Annual Report (Form 10-K), fiscal year 1994

Item 1 Business ----------------------
GENERAL DEVELOPMENT OF BUSINESS:
Red Lion Inns Limited Partnership and its subsidiary limited partnership, Red Lion Inns Operating L.P. (the "Partnership" and the "Operating Partnership", respectively; collectively, the "Partnership"), were formed on January 16, 1987, under the Delaware Revised Uniform Limited Partnership Act for the purpose of owning, through the Operating Partnership, ten Red Lion hotels (the "Hotels"). The Hotels had been previously owned by Red Lion, a California Limited Partnership ("Red Lion"), since April 10, 1985. Red Lion Properties, Inc. (the "General Partner"), a wholly-owned subsidiary of Red Lion, is the general partner for both the Partnership and the Operating Partnership.
On April 14, 1987, the Partnership completed an initial public offering of units representing limited partnership interests ("Units") totaling $98.8 million. These proceeds, accompanied by a $105.9 million mortgage loan, were used to acquire the Hotels, through the Operating Partnership, from Red Lion for a net $195 million. Since the completion of this acquisition, the Partnership's limited partners have had an effective 98.01 percent ownership interest in the Hotels, with the General Partner retaining the remaining 1.99 percent ownership interest.
Since April 14, 1987, the day-to-day management of the Hotels has been conducted pursuant to a management agreement (the "Management Agreement") which was entered into between the Operating Partnership and Red Lion. Red Lion provides the same management services to the Hotels that it renders to the other Red Lion lodging facilities, including a toll-free reservation system, centralized purchasing and training, marketing, sales, advertising, administration, maintenance, accounting and planning programs.
DESCRIPTION OF BUSINESS:
Red Lion manages the Hotels as part of a full service hotel chain which operates in the western half of the United States. The Red Lion hotel system, established in 1959, currently includes 53 lodging facilities with a total of approximately 14,000 rooms. The lodging facilities are designed to provide guests with a full range of high-quality hotel accommodations in convenient locations at competitive prices.
The Partnership's Hotels are located in western and mid-western states and compete primarily in the upscale sector of the hospitality market. Red Lion has had particular success in establishing its presence in the medium-sized city segment of the hospitality market. The Hotels are typically located near airports or major traffic arteries and are convenient to commercial centers or tourist destinations. The Hotels vary in size, ranging from 208 rooms to 476 rooms.
Red Lion's operating strategy emphasizes a commitment to service and customer value, reinvestment in facilities, quality food and beverage services and maintenance of a strong base of group business and direct sales and marketing. The hospitality industry is highly competitive. Red Lion distinguishes itself from competing hotel chains by providing exceptional service and value to its customers, with high-quality facilities, food and beverage services which attract local clientele as well as hotel guests, and extensive meeting and convention facilities.
The Hotels offer a variety of meeting and convention facilities which attract not only business conventions and conferences, but also local functions such as banquets and receptions. A network of over 140 on-site sales representatives along with national sales support from offices in Seattle, Portland, San Francisco, Sacramento, Los Angeles, Washington DC, Chicago, and Red Lion's Vancouver, Washington executive office, work to expand Red Lion's share of convention market business.
All of the Hotels offer full-service accommodations. In addition to restaurants, lounges, banquet and meeting space, most of the Hotels offer oversized rooms with oversized beds, premium television channel availability, complimentary airport shuttle service, free parking, swimming pools, room service and valet services. Red Lion develops and implements advertising, public relations, market research and training programs on behalf of the Hotels. Technical training and assistance is provided to each Hotel for other areas such as front office operations, reservations, housekeeping, property maintenance, energy management, laundry, valet services, telephone systems and guest services. Other services provided by Red Lion include accounting and cash management, risk management, credit and collection, tax compliance, legal, computer and point of sale systems support and internal audit. Red Lion's food and beverage division establishes quality levels and monitors performance, provides culinary training, assisting in menu design, pricing, accounting and cost controls.
Red Lion purchases for the Hotels certain operating supplies, furnishings and equipment allowing Red Lion to ensure consistently high quality and to control costs.
A toll-free reservation system is available to customers throughout the United States and Canada. Red Lion is in the process of upgrading and improving its central reservation system based in Vancouver, Washington, a project expected to be implemented in 1996. The improved system will provide, among other features, a real time inventory of all the Company's rooms, which will enhance the Company's ability to manage occupancy yields and room rates. Red Lion also participates in major national and international airline reservations systems which allow travel agents to book Red Lion hotel reservations.
The Partnership has no employees. Hotel and administrative personnel are employed by Red Lion. Neither the Partnership nor the Operating Partnership is responsible for the payment of executive compensation to the officers of the General Partner. The Partnership reimburses Red Lion for the cost of providing such services at the hotel level and reimburses the General Partner for Partnership administrative costs. For further discussion of reimbursements to the General Partner and executive compensation, see Items 11 and 13 of this report.
The table below presents comparative information on certain characteristics of the Hotels:
Average Number of Rooms Per Hotel(1) - 306
---------- (1) As of December 31, 1994. (2) Calculated on a per available room per year basis. (3) Based on rooms occupied.
Item 2



Item 2 Properties ------------------------
The Hotels were originally selected by the General Partner so as to be representative of the Red Lion portfolio taking into account the age, guest capacity, occupancy levels, average daily room rates, profitability and the geographical diversity of the Hotels. The Hotels have an average of 306 rooms per Hotel and have at least two food outlets per Hotel.
The following table presents certain information concerning the Hotels:
---------- (1)Property subject to full or partial ground lease.
During 1994, the Partnership carried out capital improvements at the Hotels amounting to $8.1 million, which included $3.3 million for room renovations, of which $1.5 million was used for an extensive guest room refurbishment at the Partnership's Sacramento property. Other improvements included $2.2 million used for public area refurbishments, lock and structural upgrades.
Item 3

Item 3 Legal Proceedings -------------------------------
The Partnership is not a party to any material legal proceedings.
Item 4

Item 4 Submission of Matters to a Vote of Security Holders -----------------------------------------------------------------
There were no matters submitted to a vote of Unitholders during the quarter ended December 31, 1994.
PART II
Item 5

Item 5 Market for Registrant's Common Equity and Related Stockholder --------------------------------------------------------------------------- Matters -------
Red Lion Inns Limited Partnership units are listed on the American Stock Exchange under the symbol RED. Per unit market prices during 1994 and 1993 were:
Cash distributions to unitholders were:
At December 31, 1994, the Partnership had 965 unitholders of record, representing 5,833 identified beneficial owners.
Item 6

Item 6 Selected Financial Data --------------------------------- (in thousands, except for operating statistics and per unit amounts)
---------------------------- (a) Partnership revenues represent the gross operating profit of the Hotels which is the amount credited from Red Lion pursuant to the Management Agreement. (b) Calculated on a per available room per year basis. (c) Based on rooms occupied.
Item 7

Item 7 Management's Discussion and Analysis of Financial Condition and -------------------------------------------------------------------------- Results of Operations ---------------------
FISCAL 1994 COMPARED TO FISCAL 1993 ------------------------------------
REVENUES: Revenues, which represent the amounts credited from Red Lion, increased to $35.6 million in 1994 from $32.5 million in 1993, an increase of $3.1 million, or 9.6%. The changes in specific revenues and expenses, including those of the Hotels which affect the amounts credited from Red Lion and thus the Partnership's revenues and operating results, are discussed below.
GROSS REVENUES OF THE HOTELS: Gross revenues increased by $4.4 million, or 4.5%, to $100.6 million from the prior year's $96.2 million.
Room revenues increased $2.5 million, or 4.5%, primarily because of a 5.3% increase in average daily room rates. The average daily room rates increased to $70.22 from $66.67 in the prior year. The increase in room revenues from higher rates was offset in part by a .5 percentage point decline in occupancy to 72.8% from 73.3% in the prior year.
Other revenues increased by $1.2 million, or 14.5%. The majority of the increase was due to higher banquet room rentals.
OPERATING INCOME: Operating income before depreciation, amortization and incentive management fees increased $3.7 million, or 15%, in 1994 compared to the prior year. Contributing to this increase were higher food and beverage profits and lower workers' compensation costs. After depreciation, amortization and management fees, operating income of $13.4 million was essentially unchanged from the prior year.
NET INCOME: Net income increased by $1.1 million or 57.9% from the prior year. Before the cumulative effect of a change in accounting for income taxes which reduced 1993 net income, net income decreased $.3 million, or 8.6%, primarily because of higher interest expense. The 1993 year included a non-cash charge of $1.3 million for the cumulative effect of the change in accounting for income taxes resulting from the adoption, in January 1993, of Statement of Financial Accounting Standards No. 109. This new method required the Partnership to record income tax liabilities arising principally from current differences between book and tax depreciation which will be in existence when the Partnership becomes a taxable entity in 1998. For further discussion, see Note 3 to the Partnership's consolidated financial statements.
CASH FLOW AVAILABLE FOR DISTRIBUTIONS AND INCENTIVE MANAGEMENT FEES: As defined in the Management Agreement, cash flow available for distributions and incentive management fees ("Cash Flow") is net income (or loss) before non-cash charges (principally depreciation and amortization) and incentive management fees but after a reserve for capital improvements and principal payments on mortgage debt. Cash Flow increased in 1994 by $3.3 million, or 31%, to $13.8 million from the prior year's $10.5 million. The increase in Cash Flow resulted from the previously discussed increase in operating income before incentive fees and depreciation. After payment of $9.3 million of cash distributions in 1994 (unchanged from 1993), the Partnership had sufficient Cash Flow to pay current incentive management fees of $4.4 million in 1994 compared to $1.1 million in 1993. For further discussion of Cash Flow, see Note 6 to the Partnership's consolidated financial statements.
FISCAL 1993 COMPARED TO FISCAL 1992 -----------------------------------
REVENUES: Revenues, which as noted above, represent the amounts credited from Red Lion, increased to $32.5 million in 1993 from $31.7 million in 1992, an increase of $.8 million, or 2.5%. The changes in specific revenues and expenses, including those of the Hotels which affect the amounts credited from Red Lion and thus the Partnership's revenues and operating results, are discussed below.
GROSS REVENUES OF THE HOTELS: Room revenues increased $2.1 million, or 4%, in 1993 while total revenues increased by a smaller increment of $.5 million to $96.2 million from the prior years $95.7 million. The dampening effect on revenues was primarily due to a $1.4 million decline in the Partnership's food and beverage revenues caused by lower demand in food and beverage outlets and the temporary closing of some outlets for renovations.
Of the $2.1 million (4%) increase in room revenues, the majority, $1.7 million (3%), was due to higher room rates related to improvements in the market segment mix. The average daily room rate increased 3% to $66.67 from $64.56 in the prior year. Average occupancy increased .6 percentage points to 73.3% from 72.7% in the prior year.
OPERATING INCOME: Operating income before depreciation, amortization and incentive management fees increased $.6 million, or 3%, in 1993 compared to the prior year. Contributing to the increase was a $1 million decline in workers' compensation costs in 1993. Offsetting this were higher liability insurance reserves ($.4 million) and lower food and beverage profits which were caused by the soft demand discussed above. After depreciation, amortization and the incentive management fee, operating income of $13.4 million was essentially unchanged from the prior year.
NET INCOME: Net income decreased $1.2 million from the prior year. Before the cumulative effect of a change in accounting for income taxes, net income increased $.2 million due primarily to lower interest costs in 1993. The $1.3 million cumulative effect of the change in accounting for income taxes is a non- cash charge to income resulting from the adoption, in January 1993, of Statement of Financial Accounting Standards No. 109. This new method requires the Partnership to record income tax liabilities arising principally from current differences between book and tax depreciation which will be in existence when the Partnership becomes a taxable entity in 1998. For more information on this item, see Note 3 to the Partnership's consolidated financial statements.
CASH FLOW AVAILABLE FOR DISTRIBUTIONS AND INCENTIVE MANAGEMENT FEES: Cash Flow increased in 1993 by $.3 million, or 3%, to $10.5 million from the prior year's $10.2 million. Cash Flow reflects loan principal payments which were $.5 million higher in 1993 than in 1992. After payment of $9.3 million of cash distributions in 1993 (unchanged from 1992), the Partnership had sufficient Cash Flow to pay current incentive management fees of $1.1 million in 1993 compared to $.9 million in 1992. For further discussion of Cash Flow, see Note 6 to the Partnership's consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES -------------------------------
The Partnership's principal source of cash is Hotel operations. During the three years ended December 31, 1994, the Hotels generated sufficient cash from operations to cover operating needs. It is expected that, for 1995, cash provided by both operations and the lending facility discussed below, or other sources, will be sufficient to meet anticipated cash requirements.
The Partnership has in place a $14.1 million line of credit at a variable rate of interest. Borrowings under the line averaged $11,698,000, $11,784,000 and $11,791,000 during 1994, 1993 and 1992, respectively, and equaled $12,735,000 at December 31, 1994. The average interest cost for borrowings under the line in 1994, 1993 and 1992 was 5.7 percent, 4.6 percent and 5.2 percent for those years, respectively. In January 1995, the Partnership obtained a commitment to extend the maturity of the Partnership's $102,469,000 mortgage note and the line of credit for one year to April 14, 1996. The Partnership expects to negotiate a replacement for its credit facilities following expiration of the extended term. For further discussion of the Partnership's credit facilities, see Note 5 to the Partnership's consolidated financial statements.
During 1994, 1993 and 1992, the Partnership made total capital investments amounting to $8,139,000, $6,389,000 and $6,251,000, respectively. Major improvements included guest room renovations, common area refurbishments and structural improvements.
Funding of the capital improvements reserve amounted to $3,018,000, $2,887,000 and $2,872,000 in 1994, 1993 and 1992, respectively. Cash invested above the reserved amounts has been funded predominately from the line of credit described above. At December 31, 1994, the Partnership had commitments related to capital improvement projects of $1,417,000.
During 1994, 1993 and 1992, the Partnership's cash flow available for distribution covered 100 percent of the priority cash distributions and also allowed for payment of current incentive management fees to Red Lion of $4,438,000, $1,142,000 and $897,000, respectively.
INCOME TAXES: As discussed in Note 3 to the consolidated financial statements, in 1987 Congress passed the Omnibus Budget Reconciliation Act which, among other things, treats certain publicly traded partnerships as corporations for tax purposes for the years beginning after December 31, 1987. Publicly traded partnerships in existence prior to December 18, 1987, will not be treated as corporations, for tax purposes, for ten years from the effective date of the 1987 law or until taxable years beginning after December 31, 1997. The effect of treating publicly traded partnerships as corporations will be to tax the income of the Partnership at the entity level and reflect distributions to partners as dividends.
During the first quarter of 1993, the Partnership adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). This statement requires, among other things, the recording of deferred income taxes based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal income tax rate. The cumulative effect of this accounting change resulted in a first quarter non-cash charge to income of $1,351,000, or $.32 per unit. This charge reflects the tax effect, as of January 1, 1993, of cumulative differences between the book and tax bases of the Partnership's assets from depreciation differences that are estimated to exist after the Partnership becomes a taxable entity in 1998.
SEASONALITY: Operations of the Hotels are affected by seasonality. Revenues are typically lower in winter periods than in summer periods.
INFLATION: The effects of inflation, as measured by fluctuations in the Consumer Price Index, have not had a material impact on the Partnership's revenues or net income during the three years covered by this report.
Item 8


Item 8 Financial Statements and Supplementary Data --------------------------------------------------------- The consolidated financial statements and supplemental information are on the following pages.
RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP --------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (dollar amounts in thousands, except per unit amounts)
The accompanying notes are an integral part of these consolidated statements.
RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP --------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (dollar amounts in thousands)
The accompanying notes are an integral part of these consolidated statements.
RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP --------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (decrease) in cash (dollar amounts in thousands)
The accompanying notes are an integral part of these consolidated statements.
RED LION INNS LIMITED PARTNERSHIP AND SUBSIDIARY LIMITED PARTNERSHIP --------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (dollar amounts in thousands)
The accompanying notes are an integral part of these consolidated statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 1994, 1993 and 1992.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of Red Lion Inns Limited Partnership, a Delaware limited partnership (the "Partnership"), and its subsidiary limited partnership, Red Lion Inns Operating L.P. (the "Operating Partnership"). The Partnership was organized in 1987 for the purpose of acquiring and owning ten hotels (the "Hotels") from Red Lion, a California Limited Partnership ("Red Lion") through the Operating Partnership. The acquisition of the Hotels was completed on April 14, 1987. All significant intercompany transactions and accounts have been eliminated.
Red Lion is managing the Hotels under a management agreement which expires in 2012. The agreement can be extended by Red Lion for an additional ten five-year periods.
REVENUES
Revenues reported in the accompanying statements of income represent the gross operating profits of the Hotels which is credited to the Partnership by Red Lion under the terms of the management agreement.
PROPERTY AND EQUIPMENT
The Partnership recorded the April 14, 1987 acquisition of property and equipment on the basis of an allocation of the purchase price to the assets acquired. Subsequent additions and improvements have been capitalized at their cost.
Normal repairs and maintenance are charged to hotel operating costs and expenses as incurred. Upon sale or retirement 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 income.
Base stock (linens, china, silverware and glassware) for the Hotels has been depreciated to 50 percent of its initial cost on a straight-line basis over a three year period. Subsequent replacements are expensed when purchased. The carrying value of base stock is included in furnishings and equipment in the accompanying consolidated balance sheets.
Depreciation is computed on a straight-line basis using the following estimated useful lives:
Buildings and improvements ............................. 5 to 35 years Furnishings and equipment .............................. 3 to 15 years
DEFERRED LOAN COSTS
Deferred loan costs consist primarily of financing fees on the Partnership's mortgage loan and are being amortized over the term of the loan.
INCOME TAXES
No current provision for federal or state income taxes has been provided by the Partnership in the accompanying consolidated financial statements since such taxes are the responsibility of the individual partners.
CASH DISTRIBUTIONS
The Partnership declares each quarterly distribution in the month following the end of the quarter to which it applies. Fourth Quarter distributions are accrued in the accompanying consolidated balance sheets for both of the years presented.
2. ORGANIZATION:
The Partnership was formed on January 16, 1987, under the Delaware Revised Uniform Limited Partnership Act and will continue until December 31, 2062, unless sooner terminated under the provisions of the partnership agreement. The Partnership was formed to acquire, own and operate the Hotels through its 99 percent limited partnership interest in the Operating Partnership.
Red Lion Properties, Inc. (the "General Partner"), a wholly-owned subsidiary of Red Lion, is the General Partner of the Partnership and the Operating Partnership. On April 14, 1987, the Partnership completed an initial public offering of units representing limited partnership interests ("units") totaling $98.8 million. These proceeds, accompanied by a $105.9 million mortgage loan, were used to acquire, through the Operating Partnership, the Hotels from Red Lion for approximately $195 million. After completion of this acquisition, the Partnership's limited partners have an effective 98.01 percent ownership interest in the Hotels with the General Partner retaining the remaining 1.99 percent ownership interest.
The allocation of the Partnership's profits and losses is based on the relative ownership interests in accordance with the terms of the partnership agreement. Cash flow available for distribution, as defined in the partnership agreement, will generally be distributed to the partners in proportion to their respective ownership interests until certain preferential distributions are achieved and then allocated to both the general and limited partners depending on factors related to the source of the net cash flow and cash distributions as specified in the partnership agreement (see Note 6).
3. INCOME TAXES:
During 1987, Congress passed the Omnibus Budget Reconciliation Act which, among other things, treats certain publicly-traded partnerships as corporations for tax purposes for the years beginning after December 31, 1987. Publicly-traded partnerships in existence prior to December 18, 1987 will not be treated as corporations, for tax purposes, for ten years from the effective date of the 1987 law or until taxable years beginning after December 31, 1997. The effect of treating publicly-traded partnerships as corporations will be to tax the income of the partnership at the entity level and reflect distributions to partners as dividends. Additional costs to the Partnership for such taxes would reduce the amount available for distribution to the partners.
During the first quarter of 1993, the Partnership adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). This statement requires, among other things, the recording of deferred income taxes based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal income tax rate. The cumulative effect of this accounting change resulted in a first quarter non-cash charge to income of $1,351,000, or $.32 per unit. This charge reflects the tax effect, as of January 1, 1993, of cumulative differences between the book and tax bases of the Partnership's assets from depreciation differences that are estimated to exist after the Partnership becomes a taxable entity in 1998.
The cumulative effect of the change in accounting method is comprised of federal deferred income taxes of $1,209,000 and state deferred income taxes, net of federal benefits, of $142,000.
This accounting change also requires provision of deferred income taxes resulting from the accumulation of book/tax depreciation differences on assets acquired in periods after the effective date of the change. Accordingly, deferred taxes amounting to $50,000 were provided for in 1994.
4. CASH RESERVE FOR CAPITAL IMPROVEMENTS:
A cash reserve for capital improvements has been established in accordance with the provisions of the management agreement. Funding of three percent of gross revenues is to be used for renovations, refurbishments and other capital expenditures. During the years ended December 31, 1994, 1993 and 1992, $3,018,000, $2,887,000 and $2,872,000, respectively, were accumulated in this reserve and then withdrawn to fund capital improvements.
5. LONG-TERM DEBT:
Long-term debt at December 31 consists of the following (in thousands):
The mortgage note bears interest at a 9 percent fixed rate. Payments on the mortgage note were interest only through April 13, 1992. In January 1995, a commitment was obtained to extend the maturity date of this note for one year to April 14, 1996. Scheduled maturities on the mortgage note for the years subsequent to 1994 are as follows: 1995 - $1,500,000 and 1996 - $100,969,000.
The revolving line of credit allows borrowings up to $14.1 million. This facility has been used to cover, among other items, the cost of units repurchased and incurs interest at floating interest rates. The weighted average interest rate on this facility was 7.4 percent at December 31, 1994. The Partnership must pay a nominal commitment fee on the unused portion of the line. In January 1995, a commitment was obtained to extend the maturity date of the revolving credit line for one year to April 14, 1996. The line has no scheduled principal payments until its expiration. Borrowings under the line averaged $11,698,000, $11,784,000 and $11,791,000 during 1994, 1993 and 1992, respectively. The average interest rates for borrowings under the line for the years ended December 31, 1994, 1993 and 1992 were 5.7 percent, 4.6 percent and 5.2 percent, respectively. Both the credit line and mortgage note are secured by the Hotels.
Non-interest bearing amounts payable to Red Lion are comprised of deferred incentive management fees of $6 million at December 31, 1994 and 1993 and amounts drawn against a $4 million General Partner credit facility of $3,726,000 at December 31, 1994 and 1993. These items are more fully discussed in Note 6.
During the years ended December 31, 1994, 1993 and 1992, the Partnership made total interest payments of $10,389,000, $10,227,000 and $10,365,000, respectively.
Based on the borrowing rates currently quoted by financial institutions for bank loans with terms and maturities similar to the Partnership's mortgage debt, the carrying value of such debt approximates its fair value.
6. CASH DISTRIBUTIONS TO PARTNERS:
Since inception, the Partnership has made quarterly cash distributions to partners to the extent that cash flow has been available for distribution as defined in the management agreement.
The Partnership declared cash distributions of $9.3 million in 1994, 1993 and 1992. On a per unit basis, declared cash distributions were $2.20 in 1994, 1993 and 1992.
In accordance with the management agreement, Red Lion has subordinated current payment of its incentive management fee (see Note 8) to facilitate current payment of distributions to limited partners. These priority distributions were $2.00 per unit during the first 12 months of operations, increasing annually at the rate of $.05 per unit until annual distributions reached $2.20 per unit in the second quarter of 1991.
During 1994, 1993 and 1992, the Partnership's cash flow available for distribution covered 100 percent of the priority cash distributions and also allowed payment of current incentive management fees to Red Lion of $4,438,000, $1,142,000 and $897,000, respectively.
For the first 36 months of operations, the General Partner also agreed to make available to the Partnership a $4 million non-interest bearing revolving credit facility which was to be used in the event that cash flow available for distributions was insufficient to make priority distributions. During the 36 month period, which ended April 30, 1990, the General Partner was required to fund $3,726,000 from the facility. This amount will be repaid out of either (i) cash flow after payment of priority distributions and incentive management fees, or (ii) sale or refinancing proceeds prior to any distribution to limited partners.
In connection with the subordination of incentive management fees noted above, the Partnership reached, in 1988, the maximum deferred amount of $6 million of such fees in accordance with the management agreement. The deferred amount, which does not accrue interest, will be paid out of either (i) 25 percent of cash flow after payment of priority distributions and current incentive management fees or (ii) sale or refinancing proceeds prior to any distribution to limited partners.
Following is a calculation of 1994, 1993 and 1992 cash flow available for distribution and related cash flow available for payment of incentive management fees (in thousands):
7. LEASES:
Two of the Hotels hold leases on all or a portion of their land. The leases contain rental provisions which are based on increases in the Consumer Price Index. The terms of the leases exceed the estimated remaining useful lives of the Hotels.
The Partnership leases certain equipment under operating leases. Total land and equipment rent expenses for 1994, 1993 and 1992 were $94,000, $88,000 and $128,000, respectively.
Future minimum rental payments, substantially all of which relate to land leases, are as follows:
8. RELATED PARTY TRANSACTIONS:
The General Partner is responsible for the management and administration of the Partnership. In accordance with the partnership agreement, the Partnership reimburses the General Partner for related administrative costs.
Red Lion manages the Hotels pursuant to a management agreement and receives a base management fee equal to three percent of the annual gross revenues of the Hotels plus an incentive management fee based on adjusted gross operating profit, as defined in the management agreement. Expenses for management fees under this agreement are reported separately in the accompanying statements of income.
The Hotels, in accordance with the management agreement, are also charged by Red Lion for their pro rata share of support services such as computer, advertising, public relations, promotional and sales and central reservation services.
All Partnership personnel are employees of Red Lion and its affiliates. All costs for services of such employees are reimbursed to Red Lion by the Operating Partnership. These costs include salaries, wages, payroll taxes and other employee benefits. Additionally, auxiliary enterprises owned by Red Lion sell operating supplies, furnishings and equipment to the Partnership. In the opinion of Red Lion management, sales to the Partnership by the auxiliary enterprises were made at prices and terms which approximated arms-length transactions.
The aggregate amounts, excluding personnel related expenses charged to the Partnership during 1994, 1993 and 1992 under the arrangements described above, are as follows (in thousands):
The amounts shown in current liabilities as payable to affiliate in the accompanying consolidated balance sheets consist of amounts payable to Red Lion for payroll and payroll taxes, support services, base and current incentive management fees and purchases of operating supplies, furnishings and equipment. Amounts payable to affiliate also include the Hotels' net working capital items which consist of cash held in hotel accounts, accounts receivable, inventories, prepaid expenses, hotel accounts payable, certain taxes other than property, income and payroll taxes. These balances are due in the normal course of business. Also included in amounts payable to affiliate were amounts related to capital expenditures of $1,696,000 and $1,703,000 at December 31, 1994 and 1993, respectively. The following schedules show the operating revenues and expenses and working capital of the Hotels not reflected in the accompanying financial statements (in thousands).
OPERATING REVENUES AND EXPENSES OF THE HOTELS
Included in long-term debt on the accompanying consolidated balance sheets are deferred incentive management fees of $6 million and $3,726,000 advanced under the $4 million non-interest bearing credit facility. For further discussion of the non-current amounts due to Red Lion, see Note 5.
9. COMMITMENTS AND CONTINGENCIES:
At December 31, 1994, the Partnership had commitments, relating to capital improvement projects, of $1,417,000.
The Partnership is subject to claims arising in the ordinary course of business. In the opinion of management such claims will not have a material effect, if any, on the financial position or results of operations of the Partnership or its subsidiary.
10. SUMMARIZED QUARTERLY FINANCIAL DATA (Unaudited):
Summarized quarterly financial data are as follows: (in thousands, except per unit amounts, room and occupancy statistics)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Red Lion Inns Limited Partnership and its Subsidiary Limited Partnership:
We have audited the accompanying consolidated balance sheets of Red Lion Inns Limited Partnership (a Delaware limited partnership) and its subsidiary limited partnership as of December 31, 1994 and 1993 and the related consolidated statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the partnerships' management. Our responsibility is to express an opinion on these 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 aspects, the financial position of Red Lion Inns Limited Partnership and its subsidiary limited partnership as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, effective January 1, 1993, the Partnership changed its method of accounting for income taxes.
/S/ Arthur Andersen LLP
Portland, Oregon February 7, 1995
Item 9

Item 9 Changes in and Disagreements with Accountants on -------------------------------------------------------------- Accounting and Financial Disclosure -----------------------------------
None.
PART III
Item 10



Item 10 Directors and Executive Officers of the Registrant ----------------------------------------------------------------
The Partnerships have no directors or officers. Management functions of the Partnerships are performed by the General Partner. The following information is provided regarding the officers and directors of the General Partner:
Mr. Johnson has been a Director of the General Partner since October 1991 and has held his present position with Red Lion since September 1991. Prior to joining Red Lion, Mr. Johnson was General Partner of Hellman and Friedman, a privately held investment firm, from January 1990. Mr. Johnson was a management consultant from 1988 to January 1990 and served as President and Chief Operating Officer of Dillingham Holdings for the two years prior to 1988.
Mr. Vingo was appointed to his present position with the General Partner in 1994. For more than five years prior to joining Red Lion he served as Vice President - Finance, Chief Financial Officer and a Board member of Alaska Airlines and its parent, Alaska Air Group.
Ms. Ugoretz was appointed to her present position with the General Partner in June 1993. For more than five years prior to joining Red Lion in 1993, Ms. Ugoretz was associated with the law firm of Stoel Rives Boley Jones & Grey, with whom she served as partner from 1990.
Mr. Crowley was appointed to his current position with the General Partner in March 1993. He has served in the same capacity with Red Lion for more than the last five years.
Mr. Narayan was appointed to his present position with the General Partner in June 1993. He has held the same position with Red Lion since May 1992. Prior to 1992, Mr. Narayan held the position of Assistant Treasurer from 1985 and was promoted to Vice President in 1990.
Mr. Reiss has held his present position with Red Lion for more than the last five years.
Mr. Schweitzer has held his present position with Red Lion for more than the last five years.
Mr. Gilhuly has been a director of Red Lion since March 1994. Mr. Gilhuly has been a General Partner or an executive with Kohlberg Kravis Roberts & Co. ("KKR") for more than five years. Mr. Gilhuly is also a director of Layne, Inc.; Owens-Illinois, Inc.; Owens-Illinois Group, Inc.; Red Lion Properties, Inc.; and Union Texas Petroleum Holdings, Inc.
Mr. Meier has been President and Chief Executive Officer of AMCO, Inc., a privately-owned investment enterprise, for more than the last five years. Mr. Meier is a director of Fred Meyer, Inc., Key Bank of Oregon, a wholly owned subsidiary of Keycorp, and trustee of Acorn Fund and Acorn International.
Messrs. Roberts and Michelson are general partners in KKR and each has been associated with KKR for more than five years. Mr. Roberts is a director of American Re Corporation, AutoZone, Inc., Borden, Inc., Duracell International Inc., IDEX Corporation, K-III Communications Corp., Owens-Illinois, Inc., Owens- Illinois Group, Inc., RJR Nabisco Holdings Corporation., RJR Nabisco, Inc., Safeway, Inc., The Stop and Shop Companies, Inc., Flagstar Companies, Inc., Flagstar Corporation, Union Texas Petroleum Holdings, Inc., and World Color Press, Inc. Mr. Michelson is a director of AutoZone, Inc., Fred Meyer, Inc., Owens-Illinois, Inc., Owens-Illinois Group, Inc., and Union Texas Petroleum Holdings, Inc.
Messrs. Gilhuly, Meier, Roberts and Michelson have all held their directorships with the General Partner since its formation in December 1986.
Section 16(a) of the Securities Exchange Act of 1934 requires certain Partnership insiders to file reports of ownership and changes in ownership with the Securities and Exchange Commission. The General Partner, David J. Johnson, J. Ray Vingo, and Beth A. Ugoretz each filed a late Form 3 Initial Statement of Beneficial Ownership in March 1995. Each of the late Form 3 reports indicated beneficial ownership of zero Units.
Item 11

Item 11 Executive Compensation -------------------------------------
The Partnership has no directors, officers or employees. Under the respective agreement of the limited partnership, the General Partner is responsible for the management and administration of the Partnership. As discussed in Item 13 below, the General Partner is reimbursed for certain management and administrative costs but receives no fees for providing these services to the Partnership and the Partnership is not responsible for the payment of compensation to the officers of the General Partner. The Hotels are operated by Red Lion in accordance with the Management Agreement (see Item 13).
Item 12

Item 12 Security Ownership of Certain Beneficial Owners -------------------------------------------------------------- and Management --------------
As of December 31, 1994, the following owner beneficially owned more than five percent of the total number of outstanding Units.
------------------ (1) This information relating to FMR Corporation was obtained from FMR Corporation's Schedule 13G filed with the Securities and Exchange Commission on February 14, 1995.
Item 13

Item 13 Certain Relationships and Related Transactions -------------------------------------------------------------
Substantially all of the directors and principal officers of the General Partner are directors and/or principal officers of Red Lion. The General Partner is responsible for the management and administration of the Partnership. In accordance with the partnership agreement, the Partnership reimburses the General Partner for administrative costs.
Pursuant to the Management Agreement, Red Lion receives a base management fee equal to three percent of annual gross revenues of the Hotels plus an incentive management fee based on adjusted gross operating profit, as defined in the Management Agreement.
In order to facilitate the Partnership's ability to make minimum annual distributions of cash flow from operations, Red Lion has agreed to subordinate payment of its incentive management fee to an amount sufficient to make the priority distributions. In addition, incentive management fees earned but not paid have been deferred without interest up to a maximum amount of $6 million and will be repaid out of either (i) 25% of cash flow from operations in any given year in excess of amounts sufficient to pay debt service on the original mortgage loan, the $14.1 million revolving credit line, the priority distribution and the current incentive management fee, or (ii) sale or refinancing proceeds prior to any distribution to limited partners. The $6 million maximum deferred incentive management fee amount was reached in November 1988 and the resulting accrual is included in Long-Term Debt on the Partnership's consolidated balance sheets. As noted in Item 7 to this report, the Partnership has generated sufficient cash from operations to cover 100 percent of its priority distributions to partners and to pay Red Lion current incentive management fees of $4,438,000, $1,142,000 and $897,000 for 1994, 1993 and 1992, respectively.
The Partnership, in accordance with the Management Agreement, is also charged by Red Lion for its pro rata share of support services such as computer, advertising, public relations, promotional and sales and central reservation services.
All Partnership personnel are employees of Red Lion and its affiliates. All costs of services of such employees are reimbursed to Red Lion by the Operating Partnership. These costs include salaries, wages, payroll taxes and other employee benefits. Additionally, auxiliary enterprises owned by Red Lion sell operating supplies and furnishings and equipment to the Partnership. In the opinion of Red Lion management, sales to the Partnership by the auxiliary enterprises were made at prices and terms which approximated arms-length transactions.
For the first 36 full months of operations which ended April 30, 1990, the General Partner agreed to make available to the Partnership a $4 million non- interest bearing revolving credit facility which was to be used in the event that cash flow available for distribution was insufficient to make priority distributions. During the 36-month period, the General Partner was required to fund $3,726,000 from the facility. Amounts due under this facility are included in Long-Term Debt on the Partnership's consolidated balance sheets.
For further discussion of related party transactions, see Notes 6 and 8 to the Partnership's consolidated financial statements.
PART IV
Item 14

Item 14 Exhibits, Financial Statement Schedules, and Reports ------------------------------------------------------------------ on Form 8K ----------
a. The following documents are filed herewith and made a part of this report:
1. The consolidated financial statements and supplementary information set forth in Item 8 of Part II beginning on page 11 of this report.
2. Financial Statement Schedules:
None
3. Exhibits:
2.1 Amended and Restated Agreement of Limited Partnership of Red Lion Inns Limited Partnership. Incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-1, Registration No. 33-11954.
2.2 Amended and Restated Agreement of Limited Partnership of Red Lion Inns Operating L.P. Incorporated by reference to Exhibit 2.2 to the Company's Registration Statement on Form S-1, Registration No. 33-11954.
3.1 Amended and Restated Certificate of Limited Partnership of Red Lion Inns Limited Partnership. Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1, Registration No. 33-11954.
3.2 Certificate of Limited Partnership of Red Lion Inns Operating L.P. Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1, Registration No. 33-11954.
4 Form of Unit Certificate. Incorporated by reference to Exhibit 5 to the Company's Registration Statement on Form 10.
10.1 Management Agreement between Red Lion Inns Operating L.P. and RL Acquisition Company. Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1, Registration No. 33-11954.
10.2(a) Purchase and Sale Agreement between RL Acquisition Company and Red Lion Inns Operating L.P. Incorporated by reference to Exhibit 10.2(a) to the Company's Registration Statement on Form S-1, Registration No. 33- 11954.
10.2(b) Supplemental Purchase and Sale Agreement between RL Acquisition Company and Red Lion Inns Operating L.P. Incorporated by reference to Exhibit 10.2(b) to the Company's Registration Statement on Form S-1, Registration No. 33-11954.
10.3 Lease dated as of June 23, 1980, by and between Lloyd Corporation, Ltd., as Lessor, and Red Lion Inn/Lloyd Center, Inc., as Lessee. Incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1, Registration No. 33-11954.
10.4 Lease dated as of October 23, 1968, by and between First National Bank of Omaha, as Lessor, and Downtown Development Co., Ltd., as Lessee. Incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1, Registration No. 33-11954.
10.5 Assignment of Lease dated April 8, 1985, from Omaha Red Lion, Inc., to RL Acquisition Company. Incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1, Registration No. 33-11954.
10.6 Lease dated June 1, 1973, between Charles F. Larson, as Lessor and James A. McClory, as Lessee. Incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1, Registration No. 33-11954.
10.7 Purchase and Sale Agreement and Escrow Instructions dated as of April 3, 1987, by and between Lloyd Properties and Red Lion Inn/Lloyd Center, Inc. Incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1, Registration No. 33-11954.
10.8 Credit Agreement, dated as of April 14, 1987, between United States National Bank of Oregon, the Canadian Imperial Bank of Commerce and Red Lion Inns Operating L.P. Incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1, Registration No. 33- 11954.
10.9 First Amendment to Credit Agreement, dated January 1, 1990. Incorporated by reference to Exhibit 10.9 to the Company's Form 10-K for the year ended December 31, 1992.
27 Article 5 Financial Data Schedule for 10-K.
b. Reports on Form 8-K:
No reports on Form 8-K have been filed for the period covered by this report.
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 30th day of March 1995.
RED LION INNS LIMITED PARTNERSHIP
By: RED LION PROPERTIES, INC. Its sole General Partner
By: /s/ David J. Johnson ---------------------------- David J. Johnson President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated on the 30th day of March 1995.
Signatures Title -------------------- --------------------
s/David J. Johnson President and Chief Executive Officer ------------------- Director David J. Johnson
s/J. Ray Vingo Executive Vice President and Chief Financial -------------- Officer J. Ray Vingo (Principal Financial Officer and Principal Accounting Officer)
/s/George R. Roberts Director -------------------- George R. Roberts
/s/Michael W. Michelson Director ----------------------- Michael W. Michelson
/s/Edward A. Gilhuly Director -------------------- Edward A. Gilhuly
/s/Roger S. Meier Director ----------------- Roger S. Meier