort, Aurora Inn and Regal
McCormick Ranch.
Included in costs and operating expenses in 1995 is a loss
for the impairment of the Lakeside property in the amount of
$4,789,000, recorded in the fourth quarter of 1995. The
circumstances leading up to this impairment loss were primarily a
result of the existing and expected
local market conditions, a decreasing trend in the
property's appraised value and historical operating results in
recent years. This loss was recognized in accordance with the
provisions of Statement of Financial Accounting Standards No.
121, Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of (SFAS No. 121), which was issued by the Financial
Accounting Standards Board in March 1995 and adopted by the
Partnership in the fourth quarter of 1995. The
47
<PAGE>
Partnership believes that expected future cash flows
from the operations of its other hotel properties will be
sufficient to recover their carrying values. The Partnership has
no current plans to sell any of its Properties for less than
their carrying values.
Other Expenses. Other expenses decreased $25,000 or .5% in
1996 as compared to an increase of $296,000 or 6.6% in 1995. The
decrease in 1996 is attributable to a decrease in interest
expense of $79,000 due primarily to a lower average interest rate
on the Partnership's first mortgage loan, net of a $54,000
increase in amortization of debt issue costs. The increase in
1995 is primarily attributable to an increase in interest expense
of $191,000 due to higher levels of debt, net of a $123,000
decrease in amortization of debt issue costs.
Liquidity and Capital Resources
Cash Flows. Net cash provided by operating activities was
$5,071,000 in 1996, an increase of $1,928,000 from 1995. This
increase is the result of an increase in cash received from
customers, due to increased hotel revenue, of $2,314,000, a
decrease in interest paid of $885,000, offset by increases in
cash paid to suppliers, vendors and employees of $829,000 and
decrease in other cash receipts of $442,000.
Net cash provided by operating activities was $3,143,000 in
1995, a decrease of $2,425,000 from 1994. This decrease is the
result of a decrease in cash received from customers, due to
lower hotel revenues, of $1,132,000, an increase of $1,013,000 in
interest paid, and an increase in cash paid to employees of
$493,000, offset in part by decreases in cash paid to suppliers
and vendors of $172,000 and increases in other cash receipts of
$41,000.
Net cash used in investing activities increased $541,000 in
1996 due to increases in capital expenditures. Net cash used in
investing activities increased $1,362,000 in 1995 due to
increases in capital expenditures and cash paid for other assets.
Capital expenditures during 1996 and 1995 included the renovation
of University (in conjunction with its conversion to a Regal
franchise). Capital expenditures in 1996 also consisted of common
area improvements at Lakeside and the addition of a catering
pavillion at McCormick.
Net cash used in financing activities increased $2,008,000
in 1996 due to the closing of the new first mortgage loan in 1995
that generated loan proceeds. Net cash generated by financing
activities increased $6,297,000 in 1995 also due to the closing
of the new first mortgage loan.
The Partnership anticipates funding its 1997 debt
service obligations and capital expenditures through a
combination of operating cash flows and draws on its line of
credit, to handle seasonal demands, as necessary. The Partnership
has capital improvements of approximately $4,600,000 planned in
1997. Two-thirds of these planned improvements consist of the
renovation of guest rooms at certain of the Properties and
improvements at Fourwind's marina docks, and the remaining
one-third consists of other renovations and improvements at the
Properties. In the longer term, in order to remain competitive,
the Partnership may need to make significant capital expenditures
in excess of the industry norm, 5% of annual revenue, for
renovation and improvements. See "Special Factors -- Background
and Reasons for the Merger -- Need for Capital Investment;
Availability of Financing." Such capital expenditures would
require the Partnership to obtain financing from external
sources.
Indebtedness. At December 31, 1996 the Partnership had a
working capital deficit of $1,716,000. The Partnership's working
capital requirements are expected to be satisfied through the
management of payables, collection of receivables, and use of the
Partnership's revolving credit line.
On June 8, 1995, the Partnership signed a credit agreement
with a new lender to provide a new $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 to pay off the existing
mortgage loan and the note payable to bank with the balance
available for certain property renovations and the payment of a
facility fee and closing costs. Regal Holdings, an affiliate of
the General Partner, has provided a limited guarantee for the new
first mortgage loan. The Partnership paid loan guarantee fees of
$225,000 and $230,000 in 1996 and 1995, respectively, to Regal
Holdings. This is an annual fee and is calculated as 0.5% of the
outstanding loan balance at June 8 of each year.
48
<PAGE>
The new credit agreement includes a variety of interest
rate options, the most favorable of which is the Eurodollar Rate
plus 2%, which was 7.53% at December 31, 1996. Repayment of the
new first mortgage loan isbased on a twenty-year amortization
with a maturity date at June 2000, while the revolving credit
line is renewable annually at the option of the lender.
A condition of the credit agreement signed by the
Partnership for the first mortgage loan and revolving credit line
required the subordination of the $6,000,000 notes payable to the
General Partner (the "Notes"). The General Partner agreed to this
subordination, and as a result, on September 26, 1995, the Board,
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 now become due on June 8, 2000, which is
coterminous with the new mortgage loan. Interest accrued on the
Notes after December 31, 1994, was paid at closing. Interest
incurred subsequent to closing continues to be accrued at 12% per
annum and is paid monthly.
The unpaid interest on the Notes accrued prior to January
1, 1995, in the amount of $2,100,000, was converted into debt
pursuant to a new promissory note ("New Note") which will also
mature on June 8, 2000 and is also subordinate to the first
mortgage loan. The New Note accrues interest at the rate of 12%
per annum, payable at maturity.
The Notes and New Note are convertible into Class A Units
of the Partnership at $16.60 per unit. In addition, these notes
stipulate that 25% of any excess cashflow, as defined, will be
applied against the principal portion of the notes outstanding.
The new first mortgage loan contains numerous covenants
requiring, among other matters, the maintenance of a minimum debt
service coverage ratio including the deferral of management fees
payable to an affiliate if this minimum debt service ratio is not
achieved, 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 premiums during the first two years, and maintenance
of minimum aggregate capital expenditures equal to 5% of revenue.
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. Distributable cash flow is generally defined as cash
flow from operations of the hotel properties. Such cash is
allocated and distributed (net of the General Partner's 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. The Minimum Annual Distribution is $2.16 per Class
A Unit. Any portion of the Minimum Annual Distribution that is
not paid by the Partnership in any year is added to the
cumulative unpaid Minimum Annual Distribution. The Partnership
has not made any distributions since 1990. Prior to making future
distributions, the Partnership will comply with its capital
expenditure requirements as specified in its mortgage loan
agreement and maintain sufficient working capital balances. At
December 31, 1996, the cumulative unpaid Minimum Annual
Distribution per Class A Unit significantly exceeds the
Partnership's net asset value per unit based on the appraised
values of the Properties. At this time it is unlikely there will
be any excess cash flow to be available for distribution to the
Class A Unitholders in 1997, and there can be no assurance as to
when sufficient excess cash flow may exist.
The Class B Units entitle each holder of Class B Units
("Class B Unitholder") to a limited partnership interest which is
subordinated to the Class A Units. The Class B Units are
redeemable or convertible in certain circumstances. The Class B
Units do not receive distributions until the Class A Unitholders
receive Minimum Annual Distributions, which have not been made by
the Partnership since 1990. Beginning in 1997, in accordance with
the terms of the Partnership Agreement, 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
49
<PAGE>
upon conversion of a Class B Unit pursuant to the Class B
Unit Conversion will be determined at the time of the 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 trading days
prior to the conversion.
As discussed below under the "Market for Partnership's Units;
Distributions," the Partnership Agreement was amended to defer
the 1997 conversion of Class B Units pursuant to the Class B Unit
Conversion.
Based on current market prices of the Class A Units, such
required conversion is expected to result in substantial dilution
to the pre-conversion Class A Unitholders. For example, based on
the average closing month end market price of Class A Units
during 1996 of approximately $1.77, the conversion of 250,000
Class B Units in the first year of the required conversion period
would result in an approximate 35% dilution to the Class A
Unitholders upon conversion. The conversion of all 950,000 Class
B Units pursuant to the Class B Unit Conversion would result in
an approximate 67% dilution to the pre-conversion Class A
Unitholders at the $1.77 per unit market price. In addition,
using the same per unit market price for a Class A Unit of $1.77,
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 do 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 such prices upon conversion pursuant
to the Class B Unit Conversion will approximate the average per
unit market price in 1996.
Pursuant to the Partnership Agreement, the Class A Units to
be issued upon conversion of the Class B Units pursuant to the
Class B Unit Conversion must 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 preexisting Class A
Units.
Upon consummation of the Merger, the Class A Units and the
Class B Units held by Public Unitholders will be converted into
the right to receive solely the Merger Consideration of $3.10
and $20.00 per Class A Unit and Class B Unit, respectively. The
holders of such Units will cease to have any right to receive
distributions from the Partnership or, in the case of Class B
Units, to convert such Units into Class A Units. Neither the
Partnership Agreement nor the Delaware Act requires that
accumulated, undeclared distributions be paid to Unitholders as a
condition to, or in connection with, the Merger.
Property Values. The appraised value of the Properties is
$86,760,000 at December 31, 1996, which exceeds their carrying
values of $62,676,000. In accordance with Statement on Financial
Accounting Standards on Accounting for the Impairment of
Long-Lived Assets, which was issued in 1995, the Partnership
recognized an impairment on the Lakeside property in 1995. The
Partnership has no current plans to sell any of its Properties
for less than their carrying values.
Income Taxes. Under Internal Revenue Code Section 7704 the
Partnership is currently defined as a "Publicly Traded
Partnership". Upon the consummation of the Merger, the
Partnership will no longer be treated as a Publicly Traded
Partnership and will therefore automatically be taxed as an
ordinary partnership. The remaining Unitholders after the Merger
will continue to report their share of the Partnership's income
or loss subject to the income tax rules currently applicable.
If the Merger is not consummated, beginning in 1998 the
Partnership, as a Publicly Traded Partnership, will be subject
either to (i) corporate income tax on its taxable income pursuant
to Internal Revenue Code Section 7704(a) or (ii) an excise tax on
its gross revenue pursuant to Internal Revenue Code Section
7704(g). Under Internal Revenue Code Section 7704, the
Partnership will be required to make an election for its first
tax year beginning after December 31, 1997 (i.e., its tax year
beginning January 1, 1998) either to be taxed as a corporation on
its taxable income at applicable federal corporate tax rates,
which currently range from 0% to 38%, or continue to be taxed as
an ordinary partnership for income tax purposes but be subject to
an excise tax of 3.5% on its gross revenue. This election is
irrevocable and will be in effect for each taxable year the
Partnership is defined as a Publicly Traded Partnership.
50
<PAGE>
If the Partnership elects to be taxed as a corporation for
federal income tax purposes, beginning in 1998 the Partnership
will be deemed to terminate under Internal Revenue Code Section
708 and its assets will be deemed to be distributed to the
Unitholders. Immediately thereafter, the Unitholders will be
deemed to contribute the Partnership assets received to a new
corporation. Such a termination and deemed distribution is not a
taxable event to the Partnership; however, it may be a taxable
event for each Unitholder depending upon such Unitholder's tax
basis in its Partnership interest and its particular
circumstances. Thereafter, the newly-formed corporation will be
liable for corporate income tax on a quarterly basis. As
shareholders of the newly-formed corporation, the Unitholders
will be taxed on their receipt of any distributions as follows:
(i) to the extent of the earnings and profits of the corporation
amounts received will be taxable as ordinary dividend income;
(ii) if the corporation has no earnings and profits such
distribution will reduce the Unitholders' tax basis in the stock
of the corporation; and (iii) once the Unitholders' basis in the
stock will be reduced to zero any additional amounts received
will be taxable as capital gain. As a newly-formed corporation,
the earnings and profits of the corporation will initially be
zero.
Had the Partnership been treated as a stand-alone
corporation for tax purposes, based on the Partnership's 1996
taxable income, it would have incurred a federal income tax
liability of approximately $500,000 for 1996.
If the Partnership elects to be subject to the 3.5% excise
tax, the Partnership will not be subject to income tax and will
suffer no adverse federal income tax consequences. Such excise
tax payment will be deductible to the Partnership and will reduce
any cash available for distribution to the Unitholders. The
Unitholders will continue to report their share of the
Partnership income or loss subject to the income tax rules
currently applicable. If an election is made to be subject to
excise tax, it is possible that the Partnership's tax liability
may exceed, and in certain cases substantially exceed, the tax
liability resulting from the Partnership's election to be taxable
as a corporation. By way of example, had the Partnership made an
election to be subject to excise tax for 1996, it would have
incurred a tax liability of approximately $1,700,000 for that
year.
Inflation. The rate of inflation as measured by changes in
the average consumer price index has not had a material impact on
the revenue or net income of the Partnership in the three most
recent years.
51
<PAGE>
Interim Financial Information
Six months ended June 30,
----------------------------
1997 1996
---- ----
(In thousands, except per unit amounts)
Consolidated Operations Data
- ----------------------------
Revenue $ 12,816 13,053
Operating income 1,808 2,014
Net income 643 850
Income (loss) per unit:
Class A (primary) 0.07 0.10
Class B 0.31 0.32
Weighted average number
of units outstanding
Class A 5,340,214 5,340,214
Class B 950,000 950,000
Ratio of earnings to fixed charges 12.0% 17.9%
Six months ended
June 30, 1997
--------------
(In thousands)
Consolidated Balance Sheet Data
Working capital deficit (2,167)
Total assets 69,564
Long-term debt and affiliate
notes payable 50,191
Partners' capital 11,592
Consolidated Cash Flow Data Six months ended June 30,
- --------------------------- ----------------------------
1997 1996
---- ----
(In thousands, except per unit amounts)
Capital expenditures 3,081 878
Net cash provided by
operating activities 1,848 3,231
Net cash used in
investing activities (3,081) (878)
Net cash used by
financing activities (628) (540)
Results of Operations
Partnership revenue for the first three months ended
June 30, 1997 decreased $237,000 or 1.8% compared to the three
months ended June 30, 1996. Revenue for the first six months of
1997 decreased $336,000 or 1.3% compared to the first six months
of 1996. Average occupancy and daily room rates for the portfolio
of 1,586 rooms are summarized as follows:
Three months Six months
ended June 30, ended June 30,
--------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
Average occupancy 82.0% 83.7% 77.4% 79.9%
Average daily room rates $66.51 $63.90 $69.08 $65.11
The decrease in revenue at the Partnership's properties for
the three months ended June 30, 1997 when compared to the three
months ended June 30, 1996 was primarily a result of a decrease
in food and beverage revenue of $213,000 offset, in part, by an
increase in rooms revenue of $122,000. The decrease in revenue
for the six months ended June 30, 1997 when compared to the six
months ended June 30, 1996 was primarily a result of a decrease
in food and beverage revenue of $353,000 offset, in part by an
increase in rooms revenue of $238,000. Food and beverage revenue
is influenced, in part, by occupancy levels at each of the
properties. For the three
52
<PAGE>
months and six months ended June 30, 1997, occupancy
levels at the Partnership's properties decreased by 2.0% and
3.1%, respectively, as compared to same periods in 1996. These
decreases in occupancy levels contributed, in part, to decreases
in food and beverage revenue of 6.2% and 5.5% for the three
months and six months ended June 30, 1997, respectively, when
compared with the same periods in 1996. Rooms revenue is a
function of occupancy levels as well as average daily room rates.
For both the three months and six months ended June 30, 1997,
rooms revenue increased by 1.6% over the same periods in 1996, as
a result of increases in average daily rates that more than
offset decreases in occupancy levels for these periods. Increased
average daily rates and decreased occupancy levels during these
periods resulted from efforts by the Partnership to increase
revenue per available room at certain of its properties through
increased average daily rates. This resulted in an overall small
decrease in occupancy levels.
Net rooms margin (rooms revenue less rooms expenses)
increased $35,000 or 0.6% for the three months ended June 30,
1997 as compared to the three months ended June 30, 1996, as
rooms revenue increased by $122,000 or 1.6%, while rooms expenses
increased by $87,000 or 4.2%. Net rooms margin increased $91,000
or 0.8% for the six months ended June 30, 1997 as compared to the
six months ended June 30, 1996, as revenue increased by $238,000
or 1.6%, while expenses increased by $147,000 or 3.7%. The
increases in net rooms margins for the three months and six
months ended June 30, 1997 as compared to the same periods in
1996 were primarily due to increases at Lakeside offset, in part,
by decreases at Fourwinds. The increases in net rooms margins at
Lakeside were the result of increased average daily room rates,
primarily in the wholesale market segment. The decreases at
Fourwinds are primarily due to decreased occupancy levels,
resulting from rooms taken out of service for renovation during
March, April, and May of 1997.
Net food and beverage margin (food and beverage revenue less
food and beverage expenses) decreased $117,000 or 11.0% for the
three months ended June 30, 1997 as compared to the three months
ended June 30, 1996, as revenue decreased $213,000 or 6.2%, while
expenses decreased $96,000 or 4.0%. Net food and beverage margin
decreased $89,000 or 4.7% for the first six months of 1997 as
compared to the same period in 1996, as revenue decreased
$353,000 or 5.5% while expenses decreased $264,000 or 5.8%. The
decreases in net food and beverage margins during these periods
were primarily due to decreases at Buffalo and University that
were offset, in part by increases at McCormick. The decreases in
net food and beverage margins at Buffalo were primarily due to
changes in the segment mix of the hotel's guests to include more
contract business, which typically does not use the hotel's food
and beverage outlets as much as other segments. Additionally,
Buffalo experienced increased payroll costs. University
experienced a drop in occupancy levels, which contributed to
decreased net food and beverage margins. The increases in net
food and beverage margins at McCormick were primarily due to the
addition of a catering pavilion at the property during 1996,
which increased banquet revenue; reductions in payroll cost also
occurred. Revenue from other property operations decreased
$146,000 or 7.8% and $221,000 or 5.6% for the three months and
six months ended June 30, 1997, respectively, as compared to the
three months and six months ended June 30, 1996. These decreases
are primarily a result of lower revenue generated Fourwinds'
marina operations during the second quarter of 1997 due to poor
weather in Bloomington, Indiana.
Operating income for the three months ended June 30,
1997 decreased $206,000 or 10.2% as compared to the three months
ended June 30, 1996 as revenue decreased $237,000 or 1.8% and
operating costs decreased $31,000 or 0.3%. Operating income
decreased $431,000 or 12.0% for the six months ended June 30, 1997
as compared to the first six months of 1996, as revenue decreased
$336,000 or 1.3% and operating costs increased $95,000 or .4%.
Operating costs include a provision of approximately $200,000 for
an occupancy tax assessment at McCormick recorded during the
second quarter of 1997.
Interest expense during the three months and six months
ended June 30, 1997 was comparable to the same periods in 1996.
The average interest rate (inclusive of amortization of debt issue
costs) was 9.00% for the first six months of 1997 as compared to
9.04% for the first six months of 1996.
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.
53
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Liquidity and Capital Resources
Net cash provided by operating activities for the first six
months of 1997 was $1,848,000, a decrease of $1,383,000 as
compared with the same period in 1996. The decrease is primarily
attributable to the decrease in cash received from customers of
$573,000 and an increase in interest paid of $792,000. Cash used
in investing activities increased $2,203,000 in the first six
months of 1997 compared to the first six months of 1996. The
increase primarily reflects capital expenditures at McCormick for
rooms renovation and Fourwinds for dock and rooms renovation.
Cash used in financing activities in the first six months of 1997
increased $88,000 as compared to the first six months of 1996.
The Partnership had indebtedness at June 30, 1997 of
$51,317,000 as compared to $51,726,000 at December 31, 1996. At
June 30, 1997, the Partnership had a working capital deficit of
$2,167,000 compared to a working capital deficit of $1,716,000 at
December 31, 1996. The Partnership's 1997 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. The
Partnership has capital improvements of approximately
$4,600,000 planned in 1997 (approximately two-thirds of
which is for the renovation of guest rooms at certain of the
Properties and improvements at Fourwinds' marina dock and the
remainder one-third is for other renovations and improvements at
the Properties). Approximately $3,100,000 of improvements were
made through June 30, 1997. These improvements have been and are
expected to be funded from hotel operations. In the longer term, in
order to remain competitive, the Partnership may need to make
significant capital expenditures in excess of the industry norm,
5% of annual revenue, for renovation and improvements. Such
capital expenditures would require the Partnership to obtain
financing from external sources.
The market value of the Partnership's Properties differs
significantly from the historical cost of the Properties of
$63,648,000, as reflected in the Partnership's balance sheet at
June 30, 1997. As indicated under Item 2 in the Partnership's
Form 10-K for the fiscal year ended December 31, 1996, the
aggregate appraised value of the Properties at December 31, 1996
was revised to $87,300,000. The appraised value of the Properties
at December 31, 1996 was revised to $86,760,000 subsequent to the
filing of the Partnership's 1996 Form 10-K. The December 1996
appraised value may not be representative of the appraised value
which will be obtained as of December 31, 1997 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 for which the Properties should sell in a
competitive market.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS No. 128"). SFAS No. 128 establishes
standards for computing and presenting earnings per share. SFAS
No. 128 is effective for financial statements issued for periods
ending after December 15, 1997 and earlier application is not
permitted. Had the Partnership implemented the requirements of
SFAS No. 128, basic earnings per share for the three months and
six months ended June 30, 1997 would have been $0.07 and $0.05,
respectively and diluted earnings per share for both the three
months and six months ended June 30, 1997 would have been $0.05.
MARKET FOR PARTNERSHIP'S UNITS; DISTRIBUTIONS
Class A Units of the Partnership are traded on the
American Stock Exchange under the symbol AHT. There is no
established public trading market for the Partnership's Class B
Units, the majority of which are held by affiliates of the
General Partner. During 1994 and 1996 the Partnership did not
sell any Units. During 1995, the Partnership sold the New Note
with a face value of $2,100,000. The Note and the New Note are
convertible into Class A Units at a price of $16.60 per Class A
Unit.
Under certain circumstances described in the Partnership
Agreement, the Class B Units may be converted into Class A Units.
Beginning in 1997, in accordance with the terms of the
Partnership Agreement, and each year
54
<PAGE>
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. In accordance with
the Partnership Agreement, the number of Class A Units to be
received upon conversion of a Class B Unit pursuant to the Class
B Unit Conversion will be determined by dividing $20.00 by the
average of the closing prices of Class A Units for the five
trading days ending on May 30, 1997. In conjunction with approval
of the Merger transaction, the General Partner has amended the
Partnership Agreement in order to defer the mandatory conversion
of Class B Units into Class A Units pursuant to the Class B Unit
Conversion. The amendment provides that the 250,000 Class B Units
scheduled to convert into additional Class A Units during 1997
will convert on the earliest to occur of (i) any termination of
the definitive Merger Agreement, (ii) the record date for any
vote of the Class A Unitholders (other than the vote on the
Merger), (iii) the record date for any distribution by the
Partnership to holders of Class A Units and (iv) September 30,
1997. In light of the likelihood of completion of the Merger, the
General Partner adopted this amendment in order to avoid
administrative and other issues arising from the issuance of
additional Class A Units pursuant to the Class B Unit Conversion.
The following table sets forth the range of high and low
closing prices of Class A Units for each full quarterly period
for the two most recent years, as reported by the American Stock
Exchange.
For the Quarter Ended High Low
--------------------- ---- ---
March 31, 1995 4 2 7/8
June 30, 1995 3 5/8 2 3/16
September 30, 1995 2 13/16 1 13/16
December 31, 1995 2 1/8 1 1/2
March 31, 1996 2 1 11/16
June 30, 1996 2 1/16 1 11/16
September 30, 1996 2 1/8 1 3/8
December 31, 1996 2 1/8 1 3/8
March 31, 1997 2 1/4 1 7/8
June 30, 1997 2 7/8 2
September 30, 1997(1) 3 1/16 2 3/4
- -------------
(1) Through September 2, 1997.
As of September 2, 1997, the Partnership had approximately
1,400 Class A Unitholders.
The Class A Unitholders have not received any distributions
since 1990. The Class B Units do not receive distributions until
the Class A Unitholders receive Minimum Annual Distributions, as
defined in the Partnership Agreement. In addition, the
Partnership's mortgage loan agreement stipulates certain
limitations on these distributions based on excess cash flow as
defined in the mortgage loan agreement. See "Summary Financial
Data."
The Partnership currently has a Minimum Annual Distribution
requirement of $2.16 per Class A Unit. The cumulative unpaid
Minimum Annual Distribution of $10.43 per Class A Unit at June
30, 1997 significantly exceeds the Partnership's net asset value
per Unit. The cumulative unpaid Minimum Annual Distribution was
calculated assuming that the conversion of 250,000 Class B Units
into Class A Units in 1997, as discussed below, had not been
deferred by the General Partner. In accordance with the
Partnership Agreement, Class B Units converted into Class A Units
are entitled to their proportionate share (based on the total
number of Class A Units outstanding) of the cumulative unpaid
Minimum Annual Distributions in their entirety.
55
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TAX, LEGALITY AND LIABILITY
Pursuant to Section 17.4 of the Partnership Agreement,
Coudert Brothers, counsel to the Partnership, and a Delaware
counsel selected by the Partnership will provide an opinion prior
to the Effective Time to the effect that neither the existence
nor the exercise of the power otherwise granted to the
Unitholders or any class thereof or the approval of the Merger by
the Unitholders would (i) cause the Partnership or its Operating
Partnerships to be classified as an association taxable as a
corporation rather than as a partnership for federal income tax
purposes, (ii) cause the loss of limited liability of the Partnership
under any operating partnership agreement of the Operating Partnerships or
of the Unitholders as limited partners under the Partnership
Agreement, or (iii) violate the Delaware Act.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed by the Partnership with the
Commission pursuant to the Exchange Act (Commission File No.
1-9563) are incorporated by reference herein:
1. Schedule 13E-3 Transaction Statement dated
July 7, 1997, as amended.
2. Annual Report on Form 10-K for the year ended
December 31, 1996.
3. Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997 and June 30, 1997.
4. Current Reports on Form 8-K dated January 15,
1997 and May 8, 1997.
THIS PROXY STATEMENT INCORPORATES BY REFERENCE DOCUMENTS
RELATING TO THE PARTNERSHIP WHICH ARE NOT PRESENTED HEREIN OR
DELIVERED HEREWITH. DOCUMENTS RELATING TO THE PARTNERSHIP (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE TO ANY
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY
STATEMENT IS DELIVERED, ON WRITTEN OR ORAL REQUEST, WITHOUT
CHARGE, FROM AIRCOA HOTEL PARTNERS, L.P., 5775 DTC BOULEVARD,
ENGLEWOOD, COLORADO 80111, ATTN: CORPORATE SECRETARY, TELEPHONE
(303) 220-2000. COPIES OF DOCUMENTS SO REQUESTED WILL BE SENT BY
FIRST CLASS MAIL, POSTAGE PAID, WITHIN ONE BUSINESS DAY OF THE
RECEIPT OF SUCH REQUEST.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED.
56
<PAGE>
SCHEDULE 1
The Partnership and the General Partner
Set forth below is the name, citizenship, current business
address, principal occupation and employment history for at least
the past five years of each director and executive officer of the
General Partner of the Partnership.
Daniel Bong Shu Yin Daniel Bong has served as a Director
for Century City, a Bermuda corporation
listed in Hong Kong and engaged in
property development and hotel ownership
and management, since 1989. He is
also a Director of the subsidiary
corporations of Century City and Paliburg,
Deputy Chairman of Regal Holdings
and has been a Director of RHM
since 1990. Mr. Bong is responsible for
overseeing the hotel operations and is a
qualified architect. Mr. Bong has served
as President/Chief Executive Officer
of RHI since October 1995 and as a Director
since May 1995. Mr. Bong's
business address is 18th floor, Paliburg
Plaza, 68 Ye Wo Street, Causeway Bay,
Hong Kong. Mr. Bong is a citizen of Canada.
Lawrence Lau Sui Keung Lawrence Lau joined Century City in 1994
and has served as a Director since
1995. He also serves as a Director of
Paliburg and Regal Holdings and has been a
Director of RHM since May 1995. Mr. Lau
is in charge of the overall financial
and accounting functions of Century City
and its subsidiaries. Mr. Lau served
as Group Controller (Finance) for Shaw
Brothers (H.K.) Ltd. from 1992 to
1994. From 1989 to 1992 he was Financial
Controller for Regal Pacific
Holdings Limited. Mr. Lau has served
as a Director of RHI since May 1995.
Mr. Lau's business address is 18th floor,
Paliburg Plaza, 68 Yee Wo Street,
Causeway Bay, Hong Kong. Mr. Lau is a
citizen of Canada.
Douglas M. Pasquale Douglas M. Pasquale has served as
President/CEO of the General Partner since
February 1996. He has also served as a
Director, President and Chief Executive
Officer of RHM since May 1995. He previously
served as an Executive Vice
President since February 1992 and was
appointed Chief Financial Officer in
August 1994. Mr. Pasquale joined the
General Partner in 1986 as Vice
President of Investor Services. Mr. Pasquale
did not serve as an officer of the
General Partner from August 1989 to
February 1992, but continued to serve as
Vice President of RHI during this time
period. Mr. Pasquale became a Director
of RHI in February 1993. Mr. Pasquale's
business address is 5775 DTC
Boulevard, Englewood, Colorado 80111. Mr.
Pasquale is a citizen of the United States.
Michael Sheh Michael Sheh has served as Executive Vice
President since February 1997. He
has served as Senior Vice President/
Treasurer of the General Partner since June
1995 and he has served as a Director
and Executive Vice President of RHM
since May 1995. Mr. Sheh served as
Vice President/Treasurer of RHI from
1989 to 1995, and as Senior Vice President
from 1995 to February 1997, when
he was elected Executive Vice President.
He became a Director of RHI in May
1995. Mr. Sheh's business address
is 5775 DTC Boulevard, Englewood,
Colorado 80111. Mr. Sheh is a citizen
of the United Kingdom.
Carol K. Werner Carol K. Werner served as General Counsel,
Secretary and Executive Vice
President of the General Partner from
1989 to March 1995. She also served as
Director, Executive Vice President and
Secretary of RHI and certain affiliates,
including RHM, from 1989 to 1995 and
is currently a director of RHI. Since
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August 1995, Ms. Werner has been working
with the Denver, Colorado office of
Coudert Brothers, an international law
firm. Ms. Werner was an associate of
Coudert Brothers prior to her employment
with the General Partner. Ms.
Werner's business address is 1999
Broadway, Suite 2235, Denver, Colorado
80202. Ms. Werner is a citizen of the
United States.
Anthony Williams Anthony Williams is the Chairman of
the executive committee of Coudert
Brothers, an international law firm, and
has been a partner since 1981. He has
served as a director of RHI and of the
General Partner since 1989. Mr. Williams
was also elected Chairman of RHI and certain
of its affiliates in May 1997. Mr.
Williams' business address is 1114
Avenue of the Americas, New York, New
York 10036. Mr. Williams is a citizen
of the United States.
There are no family relationships between any of the
directors or the executive officers of the General Partner.
Coudert Brothers, an international law firm of which Anthony
Williams and Carol Werner are attorneys, has provided legal
services for the Partnership and affiliates since the beginning
of 1989. Century City, Paliburg and Regal Holdings are affiliates of
the Partnership.
Century City International Holdings Limited
Set forth below is the name, citizenship, principal
occupation and employment history for at least the past five
years of each director and executive officer of Century City, the
ultimate parent company of Regal Holdings, RHM and Regal. The
principal executive offices of Century City and the business
address of each individual listed below is 18th Floor, Paliburg
Plaza, 68 Ye Wo Street, Causeway Bay, Hong Kong.
Lo Yuk Sui Lo Yuk Sui has served as Chairman and
Managing Director of Century City
since 1989 when Century City was
established in Bermuda as the ultimate
holding company of Century City and its
affiliates (the "Group"). Mr. Lo is
also the chairman and managing director
of Paliburg and Regal Holdings. Mr. Lo
is a qualified architect. He is also
the chairman of the Hong Kong Tourist
Association and a Council Member of the
Hong Kong Trade Development Council. Mr.
Lo is a citizen of Hong Kong.
Daniel Bong Shu Yin See "-- The Partnership and the General
Partner" above.
Michael Choi Chi Wing Michael Choi Chi Wing has served as
a Director of Century City since January
1996. Mr. Choi was previously with
the Group as a senior executive and
director for seven years prior to 1991.
Mr. Choi rejoined the Paliburg Group in
1993. He is a qualified architect and
has extensive experience in the property
development and investment business
as well as project management. Mr. Choi
is in charge of the property and construction
related businesses of the Group.
Mr. Choi is also the deputy managing
director of Paliburg and a director of Regal
Holdings. Mr. Choi is a citizen of the
United Kingdom.
Lawrence Lau Sui Keung See "-- The Partnership and the General
Partner" above.
Kenneth Ng Kwai Kai Kenneth Ng Kwai Kai has served as a
Director and Secretary of Century City
since 1989. Mr. Ng joined the Group in
1985. Mr. Ng is in charge of the
company secretarial and corporate finance
functions of the Group. Mr. Ng is a
chartered Secretary. He is also a director
of Paliburg and the secretary of Regal
Holdings. Mr. Ng is a citizen of Hong Kong.
John Poon Cho Ming John Poon Cho Ming has served as a Director
of Century City since 1993. Mr.
Poon joined the Group in 1990. Mr. Poon is
a qualified solicitor and in
S-2
<PAGE>
addition to being the Group General Counsel,
he is also responsible for the Group's
corporate finance functions. Mr. Poon is
a citizen of Canada.
Anthony Chuang Anthony Chuang has served as a non-Executive
Director of Century City since
1993. Mr. Chuang graduated from University
of Notre Dame, South Bend,
Indiana, and has extensive experience
in the commercial field. Mr. Chuang is a
citizen of Hong Kong.
Ng Siu Chan Ng Siu Chan has served as a non-Executive
Director of Century City since
1994. He is also a non-executive director
of Paliburg. Mr. Ng is the chairman and
general manager of Kowloon Development
Company Limited and a director of
The Kowloon Motor Bus Co. (1993) Limited,
both of which are publicly listed
in Hong Kong. Mr. Ng is a citizen of
the United Kingdom.
Regal Hotel Management, Inc. and Regal Merger Limited Partnership
Set forth below is the name, citizenship, current business
address, principal occupation and employment history for at least
the past five years of each director and executive officer of RHM,
the general partner of Regal.
Daniel Bong Shu Yin See "-- The Partnership and the General Partner" above.
Lawrence Lau Sui Keung See "-- The Partnership and the General Partner" above.
Douglas M. Pasquale See "-- The Partnership and the General Partner" above.
Michael Sheh See "-- The Partnership and the General Partner" above.
S-3
<PAGE>
Annex A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
AIRCOA HOTEL PARTNERS, L.P.,
AIRCOA HOSPITALITY SERVICES, INC.,
REGAL HOTEL MANAGEMENT, INC.
AND
REGAL MERGER LIMITED PARTNERSHIP
May 2, 1997
<PAGE>
TABLE OF CONTENTS
Page
RECITALS..........................................................1
ARTICLE I -- The Merger...........................................2
1.1 The Merger.............................................2
1.2 Effective Time of the Merger...........................2
1.3 Closing................................................2
1.4 Effects of the Merger; General Partner.................2
1.5 Governing Documents....................................2
1.6 Conversion of Securities...............................2
1.7 Payment................................................3
1.8 Delisting of Class A Units and Depositary Receipts.....4
1.9 Appraisal Rights.......................................4
ARTICLE II -- Approval of the Merger..............................4
2.1 Actions of the Partnership and the General Partner.....4
2.2 Proxy Statement........................................4
ARTICLE III -- Representations and Warranties of the Parent
and Regal..........................................5
3.1 Organization and Qualification.........................5
3.2 Authority Relative to this Agreement...................5
3.3 Compliance.............................................5
3.4 Documents and Information..............................6
3.5 Financing..............................................6
3.6 Solvency...............................................6
ARTICLE IV -- Representations and Warranties of the Partnership...6
4.1 Organization and Qualification.........................6
4.2 Capitalization.........................................6
4.3 Fees...................................................7
4.4 Documents and Information..............................7
4.5 Opinion of Financial Advisor...........................7
ARTICLE V -- Covenants............................................7
5.1 Legal Conditions to the Merger.........................7
5.2 State Statutes.........................................7
5.3 Special Committee......................................7
ARTICLE VI -- Additional Agreements...............................8
6.1 Public Announcements...................................8
6.2 Expenses...............................................8
ARTICLE VII -- Conditions Precedent...............................8
7.1 Certain Conditions on the Obligation of Regal to
Consummate the Merger..................................8
7.2 Obligation of Each Party to Effect the Merger..........8
A-i
<PAGE>
ARTICLE VIII -- Termination.......................................9
8.1 Termination............................................9
8.2 Effect of Termination.................................10
ARTICLE IX -- General Provisions.................................10
9.1 Amendment.............................................10
9.2 Extension; Waiver.....................................10
9.3 Nonsurvival of Representations, Warranties and
Agreements............................................10
9.4 Entire Agreement; Counterparts........................10
9.5 Severability..........................................11
9.6 Notices...............................................11
9.7 Interpretation........................................12
9.8 Headings..............................................12
9.9 Assignment............................................12
9.10 Governing Law........................................12
9.11 Consent to Jurisdiction; Service of Process..........12
9.12 Limitation of Liability..............................13
9.13 Limitation of Remedies...............................13
A-ii
<PAGE>
AGREEMENT AND PLAN OF MERGER (this "Agreement") dated
as of May 2, 1997, among AIRCOA HOTEL PARTNERS, L.P., a Delaware
limited partnership (the "Partnership"), AIRCOA HOSPITALITY
SERVICES, INC., a Delaware corporation (the "General Partner"),
REGAL HOTEL MANAGEMENT, INC., a Delaware corporation (the
"Parent"), and REGAL MERGER LIMITED PARTNERSHIP, a Delaware
limited partnership and a direct, wholly owned subsidiary of the
Parent ("Regal").
RECITALS
WHEREAS, the Partnership has heretofore issued Class A
limited partnership units (the "Class A Units") and Class B
limited partnership units (the "Class B Units" and, together with
the Class A Units, the "Units"), each representing limited
partner interests in the Partnership;
WHEREAS, all outstanding Class A Units have been
deposited with a depository (the "Depositary") designated by the
General Partner, pursuant to the terms of a Deposit Agreement
(the "Deposit Agreement") among the General Partner (both
individually and as attorney-in-fact for the holders of Class A
Units), the Depositary, the Partnership and all holders from time
to time of Class A Units represented by depositary receipts
("Depositary Receipts") or certificates (together with the Class
B Units represented by certificates, "Certificates");
WHEREAS, the General Partner is the sole general
partner of the Partnership;
WHEREAS, each of the Parent and Regal is an affiliate
(as used herein, such term shall have the meaning set forth in
the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder (the "Exchange Act")) of the General
Partner;
WHEREAS, the Parent wishes to merge Regal with and
into the Partnership (the "Merger") pursuant and subject to the
terms and conditions of this Agreement, whereby each issued and
outstanding Unit not owned directly or indirectly by Regal, the
Parent or their affiliates will be converted into the right to
receive $3.10 per Class A Unit and $20.00 per Class B Unit (the
"Merger Consideration");
WHEREAS, the Board of Directors of the General Partner
has established a special committee consisting of persons not
otherwise affiliated with the General Partner (the "Special
Committee"), and has charged the Special Committee to negotiate
and determine the fairness of this Agreement and to, among other
things, approve any amendment of or waiver pursuant to this
Agreement on behalf of the Partnership;
WHEREAS, the Special Committee has considered the
fairness of this Agreement and the Merger to the holders of Units
("Unitholders"), other than the Parent and its affiliates (the
"Unaffiliated Unitholders"), and, subject to the terms and
conditions of this Agreement, (i) determined that the Merger is
fair to and in the best interests of the Unaffiliated
Unitholders, (ii) recommended that the General Partner approve
this Agreement and (iii) recommended that the Merger be approved
by the Unitholders;
WHEREAS, the General Partner, on its own behalf and on
behalf of the Partnership, and the Parent, on its own behalf and
on behalf of Regal, have duly approved this Agreement and the
Merger pursuant hereto, and the General Partner has determined,
upon the recommendation of the Special Committee, that the Merger
is fair to and in the best interests of the Unitholders and,
subject to the terms and conditions of this Agreement, has
recommended that the Merger be accepted by the Unitholders; and
WHEREAS, the Parent and affiliates of the Parent
holding, in the aggregate, approximately 71.0% of the outstanding
Class A Units and approximately 93.6% of the outstanding Class B
Units have agreed to submit this Agreement and the Merger to the
Unitholders for approval and adoption at a meeting of Unitholders
called for such purpose (the "Merger Meeting") pursuant to
Section 17.4 of the Agreement of Limited Partnership of AIRCOA
Hotel Partners, L.P., dated July 30, 1987 (as amended, the
"Partnership Agreement").
A-1
<PAGE>
NOW THEREFORE, in consideration of the mutual benefits
to be derived from this Agreement and of the representations,
warranties, agreements and conditions contained in this
Agreement, the parties agree as follows:
ARTICLE I
The Merger
1.1 The Merger. In accordance with and subject to (a)
the provisions of this Agreement, (b) the Certificate of Merger
(as hereinafter defined), and (c) the Delaware Revised Uniform
Limited Partnership Act (the "Delaware Partnership Act"), at the
Effective Time (as hereinafter defined), Regal shall be merged
with and into the Partnership in the Merger. As a result of the
Merger, the separate existence of Regal shall cease, and the
Partnership shall continue as the surviving partnership. The
Partnership is hereinafter sometimes referred to as the
"Surviving Partnership."
1.2 Effective Time of the Merger. Subject to the
provisions of this Agreement, an appropriate form of certificate
of merger (the "Certificate of Merger") shall be duly executed
and filed by the Partnership and Regal on the Closing Date (as
hereinafter defined) in the manner provided in Section 17-211 of
the Delaware Partnership Act. The Merger shall become effective
at such time on the Closing Date as the Certificate of Merger is
filed with the Secretary of State of the State of Delaware (or
such later time as may be specified in the Certificate of Merger)
(the "Effective Time").
1.3 Closing. Unless this Agreement shall have been
terminated and the transactions contemplated by this Agreement
shall have been abandoned pursuant to the provisions of Article
VIII, and subject to the provisions of Sections 7.1 and 7.2
hereof, the closing of the Merger (the "Closing") will take place
at 10:00 a.m., Denver time, on the first Business Day (as
hereinafter defined) occurring after the Merger Meeting (which
shall occur after the passage of 20 business days from and after
the mailing of the Proxy Statement (as defined below) to
Unitholders) or, if later, the date which is the first Business
Day after all of the conditions set forth in Sections 7.1 and 7.2
hereof shall have been satisfied (or waived in accordance with
Section 9.2 hereof), or such other date and time which is
agreed to in writing by the parties (the "Closing Date"). The
Closing shall take place at the offices of the Partnership at
5775 DTC Boulevard, Englewood, Colorado 80111, unless another
place is agreed to by the parties. For purposes of this
Agreement, "Business Day" shall mean any day except Saturday,
Sunday or any day on which banks are generally not open for
business in Denver, Colorado.
1.4 Effects of the Merger; General Partner. The Merger
shall, from and after the Effective Time, have the effects
provided for in the Delaware Partnership Act. The General Partner
shall be the general partner of the Surviving Partnership until
its resignation or removal or until its successor is duly
qualified.
1.5 Governing Documents. Following the Effective Time,
the Partnership Agreement of the Partnership shall be the
partnership agreement of the Surviving Partnership, until amended
in accordance with the provisions thereof and applicable law.
1.6 Conversion of Securities. At the Effective Time,
by virtue of the Merger and without any action on the part of
Regal, the Partnership, the Surviving Partnership or any holder
of any of the following securities:
(a) Each Class A Unit which is issued and outstanding
immediately prior to the Effective Time (other than Class A
Units owned by Regal Hotels International Holdings Limited,
a Bermuda company and an indirect parent of each of the
General Partner, the Parent and Regal ("Regal Holdings"),
or any direct or indirect subsidiary of Regal Holdings)
shall be canceled, extinguished and retired, and be
converted into and become a right to receive $3.10 in cash,
without interest (the "Class A Merger Consideration");
A-2
<PAGE>
(b) Each Class B Unit which is issued and outstanding
immediately prior to the Effective Time (other than Class B
Units owned by Regal Holdings or any direct or indirect
subsidiary of Regal Holdings) shall be canceled,
extinguished and retired, and be converted into and become
a right to receive $20.00 in cash, without interest (the
"Class B Merger Consideration" and, together with the Class
A Merger Consideration, the "Merger Consideration");
(c) Each Unit which is issued and outstanding
immediately prior to the Effective Time and owned by Regal
Holdings or any direct or indirect subsidiary of Regal
Holdings shall be and remain a unit of limited partnership
interest in the Surviving Partnership;
(d) Each partnership interest, general or limited, of
Regal issued and outstanding immediately prior to the
Effective Time shall be canceled, extinguished and retired,
and no payment shall be made thereon; and
(e) The General Partner's general partnership interest
in the Partnership shall be and remain a general
partnership interest in the Surviving Partnership.
1.7 Payment. (a) From and after the Effective Time,
a bank or trust company organized under the laws of the United
States or any state thereof with capital, surplus and
undivided profits of at least $100,000,000 that is designated by the
Parent (the "Payment Agent") shall act as payment agent in effecting
the payment of the Merger Consideration for Units pursuant to
Sections 1.6(a) and 1.6(b) hereof. At or before the Effective
Time, the Parent or Regal shall deposit with the Payment Agent
the aggregate Merger Consideration in trust for the benefit of
the Unaffiliated Units. Promptly after the Effective Time, the
Payment Agent shall mail to each record holder of Depository
Receipts or Certificates a form of letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss
and title to such Depositary Receipts or Certificates shall pass,
only upon delivery of such Depositary Receipts or Certificates to
the Payment Agent) and instructions for use in surrendering such
Depositary Receipts or Certificates and receiving the Merger
Consideration for each Unit previously represented thereby. Upon
the surrender of each such Depositary Receipt or Certificate and
the payment by the Payment Agent of the Merger Consideration in
exchange therefor, such Depositary Receipts and Certificates
shall forthwith be canceled. Until so surrendered and exchanged,
each such Depositary Receipt or Certificate (other than
Depositary Receipts or Certificates representing Units held by
Regal Holdings or any direct or indirect subsidiary of Regal
Holdings) shall represent solely the right to receive the Class A
Merger Consideration or the Class B Merger Consideration, as
applicable, multiplied by the number of Class A Units or Class B
Units, respectively, represented by such Depositary Receipt or
Certificate, and the holder thereof shall have no rights
whatsoever as a Unitholder of the Partnership or the Surviving
Partnership. Upon the surrender of such outstanding Depositary
Receipt or Certificate, the holder shall receive such Merger
Consideration, without any interest thereon. If any cash is to be
paid to a name other than the name in which the Depositary
Receipt or Certificate surrendered in exchange therefor is
registered, it shall be a condition to such payment that the
person requesting such payment shall pay to the Payment Agent any
transfer or other taxes required by reason of the payment of such
cash to a name other than that of the registered holder of the
Depositary Receipt or Certificate surrendered, or such person
shall establish to the satisfaction of the Payment Agent that
such tax has been paid or is not applicable. Notwithstanding the
foregoing, neither the Payment Agent nor any party hereto shall
be liable to a holder of Depositary Receipts or Certificates for
any Merger Consideration or other payments made to a public
official pursuant to applicable abandoned property laws. The
Surviving Partnership and the Payment Agent shall be entitled to
deduct and withhold from the Merger Consideration otherwise
payable to a holder of Units pursuant to the Merger any taxes or
other amounts as are required by applicable law, including
without limitation Sections 3406 and 1445 of the Internal Revenue
Code of 1986. To the extent that amounts are so withheld by the
Surviving Partnership or the Payment Agent, they shall be treated
for all purposes of this Agreement as having been paid to the
holder of the Units in respect of which such deduction and
withholding was made.
(b) Six (6) months after the Closing Date, the
Surviving Partnership shall be entitled to the return of all
amounts then held by the Payment Agent pursuant to Section 1.7(a)
(including earnings thereon), and the Payment Agent's duties
shall terminate. Thereafter, any holder of a Depositary Receipt
or Certificate shall
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look only to the Surviving Partnership (subject to
applicable abandoned property, escheat and similar laws) as a
general creditor to receive in exchange therefor the Merger
Consideration, without any interest thereon.
(c) At and after the Effective Time, there shall be no
transfers on the books of the Surviving Partnership of any Unit
other than Units which remain outstanding pursuant to Section
1.6(b) hereof. As of the Effective Time, each holder of a Unit
which was converted into the right to receive cash pursuant to
Section 1.6(a) hereof shall be deemed to have withdrawn as a
limited partner and shall have no further interest in the
Partnership or the Surviving Partnership or any allocations or
distributions of income, property or otherwise, other than the
right to receive the Merger Consideration as provided in this
Article I.
1.8 Delisting of Class A Units and Depositary
Receipts. Following the Effective Time, the General Partner, on
behalf of the Partnership, shall take all actions necessary to
effect the delisting of the Class A Units and the Depositary
Receipts from the American Stock Exchange and the deregistration
of the Class A Units and the Depositary Receipts with the
Securities and Exchange Commission (the "Commission").
1.9 Appraisal Rights. Unitholders shall not have any
appraisal or dissenters' rights in connection with the Merger.
ARTICLE II
Approval of the Merger
2.1 Actions of the Partnership and the General
Partner. (a) The General Partner hereby consents to the Merger,
agrees in all respects with the terms of this Agreement and,
subject to the terms and conditions of this Agreement, the
consummation of the transactions contemplated hereby. In
connection therewith, pursuant to the Delaware Partnership Act
and Article VIII of the Partnership Agreement, by executing this
Agreement, the General Partner, as the sole general partner of
the Partnership, consents to and approves in all respects this
Agreement and the transactions contemplated hereby (including,
without limitation, the Merger) on behalf of the Partnership. The
General Partner hereby represents that, at a meeting of its Board
of Directors duly called and held on May 2, 1997, (i) such Board
approved, upon the recommendation of the Special Committee, this
Agreement and the Merger and has determined that the Merger,
considered as a whole, is fair to and in the best interests of
the Unaffiliated Unitholders and (ii) such Board recommended that
the Unitholders of the Partnership approve and adopt this
Agreement and the Merger.
(b) Each of the General Partner, the Parent and
affiliates of the Parent holding, in the aggregate, approximately
71.0% of the outstanding Class A Units and approximately 93.6% of
the outstanding Class B Units, shall approve and consent to this
Agreement and the Merger by a vote in person or by proxy at the
Merger Meeting to be held twenty (20) calendar days from and
after the mailing of the Proxy Statement to the Unitholders.
2.2 Proxy Statement. Promptly following the execution
of this Agreement, the Partnership shall prepare (and Regal shall
cooperate in preparing) and as soon as reasonably practicable
thereafter shall file with the Commission a preliminary Proxy
Statement with respect to the Merger. Subject to compliance with
the rules and regulations of the Commission, the Partnership
shall thereafter file with the Commission and mail to Unitholders
a definitive Proxy Statement with respect to the Merger (the
"Proxy Statement"). The term "Proxy Statement" shall mean such
Proxy Statement at the time it initially is mailed to the
Unitholders and all amendments
or supplements thereto, if any, similarly filed and mailed. Regal
and the Partnership each agree to correct any information
provided by it for use in the Proxy Statement which shall have
become false or misleading in any material respect.
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ARTICLE III
Representations and Warranties of the Parent and Regal
The Parent and Regal, jointly and severally, represent
and warrant at the date hereof to the Partnership as follows:
3.1 Organization and Qualification. Regal is a limited
partnership duly formed, validly existing and in good standing
under the laws of the State of Delaware, with the requisite power
and authority to carry on its respective business as now
conducted. The Parent is the sole general partner of Regal. The
Parent is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has the
requisite corporate power and authority to carry on its
respective business as now conducted. Each of the Parent and
Regal is duly qualified to do business, and is in good standing,
in each jurisdiction where the character of its properties owned
or leased or the nature of its activities makes such
qualification necessary, except where the failure to be so
qualified or in good standing would not, in the aggregate, have a
material adverse effect on the Parent and its subsidiaries, taken
as a whole. Copies of the charter and bylaws of the Parent and
the Certificate of Limited Partnership and the Limited
Partnership Agreement of Regal (such documents, the
"Organizational Documents") previously delivered to the
Partnership are accurate and complete as of the date hereof.
3.2 Authority Relative to this Agreement. Each of the
Parent and Regal has the requisite power and authority to enter
into this Agreement and to perform its obligations hereunder. The
execution, delivery and performance of this Agreement by the
Parent and Regal and the consummation by the Parent and Regal of
the transactions contemplated hereby have been duly authorized by
the Board of Directors of the Parent, including in the Parent's
capacity as general partner of Regal, and no other action or
proceeding on the part of the Parent or Regal is necessary to
authorize the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated
hereby. This Agreement has been duly executed and delivered by
the Parent and Regal and constitutes a valid and binding
obligation of each of them, enforceable in accordance with its
terms, except to the extent that its enforceability may be
limited by applicable bankruptcy, insolvency, reorganization or
other laws affecting the enforcement of creditors' rights
generally or by general equitable principles.
3.3 Compliance. (a) Neither the execution and delivery
of this Agreement by the Parent and Regal nor the consummation of
the transactions contemplated hereby nor compliance by the Parent
and Regal with any of the provisions hereof will (i) violate,
conflict with, or result in a breach of any provision of, or
constitute a default (or an event which, with notice or lapse of
time or both, would constitute a default) under, or result in the
termination of, or accelerate the performance required by, or
result in a right of termination or acceleration under, or result
in the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of the Parent or
Regal or any other direct or indirect subsidiary of the Parent
under, any of the terms, conditions or provisions of (x)
the respective Organizational Documents of the Parent or Regal or
any partnership agreement or charter or bylaws of any other
direct or indirect subsidiary of the Parent or (y) any material
note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which the Parent
or Regal or any other direct or indirect subsidiary of the Parent
is a party, or to which any of them, or any of their respective
properties or assets, may be subject, or (ii) subject to
compliance with the statutes and regulations referred to in the
next paragraph, violate any judgment, ruling, order, writ,
injunction, decree, statute, rule or regulation applicable to the
Parent or Regal or any other direct or indirect subsidiary of the
Parent or any of their respective properties or assets, except,
in the case of each of clauses (i) and (ii) above, for such
violations, conflicts, breaches, defaults, terminations,
accelerations or creations of liens, security interests, charges
or encumbrances, which, in the aggregate, would not have a
material adverse effect on the transactions contemplated hereby
or on the condition (financial or other), business or operations
of the Parent and its subsidiaries taken as a whole (a "Material
Adverse Effect on the Parent").
(b) Other than in connection with or in compliance
with the provisions of the Delaware Partnership Act, the Exchange
Act, any state "anti-takeover" ("State Takeover Laws") or "blue
sky" laws ("Blue Sky Laws") or other similar statutes and
regulations, no notice to, filing with, or authorization, consent
or approval of, any domestic or foreign public body or authority
is necessary for the consummation by the Parent or Regal of
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the transactions contemplated by this Agreement, except where failure
to give such notice, make such filings, or obtain authorizations,
consents or approvals would not, in the aggregate, have a
Material Adverse Effect on the Parent.
3.4 Documents and Information. The information
supplied by the Partnership, Parent or Regal expressly for
inclusion in the Proxy Statement shall not, (i) at the time of
the mailing thereof and (ii) at the Closing Date, contain any
untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.
3.5 Financing. The Parent has sufficient available
funds to consummate the Merger, and shall make such funds
available to Regal for such purposes.
3.6 Solvency. At the Effective Time and after giving
effect to any changes in the Parent's, Regal's or the Surviving
Partnership's assets and liabilities as a result of the Merger,
none of the Parent, Regal or the Surviving Partnership will (i)
be insolvent (either because its financial condition is such that
the sum of its debts is greater than the fair value of its assets
or because the present fair salable value of its assets will be
less than the amount required to pay its probable liability on
its debts as they become absolute and matured); (ii) have
unreasonably small capital with which to engage in its business;
or (iii) have incurred or plan to incur debts beyond its ability
to pay as they become absolute and matured.
ARTICLE IV
Representations and Warranties of the Partnership
The Partnership represents and warrants to each of the
Parent and Regal at the date hereof as follows:
4.1 Organization and Qualification. The Partnership is
a limited partnership duly formed, validly existing and in good
standing under the laws of the State of Delaware and has the
requisite power and authority to carry on its business as it is
now being conducted. The Partnership is duly qualified to do
business, and is in good standing, in each jurisdiction where the
character of its properties owned or leased or the nature of its
activities makes such qualification necessary, except where the
failure to be so qualified or in good standing would not, in the
aggregate, have a material adverse effect on the Partnership and
its subsidiaries, taken as a whole. Copies of the Partnership
Agreement and the Certificate of Limited Partnership of the
Partnership which have heretofore been delivered to the Parent
are accurate and complete as of the date hereof.
4.2 Capitalization. As of the date hereof, there are
5,340,214 Class A Units and 950,000 Class B Units issued and
outstanding. All such Units have been validly issued. Other than
such Class A Units and Class B Units and the General Partner's
general partnership interest, there are no equity securities of
the Partnership authorized or outstanding, and, other than (a)
the Class B Units which are convertible into Class A Units and
(b) two promissory notes of the Partnership dated June 8, 1995,
payable to the General Partner, in the principal amounts of $2.1
million and $6 million, which are convertible into Class A Units,
there are no outstanding options, warrants, rights to subscribe
to (including any preemptive rights), calls or commitments of any
character whatsoever to which the Partnership or any subsidiary
of the Partnership is a party or may be bound, requiring the
issuance or sale of any Units or other equity securities of the
Partnership or securities or rights convertible into or
exchangeable for such Units or other equity securities, and there
are no contracts, commitments, understandings or arrangements by
which the Partnership is or may become bound to issue additional
Units or other equity securities or options, warrants or rights
to purchase or acquire any additional Units or other equity
securities or securities convertible into or exchangeable for
such Units or other equity securities.
None of the Units are held by the Partnership in treasury.
4.3 Fees. The Special Committee has not paid or agreed
to pay any fee or commission to any broker, finder or
intermediary in connection with the transactions contemplated
hereby.
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4.4 Documents and Information . The information
supplied by the Partnership expressly for inclusion in the Proxy
Statement shall not, (i) at the time of the mailing thereof and
(ii) at the Closing Date, contain any untrue statement of a
material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.5 Opinion of Financial Advisor. Houlihan Lokey,
the financial advisor to the Special Committee (the "Financial
Advisor"), has delivered to the Special Committee its written
opinion, dated May 2, 1997, that the Merger Consideration to be
received by the Unitholders pursuant to the Merger, taken as a
whole, is fair, from a financial point of view, to the
Unaffiliated Unitholders.
ARTICLE V
Covenants
5.1 Legal Conditions to the Merger. The General
Partner (on behalf of itself and the Partnership), Regal and the
Parent shall take all reasonable actions necessary to comply
promptly with all legal requirements with respect to the Merger
and shall take all reasonable action necessary to cooperate
promptly with and furnish information to the other parties in
connection with any such requirements. The General Partner (on
behalf of itself and the Partnership), Regal and the Parent shall
take all reasonable actions necessary (i) to obtain (and will
take all reasonable actions necessary to promptly cooperate with
the other parties in obtaining) any consent, authorization, order
or approval of, or any exemption by, any administrative agency or
commission or other governmental authority or instrumentality (a
"Governmental Entity"), or other third party, required to be
obtained or made (or cooperate in the obtaining of any thereof
required to be obtained) in connection with the Merger or the
taking of any action contemplated by this Agreement; (ii) to
lift, rescind or mitigate the effect of any injunction or
restraining order or other order adversely affecting the
consummation of the transactions contemplated hereby; (iii) to
fulfill all conditions pursuant to this Agreement; and (iv) to
prevent, with respect to a threatened or pending temporary,
preliminary or permanent injunction or other order, decree or
ruling, the entry thereof.
5.2 State Statutes. If any State Takeover Law shall
become applicable to the transactions contemplated by this
Agreement, the parties hereto shall use their reasonable efforts
to take such actions as are necessary so that the transactions
contemplated by this Agreement may be consummated as promptly as
practicable on the terms contemplated by this Agreement and
otherwise to minimize the effects of such State Takeover Law on
the transactions contemplated by this Agreement.
5.3 Special Committee. Prior to the Effective Time or
the earlier termination of this Agreement, the Parent and the
General Partner shall take all actions necessary such that the
Special Committee shall continue in existence without diminution
of any of its powers or duties.
ARTICLE VI
Additional Agreements
6.1 Public Announcements. The General Partner, on
behalf of itself and the Partnership, and the Parent, on behalf
of itself and Regal, shall consult with each other before issuing
any press release or otherwise making any public statements with
respect to this Agreement or the Merger and shall not issue any
such press release or make such public statement prior to such
consultation except as may be required by law or the rules of the
American Stock Exchange.
6.2 Expenses. Parent shall bear all costs and expenses
of each party hereto incurred in connection with the transactions
contemplated by this Agreement.
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ARTICLE VII
Conditions Precedent
7.1 Certain Conditions on the Obligation of Regal to
Consummate the Merger.
(a) The obligations of Regal to effect the Merger
shall be subject to the fulfillment of the following
conditions, any or all of which may be waived by Regal in
its sole discretion:
(i) except for changes in the business or
conditions of the Partnership, financial or otherwise,
or in the results of operations of the Partnership,
occurring prior to the date of this Agreement, or
expected by the management of the General Partner to
occur based on events occurring prior to the date of
this Agreement, there shall not have occurred any
material adverse change in the business or condition
of the Partnership, financial or otherwise, or in the
results of operations of the Partnership from that set
forth in or contemplated by the financial statements
of the Partnership for the year ended December 31,
1996;
(ii) there shall not be pending or threatened
against the Partnership, or any subsidiary of the
Partnership, any action, suit or proceeding involving
a claim at law or in equity or before or by any
Governmental Entity, domestic or foreign, that would
be reasonably likely to have a Material Adverse Effect
on the Partnership; and
(iii) there shall not be pending or threatened
against the Partnership, the General Partner, the
Parent, Regal, or any of their respective affiliates
or their respective properties or businesses, any
other action, suit or proceeding involving a claim at
law or in equity or before or by any federal, state,
or municipal or other court of competent jurisdiction
or other Governmental Entity, relating to the Merger
or this Agreement that would be reasonably likely to
have a Material Adverse Effect on the Partnership.
(b) The parties hereto agree that in exercising its
discretion to waive or require the fulfillment of the
conditions prescribed in Section 7.1(a) above, Regal shall
not be required to consider the interests of any person or
entity that may be affected by the Merger other than Regal,
and that Regal shall have no obligation, fiduciary or
otherwise, to the limited partners of the Partnership or
the General Partner in exercising its discretion under
Section 7.1(a).
7.2 Obligation of Each Party to Effect the Merger. The
respective obligations of each party generally to effect the
Merger shall be subject to the fulfillment at or prior to the
Effective Time of the following conditions:
(a) This Agreement and the Merger shall have been approved
and adopted by a Majority Interest (as defined in the Partnership
Agreement);
(b) Neither the execution and delivery of this Agreement
by the Partnership nor the consummation of the transactions
contemplated hereby nor compliance by the Partnership with
any of the provisions hereof shall (i) violate, conflict
with, or result in a breach of any provision of, or
constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under,
or result in the termination of, or accelerate the
performance required by, or result in a right of
termination or acceleration under, or result in the
creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of the
Partnership or any direct or indirect subsidiary of the
Partnership under any of the terms, conditions or
provisions of (x) the Partnership Agreement or any other
partnership agreement or charter or bylaws of any direct or
indirect subsidiary of the Partnership or (y) any material
note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which
the Partnership or any direct or indirect subsidiary of the
Partnership is a party, or to which any of them, or any of
their respective properties or assets, may be subject, or
(ii) violate any judgment, ruling, order, writ, injunction,
decree, statute, rule or regulation applicable to the
Partnership or any direct or indirect subsidiary of the
Partnership or any of their respective properties or
assets, except, in the case of
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each of clauses (i) and (ii) above, for such
violations, conflicts, breaches, defaults, terminations,
accelerations or creations of liens, security interests, charges
or encumbrances, which would not, in the aggregate, have a
material adverse effect on the transactions contemplated hereby
or on the condition (financial or other), business or operations
of the Partnership and its subsidiaries, taken as a whole (a
"Material Adverse Effect on the Partnership");
(c) The Financial Advisor shall not have withdrawn or
modified in any manner materially adverse to the Parent,
Regal, the Partnership or any holder of Units its opinion
as described in Section 4.5; and
(d) No preliminary or permanent injunction or other
order, decree or ruling issued by a court of competent
jurisdiction or by a Governmental Entity nor any statute,
rule, regulation or executive order promulgated or enacted
by any Governmental Entity shall be in effect, which would
make the acquisition or holding by the Parent, its
subsidiaries or affiliates of the Units of the Surviving
Partnership illegal or otherwise prevent the consummation
of the Merger or make the consummation of the Merger
illegal.
ARTICLE VIII
Termination
8.1 Termination. This Agreement may be terminated, and
the Merger contemplated herein may be abandoned, at any time
prior to the Effective Time, whether prior to or after approval
of the Merger by the Unitholders:
(a) by mutual written consent of the Board of
Directors of the Parent, on behalf of the Parent and Regal,
and the General Partner of the Partnership, with the
concurrence of the members of the Special Committee; or
(b) by the Partnership (which shall so act only if
requested by the Special Committee) if the Parent or Regal
breaches in any material respect any of its
representations, warranties, covenants or agreements
contained in this Agreement (other than any breach caused
by the Partnership) or if the Financial Advisor shall have
withdrawn or modified in any manner adverse to the
Partnership, the holder of any Units, the Parent or Regal
its opinion as described in Section 4.5; or
(c) by the Parent, if the Partnership breaches in any
material respect any of its representations, warranties,
covenants or agreements contained in this Agreement (other
than any breach caused by the Parent or any affiliate of
the Parent) or if the Special Committee shall have
withdrawn or modified in any manner adverse to the Parent
or Regal its recommendation of the Merger or this Agreement
or if the Financial Advisor shall have withdrawn or
modified in any manner adverse to the Partnership, the
holder of any Units, the Parent or Regal its opinion as
described in Section 4.5; or
(d) by either the Parent or the Partnership (with the
concurrence of the members of the Special Committee, if
terminated by the Partnership):
(i) if the Merger has not been consummated prior
to September 30, 1997; or
(ii) if any court of competent jurisdiction or
other Governmental Entity shall have issued an order,
decree or ruling, or taken any other action
restraining, enjoining or otherwise prohibiting the
Merger and such order, decree, ruling or other action
shall have become final and non-appealable.
8.2 Effect of Termination. In the event of the
termination of this Agreement as provided in Section 8.1 hereof,
this Agreement shall forthwith become void, and there shall be no
liability on the part of the Parent, Regal, the General Partner
or the Partnership.
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ARTICLE IX
General Provisions
9.1 Amendment. This Agreement may not be amended except
by (i) an instrument in writing signed on behalf of each of the
parties hereto and (ii) prior approval of such amendment by the
members of the Special Committee; provided, however, that after
approval of the Merger by the Unitholders, no amendment may be
made without the further approval of a Majority Interest (as
defined in the Partnership Agreement) which would either (a)
alter or change the Merger Consideration or (b) alter or change
any other terms and conditions of this Agreement, if any of such
alterations or changes, alone or in the aggregate, would
materially adversely affect the Unitholders.
9.2 Extension; Waiver. At any time prior to the
Effective Time, whether before or after the mailing of the Proxy
Statement, any party hereto may (i) extend the time for the
performance of any of the obligations or other acts of any other
party hereto; (ii) waive any inaccuracies in the representations
and warranties contained in this Agreement; and (iii) waive
compliance with any of the agreements of the other parties or
conditions to its own obligations contained in this Agreement.
Any agreement on the part of a party hereto to any such extension
or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party by a duly authorized
officer and, if given by the Partnership, approved by the members
of the Special Committee. No such consent or waiver of compliance
given by any of the parties hereto shall operate as a consent or
waiver of compliance in respect of any subsequent default, breach
or non-observance, whether of the same or any other nature.
9.3 Nonsurvival of Representations, Warranties and
Agreements. The respective representations and warranties of the
Partnership, the Parent and Regal contained herein shall expire
with, and be terminated and extinguished upon, consummation of
the Merger, and thereafter none of the Partnership, the Parent or
Regal or any officer, director or principal thereof shall be
under any liability whatsoever with respect to any such
representation or warranty. This Section 9.3 shall have no effect
upon any other obligation of the parties hereto, whether to be
performed before or after the consummation of the Merger.
9.4 Entire Agreement; Counterparts. (a) This Agreement
contains the entire agreement among the Partnership, the Parent
and Regal with respect to the subject matter hereof and
supersedes all prior arrangements and understandings, both
written and oral, among such parties with respect thereto.
(b) This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same
agreement and shall become effective when one or more
counterparts have been signed by each of the parties and
delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
9.5 Severability. It is the desire and intent of the
parties that the provisions of this Agreement be enforced to the
fullest extent permissible under the law and public policies
applied in each jurisdiction in which enforcement is sought.
Accordingly, in the event that any provision of this Agreement
would be held in any jurisdiction to be invalid, prohibited or
unenforceable for any reason, such provision, as to such
jurisdiction, shall be ineffective, without invalidating the
remaining provisions of this Agreement or affecting the validity
or enforceability of such provision in any other jurisdiction.
Notwithstanding the foregoing, if such provision could be more
narrowly drawn so as not to be invalid, prohibited or
unenforceable in such jurisdiction, the parties shall adopt an
amendment hereto in accordance with the provisions of Section 9.1
hereof in which such provision, as to such jurisdiction, is so
narrowly drawn, without invalidating the remaining provisions of
this Agreement or affecting the validity or enforceability of
such provision in any other jurisdiction.
9.6 Notices. All notices and other communications
hereunder shall be in writing and shall be deemed to be
sufficient if contained in a written instrument and shall be
deemed to have been duly given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or
mailed by registered or certified
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mail (return receipt requested), postage prepaid, to
the parties at the following addresses (or at such other
addresses as shall be specified by a party by like notice):
(a) If to the Parent or Regal:
REGAL HOTEL MANAGEMENT, INC.
5775 DTC Boulevard
Englewood, Colorado 80111
Attention: Douglas M. Pasquale, President
Telecopier: (303) 220-2120
with a copy to:
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attention: Paul J. Shim, Esq.
Telecopier: (212) 225-3999
(b) If to the Partnership or the General Partner:
AIRCOA HOTEL PARTNERS, L.P.
5775 DTC Boulevard
Englewood, Colorado 80111
Attention: Douglas M. Pasquale, President
Telecopier: (303) 220-2120
with a copy to:
Holland & Hart LLP
Suite 3200
555 Seventeenth Street
Denver, Colorado 80201
Attention: Michael S. Quinn, Esq.
Telecopier: (303) 295-8261
and
Hire & Associates
1383 Solitude Lane
Evergreen, Colorado 80439
Attention: Mr. James W. Hire
Telecopier: (303) 670-9967
and
Miramar Asset Management, Inc.
617 Veterans Boulevard
Suite 212
Redwood City, California 94063
Attention: Mr. Anthony C. Dimond
Telecopier: (415) 599-9234
A-11
<PAGE>
All such notices and other communications shall be deemed to have
been received (a) in the case of personal delivery, on the date
of such delivery if received prior to 5:00 p.m. New York City
time on such date, (b) in the case of a telecopy, when the party
receiving such telecopy shall have confirmed receipt of the
communication, (c) in the case of delivery by nationally
recognized overnight courier, on the Business Day following
dispatch and (d) in the case of mailing, on the third Business
Day following such mailing.
9.7 Interpretation. When a reference is made in this
Agreement to subsidiaries of Regal Holdings, the Parent, Regal or
the Partnership, the word "subsidiaries" means any corporation
more than 50% of whose outstanding voting securities, or any
partnership, joint venture or other entity more than 50% of whose
total equity interest, is directly or indirectly owned by the
Parent, Regal, or the Partnership, as the case may be. For
purposes of this Agreement, the Partnership shall not be deemed
to be an affiliate or subsidiary of the Parent or Regal.
9.8 Headings. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
9.9 Assignment. This Agreement is not intended to confer
upon any person other than the parties any rights or remedies hereunder.
This Agreement shall not be assigned by operation of law or otherwise;
provided, however, that notwithstanding the foregoing, the parties
hereto acknowledge that Regal shall have the unrestricted
right to assign all of its respective rights hereunder to a
wholly-owned affiliate of the Parent or Regal; provided, further,
that notwithstanding such assignment, Regal shall not be released
from its obligations hereunder nor shall such assignment
prejudice the rights of holders of Units entitled to receive
payment pursuant to Section 1.6(a) hereof to receive such payment
for Units properly delivered to the Payment Agent and accepted
for payment.
9.10 Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of Delaware,
without reference to the conflicts of laws provisions thereof.
9.11 Consent to Jurisdiction; Service of Process. (a)
The parties hereto irrevocably submit to the jurisdiction of the
Court of Chancery of the State of Delaware or the U.S. District
Court for the District of Delaware over any dispute arising out
of or relating to this Agreement or any of the transactions
contemplated hereby and each party hereby irrevocably agrees that
all claims in respect of such dispute or proceeding shall be
heard and determined in such court. The parties hereby
irrevocably waive, to the fullest extent permitted by applicable
law, any objection which they may now or hereafter have to the
laying of venue of any such dispute brought in such court or any
defense of inconvenient forum for the maintenance of such
dispute. Each of the parties hereto agrees that a judgment in any
such dispute may be enforced in other jurisdictions by suit on
the judgment or in any other manner provided by law.
(b) Each of the parties hereto hereby consents to
process being served by any party to this Agreement in any suit,
action or proceeding of the nature specified in subsection (a)
above by mailing a copy thereof in accordance with the provisions
of Section 9.6 hereof.
9.12 Limitation of Liability. In no event shall any
partner (other than the General Partner) or representative of the
Partnership or any direct or indirect stockholder, officer,
director, partner or representative of the General Partner or any
other such person, be personally liable for any obligation of the
Partnership or the General Partner under this Agreement. In no
event shall recourse with respect to the obligations under this
Agreement of the Partnership or the General Partner be had to the
assets or business of any person other than the Partnership or
the General Partner, respectively.
9.13 Limitation of Remedies. The sole remedy of any
party hereto for breach by any other party of a covenant,
representation or warranty made under this Agreement shall be
limited to termination of this Agreement.
A-12
<PAGE>
IN WITNESS WHEREOF, the Partnership, the General
Partner, the Parent and Regal have caused this Agreement to be
executed as of the date first written above by their respective
officers thereunder duly authorized.
AIRCOA HOTEL PARTNERS, L.P.
By AIRCOA Hospitality Services, Inc.,
its General Partner
By: /s/
------------------------------------
Name:
Title:
By: /s/
------------------------------------
Name:
Title:
AIRCOA HOSPITALITY SERVICES, INC.
By: /s/
------------------------------------
Name:
Title:
By: /s/
------------------------------------
Name:
Title:
REGAL HOTEL MANAGEMENT, INC.
By: /s/
------------------------------------
Name:
Title:
By: /s/
------------------------------------
Name:
Title:
REGAL MERGER LIMITED PARTNERSHIP
By: Regal Hotel Management, Inc.,
its General Partner
By: /s/
------------------------------------
Name:
Title:
By: /s/
------------------------------------
Name:
Title:
<PAGE>
Annex B
[LETTERHEAD OF HOULIHAN LOKEY HOWARD & ZUKIN]
May 2, 1997
Aircoa Hospitality Services, Inc.
Special Committee of the Advisory Committee of
Aircoa Hotel Partners, L.P.
Mr. James W. Hire
Hire & Associates
1383 Solitude Lane
Evergreen, CO 80439
Mr. Anthony C. Dimond
Miramar Asset Management Inc.
617 Veterans Boulevard, Suite 212
Redwood City, CA 94063
RE: Aircoa Hotel Partners, L.P.
Gentlemen:
We understand that Aircoa Hotel Partners, L.P.
("Aircoa") is a limited partnership which was organized in
December 1986 by Aircoa Hospitality Services, Inc. ("AHS," the
"General Partner" or the "Company") to acquire, own and operate
hotel and resort properties. Aircoa owns and operates six hotel
and resort properties (the "Properties") through six operating
partnerships which hold title to the Properties. Aircoa owns a 99
percent limited partnership interest in each of the six operating
partnerships which hold title to the Properties. AHS is the one
percent general partner of each of the operating partnerships.
AHS is an affiliate of Regal Hotel Management, Inc. ("Regal").
Richfield Hospitality Services, Inc. ("Richfield") operates and
manages each of the Properties under management agreements. The
limited partnership units of Aircoa consist of Class A and Class
B units ("Class A" and "Class B," respectively). The Class A
units are publicly traded and as of December 31, 1996 there were
5,340,214 Class A units outstanding. Of the Class A units, Regal
and its affiliates own or control approximately 3,800,000 units,
or approximately 71 percent of the total outstanding Class A
units. The Class B units are not publicly traded and as of
December 31, 1996, there were 950,000 outstanding. Of the Class B
units, Regal owns or controls approximately 889,000 or
approximately 94 percent of the total outstanding Class B units.
We understand that under the specific terms of the Aircoa
partnership agreement, 250,000 of the Class B units will convert
into Class A units, as of each of the following dates: (i) in
1997 on the earlier of four dates established in Amendment No. 1
to the Third Amended and Restated Agreement of Limited
Partnership of Aircoa Hotel Partners, L.P. effective May 2, 1997,
(ii) approximately May 30, 1998 (iii) and approximately May 30,
1999, the balance converting to Class A units on approximately
May 30, 2000. The new Class A units will participate, on a full
pro-rata basis, in the accrued and unpaid distributions, as well
as the future distributions that will accrue to the Class A
units. We understand and you have advised us that such potential
conversion of the Class B units into Class A units, on a full
pro-rata basis, should be assumed for purposes of our analysis.
We understand that Regal, in connection with the merger
into Aircoa (the "Merger"), intends to acquire the publicly held
Class A units and the non-publicly held Class B units that it
does not currently own or control. In the Merger, the non-Regal
Class A units will be converted into the right to receive cash
consideration of $3.10 per unit. The non-Regal Class B units,
which total 61,254 will be converted into the right to receive
cash consideration
<PAGE>
of $20.00 per unit. The Merger and other related
transactions disclosed to Houlihan Lokey are referred to
collectively herein as the "Transaction." It is our understanding
that the Company has formed the Special Committee (the
"Committee") of the Aircoa Advisory Committee (the "Advisory
Committee") to consider certain matters relating to the
Transaction.
Houlihan Lokey has been retained on behalf of, and will report
solely to, the Committee, notwithstanding that Houlihan Lokey's
fees and expenses will be paid by the Company.
You have requested our opinion (the "Opinion") as to the matters
set forth below. The Opinion does not address the Company's
underlying business decision to effect the Transaction. We have
not been requested to, and did not, solicit third party
indications of interest in acquiring all or any part of Aircoa or
its securities or the Class A and Class B units. Furthermore, at
your request, we have not negotiated the Transaction or advised
you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews,
analyses and inquiries as we have deemed necessary and
appropriate under the circumstances. Among other things, we have:
(i) reviewed Aircoa's annual reports to unitholders and on
Form 10-K for the five fiscal years ended December 31,
1996 which the Company's management has identified as
being the most current financial statements available;
(ii) reviewed a copy of the Class A Depository Units Prospectus
dated July 23, 1987;
(iii) reviewed a copy of the Aircoa's Offer Letter from Regal
Hotel Management, Inc. dated December 16, 1996;
(iv) reviewed a copy of the Agreement and Plan of Merger
dated May 2, 1997;
(v) reviewed a calculation of Aircoa's Cumulative Minimum
Annual Distributions as of December 31, 1996;
(vi) reviewed a March 20, 1997 letter and real estate
appraisals, as of January 1, 1997 prepared by Arthur
Anderson LLP, of Aircoa's six operating properties
upon which we have relied in our analysis;
(vii) reviewed the April 29, 1997 opinion by PKF Consulting
regarding PKF's portfolio analysis;
(viii) reviewed various industry reports for the hotel and
resort industries;
(ix) met with certain members of the senior management of
the Company to discuss the operations, financial
condition, future prospects and projected operations
and performance of Aircoa, and met with counsel to
discuss certain matters;
(x) conducted various telephone conversations and attended
Special Committee meetings on February 20, March
24-25, and March 27, 1997;
(xi) reviewed forecasts and projections prepared by
Aircoa's management with respect to Aircoa for the
three years ended December 31, 1997 through 1999;
(xii) reviewed the historical market prices and trading volume
for Aircoa's publicly traded securities;
(xiii) reviewed certain other publicly available financial
data for certain companies and securities that we deem
comparable to Aircoa and its securities, and publicly
available prices and premiums paid in other
transactions that we considered similar to the
Transaction; and
B-2
<PAGE>
(xiv) conducted such other studies, analyses and inquiries as we
have deemed appropriate.
We have relied upon and assumed, without independent
verification, that the appraisals of the Properties and the
financial forecasts and projections provided to us have been
reasonably prepared and reflect the best currently available
estimates of the future financial results and condition of
Aircoa, and that there has been no material change in the assets,
financial condition, business or prospects of Aircoa since the
date of the most recent appraisals and financial statements made
available to us.
We have not independently verified the accuracy and completeness
of the information supplied to us with respect to Aircoa and the
Properties and do not assume any responsibility with respect to
it. We have not made any physical inspection or independent
appraisal of any of the Properties or assets of Aircoa. Our
opinion is necessarily based on business, economic, market and
other conditions as they exist and can be evaluated by us at the
date of this letter.
Based upon the foregoing, and in reliance thereon, it is our
opinion that the consideration of $3.10 per unit to be received
by the non-Regal holders of Aircoa Hotel Partners, L.P. Class A
units and the consideration of $20.00 per unit to be received by
the non-Regal holders of Class B units in connection with the
Transaction is fair to them from a financial point of view.
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
/s/ Houlihan, Lokey, Howard & Zukin, Inc.
B-3
<PAGE>
Annex C
-------
CONSOLIDATED FINANCIAL STATEMENTS OF AIRCOA HOTEL PARTNERS, L.P.
----------------------------------------------------------------
AND ITS SUBSIDIARY OPERATING PARTNERSHIPS
-----------------------------------------
INDEX TO FINANCIAL STATEMENTS
Page
Financial Statements Number
-------------------- ------
Independent Auditor's Report C-2
Consolidated Balance Sheets
December 31, 1996 and December 31, 1995 C-3
Consolidated Statements of Operations
Years Ended December 31, 1996, 1995 and 1994 C-5
Consolidated Statement of Partners' Capital
Years Ended December 31, 1996, 1995 and 1994 C-6
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994 C-7
Notes to Consolidated Financial Statements C-9
C-1
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
Independent Auditors' Report
To the Partners of
AIRCOA Hotel Partners, L.P.:
We have audited the accompanying consolidated balance
sheets of AIRCOA Hotel Partners, L.P. and subsidiary operating
partnerships as of December 31, 1996 and 1995, and the related
consolidated statements of operations, partners' capital and cash
flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are
the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of AIRCOA Hotel Partners, L.P. and subsidiary
operating partnerships as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
February 28, 1997
C-2
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Consolidated Balance Sheets
December 31, 1996 and 1995
(In thousands)
- -----------------------------------------------------------------
Assets 1996 1995
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 2,350 2,116
Accounts receivable:
Trade 3,305 2,479
Affiliates -- 143
Inventory 373 339
Prepaid expenses 516 482
------- -------
Total current assets 6,544 5,559
------- -------
Property and equipment, at cost:
Land and leasehold improvements 9,427 8,914
Buildings and leasehold improvements 68,499 66,838
Furniture, fixtures and equipment 20,251 18,332
------- -------
98,177 94,084
Less accumulated depreciation and
amortization (35,501) (31,329)
------- -------
Net property and equipment 62,676 62,755
Other assets, including debt issue costs,
net of accumulated amoritzation of $408
in 1996 and $237 in 1995 911 1,092
------- -------
$ 70,131 69,406
======== =======
(Continued)
C-3
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Consolidated Balance Sheets, Continued
- -----------------------------------------------------------------
Liabilities and Partners' Capital 1996 1995
- ---------------------------------
Current liabilities:
Current installments of long-term debt $ 1,122 1,080
Trade accounts payable 1,284 1,672
Trade accounts payable to affiliates 444 715
Accrued liabilities:
Payroll and related 832 665
Taxes, other than income taxes 513 507
Other 2,223 1,377
Deferred revenue and advance deposits 1,842 1,995
------- -------
Total current liabilities 8,260 8,011
Long-term debt, excluding current
installments 42,504 43,290
Notes payable to affiliates 8,100 8,100
Accrued administration fees, management
fees and interest payable to affiliate 506 253
------- -------
Total liabilities 59,370 59,654
------- -------
Partners' capital:
General partner 245 236
Limited partners:
Class A Unitholders 13,517 13,603
Class B Unitholders (deficit) (3,001) (4,087)
------- -------
Total partners' capital 10,761 9,752
Commitments and contingencies
$ 70,131 69,406
======== ======
See accompanying notes to consolidated financial statements.
C-4
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Consolidated Statements or Operations
Years Ended December 31, 1996, 1995 and 1994
(In thousands, except unit data)
- -----------------------------------------------------------------
1996 1995 1994
---- ---- ----
Revenue:
Rooms $ 29,038 26,810 26,863
Food and beverage 12,272 11,733 12,274
Other property operations 7,243 6,856 7,020
-------- -------- --------
48,553 45,399 46,157
-------- -------- --------
Costs and operating expenses:
Rooms 7,774 7,366 7,242
Food and beverage 8,790 8,577 8,769
Other property operations 2,947 3,046 3,325
Administrative and general 5,488 4,954 4,793
Marketing 4,184 3,944 4,025
Energy 2,416 2,365 2,307
Property maintenance 2,329 2,348 2,255
Rent, taxes and insurance 2,753 2,743 2,540
Management fees 1,925 1,802 1,835
Depreciation and amortization 4,172 4,095 3,944
Impairment of property -- 4,789 --
-------- -------- --------
42,778 46,029 41,035
-------- -------- ---------
Operating income (loss) 5,775 (630) 5,122
-------- -------- --------
Other income (expenses):
Interest expense, including
amortization of debt issue
costs of $402 in 1996, $348 in
1995 and $471 in 1994 (4,766) (4,791) (4,600)
Gain on insurance settlements -- -- 105
-------- -------- --------
(4,766) (4,791) (4,495)
-------- -------- --------
Net income (loss) $ 1,009 (5,421) 627
======== ======== ========
Class A Unitholders:
Loss per limited partnership unit $ (.02) (1.50) (.10)
======== ======== ========
Weighted average number of
units outstanding 5,340,214 5,340,214 5,340,214
======== ======== ========
Class B Unitholders:
Income per limited
partnership unit $ 1.14 2.86 1.25
======== ======== ========
Weighted average number of
units outstanding 950,000 950,000 950,000
======== ======== ========
See accompanying notes to consolidated financial statements.
C-5
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Consolidated Statements of Partners' Capital
Years Ended December 31, 1996, 1995 and 1994
(In thousands, except unit data)
- -----------------------------------------------------------------
Limited partners' capital (deficit)
---------------------------------------
Class A Unitholder Class B Unitholders Total
General ------------------ ------------------- partners'
partner Units Capital Units Capital capital
------- ----- ------- ----- ------- -------
Balances at
December 31, 1993 $375 5,340,214 22,157 950,000 (7,986) 14,546
Net income (loss) 1 -- (552) -- 1,178 627
---- --------- ------- ------- ------- -------
Balances at
December 31, 1994 376 5,340,214 21,605 950,000 (6,808) 15,173
Net income (loss) (140) -- (8,002) -- 2,721 (5,421)
---- --------- ------- ------- ------- -------
Balances at
December 31, 1995 236 5,340,214 13,603 950,000 (4,087) 9,752
Net income (loss) 9 -- (86) -- 1,086 1,009
---- --------- ------- ------- ------- -------
Balances at
December 31, 1996 $245 5,340,214 13,517 950,000 (3,001) 10,761
==== ========= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
C-6
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
(In thousands)
- -----------------------------------------------------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Cash received from customers $ 44,774 43,460 44,592
Cash paid to suppliers and vendors (25,868) (25,054) (25,226)
Cash paid to employees (12,931) (12,916) (12,423)
Interest paid (3,558) (4,443) (3,430)
Other cash receipts 1,654 2,096 2,055
--------- --------- --------
Net cash provided by
operating activities 5,071 3,143 5,568
--------- --------- --------
Cash flows from investing activities:
Capital expenditures (3,847) (3,286) (2,049)
Proceeds from insurance
for damaged property and equipment -- -- 105
Payments for other assets -- (20) --
--------- --------- --------
Net cash used in
investing activities (3,847) (3,306) (1,944)
--------- --------- --------
Cash flows from financing activities:
Proceeds from refinancing -- 45,000 --
Principal payments on long-term debt (990) (42,995) (4,950)
Refinancing costs and other -- (987) (329)
--------- --------- --------
Net cash provided by (used in)
financing activities (990) 1,018 (5,279)
--------- --------- --------
Increase (decrease) in cash
and cash equivalents 234 855 (1,655)
--------- --------- --------
Cash and cash equivalents,
beginning of year 2,116 1,261 2,916
--------- --------- --------
Cash and cash equivalents,
end of year $ 2,350 2,116 1,261
========= ========= ========
(Continued)
C-7
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Consolidated Statements of Cash Flows, Continued
- -----------------------------------------------------------------
1996 1995 1994
---- ---- ----
Reconciliation of net income (loss)
to net cash provided by
operating activities:
Net income (loss) $ 1,009 (5,421) 627
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation and amortization 4,172 4,095 3,944
Impairment of property -- 4,789 -
Amortization of debt issue costs 402 348 471
Gain on insurance settlements -- -- (105)
Decrease (increase) in accounts
receivable relating to operations (683) (24) 284
Decrease (increase) in inventory (34) 62 (25)
Decrease (increase) in prepaid
expenses (34) 16 (124)
Increase in other assets (221) -- --
Increase (decrease) in trade
accounts payable, trade accounts
payable to affiliates, accrued
liabilities accrued administrative
fees, management fees and interest
payable to affiliate relating
to operations 613 (903) 290
Increase (decrease) in deferred
revenue and advance deposits (153) 181 206
Net cash provided by operating
activities $5,071 3,143 5,568
Non-cash investing and financing
activities - the Partnership entered
into capital lease obligations
for equipment of 5,246,000 in 1996.
See accompanying notes to consolidated financial statements.
C-8
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
(1) Summary of Significant Accounting Policies
Basis of Presentation
AIRCOA Hotel Partners, L.P. (the "Partnership") is a
publicly traded limited partnership formed to acquire, own and
operate hotel properties. The Partnership holds a 99% limited
partner interest in six limited partnerships (the "Operating
Partnerships"). Each of the Operating Partnerships owns and
operates a hotel and resort property (the "Properties"). AIRCOA
Hospitality Services, Inc. ("AHS" or the "General Partner"), a
wholly-owned subsidiary of Richfield Hospitality Services, Inc.
("Richfield") holds a 1% General Partner interest in the
Partnership and in each of the Operating Partnerships.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of the Partnership and the accounts of each of the
Operating Partnerships. All significant interpartnership accounts
and transactions have been eliminated.
Cash and Cash Equivalents
Cash equivalents, representing money market accounts,
overnight Eurodollar deposits and repurchase agreements, were
$1,865,000 and $1,965,000 at December 31, 1996 and 1995,
respectively. For purposes of the consolidated statements of cash
flows, the Partnership considers all highly liquid investments
with original maturities of three months or less to be cash
equivalents.
Operating Assets
The Partnership uses an inventory method of accounting for
china, glassware, silver, linen, and uniforms. Under the
inventory method, operating assets are stated at amounts based
upon the physical quantity of such assets on hand using average
costs, less a valuation allowance to reflect deterioration from
use.
Property and Equipment
Property and equipment are stated at cost. Hotel property
renovations and improvements are capitalized. Repairs,
maintenance, and minor refurbishments are charged to expense as
incurred. Interest incurred during construction of facilities or
major renovations is capitalized and amortized over the life of
the related assets. No interest was capitalized in 1996, 1995 or
1994. Upon the retirement or sale of property and equipment, the
cost and related accumulated depreciation are removed from the
respective accounts, and the resulting gain or loss, if any, is
included in operations.
Property and equipment held under leaseholds is amortized
over the shorter of the lease term or the estimated useful life
of the asset.
C-9
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
Depreciation and amortization are calculated using the
straight-line method over the estimated useful lives of the
assets, generally as follows:
Land improvements and leasehold improvements 15 years
Buildings and leasehold improvements 30 years
Furniture, fixtures and equipment 10 years
The Partnership assesses the carrying value of its hotel
properties for impairment when circumstances indicate such
amounts may not be recoverable from future operations. In the
fourth quarter of 1995, the Partnership adopted the provisions of
Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed Of (SFAS No. 121). SFAS No. 121, which was issued by
the Financial Accounting Standards Board in March 1995,
establishes recognition and measurement standards for the
impairment of long-lived assets expected to be held and used and
long-lived assets to be disposed. Generally, assets to be held
and used in operations are considered impaired if the sum of
expected future cash flows is less than the assets' carrying
amount. If an impairment is indicated, the loss is measured based
on the amount by which the assets' carrying value exceeds its
fair value. Assets to be disposed of are reported at the lower of
their carrying value or fair value less estimated selling costs.
In 1994, prior to the adoption of SFAS No. 121, the Partnership
assessed impairment based on the expected future cash flows from
operations of its hotel properties.
Other Assets
Other assets consist principally of debt issue costs,
franchise license costs, and liquor license costs. Debt issue and
franchise license costs are amortized using the straight-line
method over the term of the respective debt or license
agreements.
Deferred Revenue and Advance Deposits
Deferred revenue for facility rentals and advance room
deposits is recognized as revenue when services are provided.
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.
Current federal income tax regulations will subject the
Partnership to corporate taxation beginning in 1998. Accordingly,
the Partnership utilizes an asset and liability method of
accounting for deferred income taxes. Under the asset and
liability method, deferred income taxes are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax basis expected to be
recovered or settled subsequent to 1997. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years such temporary differences
are expected to be recovered or settled. The effect on deferred
taxes of a change in tax rates will be recognized in operations
in the period of the enactment date.
C-10
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
Net Income (Loss) Per Unit
Net income (loss) per limited partnership unit is computed
by dividing the net income (loss) attributable to each class of
units by the weighted average number of units outstanding in each
class during the period. Because of the loss attributable to
Class A Unitholders in 1996, 1995 and 1994, Class A Units
issuable upon conversion of notes payable (see Note 5) and upon
conversion of the Class B Units (see Note 2) were not considered
in the computation, as such conversions would be anti-dilutive.
Risks and Uncertainties
The preparation of the Partnership's consolidated financial
statements in conformity with generally accepted accounting
principles necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the balance sheet dates and the reported amounts of revenues
and expenses during the reported periods. Actual results could
differ from those estimates.
Certain of the Properties have agreements with various
customers, including airline carriers and tour groups that
require the Properties to provide rooms at specified rates. The
loss of such agreements and customers could adversely impact
revenue.
Reclassifications
Certain amounts in the 1995 and 1994 consolidated financial
statements have been reclassified to conform to the 1996
presentation.
(2) Partnership Units and Allocations
Limited Partnership Units
The Class A Units entitle each Class A 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 Class B Unitholder to a
limited partnership interest which is subordinate to the Class A
Units. 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 were 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, in accordance with the terms
of the Partnership Agreement, and each year thereafter through
2001, a minimum of 250,000 Class B Units are required to be
converted into Class A Units annually through 2001 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.
C-11
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
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 the General Partner's 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. The Minimum Annual
Distribution is presently $2.16 per Class A Unit. After payment
of the Minimum Annual Distribution, additional cash
distributions, if any, will be allocated 49.5% to the Class A
Unitholders, 49.5% to the Class B Unitholders and 1% to the
General Partner.
Capital transaction proceeds generally consist of net
proceeds from sales and refinancing of the Partnership's hotel
properties. Cash from capital transaction proceeds is allocated
and distributed 99% to the Class A Unitholders and 1% to the
General Partner until the Class A Unitholders have received any
previously unpaid Minimum Annual Distributions, and the
unrecovered capital preference amount, as defined. Capital
transaction proceeds are then allocated and distributed 99% to
the Class B Unitholders and 1% to the General Partner until all
the Class B Units have been redeemed. Subsequent to the
redemption of the Class B Units, capital transaction proceeds are
allocated and distributed 75% to the Class A Unitholders and 25%
to the General Partner. The unrecovered capital preference amount
of a Class A and a Class B Unit at December 31, 1996 is $16.60
and $20.00, respectively.
The Minimum Annual Distribution amount attributable to
Class A Unitholders and the Class B Unitholders sharing
percentage in distributable cash flow are reduced proportionately
based upon distributions of capital transaction proceeds.
The Partnership has not made any distributions since
1990. The cumulative unpaid Minimum Annual Distribution of $12.85
per Class A Unit at December 31, 1996 significantly exceeds the
Partnership's net asset value per unit based on the appraised
values of the hotel properties.
Allocation of Income and Losses
Partnership income and losses are allocated among the
partners in accordance with federal income tax provisions based
upon the partners ownership interests, adjusted to reflect
original contribution values agreed upon by the partners and
other basis differences at the inception of the Partnership.
Income and losses are allocated among individual units on a pro
rata basis within each class of units. For financial reporting
purposes, the net income or loss of the Partnership is generally
allocated in accordance with the income tax allocation provisions
described above. For the years ended December 31, 1996, 1995 and 1994, the
Partnership's net income (loss) was allocated (before the allocation of
depreciation charges) to the General Partner, Class A and Class B
Unitholders using the following percentages (in accordance with the
Partnership Agreement):
1996 1995 1994
General Partner 1.99% 1.99% 1.99%
Class A Unitholders 93.11% 91.83% 93.11%
Class B Unitholders 4.90% 6.18% 4.90%
Total 100.00% 100.00% 100.00%
C-12
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
Percentages used to allocated Partnership net income (loss)
before the allocation of depreciation charges varies depending
upon whether the Partnership generates income or losses.
In determining income (loss) allocated to the General
Partner, Class A and Class B Unitholders, depreciation charges
are allocated to the General Partner and Class A Unitholders from
the Class B Unitholders relating to differences between the basis
of certain of the Partnership's Properties at the time they were
contributed and their agreed values, as defined in the Parnership
Agreement. The allocation of these depreciation charges for the
years ended December 31, 1996, 1995 and 1994 were made as
follows:
1996 1995 1994
---- ---- ----
Additional depreciation
expense allocated to:
General Partner 11,000 32,000 12,000
Class A Unitholders 1,025,000 3,024,000 1,136,000
Depreciation expense
allocated from Class B
Unitholders $1,036,000 $3,056,000 $1,148,000
========== ========== ==========
In 1995, such allocation includes the impact from the
impairment of the Lakeside property (see Note 3).
(3) Hotel Property Valuations
The Partnership periodically evaluates the carrying value
of its hotel properties for impairment. These evaluations are
based upon management's estimate of future operating results
considering recent performance and existing and expected local
market conditions. Based on these evaluations, the Partnership
recognized an impairment of approximately $4,789,000 relating to the
Lakeside property in 1995. The Partnership's evaluation of the
carrying values of its Properties for impairment for 1995
indicated that, for the first time, both management's estimate of
future operating results for the Lakeside property and its fair
value were below the hotel property's carrying value. The
decrease in the estimated future operating results for the
Lakeside property was primarily attributable to the hotel
property's recent operating results and the anticipated increased
supply of rooms in the Orlando area. The loss was determined
based on the excess of the hotel property's carrying value over
its fair value at December 31, 1995. The fair value of the hotel
property was determined through a third-party appraisal obtained
in January 1996. The impairment loss is included in costs and
operating expenses in the accompanying consolidated statements of
operations.
The Partnership believes that the expected future cash
flows from the operations of its other hotel properties will be
sufficient to recover their carrying values. The Partnership has
no current plans to sell any of its properties for less than
their carrying values.
(4) 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 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,
C-13
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
1995, respectively, and to provide approximately $3,000,000
to fund hotel property renovations. At December 31, 1996 these
amounts have been expended. The balance of the funds were used
for the payment of a facility fee and closing costs.
The first mortgage loan interest rate at December 31, 1996
of 7.53% was based on the current Eurodollar rate plus 2%.
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 revolving credit line at December 31, 1996.
Long-term debt is summarized as follows (in thousands):
December 31,
-------------------
1996 1995
---- ----
Mortgage loan $ 43,380 $ 44,370
Capital lease obligation 246 -
------- ------
43,626 44,370
Less current installments (1,122) (1,080)
Long-term debt, excluding current installments $42,504 $43,290
======== =========
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
premiums during the first two 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 Partnership is in compliance with these
covenants for the year ended December 31, 1996. 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 Bank 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 calculated as .5% of the
outstanding loan balance at June 8 of each year to an affiliate
of the General Partner for the limited guarantee of the first
mortgage loan and the revolving credit line.
Maturities of long-term debt are summarized as follows (in
thousands):
Year ending December 31,
1997 $1,122
1998 1,127
1999 1,131
2000 40,197
2001 49
--
-------
$43,626
=======
C-14
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
(5) Notes Payable to Affiliates
A condition of the credit agreement signed by the
Partnership for the first mortgage loan and revolving credit line
required the subordination of the $6,000,000 notes payable to the
General Partner (the "Notes"), the General Partner has agreed to
this subordination, and as a result, on September 26, 1995 the
Board, 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, were 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, these notes stipulate that 25%
of any excess cashflow, as defined in the new mortgage loan, will
be applied against the principal of the notes outstanding.
(6) Income Taxes
The Partnership's only significant temporary difference
(which will result in tax deductions in 1998 and later years) is
an excess of the tax basis over the book basis of the Properties
of approximately $4,900,000 and $6,500,000 at December 31, 1996
and 1995, respectively. The Partnership's net deferred tax asset
was approximately $1,960,000 and $2,600,000 at December 31, 1996
and 1995, respectively. The Partnership has established a 100%
valuation allowance on these net deferred tax assets. The change
in the valuation allowance in 1996 and 1995 was a decrease and an
increase of approximately $640,000 and $1,660,000, respectively.
(7) Related Party Transactions and Commitments
Partnership Administration
AHS, as General Partner, is responsible for managing
the business and affairs of the Partnership and the Operating
Partnerships. The General Partner is reimbursed monthly for all
direct operating expenses incurred onbehalf of the Partnership
and Operating Partnerships. In addition, the General Partner
receives an annual partnership administration fee equal to .25%
of the independently appraised value of the hotel properties of
the Partnership.
Management Agreements
Richfield operates the hotel properties for the Partnership
in exchange for a management fee equal to 4% of annual gross
revenue from the hotel properties. In addition, the hotel
properties are obligated to reimburse Richfield for payroll,
professional fees, and certain out-of-pocket expenses incurred by
Richfield on their behalf. The management agreements expire in
2012 and can be terminated by the Partnership prior to
expiration, in certain circumstances, by the payment of a fee
equal to three times the management fee paid for the preceding 12
months.
C-15
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
Richfield also provides data processing services and
obtains various types of insurance coverage, on an aggregate
basis, for the hotel properties which it owns or manages. Such
data processing and insurance costs are charged to the hotel
properties.
License Agreements
Two of the hotel properties have license agreements with an
affiliate to operate as Regal Hotels. The license agreements
provide for fees of 2.0% to 2.5% of total sales revenue, as
defined, in 1996 and expire in 2012. In December 1996 and
February 1997, each of the agreements was amended to provide for
a fee of 2.5% throughout the terms of the agreements. The
agreements can be terminated by the Partnership prior to
expiration in certain circumstances, through payment of a
termination fee.
Hotel Property Acquisitions and Dispositions and Partnership Financing
The General Partner receives an acquisition fee equal to 1%
of the purchase price of any hotel property acquired by the
Partnership. Upon the sale of a hotel property, the General
Partner receives either a disposition fee equal to 1% of the
sales price of the hotel property, or a reasonable brokerage fee,
based upon fees for comparable properties in the area, less the
amount of any such brokerage fees paid to third parties. The
General Partner receives a financing fee equal to 1% of the
principal amount of any new Partnership loan, or refinancing of
Partnership debt if the refinancing is completed with a lender
other than the lender whose loan is being refinanced. Such fee is
required to be reduced by the amount of the financing fee paid to
the lender.
Other Arrangements
The General Partner and its affiliates are paid
development, purchasing, and design fees for services performed
in connection with the renovation or expansion of the
Partnership's hotel properties. In addition, an affiliate of the
General Partner receives fees in connection with the bulk
purchase of hotel furnishings, equipment, and supplies.
The Partnership leases a private club and recreational
facility from an affiliate of the General Partner, under an
operating lease. The Partnership receives 90% to 100% of the
available cash flow from operations of the private club and
recreational facility as lease income and management fees. The
lease expires in 2052 and may be terminated early by the
Partnership. The Partnership received lease income and management
fees of $301,000, $256,000 and $330,000 pursuant to these
arrangements in 1996, 1995 and 1994, respectively.
Subject to the terms of the lease agreement, an affiliate
of the Partnership has an option to purchase 50 undeveloped acres
from the private club for $10. The option is only exercisable if
all the permits and consents from state and local authorities
permit continued operation of the club after conveyance of the 50
acres to the affiliate. The affiliate pays a pro-rata share of
the property taxes on the private club. The private club is
located on a tract of land consisting of approximately 80 acres.
The following amounts resulting from transactions with
affiliates are included in the accompanying consolidated balance
sheets (in thousands):
C-16
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
AND SUBSIDIARY OPERATING PARTNERSHIPS
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
- -----------------------------------------------------------------
December 31,
----------------
1996 1995
---- ----
Fees and costs, included in property
and equipment, net $ 1,121 1,123
======= =====
General Partner financing fee $ 112 144
======= =====
Guarantee fee $ 112 115
======= =====
The General Partner financing fee and the guarantee fee
have been capitalized and are included in other assets. The
financing fee is being amortized over the life of the first
mortgage loan, and the annual guarantee fee is being amortized
over twelve months. Amortization relating to the financing and
guarantee fee of $145,000 and $131,000 is included in interest
expense in 1996 and 1995, respectively.
The following amounts resulting from transactions with
affiliates are included in the accompanying consolidated
statements of operations (in thousands):
1996 1995 1994
---- ---- ----
Partnership administration
fee $ 198 209 222
====== ====== =====
Management fees $1,925 1,802 1,835
====== ====== =====
Allocated insurance expense $1,263 1,411 1,505
====== ====== =====
Allocated data processing
cost $ 58 80 45
====== ====== =====
Interest expense $ 972 851 720
====== ====== =====
Lease income $ 301 256 330
====== ====== =====
License fees $ 298 174 132
====== ====== =====
(8) Commitments and Contingencies
Under terms of the Clarion and ITT Sheraton franchises. the
Partnership is committed to make annual payments for franchise
and licensing fees and reservation services. The Clarion license
agreement requires franchise fees equal to 3% of gross room
revenue and expires in 2012. The ITT Sheraton license agreements
require franchise fees equal to 6% of gross room revenue and
expire in 2002. The Sheraton agreements may be terminated by
either party at specified dates. Total franchise fees on the
Clarion and ITT's Sheraton license agreements were $l,131,000,
$1,650,000 and $l,677,000 for 1996, 1995 and 1994, respectively.
Three of the hotel properties are subject to
noncancelable operating land leases which expire between 2000 and
2033. The leases generally require annual rental payments of a
fixed amount, ranging from $10,000 to $90,000, AIRCOA HOTEL
PARTNERS, L.P. plus a contingent amount based upon a percentage
of specified room revenue, food and beverage revenue, or gross
revenue, as defined, ranging from 1% to 8%. The accompanying
consolidated statements of operations include land rent expense
of $747,000, $799,000 and $803,000 for 1996, 1995 and 1994,
respectively.
The Class A Units issuable upon conversion of notes payable
and upon conversion of the Class B Units, and the Class A Units
issued pursuant to the General Partner's obligations regarding
cash distributions have certain demand registration rights.
The Partnership is involved in various claims and legal
actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters
will not have a material effect on the consolidated financial
statements of the Partnership.
C-17
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
INDEX TO INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
Page
Financial Statements Number
-------------------- ------
Consolidated Balance Sheets (Unaudited)
June 30, 1997 and December 31, 1996 C-19
Consolidated Statements of Operations (Unaudited)
Three Months and Six Months Ended June 30, 1997
and 1996 C-21
Consolidated Statement of Partners' Capital (Unaudited)
Six Months Ended June 30, 1997 C-22
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1997 and 1996 C-23
Notes to Consolidated Financial
Statements (Unaudited) C-24
C-18
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
Assets June 30, 1997 December 31, 1996
Current assets:
Cash and cash equivalents $ 489 $ 2,350
Accounts receivable:
Trade 3,331 3,305
Affiliates 343 --
Inventory 397 373
Prepaid expenses 422 516
------ -------
Total current assets 4,982 6,544
------ -------
Property and equipment, at cost:
Land and leasehold improvements 9,461 9,427
Buildings and leasehold improvements 68,872 68,499
Furniture, fixtures and equipment 22,925 20,251
------ -------
101,258 98,177
Less accumulated depreciation
and amortization (37,610) (35,501)
Net property and equipment 63,648 62,676
------ -------
Other assets, including debt issue
costs, net of accumulated amortization
of $311 in 1997 and $337 in 1996 934 911
------ -------
$69,564 $70,131
====== =======
C-19
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In Thousands)
Liabilities and Partners' Capital June 30, 1997 December 31, 1996
Current liabilities:
Current installments of
long-term debt $ 1,126 $ 1,122
Trade accounts payable 832 1,284
Payables to affiliates 421 444
Accrued liabilities:
Payroll 795 832
Taxes, other than income taxes 1,114 513
Other 1,726 2,223
Deferred revenue and advance deposits 1,135 1,842
Total current liabilities 7,149 8,260
Long-term debt,
excluding current installments 42,091 42,504
Notes payable to affiliates 8,100 8,100
Accrued administration,
management fees and
interest payable to affiliate 632 506
------- -------
Total liabilities 57,972 59,370
------- -------
Partners' capital:
General Partner 256 245
Limited Partners:
Class A Unitholders 13,778 13,517
Class B Unitholders (deficit) (2,442) (3,001)
------- -------
Total Partners' capital 11,592 10,761
------- -------
$69,564 $70,131
======= =======
C-20
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
(In Thousands, Except Unit Data)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Revenue:
Rooms $ 7,861 $ 7,739 $ 15,294 $ 15,056
Food and beverage 3,223 3,436 6,100 6,453
Other property operations 1,732 1,878 3,691 3,912
------- ------- ------ ------
12,816 13,053 25,085 25,421
------- ------- ------ -------
Costs and operating expenses:
Rooms 2,143 2,056 4,089 3,942
Food and beverage 2,277 2,373 4,296 4,560
Other property operations 716 760 1,636 1,721
Administrative and general 1,235 1,343 2,754 2,558
Marketing 1,066 1,050 2,113 2,184
Energy 571 599 1,169 1,216
Property maintenance 665 633 1,273 1,206
Rent, taxes and insurance 803 654 1,497 1,337
Management fees 511 518 999 1,010
Depreciation and amortization 1,021 1,053 2,109 2,106
------- ------- ------ ------
11,008 11,039 21,935 21,840
------- ------- ------ -------
Operating income 1,808 2,014 3,150 3,581
Interest expense, including
amortization of debt costs 1,165 1,164 2,319 2,359
------- ------- ------ ------
Net income $ 643 $ 850 $ 831 $1,222
======= ======= ====== =======
Class A Unitholders:
Income per limited
partnership unit -primary $ .07 $ .10 $ .05 $ .12
========= ========= ======= ========
Income per limited partnership
unit -fully diluted $ -- $ .07 $ -- $ .10
====== ====== ========= ========
Weighted average number
of units outstanding -
primary 5,340,214 5,340,214 5,340,214 5,340,214
Weighted average number
of units outstanding -
fully diluted -- 15,775,810 -- 16,043,220
Class B Unitholders:
Income per limited
partnership unit $ .31 $ .32 $ .59 $ .61
======== ======== ======== =========
Weighted average
number of units outstanding 950,000 950,000 950,000 950,000
See accompanying notes to consolidated financial statements.
C-21
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
SIX MONTHS ENDED JUNE 30, 1997
(Unaudited)
(In Thousands, Except Unit Data)
Limited Partners' Capital (Deficit)
Total
General Class A Unitholders Class B Unitholders Partners'
Partner Units Capital Units Deficit Capital
Balances at
December 31, 1996 $ 245 5,340,214 $ 13,517 950,000 $ (3,001) $10,761
Net income 11 -- 261 -- 559 831
------ ----------- ------- ----- ----- --------
Balances at
June 30, 1997 $ 256 5,340,214 $ 13,778 950,000 $ (2,442) $11,592
====== ========== ======== ========= ====== =======
See accompanying notes to consolidated financial statements.
C-22
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
(In Thousands)
1997 1996
Cash flows from operating activities:
Cash received from customers $23,184 $23,948
Cash paid to suppliers and vendors (13,418) (13,626)
Cash paid to employees (6,831) (6,513)
Interest paid (2,014) (1,441)
Other cash receipts, net 927 863
------- -------
Net cash provided by
operating activities 1,848 3,231
--------- ----------
Cash flows from investing activities -
capital expenditures (3,081) (878)
-------- -------
Cash flows from financing activities:
Principal payments on long-term debt, net (409) (540)
Payment for debt issue costs (219) --
Net cash used in financing activities (628) (540)
-------- --------
(Decrease) increase in cash
and cash equivalents (1,861) 1,813
Cash and cash equivalents at
beginning of period 2,350 2,116
--------- ----------
Cash and cash equivalents at end of period $ 489 $ 3,929
======= =======
See accompanying notes to consolidated financial statements.
C-23
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(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. AHS, a wholly owned subsidiary of Richfield
Hospitality Services, Inc. ("Richfield"), is also 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, 1996. Operating results for the
six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year
ended December 31, 1997.
(2) Merger with affiliate
The Partnership received in December 1996, a written
proposal from an affiliate, Regal Hotel Management, Inc. ("RHM"),
to commence discussions with respect to the possible purchase of
all of the Class A and Class B units not currently owned by RHM
or its affiliates (the "Public Units") for $2.35 per Class A Unit
and $16.80 per Class B Unit. The General Partner of the
Partnership referred consideration of RHM's proposal to a Special
Committee (the "Special Committee") comprised of the independent
members of the Partnership's Advisory Committee. After
negotiations with the Special Committee, RHM agreed to increase
the merger consideration to $3.10 per Class A Unit and $20.00 per
Class B Unit. The Special Committee determined that such
increased merger consideration was fair to, and in the best
interests of, unaffiliated unitholders of the Partnership and
recommended approval of the merger transaction by the Board of
Directors of the Partnership's General Partner. The General
Partner's Board of Directors approved RHM's revised proposal on
May 2, 1997.
RHM's proposed acquisition of the Public Units would be
made by means of a merger of a subsidiary limited partnership
owned by RHM into the Partnership. The completion of the
merger and the resulting acquisition of the Public Units is
subject to the approval of the merger by unitholders owning a
majority interest of the Partnership's units at a special
meeting. Presently, RHM and its affiliates own 71% of the
Class A Units and 93.6% of the Class B Units. RHM and its
affiliates have agreed to vote in favor of the merger thus
assuring its approval. Although no date has been set for the
special meeting, it is presently expected that the meeting
will be held, and the merger will be consummated, during the
third quarter of 1997.
In conjunction with approval of the merger transaction, the
General Partner has amended the Partnership Agreement in
order to defer the mandatory conversion of Class B Units into
Class A Units.
C-24
<PAGE>
AIRCOA PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)
The amendment provides that the 250,000 Class B Units scheduled
to convert into additional Class A Units during 1997 will convert
on the earliest to occur of (i) any termination of the definitive
merger agreement; (ii) the record date for any vote of the
Class A Unitholders, (other than the vote on merger), (iii)
the record date for any distribution by the Partnership to
holders of Class A Units or (iv) September 30, 1997. In
1997, in accordance with the Partnership Agreement, the
number of Class A Units to be received upon conversion of a
Class B Unit will be determined by dividing $20.00 by the
average of the closing prices of Class A Units for the five
trading days ending on May 30, 1997, or $2.75. In light of the
likelihood of completion of the merger, the General Partner
adopted this amendment in order to avoid administrative and
other issues arising from the issuance of additional Class A
Units pursuant to the conversion.
(3) Long-term debt
The Partnership has a first mortgage loan and a $1,000,000
revolving credit line. The first mortgage loan bears interest
at the Eurodollar rate plus 2% (7.85% at June 30, 1997).
Re-payment of the first mortgage loan is based on a
twenty-year amortization with a 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 June 30,
1997.
Long term debt is summarized as follows (in thousands):
June 30, December 31,
1997 1996
---- ----
Mortgage loan $42,840 43,380
Capital lease obligation 377 246
------- ------
43,217 43,626
Less current installments (1,126) (1,122)
------- ------
Long-term debt, excluding current
installments $42,091 42,504
======= ======
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 two 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 Bank's approval of any
dilution in the present ownership interests of affiliates of
the General Partner in the Partnership. The Partnership pays
an annual guarantee fee calculated at .5% of the outstanding
loan balance at June 8th of each year to an affiliate of the
General Partner for the limited guarantee of the first
mortgage loan and the revolving credit line.
(4) Notes payable to affiliates
The Partnership has notes payable of $8,100,000 to AHS that
are subordinate to the first mortgage
C-25
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)
loan. Notes payable to AHS consist of notes payable of $6,000,000
and a note payable of $2,100,000. The notes payable totaling $6,000,000
accrue interest at 12% per annum, payable monthly, and mature on
June 8, 2000. The note payable for $2,100,000 accrues
interest at 12% per annum, with interest and principal due on
June 8, 2000. The notes payable to AHS are convertible into
Class A Units of the Partnership at $16.60 per unit.
In addition, these notes stipulate that 25% of any excess
cash flow, as defined in the first mortgage loan, will be
applied against the principal of the notes outstanding.
(5) 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.
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. Beginning in 1997, in
accordance with the terms of the Partnership Agreement, and
each year thereafter through 2001, a minimum of 250,000
Class B Units are required to be converted into Class A
Units annually through 2001 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. As
discussed above in Note 2, the Partnership Agreement was
amended to defer the 1997 conversion of Class B Units.
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 June 30, 1997, the cumulative
unpaid Minimum Annual Distribution per Class A Unit
significantly exceeds the Partnerships' net asset value per
unit based on the December 31, 1996 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 excess cash flow as defined
in the mortgage loan agreement. However, if the debt
service coverage ratio, as defined in the mortgage loan
agreement, is greater than 1.50, then the Partnership may
distribute up to 75% of such 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.
C-26
<PAGE>
AIRCOA HOTEL PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)
(6) Related party transactions
The following amounts resulting from transactions with
affiliates are included in the accompanying consolidated
statements of operations (in thousands):
For the six
months ended
June 30,
---------
1997 1996
---- ----
Partnership administration fees $ 120 $ 95
======= ====
Management fees $ 999 $1,010
======= ====
Allocated data processing cost $ 23 $ 44
======= ====
Allocated insurance expenses $ 671 $ 692
======= ====
Interest expense $ 486 $ 486
======= ====
Lease income $ 149 $ 115
======= ====
License fees $ 261 $ 149
======= ====
Guarantee and financing fee
(included in interest expense) $ 112 $ 112
===== =====
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.
(7) 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 $5,000,000 which gives rise
to a net deferred tax asset of approximately $2,000,000. 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. Following the enactment of the Revenue Provisions of the
Taxpayer Relief Act of 1997 (HR2014) issued August 1,1997, Title
IX, Miscellaneous Provisions, the Partnership may make an
election to be subject to an excise tax of 3.5% on its gross
receipts in lieu of being taxed as a corporation. Further, upon
the consummation of the merger discussed above in Note 2, the
Partnership would no longer be a publicly traded partnership and
would continue to be taxed as a partnership.
C-27
<PAGE>
[FORM OF PROXY CARD - [WHITE]]
[Face of Card].....................................................
AIRCOA HOTEL PARTNERS, L.P.
THIS PROXY IS SOLICITED ON BEHALF OF
AIRCOA HOTEL PARTNERS, L.P.
AND
AIRCOA HOSPITALITY SERVICES, INC.
SPECIAL MEETING OF UNITHOLDERS - SEPTEMBER 29, 1997
The undersigned unitholder of AIRCOA Hotel Partners, L.P.
(the "Partnership") acknowledges receipt of the Proxy Statement
of the Partnership and AIRCOA Hospitality Services, Inc., the
general partner of the Partnership (the "General Partner"), dated
September 5, 1997, and the undersigned revokes all prior
proxies and appoints Thomas J. Rice and Paul J. Shim, and each of
them individually, proxies for the undersigned to vote all Class
A units of limited partner interest ("Class A Units") or Class B
units of limited partner interest ("Class B Units") of the
Partnership that the undersigned would be entitled to vote at the
Special Meeting of Unitholders to be held at 9:00 a.m. (New York
City time) on September 29, 1997 at the offices of Coudert
Brothers, counsel to the Partnership, 1114 Avenue of the
Americas, New York, New York 10036, and any adjournments,
postponements or reschedulings thereof, on those matters referred
to in the Proxy Statement.
IN THEIR DISCRETION, THE PROXIES ARE, UNLESS OTHERWISE
INDICATED BELOW, AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS
MAY PROPERLY COME BEFORE THE MEETING ON BEHALF OF THE
UNDERSIGNED.
PLEASE MARK, SIGN AND DATE THIS PROXY CARD ON THE REVERSE
SIDE AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
(continued on reverse side)
[Face of Card].....................................................
***********************
<PAGE>
[Reverse of Card]..................................................
(continued from face of card)
[X] Please mark
your votes as in
this example
- ----------------------------------------------------------------------
The General Partner of the Partnership recommends a vote "FOR"
Proposal 1.
- ----------------------------------------------------------------------
1. The Merger. To approve and adopt the Agreement and Plan
of Merger, dated as of May 2, 1997, by and among the Partnership,
the General Partner, Regal Hotel Management, Inc. ("RHM") and
Regal Merger Limited Partnership, a wholly owned subsidiary of
RHM, as described in the accompanying Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Other Business. To transact such other matters as
may properly come before the Special Meeting.
[ ] AUTHORIZED [ ] NOT AUTHORIZED
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE. IF NO SPECIFICATIONS ARE MADE, THIS PROXY
WILL BE VOTED FOR THE PROPOSALS REFERRED TO IN (1) AND (2) ABOVE
PROVIDED THAT YOU HAVE SIGNED AND DATED THE PROXY CARD.
Please Mark, Sign, Date and Mail This Proxy Card Promptly, Using
the Enclosed Postage-Paid Envelope.
Dated: ____________, 1997
_____________________________________________
Signature of Unitholder (Title, if any)
_____________________________________________
Signature of Unitholder (if held jointly)
Please sign exactly as your name or names
appear hereon. If units are held jointly,
each unitholder should sign. When signing as
attorney, executor, administrator, trustee
or guardian, please give full title as such.
If a corporation, please sign in full
corporate name by president or authorized
officers. If a partnership, please sign in
partnership name by authorized person.
[Reverse of Card]..................................................
