Item 1. - BUSINESS
General
Lamcor Incorporated, formerly Laminations Incorporated was formed in July, 1983 as the successor company to Film Converting Services, Inc. The name was changed in September, 1986 to Lamcor Incorporated.
There are two basic processes that take place in the plant of the company. First the roll of plastic film is laminated with another roll of film to give it strength. The other is to apply a heat seal coating to the basic material to act as a sealant, and is called a coated roll. This resulting roll is either used in the next process, or sold to others as is. The laminated rolls are sold to the meat industry, to other food packagers, and as a generic product. The coated rolls are sold to snack food makers, to specialty food manufacturers, and as a generic product. The product sales mix is about 10% laminated rolls, 20% coated rolls, and 70% pouches, and are sold to wide variety of customers. The company has been able in the past to keep the employees employed full time as a result, since it can sell this basic laminated roll to any number of customers.
The other process takes the laminated roll of plastic film, folds it over, and makes a pouch. This machine seals the pouch on three sides, cuts it to the desired length, and is able to make the folded over roll wide enough to make two pouches at the same time. These are sold in standard sizes, and some to customers specifications.
The pouch that comes from this process is then used for packaging products. The customer takes the pouch, inserts the product, removes the air from the pouch, and seals the fourth side. This removal of air causes the plastic pouch to collapse around the product and the result is the package found in most stores. Some processors do this by machine, but most pack the product in the pouch by hand. The FDA has set standards for this type of plastic film pouch for food products. The company meets these standards. The FDA standards are met by the suppliers of the basic material; the company relies on these written representations and its own testing to ensure that the FDA standards are met.
The company has machinery that will enable it to custom make pouches for various customers in different thicknesses and sizes.
The advent of microwave cooking has brought new demands to the requirements for plastic packaging of food. Microwave cooking requires that the food be packaged in plastic that will also be used in cooking not just in the storage of the food. The cooking of the food has brought more stringent requirements from the FDA for plastic packaging. The company complies with the FDA requirements, and so far has been able to fully comply. Along with the more stringent requirements has come a vastly expanded market.
The convenience of microwave cooking is a market that has barely been tapped at this time. The company feels that the market for microwave cooking will greatly expand in the next few years, and the company wants to be in position to exploit its portion of that market; the plastic packaging of the convenience foods. The pouch that the company makes is in many ways the ideal vehicle to package the microwave foods, and, in fact, the company has several customers that use its pouch at this time in microwave foods, such as entrees and snack foods. About 30% of the production of the products of the company at this time is used for microwave foods.
Major Customers
Reference is made to Note 9 to the financial statements with regard to customers from which the company derived more than 10% of its sales.
Patents and Trademarks
The Company has no patents on any of its products, however there is a patent pending on a vacuum seal for its plastic bags.
Employees
As of September 30, 1995, the Company had 38 full time employees, of which nine are in management and twenty nine are in production.
Item 2.

Item 2. - PROPERTY
Facilities
The Company purchased its manufacturing and office facilities for $340,000 in March, 1991. The Company expanded the plant in 1994, adding an additional 9,500 square feet to bring the size of the plant to 23,000 square feet, at a cost of $210,000. The sales offices were moved from leased space in Edina, Minnesota to expanded space at the plant. The Company added an additional 1,200 square feet at a cost of $100,000 for the new offices.
Item 3.

Item 3. - LEGAL PROCEEDINGS
None
Item 4.

Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5.

Item 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has been actively traded principally in the Minneapolis over-the-counter market since March 1, 1987. As of September 30, 1995, the following brokerage firms were making a market in the Company's common stock: R.J. Steichen & Co. Corp., Van Clemons Co.
The following table sets forth for the periods indicated the range of high and low closing bid quotations per share as reported by the local over-the-counter market. These quotations represent inter-dealer prices, without retail markups, markdowns or commissions and may not necessarily represent actual transactions.
Price Per Share High Low
Fiscal year 1995 First Quarter (October 1, 1994 through December 31, 1994) $ 3.50 $ 3.00
Second Quarter (January 1, 1995 through March 31, 1995) $ 2.50 $ 1.75
Third Quarter (April 1, 1995 through June 30, 1995) $ 3.37 $ 3.00
Fourth Quarter (July 1, 1995 through September 30, 1995) $ 3.75 $ 3.00
On September 30, 1995 the high closing bid and low asked prices of the Company's common stock were $3.00 and $3.75 per share, respectively. On September 30, 1995 there were 183 holders of record.
Item 6.

Item 6. - SELECTED FINANCIAL DATA
Item 7.

Item 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Profitability was achieved for a sixth consecutive year. Net income was double that of 1994, and was aided, in part, by stability in raw material markets. Management feels that this will be a continuing trend with only moderate increases in fixed costs.
Net sales for 1995 were $7,158,636, up from $4,817,411 in 1994, $3,682,870 in 1993. This reflected an increase of 49% in one year and almost double in the last 4 years. Net income was $358,795, compared to $176,918 in 1994, an increase of 103%. Per share income was $.22 per share, as opposed to $.12 in 1994. All income was from operations.
Cost of goods sold for 1995 was $5,194,981, compared to $3,542,411 in 1994 and $2,762,358 in 1993. Gross profit was $1,963,655 in 1995 compared to $1,275,000 in 1994 and $920,512 in 1993. Selling and administrative expense for 1995, 1994 and 1993 were $1,244,694, $936,587 and $693,781 respectively. During the course of the year financing was procured to provide capital for building expansion and for new machinery for production. Assets increased from $3,527,547 in 1994 to $4,164,080 in 1995. Long term debt increased from $837,761 in 1994 to $1,277,799, primarily due to building expansion and capital lease obligation.
Capital expenditures this year included the delivery of a new P.D.I. pouch machine capable of making large recloseable pouches. Full utilization was only recent, and there are orders employing its capabilities.
Ten new offices were completed in the second quarter of 1995. For the past several years the Company has maintained a sales office in Edina, Minnesota, and the lease term ended in 1995. Management determined that the sales operations would be enhanced by a move to the manufacturing headquarters in LeSuer. This put all operations under one roof, at a lower cost, and enhanced communications between sales and production
The company funded $15,200 in 1994 and $18,000 in 1995 to the 401(k) plan. Nearly all of the employees contributed to the plan, and management feels that it adds stability to the work force.
The company is planning another major expansion to the plant to double its size for manufacturing and warehouse space and to purchase a six color impression printing press in 1996. All printing of the plastic bags has been done by others to this time. The increased volume of sales, and the added space with the new addition to the plant will enable the company to do the printing in its own facility. Management feels that the printing will enable the company to control the timing of the printing, its quality, and enhance profits.
Inflation has not had a significant effect on the company, and the company has budgeted 1996 based on moderate economic growth. The only significant variable has been the volatile price of the film purchased as a raw material.
Item 8.

Item 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are attached following Item 14.
Item 9.

Item 9. - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
Item 10.

Item 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of the Company, with a brief description, are as follows:
Name Age Position
Leo Lund 64 Chairman of the Board
Toby Jensen 43 President
David Stewart 55 Director
Sue Jones 41 Director
Christopher Elliott 38 Director
The directors of the company are elected annually by the shareholders for a term of one year or until their successors are elected and qualified. The officers serve at the pleasure of the Board of Directors.
LEO LUND, Chairman of the Board and Secretary, age 64. Mr. Lund is an accountant, and was a partner in the firm of Lund & Associates, P.A. from 1955 to 1992, which provided accounting services. Mr. Lund sold his interest in the accounting firm in 1992, and is now semi retired. He serves as a board member of several corporations, which are not registered corporations. Mr. Lund devotes less than 5% of his time to the company.
TOBY JENSEN, President, age 43. Mr. Jensen has a degree from the University of Minnesota, and has been in management and sales with 2 flexible packaging companies for the past 17 years. He has been the President of the Company since 1988.
DAVID STEWART, Director, age 55. Mr. Stewart is the President of Paragon Enterprises, Inc. a real estate development company.
SUE JONES, Director, age 41. Ms Jones was the Vice President and General Manager of Strout Plastics, Inc., for 13 years until 1994. She is now an independent sales representative in the flexible packaging industry.
CHRISTOPHER ELLIOTT, Director, age 38. Mr. Elliott is an attorney and has practiced with the firm Christoffel, Elliott and Albrecht since 1989.
Item 11.

Item 11. - EXECUTIVE COMPENSATION.
The following table sets forth the cash compensation for services rendered in all capacities to the company during the company's fiscal year ended September 30, 1995, as paid by the company to each executive officer whose cash compensation exceeded $60,000 and to all executive officers as a group:
Name Capacity Cash Compensation
Toby Jensen President $ 93,799
All executive officers as a group $121,499
Item 12.

Item 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
There are presently 1,341,542 shares of the company's common shares outstanding. The following table sets forth the information as to the ownership of each person who, as of the date of this report, owns of record, or is known by the company to own beneficially, more than five percent of the company's common stock, and the officers and directors of the company.
Number Of Percent Of Name of Beneficial Owner Shares Shares
Leo Lund 145,075 10.8%
Tanana, Inc. 122,300 9.1%
Kathy Young 103,230 7.6%
Christopher Elliott 156,000 11.6%
Toby Jensen 45,000 3.3%
Sue Jones 5,000 0.3%
David Stewart 11,300 0.8%
All executive officers and directors as a group (5 individuals) 362,375 27.0%
Does not take into account any unexecuted warrants or options.
Item 13.

Item 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See notes 6, 8, 9 & 11 to Financial Statement.
PART IV
Item 14.

Item 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Attached are the Financial Statements and Independent Auditor's Report on Examination of Financial Statements for the year ended September 30, 1994, 1993 and 1992.
(b) Attached are the following Financial Statement Schedules and Auditors Report on Schedules,
Independent Auditors Report on Schedules Schedule V - Property, Plant and Equipment Schedule VI - Accumulated Depreciation, Depletion, and Amortization of Property, Plant and Equipment Schedule IX - Short-term borrowings
All other schedules are omitted because they are not required or not applicable or the information is shown in the consolidated financial statements or notes thereto.
(c) No report was filed on Form 8-K.
(d) There are no exhibits.
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.
Dated December 22,1995
LAMCOR, INC.
by____________________________ Leo W. Lund
LAMCOR, INCORPORATED
FINANCIAL REPORT
SEPTEMBER 30, 1995, 1994 AND 1993
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders Lamcor, Incorporated LeSueur, Minnesota
We have audited the accompanying balance sheets of Lamcor, Incorporated as of September 30, 1995 and 1994, and the related statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended September 30, 1995. These financial statements are the responsibility of the Company's 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 financial statements referred to above present fairly, in all material respects, the financial position of Lamcor, Incorporated as of September 30, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1995, in conformity with generally accepted accounting principles.
/s/ HOUSE, NEZERKA & FROELICH, P.A.
November 20, 1995
See Notes to Financial Statements.
See Notes to Financial Statements.
See Notes to Financial Statements.
See Notes to Financial Statements.
LAMCOR, INCORPORATED
NOTES TO FINANCIAL STATEMENTS Years Ended September 30, 1995, 1994 and 1993
Note 1. Nature of Business and Significant Accounting Policies:
Nature of business:
The Company is engaged in the business of laminating plastic and manufacturing of plastic pouches used in the food and medical industries with sales throughout the United States.
A summary of the Company's significant accounting policies follows:
Inventories:
Inventories are stated at the lower of cost (using standard costs for work in progress and finished goods) or market, computed on a basis which approximates the first-in, first-out (FIFO) method.
Property, equipment and improvements:
Property, equipment and improvements are stated at cost. For financial reporting purposes, depreciation is computed using the straight-line method over the following estimated useful lives:
Years Building and improvements 3-40 Manufacturing equipment 5-15 Office equipment and other 3-5
Depreciation on property, equipment and improvements was $175,715, $124,805 and $103,556 for the years ended September 30, 1995, 1994 and 1993, respectively.
For income tax reporting purposes, other lives and methods are used; deferred income taxes are provided for these differences.
Income taxes:
Effective October 1, 1993, the Company began accounting for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes" (see Note 10). Deferred tax assets and liabilities are recognized for the future consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases.
Earnings per share:
Earnings per share has been determined by dividing net income by the weighted average common shares outstanding during each period plus the effect of common shares contingently issuable, primarily from stock options as computed using the modified treasury stock method.
Estimates and assumptions:
The preparation of financial statements in conformity with generally accepted accounting principles 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 date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Note 2. Inventories:
The components of inventory are as follows:
1995 1994 -------- -------- Raw materials $246,576 $ 480,394 Work in progress 416,504 355,094 Finished goods 323,358 229,199 -------- -------- $986,438 $1,064,687 ======== ========
Note 3. Other Assets:
1995 1994 -------- -------- Building lease deposit $ -- $ 844 Equipment deposits 277 291,673 Refinancing costs, less accumulated amortization 1995 $928; 1994 $464 2,381 2,845 Land deposit 1,500 -- -------- -------- $ 4,158 $295,362 ======== ========
Note 4. Bank Line of Credit:
The Company has two revolving lines of credit with a bank in the maximum amount of $300,000 and $90,000 which expire September 26, 1998 and October 10, 1995, respectively. Interest is payable at 1.5% over the bank's reference rate which was 8.75% at September 30, 1995. The notes are payable on demand and are collateralized by receivables, inventory and equipment.
Note 5. Long-Term Debt:
Maturities for the next five years on long-term debt outstanding at September 30, 1995 are as follows:
Year Ending September 30 1996 $ 97,000 1997 94,883 1998 102,389 1999 103,781 2000 169,057 After 381,983 -------- $949,093
Note 6. Leases:
On August 11, 1994, the Company entered into a capital lease agreement with a financing company to acquire $489,920 of equipment. The financing company advanced the manufacturer $157,030 for which the Company was directly obligated as of September 30, 1994. Payments totaling $332,890 were made by the financing company during the 1995 year. The lease began on May 1, 1995 and calls for 84 monthly payments of $8,147 including interest at 10.33%.
On January 17, 1995, the Company entered into a capital lease agreement to purchase a truck for $18,884. The lease requires 48 monthly payments of $400 including interest at 9.75%.
The Company also entered into a capital lease agreement to purchase a computer for $4,304 which began on April 30, 1995 and requires 36 monthly payments of $130.
The following is a schedule by year of the future minimum lease payments due under capital leases together with the present value of the net minimum lease payments:
Year Ended September 30: 1996 $104,125 1997 104,125 1998 103,345 1999 99,360 2000 97,763 After 2000 154,791 -------- Total minimum lease payments 663,509 Less amount representing interest 180,700 -------- Present value of minimum lease payments 482,809 Less current obligation under capital lease 57,103 -------- Non-current obligation under capital lease $425,706 ========
Cost and accumulated amortization of leased assets are as follows:
1995 1994 -------------- ---------- Cost $ 513,108 $ - Accumulated amortization 23,290 - -------------- ---------- $ 489,818 $ - ============== ==========
Amortization of assets under capital leases is included in depreciation expense and was $23,290 for the year ended September 30, 1995.
The Company rented space for a Minneapolis sales office under an operating lease which commenced June 1, 1990 and expired May 31, 1995. Rent expense under all operating leases was $16,488, $14,810 and $12,962 for the years ended September 30, 1995, 1994 and 1993, respectively.
Note 7. Stock Options:
The Company has reserved shares of common stock for issuance to key employees and stockholders under incentive stock option and purchase plans. Options are exercisable on a graduated scale and/or expire based on the individual terms of the option agreements. The options are exercisable at prices ranging from $ .50 to $2.00 per share. Other pertinent information related to the plan is as follows:
The options exercised during the years ended September 30, 1995, 1994 and 1993 were at an average price of $.81, $.66 and $1.25 per share, respectively.
Note 8. Notes Receivable Arising From the Sale of Common Stock:
Issued shares are being held by the Company as collateral for the above notes pending payment of the amounts due.
Note 9. Major Customers:
The Company derived more than 10% of its net sales from the following unaffiliated customers and had receivable balances from those customers in the amounts of:
* The net sales to customers A and B were less than 10% of the total net sales for the period indicated.
Note 10. Income Taxes:
Effective October 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." The adoption of Statement 109 changes the Company's method of accounting for income taxes from the deferred method to a liability method. Under the deferred method, the Company recorded the tax effects of timing differences between financial reporting and taxable income. As explained in Note 1, the liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the reported amounts of assets and liabilities and their tax bases. The cumulative effect relating to the adoption of Statement No. 109 was not significant.
The income tax components are as follows:
Net deferred tax liabilities consist of the following:
Differences between income tax expense and the amount computed by applying the statutory federal income tax rates to earnings before income taxes are as follows:
Note 11. Other Accrued Expenses:
Other accrued expenses consist of the following:
Note 12. Profit Sharing Plan:
During the year ended September 30, 1993, the Company implemented a profit sharing plan under Section 401(k) of the Internal Revenue Code for all eligible employees. The Plan provides that Company contributions are at the discretion of the Board of Directors. In addition, participants may elect to enter into salary reduction agreements with the Company for a portion of their compensation. Company contributions for the years ended September 30, 1995, 1994 and 1993 were $18,000, $15,300 and $0, respectively.
INDEPENDENT AUDITOR'S REPORT ON SCHEDULES
Board of Directors and Shareholders Lamcor, Incorporated LeSueur, Minnesota
Our audits of the financial statements of Lamcor, Incorporated included schedules V, VI and IX contained herein, for the years ended September 30, 1995, 1994 and 1993.
In our opinion, such schedules present fairly the information required to be set forth therein in conformity with generally accepted accounting principles.
HOUSE, NEZERKA & FROELICH, P.A.
Bloomington, Minnesota November 20, 1995
Depreciation and amortization of building, equipment and improvements are provided on the straight-line method over the following estimated useful lives of the assets:
Years Building and improvements 3-40 Manufacturing equipment 5-15 Office equipment and other 3-5
LAMCOR, INCORPORATED
SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
LAMCOR, INCORPORATED
SCHEDULE IX - SHORT-TERM BORROWINGS
(1) Note payable to bank under a revolving line of credit borrowing arrangement which expires September 26, 1998. Collateralized by receivables, inventory and equipment.
(2) Note payable to bank under a revolving line of credit borrowing arrangement which expires October 10, 1995. Collateralized by receivables, inventory and equipment.
(3) Note payable to bank under a revolving line of credit borrowing arrangement which expires November 3, 1994. Collateralized by receivables, inventory and equipment.
(4) Note payable to bank dated September 28, 1993 under a revolving line of credit borrowing arrangement which expires December 28, 1998. Collateralized by receivables, inventory and equipment.
(5) Total of daily outstanding principal balances divided by days in the year.
(6) Actual interest divided by the average amount outstanding.


ITEM 1. BUSINESS --------
Development and Description of Business - ---------------------------------------
The information required by Part I, Item 1 is contained in (1) Part II, Item 6, Selected Financial Data; (2) Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and (3) Part IV, Item 14 in Notes 1, 2, 3 and 4 of the notes to financial statements, which are incorporated herein by reference.
Employees - ---------
The Company has no employees. Services are performed by the General Partner and agents retained by it.
ITEM 2.

ITEM 2. PROPERTIES ----------
The following is a description of the hotels and the leasehold interests owned by the Partnership as of December 31, 1995:
I-1
PART I ------
On July 19, 1995, the Partnership sold the Days Inn Kankakee to American Indus Hotels, Inc., an unaffiliated entity. See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and the notes to the financial statements for additional information pertaining to the sale.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS -----------------
There are no material pending legal proceedings to which the Partnership is a party.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of 1995.
I-2
PART II -------
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS AND ----------------------------------------------------- RELATED PARTNERSHIP MATTERS ---------------------------
(a), (b) and (c)
The information required in these sections is part of the Selected Financial Data included in Part II, Item 6, which is incorporated herein by reference.
II-1
PART II -------
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA -----------------------
(1) Certain amounts in the 1993, 1992 and 1991 selected financial data have been reclassified to conform to the 1995 presentation.
Market Data - -----------
The Partnership's Beneficial Assignee Certificates (BACs) of limited partnership interests were sold through a public offering managed by CRICO Securities Corporation and certain participating broker-dealers. As of February 28, 1996, there were approximately 1,700 registered holders of BACs in the Partnership. The Partnership BACs are not publicly traded on any registered stock exchange but can be traded on an informal secondary market. The Partnership has been informed by Equity Resource Fund XVIII (Fund XVIII), a Massachusetts limited partnership, that Fund XVIII initiated a tender offer on February 16, 1996, to purchase up to 30,000 BACs on a "first-come, first-buy" basis, at a price of $8 per BAC. Fund XVIII has stated that it made the offer for the express purpose of holding the BACs as a long-term investment. The purchase offer of $8 per BAC was determined solely at the discretion of Fund XVIII and does not necessarily represent the fair market value of each BAC. The General Partner takes no position as to recommending or not recommending this
II-2
PART II -------
ITEM 6. SELECTED FINANCIAL DATA - Continued -----------------------
offer to BAC Holders. The offer is expected to expire on March 16, 1996. As of February 16, 1996, Fund XVIII and/or its affiliates held a 1.1% limited partner interest in the Partnership. If Fund XVIII is successful in acquiring 30,000 BACs, it would hold an additional 3.5% limited partner interest in the Partnership, bringing the total ownership percentage of Fund XVIII and/or its affiliates to 4.6%. There is no assurance that Fund XVIII will acquire any or all of the 30,000 BACs as a result of this solicitation to BAC Holders. As of February 28, 1996, the Partnership was not aware of any BACs having been purchased by Fund XVIII as a result of this solicitation. Other than the Fund XVIII solicitation, it is not anticipated that there will be any other market for resale of BACs. As a result, an investor may be unable to sell or otherwise dispose of his or her interest in the Partnership.
Cash available for distribution, as defined in the Partnership Agreement, is intended to be distributed on a quarterly basis within sixty days after the end of each calendar quarter. The Partnership paid or accrued distributions of $2,033,028 and $1,690,915 to BAC Holders during 1995 and 1994, respectively. See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for additional information regarding the distributions during the years ended December 31, 1995 and 1994 and for a discussion of factors which may affect future distribution levels.
II-3
PART II -------
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS -----------------------------------
General -------
CRI Hotel Income Partners, L.P. (the Partnership) is a limited partnership which was formed under the Delaware Revised Uniform Limited Partnership Act as of September 23, 1986 and will continue until December 31, 2016, unless dissolved earlier in accordance with the Partnership Agreement. The Partnership was formed for the purpose of investing in hotels that were acquired from Days Inns of America, Inc. (Days Inns). The Partnership's primary objective continues to be cash flow growth and capital appreciation. However, the attainment of this objective is principally dependent on the hotels' operations. The hotels are operated by Buckhead Hotel Management Company, Inc. (Buckhead), formerly known as Days Inns Management Company, Inc., under the nationally recognized franchise name of Days Inns.
The Registration Statement of the Partnership was declared effective by the Securities and Exchange Commission (SEC) on April 17, 1987, and subsequently, a Prospectus of the same date was printed. The Partnership registered a total of 6,000,000 Beneficial Assignee Certificates (BACs), at $25 per BAC, with the SEC. BACs represent beneficial assignments of limited partnership interests which were held by CRICO Hotel Fund, Inc. (CRICO Hotel Fund). BACs were to be offered in series, with Series A having a minimum of 196,000 BACs, or $4,900,000, and a maximum amount of 2,344,000 BACs, or $58,600,000. The Partnership terminated the Series A offering on March 31, 1988 with 868,662 BACs, or gross proceeds of $21,716,550, and does not intend to offer another series.
The General Partner of the Partnership is CRICO Hotel Associates I, L.P. (CRICO Associates), a Delaware limited partnership, the general partner of which is C.R.I., Inc. (CRI), a Delaware corporation. The General Partner has complete authority in the overall management and control of the Partnership. The Assignor Limited Partner of the Partnership is CRICO Hotel Fund.
The number of BACs sold generated sufficient proceeds to purchase the following hotels and leasehold interest:
Hotels Date of Purchase Amount of Purchase - -------------------- ---------------- ------------------ Clearwater Days Inn 4/01/88 $3,750,000 Days Inn Kankakee (A) 11/01/87 $2,250,000 Minneapolis Days Inn 11/01/87 $4,800,000 Plymouth Days Inn 12/30/87 $4,000,000 Roseville Days Inn 3/01/88 $4,200,000
Leasehold interest Date of Purchase Amount of Purchase - -------------------- ---------------- ------------------ Scottsdale Days Inn (B) 7/01/88 $2,000,000
(A) The Kankakee hotel was sold on July 19, 1995, as discussed below.
(B) Included in the purchase of the Scottsdale leasehold interest was $618,000 allocated to furniture, fixtures and equipment.
II-4
PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued -----------------------------------
Financial Condition/Liquidity -----------------------------
The Partnership expects that the hotels in the aggregate will generate sufficient cash flow to achieve a positive cash flow after operating expenses. During 1996, certain hotels are expected to retain aggregate additional replacement reserves of approximately $138,000 for the purpose of funding the purchase of electronic door locks. The installation of these electronic door locks is required by the American Automobile Association (AAA) as a condition of the hotels being listed in AAA travel books. Other than the purchase of electronic door locks and the periodic replacement of fixed assets, which are also funded from the replacement reserves, there are no material commitments for capital expenditures.
Due to the expiration of all remaining cash flow guarantees in 1993, the Partnership's liquidity and future results of operations are primarily dependent upon the performance of the underlying hotels. Hotel operations may be materially affected by changing market conditions and by seasonality caused by variables such as vacations, holidays and climate. The Partnership closely monitors its cash flow position in an effort to ensure that sufficient cash is available for operating requirements and distributions to BAC Holders. The Partnership's net cash provided by operating activities for 1995 and 1994 was adequate to support operating, investing and financing requirements and declared distributions to BAC Holders and the General Partners. Cash and cash equivalents decreased in 1994 principally due to deposits to the Partnership's working capital reserves. The Partnership estimates that existing cash and cash equivalents along with future cash flows from the hotels' operations, in the aggregate, will be sufficient to pay operating expenses and short term commitments, fund replacement reserves, and make distributions to BAC Holders. Short-term liabilities of $1,506,245 increased slightly from 1994. This resulted principally from an increase in declared distributions payable as a result of improved operations in 1995. In addition, accrued expenses at four hotels increased in 1995 as compared to 1994. These increases were offset by a decrease in hotel trade payables at five hotels, as well as a decrease in building lease payable resulting from the timing of lease payments made by one hotel.
On October 20, 1994, a contract for the sale of the Kankakee hotel was signed. The sale was completed on July 19, 1995. Accordingly, the assets of this hotel were classified as an asset held for sale on the balance sheet as of December 31, 1994. The sale price of the property of $1.2 million generated sufficient proceeds to the Partnership to retire the purchase money note obligation of the Partnership with respect to such property. The sale resulted in a net financial statement loss and a net tax loss in 1995 of approximately $7,000, and $607,000, respectively. Reserves for loss on the sale of the Kankakee hotel of $400,000 and $200,000 were recognized for financial statement purposes in 1994 and 1993, respectively. The sale of the Kankakee hotel is not expected to have a negative effect on the future net income or cash flow of the Partnership.
On February 21, 1995 and May 10, 1995, the Partnership advanced $35,000 and $42,000, respectively, from the working capital reserves to the Kankakee hotel to fund the hotel's short-term working capital needs. These advances were repaid and the working capital reserves were replenished on July 19, 1995 from
II-5
PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued -----------------------------------
sale proceeds of the Kankakee hotel, as discussed above. Additionally, 1994 advances of $62,055 were repaid from sale proceeds and were included in cash distributions from operating activities in the third quarter of 1995.
Working Capital Reserve - -----------------------
The working capital reserve of $225,000 and $150,000 as of December 31, 1995 and 1994, respectively, represents funds held in reserve, initially established in an amount of not less than 1% of Series A gross offering proceeds, which are maintained as working capital for the Partnership. The working capital reserves may be increased or reduced by the General Partner as it deems appropriate. The General Partner increased the working capital reserves by $75,000 and $100,000 during 1995 and 1994, respectively. Advances to the Kankakee hotel from working capital reserves during 1995 and 1994 were repaid to working capital reserves in 1995, as discussed above.
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" (SFAS 107), requires the disclosure of fair value information about financial instruments for which it is practicable to estimate that value. The Partnership implemented SFAS 107 in 1995 and has determined that the carrying amount of its working capital reserves approximate fair value.
Guaranteed Return on Hotels - ---------------------------
The Partnership entered into an agreement with Days Inns, Days Inns Corporation and Buckhead (collectively the Guarantors) whereby the Guarantors guaranteed a return on four hotels equal to 10.5% per year of the combined purchase price of the hotels for the first three consecutive twelve-month periods after the acquisition of each hotel. The guarantee period for the Minneapolis, Kankakee and Plymouth Days Inns expired in 1990, and the Roseville Days Inn guarantee expired in 1991. The Clearwater Days Inn 10.5% guarantee (for five consecutive twelve-month periods) expired March 31, 1993. The Scottsdale Days Inn 14% guarantee (for five consecutive twelve-month periods) expired June 30, 1993.
During 1993, the remaining cash flow guarantees expired. The guarantee periods were on a fiscal year basis as compared to the guarantee payments which were paid quarterly on a calendar year basis. As a result of this timing difference, at the expiration of the guarantee period for the Clearwater and Scottsdale Days Inns, certain guarantee payments received by the Partnership were returned to the Guarantors and classified as recoveries on the statement of operations in 1993. Also included in recoveries on the statement of operations for 1993 are adjustments arising from a change in accounting estimate related to the timing differences between hotel operations and cash flows recorded by the Partnership.
On September 27, 1991, the Guarantors filed in the Bankruptcy Court for the District of Delaware a voluntary petition for reorganization (the Bankruptcy) pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code. The Partnership filed a proof of claim with the Bankruptcy Court. The Guarantors filed their plan for reorganization (the Plan), and the Plan was confirmed by
II-6
PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued -----------------------------------
the Bankruptcy Court in 1992. As of December 31, 1993, $23,798 of the $145,549 remaining cash flow guarantee payment for the third quarter of 1991 and 2,345 shares of Buckhead America Corp. common stock had been received by the Partnership. On February 10, 1994, the Partnership received $3,589 and 261 shares of Buckhead America Corp. common stock. In 1995, the Partnership received $12,339 and 229 shares of Buckhead America Corp. common stock as a distribution from its beneficial interest in a trust (the Trust) established to receive proceeds from certain Buckhead litigation if such litigation is successful. The total recovery of cash flow guarantee payments to the Partnership aggregated $53,950 as of December 31, 1995, based on cash received and the market value of the common stock at the date of receipt. The common stock, which has a carrying value of $14,224 as of December 31, 1995, is included in receivables, reserve for replacements and other assets on the balance sheets. Based on the quoted market price of these instruments, the Partnership estimates that the fair value of the common stock approximates $18,000 as of December 31, 1995. The cash, shares of common stock and the beneficial interest in the Trust constitute full settlement of the Partnership's claim. There is no assurance that further distributions will be received as a result of the Partnership's beneficial interest in the Trust.
Purchase Money Notes - --------------------
In addition to the capital provided by the sale of BACs, the Partnership received Zero Coupon Purchase Money Note (the Notes) financing from Days Inns for the acquisition of the hotels. The Notes are nonrecourse notes collateralized by the various properties. Each Note provides for a ten year maturity from the date of acquisition with an accrual of interest at 9% per annum, compounded on a monthly basis. Principal and accrued interest, which will equal 47.4% of the original purchase price of the hotel, is due to BancBoston Mortgage Corporation upon maturity of each Note. The Notes may be prepaid at the initial note balance plus accrued interest at any time without premium or penalty. The Kankakee note payable of $434,925 plus accrued interest of $440,746 was retired on July 19, 1995 in connection with the sale of the hotel, as discussed below. The Managing General Partner is currently investigating refinancing options for the remaining notes. There is no assurance that a refinancing or refinancings will be completed.
The balances of the Notes, including accrued interest, due upon maturity are as follows:
II-7
PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued -----------------------------------
SFAS 107 requires the disclosure of fair value information about financial instruments for which it is practicable to estimate that value. The Partnership has determined that it is not practicable to estimate the fair value of the Notes due to the lack of an active market for this type of financial instrument, as well as the excessive costs associated with an independent appraisal of the Notes.
Distributions - -------------
The following distributions were paid or accrued to BAC Holders of record during 1995, 1994 and 1993:
II-8
PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued -----------------------------------
* Includes the distribution of net cash proceeds from the sale of the Kankakee hotel of $52,478 (approximately $0.06 per BAC), which is net of payment of outstanding Kankakee real estate taxes, retirement of the related note payable and repayment of Partnership advances.
The General Partner expects the distribution for the quarter ended March 31, 1996 to range from approximately $0.52 to $0.60 per BAC. The General Partner expects the distribution for the year ending December 31, 1996 to range from approximately $2.15 to $2.35 per BAC. Due to the expiration of the remaining cash flow guarantees during 1993, distributions are dependent on the net cash flow produced from hotel operations, net of Partnership expenses. The cash flow from certain hotels may be materially affected by changing market conditions and by seasonality. Also, cash flow from certain hotels in 1996 is expected to be reduced due to additions to replacement reserves in the first quarter of 1996 to fund the purchase of electronic door locks, as previously discussed.
Results of Operations ---------------------
1995 versus 1994 - ----------------
The Partnership's net income, which consists principally of revenues from hotel operations, increased in 1995 from 1994 primarily due to an 8% decrease in total hotel operating costs and expenses for 1995 as compared to 1994. Operating costs and expenses decreased 4% as a result of the reserve for loss on sale of the Kankakee hotel recognized in 1994, and decreased another 4% as a result of decreased operations and the eventual sale of the Kankakee hotel. Operating costs and expenses of the remaining hotels did not change significantly in 1995 from 1994. Partially offsetting the increase in net income was a .7% decrease in room revenue. Room revenue decreased 5% as a result of the sale of the Kankakee hotel in the third quarter of 1995, as discussed above. This decrease in room revenue was partially offset by a 4%
II-9
PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued -----------------------------------
increase in room revenue from the remaining hotels, primarily due to an increase in average room rates at all hotels.
1994 versus 1993 - ----------------
The Partnership's net income increased in 1994 from 1993. Room revenue increased approximately 11% in 1994 from 1993 primarily due to an increase in average occupancy at five of the six hotels, as well as an increase in average room rates at all six hotels. Contributing to the increase in net income was the return in 1993 of previously received guarantee payments due to the timing of guarantee payments, as discussed above. Also contributing to the increase in net income was a decrease in depreciation and amortization expense in 1994 from 1993, principally due to certain assets becoming fully amortized in the first quarter of 1994. An increase in telephone revenue relating to the increase in hotel occupancies also contributed to the increase in net income. Partially offsetting the increase in net income was an additional reserve for loss on the anticipated sale of the Kankakee hotel recorded in 1994, as discussed above. Also partially offsetting the increase in net income was an increase in room expenses relating to the increases in hotel occupancy, as well as an increase in management fees due to the payment of incentive management fees on two hotels in accordance with the amended management agreements, as discussed below. The hotel operations are further described in "Hotels' Results of Operations."
Hotels' Results of Operations -----------------------------
The hotels' results of operations are affected by changing market conditions and by seasonality caused by variables such as vacations, holidays and climate. Based on the hotels' operating budgets, the following months should provide the highest gross operating income and net cash flow:
Hotel Location Peak Months ------------------ --------------------- Clearwater, FL October through April Minneapolis, MN May through October Plymouth, MN June through October Roseville, MN May through October Scottsdale, AZ January through May
The Statements of Operations include operating results for each of the hotels as outlined below. Gross Operating Income represents total revenue less departmental expenses. Net Cash Flow represents cash flow after operating expenses and before replacement reserves and guarantee payments. The operating results and average occupancy for the hotels for the years ended December 31, 1995, 1994 and 1993 are as follows:
II-10
PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued -----------------------------------
II-11
PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued -----------------------------------
(1) The 1995 operating results presented for the Kankakee hotel are through July 19, 1995, the date of sale.
(2) The sub-totals and totals for average occupancy are based on a weighted average taking into consideration the number of rooms at each location.
On January 1, 1993, the management agreements between the Partnership and Buckhead, pertaining to Buckhead's management of each of the hotels, were amended to extend the existing term of each agreement for an additional two to five years and increase the base management fee from 2.5% to 3.5% of gross revenue. The amendments for the Clearwater Days Inn and the Scottsdale Days Inn included a modification to the method of calculating the incentive management fee. Incentive management fees of $78,408, $64,328 and $22,830 were earned or paid in 1995, 1994 and 1993, respectively. These agreements were amended as part of the bankruptcy process. The Partnership accepted these modifications to the management agreements in lieu of having the agreements terminated by Buckhead in its Chapter 11 Bankruptcy case (filed in 1991). Had the Partnership contracted another management agent, costs (which would have included franchise fees currently not payable because of Buckhead's management of the hotels) were expected to exceed the increase in management fees.
1995 versus 1994 - ----------------
Gross operating income and net cash flow for the Clearwater hotel increased in 1995 from 1994 primarily due to an increase in average room rates, as well as management's implementation of cost-control strategies. The hotel lost a major client in the fourth quarter of 1995 when the client relocated its training facilities out of the Clearwater area. This client accounted for approximately 11% of total room revenue for the Clearwater hotel in 1995. Gross operating income and net cash flow for the Minneapolis hotel increased in 1995 from 1994 primarily due to an increase in room rates resulting from management's marketing
II-12
PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued -----------------------------------
programs. Gross operating income and net cash flow for the Plymouth hotel increased in 1995 from 1994 primarily due to an increase in room rates resulting from increased group volume. Gross operating income and net cash flow for the Roseville hotel increased in 1995 from 1994 primarily due to an increase in occupancy and average room rates resulting from increased room demand in the Roseville area. Gross operating income for the Scottsdale hotel did not change significantly in 1995 from 1994 as a decrease in occupancy was offset by an increase in average room rates. Net cash flow for the Scottsdale hotel increased in 1995 from 1994 as a result of increased cost control efforts in 1995. The Kankakee hotel was sold on July 19, 1995, as previously discussed. From January 1, 1995 to the date of sale, gross operating income and net cash flow for the Kankakee hotel decreased from the same period in 1994 primarily due to the re-opening of a nearby competitor, as well as the opening of a new competitor in 1994.
1994 versus 1993 - ----------------
Gross operating income and net cash flow for the Clearwater hotel did not change significantly in 1994 from 1993 despite an overall decline in Florida tourism. Gross operating income and net cash flow for the Minneapolis hotel increased in 1994 from 1993 primarily due to an increase in occupancy and room rates resulting from management's marketing programs and increased room demand in the Minneapolis area. Gross operating income and net cash flow for the Plymouth hotel increased in 1994 from 1993 primarily due to an increase in occupancy and room rates resulting from increased room demand in the Plymouth area. Gross operating income and net cash flow for the Roseville hotel increased in 1994 from 1993 primarily due to an increase in occupancy resulting from increased room demand in the Roseville area and an increase in room rates resulting from management's strategy to displace lower rated volume business with higher rated segments. Gross operating income and net cash flow for the Scottsdale hotel increased in 1994 from 1993 primarily due to an increase in room rates and occupancy resulting from increased room demand in the Scottsdale area combined with new corporate accounts secured in 1994. Gross operating income and net cash flow for the Kankakee hotel increased in 1994 from 1993 primarily due to an increase in occupancy and room rates resulting from the temporary closing of a major competitor and a decrease in operating expenses resulting from a reduction in hotel staff and other cost-saving measures.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -------------------------------------------
The information required by this item is contained in Part IV.
ITEM 9.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT --------------------------------------------------
(a), (b) and (c) The Partnership has no directors, executive officers or significant employees of its own. (a), (b), (c) and (e) The names, ages and business experience of the directors and executive officers of C.R.I., Inc. (CRI), the Managing General Partner of the Partnership, are as follows:
William B. Dockser, 59, has been the Chairman of the Board of CRI and a Director since 1974. Prior to forming CRI, he served as President of Kaufman and Broad Asset Management, Inc., an affiliate of Kaufman and Broad, Inc., which managed a number of publicly held limited partnerships created to invest in low and moderate income multifamily apartment complexes. For a period of 2-1/2 years prior to joining Kaufman and Broad, he served in various positions at HUD, culminating in the post of Deputy FHA Commissioner and Deputy Assistant Secretary for Housing Production and Mortgage Credit, where he was responsible for all federally insured housing production programs. Before coming to Washington, Mr. Dockser was a practicing attorney in Boston and also was a special Assistant Attorney General for the Commonwealth of Massachusetts. He holds a Bachelor of Laws degree from Yale University Law School and a Bachelor of Arts degree, cum laude, from Harvard University. He is also Chairman of the Board of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT, Inc.
H. William Willoughby, 49, President, Secretary and a Director of CRI since January 1990 and Senior Executive Vice President, Secretary and a Director of CRI from 1974 to 1989. He is principally responsible for the financial management of CRI and its associated partnerships. Prior to joining CRI in 1974, he was Vice President of Shelter Corporation of America and a number of its subsidiaries dealing principally with real estate development and equity financing. Before joining Shelter Corporation, he was a senior tax accountant with Arthur Andersen & Company. He holds a Juris Doctorate degree, a Master of Business Administration degree and a Bachelor of Science degree in Business Administration from the University of South Dakota. He is also a Director and executive officer of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT, Inc.
Richard J. Palmer, 44, Senior Vice President-Chief Financial Officer. Prior to joining CRI in 1983 as Director of Tax Policy, he was a Tax Manager at Grant Thornton (formerly Alexander Grant & Company). He also served in the Tax and Audit Departments of Peat, Marwick, Main and Company (formerly Peat, Marwick, Mitchell and Company) prior to his seven years at Grant Thornton. He holds a Bachelor of Business Administration degree from the Florida Atlantic University and is also a Certified Public Accountant.
Ronald W. Thompson, 49, Group Executive Vice President-Hotel Asset Management. Prior to joining CRI in 1985, he was employed at the Hyatt Organization where he most recently served as the General Manager of the Hyatt Regency in Flint, Michigan. During his nine year tenure with Hyatt, Mr. Thompson held senior management positions with the Hyatt Regency in Dearborn, Michigan, the Hyatt in Richmond, Virginia, the Hyatt in Winston-Salem, North Carolina and the Hyatt Regency in Atlanta, Georgia. Before joining Hyatt, Mr. Thompson worked in London, England for the English Tourist Board as well as holding management positions in Europe, Australia, and New Zealand in the hotel industry. Mr. Thompson received his education in England where he received a business degree in Hotel Administration from Winston College.
III-1
PART III --------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - Continued --------------------------------------------------
Susan R. Campbell, 37, Senior Vice President-CRI Realty Services. Prior to joining CRI in March 1985, she was employed by the B. F. Saul Advisory Company. She holds a Bachelor of Science degree in business from the University of Maryland.
Melissa Cecil Lackey, 39, Senior Vice President and General Counsel. Prior to joining CRI in 1990, she was associated with the firms of Zuckerman, Spaeder, Goldstein, Taylor & Kolker in Washington, D.C. and Hirsch & Westheimer in Houston, Texas. She holds a Juris Doctorate from the University of Virginia School of Law and a Bachelor of Arts degree from the College of William & Mary.
(d) There is no family relationship between any of the foregoing directors and executive officers.
(f) Involvement in certain legal proceedings.
None.
(g) Promoters and control persons.
Not applicable.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION ----------------------
The information required by Item 11 is incorporated herein by reference to Note 6 of the notes to the financial statements contained in Part IV, Item 14.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND --------------------------------------------------- MANAGEMENT ----------
(a) Security ownership of certain beneficial owners.
No person or "group", as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, is known by the Partnership to be the beneficial owner of more than 5% of the issued and outstanding BACs at February 28, 1996.
(b) Security ownership of management.
The following table sets forth certain information concerning all BACs beneficially owned, as of February 28, 1996, by each director and by all directors and officers as a group of the managing general partner of the Partnership's General Partner. The voting and investment powers for the BACs listed are held solely by the named beneficial owner.
III-2
PART III --------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND --------------------------------------------------- MANAGEMENT - Continued ----------
(c) Changes in control.
There exists no arrangement known to the Partnership, the operation of which may, at a subsequent date, result in a change in control of the Partnership. There is a provision in the Limited Partnership Agreement which allows, under certain circumstances, the ability to change control.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ----------------------------------------------
(a) Transactions with management and others.
The Partnership has no directors or officers. In addition, the Partnership has had no transactions with individual officers or directors of the managing general partner of the General Partner of the Partnership other than any indirect interest such officers and directors may have in the amounts paid to the General Partner or its affiliates by virtue of either their partnership interest in the managing general partner of the General Partner or their stock ownership in CRI, respectively. Item 11 of this report, which contains a discussion of the fees and other compensation paid or accrued by the Partnership to the General Partner or its affiliates, is incorporated herein by reference.
(b) Certain business relationships.
The Partnership's response to Item 13(a) is incorporated herein by reference. In addition, the Partnership has no business relationship with entities of which the managing general partner of the General Partner of the Partnership are officers, directors or equity owners other than as set forth in the Partnership's response to Item 13(a).
(c) Indebtedness of management.
None.
(d) Transactions with promoters.
Not applicable.
III-3
PART IV -------
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON ------------------------------------------------------- FORM 8-K --------
(a) 1. Financial Statements Page -------------------- ----
Report of Independent Certified Public Accountants IV-5
Balance Sheets as of December 31, 1995 and 1994 IV-6
Statements of Operations for the years ended December 31, 1995, 1994 and 1993 IV-8
Statements of Changes in Partners' Capital (Deficit) for the years ended December 31, 1995, 1994 and 1993 IV-9
Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 IV-10
Notes to Financial Statements IV-11
(a) 2. Financial Statement Schedules -----------------------------
Report of Independent Certified Public Accountants on Financial Statement Schedules IV-22
Schedule III - Real Estate and Accumulated Depreciation IV-23
The remaining schedules are omitted because the required information is included in the financial statements and notes thereto or they are not applicable or not required.
(a) 3. Exhibits (listed according to the number assigned in the table in Item 601 of Regulation S-K)
Exhibit 1 - Underwriting Agreement
a. Forms of Sales Agency Agreement, incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986. b. Forms of Selected Dealer Agreements, incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986.
IV-1
PART IV -------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON ------------------------------------------------------- FORM 8-K - Continued --------
Exhibit 3 - Articles of Incorporation and Bylaws
a. Certificate of Limited Partnership dated as of September 23, 1986 of CRI Hotel Income Partners, L.P. (formerly named CRI Hotel Income Fund, L.P.), incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986.
1. Amendment dated as of March 12, 1987. 2. Amendment dated as of April 17, 1987.
Exhibit 10 - Material Contracts
a. Sale/Purchase Agreement, dated as of October 9, 1986, by and between Days Inns of America, Inc. (DIA), Days Inns Corp. (DIC), Days Inns Management Company, Inc. (DIMC), and CRI Hotel Income Fund, L.P., and six modifications thereof, incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986. b. Form of Management Agreement by and between DIMC and CRI Hotel Income Fund, L.P., incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986. c. Forms of Cash Flow Guarantee Agreement (Interim and Permanent) by and between DIC, DIA, DIMC and CRI Hotel Income Fund, L.P., incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986. d. Form of Bond Escrow Agreement by and between DIA, CRI Hotel Income Fund, L.P. and Escrow Agent, incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986. e. Form of Escrow Agreement between Registrant and Escrow Agent, incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986. f. Form of Beneficial Assignee Certificate, incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986. g. Forms of Amendment to Hotel Management Agreement by and between CRI Hotel Income Partners, L.P. and Buckhead Hotel Management Company, Inc. incorporated by reference to the 1994 Annual Report of Form 10-K filed on March 15, 1995.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K -------------------
No reports on Form 8-K were filed during the quarter ended December 31, 1995.
IV-2
PART IV -------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON ------------------------------------------------------- FORM 8-K - Continued --------
(c) Exhibits --------
This list of Exhibits required by Item 601 of Regulation S-K is included in Item (a)(3) above.
(d) Financial Statement Schedules -----------------------------
See Item a (2), above.
IV-3
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
CRI Hotel Income Partners, L.P.
By: CRICO Hotel Associates I, L.P., General Partner
By: C.R.I., Inc., General Partner
March 5, 1996 /s/ William B. Dockser - -------------- ------------------------------------ DATE William B. Dockser, Director Chairman of the Board, Treasurer and Principal 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:
March 5, 1996 /s/ H. William Willoughby - -------------- ------------------------------------ DATE H. William Willoughby Director, President and Secretary
March 5, 1996 /s/ Richard J. Palmer - -------------- ------------------------------------ DATE Richard J. Palmer Senior Vice President, Finance Chief Financial Officer Principal Financial and Principal Accounting Officer
IV-4
Report of Independent Certified Public Accountants --------------------------------------------------
To the Partners CRI Hotel Income Partners, L.P.
We have audited the accompanying balance sheets of CRI Hotel Income Partners, L.P. as of December 31, 1995 and 1994, and the related statements of operations, changes in partners' capital (deficit), and cash flows for the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Partnership's 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 financial statements referred to above present fairly, in all material respects, the financial position of CRI Hotel Income Partners, L.P. as of December 31, 1995 and 1994 and the results of its operations, changes in partners' capital (deficit) and cash flows for the years ended December 31, 1995, 1994 and 1993, in conformity with generally accepted accounting principles.
Grant Thornton LLP
Vienna, VA February 28, 1996
IV-5
CRI HOTEL INCOME PARTNERS, L.P.
BALANCE SHEETS
ASSETS
The accompanying notes are an integral part of these financial statements.
IV-6
CRI HOTEL INCOME PARTNERS, L.P.
BALANCE SHEETS
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
The accompanying notes are an integral part of these financial statements.
IV-7
CRI HOTEL INCOME PARTNERS, L.P.
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
IV-8
CRI HOTEL INCOME PARTNERS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
For the years ended December 31, 1995, 1994 and 1993
The accompanying notes are an integral part of these financial statements.
IV-9
CRI HOTEL INCOME PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
IV-10
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization and offering -------------------------
CRI Hotel Income Partners, L.P. (the Partnership) is a limited partnership which was formed under the Delaware Revised Uniform Limited Partnership Act as of September 23, 1986 and will continue until December 31, 2016, unless dissolved earlier in accordance with the Partnership Agreement. The Partnership was formed for the purpose of investing in hotels that were acquired from Days Inns of America, Inc. (Days Inns). The Partnership's primary objective continues to be cash flow growth and capital appreciation. However, the attainment of this objective is principally dependent on the hotels' operations. The hotels are operated by Buckhead Hotel Management Company, Inc. (Buckhead), formerly known as Days Inns Management Company, Inc., under the nationally recognized franchise name of Days Inns.
The Registration Statement of the Partnership was declared effective by the Securities and Exchange Commission (SEC) on April 17, 1987, and subsequently, a Prospectus of the same date was printed. The Partnership registered a total of 6,000,000 Beneficial Assignee Certificates (BACs), at $25 per BAC, with the SEC. BACs represent beneficial assignments of limited partnership interests which were held by CRICO Hotel Fund, Inc. (CRICO Hotel Fund). BACs were to be offered in series, with Series A having a minimum of 196,000 BACs, or $4,900,000, and a maximum amount of 2,344,000 BACs, or $58,600,000. The Partnership terminated the Series A offering on March 31, 1988 with 868,662 BACs, or gross proceeds of $21,716,550, and does not intend to offer another series.
The General Partner of the Partnership is CRICO Hotel Associates I, L.P. (CRICO Associates), a Delaware limited partnership, the general partner of which is C.R.I., Inc. (CRI), a Delaware corporation. The General Partner has complete authority in the overall management and control of the Partnership. The Assignor Limited Partner of the Partnership is CRICO Hotel Fund.
Cumulative offering costs in the amount of $2,580,132, consisting of legal and filing fees and certain travel, communication and other expenses, were recorded as a reduction of partners' capital when incurred and are not amortized for financial statement or income tax purposes.
b. Method of Accounting --------------------
The financial statements of the Partnership have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles.
IV-11
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
c. Use of estimates ----------------
In preparing financial statements in conformity with generally accepted accounting principles, the Partnership is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
d. Fair value of financial instruments -----------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" (SFAS 107), requires the disclosure of fair value information about financial instruments for which it is practicable to estimate that value. The Partnership implemented SFAS 107 in 1995.
e. Cash and cash equivalents -------------------------
Cash and cash equivalents consist of all time and demand deposits, repurchase agreements and commercial paper with original maturities of three months or less. The Partnership has determined that the carrying amount of its cash and cash equivalents approximate fair value.
f. Working capital reserve -----------------------
The working capital reserve of $225,000 and $150,000 as of December 31, 1995 and 1994, respectively, represents funds held in reserve, initially established in an amount of not less than 1% of Series A gross offering proceeds, which are maintained as working capital for the Partnership. The working capital reserves may be increased or reduced by the General Partner as it deems appropriate. The General Partner increased the working capital reserves by $75,000 and $100,000 during 1995 and 1994, respectively. Advances to the Kankakee hotel from working capital reserves during 1995 and 1994 were repaid to working capital reserves in 1995, as discussed below. The Partnership has determined that the carrying amount of its working capital reserves approximate fair value.
g. Reserve for replacements ------------------------
Pursuant to the terms of the Management Agreement, the hotels retain 3% of gross hotel revenues for a reserve for replacement of fixed assets.
IV-12
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
h. Depreciation and amortization -----------------------------
Depreciation is based on the estimated useful lives of depreciable assets using the straight-line method. The estimated lives used in determining depreciation are as follows:
Type of Asset Estimated Life --------------------------------- ----------------- Building and site improvements 30 years Furniture, fixtures and equipment 5-10 years Leasehold improvements 5 years, 7 months
Amortization of property purchase costs and acquisition fees is provided for over a 30-year period on a straight-line basis.
i. Income taxes ------------
For federal and state income tax purposes, each partner reports on his or her personal income tax return his or her share of the Partnership's income or loss as determined for tax purposes. Accordingly, no provision has been made for income taxes in these financial statements.
j. Statements of Cash Flows ------------------------
The statements of cash flows are intended to reflect only cash receipt and cash disbursement activity; therefore, the statements do not reflect investing and financing activity affecting recognized assets or liabilities which was not a result of cash receipts or payments. This non-cash activity principally consists of distributions payable of $549,562 and $452,059 at December 31, 1995 and 1994, respectively. Other than the pay-off of the Kankakee purchase money note principal and accrued interest of $434,925 and $440,746, respectively, in connection with the sale of the hotel in 1995, as discussed below, the Partnership did not pay interest on long-term debt during 1995, 1994 or 1993, pursuant to the terms of the debt agreements.
k. Assets held for sale --------------------
On October 20, 1994, a contract for the sale of the Kankakee hotel was signed. The sale was completed on July 19, 1995. Accordingly, the assets of this hotel were classified as an asset held for sale on the balance sheet as of December 31, 1994. Assets held for sale are not recorded in excess of estimated net realizable value. Reserves for loss on the sale of the Kankakee hotel of $400,000 and $200,000 were recognized for financial statement purposes in 1994 and 1993, respectively, to reduce the asset to its estimated net realizable basis.
IV-13
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
l. Implementation of accounting standards --------------------------------------
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This statement addresses how entities should measure impairment on long-lived assets. This statement is effective for fiscal years beginning after December 15, 1995 and will be implemented by the Partnership in 1996. The adoption of SFAS 121 is not expected to have a material effect on the Partnership's financial statements.
m. Reclassifications -----------------
Certain amounts in the 1993 financial statements have been reclassified to conform to the 1995 presentation.
2. HOTELS AND LEASEHOLD INTEREST OWNED BY THE PARTNERSHIP
The number of BACs sold generated sufficient proceeds to purchase the following hotels and leasehold interest:
Hotels Date of Purchase Amount of Purchase - -------------------- ---------------- ------------------ Clearwater Days Inn 4/01/88 $3,750,000 Days Inn Kankakee (A) 11/01/87 $2,250,000 Minneapolis Days Inn 11/01/87 $4,800,000 Plymouth Days Inn 12/30/87 $4,000,000 Roseville Days Inn 3/01/88 $4,200,000
Leasehold interest Date of Purchase Amount of Purchase - -------------------- ---------------- ------------------ Scottsdale Days Inn (B) 7/01/88 $2,000,000
(A) The Kankakee hotel was sold on July 19, 1995, as discussed below.
(B) Included in the purchase of the Scottsdale leasehold interest was $618,000 allocated to furniture, fixtures and equipment.
On October 20, 1994, a contract for the sale of the Kankakee hotel was signed. The sale was completed on July 19, 1995. Accordingly, the assets of this hotel were classified as an asset held for sale on the balance sheet as of December 31, 1994. The sale price of the property of $1.2 million generated sufficient proceeds to the Partnership to retire the purchase money note obligation of the Partnership with respect to such property. The sale resulted in a net financial statement loss and a net tax loss in 1995 of approximately $7,000, and $607,000, respectively. Reserves for loss on the sale of the Kankakee hotel of $400,000 and $200,000 were recognized for financial statement purposes in 1994 and 1993, respectively. The sale of the Kankakee hotel is not expected to have a negative effect on the future net income or cash flow of the Partnership.
On February 21, 1995 and May 10, 1995, the Partnership advanced $35,000 and $42,000, respectively, from the working capital reserves to the Kankakee hotel to fund the hotel's short-term working capital needs. These advances were
IV-14
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
2. HOTELS AND LEASEHOLD INTEREST OWNED BY THE PARTNERSHIP - Continued
repaid and the working capital reserves were replenished on July 19, 1995 from sale proceeds of the Kankakee hotel, as discussed above. Additionally, 1994 advances of $62,055 were repaid from sale proceeds and are included in cash distributions from operating activities in the third quarter of 1995.
3. NOTES PAYABLE
In addition to the capital provided by the sale of BACs, the Partnership received Zero Coupon Purchase Money Note (the Notes) financing from Days Inns for the acquisition of the hotels. The Notes are nonrecourse notes collateralized by the various properties. Each Note provides for a ten year maturity from the date of acquisition with an accrual of interest at 9% per annum, compounded on a monthly basis. Principal and accrued interest, which will equal 47.4% of the original purchase price of the hotel, is due to BancBoston Mortgage Corporation upon maturity of each Note. The Notes may be prepaid at the initial note balance plus accrued interest at any time without premium or penalty. The Kankakee note payable of $434,925 plus accrued interest of $440,746 was retired on July 19, 1995 in connection with the sale of the hotel, as discussed below. The Managing General Partner is currently investigating refinancing options for the remaining notes. There is no assurance that a refinancing or refinancings will be completed.
As of December 31, 1995 and 1994, the Notes, including accrued interest, consist of the following:
IV-15
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
3. NOTES PAYABLE - Continued
(A) The Kankakee note payable of $434,925 plus accrued interest of $440,746 was retired July 19, 1995 in connection with the sale of the hotel, as discussed above.
Cumulative accrued interest on the Notes was $3,367,199 and $3,192,786 at December 31, 1995 and 1994, respectively. Interest expense during 1995, 1994 and 1993 was $615,159, $588,797 and $538,300, respectively.
The balances of the Notes, including accrued interest, due upon maturity are as follows:
SFAS 107 requires the disclosure of fair value information about financial instruments for which it is practicable to estimate that value. The Partnership has determined that it is not practicable to estimate the fair value of the Notes due to the lack of an active market for this type of financial instrument, as well as the excessive costs associated with an independent appraisal of the Notes.
IV-16
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
4. COMMITMENTS
a. Cash flow guarantee -------------------
The Partnership entered into an agreement with Days Inns of America, Inc., Days Inns Corporation and Buckhead (collectively the Guarantors) whereby the Guarantors guaranteed a return on four hotels equal to 10.5% per year of the combined purchase price of the hotels for the first three consecutive twelve-month periods after the acquisition of each hotel. The guarantee period for the Minneapolis, Kankakee and Plymouth Days Inns expired in 1990, and the Roseville Days Inn guarantee expired in 1991. The Clearwater Days Inn 10.5% guarantee (for five consecutive twelve-month periods) expired March 31, 1993. The Scottsdale Days Inn 14% guarantee (for five consecutive twelve-month periods) expired June 30, 1993.
During 1993, the remaining cash flow guarantees expired. The guarantee periods were on a fiscal year basis as compared to the guarantee payments which were paid quarterly on a calendar year basis. As a result of this timing difference, at the expiration of the guarantee period for the Clearwater and Scottsdale Days Inns, certain guarantee payments received by the Partnership were returned to the Guarantors and classified as recoveries on the statement of operations in 1993. Also included in recoveries on the statement of operations for 1993 are adjustments arising from a change in accounting estimate related to the timing differences between hotel operations and cash flows recorded by the Partnership.
On September 27, 1991, the Guarantors filed in the Bankruptcy Court for the District of Delaware a voluntary petition for reorganization (the Bankruptcy) pursuant to the provisions of Chapter 11 of the Federal Bankruptcy Code. The Partnership filed a proof of claim with the Bankruptcy Court. The Guarantors filed their plan for reorganization (the Plan), and the Plan was confirmed by the Bankruptcy Court in 1992. As of December 31, 1993, $23,798 of the $145,549 remaining cash flow guarantee payment for the third quarter of 1991 and 2,345 shares of Buckhead America Corp. common stock had been received by the Partnership. On February 10, 1994, the Partnership received $3,589 and 261 shares of Buckhead America Corp. common stock. In 1995, the Partnership received $12,339 and 229 shares of Buckhead America Corp. common stock as a distribution from its beneficial interest in a trust (the Trust) established to receive proceeds from certain Buckhead litigation if such litigation is successful. The total recovery of cash flow guarantee payments to the Partnership aggregated $53,950 as of December 31, 1995, based on cash received and the market value of the common stock at the date of receipt. The common stock, which has a carrying value of $14,224 as of December 31, 1995, is included in receivables, reserve for replacements and other assets on the balance sheets. Based on the quoted market price of these instruments, the Partnership estimates that the fair value of the common stock approximates $18,000 as of December 31, 1995. The cash, shares of common stock and the beneficial interest in the Trust constitute full settlement of the Partnership's claim. There is no assurance that further distributions will be received as a result of the Partnership's beneficial interest in the Trust.
b. Hotel operations management agreements --------------------------------------
The Partnership entered into management agreements with Buckhead in connection with operations of the hotels. Each agreement was for an initial
IV-17
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
4. COMMITMENTS - Continued
term of ten years, with a five-year renewal option. The agreements called for a base management fee of 2.5% of gross revenue from operations, a marketing fee of 1.5% of net room revenues, and a reservation fee of 2.3% of gross revenues from rental of hotel guest rooms. The agreements also called for incentive management fees generally equal to 25% of net cash flow available after payment of a preferred cash flow return to the Partnership equal to 11% of the aggregate purchase price for Series A hotels owned by the Partnership.
On January 1, 1993, the management agreements between the Partnership and Buckhead, pertaining to Buckhead's management of each of the hotels, were amended to extend the existing term of each agreement for an additional two to five years and increase the base management fee from 2.5% to 3.5% of gross revenue. The amendments for the Clearwater Days Inn and the Scottsdale Days Inn included a modification to the method of calculating the incentive management fee. Incentive management fees of $78,408, $64,328 and $22,830 were earned or paid in 1995, 1994 and 1993, respectively. These agreements were amended as part of the bankruptcy process. The Partnership accepted these modifications to the management agreements in lieu of having the agreements terminated by Buckhead in the Bankruptcy. Had the Partnership contracted another management agent, costs (which would have included franchise fees currently not payable because of Buckhead's management of the hotels) were expected to exceed the increase in management fees.
c. Operating lease agreements --------------------------
The Partnership assumed an existing lease agreement from Days Inns in connection with the acquisition of the leasehold interest in the Scottsdale Days Inn. The assumption transfers the rights to operate the property on the lease's existing terms over the remaining life of the lease. Effective January 1, 1994, the lease was renewed for an additional 5-year period. The lease may be renewed at the option of the lessee for two additional 5-year periods. Annual Lease payments are equal to the greater of $140,450 or 22% of total room revenue and 2.5% of food and beverage revenue. Minimum lease payments of $11,704 are payable monthly with a quarterly analysis of the actual amount due.
The Partnership also assumed various leases entered into by Days Inns of America for equipment used by the operating hotels. These leases expire through 1997. Minimum lease payments under the leases, including the two renewal periods for the Scottsdale facility lease, are as follows:
1996 $ 176,793 1997 170,344 1998 168,626 1999 168,626 2000 158,568 Thereafter 1,182,419 ---------- $2,025,376 ==========
IV-18
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
4. COMMITMENTS - Continued
Total rental expense under the leases was $735,084, $710,848 and $753,336 for the years ended December 31, 1995, 1994 and 1993, respectively.
d. Ground lease agreement ----------------------
The Partnership entered into a ground lease with Vicorp Restaurants, Inc. (Vicorp) effective January 1991, pursuant to which the Partnership is leasing a portion of the Minneapolis Days Inn property to Vicorp, which is operating a restaurant (Baker's Square) on the property. Gross rental income pursuant to the lease agreement, which is included in Rental and Other Revenue on the accompanying statements of operations, was $48,770, $47,121 and $45,527 during 1995, 1994 and 1993, respectively.
5. PARTNERS' CAPITAL
The Partnership's Series A profits and losses and distributions are allocated 98% to the BAC Holders and 2% to the General Partner. Upon reaching a non-cumulative, annual preferred cash flow return of 12%, the Partnership's Series A profits and losses and distributions will be allocated 85% to the BAC Holders and 15% to the General Partner. To date, the annual preferred cash flow return has not been achieved. Cash available for distribution, as defined in the Partnership Agreement, is intended to be distributed on a quarterly basis within sixty days after the end of each calendar quarter.
The following distributions were paid or accrued to BAC Holders of record during 1995, 1994 and 1993:
IV-19
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
5. PARTNERS' CAPITAL - Continued
* Includes the distribution of net cash proceeds from the sale of the Kankakee hotel of $52,478 (approximately $0.06 per BAC), which is net of payment of outstanding Kankakee real estate taxes, retirement of the related note payable and repayment of Partnership advances.
The General Partner expects the distribution for the quarter ended March 31, 1996 to range from approximately $0.52 to $0.60 per BAC. The General Partner expects the distribution for the year ending December 31, 1996 to range from approximately $2.15 to $2.35 per BAC. Due to the expiration of the remaining cash flow guarantees during 1993, distributions are dependent on the net cash flow produced from hotel operations, net of Partnership expenses. The cash flow from certain hotels may be materially affected by changing market conditions and by seasonality. Also, cash flow from certain hotels in 1996 is expected to be reduced due to additions to replacement reserves during the first quarter of 1996 in the aggregate amount of approximately $138,000. Replacement reserves from these hotels are expected to be used for the purpose of installing electronic door locks in all the rooms. The installation of these door locks, which is expected to be completed in 1996, is required by the American Automobile Association (AAA) as a condition of the hotels being listed in AAA travel books.
6. RELATED-PARTY TRANSACTIONS
In accordance with the Partnership Agreement, the Partnership paid the General Partner a fee for services in connection with the review, selection, evaluation, negotiation and acquisition of the hotels. The fee amounted to $1,142,516, which was equal to 4.5% of Total Capitalization (Gross Offering Proceeds plus all receipts of the Partnership arising from mortgage loans). The acquisition fees were capitalized and are being amortized over a thirty-year period using the straight-line method. Acquisition fees and accumulated amortization of acquisition fees of $122,412 and $29,460, respectively, relating to the Kankakee hotel were written off in connection with the sale of the hotel in 1995, as discussed above.
The Partnership reimbursed the General Partner or its affiliates for costs incurred on behalf of the Partnership for real estate appraisals and market studies, engineering studies, legal consultation and accounting fees, as well as
IV-20
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
6. RELATED-PARTY TRANSACTIONS - Continued
travel and communication expenses related to the acquisition of the hotels. These costs, amounting to $233,474, have been capitalized as property purchase costs and are being amortized over a thirty-year period using the straight-line method. Property purchase costs and accumulated amortization of property purchase costs of $51,207 and $12,160, respectively, relating to the Kankakee hotel were written off in connection with the sale of the hotel in 1995, as discussed above.
The Partnership, in accordance with the terms of the Partnership Agreement, is obligated to reimburse the General Partner or its affiliates for their direct expenses in managing the Partnership. The Partnership paid or accrued $52,226, $62,973 and $40,383, for the years ended December 31, 1995, 1994 and 1993, respectively, to the General Partner or its affiliates as direct reimbursement of expenses incurred on behalf of the Partnership. Such reimbursements are included in general and administrative expense on the statements of operations.
The annual amount of the base asset management fee earned by the General Partner and/or its affiliates is equal to 0.50% of the weighted average balance of the adjusted partnership investment during the period, as defined in the Partnership Agreement. During 1995, the adjusted partnership investment decreased from $21,000,000 to $18,750,000 as a result of the sale of the Kankakee hotel on July 19, 1995, as discussed above. Based on the weighted average balance of the adjusted partnership investment during 1995, the Partnership paid or accrued a base asset management fee of $99,956 for the year ended December 31, 1995. During each of the years ended December 31, 1994 and 1993, the Partnership paid or accrued a base asset management fee of $105,000.
7. RECONCILIATION OF NET INCOME (LOSS) PER FINANCIAL STATEMENTS TO NET INCOME (LOSS) PER TAX RETURN
The following is a reconciliation of net income (loss) per the financial statements to net income (loss) per the tax return for the years ended December 31, 1995, 1994 and 1993:
IV-21
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
7. RECONCILIATION OF NET INCOME (LOSS) PER FINANCIAL STATEMENTS TO NET INCOME (LOSS) PER TAX RETURN - Continued
IV-22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -------------------------------------------------- ON FINANCIAL STATEMENT SCHEDULES --------------------------------
Partners CRI Hotel Income Partners, L.P.
We have also audited Schedule III of CRI Hotel Income Partners, L.P. as of December 31, 1995. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.
Grant Thornton, LLP
Vienna, VA February 28, 1996
IV-23
CRI HOTEL INCOME PARTNERS, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
IV-24
CRI HOTEL INCOME PARTNERS, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
IV-25
CRI HOTEL INCOME PARTNERS, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - Continued
DECEMBER 31, 1995
(A) Secured by Zero Coupon Purchase Money Notes.
(B) Originally constructed in 1970, closed for full renovation in 1986, and reopened in 1987.
(C) The aggregate cost of land for federal income tax purposes is $1,574,490 and the aggregate cost of buildings and site improvements for federal income tax purposes is $14,494,968. The total of the above mentioned items is $16,069,458.
(D) Excludes the Days Inn Kankakee hotel, which was sold on July 19, 1995.
IV-26
EXHIBIT INDEX -------------
Exhibit Method of Filing - ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
IV-27